UNITED PARCEL SERVICE INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)
Overview
We continue to execute our Customer First, People Led, Innovation Driven strategy, focusing on the parts of our market that value our integrated global network and building capabilities that matter to our customers. We are shifting our strategic framework to Better and Bolder by seeking to enhance customer engagement through combining our network with digital capabilities to drive new services, while at the same time increasing efficiencies and remaining disciplined with capital allocation. A number of macroeconomic factors contributed to a challenging operating environment in 2022, including global inflation and rising interest rates, recessionary forecasts, wage and labor market pressures, geopolitical uncertainties and foreign currency exchange rates relative tothe United States ("U.S.") Dollar. We continued to be affected by COVID-19 lockdowns inChina that impacted both manufacturing and supply chains. In addition, consumers returned to more pre-pandemic shopping patterns. These factors resulted in disruptions to certain parts of our business, negatively impacted demand for our services and contributed to increases in certain of our operating costs. We anticipate these factors will continue to impact us into 2023. We expect we may experience additional uncertainty related to the upcoming renegotiation of certain of our union labor agreements. Despite the challenging macroeconomic environment, our strategic execution strengthened our balance sheet and resulted in the generation of strong cash flows for the year. We retired$2.0 billion of debt, reinvested in the business and returned cash to shareowners through dividends and share repurchases. We also completed the acquisition of Delivery Solutions, a digital platform that optimizes customer deliveries across multiple networks, and the acquisition ofBomi Group , which will accelerate our growth in healthcare logistics by expanding our footprint and bringing additional expertise in cold chain logistics. Neither acquisition had a material impact on our results of operations for the year. See note 8 to the audited, consolidated financial statements for additional information on business acquisitions.
We have two reportable segments:
Package, which are together referred to as our global small package operations.
Our remaining businesses are reported as
Highlights of our results for the years ended
are discussed in more detail in the sections that follow, include:
Year Ended December 31, Change
2022 2021 $ %
Revenue (in millions) $ 100,338 $ 97,287 $ 3,051 3.1 %
Operating Expenses (in millions) 87,244 84,477 2,767 3.3 %
Operating Profit (in millions) $ 13,094 $ 12,810 $ 284 2.2 %
Operating Margin 13.0 % 13.2 %
Net Income (in millions) $ 11,548 $ 12,890 $ (1,342) (10.4) %
Basic Earnings Per Share $ 13.26 $ 14.75 $ (1.49) (10.1) %
Diluted Earnings Per Share $ 13.20 $ 14.68 $ (1.48) (10.1) %
Operating Days 255 254
Average Daily Package Volume (in
thousands) 24,291 25,250 (3.8) %
Average Revenue Per Piece $ 13.38 $ 12.32 $ 1.06 8.6 %
22
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
•Average daily package volume in our global small package operations decreased,
primarily due to lower levels of business-to-consumer shipping.
•Revenue increased due to strong revenue per piece growth, with most of the increase in ourU.S. Domestic Package segment. Revenue inSupply Chain Solutions decreased.
•Operating expenses increased, driven by higher fuel prices and higher
compensation and benefits expense, primarily in our
segment.
•Operating profit and operating margin increased, with the increases coming from theU.S. Domestic Package segment andSupply Chain Solutions , while operating profit and operating margin declined in the International Package segment. •We reported net income of$11.5 billion and diluted earnings per share of$13.20 . Adjusted diluted earnings per share was$12.94 after adjusting for the after-tax impacts of:
•defined benefit pension and postretirement medical benefit plan mark-to-market
gains outside of a 10% corridor, together with defined benefit pension plan
curtailment gains, totaling
•a one-time, non-cash charge related to the accelerated vesting of certain equity awards in connection with an incentive compensation program design change of$384 million , or$0.44 per diluted share; •a one-time, non-cash charge in connection with a reduction in the estimated residual value of our MD-11 aircraft of$58 million , or$0.07 per diluted share; and
•transformation strategy costs of
In theU.S. Domestic Package segment, revenue growth resulted from higher fuel revenue, driven by increases in both price per gallon and in fuel surcharge rates as part of our pricing initiatives, as well as improvements in revenue quality and customer mix. Expenses increased due to higher fuel prices and higher compensation and benefits costs, which were partially offset by declines in purchased transportation costs and higher productivity as we executed our strategy. In our International Package segment, revenue increased slightly, driven by fuel revenue, revenue quality actions and favorable shifts in customer and product mix. These increases were mostly offset by lower volume, the impact of the strengtheningU.S. Dollar and reductions in demand-related surcharges, primarily in the fourth quarter. Expense increases were primarily driven by higher fuel prices, partially offset by favorable currency impacts and volume declines. InSupply Chain Solutions , the decrease in revenue was driven by volume and market rate declines in Forwarding, as well as the impact of divesting UPS Freight in 2021. These decreases were partially offset by growth in our healthcare operations and in a number of our other businesses. Expenses decreased, driven by lower transportation costs in Forwarding and a reduction in operating expenses due to the divestiture of UPS Freight. These decreases were partially offset by higher operating costs in Logistics.
2021 compared to 2020
See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSecurities and Exchange Commission onFebruary 22, 2022 . 23 --------------------------------------------------------------------------------
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
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):
Year Ended December 31,
Non-GAAP Adjustments 2022 2021
Operating Expenses:
Incentive Compensation Program Design Changes $ 505 $ -
Long-Lived Asset Estimated Residual Value Changes 76 -
Transformation Strategy Costs 178 380
Goodwill and Asset Impairment Charges, and Divestitures - (46)
Total Adjustments to Operating Expenses $ 759 $ 334
Other Income and (Expense):
Defined Benefit Pension and Postretirement Medical Plan (Gains) and
Losses
$ (1,061) $ (3,272) Total Adjustments to Other Income and (Expense)$ (1,061) $ (3,272) Total Adjustments to Income Before Income Taxes$ (302) $ (2,938) Income Tax (Benefit) Expense: Incentive Compensation Program Design Changes$ (121) $ - Long-Lived Asset Estimated Residual Value Changes (18) - Transformation Strategy Costs (36) (95) Goodwill and Asset Impairment Charges, and Divestitures - 11
Defined Benefit Pension and Postretirement Medical Plan (Gains) and
Losses
255 784 Total Adjustments to Income Tax Expense $ 80$ 700 Total Adjustments to Net Income$ (222) $ (2,238) These items have been excluded from the following discussions of "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, other income and (expense), income tax expense and effective tax rate. The income tax impacts of these items are calculated by multiplying the statutory tax rates applicable in each tax jurisdiction, including theU.S. federal jurisdiction and variousU.S. state and non-U.S. jurisdictions, by the tax-deductible adjustments. The blended average effective income tax rates for the years endedDecember 31, 2022 and 2021 were 26.5% and 23.8%, respectively. 24 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incentive Compensation Program Design Changes
During 2022, we completed certain structural changes to the design of our incentive compensation programs that resulted in a one-time, non-cash charge in connection with the accelerated vesting of certain equity incentive awards that we do not expect to repeat. 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 these changes. We believe excluding the impacts of such changes allows users of our financial statements to more appropriately identify underlying growth trends in compensation and benefits expense. For information regarding incentive compensation program design changes, see note 13 to the audited, consolidated financial statements.
Long-lived Asset Estimated Residual Value Changes
During the fourth quarter of 2022, we determined to retire six of our existing MD-11 aircraft from operational use in 2023. In connection therewith, we reduced the estimated residual value of our MD-11 fleet, incurring a one-time, non-cash charge on our fully-depreciated aircraft. This charge was allocated between our domestic package and international package segments. 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 this charge. We believe excluding the impact of this charge better enables users of our financial statements to understand the ongoing cost associated with our long-lived assets. For information regarding residual values, see note 4 to the audited, consolidated financial statements.
Transformation Charges, and
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 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 18 to the audited, consolidated financial statements. For more information regarding goodwill and asset impairment charges, and divestitures, see note 1 and note 7 to the audited, consolidated financial statements.
