Item 1. Financial Statements

161K characters. Original on sec.gov · Markdown

Item 1. Financial Statements

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2023 (unaudited) and December 31, 2022 (in millions)


	September 30, 2023		December 31, 2022
ASSETS
Current Assets:
Cash and cash equivalents	$	4,311	$	5,602
Marketable securities	2,967		1,993
Accounts receivable	9,593		12,729
Less: Allowance for credit losses	(132)		(146)
Accounts receivable, net	9,461		12,583
Other current assets	2,512		2,039
Total Current Assets	19,251		22,217
Property, Plant and Equipment, Net	36,013		34,719
Operating Lease Right-Of-Use Assets	4,162		3,755
Goodwill	4,097		4,223
Intangible Assets, Net	2,892		2,796
Deferred Income Tax Assets	127		139
Other Non-Current Assets	3,739		3,275
Total Assets	$	70,281	$	71,124
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt, commercial paper and finance leases	$	2,243	$	2,341
Current maturities of operating leases	664		621
Accounts payable	5,972		7,515
Accrued wages and withholdings	3,341		4,049
Self-insurance reserves	1,065		1,069
Accrued group welfare and retirement plan contributions	1,306		1,078
Other current liabilities	1,226		1,467
Total Current Liabilities	15,817		18,140
Long-Term Debt and Finance Leases	18,882		17,321
Non-Current Operating Leases	3,651		3,238
Pension and Postretirement Benefit Obligations	4,670		4,807
Deferred Income Tax Liabilities	4,601		4,302
Other Non-Current Liabilities	3,480		3,513
Shareowners’ Equity:
Class A common stock (130 and 134 shares issued in 2023 and 2022, respectively)	2		2
Class B common stock (722 and 725 shares issued in 2023 and 2022, respectively)	7		7
Additional paid-in capital	—		—
Retained earnings	20,699		21,326
Accumulated other comprehensive loss	(1,540)		(1,549)
Deferred compensation obligations	9		13
Less: Treasury stock (0.2 shares in both 2023 and 2022)	(9)		(13)
Total Equity for Controlling Interests	19,168		19,786
Noncontrolling interests	12		17
Total Shareowners’ Equity	19,180		19,803
Total Liabilities and Shareowners’ Equity	$	70,281	$	71,124

See notes to unaudited, consolidated financial statements.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(In millions, except per share amounts)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
2023			2022			2023			2022
Revenue	$	21,061		$	24,161		$	66,041		$	73,305
Operating Expenses:
Compensation and benefits	11,528			11,489			34,187			34,434
Repairs and maintenance	719			732			2,126			2,160
Depreciation and amortization	837			774			2,499			2,300
Purchased transportation	3,118			4,179			9,834			13,176
Fuel	1,132			1,530			3,493			4,447
Other occupancy	481			435			1,490			1,358
Other expenses	1,903			1,909			5,748			5,531
Total Operating Expenses	19,718			21,048			59,377			63,406
Operating Profit	1,343			3,113			6,664			9,899
Other Income (Expense):
Investment income and other	124			333			424			981
Interest expense	(199)			(177)			(578)			(522)
Total Other Income (Expense)	(75)			156			(154)			459
Income Before Income Taxes	1,268			3,269			6,510			10,358
Income Tax Expense	141			685			1,407			2,263
Net Income	$	1,127		$	2,584		$	5,103		$	8,095
Basic Earnings Per Share	$	1.31		$	2.97		$	5.93		$	9.27
Diluted Earnings Per Share	$	1.31		$	2.96		$	5.92		$	9.24

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(In millions)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net Income	$	1,127	$	2,584	$	5,103	$	8,095
Change in foreign currency translation adjustment, net of tax	(96)		(263)		4		(548)
Change in unrealized gain (loss) on marketable securities, net of tax	(2)		(3)		(11)		(10)
Change in unrealized gain (loss) on cash flow hedges, net of tax	111		281		(46)		558
Change in unrecognized pension and postretirement benefit costs, net of tax	21		18		62		60
Comprehensive Income (Loss)	$	1,161	$	2,617	$	5,112	$	8,155

See notes to unaudited, consolidated financial statements.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

(unaudited)


	Nine Months Ended September 30,
	2023		2022
Cash Flows From Operating Activities:
Net income	$	5,103	$	8,095
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	2,499		2,300
Pension and postretirement benefit (income) expense	729		666
Pension and postretirement benefit contributions	(1,363)		(2,106)
Self-insurance reserves	81		182
Deferred tax (benefit) expense	327		466
Stock compensation expense	186		850
Other (gains) losses	89		(25)
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	2,880		1,022
Other assets	(252)		(98)
Accounts payable	(2,058)		(952)
Accrued wages and withholdings	(155)		(59)
Other liabilities	(157)		481
Other operating activities	(82)		(50)
Net cash from operating activities	7,827		10,772
Cash Flows From Investing Activities:
Capital expenditures	(3,109)		(2,278)
Proceeds from disposal of businesses, property, plant and equipment	167		12
Purchases of marketable securities	(3,347)		(195)
Sales and maturities of marketable securities	2,397		193
Acquisitions, net of cash acquired	(39)		(106)
Other investing activities	2		(34)
Net cash used in investing activities	(3,929)		(2,408)
Cash Flows From Financing Activities:
Net change in short-term debt	415		—
Proceeds from long-term borrowings	2,546		—
Repayments of long-term borrowings	(1,625)		(1,124)
Purchases of common stock	(2,250)		(2,194)
Issuances of common stock	190		198
Dividends	(4,034)		(3,842)
Other financing activities	(427)		(513)
Net cash used in financing activities	(5,185)		(7,475)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(4)		(99)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	(1,291)		790
Cash, Cash Equivalents and Restricted Cash:
Beginning of period	5,602		10,255
End of period	$	4,311	$	11,045

See notes to unaudited, consolidated financial statements.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Principles of Consolidation

The accompanying unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2023, our results of operations for the three and nine months ended September 30, 2023 and 2022, and our cash flows for the nine months ended September 30, 2023 and 2022. The results reported in these unaudited, consolidated financial statements should not be regarded as indicative of results that may be expected for any other period or the entire year. The unaudited, consolidated financial statements should be read in conjunction with the audited, consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

In the first nine months of 2023, we reclassified certain operating expenses to better align with the manner in which we manage our operations. Substantially all of these costs were previously classified within operating expenses as Other expenses and have now been classified within operating expenses as Repairs and maintenance in the statements of consolidated income. The remaining line items within operating expenses impacted by this reclassification were inconsequential. As a result, the statements of consolidated income give effect to this reclassification as follows:

For the three and nine months ended September 30, 2023: decreasing Other expenses by $93 and $273 million, and increasing Repairs and maintenance by $89 and $265 million, respectively.
For the three and nine months ended September 30, 2022: decreasing Other expenses by $90 and $244 million, and increasing Repairs and maintenance by $93 and $252 million, respectively.

The reclassification had no impact on our reported revenue, operating profit, net income, or any internal performance measure on which management is compensated.

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximated fair value as of September 30, 2023 and December 31, 2022. The fair values of our marketable securities are disclosed in note 5, our recognized multiemployer pension withdrawal liabilities in note 7, our short- and long-term debt in note 9 and our derivative instruments in note 15. We apply a fair value hierarchy (Levels 1, 2 and 3) when measuring and reporting items at fair value. Fair values are based on listed market prices (Level 1), when such prices are available. To the extent that listed market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations (Level 2). If listed market prices or other relevant factors are not available, inputs are developed from unobservable data reflecting our own assumptions and include situations where there is little or no market activity for the asset or liability (Level 3).

Use of Estimates

The preparation of the accompanying unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of these financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

Although our estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. As a result, our accounting estimates and assumptions may change significantly over time.

Table of Contents

Supplier Finance Programs

As part of our working capital management, 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, 2023 and December 31, 2022, suppliers sold them $640 and $806 million, respectively, of our outstanding payment obligations.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In September 2022, the Financial Accounting Standards Board issued an Accounting Standards Update ("ASU") to enhance the disclosure of supplier finance programs. This ASU did not affect the recognition, measurement or financial statement presentation of obligations covered by supplier finance programs. We adopted the requirements of this ASU as of January 1, 2023 and have included required disclosures within note 1.

Other accounting pronouncements adopted during the periods covered by the unaudited, consolidated financial statements did not have a material impact on our consolidated financial position, results of operations, cash flows or internal controls.

