International services power UPS to strong fourth-quarter profits

Strength in high-margin international parcel business offset weakness in transport giant's supply chain and freight segments.

By Mark B. Solomon

UPS Inc., powered by strong results from its international operations, today reported a fourth-quarter operating profit of $1.26 billion, well above the $803 million in profits in the fourth quarter of 2008. UPS's earnings per share came in at 75 cents, at the high end of the range it had projected several weeks back.

UPS's strong numbers came in spite of weakness in its supply chain and freight businesses. UPS's freight forwarding operating margins were squeezed by rapidly rising transportation costs that resulted from a surge in Asian demand that outstripped available capacity. The company's less-than-truckload (LTL) business reported a loss for the quarter due to what it called an "extremely competitive" pricing environment. LTL shipment growth was flat, while tonnage declined in the quarter, UPS said. The company does not publicly break out profit and loss figures for its LTL operations.

For UPS, international was the fourth-quarter standout. Revenue rose 5.8 percent over 2008 levels, with average daily volumes growing by 11.8 percent. UPS reported an international operating margin of 16.7 percent, its highest margin since the fourth quarter of 2007.

For the quarter, UPS reported revenue of $12.38 billion, down from $12.70 billion in the same period in 2008. Its domestic package business, which accounts for nearly 60 percent of overall revenue, posted revenue of $7.55 billion, down from nearly $8 billion in the year-earlier quarter.

"UPS ended 2009 on a high note by leveraging network changes implemented throughout the year and executing flawlessly during the peak holiday shipping period, which was stronger than we had anticipated," said UPS Chairman and CEO Scott Davis in a statement.

Nonetheless, company officials remained cautious about the prospects for 2010. "Economic forecasts indicate gradual improvement as 2010 unfolds," said Kurt Kuehn, UPS's chief financial officer. Kuehn said the first quarter will be the "most challenging of the year" with profitability only slightly better than the first quarter of 2009.

Kuehn said UPS will invest $1.8 billion in capital expenditures in 2010, well below its historical averages. From 2006 to 2008, the company invested between $2.6 billion and $3 billion each year on capital expenditures.

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