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 andSupply Chain Solutions on this currency-neutral basis. Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reportedU.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 reportedU.S. Dollar revenue, revenue per piece and operating profit and the derived current periodU.S. Dollar revenue, revenue per piece and operating profit is the period over period impact of currency fluctuations. 25 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Defined Benefit Pension and Postretirement Medical 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 defined benefit pension and postretirement medical plans immediately as part of Investment income (expense) 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 pension and postretirement medical 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. The remeasurement of our defined benefit pension and postretirement medical plans' assets and liabilities resulted in gains of$1.1 and$3.3 billion for the years endedDecember 31, 2022 and 2021, respectively. The table below shows the amounts associated with each component of these gains, as well as the weighted-average actuarial assumptions used to determine our net periodic benefit cost, for each year: Year Ended December 31, Components of defined benefit plan gain (loss) (in millions): 2022 2021 Discount rates$ 5,210 $ 1,871 Return on assets (4,130) (269) Demographic and other assumption changes (53) (97)
Coordinating benefits attributable to the
Pension Fund
- 1,767 Total mark-to-market gain (loss) 1,027 3,272 Curtailment gain 34 - Total defined benefit plan gain (loss)$ 1,061 $ 3,272 Year Ended December 31, Weighted-average actuarial assumptions: 2022 2021
Expected rate of return on plan assets used in determining
net periodic benefit cost
5.83 % 6.40 % Actual rate of return on plan assets (24.11) % 9.11 % Discount rate used in determining net periodic benefit cost 3.11 % 2.87 % Discount rate at measurement date 5.77 % 3.11 %
The pre-tax defined benefit plan gains and losses for the years ended
31, 2022
2022 –
•Discount Rates ($5.2 billion pre-tax gain): The weighted-average discount rate for our pension and postretirement medical plans increased from 3.11% as ofDecember 31, 2021 to 5.77% as ofDecember 31, 2022 , primarily due to an increase inU.S. treasury yields as well as an increase in credit spreads on AA-rated corporate bonds in 2022. •Return on Assets ($4.1 billion pre-tax loss): In 2022, the actual rate of return on plan assets was lower than our expected rate of return, primarily due to weaker global equity andU.S. bond market performance. •Demographic and Other Assumption Changes ($0.1 billion pre-tax loss): This loss was due to the differences between actual and estimated participant data and demographic factors, including healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality. 26 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2021 –
impact of the interim remeasurement of the UPS/IBT Plan in the first quarter of
2021 as described in note 5 to the audited, consolidated financial statements:
•Discount Rates ($1.9 billion pre-tax gain): This gain was largely attributable to an increase in the discount rate for the UPS/IBT Plan from 2.98% as ofDecember 31, 2020 to 3.70% as ofMarch 31, 2021 , driven by an increase inU.S. treasury yields in 2021. •Return on Assets ($0.3 billion pre-tax loss): This loss was driven by the actual rate of return on plan assets being approximately 220 basis points lower than our expected rate of return as ofMarch 31, 2021 , primarily due to weak global equity andU.S. bond market performance. •Demographic and Other Assumption Changes ($0.1 billion pre-tax loss): This loss was due to the differences between actual and estimated participant data and demographic factors, including healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality. •Coordinating benefits attributable to theCentral States Pension Fund ($1.8 billion pre-tax gain): This represents a reduction of the liability for potential coordinating benefits that may be required to be paid related to theCentral States Pension Fund . Expense Allocations Certain operating expenses are allocated between our operating 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 for 2022 relative to 2021. 27 --------------------------------------------------------------------------------UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSU.S. Domestic Package Year Ended December 31, Change 2022 2021 $ % Average Daily Package Volume (in thousands): Next Day Air 1,992 2,093 (4.8) % Deferred 1,553 1,723 (9.9) % Ground 17,242 17,646 (2.3) % Total Average Daily Package Volume 20,787 21,462 (3.1) % Average Revenue Per Piece: Next Day Air$ 21.06 $ 18.83 $ 2.23 11.8 % Deferred 15.07 13.36 1.71 12.8 % Ground 10.81 9.92 0.89 9.0 % Total Average Revenue Per Piece$ 12.11 $ 11.06 $ 1.05 9.5 % Operating Days in Period 255 254 Revenue (in millions): Next Day Air$ 10,699 $ 10,009 $ 690 6.9 % Deferred 5,968 5,846 122 2.1 % Ground 47,542 44,462 3,080 6.9 % Total Revenue$ 64,209 $ 60,317 $ 3,892 6.5 % Operating Expenses (in millions): Operating Expenses$ 57,212 $ 53,881 $ 3,331 6.2 % Incentive Compensation Program Design Changes (431) - (431) N/A Long-Lived Asset Estimated Residual Value Changes (25) - (25) N/A Transformation Strategy Costs (121) (281) 160 (56.9) % Adjusted Operating Expenses$ 56,635 $ 53,600 $ 3,035 5.7 % Operating Profit (in millions) and Operating Margin: Operating Profit$ 6,997 $ 6,436 $ 561 8.7 % Adjusted Operating Profit$ 7,574 $ 6,717 $ 857 12.8 % Operating Margin 10.9 % 10.7 % Adjusted Operating Margin 11.8 % 11.1 % Revenue
The change in revenue was due to the following factors:
Rates / Fuel Total Revenue
Revenue Change Drivers: Volume Product Mix Surcharge Change
2022 vs. 2021 (2.8) % 4.3 % 5.0 % 6.5 %
Revenue also benefited from one additional operating day in 2022 compared to
2021.
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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, driven by a 5.1% reduction in residential
shipments. The decline in residential shipments was driven by declines from our
largest customer in accordance with our agreed upon contract terms as we
continued to execute within our strategy. This decline was slightly offset by
growth from small- and medium-sized businesses ("SMBs"), including the expansion
of our Digital Access Program. Macroeconomic factors, including rising interest
rates and inflation, and the shift in consumer spending back towards services
and in-store shopping also contributed to the residential volume decline.
Business-to-consumer shipments represented approximately 59.4% of average daily
volume compared to 60.7% in 2021.
Business-to-business shipments remained relatively flat compared to 2021.
Commercial activity increased in the first half of the year, but declined in the
second half of 2022, primarily from industry sectors that are more sensitive to
the macroeconomic factors discussed above.
We anticipate overall average daily volume year-over-year growth rates will
continue to decline in the first half of 2023 and then grow through the
remainder of the year as economic conditions improve.
Within our Air products, average daily volume decreases were driven by lower volumes from certain large customers, as well as shifts in product preferences during the second half of the year. Ground residential average daily volume decreased 4.3%, driven by the declines discussed above. SurePost volume remained relatively flat for the year. Ground commercial volume increased 0.6%, driven by growth from SMBs and large customers in the first half of 2022 that was largely offset by volume declines in the second half of the year.
Rates and Product Mix
Revenue per piece in our Air and Ground products increased for the full year, driven by base rate increases and other pricing actions, and favorable changes in customer mix. A shift in product mix during the second half of the year, and declines in demand-related surcharges, slightly offset these increases. Rates for Air and Ground products increased an average of 5.9% inDecember 2021 . In ourNext Day Air and Deferred products, revenue per piece growth was negatively impacted by a reduction in average billable weight per piece.
We anticipate moderate revenue per piece growth in 2023 as we continue to
execute on pricing initiatives within our strategy.
Fuel Surcharges
We apply a fuel surcharge on our domestic air and ground services that adjusts weekly. Our air fuel surcharge is based on theU.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 theDOE's On-Highway Diesel Fuel price. Fuel surcharge revenue increased$3.0 billion , driven by increases in price per gallon and increases in fuel surcharges as part of our pricing initiatives. We expect a reduction in fuel surcharge revenue in 2023 based on the current commodity market outlook. 29 --------------------------------------------------------------------------------
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 increased year over year. The
increase includes the impact of one additional operating day. The cost of
operating our integrated air and ground network increased $858 million and
pickup and delivery costs increased $1.5 billion . Other indirect operating costs
increased $498 million and package sorting costs increased $163 million . These
increases primarily consisted of the following:
•Higher fuel costs, primarily attributable to increases in the price of jet
fuel, diesel and gasoline. As noted above, we expect fuel prices to decline in
2023.
•Increases in employee benefits expense for our union workforce, driven by
contractual rate increases for contributions to multiemployer benefit plans, as
well as higher year-over-year service cost for our company-sponsored pension
plans.
•Higher compensation expense due to contractual rate increases and cost of
living and market-rate adjustments for our union workforce, that were partially
offset by a decrease in union labor hours.
•Inflationary pressures that contributed to cost increases in repairs and
maintenance and facility operating costs.
