Item 1. Business

Overview

United Parcel Service, Inc. (“UPS”) was founded in 1907 as a private messenger and delivery service in Seattle, Washington. Today, we are the world’s largest package delivery company, a leader in the U.S. less-than-truckload industry and the premier provider of global supply chain management solutions. We deliver packages each business day for 1.6 million shipping customers to 8.7 million receivers ("consignees") in over 220 countries and territories. In 2016, we delivered an average of 19.1 million pieces per day, or a total of 4.9 billion packages. Total revenue in 2016 was $60.9 billion.

We serve the global market for logistics services, which include transportation, distribution, contract logistics, ground freight, ocean freight, air freight, customs brokerage, insurance and financing. We have three reportable segments: U.S. Domestic Package, International Package and Supply Chain & Freight, all of which are described below. For financial information concerning our reportable segments and geographic regions, refer to note 12 of our consolidated financial statements.

Business Strategy

Our market strategy is to provide customers with advanced logistics solutions made possible by a broad portfolio of differentiated services and capabilities expertly assembled and integrated into our customers’ businesses. This approach, supported by our efficient and globally balanced multimodal network, enables us to deliver value to our customers and thereby build lasting partnerships with them.

Customers leverage our broad portfolio of logistics capabilities; balanced global presence in North America, Europe, Middle East, Africa, Asia Pacific and Latin America; reliability; industry-leading technologies; and solutions expertise for competitive advantage in markets where they choose to compete. We prudently invest to expand our integrated global network and service portfolio.

Technology investments create user-friendly shipping, e-commerce, logistics management and visibility tools for our customers, while supporting our ongoing effort to increase operational efficiencies. We actively monitor and invest to gain insights into emerging technologies such as additive manufacturing (3D printing), route and network optimization tools, autonomous vehicles, and advanced product monitoring and tracking functionality. In 2016, we invested in Deliv, a same-day retail delivery startup, and Optoro, a reverse logistics firm.

In order to meet demand, we are increasing capital expenditures to expand network capacity and increase productivity by automating existing facilities. We are making strategic investments in our top 30 processing hubs as well as adding new facilities to our network. In 2016, we announced investments of $400 million to build a new 1.2 million square foot regional processing facility in Atlanta, Georgia, $196 million to increase the processing capacity of our Jacksonville, Florida hub by 33%, and $175 million to double the processing capacity of our Columbus, Ohio hub.

Our service portfolio and investments have produced among the best return on invested capital and operating margins in the industry. We have a long history of sound financial management and our consolidated balance sheet reflects financial strength that few companies can match. Cash generation is a significant strength of UPS, giving us strong capacity to service our obligations and allowing for distributions to shareowners, reinvestment in our business and the pursuit of growth opportunities.

We enable and are the beneficiaries of the following trends:

Expansion of Global Trade

We continue to invest to expand in both developed and emerging international markets. In Europe, we have committed to nearly $2 billion of capital investment to expand our infrastructure to meet the growing demand for cross-border commerce. The enhancements to our European ground network are designed to ensure that we provide fast, reliable service to customers moving goods across country borders.

Emerging market opportunities continue to expand. Over the next ten years, these markets are expected to represent the majority of global GDP growth and an increasing portion of global trade. Emerging markets are a focus of investment and growth for our current customers and will be a source of our next generation of customers. To take advantage of these opportunities, we continue to make long-term investments in markets where our customers are growing. Over the past ten years, we have established a strong market presence in three developing markets: China, Poland and Turkey. India, along with select countries in the Middle East, Latin America, Africa and Eastern Europe are also becoming increasingly important to us.

Transcontinental and cross-border trade are predicted to grow faster than U.S. and global gross domestic production for the foreseeable future. As a result, global economies are becoming more inter-connected and dependent on foreign trade. We are committed to continued growth in both international logistics and express services. We are expanding our aircraft fleet beginning in 2017 to include an additional 14 Boeing 747-8s.

UPS plays an important role in both global and regional trade and is well positioned to take advantage of trade growth, wherever it occurs. Our global presence and productivity enhancing technologies allow customers to expand into new markets. We advocate for the expansion of free trade, including the passage of regional trade pacts and the removal of trade barriers.

These trends underscore why we believe our international business remains a catalyst for future profitable growth.

e-Commerce Growth in Retail Sectors

E-commerce continues to drive significant growth in package delivery volume. Our integrated network puts us in an ideal position to capitalize on the shift towards residential deliveries. We continue to create new services, supported by our technology, that complement traditional UPS premium home delivery services and address the needs of e-commerce shippers and consignees. We offer cost-effective solutions such as UPS SurePost, for U.S. domestic shipments, and UPS i-parcel, for a low-cost deferred cross border solution, where economy takes precedence over speed. We also offer feature-rich solutions, such as UPS My Choice, a service that provides more than 30 million members with visibility and control of their inbound shipments. The power of UPS My Choice has been enhanced over the past year with the addition of UPS Follow My Delivery for time-sensitive shipments. UPS Follow My Delivery offers map-based tracking from a package's delivery departure to a UPS My Choice member's residence.

