UPS 2019 First-Quarter 10-Q Summary
Business context and period: United Parcel Service, Inc. reported unaudited results for the three months ended March 31, 2019, compared with the same period in 2018. UPS operates through U.S. Domestic Package, International Package, and Supply Chain & Freight segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $17.160 billion | $17.113 billion | +0.3% |
| Operating profit | $1.394 billion | $1.520 billion | -8.3% |
| Operating margin | 8.1% | 8.9% | -0.8 percentage points |
| Net income | $1.111 billion | $1.345 billion | -17.4% |
| Diluted EPS | $1.28 | $1.55 | -17.4% |
| Operating cash flow | $2.277 billion | $4.067 billion | Down $1.790 billion |
Average daily package volume rose 1.9%, and average revenue per piece increased 1.0% to $11.08. The effective tax rate was 22.8%, up from 19.0%; lower investment and other income also weighed on earnings. Q1 2019 included $123 million of pretax transformation costs ($93 million after tax); UPS presents adjusted measures excluding these costs, which are non-GAAP.
Segments
- U.S. Domestic Package: Revenue increased 2.5% to $10.480 billion, while operating profit declined 11.9% to $666 million; adjusted operating profit fell 8.2%. Volume growth and pricing were offset by higher labor and network costs, transformation spending, weather, and one fewer operating day.
- International Package: Revenue declined 2.1% to $3.459 billion, including a $117 million currency impact. Reported operating profit fell 11.1% to $528 million; adjusted operating profit increased 3.0% to $612 million, reflecting cost management and network flexibility.
- Supply Chain & Freight: Revenue declined 3.9% to $3.221 billion, while operating profit increased 17.6% to $200 million. Lower forwarding volume and rates reduced revenue; cost reductions and improved yields supported profit.
Cash, debt and liquidity
- Cash, cash equivalents and marketable securities totaled $5.111 billion at March 31, 2019, including $1.815 billion held by foreign subsidiaries. Cash and cash equivalents alone were $4.399 billion.
- Total debt, including finance leases, was $23.166 billion, versus $22.736 billion at year-end 2018. Long-term debt and finance leases were $20.377 billion; current debt maturities, commercial paper and finance leases were $2.789 billion. UPS issued $1.5 billion of senior notes in March.
- UPS had $6 billion in revolving credit facilities and no borrowings under them at quarter-end. The company reported compliance with debt covenants. It reduced one $3 billion facility by $1.5 billion on April 4, 2019.
- Capital expenditures were $1.514 billion; net cash used in investing activities was $1.416 billion. Net cash used in financing activities was $695 million, including $799 million in dividends and $246 million in cash share repurchases.
- Operating cash flow fell substantially year over year, principally reflecting lower tax-related cash receipts, working-capital changes, and $214 million of pension and postretirement contributions versus $44 million a year earlier.
Material changes, outlook and notable items
- Management attributed earnings pressure to transformation and network investment, higher employee benefit costs, unfavorable weather, the Easter holiday shifting into Q2, one fewer operating day, higher tax expense, and lower investment and other income.
- UPS expects approximately $7 billion of capital expenditures in 2019 and approximately $1 billion of share repurchases. It increased the quarterly dividend to $0.96 per share and expects to continue regular dividends. Management stated cash, capital-market access, and operating cash flows should support operating needs, investment, distributions, and debt payments over the next several years. No earnings or revenue guidance is provided in the filing.
- UPS expects full-year 2019 depreciation and amortization to increase versus 2018 as automation and capacity-expansion assets enter service. Changes to useful-life estimates reduced Q1 depreciation expense by a net $37 million and increased net income by $29 million, or $0.03 per share.
- UPS adopted the new lease standard on January 1, 2019, recording approximately $2.65 billion of operating-lease right-of-use assets and $2.70 billion of operating-lease liabilities at adoption. At March 31, operating-lease liabilities were $2.585 billion. Comparative periods were not restated.
- On April 28, 2019, after quarter-end, the Teamsters ratified a new national master agreement expiring August 1, 2023; most economic provisions are retroactive to August 1, 2018.
- Pension exposure: UPS recorded an estimated $1.6 billion increase in its projected benefit obligation at year-end 2018 for potential coordinating benefits tied to the Central States Pension Fund. If uncertainties remain unresolved, the obligation could increase by approximately $2.4 billion, to about $4.0 billion. The fund has stated it could become insolvent in 2025 absent a solution.
- Legal and regulatory matters: UPS is appealing a New York cigarette-shipment ruling involving $9.4 million in damages and $237.6 million in penalties; estimated losses could be up to $247 million plus interest, but the likely amount is not estimable. The company also disclosed competition investigations in Spain and Turkey, a DOJ inquiry into USPS international air-mail contracts, and wage-and-hour litigation; loss estimates for these matters were not clear or not estimable.
- Management cited risks including economic conditions, competition, labor negotiations and work stoppages, fuel and currency movements, cyber and technology disruption, regulation, litigation, and pension and health-benefit obligations. UPS reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether package growth, pricing, and productivity can offset labor, benefit, weather, and transformation-related costs, particularly in the U.S. Domestic segment.
- Drivers of the sharp year-over-year decline in operating cash flow and the timing of tax receipts, working capital, and pension contributions.
- Progress and cost of the multi-year automation and capacity program, including the $7 billion 2019 capital-spending expectation and depreciation outlook.
- Developments affecting the Central States Pension Fund, UPS’s potential coordinating-benefit obligation, and the financial impact of the new Teamsters agreement.
- Outcomes of the New York appeal and other legal, regulatory, and competition matters, including exposures that UPS cannot currently estimate.
- Debt, liquidity, dividends, and buybacks relative to cash generation; the reported debt-to-total-capitalization ratio was 86.9%.