Business context and reporting period
United Parcel Service, Inc. (UPS) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses. Comparisons below are with the corresponding 2010 periods.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Change |
|---|---|---|---|
| Revenue | $13.191 billion | $12.204 billion | +8.1% |
| Operating profit | $1.698 billion | $1.402 billion | +21.1% |
| Operating margin | 12.9% | 11.5% | +1.4 percentage points |
| Net income | $1.063 billion | $845 million | +25.8% |
| Diluted EPS | $1.07 | $0.84 | +27.4% |
For the six months, revenue was $25.773 billion (+7.7%), operating profit $3.124 billion (+27.8%), net income $1.948 billion (+41.4%) and diluted EPS $1.95 (+42.3%). Six-month operating margin was 12.1%, compared with 10.2%.
- Cash flow: Six-month operating cash flow was $3.314 billion, versus $3.012 billion. Investing activities used $1.069 billion, including $951 million of capital expenditures; financing activities used $971 million. Cash and cash equivalents increased to $4.691 billion from $3.370 billion at year-end 2010.
- Liquidity and debt: At June 30, cash and marketable securities totaled $5.637 billion. Total debt was $12.161 billion, including $1.374 billion in current maturities and commercial paper, versus $10.846 billion at year-end. UPS reported $10 billion of authorized U.S. commercial paper capacity, with $1.355 billion outstanding, and $2.5 billion of revolving credit facilities with no borrowings. The company reported compliance with debt covenants.
- Capital returns and investment: UPS spent approximately $1.055 billion to repurchase 14.4 million shares in the first half and paid $1.007 billion in dividends. Management anticipated approximately $2 billion of share repurchases for 2011. Capital expenditures were 3.7% of revenue, up from 2.8% a year earlier.
Material changes versus the prior comparable period
- Revenue growth reflected higher yields and fuel surcharges more than shipment growth: company-wide average daily package volume rose 1.0% in Q2, while average revenue per piece increased 7.1%.
- U.S. Domestic Package revenue rose 6.4% and operating profit rose 29.1% in Q2; reported operating margin increased to 12.5% from 10.3%. U.S. volume was nearly flat, while pricing, product mix and fuel surcharges supported revenue.
- International Package revenue rose 13.3%, supported by 6.2% volume growth, but operating profit declined 4.6% to $497 million and margin fell to 15.8% from 18.8%. Higher fuel and network costs, currency effects and new flight capacity weighed on results.
- Supply Chain & Freight revenue rose 7.0% and operating profit rose to $235 million from $133 million. The reported Q2 result included a $48 million real-estate gain; adjusted operating profit was $187 million, up 40.6%.
- Consolidated fuel expense increased 47.4% in Q2 to $1.057 billion, and purchased transportation expense increased 9.2%. Higher prices for fuel were the main driver of the fuel-cost increase.
Outlook, management commentary, risks and unusual items
- Management described a slowing U.S. economy, with weakness in manufacturing, while retail-related business-to-consumer shipments remained solid. International economic growth and trade supported stronger international package growth.
- UPS cited yield management, network efficiency, cost containment and investments in international capacity as priorities. It stated that operating cash flow and borrowing programs should provide adequate resources for expected long-term needs, including capital expenditures. The filing does not provide a clear full-year revenue or earnings forecast.
- UPS made an accelerated $1.2 billion contribution to its Teamsters pension plan in the first half, accelerating contributions otherwise due later in 2011 and approximately $440 million that would not have been due until after 2011. It expected a further $75 million of contributions to international pension and U.S. postretirement medical plans during the rest of 2011.
- Q2 results included a $15 million real-estate loss in U.S. Domestic Package and the $48 million real-estate gain in Supply Chain & Freight. Prior-year comparisons included a $98 million restructuring charge and a $38 million loss on sale of a German business in the first half of 2010. UPS also recorded a $76 million non-cash tax charge in 2010 related to a German subsidiary’s tax status.
- Risks include fuel-price volatility, economic and volume weakness, foreign-exchange movements, pension and healthcare costs, and labor matters. The Teamsters master agreement runs through July 2013; the pilots’ agreement becomes amendable at the end of 2011.
- Legal and regulatory matters include U.S. and international freight-forwarding competition investigations and litigation, a DOJ investigation concerning third-party shipping negotiators, and an investigation relating to packages for online pharmacies. The company said possible losses for several matters could not be estimated. IRS reports received in June 2011 proposed income and excise tax assessments for specified prior years; UPS disputed the proposed assessments, filed protests and protective refund claims, and could not estimate a possible loss.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the 2010 Form 10-K.
Important facts for investors to verify
- Whether U.S. shipment growth improves and whether pricing and mix can continue to offset subdued volume.
- How fuel prices, surcharges and purchased transportation costs affect margins, particularly in International Package.
- Whether the reported Supply Chain & Freight profit improvement persists after excluding the real-estate gain.
- The cash, debt and liquidity effects of accelerated pension funding, planned capital spending, dividends and the anticipated 2011 share repurchases.
- Developments in the unquantified legal, regulatory and IRS matters, and labor negotiations as relevant agreements approach amendable dates.