Business context and reporting period
United Parcel Service, Inc. (UPS) filed this Form 10-K for the fiscal year ended December 31, 2019. UPS operates three reporting segments: U.S. Domestic Package, International Package, and Supply Chain & Freight. It reported delivering an average of 21.9 million pieces per day across more than 220 countries and territories.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $74.094 billion | $71.861 billion | +3.1% |
| Operating profit | $7.798 billion | $7.024 billion | +11.0% |
| Operating margin | 10.5% | 9.8% | +0.7 percentage points |
| Net income | $4.440 billion | $4.791 billion | -7.3% |
| Diluted EPS | $5.11 | $5.51 | -7.3% |
| Cash from operating activities | $8.639 billion | $12.711 billion | -$4.072 billion |
| Capital expenditures | $6.380 billion | $6.283 billion | +$97 million |
- Revenue grew as average daily package volume rose 5.8% to 21.88 million; average revenue per piece fell 1.0% to $10.87, partly reflecting customer and product mix.
- Segment revenue and operating profit: U.S. Domestic Package $46.493 billion and $4.164 billion; International Package $14.220 billion and $2.657 billion; Supply Chain & Freight $13.381 billion and $977 million. Reported operating margins were 9.0%, 18.7%, and 7.3%, respectively.
- Cash and marketable securities totaled $5.741 billion at year-end. Total debt carrying value was $25.238 billion, including $3.234 billion of commercial paper; long-term debt and finance leases were $21.818 billion. The company reported $25.238 billion of total debt and $3.283 billion of shareowners’ equity.
- Operating cash flow declined substantially, including a $2.0 billion discretionary contribution to U.S. company-sponsored pension plans in 2019, versus none in 2018, as well as working-capital effects.
Material changes versus the prior comparable period
- Operating profit improved in all three segments. U.S. Domestic Package benefited from higher volume and productivity; International Package and Supply Chain & Freight improved margins while managing costs.
- Supply Chain & Freight revenue fell 3.2%, principally because of lower forwarding demand, volumes, and market rates. International Package revenue fell 1.5%, including an adverse currency translation effect.
- GAAP net income fell despite stronger operating profit, largely because investment income and other included a $2.387 billion pre-tax pension and postretirement plan mark-to-market loss, versus a $1.627 billion loss in 2018. Adjusted diluted EPS, a non-GAAP measure, was $7.53; it excludes specified items and is not comparable to GAAP EPS without considering those adjustments.
- Cash from operations decreased, while year-end debt increased from $22.736 billion to $25.238 billion. Capital spending remained elevated as UPS continued network and technology investments.
- Adoption of the new lease standard in 2019 added operating lease right-of-use assets and liabilities; 2018 comparative balance-sheet amounts were not restated.
Outlook, management commentary, risks, and unusual items
- UPS forecast 2020 capital expenditures of approximately $6.5–$7.0 billion and anticipated about $1.0 billion of share repurchases. It raised its quarterly dividend 5.2% to $1.01 per share in February 2020. The filing provides no specific 2020 revenue or earnings guidance.
- Management cited ongoing investment in automated facilities, technology, e-commerce, healthcare logistics, and network efficiency. It reported growth in U.S. e-commerce-related shipments but noted weaker demand in several international sectors and global trade uncertainty.
- Amazon and its affiliates accounted for 11.6% of 2019 revenue, substantially in U.S. Domestic Package, and approximately 16.9% of year-end accounts receivable.
- The Central States Pension Fund (CSPF) coordinating-benefit obligation was estimated at $2.6 billion. UPS stated it could reasonably increase by approximately $2.2 billion, to $4.8 billion, depending on legal, plan, and legislative outcomes; the CSPF has warned it may become insolvent in 2025 absent a solution.
- UPS accrued $100 million for the New York cigarette-delivery litigation; it estimated losses could reach $247 million plus interest, subject to further proceedings. Other legal matters include a DOJ investigation into USPS international mail contracts and an appealed €19 million Spanish competition fine.
- Key risks include economic and trade weakness, competition and customer concentration, labor negotiations and service disruption, fuel and currency volatility, cybersecurity and data protection, climate regulation, pension and healthcare costs, and legal or regulatory proceedings.
- Fourth-quarter 2019 GAAP results included a net loss of $106 million and diluted loss per share of $0.12, compared with net income of $453 million and diluted EPS of $0.52 in fourth-quarter 2018. The quarter included the annual $2.387 billion pension mark-to-market charge.
Most important facts for investors to verify
- Reconcile GAAP EPS of $5.11 with adjusted diluted EPS of $7.53, including the pension mark-to-market, transformation, and legal adjustments.
- Assess the assumptions, legal exposure, and potential range of the $2.6 billion CSPF obligation, including the disclosed possibility of a $4.8 billion total obligation.
- Evaluate whether U.S. package volume growth and automation can sustain margins amid lower revenue per piece, higher labor and benefit costs, and reliance on Amazon.
- Review the causes and sustainability of lower operating cash flow, alongside planned capital expenditures, dividends, repurchases, and debt maturities.
- Track outcomes of the New York litigation, DOJ inquiry, Spanish appeal, labor agreements, and other contingencies; verify any subsequent developments after the filing date.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting.