What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-22 · 468 added, 477 removed, 540 unchanged (64% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As described above, during 2020 we began implementing our Customer First, People Led, Innovation Driven strategy, as we seek to transform nearly every aspect of our business, improve our financial performance, provide the best customer experience and benefit our shareowners.

We focused on, among other things, enhancing the capabilities that we believe our customers value the most;

We are on a journey to execute our Customer First, People Led, Innovation Driven strategy within our Better not Bigger framework.

We are focused on improving revenue quality, reducing our cost to serve, growing operating profit and allocating capital in a disciplined fashion.

The Customer First component of our strategy focuses on, among other things, enhancing the capabilities that we believe our customers value the most:

speed and ease of access to our services.

We completed enhancements to our U.S.

ground network to improve time-in-transit and continued to deploy our digital access program into e-commerce platforms.

Beginning in the first quarter of 2020, unexpected business shutdowns and government restrictions implemented in many countries in response to the COVID-19 pandemic have significantly impacted the mix of demand for our services.

In our global small package business, business-to-business activity has declined, while we continue to experience a significant increase in the level of business-to-consumer shipping, which we partially attribute to the capability enhancements described above.

While business-to-business activity began to recover in the latter part of 2020, we believe that the market shift towards e-commerce will persist, with a continuing high level of residential deliveries that may continue to increase demand, but also drive higher operating costs.

The pandemic also resulted in a reduction in global air cargo capacity.

This caused market rates in the industry to increase and we experienced increased demand for our services.

On January 24, 2021, we entered into a definitive agreement to divest our UPS Freight business.

This will allow us to be even more focused on the core parts of our business that drive the greatest value for our shareholders.

The transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close during the second quarter of 2021.

We expect this divestiture to result in an improvement to our operating margin and return on invested capital.

We believe that we are well positioned for long-term growth, however we cannot reasonably estimate the duration or severity of the COVID-19 pandemic or the timing and extent of the anticipated economic recovery, and the resulting impacts on our business results or liquidity.

For additional information on these risks and uncertainties, see Part I, "Item 1A.

Risk Factors" of this report.

The People Led component of our strategy aims to enhance the employee value proposition.

Our Innovation Driven strategic approach utilizes technology and automation to deliver sustainable improvements to our network and to enhance the customer experience.

We have two reportable segments:

Domestic Package and International Package, which are together referred to as our global small package operations.

Our remaining businesses are reported as Supply Chain Solutions.

For the year, we increased average daily volume, revenue per piece and operating margin within global small package operations, with growth led by small- and medium-sized businesses ("SMBs") as we executed on our strategy.

The COVID-19 pandemic continued to have, and is expected to continue to have, an impact on our business.

We experienced a year-over-year increase in commercial volume as business returned to pre-pandemic levels, while business-to-consumer volume declined, partly due to the surge in e-commerce at the onset of the pandemic.

In the second half of the year, COVID-19 resulted in a reduction in the number of flights we operated in Asia relative to our expectations, which contributed to an overall decline in international volume in the fourth quarter.

Within Supply Chain Solutions, operating margin increased with demand for our services particularly strong in Forwarding and healthcare logistics, including COVID-19 relief efforts.

The overall economic environment continues to be challenging.

Global supply chain disruption continues, and resulted in capacity constraints that drove higher transportation costs, particularly in our Supply Chain Solutions businesses.

Rising inflation and labor market challenges continue to cause wage pressures in certain markets.

We continue to monitor the impacts of these external conditions on our business;

however, we anticipate that 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 a $3.3 billion pre-tax mark-to-market gain in the first quarter.

We completed the divestiture of UPS Freight on April 30, 2021, and used the cash proceeds of $848 million to reduce outstanding indebtedness.

We recognized a pre-tax gain of $46 million for the year in respect of this transaction.

The divestiture triggered a remeasurement of certain of our U.S.

defined benefit pension and postretirement benefit plans, which had only an immaterial impact on results of operations for the year.

For additional information on this divestiture, see note 4 to the audited, consolidated financial statements.

Following the divestiture, we renamed our Supply Chain & Freight businesses Supply Chain Solutions.

In October 2021, we completed the acquisition of Roadie, a technology platform focused on same-day delivery services, for $586 million.

The results of Roadie are reported within Supply Chain Solutions.

The acquisition did not have a material impact on our results of operations for the year.

See note 9 to the audited, consolidated financial statements for additional information on this transaction.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Highlights of our results for the years ended December 31, 2021 and 2020, which are discussed in more detail in the sections that follow, include:

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Average Revenue Per Piece $ 12.32 $ 10.94 $ 1.38 12.6 %

• Revenue increased in all segments.

• Average daily package volume increased due to increases in business-to-consumer shipping.

• Operating expenses increased due to volume growth.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

• Operating profit and operating margin were relatively flat, and included goodwill and other asset impairment charges of $686 million related to the anticipated divestiture of UPS Freight.

• Revenue increased in all segments, with double digit revenue per piece growth in both U.S.

Domestic Package and International Package.

• Average daily package volume increases were driven by growth in SMB and business-to-business volume.

• Operating expenses increased, primarily driven by fuel and third-party transportation costs.

• Operating profit and operating margin increased in global small package and Supply Chain Solutions.

• We reported net income of $12.9 billion and diluted earnings per share of $14.68.

Adjusted diluted earnings per share was $12.13 after adjusting for the after-tax impacts of:

◦ goodwill and other asset impairment charges of $629 million or $0.72 per share;

◦ transformation strategy costs of $265 million or $0.31 per share;

◦ pension mark-to-market losses recognized outside of a 10% corridor of $4.9 billion or $5.66 per share.

Domestic Package segment, volume and revenue growth was highest in our residential ground products.

The increase in residential delivery volume drove increases in headcount, delivery stops per day, average daily miles driven and average daily union labor hours, all of which increased expense and compressed operating margins as described below.

Operating expenses also increased as a result of the investments we made to improve our ground network.

The International Package segment experienced volume and revenue growth, driven by strong outbound demand from Asia as well as growth from e-commerce within Europe.

Residential delivery volume growth drove an increase in third-party pickup and delivery expense.

In the Supply Chain & Freight segment, growth was primarily driven by our Forwarding and mail services businesses.

The Forwarding business benefited from strong outbound demand from Asia and the implementation of capacity surcharges as COVID-19 led to reduced capacity in the air cargo market.

Mail services benefited from the increase in e-commerce activity and favorable changes in shipment characteristics.

We also experienced growth in demand for our healthcare logistics and distribution solutions, partly driven by the impacts of the COVID-19 pandemic.

◦ a gain on the divestiture of UPS Freight of $35 million or $0.04 per diluted share;

◦ transformation strategy costs of $285 million or $0.32 per diluted share;

◦ a pension mark-to-market gain recognized outside of a 10% corridor of $2.5 billion or $2.83 per share.

Domestic Package segment, volume increases were driven by strong growth from SMBs.

Revenue and revenue per piece increased through execution of our revenue quality initiatives, with favorable shifts in customer and product mix and base rate increases, as well as increases in fuel and demand-related surcharges.

Expenses increased primarily due to higher fuel prices and increases in employee compensation and benefit costs, which were slightly offset by productivity improvements.

The International Package segment also experienced volume growth for the year, driven by business-to-business volume.

Revenue and revenue per piece increased due to fuel and demand-related surcharges, base rate increases, shifts in customer and product mix and favorable currency movements.

Expense increases were primarily due to higher network costs, driven by higher fuel prices, and volume growth, which resulted in additional third-party pickup and delivery expense.

In Supply Chain Solutions, the impact of divesting UPS Freight was more than offset by revenue growth from the remaining businesses, primarily Forwarding and Logistics.

Forwarding growth was driven by higher volumes in our air and ocean freight businesses and market rate and base pricing increases.

Within Logistics, we experienced strong growth in our healthcare operations.

Expense increases in Supply Chain Solutions were primarily due to higher third-party transportation costs.

2020 compared to 2019

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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 including "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, amounts related to mark-to-market gains or losses, restructuring costs, including transformation strategy costs, and costs related to certain legal contingencies and expenses, as described below.

We believe that these adjusted financial measures provide additional meaningful information to assist users of our financial statements in understanding our financial results and cash flows and assessing our ongoing performance.

We believe these adjusted financial measures are important indicators of our recurring results of operations 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.

Additionally, these adjusted financial measures are used internally by management for business unit operating performance analysis, business unit resource allocation and in connection with incentive compensation award determination.

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;

and earnings per share.

Adjusted financial measures may exclude the impact of period over period exchange rate changes and hedging activities, amounts related to mark-to-market gains or 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.

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Therefore, our adjusted financial measures may not be comparable to similarly titled measures reported by other companies.

Year over year comparisons of our financial results are affected by the following (in millions):

Adjusted amounts reflect the following (in millions):

Year Ended December 31,

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Transformation Strategy Costs $ 380 $ 348

Goodwill and Other Asset Impairment Charges 686 —

Legal Contingencies and Expenses — 97

Goodwill and Asset Impairment Charges, and Divestitures (46) 686

Total Adjustments to Operating Expenses $ 334 $ 1,034

Other Income and (Expense):

Defined Benefit Plans Mark-to-Market Charges $ 6,484 $ 2,387

Defined Benefit Plans Mark-to-Market (Gain) Loss $ (3,272) $ 6,484

Total Adjustments to Other Income and (Expense) $ (3,272) $ 6,484

Total Adjustments to Income Before Income Taxes $ (2,938) $ 7,518

Income Tax Benefit from Defined Benefit Plans Mark-to-Market Charges $ (1,555) $ (571)

Income Tax (Benefit) Expense from Defined Benefit Plans Mark-to-Market $ 784 $ (1,555)

Income Tax Benefit from Transformation Strategy Costs (95) (83)

Income Tax Benefit from Goodwill and Other Asset Impairment Charges (57) —

Income Tax Benefit from Legal Contingencies and Expenses — (6)

Income Tax (Benefit) Expense from Goodwill and Asset Impairment Charges, and Divestitures 11 (57)

Total Adjustments to Income Tax Expense $ 700 $ (1,695)

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These items have been excluded from comparisons of "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, other income and (expense), income tax expense and effective tax rate in the discussion that follows.

The income tax benefit from restructuring and other costs, legal contingencies and expenses and mark-to-market charges are calculated by multiplying the statutory tax rates applicable in each tax jurisdiction, including the U.S.

The income tax impacts from transformation and other charges;

mark-to-market gains and losses;

goodwill and asset impairment charges, and divestitures are calculated by multiplying the statutory tax rates applicable in each tax jurisdiction, including the U.S.

federal jurisdiction and various U.S.

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jurisdictions, by the tax-deductible adjustments.

The blended average of the effective tax rates in 2020 and 2019 was 22.5% and 23.2%, respectively.

The blended average effective tax rates in 2021 and 2020 were 23.8% and 22.5%, respectively.

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RESULTS OF OPERATIONS

Impact of Changes in Foreign Currency Exchange Rates and Hedging Activities

We supplement the reporting of our revenue, revenue per piece and operating profit with non-GAAP measures that exclude the period over period impact of foreign currency exchange rate changes and hedging activities.

Transformation and Other Charges, Goodwill and Asset Impairment Charges, and Divestitures

We supplement the presentation of our operating profit, operating margin, income before income taxes, net income and earnings per share with non-GAAP measures that exclude the impact of charges related to transformation activities, goodwill and asset impairment charges and divestitures.

For more information regarding transformation activities, see note 19 to the audited, consolidated financial statements.

For more information regarding goodwill and asset impairment charges and divestitures, see note 4 to the audited, consolidated financial statements.

Changes in Foreign Currency Exchange Rates 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 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.

Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reported U.S.

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dollar revenue, revenue per piece and operating profit is the period over period impact of currency fluctuations.