UPS My Choice members have the added flexibility to direct packages to UPS Access Point locations when they will not be home to accept a delivery. UPS Access Point locations are convenient places – such as The UPS Store and other local businesses – that offer easy package drop-off and pick-up. With evening and weekend hours, UPS Access Point locations better fit some consumers’ schedules. Merchants in 50 origin countries and territories can ship directly to UPS Access Point locations in 18 destination countries, giving merchants and consumers greater control over package deliveries.

Industry-focused Solutions and Offerings

We offer differentiated value propositions in several segments, including aerospace, automotive, industrial manufacturing, retail, professional and consumer services, healthcare and high-tech.

Our understanding of macro and industry trends in each market allows us to develop commercial insights for our customers. These insights are incorporated into our sales and solutions process and are shared with customers through direct engagement, industry forums and publications. We help customers achieve their business objectives and improve their performance through our value-added solutions.

The combination of rising global demand for healthcare, product innovations (many of which are time and temperature sensitive), increasing regulatory oversight and downward reimbursement pressure is creating opportunities and challenges for healthcare and life sciences firms. In 2016, we expanded our healthcare capabilities by acquiring Maze 1 Limited ("Marken"), a global provider of supply chain solutions to the life sciences industry, primarily serving the clinical trials logistics space. Clinical trials are subject to strict regulatory compliance, require temperature-controlled logistics services and are typically global in reach. Marken operates a global network of clinical supply chain services to meet this need. The acquisition of Marken follows multiple acquisitions that have expanded our healthcare logistics services portfolio in recent years. With over seven million square feet of healthcare logistics and distribution facilities around the world and further growth planned for the future, we are well-positioned to meet our customers' increasingly complex requirements.

Rapid technology innovation and growing worldwide demand for electronics are driving change in the already-dynamic high-tech industry. UPS's global transportation network and integrated technology solutions enable high-tech customers to get their products to market faster, improve customer service and increase revenue. We offer global sourcing and a significant amount of repair space to leverage one of the largest networks of post-sales facilities in the world. With more than 950 field stocking locations in over 110 countries, we help high-tech companies identify better ways to manage inventories and meet their crucial logistics needs. Our experience and global capabilities make us a strong partner in the high-tech industry.

Logistics Outsourcing

Outsourcing supply chain management is becoming more prevalent as customers increasingly view professional management and operation of their supply chains as a strategic advantage. This trend enables companies to focus on what they do best. We can meet our customers’ needs for outsourced logistics with our global capabilities in customized forwarding, transportation, warehousing, distribution, delivery and post-sales services.

Technology

Technology powers logistics, forms the foundation of our reliability and allows us to enhance the customer experience. Recent developments that improve our operational efficiency, flexibility, reliability and customer experience include:

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Completed Phase I of U.S. deployment of our On Road Integrated Optimization and Navigation system ("ORION"). ORION employs advanced algorithms to determine the optimal route for each delivery, while meeting service commitments. Despite continuing growth in package volume and delivery stops, ORION is helping bend the cost curve by limiting miles driven, which results in fuel and productivity savings. For instance, average daily volume and delivery stops increased 4.1% and 4.4%, respectively, in our U.S. domestic package operations in 2016, while average daily package miles driven only increased 0.2%.

•	Expanded investment in new automated facilities. We are also automating our largest hubs, package centers and small sorts globally. This effort will reduce package handling in the network while improving network flexibility by optimizing network flows and eliminating the need for complex sort knowledge.

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Continued rollout of telematics to our international delivery fleet. Telematics helps UPS determine a vehicles' performance and condition by capturing data on more than 200 operating elements. Together, improved data and driver coaching help reduce fuel consumption, emissions and maintenance costs while improving driver safety. By the end of 2016, telematics was installed in more than 86,000 vehicles.

We bring industry-leading UPS technology to our customers who, in turn, realize increased productivity, greater control of their supply chains and improved customer experience when they integrate with our systems. Customers benefit through offerings such as:

Shipping

WorldShip™, which is our flagship desktop shipping application, provides middle-market and large customers with robust shipping capabilities. Customers can create custom labels, set up shipment alerts, create and upload customs documentation, track and export shipments, create reports and integrate with their enterprise resource planning and accounting systems to streamline shipping with real-time connectivity.

UPS marketplace shipping, which integrates www.ups.com with eBay® , Amazon®, Etsy® and BigCommerce®, allows marketplace sellers to easily ship their orders via www.ups.com or WorldShip™. UPS marketplace shipping provides simplified shipment processing, multiple payment options (including PayPal™), order and shipment history and automatic tracking updates.

