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Executive Summary

It was known as the largest Initial Public Offering (IPO) in history. United Parcel Service (UPS), an employee-owned operation, had announced that the company would be initiating an IPO. The company was worth a net income of 1.7 billion, and had a history of a solid financial performance. This offering was seen in the eyes of the company as an opportunity that would give the company flexibility to gain more control over global commerce. The main concern would be the determining of the share price, planned to be announced only a few hours before the purchasing of this stock would begin. UPS joined forces with Morgan Stanley Dean Witter & Co. to complete the task of pricing the shares (Healy). In order to price the shares this team considered many different factors and alternatives to which the share price could be based upon. After considering and researching information related to this case, the obvious solution would be for UPS to be benchmarked relative to best-of-breed industry leaders, and have their share price set at a premium compared to FedEx Corp.

This paper will begin by presenting a brief overview of the history of UPS, followed by the introduction of the companys main competitors, FedEx and USPS. A S.W.O.T. analysis of the company and its competitors will then be presented. This will then be followed up with the introduction of the main concern of this paper, which is considering the companys past and future financial success, should FedEx or best-ofbreed industry leaders be the reasonable benchmark for valuing UPS stock, or should UPS choose a different alternative to use as its benchmark? These different alternatives

will then be analyzed according to their strengths and weaknesses in order to select the

best solution. After considering each alternative based on the data presented, the solution will then be introduced.


UPS was founded in 1907 as a small messenger service by a man named James Casey. The company was first introduced as the American Messenger Service, only later to become known as the United Parcel Service (UPS). The company, based out of Seattle, began its service by delivering letters, food, and luggage, through the use of foot, bicycle, and streetcar (Healy). Casey and his partner ran the business with a handful of teenagers as messengers. They set strict policies of customer courtesy, reliability, round-the-clock service, and low rates ( These policies are still part of the companys strong foundation today.

Throughout the 1920s the company began to shift their focus to package delivery, working along side retailers. This shift gradually led to a geographical expansion. At this time the company started to implement the use of automobiles and motorcycles. The company also adopted the practice known as common carrier or consolidated delivery ( The purpose of this practice enabled the company to merge together packages of a neighborhood into a single delivery truck ( The company was also the first to contract and make use of the first-ever mechanical sorter and conveyer belt (Healy). Throughout the next three decades the company continued to grow. The company

began to realize that in order to do this they would need to expand to new geographical areas, which eventually led to thirty years of state and federal petitioning in order to acquire common carrier rights. These rights would allow them to deliver packages to

all customers, both private and commercial ( By the 1980s UPS had grown so much that they had passed up their biggest competitor at that time, United States Parcel Service, when it came to parcel volume ( In the course of the next two decades, UPS became the largest ground carrier service in the country (Healy). UPS began offering a two to three day air delivery service in 1953, and later launched next day air service in 1985. Throughout the 1980s the company also began to focus more on their use of technology, their pricing and marketing strategies, as well as the employing of new systems customized to improve the tracking, managing, and shipping of their deliveries (Healy). The focus and implementation of these new applications were the reasons why UPS ascended to where they did.


The package delivery industry can be broken up into three distinct customer categories. These categories include the sending of overnight letters, the shipment of small to medium sized packages by those who request shipment of time-critical parcels, and the movement of heavy freight between large corporations. UPS had two major competitors in this industry, FedEx and USPS. Other minor competitors included Airborne Freight, CNF, and DHL (Healy). UPS and its competitors each offered services in each of the three segments, although each company had characteristics and dominant areas different from one another. A S.W.O.T. analysis for each company, UPS, FedEx, and USPS, will now be presented which can be used to compare UPS to its competitors.

By evaluating the information provided in these analysis, an understanding as to where each company stands in this industry, when it comes to what each company has to offer

and how they differentiate from each other, will now become evident. Some of the opportunities and threats will be the same for all three companies.