Restructuring and Other Charges

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

For more information regarding transformation strategy costs, see note 18 to the audited, consolidated financial statements.

For more information regarding asset impairments, see note 4 to the audited, consolidated financial statements.

Costs Related to Certain Legal Contingencies and Expenses

We supplement the presentation of our operating profit, operating margin, income before income taxes, net income and earnings per share with similar non-GAAP measures that exclude the impact of costs related to certain legal contingencies and expenses.

Defined Benefit Plans Mark-to-Market Charges

We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor for our pension and postretirement defined benefit plans immediately as part of other pension income (expense).

We supplement the presentation of our income before income taxes, net income and earnings per share with non-GAAP measures that exclude the impact of gains and losses recognized in excess of the 10% corridor and the related income tax effects.

Defined Benefit Plans Mark-to-Market Impacts

We supplement the presentation of our income before income taxes, net income and earnings per share with non-GAAP measures that exclude the impact of these gains and losses and the related income tax effects.

We believe excluding these mark-to-market impacts provides important supplemental information by removing the volatility associated with short-term changes in market interest rates, equity values and similar factors.

This adjusted net periodic benefit cost ($641 million in 2020 and $754 million in 2019) utilizes the expected return on plan assets (7.70% in 2020 and 7.68% in 2019) and the discount rate used to determine net periodic benefit cost (3.55% in 2020 and 4.45% in 2019).

The unadjusted net periodic benefit cost reflects the actual return on plan assets (12.54% in 2020 and 17.57% in 2019) and the discount rate used to measure the projected benefit obligation at the December 31st measurement date (2.87% in 2020 and 3.55% in 2019).

We recognized pre-tax mark-to-market losses outside of a 10% corridor related to the remeasurement of our pension and postretirement defined benefit plans' assets and liabilities in "Other Income and (Expense)" of $6.5 and $2.4 billion for 2020 and 2019, respectively.

In 2019, we refined the bond matching approach used to determine the discount rate for our U.S.

pension and postretirement plans by implementing advances in technology and modeling techniques discussed in note 6 to the audited, consolidated financial statements.

Investment income (expense) and other reflects the actual return on plan assets (9.11% in 2021 and 12.54% in 2020) and the discount rate used to measure the projected benefit obligation at the December 31st measurement date (3.11% in 2021 and 2.87% in 2020).

Adjusted Investment income (expense) and other utilizes the expected return on plan assets (6.40% in 2021 and 7.70% in 2020) and the discount rate used to determine net periodic benefit cost (2.87% in 2021 and 3.55% in 2020).

The remeasurement of our pension and postretirement defined benefit plans' assets and liabilities resulted in a $3.3 billion mark-to-market gain in 2021 and $6.5 billion loss in 2020.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

The table below shows the amounts associated with each component of the pre-tax mark-to-market loss, as well as the weighted-average actuarial assumptions used to determine our net periodic benefit cost, for each year:

The table below shows the amounts associated with each component of the pre-tax mark-to-market gain (loss), as well as the weighted-average actuarial assumptions used to determine our net periodic benefit cost, for each year:

Year Ended December 31,

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Year Ended December 31,

Weighted-average actuarial assumptions used to determine net periodic benefit cost:

Weighted-average actuarial assumptions:

Expected rate of return on plan assets 6.40 % 7.70 %

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Discount rate at measurement date 3.11 % 2.87 %

The pre-tax mark-to-market losses for the years ended December 31, 2020 and 2019 were comprised of the following:

The pre-tax mark-to-market gains and losses for the years ended December 31, 2021 and 2020 consisted of the following:

2021 - $3.3 billion pre-tax mark-to-market gain:

• Discount Rates ($1.9 billion pre-tax gain):

This gain was driven by the interim remeasurement of the UPS/IBT Plan in the first quarter of 2021.

The weighted-average discount rate for our 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):

This loss was primarily driven by the interim remeasurement of the UPS/IBT Plan in the first quarter of 2021.

As of March 2021, the actual rate of return on the plan assets was approximately 220 basis points lower than our expected rate of return, primarily due to weak global equity and U.S.

bond market performance.

• Demographic and Other Assumption Changes ($0.1 billion pre-tax loss):

This represents the difference between actual and estimated participant data and demographic factors, including items such as healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality.

• 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 be required to be paid related to the Central States Pension Fund.

2020 - $6.5 billion pre-tax mark-to-market loss:

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bond market performance.

• Demographic and Other Assumption Changes ($381 million pre-tax loss):

• Demographic and Other Assumption Changes ($0.4 billion pre-tax loss):

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This represents our current best estimate of additional potential coordinating benefits that may be required to be paid related to the Central States Pension Fund.

2019 - $2.4 billion pre-tax mark-to-market loss:

• Discount Rates ($5.7 billion pre-tax loss):

The weighted-average discount rate for our pension and postretirement medical plans decreased from 4.45% as of December 31, 2018 to 3.55% as of December 31, 2019, primarily due to a decline in U.S.

treasury yields and a decrease in credit spreads on AA-rated corporate bonds in 2019.

This was partially offset by a refinement to the bond matching approach used to determine the discount rate for our U.S.

pension and postretirement plans as described in note 6 to the audited, consolidated financial statements.

• Return on Assets ($3.9 billion pre-tax gain):

In 2019, the actual rate of return on plan assets was higher than our expected rate of return, primarily due to strong global equity and U.S.

bond market performance.

• Demographic and Other Assumption Changes ($24 million pre-tax loss):

This represented the difference between actual and estimated participant data and demographic factors, including items such as healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality.

• Coordinating benefits attributable to the Central States Pension Fund ($543 million pre-tax loss):

This represented our then-best estimate of additional potential coordinating benefits that may be required to be paid related to the Central States Pension Fund.

UNITED PARCEL SERVICE, INC.

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Expense Allocations

Certain operating expenses are allocated between our reporting segments using activity-based costing methods.

Certain operating expenses are allocated between our operating 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.

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Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.

Beginning in 2020, we updated our cost allocation methodology for the Ground with Freight Pricing ("GFP") product.

The cost associated with GFP that is allocated from the U.S.

Domestic Package segment to UPS Freight, within the Supply Chain & Freight segment, was adjusted to better reflect operational activities associated with this product.

This change in methodology had only an immaterial impact on the expense allocated to UPS Freight for 2020.

There were no significant changes in our expense allocation methodologies during 2019 or 2018.

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 $73 million for the year.

Upon the divestiture of UPS Freight, revenue and costs associated with the Ground with Freight Pricing ("GFP") product began to be reported in U.S.

Domestic Package.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

Domestic Package Operations

Domestic Package

Year Ended December 31, Change

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Operating Expenses $ 53,881 $ 49,608 $ 4,273 8.6 %

Transformation Strategy Costs (237) (108) (129) 119.4 %

Legal Contingencies and Expenses — (97) 97 N/M

Transformation and Other Charges (281) (237) (44) 18.6 %

Adjusted Operating Expenses $ 53,600 $ 49,371 $ 4,229 8.6 %

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Adjusted Operating Margin 11.1 % 7.7 %

The change in total revenue was due to the following:

The change in revenue was due to the following factors:

Revenue Change Drivers:

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Product Mix Fuel

Surcharges Total Revenue

Surcharge Total Revenue

2020 1.1 % 9.2 % 2.4 % 12.7 %

Average daily volume increased slightly, driven by SMB customer volume growth of 18% as a result of the continued execution of the Customer First component of our strategy, which was partially offset by a decline in Ground residential volume from our large customers.

We anticipate this decline will moderate in 2022 and be offset by growth in Ground residential volume from our SMB customers.

We expect overall volume growth levels in 2022 will remain consistent with 2021.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

2020 compared to 2019

Volume increased across all products, with growth strongest in residential ground services.

Volume growth was primarily driven by business-to-consumer e-commerce, which grew by approximately 33%, partly due to the impact of the COVID-19 pandemic.

We also benefited from the impact of two additional operating days in 2020.

Volume growth was led by our largest customer, Amazon, with growth stronger in the first half of the year.

We also experienced growth from SMBs, as well as other large customers.

Volume from SMBs grew 14.8% for the year, with growth accelerating in the second half of the year as a result of our investments to improve both time-in-transit and our digital access platform.

Business-to-consumer shipments represented approximately 64% of total average daily volume for the year compared to approximately 54% in 2019.

We believe that the COVID-19 pandemic has accelerated a change in consumer behavior, speeding up what we believe will be a long-term market shift towards e-commerce.

Business-to-business shipments decreased 10% for the year, primarily in our ground products, as many businesses experienced disruption and periods of closure due to the pandemic.

Business-to-business activity began to recover in the latter part of 2020.

Average daily volume increased in both our Next Day Air and Deferred products, driven by increased residential demand as a result of the growth in e-commerce.

This was slightly offset by declines in business-to-business shipments, primarily as a result of COVID-19, as well as continued declines in Second Day Letter volume due to ongoing shifts in customer preferences.

Residential Ground and SurePost average daily volumes increased by 35% and 39%, respectively for the year, driven by changes in customer mix and the growth in e-commerce activity.

Ground commercial average daily volume declined, as many businesses temporarily closed or operated on a limited basis as a result of COVID-19.

Business-to-consumer shipments represented approximately 60.7% of average daily volume compared to 63.6% in 2020.

The decrease in 2021 was attributable to elevated e-commerce spending and a reduction in business-to-business activity in 2020 as a result of the COVID-19 pandemic.

Business-to-business shipments increased 9.4%, primarily in our Ground commercial product, as business activity largely recovered from the impacts of the COVID-19 pandemic.

Average daily volume in our Next Day Air product increased as a result of the increase in business-to-business activity from SMBs and large customers.

Higher residential demand also contributed to the growth in Next Day Air.

Deferred volume decreased but remained slightly above pre-pandemic levels, with shifts in customer mix impacting product demand.

SurePost average daily volume decreased 10.7%, driven by declines in volume from large customers.

Ground commercial volume increased 7.0%, with growth in all customer segments.

Rates and Product Mix

2020 compared to 2019

Overall revenue per piece increased due to changes in base rates, customer and product mix and residential surcharges that went into effect in October 2020, partially offset by declines in fuel surcharges.

Rates for UPS ground and UPS air services increased an average net 4.9% in December 2019.

SurePost rates increased effective October 2020.

Revenue per piece for our Next Day Air and Deferred products decreased primarily due to shifts in customer and product mix, lower fuel surcharges and a decrease in average billable weight per piece.

Revenue per piece for our Ground products increased primarily due to the shift in customer mix, with a significant increase in SMB volume, and higher residential surcharges.

These benefits were partially offset by shifts in product mix, lower fuel surcharges and a decrease in average billable weight per piece.

Overall revenue per piece increased in all customer segments, driven by increases in base rates and the increase in commercial volume discussed above.

Revenue per piece was favorably impacted by the growth in SMB volume resulting from continued execution of our strategy, and from demand-related and fuel surcharges.

Rates for ground and air services increased an average of 4.9% in December 2020, and our SurePost rates also increased at that time.

We anticipate demand-related surcharges will remain largely unchanged in 2022.

Revenue per piece for our Next Day Air and Deferred products increased as a result of the factors described above.

The increase was slightly offset by the impact of a reduction in average billable weight per piece.

Revenue per piece for our Ground product increased due to an increase in average billable weight per piece in addition to the factors described above.

We are focused on continuing to grow revenue per piece through execution of our strategy.

Fuel Surcharges

We apply a fuel surcharge on our domestic air and ground services.

We apply a fuel surcharge on our domestic air and ground services that is adjusted weekly.

The air fuel surcharge is based on the U.S.

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Ground 8.6 % 6.6 % 2.0 %

While fluctuations in fuel surcharges can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield.

Additional components include the mix of products sold, the base price and any additional charges or discounts on these services.

