UNITED PARCEL SERVICE INC. Overview
We continue to make progress implementing our Customer First, People Led,
Innovation Driven strategy, which focuses on transforming nearly every aspect of
our business, improving our financial performance, providing the best customer
experience and benefiting our shareowners. The Customer First component of our
strategy focuses on, among other things, enhancing the capabilities that we
believe our customers value the most: speed and ease of access to our services.
As a result, we are continuing to expand our weekend operations and enhance our
digital access program.
In the first quarter, overall growth was driven by business-to-consumer demand
that resulted from elevated e-commerce activity due to the ongoing COVID-19
pandemic. We continued to experience strong volume growth from small- and
medium-sized businesses ("SMBs"), largely driven by our efforts to improve
time-in-transit in our U.S. ground network and the ease of accessing our
services. Business-to-business activity grew in our International Package
segment for the quarter, but declined in our U.S. Domestic Package segment until
March, when we began to experience growth. Overall, we continue to expect the
higher level of residential deliveries to persist. In our Supply Chain & Freight
segment, market demand was elevated in nearly all business units, led by
Forwarding and our healthcare activities.
As previously disclosed, on January 24, 2021 , we entered into a definitive
agreement to divest our UPS Freight business. The transaction closed on April
30, 2021 .
On March 11, 2021 , the American Rescue Plan Act ("ARPA") was signed into law.
The ARPA is intended to prevent certain multiemployer pension plans from
becoming insolvent through 2051. Enactment of the ARPA resulted in a reduction
of our liability for potential coordinating benefits related to the Central
States Pension Fund , triggering a remeasurement of our UPS /IBT Full Time
Employee Pension Plan ("UPS /IBT Plan").
Highlights of our consolidated results for the three months ended March 31, 2021
and 2020, which are discussed in more detail below, include:
Three Months Ended March 31, Change
2021 2020 $ %
Revenue (in millions) $ 22,908 $ 18,035 $ 4,873 27.0 %
Operating Expenses (in millions) 20,143 16,963 3,180 18.7 %
Operating Profit (in millions) $ 2,765 $ 1,072 $ 1,693 157.9 %
Operating Margin 12.1 % 5.9 %
Net Income (in millions) $ 4,792 $ 965 $ 3,827 396.6 %
Basic Earnings Per Share $ 5.50 $ 1.12 $ 4.38 391.1 %
Diluted Earnings Per Share $ 5.47 $ 1.11 $ 4.36 392.8 %
Operating Days 63 64
Average Daily Package Volume (in thousands) 24,145 21,125 14.3 %
Average Revenue Per Piece $ 12.12 $ 10.88 $ 1.24 11.4 %
•Revenue increased in all segments, with double digit revenue per piece growth
in both our U.S. Domestic Package and International Package segments.
•Average daily package volume increased, driven by growth in
business-to-consumer shipping.
•Operating expenses increased primarily due to volume growth.
•Operating profit increased and operating margin expanded in all segments.
•We reported net income of $4.8 billion and diluted earnings per share of $5.47 .
Adjusted diluted earnings per share was $2.77 after adjusting for the after-tax
impacts of:
•a pension mark-to-market gain recognized outside of a 10% corridor of $2.5
billion or $2.86 per diluted share;
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•transformation strategy costs of $90 million or $0.10 per diluted share; and
•a valuation allowance against assets held for sale of $50 million or $0.06 per
diluted share.
In the U.S. Domestic Package segment, volume and revenue growth was highest in
our Ground residential products. Revenue and revenue per piece increased due to
a favorable shift in customer mix, with a significant increase in SMB volume,
base rate increases and capacity surcharges. The increase in residential
delivery volume drove increases in headcount, delivery stops per day, average
daily miles driven and average daily union labor hours, all of which increased
expense. Our investments to improve time-in-transit within our U.S. ground
network also increased expense for the quarter.
The International Package segment experienced volume and revenue growth across
all regions, driven by growth from both large customers and SMBs. Revenue and
revenue per piece increased due to growth in premium and non-premium products,
base rate increases and capacity surcharges. Residential delivery volume growth
drove an increase in third-party pickup and delivery expense.
In the Supply Chain & Freight segment, growth was primarily driven by our
Forwarding and mail services businesses. The Forwarding business continued to
benefit from strong outbound demand from Asia and the application of capacity
surcharges for air freight as the impacts of COVID-19 continued to constrain
capacity in the air cargo market. Mail services benefited from the growth in
e-commerce activity and favorable changes in shipment characteristics.
