UPS Sees $1.05 Billion Cost on Teamster Health-Benefit Shift

Apr 24, 2014 7:08 pm ET

(Updates with analyst’s comment in fourth paragraph.)

April 24 (Bloomberg) -- United Parcel Service Inc. will record a pretax cost of about $1.05 billion this quarter for changes to union workers’ health benefits under a five-year contract approved by the International Brotherhood of Teamsters.

The world’s largest package-delivery company will make a pretax cash payment of $2.27 billion to multiemployer funds that will administer active and post-retirement medical benefits for Teamster-represented employees, according to a filing today. The contract covers 253,000 workers.

UPS is moving its health-care plans to a system defining its contributions, not the benefits to be paid, for the term of the contract. The multiemployer plan will cover future retirees, and UPS will remove $1.2 billion in those obligations from its balance sheet, a trade-off worth the one-time hit to earnings, said Kevin Sterling, a BB&T Capital Markets analyst.

“That $1.1 billion is big now, but look at it in five years,” said Sterling, who rates Atlanta-based UPS as hold. “It could be huge.”

While UPS probably will show a second-quarter loss because of the cost, analysts will treat it as a nonrecurring event, not an issue with operations, said Sterling, who is based in Richmond, Virginia.

The union’s final approval removes uncertainty about whether the contract would be allowed to take effect. The existing agreement was extended indefinitely after it expired in July as local supplemental agreements were renegotiated and voted on.

The contract takes effect tomorrow. While it won initial approval on a national basis in June 2013, the local contracts failed at that time.

Employees will see annual raises averaging 2.4 percent, and UPS is setting a $10-an-hour wage for new part-time workers. UPS last changed its starting wage in the 1990s, Chief Financial Officer Kurt Kuehn said in a presentation to investors earlier today. Starting pay in some UPS locations had been near the minimum wage, Kuehn said.

--With assistance from Stephen West in San Francisco.