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

Overview

Pursuing our Customer First, People Led, Innovation Driven strategy, we continue to build capabilities that create value for our customers. Our strategy involves creating speed and ease of access to our services, particularly in the parts of the market that value our end-to-end network, and driving productivity improvements in our business, while delivering strong financial results to our shareowners.

Customer First is focused on leveraging technology to enable digital commerce solutions. During the quarter, we expanded our Digital Access Program and our advanced technology healthcare solution that prioritizes complex healthcare shipments within our network. We also completed the acquisition of Delivery Solutions, a digital platform that optimizes customer deliveries across multiple networks. As part of our People Led strategic focus, we recently appointed a Chief Digital and Technology Officer to lead the continuing digital transformation of our business. Executing under our Innovation Driven strategic pillar, we continue to increase the agility and automation of our network with smart facility technology that better enables us to respond more rapidly to shifting volume trends and improves productivity.

A number of external factors contributed to a challenging operating environment for the first half of the year, including global inflation, which impacted consumer spending, geopolitical uncertainties, wage and labor market pressures, fuel prices and foreign currency exchange rates. Additionally, areas within Asia continued to experience shutdowns and other restrictions as a result of the ongoing COVID-19 pandemic. These factors resulted in disruptions to certain parts of our business, negatively impacted demand for our services and contributed to increases in certain of our operating costs. We expect these impacts will continue throughout the remainder of 2022.

Volume declined in our U.S. Domestic Package reportable segment in both the current year periods, driven by lower residential volume as we continued to optimize our network within our Better not Bigger strategic framework. Broader economic factors also contributed to reduced demand for residential deliveries. Revenue per piece growth more than offset the decline in volume for both the quarter and year to date. Successful execution of our strategy primarily drove increases in operating profit and operating margin in both periods.

Our International Package reportable segment was also impacted by those external factors, as well as the year-over-year impact of the COVID-19 pandemic on e-commerce spending. This resulted in volume declines in the current year periods, although the declines were more than offset by revenue per piece growth. Results were also impacted by the strengthening of the U.S. Dollar against European currencies. Despite the challenging global environment, we continued to invest in our business by adding strategic lanes to our network and creating joint ventures to expand our services.

Within Supply Chain Solutions, year-over-year revenue growth was impacted by the second quarter 2021 divestiture of UPS Freight. Operating profit and operating margin increased, driven by growth in Forwarding and Logistics. Our Forwarding business continued to benefit from elevated market rates in international airfreight and ocean freight, which we anticipate will decrease in the latter half of the year. Truckload brokerage increased operating profit through revenue quality initiatives. Operating profit growth in Logistics was driven by business growth across our operations, including healthcare.

Our strategic execution continued to result in the generation of strong cash flows in the first half of the year, which we are reinvesting in the business and returning to shareowners through dividends and share repurchases. We recently announced an increase in our targeted share repurchases for 2022 to $3.0 billion.

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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 June 30,												Change												Six Months Ended June 30,												Change
			2022						2021						$						%						2022						2021						$						%
Revenue (in millions)			$	24,766					$	23,424					$	1,342					5.7		%				$	49,144					$	46,332					$	2,812					6.1		%
Operating Expenses (in millions)			21,231						20,166						1,065						5.3		%				42,358						40,309						2,049						5.1		%
Operating Profit (in millions)			$	3,535					$	3,258					$	277					8.5		%				$	6,786					$	6,023					$	763					12.7		%
Operating Margin			14.3		%				13.9		%																13.8		%				13.0		%
Net Income (in millions)			$	2,849					$	2,676					$	173					6.5		%				$	5,511					$	7,468					$	(1,957)					(26.2)		%
Basic Earnings Per Share			$	3.26					$	3.06					$	0.20					6.5		%				$	6.31					$	8.54					$	(2.23)					(26.1)		%
Diluted Earnings Per Share			$	3.25					$	3.05					$	0.20					6.6		%				$	6.28					$	8.51					$	(2.23)					(26.2)		%
Operating Days			64						64																		128						127
Average Daily Package Volume (in thousands)			23,071						24,236												(4.8)		%				23,175						24,191												(4.2)		%
Average Revenue Per Piece			$	13.72					$	12.26					$	1.46					11.9		%				$	13.49					$	12.19					$	1.30					10.7		%

• Revenue increased in all segments in the current year periods, with double-digit revenue per piece growth in our global small package operations.

• Average daily package volume in our global small package operations decreased, primarily due to business-to-consumer volume declines.

• Operating expenses increased for both the quarter and year to date, primarily driven by higher fuel prices.

• Operating profit increased in all segments for both the quarter and year to date. U.S. Domestic Package segment operating margin increased while International Package segment margin declined slightly in each period.

• Net income was $2.8 billion and diluted earnings per share was $3.25 for the second quarter ($5.5 billion and $6.28 per share year to date). Adjusted diluted earnings per share was $3.29 for the quarter ($6.33 per share year to date) after adjusting for the after-tax impacts of:

◦transformation strategy costs of $31 million, or $0.04 per diluted share, for the second quarter ($74 million and $0.08 per diluted share year to date); and

◦a first-quarter defined benefit plan curtailment gain of $24 million, or $0.03 per diluted share that impacted the year-to-date period.

