UPS 2016 Form 10-K Summary
Business context and reporting period
United Parcel Service, Inc. (UPS) filed its annual report for the fiscal year ended December 31, 2016. UPS operates three reportable segments: U.S. Domestic Package, International Package, and Supply Chain & Freight. It delivered an average of 19.1 million pieces per day across more than 220 countries and territories.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $60.906 billion | $58.363 billion |
| Operating profit | $5.467 billion | $7.668 billion |
| Operating margin | 9.0% | 13.1% |
| Net income | $3.431 billion | $4.844 billion |
| Diluted EPS | $3.87 | $5.35 |
| Cash from operating activities | $6.473 billion | $7.430 billion |
| Capital expenditures | $2.965 billion | $2.379 billion |
- Revenue increased 4.4%, while average daily package volume rose 4.2%. Average revenue per piece declined 0.7%, reflecting mix, fuel surcharge and currency impacts.
- Reported operating profit and net income fell mainly because of a $2.651 billion pretax pension and postretirement plan mark-to-market loss. UPS reported adjusted operating profit of $8.118 billion after excluding that item; adjusted figures are non-GAAP measures.
- Fourth-quarter 2016 operating profit was a loss of $428 million and net income a loss of $239 million, including the $2.651 billion mark-to-market charge. UPS said the charge reduced quarterly diluted EPS by $1.91.
- Segment revenue and reported operating profit: U.S. Domestic Package, $38.301 billion and $3.017 billion; International Package, $12.350 billion and $2.044 billion; Supply Chain & Freight, $10.255 billion and $406 million. International adjusted operating profit rose 13.2%; Supply Chain & Freight adjusted operating profit declined 6.7%.
- Cash and marketable securities totaled $4.567 billion at year-end. Total debt was $16.075 billion, including $3.681 billion of current maturities; long-term debt was $12.394 billion. Shareowners’ equity was $429 million.
- Current assets were $13.849 billion and current liabilities $11.730 billion. Operating cash flow less capital expenditures was approximately $3.508 billion. UPS paid $2.643 billion in dividends and spent $2.678 billion on share repurchases during 2016.
Material changes versus the prior comparable period
- U.S. Domestic Package revenue grew 4.2%, with business-to-consumer shipments up nearly 9%; reported segment operating profit dropped 36.7%, largely due to pension mark-to-market charges. Adjusted operating profit increased 2.0%.
- International Package revenue grew 1.7% despite adverse currency and fuel-surcharge effects. Higher volume and yield initiatives supported adjusted segment operating profit growth of 13.2%.
- Supply Chain & Freight revenue rose 8.3%, substantially reflecting the inclusion of Coyote Logistics, acquired in 2015. Segment adjusted operating profit declined 6.7%; UPS Freight tonnage fell 5.9%.
- Pension and postretirement benefit obligations on the balance sheet increased to $12.694 billion from $10.638 billion. UPS contributed $2.668 billion to company-sponsored plans, compared with $1.229 billion in 2015.
Outlook, management commentary, risks and unusual items
- UPS expects 2017 capital expenditures of approximately $4 billion and anticipates about $1.8 billion in share repurchases. The filing provides no specific consolidated earnings or revenue guidance.
- Management cited e-commerce growth, network automation, ORION route optimization, yield management and capacity expansion as priorities. It described economic conditions as uneven, with industrial weakness, currency fluctuations and uncertainty around the U.K.’s departure from the EU.
- UPS acquired Marken in December 2016 for approximately $570 million; its results were not material to 2016 operations. The company also ordered 14 Boeing 747-8F aircraft for delivery from 2017 to 2020.
- A significant pension contingency remains: if the Central States Pension Fund becomes insolvent as projected, UPS estimates potential coordinating benefits could increase its pension obligation by approximately $4 billion. UPS recognized no liability for this exposure at year-end, citing substantial uncertainties.
- Other key risks include labor negotiations and service disruption, pension and healthcare costs, fuel prices, foreign exchange and interest rates, cybersecurity, regulation, severe weather, competition, and litigation. Several legal matters have losses that UPS says it cannot currently estimate.
- Management and Deloitte & Touche reported effective internal control over financial reporting; Deloitte issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Reconcile reported earnings with the $2.651 billion pension mark-to-market charge and UPS’s non-GAAP adjusted measures.
- Review the funded status and assumptions of pension plans, expected 2017 contributions, and developments concerning the Central States Pension Fund.
- Assess whether volume growth, pricing and productivity can offset labor, benefit, and network costs—especially in U.S. Domestic Package and Supply Chain & Freight.
- Track planned 2017 capital spending, debt maturities and commercial paper reliance alongside dividends and share repurchases.
- Monitor the unresolved legal matters, collective bargaining negotiations, and macroeconomic, currency, fuel and cybersecurity exposures.