Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We continue to implement our Customer First, People Led, Innovation Driven strategy that focuses on transforming our business, improving our financial performance, providing the best customer experience and benefiting our shareowners. The Customer First component of our strategy focuses on, among other things, enhancing the capabilities that we believe our customers value the most: speed and ease of access to our services. In addition to improving time-in-transit, we have recently completed the expansion of weekend delivery services in our U.S. ground network, now covering approximately 90% of the population for Saturday services, which allows us to enhance network capacity.

In the third quarter, our consolidated average daily package volume decreased slightly. We experienced a year over year change in volume mix as business-to-business activity increased, contributing to margin improvement, while business-to-consumer volume declined, primarily in our U.S Domestic Package segment. Volume growth in the quarter was led by small- and medium-sized business customers ("SMBs"), driven by the continued execution of our strategy.

We continued to experience impacts of COVID-19 on our business during the third quarter, with safety protocols implemented at certain airports in Asia resulting in a reduced number of flights relative to our plan, negatively impacting export volume within our International Package segment. Global supply chains continue to be disrupted, with capacity constraints driving higher transportation costs in our Supply Chain Solutions businesses, while the availability of labor is causing wage pressures in certain markets. We continue to monitor the impacts to our business; however, we anticipate demand for our services will remain strong.

During the first quarter of 2021, following enactment of the American Rescue Plan Act ("ARPA"), we remeasured the UPS/IBT Full Time Employee Pension Plan. This resulted in us recording a $3.3 billion, pre-tax mark-to-market gain in the first quarter. In the second quarter of 2021, we completed the divestiture of our UPS Freight business, resulting in a year-to-date gain of $35 million. Cash proceeds of $848 million were used to reduce outstanding indebtedness. The divestiture triggered a remeasurement of certain of our U.S. defined benefit pension and postretirement plans, which had only an immaterial impact on results of operations for the second quarter. For additional information regarding the divestiture of UPS Freight, see note 6 to the unaudited, consolidated financial statements included within this report. In the third quarter of 2021, we entered into an agreement to acquire Roadie, Inc., a technology platform that provides delivery services for shipments that are incompatible with our small package network. We completed this acquisition in October 2021.

Highlights of our consolidated results, which are discussed in more detail below, include:


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2021			2020			$		%		2021			2020			$		%
Revenue (in millions)	$	23,184		$	21,238		$	1,946	9.2	%	$	69,516		$	59,732		$	9,784	16.4	%
Operating Expenses (in millions)	20,288			18,875			1,413		7.5	%	60,597			54,085			6,512		12.0	%
Operating Profit (in millions)	$	2,896		$	2,363		$	533	22.6	%	$	8,919		$	5,647		$	3,272	57.9	%
Operating Margin	12.5		%	11.1		%					12.8		%	9.5		%
Net Income (in millions)	$	2,329		$	1,957		$	372	19.0	%	$	9,797		$	4,690		$	5,107	108.9	%
Basic Earnings Per Share	$	2.66		$	2.25		$	0.41	18.2	%	$	11.21		$	5.42		$	5.79	106.8	%
Diluted Earnings Per Share	$	2.65		$	2.24		$	0.41	18.3	%	$	11.16		$	5.39		$	5.77	107.1	%

Operating Days	64			65							191			193
Average Daily Package Volume (in thousands)	23,381			23,855					(2.0)	%	23,920			23,142					3.4	%
Average Revenue Per Piece	$	12.50		$	11.06		$	1.44	13.0	%	$	12.29		$	10.85		$	1.44	13.3	%

Revenue increased in all segments, with double digit revenue per piece growth in both our U.S. Domestic Package and International Package segments.
Average daily package volume decreased 2.0% (increased 3.4% year to date), driven by a decrease in business-to-consumer volume, largely offset by growth in business-to-business volume.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Operating expenses increased, primarily driven by fuel and third party transportation costs.
Operating profit increased in all segments. For the third quarter, operating margin expanded in U.S. Domestic Package and Supply Chain Solutions. Year to date, operating margin expanded in all segments.
We reported net income of $2.3 billion and diluted earnings per share of $2.65 for the third quarter ($9.8 billion and $11.16 per share year to date). Adjusted diluted earnings per share was $2.71 for the quarter ($8.54 per share year to date) after adjusting for the after-tax impacts of:

◦a gain on the divestiture of UPS Freight of $27 million or $0.03 per diluted share year to date;

◦transformation strategy costs of $54 million or $0.06 per diluted share for the third quarter ($232 million and $0.26 per diluted share year to date); and

◦a first-quarter pension mark-to-market gain recognized outside of a 10% corridor of $2.5 billion or $2.85 per diluted share that impacted year-to-date earnings.

In the U.S. Domestic Package segment, as expected, volume decreased in the third quarter, driven by lower residential volume. Revenue and revenue per piece increased through execution of our revenue quality initiatives, with growth in SMB volume, favorable shifts in customer and product mix and base rate increases, as well as an increase in fuel surcharges. Expense increases for the quarter were driven by higher fuel prices and increases in employee benefit costs, while the reduction in volume, together with productivity improvements, partially offset the impact of higher compensation costs.

The International Package segment experienced volume and revenue growth in domestic and export products, with growth driven by SMBs. Revenue and revenue per piece increased due to shifts in product mix, base rate increases, favorable currency movements and fuel and capacity surcharges. Expense increases were driven primarily by volume growth, with additional third-party pickup and delivery expense and higher network costs driven by higher jet fuel prices.

In Supply Chain Solutions, the impact of divesting UPS Freight was more than offset by revenue growth from the remaining businesses, primarily Forwarding and Logistics. Forwarding revenue growth was driven by higher air freight volumes and market rate and base pricing increases, primarily in ocean freight forwarding and truckload brokerage. Within Logistics, healthcare operations continued to experience strong growth. Expense increases in Supply Chain Solutions were primarily driven by higher third party transportation costs.

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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 ("GAAP") with certain non-GAAP financial measures. These include: "adjusted" compensation and benefits; operating expenses; operating profit; operating margin; other income and (expense); income before income taxes; income tax expense; effective tax rate; net income; and earnings per share.

We believe that these non-GAAP measures provide additional meaningful information to assist users of our financial statements in more fully understanding our financial results and assessing our ongoing performance, because they exclude items that may not be indicative of, or are unrelated to, our underlying operations and may provide a useful baseline for analyzing trends in our underlying businesses. These non-GAAP measures are used internally by management for business unit operating performance analysis, business unit resource allocation and in connection with incentive compensation award determinations.