In the U.S. Domestic Package segment, revenue increased for the quarter and year to date, primarily due to higher fuel revenue driven by increases in both price per gallon and in fuel surcharge rates as part of our pricing strategy. Revenue quality and favorable shifts in customer mix also contributed to the increase. These factors were partially offset by volume declines. Expenses increased due to higher fuel prices and higher compensation and benefits costs.

In the International Package segment, revenue increased for the quarter and year to date, driven by fuel revenue and revenue quality, partially offset by lower volumes and unfavorable currency movements. Expense increases were primarily driven by higher jet fuel prices.

In Supply Chain Solutions, revenue growth for the quarter and year to date was primarily attributable to Forwarding and Logistics. Forwarding revenue growth was driven by market price increases, while Logistics experienced growth across its operations, particularly healthcare. Expenses were relatively flat for the quarter and year to date, 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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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 June 30,												Six Months Ended June 30,
Non-GAAP Adjustments			2022						2021						2022						2021
Operating Expenses:
Transformation Strategy Costs			$	41					$	116					$	96					$	234
Asset Impairment Charges and Divestitures			—						(101)						—						(35)
Total Adjustments to Operating Expenses			$	41					$	15					$	96					$	199
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			$	41					$	15					$	63					$	(3,091)
Income Tax (Benefit) Expense:
Transformation Strategy Costs			$	(10)					$	(28)					$	(22)					$	(56)
Asset Impairment Charges and Divestitures			—						24						—						8
Defined Benefit Plan (Gains) and Losses			—						—						9						788
Total Adjustments to Income Tax (Benefit) Expense			$	(10)					$	(4)					$	(13)					$	740
Total Adjustments to Net Income			$	31					$	11					$	50					$	(2,351)

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 goodwill and 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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Foreign Currency Exchange Rate Changes 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 in the statements of consolidated income. We supplement the presentation of our income before income taxes, net income and earnings per share with adjusted measures that exclude the impact of these gains and losses and the related income tax effects. We believe excluding these defined benefit 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 in the second quarter or year-to-date periods.

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U.S. Domestic Package

			Three Months Ended June 30,												Change												Six Months Ended June 30,												Change
2022						2021						$						%						2022						2021						$						%
Average Daily Package Volume (in thousands):
Next Day Air			1,910						2,071												(7.8)		%				1,928						2,041												(5.5)		%
Deferred			1,401						1,581												(11.4)		%				1,455						1,548												(6.0)		%
Ground			16,374						16,856												(2.9)		%				16,330						16,842												(3.0)		%
Total Average Daily Package Volume			19,685						20,508												(4.0)		%				19,713						20,431												(3.5)		%
Average Revenue Per Piece:
Next Day Air			$	21.73					$	18.53					$	3.20					17.3		%				$	21.27					$	18.47					$	2.80					15.2		%
Deferred			15.52						12.98						2.54						19.6		%				15.10						13.09						2.01						15.4		%
Ground			10.89						9.86						1.03						10.4		%				10.77						9.84						0.93						9.5		%
Total Average Revenue Per Piece			$	12.27					$	10.97					$	1.30					11.9		%				$	12.12					$	10.95					$	1.17					10.7		%
Operating Days in Period			64						64																		128						127
Revenue (in millions):
Next Day Air			$	2,656					$	2,456					$	200					8.1		%				$	5,250					$	4,787					$	463					9.7		%
Deferred			1,392						1,313						79						6.0		%				2,812						2,573						239						9.3		%
Ground			11,411						10,633						778						7.3		%				22,521						21,052						1,469						7.0		%
Total Revenue			$	15,459					$	14,402					$	1,057					7.3		%				$	30,583					$	28,412					$	2,171					7.6		%
Operating Expenses (in millions):
Operating Expenses			$	13,630					$	12,835					$	795					6.2		%				$	27,092					$	25,486					$	1,606					6.3		%
Transformation and Other Charges			(26)						(108)						82						(75.9)		%				(69)						(212)						143						(67.5)		%
Adjusted Operating Expense			$	13,604					$	12,727					$	877					6.9		%				$	27,023					$	25,274					$	1,749					6.9		%
Operating Profit (in millions) and Operating Margin:
Operating Profit			$	1,829					$	1,567					$	262					16.7		%				$	3,491					$	2,926					$	565					19.3		%
Adjusted Operating Profit			$	1,855					$	1,675					$	180					10.7		%				$	3,560					$	3,138					$	422					13.4		%
Operating Margin			11.8		%				10.9		%																11.4		%				10.3		%
Adjusted Operating Margin			12.0		%				11.6		%																11.6		%				11.0		%

Revenue

The change in revenue was due to the following factors:

			Volume						Rates / Product Mix						Fuel Surcharge						Total Revenue Change
Revenue Change Drivers:
Second quarter 2022 vs. 2021			(4.0)		%				4.7		%				6.6		%				7.3		%
Year to date 2022 vs. 2021			(2.8)		%				5.0		%				5.4		%				7.6		%

Year to date, revenue also benefited from one additional operating day in the first half of 2022.

Volume

Average daily volume decreased in the second quarter and year to date, driven by an 8.2% decline in residential shipments (down 7.8% year to date). The decline in residential shipments for the quarter was primarily attributable to the optimization of volume from certain large customers as we continued to execute within our Better Not Bigger strategic framework. These declines were slightly offset by growth from small- and medium-sized businesses ("SMBs") and increased business-to-business shipments.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Volume for the quarter and year to date was also impacted by rising inflation that affected consumer demand and by a shift in consumer spending towards services. Business-to-consumer shipments for both the quarter and year to date represented approximately 57.3% of average daily volume, compared to 59.9% and 60.0%, respectively, in 2021.

