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

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

Overview

Building on the strong foundation created by our Better not Bigger strategic approach, we are moving to the next phase of our strategic framework. Within our Better and Bolder approach we are moving faster to enhance customer engagement by combining our physical network with digital capabilities, while at the same time increasing further efficiencies and remaining disciplined with capital allocation.

Within the Customer First component of our strategy, we continue to leverage technology to improve the customer experience. We are growing our Digital Access Program, which makes it faster and easier for small- and medium-sized businesses ("SMBs") to ship with us. Through our People Led strategic focus, we are working to improve our employee value proposition by increasing flexibility and simplifying our hiring process. Under our Innovation Driven strategic pillar, we continue to deploy automated solutions and smart package technology to drive further productivity improvements, enable additional network agility and better serve our customers.

To accelerate our growth in complex healthcare logistics, during the third quarter we entered into an agreement to acquire Bomi Group, which we expect to close during the fourth quarter. This acquisition will expand our healthcare footprint and bring additional expertise in cold chain logistics.

For the quarter, a number of external factors continued to contribute to a challenging operating environment, including global inflation and rising interest rates, wage and labor market pressures, volatile energy prices, geopolitical uncertainties, and foreign currency exchange rates relative to the U.S. Dollar. Additionally, areas within Asia continued to experience lockdowns and other restrictions that impacted manufacturing and supply chains. 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 factors will continue to impact us and result in continued uncertainty for the remainder of the year and into 2023. In the face of this uncertain macroeconomic environment, we continue to operate within our strategic framework, maximizing the agility of our global integrated network by making adjustments to match changes in volume levels and delivering excellent service to our customers.

Volume declined in our U.S. Domestic Package segment for both the quarter and year to date, driven by a decline in residential volume from certain large customers, reflecting the continued execution within our strategic framework. This decline was partially offset by growth from SMBs and volume from new customers. Revenue per piece growth more than offset the decline in volume for both the quarter and year to date. Broader economic factors, particularly labor market pressures and fuel prices, contributed to an increase in operating costs, however, successful execution of our strategy resulted in increased operating profit and operating margin in both the current year periods.

Within our International Package segment, volume also declined for both the quarter and year to date primarily due to the factors discussed above, although the rate of decline slowed in the third quarter relative to the first half of the year. Revenue increased for both current year periods as revenue per piece growth more than offset the volume declines. Operating profit was negatively impacted by the strengthening of the U.S. Dollar against European currencies, for both the quarter and year to date.

Within Supply Chain Solutions, revenue declined for the quarter as volumes and market rates decreased in our Forwarding businesses. Operating profit and operating margin increased for the quarter, primarily due to growth in Logistics and improved revenue quality in our truckload brokerage business. Year to date, revenue decreased primarily due to the divestiture of UPS Freight in the second quarter of 2021. Operating profit and operating margin increased, driven by improved results in our Forwarding and Logistics businesses.

Our strategic execution strengthened our balance sheet and continued to result in the generation of strong cash flows for the year, which we are reinvesting in the business and returning to shareowners through dividends and share repurchases.

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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 September 30,						Change				Nine Months Ended September 30,						Change
	2022			2021			$		%		2022			2021			$		%
Revenue (in millions)	$	24,161		$	23,184		$	977	4.2	%	$	73,305		$	69,516		$	3,789	5.5	%
Operating Expenses (in millions)	21,048			20,288			760		3.7	%	63,406			60,597			2,809		4.6	%
Operating Profit (in millions)	$	3,113		$	2,896		$	217	7.5	%	$	9,899		$	8,919		$	980	11.0	%
Operating Margin	12.9		%	12.5		%					13.5		%	12.8		%
Net Income (in millions)	$	2,584		$	2,329		$	255	10.9	%	$	8,095		$	9,797		$	(1,702)	(17.4)	%
Basic Earnings Per Share	$	2.97		$	2.66		$	0.31	11.7	%	$	9.27		$	11.21		$	(1.94)	(17.3)	%
Diluted Earnings Per Share	$	2.96		$	2.65		$	0.31	11.7	%	$	9.24		$	11.16		$	(1.92)	(17.2)	%

Operating Days	64			64							192			191
Average Daily Package Volume (in thousands)	22,900			23,381					(2.1)	%	23,083			23,920					(3.5)	%
Average Revenue Per Piece	$	13.58		$	12.50		$	1.08	8.6	%	$	13.52		$	12.29		$	1.23	10.0	%

Revenue increased in both our U.S. Domestic Package and International Package segments in both the three- and nine-month periods, with strong revenue per piece growth in our global small package operations.
Average daily volume in our global small package operations decreased for both the quarter and year to date, primarily due to business-to-consumer volume declines.
Operating expenses increased for both the quarter and year to date, driven primarily by higher compensation and benefits and fuel prices.
Operating profit and operating margin increased in our U.S Domestic Package segment and Supply Chain Solutions businesses for both the quarter and year to date. Operating profit and operating margin decreased slightly in our International Package segment for both periods.
Net income was $2.6 billion and diluted earnings per share was $2.96 for the third quarter ($8.1 billion and $9.24 per share year to date). Adjusted diluted earnings per share was $2.99 for the third quarter ($9.33 per share year to date) after adjusting for the after-tax impacts of:

◦transformation strategy costs of $27 million, or $0.03 per diluted share, for the third quarter ($101 million and $0.12 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 the 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 increases were partially offset by lower revenue from volume declines. Expenses increased for the quarter and year to date due to higher compensation and benefits costs and higher fuel prices, slightly offset by productivity improvements.

