Higher revenue at UPS but pension costs hit profits

e-commerce continues to provide a fair wind for UPS as the 4th quarter and full year’s results show a record revenue at US$60.9bn for whole group. The big problem is that UPS has taken a big hit to its profits due to provision for pensions. Over the full year net income fell by 29.2% to $3.4bn. However free cash flow was up 11.5% by $746m.

Underlying growth in revenue and profit is certainly respectable. For the fourth quarter revenue growth was 5.5%. At the core ‘US Domestic Express’ operation revenues for the quarter climbed 6.3% year-on-year to $10.9bn. This was on the back of a 5% increase in shipments over the quarter. Stripping out the effects of pension contributions, operating profits were $1.34bn, edging down from Q4 2015 comparison of $1.35bn.

‘International Express’ revenue increased by 5% for the quarter year-on-year, which represented a 6.2% rise after stripping out the effects of currency. Volumes rose by 8.4%. This business, however, also took a big hit from pension provisions, driving down operating profits from $580m in Q4 2015 to $281m in this quarter. That said, on a comparative basis, operational profit was up 13%.

Supply Chain and Freight, which is UPS’ contract logistics and freight forwarding division, revenue grew, but more slowly, by 2.6% year-on-year to $2.7bn for the quarter. The business was hit brutally by pension adjustments, with a loss of $139m for the quarter. Underlying operational profits were estimated at $179m but this still represented a fall of $20m compared to the same period last year.

Two problems emerged from these numbers. The most obvious is the cost of UPS’ pension system. Whilst this is hard to avoid for the company, the financial context that has depressed pension fund yields will not last for ever. However, the other logistics-specific issue is the mixed blessing that is e-commerce.

UPS commented, “automation initiatives offset most of the impact from the faster pace of residential and SurePost growth”, but this only serves to underline that the company is finding last-mile operations expensive.

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Source: Transport Intelligence, January 31, 2017

Author: Thomas Cullen