Business context and reporting period
UPS’s Form 10-K covers the fiscal year ended December 31, 2018; it is an annual filing, not a standalone fourth-quarter report. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses, serving more than 220 countries and territories. It delivered an average of 20.7 million pieces per day in 2018.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $71.861 billion | $66.585 billion |
| Operating profit | $7.024 billion | $7.529 billion |
| Operating margin | 9.8% | 11.3% |
| Net income | $4.791 billion | $4.905 billion |
| Diluted EPS | $5.51 | $5.61 |
| Cash from operations | $12.711 billion | $1.479 billion |
| Capital expenditures | $6.283 billion | $5.227 billion |
| Cash and marketable securities, year-end | $5.035 billion | $4.069 billion |
| Total debt, carrying value, year-end | $22.736 billion | $24.289 billion |
- Revenue grew 7.9%, with average daily package volume up 3.2% and average revenue per piece up 4.3%.
- Segment revenue and operating profit: U.S. Domestic Package $43.593 billion and $3.643 billion; International Package $14.442 billion and $2.529 billion; Supply Chain & Freight $13.826 billion and $852 million.
- Operating cash flow was materially higher than 2017, when UPS made $7.291 billion in discretionary contributions to its three primary U.S. pension plans. In 2018, it made no such discretionary contributions.
- Cash and marketable securities were $5.035 billion; total current assets were $16.210 billion and current liabilities $14.087 billion. UPS also reported $6 billion of undrawn revolving credit facilities.
Material changes versus the prior comparable period
- Operating profit declined 6.7% despite revenue growth. U.S. Domestic Package operating profit fell 15.3%; International Package profit increased 4.1% and Supply Chain & Freight increased 6.9%.
- Management attributed U.S. pressure to transformation costs, higher pension and labor costs, one fewer operating day, and costs of new facilities and technology. The International and Supply Chain & Freight segments benefited from growth and pricing, though margins edged down on a reported basis.
- 2018 included $360 million of pre-tax transformation costs. It also included $1.627 billion of pre-tax pension and postretirement mark-to-market losses, primarily reflecting weak plan-asset returns and an estimated Central States Pension Fund coordinating-benefit obligation, partly offset by higher discount rates.
- Management’s adjusted net income was $6.301 billion after excluding the after-tax effects of transformation costs and pension mark-to-market losses. This is a non-GAAP measure; reported GAAP net income was $4.791 billion.
- The effective tax rate fell to 20.4% from 31.3%, principally reflecting the Tax Cuts and Jobs Act’s reduction of the U.S. federal corporate tax rate to 21%.
- Fuel expense rose 27.4% to $3.427 billion. Fuel surcharge revenue increased, but fuel-price movements and the timing or extent of surcharge recovery can affect earnings.
Outlook, commentary, risks and contingencies
- UPS forecast approximately $7 billion of 2019 capital expenditures as its multi-year network automation, capacity, aircraft and technology investment program continues. It expected approximately $1 billion of 2019 share repurchases.
- The Board raised the quarterly dividend from $0.91 to $0.96 per share in February 2019. The filing provides no specific consolidated revenue or earnings guidance.
- Management said transformation investments are intended to modernize operations and improve quality and efficiency, with benefits not expected to be fully realized immediately.
- The company estimated a $1.6 billion increase in its pension obligation for possible Central States Pension Fund coordinating benefits. If uncertainties persist, the obligation could increase by a further approximately $2.4 billion, to about $4.0 billion. The outcome depends on potential benefit reductions, legislation, PBGC support, actuarial assumptions and other factors.
- Four local or supplemental Teamsters agreements remained under negotiation or ratification after the national U.S. Domestic Package agreement was deemed ratified. UPS Freight’s national agreement was ratified; the filing identifies labor disruption and future contract costs as risks.
- Material legal matters include a New York cigarette-delivery case with estimated potential losses up to $247 million plus interest, which UPS appealed; a Spanish competition fine of €19.2 million, whose implementation was suspended pending appeal; and a U.S. Department of Justice investigation for which a possible loss was not estimable.
- Other principal risks include economic weakness, intense competition, trade and geopolitical uncertainty, fuel and currency fluctuations, cybersecurity and data-protection requirements, severe weather, regulation, benefit-plan costs and litigation. The company reported no guarantees or off-balance-sheet arrangements it believed could materially affect financial condition or liquidity.
Important facts for investors to verify
- Reconcile GAAP results with management’s adjusted figures, particularly the $1.627 billion pension mark-to-market loss and $360 million transformation charge.
- Monitor whether network investment and transformation spending deliver operating leverage, especially in U.S. Domestic Package, where reported margin fell to 8.4% from 10.6%.
- Track pension funding and the Central States Pension Fund matter, including any revised benefit-reduction proposal or legislative action.
- Review 2019 capital spending, debt maturities, liquidity needs, and the effect of the new lease-accounting standard; UPS expected to recognize about $2.6 billion of operating lease liabilities upon adoption.
- Follow labor negotiations and the outcomes of the New York litigation, Spanish appeal, and DOJ investigation; potential losses for several matters were not clearly estimable in the filing.