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

Overview

During the first quarter, we continued executing our Customer First, People Led, Innovation Driven strategy to realize further improvements in revenue quality, reductions in our cost to serve and growth in operating profit. Within the Customer First component of our strategy, we are continuing to leverage technology to make it faster and easier for small- and medium-sized businesses (SMBs) to ship with us, including first-quarter expansion of our Digital Access Program within the U.S. and internationally. Through our People Led strategic focus, we also realigned our executive leadership team to better serve our customers. Under Innovation Driven, we continued to deploy additional automation to increase productivity, including the introduction of smart facility technology. We also transitioned the two data centers which drive our global integrated network to renewable energy sources during the quarter.

During the first quarter, several factors contributed to a challenging operating environment, which is expected to persist, including global inflation, a surge in energy prices and upstream supply chain disruption. Additionally, the COVID-19 pandemic resulted in, and is expected to continue to result in, disruptions to our business, particularly in parts of Asia. In the first quarter, this drove a reduction in the number of flights we operated within the region relative to our expectations and negatively impacted demand for our services. Following Russia's invasion of Ukraine in February, we suspended all commercial operations in these countries, as well as in Belarus. Although these operations represent less than 1% of our consolidated revenues and the direct financial impact is not material to our business, we continue to monitor the evolving impact of the conflict on the broader economy. As a result of the aforementioned factors, we expect to continue to face certain pressures throughout the remainder of 2022.

In our U.S. Domestic Package reportable segment, volume decreased in the first quarter, driven by declines in residential volume. These declines were driven by a shift towards spending on services and a return to in-store shopping, as well as the impact of fiscal stimulus in the first quarter of 2021 that drove a surge in online consumer spending that did not repeat this year. Successful execution of our strategy resulted in growth in revenue per piece, which more than offset the impact of volume declines for the quarter.

Our International Package reportable segment was also impacted by the external factors discussed above, as well as lower e-commerce spending relative to the first quarter of 2021 when COVID-19 restrictions were in place in a number of countries, which resulted in a decrease in volume. This was offset by revenue per piece growth, driven by our continued focus on revenue quality as well as pricing changes which included fuel surcharge impacts. The growth in revenue per piece resulted in an increase in operating profit for the quarter.

Within Supply Chain Solutions, revenue growth was impacted by the second quarter 2021 divestiture of UPS Freight. Operating profit and operating margin increased, as global market demand continued to outpace supply in our international air and ocean freight forwarding businesses. Our truckload brokerage business benefited from revenue quality initiatives and growth remained strong in our healthcare operations.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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

															Three Months Ended March 31,												Change
																											2022						2021						$						%
Revenue (in millions)																											$	24,378					$	22,908					$	1,470					6.4		%
Operating Expenses (in millions)																											21,127						20,143						984						4.9		%
Operating Profit (in millions)																											$	3,251					$	2,765					$	486					17.6		%
Operating Margin																											13.3		%				12.1		%
Net Income (in millions)																											$	2,662					$	4,792					$	(2,130)					(44.4)		%
Basic Earnings Per Share																											$	3.05					$	5.50					$	(2.45)					(44.5)		%
Diluted Earnings Per Share																											$	3.03					$	5.47					$	(2.44)					(44.6)		%
Operating Days																											64						63
Average Daily Package Volume (in thousands)																											23,278						24,145												(3.6)		%
Average Revenue Per Piece																											$	13.26					$	12.12					$	1.14					9.4		%

• Revenue increased in all segments, driven by strong growth in small package revenue per piece and the impact of an additional operating day.

• Average daily package volume decreased in the first quarter, primarily due to business-to-consumer volume declines.

• Operating expenses increased, driven by fuel and third-party transportation costs.

• Operating profit increased in all segments and operating margin increased in U.S. Domestic and Supply Chain Solutions.

• We reported net income of $2.7 billion and diluted earnings per share of $3.03 for the quarter. Adjusted diluted earnings per share was $3.05 for the quarter after adjusting for the after-tax impacts of:

◦transformation strategy costs of $43 million or $0.05 per diluted share; partially offset by

◦a defined benefit plan curtailment gain of $24 million or $0.03 per diluted share.

In the U.S. Domestic Package segment, revenue and revenue per piece increased, primarily due to fuel surcharges and base rate increases as well as favorable shifts in customer and product mix. Expense increased due to higher compensation and benefit costs and higher fuel prices.

The International Package segment experienced revenue and revenue per piece growth, primarily due to fuel surcharges and pricing structure changes, coupled with favorable shifts in customer and product mix. Expense increases were primarily driven by higher jet fuel prices.

