UNITED PARCEL SERVICE INC. Overview
We continue to implement our Customer First, People Led, Innovation Driven strategy that focuses on transforming 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 have improved time-in-transit in ourU.S. ground network and continue to expand our weekend operations. In the second quarter, our consolidated package volume was relatively unchanged year over year as COVID-19 related volume was present in both periods. However, we experienced a significant year-over-year change in volume mix as business-to-business activity continued to return toward pre-pandemic levels, contributing to margin improvement, while business-to-consumer volume declined. We continued to experience strong volume growth from small- and medium-sized businesses ("SMBs"), driven by the execution of our Customer First strategy. The diverse business units withinSupply Chain Solutions experienced varied impacts compared to the prior year dependent upon market forces. OnApril 30, 2021 , we completed the previously-announced divestiture of ourUPS Freight business, recording a pre-tax gain of$101 million for the quarter ($35 million year to date). Cash proceeds of$848 million were used to reduce outstanding indebtedness. The divestiture also triggered a remeasurement of certain of ourU.S. defined benefit pension and postretirement plans. The resulting$2.1 billion actuarial gain was within our 10% corridor (defined as 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation) and had only an immaterial impact on results of operations for the quarter. For additional information regarding the divestiture ofUPS Freight, see note 6 to the unaudited, consolidated financial statements included within this report. Following enactment of the American Rescue Plan Act ("ARPA") during the first quarter of 2021, we remeasured theUPS /IBT Full Time Employee Pension Plan. This resulted in us recording a$3.3 billion , pre-tax mark-to-market gain in the first quarter. Highlights of our consolidated results, which are discussed in more detail below, include: Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % Revenue (in millions)$ 23,424 $ 20,459 $ 2,965 14.5 %$ 46,332 $ 38,494 $ 7,838 20.4 % Operating Expenses (in millions) 20,166 18,247 1,919 10.5 % 40,309 35,210 5,099 14.5 % Operating Profit (in millions)$ 3,258 $ 2,212 $ 1,046 47.3 %$ 6,023 $ 3,284 $ 2,739 83.4 % Operating Margin 13.9 % 10.8 % 13.0 % 8.5 % Net Income (in millions)$ 2,676 $ 1,768 $ 908 51.4 %$ 7,468 $ 2,733 $ 4,735 173.3 % Basic Earnings Per Share$ 3.06 $ 2.04 $ 1.02 50.0 %$ 8.54 $ 3.16 $ 5.38 170.3 % Diluted Earnings Per Share$ 3.05 $ 2.03 $ 1.02 50.2 %$ 8.51 $ 3.14 $ 5.37 171.0 % Operating Days 64 64 127 128 Average Daily Package Volume (in thousands) 24,236 24,436 (0.8) % 24,191 22,780 6.2 % Average Revenue Per Piece$ 12.26 $ 10.63 $ 1.63 15.3 %$ 12.19 $ 10.74 $ 1.45 13.5 % •Revenue increased in all segments, with double digit revenue per piece growth in both ourU.S. Domestic Package and International Package segments. •Average daily package volume decreased 0.8% (increased 6.2% year to date), driven by a decrease in business-to-consumer volume, largely offset by growth in business-to-business shipping. •Operating profit increased and operating margin expanded in all segments. 45
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•We reported net income of $2.7 billion and diluted earnings per share of $3.05
for the second quarter ($7.5 billion and $8.51 per share year to date). Adjusted
diluted earnings per share was $3.06 ($5.83 per share year to date) after
adjusting for the after-tax impacts of:
•a gain on the divestiture of UPS Freight of $77 million or $0.09 per diluted
share ($27 million or $0.03 per diluted share year to date);
•transformation strategy costs of $88 million or $0.10 per diluted share ($178
million and $0.20 per diluted share year to date); and
•a first quarter pension mark-to-market gain recognized outside of a 10%
corridor of $2.5 billion or $2.85 per diluted share that impacted year-to-date
earnings.
In the U.S. Domestic Package segment, volume decreased in the second quarter,
driven by lower residential volume in our Ground and SurePost products that was
largely attributable to the surge in residential deliveries last year that
resulted from the COVID-19 pandemic. Revenue and revenue per piece increased
through our revenue quality initiatives, with favorable shifts in customer and
product mix and base rate increases, as well as an increase in fuel surcharges.
Expense increases for the quarter were driven by compensation and benefits,
costs associated with our ground network investments and higher fuel prices.
The International Package segment experienced volume and revenue growth in
domestic and export products, with growth led by SMBs but also coming from large
customers. Revenue and revenue per piece increased due to shifts in product mix,
base rate increases, favorable currency movements and fuel and capacity
surcharges. Expense increases were driven primarily by volume growth, with
additional third-party pickup and delivery expense and higher network costs
driven by aircraft block hours and jet fuel prices.
