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UPS in tax windfall
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June 22, 2001: 11:47 a.m. ET
Transportation company wins tax case that brings it more than $2B in cash
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - A court victory by United Parcel Service could leave one of the world's strongest balance sheets with more than two billion more dollars, and analysts trying to anticipate what it will do with the money.
A U.S. Court of Appeals decision in Atlanta late Thursday reversed a U.S. Tax Court decision that UPS had participated in a "sham transaction" when it used an overseas operation to provide insurance for its customers who wanted coverage for the value of packages handled by the company.
Shares of UPS (UPS: down $0.41 to $56.88, Research, Estimates) slipped in morning trading Friday despite the ruling.
UPS, the world's largest transportation company, had put $1.8 billion in an escrow account after the original court ruling in 1999 as it pursued an appeal. The Court of Appeals Thursday referred the case back to the Tax Court for final disposition, and UPS officials said it is too early to determine how much of that money, plus interest, it would be due under any final decision or settlement.
The $1.8 billion was the company's best guess of its liability following the earlier decision, although its prospectus at the time of its 1999 initial public offering estimated that the tax and penalty liability could rise as high as $2.35 billion in a worst-case scenario, and analysts said additional liability had been possible if it had lost the decision.
Analysts said that since UPS had taken a special charge to accommodate the escrow payment, any refund from the money would not affect earnings forecasts, although interest payments might count towards operating results. Ed Wolfe, an analyst with Bear Stearns, says the interest could be the equivalent of 4 cents a share for the company.
Analysts surveyed by First Call forecast that the company will earn 54 cents a share in the second quarter, down from 60 cents a year ago.
"In the near term, we believe that UPS should benefit from news of this decision and from meeting EPS expectations for the quarter when they report on July 19," said Wolfe. "However, we still expect its operating margins to increasingly come under pressure throughout 2001 and early 2002 as the current weak volume environment worsens."
UPS has the top corporate credit rating available. But even for a company with such financial strength, nearly $2 billion is a significant gain, said Doug Rockel, analyst with ABN Amro.
"They already have an incredibly strong balance sheet, but now it gets a little stronger," he said. "I guess they'll put it away for the next acquisition. They have a lot of appetizers, but haven't sat down for the main course."
The company has announced purchases so far this year of custom broker and freight forwarder Fritz Cos. for $437 million in UPS stock, and retail shipping center operator Mail Boxes Etc. for an undisclosed amount in a cash transaction.
Rockel said there had been speculation that UPS might be interested in CNF Inc. (CNF: down $0.52 to $26.70, Research, Estimates), a transportation company that includes air cargo carrier Emery Worldwide, nonunion trucking company Con-Way Transportation and third-party logistics provider Menlo Logistics. CNF's market capitalization is only $1.3 billion.
UPS spokesman Norman Black wouldn't comment on what UPS planned to do with the money, or any acquisitions it might be weighing.
"We're always looking at opportunities," said Black.
Click here for a look at transportation stocks
UPS competitor FedEx Corp. (FDX: down $1.00 to $37.65, Research, Estimates) has recently moved more into the traditional trucking market, buying a competitor of Con-Way to give it national coverage in that sector. Emery, which has a very old fleet of planes, announced a restructuring to ground some of the planes and lay off employees as a way of stemming losses in that unit. 
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