Total domestic fuel surcharge revenue decreased by $344 million for the year as a result of lower fuel surcharge indices, partially offset by increases in volume and shifts in product mix.

While fluctuations in fuel surcharges 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 $1.3 billion, driven by a significant increase in fuel surcharge indices.

We expect the impact of these increases will continue in 2022.

Operating Expenses

Operating expenses, and operating expenses excluding the year-over-year impact of transformation and other charges, increased, driven by a $1.7 billion increase in the cost of operating our integrated air and ground network and a $1.7 billion increase in pickup and delivery costs.

In addition, the cost of package sorting increased $514 million and other indirect operating costs increased by $245 million.

The increase in expense was driven by:

• Higher fuel costs, primarily attributable to increases in the price of jet fuel, diesel and gasoline, which we expect to persist.

• 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.

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RESULTS OF OPERATIONS

Operating Expenses

2020 compared to 2019

Operating expenses, and operating expenses excluding the impact of transformation strategy costs and legal contingencies and expenses, increased largely due to higher pickup and delivery costs (up $4.2 billion).

In addition, the costs of operating our domestic integrated air and ground network increased $1.4 billion, costs of package sorting increased $927 million and other indirect operating costs increased $744 million.

The overall increase in expense was driven by several factors:

• Employee compensation and benefit costs increased $5.0 billion, largely resulting from:

◦ residential volume growth that negatively impacted our delivery density, driving an increase in package delivery stops per day and in average daily miles driven.

This drove an increase in average daily union labor hours of 14.1%;

◦ union pay rate increases;

◦ growth in the overall size of the workforce;

◦ acceleration of certain previously-issued incentive compensation awards for certain non-executive employees that resulted in additional expense of approximately $104 million.

We also incurred higher employee benefit expenses due to additional headcount, contractual contribution rate increases to union multiemployer plans, and higher service costs for our company-sponsored pension and postretirement plans, primarily driven by lower discount rates used to measure the projected benefit obligations of these plans.

Workers' compensation expense increased $114 million as a result of additional hours, medical and wage inflation and claims experience.

• Higher third-party transportation costs were driven by increased SurePost volume and utilization of outside carriers as part of our improvements to time-in-transit within our U.S.

ground network.

• We incurred lower fuel costs for the year, driven by lower prices for jet fuel, diesel and gasoline that were partially offset by increased usage as a result of volume growth and higher average daily miles driven.

Total cost per piece, and adjusted cost per piece excluding the year over year impact of transformation strategy costs and legal contingencies and expenses, increased 2.8% as a result of the factors described above.

• Additional compensation expense due to contractual rate increases for our union workforce.

Cost of living and wage-rate adjustments driven by inflation and other market factors also drove higher compensation costs.

Volume growth also contributed to the increase.

These increases were partially offset by productivity improvements.

Management payroll increased, primarily due to incentive compensation and commission payments.

• Higher third-party transportation costs as a result of our investments to improve time-in-transit within our ground network partially offset by lower third-party carrier costs for SurePost and rail due to lower volumes.

• The reallocation of expense for the GFP product following the divestiture of UPS Freight resulted in an increase of $281 million in segment operating expenses.

Total cost per piece, and adjusted cost per piece excluding the year-over-year impact of transformation and other charges, increased 7.4%.

We anticipate that overall costs and cost per piece may continue to increase during 2022 as a result of contractual cost increases and market factors, including inflation and the availability and cost of labor.

We expect this expense growth to moderate in 2022 due to additional operational improvements.

Operating Profit and Margin

2020 compared to 2019

As a result of the factors described above, operating profit decreased $273 million, with operating margins decreasing 170 basis points to 7.3%.

Excluding the year over year impact of transformation strategy costs and legal contingencies and expenses, adjusted operating profit decreased $241 million, with operating margins decreasing 170 basis points to 7.7%.

As a result of the factors described above, operating profit increased $2.5 billion, with operating margin increasing 340 basis points to 10.7%.

Excluding the year-over-year impact of transformation and other charges, adjusted operating profit increased $2.6 billion, with adjusting operating margin increasing 340 basis points to 11.1%.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

International Package Operations

International Package

Year Ended December 31, Change

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Operating Expenses $ 14,895 $ 12,509 $ 2,386 19.1 %

Transformation Strategy Costs (96) (122) 26 (21.3) %

Transformation and Other Charges (74) (96) 22 (22.9) %

Adjusted Operating Expenses $ 14,821 $ 12,413 $ 2,408 19.4 %

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amount represents the change compared to the prior year.

The change in total revenue was due to the following:

The change in revenue was due to the following:

Revenue Change Drivers:

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RESULTS OF OPERATIONS

2020 compared to 2019

Average daily volume increased for both domestic and export products.

Business-to-consumer volume increased as the COVID-19 pandemic drove growth in e-commerce.

Business-to-business volume declined as the pandemic negatively impacted business operations globally, however we experienced a slight increase in volumes in the fourth quarter.

Average daily volume growth was driven primarily by strong demand from the retail and technology sectors due to the increase in e-commerce activity.

This was partially offset by lower volumes in manufacturing and other sectors as COVID-19 caused a decline in commercial activity.

Export volume increased across most major trade lanes, driven by Europe and Asia.

Europe export volume growth was highest on the Europe to U.S.

trade lane, with intra-Europe volumes also growing significantly.

Asia export volume growth was strongest on the Asia to U.S.

We experienced volume growth from both our large customers and SMBs, with SMB growth accelerating during the second half of the year.

Our premium products saw volume growth, primarily driven by our Worldwide Express product, however growth was stronger in our non-premium products, such as World Wide Expedited and Transborder Standard due to shifts in customer preference for these products.

Domestic volume increased in many of our markets, driven by growth in Canada and several European countries that was primarily due to residential volume growth resulting from the increase in e-commerce.

Average daily volume increased for both domestic and export products, with growth primarily in the first half of the year.

Volume declined in the fourth quarter, largely due to the year-over-year impacts of COVID-19 on consumer behavior.

For the year, we experienced growth from both SMBs and large customers, primarily in the retail, manufacturing and technology sectors.

Business-to-business volume increased 10.8% as commercial activity largely returned to pre-pandemic levels.

Business-to-consumer volume increased 5.1%, with growth primarily in the first quarter when COVID-19 driven volume was not present in the comparative period.

We expect overall volume growth to accelerate in 2022.

Export volume increased for the year, led by Europe and the Americas, while Asia volume was largely unchanged.

Volume growth was strongest on intra-Europe trade lanes, as well as from Europe and the Americas to the United States.

Trade between Europe and the United Kingdom declined throughout the year as a result of Brexit, which became effective on January 1, 2021.

Asia export volume grew significantly in the first quarter, but was then impacted in the second quarter by a reduction in shipments of personal protective equipment relative to 2020.

Additionally, COVID-19 impacts within the region reduced the number of flights operated in the second half of the year.

Premium products saw volume growth of 14.9%, driven by Worldwide Express and Transborder Express products.

Volume for non-premium products increased 6.9%, driven by growth in our Transborder Standard product.

Worldwide Standard volume increased primarily as a result of Brexit, with shipments between the United Kingdom and the European Union that are now subject to duties and taxes shifting from Transborder to Worldwide products.

Domestic volume increased for the year in many markets, with the strongest growth in the United Kingdom and Western Europe, largely due to the impact of COVID-19 on business-to-consumer demand.

During the fourth quarter, domestic volume declined, driven by a reduction in e-commerce resulting in fewer residential deliveries, that was slightly offset by growth in commercial volume.

Rates and Product Mix

2020 compared to 2019

In December 2020, we implemented an average 4.9% net increase in base and accessorial rates for international shipments originating in the United States.

Rate changes for shipments originating outside the U.S.

are made throughout the year and vary by geographic market.

In response to market capacity constraints resulting from the COVID-19 pandemic, we implemented surcharges on certain lanes during the year.

In December 2019, we implemented an average 4.9% net increase in base and accessorial rates for international shipments originating in the United States.

Total revenue per piece increased 0.4% as a result of changes in customer and product mix, the impact of demand surcharges and currency movements, which were largely offset by a decline in fuel surcharges.

Excluding the impact of currency, revenue per piece decreased 0.5%.

Domestic revenue per piece increased 2.2% due to changes in customer and product mix, demand surcharges and currency movements that were partially offset by a decline in fuel surcharges.

Excluding the impact of currency, revenue per piece increased 1.2%.

Export revenue per piece decreased 2.0% primarily due to a decline in fuel surcharges that were partially offset by changes in demand surcharges.

Excluding the impact of currency, revenue per piece decreased 2.8%.

In response to capacity constraints resulting from the COVID-19 pandemic, we began to apply demand-related surcharges on certain lanes in the second quarter of 2020.

These surcharges are expected to remain elevated in 2022.

Total revenue per piece increased 14.4%, driven by changes in base pricing, fuel and demand-related surcharges and favorable shifts in customer and product mix.

Currency movements contributed to the increase in revenue per piece for the year, but had a negative impact in the fourth quarter.

Excluding the impact of currency, revenue per piece increased 12.0% for the year.

Export revenue per piece increased 15.1% as a result of the factors described above.

Excluding the impact of currency movements, export revenue per piece increased 13.2%.

Domestic revenue per piece increased 9.9% due to changes in base pricing, fuel surcharges and customer and product mix.

Although currency movements negatively impacted revenue per piece in the fourth quarter, they contributed to the increase in revenue per piece for the year.

Excluding the impact of currency movements, revenue per piece increased 5.6%.

We expect revenue per piece growth to moderate in 2022.

Fuel Surcharges

We apply fuel surcharges on our international air and ground services.

The fuel surcharge for international air services originating inside or outside the U.S.

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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 pricing structure that impact our overall revenue and yield.

Additional components include the mix of services sold, the base price and extra service charges and the pricing discounts offered.

Total international fuel surcharge revenue decreased by $263 million in 2020 as a result of declines in fuel surcharge indices, partially offset by volume growth and changes in customer and product mix.

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 and extra service charges and any pricing discounts offered.

Total international fuel surcharge revenue increased by $866 million, primarily due to increases in fuel surcharge indices, as well as overall volume growth and changes in customer and product mix.

UNITED PARCEL SERVICE, INC.

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Operating Expenses

2020 compared to 2019

Operating expenses, and operating expenses excluding the year over year impact of transformation strategy costs, increased in 2020.

Pickup and delivery costs increased $540 million due to volume growth and an increase in residential deliveries that drove additional third-party pickup and delivery expense.

The costs of operating our integrated international air and ground network increased $66 million, as increased block hours were partially offset by lower fuel prices.

Operating expenses, and operating expenses excluding the year-over-year impact of transformation and other charges, increased.

The costs of operating our integrated international air and ground network increased $1.2 billion driven by the impact of higher fuel prices and volume growth.

We expect these trends to continue in 2022.

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.

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Because of this, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term.

The remaining increase in operating expenses in 2020 was due to package sorting and other indirect operating costs.

Pickup and delivery costs increased $718 million, primarily due to volume growth that drove additional third-party transportation expense.

Package sorting costs increased $198 million, also as a result of overall volume growth.

We anticipate that these operating expenses may continue to increase due to volume growth and external market factors, such as fuel prices and inflation.

The remaining increase in operating expenses was due to increases in other indirect operating costs.

Operating Profit and Margin

2020 compared to 2019

As a result of the factors described above, operating profit increased $779 million, with operating margin increasing 280 basis points to 21.5%.

Excluding the year over year impact of transformation strategy costs , adjusted operating profit increased for the year, with operating margin increasing 270 basis points to 22.2%.

As a result of the factors described above, operating profit increased $1.2 billion, with operating margin increasing 230 basis points to 23.8%.

