What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-20 compared with 2023-02-21 · 462 added, 415 removed, 607 unchanged (59% of the section changed)

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

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 continue to focus on executing our strategy of Customer First, People Led and Innovation Driven by making it quicker and easier for customers to do business with us.

We continue to enhance customer engagement through combining our network with digital capabilities and to invest in the most attractive parts of the market, including healthcare, Asia trade lanes and small- and medium-sized businesses ("SMBs").

In furtherance of our strategy, during 2023 we acquired MNX Global Logistics, a global time-critical and temperature-sensitive logistics provider, and Happy Returns, a technology-focused company that provides innovative end-to-end return services.

We opened our state-of-the-art UPS Velocity fulfillment center in the U.S.

and announced plans to build a new air hub in Hong Kong.

These initiatives, together with continued growth in our Digital Access Program and deployment of our Smart Package Smart Facility technology within U.S.

small package operations, are intended to allow us to reach new markets and customers, and better serve our current customer base.

During the year, macroeconomic headwinds, including inflationary pressures and changes in consumer behavior, together with volume diversion resulting from our labor negotiations with the International Brotherhood of Teamsters ("Teamsters"), contributed to volume declines in our U.S.

small package business.

Internationally, the challenging macroeconomic environment, coupled with geopolitical tensions, drove a decline in demand for our small package services in Europe and Asia.

Our freight forwarding businesses, including truckload brokerage, were negatively impacted by soft demand and market overcapacity.

We expect global economic conditions to improve gradually during 2024, and therefore expect volume and revenue growth to increase in the second half of the year.

In the third quarter of 2023, our Teamsters employees ratified a new national master agreement.

Under the agreement, wage and benefit rates, combined with all other contract provisions, will increase union cost at a 3.3% compounded annual growth rate over the five-year term of the contract, with the majority of the increase in the first and fifth years.

We experienced higher year-over-year labor costs in the second half of the year as a result of these contractual increases, which we expect to persist through the first half of 2024.

Faced with a challenging external environment, we remain focused on our strategy.

We are taking action intended to right-size our business for the future and focus on key enablers of growth.

These moves include exploring strategic alternatives for our truckload brokerage business and reducing headcount through our "fit to serve" initiative to create a more efficient operating model and enhance responsiveness to changing market dynamics.

We have two reportable segments:

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Our remaining businesses are reported as Supply Chain Solutions.

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, 2023 and 2022, which are discussed in more detail in the sections that follow, include:

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Average Revenue Per Piece $ 13.62 $ 13.38 $ 0.24 1.8 %

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.

• Revenue and average daily package volume in our global small package operations decreased for the year, with declines in both commercial and residential shipments across all of our products.

These declines were primarily the result of the macroeconomic conditions and union labor-related uncertainties described above, as well as reductions in fuel and demand-related surcharges.

• Operating expenses decreased for the year, driven by a reduction in purchased transportation in Supply Chain Solutions and reductions in fuel expense in our small package operations, as well as the impact of our ongoing productivity initiatives and reductions in operating costs;

these reductions were partially offset by U.S.

Domestic Package segment wage rate increases in the second half of 2023 due to the new Teamsters contract.

• Operating profit and operating margin decreased, as revenue declines were greater than operating expense reductions.

• We reported net income of $6.7 billion and diluted earnings per share of $7.80.

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

◦ 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;

Adjusted diluted earnings per share were $8.78 after adjusting for the after-tax impacts of:

◦ defined benefit pension and postretirement medical benefit plan mark-to-market loss outside of a 10% corridor of $274 million, or $0.32 per diluted share;

◦ Transformation Strategy Costs of $333 million, or $0.39 per diluted share;

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.

◦ goodwill and asset impairment charges of $193 million, or $0.22 per diluted share;

◦ a one-time compensation payment of $46 million, or $0.05 per diluted share.

Domestic Package segment, revenue declines for the year were driven by lower volume, a shift in product mix, and lower fuel and demand-related surcharges.

These were somewhat offset by revenue per piece growth due to increases in base rates and changes in customer mix.

Expenses decreased for the year, primarily due to declines in fuel prices and reductions in purchased transportation.

Higher direct union labor costs were offset by a reduction in hours and lower management compensation expense.

In our International Package segment, revenue declines for the year were driven by lower volume and declines in fuel and demand-related surcharges.

These were partially offset by the impact of base rate increases.

Expenses decreased year over year, driven by lower fuel and third-party transportation expense as a result of volume declines and lower fuel prices.

In Supply Chain Solutions, revenue decreases for the year were driven by volume and market rate declines in Forwarding.

Expenses decreased for the year, primarily due to a reduction in purchased transportation in Forwarding.

2022 compared to 2021

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Operating Expenses:

One-Time Compensation Payment

Transformation Strategy Costs

Goodwill and Asset Impairment Charges

Incentive Compensation Program Design Changes — 505

Long-Lived Asset Estimated Residual Value Changes — 76

Transformation Strategy Costs 178 380

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

Total Adjustments to Operating Expenses $ 732 $ 759

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Income Tax (Benefit) Expense:

One-Time Compensation Payment $ (15) $ —

Transformation Strategy Costs (102) (36)

Goodwill and Asset Impairment Charges (43) —

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 (85) 255

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Total Adjustments to Net Income $ 846 $ (222)

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.

These items have been excluded from the following discussions of "adjusted" results.

The income tax impacts of these items are calculated by multiplying the statutory tax rates applicable in each tax jurisdiction, including the U.S.

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RESULTS OF OPERATIONS

One-Time Compensation Payment

During 2023, we made a one-time payment to certain U.S.-based, non-union part-time supervisors following the ratification of our labor agreement with the Teamsters.

We do not expect this or similar payments to recur.

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 payment.

We believe excluding the impact of this one-time payment better enables users of our financial statements to view and evaluate underlying business performance from the same perspective as management.

Transformation Charges, and Goodwill and Asset Impairment 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 and asset impairment charges.

We believe excluding the impact of these charges better enables users of our financial statements to view and evaluate 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, see note 1 and note 7.

