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| UPS > SEC Filings for UPS > Form 10-Q on 3-Aug-2012 | All Recent SEC Filings |
3-Aug-2012
Quarterly Report
Overview
The U.S. economic expansion continued at a moderate pace in the second quarter
of 2012, which provided for growth in the overall U.S. small package delivery
market compared with 2011. Additionally, continued growth in industrial
production and retail sales, particularly online retail sales, have expanded the
small package market in the U.S. These economic trends provided for a solid
increase in our U.S. Domestic Package volume in the second quarter and
year-to-date periods of 2012, and our products most aligned with
business-to-consumer shipments showed the strongest growth. In the second half
of 2012, we expect the U.S. economy to grow at a slower pace, the deceleration
of growth in our premium products and a further deterioration in the commercial
small package marketplace, compared with the first half of the year; however, we
do anticipate continued solid growth in our business-to-consumer product
offerings.
Outside of the U.S., economic growth has slowed considerably due to volatility
in world markets and fiscal austerity measures, particularly in Europe. This
slower economic growth has created an environment in which customers are more
likely to trade-down from premium express products to standard delivery
products. Additionally, the uneven nature of economic growth worldwide has led
to shifting trade patterns whereby transcontinental trade is being pressured,
but intra-regional trade is continuing to grow. These circumstances have led us
to adjust our air capacity and cost structure in our transportation network to
the prevailing volume mix levels; for example, in Asia, we are planning for a
10% capacity reduction in our air network for the third quarter of 2012. Our
broad portfolio of product offerings and the flexibilities inherent in our
transportation network have helped us adapt to these changing trends, which has
led to a continued overall solid performance in our International Package
business.
While the worldwide economic environment has been challenging in 2012, we have
continued to undertake initiatives to improve yield management, increase
operational efficiency and contain costs across all segments. This has directly
helped to improve the operating margin and profit in our U.S. Domestic Package
and Supply Chain & Freight segments. Continued deployment of technology
improvements should lead to further gains in our operational efficiency,
flexibility, and reliability, thus restraining cost increases and improving
margins. In our International Package segment, we have adjusted our air network
and utilized newly constructed or expanded operating facilities to improve
time-in-transit for shipments in each region. We have also continued to optimize
our aircraft network, to leverage the new route authority we have gained over
the last several years and to take full advantage of faster growing trade lanes.
Additionally, in the first quarter of 2012, we acquired Kiala S.A., which will
expand our service offerings for business-to-consumer deliveries in Europe.
Our consolidated results are presented in the table below:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
Revenue (in millions) $ 13,349 $ 13,191 1.2 % $ 26,485 $ 25,773 2.8 %
Operating Expenses (in millions) 11,559 11,446 1.0 % 23,126 22,556 2.5 %
Operating Profit (in millions) $ 1,790 $ 1,745 2.6 % $ 3,359 $ 3,217 4.4 %
Operating Margin 13.4 % 13.2 % 12.7 % 12.5 %
Average Daily Package Volume (in
thousands) 15,356 14,946 2.7 % 15,474 14,951 3.5 %
Average Revenue Per Piece $ 11.12 $ 11.21 (0.8 )% $ 10.99 $ 10.99 - %
Net Income (in millions) $ 1,116 $ 1,092 2.2 % $ 2,086 $ 2,007 3.9 %
Basic Earnings Per Share $ 1.16 $ 1.11 4.5 % $ 2.17 $ 2.03 6.9 %
Diluted Earnings Per Share $ 1.15 $ 1.09 5.5 % $ 2.15 $ 2.01 7.0 %
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Items Affecting Comparability
The year-over-year comparisons of our financial results were affected by the
following items (amounts in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Operating Expenses:
Net gain on real estate transactions $ - $ (33 ) $ - $ (33 )
Income Tax Expense:
Income tax expense from the items above - 13 - 13
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Net Gain on Real Estate Transactions
In the second quarter of 2011, we recognized a pre-tax loss from certain real
estate transactions within our U.S. Domestic Package segment of $15 million ($11
million after-tax) and a pre-tax gain from certain real estate transactions
within our Supply Chain & Freight segment of $48 million ($31 million
after-tax).
Results of Operations-Segment Review
The results and discussions that follow are reflective of how our executive
management monitors the performance of our reporting segments. From time to
time, we supplement the reporting of our financial information determined under
generally accepted accounting principles ("GAAP") with certain non-GAAP
financial measures, including operating profit, operating margin, pre-tax
income, effective tax rate, net income and earnings per share adjusted for the
non-comparable items. We believe that these adjusted measures provide meaningful
information to assist investors and analysts in understanding our financial
results and assessing our prospects for future performance. We believe these
adjusted financial measures are important indicators of our results of
operations because they exclude items that may not be indicative of, or are
unrelated to, our core operating results, and provide a better baseline for
analyzing trends in our underlying businesses.
Certain operating expenses are allocated between our reporting segments based on
activity-based costing methods. These activity-based costing methods require us
to make estimates that impact the amount of each expense category that is
attributed to each segment. Changes in these estimates will directly impact the
amount of expense allocated to each segment, and therefore the operating profit
of each reporting segment. There were no significant changes in our expense
allocation methodology during 2012 or 2011.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
U.S. Domestic Package Operations
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
Average Daily Package Volume
(in thousands):
Next Day Air 1,231 1,172 5.0 % 1,222 1,164 5.0 %
Deferred 924 851 8.6 % 954 873 9.3 %
Ground 10,920 10,604 3.0 % 10,981 10,611 3.5 %
Total Avg. Daily Package
Volume 13,075 12,627 3.5 % 13,157 12,648 4.0 %
Average Revenue Per Piece:
Next Day Air $ 20.42 $ 20.82 (1.9 )% $ 20.24 $ 20.52 (1.4 )%
Deferred 13.60 14.03 (3.1 )% 13.30 13.58 (2.1 )%
Ground 8.08 7.97 1.4 % 8.02 7.88 1.8 %
Total Avg. Revenue Per Piece $ 9.63 $ 9.57 0.6 % $ 9.54 $ 9.44 1.1 %
Operating Days in Period 64 64 128 128
Revenue (in millions):
Next Day Air $ 1,609 $ 1,562 3.0 % $ 3,166 $ 3,057 3.6 %
Deferred 804 764 5.2 % 1,624 1,517 7.1 %
Ground 5,645 5,411 4.3 % 11,272 10,706 5.3 %
Total Revenue $ 8,058 $ 7,737 4.1 % $ 16,062 $ 15,280 5.1 %
Operating Expenses (in
millions):
Operating Expenses $ 6,924 $ 6,740 2.7 % $ 13,933 $ 13,403 4.0 %
Gain (Loss) on Real Estate
Transactions - (15 ) - (15 )
Adjusted Operating Expenses $ 6,924 $ 6,725 3.0 % $ 13,933 $ 13,388 4.1 %
Operating Profit (in millions)
and Margin:
Operating Profit $ 1,134 $ 997 13.7 % $ 2,129 $ 1,877 13.4 %
Adjusted Operating Profit $ 1,134 $ 1,012 12.1 % $ 2,129 $ 1,892 12.5 %
Operating Margin 14.1 % 12.9 % 13.3 % 12.3 %
Adjusted Operating Margin 14.1 % 13.1 % 13.3 % 12.4 %
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Revenue
The change in overall revenue was impacted by the following factors for the
second quarter and year-to-date periods of 2012 compared with the corresponding
periods of 2011:
Total
Rates / Fuel Revenue
Volume Product Mix Surcharge Change
Net Revenue Change Drivers:
Second quarter 2012 vs. 2011 3.5 % 0.4 % 0.2 % 4.1 %
Year-to-date 2012 vs. 2011 4.0 % 0.1 % 1.0 % 5.1 %
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Volume
Our overall volume increased in the second quarter of 2012 compared with the
same period in 2011, largely due to continued solid growth in retail e-commerce
and strong customer demand for our lightweight products. Business-to-consumer
shipments, which represent approximately 40% of total U.S. Domestic Package
volume, grew rapidly and drove growth in both air and ground shipments.