In the International Package segment, revenue increased for the quarter and year to date, driven by higher fuel revenue, revenue quality actions and favorable shifts in customer and product mix. This increase was partially offset by negative impacts from lower volumes and unfavorable currency movements. Expense increases were primarily driven by higher fuel prices, somewhat offset by favorable currency impacts.

Supply Chain Solutions revenue decreased for the quarter and year to date. For the quarter, volume declines in Forwarding were partially offset by growth in our Logistics businesses, driven by healthcare. Year to date, revenue increases in Forwarding and Logistics were offset by a reduction in revenue due to the second quarter 2021 divestiture of UPS Freight. Expenses decreased for the quarter and year to date, driven by lower transportation costs in Forwarding and a reduction in operating expenses due to the divestiture of UPS Freight, partially offset by higher operating costs in Logistics.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Supplemental Information - Items Affecting Comparability

We supplement the reporting of our financial information determined under generally accepted accounting principles 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 September 30,				Nine Months Ended September 30,
Non-GAAP Adjustments	2022		2021		2022		2021
Operating Expenses:
Transformation Strategy Costs	$	36	$	74	$	132	$	308
Asset Impairment and Divestiture Charges	—		—		—		(35)
Total Adjustments to Operating Expenses	$	36	$	74	$	132	$	273

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	$	36	$	74	$	99	$	(3,017)

Income Tax (Benefit) Expense:
Transformation Strategy Costs	$	(9)	$	(20)	$	(31)	$	(76)
Asset Impairment and Divestiture Charges	—		—		—		8
Defined Benefit Plan (Gains) and Losses	—		—		9		788
Total Adjustments to Income Tax (Benefit) Expense	$	(9)	$	(20)	$	(22)	$	720

Total Adjustments to Net Income	$	27	$	54	$	77	$	(2,297)

Transformation Charges, and Goodwill, Asset Impairment and Divestiture Charges

We supplement the presentation of our operating profit, operating margin, income before income taxes, net income and earnings per share with non-GAAP measures that exclude the impact of charges related to transformation activities, and goodwill, asset impairment and divestiture charges. 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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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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).

For additional information, refer to note 7 to the unaudited, consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Results of Operations - Segment Review

The results and discussions that follow are reflective of how management monitors and evaluates the performance of our segments as defined in note 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 third quarter or year-to-date periods.

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

Testing goodwill and other indefinite-lived intangible assets for impairment requires that we make a number of significant assumptions, including assumptions related to future revenues, costs, capital expenditures, working capital and our cost of capital. We also are required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment. Changes in any of these assumptions could significantly impact the fair value of any one of our reporting units. The projections that we use in our valuation model are updated annually and will change over time based on the historical performance and changing business conditions for each of our reporting units.

Our annual impairment testing of goodwill indicated that the fair value of our recently-acquired Roadie reporting unit remained greater than its carrying value, although this excess was less than 10 percent. The extent to which fair value exceeds carrying value is impacted by changes in the cost of capital, and our ability to successfully integrate and grow the acquired business. The carrying value of goodwill associated with our Roadie reporting unit is $241 million.

There were no events or changes in circumstances during the third quarter of 2022 that would indicate the carrying amount of our goodwill or indefinite-lived intangible assets may be impaired as of the date of this report. However, future actual results, transactions or other events, or changes in estimates or assumptions, whether due to unexpected impacts on our business, our transformation activities, or the continuing evaluation of our business portfolio, could result in an impairment charge to one of our reporting units or to our indefinite-lived intangible assets in a future period.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

U.S. Domestic Package


	Three Months Ended September 30,								Change						Nine Months Ended September 30,								Change
2022				2021				$			%			2022				2021				$			%
Average Daily Package Volume (in thousands):
Next Day Air	1,932				1,949							(0.9)	%		1,929				2,010							(4.0)	%
Deferred	1,341				1,501							(10.7)	%		1,417				1,532							(7.5)	%
Ground	16,266				16,385							(0.7)	%		16,309				16,689							(2.3)	%
Total Average Daily Package Volume	19,539				19,835							(1.5)	%		19,655				20,231							(2.8)	%
Average Revenue Per Piece:
Next Day Air	$	21.62			$	19.36			$	2.26		11.7	%		$	21.39			$	18.76			$	2.63		14.0	%
Deferred	15.28				13.57				1.71			12.6	%		15.15				13.25				1.90			14.3	%
Ground	10.94				10.00				0.94			9.4	%		10.83				9.89				0.94			9.5	%
Total Average Revenue Per Piece	$	12.29			$	11.19			$	1.10		9.8	%		$	12.18			$	11.03			$	1.15		10.4	%
Operating Days in Period	64				64										192				191
Revenue (in millions):
Next Day Air	$	2,673			$	2,415			$	258		10.7	%		$	7,923			$	7,202			$	721		10.0	%
Deferred	1,311				1,304				7			0.5	%		4,123				3,877				246			6.3	%
Ground	11,390				10,489				901			8.6	%		33,911				31,541				2,370			7.5	%
Total Revenue	$	15,374			$	14,208			$	1,166		8.2	%		$	45,957			$	42,620			$	3,337		7.8	%
Operating Expenses (in millions):
Operating Expenses	$	13,708			$	12,801			$	907		7.1	%		$	40,800			$	38,287			$	2,513		6.6	%
Transformation and Other Charges	(20)				(7)				(13)			185.7	%		(89)				(219)				130			(59.4)	%
Adjusted Operating Expense	$	13,688			$	12,794			$	894		7.0	%		$	40,711			$	38,068			$	2,643		6.9	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	1,666			$	1,407			$	259		18.4	%		$	5,157			$	4,333			$	824		19.0	%
Adjusted Operating Profit	$	1,686			$	1,414			$	272		19.2	%		$	5,246			$	4,552			$	694		15.2	%
Operating Margin	10.8		%		9.9		%								11.2		%		10.2		%
Adjusted Operating Margin	11.0		%		10.0		%								11.4		%		10.7		%

