ups-20220930

United States

Securities and Exchange Commission

Washington, D.C. 20549

_____________________________________

Form 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022 or


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-15451

_____________________________________

United Parcel Service, Inc.

(Exact name of registrant as specified in its charter)

Delaware

58-2480149

(State or Other Jurisdiction of
Incorporation or Organization)

(IRS Employer
Identification No.)

55 Glenlake Parkway N.E. ,

Atlanta,

Georgia

30328

(Address of Principal Executive Offices)

(Zip Code)

(404) 828-6000

(Registrant’s telephone number, including area code)

____________________

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Class B common stock, par value $0.01 per share

UPS

New York Stock Exchange

0.375% Senior Notes due 2023

UPS23A

New York Stock Exchange

1.625% Senior Notes due 2025

UPS25

New York Stock Exchange

1% Senior Notes due 2028

UPS28

New York Stock Exchange

1.500% Senior Notes due 2032

UPS32

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

There were 135,097,238 Class A shares, and 729,820,920 Class B shares, with a par value of $0.01 per share, outstanding at October 21, 2022.

Table of Contents

TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION
	Cautionary Statement About Forward-Looking Statements	1
Item 1.	Financial Statements	2
	Consolidated Balance Sheets	2
	Statements of Consolidated Income	3
	Statements of Consolidated Comprehensive Income (Loss)	3
	Statements of Consolidated Cash Flows	4
	Notes to Unaudited, Consolidated Financial Statements	5
	Note 1—Basis of Presentation and Accounting Policies	5
	Note 2—Recent Accounting Pronouncements	6
	Note 3—Revenue Recognition	7
	Note 4—Stock-Based Compensation	9
	Note 5—Cash and Investments	11
	Note 6—Property, Plant and Equipment	14
	Note 7—Employee Benefit Plans	15
	Note 8—Goodwill and Intangible Assets	18
	Note 9—Debt and Financing Arrangements	20
	Note 10—Leases	23
	Note 11—Legal Proceedings and Contingencies	27
	Note 12—Shareowners’ Equity	28
	Note 13—Segment Information	34
	Note 14—Earnings Per Share	35
	Note 15—Derivative Instruments and Risk Management	36
	Note 16—Income Taxes	42
	Note 17—Transformation Strategy Costs	43
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
	Overview	44
	Supplemental Information - Items Affecting Comparability	46
	Results of Operations - Segment Review	48
	U.S. Domestic Package Operations	49
	International Package Operations	52
	Supply Chain Solutions Operations	55
	Consolidated Operating Expenses	57
	Other Income and (Expense)	60
	Income Tax Expense	61
	Liquidity and Capital Resources	62
	Cash Flows From Operating Activities	62
	Cash Flows From Investing Activities	64
	Cash Flows From Financing Activities	65
	Sources of Credit	66
	Contractual Commitments	66
	Legal Proceedings and Contingencies	66
	Collective Bargaining Agreements	66
	Recent Accounting Pronouncements	66
	Rate Adjustments	67
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	68
Item 4.	Controls and Procedures	69
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 6.	Exhibits	72

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PART I. FINANCIAL INFORMATION

Cautionary Statement About Forward-Looking Statements

This report, our Annual Report on Form 10-K for the year ended December 31, 2021 and our other filings with the Securities and Exchange Commission contain and in the future may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than those of current or historical fact, and all statements accompanied by terms such as “will,” “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan” and similar terms, are intended to be forward-looking statements. Forward-looking statements are made subject to the safe harbor provisions of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

