UPS 2009 Q2 Form 10-Q Summary
Business context and reporting period
United Parcel Service, Inc. (UPS) reported unaudited results for the quarter and six months ended June 30, 2009, compared with the corresponding 2008 periods. Its segments are U.S. Domestic Package, International Package, and Supply Chain & Freight. Management attributed broad declines in demand and profitability to the economic recession and weaker trade.
Key financial metrics
Amounts are in millions of dollars, except per-share data, percentages, and where otherwise noted.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $10,829 | $13,001 | $21,767 | $25,676 |
| Operating profit | $895 | $1,454 | $1,613 | $2,947 |
| Operating margin | 8.3% | 11.2% | 7.4% | 11.5% |
| Net income | $445 | $873 | $846 | $1,779 |
| Diluted EPS | $0.44 | $0.85 | $0.84 | $1.72 |
| Operating cash flow | Not separately stated | Not separately stated | $3,155 | $5,028 |
- Q2 revenue fell 16.7%; operating profit fell 38.4%; net income fell 49.0%. For the first half, revenue fell 15.2%, operating profit 45.3%, and net income 52.4%.
- Q2 consolidated average daily package volume declined 4.7%, while average revenue per piece fell 10.5%. International Package revenue was down 23.8% in Q2; Supply Chain & Freight revenue fell 23.3%.
- Six-month capital expenditures were $671, versus $1,387 in 2008. Cash and cash equivalents were $2,818 at June 30, versus $507 at year-end 2008. Current assets were $10,182 and current liabilities $7,157.
- Total debt was $10,883, including $2,017 current maturities; long-term debt was $8,866. Total debt increased from $9,871 at year-end 2008. UPS had $1,878 of commercial paper outstanding and no borrowings under its $4.0 billion revolving credit facilities.
- Six-month dividends paid were $876; UPS repurchased 5.1 million shares for $248. The quarterly dividend remained $0.45 per share.
Material changes and unusual items
- Operating profit declined in all three segments. U.S. Domestic Package operating profit fell 47.1% in Q2; International Package fell 28.0%; Supply Chain & Freight fell 14.9%.
- Lower volumes, weaker product mix, and lower fuel surcharges reduced revenue. Lower fuel and purchased transportation costs and cost controls partly offset the revenue decline.
- First-half results included a $181 aircraft impairment charge related to DC-8 fleets, reducing year-to-date diluted EPS by approximately $0.12. A $77 pre-tax currency remeasurement charge on foreign-currency debt contributed to higher Q2 interest expense and reduced Q2 and first-half diluted EPS by a further $0.05. Together, these items reduced first-half diluted EPS by $0.17.
- Investment income was a $22 loss in Q2, including a $17 impairment charge on preferred and auction-rate securities. At June 30, UPS held $278 of auction-rate securities classified as non-current because auctions had failed; these securities had estimated fair value below par.
Outlook, commentary, and risks
- The filing gives no specific full-year revenue, earnings, or cash-flow guidance. Management said results for the first half should not be viewed as necessarily indicative of full-year results.
- Management cited persistent economic weakness, lower industrial production and retail sales, reduced global trade, product-mix shifts away from premium services, and weaker network utilization. UPS said it slowed share repurchases and intended 2009 repurchases to approximately offset stock-compensation dilution.
- UPS expected to contribute a further $682 to company-sponsored pension plans and $47 to postretirement medical plans during the remainder of 2009. Future multi-employer plan contributions could rise due to investment performance, demographics, or benefit changes.
- Contingencies include wage-and-hour, disability-accommodation, franchise, and freight-forwarding price-fixing litigation; tax examinations and disputes; and ongoing government inquiries into air-cargo and freight-forwarding pricing. The filing does not quantify potential liabilities for the highlighted cases.
- Other risks include foreign exchange, interest rates, fuel prices, counterparty exposure, and pension funding. A hypothetical 100-basis-point rise in short-term rates was estimated to increase annual interest expense by about $49.
- After quarter-end, UPS completed formation of an 80%-owned Middle East joint venture, including an 80% interest in its Turkish service agent’s small-package operations. The partner holds a put option and UPS a purchase option for the remaining 20%, with potential price adjustment based on earnings.
Important facts for investors to verify
- Whether package volumes, revenue per piece, and segment margins stabilize, particularly in domestic ground and international operations.
- The extent to which cost reductions can offset continued revenue weakness, and whether aircraft utilization or further impairments change.
- The recoverability and liquidity of auction-rate securities and other investments, including the impact of any additional impairments.
- Debt maturities, refinancing needs, interest-rate sensitivity, and the cash available after pension contributions, dividends, and capital spending.
- Developments and potential financial effects of litigation, tax matters, labor negotiations, and multi-employer pension obligations.
- The joint venture’s financial contribution and the terms and potential cost of exercising the options for its remaining ownership interest.