Business context and reporting period
United Parcel Service, Inc. (UPS) filed this Form 10-K for the fiscal year ended December 31, 2017. UPS provides package delivery and supply-chain services across more than 220 countries and territories through U.S. Domestic Package, International Package, and Supply Chain & Freight segments. The filing reports full-year results; quarterly information is included, but this is not a standalone Q4 filing.
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts are in billions unless otherwise noted.
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $65.872 | $60.906 | +8.2% |
| Operating profit | $7.529 | $5.467 | +37.7% |
| Operating margin | 11.4% | 9.0% | +2.4 percentage points |
| Net income | $4.910 | $3.431 | +43.1% |
| Diluted EPS | $5.61 | $3.87 | +45.0% |
| Operating cash flow | $1.479 | $6.473 | Down $4.994 |
| Capital expenditures | $5.227 | $2.965 | Up $2.262 |
| Cash and marketable securities | $4.069 | $4.567 | Down $0.498 |
| Total debt | $24.289 | $16.075 | Up $8.214 |
| Shareowners’ equity | $1.030 | $0.429 | Up $0.601 |
Revenue increased in all segments: U.S. Domestic Package $40.764 billion (+6.4%), International Package $13.338 billion (+8.0%), and Supply Chain & Freight $11.770 billion (+14.8%). Average daily package volume rose 4.9%; average revenue per piece rose 2.2% to $10.53.
Material changes versus the prior comparable period
- Reported operating profit and earnings improved substantially, but comparisons were affected by defined-benefit plan mark-to-market losses: $800 million in 2017 versus $2.651 billion in 2016. Management attributes much of the year-over-year improvement to the lower pension charge; adjusted results show less improvement than reported results.
- Operating cash flow fell to $1.479 billion, primarily reflecting $7.794 billion of contributions to UPS-sponsored pension and postretirement plans, compared with $2.668 billion in 2016.
- Capital expenditures increased to $5.227 billion, or 7.9% of revenue, from $2.965 billion, reflecting facility, automation, aircraft, vehicle, and technology investment.
- Debt rose materially, including new U.S., euro, and Canadian senior-note issuances. Interest expense increased 18.9% to $453 million.
- Segment operating profit rose in all three segments. International export volume was particularly strong (+15.3%); Supply Chain & Freight growth included acquisition effects, notably Marken, as well as improved market demand.
Outlook, commentary, risks, and unusual items
- Management expects 2018 capital expenditures of approximately $6.5–$7.0 billion and anticipates about $1.0 billion of share repurchases. The board raised the quarterly dividend 10%, from $0.83 to $0.91 per share in February 2018.
- The Tax Cuts and Jobs Act reduced the U.S. corporate tax rate to 21% beginning in 2018. UPS said it expects a lower future effective tax rate, but its 2017 accounting was provisional: it recorded a $310 million transition-tax liability and a $606 million reduction in net U.S. deferred tax liabilities. Management stated that estimates may change as additional information and guidance become available.
- Fourth-quarter 2017 results included an $800 million pre-tax pension mark-to-market loss and a $258 million income-tax benefit related to the Tax Act and other tax changes; together these items reduced Q4 net income by $349 million and diluted EPS by $0.40. Fourth-quarter operating results also faced capacity constraints during volume surges, weather effects, facility investment costs, and Saturday-service startup costs.
- UPS identifies labor disruption, fuel costs, economic and competitive conditions, currency and interest-rate changes, cybersecurity, severe weather, regulation, and benefit-plan costs as material risks. Approximately 280,000 employees were covered by Teamsters agreements expiring July 31, 2018; negotiations with airline mechanics were also ongoing.
- A potential Central States Pension Fund insolvency could require UPS to provide coordinating benefits and increase the UPS/IBT Plan’s projected benefit obligation by approximately $4 billion. UPS recognized no additional liability at year-end 2017, citing substantial uncertainty.
- In the New York cigarette-delivery case, a court awarded $9.4 million in damages and $237.6 million in penalties; UPS appealed and estimated potential losses could reach $247 million plus interest, while stating the ultimate amount was uncertain. The filing also describes unresolved DOJ and Spanish competition investigations for which UPS could not estimate a loss.
Important facts for investors to verify
- How much of earnings growth reflects underlying operating performance versus the year-over-year reduction in pension mark-to-market charges and 2017 tax effects.
- Whether operating cash generation recovers after the unusually large pension contributions, and how planned capital spending will be funded.
- Debt repayment and refinancing requirements, including $4.011 billion of current maturities and commercial paper at year-end, relative to cash and available credit.
- Progress and cost implications of the 2018 Teamsters contract negotiations and ongoing airline-mechanic negotiations.
- Developments in the Central States pension matter, the New York litigation, and the DOJ and Spanish investigations.
- Final Tax Act accounting estimates and delivery of expected network capacity and efficiency benefits from the elevated investment program.
The audited financial statements received an unqualified opinion from Deloitte & Touche LLP; the auditor also reported effective internal control over financial reporting as of December 31, 2017.