Accounting Standards Issued But Not Yet Effective

Accounting pronouncements issued before, but not effective until after, September 30, 2023, are not expected to have a material impact on our consolidated financial position, results of operations, cash flows or internal controls.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. REVENUE RECOGNITION

Revenue Recognition

Substantially all of our revenues are from contracts associated with the pickup, transportation and delivery of packages and freight ("transportation services"). These services may be carried out by or arranged by us and generally occur over a short period of time. Additionally, we provide value-added logistics services to customers through our global network of distribution centers and field stocking locations.

The vast majority of our contracts with customers are for transportation services that include only one performance obligation; the transportation services themselves. We generally recognize revenue over time, based on the extent of progress towards completion of the services in the contract. All of our major businesses act as a principal in their revenue arrangements and as such, we report revenue and the associated purchased transportation costs on a gross basis within our statements of consolidated income.

Disaggregation of Revenue


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue:
Next Day Air	$	2,372	$	2,673	$	7,240	$	7,923
Deferred	1,128		1,311		3,491		4,123
Ground	10,160		11,390		32,312		33,911
U.S. Domestic Package	13,660		15,374		43,043		45,957

Domestic	742		785		2,299		2,465
Export	3,367		3,747		10,387		11,501
Cargo & Other	158		267		539		782
International Package	4,267		4,799		13,225		14,748

Forwarding	1,327		2,162		4,217		7,140
Logistics	1,430		1,302		4,271		3,843
Other	377		524		1,285		1,617
Supply Chain Solutions	3,134		3,988		9,773		12,600

Consolidated revenue	$	21,061	$	24,161	$	66,041	$	73,305

Contract Assets and Liabilities

Contract assets include billed and unbilled amounts resulting from in-transit shipments, as we have an unconditional right to payment only when services have been completed (i.e. shipments have been delivered). Amounts do not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.

Contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance payments and billings in excess of revenue represent payments received from our customers that will be earned over the contract term. Deferred revenue represents the amount due from customers related to in-transit shipments that has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the amount will be earned. We classify deferred revenue as current based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Contract assets and liabilities as of September 30, 2023 and December 31, 2022 were as follows (in millions):


	Balance Sheet Location	September 30, 2023		December 31, 2022
Contract Assets:
Revenue related to in-transit packages	Other current assets	$	233	$	308

Contract Liabilities:
Short-term advance payments from customers	Other current liabilities	$	13	$	11
Long-term advance payments from customers	Other non-current liabilities	$	25	$	26

Accounts Receivable, Net

Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimate of the current expected losses inherent in our accounts receivable at each balance sheet date. This estimate requires consideration of historical loss experience, adjusted for current conditions, forward looking indicators, trends in customer payment frequency and judgments about the probable effects of relevant observable data, including present and future economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk.

Our allowance for credit losses as of September 30, 2023 and December 31, 2022 was $132 and $146 million, respectively. Amounts for credit losses charged to expense, before recoveries, during each of the three months ended September 30, 2023 and 2022 were $49 and $48 million, respectively, and for the nine months ended September 30, 2023 and 2022 were $133 and $154 million, respectively.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. STOCK-BASED COMPENSATION

We issue share-based awards under various incentive compensation plans, including non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units ("RSUs") and restricted performance shares and performance units ("RPUs", collectively with RSUs, "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units.

Our primary equity compensation programs are the UPS Long-Term Incentive Performance Program (the "LTIP") and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount.

On November 2, 2022, we amended and restated the terms and conditions of the UPS Management Incentive Program (the "MIP") effective January 1, 2023, to provide that awards under the MIP will be fully electable in the form of cash or unrestricted shares of class A common stock.

Pre-tax compensation expense for share-based awards recognized in Compensation and benefits in the statements of consolidated income for the three months ended September 30, 2023 and 2022 was $21 and $233 million, respectively, and for the nine months ended September 30, 2023 and 2022 was $186 and $850 million, respectively.

Management Incentive Program

RPUs issued under the MIP prior to 2022 vested one year following the grant date subject to continued employment with the Company and were expensed on a straight-line basis (less estimated forfeitures) over the requisite service period. In cases of death, disability or retirement, RPUs vested and were expensed immediately.

RPUs issued under the MIP in 2022 vested on December 31, 2022. As a result, the award was classified as a compensation obligation and recorded in Accrued wages and withholdings on the consolidated balance sheet at that date. Based on the date of the Compensation and Human Capital Committee of the UPS Board of Directors (the "Compensation Committee") approval of the 2022 MIP, we determined the award measurement date to be February 8, 2023 for U.S.-based employees, including executive management, and March 20, 2023 for international employees. Each RPU issued under the MIP was valued using the closing New York Stock Exchange ("NYSE") prices of $186.36 and $183.49 on those dates. The compensation obligation recognized as of December 31, 2022 was relieved and the issuance of RPUs was recorded as additional paid-in capital on the measurement date.

Long-Term Incentive Performance Program

RPUs issued under the LTIP vest at the end of a three-year performance period, subject to continued employment with the Company (except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis). The actual number of RPUs earned is based on achievement of the performance targets established on the grant date.

The performance targets are equally weighted between adjusted earnings per share and cumulative free cash flow. The actual number of RPUs earned is subject to adjustment based on total shareholder return relative to the Standard & Poor's 500 Index ("S&P 500"). We determine the grant date fair value of the RPUs using a Monte Carlo model and recognize compensation expense (less estimated forfeitures) ratably over the vesting period, based on the number of awards expected to be earned.

Based on the date of the Compensation Committee's approval of the 2023 LTIP award performance targets, we determined March 22, 2023 to be the award measurement date and each target RPU awarded was valued at $200.01.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The weighted-average assumptions used and the weighted-average fair values of the LTIP awards granted in 2023 and 2022 are as follows:


	2023			2022
Risk-free interest rate	3.81		%	2.35		%
Expected volatility	30.30		%	31.92		%
Fair value of RPUs granted	$	198.98		$	227.00
Share payout	107.80		%	107.37		%

There is no expected dividend yield as units earn dividend equivalents.

Non-Qualified Stock Options

We grant non-qualified stock options to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards vest over a five-year period with approximately 20% of the award vesting at each anniversary of the grant date (except in the case of death, disability or retirement, in which case immediate vesting occurs). The option grants expire 10 years after the date of the grant. On March 22, 2023, we granted 0.1 million stock options at an exercise price of $185.54, the NYSE closing price on that date.

The fair value of each option granted is estimated using a Black-Scholes option pricing model. The weighted-average assumptions used and the weighted-average fair values of options granted in 2023 and 2022 are as follows:


	2023			2022
Expected dividend yield	3.54		%	2.35		%
Risk-free interest rate	3.70		%	2.39		%
Expected life (in years)	5.93			7.50
Expected volatility	28.31		%	25.04		%
Fair value of options granted	$	41.08		$	48.45

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. MARKETABLE SECURITIES AND NON-CURRENT INVESTMENTS

The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2023 and December 31, 2022 (in millions):


	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
September 30, 2023:
Current trading marketable securities:




Equity securities	$	4	$	—	$	—	$	4



Total trading marketable securities	4		—		—		4

Current available-for-sale securities:
U.S. government and agency debt securities	980		—		(12)		968
Mortgage and asset-backed debt securities	7		—		—		7
Corporate debt securities	1,962		—		(17)		1,945
U.S. state and local municipal debt securities	2		—		—		2

Non-U.S. government debt securities	41		—		—		41


Total available-for-sale marketable securities	2,992		—		(29)		2,963

Total current marketable securities	$	2,996	$	—	$	(29)	$	2,967

	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
December 31, 2022:
Current trading marketable securities:




Equity securities	$	2	$	—	$	—	$	2



Total trading marketable securities	2		—		—		2

Current available-for-sale securities:
U.S. government and agency debt securities	355		—		(8)		347
Mortgage and asset-backed debt securities	9		—		—		9
Corporate debt securities	1,472		—		(6)		1,466
U.S. state and local municipal debt securities	4		—		—		4

Non-U.S. government debt securities	165		—		—		165


Total available-for-sale marketable securities	2,005		—		(14)		1,991

Total current marketable securities	$	2,007	$	—	$	(14)	$	1,993

Investment Impairments

We have concluded that no material impairment losses existed as of September 30, 2023. In making this determination, we considered the financial condition and prospects of each issuer, the magnitude of the losses compared with the cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Maturity Information

The amortized cost and estimated fair value of marketable securities as of September 30, 2023 by contractual maturity are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations with or without prepayment penalties.


	Cost		Estimated Fair Value
Due in one year or less	$	1,469	$	1,464
Due after one year through three years	1,515		1,491
Due after three years through five years	8		8
Due after five years	—		—
	2,992		2,963
Equity securities	4		4
	$	2,996	$	2,967

Non-Current Investments

We hold non-current investments that are reported within Other Non-Current Assets in our consolidated balance sheets. Cash paid for these investments is included in Other investing activities in our statements of consolidated cash flows.