Tracking and Visibility

UPS Quantum View® helps customers better manage shipments, facilitate tracking, allow for inbound volume planning, manage third-party shipping costs and automatically notify customers of incoming shipments. With visibility into transit times and delivery confirmations, customers can speed up their revenue cycle and collect accounts receivable more quickly while improving customer service.

International Trade Tools

UPS Paperless™ solutions allow customers to self-enroll in UPS Paperless™ Invoice and upload shipping documents. These solutions enable customers to electronically transmit a commercial invoice, packing list or their own customs documents when shipping internationally. This eliminates redundant data entry and errors, while reducing customs delays and paper waste.

UPS TradeAbility® tools help customers effectively and confidently manage the movement of goods internationally in a timely, efficient and compliant manner.

Billing

The UPS Billing Center, a secure location for customers to view, download, manage and pay their UPS invoices, helps customers accelerate billing and payment processes. Customers can assign privileges with administrative controls, manage multiple accounts and create custom reports using a single simple interface.

Integration

The UPS Developer Kit, which is comprised of multiple Application Programming Interfaces (APIs), helps customers streamline and automate their internal business processes. The UPS Developer Kit APIs allow customers to integrate a wide range of UPS functionality into their business systems and websites such as address validation, shipment scheduling, selection of shipping service levels, tracking and much more.

Business-to-Consumer

UPS My Choice®, which focuses on the consignee, has transformed the residential delivery experience. Receivers can direct the timing and delivery instructions for their packages using their computer, mobile devices or Facebook™ app. This innovative service is powered by the complex integration of real-time route optimization and other technologies within our delivery network.

The Global Locator on www.ups.com was enhanced to give customers faster and simpler access to UPS drop-off and pick-up locations, including new UPS Access Point sites. The Global Locator has a new search field with updated filters, location images and location-specific promotions. Customers can also provide online feedback, e-mail search results, save favorite locations and access recent searches.

Mobile

UPS Mobile, which includes the mobile website, m.ups.com, and apps for iPhone®, iPad® and Android devices, is readily available for our customers in over 80 countries. Customers can track, ship, find UPS locations, manage UPS My Choice shipments and receive shipment notifications on their mobile devices. The UPS Mobile apps and website were enhanced with new mobile shipping options that make it easier to create or print a label from a mobile device. In 2016, the app was deployed in an additional 39 countries, for a total of 55 countries.

Reporting Segments and Products & Services

Global Small Package

Our global small package operations provide time-definite delivery services for express letters, documents, small packages and palletized freight via air and ground services. We serve more than 220 countries and territories around the world along with domestic delivery service within 50 countries. We handle packages that weigh up to 150 pounds and are up to 165 inches in combined length and girth as well as palletized shipments weighing more than 150 pounds. All of our package services are supported by numerous shipping, visibility and billing technologies.

We handle all levels of service (air, ground, domestic, international, commercial, residential) through one global integrated pick-up and delivery network. All packages are commingled within our network, except when necessary to meet their specific service commitments. This enables one UPS driver to pick up customers’ shipments for any of our services at the same scheduled time each day. Compared to companies with single service network designs, our integrated network uniquely provides operational and capital efficiencies while being more environmentally-friendly.

We offer same-day pick-up of air and ground packages upon request. Customers can schedule pick-ups for one to five days a week, based on their specific needs. Additionally, our wholly-owned and partnered global network offers more than 150,000 entry points where customers can tender a package to us at a location or time convenient to them. This combined network includes UPS drivers who can accept packages provided to them, UPS drop boxes, UPS Access Point locations, The UPS Store locations, authorized shipping outlets and commercial counters, alliance locations and customer centers attached to UPS facilities. Some of these locations offer a full array of services including pick-up, delivery and packing options, while others are drop-off locations only.

The growth of online shopping has increased our customers’ needs for efficient and reliable returns, resulting in our development of a robust selection of returns services that are available in more than 145 countries. Options vary based on customer needs and country, and range from cost-effective solutions such as UPS Returns, to more-specialized services such as UPS Returns Exchange. UPS Returns enables shippers to provide their customers with a return shipping label, while UPS Returns Exchange simplifies product exchanges by delivering a replacement item and picking up a return item in the same stop, and assisting with the re-packaging process.

We operate one of the largest airlines in the world, with global operations centered at our Worldport hub in Louisville, Kentucky. Worldport sort capacity, currently at 416,000 packages per hour, has expanded over the years due to volume growth and a centralization effort. Our European air hub is located in Cologne, Germany, and we maintain Asia-Pacific air hubs in Shanghai, China and Shenzhen, China and Hong Kong. Our regional air hub in Canada is located in Hamilton, Ontario, and our regional air hub for Latin America and the Caribbean is in Miami, Florida.

In the U.S., Worldport is supported by our regional air hubs in Columbia, South Carolina; Dallas, Texas; Ontario, California; Philadelphia, Pennsylvania; and Rockford, Illinois. This network design allows for cost-effective package processing in our most technology-enabled facilities, which allow us to use fewer, larger and more fuel-efficient aircraft. Our U.S. ground fleet serves all business and residential zip codes in the contiguous U.S.

