United Parcel Service, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011; financial statements are unaudited. Comparisons are with the third quarter and first nine months of 2010, unless otherwise stated. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses.
Financial performance
| Metric | Q3 2011 | Q3 2010 | First 9 months 2011 | First 9 months 2010 |
|---|---|---|---|---|
| Revenue | $13.166B | $12.192B | $38.939B | $36.124B |
| Operating profit | $1.619B | $1.616B | $4.743B | $4.060B |
| Operating margin | 12.3% | 13.3% | 12.2% | 11.2% |
| Net income | $1.042B | $991M | $2.990B | $2.369B |
| Diluted EPS | $1.06 | $0.99 | $3.00 | $2.36 |
Quarterly revenue rose 8.0%, while operating profit was nearly flat as expenses increased 9.2%; net income rose 5.1%. Nine-month revenue increased 7.8% and net income 26.2%. Fuel expense rose 40.2% in Q3 and 40.6% year to date. Average daily package volume was up 0.7% in Q3; average revenue per piece increased 7.7%.
- Segments, Q3: U.S. Domestic Package revenue was $7.767B and operating profit $1.015B (profit down 0.5% reported; adjusted profit up 11.4%). International Package revenue was $3.057B and operating profit $409M (down 2.4%). Supply Chain & Freight revenue was $2.342B and operating profit $195M (up 10.2%).
- Balance sheet, September 30: Cash and cash equivalents were $4.133B; marketable securities $1.320B; current assets $12.628B and current liabilities $7.511B. Total debt was $12.402B, including $1.293B commercial paper; shareholders’ equity was $7.869B. Debt was $10.846B at December 31, 2010.
- Cash flow, first nine months: Operating cash flow was $5.362B, versus $3.923B; capital expenditures were $1.557B, versus $1.011B. Investing cash use was $2.116B and financing cash use $2.484B. Cash increased $763M to $4.133B.
- Capital returns and leverage: UPS repurchased 31.7M shares for $2.190B and paid $1.500B in dividends during the nine months. Debt was 61.2% of total capitalization at September 30, versus 53.1% a year earlier.
Changes, outlook, and management commentary
Management described slow U.S. economic growth and broader market volatility as weighing on U.S. and import volumes, while international trade supported growth in most regions. Higher fuel prices lifted surcharge revenue but also increased operating and purchased-transportation costs. Domestic volume was flat in Q3; International Package volume grew 4.6%, but its profit and margin declined amid excess capacity on the Asia-to-U.S. lane, fuel costs, and currency effects. UPS reduced aircraft capacity on that lane by about 13% after the quarter. Supply Chain & Freight benefited from improved yields and productivity, particularly in freight.
UPS reported no specific earnings or revenue guidance in the supplied filing text. Management anticipated repurchasing approximately $2.7B of shares in 2011, expected regular cash dividends to continue, and stated that operating cash flow and borrowing programs should meet foreseeable capital and operating needs. The company announced a $200M expansion of its Cologne hub, expected to be completed in 2013.
Comparability items include a $109M real-estate gain in Q3 2010; 2010 year-to-date restructuring charges of $98M and a $38M loss on sale of a German business; and 2011 second-quarter real-estate transactions, comprising a $15M loss and a $48M gain. The Q3 2011 effective tax rate was 32.8%, versus 35.6%, reflecting a greater share of income in lower-tax jurisdictions and favorable tax developments. Nine-month pension and postretirement contributions totaled $1.397B, including an accelerated $1.2B contribution to the UPS IBT Pension Plan.
Risks, contingencies, and other matters
- UPS identified economic weakness, fuel-price volatility, foreign-exchange and interest-rate exposure, and operating-cost pressures as significant factors. Collective bargaining agreements cover many employees; the Teamsters agreement runs through July 2013, while the pilots’ agreement became amendable at the end of 2011.
- Several lawsuits and investigations remain unresolved, including franchise-related litigation, a DOJ inquiry into third-party shipping negotiators, freight-forwarding competition investigations in the U.S., Europe and Brazil, and an investigation concerning shipments for online pharmacies. UPS said it could not estimate possible losses or ranges for several matters.
- IRS reports proposed income- and excise-tax assessments for specified prior tax years; UPS disputes them, has filed protests and refund claims, and cannot estimate a possible loss range.
- UPS said it was in compliance with debt covenants and had no borrowings under its $2.5B revolving credit facilities. It reported stable Aa3 and AA- long-term credit ratings from Moody’s and S&P, respectively. Management said existing covenants were not expected to materially affect liquidity.
Important facts for investors to verify
- Whether fuel and labor-benefit cost increases can be offset by pricing, productivity, and network efficiencies, especially as volumes weaken.
- Whether International Package margins recover following reduced Asia-to-U.S. capacity and continued market volatility.
- Cash-flow sustainability after accelerated pension funding, higher capital expenditures, dividends, and substantial share repurchases; also monitor debt and near-term commercial-paper maturities.
- Developments and potential financial exposure from the legal, competition, and tax matters for which UPS could not estimate a loss range.
- Execution, cost, and returns associated with the Cologne hub expansion and other planned network investments.