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| UPS > SEC Filings for UPS > Form 10-Q on 5-Aug-2004 | All Recent SEC Filings |
5-Aug-2004
Quarterly Report
Revenue, Volume and Revenue Per Piece
The following tables set forth information showing the change in revenue,
average daily package volume and average revenue per piece, both in dollars or
amounts and in percentage terms:
Three Months Ended
June 30, Change
2004 2003 $ %
Revenue (in millions):
U.S. domestic package:
Next Day Air $ 1,492 $ 1,387 $ 105 7.6 %
Deferred 734 716 18 2.5
Ground 4,254 4,021 233 5.8
Total U.S. domestic package 6,480 6,124 356 5.8
International package:
Domestic 318 274 44 16.1
Export 1,183 992 191 19.3
Cargo 112 105 7 6.7
Total International package 1,613 1,371 242 17.7
Non-package:
UPS Supply Chain Solutions 568 530 38 7.2
Other 210 201 9 4.5
Total Non-package 778 731 47 6.4
Consolidated $ 8,871 $ 8,226 $ 645 7.8 %
#
Average Daily Package Volume
(in thousands):
U.S. domestic package:
Next Day Air 1,181 1,179 2 0.2 %
Deferred 832 862 (30 ) (3.5 )
Ground 10,252 9,776 476 4.9
Total U.S. domestic package 12,265 11,817 448 3.8
International package:
Domestic 784 742 42 5.7
Export 521 461 60 13.0
Total International package 1,305 1,203 102 8.5
Consolidated 13,570 13,020 550 4.2 %
Operating days in period 64 64
$
Average Revenue Per Piece:
U.S. domestic package:
Next Day Air $ 19.74 $ 18.38 $ 1.36 7.4 %
Deferred 13.78 12.98 0.80 6.2
Ground 6.48 6.43 0.05 0.8
Total U.S. domestic package 8.26 8.10 0.16 2.0
International package:
Domestic 6.34 5.77 0.57 9.9
Export 35.48 33.62 1.86 5.5
Total International package 17.97 16.44 1.53 9.3
Consolidated $ 9.19 $ 8.87 $ 0.32 3.6 %
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Six Months Ended
June 30, Change
2004 2003 $ %
Revenue (in millions):
U.S. domestic package:
Next Day Air $ 2,962 $ 2,740 $ 222 8.1 %
Deferred 1,498 1,414 84 5.9
Ground 8,560 7,990 570 7.1
Total U.S. domestic package 13,020 12,144 876 7.2
International package:
Domestic 654 540 114 21.1
Export 2,364 1,932 432 22.4
Cargo 214 201 13 6.5
Total International package 3,232 2,673 559 20.9
Non-package:
UPS Supply Chain Solutions 1,131 1,030 101 9.8
Other 407 394 13 3.3
Total Non-package 1,538 1,424 114 8.0
Consolidated $ 17,790 $ 16,241 $ 1,549 9.5 %
#
Average Daily Package Volume
(in thousands):
U.S. domestic package:
Next Day Air 1,175 1,157 18 1.6 %
Deferred 863 853 10 1.2
Ground 10,322 9,828 494 5.0
Total U.S. domestic package 12,360 11,838 522 4.4
International package:
Domestic 797 759 38 5.0
Export 519 466 53 11.4
Total International package 1,316 1,225 91 7.4
Consolidated 13,676 13,063 613 4.7 %
Operating days in period 128 127
$
Average Revenue Per Piece:
U.S. domestic package:
Next Day Air $ 19.69 $ 18.65 $ 1.04 5.6 %
Deferred 13.56 13.05 0.51 3.9
Ground 6.48 6.40 0.08 1.3
Total U.S. domestic package 8.23 8.08 0.15 1.9
International package:
Domestic 6.41 5.60 0.81 14.5
Export 35.59 32.65 2.94 9.0
Total International package 17.92 15.89 2.03 12.8
Consolidated $ 9.16 $ 8.81 $ 0.35 4.0 %
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Operating Profit
The following table sets forth information showing the change in operating
profit, both in dollars (in millions) and in percentage terms:
Three Months Ended
June 30, Change
2004 2003 $ %
Operating Segment
U.S. domestic package $ 892 $ 832 $ 60 7.2 %
International package 272 158 114 72.2
Non-package 146 90 56 62.2
Consolidated Operating Profit $ 1,310 $ 1,080 $ 230 21.3 %
Six Months Ended
June 30, Change
2004 2003 $ %
Operating Segment
U.S. domestic package $ 1,723 $ 1,536 $ 187 12.2 %
International package 541 292 249 85.3
Non-package 263 197 66 33.5
Consolidated Operating Profit $ 2,527 $ 2,025 $ 502 24.8 %
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U.S. Domestic Package Operations
U.S. domestic package revenue increased $356 million, or 5.8%, for the quarter ($876 million, or 7.2%, year-to-date), which was driven by a 3.8% increase in average daily package volume and a 2.0% increase in revenue per piece. Ground volume increased 4.9% during the quarter, driven in part by the improving U.S. economy. Next Day Air volume increased 0.2%, due to solid growth in package volume which reflected the improved economy. However, both Next Day Air and deferred volume were significantly affected by declines in letter volume influenced by the slowdown in mortgage refinancing.
