UPS Income Drops, Plans for Slowdown

United Parcel Service Inc.said on Thursday its first-quarter operating earnings fell 14 percent, and warned that second-quarter profits would be at the low end of estimates due to the weakened economy.
UPS, the world's largest package delivery company, reported
operating income of $582 million, or 51 cents a share, as revenues rose 4
percent to $7.5 billion. That compared with profits of $674 million, or 56
>cents a share, on $7.2 billion revenues in the year-earlier period.
>
> First-quarter revenues from the Atlanta-based shipper's core U.S.
>domestic package operations rose 2.3 percent to $6 billion, while
>international package operations revenues gained 7.4 percent to $1.1
>billion.
>
> The first-quarter operating income excluded a $26 million after-tax
>charge for a change in accounting for derivatives, and the prior-year
>figure excluded a $139 million one-time, after-tax gain.
>
> Wall Street Takes Warning In Stride
>
> Clad in their trademark brown uniforms, UPS drivers delivered an
>average 13.4 million packages a day in the quarter worldwide, up 2 percent
>from the same period last year. But for the second quarter UPS expects flat
>to slightly negative growth in domestic shipments and 1-3 percent growth in
>air products.
>
> “In the first quarter we really ran the company as if the economy
>was going to have a soft landing,'' Chief Financial Officer Scott Davis
>said, adding that the outlook changed after flat growth in shipping volumes
>set in during March.
>
> “We're going to presume we're going to be in a prolonged economic
>slowdown,'' Davis said in a conference call with analysts. “We're going to
>run the company as if this is going to be a prolonged slowdown.''
>
> Still, UPS advised analysts it was sticking with prior profit
>forecasts of 55 cents to 60 cents a share in the second quarter, with
>results likely at the lower end of that range.
>
> “If current negative economic conditions continue, our challenge
>will be to manage the business and match last year's third- and
>fourth-quarter results,'' Davis said.
>
> Investors took the profit warning in stride, pushing UPS shares up
>95 cents to $55.40 New York Stock Exchange trading.
>
> “It's not a shock. Everyone is saying the same thing,'' Merrill
>Lynch analyst Jeff Kauffman, who has a strong buy rating on UPS, said of
>the earnings guidance. “I think they don't want to come to us three months
>from now and have to lower expectations.''
>
> In March, the Atlanta-based company forecast first-quarter earnings
>of between 49 cents and 51 cents a share, guiding analysts' estimates into
>the lower range.
>
> Last month, rival FedEx Corp. (NYSE:FDX – news), the world's leading
>air express package shipper, reported that earnings fell 4 percent in its
>third quarter, ended Feb. 28, due to the economy.
>
> UPS said it would trim about $300 million from capital expenditures
>and spend $2.5 billion in 2001, with further cuts in 2002 and 2003 if the
>economy remains weak.
>
> The company planned to defer purchases of some airplanes, and
>trucks, freeze hiring at its headquarters and tighten its travel and
>relocation spending, among other things, to trim variable costs until the
>economic outlook improved.
>
> UPS inaugurated service between the United States and China on April
>3, and expects over the first 12 months to break even on deliveries there,
>Davis said.

Report of same news from Journal of Commerce:
United Parcel Service, warning that it sees continued slow growth ahead, said it earned $582 million, or 51 cents a share, in the first quarter, compared with $813 million, or 56 cents a share, in the same period last year.

The lower earnings were in line with a warning the company issued on March 22, when it said earnings would range from 49 cents to 51 cents a share.

Revenue totaled $7.5 billion, up 4%, while consolidated operating profits declined by 11.5% $944 million.

The company said several factors contributed to the earnings decline, including higher utility costs, weakening international cargo demand and one less working day, but said the main reason was the slowdown in the U.S. economy. The slowdown became especially pronounced in March and is continuing this month. Scott Davis, UPS' chief financial officer, said the company is projecting that volume will remain flat for at least the next several months.

Despite the slowdown, volume rose in all product segments, particularly UPS' international express business. The domestic express business also increased, grow, noted Jim Kelly, UPS' chairman and chief executive.

"However, the economy did slow much faster than we expected and we were not satisfied with our earnings performance," he said.

Davis said UPS was planning for 1% growth during the first quarter, but that the economy appeared to be flat by March.

The company attributed the discrepancy between the 31.6% drop in net income and the much smaller 8.9% drop in earnings per share partly to one-time factors. Last year, for example, UPS had $60 million in interest income from the proceeds of its $5.6 billion initial public offering in November 1999. That money was subsequently used to buy back UPS stock, explained Norman Black, a spokesman.

The brightest spot for UPS was 17% growth in international export volume,

led by Europe with a 25% increase. The rapidly expanding logistics business showed a 45.5% rise in revenue. In the United States, volume for the company's premium express product, Next Day Air, grew by 3.3%. Total average daily volume within the United States rose 1.3%, while consolidated worldwide daily-volume rose 2% to 13.4 million.

Davis said the acquisition of Fritz Cos. should provide a boost to its business in China because Fritz has a strong presence there. UPS, which began direct flights to China on April 1, expects to complete the Fritz purchase by the end of June. But its purchase of First International Bancorp. may be delayed until the third quarter.

Revenue for U.S. domestic package operations rose by 2.3%, to $6 billion; revenue for international package operations increased by 7.4%, to $1.1 billion; and revenue for non-package operations grew 22.2% to $435 million, led by the gain in UPS Logistics Group revenue.

Kelly said the company will keep a tighter rein on costs the rest of the year.

"During the first quarter, we managed operating expenses well, but we did not address discretionary costs," he said. "Given the change in the economy, we are managing now as if these slow conditions will persist. Going forward, we intend to reduce discretionary costs and capital expenditures."

Davis said the company will reduce capital spending this year by about $300 million, to a new total of $2.5 billion. Further cuts are anticipated in 2002 and 2003 if the weak economy continues, he added. The cost cuts might include delays in the delivery of new aircraft.

Higher first-quarter costs included the leasing of two 747 freighters because of airworthiness problems with other planes in its fleet.

Davis said the company is sticking with its previously announced earnings estimate of 55 cents to 60 cents a share in the second quarter thanks to effective cost management. Nonetheless, he said, "we will likely be at the lower end of that range." Davis added that it will be a challenge for the company to match last year's third- and fourth-quarter results if current conditions continue.