Business context and reporting period
United Parcel Service, Inc. (UPS) filed this Form 10-K for the fiscal year ended December 31, 2022. It is an annual report, not a standalone fourth-quarter earnings report. UPS operates U.S. Domestic Package, International Package and Supply Chain Solutions businesses, serving more than 220 countries and territories. It delivered an average of 24.3 million packages per day during 2022.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $100.338 billion | $97.287 billion | +3.1% |
| Operating profit | $13.094 billion | $12.810 billion | +2.2% |
| Operating margin | 13.0% | 13.2% | Down 0.2 percentage points |
| Net income | $11.548 billion | $12.890 billion | -10.4% |
| Diluted EPS | $13.20 | $14.68 | -10.1% |
| Operating cash flow | $14.104 billion | $15.007 billion | Down $903 million |
| Capital expenditures | $4.769 billion | $4.194 billion | Up $575 million |
Average daily global small-package volume fell 3.8%, while average revenue per piece rose 8.6%. Fuel expense increased 56.4% to $6.018 billion; purchased transportation expense declined 7.4% to $17.653 billion.
Segments
- U.S. Domestic Package: Revenue rose 6.5% to $64.209 billion; operating profit increased 8.7% to $6.997 billion and margin improved to 10.9% from 10.7%. Average daily volume fell 3.1%.
- International Package: Revenue increased 0.8% to $19.698 billion, but operating profit declined 6.9% to $4.326 billion and margin fell to 22.0% from 23.8%. Average daily volume fell 7.5%.
- Supply Chain Solutions: Revenue declined 5.7% to $16.431 billion, reflecting weaker forwarding markets and the prior-year UPS Freight divestiture. Operating profit rose 2.5% to $1.771 billion; margin increased to 10.8% from 9.9%.
Liquidity, debt and shareholder returns
At year-end, cash and cash equivalents were $5.602 billion and marketable securities were $1.993 billion; together these totaled $7.6 billion. Total debt was $19.662 billion, down from $21.915 billion in 2021. UPS reported $14.104 billion of operating cash flow and used $7.472 billion in investing activities and $11.185 billion in financing activities. It paid $5.114 billion in dividends and repurchased $3.5 billion of stock during 2022. The board approved a new $5 billion repurchase authorization in January 2023, and management anticipated approximately $3 billion of repurchases in 2023.
Material changes and unusual items
- Revenue growth came mainly from higher revenue per piece and fuel surcharges, despite lower package volumes and lower Supply Chain Solutions revenue.
- Net income included $1.061 billion of defined-benefit pension and postretirement plan gains, compared with $3.272 billion of such gains in 2021. These non-cash remeasurement items contributed to year-over-year earnings volatility.
- 2022 included a $505 million non-cash stock-compensation charge from accelerated vesting following incentive-program changes, a $76 million charge from reducing the estimated residual value of MD-11 aircraft, and $178 million of transformation costs.
- Operating cash flow decreased largely because company-sponsored pension and postretirement plan contributions rose to $2.342 billion from $576 million; UPS made $1.9 billion of discretionary contributions to qualified U.S. pension plans.
- UPS acquired Bomi Group and Delivery Solutions in 2022 for aggregate purchase consideration of approximately $784 million; the acquisitions had no material impact on 2022 operating results.
Outlook, commentary and risks
- Management expected macroeconomic pressures, inflation, foreign-exchange effects and China-related disruptions to continue into 2023. It anticipated lower year-over-year package-volume growth in the first half, with improvement in the second half, and moderate U.S. revenue-per-piece growth.
- Management expected international revenue per piece to be relatively flat in 2023, with lower demand-related surcharges; forwarding volume and market rates were expected to remain weak through at least midyear. It forecast 2023 capital expenditures of approximately $5.3 billion and discretionary contributions of approximately $1.2 billion to company-sponsored U.S. benefit plans.
- Approximately 330,000 U.S. employees were covered by Teamsters agreements expiring July 31, 2023. Negotiations were underway; UPS cautioned that labor disruption could affect service, customers and results.
- Other material risks include economic weakness, fuel and energy prices, competition, reliance on major customers, employee retention and benefit costs, cyber and technology disruptions, climate-related regulation and physical events, foreign-exchange and interest-rate movements, and legal or tax contingencies. Amazon represented 11.3% of 2022 revenue, substantially all in U.S. Domestic Package.
- Six MD-11 aircraft were expected to be retired from operational use in 2023. UPS also disclosed that the Roadie reporting unit’s estimated fair value exceeded carrying value by less than 10%; a 150-basis-point increase in its cost of capital could make impairment reasonably possible.
Important facts for investors to verify
- Whether the 2023 Teamsters agreement was reached without material disruption and what it means for labor costs.
- Whether package volumes, revenue per piece and fuel surcharge revenue followed management’s 2023 expectations.
- How quickly forwarding market rates and volumes recovered, and whether Supply Chain Solutions growth offset ongoing weakness.
- Cash generation after planned capital expenditures, pension contributions, dividends and share repurchases; also the repayment or refinancing of 2023 debt maturities.
- Developments in pension funding and assumptions, the Central States Pension Fund coordinating-benefit estimate, and Roadie goodwill impairment sensitivity.
- Customer concentration, cybersecurity exposure and any material developments in legal, tax or other contingencies.