Business-to-business shipments increased 2.3% for the quarter (up 2.9% year to date), with growth primarily in our Ground commercial product. We experienced growth from all customer segments as business-to-business activity continued to return to pre-pandemic levels. Overall, we anticipate that average daily volume will improve slightly in the second half of 2022 compared to the first half of the year.

Within our Air products, average daily volume decreased for the quarter, driven by lower volumes from certain of our large customers. Year to date, these declines were slightly offset by increases in Next Day Air volume from SMBs and other customers.

Within our Ground products, average daily volume decreased for the quarter and year to date, as declines in SurePost and Ground residential outpaced the gains in Ground commercial. SurePost and Ground residential average daily volumes decreased 4.8% and 8.1%, respectively, for the quarter (both decreased 7.7% year to date), driven by a reduction in shipments from a number of large retail customers. Ground residential was also impacted by changes in consumer spending as discussed above. Ground commercial volume increased 4.1% and 4.4% for the quarter and year to date, respectively, with growth from all customer segments as business activity continued to increase.

Rates and Product Mix

Revenue per piece in both our Air and Ground products increased for both the second quarter and year to date, driven by increases in fuel surcharges, base rates, pricing actions and favorable changes in customer mix as we continued to optimize volume within our network. 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 for the quarter and year to date was slightly impacted by a reduction in average billable weight per piece.

For the remainder of 2022, we anticipate that revenue per piece growth will moderate relative to the first half of the year.

Fuel Surcharges

We apply a fuel surcharge on our domestic air and ground services that is adjusted weekly. Our air fuel surcharge is based on the U.S. Department of Energy's ("DOE") Gulf Coast spot price for a gallon of kerosene-type fuel, and our ground fuel surcharge is based on the DOE's On-Highway Diesel Fuel price.

Total domestic fuel surcharge revenue increased $949 million in the second quarter (up $1.6 billion year to date), driven by increases in both price per gallon and in fuel surcharge rates as part of our pricing strategy. We expect fuel surcharge revenue 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 for the quarter and year to date, partly due to the impact of one additional operating day in the year-to-date period. The cost of operating our integrated air and ground network increased $345 million (up $624 million year to date) and pickup and delivery costs increased $334 million (up $789 million year to date). Other indirect operating costs increased $176 million (up $234 million year to date) and package sorting costs increased $22 million (up $102 million year to date). These increases included the following:

• 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 primarily due to contractual rate increases for contributions to multiemployer benefit plans. We expect an additional contractual rate increase in the third quarter, in addition to higher year-over-year service cost for our company-sponsored pension plans.

• Higher compensation expense due to union contractual rate increases, cost of living and market-rate adjustments for our union workforce. These increases were partially offset by lower volumes, which led to a decrease in average daily union labor hours. We expect compensation expense will increase in the second half of the year as a result of the annual contractual rate increase, as well as additional cost of living and market-rate adjustments. Overall, we expect that compensation and benefits costs will increase by approximately $600 million year over year in the second half of 2022.

*•*Reallocation of Ground with Freight Pricing product expense following the second quarter 2021 divestiture of UPS Freight, which resulted in $26 million of increased segment operating expenses.

• Inflationary pressures that also contributed to cost increases in repairs and maintenance and facility operating costs.

Total cost per piece increased 10.6% for the second quarter (up 9.3% year to date). Excluding the impact of transformation and other charges, adjusted cost per piece increased 11.4% for the second quarter and 9.9% year to date, for the reasons described above. We anticipate that the cost per piece growth rate will moderate in the second half of the year and remain below revenue per piece growth as we expect our productivity initiatives to more than offset rising costs.

Operating Profit and Margin

As a result of the factors described above, operating profit increased $262 million in the second quarter (up $565 million year to date), with operating margin increasing 90 basis points to 11.8% (up 110 basis points to 11.4% year to date). Excluding the year-over-year impact of transformation and other charges, adjusted operating profit increased $180 million for the quarter (up $422 million year to date), with adjusted operating margin increasing 40 basis points to 12.0% (up 60 basis points to 11.6% year to date).

