UPS Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results; comparisons are with the corresponding 2012 periods. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $13.521bn | $13.071bn | $40.462bn | $39.556bn |
| Operating profit | $1.804bn | $0.766bn | $5.126bn | $4.125bn |
| Operating margin | 13.3% | 5.9% | 12.7% | 10.4% |
| Net income | $1.097bn | $0.469bn | $3.205bn | $2.555bn |
| Diluted EPS | $1.16 | $0.48 | $3.37 | $2.63 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $5.060bn | $5.103bn |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $1.605bn | $1.603bn |
Q3 adjusted operating profit, excluding the prior-year $896 million multiemployer pension withdrawal charge, was $1.804 billion versus $1.662 billion, an increase of approximately 8.6%. Adjusted operating margin was 13.3% versus 12.7%. For the nine-month comparison, 2013 operating profit included a $284 million TNT termination charge and a $245 million foreign-subsidiary liquidation gain; 2012 included the $896 million pension charge. These items materially affect reported year-over-year comparisons.
Nine-month cash from operations was nearly unchanged year over year. Cash used in investing was $2.463 billion, including $1.605 billion of capital expenditures and net purchases of marketable securities. Cash used in financing was $4.716 billion, mainly reflecting $2.866 billion of share repurchases and $1.702 billion of dividends. Cash and cash equivalents fell to $5.182 billion from $7.327 billion at year-end 2012.
Segments and material changes
- U.S. Domestic Package: Q3 revenue rose 5.0% to $8.254 billion; average daily volume increased 2.3%. Q3 operating profit was $1.186 billion, compared with $129 million reported in 2012, which included the pension charge. Excluding that charge, prior-year operating profit was $1.025 billion. Growth reflected volume and productivity; mix and fuel effects weighed on revenue per piece and profit.
- International Package: Q3 revenue increased 2.5% to $3.017 billion, while operating profit fell 7.1% to $417 million. Average daily volume rose 6.5%, but average revenue per piece declined 5.2%; customers shifted toward lower-priced standard services, and fuel and currency effects pressured results.
- Supply Chain & Freight: Q3 revenue decreased 0.7% to $2.250 billion, while operating profit increased 6.9% to $201 million. Forwarding and logistics revenue weakened amid soft air-freight demand and competitive pricing; freight revenue grew.
Financial position, outlook, and risks
- At September 30, 2013, total debt was $12.600 billion, including $1.652 billion of commercial paper; long-term debt was $10.897 billion. Cash and marketable securities totaled $6.649 billion. Current assets were $13.758 billion and current liabilities $7.821 billion.
- Management expected 2013 capital expenditures of approximately $2.4 billion, or about 4% of revenue, and anticipated approximately $4.0 billion of share repurchases for the year. The filing provides no specific earnings or revenue guidance.
- Management described slow U.S. and international economic growth, weak business-to-business and industrial activity, and customer movement from premium to standard international services. It cited network adjustments, yield management, efficiency initiatives, and technology investment as responses.
- Teamsters agreements remained subject to outstanding supplemental and UPS Freight ratifications; extensions could be terminated on 30 days’ notice. Management cautioned that labor negotiations could affect operations and financial results.
- The proposed TNT Express acquisition was prohibited by the European Commission. UPS paid a $268 million termination fee and incurred $16 million of related costs; it also recognized a $245 million pre-tax foreign-currency gain on liquidation of a related subsidiary.
- UPS cited exposure to economic conditions, competition, fuel and foreign-exchange movements, labor disruption, pension and healthcare costs, cyber and security incidents, regulation, and litigation. Potential losses in several legal and competition matters could not be estimated; management stated it intended to defend the cases.
- A March 2013 non-prosecution agreement related to shipments by illicit online pharmacies required a $40 million forfeiture and a compliance program; UPS said it did not materially affect 2013 results. A separate inadvertent delivery of printer ink cartridges to the Iranian embassy in Helsinki was disclosed to OFAC; UPS reported approximately $35 in revenue and no profit from the shipment.
Most important facts for investors to verify
- How much of reported profit growth reflects underlying operations versus the prior-year pension charge and 2013 TNT-related items.
- Whether international yield pressure and forwarding-market weakness persist, and whether volume growth translates into improved margins.
- Progress and final ratification of remaining Teamsters supplemental and UPS Freight agreements.
- Actual full-year capital spending and share repurchases compared with management’s stated expectations, and the effect of buybacks on liquidity and leverage.
- Developments in the unquantified franchise, antitrust, freight-forwarding, and other legal or regulatory matters, as well as pension funding and benefit costs.