United States

Securities and Exchange Commission

Washington, D.C. 20549

_____________________________________

Form 10-Q

(Mark One)


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

For the quarterly period ended September 30, ~~2021~~2022 or


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

For the transition period from to

Commission file number 001-15451

_____________________________________

United Parcel Service, Inc.

(Exact name of registrant as specified in its charter)

Delaware

58-2480149

(State or Other Jurisdiction of
Incorporation or Organization)

(IRS Employer
Identification No.)

55 Glenlake Parkway N.E. ,

Atlanta,

Georgia

30328

(Address of Principal Executive Offices)

(Zip Code)

(404) 828-6000

(Registrant’s telephone number, including area code)

____________________

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

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Class B common stock, par value $0.01 per share

UPS

New York Stock Exchange

0.375% Senior Notes due 2023

UPS23A

New York Stock Exchange

1.625% Senior Notes due 2025

UPS25

New York Stock Exchange

1% Senior Notes due 2028

UPS28

New York Stock Exchange

1.500% Senior Notes due 2032

UPS32

New York Stock Exchange

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 ~~139,983,977~~135,097,238 Class A shares, and ~~729,158,173~~729,820,920 Class B shares, with a par value of $0.01 per share, outstanding at October ~~24, 2021.~~21, 2022.

Table of Contents

TABLE OF CONTENTS


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	109
	Note 5—Cash and Investments	1211
	Note 6—~~Assets Held for Sale~~Property, Plant and Equipment	14
	Note 7—Employee Benefit Plans	15
	Note ~~7—Property, Plant~~8—Goodwill and ~~Equipment~~Intangible Assets	16
	~~Note 8—Employee Benefit Plans~~	1718
	Note 9—~~Goodwill~~Debt and ~~Intangible Assets~~Financing Arrangements	20
	Note 10—~~Debt and Financing Arrangements~~Leases	2123
	Note 11—~~Leases~~Legal Proceedings and Contingencies	2427
	Note 12—~~Legal Proceedings and Contingencies~~Shareowners’ Equity	28
	Note 13—~~Shareowners’ Equity~~Segment Information	2934
	Note 14—~~Segment Information~~Earnings Per Share	35
	Note 15—~~Earnings Per Share~~Derivative Instruments and Risk Management	36
	Note 16—~~Derivative Instruments and Risk Management~~Income Taxes	3742
	Note 17—~~Income Taxes~~	43
	~~Note 18—~~Transformation Strategy Costs	44
	~~Note 19—Subsequent Events~~	4543
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4644
	Overview	4644
	Supplemental Information - Items Affecting Comparability	4846
	Results of Operations - Segment Review	5048
	U.S. Domestic Package Operations	5149
	International Package Operations	5452
	Supply Chain Solutions Operations	5755
	Consolidated Operating Expenses	5957
	Other Income and (Expense)	6260
	Income Tax Expense	6361
	Liquidity and Capital Resources	6462
	Cash Flows From Operating Activities	6462
	Cash Flows From Investing Activities	6664
	Cash Flows From Financing Activities	6765
	Sources of Credit	68
	~~Contractual Commitments~~	6866
	~~Guarantees and Other Off-Balance Sheet Arrangements~~Contractual Commitments	6866
	Legal Proceedings and Contingencies	6866
	Collective Bargaining Agreements	6866
	Recent Accounting Pronouncements	6966
	Rate Adjustments	7067
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7168
Item 4.	Controls and Procedures	7269
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	7370
Item 1A.	Risk Factors	7370
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7471
Item 6.	Exhibits	7572

Table of Contents

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, ~~2020~~2021 and our other filings with the Securities and Exchange Commission contain and in the future may contain “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 “will,” “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan” 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 written or oral forward-looking statements in other publicly disclosed materials. Such statements may relate to our intent, belief, forecasts of, or current expectations about our strategic direction, prospects, future results, or 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 and the future, by its very nature, cannot be predicted with certainty.

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, include, but are not limited to: continued uncertainties related to the impact of the COVID-19 pandemic on our business and operations, financial performance and liquidity, our customers and suppliers, and on the global economy; changes in general economic conditions, in the United States ("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 regulatory environment in the U.S. or internationally; increased or more complex physical or data security requirements; legal, regulatory or market responses to global climate change; results of negotiations and 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 our brand image; our ability to attract and retain qualified employees; 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 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 impairment of our assets; increases in our expenses or funding obligations relating to employee health, retiree health and/or pension benefits; potential additional U.S. or international tax liabilities; potential claims or 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, dispositions, 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~~described 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, ~~2020~~2021, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 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 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.

Table of Contents

Item 1. Financial Statements

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021 (in millions)


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Current Assets:	Current Assets:					Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	10,212	$	5,910	Cash and cash equivalents	$	11,045	$	10,255
Marketable securities	Marketable securities	348		406		Marketable securities	331		338
Accounts receivable	Accounts receivable	10,602		10,888		Accounts receivable	11,118		12,669
Less: Allowance for credit losses	Less: Allowance for credit losses	(128)		(138)		Less: Allowance for credit losses	(143)		(128)
Accounts receivable, net	Accounts receivable, net	10,474		10,750		Accounts receivable, net	10,975		12,541
Assets held for sale		—		1,197

Other current assets	Other current assets	1,809		1,953		Other current assets	2,247		1,800
Total Current Assets	Total Current Assets	22,843		20,216		Total Current Assets	24,598		24,934
Property, Plant and Equipment, Net	Property, Plant and Equipment, Net	32,859		32,254		Property, Plant and Equipment, Net	33,625		33,475
Operating Lease Right-Of-Use Assets	Operating Lease Right-Of-Use Assets	3,460		3,073		Operating Lease Right-Of-Use Assets	3,417		3,562
Goodwill	Goodwill	3,332		3,367		Goodwill	3,624		3,692
Intangible Assets, Net	Intangible Assets, Net	2,224		2,274		Intangible Assets, Net	2,439		2,486
Investments and Restricted Cash	Investments and Restricted Cash	24		25		Investments and Restricted Cash	20		26
Deferred Income Tax Assets	Deferred Income Tax Assets	181		527		Deferred Income Tax Assets	143		176
Other Non-Current Assets	Other Non-Current Assets	816		672		Other Non-Current Assets	1,678		1,054
Total Assets	Total Assets	$	65,739	$	62,408	Total Assets	$	69,544	$	69,405
LIABILITIES AND SHAREOWNERS’ EQUITY	LIABILITIES AND SHAREOWNERS’ EQUITY					LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:	Current Liabilities:					Current Liabilities:
Current maturities of long-term debt, commercial paper and finance leases	Current maturities of long-term debt, commercial paper and finance leases	$	1,268	$	2,623	Current maturities of long-term debt, commercial paper and finance leases	$	2,581	$	2,131
Current maturities of operating leases	Current maturities of operating leases	552		560		Current maturities of operating leases	560		580
Accounts payable	Accounts payable	6,445		6,455		Accounts payable	6,731		7,523
Accrued wages and withholdings	Accrued wages and withholdings	3,805		3,569		Accrued wages and withholdings	3,643		3,819
Self-insurance reserves	Self-insurance reserves	1,093		1,085		Self-insurance reserves	1,081		1,048
Accrued group welfare and retirement plan contributions	Accrued group welfare and retirement plan contributions	957		927		Accrued group welfare and retirement plan contributions	1,006		1,038
Liabilities to be disposed of		—		347
Hedge margin liabilities						Hedge margin liabilities	1,031		260

Other current liabilities	Other current liabilities	1,352		1,450		Other current liabilities	1,046		1,170
Total Current Liabilities	Total Current Liabilities	15,472		17,016		Total Current Liabilities	17,679		17,569
Long-Term Debt and Finance Leases	Long-Term Debt and Finance Leases	20,838		22,031		Long-Term Debt and Finance Leases	17,769		19,784
Non-Current Operating Leases	Non-Current Operating Leases	2,938		2,540		Non-Current Operating Leases	2,960		3,033
Pension and Postretirement Benefit Obligations	Pension and Postretirement Benefit Obligations	7,672		15,817		Pension and Postretirement Benefit Obligations	6,747		8,047
Deferred Income Tax Liabilities	Deferred Income Tax Liabilities	2,775		488		Deferred Income Tax Liabilities	3,761		3,125
Other Non-Current Liabilities	Other Non-Current Liabilities	3,987		3,847		Other Non-Current Liabilities	3,640		3,578
Shareowners’ Equity:	Shareowners’ Equity:					Shareowners’ Equity:
Class A common stock (141 and 147 shares issued in 2021 and 2020, respectively)		2		2
Class B common stock (728 and 718 shares issued in 2021 and 2020, respectively)		7		7
Class A common stock (135 and 138 shares issued in 2022 and 2021, respectively)						Class A common stock (135 and 138 shares issued in 2022 and 2021, respectively)	2		2
Class B common stock (730 and 732 shares issued in 2022 and 2021, respectively)						Class B common stock (730 and 732 shares issued in 2022 and 2021, respectively)	7		7
Additional paid-in capital	Additional paid-in capital	1,088		865		Additional paid-in capital	—		1,343
Retained earnings	Retained earnings	13,973		6,896		Retained earnings	20,177		16,179
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(3,029)		(7,113)		Accumulated other comprehensive loss	(3,218)		(3,278)
Deferred compensation obligations	Deferred compensation obligations	16		20		Deferred compensation obligations	12		16
Less: Treasury stock (0.3 shares in 2021 and 0.4 shares in 2020)		(16)		(20)
Less: Treasury stock (0.2 and 0.3 shares in 2022 and 2021, respectively)						Less: Treasury stock (0.2 and 0.3 shares in 2022 and 2021, respectively)	(12)		(16)
Total Equity for Controlling Interests	Total Equity for Controlling Interests	12,041		657		Total Equity for Controlling Interests	16,968		14,253
Noncontrolling interests	Noncontrolling interests	16		12		Noncontrolling interests	20		16
Total Shareowners’ Equity	Total Shareowners’ Equity	12,057		669		Total Shareowners’ Equity	16,988		14,269
Total Liabilities and Shareowners’ Equity	Total Liabilities and Shareowners’ Equity	$	65,739	$	62,408	Total Liabilities and Shareowners’ Equity	$	69,544	$	69,405

See notes to unaudited, consolidated financial statements.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(In millions, except per share amounts)

(unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue	Revenue	$	23,184	$	21,238	$	69,516	$	59,732	Revenue	$	24,161	$	23,184	$	73,305	$	69,516
Operating Expenses:	Operating Expenses:									Operating Expenses:
Compensation and benefits	Compensation and benefits	11,148		11,077		33,958		32,006		Compensation and benefits	11,506		11,148		34,480		33,958
Repairs and maintenance	Repairs and maintenance	619		576		1,837		1,693		Repairs and maintenance	639		619		1,908		1,837
Depreciation and amortization	Depreciation and amortization	738		677		2,199		1,986		Depreciation and amortization	774		738		2,300		2,199
Purchased transportation	Purchased transportation	4,638		3,937		13,327		10,584		Purchased transportation	4,173		4,638		13,158		13,327
Fuel	Fuel	950		618		2,672		1,878		Fuel	1,530		950		4,447		2,672
Other occupancy	Other occupancy	384		376		1,252		1,114		Other occupancy	427		384		1,338		1,252
Other expenses	Other expenses	1,811		1,614		5,352		4,824		Other expenses	1,999		1,811		5,775		5,352
Total Operating Expenses	Total Operating Expenses	20,288		18,875		60,597		54,085		Total Operating Expenses	21,048		20,288		63,406		60,597
Operating Profit	Operating Profit	2,896		2,363		8,919		5,647		Operating Profit	3,113		2,896		9,899		8,919
Other Income and (Expense):	Other Income and (Expense):									Other Income and (Expense):
Investment income and other	Investment income and other	274		338		4,235		1,011		Investment income and other	333		274		981		4,235
Interest expense	Interest expense	(177)		(176)		(521)		(526)		Interest expense	(177)		(177)		(522)		(521)
Total Other Income and (Expense)	Total Other Income and (Expense)	97		162		3,714		485		Total Other Income and (Expense)	156		97		459		3,714
Income Before Income Taxes	Income Before Income Taxes	2,993		2,525		12,633		6,132		Income Before Income Taxes	3,269		2,993		10,358		12,633
Income Tax Expense	Income Tax Expense	664		568		2,836		1,442		Income Tax Expense	685		664		2,263		2,836
Net Income	Net Income	$	2,329	$	1,957	$	9,797	$	4,690	Net Income	$	2,584	$	2,329	$	8,095	$	9,797
Basic Earnings Per Share	Basic Earnings Per Share	$	2.66	$	2.25	$	11.21	$	5.42	Basic Earnings Per Share	$	2.97	$	2.66	$	9.27	$	11.21
Diluted Earnings Per Share	Diluted Earnings Per Share	$	2.65	$	2.24	$	11.16	$	5.39	Diluted Earnings Per Share	$	2.96	$	2.65	$	9.24	$	11.16

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(In millions)

(unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Net Income	Net Income	$	2,329	$	1,957	$	9,797	$	4,690	Net Income	$	2,584	$	2,329	$	8,095	$	9,797
Change in foreign currency translation adjustment, net of tax	Change in foreign currency translation adjustment, net of tax	(106)		65		(140)		(66)		Change in foreign currency translation adjustment, net of tax	(263)		(106)		(548)		(140)
Change in unrealized gain (loss) on marketable securities, net of tax	Change in unrealized gain (loss) on marketable securities, net of tax	—		(2)		(5)		3		Change in unrealized gain (loss) on marketable securities, net of tax	(3)		—		(10)		(5)
Change in unrealized gain (loss) on cash flow hedges, net of tax	Change in unrealized gain (loss) on cash flow hedges, net of tax	112		(195)		180		(92)		Change in unrealized gain (loss) on cash flow hedges, net of tax	281		112		558		180
Change in unrecognized pension and postretirement benefit costs, net of tax	Change in unrecognized pension and postretirement benefit costs, net of tax	29		43		4,049		130		Change in unrecognized pension and postretirement benefit costs, net of tax	18		29		60		4,049
Comprehensive Income (Loss)	Comprehensive Income (Loss)	$	2,364	$	1,868	$	13,881	$	4,665	Comprehensive Income (Loss)	$	2,617	$	2,364	$	8,155	$	13,881

See notes to unaudited, consolidated financial statements.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

(unaudited)


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2021		2020			2022		2021
Cash Flows From Operating Activities:	Cash Flows From Operating Activities:					Cash Flows From Operating Activities:
Net income	Net income	$	9,797	$	4,690	Net income	$	8,095	$	9,797
Adjustments to reconcile net income to net cash from operating activities:	Adjustments to reconcile net income to net cash from operating activities:					Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	Depreciation and amortization	2,199		1,986		Depreciation and amortization	2,300		2,199
Pension and postretirement benefit (income) expense	Pension and postretirement benefit (income) expense	(2,656)		481		Pension and postretirement benefit (income) expense	666		(2,656)
Pension and postretirement benefit contributions	Pension and postretirement benefit contributions	(331)		(1,307)		Pension and postretirement benefit contributions	(2,106)		(331)
Self-insurance reserves	Self-insurance reserves	122		388		Self-insurance reserves	182		122
Deferred tax (benefit) expense	Deferred tax (benefit) expense	1,271		566		Deferred tax (benefit) expense	466		1,271
Stock compensation expense	Stock compensation expense	700		508		Stock compensation expense	850		700
Other (gains) losses	Other (gains) losses	33		164		Other (gains) losses	(25)		33
Changes in assets and liabilities, net of effects of business acquisitions:	Changes in assets and liabilities, net of effects of business acquisitions:					Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	Accounts receivable	(21)		352		Accounts receivable	1,022		(21)
Other assets	Other assets	256		391		Other assets	(98)		256
Accounts payable	Accounts payable	20		(450)		Accounts payable	(952)		20
Accrued wages and withholdings	Accrued wages and withholdings	306		1,330		Accrued wages and withholdings	(59)		306
Other liabilities	Other liabilities	65		120		Other liabilities	481		65
Other operating activities	Other operating activities	—		64		Other operating activities	(50)		—
Net cash from operating activities	Net cash from operating activities	11,761		9,283		Net cash from operating activities	10,772		11,761
Cash Flows From Investing Activities:	Cash Flows From Investing Activities:					Cash Flows From Investing Activities:
Capital expenditures	Capital expenditures	(2,570)		(3,219)		Capital expenditures	(2,278)		(2,570)
Proceeds from disposal of businesses, property, plant and equipment	Proceeds from disposal of businesses, property, plant and equipment	870		10		Proceeds from disposal of businesses, property, plant and equipment	12		870
Purchases of marketable securities	Purchases of marketable securities	(197)		(202)		Purchases of marketable securities	(195)		(197)
Sales and maturities of marketable securities	Sales and maturities of marketable securities	257		309		Sales and maturities of marketable securities	193		257
Net change in finance receivables	Net change in finance receivables	28		24		Net change in finance receivables	23		28
Cash paid for business acquisitions, net of cash and cash equivalents acquired	Cash paid for business acquisitions, net of cash and cash equivalents acquired	(12)		(13)		Cash paid for business acquisitions, net of cash and cash equivalents acquired	(106)		(12)
Other investing activities	Other investing activities	24		(15)		Other investing activities	(57)		24
Net cash used in investing activities	Net cash used in investing activities	(1,600)		(3,106)		Net cash used in investing activities	(2,408)		(1,600)
Cash Flows From Financing Activities:	Cash Flows From Financing Activities:					Cash Flows From Financing Activities:
Net change in short-term debt	Net change in short-term debt	—		(1,924)		Net change in short-term debt	—		—
Proceeds from long-term borrowings	Proceeds from long-term borrowings	—		5,003		Proceeds from long-term borrowings	—		—
Repayments of long-term borrowings	Repayments of long-term borrowings	(2,613)		(2,746)		Repayments of long-term borrowings	(1,124)		(2,613)
Purchases of common stock	Purchases of common stock	(500)		(224)		Purchases of common stock	(2,194)		(500)
Issuances of common stock	Issuances of common stock	196		214		Issuances of common stock	198		196
Dividends	Dividends	(2,578)		(2,528)		Dividends	(3,842)		(2,578)
Other financing activities	Other financing activities	(361)		(351)		Other financing activities	(513)		(361)
Net cash used in financing activities	Net cash used in financing activities	(5,856)		(2,556)		Net cash used in financing activities	(7,475)		(5,856)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(3)		(19)		Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(99)		(3)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	4,302		3,602		Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	790		4,302
Cash, Cash Equivalents and Restricted Cash:	Cash, Cash Equivalents and Restricted Cash:					Cash, Cash Equivalents and Restricted Cash:
Beginning of period	Beginning of period	5,910		5,238		Beginning of period	10,255		5,910
End of period	End of period	$	10,212	$	8,840	End of period	$	11,045	$	10,212

See notes to unaudited, consolidated financial statements.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Principles of Consolidation

The accompanying interim unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("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 30, ~~2021,~~2022, our results of operations for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021, and our cash flows for the nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021. The results reported in these interim unaudited, consolidated financial statements should not be regarded as 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, ~~2020.~~2021.

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no material impact on our financial position or results of operations.

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable ~~approximate~~approximated fair value as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The fair values of our investment securities are disclosed in note 5, our recognized multiemployer pension withdrawal liabilities in note 8,7, our short- and long-term debt in note 109 and our derivative instruments in note ~~16.~~15. We apply a fair value hierarchy (Levels 1, 2 and 3) when measuring and reporting items at fair value. Fair values are based on listed market prices (Level 1), when such prices are available. To the extent that listed market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations (Level 2). If listed market prices or other relevant factors are not available, inputs are developed from unobservable data reflecting our own assumptions and include situations where there is little or no market activity for the asset or liability (Level 3). 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.

Use of Estimates

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 these financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

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 and will continue to be affected by the ongoing COVID-19 pandemic. The severity, magnitude and duration of the pandemic, and the resulting economic consequences, remain uncertain, rapidly changing and difficult to predict. As a result, our accounting estimates and assumptions may change significantly over time.

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.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

~~In March 2020, the Financial~~ Accounting Standards Board issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848), to temporarily ease the potential burden in accounting for reference rate reform. The standard 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 applied through December 31, 2022. While there has been no material impact so far to our financial position, results of operations or cash flows from reference rate reform, we continue to monitor our contracts and transactions for potential application of this ASU.

For accounting standards adopted in the period ended September 30, 2020, refer to note 1 to our audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020. 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. For accounting standards adopted in the period ended September 30, 2021, refer to note 1 to our audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.

Accounting Standards Issued But Not Yet Effective

In September 2022, the Financial Accounting Standards Board issued an Accounting Standards Update ("ASU") to enhance the disclosure of supplier finance programs. The update will be effective for us in the first quarter of 2023. 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, cash flows or internal controls.

Other accounting pronouncements issued before, but not effective until after, September 30, ~~2021,~~2022, are not expected to have a material impact on our consolidated financial position, results of operations, cash flows or ~~cash flows.~~internal controls.

Table of Contents

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 pickup, transportation and delivery of packages and freight (“transportation services”)~~, whether~~ domestically or internationally. These services may be carried out by or arranged by ~~UPS, either domestically or internationally, which~~us, and generally ~~occurs~~occur over a short period of time. ~~Additionally, we~~We also 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.

~~Disaggregation of Revenue~~
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
Revenue:
Next Day Air $ 2,415 $ 2,098 $ 7,202 $ 6,137
Deferred 1,304 1,378 3,877 3,873
Ground 10,489 9,749 31,541 27,745
     U.S. Domestic Package 14,208 13,225 42,620 37,755
Domestic 852 776 2,716 2,183
Export 3,641 3,153 10,808 8,538
Cargo & Other 227 158 620 454
    International Package 4,720 4,087 14,144 11,175
Forwarding 2,625 1,753 7,006 4,897
Logistics 1,158 1,040 3,424 2,862
Freight — 870 1,064 2,360
Other 473 263 1,258 683
    Supply Chain Solutions 4,256 3,926 12,752 10,802
Consolidated revenue $ 23,184 $ 21,238 $ 69,516 $ 59,732

We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties 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 GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as 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;~~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 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.

~~Table of Contents~~

~~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 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 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 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~~primarily comprised of our customer contracts, the customer pays at periodic intervals, which are generally seven days within our U.S. Domestic Package business, 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,transportation services started 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~~completed as ~~such, we do not have a practice of including a significant financing component within our contracts with customers.~~

~~Table of Contents~~

~~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. 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,~~reporting date and we ~~determined that all~~expect to complete these remaining performance obligations within a short period of time. All of our major businesses act as ~~the~~a principal ~~rather than the agent within~~in their revenue ~~arrangements. Revenue~~arrangements and as such, we report 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 reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimateDisaggregation of the current expected losses inherent in our 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 third quarter of 2021, we increased our allowance for expected credit losses by $5 million (a decrease of $10 million year to date) based upon current forecasts that reflect changes in the economic outlook. Our allowance for credit losses as of September 30, 2021 and December 31, 2020 was $128 and $138 million, respectively. Amounts for credit losses charged to expense, before recoveries, during the three months ended September 30, 2021 and 2020 were $48 and $51 million, respectively, and for the nine months ended September 30, 2021 and 2020, were $128 and $204 million, respectively.Revenue


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue:
Next Day Air	$	2,673	$	2,415	$	7,923	$	7,202
Deferred	1,311		1,304		4,123		3,877
Ground	11,390		10,489		33,911		31,541
U.S. Domestic Package	15,374		14,208		45,957		42,620

Domestic	785		852		2,465		2,716
Export	3,747		3,641		11,501		10,808
Cargo & Other	267		227		782		620
International Package	4,799		4,720		14,748		14,144

Forwarding	2,162		2,625		7,140		7,006
Logistics	1,302		1,158		3,843		3,424
Freight	—		—		—		1,064
Other	524		473		1,617		1,258
Supply Chain Solutions	3,988		4,256		12,600		12,752

Consolidated revenue	$	24,161	$	23,184	$	73,305	$	69,516

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.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 ~~$339~~$328 and ~~$279~~$304 million as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, net of deferred revenue related to in-transit packages of ~~$359~~$346 and ~~$279~~$314 million as of September 30, ~~2021~~2022 and December 31, ~~2020, respectively. Contract assets~~2021, respectively, and are included within ~~"Other~~Other current ~~assets"~~assets in the consolidated balance sheets. Short-term contract liabilities related to advance payments from customers were ~~$35~~$10 and ~~$21~~$27 million as of September 30, ~~2021~~2022 and December 31, ~~2020, respectively. Short-term contract liabilities~~2021, respectively, and are included within ~~"Other~~Other current ~~liabilities"~~liabilities in the consolidated balance sheets. Long-term contract liabilities related to advance payments from customers were $26 and $25 million as of ~~both~~ September 30, ~~2021~~2022 and December 31, ~~2020. Long-term contract liabilities~~2021, respectively, and are included within ~~"Other~~Other Non-Current ~~Liabilities"~~Liabilities in the consolidated balance sheets.

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 reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimate of the current expected losses inherent in our accounts receivable at each balance sheet date. This estimate requires 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.

Our allowance for credit losses as of September 30, 2022 and December 31, 2021 was $143 and $128 million, respectively. Amounts for credit losses charged to expense, before recoveries, during each of the three months ended September 30, 2022 and 2021 were $48 million and for the nine months ended September 30, 2022 and 2021, were $154 and $128 million, respectively.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. STOCK-BASED COMPENSATION

We issue share-based awards under various incentive compensation plans, including non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units ("RSUs") and restricted performance shares and performance units ("RPUs", collectively with RSUs, "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.~~Units.

Our primary equity compensation programs are the UPS Management Incentive ~~Award program~~Program (the "MIP"), the UPS Long-Term Incentive Performance ~~Award program~~Program (the "LTIP") 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~~Our matching contributions to our primary employee defined contribution savings plan are made in shares of UPS class A common stock.

Management Incentive ~~Award~~ Program ~~("MIP")~~

RPUs issued under the MIP vest one year following the grant date based on continued employment with the Company ~~(except in the case of death, disability or retirement, in which case immediate vesting occurs). The grant value is~~and are expensed on a straight-line basis (less estimated forfeitures) over the requisite service ~~period (except in the case~~period. In cases of death, disability or retirement, ~~in which case immediate expensing occurs).~~RPUs vest and are expensed immediately.

Based on the date of Compensation Committee approval of the ~~2020~~2021 MIP, ~~award,~~ we determined the award measurement dates to be February ~~10, 2021~~9, 2022 (for U.S.-based employees and executive management) and March ~~22, 2021~~21, 2022 (for international employees). ~~The RPUs~~Each RPU issued under the MIP ~~were~~was valued ~~for stock compensation expense purposes~~ using the closing New York Stock Exchange ("NYSE") prices of ~~$165.66~~$225.07 and ~~$161.06~~$218.56 on those dates.

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

RPUs issued under the LTIP vest at the end of a ~~three-year~~three-year performance period, assuming continued employment with the Company (except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis). The ~~final~~actual number of RPUs earned is based on achievement of the performance targets established on the grant date.

For LTIP awards with a performance period ending December 31, 2021, the performance targets are equally weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total 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 RPUs (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 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.

~~For LTIP awards with a performance period ending in 2022 or later, the~~ performance targets are equally weighted between adjusted earnings per share and adjusted cumulative free cash flow. The ~~final~~actual number of RPUs earned ~~will then be~~is subject to adjustment based on ~~RTSR~~total shareholder return relative to the Standard & ~~Poors~~Poor's 500 Index ("S&P 500"). We determine the grant date fair value of the RPUs using a Monte Carlo model and recognize compensation expense (less estimated forfeitures) ratably over the vesting period, based on the number of awards expected to be earned.

For the 2020 LTIP award, the performance period was divided into two measurement periods. The first measurement period evaluated the achievement of the performance targets for 2020. The second measurement period will evaluate the achievement of the performance targets for the years 2021 and 2022. The performance targets for the second measurement period were approved on March 25, 2021 and the target RPUs awarded were valued at $167.66 on that date.

Based on the date of Compensation Committee approval of the ~~2021~~2022 LTIP award performance targets, we determined March ~~25, 2021~~23, 2022 to be the award measurement date and ~~the~~each target ~~RPUs~~RPU awarded ~~were~~was valued at ~~$166.52.~~$230.67.

The weighted-average assumptions used and the weighted-average fair values of the LTIP awards granted in 2022 and 2021 are as follows:


	2022			2021
Risk-free interest rate	2.33		%	0.19		%
Expected volatility	31.91		%	30.70		%
Weighted-average fair value of RPUs granted	$	228.72		$	168.05
Share payout	107.41		%	102.39		%

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

109

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~The weighted-average assumptions used and the weighted-average fair values of the LTIP awards granted in 2021 and 2020 are as follows:~~
2021 2020
Risk-free interest rate 0.19 % 0.15 %
Expected volatility 30.70 % 27.53 %
Weighted-average fair value of RPUs granted $ 167.31 $ 92.77
Share payout 102.40 % 101.00 %

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

Non-Qualified Stock Options

We grant non-qualified stock options to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards vest over a ~~five-year~~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 retirement, in which case immediate vesting occurs). The option grants expire 10 years after the date of the grant. ~~In the first quarter of 2021,~~On March 23, 2022, we granted ~~0.2~~0.1 million stock options at ~~a grant~~an exercise price of ~~$165.66, which was~~$214.58, the NYSE closing price on ~~February 10, 2021.~~that date.