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International Package

			Three Months Ended June 30,												Change												Six Months Ended June 30,												Change
			2022						2021						$						%						2022						2021						$						%
Average Daily Package Volume (in thousands):
Domestic			1,703						1,967												(13.4)		%				1,754						1,988												(11.8)		%
Export			1,683						1,761												(4.4)		%				1,708						1,772												(3.6)		%
Total Average Daily Package Volume			3,386						3,728												(9.2)		%				3,462						3,760												(7.9)		%
Average Revenue Per Piece:
Domestic			$	7.61					$	7.44					$	0.17					2.3		%				$	7.48					$	7.38					$	0.10					1.4		%
Export			36.91						32.60						4.31						13.2		%				35.47						31.85						3.62						11.4		%
Total Average Revenue Per Piece			$	22.17					$	19.32					$	2.85					14.8		%				$	21.29					$	18.91					$	2.38					12.6		%
Operating Days in Period			64						64																		128						127
Revenue (in millions):
Domestic			$	829					$	936					$	(107)					(11.4)		%				$	1,680					$	1,864					$	(184)					(9.9)		%
Export			3,976						3,674						302						8.2		%				7,754						7,167						587						8.2		%
Cargo and Other			268						207						61						29.5		%				515						393						122						31.0		%
Total Revenue			$	5,073					$	4,817					$	256					5.3		%				$	9,949					$	9,424					$	525					5.6		%
Operating Expenses (in millions):
Operating Expenses			$	3,880					$	3,633					$	247					6.8		%				$	7,640					$	7,155					$	485					6.8		%
Transformation and Other Charges			(11)						(6)						(5)						83.3		%				(15)						(12)						(3)						25.0		%
Adjusted Operating Expenses			$	3,869					$	3,627					$	242					6.7		%				$	7,625					$	7,143					$	482					6.7		%
Operating Profit (in millions) and Operating Margin:
Operating Profit			$	1,193					$	1,184					$	9					0.8		%				$	2,309					$	2,269					$	40					1.8		%
Adjusted Operating Profit			$	1,204					$	1,190					$	14					1.2		%				$	2,324					$	2,281					$	43					1.9		%
Operating Margin			23.5		%				24.6		%																23.2		%				24.1		%
Adjusted Operating Margin			23.7		%				24.7		%																23.4		%				24.2		%
Currency Benefit / (Cost) – (in millions)*:
Revenue															$	(261)																							$	(404)
Operating Expenses															201																								316
Operating Profit															$	(60)																							$	(88)
* 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:
Second quarter 2022 vs. 2021			(9.2)		%				9.5		%				10.4		%				(5.4)		%				5.3		%
Year to date 2022 vs. 2021			(7.1)		%				8.6		%				8.4		%				(4.3)		%				5.6		%

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RESULTS OF OPERATIONS

Volume

Average daily volume decreased in the second quarter and year to date 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 22.8% for the quarter (down 21.7% year to date), driven by challenging global economic conditions, including rising inflation, geopolitical uncertainty and COVID-19 disruptions in Asia. Consumer e-commerce spending declined relative to the first half of 2021 when COVID-19 restrictions were in place in a number of countries, contributing to the year-over-year decline in residential volume. These factors also impacted business-to-business volume, which decreased 2.4% for the quarter (down 1.0% year to date). We expect overall volume growth rates to improve in the second half of the year, relative to the first half.

Export volume decreased for both the quarter and year to date periods, driven by declines in Europe and Asia. European volume declines were highest on intra-Europe trade lanes, driven by overall economic conditions. The intra-Europe declines were slightly offset by growth on the Europe to U.S. trade lane. The decline in Asia export volume for the quarter and year-to-date periods was primarily driven by COVID-19 disruptions, which resulted in fewer flights being operated and reduced business activity in certain areas within China.

We experienced a slight volume decline in our premium Express products for both the quarter and year to date, driven by declines in our Transborder Express Saver product. Volume for our non-premium export products decreased 4.3% in the quarter (down 3.3% year to date), primarily driven by declines in our Transborder Standard and Worldwide Expedited products. The decline in our Transborder products was driven by the factors discussed above, while the decline in our Worldwide Expedited product resulted from shifts in customer preferences.

Domestic volume also declined for the quarter and year to date, particularly in Canada and Germany, where the COVID-19 restrictions discussed above impacted year-over-year residential volume.

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 14.8% in the quarter (up 12.6% year to date), primarily due to fuel surcharges and pricing structure changes, including demand-related surcharges, as well as favorable shifts in customer and product mix. These increases were partially offset by unfavorable currency movements. Excluding the impact of currency, revenue per piece increased 20.9% in the quarter (up 17.3% year to date). We expect our overall revenue per piece to decrease slightly for the remainder of the year. Additionally, we expect year-over-year growth in demand-related surcharges to moderate during the second half of the year.

Export revenue per piece increased 13.2% in the quarter (up 11.4% year to date) for the reasons described above. Excluding the impact of currency, export revenue per piece increased 17.9% in the quarter (up 14.9% year to date).

Domestic revenue per piece remained relatively flat for the second quarter and year to date, as unfavorable currency movements offset growth driven by the factors described above. Excluding the impact of currency, domestic revenue per piece increased 13.6% (up 10.2% year to date).

Fuel Surcharges

The fuel surcharge we apply to international air services originating inside or outside the U.S. is largely indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel. The fuel surcharges for ground services originating outside the U.S. are indexed to fuel prices in the region or country where the shipment originates.

Total international fuel surcharge revenue increased by $451 million for the second quarter (up $710 million year to date), driven by increases in both price per gallon and in fuel surcharge rates as part of our pricing strategy. These increases were slightly offset by volume declines. We expect fuel surcharges to continue to remain elevated throughout the remainder of 2022.

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RESULTS OF OPERATIONS

Operating Expenses

Operating expenses, and operating expenses excluding the year-over-year impact of transformation and other charges, increased in both the second quarter and year to date. The costs of operating our integrated international air and ground network increased $444 million for the quarter (up $739 million year to date), primarily due to higher fuel prices and additional aircraft charters. We expect these costs to remain elevated throughout the remainder of 2022.

Pickup and delivery costs decreased $113 million in the quarter (down $151 million year to date), as inflationary pressures were more than offset by favorable currency movements and volume declines. Overall, other indirect and package sorting costs remained relatively flat for the quarter and year to date.