Ground revenue per piece increased 0.8% for the quarter primarily due to the
impact of a rate increase (described below) that took effect in 2004, but was
adversely impacted by the removal of the fuel surcharge on ground products, as
discussed below. The removal of the fuel surcharge on ground products reduced
the growth rate of ground revenue per piece by 180 basis points. Next Day Air
revenue per piece increased 7.4%, while deferred revenue per piece increased
6.2%, primarily due to the shift in product mix from letters to packages, the
rate increase, and the modified fuel surcharge on domestic air products.
On January 5, 2004, a rate increase took effect which was in line with previous years' rate increases. We increased rates for standard ground shipments an average of 1.9% for commercial deliveries. The ground residential surcharge increased $0.25 to $1.40 over the commercial ground rate. An additional delivery area surcharge of $1.00 was implemented for commercial deliveries in certain ZIP codes. Rates for UPS Hundredweight increased 5.9%. In addition, we increased rates for UPS Next Day Air an average of 2.9% and increased rates for deferred services by 2.9%. Rates for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service) increased an average of 3.5%.
In addition, we discontinued the fuel surcharge on ground products, while we began to apply a new indexed surcharge to domestic air products. This new fuel surcharge for the domestic air products is based on the U.S. Energy Department's Gulf Coast spot price for a gallon of kerosene-type jet fuel. Based on published rates, the average fuel surcharge applied to our air products during the second quarter of 2004 was 5.83% (5.60% year-to-date), compared with the average surcharge of 1.80% applied to both air and ground products in 2003 (1.57% year-to-date), resulting in an increase in domestic fuel surcharge revenue of $19 million during the quarter ($56 million year-to-date).
U.S. domestic package operating profit increased $60 million, or 7.2% ($187 million, or 12.2%, year-to-date), primarily due to the increase in volume and revenue growth, combined with an improved operating margin resulting from better utilization of our delivery network.
International Package Operations
International package revenue improved $242 million, or 17.7%, for the quarter ($559 million, or 20.9% year-to-date) primarily due to the 13.0% volume growth for our export products and strong revenue per piece improvements, a portion of which can be attributed to the impact of currency fluctuations. Revenue increased $52 million during the quarter ($153 million year-to-date) due to currency fluctuations. Revenue growth was also impacted by the change to our fuel surcharge, discussed below, as well as rate changes, which vary by geographical market and occur throughout the year.
In January 2004, changes were made to the calculation of our fuel surcharge on international products (including U.S. export products). The new surcharge is indexed to fuel prices in our different international regions, depending on where the shipment takes place. The new surcharge is only applied to our international express products, while the previous surcharge was applied to all international products. These changes, along with higher fuel prices, had the effect of increasing international package revenue by $34 million during the quarter ($73 million year-to-date).
We experienced double-digit export volume growth in each region throughout the
world, with Asia-Pacific showing 17% export volume growth, and Europe and
U.S.-origin export volume growth in excess of 11%. Domestic volume increased
5.7% for the quarter, representing the third consecutive quarter of strong
growth, and primarily reflects improvements in our European domestic delivery
business.