Incentive Compensation Program Design Changes

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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.

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

For more 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.

During 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.

This charge was allocated between our U.S.

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 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 1 and note 7 to the audited, consolidated financial statements.

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

Foreign Currency Exchange Rate Changes and Hedging Activities

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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 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 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:

The remeasurement of our defined benefit pension and postretirement medical plans' assets and liabilities resulted in a loss of $0.4 billion and a gain of $1.1 billion for the years ended December 31, 2023 and 2022, respectively.

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

Year Ended December 31,

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Demographic and other assumption changes (4) (53)

Coordinating benefits attributable to the Central States Pension Fund — 1,767

Total mark-to-market gain (loss) (351) 1,027

Curtailment gain 34 —

Curtailment and settlement gain (loss)

Total defined benefit plan gain (loss) $ (359) $ 1,061

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The pre-tax defined benefit plan gains and losses for the years ended December 31, 2023 and 2022 consisted of the following:

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

• Discount Rates ($5.2 billion pre-tax gain):

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):

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):

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.

2023 - $0.4 billion pre-tax defined benefit plan loss:

• Discount Rates ($384 million pre-tax loss):

The weighted-average discount rate for our pension and postretirement medical plans decreased from 5.77% as of December 31, 2022 to 5.40% as of December 31, 2023, primarily due to a decrease in credit spreads on AA-rated corporate bonds in 2023.

• Return on Assets ($37 million pre-tax gain):

The actual rate of return on plan assets in certain of our international pension plans was higher than our expected rate of return, primarily due to strong global equity market performance.

• Demographic and Other Assumption Changes ($4 million pre-tax loss):

This loss was due to 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:

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

• Discount Rates ($5.2 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.

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 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.

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 ($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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Operating Expenses $ 54,882 $ 57,212 $ (2,330) (4.1) %

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

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

One-Time Compensation Payment (61) — (61) N/A

Transformation Strategy Costs (266) (121) (145) 119.8 %

Incentive Compensation Program Design Changes — (431) 431 (100.0) %

Long-Lived Asset Estimated Residual Value Changes — (25) 25 (100.0) %

Adjusted Operating Expenses $ 54,555 $ 56,635 $ (2,080) (3.7) %

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2022 (8.0) % 3.0 % (1.6) % (6.6) %

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

Revenue was also negatively impacted by having one less operating day in 2023 compared to 2022.

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.

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.

Average daily volume decreased, with reductions in both residential and commercial volume.

Challenging external conditions, including inflationary pressures and changes in consumer spending behavior contributed to overall volume declines.

Also contributing to the decline was diverted volume associated with our labor negotiations with the Teamsters.

Following ratification of the Teamsters contract in the third quarter of 2023, we regained approximately 60% of diverted U.S.

volume and gained volume from new customers.

We anticipate overall year-over-year volume growth rates will be flat in the first half of 2024, with moderate growth expected in the second half of the year dependent upon improving macroeconomic conditions.

Business-to-consumer volume declined 9.3% during the year, driven by changes in consumer spending behavior, as well as the impact of our labor negotiations with the Teamsters.

Business-to-consumer volume declines from SMBs were less than those from our large customers, which was partially due to continued growth in our Digital Access Program.

Volume from our largest customer declined for the year as planned under our contract terms.

Business-to-business volume declined 7.2%, primarily as a result of declines from large customers in industry sectors that are sensitive to the macroeconomic factors discussed above.

Uncertainty around our Teamsters contract also negatively impacted volume, primarily during the first nine months of the year.

Average daily returns volume increased slightly during the year, benefiting from our acquisition of Happy Returns during the fourth quarter.

Within our Air products, average daily volume decreases were driven by continued execution under the contract terms with our largest customer as planned, as well as by other customers making cost trade-offs and utilizing the enhanced speed in our ground network.

We expect moderate volume decreases in 2024 as we continue to execute contract terms with our largest customer.

Ground residential and Ground commercial average daily volume decreases of 7.1% and 6.7%, respectively, were primarily attributable to volume declines from a number of large customers due to the factors discussed above.

We expect volume growth in 2024 to be aligned with overall market growth.

Rates and Product Mix

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.

In December 2022, we implemented an average 6.9% net increase in base and accessorial rates for our Air and Ground products.

Revenue per piece in 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, declines in fuel and demand-related surcharges, and a reduction in average billable weight per piece slightly offset these increases.

We anticipate moderate revenue per piece growth in 2024 as we continue to execute on pricing initiatives within our strategy.

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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.

In 2023, fuel surcharge revenue decreased $1.0 billion, driven by reductions in price per gallon and the impact of lower volumes.

Based on current commodity market forecasts, we anticipate a further decline in fuel prices will be offset in part by higher surcharge modifiers.

UNITED PARCEL SERVICE, INC.

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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 expenses and adjusted operating expenses decreased year over year.

The costs of operating our integrated air and ground network decreased $1.5 billion, our pickup and delivery costs decreased $641 million and our package sorting costs decreased $216 million.

In addition to the impact of one less operating day in 2023, the overall decrease in operating expenses was primarily due to:

• Lower compensation expense due to a reduction in direct labor hours resulting from volume declines, as well as the impact of incentive compensation program design changes implemented in the fourth quarter of 2022 and reductions in management headcount.

These decreases were partially offset by the impact of the first-year contractual rate increase under our Teamsters contract that became effective August 1.

• A reduction in purchased transportation costs, resulting from lower volumes and a reduction in ground volume handled by third-party carriers, as well as the impact of continued strategic initiatives.

• Lower fuel expense driven by lower volumes and decreases in the price of jet fuel, diesel and gasoline.

These decreases were slightly offset by an increase of $259 million in other operating costs.

Notwithstanding the factors discussed above, total cost per piece increased 5.2% for the year and adjusted cost per piece increased 5.7%, driven by overall reductions in volume while maintaining industry leading service levels.

We anticipate that the cost per piece growth rate will remain elevated in the first half of 2024 due to Teamsters contractual wage-rate impacts.

