Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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,ChangeNine Months Ended September 30,Change
20232022$%20232022$%
Revenue (in millions)$21,061$24,161$(3,100)(12.8)%$66,041$73,305$(7,264)(9.9)%
Operating Expenses (in millions)19,71821,048(1,330)(6.3)%59,37763,406(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 Margin6.4%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 Days6364191192
Average Daily Package Volume (in thousands)20,42522,900(10.8)%21,10923,083(8.6)%
Average Revenue Per Piece$13.81$13.58$0.231.7%$13.82$13.52$0.302.2%

  • 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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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 Adjustments2023202220232022
Operating Expenses:
Transformation Strategy Costs$94$36$236$132
Goodwill and Asset Impairments, and Divestiture Charges117—125—
One-Time Compensation Payment61—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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

U.S. Domestic Package

Three Months Ended September 30,ChangeNine Months Ended September 30,Change
20232022$%20232022$%
Average Daily Package Volume (in thousands):
Next Day Air1,6791,932(13.1)%1,6991,929(11.9)%
Deferred1,0781,341(19.6)%1,1021,417(22.2)%
Ground14,52916,266(10.7)%15,10216,309(7.4)%
Total Average Daily Package Volume17,28619,539(11.5)%17,90319,655(8.9)%
Average Revenue Per Piece:
Next Day Air$22.42$21.62$0.803.7%$22.31$21.39$0.924.3%
Deferred16.6115.281.338.7%16.5915.151.449.5%
Ground11.1010.940.161.5%11.2010.830.373.4%
Total Average Revenue Per Piece$12.54$12.29$0.252.0%$12.59$12.18$0.413.4%
Operating Days in Period6364191192
Revenue (in millions):
Next Day Air$2,372$2,673$(301)(11.3)%$7,240$7,923$(683)(8.6)%
Deferred1,1281,311(183)(14.0)%3,4914,123(632)(15.3)%
Ground10,16011,390(1,230)(10.8)%32,31233,911(1,599)(4.7)%
Total Revenue$13,660$15,374$(1,714)(11.1)%$43,043$45,957$(2,914)(6.3)%
Operating Expenses (in millions):
Operating Expenses$13,089$13,708$(619)(4.5)%$39,404$40,800$(1,396)(3.4)%
Transformation Strategy Costs(33)(20)(13)65.0%(134)(89)(45)50.6%
One-Time Compensation Payment(61)—(61)N/A(61)—(61)N/A
Adjusted Operating Expense$12,995$13,688$(693)(5.1)%$39,209$40,711$(1,502)(3.7)%
Operating Profit (in millions) and Operating Margin:
Operating Profit$571$1,666$(1,095)(65.7)%$3,639$5,157$(1,518)(29.4)%
Adjusted Operating Profit$665$1,686$(1,021)(60.6)%$3,834$5,246$(1,412)(26.9)%
Operating Margin4.2%10.8%8.5%11.2%
Adjusted Operating Margin4.9%11.0%8.9%11.4%

Revenue

The change in revenue was due to the following factors:

VolumeRates / Product MixFuel SurchargeTotal Revenue Change
Revenue Change Drivers:
Third quarter 2023 vs. 2022(12.9)%4.7%(2.9)%(11.1)%
Year to date 2023 vs. 2022(9.4)%4.6%(1.5)%(6.3)%

In both the three and nine month periods, revenue was negatively impacted by having one less operating day in the third quarter of 2023.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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).

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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International Package

Three Months Ended September 30,ChangeNine Months Ended September 30,Change
20232022$%20232022$%
Average Daily Package Volume (in thousands):
Domestic1,5241,677(9.1)%1,5711,729(9.1)%
Export1,6151,684(4.1)%1,6351,699(3.8)%
Total Average Daily Package Volume3,1393,361(6.6)%3,2063,428(6.5)%
Average Revenue Per Piece:
Domestic$7.73$7.31$0.425.7%$7.66$7.43$0.233.1%
Export33.0934.77(1.68)(4.8)%33.2635.26(2.00)(5.7)%
Total Average Revenue Per Piece$20.78$21.07$(0.29)(1.4)%$20.72$21.22$(0.50)(2.4)%
Operating Days in Period6364191192
Revenue (in millions):
Domestic$742$785$(43)(5.5)%$2,299$2,465$(166)(6.7)%
Export3,3673,747(380)(10.1)%10,38711,501(1,114)(9.7)%
Cargo and Other158267(109)(40.8)%539782(243)(31.1)%
Total Revenue$4,267$4,799$(532)(11.1)%$13,225$14,748$(1,523)(10.3)%
Operating Expenses (in millions):
Operating Expenses$3,637$3,802$(165)(4.3)%$10,884$11,442$(558)(4.9)%
Transformation Strategy Costs(45)(7)(38)542.9%(42)(22)(20)90.9%
Adjusted Operating Expenses$3,592$3,795$(203)(5.3)%$10,842$11,420$(578)(5.1)%
Operating Profit (in millions) and Operating Margin:
Operating Profit$630$997$(367)(36.8)%$2,341$3,306$(965)(29.2)%
Adjusted Operating Profit$675$1,004$(329)(32.8)%$2,383$3,328$(945)(28.4)%
Operating Margin14.8%20.8%17.7%22.4%
Adjusted Operating Margin15.8%20.9%18.0%22.6%
Currency Benefit / (Cost) – (in millions)*:
Revenue$43$(152)
Operating Expenses(75)37
Operating Profit$(32)$(115)
* Net of currency hedging; amount represents the change in currency translation compared to the prior year.