The fair value of each option ~~grant~~granted is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the weighted-average fair values of options granted in ~~2021~~2022 and ~~2020~~2021 are as follows:


		2021			2020				2022			2021
Expected dividend yield	Expected dividend yield	3.31		%	3.51		%	Expected dividend yield	2.35		%	3.31		%
Risk-free interest rate	Risk-free interest rate	0.84		%	1.26		%	Risk-free interest rate	2.39		%	0.84		%
Expected life (in years)	Expected life (in years)	7.5			7.5			Expected life (in years)	7.5			7.5
Expected volatility	Expected volatility	23.15		%	19.25		%	Expected volatility	25.04		%	23.15		%
Weighted-average fair value of options granted	Weighted-average fair value of options granted	$	23.71		$	11.74		Weighted-average fair value of options granted	$	48.45		$	23.71

Pre-tax compensation expense for share-based awards recognized in Compensation and benefits on in the statements of consolidated income for the three months ended September 30, 2022 and 2021 was $233 and ~~2020 was~~ $179 ~~and $140~~ million,, respectively, and for the nine months ended September 30, 2022 and 2021 was $850and ~~2020 was~~ $700 ~~and $508~~ million, respectively.

1110

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. CASH AND INVESTMENTS

The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 (in millions):


		Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value			Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
September 30, 2021:
September 30, 2022:										September 30, 2022:
Current trading marketable securities:	Current trading marketable securities:									Current trading marketable securities:

Equity securities	Equity securities	$	2	$	—	$	—	$	2	Equity securities	$	2	$	—	$	—	$	2

Total trading marketable securities	Total trading marketable securities	2		—		—		2		Total trading marketable securities	2		—		—		2

Current available-for-sale securities:	Current available-for-sale securities:									Current available-for-sale securities:
U.S. government and agency debt securities	U.S. government and agency debt securities	222		1		—		223		U.S. government and agency debt securities	222		—		(8)		214
Mortgage and asset-backed debt securities	Mortgage and asset-backed debt securities	—		—		—		—		Mortgage and asset-backed debt securities	10		—		—		10
Corporate debt securities	Corporate debt securities	113		2		—		115		Corporate debt securities	105		—		(4)		101
U.S. state and local municipal debt securities	U.S. state and local municipal debt securities	5		—		—		5		U.S. state and local municipal debt securities	4		—		—		4

Non-U.S. government debt securities	Non-U.S. government debt securities	3		—		—		3		Non-U.S. government debt securities	—		—		—		—

Total available-for-sale marketable securities	Total available-for-sale marketable securities	343		3		—		346		Total available-for-sale marketable securities	341		—		(12)		329

Total current marketable securities	Total current marketable securities	$	345	$	3	$	—	$	348	Total current marketable securities	$	343	$	—	$	(12)	$	331

		Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value			Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
December 31, 2020:
December 31, 2021:										December 31, 2021:
Current trading marketable securities:	Current trading marketable securities:									Current trading marketable securities:

Equity securities	Equity securities	$	2	$	—	$	—	$	2	Equity securities	$	2	$	—	$	—	$	2

Total trading marketable securities	Total trading marketable securities	2		—		—		2		Total trading marketable securities	2		—		—		2

Current available-for-sale securities:	Current available-for-sale securities:									Current available-for-sale securities:
U.S. government and agency debt securities	U.S. government and agency debt securities	181		3		—		184		U.S. government and agency debt securities	199		2		(1)		200
Mortgage and asset-backed debt securities	Mortgage and asset-backed debt securities	30		1		—		31		Mortgage and asset-backed debt securities	7		—		—		7
Corporate debt securities	Corporate debt securities	174		4		—		178		Corporate debt securities	121		—		—		121
U.S. state and local municipal debt securities	U.S. state and local municipal debt securities	—		—		—		—		U.S. state and local municipal debt securities	5		—		—		5

Non-U.S. government debt securities	Non-U.S. government debt securities	11		—		—		11		Non-U.S. government debt securities	3		—		—		3

Total available-for-sale marketable securities	Total available-for-sale marketable securities	396		8		—		404		Total available-for-sale marketable securities	335		2		(1)		336

Total current marketable securities	Total current marketable securities	$	398	$	8	$	—	$	406	Total current marketable securities	$	337	$	2	$	(1)	$	338

Investment Impairments

We have concluded that no material impairment losses existed as of September 30, ~~2021.~~2022. In making this determination, we considered the financial condition and prospects of each issuer, the magnitude of the losses compared with the 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.

1211

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Maturity Information

The amortized cost and estimated fair value of marketable securities as of September 30, ~~2021~~2022 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			Cost		Estimated Fair Value
Due in one year or less	Due in one year or less	$	35	$	35	Due in one year or less	$	16	$	15
Due after one year through three years	Due after one year through three years	306		309		Due after one year through three years	325		314
Due after three years through five years	Due after three years through five years	2		2		Due after three years through five years	—		—
Due after five years	Due after five years	—		—		Due after five years	—		—
		343		346			341		329
Equity securities	Equity securities	2		2		Equity securities	2		2
		$	345	$	348		$	343	$	331

Non-Current Investments and Restricted Cash

We ~~held a $23 million~~hold an investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit ~~Plan~~Plan. The investment had a fair market value of $18 and $23 million as of ~~both~~ September 30, ~~2021~~2022 and December 31, ~~2020. The change~~2021, respectively. Changes in ~~investment~~ fair value isare recognized in Investment income and other in the statements of consolidated income. Additionally, we held ~~escrowed~~ cash in escrow of $2 and $3 million as of September 30, 2022 and December 31, 2021, respectively, related to the acquisition and disposition of certain ~~assets of $1 million and $2 million as of September 30, 2021 and December 31, 2020, respectively.~~assets. These amounts are classified as Investments and Restricted Cash in the consolidated balance sheets.

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, 2021		December 31, 2020		September 30, 2020			September 30, 2022		December 31, 2021		September 30, 2021		December 31, 2020
Cash and cash equivalents	Cash and cash equivalents	$	10,212	$	5,910	$	8,839	Cash and cash equivalents	$	11,045	$	10,255	$	10,212	$	5,910
Restricted cash	Restricted cash	—		—		1		Restricted cash	—		—		—		—
Total cash, cash equivalents and restricted cash	Total cash, cash equivalents and restricted cash	$	10,212	$	5,910	$	8,840	Total cash, cash equivalents and restricted cash	$	11,045	$	10,255	$	10,212	$	5,910

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.

1312

Table of Contents

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 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
September 30, 2021:
Marketable Securities:
September 30, 2022:										September 30, 2022:
Marketable securities:										Marketable securities:
U.S. government and agency debt securities	U.S. government and agency debt securities	$	217	$	6	$	—	$	223	U.S. government and agency debt securities	$	214	$	—	$	—	$	214
Mortgage and asset-backed debt securities	Mortgage and asset-backed debt securities	—		—		—		—		Mortgage and asset-backed debt securities	—		10		—		10
Corporate debt securities	Corporate debt securities	—		115		—		115		Corporate debt securities	—		101		—		101
U.S. state and local municipal debt securities	U.S. state and local municipal debt securities	—		5		—		5		U.S. state and local municipal debt securities	—		4		—		4
Equity securities	Equity securities	—		2		—		2		Equity securities	—		2		—		2
Non-U.S. government debt securities	Non-U.S. government debt securities	—		3		—		3		Non-U.S. government debt securities	—		—		—		—

Total marketable securities	Total marketable securities	217		131		—		348		Total marketable securities	214		117		—		331
Other non-current investments	Other non-current investments	23		—		—		23		Other non-current investments	18		—		—		18
Total	Total	$	240	$	131	$	—	$	371	Total	$	232	$	117	$	—	$	349

December 31, 2020:
Marketable Securities:
U.S. government and agency debt securities $ 184 $ — $ — $ 184
Mortgage and asset-backed debt securities — 31 — 31
Corporate debt securities — 178 — 178
U.S. state and local municipal debt securities — — — —
Equity securities — 2 — 2
Non-U.S. government debt securities — 11 — 11
Total marketable securities 184 222 — 406
Other non-current investments 23 — — 23
Total $ 207 $ 222 $ — $ 429

~~There were no transfers of investments between Level 1 and Level 2 during the nine months ended September 30, 2021 or 2020.~~



December 31, 2021:
Marketable securities:
U.S. government and agency debt securities	$	200	$	—	$	—	$	200
Mortgage and asset-backed debt securities	—		7		—		7
Corporate debt securities	—		121		—		121
U.S. state and local municipal debt securities	—		5		—		5
Equity securities	—		2		—		2

Non-U.S. government debt securities	—		3		—		3

Total marketable securities	200		138		—		338
Other non-current investments	23		—		—		23
Total	$	223	$	138	$	—	$	361

1413

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~NOTE 6. ASSETS HELD FOR SALE~~

As previously disclosed, on January 24, 2021, we entered into a definitive agreement to divest our UPS Freight business to TFI International Inc. ("TFI") for $800 million, subject to working capital and other adjustments.

As of December 31, 2020, we classified UPS Freight as held for sale and, as a result, recognized a total pre-tax impairment charge of $686 million ($629 million after tax), comprised of a goodwill impairment charge of $494 million and a valuation allowance of $192 million to adjust the carrying value of the disposal group to fair value less cost to sell. As of March 31, 2021, we increased the valuation allowance by $66 million ($50 million after tax) to adjust the carrying value of the disposal group to our revised estimate of fair value less cost to sell.

On April 30, 2021, we completed the divestiture of UPS Freight for cash proceeds of $848 million, which included our estimate of working capital and other adjustments. Self-insurance reserves for UPS Freight and obligations for benefits earned within UPS-sponsored pension and postretirement medical benefit plans were retained by us. In connection with the completion of the divestiture of UPS Freight, we remeasured and amended certain of our company-sponsored U.S. pension and postretirement medical benefit plans, resulting in a $2.1 billion reduction in the obligations included in our consolidated balance sheet. Also in connection with the completion of the divestiture, we recorded a pre-tax gain of $101 million ($77 million after tax), which included the impact of the plan remeasurements and plan amendments.

There were no adjustments recorded during the three months ended September 30, 2021. The nine months ended September 30, 2021 include a net pre-tax gain of $35 million ($27 million after tax), recognized within Other expenses in the statements of consolidated income.

UPS and TFI also entered into an agreement for UPS Freight to continue to utilize our U.S. Domestic Package network to fulfill shipments for an initial period of five years. UPS also agreed to provide certain other services to TFI for a transitional period. We recognize our performance under commercial agreements as revenue in the statements of consolidated income. Expenses associated with commercial agreements are presented in the respective line items of operating expenses in the statements of consolidated income.

The following table summarizes the carrying values of the assets and liabilities classified as held for sale in our consolidated balance sheets as of September 30, 2021 and December 31, 2020 (in millions):
2021 2020
Assets:
Accounts receivable, net $ — $ 263
Other current assets — 62
Property, plant and equipment, net — 940
Other non-current assets — 124
Total assets — 1,389
Valuation allowance — (192)
Total assets held for sale $ — $ 1,197
Liabilities:
Accounts payable $ — $ 50
Other current liabilities — 112
Other non-current liabilities — 185
Total liabilities to be disposed of $ — $ 347
Net assets held for sale $ — $ 850

~~Table of Contents~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE 7.6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 consisted of the following (in millions):


		2021		2020			2022		2021
Vehicles	Vehicles	$	9,990	$	9,786	Vehicles	$	10,284	$	10,018
Aircraft	Aircraft	21,497		20,549		Aircraft	22,569		21,973
Land	Land	2,049		2,052		Land	2,093		2,140
Buildings	Buildings	5,844		5,425		Buildings	5,793		5,802
Building and leasehold improvements	Building and leasehold improvements	4,987		4,921		Building and leasehold improvements	5,022		5,010
Plant equipment	Plant equipment	15,315		14,684		Plant equipment	15,849		15,650
Technology equipment	Technology equipment	2,788		2,626		Technology equipment	2,887		2,798
Construction-in-progress	Construction-in-progress	1,507		2,048		Construction-in-progress	1,651		1,418
		63,977		62,091			66,148		64,809
Less: Accumulated depreciation and amortization	Less: Accumulated depreciation and amortization	(31,118)		(29,837)		Less: Accumulated depreciation and amortization	(32,523)		(31,334)
Property, Plant and Equipment, Net	Property, Plant and Equipment, Net	$	32,859	$	32,254	Property, Plant and Equipment, Net	$	33,625	$	33,475

Property, plant and equipment purchased on account was ~~$365~~$601 and ~~$319~~$248 million as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aviation fuel prices and other factors. ~~Additionally, we~~We monitor all other property, plant and equipment ~~categories~~ for any indicators that the carrying value of the assets may not be recoverable. There were no material impairment charges ~~to our property, plant~~for the three and ~~equipment~~nine months ended September 30, 2022, or for the three months ended September 30, 2021. ~~For~~We recorded impairment charges of $30 million for the nine months ended September 30, 2021, ~~we recognized impairment charges of $30 million~~ due to the ~~cancellation~~reevaluation of certain facility ~~automation and expansion~~ projects. ~~There were no material impairment charges for the corresponding periods of 2020.~~

1614

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.7. EMPLOYEE BENEFIT PLANS

Company-Sponsored Benefit Plans

Information about the net periodic benefit cost (income) ~~cost~~ for our company-sponsored pension and postretirement benefit plans for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 is as follows (in millions):


		U.S. Pension Benefits				U.S. Postretirement Medical Benefits				International Pension Benefits					U.S. Pension Benefits				U.S. Postretirement Medical Benefits				International Pension Benefits
		2021		2020		2021		2020		2021		2020			2022		2021		2022		2021		2022		2021
Three Months Ended September 30:	Three Months Ended September 30:													Three Months Ended September 30:
Service cost	Service cost	$	442	$	463	$	7	$	7	$	19	$	17	Service cost	$	506	$	442	$	7	$	7	$	17	$	19
Interest cost	Interest cost	490		495		21		23		9		10		Interest cost	488		490		21		21		11		9
Expected return on assets	Expected return on assets	(825)		(887)		(1)		(2)		(17)		(22)		Expected return on assets	(820)		(825)		(1)		(1)		(19)		(17)

Amortization of prior service cost	Amortization of prior service cost	36		55		2		1		—		—		Amortization of prior service cost	23		36		—		2		—		—

Net periodic benefit cost	Net periodic benefit cost	$	143	$	126	$	29	$	29	$	11	$	5	Net periodic benefit cost	$	197	$	143	$	27	$	29	$	9	$	11

		U.S. Pension Benefits				U.S. Postretirement Medical Benefits				International Pension Benefits					U.S. Pension Benefits				U.S. Postretirement Medical Benefits				International Pension Benefits
		2021		2020		2021		2020		2021		2020			2022		2021		2022		2021		2022		2021
Nine Months Ended September 30:	Nine Months Ended September 30:													Nine Months Ended September 30:
Service cost	Service cost	$	1,456	$	1,390	$	21	$	22	$	57	$	50	Service cost	$	1,518	$	1,456	$	22	$	21	$	52	$	57
Interest cost	Interest cost	1,459		1,483		60		68		29		30		Interest cost	1,463		1,459		62		60		34		29
Expected return on assets	Expected return on assets	(2,502)		(2,662)		(4)		(6)		(51)		(64)		Expected return on assets	(2,460)		(2,502)		(3)		(4)		(59)		(51)

Amortization of prior service cost	Amortization of prior service cost	103		164		5		5		1		1		Amortization of prior service cost	69		103		—		5		1		1

Actuarial (gain) loss	Actuarial (gain) loss	(3,290)		—		—		—		—		—		Actuarial (gain) loss	—		(3,290)		—		—		—		—

Settlement and curtailment (gain) loss														Settlement and curtailment (gain) loss	—		—		—		—		(33)		—
Net periodic benefit (income) cost	Net periodic benefit (income) cost	$	(2,774)	$	375	$	82	$	89	$	36	$	17	Net periodic benefit (income) cost	$	590	$	(2,774)	$	81	$	82	$	(5)	$	36

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

During the nine months ended September 30, 2022, we amended the UPS Canada Ltd. Retirement Plan to cease future benefit accruals effective December 31, 2023. We remeasured plan assets and benefit obligations for this plan, which resulted in a curtailment gain of $33 million ($24 million after tax) during the nine month period. The ~~divestiture~~gain is included in Investment income and other in the statement of consolidated income.

During the nine months ended September 30, 2021, we divested our UPS Freight business, which triggered an interim remeasurement of ~~certain UPS-sponsored pension and postretirement medical benefit plans under Accounting Standards Codification Topic 715 ("ASC 715"). Accordingly, we remeasured~~ the plan assets and benefit obligations of the UPS Pension Plan, UPS Retirement Plan and UPS Retired Employee Health Care Plan as of ~~April 30, 2021.~~

this date. The interim remeasurement resulted in an actuarial gain of $2.1 billion, reflecting ~~a gain from~~ updated actuarial ~~assumptions. The actuarial gain reflects a $3.7 billion benefit from a 49 basis point increase in the discount rate compared to December 31, 2020~~assumptions and a $0.1 billion benefit related to workforce reductions associated with the divestiture, offset by a $1.7 billion asset loss resulting from actual asset returns approximately 430 basis points below our expected return. As a result, $2.1 billion of the actuarial gain was recorded in ~~accumulated~~ other comprehensive income within the equity section of the consolidated balance sheet. ~~A pre-tax~~An actuarial gain of $69 million ($52 million after tax) ~~was immediately recognized~~ for a prior service credit related to the divested group and a $66 million loss ($50 million after tax) for certain plan amendments to the UPS Pension Plan were immediately recognized within Other expenses in the statement of consolidated income for the ~~second quarter. We also amended certain benefit terms within~~nine months ended September 30, 2021.

During the ~~aforementioned plans as of April~~nine months ended September 30, ~~2021. The amendment to~~2021, we remeasured the ~~UPS~~UPS/IBT Full Time Employee Pension Plan following the enactment into law of the American Rescue Plan Act, which is discussed below. The interim remeasurement resulted in ~~the immediate recognition~~a pre-tax mark-to-market gain of ~~a $66 million~~$3.3 billion ($~~50 million~~2.5 billion after tax) ~~loss~~during the nine month period. The gain was included within Investment income and other in the statement of consolidated income for the ~~second quarter.~~

~~The impacts of the plan remeasurements and plan amendments are included within Other expenses in the statements of consolidated income as components of the divestiture of UPS Freight.~~

~~During the first~~ nine months ~~of 2021, we contributed $96 and $235 million~~ended September 30, 2021.

Contributions to our company-sponsored pension and U.S. postretirement medical benefit plans for the first nine months of 2022 were $1.972 billion and $134 million, respectively. We expect to contribute approximately ~~$21~~$43 and $144 million over the remainder of the year to our pension and U.S. postretirement medical benefit ~~plans.~~plans, respectively.

1715

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had ~~$832~~$824 and ~~$837~~$830 million, respectively, recorded in Other ~~non-current liabilities on~~Non-Current Liabilities in our consolidated balance sheets and $8 ~~and $7~~ million as of September 30, ~~2021~~2022 and December 31, ~~2020, respectively,~~2021 recorded in Other current liabilities on in our consolidated balance sheets associated with our previous withdrawal from ~~a multiemployer pension plan.~~the New England Teamsters and Trucking Industry Pension Fund. This liability is payable in equal monthly installments over a remaining term of approximately 4140 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 30, ~~2021~~2022 and December 31, ~~2020~~2021 was ~~$966~~$668 and $963 million, ~~and $1.0 billion,~~ respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.

UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 at which time UPS withdrew from the CSPF and paid a $6.1 billion withdrawal liability to satisfy our allocable share of unfunded vested benefits. 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 this withdrawal agreement, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with applicable law. The financial crisis of 2008 created extensive asset losses at the CSPF, contributing to the plan’s projected insolvency, at which time benefits would be reduced to the legally permitted Pension Benefit Guaranty Corporation ("PBGC") limits, triggering the coordination of benefits provision in the collective bargaining agreement.

In 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 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury (“Treasury”). In 2016, Treasury rejected the proposed plan submitted by the CSPF. In light of its financial difficulties, the CSPF had stated that it believed a legislative solution to its funded status would be necessary or that it would become insolvent in 2025, at which time benefits would be reduced to the applicable PBGC benefit levels.

We account for the potential obligation to pay coordinating benefits to the UPS Transfer Group under 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 and at interim periods when a significant event occurs. ASC 715 does not permit anticipation of changes in law when developing a best estimate.

At the December 31, 2020 measurement date, we developed our best estimate for the potential obligation to pay coordinating benefits to the UPS Transfer Group using a deterministic cash flow projection that reflected estimated CSPF cash flows and investment earnings, the lack of legislative action having been taken, the expectation of payment of guaranteed benefits by the PBGC and the lack of a benefit reduction plan under MPRA having been filed by the CSPF. As a result, our best estimate at that time of the obligation for coordinating benefits that may have been required to be directly provided by the UPS/IBT Plan to the UPS Transfer Group was $5.5 billion.

In March 2021, the American Rescue Plan Act (“ARPA”) was enacted into law. The ARPA contains provisions that allow for qualifying financially distressed multiemployer pension plans to apply for special financial assistance ("SFA") from the PBGC, which will be funded by Treasury. Following approval of an application, a qualifying multiemployer pension plan will receive a lump sum payment to enable it to continue paying unreduced benefits through 2051. The multiemployer plan is not obligated to repay the SFA. The ARPA is intended to prevent both the PBGC and certain financially distressed multiemployer pension plans, including the CSPF, from becoming insolvent through 2051. ~~On July 9, 2021, the PBGC issued interim final regulations implementing the SFA program established under the ARPA. We believe the~~The CSPF ~~will meet the eligibility requirements and will be allowed to apply~~has submitted an application for SFA ~~beginning April 1, 2022. We expect that~~to the ~~CSPF will apply for SFA during 2022 in order to continue payment of unreduced benefits through 2051.~~PBGC. The application remains under review.

1816

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The passage of the ARPA and the expected receipt of SFA by the CSPF ~~currently eliminates~~suspends our obligation to provide additional coordinating benefits to the UPS Transfer Group through 2051. These matters also triggered a plan remeasurement under ASC 715. Accordingly, we remeasured the plan assets and pension benefit obligation of the UPS/IBT Plan as of March 31, ~~2021.~~

~~The March 31,~~ 2021 ~~interim remeasurement resulted~~resulting in an actuarial gain of $6.4 billion, reflecting a reduction of the liability for coordinating benefits of $5.1 billion and a gain from other updated actuarial assumptions of $1.3 billion. The assumption gain reflects a $1.6 billion benefit from a 72 basis point increase in the discount rate compared to December 31, 2020, offset by $0.3 billion asset loss resulting from actual asset returns approximately 220 basis points below our expected return. As a result, $3.1 billion of the actuarial gain was recorded in accumulated other comprehensive income within the equity section of the consolidated balance sheet. The remaining pre-tax actuarial gain of $3.3 billion ($2.5 billion after tax) that exceeded the corridor (defined as 10% of the greater of the fair value of plan assets and the plan's projected benefit obligation) was recognized as a mark-to-market gain in the statement of consolidated income for the quarter ended March 31, 2021.

The future value of this estimate will continue to be influenced by a number of factors, including interpretations of the ARPA, future legislative actions, actuarial assumptions and the ability of the PBGC to sustain its commitments. Actual events may result in a change in our best estimate of the projected benefit obligation. We will continue to assess the impact of these uncertainties in accordance with ASC 715.

Collective Bargaining Agreements

We have approximately ~~316,000~~327,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the IBT. These agreements run through July 31, 2023.

We have approximately ~~3,000~~3,200 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA")~~. This collective bargaining agreement~~ that becomes amendable September 1, 2023. In the second quarter of 2022, we reached a tentative agreement on a two-year contract extension with the IPA. On August 12, 2022, the IPA ratified the two-year contract extension. Terms of the agreement become effective September 1, 2023 and continue in effect through September 1, 2025. The economic provisions in the agreement include pay increases and enhanced pension benefits on substantially similar terms.

We have approximately ~~1,600~~1,700 airline mechanics who are covered by a collective bargaining agreement with Teamsters Local ~~2727 which becomes~~2727. On October 17, 2022, the mechanics ratified a contract extension that will make the contract amendable on November 1, ~~2023. In addition, approximately 3,400~~2026. The provisions in the extension agreement include pay increases, with most other terms unchanged. Approximately 3,300 of our auto and maintenance mechanics who are not employed under agreements with the IBT are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”). The collective bargaining agreement with the IAM runs through July 31, 2024.

1917

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.8. GOODWILL AND INTANGIBLE ASSETS

The following table indicates the allocation of goodwill as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 (in millions):


		U.S. Domestic Package		International Package		Supply Chain Solutions		Consolidated			U.S. Domestic Package		International Package		Supply Chain Solutions		Consolidated
December 31, 2020:		$	715	$	422	$	2,230	$	3,367
December 31, 2021:										December 31, 2021:	$	847	$	403	$	2,442	$	3,692
Acquired	Acquired	—		—		—		—		Acquired	—		—		64		64
Currency / Other	Currency / Other	—		(12)		(23)		(35)		Currency / Other	—		(32)		(100)		(132)
September 30, 2021:		$	715	$	410	$	2,207	$	3,332
September 30, 2022:										September 30, 2022:	$	847	$	371	$	2,406	$	3,624

The ~~change in~~ goodwill balances for both International Package and Supply Chain Solutions ~~was primarily~~decreased due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances. In May 2022, we acquired Delivery Solutions, a digital platform that optimizes customer deliveries across multiple networks. The acquisition was funded with cash from operations and was not material to our consolidated financial position or results of operations. The goodwill associated with the acquisition is included within Supply Chain Solutions.

We test goodwill and other indefinite-lived intangible assets for impairment annually at July 1st and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired. Our annual impairment testing indicated that the fair value of goodwill associated with our recently-acquired Roadie reporting unit remained greater than its carrying value as of our July 1st testing date, although this excess was less than 10 percent.

The following is a summary of intangible assets as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 (in millions):


		Gross Carrying Amount		Accumulated Amortization		Net Carrying Value			Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
September 30, 2021:
September 30, 2022:								September 30, 2022:
Capitalized software	Capitalized software	$	4,785	$	(3,197)	$	1,588	Capitalized software	$	5,068	$	(3,427)	$	1,641
Licenses	Licenses	101		(59)		42		Licenses	49		(26)		23
Franchise rights	Franchise rights	177		(116)		61		Franchise rights	141		(37)		104
Customer relationships	Customer relationships	722		(393)		329		Customer relationships	704		(444)		260
Trade name	Trade name	200		—		200		Trade name	67		(7)		60
Trademarks, patents and other	Trademarks, patents and other	22		(18)		4		Trademarks, patents and other	169		(22)		147
Amortizable intangible assets								Amortizable intangible assets	$	6,198	$	(3,963)	$	2,235
Indefinite-lived intangible assets								Indefinite-lived intangible assets	204		—		204
Total Intangible Assets, Net	Total Intangible Assets, Net	$	6,007	$	(3,783)	$	2,224	Total Intangible Assets, Net	$	6,402	$	(3,963)	$	2,439
December 31, 2020:
December 31, 2021:								December 31, 2021:
Capitalized software	Capitalized software	$	4,531	$	(2,962)	$	1,569	Capitalized software	$	4,910	$	(3,275)	$	1,635
Licenses	Licenses	100		(37)		63		Licenses	58		(27)		31
Franchise rights	Franchise rights	165		(113)		52		Franchise rights	119		(37)		82
Customer relationships	Customer relationships	729		(344)		385		Customer relationships	733		(408)		325
Trade name	Trade name	200		—		200		Trade name	67		(1)		66
Trademarks, patents and other	Trademarks, patents and other	18		(13)		5		Trademarks, patents and other	158		(15)		143
Amortizable intangible assets								Amortizable intangible assets	$	6,045	$	(3,763)	$	2,282
Indefinite-lived intangible assets								Indefinite-lived intangible assets	204		—		204
Total Intangible Assets, Net	Total Intangible Assets, Net	$	5,743	$	(3,469)	$	2,274	Total Intangible Assets, Net	$	6,249	$	(3,763)	$	2,486

As of September 30, 2022 and December 31, 2021, we had a trade name with a carrying value of $200 million and licenses with a current carrying value of $4 million, which are deemed to be indefinite-lived intangible assets and are included in the table above. Our annual impairment testing of these assets indicated that the fair value of the trade name, which is associated with our truckload brokerage business, remained greater than its carrying value as of our July 1 testing date, although this excess was less than 10 percent. There were no events or changes in circumstances during the ~~third quarter of 2021~~nine months ended September 30, 2022 that would indicate the carrying amount of our indefinite-lived intangible assets may be impaired as of the date of this report.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Impairment tests for finite-lived intangible assets are performed when a triggering event occurs that may indicate that the carrying value of the intangible asset may not be recoverable. There were no impairment charges for finite-lived intangible assets during the three months ended September 30, ~~2021 and 2020. Impairment~~2022 or 2021. There were no impairment charges for finite-lived intangible assets during the nine months ended September 30, ~~2021 and 2020 were~~2022. We recorded $7 million ~~and $4 million, respectively.~~in impairment charges on finite-lived intangible assets during the nine months ended September 30, 2021.