From time to time, we also include written or oral forward-looking statements in other publicly disclosed materials. Such statements may relate to our intent, belief, forecasts of, or current expectations about our strategic direction, prospects, future results, or future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any forward-looking statements because such statements speak only as of the date when made and the future, by its very nature, cannot be predicted with certainty.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties, include, but are not limited to: continued uncertainties related to the impact of the COVID-19 pandemic on our business and operations, financial performance and liquidity, our customers and suppliers, and on the global economy; changes in general economic conditions, in the United States ("U.S.") or internationally; significant competition on a local, regional, national and international basis; changes in our relationships with our significant customers; changes in the regulatory environment in the U.S. or internationally; increased or more complex physical or data security requirements; legal, regulatory or market responses to global climate change; results of negotiations and ratifications of labor contracts; strikes, work stoppages or slowdowns by our employees; the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; changes in exchange rates or interest rates; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; our ability to maintain our brand image; our ability to attract and retain qualified employees; breaches in data security; disruptions to the Internet or our technology infrastructure; interruptions in or impacts on our business from natural or man-made events or disasters including terrorist attacks, epidemics or pandemics; our ability to accurately forecast our future capital investment needs; exposure to changing economic, political and social developments in international and emerging markets; changes in business strategy, government regulations, or economic or market conditions that may result in impairment of our assets; increases in our expenses or funding obligations relating to employee health, retiree health and/or pension benefits; potential additional U.S. or international tax liabilities; potential claims or litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters; our ability to realize the anticipated benefits from acquisitions, dispositions, joint ventures or strategic alliances; our ability to realize the anticipated benefits from our transformation initiatives; cyclical and seasonal fluctuations in our operating results; our ability to manage insurance and claims expenses; and other risks described in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2021, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 and subsequently filed reports. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements, except as required by law.

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Item 1. Financial Statements

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2022 (unaudited) and December 31, 2021 (in millions)


	September 30, 2022		December 31, 2021
ASSETS
Current Assets:
Cash and cash equivalents	$	11,045	$	10,255
Marketable securities	331		338
Accounts receivable	11,118		12,669
Less: Allowance for credit losses	(143)		(128)
Accounts receivable, net	10,975		12,541

Other current assets	2,247		1,800
Total Current Assets	24,598		24,934
Property, Plant and Equipment, Net	33,625		33,475
Operating Lease Right-Of-Use Assets	3,417		3,562
Goodwill	3,624		3,692
Intangible Assets, Net	2,439		2,486
Investments and Restricted Cash	20		26
Deferred Income Tax Assets	143		176
Other Non-Current Assets	1,678		1,054
Total Assets	$	69,544	$	69,405
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt, commercial paper and finance leases	$	2,581	$	2,131
Current maturities of operating leases	560		580
Accounts payable	6,731		7,523
Accrued wages and withholdings	3,643		3,819
Self-insurance reserves	1,081		1,048
Accrued group welfare and retirement plan contributions	1,006		1,038
Hedge margin liabilities	1,031		260

Other current liabilities	1,046		1,170
Total Current Liabilities	17,679		17,569
Long-Term Debt and Finance Leases	17,769		19,784
Non-Current Operating Leases	2,960		3,033
Pension and Postretirement Benefit Obligations	6,747		8,047
Deferred Income Tax Liabilities	3,761		3,125
Other Non-Current Liabilities	3,640		3,578
Shareowners’ Equity:
Class A common stock (135 and 138 shares issued in 2022 and 2021, respectively)	2		2
Class B common stock (730 and 732 shares issued in 2022 and 2021, respectively)	7		7
Additional paid-in capital	—		1,343
Retained earnings	20,177		16,179
Accumulated other comprehensive loss	(3,218)		(3,278)
Deferred compensation obligations	12		16
Less: Treasury stock (0.2 and 0.3 shares in 2022 and 2021, respectively)	(12)		(16)
Total Equity for Controlling Interests	16,968		14,253
Noncontrolling interests	20		16
Total Shareowners’ Equity	16,988		14,269
Total Liabilities and Shareowners’ Equity	$	69,544	$	69,405

