FORM 10-Q

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010, 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

LOGO

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, NE Atlanta, Georgia		30328
*(Address of Principal Executive Offices)*		*(Zip Code)*

(404) 828-6000

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report.

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

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

There were 260,027,339 Class A shares, and 728,907,161 Class B shares, with a par value of $0.01 per share, outstanding at October 28, 2010.

UNITED PARCEL SERVICE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets	1
	Statements of Consolidated Income	2
	Statements of Consolidated Comprehensive Income	2
	Statements of Consolidated Cash Flows	3
	Notes to Consolidated Financial Statements	4
	Note 1—Basis of Presentation	4
	Note 2—Recent Accounting Pronouncements	4
	Note 3—Stock-Based Compensation	4
	Note 4—Cash and Investments	6
	Note 5—Property, Plant and Equipment	10
	Note 6—Employee Benefit Plans	11
	Note 7—Goodwill and Intangible Assets	12
	Note 8—Debt and Financing Arrangements	13
	Note 9—Legal Proceedings and Contingencies	14
	Note 10—Shareowners’ Equity	16
	Note 11—Segment Information	19
	Note 12—Earnings Per Share	20
	Note 13—Derivative Instruments and Risk Management	21
	Note 14—Restructuring Costs and Related Expenses	26
	Note 15—Income Taxes	27
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Overview	28
	Items Affecting Comparability	29
	U.S. Domestic Package Operations	31
	International Package Operations	33
	Supply Chain & Freight Operations	35
	Operating Expenses	37
	Investment Income and Interest Expense	38
	Income Tax Expense	39
	Liquidity and Capital Resources	40
	Net Cash from Operating Activities	40
	Net Cash used in Investing Activities	41
	Net Cash used in Financing Activities	42
	Sources of Credit	43
	Contingencies	44
	Recent Accounting Pronouncements	47
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 5.	Other Information	49
Item 6.	Exhibits	50

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2010 (unaudited) and December 31, 2009

(In millions)


	September 30, 2010			December 31, 2009
ASSETS
Current Assets:
Cash and cash equivalents	$	3,020		$	1,542
Marketable securities		732			558
Accounts receivable, net		5,250			5,369
Finance receivables, net		259			287
Deferred income tax assets		662			585
Income tax receivable		120			266
Other current assets		713			668

Total Current Assets		10,756			9,275
Property, Plant and Equipment, Net		17,471			17,979
Goodwill		2,085			2,089
Intangible Assets, Net		609			596
Non-Current Finance Receivables, Net		313			337
Other Non-Current Assets		1,673			1,607

Total Assets	$	32,907		$	31,883

LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper	$	994		$	853
Accounts payable		1,840			1,766
Accrued wages and withholdings		1,799			1,416
Self-insurance reserves		783			757
Income taxes accrued		129			258
Other current liabilities		1,256			1,189

Total Current Liabilities		6,801			6,239
Long-Term Debt		8,648			8,668
Pension and Postretirement Benefit Obligations		4,850			5,457
Deferred Income Tax Liabilities		1,497			1,293
Self-Insurance Reserves		1,723			1,732
Other Non-Current Liabilities		862			798
Shareowners’ Equity:
Class A common stock (264 and 285 shares issued in 2010 and 2009)		3			3
Class B common stock (727 and 711 shares issued in 2010 and 2009)		7			7
Additional paid-in capital		—			2
Retained earnings		13,603			12,745
Accumulated other comprehensive loss		(5,153	)		(5,127	)
Deferred compensation obligations		101			108
Less: Treasury stock (2 shares in 2010 and 2009)		(101	)		(108	)

Total Equity for Controlling Interests		8,460			7,630
Total Equity for Non-Controlling Interests		66			66

Total Shareowners’ Equity		8,526			7,696

Total Liabilities and Shareowners’ Equity	$	32,907		$	31,883

See notes to unaudited consolidated financial statements.

