UPS 2017 Q3 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $15.978 billion | $14.928 billion | $47.043 billion | $43.975 billion |
| Operating profit | $2.035 billion | $2.034 billion | $6.035 billion | $5.895 billion |
| Operating margin | 12.7% | 13.6% | 12.8% | 13.4% |
| Net income | $1.264 billion | $1.270 billion | $3.806 billion | $3.670 billion |
| Diluted earnings per share | $1.45 | $1.44 | $4.34 | $4.13 |
- Q3 revenue increased 7.0%, while operating expenses rose 8.1%; operating profit was essentially flat and margin contracted 0.9 percentage points. Year-to-date revenue rose 7.0% and operating profit 2.4%.
- For the first nine months, net cash from operating activities was $4.418 billion, down from $5.363 billion. Capital expenditures were $3.708 billion, versus $1.837 billion. Operating cash flow less capital expenditures was approximately $710 million, versus $3.526 billion.
- At September 30, cash, cash equivalents and marketable securities totaled $4.461 billion. Total debt was $18.910 billion, including $4.120 billion of commercial paper; current maturities and commercial paper totaled $4.555 billion. UPS reported debt at 92.5% of total capitalization, versus 84.7% in the comparative disclosure.
- Current assets were $12.910 billion and current liabilities $12.167 billion. Total shareowners’ equity was $1.539 billion. Long-term pension and postretirement obligations were $10.075 billion.
Segments and period-over-period changes
- U.S. Domestic Package: Q3 revenue grew 3.9% to $9.649 billion, but operating profit fell 5.6% to $1.182 billion and margin declined to 12.2% from 13.5%. Management cited higher labor and delivery costs, fuel and purchased transportation, hurricane effects, and investment in facilities and Saturday operations.
- International Package: Q3 revenue rose 11.2% to $3.364 billion and operating profit rose 8.9% to $627 million; margin eased to 18.6% from 19.0%. Higher volume was partly offset by currency effects and costs. Year-to-date operating profit declined 1.4%, with a reported $295 million unfavorable currency impact.
- Supply Chain & Freight: Q3 revenue rose 13.4% to $2.965 billion and operating profit rose 9.7% to $226 million; margin was 7.6% versus 7.9%. Growth reflected freight and forwarding demand and the Marken acquisition, while purchased transportation costs increased.
- Consolidated average daily package volume increased 4.6% in Q3 and 4.5% year to date. Average revenue per piece rose 2.7% in Q3 and 1.9% year to date.
- Cash flow was reduced by pension and postretirement contributions of $2.585 billion, versus $1.298 billion in the prior-year period, and by lower receipts of hedge-margin collateral.
Outlook, commentary, risks and unusual items
- Management described Q3 operating results as solid despite natural disasters that slowed U.S. regional activity. It attributed growth to broad customer demand, including e-commerce, and noted cost pressure from network investments and operating expenses.
- UPS expected 2017 capital expenditures of approximately $4.6–$5.3 billion and anticipated repurchasing approximately $1.8 billion of shares during 2017. It stated that cash, operating cash flow, debt-market access and available financing should support operations and planned uses of cash.
- UPS announced average net rate increases of 4.9% for specified Ground, Air, International and Freight services effective December 24, 2017, alongside changes to dimensional-weight calculations and certain surcharges.
- A pension-plan amendment produced a $1.525 billion curtailment gain and a $569 million net actuarial gain in Q2, recorded through other comprehensive income; the filing says it had no Q2 income-statement impact. UPS contributed $2.585 billion to company-sponsored pension and postretirement plans in the first nine months.
- UPS warned that CSPF insolvency could result in an estimated $4 billion increase in the UPS/IBT Plan projected benefit obligation if UPS had to provide coordinating benefits. The company said no additional liability was recognized under its current best estimate and emphasized substantial uncertainty.
- In New York cigarette-shipment litigation, a court awarded $9.4 million in damages and $237.6 million in penalties. UPS accrued the $9.4 million damages amount, appealed, and said the ultimate penalties were uncertain; estimated losses could be up to $247 million plus interest.
- Other disclosed legal and regulatory matters include a DOJ inquiry into USPS international air-mail contracts and a Spanish competition investigation; UPS said it could not estimate possible losses. It also reported an agreement in principle to resolve a Canadian customer class action for an immaterial amount, subject to final settlement and court approval.
- Other risks include labor negotiations, fuel and currency movements, pension funding, litigation, cybersecurity and technology disruption, severe weather, and competition. UPS reported no material change to the risk factors in its 2016 Form 10-K.
- UPS planned to adopt the new revenue-recognition standard on January 1, 2018, using full retrospective application. It expected an approximately $720 million revenue reclassification for 2016 from operating expenses to revenue for certain Supply Chain & Freight activities; it did not expect the overall income-statement impact to be material.
Important facts for investors to verify
- Whether planned capital spending and network investments improve capacity and operating margins, particularly in U.S. Domestic Package.
- How pension contributions, future pension-plan developments and the potential CSPF coordinating-benefit exposure affect cash flow and reported obligations.
- The outcome and potential financial exposure of the New York judgment, DOJ inquiry and Spanish competition investigation.
- Debt refinancing, commercial-paper balances and liquidity needs alongside dividends, share repurchases and elevated capital expenditures.
- The final presentation and quantified effects of 2018 revenue-recognition adoption, including the expected gross-versus-net revenue reclassification.