United Parcel Service Inc reported a fourth-quarter net loss after taking a large pension-related charge and forecast weaker-than-expected 2013 profit due to an uneven global economy.
UPS (UPS.N) on Thursday followed a stream of other big U.S. companies such as Rockwell Automation Inc (ROK.N) and Northrop Grumman Corp (NOC.N) that were also weighed down by pension-related charges. A prolonged period of low interest rates is driving up companies' pension costs.
Even factoring out the $3 billion noncash pension charge, UPS, the world's largest package-delivery company, reported a fourth-quarter profit that still missed Wall Street's expectations.
UPS said it faces a $225 million rise in pension costs this year.
"This will be a significant drag in 2013," Chief Financial Officer Kurt Kuehn told investors on a conference call.
UPS expects earnings to rise 6 percent to 12 percent in 2013 to $4.80 to $5.06 per share, below the average Wall Street target of $5.11.
"It's going to come down to worldwide economic growth," said Helane Becker, an Dahlman Rose analyst, adding that she believed the company would be in a position to raise its dividend this year.
A rise in interest rates could ease the pension headwind, but Wednesday's report of an unexpected fourth-quarter contraction in the U.S. economy could leave the U.S. Federal Reserve inclined to hold rates low.
The Fed has kept interest rates for overnight loans between banks steady at near zero for four years now. That has driven down the rates companies use to calculate if they have enough money to pay pension benefits due to millions of U.S. workers when they retire.
"Interest rates will not stay that way forever. Clearly we don't think they will remain that low for the duration of our pension obligations," Kuehn said in an interview. "That's why we characterize this as an effect that could just as easily turn around."
UPS officials said their pension plan remained fully funded, adding that the company's required contributions are forecast to decline over the next three years.
Shares of the Atlanta-based company were down 2 percent at $79.59 on the New York Stock Exchange.
ECONOMIC 'MIXED SIGNALS'
The company posted a fourth-quarter net loss of $1.75 billion, or $1.83 per share, after the pension charge. A year earlier, it had earnings of $725 million, or 74 cents per share.
UPS said costs related to Superstorm Sandy, which pounded the New York metropolitan area in late October, sliced profit by 5 cents per share in the quarter.
Factoring out one-time, noncash items, profit came to $1.32 per share, below the analysts' average estimate of $1.38, according to Thomson Reuters I/B/E/S.
"We remain in a cycle of mixed growth and mixed signals," Chief Executive Scott Davis told investors on a conference call. "Fiscal uncertainty continues to erode business confidence and growth prospects. This will continue until Washington starts to compromise."
The final weeks of the fourth quarter saw a standoff between Democrats and Republicans over the "fiscal cliff," which had threatened higher taxes and large spending cuts.
Morningstar analyst Keith Schoonmaker said one good sign in the quarter was the 7.7 percent rise in U.S. next-day air shipments.
"We need to cut through the pension clutter and look at economic results," Schoonmaker said. "This is a company that has tremendous operating capability, so when you feed them a little bit more volume into their system, this company is able to make hay with that."
UPS' largest U.S. rival, FedEx Corp (FDX.N) has been struggling with falling profits as customers increasingly send goods by ground, which is less costly and less profitable than by air.
Because of the huge volume of packages they handle each day, UPS and FedEx are viewed as barometers of economic activity.
Revenue rose 2.9 percent to $14.57 billion from $14.17 billion.
'MOVING ON' FROM TNT
Earlier this month, UPS dropped its $7 billion bid for Dutch delivery firm TNT Express (TNTE.AS) after European regulators said they would veto the deal, citing antitrust concerns.
UPS, which had sought to expand quickly in Europe, will now likely have to grow on its own to avoid running afoul of the European Commission again.
"It would be an understatement to say that we are disappointed by the decision of the European Commission to block the acquisition," Davis said. "While we viewed the TNT acquisition as a compelling growth platform and it consumed a lot of internal resources, we are moving on."
UPS plans to buy back about $4 billion worth of stock this year, roughly 5 percent of its current market capitalization and more than the $1.5 billion it had previously said.
The company warned its forecast for 2013 did not include any costs related to the failure of the TNT deal.
At Wednesday's close, UPS shares were up about 7 percent over the past year, trailing the 14 percent rise of the Standard & Poor's 500 index .SPX.
(Reporting by Scott Malone in Boston; Editing by Jeffrey Benkoe and Lisa Von Ahn)