Operating Profit and Margin

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%.

As a result of the factors described above, operating profit decreased $1.9 billion, with operating margin decreasing 240 basis points to 8.5%.

Adjusted operating profit decreased $2.2 billion, with adjusted operating margin decreasing 280 basis points to 9.0%.

UNITED PARCEL SERVICE, INC.

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Operating Expenses $ 14,600 $ 15,372 $ (772) (5.0) %

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

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

Incentive Compensation Program Design Changes — (30) 30 (100.0) %

Long-Lived Asset Estimated Residual Value Changes — (51) 51 (100.0) %

Transformation Strategy Costs (51) (12) (39) 325.0 %

22 unchanged sentences

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.

Business-to-consumer volume decreased 10.0%, as geopolitical tensions and global macroeconomic headwinds, including persistent inflation and high interest rates, negatively impacted consumer demand.

These factors, coupled with higher U.S.

inventory levels, also negatively impacted business-to-business volume, driving a decrease of 5.8%.

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

We expect year-over-year volume growth to be relatively flat in the first half of 2024 and to improve in the second half of the year, dependent on an improvement in global macroeconomic conditions.

Export volume decreased for the year, driven by declines on intra-Europe and Asia trade lanes that were slightly offset by volume growth in the Americas.

Volume on intra-Europe and Asia trade lanes was negatively impacted by overall economic conditions, with Asia to U.S.

volumes also impacted by higher inventory levels in the United States.

Growth in the Americas was driven by transborder volume to and from the United States.

Our premium products experienced a volume decline of 10.6%, primarily from our Transborder and Worldwide Express Saver products.

These declines resulted from shifts in customer product preferences, macroeconomic conditions and lower import demand from U.S.

Volume in our non-premium products decreased 1.9%, driven by declines in our Transborder Standard product in Europe and our Worldwide Expedited product.

These declines were the result of macroeconomic conditions described above.

Domestic volume declines were largest in Europe and Canada, resulting from an overall reduction in customer demand for all of the reasons discussed above.

Rates and Product Mix

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are made throughout the year and vary by geographic market.

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.

Total revenue per piece decreased 1.0%, primarily due to declines in fuel and demand-related surcharges, as well as unfavorable currency movements during the first half of the year.

Base rate increases and favorable shifts in customer and product mix largely offset these declines.

Excluding the impact of currency, revenue per piece decreased 0.3%.

We expect overall revenue per piece to decline in 2024 driven by a continued shift to non-premium products as the challenging economic outlook persists.

Export revenue per piece decreased 4.2%, driven by declines in our Worldwide products.

These declines were slightly offset by base rate increases.

Excluding the impact of currency, export revenue per piece decreased 3.7%.

Domestic revenue per piece increased 4.3%, primarily due to base rate increases and favorable shifts in customer mix.

These were slightly offset by unfavorable currency movements in the first half of the year.

Excluding the impact of currency, domestic revenue per piece increased 5.2%.

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

Fuel Surcharges

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are indexed to fuel prices in the region or country where the shipment originates.

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.

Total international fuel surcharge revenue decreased by $532 million, driven primarily by a decrease in the fuel price per gallon and the impact of volume declines.

Based on current commodity pricing forecasts, we anticipate a decline in fuel prices to impact fuel surcharge revenue negatively in the first half of 2024.

UNITED PARCEL SERVICE, INC.

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Operating Expenses

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

This was primarily due to a reduction of $730 million in the cost of operating our integrated international air and ground network, driven by lower fuel prices and reductions in air charters and aircraft block hours as a result of lower volumes.

We expect fuel prices to further decrease in the first half of 2024.

Operating Profit and Margin

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.

As a result of the factors described above, operating profit decreased $1.1 billion, with operating margin decreasing 390 basis points to 18.1%.

Adjusted operating profit decreased $1.1 billion and adjusted operating margin decreased 400 basis points to 18.4%.

Uncertainty around increased geopolitical tensions continued to impact volumes in our International Package segment in 2023.

Substantially all of our operations in Russia and Belarus were suspended in 2022 and we subsequently commenced liquidation of our Small Package and Forwarding and Logistics subsidiaries in these countries.

We expect to complete this process during 2024.

Substantially all of our operations in Ukraine remain indefinitely suspended.

These actions have not had, and are not expected to have, a material impact on us.

UNITED PARCEL SERVICE, INC.

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Logistics 5,927 5,351 576 10.8 %

Freight — 1,064 (1,064) (100.0) %

Other 1,708 2,137 (429) (20.1) %

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Operating Expenses $ 12,335 $ 14,660 $ (2,325) (15.9) %

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

Transformation Strategy Costs (118) (45) (73) 162.2 %

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

Goodwill and Asset Impairment Charges (236) — (236) N/A

Incentive Compensation Program Design Changes — (44) 44 (100.0) %

Adjusted Operating Expenses $ 11,981 $ 14,571 $ (2,590) (17.8) %

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Logistics 48 23 25 108.7 %

Freight — 1 (1) (100.0) %

Other 2 4 (2) (50.0) %

Total Transformation Strategy Costs $ 118 $ 45 $ 73 162.2 %

Incentive Compensation Program Design Changes:

Goodwill and Asset Impairment Charges

Forwarding $ 119 $ — $ 119 N/A

Logistics 22 — 22 N/A

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

117 — $ 117 N/A

Total Goodwill and Asset Impairment Charges

$ 236 $ — $ 236 N/A

Incentive Compensation Program Design Changes

Forwarding $ — $ 22 $ (22) (100.0) %

Logistics — 22 (22) (100.0) %

Total Incentive Compensation Program Design Changes $ — $ 44 $ (44) (100.0) %

Total Adjustments to Operating Expenses $ 354 $ 89 $ 265 297.8 %

** 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 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.

Total revenue within Supply Chain Solutions decreased for the year, primarily due to lower revenue and volumes across our forwarding businesses.

The declines in forwarding and certain of our other businesses more than offset the impact of revenue growth in logistics and our digital 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.

• International airfreight revenue decreased approximately $1.2 billion.

