UPS 2022 Third-Quarter Form 10-Q Summary
Business context and reporting period
United Parcel Service, Inc. filed this unaudited quarterly report for the three and nine months ended September 30, 2022. UPS operates U.S. Domestic Package, International Package and Supply Chain Solutions businesses. Unless otherwise noted, financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $24.161 billion | $23.184 billion | $73.305 billion | $69.516 billion |
| Operating profit | $3.113 billion | $2.896 billion | $9.899 billion | $8.919 billion |
| Operating margin | 12.9% | 12.5% | 13.5% | 12.8% |
| Net income | $2.584 billion | $2.329 billion | $8.095 billion | $9.797 billion |
| Diluted EPS | $2.96 | $2.65 | $9.24 | $11.16 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $10.772 billion | $11.761 billion |
- Q3 revenue rose 4.2%, operating profit 7.5%, net income 10.9% and diluted EPS 11.7% year over year. Nine-month revenue and operating profit increased 5.5% and 11.0%, respectively, while net income and diluted EPS fell 17.4% and 17.2%.
- Q3 average daily package volume fell 2.1%, while average revenue per piece increased 8.6%. Year to date, volume declined 3.5% and revenue per piece rose 10.0%.
- Nine-month operating cash flow decreased $989 million, largely reflecting $2.106 billion of pension and postretirement contributions versus $331 million a year earlier, including discretionary pension contributions.
- Cash and cash equivalents were $11.045 billion; cash, cash equivalents and marketable securities totaled $11.376 billion at September 30. Total debt was $20.350 billion, down from $21.915 billion at December 31, 2021. No commercial paper or revolving-credit borrowings were outstanding.
- Nine-month capital expenditures were $2.278 billion. UPS reported $3.842 billion of dividends paid and $2.194 billion of share repurchases during the period.
Material changes and segment performance
- U.S. Domestic Package: Q3 revenue increased 8.2% to $15.374 billion and operating profit increased 18.4% to $1.666 billion; margin rose to 10.8%. Higher rates, fuel surcharges and customer mix more than offset lower package volume.
- International Package: Q3 revenue increased 1.7% to $4.799 billion, but operating profit declined 5.1% to $997 million and margin fell to 20.8%. Volume declines and unfavorable currency movements weighed on results.
- Supply Chain Solutions: Q3 revenue decreased 6.3% to $3.988 billion, while operating profit increased 2.7% to $450 million. Lower Forwarding revenue was partly offset by Logistics growth and improved truckload brokerage revenue quality.
- Nine-month net income comparisons were notably affected by the prior-year $3.3 billion defined-benefit pension mark-to-market gain. In 2022, UPS recorded a $33 million pension curtailment gain; adjusted nine-month diluted EPS, excluding specified items, was $9.33 versus reported EPS of $9.24.
- Operating expenses increased 3.7% in Q3 and 4.6% year to date. Fuel expense rose 61.1% in Q3 and 66.4% year to date, mainly due to higher fuel prices; purchased transportation expense declined.
Outlook, commentary, risks and unusual items
- Management cited inflation, higher interest rates, labor-market and wage pressures, volatile energy prices, currency movements, geopolitical uncertainty and Asia lockdowns as factors affecting demand and costs, with uncertainty expected to continue through the rest of 2022 and into 2023.
- Management expected U.S. average daily volume to decline in Q4; International volume was also expected to be lower, although the rate of decline was expected to moderate. International revenue per piece was expected to decrease slightly. Management expected fuel surcharge revenue to stabilize, and cost-per-piece growth to moderate.
- UPS expected approximately $5.0 billion of 2022 capital expenditures, with about half allocated to expansion, and anticipated at least $3.0 billion of share repurchases for 2022. These are management expectations, not a comprehensive earnings forecast.
- The UPS/IBT national master and supplemental labor agreements covering approximately 327,000 employees run through July 31, 2023. Labor negotiations and potential work stoppages are material risks. The company reported ratification of a pilot contract extension and, after quarter-end, a mechanics contract extension.
- UPS entered an agreement to acquire Bomi Group, expected to close in Q4 2022, to expand healthcare and cold-chain logistics. The filing also notes that goodwill for the Roadie reporting unit exceeded carrying value by less than 10% in the annual impairment test.
- The Central States Pension Fund had applied for federal special financial assistance; its application remained under review. UPS said the expected assistance suspends additional coordinating-benefit obligations through 2051, but the outcome and related actuarial estimates remain uncertain.
- Other exposures include foreign currency, fuel and interest-rate movements, litigation, uncertain tax positions, pension funding, and evolving effects of Russia’s invasion of Ukraine. UPS said substantially all operations in Russia, Belarus and Ukraine remained suspended, without material impact to date.
- Transformation costs were $36 million in Q3 and $132 million year to date. The filing presents adjusted, non-GAAP measures alongside GAAP results; these measures are not substitutes for GAAP and may not be comparable with similarly named measures at other companies.
Important facts for investors to verify
- Whether package-volume declines and weaker Forwarding market rates persist, and whether pricing and revenue-per-piece gains continue to offset them.
- How fuel, wage, benefit and other inflationary costs affect margins, and whether productivity improvements deliver the expected offset.
- Progress on the 2023 Teamsters contract negotiations and any resulting labor-cost or service-disruption risks.
- Cash generation after pension contributions, planned capital spending, dividends and repurchases; also confirm the status of debt maturities and liquidity facilities.
- Closing and integration of the Bomi Group acquisition, Roadie goodwill headroom, and developments in the Central States Pension Fund assistance application.
- The distinction between reported GAAP performance and management’s adjusted measures, particularly the impact of pension gains and transformation costs on comparisons.