Equity method investments: As of September 30, 2023 and December 31, 2022, equity securities accounted for under the equity method had a carrying value of $249 and $256 million, respectively.
Other equity securities: Certain equity securities that do not have readily determinable fair values are reported in accordance with the measurement alternative in ASC Topic 321 Investments - Equity Securities. As of September 30, 2023 and December 31, 2022, we held equity securities accounted for using the measurement alternative of $33 and $31 million, respectively.
Other investments: We hold an investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. The investment had a fair market value of $18 million as of both September 30, 2023 and December 31, 2022.

Fair Value Measurements

Marketable securities valued utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. government debt securities, as these securities all have quoted prices in active markets. Marketable securities valued utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information about our investments measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 30, 2023:
Marketable Securities:
U.S. government and agency debt securities	$	968	$	—	$	—	$	968
Mortgage and asset-backed debt securities	—		7		—		7
Corporate debt securities	—		1,945		—		1,945
U.S. state and local municipal debt securities	—		2		—		2
Equity securities	—		4		—		4
Non-U.S. government debt securities	—		41		—		41


Total marketable securities	968		1,999		—		2,967
Other non-current investments(1)	—		18		—		18
Total	$	968	$	2,017	$	—	$	2,985

(1) Represents a variable life insurance policy funding benefits for the UPS Excess Coordinating Benefit Plan.



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
December 31, 2022:
Marketable Securities:
U.S. government and agency debt securities	$	279	$	68	$	—	$	347
Mortgage and asset-backed debt securities	—		9		—		9
Corporate debt securities	—		1,466		—		1,466
U.S. state and local municipal debt securities	—		4		—		4
Equity securities	—		2		—		2

Non-U.S. government debt securities	—		165		—		165

Total marketable securities	279		1,714		—		1,993
Other non-current investments(1)	—		18		—		18
Total	$	279	$	1,732	$	—	$	2,011


(1) Represents a variable life insurance policy funding benefits for the UPS Excess Coordinating Benefit Plan.

There were no transfers of investments into or out of Level 3 during the nine months ended September 30, 2023 or 2022.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of September 30, 2023 and December 31, 2022 consisted of the following (in millions):


	2023		2022
Vehicles	$	11,403	$	10,628
Aircraft	22,780		22,598
Land	2,124		2,140
Buildings	6,164		6,032
Building and leasehold improvements	5,173		5,067
Plant equipment	16,961		16,145
Technology equipment	2,613		2,411
Construction-in-progress	2,852		2,409
	70,070		67,430
Less: Accumulated depreciation and amortization	(34,057)		(32,711)
Property, Plant and Equipment, Net	$	36,013	$	34,719

Property, plant and equipment purchased on account was $734 and $176 million as of September 30, 2023 and December 31, 2022, respectively.

For the three and nine months ended September 30, 2023 and 2022, there were no material impairment charges.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. EMPLOYEE BENEFIT PLANS

Company-Sponsored Benefit Plans

Information about the net periodic benefit cost (income) for our company-sponsored pension and postretirement benefit plans for the three and nine months ended September 30, 2023 and 2022 is as follows (in millions):


	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
2023			2022			2023			2022			2023			2022
Three Months Ended September 30:
Service cost	$	293		$	506		$	5		$	7		$	11		$	17
Interest cost	627			488			29			21			16			11
Expected return on assets	(742)			(820)			(3)			(1)			(21)			(19)


Amortization of prior service cost	27			23			—			—			1			—



Net periodic benefit cost (income)	$	205		$	197		$	31		$	27		$	7		$	9

	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2023			2022			2023			2022			2023			2022
Nine Months Ended September 30:
Service cost	$	879		$	1,518		$	15		$	22		$	33		$	52
Interest cost	1,881			1,463			87			62			49			34
Expected return on assets	(2,225)			(2,460)			(9)			(3)			(63)			(59)
Amortization of prior service cost	80			69			1			—			1			1

Settlement and curtailment (gain) loss	—			—			—			—			—			(33)
Net periodic benefit cost (income)	$	615		$	590		$	94		$	81		$	20		$	(5)

The components of net periodic benefit cost (income) other than current service cost are presented within Investment income and other in the statements of consolidated income.

During the nine months ended September 30, 2022, we amended the UPS Canada Ltd. Retirement Plan to cease future benefit accruals effective December 31, 2023. We remeasured the plan's assets and benefit obligation, which resulted in a curtailment gain of $33 million ($24 million after-tax) for the nine months ended September 30, 2022. The gain is included in Investment income and other in the statement of consolidated income.

During the nine months ended September 30, 2023, we contributed $1.3 billion and $108 million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We expect to contribute approximately $26 and $10 million over the remainder of the year to our pension and U.S. postretirement medical benefit plans, respectively.

Multiemployer Benefit Plans

We contribute to a number of multiemployer defined benefit and health and welfare plans under the terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.

As of September 30, 2023 and December 31, 2022, we had $815 and $821 million, respectively, recorded in Other Non-Current Liabilities in our consolidated balance sheets and $8 million as of each of September 30, 2023 and December 31, 2022 recorded in Other current liabilities in our consolidated balance sheets associated with our previous withdrawal from the New England Teamsters and Trucking Industry Pension Fund. This liability is payable in equal monthly installments over a remaining term of approximately 39 years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of this withdrawal liability as of September 30, 2023 and December 31, 2022 was $642 and $686 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 at which time UPS withdrew from the CSPF. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are reduced by the CSPF consistent with the terms of our withdrawal agreement with the CSPF. Under this agreement, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with law. Subsequent to our withdrawal, the CSPF incurred extensive asset losses and indicated that it was projected to become insolvent. In such event, the CSPF benefits would be reduced to the legally permitted Pension Benefit Guaranty Corporation ("PBGC") limits, triggering the coordinating benefits provision in the collective bargaining agreement.

In March 2021, the American Rescue Plan Act ("ARPA") was enacted into law. The ARPA contains provisions that allow for qualifying multiemployer pension plans to apply for special financial assistance ("SFA") from the PBGC, which will be funded by the U.S. government. Following SFA approval, a qualifying multiemployer pension plan will receive a lump sum payment to enable it to continue paying unreduced pension benefits through 2051. The multiemployer plan is not obligated to repay the SFA. The ARPA is intended to prevent both the PBGC and certain financially distressed multiemployer pension plans, including the CSPF, from becoming insolvent through 2051. The CSPF submitted an application for SFA that was approved in December 2022 and, in January 2023, the CSPF received $35.8 billion from the PBGC.

We account for the potential obligation to pay coordinating benefits under ASC Topic 715, which requires us to provide a best estimate of various actuarial assumptions in measuring our pension benefit obligation at the December 31st measurement date. As of December 31, 2022, our best estimate of coordinating benefits that may be required to be paid by the UPS/IBT Plan after SFA funds have been exhausted was immaterial.

The value of our estimate for future coordinating benefits will continue to be influenced by a number of factors, including interpretations of the ARPA, future legislative actions, actuarial assumptions and the ability of the CSPF to sustain its long-term commitments. Actual events may result in a change in our best estimate of the projected benefit obligation. We will continue to assess the impact of these uncertainties in accordance with ASC Topic 715.

Collective Bargaining Agreements

We have more than 300,000 employees in the U.S. employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. These agreements were scheduled to expire on July 31, 2023. On July 25, 2023, we reached a new tentative national master agreement with the Teamsters. On September 9, 2023, the agreement was fully ratified. The new agreement contains wage and benefit rate increases for both our part-time and full-time Teamster employees. Based on the most recent actuarial assumptions, the impact to the projected benefit obligation ("PBO") would be approximately $0.6 billion. These enhancements will be recognized at the plans' next measurement date, which is expected to be December 31, 2023, and are subject to actuarial assumptions at that date which may further impact the final PBO calculation.

We have approximately 10,000 employees in Canada employed under a collective bargaining agreement with the Teamsters which runs through July 31, 2025.

We have approximately 3,500 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association. This collective bargaining agreement becomes amendable September 1, 2025.