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,
	2010			2009			2010			2009
Revenue	$	12,192		$	11,153		$	36,124		$	32,920
Operating Expenses:
Compensation and benefits		6,411			6,341			19,465			19,003
Repairs and maintenance		282			265			837			814
Depreciation and amortization		448			441			1,348			1,297
Purchased transportation		1,656			1,298			4,770			3,698
Fuel		724			635			2,119			1,670
Other occupancy		222			241			700			738
Other expenses		833			1,003			2,825			3,158

Total Operating Expenses		10,576			10,224			32,064			30,378

Operating Profit		1,616			929			4,060			2,542

Other Income and (Expense):
Investment income (loss)		15			6			(7	)		(3	)
Interest expense		(91	)		(93	)		(260	)		(356	)

Total Other Income and (Expense)		(76	)		(87	)		(267	)		(359	)

Income Before Income Taxes		1,540			842			3,793			2,183
Income Tax Expense		549			293			1,424			788

Net Income	$	991		$	549		$	2,369		$	1,395

Basic Earnings Per Share	$	1.00		$	0.55		$	2.38		$	1.40

Diluted Earnings Per Share	$	0.99		$	0.55		$	2.36		$	1.39

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(In millions)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net income	$	991		$	549		$	2,369		$	1,395
Change in foreign currency translation adjustment		125			163			(95	)		126
Change in unrealized gain (loss) on marketable securities, net of tax		9			12			44			33
Change in unrealized gain (loss) on cash flow hedges, net of tax		(113	)		(117	)		(101	)		(166	)
Change in unrecognized pension and postretirement benefit costs, net of tax		43			39			126			118

Comprehensive income	$	1,055		$	646		$	2,343		$	1,506

See notes to unaudited consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

(unaudited)


	Nine Months Ended September 30,
	2010			2009
Cash Flows From Operating Activities:
Net income	$	2,369		$	1,395
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		1,348			1,297
Pension and postretirement benefit expense		672			659
Pension and postretirement benefit contributions		(1,069	)		(758	)
Self-insurance reserves		17			(31	)
Deferred taxes, credits and other		(24	)		352
Stock compensation expense		349			312
Asset impairment charges		—			181
Other (gains) losses		(15	)		65
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable		(43	)		550
Other current assets		81			161
Accounts payable		62			(319	)
Accrued wages and withholdings		390			266
Other current liabilities		(221	)		33
Other operating activities		7			70

Net cash from operating activities		3,923			4,233

Cash Flows From Investing Activities:
Capital expenditures		(1,011	)		(1,185	)
Proceeds from disposals of property, plant and equipment		294			40
Purchases of marketable securities		(1,751	)		(1,866	)
Sales and maturities of marketable securities		1,718			1,854
Net (increase) decrease in finance receivables		76			206
Other investing activities		181			72

Net cash used in investing activities		(493	)		(879	)

Cash Flows From Financing Activities:
Net change in short-term debt		174			(1,161	)
Proceeds from long-term borrowings		113			3,140
Repayments of long-term borrowings		(355	)		(1,753	)
Purchases of common stock		(599	)		(395	)
Issuances of common stock		151			104
Dividends		(1,363	)		(1,313	)
Other financing activities		(60	)		(283	)

Net cash used in financing activities		(1,939	)		(1,661	)

Effect Of Exchange Rate Changes On Cash And Cash Equivalents		(13	)		42

Net Increase (Decrease) In Cash And Cash Equivalents		1,478			1,735
Cash And Cash Equivalents:
Beginning of period		1,542			507

End of period	$	3,020		$	2,242

See notes to unaudited consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Principles of Consolidation

In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2010, our results of operations for the three and nine months ended September 30, 2010 and 2009, and our cash flows for the nine months ended September 30, 2010 and 2009. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The interim 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, 2009.

For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans and self-insurance reserves for each three month period based on one quarter of the estimated annual expense.

Certain prior period amounts have been reclassified to conform to the current period presentation.

Fair Value of Financial Instruments

The carrying amount of our cash and cash equivalents, accounts receivable, finance receivables, and accounts payable approximate fair value as of September 30, 2010. The fair value of our investment securities is disclosed in Note 4, our short and long-term debt in Note 8, and our derivative instruments in Note 13.

Accounting 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 the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best information and actual results could differ materially from those estimates.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

There were no accounting standards adopted during the nine months ended September 30, 2010 that had a material impact on our consolidated financial statements.

Standards Issued But Not Yet Effective

Other new pronouncements issued but not effective until after September 30, 2010 are not expected to have a significant effect on our consolidated financial position or results of operations.

NOTE 3. STOCK-BASED COMPENSATION

We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, performance units, and management incentive awards to eligible employees. The primary

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Awards Program, the UPS Long-Term Incentive Program and the UPS Long-Term Incentive Performance Award 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.

