UPS Form 10-Q Summary — Quarter Ended September 30, 2010
Business context and reporting period
United Parcel Service, Inc. reported unaudited results for the three and nine months ended September 30, 2010, compared with the same 2009 periods. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses. Management attributed improved performance to economic recovery, higher shipping volumes and yields, cost containment, and network efficiencies. Interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $12.192B | $11.153B | $36.124B | $32.920B |
| Operating profit | $1.616B | $929M | $4.060B | $2.542B |
| Operating margin | 13.3% | 8.3% | 11.2% | 7.7% |
| Net income | $991M | $549M | $2.369B | $1.395B |
| Diluted EPS | $0.99 | $0.55 | $2.36 | $1.39 |
- Consolidated revenue increased 9.3% in Q3 and 9.7% year to date. Average daily package volume increased 5.0% in Q3; average revenue per piece increased 3.7%.
- Q3 segment revenue and operating profit: U.S. Domestic Package $7.291B and $1.020B; International Package $2.676B and $419M; Supply Chain & Freight $2.225B and $177M.
- Nine-month operating cash flow was $3.923B, down from $4.233B. Capital expenditures were $1.011B. Cash and cash equivalents were $3.020B at September 30, up from $1.542B at year-end 2009.
- Total debt was $9.642B, including $994M current maturities; long-term debt was $8.648B. Shareowners’ equity was $8.526B. Debt represented 53.1% of total capitalization, versus 59.4% at September 30, 2009.
- Current assets were $10.756B and current liabilities $6.801B. UPS had $894M of U.S. commercial paper outstanding and no borrowings on its $2.5B revolving credit facilities.
- UPS paid $1.363B in dividends during the first nine months and repurchased $599M of stock. Dividends declared were $1.41 per share for the period.
Material changes versus the prior comparable period
- All three segments reported higher Q3 and year-to-date revenue and operating profit. International Package and Supply Chain & Freight showed especially strong revenue growth, up 10.5% and 19.4%, respectively, in Q3.
- Operating profit growth outpaced revenue growth, reflecting volume recovery, improved pricing and mix, and cost/network efficiencies. Fuel surcharge revenue and expense both rose as fuel prices increased.
- Q3 2010 operating profit included a $109M pre-tax gain on a real estate sale ($61M after tax). Year-to-date results also included a $98M U.S. Domestic Package restructuring charge and a $38M loss on the sale of a German business. The prior-year comparison included a $181M aircraft impairment charge and a $77M currency remeasurement charge.
- Operating cash flow declined despite higher net income, mainly because pension and postretirement contributions increased to $1.069B from $758M and working-capital cash generation was lower.
- Year-to-date interest expense fell to $260M from $356M, primarily due to lower average debt balances; the 2009 figure included the currency remeasurement charge.
Outlook, commentary, risks and unusual items
- Management cited improving economic activity, international trade, inventory rebuilding, and retail sales, while noting that forward-looking statements are subject to economic and other risks. The filing does not provide a specific earnings or revenue forecast.
- UPS estimated that health-care legislation would add $50M–$65M of annual expense beginning in 2011. Reinstating matching contributions to its primary U.S. non-union 401(k) plan was expected to add about $75M of annual expense from 2011.
- Announced rate changes included a net 4.9% increase for specified package services effective January 3, 2011, and a 5.9% general increase for UPS Freight LTL services effective October 18, 2010.
- UPS expected to contribute a further $165M to company-sponsored pension and postretirement medical plans over the remainder of 2010 and was considering accelerating some pension contributions. Multi-employer plan contributions could rise materially, but the amount was not estimable.
- Legal and regulatory matters include freight-forwarding antitrust investigations in the U.S., Europe, Brazil, and other jurisdictions; UPS said potential liability could not be estimated. Other disclosed matters include wage-and-hour, franchisee, and package dimensional-weight lawsuits. The Hohider disability-accommodation case was settled in August 2010 without material financial impact.
- UPS held auction-rate securities with a $171M cost basis; failed auctions limited liquidity. A $21M pre-tax impairment was recorded in Q2 2010 on certain asset-backed auction-rate securities. The filing also describes valuation uncertainty for Level 3 investments.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Key facts investors should verify
- How much of the reported earnings and margin improvement persists after the $109M real estate gain and other period-specific items are excluded.
- Whether volume growth, pricing, and network efficiencies continue, particularly in international forwarding and domestic package operations.
- The trajectory of pension funding, multi-employer plan obligations, and the announced 2011 health-care and 401(k) cost increases.
- Developments and potential financial exposure from freight-forwarding antitrust proceedings and other unresolved litigation.
- Liquidity and valuation developments for auction-rate securities, as well as upcoming commercial-paper and debt maturities.