Revenue

The change in revenue was due to the following factors:


	Volume		Rates / Product Mix		Fuel Surcharge		Total Revenue Change
Revenue Change Drivers:
Third quarter 2022 vs. 2021	(1.4)	%	3.8	%	5.8	%	8.2	%
Year to date 2022 vs. 2021	(2.3)	%	4.6	%	5.5	%	7.8	%

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

Volume

Average daily volume decreased in the third quarter and year to date, driven by a 2.2% decline in residential shipments (down 6.0% year to date). The decline in residential shipments was primarily attributable to terms of contracts with certain large customers, reflecting the continued execution within our strategic framework. This decline was partially offset by growth from SMBs and, during the third quarter, volume from new customers. Business-to-consumer shipments for the quarter and year to date represented approximately 57.2% and 57.3% of average daily volume, respectively, compared to 57.6% and 59.2%, respectively, in 2021.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Business-to-business shipments decreased 0.5% for the quarter but increased 1.8% year to date. For the quarter, the decline was driven by lower manufacturing volume, partially offset by an increase in retail returns. Year to date, growth was driven by our Ground commercial product as discussed below. Overall, we anticipate average daily volume growth will be negative in the fourth quarter.

Within our Air products, average daily volume decreased for the quarter and year to date due to terms of contracts with certain large customers reflecting the continued execution within our strategic framework, as well as changes in customer behavior.

Within our Ground products, average daily volume decreased for both the quarter and year to date, as declines in Ground residential volume outpaced gains in Ground commercial volume. Ground residential average daily volume decreased 4.3% for the quarter (down 6.6% year to date), driven by contract terms with certain large customers discussed above. During the third quarter, the decline in Ground residential volume was partially offset by an increase in SurePost shipments from both new and existing large retail customers. Year to date, Ground residential and SurePost average daily volumes were negatively impacted by a continuing shift in consumer spending back towards services and in-store shopping. Ground commercial volume increased 0.3% and 2.4% for the quarter and year to date, respectively, driven by heightened returns volume in the quarter and growth from SMBs in the year-to-date period.

Rates and Product Mix

Revenue per piece in our Air and Ground products increased for both the third quarter and year to date, driven by base rate increases and other pricing actions, and favorable changes in customer mix. A shift in product mix slightly offset these increases for the third quarter. Rates for Air and Ground products increased an average of 5.9% in December 2021. In our Next Day Air and Deferred products, revenue per piece growth for the quarter and year to date was slightly negatively impacted by a reduction in average billable weight per piece.

We anticipate continued revenue per piece growth in the fourth quarter of 2022, but expect that it will moderate compared to the first nine months of the year.

Fuel Surcharges

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

Total domestic fuel surcharge revenue increased $823 million in the third quarter (up $2.4 billion year to date), driven by increases in price per gallon and increases in fuel surcharge rates as part of our pricing strategy. We expect fuel surcharge revenue to stabilize at current levels in the fourth quarter.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Operating Expenses

Operating expenses, and operating expenses excluding the year-over-year impact of transformation and other charges, increased for both the quarter and year to date. The increase for the year-to-date period includes the impact of one additional operating day. The cost of operating our integrated air and ground network increased $222 million (up $846 million year to date) and pickup and delivery costs increased $459 million (up $1.2 billion year to date). Other indirect operating costs increased $167 million (up $401 million year to date) and package sorting costs increased $46 million (up $148 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 stabilize in the fourth quarter.
Increases in employee benefits expense for our union workforce, driven by contractual rate increases for contributions to multiemployer benefit plans and higher year-over-year service cost for our company-sponsored pension plans.
Higher compensation expense due to contractual rate increases, and cost of living and market-rate adjustments for our union workforce, which we expect to persist in the fourth quarter. Management payroll increased due to salary growth and higher incentive-based compensation accruals. These increases were partially offset by lower expenses resulting from a decrease in average daily union labor hours.
Inflationary pressures that contributed to cost increases in repairs and maintenance and facility operating costs.

These increases were partially offset by declines in purchased transportation costs as we execute within our strategy.

Total cost per piece increased 8.7% for the third quarter (up 9.1% year to date). Excluding the impact of transformation and other charges, adjusted cost per piece increased 8.6% for the third quarter and 9.5% year to date, for the reasons described above. We anticipate that the cost per piece growth rate will moderate in the fourth quarter and remain below the revenue per piece growth rate as we expect our productivity initiatives to continue to help offset rising compensation and benefit costs due to the annual contractual rate increases.

Operating Profit and Margin

As a result of the factors described above, operating profit increased $259 million in the third quarter (up $824 million year to date), with operating margin increasing 90 basis points to 10.8% (up 100 basis points to 11.2% year to date). Excluding the year-over-year impact of transformation and other charges, adjusted operating profit increased $272 million for the quarter (up $694 million year to date), with adjusted operating margin increasing 100 basis points to 11.0% (up 70 basis points to 11.4% year to date).

