Why did UPS's earnings decline so sharply in Q2 2024?

Operating profit fell 30.1% on a GAAP basis, driven mainly by a 3.1% rise in operating expenses against a 1.1% revenue decline. U.S. Domestic operating profit fell 38.3%, reflecting lower revenue per piece from product mix, higher compensation and benefits (including costs tied to the Teamsters labor agreement), and continued transformation spending. The one-time $94M international regulatory payment also weighed on GAAP results, though it is excluded from adjusted figures.

Is the $94 million international regulatory payment a recurring expense?

UPS characterizes it as a one-time payment to settle a challenge by Italian tax authorities to the deductibility of VAT payments to third-party service providers. The company says it does not expect this to recur and excludes it from adjusted metrics. Investors should still note that the matter arose from a review launched in Q4 2023 and reflects scrutiny of its international tax practices.

Did the updated 2024 guidance signal improvement or deterioration?

The guidance reflects a business still in transition. The ~9.4% adjusted operating margin for 2024 implies a second-half recovery, since first-half adjusted margins were lower than the full-year target. Revenue guidance of ~$93.0B is below the $91.0B-plus base implied by 2023 revenue of $91.0B only modestly, implying limited top-line growth. The guidance excludes the pending Coyote disposition and an announced acquisition, so the reported outlook could shift once those transactions close.

Why did UPS restart share buybacks now, and how sustainable is the dividend and capital return?

UPS restarted repurchases with a target of around $500M for 2024 and roughly $1B annually going forward. Six-month dividends paid were $2.7B, which exceeds six-month free cash flow of $3.4B only modestly, and free cash flow after dividends was still positive. However, adjusted total debt to adjusted EBITDA rose to 2.45x from 1.62x, and total debt and finance leases increased, so buybacks add leverage pressure. The sustainability of the $1B annual pace will depend on EBITDA recovery and free cash flow generation.

Is the volume recovery in the U.S. a durable turnaround?

U.S. Domestic average daily volume grew 0.7% year over year in Q2 2024, the first increase in nine quarters, with Ground volume up 2.3% offsetting declines in Next Day Air (-7.1%) and Deferred (-8.8%). Management attributes the gain partly to its strategy of pursuing lower-cost volume growth. Investors should monitor whether Ground growth persists and whether revenue per piece stabilizes, since the volume gain has not yet translated into revenue or margin growth.

UPS 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed July 23, 2024. Cited figures are marked; the original filing is the authoritative source.

UPS reported second-quarter 2024 consolidated revenue of $21.8 billion^a, down 1.1% year over year, and diluted GAAP EPS of $1.65 versus $2.42 a year earlier.

Adjusted diluted EPS was $1.79^b, down 29.5%. GAAP operating profit fell 30.1% to $1.94 billion, and adjusted operating profit fell 29.3% to $2.06 billion. GAAP results include a $94 million one-time payment to settle an Italian VAT-deductibility dispute, along with $26 million of after-tax transformation and other charges.

The most notable operational signal is that U.S. domestic average daily volume grew 0.7%^c year over year, the first U.S. volume growth in nine quarters, though revenue per piece fell 2.6% on product mix. Profitability remains under pressure. Adjusted operating margin was 9.5% consolidated, with U.S. Domestic at 7.1%, International at 18.9%, and Supply Chain Solutions at 7.3%.

Management said it expects operating profit to return to growth going forward, but the first-half decline versus 2023 was expected. Six-month free cash flow was $3.4 billion^d, down from $3.8 billion, and adjusted total debt to adjusted EBITDA rose to 2.45x from 1.62x a year earlier, reflecting lower EBITDA and higher debt. UPS updated full-year 2024 guidance to approximately $93.0 billion in consolidated revenue, an approximately 9.4% adjusted operating margin, and roughly $4.0 billion in capital expenditures, excluding the pending disposition of Coyote and an announced acquisition.

The company also restarted its share repurchase program, targeting about $500 million in 2024 repurchases and roughly $1 billion annually going forward. Investors will be watching whether volume recovery converts into margin recovery in the second half.

02—Key points

Key Highlights

Consolidated revenue of $21.8B, down 1.1% YoY; U.S. Domestic volume up 0.7% YoY, the first U.S. volume growth in nine quarters
GAAP diluted EPS of $1.65 (down 31.8%); adjusted diluted EPS of $1.79 (down 29.5%) excluding a $94M one-time Italian VAT settlement and $26M of after-tax transformation charges
Operating profit down 30.1% (GAAP) to $1.94B; adjusted operating margin of 9.5% versus 9.4% full-year guidance
U.S. Domestic operating margin of 7.0% (7.1% adjusted) versus a steep decline from prior year, with revenue per piece down 2.6% on product mix
Full-year 2024 guidance updated: revenue ~$93.0B, adjusted operating margin ~9.4%, capex ~$4.0B (excluding Coyote disposition and pending acquisition)
Share repurchases restarted with ~$500M targeted for 2024 and ~$1B annually thereafter
Adjusted total debt/adjusted EBITDA rose to 2.45x from 1.62x a year earlier; six-month free cash flow of $3.4B

03—Questions

Frequently Asked Questions

Why did UPS's earnings decline so sharply in Q2 2024?
Operating profit fell 30.1% on a GAAP basis, driven mainly by a 3.1% rise in operating expenses against a 1.1% revenue decline. U.S. Domestic operating profit fell 38.3%, reflecting lower revenue per piece from product mix, higher compensation and benefits (including costs tied to the Teamsters labor agreement), and continued transformation spending. The one-time $94M international regulatory payment also weighed on GAAP results, though it is excluded from adjusted figures.
Is the $94 million international regulatory payment a recurring expense?
UPS characterizes it as a one-time payment to settle a challenge by Italian tax authorities to the deductibility of VAT payments to third-party service providers. The company says it does not expect this to recur and excludes it from adjusted metrics. Investors should still note that the matter arose from a review launched in Q4 2023 and reflects scrutiny of its international tax practices.
Did the updated 2024 guidance signal improvement or deterioration?
The guidance reflects a business still in transition. The ~9.4% adjusted operating margin for 2024 implies a second-half recovery, since first-half adjusted margins were lower than the full-year target. Revenue guidance of ~$93.0B is below the $91.0B-plus base implied by 2023 revenue of $91.0B only modestly, implying limited top-line growth. The guidance excludes the pending Coyote disposition and an announced acquisition, so the reported outlook could shift once those transactions close.
Why did UPS restart share buybacks now, and how sustainable is the dividend and capital return?
UPS restarted repurchases with a target of around $500M for 2024 and roughly $1B annually going forward. Six-month dividends paid were $2.7B, which exceeds six-month free cash flow of $3.4B only modestly, and free cash flow after dividends was still positive. However, adjusted total debt to adjusted EBITDA rose to 2.45x from 1.62x, and total debt and finance leases increased, so buybacks add leverage pressure. The sustainability of the $1B annual pace will depend on EBITDA recovery and free cash flow generation.
Is the volume recovery in the U.S. a durable turnaround?
U.S. Domestic average daily volume grew 0.7% year over year in Q2 2024, the first increase in nine quarters, with Ground volume up 2.3% offsetting declines in Next Day Air (-7.1%) and Deferred (-8.8%). Management attributes the gain partly to its strategy of pursuing lower-cost volume growth. Investors should monitor whether Ground growth persists and whether revenue per piece stabilizes, since the volume gain has not yet translated into revenue or margin growth.

04—Continue

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