UPS US Equity☆

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

As described above, during 2020 we began implementing our Customer First, People Led, Innovation Driven strategy, as we seek to transform nearly every aspect of our business, improve our financial performance, provide the best customer experience and benefit our shareowners. We focused on, among other things, enhancing the capabilities that we believe our customers value the most; speed and ease of access to our services. We completed enhancements to our U.S. ground network to improve time-in-transit and continued to deploy our digital access program into e-commerce platforms.

Beginning in the first quarter of 2020, unexpected business shutdowns and government restrictions implemented in many countries in response to the COVID-19 pandemic have significantly impacted the mix of demand for our services. In our global small package business, business-to-business activity has declined, while we continue to experience a significant increase in the level of business-to-consumer shipping, which we partially attribute to the capability enhancements described above. While business-to-business activity began to recover in the latter part of 2020, we believe that the market shift towards e-commerce will persist, with a continuing high level of residential deliveries that may continue to increase demand, but also drive higher operating costs. The pandemic also resulted in a reduction in global air cargo capacity. This caused market rates in the industry to increase and we experienced increased demand for our services.

On January 24, 2021, we entered into a definitive agreement to divest our UPS Freight business. This will allow us to be even more focused on the core parts of our business that drive the greatest value for our shareholders. The transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close during the second quarter of 2021. We expect this divestiture to result in an improvement to our operating margin and return on invested capital.

We believe that we are well positioned for long-term growth, however we cannot reasonably estimate the duration or severity of the COVID-19 pandemic or the timing and extent of the anticipated economic recovery, and the resulting impacts on our business results or liquidity. For additional information on these risks and uncertainties, see Part I, "Item 1A. Risk Factors" of this report.

Highlights of our results for the years ended December 31, 2020 and 2019, which are discussed in more detail in the sections that follow, include:

Year Ended December 31, Change

Operating Margin 9.1 % 10.5 %

•Revenue increased in all segments.

•Average daily package volume increased due to increases in business-to-consumer shipping.

•Operating expenses increased due to volume growth.

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•Operating profit and operating margin were relatively flat, and included goodwill and other asset impairment charges of $686 million related to the anticipated divestiture of UPS Freight.

•We reported net income of $1.3 billion and diluted earnings per share of $1.54. Adjusted diluted earnings per share was $8.23 after adjusting for the after-tax impacts of:

◦goodwill and other asset impairment charges of $629 million or $0.72 per share;

◦transformation strategy costs of $265 million or $0.31 per share; and

◦pension mark-to-market losses recognized outside of a 10% corridor of $4.9 billion or $5.66 per share.

In the U.S. Domestic Package segment, volume and revenue growth was highest in our residential ground products. The increase in residential delivery volume drove increases in headcount, delivery stops per day, average daily miles driven and average daily union labor hours, all of which increased expense and compressed operating margins as described below. Operating expenses also increased as a result of the investments we made to improve our ground network.

The International Package segment experienced volume and revenue growth, driven by strong outbound demand from Asia as well as growth from e-commerce within Europe. Residential delivery volume growth drove an increase in third-party pickup and delivery expense.

In the Supply Chain & Freight segment, growth was primarily driven by our Forwarding and mail services businesses. The Forwarding business benefited from strong outbound demand from Asia and the implementation of capacity surcharges as COVID-19 led to reduced capacity in the air cargo market. Mail services benefited from the increase in e-commerce activity and favorable changes in shipment characteristics. We also experienced growth in demand for our healthcare logistics and distribution solutions, partly driven by the impacts of the COVID-19 pandemic.

2019 compared to 2018

See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on February 20, 2020.

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Supplemental Information - Items Affecting Comparability

We supplement the reporting of our financial information determined under generally accepted accounting principles in the United States ("GAAP") with certain non-GAAP financial measures including "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, other income and (expense), income before income taxes, income tax expense, effective tax rate, net income and earnings per share. Adjusted financial measures may exclude the impact of period over period exchange rate changes and hedging activities, amounts related to mark-to-market gains or losses, restructuring costs, including transformation strategy costs, and costs related to certain legal contingencies and expenses, as described below. We believe that these adjusted financial measures provide additional meaningful information to assist users of our financial statements in understanding our financial results and cash flows and assessing our ongoing performance. We believe these adjusted financial measures are important indicators of our recurring results of operations because they exclude items that may not be indicative of, or are unrelated to, our underlying operations, and may provide a useful baseline for analyzing trends in our underlying businesses. Additionally, these adjusted financial measures are used internally by management for business unit operating performance analysis, business unit resource allocation and in connection with incentive compensation award determination.

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

Year over year comparisons of our financial results are affected by the following (in millions):

Year Ended December 31,

Operating Expenses:

Transformation Strategy Costs $ 348 $ 255

Goodwill and Other Asset Impairment Charges 686 —

Legal Contingencies and Expenses — 97

Total Adjustments to Operating Expenses $ 1,034 $ 352

Other Income and (Expense):

Defined Benefit Plans Mark-to-Market Charges $ 6,484 $ 2,387

Total Adjustments to Other Income and (Expense) $ 6,484 $ 2,387

Total Adjustments to Income Before Income Taxes $ 7,518 $ 2,739

Income Tax Benefit from Transformation Strategy Costs (83) (59)

Income Tax Benefit from Goodwill and Other Asset Impairment Charges (57) —

Income Tax Benefit from Legal Contingencies and Expenses — (6)

Total Adjustments to Income Tax Expense $ (1,695) $ (636)

Total Adjustments to Net Income $ 5,823 $ 2,103

These items have been excluded from comparisons of "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, other income and (expense), income tax expense and effective tax rate in the discussion that follows. The income tax benefit from restructuring and other costs, legal contingencies and expenses and mark-to-market charges are calculated by multiplying the statutory tax rates applicable in each tax jurisdiction, including the U.S. federal jurisdiction and various U.S. state and non-U.S. jurisdictions, by the tax-deductible adjustments. The blended average of the effective tax rates in 2020 and 2019 was 22.5% and 23.2%, respectively.

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Impact of Changes in Foreign Currency Exchange Rates and Hedging Activities

We supplement the reporting of our revenue, revenue per piece and operating profit with non-GAAP measures that exclude the period over period impact of foreign currency exchange rate changes and hedging activities.

Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reported U.S. dollar revenue, revenue per piece and operating profit by the current period average exchange rates to derive current period local currency revenue, revenue per piece and operating profit. The derived amounts are then multiplied by the average foreign currency exchange rates used to translate the comparable results for each month in the prior year period (including the period over period impact of foreign currency hedging activities). The difference between the current period reported U.S. dollar revenue, revenue per piece and operating profit and the derived current period U.S. dollar revenue, revenue per piece and operating profit is the period over period impact of currency fluctuations.

Restructuring and Other Charges

We supplement the presentation of our operating profit, operating margin, income before income taxes, net income and earnings per share with similar non-GAAP measures that exclude the impact of charges related to restructuring activities, including transformation strategy costs and asset impairments. For more information regarding transformation strategy costs, see note 18 to the audited, consolidated financial statements. For more information regarding asset impairments, see note 4 to the audited, consolidated financial statements.

Costs Related to Certain Legal Contingencies and Expenses

We supplement the presentation of our operating profit, operating margin, income before income taxes, net income and earnings per share with similar non-GAAP measures that exclude the impact of costs related to certain legal contingencies and expenses.

Defined Benefit Plans Mark-to-Market Charges

We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor for our pension and postretirement defined benefit plans immediately as part of other pension income (expense). We supplement the presentation of our income before income taxes, net income and earnings per share with non-GAAP measures that exclude the impact of gains and losses recognized in excess of the 10% corridor and the related income tax effects. We believe excluding these mark-to-market impacts provides important supplemental information by removing the volatility associated with short-term changes in market interest rates, equity values and similar factors.