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

International Package


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2022			2021			$		%		2022			2021			$		%
Average Daily Package Volume (in thousands):
Domestic	1,677			1,851					(9.4)	%	1,729			1,943					(11.0)	%
Export	1,684			1,695					(0.6)	%	1,699			1,746					(2.7)	%
Total Average Daily Package Volume	3,361			3,546					(5.2)	%	3,428			3,689					(7.1)	%
Average Revenue Per Piece:
Domestic	$	7.31		$	7.19		$	0.12	1.7	%	$	7.43		$	7.32		$	0.11	1.5	%
Export	34.77			33.56			1.21		3.6	%	35.26			32.41			2.85		8.8	%
Total Average Revenue Per Piece	$	21.07		$	19.80		$	1.27	6.4	%	$	21.22		$	19.19		$	2.03	10.6	%
Operating Days in Period	64			64							192			191
Revenue (in millions):
Domestic	$	785		$	852		$	(67)	(7.9)	%	$	2,465		$	2,716		$	(251)	(9.2)	%
Export	3,747			3,641			106		2.9	%	11,501			10,808			693		6.4	%
Cargo and Other	267			227			40		17.6	%	782			620			162		26.1	%
Total Revenue	$	4,799		$	4,720		$	79	1.7	%	$	14,748		$	14,144		$	604	4.3	%
Operating Expenses (in millions):
Operating Expenses	$	3,802		$	3,669		$	133	3.6	%	$	11,442		$	10,824		$	618	5.7	%
Transformation and Other Charges	(7)			(57)			50		(87.7)	%	(22)			(69)			47		(68.1)	%
Adjusted Operating Expenses	$	3,795		$	3,612		$	183	5.1	%	$	11,420		$	10,755		$	665	6.2	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	997		$	1,051		$	(54)	(5.1)	%	$	3,306		$	3,320		$	(14)	(0.4)	%
Adjusted Operating Profit	$	1,004		$	1,108		$	(104)	(9.4)	%	$	3,328		$	3,389		$	(61)	(1.8)	%
Operating Margin	20.8		%	22.3		%					22.4		%	23.5		%
Adjusted Operating Margin	20.9		%	23.5		%					22.6		%	24.0		%
Currency Benefit / (Cost) – (in millions)*:
Revenue							$	(335)									$	(739)
Operating Expenses							253										569
Operating Profit							$	(82)									$	(170)
* 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:
Third quarter 2022 vs. 2021	(5.7)	%	6.8	%	7.7	%	(7.1)	%	1.7	%
Year to date 2022 vs. 2021	(6.7)	%	8.1	%	8.1	%	(5.2)	%	4.3	%

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

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Volume

Average daily volume decreased for the third quarter and year to date for both domestic and export products. Volume from both large customers and SMBs declined, primarily in the retail and technology sectors. Business-to-consumer volume decreased 10.6% for the quarter (down 18.4% year to date), as challenging global economic conditions, including rising inflation, high energy costs, lockdowns in parts of Asia and geopolitical uncertainty, impacted consumer demand. These factors also impacted business-to-business volume, which decreased 2.9% for the quarter (down 1.7% year to date). We expect year-over-year average daily volume to be lower in the fourth quarter, although the rate of decline should moderate.

For the quarter, Export volume declines were driven by reductions in U.S. exports and the Asia to U.S. trade lane. U.S. exports were negatively impacted by the strength of the U.S. Dollar and lower volumes from large customers. Declines on the Asia to U.S. trade lane were driven by disruptions resulting from lockdowns in China and lower customer demand. These declines were partly offset by growth in the intra-Europe trade lanes as supply chain disruptions eased. Year to date, declines were primarily from the intra-Europe and the Asia to U.S. trade lanes. The intra-Europe declines were driven by overall economic conditions, while the decline in the Asia to U.S. trade lane was primarily driven by the factors impacting the quarterly period.

Our premium Express products experienced a slight volume decline for both the quarter and year to date, primarily driven by lower volume from certain large customers in our Worldwide Express Saver product due to the economic factors discussed above.

Volume for our non-premium export products increased 1.8% for the quarter, driven by growth in our Transborder Standard product within Europe for the reasons discussed above. This growth was slightly offset for the quarter by declines in our Worldwide products, which also drove a 1.7% decline in volume year to date. These declines were driven by an overall reduction in consumer demand.

Domestic volume also declined for the quarter and year to date, with third-quarter declines primarily in Europe as a result of the economic conditions discussed above. Year to date, both Europe and Canada experienced declines in domestic volume, driven by lower residential deliveries as a result of reduced demand.

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, although we expect these to decrease year over year in the fourth quarter.

Total revenue per piece increased 6.4% for the quarter (up 10.6% year to date), primarily due to fuel surcharges and favorable shifts in customer and product mix. These increases were somewhat offset by unfavorable currency movements. Excluding the impact of currency, revenue per piece increased 14.1% for the quarter (up 16.3% year to date). We expect overall revenue per piece to decrease slightly for the fourth quarter.

Export revenue per piece increased 3.6% for the quarter (up 8.8% year to date) for the reasons described above. Excluding the impact of currency, export revenue per piece increased 9.4% for the quarter (up 13.1% year to date).

