- Cash Equivalents
The term cash equivalents refer to assets held by the company that can be converted into cash within three (3) months. According to the company’s financial statements, the cash equivalents that are held by UPS as declared in their balance sheet are “short term investments” which can be various types of commercial paper. The short-term investments of the company increased from 711M in 2010 to 1,241M in 2011 (75% growth) and then decreased to 597M in 2012 (52% decrease).
According to the company’s year-end financial report the company holds cash and cash equivalents in European subsidiaries. These are for the acquisition of a new company in the coming period. The company also reports that it holds cash equivalents in subsidiaries in and outside the United States.
- Accounts receivable
Based on the accounts receivables of the company, the percentage of uncollected for the current year is 2% of AR and for the previous year, about 1.8% of the AR. According to the company’s yearend financial statements, the company total allowance for doubtful accounts from December 31, 2012 and 2011 was $127 and $117 million, respectively. Thee company’s provision for doubtful accounts charged to expense during the same period was $155, $147 and $199 million, respectively.
- Receivable turnover
The receivables turnover for 2012 is 8443.7 times. The receivables turnover for 2011 is calculated the same way, by taking present year’s gross revenues and dividing it by the difference between the ARs of the current and previous years. For 2011, the receivable turnover is 235.3 times. This means that the company can cover its receivables with its gross revenues almost 400 plus times. The smaller the receivables ratio, the better it is for the company since it is collecting from its clients at a more efficient rate. From 2012 to 2011, the receivables turnover improved marginally which meant that the company may not have changed much of its operating policies towards providing credit to its clients.
For UPS, the inventories are jet fuel, diesel and unleaded gasoline which are valued at the average market cost of these materials. These materials are charged as expense items when used in operations and are recorded as “other current assets” in the company’s balance sheet. The company does not record any inventory flow system for these materials since they are consumable and are not stored for long periods of time.
- Fixed Assets
The fixed assets are grouped and depreciated as follows:
- Land – no depreciation
- Buildings – straight line depreciation, useful life of 20 to 40 years
- Improvements other than buildings – straight line depreciation, depending on term of improvements or lease
- Equipment and Furniture/fixtures – straight line depreciation, useful life for vehicles are between 6 to 15 years, aircraft, 12 to 30 years, plant equipment from 6 to 8.25 years, technology equipment from 3 to 5 years
- Construction work in progress – no depreciation since these are charged to expenses
UPS looks at long-lived assets for impairment only when the final carrying value of the asset will be not be recovered using an undiscounted future cash flow assessment of the asset’s returns. If it does not provide a positive, present cash flow, the asset is written down using a fair assessment value.
The company’s percentage depreciated is calculated to be about 53% for 2012, 52% for 2011 and 51% for 2010. The increasing percentage depreciated mean that the company has been increasing investments in fixed assets, particularly non-land assets which means that the business is growing.
The fixed asset turnover shows that the company has retained a ratio of 3 times. This means that the company’s investments in fixed assets have been proportional to its revenue movement. A higher fixed asset turnover means that the company’s fixed asset investments have generated more revenues for the company.
- Capitalized and Operating Leases
UPS has financial commitments in the form of capital leases. The current total of capital leases for 2012 is 1,804M. The imputed interest for 2012, given the principal payment of 440M is 1,364M. Capital leases are recognized as long-term debt in the company’s balance sheet. The balance of the capital lease obligations is 680M.
Operating lease on the other hand is shown below.
The company’s operating lease covered certain leases for aircraft, facilities, equipment, vehicles and land until 2038. The rentals for the leases are 615M for 2010, 629M for 2011 and 619M for 2012. If the company does not have any operating leases for the following year, it would have to pay the total cost of 1,437M.
UPS has long-term debt that it is servicing adequately. Based on the financial statements of the company the total liabilities of the company have been increasing in the last three years, which means that the company is financing its growth through the use of funds sourced externally. Its debt comes in the form of fixed-rate senior notes, debentures at an interest rate of 8.375%, pound sterling notes at 5.5% and 5.13% interest rates, floating rate senior notes, facility notes and other bonds.
The maturing debt are the fixed-rate senior notes amounting specifically the 4.5% notes amounting to 1,750M, 3.87% notes amounting to 1,000M, 1.123% notes amounting to 375M, 5.5% notes amounting to 750M and 5.125% notes amounting to 1,000M.
- Income Tax
The income tax rate is approximately 35% as shown below. The recording for 2012 is partial hence the reflected amount is less than what the company will pay for the entire year. The deferred income tax payments amount to 684M in 2012 and 118M in 2011.
- Stock Analysis
The UPS Incentive Compensation Plan allows for stock options for its employees. According to the 2012 yearend financial statements, the reserved stock issuance under the Incentive Compensation Plan is 27 million. The outstanding shares as of January 1, 2012 are recorded at 13.19M with each share having a price of 70.18. About 2.78M was exercised at an average price of 63.5/share.
The stock options that are outstanding and exercisable for yearend 2012 are presented herewith. The expense associated with exercising stock options is a dilution in earnings per share. In 2012, the exercised stock options diluted earnings per share from 0.84/share to 0.83/share.
There is no information on the restricted stocks for the company in their yearend financial statements.
- Operating Segments
UPS has three operating segments namely U.S. Domestic Package operations, International Package operations and Supply Chain & Freight operations. U.S. Domestic Package operates in throughout the US. The International Package division operates in more than 220 countries worldwide. The Supply Chain & Freight segment is the forwarding and logistics operation of the company which services 195 countries worldwide.
The revenue performance of the company is shown in the graph entitled “Quarterly Revenue”. Note that the quarterly performance of UPS is the same for this year and the previous year. There is no significant variance mainly because UPS operates under normal business cycles.
- Current ratio of the company is at 1.86 times which mean that the current assets of the company can cover its current liabilities, 1.86 times. The quick ratio indicates that the company has enough liquidity to be able to cover its short-term obligations by 1.6 times. There is not enough information to say if the liquidity of the company has improved or not or if the cash generated by operations is utilized in other critical areas of the company due to the limited amount of data. However, compared to competitors, the company’s liquidity ratios are higher but this alone does not mean the company is in a better position. There are cases where more cash held by a company could mean that there is a slowdown in growth because of less investments made.
- The turnover of receivables indicate that the average receivables is one eight of the gross revenues of the company. This seems to be a better position at 8.8 compared to the competitor’s turnover ratio.
- Total asset turnover means that the company relies on more on funds from debt rather than equity. This ratio indicates that for equity, the company only uses 12% equity of its total assets versus almost 50% equity for the competitor.
- The point above is supported by the debt to total assets ratio which is high at 88% versus only 29% for the competitor. This means that the company has lower cost of money but is exposed to additional financial risks. The effect as shown in the “times interest earned ratio” shows that the company has been able to generate income from operations and cover interest and tax expenses but can cover its interest expense only 3.4 times versus 61 for the competitor. Companies can calculate interest payments on an accrued basis or on a cash basis. Accrued basis means that UPS recognizes revenues when it earns revenues and expenses when it is incurred. Cash basis means that UPS recognizes revenues and expenses when cash is transferred from one party to another. For TIE, the TIE under an accrued basis means that the interest payments have been booked but not necessarily paid. If UPS uses this basis, then it recognizes for interest on loans when loans are made thereby making the company appear to have a larger liability. The effect of using the accrued basis for interest payments projects a riskier financial position for UPS.