UPS Form 10-Q Summary
Business context and reporting period
United Parcel Service, Inc. reported unaudited results for the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Its reportable segments are U.S. Domestic Package, International Package, and Supply Chain and Freight.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $15.750 billion | $14.629 billion | $31.065 billion | $29.047 billion |
| Operating profit | $2.216 billion | $2.038 billion | $4.000 billion | $3.861 billion |
| Operating margin | 14.1% | 13.9% | 12.9% | 13.3% |
| Net income | $1.384 billion | $1.269 billion | $2.542 billion | $2.400 billion |
| Diluted EPS | $1.58 | $1.43 | $2.90 | $2.69 |
- Q2 revenue rose 7.7%, operating profit 8.7%, net income 9.1%, and diluted EPS 10.5%. For the first half, revenue grew 6.9%, while operating profit grew 3.6% and diluted EPS 7.8%.
- First-half operating cash flow was $2.621 billion, down from $4.693 billion. Investing cash outflow was $2.027 billion, including $2.009 billion of capital expenditures, versus $963 million in capex in 2016. Financing cash outflow was $556 million. Cash and cash equivalents ended at $3.544 billion.
- At June 30, cash, cash equivalents and marketable securities totaled $4.604 billion; $2.293 billion was held by non-U.S. subsidiaries. Undrawn revolving credit facilities totaled $4.5 billion.
- Total debt carrying value was $18.074 billion, up from $16.075 billion at year-end 2016. Shareowners’ equity was $1.274 billion, versus $429 million at year-end; debt represented 93.4% of total capitalization, compared with 84.4% at the prior-year comparison date shown in the filing.
- Segment Q2 results: U.S. Domestic Package revenue was $9.745 billion and operating profit $1.395 billion; International Package revenue was $3.163 billion and operating profit $583 million; Supply Chain and Freight revenue was $2.842 billion and operating profit $238 million.
Material changes versus prior comparable periods
- U.S. Domestic Package revenue increased 8.1% in Q2, with average daily volume up 4.9% and revenue per piece up 3.0%. Operating profit rose 13.1%; margin expanded to 14.3% from 13.7%.
- International Package revenue increased 2.8%, but operating profit fell 4.9% and margin declined to 18.4% from 19.9%. Currency reduced Q2 operating profit by $114 million; volume growth was strong, particularly in exports.
- Supply Chain and Freight revenue rose 12.0% and operating profit 24.0%; the segment benefited from freight and forwarding growth. The 2016 Marken acquisition affects year-over-year comparability.
- First-half operating cash flow was lower mainly because UPS made $2.446 billion in discretionary contributions to U.S. pension plans, compared with no comparable contribution in 2016, and received less hedge-margin collateral. First-half dividends paid were $1.389 billion and share repurchases were $898 million.
- Compensation and benefits, purchased transportation, and fuel costs increased. Purchased transportation rose 18.0% in Q2 and fuel expense 22.0%; management cited higher volume, fuel prices, carrier costs, and labor costs.
Outlook, management commentary, risks and unusual items
- Management cited e-commerce and omni-channel retail growth as drivers of U.S. residential package demand, and strong export demand, particularly in Europe and Asia. It described U.S. economic conditions as generally improving but industrial growth as slower than anticipated. The filing does not provide a full-year earnings or revenue forecast.
- UPS expected 2017 capital expenditures of approximately $4.1–$4.6 billion, including aircraft deposits. It anticipated approximately $1.8 billion of 2017 share repurchases and said it expected to continue regular cash dividends. A selected-weeks peak charge for certain U.S. residential and large or oversized packages was announced for November and December 2017.
- UPS amended certain non-union pension plans to end future-service and compensation benefit accruals effective January 1, 2023. The amendments generated a $1.525 billion curtailment gain, partly offset by actuarial losses; the resulting net actuarial gain was $569 million and was recorded in accumulated other comprehensive loss, with no Q2 income-statement effect. The company also contributed $2.334 billion to company-sponsored pension plans in the first half.
- A potential obligation related to the Central States Pension Fund could increase the UPS/IBT Plan projected benefit obligation by approximately $4 billion if the fund becomes insolvent and UPS must provide coordinating benefits. UPS recognized no additional liability at the 2016 measurement date, citing significant uncertainties.
- In the New York cigarette-delivery litigation, the court awarded $9.4 million in damages and $237.6 million in penalties. UPS accrued the damages amount, appealed, and estimated potential losses could be up to $247 million plus interest, but could not estimate a likely loss within that range.
- Other disclosed matters include a pending U.S. Department of Justice investigation and appeal concerning shipper use of third-party negotiators, a Spanish competition investigation, and ongoing airline-mechanic labor negotiations. The Teamsters national agreement expires July 31, 2018.
- UPS plans to adopt the new revenue recognition standard in 2018. It expects transportation revenue recognition to accelerate as services are transferred over time and identified an approximately $720 million revenue and operating-expense gross-up for 2016 in certain Supply Chain and Freight businesses; the estimate may change as reviews continue.
Important facts for investors to verify
- Progress on the New York litigation appeal and the ultimate amount, if any, of penalties and interest payable.
- Developments in the Central States Pension Fund and the potential effect on UPS benefit obligations.
- Whether operating cash flow recovers after the unusually large pension contribution, and whether planned capital spending produces expected capacity and efficiency gains.
- Debt and liquidity trends, including commercial paper balances, refinancing needs, and the high debt-to-capitalization ratio.
- Whether International Package profitability improves as currency effects and revenue-per-piece pressure change, and how labor negotiations affect costs and operations.
- The final revenue-recognition transition effects and any changes to the estimated $720 million gross presentation reclassification.