UPS Form 10-Q Summary — Quarter Ended June 30, 2021
United Parcel Service, Inc. reported unaudited results for the second quarter and six months ended June 30, 2021, compared with the same periods in 2020. UPS operates U.S. Domestic Package, International Package and Supply Chain Solutions. The comparisons reflect different pandemic-related shipping patterns and, for the six-month period, a substantial pension-related gain.
Key Financial Results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $23.424 billion | $20.459 billion | $46.332 billion | $38.494 billion |
| Operating profit | $3.258 billion | $2.212 billion | $6.023 billion | $3.284 billion |
| Operating margin | 13.9% | 10.8% | 13.0% | 8.5% |
| Net income | $2.676 billion | $1.768 billion | $7.468 billion | $2.733 billion |
| Diluted EPS | $3.05 | $2.03 | $8.51 | $3.14 |
| Operating cash flow | Not separately stated | Not separately stated | $8.454 billion | $5.947 billion |
Q2 revenue rose 14.5%, operating profit 47.3% and net income 51.4% year over year. For the six months, revenue rose 20.4%; reported net income and EPS were significantly boosted by a $3.3 billion pre-tax pension mark-to-market gain recorded in Q1. Excluding that gain and other specified items, UPS reported adjusted diluted EPS of $3.06 for Q2 and $5.83 year to date; these are non-GAAP measures.
- Segments, Q2: U.S. Domestic Package revenue was $14.402 billion and operating profit $1.567 billion; International Package revenue was $4.817 billion and operating profit $1.184 billion; Supply Chain Solutions revenue was $4.205 billion and operating profit $507 million.
- Cash and liquidity: Cash and cash equivalents were $9.608 billion at June 30, 2021, versus $5.910 billion at year-end 2020. Cash, cash equivalents and marketable securities totaled approximately $10.0 billion. UPS said available liquidity, expected operating cash flow and access to credit and capital markets should cover operating needs and planned uses.
- Cash uses and investment: Six-month capital expenditures were $1.670 billion; net cash used in investing was $734 million and in financing was $4.038 billion. Dividends paid were $1.718 billion. UPS expects 2021 capital expenditures of approximately $4.0 billion.
- Debt: Total debt carrying value was $22.591 billion at June 30, 2021, down from $24.654 billion at December 31, 2020. UPS had $498 million of commercial paper outstanding and no borrowings under its revolving credit facilities.
Material Changes and Management Commentary
- All three segments increased Q2 revenue and operating profit. International Package grew fastest in revenue, up 30.0%; U.S. Domestic Package revenue increased 10.2%, and Supply Chain Solutions revenue increased 14.3%.
- Consolidated average daily package volume declined 0.8% in Q2, while average revenue per piece rose 15.3%. Management cited a return of business-to-business activity and a decline in business-to-consumer shipments from the unusually high pandemic-period comparison. Small- and medium-sized business volume remained strong.
- UPS completed the sale of UPS Freight on April 30 for $848 million in cash proceeds, used to reduce debt. The sale generated a $101 million pre-tax gain in Q2 ($35 million year to date). UPS retained certain self-insurance and employee-benefit obligations and entered into transitional commercial arrangements with the buyer.
- The sale triggered a remeasurement of certain company-sponsored plans, reducing related balance-sheet obligations by approximately $2.1 billion. Separately, the American Rescue Plan Act prompted a Q1 remeasurement of the UPS/IBT pension plan and a $3.3 billion pre-tax mark-to-market gain. These pension-related items materially affect comparisons of reported earnings and equity.
- Operating expenses increased 10.5% in Q2, with purchased transportation up 19.6% and fuel expense up 83.4%, reflecting higher fuel prices, network investment, activity and transportation costs. Management said cost per piece may continue to rise, including due to labor availability and cost.
Outlook, Risks and Contingencies
- UPS did not provide full-year revenue or earnings guidance in the supplied filing text. It expects approximately $4.0 billion of 2021 capital expenditures and stated that revenue growth from U.S. revenue-quality initiatives was expected to exceed volume growth for the remainder of the year.
- Management intends to continue regular cash dividends and stated a targeted dividend payout ratio, beginning in 2022, of approximately 50% of the prior year’s adjusted net income. In August 2021, after quarter-end, the board approved a new $5.0 billion share repurchase authorization.
- UPS expects the Central States Pension Fund to apply for federal special financial assistance in 2022. The filing says expected assistance currently eliminates UPS’s potential coordinating-benefit obligation through 2051, but outcomes remain subject to program implementation, eligibility and other uncertainties.
- Key disclosed risks include ongoing COVID-19 effects, economic and shipping-volume changes, competition, labor negotiations or disruptions, labor availability and costs, fuel prices and supply, foreign exchange and interest rates, cybersecurity and technology interruptions, and legal, regulatory and tax matters.
- UPS described wage-and-hour lawsuits, a U.S. Department of Justice investigation concerning USPS international air contracts, and a Spanish competition authority matter. It said it does not expect these matters to have a material impact, while noting uncertainty in outcomes. The company reported compliance with debt covenants and effective disclosure controls.
Important Facts for Investors to Verify
- Separate recurring operating performance from the Q1 pension mark-to-market gain, UPS Freight sale gain and transformation costs; review the company’s non-GAAP reconciliations.
- Track whether improved package yields and business-to-business activity offset weaker year-over-year residential volumes and rising labor, fuel and purchased-transportation costs.
- Monitor the UPS Freight transition arrangements and the retained pension, postretirement and self-insurance obligations.
- Check progress and final terms of the Central States Pension Fund’s expected special-assistance application and any resulting pension accounting changes.
- Compare actual capital spending, debt repayment, dividends and repurchases with management’s stated plans, including the post-quarter $5.0 billion authorization.