S.W.O.T. Analysis-UPS


Provides both air and ground service

Holds 51% share of market by revenue

Market leader in the $17 billion ground segment

Consistent financial success

AAA credit rating

Integrated sorting centers


Number two to USPS in the deferred segment

Number two to FedEx in the overnight express

market Opportunities: 9 Growing GDP

Growth of Internet shopping (E-Commerce)

Growth in international delivery (globalization)

Supply chain management





expansion Threats: 9 Digitization of documents and introduction of electronic signatures

Industry competition

New ground segment competition

Labor Issues

Fuel cost issues

IRS issues

S.W.O.T. Analysis-FedEx


Market leader in the overnight express segment, accounting for 84% of total revenues and 83% of operating income in 1998

A $17 billion global transportation and logistics enterprise

Can move over 3 million packages a day, with availability to almost all addresses

Single handedly pioneered concept of overnight delivery


Behind UPS with 26% share of market by revenue

Inferior financial performance compared to UPS

BBB credit rating

Separate operating centers for ground and air Opportunities:

Growing GDP

Growth of Internet shopping (E-Commerce)

Growth in international delivery (globalization)

Supply chain management

Recently acquired RPS which was second behind UPS in ground delivery business-to-business small-package shipper


Digitization of documents and introduction of electronic signatures

Industry competition

Fuel Cost issues



Offers prominent service called Priority Mail, which is shipment to any destination in country in 1 to 3 business days, and considered less expensive than UPS and FedExs 2 to 3 day service offerings

Market leader in the deferred segment

Quasi-government entity which moves more than four times as many deliveries a

day than UPS and FedEx combined


Holds 17% share of market by revenue

E-mail and electronic communication undercutting traditional mail

Priority Mail less reliable than UPS and FedEx

Lacked premier logistics


Growing GDP

Growth of Internet shopping (E-Commerce)

Growth in international delivery (globalization)

Supply chain management

Rumor is that Lockheed Martin is helping them create an advanced trackingsystem Threats:

Digitization of documents and introduction of electronic signatures

Industry competition

Information in S.W.O.T. analysis provided by Healy Case Study

Current Industry Trends

With the leverage an IPO offers and the companys current financial strength, UPS will look to strengthen their position in three categories of industry trends and opportunities. UPS is choosing to focus on these current industry trends because they believe that they define the packaging industry of the future. The following three trends and opportunities include:



Supply-Chain Management

It is important for the company to consider these three opportunities and trends, because they are a big reason why UPS is planning to issue an IPO. The first up-and-coming trend the company is planning to focus on is globalization. UPS wants to strengthen its package delivery business throughout the whole world. Since the emergence of the Internet, borders that used to hinder the business world are now being lifted. Businesses are now able to conduct business with any other business or consumer throughout the world. With the increase of business activity due to the Internet the shipping industry has picked up. This has led to an

increase in demand for the companys services. For example, in the second quarter of 1999, UPS proved it was eyeing international expansion by acquiring Challenge Air Cargo, the largest all-cargo airline serving Latin America (Lacey). Continuing to expand globally would no doubt help UPS stay competitive within this particular segment, and therefore continue their industry superiority overall. The second rising opportunity is E-Commerce, mainly focusing on the delivery of goods purchased on the web. More than ever consumers are depending on the Internet to make their purchases. The materialization of such sites as E-Bay and has brought this shipping industry into one of its own. UPS has already made a name for itself in this environment, with over 10,000 websites offering UPS functionality (Healy). In reference to the upcoming offering, Stephen Lacey, an IPO reporter states, In the year of the internet, another potential attraction to the UPS offering is the companys seemingly farflung ties to e-commerce. According to the companys filing, UPS commands about 55% of the total market for the distribution of goods purchased over the internet. Still, UPS needs to develop this market further, and promote itself as the dominant player in the Internet shipping business.

Supply chain management is the third growing trend that can be used to define the package delivery system of the future. UPS plans to be an integral player in the world of synchronized commerce by helping our customers streamline their operations and integrate their supply chains to better serve their customers, drive efficiencies, eliminate waste and create more sustainable business models ( Much of the

funds that will be used here will be to help the company develop and manage their inventory and shipping logistics. These plans are a much more efficient and effective

