UPS Tuesday reported modest operating profit and flat volumes in the third quarter. Operating income grew 0.2 percent to $1.62 billion on delivery of 965 million packages, an increase of 0.7 percent from a year ago. Adjusted for non-recurring events, operating profit actually grew 6.2 percent.
Net income was up 5.1 percent to $1.04 billion in the quarter ended Sept. 30. The package delivery and logistics services giant attributed gains to the performance of its U.S. Domestic Package and Supply Chain & Freight segments – a departure from past quarters when international business has achieved the strongest returns.
Total revenue was $13.2 billion in the third quarter, 8 percent more than the $12.2 billion recorded in the third quarter of 2010.
The Atlanta-based company said it saw increased revenue in all three of its main segments: U.S. domestic package, up 6.5 percent to $7.77 billion; international package, up 14.2 percent to $3.06 billion; and supply chain and freight, up 5.3 percent to $2.34 billion.
Total domestic volume growth was flat as a result of the slow U.S. economy, but UPS Next Day Air volume rose 1.3 percent, the company said.
Consolidated margins were down 1 percent to 12.3 percent.
Operating margins for domestic package delivery and Supply Chain & Freight improved sixth-tenths of a point to 13.1 percent and three-tenths of a point to 8.3 percent, respectively, compared to the prior year’s adjusted results. Domestic package margins, the highest in three years, were the result of base price increases of about 3 percent and higher fuel surcharges, and network efficiencies, UPS said.
The Supply Chain & Freight segment posted a 10 percent gain in operating profit to $195 million. UPS Freight, the company’s U.S. domestic less-than-truckload operation, was the difference maker for the group, with a 15 percent increase in revenue even as daily shipments declined slightly. LTL revenue per hundredweight was up more than 13 percent due to higher fuel surcharges and stronger base rates.
International package operating profit fell 2 percent, or $10 million, to $409 million, while operating margin fell to 13.4 percent from 15.7 percent. UPS blamed the declines on a deceleration in package volume from Asia to the United States, excess capacity, its product mix, higher fuel prices and currency fluctuations. UPS volume, by comparison, grew 47 percent in the third quarter of 2011.
UPS reacted by parking underutilized aircraft, but not quickly enough to stop deterioration in margins, Chief Financial Officer Kurt Kuehn said during a conference call with analysts. UPS Airlines downsized its international fleet by 10 percent, officials said.
“The bottom line is we built a network expecting a certain level of growth that did not materialize. Because of this we have reduced our airlift capacity out of Asia while still maintaining recently added service enhancements,” he said.
Officials said volumes are firming a bit in October in conjunction with major product launches from some companies and that they expect Asian exports to pick up in the near future as demand in the U.S. improves.
UPS’ distribution business experienced a mid-single digit increase in revenue while margin expansion was impacted by investments in the healthcare sector. During the quarter, UPS continued to expand its health care logistics footprint with new facilities in Brazil and the Netherlands, bringing the total UPS space under management for healthcare customers to 4.5 million square feet, Kuehn said.
“UPS produced another solid quarter of earnings growth against the backdrop of a deceleration in exports from Asia and a challenging global economic environment,” Scott Davis, UPS chairman and CEO, said in a statement. “The resilience of our global model was evident during the quarter and we remain confident in our ability to perform in both good and bad economies.”
Company officials said they expect continued slow growth for the rest of the year. They expressed optimism for continued strong margin growth as they implement productivity enhancements and add value to products in the future.
Although exports slowed considerably from Asia, the company’s European exports increased 9 percent despite economic troubles in the continent, he said. Overall export volumes were up 6.5 percent, but the growth took place on shorter trade lanes such as within Europe or within Asia, Kuehn said.
Non-U.S. domestic volume increased 3.5 percent, with strong growth in Germany, France and Poland.
Diluted earnings per share were $1.06, up 14 percent from 93 cents for the 2010 third quarter.
Results for the quarter were adjusted to account for a one-time $109 million pre-tax gain on the sale of real estate in the U.S. Domestic Package segment in 2010. Comparisons for the year-to-date earnings also back out a $15 million pre-tax loss in the second quarter associated with a U.S. Domestic Package real estate transaction and a $48 million gain in the Supply Chain & Freight segment. Adjustments also reflect a $98 million restructuring charge for Domestic Package operations, a $38 million loss on the sale of a specialized transport business in Germany for the Supply Chain segment and a $76 million charge to income tax expense from a change in the filing status of a German subsidiary in the first quarter of 2010.
UPS had $3.7 billion in free cash after the first nine months of the year to use as necessary.
In a note on UPS’s results, the investment bank BB&T Capital Markets said it believes UPS could benefit from lean inventories.
“Airfreight is poised to reap the benefit of slower containerized ocean shipments and a flat ocean peak season,” BB&T said. ” As shipments for Black Friday are already on the water and the window is quickly closing for Christmas freight delivered via ocean, any uptick in demand for the holiday season will have to come via air (particularly in light of ocean carriers slow steaming to save on fuel costs in a declining rate environment). With improving retail sales figures and low inventory levels (we believe many companies are managing inventories as tight as possible), Santa could be delivering his packages on a freighter this holiday season.” – Eric Kulisch