Excluding the year-over-year impact of transformation and other charges, adjusted operating profit also increased $1.2 billion, with operating margin increasing 200 basis points to 24.2%.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

Supply Chain & Freight Operations

Supply Chain Solutions

Year Ended December 31, Change

2021 2020 $ %

Freight LTL Statistics:

Freight Less-Than-Truckload Statistics:

Revenue (in millions) $ 881 $ 2,566 $ (1,685) (65.7) %

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Transformation Strategy Costs (25) (15) (10) 66.7 %

Goodwill and Other Asset Impairment Charges (686) — (686) N/M

Goodwill, Asset Impairment Charges and Divestitures 46 (686) 732 N/M

Adjusted Operating Expenses $ 15,722 $ 14,126 $ 1,596 11.3 %

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Currency Translation Benefit / (Cost)—(in millions)*:

Revenue $ (92)

Operating Expenses (132)

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Logistics 5 6 (1) (16.7) %

Freight 1 — 1 N/M

Freight 1 1 — — %

Other 11 — 11 N/A

Total Transformation Strategy Costs $ 25 $ 15 $ 10 66.7 %

In January 2021, we entered into a definitive agreement to sell our UPS Freight business.

As of December 31, 2020, we classified certain assets and liabilities of UPS Freight as held for sale in the consolidated balance sheet.

Upon classification as held for sale, we recognized a total impairment charge of $686 million within Other expenses in the statements of consolidated income.

This was comprised of a goodwill impairment charge of $494 million and a valuation allowance to adjust the carrying value of the disposal group to fair value less cost to sell of $192 million.

On April 30, 2021, we completed the divestiture of UPS Freight.

For the year ended December 31, 2021, we recognized a pre-tax gain of $46 million related to this divestiture.

See note 4 to the audited, consolidated financial statements for additional information.

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RESULTS OF OPERATIONS

2020 compared to 2019

Total revenue in the Supply Chain & Freight segment increased $1.8 billion.

The impact of the COVID-19 pandemic varied within the segment.

Our LTL business faced excess capacity and reduced demand in the first half of the year before market conditions began to improve.

Conversely, our international air freight forwarding business benefited from demand for personal protective equipment out of Asia as well as increases in market rates caused by a sharp decline in passenger aircraft cargo capacity.

Our Logistics business experienced increased demand from the healthcare and retail sectors, while activity in other sectors declined.

Overall Forwarding revenue increased for the year.

In our international air freight business, revenue grew as a result of higher market rates, capacity surcharges and strong demand in Asia.

Ocean freight forwarding revenue increased due to Asia-export volume growth in the second half of the year.

Revenue in our truckload brokerage business increased as volume levels recovered in the third and fourth quarters.

Higher demand, together with capacity constraints in the truckload brokerage market, drove rate increases.

Within Logistics, revenue in our mail services business increased as a result of e-commerce growth, which also led to a favorable shift in product characteristics.

In addition, we implemented a peak surcharge in mail services in the fourth quarter which contributed to the overall increase in revenue.

In the healthcare sector, we experienced growth in demand for our healthcare logistics and distribution solutions, partly driven by the impacts of the COVID-19 pandemic.

UPS Freight revenue declined due to volume and tonnage declines in our LTL business driven by overall market conditions, as well as volume optimization initiatives that resulted in an increase in revenue per hundredweight.

Revenue from the Ground with Freight Pricing product grew as volume levels increased in the second half of the year.

Revenue from the other businesses within the segment increased, driven by growth within UPS Customer Solutions, as well as additional volume from service contracts with the U.S.

Total revenue for Supply Chain Solutions increased $2.2 billion.

Forwarding revenue increased for the year.

In our international air freight business, revenue growth was driven by higher volume as a result of strong outbound demand globally.

Demand-related surcharges and rate increases also contributed to revenue growth as demand continued to exceed capacity in the market.

We expect the elevated level of demand to persist.

Ocean freight forwarding revenue increased, driven by Asia-export volume and higher market rates throughout the year.

We expect surcharges for ocean freight forwarding to be lower in 2022 relative to 2021 as supply and demand within the market begins to normalize.

Revenue in our truckload brokerage business increased due to market rate increases and the continued execution of our strategy, slightly offset by a reduction in volume.

Within Logistics, our healthcare operations experienced strong revenue growth across a broad range of customers, including COVID-19 relief efforts.

Revenue in our mail services business increased as a result of rate increases and a favorable shift in product characteristics, partially offset by lower volumes.

Our other distribution operations experienced year-over-year revenue increases, driven by new business growth.

As a result of the divestiture, UPS Freight revenue decreased $2.1 billion for the year.

Revenue from the other businesses within Supply Chain Solutions increased, driven by services provided to the acquirer of UPS Freight under certain transition services agreements and by growth in our logistics consulting services, UPS Capital and additional volume from service contracts with the U.S.

Postal Service.

Operating Expenses

2020 compared to 2019

Total operating expenses for the segment, and operating expenses excluding the year over year impact of restructuring and other costs, increased in 2020.

Forwarding operating expenses increased $1.1 billion, largely due to higher market rates and additional charter flights out of Asia which increased purchased transportation expense for international air freight.

This increase was slightly offset by declines in tonnage and volume.

In truckload brokerage, volume growth and higher market rates also contributed to the increase in purchased transportation expense.

Other expenses decreased slightly as a result of ongoing cost management initiatives.

Logistics operating expenses increased $582 million, driven by higher purchased transportation expense in mail services as a result of volume growth and carrier rate increases, as well as volume growth in the healthcare sector.

UPS Freight operating expenses increased $607 million, due primarily to an impairment charge of $686 million in respect of goodwill and assets held for sale as a result of entering into an agreement to divest our UPS Freight business.

We expect this divestiture to be completed in the second quarter of 2021.

Total operating expenses for Supply Chain Solutions, and operating expenses excluding the year-over-year impact of transformation and other charges, increased in 2021.

Forwarding operating expenses increased $2.6 billion, driven by an increase in purchased transportation of $2.5 billion.

This increase was primarily due to higher market rates across all of our forwarding businesses that were driven by supply constraints and demand-related surcharges, as well as volume growth in our international air freight and ocean freight forwarding businesses.

Capacity constraints are expected to persist, resulting in purchased transportation cost remaining elevated.

Logistics operating expenses increased $538 million, due to higher purchased transportation expense and operational expense growth in our healthcare operations as a result of COVID-19 relief efforts and strong demand for our healthcare logistics services.

Carrier rate increases drove higher expense within mail services and business growth in our other distribution operations also resulted in additional purchased transportation expense.

UPS Freight operating expenses decreased $2.8 billion as a result of the divestiture.

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

Operating Profit and Margin

2020 compared to 2019

As a result of the factors described above, total operating profit for the Supply Chain & Freight segment decreased $620 million.

Excluding the year over year impact of restructuring and other costs, adjusted operating profit increased $56 million.

Operating margin decreased 490 basis points to 2.4%, while adjusted operating margin decreased 50 basis points to 7.0%.

As a result of the factors described above, total operating profit increased $1.4 billion, with operating margin increasing 750 basis points to 9.9%.

Excluding the year-over-year impact of transformation and other charges and other gains, adjusted operating profit increased $649 million, with adjusted operating margin increasing 280 basis points to 9.8%.

UNITED PARCEL SERVICE, INC.

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Compensation and benefits $ 46,707 $ 44,529 $ 2,178 4.9 %

Transformation strategy costs (211) (166) (45) 27.1 %

Transformation and Other Charges (206) (211) 5 (2.4) %

Adjusted Compensation and benefits 46,501 44,318 2,183 4.9 %

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Total Other expenses 37,770 32,415 5,355 16.5 %

Other Transformation strategy costs (137) (89) (48) 53.9 %

Legal contingencies and expenses — (97) 97 (100.0) %

Goodwill and other asset impairment charges (686) — (686) N/M

Transformation and Other Charges (174) (137) (37) 27.0 %

Goodwill, asset impairment charges and divestitures 46 (686) 732 N/M

Adjusted Total Other expenses $ 37,642 $ 31,592 $ 6,050 19.2 %

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Adjusted Total Operating Expenses $ 84,143 $ 75,910 $ 8,233 10.8 %

Currency Translation Benefit - (in millions)* $ 31

Currency (Benefit) / Cost - (in millions)* $ 432

*Amount represents the change in currency translation compared to the prior year.

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Benefits 176 177 (1) (0.6) %

Depreciation and amortization — 3 (3) (100.0) %

Other occupancy 3 8 (5) (62.5) %

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Total Transformation Strategy Costs $ 380 $ 348 $ 32 9.2 %

Legal contingencies and expenses:

Other expenses $ — $ 97 $ (97) (100.0) %

Goodwill and other asset impairment charges:

Goodwill and asset impairment charges, and divestitures:

Other expenses $ (46) $ 686 $ (732) N/M

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Compensation and Benefits

2020 compared to 2019

Total compensation and benefits, and total compensation and benefits excluding the year over year impact of transformation strategy costs, increased in 2020.

Total compensation costs, and total compensation costs excluding the year over year impact of transformation strategy costs, increased $3.1 billion or 13.3%, primarily as a result of:

Domestic labor costs increased as a result of residential volume growth, driving a 21.5% increase in package delivery stops per day.

This drove additional headcount and an increase in average daily union hours of 14.1%.

Contractual union wage increases also contributed to the increase in compensation for hourly employees.

• Management compensation expense increased due to salary increases, higher incentive compensation, including the acceleration of certain previously-issued incentive compensation awards, and growth in the overall size of the workforce.

Benefits costs, and benefits costs excluding the year over year impact of transformation strategy costs, increased $2.5 billion as a result of:

• Health and welfare costs increased $558 million, driven by increased contributions to multiemployer plans resulting from growth in the workforce and contractually-mandated contribution rate increases.

• Pension and postretirement benefits increased $798 million.

Higher service costs for company-sponsored plans were driven by a reduction in discount rates and an increase in participating employees.

Contributions to multiemployer plans increased as a result of contractually-mandated contribution increases and an overall increase in the size of the workforce.

• Vacation, excused absence, payroll taxes and other expenses increased $587 million, primarily driven by salary increases and growth in the overall size of the workforce.

• Workers' compensation expense increased $517 million due to an increase in total hours worked, wage and medical cost inflation and unfavorable claims trends.

Total compensation and benefits, and total compensation and benefits excluding the year-over-year impact of transformation and other charges, increased in 2021.

Total compensation costs, and total compensation costs excluding the year-over-year impact of transformation and other charges, increased $1.0 billion or 3.8%, primarily as a result of:

Domestic compensation increased $704 million as a result of higher direct labor costs due to contractual rate increases for our union workforce, as well as wage-rate and cost of living adjustments driven by inflation and other market factors.

Volume growth drove additional headcount and an increase in average daily union hours, which was partially offset by productivity improvements.

• International cost increased $380 million, primarily due to volume growth, as well as the impacts of operational disruption last year that resulted from COVID-19 restrictions.

• Management compensation increased $416 million due to salary increases, higher incentive compensation and sales commissions and workforce growth that was primarily from additional part-time positions.

• These increases were partially offset by the impact of divesting UPS Freight, which decreased cost by $583 million.

Benefits costs increased $1.3 billion.

Excluding the year-over-year impact of transformation and other charges, adjusted benefits increased $1.2 billion as a result of:

• Health and welfare costs increased $530 million, driven by increased contributions to multiemployer plans resulting from growth in the eligible workforce and contractual rate increases.

• Pension and postretirement benefits increased $374 million due to an increase in the overall size of the workforce, increased contributions to multiemployer plans as a result of contractually-mandated rate increases and higher service costs for company-sponsored plans.

• Vacation, excused absence, payroll taxes and other expenses increased $212 million, primarily driven by salary increases, increases in the overall size of the workforce and additional discretionary payments to certain employees.

