United Parcel Service, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unless otherwise noted, financial amounts are in U.S. dollars. The filing presents unaudited interim results.
Business context and performance
UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses. Management described a mixed economic environment, moderate package-volume growth, shifting trade patterns, and customers trading down from premium express services to standard delivery. It continued network, automation, yield-management, and cost-efficiency initiatives, including deployment of ORION.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $14.095bn | $14.268bn | $28.072bn | $28.047bn |
| Operating profit | $1.960bn | $747m | $3.633bn | $2.260bn |
| Operating margin | 13.9% | 5.2% | 12.9% | 8.1% |
| Net income | $1.230bn | $454m | $2.256bn | $1.365bn |
| Diluted EPS | $1.35 | $0.49 | $2.48 | $1.47 |
| Operating cash flow | Not separately presented | Not separately presented | $4.239bn | $1.832bn |
| Capital expenditures | Not separately presented | Not separately presented | $958m | $813m |
- Q2 revenue declined 1.2%, while first-half revenue was essentially flat year over year. Average daily package volume increased 2.1% in Q2 and 2.4% year to date; consolidated average revenue per piece fell 2.7% in Q2 and 2.0% year to date.
- Q2 fuel expense fell $341m year over year, while lower fuel surcharges reduced revenue. Compensation and benefits were $7.502bn in Q2, versus $8.375bn a year earlier; the prior-year figure included the unusual benefit-plan charge described below.
- By segment, Q2 revenue and operating profit were: U.S. Domestic Package $8.808bn and $1.201bn; International Package $3.045bn and $552m; Supply Chain & Freight $2.242bn and $207m. Segment profit comparisons with 2014 are affected by the prior-year charge; excluding that charge, management reported adjusted Q2 profit increases of 3.0%, 17.2%, and 17.6%, respectively.
- At June 30, cash and cash equivalents were $3.430bn and marketable securities were $2.792bn. Total current assets were $13.768bn versus current liabilities of $10.303bn.
- Total debt was $13.152bn, including $3.252bn of current maturities and commercial paper; long-term debt was $9.900bn. Shareowners’ equity was $1.968bn, and reported debt to total capitalization was 87.0%.
Material changes versus the prior comparable period
- Q2 2014 included a $1.066bn pre-tax ($665m after-tax) charge tied to changes in healthcare benefits for certain union employees. It comprised curtailment, remeasurement, and settlement charges. This materially depresses 2014 reported operating profit and net income, making the reported year-over-year increases poor measures of underlying growth.
- Operating cash flow increased to $4.239bn in the first half from $1.832bn. The comparison was affected by the 2014 $1.995bn postretirement-benefit settlement payment and other union-agreement-related cash flows; excluding those transactions, the filing says operating cash flow increased approximately $388m.
- International Package revenue fell 6.4% in Q2, with currency reducing the comparison by 7.7 percentage points; operating profit nevertheless rose 24.3% as reported, or 17.2% on the filing’s adjusted basis.
- Marketable securities increased to $2.792bn from $992m at year-end 2014. Cash rose to $3.430bn from $2.291bn. Capital spending also increased, and first-half investing cash outflow was $2.776bn versus $1.802bn.
Outlook, commentary, risks, and unusual items
- The filing does not provide a clear full-year earnings or revenue guidance figure. UPS expected 2015 capital expenditures of approximately $3.0bn and anticipated approximately $2.7bn of 2015 share repurchases. It expected to continue regular cash dividends.
- On July 31, 2015, after quarter-end, UPS announced a definitive agreement to acquire Coyote Logistics for $1.8bn, funded with available cash and existing and new debt. Closing was expected in Q3, subject to customary conditions and regulatory approvals.
- Management cited labor and benefit costs, weak industrial activity, U.S. dollar strength, changing customer product mix, fuel-price and surcharge movements, and international trade-lane overcapacity as factors affecting results. It expected network flexibility, automation, and efficiency initiatives to support operations.
- Labor matters include ongoing mediation with the pilots’ union; the Teamsters national agreement runs through July 31, 2018. The company also faces litigation and investigations, including an appeal in an antitrust case and a pending DOJ civil investigation of third-party shipper-negotiator policies. UPS stated it could not estimate possible losses for several matters, including the DOJ investigation and New York cigarette-delivery litigation.
- UPS reported that debt covenants were met and that $1.5bn and $3.0bn revolving credit facilities had no amounts outstanding. It reported Moody’s long-term rating of Aa3 with a negative outlook and S&P’s A+ rating with a stable outlook. It identified foreign exchange, fuel and other commodity prices, interest rates, pension costs, litigation, labor actions, and technology or security disruptions among relevant risks.
Most important facts for investors to verify
- How much of the reported earnings increase reflects the absence of the 2014 $1.066bn benefit-plan charge, rather than underlying operating improvement.
- Whether package-volume growth can offset lower revenue per piece, fuel-surcharge reductions, and customer shifts toward lower-yield services.
- Whether first-half cash generation is sustainable after accounting for working-capital movements, collateral, benefit contributions, capital spending, dividends, and repurchases.
- How the Coyote acquisition will affect debt, liquidity, integration costs, and future earnings once completed.
- Potential outcomes and financial exposure from labor negotiations, legal matters, and unestimable contingencies, together with pension and postretirement obligations.