UPS Form 10-Q Summary
Business context and reporting period. United Parcel Service, Inc. reported unaudited results for the quarter and six months ended June 30, 2023. Its reportable segments are U.S. Domestic Package, International Package, and Supply Chain Solutions. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $22.055B | $24.766B | $44.980B | $49.144B |
| Operating profit | $2.780B | $3.535B | $5.321B | $6.786B |
| Operating margin | 12.6% | 14.3% | 11.8% | 13.8% |
| Net income | $2.081B | $2.849B | $3.976B | $5.511B |
| Diluted EPS | $2.42 | $3.25 | $4.61 | $6.28 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $5.594B | $8.293B |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $1.820B | $1.388B |
Q2 revenue fell 10.9% year over year and operating profit fell 21.4%; for the first half, revenue declined 8.5% and operating profit 21.6%. Package volume and fuel surcharge revenue weakened, and revenue declines exceeded expense reductions. Average revenue per piece increased 1.5% in Q2, while average daily package volume fell 9.4%.
Q2 segment results: U.S. Domestic Package revenue was $14.396B and operating profit $1.602B; International Package revenue was $4.415B and operating profit $883M; Supply Chain Solutions revenue was $3.244B and operating profit $295M. Revenue and operating profit declined year over year in each segment.
At June 30, cash and cash equivalents were $4.812B and marketable securities were $3.071B, totaling $7.883B. Total debt was $20.763B, versus $19.662B at December 31, 2022; long-term debt and finance leases were $19.351B. UPS had no commercial paper or revolving-credit borrowings outstanding; available revolving facilities totaled $3.0B. Total current assets were $19.439B and current liabilities $14.686B.
Material changes and notable items
- Supply Chain Solutions revenue fell 23.4% in Q2, primarily because lower freight demand and expanded market capacity reduced Forwarding volumes and rates. Logistics revenue grew, including the effect of the Bomi Group acquisition.
- Operating cash flow declined $2.699B in the first half. UPS cited a $1.2B discretionary contribution to U.S. pension plans, changes in hedge collateral, and working-capital movements. Dividends paid were $2.693B and share repurchases were $1.498B.
- UPS issued $2.5B of debt and repaid approximately $1.5B of notes during the first half. Interest expense increased 9.9% year over year for the six-month period.
- Transformation costs were $139M in Q2 and $142M for the first half. The company also recorded an $8M goodwill impairment in the first half. Adjusted diluted EPS, a non-GAAP measure, was $2.54 for Q2 and $4.74 year to date.
- Financial statement expense classifications were reworked to better align with management reporting; UPS said the reclassification did not affect revenue, operating profit, net income, or compensation performance measures.
Outlook, commentary, and risks
- Management described persistent inflation, weaker manufacturing, slower Asian recovery, difficult European conditions, and labor-related customer volume diversion as headwinds. It expected these factors to continue affecting results through the rest of 2023.
- UPS expected U.S. domestic average daily volume to improve in the second half versus the first half, with a smaller year-over-year decline; it anticipated similar year-over-year international volume declines in the second half. Management expected lower fuel surcharge revenue in U.S. Domestic Package and continued pressure on Forwarding rates and revenue.
- Management forecast approximately $5.3B of 2023 capital expenditures, including approximately $1.0B for environmental sustainability projects, and approximately $3.0B of 2023 share repurchases. It did not provide a clear full-year revenue or EPS forecast in the supplied filing text.
- On July 25, 2023, UPS reached a tentative national master agreement with the Teamsters, covering more than 300,000 U.S. employees. The agreement was subject to employee ratification; the filing warned failure to ratify could materially adversely affect the business. The agreement’s pay and benefit increases may affect costs.
- UPS identified potential future goodwill impairment risk, particularly for reporting units including Roadie whose fair values had limited headroom over carrying values. It also disclosed legal matters for which potential losses could not be estimated, including a newly certified employment-related class action.
- Other exposures include fuel prices, currency and interest-rate movements, pension funding, labor disruptions, macroeconomic conditions, litigation, and customer loss. The company reported that it was in compliance with debt covenants and considered liquidity adequate for anticipated needs.
Important facts for investors to verify
- Whether the tentative Teamsters agreement was ratified, and its eventual effect on labor costs, service levels, and customer volumes.
- Whether second-half package volumes, revenue per piece, fuel surcharges, and Forwarding market rates developed in line with management’s expectations.
- Cash generation and liquidity after pension contributions, capital spending, dividends, debt maturities, and planned share repurchases.
- Progress on the $5.3B capital spending plan and $3.0B repurchase expectation, and whether returns remain appropriate amid lower earnings and higher debt.
- Results of goodwill impairment testing and developments in legal matters for which losses were not estimable.