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

As the world's premier package delivery company and a leading provider of global supply chain management solutions, we seek to provide industry-leading service to our customers by combining our digital capabilities with our global integrated network. Under our Customer First, People Led, Innovation Driven strategy, we are continuing to invest in our business to improve the customer experience, increase productivity and drive growth in targeted customer segments.

In the second quarter, we continued the global expansion of our Digital Access Program to make it easier for e-commerce platforms and small- and medium-sized businesses ("SMBs") to do business with us. We continued deploying our Smart Package-Smart Facility technology, added to our network of dedicated healthcare distribution facilities and continued to expand our joint venture in India's domestic market.

Macroeconomic headwinds, including persistent global inflation, declines in U.S. manufacturing production and volume diversion resulting from our labor negotiations with the Teamsters, led to a challenging operating environment in the second quarter and year-to-date periods. Internationally, the economic recovery in Asia slowed during the second quarter, while conditions in Europe remained challenging throughout the period.

These factors led to volume declines in our global small package operations for both the quarter and year to date, and we anticipate that they will continue to impact us throughout the remainder of the year.

Notwithstanding the challenging external environment, we managed our network with agility, focused on productivity and controlled cost to deliver operating profit that was in line with our expectations. Additionally, we returned cash to shareowners through dividends and share repurchases and continued to make long-term investments to support our strategy.

On July 25, 2023, we reached a tentative new national master agreement with the International Brotherhood of Teamsters. For additional information, see note 18 to the accompanying unaudited, consolidated financial statements.

We have two reportable segments: U.S. Domestic Package and International Package. Our remaining businesses are reported as Supply Chain Solutions.

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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
	2023			2022			$		%		2023			2022			$		%
Revenue (in millions)	$	22,055		$	24,766		$	(2,711)	(10.9)	%	$	44,980		$	49,144		$	(4,164)	(8.5)	%
Operating Expenses (in millions)	19,275			21,231			(1,956)		(9.2)	%	39,659			42,358			(2,699)		(6.4)	%
Operating Profit (in millions)	$	2,780		$	3,535		$	(755)	(21.4)	%	$	5,321		$	6,786		$	(1,465)	(21.6)	%
Operating Margin	12.6		%	14.3		%					11.8		%	13.8		%
Net Income (in millions)	$	2,081		$	2,849		$	(768)	(27.0)	%	$	3,976		$	5,511		$	(1,535)	(27.9)	%
Basic Earnings Per Share	$	2.42		$	3.26		$	(0.84)	(25.8)	%	$	4.62		$	6.31		$	(1.69)	(26.8)	%
Diluted Earnings Per Share	$	2.42		$	3.25		$	(0.83)	(25.5)	%	$	4.61		$	6.28		$	(1.67)	(26.6)	%

Operating Days	64			64							128			128
Average Daily Package Volume (in thousands)	20,902			23,071					(9.4)	%	21,445			23,175					(7.5)	%
Average Revenue Per Piece	$	13.92		$	13.72		$	0.20	1.5	%	$	13.83		$	13.49		$	0.34	2.5	%

Average daily package volume and revenue in our global small package operations decreased for the quarter and year to date, with declines in both commercial and residential shipments, primarily as a result of the external conditions and labor-related uncertainties described herein.
Operating expenses decreased for the quarter and year to date, driven by a reduction in purchased transportation in Supply Chain Solutions and reductions in fuel expense in our small package operations, as well as the impact of our ongoing productivity initiatives.
Operating profit and operating margin decreased for the quarter and year to date, as revenue declines were greater than operating expense reductions.
We reported second quarter net income of $2.1 billion and diluted earnings per share of $2.42 per share ($4.0 billion and $4.61 per share, year to date). Adjusted diluted earnings per share were $2.54 per share for the second quarter, which includes the after-tax impacts of transformation strategy costs of $106 million, or $0.12 per diluted share. Year to date, adjusted diluted earnings per share were $4.74 per share, including the after-tax impacts of transformation strategy costs and goodwill impairment charges of $115 million, or $0.13 per diluted share.

In the U.S. Domestic Package segment, revenue declines for the quarter and year to date were driven by lower volume and fuel surcharge revenue. These were somewhat offset by revenue per piece growth due to increases in base rates, improvements in revenue quality and customer mix. Expenses for the quarter and year to date decreased, primarily due to a reduction in hours for union employees, lower management compensation expense, and declines in fuel expense and purchased transportation.

In our International Package segment, revenue declines for the quarter and year to date were driven by lower volume and declines in fuel and demand-related surcharges. Expense decreases for the quarter and year to date were primarily driven by lower fuel expense and purchased transportation as a result of volume declines and lower fuel prices.

In Supply Chain Solutions, revenue decreases for the quarter and year to date were driven by volume and market rate declines in Forwarding that were slightly offset by growth in Logistics, including the impact of the Bomi Group acquisition that occurred in the fourth quarter of 2022. Expenses decreased for the quarter and year to date, primarily driven by lower purchased transportation in Forwarding. This was slightly offset by expense increases within 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.