Adjusted amounts reflect the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
Non-GAAP Adjustments	2021		2020		2021		2020
Operating Expenses:
Transformation and Other Charges	$	74	$	44	$	273	$	201
Total Adjustments to Operating Expenses	$	74	$	44	$	273	$	201

Other Income and (Expense):
Defined Benefit Plan Mark-to-Market Gain	$	—	$	—	$	(3,290)	$	—
Total Adjustments to Other Income and (Expense)	$	—	$	—	$	(3,290)	$	—

Total Adjustments to Income Before Income Taxes	$	74	$	44	$	(3,017)	$	201

Income Tax Expense (Benefit) from Defined Benefit Plan Mark-to-Market Gain	$	—	$	—	$	788	$	—
Income Tax Expense (Benefit) from Transformation and Other Charges	(20)		(11)		(68)		(50)
Total Adjustments to Income Tax Expense	$	(20)	$	(11)	$	720	$	(50)

Total Adjustments to Net Income	$	54	$	33	$	(2,297)	$	151

Restructuring (Transformation) and Other Charges

Adjusted operating profit, operating margin, income before income taxes, net income and earnings per share may exclude the impact of charges related to any restructuring programs, including transformation costs and asset impairments.

Transformation and other charges include a year-to-date gain of $35 million related to the divestiture of UPS Freight. For additional information regarding our transformation strategy costs see note 18 to the unaudited, consolidated financial statements included within this report.

Changes in Foreign Currency Exchange Rates and Hedging Activities

We also supplement the reporting of revenue, revenue per piece and operating profit with adjusted measures that exclude the period over period impact of foreign currency exchange rate changes and hedging activities. We believe currency-neutral revenue, revenue per piece and operating profit information allows users of our financial statements to understand growth trends in our products and results. We evaluate the performance of International Package and Supply Chain Solutions on this currency-neutral basis.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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.

Defined Benefit Plan Mark-to-Market Gain

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) for our pension and postretirement defined benefit plans immediately as part of other pension income (expense). We supplement the presentation of our income before income taxes, net income and earnings per share with adjusted measures that exclude the impact of gains and losses recognized in excess of the 10% corridor and the related income tax effects. We believe excluding these mark-to-market impacts provides important supplemental information by removing the volatility associated with short-term changes in market interest rates, equity values and similar factors.

As a result of the enactment of ARPA, we remeasured the UPS/IBT Plan assets and pension benefit obligation and recognized a pre-tax mark-to-market gain outside of the 10% corridor of $3.3 billion ($2.5 billion after-tax) in the first quarter of 2021. The components of this gain, which are included in “Other Income and (Expense)” in the statements of consolidated income, are as follows:

Coordinating benefits attributable to the Central States Pension Fund ($1.8 billion pre-tax gain): This represents the reduction of the liability for potential coordinating benefits that may have been required to be paid related to the Central States Pension Fund.
Discount rates ($1.8 billion pre-tax gain): The discount rate for the UPS/IBT Plan increased from 2.98% as of December 31, 2020 to 3.70% as of March 31, 2021, primarily due to an increase in U.S. treasury yields.
Return on assets ($0.3 billion pre-tax loss): In the first quarter of 2021, the actual rate of return on plan assets was approximately 220 basis points lower than our expected rate of return, primarily due to weaker than expected global equity and U.S. bond market performance.

For additional information, refer to note 8 to the unaudited, consolidated financial statements included within this report.

Non-GAAP 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 information does not represent a comprehensive basis of accounting. Therefore, our adjusted financial information may not be comparable to similarly titled information reported by other companies.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Results of Operations - Segment Review

The results and discussions that follow are reflective of how management monitors and evaluates the performance of our segments as defined in note 14.

Certain operating expenses are allocated between our reporting 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.

Beginning in the first quarter of 2021, we updated our cost allocation methodology for aircraft engine maintenance expense to better align with aircraft utilization by segment. This change resulted in a reallocation of expense from our U.S. Domestic Package segment to our International Package segment of approximately $19 million for the quarter ($50 million year to date). There were no other significant changes in our expense allocation methodologies that affect period over period comparisons.

Following the divestiture of UPS Freight in the second quarter of 2021, we renamed Supply Chain & Freight to Supply Chain Solutions. This had no impact to prior period results.

We test goodwill and other indefinite-lived intangible assets for impairment annually at July 1st and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired.

Testing goodwill and other indefinite-lived intangible assets for impairment requires that we make a number of significant assumptions, including assumptions related to future revenues, costs, capital expenditures, working capital and our cost of capital. We also are required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment.

Our annual impairment testing of our indefinite-lived intangible assets indicated that the fair value of the indefinite-lived trade name associated with our truckload brokerage business remained greater than its carrying value, although this excess was less than 10 percent. This business has been negatively impacted by increases in the market rates at which it purchases transportation, which has in turn negatively impacted its operating margins. The carrying value of this indefinite-lived trade name is $200 million.

There were no events or changes in circumstances during the third quarter of 2021 that would indicate the carrying amount of our goodwill or indefinite-lived intangible assets may be impaired as of the date of this report. However, future actual results, transactions or other events, or changes in estimates or assumptions, whether due to unexpected impacts on our business arising from COVID-19 or otherwise, our transformation activities, or the continuing evaluation of our business portfolio, could result in an impairment charge to one of our reporting units or to our indefinite-lived intangible assets in a future period.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

U.S. Domestic Package


	Three Months Ended September 30,								Change						Nine Months Ended September 30,								Change
2021				2020				$			%			2021				2020				$			%
Average Daily Package Volume (in thousands):
Next Day Air	1,949				1,915							1.8	%		2,010				1,888							6.5	%
Deferred	1,501				1,657							(9.4)	%		1,532				1,617							(5.3)	%
Ground	16,385				16,803							(2.5)	%		16,689				16,346							2.1	%
Total Average Daily Package Volume	19,835				20,375							(2.7)	%		20,231				19,851							1.9	%
Average Revenue Per Piece:
Next Day Air	$	19.36			$	16.85			$	2.51		14.9	%		$	18.76			$	16.84			$	1.92		11.4	%
Deferred	13.57				12.79				0.78			6.1	%		13.25				12.41				0.84			6.8	%
Ground	10.00				8.93				1.07			12.0	%		9.89				8.79				1.10			12.5	%
Total Average Revenue Per Piece	$	11.19			$	9.99			$	1.20		12.0	%		$	11.03			$	9.85			$	1.18		12.0	%
Operating Days in Period	64				65										191				193
Revenue (in millions):
Next Day Air	$	2,415			$	2,098			$	317		15.1	%		$	7,202			$	6,137			$	1,065		17.4	%
Deferred	1,304				1,378				(74)			(5.4)	%		3,877				3,873				4			0.1	%
Ground	10,489				9,749				740			7.6	%		31,541				27,745				3,796			13.7	%
Total Revenue	$	14,208			$	13,225			$	983		7.4	%		$	42,620			$	37,755			$	4,865		12.9	%
Operating Expenses (in millions):
Operating Expenses	$	12,801			$	12,127			$	674		5.6	%		$	38,287			$	35,111			$	3,176		9.0	%
Transformation and Other Charges	(7)				(35)				28			(80.0)	%		(219)				(105)				(114)			108.6	%
Adjusted Operating Expense	$	12,794			$	12,092			$	702		5.8	%		$	38,068			$	35,006			$	3,062		8.7	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	1,407			$	1,098			$	309		28.1	%		$	4,333			$	2,644			$	1,689		63.9	%
Adjusted Operating Profit	$	1,414			$	1,133			$	281		24.8	%		$	4,552			$	2,749			$	1,803		65.6	%
Operating Margin	9.9		%		8.3		%								10.2		%		7.0		%
Adjusted Operating Margin	10.0		%		8.6		%								10.7		%		7.3		%

