United Parcel Service, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Comparisons are with Q1 2010 unless noted.
Financial performance and key metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $12,582 | $11,728 | +7.3% |
| Operating profit | $1,426 | $1,042 | +36.9% |
| Operating margin | 11.3% | 8.9% | +2.4 percentage points |
| Net income | $885 | $533 | +66.0% |
| Diluted EPS | $0.88 | $0.53 | +66.0% |
| Operating cash flow | $1,281 | $1,549 | Down $268 |
| Capital expenditures | $402 | $283 | Up $119 |
Revenue growth reflected higher average revenue per piece and stronger international and freight activity; average daily package volume was nearly flat at 14.957 million, up 0.2%. Operating expenses rose 4.4%, including fuel expense up 33.9% and purchased transportation up 9.8%. Investment income was $11 versus a $4 loss; interest expense was unchanged at $85. The effective tax rate was 34.5%, compared with 44.1% in Q1 2010; the prior-year rate included unusual tax and transaction items.
Cash flow and liquidity: Cash and cash equivalents were $4,657 at March 31, versus $3,370 at year-end 2010; current assets were $12,618 and current liabilities $7,605. Operating cash flow fell primarily because pension and postretirement contributions rose to $1,252 from $656. This included an accelerated $1.2 billion contribution to the UPS IBT Pension Plan. Cash from investing activities was $(282); financing activities provided $247, including $1,297 of net short-term borrowing.
Debt and capital: Total debt was $12,058, including $1,539 of commercial paper classified as current; long-term debt was $10,504. Debt to total capitalization was 59.4%, compared with 56.7% at March 31, 2010. UPS reported $4,657 cash and $787 current marketable securities. It had $2.5 billion in revolving credit facilities and reported compliance with debt covenants.
Segments and comparison with prior period
| Segment | Revenue, Q1 2011 | Revenue change | Operating profit, Q1 2011 | Operating profit, Q1 2010 |
|---|---|---|---|---|
| U.S. Domestic Package | $7,543 | +6.2% | $849 | $562 |
| International Package | $2,900 | +9.9% | $446 | $427 |
| Supply Chain & Freight | $2,139 | +7.6% | $131 | $53 |
Domestic package volume declined 0.5%; management estimated severe weather and the Easter holiday calendar reduced domestic volume by approximately 2%. Domestic revenue per piece increased 5.0%, supported by pricing, fuel surcharges, and revenue-management initiatives. International average daily package volume grew 4.0% and revenue per piece rose 3.8%; international margin declined to 15.4% from 16.2%, as fuel costs increased faster than surcharge revenue and currency hedges weighed on results. Supply Chain & Freight growth included stronger LTL shipments and pricing. Freight generated a small operating loss, though results improved year over year.
Prior-year comparisons included a $98 U.S. Domestic Package restructuring charge, a $38 loss on sale of a German business, and a $76 non-cash tax charge relating to a German subsidiary’s tax status. These items did not recur in Q1 2011 and make reported profit growth stronger than the underlying comparison alone would indicate.
Outlook, management commentary, and risks
- Management cited improving economic conditions, international trade, inventory rebuilding, retail sales, yield management, cost containment, and network efficiencies as supportive of results. No specific full-year earnings or revenue guidance is provided in the filing text.
- UPS anticipated approximately $2.0 billion of share repurchases in 2011 and reported $4.694 billion remaining under its authorization. The quarterly dividend was increased to $0.52 per share from $0.47.
- Management expected $40 of additional pension-plan contributions and $78 of postretirement medical contributions over the remainder of 2011. Capital spending was $402 in the quarter; future spending depends on economic and industry conditions. Aircraft purchases and other capital commitments remain relevant funding needs.
- Key operating exposures include fuel-price increases, foreign exchange, interest rates, weather-related disruption, and potential cost inflation. Fuel surcharges help offset fuel exposure but did not fully cover the increase in international fuel costs during the quarter.
- Potentially significant contingencies include wage-and-hour and franchise litigation, a dimensional-weight class action, antitrust litigation and investigations involving shipper negotiations and freight forwarding, and ongoing tax examinations. Management stated that amounts or outcomes for several matters could not be reasonably determined.
- UPS participates in multi-employer pension and health plans; unfavorable investment performance, demographics, or benefit changes could increase future contributions, which management could not quantify. The Teamsters master agreement runs through July 31, 2013; the pilots’ agreement becomes amendable at year-end 2011.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the 2010 Form 10-K.
Most important facts for investors to verify
- Whether revenue-per-piece gains and segment profit improvements persist as fuel costs, surcharges, and pricing evolve.
- Underlying domestic package demand, including the estimated weather and holiday effects, and trends in international and LTL volumes.
- The cash-flow effect of pension funding: the quarter’s $1.2 billion accelerated contribution and expected remaining 2011 benefit-plan contributions.
- Short-term funding and leverage trends, including commercial paper balances, debt maturities, and the reported 59.4% debt-to-capitalization ratio.
- Execution and funding of planned share repurchases, dividends, aircraft commitments, and other capital expenditures.
- Developments in legal, antitrust, tax, labor, and multi-employer benefit matters, for which potential exposure is not clearly quantified in the filing.