UPS Posts Solid Fourth-Quarter Operating Results; Net Income Hit By Pension, Legal, Operating Charges

UPS Inc. UPS reported Thursday morning solid fourth-quarter operating results, though its net income was weighed down considerably by about $1.9 billion in charges for pension adjustments, network reconfiguration, and settling a legal dispute with New York State involving movements of cigarettes.

The company's quarterly earnings per share (EPS)–adjusted for the charges–came in at $2.11 a share, 1 cent a share higher than the $2.10 estimate from nine analysts polled by Barchart and an 8.8% rise from the 2018 fourth quarter. UPS took a $2.23 EPS charge in the quarter for the associated charges. The $1.8 billion pension accounting charge was non-cash. The network reconfiguration and legal charges were after-tax, UPS said.

The quarter is considered the most important of UPS' year because it includes the peak holiday season when volumes swell to levels well above their normal size.

UPS forecast a 2020 EPS range–diluted and adjusted–of between $7.76 and $8.06 a share. The "midpoint" figure that analysts like to focus on was reduced to $7.91 per share from consensus estimates of $8.03 a share. Amit Mehrotra, analyst for Deutsche Bank, said in an early morning note that the mid-point reduction was anticipated given the magnitude of the charges.

More tellingly for the U.S. and global economies, the company predicted continued weakness in global industrial production during 2020. Industrial economies worldwide have been in a more than year-long funk, and there's no indication that the tide will turn until the second half of 2020, at the earliest. Mega-scale carriers like UPS are considered proxies not only for their industries but for global economic activity. 

UPS said it will continue to spend billions on its multi-year network re-engineering program aimed at broadening its appeal to small and mid-size businesses that have become a top priority at the company. Late yesterday, it announced a slew of initiatives largely focused on facilitating logistics services for potentially high-margin small businesses that want to tap into e-commerce but lack the in-house logistics expertise to follow through.

In the quarter, average daily volume rose 7.5% to 26.6 million packages. Revenue rose 3.6% to $20.6 billion. Operating profit grew 6.4%, or 13.7% on an adjusted basis, UPS said.

The domestic package segment, relatively insulated from geopolitical issues and benefiting from a strong U.S. consumer eager to shop for the holidays, posted a 6.5% increase in revenue. Profit and margin rose in the high single-digits range. Unit costs fell 2.1%, its third straight quarterly decline. UPS has said it is gaining efficiency traction from its network re-engineering project, which is designed to boost package throughput and drive down unit costs. UPS ships 21.7 million parcels worldwide a day.

The international segment, by contrast, suffered in the quarter from top-line weakness in U.S.-Asia trade, as well as to and from the United Kingdom, UPS said. Both lanes represent the key geopolitical flashpoints in the world today. Revenue fell to $3.7 billion from $3.8 billion, with exports bearing most of the top-line hit. Adjusted profits rose 3.6% year-on-year, while operating margins stayed robust at $21.2%, and expanded year-on-year in the quarter.

The Supply Chain and Freight segment, which houses all non-package operations and notably its fast-growing life-sciences logistics business, posted a revenue decline as lower brokerage and freight forwarding revenue offset gains in its logistics and verticals business, which both posted double-digit growth year-over-year. UPS Freight, the company's less-than-truckload (LTL) business, reported that revenue for each 100 pounds shipped rose 2.5%. Revenue per-hundredweight is considered a key metric of a carrier's profitability.

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