2019

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~10.~~9. DEBT AND FINANCING ARRANGEMENTS

The carrying value of our outstanding debt obligations as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 consists of the following (in millions):


		Principal Amount						Carrying Value									Principal Amount					Carrying Value
				Maturity			2021			2020									Maturity		2022			2021
Commercial paper				$	—					$	—			$	15

Fixed-rate senior notes:	Fixed-rate senior notes:															Fixed-rate senior notes:
3.125% senior notes		—				2021		—				1,507
2.050% senior notes		—				2021		—				700
2.450% senior notes	2.450% senior notes	1,000				2022		1,016				1,028				2.450% senior notes	1,000			2022		1,000			1,010
2.350% senior notes	2.350% senior notes	600				2022		600				599				2.350% senior notes	—			2022		—			600
2.500% senior notes	2.500% senior notes	1,000				2023		998				997				2.500% senior notes	1,000			2023		999			998
2.800% senior notes	2.800% senior notes	500				2024		498				498				2.800% senior notes	500			2024		499			498
2.200% senior notes	2.200% senior notes	400				2024		399				398				2.200% senior notes	400			2024		399			399
3.900% senior notes	3.900% senior notes	1,000				2025		996				995				3.900% senior notes	1,000			2025		997			996
2.400% senior notes	2.400% senior notes	500				2026		498				498				2.400% senior notes	500			2026		499			498
3.050% senior notes	3.050% senior notes	1,000				2027		994				993				3.050% senior notes	1,000			2027		995			994
3.400% senior notes	3.400% senior notes	750				2029		746				746				3.400% senior notes	750			2029		746			746
2.500% senior notes	2.500% senior notes	400				2029		397				397				2.500% senior notes	400			2029		397			397
4.450% senior notes	4.450% senior notes	750				2030		743				743				4.450% senior notes	750			2030		744			744
6.200% senior notes	6.200% senior notes	1,500				2038		1,484				1,483				6.200% senior notes	1,500			2038		1,484			1,484
5.200% senior notes	5.200% senior notes	500				2040		494				493				5.200% senior notes	500			2040		494			494
4.875% senior notes	4.875% senior notes	500				2040		491				490				4.875% senior notes	500			2040		491			491
3.625% senior notes	3.625% senior notes	375				2042		368				368				3.625% senior notes	375			2042		369			368
3.400% senior notes	3.400% senior notes	500				2046		492				491				3.400% senior notes	500			2046		492			492
3.750% senior notes	3.750% senior notes	1,150				2047		1,137				1,137				3.750% senior notes	1,150			2047		1,137			1,137
4.250% senior notes	4.250% senior notes	750				2049		743				742				4.250% senior notes	750			2049		743			743
3.400% senior notes	3.400% senior notes	700				2049		688				688				3.400% senior notes	700			2049		688			688
5.300% senior notes	5.300% senior notes	1,250				2050		1,231				1,231				5.300% senior notes	1,250			2050		1,231			1,231
Floating-rate senior notes:	Floating-rate senior notes:															Floating-rate senior notes:
Floating-rate senior notes	Floating-rate senior notes	—				2021		—				350				Floating-rate senior notes	—			2022		—			400
Floating-rate senior notes	Floating-rate senior notes	400				2022		400				399				Floating-rate senior notes	500			2023		500			500
Floating-rate senior notes	Floating-rate senior notes	500				2023		500				499				Floating-rate senior notes	1,039			2049-2067		1,027			1,027
Floating-rate senior notes		1,039				2049-2067		1,027				1,027
Debentures:	Debentures:															Debentures:

7.620% debentures(1)		276				2030		280				281
Pound Sterling Notes:
7.620% debentures																7.620% debentures	276			2030		280			280
Pound Sterling notes:																Pound Sterling notes:
5.500% notes	5.500% notes	89				2031		88				90				5.500% notes	74			2031		73			89
5.125% notes	5.125% notes	612				2050		581				586				5.125% notes	504			2050		479			583
Euro Senior Notes:
Euro senior notes:																Euro senior notes:
0.375% senior notes	0.375% senior notes	811				2023		808				857				0.375% senior notes	684			2023		683			791
1.625% senior notes	1.625% senior notes	811				2025		807				856				1.625% senior notes	684			2025		682			791
1.000% senior notes	1.000% senior notes	579				2028		576				611				1.000% senior notes	488			2028		486			564
1.500% senior notes	1.500% senior notes	579				2032		575				611				1.500% senior notes	488			2032		486			564

Canadian senior notes:	Canadian senior notes:															Canadian senior notes:
2.125% senior notes	2.125% senior notes	588				2024		586				583				2.125% senior notes	547			2024		547			585
Finance lease obligations	Finance lease obligations	542				2021-2062		542				342				Finance lease obligations	379			2022-2046		379			408
Facility notes and bonds	Facility notes and bonds	320				2029-2045		320				320				Facility notes and bonds	320			2029-2045		320			320
Other debt	Other debt	3				2021-2025		3				5				Other debt	4			2022-2025		4			5
Total debt	Total debt	$	22,274					22,106				24,654				Total debt	$	20,512				20,350			21,915
Less: current maturities	Less: current maturities							(1,268)				(2,623)				Less: current maturities						(2,581)			(2,131)
Long-term debt	Long-term debt							$	20,838			$	22,031			Long-term debt						$	17,769		$	19,784

~~(1)~~ ~~On April 1, 2020, the interest rate on these debentures decreased from 8.375% to 7.620% for the remaining 10 years until maturity.~~

2120

Table of Contents

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. As of September 30, ~~2021,~~2022, we had no outstanding balances under our commercial paper programs.

Debt Classification

We have classified certain floating-rate senior notes that are redeemable at the option of the note holder as long-term liabilities onin our consolidated balance sheets, due to our intent and ability to refinance the debt if the put option is exercised.

Debt Repayments

~~On January 15, 2021,~~During the second quarter, our ~~3.125%~~2.350% senior notes with a principal balance of ~~$1.5 billion matured and were repaid in full. On April 1, 2021, our 2.050% fixed-rate senior notes with a principal balance of $700~~$600 million and our floating rate senior notes with a principal balance of ~~$350~~$400 million matured and were repaid in full.

On October 3, 2022, our 2.450% senior notes with a principal balance of $1.0 billion matured and were repaid in full.

Reference Rate Reform

Our floating-rate senior notes with maturities ranging from 2049 through 2067 bear interest at rates that reference the London Interbank Offer Rate ("LIBOR") for U.S. Dollars. As part of a broader program of reference rate reform, it is expected that U.S. Dollar LIBOR rates will cease to be published after June 2023. We are currently working to transition these notes to an alternative reference rate, and we anticipate that the Secured Overnight Financing Rate ("SOFR") will be adopted in accordance with recommendations of the Alternative Reference Rates Committee.

Sources of Credit

We maintain 2two credit agreements with a consortium of banks. The first of these agreements provides revolving credit facilities of ~~$2.0~~$1.0 billion, and expires on December ~~7, 2021.~~6, 2022. Amounts outstanding under this agreement bear interest at a periodic fixed rate equal to ~~LIBOR for~~ the term SOFR rate, plus 0.10% per annum and an applicable ~~interest period and currency denomination, plus a~~ margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of September 30, 2022 was 0.875%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; or (3) ~~LIBOR~~the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%, may be used at our discretion. We expect to renew this credit agreement in the fourth quarter of 2022 on substantially similar terms.

The second agreement provides revolving credit facilities of ~~$2.5~~$2.0 billion, and expires on December ~~11, 2023.~~7, 2026. Amounts outstanding under this facility bear interest at a periodic fixed rate equal to ~~LIBOR for~~ the ~~applicable interest period~~term SOFR rate plus 0.10% per annum and ~~currency denomination, plus~~ an applicable ~~margin.~~margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of September 30, 2022 was 0.875%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; ~~and~~or (3) ~~LIBOR~~the Adjusted Term SOFR Rate for a ~~one month~~one-month interest period plus 1.00%, plus an applicable margin, may be used at our discretion.

~~The applicable margin for advances bearing interest based on LIBOR~~If the credit ratings established by Standard & Poor's and Moody's differ, the higher rating will be used, except in cases where the lower rating 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% and a maximum rate of 0.75% per annum. The rate is interpolated for a period of time fromtwo or more levels lower. In these circumstances, the ~~date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of the facility then in effect (but not less than a period of~~rating one ~~year).~~

~~The applicable margin for advances bearing interest based on the prime rate is 1.00%~~step below the ~~applicable margin for LIBOR advances (but not lower than 0%).~~higher rating will be used. We are also able to request advances under these facilities based on competitive bids for the applicable interest rate.

There were 0no amounts outstanding under these facilities as of September 30, 2021. We expect to renew these credit agreements in the fourth quarter of 2021 on substantially the same terms, except for extending the expiration dates thereof, replacing LIBOR with an alternative reference rate and reducing availability thereunder to $1.0 billion and $2.0 billion, respectively.2022.

Debt Covenants

Our existing debt instruments and credit facilities subject us to certain financial covenants. As of September 30, ~~2021,~~2022, and for all prior periods presented, we 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 30, ~~2021,~~2022, 10% of net tangible assets was equivalent to ~~$4.5~~$4.6 billion and we had no 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.

2221

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Debt

Based on the borrowing rates currently available to us for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately ~~$25.4~~$18.9 and ~~$28.3~~$25.1 billion as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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.

2322

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~11.~~10. LEASES

We have finance and operating leases for real estate, aircraft and 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.

We recognize a right-of-use ("ROU") asset and lease ~~liability~~obligation for all ~~leases.~~leases greater than twelve months. 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, 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~~obligation for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain and ifwhether the optional period and payments should be included in the calculation of the associated ROU asset and lease ~~liability.~~obligation. 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~~obligation 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. 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~~Our remaining lease terms vary from 1 month to ~~139~~138 years.

Aircraft

In addition to the aircraft that we own, we have leases for ~~320~~310 aircraft. Of these leased aircraft, 2217 are classified as finance leases, 18 are classified as operating leases and the remaining ~~280~~275 are classified as short-term leases. A majority of the obligations associated with the aircraft classified as finance leases have been legally defeased. ~~The~~A majority 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, 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, office space and expansion facilities utilized during peak shipping periods. Many of our leases contain charges for common area maintenance or other 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.~~obligation.

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~~these also reduce the initial lease ~~liability.~~obligation.

2423

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

From time to time, we enter into leases with the intention of purchasing the underlying 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 determination of the lease term and lease payments, respectively, when the option to exercise or purchase is reasonably certain.

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 ~~their~~the variable nature of these costs, these are expensed as incurred and are not included in the ROU asset and associated lease ~~liability.~~obligation.

The components of lease expense for the three and nine months ended September 30, 2022 and 2021 ~~and 2020 were~~are as follows (in millions):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Operating lease costs	Operating lease costs	$	183	$	180	$	537	$	527	Operating lease costs	$	179	$	183	$	546	$	537
Finance lease costs:	Finance lease costs:									Finance lease costs:
Amortization of assets	Amortization of assets	24		20		70		58		Amortization of assets	28		24		84		70
Interest on lease liabilities	Interest on lease liabilities	4		4		11		14		Interest on lease liabilities	3		4		10		11
Total finance lease costs	Total finance lease costs	28		24		81		72		Total finance lease costs	31		28		94		81
Variable lease costs	Variable lease costs	51		58		178		171		Variable lease costs	62		51		194		178
Short-term lease costs	Short-term lease costs	305		260		835		716		Short-term lease costs	319		305		944		835
Total lease costs	Total lease costs	$	567	$	522	$	1,631	$	1,486	Total lease costs	$	591	$	567	$	1,778	$	1,631

In addition to the lease costs disclosed in the table above, we monitor all lease categories for any indicators that the carrying value of the assets may not be recoverable. There were no material impairments recognized during the three or nine months ended September 30, 2022 or 2021.

2524

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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


		September 30, 2021			December 31, 2020				September 30, 2022			December 31, 2021
Operating Leases:	Operating Leases:							Operating Leases:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	3,460		$	3,073		Operating lease right-of-use assets	$	3,417		$	3,562

Current maturities of operating leases	Current maturities of operating leases	$	552		$	560		Current maturities of operating leases	$	560		$	580
Non-current operating leases	Non-current operating leases	2,938			2,540			Non-current operating leases	2,960			3,033
Total operating lease liabilities		$	3,490		$	3,100
Total operating lease obligations								Total operating lease obligations	$	3,520		$	3,613

Finance Leases:	Finance Leases:							Finance Leases:
Property, plant and equipment, net	Property, plant and equipment, net	$	1,260		$	1,225		Property, plant and equipment, net	$	947		$	1,125

Current maturities of long-term debt, commercial paper and finance leases	Current maturities of long-term debt, commercial paper and finance leases	$	268		$	56		Current maturities of long-term debt, commercial paper and finance leases	$	79		$	129
Long-term debt and finance leases	Long-term debt and finance leases	274			286			Long-term debt and finance leases	300			279
Total finance lease liabilities		$	542		$	342
Total finance lease obligations								Total finance lease obligations	$	379		$	408

Weighted average remaining lease term (in years):	Weighted average remaining lease term (in years):							Weighted average remaining lease term (in years):
Operating leases	Operating leases	11.8			11.2			Operating leases	11.0			11.7
Finance leases	Finance leases	5.6			9.3			Finance leases	8.8			8.0

Weighted average discount rate:	Weighted average discount rate:							Weighted average discount rate:
Operating leases	Operating leases	1.98		%	2.28		%	Operating leases	2.21		%	1.94		%
Finance leases	Finance leases	2.14		%	4.14		%	Finance leases	3.03		%	2.79		%

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


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2021		2020			2022		2021
Cash paid for amounts included in measurement of liabilities:
Cash paid for amounts included in measurement of obligations:						Cash paid for amounts included in measurement of obligations:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	538	$	508	Operating cash flows from operating leases	$	523	$	538
Operating cash flows from finance leases	Operating cash flows from finance leases	8		11		Operating cash flows from finance leases	3		8
Financing cash flows from finance leases	Financing cash flows from finance leases	48		136		Financing cash flows from finance leases	123		48

Right-of-use assets obtained in exchange for lease liabilities:
Right-of-use assets obtained in exchange for lease obligations:						Right-of-use assets obtained in exchange for lease obligations:
Operating leases	Operating leases	$	953	$	544	Operating leases	$	588	$	953
Finance leases	Finance leases	252		50		Finance leases	98		252

2625

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Maturities of lease ~~liabilities~~obligations as of September 30, ~~2021~~2022 are as follows (in millions):


		Finance Leases		Operating Leases			Finance Leases		Operating Leases
2021		$	166	$	127
2022	2022	138		629		2022	$	31	$	136
2023	2023	58		533		2023	83		644
2024	2024	35		440		2024	56		544
2025	2025	30		392		2025	42		484
2026						2026	35		437
Thereafter	Thereafter	195		1,889		Thereafter	212		1,800
Total lease payments	Total lease payments	622		4,010		Total lease payments	459		4,045
Less: Imputed interest	Less: Imputed interest	(80)		(520)		Less: Imputed interest	(80)		(525)
Total lease obligations	Total lease obligations	542		3,490		Total lease obligations	379		3,520
Less: Current obligations	Less: Current obligations	(268)		(552)		Less: Current obligations	(79)		(560)
Long-term lease obligations	Long-term lease obligations	$	274	$	2,938	Long-term lease obligations	$	300	$	2,960

As of September 30, ~~2021,~~2022, we had ~~$405 million~~$1.2 billion of additional leases which had not commenced. These leases will commence between ~~2021~~2022 and ~~2023~~2024 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.

2726

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~12.~~11. LEGAL PROCEEDINGS AND CONTINGENCIES

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

Although there can be no ~~assurance~~assurances as to the ultimate outcome, we have generally denied, or believe we have meritorious 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 amounts associated with legal proceedings when and to the extent a loss becomes probable and can be reasonably estimated. The actual costs of resolving legal proceedings may be substantially higher or lower than the amounts accrued on those claims.

For matters as to which we are not able to estimate a possible loss or range of losses, we are not able to determine whether any such loss will have a material impact on our operations or financial condition. For these matters, we have described the reasons that we are unable to estimate a possible loss or range of losses.

Judicial Proceedings

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 will have a material impact on our operations or 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 appealed~~plaintiffs' appeal of this decision ~~but~~was denied; however, in the ~~appeal has been denied.~~second quarter of 2022 the plaintiffs were granted discretionary review of these claims by the Kentucky Supreme Court.

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 in 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.

In August 2016, Spain’s National Markets and Competition Commission ~~(“CNMC”~~("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~~we received a Statement of Objections issued by the CNMC. In July 2017, ~~UPS~~we received a Proposed Decision from the CNMC. On March 8, 2018, the CNMC adopted a final decision, finding an infringement and imposing an immaterial fine on UPS. ~~UPS~~We 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. We do not believe that any loss from this matter 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. There are also unresolved questions of law and fact that could be important to the ultimate resolution of this matter.

In November 2021, the Environmental Protection Agency (the "EPA") sent us an information request related to hazardous waste regulatory compliance at certain of our facilities. The EPA indicated that it was investigating potential recordkeeping violations of the Resource Conservation and Recovery Act at those facilities. We cooperated with the EPA and resolved this matter for an immaterial amount.

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 impact on our operations or financial condition.

2827

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~13.~~12. SHAREOWNERS' EQUITY

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

We are authorized to issue 2two 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 1one 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 into class B shares at any time. Class B shares are publicly traded on the NYSE under the symbol “UPS”. Class A and B shares both have a $0.01 par value, and as of September 30, ~~2021,~~2022, 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 authorized to be issued, with a par value of $0.01 per share. As of September 30, ~~2021,~~2022, no preferred shares had been issued.

The following is a rollforward of our common stock, additional paid-in capital, retained earnings and non-controlling minority interests accounts for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in millions, except per share amounts):


Three Months Ended September 30:	Three Months Ended September 30:	2021			2020			Three Months Ended September 30:	2022			2021
		Shares	Dollars		Shares	Dollars			Shares	Dollars		Shares	Dollars
Class A Common Stock	Class A Common Stock							Class A Common Stock
Balance at beginning of period	Balance at beginning of period	144	$	2	157	$	2	Balance at beginning of period	138	$	2	144	$	2

Stock award plans	Stock award plans	(1)	—		—	—		Stock award plans	(1)	—		(1)	—
Common stock issuances	Common stock issuances	1	—		1	—		Common stock issuances	1	—		1	—
Conversions of class A to class B common stock	Conversions of class A to class B common stock	(3)	—		(8)	—		Conversions of class A to class B common stock	(3)	—		(3)	—
Class A shares issued at end of period	Class A shares issued at end of period	141	$	2	150	$	2	Class A shares issued at end of period	135	$	2	141	$	2
Class B Common Stock	Class B Common Stock							Class B Common Stock
Balance at beginning of period	Balance at beginning of period	728	$	7	706	$	7	Balance at beginning of period	732	$	7	728	$	7
Common stock purchases	Common stock purchases	(3)	—		—	—		Common stock purchases	(5)	—		(3)	—
Conversions of class A to class B common stock	Conversions of class A to class B common stock	3	—		8	—		Conversions of class A to class B common stock	3	—		3	—
Class B shares issued at end of period	Class B shares issued at end of period	728	$	7	714	$	7	Class B shares issued at end of period	730	$	7	728	$	7
Additional Paid-In Capital	Additional Paid-In Capital							Additional Paid-In Capital
Balance at beginning of period	Balance at beginning of period		$	1,329		$	255	Balance at beginning of period		$	573		$	1,329
Common stock purchases	Common stock purchases		(500)			—		Common stock purchases		(903)			(500)
Stock award plans	Stock award plans		176			145		Stock award plans		233			176
Common stock issuances	Common stock issuances		83			90		Common stock issuances		97			83

Balance at end of period	Balance at end of period		$	1,088		$	490	Balance at end of period		$	—		$	1,088
Retained Earnings	Retained Earnings							Retained Earnings
Balance at beginning of period	Balance at beginning of period		$	12,531		$	10,032	Balance at beginning of period		$	18,958		$	12,531
Net income attributable to common shareowners	Net income attributable to common shareowners		2,329			1,957		Net income attributable to common shareowners		2,584			2,329
Dividends ($1.02 and $1.01 per share) (1)			(887)			(873)

Dividends ($1.52 and $1.02 per share) (1)								Dividends ($1.52 and $1.02 per share) (1)		(1,316)			(887)
Common stock purchases								Common stock purchases		(48)			—
Other	Other		—			(1)		Other		(1)			—
Balance at end of period	Balance at end of period		$	13,973		$	11,115	Balance at end of period		$	20,177		$	13,973
Non-Controlling Minority Interest	Non-Controlling Minority Interest							Non-Controlling Minority Interest
Balance at beginning of period	Balance at beginning of period		$	17		$	13	Balance at beginning of period		$	21		$	17
Change in non-controlling minority interest	Change in non-controlling minority interest		(1)			1		Change in non-controlling minority interest		(1)			(1)
Balance at end of period	Balance at end of period		$	16		$	14	Balance at end of period		$	20		$	16
(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $27 and $28 million as of September 30, 2021 and 2020, respectively, that were settled in shares of class A common stock.
(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $41 and $27 million as of September 30, 2022 and 2021, respectively, that were settled in shares of class A common stock.								(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $41 and $27 million as of September 30, 2022 and 2021, respectively, that were settled in shares of class A common stock.

2928

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Nine Months Ended September 30:	Nine Months Ended September 30:	2021			2020			Nine Months Ended September 30:	2022			2021
		Shares	Dollars		Shares	Dollars			Shares	Dollars		Shares	Dollars
Class A Common Stock
Class A Common Stock:								Class A Common Stock:
Balance at beginning of period	Balance at beginning of period	147	$	2	156	$	2	Balance at beginning of period	138	$	2	147	$	2

Stock award plans	Stock award plans	5	—		6	—		Stock award plans	5	—		5	—
Common stock issuances	Common stock issuances	2	—		3	—		Common stock issuances	2	—		2	—
Conversions of class A to class B common stock	Conversions of class A to class B common stock	(13)	—		(15)	—		Conversions of class A to class B common stock	(10)	—		(13)	—
Class A shares issued at end of period		141	$	2	150	$	2
Class B Common Stock
Class A shares outstanding at end of period								Class A shares outstanding at end of period	135	$	2	141	$	2
Class B Common Stock:								Class B Common Stock:
Balance at beginning of period	Balance at beginning of period	718	$	7	701	$	7	Balance at beginning of period	732	$	7	718	$	7
Common stock purchases	Common stock purchases	(3)	—		(2)	—		Common stock purchases	(12)	—		(3)	—
Conversions of class A to class B common stock	Conversions of class A to class B common stock	13	—		15	—		Conversions of class A to class B common stock	10	—		13	—
Class B shares issued at end of period		728	$	7	714	$	7
Additional Paid-In Capital
Class B shares outstanding at end of period								Class B shares outstanding at end of period	730	$	7	728	$	7
Additional Paid-In Capital:								Additional Paid-In Capital:
Balance at beginning of period	Balance at beginning of period		$	865		$	150	Balance at beginning of period		$	1,343		$	865
Common stock purchases	Common stock purchases		(500)			(217)		Common stock purchases		(2,146)			(500)
Stock award plans	Stock award plans		399			215		Stock award plans		410			399
Common stock issuances	Common stock issuances		324			342		Common stock issuances		393			324

Balance at end of period	Balance at end of period		$	1,088		$	490	Balance at end of period		$	—		$	1,088
Retained Earnings
Retained Earnings:								Retained Earnings:
Balance at beginning of period	Balance at beginning of period		$	6,896		$	9,105	Balance at beginning of period		$	16,179		$	6,896
Net income attributable to controlling interests	Net income attributable to controlling interests		9,797			4,690		Net income attributable to controlling interests		8,095			9,797
Dividends ($3.06 and $3.03 per share) (1)			(2,718)			(2,679)

Dividends ($4.56 and $3.06 per share) (1)								Dividends ($4.56 and $3.06 per share) (1)		(4,049)			(2,718)
Common stock purchases								Common stock purchases		(48)			—
Other	Other		(2)			(1)		Other		—			(2)
Balance at end of period	Balance at end of period		$	13,973		$	11,115	Balance at end of period		$	20,177		$	13,973
Non-Controlling Interests
Non-Controlling Interests:								Non-Controlling Interests:
Balance at beginning of period	Balance at beginning of period		$	12		$	16	Balance at beginning of period		$	16		$	12
Change in non-controlling minority interest			4			(2)
Change in non-controlling interest								Change in non-controlling interest		4			4
Balance at end of period	Balance at end of period		$	16		$	14	Balance at end of period		$	20		$	16
(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $140 and $151 million as of September 30, 2021 and 2020 respectively, that were settled in shares of class A common stock.
(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $207 and $140 million as of September 30, 2022 and 2021, respectively, that were settled in shares of class A common stock.								(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $207 and $140 million as of September 30, 2022 and 2021, respectively, that were settled in shares of class A common stock.

In ~~May 2016,~~August 2021, the Board of Directors ~~approved a share~~authorized the company to repurchase ~~authorization for $8.0~~up to $5.0 billion of class A and class B common stock. We ~~did not repurchase any shares under this program during the three months ended September 30, 2020. We~~ repurchased ~~2.1~~4.9 and 11.6 million shares of ~~class A and~~ class B common stock for ~~$217~~$951 million during the nine months ended September 30, 2020 ($224 million in repurchases are reported on the statements of consolidated cash flows due to the timing of settlements). We did not repurchase any sharesand $2.2 billion under this program during the three and nine months ended September 30, ~~2021.~~

~~In August 2021, the Board of Directors terminated this authorization and approved a new share repurchase authorization for $5.0 billion.~~2022, respectively. We repurchased 2.6 million shares of class B common stock for $500 million under ~~an accelerated stock repurchase transaction~~this program during the three and nine months ended September 30, 2021. As of September 30, ~~2021,~~2022, we had ~~$4.5~~$2.3 billion ofavailable under this repurchase authorization. We anticipate our share ~~repurchase authorization available.~~repurchases will total at least $3.0 billion for all of 2022.

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

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.

