United Parcel Service, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results reflect the company’s package delivery, international package, and Supply Chain & Freight businesses. Management said COVID-19 materially changed demand and operating conditions; interim results are not necessarily indicative of full-year results.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $20.459B | $18.048B | $38.494B | $35.208B |
| Operating profit | $2.212B | $2.143B | $3.284B | $3.537B |
| Operating margin | 10.8% | 11.9% | 8.5% | 10.0% |
| Net income | $1.768B | $1.685B | $2.733B | $2.796B |
| Diluted EPS | $2.03 | $1.94 | $3.14 | $3.22 |
| Operating cash flow | Not separately stated for the quarter | $5.947B | $4.207B |
- Q2 revenue increased 13.4%, while operating profit rose 3.2%; the margin declined 110 basis points. For the first half, revenue increased 9.3%, but operating profit fell 7.2% and margin declined 150 basis points.
- Q2 average daily package volume grew 20.9%, while average revenue per piece fell 5.2% to $10.63. U.S. Domestic Package revenue rose 17.3%, but segment operating profit declined 2.2% to $1.182B. International Package revenue rose 5.7% and operating profit rose 16.3% to $771M. Supply Chain & Freight revenue rose 8.5%, but operating profit fell 4.8% to $259M.
- For the first half, adjusted diluted EPS, excluding transformation costs, was $3.28 versus reported diluted EPS of $3.14. Q2 adjusted diluted EPS was $2.13 versus reported $2.03. These are non-GAAP measures.
- Operating cash flow increased $1.740B year over year in the first half. Capital expenditures were $2.065B, down from $2.861B; dividends paid were $1.683B.
- At June 30, cash and cash equivalents were $8.813B and marketable securities were $403M. Total debt carrying value was $26.948B, including $3.749B of current maturities; debt to total capitalization was 86.0%.
- Total current assets were $20.226B and current liabilities were $16.271B. The company had $4.5B of undrawn revolving credit facilities and reported compliance with debt covenants.
Material changes and drivers
- COVID-19 accelerated e-commerce and residential deliveries: U.S. Domestic business-to-consumer volume grew 65.2% in Q2 and represented about 69% of segment average daily volume, versus 51% a year earlier. Commercial shipments were weaker but began recovering late in the quarter.
- Higher residential volume and lower delivery density drove increased labor, delivery, sorting, and third-party transportation costs. UPS hired approximately 39,000 additional employees during the quarter. Lower fuel prices partly offset cost increases, while lower fuel surcharges reduced revenue.
- International growth reflected strong outbound demand from Asia and European e-commerce. Supply Chain & Freight benefited from air freight demand for pandemic-related supplies and e-commerce mail, while UPS Freight and other businesses were hurt by reduced commercial and freight demand.
- Q2 transformation strategy costs were $112M ($83M after tax); first-half costs were $157M ($118M after tax). The company recorded an additional $27M allowance for credit losses in Q2, bringing the first-half increase to $50M; the allowance stood at $153M at June 30.
Outlook, risks, and contingencies
- Management said it could not reasonably estimate the duration or severity of the pandemic or its ultimate effects. It expected elevated volume and residential deliveries to continue, but could not predict for how long; management also anticipated moderating Asia outbound demand and challenging conditions in some Supply Chain & Freight businesses.
- U.S. Domestic margins could remain pressured if UPS cannot adjust costs and network capacity to lower delivery density. Management expected benefit costs to rise later in the year as newly hired employees become eligible for coverage, and costs to improve time-in-transit could exceed related revenue for the remainder of 2020.
- UPS expected approximately $5.6B of 2020 capital expenditures after deferring certain projects and vehicle purchases; it had previously reduced its capital spending forecast by $1.0B. Share repurchases were suspended on April 28, 2020. The company said it expected to continue regular cash dividends.
- Management estimated CARES Act provisions would provide a temporary 2020 cash-flow benefit of approximately $1.0B, including about $370M of employer payroll taxes deferred by June 30. First-half cash flow also benefited from lower company-sponsored pension contributions than in 2019.
- Potential multiemployer pension exposure remains significant: UPS’s December 2019 best estimate for coordinating benefits tied to the Central States Pension Fund was $2.6B; the obligation could increase by approximately $2.2B if uncertainties are not resolved. The Fund has said it could become insolvent in 2025 without a legislative solution.
- In the New York cigarette-delivery litigation, UPS had accrued $100M; the filing estimated losses could be up to $247M plus interest, with the ultimate penalties uncertain and further proceedings pending. The company also disclosed other legal, tax, credit, self-insurance, and impairment risks.
- UPS issued $3.5B of fixed-rate notes in March 2020, with coupons from 3.90% to 5.30% and maturities from 2025 to 2050. Management said cash, operating cash flow, commercial paper, and capital markets access were adequate for expected needs.
Important facts for investors to verify
- Whether elevated residential volume can be converted into durable profit and margin improvement, given lower revenue per piece and higher delivery costs.
- Whether pandemic-related credit losses, self-insurance claims, asset impairments, and pension obligations increase beyond current estimates.
- How the company funds planned capital expenditures, pension contributions, debt maturities, and dividends while maintaining liquidity and its current leverage profile.
- Developments in the Central States Pension Fund matter and New York litigation, including changes to estimated exposure or accrued liabilities.
- Full-year capital spending, pandemic-related cash-flow benefits, and transformation costs versus management’s stated expectations; the filing does not provide full-year earnings guidance.