SEC: UPS to pay $45 million penalty for improperly valuing business unit

According to the SEC’s order, UPS determined in 2019 that UPS Freight, a business unit that transported less-than-truckload shipments, was likely to sell for no more than about $650 million. GAAP required UPS to use the price it would receive to sell Freight in calculating whether it needed to write-down the value of the goodwill it had assigned to the business unit on its balance sheet. UPS’s own analysis indicated that nearly $500 million of goodwill it had associated with Freight was impaired. Rather than use that analysis, however, UPS relied on an outside consultant’s valuation of Freight without giving the consultant information necessary to conduct a fair valuation of the business. Using assumptions approved by UPS, which were clearly not ones a prospective buyer of Freight would make, the consultant estimated Freight was worth about $2 billion – three times as much as UPS had determined. On that basis, UPS did not record a goodwill impairment in 2019. Had UPS properly valued Freight, its earnings and other reported items would have been materially lower.

The SEC’s order also 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 and its entry into this term sheet, UPS relied again on a consultant’s valuation of Freight in 2020 to support not impairing the business’s goodwill. UPS also did not inform the consultant of the term sheet. As in 2019, the consultant relied on assumptions from UPS that were clearly not ones a prospective buyer would make. Like the prior year, had UPS properly valued Freight and impaired goodwill, its earnings and other reported items would have been materially lower.

“Goodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own,” said Melissa Hodgman, 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.”       

The SEC’s order finds that UPS violated Sections 17(a)(2) and (3) of the Securities Act, the reporting, book and records, internal accounting controls, and disclosure controls provisions of the Exchange Act, and various related rules. In addition to the civil penalty, UPS, without admitting or denying the SEC’s findings, agreed to cease and desist from further violations of these provisions, adopt training requirements for certain officers, directors, and employees, and retain an independent compliance consultant to review and make recommendations about the company’s fair value estimates and disclosure obligations.

The SEC’s investigation, which is continuing, was conducted by Joseph Zambuto, Jr. and supervised by Assistant Director Rami Sibay.