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 and therefore 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	2023		2022		2023		2022
Operating Expenses:
Transformation Strategy Costs	$	139	$	41	$	142	$	96
Goodwill and Asset Impairments, and Divestiture Charges	—		—		8		—
Total Adjustments to Operating Expenses	$	139	$	41	$	150	$	96

Other Income and (Expense):
Defined Benefit Plan (Gains) Losses	$	—	$	—	$	—	$	(33)
Total Adjustments to Other Income and (Expense)	$	—	$	—	$	—	$	(33)

Total Adjustments to Income Before Income Taxes	$	139	$	41	$	150	$	63

Income Tax (Benefit) Expense:
Transformation Strategy Costs	$	(33)	$	(10)	$	(33)	$	(22)
Goodwill and Asset Impairments, and Divestiture Charges	—		—		(2)		—
Defined Benefit Plan (Gains) Losses	—		—		—		9
Total Adjustments to Income Tax (Benefit) Expense	$	(33)	$	(10)	$	(35)	$	(13)

Total Adjustments to Net Income	$	106	$	31	$	115	$	50

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. We believe excluding the impact of these charges better enables users of our financial statements to view and evaluate underlying business performance from the perspective of management. We do not consider these costs when evaluating the operating performance of our business units, making decisions to allocate resources or in determining incentive compensation awards. For more information regarding transformation activities, see note 17 to the unaudited, consolidated financial statements and for goodwill impairment charges, see note 8 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

Foreign Currency Exchange Rate Changes and Hedging Activities

We 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 curtailments and settlements, 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 obligation resulting in a curtailment gain of $33 million ($24 million after-tax) for the six months ended June 30, 2022.

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 second quarter or year-to-date periods.

As a normal part of managing of our air network, we routinely idle aircraft and engines temporarily for maintenance or to adjust network capacity. As a result of the reduction in volumes experienced in the first half of 2023, we have identified additional opportunities to temporarily idle aircraft within our network in order to better match capacity with current demand. Temporarily idled assets are classified as held-and-used, and we continue to record depreciation expense for these assets. As of June 30, 2023, we had four aircraft temporarily idled for an average period of approximately four months. We expect these aircraft to return to revenue service.

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 value thereof 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, our cost of capital and market comparables. We are also required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment.

Our business has been negatively impacted by macroeconomic conditions, including rising interest rates and inflationary pressures, that have reduced demand for our services. While we do not believe it is more likely than not that our reporting units’ fair values are less than their carrying values as of June 30, 2023, if challenging macroeconomic conditions persist, then these or other factors, including market comparables, may negatively impact certain estimates and assumptions that we use in developing our reporting units' fair values. Such impacts may be more pronounced for reporting units whose fair values do not significantly exceed their carrying values. Within our consolidated goodwill balance of $4.3 billion, certain reporting units within Supply Chain Solutions, including Roadie, whose fair value exceeded their carrying value by less than 10 percent as of the most recent valuation, represented approximately $300 million.

Actual reporting unit performance, revisions to our forecasts of reporting unit performance, changes in estimates or assumptions in connection with our annual testing, or a combination thereof could result in an impairment charge in one or more of our reporting units during the third quarter of 2023 or another 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 June 30,								Change						Six Months Ended June 30,								Change
2023				2022				$			%			2023				2022				$			%
Average Daily Package Volume (in thousands):
Next Day Air	1,679				1,910							(12.1)	%		1,708				1,928							(11.4)	%
Deferred	1,087				1,401							(22.4)	%		1,113				1,455							(23.5)	%
Ground	14,974				16,374							(8.6)	%		15,385				16,330							(5.8)	%
Total Average Daily Package Volume	17,740				19,685							(9.9)	%		18,206				19,713							(7.6)	%
Average Revenue Per Piece:
Next Day Air	$	22.40			$	21.73			$	0.67		3.1	%		$	22.27			$	21.27			$	1.00		4.7	%
Deferred	16.80				15.52				1.28			8.2	%		16.59				15.10				1.49			9.9	%
Ground	11.29				10.89				0.40			3.7	%		11.25				10.77				0.48			4.5	%
Total Average Revenue Per Piece	$	12.68			$	12.27			$	0.41		3.3	%		$	12.61			$	12.12			$	0.49		4.0	%
Operating Days in Period	64				64										128				128
Revenue (in millions):
Next Day Air	$	2,407			$	2,656			$	(249)		(9.4)	%		$	4,868			$	5,250			$	(382)		(7.3)	%
Deferred	1,169				1,392				(223)			(16.0)	%		2,363				2,812				(449)			(16.0)	%
Ground	10,820				11,411				(591)			(5.2)	%		22,152				22,521				(369)			(1.6)	%
Total Revenue	$	14,396			$	15,459			$	(1,063)		(6.9)	%		$	29,383			$	30,583			$	(1,200)		(3.9)	%
Operating Expenses (in millions):
Operating Expenses	$	12,794			$	13,630			$	(836)		(6.1)	%		$	26,315			$	27,092			$	(777)		(2.9)	%
Transformation Strategy Costs	(79)				(26)				(53)			203.8	%		(101)				(69)				(32)			46.4	%
Adjusted Operating Expense	$	12,715			$	13,604			$	(889)		(6.5)	%		$	26,214			$	27,023			$	(809)		(3.0)	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	1,602			$	1,829			$	(227)		(12.4)	%		$	3,068			$	3,491			$	(423)		(12.1)	%
Adjusted Operating Profit	$	1,681			$	1,855			$	(174)		(9.4)	%		$	3,169			$	3,560			$	(391)		(11.0)	%
Operating Margin	11.1		%		11.8		%								10.4		%		11.4		%
Adjusted Operating Margin	11.7		%		12.0		%								10.8		%		11.6		%

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 2023 vs. 2022	(9.9)	%	6.1	%	(3.1)	%	(6.9)	%
Year to date 2023 vs. 2022	(7.6)	%	4.5	%	(0.8)	%	(3.9)	%

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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 in the second quarter and year to date, with reductions in both residential and commercial shipments. In both periods, challenging external conditions, including persistent inflation, declines in U.S. manufacturing production and changes in consumer spending contributed to overall volume declines. During the second quarter, volume was also negatively impacted by uncertainty around the results of our labor negotiations with the Teamsters. We expect average daily volume to increase in the second half of 2023 compared to the first half of the year, and the year-over-year decline in average daily volume to be lower in the second half than in the first half.