In the Supply Chain Solutions segment, revenue growth was primarily driven by
the Forwarding and Logistics businesses, partially offset by the impact of the
divestiture of UPS Freight. Forwarding revenue growth was driven by truckload
brokerage and ocean freight forwarding. While air freight forwarding grew year
to date, volume declined in the second quarter as Asia exports were impacted by
the prior year surge in shipments of personal protective equipment. Within
Logistics, healthcare operations, led by clinical trials and COVID-19 relief
efforts, experienced strong and broad-based growth. Expense increases in Supply
Chain Solutions were primarily driven by higher third party transportation
costs.
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RESULTS OF OPERATIONS
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. These include: "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 non-GAAP measures provide additional meaningful
information to assist users of our financial statements in more fully
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 non-GAAP 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 June 30, Six Months Ended June 30,
Non-GAAP Adjustments 2021 2020 2021 2020
Operating Expenses:
Transformation and Other Costs $ 15 $ 112 $ 199 $ 157
Total Adjustments to Operating Expenses $ 15 Other Income and (Expense): Defined Benefit Plan Mark-to-Market Gain $ - $ -$ (3,290) $ - Total Adjustments to Other Income and (Expense) $ -
$ -
Total Adjustments to Income Before Income Taxes $ 15
Income Tax Expense (Benefit) from Defined Benefit Plan Mark-to-Market Gain
$ -
$ -
(4) (29) (48) (39)
Total Adjustments to Income Tax Expense $ (4) Total Adjustments to Net Income $ 11
Restructuring and Other Charges Adjusted operating profit, operating margin, income before income taxes, net income and earnings per share may exclude the impact of charges related to any restructuring programs, including transformation costs and asset impairments. Transformation and other costs include a$101 million gain on the divestiture of UPS Freight in the second quarter ($35 million year to date). For additional information regarding our transformation strategy costs see note 18 to the unaudited, consolidated financial statements included within this report. Changes in Foreign Currency Exchange Rates and Hedging Activities 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 andSupply Chain Solutions segments on this currency-neutral basis. 47
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Currency-neutral revenue, revenue per piece and operating profit are calculated
by dividing current period reported U.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 currency 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 reported U.S. dollar
revenue, revenue per piece and operating profit and the derived current period
U.S. dollar revenue, revenue per piece and operating profit is the period over
period impact of currency fluctuations.
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 (defined as 10% of the greater of the
fair value of plan assets or the plan's projected benefit obligation) 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 enactment of 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) in the first
quarter of 2021. 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.
For additional information, refer to note 8 to the unaudited, consolidated
financial statements included within this report.
Non-GAAP financial measures should be considered in addition to, and not as an
alternative for, our reported results prepared in accordance with GAAP. Our
adjusted financial information does not represent a comprehensive basis of
accounting. Therefore, our adjusted financial information may not be comparable
to similarly titled information reported by other companies.
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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 $16 million for the quarter ($31 million year to date).
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 UPS Freight, we renamed our Supply
Chain & Freight segment to our Supply Chain Solutions segment. No other changes
are being made to this segment that would impact prior period results.
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RESULTS OF OPERATIONS
U.S. Domestic Package
Six Months Ended
Three Months Ended June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
Average Daily Package Volume (in thousands):
Next Day Air 2,071 1,865 11.0 % 2,041 1,874 8.9 %
Deferred 1,581 1,702 (7.1) % 1,548 1,597 (3.1) %
Ground 16,856 17,560 (4.0) % 16,842 16,114 4.5 %
Total Average Daily Package Volume 20,508 21,127 (2.9) % 20,431 19,585 4.3 %
Average Revenue Per Piece:
Next Day Air $ 18.53 $ 16.62 $ 1.91 11.5 % $ 18.47 $ 16.84 $ 1.63 9.7 %
Deferred 12.98 11.92 1.06 8.9 % 13.09 12.21 0.88 7.2 %
Ground 9.86 8.71 1.15 13.2 % 9.84 8.72 1.12 12.8 %
Total Average Revenue Per Piece $ 10.97 $ 9.67 $ 1.30 13.4 % $ 10.95 $ 9.79 $ 1.16 11.8 %
Operating Days in Period 64 64 127 128
Revenue (in millions):
Next Day Air $ 2,456 $ 1,984 $ 472 23.8 % $ 4,787 $ 4,039 $ 748 18.5 %
Deferred 1,313 1,298 15 1.2 % 2,573 2,495 78 3.1 %
Ground 10,633 9,792 841 8.6 % 21,052 17,996 3,056 17.0 %
Total Revenue $ 14,402 $ 13,074 $ 1,328 10.2 % $ 28,412 $ 24,530 $ 3,882 15.8 %
Operating Expenses (in millions):
Operating Expenses $ 12,835 $ 11,892 $ 943 7.9 % $ 25,486 $ 22,984 $ 2,502 10.9 %
Transformation Strategy Costs (108) (33) (75) 227.3 % (212) (70) (142) 202.9 %
Adjusted Operating Expense $ 12,727 $ 11,859 $ 868 7.3 % $ 25,274 $ 22,914 $ 2,360 10.3 %
Operating Profit (in millions) and Operating Margin:
Operating Profit $ 1,567 $ 1,182 $ 385 32.6 % $ 2,926 $ 1,546 $ 1,380 89.3 %
Adjusted Operating Profit $ 1,675 $ 1,215 $ 460 37.9 % $ 3,138 $ 1,616 $ 1,522 94.2 %
Operating Margin 10.9 % 9.0 % 10.3 % 6.3 %
Adjusted Operating Margin 11.6 % 9.3 % 11.0 % 6.6 %
RevenueThe change in overall revenue was due to the following factors:
Rates / Fuel Total Revenue
Volume Product Mix Surcharge Change
Revenue Change Drivers:
Second quarter 2021 vs. 2020 (2.9) % 10.9 % 2.2 % 10.2 %
Year to date 2021 vs. 2020 3.5 % 10.9 % 1.4 % 15.8 %
Volume
Average daily volume decreased in the second quarter but increased year to date.
