Securities and Exchange Commission

Washington, D.C. 20549

_____________________________________



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

_____________________________________

____________________

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of ~~“accelerated~~“large accelerated filer”, ~~“large accelerated~~“accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~Check one:~~

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

There were ~~157,067,643~~156,294,266 Class A shares, and ~~700,755,043~~707,081,218 Class B shares, with a par value of $0.01 per share, outstanding at ~~October 16, 2019.~~July 20, 2020.

PART I. FINANCIAL INFORMATION

Cautionary Statement About Forward-Looking Statements

This report, our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 and our other filings with the Securities and Exchange Commission contain and refer to “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than those of current or historical fact, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof, and similar terms, are intended to be forward-looking statements. Forward-looking statements are made subject to the safe harbor provisions of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

From time to time, we also include forward-looking statements in other publicly disclosed materials. Such statements may relate to our intent, belief and current expectations about our strategic direction, prospects and future results, and give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any forward-looking statements because such statements speak only as of the date when made.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience, ~~and our~~ present expectations or anticipated results. These risks and uncertainties, many of which are outside of our control, include, but are not limited to: uncertainties related to the impact of the COVID-19 pandemic on our business and operations, financial condition, financial results and financial position, our customers and suppliers, and on the global economy; changes in general economic conditions, in the U.S. or internationally; significant competition on a local, regional, national and international basis; changes in our relationships with our significant customers; changes in the complex and stringent regulation in the U.S. and internationally (including tax laws and regulations); increased physical or data security requirements that may increase our costs of operations and reduce operating efficiencies; legal, regulatory or market responses to global climate change; results ~~from the negotiation~~of negotiations and ~~ratification~~ratifications of labor contracts; strikes, work stoppages or slowdowns by our employees; the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; changes in exchange rates or interest rates; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; our ability to maintain the image of our brand; breaches in data security; disruptions to the Internet or our technology infrastructure; interruptions in or impacts on our business from natural or man-made events or disasters including ~~terrorism;~~terrorist attacks, epidemics or pandemics; our ability to accurately forecast our future capital investment needs; exposure to changing economic, political and social developments in international and emerging markets; changes in business strategy, government regulations, or economic or market conditions that may result in substantial impairment of our assets; increases in our expenses or funding obligations relating to employee health, retiree health and/or pension benefits; potential additional tax liabilities in the U.S. or internationally; the potential for various claims and litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters; our ability to realize the anticipated benefits from acquisitions, joint ventures or strategic alliances; our ability to realize the anticipated benefits from our transformation initiatives; cyclical and seasonal fluctuations in our operating results; our ability to manage insurance and claims expenses; and other risks discussed in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, ~~2018 and subsequently filed reports, including~~2019, our Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2019.~~March 31, 2020 and subsequently filed reports. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of ~~predictions~~information contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements, except as required by law.

Item 1. Financial Statements

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019 (in millions)

See notes to unaudited, consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(In millions, except per share amounts)


	Three Months Ended June 30,									Six Months Ended June 30,
			2020			2019			2020			2019
Revenue	$	20,459		$	18,048		$	38,494		$	35,208
Operating Expenses:
Compensation and benefits	10,843			9,299			20,929			18,616
Repairs and maintenance	554			473			1,117			907
Depreciation and amortization	661			575			1,309			1,143
Purchased transportation	3,716			3,000			6,647			5,966
Fuel	499			857			1,260			1,627
Other occupancy	355			322			738			693
Other expenses	1,619			1,379			3,210			2,719
Total Operating Expenses	18,247			15,905			35,210			31,671
Operating Profit	2,212			2,143			3,284			3,537
Other Income and (Expense):
Investment income and other	328			220			673			435
Interest expense	(183)			(159)			(350)			(328)
Total Other Income and (Expense)	145			61			323			107
Income Before Income Taxes	2,357			2,204			3,607			3,644
Income Tax Expense	589			519			874			848
Net Income	$	1,768		$	1,685		$	2,733		$	2,796
Basic Earnings Per Share	$	2.04		$	1.95		$	3.16		$	3.23
Diluted Earnings Per Share	$	2.03		$	1.94		$	3.14		$	3.22

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Revenue $ 18,318
$ 17,444
$ 53,526
$ 52,013
Operating Expenses:
Compensation and benefits 9,590
9,015
28,206
27,084
Repairs and maintenance 485
437
1,392
1,294
Depreciation and amortization 587
524
1,730
1,662
Purchased transportation 2,984
3,216
8,950
9,570
Fuel 824
867
2,451
2,469
Other occupancy 346
321
1,039
1,003
Other expenses 1,374
1,337
4,093
3,911
Total Operating Expenses 16,190
15,717
47,861
46,993
Operating Profit 2,128
1,727
5,665
5,020
Other Income and (Expense):
Investment income and other 237
317
672
913
Interest expense (159 )
(155 ) (487 ) (457 )
Total Other Income and (Expense) 78
162
185
456
Income Before Income Taxes 2,206
1,889
5,850
5,476
Income Tax Expense 456
381
1,304
1,138
Net Income $ 1,750
$ 1,508
$ 4,546
$ 4,338
Basic Earnings Per Share $ 2.03
$ 1.74
$ 5.26
$ 5.01
Diluted Earnings Per Share $ 2.01
$ 1.73
$ 5.23
$ 4.99

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net Income	$	1,768	$	1,685	$	2,733	$	2,796
Change in foreign currency translation adjustment, net of tax	10		(33)		(131)		20
Change in unrealized gain (loss) on marketable securities, net of tax	3		5		5		9
Change in unrealized gain (loss) on cash flow hedges, net of tax	(114)		(12)		103		64
Change in unrecognized pension and postretirement benefit costs, net of tax	44		43		87		86
Comprehensive Income	$	1,711	$	1,688	$	2,797	$	2,975

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Net Income $ 1,750
$ 1,508
$ 4,546
$ 4,338
Change in foreign currency translation adjustment, net of tax (48 ) (28 ) (28 ) (112 )
Change in unrealized gain (loss) on marketable securities, net of tax (3 ) (1 ) 6
(4 )
Change in unrealized gain (loss) on cash flow hedges, net of tax 206
49
270
315
Change in unrecognized pension and postretirement benefit costs, net of tax 43
38
129
115
Comprehensive Income $ 1,948
$ 1,566
$ 4,923
$ 4,652

See notes to unaudited, consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

See notes to unaudited, consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Principles of Consolidation

In our opinion, the accompanying interim unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("~~U.S.~~ GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of ~~September~~June 30, ~~2019,~~2020, our results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019 and our cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. The results reported in these interim, unaudited, consolidated financial statements should not be regarded as ~~necessarily~~ indicative of results that may be expected for any other period or the entire year. The interim unaudited, consolidated financial statements should be read in conjunction with the audited, consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The fair values of our investment securities are disclosed in note 5,, our recognized multiemployer pension withdrawal liabilities in note 7,, our ~~short~~short- and long-term debt in note 9 and our derivative instruments in note 15. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.

The preparation of the accompanying interim unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of ~~the interim, unaudited, consolidated~~these financial statements, as well as the reported amounts of revenues and expenses during the reporting period. ~~Estimates~~

Although our estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. In particular, a number of estimates have been ~~prepared on~~and will continue to be affected by the ~~basis~~ongoing COVID-19 pandemic. The severity, magnitude and duration of the ~~most current~~pandemic, and ~~best information~~the resulting economic consequences, remain uncertain, rapidly changing and ~~actual results~~difficult to predict. As a result, our accounting estimates and assumptions may change over time as a consequence of the effects of COVID-19.

Such changes could ~~differ materially from those estimates.~~result in future impairments of goodwill, intangible assets, long-lived assets and investment securities, incremental credit losses on financial assets, decreases in the carrying amount of our tax assets, increases in our self-insurance liabilities or increases in our net pension and postretirement benefit obligations at the time of a measurement event.

For interim unaudited, consolidated financial statement purposes, we provide for accruals under our various company-sponsored employee benefit plans for each three month period based on one quarter of the estimated annual expense.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.2. RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In ~~February~~June 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") ~~2016-02,~~ ~~Leases (Topic 842)~~, which requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond twelve months. The new standard also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. Effective January 1, 2019, we adopted the requirements of this ASU using the modified retrospective approach. The adoption on January 1, 2019 resulted in the recognition of right-of-use assets for operating leases of approximately $2.65 billion and operating lease liabilities of approximately $2.70 billion. The consolidated financial statementsintroducing an expected credit loss methodology for the ~~three and nine months ended September 30, 2019 are presented under~~measurement of financial assets not accounted for at fair value. The methodology replaced the ~~new standard, while comparative periods presented have not been adjusted and continue to be reported in accordance with the previous standard.~~

We elected the transition package of practical expedients permitted within the standard. As a result, we did not reassess initial direct costs, lease classification, or whether our contracts contain or are leases. We also made an accounting policy election to not recognize right-of-use assets and liabilitiesprobable, incurred loss model for leases with an original lease term of twelve months or less, unless the leases include options to renew or purchase the underlying asset that are reasonably certain to be exercised. See note 10 for additional disclosures required by this ASU.

~~In March 2017, the FASB issued an ASU requiring the premium on callable debt securities to be amortized to the earliest call date.~~those assets. We adopted this standard on January 1, ~~2019. It~~2020. Upon adoption, we updated our process for calculating our allowance for credit losses to include reasonable and supportable forecasts that could affect expected collectability. In the second quarter of 2020, we increased our allowance for credit losses by $27 million based upon our current forecasts that reflect ongoing economic uncertainty resulting from the COVID-19 pandemic.

In January 2017, the FASB issued an ASU to simplify the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill using a hypothetical purchase price allocation. Under this ASU, goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We adopted this standard on January 1, 2020. Upon adoption, this ASU did not have a material impact on our consolidated financial position, results of operations or cash flows.

In August 2017, the FASB issued an ASU to enhance recognition of the economic results of hedging activities in the financial statements. In addition, the update made certain targeted improvements to simplify the application of hedge accounting guidance and increase transparency regarding the scope and results of hedging activities. We adopted this standard on January 1, 2019. It did not have a material impact on our consolidated financial position, results of operations or cash flows but did require additional disclosures. See note 15 for required disclosures pertaining to this ASU.

For accounting standards adopted in the period ended ~~September~~June 30, ~~2018,~~2019, refer to note 1 to our audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Other accounting pronouncements adopted during the periods covered by the unaudited, consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.

Accounting Standards Issued But Not Yet Effective

In ~~June 2016,~~December 2019, the FASB issued an ASU ~~introducing an expected credit loss methodology~~to simplify the accounting for income taxes. The update removes certain exceptions to the ~~measurement of financial assets not accounted for at fair value.~~general income tax principles. The ~~methodology replaces the probable, incurred loss model for those assets. The standard~~update will be effective for us in the first quarter of ~~2020.~~2021. We are evaluating the impact of its adoption on our consolidated financial statements and internal control over financial reporting environment, but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.

In ~~January 2017,~~March 2020, the FASB issued an ASU to ~~simplify~~temporarily ease the potential burden in accounting for ~~goodwill impairment.~~reference rate reform. The update ~~removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under this ASU, goodwill impairment will~~provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The guidance was effective upon issuance and generally can be ~~the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard will be effective for us in the first quarter of 2020.~~applied through December 31, 2022. We ~~continue to evaluate this update to determine~~are evaluating the impact of ~~its adoption on our consolidated financial statements and internal control over financial reporting environment, but do not expect~~ this ~~ASU to have a material impact~~update on our consolidated financial position, results of operations orand cash flows.

Other accounting pronouncements issued before, but not effective until after, ~~September~~June 30, ~~2019,~~2020, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. REVENUE RECOGNITION

Revenue Recognition

Substantially all of our revenues are from contracts associated with the ~~pick-up,~~pickup, transportation and delivery of packages and freight (“transportation services”), whether carried out by or arranged by UPS, either domestically or internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services to customers, both domestically and internationally, through our global network of company-owned and leased distribution centers and field stocking ~~locations, both domestically and internationally.~~locations.

Disaggregation of Revenue

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Revenue:
Next Day Air $ 2,146
$ 1,896
$ 6,160
$ 5,510
Deferred 1,248
1,066
3,494
3,215
Ground 8,061
7,475
23,431
22,293
U.S. Domestic Package 11,455
10,437
33,085
31,018

Domestic 689
678
2,069
2,094
Export 2,673
2,654
7,972
8,073
Cargo & Other 132
146
417
446
International Package 3,494
3,478
10,458
10,613

Forwarding 1,472
1,672
4,384
4,936
Logistics 846
790
2,511
2,356
Freight 852
867
2,486
2,497
Other 199
200
602
593
Supply Chain & Freight 3,369
3,529
9,983
10,382

Consolidated revenue $ 18,318

$ 17,444
$ 53,526
$ 52,013


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue:
Next Day Air	$	1,984	$	2,173	$	4,039	$	4,014
Deferred	1,298		1,157		2,495		2,246
Ground	9,792		7,820		17,996		15,370
U.S. Domestic Package	13,074		11,150		24,530		21,630

Domestic	719		690		1,407		1,380
Export	2,824		2,668		5,385		5,299
Cargo & Other	162		147		296		285
International Package	3,705		3,505		7,088		6,964

Forwarding	1,771		1,496		3,144		2,912
Logistics	977		833		1,822		1,665
Freight	724		861		1,490		1,634
Other	208		203		420		403
Supply Chain & Freight	3,680		3,393		6,876		6,614

Consolidated revenue	$	20,459	$	18,048	$	38,494	$	35,208

We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties ~~and~~are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis of revenue recognition in accordance with ~~U.S.~~ GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as ~~one~~a single contract, and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Within most of our contracts, the customer contracts with us to provide distinct services, such as transportation services. The vast majority of our contracts with customers for transportation services include only one performance obligation; the transportation services themselves. However, if a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation ~~in an amount~~ based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In certain business units, such as Logistics, we sell customized, customer-specific solutions in which we ~~provide a significant service of integrating~~integrate a complex set of tasks and components into a single capability (even if that single capability results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. In these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

Satisfaction of Performance Obligations

We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to another. Further, if we were unable to complete delivery to the final location, another entity would not need to ~~reperform~~re-perform the transportation service already performed.

As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost measure of progress for our package delivery contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including ancillary or accessorial fees and reductions for estimated customer incentives, are recorded proportionally as costs are incurred. Costs to fulfill include labor and other direct costs and an allocation of indirect costs. For our freight and freight forwarding contracts, an output method of progress based on time-in-transit is utilized as the timing of costs incurred does not best depict the transfer of control to the customer. In our Logistics business, we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount to which we have a right to invoice the customer.

Variable Consideration

It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the transaction price. These variable amounts are generally dependent upon achievement of certain incentive tiers or performance metrics. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts of revenue, which may be reduced by incentives or other contract provisions, in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of anticipated customer spending and all information (historical, current and forecasted) that is reasonably available to us.

Contract Modifications

Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct services. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Contract modifications that add additional distinct goods or services are treated as separate contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services. These contract modifications are accounted for prospectively as the remaining performance obligations are distinct.

Payment Terms

Under the typical payment terms of our customer contracts, the customer pays at periodic intervals (i.e., every 14 days, 30 days, 45 days, etc.) for shipments included on invoices received. Invoices are generated each week on the week-ending day, which is Saturday for the majority of our U.S. Domestic Package business, but could be another day depending on the business unit or the specific agreement with the customer. It is not customary business practice to extend payment terms past 90 days, and as such, we do not have a practice of including a significant financing component within our contracts with customers.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principal vs. Agent Considerations

In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. ~~U.S.~~ GAAP requires us to evaluate, using a control model, whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent). Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. Revenue and the associated purchased transportation costs are both reported on a gross basis within our statements of consolidated income.

Accounts Receivable, Net

Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when ~~they are incurred, which~~reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimate of the ~~probable~~current expected losses inherent in our ~~customer receivables~~accounts receivable at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, forward looking indicators, trends in customer payment frequency and judgments about the probable effects of relevant observable data, including present and future economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk.

In the second quarter, we increased our allowance for expected credit losses by $27 million ($50 million year-to-date) based upon current forecasts that reflect continuing economic uncertainty resulting from the COVID-19 pandemic. Our ~~total provision~~allowance for ~~doubtful accounts~~credit losses as of June 30, 2020 and December 31, 2019 was $153 and $93 million, respectively. Amounts for credit losses charged to expense before recoveries during the quarters ended ~~September~~June 30, 2020 and 2019 was $153 and ~~2018 was $40 and $35~~$105 million, ~~respectively, and $145 and $76 million during the nine months ended September 30, 2019 and 2018,~~ respectively.

Contract Assets and Liabilities

Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e., packages have been delivered), and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.

Contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance payments and billings in excess of revenue represent payments received from our customers that will be earned over the contract term. Deferred revenue represents the amount of consideration due from customers related to in-transit shipments that has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the advance payment will be earned. We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which typically occurs within a short window after period-end. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.

Contract assets related to in-transit packages were ~~$264~~$303 and ~~$234~~$272 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, net of deferred revenue related to in-transit packages of ~~$300~~$355 and ~~$236~~$264 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Contract assets are included within "Other current assets" in the consolidated balance sheets. Short-term contract liabilities related to ~~advanced~~advance payments from customers were $7 ~~and $5~~ million at ~~September~~both June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019. Short-term contract liabilities are included within "Other current liabilities" in the consolidated balance sheets. Long-term contract liabilities related to ~~advanced~~advance payments from customers were $26 million at ~~each of September~~both June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. Long-term contract liabilities are included within "Other Non-Current Liabilities" in the consolidated balance sheets.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. 4. STOCK-BASED COMPENSATION

We issue employee share-based awards under various incentive compensation plans, which permit the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units to eligible employees (restricted stock and stock units, restricted performance shares and performance units are herein referred to as "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date, and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.

The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.

Management Incentive Award Program ("MIP")

We award Restricted Units under the MIP to certain eligible management employees. For Restricted Units granted under the MIP prior to 2019, vesting generally occurs ratably over a five-year period on January 15th of each of the years following the grant date (except in the case of death, disability or ~~disability,~~retirement, in which case immediate vesting occurs). The grant value is expensed on a straight-line basis (less estimated forfeitures) ~~ratably~~ over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs). These historical awards will continue to vest through 2023.

Beginning with the MIP grant in the first quarter of 2019, Restricted Units vest one year following the grant date (except in the case of death, disability or ~~disability,~~retirement, in which case immediate vesting occurs). The grant value is expensed on a straight-line basis (less estimated forfeitures) ~~ratably~~ over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs).

Based on the date that the eligible management population and performance targets were approved for the ~~2018~~2019 MIP, ~~award (granted in the first quarter of 2019),~~ we determined the award measurement dates to be February 6, ~~2019~~2020 (for U.S.-based ~~employees other than management committee~~ employees), February ~~14, 2019~~12, 2020 (for ~~management committee employees)~~executive management) and March ~~25, 2019~~23, 2020 (for international-based employees); therefore, the Restricted Units awarded were valued for stock compensation expense purposes using the closing New York Stock Exchange ("NYSE") price of ~~$108.82, $111.80~~$106.51, $105.54 and ~~$106.90~~$91.90 on those dates, respectively.

Long-Term Incentive Performance Award Program ("LTIP")

We award Restricted Units under the LTIP to certain eligible management employees. These Restricted Units generally vest at the end of a three-year performance period (except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis). The number of Restricted Units earned ~~will be~~is based on the ~~percentage~~ achievement of the performance targets established on the grant date. ~~The~~

For awards granted prior to 2020, the performance targets are equally-weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total ~~shareowner~~shareholder return ("RTSR") relative to a peer group of companies.

For the two-thirds of the award related to ROIC and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these Restricted Units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. We recognize the grant date fair value of this portion of the award (less estimated forfeitures) as compensation expense ratably over the vesting period.

~~Based~~Beginning with the LTIP grant that was made in the second quarter of 2020, the performance targets are equally weighted between adjusted earnings per share and adjusted cumulative free cash flow. The final number of Restricted Units earned will then be subject to adjustment based on RTSR relative to the Standard & Poors 500 Index ("S&P 500"). We determine the grant date fair value of the Restricted Units using a Monte Carlo model and recognize compensation expense (less estimated forfeitures) ratably over the vesting period, based on the ~~date that the eligible management population and performance targets were approved for the 2019 LTIP award, we determined the award measurement date~~number of awards expected to be March 22, 2019; therefore, the target Restricted Units awarded for the ROIC and growth in currency-constant consolidated revenue portions of the award were valued for stock compensation expense using the closing New York Stock Exchange price of $107.35 on that date.earned.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the 2020 award, the LTIP will be subdivided into two measurement periods. The first measurement period will evaluate the achievement of the performance targets for the year 2020. The second measurement period will evaluate the achievement of the performance targets for the years 2021 through 2022. The performance targets for the second measurement period will be determined at a future date.

~~During~~

Based on the ~~third~~date that the eligible management employees and performance targets were approved for the 2020 LTIP, we determined the award measurement date for the first measurement period to be May 13, 2020. The target Restricted Units awarded were valued at $91.65.

In the second quarter, ~~of 2019,~~ we also awarded a one-time grant of Restricted Units that will vest over the same period as the ~~2019 LTIP award.~~2020 LTIP. Based on the date that the Compensation Committee approved this award, we determined the award measurement date for the first measurement period to be ~~July~~June 1, ~~2019; therefore,~~2020 and the target Restricted Units awarded ~~for the portion of the award related to consolidated operating return on invested capital and growth in consolidated revenue~~ were valued ~~for stock compensation expense~~at $99.08 using ~~the closing New York Stock Exchange price of $102.97 on that date.~~a Monte Carlo valuation.

The weighted-average assumptions used and the calculated weighted-average fair values of the first measurement period for the 2020 LTIP and the RTSR portion of the ~~LTIP awards granted in~~ 2019 ~~and 2018~~LTIP are as follows:

2019 2018
Risk-free interest rate 2.23 % 2.61 %
Expected volatility 19.64 % 16.51 %
Weighted-average fair value of units granted $ 123.44
$ 137.57
Share payout 115.04 % 123.47 %


	2020			2019
Risk-free interest rate	0.15		%	2.23		%
Expected volatility	27.52		%	19.64		%
Weighted-average fair value of units granted	$	92.25		$	123.44
Share payout	100.90		%	115.04		%

There is no expected dividend yield as units earn dividend equivalents.

Non-Qualified Stock Options

We grant non-qualified stock ~~option awards~~options to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards generally vest over a five-year period with approximately 20% of the award vesting at each anniversary of the grant date (except in the case of death, disability or ~~disability,~~retirement, in which case immediate vesting occurs). The options granted expire 10 years after the date of the grant. In the first quarter, ~~of 2019,~~ we granted 0.3 million stock options at a grant price of ~~$111.80,~~$105.54, which ~~is based on~~was the closing ~~New York Stock Exchange~~NYSE price on February ~~14, 2019.~~12, 2020. In the ~~first~~second quarter, ~~of 2018,~~ we granted ~~0.3 million and 0.01~~0.1 million stock options at a grant price of ~~$106.43 and $104.45, respectively,~~$99.28, which ~~is based on~~was the closing ~~New York Stock Exchange~~NYSE price on ~~March~~June 1, ~~2018 and March 22, 2018, respectively.~~2020.

The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the calculated weighted-average fair values of options granted in ~~2019~~2020 and ~~2018~~2019 are as follows:

2019 2018
Expected dividend yield 2.93 % 2.93 %
Risk-free interest rate 2.60 % 2.84 %
Expected life (in years) 7.5
7.5
Expected volatility 17.79 % 16.72 %
Weighted-average fair value of options granted $ 16.39
$ 15.23


	2020			2019
Expected dividend yield	3.51		%	2.94		%
Risk-free interest rate	1.26		%	2.60		%
Expected life (in years)	7.5			7.5
Expected volatility	19.25		%	17.79		%
Weighted-average fair value of options granted	$	11.74		$	16.34

~~Compensation~~Pre-tax compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the three months ended ~~September~~June 30, 2020 and 2019 was $137 and ~~2018 was $203~~$205 million, respectively, and ~~$129 million pre-tax, respectively. Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income~~ for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 was $368 and ~~2018 was $716 and $507~~$513 million ~~pre-tax,~~, respectively.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. 5. CASH AND INVESTMENTS

The following is a summary of marketable securities classified as trading and available-for-sale as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in millions):

Cost
Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value
September 30, 2019:
Current trading marketable securities:
Corporate debt securities $ 109
$ —
$ —
$ 109
Equity securities 2
—
—
2
Total trading marketable securities 111
—
—
111

Current available-for-sale securities:
U.S. government and agency debt securities 161
2
—
163
Mortgage and asset-backed debt securities 54
1
—
55
Corporate debt securities 150
3
—
153
Non-U.S. government debt securities 16
—
—
16
Total available-for-sale marketable securities 381
6
—
387

Total current marketable securities $ 492
$ 6
$ —
$ 498

Cost
Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value
December 31, 2018:
Current trading marketable securities:
Corporate debt securities $ 137
$ —
$ —
$ 137
Equity securities 2
—
—
2
Total trading marketable securities 139
—
—
139

Current available-for-sale securities:
U.S. government and agency debt securities 297
1
(1 ) 297
Mortgage and asset-backed debt securities 82
—
(1 ) 81
Corporate debt securities 275
—
(2 ) 273
Non-U.S. government debt securities 20
—
—
20
Total available-for-sale marketable securities 674
1
(4 ) 671

Total current marketable securities $ 813
$ 1
$ (4 ) $ 810


	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
June 30, 2020:
Current trading marketable securities:




Equity securities	2		—		—		2



Total trading marketable securities	2		—		—		2

Current available-for-sale securities:
U.S. government and agency debt securities	190		6		—		196
Mortgage and asset-backed debt securities	38		2		(1)		39
Corporate debt securities	151		4		—		155


Non-U.S. government debt securities	11		—		—		11


Total available-for-sale marketable securities	390		12		(1)		401

Total current marketable securities	$	392	$	12	$	(1)	$	403

	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
December 31, 2019:
Current trading marketable securities:


Corporate debt securities	$	112	$	—	$	—	$	112

Equity securities	2		—		—		2



Total trading marketable securities	114		—		—		114

Current available-for-sale securities:
U.S. government and agency debt securities	191		2		—		193
Mortgage and asset-backed debt securities	46		1		—		47
Corporate debt securities	130		3		—		133


Non-U.S. government debt securities	16		—		—		16


Total available-for-sale marketable securities	383		6		—		389

Total current marketable securities	$	497	$	6	$	—	$	503

Investment ~~Other-Than-Temporary~~ Impairments

We have concluded that 0 material ~~other-than-temporary~~ impairment losses existed as of ~~September~~June 30, ~~2019~~.2020. In making this determination, we considered the financial condition and prospects of each issuer, the magnitude of the losses compared with the ~~investments’~~ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Maturity Information

The amortized cost and estimated fair value of marketable securities at ~~September~~June 30, ~~2019,~~2020, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations with or without prepayment penalties.

