UPS braced for lower earnings

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United_Parcel_ServiceAtlanta-based United Parcel Service (UPS) anticipates company earnings last year to fall short of target as it encountered higher peak operating costs, and projects 2015 profit to be slightly below its long-term outlook.

In an official statement, the U.S. express service giant also released advance estimates of its fourth quarter 2014 adjusted diluted earnings per share (EPS), pegging it at about US$1.25.

Full-year 2014 adjusted diluted EPS is expected to be $4.75, up 3.9% over 2013 adjusted diluted EPS of $4.57.

On a generally accepted accounting principles basis, full-year 2014 diluted earnings are expected to be about $3.28 per share, compared to $4.61 in 2013.

Company earnings for 2014 were lower than previous guidance, primarily due to the “underperformance of the U.S. domestic segment,” said the company. It noted that while package volume and revenue results met expectations, operating profit was cut by higher-than-expected peak-related expenses.

“Clearly, our financial performance during the quarter was disappointing,” said David Abney, UPS chief executive officer. “UPS invested heavily to ensure we would provide excellent service during peak when deliveries more than double. Though customers enjoyed high quality service, it came at a cost to UPS. Going forward, we will reduce operating costs and implement new pricing strategies during peak season.”

UPS explained that it harnessed extra capacity to cope with the volume surges on Cyber Monday and peak day, December 22, but saw less-than-expected demand on other days.

“This resulted in a sub-optimized network during peak season. A decline in productivity, increased contract carrier rates, as well as costs associated with overtime and training hours contributed to the excess cost. In addition, the network was somewhat disrupted by volume fluctuations caused by the West Coast port dispute.”

“The rapid expansion of e-commerce has created a complex operating environment during peak season,” said Kurt Kuehn, UPS chief financial officer.  “UPS is in the early stages of a multi-year initiative to adapt our operations to these market challenges. We are making progress, but this quarter reflects that more work needs to be done.”

International operating profit was also below expectations, primarily due to non-recurring charges and currency fluctuations.

Meanwhile, the supply chain and freight segment performed in line with guidance.

Looking ahead, UPS expects solid business growth across all segments in 2015. However, increased pension expense of about $180 million due to lower discount rates, and currency headwinds of more than $50 million will dent on results. The company now anticipates 2015 diluted earnings per share growth to be slightly less than its long-term target of 9% to 13%.

Photo: MobiusDaXter