Business-to-consumer shipments declined 11.5% in the second quarter (down 8.5% year to date), primarily due to a reduction in discretionary consumer spending as a result of the headwinds discussed above, as well as the impact of our labor negotiations with the Teamsters. For both the quarter and year to date, residential volume declines from SMBs were lower than from our large customers, which was partially due to continued growth in our Digital Access Program. Volume from our largest customer declined for both the second quarter and year to date as planned under our contract terms.

Business-to-business shipments declined 7.7% (down 6.5% year to date) primarily as a result of declines across multiple industry sectors that are sensitive to the factors discussed above. Uncertainty around our labor contract also negatively impacted volume in the second quarter. Returns volume remained relatively flat for the second quarter, but increased year to date.

Within our Air products, average daily volume decreased across all customer segments for both the quarter and year to date. These declines resulted primarily from continued execution under the contract terms with our largest customer and from other customers making cost trade offs and utilizing the enhanced speed in our ground network.

Ground residential and Ground commercial average daily volume decreases of 9.6% and 7.3%, respectively, for the quarter (down 5.8% and 5.7%, respectively, year to date), were primarily attributable to volume declines from a number of our large customers due to the economic factors discussed above.

Rates and Product Mix

Air and Ground rates increased an average of 6.9% in December 2022. Revenue per piece from our Air and Ground products increased for the quarter and year to date, resulting from base rate increases and additional pricing actions, as well as favorable changes in customer mix. For both the quarter and year to date, these increases were partially offset by the shift in product mix. For the quarter, a decline in fuel surcharges also negatively impacted revenue per piece.

We anticipate the year-over-year revenue per piece growth rate will moderate during the second half of the year, primarily driven by further anticipated declines in fuel surcharge revenue.

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.

Fuel surcharge revenue decreased $471 million for the quarter, driven by reductions in price per gallon and the impact of lower volume. Year to date, fuel surcharge revenue decreased $265 million, as higher prices per gallon and the impacts of our pricing initiatives in the first quarter were more than offset by the second-quarter declines discussed above. Based on the current commodity market outlook, we expect a continued year-over-year reduction in fuel surcharge revenue for the remainder of 2023.

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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 adjusted operating expenses decreased for both the quarter and year to date. Our pickup and delivery costs decreased $308 million in the second quarter (down $269 million year to date), the costs of operating our integrated air and ground network decreased $536 million in the second quarter (down $586 million year to date) and our package sorting costs decreased $86 million in the second quarter (down $110 million year to date). These decreases were partially offset by an increase of $41 million in other indirect operating costs in the second quarter (up $156 million year to date). The overall decrease in operating expenses was primarily due to:

Lower compensation expense for both the quarter and year-to-date periods due to a reduction in direct union labor hours resulting from volume declines, as well as incentive compensation program design changes. These decreases were partially offset by contractual rate increases and cost of living adjustments for our union workforce.
Lower employee benefits expense for our union workforce in the second quarter as service costs for our company-sponsored pension and postretirement plans decreased, driven by increases in the discount rates used to measure the projected benefit obligations of these plans.
A reduction in purchased transportation costs for both the quarter and year to date, resulting from lower overall volumes and a reduction in ground volume handled by third-party carriers, as well as the impact of continued strategic productivity initiatives.
Lower fuel expense driven by lower volume and decreases in the price of jet fuel, diesel and gasoline during the second quarter.

Total cost per piece increased 4.2% for the quarter (up 5.1% year to date), and adjusted cost per piece increased 3.7% for the quarter (up 5.0% year to date), for the reasons described above. We anticipate the cost per piece growth rate for the second half of 2023 will be consistent with that of the first half of the year, as increased costs arising from the tentative new national master agreement with the Teamsters are expected to be largely offset by the impacts of average daily volume increases, network improvements and productivity initiatives, as well as reductions in fuel cost.

Operating Profit and Margin

As a result of the factors described above, operating profit decreased $227 million in the second quarter (down $423 million year to date), with operating margin decreasing 70 basis points to 11.1% (down 100 basis points to 10.4% year to date). Adjusted operating profit decreased $174 million in the second quarter (down $391 million year to date), with adjusted operating margin decreasing 30 basis points to 11.7% (down 80 basis points to 10.8% 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 June 30,						Change				Six Months Ended June 30,						Change
	2023			2022			$		%		2023			2022			$		%
Average Daily Package Volume (in thousands):
Domestic	1,554			1,703					(8.7)	%	1,594			1,754					(9.1)	%
Export	1,608			1,683					(4.5)	%	1,645			1,708					(3.7)	%
Total Average Daily Package Volume	3,162			3,386					(6.6)	%	3,239			3,462					(6.4)	%
Average Revenue Per Piece:
Domestic	$	7.67		$	7.61		$	0.06	0.8	%	$	7.63		$	7.48		$	0.15	2.0	%
Export	33.70			36.91			(3.21)		(8.7)	%	33.34			35.47			(2.13)		(6.0)	%
Total Average Revenue Per Piece	$	20.91		$	22.17		$	(1.26)	(5.7)	%	$	20.69		$	21.29		$	(0.60)	(2.8)	%
Operating Days in Period	64			64							128			128
Revenue (in millions):
Domestic	$	763		$	829		$	(66)	(8.0)	%	$	1,557		$	1,680		$	(123)	(7.3)	%
Export	3,468			3,976			(508)		(12.8)	%	7,020			7,754			(734)		(9.5)	%
Cargo and Other	184			268			(84)		(31.3)	%	381			515			(134)		(26.0)	%
Total Revenue	$	4,415		$	5,073		$	(658)	(13.0)	%	$	8,958		$	9,949		$	(991)	(10.0)	%
Operating Expenses (in millions):
Operating Expenses	$	3,532		$	3,880		$	(348)	(9.0)	%	$	7,247		$	7,640		$	(393)	(5.1)	%
Transformation Strategy Costs	(19)			(11)			(8)		72.7	%	3			(15)			18		N/A
Adjusted Operating Expenses	$	3,513		$	3,869		$	(356)	(9.2)	%	$	7,250		$	7,625		$	(375)	(4.9)	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	883		$	1,193		$	(310)	(26.0)	%	$	1,711		$	2,309		$	(598)	(25.9)	%
Adjusted Operating Profit	$	902		$	1,204		$	(302)	(25.1)	%	$	1,708		$	2,324		$	(616)	(26.5)	%
Operating Margin	20.0		%	23.5		%					19.1		%	23.2		%
Adjusted Operating Margin	20.4		%	23.7		%					19.1		%	23.4		%
Currency Benefit / (Cost) – (in millions)*:
Revenue							$	(34)									$	(195)
Operating Expenses							2										112
Operating Profit							$	(32)									$	(83)
* 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 2023 vs. 2022	(6.6)	%	0.6	%	(6.3)	%	(0.7)	%	(13.0)	%
Year to date 2023 vs. 2022	(6.4)	%	1.1	%	(2.7)	%	(2.0)	%	(10.0)	%

