The Securities and Exchange Commission announced a $45 million penalty against United Parcel Service Inc. for materially misrepresenting its earnings on one of its worst performing businesses.
The SEC said the settlement comes after UPS determined in 2019 that its unit, UPS Freight, a business unit that transported less-than-truckload shipments, was likely to sell for no more than $650 million. However, the SEC said the company failed to follow generally accepted accounting principles (GAAP) and that GAAP would have required UPS to use the price it would receive to sell Freight in calculating whether to write down the value of the goodwill it had assigned to the business unit on its balance sheet. UPS’s own analysis indicated nearly $500 million of goodwill is had associated with Freight was impaired.
Rather than use that analysis, however, UPS relied on an outside consultant’s valuation of the business unit without giving the consultant the information they needed to conduct a fair valuation. Without those assumptions, the consultant estimated Freight was worth about $2 billion more than three times UPS’ estimate. With the consultant’s valuation in hand, UPS valued Freight, its earnings and other reported items would have been much higher in 2019, if it had recorded the goodwill impairment that year, the SEC said.
Additionally, the SEC’s order alleges that in 2020, UPS entered into a non-binding term sheet to sell Freight for $800 million, with adjustments to be made later that were likely to reduce the final price. Despite its own analysis, UPS relied on a consultant’s valuation of Freight in 2020 to support not impairing the business’s Goodwill. As in 2019, UPS did not inform the consultant about the term sheet, and the consultant relied on UPS’s information and improperly valued Freight higher than it would have if it had the impaired goodwill information.
“Goodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own,” said Melissa Hodgman, SEC associate director. “Therefore, it is essential for companies to prepare reliable fair value estimates and impair goodwill when required. UPS fell short of these obligations, repeatedly ignoring its own well-founded sale price estimates for Freight in favor of unreliable third-party valuations.”
In addition to the civil penalty, UPS agreed to cease and desist from further valuation violations, to adopt training requirements for certain officers, and to retain an independent compliance consultant to review the company’s fair value estimates and disclosure obligations.