UNITED PARCEL SERVICE INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview 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: U.S. Domestic Package and International Package, which are together referred to as our global small package operations. Our remaining businesses are reported as Supply Chain Solutions. 23 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: Year Ended December 31, Change 2023 2022 $ % Revenue (in millions) $ 90,958 $ 100,338 $ (9,380) (9.3) % Operating Expenses (in millions) 81,817 87,244 (5,427) (6.2) % Operating Profit (in millions) $ 9,141 $ 13,094 $ (3,953) (30.2) % Operating Margin 10.0 % 13.0 % Net Income (in millions) $ 6,708 $ 11,548 $ (4,840) (41.9) % Basic Earnings Per Share $ 7.81 $ 13.26 $ (5.45) (41.1) % Diluted Earnings Per Share $ 7.80 $ 13.20 $ (5.40) (40.9) % Operating Days 254 255 Average Daily Package Volume (in thousands) 22,290 24,291 (8.2) % Average Revenue Per Piece $ 13.62 $ 13.38 $ 0.24 1.8 % • 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 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; ◦ goodwill and asset impairment charges of $193 million, or $0.22 per diluted share; and ◦ a one-time compensation payment of $46 million, or $0.05 per diluted share. In the U.S. 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 See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on February 21, 2023. 24 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Supplemental Information - Items Affecting Comparability We supplement the reporting of our financial information determined under generally accepted accounting principles in the United States ("GAAP") with certain non-GAAP financial measures. Adjusted financial measures should be considered in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. Our adjusted financial measures do not represent a comprehensive basis of accounting and therefore may not be comparable to similarly titled measures reported by other companies. Adjusted amounts reflect the following (in millions): Year Ended December 31, Non-GAAP Adjustments 2023 2022 Operating Expenses: One-Time Compensation Payment $ 61 $ — Transformation Strategy Costs 435 178 Goodwill and Asset Impairment Charges 236 — Incentive Compensation Program Design Changes — 505 Long-Lived Asset Estimated Residual Value Changes — 76 Total Adjustments to Operating Expenses $ 732 $ 759 Other Income and (Expense): Defined Benefit Pension and Postretirement Medical Plan (Gains) and Losses $ 359 $ (1,061) Total Adjustments to Other Income and (Expense) $ 359 $ (1,061) Total Adjustments to Income Before Income Taxes $ 1,091 $ (302) 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) Defined Benefit Pension and Postretirement Medical Plan (Gains) and Losses (85) 255 Total Adjustments to Income Tax Expense $ (245) $ 80 Total Adjustments to Net Income $ 846 $ (222) 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. federal jurisdiction and various U.S. state and non-U.S. jurisdictions, by the tax-deductible adjustments. The blended average effective income tax rates for the years ended December 31, 2023 and 2022 were 22.5% and 26.5%, respectively. 25 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 During 2022, we completed certain structural changes to the design of our incentive compensation programs that resulted in a one-time, non-cash charge in connection with the accelerated vesting of certain equity incentive awards that we do not expect to repeat. We 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 these changes. 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 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 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 more information regarding residual values, see note 4 to the audited, consolidated financial statements. Foreign Currency Exchange Rate Changes and Hedging Activities We supplement the reporting of revenue, revenue per piece and operating profit with adjusted measures that exclude the period over period impact of foreign currency exchange rate changes and hedging activities. We believe currency-neutral revenue, revenue per piece and operating profit information allows users of our financial statements to understand growth trends in our products and results. We evaluate the performance of International Package and Supply Chain Solutions on this currency-neutral basis. Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reported U.S. Dollar revenue, revenue per piece and operating profit by the current period average exchange rates to derive current period local currency revenue, revenue per piece and operating profit. The derived amounts are then multiplied by the average foreign currency exchange rates used to translate the comparable results for each month in the prior year period (including the period over period impact of foreign currency hedging activities). The difference between the current period reported U.S. Dollar revenue, revenue per piece and operating profit and the derived current period U.S. Dollar revenue, revenue per piece and operating profit is the period-over-period impact of currency fluctuations. 