UPS 1st quarter shows strong 16percent income gain

Paced by its growing international package operation, UPS (NYSE:UPS) today reported a strong 16.2percent gain in net income for the first quarter of 2005.
Consolidated revenue for the three months ended March 31, 2005, rose 10.8percent to USD9.89 billion, reflecting in part the addition of revenue from the recently acquired Menlo Worldwide Forwarding. International package revenue climbed 13percent while U.S. package revenue rose 2.8percent.

Operating profit rose 13.8percent to USD1.39 billion compared to USD1.22 billion for the prior-year period. International operating profit jumped 25.6percent to USD348 million, while U.S. domestic operating profit increased almost 13percent to USD1.03 billion.

Operating profit for the supply chain solutions segment was reduced by integration costs from the December acquisition of Menlo Worldwide Forwarding. The former Menlo unit now is a key part of an aggressive push by UPS Supply Chain Solutions into the time-definite heavy air freight business.

UPS also announced a change to its management bonus program, moving from a fixed profit-sharing plan to a performance-based plan. This change had a positive impact on compensation expense for the quarter of USD0.045 per diluted share, and will have comparable benefits for the rest of the year. As a result, the company raised its guidance for 2005 full-year earnings growth to the range of 16-to-20percent over the adjusted USD2.90 reported for 2004. (The 2004 diluted EPS on a GAAP basis was USD2.93.) Previous guidance was 13-to-17percent.

For the three months ended March 31, net income totaled USD882 million, a gain of 16.2percent compared to the USD759 million reported for the period in 2004. Earnings per diluted share were USD0.78, up 16.4percent from the USD0.67 reported in the prior year.

Consolidated worldwide package volume for the first quarter rose by 3 million pieces to 885 million, while average daily volume increased by 38,000 packages per day to 13.82 million. Export volume was up 9.3percent, while U.S. domestic volume was essentially flat at an average 12.5 million per day.

"We had a great start to the year. The first quarter set the pace for UPS to generate earnings in 2005 at the higher end of our historical range,” said Scott Davis, UPS’s chief financial officer. “We grew our international operating profit by more than 25percent and we did a very good job of managing our costs. Our cost initiatives are taking hold and we are benefiting from the deployment of package flow technology in the U.S. operation. There is strong momentum throughout all three business units.”

Highlights by segment for the first quarter included:

International package revenue increased 13percent to USD1.84 billion. Operating profit climbed 25.6percent to USD348 million. Asia export volume increased 36percent with export volume doubling out of China. Operating margin increased 190 basis points to 18.9percent.
U.S. domestic package revenue grew 2.8percent during the period to USD6.8 billion. Operating profit rose 12.7percent to USD1.03 billion and operating margin was 15.1percent. Average daily volume in the U.S. grew 0.1percent for the quarter. Yields remained strong, with an increase in revenue per piece of 2.6percent for all U.S. domestic products.
Revenue for the supply chain solutions segment increased 86percent to USD1.23 billion with the addition of Menlo Worldwide Forwarding. Freight services and logistics accounted for USD1.12 billion of that total. Revenue growth for the segment was on track and hit its target for the quarter. Profitability was reduced by the integration of Menlo.
"We are confident we've laid the foundation to accelerate volume growth in the U.S. going forward,” added Davis. "Our efforts to better sell to mid-sized customers are gaining traction and we made good strides in connecting more customers to UPS through electronic shipping systems."

Davis said the company expects solid growth in 2005. The international segment should maintain its exceptional performance with strong export volume growth. U.S. domestic volume growth should be 2-to-3percent for the year, and the Menlo acquisition is expected to be slightly accretive to earnings for the year.

For the second quarter, UPS is projecting diluted earnings per share in a range of USD0.82 to USD0.87 compared to the USD0.72 reported during the prior-year period. The company anticipates improving volume trends in its U.S. domestic business, with 2percent growth expected in the second quarter.

UPS is the world’s largest package delivery company and a global leader in supply chain services, offering an extensive range of options for synchronizing the movement of goods, information and funds. Headquartered in Atlanta, Ga., UPS serves more than 200 countries and territories worldwide. UPS's stock trades on the New York Stock Exchange (UPS) and the company can be found on the Web at UPS.com.

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EDITOR’S NOTE: UPS CFO Scott Davis will discuss first quarter results with investors and analysts during a conference call later today at 10:00 a.m. EDT. That conference call is open to listeners through a live Webcast. To access the call, go to UPS Investor Relations and click “Earnings Webcast.”

We supplement the reporting of our financial information determined under generally accepted accounting principles (GAAP) with certain non-GAAP financial measures, including, as applicable, “as adjusted” operating profit, operating margin, pre-tax income, net income and earnings per share. We believe that these adjusted measures provide meaningful information to assist investors and analysts in understanding our financial results and assessing our prospects for future performance. We believe these adjusted financial measures are important indicators of our recurring operations because they exclude items that may not be indicative of or are unrelated to our core operating results, and provide a better baseline for analyzing trends in our underlying businesses. Furthermore, we use these adjusted financial measures to determine awards for our management personnel under our incentive compensation plan.

For the quarters ended March 31, 2005 and 2004, we did not present operating profit, net income and earnings per share excluding the impact of any transactions that were reflected in our financial statements prepared under generally accepted accounting principles. As previously reported for the quarter ended September 30, 2004, we presented net income and earnings per share excluding the impact of a credit to tax expense due to the resolution of various tax matters. As previously reported for the quarter ended December 31, 2004, we presented operating profit, net income and earnings per share excluding the impact of a charge to pension expense due to the consolidation of data collection systems, an impairment charge on Boeing 727, 747 and McDonnell Douglas DC-8 aircraft and tax credits resulting from several items. We believe it is useful to present operating profit, net income and earnings per share excluding the impact of these items because they are expected to have minimal implications on future financial performance.

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