3029

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accumulated Other Comprehensive Income (Loss)

We recognize activity in ~~AOCI~~other comprehensive income for foreign currency translation adjustments, unrealized holding gains and losses on available-for-sale securities, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in ~~AOCI~~accumulated other comprehensive income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 was as follows (in millions):


Three Months Ended September 30:	Three Months Ended September 30:	2021		2020		Three Months Ended September 30:	2022		2021
Foreign Currency Translation Gain (Loss), Net of Tax:	Foreign Currency Translation Gain (Loss), Net of Tax:					Foreign Currency Translation Gain (Loss), Net of Tax:
Balance at beginning of period	Balance at beginning of period	$	(1,015)	$	(1,209)	Balance at beginning of period	$	(1,447)	$	(1,015)

Translation adjustment (net of tax effect of $8 and $(14))		(106)		65

Translation adjustment (net of tax effect of $4 and $8)						Translation adjustment (net of tax effect of $4 and $8)	(263)		(106)
Balance at end of period	Balance at end of period	(1,121)		(1,144)		Balance at end of period	(1,710)		(1,121)
Unrealized Gain (Loss) on Marketable Securities, Net of Tax:	Unrealized Gain (Loss) on Marketable Securities, Net of Tax:					Unrealized Gain (Loss) on Marketable Securities, Net of Tax:
Balance at beginning of period	Balance at beginning of period	1		9		Balance at beginning of period	(8)		1
Current period changes in fair value (net of tax effect of $0 and $0)		—		(1)

Current period changes in fair value (net of tax effect of $(1) and $0)						Current period changes in fair value (net of tax effect of $(1) and $0)	(4)		—
Reclassification to earnings (net of tax effect of $0 and $0)	Reclassification to earnings (net of tax effect of $0 and $0)	—		(1)		Reclassification to earnings (net of tax effect of $0 and $0)	1		—
Balance at end of period	Balance at end of period	1		7		Balance at end of period	(11)		1
Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax:	Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax:					Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax:
Balance at beginning of period	Balance at beginning of period	(155)		215		Balance at beginning of period	260		(155)
Current period changes in fair value (net of tax effect of $40 and $(53))		126		(168)

Reclassification to earnings (net of tax effect of $(5) and $(8))		(14)		(27)
Current period changes in fair value (net of tax effect of $110 and $40)						Current period changes in fair value (net of tax effect of $110 and $40)	350		126
Reclassification to earnings (net of tax effect of $(21) and $(5))						Reclassification to earnings (net of tax effect of $(21) and $(5))	(69)		(14)
Balance at end of period	Balance at end of period	(43)		20		Balance at end of period	541		(43)
Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:	Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:					Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:
Balance at beginning of period	Balance at beginning of period	(1,895)		(4,948)		Balance at beginning of period	(2,056)		(1,895)

Reclassification to earnings (net of tax effect of $9 and $13)		29		43
Reclassification to earnings (net of tax effect of $5 and $9)						Reclassification to earnings (net of tax effect of $5 and $9)	18		29
Balance at end of period	Balance at end of period	(1,866)		(4,905)		Balance at end of period	(2,038)		(1,866)
Accumulated other comprehensive income (loss) at end of period	Accumulated other comprehensive income (loss) at end of period	$	(3,029)	$	(6,022)	Accumulated other comprehensive income (loss) at end of period	$	(3,218)	$	(3,029)

3130

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30: 2021 2020
Foreign currency translation gain (loss), net of tax:
Balance at beginning of period $ (981) $ (1,078)
Translation adjustment (net of tax effect of $37 and $(15)) (140) (66)
Balance at end of period (1,121) (1,144)
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of period 6 4
Current period changes in fair value (net of tax effect of $0 and $1) (1) 6
Reclassification to earnings (net of tax effect of $0 and $(1)) (4) (3)
Balance at end of period 1 7
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of period (223) 112
Current period changes in fair value (net of tax effect of $65 and $10) 207 33
Reclassification to earnings (net of tax effect of $(9) and $(39)) (27) (125)
Balance at end of period (43) 20
Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of period (5,915) (5,035)
Net actuarial gain (loss) resulting from remeasurements of plan assets and liabilities (net of tax effect of $2,039 and $0) 6,470 —
Reclassification to earnings (net of tax effect of $(763) and $40) (2,421) 130
Balance at end of period (1,866) (4,905)
Accumulated other comprehensive income (loss) at end of period $ (3,029) $ (6,022)


Nine Months Ended September 30:	2022		2021
Foreign currency translation gain (loss), net of tax:
Balance at beginning of period	$	(1,162)	$	(981)
Translation adjustment (net of tax effect of $11 and $37)	(548)		(140)
Balance at end of period	(1,710)		(1,121)
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of period	(1)		6
Current period changes in fair value (net of tax effect of $(3) and $0)	(11)		(1)
Reclassification to earnings (net of tax effect of $0 and $0)	1		(4)
Balance at end of period	(11)		1
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of period	(17)		(223)
Current period changes in fair value (net of tax effect of $222 and $65)	705		207
Reclassification to earnings (net of tax effect of $(46) and $(9))	(147)		(27)
Balance at end of period	541		(43)
Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of period	(2,098)		(5,915)
Net actuarial gain (loss) resulting from remeasurements of plan assets and liabilities (net of tax effect of $11 and $2,039)	31		6,470
Reclassification to earnings (net of tax effect of $8 and $(763))	29		(2,421)
Balance at end of period	(2,038)		(1,866)
Accumulated other comprehensive income (loss) at end of period	$	(3,218)	$	(3,029)

3231

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 is as follows (in millions):


		Amount Reclassified from AOCI				Affected Line Item in the Income Statement		Amount Reclassified from AOCI				Affected Line Item in the Income Statement
Three Months Ended September 30:	Three Months Ended September 30:	2021		2020			Three Months Ended September 30:	2022		2021

Unrealized Gain (Loss) on Marketable Securities:	Unrealized Gain (Loss) on Marketable Securities:						Unrealized Gain (Loss) on Marketable Securities:
Realized gain (loss) on sale of securities	Realized gain (loss) on sale of securities	$	—	$	1	Investment income and other	Realized gain (loss) on sale of securities	$	(1)	$	—	Investment income and other
Income tax (expense) benefit	Income tax (expense) benefit	—		—		Income tax expense	Income tax (expense) benefit	—		—		Income tax expense
Impact on net income	Impact on net income	—		1		Net income	Impact on net income	(1)		—		Net income
Unrealized Gain (Loss) on Cash Flow Hedges:	Unrealized Gain (Loss) on Cash Flow Hedges:						Unrealized Gain (Loss) on Cash Flow Hedges:
Interest rate contracts	Interest rate contracts	(3)		(3)		Interest expense	Interest rate contracts	(4)		(3)		Interest expense
Foreign currency exchange contracts	Foreign currency exchange contracts	22		38		Revenue	Foreign currency exchange contracts	94		22		Revenue
Income tax (expense) benefit							Income tax (expense) benefit	(21)		(5)		Income tax expense
Impact on net income							Impact on net income	69		14		Net income
Unrecognized Pension and Postretirement Benefit Costs:							Unrecognized Pension and Postretirement Benefit Costs:
Prior service costs							Prior service costs	(23)		(38)		Investment income and other

Income tax (expense) benefit	Income tax (expense) benefit	(5)		(8)		Income tax expense	Income tax (expense) benefit	5		9		Income tax expense
Impact on net income	Impact on net income	14		27		Net income	Impact on net income	(18)		(29)		Net income
Unrecognized Pension and Postretirement Benefit Costs:
Prior service costs		(38)		(56)		Investment income and other
Prior service credit for divested business		—		—		Other expenses
Plan amendments for divested business		—		—		Other expenses

Income tax (expense) benefit		9		13		Income tax expense
Impact on net income		(29)		(43)		Net income
Total amount reclassified for the period	Total amount reclassified for the period	$	(15)	$	(15)	Net income	Total amount reclassified for the period	$	50	$	(15)	Net income

Amount Reclassified from AOCI Affected Line Item in the Income Statement
Nine Months Ended September 30: 2021 2020
Unrealized gain (loss) on marketable securities:
Realized gain (loss) on sale of securities $ 4 $ 4 Investment income and other
Income tax (expense) benefit — (1) Income tax expense
Impact on net income 4 3 Net income
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts (8) (9) Interest expense
Foreign currency exchange contracts 44 173 Revenue
Income tax (expense) benefit (9) (39) Income tax expense
Impact on net income 27 125 Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs (109) (170) Investment income and other
Prior service credit for divested business 69 — Other expenses
Plan amendments for divested business (66) — Other expenses
Remeasurement of benefit obligation 3,290 — Investment income and other
Income tax (expense) benefit (763) 40 Income tax expense
Impact on net income 2,421 (130) Net income
Total amount reclassified for the period $ 2,452 $ (2) Net income


	Amount Reclassified from AOCI				Affected Line Item in the Income Statement
Nine Months Ended September 30:	2022		2021




Unrealized gain (loss) on marketable securities:
Realized gain (loss) on sale of securities	$	(1)	$	4	Investment income and other
Income tax (expense) benefit	—		—		Income tax expense
Impact on net income	(1)		4		Net income
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts	(9)		(8)		Interest expense
Foreign currency exchange contracts	202		44		Revenue
Income tax (expense) benefit	(46)		(9)		Income tax expense
Impact on net income	147		27		Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs	(70)		(109)		Investment income and other
Prior service credit for divested business	—		69		Other expenses
Plan amendments for divested business	—		(66)		Other expenses
Remeasurement of benefit obligation	—		3,290		Investment income and other
Curtailment of benefit obligation	33		—		Investment income and other
Income tax (expense) benefit	8		(763)		Income tax expense
Impact on net income	(29)		2,421		Net income

Total amount reclassified for the period	$	117	$	2,452	Net income

3332

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Deferred Compensation Obligations and Treasury Stock

We maintain a deferred compensation plan whereby certain employees were previously able to elect to defer the gains on stock option exercises by deferring the shares received upon exercise into a rabbi trust. The shares held in this trust are classified as treasury stock, and the liability to participating employees is classified as ~~“Deferred~~ Deferred compensation ~~obligations”~~obligations in the ~~shareowners’ equity~~Shareowners’ Equity section of the consolidated balance sheets. The number of shares needed to settle the liability for deferred compensation obligations is included in the denominator in both the basic and diluted earnings per share calculations. Employees are generally no longer able to defer the gains from stock options exercised subsequent to December 31, 2004.

Activity in the deferred compensation program for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 was as follows (in millions):


		2021			2020				2022			2021
Three Months Ended September 30:	Three Months Ended September 30:	Shares	Dollars		Shares	Dollars		Three Months Ended September 30:	Shares	Dollars		Shares	Dollars
Deferred Compensation Obligations:	Deferred Compensation Obligations:							Deferred Compensation Obligations:
Balance at beginning of period	Balance at beginning of period		$	16		$	20	Balance at beginning of period		$	12		$	16
Reinvested dividends	Reinvested dividends		—			—		Reinvested dividends		—			—
Benefit payments	Benefit payments		—			—		Benefit payments		—			—
Balance at end of period	Balance at end of period		$	16		$	20	Balance at end of period		$	12		$	16
Treasury Stock:	Treasury Stock:							Treasury Stock:
Balance at beginning of period	Balance at beginning of period	—	$	(16)	—	$	(20)	Balance at beginning of period	—	$	(12)	—	$	(16)
Reinvested dividends	Reinvested dividends	—	—		—	—		Reinvested dividends	—	—		—	—
Benefit payments	Benefit payments	—	—		—	—		Benefit payments	—	—		—	—
Balance at end of period	Balance at end of period	—	$	(16)	—	$	(20)	Balance at end of period	—	$	(12)	—	$	(16)


		2021			2020				2022			2021
Nine Months Ended September 30:	Nine Months Ended September 30:	Shares	Dollars		Shares	Dollars		Nine Months Ended September 30:	Shares	Dollars		Shares	Dollars
Deferred Compensation Obligations:	Deferred Compensation Obligations:							Deferred Compensation Obligations:
Balance at beginning of period	Balance at beginning of period		$	20		$	26	Balance at beginning of period		$	16		$	20
Reinvested dividends	Reinvested dividends		1			1		Reinvested dividends		1			1
Benefit payments	Benefit payments		(5)			(7)		Benefit payments		(5)			(5)
Balance at end of period	Balance at end of period		$	16		$	20	Balance at end of period		$	12		$	16
Treasury Stock:	Treasury Stock:							Treasury Stock:
Balance at beginning of period	Balance at beginning of period	—	$	(20)	—	$	(26)	Balance at beginning of period	—	$	(16)	—	$	(20)
Reinvested dividends	Reinvested dividends	—	(1)		—	(1)		Reinvested dividends	—	(1)		—	(1)
Benefit payments	Benefit payments	—	5		—	7		Benefit payments	—	5		—	5
Balance at end of period	Balance at end of period	—	$	(16)	—	$	(20)	Balance at end of period	—	$	(12)	—	$	(16)

3433

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~14.~~13. SEGMENT INFORMATION

We ~~report our operations in 3~~have two reportable segments: U.S. Domestic Package and International Package, ~~and~~which are together referred to as our global small package operations. Our remaining businesses are reported as Supply Chain Solutions. ~~Package~~Global small 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. Supply Chain Solutions comprises the results of non-reportable operating segments that do not meet the quantitative and qualitative criteria of a reportable segment as defined under ASC Topic 280 – Segment Reporting.

U.S. Domestic Package

U.S. 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 our operations in Europe, Asia, Americas and ~~ISMEA (Indian Subcontinent,~~the Indian Sub-Continent, Middle East and ~~Africa).~~Africa.

Supply Chain Solutions

Supply Chain Solutions includes our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations and other ~~aggregated business units.~~businesses. Our Forwarding, Logistics and UPS Mail Innovations 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. Coyote offers truckload brokerage services primarily in the United States. Marken is a global provider of supply chain solutions to the healthcare and life sciences industry, specializing in clinical trials logistics. ~~Other aggregated business units within this segment~~Our other businesses include The UPS Store, UPS Capital, Roadie and ~~UPS Capital. This segment also included~~Delivery Solutions. UPS Freight ~~prior to~~was included within Supply Chain Solutions until its divestiture ~~details~~in the second quarter of ~~which are set out in note 6.~~2021.

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 tax expense. Certain expenses are allocated between the segments using activity-based costing methods ~~as described~~that require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates would directly impact the expense allocated to each segment, and therefore the operating profit of each reporting segment. We periodically refine our allocation methodologies to reflect changes in our business. There were no significant changes to our allocation methodologies in the audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020, and in the "Results of Operations - Segment Review" section of Management's Discussion and Analysis included in this report.third quarter or year-to-date periods.

Results of operations for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 are as follows (in millions):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue:	Revenue:									Revenue:
U.S. Domestic Package	U.S. Domestic Package	$	14,208	$	13,225	$	42,620	$	37,755	U.S. Domestic Package	$	15,374	$	14,208	$	45,957	$	42,620
International Package	International Package	4,720		4,087		14,144		11,175		International Package	4,799		4,720		14,748		14,144
Supply Chain Solutions	Supply Chain Solutions	4,256		3,926		12,752		10,802		Supply Chain Solutions	3,988		4,256		12,600		12,752
Consolidated revenue	Consolidated revenue	$	23,184	$	21,238	$	69,516	$	59,732	Consolidated revenue	$	24,161	$	23,184	$	73,305	$	69,516
Operating Profit:	Operating Profit:									Operating Profit:
U.S. Domestic Package	U.S. Domestic Package	$	1,407	$	1,098	$	4,333	$	2,644	U.S. Domestic Package	$	1,666	$	1,407	$	5,157	$	4,333
International Package	International Package	1,051		966		3,320		2,288		International Package	997		1,051		3,306		3,320
Supply Chain Solutions	Supply Chain Solutions	438		299		1,266		715		Supply Chain Solutions	450		438		1,436		1,266
Consolidated operating profit	Consolidated operating profit	$	2,896	$	2,363	$	8,919	$	5,647	Consolidated operating profit	$	3,113	$	2,896	$	9,899	$	8,919

3534

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~15.~~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~~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 months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in millions, except per share amounts):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Numerator:	Numerator:									Numerator:
Net income attributable to common shareowners	Net income attributable to common shareowners	$	2,329	$	1,957	$	9,797	$	4,690	Net income attributable to common shareowners	$	2,584	$	2,329	$	8,095	$	9,797
Denominator:	Denominator:									Denominator:
Weighted average shares	Weighted average shares	870		864		869		861		Weighted average shares	867		870		870		869

Vested portion of restricted units	Vested portion of restricted units	5		4		5		5		Vested portion of restricted units	3		5		3		5
Denominator for basic earnings per share	Denominator for basic earnings per share	875		868		874		866		Denominator for basic earnings per share	870		875		873		874
Effect of dilutive securities:	Effect of dilutive securities:									Effect of dilutive securities:
Restricted units	Restricted units	3		4		3		4		Restricted units	2		3		2		3
Stock options	Stock options	1		—		1		—		Stock options	—		1		1		1
Denominator for diluted earnings per share	Denominator for diluted earnings per share	879		872		878		870		Denominator for diluted earnings per share	872		879		876		878
Basic earnings per share	Basic earnings per share	$	2.66	$	2.25	$	11.21	$	5.42	Basic earnings per share	$	2.97	$	2.66	$	9.27	$	11.21
Diluted earnings per share	Diluted earnings per share	$	2.65	$	2.24	$	11.16	$	5.39	Diluted earnings per share	$	2.96	$	2.65	$	9.24	$	11.16

~~There were no antidilutive shares~~Diluted earnings per share for the three months ended September 30, ~~2021 and 2020. Diluted earnings per share for the nine months ended September 30, 2021 and 2020~~2022 excluded the effect of 0.1 ~~and 0.8~~ million shares of common stock ~~respectively,~~ that may be issued upon the exercise of employee stock options because such effect would ~~have been~~be antidilutive.

There were no antidilutive shares for the three months ended September 30, 2021. Antidilutive shares for the nine months ended September 30, 2022 and 2021 were 0.1 million.

3635

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~16.~~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 and we actively monitor these exposures. To manage the impact of these exposures, we may 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 exchange 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~~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.

~~We have~~As of September 30, 2022 and December 31, 2021, we had agreements with all of our active counterparties (covering all of our derivative positions) ~~containing~~which contained 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. Since September 30, 2022, we have entered into foreign currency forward contracts in respect of certain foreign currency-denominated debt in notional amounts of 750 million Canadian Dollars, 1.2 billion Euro and 66 million Pounds Sterling that are not covered by the zero threshold bilateral collateral provisions.

As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we held cash collateral of ~~$139~~$1.0 billion and ~~$146~~$260 million, respectively, under these agreements. This collateral is included in ~~"Cash~~Cash and cash ~~equivalents"~~equivalents in the consolidated balance sheets and ~~its~~our use ~~by UPS~~of it is not restricted. As of September 30, ~~2021~~2022 and December 31, ~~2020, we were~~2021, no collateral was required to ~~post $15 and $158 million, respectively, of cash collateral~~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.

As of September 30, 2021, all of our instruments were covered by the zero threshold bilateral collateral provisions. As of December 31, 2020, there were no instruments in a net liability position that were not covered by the zero threshold bilateral collateral provisions.

Types of Hedges

Commodity Risk Management

Currently, the fuel surcharges that we apply to our domestic and international package ~~and less-than-truckload ("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.

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 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.

3736

Table of Contents

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 ~~(expense)~~ and other when the underlying transactions are subject to currency remeasurement.

We hedge our net investment in certain foreign operations with foreign ~~currency denominated~~currency-denominated debt instruments. The use of ~~foreign denominated~~foreign-denominated debt as the hedging instrument allows the debt to be remeasured to foreign currency translation adjustment within ~~AOCI~~other comprehensive income to offset the translation risk from those investments. Balances in the foreign currency translation adjustment ~~accounts~~account remain until the sale or substantially complete liquidation of the foreign entity, upon which ~~they are recognized~~we recognize these balances as a component of Investment income ~~(expense)~~ and ~~other.~~other in the statements of consolidated income.

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. Interest rate swaps allow us to maintain a target range of floating-rate debt within our capital structure. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged.

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 fair value hedges 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 these interest rate swaps are recorded to ~~AOCI.~~other comprehensive income.

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 September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the notional amounts of our outstanding derivative positions were as follows (in millions):

September 30, 2021

December 31, 2020

September 30, 2022

December 31,
2021

Currency hedges:

Euro

EUR

4,130

EUR

4,197

Euro

EUR

4,175

4,257

British Pound Sterling

GBP

1,391

GBP

1,400

British Pound Sterling

GBP

912

1,402

Canadian Dollar

CAD

1,623

CAD

1,576

Canadian Dollar

CAD

1,631

1,633

Hong Kong Dollar

HKD

4,103

HKD

3,717

Hong Kong Dollar

HKD

4,342

4,033

Interest rate hedges:

Fixed to Floating Interest Rate Swaps

USD

1,000

USD

3,250

Fixed to Floating Interest Rate Swaps

USD

1,000

Floating to Fixed Interest Rate Swaps

USD

778

Floating to Fixed Interest Rate Swaps

USD

As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had no outstanding commodity hedge positions.

Our fixed to floating interest rate swaps were designated as a fair value hedge of our 2.450% fixed rate notes that matured in October 2022.

3837

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet Recognition

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.

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~~Net Amounts if Right of Offset had been ~~Applied"~~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 as of September 30, 2022 and December 31, 2021 (in millions):


			Fair Value Hierarchy Level		Gross Amounts Presented in Consolidated Balance Sheets						Net Amounts if Right of Offset had been Applied									Fair Value Hierarchy Level		Gross Amounts Presented in Consolidated Balance Sheets						Net Amounts if Right of Offset had been Applied
Asset Derivatives	Asset Derivatives	Balance Sheet Location		September 30, 2021			December 31, 2020			September 30, 2021			December 31, 2020	Asset Derivatives			Balance Sheet Location				September 30, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Derivatives designated as hedges:	Derivatives designated as hedges:																	Derivatives designated as hedges:
Foreign currency exchange contracts	Foreign currency exchange contracts	Other current assets	Level 2		$	94		$	56		$	76		$	45	Foreign currency exchange contracts			Other current assets	Level 2		$	336		$	100		$	336		$	82
Interest rate contracts	Interest rate contracts	Other current assets	Level 2		—			2			—			2		Interest rate contracts			Other current assets	Level 2		—			11			—			11

Foreign currency exchange contracts	Foreign currency exchange contracts	Other non-current assets	Level 2		102			35			66			4		Foreign currency exchange contracts			Other non-current assets	Level 2		558			123			555			90
Interest rate contracts		Other non-current assets	Level 2		17			29			15			26

Derivatives not designated as hedges:	Derivatives not designated as hedges:															Derivatives not designated as hedges:
Foreign currency exchange contracts	Foreign currency exchange contracts	Other current assets	Level 2		1			4			1			4		Foreign currency exchange contracts			Other current assets	Level 2		1			2			1			2

Total Asset Derivatives	Total Asset Derivatives				$	214		$	126		$	158		$	81	Total Asset Derivatives						$	895		$	236		$	892		$	185


			Fair Value Hierarchy Level		Gross Amounts Presented in Consolidated Balance Sheets						Net Amounts if Right of Offset had been Applied									Fair Value Hierarchy Level		Gross Amounts Presented in Consolidated Balance Sheets						Net Amounts if Right of Offset had been Applied
Liability Derivatives	Liability Derivatives	Balance Sheet Location		September 30, 2021			December 31, 2020			September 30, 2021			December 31, 2020	Liability Derivatives			Balance Sheet Location				September 30, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Derivatives designated as hedges:	Derivatives designated as hedges:																	Derivatives designated as hedges:
Foreign currency exchange contracts	Foreign currency exchange contracts	Other current liabilities	Level 2		$	19		$	34		$	1		$	23	Foreign currency exchange contracts			Other current liabilities	Level 2		$	—		$	19		$	—		$	1
Interest rate contracts																Interest rate contracts			Other current liabilities	Level 2		—			—			—			—

Foreign currency exchange contracts		Other non-current liabilities	Level 2		36			142			—			111
Interest rate contracts		Other non-current liabilities	Level 2		11			13			9			10
Derivatives not designated as hedges:
Foreign currency exchange contracts	Foreign currency exchange contracts	Other current liabilities	Level 2		—			2			—			2		Foreign currency exchange contracts			Other non-current liabilities	Level 2		3			33			—			—
Interest rate contracts	Interest rate contracts	Other current liabilities	Level 2		—			1			—			1		Interest rate contracts			Other non-current liabilities	Level 2		5			10			5			10

Total Liability Derivatives	Total Liability Derivatives				$	66		$	192		$	10		$	147	Total Liability Derivatives						$	8		$	62		$	5		$	11

Our foreign currency 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~~prices. These derivatives are classified as Level 2. As of September 30, ~~2021~~2022 and December 31, ~~2020~~2021, 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).~~

within the fair value hierarchy.

3938

Table of Contents

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 30, ~~2021~~2022 and December 31, ~~2020~~2021 (in millions):


Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included	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		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
		September 30, 2021		September 30, 2021		December 31, 2020		December 31, 2020			September 30, 2022		September 30, 2022		December 31, 2021		December 31, 2021

Current maturities of long-term debt, commercial paper and finance leases										Current maturities of long-term debt, commercial paper and finance leases	$	1,000	$	—	$	1,010	$	11
Long-term debt and finance leases	Long-term debt and finance leases	$	1,296	$	22	$	2,816	$	42	Long-term debt and finance leases	$	280	$	5	$	280	$	5

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 30, ~~2021~~2022 is $6$5 million. These amounts will be recognized over the next 98 years.

Income Statement and AOCI Recognition

The following table indicates the amount of gains and (losses) that have been recognized in the statements of consolidated income for 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 months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in millions):


		Three Months Ended September 30,													Three Months Ended September 30,
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships	Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships	2021						2020						Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships	2022						2021
		Revenue		Interest Expense		Investment Income and Other		Revenue		Interest Expense		Investment Income and Other			Revenue		Interest Expense		Investment Income and Other		Revenue		Interest Expense		Investment Income and Other
Gain or (loss) on fair value hedging relationships:	Gain or (loss) on fair value hedging relationships:													Gain or (loss) on fair value hedging relationships:
Interest Contracts:	Interest Contracts:													Interest Contracts:
Hedged items	Hedged items	$	—	$	4	$	—	$	—	$	13	$	—	Hedged items	$	—	$	(1)	$	—	$	—	$	4	$	—
Derivatives designated as hedging instruments	Derivatives designated as hedging instruments	—		(4)		—		—		(13)		—		Derivatives designated as hedging instruments	—		1		—		—		(4)		—
Gain or (loss) on cash flow hedging relationships:	Gain or (loss) on cash flow hedging relationships:													Gain or (loss) on cash flow hedging relationships:
Interest Contracts:	Interest Contracts:													Interest Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income	Amount of gain or (loss) reclassified from accumulated other comprehensive income	—		(3)		—		—		(3)		—		Amount of gain or (loss) reclassified from accumulated other comprehensive income	—		(4)		—		—		(3)		—
Foreign Currency Exchange Contracts:	Foreign Currency Exchange Contracts:													Foreign Currency Exchange Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income	Amount of gain or (loss) reclassified from accumulated other comprehensive income	22		—		—		38		—		—		Amount of gain or (loss) reclassified from accumulated other comprehensive income	94		—		—		22		—		—
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	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	$	22	$	(3)	$	—	$	38	$	(3)	$	—	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	$	94	$	(4)	$	—	$	22	$	(3)	$	—

4039

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


		Nine Months Ended September 30,													Nine Months Ended September 30,
		2021						2020							2022						2021
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships	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		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:	Gain or (loss) on fair value hedging relationships:													Gain or (loss) on fair value hedging relationships:
Interest Contracts:	Interest Contracts:													Interest Contracts:
Hedged items	Hedged items	$	—	$	14	$	—	$	—	$	(21)	$	—	Hedged items	$	—	$	10	$	—	$	—	$	14	$	—
Derivatives designated as hedging instruments	Derivatives designated as hedging instruments	—		(14)		—		—		21		—		Derivatives designated as hedging instruments	—		(10)		—		—		(14)		—
Gain or (loss) on cash flow hedging relationships:	Gain or (loss) on cash flow hedging relationships:													Gain or (loss) on cash flow hedging relationships:
Interest Contracts:	Interest Contracts:													Interest Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income	Amount of gain or (loss) reclassified from accumulated other comprehensive income	—		(8)		—		—		(9)		—		Amount of gain or (loss) reclassified from accumulated other comprehensive income	—		(9)		—		—		(8)		—
Foreign Currency Exchange Contracts:	Foreign Currency Exchange Contracts:													Foreign Currency Exchange Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income	Amount of gain or (loss) reclassified from accumulated other comprehensive income	44		—		—		173		—		—		Amount of gain or (loss) reclassified from accumulated other comprehensive income	202		—		—		44		—		—
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	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	$	44	$	(8)	$	—	$	173	$	(9)	$	—	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	$	202	$	(9)	$	—	$	44	$	(8)	$	—

The following table indicates the amount of gains and (losses) that have been recognized in AOCI for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 for those derivatives designated as cash flow hedges (in millions):


Three Months Ended September 30:	Three Months Ended September 30:					Three Months Ended September 30:
Derivative Instruments in Cash Flow Hedging Relationships	Derivative Instruments in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives				Derivative Instruments in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives
		2021		2020			2022		2021
Interest rate contracts	Interest rate contracts	$	1	$	(3)	Interest rate contracts	$	1	$	1
Foreign currency exchange contracts	Foreign currency exchange contracts	165		(218)		Foreign currency exchange contracts	459		165

Total	Total	$	166	$	(221)	Total	$	460	$	166

Nine Months Ended September 30:	Nine Months Ended September 30:					Nine Months Ended September 30:
Derivative Instruments in Cash Flow Hedging Relationships	Derivative Instruments in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives				Derivative Instruments in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives
		2021		2020			2022		2021
Interest rate contracts	Interest rate contracts	$	1	$	(6)	Interest rate contracts	$	5	$	1
Foreign currency exchange contracts	Foreign currency exchange contracts	271		49		Foreign currency exchange contracts	922		271

Total	Total	$	272	$	43	Total	$	927	$	272

As of September 30, ~~2021,~~2022, there were ~~$62~~$330 million of unrealized pre-tax gains related to cash flow hedges deferred in AOCI that are expected to be reclassified to income over the 12 month period ending September 30, ~~2022.~~2023. 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 1110 years.

4140

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table indicates the amount of gains and (losses) that have been recognized in AOCI within foreign currency translation adjustment for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 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
	2022		2021
Foreign denominated debt	$	209	$	90
Total	$	209	$	90

Nine Months Ended September 30:
Non-derivative Instruments in Net Investment Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Debt
	2022		2021
Foreign denominated debt	$	436	$	167
Total	$	436	$	167

Three Months Ended September 30:
Non-derivative Instruments in Net Investment Hedging Relationships Amount of Gain (Loss) Recognized in AOCI on Debt
2021 2020
Foreign denominated debt $ 90 $ (139)
Total $ 90 $ (139)
Nine Months Ended September 30:
Non-derivative Instruments in Net Investment Hedging Relationships Amount of Gain (Loss) Recognized in AOCI on Debt
2021 2020
Foreign denominated debt $ 167 $ (92)
Total $ 167 $ (92)

Additionally, we maintain ~~interest rate swaps and~~ foreign currency exchange 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~~These foreign currency exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement and settlement risk for certain assets and liabilities in our consolidated balance sheets.