way to handle inventory, because the inventory would be always in transit (Healy). Also, the UPS Logistics group offers suppliers a portfolio of financial services and software applications to help them manage key functions of their businesses, particularly inventory and shipping logistics (Healy). Although the profits generated by the IPO could be used to further expand UPS in these future trends and opportunities, the company is fortunate to be able to support a majority of their expansion efforts with operating cash flows (Healy). The IPO would instead serve as an attractive tax-efficient medium of exchange-to fund any subsequent acquisitions (Healy). This could be attractive to potential investors because it flexes UPSs muscle a little bit. The money is in fact something that UPS does not need due to 3.4 billion in cash reserves (Lacey). This figure is no doubt appealing to potential UPS investors. Furthermore, UPS maintains an AAA credit rating, while their main competitor FedEx, maintains a BBB (Healy). An AAA rating shows an excellent capacity to service and repay debt, while a BBB rating shows capacity for satisfactory results, but adverse conditions can increase the risk ( Once again investors are turned on by such high quality marks for UPS. Arthur Hatfield states, Their cash flow and AAA debt rating give them sufficient resources to grow their business (Lacey). Lacey goes on to say, Freeing up its stock, however, would enable UPS to pursue acquisitions through a combination of equity, debt or cash, making the company even more attractive to potential partners. Given the erosion of trade barriers across the European continent and elsewhere, this additional financial flexibility has become

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increasingly important (Lacey). This further justifies the IPO and also shows just how attractive UPS stock will be to potential investors.

Introduction of Problem

Our goal is to remain the pre-eminent global company in our industry in the 21st century. By having available a publicly traded equity security, UPS will be able to take advantage of opportunities around the world to grow its business. The decision to go public reflects our willingness to embrace change, something UPS has done repeatedly since being founded as a messenger company in 1907 ( In July of 1999, UPS, a ninety year old company made it known that it was planning an initial public offering which was to be the largest IPO ever by an American company ( This offering would change the face of the company forever, and was deemed to be a stepping stone for the companys future continuation of success.

UPSs plan was to create two classes of shares. The first class was Class A stock, which would be sold to existing owners and would carry ten votes each. The second would be Class B stock, which would be sold to the public and would carry only one vote each. UPS plans to use the finances generated from the sale of the IPO to repurchase Class A stock from shareholders. Gradually, Class A shares will become available to the public and become Class B shares (Healy). After the execution of this plan, UPS estimates that the companys current shareowners will then own 90% of the companys equity and control 99% of the vote (Healy). This would enable them to keep a firm grip

and preserve the employee-owned tradition while providing them with another resource for expansion and upgrading. Though, interviewee Kurt Schletzer, an Investment Representative for Edward Jones, believes that a company as big as UPS should remain

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employee owned, and that the option to go public has its disadvantages. He feels that when a company is doing well, then its employees are the ones who are rewarded, with rights to ownerships and with earnings. Once a company goes public, they will have to worry about a board of directors, and a company will be limited to the amount of funds they can raise. For this public offering UPS has elected to use the company of Morgan Stanley Dean Witter & Co., co-managed by Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Salomon Smith Barney and Warbug Dillon Read, to help in the pricing of its shares ( Through the work of this joint collaboration, their main concern will be choosing the price of their stock. Because of the companys history of financial and operational success, the company was faced with a difficult, but good situation. They would have to decide on what benchmark to base their price on, while at the same time making sure not to underestimate their value. In order to choose their opening share price, UPS and Morgan Stanley Dean Witter & Co. had chosen to look at the following valuation benchmarks,

The trucking industry

The companys main competitor FedEx

Other best-of-breed companies in other industries

When evaluating these three benchmarks, UPS would have to consider factors such as current industry trends, the success and financials of competitors in this industry and other industries, as well as the success and financials of their own company. Finally, after researching and analyzing these factors, UPS will then be able to choose their valuation benchmark. Interestingly, the team decided the trucking industry was too

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limited and not a good source for valuing the company (Healy). We agree as UPS offers quite a different transportation service as well as operating branches that compete more on a level with FedEx, USPS, and others.

