UPS 2010 Annual Report Download - page 95

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
August 2009. This was offset by the decrease in the International Package and Supply Chain & Freight segments
due to the impact of the strengthening U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
The goodwill acquired in the International Package segment in 2009 was primarily due to the acquisition of
Unsped, as discussed further below. We also acquired an agent in Slovenia during the second quarter of 2009.
The increase in goodwill in the Supply Chain & Freight segment was due to the impact of fluctuations in the
U.S. Dollar with other currencies on the translation of non-U.S. Dollar goodwill balances, partially offset by the
allocation of goodwill to the sale of certain non-U.S. Mail Boxes Etc. franchise relationships.
In August 2009, we completed the formation of a new joint venture headquartered in Dubai to develop and
grow UPS express package, freight forwarding and contract logistics services across the Middle East, Turkey and
portions of Central Asia. We own 80% of this joint venture, and we consolidate the financial statements of the
joint venture. In conjunction with the formation of this joint venture, the joint venture acquired the small package
operations of Unsped, our existing service agent in Turkey. We contributed certain existing UPS operations in
the region to the new joint venture, along with cash consideration of $40 million and an additional $40 million
that will be due on a deferred basis. We maintain an option to purchase the remaining 20% of the joint venture,
and the joint venture partner maintains a put option to require us to purchase the remaining 20% interest. Upon
exercise of the call or put option, a payment of $20 million will be required. An additional payment may be due
depending upon the earnings of the joint venture. The 20% portion of the joint venture that we do not own, which
represents temporary equity, is recorded as a noncontrolling interest in shareowners’ equity. The express package
business operations of Unsped are included in our International Package segment, while the freight forwarding
business of Unsped is included in our Supply Chain & Freight segment.
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
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