Strong volume growth propels UPS to record quarterly profit

International Profit Jumps More Than 50%; U.S. Ground Volume Surges

Led by strong volume gains both in the United States and overseas and significant margin improvement within its international operation, UPS (NYSE:UPS) today reported a 19% jump in adjusted net income for the fourth quarter after excluding certain items that affect the year-ago comparison.

The quarter's performance capped a record year for volume. UPS delivered 3.44 billion packages in 2003, or an average 13.64 million per day.

For the quarter ended Dec. 31, consolidated revenue totaled US$8.93 billion, up 8.2% from the US$8.26 billion reported during the prior-year period as both the international and U.S. package businesses enjoyed strong volume gains. Average daily export volume increased 10% during the quarter, pushing consolidated international average daily volume to a record 1.4 million, an increase of 6.3%. Export volume out of the U.S. increased more than 10%, the largest such increase since 2000. Within the United States, average daily package volume jumped 4.9% to a record 13.8 million. U.S. ground volume surged 5.2%, while Next Day Air® volume climbed 3.5% and deferred air volume rose a solid 4%.

For the three months ended Dec. 31, net income totaled US$856 million or US$0.75 per diluted share, compared to US$1.5 billion or US$1.32 per diluted share in the fourth quarter of 2002. However, excluding several items affecting comparisons between the periods, diluted earnings per share were US$0.70 in 2003 and diluted earnings per share were US$0.59 in 2002.

The items that affect comparisons include:

In the fourth quarter of 2003, UPS realized a gain on redemption of long-term debt of US$18 million after tax. In addition, UPS lowered its effective tax rate to reflect improvements in state taxes, reducing its income tax expense by US$39 million. Combined, these items increased diluted earnings per share for the most recent period by US$0.05. Without these items, net income would have been US$799 million.
In the fourth quarter of 2002, the company booked a final settlement of a tax dispute with the Internal Revenue Service, reversing US$1.02 billion of a tax assessment liability. In addition, the company reduced an accrual due to a change in its vacation policy, and also recorded a restructuring charge related to its UPS Supply Chain Solutions unit. These items increased the 2002 fourth quarter's net income by US$832 million. Without these items, net income would have been US$670 million.
“Our fourth quarter performance underscores how effectively our strategies are working,” said Scott Davis, UPS's chief financial officer. “All three of our business segments are showing expanded margins, led by international.”

Of particular note, Davis continued, was the strength of the 2003 peak holiday season, which was boosted by increasing levels of on-line shopping. UPS delivered more than 20 million packages on Peak Day. In a sign of increasing customer connectivity, packages sent using UPS Internet Ship climbed 50% compared to 2002 and tracking requests surged to a high of 12 million on the busiest day, up a third over the previous year. During the quarter, volume through The UPS Store™ doubled compared to the prior year.

Highlights by segment, excluding the adjustments described above, included:

U.S. package revenue rose 7% to US$6.66 billion. Operating profit rose 9.6% to US$911 million and margins improved to 13.7%. Average revenue per piece rose for all products, with the overall U.S. average revenue per piece increasing 1.9%.

International package revenue rose 17% to US$1.52 billion. Operating profit for this segment increased 56% to US$241 million. Operating margin reached 15.9%, the highest operating margin ever achieved by this segment.

The non-package segment saw operating profit rise 27% to US$121 million. In the quarter, the UPS Supply Chain Solutions business unit signed a number of new contracts that will positively impact revenue growth in the first quarter.
For the full year ended Dec. 31, 2003, consolidated revenue increased 7.1% to a record US$33.5 billion, while operating profit rose 8.5% to US$4.45 billion compared to US$4.1 billion in 2002. Net income for the year totaled US$2.9 billion compared to US$3.2 billion in 2002. However, a number of items impact comparison of the two years. These items increased 2003's net income by US$126 million and increased net income for 2002 by US$760 million. Excluding the impact of these items, earnings per diluted share totaled US$2.44 in 2003 compared to US$2.14 in 2002.

Davis said the company is pleased with the momentum across all its business lines. “We continue to believe that our industry has great growth opportunities and that UPS has a business model that is creating superior returns, growth and consistency,” the CFO said. “We're one of the few U.S. companies that's as successful internationally as it is at home, and our supply chain capabilities are making us an attractive 'one-source provider' to customers. That's why we've set the goal of having all three segments operating with margins of more than 15% by 2007, our 100 th anniversary.”

For 2004, UPS expects U.S. package volume growth rates of about 4%, Davis said. The company anticipates continued vibrant growth in the international segment with about a 20% increase in profitability, he continued. On the non-package side, the company expects a revenue increase in the low double-digits with a US$50 million or more increase in profit.

Davis said the company projects first quarter earnings in the range

of US$0.58 to US$0.62 per diluted share versus an adjusted US$0.52 last year. The company reaffirms its targeted earnings growth of 12-to-18% for the full year, he added.