In Supply Chain Solutions, revenue growth was driven by Forwarding and Logistics. Forwarding revenue growth was driven by market price increases, while Logistics continued to experience strong growth from healthcare operations. Expense decreased slightly in the first quarter, as higher transportation costs in Forwarding and Logistics were offset by a reduction in operating expenses due to the second quarter 2021 divestiture of UPS Freight.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Supplemental Information - Items Affecting Comparability

We supplement the reporting of our financial information determined under generally accepted accounting principles in the United States ("GAAP") with certain non-GAAP financial measures. 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. Adjusted financial measures may exclude the impact of period over period exchange rate changes and hedging activities, defined benefit plan gains and losses, transformation and other charges, goodwill and asset impairment charges, and divestitures, as described below.

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

Adjusted financial measures should be considered in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. Our adjusted financial measures do not represent a comprehensive basis of accounting. Therefore, our adjusted financial measures may not be comparable to similarly titled measures reported by other companies.

Adjusted amounts reflect the following (in millions):

									Three Months Ended March 31,
Non-GAAP Adjustments															2022						2021
Operating Expenses:
Transformation Strategy Costs															$	55					$	118
Asset Impairment Charges and Divestitures															—						66
Total Adjustments to Operating Expenses															$	55					$	184
Other Income and (Expense):
Defined Benefit Plan (Gains) and Losses															$	(33)					$	(3,290)
Total Adjustments to Other Income and (Expense)															$	(33)					$	(3,290)
Total Adjustments to Income Before Income Taxes															$	22					$	(3,106)
Income Tax (Benefit) Expense:
Transformation Strategy Costs															$	(12)					$	(28)
Asset Impairment Charges and Divestitures															—						(16)
Defined Benefit Plan (Gains) and Losses															9						788
Total Adjustments to Income Tax (Benefit) Expense															$	(3)					$	744
Total Adjustments to Net Income															$	19					$	(2,362)

Transformation and Other Charges, Goodwill and Asset Impairment Charges, and Divestitures

We supplement the presentation of our operating profit, operating margin, income before income taxes, net income and earnings per share with non-GAAP measures that exclude the impact of charges related to transformation activities, goodwill and asset impairment charges, and divestitures. For more information regarding transformation activities, see note 17 to the unaudited, consolidated financial statements. For more information regarding asset impairment charges and divestitures, see note 4 to our audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.

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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.

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 Gains and Losses

We incur certain employment-related expenses associated with pension and postretirement medical benefits. These pension and postretirement medical benefits costs for company-sponsored defined benefit plans are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS. Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement of any of our plans.

We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor (defined as 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation), as well as gains and losses resulting from plan amendments, for our pension and postretirement defined benefit plans immediately as part of Investment income and other. We supplement the presentation of our income before income taxes, net income and earnings per share with adjusted measures that exclude the impact of these gains and losses and the related income tax effects. We believe excluding these defined benefit plan gains and losses provides important supplemental information by removing the volatility associated with plan amendments and short-term changes in market interest rates, equity values and similar factors.

During the first quarter of 2022, we amended the UPS Canada Ltd. Retirement Plan to cease future benefit accruals effective December 31, 2023. As a result, we remeasured the plan's assets and benefit obligations as of March 31, 2022, resulting in a curtailment gain of $33 million ($24 million after-tax).

During the first quarter of 2021, we remeasured the UPS/IBT Full Time Employee Pension Plan following enactment into law of the American Rescue Plan Act and recognized a pre-tax mark-to-market gain outside of the 10% corridor of $3.3 billion ($2.5 billion after-tax).

These gains are included in Investment income and other in the statements of consolidated income. For additional information, refer to note 7 to the unaudited, consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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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 13 to the unaudited, consolidated financial statements.

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. There were no significant changes to our allocation methodologies for the first quarter of 2022.

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U.S. Domestic Package

															Three Months Ended March 31,												Change
																								2022						2021						$						%
Average Daily Package Volume (in thousands):
Next Day Air																											1,945						2,012												(3.3)		%
Deferred																											1,509						1,513												(0.3)		%
Ground																											16,287						16,827												(3.2)		%
Total Average Daily Package Volume																											19,741						20,352												(3.0)		%
Average Revenue Per Piece:
Next Day Air																											$	20.84					$	18.39					$	2.45					13.3		%
Deferred																											14.70						13.22						1.48						11.2		%
Ground																											10.66						9.83						0.83						8.4		%
Total Average Revenue Per Piece																											$	11.97					$	10.93					$	1.04					9.5		%
Operating Days in Period																											64						63
Revenue (in millions):
Next Day Air																											$	2,594					$	2,331					$	263					11.3		%
Deferred																											1,420						1,260						160						12.7		%
Ground																											11,110						10,419						691						6.6		%
Total Revenue																											$	15,124					$	14,010					$	1,114					8.0		%
Operating Expenses (in millions):
Operating Expenses																											$	13,462					$	12,651					$	811					6.4		%
Transformation and Other Charges																											(43)						(104)						61						(58.7)		%
Adjusted Operating Expense																											$	13,419					$	12,547					$	872					6.9		%
Operating Profit (in millions) and Operating Margin:
Operating Profit																											$	1,662					$	1,359					$	303					22.3		%
Adjusted Operating Profit																											$	1,705					$	1,463					$	242					16.5		%
Operating Margin																											11.0		%				9.7		%
Adjusted Operating Margin																											11.3		%				10.4		%

Revenue

The change in revenue was due to the following factors:

			Volume						Rates / Product Mix						Fuel Surcharge						Total Revenue Change
Revenue Change Drivers:
First quarter 2022 vs. 2021			(1.5)		%				5.2		%				4.3		%				8.0		%

Overall revenue also benefited from one additional operating day in the first quarter of 2022.

