Business context and reporting period
United Parcel Service, Inc. (UPS) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. UPS operates through U.S. Domestic Package, International Package, and Supply Chain & Freight. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $13.507 billion | $13.349 billion | $26.941 billion | $26.485 billion |
| Operating profit | $1.742 billion | $1.790 billion | $3.322 billion | $3.359 billion |
| Operating margin | 12.9% | 13.4% | 12.3% | 12.7% |
| Net income | $1.071 billion | $1.116 billion | $2.108 billion | $2.086 billion |
| Diluted EPS | $1.13 | $1.15 | $2.21 | $2.15 |
| Operating cash flow | Not reported quarterly in the supplied filing text | $3.431 billion | $3.850 billion |
Q2 revenue rose 1.2%, while operating profit fell 2.7%, net income fell 4.0%, and diluted EPS fell 1.7% year over year. For the first six months, revenue increased 1.7%, operating profit declined 1.1%, net income rose 1.1%, and diluted EPS rose 2.8%. Compensation and benefits were the largest operating expense at $6.981 billion in Q2, up 3.5%; fuel expense declined 2.2% to $992 million.
Segments, Q2 / first six months: U.S. Domestic Package revenue increased 2.3% / 2.8%, with operating profit down 0.2% / up 4.1%. International Package revenue increased 1.6% / 1.0%, while reported operating profit declined 0.7% / 6.8%; first-half adjusted operating profit was down 2.3%. Supply Chain & Freight revenue fell 3.2% / 1.2%, and operating profit fell 21.3% / 17.9%. Forwarding and logistics weakness, particularly lower air-freight tonnage and rates, weighed on this segment.
Cash, debt and liquidity at June 30, 2013: Cash and cash equivalents were $4.808 billion; marketable securities were $1.384 billion. Total debt was $11.923 billion, including $1.045 billion of commercial paper; long-term debt was $10.837 billion. Current assets were $13.226 billion versus current liabilities of $7.183 billion. Operating cash flow of $3.431 billion less capital expenditures of $990 million was approximately $2.441 billion. Cash fell $2.519 billion from year-end 2012, with substantial share repurchases, dividends and debt repayments contributing to financing outflows. Total shareowners’ equity was $3.630 billion, down from $4.733 billion at year-end.
Material changes and unusual items
- Operating cash flow declined $419 million year over year for the first half, reflecting transaction-related cash costs and higher income tax payments, partly offset by lower pension and postretirement contributions.
- UPS recorded a $284 million pretax charge ($177 million after tax) for terminating the proposed TNT Express acquisition, and a $245 million pretax foreign-currency gain ($213 million after tax) upon liquidation of a related foreign subsidiary. Both affected International Package results in Q1; the filing presents adjusted segment results excluding these items.
- UPS repurchased 21.8 million shares for $1.836 billion during the first half and paid $1.140 billion in dividends. A new $10 billion repurchase authorization was approved; $8.825 billion remained available at June 30.
- Pension and postretirement benefit obligations were $11.426 billion, compared with $11.068 billion at year-end 2012. First-half pension and postretirement benefit expense was $562 million, versus $473 million a year earlier.
Outlook, management commentary and risks
Management described U.S. growth as slow and international growth as weak, with softer business-to-business and premium express demand, customers trading down to standard services, and overcapacity on some trade lanes. E-commerce supported U.S. residential volume. Management cited yield management, network adjustments, productivity and technology as cost and efficiency priorities. No full-year revenue, profit or EPS guidance is provided in the supplied filing text. UPS expected 2013 capital expenditures of approximately $2.4 billion (about 4% of revenue), share repurchases of approximately $4.0 billion, and $98 million of additional company-sponsored pension and postretirement medical contributions during the remainder of 2013.
- Labor negotiations remained a key uncertainty: U.S. Domestic Package employees approved the new Teamsters agreement, but some local agreements and UPS Freight still required further negotiation and approval. Existing contracts were extended; the filing cautioned that unresolved labor matters could adversely affect results or liquidity. A separate pilots’ agreement had been amendable since the end of 2011.
- Key risks include economic weakness, intense competition and pricing pressure, fuel and foreign-exchange movements, pension and healthcare costs, labor disruptions, security and technology threats, severe weather, and the possibility that capital needs or asset values differ from estimates.
- UPS disclosed unresolved franchise, antitrust, freight-forwarding and Canadian consumer claims or investigations for which it could not estimate a possible loss or loss range. It also entered a two-year non-prosecution agreement concerning shipments by illicit online pharmacies, forfeited $40 million, and agreed to implement a compliance program; UPS said this did not materially affect 2013 results.
- In July 2013, UPS completed its acquisition of Hungary-based Cemelog, a medical-logistics provider; the filing said the acquisition was not material to consolidated financial position or results.
Important facts for investors to verify
- Progress and final ratification of the Teamsters agreements, and any effects on service, customer retention, compensation costs or liquidity.
- Whether package-volume growth and productivity can offset weaker revenue per piece, higher labor and benefit costs, and pressure on operating margins.
- Further performance in international air forwarding and Supply Chain & Freight, given declining forwarding revenue and segment profit.
- Execution of the stated 2013 capital-spending and share-repurchase plans, and the resulting impact on cash, debt and equity.
- Developments in significant legal and regulatory matters for which UPS could not estimate potential losses, along with pension funding and benefit-cost assumptions.