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

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 and~~ foreign currency exchange forward contracts not designated as hedges for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in millions):
Derivative Instruments Not Designated in
Hedging Relationships Location of Gain (Loss)
Recognized in Income Amount of Gain (Loss) Recognized in Income
2021 2020
Three Months Ended September 30:
Interest rate swap contracts Interest expense $ — $ (2)
Foreign currency exchange contracts Investment income and other (21) 34
Total $ (21) $ 32
Nine Months Ended September 30:
Interest rate swap contracts Interest expense $ — $ (6)
Foreign currency exchange contracts Investment income and other (24) (15)
Total $ (24) $ (21)


Derivative Instruments Not Designated in Hedging Relationships	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income
		2022		2021
Three Months Ended September 30:



Foreign currency exchange contracts	Investment income and other	$	(45)	$	(21)


Total		$	(45)	$	(21)

Nine Months Ended September 30:



Foreign currency exchange contracts	Investment income and other	$	(131)	$	(24)


Total		$	(131)	$	(24)

4241

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~17.~~16. INCOME TAXES

Our effective tax rate decreased to ~~22.2%~~21.0% in the third quarter ~~of 2021~~ from ~~22.5%~~22.2% in the same period of ~~2020 (22.4%~~2021 (21.8% year to date compared to ~~23.5%~~22.4% in ~~2020)~~2021). The recognition in income tax of excess tax benefits related to share-based compensation reduced our effective rate by ~~0.6%~~0.8% year to date compared to ~~0.2%~~0.6% in the same period of ~~2020~~2021 (there was no significant impact in the third quarter of ~~2021~~2022 or ~~2020)~~2021). ~~Changes in the proportion of our taxable income in certain jurisdictions relative to total pre-tax income favorably~~Other items that impacted our effective tax rate in the third quarter ~~relative~~compared to ~~the prior year.~~2021 included favorable changes in uncertain tax positions and favorable changes in our jurisdictional earnings mix.

As discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, we have recognized liabilities for uncertain tax ~~positions. We~~positions and 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,~~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 allowance or disallowance of deductions, the timing of ~~interest~~ deductions and the allocation of income and expense between tax jurisdictions. ~~These~~Any changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of statutes of limitations or other unforeseen circumstances.

In the first ~~quarter,~~nine months of 2022, we recognized an immaterial income tax expense related to a pre-tax curtailment gain of $33 million on the UPS Canada Ltd. Retirement Plan. This income tax expense was generated at a higher average tax rate than the U.S. federal statutory tax rate because it included the effect of foreign taxes.

In the first nine months of 2021, we recognized an income tax expense of $788 million related to a pre-tax mark-to-market ~~income~~gain of $3.3 billion on ~~certain of our defined benefit pension plans.~~the UPS/IBT Full-Time Employee Pension Plan. This income tax expense was generated at a higher average tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.

As discussed in note ~~18,~~17, we recognized pre-tax transformation strategy costs of ~~$74~~$36 million in the third quarter of ~~2021~~2022 compared to ~~$44~~$74 million in the same period of ~~2020~~2021 ($~~308~~132 million year to date compared to ~~$201~~$308 million in the prior year). As a result, we recorded an income tax benefit of ~~$20~~$9 million in the third quarter ~~of 2021~~ compared to ~~$11~~$20 million in the same period of ~~2020~~2021 ($7631 million year to date compared to ~~$50~~$76 million in the prior ~~year period)~~year). ~~This year-to-date~~The income tax 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 6, in~~During the ~~second quarter~~first nine months of 2021, we ~~completed the divestiture of UPS Freight. We~~ recorded a net pre-tax gain of $35 million ~~year to date (none in the third quarter)~~ related to the ~~transaction. As~~divestiture of UPS Freight, resulting in a ~~result, we recorded additional~~net income tax expense of $8 ~~million year to date (none in the third quarter).~~million. This income tax expense was generated at a higher average tax rate than the U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.

Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which was effective through December 31, 2021. During the first nine months of 2022, the tax incentive was renegotiated and extended. The tax incentive is conditioned upon our meeting specific employment and investment thresholds, which we expect to meet. The impact of the tax incentive did not significantly change our effective tax rate for the first nine months of 2022 compared to 2021.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~18.~~17. TRANSFORMATION STRATEGY COSTS

~~In 2018, we launched~~Our strategy includes a multi-year, enterprise-wide transformation ~~strategy impacting~~of our organization. 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 months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in millions):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Transformation Strategy Costs:	Transformation Strategy Costs:									Transformation Strategy Costs:
Compensation and benefits	Compensation and benefits	$	33	$	18	$	164	$	111	Compensation and benefits	$	15	$	33	$	71	$	164
Total other expenses	Total other expenses	41		26		144		90		Total other expenses	21		41		61		144
Total Transformation Strategy Costs	Total Transformation Strategy Costs	$	74	$	44	$	308	$	201	Total Transformation Strategy Costs	$	36	$	74	$	132	$	308

Income Tax Benefit from Transformation Strategy Costs	Income Tax Benefit from Transformation Strategy Costs	(20)		(11)		(76)		(50)		Income Tax Benefit from Transformation Strategy Costs	(9)		(20)		(31)		(76)
After Tax Transformation Strategy Costs		$	54	$	33	$	232	$	151
After-Tax Transformation Strategy Costs										After-Tax Transformation Strategy Costs	$	27	$	54	$	101	$	232

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

~~Table of Contents~~

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

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 19. SUBSEQUENT EVENTS~~

We completed the previously-announced acquisition of Roadie, Inc. a technology platform that enables local same-day delivery with operations throughout the United States, in October 2021. The acquisition is expected to provide new growth opportunities and efficient and scalable same-day local delivery services nationwide. Roadie will continue to operate as an independent entity with the same name and existing network. The operating results of Roadie will be included in our Supply Chain Solutions results for reporting purposes beginning in the fourth quarter of 2021. The acquisition was not material to our consolidated financial position or results of operations.

4543

Table of Contents

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

Overview

~~We continue to implement~~Building on the strong foundation created by our ~~Customer First, People Led, Innovation Driven~~Better not Bigger ~~strategy that focuses on transforming~~strategic approach, we are moving to the next phase of our ~~business, improving~~strategic framework. Within our ~~financial performance, providing~~Better and Bolder approach we are moving faster to enhance customer engagement by combining our physical network with digital capabilities, while at the ~~best customer experience~~same time increasing further efficiencies and ~~benefiting our shareowners. The~~remaining disciplined with capital allocation.

Within the Customer First component of our strategy, ~~focuses on, among other things, enhancing~~we continue to leverage technology to improve the ~~capabilities that we believe~~customer experience. We are growing our ~~customers value the most: speed~~Digital Access Program, which makes it faster and ease of access to our services. In addition to improving time-in-transit, we have recently completed the expansion of weekend delivery services in our U.S. ground network, now covering approximately 90% of the populationeasier for ~~Saturday services, which allows us to enhance network capacity.~~

In the third quarter, our consolidated average daily package volume decreased slightly. We experienced a year over year change in volume mix as business-to-business activity increased, contributing to margin improvement, while business-to-consumer volume declined, primarily in our U.S Domestic Package segment. Volume growth in the quarter was led by small- and medium-sized ~~business customers~~businesses ("SMBs")~~, driven~~ to ship with us. Through our People Led strategic focus, we are working to improve our employee value proposition by ~~the continued execution of~~increasing flexibility and simplifying our ~~strategy.~~hiring process. Under our Innovation Driven strategic pillar, we continue to deploy automated solutions and smart package technology to drive further productivity improvements, enable additional network agility and better serve our customers.

~~We continued to experience impacts of COVID-19 on~~To accelerate our ~~business~~growth in complex healthcare logistics, during the third quarter with safety protocols implemented at certain airports in Asia resulting in a reduced number of flights relative to our plan, negatively impacting export volume within our International Package segment. Global supply chains continue to be disrupted, with capacity constraints driving higher transportation costs in our Supply Chain Solutions businesses, while the availability of labor is causing wage pressures in certain markets. We continue to monitor the impacts to our business; however, we anticipate demand for our services will remain strong.

During the first quarter of 2021, following enactment of the American Rescue Plan Act ("ARPA"), we remeasured the UPS/IBT Full Time Employee Pension Plan. This resulted in us recording a $3.3 billion, pre-tax mark-to-market gain in the first quarter. In the second quarter of 2021, we completed the divestiture of our UPS Freight business, resulting in a year-to-date gain of $35 million. Cash proceeds of $848 million were used to reduce outstanding indebtedness. The divestiture triggered a remeasurement of certain of our U.S. defined benefit pension and postretirement plans, which had only an immaterial impact on results of operations for the second quarter. For additional information regarding the divestiture of UPS Freight, see note 6 to the unaudited, consolidated financial statements included within this report. In the third quarter of 2021, we entered into an agreement to acquire ~~Roadie, Inc.,~~Bomi Group, which we expect to close during the fourth quarter. This acquisition will expand our healthcare footprint and bring additional expertise in cold chain logistics.

For the quarter, a ~~technology platform~~number of external factors continued to contribute to a challenging operating environment, including global inflation and rising interest rates, wage and labor market pressures, volatile energy prices, geopolitical uncertainties, and foreign currency exchange rates relative to the U.S. Dollar. Additionally, areas within Asia continued to experience lockdowns and other restrictions that ~~provides delivery services for shipments that are incompatible with our small package network. We completed this acquisition~~impacted manufacturing and supply chains. These factors resulted in ~~October 2021.~~

~~Highlights~~disruptions to certain parts of our ~~consolidated results, which are~~business, negatively impacted demand for our services and contributed to increases in certain of our operating costs. We expect these factors will continue to impact us and result in continued uncertainty for the remainder of the year and into 2023. In the face of this uncertain macroeconomic environment, we continue to operate within our strategic framework, maximizing the agility of our global integrated network by making adjustments to match changes in volume levels and delivering excellent service to our customers.

Volume declined in our U.S. Domestic Package segment for both the quarter and year to date, driven by a decline in residential volume from certain large customers, reflecting the continued execution within our strategic framework. This decline was partially offset by growth from SMBs and volume from new customers. Revenue per piece growth more than offset the decline in volume for both the quarter and year to date. Broader economic factors, particularly labor market pressures and fuel prices, contributed to an increase in operating costs, however, successful execution of our strategy resulted in increased operating profit and operating margin in both the current year periods.

Within our International Package segment, volume also declined for both the quarter and year to date primarily due to the factors discussed above, although the rate of decline slowed in ~~more detail below, include:~~
Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2021 2020 $ % 2021 2020 $ %
Revenue (in millions) $ 23,184 $ 21,238 $ 1,946 9.2 % $ 69,516 $ 59,732 $ 9,784 16.4 %
Operating Expenses (in millions) 20,288 18,875 1,413 7.5 % 60,597 54,085 6,512 12.0 %
Operating Profit (in millions) $ 2,896 $ 2,363 $ 533 22.6 % $ 8,919 $ 5,647 $ 3,272 57.9 %
Operating Margin 12.5 % 11.1 % 12.8 % 9.5 %
Net Income (in millions) $ 2,329 $ 1,957 $ 372 19.0 % $ 9,797 $ 4,690 $ 5,107 108.9 %
Basic Earnings Per Share $ 2.66 $ 2.25 $ 0.41 18.2 % $ 11.21 $ 5.42 $ 5.79 106.8 %
Diluted Earnings Per Share $ 2.65 $ 2.24 $ 0.41 18.3 % $ 11.16 $ 5.39 $ 5.77 107.1 %
Operating Days 64 65 191 193
Average Daily Package Volume (in thousands) 23,381 23,855 (2.0) % 23,920 23,142 3.4 %
Average Revenue Per Piece $ 12.50 $ 11.06 $ 1.44 13.0 % $ 12.29 $ 10.85 $ 1.44 13.3 %

•the third quarter relative to the first half of the year. Revenue increased ~~in all segments, with double digit~~for both current year periods as revenue per piece growth inmore than offset the volume declines. Operating profit was negatively impacted by the strengthening of the U.S. Dollar against European currencies, for both ~~our U.S. Domestic Package~~the quarter and ~~International Package segments.~~

•~~Average daily package volume decreased 2.0% (increased 3.4%~~ year to ~~date),~~date.

Within Supply Chain Solutions, revenue declined for the quarter as volumes and market rates decreased in our Forwarding businesses. Operating profit and operating margin increased for the quarter, primarily due to growth in Logistics and improved revenue quality in our truckload brokerage business. Year to date, revenue decreased primarily due to the divestiture of UPS Freight in the second quarter of 2021. Operating profit and operating margin increased, driven by ~~a decrease~~improved results in ~~business-to-consumer volume, largely offset by growth~~our Forwarding and Logistics businesses.

Our strategic execution strengthened our balance sheet and continued to result in ~~business-to-business volume.~~the generation of strong cash flows for the year, which we are reinvesting in the business and returning to shareowners through dividends and share repurchases.

4644

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Highlights of our consolidated results, which are discussed in more detail below, include:



	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2022			2021			$		%		2022			2021			$		%
Revenue (in millions)	$	24,161		$	23,184		$	977	4.2	%	$	73,305		$	69,516		$	3,789	5.5	%
Operating Expenses (in millions)	21,048			20,288			760		3.7	%	63,406			60,597			2,809		4.6	%
Operating Profit (in millions)	$	3,113		$	2,896		$	217	7.5	%	$	9,899		$	8,919		$	980	11.0	%
Operating Margin	12.9		%	12.5		%					13.5		%	12.8		%
Net Income (in millions)	$	2,584		$	2,329		$	255	10.9	%	$	8,095		$	9,797		$	(1,702)	(17.4)	%
Basic Earnings Per Share	$	2.97		$	2.66		$	0.31	11.7	%	$	9.27		$	11.21		$	(1.94)	(17.3)	%
Diluted Earnings Per Share	$	2.96		$	2.65		$	0.31	11.7	%	$	9.24		$	11.16		$	(1.92)	(17.2)	%

Operating Days	64			64							192			191
Average Daily Package Volume (in thousands)	22,900			23,381					(2.1)	%	23,083			23,920					(3.5)	%
Average Revenue Per Piece	$	13.58		$	12.50		$	1.08	8.6	%	$	13.52		$	12.29		$	1.23	10.0	%

•Revenue increased in both our U.S. Domestic Package and International Package segments in both the three- and nine-month periods, with strong revenue per piece growth in our global small package operations.

•Average daily volume in our global small package operations decreased for both the quarter and year to date, primarily due to business-to-consumer volume declines.

•Operating expenses increased for both the quarter and year to date, driven primarily ~~driven~~ by higher compensation and benefits and fuel ~~and third party transportation costs.~~prices.

•Operating profit and operating margin increased in ~~all segments. For the third quarter, operating margin expanded in U.S.~~our U.S Domestic Package segment and Supply Chain ~~Solutions. Year~~Solutions businesses for both the quarter and year to ~~date,~~date. Operating profit and operating margin ~~expanded~~decreased slightly in ~~all segments.~~our International Package segment for both periods.

•~~We reported net~~Net income ~~of $2.3~~was $2.6 billion and diluted earnings per share ~~of $2.65~~was $2.96 for the third quarter ($~~9.8~~8.1 billion and ~~$11.16~~$9.24 per share year to date). Adjusted diluted earnings per share was ~~$2.71~~$2.99 for the third quarter ($~~8.54~~9.33 per share year to date) after adjusting for the after-tax impacts of:

◦~~a gain on the divestiture of UPS Freight~~transformation strategy costs of $27 million, or $0.03 per diluted share, ~~year to date;~~

◦~~transformation strategy costs of $54 million or $0.06 per diluted share~~ for the third quarter ($~~232~~101 million and ~~$0.26~~$0.12 per diluted share year to date); and

◦a first-quarter ~~pension mark-to-market~~defined benefit plan curtailment gain ~~recognized outside~~ of ~~a 10% corridor of $2.5 billion~~$24 million, or ~~$2.85~~$0.03 per diluted share that impacted the year-to-date ~~earnings.~~period.

In the U.S. Domestic Package segment, ~~as expected, volume decreased in~~revenue increased for the ~~third~~ quarter and year to date, primarily due to higher fuel revenue driven by ~~lower residential volume. Revenue~~increases in both the price per gallon and ~~revenue per piece increased through execution~~in fuel surcharge rates as part of our pricing strategy. Revenue quality and favorable shifts in customer mix also contributed to the increase. These increases were partially offset by lower revenue from volume declines. Expenses increased for the quarter and year to date due to higher compensation and benefits costs and higher fuel prices, slightly offset by productivity improvements.

In the International Package segment, revenue increased for the quarter and year to date, driven by higher fuel revenue, revenue quality ~~initiatives, with growth in SMB volume,~~actions and favorable shifts in customer and product ~~mix~~mix. This increase was partially offset by negative impacts from lower volumes and ~~base rate increases, as well as an increase in fuel surcharges.~~unfavorable currency movements. Expense increases ~~for the quarter~~ were primarily driven by higher fuel prices, ~~and increases in employee benefit costs, while the reduction in volume, together with productivity improvements, partially~~somewhat offset ~~the impact of higher compensation costs.~~

~~The International Package segment experienced volume and revenue growth in domestic and export products, with growth driven~~ by ~~SMBs. Revenue and revenue per piece increased due to shifts in product mix, base rate increases,~~ favorable currency movements and fuel and capacity surcharges. Expense increases were driven primarily by volume growth, with additional third-party pickup and delivery expense and higher network costs driven by higher jet fuel prices.impacts.

In Supply Chain Solutions revenue decreased for the ~~impact~~quarter and year to date. For the quarter, volume declines in Forwarding were partially offset by growth in our Logistics businesses, driven by healthcare. Year to date, revenue increases in Forwarding and Logistics were offset by a reduction in revenue due to the second quarter 2021 divestiture of ~~divesting~~UPS Freight. Expenses decreased for the quarter and year to date, driven by lower transportation costs in Forwarding and a reduction in operating expenses due to the divestiture of UPS Freight, ~~was more than~~partially offset by ~~revenue growth from the remaining businesses, primarily Forwarding and~~higher operating costs in Logistics. Forwarding revenue growth was driven by higher air freight volumes and market rate and base pricing increases, primarily in ocean freight forwarding and truckload brokerage. Within Logistics, healthcare operations continued to experience strong growth. Expense increases in Supply Chain Solutions were primarily driven by higher third party transportation costs.

4745

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Supplemental Information - Items Affecting Comparability

We supplement the reporting of our financial information determined under generally accepted accounting principles in the United States ("GAAP") with certain non-GAAP financial measures. These include: "adjusted" compensation and benefits; operating expenses; operating profit; operating margin; other income and (expense); 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, defined benefit plan gains and losses, transformation and other charges, goodwill and asset impairment charges, and divestitures, as described below.

We believe that these non-GAAP measures provide additional meaningful information to assist users of our financial statements in more fully understanding our financial results and assessing our ongoing performance, because they exclude items that may not be indicative of, or are unrelated to, our underlying operations, and may provide a useful baseline for analyzing trends in our underlying businesses. These non-GAAP measures are used internally by management for business unit operating performance analysis, business unit resource allocation and in connection with incentive compensation award determinations.

Adjusted financial measures should be considered in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. Our adjusted financial measures do not represent a comprehensive basis of accounting. Therefore, our adjusted financial measures may not be comparable to similarly-titled measures reported by other companies.

Adjusted amounts reflect the ~~following:~~following (in millions):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
Non-GAAP Adjustments	Non-GAAP Adjustments	2021		2020		2021		2020		Non-GAAP Adjustments	2022		2021		2022		2021
Operating Expenses:	Operating Expenses:									Operating Expenses:
Transformation and Other Charges		$	74	$	44	$	273	$	201
Transformation Strategy Costs										Transformation Strategy Costs	$	36	$	74	$	132	$	308
Asset Impairment and Divestiture Charges										Asset Impairment and Divestiture Charges	—		—		—		(35)
Total Adjustments to Operating Expenses	Total Adjustments to Operating Expenses	$	74	$	44	$	273	$	201	Total Adjustments to Operating Expenses	$	36	$	74	$	132	$	273

Other Income and (Expense):	Other Income and (Expense):									Other Income and (Expense):
Defined Benefit Plan Mark-to-Market Gain		$	—	$	—	$	(3,290)	$	—
Defined Benefit Plan (Gains) and Losses										Defined Benefit Plan (Gains) and Losses	$	—	$	—	$	(33)	$	(3,290)
Total Adjustments to Other Income and (Expense)	Total Adjustments to Other Income and (Expense)	$	—	$	—	$	(3,290)	$	—	Total Adjustments to Other Income and (Expense)	$	—	$	—	$	(33)	$	(3,290)

Total Adjustments to Income Before Income Taxes	Total Adjustments to Income Before Income Taxes	$	74	$	44	$	(3,017)	$	201	Total Adjustments to Income Before Income Taxes	$	36	$	74	$	99	$	(3,017)

Income Tax Expense (Benefit) from Defined Benefit Plan Mark-to-Market Gain		$	—	$	—	$	788	$	—
Income Tax Expense (Benefit) from Transformation and Other Charges		(20)		(11)		(68)		(50)
Total Adjustments to Income Tax Expense		$	(20)	$	(11)	$	720	$	(50)
Income Tax (Benefit) Expense:										Income Tax (Benefit) Expense:
Transformation Strategy Costs										Transformation Strategy Costs	$	(9)	$	(20)	$	(31)	$	(76)
Asset Impairment and Divestiture Charges										Asset Impairment and Divestiture Charges	—		—		—		8
Defined Benefit Plan (Gains) and Losses										Defined Benefit Plan (Gains) and Losses	—		—		9		788
Total Adjustments to Income Tax (Benefit) Expense										Total Adjustments to Income Tax (Benefit) Expense	$	(9)	$	(20)	$	(22)	$	720

Total Adjustments to Net Income	Total Adjustments to Net Income	$	54	$	33	$	(2,297)	$	151	Total Adjustments to Net Income	$	27	$	54	$	77	$	(2,297)

~~Restructuring (Transformation)~~Transformation Charges, and ~~Other~~Goodwill, Asset Impairment and Divestiture Charges

~~Adjusted~~We supplement the presentation of our operating profit, operating margin, income before income taxes, net income and earnings per share ~~may~~with non-GAAP measures that exclude the impact of charges related to ~~any restructuring programs, including~~ transformation ~~costs~~activities, and goodwill, asset ~~impairments.~~

~~Transformation~~impairment and ~~other charges include a year-to-date gain of $35 million related to the~~ divestiture ~~of UPS Freight.~~charges. For ~~additional~~more information regarding ~~our~~ transformation ~~strategy costs~~activities, see note 1817 to the unaudited, consolidated financial statements. For more information regarding goodwill and asset impairment charges, and divestitures, see note 4 to our audited, consolidated financial statements ~~included within this report.~~in our Annual Report on Form 10-K for the year ended December 31, 2021.

~~Changes in~~

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Foreign Currency Exchange ~~Rates~~Rate Changes and Hedging Activities

We also supplement the reporting of revenue, revenue per piece and operating profit with adjusted 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 products and results. We evaluate the performance of International Package and Supply Chain Solutions on this currency-neutral basis.

~~Table of Contents~~

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

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

~~RESULTS OF OPERATIONS~~

Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reported U.S. ~~dollar~~Dollar revenue, revenue per piece and operating profit by the current period average exchange rates to derive current period local currency revenue, revenue per piece and operating profit. The derived amounts are then multiplied by the average foreign currency exchange rates used to translate the comparable results for each month in the prior year period (including the ~~period over period~~period-over-period impact of foreign currency hedging activities). The difference between the current period reported U.S. ~~dollar~~Dollar revenue, revenue per piece and operating profit and the derived current period U.S. ~~dollar~~Dollar revenue, revenue per piece and operating profit is the ~~period over period~~period-over-period impact of currency fluctuations.

Defined Benefit Plan ~~Mark-to-Market Gain~~Gains and Losses

We incur certain employment-related expenses associated with pension and postretirement medical benefits. These pension and postretirement medical benefits costs for company-sponsored defined benefit plans are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS. Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement of any of our plans.

We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor (defined as 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation), as well as gains and losses resulting from plan amendments, for our pension and postretirement defined benefit plans immediately as part of ~~other pension~~Investment income ~~(expense).~~and other in the statements of consolidated income. We supplement the presentation of our income before income taxes, net income and earnings per share with adjusted measures that exclude the impact of these gains and losses ~~recognized in excess of the 10% corridor~~ and the related income tax effects. We believe excluding these ~~mark-to-market impacts~~defined benefit plan gains and losses provides important supplemental information by removing the volatility associated with plan amendments and short-term changes in market interest rates, equity values and similar factors.

During the first quarter of 2022, we amended the UPS Canada Ltd. Retirement Plan to cease future benefit accruals effective December 31, 2023. As a result, we remeasured the plan's assets and benefit obligations as of March 31, 2022, resulting in a curtailmentgain of$33 million ($24 million after-tax).

During the ~~enactment~~first quarter of ~~ARPA,~~2021, we remeasured the UPS/IBT Full Time Employee Pension Plan ~~assets and pension benefit obligation~~following enactment into law of the American Rescue Plan Act and recognized a pre-tax mark-to-market gain outside of the 10% corridor of $3.3 billion ($2.5 billion after-tax) ~~in the first quarter of 2021. The components of this gain, which are included in “Other Income and (Expense)” in the statements of consolidated income, are as follows:~~

•~~Coordinating benefits attributable to the Central States Pension Fund~~ ~~($1.8 billion pre-tax gain): This represents the reduction of the liability for potential coordinating benefits that may have been required to be paid related to the Central States Pension Fund.~~

•~~Discount rates~~ ~~($1.8 billion pre-tax gain): The discount rate for the UPS/IBT Plan increased from 2.98% as of December 31, 2020 to 3.70% as of March 31, 2021, primarily due to an increase in U.S. treasury yields.~~

•~~Return on assets~~ ($0.3 billion pre-tax loss): In the first quarter of 2021, the actual rate of return on plan assets was approximately 220 basis points lower than our expected rate of return, primarily due to weaker than expected global equity and U.S. bond market performance..

For additional information, refer to note 87 to the unaudited, consolidated financial ~~statements included within this report.~~

Non-GAAP financial measures should be considered in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. Our adjusted financial information does not represent a comprehensive basis of accounting. Therefore, our adjusted financial information may not be comparable to similarly titled information reported by other companies.statements.

4947

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Results of Operations - Segment Review

The results and discussions that follow are reflective of how management monitors and evaluates the performance of our segments as defined in note ~~14.~~13 to the unaudited, consolidated financial statements.

Certain operating expenses are allocated between 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 category that is attributed to each segment. Changes in these estimates directly impact the amount of expense allocated to each segment and therefore the operating profit of each reporting segment. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.

Beginning in the first quarter of 2021, we updated our cost allocation methodology for aircraft engine maintenance expense to better align with aircraft utilization by segment. This change resulted in a reallocation of expense from our U.S. Domestic Package segment to our International Package segment of approximately $19 million for the quarter ($50 million year to date). There were no ~~other~~ significant changes into our ~~expense~~ allocation methodologies ~~that affect period over period comparisons.~~

~~Following the divestiture of UPS Freight~~ in the ~~second~~third quarter ~~of 2021, we renamed Supply Chain & Freight to Supply Chain Solutions. This had no impact to prior period results.~~or year-to-date periods.

Testing goodwill and other indefinite-lived intangible assets for impairment requires that we make a number of significant assumptions, including assumptions related to future revenues, costs, capital expenditures, working capital and our cost of capital. We also are required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment. Changes in any of these assumptions could significantly impact the fair value of any one of our reporting units. The projections that we use in our valuation model are updated annually and will change over time based on the historical performance and changing business conditions for each of our reporting units.

Our annual impairment testing of ~~our indefinite-lived intangible assets~~goodwill indicated that the fair value of ~~the indefinite-lived trade name associated with~~ our ~~truckload brokerage business~~recently-acquired Roadie reporting unit remained greater than its carrying value, although this excess was less than 10 percent. ~~This business has been negatively~~The extent to which fair value exceeds carrying value is impacted by ~~increases~~changes in the ~~market rates at which it purchases transportation, which has in turn negatively impacted its operating margins.~~cost of capital, and our ability to successfully integrate and grow the acquired business. The carrying value of ~~this indefinite-lived trade name~~goodwill associated with our Roadie reporting unit is ~~$200~~$241 million.

There were no events or changes in circumstances during the third quarter of ~~2021~~2022 that would indicate the carrying amount of our goodwill or indefinite-lived intangible assets may be impaired as of the date of this report. However, future actual results, transactions or other events, or changes in estimates or assumptions, whether due to unexpected impacts on our business, ~~arising from COVID-19 or otherwise,~~ our transformation activities, or the continuing evaluation of our business portfolio, could result in an impairment charge to one of our reporting units or to our indefinite-lived intangible assets in a future period.