Volume

Average daily volume decreased, driven by a 7.4% decline in residential shipments. The decline in residential volume was attributable to rising inflation depressing consumer demand, a shift in consumer spending away from e-commerce towards services and in-store shopping and the impact of fiscal stimulus in the first quarter of 2021 that drove a surge in online consumer spending in that period. Business-to-consumer shipments represented approximately 57.4% of average daily volume for the quarter compared to 60.1% in 2021.

Business-to-business shipments increased 3.6% in the 2022 period, with growth primarily in our Ground commercial product which was driven by growth from SMB customers as we continued to execute on our strategy. Overall, we anticipate that average daily volume growth in the first half of 2022 will be negative and then improve in the second half of the year.

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RESULTS OF OPERATIONS

Within our Air products, we experienced shifts in customer mix that resulted in overall declines in average daily volume. Deferred average daily volume remained relatively flat, while our Next Day Air average daily volume declined as we continued to execute within our Better Not Bigger strategic framework.

Within our Ground products, SurePost average daily volume decreased 10.5%, driven by a reduction in shipments from a number of large customers while Ground residential experienced volume declines in all customer segments. These declines were driven by lower consumer spending as discussed above. Ground commercial volume increased 4.1%, with growth from both large customers and SMBs.

Rates and Product Mix

Revenue per piece in both our Air and Ground products increased, driven by increases in base rates and fuel surcharges, as well as favorable changes in customer and product mix. Rates for Air and Ground products increased an average of 5.9% in December 2021, and our SurePost rates also increased at that time. In our Next Day Air and Deferred products, overall revenue per piece growth was slightly impacted by a reduction in average billable weight per piece.

Through continued execution of our strategy, we anticipate that revenue per piece will continue to grow faster than volume throughout the remainder of 2022.

Fuel Surcharges

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

															Three Months Ended March 31,												% Point Change
																					2022						2021						2022 vs 2021
Next Day Air / Deferred																					14.4		%				5.9		%				8.5		%
Ground																					12.7		%				7.2		%				5.5		%

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

Total domestic fuel surcharge revenue increased $601 million, driven by increases in fuel surcharges and pricing structure changes. We expect surcharges to remain elevated throughout the remainder of 2022.

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Operating Expenses

Operating expenses, and operating expenses excluding the year-over-year impact of transformation and other charges, increased, partly due to the impact of one additional operating day. Pickup and delivery costs increased $455 million and the cost of operating our integrated air and ground network increased $279 million. Package sorting costs increased $80 million and other indirect operating costs increased $58 million. These increases were impacted by:

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

• Increases in employee benefits expense for our union workforce due to contractual rate increases for contributions to multiemployer benefit plans, as well as additional headcount becoming eligible for health, welfare and retirement benefits.

• Higher compensation expense due to contractual rate increases, and cost of living and market-rate adjustments for our union workforce. These increases were partially offset by lower volumes, leading to a decrease in average daily union labor hours. Management payroll also increased, primarily due to wage rate adjustments for our part-time workforce and higher incentive compensation.

• Increases in workers' compensation and automobile liability expense were primarily driven by adverse claims development.

*•*Reallocation of Ground with Freight Pricing product expense following the second quarter 2021 divestiture of UPS Freight, which resulted in $69 million of increased segment operating expenses.

Total cost per piece, and adjusted cost per piece excluding the year-over-year impact of transformation and other charges, increased 8.0% and 8.5%, respectively. We anticipate that overall costs and cost per piece will continue to increase throughout the remainder of 2022 as a result of market factors, including expected increases in the cost of labor and inflation, as well as upstream supply chain disruptions.