Healthcare operations experienced strong and broad-based growth, which included
COVID-19 relief efforts. Expense increases were driven by higher third party
transportation costs.
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Supplemental Information - Items Affecting Comparability
We supplement the reporting of our financial information determined under
generally accepted accounting principles ("GAAP") with certain non-GAAP
financial measures, including "adjusted" compensation and benefits, operating
expenses, operating profit, operating margin, other income and (expense), income
before income taxes, income tax expense, effective tax rate, net income and
earnings per share. We believe that these adjusted measures provide additional
meaningful information to assist users of our financial statements in
understanding our financial results and assessing our ongoing performance
because they exclude items that may not be indicative of, or are unrelated to,
our underlying operations and may provide a useful baseline for analyzing trends
in our underlying businesses. These adjusted measures are used internally by
management for business unit operating performance analysis, business unit
resource allocation and in connection with incentive compensation award
determinations.
Adjusted amounts reflect the following:
Three Months Ended March 31,
Non-GAAP Adjustments 2021 2020
Operating Expenses:
Transformation Strategy and Other Costs $ 184 $ 45
Total Adjustments to Operating Expenses $
184
Other Income and (Expense): Defined Benefit Plan Mark-to-Market Gain$ (3,290) $ - Total Adjustments to Other Income and (Expense) $
(3,290) $ -
Total Adjustments to Income Before Income Taxes $
(3,106)
Income Tax Expense (Benefit) from Defined Benefit Plan Mark-to-Market Gain
$ 788 $ - Income Tax Expense (Benefit) from Transformation Strategy and Other Costs
(44) (10)
Total Adjustments to Income Tax Expense $
744
Total Adjustments to Net Income $
(2,362)
Transformation strategy and other costs include a valuation allowance against assets held for sale of$66 million . For additional information regarding assets held for sale, see note 6 to the unaudited, consolidated financial statements included within this report. For additional information regarding our transformation strategy costs see note 18. We also supplement the reporting of revenue, revenue per piece and operating profit with adjusted measures that exclude the period over period impact of foreign currency exchange rate changes and hedging activities. We believe currency-neutral revenue, revenue per piece and operating profit information allows users of our financial statements to understand growth trends in our products and results. We evaluate the performance of our International Package and Supply Chain & Freight segments on this currency-neutral basis. Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reportedU.S. dollar revenue, revenue per piece and operating profit by the current period average exchange rates to derive current period local currency revenue, revenue per piece and operating profit. The derived amounts are then multiplied by the average foreign exchange rates used to translate the comparable results for each month in the prior year period (including the period over period impact of foreign currency hedging activities). The difference between the current period reportedU.S. dollar revenue, revenue per piece and operating profit and the derived current periodU.S. dollar revenue, revenue per piece and operating profit is the period over period impact of currency fluctuations. Adjusted financial measures should not be considered in isolation or as a substitute for the related GAAP measures. Our adjusted financial measures may differ from similar measures used by other companies. 43
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Defined Benefit Plan Mark-to-Market Gain
We incur certain employment-related expenses associated with pension and
postretirement medical benefits. These pension and postretirement medical
benefit costs for company-sponsored defined benefit plans are calculated using
various actuarial assumptions and methodologies, including discount rates,
expected returns on plan assets, healthcare cost trend rates, inflation,
compensation increase rates, mortality rates and coordination of benefits with
plans not sponsored by UPS . Actuarial assumptions are reviewed on an annual
basis, unless circumstances require an interim remeasurement of any of our
plans.
We recognize changes in the fair value of plan assets and net actuarial gains
and losses in excess of a 10% corridor for our pension and postretirement
defined benefit plans immediately as part of other pension income (expense). We
supplement the presentation of our income before income taxes, net income and
earnings per share with adjusted measures that exclude the impact of gains and
losses recognized in excess of the 10% corridor and the related income tax
effects. We believe excluding these mark-to-market impacts provides important
supplemental information by removing the volatility associated with short-term
changes in market interest rates, equity values and similar factors.
As a result of the ARPA, we remeasured the UPS /IBT Plan assets and pension
benefit obligation and recognized a pre-tax mark-to-market gain outside of the
10% corridor of $3.3 billion ($2.5 billion after-tax). For additional
information, refer to note 8 to the unaudited, consolidated financial statements
included within this report.
The components of this gain, which are included in "Other Income and (Expense)"
in the statements of consolidated income, are as follows:
•Coordinating benefits attributable to the Central States Pension Fund ($1.8
billion pre-tax gain): This represents the reduction of the liability for
potential coordinating benefits that may have been required to be paid related
to the Central States Pension Fund .
