10-QPeriod: Q2 FY2007

UNITED PARCEL SERVICE INC Quarterly Report for Q2 Ended Jun 30, 2007

Filed August 8, 2007For Securities:UPS

Summary

United Parcel Service (UPS) reported solid revenue growth for the second quarter and first half of 2007, driven primarily by its International Package and Supply Chain & Freight segments. While U.S. Domestic Package revenue saw a modest increase, it faced headwinds from a slowing economy, impacting volume. The company also incurred significant charges, including an aircraft impairment charge of $221 million and a special voluntary separation opportunity (SVSO) charge of $68 million, which affected year-to-date profitability. Despite these charges and increased operating expenses related to compensation and benefits, UPS demonstrated an increase in net income and diluted earnings per share for the quarter, signaling operational resilience. The company continues to invest in strategic initiatives, such as expanding its Shanghai hub, and is actively managing its fleet and debt. Investors should note the ongoing legal proceedings, particularly wage-and-hour claims, though the company believes these will not materially impact its financial condition.

Key Highlights

  • 1Consolidated revenue increased by 3.9% to $12.19 billion for the quarter and 3.6% to $24.10 billion for the first six months of 2007.
  • 2International Package segment revenue grew strongly by 12.0% for the quarter, driven by a 10.4% increase in export volume, particularly in Asia.
  • 3A significant aircraft impairment and obsolescence charge of $221 million was recognized in Q1 2007 due to accelerated retirement of Boeing 727 and 747 aircraft.
  • 4A Special Voluntary Separation Opportunity (SVSO) charge of $68 million was recorded in Q1 2007, impacting operating expenses.
  • 5Net income for the second quarter rose 4.1% to $1.104 billion, with diluted EPS increasing to $1.04 from $0.97 in the prior year's quarter.
  • 6Net cash from operating activities decreased to $3.596 billion for the first six months of 2007 from $3.964 billion in 2006, partly due to a $87 million settlement for the Cornn v. UPS lawsuit.
  • 7The company repurchased $1.506 billion of its common stock in the first six months of 2007 and increased its quarterly dividend to $0.42 per share.

Frequently Asked Questions

Revenue growth was primarily driven by the International Package segment, which saw a 12.0% increase due to strong export volume, particularly from Asia and Europe. The Supply Chain & Freight segment also contributed with a 3.4% revenue increase, bolstered by UPS Freight's performance and logistics services.

Yes, UPS recorded an aircraft impairment and obsolescence charge of $221 million in the first quarter of 2007 related to accelerated retirement of certain aircraft. Additionally, a Special Voluntary Separation Opportunity (SVSO) charge of $68 million was incurred in the first quarter of 2007 for efficiency improvements.

The U.S. Domestic Package segment experienced a modest 1.6% revenue increase for the quarter. This was driven by a 1.7% improvement in revenue per piece, largely due to rate increases, but was offset by a slight decrease in average daily package volume and lower fuel surcharge revenue, influenced by a slowing U.S. economy.

UPS is involved in several class-action lawsuits, primarily concerning wage-and-hour laws. While the company denies liability and intends to defend itself vigorously, it has settled one significant case (Cornn v. UPS) for $87 million. For other ongoing cases, UPS has not yet determined the amount of potential liability but believes that the eventual resolution of these matters will not have a material adverse effect on its financial condition, results of operations, or liquidity.