Operating Profit and Margin

As a result of the factors described above, operating profit increased $303 million, with operating margin increasing 130 basis points to 11.0%. Excluding the year-over-year impact of transformation and other charges, adjusted operating profit increased $242 million, with adjusting operating margin increasing 90 basis points to 11.3%.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

International Package

															Three Months Ended March 31,												Change
																											2022						2021						$						%
Average Daily Package Volume (in thousands):
Domestic																											1,806						2,010												(10.1)		%
Export																											1,731						1,783												(2.9)		%
Total Average Daily Package Volume																											3,537						3,793												(6.7)		%
Average Revenue Per Piece:
Domestic																											$	7.36					$	7.33					$	0.03					0.4		%
Export																											34.10						31.10						3.00						9.6		%
Total Average Revenue Per Piece																											$	20.45					$	18.50					$	1.95					10.5		%
Operating Days in Period																											64						63
Revenue (in millions):
Domestic																											$	851					$	928					$	(77)					(8.3)		%
Export																											3,778						3,493						285						8.2		%
Cargo and Other																											247						186						61						32.8		%
Total Revenue																											$	4,876					$	4,607					$	269					5.8		%
Operating Expenses (in millions):
Operating Expenses																											$	3,760					$	3,522					$	238					6.8		%
Transformation and Other Charges																											(4)						(6)						2						(33.3)		%
Adjusted Operating Expenses																											$	3,756					$	3,516					$	240					6.8		%
Operating Profit (in millions) and Operating Margin:
Operating Profit																											$	1,116					$	1,085					$	31					2.9		%
Adjusted Operating Profit																											$	1,120					$	1,091					$	29					2.7		%
Operating Margin																											22.9		%				23.6		%
Adjusted Operating Margin																											23.0		%				23.7		%
Currency Benefit / (Cost) – (in millions)*:
Revenue																																													$	(143)
Operating Expenses																																													115
Operating Profit																																													$	(28)
* Net of currency hedging; amount represents the change in currency translation compared to the prior year.

Revenue

The change in revenue was due to the following:

			Volume						Rates / Product Mix						Fuel Surcharge						Currency						Total Revenue Change
Revenue Change Drivers:
First quarter 2022 vs. 2021			(5.0)		%				7.8		%				6.1		%				(3.1)		%				5.8		%

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Volume

In the first quarter, average daily volume decreased for both domestic and export products. Volume declined from both large customers and SMBs, primarily in the retail and technology sectors. Business-to-consumer volume decreased 20.7%. This decrease was attributable to challenging global economic conditions, including inflation, geopolitical uncertainty and COVID-19 disruptions in Asia, as well as a reduction in consumer e-commerce spending relative to the first quarter of 2021 when COVID-19 restrictions were in place in a number of countries. Business-to-business volume increased 0.5% in the first quarter. We expect volume growth in the first half of the year to be negative, with improvement occurring in the second half of the year.

Export volume decreased in the first quarter, driven by impacts from Europe and Asia. European volume declines were highest on intra-Europe trade lanes, driven by overall economic conditions. These declines were partially offset by growth on the Europe to U.S. trade lane driven by the United Kingdom and Turkey. The decline in Asia export volume was primarily driven by COVID-19 disruptions, which resulted in fewer flights being operated during the first quarter and reduced business activity in certain areas within China during March.

Our premium Express products experienced a slight volume decline in the quarter, primarily due to disruptions to our business in Asia related to COVID-19 shutdowns. Volume for our non-premium export products decreased 2.3%, driven by reductions in our Worldwide Expedited and Worldwide Standard products. The decline in our Worldwide Standard product was due to the year-over-year impact of Brexit as customers continued to adjust their supply chains, while the decline in our Worldwide Expedited product resulted from shifts in customer preferences.

Domestic volume also declined in the first quarter, particularly in Canada and the United Kingdom, due to a decrease in residential volume driven by the reduction in e-commerce from the comparative period, as discussed above.

Rates and Product Mix

In December 2021, we implemented an average 5.9% 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. Additionally, we continue to apply demand-related surcharges on certain lanes.

Total revenue per piece increased 10.5% in the quarter, primarily due to fuel surcharges and pricing structure changes as well as favorable shifts in customer and product mix. Demand-related surcharges on certain export volume also contributed to the increase. This increase was partially offset by unfavorable currency movements. Excluding the impact of currency, revenue per piece increased 13.9%. We expect our overall revenue per piece to increase for 2022 as a result of our continuing revenue quality initiatives.

Export revenue per piece increased 9.6% in the quarter also for the reasons described above. Excluding the impact of currency, export revenue per piece increased 12.2%.

Domestic revenue per piece was also favorably impacted by the factors described above. However, this was offset by unfavorable currency movements, which resulted in domestic revenue per piece remaining relatively flat for the quarter. Excluding the impact of currency, domestic revenue per piece increased 6.8%.

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 $259 million in the first quarter, driven by significant increases in fuel surcharge indices which were slightly offset by volume declines. We expect fuel surcharges to continue to remain elevated throughout the remainder of 2022.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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Operating Expenses

Operating expenses, and operating expenses excluding the year-over-year impact of transformation and other charges, increased in the first quarter. The costs of operating our integrated international air and ground network increased $295 million, primarily due to higher fuel prices, which we expect to persist through the remainder of 2022.

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

Pickup and delivery costs decreased $38 million, primarily due to volume declines in the first quarter discussed above. Other indirect costs also decreased year over year, while package sorting costs remained relatively flat.

