Business context and reporting period
United Parcel Service, Inc. (UPS) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. Comparisons below are with the three months ended March 31, 2014 unless noted. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses. Management said slower U.S. economic growth, port disruption, adverse weather, a stronger U.S. dollar, and changing international trade patterns shaped the quarter.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / change |
|---|---|---|
| Revenue | $13.977 billion | $13.779 billion; +1.4% |
| Operating profit | $1.673 billion | $1.513 billion; +10.6% |
| Operating margin | 12.0% | 11.0% |
| Net income | $1.026 billion | $911 million; +12.6% |
| Diluted EPS | $1.12 | $0.98; +14.3% |
| Operating cash flow | $2.751 billion | $2.267 billion |
| Capital expenditures | $365 million | $322 million |
Revenue rose 1.4%, while total operating expenses increased 0.3% to $12.304 billion. Fuel expense fell $328 million, largely reflecting lower fuel prices; compensation and benefits increased $299 million, reflecting payroll, pension, health and welfare, and workers’ compensation costs. The effective tax rate was 35.5%, versus 36.0%.
Segment results: U.S. Domestic Package revenue was $8.814 billion (+3.8%), operating profit $1.024 billion (+10.5%), and margin 11.6% (up 0.7 percentage point). International Package revenue was $2.970 billion (-5.0%), operating profit $498 million (+13.7%), and margin 16.8% (up 2.8 points); currency translation reduced revenue by $227 million and operating profit by $15 million versus the prior year. Supply Chain & Freight revenue was $2.193 billion (+1.3%), operating profit $151 million (+2.0%), and margin 6.9% (up 0.1 point).
At March 31, 2015, cash and cash equivalents were $4.482 billion and marketable securities were $1.935 billion. Total debt was $13.104 billion, including $3.163 billion of current maturities and commercial paper; long-term debt was $9.941 billion. Current assets were $13.915 billion and current liabilities $10.610 billion. Shareowners’ equity was $1.847 billion. Reported debt to total capitalization was 87.6%, compared with 65.9% at March 31, 2014. The filing attributes cash flow improvement partly to hedge collateral and tax-payment timing; operating cash flow less capital expenditures was $2.386 billion, versus $1.945 billion.
Material changes and management commentary
- Average daily package volume increased 2.8% to 17.470 million, while average revenue per piece declined 1.4% to $10.56. Domestic volume growth and productivity gains supported results; international revenue was pressured by currency, lower fuel surcharges, and customers shifting from premium to standard products.
- Operating cash flow increased $484 million. Cash used in investing activities was $1.357 billion, including $365 million of capital expenditures and net purchases of marketable securities. Financing activities provided $899 million, including net borrowings; UPS also paid $636 million in dividends and repurchased $676 million of shares.
- Cash increased from $2.291 billion at year-end 2014 to $4.482 billion. The quarter-end commercial paper balance was $3.121 billion. UPS reported $4.5 billion of revolving credit facilities with no amounts outstanding and said it complied with debt covenants.
- Management cited technology deployment, facility automation, ORION route optimization, network adjustments, yield management, and cost control as continuing operational priorities.
Outlook, risks, contingencies and unusual items
- UPS expected 2015 capital expenditures of approximately $3.0 billion and share repurchases of approximately $2.7 billion. The quarterly dividend was increased to $0.73 per share from $0.67; UPS said it expected to continue regular dividends. The filing provides no clear full-year revenue or earnings guidance.
- Key risks include economic conditions, competition, customer relationships, labor negotiations and work disruptions, fuel prices and supply, foreign exchange and interest rates, cybersecurity and technology disruption, pension and health costs, litigation, and the ability to forecast capital needs.
- Approximately 270,000 employees were covered by Teamsters agreements expiring July 31, 2018. Pilot contract negotiations were in mediation; the airline mechanics agreement was amendable. The company reported a $876 million recognized liability for a prior multiemployer pension-plan withdrawal, payable over approximately 48 years.
- Legal matters include a New York State and City lawsuit concerning alleged cigarette deliveries; UPS said it could not estimate a possible loss. A Department of Justice investigation into third-party shipper negotiators remained open, although a related antitrust case was dismissed by court order on April 30, 2015. In May 2015, after quarter-end, UPS finalized DOJ and New Jersey agreements concerning government delivery-service claims; proposed settlements were not expected to be material, while other state inquiries continued.
- UPS reported that the 2013 non-prosecution agreement concerning illicit online pharmacy shipments expired on March 30, 2015. No material changes to the risk factors in the 2014 Form 10-K were reported. Management said disclosure controls were effective.
Important facts for investors to verify
- Whether package-volume growth and productivity gains can persist as average revenue per piece falls and international customers favor lower-priced services.
- How much of the cash-flow increase reflects recurring operations versus hedge-collateral movements, tax timing, and working-capital changes.
- The implications of the high reported debt-to-capitalization ratio, near-term commercial paper and debt maturities, and the substantial pension and postretirement obligations.
- Actual 2015 capital spending, repurchases, and dividend cash requirements compared with management’s stated expectations.
- Developments and potential financial exposure from the unresolved legal and government inquiries, labor negotiations, and uncertain tax positions.