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UPS > SEC Filings for UPS > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for UNITED PARCEL SERVICE INC

Form 10-Q for UNITED PARCEL SERVICE INC


5-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview
The U.S. economic expansion has continued at a slow pace through the third quarter of 2013. Continued growth in retail sales (particularly among e-commerce retailers) has provided for expansion in the overall U.S. small package delivery market; however, slowing export growth and industrial production, and a lack of significant inventory replenishment, have negatively impacted the growth in commercial shipments. Given these trends, our products most aligned with business-to-consumer shipments have experienced the strongest growth, while growth in our business-to-business volume has remained sluggish. Outside of the U.S., economic growth has remained slow largely due to 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 in both Europe and Asia. Additionally, the uneven nature of economic growth worldwide, combined with the trend towards more international trade being conducted regionally, has led to shifting trade patterns and resulted in overcapacity in certain trade lanes. These circumstances have led us to adjust our air capacity and cost structure in our transportation network to match the prevailing volume mix levels. Our broad portfolio of product offerings and the flexibilities inherent in our transportation network have helped us adapt to these changing trends. While the worldwide economic environment has remained challenging in 2013, we have continued to undertake initiatives to improve yield management, increase operational efficiency and contain costs across all 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 transportation network and utilized newly expanded operating facilities to improve time-in-transit for shipments in each region. We have also continued to leverage the new air route authority we have gained over the last several years and to take full advantage of faster growing trade lanes. Our consolidated results are presented in the table below:

                                    Three Months Ended                     Nine Months Ended
                                      September 30,          Change          September 30,         Change
                                    2013          2012          %          2013         2012          %
Revenue (in millions)            $  13,521     $ 13,071        3.4  %   $ 40,462     $ 39,556        2.3  %
Operating Expenses (in millions)    11,717       12,305       (4.8 )%     35,336       35,431       (0.3 )%
Operating Profit (in millions)   $   1,804     $    766      135.5  %   $  5,126     $  4,125       24.3  %
Operating Margin                      13.3 %        5.9 %                   12.7 %       10.4 %
Average Daily Package Volume (in
thousands)                          15,980       15,521        3.0  %     15,974       15,490        3.1  %
Average Revenue Per Piece        $   10.87     $  10.90       (0.3 )%   $  10.94     $  10.96       (0.2 )%
Net Income (in millions)         $   1,097     $    469      133.9  %   $  3,205     $  2,555       25.4  %
Basic Earnings Per Share         $    1.17     $   0.49      138.8  %   $   3.40     $   2.66       27.8  %
Diluted Earnings Per Share       $    1.16     $   0.48      141.7  %   $   3.37     $   2.63       28.1  %

Items Affecting Comparability
The year-over-year comparisons of our financial results were affected by the
following items (amounts in millions):

                                                      Three Months Ended             Nine Months Ended
                                                         September 30,                 September 30,
                                                      2013           2012           2013           2012
Operating Expenses:
TNT Termination Fee and Related Expenses          $       -       $       -     $     284       $       -
Gain Upon Liquidation of Foreign Subsidiary               -               -          (245 )             -
Multiemployer Pension Plan Withdrawal Charge              -             896             -             896
Income Tax Expense:
Income Tax Expense (Benefit) from the Items Above         -            (337 )         (75 )          (337 )


Table of Contents
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

These items have been excluded from comparisons of "adjusted" operating expenses, operating profit and operating margin in the discussion that follows. TNT Termination Fee and Related Expenses On January 30, 2013, the European Commission issued a formal decision prohibiting our proposed acquisition of TNT Express N.V. ("TNT Express"). As a result of the prohibition by the European Commission, the condition of our offer requiring European Union competition clearance was not fulfilled, and our proposed acquisition of TNT Express could not be completed. Given this outcome, UPS and TNT Express entered a separate agreement to terminate the merger protocol, and we withdrew our formal offer for TNT Express. We paid a termination fee to TNT Express of 200 million ($268 million) under this agreement, and also incurred transaction-related expenses of $16 million during the first quarter of 2013. The combination of these items resulted in a pre-tax charge of $284 million ($177 million after-tax), which impacted our International Package segment.
Gain upon the Liquidation of a Foreign Subsidiary Subsequent to the termination of the merger protocol, we liquidated a foreign subsidiary that would have been used to acquire the outstanding shares of TNT Express in connection with the proposed acquisition. Upon the liquidation of this subsidiary in the first quarter of 2013, we realized a pre-tax foreign currency gain of $245 million ($213 million after-tax), which impacted our International Package segment.
Multiemployer Pension Plan Withdrawal Charge In the third quarter of 2012, we recognized an $896 million pre-tax charge ($559 million after-tax) for the establishment of a withdrawal liability related to our withdrawal from the New England Teamsters and Trucking Industry Pension Fund ("New England Pension Fund"), a multiemployer pension plan. This charge is recorded in compensation and benefits expense in our statements of consolidated income, and impacted our U.S. Domestic Package segment.