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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 second quarter and year to date for both domestic and export products. Volume from both large customers and SMBs declined, driven by declines from the retail and technology sectors. Business-to-consumer volume decreased 10.4% for the second quarter (down 9.1% year to date) as global macroeconomic headwinds, including high interest rates and persistent inflation, continued to impact consumer demand. These factors also negatively impacted business-to-business volume, which decreased 5.1% for the second quarter (down 5.4% year to date). We anticipate similar year-over-year declines in average daily volume during the second half of 2023.

Export volume decreased for the quarter and year to date, driven by declines in intra-Europe and Asia activity. Declines on intra-Europe trade lanes were primarily due to lower consumer spending as a result of economic conditions. Asia volume declines were highest on the Asia to U.S. and intra-Asia trade lanes, driven by the impact of overall economic conditions. The Asia to U.S. trade lane was also negatively impacted by rising inventory levels in the United States.

Our premium products saw volume decline 11.9% for the second quarter (down 9.3% year to date), primarily in our Worldwide and Transborder Express Saver products. Volume in our non-premium products decreased 0.8% for the second quarter (down 1.0% year to date), driven by declines in Transborder Standard and Worldwide Expedited. These declines were largely driven by economic conditions. Additionally, weaker import demand from U.S. consumers further impacted our Worldwide products.

The challenging economic conditions also impacted Domestic volume, which declined for both the second quarter and year to date, driven by declines in Germany and Canada.

Rates and Product Mix

In December 2022, we implemented an average 6.9% 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.

Total revenue per piece decreased 5.7% for the quarter (down 2.8% year to date), primarily due to declines in fuel and demand-related surcharges and volume reductions in our Worldwide products out of Asia. The impact of these factors were slightly offset by the impact of base rate increases. Excluding the impact of currency, revenue per piece decreased 4.9% in the quarter (down 0.7% year to date). For the second half of the year, we anticipate overall revenue per piece to be consistent with the same period last year.

Export revenue per piece decreased 8.7% for the quarter (down 6.0% year to date), driven by the impact from the decline in our Worldwide products. Excluding the impact of currency, export revenue per piece decreased 8.1% in the quarter (down 4.3% year to date).

Domestic revenue per piece increased 0.8% for the quarter (up 2.0% year to date), primarily due to the impact of base rate increases and favorable shifts in customer mix. This was largely offset by unfavorable currency movements. Excluding the impact of currency, domestic revenue per piece increased 2.1% for the quarter (up 6.3% 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.

During the quarter, total international fuel surcharge revenue decreased $322 million (down $294 million year to date), primarily driven by a decrease in price per gallon as well as the impact from volume declines. Based on the current commodity market outlook, we expect fuel surcharge revenue will remain stable for the remainder of the year.

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Operating Expenses

Operating expenses, and adjusted operating expenses, decreased for both the second quarter and year to date. The principal drivers were:

The costs of operating our integrated international air and ground network decreased $343 million for the quarter (down $317 million year to date), primarily driven by lower fuel prices and a reduction in aircraft block hours. We anticipate the price paid for fuel will remain stable throughout the remainder of the year.
Pickup and delivery costs decreased $17 million for the quarter (down $38 million year to date) due to the lower volume levels.

Operating Profit and Margin

As a result of the factors described above, operating profit decreased $310 million for the second quarter (down $598 million year to date), with operating margin decreasing 350 basis points to 20.0% for the second quarter (down 410 basis points to 19.1% year to date). Adjusted operating profit decreased $302 million for the second quarter (down $616 million year to date), while adjusted operating margin decreased 330 basis points to 20.4% for the second quarter (down 430 basis points to 19.1% year to date).

Substantially all of our operations in Russia and Belarus were suspended in March 2022 and, during 2023, we have commenced liquidation of our Small Package and Forwarding and Logistics subsidiaries in these countries. Substantially all of our operations in Ukraine remain indefinitely suspended. These actions have not had, and are not expected to have, a material impact on us.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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RESULTS OF OPERATIONS