Cost
Estimated
Fair Value
Due in one year or less $ 121
$ 121
Due after one year through three years 318
321
Due after three years through five years 7
8
Due after five years 44
46
490
496
Equity securities 2
2
$ 492
$ 498


	Cost		Estimated Fair Value
Due in one year or less	$	20	$	20
Due after one year through three years	324		332
Due after three years through five years	6		6
Due after five years	40		43
	390		401
Equity securities	2		2
	$	392	$	403

Non-Current Investments and Restricted Cash

Non-current investments and restricted cash are primarily associated with our self-insurance programs. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in various marketable securities and cash equivalents. Collateral provided is reflected in "Cash, Cash Equivalents and Restricted Cash" in the statements of consolidated cash flows. At September 30, 2019 and December 31, 2018, we had $145 and $142 million, respectively, in self-insurance investments and restricted cash.

We held a ~~$20 and $19~~$21 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. The quarterly change in investment fair value is recognized in "Investment income and other" in the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets of $3$2 and $9$3 million as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

~~The amounts described above are classified~~ We previously held various marketable securities and cash equivalents as ~~“Investments~~collateral under an escrow agreement to guarantee our self-insurance obligations. In 2019 we liquidated this investment balance and ~~Restricted Cash”~~pledged the required collateral with a surety bond. At June 30, 2020 and December 31, 2019, we had $1 and $0 million, respectively, in ~~the consolidated balance sheets.~~restricted cash.

A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows is shown below (in millions):

September 30, 2019 December 31, 2018 September 30, 2018
Cash and cash equivalents $ 4,040
$ 4,225
$ 4,097
Restricted cash 145
142
278
Total cash, cash equivalents and restricted cash $ 4,185
$ 4,367
$ 4,375


	June 30, 2020		December 31, 2019		June 30, 2019
Cash and cash equivalents	$	8,813	$	5,238	$	4,072
Restricted cash	1		—		144
Total cash, cash equivalents and restricted cash	$	8,814	$	5,238	$	4,216

Fair Value Measurements

Marketable securities valued utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. government debt securities, as these securities all have quoted prices in active markets. Marketable securities valued utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.

We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “Other non-current investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 7.33% and 8.16% as of September 30, 2019 and December 31, 2018, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis. The level 3 instruments measured on a recurring basis totaled $2 million as of September 30, 2019 and December 31, 2018, respectively.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information about our investments measured at fair value on a recurring basis as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
June 30, 2020:
Marketable Securities:
U.S. government and agency debt securities	$	196	$	—	$	—	$	196
Mortgage and asset-backed debt securities	—		39		—		39
Corporate debt securities	—		155		—		155

Equity securities	—		2		—		2
Non-U.S. government debt securities	—		11		—		11


Total marketable securities	196		207		—		403
Other non-current investments	21		—		—		21
Total	$	217	$	207	$	—	$	424

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Balance
September 30, 2019:
Marketable Securities:
U.S. government and agency debt securities $ 163
$ —
$ —
$ 163
Mortgage and asset-backed debt securities —
55
—
55
Corporate debt securities —
262
—
262
Equity securities —
2
—
2
Non-U.S. government debt securities —
16
—
16
Total marketable securities 163
335
—
498
Other non-current investments 20
—
2
22
Total $ 183
$ 335
$ 2
$ 520



December 31, 2019:
Marketable Securities:
U.S. government and agency debt securities	$	193	$	—	$	—	$	193
Mortgage and asset-backed debt securities	—		47		—		47
Corporate debt securities	—		245		—		245

Equity securities	—		2		—		2

Non-U.S. government debt securities	—		16		—		16

Total marketable securities	193		310		—		503
Other non-current investments	21		—		1		22
Total	$	214	$	310	$	1	$	525

There were 0 transfers of investments between Level 1 and Level 2 during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 or ~~2018.~~2019.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. 6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~ ~~consists~~2019 consisted of the following (in millions):

2019 2018
Vehicles $ 10,046
$ 9,820
Aircraft 18,481
17,499
Land 2,068
2,000
Buildings 4,920
4,808
Building and leasehold improvements 4,595
4,323
Plant equipment 12,369
11,833
Technology equipment 2,184
2,093
Construction-in-progress 3,195
2,112
57,858
54,488
Less: Accumulated depreciation and amortization (28,787 ) (27,912 )
$ 29,071
$ 26,576


	2020		2019
Vehicles	$	10,362	$	10,613
Aircraft	19,449		19,045
Land	2,096		2,087
Buildings	5,464		5,046
Building and leasehold improvements	4,842		4,898
Plant equipment	13,653		13,849
Technology equipment	2,652		2,206
Construction-in-progress	2,889		1,983
	61,407		59,727
Less: Accumulated depreciation and amortization	(29,968)		(29,245)
	$	31,439	$	30,482

As part of our ongoing investment in transformation, in 2018 we made prospective revisions to our estimates of useful lives for building improvements, vehicles and plant equipment which in general had the effect of lengthening the useful lives of these categories.

In the third quarter of 2019, depreciation expense increased $94 million, and net income decreased by $75 million, or $0.09 per share on a basic and diluted basis, as a result of investments in property,Property, plant and equipment ~~net~~purchased on account was $751 and $372 million as of ~~disposals~~June 30, 2020 and assets becoming fully depreciated. Depreciation expense decreased $31 million, and net income increased $26 million, or $0.03 per share on a basic and diluted basis, as a result of lengthening our estimated useful lives for various asset categories in the latter half of 2018. The combined effect of the foregoing was a net increase in depreciation expense of $63 million and a decrease in net income of $49 million, or $0.06 per share on a basic and diluted basis, for the quarter.

~~For the year-to-date period of~~December 31, 2019, depreciation expense increased $280 million, and net income decreased by $218 million, or $0.25 per share on a basic and diluted basis, as a result of investments in property, plant and equipment, net of disposals and assets becoming fully depreciated. Depreciation expense decreased $212 million, and net income increased $165 million, or $0.19 per share on a basic and diluted basis, as a result of lengthening our estimated useful lives for various asset categories in the latter half of 2018. The combined effect of the foregoing was a net increase in depreciation expense of $68 million and a decrease in net income of $53 million, or $0.06 per share on a basic and diluted basis, for the nine month period.respectively.

We continually monitor our aircraft fleet utilization in light of current and projected volume levels, ~~aircraft~~aviation fuel prices and other factors. Additionally, we monitor all other property, plant and equipment categories for any indicators that the carrying value of the assets may not be recoverable. ~~NaN~~There were 0 material impairment charges ~~on property, plant and equipment were recorded~~ during the ~~three and nine~~six months ended ~~September~~June 30, ~~2019~~2020 or ~~2018.~~2019.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. 7. EMPLOYEE BENEFIT PLANS

Company-Sponsored Benefit Plans

Information about the net periodic benefit cost for our company-sponsored pension and postretirement benefit plans ~~is as follows~~ for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~is as follows (in millions):

U.S. Pension Benefits
U.S. Postretirement
Medical Benefits

International
Pension Benefits
2019 2018 2019 2018 2019 2018
Three Months Ended September 30:
Service cost $ 360
$ 415
$ 6
$ 7
$ 15
$ 15
Interest cost 516
450
27
26
12
11
Expected return on assets (782 ) (800 ) (2 ) (2 ) (19 ) (19 )
Amortization of prior service cost 55
48
2
2
—
—
Net periodic benefit cost $ 149
$ 113
$ 33
$ 33
$ 8
$ 7

U.S. Pension Benefits
U.S. Postretirement
Medical Benefits

International
Pension Benefits
2019 2018 2019 2018 2019 2018
Nine Months Ended September 30:
Service cost $ 1,079
$ 1,246
$ 18
$ 21
$ 43
$ 47
Interest cost 1,550
1,349
81
78
35
34
Expected return on assets (2,347 ) (2,401 ) (6 ) (6 ) (57 ) (58 )
Amortization of prior service cost 164
145
5
6
1
—
Net periodic benefit cost $ 446
$ 339
$ 98
$ 99
$ 22
$ 23

During the first nine months of 2019, we contributed $2.065 billion and $256 million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We currently expect to contribute approximately $22 million over the remainder of the year to our pension benefit plans. Subject to market conditions, we continually evaluate opportunities for additional discretionary pension contributions.


	U.S. Pension Benefits									U.S. Postretirement Medical Benefits									International Pension Benefits
			2020			2019			2020			2019			2020			2019
Three Months Ended June 30:
Service cost	$	463		$	360		$	8		$	6		$	17		$	14
Interest cost	494			517			22			27			10			11
Expected return on assets	(887)			(783)			(2)			(2)			(21)			(19)


Amortization of prior service cost	54			55			2			1			1			1



Net periodic benefit cost	$	124		$	149		$	30		$	32		$	7		$	7

	U.S. Pension Benefits									U.S. Postretirement Medical Benefits									International Pension Benefits
	2020			2019			2020			2019			2020			2019
Six Months Ended June 30:
Service cost	$	927		$	719		$	15		$	12		$	33		$	28
Interest cost	988			1,034			45			54			20			23
Expected return on assets	(1,775)			(1,565)			(4)			(4)			(42)			(38)


Amortization of prior service cost	109			109			4			3			1			1



Net periodic benefit cost	$	249		$	297		$	60		$	65		$	12		$	14

The components of net periodic benefit cost other than current service cost are presented within “Investment income and other” in the statements of consolidated income.

During the first six months of 2020, we contributed $41 and $222 million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We currently expect to contribute approximately $1 billion over the remainder of the year to our pension benefit plans. Subject to market conditions, we continually evaluate opportunities for additional discretionary pension contributions.

Multiemployer Benefit Plans

We contribute to a number of multiemployer defined benefit and health and welfare plans under the terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 we had ~~$847~~$841 and ~~$852~~$845 million, respectively, recorded in "Other Non-Current Liabilities" ~~as well as~~and $7 million as of ~~September~~both June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, recorded in "Other current liabilities" on our consolidated balance sheets associated with our previous withdrawal from a multiemployer pension plan. This liability is payable in equal monthly installments over a remaining term of approximately 4342 years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of this withdrawal liability as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~$941~~$994 and ~~$832~~$929 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the CSPF and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF. Under our withdrawal agreement with the CSPF, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with applicable law.

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~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”). This change in law for the first time permitted multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury (“Treasury”). In May 2016, Treasury rejected the proposed plan submitted by the CSPF. In the first quarter of 2018, Congress established a Joint Select Committee to develop a recommendation to improve the solvency of multiemployer plans and the Pension Benefit Guaranty Corporation (“PBGC”) before a November 30, 2018 deadline. While the Committee’s efforts failed to meet its deadline, the Committee made significant progress towards finding solutions that will address the ~~long term~~long-term solvency of multiemployer pension plans. In the third quarter of 2019, the U.S. House of Representatives passed the Rehabilitation for Multiemployer Pensions Act of 2019 to provide assistance to critical and declining multiemployer pension plans. This bill is now with the U.S. Senate for consideration. UPS will continue to work with all stakeholders, including legislators and regulators, to implement an acceptable solution.

The CSPF has said that it believes a legislative solution to its funded status is necessary or that it will become insolvent in 2025, and we expect that the CSPF will continue to explore options to avoid insolvency. Numerous factors could affect the CSPF’s funded status and UPS’s potential obligation to pay coordinating benefits under the UPS/IBT Plan. Any obligation to pay coordinating benefits will be subject to a number of significant uncertainties, including whether the CSPF submits a revised MPRA filing and the terms thereof, or whether it otherwise seeks federal government assistance, as well as the terms of any applicable legislation, the extent to which benefits are paid by the PBGC and our ability to successfully defend legal positions we may take in the future under the MPRA, including the suspension ordering provisions, our withdrawal agreement and other applicable law.

We account for the potential obligation to pay coordinating benefits to the UPS Transfer Group under Accounting Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”), which requires us to provide a best estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely outcome to this matter and the broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities.

As such, our best estimate of the next most likely outcome at the December 31, ~~2018~~2019 measurement date was that the CSPF would submit and implement another benefit reduction plan under the MPRA during ~~2019.~~2020. We believe any MPRA filing would be designed to forestall insolvency by reducing benefits to participants other than the UPS Transfer Group to the maximum extent permitted, and then reducing benefits to the UPS Transfer Group by a lesser amount.

We evaluated this outcome using a deterministic cash flow projection, reflecting updated estimated CSPF cash flows and investment earnings, the lack of legislative action and the absence of a MPRA filing by the ~~CSPF.~~CSPF in 2019. As a result, at the December 31, ~~2018~~2019 measurement date, the best estimate of our projected benefit obligation ~~increased by $1.6 billion~~ for coordinating benefits that may be required to be directly provided by the UPS/IBT Plan to the UPS Transfer ~~Group.~~Group was $2.6 billion.

The future value of this estimate will be influenced by the terms and timing of any MPRA filing, changes in our discount rate, rate of return on assets and other actuarial assumptions, presumed solvency of the PBGC, as well as potential solutions resulting from federal government intervention. Any such event may result in a decrease or an increase in the best estimate of our projected benefit obligation. If the uncertainties are not resolved, it is reasonably possible that our projected benefit obligation could increase by approximately ~~$2.4~~$2.2 billion, resulting in a total obligation for coordinating benefits of approximately ~~$4.0 billion as previously disclosed.~~$4.8 billion. If a future change in law occurs, it may be a significant event requiring an interim remeasurement of the UPS/IBT Plan at the date the law is enacted. We will continue to assess the impact of these uncertainties on our projected benefit obligation in accordance with ASC 715.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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Collective Bargaining Agreements

We have approximately ~~283,000~~290,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. The current National Master Agreement ("NMA") was ratified on April 28, 2019, and runs through July 31, 2023. Most of the economic provisions of the NMA are retroactive to August 1, 2018, which is the effective date of the NMA. The UPS Freight business unit national master agreement was ratified on November 11, 2018.

We have approximately ~~2,800~~2,900 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA")~~, which~~. This collective bargaining agreement becomes amendable on September 1, ~~2021.~~2023.

We have approximately ~~1,400~~1,500 airline mechanics who are covered by a collective bargaining agreement with Teamsters Local 2727 which becomes amendable November 1, 2023. In addition, approximately ~~3,100~~3,300 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”). ~~On May 2, 2019, the IAM ratified a new~~The collective bargaining agreement ~~which~~with the IAM runs through July 31, 2024.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. 8. GOODWILL AND INTANGIBLE ASSETS

The following table indicates the allocation of goodwill by reportable segment as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in millions):

U.S. Domestic
Package

International
Package

Supply Chain &
Freight
Consolidated
December 31, 2018: $ 715
$ 417
$ 2,679
$ 3,811
Acquired —
2
3
5
Currency / Other —
(7 ) (26 ) (33 )
September 30, 2019: $ 715
$ 412
$ 2,656
$ 3,783


	U.S. Domestic Package		International Package		Supply Chain & Freight		Consolidated
December 31, 2019:	$	715	$	416	$	2,682	$	3,813
Acquired	—		—		—		—
Currency / Other	—		(6)		(20)		(26)
June 30, 2020:	$	715	$	410	$	2,662	$	3,787

The change in goodwill for both the International Package and Supply Chain & Freight segments was primarily due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.

~~Goodwill Impairment~~

We completed our annual goodwill impairment assessment for all reporting units and indefinite-lived intangible assets as of July 1, 2019, and determined that goodwill is not impaired. There were no triggering events identified during the third quarter of 2019. We will continue to monitor each reporting unit for triggering events that might require an update to our annual impairment evaluation between the annual assessment date and December 31, 2019.

The following is a summary of intangible assets as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in millions):

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
Value
September 30, 2019:
Capitalized software $ 4,004
$ (2,641 ) $ 1,363
Licenses 117
(57 ) 60
Franchise rights 146
(109 ) 37
Customer relationships 720
(261 ) 459
Trade name 200
—
200
Trademarks, patents and other 42
(30 ) 12
Total Intangible Assets, Net $ 5,229

$ (3,098 ) $ 2,131
December 31, 2018:
Capitalized software $ 3,693
$ (2,478 ) $ 1,215
Licenses 117
(36 ) 81
Franchise rights 145
(105 ) 40
Customer relationships 736
(217 ) 519
Trade name 200
—
200
Trademarks, patents and other 52
(31 ) 20
Total Intangible Assets, Net $ 4,943
$ (2,867 ) $ 2,075


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
June 30, 2020:
Capitalized software	$	4,329	$	(2,810)	$	1,519
Licenses	116		(78)		38
Franchise rights	146		(111)		35
Customer relationships	713		(305)		408
Trade name	200		—		200
Trademarks, patents and other	23		(16)		7
Total Intangible Assets, Net	$	5,527	$	(3,320)	$	2,207
December 31, 2019:
Capitalized software	$	4,125	$	(2,704)	$	1,421
Licenses	117		(64)		53
Franchise rights	146		(109)		37
Customer relationships	730		(282)		448
Trade name	200		—		200
Trademarks, patents and other	29		(21)		8
Total Intangible Assets, Net	$	5,347	$	(3,180)	$	2,167

As of ~~September~~June 30, ~~2019,~~2020, we had a trade name with a carrying value of $200 million and licenses with a carrying value of $4 million, which are deemed to be indefinite-lived intangible assets and are included in the table above.

Impairment tests for ~~the~~ finite-lived intangible assets are ~~only~~ performed when a triggering event occurs that may indicate that the carrying value of the intangible asset may not be recoverable. We recorded a $4 million impairment charge for finite-lived intangible assets in the second quarter. There was 0 impairment ~~of finite-lived assets~~ in ~~2019 and a $12 million impairment in 2018.~~2019.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. 9. DEBT AND FINANCING ARRANGEMENTS

The carrying value of our outstanding debt as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 consists of the following (in millions):

Principal
Amount
Carrying Value
Maturity 2019 2018
Commercial paper $ 2,054
2019-2020 $ 2,054
$ 2,662

Fixed-rate senior notes:
5.125% senior notes 1,000
2019 —
998
3.125% senior notes 1,500
2021 1,528
1,492
2.050% senior notes 700
2021 698
698
2.450% senior notes 1,000
2022 1,007
1,023
2.350% senior notes 600
2022 598
597
2.500% senior notes 1,000
2023 995
994
2.800% senior notes 500
2024 497
496
2.200% senior notes 400
2024 398
—
2.400% senior notes 500
2026 498
498
3.050% senior notes 1,000
2027 992
991
3.400% senior notes 750
2029 745
—
2.500% senior notes 400
2029 396
—
6.200% senior notes 1,500
2038 1,483
1,482
4.875% senior notes 500
2040 490
490
3.625% senior notes 375
2042 368
368
3.400% senior notes 500
2046 491
491
3.750% senior notes 1,150
2047 1,136
1,136
4.250% senior notes 750
2049 742
—
3.400% senior notes 700
2049 687
—
Floating-rate senior notes:

Floating-rate senior notes 350
2021 349
349
Floating-rate senior notes 400
2022 399
399
Floating-rate senior notes 500
2023 499
499
Floating-rate senior notes 1,041
2049-2067 1,028
1,029
8.375% Debentures:
8.375% debentures 424
2020 429
419
8.375% debentures 276
2030 281
274
Pound Sterling notes:
5.500% notes 82
2031 81
84
5.125% notes 559
2050 530
546
Euro senior notes:
0.375% notes 763
2023 759
797
1.625% notes 763
2025 759
798
1.000% notes 545
2028 542
570
1.500% notes 545
2032 541
569
Floating-rate senior notes 545
2020 544
572
Canadian senior notes:
2.125% notes 566
2024 564
548
Finance lease obligations 466
2019-3005 466
534
Facility notes and bonds 320
2029-2045 319
320
Other debt 8
2019-2022 8
13
Total debt $ 25,032
23,901
22,736
Less: Current maturities (2,161 ) (2,805 )
Long-term debt $ 21,740
$ 19,931


	Principal Amount				Carrying Value
				Maturity			2020			2019
Commercial paper	$	1,909	2020		$	1,908		$	3,234

Fixed-rate senior notes:
3.125% senior notes	1,500		2021		1,524			1,524
2.050% senior notes	700		2021		699			699
2.450% senior notes	1,000		2022		1,035			1,003
2.350% senior notes	600		2022		599			598
2.500% senior notes	1,000		2023		996			995
2.800% senior notes	500		2024		497			497
2.200% senior notes	400		2024		398			398
3.900% senior notes	1,000		2025		995			—
2.400% senior notes	500		2026		498			498
3.050% senior notes	1,000		2027		992			992
3.400% senior notes	750		2029		745			745
2.500% senior notes	400		2029		397			397
4.450% senior notes	750		2030		743			—
6.200% senior notes	1,500		2038		1,483			1,483
5.200% senior notes	500		2040		493			—
4.875% senior notes	500		2040		490			490
3.625% senior notes	375		2042		368			368
3.400% senior notes	500		2046		491			491
3.750% senior notes	1,150		2047		1,137			1,136
4.250% senior notes	750		2049		742			742
3.400% senior notes	700		2049		688			688
5.300% senior notes	1,250		2050		1,230			—
Floating-rate senior notes:
Floating-rate senior notes	350		2021		350			349
Floating-rate senior notes	400		2022		399			399
Floating-rate senior notes	500		2023		499			499
Floating-rate senior notes	1,039		2049-2067		1,027			1,028
8.375% Debentures:
8.375% debentures	—		2020		—			426
8.375% debentures	276		2030		281			281
Pound Sterling notes:
5.500% notes	82		2031		81			86
5.125% notes	560		2050		531			566
Euro senior notes:
0.375% notes	786		2023		783			779
1.625% notes	786		2025		782			779
1.000% notes	561		2028		559			556
1.500% notes	561		2032		558			556
Floating-rate senior notes	561		2020		561			559
Canadian senior notes:
2.125% notes	549		2024		547			571
Finance lease obligations	515		2020-2210		515			498
Facility notes and bonds	320		2029-2045		320			320
Other debt	7		2020-2025		7			8
Total debt	$	27,087			26,948			25,238
Less: Current maturities					(3,749)			(3,420)
Long-term debt					$	23,199		$	21,818

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Commercial Paper

We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as of ~~September~~June 30, ~~2019: $1.020~~2020: $1.7 billion with an average interest rate of ~~2.24%~~0.54% and ~~€949~~€228 million ($~~1.034 billion)~~256 million) with an average interest rate of ~~-0.37%~~-0.41%. As of ~~September~~June 30, ~~2019,~~2020, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheets.

Debt Classification

We have classified ~~both~~a portion of our ~~8.375% debentures due April 2020 with a principal balance of $424 million,~~debt instruments that mature within twelve months and ~~our €500 million ($545 million) floating-rate senior notes due July 2020, as long-term debt based on our intent and ability to refinance the debt as of September 30, 2019. We have classified~~ certain floating-rate senior notes ~~that are putable by the note holders~~with put options as long-term ~~debt~~ due to our intent and ability to refinance the ~~debt if the put option is exercised by the note holders.~~

debt.

Debt ~~Issuance~~Repayments

On April 1, 2020, our 8.375% senior notes with a principal balance of $424 million matured and were repaid in full.

Debt Issuances

On March ~~13, 2019~~24, 2020 we issued ~~two~~four series of notes, ~~both~~ in the following principal ~~amounts of~~amounts: $1.0 billion, $750 million. These fixed-rate notes bear interest at the rates of 3.40% and 4.25% and will mature on March 15, 2029 and March 15, 2049, respectively. Interest on the fixed-rate senior notes is payable semi-annually, beginning September 2019. The 3.40% fixed-rate senior notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of remaining scheduled payments of principal and interest due from the redemption date until three months prior to maturity, discounted to the redemption date on a semi-annual basis at the discount rate of the Treasury Rate plus 15 basis points, plus accrued and unpaid interest. The 4.25% fixed-rate senior notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of remaining scheduled payments of principal and interest due from the redemption date until six months prior to maturity discounted to the redemption date on a semi-annual basis at the discount rate of the Treasury Rate plus 20 basis points, plus accrued and unpaid interest.

~~On August 13, 2019 we issued three series of notes, two with principal amounts of $400~~million, $500 million and ~~one in the principal amount of $700 million.~~$1.25 billion. These notes bear interest at ~~the rates of 2.20%~~3.90%, ~~2.50%~~4.45%, 5.20% and ~~3.40%~~5.30%, respectively, and will mature on ~~September~~April 1, ~~2024, September~~2025, April 1, ~~2029~~2030, April 1, 2040 and ~~September~~April 1, ~~2049,~~2050, respectively. Interest on the notes is payable semi-annually, beginning ~~March~~October 2020. ~~The 2.20% senior~~Each series of notes ~~are~~is callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of scheduled payments of principal and interest, ~~due from~~plus accrued and unpaid interest.

In such event, the ~~redemption date until one month prior to maturity,~~present values of scheduled principal and interest payments are discounted to the redemption date on a semi-annual basis at the discount rate of the Treasury Rate plus 1050 basis points, ~~plus accrued~~ and ~~unpaid interest. The 2.50% senior~~are determined as follows:

•On the 3.90% notes, ~~are callable at our option at a~~payments from the redemption ~~price equal~~date until one month prior to maturity

•On the ~~greater of 100% of the principal amount, or the sum of the present values of scheduled~~4.45% notes, payments ~~of principal and interest due~~ from the redemption date until three months prior to maturity ~~discounted to~~

•On the ~~redemption date on a semi-annual basis at the discount rate of the Treasury Rate plus 15 basis points, plus accrued~~5.20% and ~~unpaid interest. The 3.40% senior~~5.30% notes, ~~are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of scheduled~~ payments ~~of principal and interest due~~ from the redemption date until six months prior to maturity ~~discounted to the redemption date on a semi-annual basis at the discount rate of the Treasury Rate plus 20 basis points, plus accrued and unpaid interest.~~

Sources of Credit

We maintain 2 credit agreements with a consortium of banks. One of these agreements provides a revolving credit ~~facility~~facilities of ~~$1.5~~$2.0 billion, and expires on December ~~10, 2019~~.8, 2020. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) ~~JPMorgan Chase Bank’s publicly announced~~the rate of interest last quoted by The Wall Street Journal as the prime ~~rate;~~rate in the United States; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. ~~The~~In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our one-year credit default swap spread, subject to a minimum rate of ~~0.10%~~0.25% and a maximum rate of ~~0.75%~~1.00%. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than ~~0.00%~~0%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate.There were no0 amounts outstanding under this facility as of ~~September~~June 30, ~~2019.~~2020.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The second agreement provides a revolving credit ~~facility~~facilities of ~~$3.0~~$2.5 billion, and expires on December 11, ~~2023~~.2023. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) ~~JPMorgan Chase Bank’s publicly announced~~the rate of interest last quoted by The Wall Street Journal as the prime ~~rate;~~rate in the United States; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our one-year credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than ~~0.00%~~0%). We are also able to request advances under this facility based on competitive bids ~~for the applicable interest rate.~~ . There were no0 amounts outstanding under this facility as of ~~September~~June 30, ~~2019.~~2020.

Debt Covenants

Our existing debt instruments and credit facilities subject us to certain financial covenants. As of ~~September~~June 30, ~~2019~~2020, and for all periods presented, we ~~were in compliance with all applicable~~have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of ~~September~~June 30, ~~2019,~~2020, 10% of net tangible assets was equivalent to ~~$3.453~~$4.0 billion; however, we ~~have~~had 0 covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.