•Discount rates ($1.8 billion pre-tax gain): The discount rate for the UPS /IBT
Plan increased from 2.98% as of December 31, 2020 to 3.70% as of March 31, 2021 ,
primarily due to an increase in U.S. treasury yields.
•Return on assets ($0.3 billion pre-tax loss): In the first quarter of 2021, the
actual rate of return on plan assets was approximately 220 basis points lower
than our expected rate of return, primarily due to weaker than expected global
equity and U.S. bond market performance.
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Results of Operations - Segment Review
The results and discussions that follow are reflective of how management
monitors and evaluates the performance of our reporting segments.
Certain operating expenses are allocated between our reporting segments using
activity-based costing methods. These activity-based costing methods require us
to make estimates that impact the amount of each expense category that is
attributed to each segment. Changes in these estimates directly impact the
amount of expense allocated to each segment and therefore the operating profit
of each reporting segment. Our allocation methodologies are refined
periodically, as necessary, to reflect changes in our businesses.
Beginning in the first quarter of 2021, we updated our cost allocation
methodology for aircraft engine maintenance expense to better align with
aircraft utilization by segment. This change resulted in a reallocation of
expense from our U.S. Domestic Package segment to our International Package
segment of approximately $15 million for the quarter. There were no other
significant changes in our expense allocation methodologies that affect period
over period comparisons during 2021 or 2020.
Following completion of the divestiture of our UPS Freight business, we intend
to rename our Supply Chain & Freight reporting segment. For additional
information, see note 19 to the unaudited, consolidated financial statements
included within this report.
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Three Months Ended March 31, Change
2021 2020 $ %
Average Daily Package Volume (in thousands):
Next Day Air 2,012 1,883 6.9 %
Deferred 1,513 1,492 1.4 %
Ground 16,827 14,669 14.7 %
Total Average Daily Package Volume 20,352 18,044 12.8 %
Average Revenue Per Piece:
Next Day Air $ 18.39 $ 17.05 $ 1.34 7.9 %
Deferred 13.22 12.54 0.68 5.4 %
Ground 9.83 8.74 1.09 12.5 %
Total Average Revenue Per Piece $ 10.93 $ 9.92 $ 1.01 10.2 %
Operating Days in Period 63 64
Revenue (in millions):
Next Day Air $ 2,331 $ 2,055 $ 276 13.4 %
Deferred 1,260 1,197 63 5.3 %
Ground 10,419 8,204 2,215 27.0 %
Total Revenue $ 14,010 $ 11,456 $ 2,554 22.3 %
Operating Expenses (in millions):
Operating Expenses $ 12,651 $ 11,092 $ 1,559 14.1 %
Transformation Strategy Costs (104) (37) (67) 181.1 %
Adjusted Operating Expense $ 12,547 $ 11,055 $ 1,492 13.5 %
Operating Profit (in millions) and Operating Margin: Operating Profit
$ 1,359 $ 364 $ 995 273.4 % Adjusted Operating Profit$ 1,463 $ 401 $ 1,062 264.8 % Operating Margin 9.7 % 3.2 % Adjusted Operating Margin 10.4 % 3.5 % Revenue
The change in overall revenue was due to the following factors:
Rates / Fuel Total Revenue
Volume Product Mix Surcharge Change
Revenue Change Drivers:
First quarter 2021 vs. 2020 11.0 % 10.6 % 0.7 % 22.3 %
Volume
Average daily volume increased across all products in the first quarter, despite
the impact of one less operating day, with growth strongest in residential
ground services. Business-to-consumer volume grew by approximately 24% year over
year, driven by continued e-commerce growth. Volume growth came from both SMBs
and large customers. SMB volume grew 35.6% for the quarter as a result of
investments to improve time-in-transit in our ground network and to expand our
digital access platform.
Business-to-consumer shipments represented approximately 60% of total average
daily volume in the first quarter, compared to approximately 55% in the first
quarter of 2020. We believe the COVID-19 pandemic accelerated a long-term market
shift towards e-commerce that will result in the level of residential deliveries
remaining elevated. Business-to-business shipments decreased 0.6% for the
quarter, but experienced year over year growth of 8.0% in March as businesses
continued to reopen.
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Average daily volume increased in both our Next Day Air and Deferred products,
driven by increased residential demand as a result of the growth in e-commerce.