Export revenue per piece increased 5.5% for the quarter (1.3% currency-adjusted), benefiting from rate increases and the impact of the fuel surcharge, but was negatively impacted by changes in product mix. In total, international average daily package volume increased 8.5% and average revenue per piece increased 9.3% (4.6% currency-adjusted).
The improvement in operating profit for our international package operations was $114 million, or 72.2%, for the quarter ($249 million, or 85.3%, year-to-date), $14 million of which was due to favorable currency fluctuations ($28 million year-to-date). This increase in operating profit was primarily due to the strong export volume growth and revenue per piece increases described previously, and a strong increase in operating margin through better network utilization.
Non-Package Operations
Non-package revenue increased $47 million, or 6.4%, for the quarter ($114 million, or 8.0%, year-to-date). UPS Supply Chain Solutions increased revenue by 7.2% during the quarter (9.8% year-to-date) with the strongest growth coming in our supply chain management and air freight businesses. Favorable currency fluctuations provided $12 million of the increase in revenue for the quarter ($38 million year-to-date). The remainder of our non-package operations, which includes Mail Boxes Etc. (the franchisor of Mail Boxes Etc. and The UPS Store), UPS Capital Corporation, our mail and consulting services, and our excess value package insurance business, increased revenue by 4.5% for the quarter (3.3% year-to-date), primarily due to strong double-digit franchise revenue growth at Mail Boxes Etc.
Non-package operating profit increased $56 million, or 62.2%, for the quarter ($66 million, or 33.5%, year-to-date). This increase was affected by a $24 million loss recognized in 2003 on the sale of our former Mail Technologies business. The remainder of the profit increase was primarily due to higher operating profit from our Supply Chain Solutions unit, our mail services unit, and our excess value insurance business. Supply Chain Solutions operating profit was driven by the increase in revenue as well as continued operating margin expansion. Mail Boxes Etc. also contributed strong profit growth, due to the increased franchise revenue noted previously. Non-package operating profit includes $32 million (compared to $26 million in 2003) of intersegment profit for the quarter, with a corresponding amount of operating expense, which reduces operating profit, in the U.S. domestic package segment.
During the second quarter of 2003, we sold our Mail Technologies business unit in a transaction that increased net income by $14 million, or $0.01 per diluted share. The gain consisted of a pre-tax loss of $24 million recorded in other operating expenses within the non-package segment, and a tax benefit of $38 million recognized in conjunction with the sale. The tax benefit exceeds the pre-tax loss from this sale primarily because the goodwill impairment charge we previously recorded for the Mail Technologies business unit was not deductible for income tax purposes. Consequently, our tax basis was greater than our book basis, thus producing the tax benefit described above. The operating results of our Mail Technologies unit were previously included in our non-package segment, and were not material to non-package operating results in any of the periods presented.
Operating Expenses and Operating Margin
Consolidated operating expenses increased by $415 million, or 5.8%, for the quarter ($1.047 billion, or 7.4%, year-to-date), $51 million of which was due to currency fluctuations in our international package and non-package segments ($162 million year-to-date). Compensation and benefits increased by $325 million, or 6.8%, for the quarter ($785 million, or 8.3%, year-to-date), largely due to increased health and welfare benefit costs and higher pension expense. Stock-based compensation expense increased $21 million, or 17.4%, in the second quarter ($42 million, or 17.9%, year-to-date), primarily as a result of increased
managementincentive awards expense and adopting the measurement provisions of FAS 123 beginning with 2003 stock-based compensation awards.
Other operating expenses increased by $90 million, or 3.8%, for the quarter ($262 million, or 5.5%, year-to-date), largely due to a 28.5% increase in fuel expense and an 11.5% increase in purchased transportation, but were somewhat offset by declines in depreciation and amortization and other expenses. The increase in fuel expense was primarily due to higher prices for Jet-A, diesel, and unleaded gasoline. The increase in purchased transportation expense was influenced by the impact of currency and volume growth in our international package business, as well as growth at our Supply Chain Solutions business. The decline in depreciation and amortization for the quarter was impacted by lower depreciation expense on aircraft and engines, largely due to the recent retirement of some older aircraft. The decline in other expenses was primarily due to the $24 million loss on the sale of our former Mail Technologies business in the second quarter of 2003.