We have approximately 1,800 airline mechanics who are covered by a collective bargaining agreement with Teamsters Local 2727 which becomes amendable November 1, 2026. In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers. These collective bargaining agreements run through July 31, 2024.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. GOODWILL AND INTANGIBLE ASSETS

The following table indicates the allocation of goodwill as of September 30, 2023 and December 31, 2022 (in millions):


	U.S. Domestic Package		International Package		Supply Chain Solutions		Consolidated
December 31, 2022:	$	847	$	492	$	2,884	$	4,223
Acquired	—		—		8		8
Impairments	—		—		(125)		(125)
Currency / Other	—		(5)		(4)		(9)
September 30, 2023:	$	847	$	487	$	2,763	$	4,097

We conducted our most recent goodwill impairment testing as of July 1, 2023 using both qualitative and quantitative methods. Our quantitative tests utilize a combination of the income and market approaches. In developing our valuation assumptions underlying the annual impairment testing, we determined that the cost of capital for our Roadie and Delivery Solutions reporting units had increased, driven by increases in the risk-free interest rate and volatility of the stock prices of market comparables. The results of our testing using these assumptions indicated that the carrying values of our Roadie and Delivery Solutions reporting units exceeded their estimated fair values.

As a result, for the third quarter of 2023, we recorded an impairment charge of $117 million ($103 million after tax, or $0.12 per diluted share) within Other Expenses in our Statement of Consolidated Income. This charge represented goodwill impairment of $56 million related to the Roadie reporting unit and $61 million related to Delivery Solutions, representing all of the goodwill associated with this reporting unit.

Additional changes in goodwill during the nine months ended September 30, 2023 resulted from:

An increase in goodwill of $8 million, as part of purchase accounting for our acquisition of Bomi Group in the fourth quarter of 2022. Certain areas, including our estimates of non-current liabilities and tax positions, remain preliminary as of September 30, 2023.
An immaterial impairment charge related to the closure of a trade management services business within Supply Chain Solutions.
The remaining movements are due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of intangible assets as of September 30, 2023 and December 31, 2022 (in millions):



	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
September 30, 2023:
Capitalized software	$	5,637	$	(3,790)	$	1,847
Licenses	71		(43)		28
Franchise rights	261		(46)		215
Customer relationships	852		(489)		363
Trade name	124		(24)		100
Trademarks, patents and other	188		(53)		135
Amortizable intangible assets	$	7,133	$	(4,445)	$	2,688
Indefinite-lived intangible assets	204		—		204
Total Intangible Assets, Net	$	7,337	$	(4,445)	$	2,892
December 31, 2022:
Capitalized software	$	5,186	$	(3,500)	$	1,686
Licenses	55		(30)		25
Franchise rights	226		(37)		189
Customer relationships	872		(453)		419
Trade name	125		(8)		117
Trademarks, patents and other	183		(27)		156
Amortizable intangible assets	$	6,647	$	(4,055)	$	2,592
Indefinite-lived intangible assets	204		—		204
Total Intangible Assets, Net	$	6,851	$	(4,055)	$	2,796

A trade name and licenses with carrying values of $200 and $4 million, respectively, as of September 30, 2023 are deemed to be indefinite-lived intangible assets, and therefore are not amortized.

Our annual impairment testing indicated that the fair value of the indefinite-lived trade name associated with our truckload brokerage business remained greater than its carrying value by less than 10 percent. The carrying value of the trade name is $200 million. Our truckload brokerage business continues to be negatively impacted by market conditions, which has resulted in revenue declines. We continue to monitor business performance and external factors affecting our valuation assumptions for this trade name. There were no events or changes in circumstances as of September 30, 2023 that would indicate the carrying amount of our indefinite-lived intangible assets may be impaired as of the date of this report.

Impairment tests for finite-lived intangible assets are performed when a triggering event occurs that may indicate that the carrying value of the intangible asset may not be recoverable. Impairment charges for finite-lived intangible assets were $8 million for the three and nine months ended September 30, 2023. There were no impairment charges for finite-lived intangible assets for the three and nine months ended September 30, 2022.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. DEBT AND FINANCING ARRANGEMENTS

The carrying value of our outstanding debt obligations as of September 30, 2023 and December 31, 2022 consisted of the following (in millions):


	Principal Amount					Carrying Value
			Maturity		2023			2022
Commercial paper	$	461		2023-2024		$	458		$	—

Fixed-rate senior notes:
2.500% senior notes	$	—		2023		$	—		$	999
2.800% senior notes	500			2024		499			499
2.200% senior notes	400			2024		400			399
3.900% senior notes	1,000			2025		998			997
2.400% senior notes	500			2026		499			499
3.050% senior notes	1,000			2027		996			995
3.400% senior notes	750			2029		747			747
2.500% senior notes	400			2029		398			397
4.450% senior notes	750			2030		745			744
4.875% senior notes	900			2033		894			—
6.200% senior notes	1,500			2038		1,485			1,485
5.200% senior notes	500			2040		494			494
4.875% senior notes	500			2040		491			491
3.625% senior notes	375			2042		369			369
3.400% senior notes	500			2046		492			492
3.750% senior notes	1,150			2047		1,138			1,137
4.250% senior notes	750			2049		743			743
3.400% senior notes	700			2049		689			688
5.300% senior notes	1,250			2050		1,231			1,231
5.050% senior notes	1,100			2053		1,083			—
Floating-rate senior notes:
Floating-rate senior notes	—			2023		—			500
Floating-rate senior notes	1,566			2049-2073		1,549			1,027

Debentures:
7.620% debentures	276			2030		280			280
Pound Sterling notes:
5.500% notes	81			2031		81			79
5.125% notes	555			2050		527			521
Euro senior notes:
0.375% senior notes	741			2023		741			745
1.625% senior notes	741			2025		739			744
1.000% senior notes	530			2028		527			531
1.500% senior notes	530			2032		527			530
Canadian senior notes:
2.125% senior notes	556			2024		555			553
Finance lease obligations	425			2023-2046		425			390
Facility notes and bonds	320			2029-2045		320			320
Other debt	5			2023-2026		5			36
Total debt	$	21,312				21,125			19,662
Less: current maturities						(2,243)			(2,341)
Long-term debt						$	18,882		$	17,321

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Commercial Paper

We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. As of September 30, 2023, we had $458 million outstanding under our U.S. commercial paper program, with an average interest rate of 5.32%. The amount of commercial paper outstanding is expected to fluctuate. As of September 30, 2023, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheet. There was no commercial paper outstanding at December 31, 2022.

Debt Classification

We have classified certain floating-rate senior notes that are redeemable at the option of the note holder as long-term liabilities in our consolidated balance sheets, due to our intent and ability to refinance the debt if the put option is exercised.

Debt Repayments

During the nine months ended September 30, 2023, we repaid approximately $23 million of foreign-currency-denominated debt assumed in the Bomi Group acquisition.

On April 1, 2023, our 2.500% Senior Notes with a principal balance of $1.0 billion and our floating rate senior notes with a principal balance of $500 million matured and were repaid in full.

Debt Issuances

On February 23, 2023, we issued two series of notes in the principal amounts of $900 million and $1.1 billion. These notes bear interest at 4.875% and 5.050%, respectively, and mature on March 3, 2033 and March 3, 2053, respectively. Interest on the notes is payable semi-annually, beginning September 2023. Each series of notes is callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of scheduled payments of principal and interest, plus accrued and unpaid interest.

On March 7, 2023, we issued floating rate senior notes with a principal balance of $529 million. These notes bear interest at a rate equal to the compounded Secured Overnight Financing Rate ("SOFR") less 0.350% per year and mature on March 15, 2073. These notes are callable at various times after 30 years at a stated percentage of par value and are redeemable at the option of the note holders at various times after one year at a stated percentage of par value.

Reference Rate Reform

Our floating-rate senior notes that mature between 2049 and 2067 bore interest at rates that referenced the London Interbank Offer Rate ("LIBOR") for U.S. Dollars. As part of a broader program of reference rate reform, U.S. Dollar LIBOR rates ceased to be published after June 2023. Beginning July 1, 2023, we transitioned these notes to an alternative reference rate, SOFR, which was adopted in accordance with recommendations of the Alternative Reference Rates Committee.

Sources of Credit

We maintain two credit agreements with a consortium of banks. The first of these agreements provides revolving credit facilities of $1.0 billion, and expires on December 5, 2023. Amounts outstanding under this agreement bear interest at a periodic fixed rate equal to the term SOFR rate, plus 0.10% per annum and an applicable margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of September 30, 2023 was 0.70%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; or (3) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%, may be used at our discretion. We expect to renew this credit agreement in the fourth quarter of 2023 on substantially similar terms.

The second agreement provides revolving credit facilities of $2.0 billion, and expires on December 7, 2026. Amounts outstanding under this facility bear interest at a periodic fixed rate equal to the term SOFR rate plus 0.10% per annum and an applicable margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of September 30, 2023 was 0.875%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; or (3) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%, plus an applicable margin, may be used at our discretion.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

If the credit ratings established by Standard & Poor's and Moody's differ, the higher rating will be used, except in cases where the lower rating is two or more levels lower. In these circumstances, the rating one step below the higher rating will be used. We are also able to request advances under these facilities based on competitive bids for the applicable interest rate.