26 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Defined Benefit Pension and Postretirement Medical Plan Gains and Losses We incur certain employment-related expenses associated with pension and postretirement medical benefits. These pension and postretirement medical benefits costs for company-sponsored defined benefit plans are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS. Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement of any of our plans. We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor (defined as 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation), as well as gains and losses resulting from plan curtailments and settlements, for our defined benefit pension and postretirement medical plans immediately as part of Investment income 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 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, Components of defined benefit plan gain (loss) (in millions): 2023 2022 Discount rates $ (384) $ 5,210 Return on assets 37 (4,130) Demographic and other assumption changes (4) (53) Total mark-to-market gain (loss) (351) 1,027 Curtailment and settlement gain (loss) (8) 34 Total defined benefit plan gain (loss) $ (359) $ 1,061 Year Ended December 31, Weighted-average actuarial assumptions: 2023 2022 Expected rate of return on plan assets used in determining net periodic benefit cost 6.99 % 5.83 % Actual rate of return on plan assets 6.64 % (24.11) % Discount rate used in determining net periodic benefit cost 5.77 % 3.11 % Discount rate at measurement date 5.40 % 5.77 % The pre-tax defined benefit plan gains and losses for the years ended December 31, 2023 and 2022 consisted of the following: 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. 27 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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): 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 differences between actual and estimated participant data and demographic factors, including healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality. Expense Allocations Certain operating expenses are allocated between our operating segments using activity-based costing methods. These activity-based costing methods require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates directly impact the amount of expense allocated to each segment and therefore the operating profit of each reporting segment. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses. There were no significant changes to our allocation methodologies for 2023 relative to 2022. 28 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS U.S. Domestic Package Year Ended December 31, Change 2023 2022 $ % Average Daily Package Volume (in thousands): Next Day Air 1,757 1,992 (11.8) % Deferred 1,224 1,553 (21.2) % Ground 16,049 17,242 (6.9) % Total Average Daily Package Volume 19,030 20,787 (8.5) % Average Revenue Per Piece: Next Day Air $ 22.17 $ 21.06 $ 1.11 5.3 % Deferred 16.38 15.07 1.31 8.7 % Ground 11.03 10.81 0.22 2.0 % Total Average Revenue Per Piece $ 12.40 $ 12.11 $ 0.29 2.4 % Operating Days in Period 254 255 Revenue (in millions): Next Day Air $ 9,894 $ 10,699 $ (805) (7.5) % Deferred 5,093 5,968 (875) (14.7) % Ground 44,971 47,542 (2,571) (5.4) % Total Revenue $ 59,958 $ 64,209 $ (4,251) (6.6) % Operating Expenses (in millions): Operating Expenses $ 54,882 $ 57,212 $ (2,330) (4.1) % 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) % Operating Profit (in millions) and Operating Margin: Operating Profit $ 5,076 $ 6,997 $ (1,921) (27.5) % Adjusted Operating Profit $ 5,403 $ 7,574 $ (2,171) (28.7) % Operating Margin 8.5 % 10.9 % Adjusted Operating Margin 9.0 % 11.8 % Revenue The change in revenue was due to the following factors: Revenue Change Drivers: Volume Rates / Product Mix Fuel Surcharge Total Revenue Change 2023 vs. 2022 (8.0) % 3.0 % (1.6) % (6.6) % Revenue was also negatively impacted by having one less operating day in 2023 compared to 2022. 29 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Volume 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 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. Fuel Surcharges We apply a fuel surcharge on our domestic air and ground services that adjusts weekly. Our air fuel surcharge is based on the U.S. Department of Energy's ("DOE") Gulf Coast spot price for a gallon of kerosene-type fuel, and our ground fuel surcharge is based on the DOE's On-Highway Diesel Fuel price. 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. 30 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Expenses 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 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%. 