This was slightly offset by declines in business-to-business shipments. We
continued to experience declines in Second Day Letter and Second Day Package
volume, due to ongoing shifts in customer preferences.
Ground Residential and SurePost average daily volumes increased by 24% and 35%,
respectively, for the quarter, driven by changes in customer mix and e-commerce
activity. Ground Commercial volume declined overall for the quarter; however, we
experienced Ground Commercial growth in March from certain sectors of the
economy.
Rates and Product Mix
Overall revenue per piece increased in the first quarter due to increases in
base rates, favorable changes in customer mix and continued application of
capacity-driven surcharges. Rates for our ground and air services increased an
average net 4.9% in December 2020 and our SurePost rates also increased in
December 2020 .
Revenue per piece increases for our Next Day Air and Deferred products were
driven by base rates increases and shifts in customer and product mix, partially
offset by a decrease in average billable weight per piece. Revenue per piece for
our Ground products increased primarily due to base rate increases and a shift
in customer mix, slightly offset by a decrease in average billable weight per
piece.
Fuel Surcharges
We apply a fuel surcharge to domestic air and ground services that is adjusted
weekly. The air fuel surcharge is based on the U.S. Department of Energy's
("DOE") Gulf Coast spot price for a gallon of kerosene-type jet fuel, while the
ground fuel surcharge is based on the DOE's On-Highway Diesel Fuel price. Based
on published rates, the average fuel surcharges for domestic Air and Ground
products were as follows:
Three Months Ended March 31, % Point Change
2021 2020 2021 vs 2020
Next Day Air / Deferred 5.9 % 5.9 % - %
Ground 7.2 % 7.2 % - %
While fluctuations in fuel surcharge percentages can be significant from period
to period, fuel surcharges are only one of the many individual components of our
pricing structure that impact our overall revenue and yield. Additional
components include the mix of services sold, the base price and additional
charges for these services and the pricing discounts offered.
Total domestic fuel surcharge revenue increased by $75 million in the first
quarter primarily as a result of volume growth and shifts in product mix.
Operating Expenses
Operating expenses, and operating expenses excluding the year over year impact
of transformation strategy costs, increased in the first quarter, driven by a
$670 million increase in pickup and delivery costs. In addition, the costs of
operating our domestic integrated air and ground network increased $461 million ,
the costs of package sorting increased $154 million and other indirect operating
costs increased $207 million . The increases in expense were driven by several
factors:
•Employee compensation and benefit costs increased $975 million , largely
resulting from:
•residential volume growth and an increase in average daily direct union labor
hours of 13.3%;
•union pay rate increases that were partially offset by productivity
improvements; and
•management payroll increases as a result of salary increases, growth in the
overall size of the workforce and increases in incentive compensation and
commission payments.
We incurred higher employee benefit expenses due to additional headcount,
contractual contribution rate increases to union multiemployer plans and higher
service costs for our company-sponsored pension and postretirement plans,
primarily driven by lower discount rates used to measure the projected benefit
obligations of these plans.
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•Higher third party transportation costs were driven by additional SurePost
volume, increased utilization of outside carriers as part of our investments to
improve time-in-transit within our U.S. ground network and rate increases.
•We incurred higher fuel costs as a result of volume growth and higher average
daily miles driven, as well as increases in the price of diesel and gasoline,
partially offset by lower prices for jet fuel.
Our self-insured automobile liability losses decreased by $76 million compared
to the first quarter of 2020 due to favorable developments in case reserves.
Total cost per piece, and cost per piece excluding the year over year impact of
transformation strategy costs, increased 2.7% and 2.2%, respectively.
Operating Profit and Margin
As a result of the factors described above, operating profit increased $995
million in the first quarter, with operating margins increasing 650 basis points
to 9.7%. Excluding the year over year impact of transformation strategy costs,
adjusted operating profit increased $1.1 billion in the first quarter, with
adjusted operating margins increasing 690 basis points to 10.4%.