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 discussed above. 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 2013 or 2012.


Table of Contents
                  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                     Nine Months Ended
                                      September 30,          Change         September 30,         Change
                                    2013          2012         %          2013         2012         %
Average Daily Package Volume
(in thousands):
Next Day Air                        1,222         1,264      (3.3 )%      1,223        1,236      (1.1 )%
Deferred                              952           931       2.3  %        970          947       2.4  %
Ground                             11,340        11,010       3.0  %     11,362       10,990       3.4  %
Total Avg. Daily Package Volume    13,514        13,205       2.3  %     13,555       13,173       2.9  %
Average Revenue Per Piece:
Next Day Air                    $   20.39      $  19.80       3.0  %   $  20.35     $  20.09       1.3  %
Deferred                            12.97         13.23      (2.0 )%      12.95        13.27      (2.4 )%
Ground                               8.09          7.94       1.9  %       8.12         7.99       1.6  %
Total Avg. Revenue Per Piece    $    9.54      $   9.45       1.0  %   $   9.57     $   9.51       0.6  %
Operating Days in Period               64            63                     191          191
Revenue (in millions):
Next Day Air                    $   1,595      $  1,577       1.1  %   $  4,754     $  4,743       0.2  %
Deferred                              790           776       1.8  %      2,400        2,400         -  %
Ground                              5,869         5,508       6.6  %     17,612       16,780       5.0  %
Total Revenue                   $   8,254      $  7,861       5.0  %   $ 24,766     $ 23,923       3.5  %
Operating Expenses (in
millions):
Operating Expenses              $   7,068      $  7,732      (8.6 )%   $ 21,363     $ 21,665      (1.4 )%
Multiemployer Pension Plan
Withdrawal Charge                       -          (896 )                     -         (896 )
Adjusted Operating Expenses     $   7,068      $  6,836       3.4  %   $ 21,363     $ 20,769       2.9  %
Operating Profit (in millions)
and Margin:
Operating Profit                $   1,186      $    129       N/A      $  3,403     $  2,258      50.7  %
Adjusted Operating Profit       $   1,186      $  1,025      15.7  %   $  3,403     $  3,154       7.9  %
Operating Margin                     14.4 %         1.6 %                  13.7 %        9.4 %
Adjusted Operating Margin            14.4 %        13.0 %                  13.7 %       13.2 %

Revenue
The change in overall revenue was impacted by the following factors for the
third quarter and year-to-date periods of 2013 compared with the corresponding
periods of 2012:
                                                                    Total
                                         Rates /         Fuel      Revenue
                            Volume     Product Mix    Surcharge     Change
Net Revenue Change Drivers:
Third quarter 2013 vs. 2012   4.0 %         1.2 %       (0.2 )%       5.0 %
Year-to-date 2013 vs. 2012    2.9 %         1.0 %       (0.4 )%       3.5 %

Volume
Our overall volume increased in the third quarter and year-to-date periods of 2013 compared with 2012, largely due to continued solid growth in e-commerce and overall retail sales; however, the increase in volume was hindered by slow overall U.S. economic and industrial production growth. Business-to-consumer shipments, which represent over 40% of total U.S. Domestic Package volume, grew approximately 5% for the quarter and drove increases in both air and ground shipments. Business-to-business volume increased slightly in the third quarter of 2013, largely due to increased shipping activity by the retail industry; however, business-to-business volume was negatively impacted by slowing industrial production.