31 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS International Package Year Ended December 31, Change 2023 2022 $ % Average Daily Package Volume (in thousands): Domestic 1,591 1,759 (9.6) % Export 1,669 1,745 (4.4) % Total Average Daily Package Volume 3,260 3,504 (7.0) % Average Revenue Per Piece: Domestic $ 7.78 $ 7.46 $ 0.32 4.3 % Export 33.03 34.48 (1.45) (4.2) % Total Average Revenue Per Piece $ 20.71 $ 20.91 $ (0.20) (1.0) % Operating Days in Period 254 255 Revenue (in millions): Domestic $ 3,144 $ 3,346 $ (202) (6.0) % Export 14,003 15,341 (1,338) (8.7) % Cargo & Other 684 1,011 (327) (32.3) % Total Revenue $ 17,831 $ 19,698 $ (1,867) (9.5) % Operating Expenses (in millions): Operating Expenses $ 14,600 $ 15,372 $ (772) (5.0) % 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 % Adjusted Operating Expenses $ 14,549 $ 15,279 $ (730) (4.8) % Operating Profit (in millions) and Operating Margin: Operating Profit $ 3,231 $ 4,326 $ (1,095) (25.3) % Adjusted Operating Profit $ 3,282 $ 4,419 $ (1,137) (25.7) % Operating Margin 18.1 % 22.0 % Adjusted Operating Margin 18.4 % 22.4 % Currency Translation Benefit / (Cost)—(in millions)*: Revenue $ (111) Operating Expenses (22) Operating Profit $ (133) * Net of currency hedging; amount represents the change compared to the prior year. Revenue The change in revenue was due to the following: Revenue Change Drivers: Volume Rates / Product Mix Fuel Surcharges Currency Total Revenue Change 2023 vs. 2022 (7.3) % 1.1 % (2.7) % (0.6) % (9.5) % 32 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Volume Average daily volume decreased for both domestic and export products. 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. consumers. 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 In December 2022, we implemented an average 6.9% net increase in base and accessorial rates for international shipments originating in the United States. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market. Total 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%. Fuel Surcharges The fuel surcharge we apply to international air services originating inside or outside the U.S. is largely indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel. The fuel surcharges for ground services originating outside the U.S. are indexed to fuel prices in the region or country where the shipment originates. 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. 33 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Expenses 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 $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. 34 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Supply Chain Solutions Year Ended December 31, Change 2023 2022 $ % Revenue (in millions): Forwarding $ 5,534 $ 8,943 $ (3,409) (38.1) % Logistics 5,927 5,351 576 10.8 % Other 1,708 2,137 (429) (20.1) % Total Revenue $ 13,169 $ 16,431 $ (3,262) (19.9) % Operating Expenses (in millions): Operating Expenses $ 12,335 $ 14,660 $ (2,325) (15.9) % Transformation Strategy Costs (118) (45) (73) 162.2 % 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) % Operating Profit (in millions) and Operating Margins: Operating Profit $ 834 $ 1,771 $ (937) (52.9) % Adjusted Operating Profit 1,188 1,860 (672) (36.1) % Operating Margin 6.3 % 10.8 % Adjusted Operating Margin 9.0 % 11.3 % Currency Translation Benefit / (Cost)—(in millions)*: Revenue $ (9) Operating Expenses 18 Operating Profit $ 9 * Amount represents the change compared to the prior year. Year Ended December 31, Change 2023 2022 $ % Adjustments to Operating Expenses (in millions): Transformation Strategy Costs Forwarding $ 68 $ 18 $ 50 277.8 % Logistics 48 23 25 108.7 % Other 2 4 (2) (50.0) % Total Transformation Strategy Costs $ 118 $ 45 $ 73 162.2 % Goodwill and Asset Impairment Charges Forwarding $ 119 $ — $ 119 N/A Other 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 % 35 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenue 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 $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. 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. 36 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Profit and Margin 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%. 37 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Operating Expenses Year Ended December 31, Change 2023 2022 $ % Operating Expenses (in millions): Compensation and benefits $ 47,088 $ 47,720 $ (632) (1.3) % 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) % Repairs and maintenance 2,828 2,884 (56) (1.9) % Depreciation and amortization 3,366 3,188 178 5.6 % Purchased transportation 13,651 17,675 (4,024) (22.8) % Fuel 4,775 6,018 (1,243) (20.7) % Other occupancy 2,019 1,844 175 9.5 % Other expenses 8,090 7,915 175 2.2 % Total Other expenses 34,729 39,524 (4,795) (12.1) % 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) % Total Operating Expenses $ 81,817 $ 87,244 $ (5,427) (6.2) % Adjusted Total Operating Expenses $ 81,085 $ 86,485 $ (5,400) (6.2) % Currency (Benefit) / Cost - (in millions)* 4 * Amount represents the change in currency translation compared to the prior year. Year Ended December 31, Change 2023 2022 $ % Adjustments to Operating Expenses (in millions): Transformation Strategy Costs Compensation $ 19 $ 36 $ (17) (47.2) % Benefits 318 10 308 N/M Other expenses 98 132 (34) (25.8) % Total Transformation Strategy Costs $ 435 $ 178 $ 257 144.4 % Incentive Compensation Program Design Changes Compensation — 505 (505) (100.0) % One-Time Compensation Payment Benefits 61 — 61 N/A Long-Lived Asset Estimated Residual Value Changes 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) % 38 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Compensation and Benefits 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: • 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 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. 39 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 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. • U.S. 