• Workers' compensation expense increased $51 million due to an increase in total hours worked and higher claim counts, partially offset by improved claims trends relative to the previous year and lower activity resulting from the divestiture of UPS Freight.

Repairs and Maintenance

2020 compared to 2019

The increase in repairs and maintenance expense was driven by additional aircraft engine maintenance cost, primarily due to the replacement of parts on our A300-600 fleet, as well as an increase in routine repairs to buildings and facilities and maintenance of our other transportation equipment.

The increase in repairs and maintenance expense was driven by additional aircraft engine maintenance cost, primarily due to the increase in operating activity.

Routine repairs and maintenance for buildings and facilities, and maintenance costs for our other transportation equipment, increased slightly.

Depreciation and Amortization

2020 compared to 2019

Depreciation and amortization expense increased as a result of additional investments in facility automation and capacity expansion projects, increases in the size of our vehicle and aircraft fleets and investments in internally developed software.

Depreciation and amortization expense increased as a result of additional operating facilities coming into service and investments in internally developed software, as well as growth in the size of our vehicle and aircraft fleets.

Purchased Transportation

2020 compared to 2019

The increase in purchased transportation expense charged to us by third-party air, rail, ocean and truck carriers was primarily driven by:

Domestic Package expense increased $1.2 billion due to investments to improve time-in-transit in our U.S.

ground network, an increase in SurePost volume that drove approximately $480 million of incremental third-party transportation expense and volume growth in our other products.

The increase in purchased transportation expense charged to us by third-party air, ocean and truck carriers was primarily driven by:

• Supply Chain Solutions expense increased $2.2 billion, primarily due to market rate and volume increases in our international air freight and ocean freight businesses and rate increases in our truckload brokerage business.

These increases were partially offset by the impact of the divestiture of UPS Freight, which reduced third-party transportation costs by $596 million.

• International Package expense increased $617 million, primarily due to additional volume being handled by third-party pickup and delivery services in Asia and Europe.

Currency movements also negatively impacted expense, primarily in Europe.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

• Forwarding and Logistics expense increased $1.5 billion due to increased market rates in our international air freight business, as well as volume growth and rate increases in our mail services and truckload brokerage businesses.

The rate increases in our international air freight and truckload brokerage businesses were primarily driven by market capacity constraints.

• International Package expense increased $521 million primarily due to volume increases in Asia and Europe that drove higher third-party pickup and delivery cost, as well as additional charter flights originating from Asia.

2020 compared to 2019

The decrease in fuel expense was driven by lower prices for jet fuel, diesel and gasoline.

These decreases were partially offset by higher consumption due to increases in aircraft block hours and miles driven as a result of increased volume, as well as the impact of higher alternative fuel tax credits in 2019.

Domestic Package expense increased $310 million due to ongoing investments to improve time-in-transit in our U.S.

ground network and overall increases in per-shipment costs.

These impacts were partially offset by decreases in rail and SurePost volumes for the year.

Higher fuel prices increased expense $1.2 billion.

Increases in usage from additional aircraft block hours and miles driven were partly offset by the impact of the divestiture of UPS Freight.

Other Occupancy

2020 compared to 2019

The increase in other occupancy expense, and other occupancy expense excluding the year over year impact of transformation strategy costs, was driven by additional operating facilities coming into service, rent and property tax increases and ongoing facility maintenance.

The increase in other occupancy expense, and other occupancy expense excluding the year-over-year impact of transformation and other charges, was due to higher utilities costs, rent and property tax increases and ongoing facility maintenance.

Other Expenses

2020 compared to 2019

Other expenses, and other expenses excluding the year over year impact of transformation strategy costs, legal contingencies and expenses and goodwill and other asset impairment charges, increased as a result of:

• Other operational expenses, including vehicle and equipment rentals, increased $385 million driven by volume growth.

This included cleaning and other safety supplies related to COVID-19 amounting to $89 million.

• Professional fees increased $139 million, primarily related to information technology and other business support services.

• Self-insured automobile liability claims increased $125 million as a result of higher average daily miles driven in our U.S.

Domestic business and unfavorable claims experience.

• Other increases included reserves for certain tax positions and contingencies, payment processing fees, recruitment costs, telecommunications costs, information technology expenses and allowances for credit losses and other bad debt expense.

Other expenses, and other expenses excluding the year-over-year impact of transformation strategy costs and goodwill, asset impairment charges and divestitures, increased as a result of:

• Other operational expenses, including vehicle and equipment rentals, increased $214 million, primarily driven by business growth.

• The cost of business services that support our operating segments increased $129 million, driven by business growth and the expansion of services provided.

• Customer claims increased $108 million, driven by changes to our claims policy, which resulted in higher claims for lost packages.

• Other increases included the cost of goods provided under transitional service agreements to the acquirer of UPS Freight, information technology expenses, payment processing fees and the write down of certain construction in progress activities.

These increases were partially offset by reductions in self-insured automobile liability claims due to improvements in claims experience, a reduction in our allowance for credit losses and a reduction in purchases of COVID-related safety and cleaning supplies.

UNITED PARCEL SERVICE, INC.

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Investment Income (Expense) and Other $ 4,479 $ (5,139) $ 9,618 N/M

Defined Benefit Plans Mark-to-Market Charges 6,484 2,387 4,097 171.6 %

Defined Benefit Plans Mark-to-Market (Gain) Loss (3,272) 6,484 (9,756) N/M

Adjusted Investment Income (Expense) and Other $ 1,207 $ 1,345 $ (138) (10.3) %

Interest Expense (694) (701) 7 (1.0) %

Total Other Income and (Expense) $ (5,840) $ (2,146) $ (3,694) 172.1 %

Total Other Income and (Expense) $ 3,785 $ (5,840) $ 9,625 N/M

Adjusted Other Income and (Expense) $ 513 $ 644 $ (131) (20.3) %

Investment Income (Expense) and Other

2020 compared to 2019

Investment and other expense for the year increased $3.6 billion, which included a $4.1 billion increase in defined benefit plans mark-to-market charges.

Excluding the impact of these mark-to-market charges, adjusted investment and other income increased $451 million for the year, primarily due to an increase in other pension income, which includes expected investment returns on pension assets, net of interest cost on projected benefit obligations and prior service costs.

Expected returns on plan assets increased as a result of a higher asset base due to positive asset returns in 2019 and discretionary contributions made in 2020.

Pension interest cost decreased due to the impact of lower year end discount rates, partially offset by ongoing plan growth and an increase in the projected benefit obligation as a result of the 2019 year end measurement of our plans.

Investment income decreased due to lower yields on higher average invested asset balances and impairments of certain non-current investments, partially offset by foreign currency gains.

Investment and other income increased $9.6 billion, primarily due to a net $3.3 billion mark-to-market gain from remeasurements of our defined benefit plans in 2021 compared to a $6.5 billion loss in 2020.

Excluding the impact of these mark-to-market gains and losses, adjusted investment and other income decreased $138 million, driven by a decrease in other pension income which includes expected returns on pension assets, net of interest cost on projected benefit obligations and prior service costs.

• Expected returns on pension assets decreased due to a reduction in our expected rate of return assumption.

This was partially offset by a higher asset base due to discretionary contributions and positive asset returns in 2020.

• Pension interest cost decreased, driven by a reduction in projected benefit obligations following interim plan remeasurements.

The interim plan remeasurements were triggered by the signing into law of the ARPA in March 2021 and by the divestiture of UPS Freight in April 2021.

We also experienced a reduction in prior service cost.

The remaining items in other income decreased due to foreign currency losses, partially offset by net gains from certain non-current investments.

Interest Expense

2020 compared to 2019

Interest expense increased as a result of higher average outstanding debt balances and lower capitalization of interest, partially offset by lower effective interest rates on floating rate debt and commercial paper balances.

Interest expense for the year decreased due to lower average outstanding debt balances and lower effective interest rates on floating rate debt and commercial paper, partially offset by a reduction in capitalization of interest.

UNITED PARCEL SERVICE, INC.

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Income Tax Impact of:

Defined Benefit Plans Mark-to-Market Charges 1,555 571 984 172.3 %

Defined Benefit Plans Mark-to-Market (784) 1,555 (2,339) N/M

Transformation Strategy Costs 95 83 12 14.5 %

Goodwill and Other Asset Impairment Charges 57 — 57 N/M

Legal Contingencies and Expenses — 6 (6) N/M

Goodwill, Asset Impairment Charges and Divestitures (11) 57 (68) N/M

Adjusted Income Tax Expense $ 3,005 $ 2,196 $ 809 36.8 %

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As of December 31, 2021, we had $10.6 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 requirements, planned capital expenditures and pension contributions, transformation strategy costs, debt obligations and planned shareowner returns.

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 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 have currently suspended share repurchases under our stock repurchase program.

We deploy a disciplined and balanced approach to capital allocation, including returns to shareowners through dividends and share repurchases.

Cash Flows From Operating Activities

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Net cash from operating activities $ 15,007 $ 10,459

(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 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 $1.8 billion for the year, driven by the following:

• Total contributions to our company-sponsored pension and U.S.

postretirement medical benefit plans were $3.1 billion during 2020 compared to $2.4 billion in 2019.

We made discretionary contributions of $2.8 billion to our three primary, company-sponsored U.S.

pension plans during 2020 compared to $2.0 billion in 2019.

• Our net hedge margin collateral decreased by $678 million due to the change in net fair value of derivative contracts used in our currency and interest rate hedging programs.

• Cash payments for income taxes were $1.1 billion and $514 million for 2020 and 2019, respectively, with changes driven by the timing of deductions related to pension contributions, depreciation and employer payroll taxes.

• Favorable changes in working capital were driven by the deferral of approximately $1.1 billion of employer payroll taxes under the Coronavirus Aid, Relief and Economic Security (CARES) Act that was signed into law on March 27, 2020, as well as changes in incentive compensation plan payouts.

These benefits were partially offset by an increase in working capital demand as a result of business growth.

As part of our ongoing efforts to improve our working capital efficiency, certain financial institutions offer a voluntary Supply Chain Finance ("SCF") program to certain of our suppliers.

We agree commercial terms with our suppliers, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program.

(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 $4.5 billion year to date, primarily due to improved performance.

Additional impacts included:

• Contributions to our company-sponsored pension and U.S.

postretirement medical benefit plans totaled $576 million and $3.1 billion in 2021 and 2020, respectively.

This included discretionary contributions of $200 million and $2.8 billion, respectively.

• Our net hedge margin collateral position increased by $779 million due to changes in the fair value of derivative contracts used in our currency and interest rate hedging programs.

• Cash payments for income taxes were $1.9 billion and $1.1 billion for 2021 and 2020, respectively, with changes primarily driven by an increase in income.

• During 2020, our working capital benefited from a one-time deferral of employer payroll taxes of approximately $1.1 billion under the CARES Act.

During the fourth quarter of 2021, we paid $577 million of these deferred employer payroll taxes.

Other changes in working capital were driven by business growth and the timing of duty and tax settlements.

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.

Then, if they are participating in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, to sell to the financial institutions.

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.

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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.

The amount settled through the SCF program was approximately $1.8 billion for the year ended December 31, 2020.

As of December 31, 2020, our total worldwide holdings of cash, cash equivalents and marketable securities were $6.3 billion, of which approximately $3.0 billion was held by foreign subsidiaries.

The amounts settled through the SCF program were approximately $1.7 and $1.8 billion for the years ended December 31, 2021 and 2020, respectively.

As of December 31, 2021, approximately $3.1 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.

