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UPS to Add Estimated $60 Million to Operating Income With New Useful Life Estimate
Parcel delivery firm will depreciate technology assets slower.
February 24, 2021
Though United Parcel Service (UPS) is also adjusting useful life estimates for buildings and vehicles, it’s the change to its technology equipment that is of particular interest to investors. In its 2019 10-K, UPS provided the following useful life estimate:
“Technology Equipment: 3 to 5 years”
In its 2020 10-K, UPS doubles the upper end of the useful life:
“Technology Equipment: 3 to 10 years”
The change has the potential to be significant. In its Q4 2020 earnings call, UPS provided details about its technology related investments:
“Looking at full year capital allocation in 2021, we expect capital expenditures to be about $4 billion, with 40% allocated to maintenance CapEx, 50% for both technology initiatives and network capabilities in 2021 with over half of this investment being deployed to International and health care, and the remaining 10% for growth projects that will come online after 2021.”
If we conservatively assume $1 billion in technology investments in 2021, the change in useful life may have a big impact on reported earnings. Under the old useful life estimate, annual depreciation expense would range from $333 million (3 years) to $200 million (5 years). Under the new useful life estimate, annual depreciation expense will range from $333 million (3 years) to $100 million (10 years).
If we further assume only one-third of the 2021 technology investment has a useful life of 10 years (the upper end), UPS has the opportunity to recognize an additional $33 million in operating income in 2021 (compared with the upper end of the prior depreciation schedule), or 0.43% of 2020’s operating income.
Of UPS’s existing property plant and equipment, more than $2 billion is classified as technology equipment. If we extend the useful life to 10 years (the new upper end) for just a third of UPS’s existing technology equipment— $660 million— UPS has the opportunity to recognize $66 million in additional operating income compared with the old depreciation schedule, or 0.85% of 2020’s operating income.
Our estimate is likely inflated as we don’t know exactly how much UPS’s technology assets have already been depreciated. What we do know is that UPS reports a total of $62 billion in PP&E, of which $29.8 billion has already been depreciated or amortized— or approximately half.
If we cut our estimate above in half and add it to our estimate for 2021 (from the earnings call), UPS has the opportunity to recognize more than $60 million in additional operating income in 2021 due to the new depreciation schedule.
While the new useful life estimate is the most significant change in UPS’s latest annual report, investors should also consider two other items. In its 2019 10-K, UPS quantified its customer payment terms:
“Under the typical payment terms of our customer contracts, the customer pays at periodic intervals (i.e. every 14 days, 30 days, 45 days, etc.) for shipments included on invoices received.”
In its latest annual, UPS appears to slash the time customers have to pay:
“Under the typical payment terms of our customer contracts, the customer pays at periodic intervals, which are generally seven days within our U.S. Domestic Package business, for shipments included on invoices received.”
Carol Tomé, the new CEO, was Home Depot’s CFO prior to accepting the top job at UPS and has emphasized a “better, no bigger” framework. Investors would be wise to monitor UPS’s working capital for improvements.
Related: FDX, DPW, ZTO, PST, RMG, INPST, POST, BPOST, XPO, GXO, CHRW
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