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. Fuel 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. The majority of our fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the indices are correlated, each index may respond differently to changes in underlying prices, which in turn can drive variability in our costs. 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 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 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. • An increase of $78 million in hosted software application fees and other technology costs in support of ongoing investments in our digital transformation. 40 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Income and (Expense) The following table sets forth investment income and other and interest expense for the years ended December 31, 2023 and 2022 (in millions): Year Ended December 31, Change 2023 2022 $ % 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) $ (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 higher effective interest rates on floating rate debt. The impact of higher average outstanding debt balances was largely offset by additional capitalization of interest. 41 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income Tax Expense The following table sets forth income tax expense and our effective tax rate for the years ended December 31, 2023 and 2022 (in millions): Year Ended December 31, Change 2023 2022 $ % Income Tax Expense: $ 1,865 $ 3,277 $ (1,412) (43.1) % Income Tax Impact of: One-Time Compensation Payment 15 — 15 N/A Transformation Strategy Costs 102 36 66 183.3 % 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) % Effective Tax Rate 21.8 % 22.1 % Adjusted Effective Tax Rate 21.8 % 22.0 % For additional information on income tax expense and our effective tax rate, see note 15 to the audited, consolidated financial statements. 42 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources We deploy a disciplined and balanced approach to capital allocation, including returns to shareowners through dividends and share repurchases. As of December 31, 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. Cash Flows From Operating Activities The following is a summary of the significant sources (uses) of cash from operating activities (in millions): 2023 2022 Net income $ 6,708 $ 11,548 Non-cash operating activities (1) 5,437 5,261 Pension and postretirement medical benefit plan contributions (company-sponsored plans) (1,393) (2,342) Hedge margin receivables and payables (444) 274 Income tax receivables and payables (294) 154 Changes in working capital and other non-current assets and liabilities 366 (797) Other operating activities (142) 6 Net cash from operating activities $ 10,238 $ 14,104 (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. • 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. 43 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of December 31, 2023, approximately $1.9 billion of our total worldwide holdings of cash, cash equivalents and marketable securities were held by foreign subsidiaries. The amount of cash, cash equivalents and marketable securities held by our U.S. and foreign subsidiaries fluctuates throughout the year due to a variety of factors, including the timing of cash receipts and disbursements in the normal course of business. Cash provided by operating activities in the U.S. continues to be our primary source of funds to finance domestic operating needs, capital expenditures, share repurchases, pension contributions and dividend payments to shareowners. All cash, cash equivalents and marketable securities held by foreign subsidiaries are generally available for distribution to the U.S. without any U.S. federal income taxes. Any such distributions may be subject to foreign withholding and U.S. state taxes. When amounts earned by foreign subsidiaries are expected to be indefinitely reinvested, no accrual for taxes is provided. As of December 31, 2023, we had $37 million of restricted cash related to certain tax and regulatory matters and acquisitions. 44 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash Flows From Investing Activities Our primary sources (uses) of cash from investing activities for the years ended December 31, 2023 and 2022 were as follows (in millions): 2023 2022 Net cash used in investing activities $ (7,133) $ (7,472) Capital Expenditures: Buildings, facilities and plant equipment $ (2,211) $ (1,708) Aircraft and parts (585) (1,267) Vehicles (1,485) (1,067) Information technology (877) (727) Total Capital Expenditures (1) : $ (5,158) $ (4,769) Capital Expenditures as a % of revenue 5.7 % 4.8 % Other Investing Activities: Proceeds from disposals of businesses, property, plant and equipment $ 193 $ 12 Net (purchases)/sales and maturities of marketable securities $ (820) $ (1,651) Acquisitions, net of cash acquired $ (1,329) $ (755) Other investing activities $ (19) $ (309) (1) In addition to capital expenditures of $5.2 and $4.8 billion for the years ended December 31, 2023 and 2022, respectively, there were principal repayments of finance lease obligations of $126 and $149 million, respectively. These are included in cash flows from financing activities. We have commitments for the purchase of aircraft, vehicles, equipment and real estate to provide for the replacement and enhancement of existing capacity and targeted growth. Future capital spending will depend on a variety of factors, including economic and industry conditions. Our current investment program anticipates investments in technology initiatives and enhanced network capabilities, including over $1.0 billion of projects to support our environmental sustainability goals in 2024. 