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Cash Flows From Investing Activities

Our primary sources (uses) of cash for investing activities were as follows (amounts in millions):

Our primary sources (uses) of cash from investing activities for the years ended December 31, 2021 and 2020 were as follows (in millions):

Net cash used in investing activities $ (3,818) $ (5,283)

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Other Investing Activities:

Proceeds from disposals of property, plant and equipment $ 40 $ 65

Proceeds from disposals of businesses, property, plant and equipment $ 872 $ 40

Net change in finance receivables $ 34 $ 44

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Other investing activities $ 18 $ (41)

(1) In addition to capital expenditures of $5.4 and $6.4 billion in 2020 and 2019, respectively, there were capital expenditures relating to principal repayments of finance lease obligations of $192 and $140 million.

(1) In addition to capital expenditures of $4.2 and $5.4 billion in 2021 and 2020, respectively, there were capital expenditures relating to principal repayments of finance lease obligations of $208 and $192 million, respectively.

These are included in cash flows from financing activities.

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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 maintenance of buildings, facilities and plant equipment, as well as investments in technology initiatives and additional network capabilities.

We currently expect that our capital expenditures will be approximately $4.0 billion in 2021.

In 2020, capital expenditures on buildings, facilities and plant equipment decreased in our global small package business, as we reduced spending on facility automation and capacity expansion projects.

Capital spending on aircraft decreased due to reductions in contract deposits on open aircraft orders and in final payments associated with the delivery of aircraft.

Proceeds from the disposal of property, plant and equipment were largely attributable to sales of international property in 2020 and 2019.

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.

It also provides for maintenance of buildings, facilities and plant equipment and replacement of certain aircraft within our fleet.

We currently expect that our capital expenditures will be approximately $5.5 billion in 2022, of which approximately 60 percent will be allocated to expansion projects.

In 2021, capital expenditures on buildings, facilities and operating equipment decreased in our global small package business, as we reduced spending on facility expansion projects.

Capital spending on aircraft increased slightly as final payments associated with the delivery of aircraft were largely offset by reductions in contract deposits on open aircraft orders.

Capital expenditures on information technology decreased due to the timing of projects.

Proceeds from the disposal of businesses, property, plant and equipment increased as we completed the divestiture of UPS Freight for cash proceeds of $848 million in the second quarter.

The proceeds were used to reduce outstanding indebtedness.

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 paid for business acquisitions in 2020 related to the acquisition of area franchise rights for The UPS Store.

In 2019, we also acquired area franchise rights for The UPS Store, as well as made immaterial acquisitions in our International Small Package and Healthcare Logistics business units.

Cash paid for business acquisitions in 2021 was primarily attributable to the acquisition of Roadie and the purchase of development areas for The UPS Store.

Cash paid for business acquisitions in 2020 related to the purchase of development areas for The UPS Store.

Other investing activities were impacted by changes in our non-current investments, purchase contract deposits and various other items.

We anticipate that the divestiture of UPS Freight will be completed in the second quarter of 2021.

We intend to use the proceeds from this divestiture to repay outstanding debt.

UNITED PARCEL SERVICE, INC.

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Share Repurchases:

Cash expended for shares repurchased $ (224) $ (1,004)

Cash paid to repurchase shares $ (500) $ (224)

Number of shares repurchased (2.6) (2.1)

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Dividends declared per share $ 4.08 $ 4.04

Cash expended for dividend payments $ (3,374) $ (3,194)

Cash paid for dividends $ (3,437) $ (3,374)

Net borrowings (repayments) of debt principal $ (2,773) $ (851)

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Total capitalization $ 36,184 $ 25,323

We repurchased a total of 2.1 million shares of class A and class B common stock for $217 million in 2020;

substantially all of those purchases were in the first quarter of 2020.

As previously disclosed, we have suspended share repurchases under our stock repurchase program.

We repurchased 9.1 million shares for $1.0 billion throughout 2019 ($224 million and $1.0 billion in repurchases for 2020 and 2019, respectively, are reported on the statement of cash flows due to the timing of settlements).

We repurchased 2.6 million shares of class B common stock for $500 million under our stock repurchase program in 2021.

We repurchased 2.1 million shares of class A and class B common stock for $217 million in 2020 ($224 million in repurchases is reported on the statement of cash flows for 2020 due to the timing of settlements).

For additional information on our share repurchase activities, see note 13 to the audited, consolidated financial statements.

For the years ended December 31, 2021 and 2020, dividends reported within shareowners' equity include $167 and $178 million, respectively, of non-cash dividends that were settled in shares of class A common stock.

The declaration of dividends is subject to the discretion of the Board of Directors and depends on various factors, including our net income, financial condition, cash requirements, future prospects and other relevant factors.

We expect to continue the practice of paying regular cash dividends.

In February 2021, we increased our quarterly dividend payment from $1.01 to $1.02 per share.

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.

In the first quarter of 2022, we increased our quarterly dividend from $1.02 to $1.52 per share.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

Issuances of debt in 2020 and 2019 consisted of borrowings under our commercial paper program and issuances of fixed-rate senior notes as follows (in millions):

Issuances of debt in 2021 consisted of short-term borrowings under our commercial paper program, of which none remained outstanding as of December 31, 2021.

Issuances of debt in 2020 consisted of borrowings under our commercial paper program and issuances of fixed-rate senior notes as follows (in millions):

Principal Amount in USD

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Total $ 3,500

Principal Amount in USD

Fixed-rate senior notes:

2.200% senior notes $ 400

2.500% senior notes 400

3.400% senior notes (multiple issuances) 1,450

4.250% senior notes 750

Total $ 3,000

Repayments of debt in 2020 included our $424 million 8.375% debentures that matured in April 2020 and our €500 million floating rate senior notes that matured in July 2020.

We also paid down commercial paper and made scheduled principal payments on our finance lease obligations.

Repayments of debt in 2019 included fixed-rate senior notes in the amount of $1.0 billion, commercial paper and scheduled principal payments on our finance lease obligations.

Repayments of debt in 2021 included our $1.5 billion 3.125% senior notes, our $700 million 2.050% senior notes and our $350 million floating rate senior notes.

We also reduced our commercial paper balances and made scheduled principal payments on our finance lease obligations.

Repayments of debt in 2020 included our $424 million 8.375% debentures and our €500 million floating rate senior notes.

We also paid down commercial paper balances and made scheduled principal payments on our finance lease obligations.

We have $2.0 billion of fixed and floating rate notes that mature in 2022.

We may repay these amounts when due with cash generated from operations or other borrowings, depending on various factors.

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.

We have $2.6 billion of senior notes that mature in 2021.

We do not currently intend to refinance this debt when it becomes due.

The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs.

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USD $ — $ — $ 151 $ 151 0.05 %

EUR € — $ — € 432 $ 493 (0.39) %

Functional currency outstanding balance at year end Outstanding balance at year end ($) Average balance outstanding Average balance outstanding ($) Average interest rate

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EUR € — $ — € 432 $ 493 (0.39) %

Total $ 3,234

The variation in cash received from common stock issuances was primarily due to the number of stock option exercises by employees in 2020 and 2019.

As of December 31, 2021, we had no outstanding balances under our U.S.

and European commercial paper program.

Except as disclosed in note 10 to the audited, consolidated financial statements, 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.

The variation in cash received from common stock issuances was driven by the number of stock options exercised by employees and movements in other employee-related plans in 2021 and 2020.

Other financing activities includes cash used to repurchase shares to satisfy tax withholding obligations on vested stock awards of $358 and $340 million in 2021 and 2020, respectively.

The increase in cash used was driven by changes in payment levels for certain of our awards.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

Other financing activities includes cash used to repurchase shares from employees sold to satisfy tax withholding obligations on vested stock awards of $340 and $180 million in 2020 and 2019, respectively.

The increase in cash used was driven by changes in the vesting schedule for certain of our awards.

Net cash inflows from premium payments and settlements of capped call options for the purchase of UPS class B shares were $0 and $21 million in 2020 and 2019, respectively.

Sources of Credit

See note 10 to the audited, consolidated financial statements for a discussion of our available credit and debt covenants.

Guarantees and Other Off-Balance Sheet Financing Arrangements

Except as disclosed in note 9 to the audited, consolidated financial statements, 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 financial condition or liquidity.

Contractual Commitments

We have contractual obligations and commitments in the form of finance leases, operating leases, debt obligations, purchase commitments and certain other liabilities.

We intend to satisfy these obligations primarily through the use of cash flows from operations.

The following table summarizes the expected cash outflow to satisfy our contractual obligations and commitments as of December 31, 2020 (in millions):

Commitment Type 2021 2022 2023 2024 2025 After 2025 Total

Finance Leases $ 69 $ 64 $ 50 $ 30 $ 27 $ 188 $ 428

Operating Leases (1)

815 557 458 335 259 1,468 3,892

Debt Principal 2,568 2,001 2,360 1,485 1,860 14,198 24,472

Debt Interest 754 725 671 633 638 7,703 11,124

Purchase Commitments 2,730 1,415 404 201 60 1 4,811

Tax Act Repatriation Liability — — 13 49 61 — 123

Pension Funding 252 — — — — — 252

Total $ 7,188 $ 4,762 $ 3,956 $ 2,733 $ 2,905 $ 23,558 $ 45,102

(1) Operating lease commitments for 2021 include $184 million of committed leases that have not yet commenced.

Our finance lease obligations relate primarily to leases on aircraft and real estate.

Finance leases and operating leases are discussed further in note 11 to the audited, consolidated financial statements.

Purchase commitments, as well as our debt principal obligations, are discussed further in note 9 to the audited, consolidated financial statements.

The amount of interest on our debt was calculated as the contractual interest payments due on our fixed-rate debt and variable rate debt based on interest rates as of December 31, 2020.

The calculations of debt interest take into account the effect of any interest rate swap agreements.

For debt denominated in a foreign currency, the U.S.

Dollar equivalent principal amount of the debt at the end of the year was used as the basis to calculate future interest payments.

Purchase commitments represent contractual agreements to purchase assets, goods or services that are legally binding, including contracts for aircraft, construction of new or expanded facilities and orders for technology equipment and vehicles.

As of December 31, 2020, we had firm commitments to purchase three new Boeing 767-300 aircraft to be delivered in 2021 and 8 new Boeing 747-8F aircraft to be delivered between 2021 and 2022.

We also had a firm commitment to purchase two Boeing MD-11 aircraft to be delivered in 2021.

We paid a deposit equal to the full purchase price for these MD-11 aircraft in December 2019;

therefore these aircraft are not included in the commitment table above.

In December 2017, the United States enacted into law the Tax Act, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries.

We elected to pay the tax over eight years based on an installment schedule outlined in the Tax Act and, as required, have reflected our remaining transition tax due by year as a contractual obligation.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

There are no anticipated required minimum cash contributions to our qualified U.S.

pension plans (these plans are discussed further in note 6 to the audited, consolidated financial statements).

The amount of any minimum funding requirement, as applicable, for these plans could change significantly in future periods depending on many factors, including future plan asset returns, discount rates, other actuarial assumptions and changes to pension plan funding regulations.

A decline in discount rates or a sustained significant decline in equity or bond returns could result in our U.S.

pension plans being subject to significantly higher minimum funding requirements.

We have material cash requirements for known contractual obligations and commitments in the form of finance leases, operating leases, debt obligations, purchase commitments and certain other liabilities that are disclosed in the notes to the audited, consolidated financial statements and discussed below.

We expect to fund these obligations and other discretionary payments, including expected returns to shareowners, primarily through cash from operations.

We anticipate making discretionary contributions to our company-sponsored U.S.

pension and postretirement benefit plans of approximately $1.9 billion in 2022, which are included within Expected employer contributions to plan trusts shown in note 6 to the audited, consolidated financial statements.

There are currently no anticipated required minimum cash contributions to our qualified U.S.

pension plans.

The amount of any minimum funding requirement, as applicable, for these plans could change significantly in future periods depending on many factors, including plan asset returns, discount rates, other actuarial assumptions, changes to pension plan funding regulations and the discretionary contributions that we make.

Actual contributions made in future years could materially differ and consequently required minimum contributions beyond 2022 cannot be reasonably estimated.

