UPS Posts First Quarter Net Income Gain, Could Face $3.8 Billion Pension Charge

This story appears in the May 2 print edition of Transport Topics.

Parcel and logistics company UPS Inc. posted first-quarter increases in revenue and net income despite mixed economic conditions, nationally and internationally, and warned it might have to take a charge against future earnings of as much as $3.8 billion related to a pension issue.

UPS earned $1.13 billion, or $1.27 a share, on first-quarter revenue of $14.42 billion. During the same time in 2015, it had net income of $1.03 billion, or $1.12, on revenue of $13.98 billion.

The Atlanta-based company ranks No. 1 on the Transport Topics Top 100 list of for-hire carriers in the United States and Canada.

Operating profits increased for domestic and international package shipping, but declined for the supply chain-freight division, as less-than-truckload revenue at UPS Freight decreased year-over-year.

CEO David Abney described the results during an April 28 earnings call as “another excellent quarter,” featuring double-digit profit growth from the international package segment.

Domestically, the company enjoyed benefits from strong consumer spending that yielded more business-to-consumer packages, but declines in industrial production cut into manufacturing-related shipments, he added.

The company said its basic freight rates increased by about 2%, year-over-year, but the fall in fuel prices for trucks and cargo jets caused fuel surcharge revenue to decline.

The pension issue relates to the Central States Fund for Teamsters, from which UPS withdrew in 2007, paying $6 billion at the time to do so.

Central States petitioned the Department of the Treasury in the fall to cut the benefits it pays because the fund does not have enough investment income to keep paying 100% of its obligations. UPS General Counsel Norman Brothers said during the call that UPS would make supplementary payments to its retired employees if the cuts are ordered legally.

Brothers said UPS expects Treasury to make a decision on Central States around May 7.

Even if Treasury decides for the pension fund and allows the cuts, Brothers said UPS would oppose the decision because “it does not conform with the law.”

Chief Financial Officer Richard Peretz said if the payments are made, they would be an ongoing liability for UPS and the company would deal with it by taking a charge against earnings of $3.2 billion to $3.8 billion later this year. But, he said, that would not cause UPS to decrease its 2016 earnings forecast of $5.70 to $5.90 a share — though it could drive earnings into the lower part of the range.

Among the company’s three major divisions, the strongest results came from international packages, where quarterly operating profit jumped 15.3% to $574 million, even though revenue dipped by 1.9% to $2.91 billion.

Abney said it was the fifth straight quarter of double-digit profit growth for international.

Stock analyst Robert Salmon told clients of Deutsche Bank Securities in an investors note: “Disciplined pricing, network efficiency and currency tailwind gains drove a 2.93 [percentage point] improvement in segment operating ratio, to 80.3% from 82.8%, which resulted in the solid [operating profit] growth.”

Salmon also noted that UPS’ net earnings of $1.27 a share beat the Wall Street average estimate of $1.22.

Domestic package profits grew by 7.6% to $1.1 billion, while its revenue grew by 3.1% to $9.08 billion for the quarter.

Within domestic package, the UPS truck fleet moved 12.7 million parcels a day, on average, up from 12.3 million in the 2015 quarter. Average revenue per parcel dipped to $8.10 from $8.19.

Based on the volume increase, ground-based parcels brought in $6.59 billion for the quarter, up from $6.36 billion in the year-ago quarter.

Supply chain-freight profits slipped 2.6% to $147 million, while revenue grew by 10.4% because of the August 2015 acquisition of Coyote Logistics.

At LTL carrier UPS Freight, quarterly revenue declined to $656 million from $710 million in the 2015 first quarter.

Peretz said the company is sticking with its strategy of “disciplined revenue management” and focusing on “serving high-yield middle-market customers.”

Both the number of shipments and gross tonnage hauled during the quarter declined, but LTL revenue per hundredweight, a measure of pricing, increased by 2.1% to $23.25.