This adjusted net periodic benefit cost ($641 million in 2020 and $754 million in 2019) utilizes the expected return on plan assets (7.70% in 2020 and 7.68% in 2019) and the discount rate used to determine net periodic benefit cost (3.55% in 2020 and 4.45% in 2019). The unadjusted net periodic benefit cost reflects the actual return on plan assets (12.54% in 2020 and 17.57% in 2019) and the discount rate used to measure the projected benefit obligation at the December 31st measurement date (2.87% in 2020 and 3.55% in 2019).

We recognized pre-tax mark-to-market losses outside of a 10% corridor related to the remeasurement of our pension and postretirement defined benefit plans' assets and liabilities in "Other Income and (Expense)" of $6.5 and $2.4 billion for 2020 and 2019, respectively. In 2019, we refined the bond matching approach used to determine the discount rate for our U.S. pension and postretirement plans by implementing advances in technology and modeling techniques discussed in note 6 to the audited, consolidated financial statements.

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The table below shows the amounts associated with each component of the pre-tax mark-to-market loss, as well as the weighted-average actuarial assumptions used to determine our net periodic benefit cost, for each year:

Year Ended December 31,

Components of mark-to-market gain (loss) (in millions): 2020 2019

Demographic and other assumption changes (381) (24)

Total mark-to-market gain (loss) $ (6,484) $ (2,387)

Year Ended December 31,

Expected rate of return on plan assets 7.70 % 7.68 %

Actual rate of return on plan assets 12.54 % 17.57 %

Discount rate used for net periodic benefit cost 3.55 % 4.45 %

Discount rate at measurement date 2.87 % 3.55 %

The pre-tax mark-to-market losses for the years ended December 31, 2020 and 2019 were comprised of the following:

2020 - $6.5 billion pre-tax mark-to-market loss:

•Discount Rates ($6.5 billion pre-tax loss):The weighted-average discount rate for our pension and postretirement medical plans decreased from 3.55% as of December 31, 2019 to 2.87% as of December 31, 2020, primarily due to a decline in U.S. treasury yields that was slightly offset by an increase in credit spreads on AA-rated corporate bonds.

•Return on Assets ($2.4 billion pre-tax gain): In 2020, the actual rate of return on plan assets was higher than our expected rate of return, primarily due to strong global equity and U.S. bond market performance.

•Demographic and Other Assumption Changes ($381 million pre-tax loss): This represents the difference between actual and estimated participant data and demographic factors, including items such as healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality.

•Coordinating benefits attributable to the Central States Pension Fund ($2.0 billion pre-tax loss): This represents our current best estimate of additional potential coordinating benefits that may be required to be paid related to the Central States Pension Fund.

2019 - $2.4 billion pre-tax mark-to-market loss:

•Discount Rates ($5.7 billion pre-tax loss):The weighted-average discount rate for our pension and postretirement medical plans decreased from 4.45% as of December 31, 2018 to 3.55% as of December 31, 2019, primarily due to a decline in U.S. treasury yields and a decrease in credit spreads on AA-rated corporate bonds in 2019. This was partially offset by a refinement to the bond matching approach used to determine the discount rate for our U.S. pension and postretirement plans as described in note 6 to the audited, consolidated financial statements.

•Return on Assets ($3.9 billion pre-tax gain): In 2019, the actual rate of return on plan assets was higher than our expected rate of return, primarily due to strong global equity and U.S. bond market performance.

•Demographic and Other Assumption Changes ($24 million pre-tax loss): This represented the difference between actual and estimated participant data and demographic factors, including items such as healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality.

•Coordinating benefits attributable to the Central States Pension Fund ($543 million pre-tax loss): This represented our then-best estimate of additional potential coordinating benefits that may be required to be paid related to the Central States Pension Fund.

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Expense Allocations

Certain operating expenses are allocated between our reporting segments using activity-based costing methods. These activity-based costing methods require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates would 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. Beginning in 2020, we updated our cost allocation methodology for the Ground with Freight Pricing ("GFP") product. The cost associated with GFP that is allocated from the U.S. Domestic Package segment to UPS Freight, within the Supply Chain & Freight segment, was adjusted to better reflect operational activities associated with this product. This change in methodology had only an immaterial impact on the expense allocated to UPS Freight for 2020. There were no significant changes in our expense allocation methodologies during 2019 or 2018.

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U.S. Domestic Package Operations

Year Ended December 31, Change

Average Daily Package Volume (in thousands):

Average Revenue Per Piece:

Total Average Revenue Per Piece $ 9.92 $ 9.83 $ 0.09 0.9 %

Operating Days in Period 255 253

Revenue (in millions):

Operating Expenses (in millions):

Legal Contingencies and Expenses — (97) 97 N/M

Operating Profit (in millions) and Operating Margin:

Operating Margin 7.3 % 9.0 %

Adjusted Operating Margin 7.7 % 9.4 %

Revenue

The change in total revenue was due to the following:

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Volume

2020 compared to 2019

Volume increased across all products, with growth strongest in residential ground services. Volume growth was primarily driven by business-to-consumer e-commerce, which grew by approximately 33%, partly due to the impact of the COVID-19 pandemic. We also benefited from the impact of two additional operating days in 2020. Volume growth was led by our largest customer, Amazon, with growth stronger in the first half of the year. We also experienced growth from SMBs, as well as other large customers. Volume from SMBs grew 14.8% for the year, with growth accelerating in the second half of the year as a result of our investments to improve both time-in-transit and our digital access platform.

Business-to-consumer shipments represented approximately 64% of total average daily volume for the year compared to approximately 54% in 2019. We believe that the COVID-19 pandemic has accelerated a change in consumer behavior, speeding up what we believe will be a long-term market shift towards e-commerce. Business-to-business shipments decreased 10% for the year, primarily in our ground products, as many businesses experienced disruption and periods of closure due to the pandemic. Business-to-business activity began to recover in the latter part of 2020.

Average daily volume increased in both our Next Day Air and Deferred products, driven by increased residential demand as a result of the growth in e-commerce. This was slightly offset by declines in business-to-business shipments, primarily as a result of COVID-19, as well as continued declines in Second Day Letter volume due to ongoing shifts in customer preferences.

Residential Ground and SurePost average daily volumes increased by 35% and 39%, respectively for the year, driven by changes in customer mix and the growth in e-commerce activity. Ground commercial average daily volume declined, as many businesses temporarily closed or operated on a limited basis as a result of COVID-19.

Rates and Product Mix

2020 compared to 2019

Overall revenue per piece increased due to changes in base rates, customer and product mix and residential surcharges that went into effect in October 2020, partially offset by declines in fuel surcharges. Rates for UPS ground and UPS air services increased an average net 4.9% in December 2019. SurePost rates increased effective October 2020.

Revenue per piece for our Next Day Air and Deferred products decreased primarily due to shifts in customer and product mix, lower fuel surcharges and a decrease in average billable weight per piece. Revenue per piece for our Ground products increased primarily due to the shift in customer mix, with a significant increase in SMB volume, and higher residential surcharges. These benefits were partially offset by shifts in product mix, lower fuel surcharges and a decrease in average billable weight per piece.

Fuel Surcharges

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

Year Ended December 31, % Point Change

Next Day Air / Deferred 3.9 % 7.3 % (3.4) %

While fluctuations in fuel surcharges can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of products sold, the base price and any additional charges or discounts on these services.

Total domestic fuel surcharge revenue decreased by $344 million for the year as a result of lower fuel surcharge indices, partially offset by increases in volume and shifts in product mix.

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Operating Expenses

2020 compared to 2019

Operating expenses, and operating expenses excluding the impact of transformation strategy costs and legal contingencies and expenses, increased largely due to higher pickup and delivery costs (up $4.2 billion). In addition, the costs of operating our domestic integrated air and ground network increased $1.4 billion, costs of package sorting increased $927 million and other indirect operating costs increased $744 million. The overall increase in expense was driven by several factors:

•Employee compensation and benefit costs increased $5.0 billion, largely resulting from:

◦residential volume growth that negatively impacted our delivery density, driving an increase in package delivery stops per day and in average daily miles driven. This drove an increase in average daily union labor hours of 14.1%;

◦union pay rate increases;

◦growth in the overall size of the workforce; and

◦acceleration of certain previously-issued incentive compensation awards for certain non-executive employees that resulted in additional expense of approximately $104 million.