Revenue

The change in revenue was due to the following:

VolumeRates / Product MixFuel SurchargeCurrencyTotal Revenue Change
Revenue Change Drivers:
Third quarter 2023 vs. 2022(8.4)%(0.1)%(3.5)%0.9%(11.1)%
Year to date 2023 vs. 2022(7.0)%0.6%(2.9)%(1.0)%(10.3)%

In both the three and nine month periods, revenue was negatively impacted by having one less operating day in the third quarter of 2023.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Supply Chain Solutions

Three Months Ended September 30,ChangeNine Months Ended September 30,Change
20232022$%20232022$%
Revenue (in millions):
Forwarding$1,327$2,162$(835)(38.6)%$4,217$7,140$(2,923)(40.9)%
Logistics1,4301,3021289.8%4,2713,84342811.1%
Other377524(147)(28.1)%1,2851,617(332)(20.5)%
Total Revenue$3,134$3,988$(854)(21.4)%$9,773$12,600$(2,827)(22.4)%
Operating Expenses (in millions):
Operating Expenses$2,992$3,538$(546)(15.4)%$9,089$11,164$(2,075)(18.6)%
Transformation Strategy Costs(16)(9)(7)77.8%(60)(21)(39)185.7%
Goodwill and Asset Impairments, and Divestiture Charges(117)—(117)N/A(125)—(125)N/A
Adjusted Operating Expenses:$2,859$3,529$(670)(19.0)%$8,904$11,143$(2,239)(20.1)%
Operating Profit (in millions) and Operating Margin:
Operating Profit$142$450$(308)(68.4)%$684$1,436$(752)(52.4)%
Adjusted Operating Profit$275$459$(184)(40.1)%$869$1,457$(588)(40.4)%
Operating Margin4.5%11.3%7.0%11.4%
Adjusted Operating Margin8.8%11.5%8.9%11.6%
Currency Benefit / (Cost) – (in millions)*:
Revenue$24$(33)
Operating Expenses(30)35
Operating Profit$(6)$2
* Amount represents the change in currency translation compared to the prior year.
Three Months Ended September 30,ChangeNine Months Ended September 30,Change
20232022$%20232022$%
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs
Forwarding$14$1$131,300.0%$38$9$29322.2%
Logistics17(6)(85.7)%21912133.3%
Other11——%13(2)(66.7)%
Total Transformation Strategy Costs$16$9$777.8%$60$21$39185.7%
Goodwill and Asset Impairments, and Divestiture Charges
Forwarding$—$—$—N/A$8$—$8N/A
Logistics———N/A———N/A
Other117—117N/A117—117N/A
Total Goodwill and Asset Impairments, and Divestitures Charges$117$—$117N/A$125$—$125N/A
Total Adjustments to Operating Expenses$133$9$1241,377.8%$185$21$164781.0%

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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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).

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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Consolidated Operating Expenses