Revenue

The change in overall revenue was due to the following factors:


	Volume		Rates / Product Mix		Fuel Surcharge		Total Revenue Change
Revenue Change Drivers:
Third quarter 2021 vs. 2020	(4.2)	%	9.2	%	2.4	%	7.4	%
Year to date 2021 vs. 2020	0.9	%	10.2	%	1.8	%	12.9	%

Volume

Average daily volume decreased in the third quarter but increased year to date. The volume decrease for the quarter was attributable to a decline in residential deliveries and Deferred volume, which was partially offset by growth in Ground commercial and Next Day Air volume. The increase year to date was driven by growth from SMBs as a result of the execution of the Customer First component of our strategy. SMB volume grew 10.9% for the quarter and 21.9% year to date. We expect that SMB growth will moderate in the fourth quarter as we typically experience higher volume growth from large customers during this period.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Business-to-consumer shipments, which represented approximately 57.6% of the total average daily volume for the third quarter, compared to approximately 61.4% in the third quarter of 2020, declined by 8.6% (down 2.8% year to date). These shipments decreased year over year due to the initial surge in e-commerce activity that we experienced last year at the onset of the COVID-19 pandemic in the U.S., combined with higher in-store spending in 2021. Business-to-business volume increased by 6.8% (up 9.6% year to date) across a number of industry sectors, including retail and high tech.

Average daily volume in our Next Day Air product increased in the third quarter and year to date, with higher demand from both large customers and SMBs, driven by increased business-to-business activity. Residential demand for this product increased year to date as customer expectations continue to shift towards faster delivery. This demand has led to average daily volume decreases in our Deferred product in both the third quarter and year-to-date periods.

Ground residential and SurePost average daily volume decreased by 4.6% and 17.4%, respectively, for the quarter (up 1.0% and down 11.4%, respectively, year to date), primarily due to decreases in volume from large customers. Ground commercial volume increased in the third quarter and year to date, driven by strong growth from SMBs. Following the divestiture of UPS Freight, our Ground with Freight Pricing ("GFP") product began to be reported within U.S. Domestic Ground volume. This did not have a significant impact on overall growth for the quarter or year-to-date periods.

Rates and Product Mix

Overall revenue per piece increased in the third quarter and year to date due to increases in base rates and favorable changes in product and customer mix. Revenue per piece also increased as a result of capacity and fuel surcharges and overall increases in average billable weight per piece. Rates for our ground and air services increased an average 4.9% in December 2020 and our SurePost rates also increased in December 2020. We anticipate that our revenue quality initiatives will lead to continued revenue growth.

Revenue per piece increases for Next Day Air and Deferred products in the third quarter and year-to-date periods were driven by base rate and fuel surcharge increases and favorable shifts in customer and product mix, partially offset by declines in average billable weight per piece. Revenue per piece for our Ground product increased in the third quarter and year to date due to base rate and fuel surcharge increases, increases in average billable weight per piece and favorable shifts in product and customer mix.

Fuel Surcharges

We apply a fuel surcharge to domestic air and ground services that is adjusted weekly. The air fuel surcharge is based on the U.S. Department of Energy's ("DOE") Gulf Coast spot price for a gallon of kerosene-type fuel, while the ground fuel surcharge is based on the DOE's On-Highway Diesel Fuel price. Based on published rates, the average surcharges for domestic Air and Ground products were as follows:


	Three Months Ended September 30,				% Point Change		Nine Months Ended September 30,				% Point Change
	2021		2020		2021 vs 2020		2021		2020		2021 vs 2020
Next Day Air / Deferred	8.7	%	3.8	%	4.9	%	7.2	%	3.9	%	3.3	%
Ground	8.9	%	6.5	%	2.4	%	8.0	%	6.7	%	1.3	%

While fluctuations in fuel surcharge percentages can be significant from period to period, fuel surcharges are only one of the many individual components of our market pricing strategy that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and additional charges for these services and the pricing discounts offered.

Total domestic fuel surcharge revenue increased by $320 million in the third quarter, primarily as a result of higher fuel surcharge indices. Year to date, total fuel surcharge revenue increased $674 million, primarily as a result of higher fuel surcharge indices, volume growth and shifts in product mix.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Operating Expenses

Operating expenses, and operating expenses excluding the year over year impact of transformation and other charges, increased in the third quarter, driven by a $336 million increase in the cost of operating our integrated air and ground network. In addition, pickup and delivery costs increased by $214 million, the cost of package sorting increased $102 million, and other indirect operating costs increased by $50 million. The increase in expense was driven by:

Higher employee benefit expense for our union workforce due to contractual contribution rate increases to multiemployer plans and additional headcount becoming eligible for health, welfare and retirement benefits.
Higher fuel costs, primarily driven by increases in the price of diesel, gasoline and jet fuel.

Employee compensation remained relatively flat for the third quarter as contractual rate increases, market rate adjustments in certain geographies and cost of living adjustments were offset by productivity improvements and lower volume.

Third party transportation costs remained relatively flat in the third quarter. The investments to improve time-in-transit within our ground network were fully offset by lower third party carrier costs for SurePost and rail due to lower volumes.

On a year-to-date basis, operating expenses and operating expenses excluding the year over year impact of transformation and other charges, increased. Pickup and delivery costs increased $1.1 billion; the costs of operating our integrated air and ground network increased $1.4 billion; package sorting costs increased $375 million and other indirect operating costs increased $204 million. These increases were primarily driven by higher volume, increased employee headcount and hours resulting in higher compensation and benefit costs, investments in our ground network and higher fuel costs.

Total cost per piece increased 10.1% for the third quarter (up 8.1% year to date). Excluding the impact of transformation and other charges, adjusted cost per piece increased 10.4% for the third quarter, for the reasons described above (up 7.8% year to date). We expect that cost per piece growth will moderate in the fourth quarter relative to the third quarter, however we anticipate that overall costs may continue to increase as a result of market factors, including the availability and cost of labor.

Operating Profit and Margin

As a result of the factors described above, operating profit increased $309 million in the third quarter (up $1.7 billion year to date), with operating margin increasing 160 basis points to 9.9% (up 320 basis points to 10.2% year to date). Excluding the year over year impact of transformation and other charges, adjusted operating profit increased $281 million in the third quarter (up $1.8 billion year to date), with adjusted operating margin increasing 140 basis points to 10.0% (up 340 basis points to 10.7% year to date).