These increases were partially offset by lower purchased transportation costs
due to a reduction in ground volume handled by third-party carriers and
continued productivity initiatives as we executed within our strategy.
Total cost per piece increased 9.2% for the year and adjusted cost per piece increased 8.6%, for the reasons described above. We anticipate that the cost per piece growth rate will be elevated in the first quarter of 2023 and will then moderate throughout the remainder of the year. We expect our productivity initiatives will continue to help offset rising compensation and benefit costs.
Operating Profit and Margin
As a result of the factors described above, operating profit increased
million
operating profit increased
increasing 70 basis points to 11.8%.
30
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
International Package
Year Ended December 31, Change
2022 2021 $ %
Average Daily Package Volume (in thousands):
Domestic 1,759 1,988 (11.5) %
Export 1,745 1,800 (3.1) %
Total Average Daily Package Volume 3,504 3,788 (7.5) %
Average Revenue Per Piece:
Domestic $ 7.46 $ 7.31 $ 0.15 2.1 %
Export 34.48 32.83 1.65 5.0 %
Total Average Revenue Per Piece $ 20.91 $ 19.44 $ 1.47 7.6 %
Operating Days in Period 255 254
Revenue (in millions):
Domestic $ 3,346 $ 3,690 $ (344) (9.3) %
Export 15,341 15,012 329 2.2 %
Cargo & Other 1,011 839 172 20.5 %
Total Revenue $ 19,698 $ 19,541 $ 157 0.8 %
Operating Expenses (in millions):
Operating Expenses $ 15,372 $ 14,895 $ 477 3.2 %
Incentive Compensation Program Design Changes (30) - (30) N/A
Long-Lived Asset Estimated Residual Value
Changes (51) - (51) N/A
Transformation Strategy Costs (12) (74) 62 (83.8) %
Adjusted Operating Expenses $ 15,279 $ 14,821 $ 458 3.1 %
Operating Profit (in millions) and Operating
Margin:
Operating Profit $ 4,326 $ 4,646 $ (320) (6.9) %
Adjusted Operating Profit $ 4,419 $ 4,720 $ (301) (6.4) %
Operating Margin 22.0 % 23.8 %
Adjusted Operating Margin 22.4 % 24.2 %
Currency Translation Benefit / (Cost)-(in
millions)*:
Revenue $ (1,060)
Operating Expenses 792
Operating Profit $ (268)
* Net of currency hedging; amount represents the change compared to the prior year.
Revenue
The change in revenue was due to the following:
Rates / Fuel Total Revenue
Revenue Change Drivers: Volume Product Mix Surcharges Currency Change
2022 vs. 2021 (7.2) % 6.5 % 6.9 % (5.4) % 0.8 %
31
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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 for both domestic and export products. Volume
from both large customers and SMBs declined, driven by declines in the retail
and technology sectors. Business-to-consumer volume decreased 17.2%, as
challenging global economic conditions, including high inflation, high energy
costs, COVID-19 lockdowns in China and geopolitical uncertainty, impacted
consumer demand. In the first half of the year, volume growth was also impacted
by the year-over-year effect of COVID-19 restrictions on consumer e-commerce
spending. These global economic conditions also impacted business-to-business
volume, which decreased 2.9%. We expect year-over-year volume growth in the
first half of 2023 to be negative, with economic conditions and volume growth
rates improving in the second half of the year.
Export volume decreased for the year driven by reduced intra-Europe activity, as
well as lower volumes on the Asia and U.S. export trade lanes. Intra-Europe
declines resulted from overall economic conditions. The decline in Asia export
trade lanes was also driven by COVID-19 lockdowns, which resulted in fewer
flights being operated throughout the year and reduced business activity within
China and Hong Kong . We experienced lower volumes from certain large customers
on U.S. export trade lanes, due to the strength of the U.S. Dollar and the
economic factors discussed above.
Our premium products saw volume decline 3.0%, primarily from our Express Saver
product which was impacted by lower volumes from certain large customers as a
result of the economic factors and COVID-19 disruptions discussed above. Volume
in our non-premium products decreased 1.4%, driven by declines in our Worldwide
products. These declines were the result of an overall reduction in consumer
demand for all of the reasons discussed above.
Domestic volume declines were largest in Europe and Canada , where macroeconomic
conditions and the year-over-year impact of COVID-19 restrictions on e-commerce
spending resulted in lower residential deliveries.
Rates and Product Mix
InDecember 2021 , we implemented an average 5.9% net increase in base and accessorial rates for international shipments originating inthe United States . Rate changes for shipments originating outside theU.S. are made throughout the year and vary by geographic market. We continue to apply demand-related surcharges on certain lanes. Total revenue per piece increased 7.6%, primarily due to fuel surcharges and favorable shifts in customer and product mix as we executed on revenue quality initiatives. Demand-related surcharges contributed slightly to the growth in revenue per piece, although we experienced a decline in these surcharges during the latter part of the year. Unfavorable currency movements partially offset these increases. Excluding the impact of currency, revenue per piece increased 13.5%.
Export revenue per piece increased 5.0% for the reasons described above.
Excluding the impact of currency, export revenue per piece increased 9.6%.
Domestic revenue per piece increased 2.1% for the reasons described above.
Excluding the impact of currency, domestic revenue per piece increased 13.3%.
We expect overall revenue per piece to be relatively flat in 2023, with a
decline in demand-related surcharges relative to 2022.
Fuel Surcharges
The fuel surcharge we apply to international air services originating inside or outside theU.S. is largely indexed to theDOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel. The fuel surcharges for ground services originating outside theU.S. are indexed to fuel prices in the region or country where the shipment originates. Total international fuel surcharge revenue increased by$1.2 billion , driven primarily by increases in price per gallon as well as changes in fuel surcharge rates as part of our pricing strategy. These increases were slightly offset by unfavorable currency movements and volume declines. Based on commodity forecasts, we expect declining fuel prices will drive a decrease in fuel surcharge revenue in 2023. 32 --------------------------------------------------------------------------------
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, increased year over year.
This includes the impact of one additional operating day. The costs of operating
our integrated international air and ground network increased $1.1 billion ,
primarily due to higher fuel prices. As noted above, we expect fuel prices to
decrease in 2023.
Pickup and delivery costs decreased $333 million , other indirect costs,
including compensation and benefits, decreased $319 million and package sorting
costs decreased $20 million as inflationary pressures were more than offset by
favorable currency movements and volume declines. We expect volume declines and
inflationary pressures will continue to impact our costs in 2023. We will
continue adjusting our network in order to mitigate these impacts.
Operating Profit and Margin
As a result of the factors described above, operating profit decreased$320 million , with operating margin decreasing 180 basis points to 22.0%. Adjusted operating profit decreased$301 million and adjusted operating margin decreased 180 basis points to 22.4%. Substantially all of our operations inRussia andBelarus remain suspended and are being wound down, and our operations inUkraine remain suspended. None of these actions have had a material impact on us. We continue to monitor the evolving impact ofRussia's invasion ofUkraine on the global economy. 33 --------------------------------------------------------------------------------UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSupply Chain Solutions Year Ended December 31, Change 2022 2021 $ % Revenue (in millions): Forwarding$ 8,943 $ 9,872 $ (929) (9.4) % Logistics 5,351 4,767 584 12.3 % Freight - 1,064 (1,064) (100.0) % Other 2,137 1,726 411 23.8 % Total Revenue$ 16,431 $ 17,429 $ (998) (5.7) % Operating Expenses (in millions): Operating Expenses$ 14,660 $ 15,701 $ (1,041) (6.6) % Incentive Compensation Program Design Changes (44) - (44) N/A Transformation Strategy Costs (45) (25) (20) 80.0 %Goodwill , Asset Impairment Charges and Divestitures - 46 (46) (100.0) % Adjusted Operating Expenses$ 14,571 $ 15,722 $ (1,151) (7.3) %
Operating Profit (in millions) and Operating Margins:
Operating Profit
$ 1,771 $ 1,728 $ 43 2.5 % Adjusted Operating Profit$ 1,860 $ 1,707 $ 153 9.0 % Operating Margin 10.8 % 9.9 % Adjusted Operating Margin 11.3 %
9.8 %
Currency Translation Benefit / (Cost)-(in millions)*:
Revenue
$ (272) Operating Expenses 307 Operating Profit$ 35 * Amount represents the change compared to the prior year. Year Ended December 31, Change 2022 2021 $ % Adjustments to Operating Expenses (in millions)**: Transformation Strategy Costs: Forwarding $ 18$ 8 $ 10 125.0 % Logistics 23 5 18 360.0 % Freight - 1 (1) (100.0) % Other 4 11 (7) (63.6) % Total Transformation Strategy Costs $ 45$ 25 $ 20 80.0 % Incentive Compensation Program Design Changes: Forwarding $ 22 $ -$ 22 N/A Logistics 22 - 22 N/A Total Incentive Compensation Program Design Changes $ 44 $ -$ 44 N/A Total Adjustments to Operating Expenses $ 89$ 25 $ 64 256.0 %
** Excludes the
Freight for the year ended
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue
Total revenue within Supply Chain Solutions decreased for the year. Lower volume
and revenue in forwarding and the impact of divesting UPS Freight in the second
quarter of 2021 more than offset strong revenue growth in logistics and a number
of our other businesses.