Market rates declined during the year as customer demand remained weak and capacity continued to outpace demand.

As a result, Asia export lanes experienced significant pressure during the first half of the year.

Year-over-year revenue declines began to moderate in the fourth quarter and we experienced volume growth on Asia export lanes.

We expect limited improvements in 2024, primarily from the continued volume growth in Asia.

• Revenue in our truckload brokerage business decreased $1.3 billion due to declines in volume and market rates.

We focused on revenue quality initiatives for this business during the year and, as a result, were able to grow volume from SMBs.

We intend to explore strategic alternatives for this business in 2024.

• The remaining reduction in revenue was attributable to declines in ocean freight forwarding, driven by lower market rates.

While volume in this business also declined for the year, we experienced year-over-year growth during the second half of the year.

We anticipate ocean freight forwarding revenue will remain challenged in 2024 as market overcapacity continues to adversely impact rates.

Within our Logistics businesses, healthcare logistics revenue increased $439 million, primarily due to the acquisition of Bomi Group in the fourth quarter of 2022.

Additionally, we experienced growth within our other healthcare operations.

Revenue in mail services increased $130 million as a result of volume growth, rate increases and a favorable shift in product characteristics.

The impact of acquiring MNX Global Logistics during the fourth quarter of 2023 was largely offset by declines in our distribution and post sales operations.

We expect growth within our Logistics businesses to continue into 2024.

Within our other Supply Chain Solutions businesses, we experienced higher revenue from our digital businesses, including the acquisition of Happy Returns during the fourth quarter of 2023.

We anticipate continued growth in these businesses during 2024 as we continue to execute on our strategy.

Growth in our digital businesses was more than offset by a reduction of $386 million in transition services provided to the acquirer of UPS Freight.

We expect to complete the work associated with these transition services arrangements during the first half of 2024.

Revenue was also negatively impacted by $155 million due to lower volumes from our service contracts with the U.S.

Postal Service.

Operating Expenses

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.

Forwarding operating expenses decreased $2.7 billion, including charges of $119 million related to impairments of goodwill and an indefinite-lived trade name.

On an adjusted basis, operating expenses decreased $2.8 billion, driven by a reduction in purchased transportation expense as a result of lower market rates and volume declines.

Overall, we expect market conditions will improve during 2024, leading to increases in our purchased transportation costs, particularly for airfreight.

Logistics operating expenses increased $532 million primarily due to the acquisitions of Bomi Group and MNX Global Logistics.

Within our other Supply Chain Solutions businesses, operating expense increases in our digital businesses, including Happy Returns, were more than offset by reductions in other businesses.

In total, operating expenses decreased $176 million, including goodwill impairment charges of $117 million.

On an adjusted basis, operating expenses decreased $295 million driven by a reduction of $363 million in costs incurred to procure transportation for, and provide transition services to, the acquirer of UPS Freight.

We expect these costs to be further reduced, although not significantly, as we complete the obligations under these agreements during the first half of 2024.

Transportation costs related to our contracts with the U.S.

Postal Service also decreased for the year as a result of lower volumes.

UNITED PARCEL SERVICE, INC.

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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 $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%.

As a result of the factors described above, total operating profit decreased $937 million, with operating margin decreasing 450 basis points to 6.3%.

On an adjusted basis, operating profit decreased $672 million and operating margin decreased 230 basis points to 9.0%.

UNITED PARCEL SERVICE, INC.

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Compensation and benefits $ 47,088 $ 47,720 $ (632) (1.3) %

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

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

Transformation Strategy Costs

(337) (46) (291) 632.6 %

One-Time Compensation Payment

(61) — (61) N/A

Incentive Compensation Program Design Changes — (505) 505 (100.0) %

Adjusted Compensation and benefits 46,690 47,169 (479) (1.0) %

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Total Other expenses 34,729 39,524 (4,795) (12.1) %

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

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

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

Transformation Strategy Costs

(98) (132) 34 (25.8) %

Long-Lived Asset Estimated Residual Value Changes — (76) 76 (100.0) %

Goodwill and Asset Impairment Charges (236) — (236) N/A

Adjusted Total Other expenses $ 34,395 $ 39,316 $ (4,921) (12.5) %

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Compensation $ 19 $ 36 $ (17) (47.2) %

Benefits 10 176 (166) (94.3) %

Other occupancy — 3 (3) (100.0) %

Benefits 318 10 308 N/M

Other expenses 98 132 (34) (25.8) %

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Incentive Compensation Program Design Changes

Compensation 505 — 505 N/A

Compensation — 505 (505) (100.0) %

One-Time Compensation Payment

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) %

Depreciation and amortization — 76 (76) (100.0) %

Goodwill and Asset Impairment Charges

Other expenses $ 236 $ — $ 236 N/A

Total Adjustments to Operating Expenses $ 732 $ 759 $ (27) (3.6) %

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Compensation and Benefits

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

Compensation costs increased $495 million.

Total compensation and benefits and adjusted total compensation and benefits decreased in 2023 compared to 2022.

Compensation costs decreased $1.2 billion.

On an adjusted basis, compensation costs decreased $676 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.

• Management compensation decreased $1.2 billion, including the effect of a 2022 one-time charge related to incentive compensation program design changes.

Adjusted management compensation decreased $639 million, driven by lower incentive compensation accruals and lower overall headcount.

• The acquisition of Bomi Group in the fourth quarter of 2022 and the acquisitions of MNX Global Logistics and Happy Returns in the fourth quarter of 2023 resulted in additional compensation cost of $116 million within Supply Chain Solutions.

• Reductions in U.S.

direct labor hours due to volume declines and lower administrative headcount resulted in a reduction in compensation cost of $1.2 billion that was offset by an increase of $1.3 billion due to contractual wage rate increases for our Teamsters workforce.

We expect wage rate growth on a year-over-year basis to continue through the first half of 2024 as a result of the new Teamsters contract.