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Contribution rates to these multiemployer pension and health and welfare plans are established through the collective bargaining process.

As we are not subject to any minimum contribution levels, we have not included any amounts in the contractual commitments table with respect to these multiemployer plans.

The table above does not include approximately $398 million of liabilities for uncertain tax positions because we are uncertain if or when such amounts will ultimately be settled in cash.

Uncertain tax positions are further discussed in note 15 to the audited, consolidated financial statements.

As of December 31, 2020, we had outstanding letters of credit totaling approximately $1.4 billion issued in connection with our self-insurance reserves and other routine business requirements.

We also issue surety bonds as an alternative to letters of credit in certain instances, and as of December 31, 2020, we had $1.3 billion of surety bonds written.

As of December 31, 2020, we had unfunded loan commitments totaling $52 million associated with UPS Capital.

We believe that funds from operations and borrowing programs will provide adequate sources of liquidity and capital resources to meet our expected long-term needs for the operation of our business, including anticipated capital expenditures, transformation strategy costs and pension contributions for the foreseeable future.

We have outstanding letters of credit and surety bonds that are discussed in note 10 to the audited, consolidated financial statements.

Additionally, we have $2.0 billion of fixed- and floating-rate senior notes that mature in 2022.

We may repay these amounts when due with cash generated from operations or other borrowings, depending on various factors.

Annual principal payments on our long-term debt, estimated debt interest obligations and purchase commitments are also set out in note 10.

Included within purchase commitments as disclosed in note 10, we have firm commitments to purchase two new Boeing 747-8F aircraft to be delivered in 2022 and 19 new Boeing 767-300 aircraft to be delivered between 2023 and 2025.

We have an option to purchase an additional 8 new Boeing 767-300 aircraft for delivery in 2025 and 2026 which are not reflected in our purchase commitments.

Our finance lease obligations, including purchase options that are reasonably certain to be exercised, relate primarily to leases on aircraft and real estate.

These obligations, together with our obligations under operating leases are set out in note 12 to the audited, consolidated financial statements.

Under provisions of the Tax Cuts and Jobs Act (the "Tax Act"), we elected to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries over eight years through 2025.

Additionally, we have uncertain tax positions that are further discussed in note 16 to the audited, consolidated financial statements.

In 2022, we will pay $558 million of employer payroll taxes that we deferred under the CARES Act.

Contingencies

See note 6 to the audited, consolidated financial statements for a discussion of pension related matters and note 11 to the audited, consolidated financial statements for a discussion of judicial proceedings and other matters arising from the conduct of our business activities.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Collective Bargaining Agreements

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We contribute to a number of multiemployer pension 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 will remain in effect throughout the terms of the existing collective bargaining agreements.

These agreements set forth the annual contribution rate increases for the plans that we participate in.

New Accounting Pronouncements

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See note 1 to the audited, consolidated financial statements for a discussion of accounting standards issued, but not yet effective.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Rate Adjustments

We announced various adjustments to our peak surcharges during the fourth quarter as follows:

• Effective October 25, 2020, surcharges applied to China and Hong Kong origin international shipments increased.

• Effective November 1, 2020, surcharges for certain Europe origin shipments increased.

• Effective November 8, 2020, surcharges increased for China Mainland, Hong Kong Special Administrative Region, Australia, New Zealand and other Asia origin shipments and a surcharge was applied to international shipments from Korea.

• Effective November 15, 2020, surcharges for certain Europe origin shipments increased.

• Effective December 27, 2020, surcharges for shipments from China Mainland and Hong Kong Special Administrative Region to the U.S.

• Effective January 17, 2021, updated surcharges were applied to U.S.

The following changes took effect on December 27, 2020:

• The rates for UPS Ground, UPS Air and International services increased by an average net 4.9%.

• UPS Air Freight rates within and between the U.S., Canada and Puerto Rico increased an average net 4.8%.

• Rates for all UPS SurePost services increased.

Additionally, effective January 10, 2021, an additional handling charge was applied to any package with a combined length plus girth exceeding 105 inches.

Effective April 11, 2021, additional handling and large package surcharge rates for non-Hundredweight service packages will differ by zone and effective July 11, 2021, additional handling and large package surcharge rates for Hundredweight Service packages will differ by zone.

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.

UNITED PARCEL SERVICE, INC.

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Critical Accounting Estimates

This discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which are prepared in accordance with GAAP.

As indicated in note 1 to the audited, consolidated financial statements, the amounts of assets, liabilities, revenue and expenses reported in our financial statements are affected by estimates and judgments that are necessary to comply with GAAP.

The amounts of assets, liabilities, revenue and expenses reported in our financial statements are affected by estimates and judgments that are necessary to comply with GAAP.

We base our estimates on prior experience, current trends, various other assumptions and third-party input that we consider reasonable to our circumstances.

Actual results could differ materially from our estimates, which would affect the related amounts reported in our consolidated financial statements.

While estimates and judgments are applied in arriving at many reported amounts, we believe that the following critical accounting policies involve a higher degree of judgment and complexity.

While estimates and judgments are applied in arriving at many reported amounts, we believe that the following critical accounting estimates involve a higher degree of judgment and complexity.

Contingencies

As discussed in note 10 to the audited, consolidated financial statements, we are involved in various legal proceedings and subject to various contingencies.

From time to time, we are involved in various legal proceedings and have exposure to various other contingent obligations.

The events that may impact our contingent liabilities are often unique and generally are not predictable.

At the time a contingency is identified, we consider all relevant facts as part of our evaluation.

We apply judgment when establishing a range of reasonably possible losses for our contingencies.

Our judgment is influenced by our understanding of information currently available for legal actions and potential outcomes of these actions, including the advice from our internal counsel, external counsel and senior management .

We record a liability for a loss when the loss is probable of occurring and reasonably estimable.

Events may arise that were not anticipated and the outcome of a contingency may result in a loss to us that differs from our previously estimated liability.

This difference could be material.

Income taxes and self-insurance are discussed below.

Except as disclosed in note 10 to the audited, consolidated financial statements, other contingent losses that were probable and estimable were not material to our financial position or results of operations as of, or for the year ended, December 31, 2020.

For such accruals, we record the amount we consider to be the best estimate within a range of potential losses;

however, when there appears to be a range of equally possible losses, our accrual is based on the low-end of this range.

The likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a reasonable estimate of the loss or a range of loss may not be practicable based on the information available.

Additionally, events may arise that were not anticipated and, as a result, the outcome of a contingency may result in a loss that differs materially from our previously estimated liability.

Except as disclosed in note 11 to the audited, consolidated financial statements, contingent losses that were probable and estimable were not material to our financial position or results of operations as of, or for the year ended, December 31, 2021.

In addition, we have certain contingent liabilities that have not been recognized as of, or for the year ended, December 31, 2021, because a loss was not reasonably estimable.

Obligations relating to income taxes and self-insurance are discussed below.

Goodwill and Intangible Asset Impairments

We test goodwill and indefinite-lived intangible assets for impairment on an annual basis as of 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.

We assess goodwill for impairment at the reporting unit level, initially evaluating qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If the qualitative assessment is not conclusive, we calculate the fair value of a reporting unit to test goodwill for impairment.

If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we record the excess amount as goodwill impairment, not to exceed the total amount of goodwill allocated to the reporting unit.

Our reporting units are set out in note 8 to the audited, consolidated financial statements.

We primarily determine the fair value of our reporting units using a discounted cash flow (“DCF”) model and supplement this with observable valuation multiples for comparable companies, as appropriate.

The completion of the DCF model requires that we make a number of significant assumptions to produce an estimate of future cash flows.

These assumptions include projections of future revenue, costs, capital expenditures, working capital and our cost of capital.

We assess goodwill for impairment at the reporting unit level.

The determination of reporting units requires judgment, and if we changed the definition of our reporting units, it is possible that we would have reached different conclusions when performing our impairment tests.

We initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If the qualitative assessment is not conclusive, we quantitatively assess the fair value of a reporting unit to test goodwill for impairment.

This assessment uses a combination of income and market approaches:

• The income approach uses a discounted cash flow (“DCF”) model, which requires us to make a number of significant assumptions to produce an estimate of future cash flows.

These assumptions include projections of future revenue, costs, capital expenditures, working capital and the cost of capital.

We are also 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 DCF model are updated annually and will change over time based on the historical performance and changing business conditions for each of our reporting units.

The determination of whether goodwill is impaired involves a significant level of judgment in these assumptions, and changes in our forecasts, business strategy, government regulations, or economic or market conditions could significantly impact these judgments, potentially decreasing the fair value of one or more reporting units.

Any resulting impairment charges could have a material impact on our results of operations.

We recognized a goodwill impairment charge of $494 million for our UPS Freight reporting unit in 2020 in conjunction with our evaluation of assets held for sale, which is discussed in note 4 to the audited, consolidated financial statements.

Based on the most recent tests, the fair value of our remaining reporting units exceeds their carrying value.

None of our reporting units incurred any goodwill impairment charges in 2019.

• The market approach uses observable market data of comparable public companies to estimate fair value utilizing financial metrics (such as enterprise value to net sales).

We apply judgment to select appropriate comparison companies based on the business operations, size and operating results of our reporting units.

Changes to our selection of comparable companies may result in changes to the estimates of fair value of our reporting units.

For reporting units tested using a quantitative model during 2021, we concluded the fair value of each reporting unit exceeded its carrying value by more than 10 percent.

Our truckload brokerage reporting unit was most sensitive to changes in valuation assumptions.

The ratio of excess fair value of this reporting unit to its carrying value would decrease by approximately one percentage point if the cost of capital increased by ten basis points.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

A trade name with a carrying value of $200 million and licenses with a carrying value of $5 million as of December 31, 2020 are considered to be indefinite-lived intangibles.

We determined that the income approach, specifically the relief from royalty method, is the most appropriate valuation method to estimate the fair value of the trade name.

This valuation approach requires that we make a number of assumptions to estimate fair value.

These assumptions include projections of future revenues, market royalty rates, tax rates, discount rates and other relevant variables.

Goodwill impairment charges could have a material impact on our results of operations.

None of our reporting units incurred any goodwill impairment charges in 2021.

During 2020, we recognized a goodwill impairment charge of $494 million in our UPS Freight reporting unit in conjunction with our evaluation of assets held for sale, which is discussed in note 4 to the audited, consolidated financial statements.

We evaluate the indefinite-lived trade name associated with our truckload brokerage business for impairment using the relief from royalty method.

This valuation approach requires that we make a number of assumptions to estimate fair value, including projections of future revenues, market royalty rates, tax rates, discount rates and other relevant variables.

The projections we use in the model are updated annually and will change over time based on the historical performance and changing business conditions.

If the carrying value of the trade name exceeds its estimated fair value, an impairment charge would be recognized for the excess amount.

All of our remaining intangible assets are deemed to be finite-lived and are amortized over their estimated useful lives.

Our annual impairment test for the current year indicated that the fair value of the indefinite-lived trade name remained greater than its carrying value, although this excess was less than 10 percent.

Our valuation estimate was most sensitive to changes in royalty rates and the cost of capital.

The ratio of excess fair value to carrying value would decrease by approximately one percentage point if the royalty rate decreased by five basis points or the cost of capital increased by ten basis points.

Our truckload brokerage business has been negatively impacted by increases in the market rates at which it purchases transportation, which has in turn negatively impacted its operating margins.

Business performance below current forecasts or unfavorable changes in valuation assumptions, such as a lower royalty rate or higher cost of capital, could result in an impairment of the trade name in the future.

Our finite-lived intangible assets are amortized over their estimated useful lives.

Impairment tests for these assets are only performed when a triggering event occurs that indicates that the carrying value of the intangible may not be recoverable based on its undiscounted future cash flows.