Substantially all of our operations in Russia, Belarus and Ukraine remain suspended, which actions have not had a material impact on us. We are continuing to monitor the evolving impact of Russia’s invasion of Ukraine on the global economy and evaluating our long-term strategy in the region.

Operating Profit and Margin

As a result of the factors described above, operating profit increased $9 million for the second quarter (up $40 million year to date), with operating margin decreasing 110 basis points to 23.5% (down 90 basis points to 23.2% year to date). Excluding the year-over-year impact of transformation and other charges, adjusted operating profit increased $14 million in the quarter (up $43 million year to date), while adjusted operating margin decreased 100 basis points to 23.7% (down 80 basis points to 23.4% year to date).

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Supply Chain Solutions

			Three Months Ended June 30,												Change												Six Months Ended June 30,												Change
			2022						2021						$						%						2022						2021						$						%
Revenue (in millions):
Forwarding			$	2,389					$	2,309					$	80					3.5		%				$	4,978					$	4,381					$	597					13.6		%
Logistics			1,290						1,162						128						11.0		%				2,541						2,266						275						12.1		%
Freight			—						297						(297)						(100.0)		%				—						1,064						(1,064)						(100.0)		%
Other			555						437						118						27.0		%				1,093						785						308						39.2		%
Total Revenue			$	4,234					$	4,205					$	29					0.7		%				$	8,612					$	8,496					$	116					1.4		%
Operating Expenses (in millions):
Operating Expenses			$	3,721					$	3,698					$	23					0.6		%				$	7,626					$	7,668					$	(42)					(0.5)		%
Transformation Strategy Costs			(4)						(2)						(2)						100.0		%				(12)						(10)						(2)						20.0		%
Asset Impairment Charges and Divestitures			—						101						(101)						(100.0)		%				—						35						(35)						(100.0)		%
Adjusted Operating Expenses:			$	3,717					$	3,797					$	(80)					(2.1)		%				$	7,614					$	7,693					$	(79)					(1.0)		%
Operating Profit (in millions) and Operating Margin:
Operating Profit			$	513					$	507					$	6					1.2		%				$	986					$	828					$	158					19.1		%
Adjusted Operating Profit			$	517					$	408					$	109					26.7		%				$	998					$	803					$	195					24.3		%
Operating Margin			12.1		%				12.1		%																11.4		%				9.7		%
Adjusted Operating Margin			12.2		%				9.7		%																11.6		%				9.5		%
Currency Benefit / (Cost) – (in millions)*:
Revenue															$	(62)																							$	(99)
Operating Expenses															77																								117
Operating Profit															$	15																							$	18
* Amount represents the change in currency translation compared to the prior year.

			Three Months Ended June 30,												Change												Six Months Ended June 30,												Change
			2022						2021						$						%						2022						2021						$						%
Transformation Strategy Costs (in millions):
Forwarding			$	2					$	1					$	1					100.0		%				$	8					$	6					$	2					33.3		%
Logistics			1						1						—						—		%				2						3						(1)						(33.3)		%
Freight			—						—						—						N/A						—						1						(1)						(100.0)		%
Other			1						—						1						N/A						2						—						2						N/A
Total Transformation Strategy Costs			$	4					$	2					$	2					100.0		%				$	12					$	10					$	2					20.0		%

Revenue

Total revenue for Supply Chain Solutions increased $29 million in the second quarter (up $116 million year to date) as strong revenue growth across a number of our businesses offset a $297 million decrease ($1.1 billion year-to-date decrease) attributable to the divestiture of UPS Freight in the second quarter of 2021.

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RESULTS OF OPERATIONS

Forwarding revenue increased for both the quarter and year to date. In our international airfreight business, both volume and revenue declined in the second quarter, driven by the impacts of COVID restrictions in Asia and lower market demand. Year-to-date volume also declined, but was more than offset by the impact of elevated market rates and demand-related surcharges in the first quarter. Ocean freight forwarding revenue increased for both the quarter and year to date as market rates remained elevated due to capacity constraints, while volume declined. We expect rates to moderate during the remainder of 2022 in both the air and ocean freight markets as capacity returns to the market. While volume in our truckload brokerage business declined in the quarter and year-to-date periods, revenue remained relatively flat for the quarter, and increased $140 million year to date, driven by revenue quality initiatives.

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

Revenue from the other businesses within Supply Chain Solutions increased for both the quarter and year to date, driven by services provided to the acquirer of UPS Freight under certain transition services agreements, and by the acquisition of Roadie, Inc. in the fourth quarter of 2021.

Operating Expenses

Total operating expenses in Supply Chain Solutions increased for the quarter but decreased year to date. This included a decrease of $168 million ($952 million year to date) due to the divestiture of UPS Freight. Operating expenses, excluding the year-over-year impact of transformation and other charges, decreased for both the quarter and year to date.

Forwarding operating expenses decreased $50 million for the quarter, driven by a reduction in purchased transportation expense resulting from lower volumes in truckload brokerage and international airfreight. The impact of volume declines in the quarter was partially offset by elevated ocean freight forwarding and truckload brokerage rates. Year to date, operating expenses increased $342 million, primarily due to higher purchased transportation expense in our international airfreight and ocean freight forwarding businesses.

Logistics operating expenses increased $109 million for the quarter (up $235 million year to date) resulting from increases in third-party transportation and compensation and benefits expenses as a result of business growth and inflationary pressures. We anticipate that inflation and labor market pressures may continue to drive higher costs throughout the remainder of the year.

