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55: R45 STOCK-BASED COMPENSATION - Additional Information HTML 77K
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Assumptions and Fair Values Used of Performance
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Stock Options Granted as Determined by
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- Summary of Marketable Securities (Details)
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- Additional Information (Details)
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- Investments Measured at Fair Value on a
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Property, Plant and Equipment (Details)
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Information (Details)
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Additional Information (Details)
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Schedule of Notional Amounts of Outstanding
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91: R81 DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT - HTML 43K
Amount and Location in the Income Statement for
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92: R82 DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT - HTML 36K
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(Exact name of registrant as specified in its charter)
iDelaware
i58-2480149
(State
or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
i55 Glenlake Parkway N.E. ,
iAtlanta,
iGeorgia
i30328
(Address of Principal Executive Offices)
(Zip Code)
(i404)
i828-6000
(Registrant’s telephone number, including area code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name
of Each Exchange on Which Registered
iClass B common stock, par value $0.01 per share
iUPS
iNew
York Stock Exchange
i0.375% Senior Notes due 2023
iUPS23A
iNew
York Stock Exchange
i1.625% Senior Notes due 2025
iUPS25
iNew
York Stock Exchange
i1% Senior Notes due 2028
iUPS28
iNew
York Stock Exchange
i1.500% Senior Notes due 2032
iUPS32
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
x
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☑
There were i128,669,028 Class A shares, and i723,256,561
Class B shares, with a par value of $0.01 per share, outstanding at October 19, 2023.
Cautionary
Statement About Forward-Looking Statements
This report, our Annual Report on Form 10-K for the year ended December 31, 2022 and our other filings with the Securities and Exchange Commission contain and in the future may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than those of current or historical fact, and all statements accompanied by terms such as “will,”“believe,”“project,”“expect,”“estimate,”“assume,”“intend,”“anticipate,”“target,”“plan,” and similar terms, are intended to be forward-looking statements. Forward-looking statements are made subject to the safe harbor provisions of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934.
From time to time, we also include written or oral forward-looking statements in other publicly disclosed materials. Such statements may relate to our intent, belief, forecasts of, or current expectations about our strategic direction, prospects, future results, or future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any forward-looking statements because such statements speak only as of the date when made and the future, by its very nature, cannot be predicted with certainty.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks
and uncertainties include, but are not limited to, the impact of: continued uncertainties arising from the COVID-19 pandemic; changes in general economic conditions, in the United States ("U.S.") or internationally; industry evolution and significant competition; changes in our relationships with any of our significant customers; our ability to attract and retain qualified employees; strikes, work stoppages or slowdowns by our employees; impacts arising from negotiations and ratifications of labor contracts; our ability to maintain our brand image and corporate reputation; increased or more complex physical security requirements; a significant data breach or information technology system disruption; global climate change; interruptions in or impacts on our business from natural or man-made events or disasters including terrorist attacks, epidemics or pandemics; exposure
to changing economic, political and social developments in international markets; our ability to realize the anticipated benefits from acquisitions, dispositions, joint ventures or strategic alliances; changing prices of energy, including gasoline, diesel and jet fuel, or interruptions in supplies of these commodities; changes in exchange rates or interest rates; our ability to accurately forecast our future capital investment needs; significant expenses and funding obligations relating to employee health, retiree health and/or pension benefits; our ability to manage insurance and claims expenses; changes in business strategy, government regulations, or economic or market conditions that may result in impairments of our assets; potential additional U.S. or international tax liabilities; increasingly stringent laws and regulations, including relating to climate change; potential claims or litigation related to labor and employment, personal injury, property damage, business
practices, environmental liability and other matters; and other risks discussed in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2022, and subsequently filed reports. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements, except as required by law.
From time to time, we expect to participate in analyst and investor conferences. Materials provided or displayed at those conferences, such as slides and presentations, may be posted on our investor
relations website at www.investors.ups.com under the heading "Presentations" when made available. These presentations may contain new material nonpublic information about our company and you are encouraged to monitor this site for any new posts, as we may use this mechanism as a public announcement.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. iBASIS
OF PRESENTATION AND ACCOUNTING POLICIES
i
Principles of Consolidation
The accompanying unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2023, our results of
operations for the three and nine months ended September 30, 2023 and 2022, and our cash flows for the nine months ended September 30, 2023 and 2022. The results reported in these unaudited, consolidated financial statements should not be regarded as indicative of results that may be expected for any other period or the entire year. The unaudited, consolidated financial statements should be read in conjunction with the audited, consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.
In the first nine months of 2023, we reclassified certain operating expenses to better align with the manner in which
we manage our operations. Substantially all of these costs were previously classified within operating expenses as Other expenses and have now been classified within operating expenses as Repairs and maintenance in the statements of consolidated income. The remaining line items within operating expenses impacted by this reclassification were inconsequential. As a result, the statements of consolidated income give effect to this reclassification as follows:
•For the three and nine months ended September 30, 2023: decreasing Other expenses by $i93
and $i273 million, and increasing Repairs and maintenance by $i89 and $i265 million,
respectively.
•For the three and nine months ended September 30, 2022: decreasing Other expenses by $i90 and $i244 million,
and increasing Repairs and maintenance by $i93 and $i252 million, respectively.
The reclassification had no impact on our reported revenue, operating profit, net income, or any internal performance measure on which management is compensated.
iFair
Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximated fair value as of September 30, 2023 and December 31, 2022. The fair values of our marketable securities are disclosed in note 5, our recognized multiemployer pension withdrawal liabilities in note 7, our short- and long-term debt in note 9 and our derivative instruments in note 15. We apply a fair value hierarchy (Levels 1, 2 and 3) when measuring and reporting items at fair value. Fair values are based on listed market prices (Level 1), when such prices are available. To the extent that listed market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations (Level 2). If listed market prices or other
relevant factors are not available, inputs are developed from unobservable data reflecting our own assumptions and include situations where there is little or no market activity for the asset or liability (Level 3).
i
Use of Estimates
The preparation of the accompanying unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of these financial statements, as well as the reported amounts of revenues and expenses during the reporting period.
Although our
estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. As a result, our accounting estimates and assumptions may change significantly over time.
As part of our working capital management, certain financial institutions offer a Supply Chain Finance ("SCF") program to certain of our suppliers. We agree to commercial terms with our suppliers, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program. Suppliers issue invoices to us based on the agreed-upon contractual terms. If they participate in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, to sell to the financial institutions. Our suppliers’ voluntary inclusion of invoices in the SCF program has no bearing on our payment terms. No guarantees are provided by us under the SCF program. We have no economic interest in a supplier’s decision to participate, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program.
Amounts
due to our suppliers that participate in the SCF program are included in Accounts payable in our consolidated balance sheets. We have been informed by the participating financial institutions that as of September 30, 2023 and December 31, 2022, suppliers sold them $i640 and $i806 million,
respectively, of our outstanding payment obligations.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. iRECENT
ACCOUNTING PRONOUNCEMENTS
iAdoption of New Accounting Standards
In September 2022, the Financial Accounting Standards Board issued an Accounting Standards Update ("ASU") to enhance the disclosure of supplier finance programs. This ASU did not affect the recognition, measurement or financial statement presentation of obligations covered by supplier finance programs. We adopted the requirements of this ASU as of January 1, 2023 and have included required disclosures
within note 1.
Other accounting pronouncements adopted during the periods covered by the unaudited, consolidated financial statements did not have a material impact on our consolidated financial position, results of operations, cash flows or internal controls.
Accounting Standards Issued But Not Yet Effective
Accounting pronouncements issued before, but not effective until after, September 30, 2023, are not expected to have a material impact on our consolidated financial position, results of operations, cash flows or internal controls.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. iREVENUE RECOGNITION
i
Revenue
Recognition
Substantially all of our revenues are from contracts associated with the pickup, transportation and delivery of packages and freight ("transportation services"). These services may be carried out by or arranged by us and generally occur over a short period of time. Additionally, we provide value-added logistics services to customers through our global network of distribution centers and field stocking locations.
The vast majority of our contracts with customers are for transportation services that include only one performance obligation; the transportation services themselves. We generally recognize revenue over time, based on the extent of progress towards completion of the services
in the contract. All of our major businesses act as a principal in their revenue arrangements and as such, we report revenue and the associated purchased transportation costs on a gross basis within our statements of consolidated income.
Contract assets include billed and unbilled amounts resulting from in-transit shipments, as we have an unconditional right to payment only when services have been completed (i.e. shipments have been delivered). Amounts do not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.
Contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance payments and billings in excess of revenue represent payments
received from our customers that will be earned over the contract term. Deferred revenue represents the amount due from customers related to in-transit shipments that has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the amount will be earned. We classify deferred revenue as current based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each
reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.
Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimate of the current expected losses inherent in our accounts receivable at each balance sheet date. This estimate requires consideration of historical loss experience, adjusted for current conditions, forward looking indicators, trends in customer payment frequency and judgments about the probable effects of relevant observable data, including present and future economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk.
Our
allowance for credit losses as of September 30, 2023 and December 31, 2022 was $i132 and $i146 million, respectively. Amounts for credit losses charged to expense, before recoveries, during
each of the three months ended September 30, 2023 and 2022 were $i49 and $i48 million, respectively, and for the nine months ended September 30, 2023 and 2022
were $i133 and $i154 million, respectively.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. iSTOCK-BASED COMPENSATION
We issue share-based awards under various incentive compensation plans, including non-qualified and incentive stock options,
stock appreciation rights, restricted stock and stock units ("RSUs") and restricted performance shares and performance units ("RPUs", collectively with RSUs, "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units.
Our primary equity compensation programs are the UPS Long-Term Incentive Performance Program (the "LTIP") and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount.
On November
2, 2022, we amended and restated the terms and conditions of the UPS Management Incentive Program (the "MIP") effective January 1, 2023, to provide that awards under the MIP will be fully electable in the form of cash or unrestricted shares of class A common stock.
Pre-tax compensation expense for share-based awards recognized in Compensation and benefits in the statements of consolidated income for the three months ended September 30, 2023 and 2022 was $i21
and $i233 million, respectively, and for the nine months ended September 30, 2023 and 2022 was $i186 and $i850 million,
respectively.
Management Incentive Program
RPUs issued under the MIP prior to 2022 vested one year following the grant date subject to continued employment with the Company and were expensed on a straight-line basis (less estimated forfeitures) over the requisite service period. In cases of death, disability or retirement, RPUs vested and were expensed immediately.
RPUs issued under the MIP in 2022 vested on December 31, 2022. As a result, the award was classified as a compensation obligation and recorded in Accrued wages and withholdings on the consolidated balance sheet at that date. Based on the date of the Compensation and Human Capital Committee of the
UPS Board of Directors (the "Compensation Committee") approval of the 2022 MIP, we determined the award measurement date to be February 8, 2023 for U.S.-based employees, including executive management, and March 20, 2023 for international employees. Each RPU issued under the MIP was valued using the closing New York Stock Exchange ("NYSE") prices of $i186.36 and $i183.49
on those dates. The compensation obligation recognized as of December 31, 2022 was relieved and the issuance of RPUs was recorded as additional paid-in capital on the measurement date.
Long-Term Incentive Performance Program
RPUs issued under the LTIP vest at the end of a ithree-year performance period, subject to continued employment with the Company
(except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis). The actual number of RPUs earned is based on achievement of the performance targets established on the grant date.
The performance targets are equally weighted between adjusted earnings per share and cumulative free cash flow. The actual number of RPUs earned is subject to adjustment based on total shareholder return relative to the Standard & Poor's 500 Index ("S&P 500"). We determine the grant date fair value of the RPUs using a Monte Carlo model and recognize compensation expense (less estimated forfeitures) ratably over the vesting period, based on the number of awards expected to be earned.
Based on the date of the Compensation Committee's approval of the 2023 LTIP award performance targets, we determined March
22, 2023 to be the award measurement date and each target RPU awarded was valued at $i200.01.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
iThe weighted-average assumptions used and the weighted-average fair values of the LTIP awards granted in 2023 and 2022 are as follows:
2023
2022
Risk-free
interest rate
i3.81
%
i2.35
%
Expected
volatility
i30.30
%
i31.92
%
Fair
value of RPUs granted
$
i198.98
$
i227.00
Share
payout
i107.80
%
i107.37
%
/
There
is no expected dividend yield as units earn dividend equivalents.
