Business context and reporting period
UPS’s fiscal 2013 Form 10-K covers the year ended December 31, 2013; it also reports fourth-quarter results. UPS operates through U.S. Domestic Package, International Package, and Supply Chain & Freight. It delivered an average of 16.9 million pieces per day worldwide and generated $55.4 billion in revenue.
Financial performance and key metrics
Amounts in dollars; financial figures are in billions unless otherwise stated.
| Metric | 2013 | 2012 | Comparison |
|---|---|---|---|
| Revenue | $55.438 | $54.127 | Up 2.4% |
| Operating profit (GAAP) | $7.034 | $1.343 | 2012 included major pension-related charges |
| Operating margin (GAAP) | 12.7% | 2.5% | Not directly comparable because of 2012 charges |
| Net income (GAAP) | $4.372 | $0.807 | 2012 included major pension-related charges |
| Diluted EPS (GAAP) | $4.61 | $0.83 | 2012 included major pension-related charges |
| Net cash from operating activities | $7.304 | $7.216 | Up about 1% |
| Capital expenditures | $2.065 | $2.153 | Down about 4% |
| Cash and marketable securities at year-end | $5.245 | $7.924 | Down $2.679 |
| Total debt at year-end | $10.872 | $12.870 | Down $1.998 |
| Shareowners’ equity | $6.488 | $4.733 | Up $1.755 |
2013 adjusted operating profit, excluding identified comparability items, was approximately $7.073 billion, versus approximately $7.070 billion in 2012. Adjusted operating margin was approximately 12.8% in both years. These are non-GAAP figures; the filing’s reported GAAP operating profit includes the items described below.
Segments: U.S. Domestic Package revenue rose 3.7% to $34.074 billion; adjusted operating profit increased 1.6% to $4.603 billion. International Package revenue rose 2.5% to $12.429 billion, while adjusted operating profit slipped 0.8% to $1.796 billion. Supply Chain & Freight revenue fell 2.3% to $8.935 billion and adjusted operating profit fell 7.4% to $674 million.
Liquidity and capital returns: Current assets were $13.387 billion and current liabilities $7.131 billion at year-end. Cash from operations funded capital spending, dividends, and repurchases. UPS repurchased $3.838 billion of shares and paid $2.260 billion in dividends during 2013. Debt-to-total-capitalization declined to 62.6% from 73.1%.
Material changes versus the prior comparable period
- Revenue grew 2.4%, while average daily package volume increased 3.9%; average revenue per piece declined 0.6%, reflecting product and customer mix, lower fuel surcharges, and currency effects.
- 2012 results included a $4.831 billion pre-tax pension and postretirement mark-to-market loss and an $896 million charge for a multiemployer pension withdrawal liability. These charges substantially depressed 2012 GAAP profit.
- 2013 included a $284 million pre-tax charge for terminating the proposed TNT Express acquisition, partly offset by a $245 million pre-tax foreign-currency gain from liquidating an acquisition-related subsidiary. The net impact reduced operating profit by $39 million.
- Fourth-quarter 2013 revenue was $14.976 billion versus $14.571 billion. Operating profit was $1.908 billion versus a loss of $2.782 billion, and net income was $1.167 billion versus a loss of $1.748 billion; the prior-year quarter included the large pension mark-to-market charge.
- Fourth-quarter 2013 domestic operations faced elevated costs from concentrated holiday volume, adverse weather, and additional contract-carrier use. UPS estimated $125–$150 million of extra costs and reported about $50 million of service refunds for unmet delivery commitments.
- Cash and marketable securities declined, but total debt also decreased; operating cash flow remained strong at $7.304 billion.
Outlook, commentary, risks, contingencies, and unusual items
- Management described the global economy as challenging: U.S. e-commerce and residential shipments grew, while business-to-business activity was held back by sluggish industrial production. Slow overseas growth encouraged customers to shift from premium express to standard services.
- No explicit earnings or revenue guidance is provided. UPS anticipated 2014 capital expenditures of about $2.5 billion and share repurchases of about $2.7 billion. The board raised the quarterly dividend from $0.62 to $0.67 per share in February 2014. Management expected pension and postretirement expense to decline in 2014, primarily because of a higher discount rate used for ongoing benefit cost.
- Key risks include economic weakness, pricing and competitive pressure, fuel costs and surcharge timing, currency and interest-rate movements, severe weather or other disruptions, cybersecurity and privacy incidents, and the ability to forecast network capacity and capital needs.
- Labor and benefit exposure is significant. About 253,000 employees were covered by Teamsters agreements; six U.S. Domestic Package supplemental agreements still required approval as of February 2014. UPS and the pilots’ union sought mediation in February 2014. Pension funding needs may change with investment returns, discount rates, and plan assumptions; future multiemployer-plan contributions are uncertain.
- UPS reported ongoing litigation and competition-authority investigations, including franchise, antitrust, and freight-forwarding matters for which potential losses could not be estimated. Under a 2013 non-prosecution agreement relating to illicit online pharmacy shipments, UPS forfeited $40 million and agreed to implement a compliance program; the filing said this did not materially affect 2013 results.
- UPS’s proposed TNT Express acquisition was prohibited by the European Commission and terminated. The filing reported no material effect from 2013 accounting pronouncements adopted or expected from standards not yet effective.
Important facts for investors to verify
- Reconcile GAAP results with management’s non-GAAP adjusted measures, especially the large 2012 pension charges and the 2013 TNT-related net charge.
- Assess whether domestic productivity and pricing can offset labor, healthcare, pension, and peak-season service costs.
- Track International Package yields and margins as customers favor standard services, and monitor air-freight overcapacity and currency effects.
- Review liquidity and capital allocation against pension funding needs, the 2014 debt maturity, planned capital spending, dividends, and share repurchases.
- Monitor labor negotiations, unresolved legal and regulatory matters, and the potential for higher pension or multiemployer-plan contributions.