We also incurred higher employee benefit expenses due to additional headcount, contractual contribution rate increases to union multiemployer plans, and higher service costs for our company-sponsored pension and postretirement plans, primarily driven by lower discount rates used to measure the projected benefit obligations of these plans. Workers' compensation expense increased $114 million as a result of additional hours, medical and wage inflation and claims experience.

•Higher third-party transportation costs were driven by increased SurePost volume and utilization of outside carriers as part of our improvements to time-in-transit within our U.S. ground network.

•We incurred lower fuel costs for the year, driven by lower prices for jet fuel, diesel and gasoline that were partially offset by increased usage as a result of volume growth and higher average daily miles driven.

Total cost per piece, and adjusted cost per piece excluding the year over year impact of transformation strategy costs and legal contingencies and expenses, increased 2.8% as a result of the factors described above.

Operating Profit and Margin

2020 compared to 2019

As a result of the factors described above, operating profit decreased $273 million, with operating margins decreasing 170 basis points to 7.3%. Excluding the year over year impact of transformation strategy costs and legal contingencies and expenses, adjusted operating profit decreased $241 million, with operating margins decreasing 170 basis points to 7.7%.

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International Package Operations

Year Ended December 31, Change

Average Daily Package Volume (in thousands):

Average Revenue Per Piece:

Operating Days in Period 255 253

Revenue (in millions):

Operating Expenses (in millions):

Transformation Strategy Costs (96) (122) 26 (21.3) %

Operating Profit (in millions) and Operating Margin:

Adjusted Operating Margin 22.2 % 19.5 %

Currency Translation Benefit / (Cost)—(in millions)*:

Operating Expenses (59)

Operating Profit $ 70

Revenue

The change in total revenue was due to the following:

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Volume

2020 compared to 2019

Average daily volume increased for both domestic and export products. Business-to-consumer volume increased as the COVID-19 pandemic drove growth in e-commerce. Business-to-business volume declined as the pandemic negatively impacted business operations globally, however we experienced a slight increase in volumes in the fourth quarter.

Average daily volume growth was driven primarily by strong demand from the retail and technology sectors due to the increase in e-commerce activity. This was partially offset by lower volumes in manufacturing and other sectors as COVID-19 caused a decline in commercial activity.

Export volume increased across most major trade lanes, driven by Europe and Asia. Europe export volume growth was highest on the Europe to U.S. trade lane, with intra-Europe volumes also growing significantly. Asia export volume growth was strongest on the Asia to U.S. trade lane. We experienced volume growth from both our large customers and SMBs, with SMB growth accelerating during the second half of the year. Our premium products saw volume growth, primarily driven by our Worldwide Express product, however growth was stronger in our non-premium products, such as World Wide Expedited and Transborder Standard due to shifts in customer preference for these products.

Domestic volume increased in many of our markets, driven by growth in Canada and several European countries that was primarily due to residential volume growth resulting from the increase in e-commerce.

Rates and Product Mix

2020 compared to 2019

Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market. In response to market capacity constraints resulting from the COVID-19 pandemic, we implemented surcharges on certain lanes during the year. In December 2019, we implemented an average 4.9% net increase in base and accessorial rates for international shipments originating in the United States.

Total revenue per piece increased 0.4% as a result of changes in customer and product mix, the impact of demand surcharges and currency movements, which were largely offset by a decline in fuel surcharges. Excluding the impact of currency, revenue per piece decreased 0.5%.

Domestic revenue per piece increased 2.2% due to changes in customer and product mix, demand surcharges and currency movements that were partially offset by a decline in fuel surcharges. Excluding the impact of currency, revenue per piece increased 1.2%.

Export revenue per piece decreased 2.0% primarily due to a decline in fuel surcharges that were partially offset by changes in demand surcharges. Excluding the impact of currency, revenue per piece decreased 2.8%.

Fuel Surcharges

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

While fluctuations can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges and the pricing discounts offered. Total international fuel surcharge revenue decreased by $263 million in 2020 as a result of declines in fuel surcharge indices, partially offset by volume growth and changes in customer and product mix.

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Operating Expenses

2020 compared to 2019

Operating expenses, and operating expenses excluding the year over year impact of transformation strategy costs, increased in 2020. Pickup and delivery costs increased $540 million due to volume growth and an increase in residential deliveries that drove additional third-party pickup and delivery expense.

The costs of operating our integrated international air and ground network increased $66 million, as increased block hours were partially offset by lower fuel prices.

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

The remaining increase in operating expenses in 2020 was due to package sorting and other indirect operating costs.

Operating Profit and Margin

2020 compared to 2019

As a result of the factors described above, operating profit increased $779 million, with operating margin increasing 280 basis points to 21.5%. Excluding the year over year impact of transformation strategy costs, adjusted operating profit increased for the year, with operating margin increasing 270 basis points to 22.2%.

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Supply Chain & Freight Operations

Year Ended December 31, Change

Freight LTL Statistics:

Shipments Per Day (in thousands) 34.8 36.7 (5.2) %

Gross Weight Hauled (in millions of lbs) 9,343 10,096 (7.5) %

Operating Days in Period 254 253

Revenue (in millions):

Operating Expenses (in millions):

Transformation Strategy Costs (15) (25) 10 (40.0) %

Goodwill and Other Asset Impairment Charges (686) — (686) N/M

Operating Profit (in millions) and Operating Margins:

Operating Margin 2.4 % 7.3 %

Adjusted Operating Margin 7.0 % 7.5 %

Currency Translation Benefit / (Cost)—(in millions)*:

Revenue $ (92)

Operating Expenses 90

Operating Profit $ (2)

* Amount represents the change compared to the prior year.

Year Ended December 31, Change

Transformation Strategy Costs (in millions):

Freight 1 — 1 N/M

Total Transformation Strategy Costs $ 15 $ 25 $ (10) (40.0) %

In January 2021, we entered into a definitive agreement to sell our UPS Freight business. As of December 31, 2020, we classified certain assets and liabilities of UPS Freight as held for sale in the consolidated balance sheet. Upon classification as held for sale, we recognized a total impairment charge of $686 million within Other expenses in the statements of consolidated income. This was comprised of a goodwill impairment charge of $494 million and a valuation allowance to adjust the carrying value of the disposal group to fair value less cost to sell of $192 million. See note 4 to the audited, consolidated financial statements for additional information.

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Revenue

2020 compared to 2019

Total revenue in the Supply Chain & Freight segment increased $1.8 billion. The impact of the COVID-19 pandemic varied within the segment. Our LTL business faced excess capacity and reduced demand in the first half of the year before market conditions began to improve. Conversely, our international air freight forwarding business benefited from demand for personal protective equipment out of Asia as well as increases in market rates caused by a sharp decline in passenger aircraft cargo capacity. Our Logistics business experienced increased demand from the healthcare and retail sectors, while activity in other sectors declined.

Overall Forwarding revenue increased for the year. In our international air freight business, revenue grew as a result of higher market rates, capacity surcharges and strong demand in Asia. Ocean freight forwarding revenue increased due to Asia-export volume growth in the second half of the year. Revenue in our truckload brokerage business increased as volume levels recovered in the third and fourth quarters. Higher demand, together with capacity constraints in the truckload brokerage market, drove rate increases.

Within Logistics, revenue in our mail services business increased as a result of e-commerce growth, which also led to a favorable shift in product characteristics. In addition, we implemented a peak surcharge in mail services in the fourth quarter which contributed to the overall increase in revenue. In the healthcare sector, we experienced growth in demand for our healthcare logistics and distribution solutions, partly driven by the impacts of the COVID-19 pandemic.

