UPS 2Q: Revenue down, profit way up

UPS 2Q15UPS reported second-quarter net income up over 170% y-o-y to $1.23 billion, as total revenue declined 1.2% to $14.09 billion. Reported operating income for the quarter was up over 160% to $1.96 billion.

Of course, the huge gains in reported operating income and net income shrink substantially when adjusted for a major one-time charge taken in the second quarter of 2014. But even after adjusting 2Q14 results for this charge, UPS year-over-year growth looks very good, with adjusted net income up 9.9% and adjusted operating profit up 9.2%. Both reported and adjusted financial results are shown in the chart at right.

Regarding the 2Q14 charge: at that time, UPS recorded a $1.066 billion pre-tax charge ($665 million after-tax) related to the transfer of postretirement benefit obligations to multiemployer healthcare plans for certain employees employed under the Teamsters National Master Agreement. The charge was allocated between the U.S. Domestic Package segment ($957 million), the International Package segment ($27 million) and the Supply Chain & Freight segment ($82 million).

That UPS could strongly increase operating and net results while revenue was declining is interesting. It is also illustrative of the fact that declines in yield driven by falling surcharges will not negatively impact the bottom line if costs (in this case fuel costs) are falling as fast or faster. The same is true changes of in currency exchange rates. The fall of other currencies relative to the US dollar will reduce the reported revenue earned in those currencies, but it also reduces costs incurred in those currencies, and bottom-line impact varies accordingly.

Turning from financial to operational results, average daily package volumes were up for all products in both the US Domestic Package and International Package reporting segments, led by a 14.6% increase in Domestic Deferred Air. UPS said it also saw an 8% increase in SurePost shipments.

  • In the US Domestic segment, the company said that total revenue growth was a relatively low 1.8% “due to a slower pace of B2C (business-to-consumer) growth;” and further, that per-package revenue was flat, as changes in fuel surcharges dropped reported yield by almost 3%. But despite the relatively unimpressive performance on the revenue side, adjusted operating profit in the US Domestic segment was up 3.0% in the quarter, “as improved pricing and productivity offset higher benefit costs.”
  • In the International Package segment, the weakening of other currencies against the US dollar led to a 6.4% decline in revenue to $3.05 billion (although, on a currency-adjusted basis, International revenue was up 1.5%). Average Daily Export shipments increased 5.5%, driven by an 8.5% increase in intra-Europe shipments, while International Domestic shipments were up 2.3%. As can be seen in the chart, per-package yield fell dramatically for both the Export and Domestic products, but adjusted operating profit nonetheless rose 17.2% to $552 million, as “network improvements, volume growth, and pricing initiatives all contributed to expanded operating margin and increased profitability.”
  • Revenue in the Supply Chain & Freight segment was down 4.5% to $2.24 billion, due to exchange rate impacts, revenue management initiatives in the Forwarding unit, and lower fuel surcharges at UPS Freight. Forwarding tonnage and revenue both declined in the quarter, “primarily due to revenue management initiatives and the impact of currency fluctuation.” But operating profit in the Forwarding unit rose nonetheless, due to continued implementation of “a disciplined pricing strategy across key trade lanes.” Overall adjusted operating profit for the Supply Chain & Freight segment jumped 17.6% y-o-y to $207 million.

Looking ahead, UPS said that even though the US economy “appears to be growing at a slower pace” it expected full-year earnings per share to be up between 6% and 12% over 2014.

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