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International Package Operations
Three Months Ended March 31, Change
2021 2020 $ %
Average Daily Package Volume (in thousands):
Domestic 2,010 1,668 20.5 %
Export 1,783 1,413 26.2 %
Total Average Daily Package Volume 3,793 3,081 23.1 %
Average Revenue Per Piece:
Domestic $ 7.33 $ 6.44 $ 0.89 13.8 %
Export 31.10 28.32 2.78 9.8 %
Total Average Revenue Per Piece $ 18.50 $ 16.48 $ 2.02 12.3 %
Operating Days in Period 63 64
Revenue (in millions):
Domestic $ 928 $ 688 $ 240 34.9 %
Export 3,493 2,561 932 36.4 %
Cargo and Other 186 134 52 38.8 %
Total Revenue $ 4,607 $ 3,383 $ 1,224 36.2 %
Operating Expenses (in millions):
Operating Expenses $ 3,522 $ 2,832 $ 690 24.4 %
Transformation Strategy Costs (6) (7) 1 (14.3) %
Adjusted Operating Expenses $ 3,516 $ 2,825 $ 691 24.5 %
Operating Profit (in millions) and Operating Margin:
Operating Profit $ 1,085 $ 551 $ 534 96.9 %
Adjusted Operating Profit $ 1,091 $ 558 $ 533 95.5 %
Operating Margin 23.6 % 16.3 %
Adjusted Operating Margin 23.7 % 16.5 %
Currency Benefit / (Cost) - (in millions)*:
Revenue $ 176
Operating Expenses (137)
Operating Profit $ 39 * Net of currency hedging; amount represents the change in currency translation compared to the prior year.
The change in revenue was due to the following:
Rates / Fuel Total Revenue
Volume Product Mix Surcharge Currency Change
Revenue Change Drivers:
First quarter 2021 vs. 2020 21.2 % 7.8 % 2.0 % 5.2 % 36.2 %
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Volume
Average daily volume increased in the first quarter for both domestic and export products, with growth across all customer segments. Business-to-consumer volume increased 78% in the first quarter, driven by strong growth from the retail sector due to the continued growth of e-commerce. Business-to-business volume increased 10% in the first quarter, with growth increasing as the quarter progressed, reaching 24% in March as countries continued to resume commercial activities. Export volume increased across all regions, led byEurope andAsia .Europe export volume growth was highest on theEurope toU.S. and intra-Europe trade lanes, whileUnited Kingdom trade withEurope experienced a slight decline as a result of Brexit challenges.Asia export volume growth was strongest on theAsia toU.S. trade lane. We experienced volume growth from both our large customers and SMBs, with SMB growth across all regions. Our premium products saw volume growth of 34% for the quarter, driven by ourWorldwide Express and Transborder Express products. Volume growth for our non-premium products was 30%, primarily driven by our Transborder Standard product. Domestic volume increased in many of our markets, with growth strongest inCanada as well as several countries in westernEurope , primarily due to residential volume growth driven by e-commerce. Rates and Product Mix InDecember 2020 , we implemented an average 4.9% net increase in base and accessorial rates for international shipments originating inthe United States . Rate changes for shipments originating outside theU.S. are made throughout the year and vary by geographic market. In response to capacity constraints resulting from the COVID-19 pandemic, we implemented surcharges on certain lanes beginning in the second quarter of 2020. Total revenue per piece increased 12.3% as a result of changes in customer and product mix, capacity surcharges, favorable currency movements and fuel surcharges. Excluding the impact of currency, revenue per piece increased 7.8%. Domestic revenue per piece increased 13.8% due to changes in customer and product mix, capacity surcharges and favorable currency movements. Excluding the impact of currency, revenue per piece increased 6.7%. Export revenue per piece increased 9.8% primarily due to changes in customer and product mix, capacity surcharges, favorable currency movements and fuel surcharges. Excluding the impact of currency, revenue per piece increased 6.1%. Fuel Surcharges The fuel surcharge for international air services originating inside or outside theU.S. is largely indexed to theDOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel. The fuel surcharges for ground services originating outside theU.S. are indexed to fuel prices in the region or country where the shipment originates. While fluctuations can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges and the pricing discounts offered. Total international fuel surcharge revenue increased by$89 million as a result of volume growth and changes in customer and product mix, partially offset by declines in fuel surcharge indices. Operating Expenses Operating expenses, and operating expenses excluding the year over year impact of transformation strategy costs, increased for the first quarter of 2021. Pickup and delivery costs increased$310 million as volume growth and an increase in residential deliveries drove additional third-party pickup and delivery expense. Package sorting costs also increased$69 million as a result of volume growth. The costs of operating our integrated international air and ground network increased$204 million , driven by overall volume growth. This volume growth, together with additional flights to support outbound demand fromAsia , resulted in increased block hours which were partially offset by lower jet fuel prices. 50
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In addition to variability in usage and market prices, the manner in which we
purchase fuel also influences the net impact of costs on our results. The
majority of our contracts for fuel purchases utilize index-based pricing
formulas plus or minus a fixed locational/supplier differential. While many of
the indices are aligned, each index may fluctuate at a different pace, driving
variability in the prices paid for fuel. Because of this, our operating results
may be affected should the market price of fuel suddenly change by a significant
amount or change by amounts that do not result in an adjustment in our fuel
surcharges, which can significantly affect our earnings either positively or
negatively in the short-term.