Commercial volume declined slightly in the second quarter as the U.S. economy
weakened, after experiencing volume growth in the first quarter of 2012.
Among our air products, Next Day Air package volume increased 5.0% with
particular growth in our Next Day Air Saver product, while volume for our
deferred air products increased 8.6% for the quarter (5.0% and 9.3%,
respectively, year-to-date). This strong growth was driven by
business-to-consumer shipments from e-commerce retailers.
The increase in ground volume was driven by our lightweight service offerings,
including SurePost, which target low-cost, non-urgent residential deliveries.
These lightweight products experienced volume growth of 25%, and accounted for
over half of the total increase in ground shipments in the second quarter.
Growth continues to be driven by business-to-consumer shipping activity from
e-commerce retailers.
Rates and Product Mix
Overall revenue per piece increased in the second quarter and year-to-date
periods of 2012 due to a combination of base price increases and a shift in
overall product mix from our ground products to our air products. Fuel surcharge
rate changes, which are discussed further below, adversely impacted revenue per
piece growth in the second quarter of 2012 compared with 2011, but positively
impacted the year-to-date comparison. The strong volume growth in Next Day Air
Saver and our lightweight products negatively impacted overall yield growth, as
these relatively lower-yielding products accounted for a greater portion of our
overall volume in the second quarter and year-to-date periods of 2012, compared
with the corresponding periods of 2011.
Revenue per piece for our ground and air products was also positively impacted
by an increase in base rates that took effect on January 2, 2012. We increased
the base rates 6.9% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day Select,
and 5.9% on UPS Ground, while reducing our fuel surcharge indices (discussed
further below). Other pricing changes included an increase in the residential
surcharge, and an increase in the delivery area surcharge on certain residential
and commercial services. These rate changes are customary and occur on an annual
basis.
Fuel Surcharges
UPS applies a fuel surcharge on our domestic air and ground services. The air
fuel surcharge is based on the U.S. Department of Energy's ("DOE") Gulf Coast
spot price for a gallon of kerosene-type jet fuel, while the ground fuel
surcharge is based on the DOE's On-Highway Diesel Fuel price. Based on published
rates, the average fuel surcharge for domestic air and ground products was as
follows:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % Point 2012 2011 % Point
Next Day Air / Deferred 14.3 % 14.7 % (0.4 )% 13.7 % 12.4 % 1.3 %
Ground 8.3 % 8.5 % (0.2 )% 8.2 % 7.2 % 1.0 %
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On January 2, 2012, in connection with our base rate increase, we modified the
fuel surcharge on air and ground services by reducing the index used to
determine the fuel surcharge by 2% and 1%, respectively. Total domestic fuel
surcharge revenue increased by $13 million in the second quarter of 2012
compared with the same period of 2011, primarily due to the increase in volume,
but partially offset by the lower second quarter fuel surcharge rates. On a
year-to-date basis, total domestic fuel surcharge revenue increased $156 million
compared with 2011 due to increased volume and higher year-to-date fuel
surcharge rates. These increased fuel surcharge rates were driven by higher jet
and diesel fuel prices, but partially offset by the reduction in the index on
the air and ground surcharges.
Operating Expenses
Adjusted operating expenses for the segment increased $199 million for the
second quarter of 2012 compared with the same period of 2011 ($545 million
year-to-date). This increase was primarily due to pick-up and delivery costs,
which grew $175 million ($373 million year-to-date), as well as the cost of
operating our domestic integrated air and ground network, which increased $45
million for the second quarter ($183 million year-to-date). The growth in
pick-up and delivery and network costs were due largely to increased volume and
higher employee compensation costs, which were impacted by a union contractual
wage increase (package driver wage rates rose 2.2%), an increase in driver hours
(up 0.8%) and increased employee health care costs.
