Business context and reporting period
United Parcel Service, Inc. (UPS) filed this Form 10-K for the fiscal year ended December 31, 2009. UPS is a global package-delivery, freight, and supply-chain services company, reporting U.S. Domestic Package, International Package, and Supply Chain & Freight segments. It delivered an average of 15.1 million pieces per day in 2009 and generated $45.3 billion in revenue. The filing also reports improving volume and revenue trends in the latter half of the year, including the fourth quarter.
Financial performance and liquidity
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Revenue | $45.297 billion | $51.486 billion | Down 12.0% |
| Operating profit | $3.801 billion | $5.382 billion | Down 29.4% |
| Operating margin | 8.4% | 10.5% | Down 2.1 percentage points |
| Net income | $2.152 billion | $3.003 billion | Down 28.3% |
| Diluted EPS | $2.14 | $2.94 | Down 27.2% |
| Cash from operating activities | $5.285 billion | $8.426 billion | Down $3.141 billion |
- All three segments reported lower revenue. U.S. Domestic Package revenue fell 10.0% and operating profit fell 45.3%; International Package revenue fell 14.1% and operating profit fell 13.5%. Supply Chain & Freight revenue fell 16.5%, while operating profit was $296 million versus a $105 million loss in 2008, when a $548 million goodwill impairment was recorded.
- Average daily package volume declined 3.1% overall, and average revenue per piece declined 8.1%. In U.S. Domestic Package, average daily volume fell 3.9% and revenue per piece fell 6.7%. Management attributed pressure to recession-related weakness, lower fuel surcharges, product and customer mix, lighter packages, and weaker international trade.
- Year-end cash and marketable securities were approximately $2.1 billion; total debt was $9.521 billion, including $8.668 billion of long-term debt. Shareowners’ equity was $7.696 billion and debt was 55.3% of total capitalization. UPS reported $672 million of commercial paper outstanding and no borrowings on its $4 billion of revolving credit facilities at year-end.
- Capital expenditures were $1.602 billion, down from $2.636 billion in 2008. Net cash used in investing activities was $1.248 billion. UPS paid $1.751 billion in dividends and spent $561 million on share repurchases in 2009, materially less on repurchases than in 2008.
Material changes, outlook, and unusual items
- Management said volume and revenue trends improved in the second half of 2009; fourth-quarter U.S. Domestic Package operating margin was 10.1%. International Package operating margin reached 16.7% in the quarter, and Supply Chain & Freight returned to quarterly operating profit. Management cited cost controls and network efficiencies, while noting the continuing effect of the recession.
- In 2009, UPS recorded a $181 million impairment charge on retired DC-8 aircraft and a $77 million non-cash foreign-currency remeasurement charge. It also recorded a $17 million other-than-temporary investment impairment. The prior-year comparison included $548 million of goodwill impairment and $27 million of intangible impairment. The $6.1 billion Central States pension-fund withdrawal charge occurred in 2007.
- UPS estimated 2010 capital expenditures of approximately $1.8 billion. It expected to continue regular cash dividends; in February 2010, the Board raised the quarterly dividend from $0.45 to $0.47 per share. The company said 2010 share repurchases were intended approximately to offset stock-compensation dilution.
- UPS announced a U.S. Domestic Package management restructuring, with approximately 1,800 management and administrative positions to be eliminated and a charge of up to $80 million expected in first-quarter 2010. It also expected an approximately $40 million first-quarter 2010 loss from the sale of a German freight business. The company planned to furlough at least 300 pilots, subject to implementation.
- Key risks include prolonged economic weakness, competition, fuel-price and surcharge timing or mix effects, currency and interest-rate movements, labor disruptions, rising pension and health costs, regulation and security requirements, technology or data-security disruption, and litigation. UPS disclosed a European Commission Statement of Objections concerning alleged freight-forwarding anticompetitive conduct; it said the proceeding’s outcome and potential liability could not be determined.
- Required pension fundings were projected at $980 million for 2010, primarily related to the UPS IBT Pension Plan; actual future contributions could differ with plan performance and assumptions. A $3 billion revolving facility was due to expire in April 2010. Management stated that operating cash flow and borrowing programs should provide adequate liquidity for foreseeable needs.
Most important facts for investors to verify
- Whether the late-2009 recovery in package volumes and segment profitability continued, and whether it offset persistently lower revenue per piece and international trade weakness.
- How fuel surcharge revenue, fuel expense, and product mix affect margins as fuel prices change; domestic fuel surcharge revenue fell $1.924 billion in 2009.
- Actual 2010 pension contributions and the sensitivity of pension obligations and cash needs to investment returns, discount rates, and healthcare costs.
- Execution, costs, and realized savings from the domestic restructuring, and the effect of the Germany business sale and pilot furlough plans.
- Outcomes or developments in the disclosed class actions, freight-forwarding investigations, and tax examinations; UPS stated that the potential effects of several matters were not determinable.
- Debt maturities, renewal or replacement of the revolving credit facility due in April 2010, and the company’s ability to fund capital commitments, dividends, and other obligations. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.