UPS Q1 2010 Form 10-Q Summary
Business context and reporting period. United Parcel Service, Inc. reported unaudited results for the three months ended March 31, 2010, compared with Q1 2009. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight segments. Management attributed stronger results to improving economic activity, trade and inventory rebuilding, higher volumes, and network efficiencies. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
- Revenue: $11.728 billion, up 7.2% year over year. Average daily package volume rose 2.7% and average revenue per piece increased 2.9%.
- Profit: Operating profit was $1.042 billion, up 45.1%; operating margin was 8.9%, versus 6.6%. Net income was $533 million, up 32.9%. Diluted EPS was $0.53, versus $0.40.
- Segment results: U.S. Domestic Package revenue was $7.102 billion and operating profit $562 million; International Package revenue was $2.639 billion and operating profit $427 million; Supply Chain & Freight revenue was $1.987 billion and operating profit $53 million. Segment results include the unusual items described below.
- Cash flow and capital spending: Operating cash flow was $1.549 billion, down from $2.196 billion, primarily because pension and postretirement contributions increased to $656 million from $24 million. Investing cash outflow was $250 million; capital expenditures were $283 million, compared with $382 million. Financing cash outflow was $257 million. Cash and cash equivalents increased by $1.002 billion to $2.544 billion.
- Liquidity: Current assets were $10.060 billion and current liabilities $7.366 billion at quarter-end. Cash plus current marketable securities totaled $3.115 billion. UPS reported no borrowings under its $2.5 billion revolving credit facilities.
- Debt and capitalization: Total debt was $9.954 billion, including $1.276 billion of commercial paper; long-term debt was $8.548 billion. Debt to total capitalization was 56.7%, compared with 64.1% at March 31, 2009. UPS reported compliance with debt covenants.
Changes versus Q1 2009
- Revenue, operating profit, and net income increased as activity and package volumes improved. International Package had the strongest segment revenue growth, up 17.8%; U.S. Domestic Package revenue grew 2.2%, and Supply Chain & Freight revenue grew 13.6%.
- Operating expenses increased 4.6%, slower than revenue growth. Higher purchased transportation and fuel costs were partly offset by lower other expenses and cost-control measures.
- Operating cash flow fell despite higher net income, reflecting substantially higher pension contributions and less favorable working-capital effects than in Q1 2009.
- Reported year-over-year profit comparisons are affected by a $181 million aircraft impairment charge in Q1 2009 and Q1 2010 charges for domestic restructuring and a German business sale.
Outlook, management commentary, risks, and unusual items
- Management described the economy and operating trends as improving and cited network optimization, cost containment, the Worldport expansion, and a new intra-Asia hub as supporting efficiency. The filing provides no specific full-year revenue or earnings guidance.
- Q1 2010 included a $98 million pretax ($64 million after-tax) charge for a U.S. Domestic Package management restructuring expected to eliminate approximately 1,800 positions. UPS said further relocation and restructuring costs were expected during 2010 and believed they would be approximately offset by staffing savings.
- The sale of a specialized transportation and express freight business in Germany resulted in a $38 million pretax ($35 million after-tax) loss. UPS also provided a two-year guarantee for certain employee benefit payments assumed by the buyer.
- A change in the tax status of a German subsidiary generated a $76 million non-cash tax charge, primarily from writing off deferred tax assets. The reported effective tax rate was 44.1%; the company’s adjusted rate, excluding identified items, was 35.0%.
- UPS expected to contribute a further $405 million to company-sponsored pension plans and $66 million to postretirement medical plans during the remainder of 2010. It noted that multi-employer plan contributions could rise with unfavorable investment performance, demographic changes, or increased benefits.
- Risks include wage-and-hour, disability accommodation, franchisee, dimensional-weight and freight-forwarding litigation, as well as U.S. and foreign antitrust investigations. The European Commission issued a Statement of Objections concerning alleged freight-forwarding anticompetitive conduct; UPS said potential penalties were not reasonably estimable and intended to defend itself. UPS also planned to begin furloughing 170 pilots in May 2010.
- UPS held $250 million in auction-rate securities at par value; persistent failed auctions limited liquidity and the securities were classified as non-current. Their estimated fair value reflected a $39 million pretax unrealized loss. Management reported no other-than-temporary impairment of investments at quarter-end.
Important facts for investors to verify
- Whether volume, yield, and margin improvements continued beyond the quarter, especially in U.S. air products and the LTL freight business.
- How pension funding requirements and other benefit costs affect cash generation over the rest of 2010.
- The realized savings and additional costs from the domestic restructuring, and any further effects of the German business sale.
- Developments in the European Commission and other antitrust matters, and in the disclosed class-action and franchisee litigation, for which potential exposure was not quantified.
- The liquidity and valuation of auction-rate securities, and the sensitivity of results to fuel prices, foreign exchange, interest rates, and market conditions.