Business context and reporting period
United Parcel Service, Inc. (UPS) filed this unaudited Form 10-Q for the quarter ended June 30, 2010. UPS operates through U.S. Domestic Package, International Package, and Supply Chain & Freight. Management attributed stronger first-half results to improving economic activity, trade and shipment volumes, alongside cost containment and network efficiencies. Interim results are not necessarily indicative of full-year performance.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $12,204 | $10,829 | $23,932 | $21,767 |
| Operating profit | $1,402 | $895 | $2,444 | $1,613 |
| Operating margin | 11.5% | 8.3% | 10.2% | 7.4% |
| Net income | $845 | $445 | $1,378 | $846 |
| Diluted EPS | $0.84 | $0.44 | $1.37 | $0.84 |
- Q2 revenue grew 12.7%, operating profit 56.6%, and net income 89.9% year over year. First-half revenue grew 9.9%, operating profit 51.5%, and net income 62.9%.
- Q2 average daily package volume rose 3.6% and average revenue per piece increased 7.1%. First-half figures increased 3.1% and 5.0%, respectively.
- Q2 segment results: U.S. Domestic Package revenue of $7,269 and operating profit of $748; International Package revenue of $2,771 and operating profit of $521; Supply Chain & Freight revenue of $2,164 and operating profit of $133. International Package had the strongest segment revenue and profit growth.
- Six-month operating cash flow was $3,012, versus $3,155 in 2009. Capital expenditures were $664; cash used in investing activities was $608 and cash used in financing activities was $646. Cash and cash equivalents ended the period at $3,252, up from $1,542 at year-end 2009.
- At June 30, total debt was $10,251, including $1,637 of current maturities and commercial paper; long-term debt was $8,614. Debt was $9,521 at year-end 2009. Debt to total capitalization was 56.4%, compared with 61.6% at June 30, 2009.
- UPS had $1,528 of U.S. commercial paper outstanding and no borrowings under its $2.5 billion revolving credit facilities. It reported compliance with debt covenants and stated that operating cash flow and borrowing programs should meet foreseeable funding needs.
Material changes versus the prior comparable period
- All three segments improved year over year, supported by higher package and forwarding volumes, pricing and fuel surcharges, and operating efficiencies. Domestic and international package operating margins improved substantially; Supply Chain & Freight’s Q2 margin fell to 6.1% from 7.0% despite higher operating profit.
- Purchased transportation expense increased 35.8% and fuel expense 33.0% in Q2, reflecting higher volumes, fuel prices and third-party carrier costs. Compensation and benefits rose 2.9% in Q2, partly due to benefit costs and incentive compensation.
- Interest expense fell to $84 from $181 in Q2, partly because Q2 2009 included a $77 foreign-currency remeasurement charge; lower average debt and borrowing costs also contributed.
- First-half operating cash flow declined despite higher earnings, chiefly due to pension and postretirement contributions of $812 versus $180 in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management described economic growth, inventory rebuilding and international trade as supportive of shipment demand, while highlighting continued cost controls, network efficiency efforts and investments in its Worldport expansion and Shenzhen air hub. The filing provides no specific full-year revenue or earnings guidance.
- UPS expected to contribute a further $428 to company-sponsored pension and postretirement medical plans during the remainder of 2010. It estimated health-care legislation would add $50–$65 of annual expense beginning in 2011, subject to further evaluation.
- First-quarter 2010 unusual items included a $98 pre-tax domestic restructuring charge, a $38 pre-tax loss on the sale of a German specialized transportation business, and a $76 non-cash income-tax charge related to changing a German subsidiary’s tax status. UPS expected additional restructuring and relocation costs in 2010, which it believed would be more than offset by savings.
- In Q2 2010, UPS recorded a $21 impairment charge on certain asset-backed auction-rate securities. It held $200 at cost in auction-rate securities; failed auctions and limited liquidity continued to constrain their sale at par. Fair value estimates involve unobservable inputs.
- Key exposures include unresolved wage-and-hour, disability accommodation, franchise, dimensional-weight and freight-forwarding litigation; competition-authority investigations, including a European Commission Statement of Objections for which potential fines were not reasonably estimable; and uncertainty over future multi-employer benefit-plan contributions. UPS stated that it intended to defend itself and could not determine potential liabilities for several matters.
- UPS began furloughing 170 pilots in May 2010; further furloughs could depend on economic conditions. Airline mechanic negotiations remained in recess. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether volume, pricing and margins remain resilient as economic conditions and fuel prices change, and how fuel surcharges compare with fuel and carrier costs.
- Cash generation after pension funding, planned capital spending, dividends and share repurchases; the filing reports $428 of expected remaining 2010 benefit contributions.
- Debt maturities and refinancing needs, particularly the $1,528 commercial-paper balance classified as current, alongside available revolver capacity and credit ratings.
- Valuation, liquidity and further impairment risk in auction-rate securities and other investments using Level 3 estimates.
- Potential financial effects of litigation, antitrust proceedings and multi-employer pension and health-plan obligations, which the filing does not quantify clearly.
- Actual restructuring savings and costs, and whether the estimated $50–$65 annual health-care expense increase beginning in 2011 is confirmed.