UPS Freight revenue declined due to volume and tonnage declines in our LTL business driven by overall market conditions, as well as volume optimization initiatives that resulted in an increase in revenue per hundredweight. Revenue from the Ground with Freight Pricing product grew as volume levels increased in the second half of the year.

Revenue from the other businesses within the segment increased, driven by growth within UPS Customer Solutions, as well as additional volume from service contracts with the U.S. Postal Service.

Operating Expenses

2020 compared to 2019

Total operating expenses for the segment, and operating expenses excluding the year over year impact of restructuring and other costs, increased in 2020.

Forwarding operating expenses increased $1.1 billion, largely due to higher market rates and additional charter flights out of Asia which increased purchased transportation expense for international air freight. This increase was slightly offset by declines in tonnage and volume. In truckload brokerage, volume growth and higher market rates also contributed to the increase in purchased transportation expense. Other expenses decreased slightly as a result of ongoing cost management initiatives.

Logistics operating expenses increased $582 million, driven by higher purchased transportation expense in mail services as a result of volume growth and carrier rate increases, as well as volume growth in the healthcare sector.

UPS Freight operating expenses increased $607 million, due primarily to an impairment charge of $686 million in respect of goodwill and assets held for sale as a result of entering into an agreement to divest our UPS Freight business. We expect this divestiture to be completed in the second quarter of 2021.

Operating Profit and Margin

2020 compared to 2019

As a result of the factors described above, total operating profit for the Supply Chain & Freight segment decreased $620 million. Excluding the year over year impact of restructuring and other costs, adjusted operating profit increased $56 million. Operating margin decreased 490 basis points to 2.4%, while adjusted operating margin decreased 50 basis points to 7.0%.

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Consolidated Operating Expenses

Year Ended December 31, Change

Operating Expenses (in millions):

Other Transformation strategy costs (137) (89) (48) 53.9 %

Legal contingencies and expenses — (97) 97 (100.0) %

Goodwill and other asset impairment charges (686) — (686) N/M

Currency Translation Benefit - (in millions)* $ 31

Year Ended December 31, Change

Adjustments to Operating Expenses (in millions):

Transformation strategy costs:

Depreciation and amortization — 3 (3) (100.0) %

Other occupancy 8 8 — — %

Total Transformation strategy costs $ 348 $ 255 $ 93 36.5 %

Legal contingencies and expenses:

Goodwill and other asset impairment charges:

Other expenses $ 686 $ — $ 686 N/M

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Compensation and Benefits

2020 compared to 2019

Total compensation and benefits, and total compensation and benefits excluding the year over year impact of transformation strategy costs, increased in 2020.

Total compensation costs, and total compensation costs excluding the year over year impact of transformation strategy costs, increased $3.1 billion or 13.3%, primarily as a result of:

•U.S. Domestic labor costs increased as a result of residential volume growth, driving a 21.5% increase in package delivery stops per day. This drove additional headcount and an increase in average daily union hours of 14.1%. Contractual union wage increases also contributed to the increase in compensation for hourly employees.

•Management compensation expense increased due to salary increases, higher incentive compensation, including the acceleration of certain previously-issued incentive compensation awards, and growth in the overall size of the workforce.

Benefits costs, and benefits costs excluding the year over year impact of transformation strategy costs, increased $2.5 billion as a result of:

•Health and welfare costs increased $558 million, driven by increased contributions to multiemployer plans resulting from growth in the workforce and contractually-mandated contribution rate increases.

•Pension and postretirement benefits increased $798 million. Higher service costs for company-sponsored plans were driven by a reduction in discount rates and an increase in participating employees. Contributions to multiemployer plans increased as a result of contractually-mandated contribution increases and an overall increase in the size of the workforce.

•Vacation, excused absence, payroll taxes and other expenses increased $587 million, primarily driven by salary increases and growth in the overall size of the workforce.

•Workers' compensation expense increased $517 million due to an increase in total hours worked, wage and medical cost inflation and unfavorable claims trends.

Repairs and Maintenance

2020 compared to 2019

The increase in repairs and maintenance expense was driven by additional aircraft engine maintenance cost, primarily due to the replacement of parts on our A300-600 fleet, as well as an increase in routine repairs to buildings and facilities and maintenance of our other transportation equipment.

Depreciation and Amortization

2020 compared to 2019

Depreciation and amortization expense increased as a result of additional investments in facility automation and capacity expansion projects, increases in the size of our vehicle and aircraft fleets and investments in internally developed software.

Purchased Transportation

2020 compared to 2019

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

•U.S. Domestic Package expense increased $1.2 billion due to investments to improve time-in-transit in our U.S. ground network, an increase in SurePost volume that drove approximately $480 million of incremental third-party transportation expense and volume growth in our other products.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

•Forwarding and Logistics expense increased $1.5 billion due to increased market rates in our international air freight business, as well as volume growth and rate increases in our mail services and truckload brokerage businesses. The rate increases in our international air freight and truckload brokerage businesses were primarily driven by market capacity constraints.

•International Package expense increased $521 million primarily due to volume increases in Asia and Europe that drove higher third-party pickup and delivery cost, as well as additional charter flights originating from Asia.

Fuel

2020 compared to 2019

The decrease in fuel expense was driven by lower prices for jet fuel, diesel and gasoline. These decreases were partially offset by higher consumption due to increases in aircraft block hours and miles driven as a result of increased volume, as well as the impact of higher alternative fuel tax credits in 2019.

Other Occupancy

2020 compared to 2019

The increase in other occupancy expense, and other occupancy expense excluding the year over year impact of transformation strategy costs, was driven by additional operating facilities coming into service, rent and property tax increases and ongoing facility maintenance.

Other Expenses

2020 compared to 2019

Other expenses, and other expenses excluding the year over year impact of transformation strategy costs, legal contingencies and expenses and goodwill and other asset impairment charges, increased as a result of:

•Other operational expenses, including vehicle and equipment rentals, increased $385 million driven by volume growth. This included cleaning and other safety supplies related to COVID-19 amounting to $89 million.

•Professional fees increased $139 million, primarily related to information technology and other business support services.

•Self-insured automobile liability claims increased $125 million as a result of higher average daily miles driven in our U.S. Domestic business and unfavorable claims experience.

•Other increases included reserves for certain tax positions and contingencies, payment processing fees, recruitment costs, telecommunications costs, information technology expenses and allowances for credit losses and other bad debt expense.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Other Income and (Expense)

The following table sets forth investment income (expense) and other and interest expense for the years ended December 31, 2020 and 2019 (in millions):

Year Ended December 31, Change

Investment Income (Expense) and Other $ (5,139) $ (1,493) $ (3,646) N/M

Adjusted Investment Income (Expense) and Other $ 1,345 $ 894 $ 451 50.4 %

Investment Income (Expense) and Other

2020 compared to 2019

Investment and other expense for the year increased $3.6 billion, which included a $4.1 billion increase in defined benefit plans mark-to-market charges. Excluding the impact of these mark-to-market charges, adjusted investment and other income increased $451 million for the year, primarily due to an increase in other pension income, which includes expected investment returns on pension assets, net of interest cost on projected benefit obligations and prior service costs. Expected returns on plan assets increased as a result of a higher asset base due to positive asset returns in 2019 and discretionary contributions made in 2020. Pension interest cost decreased due to the impact of lower year end discount rates, partially offset by ongoing plan growth and an increase in the projected benefit obligation as a result of the 2019 year end measurement of our plans. Investment income decreased due to lower yields on higher average invested asset balances and impairments of certain non-current investments, partially offset by foreign currency gains.

