UPS profits down 57% after retiree liability charge

UPS profits down 57% after retiree liability charge

UPS profits have been dented by the restructuring of its healthcare programme, as earnings per share dropped 57% in the second quarter of the year. The package delivery giant said its profits were also impacted by the significant investment it is making in increasing network capacity — after a difficult run-up to Christmas in 2013.

The Atlanta-based integrator is investing $175m in boosting its capacity ready for the peak season this year. The added investment costs have led to UPS lowering its expectations for earnings in the rest of the year.

During the three months to the end of June, it was also hit by a $665m after-tax charge related as post-retirement Teamsters members were moved to defined contribution healthcare plans.

However, the company said its underlying business saw a strong performance in the quarter, with earnings per share adjusted for the one-off impacts up 7.1% compared to last year’s second quarter.

E-commerce shipping in the United States, along with strong international export growth was driving the performance of the underlying business, the firm said.

Scott Davis, the UPS chairman and CEO, said: “The strong revenue growth this quarter is evidence that our portfolio resonates with customers, with more choosing UPS as their logistics provider.”

Davis said 2014 was a year of investing to ensure the company meets the “rapidly growing” needs of the marketplace. The company is expanding its infrastructure with additional hub sorting capacity, and the expansion of deployment for the UPS route optimisation software, ORION.

The improvements are designed to boost UPS in the peak season, but should also bring benefits to the network during the rest of the year.

Kurt Kuehn, the UPS chief financial officer said: “These initiatives will increase operating expense this year, but will provide financial benefits for years to come.

“As a result, we have lowered our expectations for adjusted diluted earnings per share to be in a range of $4.90 to $5.00, a 7-to-9% increase over 2013 adjusted results.”

US domestic

UPS said its US domestic revenue grew 5.2% year-on-year in the second quarter, to $8.7bn, as daily package volume improved by 7.4%.

Much of the growth came in the UPS Ground and Deferred services, up 8.1% and 5.4% respectively, driven by e-commerce in the United States. Half of the growth came from UPS SurePost, the economy parcel delivery service that uses the US Postal Service for delivery in the last mile.

SurePost saw a 60% growth in shipments in the quarter, primarily from the growth in lightweight e-commerce shipments. However, this mean a 2% decline in revenue per package because lightweight e-commerce parcels are a little less profitable than other packages.

On a reported basis, US domestic operating profit was down 82% in the quarter, to $209m, thanks to the employee healthcare restructuring. Adjusted for this factor, operating profit would have been $1.2bn, up 3% compared to the same period last year.

International package

UPS said its international small package revenue grew 6.2% to $3.3bn thanks to strong growth in export shipments, which were up 9.1% year-on-year.

On a reported basis, the healthcare restructuring charge meant operating profit dipped by $7m (1.6%) to $444m. Adjusted for the restructuring the operating profit would have improved by 4.4% to $471m.

Revenue growth came from all regions of the world, but led by Europe where daily shipment volumes were up 13% year-on-year, more than twice the 6% daily volume growth seen in Asia.

The international package performance was hit by the purchase of additional short-term capacity, at a premium cost from local service providers, to cope with rapid shipment growth in Europe, UPS said. It was also affected by the continuing of customers downgrading to cheaper deferred delivery services.

The UPS supply chain and freight revenue increased 6.5% to $2.3bn, thanks to growth in the Forwarding and Distribution business units, with reported operating profit down 41% or by $65m thanks to the healthcare restructuring, with adjusted operating profit 11% higher at $176m.

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