There were no amounts outstanding under these facilities as of September 30, 2023.

Debt Covenants

Our existing debt instruments and credit facilities subject us to certain financial covenants. As of September 30, 2023, and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of September 30, 2023, 10% of net tangible assets was equivalent to $4.7 billion and we had no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.

Fair Value of Debt

Based on the borrowing rates currently available to us for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately $19.8 and $18.2 billion as of September 30, 2023 and December 31, 2022, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. LEASES

We have finance and operating leases for real estate (primarily package centers, airport facilities and warehouses), aircraft and engines, information technology equipment, vehicles and various other equipment used in operating our business. Certain leases for real estate and aircraft contain options to purchase, extend or terminate the lease.

Aircraft

In addition to the aircraft that we own, we charter aircraft to handle package and cargo volume on certain international trade lanes and domestic routes. Due to the nature of these agreements, primarily being that either party can cancel the agreement with short notice, we have classified these as short-term leases. A majority of our long-term aircraft operating leases are operated by a third party to handle package and cargo volume in geographic regions where, due to government regulations, we are restricted from operating an airline.

Transportation equipment and other equipment

We enter into both long-term and short-term leases for transportation equipment to supplement our capacity or meet contractual demands. Some of these assets are leased on a month-to-month basis and the leases can be terminated without penalty. We also enter into equipment leases to increase capacity during periods of high demand. These leases are treated as short-term as the cumulative right of use is less than 12 months over the term of the contract.

Some of our transportation and technology equipment leases require us to make additional lease payments based on the underlying usage of the assets. Due to the variable nature of these costs, these are expensed as incurred and are not included in the right of use lease asset and associated lease obligation.

The components of lease expense for the three and nine months ended September 30, 2023 and 2022 were as follows (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating lease costs	$	219	$	179	$	645	$	546
Finance lease costs:
Amortization of assets	31		28		88		84
Interest on lease liabilities	4		3		13		10
Total finance lease costs	35		31		101		94
Variable lease costs	63		62		203		194
Short-term lease costs	243		319		746		944
Total lease costs(1)	$	560	$	591	$	1,695	$	1,778
(1) This table excludes sublease income as it was not material for the three and nine months ended September 30, 2023 or 2022.

In addition to the lease costs disclosed in the table above, we monitor all lease categories for any indicators that the carrying value of the assets may not be recoverable. There were no impairments recognized during the three months ended September 30, 2023. We recognized $13 million of impairments during the nine months ended September 30, 2023. There were no material impairments recognized during the three or nine months ended September 30, 2022.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Supplemental information related to leases and location within our consolidated balance sheets is as follows (in millions, except lease term and discount rate):


	September 30, 2023			December 31, 2022
Operating Leases:
Operating lease right-of-use assets	$	4,162		$	3,755

Current maturities of operating leases	$	664		$	621
Non-current operating leases	3,651			3,238
Total operating lease obligations	$	4,315		$	3,859

Finance Leases:
Property, plant and equipment, net	$	810		$	959

Current maturities of long-term debt, commercial paper and finance leases	$	86		$	92
Long-term debt and finance leases	339			298
Total finance lease obligations	$	425		$	390

Weighted average remaining lease term (in years):
Operating leases	11.0			10.8
Finance leases	8.1			8.4

Weighted average discount rate:
Operating leases	3.04		%	2.32		%
Finance leases	3.72		%	3.17		%

Supplemental cash flow information related to leases is as follows (in millions):


	Nine Months Ended September 30,
	2023		2022
Cash paid for amounts included in measurement of obligations:
Operating cash flows from operating leases	$	627	$	523
Operating cash flows from finance leases	10		3
Financing cash flows from finance leases	101		123

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	1,013	$	588
Finance leases	$	136	$	98

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Maturities of lease obligations as of September 30, 2023 were as follows (in millions):


	Finance Leases		Operating Leases
2023	$	32	$	180
2024	97		789
2025	74		713
2026	51		612
2027	44		532
Thereafter	212		2,323
Total lease payments	510		5,149
Less: Imputed interest	(85)		(834)
Total lease obligations	425		4,315
Less: Current obligations	(86)		(664)
Long-term lease obligations	$	339	$	3,651

As of September 30, 2023, we had $764 million of additional leases which had not commenced. These leases will commence between 2023 and 2025 when we are granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. LEGAL PROCEEDINGS AND CONTINGENCIES

We are involved in a number of judicial proceedings and other matters arising from the conduct of our business.

Although there can be no assurances as to the ultimate outcome, we have generally denied, or believe we have meritorious defenses and will deny, liability in all pending matters, including (except as otherwise noted herein) the matters described below, and we intend to vigorously defend each matter. We accrue amounts associated with legal proceedings when and to the extent a loss becomes probable and can be reasonably estimated. The actual costs of resolving legal proceedings may be substantially higher or lower than the amounts accrued on those claims.

For matters as to which we are not able to estimate a possible loss or range of losses, we are not able to determine whether any such loss will have a material impact on our operations or financial condition. For these matters, we have described the reasons that we are unable to estimate a possible loss or range of losses.

Judicial Proceedings

We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with any such matter will have a material impact on our operations or financial condition. One of these matters, Hughes v. UPS Supply Chain Solutions, Inc. and United Parcel Service, Inc. had previously been certified as a class action in Kentucky state court. In the second quarter of 2019, the court granted our motion for judgment on the pleadings related to the wage-and-hour claims. The plaintiffs' appeal of this decision was denied. However, they were granted a discretionary review by the Kentucky Supreme Court. In the first quarter of 2023, the Kentucky Supreme Court ruled in our favor. Plaintiffs subsequently filed a motion for rehearing, which was denied.

In July 2023, another matter, Baker v. United Parcel Service, Inc. (DE) and United Parcel Service, Inc. (OH) was certified as a class action in federal court in the Eastern District of Washington. The plaintiff in this matter alleges that UPS violated the Uniformed Services Employment and Reemployment Rights Act. We are vigorously defending ourselves in this matter and believe that we have a number of meritorious defenses, and there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

Other Matters

In August 2016, Spain’s National Markets and Competition Commission ("CNMC") announced an investigation into 10 companies in the commercial delivery and parcel industry, including UPS, related to alleged nonaggression agreements to allocate customers. In May 2017, we received a Statement of Objections issued by the CNMC. In July 2017, we received a Proposed Decision from the CNMC. In March 2018, the CNMC adopted a final decision, finding an infringement and imposing an immaterial fine on UPS. We appealed the decision. In December 2022, a trial court ruled against us. We have filed an appeal before the Spanish Supreme Court. We are vigorously defending ourselves and believe that we have a number of meritorious defenses. There are also unresolved questions of law that could be important to the ultimate resolution of this matter. We do not believe that any loss from this matter would have a material impact on our operations or financial condition.

We are a party in various other matters that arose in the normal course of business. We do not believe that the eventual resolution of these other matters (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material impact on our operations or financial condition.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12. SHAREOWNERS' EQUITY

Capital Stock, Additional Paid-In Capital, Retained Earnings and Non-Controlling Interests

We are authorized to issue two classes of common stock, which are distinguished from each other primarily by their respective voting rights. Class A shares of UPS are entitled to 10 votes per share, whereas class B shares are entitled to one vote per share. Class A shares are primarily held by UPS employees and retirees, as well as trusts and descendants of the Company's founders, and these shares are fully convertible into class B shares at any time. Class B shares are publicly traded on the NYSE under the symbol “UPS”. Class A and B shares both have a $0.01 par value, and as of September 30, 2023, there were 4.6 billion class A shares and 5.6 billion class B shares authorized to be issued. Additionally, there are 200 million preferred shares authorized to be issued, with a par value of $0.01 per share. As of September 30, 2023, no preferred shares had been issued.

