Tough Quarter for UPS, “Slight Improvements” Later

UPS announced a 22% decline in fourth-quarter adjusted diluted earnings per share, down from $1.07 for the same period in 2007. On a reported basis, diluted earnings per share were $0.25 and a loss of $2.52 for the fourth quarters of 2008 and 2007, respectively.

“Visibility into the future has become increasingly difficult given the enormous amount of economic uncertainty around the world,” said Kurt Kuehn, UPS chief financial officer. “Therefore, UPS will provide guidance only for the first quarter, which is earnings per share within a range of $0.52 and $0.68.

“The year will undoubtedly be one of the most difficult in UPS’s history,” Kuehn continued. “Since economists do not expect any meaningful recovery until 2010, earnings in 2009 will suffer. Lower volume levels and reductions in package weight will put further pressure on margins. We anticipate the first quarter will be weak, with slight improvements later in the year as initiatives take hold.”

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UPS announced a 22% decline in fourth-quarter adjusted diluted earnings per share, down from $1.07 for the same period in 2007. On a reported basis, diluted earnings per share were $0.25 and a loss of $2.52 for the fourth quarters of 2008 and 2007, respectively.

“Visibility into the future has become increasingly difficult given the enormous amount of economic uncertainty around the world,” said Kurt Kuehn, UPS chief financial officer. “Therefore, UPS will provide guidance only for the first quarter, which is earnings per share within a range of $0.52 and $0.68.

“The year will undoubtedly be one of the most difficult in UPS’s history,” Kuehn continued. “Since economists do not expect any meaningful recovery until 2010, earnings in 2009 will suffer. Lower volume levels and reductions in package weight will put further pressure on margins. We anticipate the first quarter will be weak, with slight improvements later in the year as initiatives take hold.”

UPS said reported results for the 2008 fourth quarter include the impact of a $575 million non-cash impairment charge primarily related to the UPS Freight business unit due to an extremely challenging LTL environment. Reported results for the 2007 fourth quarter included a $6.1 billion charge in the US Domestic Package segment related to the withdrawal of UPS employees from the Central States Pension Plan. That withdrawal followed ratification of a long-term national master agreement with the International Brotherhood of Teamsters.

For the full year, UPS posted adjusted operating profit of $6.0 billion and adjusted diluted earnings per share of $3.50, within the range the company provided mid-year. On a reported basis, operating profit was $5.4 billion and diluted earnings per share were $2.94.

“The severe decline in economic activity around the world resulted in sharply lower package and freight volumes for UPS,” said Scott Davis, chairman and CEO. “Consequently, we’re making the tough decisions necessary to adapt our enterprise to today’s realities. This includes changes in organizational structure, compensation and network configuration.”

For example, UPS has consolidated operating districts, reduced air segments and eliminated some package handling operations. It also announced it is freezing management salaries and suspending the match for its 401(k) plans. It did not make any changes to its long-standing defined benefit pension plans.

For the three months ended Dec. 31, 2008, consolidated package volume declined 3.7% to 1.0 billion pieces on 5% lower revenue. Declining fuel costs provided a benefit in the quarter, which was more than offset by the effects of economic deceleration around the world.

For the full year, the company delivered 3.9 billion packages, an average of 15.5 million per day. Consolidated revenue increased 3.6% to $51.5 billion.

US package revenues were $7.99 billion in the fourth quarter vs. $8.31 billion in the same period in 2007. Average daily package volume dropped to 15.1 million from 15.6 million during the 2007 period.

Total US volume decreased 4.4% with ground volume down 3.7% and Next Day Air declining 10.1%. Pricing remained stable, UPS reported. Revenue per piece growth was constrained by a lower average weight per package and a continuing shift away from premium products. These trends, along with lower volumes, more than offset the benefits from reduced fuel cost and competitive wins.

During the peak holiday shipping season, volume exceeded 20 million packages on five consecutive days. International package revenues for the quarter were $2.64 billion, down from $2.87 billion in 2007. Total export volume increased 1.6% in the fourth quarter, which clearly outpaced market trends. However, revenue and revenue per piece declined 8% primarily due to a shift away from premium products, general economic conditions and a stronger US dollar. Adjusted operating profit fell to $393 million, excluding the effect of a $27 million impairment of an intangible asset related to a UK domestic package business. This impairment reduced operating profit to $366 million.

During the quarter, UPS continued to expand its presence in China by opening a new hub in Shanghai. UPS began building a new intra-Asian hub in Shenzhen, scheduled to open in 2010.

The company reports its supply chain services and less-than-truckload operations (UPS Freight) together. The two operations reported $2.07 billion in revenues for the quarter, down from $2.22 billion in the same period in 2007. The operating loss for the Supply Chain & Freight segment was $495 million, including the effect of the $548 million UPS Freight goodwill impairment. Fourth quarter revenue for the segment declined 6.5% and adjusted operating profit of $53 million represented a $29 million decrease over last year’s results.

Declines in UPS Freight profitability weighed on segment results. LTL revenue declined 9.6% with shipments per day down 8.2% in the weakest LTL environment in decades.

Despite tough economic conditions that caused revenue declines, the Forwarding and Logistics operations continued to demonstrate profit improvement.

One area of focus has been healthcare where UPS has invested to provide customers with solutions to their supply chain needs. Early this year,

Merck & Co., Inc. selected UPS to manage a significant portion of its US distribution of pharmaceuticals and vaccines as well as to provide package transportation services. UPS now manages 25 compliant healthcare facilities. This demonstrates UPS’s success in establishing its supply chain management capabilities for the healthcare sector.

www.ups.com

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