Operating Profit and Margin

As a result of the factors described above, operating profit increased $31 million for the first quarter, with operating margin decreasing 70 basis points to 22.9%. Excluding the year-over-year impact of transformation and other charges, adjusted operating profit increased $29 million in the first quarter, while adjusted operating margin decreased 70 basis points to 23.0%.

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Supply Chain Solutions

															Three Months Ended March 31,												Change
																											2022						2021						$						%
Revenue (in millions):
Forwarding																											$	2,589					$	2,072					$	517					25.0		%
Logistics																											1,251						1,104						147						13.3		%
Freight																											—						767						(767)						(100.0)		%
Other																											538						348						190						54.6		%
Total Revenue																											$	4,378					$	4,291					$	87					2.0		%
Operating Expenses (in millions):
Operating Expenses																											$	3,905					$	3,970					$	(65)					(1.6)		%
Transformation Strategy Costs																											(8)						(8)						—						—		%
Asset Impairment Charges and Divestitures																											—						(66)						66						(100.0)		%
Adjusted Operating Expenses:																											$	3,897					$	3,896					$	1					—		%
Operating Profit (in millions) and Operating Margin:
Operating Profit																											$	473					$	321					$	152					47.4		%
Adjusted Operating Profit																											$	481					$	395					$	86					21.8		%
Operating Margin																											10.8		%				7.5		%
Adjusted Operating Margin																											11.0		%				9.2		%
Currency Benefit / (Cost) – (in millions)*:
Revenue																																							$	(37)
Operating Expenses																																							40
Operating Profit																																							$	3
* Amount represents the change in currency translation compared to the prior year.

															Three Months Ended March 31,												Change
																											2022						2021						$						%
Transformation Strategy Costs (in millions):
Forwarding																											$	6					$	5					$	1					20.0		%
Logistics																											1						2						(1)						(50.0)		%
Freight																											—						1						(1)						(100.0)		%
Other																											1						—						1						N/A
Total Transformation Strategy Costs																											$	8					$	8					$	—					—		%

Revenue

Total revenue for Supply Chain Solutions increased $87 million, as strong revenue growth across many of our businesses was largely offset by a $767 million decrease in revenue attributable to the second quarter 2021 divestiture of UPS Freight.

Forwarding revenue increased in the first quarter. In our international air freight business, revenue growth was driven by ongoing demand-related surcharges and elevated market rates, slightly offset by a reduction in Asia export volume. We anticipate that rates may moderate during the year as capacity returns to the market. Ocean freight forwarding revenue increased as market rates remained elevated, while volume declined slightly. We expect ocean rates to moderate below 2021 peak levels later in 2022. Revenue in our truckload brokerage business increased $146 million, which was primarily driven by revenue quality initiatives, slightly offset by a reduction in volume of approximately 10%.

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Within Logistics, our healthcare operations experienced strong business growth in the first quarter driven by pharmaceuticals, clinical trials and lab customers. Revenue in our mail services business increased slightly due to rate increases and a favorable shift in product characteristics, which were somewhat offset by lower volumes. Our other distribution operations experienced year-over-year revenue increases, driven by business growth, service expansion and higher demand for warehouse space.

Revenue from the other businesses within Supply Chain Solutions increased, driven by services provided to the acquirer of UPS Freight under certain transition services agreements, the acquisition of Roadie, Inc. and business growth in UPS Capital.

Operating Expenses

Total operating expenses in Supply Chain Solutions decreased slightly in the first quarter, which included a decrease of $784 million from the divestiture of UPS Freight. Operating expenses, excluding the year-over-year impact of transformation and other charges, were relatively unchanged.

Forwarding operating expenses increased $392 million, driven by an increase in purchased transportation expense. This increase was primarily due to higher fuel costs and capacity constraints driving higher rates in our international airfreight, ocean freight forwarding and truckload brokerage businesses. We expect these rates to moderate during 2022.

Logistics operating expenses increased $126 million, driven by higher purchased transportation costs due to business growth in our healthcare operations and carrier rate increases in mail services. Business growth also resulted in higher compensation and benefits expense within our healthcare operations, while market wage pressures drove increased compensation costs in mail services. We anticipate that a tight labor market and inflation may result in higher compensation costs throughout the remainder of 2022.

Expense in the other businesses within Supply Chain Solutions increased, largely due to transportation and other costs incurred under the transition services agreements with the acquirer of UPS Freight and additional third-party transportation costs resulting from the acquisition of Roadie, Inc..

Operating Profit and Margin

As a result of the factors described above, operating profit increased $152 million in the first quarter, with operating margin increasing 330 basis points to 10.8%. Excluding the year-over-year impact of transformation and other charges, adjusted operating profit increased $86 million, with adjusted operating margin increasing 180 basis points to 11.0%.

