United Parcel Service, Inc. (UPS) has entered into an agreement with New England Teamsters and Trucking Industry Pension Fund (NETTI) for restructuring its pension liabilities. The company expected to incur a one time charge of $896 million in the third quarter to transfer its 10,200 employees to a new pension plan. The new agreement with Teamsters also ends UPS' pension liabilities under the old plan.   Once employees are transferred to the new pension plan, the company expects it to remove ambiguities related to the old pension plans. Further, the new plan ensures no diminution in pension benefits and the company will not be required to increase its cash contribution for the next 10 years.

Approximately 60% of United Parcel Service's employees are union members. Strikes, work stoppages and slowdowns by the employees would affect the company's competitive position against rivals like FedEx Corporation (FDX). As a result, the company together with unions remains focused on resolving employee related issues by revising theirs pension and other benefits.

Recently, the company expressed intentions to expedite the initial talks for its next major union contract renewal with the Teamsters representing 260,000 out of the total 462,000 employees. Previously, the deal was slated for renewal in July 2013.

Over the long term, we believe the company will continue to invest in its workforce and technological requirements. Amid a challenging economic backdrop, we believe these investments have aided UPS' continued productivity gains and higher operating profits.

On the flip side, these expenses may weigh on the company's cash position and restrict its liquidity profile. The new $896 million pension liability is drawn from the company's $2.1 billion withdrawal liability, which it expects to repay in the next 50 years. However, in the near term, we can expect the company's pension liabilities to restrict the margin by increasing pension contributions over $800 million.

We, currently, have a long-term Neutral rating on UPS. For the short term (1-3 months), the stock retains a Zacks #4 Rank (Sell).



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Tickers in this Article: UPS, FDX

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