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

International Package


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2021			2020			$		%		2021			2020			$		%
Average Daily Package Volume (in thousands):
Domestic	1,851			1,806					2.5	%	1,943			1,746					11.3		%
Export	1,695			1,674					1.3	%	1,746			1,545					13.0		%
Total Average Daily Package Volume	3,546			3,480					1.9	%	3,689			3,291					12.1		%
Average Revenue Per Piece:
Domestic	$	7.19		$	6.61		$	0.58	8.8	%	$	7.32		$	6.48		$	0.84	13.0		%
Export	33.56			28.98			4.58		15.8	%	32.41			28.63			3.78		13.2		%
Total Average Revenue Per Piece	$	19.80		$	17.37		$	2.43	14.0	%	$	19.19		$	16.88		$	2.31	13.7		%
Operating Days in Period	64			65							191			193
Revenue (in millions):
Domestic	$	852		$	776		$	76	9.8	%	$	2,716		$	2,183		$	533	24.4		%
Export	3,641			3,153			488		15.5	%	10,808			8,538			2,270		26.6		%
Cargo and Other	227			158			69		43.7	%	620			454			166		36.6		%
Total Revenue	$	4,720		$	4,087		$	633	15.5	%	$	14,144		$	11,175		$	2,969	26.6		%
Operating Expenses (in millions):
Operating Expenses	$	3,669		$	3,121		$	548	17.6	%	$	10,824		$	8,887		$	1,937	21.8		%
Transformation and Other Charges	(57)			(6)			(51)		N/M		(69)			(84)			15		(17.9)		%
Adjusted Operating Expenses	$	3,612		$	3,115		$	497	16.0	%	$	10,755		$	8,803		$	1,952	22.2		%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	1,051		$	966		$	85	8.8	%	$	3,320		$	2,288		$	1,032	45.1		%
Adjusted Operating Profit	$	1,108		$	972		$	136	14.0	%	$	3,389		$	2,372		$	1,017	42.9		%
Operating Margin	22.3		%	23.6		%					23.5		%	20.5		%
Adjusted Operating Margin	23.5		%	23.8		%					24.0		%	21.2		%
Currency Benefit / (Cost) – (in millions)*:
Revenue							$	58											$	452
Operating Expenses							(38)												(351)
Operating Profit							$	20											$	101
* Net of currency hedging; amount represents the change in currency translation compared to the prior year.

The change in revenue was due to the following:


	Volume		Rates / Product Mix		Fuel Surcharge		Currency		Total Revenue Change
Revenue Change Drivers:
Third quarter 2021 vs. 2020	0.8	%	8.4	%	4.9	%	1.4	%	15.5	%
Year to date 2021 vs. 2020	11.0	%	7.0	%	4.5	%	4.1	%	26.6	%

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Volume

In the third quarter, average daily volume growth moderated year over year as COVID-19 related volume was present in both periods. Volume increased in the third quarter and year to date for both domestic and export products, with growth in the quarter led by SMB customers as we continued to execute the Customer First component of our strategy. Year to date, volume growth was attributable to both SMBs and large customers. Business-to-business volume increased 3.8% in the third quarter (up 11.1% year to date) as commercial activity continued to return. Business-to-consumer volume decreased 2.3% in the third quarter, primarily due to the initial surge in e-commerce activity that we experienced last year at the onset of the COVID-19 pandemic. On a year-to-date basis, business-to-consumer volume increased 14.3%, as e-commerce continued to drive growth within the retail sector.

Export volume increased in the third quarter and year to date. Growth in the quarter was led by Europe and the Americas, while Asia experienced a decline in export volume. Europe export volume growth was highest on intra-Europe trade lanes, while trade between the United Kingdom and Europe continued to decline as a result of Brexit, which became effective in the first quarter of 2021. The decline in Asia export volume was primarily due to COVID-19 safety protocols at certain airports within the region reducing the number of flights we operated relative to our plan during the quarter. On a year-to-date basis, Asia export volume grew, led by the Asia to U.S. trade lane.

Our premium products saw volume growth of 11% for the quarter (21% year to date), driven by our Worldwide Express and Transborder Express products. Volume for our non-premium products was flat for the quarter. Year to date, non-premium products saw volume growth of 12%, driven by Transborder Standard shipments within the European Union. As a result of Brexit, shipments between the UK and the European Union that are now subject to duties and taxes shifted from our Transborder to our Worldwide products.

Domestic volume increased in the third quarter and year to date in many of our markets, with the strongest growth in the United Kingdom and Western Europe, as commercial volume continued to return.

Rates and Product Mix

In December 2020, we implemented an average 4.9% net increase in base and accessorial rates for international shipments originating in the United States. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market. In response to capacity constraints resulting from the COVID-19 pandemic, we implemented surcharges on certain lanes beginning in the second quarter of 2020.

Total revenue per piece increased 14.0% in the quarter (up 13.7% year to date) driven by changes in base pricing, fuel and capacity surcharges and favorable currency movements. Changes in customer and product mix also contributed to the increase. Excluding the impact of currency, revenue per piece increased 12.5% (up 10.0% year to date).

Domestic revenue per piece increased 8.8% in the quarter (up 13.0% year to date) due to changes in base pricing, customer and product mix, fuel surcharges and favorable currency movements. Excluding the impact of currency, domestic revenue per piece increased 6.4% in the quarter (up 6.3% year to date).

Export revenue per piece increased 15.8% in the quarter (up 13.2% year to date) due to changes in base pricing, customer and product mix, fuel and capacity surcharges and favorable currency movements. Excluding the impact of currency, export revenue per piece increased 14.6% (up 10.2% year to date).

Fuel Surcharges

The fuel surcharge for 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.

While fluctuations can be significant from period to period, fuel surcharges represent one of the many individual components of our market pricing strategy that impact our overall revenue and yield. Additional components include the mix of services sold, the base price, extra service charges and any pricing discounts offered. Total international fuel surcharge revenue increased by $208 million for the third quarter ($553 million year to date) as a result of increases in fuel surcharge indices and volume growth, as well as changes in customer and product mix.

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Operating Expenses

Operating expenses, and operating expenses excluding the year over year impact of transformation and other charges, increased in both the third quarter and year-to-date periods. Pickup and delivery costs increased $113 million in the third quarter ($709 million year to date), primarily due to volume growth that drove additional third-party expense. Package sorting costs increased $38 million for the third quarter ($178 million year to date), also as a result of volume growth.

The costs of operating our integrated international air and ground network increased $290 million for the third quarter ($839 million year to date), driven by overall volume growth and higher jet fuel prices.

In addition to variability in usage and market prices, the manner in which we purchase fuel also influences the net impact of costs on our results. The majority of our contracts for fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for fuel. Because of this, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term.

The remaining increase in operating expenses was driven by other indirect costs.

Operating Profit and Margin

As a result of the factors described above, operating profit increased $85 million for the third quarter (increased $1.0 billion year to date), with operating margin decreasing 130 basis points to 22.3% (increased 300 basis points to 23.5% year to date). Excluding the year over year impact of transformation and other charges, adjusted operating profit increased $136 million in the third quarter (increased $1.0 billion year to date), while adjusted operating margin decreased 30 basis points to 23.5% (increased 280 basis points to 24.0% year to date).