Benefits costs increased $566 million and increased $197 million on an adjusted basis, primarily due to:

• Other benefits costs increased $348 million, driven by employee separation costs of $303 million as we reduced headcount to create a more efficient operating model and enhance responsiveness to changing market dynamics.

In addition, we made a one-time payment of $52 million to certain U.S.-based, non-union part-time supervisors following the ratification of our labor agreement with the Teamsters.

On an adjusted basis, other benefits costs decreased $6 million.

• Health and welfare costs increased $294 million, driven by increased contributions to multiemployer plans as a result of contractually-mandated rate increases.

Costs related to Company-sponsored health and welfare plans increased $51 million due to claims experience and medical cost inflation, partially offset by lower overall headcount.

• Accruals for paid time off, payroll taxes and other costs increased $250 million, including payroll taxes associated with the one-time payment discussed above.

On an adjusted basis, these accruals increased $240 million, primarily due to contractual wage growth.

• Workers' compensation expense increased $61 million due to adverse claims trends, partially offset by the impact from a reduction in hours worked.

Partially offsetting these increases, pension and other postretirement benefits expense decreased $392 million, primarily impacted by:

• A reduction of $887 million in the cost of Company-sponsored defined benefit plans, driven by a reduction in service cost due to higher discount rates and the cessation of accruals for future service in the UPS Retirement Plan.

• An expense increase of $445 million for the UPS 401(k) Savings Plan, primarily due to the impact of replacement contributions for the UPS Retirement Plan.

Repairs and Maintenance

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, 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.

The decrease in repairs and maintenance expense was primarily due to a reduction in aircraft engine maintenance as the declines in volume we experienced in 2023 resulted in the temporary idling of certain aircraft to better match capacity with demand.

Based on current volume projections, we anticipate that certain aircraft may be temporarily idled for periods during 2024, resulting in a further reduction in maintenance expense.

The reduction in aircraft engine maintenance was partially offset by increases in the cost of materials and supplies and an increase in routine repairs to buildings and facilities.

We expect these trends to continue in 2024 due to ongoing facility maintenance programs.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

Depreciation and Amortization

We incurred higher depreciation expense during 2023, primarily as a result of new facilities coming into service.

We incurred higher amortization expense on capitalized software investments in support of our strategic initiatives, as well as on intangible assets due to the addition of assets arising from the acquisitions of Bomi Group in the fourth quarter of 2022 and MNX Global Logistics and Happy Returns in the fourth quarter of 2023.

We expect to incur higher depreciation and amortization expense in 2024 as a result of our recent acquisitions and our continuing investments in network enhancement projects and other technology initiatives.

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.

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

• Supply Chain Solutions expense decreased $2.8 billion resulting from volume declines and a reduction in market rates paid for services in our forwarding businesses.

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

Domestic Package expense decreased $783 million, driven by reduced utilization of third-party ground carriers as a result of volume declines and network optimization initiatives.

• International Package expense decreased $382 million, primarily due to a reduction in air charters and ground transportation expense as a result of volume declines.

These decreases were partially offset by unfavorable currency movements during the year.

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

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

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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.

Based on current commodity market forecasts, we anticipate a decline in fuel prices in the first half of 2024.

Other Occupancy

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.

The increase in other occupancy expense was primarily the result of leased operating facilities coming into service, increases in rental rates due to market demand and inflationary pressures, and higher utility costs.

We expect market factors may continue to increase rent and utility costs in 2024.

Other Expenses

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

Other expenses increased $176 million for the year, driven by goodwill impairment charges of $125 million in certain Supply Chain Solutions reporting units and a $111 million indefinite-lived trade name impairment charge in our truckload brokerage business.

On an adjusted basis, other expenses decreased $25 million.

This was primarily attributable to the following:

• Reductions in vehicle lease expense of $144 million due to volume declines.

• Gains on the sale of surplus real estate of $98 million.

• A reduction of $74 million in costs incurred under the transition service agreements with the acquirer of UPS Freight as we reach the termination of these agreements in the first half of 2024.

These reductions were largely offset by:

• Purchases of supplies for our Smart Package Smart Facility initiative, which increased costs $109 million.

• An increase of $85 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.

• An increase of $78 million in hosted software application fees and other technology costs in support of ongoing investments in our digital transformation.

UNITED PARCEL SERVICE, INC.

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Other Income and (Expense)

The following table sets forth investment income (expense) and other and interest expense for the years ended December 31, 2022 and 2021 (in millions):

The following table sets forth investment income and other and interest expense for the years ended December 31, 2023 and 2022 (in millions):

Year Ended December 31, Change

2023 2022 $ %

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 %

Investment Income and Other

$ 217 $ 2,435 $ (2,218) (91.1) %

Defined Benefit Pension and Postretirement Medical Plan (Gains) and Losses 359 (1,061) 1,420 N/A

Adjusted Investment Income and Other

$ 576 $ 1,374 $ (798) (58.1) %

Interest Expense (785) (704) (81) 11.5 %

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 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.

Total Other Income and (Expense) $ (568) $ 1,731 $ (2,299) N/A

Adjusted Other Income and (Expense) $ (209) $ 670 $ (879) N/A

Investment Income and Other

Investment income and other decreased $2.2 billion.

Remeasurements of our defined benefit plans resulted in a $359 million mark-to-market loss in 2023 compared to a $1.1 billion gain in 2022.

Excluding the impact of these remeasurements, adjusted investment income and other decreased $798 million, driven by a reduction in other pension income.

Expected returns on pension assets decreased, primarily due to a lower asset base resulting from negative returns in 2022, while pension interest cost increased as a result of higher discount rates and ongoing plan growth.

The reduction in other pension income was partially offset by higher yields on invested balances.

Interest Expense

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.

Interest expense increased due to higher effective interest rates on floating rate debt.

The impact of higher average outstanding debt balances was largely offset by additional capitalization of interest.

UNITED PARCEL SERVICE, INC.

