UPS 2020 Q1 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; unaudited, compared with the first quarter of 2019. Amounts are U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses. COVID-19 disrupted global activity during the quarter, shifting shipments from business-to-business to business-to-consumer and increasing residential deliveries. Consolidated revenue rose, but lower delivery density, operating cost increases, and weaker segment mix reduced operating profit and margin.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $18,035 | $17,160 | +5.1% |
| Operating expenses | $16,963 | $15,766 | +7.6% |
| Operating profit | $1,072 | $1,394 | −23.1% |
| Operating margin | 5.9% | 8.1% | −2.2 percentage points |
| Net income | $965 | $1,111 | −13.1% |
| Diluted EPS | $1.11 | $1.28 | −13.3% |
| Operating cash flow | $2,550 | $2,277 | +$273 |
Average daily package volume increased 6.9% to 21.125 million, while average revenue per piece declined 1.8% to $10.88. Adjusted diluted EPS, excluding after-tax transformation strategy costs, was $1.15; this is a non-GAAP measure.
Segments and material period changes
- U.S. Domestic Package: Revenue increased 9.3% to $11,456, but operating profit fell 45.3% to $364 and margin declined to 3.2% from 6.4%. Average daily volume grew 8.5%; average revenue per piece fell 0.8%. B2C shipments were about 55% of domestic volume versus 50% a year earlier; B2C volume grew 19%, while B2B volume declined 1.9%.
- International Package: Revenue declined 2.2% to $3,383; reported operating profit rose 4.4% to $551 and margin was 16.3% versus 15.3%. Excluding transformation costs, operating profit declined 8.8% and adjusted margin fell to 16.5% from 17.7%. Volume declined 1.8%, reflecting weaker B2B demand and pandemic-related disruption.
- Supply Chain & Freight: Revenue declined 0.8% to $3,196; operating profit fell 21.5% to $157 and margin declined to 4.9% from 6.2%. Forwarding was pressured by lower demand and rates; healthcare-related logistics activity grew.
Operating expenses rose faster than revenue, driven by higher compensation and benefits, repairs and maintenance, depreciation, and other expenses. The filing cites higher labor hours, benefit costs, workers’ compensation and self-insured auto claims, alongside lower fuel expense.
Financial position, cash flow and liquidity
- At March 31, cash and cash equivalents were $8,955; marketable securities were $505. Management reported $9.5 billion in combined cash, cash equivalents, and marketable securities.
- Total debt was $28,601, up from $25,238 at December 31, 2019; total debt to total capitalization was 89.6%, versus 86.9% at year-end 2019. Long-term debt and finance leases were $24,196; current maturities, commercial paper and finance leases were $4,405.
- UPS issued $3.5 billion of senior notes in March. It had $3.245 billion of commercial paper outstanding and no borrowings under its $4.5 billion revolving credit facilities; it reported compliance with debt covenants.
- Operating cash flow was $2,550; capital expenditures were $933, compared with $1,514 a year earlier. Financing cash flow was $2,167, including debt issuance and $840 of dividend payments.
- Current assets were $19,389 and current liabilities were $15,846. The filing does not provide a current-ratio discussion.
- Quarterly dividends increased to $1.01 per share from $0.96. UPS repurchased $217 million of shares during the quarter, then announced it would suspend buybacks for the remainder of 2020.
Outlook, risks and unusual items
- UPS stated it could not reasonably estimate the duration or severity of COVID-19 or its ultimate effects. Management warned that persistent residential delivery volumes and lower delivery density could compress margins; weaker demand and constrained capacity could also narrow Supply Chain & Freight buy-sell spreads.
- UPS reduced its anticipated 2020 capital expenditures by $1.0 billion, deferring projects and vehicle purchases, and forecast capital expenditures of approximately $5.5–$6.0 billion. It anticipated a temporary 2020 cash-flow benefit of approximately $1.0 billion from CARES Act provisions. The filing gives no full-year earnings or revenue guidance.
- Transformation strategy costs were $45, compared with $123 in Q1 2019. The company reported no impairment trigger for goodwill or indefinite-lived intangibles as of March 31, but said deterioration in outlook could lead to impairment.
- UPS increased its allowance for credit losses by $23 based on economic forecasts; the allowance was $119 at quarter-end, versus $93 at year-end 2019. Management also warned of possible further credit-loss, asset-impairment, self-insurance and pension impacts.
- The estimated UPS/IBT pension coordinating-benefit obligation related to the Central States Pension Fund was $2.6 billion at the December 2019 measurement date. UPS said it could rise by approximately $2.2 billion, to about $4.8 billion, if uncertainties are not resolved.
- Legal matters include a New York cigarette-delivery case with a $100 accrual and estimated possible losses up to $247 plus interest; a pending DOJ investigation for which UPS could not estimate a loss; and a pending appeal of a €19 million Spanish competition fine.
Important facts for investors to verify
- Whether COVID-related shipment mix, delivery density, customer collections, and cost levels improve or further pressure margins and credit losses.
- Execution of the revised 2020 capital expenditure plan and the realization, timing, and cash impact of CARES Act relief.
- Debt maturities, commercial-paper refinancing, liquidity levels, and the effect of increased leverage.
- Developments in the Central States Pension Fund matter and the potential coordinating-benefit obligation.
- Outcomes and any changes in accruals or disclosures for the New York case, DOJ investigation, and international competition matters.