Cost increases have been mitigated as we adjust our air and ground networks to
better match higher volume levels and utilize technology to increase package
sorting efficiency. Improved delivery densities, particularly for our
residential products, have also contained increases in cost. These network
efficiency improvements allowed us to process increased volume at a faster rate
than the increase in direct labor hours (up 1.2%), aircraft block hours (down
1.2%) and miles driven (up 0.7%) in the second quarter of 2012 compared with the
same period of 2011, resulting in a reduction in the total cost per piece of
0.6% (no change year-to-date).
Operating Profit and Margin
The increase in revenue per piece in excess of the growth in cost per piece
resulted in strong operating leverage, leading to a 100 basis point increase in
the adjusted operating margin during the second quarter of 2012 compared with
the same period of 2011 (90 basis points on a year-to-date basis). Additionally,
because fuel prices decreased rapidly during the second quarter of 2012,
operating profit benefited by approximately $60 million from the two month time
lag between the fuel price changes and when the monthly surcharge rates are
applied to package shipments. The operating margin improvement, combined with
volume growth and the fuel surcharge time lag, resulted in a solid operating
profit increase in the second quarter and year-to-date periods of 2012 compared
with the same periods of 2011.
International Package Operations
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
Average Daily Package Volume (in
thousands):
Domestic 1,358 1,403 (3.2 )% 1,384 1,398 (1.0 )%
Export 923 916 0.8 % 933 905 3.1 %
Total Avg. Daily Package Volume 2,281 2,319 (1.6 )% 2,317 2,303 0.6 %
Average Revenue Per Piece:
Domestic $ 7.08 $ 7.48 (5.3 )% $ 7.08 $ 7.27 (2.6 )%
Export 38.12 39.51 (3.5 )% 37.24 38.39 (3.0 )%
Total Avg. Revenue Per Piece $ 19.64 $ 20.13 (2.4 )% $ 19.23 $ 19.50 (1.4 )%
Operating Days in Period 64 64 128 128
Revenue (in millions):
Domestic $ 615 $ 672 (8.5 )% $ 1,255 $ 1,301 (3.5 )%
Export 2,252 2,316 (2.8 )% 4,447 4,447 - %
Cargo 147 151 (2.6 )% 278 291 (4.5 )%
Total Revenue $ 3,014 $ 3,139 (4.0 )% $ 5,980 $ 6,039 (1.0 )%
Operating Expenses (in millions) $ 2,560 $ 2,634 (2.8 )% $ 5,118 $ 5,081 0.7 %
Operating Profit (in millions) $ 454 $ 505 (10.1 )% $ 862 $ 958 (10.0 )%
Operating Margin 15.1 % 16.1 % 14.4 % 15.9 %
Currency Translation Benefit /
(Cost)-(in millions)*: $ $
Revenue $ (104 ) $ (160 )
Operating Expenses 106 145
Operating Profit $ 2 $ (15 )
___________________
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Revenue
The change in overall revenue was impacted by the following factors for the
second quarter and year-to-date periods of 2012 compared with the corresponding
periods of 2011:
Total
Rates / Fuel Revenue
Volume Product Mix Surcharge Currency Change
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Volume
Export volume increased in the second quarter and year-to-date periods of 2012
compared to the corresponding periods of 2011; however, volume growth has been
significantly impacted by the worldwide economic slowdown. Export volume growth
was driven by intra-regional shipments, particularly intra-Europe and
intra-Asia, with our Transborder Standard product experiencing solid growth.
This growth in intra-regional shipments was largely offset by declines in
transcontinental volume, which was impacted by double-digit declines in exports
from Asia (particularly from China) to the U.S. and Europe. Additionally,
transcontinental volume into Europe declined, largely due to the economic
weakness within the European Union in the second quarter and year-to-date
periods of 2012.