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The following table sets forth income tax expense and our effective tax rate for the years ended December 31, 2023 and 2022 (in millions):

Year Ended December 31, Change

Year Ended December 31,

2023 2022 $ %

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Income Tax Impact of:

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

One-Time Compensation Payment 15 — 15 N/A

Transformation Strategy Costs 102 36 66 183.3 %

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

Goodwill and Asset Impairment Charges 43 — 43 N/A

Incentive Compensation Program Design Changes — 121 (121) (100.0) %

Long-Lived Asset Estimated Residual Value Changes — 18 (18) (100.0) %

Defined Benefit Pension and Postretirement Medical Plan (Gains) and Losses 85 (255) 340 N/A

Adjusted Income Tax Expense $ 2,110 $ 3,197 $ (1,087) (34.0) %

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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.

We believe that these positions, expected cash from operations, access to commercial paper programs and capital markets and other available liquidity options will be adequate to fund our material short- and long-term cash requirements, including our business operations, planned capital expenditures and pension contributions, transformation strategy costs, debt obligations and planned shareowner returns.

As of December 31, 2023, we had $6.1 billion in cash, cash equivalents, restricted cash and marketable securities.

We believe that these positions, expected cash from operations, access to commercial paper programs and capital markets and other available liquidity options will be adequate to fund our material short- and long-term cash requirements, including our business operations, planned capital expenditures, anticipated pension contributions, potential acquisitions, debt obligations and planned shareowner returns.

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

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Net income $ 6,708 $ 11,548

Non-cash operating activities (a)

Non-cash operating activities (1)

Pension and postretirement medical benefit plan contributions (company-sponsored plans) (1,393) (2,342)

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Net cash from operating activities $ 10,238 $ 14,104

(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.

(1) Represents depreciation and amortization, gains and losses on derivative transactions and foreign currency exchange, deferred income taxes, allowances for expected credit losses, 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 $3.9 billion in 2023, primarily due to the reduction in net income.

It was also impacted by:

• A decrease in our hedge margin collateral position due to changes in the fair value of derivative contracts used in our foreign currency hedging program.

• A payment of $323 million in 2023 for employer payroll taxes that were deferred under the Coronavirus Aid, Recovery and Economic Security Act in 2020, compared to a payment of $234 million in 2022.

• A decrease in income taxes payable, primarily due to changes in our uncertain tax positions.

These factors were partially offset by:

• A decrease in contributions to our company-sponsored, defined benefit pension and postretirement medical plans.

We made discretionary contributions to our qualified U.S.

pension plans of $1.2 billion in 2023 compared to $1.9 billion in 2022.

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.

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

Suppliers issue invoices to us based on the agreed-upon contractual terms.

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

Our suppliers’ voluntary inclusion of invoices in the SCF program has no bearing on our payment terms.

No guarantees are provided by us under the SCF program.

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

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

We have been informed by the participating financial institutions that as of December 31, 2022 and 2021, suppliers sold them $806 and $545 million, respectively, of our outstanding payment obligations.

Amounts due to suppliers that participate in the SCF program may be reflected in cash flows from operating activities or cash flows from investing activities in our consolidated statements of cash flows.

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.

• Working capital benefited primarily from the timing of group welfare plan contributions and other compensation-related items.

Cash payments for income taxes were $2.0 and $2.6 billion for the years ended December 31, 2023 and 2022, respectively, with the decrease corresponding to the reduction in net income.

UNITED PARCEL SERVICE, INC.

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When amounts earned by foreign subsidiaries are expected to be indefinitely reinvested, no accrual for taxes is provided.

As of December 31, 2023, we had $37 million of restricted cash related to certain tax and regulatory matters and acquisitions.

UNITED PARCEL SERVICE, INC.

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Proceeds from disposals of businesses, property, plant and equipment $ 193 $ 12

Net change in finance receivables $ 24 $ 34

Net (purchases)/sales and maturities of marketable securities

$ (820) $ (1,651)

Acquisitions, net of cash acquired $ (1,329) $ (755)

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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 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.

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

Future capital spending will depend on a variety of factors, including economic and industry conditions.

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.

We currently expect our capital expenditures will be approximately $4.5 billion in 2024, of which approximately 50 percent will be allocated to network enhancement projects and other technology initiatives.

Total capital expenditures increased in 2023 compared to 2022 as a result of:

• Spending on buildings, facilities and plant equipment increased due to network enhancements, capacity expansion projects and facility maintenance.

• Vehicles expenditures increased, driven by the timing and availability of vehicle replacements and continuing investments in our network.

• Information technology expenditures increased as a result of continuing investments in our digital capabilities and network automation.

• Aircraft expenditures decreased as a result of lower payments on open aircraft orders and final delivery of aircraft.

Proceeds from the disposal of businesses, property, plant and equipment were higher in 2023 relative to 2022, primarily due to the sale of surplus real estate during 2023.

Net purchases of marketable securities increased in 2023 due to a shift to longer duration investments.

During the first quarter of 2024, we anticipate liquidating our portfolio of marketable securities to provide additional resources for our short-term and strategic operating needs.

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.

Cash paid for acquisitions in 2023 was primarily attributable to the acquisitions of MNX Global Logistics and Happy Returns, and the purchase of development areas for The UPS Store.

In 2022, we acquired Bomi Group and Delivery Solutions, as well as the purchase of development areas for The UPS Store.

Cash used in other investing activities decreased, primarily due to our 2022 investment of $252 million in the parent company of CommerceHub, Inc.

and changes in other non-current investments.

UNITED PARCEL SERVICE, INC.

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Number of shares repurchased (12.8) (19.0)

Shares outstanding at period end 859 870

Shares outstanding at year end

Dividends declared per share $ 6.48 $ 6.08

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Total capitalization $ 39,578 $ 39,465

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.

We repurchased 12.8 and 19.0 million shares of class B common stock for $2.3 and $3.5 billion under our stock repurchase program for the years ended December 31, 2023 and 2022, respectively.

We do not anticipate repurchasing any shares in 2024.

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

For the years ended December 31, 2023 and 2022, dividends reported within shareowners' equity include $239 and $249 million, respectively, of non-cash dividends that were settled in shares of class A common stock.