The volume decline for the quarter was largely attributable to the surge in
residential deliveries last year that resulted from the COVID-19 pandemic. This
contributed to a year-over-year reduction in e-commerce volume from our large
customers that was partially offset by growth from SMBs as a result of our
Customer First strategic focus. SMB volume grew 21.6% for the quarter and 28.2%
year to date.
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Business-to-consumer shipments, which represented approximately 60% of the total
average daily volume in the second quarter, compared to approximately 69% in the
second quarter of 2020, declined 15.8% (up 0.2% year to date). While residential
volume remained elevated, shipments decreased year over year due to the surge in
e-commerce activity last year as a result of stay-at-home restrictions imposed
in response to COVID-19. Notwithstanding the quarterly decline, we believe there
has been a long-term market shift towards e-commerce that will cause the volume
of residential deliveries to remain above its pre-pandemic level.
Business-to-business volume grew by 25.7% in the quarter (up 11.1% year to
date), as business activity continued to increase toward pre-pandemic levels
across all industry sectors.
Average daily volume increased in our Next Day Air product in the second quarter
and year to date, with increased demand from both large customers and SMBs,
primarily as a result of the increased business-to-business activity described
above. Residential demand for this product increased year to date as a result of
year over year growth in e-commerce. Average daily volume decreased in our
Deferred product for the second quarter and year to date as we continued to
experience declines in Second Day Package volume due to ongoing shifts in
customer preferences.
Ground residential and SurePost average daily volumes decreased by 11% and 31%,
respectively, for the quarter (up 3.8% and down 8.2%, respectively, year to
date), primarily due to last year's surge in e-commerce activity in the second
quarter. Ground commercial volume increased in the second quarter and year to
date, driven by strong growth from both large customers and SMBs due to the
overall increase in business activity. Following the divestiture of UPS Freight,
our Ground with Freight Pricing product began to be reported within U.S.
Domestic Ground volume effective May 1, 2021 . This did not have a significant
impact on overall growth for the quarter or year-to-date periods.
Rates and Product Mix
Overall revenue per piece increased in the second quarter and year to date as
our revenue quality initiatives drove base rate increases and favorable changes
in customer and product mix. Revenue per piece also increased as a result of
capacity and fuel surcharges and increases in average billable weight per piece.
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 . We anticipate that
our revenue quality initiatives will lead to revenue growth exceeding volume
growth for the remainder of the year.
Revenue per piece increases for our Next Day Air and Deferred products in the
second quarter and year-to-date periods were driven by base rate increases and
favorable 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 in the second quarter and year to date due to base rate increases,
increases in average billable weight per piece and favorable shifts in customer
and product mix.
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:
Six Months Ended
Three Months Ended June 30, % Point Change June 30, % Point Change
2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Next Day Air / Deferred 6.9 % 1.9 % 5.0 % 6.4 % 3.9 % 2.5 %
Ground 8.0 % 6.4 % 1.6 % 7.6 % 6.8 % 0.8 %
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 $279 million in the second
quarter (up $354 million year to date) primarily as a result of higher fuel
surcharge indices, volume growth and shifts in product mix.
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Operating Expenses
Operating expenses, and operating expenses excluding the year over year impact
of transformation strategy costs, increased in the second quarter, driven by a
$563 million increase in the cost of operating our integrated air and ground
network. In addition, pickup and delivery costs increased $239 million and the
cost of package sorting increased $119 million . These increases were partially
offset by a decrease in other indirect operating costs of $53 million . The
increase in expense was driven by:
•Employee compensation and benefit costs increased $407 million , driven by
higher employee benefit expenses due to contractual contribution rate increases
and additional headcount becoming eligible for health, welfare and retirement
benefits. Workers' compensation expenses increased $73 million as a result of
additional hours, medical and wage inflation and unfavorable claims trends.