Forwarding revenue was impacted by the following:
•International airfreight revenue decreased approximately$480 million , as challenging economic conditions and lockdowns inChina drove a decline in customer demand during the year. Lower demand coupled with higher capacity, particularly in the fourth quarter of 2022, resulted in a decline in the market rates we charge for services, including demand-related surcharges that were elevated in the first quarter of the year.
•Revenue in our truckload brokerage business decreased approximately
million
by successful revenue quality initiatives.
•The remaining reduction in revenue was attributable to ocean freight forwarding as a result of a significant decline in market rates in the second half of the year, particularly on theAsia toU.S. lane. Volume also declined during the year, driven by lower customer demand. As a result of expected market conditions, we anticipate that volume will remain challenged and that market rates within all of our Forwarding businesses during the first half of 2023 will be lower than the first half of 2022. Rates in our airfreight and truckload brokerage businesses are expected to stabilize in the latter half of 2023.
Revenue within our Logistics businesses increased as a result of the following
factors:
•Healthcare logistics revenue increased approximately
clinical trials and pharmaceuticals. We expect growth to continue in 2023,
including revenue from
•Revenue in our mail services business increased approximately$160 million as a result of volume from new customers, rate increases and a favorable shift in product characteristics.
•The remaining revenue growth was within our other distribution operations. We
experienced year-over-year revenue increases, driven by customer expansion,
revenue quality initiatives and increased demand for warehousing services.
Revenue from the other businesses withinSupply Chain Solutions increased, partly due to the acquisition ofRoadie, Inc. in the fourth quarter of 2021. Revenue from transition services provided to the acquirer of UPS Freight increased and revenue from our service contracts with theU.S. Postal Service also increased. We expect our transition services revenue to decline in 2023 as the acquirer of UPS Freight begins to exit these arrangements.
Operating Expenses
Total operating expenses and total adjusted operating expenses forSupply Chain Solutions decreased for the year. This included a decrease of$952 million due to the divestiture of UPS Freight in 2021. Forwarding operating expenses decreased$1.1 billion , driven by a reduction in purchased transportation costs. Elevated market rates in the first half of 2022 were more than offset by declines in the latter part of the year. We expect market volume and rates will remain low through at least mid-2023, which will reduce our purchased transportation costs. Logistics operating expenses increased$485 million , including the impact of theBomi Group acquisition. Compensation and benefits expense increased, driven by business growth and inflationary pressures across our logistics businesses. Purchased transportation costs increased in our healthcare and mail services businesses due to business growth. Mail services expenses were also impacted by transportation rate increases and higher fuel surcharges. 35 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Expenses for the other businesses within Supply Chain Solutions increased. This
was driven by the acquisition of Roadie, Inc. in the fourth quarter of 2021, and
higher fuel costs associated with service contracts with the U.S. Postal
Service . Costs incurred in procuring transportation for, and providing
transition services to, the acquirer of UPS Freight also increased for the year.
We expect these costs to decline in 2023 as the acquirer of UPS Freight
continues to exit these arrangements.
Operating Profit and Margin
As a result of the factors described above, total operating profit increased$43 million , with operating margin increasing 90 basis points to 10.8%. On an adjusted basis, operating profit increased$153 million and operating margin increased 150 basis points to 11.3%. 36 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated Operating Expenses
Year Ended December 31, Change
2022 2021 $ %
Operating Expenses (in millions):
Compensation and benefits $ 47,781 $ 46,707 $ 1,074 2.3 %
Transformation and Other Charges (46) (206) 160 (77.7) %
Incentive Compensation Program Design Changes (505) - (505) N/A
Adjusted Compensation and benefits 47,230 46,501 729 1.6 %
Repairs and maintenance 2,515 2,443 72 2.9 %
Depreciation and amortization 3,188 2,953 235 8.0 %
Purchased transportation 17,653 19,058 (1,405) (7.4) %
Fuel 6,018 3,847 2,171 56.4 %
Other occupancy 1,818 1,698 120 7.1 %
Other expenses 8,271 7,771 500 6.4 %
Total Other expenses 39,463 37,770 1,693 4.5 %
Transformation and Other Charges (132) (174) 42 (24.1) %
Long-Lived Asset Estimated Residual Value
Changes (76) - N/A
Goodwill , Asset Impairment Charges and
Divestitures - 46 (46) (100.0) %
Adjusted Total Other expenses $ 39,255 $ 37,642 $ 1,613 4.3 %
Total Operating Expenses $ 87,244 $ 84,477 $ 2,767 3.3 %
Adjusted Total Operating Expenses $ 86,485 $ 84,143 $ 2,342 2.8 %
Currency (Benefit) / Cost - (in millions)* (1,099)
*Amount represents the change in currency translation compared to the prior year.
Year Ended December 31, Change
2022 2021 $ %
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs:
Compensation $ 36 $ 30 $ 6 20.0 %
Benefits 10 176 (166) (94.3) %
Other occupancy - 3 (3) (100.0) %
Other expenses 132 171 (39) (22.8) %
Total Transformation Strategy Costs $ 178 $ 380 $ (202) (53.2) %
Incentive Compensation Program Design Changes:
Compensation 505 - 505 N/A
Long-Lived Asset Estimated Residual Value
Changes:
Depreciation and amortization 76 - 76 N/A
Goodwill , Asset Impairment Charges and
Divestitures:
Other expenses $ - $ (46) $ 46 (100.0) %
Total Adjustments to Operating Expenses $ 759 $ 334 $ 425 127.2 %
37
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Compensation and Benefits
Total compensation and benefits and adjusted total compensation and benefits
increased. Compensation costs increased $495 million . On an adjusted basis,
compensation costs decreased $16 million . The principal factors impacting the
change were:
•U.S. Domestic direct labor costs increased $422 million due to annual
contractual rate increases for our union workforce that occur in August, as well
as cost of living adjustments driven by inflation and other market factors.
Headcount in our line-haul network operations also increased. These increases
were partially offset by a reduction in labor hours, driven by volume declines
and productivity improvements.
•International compensation decreased
declines and favorable currency movements.
•Supply Chain Solutions’ compensation costs increased
business growth and inflationary pressures across our logistics operations.
•Management compensation increased
accelerated vesting of certain equity incentive awards in connection with a
one-time change to the design of our incentive compensation programs. On an
adjusted basis, management compensation increased
growth, which was partially offset by reductions in other incentive awards and
sales commissions.
•The UPS Freight divestiture in 2021 resulted in a
compensation costs.
We expect inflation and other market factors will continue to impact
compensation cost in certain parts of our business in 2023.
Benefits costs increased
basis, primarily as a result of:
•Health and welfare costs increased
contributions to multiemployer plans as a result of contractual rate increases
that occur annually in August. The UPS Freight divestiture in 2021 reduced
expense by
•Pension and postretirement benefits increased$215 million due to contractually-mandated contribution increases to multiemployer plans and higher service costs for company-sponsored plans. The UPS Freight divestiture in 2021 reduced expense by$53 million . •Vacation, excused absence, payroll taxes and other expenses increased$248 million , driven by wage growth and additional discretionary payments. The UPS Freight divestiture in 2021 reduced expense by$54 million . •Workers' compensation expense increased$88 million due to an increase in current year claims, partially offset by favorable developments in reserves for existing claims. Repairs and Maintenance The increase in repairs and maintenance expense was due to an increase in planned building maintenance as well as increases in the cost of materials and supplies, which we expect to persist in 2023. We also incurred higher costs for aircraft engine and airframe maintenance due to the timing of scheduled maintenance events. We anticipate these costs will remain elevated as scheduled maintenance events commence on newer aircraft within our fleet.
