UPS Q1 2012 Form 10-Q Summary
Reporting period: Three months ended March 31, 2012; unaudited. Financial amounts are in U.S. dollars, generally millions unless stated otherwise. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses.
Financial performance and liquidity
- Revenue: $13.136 billion, up 4.4% year over year. Average daily package volume rose 4.3%; average revenue per piece increased 0.9%.
- Profit and margins: Operating profit was $1.569 billion, up 6.6%; operating margin was 11.9%, versus 11.7%. Net income was $970 million, up 6.0%. Diluted EPS was $1.00, versus $0.91.
- Segment results: U.S. Domestic revenue was $8.004 billion and operating profit $995 million (up 6.1% and 13.1%). International revenue was $2.966 billion and operating profit $408 million (up 2.3%; down 9.9%). Supply Chain & Freight revenue was $2.166 billion and operating profit $166 million (up 1.3% and 19.4%).
- Cash flow and investment: Operating cash flow was $2.280 billion, versus $1.281 billion. Capital expenditures were $428 million; operating cash flow less capital expenditures was approximately $1.852 billion. Investing activities used $259 million. The cash-flow comparison benefited substantially from pension and postretirement contributions of $220 million, versus $1.252 billion in Q1 2011.
- Cash and liquidity: Cash and cash equivalents were $5.133 billion at quarter-end, compared with $3.034 billion at year-end 2011; marketable securities were $947 million. Current assets were $13.473 billion and current liabilities $7.543 billion.
- Debt and capital: Total debt was $11.998 billion, including $885 million of commercial paper; total debt was $11.128 billion at year-end 2011. Debt to total capitalization was 61.5%, versus 59.4% at March 31, 2011. UPS reported compliance with debt covenants and no outstanding amounts under its revolving credit facilities.
- Other metrics: Effective tax rate was 34.5%, unchanged year over year. Dividends declared were $0.57 per share, versus $0.52.
Material changes and management commentary
- U.S. Domestic Package benefited from stronger U.S. demand, e-commerce and lightweight residential shipments; operating margin improved to 12.4% from 11.7%.
- International operating margin fell to 13.8% from 15.6%. Management cited customers shifting from premium express to standard products, higher fuel costs, and adverse currency effects; international operating profit comparisons were reduced by $17 million from currency movements.
- Supply Chain & Freight operating margin improved to 7.7% from 6.5%, including a $9 million gain on the sale of an operating facility. Freight forwarding activity faced weaker air-freight demand.
- Higher fuel prices raised fuel expense by $117 million year over year. Increased fuel surcharges partly offset the impact. Compensation and benefits expense also rose, including higher pension and self-insurance costs.
- UPS acquired Kiala S.A. in February to expand business-to-consumer delivery options in Europe; the acquisition was described as not material to consolidated results.
Outlook, risks and unusual items
- UPS announced an agreement to acquire TNT Express for €9.50 per share, valuing the issued and outstanding share capital at €5.16 billion (about $6.77 billion). Closing was anticipated in Q3 2012, subject to completion. UPS expected to use about $5.0 billion of available cash and $1.8 billion of new debt to fund the offer.
- Management described moderate U.S. economic growth and slower, volatile growth outside the U.S., particularly in Europe. It cited ongoing yield management, efficiency and cost-control initiatives, but provided no specific consolidated earnings guidance in the supplied filing text.
- UPS expected approximately $675 million of additional contributions to company-sponsored pension and U.S. postretirement medical plans during the remainder of 2012. It anticipated share repurchases of about $1.5 billion in each of 2012 and 2013. On May 3, 2012, the board approved a new $5.0 billion share-repurchase authorization with no expiration date.
- The European Commission assessed a €10 million fine against UPS in a freight-forwarding competition matter; UPS was evaluating the decision and a potential appeal. Other franchise, antitrust, competition, wage-and-hour, and tax matters remained pending. For several matters, UPS said it could not estimate a possible loss or range of loss.
- Approximately 245,000 employees were covered by Teamsters agreements running through July 31, 2013; the pilots’ agreement became amendable at the end of 2011. The filing identifies labor negotiations and benefit-plan costs as matters to monitor.
- Management cautioned that interim results are not necessarily indicative of full-year results. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the proposed TNT Express acquisition closed, its final financing, and its effect on debt and liquidity.
- Whether international margin pressure from product mix, fuel and currency persisted, and whether U.S. volume growth translated into sustained profitability.
- Actual 2012 pension and postretirement contributions, capital spending, and share repurchases compared with stated expectations.
- Developments in the €10 million European Commission fine and other unquantified litigation and tax contingencies.
- The sustainability of operating cash flow, noting that the year-over-year increase partly reflected much lower pension contributions than in Q1 2011.