During the first quarter of 2010, we granted target restricted stock units (“RSUs”) under the UPS Long-Term Incentive Performance Award program to eligible management. Of the total 2010 target award, 90% of the target award will be divided into three substantially equal tranches, one for each calendar year in the three-year award cycle from 2010 to 2012, using performance criteria targets established each year. For 2010, those targets consist of consolidated operating return on invested capital and growth in consolidated revenue. The remaining 10% of the total 2010 target award will be based upon our achievement of adjusted earnings per share for the three-year award cycle compared to a target established at the beginning of the award cycle.

The number of RSUs earned each year will be the target number adjusted for the percentage achievement of performance criteria targets for the year. The percentage of achievement used to determine the RSUs earned may be a percentage less than or more than 100% of the target RSUs for each tranche. Based on the date that the eligible management population and performance targets were approved for the 2010 performance tranches, we determined the award measurement date to be March 18, 2010, and therefore the target RSU grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $64.42 on that date.

During the second quarter of 2010, we granted stock option and restricted performance unit (“RPU”) awards to eligible management employees under the UPS Long-Term Incentive Program. Stock options are granted to a limited group of senior management, while all of the eligible management population receives awards in the form of RPUs. Stock option and RPU awards will generally vest over a five year period with approximately 20% of the award vesting at each anniversary date of the grant (except in the case of death, disability, or retirement, whereby immediate vesting occurs). The options granted will expire ten years after the date of grant. In the second quarter of 2010, we granted 0.2 million stock options and 1.8 million RPUs at a grant price of $67.18. In the second quarter of 2009, we granted 0.3 million stock options and 2.2 million RPUs at a grant price of $55.83. The fair value of each stock option granted, as determined by the Black-Scholes valuation model, was $14.83 and $10.86 for 2010 and 2009, respectively, using the following assumptions:


	2010			2009
Expected life (in years)		7.5			7.5
Risk-free interest rate		3.30	%		3.22	%
Expected volatility		23.59	%		23.16	%
Expected dividend yield		2.70	%		3.25	%

Awards under the Management Incentive Program are normally granted during the fourth quarter of each year. Compensation expense for share-based awards recognized in net income for the three months ended September 30, 2010 and 2009 was $111 and $93 million pre-tax, respectively. Compensation expense for share-based awards recognized in net income for the nine months ended September 30, 2010 and 2009 was $349 and $312 million pre-tax, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. CASH AND INVESTMENTS

The following is a summary of marketable securities classified as available-for-sale as of September 30, 2010 and December 31, 2009 (in millions):


	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
September 30, 2010
Current marketable securities:
U.S. government and agency debt securities	$	194	$	3	$	—		$	197
Mortgage and asset-backed debt securities		189		3		(1	)		191
Corporate debt securities		230		9		—			239
U.S. state and local municipal debt securities		41		—		—			41
Other debt and equity securities		58		6		—			64

Current marketable securities		712		21		(1	)		732
Non-current marketable securities:
Asset-backed debt securities		84		2		(2	)		84
U.S. state and local municipal debt securities		71		3		(9	)		65
Common equity securities		20		12		—			32
Preferred equity securities		16		2		(2	)		16

Non-current marketable securities		191		19		(13	)		197

Total marketable securities	$	903	$	40	$	(14	)	$	929


	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
December 31, 2009
Current marketable securities:
U.S. government and agency debt securities	$	126	$	—	$	(1	)	$	125
Mortgage and asset-backed debt securities		158		2		(1	)		159
Corporate debt securities		213		6		—			219
U.S. state and local municipal debt securities		22		—		—			22
Other debt and equity securities		28		5		—			33

Current marketable securities		547		13		(2	)		558
Non-current marketable securities:
Asset-backed debt securities		150		—		(38	)		112
U.S. state and local municipal debt securities		115		—		(26	)		89
Common equity securities		21		10		—			31
Preferred equity securities		16		—		(1	)		15

Non-current marketable securities		302		10		(65	)		247

Total marketable securities	$	849	$	23	$	(67	)	$	805

Auction Rate Securities

At September 30, 2010, we held investments in auction rate securities with a cost basis of $171 million. Some of these investments take the form of debt securities, and are structured as direct obligations of local governments or agencies (classified as “U.S. state and local municipal debt securities”). Other auction rate security investments are structured as obligations of asset-backed trusts (classified as “Asset-backed debt securities”), generally all of which

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

are collateralized by student loans and are guaranteed by the U.S. Government or through private insurance. The remaining auction rate securities take the form of preferred stock, and are collateralized by securities issued directly by large corporations or money market securities. Substantially all of our investments in auction rate securities maintain investment-grade ratings of BBB / Baa or higher by Standard & Poor’s Rating Service (“Standard & Poor’s”) and Moody’s Investors Service (“Moody’s”), respectively.