Depreciation and Amortization
Depreciation and amortization expense increased, primarily due to the reduction
in the estimated residual value of our fully-depreciated MD-11 aircraft,
facility automation and expansion projects, investments in internally developed
software and the amortization of acquired intangible assets. Excluding the
impact of the estimated residual value change, adjusted depreciation and
amortization expense increased due to the aforementioned factors. The reduction
in estimated residual value of our MD-11 aircraft will result in additional
depreciation expense for the remainder of these aircraft in 2023 and thereafter.
38
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Purchased Transportation
The decrease in purchased transportation expense charged to us by third-party
air, ocean and truck carriers was primarily attributable to:
•Supply Chain Solutions expense decreased$957 million , resulting from volume declines in our international air and ocean freight and truckload brokerage businesses and declining market rates paid for services in the latter half of the year. These impacts were slightly offset by expense increases in our logistics operations due to business growth and third-party rate increases in our mail services business. The UPS Freight divestiture in 2021 drove a decrease of$260 million . •U.S. Domestic expense decreased$254 million , driven by a reduction in ground volume handled by third-party carriers as a result of network optimization initiatives. This was partially offset by the impacts of higher fuel surcharges and rate increases. •International expense decreased$194 million , primarily due to a reduction in air charter expense in the second half of the year and favorable currency movements. These decreases were partially offset by increases in markets rates for ground transportation and fuel surcharges from third-party carriers.
Fuel
The increase in fuel expense was primarily driven by higher prices for jet fuel, diesel and gasoline. 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
The increase in other occupancy expense, and adjusted other occupancy expense, was due to additional facilities coming into service, higher utilities costs and rent and property tax increases. We expect inflation may continue to impact rent and utility costs in 2023. Other Expenses
Other expenses and adjusted other expenses increased primarily as a result of:
•An increase of
•Hosted software application fees and other technology costs increased
million
•Professional fees increased
services provided to various business units and information technology
consulting to support ongoing strategic initiatives.
•Other increases included the cost of goods provided under transitional service
agreements to the acquirer of UPS Freight, allowances for credit losses,
facility security expenses and self-insured automobile liability expense, driven
by increases in the frequency and severity of claims.
These increases were partially offset by favorable developments in certain legal
and tax contingencies and reductions in asset impairment charges and customer
claims.
39
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Income and (Expense)
The following table sets forth investment income (expense) and other and
interest expense for the years ended December 31, 2022 and 2021 (in millions):
Year Ended December 31, Change
2022 2021 $ %
Investment Income (Expense) and Other $ 2,435 $ 4,479 $ (2,044) (45.6) %
Defined Benefit Pension and Postretirement
Medical Plan (Gains) and Losses (1,061) (3,272) 2,211 (67.6) %
Adjusted Investment Income (Expense) and Other $ 1,374 $ 1,207 $ 167 13.8 %
Interest Expense (704) (694) (10) 1.4 %
Total Other Income and (Expense) $ 1,731 $ 3,785 $ (2,054) (54.3) %
Adjusted Other Income and (Expense) $ 670 $ 513 $ 157 30.6 %
Investment Income (Expense) and Other
Investment and other income decreased$2.0 billion , primarily due to a reduction in mark-to-market gains recognized on remeasurements of our defined benefit pension and postretirement plans. Excluding the impact of these gains, adjusted investment and other income increased$167 million , driven by higher yields on higher average invested balances and foreign currency gains. These increases were partially offset by declines in the fair values of certain non-current investments.
Interest Expense
Interest expense increased due to the impact of higher effective interest rates
on floating rate debt, partially offset by lower average outstanding debt
balances, higher capitalized interest and favorable foreign currency exchange
rate impacts on foreign currency-denominated debt.
40
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Tax Expense
The following table sets forth income tax expense and our effective tax rate for
the years ended
Year Ended December 31, Change
2022 2021 $ %
Income Tax Expense: $ 3,277 $ 3,705 $ (428) (11.6) %
Income Tax Impact of:
Defined Benefit Pension and Postretirement
Medical Plan (Gains) and Losses (255) (784) 529 (67.5) %
Incentive Compensation Program Design Changes 121 - 121 N/A
Long-Lived Asset Estimated Residual Value Changes 18 - 18 N/A
Transformation Strategy Costs 36 95 (59) (62.1) %
Goodwill and Asset Impairment Charges, and
Divestitures - (11) 11 (100.0) %
Adjusted Income Tax Expense $ 3,197 $ 3,005 $ 192 6.4 %
Effective Tax Rate 22.1 % 22.3 %
Adjusted Effective Tax Rate 22.0 % 22.0 %
For additional information on income tax expense and our effective tax rate, see
note 15 to the audited, consolidated financial statements.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
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 ofDecember 31, 2022 , we had$7.6 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 and pension contributions, 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):
2022 2021
Net income $ 11,548 $ 12,890
Non-cash operating activities(a) 5,261 3,335
Pension and postretirement medical benefit plan contributions
(company-sponsored plans)
(2,342) (576) Hedge margin receivables and payables 274 272 Income tax receivables and payables 154 170
Changes in working capital and other non-current assets and
liabilities
(797) (1,106) Other operating activities 6 22 Net cash from operating activities $
14,104
(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$903 million in 2022, driven by higher contributions to our company-sponsored defined benefit pension and postretirement medical plans. We made discretionary contributions to our qualifiedU.S. pension plans of$1.9 billion in 2022 compared to$0.2 billion in 2021. Our working capital benefited from an improvement in collections that was partially offset by increases in duty and tax settlements on behalf of our customers due to the timing of payments. Additionally, during 2022, we paid$234 million of employer payroll taxes that were deferred under the Coronavirus Aid, Recovery and Economic Security ("CARES") Act in 2020, compared to a payment of$577 million in 2021. We paid the remaining$323 million of deferred employer payroll taxes inJanuary 2023 .
Cash payments for income taxes were
ended
timing of deductions related to pension contributions and depreciation.
As part of our ongoing efforts to improve our working capital efficiency,
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 December 31, 2022 and 2021,
suppliers sold them $806 and $545 million , respectively, of our outstanding
payment obligations. Amounts due to suppliers that participate in the SCF
program may be reflected in cash flows from operating activities or cash flows
from investing activities in our consolidated statements of cash flows. The
amounts settled through the SCF program were approximately $2.3 and $1.7 billion
for the years ended December 31, 2022 and 2021, respectively.
42
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As of December 31, 2022 , approximately $2.2 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.
43
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cash Flows From Investing Activities
Our primary sources (uses) of cash from investing activities for the years ended
2022 2021
Net cash used in investing activities $ (7,472) $ (3,818)
Capital Expenditures:
Buildings, facilities and plant equipment $ (1,708) $ (1,635)
Aircraft and parts (1,267) (1,185)
Vehicles (1,067) (807)
Information technology (727) (567)
Total Capital Expenditures(1): $
(4,769)
Capital Expenditures as a % of revenue 4.8 % 4.3 % Other Investing Activities: Proceeds from disposals of businesses, property, plant and equipment$ 12 $ 872 Net change in finance receivables$ 24 $ 34 Net (purchases), sales and maturities of marketable securities$ (1,651) $ 54 Acquisitions, net of cash acquired$ (755) $ (602) Other investing activities$ (333) $ 18 (1) In addition to capital expenditures of$4.8 and$4.2 billion for the years endedDecember 31, 2022 and 2021, respectively, there were principal repayments of finance lease obligations of$149 and$208 million , respectively. These are included in cash flows from financing activities. We have commitments 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 regulatory, economic and industry conditions. Our current investment program anticipates investments in technology initiatives and enhanced network capabilities, including over$1.0 billion of projects to support our environmental sustainability goals. It also provides for maintenance of buildings, facilities and equipment and replacement of certain aircraft within our fleet. We currently expect our capital expenditures will be approximately$5.3 billion in 2023, of which approximately 50 percent will be allocated to expansion projects.