Our operating margin, defined as operating profit as a percentage of revenue, increased in each segment during the second quarter. The operating margins for our three business segments were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Operating Segment
U.S. domestic package 13.8 % 13.6 % 13.2 % 12.6 %
International package 16.9 % 11.5 % 16.7 % 10.9 %
Non-package 18.8 % 12.3 % 17.1 % 13.8 %
Consolidated 14.8 % 13.1 % 14.2 % 12.5 %
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Investment Income/Interest Expense
Investment income increased by $4 million during the second quarter, primarily due to higher interest-earning cash balances during 2004 compared to 2003. The year-to-date increase in investment income of $59 million was primarily due to a $58 million impairment charge recognized during the first quarter of 2003. We periodically review our investments for indications of other than temporary impairment considering many factors, including the extent and duration to which a security's fair value has been less than its cost, overall economic and market conditions, and the financial condition and specific prospects for the issuer. During the first quarter of 2003, after considering the continued decline in the U.S. equity markets, we recognized an impairment charge of $58 million, primarily related to our investment in S&P 500 equity portfolios.
The $3 million decrease in interest expense during the second quarter was primarily due to lower average debt balances outstanding as well as the impact of lower interest rates on certain interest rate swaps. The year-to-date increase in interest expense of $11 million was affected by imputed interest expense associated with certain investments, currency exchange rates, and a lower amount of capitalized interest during 2004.
Net Income and Earnings Per Share
Net income for the second quarter of 2004 was $818 million, an 18.2% increase from the $692 million achieved in the second quarter of 2003, resulting in an increase in diluted earnings per share from $0.61 in 2003 to $0.72 in 2004. Net income in the second quarter of 2003 was favorably impacted by $14 million, or $0.01 per diluted share, due to the sale of our former Mail Technologies business unit.
Year-to-date 2004 net income was $1.577 billion, a 21.0% increase from the $1.303 billion in the first six months of 2003, resulting in an increase in diluted earnings per share from $1.15 in 2003 to $1.39 in 2004. Net income in the first six months of 2003 was favorably impacted by a reduction in income tax expense of $55 million ($0.05 per diluted share) due to the resolution of various tax issues with the Internal Revenue Service, and by $14 million ($0.01 per diluted share) due to the sale of our former Mail Technologies business unit. Net income in 2003 was adversely impacted by the $58 million ($37 million after-tax, or $0.03 per diluted share) investment impairment charge described previously.
Liquidity and Capital Resources
Net Cash From Operating Activities
Net cash provided by operating activities increased to $3.140 billion in the first six months of 2004 from $2.579 billion during 2003, largely due to higher net income and the receipt of an income tax refund of $185 million associated with the resolution of the excess value ("EV") tax case discussed in Note 8 to the unaudited consolidated financial statements. As discussed in Note 5 to the unaudited consolidated financial statements, we expect to contribute $287 and $95 million over the remainder of the year to our pension and postretirement medical benefit plans, respectively.
In November 2003, we announced rate increases, which took effect on January 5, 2004. The overall impact is in line with previous years' rate increases. We increased rates for standard ground shipments an average of 1.9% for commercial deliveries. The ground residential surcharge increased $0.25 to $1.40 over the commercial ground rate. An additional delivery area surcharge of $1.00 was implemented for commercial deliveries in certain ZIP codes. Rates for UPS Hundredweight increased 5.9%. In addition, we increased rates for UPS Next Day Air an average of 2.9% and increased rates for deferred services by 2.9%. Rates for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service) increased an average of 3.5%. Rate changes for shipments originating outside the U.S. were made throughout the past year and varied by geographic market.
In addition, we discontinued the fuel surcharge on ground service, while a new indexed surcharge is being applied to our Next Day Air, deferred products, and international services. This new fuel surcharge for the domestic air products is based on the U.S. Energy Department's Gulf Coast spot price for a gallon of kerosene-type jet fuel. The index for shipments originating in Europe is based on the Rotterdam ARA spot price of kerosene-type jet fuel.
Net Cash Used In Investing Activities
Net cash used in investing activities increased to $1.524 billion in the first six months of 2004 from $1.463 billion during 2003, primarily due to increased purchases (net of sales and maturities) of marketable securities and short-term investments resulting from our improved free cash flow, but was somewhat offset by loan sales and principal repayments in our finance receivables portfolio and slightly reduced capital expenditures. We anticipate capital expenditures of approximately $2.2 billion in 2004. These expenditures will provide for replacement of existing capacity and anticipated future growth and include the projected cost of capitalized software. We fund our capital expenditures with our cash from operations.
