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| UPS > SEC Filings for UPS > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
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
September 30, Change
2008 2007 $ %
Revenue (in millions):
U.S. Domestic Package:
Next Day Air $ 1,696 $ 1,666 $ 30 1.8 %
Deferred 818 782 36 4.6
Ground 5,327 5,097 230 4.5
Total U.S. Domestic Package 7,841 7,545 296 3.9
International Package:
Domestic 598 535 63 11.8
Export 2,165 1,831 334 18.2
Cargo 186 163 23 14.1
Total International Package 2,949 2,529 420 16.6
Supply Chain & Freight:
Forwarding and Logistics 1,619 1,486 133 9.0
Freight 598 546 52 9.5
Other 106 99 7 7.1
Total Supply Chain & Freight 2,323 2,131 192 9.0
Consolidated $ 13,113 $ 12,205 $ 908 7.4 %
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Average Daily Package Volume (in thousands):
U.S. Domestic Package:
Next Day Air 1,117 1,238 (121 ) (9.8 )%
Deferred 859 874 (15 ) (1.7 )
Ground 10,971 11,291 (320 ) (2.8 )
Total U.S. Domestic Package 12,947 13,403 (456 ) (3.4 )
International Package:
Domestic 1,106 1,102 4 0.4
Export 792 740 52 7.0
Total International Package 1,898 1,842 56 3.0
Consolidated 14,845 15,245 (400 ) (2.6 )%
Operating days in period 64 63
$
Average Revenue Per Piece:
U.S. Domestic Package:
Next Day Air $ 23.72 $ 21.36 $ 2.36 11.0 %
Deferred 14.88 14.20 0.68 4.8
Ground 7.59 7.17 0.42 5.9
Total U.S. Domestic Package 9.46 8.94 0.52 5.8
International Package:
Domestic 8.45 7.71 0.74 9.6
Export 42.71 39.27 3.44 8.8
Total International Package 22.75 20.39 2.36 11.6
Consolidated $ 11.16 $ 10.32 $ 0.84 8.1 %
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nine Months Ended
September 30, Change
2008 2007 $ %
Revenue (in millions):
U.S. Domestic Package:
Next Day Air $ 4,982 $ 5,003 $ (21 ) (0.4 )%
Deferred 2,412 2,376 36 1.5
Ground 15,896 15,297 599 3.9
Total U.S. Domestic Package 23,290 22,676 614 2.7
International Package:
Domestic 1,803 1,563 240 15.4
Export 6,332 5,412 920 17.0
Cargo 521 439 82 18.7
Total International Package 8,656 7,414 1,242 16.8
Supply Chain & Freight:
Forwarding and Logistics 4,817 4,337 480 11.1
Freight 1,707 1,583 124 7.8
Other 319 290 29 10.0
Total Supply Chain & Freight 6,843 6,210 633 10.2
Consolidated $ 38,789 $ 36,300 $ 2,489 6.9 %
#
Average Daily Package Volume (in thousands):
U.S. Domestic Package:
Next Day Air 1,166 1,248 (82 ) (6.6 )%
Deferred 882 903 (21 ) (2.3 )
Ground 11,036 11,156 (120 ) (1.1 )
Total U.S. Domestic Package 13,084 13,307 (223 ) (1.7 )
International Package:
Domestic 1,111 1,097 14 1.3
Export 789 728 61 8.4
Total International Package 1,900 1,825 75 4.1
Consolidated 14,984 15,132 (148 ) (1.0 )%
Operating days in period 192 191
$
Average Revenue Per Piece:
U.S. Domestic Package:
Next Day Air $ 22.25 $ 20.99 $ 1.26 6.0 %
Deferred 14.24 13.78 0.46 3.3
Ground 7.50 7.18 0.32 4.5
Total U.S. Domestic Package 9.27 8.92 0.35 3.9
International Package:
Domestic 8.45 7.46 0.99 13.3
Export 41.80 38.92 2.88 7.4
Total International Package 22.30 20.01 2.29 11.4
Consolidated $ 10.92 $ 10.26 $ 0.66 6.4 %
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The following table sets forth information showing the change in UPS Freight's less-than-truckload revenue, shipments, and weight hauled, both in dollars or amounts and in percentage terms:
Three Months Ended
September 30, Change
2008 2007 $/# %
LTL revenue (in millions) $ 562 $ 521 $ 41 7.8 %
LTL revenue per LTL hundredweight $ 19.06 $ 17.71 $ 1.35 7.6
LTL shipments (in thousands) 2,646 2,713 (67 ) (2.5 )
LTL shipments per day (in thousands) 41.3 43.1 (1.8 ) (4.2 )
LTL gross weight hauled (in millions of pounds) 2,949 2,944 5 0.2
LTL weight per shipment (in pounds) 1,115 1,085 30 2.8
Operating days in period 64 63
Nine Months Ended
September 30, Change
2008 2007 $/# %
LTL revenue (in millions) $ 1,610 $ 1,512 $ 98 6.5 %