5048

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

U.S. Domestic Package


		Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change					Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
		2021			2020			$		%		2021			2020			$		%			2022			2021			$		%		2022			2021			$		%
Average Daily Package Volume (in thousands):	Average Daily Package Volume (in thousands):																					Average Daily Package Volume (in thousands):
Next Day Air	Next Day Air	1,949			1,915					1.8	%	2,010			1,888					6.5	%	Next Day Air	1,932			1,949					(0.9)	%	1,929			2,010					(4.0)	%
Deferred	Deferred	1,501			1,657					(9.4)	%	1,532			1,617					(5.3)	%	Deferred	1,341			1,501					(10.7)	%	1,417			1,532					(7.5)	%
Ground	Ground	16,385			16,803					(2.5)	%	16,689			16,346					2.1	%	Ground	16,266			16,385					(0.7)	%	16,309			16,689					(2.3)	%
Total Average Daily Package Volume	Total Average Daily Package Volume	19,835			20,375					(2.7)	%	20,231			19,851					1.9	%	Total Average Daily Package Volume	19,539			19,835					(1.5)	%	19,655			20,231					(2.8)	%
Average Revenue Per Piece:	Average Revenue Per Piece:																					Average Revenue Per Piece:
Next Day Air	Next Day Air	$	19.36		$	16.85		$	2.51	14.9	%	$	18.76		$	16.84		$	1.92	11.4	%	Next Day Air	$	21.62		$	19.36		$	2.26	11.7	%	$	21.39		$	18.76		$	2.63	14.0	%
Deferred	Deferred	13.57			12.79			0.78		6.1	%	13.25			12.41			0.84		6.8	%	Deferred	15.28			13.57			1.71		12.6	%	15.15			13.25			1.90		14.3	%
Ground	Ground	10.00			8.93			1.07		12.0	%	9.89			8.79			1.10		12.5	%	Ground	10.94			10.00			0.94		9.4	%	10.83			9.89			0.94		9.5	%
Total Average Revenue Per Piece	Total Average Revenue Per Piece	$	11.19		$	9.99		$	1.20	12.0	%	$	11.03		$	9.85		$	1.18	12.0	%	Total Average Revenue Per Piece	$	12.29		$	11.19		$	1.10	9.8	%	$	12.18		$	11.03		$	1.15	10.4	%
Operating Days in Period	Operating Days in Period	64			65							191			193							Operating Days in Period	64			64							192			191
Revenue (in millions):	Revenue (in millions):																					Revenue (in millions):
Next Day Air	Next Day Air	$	2,415		$	2,098		$	317	15.1	%	$	7,202		$	6,137		$	1,065	17.4	%	Next Day Air	$	2,673		$	2,415		$	258	10.7	%	$	7,923		$	7,202		$	721	10.0	%
Deferred	Deferred	1,304			1,378			(74)		(5.4)	%	3,877			3,873			4		0.1	%	Deferred	1,311			1,304			7		0.5	%	4,123			3,877			246		6.3	%
Ground	Ground	10,489			9,749			740		7.6	%	31,541			27,745			3,796		13.7	%	Ground	11,390			10,489			901		8.6	%	33,911			31,541			2,370		7.5	%
Total Revenue	Total Revenue	$	14,208		$	13,225		$	983	7.4	%	$	42,620		$	37,755		$	4,865	12.9	%	Total Revenue	$	15,374		$	14,208		$	1,166	8.2	%	$	45,957		$	42,620		$	3,337	7.8	%
Operating Expenses (in millions):	Operating Expenses (in millions):																					Operating Expenses (in millions):
Operating Expenses	Operating Expenses	$	12,801		$	12,127		$	674	5.6	%	$	38,287		$	35,111		$	3,176	9.0	%	Operating Expenses	$	13,708		$	12,801		$	907	7.1	%	$	40,800		$	38,287		$	2,513	6.6	%
Transformation and Other Charges	Transformation and Other Charges	(7)			(35)			28		(80.0)	%	(219)			(105)			(114)		108.6	%	Transformation and Other Charges	(20)			(7)			(13)		185.7	%	(89)			(219)			130		(59.4)	%
Adjusted Operating Expense	Adjusted Operating Expense	$	12,794		$	12,092		$	702	5.8	%	$	38,068		$	35,006		$	3,062	8.7	%	Adjusted Operating Expense	$	13,688		$	12,794		$	894	7.0	%	$	40,711		$	38,068		$	2,643	6.9	%
Operating Profit (in millions) and Operating Margin:	Operating Profit (in millions) and Operating Margin:																					Operating Profit (in millions) and Operating Margin:
Operating Profit	Operating Profit	$	1,407		$	1,098		$	309	28.1	%	$	4,333		$	2,644		$	1,689	63.9	%	Operating Profit	$	1,666		$	1,407		$	259	18.4	%	$	5,157		$	4,333		$	824	19.0	%
Adjusted Operating Profit	Adjusted Operating Profit	$	1,414		$	1,133		$	281	24.8	%	$	4,552		$	2,749		$	1,803	65.6	%	Adjusted Operating Profit	$	1,686		$	1,414		$	272	19.2	%	$	5,246		$	4,552		$	694	15.2	%
Operating Margin	Operating Margin	9.9		%	8.3		%					10.2		%	7.0		%					Operating Margin	10.8		%	9.9		%					11.2		%	10.2		%
Adjusted Operating Margin	Adjusted Operating Margin	10.0		%	8.6		%					10.7		%	7.3		%					Adjusted Operating Margin	11.0		%	10.0		%					11.4		%	10.7		%

Revenue

The change in ~~overall~~ revenue was due to the following factors:
Volume Rates /
Product Mix Fuel
Surcharge Total Revenue
Change
Revenue Change Drivers:
Third quarter 2021 vs. 2020 (4.2) % 9.2 % 2.4 % 7.4 %
Year to date 2021 vs. 2020 0.9 % 10.2 % 1.8 % 12.9 %


	Volume		Rates / Product Mix		Fuel Surcharge		Total Revenue Change
Revenue Change Drivers:
Third quarter 2022 vs. 2021	(1.4)	%	3.8	%	5.8	%	8.2	%
Year to date 2022 vs. 2021	(2.3)	%	4.6	%	5.5	%	7.8	%

Year to date, revenue also benefited from one additional operating day in the first half of 2022.

Volume

Average daily volume decreased in the third quarter ~~but increased~~and year to ~~date. The volume decrease for the quarter was attributable to~~date, driven by a 2.2% decline in residential ~~deliveries and Deferred volume, which~~shipments (down 6.0% year to date). The decline in residential shipments was primarily attributable to terms of contracts with certain large customers, reflecting the continued execution within our strategic framework. This decline was partially offset by growth ~~in Ground commercial and Next Day Air volume. The increase year to date was driven by growth~~ from SMBs ~~as a result of~~and, during the ~~execution of the~~ ~~Customer First~~ ~~component of our strategy. SMB~~third quarter, volume ~~grew 10.9%~~from new customers. Business-to-consumer shipments for the quarter and ~~21.9%~~ year to ~~date. We expect that SMB growth will moderate~~date represented approximately 57.2% and 57.3% of average daily volume, respectively, compared to 57.6% and 59.2%, respectively, in ~~the fourth quarter as we typically experience higher volume growth from large customers during this period.~~

2021.

5149

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

~~Business-to-consumer~~Business-to-business shipments ~~which represented approximately 57.6% of~~decreased 0.5% for the ~~total~~quarter but increased 1.8% year to date. For the quarter, the decline was driven by lower manufacturing volume, partially offset by an increase in retail returns. Year to date, growth was driven by our Ground commercial product as discussed below. Overall, we anticipate average daily volume ~~for the third quarter, compared to approximately 61.4%~~growth will be negative in the third quarter of 2020, declined by 8.6% (down 2.8% year to date). These shipments decreased year over year due to the initial surge in e-commerce activity that we experienced last year at the onset of the COVID-19 pandemic in the U.S., combined with higher in-store spending in 2021. Business-to-business volume increased by 6.8% (up 9.6% year to date) across a number of industry sectors, including retail and high tech.fourth quarter.

~~Average~~Within our Air products, average daily volume ~~in our Next Day Air product increased in~~decreased for the ~~third~~ quarter and year to date due to terms of contracts with ~~higher demand from both~~certain large customers ~~and SMBs, driven by increased business-to-business activity. Residential demand~~reflecting the continued execution within our strategic framework, as well as changes in customer behavior.

Within our Ground products, average daily volume decreased for ~~this product increased~~both the quarter and year to date, as ~~customer expectations continue to shift towards faster delivery. This demand has led to~~declines in Ground residential volume outpaced gains in Ground commercial volume. Ground residential average daily volume ~~decreases in our Deferred product in both~~decreased 4.3% for the quarter (down 6.6% year to date), driven by contract terms with certain large customers discussed above. During the third quarter, the decline in Ground residential volume was partially offset by an increase in SurePost shipments from both new and ~~year-to-date periods.~~

existing large retail customers. Year to date, Ground residential and SurePost average daily ~~volume decreased~~volumes were negatively impacted by ~~4.6%~~a continuing shift in consumer spending back towards services and ~~17.4%, respectively, for the quarter (up 1.0% and down 11.4%, respectively, year to date), primarily due to decreases in volume from large customers.~~in-store shopping. Ground commercial volume increased 0.3% and 2.4% for the quarter and year to date, respectively, driven by heightened returns volume in the quarter and growth from SMBs in the year-to-date period.

Rates and Product Mix

Revenue per piece in our Air and Ground products increased for both the third quarter and year to date, driven by strong growth from SMBs. Following the divestiture of UPS Freight, our Ground with Freight Pricing ("GFP") product began to be reported within U.S. Domestic Ground volume. This did not have a significant impact on overall growth for the quarter or year-to-date periods.

~~Rates~~base rate increases and ~~Product Mix~~

~~Overall revenue per piece increased in the third quarter and year to date due to increases in base rates~~other pricing actions, and favorable changes in ~~product and~~ customer mix. ~~Revenue per piece also increased as a result of capacity and fuel surcharges and overall~~A shift in product mix slightly offset these increases ~~in average billable weight per piece.~~for the third quarter. Rates for ~~our ground~~Air and ~~air services~~Ground products increased an average ~~4.9%~~of 5.9% in December ~~2020 and~~2021. In our ~~SurePost rates also increased in December 2020. We anticipate that our revenue quality initiatives will lead to continued revenue growth.~~

~~Revenue per piece increases for~~ Next Day Air and Deferred products, inrevenue per piece growth for the ~~third~~ quarter and ~~year-to-date periods were driven~~year to date was slightly negatively impacted by ~~base rate and fuel surcharge increases and favorable shifts in customer and product mix, partially offset by declines~~a reduction in average billable weight per piece. ~~Revenue~~

We anticipate continued revenue per piece ~~for our Ground product increased~~growth in the ~~third~~fourth quarter ~~and year~~of 2022, but expect that it will moderate compared to ~~date due to base rate and fuel surcharge increases, increases in average billable weight per piece and favorable shifts in product and customer mix.~~the first nine months of the year.

Fuel Surcharges

We apply a fuel surcharge toon our domestic air and ground services that ~~is adjusted~~adjusts weekly. ~~The~~Our air fuel surcharge is based on the U.S. Department of Energy's ("DOE") Gulf Coast spot price for a gallon of kerosene-type fuel, ~~while the~~and our ground fuel surcharge is based on the DOE's On-Highway Diesel Fuel price. ~~Based on published rates, the average surcharges for domestic Air and Ground products were as follows:~~
Three Months Ended September 30, % Point Change Nine Months Ended
September 30, % Point Change
2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Next Day Air / Deferred 8.7 % 3.8 % 4.9 % 7.2 % 3.9 % 3.3 %
Ground 8.9 % 6.5 % 2.4 % 8.0 % 6.7 % 1.3 %

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 market pricing strategy 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 increased ~~by $320~~$823 million in the third quarter ~~primarily as a result of higher~~(up $2.4 billion year to date), driven by increases in price per gallon and increases in fuel surcharge ~~indices. Year to date, total~~rates as part of our pricing strategy. We expect fuel surcharge revenue ~~increased $674 million, primarily as a result of higher fuel surcharge indices, volume growth and shifts~~to stabilize at current levels in ~~product mix.~~

the fourth quarter.

5250

Table of Contents

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~~year-over-year impact of transformation and other charges, increased infor both the ~~third~~ quarter ~~driven by a $336 million increase in the cost of operating our integrated air~~ and ~~ground network. In addition, pickup and delivery costs increased by $214 million, the cost of package sorting increased $102 million, and other indirect operating costs increased by $50 million.~~year to date. The increase ~~in expense was driven by:~~

•Higher employee benefit expense for our union workforce due to contractual contribution rate increases to multiemployer plans and additional headcount becoming eligible for health, welfare and retirement benefits.

•~~Higher fuel costs, primarily driven by increases in the price of diesel, gasoline and jet fuel.~~

~~Employee compensation remained relatively flat~~ for the ~~third quarter as contractual rate increases, market rate adjustments in certain geographies and cost of living adjustments were offset by productivity improvements and lower volume.~~

~~Third party transportation costs remained relatively flat in~~year-to-date period includes the ~~third quarter. The investments to improve time-in-transit within our ground network were fully offset by lower third party carrier costs for SurePost and rail due to lower volumes.~~

~~On a year-to-date basis, operating expenses and operating expenses excluding the year over year~~ impact of ~~transformation and other charges, increased. Pickup and delivery costs increased $1.1 billion; the costs~~one additional operating day. The cost of operating our integrated air and ground network increased ~~$1.4 billion;~~$222 million (up $846 million year to date) and pickup and delivery costs increased $459 million (up $1.2 billion year to date). Other indirect operating costs increased $167 million (up $401 million year to date) and package sorting costs increased ~~$375~~$46 million (up $148 million year to date). These increases included the following:

•Higher fuel costs, primarily attributable to increases in the price of jet fuel, diesel and ~~other indirect operating costs~~gasoline, which we expect to stabilize in the fourth quarter.

•Increases in employee benefits expense for our union workforce, driven by contractual rate increases for contributions to multiemployer benefit plans and higher year-over-year service cost for our company-sponsored pension plans.

•Higher compensation expense due to contractual rate increases, and cost of living and market-rate adjustments for our union workforce, which we expect to persist in the fourth quarter. Management payroll increased ~~$204 million.~~due to salary growth and higher incentive-based compensation accruals. These increases were ~~primarily driven~~partially offset by ~~higher volume, increased employee headcount~~lower expenses resulting from a decrease in average daily union labor hours.

•Inflationary pressures that contributed to cost increases in repairs and ~~hours resulting~~maintenance and facility operating costs.

These increases were partially offset by declines in ~~higher compensation and benefit~~purchased transportation costs ~~investments in~~as we execute within our ~~ground network and higher fuel costs.~~strategy.

Total cost per piece increased ~~10.1%~~8.7% for the third quarter (up ~~8.1%~~9.1% year to date). Excluding the impact of transformation and other charges, adjusted cost per piece increased ~~10.4%~~8.6% for the third quarter and 9.5% year to date, for the reasons described ~~above (up 7.8% year to date).~~above. We ~~expect~~anticipate that the cost per piece growth rate will moderate in the fourth quarter ~~relative~~and remain below the revenue per piece growth rate as we expect our productivity initiatives to continue to help offset rising compensation and benefit costs due to the ~~third quarter, however we anticipate that overall costs may continue to increase as a result of market factors, including the availability and cost of labor.~~annual contractual rate increases.

Operating Profit and Margin

As a result of the factors described above, operating profit increased ~~$309~~$259 million in the third quarter (up ~~$1.7 billion~~$824 million year to date), with operating margin increasing ~~160~~90 basis points to ~~9.9%~~10.8% (up ~~320~~100 basis points to ~~10.2%~~11.2% year to date). Excluding the ~~year over year~~year-over-year impact of transformation and other charges, adjusted operating profit increased ~~$281~~$272 million infor the ~~third~~ quarter (up ~~$1.8 billion~~$694 million year to date), with adjusted operating margin increasing ~~140~~100 basis points to ~~10.0%~~11.0% (up ~~340~~70 basis points to ~~10.7%~~11.4% year to date).

5351

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

International Package


		Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change						Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
		2021			2020			$		%		2021			2020			$		%				2022			2021			$		%		2022			2021			$		%
Average Daily Package Volume (in thousands):	Average Daily Package Volume (in thousands):																						Average Daily Package Volume (in thousands):
Domestic	Domestic	1,851			1,806					2.5	%	1,943			1,746					11.3		%	Domestic	1,677			1,851					(9.4)	%	1,729			1,943					(11.0)	%
Export	Export	1,695			1,674					1.3	%	1,746			1,545					13.0		%	Export	1,684			1,695					(0.6)	%	1,699			1,746					(2.7)	%
Total Average Daily Package Volume	Total Average Daily Package Volume	3,546			3,480					1.9	%	3,689			3,291					12.1		%	Total Average Daily Package Volume	3,361			3,546					(5.2)	%	3,428			3,689					(7.1)	%
Average Revenue Per Piece:	Average Revenue Per Piece:																						Average Revenue Per Piece:
Domestic	Domestic	$	7.19		$	6.61		$	0.58	8.8	%	$	7.32		$	6.48		$	0.84	13.0		%	Domestic	$	7.31		$	7.19		$	0.12	1.7	%	$	7.43		$	7.32		$	0.11	1.5	%
Export	Export	33.56			28.98			4.58		15.8	%	32.41			28.63			3.78		13.2		%	Export	34.77			33.56			1.21		3.6	%	35.26			32.41			2.85		8.8	%
Total Average Revenue Per Piece	Total Average Revenue Per Piece	$	19.80		$	17.37		$	2.43	14.0	%	$	19.19		$	16.88		$	2.31	13.7		%	Total Average Revenue Per Piece	$	21.07		$	19.80		$	1.27	6.4	%	$	21.22		$	19.19		$	2.03	10.6	%
Operating Days in Period	Operating Days in Period	64			65							191			193								Operating Days in Period	64			64							192			191
Revenue (in millions):	Revenue (in millions):																						Revenue (in millions):
Domestic	Domestic	$	852		$	776		$	76	9.8	%	$	2,716		$	2,183		$	533	24.4		%	Domestic	$	785		$	852		$	(67)	(7.9)	%	$	2,465		$	2,716		$	(251)	(9.2)	%
Export	Export	3,641			3,153			488		15.5	%	10,808			8,538			2,270		26.6		%	Export	3,747			3,641			106		2.9	%	11,501			10,808			693		6.4	%
Cargo and Other	Cargo and Other	227			158			69		43.7	%	620			454			166		36.6		%	Cargo and Other	267			227			40		17.6	%	782			620			162		26.1	%
Total Revenue	Total Revenue	$	4,720		$	4,087		$	633	15.5	%	$	14,144		$	11,175		$	2,969	26.6		%	Total Revenue	$	4,799		$	4,720		$	79	1.7	%	$	14,748		$	14,144		$	604	4.3	%
Operating Expenses (in millions):	Operating Expenses (in millions):																						Operating Expenses (in millions):
Operating Expenses	Operating Expenses	$	3,669		$	3,121		$	548	17.6	%	$	10,824		$	8,887		$	1,937	21.8		%	Operating Expenses	$	3,802		$	3,669		$	133	3.6	%	$	11,442		$	10,824		$	618	5.7	%
Transformation and Other Charges	Transformation and Other Charges	(57)			(6)			(51)		N/M		(69)			(84)			15		(17.9)		%	Transformation and Other Charges	(7)			(57)			50		(87.7)	%	(22)			(69)			47		(68.1)	%
Adjusted Operating Expenses	Adjusted Operating Expenses	$	3,612		$	3,115		$	497	16.0	%	$	10,755		$	8,803		$	1,952	22.2		%	Adjusted Operating Expenses	$	3,795		$	3,612		$	183	5.1	%	$	11,420		$	10,755		$	665	6.2	%
Operating Profit (in millions) and Operating Margin:	Operating Profit (in millions) and Operating Margin:																						Operating Profit (in millions) and Operating Margin:
Operating Profit	Operating Profit	$	1,051		$	966		$	85	8.8	%	$	3,320		$	2,288		$	1,032	45.1		%	Operating Profit	$	997		$	1,051		$	(54)	(5.1)	%	$	3,306		$	3,320		$	(14)	(0.4)	%
Adjusted Operating Profit	Adjusted Operating Profit	$	1,108		$	972		$	136	14.0	%	$	3,389		$	2,372		$	1,017	42.9		%	Adjusted Operating Profit	$	1,004		$	1,108		$	(104)	(9.4)	%	$	3,328		$	3,389		$	(61)	(1.8)	%
Operating Margin	Operating Margin	22.3		%	23.6		%					23.5		%	20.5		%						Operating Margin	20.8		%	22.3		%					22.4		%	23.5		%
Adjusted Operating Margin	Adjusted Operating Margin	23.5		%	23.8		%					24.0		%	21.2		%						Adjusted Operating Margin	20.9		%	23.5		%					22.6		%	24.0		%
Currency Benefit / (Cost) – (in millions)*:	Currency Benefit / (Cost) – (in millions)*:																						Currency Benefit / (Cost) – (in millions)*:
Revenue	Revenue							$	58											$	452		Revenue							$	(335)									$	(739)
Operating Expenses	Operating Expenses							(38)												(351)			Operating Expenses							253										569
Operating Profit	Operating Profit							$	20											$	101		Operating Profit							$	(82)									$	(170)
* Net of currency hedging; amount represents the change in currency translation compared to the prior year.	* Net of currency hedging; amount represents the change in currency translation compared to the prior year.																						* 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:
Third quarter 2021 vs. 2020 0.8 % 8.4 % 4.9 % 1.4 % 15.5 %
Year to date 2021 vs. 2020 11.0 % 7.0 % 4.5 % 4.1 % 26.6 %


	Volume		Rates / Product Mix		Fuel Surcharge		Currency		Total Revenue Change
Revenue Change Drivers:
Third quarter 2022 vs. 2021	(5.7)	%	6.8	%	7.7	%	(7.1)	%	1.7	%
Year to date 2022 vs. 2021	(6.7)	%	8.1	%	8.1	%	(5.2)	%	4.3	%

Year to date, revenue also benefited from one additional operating day in the first half of 2022.

5452

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Volume

~~In the third quarter, average~~Average daily volume ~~growth moderated year over year as COVID-19 related volume was present in both periods. Volume increased in~~decreased for the third quarter and year to date for both domestic and export ~~products, with growth~~products. Volume from both large customers and SMBs declined, primarily in the ~~quarter led by SMB customers as we continued to execute the~~ ~~Customer First~~ ~~component of our strategy. Year to date, volume growth was attributable to both SMBs~~retail and ~~large customers. Business-to-business volume increased 3.8% in the third quarter (up 11.1% year to date) as commercial activity continued to return.~~technology sectors. Business-to-consumer volume decreased ~~2.3%~~10.6% for the quarter (down 18.4% year to date), as challenging global economic conditions, including rising inflation, high energy costs, lockdowns in parts of Asia and geopolitical uncertainty, impacted consumer demand. These factors also impacted business-to-business volume, which decreased 2.9% for the quarter (down 1.7% year to date). We expect year-over-year average daily volume to be lower in the ~~third~~fourth quarter, ~~primarily due to~~although the ~~initial surge in e-commerce activity that we experienced last year at~~rate of decline should moderate.

For the ~~onset of the COVID-19 pandemic. On a year-to-date basis, business-to-consumer volume increased 14.3%, as e-commerce continued to drive growth within the retail sector.~~

quarter, Export volume ~~increased~~declines were driven by reductions in ~~the third quarter~~U.S. exports and year to date. Growth in the quarter was led by Europe and the Americas, while Asia experienced a decline in export volume. Europe export volume growth was highest on intra-Europe trade lanes, while trade between the United Kingdom and Europe continued to decline as a result of Brexit, which became effective in the first quarter of 2021. The decline in Asia export volume was primarily due to COVID-19 safety protocols at certain airports within the region reducing the number of flights we operated relative to our plan during the quarter. On a year-to-date basis, Asia export volume grew, led by the Asia to U.S. trade lane. U.S. exports were negatively impacted by the strength of the U.S. Dollar and lower volumes from large customers. Declines on the Asia to U.S. trade lane were driven by disruptions resulting from lockdowns in China and lower customer demand. These declines were partly offset by growth in the intra-Europe trade lanes as supply chain disruptions eased. Year to date, declines were primarily from the intra-Europe and the Asia to U.S. trade lanes. The intra-Europe declines were driven by overall economic conditions, while the decline in the Asia to U.S. trade lane was primarily driven by the factors impacting the quarterly period.

Our premium Express products ~~saw~~experienced a slight volume ~~growth of 11%~~decline for both the quarter (21% year to date), driven by our Worldwide Express and Transborder Express products. Volume for our non-premium products was flat for the quarter. Year to date, non-premium products saw volume growth of 12%, driven by Transborder Standard shipments within the European Union. As a result of Brexit, shipments between the UK and the European Union that are now subject to duties and taxes shifted from our Transborder to our Worldwide products.

~~Domestic volume increased in the third~~ quarter and year to date, primarily driven by lower volume from certain large customers in ~~many of~~ our ~~markets, with~~Worldwide Express Saver product due to the ~~strongest~~economic factors discussed above.

Volume for our non-premium export products increased 1.8% for the quarter, driven by growth in our Transborder Standard product within Europe for the ~~United Kingdom~~reasons discussed above. This growth was slightly offset for the quarter by declines in our Worldwide products, which also drove a 1.7% decline in volume year to date. These declines were driven by an overall reduction in consumer demand.

Domestic volume also declined for the quarter and ~~Western~~year to date, with third-quarter declines primarily in Europe as ~~commercial~~a result of the economic conditions discussed above. Year to date, both Europe and Canada experienced declines in domestic volume, ~~continued to return.~~driven by lower residential deliveries as a result of reduced demand.

Rates and Product Mix

In December ~~2020,~~2021, we implemented an average ~~4.9%~~5.9% 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~~Additionally, we continue to ~~capacity constraints resulting from the COVID-19 pandemic, we implemented~~apply demand-related surcharges on certain lanes, ~~beginning~~although we expect these to decrease year over year in the ~~second quarter of 2020.~~fourth quarter.

Total revenue per piece increased ~~14.0% in~~6.4% for the quarter (up ~~13.7%~~10.6% year to date) ~~driven by changes in base pricing,~~, primarily due to fuel ~~and capacity~~ surcharges and favorable ~~currency movements. Changes~~shifts in customer and product ~~mix also contributed to the increase.~~mix. These increases were somewhat offset by unfavorable currency movements. Excluding the impact of currency, revenue per piece increased ~~12.5%~~14.1% for the quarter (up ~~10.0%~~16.3% year to date). We expect overall revenue per piece to decrease slightly for the fourth quarter.

Export revenue per piece increased 3.6% for the quarter (up 8.8% year to date) for the reasons described above. Excluding the impact of currency, export revenue per piece increased 9.4% for the quarter (up 13.1% year to date).

Domestic revenue per piece ~~increased 8.8% in~~remained relatively flat for the quarter ~~(up 13.0%~~and year to ~~date) due to changes in base pricing, customer and product mix, fuel surcharges and favorable~~date, as unfavorable currency ~~movements.~~movements offset growth from the factors described above. Excluding the impact of currency, domestic revenue per piece increased ~~6.4% in~~16.7% for the quarter (up ~~6.3% year to date).~~

Export revenue per piece increased 15.8% in the quarter (up 13.2% year to date) due to changes in base pricing, customer and product mix, fuel and capacity surcharges and favorable currency movements. Excluding the impact of currency, export revenue per piece increased 14.6% (up 10.2%12.2% year to date).

Fuel Surcharges

The fuel surcharge ~~for~~we apply to international air services originating inside or outside the U.S. is largely indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel. The fuel surcharges for ground services originating outside the U.S. are indexed to fuel prices in the region or country where the shipment originates.

While fluctuations can be significant from period to period, fuel surcharges represent one of the many individual components of our market pricing strategy that impact our overall revenue and yield. Additional components include the mix of services sold, the base price, extra service charges and any pricing discounts offered. Total international fuel surcharge revenue increased by ~~$208~~$298 million for the third quarter ~~($553 million~~(up $1.0 billion year to date) ~~as a result of~~, driven primarily by increases in ~~fuel surcharge indices and volume growth,~~price per gallon as well as changes in ~~customer~~fuel surcharge rates as part of our pricing strategy. These increases were slightly offset by unfavorable currency movements and ~~product mix.~~

volume declines. We expect fuel surcharges will stabilize at current levels during the fourth quarter.

5553

Table of Contents

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~~year-over-year impact of transformation and other charges, increased in both the third quarter and ~~year-to-date periods. Pickup and delivery costs increased $113 million in the third quarter ($709 million~~ year to ~~date), primarily due to volume growth that drove additional third-party expense. Package sorting costs increased $38 million~~date. The increase for the ~~third quarter ($178 million year to date), also as a result~~year-to-date period includes the impact of ~~volume growth.~~

one additional operating day. The costs of operating our integrated international air and ground network increased ~~$290~~$343 million for the quarter (up $1.1 billion year to date), primarily due to higher fuel prices, which we expect to persist during the remainder of 2022.

Pickup and delivery costs decreased $86 million for the quarter (down $237 million year to date), other indirect costs decreased $67 million for the quarter (down $171 million year to date) and package sorting costs decreased slightly for the quarter and year to date as inflationary pressures were more than offset by favorable currency movements and volume declines. We expect inflationary pressures will persist for the remainder of the year.

Substantially all of our operations in Russia, Belarus and Ukraine remain suspended, which actions have not had a material impact on us. We are continuing to monitor the evolving impact of Russia’s invasion of Ukraine on the global economy and evaluating our long-term strategy in the region.

Operating Profit and Margin

As a result of the factors described above, operating profit decreased $54 million for the third quarter ~~($839~~(down $14 million year to date), with operating margin decreasing 150 basis points to 20.8% (down 110 basis points to 22.4% year to date). Excluding the year-over-year impact of transformation and other charges, adjusted operating profit decreased $104 million in the quarter (down $61 million year to date), while adjusted operating margin decreased 260 basis points to 20.9% (down 140 basis points to 22.6% year to date).