Non-Qualified Stock Options
We grant non-qualified stock options to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards vest over a ifive-year period with approximately iiiii20////%
of the award vesting at each anniversary of the grant date (except in the case of death, disability or retirement, in which case immediate vesting occurs). The option grants expire i10 years after the date of the grant. On March 22, 2023, we granted i0.1
million stock options at an exercise price of $i185.54, the NYSE closing price on that date.
iThe
fair value of each option granted is estimated using a Black-Scholes option pricing model. The weighted-average assumptions used and the weighted-average fair values of options granted in 2023 and 2022 are as follows:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. iMARKETABLE SECURITIES AND NON-CURRENT INVESTMENTS
iThe
following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2023 and December 31, 2022 (in millions):
We have concluded that no material impairment losses existed as of September 30, 2023. In making this determination, we considered the financial condition and prospects of each issuer, the magnitude of the losses compared with the cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Maturity Information
iThe amortized cost and estimated fair value of marketable securities as of September 30, 2023 by contractual maturity are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations with or without prepayment penalties.
Cost
Estimated Fair Value
Due
in one year or less
$
i1,469
$
i1,464
Due
after one year through three years
i1,515
i1,491
Due
after three years through five years
i8
i8
Due
after five years
i—
i—
i2,992
i2,963
Equity
securities
i4
i4
$
i2,996
$
i2,967
/
Non-Current
Investments
We hold non-current investments that are reported within Other Non-Current Assets in our consolidated balance sheets. Cash paid for these investments is included in Other investing activities in our statements of consolidated cash flows.
•Equity method investments: As of September 30, 2023 and December 31, 2022, equity securities accounted for under the equity method had a carrying value of $i249
and $i256 million, respectively.
•Other equity securities: Certain equity securities that do not have readily determinable fair values are reported in accordance with the measurement alternative in ASC Topic 321 Investments - Equity Securities. As of September 30, 2023 and December 31, 2022, we held equity securities accounted for using the measurement alternative of $i33
and $i31 million, respectively.
•Other investments: We hold an investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. The investment had a fair market value of $ii18/
million as of both September 30, 2023 and December 31, 2022.
Fair Value Measurements
Marketable securities valued utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. government debt securities, as these securities all have quoted prices in active markets. Marketable securities valued utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
i
The following table presents information about our investments measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, and indicates the fair
value hierarchy of the valuation techniques utilized to determine such fair value (in millions):
Quoted Prices in Active Markets for Identical Assets (Level 1)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. iEMPLOYEE
BENEFIT PLANS
Company-Sponsored Benefit Plans
iInformation about the net periodic benefit cost (income) for our company-sponsored pension and postretirement benefit plans for the three and nine months ended September 30, 2023 and 2022 is as follows (in millions):
U.S. Pension Benefits
U.S. Postretirement Medical
Benefits
International Pension Benefits
2023
2022
2023
2022
2023
2022
Three Months Ended September 30:
Service
cost
$
i293
$
i506
$
i5
$
i7
$
i11
$
i17
Interest
cost
i627
i488
i29
i21
i16
i11
Expected
return on assets
(i742)
(i820)
(i3)
(i1)
(i21)
(i19)
Amortization
of prior service cost
i27
i23
i—
i—
i1
i—
Net
periodic benefit cost (income)
$
i205
$
i197
$
i31
$
i27
$
i7
$
i9
U.S. Pension Benefits
U.S. Postretirement Medical
Benefits
International Pension Benefits
2023
2022
2023
2022
2023
2022
Nine Months Ended September 30:
Service
cost
$
i879
$
i1,518
$
i15
$
i22
$
i33
$
i52
Interest
cost
i1,881
i1,463
i87
i62
i49
i34
Expected
return on assets
(i2,225)
(i2,460)
(i9)
(i3)
(i63)
(i59)
Amortization
of prior service cost
i80
i69
i1
i—
i1
i1
Settlement
and curtailment (gain) loss
i—
i—
i—
i—
i—
(i33)
Net
periodic benefit cost (income)
$
i615
$
i590
$
i94
$
i81
$
i20
$
(i5)
/
The
components of net periodic benefit cost (income) other than current service cost are presented within Investment income and other in the statements of consolidated income.
During the nine months ended September 30, 2022, we amended the UPS Canada Ltd. Retirement Plan to cease future benefit accruals effective December 31, 2023. We remeasured the plan's assets and benefit obligation, which resulted in a curtailment gain of $i33 million
($i24 million after-tax) for the nine months ended September 30, 2022. The gain is included in Investment income and other in the statement of consolidated income.
During the nine months ended September 30, 2023, we contributed $i1.3
billion and $i108 million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We expect to contribute approximately $i26
and $i10 million over the remainder of the year to our pension and U.S. postretirement medical benefit plans, respectively.
Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under the terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted
to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.
As of September 30, 2023 and December 31, 2022, we had $i815 and $i821
million, respectively, recorded in Other Non-Current Liabilities in our consolidated balance sheets and $ii8/
million as of each of September 30, 2023 and December 31, 2022 recorded in Other current liabilities in our consolidated balance sheets associated with our previous withdrawal from the New England Teamsters and Trucking Industry Pension Fund. This liability is payable in equal monthly installments over a remaining term of approximately i39 years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of this withdrawal liability as of September 30,
2023 and December 31, 2022 was $i642 and $i686 million, respectively. We utilized Level 2 inputs in the fair value hierarchy
of valuation techniques to determine the fair value of this liability.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 at which time UPS withdrew from the CSPF. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits
in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are reduced by the CSPF consistent with the terms of our withdrawal agreement with the CSPF. Under this agreement, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with law. Subsequent to our withdrawal, the CSPF incurred extensive asset losses and indicated that it was projected to become insolvent. In such event, the CSPF benefits would be reduced to the legally permitted Pension Benefit Guaranty Corporation ("PBGC") limits, triggering the coordinating benefits provision in the collective bargaining agreement.
In March 2021, the American Rescue Plan Act ("ARPA") was enacted into
law. The ARPA contains provisions that allow for qualifying multiemployer pension plans to apply for special financial assistance ("SFA") from the PBGC, which will be funded by the U.S. government. Following SFA approval, a qualifying multiemployer pension plan will receive a lump sum payment to enable it to continue paying unreduced pension benefits through 2051. The multiemployer plan is not obligated to repay the SFA. The ARPA is intended to prevent both the PBGC and certain financially distressed multiemployer pension plans, including the CSPF, from becoming insolvent through 2051. The CSPF submitted an application for SFA that was approved in December 2022 and, in January 2023, the CSPF received $i35.8 billion
from the PBGC.
We account for the potential obligation to pay coordinating benefits under ASC Topic 715, which requires us to provide a best estimate of various actuarial assumptions in measuring our pension benefit obligation at the December 31st measurement date. As of December 31, 2022, our best estimate of coordinating benefits that may be required to be paid by the UPS/IBT Plan after SFA funds have been exhausted was immaterial.
The value of our estimate for future coordinating benefits will continue to be influenced by a number of factors, including interpretations of the ARPA, future legislative actions, actuarial assumptions and the ability of the CSPF to sustain its long-term commitments. Actual events may result in a change in our best estimate of the projected benefit obligation. We will continue to assess the impact of
these uncertainties in accordance with ASC Topic 715.
Collective Bargaining Agreements
We have more than i300,000 employees in the U.S. employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. These agreements were scheduled to expire on July 31, 2023. On July 25, 2023, we reached a new tentative national master agreement
with the Teamsters. On September 9, 2023, the agreement was fully ratified. The new agreement contains wage and benefit rate increases for both our part-time and full-time Teamster employees. Based on the most recent actuarial assumptions, the impact to the projected benefit obligation ("PBO") would be approximately $i0.6 billion. These enhancements will be recognized at the plans' next measurement date, which is expected to be December
31, 2023, and are subject to actuarial assumptions at that date which may further impact the final PBO calculation.
We have approximately i10,000 employees in Canada employed under a collective bargaining agreement with the Teamsters which runs through July 31, 2025.
We have approximately i3,500
pilots who are employed under a collective bargaining agreement with the Independent Pilots Association. This collective bargaining agreement becomes amendable September 1, 2025.
We have approximately i1,800 airline mechanics who are covered by a collective bargaining agreement with Teamsters Local 2727 which becomes amendable November 1, 2026. In addition, approximately i3,100
of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers. These collective bargaining agreements run through July 31, 2024.
We
conducted our most recent goodwill impairment testing as of July 1, 2023 using both qualitative and quantitative methods. Our quantitative tests utilize a combination of the income and market approaches. In developing our valuation assumptions underlying the annual impairment testing, we determined that the cost of capital for our Roadie and Delivery Solutions reporting units had increased, driven by increases in the risk-free interest rate and volatility of the stock prices of market comparables. The results of our testing using these assumptions indicated that the carrying values of our Roadie and Delivery Solutions reporting units exceeded their estimated fair values.
As a result, for the third quarter of 2023, we recorded an impairment charge of $i117 million
($i103 million after tax, or $i0.12 per diluted share) within Other Expenses in our Statement of Consolidated Income. This charge represented goodwill impairment of $i56 million
related to the Roadie reporting unit and $i61 million related to Delivery Solutions, representing all of the goodwill associated with this reporting unit.
Additional changes in goodwill during the nine months ended September 30, 2023 resulted from:
•An increase in goodwill of $i8 million,
as part of purchase accounting for our acquisition of Bomi Group in the fourth quarter of 2022. Certain areas, including our estimates of non-current liabilities and tax positions, remain preliminary as of September 30, 2023.
•An immaterial impairment charge related to the closure of a trade management services business within Supply Chain Solutions.
•The remaining movements are due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
A
trade name and licenses with carrying values of $i200 and $i4 million, respectively, as of September 30, 2023 are deemed to be indefinite-lived intangible
assets, and therefore are not amortized.
Our annual impairment testing indicated that the fair value of the indefinite-lived trade name associated with our truckload brokerage business remained greater than its carrying value by less than 10 percent. The carrying value of the trade name is $i200 million. Our truckload brokerage business continues to be negatively impacted by market conditions, which has resulted in revenue declines. We continue to monitor business performance and external factors affecting our valuation
assumptions for this trade name. There were no events or changes in circumstances as of September 30, 2023 that would indicate the carrying amount of our indefinite-lived intangible assets may be impaired as of the date of this report.
Impairment tests for finite-lived intangible assets are performed when a triggering event occurs that may indicate that the carrying value of the intangible asset may not be recoverable. Impairment charges for finite-lived intangible assets were $ii8/ million
for the three and nine months ended September 30, 2023. There were iino/
impairment charges for finite-lived intangible assets for the three and nine months ended September 30, 2022.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Commercial Paper
We are authorized to borrow up to $i10.0 billion under a U.S. commercial paper program and €i5.0
billion (in a variety of currencies) under a European commercial paper program. As of September 30, 2023, we had $i458 million outstanding under our U.S. commercial paper program, with an average interest rate of i5.32%. The amount of commercial paper
outstanding is expected to fluctuate. As of September 30, 2023, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheet. There was ino commercial paper outstanding at December 31, 2022.
Debt Classification
We have classified certain floating-rate senior notes that are redeemable at the option of the note holder as long-term liabilities in our consolidated balance sheets, due to our intent and
ability to refinance the debt if the put option is exercised.
Debt Repayments
During the nine months ended September 30, 2023, we repaid approximately $i23 million of foreign-currency-denominated debt assumed in the Bomi Group acquisition.
On April 1, 2023, our i2.500%
Senior Notes with a principal balance of $i1.0 billion and our floating rate senior notes with a principal balance of $i500 million matured and were repaid in full.
Debt Issuances
On
February 23, 2023, we issued itwo series of notes in the principal amounts of $i900 million and $i1.1 billion.
These notes bear interest at i4.875% and i5.050%, respectively, and mature on March 3, 2033 and March 3, 2053, respectively. Interest on the notes is payable semi-annually, beginning September 2023. Each
series of notes is callable at our option at a redemption price equal to the greater of i100% of the principal amount, or the sum of the present values of scheduled payments of principal and interest, plus accrued and unpaid interest.
On March 7, 2023, we issued floating rate senior notes with a principal balance of $i529 million.
These notes bear interest at a rate equal to the compounded Secured Overnight Financing Rate ("SOFR") less i0.350% per year and mature on March 15, 2073. These notes are callable at various times after i30 years at a stated percentage of par value and are redeemable at the option of the note holders
at various times after one year at a stated percentage of par value.
Reference Rate Reform
Our floating-rate senior notes that mature between 2049 and 2067 bore interest at rates that referenced the London Interbank Offer Rate ("LIBOR") for U.S. Dollars. As part of a broader program of reference rate reform, U.S. Dollar LIBOR rates ceased to be published after June 2023. Beginning July 1, 2023, we transitioned these notes to an alternative reference rate, SOFR, which was adopted in accordance with recommendations of the Alternative Reference Rates Committee.