During the first quarter of 2008, market auctions, including auctions for substantially all of our auction rate securities portfolio, began to fail due to insufficient buyers. As a result of the persistent failed auctions, and the uncertainty of when these investments could successfully be liquidated at par, we have continued to classify all of our investments in auction rate securities as non-current marketable securities (which are reported in “Other Non-Current Assets” on the consolidated balance sheet), as noted in the table above, as of September 30, 2010. The securities for which auctions have failed will continue to accrue interest and be auctioned at each respective reset date until the auction succeeds, the issuer redeems the securities, or the securities mature. In the first nine months of 2010, auction rate securities with a par value of $39 million were successfully auctioned, resulting in their liquidation with no realized gain or loss.

Historically, the par value of the auction rate securities approximated fair value due to the frequent resetting of the interest rate. While we will continue to earn interest on these investments in failed auction rate securities (often at the maximum contractual interest rate), the estimated fair value of the auction rate securities no longer approximates par value due to the lack of liquidity. As a result, we have an after-tax unrealized loss of $4 million on these securities as of September 30, 2010 in accumulated other comprehensive income ($6 million pre-tax), reflecting the decline in the estimated fair value of these securities.

Other-Than-Temporary Impairment Losses

During the second quarter of 2010, we recorded impairment losses on certain asset-backed auction rate securities. The impairment charge resulted from the provisions that allow the issuers of the securities to subordinate our holdings to newly issued debt or to tender for the securities at less than their par value. These securities, which had a cost basis of $128 million, were written down to their fair value of $107 million as of June 30, 2010, as an other-than-temporary impairment. The $21 million total impairment charge during the quarter was recorded in investment income (loss) on the statement of consolidated income.

During the second quarter of 2009, we recorded impairment losses on certain perpetual preferred securities, and an auction rate security collateralized by preferred securities, issued by large financial institutions. The impairment charge resulted from conversion offers from the issuers of these securities at prices well below the stated redemption value of the preferred shares. These securities, which had a cost basis of $42 million, were written down to their fair value of $25 million as of June 30, 2009, as an other-than-temporary impairment. The $17 million total impairment charge during the quarter was recorded in investment income (loss) on the statement of consolidated income.

Other than as previously discussed, we have concluded that no other-than-temporary impairment losses existed as of September 30, 2010. In making this determination, we considered the financial condition and prospects of the issuers, the magnitude of the losses compared with the investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that we will be unable to collect all amounts due according to the contractual terms of the securities, the credit rating of the securities, and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Maturity Information

The amortized cost and estimated fair value of marketable securities at September 30, 2010, 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 without prepayment penalties.


	Cost		Estimated Fair Value
Due in one year or less	$	96	$	96
Due after one year through three years		221		225
Due after three years through five years		65		66
Due after five years		466		469

		848		856
Equity securities		55		73

	$	903	$	929

Restricted Cash

We had $286 million of restricted cash related to our self-insurance requirements, as of September 30, 2010 and December 31, 2009, which is reported in “Other Non-Current Assets” on the consolidated balance sheets.

Fair Value Measurements

Marketable securities 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 utilizing Level 2 inputs include non-auction rate 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.

We have classified our auction rate securities portfolio as utilizing Level 3 inputs, as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. The valuation may be revised in future periods as market conditions evolve. These securities were valued as of September 30, 2010 considering several factors, including the credit quality of the securities, the rate of interest received since the failed auctions began, the yields of securities similar to the underlying auction rate securities, and the input of broker-dealers in these securities.

We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “other investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have any quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model based on each partnership’s financial statements and cash flow projections.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information about our investments measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, 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 as of September 30, 2010
September 30, 2010
Marketable Securities:
U.S. Government and Agency Debt Securities	$	197	$	—	$	—	$	197
Mortgage and Asset-Backed Debt Securities		—		191		84		275
Corporate Debt Securities		—		239		—		239
U.S. State and Local Municipal Debt Securities		—		41		65		106
Other Debt and Equity Securities		57		39		16		112
Other investments		—		—		272		272

Total	$	254	$	510	$	437	$	1,201


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2009
December 31, 2009
Marketable Securities:
U.S. Government and Agency Debt Securities	$	125	$	—	$	—	$	125
Mortgage and Asset-Backed Debt Securities		—		159		112		271
Corporate Debt Securities		—		219		—		219
U.S. State and Local Municipal Debt Securities		—		22		89		111
Other Debt and Equity Securities		54		10		15		79
Other investments		—		—		301		301

Total	$	179	$	410	$	517	$	1,106

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended September 30, 2010 (in millions).