Fair Value of Debt

Based on the borrowing rates currently available to us for debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately ~~$25.668~~$30.6 and ~~$23.293~~$26.9 billion as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. LEASES

We ~~adopted ASU 2016-02,~~ ~~Leases (Topic 842), on January 1, 2019. The standard requires lessees to~~ recognize a right-of-use ("ROU") asset and lease liability for all leases. Some of our leases contain both lease and non-lease components, which we have elected to treat as a single lease component. We have also elected not to recognize leases that have an original lease term, including reasonably certain renewal or purchase options, of twelve months or less in our consolidated balance sheets for all classes of underlying assets. Lease costs for short-term leases are recognized on a straight-line basis over the lease term. We elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are, or contain, leases, lease classification and determination of initial direct costs.

We lease property and equipment under finance and operating leases. We have finance and operating leases for package centers, airport facilities, warehouses, ~~corporate~~ office space, aircraft, aircraft engines, information technology equipment (primarily mainframes, servers and copiers), vehicles and various other equipment used in operating our business. Certain leases for real estate and aircraft contain options to purchase, extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the optional period and payments should be included in the calculation of the associated ROU asset and lease liability. In making this determination, we consider all relevant economic factors that would compel us to exercise or not exercise an option.

When our leases contain future payments that are dependent on an index or rate, such as the consumer price index, we initially measure the lease liability and ROU asset using the index or rate at the commencement date. In subsequent periods, lease payments dependent on an index or rate are not remeasured. Rather, changes to payments due to a change in an index or rate are recognized in our statements of consolidated income in the period of the change.

When available, we use the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of our leases. ~~In such cases,~~For these leases, we use an estimate of our incremental borrowing rate to discount lease payments based on information available at lease commencement. The incremental borrowing rate is derived using multiple inputs including our credit rating, the impact of full collateralization, lease term and denominated currency. The remaining lease terms vary from 1 month to 190 years.

Aircraft

In addition to the aircraft that we own, we have leases for ~~332~~321 aircraft. Of these leased aircraft, 3427 are classified as finance leases, 1215 are classified as operating leases and the remaining ~~286~~279 are classified as short-term leases. A majority of the obligations associated with the aircraft classified as finance leases have been legally defeased. ~~The~~Most of our long-term aircraft operating leases are operated by a third party to handle package and cargo volume in geographic regions where, due to government regulations, we are restricted from operating an airline.

In order to meet customers' needs, we charter aircraft to handle package and cargo volume on certain international trade lanes and domestic routes. Due to the nature of these agreements, primarily being that either party can cancel the agreement with short notice, we have classified these as short-term leases. Additionally, ~~all of~~ the lease payments associated with these charter agreements are variable in nature based on the number of hours flown.

Real Estate

We have operating and finance leases for package centers, airport facilities, warehouses, ~~corporate~~ office space and expansion facilities utilized during peak shipping periods. Many of our leases contain charges for common area maintenance or other ~~miscellaneous~~ expenses that are updated based on landlord estimates. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the ROU asset and associated lease liability.

Some of our real estate leases contain options to renew or extend the lease or terminate the lease before the expiration date. These options are factored into the determination of the lease term and lease payments when their exercise is considered to be reasonably certain.

We also enter into real estate leases that contain lease incentives, such as tenant improvement allowances or move-in allowances, that are received or receivable at lease commencement. These incentives reduce lease payments for classification purposes and reduce the initial ROU asset. When lease incentives are receivable at lease commencement, they also reduce the initial lease liability.

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From time to time, we enter into leases with the intention of purchasing the property, either through purchase options with a fixed price or a purchase agreement negotiated contemporaneously with the lease agreement. We classify these leases as finance leases and include the purchase date and purchase price in the lease term and lease payments, respectively, when the option to exercise or purchase is reasonably certain.

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~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Transportation equipment and other equipment

We enter into both long-term and short-term leases for transportation equipment to supplement our capacity or meet contractual demands. Some of these assets are leased on a month-to-month basis and the leases can be terminated without penalty. The lease term for these types of leases is determined by the length of the underlying customer contract or based on the judgment of the business unit. We also enter into multi-year leases for trailers to increase capacity during periods of high demand, which are typically only used for 90-120 days during the year. These leases are treated as short-term as the cumulative right-of-use is less than 12 months over the term of the contract.

The remainder of our leases are primarily related to equipment used in our air operations, vehicles required to meet capacity needs during periods of higher demand for our shipping services, technology equipment and office equipment used in our facilities.

Some of our transportation and technology equipment leases require us to make additional lease payments based on the underlying usage of the assets. Due to the variable nature of these costs, these are expensed as incurred and are not included in the ROU asset and lease liability.

The components of lease expense for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~are~~were as follows (in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Operating lease costs	$	172	166		$	347	$	323
Finance lease costs:
Amortization of assets	20		18		38		37
Interest on lease liabilities	5		4		10		9
Total finance lease costs	25		22		48		46
Variable lease costs	55		31		113		79
Short-term lease costs	253		209		456		439
Total lease costs	$	505	$	428	$	964	$	887

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2019
Operating lease costs $ 151
$ 474
Finance lease costs:

Amortization of assets 18
$ 55
Interest on lease liabilities 5
14
Total finance lease costs 23
69
Variable lease costs 69
148
Short-term lease costs 194
633
Total lease costs $ 437
$ 1,324

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Supplemental information related to leases and location within our consolidated balance sheets are as follows (in millions, except lease term and discount rate):


	June 30, 2020			December 31, 2019
Operating Leases:
Operating lease right-of-use assets	$	2,998		$	2,856

Current maturities of operating leases	$	534		$	538
Non-current operating leases	2,463			2,391
Total operating lease liabilities	$	2,997		$	2,929

Finance Leases:
Property, plant and equipment, net	$	1,403		$	1,502

Current maturities of long-term debt, commercial paper and finance leases	$	183		$	181
Long-term debt and finance leases	332			317
Total finance lease liabilities	$	515		$	498

Weighted average remaining lease term (in years):
Operating leases	9.6			9.7
Finance leases	8.2			8.9

Weighted average discount rate:
Operating leases	2.76		%	2.78		%
Finance leases	3.81		%	4.03		%

September 30, 2019
Operating Leases:
Operating lease right-of-use assets $ 2,504

Current maturities of operating leases $ 500
Non-current operating leases 2,063
Total operating lease liabilities $ 2,563

Finance Leases:
Property, plant and equipment, at cost $ 2,541
Accumulated amortization (979 )
Property, plant and equipment, net $ 1,562

Current maturities of long-term debt, commercial paper and finance leases $ 102
Long-term debt and finance leases 364
Total finance lease liabilities $ 466

Weighted average remaining lease term (in years):
Operating leases 9.1
Finance leases 9.8

Weighted average discount rate:
Operating leases 2.77 %
Finance leases 4.23 %

Supplemental cash flow information related to leases is as follows (in millions):


	Six Months Ended June 30,
	2020		2019
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases	$	338	$	311
Operating cash flows from finance leases	10		9
Financing cash flows from finance leases	33		85

Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	403	$	56
Finance leases	49		3

Nine Months Ended
September 30,
2019
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases $ 455
Operating cash flows from finance leases 11
Financing cash flows from finance leases 121

Right-of-use assets obtained in exchange for lease liabilities:
Operating leases $ 144

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Maturities of lease liabilities as of ~~September~~June 30, ~~2019~~2020 are as follows (in millions):

Finance Leases Operating Leases
2019 $ 26
$ 151
2020 149
546
2021 44
463
2022 39
384
2023 37
309
Thereafter 292
1,159
Total lease payments 587
3,012
Less: Imputed interest (121 ) (449 )
Total lease obligations 466
2,563
Less: Current obligations (102 ) (500 )
Long-term lease obligations $ 364
$ 2,063


	Finance Leases		Operating Leases
2020	$	168	$	299
2021	60		596
2022	55		506
2023	44		411
2024	36		300
Thereafter	259		1,420
Total lease payments	622		3,532
Less: Imputed interest	(107)		(535)
Total lease obligations	515		2,997
Less: Current obligations	(183)		(534)
Long-term lease obligations	$	332	$	2,463

As of ~~September~~June 30, ~~2019,~~2020, we have additional leases which have not commenced. These leases will commence in 2020 when we are granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained. ~~These leases will commence in 2019 and 2020.~~

~~Disclosures related to periods prior to adoption of the new lease standard~~

~~The following table sets forth the aggregate minimum lease payments under capital and operating leases (in millions) as of December 31, 2018:~~

Capital Leases Operating Leases
2019 $ 158
$ 578
2020 95
477
2021 42
399
2022 39
325
2023 36
262
After 2023 293
926
Total lease payments 663
2,967
Less: Imputed interest (129 )
Total lease obligations 534

Less: Current obligations (140 )
Long-term lease obligations $ 394

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NOTE 11. 11. LEGAL PROCEEDINGS AND CONTINGENCIES

We are involved in a number of judicial proceedings and other matters arising from the conduct of our ~~business activities.~~business.

Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious ~~defense~~defenses and will deny, liability in all pending matters, including (except as otherwise noted herein) the matters described below, and we intend to vigorously defend each matter. We accrue ~~for~~amounts associated with legal ~~claims~~proceedings when and to the extent ~~that, amounts associated with the claims become~~a loss becomes probable and can be reasonably estimated. The actual costs of resolving legal ~~claims~~proceedings may be substantially higher or lower than the amounts accrued ~~for~~on those claims.

For ~~those~~ matters as to which we are not able to estimate a possible loss or range of ~~loss,~~losses, we are not able to determine whether ~~the~~any such loss will have a material ~~adverse effect~~impact on our ~~business, financial condition, results of~~ operations or ~~liquidity.~~financial condition. For matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible loss or range of ~~loss.~~losses.

Judicial Proceedings

In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern District of New York, arising from alleged shipments of cigarettes to New York State and City residents. The complaint asserted claims under various federal and state laws. The complaint also included a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. On March 24, 2017, the District Court issued an opinion and order finding liability against UPS on each of the plaintiffs’ causes of action. On May 25, 2017, the District Court issued a corrected opinion and order on liability and an order awarding the plaintiffs damages of ~~$9.4~~$9 million and penalties of ~~$237.6~~$238 million. Following an appeal, on November 7, 2019, the U.S. Court of Appeals for the Second Circuit issued an order awarding the plaintiffs damages of $19 million and penalties of $79 million. An accrual of ~~$9.4~~$100 million with respect to ~~the damages awarded by the court~~this matter is included on our consolidated balance ~~sheets at September 30, 2019.~~sheets. We estimate that the amount of losses could be up to $247 million, plus interest; however, the amount of penalties ultimately payable, if any, is subject to a variety of complex factors and potential outcomes that ~~remain to~~could be determined in future legal ~~proceedings. Consequently, we are unable to reasonably estimate a likely amount~~proceedings, including our pending writ of ~~loss within that range. We strongly disagree~~certiorari with the District Court's analysis and conclusions, and have appealed to the United States Court of Appeals for the Second Circuit. The briefing and oral argument are now complete. We await a ruling by the Court of Appeals.U.S. Supreme Court.

We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with any such matter ~~would~~will have a material ~~adverse effect~~impact on our ~~financial condition, results of~~ operations or ~~liquidity.~~financial condition. One of these matters, Hughes v. UPS Supply Chain Solutions, Inc. and United Parcel Service, Inc. had previously been certified as a class action in Kentucky state court. In the second quarter of 2019, the court granted our motion for judgment on the pleadings related to the wage-and-hour claims. The plaintiffs have appealed this decision.

Other Matters

In October 2015, the Department of Justice ("DOJ") informed us of an industry-wide inquiry into the transportation of mail under the United States Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a Civil Investigative Demand seeking certain information relating to our contracts. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating with the DOJ. An immaterial accrual with respect to this matter is included on our consolidated balance sheets. We do not believe that any loss from this matter would have a material impact on our operations or financial condition, although we are unable to predict what action, if any, might be taken in the future by any government authorities as a result of their investigation. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

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In August 2016, Spain’s National Markets and Competition Commission (“CNMC”) announced an investigation into 10 companies in the commercial delivery and parcel industry, including UPS, related to alleged nonaggression agreements to allocate customers. In May 2017, UPS received a Statement of Objections issued by the CNMC. In July 2017, UPS received a Proposed Decision from the CNMC. On March 8, 2018, the CNMC adopted a final decision, finding an infringement and imposing aan immaterial fine on UPS. UPS ~~of €19.2 million. UPS has~~ appealed the decision and in September 2018, obtained a suspension of the implementation of the decision (including payment of the fine). The appeal is pending. ~~There are multiple factors~~We do not believe that ~~prevent us from being able to estimate the amount of~~any loss ~~if any, that may result~~ from this matter ~~including: (1) we~~would have a material impact on our operations or financial condition. We are vigorously defending ourselves and believe that we have a number of meritorious legal ~~defenses; and (2) there~~defenses. There are also unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

In February 2018, the Turkish Competition Authority (“Authority”) opened an investigation into nine companies, including UPS, in the small package industry related to alleged customer allocations in violation of Turkish competition law. In April 2018, the Authority consolidated this investigation with two other investigations involving similar allegations. The consolidated investigation involves over 30 companies. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

We are a party in various other matters that arose in the normal course of business. We do not believe that the eventual resolution of these other matters (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material ~~adverse effect~~impact on our ~~financial condition, results of~~ operations or ~~liquidity.~~financial condition.

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NOTE 12. 12. SHAREOWNERS' EQUITY

Capital Stock, Additional Paid-In Capital, ~~and~~ Retained Earnings and Non-Controlling Minority Interest

We maintain 2 classes of common stock, which are distinguished from each other ~~primarily~~ by their respective voting rights. Class A shares of UPS are entitled to 10 votes per share, whereas class B shares are entitled to 1 vote per share. Class A shares are primarily held by UPS employees and retirees, as well as trusts and descendants of the Company's founders, and these shares are fully convertible ~~on a one-to-one basis~~ into class B shares at any time. Class B shares are publicly traded on the ~~New York Stock Exchange~~NYSE under the symbol “UPS”. Class A and B shares both have a $0.01 par value, and as of ~~September~~June 30, ~~2019,~~2020, there were 4.6 billion class A shares and 5.6 billion class B shares authorized to be issued. Additionally, there are 200 million preferred shares ~~with a $0.01 par value,~~ authorized to be ~~issued.~~issued, with a par value of $0.01 per share. As of ~~September~~June 30, ~~2019,~~2020, 0 preferred shares had been issued.

The following is a rollforward of our common stock, additional paid-in capital, retained earnings and non-controlling minority interest accounts for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (in millions, except per share amounts):


Three Months Ended June 30:	2020				2019
	Shares	Dollars		Shares	Dollars
Class A Common Stock
Balance at beginning of period	158	$	2	164	$	2
Common stock purchases	—	—		(1)	—
Stock award plans	2	—		1	—
Common stock issuances	—	—		(1)	—
Conversions of class A to class B common stock	(3)	—		(2)	—
Class A shares issued at end of period	157	$	2	161	$	2
Class B Common Stock
Balance at beginning of period	703	$	7	697	$	7
Common stock purchases	—	—		(1)	—
Conversions of class A to class B common stock	3	—		2	—
Class B shares issued at end of period	706	7		698	7
Additional Paid-In Capital
Balance at beginning of period		$	29		$	27
Common stock purchases		—			(251)
Stock award plans		137			213
Common stock issuances		89			107
Option premiums paid		—			6

Balance at end of period		$	255		$	102
Retained Earnings
Balance at beginning of period		$	9,137		8,249
Net income attributable to common shareowners		1,768			1,685
Dividends ($1.01 and $0.96 per share) ⁽¹⁾		(873)			(826)


Other		—			1
Balance at end of period		$	10,032		$	9,109
Non-Controlling Minority Interest
Balance at beginning of period		$	14		$	18
Change in non-controlling minority interest		(1)			—
Balance at end of period		$	13		$	18
⁽¹⁾The dividend per share amount is the same for both class A and class B common stock. Dividends include $30 and $26 million as of June 30, 2020 and June 30, 2019 respectively, that were settled in shares of class A common stock.

Three Months Ended September 30: 2019 2018
Shares Dollars Shares Dollars
Class A Common Stock
Balance at beginning of period 161
$ 2
168
$ 2
Common stock purchases (1 ) —
(1 ) —
Stock award plans —
—
1
—
Common stock issuances 1
—
1
—
Conversions of class A to class B common stock (4 ) —
(4 ) —
Class A shares issued at end of period 157
$ 2
165
$ 2
Class B Common Stock
Balance at beginning of period 698
$ 7
693
$ 7
Common stock purchases (1 ) —
(2 ) —
Conversions of class A to class B common stock 4
—
4
—
Class B shares issued at end of period 701
7
695
7
Additional Paid-In Capital
Balance at beginning of period $ 102
$ —
Stock award plans 202
137
Common stock purchases (251 ) (249 )
Common stock issuances 56
80
Option premiums received (paid) 20
32
Balance at end of period $ 129
$ —
Retained Earnings
Balance at beginning of period $ 9,109
7,665
Net income attributable to common shareowners 1,750
1,508
Dividends ($0.96 and $0.91 per share) ⁽¹⁾
(825 ) (784 )
Common stock purchases —
4
Other 3
(16 )
Balance at end of period $ 10,037
$ 8,377
Non-Controlling Minority Interest
Balance at beginning of period $ 18
$ 28
Change in non-controlling minority interest (2 ) —
Balance at end of period $ 16
$ 28
⁽¹⁾The dividend per share amount is the same for both class A and class B common stock

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Nine Months Ended September 30: 2019 2018
Shares Dollars Shares Dollars
Class A Common Stock
Balance at beginning of period 163
$ 2
173
$ 2
Common stock purchases (3 )

(3 ) —
Stock award plans 4
—
4
—
Common stock issuances 2
—
3
—
Conversions of class A to class B common stock (9 ) —
(12 ) —
Class A shares issued at end of period 157
$ 2
165
$ 2
Class B Common Stock
Balance at beginning of period 696
$ 7
687
$ 7
Common stock purchases (4 ) —
(4 ) —
Conversions of class A to class B common stock 9
—
12
—
Class B shares issued at end of period 701
7
695
7
Additional Paid-In Capital
Balance at beginning of period $ —
$ —
Stock award plans 584
307
Common stock purchases (753 ) (632 )
Common stock issuances 277
312
Option premiums received (paid) 21
13
Balance at end of period $ 129
$ —
Retained Earnings
Balance at beginning of period $ 8,006
$ 5,852
Net income attributable to common shareowners 4,546
4,338
Dividends ($2.88 and $2.73 per share) ⁽¹⁾
(2,518 ) (2,408 )
Common stock purchases —
(124 )
Reclassification from AOCI pursuant to the early adoption of ASU 2018-02 —
735
Other 3
(16 )
Balance at end of period $ 10,037
$ 8,377
Non-Controlling Minority Interest
Balance at beginning of period $ 16
$ 30
Change in non-controlling minority interest —
(2 )
Balance at end of period $ 16
$ 28
⁽¹⁾ The dividend per share amount is the same for both class A and class B common stock


Six Months Ended June 30:	2020				2019
	Shares	Dollars		Shares	Dollars
Class A Common Stock
Balance at beginning of period	156	2		163	$	2
Common stock purchases	—	—		(2)	—
Stock award plans	6	—		4	—
Common stock issuances	2	—		1	—
Conversions of class A to class B common stock	(7)	—		(5)	—
Class A shares issued at end of period	157	$	2	161	$	2
Class B Common Stock
Balance at beginning of period	701	$	7	696	$	7
Common stock purchases	(2)	—		(3)	—
Conversions of class A to class B common stock	7	—		5	—
Class B shares issued at end of period	706	7		698	7
Additional Paid-In Capital
Balance at beginning of period		150			$	—
Common stock purchases		(217)			(502)
Stock award plans		70			382
Common stock issuances		252			221
Option premiums received (paid)		—			1

Balance at end of period		$	255		$	102
Retained Earnings
Balance at beginning of period		9,105			$	8,006
Net income attributable to common shareowners		2,733			2,796
Dividends ($2.02 and $1.92 per share) ⁽¹⁾		(1,806)			(1,693)



Balance at end of period		$	10,032		$	9,109
Non-Controlling Minority Interest
Balance at beginning of period		$	16		$	16
Change in non-controlling minority interest		(3)			2
Balance at end of period		$	13		$	18
⁽¹⁾ The dividend per share amount is the same for both class A and class B common stock. Dividends include $123 and $94 million as of June 30, 2020 and June 30, 2019 respectively, that were settled in shares of class A common stock.

In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion for shares of class A and class B common stock, which has no expiration date. As of ~~September~~June 30, ~~2019,~~2020, we had ~~$2.586~~$2.1 billion of this share repurchase authorization available.

Share repurchases may be in the form of accelerated share repurchase programs, open market purchases or other ~~such~~ methods as we deem appropriate. The timing of share repurchases will depend upon market conditions. Unless terminated earlier by the Board, the program will expire when we have purchased all shares authorized for repurchase under the program.

We ~~repurchased 2.2 million~~did 0t repurchase any shares ~~of class A and class B common stock in~~under this program during the three months ended ~~September~~June 30, 2020. During the three months ended June 30, 2019, ~~and 2018 for $251 and $245 million, respectively. We~~we repurchased ~~7.0 and 6.6~~2.4 million shares of class A and class B common stock for ~~$753~~$251 million. We repurchased 2.1 and ~~$756~~4.8 million shares of class A and class B common stock for $217 and $502 million during the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018~~respectively ($~~751~~231 million and ~~$770~~$503 million in repurchases for ~~2019~~2020 and ~~2018,~~2019, respectively, are reported on the statements of consolidated cash flows due to the timing of settlements).

From time to time, we enter into share repurchase programs with large financial institutions to assist in our buyback of company stock. These programs may allow us to repurchase our shares at a price below the weighted average ~~UPS~~ share price for a given period. During the ~~third~~second quarter, ~~of 2019,~~ we did ~~not~~0t enter into any accelerated share repurchase transactions.

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In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a ~~pre-determined~~predetermined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the ~~pre-determined~~predetermined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the ~~pre-determined~~predetermined price, we will receive the number of shares specified in the agreement. We received net premiums of ~~$20~~$6 and ~~$32~~$1 million during the three and six months ended ~~September 30,~~ 2019, ~~and 2018,~~ respectively, related to entering into and settling capped call options for the purchase of class B shares. ~~We received net premiums of $21 and $13 million during the first nine months of 2019 and 2018, respectively.~~ As of ~~September~~June 30, ~~2019,~~2020, we had no0 capped call options outstanding.

On April 28, 2020 we announced our intention to suspend stock repurchases.

Movements in Additional Paid-In Capital in respect of stock award plans comprise accruals for unvested awards, offset by adjustments for awards that vest during the period. The movements for the three and six months ended June 30, 2020 were driven by changes in the vesting schedule for certain of our awards.

Accumulated Other Comprehensive Income (Loss)

We recognize activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. ~~Additionally, effective January 1, 2018, we early adopted ASU 2018-02 that allowed a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.~~ The activity in AOCI for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 is as follows (in millions):

Three Months Ended September 30: 2019 2018
Foreign currency translation gain (loss), net of tax:
Balance at beginning of period $ (1,106 ) $ (1,061 )
Translation adjustment (net of tax effect of $41 and $1) (48 ) (28 )
Balance at end of period (1,154 ) (1,089 )
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of period 7
(5 )
Current period changes in fair value (net of tax effect of $1 and $(1)) 2
(2 )
Reclassification to earnings (net of tax effect of $(1) and $0) (5 ) 1
Balance at end of period 4
(6 )
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of period 104
(179 )
Current period changes in fair value (net of tax effect of $79 and $14) 251
44
Reclassification to earnings (net of tax effect of $(14) and $1) (45 ) 5
Balance at end of period 310
(130 )
Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of period (3,820 ) (4,101 )
Reclassification to earnings (net of tax effect of $14 and $12) 43
38
Balance at end of period (3,777 ) (4,063 )
Accumulated other comprehensive income (loss) at end of period $ (4,617 ) $ (5,288 )


Three Months Ended June 30:	2020		2019
Foreign currency translation gain (loss), net of tax:
Balance at beginning of period	$	(1,219)	$	(1,073)

Translation adjustment (net of tax effect of $(14) and $(7))	10		(33)

Balance at end of period	(1,209)		(1,106)
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of period	6		2
Current period changes in fair value (net of tax effect of $1 and $3)	5		5

Reclassification to earnings (net of tax effect of $(1) and $0)	(2)		—
Balance at end of period	9		7
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of period	329		116
Current period changes in fair value (net of tax effect of $(20) and $5)	(62)		15

Reclassification to earnings (net of tax effect of $(16) and $(9))	(52)		(27)
Balance at end of period	215		104
Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of period	(4,992)		(3,863)

Reclassification to earnings (net of tax effect of $13 and $14)	44		43


Balance at end of period	(4,948)		(3,820)
Accumulated other comprehensive income (loss) at end of period	$	(5,933)	$	(4,815)

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Six Months Ended June 30:	2020		2019
Foreign currency translation gain (loss), net of tax:
Balance at beginning of period	$	(1,078)	$	(1,126)

Translation adjustment (net of tax effect of $(1) and $2)	(131)		20

Balance at end of period	(1,209)		(1,106)
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of period	4		(2)
Current period changes in fair value (net of tax effect of $1 and $3)	7		9

Reclassification to earnings (net of tax effect of $(1) and $0)	(2)		—
Balance at end of period	9		7
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of period	112		40
Current period changes in fair value (net of tax effect of $63 and $33)	201		104

Reclassification to earnings (net of tax effect of $(31) and $(13))	(98)		(40)
Balance at end of period	215		104
Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of period	(5,035)		(3,906)

Reclassification to earnings (net of tax effect of $27 and $27)	87		86


Balance at end of period	(4,948)		(3,820)
Accumulated other comprehensive income (loss) at end of period	$	(5,933)	$	(4,815)

Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 is as follows (in millions):


	Amount Reclassified from AOCI					Affected Line Item in the Income Statement
Three Months Ended June 30:	2020		2019




Unrealized gain (loss) on marketable securities:
Realized gain (loss) on sale of securities	$	3	$	—	Investment income and other
Income tax (expense) benefit	(1)		—		Income tax expense
Impact on net income	2		—		Net income
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts	(3)		(3)		Interest expense
Foreign exchange contracts	71		39		Revenue


Income tax (expense) benefit	(16)		(9)		Income tax expense
Impact on net income	52		27		Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs	(57)		(57)		Investment income and other


Income tax (expense) benefit	13		14		Income tax expense
Impact on net income	(44)		(43)		Net income
Total amount reclassified for the period	$	10	$	(16)	Net income

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


	Amount Reclassified from AOCI					Affected Line Item in the Income Statement
Six Months Ended June 30:	2020		2019




Unrealized gain (loss) on marketable securities:
Realized gain (loss) on sale of securities	$	3	$	—	Investment income and other
Income tax (expense) benefit	(1)		—		Income tax expense
Impact on net income	2		—		Net income
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts	(6)		(9)		Interest expense
Foreign exchange contracts	135		62		Revenue


Income tax (expense) benefit	(31)		(13)		Income tax expense
Impact on net income	98		40		Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs	(114)		(113)		Investment income and other


Income tax (expense) benefit	27		27		Income tax expense
Impact on net income	(87)		(86)		Net income

Total amount reclassified for the period	$	13	$	(46)	Net income

Nine Months Ended September 30:
Amount Reclassified from AOCI Affected Line Item in the Income Statement
2019 2018
Unrealized gain (loss) on marketable securities:
Realized gain (loss) on sale of securities $ 6
$ (3 ) Investment income and other
Income tax (expense) benefit (1 ) 1
Income tax expense
Impact on net income 5
(2 ) Net income
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts (12 ) (18 ) Interest expense
Foreign exchange contracts 124
(62 ) Revenue
Income tax (expense) benefit (27 ) 19
Income tax expense
Impact on net income 85
(61 ) Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs (170 ) (151 ) Investment income and other
Income tax (expense) benefit 41
36
Income tax expense
Impact on net income (129 ) (115 ) Net income

Total amount reclassified for the period $ (39 ) $ (178 ) Net income

Deferred Compensation Obligations and Treasury Stock

Activity in the deferred compensation program for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 is as follows (in millions):


	2020				2019
Three Months Ended June 30:	Shares	Dollars		Shares	Dollars
Deferred Compensation Obligations:
Balance at beginning of period		$	19		$	25
Reinvested dividends		1			—
Benefit payments		—			—
Balance at end of period		$	20		$	25
Treasury Stock:
Balance at beginning of period	—	$	(19)	(1)	$	(25)
Reinvested dividends	—	(1)		—	—
Benefit payments	—	—		1	—
Balance at end of period	—	(20)		—	(25)

Three Months Ended September 30: 2019 2018
Shares Dollars Shares Dollars
Deferred Compensation Obligations:
Balance at beginning of period $ 25
$ 31
Reinvested dividends —
1
Benefit payments —
—
Balance at end of period $ 25
$ 32
Treasury Stock:
Balance at beginning of period —
$ (25 ) (1 ) $ (31 )
Reinvested dividends —
—
—
(1 )
Benefit payments —
—
—
—
Balance at end of period —
(25 ) (1 ) (32 )

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


	2020				2019
Six Months Ended June 30:	Shares	Dollars		Shares	Dollars
Deferred Compensation Obligations:
Balance at beginning of period		$	26		$	32
Reinvested dividends		1			1
Benefit payments		(7)			(8)
Balance at end of period		$	20		$	25
Treasury Stock:
Balance at beginning of period	—	$	(26)	(1)	$	(32)
Reinvested dividends	—	(1)		—	(1)
Benefit payments	—	7		1	8
Balance at end of period	—	(20)		—	(25)

Nine Months Ended September 30: 2019 2018
Shares Dollars Shares Dollars
Deferred Compensation Obligations:
Balance at beginning of period $ 32
$ 37
Reinvested dividends 1
2
Benefit payments (8 ) (7 )
Balance at end of period $ 25
$ 32
Treasury Stock:
Balance at beginning of period (1 ) $ (32 ) (1 ) $ (37 )
Reinvested dividends —
(1 ) —
(2 )
Benefit payments 1
8
—
7
Balance at end of period —
(25 ) (1 ) (32 )

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. 13. SEGMENT INFORMATION

We report our operations in 3 segments: U.S. Domestic Package, International Package and Supply Chain & Freight. Package operations represent our most significant business and are broken down into regional operations around the world. Regional operations managers are responsible for both domestic and export products within their geographic area.