Table of Contents
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Among our air products, volume declined slightly in the third quarter of 2013 compared with 2012, as growth in our deferred products was more than offset by a decline in our Next Day Air services. Solid air volume growth continued for those products most aligned with business-to-consumer shipping, including our residential Second Day Air package and residential Next Day Air Saver products. Next Day Air letter volume decreased over 10%, and was negatively impacted by competitive losses and slowing growth in the financial services industry. Our business-to-business air volume continued to be impacted by sluggish economic conditions in the U.S., low levels of inventory replenishment among our customers and changes in our customers' supply chain networks. The combination of these factors influence their sensitivity towards the price and speed of shipments, and therefore the use of our premium air services. The increase in ground volume in the third quarter of 2013 was primarily attributed to our traditional and lightweight residential service offerings. Demand for these residential products continues to be driven by business-to-consumer shipping activity from e-commerce retailers and other large customers. Business-to-business ground volume also showed a small increase, and was positively impacted by the overall expansion of the U.S. retail sector; however, continued weakness in industrial production hindered growth. The increased use of omni-channel retailing (including ship-from-store and ship-to-store models) by customers is also positively impacting volume growth for both our residential and commercial ground products. Rates and Product Mix
Overall revenue per piece increased 1.0% for the third quarter of 2013 compared with the same period of 2012 (0.6% year-to-date), and was impacted by changes in base rates, customer and product mix, and fuel surcharge rates.
Revenue per piece for our ground and air products was positively impacted by an increase in base rates that took effect on December 31, 2012. We increased the base rates 6.5% 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. 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.
In the third quarter of 2013, revenue per piece increased for Next Day Air, and was positively impacted by the base rate increase and the loss of some lower-yielding letter volume. Revenue per piece for our deferred products declined, as the impact of the base rate increase was more than offset by declines in fuel surcharge rates and changes in customer and product mix. Revenue per piece for our air products was adversely impacted by the relatively stronger growth in our lower-yielding Next Day Air Saver and deferred products, compared with our premium Next Day Air services, as well as the faster growth in lighter-weight business-to-consumer shipments. Additionally, revenue per piece was negatively affected by the faster volume growth among our larger customers, which typically have a lower average yield than our smaller and middle-market customers.
Ground revenue per piece increased for the third quarter of 2013, compared with the corresponding period of 2012, primarily due to the base rate increase; however, this was partially offset by customer and product mix changes, as a greater portion of our overall volume in 2013, relative to 2012, came from lighter-weight shipments and larger customers. Fuel surcharge rate changes adversely impacted ground revenue per piece growth in the third quarter of 2013 compared with 2012.
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 were as follows:

                          Three Months Ended                    Nine Months Ended
                             September 30,         Change         September 30,         Change
                           2013         2012      % Point       2013         2012      % Point
Next Day Air / Deferred    10.0 %        11.1 %    (1.1 )%      10.7 %        12.8 %    (2.1 )%
Ground                      7.0 %         7.3 %    (0.3 )%       7.3 %         7.9 %    (0.6 )%


Table of Contents
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

On December 31, 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 decreased by $15 million in the third quarter of 2013 compared with the same period of 2012 ($103 million year-to-date) primarily due to the lower fuel surcharge rates; however, this was partially offset by the increase in package volume for the quarter and year-to-date periods. These decreased fuel surcharge rates were due to lower jet and diesel fuel prices, as well as the reduction in the index on the air and ground surcharges made in conjunction with our base rate increase.
Operating Expenses
Adjusted operating expenses for the segment increased $232 million for the third quarter of 2013 compared with the same period of 2012 ($594 million year-to-date). This increase was primarily due to pick-up and delivery costs, which grew $153 million, as well as the cost of operating our domestic integrated air and ground network, which increased $60 million for the third quarter ($422 million and $148 million on a year-to-date basis, respectively). The growth in pick-up and delivery and network costs was largely due 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 average daily driver hours (up 1.7%) and an increase in employee pension and healthcare costs. Partially offsetting these cost increases was a reduction in worker's compensation expense, due to actuarial adjustments that were largely attributable to operational safety and claims management initiatives.
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 and delivery efficiency. Improved pick-up and delivery densities, particularly for our residential products, have also contained increases in cost. These network efficiency improvements allowed us to process increased volume (up 2.3%) at a faster rate than the increase in average daily union labor hours (up 1.8%), aircraft block hours (down 3.6%) and miles driven (up 2.0%) in the third quarter of 2013 compared with the same period of 2012. The total adjusted cost per piece decreased 0.6% for the third quarter of 2013 (flat year-to-date).
Operating Profit and Margin
Adjusted operating profit increased $161 million for the third quarter of 2013 compared with 2012 ($249 million year-to-date), as the volume growth and productivity improvements discussed previously more than offset the pressure on revenue per piece and the adverse impact of fuel. Overall volume growth allowed us to better leverage our transportation network, resulting in greater productivity and better pick-up and delivery density, which drove the 140 basis point increase in our adjusted operating margin (50 basis points year-to-date). Operating profit and margin was also favorably impacted by having one additional operating day in the third quarter of 2013, which is estimated to add approximately $50-$60 million in operating profit. However, these factors were partially offset by changes in customer and product mix, which combined to pressure our revenue per piece. Additionally, the net impact of fuel adversely affected operating profit by approximately $20 million in the third quarter of 2013 compared with 2012 ($100 million year-to-date), as fuel surcharge revenue decreased at a faster rate than fuel expense.