Choosing FedEx as a Benchmark

In the package shipping industry FedEx Corporation is UPSs main competitor. FedEx, which is based out of Tennessee, operates a fleet of 634 airplanes and 41,000 pickup/delivery vehicles. It has 88,000 full-time workers and 50,000 part-time workers. When compared to UPS, UPS has a fleet of 500 airplanes, 149,000 pickup/delivery vehicles, and has over 340,000 employees (Healy). FedEx, which started out as an overnight air express delivery service has since diversified their services to other aspects of the package delivery industry. To further strengthen their company FedEx acquired Roadway Package System (RPS), which was the second-largest ground delivery service behind UPS (Healy). In order to keep FedEx Grounds costs lower than UPSs they use contract drivers and trucks which are much cheaper then UPSs Teamster organized delivery workforce. They also have invested in RPSs existing ground networks to help them expand their reach to more customers, and to also help in increasing customer service through technology and training (Healy). They also are looking to the international delivery service as a key source of business growth for the future (

However, there is evidence and facts that suggest FedEx is not a reliable benchmark for valuing UPS stock. One key factor is that UPS relies more on the ground aspect of package delivery where as FedEx relies more on the air/express aspect of the

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industry. With this, the cost structures of ground delivery verses air/express delivery are very different. Another key factor that suggests FedEx is not a reliable valuation benchmark is the fact that UPS handles many more packages a day then FedEx. Meaning UPS drivers will pick up and deliver a great deal more packages a day then FedEx drivers. Another major difference between the two companies is that UPS has integrated its ground and air/express services as one company. The company shares all their resources and assets, for example, their sorting centers and trucks. UPSs management team thinks that this has developed a strong advantage for UPS over its rival FedEx. Lastly, there are also differences in the financial management sector of the two companies. As we said earlier, UPS has an AAA credit rating where FedEx has a BBB credit rating. One aspect where FedEx is superior to UPS is in the customer service department. FedEx over the years has relied heavily on its superior customer service to gain customers. The company is known to be committed to its customers. This is shown by its best-in-industry on-time reliability record (Healy). Also, FedExs operations are segmented into many parts. Because of this they can help their customers better by giving them a more options for what they want. They feel that because their ground and air/express departments are segmented, they can speed up the delivery process. On the other hand, UPS is integrated into one company, in which FedEx believes this integration

slows down the package delivery process. FedEx greatly stresses their segmentation and feels that it is one of the key aspects in whom and what the company is ( They even take a jab at UPSs operations, when talking about the

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integrated approach by saying, when it comes to shipping, one size does not fit all ( The following chart depicts how each company goes through their delivery process.
With FedEx.

With UPS..



*Chart adopted from Healy Case study

Further evaluation

UPS Brown

FedEx Express
Sorting Center for Express and Ground

To Destination

Sorting Center for Express

To Destination

FedEx Ground

Sorting Center for Ground

To Destination

In developing a solution to the valuation problem such as this we must also look at key industry holdings. In looking at figures from the Healy case, UPS holds 51% of the market share by revenue, where FedEx has only 26% of the market share based upon revenue.


% Share of Market by Revenue

Other USPS 17% FedE x UPS 51% FedEx 26% USP S Other 6%

Next, by looking at this chart we see that UPSs Domestic Revenue for 1998 was 2.169 times greater then that of FedEx. Internationally, UPS has a stronger position package wise than FedEx as well, so the figures would give UPS an even greater advantage.

1998 Average Daily Package (Volume=Thousands of Packages)



U.S. Express (Air) U.S. Deferred U.S. Ground

1998 Average U.S. Revenue/Package

938 783 9645

1957 894 1385

Express (Air) Deferred Ground

$19.69 $12.39 $5.51

$14.34 $9.93 $5.36

1998 Tot. Rev. packages delivered U.S.



Summary of UPS and FedEx Operating Statistics *Numbers adopted from Healy Case Study

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If UPS is going to benchmark their IPO upon FedEx then we must also look at what their shares are going for in the market.

