Will UPS Avoid a $3.5 Billion Pension Charge?

United Parcel Service Inc. (NYSE: UPS) reported a gain to its first quarter profit of 10% and managed to beat expectations. The $1.13 billion in income translated to $1.27 per share. Its first quarter revenue of $14.42 billion was up from a year ago’s revenue of $13.98 billion.

UPS managed to see a gain in operating earnings from stronger domestic and international shipping services, but its supply chain-freight division acted as a drag against earnings after the “less than truckload” sales were lower. Basic freight rates were up roughly 2%, but UPS went on to note that its fuel surcharge revenue declined due to those lower gasoline prices.

The big news was actually not the earnings, and was not even the guidance. UPS disclosed that the package and parcel transportation giant could face a charge against future earnings of roughly $3.5 billion. That charge is around its pension.
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The $3.5 billion sum for a potential charge against earnings is based upon the range of $3.2 to $3.8 billion, and if taken it would occur at some point during this year. One thing that UPS said earlier is that the company was not lowering its prior guidance, but this could send it toward the lower end of that range.

UPS’ potential pension issue was said to be related to the Central States Fund for Teamsters. UPS withdrew from this back in 2007 and paid close to $6 billion back then. Now the Central States union has apparently petitioned the Treasury Department to cut benefit payments as it said it does not have ample investment income to pay 100% of its obligations on an ongoing basis.

UPS did indicate that the company will make supplemental payments to retirees if the cuts are ordered. UPS also said that it would still oppose such a decision as it believes it would not be complying within the laws. Also noted was that if such payments are made, it would constitute an ongoing liability.

All in all, the earnings report was considered a win versus estimates. Growth in e-commerce was a driver here, and the company all in all is comfortable with its growth in China. Still this $3.5 billion charge would not be welcome — UPS’ total 2015 operating income was $7.67 billion and its 2015 net income from operations was $4.84 billion.

UPS closed down 1.5% at $104.84 on Thursday, versus a 52-week range of $87.30 to $107.32. It has a market cap of $92 billion. The sum of $3.5 billion might not be catastrophic on the surface, but it is impossible to think that this is a bite that would not hurt.