The remaining increase in operating expenses was driven by other indirect costs.
Operating Profit and Margin
Operating profit increased 96.9% to $1.1 billion , with operating margin
increasing 730 basis points to 23.6%. Excluding the year over year impact of
transformation strategy costs, adjusted operating profit increased, with
adjusted operating margin increasing 720 basis points to 23.7%. Operating profit
increased as a result of the factors described above.
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Supply Chain & Freight Operations
Three Months Ended March 31, Change
2021 2020 $ %
Freight LTL Statistics:
Revenue (in millions) $ 634 $ 637 $ (3) (0.5) %
Revenue Per Hundredweight $ 29.63 $ 26.50 $ 3.13 11.8 %
Shipments (in thousands) 2,060 2,225 (7.4) %
Shipments Per Day (in thousands) 32.7 34.8 (6.0) %
Gross Weight Hauled (in millions of lbs) 2,140 2,404 (11.0) %
Weight Per Shipment (in lbs) 1,039 1,081 (3.9) %
Operating Days in Period 63 64
Revenue (in millions):
Forwarding $ 2,072 $ 1,373 $ 699 50.9 %
Logistics 1,104 845 259 30.7 %
Freight 767 766 1 0.1 %
Other 348 212 136 64.2 %
Total Revenue $ 4,291 $ 3,196 $ 1,095 34.3 %
Operating Expenses (in millions):
Operating Expenses $ 3,970 $ 3,039 $ 931 30.6 %
Transformation Strategy and Other Costs (74) (1) (73) N/M
Adjusted Operating Expenses: $ 3,896 $ 3,038 $ 858 28.2 %
Operating Profit (in millions) and Operating Margin:
Operating Profit $ 321 $ 157 $ 164 104.5 %
Adjusted Operating Profit $ 395 $ 158 $ 237 150.0 %
Operating Margin 7.5 % 4.9 %
Adjusted Operating Margin 9.2 % 4.9 %
Currency Benefit / (Cost) - (in millions)*:
Revenue $ 45
Operating Expenses (47)
Operating Profit $ (2)
* Amount represents the change in currency translation compared to the prior year.
Three Months Ended March 31, Change
2021 2020 $ %
Transformation Strategy Costs (in millions):
Forwarding $ 5 $ 1 $ 4 400.0 %
Logistics 2 - 2 N/A
Freight 1 - 1 N/A
Total Transformation Strategy Costs $ 8 $ 1 $ 7 N/M
In January 2021 , we entered into a definitive agreement to divest our UPS
Freight business. As of December 31, 2020 , we classified certain assets and
liabilities of UPS Freight as held for sale in the consolidated balance sheet.
In the first quarter of 2021, we recognized an additional valuation allowance of
$66 million . See note 6 to the unaudited, consolidated financial statements for
additional information.
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Revenue
Total revenue for the Supply Chain & Freight segment increased$1.1 billion in the first quarter. Forwarding revenue increased in the first quarter. In our international air freight business, revenue growth was primarily driven by year over year increases in market rates and by capacity surcharges, as well as continued strong outbound demand fromAsia . Ocean freight forwarding revenue increased due toAsia -export volume growth and higher market rates. Revenue in our truckload brokerage business increased due to volume growth and higher market rates. Within Logistics, revenue in our mail services business increased as a result of volume growth, a favorable shift in product characteristics and annual rate increases. Our healthcare logistics operations experienced strong revenue growth across a broad range of customers.COVID-19 relief efforts also contributed to this growth. UPS Freight revenue was relatively flat in the first quarter. Revenue from our Ground with Freight Pricing product grew; however this growth was largely offset by lower volume and revenue in our truckload businesses. Revenue for the other businesses within Supply Chain & Freight increased, driven by growth in our logistics consulting services, as well as additional volume from service contracts with theU.S. Postal Service . Operating Expenses Total operating expenses for the Supply Chain & Freight segment, and operating expenses excluding the year over year impact of transformation strategy and other costs, increased in the first quarter. Forwarding operating expenses increased$624 million . Purchased transportation increased$591 million due to cost per load and volume increases in our truckload brokerage business, as well as higher market rates and volumes in our international air freight and ocean freight businesses. Logistics operating expenses increased$224 million , driven by higher purchased transportation expense in mail services as a result of volume growth and carrier rate increases, as well as volume growth in the healthcare sector. UPS Freight operating expenses decreased$2 million in the first quarter. The impact of lower volumes in our less-than-truckload ("LTL") and truckload businesses and a year