Grade: D — Two Fails, One Watch Item, Revenue Declining
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed February 17, 2026, FY ended December 31, 2025) + Yahoo Finance
Auditor: Deloitte & Touche LLP (PCAOB ID: 34) — Unqualified opinion (Critical audit matters: Goodwill — Global Freight Forwarding and Healthcare Logistics Distribution reporting units)
One-line verdict: UPS is shrinking. Revenue fell 2.6% to $88,661M — the third consecutive year of decline from the $100,338M FY2022 peak — and net income declined 3.6% to $5,572M. Operating profit fell $601M to $7,867M with operating margin compressing 60 basis points to 6.9% (non-GAAP adjusted operating margin improved 20bp to 7.5%). The two fails are cash covering only 21% of $28.6B debt and goodwill+intangibles at 61% of equity, with Deloitte flagging goodwill impairment risk in the Global Freight Forwarding and Healthcare Logistics Distribution reporting units. Goodwill+intangibles surged 34% YoY — the E2 watch. The company has recorded $182M in asset impairment charges. Cash flow remains solid (CFFO/NI of 1.52x) but is declining.
| Metric | Result |
|---|---|
| Red Flags | **2** (C4 cash-to-debt 21%, D1 goodwill 61% equity) |
| Watch Items | **1** (E2 goodwill+intangibles surged 34%) |
| Checks Completed | **15/18** |
| Beneish M-Score | **N/A** (insufficient data) |
| Altman Z-Score | **2.26** (grey zone) |
| F-Score (Fraud Probability) | **0.56** (0.21% probability) |
A Logistics Giant Under Pressure
UPS operates through three segments: U.S. Domestic Package, International Package, and Supply Chain Solutions. The company has been executing a "transformation strategy" to become a more efficient, customer-centric logistics provider.
Deloitte's critical audit matter is alarming: goodwill impairment risk in the Global Freight Forwarding and Healthcare Logistics Distribution reporting units. The 10-K discloses: "certain of our reporting units experienced a decrease in the excess of their estimated fair values over their respective carrying values during each year. We have been and may be required in the future to recognize additional impairments." The company already recorded $182M in asset impairment charges. Goodwill+intangibles surging 34% YoY (from acquisitions) while revenue declines creates a divergent trajectory.
Per the MD&A: "Operating Profit and Margin. Operating profit decreased $419 million, with operating margin decreasing 60 basis points to 6.9%." On an adjusted basis: "Non-GAAP adjusted operating profit increased $88 million, with non-GAAP adjusted operating margin increasing 20 basis points to 7.5%."
Financial Performance: Revenue Decline Year Three
| Metric | FY2025 | FY2024 | FY2023 | FY2022 |
|---|---|---|---|---|
| Total Revenue | $88,661M | $91,070M | $90,958M | $100,338M |
| Gross Profit | $16,030M | $16,356M | $17,238M | $21,014M |
| Gross Margin | 18.1% | 18.0% | 19.0% | 20.9% |
| Operating Income | $7,867M | $8,468M | $9,141M | $13,094M |
| Net Income | $5,572M | $5,782M | $6,708M | $11,548M |
| EBITDA | $11,927M | $11,917M | $12,726M | $18,717M |
| Interest Expense | $1,017M | $866M | $787M | $704M |
The trajectory is negative across the board. Revenue has declined $11.7B (-12%) from the FY2022 peak. Net income has been cut in half from $11,548M to $5,572M. Operating margin has compressed from 13.0% to 8.9%.
Interest expense is rising ($704M to $1,017M, +44% over three years) as debt grows, creating a headwind during a period of declining revenue. The combination of rising interest costs and falling revenue is the classic risk pattern.
Cash Flow: Still Healthy but Declining
| Metric | FY2025 | FY2024 | FY2023 | FY2022 |
|---|---|---|---|---|
| Operating Cash Flow | $8,450M | $10,122M | $10,238M | $14,104M |
| CapEx | $(3,685)M | $(3,909)M | $(5,158)M | $(4,769)M |
| Free Cash Flow | $4,765M | $6,213M | $5,080M | $9,335M |
| Buybacks | $(1,000)M | $(500)M | $(2,250)M | $(3,500)M |
| Dividends | $(5,398)M | $(5,399)M | $(5,372)M | $(5,114)M |
| D&A | $3,746M | $3,609M | $3,366M | $3,188M |
CFFO/NI of 1.52x remains healthy. However, CFFO has declined 40% from $14.1B to $8.5B over three years. FCF of $4,765M is well below the $5,398M dividend payout — UPS is not covering its dividend from free cash flow in FY2025. The gap is being funded by debt ($28.6B total, up from $25.7B last year).
Dividend coverage: FCF/Dividends = 0.88x. This is unsustainable if the revenue decline continues. UPS would need to cut the dividend or further reduce CapEx/buybacks.