Supply Chain Solutions


	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2023			2022			$		%		2023			2022			$		%
Revenue (in millions):
Forwarding	$	1,376		$	2,389		$	(1,013)	(42.4)	%	$	2,890		$	4,978		$	(2,088)	(41.9)	%
Logistics	1,431			1,290			141		10.9	%	2,841			2,541			300		11.8	%
Other	437			555			(118)		(21.3)	%	908			1,093			(185)		(16.9)	%
Total Revenue	$	3,244		$	4,234		$	(990)	(23.4)	%	$	6,639		$	8,612		$	(1,973)	(22.9)	%
Operating Expenses (in millions):
Operating Expenses	$	2,949		$	3,721		$	(772)	(20.7)	%	$	6,097		$	7,626		$	(1,529)	(20.0)	%
Transformation Strategy Costs	(41)			(4)			(37)		925.0	%	(44)			(12)			(32)		266.7	%
Goodwill and Asset Impairments, and Divestiture Charges	—			—			—		N/A		(8)			—			(8)		N/A
Adjusted Operating Expenses:	$	2,908		$	3,717		$	(809)	(21.8)	%	$	6,045		$	7,614		$	(1,569)	(20.6)	%
Operating Profit (in millions) and Operating Margin:
Operating Profit	$	295		$	513		$	(218)	(42.5)	%	$	542		$	986		$	(444)	(45.0)	%
Adjusted Operating Profit	$	336		$	517		$	(181)	(35.0)	%	$	594		$	998		$	(404)	(40.5)	%
Operating Margin	9.1		%	12.1		%					8.2		%	11.4		%
Adjusted Operating Margin	10.4		%	12.2		%					8.9		%	11.6		%
Currency Benefit / (Cost) – (in millions)*:
Revenue							$	(7)									$	(57)
Operating Expenses							10										65
Operating Profit							$	3									$	8
* Amount represents the change in currency translation compared to the prior year.


	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2023		2022		$		%		2023		2022		$		%
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs
Forwarding	$	23	$	2	$	21	1,050.0	%	$	24	$	8	$	16	200.0	%
Logistics	18		1		17		1,700.0	%	20		2		18		900.0	%
Other	—		1		(1)		(100.0)	%	—		2		(2)		(100.0)	%
Total Transformation Strategy Costs	$	41	$	4	$	37	925.0	%	$	44	$	12	$	32	266.7	%
Goodwill and Asset Impairments, and Divestiture Charges
Forwarding	$	—	$	—	$	—	N/A		$	8	$	—	$	8	N/A
Logistics	—		—		—		N/A		—		—		—		N/A
Other	—		—		—		N/A		—		—		—		N/A
Total Goodwill and Asset Impairments, and Divestitures Charges	$	—	$	—	$	—	N/A		$	8	$	—	$	8	N/A
Total Adjustments to Operating Expenses	$	41	$	4	$	37	925.0	%	$	52	$	12	$	40	333.3	%

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Revenue

Total revenue in Supply Chain Solutions decreased for both the second quarter and year to date. This was driven by declines in our Forwarding business as challenging economic conditions drove declines in customer activity, while increased capacity led to lower market rates.

International airfreight revenue decreased approximately $365 million for the quarter (down $785 million year to date) as customer demand remained weak, particularly on Asia export lanes, and capacity growth continued to outpace demand. These factors drove down the rates we charge for services in both the quarter and year-to-date periods and we anticipate that they will continue to pressure rates through the second half of the year.
Revenue in our truckload brokerage business decreased $372 million for the quarter (down $775 million year to date) due to lower volume and a continued decline in market rates. We remained focused on our revenue quality initiatives and experienced volume growth from SMBs during the second quarter and year-to-date periods.
The remaining reduction in revenue, for both the quarter and year to date, was attributable to our ocean freight forwarding business. Market rates and volume declined in both periods, particularly on the Asia to U.S. lane, due to lower demand, an increase in inventory levels and additional capacity entering the market. We expect revenue to remain challenged in the second half of 2023 as capacity increases are expected to continue to outpace demand.

Within our Logistics businesses, healthcare logistics revenue increased $106 million for the second quarter (up $204 million year to date), primarily due to the impact from the acquisition of Bomi Group in the fourth quarter of 2022, as well as growth in our clinical trials business for the year. Revenue in mail services increased $48 million for the quarter (up $103 million year to date) as a result of volume growth, rate increases and a favorable shift in product characteristics. The growth in healthcare and mail services was slightly offset by declines in our other distribution operations for both the second quarter and year to date.

Revenue from the other businesses within Supply Chain Solutions decreased for the quarter and year to date, driven by an expected reduction of $130 million (down $215 million year to date) in transition services provided to the acquirer of UPS Freight as we continue to wind down these arrangements. This was partially offset by higher revenue from our digital businesses for both the second quarter and year to date, driven by business growth.

Operating Expenses

Total operating expenses and total adjusted operating expenses for Supply Chain Solutions decreased for the quarter and year to date.

Forwarding operating expenses decreased $832 million for the quarter (down $1.7 billion year to date). This primarily resulted from a reduction of approximately $785 million in purchased transportation expense for the quarter (down $1.6 billion year to date) due to lower volumes and market rates across our forwarding businesses. We expect these conditions to persist as we move through the second half of the year, resulting in lower purchased transportation costs.

Logistics operating expenses increased $112 million for the quarter (up $267 million year to date), driven by the impact of acquiring Bomi Group. Mail services incurred higher purchased transportation cost in both periods due to volume and rate increases and shifts in product characteristics.

Expenses in the other businesses within Supply Chain Solutions decreased for both the quarter and year to date, largely driven by a reduction in costs incurred to procure transportation for, and provide transition services to, the acquirer of UPS Freight. This was partially offset by higher operating costs within our digital businesses, driven by year-over-year business growth.

Operating Profit and Margin

As a result of the factors described above, total operating profit decreased $218 million for the second quarter (down $444 million year to date) with operating margin decreasing 300 basis points to 9.1% for the second quarter (down 320 basis points to 8.2% year to date). On an adjusted basis, operating profit decreased $181 million for the second quarter (down $404 million year to date), with adjusted operating margin decreasing 180 basis points to 10.4% for the second quarter (down 270 basis points to 8.9% year to date).