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Consolidated Operating Expenses

															Three Months Ended March 31,												Change
																											2022						2021						$						%
Operating Expenses (in millions):
Compensation and benefits																											$	11,616					$	11,483					$	133					1.2		%
Transformation and Other Charges																											(33)						(76)						43						(56.6)		%
Adjusted Compensation and benefits																											$	11,583					$	11,407					$	176					1.5		%
Repairs and maintenance																											$	626					$	619					$	7					1.1		%
Depreciation and amortization																											764						722						42						5.8		%
Purchased transportation																											4,600						4,243						357						8.4		%
Fuel																											1,220						807						413						51.2		%
Other occupancy																											491						466						25						5.4		%
Other expenses																											1,810						1,803						7						0.4		%
Total Other expenses																											9,511						8,660						851						9.8		%
Transformation and Other Charges																											(22)						(42)						20						(47.6)		%
Asset impairment charges and divestitures																											—						(66)						66						(100.0)		%
Adjusted Total Other expenses																											$	9,489					$	8,552					937						11.0		%
Total Operating Expenses																											$	21,127					$	20,143					$	984					4.9		%
Adjusted Total Operating Expenses																											$	21,072					$	19,959					$	1,113					5.6		%
Currency (Benefit) / Cost - (in millions)*																																							$	(155)
* Amount represents the change in currency translation compared to the prior year.

															Three Months Ended March 31,												Change
																											2022						2021						$						%
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs:
Compensation																											$	16					$	6					$	10					166.7		%
Benefits																											17						70						(53)						(75.7)		%
Other occupancy																											—						1						(1)						(100.0)		%
Other expenses																											22						41						(19)						(46.3)		%
Total Transformation Strategy Costs																											$	55					$	118					$	(63)					(53.4)		%
Asset impairment charges and divestitures:
Other expenses																											$	—					$	66					$	(66)					(100.0)		%
Total Adjustments to Operating Expenses																											$	55					$	184					$	(129)					(70.1)		%

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Compensation and Benefits

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

Total compensation costs increased $31 million or 0.5%. Excluding the year- over-year impact of transformation and other charges, adjusted total compensation costs increased $21 million. U.S. Domestic direct labor costs increased, driven by increases in wage rates and cost of living adjustments for our union workforce. These wage increases were partially offset by a reduction in labor hours due to a 3.0% reduction in volume. Management compensation increased as a result of part-time management wage rate adjustments and additional incentive compensation. The increases were partially offset by a decrease of $235 million as a result of the second quarter 2021 divestiture of UPS Freight.

Benefits costs increased $102 million or 2.1%. Excluding the year-over-year impact of transformation and other charges, adjusted benefits costs increased $155 million or 3.2%. The primary drivers were as follows:

• Vacation, excused absence, payroll taxes and other costs increased $109 million, driven by salary and wage increases and growth in the overall size of the workforce.

• Health and welfare costs increased $40 million, driven by increased contributions to multiemployer plans as a result of growth in the eligible workforce and contractual rate increases. This was partly offset by the impact of divesting UPS Freight, which decreased cost $49 million year over year.

• Workers' compensation costs increased $35 million, driven by adverse claims developments.

• Pension and other postretirement benefits costs decreased by $37 million. Lower service costs and a reduction in defined contributions for company-sponsored plans were largely offset by higher contributions to multiemployer plans as a result of contractually-mandated contribution increases. The divestiture of UPS Freight decreased expense $36 million year over year.

Repairs and Maintenance

We incurred higher costs for aircraft engine maintenance in the first quarter of 2022 due to the timing of scheduled maintenance events. This increase was partially offset by a reduction in routine repairs and maintenance for our buildings and facilities.

Depreciation and Amortization

Depreciation and amortization expense increased as a result of additional expenses arising from facility automation projects coming into service, investments in internally developed software and the amortization of intangible assets acquired as part of the Roadie, Inc. acquisition in the fourth quarter of 2021.

Purchased Transportation

The overall increase in third-party transportation expense charged to us by air, ocean and ground carriers was primarily driven by:

• Supply Chain Solutions expense increased $345 million, driven by market rate increases in our air and ocean freight and truckload brokerage businesses, as well as volume growth in our healthcare operations. The divestiture of UPS Freight resulted in a decrease of $187 million in expenses period over period, which was somewhat offset by the cost of transportation procured under transitional arrangements with the acquirer of the business.

• International Package expense increased $13 million, as higher network costs were partially offset by favorable currency movements, primarily in Europe.

Fuel

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

Other Occupancy

Other occupancy expense increased as a result of expenses from additional operating facilities coming into service and higher utilities costs.

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Other Expenses

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

• Hosted software application fees and other technology costs increased $31 million.

• The cost of goods provided under transitional service agreements to the acquirer of UPS Freight was $28 million. There was no similar cost in the 2021 period.

• Auto liability insurance increased $22 million, driven by increases in the frequency and severity of claims.

• Other increases included airline operational expenses, third-party commissions, payment processing fees and an increase in our allowance for credit losses.