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Supply Chain Solutions


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2021			2020			$		%		2021			2020			$		%
Freight LTL Statistics:
Revenue (in millions)	$	—		$	689		$	(689)	N/M		$	881		$	1,911		$	(1,030)	(53.9)	%
Revenue Per Hundredweight	$	—		$	27.69		$	(27.69)	N/M		$	29.93		$	27.02		$	2.91	10.8	%
Shipments (in thousands)	—			2,371					N/M		2,829			6,667					(57.6)	%
Shipments Per Day (in thousands)	—			37.0					N/M		33.3			34.7					(4.0)	%
Gross Weight Hauled (in millions of lbs)	—			2,488					N/M		2,944			7,073					(58.4)	%
Weight Per Shipment (in lbs)	—			1,049					N/M		1,041			1,061					(1.9)	%
Operating Days in Period	—			64							85			192
Revenue (in millions):
Forwarding	$	2,625		$	1,753		$	872	49.7	%	$	7,006		$	4,897		$	2,109	43.1	%
Logistics	1,158			1,040			118		11.3	%	3,424			2,862			562		19.6	%
Freight	—			870			(870)		(100.0)	%	1,064			2,360			(1,296)		(54.9)	%
Other	473			263			210		79.8	%	1,258			683			575		84.2	%
Total Revenue	$	4,256		$	3,926		$	330	8.4	%	$	12,752		$	10,802		$	1,950	18.1	%
Operating Expenses (in millions):
Operating Expenses	$	3,818		$	3,627		$	191	5.3	%	$	11,486		$	10,087		$	1,399	13.9	%
Transformation and Other Charges	(10)			(3)			(7)		233.3	%	15			(12)			27		(225.0)	%
Adjusted Operating Expenses:	$	3,808		$	3,624		$	184	5.1	%	$	11,501		$	10,075		$	1,426	14.2	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	438		$	299		$	139	46.5	%	$	1,266		$	715		$	551	77.1	%
Adjusted Operating Profit	$	448		$	302		$	146	48.3	%	$	1,251		$	727		$	524	72.1	%
Operating Margin	10.3		%	7.6		%					9.9		%	6.6		%
Adjusted Operating Margin	10.5		%	7.7		%					9.8		%	6.7		%
Currency Benefit / (Cost) – (in millions)*:
Revenue							$	12									$	121
Operating Expenses							(29)										(146)
Operating Profit							$	(17)									$	(25)
* Amount represents the change in currency translation compared to the prior year.


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2021		2020		$		%		2021		2020		$		%
Transformation Strategy Costs (in millions):
Forwarding	$	—	$	2	$	(2)	(100.0)	%	$	6	$	7	$	(1)	(14.3)	%
Logistics	—		1		(1)		(100.0)	%	3		5		(2)		(40.0)	%
Freight	—		—		—		N/A		1		—		1		N/A
Other	10		—		10		N/A		10		—		10		N/A

Total Transformation Strategy Costs	$	10	$	3	$	7	233.3	%	$	20	$	12	$	8	66.7	%

On April 30, 2021, we completed the previously announced divestiture of UPS Freight. Year to date, we recognized a pre-tax gain of $35 million related to this divestiture. See note 6 to the unaudited, consolidated financial statements for additional information.

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Revenue

Total revenue for Supply Chain Solutions increased $330 million in the third quarter ($2.0 billion year to date).

Forwarding revenue increased in the third quarter and year to date. In our international air freight business, revenue growth was driven by higher volume in the third quarter and year to date as a result of strong outbound demand from North America and Europe. Ongoing capacity surcharges and rate increases also contributed to revenue growth. Ocean freight forwarding revenue increased in the third quarter and year to date, primarily due to higher market rates. Revenue growth in our truckload brokerage business for the third quarter was driven by market rate and base pricing increases, slightly offset by a reduction in volume. Year to date, growth was driven by market rate increases and increased volume.

Within Logistics, our healthcare operations experienced strong revenue growth in the third quarter and year-to-date periods. Revenue in our mail services business declined in the third quarter as a result of lower volumes relative to the prior year, when we experienced a surge in e-commerce driven by the COVID-19 pandemic. Year to date, revenue increased as a result of volume growth, rate increases and a favorable shift in product characteristics.

As a result of the divestiture, UPS Freight revenue decreased $1.3 billion year to date. There was no UPS Freight revenue included in our third quarter 2021 results, compared with revenue of $870 million in the third quarter of 2020.

Revenue from the other businesses within Supply Chain Solutions increased during the third quarter and year to date, driven by growth in our logistics consulting services and by services provided to the acquirer of UPS Freight under certain transition services agreements.

Operating Expenses

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

Forwarding operating expenses increased $746 million in the third quarter ($1.9 billion year to date). The increase was driven by purchased transportation expense, which increased $717 million in the quarter ($1.8 billion year to date). The increase was partly due to higher rates in our truckload brokerage and international air and ocean freight forwarding businesses driven by market supply constraints. Expenses also increased as a result of volume growth, primarily in our air and ocean freight forwarding businesses.

Logistics operating expenses increased $85 million in the third quarter ($442 million year to date), driven by purchased transportation expense in our healthcare operations as a result of business growth. Mail services contributed to the year to date increase as a result of volume growth in the first quarter and carrier rate increases.

UPS Freight operating expenses decreased $1.4 billion year to date. There were no operating expenses included in the third quarter of 2021, compared with expenses of $832 million in the third quarter of 2020.

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

Operating Profit and Margin

As a result of the factors described above, operating profit increased $139 million in the third quarter ($551 million year to date), with operating margin increasing 270 basis points to 10.3% (increased 330 basis points to 9.9% year to date). Excluding the year over year impact of transformation and other charges and other gains, adjusted operating profit increased $146 million (increased $524 million year to date), with adjusted operating margin increasing 280 basis points to 10.5% (increased 310 basis points to 9.8% year to date).

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RESULTS OF OPERATIONS

Consolidated Operating Expenses


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2021		2020		$		%		2021		2020		$		%
Operating Expenses (in millions):
Compensation and benefits	$	11,148	$	11,077	$	71	0.6	%	$	33,958	$	32,006	$	1,952	6.1	%
Transformation and Other Charges	(33)		(18)		(15)		83.3	%	(164)		(111)		$	(53)	47.7	%
Adjusted Compensation and benefits	$	11,115	$	11,059	$	56	0.5	%	$	33,794	$	31,895	$	1,899	6.0	%

Repairs and maintenance	$	619	$	576	$	43	7.5	%	$	1,837	$	1,693	$	144	8.5	%
Depreciation and amortization	738		677		61		9.0	%	2,199		1,986		213		10.7	%
Purchased transportation	4,638		3,937		701		17.8	%	13,327		10,584		2,743		25.9	%
Fuel	950		618		332		53.7	%	2,672		1,878		794		42.3	%
Other occupancy	384		376		8		2.1	%	1,252		1,114		138		12.4	%
Other expenses	1,811		1,614		197		12.2	%	5,352		4,824		528		10.9	%
Total Other expenses	9,140		7,798		1,342		17.2	%	26,639		22,079		4,560		20.7	%
Transformation and Other Charges	(41)		(26)		(15)		57.7	%	(109)		(90)		(19)		21.1	%
Adjusted Total Other expenses	$	9,099	$	7,772	$	1,327	17.1	%	$	26,530	$	21,989	$	4,541	20.7	%

Total Operating Expenses	$	20,288	$	18,875	$	1,413	7.5	%	$	60,597	$	54,085	$	6,512	12.0	%
Adjusted Total Operating Expenses	$	20,214	$	18,831	$	1,383	7.3	%	$	60,324	$	53,884	$	6,440	12.0	%

Currency (Benefit) / Cost - (in millions)*					$	67							$	497
* Amount represents the change in currency translation compared to the prior year.