Interest Expense

2020 compared to 2019

Interest expense increased as a result of higher average outstanding debt balances and lower capitalization of interest, partially offset by lower effective interest rates on floating rate debt and commercial paper balances.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Income Tax Expense

The following table sets forth income tax expense and our effective tax rate for the years ended December 31, 2020 and 2019 (in millions):

Year Ended December 31, Change

Income Tax Impact of:

Goodwill and Other Asset Impairment Charges 57 — 57 N/M

Legal Contingencies and Expenses — 6 (6) N/M

Effective Tax Rate 27.2 % 21.4 %

Adjusted Effective Tax Rate 23.5 % 22.0 %

For additional information on income tax expense and our effective tax rate, see note 15 to the audited, consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Liquidity and Capital Resources

As of December 31, 2020, we had $6.3 billion in cash, cash equivalents and marketable securities. We believe that these positions, expected cash from operations, access to commercial paper programs and capital markets and other available liquidity options will be adequate to fund our operating requirements, planned capital expenditures and pension contributions, transformation strategy costs, debt obligations and planned shareowner returns. We regularly evaluate opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund operations. We have currently suspended share repurchases under our stock repurchase program.

Cash Flows From Operating Activities

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

Hedge margin receivables and payables (507) 171

Income tax receivables and payables 205 599

Other operating activities (21) 20

Net cash from operating activities $ 10,459 $ 8,639

(a) Represents depreciation and amortization, gains and losses on derivative transactions and foreign currency exchange, deferred income taxes, allowances for expected credit losses, amortization of operating lease assets, pension and postretirement benefit expense, stock compensation expense, changes in casualty self-insurance reserves, goodwill and other asset impairment charges and other non-cash items.

Net cash from operating activities increased $1.8 billion for the year, driven by the following:

•Total contributions to our company-sponsored pension and U.S. postretirement medical benefit plans were $3.1 billion during 2020 compared to $2.4 billion in 2019. We made discretionary contributions of $2.8 billion to our three primary, company-sponsored U.S. pension plans during 2020 compared to $2.0 billion in 2019.

•Our net hedge margin collateral decreased by $678 million due to the change in net fair value of derivative contracts used in our currency and interest rate hedging programs.

•Cash payments for income taxes were $1.1 billion and $514 million for 2020 and 2019, respectively, with changes driven by the timing of deductions related to pension contributions, depreciation and employer payroll taxes.

•Favorable changes in working capital were driven by the deferral of approximately $1.1 billion of employer payroll taxes under the Coronavirus Aid, Relief and Economic Security (CARES) Act that was signed into law on March 27, 2020, as well as changes in incentive compensation plan payouts. These benefits were partially offset by an increase in working capital demand as a result of business growth.

As part of our ongoing efforts to improve our working capital efficiency, certain financial institutions offer a voluntary Supply Chain Finance ("SCF") program to certain of our suppliers. We agree 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. Then, if they are participating 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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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 December 31, 2020 and 2019, suppliers sold them $639 and $268 million, respectively, of our outstanding payment obligations. Amounts due to suppliers that participate in the SCF program may be reflected in cash flows from operating activities or cash flows from investing activities in our consolidated statements of cash flows. The amount settled through the SCF program was approximately $1.8 billion for the year ended December 31, 2020.

As of December 31, 2020, our total worldwide holdings of cash, cash equivalents and marketable securities were $6.3 billion, of which approximately $3.0 billion was held by foreign subsidiaries. The amount of cash, cash equivalents and marketable securities held by our U.S. and foreign subsidiaries fluctuates throughout the year due to a variety of factors, including the timing of cash receipts and disbursements in the normal course of business. Cash provided by operating activities in the U.S. continues to be our primary source of funds to finance domestic operating needs, capital expenditures, share repurchases, pension contributions and dividend payments to shareowners. All cash, cash equivalents and marketable securities held by foreign subsidiaries are generally available for distribution to the U.S. without any U.S. federal income taxes. Any such distributions may be subject to foreign withholding and U.S. state taxes. When amounts earned by foreign subsidiaries are expected to be indefinitely reinvested, no accrual for taxes is provided.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Cash Flows From Investing Activities

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

Net cash used in investing activities $ (5,283) $ (6,061)

Capital Expenditures:

Buildings, facilities and plant equipment $ (2,460) $ (2,729)

Information technology (805) (774)

Total Capital Expenditures(1): $ (5,412) $ (6,380)

Capital Expenditures as a % of revenue 6.4 % 8.6 %

Other Investing Activities:

Proceeds from disposals of property, plant and equipment $ 40 $ 65

Net change in finance receivables $ 44 $ 13

Net (purchases), sales and maturities of marketable securities $ 106 $ 322

Other investing activities $ (41) $ (75)

(1) In addition to capital expenditures of $5.4 and $6.4 billion in 2020 and 2019, respectively, there were capital expenditures relating to principal repayments of finance lease obligations of $192 and $140 million. These are included in cash flows from financing activities.

We have commitments for the purchase of aircraft, vehicles, equipment and real estate to provide for the replacement of existing capacity and anticipated future growth. Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions. Our current investment program anticipates maintenance of buildings, facilities and plant equipment, as well as investments in technology initiatives and additional network capabilities. We currently expect that our capital expenditures will be approximately $4.0 billion in 2021.

In 2020, capital expenditures on buildings, facilities and plant equipment decreased in our global small package business, as we reduced spending on facility automation and capacity expansion projects. Capital spending on aircraft decreased due to reductions in contract deposits on open aircraft orders and in final payments associated with the delivery of aircraft.

Proceeds from the disposal of property, plant and equipment were largely attributable to sales of international property in 2020 and 2019. The net change in finance receivables was primarily due to reductions in outstanding balances within our finance portfolios. Purchases and sales of marketable securities are largely determined by liquidity needs and the periodic rebalancing of investment types, and will fluctuate from period to period.

Cash paid for business acquisitions in 2020 related to the acquisition of area franchise rights for The UPS Store. In 2019, we also acquired area franchise rights for The UPS Store, as well as made immaterial acquisitions in our International Small Package and Healthcare Logistics business units. Other investing activities were impacted by changes in our non-current investments, purchase contract deposits and various other items.

We anticipate that the divestiture of UPS Freight will be completed in the second quarter of 2021. We intend to use the proceeds from this divestiture to repay outstanding debt.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Cash Flows From Financing Activities

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

Net cash used in financing activities $ (4,517) $ (1,727)

Share Repurchases:

Cash expended for shares repurchased $ (224) $ (1,004)

Number of shares repurchased (2.1) (9.1)

Shares outstanding at period end 865 857

Percent increase (decrease) in shares outstanding 0.9 % (0.1) %

Dividends:

Dividends declared per share $ 4.04 $ 3.84

Cash expended for dividend payments $ (3,374) $ (3,194)

Borrowings:

Net borrowings (repayments) of debt principal $ (851) $ 2,419

Other Financing Activities:

Cash received for common stock issuances $ 285 $ 218

Other financing activities $ (353) $ (166)

Capitalization:

Total debt outstanding at year end $ 24,654 $ 25,238

Total shareowners’ equity at year end 669 3,283

We repurchased a total of 2.1 million shares of class A and class B common stock for $217 million in 2020; substantially all of those purchases were in the first quarter of 2020. As previously disclosed, we have suspended share repurchases under our stock repurchase program. We repurchased 9.1 million shares for $1.0 billion throughout 2019 ($224 million and $1.0 billion in repurchases for 2020 and 2019, respectively, are reported on the statement of cash flows due to the timing of settlements). For additional information on our share repurchase activities, see note 12 to the audited, consolidated financial statements.

For the years ended December 31, 2020 and 2019, dividends reported within shareowners' equity include $178 and $147 million, respectively, of non-cash dividends that were settled in shares of class A common stock.