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Supply Chain Solutions


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2022			2021			$		%		2022			2021			$		%
Revenue (in millions):
Forwarding	$	2,162		$	2,625		$	(463)	(17.6)	%	$	7,140		$	7,006		$	134	1.9	%
Logistics	1,302			1,158			144		12.4	%	3,843			3,424			419		12.2	%
Freight	—			—			—		—	%	—			1,064			(1,064)		(100.0)	%
Other	524			473			51		10.8	%	1,617			1,258			359		28.5	%
Total Revenue	$	3,988		$	4,256		$	(268)	(6.3)	%	$	12,600		$	12,752		$	(152)	(1.2)	%
Operating Expenses (in millions):
Operating Expenses	$	3,538		$	3,818		$	(280)	(7.3)	%	$	11,164		$	11,486		$	(322)	(2.8)	%
Transformation Strategy Costs	(9)			(10)			1		(10.0)	%	(21)			(20)			(1)		5.0	%
Asset Impairment and Divestiture Charges	—			—			—		—	%	—			35			(35)		(100.0)	%
Adjusted Operating Expenses:	$	3,529		$	3,808		$	(279)	(7.3)	%	$	11,143		$	11,501		$	(358)	(3.1)	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	450		$	438		$	12	2.7	%	$	1,436		$	1,266		$	170	13.4	%
Adjusted Operating Profit	$	459		$	448		$	11	2.5	%	$	1,457		$	1,251		$	206	16.5	%
Operating Margin	11.3		%	10.3		%					11.4		%	9.9		%
Adjusted Operating Margin	11.5		%	10.5		%					11.6		%	9.8		%
Currency Benefit / (Cost) – (in millions)*:
Revenue							$	(92)									$	(191)
Operating Expenses							99										216
Operating Profit							$	7									$	25
* Amount represents the change in currency translation compared to the prior year.


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2022		2021		$		%		2022		2021		$		%
Transformation Strategy Costs (in millions):
Forwarding	$	1	$	—	$	1	N/A		$	9	6		$	3	50.0	%
Logistics	7		—		7		N/A		9		3		6		200.0	%
Freight	—		—		—		N/A		—		1		(1)		(100.0)	%
Other	1		10		(9)		(90.0)	%	3		10		(7)		(70.0)	%

Total Transformation Strategy Costs	$	9	$	10	$	(1)	(10.0)	%	$	21	$	20	$	1	5.0	%

Revenue

Total revenue for Supply Chain Solutions decreased $268 million in the third quarter (down $152 million year to date) as lower revenue in forwarding and truckload brokerage more than offset growth across many of our other businesses. Year to date, growth in Supply Chain Solutions was offset by the impact of divesting UPS Freight in the second quarter of 2021.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Forwarding revenue decreased for the third quarter but increased year to date:

•International airfreight volume and revenue declined in the third quarter, driven by ~~overall volume growth and higher jet fuel prices.~~

~~In addition to variability in usage and market prices,~~ the ~~manner in which we purchase fuel also influences the net~~ impact of ~~costs on our results. The majority~~lockdowns in Asia, lower customer demand and the market rates we charge for services. Year-to-date volume also declined but was fully offset by the impact 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 variabilityelevated market rates and demand-related surcharges in the ~~prices paid for fuel. Because~~first quarter.

•Ocean freight forwarding revenue decreased in the third quarter but increased year to date. For the quarter, the declines were driven by lower volume, particularly on the Asia to U.S. lane, and lower market rates. Year to date, these declines were fully offset by elevated market rates driven by market capacity constraints in the first half 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~~2022.

•Revenue in our ~~fuel surcharges, which can significantly affect our earnings either positively or negatively~~truckload brokerage business declined for the quarter and remained relatively flat year to date. The decline in the ~~short-term.~~

~~The remaining increase in operating expenses~~third quarter was driven by lower volumes and a reduction in market rates. Year to date, volume declines were largely offset by increases in rates as we executed within our strategic framework.

We expect that the market rates we charge for services within all our Forwarding businesses will remain lower during the fourth quarter.

Within Logistics, our healthcare operations experienced strong revenue growth for both the quarter and year to date, driven by pharmaceuticals, clinical trials and lab customers. Revenue in our mail services business increased for both the quarter and year to date, driven by rate increases, a favorable shift in product characteristics and, during the third quarter, volume from new customers. These increases were slightly offset by volume declines in both periods. Our other ~~indirect costs.~~distribution operations experienced revenue growth for both the quarter and year to date, driven by customer expansion, revenue quality initiatives and strong demand for warehousing services. We expect growth to continue within our Logistics businesses in the fourth quarter.

Revenue from the other businesses within Supply Chain Solutions increased for both the quarter and year to date, driven by rate increases and additional volume from service contracts with the U.S. Postal Service, and from the acquisition of Roadie in the fourth quarter of 2021. Additionally, revenue for services provided to the acquirer of UPS Freight under certain transition services agreements increased for the year-to-date period.

Operating Expenses

Total operating expenses in Supply Chain Solutions, and operating expenses excluding the year-over-year impact of transformation and other charges, decreased for the quarter and year to date. This included a decrease of $952 million in the year-to-date period due to the divestiture of UPS Freight in the second quarter of 2021.

Forwarding operating expenses decreased $462 million for the quarter (down $120 million year to date). Declines in the third quarter were driven by a reduction in purchased transportation expense resulting from lower volumes and market rates in truckload brokerage, international airfreight and ocean freight forwarding. Year to date, these decreases were partially offset by elevated rates in all our forwarding businesses during the first of half of 2022.

Logistics operating expenses increased $124 million for the quarter (up $359 million year to date) primarily resulting from increases in compensation and benefits expenses and third-party transportation costs as a result of business growth and inflationary pressures.

Expenses in the other businesses within Supply Chain Solutions increased for the quarter and year to date, largely driven by increased volume from the U.S. Postal Service and the acquisition of Roadie. Transportation and other costs incurred in providing transition services to the acquirer of UPS Freight increased year to date.

Operating Profit and Margin

As a result of the factors described above, operating profit increased ~~$85~~$12 million for the ~~third~~ quarter ~~(increased $1.0 billion~~(up $170 million year to date), with operating margin ~~decreasing 130~~increasing 100 basis points to ~~22.3% (increased 300~~11.3% (up 150 basis points to ~~23.5%~~11.4% year to date). Excluding the ~~year over year~~year-over-year impact of transformation and other charges, adjusted operating profit increased ~~$136~~$11 million infor the ~~third~~ quarter ~~(increased $1.0 billion~~(up $206 million year to date), ~~while~~with adjusted operating margin ~~decreased 30~~increasing 100 basis points to ~~23.5% (increased 280~~11.5% (up 180 basis points to ~~24.0%~~11.6% year to date).

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

~~Supply Chain Solutions~~Consolidated Operating Expenses
Three Months Ended September 30, Change Nine Months Ended
September 30, Change
2021 2020 $ % 2021 2020 $ %
Freight LTL Statistics:
Revenue (in millions) $ — $ 689 $ (689) N/M $ 881 $ 1,911 $ (1,030) (53.9) %
Revenue Per Hundredweight $ — $ 27.69 $ (27.69) N/M $ 29.93 $ 27.02 $ 2.91 10.8 %
Shipments (in thousands) — 2,371 N/M 2,829 6,667 (57.6) %
Shipments Per Day (in thousands) — 37.0 N/M 33.3 34.7 (4.0) %
Gross Weight Hauled (in millions of lbs) — 2,488 N/M 2,944 7,073 (58.4) %
Weight Per Shipment (in lbs) — 1,049 N/M 1,041 1,061 (1.9) %
Operating Days in Period — 64 85 192
Revenue (in millions):
Forwarding $ 2,625 $ 1,753 $ 872 49.7 % $ 7,006 $ 4,897 $ 2,109 43.1 %
Logistics 1,158 1,040 118 11.3 % 3,424 2,862 562 19.6 %
Freight — 870 (870) (100.0) % 1,064 2,360 (1,296) (54.9) %
Other 473 263 210 79.8 % 1,258 683 575 84.2 %
Total Revenue $ 4,256 $ 3,926 $ 330 8.4 % $ 12,752 $ 10,802 $ 1,950 18.1 %
Operating Expenses (in millions):
Operating Expenses $ 3,818 $ 3,627 $ 191 5.3 % $ 11,486 $ 10,087 $ 1,399 13.9 %
Transformation and Other Charges (10) (3) (7) 233.3 % 15 (12) 27 (225.0) %
Adjusted Operating Expenses: $ 3,808 $ 3,624 $ 184 5.1 % $ 11,501 $ 10,075 $ 1,426 14.2 %
Operating Profit (in millions) and Operating Margin:
Operating Profit $ 438 $ 299 $ 139 46.5 % $ 1,266 $ 715 $ 551 77.1 %
Adjusted Operating Profit $ 448 $ 302 $ 146 48.3 % $ 1,251 $ 727 $ 524 72.1 %
Operating Margin 10.3 % 7.6 % 9.9 % 6.6 %
Adjusted Operating Margin 10.5 % 7.7 % 9.8 % 6.7 %
Currency Benefit / (Cost) – (in millions)*:
Revenue $ 12 $ 121
Operating Expenses (29) (146)
Operating Profit $ (17) $ (25)
* Amount represents the change in currency translation compared to the prior year.


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2022		2021		$		%		2022		2021		$		%
Operating Expenses (in millions):
Compensation and benefits	$	11,506	$	11,148	$	358	3.2	%	$	34,480	$	33,958	$	522	1.5	%
Transformation and Other Charges	(15)		(33)		18		(54.5)	%	(71)		(164)		93		(56.7)	%
Adjusted Compensation and benefits	$	11,491	$	11,115	$	376	3.4	%	$	34,409	$	33,794	$	615	1.8	%

Repairs and maintenance	$	639	$	619	$	20	3.2	%	$	1,908	$	1,837	$	71	3.9	%
Depreciation and amortization	774		738		36		4.9	%	2,300		2,199		101		4.6	%
Purchased transportation	4,173		4,638		(465)		(10.0)	%	13,158		13,327		(169)		(1.3)	%
Fuel	1,530		950		580		61.1	%	4,447		2,672		1,775		66.4	%
Other occupancy	427		384		43		11.2	%	1,338		1,252		86		6.9	%
Other expenses	1,999		1,811		188		10.4	%	5,775		5,352		423		7.9	%
Total Other expenses	9,542		9,140		402		4.4	%	28,926		26,639		2,287		8.6	%
Transformation and Other Charges	(21)		(41)		20		(48.8)	%	(61)		(144)		83		(57.6)	%
Asset Impairment and Divestiture Charges	—		—		—		N/A		—		35		(35)		(100.0)	%
Adjusted Total Other expenses	$	9,521	$	9,099	$	422	4.6	%	$	28,865	$	26,530	2,335		8.8	%

Total Operating Expenses	$	21,048	$	20,288	$	760	3.7	%	$	63,406	$	60,597	$	2,809	4.6	%
Adjusted Total Operating Expenses	$	21,012	$	20,214	$	798	3.9	%	$	63,274	$	60,324	$	2,950	4.9	%

Currency (Benefit) / Cost - (in millions)*					$	(352)							$	(785)
* Amount represents the change in currency translation compared to the prior year.

Three Months Ended September 30, Change Nine Months Ended
September 30, Change
2021 2020 $ % 2021 2020 $ %
Transformation Strategy Costs (in millions):
Forwarding $ — $ 2 $ (2) (100.0) % $ 6 $ 7 $ (1) (14.3) %
Logistics — 1 (1) (100.0) % 3 5 (2) (40.0) %
Freight — — — N/A 1 — 1 N/A
Other 10 — 10 N/A 10 — 10 N/A
Total Transformation Strategy Costs $ 10 $ 3 $ 7 233.3 % $ 20 $ 12 $ 8 66.7 %

On April 30, 2021, we completed the previously announced divestiture of UPS Freight. Year to date, we recognized a pre-tax gain of $35 million related to this divestiture. See note 6 to the unaudited, consolidated financial statements for additional information.


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2022		2021		$		%		2022		2021		$		%
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs:
Compensation	$	7	$	9	$	(2)	(22.2)	%	$	31	$	23	$	8	34.8	%
Benefits	8		24		(16)		(66.7)	%	40		141		(101)		(71.6)	%

Other occupancy	—		—		—		N/A		—		3		(3)		(100.0)	%
Other expenses	21		41		(20)		(48.8)	%	61		141		(80)		(56.7)	%
Total Transformation Strategy Costs	$	36	$	74	$	(38)	(51.4)	%	$	132	$	308	$	(176)	(57.1)	%
Asset Impairment and Divestiture Charges:
Other gains	$	—	$	—	$	—	N/A		$	—	$	(35)	$	35	(100.0)	%
Total Adjustments to Operating Expenses	$	36	$	74	$	(38)	(51.4)	%	$	132	$	273	$	(141)	(51.6)	%

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

~~Revenue~~

~~Total revenue for Supply Chain Solutions increased $330 million in the third quarter ($2.0 billion year to date).~~

Forwarding revenue increased in the third quarter and year to date. In our international air freight business, revenue growth was driven by higher volume in the third quarter and year to date as a result of strong outbound demand from North America and Europe. Ongoing capacity surcharges and rate increases also contributed to revenue growth. Ocean freight forwarding revenue increased in the third quarter and year to date, primarily due to higher market rates. Revenue growth in our truckload brokerage business for the third quarter was driven by market rate and base pricing increases, slightly offset by a reduction in volume. Year to date, growth was driven by market rate increases and increased volume.

Within Logistics, our healthcare operations experienced strong revenue growth in the third quarter and year-to-date periods. Revenue in our mail services business declined in the third quarter as a result of lower volumes relative to the prior year, when we experienced a surge in e-commerce driven by the COVID-19 pandemic. Year to date, revenue increased as a result of volume growth, rate increases and a favorable shift in product characteristics.

As a result of the divestiture, UPS Freight revenue decreased $1.3 billion year to date. There was no UPS Freight revenue included in our third quarter 2021 results, compared with revenue of $870 million in the third quarter of 2020.

Revenue from the other businesses within Supply Chain Solutions increased during the third quarter and year to date, driven by growth in our logistics consulting services and by services provided to the acquirer of UPS Freight under certain transition services agreements.

~~Operating Expenses~~

~~Total operating expenses for Supply Chain Solutions, and operating expenses excluding the year over year impact of transformation and other charges, increased in the third quarter and year to date.~~

Forwarding operating expenses increased $746 million in the third quarter ($1.9 billion year to date). The increase was driven by purchased transportation expense, which increased $717 million in the quarter ($1.8 billion year to date). The increase was partly due to higher rates in our truckload brokerage and international air and ocean freight forwarding businesses driven by market supply constraints. Expenses also increased as a result of volume growth, primarily in our air and ocean freight forwarding businesses.

Logistics operating expenses increased $85 million in the third quarter ($442 million year to date), driven by purchased transportation expense in our healthcare operations as a result of business growth. Mail services contributed to the year to date increase as a result of volume growth in the first quarter and carrier rate increases.

UPS Freight operating expenses decreased $1.4 billion year to date. There were no operating expenses included in the third quarter of 2021, compared with expenses of $832 million in the third quarter of 2020.

Expense for the other businesses within Supply Chain Solutions increased in the third quarter and year to date, largely due to higher third party transportation expense in logistics consulting and transportation and other costs incurred under the transition services agreements with the acquirer of UPS Freight.

~~Operating Profit and Margin~~

As a result of the factors described above, operating profit increased $139 million in the third quarter ($551 million year to date), with operating margin increasing 270 basis points to 10.3% (increased 330 basis points to 9.9% year to date). Excluding the year over year impact of transformation and other charges and other gains, adjusted operating profit increased $146 million (increased $524 million year to date), with adjusted operating margin increasing 280 basis points to 10.5% (increased 310 basis points to 9.8% year to date).

~~Table of Contents~~

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

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

~~RESULTS OF OPERATIONS~~

~~Consolidated Operating Expenses~~
Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2021 2020 $ % 2021 2020 $ %
Operating Expenses (in millions):
Compensation and benefits $ 11,148 $ 11,077 $ 71 0.6 % $ 33,958 $ 32,006 $ 1,952 6.1 %
Transformation and Other Charges (33) (18) (15) 83.3 % (164) (111) $ (53) 47.7 %
Adjusted Compensation and benefits $ 11,115 $ 11,059 $ 56 0.5 % $ 33,794 $ 31,895 $ 1,899 6.0 %
Repairs and maintenance $ 619 $ 576 $ 43 7.5 % $ 1,837 $ 1,693 $ 144 8.5 %
Depreciation and amortization 738 677 61 9.0 % 2,199 1,986 213 10.7 %
Purchased transportation 4,638 3,937 701 17.8 % 13,327 10,584 2,743 25.9 %
Fuel 950 618 332 53.7 % 2,672 1,878 794 42.3 %
Other occupancy 384 376 8 2.1 % 1,252 1,114 138 12.4 %
Other expenses 1,811 1,614 197 12.2 % 5,352 4,824 528 10.9 %
Total Other expenses 9,140 7,798 1,342 17.2 % 26,639 22,079 4,560 20.7 %
Transformation and Other Charges (41) (26) (15) 57.7 % (109) (90) (19) 21.1 %
Adjusted Total Other expenses $ 9,099 $ 7,772 $ 1,327 17.1 % $ 26,530 $ 21,989 $ 4,541 20.7 %
Total Operating Expenses $ 20,288 $ 18,875 $ 1,413 7.5 % $ 60,597 $ 54,085 $ 6,512 12.0 %
Adjusted Total Operating Expenses $ 20,214 $ 18,831 $ 1,383 7.3 % $ 60,324 $ 53,884 $ 6,440 12.0 %
Currency (Benefit) / Cost - (in millions)* $ 67 $ 497
* Amount represents the change in currency translation compared to the prior year.

Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2021 2020 $ % 2021 2020 $ %
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs:
Compensation $ 9 $ 9 $ — — % $ 23 $ 24 $ (1) (4.2) %
Benefits 24 9 15 166.7 % 141 87 54 62.1 %
Other occupancy — 2 (2) (100.0) % 3 6 (3) (50.0) %
Other expenses 41 24 17 70.8 % 141 84 57 67.9 %
Total Transformation Strategy Costs $ 74 $ 44 $ 30 68.2 % $ 308 $ 201 $ 107 53.2 %
Adjustments to assets held for sale:
Other gains $ — $ — $ — N/A $ (35) $ — $ (35) N/A
Total Adjustments to Operating Expenses $ 74 $ 44 $ 30 68.2 % $ 273 $ 201 $ 72 35.8 %

Compensation and Benefits

Total compensation and benefits, and total compensation and benefits excluding the ~~year over year~~year-over-year impact of transformation and other charges, increased for the quarter and year to date.

Total compensation costs, and total compensation costs excluding transformation and other charges, increased $177 million and $179 million, respectively, for the quarter. For the year-to-date period, total compensation costs and total compensation costs excluding transformation and other charges, increased $107 million and $99 million, respectively. U.S. Domestic direct labor costs increased for both the quarter and year to date, driven by increases in wage rates and cost of living adjustments for our union workforce, as well as additional headcount in our line-haul operations. These increases were partially offset by a reduction in labor hours due to decreases in volume and productivity improvements. Management compensation increased for both the quarter and year to date due to increases in part-time management wages and headcount, and higher incentive compensation, partially offset by a reduction in commissions. The divestiture of UPS Freight in the second quarter of 2021 reduced compensation costs for the year-to-date period by $328 million.

Benefits costs increased $181 million for the quarter (up $415 million year to date). Excluding the year-over-year impact of transformation and other charges, adjusted benefits costs increased $197 million for the quarter (up $516 million year to date). The primary drivers were:

•Health and welfare costs increased $38 million for the quarter (up $137 million year to date), driven by increased contributions to multiemployer plans as a result of contractual rate increases, partially offset by a reduction in expense for company-sponsored plans. For the year-to-date period, the divestiture of UPS Freight reduced expense by $65 million.

•Pension and other postretirement benefits costs increased by $85 million for the quarter (up $105 million year to date), due to higher service costs for company-sponsored plans and increased contributions to multiemployer plans as a result of contractually-mandated contribution increases. Year to date, the divestiture of UPS Freight reduced expense by $46 million.

•Vacation, excused absence, payroll taxes and other costs increased $63 million for the quarter (up $194 million year to date), primarily due to wage growth.

Repairs and Maintenance

Expense increased for both the quarter and year to date, due to an increase in planned building maintenance as well as increases in the cost of materials and supplies. We also incurred higher costs for aircraft engine and airframe maintenance in both the quarter and year-to-date periods due to the timing of scheduled maintenance events.

Depreciation and Amortization

Depreciation and amortization expense increased as a result of facility automation and expansion projects coming into service, investments in internally developed software and the amortization of acquired intangible assets.

Purchased Transportation

Third-party transportation expense charged to us by air, ocean and ground carriers decreased for both the quarter and year-to-date periods. The changes were primarily driven by:

•Supply Chain Solutions expense decreased by $387 million for the quarter, resulting from volume declines and lower market rates paid for services in our international air and ocean freight and truckload brokerage businesses. This was partially offset by increases in our logistics operations, including healthcare, driven by business growth. Year to date, Supply Chain Solutions expense decreased by $62 million. The divestiture of UPS Freight resulted in a decrease of $260 million that was partially offset by an increase of $198 million in our forwarding businesses due to elevated market rates in the first half of the year.

•International Package expense decreased by $51 million for the third quarter (down $39 million year to date), as fuel surcharge increases were more than offset by favorable currency movements and ~~year-to-date periods.~~lower volumes.

•U.S. Domestic expense decreased $27 million for the third quarter (down $68 million year to date), driven by a reduction in ground volume handled by third-party carriers and network optimization initiatives.

5958

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

~~Total compensation costs decreased $108 million or 1.6% in the~~ ~~third~~ ~~quarter.~~ Excluding the year over year impact of transformation and other charges, adjusted total compensation costs also decreased $108 million in the quarter, driven by the impact of divesting UPS Freight during the second quarter of 2021, which reduced year-over-year compensation costs by $252 million. The remaining change of $144 million was attributable to increases in International Package operations which experienced higher labor costs due to volume growth as well as the effects last year of operational disruptions as a result of COVID-19 restrictions. Management compensation also increased, primarily as a result of higher incentive compensation and commission payments. Direct labor costs in our U.S. Domestic business remained flat for the third quarter as increases in wage rates were offset by lower volume and productivity improvements.

~~Year to date, total compensation costs and adjusted total compensation costs~~ ~~increased $900 million and~~ $899 million, respectively. The increase was partially due to first-quarter growth in headcount and hours in our U.S. Domestic business when COVID-19 related volume was not present in the comparative period. Volume growth also drove additional year-to-date compensation costs in our International Package operations, while higher incentive compensation and commission payments led to an increase in management compensation. These increases were partially offset by the impact of divesting UPS Freight, which resulted in lower year-over-year compensation costs of $408 million.

~~Benefits c~~osts increased $179 million or 4.0% ($1.0 billion or 7.7% year to date). Excluding the year over year impact of transformation and other charges, adjusted benefits costs increased $164 million or 3.7% ($1.0 billion or 8.0% year to date):

•Health and welfare costs increased $117 million ($421 million year to date), primarily as a result of increased contributions to multiemployer plans driven by the overall increase in the size of the workforce and contractual rate increases.

•Pension and other postretirement benefits costs increased $16 million ($332 million year to date) due to increased contributions to multiemployer plans as a result of contractually-mandated contribution increases and the overall increase in the size of the workforce. This was partially offset by a reduction in service costs for company-sponsored plans due to favorable changes in discount rates at the interim measurement dates for certain plans. Year to date, service costs contributed to the overall increase in pension and other postretirement benefits costs as a result of lower discount rates at the annual measurement date.

•Workers' compensation costs increased $15 million ($79 million year to date) driven by increased claim counts that were partially offset by a reduction in activity resulting from the divestiture of UPS Freight.

•Vacation, excused absence, payroll taxes and other costs increased $16 million ($167 million year to date), driven by wage growth. Year to date, increases were also driven by growth in the overall size of the workforce, as well as an additional discretionary payment to certain part-time employees.

~~Repairs and Maintenance~~

We incurred higher costs for aircraft engine maintenance for the quarter and year-to-date periods, primarily due to the increase in operating activity and the replacement of parts on certain types of aircraft. Routine repairs and maintenance for buildings and facilities and maintenance costs for our other transportation equipment also increased.

~~Depreciation and Amortization~~

Depreciation and amortization expense increased in the quarter and year-to-date periods as a result of investments in facility automation projects, as well as growth in the size of our vehicle and aircraft fleets and additional investments in internally developed software.

~~Purchased Transportation~~

~~The overall increase in third-party transportation expense charged to us by air, ocean and ground carriers for the quarter and year-to-date periods was primarily driven by:~~

•Supply Chain Solutions expense increased $581 million ($1.7 billion year to date), primarily due to volume growth and rate increases in our international air freight, ocean freight and truckload brokerage businesses, partially offset by the impact of divesting UPS Freight in the second quarter, which reduced third party transportation costs by $263 million. Year to date, all businesses within this segment, with the exception of UPS Freight, contributed to the growth in expense as a result of both volume growth and higher market rates.

~~Table of Contents~~

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

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

~~RESULTS OF OPERATIONS~~

•International Package expense increased $125 million ($557 million year to date), primarily due to additional volume being handled by third-party pickup and delivery services in Europe and Asia, as well as unfavorable currency movements.

•U.S. Domestic Package expense decreased $5 million (increased $273 million year to date), driven by decreases in SurePost and rail volumes in the quarter that drove reductions in expense. These reductions were offset by increases in third party carrier cost driven by our ground network enhancements, as well as costs previously reported within UPS Freight that relate to our GFP product. Year to date, expense increased primarily as a result of additional third party carrier costs driven by our ground network enhancements.

Fuel

The increase in fuel expense for both the quarter and year-to-date periods was primarily driven by higher prices for jet fuel, diesel and ~~gasoline, as well as~~gasoline. Market prices and the ~~impact~~manner in which we purchase fuel influence our costs. The majority of ~~increased aircraft block hours.~~our fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the indices are correlated, each index may respond differently to changes in underlying prices, which in turn can drive variability in our costs.

Other Occupancy

Other occupancy expense ~~and other occupancy expense excluding the year over year impact of transformation and other charges,~~ increased infor both the quarter and ~~year-to-date periods due~~year to date as a result of additional operating facilities coming into ~~service. Year to date, we also incurred~~service, higher ~~weather-related expenses.~~utilities costs and increases in rental rates.

Other Expenses

Other expenses, and other expenses excluding the ~~year over year~~year-over-year impact of transformation and other charges, increased infor both the quarter and year to date, primarily as a result ~~of the following:~~of:

•~~Customer claims~~An increase of $45 million for the quarter ($115 million increase year to date) in commissions paid for certain online shipments.

•An increase of $38 million for the quarter ($61 million increase year to date) in self-insured automobile liability expense, driven by increases in the frequency and severity of claims.

•Hosted software application fees and other technology costs increased ~~$43~~$26 million in the ~~third~~ quarter ~~($97~~(up $78 million year to date), ~~driven by changes to~~in support of ongoing investments in our ~~claims policy, which resulted in higher claims for lost packages. The year-to-date increase was also impacted by volume growth.~~digital transformation.

•~~Taxes~~Professional fees increased ~~$40~~$34 million in the ~~third~~ quarter ~~($118~~(up $57 million year to date)~~, primarily due~~ as a result of an increase in services provided to ~~the reinstatement of Federal Excise Tax following a temporary suspension under the Coronavirus Aid, Relief and Economic Security ("CARES") Act during 2020.~~various business units.

•Other ~~operational expenses, including vehicle~~increases for the quarter and ~~equipment rentals, increased $14 million in the third quarter ($141 million~~ year to ~~date), driven by continued business growth.~~

•The cost of business services that support our operating segments increased $10 million in the third quarter ($82 million year to date), driven by business growth and the expansion of services provided.

•~~Other increases~~date included employee-related expenses, payment processing fees ~~information technology expenses~~ and ~~the cost of goods provided under transitional service agreements~~costs to ~~the acquirer of UPS Freight.~~lease and purchase additional vehicles for our network. These increases were partially offset by ~~reductions~~favorable developments in ~~self-insured automobile liability claims due to improvements in claims experience,~~certain legal and tax contingencies, a reduction in ~~our allowance for credit losses~~asset impairment charges and ~~reductions~~a reduction in ~~the purchase of COVID-related safety and cleaning supplies.~~

customer claims.

