Business context and reporting period
United Parcel Service, Inc. (UPS) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2009. UPS reports U.S. Domestic Package, International Package, and Supply Chain & Freight. Management attributed broad revenue and volume pressure to the economic recession, weaker industrial production and retail sales, reduced world trade, lower fuel surcharges, product-mix shifts, and foreign currency movements.
Financial performance
Amounts are U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $11,153 | $13,113 | $32,920 | $38,789 |
| Operating profit | $929 | $1,632 | $2,542 | $4,579 |
| Operating margin | 8.3% | 12.4% | 7.7% | 11.8% |
| Net income | $549 | $970 | $1,395 | $2,749 |
| Diluted EPS | $0.55 | $0.96 | $1.39 | $2.67 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4,233 | $6,948 |
- Q3 revenue fell 14.9%, operating profit 43.1%, and net income 43.4% year over year. For the first nine months, the respective declines were 15.1%, 44.5%, and 49.3%.
- Q3 average daily package volume declined 3.9% overall, while consolidated average revenue per piece fell 11.3%. Nine-month declines were 4.2% and 9.6%, respectively.
- All segments reported lower revenue and operating profit. Q3 revenue / operating profit: U.S. Domestic Package, $6,868 / $514 million; International Package, $2,422 / $313 million; Supply Chain & Freight, $1,863 / $102 million. The domestic segment’s Q3 operating margin was 7.5%, versus 14.2% a year earlier.
- Operating expenses declined 10.9% in Q3, including lower fuel and purchased transportation costs, but did not offset the revenue decline. Management said the domestic segment was also hurt by lower network efficiency, product mix, and a greater decline in fuel surcharge revenue than in fuel expense.
Financial position, cash flow, and capital resources
- At September 30, 2009, cash and cash equivalents were $2,242 million, current marketable securities $546 million, and current liabilities $6,774 million. Total assets were $32,211 million.
- Total debt was $10,305 million, up from $9,871 million at December 31, 2008; $1,397 million was classified as current. Long-term debt was $8,908 million. Pension and postretirement obligations were $6,048 million.
- Nine-month operating cash flow of $4,233 million compared with $6,948 million in 2008. UPS said the comparison reflected lower earnings and the absence of about $1.035 billion of 2008 cash tax benefits, including an $850 million refund; higher pension contributions also used cash.
- Nine-month investing cash outflow was $879 million, including $1,185 million of capital expenditures, down from $2,108 million in the comparable 2008 period. Financing cash outflow was $1,661 million. Cash increased by $1,735 million from year-end to $2,242 million.
- UPS had $1.231 billion of U.S. commercial paper outstanding and no borrowings on its $3 billion and $1 billion revolving credit facilities. It reported compliance with debt covenants and a defined net worth of $12.512 billion against a $5 billion minimum requirement.
- UPS paid $1.313 billion of dividends in the first nine months and repurchased $396 million of shares, compared with $3.299 billion of repurchases in the prior-year period. The quarterly dividend remained $0.45 per share.
Material changes, outlook, risks, and unusual items
- Operating conditions: U.S. ground volume fell 6.2% in Q3; international export volume fell 3.2%. International domestic volume rose 9.1%, partly reflecting the acquisition of Turkish agent Unsped. Supply Chain & Freight revenue fell 19.8% in Q3, with forwarding and logistics particularly weak.
- Unusual charges and investment exposure: UPS recorded a $181 million first-quarter impairment charge on retired DC-8 aircraft, reducing nine-month net income by $116 million after tax. A $77 million pre-tax foreign-currency remeasurement charge contributed to higher year-to-date interest expense and reduced nine-month net income by $48 million after tax. In Q2, UPS also recorded a $17 million impairment on certain preferred and auction-rate securities.
- Liquidity and securities: Auction-rate securities had a carrying value of $277 million and remained classified as non-current because auctions had failed and liquidity was limited. Their cumulative unrealized loss was $65 million pre-tax. The filing said no further other-than-temporary impairments were identified at September 30, 2009.
- Pensions: UPS contributed $758 million to company-sponsored pension and postretirement plans in the first nine months and expected to contribute a further $149 million for the remainder of 2009. Management noted that multi-employer plan contributions could increase because of investment performance, demographics, or benefit changes.
- Tax and legal contingencies: UPS received a $271 million IRS refund in Q3 for tax years 1999–2002. IRS reviews of later tax years and non-income-based taxes, state and foreign tax matters, and several class actions and freight-forwarding price-fixing allegations remained unresolved. UPS said it could not determine potential liabilities for several matters, but did not expect the tax matters to have a material adverse effect.
- Labor and operations: The Teamsters agreements were scheduled through July 31, 2013; the IAM agreement was ratified in July 2009 and runs through July 31, 2014. Negotiations with airline mechanics’ union Teamsters Local 2727 had begun in 2006. UPS and DHL terminated discussions on U.S. air transportation services in April 2009.
- Outlook: The filing provides no specific numerical earnings or revenue guidance. Management described continued economic weakness and related volume, mix, and pricing pressures. It expected regular cash dividends to continue, subject to Board discretion, and planned 2009 repurchases at a rate intended approximately to offset stock-compensation dilution.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing stated that risk factors had not materially changed from the 2008 Form 10-K.
Important facts for investors to verify
- Whether package volumes, revenue per piece, and segment margins stabilized after the sharp 2009 declines, particularly in U.S. ground and international export operations.
- How much of the earnings and cash-flow decline reflects recurring operating weakness versus prior-year tax benefits and 2009 impairment and currency charges.
- The recoverability and liquidity of auction-rate securities and other Level 3 investments, and any subsequent impairment or sale activity.
- Future pension funding requirements, including company-sponsored and multi-employer plans, and their effect on cash generation.
- Developments in the identified legal, tax, antitrust, and labor matters; the filing does not provide clear estimated loss amounts for several proceedings.
- Debt maturities, commercial-paper refinancing, capital expenditure commitments, and whether available credit facilities remain undrawn and covenant headroom remains adequate.