UPS Q3 2023 Form 10-Q Summary
Business context and reporting period
United Parcel Service, Inc. reported unaudited results for the quarter and nine months ended September 30, 2023. Its reportable segments are U.S. Domestic Package, International Package and Supply Chain Solutions.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $21.061B | $24.161B | $66.041B | $73.305B |
| Operating profit | $1.343B | $3.113B | $6.664B | $9.899B |
| Operating margin | 6.4% | 12.9% | 10.1% | 13.5% |
| Net income | $1.127B | $2.584B | $5.103B | $8.095B |
| Diluted EPS | $1.31 | $2.96 | $5.92 | $9.24 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $7.827B | $10.772B |
For the first nine months, capital expenditures were $3.109B and cash used in investing activities was $3.929B. Cash and cash equivalents were $4.311B at September 30; marketable securities were $2.967B, for combined cash and securities of $7.3B. Total debt was $21.125B, including $2.243B of current maturities. Long-term debt and finance leases were $18.882B. Total current assets were $19.251B and current liabilities were $15.817B.
Material changes versus prior comparable periods
- Q3 revenue fell 12.8% and operating profit fell 56.9% year over year; nine-month revenue fell 9.9% and operating profit fell 32.7%. Management said revenue declines exceeded expense reductions.
- Q3 average daily package volume declined 10.8%; average revenue per piece increased 1.7%. Management attributed weaker volumes to macroeconomic conditions, customer behavior and labor-related uncertainty, as well as lower fuel surcharge revenue.
- All segments reported lower revenue and operating profit in Q3. U.S. Domestic Package revenue declined 11.1%, International Package declined 11.1%, and Supply Chain Solutions declined 21.4%.
- Operating expenses decreased 6.3% in Q3, particularly due to lower purchased transportation and fuel costs. Depreciation and amortization rose 8.1% in Q3 and 8.7% year to date.
- Net cash from operations declined by $2.945B year to date. Investing cash outflows increased, including higher capital expenditures and net purchases of marketable securities.
- Debt increased from $19.662B at December 31, 2022 to $21.125B at September 30, 2023. The company issued $2.5B of senior notes and commercial paper and repaid maturing debt during the period.
Outlook, management commentary, risks and unusual items
- Management expected Q4 U.S. average daily volume to decline year over year but improve from Q3; international volume declines were expected to continue. It anticipated lower fuel surcharge revenue and expected cost-per-piece growth to moderate. These are management expectations, not guaranteed results.
- UPS estimated 2023 capital expenditures of approximately $5.3B, with about half allocated to strategic expansion projects. It did not anticipate further share repurchases in 2023. The filing text does not provide a clear consolidated full-year revenue or EPS forecast.
- The Teamsters national master agreement was ratified in September. UPS said wage and benefit rates and other provisions increase union costs at a 3.3% compounded annual rate over the five-year contract. The company estimated an approximately $0.6B impact to pension obligations, subject to year-end actuarial assumptions.
- Q3 included $94M of transformation strategy costs, a $117M goodwill impairment charge ($103M after tax), and a $61M one-time compensation payment. Management’s non-GAAP adjusted Q3 diluted EPS was $1.57 versus reported EPS of $1.31; adjusted measures exclude specified items and are not GAAP measures.
- The goodwill impairment related to Roadie and Delivery Solutions. The fair value of a $200M indefinite-lived truckload brokerage trade name exceeded carrying value by less than 10%, leaving limited valuation headroom.
- UPS agreed to acquire MNX Global Logistics, subject to regulatory approval, and acquired Happy Returns on November 1, 2023. The combined purchase price was expected to be approximately $1.3B.
- Risks identified include economic and volume weakness, competition, labor disruption and contract costs, fuel and currency fluctuations, pension and benefit obligations, technology and cybersecurity incidents, litigation, and impairment risk. The company reported no material changes to its previously disclosed risk factors. It said it was in compliance with debt covenants and had no amounts outstanding on its revolving credit facilities at quarter-end.
- Legal matters include a newly certified employment-related class action for which UPS could not estimate a possible loss or range of loss. UPS stated that other disclosed legal matters were not expected to have a material impact.
Important facts for investors to verify
- Whether package volumes and revenue per piece develop as management expected, particularly after the labor agreement ratification.
- How the new Teamsters contract affects operating costs, pension obligations and productivity gains.
- Whether the truckload brokerage trade name or other reporting units require additional impairment charges.
- Cash generation, capital spending, debt levels and the funding of dividends and planned acquisitions.
- Progress and final consideration for the MNX and Happy Returns acquisitions, including regulatory approval for MNX.