over year reduction in self-insurance costs were largely offset by an additional valuation allowance related to the divestiture ofUPS Freight. Expense for the other businesses within Supply Chain & Freight increased due to growth in our logistics consulting services and additional volume from theU.S. Postal Service . Operating Profit and Margin Operating profit for the Supply Chain & Freight segment increased$164 million in the first quarter, with operating margin increasing 260 basis points to 7.5%. Excluding the year over year impact of transformation strategy and other costs, adjusted operating profit increased$237 million , with adjusted operating margin increasing 430 basis points to 9.2%. Operating profit and adjusted operating profit increased as a result of the factors described above. 53
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated Operating Expenses
Three Months Ended
March 31, Change
2021 2020 $ %
Operating Expenses (in millions):
Compensation and benefits $ 11,483 $ 10,086 $ 1,397 13.9 %
Transformation Strategy and Other Costs (76) (12) (64) N/M
Adjusted Compensation and benefits $ 11,407 $ 10,074 $ 1,333 13.2 %
Repairs and maintenance $ 619 $ 563 $ 56 9.9 %
Depreciation and amortization 722 648 74 11.4 %
Purchased transportation 4,243 2,931 1,312 44.8 %
Fuel 807 761 46 6.0 %
Other occupancy 466 383 83 21.7 %
Other expenses 1,803 1,591 212 13.3 %
Total Other expenses 8,660 6,877 1,783 25.9 %
Transformation Strategy and Other Costs (108) (33) (75) 227.3 %
Adjusted Total Other expenses $ 8,552 $ 6,844 $ 1,708 25.0 %
Total Operating Expenses $ 20,143 $ 16,963 $ 3,180 18.7 %
Adjusted Total Operating Expenses $ 19,959 $ 16,918 $ 3,041 18.0 %
Currency (Benefit) / Cost - (in millions)* $ 184
* Amount represents the change in currency translation compared to the prior year.
Three Months Ended
March 31, Change
2021 2020 $ %
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs:
Compensation $ 6 $ 8 $ (2) (25.0) %
Benefits 70 4 66 N/M
Other occupancy 1 2 (1) (50.0) %
Other expenses 41 31 10 32.3 %
Total Transformation Strategy Costs $ 118 $ 45 $ 73 162.2 %
Valuation allowance on assets held for sale:
Other expenses $ 66 $ - $ 66 N/A
Total Adjustments to Operating Expenses
308.9 %
Compensation and Benefits
Total compensation and benefits, and total compensation and benefits excluding
the year over year impact of transformation strategy costs, increased in the
first quarter of 2021.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Total compensation costs increased $795 million or 13.5%. Excluding the year
over year impact of transformation strategy costs, adjusted total compensation
costs increased $797 million , driven by higher U.S. Domestic direct labor costs
as a result of growth in average daily volume. This volume growth drove
additional headcount and an increase in average daily union hours of 13.3%.
Contractual union wage increases also contributed to the increase in
compensation costs for hourly employees. Compensation costs for management
employees increased due to salary increases, growth in the overall size of the
workforce and increases in incentive compensation and commission payments.
Benefits costs increased $602 million or 14.4%. Excluding the year over year
impact of transformation strategy costs, adjusted benefits costs increased $536
million as a result of:
•Health and welfare costs increased $164 million , primarily as a result of
increased contributions to multiemployer plans driven by the overall increase in
the size of the workforce and contractual rate increases.
•Pension and other postretirement benefits increased $225 million due to higher
service costs for company-sponsored plans, primarily driven by a reduction in
discount rates, as well as increased contributions to multiemployer plans as a
result of contractually-mandated contribution increases and the overall increase
in the size of the workforce.
•Vacation, excused absence, payroll taxes and other costs increased $156
million , primarily driven by salary and wage increases and growth in the overall
size of the workforce, as well as additional discretionary bonus payments.
•Workers' compensation costs decreased $9 million driven by favorable
developments in claims reserves that were partially offset by growth in hours,
medical trends and wage increases.
Repairs and Maintenance
We incurred higher costs for aircraft engine maintenance, primarily due to the
increase in operating activity as well as the replacement of parts on certain
types of aircraft. Repairs and maintenance for buildings and facilities also
increased, primarily as a result of additional facilities coming into service.