U.S. Domestic Package Reporting Segment

We are a leader in time-definite, money-back guaranteed, small package delivery services in the U.S. We offer a full spectrum of U.S. domestic guaranteed ground and air package transportation services.

•	Customers can select from same day, next day, two day and three day delivery alternatives. Many of these services offer options that enable customers to specify a time-of-day guarantee for their delivery (e.g., by 8:00 AM, 10:30 AM, noon, end of day, etc.).

•	We expanded UPS Next Day Air Early (previously known as "UPS Next Day Air Early AM") service to over 12,000 zip codes in two phases where previously only an end-of-day guarantee was available. This enhancement provides shippers and their customers the option of earlier commitment times from 8:00 A.M. to 2:00 P.M. and enlarges our early delivery coverage.

•	Customers can also leverage our extensive ground network to ship using our day-definite guaranteed ground service that serves every U.S. business and residential address. We deliver more ground packages than any other carrier, with average daily package volume of 13.5 million in the U.S., most within one to three business days.

•	We also offer UPS SurePost, an economy residential ground service for customers with non-urgent, lightweight residential shipments. UPS SurePost is a contractual residential ground service that combines the consistency and reliability of the UPS Ground network with final delivery often provided by the U.S. Postal Service.

International Package Reporting Segment

Our International Package reporting segment includes small package operations in Europe, Asia-Pacific, Canada and Latin America, the Indian sub-continent, the Middle East and Africa. We offer a wide selection of guaranteed day and time-definite international shipping services. We offer more guaranteed time-definite express options (Express Plus, Express and Express Saver) than any other carrier.

•	In 2016, we undertook significant country expansions of Express time-definite portfolios:

◦	We expanded our UPS Worldwide Express mid-day service to 52 new countries across all regions. This service is now available in 118 countries.

◦	We expanded our UPS Worldwide Express Plus morning delivery service to 28 new countries and expanded our footprint in 25 existing markets. This service is now available in 56 countries.

•	For international shipments that do not require Express services, UPS Worldwide Expedited offers a reliable, deferred, guaranteed day-definite service option. The service is available from more than 80 origin countries to more than 220 countries and territories.

•	For cross-border ground package delivery, we offer UPS Standard delivery services within Europe, between the U.S. and Canada and between the U.S. and Mexico.

•	UPS Worldwide Express Freight provides guaranteed, day-definite delivery for palletized shipments over 150 pounds. In 2016, we expanded services to nine new emerging market countries. UPS Worldwide Express Freight is now available from 66 origin countries to 64 destination countries.

Europe, our largest region outside of the U.S., accounts for approximately half of international revenue and is one of the primary drivers of our growth. To accommodate the strong potential for growth in small package exports, we made a series of enhancements to our ground network that helps reduce transit time for cross-border shipments by one to two days and will result in improved exporting opportunities for customers in Europe. These expansions and enhancements are part of our commitment to invest nearly $2 billion in our European infrastructure by 2019.

Asia-Pacific remains a strategic market due to growth rates in intra-Asia trade and the expanding Chinese economy. To capitalize on these opportunities, we are bringing faster time-in-transit to customers focused on intra-Asia trade, and reducing transit days from Asia to the U.S. and Europe. Through added flight frequencies, we provide our customers the ability to ship next day to more places in the U.S. and Europe, guaranteed, than any other express carrier. We serve more than 40 Asia-Pacific countries and territories through more than two dozen alliances with local delivery companies that supplement company-owned operations.

The investments we are making to expand our network and improve service levels have already created a strong foundation, contributing to 30% incremental profit growth over the last two years. Excluding any impacts from foreign currency, we expect this positive momentum in our core International business model to continue going forward.

Supply Chain & Freight Reporting Segment

The Supply Chain & Freight reporting segment consists of our forwarding and logistics services, truckload freight brokerage, UPS Freight and our financial offerings through UPS Capital. Supply chain complexity creates demand for a global service offering that incorporates transportation, distribution and international trade and brokerage services, with complementary financial and information services. Outsourcing of non-core logistics activity is a strategy more and more companies are pursuing. With increased competition and growth opportunities in new markets, businesses require flexible and responsive supply chains to support their business strategies. We meet this demand by offering a broad array of supply chain services in over 195 countries and territories.

Freight Forwarding

We are one of the largest U.S. domestic air freight carriers and among the top international air freight forwarders globally. We offer a portfolio of guaranteed and non-guaranteed global air freight services. Additionally, as one of the world’s leading non-vessel operating common carriers, we provide ocean freight full-container load, less-than-container load and multimodal transportation services between most major ports around the world.