	Marketable Securities			Other Investments			Total
Balance on July 1, 2010	$	184		$	278		$	462
Transfers into (out of) Level 3		—			—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income (loss))		—			(6	)		(6	)
Included in accumulated other comprehensive income (pre-tax)		10			—			10
Purchases, issuances, and settlements		(29	)		—			(29	)

Balance on September 30, 2010	$	165		$	272		$	437

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the nine months ended September 30, 2010 (in millions).


	Marketable Securities			Other Investments			Total
Balance on January 1, 2010	$	216		$	301		$	517
Transfers into (out of) Level 3		—			—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income (loss))		(28	)		(29	)		(57	)
Included in accumulated other comprehensive income (pre-tax)		58			—			58
Purchases, issuances, and settlements		(81	)		—			(81	)

Balance on September 30, 2010	$	165		$	272		$	437

There were no transfers of investments between Level 1 and Level 2 during the three and nine months ended September 30, 2010 and 2009.

NOTE 5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of September 30, 2010 and December 31, 2009 consist of the following (in millions):


	2010			2009
Vehicles	$	5,410		$	5,480
Aircraft (including aircraft under capitalized leases)		14,051			13,777
Land		1,079			1,079
Buildings		3,101			3,076
Building and leasehold improvements		2,851			2,800
Plant equipment		6,635			6,371
Technology equipment		1,571			1,591
Equipment under operating leases		127			145
Construction-in-progress		215			488

		35,040			34,807
Less: Accumulated depreciation and amortization		(17,569	)		(16,828	)

	$	17,471		$	17,979

We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices, and other factors. In 2008, we had announced that we were in negotiations with DHL to provide air transportation services for all of DHL’s express, deferred and international package volume within the United States, as well as air transportation services between the United States, Canada and Mexico. In early April 2009, UPS and DHL mutually agreed to terminate further discussions on providing these services. Additionally, our U.S. Domestic Package air delivery volume had declined for several quarters as a result of persistent economic weakness and shifts in product mix from our premium air services to our lower cost ground services. As a result of these factors, the utilization of certain aircraft fleet types had declined and was expected to be lower in the future.

Based on the factors noted above, as well as Federal Aviation Administration aging aircraft directives that would require significant future maintenance expenditures, we determined that a triggering event had occurred that required an impairment assessment of our McDonnell-Douglas DC-8-71 and DC-8-73 aircraft fleets. We conducted an impairment analysis as of March 31, 2009, and determined that the carrying amount of these fleets

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

was not recoverable due to the accelerated expected retirement dates of the aircraft. Based on anticipated residual values for the airframes, engines, and parts, we recognized an impairment charge of $181 million in the first quarter of 2009. This charge is included in the caption “Other expenses” in the Statements of Consolidated Income, and impacted our U.S. Domestic Package segment. The DC-8 fleets were subsequently retired from service. We currently continue to utilize and operate all of our other aircraft fleets.

The impaired airframes, engines, and parts had a net carrying value of $192 million, and were written down to an aggregate fair value of $11 million. The fair values for the impaired airframes, engines, and parts were determined using unobservable inputs (Level 3).

NOTE 6. EMPLOYEE BENEFIT PLANS

Information about net periodic benefit cost for our pension and postretirement benefit plans is as follows for the three and nine months ended September 30, 2010 and 2009 (in millions):


	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
Three Months Ended September 30,	2010			2009			2010			2009			2010			2009
Net Periodic Cost:
Service cost	$	181		$	172		$	22		$	21		$	6		$	5
Interest cost		300			283			53			52			9			8
Expected return on assets		(400	)		(372	)		(5	)		(6	)		(10	)		(8	)
Amortization of:
Transition obligation		—			1			—			—			—			—
Prior service cost		43			45			1			2			—			1
Actuarial (gain) loss		19			11			4			3			1			—