Depreciation and Amortization
Depreciation and amortization expense increased as a result of investments in
facility automation and capacity expansion projects that came online after the
first quarter of 2020, as well as growth in the size of our vehicle and aircraft
fleets and additional investments in internally developed software.
Purchased Transportation
The overall increase in third-party transportation expense charged to us by
third-party air, ocean and truck carriers was primarily driven by:
•Forwarding and Logistics expense increased $724 million , primarily due to
increased market rates in our international air freight business, as well as
volume growth and rate increases in our ocean freight, mail services and
truckload brokerage businesses.
•U.S. Domestic Package expense increased $296 million resulting from investments
to improve time-in-transit in our U.S. ground network. Additionally, increases
in SurePost volume and growth in our other products resulted in approximately
$70 million of incremental third-party transportation cost.
•International Package expense increased $253 million , primarily due to volume
increases in Asia and Europe that drove higher third-party pickup and delivery
cost and unfavorable currency movements.
Fuel
The increase in fuel expense was driven by an increase in aircraft block hours
and delivery miles driven as a result of increased package volume. These
increases were partially offset by lower jet fuel prices.
Other Occupancy
Other occupancy expense, and other occupancy expense excluding the year over
year impact of transformation strategy costs, increased due to additional
operating facilities coming into service and higher costs for weather related
expenses, such as snow removal.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Expenses
Other expenses, and other expenses excluding the year over year impact of
transformation strategy and other costs, increased as a result of the following:
•Other operational expenses, including vehicle and equipment rentals, increased
$74 million as a result of volume growth.
•Professional fees related to business support services increased $32 million .
•Asset impairments increased $24 million driven by the timing of cancellation of
certain facility expansion projects.
•Other increases included reserves for certain tax positions and legal
contingencies, payment processing fees, non-income based taxes, package claims
and information technology expenses. These were largely offset by reductions in
self-insured automobile liability claims of $91 million due to improvements in
claims experience, allowances for credit losses and employee expense
reimbursements.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Income and (Expense)
The following table sets forth investment income and other and interest expense
for the three months ended March 31, 2021 and 2020 (in millions):
Three Months Ended March 31, Change
2021 2020 $ %
Investment Income and Other $ 3,616 $ 345 $ 3,271 N/M
Defined Benefit Plan Mark-to-Market Gain
-$ (3,290) N/A Adjusted Investment Income and Other$ 326 $ 345 $ (19) (5.5) % Interest Expense (177) (167) (10) 6.0 % Total Other Income and (Expense)$ 3,439 $ 178 $ 3,261 N/M Adjusted Other Income and (Expense)$ 149 $ 178 $ (29) (16.3) % Investment Income and Other Investment income and other increased$3.3 billion , inclusive of a defined benefit plan mark-to-market gain recognized inMarch 2021 . Excluding the impact of this mark-to-market gain, adjusted investment income and other decreased$19 million , primarily due to a decrease in other pension income, which includes expected investment returns on pension assets, net of interest cost on projected benefit obligations and prior service costs. •Expected returns on pension assets decreased as a result of a reduction in the expected rate of return assumption, partially offset by a higher asset base due to discretionary contributions and positive asset returns in 2020. •Pension interest cost decreased due to the impact of lower year end discount rates that was partially offset by ongoing plan growth and an increase in projected benefit obligations. Additional impacts included foreign currency losses, lower yields on invested assets and a gain from fair value changes in certain non-current investments. Interest Expense Interest expense increased, primarily driven by the effect of debt issuances at the end of the first quarter of 2020 partially offset by lower average outstanding balances and effective interest rates on floating rate debt and commercial paper. 57
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Tax Expense
The following table sets forth our income tax expense and effective tax rate for
the three months ended March 31, 2021 and 2020 (in millions):
Three Months Ended March 31, Change
2021 2020 $ %
Income Tax Expense $ 1,412 $ 285 $ 1,127 395.4 %
Income Tax Impact of:
Defined Benefit Plan Mark-to-Market Gain (788) - (788) N/A
Transformation Strategy and Other Costs 44 10 34 340.0 %
Adjusted Income Tax Expense $ 668 $ 295 $ 373 126.4 %
Effective Tax Rate 22.8 % 22.8 %
Adjusted Effective Tax Rate 21.6 % 22.8 %
For additional information on our income tax expense and effective tax rate, see
note 17 to the unaudited, consolidated financial statements included in this
report.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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