Expenses in the other businesses within Supply Chain Solutions increased for the quarter and year to date, largely due to transportation and other costs incurred in providing transition services to the acquirer of UPS Freight and the acquisition of Roadie, Inc..

Operating Profit and Margin

As a result of the factors described above, operating profit increased $6 million for the quarter (up $158 million year to date), with operating margin remaining unchanged at 12.1% (up 170 basis points to 11.4% year to date). Excluding the year-over-year impact of transformation strategy costs, goodwill and asset impairments, and divestitures, adjusted operating profit increased $109 million for the quarter (up $195 million year to date), with adjusted operating margin increasing 250 basis points to 12.2% (up 210 basis points to 11.6% year to date).

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Consolidated Operating Expenses

			Three Months Ended June 30,												Change												Six Months Ended June 30,												Change
			2022						2021						$						%						2022						2021						$						%
Operating Expenses (in millions):
Compensation and benefits			$	11,358					$	11,327					$	31					0.3		%				$	22,974					$	22,810					$	164					0.7		%
Transformation and Other Charges			(23)						(55)						$	32					(58.2)		%				(56)						(131)						75						(57.3)		%
Adjusted Compensation and benefits			$	11,335					$	11,272					$	63					0.6		%				$	22,918					$	22,679					$	239					1.1		%
Repairs and maintenance			$	643					$	599					$	44					7.3		%				$	1,269					$	1,218					$	51					4.2		%
Depreciation and amortization			762						739						23						3.1		%				1,526						1,461						65						4.4		%
Purchased transportation			4,385						4,446						(61)						(1.4)		%				8,985						8,689						296						3.4		%
Fuel			1,697						915						782						85.5		%				2,917						1,722						1,195						69.4		%
Other occupancy			420						402						18						4.5		%				911						868						43						5.0		%
Other expenses			1,966						1,738						228						13.1		%				3,776						3,541						235						6.6		%
Total Other expenses			9,873						8,839						1,034						11.7		%				19,384						17,499						1,885						10.8		%
Transformation and Other Charges			(18)						(61)						43						(70.5)		%				(40)						(103)						63						(61.2)		%
Asset impairment charges and divestitures			—						101						(101)						(100.0)		%				—						35						(35)						(100.0)		%
Adjusted Total Other expenses			$	9,855					$	8,879					$	976					11.0		%				$	19,344					$	17,431					1,913						11.0		%
Total Operating Expenses			$	21,231					$	20,166					$	1,065					5.3		%				$	42,358					$	40,309					$	2,049					5.1		%
Adjusted Total Operating Expenses			$	21,190					$	20,151					$	1,039					5.2		%				$	42,262					$	40,110					$	2,152					5.4		%
Currency (Benefit) / Cost - (in millions)*															$	(278)																							$	(433)
* Amount represents the change in currency translation compared to the prior year.

			Three Months Ended June 30,												Change												Six Months Ended June 30,												Change
			2022						2021						$						%						2022						2021						$						%
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs:
Compensation			$	8					$	8					$	—					—		%				$	24					$	14					$	10					71.4		%
Benefits			15						47						(32)						(68.1)		%				32						117						(85)						(72.6)		%
Other occupancy			—						2						(2)						(100.0)		%				—						3						(3)						(100.0)		%
Other expenses			18						59						(41)						(69.5)		%				40						100						(60)						(60.0)		%
Total Transformation Strategy Costs			$	41					$	116					$	(75)					(64.7)		%				$	96					$	234					$	(138)					(59.0)		%
Asset impairment charges and divestitures:
Other expenses			$	—					$	(101)					$	101					(100.0)		%				$	—					$	(35)					$	35					(100.0)		%
Total Adjustments to Operating Expenses			$	41					$	15					$	26					173.3		%				$	96					$	199					$	(103)					(51.8)		%

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Compensation and Benefits

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

Total compensation costs and total compensation costs excluding transformation and other charges decreased $100 million in the quarter. For the year-to-date period, total compensation costs and total compensation costs excluding transformation and other charges decreased $69 million and $79 million, respectively. U.S. Domestic direct labor costs increased for both the quarter and year to date, driven by increases in wage rates and additional headcount in our line-haul network operations. These increases were partially offset by a reduction in labor hours due to decreases in average daily volume. Management compensation decreased for both the quarter and year to date, driven by decreases in commissions and incentive compensation awards, partially offset by increases in part-time management wages and headcount. The divestiture of UPS Freight reduced compensation costs by $93 million for the quarter ($328 million reduction year to date).

Benefits costs increased $131 million for the quarter (up $233 million year to date). Excluding the year-over-year impact of transformation and other charges, adjusted benefits costs increased $163 million for the quarter (up $318 million year to date). The primary drivers were:

• Health and welfare costs increased $59 million for the quarter (up $99 million year to date), due to increased contributions to multiemployer plans as a result of contractual rate increases. This was partly offset by the impact of divesting UPS Freight, which reduced our costs by $16 million for the quarter ($65 million reduction year to date).

• Pension and other postretirement benefits costs increased by $57 million for the quarter (up $20 million year to date), due to higher service costs for company-sponsored plans and increased contributions to multiemployer plans as a result of contractually-mandated contribution increases. The divestiture of UPS Freight drove a reduction in expense of $10 million for the quarter ($46 million reduction year to date).

• Vacation, excused absence, payroll taxes and other costs increased $22 million for the quarter (up $131 million year to date), primarily due to wage growth.