Sources of Credit
We maintain itwo
credit agreements with a consortium of banks. The first of these agreements provides revolving credit facilities of $i1.0 billion, and expires on December 5, 2023. Amounts outstanding under this agreement bear interest at a periodic fixed rate equal to the term SOFR rate, plus i0.10%
per annum and an applicable margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of September 30, 2023 was i0.70%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus i0.50%;
or (3) the Adjusted Term SOFR Rate for a one-month interest period plus i1.00%, may be used at our discretion. We expect to renew this credit agreement in the fourth quarter of 2023 on substantially similar terms.
The second agreement provides revolving credit facilities of $i2.0 billion,
and expires on December 7, 2026. Amounts outstanding under this facility bear interest at a periodic fixed rate equal to the term SOFR rate plus i0.10% per annum and an applicable margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of September 30, 2023 was i0.875%.
Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus i0.50%; or (3) the Adjusted Term SOFR Rate for a one-month interest period plus i1.00%,
plus an applicable margin, may be used at our discretion.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
If the credit ratings established by Standard & Poor's and Moody's differ, the higher rating will be used, except in cases where the lower rating is two or more levels lower. In these circumstances, the rating one step below the higher rating will be used. We are also able to request
advances under these facilities based on competitive bids for the applicable interest rate.
There were iino/
amounts outstanding under these facilities as of September 30, 2023.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of September 30, 2023, and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to i10%
of net tangible assets. As of September 30, 2023, i10% of net tangible assets was equivalent to $i4.7 billion
and we had iino/ covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact
on our financial condition or liquidity.
Fair Value of Debt
Based on the borrowing rates currently available to us for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately $i19.8 and $i18.2
billion as of September 30, 2023 and December 31, 2022, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10. iiLEASES /
We have finance and operating leases for real estate (primarily package centers, airport facilities and warehouses), aircraft and engines, information technology
equipment, vehicles and various other equipment used in operating our business. Certain leases for real estate and aircraft contain options to purchase, extend or terminate the lease.
Aircraft
In addition to the aircraft that we own, we charter aircraft to handle package and cargo volume on certain international trade lanes and domestic routes. Due to the nature of these agreements, primarily being that either party can cancel the agreement with short notice, we have classified these as short-term leases. A majority of our long-term aircraft operating leases are operated by a third party to handle package and cargo volume in geographic regions where, due to government regulations, we are restricted from operating an airline.
Transportation equipment and other equipment
We enter into both long-term
and short-term leases for transportation equipment to supplement our capacity or meet contractual demands. Some of these assets are leased on a month-to-month basis and the leases can be terminated without penalty. We also enter into equipment leases to increase capacity during periods of high demand. These leases are treated as short-term as the cumulative right of use is less than 12 months over the term of the contract.
Some of our transportation and technology equipment leases require us to make additional lease payments based on the underlying usage of the assets. Due to the variable nature of these costs, these are expensed as incurred and are not included in the right of use lease asset and associated lease obligation.
iThe
components of lease expense for the three and nine months ended September 30, 2023 and 2022 were as follows (in millions):
(1)
This table excludes sublease income as it was not material for the three and nine months ended September 30, 2023 or 2022.
/
In addition to the lease costs disclosed in the table above, we monitor all lease categories for any indicators that the carrying value of the assets may not be recoverable. There were iino/
impairments recognized during the three months ended September 30, 2023. We recognized $ii13/ million
of impairments during the nine months ended September 30, 2023. There were iiiino///
material impairments recognized during the three or nine months ended September 30, 2022.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
iSupplemental
information related to leases and location within our consolidated balance sheets is as follows (in millions, except lease term and discount rate):
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
iiMaturities
of lease obligations as of September 30, 2023 were as follows (in millions):
Finance Leases
Operating Leases
2023
$
i32
$
i180
2024
i97
i789
2025
i74
i713
2026
i51
i612
2027
i44
i532
Thereafter
i212
i2,323
Total
lease payments
i510
i5,149
Less:
Imputed interest
(i85)
(i834)
Total
lease obligations
i425
i4,315
Less: Current obligations
(i86)
(i664)
Long-term
lease obligations
$
i339
$
i3,651
//
As
of September 30, 2023, we had $i764 million of additional leases which had not commenced. These leases will commence between 2023 and 2025 when we are granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. iLEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business.
Although there can be
no assurances as to the ultimate outcome, we have generally denied, or believe we have meritorious defenses and will deny, liability in all pending matters, including (except as otherwise noted herein) the matters described below, and we intend to vigorously defend each matter. We accrue amounts associated with legal proceedings when and to the extent a loss becomes probable and can be reasonably estimated. The actual costs of resolving legal proceedings may be substantially higher or lower than the amounts accrued on those claims.
For matters as to which we are not able to estimate a possible loss or range of losses, we are not able to determine whether any such loss will have a material impact on our operations or financial condition. For these matters, we have described the reasons that we are unable to estimate a possible loss or range of losses.
Judicial Proceedings
We
are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with any such matter will have a material impact on our operations or financial condition. One of these matters, Hughes v. UPS Supply Chain Solutions, Inc. and United Parcel Service, Inc. had previously been certified as a class action in Kentucky state court. In the second quarter of 2019, the court granted our motion for judgment on the pleadings related to the wage-and-hour claims. The plaintiffs' appeal of this decision was denied. However, they were granted a discretionary review by the Kentucky Supreme Court. In the first quarter of 2023, the Kentucky Supreme Court ruled in our favor. Plaintiffs subsequently filed a motion for rehearing, which was denied.
In July 2023, another matter, Baker v. United Parcel Service,
Inc. (DE) and United Parcel Service, Inc. (OH) was certified as a class action in federal court in the Eastern District of Washington. The plaintiff in this matter alleges that UPS violated the Uniformed Services Employment and Reemployment Rights Act. We are vigorously defending ourselves in this matter and believe that we have a number of meritorious defenses, and there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
Other Matters
In August 2016, Spain’s National Markets and Competition Commission ("CNMC") announced an investigation into i10
companies in the commercial delivery and parcel industry, including UPS, related to alleged nonaggression agreements to allocate customers. In May 2017, we received a Statement of Objections issued by the CNMC. In July 2017, we received a Proposed Decision from the CNMC. In March 2018, the CNMC adopted a final decision, finding an infringement and imposing an immaterial fine on UPS. We appealed the decision. In December 2022, a trial court ruled against us. We have filed an appeal before the Spanish Supreme Court. We are vigorously defending ourselves and believe that we have a number of meritorious defenses. There are also unresolved questions of law that could be important to the ultimate resolution of this matter. We do not believe that any loss from this matter would have a material impact on our operations or financial condition.
We are a party in various other matters that arose in the normal course of business. We do
not believe that the eventual resolution of these other matters (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material impact on our operations or financial condition.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 12. iSHAREOWNERS' EQUITY
Capital Stock, Additional Paid-In Capital, Retained Earnings and Non-Controlling Interests
We are authorized to issue itwo
classes of common stock, which are distinguished from each other primarily by their respective voting rights. Class A shares of UPS are entitled to i10 votes per share, whereas class B shares are entitled to ione vote per share. Class A shares are primarily held by UPS employees and retirees, as well as trusts and descendants of the
Company's founders, and these shares are fully convertible into class B shares at any time. Class B shares are publicly traded on the NYSE under the symbol “UPS”. Class A and B shares both have a $ii0.01/
par value, and as of September 30, 2023, there were i4.6 billion class A shares and i5.6 billion class B shares authorized to be issued. Additionally, there are i200 million
preferred shares authorized to be issued, with a par value of $i0.01 per share. As of September 30, 2023, ino preferred shares had been issued.
iThe
following is a rollforward of our common stock, additional paid-in capital, retained earnings and non-controlling interests accounts for the three and nine months ended September 30, 2023 and 2022 (in millions, except per share amounts):
Three Months Ended September 30:
2023
2022
Shares
Dollars
Shares
Dollars
Class A
Common Stock
Balance at beginning of period
i132
$
i2
i138
$
i2
Stock
award plans
i1
i—
(i1)
i—
Common
stock issuances
i1
i—
i1
i—
Conversions
of class A to class B common stock
(i4)
i—
(i3)
i—
Class A
shares issued at end of period
i130
$
i2
i135
$
i2
Class
B Common Stock
Balance at beginning of period
i723
$
i7
i732
$
i7
Common
stock purchases
(i5)
i—
(i5)
i—
Conversions
of class A to class B common stock
i4
i—
i3
i—
Class
B shares issued at end of period
i722
$
i7
i730
$
i7
Additional
Paid-In Capital
Balance at beginning of period
$
i—
$
i573
Stock
award plans
i14
i233
Common
stock purchases
(i123)
(i903)
Common
stock issuances
i115
i97
Other
(1)
(i6)
i—
Balance
at end of period
$
i—
$
i—
Retained
Earnings
Balance at beginning of period
$
i21,584
$
i18,958
Net
income attributable to common shareowners
i1,127
i2,584
Dividends
($i1.62 and $i1.52 per share) (2)
(i1,384)
(i1,316)
Common
stock purchases
(i627)
(i48)
Other
(i1)
(i1)
Balance
at end of period
$
i20,699
$
i20,177
Non-Controlling
Interest
Balance at beginning of period
$
i18
$
i21
Change
in non-controlling interest
(i6)
(i1)
Balance
at end of period
$
i12
$
i20
(1)
Includes a i1% excise tax applicable to share repurchases.
(2) The dividend per share amount is the same for both class A and class B common stock. Dividends included $i43 and $i41
million as of September 30, 2023 and 2022, respectively, that were settled in shares of class A common stock.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30:
2023
2022
Shares
Dollars
Shares
Dollars
Class A Common Stock:
Balance at beginning of period
i134
$
i2
i138
$
i2
Stock
award plans
i4
i—
i5
i—
Common
stock issuances
i2
i—
i2
i—
Conversions
of class A to class B common stock
(i10)
i—
(i10)
i—
Class A
shares issued at end of period
i130
$
i2
i135
$
i2
Class
B Common Stock:
Balance at beginning of period
i725
$
i7
i732
$
i7
Common
stock purchases
(i13)
i—
(i12)
i—
Conversions
of class A to class B common stock
i10
i—
i10
i—
Class
B shares issued at end of period
i722
$
i7
i730
$
i7
Additional
Paid-In Capital:
Balance at beginning of period
$
i—
$
i1,343
Stock
award plans
i391
i410
Common
stock purchases
(i750)
(i2,146)
Common
stock issuances
i370
i393
Other
(1)
(i11)
i—
Balance
at end of period
$
i—
$
i—
Retained
Earnings:
Balance at beginning of period
$
i21,326
$
i16,179
Net
income attributable to controlling interests
i5,103
i8,095
Dividends
($i4.86 and $i4.56 per share) (2)
(i4,230)
(i4,049)
Common
stock purchases
(i1,500)
(i48)
Other
i—
i—
Balance
at end of period
$
i20,699
$
i20,177
Non-Controlling
Interests:
Balance at beginning of period
$
i17
$
i16
Change
in non-controlling interest
(i5)
i4
Balance
at end of period
$
i12
$
i20
(1)
Includes a i1% excise tax applicable to share repurchases.
(2) The dividend per share amount is the same for both class A and class B common stock. Dividends include $i196 and $i207 million
as of September 30, 2023 and 2022, respectively, that were settled in shares of class A common stock.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We repurchased i4.4
and i12.8 million shares of class B common stock for $i750 million and $i2.3 billion
during the three and nine months ended September 30, 2023, respectively. We repurchased i4.9 and i11.6 million shares of class B common stock for $i951
million and $i2.2 billion during the three and nine months ended September 30, 2022, respectively. These repurchases were completed as follows:
•In August 2021, the Board of Directors authorized the company to repurchase up to $i5.0 billion
of class A and class B common stock (the "2021 Authorization"). For the nine months ended months ended September 30, 2023, we repurchased i0.5 million shares of class B common stock for $i82 million under
this authorization. The share repurchases discussed above for the three and nine months ended September 30, 2022, were completed under this authorization.
•In January 2023, the Board of Directors terminated the 2021 Authorization and approved a new share repurchase authorization for $i5.0 billion of class A and class B common stock (the "2023 Authorization"). For the three and nine months ended September 30, 2023,
we repurchased i4.4 and i12.3 million shares for$i750
million and $i2.2 billion, respectively, under the 2023 Authorization. As of September 30, 2023, we had $i2.8 billion available
under this repurchase authorization.
We do not anticipate further share repurchases in 2023.
