United Parcel Service, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. UPS operates U.S. Domestic Package, International Package, and Supply Chain & Freight businesses, serving more than 220 countries and territories. Financial amounts below are in U.S. dollars; dollar figures are in millions unless noted.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $53,105 | $49,545 | +7.2% |
| Operating profit | $6,080 | $5,641 | +7.8% |
| Operating margin | 11.4% | 11.4% | Unchanged |
| Net income | $3,804 | $3,338 | +14.0% |
| Diluted EPS | $3.84 | $3.33 | +15.3% |
| Operating cash flow | $7,073 | $3,835 | +$3,238 |
| Capital expenditures | $2,005 | $1,389 | +$616 |
- Average daily package volume rose 1.4% to 15.797 million; average revenue per piece increased 5.7% to $10.82.
- Revenue and operating profit by segment: U.S. Domestic Package $31,717 and $3,764; International Package $12,249 and $1,709; Supply Chain & Freight $9,139 and $607. Year-over-year revenue changes were +6.6%, +10.0%, and +5.4%, respectively; operating profit changes were +16.2%, -6.7%, and +6.1%.
- At year-end, cash and marketable securities totaled $4,275, total assets were $34,701, total debt was $11,128 (including $11,095 long-term debt), and shareowners’ equity was $7,108. Debt to total capitalization rose to 61.0% from 57.4%.
- UPS had no commercial paper outstanding at year-end and no borrowings under its $2.5 billion revolving credit facilities. Current assets were $12,284 and current liabilities $6,514.
- Cash from operations exceeded investing and financing outflows. UPS used $2,537 in investing activities and $4,862 in financing activities; financing included $2,665 of share repurchases and $1,997 of dividends paid.
Material changes and fourth-quarter results
- Revenue rose 7.2%, while operating expenses increased 7.1%. Fuel expense increased 36.1% to $4,046, primarily due to higher prices; fuel surcharges partly offset fuel-cost pressure.
- Domestic Package benefited from improved pricing and operating efficiencies. International Package operating profit declined amid excess capacity and weaker Asia-to-U.S. demand in the second half, higher fuel costs, and adverse currency effects. Supply Chain & Freight profit improved, supported by yield management and productivity, though forwarding volumes weakened late in the year.
- Fourth-quarter revenue was $14,166 versus $13,421 in 2010; operating profit was $1,197 versus $1,672, and net income was $725 versus $1,025. Diluted EPS was $0.74 versus $1.02.
- Fourth-quarter operating profit included an $827 pension and postretirement benefit mark-to-market loss, reducing net income by $527 and diluted EPS by $0.54. This reflects a change in accounting policy that accelerated recognition of actuarial gains and losses and asset-value changes.
- UPS retrospectively applied the pension accounting change to periods presented; it recorded a cumulative $3,226 reduction to retained earnings as of January 1, 2009. The filing’s reported results and comparisons reflect the revised method.
Outlook, commentary, risks, and unusual items
- Management described a slow U.S. recovery and slowing international growth, but cited stronger U.S. e-commerce and holiday shipment activity in the fourth quarter. It continued to emphasize yield management, cost control, network efficiency, and international growth investments.
- UPS expected 2012 capital expenditures of approximately $2.2 billion. It anticipated repurchasing about $2.7 billion of shares in 2012, subject to Board approval of additional authorization. The Board raised the quarterly dividend 10%, from $0.52 to $0.57 per share, in February 2012.
- Major planned investments included a roughly $200 million expansion of the Cologne hub, targeted for completion by the end of 2013. UPS also had firm commitments for 15 Boeing 767-300ER freighters scheduled for delivery in 2012–2013.
- Key risks include economic and trade weakness, competitive pricing, fuel-price volatility and supply disruption, foreign exchange and interest-rate changes, security or IT disruption, severe weather, regulation, and labor actions. Approximately 245,000 employees were covered by Teamsters agreements expiring July 31, 2013; the pilots’ agreement became amendable at the end of 2011.
- Pension and benefit obligations are significant: the balance-sheet pension and postretirement obligation was $5,505, and required pension funding commitments in the contractual-obligations schedule totaled $5,855 across the periods shown. Lower discount rates and weak investment returns could increase expense and future contributions.
- UPS disclosed ongoing antitrust and competition matters, including freight-forwarding investigations in the U.S., Europe, and Brazil, as well as other litigation and IRS disputes. The company said potential losses for several matters could not be reasonably estimated. The filing also identifies wage-and-hour, franchise, and other claims.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2011. The filing provides no specific full-year 2012 earnings or revenue guidance.
Important facts for investors to verify
- How much of 2011’s revenue and EPS growth came from underlying shipment demand and pricing versus fuel surcharges, share repurchases, and accounting changes.
- Whether International Package margins recover as capacity adjusts, particularly on the Asia-to-U.S. trade lane, and whether higher fuel and currency costs remain a drag.
- The outlook for pension funding, benefit expense, and multiemployer plan contributions as discount rates, asset returns, and labor agreements evolve.
- Whether planned capital spending and share repurchases are funded sustainably while debt to capitalization is elevated and the 2012 authorization remains subject to Board approval.
- Developments in the disclosed antitrust investigations, IRS disputes, and franchise litigation, for which UPS could not estimate possible losses in several cases.