Management payroll increased, primarily due to incentive compensation and
commission payments, with payroll in our operations remaining relatively flat
for the quarter.
•Higher third party carrier costs as part of our investments to improve
time-in-transit within our ground network and to expand weekend operations.
Increases were offset by lower other third party transportation costs as a
result of decreases in SurePost and rail volumes.
•Higher fuel costs as a result of increases in the price of diesel, gasoline and
jet fuel, coupled with higher fuel usage.
On a year-to-date basis, operating expenses and operating expenses excluding the
year over year impact of transformation strategy costs, increased. Pickup and
delivery costs increased $909 million ; the costs of operating our integrated air
and ground network increased $1.0 billion ; package sorting increased $273
million and other indirect operating costs increased $154 million . These
increases were primarily driven by higher volume, increased employee headcount
and hours resulting in higher compensation and benefit costs and by investments
in our ground network.
Total cost per piece increased 11.2% for the second quarter (up 7.1% year to
date). Excluding the impact of transformation strategy costs, adjusted cost per
piece increased 10.6% for the second quarter (up 6.6% year to date). We
anticipate that cost per piece may continue to increase as a result of market
factors, including the availability and cost of labor.
Operating Profit and Margin
As a result of the factors described above, operating profit increased $385
million in the second quarter (up $1.4 billion year to date), with operating
margin increasing 190 basis points to 10.9% (up 400 basis points to 10.3% year
to date). Excluding the year over year impact of transformation strategy costs,
adjusted operating profit increased $460 million in the second quarter (up $1.5
billion year to date), with adjusted operating margin increasing 230 basis
points to 11.6% (up 440 basis points to 11.0% year to date).
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International Package
Six Months Ended
Three Months Ended June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
Average Daily Package Volume (in
thousands):
Domestic 1,967 1,764 11.5 % 1,988 1,716 15.9 %
Export 1,761 1,545 14.0 % 1,772 1,479 19.8 %
Total Average Daily Package Volume 3,728 3,309 12.7 % 3,760 3,195 17.7 %
Average Revenue Per Piece:
Domestic $ 7.44 $ 6.37 $ 1.07 16.8 % $ 7.38 $ 6.41 $ 0.97 15.1 %
Export 32.60 28.56 4.04 14.1 % 31.85 28.45 3.40 12.0 %
Total Average Revenue Per Piece $ 19.32 $ 16.73 $ 2.59 15.5 % $ 18.91 $ 16.61 $ 2.30 13.8 %
Operating Days in Period 64 64 127 128
Revenue (in millions):
Domestic $ 936 $ 719 $ 217 30.2 % $ 1,864 $ 1,407 $ 457 32.5 %
Export 3,674 2,824 850 30.1 % 7,167 5,385 1,782 33.1 %
Cargo and Other 207 162 45 27.8 % 393 296 97 32.8 %
Total Revenue $ 4,817 $ 3,705 $ 1,112 30.0 % $ 9,424 $ 7,088 $ 2,336 33.0 %
Operating Expenses (in millions):
Operating Expenses $ 3,633 $ 2,934 $ 699 23.8 % $ 7,155 $ 5,766 $ 1,389 24.1 %
Transformation Strategy Costs (6) (71) 65 (91.5) % (12) (78) 66 (84.6) %
Adjusted Operating Expenses $ 3,627 $ 2,863 $ 764 26.7 % $ 7,143 $ 5,688 $ 1,455 25.6 %
Operating Profit (in millions) and Operating Margin: Operating Profit
$ 1,184 $ 771 $ 413 53.6 %$ 2,269 $ 1,322 $ 947 71.6 % Adjusted Operating Profit$ 1,190 $ 842 $ 348 41.3 %$ 2,281 $ 1,400 $ 881 62.9 % Operating Margin 24.6 % 20.8 % 24.1 % 18.7 % Adjusted Operating Margin 24.7 % 22.7 % 24.2 % 19.8 % Currency Benefit / (Cost) - (in millions)*: Revenue$ 218 $ 394 Operating Expenses (176) (313) Operating Profit$ 42 $ 81
* 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:
Second quarter 2021 vs. 2020 12.7 % 5.2 % 6.2 % 5.9 % 30.0 %
Year to date 2021 vs. 2020 16.8 % 6.4 % 4.2 % 5.6 % 33.0 %
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Volume
Average daily volume increased in the second quarter and year to date for both domestic and export products, with growth across a number of customer segments. Business-to-business volume increased 25% in the second quarter (up 17% year to date) as commercial activity returned towards pre-pandemic levels. Business-to-consumer volume decreased 4% in the second quarter, primarily due to the surge in e-commerce activity last year as a result of stay-at-home restrictions imposed in response to COVID-19. On a year-to-date basis, business-to-consumer volume increased 25%, driven by continued growth in e-commerce within the retail sector. Overall export volume increased in the second quarter and year to date. Growth was led byEurope , whileAsia experienced a slight decline in export volume in the second quarter.Europe export volume growth was highest on theEurope toU.S. and intra-Europe trade lanes, whileUnited Kingdom trade withEurope declined as a result of Brexit. The decline inAsia export volume was primarily due to shipments of personal protective equipment in the second quarter of last year that did not repeat. On a year-to-date basis,Asia export volume grew, led by theAsia toU.S. trade lane. We experienced volume growth from both SMBs and large