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Self-Insurance Accruals

We self-insure costs associated with workers’ compensation claims, automobile liability, health and welfare and general business liabilities, up to certain limits.

Insurance reserves are based on third-party actuarial estimates, which incorporate historical loss experience and judgments about the present and expected cost per claim.

Trends in actual experience are a significant factor in the determination of our reserves.

Workers’ compensation, automobile liability and general liability insurance claims may take several years to completely settle.

Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to fully resolve a claim.

A number of factors can affect the actual cost of a claim, including the severity and length of time the claim remains open, trends in healthcare costs, the results of any related litigation and changes in legislation.

Furthermore, claims may emerge in a future year for events that occurred in a prior year at a rate that differs from actuarial projections.

All of these factors can result in revisions to actuarial projections and produce a material difference between estimated and actual operating results.

Based on our historical experience, in 2019 we changed our self-insurance reserves from the central estimate to the low end of the actuarial range of losses.

We base self-insurance reserves on actuarial estimates, which are determined, with the assistance of third-party actuaries, through a complex process that includes the application of various actuarial methods and assumptions.

The process incorporates actual loss experience and judgments about expected future development based on historical experience, recent and projected trends in claim frequency and severity, and changes in claims handling practices, among other factors.

Workers’ compensation, automobile liability and general liability insurance claims may take several years to resolve.

Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to resolve a claim.

Several factors can affect the actual cost, or severity, of a claim, including the length of time the claim remains open, trends in healthcare costs, the results of any related litigation and changes in legislation.

Furthermore, claims may emerge in a future year for events that occurred in a prior policy period at a rate that differs from actuarial projections.

All these factors can result in revisions to actuarial projections and produce a material difference between estimated and actual operating results.

We increased our total reserves related to prior year claims by $34 million and $169 million in 2021 and 2020, respectively.

Due to the complexity and inherent uncertainty associated with the estimation of our workers’ compensation, automobile and general liability claims, the third-party actuary develops a range of expected losses.

We believe our estimated reserves for such claims are adequate;

actual experience in claim frequency and/or severity could materially differ from our estimates and affect our results of operations.

For additional information on our self-insurance reserves, refer to note 1 of the audited, consolidated financial statements.

We sponsor a number of health and welfare insurance plans for our employees.

Liabilities and expenses related to these plans are based on estimates of, among other things, the number of employees and eligible dependents covered under the plans, global health events, anticipated medical usage by participants and overall trends in medical costs and inflation.

We believe our estimates are reasonable/appropriate.

Actual experience may differ from these estimates and, therefore, produce a material difference between estimated and actual operating results.

however, actual experience in claim frequency and/or severity of a claim could materially differ from our estimates and affect our results of operations.

We also sponsor several health and welfare insurance plans for our employees.

Liabilities and expenses related to these plans are based on estimates of the number of employees and eligible dependents covered under the plans, global health events, anticipated utilization by participants and overall trends in medical costs and inflation.

We believe our estimates are reasonable and appropriate.

Actual experience may differ materially from these estimates and, therefore, produce a material difference between estimated and actual operating results.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Self-insurance reserves as of December 31, 2021 and 2020 were as follows (in millions):

Current self-insurance reserves $ 1,048 $ 1,085

Non-current self-insurance reserves (1)

Total self-insurance reserves $ 2,903 $ 2,704

(1) Included within Other Non-Current Liabilities in the consolidated balance sheets.

A five percent reduction or improvement in the assumed claim severity and claim frequency rates used to estimate our self-insurance reserves would result in an increase or decrease of approximately $290 million, respectively, in our reserves and expenses as of, and for the year ended, December 31, 2021.

Pension and Other Postretirement Medical Benefits

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Differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations and future expenses.

The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension and postretirement benefit obligations as of the measurement date, (2) differences between the expected and the actual return on plan assets, (3) changes in demographic assumptions including mortality, (4) participant experience different from demographic assumptions and (5) changes in coordinating benefits with plans not sponsored by UPS.

In 2019, we refined the bond matching approach used to determine the discount rate for our U.S.

pension and postretirement plans by implementing advances in technology and modeling techniques as discussed in note 6 to the audited, consolidated financial statements.

The primary factors contributing to actuarial gains and losses each year are:

• Changes in the discount rate used to value pension and postretirement benefit obligations as of the measurement date;

• Differences between expected and the actual return on plan assets;

• Changes in demographic assumptions including mortality;

• Differences in participant experience from demographic assumptions;

• Changes in coordinating benefits with plans not sponsored by UPS.

We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of a corridor (defined as 10% of the greater of the fair value of plan assets or the plans' projected benefit obligations) in pension expense upon remeasurement of a plan.

The remaining components of pension expense (referred to as "ongoing net periodic benefit cost"), primarily service and interest costs and the expected return on plan assets, are reported on a quarterly basis.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

The remaining components of pension expense (herein referred to as "ongoing net periodic benefit cost"), primarily service and interest costs and the expected return on plan assets, are reported on a quarterly basis.

The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate and return on assets for our pension and postretirement benefit plans, and the resulting increase (decrease) on our obligations and expense as of, and for the year ended, December 31, 2020 (in millions):

The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate and return on assets for our pension and postretirement benefit plans, and the resulting increase (decrease) in our obligations and expense as of, and for the year ended, December 31, 2021 (in millions):

Pension Plans 25 Basis Point

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Depreciation, Residual Value and Impairment of Fixed Assets

As of December 31, 2020, we had $32.3 billion of net fixed assets, the most significant category of which is aircraft.

As of December 31, 2021, we had $33.5 billion of net fixed assets, the most significant category of which was aircraft.

In accounting for fixed assets, we make estimates of the expected useful lives and residual values.

We review long-lived assets for impairment at either the individual asset level or the asset group for which the lowest level of independent cash flows can be identified.

Impairment reviews occur when circumstances indicate the carrying amount of an asset or asset group may not be recoverable based on undiscounted future cash flows.

The circumstances that would indicate potential impairment may include, but are not limited to, a significant change in the extent to which an asset is utilized and operating or cash flow losses associated with the use of the asset.

If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded.

Fair values are determined based on quoted market values, discounted cash flows or external appraisals, as appropriate.

There were no material impairment charges on our fixed assets during 2020 or 2019.

We evaluate the useful lives of our property, plant and equipment based on our usage, maintenance and replacement policies, and taking into account physical and economic factors that may affect the useful lives of the assets.

Our accounting policy for long-lived assets is set out in note 1 to the audited, consolidated financial statements.

In estimating the useful lives and expected residual values of aircraft, we consider actual experience with the same or similar aircraft types and future volume projections for our air products.

Adverse changes in volume forecasts, or a shortfall in our actual volume compared with our projections, could result in our current aircraft capacity exceeding current or projected demand.

This situation could lead to an excess of a particular aircraft, resulting in an impairment charge or a reduction of the expected useful life of an aircraft that may result in increased depreciation expense.

Revisions to estimates of useful lives and residual values could also be caused by changes to our maintenance programs, governmental regulations on aging aircraft and changing market prices of new and used aircraft of the same or similar types.

We periodically evaluate these estimates and assumptions, and adjust them as necessary.

Adjustments are accounted for on a prospective basis through depreciation expense.

We monitor our long-lived assets for indicators of impairment which may include, but are not limited to, a significant change in the extent to which an asset is utilized and operating or cash flow losses associated with the use of the asset.

If circumstances are present that indicate the carrying value of our long-lived assets may not be recoverable, we then perform impairment testing at the asset group level.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

In estimating the lives and expected residual values of aircraft, we rely upon actual experience with the same or similar aircraft types.

Revisions to these estimates could be caused by changes to our maintenance programs, changes in the utilization of the aircraft, governmental regulations on aging aircraft and changing market prices of new and used aircraft of the same or similar types.

We periodically evaluate these estimates and assumptions, and adjust them as necessary.

Adjustments are accounted for on a prospective basis through depreciation expense.

In estimating cash flows, we project future volume levels for our different air products in all geographic regions in which we do business.

Adverse changes in these volume forecasts, or a shortfall of our actual volume compared with our projections, could result in our current aircraft capacity exceeding current or projected demand.

See note 1 to the audited, consolidated financial statements for a discussion of our accounting policies for long-lived assets.

Asset groups represent the lowest level at which independent cash flows can be identified.

Determining the asset group requires judgment and changes in the way asset groups are defined could have material impact to the results of impairment testing.

We perform recoverability testing by comparing the undiscounted cash flows of the asset group to the carrying value of the asset group.

If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded.

Fair values are determined based on quoted market values, discounted cash flows or external appraisals, as appropriate.

Details of long-lived asset impairments are included in note 5 to the audited, consolidated financial statements.

Fair Value Measurements

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Certain of these financial instruments are required to be recorded at fair value, principally derivatives, marketable securities, pension assets and certain other investments.

Fair values are based on listed market prices, 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.

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.

These financial instruments are measured and reported at fair value on a recurring basis based upon a fair value hierarchy (Levels 1, 2 and 3).

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).

Certain financial instruments, including over-the-counter derivative instruments, are valued using pricing models that consider, among other factors, contractual and market prices, correlations, time value, credit spreads and yield curve volatility factors.

Changes in the fixed income, foreign currency exchange and commodity markets will impact our estimates of fair value in the future, potentially affecting our results of operations.

Further information on our accounting polices relating to fair value measurements can be found in note 1 to the audited, consolidated financial statements.

As of December 31, 2021, the majority of our financial instruments were categorized as either Level 1 or Level 2.

Refer to notes 3, 10 and 18 to the audited, consolidated financial statements for further information on these instruments.

A quantitative sensitivity analysis of our exposure to changes in commodity prices, foreign currency exchange rates and interest rates is presented in the Quantitative and Qualitative Disclosures about Market Risk section of this report.

Within our pension assets, we hold investments in hedge, risk parity, private debt, private equity and real estate funds which are primarily measured using net asset value ("NAV") as a practical expedient for fair value, as appropriate.

These investments were valued at $9.6 billion as of December 31, 2021.

In order to estimate NAV, we evaluate audited and unaudited financial reports from fund managers and make adjustments for investment activity between the date of the financial reports and December 31st.

These investments are not actively traded, and their values can only be estimated using these assumptions.

If our estimates of activity changed, this could have a material impact on the reported value of these investments and on the return on assets that we report.

Refer to note 6 to the audited, consolidated financial statements for further information on our pension assets.

Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis, including property, plant, and equipment, goodwill and intangible assets.

These assets are not measured at fair value on a recurring basis;

however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of an impairment or when an asset or disposal group is classified as held for sale.

For business acquisitions, we allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.

Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, technology and trade names from a market participant perspective, useful lives and discount rates.

Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

As a result, actual results may differ from estimates.

During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

We make certain estimates and judgments in determining income tax expense for financial statement purposes.

These estimates and judgments occur in the calculation of income by legal entity and jurisdiction, tax credits, benefits and deductions, and in the calculation of deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as tax, interest and penalties related to uncertain tax positions.

Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of an impairment or when an asset or disposal group is classified as held for sale.

In accounting for business acquisitions, we allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values.

Estimating the fair value of assets acquired and liabilities assumed requires judgment, especially with respect to identified intangible assets as there may be limited or no observable transactions within the market, requiring us to develop internal models to estimate fair value.

For example, estimating the fair value of identified intangible assets may require us to develop valuation assumptions, including but not limited to, future expected cash flows from identified intangible assets, synergies and the cost of capital.

Certain inputs require us to determine assumptions that are reflective of a market participant view of fair value.

Changes in any of these assumptions may materially impact the amount we recognize for identifiable assets and liabilities, in addition to the residual amount allocated to goodwill.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

We make certain estimates and judgments in determining income tax expense for financial statement purposes.

Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We assess the likelihood that we will be able to recover our deferred tax assets.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis