Microsoft Excel LibreOffice Calc

United Parcel Service Inc. (UPS)

Analysis of Operating Leases

Difficulty: Advanced

An operating lease is treated like a rental contract. Neither the leased asset nor the associated liability is reported on the lessee statement of financial position, but the rights may be very similar to the rights of an owner. The lessee only records the lease payments as a rental expense in income statement.

Present Value of Future Operating Lease Payments

United Parcel Service Inc., future operating lease payments

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total undiscounted future operating lease payments1 (USD $ in millions) 1,637  1,470  1,259  1,304  1,216 
Discount rate2 7.43% 6.60% 7.04% 7.37% 7.02%
Total present value of future operating lease payments (USD $ in millions) 1,290  1,198  1,012  1,036  980 

1 Source: United Parcel Service Inc. Annual Reports

2 Internal rate of return on capital leases

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 7.43%
2018 398  2018 398  370 
2019 305  2019 305  264 
2020 239  2020 239  193 
2021 186  2021 186  140 
2022 138  2022 138  96 
2023 and thereafter 371  2023 138  90 
2024 138  84 
2025 95  54 
Total: 1,637  1,637  1,290 

1 Source: United Parcel Service Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 6.60%
2017 368  2017 368  345 
2018 302  2018 302  266 
2019 221  2019 221  182 
2020 168  2020 168  130 
2021 111  2021 111  81 
2022 and thereafter 300  2022 111  76 
2023 111  71 
2024 78  47 
Total: 1,470  1,470  1,198 

1 Source: United Parcel Service Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 7.04%
2016 324  2016 324  303 
2017 263  2017 263  230 
2018 197  2018 197  161 
2019 125  2019 125  95 
2020 84  2020 84  60 
2021 and thereafter 266  2021 84  56 
2022 84  52 
2023 84  49 
2024 14  8 
Total: 1,259  1,259  1,012 

1 Source: United Parcel Service Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 7.37%
2015 323  2015 323  301 
2016 257  2016 257  223 
2017 210  2017 210  170 
2018 150  2018 150  113 
2019 90  2019 90  63 
2020 and thereafter 274  2020 90  59 
2021 90  55 
2022 90  51 
2023 4  2 
Total: 1,304  1,304  1,036 

1 Source: United Parcel Service Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 7.02%
2014 310  2014 310  290 
2015 239  2015 239  209 
2016 180  2016 180  147 
2017 146  2017 146  111 
2018 99  2018 99  71 
2019 and thereafter 242  2019 99  66 
2020 99  62 
2021 44  26 
Total: 1,216  1,216  980 

1 Source: United Parcel Service Inc. Annual Reports

Analyst Adjustments for Operating Leases

United Parcel Service Inc., adjustments to financial data

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported) 45,403  40,377  38,311  35,471  36,212 
Add: Operating leased assets1 1,290  1,198  1,012  1,036  980 
Total assets (adjusted) 46,693  41,575  39,323  36,507  37,192 
Adjustment to Total Debt
Total debt (as reported) 24,289  16,075  14,334  10,787  10,872 
Add: Operating lease obligations2 1,290  1,198  1,012  1,036  980 
Total debt (adjusted) 25,579  17,273  15,346  11,823  11,852 
Adjustment to Earnings before Interest and Tax (EBIT)
EBIT3 (as reported) 7,601  5,517  7,683  4,990  7,054 
Add-back: Rent expense related to operating leases4 804  686  669  676  575 
Less: Depreciation expense, operating leased assets5 659  569  558  558  473 
EBIT (adjusted) 7,746  5,634  7,794  5,108  7,156 
Adjustment to Interest Expense
Interest expense (as reported) 453  381  341  353  380 
Add: Interest expense, operating lease obligations6 145  117  111  118  102 
Interest expense (adjusted) 598  498  452  471  482 

1, 2 Equal to total present value of future operating lease payments. See Details »

3 See Details »

4 Source: United Parcel Service Inc. Annual Reports

5 See Details »

6 See Details »

Adjusted Ratios for Operating Leases (Summary)

United Parcel Service Inc., adjusted ratios

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total Asset Turnover1
Reported total asset turnover 1.45 1.51 1.52 1.64 1.53
Adjusted total asset turnover 1.41 1.46 1.48 1.60 1.49
Debt to Equity2
Reported debt to equity 24.29 39.69 5.80 5.04 1.68
Adjusted debt to equity 25.58 42.65 6.21 5.52 1.83
Return on Assets3 (ROA)
Reported ROA 10.81% 8.50% 12.64% 8.55% 12.07%
Adjusted ROA 10.52% 8.25% 12.32% 8.31% 11.76%
Interest Coverage4
Reported interest coverage 16.78 14.48 22.53 14.14 18.56
Adjusted interest coverage 12.96 11.32 17.26 10.86 14.85