Domestic revenue per piece remained relatively flat for the quarter and year to date, as unfavorable currency movements offset growth from the factors described above. Excluding the impact of currency, domestic revenue per piece increased 16.7% for the quarter (up 12.2% 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 $298 million for the third quarter (up $1.0 billion year to date), driven primarily by increases in price per gallon as well as changes in fuel surcharge rates as part of our pricing strategy. These increases were slightly offset by unfavorable currency movements and volume declines. We expect fuel surcharges will stabilize at current levels during the fourth quarter.

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Operating Expenses

Operating expenses, and operating expenses excluding the year-over-year impact of transformation and other charges, increased in both the third quarter and year to date. The increase for the year-to-date period includes the impact of one additional operating day. The costs of operating our integrated international air and ground network increased $343 million for the quarter (up $1.1 billion year to date), primarily due to higher fuel prices, which we expect to persist during the remainder of 2022.

Pickup and delivery costs decreased $86 million for the quarter (down $237 million year to date), other indirect costs decreased $67 million for the quarter (down $171 million year to date) and package sorting costs decreased slightly for the quarter and year to date as inflationary pressures were more than offset by favorable currency movements and volume declines. We expect inflationary pressures will persist for the remainder of the year.

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 decreased $54 million for the third quarter (down $14 million year to date), with operating margin decreasing 150 basis points to 20.8% (down 110 basis points to 22.4% year to date). Excluding the year-over-year impact of transformation and other charges, adjusted operating profit decreased $104 million in the quarter (down $61 million year to date), while adjusted operating margin decreased 260 basis points to 20.9% (down 140 basis points to 22.6% year to date).

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Supply Chain Solutions


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2022			2021			$		%		2022			2021			$		%
Revenue (in millions):
Forwarding	$	2,162		$	2,625		$	(463)	(17.6)	%	$	7,140		$	7,006		$	134	1.9	%
Logistics	1,302			1,158			144		12.4	%	3,843			3,424			419		12.2	%
Freight	—			—			—		—	%	—			1,064			(1,064)		(100.0)	%
Other	524			473			51		10.8	%	1,617			1,258			359		28.5	%
Total Revenue	$	3,988		$	4,256		$	(268)	(6.3)	%	$	12,600		$	12,752		$	(152)	(1.2)	%
Operating Expenses (in millions):
Operating Expenses	$	3,538		$	3,818		$	(280)	(7.3)	%	$	11,164		$	11,486		$	(322)	(2.8)	%
Transformation Strategy Costs	(9)			(10)			1		(10.0)	%	(21)			(20)			(1)		5.0	%
Asset Impairment and Divestiture Charges	—			—			—		—	%	—			35			(35)		(100.0)	%
Adjusted Operating Expenses:	$	3,529		$	3,808		$	(279)	(7.3)	%	$	11,143		$	11,501		$	(358)	(3.1)	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	450		$	438		$	12	2.7	%	$	1,436		$	1,266		$	170	13.4	%
Adjusted Operating Profit	$	459		$	448		$	11	2.5	%	$	1,457		$	1,251		$	206	16.5	%
Operating Margin	11.3		%	10.3		%					11.4		%	9.9		%
Adjusted Operating Margin	11.5		%	10.5		%					11.6		%	9.8		%
Currency Benefit / (Cost) – (in millions)*:
Revenue							$	(92)									$	(191)
Operating Expenses							99										216
Operating Profit							$	7									$	25
* Amount represents the change in currency translation compared to the prior year.


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2022		2021		$		%		2022		2021		$		%
Transformation Strategy Costs (in millions):
Forwarding	$	1	$	—	$	1	N/A		$	9	6		$	3	50.0	%
Logistics	7		—		7		N/A		9		3		6		200.0	%
Freight	—		—		—		N/A		—		1		(1)		(100.0)	%
Other	1		10		(9)		(90.0)	%	3		10		(7)		(70.0)	%

Total Transformation Strategy Costs	$	9	$	10	$	(1)	(10.0)	%	$	21	$	20	$	1	5.0	%

Revenue

Total revenue for Supply Chain Solutions decreased $268 million in the third quarter (down $152 million year to date) as lower revenue in forwarding and truckload brokerage more than offset growth across many of our other businesses. Year to date, growth in Supply Chain Solutions was offset by the impact of divesting UPS Freight in the second quarter of 2021.

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Forwarding revenue decreased for the third quarter but increased year to date:

International airfreight volume and revenue declined in the third quarter, driven by the impact of lockdowns in Asia, lower customer demand and the market rates we charge for services. Year-to-date volume also declined but was fully offset by the impact of elevated market rates and demand-related surcharges in the first quarter.
Ocean freight forwarding revenue decreased in the third quarter but increased year to date. For the quarter, the declines were driven by lower volume, particularly on the Asia to U.S. lane, and lower market rates. Year to date, these declines were fully offset by elevated market rates driven by market capacity constraints in the first half of 2022.
Revenue in our truckload brokerage business declined for the quarter and remained relatively flat year to date. The decline in the third quarter was driven by lower volumes and a reduction in market rates. Year to date, volume declines were largely offset by increases in rates as we executed within our strategic framework.

We expect that the market rates we charge for services within all our Forwarding businesses will remain lower during the fourth quarter.

Within Logistics, our healthcare operations experienced strong revenue growth for both 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, a favorable shift in product characteristics and, during the third quarter, volume from new customers. These increases were slightly offset by volume declines in both periods. Our other distribution operations experienced revenue growth for both the quarter and year to date, driven by customer expansion, revenue quality initiatives and strong demand for warehousing services. We expect growth to continue within our Logistics businesses in the fourth quarter.