See notes to unaudited, consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(In millions, except per share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	$	24,161	$	23,184	$	73,305	$	69,516
Operating Expenses:
Compensation and benefits	11,506		11,148		34,480		33,958
Repairs and maintenance	639		619		1,908		1,837
Depreciation and amortization	774		738		2,300		2,199
Purchased transportation	4,173		4,638		13,158		13,327
Fuel	1,530		950		4,447		2,672
Other occupancy	427		384		1,338		1,252
Other expenses	1,999		1,811		5,775		5,352
Total Operating Expenses	21,048		20,288		63,406		60,597
Operating Profit	3,113		2,896		9,899		8,919
Other Income and (Expense):
Investment income and other	333		274		981		4,235
Interest expense	(177)		(177)		(522)		(521)
Total Other Income and (Expense)	156		97		459		3,714
Income Before Income Taxes	3,269		2,993		10,358		12,633
Income Tax Expense	685		664		2,263		2,836
Net Income	$	2,584	$	2,329	$	8,095	$	9,797
Basic Earnings Per Share	$	2.97	$	2.66	$	9.27	$	11.21
Diluted Earnings Per Share	$	2.96	$	2.65	$	9.24	$	11.16

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(In millions)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net Income	$	2,584	$	2,329	$	8,095	$	9,797
Change in foreign currency translation adjustment, net of tax	(263)		(106)		(548)		(140)
Change in unrealized gain (loss) on marketable securities, net of tax	(3)		—		(10)		(5)
Change in unrealized gain (loss) on cash flow hedges, net of tax	281		112		558		180
Change in unrecognized pension and postretirement benefit costs, net of tax	18		29		60		4,049
Comprehensive Income (Loss)	$	2,617	$	2,364	$	8,155	$	13,881

See notes to unaudited, consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

(unaudited)


	Nine Months Ended September 30,
	2022		2021
Cash Flows From Operating Activities:
Net income	$	8,095	$	9,797
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	2,300		2,199
Pension and postretirement benefit (income) expense	666		(2,656)
Pension and postretirement benefit contributions	(2,106)		(331)
Self-insurance reserves	182		122
Deferred tax (benefit) expense	466		1,271
Stock compensation expense	850		700
Other (gains) losses	(25)		33
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	1,022		(21)
Other assets	(98)		256
Accounts payable	(952)		20
Accrued wages and withholdings	(59)		306
Other liabilities	481		65
Other operating activities	(50)		—
Net cash from operating activities	10,772		11,761
Cash Flows From Investing Activities:
Capital expenditures	(2,278)		(2,570)
Proceeds from disposal of businesses, property, plant and equipment	12		870
Purchases of marketable securities	(195)		(197)
Sales and maturities of marketable securities	193		257
Net change in finance receivables	23		28
Cash paid for business acquisitions, net of cash and cash equivalents acquired	(106)		(12)
Other investing activities	(57)		24
Net cash used in investing activities	(2,408)		(1,600)
Cash Flows From Financing Activities:
Net change in short-term debt	—		—
Proceeds from long-term borrowings	—		—
Repayments of long-term borrowings	(1,124)		(2,613)
Purchases of common stock	(2,194)		(500)
Issuances of common stock	198		196
Dividends	(3,842)		(2,578)
Other financing activities	(513)		(361)
Net cash used in financing activities	(7,475)		(5,856)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(99)		(3)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	790		4,302
Cash, Cash Equivalents and Restricted Cash:
Beginning of period	10,255		5,910
End of period	$	11,045	$	10,212

See notes to unaudited, consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Principles of Consolidation

The accompanying interim unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2022, our results of operations for the three and nine months ended September 30, 2022 and 2021, and our cash flows for the nine months ended September 30, 2022 and 2021. The results reported in these interim unaudited, consolidated financial statements should not be regarded as indicative of results that may be expected for any other period or the entire year. The interim unaudited, consolidated financial statements should be read in conjunction with the audited, consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no material impact on our financial position or results of operations.

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximated fair value as of September 30, 2022 and December 31, 2021. The fair values of our investment securities are disclosed in note 5, our recognized multiemployer pension withdrawal liabilities in note 7, our short- and long-term debt in note 9 and our derivative instruments in note 15. We apply a fair value hierarchy (Levels 1, 2 and 3) when measuring and reporting items at fair value. Fair values are based on listed market prices (Level 1), when such prices are available. To the extent that listed market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations (Level 2). If listed market prices or other relevant factors are not available, inputs are developed from unobservable data reflecting our own assumptions and include situations where there is little or no market activity for the asset or liability (Level 3). We utilized Level 1 inputs in the fair value hierarchy to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.