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

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;

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

We paid quarterly cash dividends of $1.62 and $1.52 per share in 2023 and 2022, respectively.

In the first quarter of 2024, we declared a quarterly cash dividend of $1.63 per share.

Issuances of debt in 2023 consisted of borrowings under our commercial paper program and fixed- and floating-rate senior notes.

The principal balances of the senior notes are as follows:

• $900 million 4.875% senior notes;

• $1.1 billion 5.050% senior notes;

• $529 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:

There were no issuances of debt in 2022.

Repayments of debt in 2023 included $23 million of debt assumed in the Bomi Group acquisition, scheduled principal payments on our finance lease obligations and reductions in our commercial paper balances.

We also repaid the following senior notes at maturity:

• $1.0 billion 2.500% senior notes;

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• $500 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

Repayments of debt in 2022 included scheduled principal payments on our finance lease obligations and repayment of senior notes at maturity as follows:

• $1.0 billion 2.450% senior notes;

• $600 million 2.350% senior notes;

• $400 million floating rate senior notes.

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

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

Outstanding balance at year end ($)

Average balance outstanding ($)

Average interest rate

USD $ 2,172 $ 417 5.45 %

As of December 31, 2023, we had no outstanding balances under our European commercial paper program.

We had no outstanding balances under our U.S.

or European commercial paper programs as of December 31, 2022.

We have $1.5 billion of fixed- and floating-rate senior notes that mature in 2024.

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

We intend to repay or refinance these amounts when due.

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 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.

The cash received from common stock issuances in both 2023 and 2022 resulted from activity within the UPS 401(k) Savings Plan and our employee stock purchase plan.

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

Cash outflows for this purpose were $402 and $516 million for the years ended December 31, 2023 and 2022, respectively.

The increase was driven by changes in required repurchase amounts.

The decrease was due to 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.

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

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Contractual Commitments

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

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.

defined benefit pension and postretirement medical benefit plans of approximately $1.3 billion in 2024, 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.

pension plans.

pension plans in 2024.

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

Actual contributions made in future years could materially differ and consequently required minimum contributions beyond 2024 cannot be reasonably estimated.

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.

We expect contributions to the UPS 401(k) Savings Plan to be approximately $670 million 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.

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Additionally, we have $1.5 billion of fixed- and floating-rate senior notes that mature in 2024.

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

We intend to repay or refinance these amounts when due.

Estimated future interest payments on our outstanding debt total approximately $14.7 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.

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, 2023.

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

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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.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Included within these purchase commitments are firm commitments to purchase 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 approximately 3,000 alternative fuel vehicles in 2024.

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

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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.

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.

The remaining balance will be paid between 2024 and 2026.

Additionally, we have uncertain tax positions that are further discussed in note 15 to the audited, consolidated financial statements.

As discussed in note 1 to the audited, consolidated financial statements, as of December 31, 2023, we had a restricted cash balance related to certain tax and regulatory matters in Italy.

We anticipate this balance will increase by approximately $61 million in 2024.

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.

See note 5 and note 15 to the audited, consolidated financial statements for a discussion of pension-related matters and income-tax-related matters, respectively.

See note 10 for a discussion of judicial proceedings and other matters arising from the conduct of our business activities.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Collective Bargaining Agreements

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

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

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

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

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Contingencies

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

From time to time, we are involved in various judicial proceedings and other matters arising from the conduct of our business that result in exposure to various contingent liabilities.

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

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

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

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

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

We apply judgment when establishing a range of reasonably possible losses arising from contingencies.

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

We accrue amounts associated with judicial proceedings and other contingencies when and to the extent a loss becomes probable and can be reasonably estimated.

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

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

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

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

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

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

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In addition, we have certain contingent liabilities that have not been recognized as of, or for the year ended, December 31, 2023, because a loss was not reasonably estimable.

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

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

Goodwill and Intangible Asset Impairments

We test goodwill and indefinite-lived intangible assets for impairment annually as of July 1, or more frequently if circumstances require.

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.

Changes in our management structure or business acquisitions may result in changes to our reporting units.

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

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

This assessment uses a combination of income and market approaches:

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

This assessment uses a combination of income and market approaches to develop an estimate of reporting unit fair value.

These approaches consider both entity-specific and observable market information under the fair value hierarchy in ASC Topic 820 and changes in, or additions to, available information may affect the assumptions we use in estimating fair value.

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

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

During periods of time in which macroeconomic conditions are uncertain or volatile, these assumptions are subject to a greater degree of uncertainty.

We are also required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment.

Changes in any of these assumptions could significantly impact the fair value of any one of our reporting units.

Changes in any of our assumptions could significantly impact the fair value of one or more 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.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

• 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).

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

In 2023, we performed our annual goodwill impairment testing using both qualitative and quantitative methods.

In developing our valuation assumptions underlying the quantitative annual impairment testing, we determined that the cost of capital for our Roadie and Delivery Solutions reporting units had increased, driven by increases in the risk-free interest rate and volatility of the stock prices of market comparables.

The results of our testing using these assumptions indicated that the carrying values of our Roadie and Delivery Solutions reporting units exceeded their estimated fair values.

As a result, during the third quarter of 2023 we recorded and disclosed goodwill impairment charges of $56 million related to Roadie and $61 million related to Delivery Solutions.

The Delivery Solutions impairment represented all of the goodwill associated with this reporting unit.

These charges are included within Other expenses in the statement of consolidated income.

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

We test the indefinite-lived Coyote trade name associated with our truckload brokerage business for impairment in accordance with GAAP 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, or more often if necessary, and will change over time based on historical performance and changing business conditions.

Our annual testing as of July 1 indicated that the fair value of the Coyote trade name was in excess of its carrying value, although the excess was less than 10 percent.

Since the annual testing date, our truckload brokerage business continued to be negatively impacted by market conditions, which resulted in revenue declines.

In response, during the fourth quarter of 2023, we began to evaluate strategic alternatives for this business.

As a result, we tested the Coyote trade name for impairment as of December 31, 2023, using forecasts that reflected updated market conditions and our evaluation of strategic alternatives related to this business.