Truckload Freight Brokerage (Coyote)

In 2015, we acquired Coyote Logistics Midco, Inc ("Coyote"), a U.S.-based truckload freight brokerage company. We successfully integrated this large-scale truckload freight brokerage and transportation management services operation into our Supply Chain & Freight reporting segment, and have seen significant synergies in the areas of purchased transportation, backhaul utilization, cross-selling to customers, technology systems and industry best practices. Coyote's access to our UPS fleet combined with its broad carrier network has created a customized capacity solution for all markets, customers and situations. Moreover, Coyote has been able to cross-sell UPS services (such as air freight, customs brokerage and global freight forwarding) to its customer base.

Global Logistics and Distribution

UPS Logistics offers the following services:

•	We provide value-added distribution services to customers through our global network of company-owned and leased warehouse facilities.

•	UPS Post Sales enables customers and end users to support equipment and devices after they have been delivered or installed in the field. We leverage our global network of over 950 field stocking locations ("FSL") to ensure the right parts are in the right place, at the right time. Our network of FSLs span more than 110 countries around the globe.

•	UPS Mail Innovations offers an efficient, cost-effective method for sending lightweight parcels and flat mail to global addresses from the U.S. We pick up customers' domestic and international mail and then sort, post, manifest and expedite the secured mail containers to the destination postal service for last-mile delivery.

•	UPS Express Critical provides urgent, secure transportation for time-sensitive and high-value goods. The service is designed to complement UPS's core parcel and air freight services. It includes same-day, next-flight-out and door-to-door ground services, including specialized charter and hand-carry services for both light and heavyweight shipments.

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In 2016, we expanded our healthcare capabilities by acquiring Marken, a global provider of supply chain solutions to the life sciences industry, primarily serving the clinical trials logistics space. Clinical trials are subject to strict regulatory compliance, require temperature-controlled logistics services and are typically global in reach. Marken operates a global network of clinical supply chain services to meet the increasingly complex demands of its clients. The acquisition of Marken follows multiple acquisitions that have expanded our healthcare logistics services portfolio.

UPS Freight

UPS Freight offers regional, inter-regional and long-haul less-than-truckload ("LTL") services, as well as full truckload services, in all 50 states, Canada, Puerto Rico, Guam, the U.S. Virgin Islands and Mexico. UPS Freight provides reliable LTL service backed by a day-definite, on-time guarantee at no additional cost. Additionally, user-friendly shipping, visibility and billing technology offerings including UPS WorldShip®, Quantum View and UPS Billing Center, allow freight customers to create electronic bills of lading, monitor shipment progress and reconcile shipping charges.

Customs Brokerage

We are among the world’s largest customs brokers by both the number of shipments processed annually and by the number of dedicated brokerage employees worldwide. We provide our customers with customs clearance, trade management and international trade consulting services.

UPS Capital

UPS Capital provides financial, insurance and payment services to help protect companies from risk and leverage cash in their supply chains. With services available in over 21 countries, UPS Capital and its affiliates support all aspects of the order-to-cash cycle, including financing inventory warehoused overseas, insuring shipments and providing payment solutions. The UPS Capital suite of cargo and credit insurance, trade finance and payment solutions is designed to help customers protect their assets and keep their businesses running smoothly. With the acquisitions of Parcel Pro™ and the Insured Parcel Services business of G4S International Logistics in 2015, UPS Capital now offers insured transportation of high-value goods including loose stones, finished jewelry and wristwatches.

Sustainability

Our business and corporate responsibility strategies pursue a common interest to increase the vitality and environmental sustainability of the global economy by aggregating the shipping activity of millions of businesses and individuals worldwide into a single, highly efficient logistics network. This provides benefits to:

•	UPS, by ensuring strong demand for our services.

•	The economy, by enabling global commerce and making global supply chains more efficient and less expensive.

•	The environment, by enabling our global customers to leverage UPS’s network efficiency and thereby reduce the greenhouse gas emissions intensity of their supply chains.

•	Communities, by connecting individuals to global markets and providing the economic empowerment that can help facilitate positive social change.

We pursue sustainable business practices worldwide through operational efficiency, fleet and fuel advances, facility engineering projects and conservation-enabling technology and service offerings. We help our customers do the same. We consider stakeholder engagement an essential aspect of corporate governance and regularly collaborate with a diverse set of global stakeholders on sustainability issues. Our most material global sustainability issues primarily involve our energy use, emissions and workplace policies. UPS established an enterprise-wide target to reduce the carbon intensity of our operations by 20% by 2020, using 2007 as a baseline. As of 2015, we achieved a 14.5% reduction toward this goal as a result of successfully executing greenhouse gas reduction strategies in our ground, air and facility operations.

Sustainability highlights in 2016 include:

•	One of Corporate Responsibility’s “100 Best Corporate Citizens” for the 7th consecutive year.

•	Recognized by Ethisphere Institute as one of the “World’s Most Ethical Companies” for the 10th consecutive year.

•	Recognized as a constituent of the Dow Jones Sustainability North America Index for the 12th consecutive year; in addition, we were included on the Dow Jones Sustainability World Index for the 4th consecutive year.

