UPS hit with SEC fine over its internal valuation of UPS Freight before TFI sale

The former UPS Freight LTL carrier – which has been enough of a headache for its subsequent owner that its CEO felt the need to defend its acquisition in a recent earnings call – was not properly valued by UPS when its sale was being considered, according to the Securities and Exchange Commission.

The penalty levied against UPS, after what the SEC said was a settlement with the logistics provider, was a $45 million fine. UPS, in the settlement, did not admit or deny the SEC findings, according to the agency.

UPS Freight is now known as TForce Freight within TFI International. UPS sold the LTL carrier to TFI in an $800 million deal that closed in April 2021 and was announced in January of that year.

At issue for the SEC was the UPS valuation of goodwill attached to the UPS Freight unit.

Goodwill is a balance sheet line item that has been described as an “intangible asset” that reflects such amorphous non-financial capital as reputation and the strength of a company’s customer base. Its valuation is always a challenge, and according to financial information company Finance Strategists, it is reported by a company “only if its valuation can be supported by a transaction involving the purchase of a firm.”

“In general, it refers to a kindly feeling of approval and support,” Financial Strategists said.

According to a prepared statement released by the SEC, UPS in a 2019 internal review concluded that the top price it could receive for UPS Freight was $650 million (or $150 million less than it ultimately received in 2021).

Given that calculation, according to the SEC, the provisions of Generally Accepted Accounting Principles (GAAP), if properly implemented, should have been considered by UPS in a determination whether to write down the value of goodwill it had assigned to UPS Freight. Approximately $500 million in goodwill attributed to UPS Freight should have been considered “impaired,” which normally would lead to a writedown, the SEC said.

(In its latest quarterly earnings, UPS listed approximately $4.4 billion in goodwill for the company as a whole. At the end of 2019, that figure was approximately $3.8 billion).

But the SEC said that UPS turned to an outside consultant to value UPS Freight “without giving the consultant information necessary to conduct a fair valuation of the business.”

Outsider sees a $2 billion business

That consultant estimated UPS Freight was worth about $2 billion, which would have been about 150% more than what TFI ultimately paid for the LTL carrier. It was also well above the internal valuation that UPS could expect to receive no more than $650 million for the asset.

As a result of what the consultant estimated, according to the SEC, “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.”

When UPS (NASDAQ: UPS) entered into the deal with TFI (NASDAQ: TFII) for $800-million (TFI was not identified by name by the SEC), there were adjustments agreed to in the deal “that were likely to reduce the final price,” the SEC said.

“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,” the SEC said. “UPS also did not inform the consultant of the term sheet.”

UPS, in a statement provided to FreightWaves, noted that the investigation had already been previously disclosed by the company.

The statement reiterated that UPS was not admitting or denying the allegations.

“The settlement amount had previously been fully accrued in our financial statements, and the settlement will not have a material effect on our business, financial condition, results of operation, or liquidity,” UPS said, adding that the investigation has concluded.

In the quarterly earnings calls at TFI, CEO Alain Bedard, frustrated by the unit’s performance, said of operations at TForce that its practice of taking shipments that he believed were too light were “stupid” and that the unit was “too fat.”

In an email to FreightWaves, Bedard said he had no comment on the SEC fine against UPS and its report.

UPS stock at approximately 12:15 p.m. EST was up 2,15% to $134.19, a gain of $2.82. It has been an industry laggard in the last year, down about 11%.

TFI was up less than 0.5% Friday morning. It is up about 28.4% in the last 12 months.