Market Data and Multiples(November 1, 1999)

Shares Outstanding(Weighted average,diluted) Share Price

300.6 million $41.50



Price/Total Revenue


Market/Book Value


Equity Beta


*Healy Case Study

From this table we see that FedEx has 300.6 million shares outstanding at a price of $41.50 per share. If UPS was to use FedExs company as a benchmark to value their stock then they would set their prices from a range of $38 to $44 a share. Interviewee Kurt Schletzer feels that UPS should not use FedEx as their benchmark for setting their share price. Schletzer states, If a company has no respect for another company, and they feel that they are the premier company, then why use the other company as a


UPS as a Best of Breeds Company

Another alternative that UPS could use when valuing their stock would be to reflect their stock as if they were a best-of-breed type company. In doing this UPS would value themselves at a premium due to being the superior company in the package delivery industry. UPS feels that with their 51% share of market revenue that they are a best-of-breed type company. With their superior performance they feel that their stock


should be priced higher than the other firms in the industry to further exemplify their strengths. Examples of such companies that are in this higher class are Coca-Cola, Wal-Mart, and Home Depot. Exhibit 13 of the Healy Case data is presented on industry leaders and their main competitors. The following chart shows this data and also includes a hypothetical UPS/FedEx comparison.

Stock Price

Market Cap (Billions)

Net Income (Millions)


Price to Earnings

Market to book

Home Depot $68.50









































39.4-45.9 *taken
from (Rocks)










*adapted from the Healy Case Study

The data in the table above show that UPS would likely command a higher stock price if the numbers were to stand true in their industry. Their market capital is significantly higher than FedEx, which is true for the other three companies that lead their industry. Net income figures and return on equity also follow this same pattern.

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UPS employs over 340,000 and has customers all over the world. UPS also delivers over 13 million packages each day from over 2 million addresses to over 6 million commercial and residential addresses across the world. UPS also has contacts with 1.8 million customers every day, including every company in the Fortune 1000 (Healy). These are no doubt very impressive stats and UPS has not gone unrecognized for their previous success in operations and performance. In 1999 Fortune magazine named UPS as the Worlds Most Admired Global Mail, Package and Freight Delivery Company. While Forbes magazine named UPS Company of the Year (Healy). The recognition of these two large circulation magazines will undoubtedly leave a positive impression on those who read them. Further, for UPS to be able to be so successful they need a very highly sophisticated IT system, which they have developed and upgraded to ensure to their customers the best in reliability, efficiency, and speed (Healy). Also helping to make the company more efficient and effective are precise driving routes and quality sorting facilities, where packages are moved swiftly but effectively in that an Air package that can be delivered by truck in less time will be redirected to ground delivery. This allows for improvements in cost efficiency that a segmented operation such as FedEx could not reproduce.

Again, UPS handles 55% of all distribution from e-commerce, which includes shopping done over the internet. When it comes to Christmas, many consumers do not mind waiting a couple days to get their items ( UPSs low cost

shipping methods are ideal for online shopping deliveries during such a peak period for all businesses. Internet shopping is becoming more and more convenient for shoppers

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and it is drawing in a lot of business for UPS. In the fourth quarter of 1999 it is expected that 9.5 billion dollars will be spent during the holiday season ( This is a big plus for a company that is dominant compared to its rivals in this sector of the package delivery market ( Not only does this abide well for the superiority of UPS, but it also stresses a focus on the e-commerce sector of business expansion. Another reason to rank UPS as a best-of-breed company is because of their loyal workforce. UPS has recruited many of their employees through part-time positions and training programs. These employees are then trained and sent through carefully studied work programs at a cost of 300 million annually (Healy). These training programs and on the job mentors have led to UPS having one of the lowest turnover rates in the industry. UPS also promotes from within which leads to employees staying with the company longer and being more loyal to it (Healy). Over 200,000 of the UPS employees are members of the International Brotherhood of Teamsters, making UPS the main group of workers for that union (Healy). This along with other factors help to conclude that controls, rules, detailed union contracts, and carefully studied work methods help to guarantee the customer reliable, low-cost service (Healy).

On the other side some sources believe that UPSs IPO will start off with a bang but its prices will drop after a few months. For instance, David Rocks feels that UPS is a slow but steady blue chip which will command much respect. But after the glow fades from the IPO they fear that UPS stock will face the same fate as FedExs stock (Rocks).

