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Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-22 · 453 added, 439 removed, 569 unchanged (61% of the section changed)

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

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.

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 continue to execute our Customer First, People Led, Innovation Driven strategy, focusing on the parts of our market that value our integrated global network and building capabilities that matter to our customers.

We are shifting our strategic framework to Better and Bolder by seeking to enhance customer engagement through combining our network with digital capabilities to drive new services, while at the same time increasing efficiencies and remaining disciplined with capital allocation.

A number of macroeconomic factors contributed to a challenging operating environment in 2022, including global inflation and rising interest rates, recessionary forecasts, wage and labor market pressures, geopolitical uncertainties and foreign currency exchange rates relative to the United States ("U.S.") Dollar.

We continued to be affected by COVID-19 lockdowns in China that impacted both manufacturing and supply chains.

In addition, consumers returned to more pre-pandemic shopping patterns.

These factors resulted in disruptions to certain parts of our business, negatively impacted demand for our services and contributed to increases in certain of our operating costs.

We anticipate these factors will continue to impact us into 2023.

We expect we may experience additional uncertainty related to the upcoming renegotiation of certain of our union labor agreements.

Despite the challenging macroeconomic environment, our strategic execution strengthened our balance sheet and resulted in the generation of strong cash flows for the year.

We retired $2.0 billion of debt, reinvested in the business and returned cash to shareowners through dividends and share repurchases.

We also completed the acquisition of Delivery Solutions, a digital platform that optimizes customer deliveries across multiple networks, and the acquisition of Bomi Group, which will accelerate our growth in healthcare logistics by expanding our footprint and bringing additional expertise in cold chain logistics.

Neither acquisition had a material impact on our results of operations for the year.

See note 8 to the audited, consolidated financial statements for additional information on business acquisitions.

We have two reportable segments:

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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, 2022 and 2021, which are discussed in more detail in the sections that follow, include:

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Average Revenue Per Piece $ 13.38 $ 12.32 $ 1.06 8.6 %

• 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.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

• Average daily package volume in our global small package operations decreased, primarily due to lower levels of business-to-consumer shipping.

• Revenue increased due to strong revenue per piece growth, with most of the increase in our U.S.

Domestic Package segment.

Revenue in Supply Chain Solutions decreased.

• Operating expenses increased, driven by higher fuel prices and higher compensation and benefits expense, primarily in our U.S.

Domestic Package segment.

• Operating profit and operating margin increased, with the increases coming from the U.S.

Domestic Package segment and Supply Chain Solutions, while operating profit and operating margin declined in the International Package segment.

• We reported net income of $11.5 billion and diluted earnings per share of $13.20.

Adjusted diluted earnings per share was $12.94 after adjusting for the after-tax impacts of:

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

◦ defined benefit pension and postretirement medical benefit plan mark-to-market gains outside of a 10% corridor, together with defined benefit pension plan curtailment gains, totaling $806 million, or $0.92 per diluted share;

◦ a one-time, non-cash charge related to the accelerated vesting of certain equity awards in connection with an incentive compensation program design change of $384 million, or $0.44 per diluted share;

◦ a one-time, non-cash charge in connection with a reduction in the estimated residual value of our MD-11 aircraft of $58 million, or $0.07 per diluted share;

◦ transformation strategy costs of $142 million, or $0.15 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.

Domestic Package segment, revenue growth resulted from higher fuel revenue, driven by increases in both price per gallon and in fuel surcharge rates as part of our pricing initiatives, as well as improvements in revenue quality and customer mix.

Expenses increased due to higher fuel prices and higher compensation and benefits costs, which were partially offset by declines in purchased transportation costs and higher productivity as we executed our strategy.

In our International Package segment, revenue increased slightly, driven by fuel revenue, revenue quality actions and favorable shifts in customer and product mix.

These increases were mostly offset by lower volume, the impact of the strengthening U.S.

Dollar and reductions in demand-related surcharges, primarily in the fourth quarter.

Expense increases were primarily driven by higher fuel prices, partially offset by favorable currency impacts and volume declines.

In Supply Chain Solutions, the decrease in revenue was driven by volume and market rate declines in Forwarding, as well as the impact of divesting UPS Freight in 2021.

These decreases were partially offset by growth in our healthcare operations and in a number of our other businesses.

Expenses decreased, driven by lower transportation costs in Forwarding and a reduction in operating expenses due to the divestiture of UPS Freight.

These decreases were partially offset by higher operating costs in Logistics.

2021 compared to 2020

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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.

Our adjusted financial measures do not represent a comprehensive basis of accounting.

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

Our adjusted financial measures do not represent a comprehensive basis of accounting and therefore may not be comparable to similarly titled measures reported by other companies.

Adjusted amounts reflect the following (in millions):

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Operating Expenses:

Incentive Compensation Program Design Changes $ 505 $ —

Long-Lived Asset Estimated Residual Value Changes 76 —

Transformation Strategy Costs 178 380

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Other Income and (Expense):

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

Defined Benefit Pension and Postretirement Medical Plan (Gains) and Losses $ (1,061) $ (3,272)

Total Adjustments to Other Income and (Expense) $ (1,061) $ (3,272)

Total Adjustments to Income Before Income Taxes $ (302) $ (2,938)

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

Income Tax (Benefit) Expense:

Incentive Compensation Program Design Changes $ (121) $ —

Long-Lived Asset Estimated Residual Value Changes (18) —

Transformation Strategy Costs (36) (95)

Goodwill and Asset Impairment Charges, and Divestitures — 11

Defined Benefit Pension and Postretirement Medical Plan (Gains) and Losses 255 784

Total Adjustments to Income Tax Expense $ 80 $ 700

Total Adjustments to Net Income $ (222) $ (2,238)

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 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.

These items have been excluded from the following discussions of "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, other income and (expense), income tax expense and effective tax rate.

The income tax impacts of these items 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 effective tax rates in 2021 and 2020 were 23.8% and 22.5%, respectively.

The blended average effective income tax rates for the years ended December 31, 2022 and 2021 were 26.5% and 23.8%, respectively.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

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.

Incentive Compensation Program Design Changes

During 2022, we completed certain structural changes to the design of our incentive compensation programs that resulted in a one-time, non-cash charge in connection with the accelerated vesting of certain equity incentive awards that we do not expect to repeat.

We believe excluding the impacts of such changes allows users of our financial statements to more appropriately identify underlying growth trends in compensation and benefits expense.

For information regarding incentive compensation program design changes, see note 13 to the audited, consolidated financial statements.

Long-lived Asset Estimated Residual Value Changes

During the fourth quarter of 2022, we determined to retire six of our existing MD-11 aircraft from operational use in 2023.

In connection therewith, we reduced the estimated residual value of our MD-11 fleet, incurring a one-time, non-cash charge on our fully-depreciated aircraft.

This charge was allocated between our domestic package and international package segments.

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 this charge.

We believe excluding the impact of this charge better enables users of our financial statements to understand the ongoing cost associated with our long-lived assets.

For information regarding residual values, see note 4 to the audited, consolidated financial statements.

Transformation Charges, and Goodwill, Asset Impairment and Divestiture Charges

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, and goodwill, asset impairment and divestiture charges.

We believe excluding the impact of these charges better enables users of our financial statements to view underlying business performance from the perspective of management.

We do not consider these costs when evaluating the operating performance of our business units, making decisions to allocate resources or in determining incentive compensation awards .

For more information regarding transformation activities, see note 18 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.

For more information regarding goodwill and asset impairment charges, and divestitures, see note 1 and note 7 to the audited, consolidated financial statements.

Foreign Currency Exchange Rate Changes and Hedging Activities

We 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.

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

Defined Benefit Plans Mark-to-Market Impacts

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 Investment income (expense) and other within Other Income and (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 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.

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 gain (loss), as well as the weighted-average actuarial assumptions used to determine our net periodic benefit cost, for each year:

Defined Benefit Pension and Postretirement Medical Plan Gains and Losses

We incur certain employment-related expenses associated with pension and postretirement medical benefits.

These pension and postretirement medical benefits costs for company-sponsored defined benefit plans are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS.

Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement of any of our plans.

We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor (defined as 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation), as well as gains and losses resulting from plan curtailments and settlements, for our defined benefit pension and postretirement medical plans immediately as part of Investment income (expense) and other in the statements of consolidated income.

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

We believe excluding these defined benefit pension and postretirement medical plan gains and losses provides important supplemental information by removing the volatility associated with plan amendments and short-term changes in market interest rates, equity values and similar factors.

The remeasurement of our defined benefit pension and postretirement medical plans' assets and liabilities resulted in gains of $1.1 and $3.3 billion for the years ended December 31, 2022 and 2021, respectively.

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

Year Ended December 31,

Components of mark-to-market gain (loss) (in millions):

Components of defined benefit plan gain (loss) (in millions):

Discount rates $ 5,210 $ 1,871

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Total mark-to-market gain (loss) 1,027 3,272

Curtailment gain 34 —

Total defined benefit plan gain (loss) $ 1,061 $ 3,272

Year Ended December 31,

Weighted-average actuarial assumptions:

Expected rate of return on plan assets 6.40 % 7.70 %

Expected rate of return on plan assets used in determining net periodic benefit cost 5.83 % 6.40 %

Actual rate of return on plan assets (24.11) % 9.11 %

Discount rate used for net periodic benefit cost 2.87 % 3.55 %

Discount rate used in determining net periodic benefit cost 3.11 % 2.87 %

Discount rate at measurement date 5.77 % 3.11 %

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:

The pre-tax defined benefit plan gains and losses for the years ended December 31, 2022 and 2021 consisted of the following:

2022 - $1.1 billion pre-tax defined benefit plan gain:

• Discount Rates ($5.2 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.

The weighted-average discount rate for our pension and postretirement medical plans increased from 3.11% as of December 31, 2021 to 5.77% as of December 31, 2022, primarily due to an increase in U.S.

treasury yields as well as an increase in credit spreads on AA-rated corporate bonds in 2022.

• Return on Assets ($4.1 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:

• Discount Rates ($6.5 billion pre-tax loss):

The weighted-average discount rate for our pension and postretirement medical plans decreased from 3.55% as of December 31, 2019 to 2.87% as of December 31, 2020, primarily due to a decline in U.S.

treasury yields that was slightly offset by an increase in credit spreads on AA-rated corporate bonds.

• Return on Assets ($2.4 billion pre-tax gain):

In 2020, 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.

In 2022, the actual rate of return on plan assets was lower than our expected rate of return, primarily due to weaker global equity and U.S.

bond market performance.

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

• Coordinating benefits attributable to the Central States Pension Fund ($2.0 billion pre-tax loss):

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.

This loss was due to the differences between actual and estimated participant data and demographic factors, including healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

2021 - $3.3 billion pre-tax defined benefit plan gain, primarily due to the impact of the interim remeasurement of the UPS/IBT Plan in the first quarter of 2021 as described in note 5 to the audited, consolidated financial statements:

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

This gain was largely attributable to an increase in the discount rate for the UPS/IBT Plan from 2.98% as of December 31, 2020 to 3.70% as of March 31, 2021, driven by an increase in U.S.

treasury yields in 2021.

• Return on Assets ($0.3 billion pre-tax loss):

This loss was driven by the actual rate of return on plan assets being approximately 220 basis points lower than our expected rate of return as of March 31, 2021, primarily due to weak global equity and U.S.

bond market performance.

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

• Coordinating benefits attributable to the Central States Pension Fund ($1.8 billion pre-tax gain):

This represents a reduction of the liability for potential coordinating benefits that may be required to be paid related to the Central States Pension Fund.

Expense Allocations

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These activity-based costing methods require us to make estimates that impact the amount of each expense category that is attributed to each segment.

Changes in these estimates would directly impact the amount of expense allocated to each segment, and therefore the operating profit of each reporting segment.

Changes in these estimates directly impact the amount of expense allocated to each segment and therefore the operating profit of each reporting segment.

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

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.

There were no significant changes to our allocation methodologies for 2022 relative to 2021.

UNITED PARCEL SERVICE, INC.

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Operating Expenses $ 57,212 $ 53,881 $ 3,331 6.2 %

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

Incentive Compensation Program Design Changes (431) — (431) N/A

Long-Lived Asset Estimated Residual Value Changes (25) — (25) N/A

Transformation Strategy Costs (121) (281) 160 (56.9) %

Adjusted Operating Expenses $ 56,635 $ 53,600 $ 3,035 5.7 %

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2021 (2.8) % 4.3 % 5.0 % 6.5 %

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.