U.S. Domestic Package

Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the United States.

International Package

International Package operations include delivery to more than 220 countries and territories worldwide, including shipments wholly outside the United States, as well as shipments with either origin or destination outside the United States. Our International Package reporting segment includes the operations of our Europe, Asia, Americas and ISMEA (Indian Subcontinent, Middle East and Africa) operating segments.

Supply Chain & Freight

Supply Chain & Freight includes ~~our~~ Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units. Our Forwarding, Logistics and UPS Mail Innovations business units provide services in more than 200 countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, distribution and post-sales services, mail and consulting services. UPS Freight offers a variety of less-than-truckload ("LTL") and truckload ("TL") services to customers in North America. Coyote offers truckload brokerage services primarily in the United States. Marken is a global provider of supply chain solutions to the life sciences industry. Other aggregated business units within this segment include The UPS Store and UPS Capital.

In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income and other, interest expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies included in the audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019, and in the "Results of Operations - Segment Review" section of Management's Discussion and Analysis included in this report. Certain expenses are allocated between the segments using activity-based costing methods.

Segment information for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 is as follows (in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue:
U.S. Domestic Package	$	13,074	$	11,150	$	24,530	$	21,630
International Package	3,705		3,505		7,088		6,964
Supply Chain & Freight	3,680		3,393		6,876		6,614
Consolidated	$	20,459	$	18,048	$	38,494	$	35,208
Operating Profit:
U.S. Domestic Package	$	1,182	$	1,208	$	1,546	$	1,874
International Package	771		663		1,322		1,191
Supply Chain & Freight	259		272		416		472
Consolidated	$	2,212	$	2,143	$	3,284	$	3,537

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Revenue:
U.S. Domestic Package $ 11,455
$ 10,437
$ 33,085
$ 31,018
International Package 3,494
3,478
10,458
10,613
Supply Chain & Freight 3,369
3,529
9,983
10,382
Consolidated $ 18,318
$ 17,444
$ 53,526
$ 52,013
Operating Profit:
U.S. Domestic Package $ 1,216
$ 949
$ 3,090
$ 2,644
International Package 667
536
1,858
1,748
Supply Chain & Freight 245
242
717
628
Consolidated $ 2,128
$ 1,727
$ 5,665
$ 5,020

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. 14. EARNINGS PER SHARE

The earnings per share amounts are the same for class A and class B common shares as the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

The following table sets forth the computation of basic and diluted earnings per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (in millions, except per share amounts):


	Three Months Ended June 30,									Six Months Ended June 30,
			2020			2019			2020			2019
Numerator:
Net income attributable to common shareowners	$	1,768		$	1,685		$	2,733		$	2,796
Denominator:
Weighted average shares	862			860			860			860
Deferred compensation obligations	—			—			—			1
Vested portion of restricted units	4			5			5			5
Denominator for basic earnings per share	866			865			865			866
Effect of dilutive securities:
Restricted units	3			4			4			3
Stock options	—			—			—			—
Denominator for diluted earnings per share	869			869			869			869
Basic earnings per share	$	2.04		$	1.95		$	3.16		$	3.23
Diluted earnings per share	$	2.03		$	1.94		$	3.14		$	3.22

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Numerator:
Net income attributable to common shareowners $ 1,750
$ 1,508
$ 4,546
$ 4,338
Denominator:
Weighted average shares 858
860
859
861
Deferred compensation obligations —
1
—
1
Vested portion of restricted units 6
4
6
4
Denominator for basic earnings per share 864
865
865
866
Effect of dilutive securities:
Restricted units 6
5
4
4
Stock options —
—
—
—
Denominator for diluted earnings per share 870
870
869
870
Basic earnings per share $ 2.03
$ 1.74
$ 5.26
$ 5.01
Diluted earnings per share $ 2.01
$ 1.73
$ 5.23
$ 4.99

Diluted earnings per share for the three months ended ~~September~~June 30, 2020 and 2019 excluded the effect of ~~0.3~~1.3 and 0.9 million shares of common stock, respectively, that may be issued upon the exercise of employee stock options because such effect would be antidilutive. ~~There were 0 antidilutive~~Antidulitive shares for the ~~three~~six months ended ~~September~~June 30, ~~2018. Antidilutive shares for the nine months ended September 30,~~2020 and 2019 were 1.3 and ~~2018 were 0.7 and 0.1~~0.9 million, respectively.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. 15. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT

Risk Management Policies

Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations. These exposures are actively monitored by management. To manage the impact of these exposures, we enter into a variety of derivative financial instruments. Our objective is to manage, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates, commodity prices and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value from those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes.

Credit Risk Management

The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however, we seek to minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines and by monitoring counterparties to prevent concentrations of credit risk with any single counterparty.

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we held cash collateral of ~~$713~~$623 and ~~$325~~$495 million, respectively, under these agreements; this collateral is included in "Cash and cash equivalents" in the consolidated balance sheets and its use by UPS is not restricted. At each of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, 0 additional collateral was required to be posted with our counterparties.

Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. Alternatively, we could be required to provide additional collateral or terminate transactions with certain counterparties in the event of a downgrade of our credit rating. The amount of collateral required would be determined by the net fair value of the associated derivatives with each counterparty. We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 there were no0 instruments in a net liability position that were not covered by the zero threshold bilateral collateral provisions.

~~Accounting Policy for Derivative Instruments~~

We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.

A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings.

A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability in the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.

A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the hedge accounting requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the foreign currency translation adjustment within AOCI, and are recorded in the income statement when the hedged item affects earnings.

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~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Types of Hedges

Commodity Risk Management

Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. In order to mitigate the impact of fuel surcharges imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services. We periodically enter into derivative contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We normally designate and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.

Foreign Currency Risk Management

To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with ~~option and~~ forward contracts. We normally designate and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

We also hedge portions of our anticipated cash settlements of intercompany transactions and interest payments on certain debt subject to foreign currency remeasurement using foreign currency forward contracts. We normally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions; therefore, the resulting gains and losses from these hedges are recognized as a component of investment income and other when the underlying transactions are subject to currency remeasurement.

We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of foreign denominated debt as the hedging instrument allows the debt to be remeasured to foreign currency translation adjustment within AOCI to offset the translation risk from those investments. Balances in the cumulative translation adjustment accounts remain until the sale or substantially complete liquidation of the foreign entity, upon which they are recognized as a component of investment income and other.

Interest Rate Risk Management

Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating-rate debt within our capital structure.

We have designated and account for the majority of our interest rate swaps that convert fixed-rate interest payments into floating-rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We have designated and account for interest rate swaps that convert floating-rate interest payments into fixed-rate interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from fair value adjustments to ~~the~~these interest rate swaps are recorded to AOCI.

We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings by using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.

Outstanding Positions

As of June 30, 2020 and December 31, 2019, the notional amounts of our outstanding derivative positions were as follows (in millions):

June 30, 2020

December 31, 2019

Currency hedges:

Euro

EUR

3,781

EUR

4,571

British Pound Sterling

GBP

1,308

GBP

1,494

Canadian Dollar

CAD

1,279

CAD

1,402

Hong Kong Dollar

HKD

3,464

HKD

3,327

Interest rate hedges:

Fixed to Floating Interest Rate Swaps

USD

3,250

USD

3,674

Floating to Fixed Interest Rate Swaps

USD

778

USD

778

As of June 30, 2020 and December 31, 2019, we had 0 outstanding commodity hedge positions.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~Outstanding Positions~~

~~As of September 30, 2019 and December 31, 2018, the notional amounts of our outstanding derivative positions were as follows (in millions):~~

September 30, 2019 December 31, 2018
Currency hedges:
Euro EUR 4,850
EUR 4,924
British Pound Sterling GBP 1,660
GBP 2,037
Canadian Dollar CAD 1,438
CAD 1,443
Hong Kong Dollar HKD 3,670
HKD 3,642
Singapore Dollar SGD —
SGD 20

Interest rate hedges:
Fixed to Floating Interest Rate Swaps USD 3,674
USD 4,674
Floating to Fixed Interest Rate Swaps USD 778
USD 778

~~As of September 30, 2019 and December 31, 2018, we had no outstanding commodity hedge positions.~~

Balance Sheet Recognition ~~and Fair Value Measurements~~

The following table indicates the location in the consolidated balance sheets where our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives (in millions).

We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded in the consolidated balance sheets. The columns labeled "Net Amounts if Right of Offset had been Applied" indicate the potential net fair value positions by type of contract and location in the consolidated balance sheets had we elected to apply the right of ~~offset.~~offset:


		Fair Value Hierarchy Level	Gross Amounts Presented in Consolidated Balance Sheets									Net Amounts if Right of Offset had been Applied
Asset Derivatives	Balance Sheet Location				June 30, 2020			December 31, 2019			June 30, 2020			December 31, 2019
Derivatives designated as hedges:
Foreign exchange contracts	Other current assets	Level 2	$	202		$	138		$	201		$	131
Interest rate contracts	Other current assets	Level 2	20			2			20			2

Foreign exchange contracts	Other non-current assets	Level 2	300			252			299			236
Interest rate contracts	Other non-current assets	Level 2	37			21			33			20
Derivatives not designated as hedges:
Foreign exchange contracts	Other current assets	Level 2	3			7			3			7
Interest rate contracts	Other current assets	Level 2	12			—			10			—

Interest rate contracts	Other non-current assets	Level 2	—			12			—			11
Total Asset Derivatives			$	574		$	432		$	566		$	407

Fair Value Hierarchy Level
Gross Amounts Presented in
Consolidated Balance Sheets

Net Amounts if Right of
Offset had been Applied
Asset Derivatives Balance Sheet Location September 30,
2019 December 31,
2018 September 30,
2019 December 31,
2018
Derivatives designated as hedges:
Foreign exchange contracts Other current assets Level 2 $ 203
$ 90
$ 203
$ 83
Interest rate contracts Other current assets Level 2 3
1
3
1
Foreign exchange contracts Other non-current assets Level 2 433
230
433
215
Interest rate contracts Other non-current assets Level 2 29
14
27
6
Derivatives not designated as hedges:
Foreign exchange contracts Other current assets Level 2 3
7
2
5
Foreign exchange contracts Other non-current assets Level 2 —
1
—
1
Interest rate contracts Other non-current assets Level 2 14
18
13
18
Total Asset Derivatives $ 685
$ 361
$ 681
$ 329

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~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Fair Value Hierarchy Level
Gross Amounts Presented in
Consolidated Balance Sheets

Net Amounts if Right of
Offset had been Applied
Liability Derivatives Balance Sheet Location September 30,
2019 December 31,
2018 September 30,
2019 December 31,
2018
Derivatives designated as hedges:
Foreign exchange contracts Other current liabilities Level 2 $ —
$ 7
$ —
$ —
Foreign exchange contracts Other non-current liabilities Level 2 —
15
—
—
Interest rate contracts Other non-current liabilities Level 2 13
41
11
33
Derivatives not designated as hedges:
Foreign exchange contracts Other current liabilities Level 2 2
3
1
1
Foreign exchange contracts Other non-current liabilities Level 2 —
1

1
Interest rate contracts Other non-current liabilities Level 2 3
—
2
—
Total Liability Derivatives $ 18
$ 67
$ 14
$ 35


		Fair Value Hierarchy Level	Gross Amounts Presented in Consolidated Balance Sheets									Net Amounts if Right of Offset had been Applied
Liability Derivatives	Balance Sheet Location				June 30, 2020			December 31, 2019			June 30, 2020			December 31, 2019
Derivatives designated as hedges:
Foreign exchange contracts	Other current liabilities	Level 2	$	1		$	7		$	—		$	—


Foreign exchange contracts	Other non-current liabilities	Level 2	1			16			—			—
Interest rate contracts	Other non-current liabilities	Level 2	14			11			10			10
Derivatives not designated as hedges:

Interest rate contracts	Other current liabilities	Level 2	8			—			6			—


Interest rate contracts	Other non- current liabilities	Level 2	—			3			—			2
Total Liability Derivatives			$	24		$	37		$	16		$	12

Our foreign exchange, interest rate and investment market price derivatives are largely comprised of over-the-counter derivatives, which are primarily valued using pricing models that rely on market observable inputs such as yield curves, currency exchange rates and investment forward prices; therefore, these derivatives are classified as Level 2. At June 30, 2020 and December 31, 2019 we did not have any derivatives that were classified as Level 1 (valued using quoted prices in active markets for identical assets) or Level 3 (valued using significant unobservable inputs).

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet Location of Hedged Item in Fair Value Hedges

The following table indicates the amounts that were recorded in the consolidated balance sheets related to cumulative basis adjustments for fair value hedges as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in millions).:

Carrying Amount of Hedged Liabilities Cumulative Amount of Fair Value Hedge Adjustments Carrying Amount of Hedged Liabilities Cumulative Amount of Fair Value Hedge Adjustments
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included September 30, 2019 September 30, 2019 December 31, 2018 December 31, 2018
Long-term debt and finance leases 3,246
53
4,207
16


Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included	Carrying Amount of Hedged Liabilities			Cumulative Amount of Fair Value Hedge Adjustments			Carrying Amount of Hedged Liabilities			Cumulative Amount of Fair Value Hedge Adjustments
			June 30, 2020			June 30, 2020			December 31, 2019			December 31, 2019

Long-term debt and finance leases	$	2,840		$	68		$	3,234		$	40

The cumulative amount of fair value hedging losses remaining for any hedged assets and liabilities for which hedge accounting has been discontinued as of ~~September~~June 30, ~~2019~~2020 is ~~$21~~$11 million. These amounts will be recognized over the next 1110 years.

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~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Income Statement and AOCI Recognition

The following table indicates the amount of gains and ~~losses~~(losses) that have been recognized in the income statement for the fair value and cash flow hedges, as well as the associated gain or (loss) for the underlying hedged item for fair value hedges for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (in millions):


	Three Months Ended June 30,
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships	2020									2019
			Revenue			Interest Expense			Revenue			Interest Expense
Gain or (loss) on fair value hedging relationships:
Interest Contracts:
Hedged items	$	—		$	2		$	—		$	(30)
Derivatives designated as hedging instruments	—			(2)			—			30
Gain or (loss) on cash flow hedging relationships:
Interest Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income	—			(3)			—			(3)
Foreign Exchange Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income	71			—			39			—
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded	$	71		$	(3)		$	39		$	(3)

Three Months Ended
September 30, Three Months Ended
September 30,
2019 2018
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships

Revenue Interest Expense Investment Income and Other Revenue Interest Expense Investment Income and Other
Gain or (loss) on fair value hedging relationships:
Interest Contracts:
Hedged items $ —
$ (2 ) $ —
$ —
$ 13
$ —
Derivatives designated as hedging instruments —
2
—
—
(13 ) —
Gains or (loss) on cash flow hedging relationships:
Interest Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income —
(3 ) —
—
(6 ) —
Foreign Exchange Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income 62
—
—
—
—
—
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded $ 62
$ (3 ) $ —
$ —
$ (6 ) $ —

Nine Months Ended
September 30, Nine Months Ended
September 30,

2019 2018
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships

Revenue Interest Expense Investment Income and Other Revenue Interest Expense Investment Income and Other
Gain or (loss) on fair value hedging relationships:
Interest Contracts:
Hedged items $ —
$ (47 ) $ —
$ —
$ 86
$ —
Derivatives designated as hedging instruments —
47
—
—
(86 ) —
Gains or (loss) on cash flow hedging relationships:
Interest Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income —
(12 ) —
—
(18 ) —
Foreign Exchange Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income 124
—
—
(62 ) —
—
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded $ 124
$ (12 ) $ —
$ (62 ) $ (18 ) $ —

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


	Six Months Ended June 30,
	2020						2019
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships	Revenue		Interest Expense		Revenue		Interest Expense
Gain or (loss) on fair value hedging relationships:
Interest Contracts:
Hedged items	$	—	$	(34)	$	—	$	(45)
Derivatives designated as hedging instruments	—		34		—		45
Gain or (loss) on cash flow hedging relationships:
Interest Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income	—		(6)		—		(9)
Foreign Exchange Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income	135		—		62		—
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded	$	135	$	(6)	$	62	$	(9)

The following table indicates the amount of gains and (losses) that have been recognized in AOCI for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 for those derivatives designated as cash flow hedges (in millions):

Three Months Ended September 30:
Derivative Instruments in Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in AOCI on Derivatives
2019 2018
Interest rate contracts $ (1 ) $ 1
Foreign exchange contracts 331
57
Total $ 330
$ 58

Nine Months Ended September 30:
Derivative Instruments in Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in AOCI on Derivatives
2019 2018
Interest rate contracts $ 10
$ 3
Foreign exchange contracts 457
332
Total $ 467
$ 335


Three Months Ended June 30:
Derivative Instruments in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives
			2020			2019
Interest rate contracts	$	(2)		$	(2)
Foreign exchange contracts	(80)			22

Total	$	(82)		$	20

Six Months Ended June 30:
Derivative Instruments in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives
			2020			2019
Interest rate contracts	$	(3)		$	11
Foreign exchange contracts	267			126

Total	$	264		$	137

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As of ~~September~~June 30, ~~2019,~~2020, there ~~are $255~~were $248 million of pre-tax gains related to cash flow hedges ~~that are currently~~ deferred in AOCI that are expected to be reclassified to income over the 12 month period ending ~~September~~June 30, ~~2020.~~2021. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions. The maximum term over which we are hedging exposures to the variability of cash flows is approximately 1312 years.

The following table indicates the amount of gains and ~~losses~~(losses) that have been recognized in AOCI within foreign currency translation adjustment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 for those instruments designated as net investment hedges (in millions):

Three Months Ended September 30:
Non-derivative Instruments in Net Investment Hedging Relationships Amount of Gain (Loss) Recognized in AOCI on Debt
2019 2018
Foreign denominated debt $ 191
$ 10
Total $ 191
$ 10

Nine Months Ended September 30:
Non-derivative Instruments in Net Investment Hedging Relationships Amount of Gain (Loss) Recognized in AOCI on Debt
2019 2018
Foreign denominated debt $ 197
$ 148
Total $ 197
$ 148


Three Months Ended June 30:
Non-derivative Instruments in Net Investment Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Debt
			2020			2019
Foreign denominated debt	$	(103)		$	(67)
Total	$	(103)		$	(67)
Six Months Ended June 30:
Non-derivative Instruments in Net Investment Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Debt
			2020			2019
Foreign denominated debt	$	47		$	6
Total	$	47		$	6

Additionally, we maintain interest rate swaps, foreign exchange forwards and investment market price forward contracts that are not designated as hedges. The interest rate swap contracts are intended to provide an economic hedge of portions of our outstanding debt. The foreign exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement and settlement risk for certain assets and liabilities on our consolidated balance sheets. The investment market price forward contracts are intended to provide an economic offset to fair value fluctuations of certain investments in marketable securities.

~~Table of Contents~~

~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

We also periodically terminate interest rate swaps and foreign exchange ~~options~~forward contracts by entering into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original swap and foreign exchange contracts. These transactions provide an economic offset that effectively eliminates the effects of changes in market valuation.

The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these interest rate swaps, foreign currency forward and investment market price forward contracts not designated as hedges for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (in millions):


Derivative Instruments Not Designated in Hedging Relationships	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income
				2020		2019
Three Months Ended June 30:
Interest rate contracts	Interest expense	$	(2)	$	(2)


Foreign exchange contracts	Investment income and other	2		(19)


Total		$	—	$	(21)
Six Months Ended June 30:
Interest rate contracts	Interest expense	$	(4)	$	(4)


Foreign exchange contracts	Investment income and other	(49)		(20)


Total		$	(53)	$	(24)

Derivative Instruments Not Designated in
Hedging Relationships
Location of Gain (Loss)
Recognized in Income

Amount of Gain (Loss)
Recognized in Income
2019 2018
Three Months Ended September 30:
Interest rate contracts Interest expense $ (2 ) $ (3 )
Foreign exchange contracts Investment income and other (39 ) (14 )
Total $ (41 ) $ (17 )
Nine Months Ended September 30:
Interest rate contracts Interest expense $ (6 ) $ (7 )
Foreign exchange contracts Investment income and other (59 ) $ (73 )
Investment market price contracts Investment income and other —
16
Total $ (65 ) $ (64 )

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. 16. INCOME TAXES

Our effective tax rate increased to ~~20.7%~~25.0% in the ~~third~~second quarter of ~~2019~~2020 from ~~20.2%~~23.5% in the same period of ~~2018 (22.3%~~2019 (24.2% year-to-date in ~~2019~~2020 compared to ~~20.8%~~23.3% in the same period of ~~2018)~~2019). The recognition in income tax of excess tax benefits related to share-based compensation reduced our effective rate by ~~0.1%~~0.3% year-to-date in ~~2019~~2020 compared to ~~0.8%~~0.2% in the same period of ~~2018~~2019 (there was ~~not a~~0 significant impact in the ~~third~~second quarter of ~~2019~~2020 or ~~2018)~~2019). ~~Other favorable items that impacted our~~Our effective tax rate increased in ~~2018, but did not recur~~2020 compared to 2019 primarily due to unfavorable changes in ~~2019, included resolutions of~~our uncertain tax ~~positions, tax provisions enacted in the Bipartisan Budget Act of 2018 and discrete tax credits associated with the filing of our 2017 U.S. federal income tax return.~~positions.

As discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, we have recognized liabilities for uncertain tax positions. We reevaluate these uncertain tax positions on a quarterly basis. A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. However, an estimate of the range of reasonably possible outcomes cannot be made. Items that may cause changes to unrecognized tax benefits include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statutes of limitations, additional regulatory guidance on the Tax Cuts and Jobs Act or other unforeseen circumstances.

As of June 30, 2019 and December 31, 2018, we maintained a valuation allowance against certain deferred tax assets, primarily related to foreign net operating loss carryforwards. As of each reporting date, we consider new evidence, both positive and negative, that could affect the future realization of deferred tax assets. During the third quarter of 2019, we determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets related to certain foreign net operating loss carryforwards will be realized. This conclusion is primarily related to achieving cumulative three-year income and anticipated future earnings within the relevant jurisdiction. Accordingly, we reversed the related valuation allowance and recognized a discrete tax benefit of approximately $62 million.

As discussed in note 17, we recognized pre-tax transformation strategy costs of ~~$63~~$112 million in the ~~third~~second quarter of 2020 compared to $21 million in the same period of 2019 ($~~207~~157 million ~~year-to-date)~~year-to-date in 2020 compared to $144 million in the same period of 2019). As a result, we recorded an additional income tax benefit of $29 million in the ~~third~~second quarter of ~~$16~~2020 compared to $4 million in the same period of 2019 ($5039 million ~~year-to-date)~~year-to-date in 2020 compared to $34 million in the same period of 2019). This year-to-date benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate primarily due to the effect of U.S. state and local taxes and foreign taxes.

As discussed in note 17, we recognized pre-tax transformation strategy costs of $97 million in the third quarter of 2018 ($360 million year-to-date). As a result, we recorded an additional income tax benefit in the third quarter of $24 million ($87 million year-to-date). This benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate primarily due to the effect of U.S. state and local taxes and foreign taxes.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. TRANSFORMATION STRATEGY COSTS

In the first quarter of 2018, we launched the first phase of a multi-year, enterprise-wide transformation strategy ~~that is expected to impact~~impacting our organization. Over the next ~~few~~several years additional phases will be implemented. The program includes investments, as well as changes in processes and technology, that impact global direct and indirect operating costs.

The table below presents the transformation strategy costs for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (in millions):

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Transformation Strategy Costs:
Compensation and benefits $ 41
$ 70
$ 149
$ 262
Total other expenses 22
27
58
98
Total Transformation Strategy Costs $ 63
$ 97
$ 207
$ 360

Income Tax Benefit from Transformation Strategy Costs (16 ) (24 ) (50 ) (87 )
After Tax Transformation Strategy Costs $ 47
$ 73
$ 157
$ 273


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Transformation Strategy Costs:
Compensation and benefits	$	81	$	2	$	93	$	108
Total other expenses	31		19		64		36
Total Transformation Strategy Costs	$	112	$	21	$	157	$	144

Income Tax Benefit from Transformation Strategy Costs	(29)		(4)		(39)		(34)
After Tax Transformation Strategy Costs	$	83	$	17	$	118	$	110

The income tax effects of ~~the~~ transformation strategy costs are calculated by multiplying the amount of the adjustments by the statutory tax rates applicable in each tax jurisdiction.