Table of Contents
                  UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


International Package Operations
                                   Three Months Ended                      Nine Months Ended
                                      September 30,          Change          September 30,          Change
                                    2013          2012          %          2013          2012          %
Average Daily Package Volume
(in thousands):
Domestic                            1,474         1,386        6.3  %       1,439        1,385        3.9  %
Export                                992           930        6.7  %         980          932        5.2  %
Total Avg. Daily Package Volume     2,466         2,316        6.5  %       2,419        2,317        4.4  %
Average Revenue Per Piece:
Domestic                        $    6.92      $   6.87        0.7  %   $    7.05     $   7.01        0.6  %
Export                              34.87         37.46       (6.9 )%       35.60        37.31       (4.6 )%
Total Avg. Revenue Per Piece    $   18.17      $  19.16       (5.2 )%   $   18.62     $  19.20       (3.0 )%
Operating Days in Period               64            63                       191          191
Revenue (in millions):
Domestic                        $     653      $    600        8.8  %   $   1,939     $  1,855        4.5  %
Export                              2,214         2,195        0.9  %       6,664        6,642        0.3  %
Cargo                                 150           148        1.4  %         454          426        6.6  %
Total Revenue                   $   3,017      $  2,943        2.5  %   $   9,057     $  8,923        1.5  %
Operating Expenses (in
millions):
Operating Expenses              $   2,600      $  2,494        4.3  %   $   7,837     $  7,612        3.0  %
TNT Termination Fee and Related
Expenses                                -             -                      (284 )          -
Gain Upon Liquidation of
Foreign Subsidiary                      -             -                       245            -
Adjusted Operating Expenses     $   2,600      $  2,494        4.3  %   $   7,798     $  7,612        2.4  %
Operating Profit (in millions) and Operating
Margin:
Operating Profit                $     417      $    449       (7.1 )%   $   1,220     $  1,311       (6.9 )%
Adjusted Operating Profit       $     417      $    449       (7.1 )%   $   1,259     $  1,311       (4.0 )%
Operating Margin                     13.8 %        15.3 %                    13.5 %       14.7 %
Adjusted Operating Margin            13.8 %        15.3 %                    13.9 %       14.7 %
Currency Translation Benefit / (Cost)-(in
millions)*:                                                     $                                      $
Revenue                                                     $  (24 )                               $  (43 )
Operating Expenses                                             (19 )                                  (24 )
Operating Profit                                            $  (43 )                               $  (67 )


___________________


* Net of currency hedging; amount represents the change compared to the prior year.


Table of Contents
                  UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


Revenue
The change in overall revenue was impacted by the following factors for the
third quarter and year-to-date periods of 2013 compared with the corresponding
periods of 2012:
                                                                                Total
                                         Rates /         Fuel                  Revenue
                            Volume     Product Mix    Surcharge    Currency     Change
Net Revenue Change Drivers:
Third quarter 2013 vs. 2012   8.2 %       (4.1 )%       (0.8 )%      (0.8 )%      2.5 %
Year-to-date 2013 vs. 2012    4.4 %       (1.3 )%       (1.1 )%      (0.5 )%      1.5 %

Volume
Our overall average daily volume increased in the third quarter and year-to-date periods of 2013 compared with the corresponding periods of 2012, largely due to growth in key markets in Europe, as well as Canada and Mexico. Export volume increased in the third quarter and year-to-date periods of 2013. Volume continued to shift towards our standard products, such as Transborder Standard and Worldwide Expedited, as compared with our premium express products, such as Worldwide Express. Our international customers continue to be impacted by economic pressures and changes in their supply chain networks, and the combination of these factors influence their sensitivity towards the price and speed of shipments. Export volume growth in the third quarter was driven by Europe (largely in the intra-European trade lanes) and the Americas (particularly in the Canada-to-U.S. and Mexico-to-U.S. trade lanes). Asian export volume growth was flat with the prior year and was impacted by slowing economic growth, fewer technology product launches from our customers, and a small number of competitive losses.
Domestic volume increased in the third quarter and year-to-date periods of 2013 compared to 2012. Results were driven by solid volume growth in several key markets, including Italy, Canada, Poland and Turkey. Rates and Product Mix
Total average revenue per piece decreased 4.3% for the third quarter of 2013 on a currency-adjusted basis (2.5% year-to-date), and was impacted by changes in base rates, customer and product mix, and fuel surcharge rates. On December 31, 2012, we increased the base rates 6.5% 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. Currency-adjusted export revenue per piece decreased 5.4% for the third quarter (3.8% 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. Currency-adjusted export revenue per piece was also negatively affected by the . . .

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