Balance Sheet: Growing Debt, Shrinking Equity
| Item | Dec 31, 2025 | Dec 31, 2024 |
|---|---|---|
| Cash & Equivalents | $5,887M | $6,112M |
| Accounts Receivable | $11,209M | $10,871M |
| Inventories | $739M | $826M |
| Total Current Assets | $19,045M | $19,310M |
| Goodwill | $5,837M | $4,300M |
| Other Intangible Assets | $4,021M | $3,064M |
| Total Assets | $73,090M | $70,070M |
| Total Debt | $28,590M | $25,652M |
| Total Liabilities | $56,835M | $53,327M |
| Stockholders' Equity | $16,227M | $16,718M |
| Retained Earnings | $20,151M | $20,882M |
Goodwill jumped $1.5B ($4,300M to $5,837M, +36%) and intangibles grew $957M ($3,064M to $4,021M, +31%). Combined goodwill+intangibles of $9.9B at 61% of equity, plus the Deloitte CAM flagging impairment risk in specific reporting units, is concerning. The acquisitions driving this growth occurred while the core business was shrinking.
Total debt grew $2.9B from $25.7B to $28.6B. Equity declined from $16.7B to $16.2B. Retained earnings fell from $20,882M to $20,151M — dividends exceeded net income. This capital structure is moving in the wrong direction.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 46 days, +3 days YoY |
| A2 | AR vs Revenue Growth | PASS | AR +3.1% vs revenue -2.6% |
| A3 | Revenue vs CFFO | PASS | Revenue -2.6%, CFFO -16.5% |
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | PASS | Inventory -10.5% vs COGS -2.8% |
| B2 | CapEx vs Revenue | PASS | CapEx -5.7% vs revenue -2.6% |
| B3 | SG&A Ratio | N/A | Insufficient data |
| B4 | Gross Margin | PASS | 18.1%, +0.1pp |
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.52 |
| C2 | Free Cash Flow | PASS | FCF $4.8B, FCF/NI = 0.86 |
| C3 | Accruals Ratio | PASS | -3.9% — low |
| C4 | Cash vs Debt | **FAIL** | Cash $5.9B covers 21% of debt $28.6B |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | **FAIL** | $9.9B = 61% of equity |
| D2 | Leverage | PASS | Debt/EBITDA = 2.4x |
| D3 | Soft Asset Growth | PASS | Other assets +5.0% vs revenue -2.6% |
| D4 | Asset Impairment | N/A | No write-off data |
Acquisition Risk & Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | WATCH | Goodwill+intangibles surged 34% YoY |
| F1 | Beneish M-Score | N/A | Insufficient data |
Key Risks from the 10-K
1. Goodwill Impairment Risk — Deloitte's Critical Audit Matter
Deloitte identified goodwill impairment risk in the Global Freight Forwarding and Healthcare Logistics Distribution reporting units. The 10-K confirms: "certain of our reporting units experienced a decrease in the excess of their estimated fair values over their respective carrying values during each year." With $5.8B of goodwill and declining revenue, impairment risk is elevated. The $182M in asset impairment charges already recorded may be the beginning, not the end.
2. Dividend Sustainability
FCF of $4,765M does not cover dividends of $5,398M. FCF/Dividends ratio of 0.88x means UPS is borrowing to fund its dividend. With total debt growing from $25.7B to $28.6B, this trajectory is unsustainable without revenue stabilization.
3. Revenue Decline and Customer Concentration
Revenue has declined 12% from FY2022's $100.3B peak. The transformation strategy has not yet reversed the trend. Amazon (a significant but declining customer) and USPS contract changes create volume uncertainty. The 10-K references "Transformation Strategy Costs" of $123M in FY2025.
4. Rising Interest Costs
Interest expense grew 44% from $704M to $1,017M over three years as total debt increased. If revenue continues to decline while interest costs rise, the margin squeeze intensifies.
Summary
Grade: D. Two fails (cash-to-debt 21%, goodwill 61% of equity) plus one watch item (goodwill surge 34%). The Altman Z-Score of 2.26 places UPS in the grey zone.
The most concerning pattern is the combination of declining revenue, growing debt, rising interest costs, goodwill growth from acquisitions, and a dividend that exceeds free cash flow. These are the ingredients for a potential dividend cut or goodwill impairment event.
Cash flow quality remains solid (CFFO/NI of 1.52x, low accruals), which means the reported earnings are real — the problem is that the earnings are declining. The transformation strategy needs to reverse the revenue trajectory before the capital structure deteriorates further.
Deloitte's focus on goodwill impairment as the critical audit matter is the signal to watch: if the Global Freight Forwarding or Healthcare Logistics reporting units fail the impairment test, a multi-billion-dollar write-down would materially impact equity.
**Disclaimer**: This report is based on United Parcel Service's FY2025 10-K filed with SEC EDGAR on February 17, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Deloitte & Touche LLP (PCAOB ID: 34, Unqualified opinion, critical audit matters — Goodwill impairment in Global Freight Forwarding and Healthcare Logistics Distribution)
Fiscal year ended: December 31, 2025