1 See Details »

2 See Details »

3 See Details »

4 See Details »

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. United Parcel Service Inc.'s adjusted total asset turnover deteriorated from 2015 to 2016 and from 2016 to 2017.
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. United Parcel Service Inc.'s adjusted debt-to-equity deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. United Parcel Service Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level.
Adjusted interest coverage A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. United Parcel Service Inc.'s adjusted interest coverage deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Revenue (USD $ in millions) 65,872  60,906  58,363  58,232  55,438 
Total assets (USD $ in millions) 45,403  40,377  38,311  35,471  36,212 
Total asset turnover1 1.45 1.51 1.52 1.64 1.53
Adjusted for Operating Leases
Revenue (USD $ in millions) 65,872  60,906  58,363  58,232  55,438 
Adjusted total assets (USD $ in millions) 46,693  41,575  39,323  36,507  37,192 
Adjusted total asset turnover2 1.41 1.46 1.48 1.60 1.49

2017 Calculations

1 Total asset turnover = Revenue ÷ Total assets
= 65,872 ÷ 45,403 = 1.45

2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= 65,872 ÷ 46,693 = 1.41

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. United Parcel Service Inc.'s adjusted total asset turnover deteriorated from 2015 to 2016 and from 2016 to 2017.

Adjusted Debt to Equity

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Total debt (USD $ in millions) 24,289  16,075  14,334  10,787  10,872 
Equity for controlling interests (USD $ in millions) 1,000  405  2,470  2,141  6,474 
Debt to equity1 24.29 39.69 5.80 5.04 1.68
Adjusted for Operating Leases
Adjusted total debt (USD $ in millions) 25,579  17,273  15,346  11,823  11,852 
Equity for controlling interests (USD $ in millions) 1,000  405  2,470  2,141  6,474 
Adjusted debt to equity2 25.58 42.65 6.21 5.52 1.83

2017 Calculations

1 Debt to equity = Total debt ÷ Equity for controlling interests
= 24,289 ÷ 1,000 = 24.29

2 Adjusted debt to equity = Adjusted total debt ÷ Equity for controlling interests
= 25,579 ÷ 1,000 = 25.58

Ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. United Parcel Service Inc.'s adjusted debt-to-equity deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (USD $ in millions) 4,910  3,431  4,844  3,032  4,372 
Total assets (USD $ in millions) 45,403  40,377  38,311  35,471  36,212 
ROA1 10.81% 8.50% 12.64% 8.55% 12.07%
Adjusted for Operating Leases
Net income (USD $ in millions) 4,910  3,431  4,844  3,032  4,372 
Adjusted total assets (USD $ in millions) 46,693  41,575  39,323  36,507  37,192 
Adjusted ROA2 10.52% 8.25% 12.32% 8.31% 11.76%

2017 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 4,910 ÷ 45,403 = 10.81%

2 Adjusted ROA = 100 × Net income ÷ Adjusted total assets
= 100 × 4,910 ÷ 46,693 = 10.52%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. United Parcel Service Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level.

Adjusted Interest Coverage

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Earnings before interest and tax1 (EBIT) (USD $ in millions) 7,601  5,517  7,683  4,990  7,054 
Interest expense (USD $ in millions) 453  381  341  353  380 
Interest coverage2 16.78 14.48 22.53 14.14 18.56
Adjusted for Operating Leases
Adjusted EBIT (USD $ in millions) 7,746  5,634  7,794  5,108  7,156 
Adjusted interest expense (USD $ in millions) 598  498  452  471  482 
Adjusted interest coverage3 12.96 11.32 17.26 10.86 14.85

1 See Details »

2017 Calculations

2 Interest coverage = EBIT ÷ Interest expense
= 7,601 ÷ 453 = 16.78

3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= 7,746 ÷ 598 = 12.96

Ratio Description The company
Adjusted interest coverage ratio A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. United Parcel Service Inc.'s adjusted interest coverage ratio deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

Estimation of Depreciation Expense, Operating Leased Assets

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Rent expense related to operating leases1 804  686  669  676  575 
Less: Estimated interest expense, operating lease obligations2 145  117  111  118  102 
Estimated depreciation expense, operating leased assets 659  569  558  558  473 

1 Source: United Parcel Service Inc., Annual Reports

2 See Details »

Estimation of Interest Expense, Operating Lease Obligations

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Operating leased assets, at beginning of year1 (USD $ in millions) 1,950  1,767  1,571  1,594  1,453 
Discount rate2 7.43% 6.60% 7.04% 7.37% 7.02%
Estimated interest expense, operating lease obligations3 (USD $ in millions) 145  117  111  118  102 

1 See Details »

2 Internal rate of return on capital leases

2017 Calculations

3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= 1,950 × 7.43% = 145

Present Value of Operating Lease Payments, at Beginning of Year

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total present value of future operating lease payments1 (USD $ in millions) 1,290  1,198  1,012  1,036  980 
Rent expense related to operating leases2 (USD $ in millions) 804  686  669  676  575 
Discount rate3 7.43% 6.60% 7.04% 7.37% 7.02%
Total present value of operating lease payments, at beginning of year4 (USD $ in millions) 1,950  1,767  1,571  1,594  1,453 

1 Equal to total present value of future operating lease payments. See Details »

2 Source: United Parcel Service Inc., Annual Reports

3 Internal rate of return on capital leases

2017 Calculations

4 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Rent expense related to operating leases) ÷ (1 + Discount rate)
= (1,290 + 804) ÷ (1 + 7.43%) = 1,950