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

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

Overview

~~Consolidated revenue increased 5.0%~~During the second quarter, the COVID-19 pandemic and the resulting actions taken by governments and consumers around the world continued to ~~$18.318 billion~~impact our business globally. In particular, shutdowns and other restrictions implemented in many countries, together with the continuing migration to e-commerce, significantly impacted the overall mix of demand for our services. Business-to-consumer shipments were elevated throughout the ~~third~~second quarter, although their relative share of ~~2019, largely attributable~~average daily volume began to ~~growth~~reduce in ~~our U.S. Domestic Package segment. For~~June as government restrictions were eased globally. Commercial shipments, which declined as a result of the ~~year-to-date period, consolidated revenue increased 2.9%~~widespread shutdowns, began to $53.526 billion, also driven by results in our U.S. Domestic Package segment. For both the three and nine months ended September 30, 2019, U.S. Domestic Package realized strong revenue growth across all major products. Volume increases were led by our air products as both consumers and businesses continue to demand faster delivery options.

Consolidated operating profit increased 23.2% to $2.128 billion for the three months ended September 30, 2019 and increased 12.8% to $5.665 billion for the nine months ended September 30, 2019. Operating profitrecover in the latter part of the quarter.

The U.S. Domestic Package segment ~~improved 28.1%~~experienced strong revenue growth, driven by increased residential ground volume. The change in customer and product mix, as well as a decline in average billable weight per shipment, resulted in lower revenue per piece. Expenses reflect the impact of elevated residential deliveries. The lower delivery density resulted in higher average daily union hours and higher average daily miles driven. We also hired approximately 39,000 additional employees to enable us to process the increase in volume. These factors weighed on the segment's operating profit for the quarter.

We expect the elevated level of volume and residential deliveries will continue, although we are unable to predict for how long these circumstances will persist. We anticipate that our benefits cost will increase in the ~~third quarter, with continuing expansion~~latter part of the year as newly-hired employees become eligible for coverage. Additionally, costs incurred to improve our time-in-transit may exceed the associated revenue for the remainder of the year. If we are unable to optimize volume in our network and adjust our costs in response to the lower delivery density, operating margins may continue to be compressed.

Our International segment experienced revenue growth driven by a strong increase in outbound volume from Asia, as well as growth from e-commerce within Europe. We expect outbound demand from Asia to moderate over the remainder of the year.

In our Supply Chain & Freight segment, we experienced growth in international air freight due to outbound demand from Asia, primarily ~~attributable~~for personal protective equipment and other supplies related to ~~lower unit costs. All three segments expanded operating profit~~the COVID-19 pandemic. In addition, our mail services business saw strong growth from e-commerce shipments. Our other Supply Chain & Freight businesses were negatively impacted by the widespread business shutdowns, and we expect that overall conditions may remain challenging.

We continue to anticipate negative impacts on our accounts receivable collections from the disruption to global business activity caused by COVID-19. As a result, we recorded an incremental allowance for credit losses of $27 million in the ~~third~~second quarter ($50 million year-to-date). As global macroeconomic trends continue to evolve, it is possible that we will experience further adverse developments in our allowances for credit losses or be required to recognize impairments of ~~2019.~~goodwill or other long-lived assets. The increases in average daily hours and average daily miles driven within our U.S. Domestic business could also continue to drive adverse developments in our casualty self-insurance reserves.

We ~~reported third quarter 2019 net income~~believe that we remain well positioned for long-term growth, however we cannot reasonably estimate the duration or severity of ~~$1.750 billion, an increase of 16.0% compared to 2018. Diluted earnings per share increased 16.2% to $2.01. On a year-to-date basis, net income increased 4.8% to $4.546 billion~~this pandemic or its ultimate impact on the global economy, our business results or liquidity. For additional information on these risks and ~~diluted earnings per share increased 4.8% to $5.23. Growth~~uncertainties, see Part II, Item 1A in ~~operating profit was offset by increases in income taxes and lower investment and other income~~our Quarterly Report on Form 10-Q for ~~both~~ the quarter ~~and year-to-date periods.~~ended March 31, 2020.

~~Our consolidated results are presented in the table below:~~

Three Months Ended
September 30, Change Change Nine Months Ended
September 30, Change Change
2019 2018 $ % 2019 2018 $ %
Revenue (in millions) $ 18,318
$ 17,444
$ 874
5.0 % $ 53,526
$ 52,013
$ 1,513
2.9 %
Operating Expenses (in millions) 16,190
15,717
473
3.0 % 47,861
46,993
868
1.8 %
Operating Profit (in millions) $ 2,128
$ 1,727
$ 401
23.2 % $ 5,665
$ 5,020
$ 645
12.8 %
Operating Margin 11.6 % 9.9 % 10.6 % 9.7 %
Average Daily Package Volume (in thousands) 21,014
19,506
7.7 % 20,338
19,349
5.1 %
Average Revenue Per Piece $ 11.02
$ 11.20
$ (0.18 ) (1.6 )% $ 11.10
$ 11.14
$ (0.04 ) (0.4 )%
Net Income (in millions) $ 1,750
$ 1,508
$ 242
16.0 % $ 4,546
$ 4,338
$ 208
4.8 %
Basic Earnings Per Share $ 2.03
$ 1.74
$ 0.29
16.7 % $ 5.26
$ 5.01
$ 0.25
5.0 %
Diluted Earnings Per Share $ 2.01
$ 1.73
$ 0.28
16.2 % $ 5.23
$ 4.99
$ 0.24
4.8 %

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Highlights of our consolidated results for the three and six months ended June 30, 2020 and 2019 follow:


	Three Months Ended June 30,								Change								Six Months Ended June 30,				Change
	2020			2019			$		%		2020			2019			$		%
Revenue (in millions)	$	20,459		$	18,048		$	2,411	13.4	%	$	38,494		$	35,208		$	3,286	9.3	%
Operating Expenses (in millions)	18,247			15,905			2,342		14.7	%	35,210			31,671			3,539		11.2	%
Operating Profit (in millions)	$	2,212		$	2,143		$	69	3.2	%	$	3,284		$	3,537		$	(253)	(7.2)	%
Operating Margin	10.8		%	11.9		%					8.5		%	10.0		%
Net Income (in millions)	$	1,768		$	1,685		$	83	4.9	%	$	2,733		$	2,796		$	(63)	(2.3)	%
Basic Earnings Per Share	$	2.04		$	1.95		$	0.09	4.6	%	$	3.16		$	3.23		$	(0.07)	(2.2)	%
Diluted Earnings Per Share	$	2.03		$	1.94		$	0.09	4.6	%	$	3.14		$	3.22		$	(0.08)	(2.5)	%

Average Daily Package Volume (in thousands)	24,436			20,220					20.9	%	22,780			19,997					13.9	%
Average Revenue Per Piece	$	10.63		$	11.21		$	(0.58)	(5.2)	%	$	10.74		$	11.15		$	(0.41)	(3.7)	%

•Consolidated revenue increased 13.4% (9.3% year-to-date), driven by growth in business-to-consumer shipments.

•Average daily package volume increased 20.9% (13.9% year-to-date), primarily driven by business-to-consumer increases in our U.S. Domestic Package segment.

•In our U.S. Domestic Package segment, average revenue per piece decreased as a result of changes in customer and product mix and lower average billable weight per piece. Currency movements as well as fuel prices negatively impacted revenue per piece in our International Package segment.

•Operating expenses increased primarily due to volume growth as well as the shift in customer and product mix described above.

•Consolidated operating profit for the quarter increased $69 million or 3.2%, driven by strong demand out of Asia and growth in e-commerce in our International Package segment.

•We reported net income of $1.8 billion ($2.7 billion year-to-date) and diluted earnings per share of $2.03 ($3.14 year-to-date). Excluding the after-tax impact of transformation strategy costs of $83 million ($118 million year-to-date), adjusted diluted earnings per share was $2.13 ($3.28 year-to-date).

•Net cash from operations increased $1.7 billion to $5.9 billion.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Supplemental Information - Items Affecting Comparability

We supplement the reporting of our financial information determined under generally accepted accounting principles (“~~U.S.~~ GAAP”) with certain non-GAAP financial measures including ~~as applicable,~~ "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, other income ~~and~~ (expense), ~~pre-tax~~ income before income taxes, income tax expense, effective tax rate, net income and earnings per share. ~~Adjusted financial measures may exclude the impact of period-over-period exchange rate changes and hedging activities, and transformation strategy costs, as described below.~~ We believe that these ~~adjusted financial~~non-GAAP measures provide additional meaningful information to assist ~~investors and analysts~~users of our financial statements in understanding our financial results and assessing our ~~prospects for future performance. We believe these adjusted financial measures are important indicators of our recurring results of operations~~ongoing performance, because they exclude items that may not be indicative of, or are unrelated to, our underlying ~~operating results,~~operations, and may provide a useful baseline for analyzing trends in our underlying businesses. ~~Additionally, these adjusted financial~~These non-GAAP measures are used internally by management for ~~the determination of incentive compensation awards,~~ business unit operating performance analysis, ~~and~~ business unit resource ~~allocation.~~allocation and in connection with incentive compensation award determinations.

Adjusted amounts reflect the following:


	Three Months Ended June 30,						Six Months Ended June 30,
Non-GAAP Adjustments	2020		2019		2020		2019
Operating Expenses:
Transformation Strategy Costs	$	112	$	21	$	157	$	144
Total Adjustments to Operating Expenses	112		21		157		144
Income Tax Benefit from Transformation Strategy Costs	(29)		(4)		(39)		(34)
Total Adjustments to Net Income	$	83	$	17	$	118	$	110

For additional information regarding our transformation strategy costs see note 17 to the unaudited, consolidated financial statements included in this report.

We also supplement the reporting of ~~our~~ revenue, revenue per piece and operating profit with non-GAAP measures that exclude the ~~period-over-period~~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 ~~business~~products and results. We evaluate the performance of our International Package and Supply Chain & Freight segments on athis currency-neutral basis.

Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reported U.S. dollar revenue, revenue per piece and operating profit by the current period average exchange rates to derive current period local currency revenue, revenue per piece and operating profit. The derived amounts are then multiplied by the average foreign 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 revenue hedging activities). The difference between the current period reported U.S. dollar revenue, revenue per piece and operating profit and the derived current period U.S. dollar revenue, revenue per piece and operating profit is the period over period impact of currency fluctuations.

~~Amounts presented on an adjusted basis reflect the following:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
Non-GAAP Adjustments 2019 2018 2019 2018
Operating Expenses:
Transformation Strategy Costs $ 63
$ 97
$ 207
$ 360
Total Adjustments to Operating Expenses 63
97
207
360
Income Tax Benefit from Transformation Strategy Costs (16 ) (24 ) (50 ) (87 )
Total Adjustments to Net Income $ 47
$ 73
$ 157
$ 273

~~For additional information regarding our transformation strategy costs, see note 17 to the unaudited, consolidated financial statements included in this report.~~

Non-GAAP financial measures should not be considered in ~~addition to, and not~~isolation or as ~~an alternative~~a substitute for ~~our reported results prepared in accordance with U.S. GAAP.~~the related GAAP measures. Our non-GAAP financial ~~information does not represent a comprehensive basis of accounting. Therefore, our non-GAAP financial information~~measures may ~~not be comparable to similarly titled~~differ from similar measures ~~reported~~used by other companies.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Results of Operations - Segment Review

The results and discussions that follow are reflective of how our ~~executive~~ management monitors and evaluates the performance of our reporting segments.

Certain operating expenses are allocated among our reporting segments using activity-based costing methods. These activity-based costing methods require us to make estimates that impact the amount of each expense that is attributed to each segment. Changes in these estimates would 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 business. Beginning in 2020, we updated our cost allocation methodology for the Ground with Freight Pricing ("GFP") product. The cost associated with GFP that is allocated from the U.S. Domestic Package segment to UPS Freight, within the Supply Chain & Freight segment, was adjusted to better reflect operational activities associated with this product. As a result, expense allocated to UPS Freight for the second quarter decreased by $1 million (increased allocation of $2 million year-to-date). There were no significant changes in our expense allocation methodologies ~~during 2019~~in 2019.

We continue to monitor the impact of COVID-19 on the fair value of our reporting units and indefinite-lived intangible assets. As of June 30, 2020, we concluded that no events had occurred that would more likely than not reduce the fair value of any reporting unit or ~~2018.~~indefinite-lived intangible asset below its carrying value as of that date. However, the economic outlook remains uncertain. If our future expectations for revenue, earnings or cash flows from our reporting units decrease, it is reasonably possible that goodwill or indefinite-lived intangible assets in one or more of these reporting units could be impaired.

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RESULTS OF OPERATIONS

U.S. Domestic Package Operations


	Three Months Ended September 30,						Change			Change		Nine Months Ended September 30,						Change			Change			Three Months Ended June 30,											Change											Six Months Ended June 30,						Change
	2019			2018			$			%		2019			2018			$			%						2020				2019			$			%				2020				2019			$			%
Average Daily Package Volume (in thousands):																							Average Daily Package Volume (in thousands):
Next Day Air	1,891			1,526						23.9	%	1,771			1,462						21.1	%	Next Day Air	1,865				1,855							0.5	%		1,874				1,710							9.6	%
Deferred	1,474			1,256						17.4	%	1,413			1,260						12.1	%	Deferred	1,702				1,380							23.3	%		1,597				1,382							15.6	%
Ground	14,544			13,624						6.8	%	14,068			13,529						4.0	%	Ground	17,560				13,972							25.7	%		16,114				13,829							16.5	%
Total Avg. Daily Package Volume	17,909			16,406						9.2	%	17,252			16,251						6.2	%
Total Average Daily Package Volume																							Total Average Daily Package Volume	21,127				17,207							22.8	%		19,585				16,921							15.7	%
Average Revenue Per Piece:																							Average Revenue Per Piece:
Next Day Air	$	17.73		$	19.72		$	(1.99	)	(10.1	)%	$	18.21		$	19.73		$	(1.52	)	(7.7	)%	Next Day Air	$	16.62			$	18.30			$	(1.68)		(9.2)	%		$	16.84			$	18.48			$	(1.64)		(8.9)	%
Deferred	13.23			13.47			(0.24		)	(1.8	)%	12.95			13.36			(0.41		)	(3.1	)%	Deferred	11.92				13.10				(1.18)			(9.0)	%		12.21				12.80				(0.59)			(4.6)	%
Ground	8.66			8.71			(0.05		)	(0.6	)%	8.72			8.63			0.09			1.0	%	Ground	8.71				8.75				(0.04)			(0.5)	%		8.72				8.75				(0.03)			(0.3)	%
Total Avg. Revenue Per Piece	$	9.99		$	10.10		$	(0.11	)	(1.1	)%	$	10.04		$	9.99		$	0.05		0.5	%
Total Average Revenue Per Piece																							Total Average Revenue Per Piece	$	9.67			$	10.12			$	(0.45)		(4.4)	%		$	9.79			$	10.07			$	(0.28)		(2.8)	%
Operating Days in Period	64			63								191			191								Operating Days in Period	64				64										128				127
Revenue (in millions):																							Revenue (in millions):
Next Day Air	$	2,146		$	1,896		$	250		13.2	%	$	6,160		$	5,510		$	650		11.8	%	Next Day Air	$	1,984			$	2,173			$	(189)		(8.7)	%		$	4,039			$	4,014			$	25		0.6	%
Deferred	1,248			1,066			182			17.1	%	3,494			3,215			279			8.7	%	Deferred	1,298				1,157				141			12.2	%		2,495				2,246				249			11.1	%
Ground	8,061			7,475			586			7.8	%	23,431			22,293			1,138			5.1	%	Ground	9,792				7,820				1,972			25.2	%		17,996				15,370				2,626			17.1	%
Total Revenue	$	11,455		$	10,437		$	1,018		9.8	%	$	33,085		$	31,018		$	2,067		6.7	%	Total Revenue	$	13,074			$	11,150			$	1,924		17.3	%		$	24,530			$	21,630			$	2,900		13.4	%
Operating Expenses (in millions):																							Operating Expenses (in millions):
Operating Expenses	$	10,239		$	9,488		$	751		7.9	%	$	29,995		$	28,374		$	1,621		5.7	%	Operating Expenses	$	11,892			$	9,942			$	1,950		19.6	%		$	22,984			$	19,756			$	3,228		16.3	%
Transformation Strategy Costs	(26		)	(39		)	13			(33.3	)%	(72		)	(235		)	163			(69.4	)%	Transformation Strategy Costs	(33)				(18)				(15)			83.3	%		(70)				(46)				(24)			52.2	%
Adjusted Operating Expense	$	10,213		$	9,449		$	764		8.1	%	$	29,923		$	28,139		$	1,784		6.3	%	Adjusted Operating Expense	$	11,859			$	9,924			$	1,935		19.5	%		$	22,914			$	19,710			$	3,204		16.3	%
Operating Profit (in millions) and Operating Margin:																							Operating Profit (in millions) and Operating Margin:
Operating Profit	$	1,216		$	949		$	267		28.1	%	$	3,090		$	2,644		$	446		16.9	%	Operating Profit	$	1,182			$	1,208			$	(26)		(2.2)	%		$	1,546			$	1,874			$	(328)		(17.5)	%
Adjusted Operating Profit	$	1,242		$	988		$	254		25.7	%	$	3,162		$	2,879		$	283		9.8	%	Adjusted Operating Profit	$	1,215			$	1,226			$	(11)		(0.9)	%		$	1,616			$	1,920			$	(304)		(15.8)	%
Operating Margin	10.6		%	9.1		%						9.3		%	8.5		%						Operating Margin	9.0		%		10.8		%								6.3		%		8.7		%
Adjusted Operating Margin	10.8		%	9.5		%						9.6		%	9.3		%						Adjusted Operating Margin	9.3		%		11.0		%								6.6		%		8.9		%

Revenue

The change in overall revenue was ~~impacted by~~due to the ~~following:~~following factors:

Volume
Rates /
Product Mix

Fuel
Surcharge

Total Revenue
Change
Revenue Change Drivers:
Third quarter 2019 vs. 2018 10.9 % (1.3 )% 0.2 % 9.8 %
Year-to-date 2019 vs. 2018 6.2 % — % 0.5 % 6.7 %


	Volume		Rates / Product Mix		Fuel Surcharge		Total Revenue Change
Revenue Change Drivers:
Second quarter 2020 vs. 2019	22.8	%	(4.3)	%	(1.2)	%	17.3	%
Year-to-date 2020 vs. 2019	16.7	%	(2.7)	%	(0.6)	%	13.4	%

Volume

~~Our overall volume~~Volume increased across all products in the ~~third~~second quarter and year-to-date periods, ~~of 2019,~~ led by strong growth in our ~~Next Day Air~~deferred and ~~Deferred~~ground services ~~due to increasing~~driven by continuing elevated demand for ~~faster delivery options~~residential delivery. Growth was driven primarily by large retail customers, although we experienced volume growth from small- and ~~for the third quarter, one additional operating day.~~

~~Business-to-consumer shipments, which represented approximately 52%~~medium-sized business customers of 17.8% and 22.4% during May and June, respectively, as a result of the total U.S. Domestic Package average daily volume in the quarter, grew 15.0% (up 9.7% year-to-date) and were driven by overall increases in air and ground volume. Business-to-business shipments increased 3.4% (up 2.6% year-to-date), with volume increases in both air and ground services.e-commerce shift related to COVID-19.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Business-to-consumer shipments, which represented approximately 69% of the total U.S. Domestic Package average daily volume in the quarter, as compared to approximately 51% in the second quarter of 2019, grew 65.2% (up 42.8% year-to-date) driven by growth in e-commerce. In particular, we continued to experience significantly elevated business-to-consumer volume as restrictions implemented in response to COVID-19 drove more consumers online. Business-to-consumer shipments remained significantly elevated throughout the second quarter, although the percentage of average daily volume attributable to business-to-consumer shipments declined in June as government restrictions were eased around the country and business activity began to increase. Business-to-business shipments decreased 21.9% in the second quarter (down 12.0% year-to-date), driven by lower volume in our ground products as a result of temporary business closures across large parts of the country. This decrease was most significant in April, when volume declined 37.8%, and had moderated to a decline of 7.7% in June.

~~Among our air products, overall~~Overall average daily volume increased in the ~~third~~second quarter and year-to-date periods ~~of 2019~~ for both our Next Day Air and Deferred ~~services.~~products. Strong air volume growth continued ~~for those products aligned~~ primarily ~~with business-to-consumer shipping, including our~~in residential Next Day ~~Air~~ and ~~Second Day package~~Deferred Package products as ~~consumers and businesses continue to demand faster delivery options.~~the impacts of COVID-19 drove a significant increase in business-to-consumer volume. This growth was slightly offset by declines in Next Day ~~Air letter~~ and Second Day ~~letter~~Letter volume due to shifts in customer preferences.

InResidential ground and SurePost volume also increased significantly in the ~~third~~second quarter and year-to-date periods, ~~we experienced year over year growth in residential ground products,~~ driven by changes in customer mix ~~while~~resulting from continued growth in ~~ground~~e-commerce as COVID-19 restrictions continued during the quarter. Ground commercial ~~products was partly driven by retail return services.~~volume declined overall during the second quarter and year-to-date periods as many businesses temporarily closed in response to government restrictions, however we experienced some volume growth in June as businesses began to reopen.

Rates and Product Mix

Overall revenue per piece decreased for the ~~third~~second quarter ~~of 2019~~and year-to-date periods due to changes in customer and product mix and fuel surcharge ~~rates. On a year-to-date basis, revenue per piece increased due to~~rates, partially offset by changes in base ~~rates, customer and product mix and fuel surcharge~~ rates.

Revenue per piece for ~~ground and air~~all products ~~on a year-to-date basis~~ was positively impacted by a base rate increase onin December ~~26, 2018. UPS~~2019. Ground rates and ~~UPS Air~~air services rates increased an average net 4.9%.

Revenue per piece for our Next Day Air ~~services~~and Deferred products decreased in ~~both~~ the ~~third~~second quarter and year-to-date ~~periods of 2019.~~periods. This decrease was primarily driven by a shift in customer and product mix and a decrease in average billable weight per piece, which was partially offset by anthe increase in base ~~rates.~~rates described above.

Revenue per piece for our ~~Deferred services~~Ground products decreased inslightly for the ~~third~~second quarter and year-to-date periods ~~of 2019~~primarily due to ~~an unfavorable~~a shift in ~~customer and~~ product mix ~~and~~with a substantial increase in SurePost volume, as well as a decrease in average billable weight per ~~piece, partially offset by an increase in base rates.~~

~~Revenue per piece for our ground products decreased for the third quarter primarily due to customer mix and a~~piece. This decrease ~~in average billable weight per piece,~~was partially offset by base rate ~~increases and favorable product mix. On a year-to-date basis, revenue per piece for ground products increased due to favorable customer and product mix and base rate~~ increases.

Lower fuel surcharge rates negatively impacted revenue per piece for ground products in the third quarter of 2019. On a year-to-date basis, revenue per piece for ground products was positively impacted by fuel surcharge rate increases during 2018. Fuel ~~surcharge rates for air products decreased slightly in the third quarter and year-to-date periods of 2019.~~Surcharges

~~UPS applies~~We apply a fuel surcharge onto domestic air and ground ~~services.~~services that is adjusted weekly. The air fuel surcharge is based on the U.S. Department of Energy’s (“DOE”) Gulf Coast spot price for a gallon of kerosene-type jet fuel, while the ground fuel surcharge is based on the DOE’s On-Highway Diesel Fuel price. Effective March 2, 2020, the fuel surcharge rates were raised for all thresholds on U.S. air and ground services. Based on published rates, the average fuel surcharges for domestic ~~air~~Air and ~~ground~~Ground products were as follows:


	Three Months Ended June 30,						Change		Six Months Ended June 30,				Change
	2020		2019		% Point		2020		2019		% Point
Next Day Air / Deferred	1.9	%	7.7	%	(5.8)	%	3.9	%	7.4	%	(3.5)	%
Ground	6.4	%	7.4	%	(1.0)	%	6.8	%	7.3	%	(0.5)	%

While fluctuations in fuel surcharge percentages can be significant from period to period, fuel surcharges are only one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and additional charges for these services and the pricing discounts offered.

Total domestic fuel surcharge revenue decreased by $129 million in the second quarter (down $135 year-to-date) as a result of lower fuel surcharge indices, partially offset by increases in package volume and shifts in product mix.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2019
2018 % Point 2019 2018 % Point
Next Day Air / Deferred 7.3 % 8.0 % (0.7 )% 7.4 % 7.6 % (0.2 )%
Ground 7.1 % 7.3 % (0.2 )% 7.2 % 6.8 % 0.4 %
Operating Expenses

Operating expenses, and operating expenses excluding the year over year impact of transformation strategy costs, increased in the second quarter, primarily due to increased pickup and delivery costs (up $1,249 million). Pickup and delivery costs increased as the elevated level of residential volume negatively impacted our delivery density, driving a 36.2% increase in package delivery stops per day and a 15.7% increase in average daily miles driven. In addition, the costs of operating our domestic integrated air and ground network increased $221 million, the costs of package sorting increased $271 million and other indirect operating costs increased $194 million. The increases in expense were driven by several factors:

•Higher employee compensation and benefit costs largely resulting from:

◦volume growth, which resulted in an increase in average daily direct union labor hours of 22.7%;

◦union pay rate increases; and

◦growth in the overall size of the workforce.

We incurred higher employee benefit expenses due to additional headcount, contractual contribution rate increases to union multiemployer plans, changes in benefit eligibility for certain union employees and higher service costs for our company-sponsored pension and postretirement plans, primarily driven by lower discount rates used to measure the projected benefit obligations of these plans. Workers' compensation expense increased $126 million as a result of additional hours, medical and wage inflation and claims experience.

•Higher third party transportation costs were largely driven by additional SurePost volume.

•The increases described above were partially offset by a decrease in fuel costs driven by lower jet fuel, diesel and gasoline prices, as well as alternative fuel tax credits arising from legislation passed in the fourth quarter of 2019.

On a year-to-date basis, operating expenses and operating expenses excluding the year over year impact of transformation strategy costs increased due to pickup and delivery costs (up $1,972 million), the costs of operating our domestic integrated air and ground network (up $505 million), the costs of package sorting (up $427 million) and other indirect operating costs (up $300 million). These increases were primarily driven by higher volume with lower delivery density, increased employee compensation and benefit costs and higher self-insurance casualty losses.

Total cost per piece decreased 2.6% for the second quarter (down 0.3% year-to-date). Excluding the impact of transformation strategy costs, adjusted cost per piece decreased 2.7% for the second quarter (down 0.3% year-to-date). Cost per piece decreased primarily due to lower fuel costs.

