10-QPeriod: Q3 FY2008

UNITED PARCEL SERVICE INC Quarterly Report for Q3 Ended Sep 30, 2008

Filed November 7, 2008For Securities:UPS

Summary

United Parcel Service Inc. (UPS) reported its third-quarter and year-to-date results for the period ending September 30, 2008. The company experienced a decline in net income and earnings per share compared to the same periods in the prior year, primarily due to weakened economic conditions impacting its U.S. Domestic and International Package segments. Despite the revenue growth across all segments, operating profit was negatively affected by lower asset utilization and a shift in product mix, although a strong performance in the Supply Chain & Freight segment partially offset these declines. The company also faced increased operating expenses, particularly in fuel and purchased transportation. From a liquidity standpoint, UPS saw a significant increase in net cash provided by operating activities, largely driven by tax benefits related to pension fund withdrawal. The company continued its substantial capital expenditure program, focusing on hub expansions and facility improvements. Furthermore, UPS actively engaged in its share repurchase program and maintained its quarterly dividend payment, signaling a commitment to returning value to shareholders.

Financial Highlights

27 data points
Beta

Revenue

$13.11B

Net Income

$970.00M

7.4% Net Margin

EPS (Diluted)

$0.96

Cash & Equivalents

$1.24B

Free Cash Flow

$1.20B

Financial Statements
Beta
Revenue$13.11B
Operating Expenses$11.48B
Operating Income$1.63B
Interest Expense$104.00M
Net Income$970.00M
EPS (Basic)$0.96
EPS (Diluted)$0.96

Key Highlights

  • 1Consolidated revenue increased by 7.4% to $13.11 billion in Q3 2008 compared to Q3 2007, and by 6.9% to $38.79 billion year-to-date.
  • 2Net income decreased by 9.9% to $970 million in Q3 2008 compared to $1.076 billion in Q3 2007. Diluted EPS fell to $0.96 from $1.02.
  • 3U.S. Domestic Package revenue grew 3.9% in Q3, but average daily package volume declined by 3.4%, indicating economic weakness impacting shipments.
  • 4International Package revenue showed strong growth of 16.6% in Q3, driven by export volume and higher revenue per piece, aided by favorable currency exchange rates.
  • 5Supply Chain & Freight segment operating profit saw a significant increase of 148.1% in Q3, driven by improved results in forwarding and logistics, despite a slowing LTL market.
  • 6Fuel expense increased substantially by 64.5% in Q3 due to higher prices for jet-A fuel and diesel, impacting operating expenses.
  • 7Net cash from operating activities increased significantly to $6.948 billion year-to-date, benefiting from tax refunds related to pension fund withdrawal.

Frequently Asked Questions

The primary drivers for the decline in net income were the weakening U.S. economy, which led to lower package volumes and asset utilization in the U.S. Domestic and International Package segments, and increased operating expenses, particularly higher fuel costs and purchased transportation expenses. A shift in product mix away from premium services also negatively impacted profitability.

UPS significantly increased its net cash provided by operating activities, benefiting from substantial tax refunds related to its withdrawal from the Central States Pension Fund. The company continued its capital expenditure program, investing in facility expansions and new construction, and actively repurchased shares under its authorized program, while also maintaining its regular quarterly dividend payments.

The filing indicates that the company is facing weakness in the U.S. economy, which is unfavorable for the small package market and puts pressure on domestic package volume. High energy costs and weak industrial production and retail sales are also cited as negative factors. The company anticipates continued economic challenges and has announced upcoming rate increases and fuel surcharge adjustments for early 2009, reflecting these pressures.

UPS is involved in several significant lawsuits, including class-action allegations related to wage-and-hour laws (Marlo v. UPS), challenges under the Americans with Disabilities Act (Hohider v. UPS), lawsuits from franchisees of Mail Boxes Etc./The UPS Store, and a multi-district litigation concerning alleged price fixing of fuel surcharge rates in the LTL freight business. The company also faces potential tax assessments from the IRS and challenges to inter-company transfer pricing in Italy. The potential financial impact of these matters is not yet determined.