UPS Q1 2017 Form 10-Q Summary
Business context and reporting period
United Parcel Service, Inc. (UPS) reported results for the three months ended March 31, 2017, compared with the first quarter of 2016. Its reportable segments are U.S. Domestic Package, International Package, and Supply Chain & Freight. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial and operating metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $15,315 | $14,418 |
| Operating profit / margin | $1,784 / 11.6% | $1,823 / 12.6% |
| Net income | $1,158 | $1,131 |
| Diluted EPS | $1.32 | $1.27 |
| Operating cash flow | $239 | $2,670 |
| Capital expenditures | $938 | $427 |
- Revenue increased 6.2%; average daily package volume rose 4.0%, and average revenue per piece increased 1.1%.
- Operating expenses rose 7.4%, led by purchased transportation (+16.9%) and fuel (+43.1%). Higher costs outpaced revenue growth and reduced operating profit 2.1%.
- Segment revenue and operating profit: U.S. Domestic Package $9,535 and $1,076; International Package $3,058 and $529; Supply Chain & Freight $2,722 and $179. Year over year, segment operating profit changed by -2.4%, -7.8%, and +21.8%, respectively.
- Cash and cash equivalents were $2,687 and marketable securities $1,031 at March 31. Total debt was $17,240, comprising $4,302 current maturities and $12,938 long-term debt. No amounts were outstanding under the $1.5 billion and $3.0 billion revolving credit facilities.
- Operating cash flow fell sharply, principally because UPS made $2,489 of pension and postretirement contributions, including $2,291 of discretionary contributions to U.S. pension plans; the prior-year contribution was $43. Cash declined from $3,476 at year-end 2016 to $2,687.
Material changes and management commentary
- U.S. Domestic Package revenue increased 5.0%, but operating margin declined to 11.3% from 12.1%. E-commerce-supported business-to-consumer volume grew more than 7%; higher fuel, benefits, and purchased transportation costs weighed on profit.
- International Package volume increased 12.1%, while reported revenue rose 4.9%. Currency translation reduced segment operating profit by $119; margin fell to 17.3% from 19.7%.
- Supply Chain & Freight revenue rose 12.5% and operating margin improved to 6.6% from 6.1%. Results included Marken, acquired in December 2016; management said the acquisition affected comparability.
- Management cited improving U.S. consumer conditions, e-commerce growth, and modest improvement in international markets. It described ongoing efforts to expand network capacity, improve yield management, and increase efficiency through technology and facility investments.
Outlook, risks, contingencies, and unusual items
- UPS anticipated 2017 capital expenditures of approximately $4.0 billion and share repurchases of approximately $1.8 billion. The company expected to continue regular cash dividends; the quarterly rate increased to $0.83 per share from $0.78.
- The $55 share-based compensation tax benefit reduced the Q1 effective tax rate to 31.8%, from 35.3%, and increased net income. The filing does not provide a specific full-year earnings or revenue forecast.
- A potential UPS obligation to provide coordinating pension benefits if the Central States Pension Fund becomes insolvent could increase the UPS/IBT Plan projected benefit obligation by approximately $4 billion. UPS recorded no additional liability at the December 31, 2016 measurement date, citing significant uncertainties and its legal position.
- In litigation concerning alleged untaxed cigarette shipments to New York, a March 2017 court order found UPS liable and indicated significant penalties were appropriate. Damages and penalties remained undetermined; UPS was evaluating the opinion and potential appeal grounds.
- The Teamsters national master agreement expires July 31, 2018. UPS was negotiating with Teamsters Local 2727 covering airline mechanics. The filing also identifies general business risks including fuel prices, competition, labor disruptions, cybersecurity and technology interruptions, regulation, and litigation.
- UPS plans to adopt the new revenue recognition standard in 2018. It expected transportation revenue recognition to accelerate and certain Supply Chain & Freight businesses to report revenue gross rather than net of purchased transportation; the financial impact was still being quantified.
Important facts for investors to verify
- Whether operating costs, particularly fuel, purchased transportation, and employee benefits, continue to grow faster than revenue and pressure margins.
- The sustainability of operating cash flow after the unusually large pension contributions, and the funding and timing of planned capital spending, dividends, and repurchases.
- Developments in the Central States pension matter, including any revised plan or changes to UPS’s estimated potential obligation.
- Any damages, penalties, appeal, or further proceedings in the New York cigarette-shipment litigation.
- The eventual quantified effects of the 2018 revenue recognition standard and the comparability impact of acquisitions such as Marken.