customers, with significant SMB growth in several regions for the quarter and year-to-date periods driven by execution of our Customer First strategy. Our premium products saw volume growth of 21% for the quarter (27% year to date), driven by ourWorldwide Express and Transborder Express products. Volume growth for our non-premium products was 10% for the quarter (19% year to date), driven by Transborder Standard shipments within theEuropean Union . As a result of Brexit, which became effectiveJanuary 1, 2021 , shipments between theUK and theEuropean Union that are now subject to duties and taxes shifted from our Transborder to our Worldwide products. As a result of this shift, we saw year over year volume growth in our Worldwide Standard product. Domestic volume increased in the second quarter and year to date in many of our markets, with the strongest second quarter growth in theUnited Kingdom and westernEurope , as commercial volume continued to recover towards pre-pandemic levels. 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 15.5% in the quarter (up 13.8% year to date) as a result of favorable currency movements, changes in customer and product mix and fuel and capacity surcharges. Excluding the impact of currency, revenue per piece increased 10.2% (up 9.0% year to date). Domestic revenue per piece increased 16.8% in the quarter (up 15.1% year to date) due to favorable currency movements, changes in customer and product mix and fuel surcharges. Excluding the impact of currency, revenue per piece increased 6.4% for both the quarter and year to date. Export revenue per piece increased 14.1% in the quarter (up 12.0% year to date) due to favorable currency movements, changes in customer and product mix and fuel and capacity surcharges. Excluding the impact of currency, revenue per piece increased 10.1% (up 8.1% year to date). 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$256 million for the second quarter ($345 million year to date) as a result of increases in fuel surcharge indices and volume growth, as well as changes in customer and product mix. 54
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Expenses
Operating expenses, and operating expenses excluding the year over year impact
of transformation strategy costs, increased in both the second quarter and
year-to-date periods. Pickup and delivery costs increased $286 million in the
second quarter ($596 million year to date), primarily due to volume growth that
drove additional third-party expense. Package sorting costs increased $71
million for the second quarter ($140 million year to date), also as a result of
volume growth.
The costs of operating our integrated international air and ground network
increased $345 million for the second quarter ($549 million year to date),
driven by overall volume growth and higher jet fuel prices.
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
As a result of the factors described above, operating profit increased 53.6% for
the second quarter to $1.2 billion (increased 71.6% to $2.3 billion year to
date), with operating margin increasing 380 basis points to 24.6% (540 basis
points to 24.1% year to date). Excluding the year over year impact of
transformation strategy costs, adjusted operating profit increased, with
adjusted operating margin increasing 200 basis points to 24.7% (440 basis points
to 24.2% year to date).
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RESULTS OF OPERATIONS
Supply Chain Solutions
Six Months Ended
Three Months Ended June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
Freight LTL Statistics:
Revenue (in millions) $ 247 $ 585 $ (338) (57.8) % $ 881 $ 1,222 $ (341) (27.9) %
Revenue Per Hundredweight $ 30.72 $ 26.82 $ 3.90 14.5 % $ 29.93 $ 26.65 $ 3.28 12.3 %
Shipments (in thousands) 769 2,071 (62.9) % 2,829 4,296 (34.1) %
Shipments Per Day (in thousands) 35.0 32.4 8.0 % 33.3 33.6 (0.9) %
Gross Weight Hauled (in millions of
lbs) 804 2,181 (63.1) % 2,944 4,585 (35.8) %
Weight Per Shipment (in lbs) 1,045 1,053 (0.8) % 1,041 1,067 (2.4) %
Operating Days in Period 22 64 85 128
Revenue (in millions):
Forwarding $ 2,309 $ 1,771 $ 538 30.4 % $ 4,381 $ 3,144 $ 1,237 39.3 %
Logistics 1,162 977 185 18.9 % 2,266 1,822 444 24.4 %
Freight 297 724 (427) (59.0) % 1,064 1,490 (426) (28.6) %
Other 437 208 229 110.1 % 785 420 365 86.9 %
Total Revenue $ 4,205 $ 3,680 $ 525 14.3 % $ 8,496 $ 6,876 $ 1,620 23.6 %
Operating Expenses (in millions):
Operating Expenses $ 3,698 $ 3,421 $ 277 8.1 % $ 7,668 $ 6,460 $ 1,208 18.7 %
Transformation Strategy and Other 99 (8) 107 N/M 25 (9) 34 (377.8) %
Adjusted Operating Expenses: $ 3,797 $ 3,413 $ 384 11.3 % $ 7,693 $ 6,451 $ 1,242 19.3 %
Operating Profit (in millions) and Operating Margin:
Operating Profit $ 507 $ 259 $ 248 95.8 % $ 828 $ 416 $ 412 99.0 %
Adjusted Operating Profit $ 408 $ 267 $ 141 52.8 % $ 803 $ 425 $ 378 88.9 %
Operating Margin 12.1 % 7.0 % 9.7 % 6.1 %
Adjusted Operating Margin 9.7 % 7.3 % 9.5 % 6.2 %
Currency Benefit / (Cost) - (in millions)*:
Revenue $ 64 $ 109
Operating Expenses (70) (117)
Operating Profit $ (6) $ (8)
* Amount represents the change in currency translation compared to the prior year.
