United Parcel Service, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. UPS operates through U.S. Domestic Package, International Package, and Supply Chain & Freight. The filing is an annual report; quarterly results are also included.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $58.363 billion | $58.232 billion |
| Operating profit | $7.668 billion | $4.968 billion |
| Operating margin | 13.1% | 8.5% |
| Net income | $4.844 billion | $3.032 billion |
| Diluted EPS | $5.35 | $3.28 |
| Cash from operating activities | $7.430 billion | $5.726 billion |
| Capital expenditures | $2.379 billion | $2.328 billion |
| Cash and marketable securities | $4.726 billion | $3.283 billion |
| Total debt | $14.334 billion | $10.779 billion |
Revenue increased 0.2%; average daily package volume rose 1.7%, while average revenue per piece fell 2.0% to $10.37. Operating cash flow less capital expenditures was approximately $5.051 billion in 2015, a calculated measure.
Segments and year-over-year changes
- U.S. Domestic Package: Revenue grew 2.5% to $36.747 billion; operating profit was $4.767 billion. Adjusted operating profit, excluding specified items, increased 7.1% to $4.829 billion. E-commerce and deferred air shipments supported volume; lower fuel surcharges and mix pressured yields.
- International Package: Revenue fell 6.5% to $12.149 billion, reflecting currency translation and lower fuel surcharge revenue, despite 1.2% volume growth. Operating profit rose 27.4% to $2.137 billion; adjusted operating profit increased 14.5% to $2.181 billion.
- Supply Chain & Freight: Revenue grew 0.8% to $9.467 billion, and operating profit rose to $764 million. Adjusted operating profit increased 8.1% to $776 million. Coyote contributed to forwarding and logistics results; UPS Freight revenue declined with lower tonnage and fuel surcharges.
The reported earnings comparison is materially affected by unusual items. 2015 included a $118 million pre-tax pension and postretirement benefit mark-to-market loss. 2014 included $1.062 billion of such losses and $1.102 billion of health and welfare plan charges. Consequently, 2015’s reported profit growth should not be read as solely underlying operating improvement; UPS also presents adjusted measures that exclude specified items.
Cash, debt, and capital allocation
Year-end long-term debt was $11.316 billion, with total debt of $14.334 billion including $2.965 billion of commercial paper. Debt to total capitalization was 85.2%, versus 83.3% in 2014. Cash and marketable securities totaled $4.726 billion; $2.516 billion was held by foreign subsidiaries. UPS reported no borrowings under its revolving credit facilities at year-end, which totaled $4.5 billion, although the $1.5 billion facility was due to expire in March 2016.
UPS spent $2.702 billion on share repurchases and $2.525 billion on dividends in 2015. It expected approximately $2.7 billion of repurchases and $2.8 billion of capital expenditures in 2016. The quarterly dividend was raised from $0.73 to $0.78 per share in February 2016.
Outlook, commentary, and risks
- Management described U.S. and global economic growth as uneven, citing weak manufacturing, soft holiday retail sales, slowing emerging-market growth, and shifting trade patterns. UPS said it was adjusting air capacity and costs and pursuing yield management, efficiency, automation, and network flexibility.
- No specific 2016 revenue or earnings guidance is provided in the supplied filing text. Management expected pension expense to remain approximately flat in 2016 compared with 2015.
- UPS acquired Coyote Logistics in August 2015 for $1.829 billion, expanding truckload brokerage and transportation management. Purchase-price allocations remained subject to finalization; anticipated synergies had not yet been established as realized results.
- Key exposures include economic and competitive conditions, labor negotiations and service disruption, fuel and energy prices, foreign exchange, regulation and security, cyber and IT disruption, severe weather, and employee benefit costs. Pilot negotiations were in mediation.
- UPS challenged a proposed Central States Pension Fund benefit-suspension plan and said it could not estimate any additional obligations. The company also disclosed legal proceedings for which potential losses could not be estimated, including investigations and claims; it stated that other accrued or probable-and-estimable contingencies were not material at year-end.
- Management and Deloitte reported effective internal control over financial reporting and an unqualified audit opinion. Coyote was excluded from the internal-control assessment as a recently acquired business.
Important facts for investors to verify
- Reconcile reported 2015 earnings growth with the large 2014 pension and healthcare charges, using both GAAP and UPS’s adjusted measures.
- Assess the debt increase, commercial-paper refinancing needs, credit-facility renewal, and the high debt-to-capitalization ratio against planned buybacks and capital spending.
- Track whether Coyote delivers the stated network, purchasing, and cross-selling benefits, and review final acquisition accounting and integration costs.
- Monitor pension asset performance, required contributions, and developments in the Central States Pension Fund dispute, as additional exposure was not estimable.
- Evaluate international performance excluding currency and fuel effects, and watch package yield, fuel surcharge recovery, labor costs, and service performance.