Revenue also benefited from one additional operating day in 2022 compared to 2021.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

Average daily volume decreased, driven by a 5.1% reduction in residential shipments.

The decline in residential shipments was driven by declines from our largest customer in accordance with our agreed upon contract terms as we continued to execute within our strategy.

This decline was slightly offset by growth from small- and medium-sized businesses ("SMBs"), including the expansion of our Digital Access Program.

Macroeconomic factors, including rising interest rates and inflation, and the shift in consumer spending back towards services and in-store shopping also contributed to the residential volume decline.

Business-to-consumer shipments represented approximately 59.4% of average daily volume compared to 60.7% in 2021.

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.

Business-to-business shipments remained relatively flat compared to 2021.

Commercial activity increased in the first half of the year, but declined in the second half of 2022, primarily from industry sectors that are more sensitive to the macroeconomic factors discussed above.

We anticipate overall average daily volume year-over-year growth rates will continue to decline in the first half of 2023 and then grow through the remainder of the year as economic conditions improve.

Within our Air products, average daily volume decreases were driven by lower volumes from certain large customers, as well as shifts in product preferences during the second half of the year.

Ground residential average daily volume decreased 4.3%, driven by the declines discussed above.

SurePost volume remained relatively flat for the year.

Ground commercial volume increased 0.6%, driven by growth from SMBs and large customers in the first half of 2022 that was largely offset by volume declines in the second half of the year.

Rates and Product Mix

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.

Revenue per piece in our Air and Ground products increased for the full year, driven by base rate increases and other pricing actions, and favorable changes in customer mix.

A shift in product mix during the second half of the year, and declines in demand-related surcharges, slightly offset these increases.

Rates for Air and Ground products increased an average of 5.9% in December 2021.

In our Next Day Air and Deferred products, revenue per piece growth was negatively impacted by a reduction in average billable weight per piece.

We anticipate moderate revenue per piece growth in 2023 as we continue to execute on pricing initiatives within our strategy.

Fuel Surcharges

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.

Department of Energy’s (“DOE”) Gulf Coast spot price for a gallon of kerosene-type jet fuel, while the ground fuel surcharge is based on the DOE’s On-Highway Diesel Fuel Price.

Based on published rates, the average fuel surcharge rates for domestic Air and Ground products were as follows:

Year Ended December 31, % Point Change

2021 2020 2021 vs.

Next Day Air / Deferred 8.1 % 3.9 % 4.2 %

Ground 8.6 % 6.6 % 2.0 %

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.

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

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

Department of Energy's ("DOE") Gulf Coast spot price for a gallon of kerosene-type fuel, and our ground fuel surcharge is based on the DOE's On-Highway Diesel Fuel price.

Fuel surcharge revenue increased $3.0 billion, driven by increases in price per gallon and increases in fuel surcharges as part of our pricing initiatives.

We expect a reduction in fuel surcharge revenue in 2023 based on the current commodity market outlook.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

• 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 Expenses

Operating expenses and adjusted operating expenses increased year over year.

The increase includes the impact of one additional operating day.

The cost of operating our integrated air and ground network increased $858 million and pickup and delivery costs increased $1.5 billion.

Other indirect operating costs increased $498 million and package sorting costs increased $163 million.

These increases primarily consisted of the following:

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

As noted above, we expect fuel prices to decline in 2023.

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

• Higher compensation expense due to contractual rate increases and cost of living and market-rate adjustments for our union workforce, that were partially offset by a decrease in union labor hours.

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

These increases were partially offset by lower purchased transportation costs due to a reduction in ground volume handled by third-party carriers and continued productivity initiatives as we executed within our strategy.

Total cost per piece increased 9.2% for the year and adjusted cost per piece increased 8.6%, for the reasons described above.

We anticipate that the cost per piece growth rate will be elevated in the first quarter of 2023 and will then moderate throughout the remainder of the year.

We expect our productivity initiatives will continue to help offset rising compensation and benefit costs.

Operating Profit and Margin

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%.

As a result of the factors described above, operating profit increased $561 million, with operating margin increasing 20 basis points to 10.9%.

Adjusted operating profit increased $857 million, with adjusted operating margin increasing 70 basis points to 11.8%.

UNITED PARCEL SERVICE, INC.

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Operating Expenses $ 15,372 $ 14,895 $ 477 3.2 %

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

Incentive Compensation Program Design Changes (30) — (30) N/A

Long-Lived Asset Estimated Residual Value Changes (51) — (51) N/A

Transformation Strategy Costs (12) (74) 62 (83.8) %

Adjusted Operating Expenses $ 15,279 $ 14,821 $ 458 3.1 %

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RESULTS OF OPERATIONS

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.

Average daily volume decreased for both domestic and export products.

Volume from both large customers and SMBs declined, driven by declines in the retail and technology sectors.

Business-to-consumer volume decreased 17.2%, as challenging global economic conditions, including high inflation, high energy costs, COVID-19 lockdowns in China and geopolitical uncertainty, impacted consumer demand.

In the first half of the year, volume growth was also impacted by the year-over-year effect of COVID-19 restrictions on consumer e-commerce spending.

These global economic conditions also impacted business-to-business volume, which decreased 2.9%.

We expect year-over-year volume growth in the first half of 2023 to be negative, with economic conditions and volume growth rates improving in the second half of the year.

Export volume decreased for the year driven by reduced intra-Europe activity, as well as lower volumes on the Asia and U.S.

export trade lanes.

Intra-Europe declines resulted from overall economic conditions.

The decline in Asia export trade lanes was also driven by COVID-19 lockdowns, which resulted in fewer flights being operated throughout the year and reduced business activity within China and Hong Kong.

We experienced lower volumes from certain large customers on U.S.

export trade lanes, due to the strength of the U.S.

Dollar and the economic factors discussed above.

Our premium products saw volume decline 3.0%, primarily from our Express Saver product which was impacted by lower volumes from certain large customers as a result of the economic factors and COVID-19 disruptions discussed above.

Volume in our non-premium products decreased 1.4%, driven by declines in our Worldwide products.

These declines were the result of an overall reduction in consumer demand for all of the reasons discussed above.

