UPS Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; comparisons are with the three and nine months ended September 30, 2014. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $14.237B | $14.290B | $42.309B | $42.337B |
| Operating profit | $1.984B | $1.954B | $5.617B | $4.214B |
| Operating margin | 13.9% | 13.7% | 13.3% | 10.0% |
| Net income | $1.257B | $1.214B | $3.513B | $2.579B |
| Diluted EPS | $1.39 | $1.32 | $3.87 | $2.78 |
| Operating cash flow | Not presented by quarter | $6.415B | $4.191B |
Q3 revenue fell 0.4%, while operating profit rose 1.5% and net income rose 3.5%. For the nine-month period, revenue was nearly flat, but operating profit increased 33.3% and net income increased 36.2%. The prior-year comparison includes a $1.066B pre-tax ($665M after-tax) union healthcare-plan charge in Q2 2014; excluding it, nine-month adjusted operating profit was $5.617B versus $5.280B, and adjusted operating margin was 13.3% versus 12.5%.
Segment results: Q3 U.S. Domestic Package revenue increased 1.9% to $8.860B, but operating profit declined 1.6% to $1.258B. International Package revenue decreased 7.0% to $2.959B, while operating profit increased 10.2% to $507M. Supply Chain & Freight revenue was nearly unchanged at $2.418B and operating profit rose 1.9% to $219M. International revenue was particularly affected by foreign exchange and lower fuel surcharges; U.S. results reflected higher labor and benefit costs and fuel-surcharge pressure.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $3.441B and marketable securities were $2.248B. Current assets were $13.581B versus current liabilities of $11.869B.
- Total debt was $14.601B, including $4.401B of commercial paper classified as current; long-term debt was $10.044B. Debt to total capitalization was 88.2%, compared with 68.5% at September 30, 2014. The company reported no borrowings under its revolving credit facilities and compliance with debt covenants.
- Nine-month investing cash outflow was $4.959B, including $1.648B of capital expenditures and $1.925B for acquisitions. Financing cash outflow was $160M; it included $2.028B of share repurchases and $1.899B of dividends, offset in part by net debt issuance.
- UPS acquired Coyote Logistics in August for $1.853B, funded with operating cash and commercial paper. It also acquired Poltraf, Parcel Pro and the Insured Parcel Services division of G4S. Coyote’s preliminary purchase allocation included $1.246B of goodwill and $658M of intangible assets; valuation remained subject to finalization.
Outlook, commentary and risks
- Management described economic conditions as challenging and uneven: U.S. industrial production was weak, China manufacturing slowed, and the stronger U.S. dollar shifted trade patterns. E-commerce supported residential package demand. UPS said it was adjusting capacity and costs and pursuing yield management, productivity, automation and ORION technology deployment.
- Management anticipated 2015 capital expenditures of approximately $2.8B and approximately $2.7B of 2015 share repurchases. No earnings or revenue guidance was stated in the filing.
- Announced rate changes included average net increases effective December 28, 2015 of 4.9% for U.S. Ground and 5.2% for Air and International services; UPS Freight rates were to rise 4.9% effective October 26, 2015.
- Key uncertainties include labor negotiations, pension and healthcare costs, fuel prices, currency and interest-rate movements, economic conditions, competition, cybersecurity and technology disruption, and litigation. The Central States Pension Fund proposed benefit reductions; UPS said it was assessing the plan and could not estimate any additional obligation. UPS also disclosed ongoing legal matters, including New York cigarette-delivery claims and a DOJ investigation of shipper policies, for which potential losses could not be estimated.
- Moody’s outlook was negative; Standard & Poor’s outlook was stable. Management believed operating funds and borrowing programs would meet foreseeable liquidity needs.
Investor verification points
- Review adjusted comparisons against GAAP results, especially the 2014 healthcare-plan charge, and assess whether operating improvements are continuing.
- Track commercial-paper balances, debt maturity/refinancing needs, leverage and liquidity following the Coyote acquisition and increased debt.
- Assess whether package pricing, fuel surcharges, labor and benefit costs, and foreign exchange are supporting segment margins.
- Monitor Coyote integration, final purchase accounting, expected synergies and acquisition-related costs.
- Follow the Central States pension proposal, labor negotiations and the outcome of material legal and regulatory proceedings.
- Compare actual 2015 capital spending and repurchases with management’s stated expectations.