These increases were partially offset by favorable developments in certain legal and tax contingencies and a reduction in asset impairment charges.

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Other Income and (Expense)

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

															Three Months Ended March 31,												Change
																											2022						2021						$						%
Investment Income and Other																											$	315					$	3,616					$	(3,301)					(91.3)		%
Defined Benefit Plan (Gains) and Losses																											(33)						(3,290)						3,257						(99.0)		%
Adjusted Investment Income and Other																											$	282					$	326					$	(44)					(13.5)		%
Interest Expense																											(174)						(177)						3						(1.7)		%
Total Other Income and (Expense)																											$	141					$	3,439					$	(3,298)					(95.9)		%
Adjusted Other Income and (Expense)																											$	108					$	149					$	(41)					(27.5)		%

Investment Income and Other

Investment income and other decreased $3.3 billion. We recognized a $3.3 billion defined benefit plan mark-to-market gain in the first quarter of 2021 and a $33 million defined benefit plan curtailment gain in the first quarter of 2022. Excluding the impact of these defined benefit plan gains, adjusted investment income and other decreased $44 million, primarily due to year-over-year changes in the fair value of certain non-current investments, as well as a decrease in other pension income. Other pension income decreased due to the following:

• Expected returns on pension assets decreased as a result of a reduction in our rate of return assumption, partially offset by a higher asset base due to contributions and positive asset returns in 2021.

• Pension interest cost decreased due to a reduction in projected benefit obligations, partially offset by the impact of higher discount rates and changes in demographic assumptions.

• Prior service cost decreased as the cost base from certain plan amendments became fully amortized during 2021.

Interest Expense

Interest expense decreased due to lower average outstanding debt balances, partially offset by a reduction in the 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 months ended March 31, 2022 and 2021 (in millions):

															Three Months Ended March 31,												Change
																											2022						2021						$						%
Income Tax Expense																											$	730					$	1,412					$	(682)					(48.3)		%
Income Tax Impact of:
Transformation Strategy Costs																											12						28						(16)						(57.1)		%
Asset Impairment Charges and Divestitures																											—						16						(16)						(100.0)		%
Defined Benefit Plan (Gains) and Losses																											(9)						(788)						779						(98.9)		%
Adjusted Income Tax Expense																											$	733					$	668					$	65					9.7		%
Effective Tax Rate																											21.5		%				22.8		%
Adjusted Effective Tax Rate																											21.5		%				21.6		%

For additional information on our income tax expense and effective tax rate, see note 16 to the unaudited, consolidated financial statements.

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Liquidity and Capital Resources

As of March 31, 2022, we had $12.5 billion in cash, cash equivalents and marketable securities. We believe that these positions, expected cash from operations, access to commercial paper programs and capital markets and other available liquidity options will be adequate to fund our material short- and long-term cash requirements, including our business operations, planned capital expenditures and pension contributions, transformation strategy costs, debt obligations and planned shareowner returns. We regularly evaluate opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund operations. We deploy a disciplined and balanced approach to capital allocation, including returns to shareowners through dividends and share repurchases.

Cash Flows From Operating Activities

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

			Three Months Ended March 31,
			2022						2021
Net income			$	2,662					$	4,792
Non-cash operating activities (a)			1,559						(984)
Pension and postretirement benefit plan contributions (company-sponsored plans)			(45)						(215)
Hedge margin receivables and payables			(9)						85
Income tax receivables and payables			379						353
Changes in working capital and other non-current assets and liabilities			(49)						478
Other operating activities			(17)						22
Net cash from operating activities			$	4,480					$	4,531

---

(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 decreased $51 million in the first quarter, and was impacted by the following:

• An increase in working capital, driven by the timing of payroll and other compensation-related items.

• A decrease in contributions to our company-sponsored pension and U.S. postretirement medical benefit plans, which totaled $45 million in the first quarter of 2022 compared to $215 million in 2021. The reduction was driven by the timing of contributions to our U.S. postretirement medical plan.

• A decrease in our net hedge margin collateral position of $94 million due to changes in the fair value of derivative contracts used in our currency and interest rate hedging programs.

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

Amounts due to our suppliers that participate in the SCF program are included in Accounts payable in our consolidated balance sheets. We have been informed by the participating financial institutions that as of March 31, 2022 and 2021, suppliers sold them $509 and $343 million, respectively, of our outstanding payment obligations. Amounts due to suppliers that participate in the SCF program may be reflected in cash flows from operating activities or cash flows from investing activities in our consolidated statements of cash flows. The amounts settled through the SCF program were approximately $308 and $267 million for the three months ended March 31, 2022 and 2021, respectively.