Domestic volume declines were largest in Europe and Canada, where macroeconomic conditions and the year-over-year impact of COVID-19 restrictions on e-commerce spending resulted in lower residential deliveries.

Rates and Product Mix

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are made throughout the year and vary by geographic market.

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.

We continue to apply demand-related surcharges on certain lanes.

Total revenue per piece increased 7.6%, primarily due to fuel surcharges and favorable shifts in customer and product mix as we executed on revenue quality initiatives.

Demand-related surcharges contributed slightly to the growth in revenue per piece, although we experienced a decline in these surcharges during the latter part of the year.

Unfavorable currency movements partially offset these increases.

Excluding the impact of currency, revenue per piece increased 13.5%.

Export revenue per piece increased 5.0% for the reasons described above.

Excluding the impact of currency, export revenue per piece increased 9.6%.

Domestic revenue per piece increased 2.1% for the reasons described above.

Excluding the impact of currency, domestic revenue per piece increased 13.3%.

We expect overall revenue per piece to be relatively flat in 2023, with a decline in demand-related surcharges relative to 2022.

Fuel Surcharges

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

The fuel surcharge we apply to international air services originating inside or outside the U.S.

is largely indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel.

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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 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.

Total international fuel surcharge revenue increased by $1.2 billion, driven primarily by increases in price per gallon as well as changes in fuel surcharge rates as part of our pricing strategy.

These increases were slightly offset by unfavorable currency movements and volume declines.

Based on commodity forecasts, we expect declining fuel prices will drive a decrease in fuel surcharge revenue in 2023.

UNITED PARCEL SERVICE, INC.

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Operating Expenses

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.

The majority of our contracts for fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential.

While many of the indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for fuel.

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

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 expenses, and adjusted operating expenses, increased year over year.

This includes the impact of one additional operating day.

The costs of operating our integrated international air and ground network increased $1.1 billion, primarily due to higher fuel prices.

As noted above, we expect fuel prices to decrease in 2023.

Pickup and delivery costs decreased $333 million, other indirect costs, including compensation and benefits, decreased $319 million and package sorting costs decreased $20 million as inflationary pressures were more than offset by favorable currency movements and volume declines.

We expect volume declines and inflationary pressures will continue to impact our costs in 2023.

We will continue adjusting our network in order to mitigate these impacts.

Operating Profit and Margin

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%.

As a result of the factors described above, operating profit decreased $320 million, with operating margin decreasing 180 basis points to 22.0%.

Adjusted operating profit decreased $301 million and adjusted operating margin decreased 180 basis points to 22.4%.

Substantially all of our operations in Russia and Belarus remain suspended and are being wound down, and our operations in Ukraine remain suspended.

None of these actions have had a material impact on us.

We continue to monitor the evolving impact of Russia’s invasion of Ukraine on the global economy.

UNITED PARCEL SERVICE, INC.

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2022 2021 $ %

Freight Less-Than-Truckload Statistics:

Revenue (in millions):

Revenue Per Hundredweight $ 29.93 $ 27.46 $ 2.47 9.0 %

Shipments (in thousands) 2,829 8,847 (68.0) %

Shipments Per Day (in thousands) 33.3 34.8 (4.3) %

Gross Weight Hauled (in millions of lbs) 2,944 9,343 (68.5) %

Weight Per Shipment (in lbs) 1,041 1,056 (1.4) %

Operating Days in Period 85 254

Revenue (in millions):

Forwarding $ 8,943 $ 9,872 $ (929) (9.4) %

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Operating Expenses $ 14,660 $ 15,701 $ (1,041) (6.6) %

Incentive Compensation Program Design Changes (44) — (44) N/A

Transformation Strategy Costs (45) (25) (20) 80.0 %

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

Goodwill, Asset Impairment Charges and Divestitures — 46 (46) (100.0) %

Adjusted Operating Expenses $ 14,571 $ 15,722 $ (1,151) (7.3) %

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

Revenue $ (272)

Operating Expenses 307

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2022 2021 $ %

Transformation Strategy Costs (in millions):

Adjustments to Operating Expenses (in millions)**:

Transformation Strategy Costs:

Forwarding $ 18 $ 8 $ 10 125.0 %

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Freight — 1 (1) (100.0) %

Other 11 — 11 N/A

Other 4 11 (7) (63.6) %

Total Transformation Strategy Costs $ 45 $ 25 $ 20 80.0 %

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.

Incentive Compensation Program Design Changes:

Forwarding $ 22 $ — $ 22 N/A

Logistics 22 — 22 N/A

Total Incentive Compensation Program Design Changes $ 44 $ — $ 44 N/A

Total Adjustments to Operating Expenses $ 89 $ 25 $ 64 256.0 %

** Excludes the $46 million pre-tax gain recognized as part of the divestiture of UPS Freight for the year ended December 31, 2021.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

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.

Total revenue within Supply Chain Solutions decreased for the year.

Lower volume and revenue in forwarding and the impact of divesting UPS Freight in the second quarter of 2021 more than offset strong revenue growth in logistics and a number of our other businesses.

Forwarding revenue was impacted by the following:

• International airfreight revenue decreased approximately $480 million, as challenging economic conditions and lockdowns in China drove a decline in customer demand during the year.

Lower demand coupled with higher capacity, particularly in the fourth quarter of 2022, resulted in a decline in the market rates we charge for services, including demand-related surcharges that were elevated in the first quarter of the year.

• Revenue in our truckload brokerage business decreased approximately $300 million, as volume and market rates declined.

These declines were partly offset by successful revenue quality initiatives.

• The remaining reduction in revenue was attributable to ocean freight forwarding as a result of a significant decline in market rates in the second half of the year, particularly on the Asia to U.S.

Volume also declined during the year, driven by lower customer demand.

As a result of expected market conditions, we anticipate that volume will remain challenged and that market rates within all of our Forwarding businesses during the first half of 2023 will be lower than the first half of 2022.

Rates in our airfreight and truckload brokerage businesses are expected to stabilize in the latter half of 2023.

Revenue within our Logistics businesses increased as a result of the following factors:

• Healthcare logistics revenue increased approximately $360 million, driven by clinical trials and pharmaceuticals.

We expect growth to continue in 2023, including revenue from Bomi Group, which we acquired in the fourth quarter.

• Revenue in our mail services business increased approximately $160 million as a result of volume from new customers, rate increases and a favorable shift in product characteristics.

• The remaining revenue growth was within our other distribution operations.

We experienced year-over-year revenue increases, driven by customer expansion, revenue quality initiatives and increased demand for warehousing services.

Revenue from the other businesses within Supply Chain Solutions increased, partly due to the acquisition of Roadie, Inc.

in the fourth quarter of 2021.

Revenue from transition services provided to the acquirer of UPS Freight increased and revenue from our service contracts with the U.S.

Postal Service also increased.

We expect our transition services revenue to decline in 2023 as the acquirer of UPS Freight begins to exit these arrangements.

Operating Expenses

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

Total operating expenses and total adjusted operating expenses for Supply Chain Solutions decreased for the year.

This included a decrease of $952 million due to the divestiture of UPS Freight in 2021.

Forwarding operating expenses decreased $1.1 billion, driven by a reduction in purchased transportation costs.

Elevated market rates in the first half of 2022 were more than offset by declines in the latter part of the year.

We expect market volume and rates will remain low through at least mid-2023, which will reduce our purchased transportation costs.

Logistics operating expenses increased $485 million, including the impact of the Bomi Group acquisition.

Compensation and benefits expense increased, driven by business growth and inflationary pressures across our logistics businesses.

Purchased transportation costs increased in our healthcare and mail services businesses due to business growth.

Mail services expenses were also impacted by transportation rate increases and higher fuel surcharges.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Expenses for the other businesses within Supply Chain Solutions increased.

This was driven by the acquisition of Roadie, Inc.

in the fourth quarter of 2021, and higher fuel costs associated with service contracts with the U.S.

Postal Service.

Costs incurred in procuring transportation for, and providing transition services to, the acquirer of UPS Freight also increased for the year.

We expect these costs to decline in 2023 as the acquirer of UPS Freight continues to exit these arrangements.

Operating Profit and Margin

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%.

As a result of the factors described above, total operating profit increased $43 million, with operating margin increasing 90 basis points to 10.8%.

On an adjusted basis, operating profit increased $153 million and operating margin increased 150 basis points to 11.3%.

UNITED PARCEL SERVICE, INC.

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Transformation and Other Charges (46) (206) 160 (77.7) %

Incentive Compensation Program Design Changes (505) — (505) N/A

Adjusted Compensation and benefits 47,230 46,501 729 1.6 %

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Transformation and Other Charges (132) (174) 42 (24.1) %

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

Long-Lived Asset Estimated Residual Value Changes (76) — N/A

Goodwill, Asset Impairment Charges and Divestitures — 46 (46) (100.0) %

Adjusted Total Other expenses $ 39,255 $ 37,642 $ 1,613 4.3 %

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Total Transformation Strategy Costs $ 178 $ 380 $ (202) (53.2) %

Goodwill and asset impairment charges, and divestitures:

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

Incentive Compensation Program Design Changes:

Compensation 505 — 505 N/A

Long-Lived Asset Estimated Residual Value Changes:

Depreciation and amortization 76 — 76 N/A

Goodwill, Asset Impairment Charges and Divestitures:

Other expenses $ — $ (46) $ 46 (100.0) %

Total Adjustments to Operating Expenses $ 759 $ 334 $ 425 127.2 %

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Compensation and Benefits

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.

Total compensation and benefits and adjusted total compensation and benefits increased.

Compensation costs increased $495 million.

On an adjusted basis, compensation costs decreased $16 million.

The principal factors impacting the change were:

Domestic direct labor costs increased $422 million due to annual contractual rate increases for our union workforce that occur in August, as well as cost of living adjustments driven by inflation and other market factors.

Headcount in our line-haul network operations also increased.

These increases were partially offset by a reduction in labor hours, driven by volume declines and productivity improvements.

• International compensation decreased $245 million, primarily due to volume declines and favorable currency movements.

• Supply Chain Solutions' compensation costs increased $95 million, driven by business growth and inflationary pressures across our logistics operations.

• Management compensation increased $466 million, primarily due to the accelerated vesting of certain equity incentive awards in connection with a one-time change to the design of our incentive compensation programs.

On an adjusted basis, management compensation increased $42 million due to salary growth, which was partially offset by reductions in other incentive awards and sales commissions.

• The UPS Freight divestiture in 2021 resulted in a $328 million decrease in compensation costs.

We expect inflation and other market factors will continue to impact compensation cost in certain parts of our business in 2023.

Benefits costs increased $579 million and increased $745 million on an adjusted basis, primarily as a result of:

• Health and welfare costs increased $195 million, driven by increased contributions to multiemployer plans as a result of contractual rate increases that occur annually in August.

The UPS Freight divestiture in 2021 reduced expense by $75 million.

• Pension and postretirement benefits increased $215 million due to contractually-mandated contribution increases to multiemployer plans and higher service costs for company-sponsored plans.

The UPS Freight divestiture in 2021 reduced expense by $53 million.

• Vacation, excused absence, payroll taxes and other expenses increased $248 million, driven by wage growth and additional discretionary payments.

The UPS Freight divestiture in 2021 reduced expense by $54 million.

• Workers' compensation expense increased $88 million due to an increase in current year claims, partially offset by favorable developments in reserves for existing claims.

Repairs and Maintenance

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.

The increase in repairs and maintenance expense was due to an increase in planned building maintenance as well as increases in the cost of materials and supplies, which we expect to persist in 2023.

We also incurred higher costs for aircraft engine and airframe maintenance due to the timing of scheduled maintenance events.

We anticipate these costs will remain elevated as scheduled maintenance events commence on newer aircraft within our fleet.

Depreciation and Amortization

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

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.

Depreciation and amortization expense increased, primarily due to the reduction in the estimated residual value of our fully-depreciated MD-11 aircraft, facility automation and expansion projects, investments in internally developed software and the amortization of acquired intangible assets.

Excluding the impact of the estimated residual value change, adjusted depreciation and amortization expense increased due to the aforementioned factors.

The reduction in estimated residual value of our MD-11 aircraft will result in additional depreciation expense for the remainder of these aircraft in 2023 and thereafter.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

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.

Purchased Transportation

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

• Supply Chain Solutions expense decreased $957 million, resulting from volume declines in our international air and ocean freight and truckload brokerage businesses and declining market rates paid for services in the latter half of the year.

These impacts were slightly offset by expense increases in our logistics operations due to business growth and third-party rate increases in our mail services business.

The UPS Freight divestiture in 2021 drove a decrease of $260 million.

Domestic expense decreased $254 million, driven by a reduction in ground volume handled by third-party carriers as a result of network optimization initiatives.

This was partially offset by the impacts of higher fuel surcharges and rate increases.

• International expense decreased $194 million, primarily due to a reduction in air charter expense in the second half of the year and favorable currency movements.

These decreases were partially offset by increases in markets rates for ground transportation and fuel surcharges from third-party carriers.

The increase in fuel expense was primarily driven by higher prices for jet fuel, diesel and gasoline.

Market prices, and the manner in which we purchase fuel, influence our costs.

The majority of our fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential.

While many of the indices are correlated, each index may respond differently to changes in underlying prices, which in turn can drive variability in our costs.

Other Occupancy

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.

The increase in other occupancy expense, and adjusted other occupancy expense, was due to additional facilities coming into service, higher utilities costs and rent and property tax increases.

We expect inflation may continue to impact rent and utility costs in 2023.

Other Expenses

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.

Other expenses and adjusted other expenses increased primarily as a result of:

• An increase of $170 million in commissions paid for certain online shipments.

• Hosted software application fees and other technology costs increased $115 million in support of ongoing investments in our digital transformation.

• Professional fees increased $72 million, driven by an increase in support services provided to various business units and information technology consulting to support ongoing strategic initiatives.

• Other increases included the cost of goods provided under transitional service agreements to the acquirer of UPS Freight, allowances for credit losses, facility security expenses and self-insured automobile liability expense, driven by increases in the frequency and severity of claims.

These increases were partially offset by favorable developments in certain legal and tax contingencies and reductions in asset impairment charges and customer claims.

UNITED PARCEL SERVICE, INC.

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2022 2021 $ %

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

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

Investment Income (Expense) and Other $ 2,435 $ 4,479 $ (2,044) (45.6) %

Defined Benefit Pension and Postretirement Medical Plan (Gains) and Losses (1,061) (3,272) 2,211 (67.6) %

Adjusted Investment Income (Expense) and Other $ 1,374 $ 1,207 $ 167 13.8 %

Interest Expense (704) (694) (10) 1.4 %

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

Total Other Income and (Expense) $ 1,731 $ 3,785 $ (2,054) (54.3) %

Adjusted Other Income and (Expense) $ 670 $ 513 $ 157 30.6 %

Investment Income (Expense) and Other

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.

Investment and other income decreased $2.0 billion, primarily due to a reduction in mark-to-market gains recognized on remeasurements of our defined benefit pension and postretirement plans.

Excluding the impact of these gains, adjusted investment and other income increased $167 million, driven by higher yields on higher average invested balances and foreign currency gains.

These increases were partially offset by declines in the fair values of certain non-current investments.

Interest Expense

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.

Interest expense increased due to the impact of higher effective interest rates on floating rate debt, partially offset by lower average outstanding debt balances, higher capitalized interest and favorable foreign currency exchange rate impacts on foreign currency-denominated debt.

UNITED PARCEL SERVICE, INC.

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Income Tax Impact of:

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

Defined Benefit Pension and Postretirement Medical Plan (Gains) and Losses (255) (784) 529 (67.5) %

Incentive Compensation Program Design Changes 121 — 121 N/A

Long-Lived Asset Estimated Residual Value Changes 18 — 18 N/A

Transformation Strategy Costs 36 95 (59) (62.1) %

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

Goodwill and Asset Impairment Charges, and Divestitures — (11) 11 (100.0) %

Adjusted Income Tax Expense $ 3,197 $ 3,005 $ 192 6.4 %

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Liquidity and Capital Resources

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

As of December 31, 2022, we had $7.6 billion in cash, cash equivalents and marketable securities.

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We regularly evaluate opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund operations.

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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Non-cash operating activities (a)

Pension and postretirement benefit plan contributions (company-sponsored plans) (576) (3,125)

Pension and postretirement medical benefit plan contributions (company-sponsored plans) (2,342) (576)

Hedge margin receivables and payables 274 272

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Net cash from operating activities $ 14,104 $ 15,007

(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.

(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 medical 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 decreased $903 million in 2022, driven by higher contributions to our company-sponsored defined benefit pension and postretirement medical plans.

We made discretionary contributions to our qualified U.S.

pension plans of $1.9 billion in 2022 compared to $0.2 billion in 2021.

Our working capital benefited from an improvement in collections that was partially offset by increases in duty and tax settlements on behalf of our customers due to the timing of payments.

Additionally, during 2022, we paid $234 million of employer payroll taxes that were deferred under the Coronavirus Aid, Recovery and Economic Security ("CARES") Act in 2020, compared to a payment of $577 million in 2021.

We paid the remaining $323 million of deferred employer payroll taxes in January 2023.

Cash payments for income taxes were $2.6 billion and $1.9 billion for the years ended December 31, 2022 and 2021, respectively, with changes driven by the timing of deductions related to pension contributions and depreciation.

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.

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We have no economic interest in a supplier’s decision to participate, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Amounts due to our suppliers that participate in the SCF program are included in Accounts payable in our consolidated balance sheets.

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The amounts settled through the SCF program were approximately $2.3 and $1.7 billion for the years ended December 31, 2022 and 2021, respectively.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

As of December 31, 2022, approximately $2.2 billion of our total worldwide holdings of cash, cash equivalents and marketable securities were held by foreign subsidiaries.

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Net (purchases), sales and maturities of marketable securities $ (1,651) $ 54

Cash paid for business acquisitions, net of cash and cash equivalents acquired $ (602) $ (20)

Acquisitions, net of cash acquired $ (755) $ (602)

Other investing activities $ (333) $ 18

(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.

(1) In addition to capital expenditures of $4.8 and $4.2 billion for the years ended December 31, 2022 and 2021, respectively, there were principal repayments of finance lease obligations of $149 and $208 million, respectively.

These are included in cash flows from financing activities.

We have commitments for the purchase of aircraft, vehicles, equipment and real estate to provide for the replacement of existing capacity and anticipated future growth.

Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions.

Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including regulatory, economic and industry conditions.

Our current investment program anticipates investments in technology initiatives and enhanced network capabilities, including over $1.0 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.

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

We currently expect our capital expenditures will be approximately $5.3 billion in 2023, of which approximately 50 percent will be allocated to expansion projects.

Total capital expenditures increased in 2022, primarily due to:

• Spending on buildings, facilities and plant equipment increased, largely due to facility automation and capacity expansion projects in our global small package business.

Expenditures in the fourth quarter more than offset the impact of supply chain disruptions that we experienced earlier in the year.

• Aircraft and parts expenditures increased due to higher contract deposits on open aircraft orders, partially offset by fewer payments associated with the delivery of aircraft.

• Vehicles expenditures increased as supply chain constraints eased in the latter half of 2022 relative to 2021.

• Information technology expenditures increased due to additional deployments of technology equipment and continuing investments in our digital capabilities and network automation.

Proceeds from the disposal of businesses, property, plant and equipment decreased, primarily due to the 2021 divestiture of UPS Freight for cash proceeds of $848 million.

Net purchases of marketable securities increased due to a shift to longer duration investments.

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 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.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

The increase in cash paid for acquisitions in 2022 was primarily attributable to the acquisitions of Bomi Group and Delivery Solutions, and the purchase of development areas for The UPS Store.

Cash paid for acquisitions in 2021 related to the acquisition of Roadie and the purchase of development areas for The UPS Store.

The increase in other investing activities was driven by our investment of $252 million in the parent company of CommerceHub, Inc., as well as changes in our other non-current investments and various other items.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Cash Flows From Financing Activities

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Shares outstanding at period end 859 870

Percent increase (decrease) in shares outstanding 0.6 % 0.9 %

Dividends declared per share $ 6.08 $ 4.08

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Total capitalization $ 39,465 $ 36,184

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).

We repurchased 19.0 and 2.6 million shares of class B common stock for $3.5 billion and $500 million under our stock repurchase program for the years ended December 31, 2022 and 2021, respectively.

We anticipate our share repurchases will total $3.0 billion for 2023.

For additional information on our share repurchase activities, see note 12 to the audited, consolidated financial statements.

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In the first quarter of 2023, we increased our quarterly dividend from $1.52 to $1.62 per share.

There were no issuances of debt in 2022.

Issuances of debt in 2021 consisted of short-term borrowings under our commercial paper program.

Repayments of debt in 2022 included scheduled principal payments on our finance lease obligations, payment of amounts assumed in the Bomi Group acquisition and repayment at maturity of senior notes as follows:

• $1.0 billion 2.450% senior notes;

• $600 million 2.350% senior notes;

• $400 million floating rate senior notes.

Repayments of debt in 2021 included scheduled principal payments on our finance lease obligations, payments of commercial paper balances and repayment at maturity of senior notes as follows:

• $1.5 billion 3.125% senior notes;

• $700 million 2.050% senior notes;

• $350 million floating rate senior notes.

As of December 31, 2022 and 2021, we had no outstanding balances under our commercial paper programs.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

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

Fixed-rate senior notes:

3.900% senior notes $ 1,000

4.450% senior notes 750

5.200% senior notes 500

5.300% senior notes 1,250

Total $ 3,500

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 have $2.2 billion of fixed- and floating-rate senior notes that mature in 2023.

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.

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

The following is a summary of our commercial paper program (in millions):

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

USD $ — $ — $ 151 $ 151 0.05 %

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

USD $ 15 $ 15 $ 1,426 $ 1,426 0.78 %

EUR € — $ — € 432 $ 493 (0.39) %

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

and European commercial paper program.

The variation in cash received from common stock issuances resulted from activity within the UPS 401(k) Savings Plan and our employee stock purchase plan in both the current and comparative period.

Other financing activities includes cash used to repurchase shares to satisfy tax withholding obligations on vested employee stock awards.

Cash outflows for this purpose were $516 and $358 million for the years ended December 31, 2022 and 2021, respectively.

The increase was driven by changes in required repurchase amounts.

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 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.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Sources of Credit

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

See note 9 to the audited, consolidated financial statements for a discussion of our available credit and our debt covenants.

Contractual Commitments

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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.

defined benefit pension and postretirement medical plans of approximately $1.2 billion in 2023, which are included within Expected employer contributions to plan trusts shown in note 5 to the audited, consolidated financial statements.

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

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Actual contributions made in future years could materially differ and consequently required minimum contributions beyond 2023 cannot be reasonably estimated.

As discussed in note 7 to the audited, consolidated financial statements, we are not currently subject to any minimum contributions or surcharges with respect to the multiemployer pension and health and welfare plans in which we participate.

As a result of the amendments to the UPS 401(k) Savings Plan discussed in note 5 to the audited, consolidated financial statements, we expect contributions to this plan will increase by approximately $450 million beginning in 2024.

As discussed in note 6 to the audited, consolidated financial statements, we are not currently subject to any surcharges or minimum contributions outside of our agreed-upon contractual rates with respect to the multiemployer pension and health and welfare plans in which we participate.

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

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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.

Estimated future interest payments on our outstanding debt total approximately $11.3 billion.

This amount was calculated using the contractual interest payments due on our fixed- and variable-rate debt based on interest rates as of December 31, 2022, taking 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 project future interest payments.

Annual principal payments on our long-term debt, and purchase commitments for certain capital expenditures are also set out in note 9 to the audited, consolidated financial statements.

Included within these purchase commitments are firm commitments to purchase seven new and used Boeing 767-300 aircraft to be delivered in 2023, 21 new Boeing 767-300 aircraft to be delivered between 2024 and 2026, and two used Boeing 747-8F aircraft to be delivered in 2024.

Additionally, we anticipate purchasing over 2,400 alternative fuel vehicles in 2023.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

In addition to purchase commitments, we have other contractual agreements including equipment rentals, software licensing and commodity contracts.

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 11 to the audited, consolidated financial statements.

Under provisions of the Tax Cuts and Jobs 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 15 to the audited, consolidated financial statements.

Contingencies

See note 5 to the audited, consolidated financial statements for a discussion of pension-related matters, note 10 to the audited, consolidated financial statements for a discussion of judicial proceedings and other matters arising from the conduct of our business activities and note 15 to the audited, consolidated financial statements for a discussion of income-tax-related matters.

