UPS to Take Pre-Tax Charge on New Labor Contract

Laura Stevens
Wall Street Journal
April 24, 2014

United Parcel Service Inc. on Thursday said that it will record a $1.05 billion pre-tax charge in the second quarter as it moves the remaining 125,000 unionized package delivery employees off its own health-care plan and into multi-employer health-care plans.

The move will fundamentally change the way UPS pays for its union members' health plans. Instead of being committed to providing benefits on UPS's own plan, it will now pay funds into multi-employer health-care plans, union-run plans that are financed by the workers' employers.

The change will help the company to avoid benefit costs that were expected to increase at about 8% each year, UPS said. During a conference call with analysts on Thursday, Chief Financial Officer Kurt Kuehn said that the company had already factored the costs--and the charge--into its earnings forecast for the year.

This week the International Brotherhood of Teamsters overrode several of its local bargaining units to approve a five-year national contract. The company said in a securities filing it currently owes about $325 million in back pay and other expenses to about 253,000 unionized employees retroactive to the contract's start date, also to be paid in the second quarter.

Under the plan, UPS will transfer a total of $2.27 billion to the three multi-employer health-care plans to which its employees are moving. The shift will also allow it to remove about $1.2 billion in retiree health-care liability from its balance sheet.

Health care was a major sticking point in the latest round of labor talks. Critics say the move to the new plans result in benefit cuts--such as introducing a $100 deductible after four years. The national Teamsters group says the new plan maintains strong and similar benefits to the employees' current plan.

Multi-employer health plans have flexibility to change benefits over time, however, something UPS couldn't previously do with its own plan, according to the presentation on the company's website.

On Wednesday, the national Teamsters union representing the delivery workers took the unusual move of overriding three of its own local bargaining units that had rejected parts of the national contract, delaying its implementation. Now, the new master contract is expected to take effect Friday.

The national Teamsters said it was able to take such action on the grounds that the locals had been objecting to parts of the contract that had already been agreed to: namely the new health-care benefits. The locals disagreed and said the national union overstepped.

The new contract allows UPS to lengthen the time they are able to use some part-time workers, slows average annual wage growth to 2.4% and lengthens the time it takes some workers to achieve top pay, according to a presentation on UPS's investor relations web site.

UPS announced the news Thursday after it reported that a difficult winter had cost it about $200 million in the first quarter.

Severe weather conditions affected about half the working days during the quarter, prohibiting some U.S. employees from working, executives said during a conference call with analysts. The impact is expected to push the entire year's profits to the lower range of the company's previous forecast of between $5.05 and $5.30 per share.

"I don't think there is a person in the country who is more happy about seeing spring weather return, and as a result of it, in April, both our productivity and service has returned to normal levels," said Myron Gray, head of U.S. operations.

During the earnings call, executives discussed plans to improve its performance during this year's busy holiday season. In addition to making permanent changes, such as increasing the space to unload trailers at its Louisville, Ky., air hub, it is also adding about 6,000 new parking spaces to load and unload its delivery trucks, an increase of 10%.

The company also is in talks with retailers to better forecast package flow, he added. UPS said it is investing around $600 million to improve its network and technology to avoid problems this year.

For the first quarter, the shipper reported earnings of $911 million, or 98 cents a share, down 12.4% from $1.04 billion, or $1.08 a share, a year earlier. Revenue rose 2.6% to $13.8 billion.

The company's U.S. domestic package business reported $927 million in operating profit, down by $158 million from a year earlier. The international business was a bright spot, reporting a 5% increase in revenue to $3.13 billion.

Erin McCarthy contributed to this article.

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