Total capital expenditures increased in 2022, primarily due to:
•Spending on buildings, facilities and plant equipment increased, largely due to facility automation and capacity expansion projects in our global small package business. Expenditures in the fourth quarter more than offset the impact of supply chain disruptions that we experienced earlier in the year. •Aircraft and parts expenditures increased due to higher contract deposits on open aircraft orders, partially offset by fewer payments associated with the delivery of aircraft.
•Vehicles expenditures increased as supply chain constraints eased in the latter
half of 2022 relative to 2021.
•Information technology expenditures increased due to additional deployments of technology equipment and continuing investments in our digital capabilities and network automation. Proceeds from the disposal of businesses, property, plant and equipment decreased, primarily due to the 2021 divestiture of UPS Freight for cash proceeds of$848 million . Net purchases of marketable securities increased due to a shift to longer duration investments. The net change in finance receivables was primarily due to reductions in outstanding balances within our finance portfolios. 44 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The increase in cash paid for acquisitions in 2022 was primarily attributable to
the acquisitions of Bomi Group and Delivery Solutions, and the purchase of
development areas for The UPS Store . Cash paid for acquisitions in 2021 related
to the acquisition of Roadie and the purchase of development areas for The UPS
Store . The increase in other investing activities was driven by our investment
of $252 million in the parent company of CommerceHub, Inc. , as well as changes
in our other non-current investments and various other items.
45
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cash Flows From Financing Activities
Our primary sources (uses) of cash for financing activities were as follows
(amounts in millions, except per share data):
2022 2021
Net cash used in financing activities $ (11,185) $ (6,823)
Share Repurchases:
Cash paid to repurchase shares $ (3,500) $ (500)
Number of shares repurchased (19.0) (2.6)
Shares outstanding at period end 859 870
Dividends:
Dividends declared per share$ 6.08 $ 4.08 Cash paid for dividends$ (5,114) $ (3,437)
Borrowings:
Net borrowings (repayments) of debt principal
Other Financing Activities:
Cash received for common stock issuances
Other financing activities
$ (529) $ (364)
Capitalization:
Total debt outstanding at year end$ 19,662 $ 21,915 Total shareowners' equity at year end 19,803 14,269 Total capitalization$ 39,465 $ 36,184 We repurchased 19.0 and 2.6 million shares of class B common stock for$3.5 billion and$500 million under our stock repurchase program for the years endedDecember 31, 2022 and 2021, respectively. We anticipate our share repurchases will total$3.0 billion for 2023. For additional information on our share repurchase activities, see note 12 to the audited, consolidated financial statements.
For the years ended
shareowners’ equity include
dividends that were settled in shares of class A common stock.
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. In the first quarter of 2023, we increased our quarterly dividend from$1.52 to$1.62 per share.
There were no issuances of debt in 2022. Issuances of debt in 2021 consisted of
short-term borrowings under our commercial paper program.
Repayments of debt in 2022 included scheduled principal payments on our finance lease obligations, payment of amounts assumed in theBomi Group acquisition and repayment at maturity of senior notes as follows:
•$1.0 billion 2.450% senior notes;
•$600 million 2.350% senior notes; and
•$400 million floating rate senior notes.
Repayments of debt in 2021 included scheduled principal payments on our finance
lease obligations, payments of commercial paper balances and repayment at
maturity of senior notes as follows:
•$1.5 billion 3.125% senior notes;
•$700 million 2.050% senior notes; and
•$350 million floating rate senior notes.
As of
commercial paper programs.
46 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We have $2.2 billion of fixed- and floating-rate senior notes that mature in
2023. We may repay these amounts when due with cash generated from operations or
other borrowings, depending on various factors. 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.
The variation in cash received from common stock issuances 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$516 and$358 million for the years endedDecember 31, 2022 and 2021, respectively. The increase was driven by changes in required repurchase amounts. Except as disclosed in note 9 to the audited, consolidated financial statements, 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 audited, consolidated financial statements for a discussion of
our available credit and our debt covenants.
Contractual Commitments
We have material cash requirements for known contractual obligations and commitments in the form of finance leases, operating leases, debt obligations, purchase commitments and certain other liabilities that are disclosed in the notes to the audited, consolidated financial statements and discussed below. We expect to fund these obligations and other discretionary payments, including expected returns to shareowners, primarily through cash from operations. We anticipate making discretionary contributions to our company-sponsoredU.S. defined benefit pension and postretirement medical plans of approximately$1.2 billion in 2023, which are included within Expected employer contributions to plan trusts shown in note 5 to the audited, consolidated financial statements. There are currently no anticipated required minimum cash contributions to our qualifiedU.S. pension plans. The amount of any minimum funding requirement, as applicable, for these plans could change significantly in future periods depending on many factors, including plan asset returns, discount rates, other actuarial assumptions, changes to pension plan funding regulations and the discretionary contributions that we make. Actual contributions made in future years could materially differ and consequently required minimum contributions beyond 2023 cannot be reasonably estimated. As a result of the amendments to the UPS 401(k) Savings Plan discussed in note 5 to the audited, consolidated financial statements, we expect contributions to this plan will increase by approximately$450 million beginning in 2024. As discussed in note 6 to the audited, consolidated financial statements, we are not currently subject to any surcharges or minimum contributions outside of our agreed-upon contractual rates with respect to the multiemployer pension and health and welfare plans in which we participate. Contribution rates to these multiemployer pension and health and welfare plans are established through the collective bargaining process. We have outstanding letters of credit and surety bonds that are discussed in note 9 to the audited, consolidated financial statements. Additionally, we have$2.2 billion of fixed- and floating-rate senior notes that mature in 2023. We may repay these amounts when due with cash generated from operations or other borrowings, depending on various factors. Estimated future interest payments on our outstanding debt total approximately$11.3 billion . This amount was calculated using the contractual interest payments due on our fixed- and variable-rate debt based on interest rates as ofDecember 31, 2022 , taking into account the effect of any interest rate swap agreements. For debt denominated in a foreign currency, theU.S. Dollar equivalent principal amount of the debt at the end of the year was used as the basis to project future interest payments. Annual principal payments on our long-term debt, and purchase commitments for certain capital expenditures are also set out in note 9 to the audited, consolidated financial statements. Included within these purchase commitments are firm commitments to purchase seven new and used Boeing 767-300 aircraft to be delivered in 2023, 21 new Boeing 767-300 aircraft to be delivered between 2024 and 2026, and two used Boeing 747-8F aircraft to be delivered in 2024. Additionally, we anticipate purchasing over 2,400 alternative fuel vehicles in 2023. 47 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to purchase commitments, we have other contractual agreements
including equipment rentals, software licensing and commodity contracts.
Our finance lease obligations, including purchase options that are reasonably certain to be exercised, relate primarily to leases on aircraft and real estate. These obligations, together with our obligations under operating leases are set out in note 11 to the audited, consolidated financial statements. Under provisions of the Tax Cuts and Jobs Act, we elected to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries over eight years through 2025. Additionally, we have uncertain tax positions that are further discussed in note 15 to the audited, consolidated financial statements.
Contingencies
See note 5 to the audited, consolidated financial statements for a discussion of pension-related matters, note 10 to the audited, consolidated financial statements for a discussion of judicial proceedings and other matters arising from the conduct of our business activities and note 15 to the audited, consolidated financial statements for a discussion of income-tax-related matters.
Collective Bargaining Agreements
Status of Collective Bargaining Agreements
See note 6 to the audited, consolidated financial statements for a discussion of the status of collective bargaining agreements and "Risk Factors - Business and Operating Risks - Strikes, work stoppages or slowdowns by our employees could materially adversely affect us" in Part I, Item 1A of this report.
Multiemployer Benefit Plans
We contribute to a number of multiemployer pension and health and welfare plans under the terms of collective bargaining agreements that cover our union-represented employees. These agreements set forth the annual contribution rate increases for the plans that we participate in.
New Accounting Pronouncements
Recently Adopted Accounting Standards
See note 1 to the audited, consolidated financial statements for a discussion of
recently adopted accounting standards.
Accounting Standards Issued But Not Yet Effective
See note 1 to the audited, consolidated financial statements for a discussion of
accounting standards issued, but not yet effective.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Estimates
The amounts of assets, liabilities, revenue and expenses reported in our financial statements are affected by estimates and judgments that are necessary to comply with GAAP. We base our estimates on prior experience, current trends, various other assumptions and third-party input that we consider reasonable to our circumstances. Actual results could differ materially from our estimates, which would affect the related amounts reported in our consolidated financial statements. While estimates and judgments are applied in arriving at many reported amounts, we believe that the following critical accounting estimates involve a higher degree of judgment and complexity.