Net Cash Used In Financing Activities
Net cash used in financing activities decreased to $1.191 billion in the first six months of 2004 from $1.193 billion during 2003, primarily due to lower repayments of debt, which was mostly offset with increased repurchases of stock and higher cash dividends. Our primary use of cash in financing activities has been to repay long-term debt, repurchase stock, and pay dividends. During the first half of 2004, we repaid $78 million in debt, primarily consisting of UPS Notes and principal payments on our capitalized lease obligations. Issuances of debt consisted primarily of UPS Notes and short-term borrowings under our commercial paper program, and totaled $178 million for the six months ended June 30, 2004. We consider the overall fixed and floating interest rate mix of our portfolio and the related overall cost of borrowing when planning for future issuances and non-scheduled repayments of debt.
In May 2004, a total of $1.0 billion was authorized for share repurchases as part of our continuing share repurchase program. We repurchased a total of $745 and $198 million of common stock in first half of 2004 and 2003, respectively. As of June 30, 2004, we had $824 million of this authorization available for future share repurchases.
We increased our cash dividend payments to $0.56 per share in the first six months of 2004 from $0.42 per share in the same period of 2003, resulting in an increase in total cash dividends paid to $621 million from $472 million. The declaration of dividends is subject to the discretion of the Board of Directors and will depend on various factors, including our net income, financial condition, cash requirements, future prospects, and other relevant factors. We expect to continue the practice of paying regular cash dividends.
Sources of Credit
We maintain two commercial paper programs under which we are authorized to borrow up to $7.0 billion. Approximately $645 million was outstanding under these programs as of June 30, 2004, with an average interest rate of 1.03%. The entire balance outstanding has been classified as a current liability in our
balancesheet. In addition, we maintain an extendible commercial notes program under which we are authorized to borrow up to $500 million. No amounts were outstanding under this program at June 30, 2004.
We maintain two credit agreements with a consortium of banks. These agreements provide revolving credit facilities of $1.0 billion each, with one expiring on April 21, 2005 and the other on April 24, 2008. Interest on any amounts we borrow under these facilities would be charged at 90-day LIBOR plus 15 basis points. There were no borrowings under either of these agreements as of June 30, 2004.
We also maintain a $1.0 billion European medium-term note program. Under this program, we may issue notes from time to time, denominated in a variety of currencies. No amounts were outstanding under this program at June 30, 2004.
In August 2003, we filed a $2.0 billion shelf registration statement under which we may issue debt securities in the United States. There was approximately $126 million issued under this shelf registration statement at June 30, 2004, all of which consists of issuances under our UPS Notes program.
Commitments & Contingencies
We have contractual obligations and commitments in the form of operating leases, capital leases, debt obligations, and purchase commitments. We intend to satisfy these obligations through the use of cash flow from operations.
We believe that funds from operations and borrowing programs will provide adequate sources of liquidity and capital resources to meet our expected current and long-term needs for the operation of our business, including anticipated capital expenditures such as commitments for aircraft purchases, through 2009.
On August 9, 1999 the United States Tax Court held that we were liable for tax on income of Overseas Partners Ltd., a Bermuda company that had reinsured EV insurance purchased by our customers beginning in 1984, and that we were liable for additional tax for the 1983 and 1984 tax years. The IRS took similar positions to those advanced in the Tax Court decision for tax years subsequent to 1984 through 1998. On June 20, 2001, the U.S. Court of Appeals for the Eleventh Circuit ruled in our favor and reversed the Tax Court decision. In January 2003, we and the IRS finalized settlement of all outstanding tax issues related to EV package insurance. Under the terms of settlement, we agreed to adjustments that will result in income tax due of approximately $562 million, additions to tax of $60 million and related interest. The amount due to the IRS as a result of the settlement is less than amounts we previously had accrued, and less than amounts we had previously paid to the IRS. As a result, we recorded income, before taxes, of $1.023 billion ($776 million after tax) during the fourth quarter of 2002. In the first quarter of 2004, we received a refund . . .
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