Business context and reporting period
United Parcel Service, Inc. (UPS) filed this Form 10-K for the fiscal year ended December 31, 2010. The filing reports annual results and unaudited quarterly information, including fourth-quarter results. UPS operates in U.S. Domestic Package, International Package, and Supply Chain & Freight, serving more than 220 countries and territories.
Financial results and liquidity
Unless otherwise noted, amounts are U.S. dollars; financial statement amounts are in millions.
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $49,545 | $45,297 | +9.4% |
| Operating profit | $5,874 | $3,801 | +54.5% |
| Operating margin | 11.9% | 8.4% | +3.5 percentage points |
| Net income | $3,488 | $2,152 | +62.1% |
| Diluted EPS | $3.48 | $2.14 | +62.6% |
| Operating cash flow | $3,835 | $5,285 | −27.4% |
| Capital expenditures | $1,389 | $1,602 | −13.3% |
- Revenue growth reflected economic recovery, increased package and freight volumes, higher fuel surcharges, and improved yields. Average daily package volume rose 3.4%; average revenue per piece increased 4.2%.
- All segments improved year over year: U.S. Domestic Package revenue was $29.742 billion and operating profit $3.373 billion; International Package revenue was $11.133 billion and operating profit $1.904 billion; Supply Chain & Freight revenue was $8.670 billion and operating profit $597 million.
- Fourth-quarter revenue was $13.421 billion versus $12.377 billion; operating profit was $1.814 billion versus $1.259 billion; net income was $1.119 billion versus $757 million.
- Operating cash flow fell despite higher earnings, principally due to $2.0 billion of discretionary contributions to UPS-sponsored pension plans and increased working-capital needs.
- At year-end, cash and marketable securities totaled $4.081 billion, total debt was $10.846 billion, long-term debt was $10.491 billion, and shareowners’ equity was $8.047 billion. Debt was 57.4% of total capitalization, compared with 55.3% in 2009.
- UPS had $341 million of commercial paper outstanding and no borrowings under its $2.5 billion revolving credit facilities. One $1.5 billion facility was due to expire in April 2011. Management said operating cash flow and borrowing programs should meet foreseeable needs.
Material changes and unusual items
- Operating profit recovery was supported by higher volumes and yields, cost containment, and network efficiencies. International and Supply Chain & Freight benefited from recovering global trade and freight demand.
- 2010 results included a $98 million U.S. Domestic Package restructuring charge; a $109 million real-estate sale gain; a $71 million gain on sale of UPS Logistics Technologies; a $51 million loss on sale of a German business, including guarantee-related costs; and a $76 million non-cash tax charge related to a German subsidiary’s tax status change.
- In 2009, UPS recorded a $181 million aircraft impairment and a $77 million foreign-currency remeasurement charge. In 2008, it recorded $548 million of goodwill impairment and $27 million of intangible impairment.
- Net income and operating performance measures adjusted for selected non-comparable items are non-GAAP measures; reconcile them to GAAP results when evaluating trends.
Outlook, risks and contingencies
- Management expected a modestly paced economic recovery in 2011, while identifying European sovereign debt concerns as an ongoing uncertainty. The filing does not provide full-year 2011 earnings or revenue guidance.
- UPS forecast 2011 capital expenditures of approximately $2.2 billion and anticipated about $2.0 billion of share repurchases. The Board raised the quarterly dividend from $0.47 to $0.52 per share in February 2011.
- UPS made a $1.2 billion pension-plan contribution in January 2011. Management expected higher 2011 pension expense, and identified pension funding, health-care costs, and multi-employer plan contributions as potential sources of future cost and cash-flow pressure.
- Key risks include economic weakness, competition, fuel-price and currency fluctuations, labor disruption, extensive regulation, security and technology interruptions, climate-related costs, pension and benefit obligations, litigation, and impairment of assets.
- Material unresolved matters include wage-and-hour, franchise, dimensional-weight and antitrust lawsuits, plus U.S. and international freight-forwarding investigations. Potential liabilities were not reasonably estimable in the filing. The IRS was also examining certain employment and excise taxes.
- UPS disclosed an estimated $50–$65 million of additional annual health-care expense beginning in 2011 from U.S. health-care legislation. The company reported effective internal controls and unqualified audit opinions on its financial statements and internal controls.
Important facts for investors to verify
- Whether package volume, pricing, and fuel surcharges sustain the 2010 revenue and margin recovery, and how higher fuel costs affect demand and profitability.
- The cash-flow and earnings impact of pension contributions, including the $1.2 billion January 2011 contribution and projected future funding requirements.
- Debt maturities, refinancing needs, liquidity-facility renewal, and the balance between planned capital spending, dividends, and share repurchases.
- Potential outcomes and financial exposure from antitrust proceedings, employment and franchise litigation, and tax examinations.
- Whether the 2011 recovery assumptions, capital-expenditure plan, and management’s operating-efficiency expectations are being achieved.