The following is a rollforward of our common stock, additional paid-in capital, retained earnings and non-controlling interests accounts for the three and nine months ended September 30, 2023 and 2022 (in millions, except per share amounts):


Three Months Ended September 30:	2023			2022
	Shares	Dollars		Shares	Dollars
Class A Common Stock
Balance at beginning of period	132	$	2	138	$	2
Stock award plans	1	—		(1)	—
Common stock issuances	1	—		1	—
Conversions of class A to class B common stock	(4)	—		(3)	—
Class A shares issued at end of period	130	$	2	135	$	2
Class B Common Stock
Balance at beginning of period	723	$	7	732	$	7
Common stock purchases	(5)	—		(5)	—
Conversions of class A to class B common stock	4	—		3	—
Class B shares issued at end of period	722	$	7	730	$	7
Additional Paid-In Capital
Balance at beginning of period		$	—		$	573
Stock award plans		14			233
Common stock purchases		(123)			(903)
Common stock issuances		115			97
Other (1)		(6)			—
Balance at end of period		$	—		$	—
Retained Earnings
Balance at beginning of period		$	21,584		$	18,958
Net income attributable to common shareowners		1,127			2,584
Dividends ($1.62 and $1.52 per share) (2)		(1,384)			(1,316)
Common stock purchases		(627)			(48)
Other		(1)			(1)
Balance at end of period		$	20,699		$	20,177
Non-Controlling Interest
Balance at beginning of period		$	18		$	21
Change in non-controlling interest		(6)			(1)
Balance at end of period		$	12		$	20
(1) Includes a 1% excise tax applicable to share repurchases. (2) The dividend per share amount is the same for both class A and class B common stock. Dividends included $43 and $41 million as of September 30, 2023 and 2022, respectively, that were settled in shares of class A common stock.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Nine Months Ended September 30:	2023			2022
	Shares	Dollars		Shares	Dollars
Class A Common Stock:
Balance at beginning of period	134	$	2	138	$	2
Stock award plans	4	—		5	—
Common stock issuances	2	—		2	—
Conversions of class A to class B common stock	(10)	—		(10)	—
Class A shares issued at end of period	130	$	2	135	$	2
Class B Common Stock:
Balance at beginning of period	725	$	7	732	$	7
Common stock purchases	(13)	—		(12)	—
Conversions of class A to class B common stock	10	—		10	—
Class B shares issued at end of period	722	$	7	730	$	7
Additional Paid-In Capital:
Balance at beginning of period		$	—		$	1,343
Stock award plans		391			410
Common stock purchases		(750)			(2,146)
Common stock issuances		370			393
Other (1)		(11)			—
Balance at end of period		$	—		$	—
Retained Earnings:
Balance at beginning of period		$	21,326		$	16,179
Net income attributable to controlling interests		5,103			8,095
Dividends ($4.86 and $4.56 per share) (2)		(4,230)			(4,049)
Common stock purchases		(1,500)			(48)
Other		—			—
Balance at end of period		$	20,699		$	20,177
Non-Controlling Interests:
Balance at beginning of period		$	17		$	16
Change in non-controlling interest		(5)			4
Balance at end of period		$	12		$	20
(1) Includes a 1% excise tax applicable to share repurchases. (2) The dividend per share amount is the same for both class A and class B common stock. Dividends include $196 and $207 million as of September 30, 2023 and 2022, respectively, that were settled in shares of class A common stock.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

We repurchased 4.4 and 12.8 million shares of class B common stock for $750 million and $2.3 billion during the three and nine months ended September 30, 2023, respectively. We repurchased 4.9 and 11.6 million shares of class B common stock for $951 million and $2.2 billion during the three and nine months ended September 30, 2022, respectively. These repurchases were completed as follows:

In August 2021, the Board of Directors authorized the company to repurchase up to $5.0 billion of class A and class B common stock (the "2021 Authorization"). For the nine months ended months ended September 30, 2023, we repurchased 0.5 million shares of class B common stock for $82 million under this authorization. The share repurchases discussed above for the three and nine months ended September 30, 2022, were completed under this authorization.
In January 2023, the Board of Directors terminated the 2021 Authorization and approved a new share repurchase authorization for $5.0 billion of class A and class B common stock (the "2023 Authorization"). For the three and nine months ended September 30, 2023, we repurchased 4.4 and 12.3 million shares for $750 million and $2.2 billion, respectively, under the 2023 Authorization. As of September 30, 2023, we had $2.8 billion available under this repurchase authorization.

We do not anticipate further share repurchases in 2023.

Future share repurchases may be in the form of accelerated share repurchase programs, open market purchases or other methods we deem appropriate. The timing of share repurchases will depend upon market conditions. Unless terminated earlier by the Board of Directors, this program will expire when we have purchased all shares authorized for repurchase under the program.

Movements in additional paid-in capital in respect of stock award plans comprise accruals for unvested awards, offset by adjustments for awards that vest during the period.

Accumulated Other Comprehensive Income (Loss)

We recognize activity in other comprehensive income for foreign currency translation adjustments, unrealized holding gains and losses on available-for-sale securities, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022 was as follows (in millions):


Three Months Ended September 30:	2023		2022
Foreign Currency Translation Gain (Loss), Net of Tax:
Balance at beginning of period	$	(1,346)	$	(1,447)
Translation adjustment (net of tax effect of $0 and $4)	(96)		(263)

Balance at end of period	(1,442)		(1,710)
Unrealized Gain (Loss) on Marketable Securities, Net of Tax:
Balance at beginning of period	(20)		(8)
Current period changes in fair value (net of tax effect of $(1) and $(1))	(2)		(4)
Reclassification to earnings (net of tax effect of $0 and $0)	—		1
Balance at end of period	(22)		(11)
Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax:
Balance at beginning of period	10		260
Current period changes in fair value (net of tax effect of $44 and $110)	138		350
Reclassification to earnings (net of tax effect of $(8) and $(21))	(27)		(69)
Balance at end of period	121		541
Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:
Balance at beginning of period	(218)		(2,056)

Reclassification to earnings (net of tax effect of $7 and $5)	21		18
Balance at end of period	(197)		(2,038)
Accumulated other comprehensive income (loss) at end of period	$	(1,540)	$	(3,218)

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Nine Months Ended September 30:	2023		2022
Foreign currency translation gain (loss), net of tax:
Balance at beginning of period	$	(1,446)	$	(1,162)
Translation adjustment (net of tax effect of $(13) and $11)	1		(548)
Reclassification to earnings (net of tax effect of $0 and $0)	3		—
Balance at end of period	(1,442)		(1,710)
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of period	(11)		(1)
Current period changes in fair value (net of tax effect of $(5) and $(3))	(13)		(11)
Reclassification to earnings (net of tax effect of $1 and $0)	2		1
Balance at end of period	(22)		(11)
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of period	167		(17)
Current period changes in fair value (net of tax effect of $22 and $222)	69		705
Reclassification to earnings (net of tax effect of $(36) and $(46))	(115)		(147)
Balance at end of period	121		541
Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of period	(259)		(2,098)
Net actuarial gain (loss) resulting from remeasurements of plan assets and liabilities (net of tax effect of $0 and $11)	—		31
Reclassification to earnings (net of tax effect of $20 and $8)	62		29
Balance at end of period	(197)		(2,038)
Accumulated other comprehensive income (loss) at end of period	$	(1,540)	$	(3,218)

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Detail of the gains (losses) reclassified from accumulated other comprehensive income (loss) to the statements of consolidated income for the three and nine months ended September 30, 2023 and 2022 is as follows (in millions):


	Amount Reclassified from AOCI(1)				Affected Line Item in the Income Statement
Three Months Ended September 30:	2023		2022




Unrealized Gain (Loss) on Marketable Securities:
Realized gain (loss) on sale of securities	$	—	$	(1)	Investment income and other
Income tax (expense) benefit	—		—		Income tax expense
Impact on net income	—		(1)		Net income
Unrealized Gain (Loss) on Cash Flow Hedges:
Interest rate contracts	(6)		(4)		Interest expense
Foreign currency exchange contracts	41		94		Revenue

Income tax (expense) benefit	(8)		(21)		Income tax expense
Impact on net income	27		69		Net income
Unrecognized Pension and Postretirement Benefit Costs:
Prior service costs	(28)		(23)		Investment income and other


Income tax (expense) benefit	7		5		Income tax expense
Impact on net income	(21)		(18)		Net income
Total amount reclassified for the period	$	6	$	50	Net income
(1) Accumulated other comprehensive income (loss)


	Amount Reclassified from AOCI(1)				Affected Line Item in the Income Statement
Nine Months Ended September 30:	2023		2022
Unrealized Gain (Loss) on Foreign Currency Translation:
Realized gain (loss) on business wind-down	$	(3)	$	—	Other expenses
Income tax (expense) benefit	—		—		Income tax expense
Impact on net income	(3)		—		Net income
Unrealized gain (loss) on marketable securities:
Realized gain (loss) on sale of securities	(3)		(1)		Investment income and other
Income tax (expense) benefit	1		—		Income tax expense
Impact on net income	(2)		(1)		Net income
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts	(9)		(9)		Interest expense
Foreign currency exchange contracts	160		202		Revenue

Income tax (expense) benefit	(36)		(46)		Income tax expense
Impact on net income	115		147		Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs	(82)		(70)		Investment income and other

Curtailment of benefit obligation	—		33		Investment income and other
Income tax (expense) benefit	20		8		Income tax expense
Impact on net income	(62)		(29)		Net income
Total amount reclassified for the period	$	48	$	117	Net income
(1) Accumulated other comprehensive income (loss)

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Deferred Compensation Obligations and Treasury Stock

We maintain a deferred compensation plan whereby certain employees were previously able to elect to defer the gains on stock option exercises by deferring the shares received upon exercise into a rabbi trust. The shares held in this trust are classified as treasury stock, and the liability to participating employees is classified as a deferred compensation obligation within Shareowners’ Equity in the consolidated balance sheets. The number of shares needed to settle the liability for deferred compensation obligations is included in the denominator in both the basic and diluted earnings per share calculations. Employees are generally no longer able to defer the gains from stock options exercised.

