UPS Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; comparisons are with the first quarter of 2015 unless noted. UPS provides domestic and international package delivery, freight, logistics and related services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $14,418 | $13,977; up 3.2% |
| Operating profit | $1,823 | $1,673; up 9.0% |
| Operating margin | 12.6% | 12.0% |
| Net income | $1,131 | $1,026; up 10.2% |
| Diluted earnings per share | $1.27 | $1.12; up 13.4% |
| Net cash from operations | $2,670 | $2,751 |
| Capital expenditures | $427 | $365 |
- Operating expenses increased 2.4% to $12,595. Fuel expense fell $210, primarily due to lower fuel prices; compensation and benefits, purchased transportation, repairs and depreciation increased.
- Cash, cash equivalents and marketable securities totaled $6,267 at March 31, including $2,326 held by non-U.S. subsidiaries. Cash and cash equivalents alone were $3,887.
- Total debt was $15,438, including $3,869 of current maturities and commercial paper; long-term debt was $11,569. Debt to total capitalization was 86.2%, compared with 87.6% a year earlier. The company reported compliance with debt covenants and no borrowings under its revolving credit facilities.
- Current assets were $13,912 and current liabilities $11,098. Pension and postretirement benefit obligations were $10,839.
- Cash dividends paid were $666; share repurchases and related share transactions used significant cash. Financing activities used $440, versus $899 provided in Q1 2015.
Segments and changes versus prior year
| Segment | Revenue | Operating profit | Notable comparison |
|---|---|---|---|
| U.S. Domestic Package | $9,084; up 3.1% | $1,102; up 7.6% | Volume rose 2.8%; revenue per piece declined 1.3%. Margin improved to 12.1% from 11.6%. |
| International Package | $2,914; down 1.9% | $574; up 15.3% | Margin improved to 19.7% from 16.8%, aided by revenue management and cost actions; currency and lower fuel surcharges weighed on revenue. |
| Supply Chain & Freight | $2,420; up 10.4% | $147; down 2.6% | Revenue included Coyote Logistics, acquired in August 2015. Excluding Coyote, forwarding and logistics revenue declined; segment margin fell to 6.1% from 6.9%. |
Consolidated average daily package volume increased 2.1%, while average revenue per piece declined 1.6%. UPS attributed volume growth chiefly to e-commerce and an additional U.S. operating day. Reported EPS growth also reflected a lower weighted-average diluted share count.
Outlook, risks and unusual items
- UPS did not provide a consolidated revenue or earnings forecast in the supplied filing text. It anticipated approximately $2.8 billion in 2016 capital expenditures and approximately $2.7 billion in 2016 share repurchases. The Board approved a new $8.0 billion share-repurchase authorization in May 2016.
- Management described a mixed and challenging economic environment: weak U.S. manufacturing and business investment, softer global growth and uneven trade lanes. It cited network adjustments, yield management, automation and ORION deployment as operational priorities.
- Central States Pension Fund (CSPF): In April 2016, UPS estimated a potential 2016 charge of $3.2–$3.8 billion if the fund’s proposed benefit-reduction plan were approved and implemented. The U.S. Treasury rejected that proposal on May 6, 2016. UPS said a revised plan remained possible and that potential additional obligations could be material but could not be estimated; no additional coordinating-benefit liability was recorded.
- UPS expected to contribute a further $1.216 billion to company-sponsored pension plans and $78 million to U.S. postretirement medical plans during the remainder of 2016.
- Labor matters include ongoing mediation with pilots and negotiations with airline mechanics. The Teamsters national master agreement was due to expire July 31, 2018.
- Legal matters include a pending U.S. Department of Justice civil investigation concerning third-party shipper negotiators, the New York cigarette-delivery lawsuit scheduled for trial in September 2016, and other proceedings for which UPS said potential losses could not be estimated. The filing said no material changes had occurred to previously disclosed risk factors aside from the CSPF exposure.
- Trading securities recognized a $156 million unrealized loss in Q1 2016, primarily associated with carbon-credit investments. The filing reported no material impairment losses on investments.
Important facts for investors to verify
- Whether CSPF submits a revised plan and the resulting potential UPS benefit obligations, charges and timing.
- Whether package volume, revenue per piece and segment margins sustain their Q1 trends, particularly in Supply Chain & Freight and after Coyote’s acquisition.
- Whether planned 2016 capital spending, share repurchases and dividends remain consistent with operating cash generation and debt levels.
- Developments in labor negotiations and the DOJ, New York cigarette-delivery and other legal matters, including any newly estimable losses.
- The extent to which lower fuel prices, currency movements and changes in fuel surcharges continue to affect revenue, costs and reported earnings.