UPS Q1 2023 Form 10-Q Summary
Business context and reporting period
United Parcel Service, Inc. reported unaudited results for the three months ended March 31, 2023, compared with the same period in 2022. Its reportable segments are U.S. Domestic Package, International Package, and Supply Chain Solutions.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $22.925 billion | $24.378 billion | Down 6.0% |
| Operating profit | $2.541 billion | $3.251 billion | Down 21.8% |
| Operating margin | 11.1% | 13.3% | Down 2.2 percentage points |
| Net income | $1.895 billion | $2.662 billion | Down 28.8% |
| Diluted EPS | $2.19 | $3.03 | Down 27.7% |
| Operating cash flow | $2.357 billion | $4.480 billion | Down $2.123 billion |
Average daily package volume fell 5.5%, while average revenue per piece rose 3.6% to $13.74. Operating expense declined 3.5%, primarily from lower purchased transportation costs, but revenue fell faster than costs. The effective tax rate increased to 24.9% from 21.5%.
At March 31, cash and cash equivalents were $6.190 billion and marketable securities were $3.208 billion, totaling $9.4 billion. Current assets were $21.725 billion and current liabilities $16.262 billion. Total debt carrying value was $22.188 billion, including $2.332 billion current maturities; no commercial paper or revolving credit borrowings were outstanding. UPS issued $2.5 billion of notes during the quarter. Its $3.0 billion in available revolving credit facilities were undrawn. In April, $1.5 billion of notes maturing in 2023 were repaid.
Cash capital expenditures were $609 million. Operating cash flow was lower year over year, notably reflecting $1.2 billion in discretionary contributions to qualified U.S. pension plans, compared with no such discretionary contribution in Q1 2022. Dividends paid were $1.348 billion and share repurchases were $751 million.
Material changes and segment results
- U.S. Domestic Package: Revenue was $14.987 billion, down 0.9%; operating profit was $1.466 billion, down 11.8%, and margin was 9.8% versus 11.0%. Volume declined 5.4%, partly offset by higher revenue per piece.
- International Package: Revenue was $4.543 billion, down 6.8%; operating profit was $828 million, down 25.8%, and margin was 18.2% versus 22.9%. Lower volume, currency effects, and weaker demand-related surcharges weighed on results.
- Supply Chain Solutions: Revenue was $3.395 billion, down 22.5%; operating profit was $247 million, down 47.8%, and margin was 7.3% versus 10.8%. Forwarding weakness, including lower freight demand and market rates, was partly offset by Logistics growth and the Bomi Group acquisition.
Q1 2023 included $3 million of transformation costs and $8 million of goodwill and asset impairment charges. Q1 2022 included $55 million of transformation costs and a $33 million defined-benefit plan curtailment gain. Management reported adjusted diluted EPS of $2.20 for Q1 2023, including $0.01 per share from transformation costs and goodwill impairment. UPS also reclassified certain operating expenses between line items; the change did not affect revenue, operating profit, or net income.
Outlook, commentary, and risks
Management described a challenging environment driven by inflation, lower U.S. manufacturing production, weaker discretionary spending, and soft international export demand. It expects these factors to continue affecting results in 2023. Management anticipates domestic package volume declines through the remainder of the year, moderating but persistent international declines, and continued pressure on Forwarding rates. It expects fuel-surcharge revenue to decline as commodity prices and prior pricing initiatives unwind, and expects cost-per-piece growth to moderate as productivity and network adjustments take effect.
UPS expects approximately $5.3 billion in 2023 capital expenditures, around half allocated to strategic expansion, and approximately $3.0 billion in 2023 share repurchases. Management stated that available liquidity, operating cash flow, and access to credit and capital markets should be adequate for expected requirements. No consolidated revenue or earnings guidance is provided in the filing text.
A key near-term risk is negotiation of successor U.S. Teamsters agreements covering approximately 330,000 employees; existing agreements run through July 31, 2023. UPS cautioned that labor disruption could interrupt service, harm customer relationships, and adversely affect results. Other cited risks include economic conditions, competition, fuel and currency movements, pension and benefit costs, cybersecurity, litigation, regulation, and severe disruptions. The company reported no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Progress and outcome of Teamsters negotiations, and any effects on service, costs, or customer retention.
- Whether package volumes, freight market rates, and fuel-surcharge trends develop as management expects.
- Operating cash flow and liquidity after pension contributions, capital expenditures, dividends, debt maturities, and planned repurchases.
- Performance and integration of Bomi Group, and monitoring of Roadie goodwill, whose carrying value was $241 million and whose prior impairment-test cushion was less than 10%.
- Potential changes in pension obligations and uncertain tax positions; UPS said unrecognized tax benefits could decrease by up to $180 million over the next 12 months.