Three Months Ended September 30,ChangeNine Months Ended September 30,Change
20232022$%20232022$%
Operating Expenses (in millions):
Compensation and benefits$11,528$11,489$390.3%$34,187$34,434$(247)(0.7)%
Transformation Strategy Costs(80)(15)(65)433.3%(178)(71)(107)150.7%
One-Time Compensation Payment$(61)$—$(61)N/A$(61)$—$(61)N/A
Adjusted Compensation and benefits$11,387$11,474$(87)(0.8)%$33,948$34,363$(415)(1.2)%
Repairs and maintenance$719$732$(13)(1.8)%$2,126$2,160$(34)(1.6)%
Depreciation and amortization837774638.1%2,4992,3001998.7%
Purchased transportation3,1184,179(1,061)(25.4)%9,83413,176(3,342)(25.4)%
Fuel1,1321,530(398)(26.0)%3,4934,447(954)(21.5)%
Other occupancy4814354610.6%1,4901,3581329.7%
Other expenses1,9031,909(6)(0.3)%5,7485,5312173.9%
Total Other expenses8,1909,559(1,369)(14.3)%25,19028,972(3,782)(13.1)%
Transformation Strategy Costs(14)(21)7(33.3)%(58)(61)3(4.9)%
Goodwill and Asset Impairments, and Divestiture Charges(117)—(117)N/A(125)—(125)N/A
Adjusted Total Other expenses$8,059$9,538$(1,479)(15.5)%$25,007$28,911(3,904)(13.5)%
Total Operating Expenses$19,718$21,048$(1,330)(6.3)%$59,377$63,406$(4,029)(6.4)%
Adjusted Total Operating Expenses$19,446$21,012$(1,566)(7.5)%$58,955$63,274$(4,319)(6.8)%
Currency (Benefit) / Cost - (in millions)*$105$(72)
* Amount represents the change in currency translation compared to the prior year.
Three Months Ended September 30,ChangeNine Months Ended September 30,Change
20232022$%20232022$%
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs
Compensation$5$7$(2)(28.6)%$15$31$(16)(51.6)%
Benefits13681281,600.0%22340183457.5%
Other expenses1421(7)(33.3)%5961(2)(3.3)%
Total Transformation Strategy Costs$155$36$119330.6%$297$132$165125.0%
Goodwill and Asset Impairments, and Divestiture Charges
Other expenses$117$—$117N/A$125$—$125N/A
Total Adjustments to Operating Expenses$272$36$236655.6%$422$132$290219.7%

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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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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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.

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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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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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,ChangeNine Months Ended September 30,Change
20232022$%20232022$%
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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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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,ChangeNine Months Ended September 30,Change
20232022$%20232022$%
Income Tax Expense$141$685$(544)(79.4)%$1,407$2,263$(856)(37.8)%
Income Tax Impact of:
Transformation Strategy Costs24915166.7%57312683.9%
Goodwill and Asset Impairments, and Divestiture Charges14—14N/A16—16N/A
One-Time Compensation Payment15—15N/A15—15N/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 Rate11.1%21.0%21.6%21.8%
Adjusted Effective Tax Rate12.6%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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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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):

Nine Months Ended September 30,
20232022
Net income$5,103$8,095
Non-cash operating activities (a)3,9114,439
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 liabilities1,138(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.

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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.

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Cash Flows From Investing Activities

Our primary sources (uses) of cash from investing activities were as follows (in millions):

Nine Months Ended September 30,
20232022
Net cash used in investing activities$(3,929)$(2,408)
Capital Expenditures:
Buildings, facilities and plant equipment$(1,559)$(937)
Aircraft and parts(364)(468)
Vehicles(518)(382)
Information technology(668)(491)
Total Capital Expenditures(1)$(3,109)$(2,278)
Capital Expenditures as a % of revenue4.7%3.1%
Other Investing Activities:
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.

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Cash Flows From Financing Activities

Our primary sources (uses) of cash from financing activities were as follows (amounts in millions, except per share data):

Nine Months Ended September 30,
20232022
Net cash used in financing activities$(5,185)$(7,475)
Share Repurchases:
Cash paid to repurchase shares$(2,250)$(2,194)
Number of shares repurchased(12.8)(11.6)
Shares outstanding at period end852865
Dividends:
Dividends declared per share$4.86$4.56
Cash paid for dividends$(4,034)$(3,842)
Borrowings:
Net borrowings (repayments) of debt principal$1,336$(1,124)
Other Financing Activities:
Cash received for common stock issuances$190$198
Other financing activities$(427)$(513)
Capitalization:
Total debt outstanding at period end$21,125$20,350
Total shareowners’ equity at period end19,18016,988
Total capitalization$40,305$37,338

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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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-endOutstanding balance at quarter-end ($)Average balance outstanding ($)Average interest rate
USD$458$458$755.32%
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 Type20232024202520262027After 2027Total
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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Collective Bargaining Agreements

Status of Collective Bargaining Agreements

See note 7 to the unaudited, consolidated financial statements for a discussion of the status of our collective bargaining agreements.

Multiemployer Benefit Plans

See note 7 to the unaudited, consolidated financial statements for a discussion of our participation in multiemployer benefit plans.

Recent Accounting Pronouncements

Adoption of New Accounting Standards

See note 2 to the unaudited, consolidated financial statements for a discussion of recently adopted accounting standards.

Accounting Standards Issued But Not Yet Effective

See note 2 to the unaudited, consolidated financial statements for a discussion of accounting standards issued, but not yet effective.

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