Use of Estimates

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

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

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

Accounting pronouncements adopted during the periods covered by the unaudited, consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows. For accounting standards adopted in the period ended September 30, 2021, refer to note 1 to our audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.

Accounting Standards Issued But Not Yet Effective

In September 2022, the Financial Accounting Standards Board issued an Accounting Standards Update ("ASU") to enhance the disclosure of supplier finance programs. The update will be effective for us in the first quarter of 2023. We are evaluating the impact of its adoption on our consolidated financial statements and internal control over financial reporting environment, but do not expect this ASU to have a material impact on our consolidated financial position, results of operations, cash flows or internal controls.

Other accounting pronouncements issued before, but not effective until after, September 30, 2022, are not expected to have a material impact on our consolidated financial position, results of operations, cash flows or internal controls.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. REVENUE RECOGNITION

Revenue Recognition

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

The majority of our contracts with customers for transportation services include only one performance obligation: the transportation services themselves. We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our remaining performance obligations are primarily comprised of transportation services started but not completed as of the reporting date and we expect to complete these remaining performance obligations within a short period of time. All of our major businesses act as a principal in their revenue arrangements and as such, we report revenue and the associated purchased transportation costs on a gross basis within our statements of consolidated income.

Disaggregation of Revenue


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue:
Next Day Air	$	2,673	$	2,415	$	7,923	$	7,202
Deferred	1,311		1,304		4,123		3,877
Ground	11,390		10,489		33,911		31,541
U.S. Domestic Package	15,374		14,208		45,957		42,620

Domestic	785		852		2,465		2,716
Export	3,747		3,641		11,501		10,808
Cargo & Other	267		227		782		620
International Package	4,799		4,720		14,748		14,144

Forwarding	2,162		2,625		7,140		7,006
Logistics	1,302		1,158		3,843		3,424
Freight	—		—		—		1,064
Other	524		473		1,617		1,258
Supply Chain Solutions	3,988		4,256		12,600		12,752

Consolidated revenue	$	24,161	$	23,184	$	73,305	$	69,516

Contract Assets and Liabilities

Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e. packages have been delivered) and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

Contract assets related to in-transit packages were $328 and $304 million as of September 30, 2022 and December 31, 2021, respectively, net of deferred revenue related to in-transit packages of $346 and $314 million as of September 30, 2022 and December 31, 2021, respectively, and are included within Other current assets in the consolidated balance sheets. Short-term contract liabilities related to advance payments from customers were $10 and $27 million as of September 30, 2022 and December 31, 2021, respectively, and are included within Other current liabilities in the consolidated balance sheets. Long-term contract liabilities related to advance payments from customers were $26 and $25 million as of September 30, 2022 and December 31, 2021, respectively, and are included within Other Non-Current Liabilities in the consolidated balance sheets.

Accounts Receivable, Net

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

Our allowance for credit losses as of September 30, 2022 and December 31, 2021 was $143 and $128 million, respectively. Amounts for credit losses charged to expense, before recoveries, during each of the three months ended September 30, 2022 and 2021 were $48 million and for the nine months ended September 30, 2022 and 2021, were $154 and $128 million, respectively.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. STOCK-BASED COMPENSATION

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

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

Management Incentive Program

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

Based on the date of Compensation Committee approval of the 2021 MIP, we determined the award measurement dates to be February 9, 2022 (for U.S.-based employees and executive management) and March 21, 2022 (for international employees). Each RPU issued under the MIP was valued using the closing New York Stock Exchange ("NYSE") prices of $225.07 and $218.56 on those dates.

Long-Term Incentive Performance Program

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

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

Based on the date of Compensation Committee approval of the 2022 LTIP award performance targets, we determined March 23, 2022 to be the award measurement date and each target RPU awarded was valued at $230.67.

