UNITED PARCEL SERVICE INC quarterly report, Q2 FY2022

UPS Q2 2022 Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2022. Amounts are U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Business context and results

UPS operates U.S. Domestic Package, International Package, and Supply Chain Solutions. Management emphasized its Customer First, People Led, Innovation Driven strategy and continued network optimization under its “Better Not Bigger” framework.

Q2 revenue rose 5.7%, operating profit 8.5%, and diluted EPS 6.6% year over year. For the first half, revenue grew 6.1% and operating profit 12.7%, while reported net income fell 26.2% and diluted EPS fell 26.2%. The year-over-year decline in first-half earnings principally reflects the prior-year $3.3 billion pension mark-to-market gain; 2022 included a $33 million pension curtailment gain. Management reported adjusted diluted EPS of $3.29 for Q2 and $6.33 year to date, excluding specified items.

Segments and operating trends

• U.S. Domestic Package: Q2 revenue increased 7.3% to $15.459 billion and operating profit rose 16.7% to $1.829 billion; margin increased to 11.8% from 10.9%. Average daily volume fell 4.0%, while revenue per piece rose 11.9%.
• International Package: Q2 revenue increased 5.3% to $5.073 billion, but operating profit was nearly flat at $1.193 billion and margin declined to 23.5% from 24.6%. Average daily volume fell 9.2%; currency-neutral revenue per piece increased 20.9%.
• Supply Chain Solutions: Q2 revenue increased 0.7% to $4.234 billion and operating profit increased 1.2% to $513 million. Excluding transformation and prior-year divestiture-related items, adjusted operating profit rose 26.7%. Comparisons are affected by UPS Freight’s 2021 divestiture.

Higher fuel surcharges and pricing/revenue quality supported revenue and revenue per piece. Consolidated Q2 fuel expense rose 85.5% year over year, contributing to higher operating costs. Companywide average daily package volume declined 4.8%.

Cash flow, liquidity and debt

• First-half operating cash flow was $8.293 billion, versus $8.454 billion in 2021. Capital expenditures were $1.388 billion, versus $1.670 billion; cash used in investing activities was $1.499 billion.
• Cash used in financing activities was $5.286 billion, including $2.567 billion of dividends, $1.242 billion of share repurchases, and $1.105 billion of long-term debt repayments.
• At June 30, cash and cash equivalents were $11.735 billion and marketable securities were $336 million. Management reported $12.1 billion of cash, cash equivalents and marketable securities and said liquidity sources were adequate for expected needs.
• Total debt, including finance leases, was $20.576 billion, down from $21.915 billion at year-end 2021; current maturities were $2.579 billion. No commercial paper or revolving credit facility balances were outstanding. UPS reported compliance with debt covenants.
• Management expected approximately $5.5 billion of 2022 capital expenditures, about 60% for expansion projects, and approximately $1.9 billion of pension and $221 million of postretirement medical contributions over the remainder of 2022.

Outlook, risks and unusual items

• Management expected inflation, geopolitical uncertainty, labor-market pressures, elevated fuel costs, foreign exchange effects, and COVID-related disruption in parts of Asia to continue affecting the business through the rest of 2022. It anticipated modest improvement in package volume growth in the second half, moderation in revenue-per-piece growth, and elevated fuel surcharges.
• Management expected Forwarding air and ocean freight market rates to moderate later in 2022. It also anticipated U.S. Domestic compensation and benefits costs to increase by approximately $600 million year over year in the second half, while productivity initiatives were expected to help cost-per-piece growth remain below revenue-per-piece growth.
• UPS announced expected 2022 share repurchases of approximately $3.0 billion. The filing does not provide a clear full-year revenue or EPS forecast.
• The approximately 327,000 employees covered by the national Teamsters master agreement have agreements running through July 31, 2023. UPS reached a tentative two-year pilot-contract extension; ratification was pending. Labor negotiations, strikes or work stoppages are identified risks.
• The Central States Pension Fund applied for federal special financial assistance in April 2022. UPS said expected assistance currently suspends its potential obligation to provide coordinating benefits through 2051, but the outcome remains subject to PBGC review and other uncertainties.
• UPS disclosed wage-and-hour litigation, a pending appeal of a Spanish competition decision with an immaterial fine, and an EPA information request concerning potential hazardous-waste recordkeeping violations. The company said it did not expect these matters to have a material impact, while noting outcomes can be uncertain.
• Transformation strategy costs were $41 million in Q2 and $96 million year to date. The filing also notes risks from economic conditions, fuel and currency movements, cybersecurity and operational disruption, labor relations, pensions, regulation, litigation, and execution of strategic initiatives.

Important facts for investors to verify

• Whether package volumes stabilize as management anticipated, particularly in U.S. residential and international markets, and whether pricing continues to offset volume declines.
• Whether fuel, labor, inflation and other cost pressures moderate as expected, and whether productivity protects margins.
• Progress on the 2022 capital-spending and share-repurchase plans, dividend capacity, and debt maturities and repayments.
• Developments in the 2023 Teamsters negotiations and ratification of the tentative pilot agreement.
• PBGC review of the Central States Pension Fund application and any resulting change to UPS’s pension exposure.
• How the UPS Freight divestiture and other unusual or non-GAAP adjustments affect comparisons; review adjusted measures alongside GAAP results.