• Workers' compensation costs decreased $32 million for the quarter (up $3 million year to date), driven by changes in claims development trends relative to the prior year.

Repairs and Maintenance

Expense increased for both the quarter and year to date, due to an increase in planned building maintenance as well as increases in the cost of materials and supplies. We also incurred higher costs for aircraft engine and airframe maintenance in both the quarter and year-to-date periods due to the timing of scheduled maintenance events.

Depreciation and Amortization

Depreciation and amortization expense increased as a result of facility automation and expansion 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

Third-party transportation expense charged to us by air, ocean and ground carriers decreased for the second quarter but increased year to date. The changes were primarily driven by:

• Supply Chain Solutions expense decreased by $19 million for the quarter, resulting from volume declines in our international airfreight and truckload brokerage businesses that were largely offset by increases in ocean freight rates and growth in our logistics operations. Year to date, this expense increased $326 million, due to rate increases in international airfreight, ocean freight and truckload brokerage, slightly offset by the impact of volume reductions within these businesses.

• The divestiture of UPS Freight resulted in a $73 million decrease in expense for the quarter ($260 million decrease year to date) within Supply Chain Solutions, which was somewhat offset by the cost of transportation procured under transition service agreements with the acquirer of the business.

• U.S. Domestic expense decreased $41 million (down $42 million year to date), driven by a reduction in ground volume handled by third-party carriers and network optimization initiatives.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Fuel

The increase in fuel expense for both the quarter and year to date was primarily driven by higher prices for jet fuel, diesel and gasoline. Market prices and the manner in which we purchase fuel may influence the impact on our costs. The majority of our fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the indices are correlated, each index may respond differently to changes in underlying prices, which in turn can drive variability in our costs.

Other Occupancy

Other occupancy expense increased for both the quarter and year to date as a result of additional operating facilities coming into service, higher utilities costs and increases in rental rates.

Other Expenses

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

• An increase of $56 million in the quarter ($70 million increase year to date) in commissions paid for certain online shipments.

• An increase of $23 million in the quarter ($36 million increase year to date) in our allowance for credit losses, primarily resulting from a deterioration in economic forecasts relative to the prior year.

• Hosted software application fees and other technology costs increased $21 million in the quarter (up $52 million year to date), in support of ongoing investments in our digital transformation.

• Professional fees increased $20 million in the quarter (up $23 million year to date) as a result of an increase in services provided to various business units.

• The cost of goods provided under transition service agreements to the acquirer of UPS Freight increased $13 million in the quarter ($41 million year to date).

Other increases for the quarter and year to date included costs related to the lease and purchase of additional vehicles for our network and self-insured automobile liability expense driven by increases in the frequency and severity of claims. These increases were partially offset by favorable developments in certain legal and tax contingencies and a reduction in asset impairment charges.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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Other Income and (Expense)

The following table sets forth investment income and other and interest expense for the three and six months ended June 30, 2022 and 2021 (in millions):

			Three Months Ended June 30,												Change												Six Months Ended June 30,												Change
			2022						2021						$						%						2022						2021						$						%
Investment Income and Other			$	333					$	345					$	(12)					(3.5)		%				$	648					$	3,961					$	(3,313)					(83.6)		%
Defined Benefit Plan (Gains) and Losses			—						—						—						N/A						(33)						(3,290)						3,257						(99.0)		%
Adjusted Investment Income and Other			$	333					$	345					$	(12)					(3.5)		%				$	615					$	671					$	(56)					(8.3)		%
Interest Expense			(171)						(167)						(4)						2.4		%				(345)						(344)						(1)						0.3		%
Total Other Income and (Expense)			$	162					$	178					$	(16)					(9.0)		%				$	303					$	3,617					$	(3,314)					(91.6)		%
Adjusted Other Income and (Expense)			$	162					$	178					$	(16)					(9.0)		%				$	270					$	327					$	(57)					(17.4)		%

Investment Income and Other

The decrease in investment income and other for the quarter was primarily due to changes in the fair value of certain non-current investments and a decrease in other pension income. These losses were partially offset by foreign currency gains and higher yields on invested assets.

Year to date, investment income and other decreased $3.3 billion due to year-over-year changes in defined benefit plan adjustments. We recognized a $3.3 billion defined benefit plan mark-to-market gain in 2021 compared to a $33 million defined benefit plan curtailment gain in 2022. Excluding the impact of these defined benefit plan gains, adjusted investment income and other decreased $56 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 $4 million for the quarter (down $20 million year to date) due to the following:

• Lower expected returns on pension assets 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.

• Higher pension interest cost due to an increase in projected benefit obligations and changes in demographic assumptions, partially offset by the impact of lower discount rates for the quarter. Year to date, pension interest cost increased due to the impact of changes in demographic data.