Six Months Ended
Three Months Ended June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
Transformation Strategy Costs (in
millions):
Forwarding $ 1 $ 4 $ (3) (75.0) % $ 6 $ 5 $ 1 20.0 %
Logistics 1 4 (3) (75.0) % 3 4 (1) (25.0) %
Freight - - - N/A 1 - 1 N/A
Total Transformation Strategy Costs $ 2 $ 8 11.1 %
As previously disclosed, inJanuary 2021 we entered into an agreement to divest our UPS Freight business. This transaction closed onApril 30, 2021 . In the second quarter, we recognized a pre-tax gain of$101 million ($35 million year to date) related to this divestiture. See note 6 to the unaudited, consolidated financial statements for additional information. 56
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue
Total revenue for theSupply Chain Solutions segment increased$525 million in the second quarter ($1.6 billion year to date). Forwarding revenue increased in the second quarter and year-to-date periods. Revenue growth in our truckload brokerage business was primarily driven by market rate increases for both the quarter and year-to-date periods, with volumes also increasing slightly. Ocean freight forwarding revenue also increased in the second quarter and year-to-date periods, with inventory replenishment demand contributing toAsia -export volume growth and driving higher market rates. Additionally, ocean volumes in the second quarter of the prior year were adversely impacted by the COVID-19 pandemic. In our international air freight business, revenue increased year to date but declined slightly in the second quarter due to the high volume of personal protective equipment shipped fromAsia in 2020 that did not repeat. This decline was partly offset by strong outbound demand fromNorth America andEurope , as well as by ongoing capacity surcharges. Within Logistics, our healthcare operations, led by clinical trials and COVID-19 relief efforts, experienced strong revenue growth from a broad range of customers in the second quarter and year-to-date periods. Revenue in our mail services business increased year to date as a result of volume growth, a favorable shift in product characteristics and annual rate increases. For the second quarter, revenue was lower due to the prior year surge in e-commerce that was driven by the impact of the COVID-19 pandemic. UPS Freight revenue increased by$80 million inApril 2021 compared toApril 2020 , prior to the completion of the divestiture of the business onApril 30, 2021 . Year to date, revenue decreased$426 million as a result of the divestiture. Revenue from the other businesses withinSupply Chain Solutions increased during the second quarter and year-to-date periods, driven by growth in our logistics consulting services and inUPS Capital , additional volume from service contracts with theU.S. Postal Service and services provided to the acquirer ofUPS Freight under certain transition services agreements. Operating Expenses Total operating expenses for theSupply Chain Solutions segment, and operating expenses excluding the year over year impact of transformation strategy and other costs, increased in the second quarter and year-to-date periods. Forwarding operating expenses increased$528 million in the second quarter ($1.2 billion year to date). The increase was driven by purchased transportation expense, which increased$526 million in the quarter ($1.1 billion year to date), primarily due to rate increases in our truckload brokerage business and volume and rate increases in our ocean freight business. Logistics operating expenses increased$133 million in the second quarter ($357 million year to date), driven by purchased transportation expense in our healthcare operations as a result of business growth. Mail services contributed to the year-to-date increase as a result of volume growth in the first quarter and carrier rate increases. UPS Freight operating expenses increased by$40 million comparingApril 2021 toApril 2020 , driven by an increase in less-than-truckload shipments. Year to date, expenses decreased$560 million as a result of the divestiture. Expense for the other businesses withinSupply Chain Solutions increased in the second quarter and year to date, largely due to higher third party transportation expense in logistics consulting andUPS Capital . Also driving the expense increase were transportation and other costs incurred under the transition services agreements with the acquirer of UPS Freight, as well as higher costs incurred to transportU.S. Postal Service volume driven by higher fuel prices. Operating Profit and Margin As a result of the factors described above, operating profit for theSupply Chain Solutions segment increased$248 million in the second quarter ($412 million year to date), with operating margin increasing 510 basis points to 12.1% (increased 360 basis points to 9.7% year to date). Excluding the year over year impact of transformation strategy costs and other gains, adjusted operating profit increased$141 million (increased$378 million year to date), with adjusted operating margin increasing 240 basis points to 9.7% (increased 330 basis points to 9.5% year to date). 57
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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 Six Months Ended
June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
Operating Expenses (in millions):
Compensation and benefits $ 11,327 $ 10,843 $ 484 4.5 % $ 22,810 $ 20,929 $ 1,881 9.0 %
Transformation Strategy and Other (55) (81) 26 (32.1) % (131) (93) $ (38) 40.9 %
Adjusted Compensation and benefits $ 11,272 $ 10,762 $ 510 4.7 % $ 22,679 $ 20,836 $ 1,843 8.8 %
Repairs and maintenance $ 599 $ 554 $ 45 8.1 % $ 1,218 $ 1,117 $ 101 9.0 %
Depreciation and amortization 739 661 78 11.8 % 1,461 1,309 152 11.6 %
Purchased transportation 4,446 3,716 730 19.6 % 8,689 6,647 2,042 30.7 %
Fuel 915 499 416 83.4 % 1,722 1,260 462 36.7 %
Other occupancy 402 355 47 13.2 % 868 738 130 17.6 %
Other expenses 1,738 1,619 119 7.4 % 3,541 3,210 331 10.3 %
Total Other expenses 8,839 7,404 1,435 19.4 % 17,499 14,281 3,218 22.5 %
Transformation Strategy and Other 40 (31) 71 (229.0) % (68) (64) (4) 6.3 %
Adjusted Total Other expenses $ 8,879 $ 7,373 $ 1,506 20.4 % $ 17,431 $ 14,217 $ 3,214 22.6 %
Total Operating Expenses $ 20,166 $ 18,247 $ 1,919 10.5 % $ 40,309 $ 35,210 $ 5,099 14.5 %
Adjusted Total Operating Expenses
11.1 % $ 40,110 $ 35,053 $ 5,057 14.4 %
Currency (Benefit) / Cost - (in
millions)* $ 246 $ 430
* Amount represents the change in currency translation compared to the prior year.
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
Adjustments to Operating Expenses (in
millions):
Transformation Strategy Costs:
Compensation $ 8 $ 7 $ 1 14.3 % $ 14 $ 15 $ (1) (6.7) %
Benefits 47 74 (27) (36.5) % 117 78 39 50.0 %
Other occupancy 2 2 - - % 3 4 (1) (25.0) %
Other expenses 59 29 30 103.4 % 100 60 40 66.7 %
Total Transformation Strategy Costs
3.6 % $ 234 $ 157 $ 77 49.0 %
Adjustments to assets held for sale:
Other gains $ (101) $ - $ (101) N/A $ (35) $ - $ (35) N/A
Total Adjustments to Operating
Expenses $ 15 $ 112 $ (97) (86.6) % $ 199 $ 157 $ 42 26.8 %
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
second quarter and year-to-date periods.
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Total compensation costs increased $211 million or 3.3% ($1.0 billion or 8.2%
year to date). Excluding the year over year impact of transformation strategy
costs, adjusted total compensation costs increased $210 million ($1.0 billion
year to date), driven by higher labor cost in our International Package
operations and increases in management compensation. International cost
increased due to volume growth, as well as the effects of operational disruption
last year as a result of COVID-19 restrictions. Management compensation
increased due to growth in the overall size of the workforce, salary increases,
incentive compensation and commission payments. Year to date, the increase in
compensation costs was driven by first-quarter growth in headcount and hours in
our U.S. Domestic business when COVID-19 related volume was not present in the
comparative period.
Benefits costs increased $273 million or 6.1% ($875 million or 10.1% year to
date). Excluding the year over year impact of transformation strategy costs,
adjusted benefits costs increased $300 million ($836 million year to date) as a
result of:
•Health and welfare costs increased $140 million ($304 million year to date),
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 costs increased $91 million
($316 million year to date) due to higher service costs for company-sponsored
plans 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.
•Workers' compensation costs increased $73 million ($64 million year to date)
driven by increases in overall hours worked, wage and medical inflation and
unfavorable second-quarter developments in claim trends.
•Vacation, excused absence, payroll taxes and other costs decreased $5 million
(increased $151 million year to date), driven by certain incentive payments in
the prior year. Year to date, the impact was offset by salary and wage increases
and growth in the overall size of the workforce, as well as an additional
discretionary payment to certain part-time employees.
Repairs and Maintenance
We incurred higher costs for aircraft engine maintenance for the quarter and
year-to-date periods, primarily due to the increase in operating activity and
the replacement of parts on certain types of aircraft. Routine repairs and
maintenance for buildings and facilities and maintenance costs for our other
transportation equipment also increased.