•	Recognized as a constituent of the NASDAQ OMX Global Sustainability Index for the 7th consecutive year.

•	Recognized at the Leadership level of CDP's climate performance review.

•	Included for the 3rd consecutive time on Points of Light's Civic 50, which recognizes the most community-minded companies in the US.

More information on how we address our most significant sustainability issues is available in the UPS Corporate Sustainability Report and on the UPS Sustainability website at www.ups.com/sustainability.

Community

We believe that strong communities are vital to the success of our company. By combining our philanthropy with the volunteer time and talents of our employees, we help drive positive change for organizations and communities in need across the globe. The highlights of our corporate citizenship efforts in 2016 include:

•	Local non-profits around the world received nearly 2.7 million hours of volunteer service from our employees participating in our Neighbor-to-Neighbor program.

•	The UPS Foundation, which oversees corporate citizenship efforts for the company, invested nearly $117 million in donations of both cash and in-kind services to global causes, primarily in four focus areas—community safety, environmental sustainability, diversity and volunteerism.

•	Our employees, both active and retired, contributed approximately $57 million to United Way, which was matched by a corporate contribution of nearly $9 million.

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Through The UPS Foundation we have the opportunity to support our global communities to offset carbon, support clean water, reduce poverty and help individuals sustain their lives through the planting of trees. The UPS Global Forestry Initiative, which began in 2013, is the signature program of The UPS Foundation’s Environmental Focus area. By the end of 2016, we have supported the planting of seven million trees worldwide.

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We continued to aid communities impacted by disasters through our UPS Humanitarian Relief and Resilience program, by providing our logistics expertise, skilled volunteers, capacity building support and in-kind services. In 2016, we coordinated more than 450 humanitarian relief shipments across 53 countries and provided funding and logistics support to strengthen long-term recovery efforts of communities impacted by over 20 world disasters including the Global Refugee Crisis, Hurricane Matthew and the Japan Earthquake.

•	Nearly 8,500 teenagers and novice drivers in the U.S., Canada, the U.K., Germany, Mexico and China participated in UPS Road Code. This safety program for new drivers features our employees as instructors – a role where they share driving knowledge and safety tips amassed over our long history of safe driving.

Reputation

Great brands require connecting with customers, investors and other stakeholders with honesty and transparency. In working to develop these connections, we regularly receive high accolades from independent brand and reputation evaluations.

In 2016, we continued to be ranked highly by the following:

• Forbes’ 2016 ranking of "The World's Most Valued Brands",

• Interbrand’s "Best Global Brands,2016",

• 2016 FORTUNE Magazine's list of "World's Most Admired Companies",

• 2016 Gartner Magic Quadrant for the Third-Party Logistics Leader, Worldwide, and

• WPP's BrandZ "Top 100 Most Valuable Global Brands" 2016 survey by Millward Brown Optimor.

Employees

The strength of our company is our people, working together with a common purpose. We had more than 434,000 employees (excluding temporary seasonal employees) as of December 31, 2016, of which 355,000 are in the U.S. and 79,000 are located internationally. Our global workforce includes approximately 78,000 management employees (38% of whom are part-time) and 356,000 hourly employees (47% of whom are part-time).

As of December 31, 2016, we had approximately 268,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). During 2014, the Teamsters ratified a new national master agreement with UPS that will expire on July 31, 2018.

We have approximately 2,600 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which became amendable at the end of 2011. On August 31, 2016, the IPA members voted to ratify a new five-year labor contract. Terms of the agreement became effective September 1, 2016 and run through September 1, 2021. The economic provisions in the agreement included pay increases, signing bonuses and enhanced pension benefits.

Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727. In addition, approximately 3,000 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”) that will expire on July 31, 2019.

The experience of our management team continues to be an organizational strength. Nearly 34% of our full-time managers have more than 20 years of service with UPS.

We believe that our relations with our employees are good. We periodically survey all our employees to determine their level of job satisfaction. Areas of concern receive management attention as we strive to keep UPS the employer-of-choice among our employees. We consistently receive numerous awards and wide recognition as an employer-of-choice, resulting in part from our emphasis on diversity and corporate citizenship.

Safety

Health, Wellness and Safety are core values at UPS and an enduring belief that the well-being of our people, business partners and the general public is of utmost importance. We train our people to recognize hazards, mitigate risk and avoid injury to themselves and others in all aspects of their work. We do not tolerate unsafe work practices.

We recognize employees for health, wellness, and safety accomplishments. We provide education programs which promote the health and wellness of employees, their families and the safety of our global operations. We are committed to fostering the most effective safety practices in our work environment. By maintaining our high safety standards, we contribute to the well-being of our people, the company and the communities we serve.

Competition

UPS is a global leader in logistics. We offer a broad array of services in the package and freight delivery industry and, therefore, compete with many different local, regional, national and international logistics providers. Our competitors include worldwide postal services, various motor carriers, express companies, freight forwarders, air couriers and others, including startups that combine technology with crowdsourcing to focus on local market needs. Through our supply chain service offerings, we compete with a number of providers in the supply chain, financial services and information technology industries.