Operating Profit and Margin

As a result of the factors described above, operating profit decreased $26 million in the second quarter (down $328 million year-to-date), with operating margins decreasing 180 basis points to 9.0% (down 240 basis points to 6.3% year-to-date). Excluding the year over year impact of transformation strategy costs, adjusted operating profit decreased $11 million in the second quarter (down $304 million year-to-date), with adjusted operating margins decreasing 170 basis points to 9.3% (down 230 basis points to 6.6% year-to-date).

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

International Package Operations


	Three Months Ended June 30,								Change									Six Months Ended June 30,					Change
	2020			2019			$		%			2020			2019			$		%
Average Daily Package Volume (in thousands):
Domestic	1,764			1,626					8.5		%	1,716			1,657					3.6		%
Export	1,545			1,387					11.4		%	1,479			1,419					4.2		%
Total Average Daily Package Volume	3,309			3,013					9.8		%	3,195			3,076					3.9		%
Average Revenue Per Piece:
Domestic	$	6.37		$	6.63		$	(0.26)	(3.9)		%	$	6.41		$	6.56		$	(0.15)	(2.3)		%
Export	28.56			30.06			(1.50)		(5.0)		%	28.45			29.40			(0.95)		(3.2)		%
Total Average Revenue Per Piece	$	16.73		$	17.41		$	(0.68)	(3.9)		%	$	16.61		$	17.10		$	(0.49)	(2.9)		%
Operating Days in Period	64			64								128			127
Revenue (in millions):
Domestic	$	719		$	690		$	29	4.2		%	$	1,407		$	1,380		$	27	2.0		%
Export	2,824			2,668			156		5.8		%	5,385			5,299			86		1.6		%
Cargo and Other	162			147			15		10.2		%	296			285			11		3.9		%
Total Revenue	$	3,705		$	3,505		$	200	5.7		%	$	7,088		$	6,964		$	124	1.8		%
Operating Expenses (in millions):
Operating Expenses	$	2,934		$	2,842		$	92	3.2		%	$	5,766		$	5,773		$	(7)	(0.1)		%
Transformation Strategy Costs	(71)			(2)			(69)		N/M			(78)			(86)			8		(9.3)		%


Adjusted Operating Expenses	$	2,863		$	2,840		$	23	0.8		%	$	5,688		$	5,687		$	1	—		%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	771		$	663		$	108	16.3		%	$	1,322		$	1,191		$	131	11.0		%
Adjusted Operating Profit	$	842		$	665		$	177	26.6		%	$	1,400		$	1,277		$	123	9.6		%
Operating Margin	20.8		%	18.9		%						18.7		%	17.1		%
Adjusted Operating Margin	22.7		%	19.0		%						19.8		%	18.3		%
Currency Benefit / (Cost) – (in millions)*:
Revenue									$	(38)										$	(57)
Operating Expenses									46											87
Operating Profit									$	8										$	30
* Net of currency hedging; amount represents the change in currency translation compared to the prior year.

Revenue

The change in revenue was due to the following:


	Volume		Rates / Product Mix		Fuel Surcharge		Currency		Total Revenue Change
Revenue Change Drivers:
Second quarter 2020 vs. 2019	9.8	%	1.1	%	(4.1)	%	(1.1)	%	5.7	%
Year-to-date 2020 vs. 2019	4.7	%	—	%	(2.1)	%	(0.8)	%	1.8	%

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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 increased in the second quarter and year-to-date periods for both domestic and export products. Business-to-consumer volume increased in the second quarter and year-to-date periods, with growth peaking in May as isolation measures implemented by many countries in response to COVID-19 during the first quarter continued to push consumers online. As countries began easing these measures in the latter half of the second quarter, business-to-consumer volume decreased slightly in June. Business-to-business volume declined in the second quarter and for the year-to-date. Declines in commercial volume in April and May were partially offset by growth in June, primarily in Europe and Asia as business activity began to resume.

Average daily volume for the quarter and year-to-date periods was impacted by higher online consumer demand, as well as increased demand from the government and technology sectors. These increases were slightly offset by lower demand from manufacturing, healthcare and professional services customers.

Export volume increased in the second quarter and year-to-date periods across most major trade lanes, driven by Asia, as the region was the first to ease restrictions implemented in response to COVID-19. Volume on the Europe to U.S. and Intra-Europe trade lanes also increased, driven by our large customers. Export volume growth for the quarter and year-to-date periods was strongest in our non-premium expedited and standard products such as Worldwide Expedited and Transborder Standard. Export volume increased slightly in the second quarter in our premium Worldwide Express product.

Domestic volume also increased in the majority of our markets in the second quarter and year-to-date periods primarily due to residential growth from large customers in the online retail sector.

Rates and Product Mix

In ~~October 2018, ground~~December 2019 we implemented an average 4.9% net increase in base and accessorial rates for international shipments originating in the United States. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market. In response to capacity constraints driven by the COVID-19 pandemic, we implemented a demand surcharge on certain shipments from Asia to the U.S. and Asia to Europe in March 2020.

Total revenue per piece decreased 3.9% in the second quarter (down 2.9% year-to-date), of which 1.0% (0.8% year-to-date) was attributable to currency movements. Excluding the impact of currency, revenue per piece decreased 2.9% (2.1% year-to-date), primarily due to negative impacts from declines in fuel surcharge ~~rates were raised for all thresholds, and~~indices.

Domestic revenue per piece decreased 3.9% in ~~October and December 2018, Domestic Air~~the second quarter (down 2.3% year-to-date), of which 2.4% (2.0% year-to-date) was attributable to currency movements. Excluding the impact of currency, revenue per piece decreased 1.5% (0.3% year-to-date) due to declines in fuel surcharge indices, offset by base rate increases.

Export revenue per piece decreased 5.0% in the second quarter (3.2% year-to-date), of which 0.6% (0.4% year-to-date) was attributable to currency movements. Excluding the impact of currency, revenue per piece decreased 4.4% (2.8% year-to-date) driven by declines in fuel surcharge indices and the continuing trend towards our non-premium products, offset by base rate increases and growth in our express product in Asia.

We have implemented changes to our international rates ~~were increased~~to better reflect the rapidly changing environment. We constantly monitor rates and make adjustments where feasible.

Fuel Surcharges

We apply fuel surcharges on our international air and ground services. The fuel surcharges for ~~all thresholds. Ground~~international air services originating inside or outside the U.S. are largely indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel. The fuel surcharges ~~will continue~~for ground services originating outside the U.S. are indexed to ~~be based on~~fuel prices in the ~~national U.S. Average On-Highway Diesel Fuel price and adjusted weekly.~~region or country where the shipment originates.

Total ~~domestic~~international fuel surcharge revenue ~~increased by $21~~decreased $148 million in the ~~third~~second quarter ~~of 2019 as a result of increases in package volume, partially offset by lower fuel surcharge rates for the quarter. On a year-to-date basis, fuel surcharge revenue increased by $152~~($155 million year-to-date) due to the ~~overall increase~~declines in ~~package volume, as well as increases in the~~fuel surcharge indices.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Operating Expenses

Operating expenses, and operating expenses excluding the year over year impact of transformation strategy costs, increased in the ~~third~~second quarter ~~of 2019,~~but remained relatively flat year-to-date. The second quarter increase was primarily due to increased pickup and delivery costs (up $446 million), the costs of operating our domestic integrated air and ground network (up $177 million), the costs of package sorting (up $113 million) and other indirect operating costs (up $28 million).

~~The growth in pickup and delivery and network costs was impacted~~driven by ~~several factors:~~

~~Higher employee compensation and benefit costs largely resulting from (1)~~higher volume, ~~growth,~~ which resulted in an increase in average daily union labor hours of 7.0%; (2) union pay rate and benefit increases; and (3) growth in the overall size of the workforce due to facility expansions. These increases were partially offset by productivity improvements. We incurred higher employee benefit expenses due to additional headcount, contractual contribution rate increases to union multiemployer plans and changes in benefit eligibility for certain union employees. These increases were partially offset by productivity improvements and lower pension expense for our company-sponsored plans due to higher discount rates used to measure the projected benefit obligations, which reduced service costs.

Higher fuel expense in the third quarter of 2019 was primarily driven by increased network volume, which resulted in higher fuel and alternative fuel usage. Aircraft block hours increased 13.8%, daily package delivery stops increased 14.1% and daily delivery miles increased 9.2%. These increases were partially offset by year over year declines in fuel prices, as well as improved delivery stops per mile.

~~Lower costs for outside contract carriers driven by retaining additional volume within our network.~~

On a year-to-date basis, operating expenses, and operating expenses excluding the impact of transformation strategy costs, increased largely due to pickup and delivery costs (up $904 million), network costs (up $503 million), the cost of package sorting (up $295 million) and other indirect operating costs (up $82 million). These increases were primarily driven by higher volume, increased employee compensation costs and increased fuel costs, with higher fuel consumption partially offset by declines in fuel prices. Alternative fuel costs were higher year over year due to alternative fuel tax credits received in 2018.

Total cost per piece, which includes transformation strategy costs, decreased 2.7% for the third quarter of 2019 (down 0.4% for the year-to-date period). Excluding the year over year impact of transformation strategy costs, adjusted cost per piece decreased 2.5% in the third quarter and remained relatively flat year-to-date. Cost per piece growth rates have slowed over the last several quarters as we have begun to realize the benefits of our new automated facilities and other transformation initiatives.

~~Operating Profit and Margin~~

Operating profit increased $267 million for the third quarter of 2019 (up $446 million year-to-date), with operating margins increasing 150 basis points to 10.6% (up 80 basis points to 9.3% year-to-date). Excluding the year over year impact of transformation strategy costs, adjusted operating profit increased $254 million for the third quarter (up $283 million year-to-date), with adjusted operating margins increasing 130 basis points to 10.8% (up 30 basis points to 9.6% year-to-date). Operating profit increased as a result of the items described above.

~~Table of Contents~~

~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND~~

~~RESULTS OF OPERATIONS~~

~~International Package Operations~~

Three Months Ended
September 30, Change Change Nine Months Ended
September 30, Change Change
2019 2018 $ % 2019 2018 $ %
Average Daily Package Volume (in thousands):
Domestic 1,668
1,663
0.3 % 1,661
1,662
(0.1 )%
Export 1,437
1,437
— % 1,425
1,436
(0.8 )%
Total Avg. Daily Package Volume 3,105
3,100
0.2 % 3,086
3,098
(0.4 )%
Average Revenue Per Piece:
Domestic $ 6.45
$ 6.47
$ (0.02 ) (0.3 )% $ 6.52
$ 6.60
$ (0.08 ) (1.2 )%
Export 29.06
29.32
(0.26 ) (0.9 )% 29.29
29.43
(0.14 ) (0.5 )%
Total Avg. Revenue Per Piece $ 16.92
$ 17.06
$ (0.14 ) (0.8 )% $ 17.04
$ 17.18
$ (0.14 ) (0.8 )%
Operating Days in Period 64
63
191
191

Revenue (in millions):
Domestic $ 689
$ 678
$ 11
1.6 % $ 2,069
$ 2,094
$ (25 ) (1.2 )%
Export 2,673
2,654
19
0.7 % 7,972
8,073
(101 ) (1.3 )%
Cargo and Other 132
146
(14 ) (9.6 )% 417
446
(29 ) (6.5 )%
Total Revenue $ 3,494
$ 3,478
$ 16
0.5 % $ 10,458
$ 10,613
$ (155 ) (1.5 )%
Operating Expenses (in millions):

Operating Expenses $ 2,827
$ 2,942
$ (115 ) (3.9 )% $ 8,600
$ 8,865
$ (265 ) (3.0 )%
Transformation Strategy Costs (26 ) (40 ) 14
(35.0 )% (112 ) (76 ) (36 ) 47.4 %
Adjusted Operating Expenses $ 2,801
$ 2,902
$ (101 ) (3.5 )% $ 8,488
$ 8,789
$ (301 ) (3.4 )%
Operating Profit (in millions) and Operating Margin:
Operating Profit $ 667
$ 536
$ 131
24.4 % $ 1,858
$ 1,748
$ 110
6.3 %
Adjusted Operating Profit $ 693
$ 576
$ 117
20.3 % $ 1,970
$ 1,824
$ 146
8.0 %
Operating Margin 19.1 % 15.4 % 17.8 % 16.5 %
Adjusted Operating Margin 19.8 % 16.6 % 18.8 % 17.2 %
Currency Benefit / (Cost) – (in millions)*:
Revenue $ (24 ) $ (222 )
Operating Expenses 56
268
Operating Profit $ 32
$ 46
* Net of currency hedging; amount represents the change in currency translation compared to the prior year.

~~Revenue~~

~~The change in overall revenue was impacted by the following:~~

Volume
Rates /
Product Mix

Fuel
Surcharge
Currency
Total Revenue
Change
Revenue Change Drivers:
Third quarter 2019 vs. 2018 1.8 % (0.6 )% — % (0.7 )% 0.5 %
Year-to-date 2019 vs. 2018 (0.4 )% 0.9 % 0.1 % (2.1 )% (1.5 )%

~~Volume~~

Our overall average daily volume increased slightly in the third quarter of 2019 due to growth in domestic products while export products remained flat. Average daily volume for both domestic and export products decreased in the year-to-date period.

Average daily volume was impacted by lower demand across a number of sectors including government, automotive, high tech, retail, manufacturing and professional services, partially offset by higher demand in healthcare and other sectors. Business-to-consumer shipments remained relatively flat for the quarter and year-to-date periods.

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~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND~~

~~RESULTS OF OPERATIONS~~

Domestic volume increased slightly in the third quarter of 2019, with growth in several European and other markets. On a year-to-date basis, domestic volume remained flat as overall economic declines offset these pockets of growth.

Export volume remained flat in the third quarter and declined for the year-to-date period. Intra-European volume grew slightly in the third quarter, but remained flat year-to-date. Volume on the Europe to U.S. and Europe to U.K. trade lanes declined, due in part to continued uncertainty around Brexit. U.S. export volume decreased across all major trade lanes with the exception of the U.S. to ISMEA lane, while Asia export volumes grew in all major trade lanes with the exception of the United States. Export volume for the quarter and year-to-date periods was strongest in our non-premium expedited and standard products such as Worldwide Expedited and Transborder Standard, offset by declines in our premium Worldwide and Transborder Express services.

~~Rates and Product Mix~~

On December 26, 2018 we implemented an average 4.9% net increase in base and accessorial rates for international shipments originating in the United States. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market.

Total average revenue per piece decreased 60 basis points due to currency in the third quarter of 2019 (210 basis point decrease year-to-date). Excluding the impact of currency, revenue per piece decreased 0.2% (increased 1.3% year-to-date). Revenue per piece for the third quarter was negatively impacted by declines in fuel surcharge indices. On a quarter-to-date and year-to-date basis, revenue per piece was positively impacted by base rate increases.

Domestic revenue per piece decreased 260 basis points due to currency in the third quarter of 2019 (500 basis point decrease year-to-date). Excluding the impact of currency, revenue per piece increased 2.3% (3.8% year-to-date) due to base rate increases.

Export revenue per piece decreased 20 basis points due to currency in the third quarter of 2019 (150 basis point decrease year-to-date). Excluding the impact of currency, revenue per piece decreased 0.7% (increased 1.0% year-to-date). In the third quarter, the trend towards our non-premium services drove a decrease in export revenue per piece. On a year-to-date basis, the shift in customer preferences was more ~~than offset by base rate increases.~~

We maintain fuel surcharges on our international air and ground services. The fuel surcharges for international air products originating inside or outside the United States are largely indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel. The fuel surcharges for ground products originating outside the United States are indexed to fuel prices in the region or country where the shipment originates.

While fluctuations in fuel surcharge percentages can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impacts our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges we obtain and the level of pricing discounts offered. Total international fuel surcharge revenue decreased $11 million for the third quarter of 2019 ($20 million year-to-date), due to decreases in fuel surcharge indices. For the third quarter, this impact was partially offset by changes in product mix.

~~Operating Expenses~~

Operating expenses, and operating expenses excluding the year over year impact of transformation strategy costs, decreased in the third quarter and year-to-date periods of 2019. These decreases are the result of effective management of network capacity, ~~and cost in response to lower volumes within our air, ground and local pickup and delivery networks,~~ combined with lower fuel prices and favorable currency exchange rate movements.

The costs of operating our integrated international air and ground network decreased $105 million in the second quarter ($137 million year-to-date), as increased block hours were more than offset by lower fuel prices. Pickup and delivery costs increased $64 million for the second quarter ($69 million year-to-date) due to shifts in customer and product mix. The remaining increase in operating expenses in the second quarter and year-to-date periods was largely attributable to transformation strategy costs.

In addition to variability in usage and market prices, the manner in which we purchase fuel also influences the net impact of fuel costs on our results. The majority of our contracts for fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for fuel. Because of this, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term.

~~The costs~~Operating Profit and Margin

As a result of the factors described above, operating our integrated international air and ground network decreased $36 million for the third quarter of 2019 ($72 million year-to-date). The decrease in network costs was primarily driven by a 1.1% decrease in aircraft block hours and relatively flat package volumes in the third quarter of 2019 (1.8% decrease in block hours year-to-date), together with lower fuel prices. Additionally, pickup and delivery costs decreased $17profit increased $108 million in the ~~third~~second quarter ($131 million year-to-date), with operating margin increasing 190 basis points to 20.8% (160 basis points to 18.7% year-to-date). Excluding the year over year impact of ~~2019 ($107 million~~transformation strategy costs, adjusted operating profit increased for the second quarter and year-to-date periods, with adjusted operating margin increasing 370 basis points to 22.7% (150 basis points to 19.8% year-to-date).

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Supply Chain & Freight Operations

The remaining decrease in operating expenses in the third quarter was largely due to a $40 million gain from the sale of surplus property in Canada, as well as decreases in the costs of package sorting and other indirect operating costs.


	Three Months Ended June 30,								Change								Six Months Ended June 30,				Change
	2020			2019			$		%		2020			2019			$		%
Freight LTL Statistics:
Revenue (in millions)	$	585		$	706		$	(121)	(17.1)	%	$	1,222		$	1,341		$	(119)	(8.9)	%
Revenue Per Hundredweight	$	26.82		$	26.34		$	0.48	1.8	%	$	26.65		$	26.23		$	0.42	1.6	%
Shipments (in thousands)	2,071			2,440					(15.1)	%	4,296			4,623					(7.1)	%
Shipments Per Day (in thousands)	32.4			38.1					(15.0)	%	33.6			36.4					(7.7)	%
Gross Weight Hauled (in millions of lbs)	2,181			2,680					(18.6)	%	4,585			5,113					(10.3)	%
Weight Per Shipment (in lbs)	1,053			1,098					(4.1)	%	1,067			1,106					(3.5)	%
Operating Days in Period	64			64							128			127
Revenue (in millions):
Forwarding	$	1,771		$	1,496		$	275	18.4	%	$	3,144		$	2,912		$	232	8.0	%
Logistics	977			833			144		17.3	%	1,822			1,665			157		9.4	%
Freight	724			861			(137)		(15.9)	%	1,490			1,634			(144)		(8.8)	%
Other	208			203			5		2.5	%	420			403			17		4.2	%
Total Revenue	$	3,680		$	3,393		$	287	8.5	%	$	6,876		$	6,614		$	262	4.0	%
Operating Expenses (in millions):
Operating Expenses	$	3,421		$	3,121		$	300	9.6	%	$	6,460		$	6,142		$	318	5.2	%
Transformation Strategy Costs	(8)			(1)			(7)		N/M		(9)			(12)			3		(25.0)	%
Adjusted Operating Expenses:	$	3,413		$	3,120		$	293	9.4	%	$	6,451		$	6,130		$	321	5.2	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	259		$	272		$	(13)	(4.8)	%	$	416		$	472		$	(56)	(11.9)	%
Adjusted Operating Profit	$	267		$	273		$	(6)	(2.2)	%	$	425		$	484		$	(59)	(12.2)	%
Operating Margin	7.0		%	8.0		%					6.1		%	7.1		%
Adjusted Operating Margin	7.3		%	8.0		%					6.2		%	7.3		%
Currency Benefit / (Cost) – (in millions)*:
Revenue							(52)										(100)
Operating Expenses							59										106
Operating Profit							7										6
* Amount represents the change in currency translation compared to the prior year.

~~Operating Profit and Margin~~

Operating profit increased $131 million in the third quarter of 2019 ($110 million year-to-date), with operating margin increasing 370 basis points to 19.1% (increase of 130 basis points to 17.8% year-to-date). Excluding the year over year impact of transformation strategy costs, adjusted operating profit increased for the third quarter of 2019 and year-to-date periods, with adjusted operating margin up 320 basis points to 19.8% (up 160 basis points to 18.8% year-to-date). Operating profit increased as a result of the items described above.


	Three Months Ended June 30,						Change					Six Months Ended June 30,				Change
	2020		2019		$		%	2020		2019		$		%
Transformation Strategy Costs (in millions):
Forwarding	$	4	$	1	$	3	N/M	$	5	$	6	$	(1)	(16.7)	%
Logistics	4		—		4		N/M	4		6		(2)		(33.3)	%


Total Transformation Strategy Costs	$	8	$	1	$	7	N/M	$	9	$	12	$	(3)	(25.0)	%

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

~~Supply Chain & Freight Operations~~

Three Months Ended
September 30, Change Change Nine Months Ended
September 30, Change Change
2019
2018 $ % 2019 2018 $ %
Freight LTL Statistics:
Revenue (in millions) $ 699
$ 735
$ (36 ) (4.9 )% $ 2,040
$ 2,122
$ (82 ) (3.9 )%
Revenue Per Hundredweight $ 26.71
$ 25.70
$ 1.01
3.9 % $ 26.39
$ 25.29
$ 1.10
4.3 %
Shipments (in thousands) 2,441
2,603
(6.2 )% 7,064
7,710
(8.4 )%
Shipments Per Day (in thousands) 38.1
41.3
(7.7 )% 37.0
40.4
(8.4 )%
Gross Weight Hauled (in millions of lbs) 2,617
2,860
(8.5 )% 7,730
8,391
(7.9 )%
Weight Per Shipment (in lbs) 1,072
1,098
(2.4 )% 1,094
1,088
0.6 %
Operating Days in Period 64
63
191
191

Revenue (in millions):
Forwarding $ 1,472
$ 1,672
$ (200 ) (12.0 )% $ 4,384
$ 4,936
$ (552 ) (11.2 )%
Logistics 846
790
56
7.1 % 2,511
2,356
155
6.6 %
Freight 852
867
(15 ) (1.7 )% 2,486
2,497
(11 ) (0.4 )%
Other 199
200
(1 ) (0.5 )% 602
593
9
1.5 %
Total Revenue $ 3,369
$ 3,529
$ (160 ) (4.5 )% $ 9,983
$ 10,382
$ (399 ) (3.8 )%
Operating Expenses (in millions):
Operating Expenses $ 3,124
$ 3,287
$ (163 ) (5.0 )% $ 9,266
$ 9,754
$ (488 ) (5.0 )%
Transformation Strategy Costs (11 ) (18 ) 7
(38.9 )% (23 ) (49 ) 26
(53.1 )%
Adjusted Operating Expenses: $ 3,113
$ 3,269
$ (156 ) (4.8 )% $ 9,243
$ 9,705
$ (462 ) (4.8 )%
Operating Profit (in millions) and Operating Margin:
Operating Profit $ 245
$ 242
$ 3
1.2 % $ 717
$ 628
$ 89
14.2 %
Adjusted Operating Profit $ 256
$ 260
$ (4 ) (1.5 )% $ 740
$ 677
$ 63
9.3 %
Operating Margin 7.3 % 6.9 % 7.2 % 6.0 %
Adjusted Operating Margin 7.6 % 7.4 % 7.4 % 6.5 %
Currency Benefit / (Cost) – (in millions)*:
Revenue $ (20 ) $ (70 )
Operating Expenses 13
61

Operating Profit $ (7 ) $ (9 )
* Amount represents the change in currency translation compared to the prior year.

Three Months Ended
September 30, Change Change Nine Months Ended
September 30, Change Change
2019 2018 $ % 2019 2018 $ %
Transformation Strategy Costs (in millions):
Forwarding $ 5
$ 11
$ (6 ) (54.5 )% $ 11
$ 16
$ (5 ) (31.3 )%
Logistics 6
6
—
— % 12
22
(10 ) (45.5 )%
Freight —
—
—
N/A —
6
(6 ) (100.0 )%
Other —
1
(1 ) (100.0 )% —
5
(5 ) (100.0 )%
Total Transformation Strategy Costs $ 11
$ 18
$ (7 ) (38.9 )% $ 23
$ 49
$ (26 ) (53.1 )%

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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 for the Supply Chain & Freight segment ~~decreased $160~~increased $287 million in the ~~third~~second quarter ~~of 2019~~ ($~~399~~262 million year-to-date) ~~compared with 2018.~~.

Forwarding revenue ~~decreased primarily~~in the second quarter increased due to ~~an overall decline in~~higher market ~~demand that was impacted by global trade uncertainties. This led to lower tonnage~~rates and ~~volume~~capacity surcharges in our international air freight forwarding business attributable to increased volume on Asia-outbound lanes. This volume growth was driven by shipments of personal protective equipment and other supplies related to the COVID-19 pandemic. The increase more than offset both quarter- and year-to-date declines in our North American air freight and ocean freight forwarding businesses that continue to be impacted by the overall decline in demand resulting from economic uncertainty driven by COVID-19 and ongoing global trade tensions. In addition, our truckload brokerage business experienced a decline in revenue due to market pricing pressures in both the quarter and year-to-date periods.

Logistics revenue increased in our mail services business in the second quarter due to e-commerce growth driven by COVID-19, which also drove a favorable shift in product mix. In addition, the healthcare sector experienced revenue growth for the quarter and year-to-date periods, partly resulting from increased demand for healthcare logistics and distribution solutions in response to COVID-19. Revenue from most other sectors declined due to the economic impacts of the pandemic on customer demand.

UPS Freight revenue decreased as ~~well as~~a result of volume and tonnage declines in ~~rates charged to~~ our ~~customers. In addition, capacity surplus~~LTL product which were driven by reduced demand in the freight market, particularly early in the quarter. Fuel surcharge revenue decreased in the second quarter as a result of lower diesel fuel prices. On a year-to-date basis, volume declines in our LTL and truckload ~~brokerage market depressed rates, contributing~~products contributed to the ~~year over year decrease~~decline in revenue. These decreases were partially offset by ~~yield management initiatives.~~

~~Logistics~~an increase in LTL revenue ~~increased as we experienced growth in our mail services, healthcare, retail and manufacturing sectors.~~

UPS Freight revenue decreased in the third quarter of 2019 as a result of revenue management initiatives that drove declines in tonnage and shipment volume. These decreases were partially offset by increased yields as well as increases in our Ground Freight Pricing productper hundredweight, largely due to ~~higher volume.~~base rate increases that took effect in March 2020.

Operating Expenses

Total operating expenses for the Supply Chain & Freight segment, and operating expenses excluding the year over year impact of transformation strategy costs, ~~decreased~~increased in the ~~third~~second quarter and year-to-date ~~periods of 2019.~~periods.