Depreciation and Amortization
Depreciation and amortization expense increased in the quarter and year-to-date
periods as a result of investments in facility automation projects, 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 air,
ocean and truck carriers for the quarter and year-to-date periods was primarily
driven by:
•Forwarding and Logistics expense increased $487 million ($1.2 billion year to
date), primarily due to volume growth and rate increases in our ocean freight
and truckload brokerage businesses, partially offset by decreased volume in our
international air freight and mail service businesses. Year to date, all
businesses contributed to the growth in expense as a result of both volume
growth and higher market rates.
•International Package expense increased $179 million ($432 million year to
date), primarily due to volume increases in Asia and Europe that drove higher
third-party pickup and delivery cost, as well as unfavorable currency movements.
•U.S. Domestic Package expense decreased $18 million (increased $278 million
year to date), driven by a decrease in SurePost volume in the quarter which
reduced expense by $121 million and lower rail volume (down $51 million ). These
reductions were largely offset by a $147 million ($336 million year to date)
increase in third party carrier cost driven by our ground network enhancements
and expanded weekend operations.
Fuel
The increase in fuel expense for the quarter and year-to-date periods was
primarily driven by higher prices for jet fuel, diesel and gasoline, as well as
the impact of increased aircraft block hours.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Occupancy
Other occupancy expense, and other occupancy expense excluding the year over
year impact of transformation strategy costs, increased in the quarter and
year-to-date periods due to additional operating facilities coming into service
and higher weather-related expenses.
Other Expenses
Other expenses, and other expenses excluding the year over year impact of
transformation strategy and other costs, increased in the quarter and year to
date, primarily as a result of the following:
•Other operational expenses, including vehicle and equipment rentals, increased
$52 million in the second quarter ($127 million year to date), driven by
continued business growth.
•The cost of business services that support our operating segments increased $40
million in the second quarter ($72 million year to date), driven by business
growth and the expansion of services provided.
•Other increases included payment processing fees, non-income based taxes,
customer claims and information technology expenses. These were largely offset
by reductions in our allowance for credit losses and reserves for certain tax
positions and legal contingencies, as well as reductions in the purchase of
COVID-related safety and cleaning supplies.
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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 and six months ended June 30, 2021 and 2020 (in millions):
Three Months Ended June Six Months Ended
30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
Investment Income and Other $ 345 $ 328 $ 17 5.2 % $ 3,961 $ 673 $ 3,288 N/M
Defined Benefit Plan Mark-to-Market
Gain - - - N/A (3,290) - (3,290) N/A
Adjusted Investment Income and
Other $ 345 $ 328 $ 17 5.2 % $ 671 $ 673 $ (2) (0.3) %
Interest Expense (167) (183) 16 (8.7) % (344) (350) 6 (1.7) %
Total Other Income and (Expense) $ 178 $ 145 $ 33 22.8 % $ 3,617 $ 323 $ 3,294 N/M
Adjusted Other Income and (Expense) $ 178 $ 145 $ 33 22.8 % $ 327 $ 323 $ 4 1.2 %
Investment Income and Other
The increase in investment income and other for the second quarter was primarily
due to gains from fair value changes in certain non-current investments,
partially offset by a decrease in other pension income, foreign currency losses
and lower yields on invested assets.
Investment income and other increased $3.3 billion year to date, inclusive of a
defined benefit plan mark-to-market gain recognized in March 2021 . Excluding the
impact of this mark-to-market gain, year-to-date adjusted investment income and
other decreased $2 million , primarily due to a decrease in other pension income
and foreign currency losses, offset by gains from fair value changes in certain
non-current investments. Other pension income includes expected 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 a reduction in projected benefit
obligations following interim remeasurements, the impact of lower year end
discount rates and a reduction in prior service cost.
Interest Expense
The decrease in interest expense for the second quarter and year-to-date periods
was primarily due to lower average outstanding debt balances and lower effective
interest rates on floating rate debt and commercial paper, partially offset by
lower capitalization of interest.
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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 and six months ended June 30, 2021 and 2020 (in millions):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Income Tax Expense $ 760 $ 589 $ 171 29.0 % $ 2,172 $ 874 $ 1,298 148.5 %
Income Tax Impact of:
Defined Benefit Plan Mark-to-Market
Gain - - - N/A (788) - (788) N/A
Transformation Strategy and Other
Costs 4 29 (25) (86.2) % 48 39 9 23.1 %
Adjusted Income Tax Expense $ 764 $ 618 $ 146 23.6 % $ 1,432 $ 913 $ 519 56.8 %
Effective Tax Rate 22.1 % 25.0 % 22.5 % 24.2 %
Adjusted Effective Tax Rate 22.1 % 25.0 % 21.9 % 24.2 %
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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