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2021		2020		$		%		2021		2020		$		%
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs:
Compensation	$	9	$	9	$	—	—	%	$	23	$	24	$	(1)	(4.2)	%
Benefits	24		9		15		166.7	%	141		87		54		62.1	%

Other occupancy	—		2		(2)		(100.0)	%	3		6		(3)		(50.0)	%
Other expenses	41		24		17		70.8	%	141		84		57		67.9	%
Total Transformation Strategy Costs	$	74	$	44	$	30	68.2	%	$	308	$	201	$	107	53.2	%
Adjustments to assets held for sale:
Other gains	$	—	$	—	$	—	N/A		$	(35)	$	—	$	(35)	N/A
Total Adjustments to Operating Expenses	$	74	$	44	$	30	68.2	%	$	273	$	201	$	72	35.8	%

Compensation and Benefits

Total compensation and benefits, and total compensation and benefits excluding the year over year impact of transformation and other charges, increased in the third quarter and year-to-date periods.

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Total compensation costs decreased $108 million or 1.6% in the third quarter. Excluding the year over year impact of transformation and other charges, adjusted total compensation costs also decreased $108 million in the quarter, driven by the impact of divesting UPS Freight during the second quarter of 2021, which reduced year-over-year compensation costs by $252 million. The remaining change of $144 million was attributable to increases in International Package operations which experienced higher labor costs due to volume growth as well as the effects last year of operational disruptions as a result of COVID-19 restrictions. Management compensation also increased, primarily as a result of higher incentive compensation and commission payments. Direct labor costs in our U.S. Domestic business remained flat for the third quarter as increases in wage rates were offset by lower volume and productivity improvements.

Year to date, total compensation costs and adjusted total compensation costs increased $900 million and $899 million, respectively. The increase was partially due to first-quarter growth in headcount and hours in our U.S. Domestic business when COVID-19 related volume was not present in the comparative period. Volume growth also drove additional year-to-date compensation costs in our International Package operations, while higher incentive compensation and commission payments led to an increase in management compensation. These increases were partially offset by the impact of divesting UPS Freight, which resulted in lower year-over-year compensation costs of $408 million.

Benefits costs increased $179 million or 4.0% ($1.0 billion or 7.7% year to date). Excluding the year over year impact of transformation and other charges, adjusted benefits costs increased $164 million or 3.7% ($1.0 billion or 8.0% year to date):

Health and welfare costs increased $117 million ($421 million year to date), primarily as a result of increased contributions to multiemployer plans driven by the overall increase in the size of the workforce and contractual rate increases.
Pension and other postretirement benefits costs increased $16 million ($332 million year to date) due to increased contributions to multiemployer plans as a result of contractually-mandated contribution increases and the overall increase in the size of the workforce. This was partially offset by a reduction in service costs for company-sponsored plans due to favorable changes in discount rates at the interim measurement dates for certain plans. Year to date, service costs contributed to the overall increase in pension and other postretirement benefits costs as a result of lower discount rates at the annual measurement date.
Workers' compensation costs increased $15 million ($79 million year to date) driven by increased claim counts that were partially offset by a reduction in activity resulting from the divestiture of UPS Freight.
Vacation, excused absence, payroll taxes and other costs increased $16 million ($167 million year to date), driven by wage growth. Year to date, increases were also driven by growth in the overall size of the workforce, as well as an additional discretionary payment to certain part-time employees.

Repairs and Maintenance

We incurred higher costs for aircraft engine maintenance for the quarter and year-to-date periods, primarily due to the increase in operating activity and the replacement of parts on certain types of aircraft. Routine repairs and maintenance for buildings and facilities and maintenance costs for our other transportation equipment also increased.

Depreciation and Amortization

Depreciation and amortization expense increased in the quarter and year-to-date periods as a result of investments in facility automation projects, as well as growth in the size of our vehicle and aircraft fleets and additional investments in internally developed software.

Purchased Transportation

The overall increase in third-party transportation expense charged to us by air, ocean and ground carriers for the quarter and year-to-date periods was primarily driven by:

Supply Chain Solutions expense increased $581 million ($1.7 billion year to date), primarily due to volume growth and rate increases in our international air freight, ocean freight and truckload brokerage businesses, partially offset by the impact of divesting UPS Freight in the second quarter, which reduced third party transportation costs by $263 million. Year to date, all businesses within this segment, with the exception of UPS Freight, contributed to the growth in expense as a result of both volume growth and higher market rates.

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International Package expense increased $125 million ($557 million year to date), primarily due to additional volume being handled by third-party pickup and delivery services in Europe and Asia, as well as unfavorable currency movements.
U.S. Domestic Package expense decreased $5 million (increased $273 million year to date), driven by decreases in SurePost and rail volumes in the quarter that drove reductions in expense. These reductions were offset by increases in third party carrier cost driven by our ground network enhancements, as well as costs previously reported within UPS Freight that relate to our GFP product. Year to date, expense increased primarily as a result of additional third party carrier costs driven by our ground network enhancements.

Fuel

The increase in fuel expense for the quarter and year-to-date periods was primarily driven by higher prices for jet fuel, diesel and gasoline, as well as the impact of increased aircraft block hours.

Other Occupancy

Other occupancy expense, and other occupancy expense excluding the year over year impact of transformation and other charges, increased in the quarter and year-to-date periods due to additional operating facilities coming into service. Year to date, we also incurred higher weather-related expenses.

Other Expenses

Other expenses, and other expenses excluding the year over year impact of transformation and other charges, increased in the quarter and year to date, primarily as a result of the following:

Customer claims increased $43 million in the third quarter ($97 million year to date), driven by changes to our claims policy, which resulted in higher claims for lost packages. The year-to-date increase was also impacted by volume growth.
Taxes increased $40 million in the third quarter ($118 million year to date), primarily due to the reinstatement of Federal Excise Tax following a temporary suspension under the Coronavirus Aid, Relief and Economic Security ("CARES") Act during 2020.
Other operational expenses, including vehicle and equipment rentals, increased $14 million in the third quarter ($141 million year to date), driven by continued business growth.
The cost of business services that support our operating segments increased $10 million in the third quarter ($82 million year to date), driven by business growth and the expansion of services provided.
Other increases included payment processing fees, information technology expenses and the cost of goods provided under transitional service agreements to the acquirer of UPS Freight. These were partially offset by reductions in self-insured automobile liability claims due to improvements in claims experience, a reduction in our allowance for credit losses and reductions in the purchase of COVID-related safety and cleaning supplies.

