Business context and reporting period
United Parcel Service, Inc. (UPS) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. UPS operates through U.S. Domestic Package, International Package, and Supply Chain & Freight segments. Results reflected the pandemic-driven shift toward e-commerce and residential shipping, while business-to-business demand remained weaker.
Financial performance
- Third quarter: Revenue was $21.24 billion, up 15.9% year over year. Operating profit was $2.36 billion, up 11.0%, with an 11.1% operating margin versus 11.6%. Net income was $1.96 billion, up 11.8%; diluted EPS was $2.24 versus $2.01.
- Nine months: Revenue was $59.73 billion, up 11.6%. Operating profit was $5.65 billion, down 0.3%, and operating margin was 9.5% versus 10.6%. Net income was $4.69 billion, up 3.2%; diluted EPS was $5.39 versus $5.23.
- Cash flow and investment: Operating cash flow was $9.28 billion for the first nine months, compared with $5.69 billion in 2019. Capital expenditures were $3.22 billion, down from $4.34 billion. Cash provided by operations included lower pension contributions and working-capital benefits, including approximately $724 million of deferred employer payroll taxes under the CARES Act.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $9.2 billion at September 30. Total debt was $25.72 billion; debt to total capitalization was 82.1%, versus 81.1% at year-end 2019. Management stated that available liquidity and financing sources were adequate for expected needs.
- Segments, third quarter: U.S. Domestic Package revenue rose 15.5%, but operating profit fell 9.7% to $1.10 billion and margin declined to 8.3%. International Package revenue rose 17.0% and operating profit rose 44.8% to $966 million, with margin increasing to 23.6%. Supply Chain & Freight revenue rose 16.5% and operating profit rose 22.0% to $299 million.
Material changes versus prior periods
- Average daily package volume increased 13.5% in the quarter. U.S. Domestic business-to-consumer shipments represented about 61% of average daily volume, up from about 52% a year earlier, and grew 33.4%.
- Residential growth and lower delivery density raised labor, delivery, and third-party transportation costs, pressuring U.S. Domestic margins. Lower fuel costs partly offset those increases.
- International results benefited from strong outbound demand from Asia and e-commerce activity in Europe. Supply Chain & Freight gains in air freight, logistics, and healthcare were partly offset by weakness in truckload brokerage and freight markets.
- UPS issued $3.5 billion of senior notes in March 2020. Share repurchases were suspended on April 28; no shares were repurchased in the second or third quarter. Nine-month dividends paid were $2.53 billion.
Outlook, risks, and unusual items
- Management expected elevated residential delivery volumes to continue, with fourth-quarter employee benefit costs rising as recent hires became eligible for coverage. Network investments could continue to exceed related revenue, and domestic margins could remain compressed if pricing, costs, and network capacity do not adjust to lower delivery density.
- Management expected strong International Package performance to continue through year-end, but warned truckload brokerage conditions could remain challenging and weigh on Supply Chain & Freight results.
- UPS projected 2020 capital expenditures of approximately $5.6 billion after deferring projects and vehicle purchases. It also expected CARES Act provisions to provide a temporary 2020 cash-flow benefit of approximately $1.0 billion.
- COVID-19’s duration and economic effects remained uncertain. Risks included potential deterioration in credit losses, asset impairments, and self-insurance reserves. The filing reported no goodwill impairment in the third quarter; however, fair-value headroom for certain Supply Chain & Freight reporting units had declined.
- A significant pension contingency relates to the Central States Pension Fund. UPS’s estimated coordinating-benefit obligation was $2.6 billion at the December 2019 measurement date; if uncertainties remain unresolved, UPS said it could increase by approximately $2.2 billion at the December 2020 measurement date, to about $4.8 billion.
- Transformation strategy costs were $44 million in the quarter and $201 million year to date. The New York cigarette-delivery judgment was paid and fully satisfied. Other disclosed investigations and proceedings were described as immaterial or not expected to have a material impact, though outcomes remain uncertain.
Important facts for investors to verify
- Whether residential and e-commerce demand persists, and whether UPS can recover the associated labor, transportation, and capacity costs through pricing and productivity.
- How operating cash flow develops when payroll-tax deferrals, pension contributions, and working-capital timing effects normalize.
- Developments affecting the Central States Pension Fund and the potential coordinating-benefit obligation.
- Debt maturities, commercial-paper usage, and execution of the planned capital spending program amid elevated leverage.
- Changes in credit-loss allowances, casualty self-insurance reserves, and impairment assumptions as pandemic-related conditions evolve.