UPS Swings to Loss on Mark-to-Market Charges

Revenue grew 5.5% to $16.93 billion in Q4 FY16 from $16.05 billion in the year ago same period

United Parcel Service Inc. (NYSE: UPS), the world’s largest package delivery company, announced its Q4 FY16 and full-year FY16 financial results on January 31st, 2017.

The Atlanta, Georgia-based company provides transportation, logistics, and financial services in the US and internationally. It operates in three segments: US Domestic Package, International Package, and Supply Chain & Freight. The US Domestic Package segment offers time-definite delivery of letters, documents, small packages, and palletized freight through air and ground services. The International Package segment provides time-definite international shipping services in Europe, the Asia/Pacific, Canada and Latin America, India, Middle East, and Africa. It offers time-definite express options, including Express Plus, Express, and Express Saver.

The Supply Chain & Freight segment offers international air and ocean freight forwarding, customs brokerage, truckload freight brokerage, and mail and consulting services in approximately 220 countries and territories; and less-than-truckload and truckload services to customers in North America. UPS operates a fleet of approximately 110,000 package cars, vans, tractors, and motorcycles; and owns 33,000 containers used to transport cargo in its aircraft. Read more about UPS’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, United Parcel Service’s revenue grew 5.5% to $16.93 billion from $16.05 billion in the year ago comparable period. Growth was mainly driven by higher volumes during the peak holiday season and e-commerce. UPS is banking on online retail as its growth engine for the future. During the reporting quarter, UPS delivered 1.4 billion packages, up 7.1% over last year.

During Q4 FY16, UPS reported an operating loss of $428 million versus an operating profit of $2.05 billion in Q4 FY15. As a result, UPS swung to losses of $239 million, or $(0.27) per diluted share, versus profit of $1.33 billion, or $1.48 per diluted share, in the year ago same period.

For the full-year FY16, United Parcel Service’s revenue grew 4.4% to $61 billion from $58.36 billion in the prior year. Operating profit plunged to $5.46 billion from $7.66 billion in the prior year. As a result, net income fell to $3.43 billion, or $3.87 per diluted share, from $4.84 billion, or $5.35 per diluted share, in Q4 FY15.

Full-year FY16 and Q4 FY16 results include a non-cash, after-tax, mark-to-market pension charge of $1.90 per diluted share. In the prior-year same period, the Company reported non-cash, after-tax charges of $0.09 per diluted share related to pension mark-to-market charges.

For FY16, UPS generated $6.5 billion in cash from operations. The Company made capital expenditures of nearly $3 billion during the year.

Segmental highlights

US Domestic Package: This segment’s Q4 FY16 revenue increased 6.3% Y-o-Y to $10.91 billion. Average daily package volume increased 5% to 19.6 million. Strong business-to-consumer (B2C) growth trends continued this quarter, while business-to-business (B2B) growth was positive primarily due to online retail returns.

During the reporting quarter, UPS experienced a significant shift in mix toward lower-revenue products. This, combined with the cost of facility investments, weighed on operating profit. During the peak delivery season, both UPS and its rival FedEx Corporation (NYSE: FDX) have taken steps such as wide-scale adoption of dim-weight pricing (packages priced by dimension as well as weight) and lowering the length threshold at which additional handling surcharges come into play. Despite these measures, UPS reported an operating loss of $570 million during Q4 FY16. Benefits from ORION and automation initiatives offset most of the impact from the faster pace of residential and SurePost growth.

UPS and FedEx are facing pressure on operating margins owing to the burgeoning ecommerce demand during peak seasons, which has called for increases in capacity and manpower. Both companies are responding to this by increasing rates by the end of 2016, instead of chasing volume growth over the few months. Both FedEx and UPS also face competition from Inc. (NASDAQ: AMZN), which is leasing 40 planes to carry goods and buying branded truck trailers to ramp up its delivery capacity during the peak holiday season.

International Package: This segment’s Q4 FY16 revenue grew 5% Y-o-Y to $3.33 billion, driven by an 8.4% jump in daily export shipments. Volume growth in all products, base-rate increases, and network efficiency gains contributed to the improved revenues. Currency-neutral revenue increased 6.2% over the prior year. However, operating profit declined to $281 million from $580 million in the year ago corresponding period due to mark-to-market pension charges.

Supply Chain and Freight: This segment’s Q4 FY16 revenue rose 2.6% to $2.68 billion, primarily due to the Coyote Logistics acquisition in 2015. Weak market conditions in the Air Freight Forwarding and LTL (less than truckload) markets weighed on top-line growth. The company reported an operating loss of $139 million due to mark-to-market pension charges.

Other highlights

Dividends and share buyback: UPS paid dividends of $2.8 billion, an increase of 6.8% per share over the prior year. It repurchased 25.5 million shares for approximately $2.7 billion during FY16.

UPS purchases 14 new 747-8f Jumbo Freighters: In early November 2016, UPS announced that it has ordered 14 new Boeing 747-8 cargo jets with a list value of $5.3 billion to meet increased demand for air shipping services. UPS’s long term strategy is to increase customers’ access to global markets and air shipments are a major growth opportunity for the company. The 747-8s will enable UPS to begin a cascade of aircraft route reassignments that will add significant air capacity in the busiest lanes, thereby optimizing global air network capacity well beyond the impact of adding new cargo jets.

The 14 aircraft are to be delivered between 2017 and 2020, with the first 2 aircraft to be delivered by the end of 2017. The value of the contract, which also contains options for 14 additional jets in the future, was not disclosed. The new jumbo freighters will be added to the company’s existing operating fleet of more than 500 aircraft.

The 747-8 freighters primarily will be used on routes with heavy package volumes between the US and Asia, Europe and the Middle East. The greater size of the 747-8 will allow UPS to carry more packages than it currently can with 747-4 jets, which will be redeployed to the US.

Rate hikes: UPS increased its air freight rates within and between the US, Canada, and Puerto Rico, by an average net of 4.9%. It also hiked tariffs by an average net 4.9% effective September 19th, 2016. Effective December 26th, 2016, the published rates for UPS’ services will also be increased to support the ongoing investments that the company is making with regard to the speed, scope, and coverage of its transportation network. The rate hikes will also support ongoing expansion and capabilities enhancements to maintain high service levels to customers.

Outlook for FY17

UPS expects 2017 revenue growth of 5% to 7% compared to 4.4% in 2016 and adjusted diluted EPS in the range of $5.80 to $6.10, which includes $400 million of pre-tax currency headwinds. Further, the currency drag lowers the adjusted diluted EPS by $0.30 in 2017, and decreases the EPS growth rates by approximately 500 basis points. Capital expenditures forecast to increase to $4 billion from $3 billion in 2016.

Stock Performance

UPS’s stock finished the day at $106.46, gaining 0.28%, at the close on Thursday, February 09th, 2017, having vacillated between an intraday high of $107.01 and a low of $106.02 during the session. The stock’s trading volume was at 2,415,864 for the day. The Company’s market cap was at $91.30 billion as of Thursday’s close.

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