Forwarding operating expenses ~~decreased $178~~increased $241 million in the second quarter ($~~555~~236 million year-to-date). Purchased transportation expense increased $244 million in the quarter ($260 million year-to-date), ~~largely due to reductions in purchased transportation. Purchased transportation expense decreased $144 million ($529 million year-to-date), primarily due to lower tonnage and~~as market ~~rates~~rate increases in our international air freight forwarding business outpaced the overall declines in tonnage and ~~a decrease in volume~~volume. For the quarter and ~~market rates in truckload brokerage. Cost~~year-to-date periods, these increases were slightly offset by the impact of cost management initiatives ~~also contributed~~that were implemented in response to ~~the reduction in operating expenses.~~lower volume.

Logistics operating expenses increased ~~$49~~$146 million ($~~140~~148 million year-to-date), ~~primarily due to increases in~~driven by higher purchased transportation ~~driven by increased volume and business investments~~expense in ~~healthcare quality assurance and technology. Increased rates~~the second quarter for mail services ~~also contributed to~~as a result of volume growth and carrier rate increases, as well as volume growth in the ~~increase in purchased transportation expenses.~~healthcare sector.

UPS Freight operating expenses decreased ~~$24~~$96 million in the second quarter ($6082 million year-to-date), largely due to ~~decreases in~~lower costs associated with operating our linehaul network ($~~24 million quarter-to-date~~46 and ~~$52~~$47 million year-to-date) and ~~decreases in~~lower pickup and delivery costs ($~~12 million quarter-to-date~~43 and ~~$40~~$38 million year-to-date). These reductions were driven by ~~a lower expense from outside transportation carriers as a result of a decline~~the declines in tonnage and ~~lower fuel surcharges. These decreases were partially offset by increases in transportation expense for our Ground Freight Pricing product due to higher volumes. Additionally,~~volume resulting from the impact of COVID-19 on the freight market, as well as cost management initiatives and production improvements ~~contributed~~implemented in response to ~~the reduction~~market conditions. On a year-to-date basis, expense was impacted by increases in ~~operating expenses.~~reserves for self-insured automobile liability claims.

Operating Profit and Margin

~~Total~~As a result of the factors described above, operating profit for the Supply Chain & Freight segment ~~increased $3~~decreased $13 million in the ~~third~~second quarter ~~of 2019~~ ($8956 million year-to-date) ~~compared with 2018.~~. Excluding the year over year impact of transformation strategy costs, adjusted operating profit decreased $4$6 million ~~(increased $63~~in the second quarter ($59 million year-to-date). ~~Operating profit was impacted by the items described above.~~

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Consolidated Operating Expenses


	Three Months Ended June 30,						Change							Six Months Ended June 30,					Change
	2020		2019		$		%			2020		2019		$		%
Operating Expenses (in millions):
Compensation and benefits	$	10,843	$	9,299	$	1,544	16.6		%	$	20,929	$	18,616	$	2,313	12.4		%
Transformation strategy costs	(81)		(2)		(79)		N/M			(93)		(108)		15		(13.9)		%
Adjusted Compensation and benefits	10,762		9,297		1,465		15.8		%	20,836		18,508		2,328		12.6		%

Repairs and maintenance	554		473		81		17.1		%	1,117		907		210		23.2		%
Depreciation and amortization	661		575		86		15.0		%	1,309		1,143		166		14.5		%
Purchased transportation	3,716		3,000		716		23.9		%	6,647		5,966		681		11.4		%
Fuel	499		857		(358)		(41.8)		%	1,260		1,627		(367)		(22.6)		%
Other occupancy	355		322		33		10.2		%	738		693		45		6.5		%
Other expenses	1,619		1,379		240		17.4		%	3,210		2,719		491		18.1		%
Total Other expenses	7,404		6,606		798		12.1		%	14,281		13,055		1,226		9.4		%
Other Transformation strategy costs	(31)		(19)		(12)		63.2		%	(64)		(36)		(28)		77.8		%
Adjusted Total Other expenses	7,373		6,587		786		11.9		%	14,217		13,019		1,198		9.2		%

Total Operating Expenses	$	18,247	$	15,905	$	2,342	14.7		%	$	35,210	$	31,671	$	3,539	11.2		%
Adjusted Total Operating Expenses	$	18,135	$	15,884	$	2,251	14.2		%	$	35,053	$	31,527	$	3,526	11.2		%

Currency (Benefit) / Cost - (in millions)*							$	(105)								$	(193)
* Amount represents the change in currency translation compared to the prior year.

Three Months Ended
September 30, Change Change Nine Months Ended
September 30, Change Change
2019 2018 $ % 2019 2018 $ %
Operating Expenses (in millions):
Compensation and benefits $ 9,590
$ 9,015
$ 575
6.4 % $ 28,206
$ 27,084
$ 1,122
4.1 %
Transformation strategy costs (41 ) (70 ) 29
(41.4 )% (149 ) (262 ) 113
(43.1 )%
Adjusted Compensation and benefits 9,549
8,945
604
6.8 % 28,057
26,822
1,235
4.6 %

Repairs and maintenance 485
437
48
11.0 % 1,392
1,294
98
7.6 %
Depreciation and amortization 587
524
63
12.0 % 1,730
1,662
68
4.1 %
Purchased transportation 2,984
3,216
(232 ) (7.2 )% 8,950
9,570
(620 ) (6.5 )%
Fuel 824
867
(43 ) (5.0 )% 2,451
2,469
(18 ) (0.7 )%
Other occupancy 346
321
25
7.8 % 1,039
1,003
36
3.6 %
Other expenses 1,374
1,337
37
2.8 % 4,093
3,911
182
4.7 %
Total Other expenses 6,600

6,702
(102 ) (1.5 )% 19,655
19,909
(254 ) (1.3 )%
Other Transformation strategy costs (22 ) (27 ) 5
(18.5 )% (58 ) (98 ) 40
(40.8 )%
Adjusted Total Other expenses 6,578

6,675
(97 ) (1.5 )% 19,597
19,811
(214 ) (1.1 )%

Total Operating Expenses $ 16,190
$ 15,717
$ 473
3.0 % $ 47,861
$ 46,993
$ 868
1.8 %
Adjusted Total Operating Expenses $ 16,127
$ 15,620
$ 507
3.2 % $ 47,654
$ 46,633
$ 1,021
2.2 %

Currency (Benefit) / Cost - (in millions)* $ (69 ) $ (329 )
* Amount represents the change in currency translation compared to the prior year.

Three Months Ended
September 30, Change Change Nine Months Ended
September 30, Change Change
2019 2018 $ % 2019 2018 $ %
Transformation Strategy and Other Costs (in millions):
Compensation $ 6
$ —
$ 6
N/A
$ 8
$ —
$ 8
N/A
Benefits 35
70
(35 ) (50.0 )% 141
262
(121 ) (46.2 )%
Depreciation and Amortization —
—
—
N/A
—
12
(12 ) (100.0 )%
Other Occupancy 2
—
2
N/A
6
—
6
N/A
Other Expenses 20
27
(7 ) (25.9 )% 52
86
(34 ) (39.5 )%
Total Transformation Strategy and Other Costs $ 63
$ 97
$ (34 ) (35.1 )% $ 207
$ 360
$ (153 ) (42.5 )%


	Three Months Ended June 30,						Change						Six Months Ended June 30,				Change
	2020		2019		$		%		2020		2019		$		%
Transformation strategy costs (in millions):
Compensation	$	7	$	2	$	5	N/M		$	15	$	2	$	13	N/M
Benefits	74		—		74		N/M		78		106		(28)		(26.4)	%

Other occupancy	2		4		(2)		(50.0)	%	4		4		—		—	%
Other expenses	29		15		14		93.3	%	60		32		28		87.5	%
Total Transformation strategy costs	$	112	$	21	$	91	N/M		$	157	$	144	$	13	9.0	%

Compensation and Benefits

Total compensation and benefits, and total compensation and benefits excluding the year over year impact of transformation strategy costs, increased ~~for~~in the ~~third~~second quarter and year-to-date ~~periods~~periods.

Total compensation costs increased $843 million or 15.2% ($1.2 billion or 10.8% year-to-date). Excluding the year over year impact of ~~2019.~~transformation strategy costs, adjusted total compensation costs increased $838 million ($1.2 billion year-to-date), driven by higher U.S. Domestic direct labor costs as a result of growth in average daily volume. This volume growth drove additional headcount and an increase in average daily union hours of 22.7% (15.7% year-to-date). Contractual union wage increases also contributed to the increase in compensation costs for hourly employees. Compensation costs for management employees increased primarily due to salary increases and growth in the overall size of the workforce.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

~~Total compensation~~Benefits costs increased ~~$371~~$701 million or ~~6.8% for the third quarter of 2019~~18.7% ($~~725 million~~1.1 billion or 4.5% year-to-date). Excluding the year over year impact of transformation strategy costs, adjusted compensation increased $365 million ($717 million year-to-date) largely due to higher U.S. Domestic hourly and management compensation costs. U.S. Domestic compensation costs for hourly employees increased as a result of an increase in headcount for the third quarter of 2019, driven by an average daily volume increase of 9.2% (6.2% year-to-date). The increase in volume resulted in an increase in average daily union hours of 7.0% (4.5% year-to-date). Contractual union wage increases also contributed to the increase in compensation for hourly employees, but were partially offset by productivity improvements. Compensation costs for management employees increased primarily due to growth in the overall size of the workforce.

~~Benefits expense increased $204 million for the third quarter of 2019 ($397 million~~14.8% year-to-date). Excluding the year over year impact of transformation strategy costs, adjusted benefits costs increased ~~$239~~$627 million ~~for the third quarter of 2019~~ ($~~518 million~~1.1 billion year-to-date) ~~due to the following:~~:

•Health and welfare costs increased ~~$186~~$147 million ~~for the third quarter~~ ($~~390~~312 million year-to-date), driven by increased contributions to multiemployer plans due to ~~contractual rate increases,~~ an overall increase in the size of the workforce, contractual rate increases and changes in eligibility for certain union employees.

•Pension and ~~retirement~~other postretirement benefits ~~decreased $3~~costs increased $193 million ~~for the third quarter~~ ($6351 million year-to-date) ~~as lower~~due to higher service cost for company-sponsored plans, ~~was largely offset~~primarily driven by a reduction in discount rates, increased contributions to multiemployer plans due to contractually-mandated contribution increases ~~to multiemployer plans.~~and an overall increase in the size of the workforce.

•Vacation, excused absence, payroll taxes and other ~~expenses~~costs increased ~~$57~~$159 million ~~for the third quarter~~ ($~~134~~244 million year-to-date), primarily driven by salary increases, ~~and~~ growth in the overall size of the ~~workforce.~~workforce and additional incentives for certain full-time employees.

•Workers' compensation ~~expense decreased $1~~costs increased $128 million ($238 million year-to-date) driven by an increase in overall hours worked, wage and medical inflation and unfavorable claims trends. We evaluate the total potential range of actuarial outcomes when estimating losses that will ultimately be incurred. See note 1 to the audited, consolidated financial statements in our Annual Report on Form 10-K for the ~~third quarter (remained flat year-to-date). Insurance reserves are established based on actuarial estimates~~year ended December 31, 2019, for a further description of the loss that we will ultimately incur on reported workers' compensation claims, as well as estimates of claims that have been incurred but not reported, and take into account a number of factors including our history of claim losses, payroll growth and the impact of safety improvement initiatives.this policy.

Repairs and Maintenance

The increase in repairs and maintenance expense ~~for~~in the ~~third~~ quarter and year-to-date periods ~~of 2019~~ was driven by additional aircraft engine maintenance ~~of our aircraft,~~events, as well as an increase in routine repairs to buildings and facilities and maintenance of our other transportation equipment.

Depreciation and Amortization

~~We evaluate the useful lives of our property, plant~~Depreciation 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. Refer to note 1~~amortization expense increased in the ~~audited consolidated financial statements included in our Annual Report on Form 10-K for further description of our policy.~~

~~In the third~~ quarter ~~of 2019, depreciation expense increased $94 million,~~ and ~~net income decreased by $75 million, or $0.09 per share on a basic and diluted basis,~~year-to-date periods as a result of the additional investments in ~~property, plant~~facility automation and ~~equipment, net~~capacity expansion projects, increases in the size of ~~disposals~~our vehicle and ~~assets becoming fully depreciated. Depreciation~~aircraft fleets and investments in internally developed software.

Purchased Transportation

The overall increase in purchased transportation expense in the quarter and year-to-date periods charged to us by third-party carriers was primarily driven by the following:

•U.S. Domestic Package expense increased $393 million ($408 million year-to-date) driven by an increase in SurePost volume that drove higher utilization of third-party transportation carriers. Volume growth in our other products also resulted in additional third-party transportation expense.

•Forwarding and Logistics expense increased $330 million ($345 million year-to-date), primarily due to increased market rates in our international air freight business, as well as volume increases in our mail services business. This was partially offset by a reduction in truckload brokerage expense resulting from declines in market rates.

•International Package expense increased $81 million ($57 million year-to-date) primarily due to volume increases in Asia that drove higher pickup and delivery cost.

•UPS Freight expense decreased ~~$31~~$44 million ($45 million year-to-date) primarily due to a decline in LTL shipments which resulted in lower carrier miles, as well as declines in fuel surcharges passed on to us.

•Other purchased transportation expense decreased $44 million ($84 million year-to-date) due to changes in the number of leased and ~~net income increased $26 million, or $0.03 per share on a basic~~chartered aircraft.

Fuel

The decrease in fuel expense in the quarter and ~~diluted basis,~~year-to-date periods was driven by lower jet fuel, diesel and gasoline prices, as well as alternative fuel tax credits arising from legislation passed in the fourth quarter of 2019. These decreases were partially offset by higher consumption due to increases in aircraft block hours and miles driven as a result of lengthening our estimated useful lives for various asset categories in the latter half of 2018. The combined effect of the foregoing was a net increase in depreciation expense of $63 million and a decrease in net income of $49 million, or $0.06 per share on a basic and diluted basis, for the quarter.increased volume.

For the year-to-date period of 2019, depreciation expense increased $280 million, and net income decreased by $218 million, or $0.25 per share on a basic and diluted basis, as a result of investments in property, plant and equipment, net of disposals and assets becoming fully depreciated. Depreciation expense decreased $212 million, and net income increased $165 million, or $0.19 per share on a basic and diluted basis, as a result of lengthening our estimated useful lives for various asset categories in the latter half of 2018. The combined effect of the foregoing was a net increase in depreciation expense of $68 million and a decrease in net income of $53 million, or $0.06 per share on a basic and diluted basis, for the nine month period.

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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, rail, ocean and truck carriers for the third quarter and year-to-date periods of 2019 was primarily driven by the following factors:

Freight Forwarding and Logistics expense decreased $135 million in the third quarter ($441 million year-to-date) due to decreases in both market rates and volume in truckload brokerage. Our international air freight forwarding business also experienced decreases in market rates and tonnage.

~~International Package expense decreased $25 million in the third quarter ($84 million year-to-date) primarily due to a favorable impact from currency exchange rate movements.~~

~~U.S. Domestic Package expense decreased $52 million in the third quarter ($93 million year-to-date) primarily due to lower overall usage of third-party transportation carriers.~~

UPS Freight expense increased $1 million in the third quarter ($11 million year-to-date) primarily due to increases in our Ground Freight Pricing product. These increases were partially offset by lower LTL shipments and lower fuel surcharges passed on to us by outside carriers.

~~Other purchased transportation expense decreased $21 million in the third quarter ($13 million year-to-date) due to changes in the number of leased and chartered aircraft.~~

~~Fuel~~

The decrease in fuel expense for the third quarter and year-to-date periods of 2019 was primarily due to lower jet fuel, diesel and gasoline prices in the third quarter. These decreases were partially offset by increased aircraft block hours and vehicle miles driven by increased U.S. Domestic package volume. Additionally, the year-to-date decrease was impacted by the receipt of alternative fuel tax credits in the first quarter of 2018 that did not repeat.

Other Occupancy

Other occupancy expense, and other occupancy expense excluding the year over year impact of transformation strategy costs, increased ~~for~~in the ~~third~~ quarter and year-to-date periods ~~of 2019~~ primarily ~~driven by~~due to additional operating facilities coming into service.

Other Expenses

Other expenses, and other expenses excluding the year over year impact of transformation strategy costs, increased ~~for~~in the ~~third~~ quarter and year-to-date periods as a result of ~~2019. The increase is attributable~~the following items:

•Purchases of cleaning and other safety supplies primarily related to ~~various items, including professional service fees,~~COVID-19 of $66 million in the second quarter and year-to-date periods.

•Reserves for uncertain tax positions and legal contingencies of $66 million in the second quarter ($56 million year-to-date).

•Self-insured automobile liability claims of $21 million in the second quarter ($130 million year-to-date) increased primarily as a result of higher average daily miles driven in our U.S. Domestic business.

•Allowances for credit losses and other bad debt expense, primarily driven by the economic impact of COVID-19, increased $16 million in the second quarter as compared to the prior year ($48 million year-to-date).

•Other items, including transportation equipment expenses, outside professional fees and information technology ~~equipment~~ and software licenses, and adjustments to reserves for self-insured automobile liability claims. These increases were partially offset by a $40 million gain on the sale of surplus international property and lower travel and entertainment expense.communications costs.

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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 and other and interest expense for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018:~~(in millions):


																								Three Months Ended June 30,						Change						Six Months Ended June 30,				Change
	Three Months Ended September 30,						Change			Change		Nine Months Ended September 30,						Change			Change			2020		2019		$		%		2020		2019		$		%
	2019			2018			$			%		2019			2018			$			%
(dollars in millions)
Investment Income and Other	$	237		$	317		$	(80	)	(25.2	)%	$	672		$	913		$	(241	)	(26.4	)%	Investment Income and Other	$	328	$	220	$	108	49.1	%	$	673	$	435	$	238	54.7	%
Interest Expense	(159		)	(155		)	(4		)	2.6	%	(487		)	(457		)	(30		)	6.6	%	Interest Expense	(183)		(159)		(24)		15.1	%	(350)		(328)		(22)		6.7	%
Total Other Income and (Expense)	$	78		$	162		$	(84	)	(51.9	)%	$	185		$	456		$	(271	)	(59.4	)%	Total Other Income and (Expense)	$	145	$	61	$	84	137.7	%	$	323	$	107	$	216	N/M

Investment Income and Other

The ~~decrease~~increase in investment income and other for the ~~third~~second quarter and year-to-date periods ~~of 2019 is~~was primarily due to ~~a decrease~~an increase in other pension income, which is comprised of expected returns on pension assets net of interest cost on projected benefit obligations. Expected returns on ~~plan~~pension assets ~~decreased~~increased as a result of ~~the lower~~a higher asset base due to ~~negative~~positive asset returns in ~~2018,~~2019 and discretionary contributions. Pension interest cost decreased due to the impact of lower year end discount rates that was partially offset by ~~the effects of higher discretionary contributions in 2019. Pension interest cost increased with higher year-end discount rates,~~ ongoing plan growth and an increase in ~~the~~ projected benefit ~~obligation~~obligations as a result of the ~~year-end~~year end measurement of our plans. Investment income ~~increased primarily~~decreased due to ~~higher~~lower yields on invested assets and ~~higher overall investment balances.~~impairments of certain investments, partially offset by foreign currency gains.

Interest Expense

The increase in interest expense infor the ~~third~~second quarter and year-to-date periods ~~of 2019 is~~was primarily due to additional interest expense from debt issuances since the ~~issuance~~first quarter of ~~new senior notes~~2019, partially offset by lower effective interest rates on floating rate debt and ~~higher average outstanding debt~~commercial paper balances.

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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 three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018:~~

(in millions):


																								Three Months Ended June 30,								Change								Six Months Ended June 30,				Change
																								2020			2019			$		%		2020			2019			$		%
Income Tax Expense																							Income Tax Expense	$	589		$	519		$	70	13.5	%	$	874		$	848		$	26	3.1	%
Income Tax Impact of:																							Income Tax Impact of:
Transformation Strategy Costs																							Transformation Strategy Costs	29			4			25		N/M		39			34			5		14.7	%
Adjusted Income Tax Expense																							Adjusted Income Tax Expense	$	618		$	523		$	95	18.2	%	$	913		$	882		$	31	3.5	%

	Three Months Ended September 30,						Change			Change		Nine Months Ended September 30,						Change			Change
	2019			2018			$			%		2019			2018			$			%
(dollars in millions)
Income Tax Expense	$	456		$	381		$	75		19.7	%	$	1,304		$	1,138		$	166		14.6	%
Income Tax Impact of:
Transformation Strategy Costs	16			24			(8		)	(33.3	)%	50			87			(37		)	(42.5	)%
Adjusted Income Tax Expense	$	472		$	405		$	67		16.5	%	$	1,354		$	1,225		$	129		10.5	%
Effective Tax Rate	20.7		%	20.2		%						22.3		%	20.8		%						Effective Tax Rate	25.0		%	23.5		%					24.2		%	23.3		%
Adjusted Effective Tax Rate	20.8		%	20.4		%						22.4		%	21.0		%						Adjusted Effective Tax Rate	25.0		%	23.5		%					24.2		%	23.3		%

For additional information on income tax expense and our effective tax rate, see note 16 to the unaudited, consolidated financial statements included in this report.

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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

As of ~~September~~June 30, ~~2019,~~2020, we had ~~$4.538~~$9.2 billion in cash, cash equivalents and marketable securities. We believe that ~~our current~~these positions, expected cash ~~position,~~from operations, access to commercial paper programs and capital markets financing and ~~cash flows generated from operations should~~other available liquidity options will be adequate ~~not only for~~to fund our operating requirements, ~~but also to enable us to complete our~~planned capital ~~expenditure programs,~~expenditures and pension contributions, transformation strategy costs, debt obligations and ~~to fund dividend payments, share repurchases and long-term debt payments through the next several years.~~planned shareowner returns. We regularly evaluate opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund ongoing ~~cash~~ needs.

As previously disclosed and described below, as a result of the ongoing economic uncertainty created by the COVID-19 pandemic, we intend to defer certain components of our previously announced capital expenditure program beyond 2020, and have suspended share repurchases under our stock repurchase program.

Cash Flows From Operating Activities

The following is a summary of the significant sources (uses) of cash from operating activities (in millions):


	Nine Months Ended September 30,							Six Months Ended June 30,
	2019			2018				2020		2019
Net income	$	4,546		$	4,338		Net income	$	2,733	$	2,796
Non-cash operating activities^(a)	2,920			2,964			Non-cash operating activities^(a)	2,672		2,317
Pension and postretirement benefit plan contributions (company-sponsored plans)	(2,321		)	(137		)	Pension and postretirement benefit plan contributions (company-sponsored plans)	(263)		(1,108)

Hedge margin receivables and payables	389			171			Hedge margin receivables and payables	128		123
Income tax receivables and payables	901			1,129			Income tax receivables and payables	380		373
Changes in working capital and other non-current assets and liabilities	(696		)	939			Changes in working capital and other non-current assets and liabilities	291		(262)
Other operating activities	(46		)	18			Other operating activities	6		(32)
Net cash from operating activities	$	5,693		$	9,422		Net cash from operating activities	$	5,947	$	4,207

___________________


~~(a)~~	Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, provisions for uncollectible accounts, amortization on operating lease assets, pension and postretirement benefit expense, stock compensation expense and other non-cash items.

(a)Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, allowances for expected credit losses, amortization on operating lease assets, pension and postretirement benefit plan expense, stock compensation expense and other non-cash items.

Net cash from operating activities ~~decreased $3.729~~increased $1.7 billion ~~through~~year-to-date. The following factors contributed to the ~~third quarter of 2019 compared to 2018, largely due to decreased~~change in net cash ~~receipts~~ from ~~income taxes, changes in working capital, and higher pension and postretirement benefit plan contributions.~~operating activities:

•We made year-to-date contributions to our company-sponsored pension and U.S. postretirement medical benefit plans totaling ~~$2.321 billion~~$263 million during ~~the first nine months of 2019~~2020 as compared to ~~$137 million~~$1.1 billion in ~~2018.~~ 2019. There have been no discretionary contributions to our qualified, company-sponsored U.S. pension plans during 2020 ($1.0 billion year-to-date in 2019).

•The net hedge margin collateral received from our derivative counterparties increased by ~~$218~~$5 million ~~in the first nine months of 2019,~~year-to-date due to the change in net fair value of derivative contracts used in our currency and interest rate hedging programs.

•Cash received in respect of income taxes ~~decreased in the first nine months of 2019,~~increased, primarily due to the timing of ~~deductions related to pension contributions. In addition to the transactions described above, operating cash flows was impacted by~~income tax payments.

•Favorable changes in our working capital, ~~management whereby payments from~~largely driven by changes in incentive compensation plan payouts and other compensation-related items. These included deferral of approximately $370 million of employer payroll taxes under the ~~fourth quarter~~Coronavirus Aid, Relief and Economic Security (CARES) Act that was signed into law on March 27, 2020. The CARES Act includes, among other things, provisions relating to deferral of ~~2018 shifted~~the employer portion of certain ~~payments into~~payroll taxes, temporary suspension of federal excise taxes on the ~~first quarter~~transportation of ~~2019~~property by air and ~~accelerated growth~~on commercial purchases of jet aviation fuel and deferral of federal income tax payments. We anticipate that the various provisions of the CARES Act will provide a temporary cash flow benefit in the ~~business lifted overall working~~current year of approximately $1.0 billion. Working capital ~~demand.~~also benefited from changes in the timing of interest payments on outstanding debt.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

As of ~~September~~June 30, ~~2019, the~~2020, our total ~~of our~~ worldwide holdings of cash, cash equivalents and marketable securities ~~was $4.538~~were $9.2 billion, of which ~~$2.185~~approximately $2.7 billion was 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~~ and shareowner returns, including dividend ~~payments to shareowners.~~payments. 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.

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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 were as follows (in millions):


	Nine Months Ended September 30,							Six Months Ended June 30,
	2019			2018				2020			2019
Net cash used in investing activities	$	(4,027	)	$	(4,499	)	Net cash used in investing activities	$	(1,943)		$	(2,847)

Capital Expenditures:							Capital Expenditures:
Buildings, facilities and plant equipment	$	(1,916	)	$	(2,287	)	Buildings, facilities and plant equipment	$	(1,023)		$	(1,224)
Aircraft and parts	(1,108		)	(1,037		)	Aircraft and parts	(463)			(791)
Vehicles	(733		)	(619		)	Vehicles	(196)			(434)
Information technology	(579		)	(547		)	Information technology	(383)			(412)
	$	(4,336	)	$	(4,490	)		$	(2,065)		$	(2,861)

Capital Expenditures as a % of Revenue	8.1		%	8.6		%
Capital Expenditures as a % of revenue							Capital Expenditures as a % of revenue	5.4		%	8.1		%

Other Investing Activities:							Other Investing Activities:
Proceeds from disposals of property, plant and equipment	$	61		$	45		Proceeds from disposals of property, plant and equipment	$	2		$	6
Net change in finance receivables	$	8		$	(7	)	Net change in finance receivables	$	16		$	8
Net (purchases), sales and maturities of marketable securities	$	330		$	(22	)	Net (purchases), sales and maturities of marketable securities	$	110		$	97
Cash paid for business acquisitions, net of cash and cash equivalents acquired	$	(6	)	$	(2	)	Cash paid for business acquisitions, net of cash and cash equivalents acquired	$	—		$	(1)
Other investing activities	$	(84	)	$	(23	)	Other investing activities	$	(6)		$	(96)

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. ~~We generally fund our capital expenditures with our cash from operations.~~ Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions. ~~In 2017, we began a multi-year~~Our current investment program ~~in our smart global logistics network which impacts all asset categories, with the largest~~includes investments in buildings, facilities and plant equipment. ~~This investment program has continued~~In the first quarter, we announced a reduction in ~~2019, whereby we~~our forecasted capital expenditures for the year of $1.0 billion through deferring certain facility projects and vehicle purchases to future years. We currently anticipate that our capital expenditures will be approximately ~~$6.5 billion.~~$5.6 billion in 2020.

