Why did UPS's reported earnings fall so sharply in Q4 2023?

Lower volumes across U.S. Domestic and International, along with rate declines in forwarding, reduced revenue by 7.8%. Reported diluted EPS of $1.87 also included a $0.60 per-share charge, comprising a non-cash pension mark-to-market loss, transformation costs, and a Coyote trade name impairment. Excluding these items, adjusted EPS was $2.47, still down 31.8% year over year.

What does the 2024 guidance imply for profitability?

UPS guided to 2024 revenue of $92.0B to $94.5B and an adjusted consolidated operating margin of 10.0% to 10.6%. That range is above the 2023 adjusted operating margin of 10.9%? No: it sits modestly below it, so the guidance implies margins roughly flat to slightly lower than 2023, with the midpoint suggesting a modest revenue recovery. The guidance is on an adjusted basis because future pension and other items cannot be predicted.

Is UPS's dividend at risk given the earnings decline?

The dividend appears well covered for now. UPS declared a $1.63 quarterly dividend, a $0.01 increase, and expects 2024 dividend payments of about $5.4 billion. That compares with 2023 free cash flow of $5.3 billion, so the payout is roughly in line with free cash flow, which warrants monitoring if free cash flow does not improve.

How healthy is UPS's balance sheet?

Adjusted total debt to adjusted EBITDA was 2.15x at year-end 2023, up from 1.44x a year earlier, reflecting lower EBITDA and higher debt. Total debt including finance leases rose to $22.3B. Adjusted ROIC remained solid at 21.9%, though it declined from 31.3% in 2022.

Which parts of the business drove the weakness?

Supply Chain Solutions was the weakest segment, with Q4 revenue down 11.4% and forwarding revenue down 27.0%, reflecting market rate declines and excess capacity. International revenue fell 6.9% on softness in Europe. U.S. Domestic was the largest contributor to absolute revenue decline, with ground volume down 5.8% and Next Day Air down 11.5%.

UPS 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed January 30, 2024. Cited figures are marked; the original filing is the authoritative source.

UPS reported fourth-quarter 2023 results that were sharply weaker year over year.

Consolidated revenue fell 7.8% to $24.9 billion^a, driven by a 7.4% decline in U.S. Domestic average daily volume and an 8.3% decline in International volume, with Supply Chain Solutions revenue down 11.4% on lower forwarding rates and excess market capacity. Reported diluted EPS was $1.87 versus $3.96 a year earlier, while adjusted diluted EPS was $2.47 versus $3.62, down 31.8%. Adjusted consolidated operating margin was 11.2% for the quarter, and the GAAP results included a $512 million ($0.60 per share) charge made up of a non-cash pension mark-to-market loss, transformation costs, and an impairment of the Coyote trade name.

For full-year 2023, revenue was $91.0 billion^b (down 9.3%), adjusted operating profit was $9.9 billion (down 28.7%), and free cash flow was $5.3 billion on $10.2 billion of operating cash flow. UPS returned $7.6 billion to shareowners through dividends and buybacks. Adjusted ROIC was 21.9%, and adjusted total debt to adjusted EBITDA was 2.15x, indicating a still-manageable leverage profile despite the earnings decline.

For 2024, management guided to revenue of $92.0 to $94.5 billion^c and an adjusted operating margin of 10.0% to 10.6%, with capital expenditures of about $4.5 billion and dividends of around $5.4 billion. The company also announced a $0.01 increase in its quarterly dividend to $1.63 per share, the 15th consecutive annual increase.

Investors will likely focus on whether volume stabilizes in U.S. Domestic and Europe and whether the margin recovery guidance is achievable given the decline in forwarding and the one-time labor and pension items. (Note: this analysis reflects only the content of the filing provided.)

02—Key points

Key Highlights

Q4 2023 revenue fell 7.8% to $24.9B; U.S. Domestic revenue down 7.3% on a 7.4% drop in average daily volume.
Q4 2023 diluted EPS was $1.87 (GAAP) versus $2.47 adjusted, down 31.8% from $3.62 adjusted in Q4 2022.
Supply Chain Solutions revenue fell 11.4% and adjusted operating margin compressed to 9.4%, driven by forwarding rate declines and excess market capacity.
Full-year 2023 adjusted operating profit was $9.9B (down 28.7%), with adjusted operating margin of 10.9%.
Free cash flow for 2023 was $5.3B, and UPS returned $7.6B to shareowners through dividends and buybacks.
2024 guidance calls for revenue of $92.0B to $94.5B and adjusted operating margin of 10.0% to 10.6%.
Quarterly dividend raised by $0.01 to $1.63 per share, the 15th consecutive annual increase; payable March 8, 2024.

03—Questions

Frequently Asked Questions

Why did UPS's reported earnings fall so sharply in Q4 2023?
Lower volumes across U.S. Domestic and International, along with rate declines in forwarding, reduced revenue by 7.8%. Reported diluted EPS of $1.87 also included a $0.60 per-share charge, comprising a non-cash pension mark-to-market loss, transformation costs, and a Coyote trade name impairment. Excluding these items, adjusted EPS was $2.47, still down 31.8% year over year.
What does the 2024 guidance imply for profitability?
UPS guided to 2024 revenue of $92.0B to $94.5B and an adjusted consolidated operating margin of 10.0% to 10.6%. That range is above the 2023 adjusted operating margin of 10.9%? No: it sits modestly below it, so the guidance implies margins roughly flat to slightly lower than 2023, with the midpoint suggesting a modest revenue recovery. The guidance is on an adjusted basis because future pension and other items cannot be predicted.
Is UPS's dividend at risk given the earnings decline?
The dividend appears well covered for now. UPS declared a $1.63 quarterly dividend, a $0.01 increase, and expects 2024 dividend payments of about $5.4 billion. That compares with 2023 free cash flow of $5.3 billion, so the payout is roughly in line with free cash flow, which warrants monitoring if free cash flow does not improve.
How healthy is UPS's balance sheet?
Adjusted total debt to adjusted EBITDA was 2.15x at year-end 2023, up from 1.44x a year earlier, reflecting lower EBITDA and higher debt. Total debt including finance leases rose to $22.3B. Adjusted ROIC remained solid at 21.9%, though it declined from 31.3% in 2022.
Which parts of the business drove the weakness?
Supply Chain Solutions was the weakest segment, with Q4 revenue down 11.4% and forwarding revenue down 27.0%, reflecting market rate declines and excess capacity. International revenue fell 6.9% on softness in Europe. U.S. Domestic was the largest contributor to absolute revenue decline, with ground volume down 5.8% and Next Day Air down 11.5%.

04—Continue

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