Future share repurchases may be in the form of accelerated share repurchase programs, open market purchases or other methods we deem appropriate. The timing of share repurchases will depend upon market conditions. Unless terminated earlier by the Board of Directors, this program will expire when we have purchased all shares authorized for repurchase under the program.
Movements in additional paid-in capital in respect of stock award plans comprise accruals for unvested awards, offset by adjustments for awards that vest during the period.
Accumulated Other Comprehensive Income (Loss)
We recognize activity in other comprehensive income for foreign currency translation
adjustments, unrealized holding gains and losses on available-for-sale securities, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. iThe activity in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022 was as follows (in millions):
Three
Months Ended September 30:
2023
2022
Foreign Currency Translation Gain (Loss), Net of Tax:
Balance at beginning of period
$
(i1,346)
$
(i1,447)
Translation
adjustment (net of tax effect of $i0 and $i4)
(i96)
(i263)
Balance
at end of period
(i1,442)
(i1,710)
Unrealized
Gain (Loss) on Marketable Securities, Net of Tax:
Balance at beginning of period
(i20)
(i8)
Current
period changes in fair value (net of tax effect of $(i1) and $(i1))
(i2)
(i4)
Reclassification
to earnings (net of tax effect of $i0 and $i0)
i—
i1
Balance
at end of period
(i22)
(i11)
Unrealized
Gain (Loss) on Cash Flow Hedges, Net of Tax:
Balance at beginning of period
i10
i260
Current
period changes in fair value (net of tax effect of $i44 and $i110)
i138
i350
Reclassification
to earnings (net of tax effect of $(i8) and $(i21))
(i27)
(i69)
Balance
at end of period
i121
i541
Unrecognized
Pension and Postretirement Benefit Costs, Net of Tax:
Balance at beginning of period
(i218)
(i2,056)
Reclassification
to earnings (net of tax effect of $i7 and $i5)
i21
i18
Balance
at end of period
(i197)
(i2,038)
Accumulated
other comprehensive income (loss) at end of period
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
i
Detail of the gains (losses) reclassified from accumulated other comprehensive income (loss) to the statements of consolidated income for the three and nine months ended September 30,
2023 and 2022 is as follows (in millions):
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Deferred Compensation Obligations and Treasury Stock
We maintain a deferred compensation plan whereby certain employees were previously able to elect to defer the gains on stock option exercises by deferring the shares received upon exercise into a rabbi trust. The shares held in this trust are classified as treasury stock, and the liability to participating employees is classified as a deferred compensation obligation within Shareowners’ Equity in the consolidated balance sheets. The number of shares needed to settle the liability for deferred compensation obligations is included in the denominator in both the basic and diluted earnings per share calculations. Employees are generally no longer able to defer the gains from stock options exercised.
i
Activity
in the deferred compensation program for the three and nine months ended September 30, 2023 and 2022 was as follows (in millions):
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. iSEGMENT INFORMATION
We have itwo
reportable segments: U.S. Domestic Package and International Package, which are together referred to as our global small package operations. Our remaining businesses are reported as Supply Chain Solutions. Global small package operations represent our most significant business and are broken down into regional operations around the world. Regional operations managers are responsible for both domestic and export products within their geographic area. Supply Chain Solutions comprises the results of non-reportable operating segments that do not meet the quantitative and qualitative criteria of a reportable segment as defined under ASC Topic 280 – Segment Reporting.
U.S. Domestic Package
U.S. Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the United States.
International Package
International
Package operations include delivery to more than i200 countries and territories worldwide, including shipments wholly outside the United States, as well as shipments with either origin or destination outside the United States. Our International Package reporting segment includes our operations in Europe, the Indian sub-continent, the Middle East and Africa ("EMEA"), Canada and Latin America (together "Americas") and Asia.
Supply Chain Solutions
Supply Chain Solutions includes our Forwarding, Logistics,
UPS Mail Innovations, Coyote, Healthcare and other businesses. Our Forwarding, Logistics and UPS Mail Innovations businesses provide services in more than i200 countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, distribution and post-sales services, mail and consulting services. Coyote offers truckload brokerage services primarily in the United States. Our Healthcare businesses provide supply chain solutions to the healthcare and life sciences industries. Other businesses within Supply Chain Solutions include The UPS Store, UPS Capital, Roadie
and Delivery Solutions.
In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income (expense) and other, interest expense and income tax expense. Certain expenses are allocated between the segments using activity-based costing methods. These activity-based costing methods require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates directly impact the amount of expense allocated to each segment, and therefore the operating profit of each reporting segment. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses. There were no significant changes to our allocation methodologies in the third quarter or year-to-date periods.
i
Results
of operations for the three and nine months ended September 30, 2023 and 2022 were as follows (in millions):
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. iEARNINGS PER SHARE
The earnings per share amounts are the same for class A and class B common shares as the holders of each class are legally entitled to equal per-share distributions whether through dividends or in liquidation.
iThe
following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2023 and 2022 (in millions, except per share amounts):
(1)
Earnings per share is computed using unrounded amounts.
/
Diluted earnings per share for the three and nine months ended September 30, 2023 and 2022 excluded the effect of ii0.2/
and ii0.1/ million
shares of common stock, respectively, that may be issued upon the exercise of employee stock options because such effect would be antidilutive.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. iDERIVATIVE
INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations and we actively monitor these exposures. Where deemed appropriate, to manage the impact of these exposures on earnings and/or cash flows, we may enter into a variety of derivative financial instruments. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Credit Risk Management
The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements. We seek to minimize such risk exposures for these instruments
by limiting the counterparties to banks and financial institutions that meet established credit guidelines. We may further manage credit risk through the use of zero threshold bilateral collateral provisions and/or early termination rights utilizing master netting arrangements, whereby cash is exchanged based on the net fair value of derivatives associated with each counterparty.
As of September 30, 2023 and December 31, 2022, we held cash collateral of $i382 and $i534
million, respectively, under these agreements. This collateral is included in Cash and cash equivalents in the consolidated balance sheets and is unrestricted. As of September 30, 2023 and December 31, 2022, iino/
collateral was required to be posted with our counterparties.
Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply in our domestic and international package businesses are the primary means of reducing the risk of adverse fuel price changes on our business. In order to mitigate the impact of fuel surcharges imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage services.
Foreign Currency Risk Management
To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, British Pound Sterling,
Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We generally designate and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue.
We may also hedge portions of our anticipated cash settlements of principal and interest on certain foreign currency denominated debt. We generally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions.
We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments.
Interest Rate Risk Management
We may use a combination of
derivative instruments to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing.
We generally designate and account for interest rate swaps that convert fixed-rate interest payments into floating-rate interest payments as fair value hedges of the associated debt instruments. We designate and account for interest rate swaps that convert floating-rate interest payments into fixed-rate interest payments as cash flow hedges of the forecasted payment obligations.
We may periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings by using forward starting interest rate swaps, interest rate locks or similar derivatives.
The following table indicates the location in the consolidated balance sheets where our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives.
We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair
value positions of our derivative contracts recorded in the consolidated balance sheets. The columns labeled Net Amounts if Right of Offset had been Applied indicate the potential net fair value positions by type of contract and location in the consolidated balance sheets had we elected to apply the right of offset as of September 30, 2023 and December 31, 2022 (in millions):
Fair
Value Hierarchy Level
Gross Amounts Presented in Consolidated Balance Sheets
Our
foreign currency exchange rate and interest rate derivatives are largely comprised of over-the-counter derivatives, which are primarily valued using pricing models that rely on market observable inputs such as yield curves, foreign currency exchange rates and investment forward prices; therefore, these derivatives are classified as Level 2.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Balance
Sheet Location of Hedged Item in Fair Value Hedges
The following table indicates the amounts that were recorded in the consolidated balance sheets related to cumulative basis adjustments for fair value hedges as of September 30, 2023 and December 31, 2022 (in millions):
Line
Item in the Consolidated Balance Sheets in Which the Hedged Item is Included
Income
Statement and AOCI Recognition of Designated Hedges
iThe following table indicates the amount of gains (losses) that have been recognized in the statements of consolidated income for fair value and cash flow hedges, as well as the associated gain (loss) for the underlying hedged item for fair value hedges for the three and nine months ended September 30, 2023 and 2022
(in millions):
Three
Months Ended September 30,
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
2023
2022
Revenue
Interest Expense
Investment Income and Other
Revenue
Interest Expense
Investment
Income and Other
Gain or (loss) on fair value hedging relationships:
Amount of gain or (loss) reclassified from accumulated other comprehensive income
i41
i—
i—
i94
i—
i—
Total
amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded
Amount of gain (loss) reclassified from accumulated other comprehensive income
i160
i—
i—
i202
i—
i—
Total
amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded
$
i160
$
(i9)
$
i—
$
i202
$
(i9)
$
i—
i
The
following table indicates the amount of gains (losses) that have been recognized in AOCI for the three and nine months ended September 30, 2023 and 2022 for those derivatives designated as cash flow hedges (in millions):
Three Months Ended September 30:
Derivative Instruments in Cash Flow
Hedging Relationships
Amount of Gain (Loss) Recognized in AOCI on Derivatives
As
of September 30, 2023, there were $i160 million of pre-tax gains related to cash flow hedges deferred in AOCI that are expected to be reclassified to income over the 12-month period ending September 30, 2024. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions. The maximum term over which we are hedging exposures to the variability of cash flows is
approximately i3 years.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
i
The
following table indicates the amount of gains (losses) that have been recognized in AOCI within foreign currency translation adjustment for the three and nine months ended September 30, 2023 and 2022 for those instruments designated as net investment hedges (in millions):
Three Months Ended September 30:
Non-derivative
Instruments in Net Investment Hedging Relationships
Amount of Gain (Loss) Recognized in AOCI on Debt
2023
2022
Foreign currency denominated debt
$
i103
$
i209
Total
$
i103
$
i209
Nine
Months Ended September 30:
Non-derivative Instruments in Net Investment Hedging Relationships
Amount of Gain (Loss) Recognized in AOCI on Debt
2023
2022
Foreign currency denominated debt
$
i5
$
i436
Total
$
i5
$
i436
/
Income
Statement Recognition of Non-Designated Derivative Instruments
Derivative instruments that are not designated as hedges are recorded at fair value with unrealized gains and losses reported in earnings each period. Cash flows from the settlement of derivative instruments appear in the statement of consolidated cash flows within the same categories as the cash flows of the hedged item.
We may periodically terminate interest rate swaps and foreign currency exchange forward contracts or enter into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original hedge relationship.
i
Amounts
recorded in the statements of consolidated income related to fair value changes and settlements of interest rate swaps and foreign currency forward contracts not designated as hedges for the three and nine months ended September 30, 2023 and 2022 (in millions) were as follows:
Derivative
Instruments Not Designated in Hedging Relationships
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. iINCOME TAXES
Our third-quarter effective tax rate decreased to i11.1%
as compared to i21.0% in the prior year (i21.6% year to date compared to i21.8%
in 2022). The year-over-year decrease was driven by favorable U.S. Treasury guidance on utilization of foreign tax credits, decreases in uncertain tax positions as a result of resolution of global tax audits and adjustments to our tax balances to reflect our recently filed tax returns.
We have recognized liabilities for uncertain tax positions and we reevaluate these uncertain tax positions on a quarterly basis. A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months, however, an estimate of the range of reasonably possible outcomes cannot be made. Items that may cause changes to unrecognized tax benefits include the allowance or disallowance
of deductions, the timing of deductions and the allocation of income and expense between tax jurisdictions. Any changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of statutes of limitations or other unforeseen circumstances.
During the third quarter of 2023, we recognized an income tax benefit of $i15 million related to a one-time compensation payment of $i61
million. This income tax benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.
Also in the third quarter of 2023, we recorded goodwill impairment charges of $i117 million ($i125 million year to date). As a result, we recorded
an additional income tax benefit of $i14 million ($i16 million year to date). This income tax benefit was generated at a lower average tax rate than the U.S. federal statutory tax rate due to a portion of the goodwill
impairment charge not being deductible for tax purposes.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. iTRANSFORMATION
STRATEGY COSTS
We are undertaking an enterprise-wide transformation of our organization that includes initiatives, as well as changes in processes and technology, that impact global direct and indirect operating costs. During the third quarter of 2023, we reduced staff to better align direct headcount with volumes. As of September 30, 2023, we recorded an accrual for separation costs of $i90 million on the consolidated balance sheet. We currently expect approximately $i26 million
to be paid by December 31, 2023 and the remainder to be paid during the first quarter of 2024.
i
The table below presents transformation strategy costs for the three and nine months ended September 30, 2023 and 2022 (in millions):
Income
Tax Benefit from Transformation Strategy Costs
(i24)
(i9)
(i57)
(i31)
After-Tax
Transformation Strategy Costs
$
i70
$
i27
$
i179
$
i101
/
The
income tax effects of transformation strategy costs are calculated by multiplying the amount of the adjustments by the statutory tax rates applicable in each tax jurisdiction.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. iSUBSEQUENT
EVENTS
In the third quarter of 2023, we entered into an agreement to acquire MNX Global Logistics, a global time-critical and temperature-sensitive logistics provider. This acquisition is expected to enhance our capabilities in time-critical logistics, including healthcare and related industries and is expected to close in the fourth quarter of 2023, subject to regulatory approval.