The declaration of dividends is subject to the discretion of the Board of Directors and depends on various factors, including our net income, financial condition, cash requirements, future prospects and other relevant factors. We expect to continue the practice of paying regular cash dividends. In February 2021, we increased our quarterly dividend payment from $1.01 to $1.02 per share.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Issuances of debt in 2020 and 2019 consisted of borrowings under our commercial paper program and issuances of fixed-rate senior notes as follows (in millions):

Principal Amount in USD

Fixed-rate senior notes:

Principal Amount in USD

Fixed-rate senior notes:

3.400% senior notes (multiple issuances) 1,450

Repayments of debt in 2020 included our $424 million 8.375% debentures that matured in April 2020 and our €500 million floating rate senior notes that matured in July 2020. We also paid down commercial paper and made scheduled principal payments on our finance lease obligations. Repayments of debt in 2019 included fixed-rate senior notes in the amount of $1.0 billion, commercial paper and scheduled principal payments on our finance lease obligations.

We consider the overall fixed and floating interest rate mix of our portfolio and the related overall cost of borrowing when planning for future issuances and non-scheduled repayments of debt. We have $2.6 billion of senior notes that mature in 2021. We do not currently intend to refinance this debt when it becomes due.

The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. The following is a summary of our commercial paper program (in millions):

The variation in cash received from common stock issuances was primarily due to the number of stock option exercises by employees in 2020 and 2019.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Other financing activities includes cash used to repurchase shares from employees sold to satisfy tax withholding obligations on vested stock awards of $340 and $180 million in 2020 and 2019, respectively. The increase in cash used was driven by changes in the vesting schedule for certain of our awards. Net cash inflows from premium payments and settlements of capped call options for the purchase of UPS class B shares were $0 and $21 million in 2020 and 2019, respectively.

Sources of Credit

See note 9 to the audited, consolidated financial statements for a discussion of our available credit and debt covenants.

Guarantees and Other Off-Balance Sheet Financing Arrangements

Except as disclosed in note 9 to the audited, consolidated financial statements, we do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, which we believe could have a material impact on financial condition or liquidity.

Contractual Commitments

We have contractual obligations and commitments in the form of finance leases, operating leases, debt obligations, purchase commitments and certain other liabilities. We intend to satisfy these obligations primarily through the use of cash flows from operations. The following table summarizes the expected cash outflow to satisfy our contractual obligations and commitments as of December 31, 2020 (in millions):

Tax Act Repatriation Liability — — 13 49 61 — 123

Pension Funding 252 — — — — — 252

(1) Operating lease commitments for 2021 include $184 million of committed leases that have not yet commenced.

Our finance lease obligations relate primarily to leases on aircraft and real estate. Finance leases and operating leases are discussed further in note 11 to the audited, consolidated financial statements. Purchase commitments, as well as our debt principal obligations, are discussed further in note 9 to the audited, consolidated financial statements. The amount of interest on our debt was calculated as the contractual interest payments due on our fixed-rate debt and variable rate debt based on interest rates as of December 31, 2020. The calculations of debt interest take into account the effect of any interest rate swap agreements. For debt denominated in a foreign currency, the U.S. Dollar equivalent principal amount of the debt at the end of the year was used as the basis to calculate future interest payments.

Purchase commitments represent contractual agreements to purchase assets, goods or services that are legally binding, including contracts for aircraft, construction of new or expanded facilities and orders for technology equipment and vehicles. As of December 31, 2020, we had firm commitments to purchase three new Boeing 767-300 aircraft to be delivered in 2021 and 8 new Boeing 747-8F aircraft to be delivered between 2021 and 2022. We also had a firm commitment to purchase two Boeing MD-11 aircraft to be delivered in 2021. We paid a deposit equal to the full purchase price for these MD-11 aircraft in December 2019; therefore these aircraft are not included in the commitment table above.

In December 2017, the United States enacted into law the Tax Act, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. We elected to pay the tax over eight years based on an installment schedule outlined in the Tax Act and, as required, have reflected our remaining transition tax due by year as a contractual obligation.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

There are no anticipated required minimum cash contributions to our qualified U.S. pension plans (these plans are discussed further in note 6 to the audited, consolidated financial statements). The amount of any minimum funding requirement, as applicable, for these plans could change significantly in future periods depending on many factors, including future plan asset returns, discount rates, other actuarial assumptions and changes to pension plan funding regulations. A decline in discount rates or a sustained significant decline in equity or bond returns could result in our U.S. pension plans being subject to significantly higher minimum funding requirements. Actual contributions made in future years could materially differ and consequently required minimum contributions beyond 2021 cannot be reasonably estimated.

As discussed in note 7 to the audited, consolidated financial statements, we are not currently subject to any minimum contributions or surcharges with respect to the multiemployer pension and health and welfare plans in which we participate. Contribution rates to these multiemployer pension and health and welfare plans are established through the collective bargaining process. As we are not subject to any minimum contribution levels, we have not included any amounts in the contractual commitments table with respect to these multiemployer plans.

The table above does not include approximately $398 million of liabilities for uncertain tax positions because we are uncertain if or when such amounts will ultimately be settled in cash. Uncertain tax positions are further discussed in note 15 to the audited, consolidated financial statements.

As of December 31, 2020, we had outstanding letters of credit totaling approximately $1.4 billion issued in connection with our self-insurance reserves and other routine business requirements. We also issue surety bonds as an alternative to letters of credit in certain instances, and as of December 31, 2020, we had $1.3 billion of surety bonds written. As of December 31, 2020, we had unfunded loan commitments totaling $52 million associated with UPS Capital.

We believe that funds from operations and borrowing programs will provide adequate sources of liquidity and capital resources to meet our expected long-term needs for the operation of our business, including anticipated capital expenditures, transformation strategy costs and pension contributions for the foreseeable future.

Contingencies

See note 6 to the audited, consolidated financial statements for a discussion of pension related matters and note 10 to the audited, consolidated financial statements for a discussion of judicial proceedings and other matters arising from the conduct of our business activities.

Collective Bargaining Agreements

Status of Collective Bargaining Agreements

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

Multiemployer Benefit Plans

We contribute to a number of multiemployer pension 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 will remain in effect throughout the terms of the existing collective bargaining agreements.

New Accounting Pronouncements

Recently Adopted Accounting Standards

See note 1 to the audited, consolidated financial statements for a discussion of recently adopted accounting standards.

Accounting Standards Issued But Not Yet Effective

See note 1 to the audited, consolidated financial statements for a discussion of accounting standards issued, but not yet effective.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Rate Adjustments

We announced various adjustments to our peak surcharges during the fourth quarter as follows:

•Effective October 25, 2020, surcharges applied to China and Hong Kong origin international shipments increased.

•Effective November 1, 2020, surcharges for certain Europe origin shipments increased.

•Effective November 8, 2020, surcharges increased for China Mainland, Hong Kong Special Administrative Region, Australia, New Zealand and other Asia origin shipments and a surcharge was applied to international shipments from Korea.

•Effective November 15, 2020, surcharges for certain Europe origin shipments increased.

•Effective December 27, 2020, surcharges for shipments from China Mainland and Hong Kong Special Administrative Region to the U.S. decreased.

•Effective January 17, 2021, updated surcharges were applied to U.S. shipments.

The following changes took effect on December 27, 2020:

•The rates for UPS Ground, UPS Air and International services increased by an average net 4.9%.

•UPS Air Freight rates within and between the U.S., Canada and Puerto Rico increased an average net 4.8%.

•Rates for all UPS SurePost services increased.

Additionally, effective January 10, 2021, an additional handling charge was applied to any package with a combined length plus girth exceeding 105 inches. Effective April 11, 2021, additional handling and large package surcharge rates for non-Hundredweight service packages will differ by zone and effective July 11, 2021, additional handling and large package surcharge rates for Hundredweight Service packages will differ by zone.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Critical Accounting Estimates

This discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which are prepared in accordance with GAAP. As indicated in note 1 to the audited, consolidated financial statements, the amounts of assets, liabilities, revenue and expenses reported in our financial statements are affected by estimates and judgments that are necessary to comply with GAAP. We base our estimates on prior experience, current trends, various other assumptions and third-party input that we consider reasonable to our circumstances. Actual results could differ materially from our estimates, which would affect the related amounts reported in our consolidated financial statements. While estimates and judgments are applied in arriving at many reported amounts, we believe that the following critical accounting policies involve a higher degree of judgment and complexity.

