UPS Q1 2013 Form 10-Q Summary
Business context and reporting period
United Parcel Service, Inc. (UPS) reported unaudited results for the three months ended March 31, 2013, compared with the same period in 2012. Its segments are U.S. Domestic Package, International Package, and Supply Chain & Freight.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $13.434 billion | $13.136 billion |
| Operating profit | $1.580 billion | $1.569 billion |
| Operating margin | 11.8% | 11.9% |
| Net income | $1.037 billion | $970 million |
| Diluted EPS | $1.08 | $1.00 |
| Cash from operations | $1.758 billion | $2.280 billion |
| Capital expenditures | $453 million | $428 million |
Revenue grew 2.3%, while operating profit rose 0.7%; average daily package volume increased 4.1% and average revenue per piece was unchanged at $10.86. The reported effective tax rate declined to 30.4% from 34.5%, largely because part of a foreign-subsidiary liquidation gain was non-taxable; the adjusted rate was 34.5% in both periods.
Segment results: U.S. Domestic Package revenue was $8.271 billion and operating profit $1.085 billion (margin 13.1%, versus 12.4%). International Package revenue was $2.978 billion and reported operating profit $352 million; excluding TNT-related items, operating profit was $391 million, down 4.2%, with a 13.1% adjusted margin versus 13.8%. Supply Chain & Freight revenue was $2.185 billion and operating profit $143 million (margin 6.5%, versus 7.7%).
At March 31, cash and cash equivalents were $6.456 billion and marketable securities $876 million. Total debt was $12.666 billion, including $1.615 billion of current maturities and commercial paper; long-term debt was $11.051 billion. Pension and postretirement obligations were $11.243 billion. Shareowners’ equity was $4.043 billion, down from $4.733 billion at year-end 2012.
Material changes versus prior period
- Domestic Package operating profit increased 9.0%, supported by 4.4% volume growth and productivity gains. Revenue per piece rose only 0.4%, reflecting mix pressure and lower fuel surcharges.
- International Package adjusted operating profit fell 4.2% amid shifts from premium express to standard products, weaker yield, and adverse fuel and currency effects.
- Supply Chain & Freight operating profit declined 13.9%. Forwarding and logistics faced weak air-freight demand and pricing pressure, partly offset by growth in freight operations.
- Operating cash flow decreased $522 million year over year. Lower pension contributions partly offset weaker working-capital contribution and transaction-related cash costs.
- UPS repurchased 12.2 million shares for approximately $1.013 billion and paid $572 million in dividends. Cash financing outflows were $1.846 billion, including debt repayment, repurchases, and dividends.
Outlook, commentary, risks and unusual items
- Management described the global economy as challenging: U.S. e-commerce supported residential shipments, while business-to-business growth remained weak; slower overseas growth and trade-lane overcapacity pressured international demand and product mix.
- Management expected 2013 capital expenditures of approximately $2.4 billion, or about 4% of revenue, and anticipated approximately $4.0 billion of share repurchases during 2013. The filing provides no specific full-year earnings or revenue guidance.
- The proposed TNT Express acquisition was prohibited by the European Commission. UPS recorded a $284 million pre-tax termination charge and a separate $245 million pre-tax foreign-currency gain from liquidating a related subsidiary; both affected International Package. Together these items increased reported pre-tax income by a net $39 million.
- UPS entered a non-prosecution agreement concerning shipments by illicit online pharmacies, forfeited $40 million, admitted to a statement of facts, and agreed to implement a compliance program. UPS said the agreement did not materially affect Q1 results.
- UPS faces litigation and investigations, including a U.S. antitrust case and DOJ investigation, freight-forwarding matters in Brazil and Singapore, and an outstanding Canadian class action. The company could not estimate potential losses for certain matters.
- A tentative five-year agreement with the Teamsters for U.S. Domestic Package and UPS Freight was reached April 25, 2013, subject to employee ratification. Other labor agreements and pension costs remain relevant risks.
Important facts for investors to verify
- Whether domestic volume growth and productivity can offset lower-yielding shipment mix and muted revenue per piece.
- Whether international and forwarding margins stabilize amid economic weakness, overcapacity, and product-mix shifts.
- How operating cash flow, planned capital spending, debt, dividends, and substantial repurchases evolve through the year.
- Ratification and financial implications of the tentative Teamsters agreements, alongside pension and postretirement obligations.
- Developments in the TNT-related accounting effects, the non-prosecution agreement, and legal or regulatory matters for which losses are not estimable.