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 $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. 45 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 46 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash Flows From Financing Activities Our primary sources (uses) of cash for financing activities were as follows (amounts in millions, except per share data): 2023 2022 Net cash used in financing activities $ (5,534) $ (11,185) Share Repurchases: Cash paid to repurchase shares $ (2,250) $ (3,500) Number of shares repurchased (12.8) (19.0) Shares outstanding at year end 853 859 Dividends: Dividends declared per share $ 6.48 $ 6.08 Cash paid for dividends $ (5,372) $ (5,114) Borrowings: Net borrowings (repayments) of debt principal $ 2,272 $ (2,304) Other Financing Activities: Cash received for common stock issuances $ 248 $ 262 Other financing activities $ (432) $ (529) Capitalization: Total debt outstanding at year end $ 22,264 $ 19,662 Total shareowners’ equity at year end 17,314 19,803 Total capitalization $ 39,578 $ 39,465 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 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; and • $529 million floating rate senior notes. 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; • €700 million 0.375% senior notes; and • $500 million floating rate senior notes. 47 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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; and • $400 million floating rate senior notes. The amount of commercial paper outstanding fluctuates based on daily liquidity needs. The following is a summary of our commercial paper program (in millions): Outstanding balance at year end ($) Average balance outstanding ($) Average interest rate 2023 USD $ 2,172 $ 417 5.45 % Total $ 2,172 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 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 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 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. Sources of Credit See note 9 to the audited, consolidated financial statements for a discussion of our available credit and our debt covenants. 48 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Contractual Commitments We have material cash requirements for known contractual obligations and commitments in the form of finance leases, operating leases, debt obligations, purchase commitments and certain other liabilities that are disclosed in the notes to the audited, consolidated financial statements and discussed below. We expect to fund these obligations and other discretionary payments, including expected returns to shareowners, primarily through cash from operations. We anticipate making discretionary contributions to our company-sponsored U.S. 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 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. 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. Contribution rates to these multiemployer pension and health and welfare plans are established through the collective bargaining process. We have outstanding letters of credit and surety bonds that are discussed in note 9 to the audited, consolidated financial statements. Additionally, we have $1.5 billion of fixed- and floating-rate senior notes that mature in 2024. 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, 2023. For debt denominated in a foreign currency, the U.S. Dollar equivalent principal amount of the debt at the end of the year was used as the basis to project future interest payments. Annual principal payments on our long-term debt, and purchase commitments for certain capital expenditures are also set out in note 9 to the audited, consolidated financial statements. Included within these purchase commitments are firm commitments to purchase 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. Our finance lease obligations, including purchase options that are reasonably certain to be exercised, relate primarily to leases on aircraft and real estate. These obligations, together with our obligations under operating leases are set out in note 11 to the audited, consolidated financial statements. Under provisions of the Tax Cuts and Jobs Act, we elected to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries over eight years. 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 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. 