Activity in the deferred compensation program for the three and nine months ended September 30, 2023 and 2022 was as follows (in millions):


	2023			2022
Three Months Ended September 30:	Shares	Dollars		Shares	Dollars
Deferred Compensation Obligations:
Balance at beginning of period		$	9		$	12
Reinvested dividends		—			—
Benefit payments		—			—
Balance at end of period		$	9		$	12
Treasury Stock:
Balance at beginning of period	—	$	(9)	—	$	(12)
Reinvested dividends	—	—		—	—
Benefit payments	—	—		—	—
Balance at end of period	—	$	(9)	—	$	(12)


	2023			2022
Nine Months Ended September 30:	Shares	Dollars		Shares	Dollars
Deferred Compensation Obligations:
Balance at beginning of period		$	13		$	16
Reinvested dividends		—			1
Benefit payments		(4)			(5)
Balance at end of period		$	9		$	12
Treasury Stock:
Balance at beginning of period	—	$	(13)	—	$	(16)
Reinvested dividends	—	—		—	(1)
Benefit payments	—	4		—	5
Balance at end of period	—	$	(9)	—	$	(12)

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. SEGMENT INFORMATION

We have two reportable segments: U.S. Domestic Package and International Package, which are together referred to as our global small package operations. Our remaining businesses are reported as Supply Chain Solutions. Global small package operations represent our most significant business and are broken down into regional operations around the world. Regional operations managers are responsible for both domestic and export products within their geographic area. Supply Chain Solutions comprises the results of non-reportable operating segments that do not meet the quantitative and qualitative criteria of a reportable segment as defined under ASC Topic 280 – Segment Reporting.

U.S. Domestic Package

U.S. Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the United States.

International Package

International Package operations include delivery to more than 200 countries and territories worldwide, including shipments wholly outside the United States, as well as shipments with either origin or destination outside the United States. Our International Package reporting segment includes our operations in Europe, the Indian sub-continent, the Middle East and Africa ("EMEA"), Canada and Latin America (together "Americas") and Asia.

Supply Chain Solutions

Supply Chain Solutions includes our Forwarding, Logistics, UPS Mail Innovations, Coyote, Healthcare and other businesses. Our Forwarding, Logistics and UPS Mail Innovations businesses provide services in more than 200 countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, distribution and post-sales services, mail and consulting services. Coyote offers truckload brokerage services primarily in the United States. Our Healthcare businesses provide supply chain solutions to the healthcare and life sciences industries. Other businesses within Supply Chain Solutions include The UPS Store, UPS Capital, Roadie and Delivery Solutions.

In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income (expense) and other, interest expense and income tax expense. Certain expenses are allocated between the 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.

Results of operations for the three and nine months ended September 30, 2023 and 2022 were as follows (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue:
U.S. Domestic Package	$	13,660	$	15,374	$	43,043	$	45,957
International Package	4,267		4,799		13,225		14,748
Supply Chain Solutions	3,134		3,988		9,773		12,600
Consolidated revenue	$	21,061	$	24,161	$	66,041	$	73,305
Operating Profit:
U.S. Domestic Package	$	571	$	1,666	$	3,639	$	5,157
International Package	630		997		2,341		3,306
Supply Chain Solutions	142		450		684		1,436
Consolidated operating profit	$	1,343	$	3,113	$	6,664	$	9,899

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. EARNINGS PER SHARE

The earnings per share amounts are the same for class A and class B common shares as the holders of each class are legally entitled to equal per-share distributions whether through dividends or in liquidation.

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2023 and 2022 (in millions, except per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
2023			2022			2023			2022
Numerator:
Net income attributable to common shareowners	$	1,127		$	2,584		$	5,103		$	8,095
Denominator:
Weighted average shares	853			867			856			870

Vested portion of restricted units	4			3			4			3
Denominator for basic earnings per share	857			870			860			873
Effect of dilutive securities:
Restricted units	1			2			1			2
Stock options	—			—			—			1
Denominator for diluted earnings per share	858			872			861			876
Basic earnings per share(1)	$	1.31		$	2.97		$	5.93		$	9.27
Diluted earnings per share(1)	$	1.31		$	2.96		$	5.92		$	9.24
(1) Earnings per share is computed using unrounded amounts.

Diluted earnings per share for the three and nine months ended September 30, 2023 and 2022 excluded the effect of 0.2 and 0.1 million shares of common stock, respectively, that may be issued upon the exercise of employee stock options because such effect would be antidilutive.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT

Risk Management Policies

Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations and we actively monitor these exposures. Where deemed appropriate, to manage the impact of these exposures on earnings and/or cash flows, we may enter into a variety of derivative financial instruments. We do not hold or issue derivative financial instruments for trading or speculative purposes.

Credit Risk Management

The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements. We seek to minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines. We may further manage credit risk through the use of zero threshold bilateral collateral provisions and/or early termination rights utilizing master netting arrangements, whereby cash is exchanged based on the net fair value of derivatives associated with each counterparty.

As of September 30, 2023 and December 31, 2022, we held cash collateral of $382 and $534 million, respectively, under these agreements. This collateral is included in Cash and cash equivalents in the consolidated balance sheets and is unrestricted. As of September 30, 2023 and December 31, 2022, no collateral was required to be posted with our counterparties.

Types of Hedges

Commodity Risk Management

Currently, the fuel surcharges that we apply in our domestic and international package businesses are the primary means of reducing the risk of adverse fuel price changes on our business. In order to mitigate the impact of fuel surcharges imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage services.

Foreign Currency Risk Management

To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We generally designate and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue.

We may also hedge portions of our anticipated cash settlements of principal and interest on certain foreign currency denominated debt. We generally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions.

We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments.

Interest Rate Risk Management

We may use a combination of derivative instruments to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing.

We generally designate and account for interest rate swaps that convert fixed-rate interest payments into floating-rate interest payments as fair value hedges of the associated debt instruments. We designate and account for interest rate swaps that convert floating-rate interest payments into fixed-rate interest payments as cash flow hedges of the forecasted payment obligations.

We may periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings by using forward starting interest rate swaps, interest rate locks or similar derivatives.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Outstanding Positions

As of September 30, 2023 and December 31, 2022, the notional amounts of our outstanding derivative positions were as follows (in millions):


		September 30, 2023	December 31, 2022
Currency hedges:
Euro	EUR	3,837	4,115
British Pound Sterling	GBP	682	856
Canadian Dollar	CAD	1,518	1,598
Hong Kong Dollar	HKD	2,669	4,261






Interest rate hedges:

Floating to Fixed Interest Rate Swaps	USD	—	28

As of September 30, 2023 and December 31, 2022, we had no outstanding commodity hedge positions.

Balance Sheet Recognition

The following table indicates the location in the consolidated balance sheets where our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives.