LTL revenue per LTL hundredweight $ 18.93 $ 17.14 $ 1.79 10.4
LTL shipments (in thousands) 7,703 7,939 (236 ) (3.0 )
LTL shipments per day (in thousands) 40.1 41.6 (1.5 ) (3.6 )
LTL gross weight hauled (in millions of pounds) 8,508 8,825 (317 ) (3.6 )
LTL weight per shipment (in pounds) 1,105 1,112 (7 ) (0.6 )
Operating days in period 192 191
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Operating Profit and Operating Margin
The following tables set forth information showing the change in operating
profit, both in dollars (in millions) and in percentage terms, as well as the
operating margin for each reporting segment:
Three Months Ended
September 30, Change
2008 2007 $ %
Reporting Segment
U.S. Domestic Package $ 1,117 $ 1,228 $ (111 ) (9.0 )%
International Package 386 428 (42 ) (9.8 )
Supply Chain & Freight 129 52 77 148.1
Consolidated Operating Profit $ 1,632 $ 1,708 $ (76 ) (4.4 )%
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Three Months Ended
September 30,
2008 2007
Reporting Segment
U.S. Domestic Package 14.2 % 16.3 %
International Package 13.1 % 16.9 %
Supply Chain & Freight 5.6 % 2.4 %
Consolidated Operating Margin 12.4 % 14.0 %
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nine Months Ended
September 30, Change
2008 2007 $ %
Reporting Segment
U.S. Domestic Package $ 2,975 $ 3,361 $ (386 ) (11.5 )%
International Package 1,214 1,274 (60 ) (4.7 )
Supply Chain & Freight 390 196 194 99.0
Consolidated Operating Profit $ 4,579 $ 4,831 $ (252 ) (5.2 )%
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Nine Months Ended
September 30,
2008 2007
Reporting Segment
U.S. Domestic Package 12.8 % 14.8 %
International Package 14.0 % 17.2 %
Supply Chain & Freight 5.7 % 3.2 %
Consolidated Operating Margin 11.8 % 13.3 %
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U.S. Domestic Package Operations
U.S. domestic package revenue increased $296 million, or 3.9%, for the quarter ($614 million, or 2.7%, year-to-date), largely due to a 5.8% improvement in revenue per piece, partially offset by a 3.4% decrease in average daily package volume.
Next Day Air volume, deferred air volume and ground volume declined 9.8%, 1.7%, and 2.8%, respectively during the quarter (6.6%, 2.3%, and 1.1% year-to-date, respectively), primarily as a result of weakness in the U.S. economy. Relatively high energy costs combined with weak output within the industrial production and retail sales sectors have not been favorable for the small package market, which places additional pressure on our domestic package volume.
The increase in overall revenue per piece of 5.8% (3.9% year-to-date) resulted primarily from a rate increase that took effect during the first quarter and higher fuel surcharge rates, but was partially offset by an unfavorable shift in product mix. Next Day Air and Deferred revenue per piece increased 11.0% and 4.8%, respectively (6.0% and 3.3% year-to-date, respectively), and were positively impacted by the base rate increase and a higher fuel surcharge rate for air products (discussed further below). This increase was adversely impacted by lower average package weights, a mix shift toward lower yielding products, and hedging losses. Ground revenue per piece increased 5.9% (4.5% year-to-date), mainly due to the rate increase, as well as a higher fuel surcharge rate due to increased diesel fuel prices in 2008 compared with 2007.
On November 9, 2007, we announced a rate increase and a change in the fuel surcharge that took effect on December 31, 2007. We increased the base rates 6.9% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day Select, and 4.9% on UPS Ground. Other pricing changes included a $0.10 increase in the residential surcharge, and an increase of $0.10 in the delivery area surcharge on both residential and commercial services to certain ZIP codes.
We also modified the fuel surcharge on domestic air services by reducing the index used to determine the fuel surcharge by 2%. This fuel surcharge continues to be 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 on domestic
air products was 33.81% in the third quarter of 2008, an increase from the 13.98% in the third quarter of 2007 (25.64% year-to-date 2008 compared with 11.64% in the same period of 2007), due to the significant increase in jet fuel prices in 2008, but partially offset by the 2% reduction in the index. The ground fuel surcharge rate continues to fluctuate based on the U.S. Energy Department's On-Highway Diesel Fuel Price. Based on published rates, the average fuel surcharge on domestic ground products increased to 10.07% in the third quarter of 2008 from 4.58% in the third quarter of 2007 (7.91% year-to-date 2008 compared with 4.08% in the same period of 2007), due to significantly higher diesel fuel prices. Total domestic fuel surcharge revenue, net of the impact of hedging losses, increased by $487 million in the third quarter of 2008 compared with the same period of 2007 ($908 million year-to-date), primarily due to the higher fuel surcharge rates discussed above, but partially offset by the decline in volume for our air and ground products.
U.S. domestic package operating profit decreased $111 million, or 9.0%, in the third quarter of 2008 compared with the same period in 2007 ($386 million, or 11.5%, year-to-date). Operating profit in 2008 was adversely impacted by the weakness in the U.S. economy, lower asset utilization due to the decline in volume, and a shift in product mix away from our premium services, partially offset by the increase in the fuel surcharge relative to the cost of fuel. Because fuel costs decreased rapidly as the quarter progressed, operating profit benefited from the approximate two month time lag between the fuel price changes and when the monthly surcharge rates are applied to package shipments. This is the opposite effect the Company experienced during the second quarter, when fuel costs rose much faster than the fuel surcharge rate.
Operating profit for the first nine months of 2007 was adversely affected by an aircraft impairment and a Special Voluntary Separation Opportunity ("SVSO") charge (discussed further in the "Operating Expenses" section), which reduced domestic operating profit by $159 million and $53 million, respectively. The absence of these charges in 2008 favorably affected the operating profit comparison between periods.
International Package Operations
International Package revenue improved $420 million, or 16.6%, for the quarter ($1.242 billion, or 16.8%, year-to-date), driven by a 7.0% volume increase for our export products and an 11.6% increase in total revenue per piece (8.4% and 11.4% year-to-date, respectively). The growth in revenue per piece was primarily due to rate increases, the impact of currency exchange rates, and increased fuel surcharge rates.
Export volume increased in each region in the world, with intra-regional volume showing the strongest growth, especially in Europe. Asian export volume continues to benefit from our geographic service expansion, as well as economic growth in Asia. Export volume growth was hindered by declines in shipments to the U.S. from each region in the world, due to the slowing U.S. economy. Non-U.S. domestic volume increased 0.4% for the quarter (1.3% year-to-date), and was impacted by volume growth in our domestic businesses in Europe and Canada.
Export revenue per piece increased 8.8% for the quarter (7.4% year-to-date), largely due to base rate increases, higher fuel surcharge rates, and favorable currency exchange rates, but was adversely impacted by relatively higher growth in lower revenue per piece transborder products. Domestic revenue per piece increased 9.6% for the quarter (13.3% year-to-date), and was affected by rate increases, higher fuel surcharge rates, and favorable exchange rates. Total average revenue per piece increased 6.5% on a currency-adjusted basis (4.5% year-to-date), and the overall change in segment revenue was positively affected by $112 million during the quarter ($468 million year-to-date) due to currency fluctuations, net of hedging activity.
On December 31, 2007, we increased the base rates 6.9% for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International
Standard service). Rate changes for international shipments originating outside the United States vary by geographical market and occur throughout the year.
Additionally, we modified the fuel surcharge on certain U.S.-related international air services by reducing the index used to determine the fuel surcharge by 2%. The fuel surcharge for products originating outside the United States continues to be indexed to fuel prices in our different international regions, depending upon where the shipment takes place. Total international fuel surcharge revenue increased by $241 million in the third quarter ($525 million year-to-date), due to higher fuel surcharge rates caused by increased fuel prices as well as an increase in international air volume.
International Package operating profit decreased $42 million, or 9.8%, in the third quarter of 2008 compared with the same period of 2007 ($60 million, or 4.7%, year-to-date). The decline in operating profit was affected by reduced asset utilization resulting from changes in economic conditions and trade flows, such as the reduced import volume into the United States. Operating profit was also negatively affected by a shift in product mix away from our premium services, as well as expenses associated with integration activities in our delivery network.
Operating profit for the first nine months of 2007 was adversely affected by the aircraft impairment and SVSO charges ($62 million of the aircraft impairment charge and $7 million of the SVSO charge impacted the International Package segment). The absence of these charges in 2008 favorably affected the operating profit comparison between periods. The change in operating profit was also positively affected by $37 million during the quarter ($142 million year-to-date) due to favorable currency exchange rates, net of hedging activity.
Supply Chain & Freight Operations
Supply Chain & Freight revenue increased $192 million, or 9.0%, for the quarter ($633 million, or 10.2%, year-to-date). Forwarding and logistics revenue increased $133 million, or 9.0%, for the quarter ($480 million, or 11.1%, year-to-date), primarily due to growth in international air freight, North American air freight, distribution services and mail services. Revenue growth in this business was affected by fuel and security surcharges, expanded air freight service offerings, overall market growth and improved customer retention rates. Growth was negatively impacted by weakness in the ocean freight business. The overall change in forwarding and logistics revenue was positively affected by $42 million during the quarter ($224 million year-to-date) due to favorable currency exchange rates.
UPS Freight increased revenue $52 million, or 9.5%, for the quarter ($124 million, or 7.8%, year-to-date), as a result of improved yields and higher fuel surcharge rates, but partially offset by a decline in average daily LTL shipments. Average LTL shipments per day decreased 4.2% during the quarter (3.6% year-to-date), reflecting the weak LTL market in the United States in 2008 as compared with 2007. However, LTL revenue per hundredweight increased 7.6% for the quarter (10.4% year-to-date), due to an increase in base rates in 2008 and an increase in fuel surcharge revenue as a result of higher diesel prices.
In January 2008, UPS Freight announced a general rate increase averaging 5.4% covering non-contractual shipments in the United States and Canada. The increase became effective on February 4, 2008, and applies to minimum charge, LTL and TL rates.
The other businesses within Supply Chain & Freight, which include our retail franchising business and our financial business, increased revenue by 7.1% during the quarter (10.0% year-to-date). This revenue growth was
impacted by increased revenue from our contract to provide domestic air transportation services for the U.S. Postal Service.
Operating profit for the Supply Chain & Freight segment increased by $77 million, or 148.1%, for the quarter ($194 million, or 99.0%, year-to-date), primarily due to improved results in the forwarding and logistics business. The improved operating results in this business primarily resulted from revenue management initiatives and a focus on asset utilization. The change in operating profit was also positively affected by $1 million in the quarter ($13 million year-to-date) due to favorable currency exchange rates. Operating profit was lower at UPS Freight during the quarter and year-to-date periods, largely as a result of the slowing LTL market in the United States.
Operating profit for this segment was reduced by $46 million in the third quarter of 2007 as a result of a charge for restructuring and disposing of certain non-core business units in France. The absence of this charge in 2008 favorably affected the operating profit comparison between periods. This charge largely consisted of employee severance-related costs, as well as smaller amounts recognized for asset impairments and the cancellation of operating leases (see Note 16 to the unaudited consolidated financial statements). The operating results of these business units were not material to the Supply Chain & Freight segment.
Operating profit for this segment was negatively impacted in the first nine months of 2007 by $8 million due to the SVSO charge, as discussed further in the "Operating Expenses" section below. The absence of this charge in 2008 favorably affected the operating profit comparison between periods.
Operating Expenses
Consolidated operating expenses increased by $984 million, or 9.4%, for the quarter ($2.741 billion, or 8.7%, year-to-date), of which approximately $116 million ($537 million year-to-date) was due to currency fluctuations in our International Package and Supply Chain & Freight segments.
Compensation and benefits expense increased by $172 million, or 2.8%, for the quarter ($526 million, or 2.8%, year-to-date), and was impacted by several items. A large component of this increase was related to employee payroll costs due to contractual wage increases for our union employees and normal merit increases for our non-union employees. Benefits expense increased largely due to higher employee health and welfare program costs, which is impacted by medical cost inflation, and increased vacation and holiday pay expense, largely for our union workforce. These increases were partially offset by a reduction in pension expense.
The total expense for our employee pension programs declined in the third quarter and on a year-to-date basis, and was affected by the 2007 withdrawal from the Central States Pension Fund. Partially offsetting this was higher expense for UPS-sponsored pension plans (See Note 6 to the unaudited consolidated financial statements), which was impacted by expense recognition for the new UPS-IBT pension plan.
In December 2006, we offered the SVSO to approximately 640 employees who work in non-operating functions. This program was established to improve the efficiency of non-operating processes by eliminating duplication and sharing expertise across the company. The SVSO ended in February 2007, and 195, or 30% of eligible employees, accepted the offer. As a result, we recorded a charge to expense of approximately $68 million in the first quarter of 2007, to reflect the cash payout and the acceleration of stock compensation and certain retiree healthcare benefits under the SVSO program. The absence of this charge in 2008 favorably affected the compensation and benefits expense comparison between periods.
The 1.0% quarterly increase in repairs and maintenance was largely due to increased aircraft maintenance, while the 0.3% year-to-date decrease was largely due to reduced vehicle maintenance expense. The 4.8% quarterly increase (4.5% year-to-date) in depreciation and amortization was influenced by several . . .
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