49 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Collective Bargaining Agreements Status of Collective Bargaining Agreements See note 6 to the audited, consolidated financial statements for a discussion of the status of collective bargaining agreements and "Risk Factors - Business and Operating Risks - Strikes, work stoppages or slowdowns by our employees could materially adversely affect us" in Part I, Item 1A of this report. Multiemployer Benefit Plans We contribute to a number of multiemployer pension and health and welfare plans under the terms of collective bargaining agreements that cover our union-represented employees. These agreements set forth the annual contribution rate increases for the plans that we participate in. New Accounting Pronouncements Recently Adopted Accounting Standards See note 1 to the audited, consolidated financial statements for a discussion of recently adopted accounting standards. Accounting Standards Issued But Not Yet Effective See note 1 to the audited, consolidated financial statements for a discussion of accounting standards issued, but not yet effective. 50 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Estimates 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 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. While estimates and judgments are applied in arriving at many reported amounts, we believe that the following critical accounting estimates involve a higher degree of judgment and complexity. Contingencies 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 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 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. Except as disclosed in note 10 to the audited, consolidated financial statements, contingent losses that were probable and estimable were not material to our financial position or results of operations as of, or for the year ended, December 31, 2023. 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. 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. 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. 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, 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 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. 51 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). We apply judgment to select appropriate comparison companies based on the business operations, size and operating results of our reporting units. Changes to our selection of comparable companies 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. 52 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 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. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to resolve a claim. Several factors can affect the actual cost, or severity, of a claim, including: • Risk retention limits; • Length of time a claim remains open; • Trends in healthcare costs; • Results of any related litigation; and • Changes in legislation. 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 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. We also sponsor several health and welfare insurance plans for our employees. Liabilities and expenses related to these plans are based on estimates of the number of employees and eligible dependents covered under the plans, global health events, anticipated utilization by participants and overall trends in medical costs and inflation. We believe our estimates are reasonable and appropriate. Actual experience may differ materially from these estimates and, therefore, produce a material difference between estimated and actual operating results. Self-insurance reserves as of December 31, 2023 and 2022 were as follows (in millions): 2023 2022 Current self-insurance reserves $ 1,320 $ 1,069 Non-current self-insurance reserves (1) 1,626 1,818 Total self-insurance reserves $ 2,946 $ 2,887 (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. 53 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pension and Other Postretirement Medical Benefits Our pension and postretirement medical benefit costs are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, healthcare cost trend rates, inflation, compensation increases, expected returns on plan assets, mortality rates, regulatory requirements and other factors. The assumptions utilized in recording the obligations under our plans represent our best estimates. 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. The primary factors contributing to actuarial gains and losses each year are: • Changes in the discount rate used to value pension and postretirement medical benefit obligations as of the measurement date; • Differences between expected and actual returns on plan assets; • Changes in demographic assumptions, including mortality; • Differences in participant experience from demographic assumptions; and • Changes in coordinating benefits with plans not sponsored by UPS. We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of a corridor (defined as 10% of the greater of the fair value of plan assets or the plans' projected benefit obligations) immediately within income upon remeasurement of a plan. 