Competitive Strengths

Our competitive strengths include:

Global Network. We believe that our integrated global ground and air network is the most extensive in the industry. We provide all types of package service (air, ground, domestic, international, commercial and residential) through a single pick-up and delivery service network. We also have extensive air freight, ocean freight, ground freight and logistics networks that provide additional capabilities in the global transportation and logistics market.

Our sophisticated engineering systems allow us to optimize our network efficiency and asset utilization on a daily basis. This unique, integrated global business model creates consistent and superior returns.

Global Presence. We serve more than 220 countries and territories around the world. We have a significant presence in all of the world’s major economies.

Leading-edge Technology. We are a global leader in developing technology that helps our customers optimize their shipping and logistics business processes to lower costs, improve service and increase efficiency.

Technology powers virtually every service we offer and every operation we perform. Our technology offerings are driven by our customers’ needs. We offer a variety of online service options that enable our customers to integrate UPS functionality into their own businesses not only to send, manage and track their shipments conveniently, but also to provide their customers with better information services. We provide the infrastructure for an Internet presence that extends to tens of thousands of customers who have integrated UPS tools directly into their own websites.

Broad Portfolio of Services. Our portfolio of services enables customers to choose the delivery option that is most appropriate for their requirements. Increasingly, our customers benefit from business solutions that integrate many UPS services in addition to package delivery. For example, our supply chain services—such as freight forwarding, customs brokerage, order fulfillment and returns management—help improve the efficiency of the supply chain management process.

Customer Relationships. We focus on building and maintaining long-term customer relationships. We serve 1.6 million pickup customers and 8.7 million delivery customers daily. Cross-selling small package, supply chain and freight services across our customer base is an important growth mechanism for UPS.

Brand Equity. We have built a leading and trusted brand that stands for quality service, reliability and service innovation. The distinctive appearance of our vehicles and the professional courtesy of our drivers are major contributors to our brand equity.

Distinctive Culture. We believe that the dedication of our employees results in large part from our distinctive “employee-owner” concept. Our employee stock ownership tradition dates from 1927, when our founders, who believed that employee stock ownership was a vital foundation for successful business, first offered stock to employees. To encourage employee stock ownership, we maintain several stock-based compensation programs.

Our long-standing policy of “promotion from within” complements our tradition of employee ownership, and this policy reduces the need for us to hire managers and executive officers from outside UPS. The majority of our management team began their careers as full-time or part-time hourly UPS employees, and have spent their entire careers with us. Many of our executive officers have more than 30 years of service with UPS and have accumulated a meaningful ownership stake in our company. Therefore, our executive officers have a strong incentive to effectively manage UPS, which benefits all of our shareowners.

Financial Strength. Our financial strength gives us the resources to achieve global scale; to invest in employee development, technology, transportation equipment and facilities; to pursue strategic opportunities that facilitate our growth; to service our obligations; and to return value to our shareowners in the form of dividends, share repurchases and steady share growth.

Government Regulation

We are subject to numerous laws and regulations in connection with our package and non-package businesses in the countries in which we operate. Certain of these laws and regulations are summarized below.

Air Operations

The U.S. Department of Transportation (“DOT”), the Federal Aviation Administration (“FAA”) and the U.S. Department of Homeland Security, through the Transportation Security Administration (“TSA”), have regulatory authority over United Parcel Service Co.’s (“UPS Airlines’”) air transportation services. The Federal Aviation Act of 1958, as amended, is the statutory basis for DOT and FAA authority and the Aviation and Transportation Security Act of 2001, as amended, is the basis for TSA aviation security authority.

The DOT’s authority primarily relates to economic aspects of air transportation, such as insurance requirements, discriminatory pricing, non-competitive practices, interlocking relations and cooperative agreements. The DOT also regulates, subject to the authority of the President of the United States, international routes, fares, rates and practices, and is authorized to investigate and take action against discriminatory treatment of U.S. air carriers abroad. International operating rights for U.S. airlines are usually subject to bilateral agreements between the U.S. and foreign governments or, in the absence of such agreements, by principles of reciprocity. We are also subject to current and potential aviation regulations imposed by foreign governments in the countries in which we operate, including registration and license requirements and security regulations. UPS Airlines has international route operating rights granted by the DOT and we may apply for additional authorities when those operating rights are available and are required for the efficient operation of our international network. The efficiency and flexibility of our international air transportation network is dependent on DOT and foreign government regulations and operating restrictions.

The FAA’s authority primarily relates to safety aspects of air transportation, including aircraft operating procedures, transportation of hazardous materials, record keeping standards and maintenance activities and personnel. In 1988, the FAA granted us an operating certificate, which remains in effect so long as we meet the safety and operational requirements of the applicable FAA regulations. In addition, we are subject to non-U.S. government regulation of aviation rights involving non-U.S. jurisdictions and non-U.S. customs regulation.