The weighted-average assumptions used and the weighted-average fair values of the LTIP awards granted in 2022 and 2021 are as follows:


	2022			2021
Risk-free interest rate	2.33		%	0.19		%
Expected volatility	31.91		%	30.70		%
Weighted-average fair value of RPUs granted	$	228.72		$	168.05
Share payout	107.41		%	102.39		%

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

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Non-Qualified Stock Options

We grant non-qualified stock options to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards vest over a five-year period with approximately 20% of the award vesting at each anniversary of the grant date (except in the case of death, disability or retirement, in which case immediate vesting occurs). The option grants expire 10 years after the date of the grant. On March 23, 2022, we granted 0.1 million stock options at an exercise price of $214.58, the NYSE closing price on that date.

The fair value of each option granted is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the weighted-average fair values of options granted in 2022 and 2021 are as follows:


	2022			2021
Expected dividend yield	2.35		%	3.31		%
Risk-free interest rate	2.39		%	0.84		%
Expected life (in years)	7.5			7.5
Expected volatility	25.04		%	23.15		%
Weighted-average fair value of options granted	$	48.45		$	23.71

Pre-tax compensation expense for share-based awards recognized in Compensation and benefits in the statements of consolidated income for the three months ended September 30, 2022 and 2021 was $233 and $179 million, respectively, and for the nine months ended September 30, 2022 and 2021 was $850 and $700 million, respectively.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. CASH AND INVESTMENTS

The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2022 and December 31, 2021 (in millions):


	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
September 30, 2022:
Current trading marketable securities:




Equity securities	$	2	$	—	$	—	$	2



Total trading marketable securities	2		—		—		2

Current available-for-sale securities:
U.S. government and agency debt securities	222		—		(8)		214
Mortgage and asset-backed debt securities	10		—		—		10
Corporate debt securities	105		—		(4)		101
U.S. state and local municipal debt securities	4		—		—		4

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


Total available-for-sale marketable securities	341		—		(12)		329

Total current marketable securities	$	343	$	—	$	(12)	$	331

	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
December 31, 2021:
Current trading marketable securities:




Equity securities	$	2	$	—	$	—	$	2



Total trading marketable securities	2		—		—		2

Current available-for-sale securities:
U.S. government and agency debt securities	199		2		(1)		200
Mortgage and asset-backed debt securities	7		—		—		7
Corporate debt securities	121		—		—		121
U.S. state and local municipal debt securities	5		—		—		5

Non-U.S. government debt securities	3		—		—		3


Total available-for-sale marketable securities	335		2		(1)		336

Total current marketable securities	$	337	$	2	$	(1)	$	338

Investment Impairments

We have concluded that no material impairment losses existed as of September 30, 2022. In making this determination, we considered the financial condition and prospects of each issuer, the magnitude of the losses compared with the cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

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Maturity Information

The amortized cost and estimated fair value of marketable securities as of September 30, 2022 by contractual maturity are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations with or without prepayment penalties.


	Cost		Estimated Fair Value
Due in one year or less	$	16	$	15
Due after one year through three years	325		314
Due after three years through five years	—		—
Due after five years	—		—
	341		329
Equity securities	2		2
	$	343	$	331

Non-Current Investments and Restricted Cash

We hold an investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. The investment had a fair market value of $18 and $23 million as of September 30, 2022 and December 31, 2021, respectively. Changes in fair value are recognized in Investment income and other in the statements of consolidated income. Additionally, we held cash in escrow of $2 and $3 million as of September 30, 2022 and December 31, 2021, respectively, related to the acquisition and disposition of certain assets. These amounts are classified as Investments and Restricted Cash in the consolidated balance sheets.

A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows is shown below (in millions):


	September 30, 2022		December 31, 2021		September 30, 2021		December 31, 2020
Cash and cash equivalents	$	11,045	$	10,255	$	10,212	$	5,910
Restricted cash	—		—		—		—
Total cash, cash equivalents and restricted cash	$	11,045	$	10,255	$	10,212	$	5,910

Fair Value Measurements

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

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The following table presents information about our investments measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
September 30, 2022:
Marketable securities:
U.S. government and agency debt securities	$	214	$	—	$	—	$	214
Mortgage and asset-backed debt securities	—		10		—		10
Corporate debt securities	—		101