UPS 2009 Annual Report Download - page 91

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
includes the translation effect on goodwill from fluctuations in currency exchange rates, as well as escrow
reimbursements and the resolutions of certain tax contingencies from acquisitions completed previously.
Pro forma results of operations have not been presented for these acquisitions, because the effects of these
transactions were not material. The results of operations of these acquired companies have been included in our
statements of consolidated income from the date of acquisition.
Goodwill Impairment
We test our goodwill for impairment annually, as of October 1st, on a reporting unit basis. Our reporting
units are comprised of the Europe, Asia, and Americas reporting units in the International Package reporting
segment, and the Forwarding & Logistics, UPS Freight, MBE / UPS Store, and UPS Capital reporting units in the
Supply Chain & Freight reporting segment. The impairment test involves a two-step process. First, a comparison
of the fair value of the applicable reporting unit with the aggregate carrying values, including goodwill, is
performed. We primarily determine the fair value of our reporting units using a discounted cash flow model, and
supplement this with observable valuation multiples for comparable companies, as applicable. If the carrying
amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill
impairment test to determine the amount of impairment loss. The second step includes comparing the implied fair
value of the affected reporting unit’s goodwill with the carrying value of that goodwill.
In the fourth quarter of 2008, we completed our annual goodwill impairment testing and determined that our
UPS Freight reporting unit, which was formed through the acquisition of Overnite Corporation in 2005, had a
goodwill impairment of $548 million which is included in the caption “other expenses” in the consolidated
income statement. This impairment charge resulted from several factors, including a lower cash flow forecast due
to a longer estimated economic recovery time for the LTL sector, and significant deterioration in equity
valuations for other similar LTL industry participants. At the time of acquisition of Overnite Corporation, LTL
equity valuations were higher and the economy was significantly stronger. We invested in operational
improvements and technology upgrades to enhance service and performance, as well as expand service offerings.
However, this process took longer than initially anticipated, and thus financial results have been below our
expectations. Additionally, the LTL sector in 2008 was adversely impacted by the economic recession in the
U.S., lower industrial production and retail sales, volatile fuel prices, and significant levels of price-based
competition. By the fourth quarter of 2008, the combination of these internal and external factors reduced our
near term expectations for this unit, leading to the goodwill impairment charge.
None of the other reporting units incurred an impairment of goodwill in 2008, nor did we have any goodwill
impairment charges in 2009 or 2007. Cumulatively, our Supply Chain & Freight reporting segment has recorded
goodwill impairment charges of $622 million, while our International and U.S. Domestic Package segments have
not recorded any impairment charges.
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