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, 2012. UPS operates through U.S. Domestic Package, International Package, and Supply Chain & Freight segments. Comparisons below are with the corresponding 2011 periods.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $13.071 billion | $13.166 billion | $39.556 billion | $38.939 billion |
| Operating profit | $766 million | $1.666 billion | $4.125 billion | $4.883 billion |
| Operating margin | 5.9% | 12.7% | 10.4% | 12.5% |
| Net income | $469 million | $1.072 billion | $2.555 billion | $3.079 billion |
| Diluted EPS | $0.48 | $1.09 | $2.63 | $3.09 |
Cash flow and liquidity: Nine-month operating cash flow was $5.103 billion, versus $5.362 billion; investing cash use was $907 million, versus $2.116 billion; financing provided $1.067 billion, versus using $2.484 billion. Capital expenditures were $1.603 billion. Cash and cash equivalents were $8.430 billion at September 30, up from $3.034 billion at December 31, 2011; current assets totaled $16.344 billion and current liabilities $10.289 billion.
Debt and capital: Total debt was $15.007 billion, including $3.859 billion of current maturities and commercial paper, compared with $11.128 billion at year-end 2011. Debt was 66.3% of total capitalization, versus 61.2% at September 30, 2011. UPS issued $1.75 billion of senior notes in September, with proceeds intended to repay $1.75 billion of 4.5% notes due January 2013. It had $2.075 billion of U.S. commercial paper outstanding and no borrowings on its $2.5 billion of revolving credit facilities. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Reported Q3 operating profit fell 54.0% and net income fell 56.3%; nine-month operating profit declined 15.5% and net income 17.0%.
- The main unusual item was a $896 million pretax ($559 million after-tax) Q3 charge for a multiemployer pension-plan withdrawal liability. Excluding this item, U.S. Domestic Package adjusted Q3 operating profit was $1.025 billion, down 2.0%, and adjusted margin was 13.0%, versus 13.5%.
- Consolidated Q3 revenue edged down 0.7%, while nine-month revenue increased 1.6%. Average daily package volume increased 2.9% for Q3 and 3.3% year to date; average revenue per piece decreased 1.4% and 0.5%, respectively.
- Segment Q3 operating profit: U.S. Domestic Package $129 million versus $1.046 billion, including the pension charge; International Package $449 million versus $417 million; Supply Chain & Freight $188 million versus $203 million. International’s Q3 margin improved to 15.3% from 13.6%, while Supply Chain & Freight revenue declined 3.2%.
- Cash from operations declined modestly as working-capital timing was less favorable; lower pension and postretirement contributions partly offset the effect. Cash increased significantly alongside debt issuance and increased short-term borrowing.
Outlook, management commentary, risks and unusual items
- Management described U.S. growth as slow to moderate, with e-commerce supporting business-to-consumer deliveries but manufacturing weakness pressuring business-to-business volumes. It expected these trends to continue through the remainder of 2012.
- Outside the U.S., management cited slower growth, particularly in Europe, customer shifts from premium express to standard services, and pressure on transcontinental trade. UPS said it was adjusting air capacity and costs and pursuing yield management, efficiency, and cost-containment initiatives. The filing provides no specific consolidated earnings or revenue guidance.
- The pension agreement created an undiscounted $2.162 billion obligation payable in equal monthly installments over 50 years, recorded at a present value of $896 million using a 4.25% discount rate. UPS cited reduced exposure to future contribution increases and a 10-year freeze on its hourly contribution rate to the newly established plan pool.
- UPS anticipated completing its proposed €5.16 billion TNT Express acquisition in early 2013, subject to regulatory review. The European Commission had issued a Statement of Objections concerning competition in European international express small-package markets. UPS planned to use available cash and debt backed by credit facilities to fund the offer.
- Legal and regulatory matters include a DOJ civil investigation into shipper use of third-party negotiators, freight-forwarding antitrust investigations and litigation, franchise litigation, and tax disputes. For several matters, UPS said it could not estimate a possible loss or range; it generally denied liability and intended to defend itself. It did not expect the matters discussed to have a material effect, while noting outcomes remain uncertain.
- UPS reported negative outlooks from Moody’s and S&P. Its collective bargaining agreements with approximately 245,000 Teamsters-covered employees run through July 31, 2013; the pilots’ agreement became amendable at the end of 2011.
Most important facts for investors to verify
- How much of the Q3 earnings decline reflects the $896 million pension charge, and how underlying domestic margins and operating costs develop.
- Whether the cash balance and operating cash generation remain adequate alongside $15.007 billion in debt, upcoming maturities, dividends, repurchases, and potential TNT financing.
- The eventual cost, timing, and regulatory outcome of the TNT Express transaction, including the implications of the European Commission’s objections.
- Developments in the pension-plan restructuring, including the present-value liability, long-term installment payments, and contribution arrangements.
- Progress and potential exposure in material legal, DOJ, and IRS matters for which losses are not currently estimable.