On a headline basis, United Parcel Service (NYSE:UPS) delivered a solid set of results and guidance on Tuesday, but many of the underlying themes in the report confirmed what key rival FedEx Corporation (NYSE:FDX) said about the weakening in the global economy in 2015. Let's take a look at the headline numbers and then focus on the trends beneath them.

United Parcel Service earnings: The numbers
Third-quarter revenue came in with a slight decrease to $14.24 billion, but on a constant currency basis it increased 1.8%. Meanwhile, diluted EPS of $1.39 increased 5.3% compared to the same period last year.

A look at the segmental numbers:


Revenue ($ million)


Adjusted Operating Profit ($m)


Contribution to Total Adjusted Income Increase

U.S. Domestic Package






International Package






Supply Chain and Freight













As you can see above, growth in the International Package segment more than offset a profit decline in the U.S. Domestic Package segment. In fact, this is the fourth consecutive quarter in which the International Package segment has increased adjusted income growth in the double digits. Let's look at the facts behind each segment's performance.

U.S. Domestic Package

  • Lower fuel surcharge rates -- due to lower oil prices -- reduced overall revenue growth to 1.9%.
  • Lower fuel surcharge rates reduced revenue per package by 250 basis points (where 100 basis points equals 1%); ultimately, reported revenue per package for the segment came in 30 basis points lower.
  • Ground (71% of the segment's revenue in the quarter) daily package volume dropped 0.8% in the quarter due to slowing industrial production, and Business to Business, or B2B, volumes declined for the first time this year.
  • Ground Business to Consumer, or B2C, increased pace of growth in the quarter.
  • Ground average revenue per piece increased 0.6% to $8.02 as wide-scale adoption of dimensional weight pricing helped raise average rates
  • Next Day Air (19% of segment revenue) increased volume by 4%, but average revenue per piece fell 3.9%.
  • Deferred (10% of segment revenue) increased volumes by an impressive 13.2%.

At the time of the second-quarter results in July, UPS management spoke of a slower U.S. economy and discussed some weakness in its industrial markets at the quarter's end. Fast-forward to FedEx's first-quarter results in September, and FedEx Chairman Fred Smith spoke of "weaker-than-expected economic conditions, especially in manufacturing and global trade."

Clearly, UPS' latest third-quarter results confirm the trend of a weakening industrial economy, with B2B volume declining and "softness in the manufacturing sectors," according to CEO David Abney in the earnings call.

On a brighter note, CFO Richard Peretz predicted "higher average daily volume growth in the fourth quarter to be around 4% to 5%" for the U.S. -- a significant improvement from the 0.6% U.S. Domestic Package volume increase in the third quarter. When questioned on the subject on the earnings call, Peretz replied that e-commerce and B2C growth is expected to drive the increase.

International Package and Supply Chain and Freight

  • Segment-adjusted operating profit margin increased to 17.1% compared to last year's third-quarter margin of 14.5%, driven by what management called "revenue quality enhancements, network improvements, and Export volume growth."
  • Reported revenue declined 7%, but when adjusted for currency it increased 0.4%.
  • Average daily package volume decreased 1.5%, but currency effects helped cause a 7.3% drop in average revenue per piece.

The margin expansion is impressive even if adverse currency movements are reducing revenue growth.

Supply Chain and Freight generated a small increase in revenue, as revenue from the acquisition of Coyote Logistics helped bolster the numbers.

However, Freight revenue (31% of segment revenue) fell 8.6%, with management citing a drop in Less-Than-Truckload, or LTL, tonnage -- incidentally, weaker LTL industry demand is one of the reasons that FedEx cut its full-year guidance in September. Meanwhile, forwarding and logistics (62% of segment revenue) recorded a 2.8% increase.

Looking forward
The report continued the kind of narrative that FedEx gave in September. In other words, the industrial economy is on a weakening trend and B2B and LTL volumes are weaker as a consequence. On the other hand, B2C growth looks good, and investors will be hoping that UPS meets its target for overall U.S. volume growth of 4% to 5% in the fourth quarter, while it meets the challenges of dealing with peak demand during the holiday season.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.