Revenue from the other businesses within Supply Chain Solutions increased for both the quarter and year to date, driven by rate increases and additional volume from service contracts with the U.S. Postal Service, and from the acquisition of Roadie in the fourth quarter of 2021. Additionally, revenue for services provided to the acquirer of UPS Freight under certain transition services agreements increased for the year-to-date period.

Operating Expenses

Total operating expenses in Supply Chain Solutions, and operating expenses excluding the year-over-year impact of transformation and other charges, decreased for the quarter and year to date. This included a decrease of $952 million in the year-to-date period due to the divestiture of UPS Freight in the second quarter of 2021.

Forwarding operating expenses decreased $462 million for the quarter (down $120 million year to date). Declines in the third quarter were driven by a reduction in purchased transportation expense resulting from lower volumes and market rates in truckload brokerage, international airfreight and ocean freight forwarding. Year to date, these decreases were partially offset by elevated rates in all our forwarding businesses during the first of half of 2022.

Logistics operating expenses increased $124 million for the quarter (up $359 million year to date) primarily resulting from increases in compensation and benefits expenses and third-party transportation costs as a result of business growth and inflationary pressures.

Expenses in the other businesses within Supply Chain Solutions increased for the quarter and year to date, largely driven by increased volume from the U.S. Postal Service and the acquisition of Roadie. Transportation and other costs incurred in providing transition services to the acquirer of UPS Freight increased year to date.

Operating Profit and Margin

As a result of the factors described above, operating profit increased $12 million for the quarter (up $170 million year to date), with operating margin increasing 100 basis points to 11.3% (up 150 basis points to 11.4% year to date). Excluding the year-over-year impact of transformation and other charges, adjusted operating profit increased $11 million for the quarter (up $206 million year to date), with adjusted operating margin increasing 100 basis points to 11.5% (up 180 basis points to 11.6% year to date).

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Consolidated Operating Expenses


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2022		2021		$		%		2022		2021		$		%
Operating Expenses (in millions):
Compensation and benefits	$	11,506	$	11,148	$	358	3.2	%	$	34,480	$	33,958	$	522	1.5	%
Transformation and Other Charges	(15)		(33)		18		(54.5)	%	(71)		(164)		93		(56.7)	%
Adjusted Compensation and benefits	$	11,491	$	11,115	$	376	3.4	%	$	34,409	$	33,794	$	615	1.8	%

Repairs and maintenance	$	639	$	619	$	20	3.2	%	$	1,908	$	1,837	$	71	3.9	%
Depreciation and amortization	774		738		36		4.9	%	2,300		2,199		101		4.6	%
Purchased transportation	4,173		4,638		(465)		(10.0)	%	13,158		13,327		(169)		(1.3)	%
Fuel	1,530		950		580		61.1	%	4,447		2,672		1,775		66.4	%
Other occupancy	427		384		43		11.2	%	1,338		1,252		86		6.9	%
Other expenses	1,999		1,811		188		10.4	%	5,775		5,352		423		7.9	%
Total Other expenses	9,542		9,140		402		4.4	%	28,926		26,639		2,287		8.6	%
Transformation and Other Charges	(21)		(41)		20		(48.8)	%	(61)		(144)		83		(57.6)	%
Asset Impairment and Divestiture Charges	—		—		—		N/A		—		35		(35)		(100.0)	%
Adjusted Total Other expenses	$	9,521	$	9,099	$	422	4.6	%	$	28,865	$	26,530	2,335		8.8	%

Total Operating Expenses	$	21,048	$	20,288	$	760	3.7	%	$	63,406	$	60,597	$	2,809	4.6	%
Adjusted Total Operating Expenses	$	21,012	$	20,214	$	798	3.9	%	$	63,274	$	60,324	$	2,950	4.9	%

Currency (Benefit) / Cost - (in millions)*					$	(352)							$	(785)
* Amount represents the change in currency translation compared to the prior year.


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2022		2021		$		%		2022		2021		$		%
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs:
Compensation	$	7	$	9	$	(2)	(22.2)	%	$	31	$	23	$	8	34.8	%
Benefits	8		24		(16)		(66.7)	%	40		141		(101)		(71.6)	%

Other occupancy	—		—		—		N/A		—		3		(3)		(100.0)	%
Other expenses	21		41		(20)		(48.8)	%	61		141		(80)		(56.7)	%
Total Transformation Strategy Costs	$	36	$	74	$	(38)	(51.4)	%	$	132	$	308	$	(176)	(57.1)	%
Asset Impairment and Divestiture Charges:
Other gains	$	—	$	—	$	—	N/A		$	—	$	(35)	$	35	(100.0)	%
Total Adjustments to Operating Expenses	$	36	$	74	$	(38)	(51.4)	%	$	132	$	273	$	(141)	(51.6)	%

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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 for the quarter and year to date.

Total compensation costs, and total compensation costs excluding transformation and other charges, increased $177 million and $179 million, respectively, for the quarter. For the year-to-date period, total compensation costs and total compensation costs excluding transformation and other charges, increased $107 million and $99 million, respectively. U.S. Domestic direct labor costs increased for both the quarter and year to date, driven by increases in wage rates and cost of living adjustments for our union workforce, as well as additional headcount in our line-haul operations. These increases were partially offset by a reduction in labor hours due to decreases in volume and productivity improvements. Management compensation increased for both the quarter and year to date due to increases in part-time management wages and headcount, and higher incentive compensation, partially offset by a reduction in commissions. The divestiture of UPS Freight in the second quarter of 2021 reduced compensation costs for the year-to-date period by $328 million.