Also in the third quarter of 2023, we entered into a separate agreement to acquire Happy Returns, a technology-focused company that provides innovative end-to-end return services. This acquisition will expand our returns portfolio and provide a consolidated returns solution for our enterprise retail customers. This acquisition was closed on November 1, 2023.
The aggregate purchase price for both acquisitions
will be approximately $i1.3 billion. These acquisitions are not expected to exceed i10% of operating income.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
As the world’s premier package delivery company and leading provider of global supply chain management solutions, we seek to provide industry-leading service to our customers by combining our digital capabilities with our global integrated network and diversified portfolio. Our Customer First, People Led, Innovation Driven strategy is enabling us to stay focused on our core business and invest to grow in the most attractive parts of the market, like healthcare and with small- and medium-sized
businesses ("SMBs").
We have taken a number of steps in furtherance of our strategy in the third quarter of 2023. We entered into an agreement to acquire MNX Global Logistics, a global time-critical and temperature-sensitive logistics provider, which we anticipate will close during the fourth quarter. We also entered into an agreement to acquire Happy Returns, a technology-focused company that provides innovative end-to-end return services. This acquisition closed on November 1st.
In addition, in early September, our International Brotherhood of Teamsters employees fully ratified a new national master agreement. In total, wage and benefit rates combined with all other contract provisions will increase union cost at a 3.3% compounded annual growth rate over the five-year term of the contract,
with the majority of the increase in the first and fifth years. Importantly, this contract provides us significant certainty around labor, and we have retained the ability to implement technology to further drive productivity inside our buildings, which is expected to help offset cost increases.
Throughout the third quarter, we continued deploying our Smart Package Smart Facility RFID technology to reduce package car loading errors and improve efficiency in deliveries. As of September 30, 2023, this technology was installed in most of our U.S. facilities. In Supply Chain Solutions, we began implementing robotic technology to unload packages more efficiently.
For the quarter and year-to-date periods,
macroeconomic headwinds, including persistent global inflation, geopolitical tensions and changes in consumer behavior, together with volume diversion resulting from our labor negotiations with the Teamsters, have contributed to a challenging operating environment. Internationally, demand continued to decline in Asia while economic conditions in Europe remained challenging.
These factors led to volume declines in our global small package operations for both the quarter and year to date, and we anticipate that they will continue to impact us in the fourth quarter, although we have experienced week-over-week U.S. volume growth since the ratification of our contract with the Teamsters.
Faced with this challenging external environment during the quarter, we continued our focus on adjusting our
network to match volume levels and delivering industry-leading service to our customers. Additionally, we remained disciplined in our capital allocation practices by returning cash to shareowners through both a dividend and share repurchases, and by reinvesting in our business. We do not anticipate further share repurchases in 2023.
We have two reportable segments: U.S. Domestic Package and International Package. Our remaining businesses are reported as Supply Chain Solutions.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Highlights of our consolidated results, which are discussed in more detail below, include:
Three
Months Ended September 30,
Change
Nine Months Ended September 30,
Change
2023
2022
$
%
2023
2022
$
%
Revenue
(in millions)
$
21,061
$
24,161
$
(3,100)
(12.8)
%
$
66,041
$
73,305
$
(7,264)
(9.9)
%
Operating
Expenses (in millions)
19,718
21,048
(1,330)
(6.3)
%
59,377
63,406
(4,029)
(6.4)
%
Operating
Profit (in millions)
$
1,343
$
3,113
$
(1,770)
(56.9)
%
$
6,664
$
9,899
$
(3,235)
(32.7)
%
Operating
Margin
6.4
%
12.9
%
10.1
%
13.5
%
Net Income (in millions)
$
1,127
$
2,584
$
(1,457)
(56.4)
%
$
5,103
$
8,095
$
(2,992)
(37.0)
%
Basic
Earnings Per Share
$
1.31
$
2.97
$
(1.66)
(55.9)
%
$
5.93
$
9.27
$
(3.34)
(36.0)
%
Diluted
Earnings Per Share
$
1.31
$
2.96
$
(1.65)
(55.7)
%
$
5.92
$
9.24
$
(3.32)
(35.9)
%
Operating
Days
63
64
191
192
Average Daily Package Volume (in thousands)
20,425
22,900
(10.8)
%
21,109
23,083
(8.6)
%
Average
Revenue Per Piece
$
13.81
$
13.58
$
0.23
1.7
%
$
13.82
$
13.52
$
0.30
2.2
%
•Revenue
and average daily package volume in our global small package operations decreased for both the quarter and year to date, with declines in both commercial and residential shipments across all of our products. These declines were primarily the result of the macroeconomic conditions and labor-related uncertainties described above, as well as a reduction in fuel surcharge revenue driven by declines in fuel prices.
•Operating expenses decreased for both the quarter and year to date, driven by a reduction in purchased transportation in Supply Chain Solutions and reductions in fuel expense in our small package operations, as well as the impact of our ongoing productivity initiatives.
•Operating profit and operating margin decreased for both the quarter and year to date, as revenue declines were greater than operating expense reductions.
•We
reported third quarter net income of $1.1 billion and diluted earnings per share of $1.31 ($5.1 billion and $5.92 per diluted share for the year-to-date period). Adjusted diluted earnings per share were $1.57 for the third quarter ($6.31 per diluted share year to date) after adjusting for the after-tax impacts of:
◦transformation strategy costs of $70 million, or $0.09 per diluted share, for the third quarter ($179 million and $0.21 per diluted share year to date);
◦goodwill impairment charges of $103 million, or $0.12 per diluted share, for the third quarter ($109 million and $0.13 per diluted share year to date); and
◦a one-time compensation payment of $46 million, or $0.05 per diluted share, for the third quarter and year to date.
In
the U.S. Domestic Package segment, revenue declines for the quarter and year to date were driven by lower volume and fuel surcharge revenue. These were somewhat offset by revenue per piece growth due to increases in base rates and changes in product and customer mix. Expenses for the quarter and year to date decreased, primarily due to declines in fuel expense, purchased transportation and management compensation expense.
In our International Package segment, revenue declines for the quarter and year to date were driven by lower volume and declines in fuel and demand-related surcharges. These were slightly offset by the impact of base rate increases. Expense decreases for the quarter and year to date were primarily driven by lower fuel and purchased transportation expense as a result of volume declines and lower fuel prices.
In Supply Chain Solutions, revenue decreases for the quarter
and year to date were driven by volume and market rate declines in Forwarding that were slightly offset by growth in Logistics, including the impact of the Bomi Group acquisition that occurred in the fourth quarter of 2022. Expenses decreased for the quarter and year to date, primarily driven by lower purchased transportation in Forwarding. This was slightly offset by expense increases within Logistics.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Supplemental Information - Items Affecting Comparability
We supplement the reporting of our financial information determined under generally accepted accounting principles in the United States ("GAAP") with certain non-GAAP financial measures.
Adjusted financial measures should be considered in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. Our adjusted financial measures do not represent a comprehensive basis of accounting and therefore may not be comparable to similarly titled measures reported by other companies.
Adjusted
amounts reflect the following (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
Non-GAAP Adjustments
2023
2022
2023
2022
Operating
Expenses:
Transformation Strategy Costs
$
94
$
36
$
236
$
132
Goodwill
and Asset Impairments, and Divestiture Charges
117
—
125
—
One-Time Compensation Payment
61
—
61
—
Total
Adjustments to Operating Expenses
$
272
$
36
$
422
$
132
Other Income and (Expense):
Defined
Benefit Plan (Gains) Losses
$
—
$
—
$
—
$
(33)
Total Adjustments to Other Income and (Expense)
$
—
$
—
$
—
$
(33)
Total
Adjustments to Income Before Income Taxes
$
272
$
36
$
422
$
99
Income Tax (Benefit)
Expense:
Transformation Strategy Costs
$
(24)
$
(9)
$
(57)
$
(31)
Goodwill
and Asset Impairments, and Divestiture Charges
(14)
—
(16)
—
One-Time Compensation Payment
(15)
—
(15)
—
Defined
Benefit Plan (Gains) Losses
—
—
—
9
Total Adjustments to Income Tax (Benefit) Expense
$
(53)
$
(9)
$
(88)
$
(22)
Total
Adjustments to Net Income
$
219
$
27
$
334
$
77
Transformation Charges, and Goodwill, Asset Impairment and Divestiture Charges
We supplement the presentation of our operating profit, operating margin, income before income taxes, net income and earnings per share with non-GAAP measures that exclude the impact of charges related
to transformation activities, and goodwill, asset impairment and divestiture charges. We believe excluding the impact of these charges better enables users of our financial statements to view and evaluate underlying business performance from the perspective of management. We do not consider these costs when evaluating the operating performance of our business units, making decisions to allocate resources or in determining incentive compensation awards. For more information regarding transformation activities, see note 17 to the unaudited, consolidated financial statements and for goodwill impairment charges, see note 8 to the unaudited, consolidated financial statements.
One-Time Compensation Payment
We supplement the presentation of our operating profit, operating margin, income before income taxes, net income and earnings per share with non-GAAP measures that exclude the impact
of a one-time payment made to certain U.S.-based, non-union part-time supervisors following the ratification of our labor agreement with the Teamsters. We do not expect this or similar payments to recur. We believe excluding the impact of this one-time payment better enables users of our financial statements to view and evaluate underlying business performance from the same perspective as management.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
Foreign Currency Exchange Rate Changes and Hedging Activities
We supplement the reporting of revenue, revenue per piece and operating profit with adjusted measures that exclude the period-over-period impact of foreign currency exchange rate changes and hedging activities. We believe currency-neutral revenue, revenue per piece and operating profit information allows users of our financial statements to understand growth trends in our products and results. We evaluate the performance of International Package and Supply Chain Solutions on this currency-neutral basis.
Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reported U.S. Dollar revenue, revenue per piece and operating
profit by the current period average exchange rates to derive current period local currency revenue, revenue per piece and operating profit. The derived amounts are then multiplied by the average foreign currency exchange rates used to translate the comparable results for each month in the prior year period (including the period-over-period impact of foreign currency hedging activities). The difference between the current period reported U.S. Dollar revenue, revenue per piece and operating profit and the derived current period U.S. Dollar revenue, revenue per piece and operating profit is the period-over-period impact of currency fluctuations.
Defined Benefit Plan Gains and Losses
We incur certain employment-related expenses associated with pension and postretirement medical benefits. These pension and postretirement medical benefits costs for company-sponsored defined benefit plans
are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS. Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement of any of our plans.
We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor (defined as 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation), as well as gains and losses resulting from plan curtailments and settlements, for our pension and postretirement defined benefit plans immediately as part of Investment income and other in the statements of consolidated income. We supplement the presentation
of our income before income taxes, net income and earnings per share with adjusted measures that exclude the impact of these gains and losses and the related income tax effects. We believe excluding these defined benefit plan gains and losses provides important supplemental information by removing the volatility associated with plan amendments and short-term changes in market interest rates, equity values and similar factors.
During the first quarter of 2022, we amended the UPS Canada Ltd. Retirement Plan to cease future benefit accruals effective December 31, 2023. As a result, we remeasured the plan's assets and benefit obligation resulting in a curtailment gain of $33 million ($24 million after-tax) for the nine months ended September 30, 2022.
For additional information, refer
to note 7 to the unaudited, consolidated financial statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- Segment Review
The results and discussions that follow are reflective of how management monitors and evaluates the performance of our segments as defined in note 13 to the unaudited, consolidated financial statements.
Certain operating expenses are allocated between our reporting segments using activity-based costing methods. These activity-based costing methods require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates directly impact the amount of expense allocated to each segment and therefore the operating profit of each reporting segment. Our allocation methodologies are refined periodically, or as necessary to reflect changes in our businesses. There were no significant changes to our allocation methodologies in the third quarter or year-to-date periods.