Contingencies

As discussed in note 10 to the audited, consolidated financial statements, we are involved in various legal proceedings and subject to various contingencies. The events that may impact our contingent liabilities are often unique and generally are not predictable. At the time a contingency is identified, we consider all relevant facts as part of our evaluation. We record a liability for a loss when the loss is probable of occurring and reasonably estimable. Events may arise that were not anticipated and the outcome of a contingency may result in a loss to us that differs from our previously estimated liability. This difference could be material. Income taxes and self-insurance are discussed below. Except as disclosed in note 10 to the audited, consolidated financial statements, other contingent losses that were probable and estimable were not material to our financial position or results of operations as of, or for the year ended, December 31, 2020. In addition, we have certain contingent liabilities that have not been recognized as of, or for the year ended, December 31, 2020, because a loss was not reasonably estimable.

Goodwill and Intangible Asset Impairments

We test goodwill and indefinite-lived intangible assets for impairment on an annual basis as of July 1st and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying amount may be impaired. We assess goodwill for impairment at the reporting unit level, initially evaluating qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive, we calculate the fair value of a reporting unit to test goodwill for impairment. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we record the excess amount as goodwill impairment, not to exceed the total amount of goodwill allocated to the reporting unit. Our reporting units are set out in note 8 to the audited, consolidated financial statements.

We primarily determine the fair value of our reporting units using a discounted cash flow (“DCF”) model and supplement this with observable valuation multiples for comparable companies, as appropriate. The completion of the DCF model requires that we make a number of significant assumptions to produce an estimate of future cash flows. These assumptions include projections of future revenue, costs, capital expenditures, working capital and our cost of capital. We are also required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment. The projections that we use in our DCF model are updated annually and will change over time based on the historical performance and changing business conditions for each of our reporting units.

The determination of whether goodwill is impaired involves a significant level of judgment in these assumptions, and changes in our forecasts, business strategy, government regulations, or economic or market conditions could significantly impact these judgments, potentially decreasing the fair value of one or more reporting units. Any resulting impairment charges could have a material impact on our results of operations.

We recognized a goodwill impairment charge of $494 million for our UPS Freight reporting unit in 2020 in conjunction with our evaluation of assets held for sale, which is discussed in note 4 to the audited, consolidated financial statements. Based on the most recent tests, the fair value of our remaining reporting units exceeds their carrying value. None of our reporting units incurred any goodwill impairment charges in 2019.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

A trade name with a carrying value of $200 million and licenses with a carrying value of $5 million as of December 31, 2020 are considered to be indefinite-lived intangibles. We determined that the income approach, specifically the relief from royalty method, is the most appropriate valuation method to estimate the fair value of the trade name. This valuation approach requires that we make a number of assumptions to estimate fair value. These assumptions include projections of future revenues, market royalty rates, tax rates, discount rates and other relevant variables. The projections we use in the model are updated annually and will change over time based on the historical performance and changing business conditions. If the carrying value of the trade name exceeds its estimated fair value, an impairment charge would be recognized for the excess amount.

All of our remaining intangible assets are deemed to be finite-lived and are amortized over their estimated useful lives. Impairment tests for these assets are only performed when a triggering event occurs that indicates that the carrying value of the intangible may not be recoverable based on its undiscounted future cash flows. If the carrying amount of the intangible is determined not to be recoverable, a write-down to fair value is recorded. Fair values are estimated using a DCF model. If impairment indicators are present, the resulting impairment charges could have a material impact on our results of operations. See note 8 to the audited, consolidated financial statements for details of finite-lived intangible asset impairments.

Self-Insurance Accruals

We self-insure costs associated with workers’ compensation claims, automobile liability, health and welfare and general business liabilities, up to certain limits. Insurance reserves are based on third-party actuarial estimates, which incorporate historical loss experience and judgments about the present and expected cost per claim. Trends in actual experience are a significant factor in the determination of our reserves.

Workers’ compensation, automobile liability and general liability insurance claims may take several years to completely settle. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to fully resolve a claim. A number of factors can affect the actual cost of a claim, including the severity and length of time the claim remains open, trends in healthcare costs, the results of any related litigation and changes in legislation. Furthermore, claims may emerge in a future year for events that occurred in a prior year at a rate that differs from actuarial projections. All of these factors can result in revisions to actuarial projections and produce a material difference between estimated and actual operating results. Based on our historical experience, in 2019 we changed our self-insurance reserves from the central estimate to the low end of the actuarial range of losses. We believe our estimated reserves for such claims are adequate; actual experience in claim frequency and/or severity could materially differ from our estimates and affect our results of operations. For additional information on our self-insurance reserves, refer to note 1 of the audited, consolidated financial statements.

We sponsor a number of health and welfare insurance plans for our employees. Liabilities and expenses related to these plans are based on estimates of, among other things, the number of employees and eligible dependents covered under the plans, global health events, anticipated medical usage by participants and overall trends in medical costs and inflation. We believe our estimates are reasonable/appropriate. Actual experience may differ from these estimates and, therefore, produce a material difference between estimated and actual operating results.

Pension and Other Postretirement Medical Benefits

Our pension and other postretirement medical benefit costs are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, healthcare cost trend rates, inflation, compensation increases, expected returns on plan assets, mortality rates, regulatory requirements and other factors. The assumptions utilized in recording the obligations under our plans represent our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance as well as other factors that might cause future expectations to differ from past trends.

Differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations and future expenses. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension and postretirement benefit obligations as of the measurement date, (2) differences between the expected and the actual return on plan assets, (3) changes in demographic assumptions including mortality, (4) participant experience different from demographic assumptions and (5) changes in coordinating benefits with plans not sponsored by UPS. In 2019, we refined the bond matching approach used to determine the discount rate for our U.S. pension and postretirement plans by implementing advances in technology and modeling techniques as discussed in note 6 to the audited, consolidated financial statements.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of a corridor (defined as 10% of the greater of the fair value of plan assets or the plans' projected benefit obligations) in pension expense annually at December 31st each year. The remaining components of pension expense (herein referred to as "ongoing net periodic benefit cost"), primarily service and interest costs and the expected return on plan assets, are reported on a quarterly basis.

The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate and return on assets for our pension and postretirement benefit plans, and the resulting increase (decrease) on our obligations and expense as of, and for the year ended, December 31, 2020 (in millions):

Pension Plans 25 Basis PointIncrease 25 Basis PointDecrease

Discount Rate:

Effect on ongoing net periodic benefit cost $ (41) $ 42

Effect on projected benefit obligation (2,761) 2,942

Return on Assets:

Effect on ongoing net periodic benefit cost(1) (118) 118

Postretirement Medical Plans

Discount Rate:

Effect on ongoing net periodic benefit cost 3 (3)

Effect on accumulated postretirement benefit obligation (60) 71

Healthcare Cost Trend Rate:

Effect on ongoing net periodic benefit cost 1 (1)

Effect on accumulated postretirement benefit obligation 14 (16)

(1)Amount calculated based on 25 basis point increase / decrease in the expected return on assets.

(2)Amount calculated based on 25 basis point increase / decrease in the actual return on assets.

Refer to note 6 to the audited, consolidated financial statements for information on our potential liability for coordinating benefits related to the Central States Pension Fund.