6159

Table of Contents

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 months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in millions):


		Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change					Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
		2021		2020		$		%		2021		2020		$		%			2022		2021		$		%		2022		2021		$		%
Investment Income and Other	Investment Income and Other	$	274	$	338	$	(64)	(18.9)	%	$	4,235	$	1,011	$	3,224	318.9	%	Investment Income and Other	$	333	$	274	$	59	21.5	%	$	981	$	4,235	$	(3,254)	(76.8)	%
Defined Benefit Plan Mark-to-Market Gain		—		—		—		N/A		(3,290)		—		(3,290)		N/A
Defined Benefit Plan (Gains) and Losses																		Defined Benefit Plan (Gains) and Losses	—		—		—		N/A		(33)		(3,290)		3,257		(99.0)	%
Adjusted Investment Income and Other	Adjusted Investment Income and Other	$	274	$	338	$	(64)	(18.9)	%	$	945	$	1,011	$	(66)	(6.5)	%	Adjusted Investment Income and Other	$	333	$	274	$	59	21.5	%	$	948	$	945	$	3	0.3	%

Interest Expense	Interest Expense	(177)		(176)		(1)		0.6	%	(521)		(526)		5		(1.0)	%	Interest Expense	(177)		(177)		—		0.0	%	(522)		(521)		(1)		0.2	%
Total Other Income and (Expense)	Total Other Income and (Expense)	$	97	$	162	$	(65)	(40.1)	%	$	3,714	$	485	$	3,229	N/M		Total Other Income and (Expense)	$	156	$	97	$	59	60.8	%	$	459	$	3,714	$	(3,255)	(87.6)	%
Adjusted Other Income and (Expense)	Adjusted Other Income and (Expense)	$	97	$	162	$	(65)	(40.1)	%	$	424	$	485	$	(61)	(12.6)	%	Adjusted Other Income and (Expense)	$	156	$	97	$	59	60.8	%	$	426	$	424	$	2	0.5	%

Investment Income and Other

~~The decrease in investment income and other for the third quarter was primarily due to a decrease in other pension income and losses from fair value changes in certain non-current investments.~~

Investment income and other increased ~~$3.2 billion year~~$59 million for the quarter, driven by higher yields on higher average invested balances, changes in the fair value of certain non-current investments and an increase in other pension income partially offset by foreign currency losses.

Year to date, ~~inclusive of a~~investment income and other decreased $3.3 billion due to year-over-year changes in defined benefit plan adjustments. We recognized a curtailment gain of $33 million dollars in 2022, compared to a $3.3 billion mark-to-market gain ~~recognized~~ in ~~the first quarter of~~ 2021. Excluding the impact of ~~this mark-to-market gain, year-to-date~~these defined benefit plan gains, adjusted investment income and other ~~decreased $66~~increased $3 million, ~~primarily due to~~driven by higher yields on higher average invested balances and year-to-date foreign currency gains, that were largely offset by changes in the fair value of certain non-current investments and a decrease in other pension ~~income and foreign currency losses, offset by net gains from fair value changes in certain non-current investments.~~ income.

Other pension income ~~includes~~increased $12 million for the quarter (down $7 million year to date) due to the following:

•Lower expected returns on pension assets ~~net of interest cost on projected benefit obligations~~for the quarter and ~~prior service costs.~~

•~~Expected returns on pension assets decreased~~year-to-date periods as a result of a reduction in ~~the expected~~our rate of return assumption, partially o~~ffset~~offset by a higher asset base due to ~~discretionary~~ contributions and positive asset returns in ~~2020.~~2021.

•P~~ension~~Pension interest cost ~~decreased~~was flat for the quarter, due to ~~a reduction~~an increase in projected benefit obligations ~~following interim remeasurements,~~and changes in demographic assumptions that were offset by the impact of lower discount ~~rates at~~rates. Interest cost increased year to date, due to the ~~annual measurement date~~impact of interim remeasurements of certain plans in 2021 on pension benefit obligations and ~~a reduction in prior~~discount rates.

•Prior service ~~cost.~~cost decreased for the quarter and year-to-date periods as the cost base from certain plan amendments became fully amortized during 2021.

Interest Expense

~~The increase in~~Interest expense was flat for both the quarter and year-to-date periods as higher effective interest ~~expense for the third quarter was primarily due to lower capitalization of interest,~~rates on floating rate debt were largely offset by lower average outstanding debt balances.

~~Interest~~ Foreign currency exchange rates also favorably impacted interest expense ~~decreased year to date due to lower average outstanding debt balances and lower effective interest rates~~ on ~~floating rate debt and commercial paper, partially offset by lower capitalization of interest.~~foreign currency-denominated debt.

6260

Table of Contents

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 our income tax expense and effective tax rate for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in millions):


		Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change					Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
		2021			2020			$		%		2021			2020			$		%			2022			2021			$		%		2022			2021			$		%
Income Tax Expense	Income Tax Expense	$	664		$	568		$	96	16.9	%	$	2,836		$	1,442		$	1,394	96.7	%	Income Tax Expense	$	685		$	664		$	21	3.2	%	$	2,263		$	2,836		$	(573)	(20.2)	%
Income Tax Impact of:	Income Tax Impact of:																					Income Tax Impact of:
Defined Benefit Plan Mark-to-Market Gain		—			—			—		N/A		(788)			—			(788)		N/A
Transformation Strategy and Other Charges		20			11			9		81.8	%	68			50			18		36.0	%
Transformation Strategy Costs																						Transformation Strategy Costs	9			20			(11)		(55.0)	%	31			76			(45)		(59.2)	%
Asset Impairment and Divestiture Charges																						Asset Impairment and Divestiture Charges	—			—			—		N/A		—			(8)			8		(100.0)	%
Defined Benefit Plan (Gains) and Losses																						Defined Benefit Plan (Gains) and Losses	—			—			—		N/A		(9)			(788)			779		(98.9)	%
Adjusted Income Tax Expense	Adjusted Income Tax Expense	$	684		$	579		$	105	18.1	%	$	2,116		$	1,492		$	624	41.8	%	Adjusted Income Tax Expense	$	694		$	684		$	10	1.5	%	$	2,285		$	2,116		$	169	8.0	%

Effective Tax Rate	Effective Tax Rate	22.2		%	22.5		%					22.4		%	23.5		%					Effective Tax Rate	21.0		%	22.2		%					21.8		%	22.4		%
Adjusted Effective Tax Rate	Adjusted Effective Tax Rate	22.3		%	22.5		%					22.0		%	23.6		%					Adjusted Effective Tax Rate	21.0		%	22.3		%					21.9		%	22.0		%

For additional information on our income tax expense and effective tax rate, see note 1716 to the unaudited, consolidated financial ~~statements included in this report.~~statements.

6361

Table of Contents

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 30, ~~2021,~~2022, we had ~~$10.6~~$11.4 billion in cash, cash equivalents and marketable securities. We believe that these positions, expected cash from operations, access to commercial paper programs and capital markets and other available liquidity options will be adequate to fund our ~~operating~~material short- and long-term cash requirements, including our business operations, planned capital expenditures and pension contributions, transformation strategy costs, debt obligations and planned shareowner returns. We regularly evaluate opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund operations. We ~~intend to~~ deploy a disciplined and balanced approach to capital allocation, including returns to shareowners through dividends and share repurchases.

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,					Nine Months Ended September 30,
		2021		2020			2022		2021
Net income	Net income	$	9,797	$	4,690	Net income	$	8,095	$	9,797
Non-cash operating activities (a)	Non-cash operating activities (a)	1,669		4,093		Non-cash operating activities (a)	4,439		1,669
Pension and postretirement benefit plan contributions (company-sponsored plans)	Pension and postretirement benefit plan contributions (company-sponsored plans)	(331)		(1,307)		Pension and postretirement benefit plan contributions (company-sponsored plans)	(2,106)		(331)

Hedge margin receivables and payables	Hedge margin receivables and payables	136		(176)		Hedge margin receivables and payables	771		136
Income tax receivables and payables	Income tax receivables and payables	235		458		Income tax receivables and payables	(38)		235
Changes in working capital and other non-current assets and liabilities	Changes in working capital and other non-current assets and liabilities	255		1,461		Changes in working capital and other non-current assets and liabilities	(339)		255
Other operating activities	Other operating activities	—		64		Other operating activities	(50)		—
Net cash from operating activities	Net cash from operating activities	$	11,761	$	9,283	Net cash from operating activities	$	10,772	$	11,761

___________________

(a)Represents depreciation and amortization, gains and losses on derivative transactions and foreign currency exchange, deferred income taxes, allowances for expected credit losses, amortization of operating lease assets, pension and postretirement benefit plan (income) expense, stock compensation expense, changes in casualty self-insurance reserves, goodwill and other asset impairment charges and other non-cash items.

Net cash from operating activities ~~increased $2.5 billion year to date, and was impacted by~~decreased $989 million for the ~~following:~~2022 period, primarily due to:

•~~Contributions~~Higher contributions to our company-sponsored pension and U.S. postretirement medical benefit plans, ~~totaled $331 million during 2021 compared to $1.3~~driven by $1.9 billion in ~~2020. There have been no~~ discretionary contributions to our qualified ~~company-sponsored~~ U.S. pension plans. There were no discretionary contributions to these plans ~~during 2021 ($1.0 billion year to date~~ in ~~2020).~~2021.

•~~Our~~An unfavorable change in working capital, driven by the timing of payroll and other compensation items and vendor payments, as well as the settlement of duties and taxes on behalf of our customers.

•A reduction in income taxes payable due to the timing of tax payments relative to accruals.

These impacts were partially offset by an increase in our net hedge margin collateral position ~~increased by $312 million~~ due to favorable changes in the fair value of derivative contracts used in our currency ~~and interest rate~~ hedging programs.

•~~Changes in our working capital, comprised of:~~

◦~~An increase in accounts receivable within our Supply Chain Solutions businesses, due to volume and revenue growth.~~

◦~~Increases in accounts payable resulting from business growth and the timing of duty and tax settlements.~~

◦~~A reduction in compensation-related items, which included the impact of deferring approximately $724 million of employer payroll taxes under the CARES Act in the prior year.~~

•~~Income taxes payable decreased due to expected refunds and payments.~~

As part of our ongoing efforts to improve our working capital efficiency, certain financial institutions offer a Supply Chain Finance ("SCF") program to certain of our suppliers. We agree to commercial terms with our suppliers, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program. Suppliers issue invoices to us based on the agreed-upon contractual terms. If they participate in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, to sell to the financial institutions. Our suppliers’ voluntary inclusion of invoices in the SCF program has no bearing on our payment terms. No guarantees are provided by us under the SCF program. We have no economic interest in a supplier’s decision to participate, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program.

Amounts due to our suppliers that participate in the SCF program are included in Accounts payable in our consolidated balance sheets. We have been informed by the participating financial institutions that as of September 30, 2022 and 2021, suppliers sold them $690 and $462 million, respectively, of our outstanding payment obligations. Amounts due to suppliers that participate in the SCF program may be reflected incash flows from operating activities or cash flows from investing activities in our consolidated statements of cash flows. The amounts settled through the SCF program were approximately $1.3 billion and $953 million for the nine months ended September 30, 2022 and 2021, respectively.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Amounts due to our suppliers that participate in the SCF program are included in accounts payable in our consolidated balance sheets. We have been informed by the participating financial institutions that as of September 30, 2021 and 2020, suppliers sold them $462 and $595 million, respectively, of our outstanding payment obligations. Amounts due to suppliers that participate in the SCF program may be reflected in cash flows from operating activities or cash flows from investing activities in our consolidated statements of cash flows. Amounts settled through the SCF program totaled approximately $953 and $913 million for the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, ~~2021,~~2022, approximately ~~$3.4~~$3.3 billion of our total worldwide holdings of cash, cash equivalents and marketable securities were held by foreign subsidiaries. The amount of cash, cash equivalents and marketable securities held by our U.S. and foreign subsidiaries fluctuates throughout the year due to a variety of factors, including the timing of cash receipts and disbursements in the normal course of business. Cash provided by operating activities in the U.S. iscontinues to be our primary source of funds to finance domestic operating needs, capital expenditures, share repurchases, pension contributions and dividend payments to shareowners. All cash, cash equivalents and marketable securities held by foreign subsidiaries are generally available for distribution to the U.S. without any U.S. federal income taxes. Any such distributions may be subject to foreign withholding and U.S. state taxes. When amounts earned by foreign subsidiaries are expected to be indefinitely reinvested, no accrual for taxes is provided.

6563

Table of Contents

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,							Nine Months Ended September 30,
		2021			2020				2022			2021
Net cash used in investing activities	Net cash used in investing activities	$	(1,600)		$	(3,106)		Net cash used in investing activities	$	(2,408)		$	(1,600)

Capital Expenditures:	Capital Expenditures:							Capital Expenditures:
Buildings, facilities and plant equipment	Buildings, facilities and plant equipment	$	(1,089)		$	(1,615)		Buildings, facilities and plant equipment	$	(937)		$	(1,089)
Aircraft and parts	Aircraft and parts	(706)			(667)			Aircraft and parts	(468)			(706)
Vehicles	Vehicles	(379)			(368)			Vehicles	(382)			(379)
Information technology	Information technology	(396)			(569)			Information technology	(491)			(396)
		$	(2,570)		$	(3,219)
Total Capital Expenditures								Total Capital Expenditures	$	(2,278)		$	(2,570)

Capital Expenditures as a % of revenue	Capital Expenditures as a % of revenue	3.7		%	5.4		%	Capital Expenditures as a % of revenue	3.1		%	3.7		%

Other Investing Activities:	Other Investing Activities:							Other Investing Activities:
Proceeds from disposal of businesses, property, plant and equipment	Proceeds from disposal of businesses, property, plant and equipment	$	870		$	10		Proceeds from disposal of businesses, property, plant and equipment	$	12		$	870
Net change in finance receivables	Net change in finance receivables	$	28		$	24		Net change in finance receivables	$	23		$	28
Net (purchases), sales and maturities of marketable securities	Net (purchases), sales and maturities of marketable securities	$	60		$	107		Net (purchases), sales and maturities of marketable securities	$	(2)		$	60
Cash paid for business acquisitions, net of cash and cash equivalents acquired	Cash paid for business acquisitions, net of cash and cash equivalents acquired	$	(12)		$	(13)		Cash paid for business acquisitions, net of cash and cash equivalents acquired	$	(106)		$	(12)
Other investing activities	Other investing activities	$	24		$	(15)		Other investing activities	$	(57)		$	24

We have commitments for the purchase of aircraft, vehicles, equipment and real estate to provide for the replacement of existing capacity and anticipated future growth. Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions. Our current investment program anticipates investments in technology initiatives and enhanced network capabilities, including over $1 billion of projects to support our environmental sustainability goals in 2022. It also provides for the maintenance of buildings, facilities and plant equipment ~~as well as investments in technology initiatives~~ and ~~additional network capabilities.~~replacement of certain aircraft within our fleet. We currently expect that our capital expenditures will betotal approximately ~~$4.2~~$5.0 billion in ~~2021.~~2022, of which approximately 50 percent will be allocated to expansion projects. Our strategic decision to lease rather than purchase certain facilities drove a reduction in our expected capital expenditures.

~~Capital~~Total capital expenditures decreased for the 2022 period, primarily due to:

•Spending on buildings, facilities and plant equipment ~~decreased~~ in our global small package business decreased as ~~we reduced spending on facility expansion~~supply chain disruptions resulted in delays in certain projects. ~~Capital spending on aircraft increased~~

•Aircraft expenditures decreased due to ~~increases in final~~fewer payments associated with the delivery of aircraft, ~~partially~~slightly offset by ~~reductions~~increases in contract deposits on open aircraft orders. ~~Capital spending on information~~

•Information technology ~~decreased~~expenditures increased due to ~~fewer technology-related~~additional deployments of technology equipment and capitalized software projects.

Proceeds from ~~the~~ disposal of businesses, property, plant and equipment ~~increased as a result of the completion of~~decreased, driven by the divestiture of ~~our~~ UPS Freight ~~business~~for cash proceeds of $848 million in the second quarter of ~~2021 for cash proceeds of $848 million. The proceeds were used to reduce outstanding indebtedness.~~2021.

~~The net change in finance receivables was primarily due to reductions in outstanding balances within 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.

~~Cash~~The increase in cash paid for business acquisitions in ~~2021 and 2020 related~~2022 was primarily due to the acquisition of ~~area franchise rights~~Delivery Solutions and the purchase of additional development areas for The UPS ~~Store.~~Store relative to the 2021 period. Other investing activities were impacted by changes in our non-current investments, purchase contract deposits and various other items.

6664

Table of Contents

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 were as follows (amounts in millions, except per share data):


		Nine Months Ended September 30,							Nine Months Ended September 30,
		2021			2020				2022		2021
Net cash used in financing activities	Net cash used in financing activities	$	(5,856)		$	(2,556)		Net cash used in financing activities	$	(7,475)	$	(5,856)
Share Repurchases:	Share Repurchases:							Share Repurchases:
Cash expended for shares repurchased		(500)			(224)
Cash paid to repurchase shares								Cash paid to repurchase shares	(2,194)		(500)
Number of shares repurchased	Number of shares repurchased	(2.6)			(2.1)			Number of shares repurchased	(11.6)		(2.6)
Shares outstanding at period end	Shares outstanding at period end	869			864			Shares outstanding at period end	865		869
Percent increase (decrease) in shares outstanding		0.5		%	0.8		%
Dividends:	Dividends:							Dividends:
Dividends declared per share	Dividends declared per share	$	3.06		$	3.03		Dividends declared per share	$	4.56	$	3.06
Cash expended for dividend payments		$	(2,578)		$	(2,528)
Cash paid for dividends								Cash paid for dividends	$	(3,842)	$	(2,578)
Borrowings:	Borrowings:							Borrowings:
Net borrowings (repayments) of debt principal	Net borrowings (repayments) of debt principal	$	(2,613)		$	333		Net borrowings (repayments) of debt principal	$	(1,124)	$	(2,613)
Other Financing Activities:	Other Financing Activities:							Other Financing Activities:
Cash received for common stock issuances	Cash received for common stock issuances	$	196		$	214		Cash received for common stock issuances	$	198	$	196
Other financing activities	Other financing activities	$	(361)		$	(351)		Other financing activities	$	(513)	$	(361)
Capitalization:	Capitalization:							Capitalization:
Total debt outstanding at period end	Total debt outstanding at period end	22,106			25,718			Total debt outstanding at period end	20,350		22,106
Total shareowners’ equity at period end	Total shareowners’ equity at period end	12,057			5,606			Total shareowners’ equity at period end	16,988		12,057
Total capitalization	Total capitalization	$	34,163		$	31,324		Total capitalization	$	37,338	$	34,163

We repurchased 11.6 and 2.6 million shares of class B common stock for $2.2 billion and $500 million under our stock repurchase program during the ~~three and~~ nine months ended September 30, ~~2021.~~2022 and 2021, respectively. We ~~repurchased a~~anticipate our share repurchases will total at least $3.0 billion for all of 2.1 million shares of class A and class B common stock for $217 million in the prior year-to-date period ($224 million in repurchases is reported on the statement of cash flows due to timing of settlements).2022. For additional information on our share repurchase activities, see note 1312 to the unaudited, consolidated financial ~~statements included~~statements.

We increased our quarterly cash dividend to $1.52 per share in ~~this report.~~

2022, compared to $1.02 in 2021. The declaration of dividends is subject to the discretion of the Board and depends on various factors, including our net income, financial condition, cash requirements, future prospects and other relevant factors. As previously disclosed, we expect to continue paying regular cash dividends, with a targeted dividend payout ratio, beginning in 2022, of approximately 50% of our prior year's adjusted net income. We increased our quarterly cash dividend payment to $1.02 per share in 2021, compared to $1.01 in 2020.

~~Year-to-date~~There were no issuances of debt ~~consisted of borrowings under our commercial paper program that were repaid~~ during the nine months ended September 30, ~~2021.~~2022. Repayments of debt ~~in the year-to-date period include~~included our $600 million 2.350% senior notes, ~~totaling $2.6 billion, commercial paper~~our $400 million floating rate senior notes and scheduled principal payments on our finance lease obligations. In the prior year-to-date period, issuances of debt consisted ~~primarily~~ of ~~fixed-rate senior notes of varying maturities totaling $3.5 billion, as well as~~ borrowings under our commercial paper program. Repayments of debt included ~~$990 million~~$2.6 billion of fixed and floating rate senior notes, commercial paper and scheduled principal payments on our finance lease obligations.

~~We have $2.0 billion and $2.3~~As of September 30, 2022, we had $1.0 billion of fixed ~~and floating~~ rate senior notes outstanding that ~~mature~~matured this year. We repaid these notes at maturity in October 2022 ~~and 2023, respectively. We currently intend to repay this debt at maturity.~~with cash from operations. We consider the overall fixed and floating interest rate mix of our portfolio and the related overall cost of borrowing when planning for future issuances and non-scheduled repayments of debt.

The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. As of September 30, 2022 and 2021, we had no outstanding balances under our commercial paper programs.

Cash flows from other financing activities were largely attributable to the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards. Cash outflows for this purpose were $514 and $357 million for the nine months ended September 30, 2022 and 2021, respectively. The increase was driven by changes in required repurchase amounts.

Except as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, 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.

Table of Contents

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
2021
USD $ — $ — $ 199 $ 199 0.05 %
Total $ —

~~As of September 30, 2021, we had no outstanding balances under our U.S. and European commercial paper programs.~~

Cash flows for other financing activities were driven by the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards. Cash outflows were $357 and $339 million in the first nine months of 2021 and 2020, respectively. The increase was driven by changes in payment levels for certain of our awards.

Sources of Credit

See note 109 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.

Contractual Commitments

There have been no material changes to the contractual commitments described in Part II, Item 7 inof our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, except as described below.

~~We have~~Purchase commitments represent contractual ~~obligations~~agreements to purchase assets, goods or services that are legally binding, including contracts for aircraft, construction of new or expanded facilities and ~~commitments~~orders for ~~purchases of aircraft, vehicles~~technology equipment and technology equipment; and building and leasehold improvements. In the third quarter of 2021, we increased our projected capital expenditures by $0.2 billion for the year, including spending on technology-related projects, and renegotiated the timing of delivery of certain vehicles and aircraft.vehicles. We also have ~~contractual~~ commitments related to pending business ~~acquisitions.~~acquisitions and investments.

~~Additionally, we have contractual obligations and commitments under finance leases. During the quarter, it became reasonably certain that we would exercise a purchase option on a leased property.~~ The following table summarizes the expected cash outflows to satisfy our total purchase commitments, ~~and finance leases,~~ inclusive of these changes, as of September 30, ~~2021~~2022 (in millions):


Commitment Type	Commitment Type	2021		2022		2023		2024		2025		After 2025		Total		Commitment Type	2022		2023		2024		2025		2026		After 2026		Total
Purchase Commitments(1)	Purchase Commitments(1)	$	1,929	$	1,923	$	646	$	280	$	93	$	111	$	4,982	Purchase Commitments(1)	$	2,513	$	2,405	$	1,285	$	959	$	237	$	68	$	7,467
Finance Leases		166		138		58		35		30		195		622
Total	Total	$	2,095	$	2,061	$	704	$	315	$	123	$	306	$	5,604	Total	$	2,513	$	2,405	$	1,285	$	959	$	237	$	68	$	7,467

(1)Purchase commitments for ~~2021~~2022 include amounts related to pending business ~~acquisitions.~~

~~Guarantees~~acquisitions and ~~Other Off-Balance Sheet Arrangements~~

Except as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, 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.investments.

Legal Proceedings and Contingencies

See note 87 and note 1211 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 1716 for a discussion of income tax related matters.

~~Table of Contents~~

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

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

~~RESULTS OF OPERATIONS~~

Collective Bargaining Agreements

Status of Collective Bargaining Agreements

See note 87 to the unaudited, consolidated financial statements for a discussion of the status of our collective bargaining agreements.

Multiemployer Benefit Plans

See note 87 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.

6966

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Rate Adjustments

From time to time we adjust published rates applicable to our services. These rates, when published, are made available on our website at www.ups.com. We provide the address to our internet site solely for information. We do not intend for this address to be an active link or to otherwise incorporate the contents of any website into this or any other report we file with the Securities and Exchange Commission.

7067

Table of Contents

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 currency 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 1615 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, 2021		December 31, 2020			September 30, 2022		December 31, 2021
Currency Derivatives	Currency Derivatives	$	142	$	(83)	Currency Derivatives	$	892	$	173

Interest Rate Derivatives	Interest Rate Derivatives	6		17		Interest Rate Derivatives	(5)		1

		$	148	$	(66)		$	887	$	174

As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had no outstanding commodity hedge positions.

Our market risks, hedging strategies and financial instrument positions as of September 30, ~~2021~~2022 have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. In ~~2021,~~2022, we entered into several foreign currency exchange forward contracts on the Euro, British Pound Sterling, Canadian Dollar and Hong Kong Dollar, and had forward contracts expire. The ~~remaining~~ fair value changes between December 31, ~~2020~~2021 and September 30, ~~2021~~2022 in the preceding table are primarily due to interest rate and foreign currency exchange rate fluctuations between those dates.

The foreign currency 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 all 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. As of September 30, ~~2021,~~2022, we held cash collateral of ~~$139 million~~$1.0 billion and were not required to post cash collateral ~~of $15 million~~ with our counterparties under these agreements.

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, ~~2020~~2021 is ~~hereby~~ incorporated herein by reference.

7168

Table of Contents

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 and Accounting Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act")). Based upon, and as of the date of, the evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our 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 during the ongoing COVID-19 pandemic. As previously disclosed, in recent periods we have enhanced our oversight and monitoring during the closing and reporting processes and we continue to monitor and assess the effects of remote work on our internal controls to minimize the impact on their design and operating effectiveness.

7269

Table of Contents

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

For a discussion of material legal proceedings affecting the Company, see note 1211 to the unaudited, consolidated financial statements included in this report.

Item 1A.Risk Factors

~~The occurrence of any of~~There have been no material changes to the ~~significant~~ risk factors described in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 and Part II, Item 1A in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022. The occurrence of any of the risks described therein 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.~~

material.

7370

Table of Contents

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

(c) A summary of repurchases of our class A and class B common stock during the third quarter of ~~2021~~2022 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 Publically Announced Program Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
July 1 - July 31, 2021 — $ — — $ 2,117
August 1 - August 31, 2021 2.2 194.44 2.2 4,570
September 1 - September 30, 2021 0.4 194.44 0.4 4,500
Total July 1 - September 30, 2021 2.6 $ 194.44 2.6


	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program	Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
July 1 - July 31, 2022	0.9	$	183.23	0.9	$	3,096
August 1 - August 31, 2022	3.2	200.08		3.2	2,454
September 1 - September 30, 2022	0.8	190.94		0.8	$	2,306
Total July 1 - September 30, 2022	4.9	$	195.59	4.9

___________________

(1)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,~~August 2021, the Board of Directors ~~approved a share~~authorized the company to repurchase ~~authorization for $8.0~~up to $5.0 billion of class A and class B common stock. ~~In August 2021, the Board of Directors terminated this authorization and approved a new share repurchase authorization for $5.0 billion.~~ We repurchased ~~2.6~~4.9 and 11.6 million shares of class B common stock for ~~$500~~$951 million and $2.2 billion under ~~an accelerated stock repurchase transaction~~this program during the three and nine months ended September 30, ~~2021.~~2022, respectively. As of September 30, ~~2021,~~2022, we had ~~$4.5~~$2.3 billion available under this repurchase authorization. We anticipate our share repurchases will total at least $3.0 billion for all of 2022.

For additional information on our share repurchase activities, see note 1312 to the unaudited, consolidated financial ~~statements included in this report.~~statements.

7471

Table of Contents

Item 6.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~~November 17, 2017 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed on ~~February 19, 2013)~~November 17, 2017).

10.1	—	Indenture dated as of September 30, 2022, between UPS and U.S. Bank Trust Company, National Association , as Trustee (incorporated by reference to Exhibit 4.4 to F orm S-3 (File No.333-267664), filed on September 30, 2022.

10.2	—	Indenture dated as of September 30, 2022, between UPS and Truist Bank, as Trustee (incorporated by reference to Exhibit 4.5 to Form S-3 (File No.333-267664), filed on September 30, 2022.

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 and Accounting 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 and Accounting 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 30, ~~2021~~2022 is formatted in 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	—	Cover Page Interactive Data File - The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2021~~2022 is formatted in Inline XBRL (included as Exhibit 101).

7572

Table of Contents

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:

November ~~4, 2021~~2, 2022

By:

/S/s/ BRIAN O. NEWMAN

Brian O. Newman

~~Senior~~Executive Vice President and Chief Financial Officer ~~and Treasurer~~

(Principal Financial and Accounting Officer)

7673


	2021		2020
Assets:
Accounts receivable, net	$	—	$	263
Other current assets	—		62
Property, plant and equipment, net	—		940
Other non-current assets	—		124
Total assets	—		1,389
Valuation allowance	—		(192)
Total assets held for sale	$	—	$	1,197

Liabilities:
Accounts payable	$	—	$	50
Other current liabilities	—		112
Other non-current liabilities	—		185
Total liabilities to be disposed of	$	—	$	347

Net assets held for sale	$	—	$	850


	Three Months Ended September 30,				% Point Change		Nine Months Ended September 30,				% Point Change
	2021		2020		2021 vs 2020		2021		2020		2021 vs 2020
Next Day Air / Deferred	8.7	%	3.8	%	4.9	%	7.2	%	3.9	%	3.3	%
Ground	8.9	%	6.5	%	2.4	%	8.0	%	6.7	%	1.3	%


	Functional currency outstanding balance at quarter-end		Outstanding balance at quarter-end ($)		Average balance outstanding		Average balance outstanding ($)		Average interest rate
2021
USD	$	—	$	—	$	199	$	199	0.05	%


Total			$	—