As
a normal part of managing of our air network, we routinely idle aircraft and engines temporarily for maintenance or to adjust network capacity. As a result of the reduction in volumes experienced during the quarter, we identified additional opportunities to temporarily idle aircraft within our network in order to better match capacity with current demand. Temporarily idled assets are classified as held-and-used, and we continue to record depreciation expense for these assets. As of September 30, 2023, we had nine aircraft temporarily idled for an average period of approximately four months. We expect these aircraft to return to revenue service.
We test goodwill and other indefinite-lived intangible assets for impairment annually at July 1st and at other dates on an interim basis if an event occurs or circumstances change that would indicate that it is more likely than not that
the carrying value thereof may be impaired. Testing goodwill and other indefinite-lived intangible assets for impairment requires that we make a number of significant assumptions, including assumptions related to future revenues, costs, capital expenditures, working capital, our cost of capital and market comparables. We are also required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment. Actual results that differ from, changes in, or the use of different, assumptions may adversely affect the fair value of a reporting unit, which may in turn require us to recognize an impairment charge.
We conducted our most recent goodwill impairment testing as of July 1, 2023. In developing our valuation assumptions underlying the annual impairment testing, we determined that the cost of capital for our Roadie and Delivery
Solutions reporting units had increased, driven by increases in the risk-free interest rate and volatility of the stock prices of market comparables. The results of our testing using these assumptions indicated that the carrying values of our Roadie and Delivery Solutions reporting units exceeded their estimated fair values.
As a result, for the third quarter of 2023, we recorded an impairment charge of $117 million ($103 million after tax, or $0.12 per diluted share) within Other Expenses in our Statement of Consolidated Income. This charge represented goodwill impairment of $56 million related to the Roadie reporting unit and $61 million related to Delivery Solutions, which represents all of the goodwill associated with this reporting unit.
Additionally, our annual impairment testing indicated that the fair value of the indefinite-lived
trade name associated with our truckload brokerage business remained greater than its carrying value by less than 10 percent. The carrying value of the trade name is $200 million. Our truckload brokerage business continues to be negatively impacted by market conditions, which has resulted in revenue declines. We continue to monitor business performance and external factors affecting our valuation assumptions for this trade name.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Volume
Average daily volume
decreased in the third quarter and year to date, with reductions in both residential and commercial shipments. In both periods, challenging external conditions, including persistent inflation, geopolitical tensions and changes in consumer behavior contributed to overall volume declines. Volume was also negatively impacted for both the quarter and year-to-date periods by our labor negotiations with the Teamsters. Following ratification of the contract in September, we began to experience week-over-week increases in volume. We anticipate that average daily volume will decline in the fourth quarter relative to the comparative period, but will increase compared to the third quarter of 2023.
Business-to-consumer shipments declined 13.4% in the third quarter (down 10.1% year to date), primarily due to a reduction in discretionary consumer
spending as a result of the macroeconomic environment discussed above, as well as the impact of our labor negotiations with the Teamsters. In both periods, residential volume declines from SMBs were lower than from our large customers, which was partially due to continued growth in our Digital Access Program. Volume from our largest customer declined for both the third quarter and year to date as planned under our contract terms.
Business-to-business shipments declined 9.0% in the third quarter (down 7.3% year to date), primarily as a result of declines from our large customers in industry sectors that are sensitive to macroeconomic factors discussed above. Uncertainty around our Teamsters contract also negatively impacted volume in both periods.
Returns volume declined in the third quarter, but remained relatively flat year to date. We anticipate that our acquisition of Happy Returns will accelerate returns volume growth.
Within our Air products, average daily volume decreased across all customer segments for both the quarter and year to date. These declines resulted from continued execution under the contract terms with our largest customer as planned, as well as from other customers making cost trade-offs and utilizing the enhanced speed in our ground network.
Ground residential and Ground commercial average daily volume decreases of 12.3% and 8.7%, respectively, for the quarter (down 8.0% and 6.7%, respectively, year to date) were primarily attributable to volume declines from a number of large customers due to the macroeconomic
factors discussed above.
Rates and Product Mix
Air and Ground rates increased an average of 6.9% in December 2022. Revenue per piece from our Air and Ground products increased for the quarter and year to date, resulting from base rate increases and additional pricing actions, as well as favorable changes in customer mix and, for the third quarter, a favorable shift in product mix. Declines in fuel surcharges negatively impacted revenue per piece in both periods.
We anticipate the year-over-year revenue per piece growth rate will improve in the fourth quarter relative to the third quarter of 2023, as anticipated declines in fuel surcharge revenue are expected to be more than offset by the impact of the base rate increases and additional pricing actions.
Fuel Surcharges
We
apply a fuel surcharge on our domestic air and ground services that adjusts weekly. Our air fuel surcharge is based on the U.S. Department of Energy's ("DOE") Gulf Coast spot price for a gallon of kerosene-type fuel, and our ground fuel surcharge is based on the DOE's On-Highway Diesel Fuel price.
Fuel surcharge revenue decreased $459 million for the quarter (down $724 million year to date), driven by reductions in price per gallon and the impact of lower volume. Based on the current commodity market outlook, we expect a continued year-over-year reduction in fuel surcharge revenue in the fourth quarter.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Expenses
Operating expenses and adjusted operating expenses decreased for both the quarter and year to date. Our pickup and delivery costs decreased $210 million in the third quarter (down $479 million year to date), the costs of operating our integrated air and ground network decreased $439 million in the third quarter (down $1.0 billion year to date) and our package sorting costs decreased $88 million in the third quarter (down $198 million year to date). These decreases
were partially offset by an increase of $44 million in other indirect operating costs in the third quarter (up $200 million year to date). In addition to the impact of one less operating day in 2023, the overall decrease in operating expenses was primarily due to:
•Lower compensation expense for both the quarter and year-to-date periods due to a reduction in direct union labor hours resulting from volume declines, as well as the impact of incentive compensation program design changes implemented in the fourth quarter of 2022 and reductions in management headcount. These decreases were partially offset by the impact of the first-year contractual rate increase under our new Teamsters contract that became effective August 1st.
•A reduction in purchased
transportation costs for both the quarter and year to date, resulting from lower overall volumes and a reduction in ground volume handled by third-party carriers, as well as the impact of continued strategic initiatives.
•Lower fuel expense driven by lower volume and decreases in the price of jet fuel, diesel and gasoline which we expect to continue in the fourth quarter.
Notwithstanding the factors discussed above, total cost per piece increased 9.7% for the quarter (up 6.6% year to date), and adjusted cost per piece increased 8.9% for the quarter (up 6.3% year to date), driven by overall reductions in volume. We anticipate the cost per piece growth rate will moderate in the fourth quarter relative to the third quarter of 2023, driven by volume growth, additional network improvements and productivity initiatives, as well as further reductions in fuel cost.
Operating
Profit and Margin
Operating profit decreased $1.1 billion in the third quarter (down $1.5 billion year to date), with operating margin decreasing 660 basis points to 4.2% (down 270 basis points to 8.5% year to date) as revenue declines were greater than operating expense reductions. Adjusted operating profit decreased $1.0 billion in the third quarter (down $1.4 billion year to date), with adjusted operating margin decreasing 610 basis points to 4.9% (down 250 basis points to 8.9% year to date).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Volume
Average daily volume for domestic and export products decreased for the third quarter and year to date. Business-to-consumer volume decreased 11.5% for the third quarter (down 9.8% year to date) as persistent inflation and high interest rates continued to impact consumer demand. These factors and increased levels of U.S. inventory also negatively impacted business-to-business volume, which decreased 4.7%
for the third quarter (down 5.2% year to date). Volume from large customers and SMBs declined in both periods, driven by declines from the retail, manufacturing and technology sectors. We expect year-over-year declines in average daily volume to continue through the fourth quarter.
Export volume decreased for the quarter and year to date, driven by declines in intra-Europe and Asia activity. These were partially offset by an increase in volume in the Americas region. The volume declines in intra-Europe and Asia trade lanes were primarily due to lower consumer spending as a result of challenging economic conditions. The Asia to U.S. trade lane was also negatively impacted by high inventory levels in the United States.
Our premium products saw volume decline 11.3% for the third quarter (down 10.0% year to date), primarily in our Worldwide and Transborder Express Saver products. These
declines resulted from shifts in customer product preferences, macroeconomic conditions and lower import demand from U.S. consumers. Volume in our non-premium products decreased 2.6% for the third quarter (down 1.5% year to date), driven by declines in Transborder Standard and Worldwide Expedited. These declines were primarily due to the macroeconomic conditions described above.
Macroeconomic conditions also impacted Domestic volume, which declined for both the third quarter and year to date, driven by declines in Europe and Canada.
Rates and Product Mix
In December 2022, we implemented an average 6.9% net increase in base and accessorial rates for international shipments originating in the United States. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market.
Total
revenue per piece decreased 1.4% for the quarter (down 2.4% year to date), primarily due to declines in fuel and demand-related surcharges and unfavorable shifts in product mix. These declines were partially offset by base rate increases and, for the third quarter, favorable currency movements. Year to date, currency negatively impacted revenue per piece. Excluding the impact of currency, revenue per piece decreased 2.4% in the quarter (down 1.2% year to date). In the fourth quarter, we anticipate overall revenue per piece will be relatively flat compared to the same period last year.
Export revenue per piece decreased 4.8% for the quarter (down 5.7% year to date). Decreases were driven by changes in product mix, primarily a decline in our Worldwide products. In both periods, these decreases were slightly offset by base rate increases. Excluding the impact of currency, export revenue per piece decreased 5.4% in the quarter
(down 4.7% year to date).
Domestic revenue per piece increased 5.7% for the quarter (up 3.1% year to date), primarily due to customer mix. Currency movements favorably impacted revenue per piece for the quarter, but were unfavorable for the year. Excluding the impact of currency, domestic revenue per piece increased 2.9% for the quarter (up 5.1% year to date).
Fuel Surcharges
The fuel surcharge we apply to international air services originating inside or outside the U.S. is largely indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel. The fuel surcharges for ground services originating outside the U.S. are indexed to fuel prices in the region or country where the shipment originates.
Total international fuel surcharge revenue decreased $156 million for the quarter
(down $450 million year to date), primarily driven by a decrease in price per gallon and the impact of volume declines. Based on our current commodity market outlook, we expect fuel surcharge revenue in the fourth quarter to remain below the same period last year.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating
Expenses
Operating expenses and adjusted operating expenses decreased for both the third quarter and year to date. This was primarily due to reductions in the cost of operating our integrated international air and ground network, which decreased $277 million for the quarter and $594 million year to date, driven by lower fuel prices as well as a reduction in air charters and aircraft block hours. We anticipate that fuel prices in the fourth quarter will remain lower than in the prior year.
These reductions were slightly offset by increases in our pickup and delivery costs of $29 million for the quarter (down $9 million year to date) and our other indirect costs, which increased $39 million for the quarter (up $24 million year to date). We also incurred additional employee separation costs as we made staffing adjustments to reduce overhead and better align direct labor headcount with
volume.
Operating Profit and Margin
As a result of the factors described above, operating profit decreased $367 million for the third quarter (down $965 million year to date), with operating margin decreasing 600 basis points to 14.8% (down 470 basis points to 17.7% year to date). Adjusted operating profit decreased $329 million for the third quarter (down $945 million year to date), while adjusted operating margin decreased 510 basis points to 15.8% (down 460 basis points to 18.0% year to date).
Substantially all of our operations in Russia and Belarus were suspended in March 2022. Subsequently, we have commenced liquidation of our Small Package and Forwarding and Logistics subsidiaries in these countries. We expect to complete this process in early
2024. Substantially all of our operations in Ukraine remain indefinitely suspended. These actions have not had, and are not expected to have, a material impact on us.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue
Total revenue in Supply Chain Solutions decreased for both the third quarter and year to date. This was primarily due to declines in our Forwarding business as macroeconomic conditions drove declines in customer activity, while increased capacity led to lower market rates.
•International airfreight revenue decreased approximately $290
million for the quarter (down $1.1 billion year to date). Customer demand remained weak, particularly on Asia export lanes for the first half of the year, and capacity growth continued to outpace demand. These factors drove down the rates we charge for services in both the quarter and year-to-date periods and we anticipate that they will continue to pressure rates in the fourth quarter.
•Revenue in our truckload brokerage business decreased $295 million for the quarter (down $1.1 billion year to date) due to lower volume and a continued decline in market rates. We remained focused on our revenue quality initiatives and, as a result, were able to grow volume from SMBs during both the third quarter and year-to-date periods.