UPS aircraft maintenance programs and procedures, including aircraft inspection and repair at periodic intervals, are approved for all aircraft under FAA regulations. The future cost of repairs pursuant to these programs may fluctuate according to aircraft condition, age and the enactment of additional FAA regulatory requirements.

The TSA regulates various security aspects of air cargo transportation in a manner consistent with the TSA mission statement to “protect the Nation’s transportation systems to ensure freedom of movement for people and commerce.” UPS Airlines, and specified airport and off-airport locations, are regulated under TSA regulations applicable to the transportation of cargo in an air network. In addition, personnel, facilities and procedures involved in air cargo transportation must comply with TSA regulations.

UPS Airlines, along with a number of other domestic airlines, participates in the Civil Reserve Air Fleet (“CRAF”) program. Our participation in the CRAF program allows the U.S. Department of Defense (“DOD”) to requisition specified UPS Airlines wide-body aircraft for military use during a national defense emergency. The DOD compensates us for the use of aircraft under the CRAF program. In addition, participation in CRAF entitles UPS Airlines to bid for military cargo charter operations.

Ground Operations

Our ground transportation of packages in the U.S. is subject to regulation by the DOT and its agency, the Federal Motor Carrier Safety Administration (the “FMCSA”) and the states’ jurisdiction with respect to the regulation of operations, safety, insurance and hazardous materials. We also must comply with the safety and fitness regulations promulgated by the FMCSA, including those relating to drug and alcohol testing and hours of service for drivers. We are subject to similar regulation in many non-U.S. jurisdictions.

The Postal Reorganization Act of 1970 created the U.S. Postal Service as an independent establishment of the executive branch of the federal government, and created the Postal Rate Commission, an independent agency, to recommend postal rates. The Postal Accountability and Enhancement Act of 2006 amended the 1970 Act to give the re-named Postal Regulatory Commission revised oversight authority over many aspects of the Postal Service, including postal rates, product offerings and service standards. We sometimes participate in the proceedings before the Postal Regulatory Commission in an attempt to secure fair postal rates for competitive services.

Our ground operations are subject to compliance with various cargo-security and transportation regulations issued by the U.S. Department of Homeland Security, including regulation by the TSA.

Customs

We are subject to the customs laws in the countries in which we operate, regarding the import and export of shipments, including those related to the filing of documents on behalf of client importers and exporters. Our activities, including customs brokerage and freight forwarding, are subject to regulation by the Bureau of Customs and Border Protection, the TSA, the U.S. Federal Maritime Commission and the DOT.

Environmental

We are subject to federal, state and local environmental laws and regulations across all of our business units. These laws and regulations cover a variety of processes, including, but not limited to: proper storage, handling and disposal of waste materials; appropriately managing wastewater and stormwater; monitoring and maintaining the integrity of underground storage tanks; complying with laws regarding clean air, including those governing emissions; protecting against and appropriately responding to spills and releases; and communicating the presence of reportable quantities of hazardous materials to local responders. We have established site- and activity-specific environmental compliance and pollution prevention programs to address our environmental responsibilities and remain compliant. In addition, we have created numerous programs which seek to minimize waste and prevent pollution within our operations.

Pursuant to the Federal Aviation Act, the FAA, with the assistance of the Environmental Protection Agency (“EPA”), is authorized to establish standards governing aircraft noise. Our aircraft fleet is in compliance with current noise standards of the federal aviation regulations. Our international operations are also subject to noise regulations in certain countries in which we operate.

Communications

Because of our extensive use of radio and other communication facilities in our aircraft and ground transportation operations, we are subject to the Federal Communications Act of 1934, as amended. Additionally, the Federal Communications Commission regulates and licenses our activities pertaining to satellite communications.

Where You Can Find More Information

We maintain a website at www.ups.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 are made available through our website www.investors.ups.com as soon as reasonably practical after we electronically file or furnish the reports to the SEC. However, information on these websites is not incorporated by reference into this report or any other report filed with or furnished to the SEC.

We have adopted a written Code of Business Conduct that applies to all of our directors, officers and employees, including our principal executive officer and senior financial officers. It is available in the governance section of our investor relations website, located at www.investors.ups.com. In the event that we make changes in, or provide waivers from, the provisions of the Code of Business Conduct that the SEC requires us to disclose, we intend to disclose these events in the governance section of our investor relations website.

Our Corporate Governance Guidelines and the Charters for our Audit Committee, Compensation Committee, Risk Committee and Nominating and Corporate Governance Committee are also available in the governance section of our investor relations website.

Our sustainability report, which describes our activities that support our commitment to acting responsibly and contributing to society, is available at www.sustainability.ups.com. We provide the addresses to our Internet sites solely for the information of investors. We do not intend for any addresses to be active links or to otherwise incorporate the contents of any website into this report.