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As of March 31, 2022, 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. continues to be our primary source of funds to finance domestic operating needs, capital expenditures, share repurchases, pension contributions and dividend payments to shareowners. All cash, cash equivalents and marketable securities held by foreign subsidiaries are generally available for distribution to the U.S. without any U.S. federal income taxes. Any such distributions may be subject to foreign withholding and U.S. state taxes. When amounts earned by foreign subsidiaries are expected to be indefinitely reinvested, no accrual for taxes is provided.

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Cash Flows From Investing Activities

Our primary sources (uses) of cash from investing activities were as follows (in millions):

			Three Months Ended March 31,
			2022						2021
Net cash used in investing activities			$	(572)					$	(766)
Capital Expenditures:
Buildings, facilities and plant equipment			$	(169)					$	(325)
Aircraft and parts			(206)						(239)
Vehicles			(10)						(135)
Information technology			(163)						(135)
Total Capital Expenditures			$	(548)					$	(834)
Capital Expenditures as a % of revenue			2.2		%				3.6		%
Other Investing Activities:
Proceeds from disposal of businesses, property, plant and equipment			$	—					$	10
Net change in finance receivables			$	5					$	11
Net (purchases), sales and maturities of marketable securities			$	(8)					$	56
Cash paid for business acquisitions, net of cash and cash equivalents acquired			$	1					$	(3)
Other investing activities			$	(22)					$	(6)

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 investments in technology initiatives and enhanced network capabilities, including over $1 billion of projects to support our environmental sustainability goals in 2022. It also provides for the maintenance of buildings, facilities and plant equipment and replacement of certain aircraft within our fleet. We currently expect that our capital expenditures will total approximately $5.5 billion in 2022, of which approximately 60 percent will be allocated to expansion projects.

Total capital expenditures decreased in the first quarter of 2022 compared to 2021:

• Spending on buildings, facilities and plant equipment in our global small package business decreased as supply chain disruption resulted in delays to certain projects.

• Aircraft expenditures decreased due to fewer payments associated with the delivery of aircraft, partially offset by increases in contract deposits on open aircraft orders.

• Vehicle expenditures decreased due to the timing of deliveries and payments.

• Information technology expenditures increased due to additional deployments of technology equipment.

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 the first quarter of 2021 related to the purchase of development areas for The UPS Store. Other investing activities were impacted by changes in our non-current investments, purchase contract deposits and various other items.

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Cash Flows From Financing Activities

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

			Three Months Ended March 31,
2022						2021
Net cash used in financing activities			$	(1,970)					$	(1,945)
Share Repurchases:
Cash paid to repurchase shares			(254)						—
Number of shares repurchased			1.2						—
Shares outstanding at period end			874						870
Dividends:
Dividends declared per share			$	1.52					$	1.02
Cash paid for dividends			$	(1,284)					$	(858)
Borrowings:
Net borrowings (repayments) of debt principal			$	(18)					$	(831)
Other Financing Activities:
Cash received for common stock issuances			$	67					$	78
Other financing activities			$	(481)					$	(334)
Capitalization:
Total debt outstanding at period end			21,881						23,727
Total shareowners’ equity at period end			15,434						7,159
Total capitalization			$	37,315					$	30,886

We repurchased 1.2 million shares of class B common stock for $260 million under our stock repurchase program during the three months ended March 31, 2022 ($254 million in repurchases are reported on the statements of consolidated cash flows due to the timing of settlements). We did not repurchase any shares under this program during the three months ended March 31, 2021. We anticipate our share repurchases will total approximately $2.0 billion for all of 2022. For additional information on our share repurchase activities, see note 12 to the unaudited, consolidated financial statements.

In the first quarter of 2022, we declared a quarterly dividend of $1.52 per share. 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.

There were no issuances of debt during the three months ended March 31, 2022. Repayments of debt during the first quarter of 2022 were related to scheduled principal payments on our finance lease obligations. In the first quarter of 2021, issuances of debt consisted of borrowings under our commercial paper program. Repayments included fixed-rate senior notes totaling $1.5 billion, commercial paper and scheduled principal payments on our finance lease obligations.

We have $2.0 billion of fixed and floating rate notes maturing in 2022 that we currently expect to repay at maturity with cash from operations. We consider the overall fixed and floating interest rate mix of our portfolio and the related overall cost of borrowing when planning for future issuances and non-scheduled repayments of debt.

The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. As of March 31, 2022, we had no outstanding balances under our commercial paper programs.

Cash flows from other financing activities were driven by the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards. Cash outflows were $479 and $330 million for the three months ended March 31, 2022 and 2021, respectively. The increase was driven by changes in payment amounts for certain awards.

Except as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, we do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, which we believe could have a material impact on our financial condition or liquidity.

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Sources of Credit

See note 9 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 of our Annual Report on Form 10-K for the year ended December 31, 2021.

Legal Proceedings and Contingencies

See note 7 and note 11 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 16 for a discussion of income tax related matters.

Collective Bargaining Agreements

Status of Collective Bargaining Agreements

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

Multiemployer Benefit Plans

See note 7 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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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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