Business context and reporting period
United Parcel Service, Inc. (UPS) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. UPS operates through U.S. Domestic Package, International Package, and Supply Chain & Freight segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $18,048 | $17,456 | $35,208 | $34,569 |
| Operating profit | $2,143 | $1,773 | $3,537 | $3,293 |
| Operating margin | 11.9% | 10.2% | 10.0% | 9.5% |
| Net income | $1,685 | $1,485 | $2,796 | $2,830 |
| Diluted EPS | $1.94 | $1.71 | $3.22 | $3.25 |
- Cash flow: Six-month operating cash flow was $4,207, down from $7,200. Capital expenditures were $2,861, compared with $2,849. Operating cash flow less capital expenditures was $1,346 versus $4,351, respectively.
- Liquidity: Cash, cash equivalents, and marketable securities totaled $4,797 at June 30, 2019; cash and cash equivalents alone were $4,072. UPS said cash, market access, and operating cash generation should meet operating, investment, dividend, repurchase, and debt needs over the next several years.
- Debt and leases: Debt carrying value was $23,379, including $2,871 of commercial paper; long-term debt and finance leases were $20,427. Debt to total capitalization was 84.1%. Newly recognized operating lease liabilities totaled $2,513, following adoption of the lease accounting standard.
- Other balance-sheet items: Total assets were $52,787 and shareowners’ equity was $4,423. Pension and postretirement benefit obligations were $7,524.
Material changes and segment results
- Q2 revenue rose 3.4%, operating profit rose 20.9%, and diluted EPS rose 13.5%. For the first half, revenue rose 1.8%, while net income fell 1.2% and diluted EPS fell 0.9%.
- U.S. Domestic Package Q2 revenue increased 7.7% to $11,150 and operating profit increased 28.6% to $1,208. Average daily package volume grew 7.1%, led by air products and business-to-consumer shipments. Reported results benefited from substantially lower transformation charges than the prior year.
- International Package Q2 revenue declined 2.7% to $3,505, while operating profit increased 7.3% to $663. Volume fell 2.1%; currency reduced reported revenue, while cost management supported profit.
- Supply Chain & Freight Q2 revenue declined 3.1% to $3,393, while operating profit increased 25.9% to $272. Forwarding weakness reflected lower demand and global trade uncertainty; Logistics and Freight profit improved.
- Investment income and other fell 27.2% in Q2 and 27.0% year to date, chiefly reflecting lower pension income. Interest expense increased 6.7% in Q2 and 8.6% year to date, partly due to new notes and higher average debt. The effective tax rate was 23.5% in Q2 and 23.3% year to date, versus 22.9% and 21.1% in 2018.
Outlook, commentary, risks, and unusual items
- UPS expected 2019 capital expenditures of approximately $7.0 billion and anticipated about $1.0 billion of share repurchases for the year. It increased its quarterly dividend to $0.96 per share and expected to continue regular cash dividends. The filing does not provide a full-year revenue or EPS forecast.
- The multiyear transformation strategy continued, with charges of $21 in Q2 and $144 year to date, versus $263 in Q2 and year to date 2018. These charges make reported year-over-year comparisons less like-for-like; UPS also presents non-GAAP adjusted measures.
- UPS said facility automation and capacity expansion would drive higher depreciation and amortization in 2019. Q2 capital investment-related depreciation reduced net income by $73, partly offset by $41 of benefit from prior useful-life estimate changes; the net Q2 effect was a $32 net-income reduction.
- Six-month pension and postretirement contributions were $1,108, compared with $92 in 2018. UPS expected to contribute approximately $1.2 billion more to pension plans and $10 million to U.S. postretirement medical plans during the remainder of 2019.
- A major contingent exposure relates to the Central States Pension Fund: UPS reported a $1.6 billion increase in its projected benefit obligation at year-end 2018 for potential coordinating benefits. If uncertainties remain unresolved, the obligation could increase by approximately $2.4 billion, to about $4.0 billion.
- Legal matters include a New York cigarette-delivery judgment with penalties of $237.6 million plus $9.4 million damages; UPS estimated potential losses could reach $247 million plus interest but could not estimate a likely loss. Appeals were pending. UPS also disclosed unresolved DOJ, Spanish competition, and Turkish competition investigations and could not estimate potential losses in those matters.
- Risks highlighted include intense competition and industry consolidation, economic and trade uncertainty, labor relations, fuel and foreign-exchange movements, pension funding, litigation, cybersecurity and technology disruption, and execution of transformation initiatives. UPS reported compliance with debt covenants and effective disclosure controls.
Important facts for investors to verify
- Whether domestic package volume growth and operating-margin improvement persist after adjusting for the prior-year comparison of transformation costs.
- Whether international and forwarding demand stabilize, given reported volume declines, currency effects, and global trade uncertainty.
- How operating cash flow develops after the unusually large pension contributions and the 2018 tax refund that did not recur.
- Funding needs and potential liabilities related to the Central States Pension Fund, alongside planned capital expenditures, dividends, repurchases, and debt maturities.
- Progress and potential financial effects of the New York appeal and the DOJ and competition investigations.