•The remaining reduction in revenue, for both the quarter and year to date, was attributable to our ocean freight
forwarding business. Market rates declined in both periods, particularly on the Asia to U.S. lane, driven by challenging macroeconomic conditions and the impact of additional capacity entering the market. While volume decreases negatively impacted revenue year to date, volume growth in the third quarter slightly offset the impact of lower market rates. We expect revenue to remain challenged in the fourth quarter as capacity increases are expected to continue to outpace demand.
Within our Logistics businesses, healthcare logistics revenue increased $138 million for the third quarter (up $342 million year to date). The acquisition of Bomi Group in the fourth quarter of 2022 drove $97 million of the increase for the quarter ($291 million year to date) and we also experienced growth across our other healthcare operations. Revenue in mail services increased $19 million for the quarter (up $122 million year to date) as a result of
volume growth, rate increases and a favorable shift in product characteristics. The growth in healthcare and mail services was partially offset by declines in our other distribution operations for both the third quarter and year to date.
Revenue from the other businesses within Supply Chain Solutions decreased for both the quarter and year to date, driven by a reduction of $92 million (down $307 million year to date) in transition services provided to the acquirer of UPS Freight as we continue to wind down these arrangements. Third-quarter revenue was also negatively impacted by lower volumes from service contracts with the U.S. Postal Service. These reductions were partially offset by higher revenue from our digital businesses for both the third quarter and year to date.
Operating Expenses
Total
operating expenses and total adjusted operating expenses for Supply Chain Solutions decreased for both the quarter and year to date.
Forwarding operating expenses decreased $687 million for the quarter (down $2.4 billion year to date). This primarily resulted from a reduction of approximately $650 million in purchased transportation expense for the quarter (down approximately $2.3 billion year to date) due to lower volumes and market rates across our forwarding businesses. We expect these conditions to persist as we move through the fourth quarter, resulting in lower purchased transportation costs.
Logistics operating expenses increased $121 million for the quarter (up $388 million year to date), driven by the impact of the acquisition of Bomi Group, which was responsible for $107 million of the increase ($317 million year to date). Purchased transportation costs in mail services
were relatively flat for the quarter but increased $67 million year to date due to volume and rate increases and shifts in product characteristics.
Expenses in the other businesses within Supply Chain Solutions decreased for both the quarter and year to date, largely driven by a reduction in costs incurred to procure transportation for, and provide transition services to, the acquirer of UPS Freight. Transportation costs related to our contracts with the U.S. Postal Service decreased during the third quarter as a result of lower volumes. These decreases were partially offset by goodwill impairment charges and higher operating costs within our digital businesses.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Profit and Margin
As a result of the factors described above, total operating profit decreased $308 million for the third quarter (down $752 million year to date) with operating margin decreasing 680 basis points to 4.5% (down 440 basis points to 7.0% year to date). On an adjusted basis, operating profit decreased $184 million for the third quarter (down $588 million year to date), with adjusted operating
margin decreasing 270 basis points to 8.8% (down 270 basis points to 8.9% year to date).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Compensation and Benefits
Total compensation and benefits costs increased in the third quarter while adjusted total compensation and benefits decreased in the third quarter. In the year-to-date period, total compensation and benefits and adjusted total compensation and benefits decreased. Compensation costs decreased $163 million for the third quarter (down $542 million year to date). On an adjusted basis, compensation
costs decreased $161 million for the third quarter (down $526 million year to date). The principal factors contributing to the decreases were:
•Management compensation decreased $152 million for the third quarter (down $476 million year to date). On an adjusted basis, management compensation decreased $150 million for the third quarter (down $468 million year to date). The decreases were driven by fourth quarter 2022 design changes to our incentive compensation programs, lower incentive compensation accruals and lower overall headcount.
•Direct labor costs decreased $36 million for the third quarter (down $90 million year to date). Reductions in U.S. direct labor hours and administrative headcount due to volume declines resulted in a reduction in expense of $362 million for the quarter (down approximately $760 million year to date).
Other labor-related costs decreased by approximately $30 million for the quarter (approximately $110 million year to date). These declines were largely offset by an increase of $372 million for the quarter (approximately $790 million year to date) attributable to contractual wage rate increases for our U.S. union workforce. We expect wage rate growth will continue through the fourth quarter due to the new Teamsters contract.
•The acquisition of Bomi Group in the fourth quarter of 2022 resulted in additional compensation cost of $28 million for the third quarter ($79 million year to date).
Benefits costs increased $202 million for the third quarter (up $295 million year to date). On an adjusted basis, benefits costs increased $74 million for the third quarter (up $111
million year to date). The principal factors impacting the changes were:
•Other benefits costs increased $118 million for the quarter (up $180 million year to date), driven by a one-time payment of $52 million to certain U.S.-based, non-union part time supervisors and employee separation costs of $64 million ($118 million year to date) related to staffing adjustment initiatives to reduce our overhead cost and better align direct labor headcount with volume. On an adjusted basis, other benefits increased $2 million for the third quarter (up $9 million year to date).
•Accruals for paid time off, payroll taxes and other costs increased $85 million for the quarter (up $65 million year to date), primarily due to wage growth and payroll taxes for the one-time payment discussed above. On an adjusted basis, these costs increased $76 million
for the quarter (up $56 million year to date).
•Health and welfare costs increased $65 million for the third quarter (up $200 million year to date), driven by increased contributions to multiemployer plans as a result of contractually-mandated rate increases.
•Workers' compensation expense increased $60 million for the third quarter (up $96 million year to date), driven by an increase in current year claims and unfavorable developments in reserves for prior years' claims, partially offset by the impact of a decrease in overall hours worked.
•Pension and other postretirement benefits costs decreased $126 million for the third quarter (down $248 million year to date) due primarily to:
◦The cost of
company-sponsored defined benefit plans decreased $219 million in the third quarter (down $658 million year to date), driven by a reduction in service cost due to higher discount rates. The cessation of accruals for future service in the UPS Retirement Plan was offset by the cost of replacement contributions to the UPS 401(k) Savings Plan.
◦Contributions to multiemployer plans remained flat in the third quarter but increased $56 million year to date due to the impact of contractually-mandated contribution increases, partially offset by reductions in eligible headcount.
◦Expense for the UPS 401(k) Savings Plan increased $87 million in the third quarter (up $328 million year to date), primarily due to the impact of replacement contributions for the UPS Retirement Plan, demographic changes and additional contributions resulting
from the one-time payment discussed above.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Repairs and Maintenance
The decrease in repairs and maintenance expense for the third quarter and year-to-date
periods was primarily due to the deferral of aircraft engine maintenance, as the declines in volume resulted in the temporary idling of certain aircraft in both periods.
Depreciation and Amortization
We incurred higher depreciation expense during the third quarter and year-to-date periods as a result of additional facilities coming into service, growth in the size of our vehicle fleet and the reduction in estimated residual value of our MD-11 aircraft. We incurred higher amortization expense on capitalized software investments in support of our strategic initiatives, as well as amortization expense for intangible assets recognized in connection with the acquisition of Bomi Group.
Purchased Transportation
Third-party transportation expense charged to us by air, ocean and ground carriers decreased
for the quarter and year-to-date periods. The changes were primarily driven by:
•Supply Chain Solutions expense decreased $686 million for the third quarter (down $2.4 billion year to date), driven by volume declines and lower market rates paid for services in our Forwarding businesses. This was slightly offset by increases in our logistics operations due to business growth, third-party rate increases in our mail services business and impacts from the acquisition of Bomi Group.
•U.S. Domestic expense decreased $302 million for the third quarter (down $639 million year to date), driven by the overall decline in volume and a reduction in ground volume handled by third-party carriers as a result of our network optimization initiatives.
•International
Package expense decreased $73 million for the third quarter (down $271 million year to date), primarily due to declines in volume partially offset by unfavorable currency movements.
Fuel
The decrease in fuel expense for both the quarter and year to date was driven by lower prices for jet fuel, diesel and gasoline and the impact of lower volume. Market prices and the manner in which we purchase fuel influence our costs. The majority of our fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the indices are correlated, each index may respond differently to changes in underlying prices, which in turn can drive variability in our costs.
Other Occupancy
Other occupancy expense increased for both the quarter and year to date as a
result of additional operating facilities coming into service, increases in rental rates and higher year-to-date utilities costs. We expect inflation may continue to adversely impact these costs for the remainder of the year.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other
Expenses
Other expenses and adjusted other expenses decreased for the quarter but increased for the year-to-date period. The decrease for the quarter was primarily the result of:
•Gains on the sale of surplus real estate of $82 million.
•A reduction in outsourcing and professional fees of $38 million due to a decrease in project-driven consulting services and higher capitalization of third-party software development expenditure relative to the prior year period.
•Reductions of $35 million in vehicle lease expense due to the decrease in volume.
•Lower costs incurred under the transition service agreements with the acquirer of UPS Freight as these agreements
wind down.
Other decreases for the quarter were primarily attributable to the impact of lower volumes. These were partially offset by increases in the following expenses:
•We recorded goodwill impairment charges in respect of our Roadie and Delivery Solutions reporting units of $117 million.
•Supplies required to support our Smart Package Smart Facility initiative increased $45 million.
•Hosted software application fees and other technology costs increased $26 million in support of ongoing investments in our digital transformation.
For the year-to-date period, the overall increase in expense was driven by the goodwill impairment charges
and hosted software application fees described above, as well as an increase in outsourcing and professional fees to support ongoing strategic initiatives. An increase in commissions paid for certain online shipments also contributed to the increase.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
Other Income (Expense)
The following table sets forth investment income and other and interest expense for the three and nine months ended September 30, 2023 and 2022 (in millions):
Three
Months Ended September 30,
Change
Nine Months Ended September 30,
Change
2023
2022
$
%
2023
2022
$
%
Investment
Income and Other
$
124
$
333
$
(209)
(62.8)
%
$
424
$
981
$
(557)
(56.8)
%
Defined
Benefit Plan (Gains) Losses
—
—
—
N/A
—
(33)
33
(100.0)
%
Adjusted Investment Income and Other
$
124
$
333
$
(209)
(62.8)
%
$
424
$
948
$
(524)
(55.3)
%
Interest
Expense
(199)
(177)
(22)
12.4
%
(578)
(522)
(56)
10.7
%
Total Other Income
(Expense)
$
(75)
$
156
$
(231)
N/A
$
(154)
$
459
$
(613)
N/A
Adjusted
Other Income (Expense)
$
(75)
$
156
$
(231)
N/A
$
(154)
$
426
$
(580)
N/A
Investment
Income and Other
Investment income and other decreased $209 and $557 million for the third quarter and year-to-date periods, respectively. Excluding the impact of a $33 million defined benefit plan curtailment gain that we recognized in the first quarter of 2022, adjusted investment income and other decreased $524 million year to date. These decreases were primarily due to a reduction in other pension income and an increase in foreign currency losses, partially offset by higher yields on invested balances and changes in the fair value of certain non-current investments.
Other pension income decreased $231 million in the quarter (down $695 million year to date) due to:
•Lower expected returns on pension assets for both the quarter and year to date as a result of a lower
asset base due to losses in 2022, partially offset by an increase in our rate of return assumption.
•Higher pension interest cost for both the quarter and year to date, primarily due to higher discount rates and changes in demographic assumptions.
Interest Expense
Interest expense increased for both the quarter and year to date, driven by higher effective interest rates on floating rate debt and an increase in our total debt. These impacts were partially offset by an increase in capitalized interest.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Tax Expense
The following table sets forth our income tax expense and effective tax rate for the three and nine months ended September 30, 2023 and 2022 (in millions):
Three
Months Ended September 30,
Change
Nine Months Ended September 30,
Change
2023
2022
$
%
2023
2022
$
%
Income
Tax Expense
$
141
$
685
$
(544)
(79.4)
%
$
1,407
$
2,263
$
(856)
(37.8)
%
Income
Tax Impact of:
Transformation
Strategy Costs
24
9
15
166.7
%
57
31
26
83.9
%
Goodwill
and Asset Impairments, and Divestiture Charges
14
—
14
N/A
16
—
16
N/A
One-Time
Compensation Payment
15
—
15
N/A
15
—
15
N/A
Defined
Benefit Plan (Gains) Losses
—
—
—
N/A
—
(9)
9
(100.0)
%
Adjusted
Income Tax Expense
$
194
$
694
$
(500)
(72.0)
%
$
1,495
$
2,285
$
(790)
(34.6)
%
Effective
Tax Rate
11.1
%
21.0
%
21.6
%
21.8
%
Adjusted
Effective Tax Rate
12.6
%
21.0
%
21.6
%
21.9
%
For
additional information on our income tax expense and effective tax rate, see note 16 to the unaudited, consolidated financial statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity
and Capital Resources
We deploy a disciplined and balanced approach to capital allocation, including returns to shareowners through dividends and share repurchases. As of September 30, 2023, we had $7.3 billion in cash, cash equivalents and marketable securities. We believe that these positions, expected cash from operations, access to commercial paper programs and capital markets and other available liquidity options will be adequate to fund our material short- and long-term cash requirements, including our business operations, planned capital expenditures, pension contributions, planned acquisitions, transformation strategy costs, debt obligations and planned shareowner returns. We regularly evaluate opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund operations.