Benefits costs increased $181 million for the quarter (up $415 million year to date). Excluding the year-over-year impact of transformation and other charges, adjusted benefits costs increased $197 million for the quarter (up $516 million year to date). The primary drivers were:

Health and welfare costs increased $38 million for the quarter (up $137 million year to date), driven by increased contributions to multiemployer plans as a result of contractual rate increases, partially offset by a reduction in expense for company-sponsored plans. For the year-to-date period, the divestiture of UPS Freight reduced expense by $65 million.
Pension and other postretirement benefits costs increased by $85 million for the quarter (up $105 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. Year to date, the divestiture of UPS Freight reduced expense by $46 million.
Vacation, excused absence, payroll taxes and other costs increased $63 million for the quarter (up $194 million year to date), primarily due to wage growth.

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 acquired intangible assets.

Purchased Transportation

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

Supply Chain Solutions expense decreased by $387 million for the quarter, resulting from volume declines and lower market rates paid for services in our international air and ocean freight and truckload brokerage businesses. This was partially offset by increases in our logistics operations, including healthcare, driven by business growth. Year to date, Supply Chain Solutions expense decreased by $62 million. The divestiture of UPS Freight resulted in a decrease of $260 million that was partially offset by an increase of $198 million in our forwarding businesses due to elevated market rates in the first half of the year.
International Package expense decreased by $51 million for the third quarter (down $39 million year to date), as fuel surcharge increases were more than offset by favorable currency movements and lower volumes.
U.S. Domestic expense decreased $27 million for the third quarter (down $68 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 periods was primarily driven by higher prices for jet fuel, diesel and gasoline. Market prices and the manner in which we purchase fuel influence our costs. The majority of our fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the indices are correlated, each index may respond differently to changes in underlying prices, which in turn can drive variability in our costs.

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 $45 million for the quarter ($115 million increase year to date) in commissions paid for certain online shipments.
An increase of $38 million for the quarter ($61 million increase year to date) in self-insured automobile liability expense, driven by increases in the frequency and severity of claims.
Hosted software application fees and other technology costs increased $26 million in the quarter (up $78 million year to date), in support of ongoing investments in our digital transformation.
Professional fees increased $34 million in the quarter (up $57 million year to date) as a result of an increase in services provided to various business units.

Other increases for the quarter and year to date included employee-related expenses, payment processing fees and costs to lease and purchase additional vehicles for our network. These increases were partially offset by favorable developments in certain legal and tax contingencies, a reduction in asset impairment charges and a reduction in customer claims.

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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 nine months ended September 30, 2022 and 2021 (in millions):


	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2022		2021		$		%		2022		2021		$		%
Investment Income and Other	$	333	$	274	$	59	21.5	%	$	981	$	4,235	$	(3,254)	(76.8)	%
Defined Benefit Plan (Gains) and Losses	—		—		—		N/A		(33)		(3,290)		3,257		(99.0)	%
Adjusted Investment Income and Other	$	333	$	274	$	59	21.5	%	$	948	$	945	$	3	0.3	%

Interest Expense	(177)		(177)		—		0.0	%	(522)		(521)		(1)		0.2	%
Total Other Income and (Expense)	$	156	$	97	$	59	60.8	%	$	459	$	3,714	$	(3,255)	(87.6)	%
Adjusted Other Income and (Expense)	$	156	$	97	$	59	60.8	%	$	426	$	424	$	2	0.5	%

Investment Income and Other

Investment income and other increased $59 million for the quarter, driven by higher yields on higher average invested balances, changes in the fair value of certain non-current investments and an increase in other pension income partially offset by foreign currency losses.

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 curtailment gain of $33 million dollars in 2022, compared to a $3.3 billion mark-to-market gain in 2021. Excluding the impact of these defined benefit plan gains, adjusted investment income and other increased $3 million, driven by higher yields on higher average invested balances and year-to-date foreign currency gains, that were largely offset by changes in the fair value of certain non-current investments and a decrease in other pension income.

Other pension income increased $12 million for the quarter (down $7 million year to date) due to the following:

Lower expected returns on pension assets for the quarter and year-to-date periods 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 was flat for the quarter, due to an increase in projected benefit obligations and changes in demographic assumptions that were offset by the impact of lower discount rates. Interest cost increased year to date, due to the impact of interim remeasurements of certain plans in 2021 on pension benefit obligations and discount rates.
Prior service cost decreased for the quarter and year-to-date periods as the cost base from certain plan amendments became fully amortized during 2021.