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Consolidated Operating Expenses


	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2023		2022		$		%		2023		2022		$		%
Operating Expenses (in millions):
Compensation and benefits	$	11,197	$	11,344	$	(147)	(1.3)	%	$	22,659	$	22,945	$	(286)	(1.2)	%
Transformation Strategy Costs	(109)		(23)		(86)		373.9	%	(97)		(56)		(41)		73.2	%
Adjusted Compensation and benefits	$	11,088	$	11,321	$	(233)	(2.1)	%	$	22,562	$	22,889	$	(327)	(1.4)	%

Repairs and maintenance	$	682	$	727	$	(45)	(6.2)	%	$	1,407	$	1,428	$	(21)	(1.5)	%
Depreciation and amortization	828		762		66		8.7	%	1,662		1,526		136		8.9	%
Purchased transportation	3,173		4,390		(1,217)		(27.7)	%	6,716		8,997		(2,281)		(25.4)	%
Fuel	1,090		1,697		(607)		(35.8)	%	2,361		2,917		(556)		(19.1)	%
Other occupancy	458		422		36		8.5	%	1,009		923		86		9.3	%
Other expenses	1,847		1,889		(42)		(2.2)	%	3,845		3,622		223		6.2	%
Total Other expenses	8,078		9,887		(1,809)		(18.3)	%	17,000		19,413		(2,413)		(12.4)	%
Transformation Strategy Costs	(30)		(18)		(12)		66.7	%	(45)		(40)		(5)		12.5	%
Goodwill and Asset Impairments, and Divestiture Charges	—		—		—		N/A		(8)		—		(8)		N/A
Adjusted Total Other expenses	$	8,048	$	9,869	$	(1,821)	(18.5)	%	$	16,947	$	19,373	(2,426)		(12.5)	%

Total Operating Expenses	$	19,275	$	21,231	$	(1,956)	(9.2)	%	$	39,659	$	42,358	$	(2,699)	(6.4)	%
Adjusted Total Operating Expenses	$	19,136	$	21,190	$	(2,054)	(9.7)	%	$	39,509	$	42,262	$	(2,753)	(6.5)	%

Currency (Benefit) / Cost - (in millions)*					$	(12)							$	(177)
* Amount represents the change in currency translation compared to the prior year.


	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2023		2022		$		%		2023		2022		$		%
Adjustments to Operating Expenses (in millions):
Transformation Strategy Costs
Compensation	$	5	$	8	$	(3)	(37.5)	%	$	10	$	24	$	(14)	(58.3)	%
Benefits	104		15		89		593.3	%	87		32		55		171.9	%


Other expenses	30		18		12		66.7	%	45		40		5		12.5	%
Total Transformation Strategy Costs	$	139	$	41	$	98	239.0	%	$	142	$	96	$	46	47.9	%
Goodwill and Asset Impairments, and Divestiture Charges
Other expenses	$	—	$	—	$	—	N/A		$	8	$	—	$	8	N/A
Total Adjustments to Operating Expenses	$	139	$	41	$	98	239.0	%	$	150	$	96	$	54	56.3	%

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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Compensation and Benefits

Total compensation and benefits and adjusted total compensation and benefits decreased for the second quarter and year to date. Compensation costs decreased $201 million for the second quarter (down $379 million year to date). On an adjusted basis, compensation costs decreased $197 million for the second quarter (down $365 million year to date). The principal factors impacting the decreases were:

Management compensation decreased $112 million for the second quarter (down $318 million year to date), driven by fourth quarter 2022 design changes to our incentive compensation programs, lower incentive compensation accruals and lower overall headcount.
U.S. Domestic labor costs decreased $102 million for the second quarter (down $56 million year to date) primarily due to a reduction in direct labor hours resulting from volume declines and reductions in administrative labor. The decrease was partially offset by contractual wage rate increases and cost of living adjustments for our union workforce.
The acquisition of Bomi Group in the fourth quarter of 2022 resulted in additional compensation cost of $27 million for the second quarter ($51 million year to date).

Benefits costs increased $54 million for the second quarter (up $93 million year to date). On an adjusted basis, benefits costs decreased $36 million for the second quarter (up $38 million year to date). The principal factors impacting the changes were:

Health and welfare costs increased $46 million for the second quarter (up $135 million year to date), driven by increased contributions to multiemployer plans as a result of contractually-mandated rate increases.
Workers' compensation expense increased $13 million for the second quarter (up $36 million year to date), driven by an increase in current year claims, partially offset by a decrease in overall hours worked and favorable developments in reserves for prior years' claims.
Pension and other postretirement benefits costs decreased $75 million for the second quarter ($123 million year to date):

◦The cost of company-sponsored defined benefit plans decreased $109 million for the second quarter (down $219 million year to date), driven by a reduction in service cost due to higher discount rates. The cessation of accruals for future service in the UPS Retirement Plan was offset by the cost of replacement contributions to the UPS 401(k) Savings Plan.

◦Contributions to multiemployer plans increased $25 million for the second quarter (up $64 million year to date) as the impact of contractually-mandated contribution increases was partially offset by a reduction in eligible headcount.

◦Year to date, expense for the UPS 401(k) Savings Plan increased $18 million, primarily due to demographic changes.

Other benefits, primarily costs related to employee separations, increased $89 million for the second quarter (up $55 million year to date) as we implemented staffing adjustment initiatives to reduce our overhead cost and better align direct labor headcount with volume.

Repairs and Maintenance

The decrease in repairs and maintenance expense for the second quarter and year-to-date periods was primarily due to the deferral of aircraft engine maintenance, as the declines in volume resulted in the temporary idling of certain aircraft.