Cash
Flows From Operating Activities
The following is a summary of the significant sources (uses) of cash from operating activities (in millions):
Pension and postretirement medical benefit plan contributions (company-sponsored plans)
(1,363)
(2,106)
Hedge margin receivables and payables
(152)
771
Income tax receivables and payables
(728)
(38)
Changes
in working capital and other non-current assets and liabilities
1,138
(339)
Other operating activities
(82)
(50)
Net cash from operating activities
$
7,827
$
10,772
___________________
(a)Represents
depreciation and amortization, gains and losses on derivative transactions and foreign currency exchange, deferred income taxes, allowances for expected credit losses, amortization of operating lease assets, pension and postretirement medical benefit plan (income) expense, stock compensation expense, changes in casualty self-insurance reserves, goodwill and other asset impairment charges and other non-cash items.
Net cash from operating activities decreased $3.0 billion for the nine months ended September 30, 2023 primarily due to a reduction in net income. It was also impacted by:
•A decrease in contributions to our company-sponsored, defined benefit pension and postretirement medical plans. We made discretionary pension
contributions of $1.2 and $1.9 billion to our qualified U.S. pension plans during the nine months ended September 30, 2023 and 2022, respectively.
•A decrease in our net hedge margin collateral position due to changes in the fair value of derivative contracts used in our currency hedging programs.
•An increase in income taxes receivable due to excess tax payments relative to accruals, changes in uncertain tax positions and timing of payments.
•Our working capital benefited from improvements in collections, partially offset by settlement of vendor payables and reductions in amounts
outstanding for duty and tax payables due to the decline in volume. We benefited from the timing of payroll and other compensation-related items relative to the comparative period.
•During the first nine months of 2023, we paid the remaining $323 million of employer payroll taxes that were deferred under the Coronavirus Aid, Recovery and Economic Security (CARES) Act in 2020. No such payments were made in the 2022 period.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As of September 30, 2023, approximately $3.0 billion of our total worldwide holdings of cash, cash equivalents and marketable securities were held by foreign subsidiaries. The amount of cash, cash equivalents and marketable securities held by our U.S. and foreign subsidiaries fluctuates throughout the year due to a variety of factors, including the timing of cash receipts and disbursements in the normal course of business. Cash provided by operating activities in the U.S.
continues to be our primary source of funds to finance domestic operating needs, capital expenditures, share repurchases, pension contributions and dividend payments to shareowners. All cash, cash equivalents and marketable securities held by foreign subsidiaries are generally available for distribution to the U.S. without any U.S. federal income taxes. Any such distributions may be subject to foreign withholding and U.S. state taxes. When amounts earned by foreign subsidiaries are expected to be indefinitely reinvested, no accrual for taxes is provided. We did not have any restricted cash as of September 30, 2023 or 2022.
Proceeds from disposal of businesses, property, plant and equipment
$
167
$
12
Net (purchases)/sales and maturities of marketable securities
$
(950)
$
(2)
Acquisitions, net of cash acquired
$
(39)
$
(106)
Other
investing activities
$
2
$
(34)
(1) In addition to capital expenditures of $3.1 and $2.3 billion for the nine months ended September 30, 2023 and 2022, respectively, there were principal repayments of finance lease obligations of $101 and $124 million, respectively. These are included in cash flows from financing activities.
We have commitments for acquisitions and for the purchase of aircraft, vehicles, equipment and real estate to provide for the replacement of existing capacity and anticipated future
growth. Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions. Our 2023 investment program anticipates investments in technology initiatives and enhanced network capabilities, including approximately $1.0 billion of projects that support our environmental sustainability goals. It also provides for the maintenance of buildings, facilities and equipment and replacement of certain aircraft within our fleet. We currently expect that our capital expenditures will total approximately $5.3 billion in 2023, of which approximately 50 percent will be allocated to strategic expansion projects.
For the first nine months of 2023 compared to 2022, total capital expenditures increased, primarily due to:
•Spending on buildings, facilities and plant equipment increased due to facility
maintenance and capacity expansion projects.
•Vehicle expenditures increased, driven by the timing and availability of vehicle replacements and continuing investments in our network.
•Information technology expenditures increased as a result of continuing investments in our digital capabilities and network automation.
•Aircraft expenditures decreased, as higher payments associated with open aircraft orders were more than offset by lower payments associated with the delivery of aircraft.
Proceeds from the disposal of businesses, property, plant and equipment were higher relative to the comparative period due to the sale of surplus real estate properties during 2023.
Net purchases of
marketable securities increased due to a continued shift to longer duration investments.
Cash paid for acquisitions in the 2023 period primarily represents the purchase of development areas for The UPS Store. In the 2022 period, this also included our acquisition of Delivery Solutions. Other investing activities were impacted by changes in our non-current investments, purchase contract deposits and various other immaterial items.
We repurchased 12.8 and 11.6 million shares of class B common stock for $2.3 and $2.2 billion under our stock repurchase program during the nine months ended September 30, 2023
and 2022, respectively. We do not anticipate further repurchases in 2023. In the fourth quarter we plan to redeploy cash back into the business for growth initiatives, such as strategic acquisitions, to drive shareowner value. For additional information on our share repurchase activities, see note 12 to the unaudited, consolidated financial statements.
The declaration of dividends is subject to the discretion of the Board and depends on various factors, including our net income, financial condition, cash requirements, future prospects and other relevant factors. We have paid quarterly cash dividends of $1.62 per share in 2023, compared to $1.52 in 2022.
Issuances of debt during the nine months ended September 30, 2023 consisted of borrowings under our commercial paper program and fixed-
and floating-rate senior notes of varying maturities totaling $2.5 billion. We used proceeds from the senior note issuances to repay $1.5 billion of fixed- and floating-rate senior notes, debt assumed in the Bomi Group acquisition and to make scheduled principal payments on our finance lease obligations. We expect to use substantially all of the remaining proceeds to repay €700 million of fixed-rate senior notes that mature in the fourth quarter of 2023.
There were no issuances of debt in the nine months ended September 30, 2022. Repayments of debt in 2022 included fixed- and floating-rate senior notes of varying maturities totaling $1.0 billion and scheduled principal payments on our finance lease obligations.
We consider the overall fixed and floating interest rate mix of our portfolio and the related overall cost of borrowing when
planning for future issuances and non-scheduled repayments of debt.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The amount of commercial paper outstanding fluctuates based on daily liquidity needs. The following is a summary of our commercial paper
program (in millions):
Functional currency outstanding balance at quarter-end
Outstanding balance at quarter-end ($)
Average
balance outstanding ($)
Average interest rate
USD
$
458
$
458
$
75
5.32
%
Total
$
458
We
had no outstanding balances under our European commercial paper program during the nine months ended September 30, 2023.
The variation in cash received from common stock issuances primarily resulted from activity within the UPS 401(k) Savings Plan and our employee stock purchase plan in both the current and comparative period.
Other financing activities includes cash used to repurchase shares to satisfy tax withholding obligations on vested employee stock awards. Cash outflows for this purpose were $402 and $514 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease was driven by changes in required repurchase amounts.
Except as disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2022, we do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, which we believe could have a material impact on our financial condition or liquidity.
Sources of Credit
See note 9 to the unaudited, consolidated financial statements for a discussion of our available credit and the financial covenants that we are subject to as part of our credit agreements.
Contractual Commitments
There have been no material
changes to the contractual commitments described in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, except as described below.
Purchase commitments represent contractual agreements to purchase assets, goods or services that are legally binding, including contracts for aircraft, construction of new or expanded facilities and vehicles. We also have commitments related to pending business acquisitions.
The following table summarizes the expected cash outflows to satisfy our total purchase commitments, inclusive of these changes, as of September 30, 2023 (in millions):
Commitment
Type
2023
2024
2025
2026
2027
After 2027
Total
Purchase Commitments(1)
$
2,301
$
1,548
$
911
$
373
$
38
$
27
$
5,198
Total
$
2,301
$
1,548
$
911
$
373
$
38
$
27
$
5,198
(1)Purchase commitments for 2023 include amounts related to pending business acquisitions.
For additional information on 2023 debt issuances, see note 9 to the unaudited, consolidated financial statements.
Legal Proceedings and Contingencies
See note 7 and note 11 to the unaudited, consolidated financial statements for a discussion of judicial proceedings and other matters arising from the conduct of our business activities, and note 16 for a discussion of income tax related matters.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates, interest rates and equity prices. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. In order to manage the risk arising from these exposures, we may utilize a variety of commodity, foreign currency exchange and interest rate forward contracts, options and swaps. A discussion of our accounting policies for derivative instruments and further disclosures are provided in note 15 to the unaudited, consolidated financial statements.
The total net fair value asset (liability)
of our derivative financial instruments is summarized in the following table (in millions):
The information concerning market risk in Item 7A under the
caption "Quantitative and Qualitative Disclosures about Market Risk" of our Annual Report on Form 10-K for the year ended December 31, 2022 is incorporated herein by reference.
Our market risks, hedging strategies and financial instrument positions as of September 30, 2023 have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. In the third quarter of 2023, we entered into foreign currency exchange forward contracts on the Euro, British Pound Sterling, and Canadian Dollar, and had forward contracts
expire. The fair value changes between December 31, 2022 and September 30, 2023 in the preceding table are primarily due to terminated interest rate swaps and foreign currency exchange rate fluctuations between those dates.
The foreign currency exchange forward contracts, swaps and options previously discussed contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however, we seek to minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines and by monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.
We
have agreements with all of our active counterparties (covering all of our derivative positions) containing early termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of derivatives associated with those counterparties. Events such as a credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. As of September 30, 2023, we held cash collateral of $382 million and were not required to post cash collateral with our counterparties under these agreements. We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
As of the end of the period covered by this report, management, including our Principal Executive Officer and Principal Financial and Accounting Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act")). Based upon, and as of the date of, the evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as
and when required and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
For a discussion of material legal proceedings affecting the Company, see note 11 to the unaudited, consolidated financial statements included in this report.
Item 1A.Risk Factors
There have been no material changes to the risk factors described in Part 1, Item 1A in our Annual Report
on Form 10-K for the year ended December 31, 2022. The occurrence of any of the risks described therein could materially affect us, including impacting our business, financial condition, results of operations, stock price or credit rating, as well as our reputation. These risks are not the only ones we face. We could also be materially adversely affected by other events, factors or uncertainties that are unknown to us, or that we do not currently consider to be material.
Item 2.Unregistered
Sales of Equity Securities and Use of Proceeds
(c) A summary of repurchases of our class A and class B common stock during the third quarter of 2023 is as follows (in millions, except per share amounts):
Total Number of Shares Purchased (1)
Average
Price Paid Per Share
Total Number of Shares Purchased as Part of a Publicly Announced Program
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
(1) Includes shares repurchased through our publicly announced share repurchase programs and shares tendered to pay the exercise price and tax withholding on employee stock options.
We repurchased 4.4 and 12.8 million shares of class B common stock for $750 million and $2.3 billion during the three and nine months ended September 30,
2023, respectively. These repurchases were completed as follows:
•In August 2021, the Board of Directors approved a share repurchase authorization of $5.0 billion of class A and class B common stock (the "2021 Authorization"). During the nine months ended September 30, 2023, we repurchased 0.5 million shares of class B common stock for $82 million under this authorization.
•In January 2023, the Board of Directors terminated the 2021 Authorization and approved a new share repurchase authorization of $5.0 billion for class A and class B common stock. During the three and nine months ended September 30, 2023, we repurchased 4.4 and 12.3 million shares of class B common stock for $750 million and $2.2 billion, respectively, under
this authorization.
We do not anticipate further share repurchases in 2023.
For additional information on our share repurchase activities, see note 12 to the unaudited, consolidated financial statements.
The
following unaudited financial information from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 is formatted in Inline XBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Statements of Consolidated Income, (iii) the Statements of Consolidated Comprehensive Income (Loss), (iv) the Statements of Consolidated Cash Flows, and (v) the Notes to the Consolidated Financial Statements.
104
—
Cover Page Interactive Data File - The cover page from this Quarterly
Report on Form 10-Q for the quarter ended September 30, 2023 is formatted in Inline XBRL (included as Exhibit 101).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