~~Capital~~Year-to-date capital expenditures on buildings, facilities and plant equipment decreased in ~~the first nine months of 2019 compared to 2018 in~~ our U.S. and ~~International Package~~international package businesses, largely due to ~~several~~the timing of payments and postponement of certain facility automation and capacity expansion ~~projects completed in 2018.~~projects. Capital spending on aircraft ~~increased compared~~decreased due to ~~2018 due to~~reductions in contract deposits on open aircraft orders ~~as well as~~and final payments associated with the delivery of aircraft. Capital spending on vehicles ~~increased in the first nine months of 2019 relative to 2018, largely~~decreased due to the timing of vehicle ~~replacements~~replacement projects and ~~expansion of the overall fleet to support volume growth.~~changes in vendor payment terms.

~~Proceeds from the disposal of property, plant and equipment increased in 2019 due to the disposal of an international property in the third quarter of 2019.~~ The net change in finance receivables was primarily due to ~~reductions~~growth in our finance portfolios. Purchases and sales of marketable securities are largely determined by liquidity needs and the periodic rebalancing of investment types, and will fluctuate from period to period.

There was no cash paid for business acquisitions year-to-date. Cash paid for business acquisitions in 2019 related to our acquisition of area franchise rights for The UPS ~~Store, as well as other, small acquisitions in our International Small Package and Marken business units in the first nine months of 2019.~~Store. Other investing activities are impacted by changes in our non-current investments, changes in purchase contract deposits for buildings and various other items.

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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 from financing activities ~~are~~were as follows (amounts in millions, except per share data):

Nine Months Ended
September 30,
2019 2018
Net cash used in financing activities $ (1,854 ) $ (4,260 )
Share Repurchases:
Cash expended for shares repurchased $ (751 ) $ (770 )
Number of shares repurchased (7.0 ) (6.6 )
Shares outstanding at period end 858
859
Percent increase (decrease) in shares outstanding 0.0 % 0.0 %
Dividends:
Dividends declared per share $ 2.88
$ 2.73
Cash expended for dividend payments $ (2,397 ) $ (2,260 )
Borrowings:
Net borrowings (repayments) of debt principal $ 1,291
$ (1,147 )
Other Financing Activities:
Cash received for common stock issuances $ 161
$ 176
Other financing activities $ (158 ) $ (259 )
Capitalization:
Total debt outstanding at period end $ 23,901
$ 23,301
Total shareowners’ equity at period end 5,574
3,126
Total capitalization $ 29,475
$ 26,427
Debt to Total Capitalization % 81.1 % 88.2 %


	Six Months Ended June 30,
				2020				2019
Net cash from (used in) financing activities	$	(399)			$	(1,534)
Share Repurchases:
Cash expended for shares repurchased	$	(231)			$	(503)
Number of shares repurchased	(2.1)				(4.8)
Shares outstanding at period end	863				859
Percent increase (decrease) in shares outstanding	0.7		%		0.1		%
Dividends:
Dividends declared per share	$	2.02			$	1.92
Cash expended for dividend payments	$	(1,683)			$	(1,599)
Borrowings:
Net borrowings (repayments) of debt principal	$	1,718			$	614
Other Financing Activities:
Cash received for common stock issuances	$	131			$	129
Other financing activities	$	(334)			$	(175)
Capitalization:
Total debt outstanding at period end	$	26,948			$	23,379
Total shareowners’ equity at period end	4,376				4,423
Total capitalization	$	31,324			$	27,802
Debt to Total Capitalization %	86.0		%		84.1		%

We repurchased a total of ~~7.0~~2.1 million shares of class A and class B common stock for ~~$753~~$217 million ~~in the first nine months of 2019,~~year-to-date and ~~6.6~~4.8 million shares for ~~$756~~$502 million in the ~~first nine~~prior year-to-date period ($231 and $503 million in repurchases for 2020 and 2019, respectively, are reported on the statement of cash flows due to timing of settlements). All of the share repurchases in 2020 occurred in the three months ~~of 2018.~~ended March 31, 2020. As previously disclosed, we have suspended share repurchases under our stock repurchase program. For additional information on our share repurchase activities, see note 12 to the unaudited, consolidated financial statements included in this report.

The declaration of dividends is subject to the discretion of the Board and will depend on various factors, including our net income, financial condition, cash requirements, future prospects and other relevant factors. We increased our quarterly cash dividend payment to ~~$0.96~~$1.01 per share in ~~2019~~,2020, compared ~~with a $0.91 quarterly dividend rate~~to $0.96 in ~~2018~~.2019. We expect to continue paying regular cash dividends.

Issuances of debt ~~in the first nine months of 2019~~year-to-date consisted ~~of commercial paper and~~primarily of fixed-rate senior notes of varying maturities totaling ~~$3.0 billion.~~$3.5 billion, as well as borrowings under our commercial paper program. These issuances more than satisfy our debt repayment obligations for 2020. Repayments of debt ~~consisted of~~for the year-to-date period included fixed-rate senior notes totaling $424 million, commercial paper and ~~$1 billion~~scheduled principal payments on our finance lease obligations. Year-to-date issuances of ~~5.125%~~debt in 2019 consisted primarily of fixed-rate senior notes ~~that matured in April 2019. Issuances of debt in the first nine months of 2018 consisted of~~totaling $1.5 billion. Repayments included fixed-rate senior notes totaling $1.0 billion, commercial paper and ~~repayments consisted of commercial paper and $750 million of 5.50% fixed-rate senior notes that matured in January 2018.~~scheduled principal payments on our finance lease obligations. We consider the overall fixed and floating interest rate mix of our portfolio and the related overall cost of borrowing when planning for future issuances and non-scheduled repayments of debt.

6465

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. The following is a summary of our commercial paper program (in millions):


	Functional currency outstanding balance at quarter-end		Outstanding balance at quarter-end ($)		Average balance outstanding		Average balance outstanding ($)		Average interest rate
2020
USD	$	1,652	$	1,652	$	1,998	$	1,998	1.05	%
EUR	€	228	$	256	€	652	$	719	(0.42)	%

Total			$	1,908

Functional currency outstanding balance at quarter-end Outstanding balance at quarter-end ($) Average balance outstanding Average balance outstanding ($) Average interest rate
2019
USD $ 1,020
$ 1,020
$ 1,678
$ 1,678
2.35 %
EUR € 949
$ 1,034
€ 846
$ 950
(0.37 )%
Total $ 2,054

~~The cash~~Cash outflows infor other financing activities were impacted by several factors. ~~Net cash inflows from the premium payments and settlements of capped call options for the purchase of UPS class B shares were $21 and $13 million during the first~~ ~~nine~~ ~~months of~~ ~~2019~~ ~~and~~ ~~2018, respectively.~~ Cash outflows related to the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards were ~~$177~~$323 and ~~$250~~$173 million ~~during~~for the ~~first~~ ~~nine~~ ~~months~~year-to-date periods of ~~2019~~2020 and ~~2018~~,2019, respectively. This increase was driven by changes in the vesting schedule for certain of our awards.

Sources of Credit

See note 9 to the unaudited, consolidated financial statements for a discussion of our available credit and the financial covenants that we are subject to as part of our credit agreements.

Guarantees and Other Off-Balance Sheet Arrangements

Except as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, 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.

Legal Proceedings and Contingencies

See note 7 and note 11 to the unaudited, consolidated financial statements for a discussion of judicial proceedings and other matters arising from the conduct of our business activities, and note 16 for a discussion of income tax related matters.

Collective Bargaining Agreements

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

Multiemployer Benefit Plans

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

Recent Accounting Pronouncements

Adoption of New Accounting Standards

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

Accounting Standards Issued But Not Yet Effective

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

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Rate Adjustments

On ~~August 16, 2019,~~May 15, 2020, we announced an increase in the temporary peak ~~surcharges~~surcharge that took effect on April 12, 2020 for ~~Over Maximum Limits~~shipments from China Mainland and ~~Large packages during select weeks from October 2019 through January 2020. We also announced peak surcharges for Additional Handling packages during select weeks from November 2019 through January~~Hong Kong to the United States. This change took effect May 24, 2020.

~~Effective August~~

On May 26, ~~2019,~~2020, we announced a temporary peak surcharge on certain U.S. domestic packages that became effective May 31, 2020.

On June 23, 2020, we announced a decrease in the ~~International Air-Import Fuel Surcharge increased by 1.0%. This~~temporary peak surcharge ~~continues~~on shipments from China Mainland to ~~be based on~~ the ~~National Average U.S. Gulf Coast Jet Fuel Price and adjusted weekly.~~United States. The change became effective June 28, 2020.

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~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk~~

Item 3.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates, interest rates and equity prices. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. In order to manage the risk arising from these exposures, we utilize a variety of commodity, foreign exchange and interest rate forward contracts, options and swaps. A discussion of our accounting policies for derivative instruments and further disclosures are provided in note 15 to the unaudited, consolidated financial statements.

The total net fair value asset (liability) of our derivative financial instruments is summarized in the following table (in millions):


	September 30, 2019		December 31, 2018				June 30, 2020		December 31, 2019
Currency Derivatives	$	637	$	302		Currency Derivatives	$	503	$	374

Interest Rate Derivatives	30		(8		)	Interest Rate Derivatives	47		21
	$	667	$	294
							$	550	$	395

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we had no outstanding commodity hedge positions.

Our market risks, hedging strategies and financial instrument positions at ~~September~~June 30, ~~2019~~2020 have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. In ~~2019,~~2020, we entered into several foreign exchange forward contracts on the Euro, British Pound Sterling, Canadian Dollar and Hong Kong Dollar, and had forward contracts expire. ~~We had foreign exchange options on the British Pound Sterling that expired during the first nine months of 2019.~~ The remaining fair value changes between December 31, ~~2018~~2019 and ~~September~~June 30, ~~2019~~2020 in the preceding table are primarily due to interest rate and foreign currency exchange rate fluctuations between those dates.

The foreign exchange forward contracts, swaps and options previously discussed contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines and by monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.

We have agreements with all of our active counterparties (covering the majority of our derivative positions) containing early termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of derivatives associated with those counterparties. Events such as a credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. Under these agreements, we held cash collateral of ~~$713~~$623 million and were not required to post ~~$0 million in~~any cash collateral with our counterparties as of ~~September~~June 30, ~~2019.~~2020.

We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.

The information concerning market risk in Item 7A under the caption “Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 is hereby incorporated by reference.

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~~Item 4.~~	~~Controls and Procedures~~

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in ~~Rule~~Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon, ~~that~~and as of the date of, the evaluation, our Principal Executive Officer and Principal Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms; and (2) accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate to allow their timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended ~~September~~June 30, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that more of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the effects of the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

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PART II. OTHER INFORMATION


~~Item 1.~~	~~Legal Proceedings~~

Item 1.Legal Proceedings

For a discussion of material legal proceedings affecting ~~us and our subsidiaries,~~the Company, see note 11 to the unaudited, consolidated financial statements included in this report.


~~Item 1A.~~	~~Risk Factors~~

~~There have been no material changes to~~Item 1A.Risk Factors

The occurrence of any of the significant risk factors described in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 and in Part II, Item 1A in our Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2019.~~March 31, 2020 could materially affect us, including impacting our business, financial condition, results of operations, stock price or credit rating, as well as our reputation. These risks are not the only ones we face. We could also be materially adversely affected by other events, factors or uncertainties that are unknown to us, or that we do not currently consider to be significant.

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~~Item 2.~~	Item 2.Unregistered Sales ~~of Equity Securities and Use of Proceeds~~

~~(c) A summary~~ of ~~repurchases~~Equity Securities and Use of ~~our class A and class B common stock during the third quarter of 2019 is as follows (in millions, except per share amounts):~~

Total Number
of Shares
Purchased ⁽¹⁾

Average
Price Paid
Per Share

Total Number
of Shares Purchased
as Part of Publicly
Announced Program

Approximate Dollar
Value of Shares that
May Yet be Purchased
Under the Program
July 1 – July 31, 2019 0.8
$ 106.66
0.8
$ 2,750
August 1 – August 31, 2019 0.7
116.57
0.7
2,664
September 1 – September 30, 2019 0.7
120.34
0.7
2,586
Total July 1 – September 30, 2019 2.2
$ 114.01
2.2

~~_________________~~


⁽¹⁾Proceeds	^{Includes shares repurchased through our publicly announced share repurchase programs and shares tendered to pay the exercise price and tax withholding on employee stock options.}

In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion for shares of class A and class B common stock. ~~We anticipate repurchasing approximately $1.0~~As of June 30, 2020, we had $2.1 billion of ~~shares in 2019.~~this share repurchase authorization available.

On April 28, 2020 we announced our intention to suspend share repurchases under our stock repurchase program. There were no repurchases of class A or class B common stock during the second quarter. In the first quarter, we repurchased approximately $217 million of shares.

For additional information on our share repurchase activities, see note 12 to the unaudited, consolidated financial statements included in this report.

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Item 6.~~Exhibit~~Exhibits




3.1			—		Restated Certificate of Incorporation of United Parcel Service, Inc. (incorporated by reference to Exhibit 3.3 to Form 8-K filed on May 12, 2010).

3.2			—		Amended and Restated Bylaws of United Parcel Service, Inc. as of February 14, 2013 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed on February 19, 2013).

~~4.1~~31.1			—		~~Form of 2.200% Senior Notes due 2024 (incorporated by reference to Exhibit 4.1 to Form 8-K filed on August 16, 2019).~~

~~4.2~~	—	~~Form of 2.500% Senior Notes due 2029 (incorporated by reference to Exhibit 4.2 to Form 8-K filed on August 16, 2019).~~

~~4.3~~	—	~~Form of 3.400% Senior Notes due 2049 (incorporated by reference to Exhibit 4.3 to Form 8-K filed on August 16, 2019).~~

~~10.1~~	—	Employment offer letter agreement between the Company and Brian Newman, dated August 7, 2019 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on August 13, 2019).*

~~10.2~~	—	Protective Covenant Agreement between the Company and Brian Newman, dated August 7, 2019 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on August 13, 2019).*

~~31.1~~	—	Certification of the Principal Executive Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2			—		Certification of the Principal Financial Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			—		Certification of the Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2			—		Certification of the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101			—		The following unaudited financial information from this Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2019, are~~2020, is formatted in ~~iXBRL~~Inline XBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Statements of Consolidated Income, (iii) the Statements of Consolidated Comprehensive Income (Loss), (iv) the Statements of Consolidated Cash Flows, and (v) the Notes to the Consolidated Financial Statements.
~~104~~				—
104			—		Cover Page Interactive Data File - The cover page from this Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2019~~2020 is formatted in ~~iXBRL.~~Inline XBRL (included as Exhibit 101).



	* Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED PARCEL SERVICE, INC.
(Registrant)

Date:

August 4, 2020

~~UNITED PARCEL SERVICE, INC.~~

~~(Registrant)~~

By:

~~Date:~~

~~October 29, 2019~~

~~By:~~

/S/ ~~RICHARD N. PERETZ~~BRIAN O. NEWMAN

~~Richard N. Peretz~~Brian O. Newman

Senior Vice President, Chief Financial Officer and Treasurer

(Principal Financial Officer)


	September 30, 2019			December 31, 2018				June 30, 2020		December 31, 2019
ASSETS							ASSETS
Current Assets:							Current Assets:
Cash and cash equivalents	$	4,040		$	4,225		Cash and cash equivalents	$	8,813	$	5,238
Marketable securities	498			810			Marketable securities	403		503
Accounts receivable							Accounts receivable	9,383		9,645
Less: Allowance for credit losses							Less: Allowance for credit losses	(153)		(93)
Accounts receivable, net	7,951			8,958			Accounts receivable, net	9,230		9,552
Current income taxes receivable	204			940

Other current assets	1,491			1,277			Other current assets	1,780		1,810
Total Current Assets	14,184			16,210			Total Current Assets	20,226		17,103
Property, Plant and Equipment, Net	29,071			26,576			Property, Plant and Equipment, Net	31,439		30,482
Operating Lease Right-Of-Use Assets	2,504			—			Operating Lease Right-Of-Use Assets	2,998		2,856
Goodwill	3,783			3,811			Goodwill	3,787		3,813
Intangible Assets, Net	2,131			2,075			Intangible Assets, Net	2,207		2,167
Investments and Restricted Cash	169			170			Investments and Restricted Cash	24		24

Deferred Income Tax Assets	194			141			Deferred Income Tax Assets	277		330
Other Non-Current Assets	1,246			1,033			Other Non-Current Assets	1,099		1,082
Total Assets	$	53,282		$	50,016		Total Assets	$	62,057	$	57,857
LIABILITIES AND SHAREOWNERS’ EQUITY							LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:							Current Liabilities:
Current maturities of long-term debt, commercial paper and finance leases	$	2,161		$	2,805		Current maturities of long-term debt, commercial paper and finance leases	$	3,749	$	3,420
Current maturities of operating leases	500			—			Current maturities of operating leases	534		538
Accounts payable	4,218			5,188			Accounts payable	5,271		5,555
Accrued wages and withholdings	2,483			3,047			Accrued wages and withholdings	2,922		2,552
Self-insurance reserves	756			810			Self-insurance reserves	1,080		914

Accrued group welfare and retirement plan contributions	705			715			Accrued group welfare and retirement plan contributions	794		793
Hedge margin liabilities	713			325

Other current liabilities	1,299			1,197			Other current liabilities	1,921		1,641
Total Current Liabilities	12,835			14,087			Total Current Liabilities	16,271		15,413
Long-Term Debt and Finance Leases	21,740			19,931			Long-Term Debt and Finance Leases	23,199		21,818
Non-Current Operating Leases	2,063			—			Non-Current Operating Leases	2,463		2,391
Pension and Postretirement Benefit Obligations	6,443			8,347			Pension and Postretirement Benefit Obligations	10,554		10,601
Deferred Income Tax Liabilities	1,886			1,619			Deferred Income Tax Liabilities	1,918		1,632
Self-Insurance Reserves	1,442			1,571

Other Non-Current Liabilities	1,299			1,424			Other Non-Current Liabilities	3,276		2,719
Shareowners’ Equity:							Shareowners’ Equity:
Class A common stock (157 and 163 shares issued in 2019 and 2018, respectively)	2			2
Class B common stock (701 and 696 shares issued in 2019 and 2018, respectively)	7			7
Class A common stock (157 and 156 shares issued in 2020 and 2019, respectively)							Class A common stock (157 and 156 shares issued in 2020 and 2019, respectively)	2		2
Class B common stock (706 and 701 shares issued in 2020 and 2019, respectively)							Class B common stock (706 and 701 shares issued in 2020 and 2019, respectively)	7		7
Additional paid-in capital	129			—			Additional paid-in capital	255		150
Retained earnings	10,037			8,006			Retained earnings	10,032		9,105
Accumulated other comprehensive loss	(4,617		)	(4,994		)	Accumulated other comprehensive loss	(5,933)		(5,997)
Deferred compensation obligations	25			32			Deferred compensation obligations	20		26
Less: Treasury stock (0.4 shares in 2019 and 0.6 shares in 2018)	(25		)	(32		)
Less: Treasury stock (0.4 shares in 2020 and 2019)							Less: Treasury stock (0.4 shares in 2020 and 2019)	(20)		(26)
Total Equity for Controlling Interests	5,558			3,021			Total Equity for Controlling Interests	4,363		3,267
Noncontrolling interests	16			16			Noncontrolling interests	13		16
Total Shareowners’ Equity	5,574			3,037			Total Shareowners’ Equity	4,376		3,283
Total Liabilities and Shareowners’ Equity	$	53,282		$	50,016		Total Liabilities and Shareowners’ Equity	$	62,057	$	57,857



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



PART I—FINANCIAL INFORMATION
	Cautionary Statement About Forward-Looking Statements	1
Item 1.	Financial Statements	2
	Consolidated Balance Sheets	2
	Statements of Consolidated Income	3
	Statements of Consolidated Comprehensive Income (Loss)	3
	Statements of Consolidated Cash Flows	4
	Notes to Unaudited, Consolidated Financial Statements	5
	Note 1—Basis of Presentation and Accounting Policies	5
	Note 2—Recent Accounting Pronouncements	6
	Note 3—Revenue Recognition	7
	Note 4—Stock-Based Compensation	10
	Note 5—Cash and Investments	12
	Note 6—Property, Plant and Equipment	15
	Note 7—Employee Benefit Plans	16
	Note 8—Goodwill and Intangible Assets	19
	Note 9—Debt and Financing Arrangements	20
	Note 10—Leases	23
	Note 11—Legal Proceedings and Contingencies	27
	Note 12—Shareowners’ Equity	29
	Note 13—Segment Information	35
	Note 14—Earnings Per Share	36
	Note 15—Derivative Instruments and Risk Management	37
	Note 16—Income Taxes	4443
	Note 17—Transformation Strategy Costs	4544
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4645
	Overview	4645
	Supplemental Information - Items Affecting Comparability	47
	Results of Operations - Segment Review	48
	U.S. Domestic Package Operations	49
	International Package Operations	52
	Supply Chain & Freight Operations	55
	Consolidated Operating Expenses	57
	Other Income and (Expense)	60
	Income Tax Expense	61
	Liquidity and Capital Resources	62
	~~Net~~ Cash Flows From Operating Activities	62
	~~Net~~ Cash ~~Used in~~Flows From Investing Activities	6364
	~~Net~~ Cash ~~Used in~~Flows From Financing Activities	6465
	Sources of Credit	6566
	Guarantees and Other Off-Balance Sheet Arrangements	6566
	Legal Proceedings and Contingencies	6566
	Collective Bargaining Agreements	6566
	Recent Accounting Pronouncements	6566
	Rate Adjustments	6667
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6768
Item 4.	Controls and Procedures	6869
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	6970
Item 1A.	Risk Factors	6970
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6971
Item 6.	Exhibits	7072



	September 30, 2019		December 31, 2018		September 30, 2018
Cash and cash equivalents	$	4,040	$	4,225	$	4,097
Restricted cash	145		142		278
Total cash, cash equivalents and restricted cash	$	4,185	$	4,367	$	4,375



December 31, 2018:
Marketable Securities:
U.S. government and agency debt securities	$	297	$	—	$	—	$	297
Mortgage and asset-backed debt securities	—		81		—		81
Corporate debt securities	—		410		—		410
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		20		—		20
Total marketable securities	297		513		—		810
Other non-current investments	19		—		2		21
Total	$	316	$	513	$	2	$	831



	Capital Leases			Operating Leases
2019	$	158		$	578
2020	95			477
2021	42			399
2022	39			325
2023	36			262
After 2023	293			926
Total lease payments	663			2,967
Less: Imputed interest	(129		)
Total lease obligations	534
Less: Current obligations	(140		)
Long-term lease obligations	$	394



Three Months Ended September 30:	2019					2018
	Shares		Dollars			Shares		Dollars
Class A Common Stock
Balance at beginning of period	161		$	2		168		$	2
Common stock purchases	(1	)	—			(1	)	—
Stock award plans	—		—			1		—
Common stock issuances	1		—			1		—
Conversions of class A to class B common stock	(4	)	—			(4	)	—
Class A shares issued at end of period	157		$	2		165		$	2
Class B Common Stock
Balance at beginning of period	698		$	7		693		$	7
Common stock purchases	(1	)	—			(2	)	—
Conversions of class A to class B common stock	4		—			4		—
Class B shares issued at end of period	701		7			695		7
Additional Paid-In Capital
Balance at beginning of period			$	102				$	—
Stock award plans			202					137
Common stock purchases			(251		)			(249		)
Common stock issuances			56					80
Option premiums received (paid)			20					32
Balance at end of period			$	129				$	—
Retained Earnings
Balance at beginning of period			$	9,109				7,665
Net income attributable to common shareowners			1,750					1,508
Dividends ($0.96 and $0.91 per share) ⁽¹⁾			(825		)			(784		)
Common stock purchases			—					4
Other			3					(16		)
Balance at end of period			$	10,037				$	8,377
Non-Controlling Minority Interest
Balance at beginning of period			$	18				$	28
Change in non-controlling minority interest			(2		)			—
Balance at end of period			$	16				$	28
⁽¹⁾The dividend per share amount is the same for both class A and class B common stock



Nine Months Ended September 30:	2019					2018
	Shares		Dollars			Shares		Dollars
Class A Common Stock
Balance at beginning of period	163		$	2		173		$	2
Common stock purchases	(3	)				(3	)	—
Stock award plans	4		—			4		—
Common stock issuances	2		—			3		—
Conversions of class A to class B common stock	(9	)	—			(12	)	—
Class A shares issued at end of period	157		$	2		165		$	2
Class B Common Stock
Balance at beginning of period	696		$	7		687		$	7
Common stock purchases	(4	)	—			(4	)	—
Conversions of class A to class B common stock	9		—			12		—
Class B shares issued at end of period	701		7			695		7
Additional Paid-In Capital
Balance at beginning of period			$	—				$	—
Stock award plans			584					307
Common stock purchases			(753		)			(632		)
Common stock issuances			277					312
Option premiums received (paid)			21					13
Balance at end of period			$	129				$	—
Retained Earnings
Balance at beginning of period			$	8,006				$	5,852
Net income attributable to common shareowners			4,546					4,338
Dividends ($2.88 and $2.73 per share) ⁽¹⁾			(2,518		)			(2,408		)
Common stock purchases			—					(124		)
Reclassification from AOCI pursuant to the early adoption of ASU 2018-02			—					735
Other			3					(16		)
Balance at end of period			$	10,037				$	8,377
Non-Controlling Minority Interest
Balance at beginning of period			$	16				$	30
Change in non-controlling minority interest			—					(2		)
Balance at end of period			$	16				$	28
⁽¹⁾ The dividend per share amount is the same for both class A and class B common stock



Derivative Instruments Not Designated in Hedging Relationships	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income
	Location of Gain (Loss) Recognized in Income	2019			2018
Three Months Ended September 30:
Interest rate contracts	Interest expense	$	(2	)	$	(3	)
Foreign exchange contracts	Investment income and other	(39		)	(14		)
Total		$	(41	)	$	(17	)
Nine Months Ended September 30:
Interest rate contracts	Interest expense	$	(6	)	$	(7	)
Foreign exchange contracts	Investment income and other	(59		)	$	(73	)
Investment market price contracts	Investment income and other	—			16
Total		$	(65	)	$	(64	)



	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
July 1 – July 31, 2019	0.8	$	106.66	0.8	$	2,750
August 1 – August 31, 2019	0.7	116.57		0.7	2,664
September 1 – September 30, 2019	0.7	120.34		0.7	2,586
Total July 1 – September 30, 2019	2.2	$	114.01	2.2