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): Pension Plans 25 Basis Point Increase 25 Basis Point Decrease Discount Rate: Effect on ongoing net periodic benefit cost $ (15) $ 16 Effect on net periodic benefit cost for amounts recognized outside the 10% corridor (423) 697 Effect on projected benefit obligation (1,550) 1,636 Return on Assets: Effect on ongoing net periodic benefit cost (1) (108) 108 Effect on net periodic benefit cost for amounts recognized outside the 10% corridor (2) $ (54) $ 54 Postretirement Medical Benefit Plans Discount Rate: Effect on ongoing net periodic benefit cost $ 2 $ (2) Effect on net periodic benefit cost for amounts recognized outside the 10% corridor — — Effect on accumulated postretirement benefit obligation (34) 39 Healthcare Cost Trend Rate: Effect on ongoing net periodic benefit cost 1 (1) Effect on net periodic benefit cost for amounts recognized outside the 10% corridor — — Effect on accumulated postretirement benefit obligation $ 9 $ (10) (1) Amount calculated based on 25 basis point increase / decrease in the expected return on assets. (2) Amount calculated based on 25 basis point increase / decrease in the actual return on assets. 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. 54 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 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 perform impairment testing at the asset group level. Asset groups represent the lowest level at which independent cash flows can be identified. 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. 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 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. Fair Value Measurements In the normal course of business, we hold and issue financial instruments that contain elements of market risk, including derivatives, marketable securities and debt. Certain of these financial instruments are required to be recorded at fair value, principally derivatives, marketable securities and certain other investments. These financial instruments are measured and reported at fair value on a recurring basis based upon a fair value hierarchy (Levels 1, 2 and 3). Fair values are based on listed market prices (Level 1), when such prices are available. To the extent that listed market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations (Level 2). If listed market prices or other relevant factors are not available, inputs are developed from unobservable data reflecting our own assumptions and include situations where there is little or no market activity for the asset or liability (Level 3). 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 55 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Refer to notes 3, 9 and 17 to the audited, consolidated financial statements for further information on these instruments. A quantitative sensitivity analysis of our exposure to changes in commodity prices, foreign currency exchange rates and interest rates is presented in the Quantitative and Qualitative Disclosures about Market Risk section of this report. Our pension and postretirement plan assets include investments in hedge funds, as well as private debt, private equity and real estate funds, which are primarily measured using net asset value ("NAV") as a practical expedient for fair value, as appropriate. These investments were valued at $9.9 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 31. These investments are not actively traded, and their values can only be estimated using these assumptions. If our estimates of activity changed, this could have a material impact on the reported value of these investments and on the return on assets that we report. Refer to note 5 to the audited, consolidated financial statements for further information on our pension and postretirement plan assets. Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis, including property, plant and equipment, goodwill and intangible assets. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of an impairment or when an asset or disposal group is classified as held for sale. In accounting for business acquisitions, we allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values. Estimating the fair value of assets acquired and liabilities assumed requires judgment, especially with respect to identified intangible assets as there may be limited or no observable transactions within the market, requiring us to develop internal models to estimate fair value. For example, estimating the fair value of identified intangible assets may require us to develop valuation assumptions, including but not limited to, future expected cash flows from these assets, synergies and the cost of capital. Certain inputs require us to determine assumptions that are reflective of a market participant view of fair value. Changes in any of these assumptions may materially impact the amount we recognize for identifiable assets and liabilities, in addition to the residual amount allocated to goodwill. Income Taxes 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 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. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. Once it is determined that the position meets the recognition threshold, the second step requires us to estimate and measure the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement. The difference between the amount of recognizable tax benefit and the total amount of tax benefit from positions filed or to be filed with the tax authorities is recorded as a liability for uncertain tax benefits. 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 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. 56 UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS