UPS Q1 2022 Form 10-Q Summary
Business context and reporting period
United Parcel Service, Inc. reported unaudited results for the three months ended March 31, 2022, compared with the same period in 2021. Its reportable segments are U.S. Domestic Package and International Package; other businesses are presented as Supply Chain Solutions. Results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $24.378 billion | $22.908 billion | +6.4% |
| Operating profit | $3.251 billion | $2.765 billion | +17.6% |
| Operating margin | 13.3% | 12.1% | +1.2 percentage points |
| Net income | $2.662 billion | $4.792 billion | -44.4% |
| Diluted EPS | $3.03 | $5.47 | -44.6% |
| Operating cash flow | $4.480 billion | $4.531 billion | -$51 million |
Operating expenses rose 4.9% to $21.127 billion, with fuel expense up 51.2% and purchased transportation up 8.4%. Average daily package volume declined 3.6%, while average revenue per piece increased 9.4% to $13.26. The company reported adjusted diluted EPS of $3.05 after specified adjustments.
Revenue and operating profit increased in all segments. U.S. Domestic Package revenue was $15.124 billion and operating profit $1.662 billion; International Package revenue was $4.876 billion and operating profit $1.116 billion; Supply Chain Solutions revenue was $4.378 billion and operating profit $473 million. Supply Chain Solutions revenue comparisons include the 2021 divestiture of UPS Freight.
At March 31, 2022, cash and cash equivalents were $12.208 billion and marketable securities were $337 million. Total debt was $21.881 billion, including $2.141 billion of current maturities; there was no commercial paper outstanding. The company reported $4.480 billion of operating cash flow, $548 million of capital expenditures, and $1.970 billion of cash used in financing activities. It paid $1.284 billion in dividends and repurchased shares for $254 million in cash-flow reporting.
Material changes versus the prior comparable period
- Operating profit and operating margin improved despite lower package volumes, reflecting higher revenue per piece, pricing and fuel surcharges.
- Net income and EPS fell sharply mainly because Q1 2021 included a $3.3 billion defined-benefit pension mark-to-market gain. Q1 2022 included a $33 million pension curtailment gain. These unusual items make reported net income comparisons less representative of underlying operating trends.
- Fuel and purchased transportation costs increased materially. Revenue benefited from higher surcharges and pricing, while volume was lower, particularly in residential and business-to-consumer shipments.
- Q1 2022 operating cash flow was broadly comparable to the prior year. Capital expenditures were lower, at $548 million versus $834 million.
Outlook, management commentary, risks and contingencies
- Management expected negative average daily volume growth in the first half of 2022, with improvement in the second half; it expected revenue per piece to grow faster than volume.
- UPS expected fuel surcharges to remain elevated and costs, including labor and cost per piece, to continue rising amid inflation and supply-chain disruption. It also anticipated air and ocean forwarding rates could moderate during 2022.
- Management forecast approximately $5.5 billion of 2022 capital expenditures, with about 60% allocated to expansion projects, and approximately $2.0 billion of 2022 share repurchases. It expected to contribute approximately $2.0 billion to pension plans and $264 million to U.S. postretirement medical plans over the remainder of the year.
- COVID-19-related disruptions in Asia, inflation, higher energy prices, supply-chain constraints and Russia’s invasion of Ukraine were cited as operating pressures. UPS suspended commercial operations in Russia, Ukraine and Belarus; those operations represented less than 1% of consolidated revenue.
- Approximately 327,000 employees were covered by Teamsters agreements running through July 31, 2023. Labor negotiations, potential work stoppages, benefit costs, fuel prices, currency and interest-rate changes, and cybersecurity and climate-related risks were among the disclosed risks.
- The Central States Pension Fund applied for federal special financial assistance on April 28, 2022. UPS stated that expected assistance currently suspends its potential coordinating-benefit obligation through 2051, but the outcome remains subject to PBGC review and other uncertainties.
- UPS reported ongoing legal and regulatory matters, including wage-and-hour litigation, a pending Spanish competition-law appeal and an EPA information request concerning hazardous-waste compliance. The company did not believe these matters would have a material effect based on information then available.
Most important facts for investors to verify
- How much of revenue and operating-profit growth came from sustainable pricing and mix versus fuel surcharges, and whether package volumes recover as management expected.
- Whether elevated fuel, labor, transportation and inflation costs continue to pressure margins, particularly if surcharges or pricing do not keep pace.
- The effect of the 2021 pension gain on year-over-year earnings comparisons; review adjusted measures alongside GAAP results and their reconciliations.
- Execution of the $5.5 billion capital-spending plan, the approximately $2.0 billion repurchase outlook, and planned pension contributions against cash generation and debt maturities.
- Developments in Teamsters negotiations, the Central States Fund’s PBGC application, and disclosed legal, regulatory and geopolitical matters.