Peak season operational surge bites into UPS earnings

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UPSAtlanta-based United Parcel Service (UPS) said it was disappointed with its fourth quarter 2014 earnings that fell below expectations as a result of a spike in holiday season operational costs.

UPS said fourth quarter 2014 adjusted diluted earnings per share was US$1.25, flat to the prior-year period. On a general accepted accounting principles or GAAP basis, fourth quarter 2014 diluted earnings were $0.49 per share, compared to $1.25 in 2013.

“UPS customers were delighted with the high quality service we delivered during the holiday season,” said David Abney, group chief executive officer. “However, the financial results were below our expectations.

“As we move into 2015, we will address this disparity with both cost and revenue actions,” continued Abney. “We will take actions necessary to improve profitability by increasing operational efficiency and adjusting price where appropriate.”

He further stated: “Our growth strategy is sound and we reaffirm our long-term target of 9%-to-13% earnings per share growth.”

UPS said operating results in the domestic segment were negatively impacted by higher than expected peak-related expenses.

“We absolutely will charge our customers more for the extra costs that we had in peak,” Abney said in a report by The Wall Street Journal.

The package delivery service delivered 1.3 billion packages during the fourth quarter, an increase of 8.1% over the same period last year. For calendar year 2014, the company completed delivery of 4.6 billion packages, up 6.8% over 2013.

Domestic fourth quarter revenue climbed 7.5% to $10 billion. Daily package volume increased 6.6% with deferred air and ground sales up 11% and 7.1%, respectively.

Fourth-quarter adjusted operating profit was $1.1 billion, a 5.3% drop from the prior-year period. Operating expense increased more than $200 million primarily due to higher than anticipated peak-related costs. Decreased productivity, higher contract carrier rates as well as overtime and training hours contributed to the excess costs.

Total revenue per package was down 0.8%, as lower fuel surcharges and changes in product mix offset increases in base rates. UPS SurePost product grew 28% in the fourth quarter.

On a reported basis, fourth quarter 2014 operating profit was down 63% to $444 million as a result of the pension mark-to-market charge and the transfer of certain healthcare liabilities.

International results

On international revenue, this increased 5.9% to $3.4 billion on 4.3% growth in daily package volume. Export shipments were up 5.2% per day, driven primarily by 8.5% growth from Europe, offset somewhat by a decline in Asia export volume. Non-U.S. domestic products were up 3.6% with strong growth in Canada, Spain and Mexico.

However, currency fluctuations and one-time items, including a restructuring charge, weighed on results to bring down international adjusted operating profit to $536 million, relatively flat with the prior-year.

Export yield contracted 1.7% on a currency-neutral basis, as a result of lower fuel surcharges, product mix and stronger intraregional shipment growth. Non-U.S. domestic revenue per package increased 0.8% when adjusted for currency.

On a reported basis, operating profit for the fourth quarter declined 38% to $335 million as a result of the pension mark-to-market charge and the transfer of certain healthcare liabilities.

Division revenues

Revenue in the domestic segment increased 7.4% to $2.5 billion, driven by growth in distribution and freight. Adjusted operating profit increased 4.7% to $179 million as improvements in distribution and freight were offset by declines in the forwarding unit.

Operating profit for forwarding was lower, as results in North American airfreight and ocean were offset by challenges in international airfreight.

Distribution revenues increased at a mid-teens growth rate, as demand from retail and healthcare customers remained strong. Operating profit expanded over the prior year results.

Freight experienced solid revenue growth of 8.6%, primarily driven by less-than-container load tonnage gains of 4.8% and yield improvements. The business unit expanded operating profit and margin over the prior year.

On a reported basis, operating loss for the fourth quarter 2014 was $25 million as a result of the pension mark-to-market charge and the transfer of certain healthcare liabilities.

Looking ahead, “this year will be one of continuous improvement and advances in strategic initiatives that have great potential for the company,” said Kurt Kuehn, group chief financial officer. “E-commerce growth, operations technology implementation, emerging market expansion and industry specific solutions will provide momentum for UPS as we move throughout the year.

“The company expects growth across all business units,” Kuehn continued. “We anticipate full-year 2015 diluted earnings per share of $5.05 to $5.30, a 6%-to-12% increase over our 2014 adjusted results.”

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