FedEx stock fell through because of less then expected growth rates and higher fuel cost. These costs led to FedExs stock plunging nearly 12% in one day. UPS has already

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stated that they are also concerned that they too will be affected by these higher fuel costs much like FedEx. Another major issue of concern for UPS is their workforce. Two years ago UPS was hit hard by the strike of their employees which amounted to great financial and customer relation losses. The Teamsters organization is now bringing up that UPS has not fulfilled its side of the deal and has not hired the 2,000 new employees that they said they would (Rocks). CEO Kelly has also said that UPS is being threatened by postal services which are getting more and more aggressive (Rocks). Lastly, UPS has had a history of troubles with the IRS. In 1999, just before the launch of the IPO, it was announced that UPS had to pay $300 million in taxes and penalties to the IRS due to infractions that dated back to the 80s (Hahn). Fortunately, a company that is as successful as UPS will have little trouble paying this debt. IRS troubles are not uncommon for big business and this event should have little effect on the company and investors interest. Alex Brand, a transportation analyst with Scott & Stringfellow says, I think you have to put it in the context of $25 billion organization, I cant see that it would have any impact whatsoever. Its a non-event for an IPO (Hahn). Others believed it would affect the IPO a little more than Mr. Brand leads us to believe, but it is hard to imagine it being much of a blow to such a successful, well-established company.

Is UPSs dominance of the industry good enough to establish themselves as a

best of breed type company? Some sources are skeptical when considering whether or not UPSs stock should be priced much higher than FedExs stock. However, these same skeptics believe that UPS is a dominant company in the package delivery industry, and

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believe that UPS should not be priced a lot much higher than FedEx, but that they still should be priced a little higher because of their great track record and continual growth and dominance of the industry.

Decision time

After a careful look at UPSs standing as compared to that of their competitors, it is easy to see that UPS is no doubt superior in many ways. With an eye on the future and a new bargaining chip on the horizon it seems that UPS is destined to remain one of the most respected companies around. The creation on a new medium of exchange will help UPS concentrate their efforts to expand globally with key acquisitions in markets abroad. Also, a tightening of their grip in the e-commerce realm will also prove to be a strong point for the company. Being able to upgrade their supply chain management and helping others do the same will also be a factor in UPSs future. In a changing world like package delivery, which gets more and more complicated daily, being able to have a efficient and effective operation is key. The UPS Logistics group seems to have a good idea of just what they want to accomplish in the future.

By being able to generate the most revenue in the industry, with the majority coming in from their ground delivery segment, UPS is able to more than make up for their second-best role in the air and deferred delivery segments. Also, UPS is looking to add acquisitions and compete aggressively in these segments in the future, particularly

when it comes to air delivery. Financially, UPS maintains AAA credit ratings, which competitors such as FedEx and USPS do not possess, and therefore cannot use this claim to attract investors. Further, UPS consistently has a larger net income, revenues, and industry market share

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than FedEx, which extends its financial leverage. Obviously, if one was looking to invest in a company within this industry their finalists would most likely be either UPS or FedEx. With the incredible amount of evidence weighing towards UPS, it seems the logical conclusion would be to invest in UPS. So what does all this mean when those set to decide UPSs IPO particulars sit down to discuss the situation? Well, based on the evidence presented and readily available to potential investors, anything less than a premium best-of-breed price would be unacceptable. A price range that we suggest could be $48-$54. UPS would soon set themselves apart from the competition with the largest IPO ever.


Income Statement comparison: selected figures(1997-1998-1999)

*amounts in millions, except per Federal share amounts Express

United Parcel Service

Federal Express

United Parcel Service

Federal Express

United Parcel Service

1999 Revenues $16,773 Operating Expenses $15,610 Operating Income Other Income (expense) Income from Continuing Operations Net of Income Taxes Net Income $0 $631 $1,163 -$102 $631



1998 $24,596 $21,593 $3,003 -$101 $2,902

1997 $14,238

1997 $22,458

$26,872 $15,873 $22,967 $14,862 $3,905 -$1,817 $2,088 $1,011 -$111 $498

$13,731 $20,815 $507 -$81 $196 $1,643 -$90 $1,553

$1,205 $883

$5 $503

$1,161 $1,741

$0 $196

$644 $909

Earnings Per Common Share Diluted Earnings Per Share

$2.13 $2.10

$0.79 $0.77

$1.72 $1.69

$1.59 $1.57

$0.67 $0.67

$0.82 $0.81

Excel document produced with figures from Healy Case and