Depreciation, Residual Value and Impairment of Fixed Assets

As of December 31, 2020, we had $32.3 billion of net fixed assets, the most significant category of which is aircraft. In accounting for fixed assets, we make estimates of the expected useful lives and residual values. We review long-lived assets for impairment at either the individual asset level or the asset group for which the lowest level of independent cash flows can be identified. Impairment reviews occur when circumstances indicate the carrying amount of an asset or asset group may not be recoverable based on undiscounted future cash flows. The circumstances that would indicate potential impairment may include, but are not limited to, a significant change in the extent to which an asset is utilized and operating or cash flow losses associated with the use of the asset. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows or external appraisals, as appropriate. There were no material impairment charges on our fixed assets during 2020 or 2019.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

In estimating the lives and expected residual values of aircraft, we rely upon actual experience with the same or similar aircraft types. Revisions to these estimates could be caused by changes to our maintenance programs, changes in the utilization of the aircraft, governmental regulations on aging aircraft and changing market prices of new and used aircraft of the same or similar types. We periodically evaluate these estimates and assumptions, and adjust them as necessary. Adjustments are accounted for on a prospective basis through depreciation expense. In estimating cash flows, we project future volume levels for our different air products in all geographic regions in which we do business. Adverse changes in these volume forecasts, or a shortfall of our actual volume compared with our projections, could result in our current aircraft capacity exceeding current or projected demand. This situation could lead to an excess of a particular aircraft, resulting in an impairment charge or a reduction of the expected useful life of an aircraft that may result in increased depreciation expense.

We evaluate the useful lives of our property, plant and equipment based on our usage, maintenance and replacement policies, and taking into account physical and economic factors that may affect the useful lives of the assets. See note 1 to the audited, consolidated financial statements for a discussion of our accounting policies for long-lived assets.

Fair Value Measurements

In the normal course of business, we hold and issue financial instruments that contain elements of market risk, including derivatives, marketable securities, finance receivables, pension assets, other investments and debt. Certain of these financial instruments are required to be recorded at fair value, principally derivatives, marketable securities, pension assets and certain other investments. Fair values are based on listed market prices, 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. 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. Certain financial instruments, including over-the-counter derivative instruments, are valued using pricing models that consider, among other factors, contractual and market prices, correlations, time value, credit spreads and yield curve volatility factors. Changes in the fixed income, foreign currency exchange and commodity markets will impact our estimates of fair value in the future, potentially affecting our results of operations. A quantitative sensitivity analysis of our exposure to changes in commodity prices, foreign currency exchange rates and interest rates is presented in the “Quantitative and Qualitative Disclosures about Market Risk” section of this report.

Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis, including property, plant, and equipment, goodwill and intangible assets. These assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of an impairment or when an asset or disposal group is classified as held for sale.

For business acquisitions, we allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, technology and trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Income Taxes

We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of income by legal entity and jurisdiction, tax credits, benefits and deductions, and in the calculation of deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as tax, interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

We assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that we will ultimately recover a substantial majority of the deferred tax assets recorded on our consolidated balance sheets. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery was not likely.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. Once it is determined that the position meets the recognition threshold, the second step requires us to estimate and measure the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement. The difference between the amount of recognizable tax benefit and the total amount of tax benefit from positions filed or to be filed with the tax authorities is recorded as a liability for uncertain tax benefits. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates, interest rates and equity prices. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. In order to manage the risk arising from these exposures, we may utilize a variety of commodity, foreign currency exchange rate and interest rate forward contracts, options and swaps. A discussion of our accounting policies for derivative instruments and further disclosures are provided in note 1 to the audited, consolidated financial statements.

Commodity Price Risk

We are exposed to changes in the prices of refined fuels, principally jet-A, diesel and unleaded gasoline, as well as changes in the price of natural gas and other alternative fuels. Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are the primary means of reducing the risk of adverse fuel price changes. 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, inter-modal and truckload services. The majority of our contracts for fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for fuel. Because of this, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our results either positively or negatively in the short-term. As of December 31, 2020 and 2019, we had no commodity contracts outstanding.

Foreign Currency Exchange Rate Risk

We have foreign currency risks related to our revenue, operating expenses and financing transactions in currencies other than the local currencies in which we operate. We are exposed to currency risk from the potential changes in functional currency values of our foreign currency-denominated assets, liabilities and cash flows. Our most significant foreign currency exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We use forward contracts as well as a combination of purchased and written options to hedge forecasted cash flow currency exposures. These derivative instruments generally cover forecasted foreign currency exposures for periods of 12 to 48 months. We also utilize forward contracts to hedge portions of our anticipated cash settlements of intercompany transactions and interest payments on certain debt subject to foreign currency remeasurement.

Interest Rate Risk

We have issued debt instruments, including debt associated with finance leases, that accrue expense at fixed and floating rates of interest. We use a combination of interest rate swaps as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. The notional amount, interest payment and maturity dates of the swaps match the terms of the associated debt. We also utilize forward starting swaps and similar instruments to lock in all or a portion of the borrowing cost of anticipated debt issuances. Our floating-rate debt and interest rate swaps subject us to risk resulting from changes in short-term interest rates. For a discussion of the risks associated with the anticipated cessation of LIBOR, see Part I, "Item 1A. Risk Factors - Financial Risks - The proposed phase out of the London Interbank Offer Rate ("LIBOR") could have a material adverse effect on us".

We also are subject to interest rate risk with respect to our pension and postretirement benefit obligations, as changes in interest rates will effectively increase or decrease our liabilities associated with these benefit plans, which also results in changes to the amount of pension and postretirement benefit expense recognized in future periods.

We have investments in debt securities, as well as cash-equivalent instruments, some of which accrue income at variable rates of interest. Additionally, we hold a portfolio of finance receivables that accrue income at fixed and floating rates of interest.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Sensitivity Analysis

The following analysis provides quantitative information regarding our exposure to foreign currency exchange risk, interest rate risk and equity price risk embedded in our existing financial instruments. We utilize valuation models to evaluate the sensitivity of the fair value of financial instruments with exposure to market risk that assume instantaneous, parallel shifts in exchange rates, interest rate yield curves and commodity and equity prices. For options and instruments with non-linear returns, models appropriate to the instrument are utilized to determine the impact of market shifts.

There are certain limitations inherent in the sensitivity analyses presented, primarily due to the assumption that foreign currency exchange rates change in a parallel fashion and that interest rates change instantaneously. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled. While this is our best estimate of the impact of the specified interest rate scenarios, these estimates should not be viewed as forecasts. We adjust the fixed and floating interest rate mix of our interest rate sensitive assets and liabilities in response to changes in market conditions. Additionally, changes in the fair value of foreign currency derivatives and commodity derivatives are offset by changes in the cash flows of the underlying hedged foreign currency and commodity transactions.

Shock-Test Result As of December 31,

Change in Fair Value:

Currency Derivatives(1) $ (809) $ (786)

Change in Annual Interest Expense:

Variable Rate Debt(2) $ 26 $ 64

Interest Rate Derivatives(2) $ 33 $ 37

(1)The potential change in fair value from a hypothetical 10% weakening of the U.S. Dollar against local currency exchange rates across all maturities.

(2)The potential change in annual interest expense resulting from a hypothetical 100 basis point increase in short-term interest rates, applied to our variable rate debt and swap instruments (excluding hedges of anticipated debt issuances).

The sensitivity of our pension and postretirement benefit obligations to changes in interest rates is quantified in “Critical Accounting Estimates”. The sensitivity in the fair value and interest income of our finance receivables and marketable securities due to changes in interest rates was not material as of December 31, 2020 or 2019.

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Item 8.Financial Statements and Supplementary Data

Table of Contents

Report of Independent Registered Public Accounting Firm 57

Consolidated Balance Sheets 61

Statements of Consolidated Income 62

Statements of Consolidated Comprehensive Income (Loss) 62

Statements of Consolidated Cash Flows 63

Notes to Consolidated Financial Statements 64

Note 1—Summary of Accounting Policies 64

Note 2—Revenue Recognition 71

Note 3—Investments and Restricted Cash 74

Note 4—Assets Held for Sale 78

Note 5—Property, Plant and Equipment 79

Note 6—Company-Sponsored Employee Benefit Plans 80

Note 7—Multiemployer Employee Benefit Plans 92