UPS 2014 Form 10-K Summary
Business context and reporting period
United Parcel Service, Inc. (UPS) reported for the fiscal year ended December 31, 2014; this is an annual filing, not a standalone fourth-quarter report. UPS operates through U.S. Domestic Package, International Package, and Supply Chain & Freight. It delivered an average of 18.0 million pieces per day and reported revenue of $58.2 billion.
Financial performance
Amounts below are in billions of dollars except per-share data. Figures are reported GAAP results unless identified as adjusted.
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $58.232 | $55.438 | +5.0% |
| Operating profit | $4.968 | $7.034 | -29.4% |
| Operating margin | 8.5% | 12.7% | -4.2 percentage points |
| Net income | $3.032 | $4.372 | -30.6% |
| Diluted EPS | $3.28 | $4.61 | -28.9% |
| Operating cash flow | $5.726 | $7.304 | -21.6% |
| Capital expenditures | $2.328 | $2.065 | +12.7% |
Reported 2014 earnings included a $1.062 billion pre-tax pension and postretirement-benefit mark-to-market loss and $1.102 billion of health and welfare plan charges. Excluding those items, UPS reported adjusted operating profit of approximately $7.132 billion and adjusted operating margin of approximately 12.2%, versus adjusted operating profit of $7.073 billion in 2013. Adjusted measures are non-GAAP.
- U.S. Domestic Package revenue rose 5.2%; adjusted operating profit fell 2.0% to $4.509 billion. Average daily volume increased 6.4%, while revenue per piece declined 1.5%.
- International Package revenue rose 4.5%; adjusted operating profit increased 6.1% to $1.905 billion. Volume grew 6.4%, but average revenue per piece fell 2.1%.
- Supply Chain & Freight revenue rose 5.1%; adjusted operating profit increased 6.5% to $718 million. Freight and logistics growth helped, while air-forwarding profitability remained pressured by excess capacity in some trade lanes.
Cash and marketable securities totaled $3.283 billion at year-end, down from $5.245 billion. Total debt was $10.787 billion, including $923 million of current maturities and commercial paper; long-term debt was $9.864 billion. Debt to total capitalization was 83.3%, up from 62.6%, alongside shareowners’ equity declining to $2.158 billion from $6.488 billion. The current ratio was approximately 1.37.
Material changes versus prior year
- Revenue and package volumes grew, supported especially by e-commerce, residential deliveries, and international export volume; mix shifted toward lower-yield standard and lightweight shipments, weighing on revenue per piece.
- Reported operating profit and net income fell substantially, principally reflecting benefit-plan charges. Separately, U.S. weather disruptions reduced 2014 operating profit by an estimated $200 million, and peak-season inefficiencies added approximately $200 million of costs.
- UPS transferred $2.271 billion to multiemployer funds as part of changes to retiree healthcare obligations and recorded related charges. The transfer and pension funding contributed to lower operating cash flow.
- Cash used for share repurchases was $2.695 billion; dividends paid were $2.366 billion. Capital spending increased, particularly for vehicles and facilities.
- Comprehensive income was a loss of $102 million, including a significant adverse change in unrecognized pension and postretirement costs recorded in other comprehensive income.
Outlook, management commentary, risks, and unusual items
- Management described global economic conditions as uneven, with weaker European activity, moderated Chinese growth, changing trade patterns, and pressure on premium international services. It cited network flexibility, yield management, technology, and cost control as priorities.
- UPS expected approximately $3.0 billion of capital expenditures and approximately $2.7 billion of share repurchases in 2015. The Board raised the quarterly dividend from $0.67 to $0.73 per share in February 2015. The filing does not provide a clear earnings or revenue forecast.
- 2014 benefit-plan charges included a $1.062 billion pre-tax mark-to-market loss, driven mainly by lower discount rates and updated mortality assumptions, and $1.102 billion in health and welfare plan charges. UPS also made $1.042 billion of discretionary contributions to its primary U.S. pension plans.
- Key risks include economic and competitive conditions, fuel and currency volatility, labor negotiations and work stoppages, pension and healthcare costs, severe weather, cybersecurity and privacy incidents, regulatory changes, and service disruptions.
- Unresolved matters include government inquiries concerning guaranteed delivery services to government customers, antitrust investigations in Brazil and Singapore, and litigation and class actions. UPS said it could not estimate potential losses for certain matters. A New York State and City suit over alleged cigarette shipments was filed on February 18, 2015, after year-end.
- UPS disclosed a 2014 malware intrusion affecting approximately 1% of franchisee locations; it said the impact was not material and the intrusion was eradicated. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported and adjusted results, particularly the benefit-plan charges and their tax effects.
- Assess whether volume growth can translate into improved revenue per piece and margins, given continued lower-yield product and customer mix.
- Review pension funding needs, benefit obligations, discount-rate sensitivity, and the effect of the healthcare liability transfer on recurring costs and cash flow.
- Evaluate liquidity and capital allocation against debt maturities, planned 2015 capital spending, buybacks, and dividends.
- Track holiday-season network productivity and service performance, as well as the unresolved legal and government matters and associated potential exposure.