Depreciation and Amortization

We incurred higher depreciation expense during the second quarter and year-to-date periods as a result of additional facilities coming into service, growth in the size of our vehicle and aircraft fleets and the reduction in estimated residual value of our MD-11 aircraft. We incurred higher amortization expense on capitalized software investments in support of our strategic initiatives, as well as amortization expense for intangible assets recognized in connection with the acquisition of Bomi Group.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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Purchased Transportation

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

Supply Chain Solutions expense decreased $851 million for the second quarter (down $1.7 billion year to date), driven by volume declines and lower market rates paid for services in our Forwarding businesses. This was slightly offset by increases in our logistics operations due to business growth, third-party rate increases in our mail services business and the acquisition of Bomi Group.
U.S. Domestic expense decreased $243 million for the second quarter (down $337 million year to date), driven by a reduction in ground volume handled by third-party carriers as a result of our network optimization initiatives.
International Package expense decreased $123 million for the second quarter (down $198 million year to date), primarily due to declines in volume.

Fuel

The decrease in fuel expense for the quarter and year to date was primarily driven by lower prices for jet fuel, diesel and gasoline, as well as the impact of lower volume. 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 the quarter and year to date as a result of additional operating facilities coming into service, increases in rental rates and higher utilities costs. We expect inflation may continue to adversely impact these costs for the remainder of the year.

Other Expenses

Other expenses and adjusted other expenses decreased for the quarter but increased year to date. The decrease for the quarter was primarily the result of:

Reductions of $33 million in vehicle leases and $18 million in operational supplies due to the decline in volumes.
Lower costs incurred under the transitional service agreements with the acquirer of UPS Freight.
A decrease in self-insured automobile liability expense of $14 million.

Other decreases for the quarter were primarily attributable to the impact of lower volumes. The decreases were partially offset by increases in the following expenses:

Hosted software application fees and other technology costs increased $30 million in support of ongoing investments in our digital transformation.
Outsourcing and professional fees increased $29 million due to increased utilization of third-party services to support our business initiatives.

For the year-to-date period, the increase was driven by hosted software application fees and outsourcing and professional fees for the reasons discussed above. An increase in commissions paid for certain online shipments also contributed to the increase.

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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, 2023 and 2022 (in millions):


	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2023		2022		$		%		2023		2022		$		%
Investment Income and Other	$	131	$	333	$	(202)	(60.7)	%	$	300	$	648	$	(348)	(53.7)	%
Defined Benefit Plan (Gains) Losses	—		—		—		N/A		—		(33)		33		(100.0)	%
Adjusted Investment Income and Other	$	131	$	333	$	(202)	(60.7)	%	$	300	$	615	$	(315)	(51.2)	%

Interest Expense	(191)		(171)		(20)		11.7	%	(379)		(345)		(34)		9.9	%
Total Other Income and (Expense)	$	(60)	$	162	$	(222)	N/A		$	(79)	$	303	$	(382)	N/A
Adjusted Other Income and (Expense)	$	(60)	$	162	$	(222)	N/A		$	(79)	$	270	$	(349)	N/A

Investment Income and Other

Investment income and other decreased $202 and $348 million for the second quarter and year to date, respectively. Excluding the impact of a $33 million defined benefit plan curtailment gain that we recognized in the first quarter of 2022, adjusted investment income and other decreased $315 million year to date. These decreases were primarily due to a reduction in other pension income and foreign currency losses, partially offset by higher yields on invested balances and changes in the fair value of certain non-current investments.

Other pension income decreased $232 million for the quarter (down $464 million year to date) due to:

Lower expected returns on pension assets for the quarter and year to date as a result of a lower asset base due to losses in 2022, partially offset by an increase in our rate of return assumption.
Higher pension interest cost for the quarter and year to date due to higher discount rates and changes in demographic assumptions.

Interest expense increased for the quarter and year-to-date periods, driven by higher effective interest rates on floating rate debt and an increase in our total debt. These impacts were partially offset by an increase in capitalized interest.

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Income Tax Expense

The following table sets forth our income tax expense and effective tax rate for the three and six months ended June 30, 2023 and 2022 (in millions):


	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2023			2022			$		%		2023			2022			$		%
Income Tax Expense	$	639		$	848		$	(209)	(24.6)	%	$	1,266		$	1,578		$	(312)	(19.8)	%
Income Tax Impact of:
Transformation Strategy Costs	33			10			23		230.0	%	33			22			11		50.0	%
Goodwill and Asset Impairments, and Divestiture Charges	—			—			—		N/A		2			—			2		N/A
Defined Benefit Plan (Gains) Losses	—			—			—		N/A		—			(9)			9		(100.0)	%
Adjusted Income Tax Expense	$	672		$	858		$	(186)	(21.7)	%	$	1,301		$	1,591		$	(290)	(18.2)	%
Effective Tax Rate	23.5		%	22.9		%					24.2		%	22.3		%
Adjusted Effective Tax Rate	23.5		%	22.9		%					24.1		%	22.2		%

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

We deploy a disciplined and balanced approach to capital allocation, including returns to shareowners through dividends and share repurchases. As of June 30, 2023, we had $7.9 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.

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,
	2023		2022
Net income	$	3,976	$	5,511
Non-cash operating activities (a)	2,526		3,059
Pension and postretirement medical benefit plan contributions (company-sponsored plans)	(1,328)		(123)
Hedge margin receivables and payables	(298)		286
Income tax receivables and payables	(61)		14
Changes in working capital and other non-current assets and liabilities	856		(376)
Other operating activities	(77)		(78)
Net cash from operating activities	$	5,594	$	8,293

(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 medical 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 $2.7 billion for the 2023 period, impacted by:

The timing of contributions to our company-sponsored, defined benefit pension and postretirement medical plans. We made discretionary contributions of $1.2 billion to our qualified U.S. pension plans during the six months ended June 30, 2023. There were no discretionary contributions to these plans in the comparative period.
A decrease in our net hedge margin collateral position due to changes in the fair value of derivative contracts used in our currency hedging programs.
Our working capital benefited from an improvement in collections, partially offset by an increase in vendor payments. The reduction in volumes also reduced our overall working capital requirements, and we benefited from the timing of payroll and other compensation-related items relative to the comparative period.
During the first six months of 2023, we paid the remaining $323 million of employer payroll taxes that were deferred under the Coronavirus Aid, Recovery and Economic Security (CARES) Act in 2020.

