Business context and reporting period
United Parcel Service, Inc. (UPS) filed this annual report for the fiscal year ended December 31, 2012. UPS operates three segments: U.S. Domestic Package, International Package, and Supply Chain & Freight. It delivered an average of 16.3 million pieces daily across more than 220 countries and territories.
Key financial metrics
Amounts are in U.S. dollars. The filing reports fiscal-year results and separately provides fourth-quarter figures.
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $54.127 billion | $53.105 billion | +1.9% |
| Operating profit, reported | $1.343 billion | $6.080 billion | -77.9% |
| Operating margin, reported | 2.5% | 11.4% | -8.9 percentage points |
| Net income, reported | $807 million | $3.804 billion | -78.8% |
| Diluted EPS, reported | $0.83 | $3.84 | -78.4% |
| Cash from operating activities | $7.216 billion | $7.073 billion | +2.0% |
| Capital expenditures | $2.153 billion | $2.005 billion | +$148 million |
Reported 2012 results included a $4.831 billion pre-tax pension and postretirement benefit mark-to-market loss and an $896 million pre-tax multiemployer pension withdrawal charge. Excluding these items, UPS reported adjusted operating profit of $7.070 billion, adjusted operating margin of approximately 13.1%, adjusted net income of approximately $4.389 billion, and adjusted diluted EPS of approximately $4.57. These adjusted figures are derived from the filing’s disclosed adjustments and are non-GAAP measures.
Fourth-quarter 2012 revenue was $14.571 billion; reported operating loss was $2.782 billion, net loss was $1.748 billion, and diluted EPS was a loss of $1.83. The quarterly operating result reflected the pension mark-to-market loss, which reduced net income by $3.023 billion and EPS by $3.16.
By segment, 2012 revenue and reported operating profit were: U.S. Domestic Package, $32.856 billion and $459 million; International Package, $12.124 billion and $869 million; Supply Chain & Freight, $9.147 billion and $15 million. Adjusted segment operating profit was $4.532 billion, $1.810 billion, and $728 million, respectively.
At year-end, cash and marketable securities totaled $7.924 billion; total debt was $12.870 billion, including $1.781 billion of current maturities; long-term debt was $11.089 billion. Debt to total capitalization rose to 73.1% from 61.0%. Shareowners’ equity declined to $4.733 billion from $7.108 billion. Cash from operations less capital expenditures was approximately $5.063 billion, calculated from the reported amounts.
Material changes versus the prior comparable period
- Revenue increased modestly, supported by U.S. package volume growth, while reported operating profit and net income fell sharply due primarily to pension-related charges.
- Average daily package volume rose 3.2% overall. U.S. Domestic Package revenue increased 3.6%; International Package revenue decreased 1.0%; Supply Chain & Freight revenue was nearly flat.
- U.S. Domestic adjusted operating profit rose 6.4%, but International Package adjusted operating profit fell 3.7%, amid mix shift from premium express to standard services and softer transcontinental trade. Supply Chain & Freight adjusted operating profit fell 1.1%.
- Cash from operations was broadly stable, while pension and postretirement contributions declined to $917 million from $1.436 billion. Capital expenditures increased to $2.153 billion.
- Year-end cash and marketable securities increased from $4.275 billion to $7.924 billion, including $4.211 billion held in European subsidiaries for the planned TNT Express acquisition.
Outlook, management commentary, risks and unusual items
- Management described the global economic environment as challenging: U.S. growth was slow to moderate, business-to-business activity lagged, and economic weakness in Europe and elsewhere encouraged customers to shift from premium express to standard delivery. E-commerce and residential shipments were comparatively stronger.
- UPS forecast 2013 capital expenditures of approximately $2.4 billion and anticipated approximately $4.0 billion of share repurchases. No specific earnings or revenue guidance is stated in the supplied filing text.
- In January 2013, the European Commission prohibited the proposed TNT Express acquisition. UPS withdrew its offer and paid a €200 million (approximately $268 million) termination fee in the first quarter of 2013. The acquisition-related cash reserve therefore merits reassessment.
- UPS recorded an $896 million withdrawal liability charge after restructuring its participation in the New England Teamsters and Trucking Industry Pension Fund. The undiscounted obligation is $2.162 billion, payable over 50 years; the agreement also freezes the hourly contribution rate to the new pool for 10 years.
- Defined-benefit plan obligations and expense are sensitive to discount rates, asset returns, and healthcare costs. Management expected pension and postretirement expense to increase in 2013, primarily because of lower discount rates.
- Key risks include economic and trade weakness, competition and pricing pressure, fuel costs and surcharge timing, currency movements, cybersecurity and service disruption, severe weather, litigation, pension exposure, and labor negotiations. The Teamsters’ national agreement covering approximately 249,000 employees ran through July 31, 2013; the pilots’ agreement was amendable at the end of 2011.
- Notable contingencies include antitrust and class-action matters, certain international competition investigations, and a DOJ investigation concerning shipments for online pharmacies. UPS said it could not estimate potential losses for several matters; the filing does not provide clear quantified exposure for them.
Most important facts for investors to verify
- Reconcile reported and adjusted results, particularly the $4.831 billion pension remeasurement loss and $896 million withdrawal charge, and assess the recurring earnings baseline.
- Review pension funded status, actuarial assumptions, future contributions, and the long-term cash cost of the $2.162 billion New England fund obligation.
- Confirm the impact of the failed TNT transaction, including the $268 million termination fee and use of the cash reserved for the deal.
- Monitor labor negotiations and potential effects on wages, benefits, service continuity, and operating margins.
- Track International Package and forwarding profitability, customer mix shifts, volume trends, and whether cost reductions offset weaker premium demand.
- Assess debt and liquidity in light of the higher debt-to-capitalization ratio, upcoming debt maturities, planned repurchases, and capital spending.
- Follow the status and potential outcomes of legal, regulatory, and tax matters for which UPS could not estimate a loss range.