Collective Bargaining Agreements

Status of Collective Bargaining Agreements

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

See note 6 to the audited, consolidated financial statements for a discussion of the status of collective bargaining agreements and "Risk Factors - Business and Operating Risks - Strikes, work stoppages or slowdowns by our employees could materially adversely affect us" in Part I, Item 1A of this report.

Multiemployer Benefit Plans

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

Rate Adjustments

From time to time we adjust published rates applicable to our services.

These rates, when published, are made available on our website at www.ups.com .

We provide the address to our internet site solely for information.

We do not intend for this address to be an active link or to otherwise incorporate the contents of any website into this or any other report we file with the Securities and Exchange Commission.

UNITED PARCEL SERVICE, INC.

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We assess goodwill for impairment at the reporting unit level.

We did not incur goodwill impairment charges in 2022 or 2021.

During 2020, we recognized a goodwill impairment charge of $494 million in our former UPS Freight reporting unit.

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.

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

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.

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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 projections that we use in our DCF model are updated annually, or more often if necessary, and will change over time based on the historical performance and changing business conditions for each of our reporting units.

• 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.

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

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

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.

As of our July 1st testing date, we concluded the fair value of each reporting unit exceeded its carrying value;

however, the excess of fair value over the carrying value for our Roadie reporting unit was less than 10 percent.

In addition to business performance, our valuation estimate is most sensitive to changes in the cost of capital.

If the cost of capital used in our July 1st test increased by 150 basis points, it is reasonably possible that the reporting unit would be impaired.

We believe the fair value of the Roadie reporting unit continues to exceed its carrying value;

however, if the cost of capital increases or the business does not meet forecasts, we may incur an impairment charge in the future.

The goodwill associated with our Roadie reporting unit as of December 31, 2022 was $241 million.

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.

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

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

In addition to business performance, our valuation estimate is 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.

A ten percent decrease in the estimated fair value of our trade name would have had no effect on its carrying value as of our July 1st measurement date.

However, if near-term economic conditions change our assumptions unfavorably, or result in the reporting unit being unable to meet forecasts, there could be a more significant decrease in the estimated fair value of the trade name, which may result in an impairment.

The carrying value of the trade name as of December 31, 2022 was $200 million.

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

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

Fair values are estimated using a DCF model.

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

If impairment indicators are present, the resulting impairment charges could have a material impact on our results of operations.

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Self-Insurance Accruals

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.

We base self-insurance reserves on actuarial estimates, which are determined with the assistance of a third-party actuary 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.

Workers' compensation, automobile liability and general liability insurance claims may take a number of 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.

Several factors can affect the actual cost, or severity, of a claim, including:

• Length of time a claim remains open;

• Trends in healthcare costs;

• Results of any related litigation;

• 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;

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.

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

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

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

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.

Self-insurance reserves as of December 31, 2022 and 2021 were as follows (in millions):

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(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.

Our total reserves related to prior year claims decreased by $5 million in 2022 and increased by $34 million in 2021.

A five percent deterioration or improvement in both 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, 2022.

Pension and Other Postretirement Medical Benefits

Our pension and other postretirement medical benefit costs are calculated using various actuarial assumptions and methodologies.

Our pension and postretirement medical benefit costs are calculated using various actuarial assumptions and methodologies.

These assumptions include discount rates, healthcare cost trend rates, inflation, compensation increases, expected returns on plan assets, mortality rates, regulatory requirements and other factors.

The assumptions utilized in recording the obligations under our plans represent our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance as well as other factors that might cause future expectations to differ from past trends.

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

The assumptions utilized in recording the obligations under our plans represent our best estimates.

We believe that they are reasonable, based on information as to historical experience and performance as well as other factors that might cause future expectations to differ from past trends.

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

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

• Differences between expected and actual returns on plan assets;

• Changes in demographic assumptions, including mortality;

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• 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.

Other 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.

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, 2022 (in millions):

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

Pension Plans 25 Basis Point

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Effect on net periodic benefit cost for amounts recognized outside the 10% corridor (2)

Postretirement Medical Plans

Postretirement Medical Benefit Plans

Discount Rate:

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Refer to note 5 to the audited, consolidated financial statements for information on our potential liability for coordinating benefits related to the Central States Pension Fund.

Depreciation, Residual Value and Impairment of Fixed Assets

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.

Depreciation, Residual Value and Impairment of Property, Plant and Equipment

As of December 31, 2022, we had $34.7 billion of net property, plant and equipment, the most significant category of which was aircraft.

In accounting for property, plant and equipment, we make estimates of the expected useful lives and residual values.

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.

Our accounting policy for property, plant and equipment is set out in note 1 to the audited, consolidated financial statements.

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.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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

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Details of long-lived asset impairments are included in note 4 to the audited, consolidated financial statements.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

In estimating the useful lives and expected residual values of aircraft, we consider actual experience with the same or similar aircraft types and 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 aircraft, resulting in an impairment charge or reduction in expected useful life 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, operational intentions, or market prices for new and used aircraft of the same or similar types.

We periodically evaluate our estimates and assumptions, and adjust them, as necessary, on a prospective basis through depreciation expense.

In the fourth quarter of 2022, we reduced the estimated residual value of our MD-11 aircraft and associated engines to zero based on updated operational plans for these aircraft and our expectations for their eventual disposal.

In connection with this change in estimate, during the fourth quarter of 2022 we recorded a one-time depreciation charge to adjust the residual value of our fully-depreciated MD-11 aircraft.

Refer to note 4 to the audited, consolidated financial statements for information on the impact to our results of operations.

Fair Value Measurements

In the normal course of business, we hold and issue financial instruments that contain elements of market risk, including derivatives, marketable securities, finance receivables, pension assets, other investments and debt.

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

In the normal course of business, we hold and issue financial instruments that contain elements of market risk, including derivatives, marketable securities and debt.

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

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).

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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.

Our pension and postretirement plan assets include investments in hedge funds, as well as 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, 2022.

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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.

Refer to note 5 to the audited, consolidated financial statements for further information on our pension and postretirement plan 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 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

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.

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.

We make certain estimates and judgments in determining income tax expense for financial statement purposes.

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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