Contingencies
From time to time, we are involved in various legal proceedings and have exposure to various other contingent obligations. The events that may impact our contingent liabilities are often unique and generally are not predictable. At the time a contingency is identified, we consider all relevant facts as part of our evaluation. We apply judgment when establishing a range of reasonably possible losses for our contingencies. Our judgment is influenced by our understanding of information currently available for legal actions and potential outcomes of these actions, including the advice from our internal counsel, external counsel and senior management. We record a liability for a loss when the loss is probable of occurring and reasonably estimable. For such accruals, we record the amount we consider to be the best estimate within a range of potential losses; however, when there appears to be a range of equally possible losses, our accrual is based on the low end of this range. The likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a reasonable estimate of the loss or a range of loss may not be practicable based on the information available. Additionally, events may arise that were not anticipated and, as a result, the outcome of a contingency may result in a loss that differs materially from our previously estimated liability. Except as disclosed in note 10 to the audited, consolidated financial statements, contingent losses that were probable and estimable were not material to our financial position or results of operations as of, or for the year ended,December 31, 2022 . In addition, we have certain contingent liabilities that have not been recognized as of, or for the year ended,December 31, 2022 , because a loss was not reasonably estimable. Obligations relating to income taxes and self-insurance are discussed below.
We assess goodwill for impairment at the reporting unit level. We did not incur goodwill impairment charges in 2022 or 2021. During 2020, we recognized a goodwill impairment charge of$494 million in our former UPS Freight reporting unit. The determination of reporting units requires judgment, and if we changed the definition of our reporting units, it is possible that we would have reached different conclusions when performing our impairment tests.Goodwill impairment charges could have a material impact on our results of operations. We initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive, we quantitatively assess the fair value of a reporting unit to test goodwill for impairment. This assessment uses a combination of income and market approaches: •The income approach uses a discounted cash flow ("DCF") model, which requires us to make a number of significant assumptions to produce an estimate of future cash flows. These assumptions include projections of future revenue, costs, capital expenditures, working capital and the cost of capital. We are also required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment. Changes in any of these assumptions could significantly impact the fair value of any one of our reporting units. The projections that we use in our DCF model are updated annually, or more often if necessary, and will change over time based on the historical performance and changing business conditions for each of our reporting units. •The market approach uses observable market data of comparable public companies to estimate fair value utilizing financial metrics (such as enterprise value to net sales). We apply judgment to select appropriate comparison companies based on the business operations, size and operating results of our reporting units. Changes to our selection of comparable companies or market multiples may result in changes to the estimates of fair value of our reporting units. 49 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As of our July 1st testing date, we concluded the fair value of each reporting
unit exceeded its carrying value; however, the excess of fair value over the
carrying value for our Roadie reporting unit was less than 10 percent. In
addition to business performance, our valuation estimate is most sensitive to
changes in the cost of capital. If the cost of capital used in our July 1st test
increased by 150 basis points, it is reasonably possible that the reporting unit
would be impaired. We believe the fair value of the Roadie reporting unit
continues to exceed its carrying value; however, if the cost of capital
increases or the business does not meet forecasts, we may incur an impairment
charge in the future. The goodwill associated with our Roadie reporting unit as
of December 31, 2022 was $241 million .
We evaluate the indefinite-lived trade name associated with our truckload
brokerage business for impairment using the relief from royalty method. This
valuation approach requires that we make a number of assumptions to estimate
fair value, including projections of future revenues, market royalty rates, tax
rates, discount rates and other relevant variables. The projections we use in
the model are updated annually and will change over time based on historical
performance and changing business conditions. If the carrying value of the trade
name exceeded its estimated fair value, an impairment charge would be recognized
for the excess amount.
In addition to business performance, our valuation estimate is most sensitive to
changes in royalty rates and the cost of capital. The ratio of excess fair value
to carrying value would decrease by approximately one percentage point if the
royalty rate decreased by five basis points or the cost of capital increased by
ten basis points. A ten percent decrease in the estimated fair value of our
trade name would have had no effect on its carrying value as of our July 1st
measurement date. However, if near-term economic conditions change our
assumptions unfavorably, or result in the reporting unit being unable to meet
forecasts, there could be a more significant decrease in the estimated fair
value of the trade name, which may result in an impairment. The carrying value
of the trade name as of December 31, 2022 was $200 million .
Our finite-lived intangible assets are amortized over their estimated useful
lives. Impairment tests for these assets are only performed when a triggering
event occurs that indicates that the carrying value of the intangible may not be
recoverable based on its undiscounted future cash flows. If the carrying amount
of the intangible is determined not to be recoverable, a write-down to fair
value is recorded. Fair values are determined based on quoted market prices,
discounted cash flows or external appraisals, as appropriate. If impairment
indicators are present, the resulting impairment charges could have a material
impact on our results of operations. See note 7 to the audited, consolidated
financial statements for details of finite-lived intangible asset impairments.
Self-Insurance Accruals
We base self-insurance reserves on actuarial estimates, which are determined with the assistance of a third-party actuary through a complex process that includes the application of various actuarial methods and assumptions. The process incorporates actual loss experience and judgments about expected future development based on historical experience, recent and projected trends in claim frequency and severity, and changes in claims handling practices, among other factors. Workers' compensation, automobile liability and general liability insurance claims may take a number of years to resolve. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to resolve a claim. Several factors can affect the actual cost, or severity, of a claim, including:
•Length of time a claim remains open;
•Trends in healthcare costs;
•Results of any related litigation; and
•Changes in legislation.
Furthermore, claims may emerge in a future year for events that occurred in a
prior policy period at a rate that differs from actuarial projections. All these
factors can result in revisions to actuarial projections and produce a material
difference between estimated and actual operating results.
Due to the complexity and inherent uncertainty associated with the estimation of
our workers' compensation, automobile and general liability claims, the
third-party actuary develops a range of expected losses. We believe our
estimated reserves for such claims are adequate; however, actual experience in
claims frequency and/or severity of claims could materially differ from our
estimates and affect our results of operations.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We also sponsor several health and welfare insurance plans for our employees.
Liabilities and expenses related to these plans are based on estimates of the
number of employees and eligible dependents covered under the plans, global
health events, anticipated utilization by participants and overall trends in
medical costs and inflation. We believe our estimates are reasonable and
appropriate. Actual experience may differ materially from these estimates and,
therefore, produce a material difference between estimated and actual operating
results.
Self-insurance reserves as of
millions):
2022 2021
Current self-insurance reserves $ 1,069 $ 1,048
Non-current self-insurance reserves(1) 1,818 1,855
Total self-insurance reserves
$ 2,887 $ 2,903
(1) Included within Other Non-Current Liabilities in the consolidated balance
sheets.
Our total reserves related to prior year claims decreased by$5 million in 2022 and increased by$34 million in 2021. A five percent deterioration or improvement in both the assumed claim severity and claim frequency rates used to estimate our self-insurance reserves would result in an increase or decrease of approximately$290 million , respectively, in our reserves and expenses as of, and for the year ended,December 31, 2022 .
Pension and Other Postretirement Medical Benefits
Our pension and postretirement medical benefit costs are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, healthcare cost trend rates, inflation, compensation increases, expected returns on plan assets, mortality rates, regulatory requirements and other factors. The assumptions utilized in recording the obligations under our plans represent our best estimates. We believe that they are reasonable, based on information as to historical experience and performance as well as other factors that might cause future expectations to differ from past trends.
Differences in actual experience or changes in assumptions may affect our
pension and postretirement medical benefit obligations and future expenses. The
primary factors contributing to actuarial gains and losses each year are:
•Changes in the discount rate used to value pension and postretirement medical
benefit obligations as of the measurement date;
•Differences between expected and actual returns on plan assets;
•Changes in demographic assumptions, including mortality;
•Differences in participant experience from demographic assumptions; and
•Changes in coordinating benefits with plans not sponsored by UPS.
We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of a corridor (defined as 10% of the greater of the fair value of plan assets or the plans' projected benefit obligations) immediately within income upon remeasurement of a plan. Other components of pension expense (referred to as "ongoing net periodic benefit cost"), primarily service and interest costs and the expected return on plan assets, are reported on a quarterly basis. The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate and return on assets for our pension and postretirement benefit plans, and the resulting increase (decrease) in our obligations and expense as of, and for the year ended,December 31, 2022 (in millions): 51 --------------------------------------------------------------------------------UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25 Basis Point 25 Basis Point Pension Plans Increase Decrease Discount Rate: Effect on ongoing net periodic benefit cost $ (38) $ 39
Effect on net periodic benefit cost for amounts recognized outside
the 10% corridor
(582) 521 Effect on projected benefit obligation (1,378) 1,471 Return on Assets: Effect on ongoing net periodic benefit cost(1) (144) 144
Effect on net periodic benefit cost for amounts recognized outside
the 10% corridor(2)
$ (34) $ 34 Postretirement Medical Benefit Plans Discount Rate: Effect on ongoing net periodic benefit cost $ 4 $ (3)
Effect on net periodic benefit cost for amounts recognized outside
the 10% corridor
(38) 22 Effect on accumulated postretirement benefit obligation (34) 40 Healthcare Cost Trend Rate: Effect on ongoing net periodic benefit cost - -
Effect on net periodic benefit cost for amounts recognized outside
the 10% corridor
3 (12) Effect on accumulated postretirement benefit obligation $ 10 $ (11) (1)Amount calculated based on 25 basis point increase / decrease in the expected return on assets. (2)Amount calculated based on 25 basis point increase / decrease in the actual return on assets.
Refer to note 5 to the audited, consolidated financial statements for
information on our potential liability for coordinating benefits related to the
Depreciation, Residual Value and Impairment of Property, Plant and Equipment
As ofDecember 31, 2022 , we had$34.7 billion of net property, plant and equipment, the most significant category of which was aircraft. In accounting for property, plant and equipment, we make estimates of the expected useful lives and residual values. We evaluate the useful lives of our property, plant and equipment based on our usage, maintenance and replacement policies, and taking into account physical and economic factors that may affect the useful lives of the assets. Our accounting policy for property, plant and equipment is set out in note 1 to the audited, consolidated financial statements. We monitor our long-lived assets for indicators of impairment which may include, but are not limited to, a significant change in the extent to which an asset is utilized and operating or cash flow losses associated with the use of the asset. If circumstances are present that indicate the carrying value of our long-lived assets may not be recoverable, we then perform impairment testing at the asset group level. Asset groups represent the lowest level at which independent cash flows can be identified. Determining the asset group requires judgment and changes in the way asset groups are defined could have material impact to the results of impairment testing. We perform recoverability testing by comparing the undiscounted cash flows of the asset group to the carrying value of the asset group. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows or external appraisals, as appropriate. Details of long-lived asset impairments are included in note 4 to the audited, consolidated financial statements. 52 --------------------------------------------------------------------------------
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In estimating the useful lives and expected residual values of aircraft, we
consider actual experience with the same or similar aircraft types and volume
projections for our air products. Adverse changes in volume forecasts, or a
shortfall in our actual volume compared with our projections, could result in
our current aircraft capacity exceeding current or projected demand. This
situation could lead to an excess of aircraft, resulting in an impairment charge
or reduction in expected useful life that may result in increased depreciation
expense.
Revisions to estimates of useful lives and residual values could also be caused
by changes to our maintenance programs, governmental regulations, operational
intentions, or market prices for new and used aircraft of the same or similar
types. We periodically evaluate our estimates and assumptions, and adjust them,
as necessary, on a prospective basis through depreciation expense. In the fourth
quarter of 2022, we reduced the estimated residual value of our MD-11 aircraft
and associated engines to zero based on updated operational plans for these
aircraft and our expectations for their eventual disposal. In connection with
this change in estimate, during the fourth quarter of 2022 we recorded a
one-time depreciation charge to adjust the residual value of our
fully-depreciated MD-11 aircraft. Refer to note 4 to the audited, consolidated
financial statements for information on the impact to our results of operations.
Fair Value Measurements
In the normal course of business, we hold and issue financial instruments that contain elements of market risk, including derivatives, marketable securities and debt. Certain of these financial instruments are required to be recorded at fair value, principally derivatives, marketable securities and certain other investments. These financial instruments are measured and reported at fair value on a recurring basis based upon a fair value hierarchy (Levels 1, 2 and 3). 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). Certain financial instruments, including over-the-counter derivative instruments, are valued using pricing models that consider, among other factors, contractual and market prices, correlations, time value, credit spreads and yield curve volatility factors. Changes in the fixed income, foreign currency exchange and commodity markets will impact our estimates of fair value in the future, potentially affecting our results of operations. Further information on our accounting polices relating to fair value measurements can be found in note 1 to the audited, consolidated financial statements.
As of
categorized as either Level 1 or Level 2. Refer to notes 3, 9 and 17 to the
audited, consolidated financial statements for further information on these
instruments. A quantitative sensitivity analysis of our exposure to changes in
commodity prices, foreign currency exchange rates and interest rates is
presented in the Quantitative and Qualitative Disclosures about Market Risk
section of this report.
Our pension and postretirement plan assets include investments in hedge funds,
as well as private debt, private equity and real estate funds, which are
primarily measured using net asset value ("NAV") as a practical expedient for
fair value, as appropriate. These investments were valued at $9.6 billion as of
December 31, 2022 . In order to estimate NAV, we evaluate audited and unaudited
financial reports from fund managers and make adjustments for investment
activity between the date of the financial reports and December 31st . These
investments are not actively traded, and their values can only be estimated
using these assumptions. If our estimates of activity changed, this could have a
material impact on the reported value of these investments and on the return on
assets that we report. Refer to note 5 to the audited, consolidated financial
statements for further information on our pension and postretirement plan
assets.
Certain non-financial assets and liabilities are measured at fair value on a
nonrecurring basis, including property, plant and equipment, goodwill and
intangible assets. These assets are subject to fair value adjustments in certain
circumstances, such as when there is evidence of an impairment or when an asset
or disposal group is classified as held for sale.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In accounting for business acquisitions, we allocate the fair value of purchase
consideration to the assets acquired and liabilities assumed based on their
estimated fair values. Estimating the fair value of assets acquired and
liabilities assumed requires judgment, especially with respect to identified
intangible assets as there may be limited or no observable transactions within
the market, requiring us to develop internal models to estimate fair value. For
example, estimating the fair value of identified intangible assets may require
us to develop valuation assumptions, including but not limited to, future
expected cash flows from these assets, synergies and the cost of capital.
Certain inputs require us to determine assumptions that are reflective of a
market participant view of fair value. Changes in any of these assumptions may
materially impact the amount we recognize for identifiable assets and
liabilities, in addition to the residual amount allocated to goodwill.
Income Taxes
We make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the
calculation of income by legal entity and jurisdiction, tax credits, benefits
and deductions, and in the calculation of deferred tax assets and liabilities,
which arise from differences in the timing of recognition of revenue and expense
for tax and financial statement purposes, as well as tax, interest and penalties
related to uncertain tax positions. Significant changes to these estimates may
result in an increase or decrease to our tax provision in a subsequent period.
We assess the likelihood that we will be able to recover our deferred tax
assets. If recovery is not likely, we must increase our provision for taxes by
recording a valuation allowance against the deferred tax assets that we estimate
will not ultimately be recoverable. We believe that we will ultimately recover a
substantial majority of the deferred tax assets recorded on our consolidated
balance sheets. However, should there be a change in our ability to recover our
deferred tax assets, our tax provision would increase in the period in which we
determined that the recovery was not likely.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax regulations. We recognize liabilities for
uncertain tax positions based on a two-step process. The first step is to
evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. Once it is determined that the position meets the
recognition threshold, the second step requires us to estimate and measure the
largest amount of tax benefit that is more likely than not to be realized upon
ultimate settlement. The difference between the amount of recognizable tax
benefit and the total amount of tax benefit from positions filed or to be filed
with the tax authorities is recorded as a liability for uncertain tax benefits.
It is inherently difficult and subjective to estimate such amounts, as we have
to determine the probability of various possible outcomes. We reevaluate
uncertain tax positions on a quarterly basis. This evaluation is based on
factors including, but not limited to, changes in facts or circumstances,
changes in tax law, effectively settled issues under audit and new audit
activity. Such a change in recognition or measurement could result in the
recognition of a tax benefit or an additional charge to the tax provision.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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