Based on the results of this testing, we concluded that the carrying value of the Coyote trade name exceeded its estimated fair value and recorded an impairment charge of $111 million.

The revised carrying value of this trade name as of December 31, 2023 was $89 million.

Our trade name valuation estimate remains sensitive to further changes in assumptions, including business performance, royalty rates and the cost of capital.

A decrease of 10 percent in forecasted cash flows, a decrease of 40 basis points in our selected royalty rate or an increase of 100 basis points in the cost of capital would each result in an incremental impairment charge of $10 million.

We continue to monitor the impact of business performance, our determination of strategic alternatives and external factors on the valuation assumptions for this trade name.

In connection with matters resulting in the Coyote trade name impairment, we also tested the goodwill associated with this reporting unit for impairment as of December 31, 2023 using the updated forecasts of future cash flows described above.

While this interim test did not indicate an impairment, we continue to monitor this reporting unit and may be required to perform additional interim tests in future periods as facts and circumstances evolve.

The goodwill associated with this reporting unit as of December 31, 2023 was $482 million.

Within our consolidated goodwill balance of $4.9 billion as of December 31, 2023, approximately $0.9 billion was represented by certain reporting units within Supply Chain Solutions, including Coyote and Roadie, that have a limited excess of fair value as of the most recent valuation.

If the cost of capital were increased by 100 basis points or our projected cash flows were reduced by 10 percent, it is reasonably possible that these reporting units would be impaired.

We continue to monitor all of our reporting units between annual testing dates.

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

These assets are tested for impairment as part of asset groups that may include other long-lived assets.

See "Critical Accounting Estimates – Depreciation, Residual Value and Impairment of Property, Plant and Equipment" for a discussion of estimates impacting asset groups.

In addition, a reduction in expected useful life, or a decision to sell or abandon an intangible asset before the end of its useful life, may increase amortization expense, which could have a material impact on our results of operations.

See note 7 to the audited, consolidated financial statements for a discussion of finite-lived intangible asset impairments.

UNITED PARCEL SERVICE, INC.

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RESULTS OF OPERATIONS

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.

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.

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.

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

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

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.

See note 7 to the audited, consolidated financial statements for details of finite-lived intangible asset impairments.

Self-Insurance Accruals

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.

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, changes in the level of risk retained under our programs and changes in claims handling practices, among other factors.

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

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

• Risk retention limits;

• Length of time a claim remains open;

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• 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.

Furthermore, claims may emerge in future years 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.

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.

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

We believe our estimated reserves for such claims are adequate;

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.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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

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Total self-insurance reserves $ 2,946 $ 2,887

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

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.

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

Our total reserves related to prior year claims increased by $39 million in 2023 and decreased by $5 million in 2022 as a result of changes in estimated claim costs.

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 a decrease, respectively, of approximately $300 million in our reserves and expenses as of, and for the year ended, December 31, 2023.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Pension and Other Postretirement Medical Benefits

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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.

We believe that they are reasonable based on historical experience and performance, as well as 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.

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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) immediately within income upon remeasurement of a plan.

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.

Other components of pension expense (referred to as "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, 2023 (in millions):

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Pension Plans 25 Basis Point

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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.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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

As of December 31, 2023, we had $36.9 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.

In accounting for property, plant and equipment, we make estimates of the expected useful lives and residual values to arrive at depreciation expense.

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.

A reduction in expected useful life, or a decision to sell or abandon a long-lived asset before the end of its useful life, may increase 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.

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

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

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

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

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

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

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

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

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

Details of long-lived asset impairments are included in note 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.

In estimating the useful lives and expected residual values of aircraft, we consider actual experience with the same or similar aircraft types, multi-year volume projections for our air products and the types of aircraft required to efficiently operate our network.

Adverse changes in volume could result in our current aircraft capacity exceeding projected demand, which may result in temporary idling of aircraft to better match capacity with demand.

Temporarily idled assets are classified as held-and-used, and we continue to record depreciation expense for these assets.

As a result of the reduction in volumes experienced during 2023, we temporarily idled nine aircraft for an average of approximately five months.

As of December 31, 2023 all of these aircraft had re-entered operational service.

Based on current volume projections, we anticipate that certain aircraft may be temporarily idled during part of 2024.

Over a longer period, continued adverse changes in volume forecasts 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.

In 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, in 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.

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

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

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

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

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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

As of December 31, 2023, the majority of our financial instruments were categorized as either Level 1 or Level 2.

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These investments were valued at $9.9 billion as of December 31, 2023.

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

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

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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.

UNITED PARCEL SERVICE, INC.

AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

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.

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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.

These estimates and judgments occur in the calculation of income by legal entity and jurisdiction, tax credits, benefits and deductions, and in the calculation of deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as tax, interest and penalties related to uncertain tax positions.

Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We make certain estimates and judgments in determining income tax expense within our financial statements.

These estimates and judgments occur in the calculation of income by legal entity and jurisdiction, tax credits, benefits and deductions, and in the calculation of deferred tax assets and liabilities arising from timing differences in the recognition of revenue and expense for tax and financial statement purposes, as well as tax, interest and penalties related to uncertain tax positions.

Significant changes in these estimates may result in an increase or decrease to our tax expense in a subsequent period.

We assess the likelihood that we will be able to recover our deferred tax assets.

If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.

We believe that we will ultimately recover a substantial majority of the deferred tax assets recorded on our consolidated balance sheets.

If recovery is not likely, we increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.

We believe that we will ultimately recover a substantial majority of the deferred tax assets recorded in our consolidated balance sheets.

However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery was not likely.

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It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes.

We reevaluate uncertain tax positions on a quarterly basis.

This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity.

Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision.

We reevaluate uncertain tax positions quarterly based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity.

Such a change in recognition or measurement could result in the recognition of a tax benefit or additional tax expense.

In 2023, we recognized a net tax benefit of $102 million following resolution of certain global tax audits.

UNITED PARCEL SERVICE, INC.

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What changed 10-K

Item 7. Management’s Discussion and Analysis