UPS 2Q results affected by recession
UPS said its second quarter results for 2009 were “adversely affected by continuing weakness in global economic activity”, after announcing operating profit of $895m on a 16.7% revenue decline. UPS said its second quarter results for 2009 were “adversely affected by continuing weakness in global economic activity”, after announcing operating profit of $895m on a 16.7% revenue decline.
The company said that despite the decline in their international and domestic businesses stabilising, this years’ volumes will be significantly lower than 2008 levels.
Adjusted diluted earnings per share were $0.49 compared to $0.85 last year.
Adjusted diluted earnings per share exclude a charge for the remeasurement of certain foreign currency obligations that did not qualify for hedge accounting treatment. The after-tax charge was $48m and had no impact on operating income or cash flow. Including this non-cash charge, diluted earnings per share were $0.44.
Consolidated revenue was $10.8bn compared to $13bn for the prior-year quarter, while consolidated volume was 914m packages, down 4.7%.
"The global economic environment pressured our performance, but UPS remains financially very strong," said Scott Davis, UPS chairman and CEO. "We continue to invest in growth opportunities, even as UPSers improve productivity and help our customers manage through these challenging times. We are a company that can weather this recession, positioning ourselves well to benefit when economic recovery occurs."
Consolidated revenue per piece declined 10.5%, due to reductions in fuel surcharges, the effects of lighter-weight packages and the negative impact of currency. UPS reduced operating expense by $985m, excluding fuel.
Earlier in July, the company released its 2008 Corporate Sustainability Report, documenting UPS's environmental leadership role in the package delivery sector and describing its plan to cut the carbon emissions of its airline by 20% by 2020 for a total reduction of 42% since 1990.
Cash Position
In spite of the decline in earnings, free cash flow increased $195m in the first six months of 2009 (excluding the impact of tax refunds in 2008). Effective management of capital expenditures and working capital enabled UPS to generate $2.7bn in free cash flow for the period. For the six months, the company also:
· Paid dividends totalling $876m.
· Invested $671 million in capital expenditures.
· Purchased 5.1 million shares at a cost of $248m.
· Ended the period with $3.3bn in cash and marketable securities.
Average daily volume in the U.S. Domestic Package segment declined 4.6% in the quarter. Air volume was flat while ground volume declined 5.4%. U.S. domestic package revenue per piece was down 7.8% due to the decrease in fuel surcharges, the continuing trend toward lighter-weight packages and changes in product mix. Even with the volume decline, this business gained market share.
Effective cost management reduced labour hours, miles driven and block hours flown by a greater percentage than volume declines. However, savings from these reductions were not enough to offset fully the impact from lower revenue. As a result, the segment posted lower operating profit and margin.
In early July, UPS completed the first phase of the multi-year expansion of its Worldport® air hub in Louisville, Ky. This facility is the company's largest international air hub. This phase increased sort capacity by 15% to 350,000 packages per hour and enables more cost-effective package processing and network efficiencies.
Average daily international export volume decreased 7.3%. Without the impact from the timing of Easter, export volume would have been down approximately 5%. Revenue per piece was negatively impacted by reduced fuel surcharges, currency, changes in product mix and lighter-weight packages. Although volumes declined, operating margin remained flat with the first quarter of 2009 due to effective cost management.
During the quarter, UPS continued to invest in its international segment with the acquisition of its service providers in Slovenia and Turkey. The company also established a joint venture in Dubai to manage and grow UPS package, freight and contract logistics services across the Middle East, Turkey and portions of Central Asia.
Revenue decreased 23.3% as a result of reduced fuel surcharges and lower volume. Margin expansion was attributed to improved revenue management and effective cost control in Forwarding and Logistics. UPS Freight posted quarter-over-quarter improvements in LTL tonnage and shipments. This business unit continued to take share in an extremely competitive environment. Its 1.9% decline in shipments year-over-year was in sharp contrast to the double-digit market decline.
In the second quarter, UPS also opened healthcare logistics facilities in Puerto Rico and The Netherlands designed to meet the growing supply chain needs of pharmaceutical, medical device and biotech companies.
UPS also enhanced its worldwide supply chain service capabilities with the introduction of new global technology for critical parts fulfillment and the establishment of a field stocking location network in India.
Outlook
"The economic environment continues to be difficult. Declines in both our domestic and international businesses appear to be stabilising but volumes will remain significantly below last year's levels," said Kurt Kuehn, UPS's chief financial officer.
"Although declines in economic indicators are less dramatic than earlier in the year, questions remain as to when business activity will begin to strengthen," he continued. "The business environment in the third quarter should be similar to the second quarter. As a result, we are providing the same guidance as we did for the second quarter – earnings per share within a range of $0.45 to 0.55.
"We are exceeding targeted cost savings, without compromising our high levels of service, while also investing for the future," Kuehn concluded. "We are managing our business with a keen eye on balancing cost cutting with strategic investment."