As of June 30, 2023, approximately $2.8 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. We did not have any restricted cash as of June 30, 2023 or 2022.

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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,
	2023			2022
Net cash used in investing activities	$	(2,859)		$	(1,499)

Capital Expenditures:
Buildings, facilities and plant equipment	$	(818)		$	(524)
Aircraft and parts	(272)			(406)
Vehicles	(277)			(129)
Information technology	(453)			(329)
Total Capital Expenditures(1)	$	(1,820)		$	(1,388)

Capital Expenditures as a % of revenue	4.0		%	2.8		%

Other Investing Activities:
Proceeds from disposal of businesses, property, plant and equipment	$	50		$	9
Net (purchases)/sales and maturities of marketable securities	$	(1,067)		$	(2)
Acquisitions, net of cash acquired	$	(34)		$	(99)
Other investing activities	$	12		$	(19)

(1) In addition to capital expenditures of $1.8 and $1.4 billion for the six months ended June 30, 2023 and 2022, respectively, there were principal repayments of finance lease obligations of $79 and $105 million, respectively. These are included in cash flows from financing activities.

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 2023 investment program anticipates investments in technology initiatives and enhanced network capabilities, including approximately $1.0 billion of projects to support our environmental sustainability goals. It also provides for the maintenance of buildings, facilities and equipment and replacement of certain aircraft within our fleet. We currently expect that our capital expenditures will total approximately $5.3 billion in 2023, of which approximately 50 percent will be allocated to strategic expansion projects.

For the first six months of 2023 compared to 2022, total capital expenditures increased, primarily due to:

Spending on buildings, facilities and plant equipment increased due to facility maintenance and capacity expansion projects.
Vehicle expenditures increased, driven by the timing and availability of vehicle replacements and continuing investments in our network.
Information technology expenditures increased as a result of continuing investments in our digital capabilities and network automation.
Aircraft expenditures decreased due to the timing of payments associated with open aircraft orders.

Proceeds from the disposal of businesses, property, plant and equipment were higher relative to the comparative period as we sold surplus real estate properties during the second quarter of 2023.

Net purchases of marketable securities increased due to a continued shift to longer duration investments.

Cash paid for acquisitions in the 2023 period represents the purchase of development areas for The UPS Store. In 2022, this also included our acquisition of Delivery Solutions in the second quarter. Other investing activities were impacted by changes in our non-current investments, purchase contract deposits and various other immaterial 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,
2023			2022
Net cash used in financing activities	$	(3,582)		$	(5,286)
Share Repurchases:
Cash paid to repurchase shares	$	(1,498)		$	(1,242)
Number of shares repurchased	(8.4)			(6.7)
Shares outstanding at period end	855			870
Dividends:
Dividends declared per share	$	3.24		$	3.04
Cash paid for dividends	$	(2,693)		$	(2,567)
Borrowings:
Net borrowings (repayments) of debt principal	$	907		$	(1,105)
Other Financing Activities:
Cash received for common stock issuances	$	119		$	136
Other financing activities	$	(417)		$	(508)
Capitalization:
Total debt outstanding at period end	$	20,763		$	20,576
Total shareowners’ equity at period end	20,037			16,310
Total capitalization	$	40,800		$	36,886

We repurchased 8.4 and 6.7 million shares of class B common stock for $1.5 and $1.2 billion under our stock repurchase program during the six months ended June 30, 2023 and 2022, respectively. We anticipate our share repurchases will total approximately $3.0 billion in 2023. For additional information on our share repurchase activities, see note 12 to the unaudited, consolidated financial statements.

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. We increased our quarterly cash dividend to $1.62 per share in 2023, compared to $1.52 in 2022. On August 3, 2023, the Board approved a dividend of $1.62 per share, which is payable on August 31, 2023, to shareowners of record on August 14, 2023.

Issuances of debt during the six months ended June 30, 2023 consisted of fixed- and floating-rate senior notes of varying maturities totaling $2.5 billion. We used proceeds from these debt issuances to repay $1.5 billion of fixed- and floating-rate senior notes during the second quarter and we expect to use substantially all of the remaining proceeds to repay additional outstanding debt at maturity during the second half of the year.

There were no issuances of debt in the six months ended June 30, 2022. Repayments of debt in 2022 included fixed- and floating-rate senior notes of varying maturities totaling $1.0 billion and scheduled principal payments on our finance lease obligations.

As of June 30, 2023, we had $763 million of fixed-rate senior notes outstanding that mature in 2023. 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 variation in cash received from common stock issuances primarily resulted from activity within the UPS 401(k) Savings Plan and our employee stock purchase plan in both the current and comparative period.

Other financing activities includes cash used to repurchase shares to satisfy tax withholding obligations on vested employee stock awards. Cash outflows for this purpose were $395 and $512 million for the six months ended June 30, 2023 and 2022, respectively. The decrease was driven by changes in required repurchase amounts.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Except as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, 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.

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, 2022, except as follows. On May 31, 2023 we entered into an accelerated share repurchase agreement for $250 million. The transaction commenced on July 7, 2023 and completed on July 31, 2023.

For additional information on 2023 debt issuances, see note 9 to the unaudited, consolidated financial statements.

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 and note 18 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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