Domestic volume decreased during the second quarter and year-to-date periods of
2012 compared to the same periods in 2011, and was negatively impacted by
economic weakness in southern Europe and revenue management initiatives in
Germany and Turkey. These declines were somewhat offset by domestic volume
growth in the Netherlands, the U.K., Mexico and Poland.
Rates and Product Mix
Total average revenue per piece increased 2.1% for the second quarter of 2012
(2.0% year-to-date) on a currency-adjusted basis. Currency-adjusted export
revenue per piece decreased 0.3% for the second quarter (0.6% year-to-date), as
the shift in product mix from our premium express products to our standard
products more than offset the increase in base rates. Additionally,
currency-adjusted export revenue per piece was adversely impacted by a
shortening of average trade lanes, as we experienced greater volume growth among
our lower-yielding Transborder and Trade Direct products relative to our
higher-yielding transcontinental volume.
Currency-adjusted domestic revenue per piece increased 3.5% for second quarter
(4.0% year-to-date), largely due to base rate increases.
On January 2, 2012, 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), while reducing fuel
surcharge indices. Rate changes for shipments originating outside the U.S. are
made throughout the year and vary by geographic market.
Fuel Surcharges
On January 2, 2012, in connection with our base rate increases, 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 surcharges for
air products originating outside the United States are indexed to the DOE's Gulf
Coast spot price for a gallon of kerosene-type jet fuel, while the fuel
surcharges for ground products originating outside the United States are indexed
to fuel prices in the international region or country where the shipment takes
place. Total international fuel surcharge revenue decreased by $10 million for
the second quarter of 2012 when compared with 2011, primarily due to lower
package volume and reduced fuel surcharge rates caused by declining fuel prices.
On a year-to-date basis, fuel surcharge revenue increased by $50 million in 2012
compared to 2011, due to higher fuel surcharge rates and a year-to-date increase
in international air volume.
Operating Expenses
Overall operating expenses for the segment decreased $74 million for the second
quarter of 2012 compared with the same period in 2011. The largest component of
this decrease relates to the cost of operating our international integrated air
and ground network, which decreased $48 million for the second quarter due
largely to lower fuel costs, a 3.4% reduction in aircraft block hours and the
impact of currency exchange rate changes. Pick-up and delivery costs decreased
$35 million for the second quarter, primarily as a result of lower fuel prices,
decreased package volume and the impact of currency exchange rate movements.
On a year-to-date basis, operating expenses for the segment increased by $37
million in 2012 compared to 2011. This increase was impacted by the February
2012 acquisition of Kiala S.A., which added $26 million to operating expenses
for the segment in 2012. Additionally, our non-operating costs increased $31
million, primarily associated with our investment in enhanced security screening
for our international locations as well as business acquisition activities,
including our proposed acquisition of TNT Express N.V. These increases were
partially offset by a $14 million decrease in pick-up and delivery costs,
largely due to lower non-U.S. domestic volume and the impact of currency
exchange rate movements.
Excluding the impact of currency exchange rate changes, the total cost per piece
for the segment increased 3.0% for the second quarter (3.1% year-to-date).
Operating Profit and Margin
The operating margin declined 100 basis points in the second quarter of 2012
(150 basis points year-to-date) compared with the same period of 2011. This
decline in operating margin was impacted by the volume declines in the key Asia
and U.S.-origin transcontinental trade lanes, as these routes have a larger cost
infrastructure (relative to the remainder of the International Package segment)
to support the air express volume in each region. Operating margin was also
adversely impacted by the product mix change from our premium express products
to our standard products. Additionally, we incurred approximately $15 million in
costs during the second quarter of 2012 related to business acquisition
activities, including our proposed acquisition of TNT Express N.V. These factors
combined to result in a 10% decline in operating profit for the second quarter
and year-to-date periods of 2012 compared with 2011.
Supply Chain & Freight Operations
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2012 2011 % 2012 2011 %
Freight LTL Statistics:
Revenue (in millions) $ 597 $ 592 0.8 % $ 1,155 $ 1,138 1.5 %
. . .
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