$3 Billion Pension Charge Sends UPS to 4th-Qtr. Loss

This story appears in the Feb. 4 print edition of Transport Topics.

UPS Inc. posted a $1.75 billion fourth-quarter loss tied to pension costs, but CEO Scott Davis forecast 2013 earnings could improve, along with the U.S. and global economies.

The loss, tied to a $3 billion pension expense, followed a $725 million profit in the final quarter of 2011. Revenue in the most recent period rose 2.9% to $14.6 billion. UPS Freight, the firm’s less-than-truckload unit, raised revenue 6.2% to $671 million.

The results were announced after UPS formally dropped its $6.8 billion plan to buy TNT Express NV. European Commission regulators signaled they would reject the deal.

Davis, in the company’s first public comments since the TNT plan fell through, said there was “an absolute possibility” that UPS would make more acquisitions, but on a smaller scale with a focus on the health-care or international package sectors.

“UPS essentially put all hands on deck to get this deal done,” Davis said on a conference call. “It would be an understatement to say we are disappointed by the decision.”

The company also increased its share repurchase program by $2.5 billion, finding a home for part of the cash accumulated to buy TNT.

The full-year 2013 profit forecast was pegged on an improvement in earnings of 6% to 12%, excluding one-time costs, or $4.80 to $5.06 per share. The UPS forecast was based on 2% U.S. gross domestic product growth this year and 2.5% on a worldwide basis. Package volume growth was pegged at 2% to 3%.

Excluding the pension expense, UPS said fourth-quarter earnings totaled $1.32 a share, or $1.26 billion. That was 5% better than the $1.28 per share, or $1.25 billion, in the 2011 period, which also included one-time pension costs.

UPS quantified the effects of Superstorm Sandy, saying it cost the company $75 million, without specifying expenses in each portion of its business.

Net income for the full year was 79% lower at $807 million, reflecting costs such as the pension expense. Excluding those expenses, net income rose 1.8% to $4.39 billion. Revenue was 1.9% higher at $54.1 billion.

A Jan. 31 investor note from Peter Nesvold of Jefferies & Co. said that the fourth-quarter results were hurt by lower-than-expected profit margins throughout the company.

Chief Financial Officer Kurt Kuehn said that domestic results were stronger than international, saying that, “in the U.S., we fired on all cylinders.”

Domestic package revenue rose 3% to $8.93 billion, international package revenue rose 1.5% to $3.20 billion and supply chain and freight revenue climbed 4% to $2.44 billion.

In the domestic package business, revenue grew the fastest for next-day air, improving by 5.4%, while ground revenue improved 3.4%.

Domestic package profit improved to $1.38 billion.

International’s profit margin slipped 1.2%to $499 million as margins were hurt by a shift to lower-cost shipments.

Kuehn also said profit was challenged in the supply chain and freight segment, where a surge in shipments during the quarter raised the cost to purchase transportation.

Profit in supply chain and freight fell 14% to $172 million.

LTL shipments and tonnage both rose, and the truckload business added $69 million in revenue.

The LTL tonnage increase was 4.9%, and revenue per 100 pounds of freight was 1.5% higher at $22.06.

UPS doesn’t disclose profitability for the LTL unit, but Kuehn said profit margins in the quarter were similar to last year. For the full year, operating income increased 0.7 percentage point at UPS Freight, he said.

“The global economic events show we remain in an environment of mixed growth and mixed signals,” Davis said. “In the U.S., we are off to a surprisingly strong start in January.”

UPS will pay 200 million euros in a breakup fee to TNT, or about $270 million based on last week’s exchange rates.

Kuehn said the company is “making very good progress” in contract talks with the Teamsters union, far in advance of a July 31 contract expiration.