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Other Income and (Expense)

The following table sets forth investment income and other and interest expense for the three and nine months ended September 30, 2021 and 2020 (in millions):


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2021		2020		$		%		2021		2020		$		%
Investment Income and Other	$	274	$	338	$	(64)	(18.9)	%	$	4,235	$	1,011	$	3,224	318.9	%
Defined Benefit Plan Mark-to-Market Gain	—		—		—		N/A		(3,290)		—		(3,290)		N/A
Adjusted Investment Income and Other	$	274	$	338	$	(64)	(18.9)	%	$	945	$	1,011	$	(66)	(6.5)	%

Interest Expense	(177)		(176)		(1)		0.6	%	(521)		(526)		5		(1.0)	%
Total Other Income and (Expense)	$	97	$	162	$	(65)	(40.1)	%	$	3,714	$	485	$	3,229	N/M
Adjusted Other Income and (Expense)	$	97	$	162	$	(65)	(40.1)	%	$	424	$	485	$	(61)	(12.6)	%

Investment Income and Other

The decrease in investment income and other for the third quarter was primarily due to a decrease in other pension income and losses from fair value changes in certain non-current investments.

Investment income and other increased $3.2 billion year to date, inclusive of a defined benefit plan mark-to-market gain recognized in the first quarter of 2021. Excluding the impact of this mark-to-market gain, year-to-date adjusted investment income and other decreased $66 million, primarily due to a decrease in other pension income and foreign currency losses, offset by net gains from fair value changes in certain non-current investments. Other pension income includes expected returns on pension assets, net of interest cost on projected benefit obligations and prior service costs.

Expected returns on pension assets decreased as a result of a reduction in the expected rate of return assumption, partially offset by a higher asset base due to discretionary contributions and positive asset returns in 2020.
Pension interest cost decreased due to a reduction in projected benefit obligations following interim remeasurements, the impact of lower discount rates at the annual measurement date and a reduction in prior service cost.

Interest Expense

The increase in interest expense for the third quarter was primarily due to lower capitalization of interest, largely offset by lower average outstanding debt balances.

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

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Income Tax Expense

The following table sets forth our income tax expense and effective tax rate for the three and nine months ended September 30, 2021 and 2020 (in millions):


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2021			2020			$		%		2021			2020			$		%
Income Tax Expense	$	664		$	568		$	96	16.9	%	$	2,836		$	1,442		$	1,394	96.7	%
Income Tax Impact of:
Defined Benefit Plan Mark-to-Market Gain	—			—			—		N/A		(788)			—			(788)		N/A
Transformation Strategy and Other Charges	20			11			9		81.8	%	68			50			18		36.0	%
Adjusted Income Tax Expense	$	684		$	579		$	105	18.1	%	$	2,116		$	1,492		$	624	41.8	%




Effective Tax Rate	22.2		%	22.5		%					22.4		%	23.5		%
Adjusted Effective Tax Rate	22.3		%	22.5		%					22.0		%	23.6		%

For additional information on our income tax expense and effective tax rate, see note 17 to the unaudited, consolidated financial statements included in this report.

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Liquidity and Capital Resources

As of September 30, 2021, we had $10.6 billion in cash, cash equivalents and marketable securities. We believe that these positions, expected cash from operations, access to commercial paper programs and capital markets and other available liquidity options will be adequate to fund our operating requirements, planned capital expenditures, pension contributions, transformation strategy costs, debt obligations and planned shareowner returns. We regularly evaluate opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund operations. We intend to deploy a disciplined and balanced approach to capital allocation, including returns to shareowners through dividends and share repurchases.

Cash Flows From Operating Activities

The following is a summary of the significant sources (uses) of cash from operating activities (in millions):


	Nine Months Ended September 30,
	2021		2020
Net income	$	9,797	$	4,690
Non-cash operating activities (a)	1,669		4,093
Pension and postretirement benefit plan contributions (company-sponsored plans)	(331)		(1,307)

Hedge margin receivables and payables	136		(176)
Income tax receivables and payables	235		458
Changes in working capital and other non-current assets and liabilities	255		1,461
Other operating activities	—		64
Net cash from operating activities	$	11,761	$	9,283

(a)Represents depreciation and amortization, gains and losses on derivative transactions and foreign currency exchange, deferred income taxes, allowances for expected credit losses, amortization of operating lease assets, pension and postretirement benefit plan (income) expense, stock compensation expense, changes in casualty self-insurance reserves, goodwill and other asset impairment charges and other non-cash items.

Net cash from operating activities increased $2.5 billion year to date, and was impacted by the following:

Contributions to our company-sponsored pension and U.S. postretirement medical benefit plans totaled $331 million during 2021 compared to $1.3 billion in 2020. There have been no discretionary contributions to our qualified, company-sponsored U.S. pension plans during 2021 ($1.0 billion year to date in 2020).
Our net hedge margin collateral position increased by $312 million due to changes in the fair value of derivative contracts used in our currency and interest rate hedging programs.
Changes in our working capital, comprised of:

◦An increase in accounts receivable within our Supply Chain Solutions businesses, due to volume and revenue growth.

◦Increases in accounts payable resulting from business growth and the timing of duty and tax settlements.

◦A reduction in compensation-related items, which included the impact of deferring approximately $724 million of employer payroll taxes under the CARES Act in the prior year.

Income taxes payable decreased due to expected refunds and payments.

As part of our ongoing efforts to improve our working capital efficiency, certain financial institutions offer a Supply Chain Finance ("SCF") program to certain of our suppliers. We agree to commercial terms with our suppliers, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program. Suppliers issue invoices to us based on the agreed-upon contractual terms. If they participate in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, to sell to the financial institutions. Our suppliers’ voluntary inclusion of invoices in the SCF program has no bearing on our payment terms. No guarantees are provided by us under the SCF program. We have no economic interest in a supplier’s decision to participate, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Amounts due to our suppliers that participate in the SCF program are included in accounts payable in our consolidated balance sheets. We have been informed by the participating financial institutions that as of September 30, 2021 and 2020, suppliers sold them $462 and $595 million, respectively, of our outstanding payment obligations. Amounts due to suppliers that participate in the SCF program may be reflected in cash flows from operating activities or cash flows from investing activities in our consolidated statements of cash flows. Amounts settled through the SCF program totaled approximately $953 and $913 million for the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021, approximately $3.4 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. is 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.

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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 were as follows (in millions):


	Nine Months Ended September 30,
	2021			2020
Net cash used in investing activities	$	(1,600)		$	(3,106)

Capital Expenditures:
Buildings, facilities and plant equipment	$	(1,089)		$	(1,615)
Aircraft and parts	(706)			(667)
Vehicles	(379)			(368)
Information technology	(396)			(569)
	$	(2,570)		$	(3,219)

Capital Expenditures as a % of revenue	3.7		%	5.4		%

Other Investing Activities:
Proceeds from disposal of businesses, property, plant and equipment	$	870		$	10
Net change in finance receivables	$	28		$	24
Net (purchases), sales and maturities of marketable securities	$	60		$	107
Cash paid for business acquisitions, net of cash and cash equivalents acquired	$	(12)		$	(13)
Other investing activities	$	24		$	(15)

We have commitments for the purchase of aircraft, vehicles, equipment and real estate to provide for the replacement of existing capacity and anticipated future growth. Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions. Our current investment program anticipates maintenance of buildings, facilities and plant equipment, as well as investments in technology initiatives and additional network capabilities. We currently expect that our capital expenditures will be approximately $4.2 billion in 2021.

Capital expenditures on buildings, facilities and plant equipment decreased in our global small package business, as we reduced spending on facility expansion projects. Capital spending on aircraft increased due to increases in final payments associated with the delivery of aircraft, partially offset by reductions in contract deposits on open aircraft orders. Capital spending on information technology decreased due to fewer technology-related projects.

Proceeds from the disposal of businesses, property, plant and equipment increased as a result of the completion of the divestiture of our UPS Freight business in the second quarter of 2021 for cash proceeds of $848 million. The proceeds were used to reduce outstanding indebtedness.

The net change in finance receivables was primarily due to reductions in outstanding balances within our finance portfolios. Purchases and sales of marketable securities are largely determined by liquidity needs and the periodic rebalancing of investment types, and will fluctuate from period to period.

Cash paid for business acquisitions in 2021 and 2020 related to the acquisition of area franchise rights for The UPS Store. Other investing activities were impacted by changes in our non-current investments, purchase contract deposits and various other items.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Cash Flows From Financing Activities

Our primary sources (uses) of cash from financing activities were as follows (amounts in millions, except per share data):


	Nine Months Ended September 30,
2021				2020
Net cash used in financing activities	$	(5,856)			$	(2,556)
Share Repurchases:
Cash expended for shares repurchased	(500)				(224)
Number of shares repurchased	(2.6)				(2.1)
Shares outstanding at period end	869				864
Percent increase (decrease) in shares outstanding	0.5		%		0.8		%
Dividends:
Dividends declared per share	$	3.06			$	3.03
Cash expended for dividend payments	$	(2,578)			$	(2,528)
Borrowings:
Net borrowings (repayments) of debt principal	$	(2,613)			$	333
Other Financing Activities:
Cash received for common stock issuances	$	196			$	214
Other financing activities	$	(361)			$	(351)
Capitalization:
Total debt outstanding at period end	22,106				25,718
Total shareowners’ equity at period end	12,057				5,606
Total capitalization	$	34,163			$	31,324

We repurchased 2.6 million shares of class B common stock for $500 million under our stock repurchase program during the three and nine months ended September 30, 2021. We repurchased a total of 2.1 million shares of class A and class B common stock for $217 million in the prior year-to-date period ($224 million in repurchases is reported on the statement of cash flows due to timing of settlements). For additional information on our share repurchase activities, see note 13 to the unaudited, consolidated financial statements included in this report.

The declaration of dividends is subject to the discretion of the Board and depends on various factors, including our net income, financial condition, cash requirements, future prospects and other relevant factors. As previously disclosed, we expect to continue paying regular cash dividends, with a targeted dividend payout ratio, beginning in 2022, of approximately 50% of our prior year's adjusted net income. We increased our quarterly cash dividend payment to $1.02 per share in 2021, compared to $1.01 in 2020.

Year-to-date issuances of debt consisted of borrowings under our commercial paper program that were repaid during the nine months ended September 30, 2021. Repayments of debt in the year-to-date period include senior notes totaling $2.6 billion, commercial paper and scheduled principal payments on our finance lease obligations. In the prior year-to-date period, issuances of debt consisted primarily of fixed-rate senior notes of varying maturities totaling $3.5 billion, as well as borrowings under our commercial paper program. Repayments included $990 million of senior notes, commercial paper and scheduled principal payments on our finance lease obligations.

We have $2.0 billion and $2.3 billion of fixed and floating rate notes that mature in 2022 and 2023, respectively. We currently intend to repay this debt at maturity. 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.

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RESULTS OF OPERATIONS

The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. The following is a summary of our commercial paper program (in millions):


	Functional currency outstanding balance at quarter-end		Outstanding balance at quarter-end ($)		Average balance outstanding		Average balance outstanding ($)		Average interest rate
2021
USD	$	—	$	—	$	199	$	199	0.05	%


Total			$	—

As of September 30, 2021, we had no outstanding balances under our U.S. and European commercial paper programs.

Cash flows for other financing activities were driven by the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards. Cash outflows were $357 and $339 million in the first nine months of 2021 and 2020, respectively. The increase was driven by changes in payment levels for certain of our awards.

Sources of Credit

See note 10 to the unaudited, consolidated financial statements for a discussion of our available credit and the financial covenants that we are subject to as part of our credit agreements.

Contractual Commitments

There have been no material changes to the contractual commitments described in Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2020, except as described below.

We have contractual obligations and commitments for purchases of aircraft, vehicles and technology equipment; and building and leasehold improvements. In the third quarter of 2021, we increased our projected capital expenditures by $0.2 billion for the year, including spending on technology-related projects, and renegotiated the timing of delivery of certain vehicles and aircraft. We also have contractual commitments related to pending business acquisitions.

Additionally, we have contractual obligations and commitments under finance leases. During the quarter, it became reasonably certain that we would exercise a purchase option on a leased property. The following table summarizes the expected cash outflows to satisfy our total purchase commitments and finance leases, inclusive of these changes, as of September 30, 2021 (in millions):


Commitment Type	2021		2022		2023		2024		2025		After 2025		Total
Purchase Commitments(1)	$	1,929	$	1,923	$	646	$	280	$	93	$	111	$	4,982
Finance Leases	166		138		58		35		30		195		622
Total	$	2,095	$	2,061	$	704	$	315	$	123	$	306	$	5,604

(1)Purchase commitments for 2021 include amounts related to pending business acquisitions.

Guarantees and Other Off-Balance Sheet Arrangements

Except as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, 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.

Legal Proceedings and Contingencies

See note 8 and note 12 to the unaudited, consolidated financial statements for a discussion of judicial proceedings and other matters arising from the conduct of our business activities, and note 17 for a discussion of income tax related matters.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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Collective Bargaining Agreements

Status of Collective Bargaining Agreements

See note 8 to the unaudited, consolidated financial statements for a discussion of the status of our collective bargaining agreements.

Multiemployer Benefit Plans

See note 8 to the unaudited, consolidated financial statements for a discussion of our participation in multiemployer benefit plans.

Recent Accounting Pronouncements

Adoption of New Accounting Standards

See note 2 to the unaudited, consolidated financial statements for a discussion of recently adopted accounting standards.

Accounting Standards Issued But Not Yet Effective

See note 2 to the unaudited, consolidated financial statements for a discussion of accounting standards issued, but not yet effective.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Rate Adjustments

From time to time we adjust published rates applicable to our services. These rates, when published, are made available on our website at www.ups.com. We provide the address to our internet site solely for information. We do not intend for this address to be an active link or to otherwise incorporate the contents of any website into this or any other report we file with the Securities and Exchange Commission.

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