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

Interest Expense

The increase in interest expense for both the quarter and year to date was primarily due to higher effective interest rates on floating rate debt and a reduction in capitalized interest, partially offset by lower average outstanding debt balances and a positive impact from currency exchange rates on foreign currency denominated debt.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Income Tax Expense

The following table sets forth our income tax expense and effective tax rate for the three and six months ended June 30, 2022 and 2021 (in millions):

			Three Months Ended June 30,												Change												Six Months Ended June 30,												Change
			2022						2021						$						%						2022						2021						$						%
Income Tax Expense			$	848					$	760					$	88					11.6		%				$	1,578					$	2,172					$	(594)					(27.3)		%
Income Tax Impact of:
Transformation Strategy Costs			10						28						(18)						(64.3)		%				22						56						(34)						(60.7)		%
Asset Impairment Charges and Divestitures			—						(24)						24						(100.0)		%				—						(8)						8						(100.0)		%
Defined Benefit Plan (Gains) and Losses			—						—						—						N/A						(9)						(788)						779						(98.9)		%
Adjusted Income Tax Expense			$	858					$	764					$	94					12.3		%				$	1,591					$	1,432					$	159					11.1		%
Effective Tax Rate			22.9		%				22.1		%																22.3		%				22.5		%
Adjusted Effective Tax Rate			22.9		%				22.1		%																22.2		%				21.9		%

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 June 30, 2022, we had $12.1 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):

			Six Months Ended June 30,
			2022						2021
Net income			$	5,511					$	7,468
Non-cash operating activities (a)			3,059						400
Pension and postretirement benefit plan contributions (company-sponsored plans)			(123)						(276)
Hedge margin receivables and payables			286						(25)
Income tax receivables and payables			14						258
Changes in working capital and other non-current assets and liabilities			(376)						631
Other operating activities			(78)						(2)
Net cash from operating activities			$	8,293					$	8,454

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(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 $161 million in the 2022 period, primarily due to:

• An unfavorable change in working capital due to the timing of payroll and other compensation-related items, as well as the settlement of duties and taxes on behalf of our customers.

• A reduction in income taxes payable due to the timing of tax payments relative to accruals.

• A decrease in contributions to our company-sponsored pension and U.S. postretirement medical benefit plans, driven by the timing of contributions to our U.S. postretirement medical plan.

• An increase in our net hedge margin collateral position 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 June 30, 2022 and 2021, suppliers sold them $599 and $412 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 $712 and $578 million for the six months ended June 30, 2022 and 2021, respectively.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

As of June 30, 2022, approximately $3.6 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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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):

			Six Months Ended June 30,
			2022						2021
Net cash used in investing activities			$	(1,499)					$	(734)
Capital Expenditures:
Buildings, facilities and plant equipment			$	(524)					$	(719)
Aircraft and parts			(406)						(438)
Vehicles			(129)						(261)
Information technology			(329)						(252)
Total Capital Expenditures			$	(1,388)					$	(1,670)
Capital Expenditures as a % of revenue			2.8		%				3.6		%
Other Investing Activities:
Proceeds from disposal of businesses, property, plant and equipment			$	9					$	863
Net change in finance receivables			$	7					$	16
Net (purchases), sales and maturities of marketable securities			$	(2)					$	73
Cash paid for business acquisitions, net of cash and cash equivalents acquired			$	(99)					$	(5)
Other investing activities			$	(26)					$	(11)

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 2022 period, primarily due to:

• Spending on buildings, facilities and plant equipment in our global small package business decreased as supply chain disruptions resulted in delays in 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 as supply chain disruptions impacted delivery schedules.

• Information technology expenditures increased due to additional deployments of technology equipment and capitalized software projects.

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.

The increase in cash paid for business acquisitions in 2022 was primarily due to the acquisition of Delivery Solutions, as well as the purchase of additional development areas for The UPS Store relative to the 2021 period. 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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

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):

			Six Months Ended June 30,
2022						2021
Net cash used in financing activities			$	(5,286)					$	(4,038)
Share Repurchases:
Cash paid to repurchase shares			(1,242)						—
Number of shares repurchased			6.7						—
Shares outstanding at period end			870						872
Dividends:
Dividends declared per share			$	3.04					$	2.04
Cash paid for dividends			$	(2,567)					$	(1,718)
Borrowings:
Net borrowings (repayments) of debt principal			$	(1,105)					$	(2,101)
Other Financing Activities:
Cash received for common stock issuances			$	136					$	141
Other financing activities			$	(508)					$	(360)
Capitalization:
Total debt outstanding at period end			20,576						22,591
Total shareowners’ equity at period end			16,310						10,822
Total capitalization			$	36,886					$	33,413

We repurchased 6.7 million shares of class B common stock for $1.2 billion under our stock repurchase program during the six months ended June 30, 2022. We did not repurchase any shares during the six months ended June 30, 2021. In July 2022, we announced that we anticipate our share repurchases will total approximately $3.0 billion for all of 2022. For additional information on our share repurchase activities, see note 12 to the unaudited, consolidated financial statements.

We increased our quarterly cash dividend to $1.52 per share in 2022, compared to $1.02 in 2021. 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 six months ended June 30, 2022. Repayments of debt in 2022 included our $600 million 2.350% senior notes, our $400 million floating rate senior notes and scheduled principal payments on our finance lease obligations. In the prior year-to-date period, issuances of debt consisted of borrowings under our commercial paper program. Repayments included $2.6 billion of fixed-rate senior notes, commercial paper and scheduled principal payments on our finance lease obligations.

We have $1.0 billion of fixed rate senior notes outstanding that mature in 2022. We currently expect to repay these notes 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 June 30, 2022, we had no outstanding balances under our commercial paper programs.

Cash flows from other financing activities were attributable to the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards. Cash outflows for this purpose were $512 and $359 million for the six months ended June 30, 2022 and 2021, respectively. The increase was driven by changes in required repurchase amounts.

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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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

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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