UPS Q1 2014 Form 10-Q Summary
Business context and reporting period
United Parcel Service, Inc. reported unaudited results for the three months ended March 31, 2014, compared with the same period in 2013. Its three reportable segments are U.S. Domestic Package, International Package, and Supply Chain & Freight. Management cited severe U.S. winter weather, uneven global growth, and customers shifting toward lower-priced international delivery products.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $13.779 billion | $13.434 billion |
| Operating profit | $1.513 billion | $1.580 billion |
| Operating margin | 11.0% | 11.8% |
| Net income | $911 million | $1.037 billion |
| Diluted EPS | $0.98 | $1.08 |
| Operating cash flow | $2.267 billion | $1.758 billion |
| Capital expenditures | $322 million | $453 million |
Revenue increased 2.6%, while operating expenses rose 3.5%. Average daily package volume increased 4.8%, but average revenue per piece declined 1.4%. The effective tax rate rose to 36.0% from 30.4%; the prior-year rate benefited from a non-taxable gain on liquidation of a foreign subsidiary.
Segment results: U.S. Domestic Package revenue was $8.488 billion and operating profit $927 million, down 14.6%; International Package revenue was $3.127 billion and operating profit $438 million, up 24.4% reported and 12.0% adjusted for prior-year comparison items; Supply Chain & Freight revenue was $2.164 billion and operating profit $148 million, up 3.5%.
At March 31, cash and cash equivalents were $5.946 billion and marketable securities were $1.089 billion. Total debt was $12.082 billion, including $2.222 billion classified as current; long-term debt was $9.860 billion. Shareowners’ equity was $6.262 billion. The company had $1.183 billion outstanding under its U.S. commercial paper program and no borrowings under its revolving credit facilities. Debt covenants were reported as satisfied.
Material changes and unusual items
- U.S. weather-related service disruption affected more than half of operating days and reduced U.S. Domestic Package operating profit by an estimated $200 million, including lost volume, service refunds, and higher costs.
- Q1 2013 included a $284 million pre-tax TNT transaction termination charge and a $245 million pre-tax foreign-currency gain from liquidating a subsidiary. These items complicate year-over-year comparisons, particularly for International Package.
- Operating cash flow improved year over year, partly due to working-capital movements, tax timing, and the absence of the prior-year TNT termination-fee payment. Financing cash flow included $670 million of share repurchases and $596 million of dividends. UPS expected approximately $2.7 billion of share repurchases in 2014.
- After quarter-end, the Teamsters ratified a national master agreement on April 24, 2014, expiring July 31, 2018. UPS had accrued about $325 million for retroactive economic benefits, expected to pay in Q2.
Outlook, management commentary, and risks
UPS expected 2014 capital expenditures of approximately $2.5 billion and said operating cash flow and borrowing programs should meet foreseeable funding needs. The filing gives no clear consolidated earnings or revenue guidance. Management highlighted network flexibility, yield management, efficiency initiatives, facility automation, and accelerated deployment of ORION as priorities.
The labor agreement also provides for a $2.271 billion Q2 cash transfer to multiemployer healthcare funds. UPS expected to record an approximately $1.047 billion pre-tax charge in Q2 for healthcare-plan changes, with an additional estimated $32 million pre-tax charge later in 2014 for Non-NMA Group employees. These are estimates subject to actuarial assumptions and agreement details. UPS expected postretirement medical obligations to decline, but the transfer and charges are material near-term cash-flow and earnings items.
Other disclosed risks include ongoing pilot contract negotiations in mediation, pending wage-and-hour, franchise, antitrust, and freight-forwarding litigation or investigations for which some potential losses cannot be estimated, and exposure to fuel, currency, interest-rate, economic, competitive, cyber, and labor risks. Management said there were no material changes to the risk factors in its 2013 Form 10-K.
Most important facts for investors to verify
- Whether the estimated $200 million weather-related operating-profit impact and the decline in U.S. segment margin prove temporary or signal ongoing cost and yield pressure.
- Actual timing and cash effects of the $2.271 billion healthcare-fund transfer and the $325 million retroactive labor payment, and the final Q2 and subsequent accounting charges.
- Whether package volume growth can translate into revenue and margin growth amid lower revenue per piece and customers trading down to standard services.
- Debt and liquidity after the April 1 repayment of $1.0 billion in senior notes, funded with commercial paper, and following the planned healthcare transfer and shareholder distributions.
- Developments in unquantified legal matters and labor negotiations, including the pilot agreement and remaining collective bargaining agreements.