United Parcel Service, Inc. — Q2 2012 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2012; financial statements are unaudited. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses. Comparisons below are year over year unless noted.
Financial performance and liquidity
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Revenue | $13.349 billion; +1.2% | $26.485 billion; +2.8% |
| Operating profit | $1.790 billion; +2.6% | $3.359 billion; +4.4% |
| Operating margin | 13.4%, versus 13.2% | 12.7%, versus 12.5% |
| Net income | $1.116 billion; +2.2% | $2.086 billion; +3.9% |
| Diluted EPS | $1.15; +5.5% | $2.15; +7.0% |
For the first half, operating cash flow was $3.850 billion, up from $3.314 billion. Investing activities used $307 million, including $949 million of capital expenditures and $100 million for acquisitions. Financing activities provided $158 million; dividends paid were $1.068 billion and share repurchases totaled $885 million in cash-flow reporting.
At June 30, cash and cash equivalents were $6.718 billion and marketable securities were $604 million. Current assets were $14.702 billion versus current liabilities of $8.400 billion. Total debt was $13.023 billion, including $1.911 billion classified as current; long-term debt was $11.112 billion. Debt was $11.128 billion at December 31, 2011. UPS reported covenant compliance and no borrowings under its revolving credit facilities. Credit ratings were Aa3 and AA-, with negative outlooks from both rating agencies.
Material changes and segment trends
- U.S. Domestic Package: Q2 revenue rose 4.1% to $8.058 billion and operating profit rose 13.7% to $1.134 billion; margin improved to 14.1% from 12.9%. Daily volume grew 3.5%, led by e-commerce and lightweight residential shipments. Revenue per piece increased 0.6%.
- International Package: Q2 revenue fell 4.0% to $3.014 billion and operating profit fell 10.1% to $454 million; margin declined to 15.1% from 16.1%. Weak transcontinental trade, lower-yield product mix, and currency effects weighed on results.
- Supply Chain & Freight: Q2 revenue declined 1.6% to $2.277 billion and operating profit declined 16.9% to $202 million. The prior-year quarter included a $48 million real-estate gain; excluding that item, adjusted operating profit increased 3.6% to $202 million.
Q2 consolidated operating expenses increased 1.0%, slower than revenue. Compensation and benefits rose, reflecting pension, health-care, and workers’ compensation costs, while fuel expense declined year over year. Interest expense increased 10.8% in Q2 to $92 million. The effective tax rate was 34.5%, compared with 34.6%.
Outlook, management commentary, risks, and unusual items
- Management expected slower U.S. economic growth in the second half, decelerating premium-product growth, and further weakening in the commercial small-package market, while anticipating continued solid business-to-consumer growth. No numerical full-year earnings guidance is stated in the supplied filing text.
- Outside the U.S., slower growth and customer trade-down from premium express to standard delivery were pressuring mix and trade lanes. UPS planned a 10% reduction in Asia air-network capacity in Q3 2012.
- Management cited yield management, operating efficiency, technology deployment, and network adjustments as actions to contain costs. It expected to repurchase approximately $1.5 billion of shares in 2012; the Board authorized a new $5.0 billion repurchase program.
- UPS agreed to acquire TNT Express for €9.50 per share, valuing the offer at about €5.16 billion (approximately $6.54 billion at the June 30 exchange rate). The European Commission moved the deal to a Phase II review; UPS expected to extend the offer and anticipated completion in Q4 2012. The acquisition remained subject to review and completion conditions.
- UPS acquired Kiala in February 2012; the acquisition was described as not material to consolidated results. A €10 million European Commission competition-law fine assessed in March was paid.
- Contingencies include franchise-related litigation, an antitrust lawsuit and DOJ investigation concerning third-party shipper negotiators, freight-forwarding investigations and litigation, and IRS tax disputes. For several matters, UPS said potential losses could not be estimated. The filing also discusses a DOJ investigation involving shipments for online pharmacies; any additional payment could exceed prior accruals, though UPS did not expect a material adverse effect.
- Collective bargaining agreements covering about 245,000 Teamsters-represented employees run through July 31, 2013; the pilots’ agreement became amendable at the end of 2011. UPS identified economic weakness, fuel and currency movements, labor and benefit costs, and execution and regulatory uncertainty around the TNT offer as relevant risks. It reported no material change to the prior annual report’s risk factors.
Important facts for investors to verify
- Whether U.S. volume and operating-margin improvement persist as management anticipated slower second-half growth and weaker commercial demand.
- International segment recovery, including trade-lane trends, product mix, currency effects, and the planned Asia capacity reduction.
- Cash generation and funding needs, including pension contributions, capital spending, dividends, repurchases, and the proposed TNT Express acquisition.
- Progress and final terms of the TNT regulatory review, offer extension, financing, and expected closing timing.
- Updates to material litigation, regulatory investigations, and unresolved IRS assessments; the filing does not provide estimable loss ranges for several matters.
- Effects of higher pension, health-care, and self-insurance costs, as well as negative credit-rating outlooks, on margins and liquidity.