Business context and reporting period
United Parcel Service, Inc. (UPS) filed this unaudited Form 10-Q for the quarter ended September 30, 2021. UPS operates U.S. Domestic Package, International Package and Supply Chain Solutions. The nine-month period includes the April 30 sale of UPS Freight; comparative results therefore include Freight for part or all of 2020 periods.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $23.184 billion | $21.238 billion | $69.516 billion | $59.732 billion |
| Operating profit | $2.896 billion | $2.363 billion | $8.919 billion | $5.647 billion |
| Operating margin | 12.5% | 11.1% | 12.8% | 9.5% |
| Net income | $2.329 billion | $1.957 billion | $9.797 billion | $4.690 billion |
| Diluted EPS | $2.65 | $2.24 | $11.16 | $5.39 |
| Operating cash flow | Not provided separately | Not provided separately | $11.761 billion | $9.283 billion |
For Q3, revenue rose 9.2%, operating profit 22.6%, and diluted EPS 18.3% year over year. For the first nine months, revenue rose 16.4% and operating profit 57.9%. Nine-month GAAP earnings include a $3.290 billion pre-tax ($2.5 billion after-tax) pension mark-to-market gain; UPS reported adjusted diluted EPS of $8.54 year to date, excluding that gain and other identified items. Q3 adjusted diluted EPS was $2.71.
- Segment performance, Q3: U.S. Domestic Package revenue was $14.208 billion and operating profit $1.407 billion; International Package revenue was $4.720 billion and operating profit $1.051 billion; Supply Chain Solutions revenue was $4.256 billion and operating profit $438 million.
- Cash and investment: Cash and cash equivalents were $10.212 billion and marketable securities $348 million at September 30. Nine-month capital expenditures were $2.570 billion; operating cash flow less capital expenditures was $9.191 billion.
- Debt and liquidity: Total debt was $22.106 billion, including $1.268 billion current maturities. No commercial paper or revolving credit facility balances were outstanding. UPS reported $10.6 billion in cash, cash equivalents and marketable securities and stated available liquidity was adequate for expected requirements.
- Capital returns: Nine-month dividends paid were $2.578 billion. UPS repurchased $500 million of shares during the period and had $4.5 billion remaining under its new $5 billion authorization.
Material changes versus prior comparable periods
- Q3 average daily package volume declined 2.0% overall, while average revenue per piece increased 13.0%. U.S. Domestic average daily volume fell 2.7%; International volume rose 1.9%.
- Revenue increased in all segments. Q3 International operating margin declined to 22.3% from 23.6%, despite higher revenue and operating profit; U.S. Domestic and Supply Chain Solutions margins expanded.
- Higher fuel expense and purchased transportation costs were notable cost pressures: consolidated Q3 fuel expense rose 53.7% and purchased transportation expense rose 17.8% year over year.
- Operating cash flow increased from $9.283 billion to $11.761 billion for the nine months, while capital expenditures declined from $3.219 billion to $2.570 billion.
- Debt declined from $24.654 billion at year-end 2020 to $22.106 billion. Shareowners’ equity increased to $12.057 billion from $669 million, substantially reflecting pension remeasurements and related changes in accumulated other comprehensive income.
Outlook, management commentary, risks and unusual items
- Management said demand was expected to remain strong and highlighted growth from small- and medium-sized businesses. It expected SMB growth to moderate in Q4, domestic cost-per-piece growth to moderate from Q3, and costs to remain exposed to labor-market conditions.
- UPS expected 2021 capital expenditures of approximately $4.2 billion. It targeted a dividend payout ratio of approximately 50% of prior-year adjusted net income beginning in 2022. The filing does not provide a clear full-year revenue or EPS forecast.
- Management cited pandemic-related operating constraints, disrupted global supply chains, higher transportation costs, labor availability and wage pressures, rising fuel prices, and lower-than-planned Asia flight activity as current headwinds. Other disclosed risks include competition, labor negotiations and work stoppages, cybersecurity and technology disruption, foreign exchange and interest-rate changes, and litigation.
- The UPS Freight divestiture generated $848 million cash proceeds and a $35 million year-to-date pre-tax gain; proceeds were used to reduce debt. UPS retained certain self-insurance and benefit-plan obligations. The sale and benefit-plan remeasurements also produced significant pension accounting effects.
- UPS’s estimate of its potential Central States Pension Fund coordinating-benefit obligation was reduced following the American Rescue Plan Act. Management expected the fund to qualify for federal special financial assistance, but noted outcomes remain subject to interpretations, future actions and actuarial assumptions.
- UPS completed its acquisition of Roadie in October 2021, after quarter-end; it was described as not material to consolidated financial position or results.
- The company disclosed ongoing government and legal matters, including a DOJ inquiry and a Spanish competition decision under appeal; it did not expect these matters to have a material impact based on current assessments. Management reported effective disclosure controls.
Important facts for investors to verify
- How much reported nine-month earnings growth reflects the one-time pension mark-to-market gain, and how adjusted performance compares with GAAP results.
- Whether pricing, fuel surcharges and favorable business mix can continue to offset lower residential volumes, fuel inflation and transportation and labor cost pressures.
- The assumptions and risks underlying the Central States pension benefit estimate and anticipated federal assistance.
- Capital-spending plans, debt maturities and the pace of dividends and share repurchases relative to cash generation.
- The post-divestiture performance of Supply Chain Solutions and the contribution of Roadie beginning in Q4.