United Parcel Service, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Unless otherwise noted, financial amounts are in millions of dollars. Comparisons are with the corresponding 2015 period.
Business context
UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses. Management described modest U.S. economic growth, weak industrial activity, uneven international demand, and shifting trade patterns. E-commerce supported package volumes; UPS cited network adjustments, yield management, automation, and deployment of its ORION routing technology as operating priorities.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $14,629 | $14,095 | $29,047 | $28,072 |
| Operating profit | $2,038 | $1,960 | $3,861 | $3,633 |
| Operating margin | 13.9% | 13.9% | 13.3% | 12.9% |
| Net income | $1,269 | $1,230 | $2,400 | $2,256 |
| Diluted EPS | $1.43 | $1.35 | $2.69 | $2.48 |
| Operating cash flow | Not separately presented | Not separately presented | $4,693 | $4,239 |
| Capital expenditures | Not separately presented | Not separately presented | $963 | $958 |
Q2 revenue increased 3.8%, operating profit 4.0%, net income 3.2%, and diluted EPS 5.9%. First-half revenue increased 3.5%, operating profit 6.3%, net income 6.4%, and diluted EPS 8.5%. First-half cash flow from operations rose $454 million year over year; management attributed the increase mainly to higher earnings and working-capital improvement, partly offset by lower hedge-margin collateral receipts and higher net tax payments.
Segment results
| Segment | Q2 revenue | Q2 operating profit | First-half revenue | First-half operating profit |
|---|---|---|---|---|
| U.S. Domestic Package | $9,015 (+2.4%) | $1,233 (+2.7%) | $18,099 (+2.7%) | $2,335 (+4.9%) |
| International Package | $3,077 (+1.1%) | $613 (+11.1%) | $5,991 (-0.4%) | $1,187 (+13.0%) |
| Supply Chain & Freight | $2,537 (+13.2%) | $192 (-7.2%) | $4,957 (+11.8%) | $339 (-5.3%) |
U.S. package growth reflected higher volumes, led by e-commerce, partly offset by lower fuel surcharges and mix-related pressure on revenue per piece. International operating profit and margins improved amid network and cost-management actions, despite lower revenue per piece and currency and fuel effects. Supply Chain & Freight revenue growth included Coyote Logistics, acquired in August 2015; segment profit declined as freight volumes and tonnage weakened and costs rose. LTL revenue fell 7.3% in both the quarter and first half, while shipments and tonnage also declined.
Financial position, liquidity, and capital allocation
- At June 30, cash and cash equivalents were $3,059 and marketable securities were $2,613; combined holdings were $5,672, including $2,272 held by non-U.S. subsidiaries. Current assets were $13,123 and current liabilities were $9,961.
- Total debt was $14,366, including $2,816 of current maturities and commercial paper; long-term debt was $11,550. Total shareowners’ equity was $2,650. The filing reports debt to total capitalization of 84.4% in its financing discussion.
- First-half investing cash outflow was $1,794; financing cash outflow was $2,584, including $1,329 of share repurchases and $1,327 of dividends. Cash increased by $329 to $3,059.
- UPS repurchased 13.1 million shares for $1.330 billion during the first half and authorized a new $8.0 billion repurchase program in May; $7.505 billion remained available at June 30. Management anticipated approximately $2.7 billion of repurchases for 2016.
- UPS expected 2016 capital expenditures of approximately $2.8 billion, primarily supporting replacement capacity, facility automation, and expansion. No specific earnings or revenue guidance is provided in the supplied filing text.
- Credit facilities totaling $4.5 billion had no borrowings outstanding at June 30. UPS reported compliance with debt covenants and did not expect them to materially affect liquidity.
Outlook, risks, and unusual items
- Management cited uncertain global growth, weak industrial conditions, volatile currencies, trade-lane weakness, and the UK’s decision to leave the EU as factors affecting demand and planning. UPS said it continued to align air capacity and costs with volumes.
- Fuel prices reduced fuel expense but also lowered fuel-surcharge revenue; the net fuel effect partly offset operating gains in U.S. Domestic Package. Purchased transportation expense rose, significantly reflecting Coyote and mail-service activity.
- Employee benefit costs are material. UPS expected to contribute a further $1.192 billion to company-sponsored pension plans and $56 million to U.S. postretirement medical plans during the remainder of 2016.
- The Central States Pension Fund’s proposed benefit-reduction plan was rejected by the U.S. Treasury on May 6, 2016. UPS had previously estimated a potential 2016 charge of $3.2–$3.8 billion if that proposal were approved and implemented as proposed. The fund may pursue other actions; UPS said any additional coordinating-benefit obligation could not currently be estimated and could significantly increase its pension obligation. No additional liability had been recognized.
- A tentative five-year pilot labor agreement was announced June 30, subject to ratification; a separate airline mechanics agreement was under negotiation. The Teamsters national master agreement was scheduled to expire July 31, 2018.
- UPS disclosed several legal matters, including a New York cigarette-delivery lawsuit scheduled for trial in September 2016, a pending DOJ investigation and appeal involving third-party shipper negotiators, and other class-action and regulatory proceedings. For several matters, the company could not estimate a possible loss or range of loss.
- UPS stated that there were no material changes to its previously reported risk factors except the additional discussion of exposure related to Central States Pension Fund benefits. Forward-looking results remain subject to economic, competitive, labor, regulatory, fuel, currency, cybersecurity, pension, and litigation risks.
Most important facts for investors to verify
- Whether package volume growth and yield management can offset lower revenue per piece, fuel-surcharge pressure, and higher labor and benefit costs.
- Supply Chain & Freight profitability and underlying performance excluding Coyote, given falling freight volumes and acquisition-related comparability effects.
- The size and timing of pension contributions and any future Central States Pension Fund action that could create coordinating-benefit obligations.
- Actual 2016 capital expenditures and share repurchases versus management’s stated expectations, and the effect of distributions on liquidity and leverage.
- Developments and potential financial exposure in the disclosed litigation and regulatory matters, for which some loss estimates were unavailable.