UPS Form 10-Q Summary — Quarter Ended September 30, 2014
Business context and reporting period
United Parcel Service, Inc. reported results for the third quarter and first nine months of 2014. Its three reportable segments are U.S. Domestic Package, International Package, and Supply Chain & Freight. Management cited U.S. e-commerce and retail-driven package growth, while economic weakness in parts of Europe and product mix shifts toward lower-priced standard services affected international yields.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $14.290 billion | $13.521 billion | $42.337 billion | $40.462 billion |
| Operating profit | $1.954 billion | $1.804 billion | $4.214 billion | $5.126 billion |
| Operating margin | 13.7% | 13.3% | 10.0% | 12.7% |
| Net income | $1.214 billion | $1.097 billion | $2.579 billion | $3.205 billion |
| Diluted EPS | $1.32 | $1.16 | $2.78 | $3.37 |
| Operating cash flow | Not separately stated | Not separately stated | $4.191 billion | $5.060 billion |
- Third-quarter revenue increased 5.7% and net income increased 10.7%; average daily package volume rose 6.9%, while average revenue per piece fell 1.4%.
- Nine-month reported operating profit declined 17.8% and net income declined 19.5%. Results included a $1.066 billion pre-tax health and welfare plan charge in 2014; 2013 included a $284 million TNT termination charge and a $245 million foreign-subsidiary liquidation gain.
- Third-quarter segment revenue and operating profit were: U.S. Domestic Package $8.691 billion and $1.279 billion; International Package $3.183 billion and $460 million; Supply Chain & Freight $2.416 billion and $215 million. Nine-month segment results also reflect the health-benefit charge.
- At September 30, cash and cash equivalents were $4.204 billion, marketable securities $1.367 billion, and total current assets $13.318 billion. Total debt was $12.251 billion, including $2.352 billion of commercial paper classified as current; total current liabilities were $9.096 billion.
- Nine-month investing cash use was $2.139 billion, including $1.444 billion in capital expenditures. Financing cash use was $2.413 billion, including $1.780 billion in dividends and $2.062 billion of share repurchases. Cash declined $461 million from year-end 2013.
Material changes and management commentary
- Q3 operating profit improved year over year, supported by volume growth, productivity and network leverage. U.S. Domestic Package benefited from strong ground and residential demand, although lower-yielding customer and product mix pressured revenue per piece.
- International Package profit increased as volume growth and cost controls supported margins, but customers shifted toward standard services and international export yields weakened. Supply Chain & Freight revenue grew, with LTL shipment and yield gains; forwarding faced excess capacity and rate pressure in some trade lanes.
- Management estimated adverse U.S. weather reduced domestic package operating profit by approximately $200 million in the first nine months. Higher purchased transportation, compensation, and network costs also weighed on year-to-date results.
- Under the newly ratified Teamsters agreement, UPS transferred $2.271 billion to multiemployer funds for healthcare obligations and recorded the $1.066 billion charge. Management expected an additional approximately $31 million pre-tax charge upon ratification of remaining agreements and forecast the postretirement medical obligation would fall to about $2.538 billion by year-end.
Outlook, liquidity, risks and unusual items
- UPS expected 2014 capital expenditures of approximately $2.5 billion and share repurchases of approximately $2.7 billion. It said operating funds and borrowing programs should meet foreseeable liquidity needs; it provided no specific earnings guidance in the filing.
- The company had $2.352 billion of U.S. commercial paper outstanding and $2.5 billion of unused revolving credit facilities, with no borrowings under those facilities. Debt covenants were satisfied. Management noted cash held by foreign subsidiaries may incur tax if repatriated, depending on circumstances.
- Key risks include uneven global economic conditions, competition, fuel and currency movements, labor negotiations or disruptions, benefit costs, litigation, and cyber or technology disruption. In August 2014, malware affected approximately 1% of UPS Store franchisee locations; UPS reported no material financial impact.
- Legal matters include government inquiries regarding guaranteed delivery commitments to government customers, antitrust-related proceedings and investigations, and other litigation. The company stated it could not estimate possible losses for several matters. The filing also disclosed the 2013 non-prosecution agreement related to illicit online pharmacy shipments and a $40 million forfeiture.
- Subsequent to quarter-end, UPS acquired i-parcel; the acquisition was described as not material. Its results were to be included in International Package beginning in Q4.
Important facts for investors to verify
- How much of the year-to-date earnings decline reflects the one-time health and welfare charge and prior-year TNT-related items, versus underlying operating trends.
- Whether volume growth can translate into improved revenue per piece and margins despite lower-yielding mix and purchased-transportation cost pressure.
- Final costs and balance-sheet effects of the remaining labor-agreement healthcare changes, including the expected additional charge and cash tax benefits.
- Progress and potential exposure from the government, antitrust, and other legal investigations for which losses were not estimable.
- Execution of the stated 2014 capital-spending and repurchase plans, and the company’s short-term refinancing and liquidity position given commercial paper classified as current.