We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded in the consolidated balance sheets. The columns labeled Net Amounts if Right of Offset had been Applied indicate the potential net fair value positions by type of contract and location in the consolidated balance sheets had we elected to apply the right of offset as of September 30, 2023 and December 31, 2022 (in millions):


		Fair Value Hierarchy Level		Gross Amounts Presented in Consolidated Balance Sheets						Net Amounts if Right of Offset had been Applied
Asset Derivatives	Balance Sheet Location		September 30, 2023			December 31, 2022			September 30, 2023			December 31, 2022
Derivatives designated as hedges:
Foreign currency exchange contracts	Other current assets	Level 2		$	171		$	174		$	166		$	171


Foreign currency exchange contracts	Other non-current assets	Level 2		172			250			161			226

Derivatives not designated as hedges:
Foreign currency exchange contracts	Other current assets	Level 2		—			1			—			1



Total Asset Derivatives				$	343		$	425		$	327		$	398


		Fair Value Hierarchy Level		Gross Amounts Presented in Consolidated Balance Sheets						Net Amounts if Right of Offset had been Applied
Liability Derivatives	Balance Sheet Location		September 30, 2023			December 31, 2022			September 30, 2023			December 31, 2022
Derivatives designated as hedges:
Foreign currency exchange contracts	Other current liabilities	Level 2		$	5		$	3		$	—		$	—


Foreign currency exchange contracts	Other non-current liabilities	Level 2		11			24			—			—
Interest rate contracts	Other non-current liabilities	Level 2		—			5			—			5






Total Liability Derivatives				$	16		$	32		$	—		$	5

Our foreign currency exchange rate and interest rate derivatives are largely comprised of over-the-counter derivatives, which are primarily valued using pricing models that rely on market observable inputs such as yield curves, foreign currency exchange rates and investment forward prices; therefore, these derivatives are classified as Level 2.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet Location of Hedged Item in Fair Value Hedges

The following table indicates the amounts that were recorded in the consolidated balance sheets related to cumulative basis adjustments for fair value hedges as of September 30, 2023 and December 31, 2022 (in millions):


Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included		Carrying Amount of Hedged Liabilities		Cumulative Amount of Fair Value Hedge Adjustments		Carrying Amount of Hedged Liabilities		Cumulative Amount of Fair Value Hedge Adjustments
	September 30, 2023	September 30, 2023		December 31, 2022		December 31, 2022

Long-term debt and finance leases		$	280	$	5	$	280	$	5

Income Statement and AOCI Recognition of Designated Hedges

The following table indicates the amount of gains (losses) that have been recognized in the statements of consolidated income for fair value and cash flow hedges, as well as the associated gain (loss) for the underlying hedged item for fair value hedges for the three and nine months ended September 30, 2023 and 2022 (in millions):



		Three Months Ended September 30,
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships		2023									2022
	Revenue			Interest Expense			Investment Income and Other			Revenue			Interest Expense			Investment Income and Other
Gain or (loss) on fair value hedging relationships:
Interest Contracts:
Hedged items		$	—		$	—		$	—		$	—		$	(1)		$	—
Derivatives designated as hedging instruments		—			—			—			—			1			—
Gain or (loss) on cash flow hedging relationships:
Interest Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income		—			(6)			—			—			(4)			—
Foreign Currency Exchange Contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income		41			—			—			94			—			—
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded		$	41		$	(6)		$	—		$	94		$	(4)		$	—

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


	Nine Months Ended September 30,
	2023						2022
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships	Revenue		Interest Expense		Investment Income and Other		Revenue		Interest Expense		Investment Income and Other
Gain (loss) on fair value hedging relationships:
Interest Rate Contracts:
Hedged items	$	—	$	—	$	—	$	—	$	10	$	—
Derivatives designated as hedging instruments	—		—		—		—		(10)		—
Gain (loss) on cash flow hedging relationships:
Interest Rate Contracts:
Amount of gain (loss) reclassified from accumulated other comprehensive income	—		(9)		—		—		(9)		—
Foreign Currency Exchange Contracts:
Amount of gain (loss) reclassified from accumulated other comprehensive income	160		—		—		202		—		—
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded	$	160	$	(9)	$	—	$	202	$	(9)	$	—

The following table indicates the amount of gains (losses) that have been recognized in AOCI for the three and nine months ended September 30, 2023 and 2022 for those derivatives designated as cash flow hedges (in millions):


Three Months Ended September 30:
Derivative Instruments in Cash Flow Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Derivatives
	2023			2022
Interest rate contracts		$	—		$	1
Foreign currency exchange contracts		182			459

Total		$	182		$	460

Nine Months Ended September 30:
Derivative Instruments in Cash Flow Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Derivatives
	2023			2022
Interest rate contracts		$	—		$	5
Foreign currency exchange contracts		91			922

Total		$	91		$	927

As of September 30, 2023, there were $160 million of pre-tax gains related to cash flow hedges deferred in AOCI that are expected to be reclassified to income over the 12-month period ending September 30, 2024. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions. The maximum term over which we are hedging exposures to the variability of cash flows is approximately 3 years.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table indicates the amount of gains (losses) that have been recognized in AOCI within foreign currency translation adjustment for the three and nine months ended September 30, 2023 and 2022 for those instruments designated as net investment hedges (in millions):


Three Months Ended September 30:
Non-derivative Instruments in Net Investment Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Debt
	2023			2022
Foreign currency denominated debt		$	103		$	209
Total		$	103		$	209

Nine Months Ended September 30:
Non-derivative Instruments in Net Investment Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Debt
	2023			2022
Foreign currency denominated debt		$	5		$	436
Total		$	5		$	436

Income Statement Recognition of Non-Designated Derivative Instruments

Derivative instruments that are not designated as hedges are recorded at fair value with unrealized gains and losses reported in earnings each period. Cash flows from the settlement of derivative instruments appear in the statement of consolidated cash flows within the same categories as the cash flows of the hedged item.

We may periodically terminate interest rate swaps and foreign currency exchange forward contracts or enter into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original hedge relationship.

Amounts recorded in the statements of consolidated income related to fair value changes and settlements of interest rate swaps and foreign currency forward contracts not designated as hedges for the three and nine months ended September 30, 2023 and 2022 (in millions) were as follows:


Derivative Instruments Not Designated in Hedging Relationships	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income
	2023	2022
Three Months Ended September 30:



Foreign currency exchange contracts	Investment income and other	$	(4)	$	(45)


Total		$	(4)	$	(45)

Nine Months Ended September 30:



Foreign currency exchange contracts	Investment income and other	$	(1)	$	(131)


Total		$	(1)	$	(131)

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. INCOME TAXES

Our third-quarter effective tax rate decreased to 11.1% as compared to 21.0% in the prior year (21.6% year to date compared to 21.8% in 2022). The year-over-year decrease was driven by favorable U.S. Treasury guidance on utilization of foreign tax credits, decreases in uncertain tax positions as a result of resolution of global tax audits and adjustments to our tax balances to reflect our recently filed tax returns.

We have recognized liabilities for uncertain tax positions and we reevaluate these uncertain tax positions on a quarterly basis. A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months, however, an estimate of the range of reasonably possible outcomes cannot be made. Items that may cause changes to unrecognized tax benefits include the allowance or disallowance of deductions, the timing of deductions and the allocation of income and expense between tax jurisdictions. Any changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of statutes of limitations or other unforeseen circumstances.

During the third quarter of 2023, we recognized an income tax benefit of $15 million related to a one-time compensation payment of $61 million. This income tax benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.

Also in the third quarter of 2023, we recorded goodwill impairment charges of $117 million ($125 million year to date). As a result, we recorded an additional income tax benefit of $14 million ($16 million year to date). This income tax benefit was generated at a lower average tax rate than the U.S. federal statutory tax rate due to a portion of the goodwill impairment charge not being deductible for tax purposes.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. TRANSFORMATION STRATEGY COSTS

We are undertaking an enterprise-wide transformation of our organization that includes initiatives, as well as changes in processes and technology, that impact global direct and indirect operating costs. During the third quarter of 2023, we reduced staff to better align direct headcount with volumes. As of September 30, 2023, we recorded an accrual for separation costs of $90 million on the consolidated balance sheet. We currently expect approximately $26 million to be paid by December 31, 2023 and the remainder to be paid during the first quarter of 2024.

The table below presents transformation strategy costs for the three and nine months ended September 30, 2023 and 2022 (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Transformation Strategy Costs:
Compensation and benefits	$	80	$	15	$	178	$	71
Total other expenses	14		21		58		61
Total Transformation Strategy Costs	$	94	$	36	$	236	$	132

Income Tax Benefit from Transformation Strategy Costs	(24)		(9)		(57)		(31)
After-Tax Transformation Strategy Costs	$	70	$	27	$	179	$	101

The income tax effects of transformation strategy costs are calculated by multiplying the amount of the adjustments by the statutory tax rates applicable in each tax jurisdiction.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18. SUBSEQUENT EVENTS

In the third quarter of 2023, we entered into an agreement to acquire MNX Global Logistics, a global time-critical and temperature-sensitive logistics provider. This acquisition is expected to enhance our capabilities in time-critical logistics, including healthcare and related industries and is expected to close in the fourth quarter of 2023, subject to regulatory approval.

Also in the third quarter of 2023, we entered into a separate agreement to acquire Happy Returns, a technology-focused company that provides innovative end-to-end return services. This acquisition will expand our returns portfolio and provide a consolidated returns solution for our enterprise retail customers. This acquisition was closed on November 1, 2023.

The aggregate purchase price for both acquisitions will be approximately $1.3 billion. These acquisitions are not expected to exceed 10% of operating income.

Table of Contents

Previous: Cover and table of contents · Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations