United Parcel Service, Inc. — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2014, compared with the same periods in 2013. UPS reports U.S. Domestic Package, International Package, and Supply Chain & Freight operations. Management described stronger U.S. package demand, led by e-commerce, alongside uneven international growth and pressure as customers shifted from premium to standard services.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $14.268 billion | $13.507 billion | $28.047 billion | $26.941 billion |
| Operating profit | $747 million | $1.742 billion | $2.260 billion | $3.322 billion |
| Net income | $454 million | $1.071 billion | $1.365 billion | $2.108 billion |
| Diluted EPS | $0.49 | $1.13 | $1.47 | $2.21 |
| Operating margin | 5.2% | 12.9% | 8.1% | 12.3% |
- Q2 revenue rose 5.6%, while average daily package volume increased 7.2%; average revenue per piece fell 1.5%. For the first half, revenue grew 4.1%, volume rose 6.0%, and revenue per piece declined 1.5%.
- Q2 operating profit and net income were substantially affected by a $1.066 billion pre-tax ($665 million after-tax) charge for healthcare plan changes. Excluding that charge, UPS reported adjusted Q2 operating profit of $1.813 billion, versus $1.742 billion a year earlier; adjusted operating margin was 12.7% versus 12.9%.
- Segment Q2 revenue and operating profit: U.S. Domestic Package $8.668 billion and $209 million; International Package $3.252 billion and $444 million; Supply Chain & Freight $2.348 billion and $94 million. Segment profit included healthcare-plan charges; management reported adjusted profit of $1.166 billion, $471 million, and $176 million, respectively.
- Six-month cash from operations was $1.832 billion, down from $3.431 billion. The decline included the $1.995 billion postretirement-obligation settlement; management said operating cash flow excluding specified transaction effects increased approximately $217 million year over year. Investing cash outflow was $1.802 billion and financing cash outflow was $1.632 billion.
- At June 30, cash and cash equivalents were $3.056 billion and marketable securities were $1.543 billion. Total debt was $11.842 billion, including $1.860 billion of commercial paper; debt to total capitalization was 68.0%. UPS reported no borrowings under its revolving credit facilities and stated it was in compliance with debt covenants.
- Capital expenditures were $813 million in the first half. The company declared dividends of $1.34 per share for the first half and repurchased 13.7 million shares for $1.363 billion.
Material changes and management commentary
- The healthcare-plan changes followed ratification of a Teamsters agreement in April 2014. UPS transferred $2.271 billion to multiemployer funds: $1.995 billion settled an obligation and $276 million was recorded as a prepaid deposit pending other contract ratifications. The accounting charge comprised $112 million for curtailment, $746 million for remeasurement, and $208 million for settlement.
- U.S. Domestic Package Q2 revenue grew 5.2%, but mix—particularly growth in lighter-weight, lower-yield shipments—reduced revenue per piece. For the first half, U.S. weather was estimated to have reduced operating profit by approximately $200 million.
- International Package Q2 revenue rose 6.2%; adjusted operating profit increased 4.4%. Management cited volume growth, offset in part by a shift toward standard products and international air-freight capacity pressure.
- Supply Chain & Freight Q2 revenue increased 6.5%; adjusted operating profit rose 10.7%. Forwarding and logistics benefited from volume growth, while excess capacity in some trade lanes pressured customer rates.
- Management anticipated approximately $2.5 billion of 2014 capital expenditures and approximately $2.7 billion of 2014 share repurchases. It expected about $479 million of additional cash tax benefits from benefit-plan payments during the remainder of 2014 and planned a further approximately $31 million pre-tax benefit-plan charge upon ratification of certain other agreements.
Outlook, risks, and contingencies
UPS cited uncertain global economic conditions, competition, fuel and foreign-exchange exposure, labor negotiations, operating disruptions, cybersecurity and technology risks, and employee benefit costs among its forward-looking risks. The Teamsters agreement runs through July 31, 2018; pilot negotiations remained in mediation, and certain mechanic agreements were amendable or newly ratified. The company identified unresolved litigation and investigations, including franchise, antitrust, competition, and government-customer delivery matters, for which it could not estimate a possible loss or range of loss. UPS stated that its liquidity sources were adequate for foreseeable needs. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Reconcile reported earnings and margins with the $1.066 billion benefit-plan charge and assess which adjusted measures are useful for comparison.
- Track the cash and accounting consequences of transferring retiree healthcare obligations, including remaining contract ratifications, the planned charge, and expected tax benefits.
- Assess whether volume growth can translate into improved yields and margins, given lower-yield shipment mix, transportation costs, and the prior-period weather impact.
- Monitor operating cash generation, commercial-paper usage, debt maturities, capital spending, dividends, and planned share repurchases.
- Follow unresolved legal and regulatory matters and labor negotiations; the filing does not provide clear loss estimates for several proceedings.