Interest Expense

Interest expense was flat for both the quarter and year-to-date periods as higher effective interest rates on floating rate debt were largely offset by lower average outstanding debt balances. Foreign currency exchange rates also favorably impacted interest expense 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 nine months ended September 30, 2022 and 2021 (in millions):


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	2022			2021			$		%		2022			2021			$		%
Income Tax Expense	$	685		$	664		$	21	3.2	%	$	2,263		$	2,836		$	(573)	(20.2)	%
Income Tax Impact of:
Transformation Strategy Costs	9			20			(11)		(55.0)	%	31			76			(45)		(59.2)	%
Asset Impairment and Divestiture Charges	—			—			—		N/A		—			(8)			8		(100.0)	%
Defined Benefit Plan (Gains) and Losses	—			—			—		N/A		(9)			(788)			779		(98.9)	%
Adjusted Income Tax Expense	$	694		$	684		$	10	1.5	%	$	2,285		$	2,116		$	169	8.0	%




Effective Tax Rate	21.0		%	22.2		%					21.8		%	22.4		%
Adjusted Effective Tax Rate	21.0		%	22.3		%					21.9		%	22.0		%

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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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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Liquidity and Capital Resources

As of September 30, 2022, we had $11.4 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):


	Nine Months Ended September 30,
	2022		2021
Net income	$	8,095	$	9,797
Non-cash operating activities (a)	4,439		1,669
Pension and postretirement benefit plan contributions (company-sponsored plans)	(2,106)		(331)

Hedge margin receivables and payables	771		136
Income tax receivables and payables	(38)		235
Changes in working capital and other non-current assets and liabilities	(339)		255
Other operating activities	(50)		—
Net cash from operating activities	$	10,772	$	11,761

(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 $989 million for the 2022 period, primarily due to:

Higher contributions to our company-sponsored pension and U.S. postretirement medical benefit plans, driven by $1.9 billion in discretionary contributions to our qualified U.S. pension plans. There were no discretionary contributions to these plans in 2021.
An unfavorable change in working capital, driven by the timing of payroll and other compensation items and vendor payments, 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.

These impacts were partially offset by an increase in our net hedge margin collateral position due to favorable changes in the fair value of derivative contracts used in our currency 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 September 30, 2022 and 2021, suppliers sold them $690 and $462 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 $1.3 billion and $953 million for the nine months ended September 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 September 30, 2022, approximately $3.3 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):


	Nine Months Ended September 30,
	2022			2021
Net cash used in investing activities	$	(2,408)		$	(1,600)

Capital Expenditures:
Buildings, facilities and plant equipment	$	(937)		$	(1,089)
Aircraft and parts	(468)			(706)
Vehicles	(382)			(379)
Information technology	(491)			(396)
Total Capital Expenditures	$	(2,278)		$	(2,570)

Capital Expenditures as a % of revenue	3.1		%	3.7		%

Other Investing Activities:
Proceeds from disposal of businesses, property, plant and equipment	$	12		$	870
Net change in finance receivables	$	23		$	28
Net (purchases), sales and maturities of marketable securities	$	(2)		$	60
Cash paid for business acquisitions, net of cash and cash equivalents acquired	$	(106)		$	(12)
Other investing activities	$	(57)		$	24

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 $5.0 billion in 2022, of which approximately 50 percent will be allocated to expansion projects. Our strategic decision to lease rather than purchase certain facilities drove a reduction in our expected capital expenditures.

Total capital expenditures decreased for 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, slightly offset by increases in contract deposits on open aircraft orders.
Information technology expenditures increased due to additional deployments of technology equipment and capitalized software projects.

Proceeds from disposal of businesses, property, plant and equipment decreased, driven by the divestiture of UPS Freight for cash proceeds of $848 million in the second quarter of 2021.

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 and 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):


	Nine Months Ended September 30,
2022			2021
Net cash used in financing activities	$	(7,475)		$	(5,856)
Share Repurchases:
Cash paid to repurchase shares	(2,194)			(500)
Number of shares repurchased	(11.6)			(2.6)
Shares outstanding at period end	865			869
Dividends:
Dividends declared per share	$	4.56		$	3.06
Cash paid for dividends	$	(3,842)		$	(2,578)
Borrowings:
Net borrowings (repayments) of debt principal	$	(1,124)		$	(2,613)
Other Financing Activities:
Cash received for common stock issuances	$	198		$	196
Other financing activities	$	(513)		$	(361)
Capitalization:
Total debt outstanding at period end	20,350			22,106
Total shareowners’ equity at period end	16,988			12,057
Total capitalization	$	37,338		$	34,163

We repurchased 11.6 and 2.6 million shares of class B common stock for $2.2 billion and $500 million under our stock repurchase program during the nine months ended September 30, 2022 and 2021, respectively. We anticipate our share repurchases will total at least $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 nine months ended September 30, 2022. Repayments of debt 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 of debt included $2.6 billion of fixed and floating rate senior notes, commercial paper and scheduled principal payments on our finance lease obligations.

As of September 30, 2022, we had $1.0 billion of fixed rate senior notes outstanding that matured this year. We repaid these notes at maturity in October 2022 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 September 30, 2022 and 2021, we had no outstanding balances under our commercial paper programs.

Cash flows from other financing activities were largely attributable to the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards. Cash outflows for this purpose were $514 and $357 million for the nine months ended September 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, except as described below.

Purchase commitments represent contractual agreements to purchase assets, goods or services that are legally binding, including contracts for aircraft, construction of new or expanded facilities and orders for technology equipment and vehicles. We also have commitments related to pending business acquisitions and investments.

The following table summarizes the expected cash outflows to satisfy our total purchase commitments, inclusive of these changes, as of September 30, 2022 (in millions):


Commitment Type	2022		2023		2024		2025		2026		After 2026		Total
Purchase Commitments(1)	$	2,513	$	2,405	$	1,285	$	959	$	237	$	68	$	7,467
Total	$	2,513	$	2,405	$	1,285	$	959	$	237	$	68	$	7,467

(1)Purchase commitments for 2022 include amounts related to pending business acquisitions and investments.

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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