Net periodic benefit cost	$	143		$	140		$	75		$	72		$	6		$	6


	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
Nine Months Ended September 30,	2010			2009			2010			2009			2010			2009
Net Periodic Cost:
Service cost	$	542		$	517		$	65		$	64		$	18		$	15
Interest cost		899			848			160			158			26			22
Expected return on assets		(1,199	)		(1,116	)		(16	)		(20	)		(27	)		(20	)
Amortization of:
Transition obligation		—			3			—			—			—			—
Prior service cost		129			134			3			5			—			1
Actuarial (gain) loss		58			34			12			10			2			1
Settlements / curtailments		—			3			—			—			—			—

Net periodic benefit cost	$	429		$	423		$	224		$	217		$	19		$	19

During the first nine months of 2010, we contributed $1.001 billion and $68 million to our company-sponsored pension and postretirement medical benefit plans, respectively. We expect to contribute $142 and $23 million over the remainder of the year to the pension and postretirement medical benefit plans, respectively. We are currently evaluating whether to accelerate a portion of our required future contributions for our primary domestic pension plans into the fourth quarter of 2010.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

During October 2010, we announced that we are planning to reinstate matching contributions to our primary 401(k) plan covering most non-union employees based in the United States, effective January 1, 2011. We had previously suspended matching contributions in the first quarter of 2009. The reinstatement of matching contributions is expected to increase expense by approximately $75 million on an annual basis beginning in 2011.

The enactment of the “Patient Protection and Affordable Care Act” and “The Health Care and Education Reconciliation Act of 2010” in 2010 will bring significant changes to the U.S. health care system. The legislation eliminated the tax deductibility of Medicare Part D subsidies for retiree prescription drug coverage; however, this impact has not been material to our financial results. We are evaluating the long-term impacts of this legislation on us. It is difficult to estimate the impact due to the nature of our workforce, the various years in which certain provisions become applicable, and the fact that additional regulatory and rulemaking actions will be occurring. Our current estimate is that we will incur an additional $50 to $65 million of annual expense beginning in 2011, which is primarily due to the multiple coverage provisions of the legislation which require the expansion of dependent coverage to age 26, among other requirements.

NOTE 7. GOODWILL AND INTANGIBLE ASSETS

The following table indicates the allocation of goodwill by reportable segment as of September 30, 2010 and December 31, 2009 (in millions):


	U.S. Domestic Package		International Package			Supply Chain & Freight			Consolidated
December 31, 2009 balance	$	—	$	374		$	1,715		$	2,089
Acquired		—		—			—			—
Purchase Accounting Adjustments		—		5			—			5
Currency / Other		—		(2	)		(7	)		(9	)

September 30, 2010 balance	$	—	$	377		$	1,708		$	2,085

The increase to goodwill, in the International Package segment, during the third quarter of 2010, was due to adjustments to the purchase price allocation for Unsped Paket Servisi San ve Ticaret A.S. (“Unsped”), that was acquired in August 2009, after completing our process to identify assumed liabilities. This was offset by the decrease in the International Package and Supply Chain & Freight segments due to the impact of the strengthening U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.

The following is a summary of intangible assets as of September 30, 2010 and December 31, 2009 (in millions):


	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
September 30, 2010
Trademarks, licenses, patents, and other	$	188	$	(39	)	$	149
Customer lists		107		(63	)		44
Franchise rights		109		(51	)		58
Capitalized software		1,905		(1,547	)		358

Total Intangible Assets, Net	$	2,309	$	(1,700	)	$	609

December 31, 2009
Trademarks, licenses, patents, and other	$	132	$	(9	)	$	123
Customer lists		107		(52	)		55
Franchise rights		109		(46	)		63
Capitalized software		1,812		(1,457	)		355

Total Intangible Assets, Net	$	2,160	$	(1,564	)	$	596

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. DEBT AND FINANCING ARRANGEMENTS

The carrying value of our outstanding debt as of September 30, 2010 and December 31, 2009 consists of the following (in millions):


	Maturity		2010			2009
Commercial paper		2010	$	894		$	672
4.50% senior notes		2013		1,817			1,773
3.875% senior notes		2014		1,084			1,023
5.50% senior notes		2018		812			758
5.125% senior notes		2019		1,059			991
6.20% senior notes		2038		1,480			1,480
8.375% debentures		2020-2030		738			739
Floating rate senior notes		2049-2053		397			409
Facility notes and bonds		2015-2036		320			320
Pound Sterling notes		2031-2050		782			791
Capital lease obligations		2010-2025		254			369
UPS Notes				—			175
Other debt		2010-2012		5			21

Total debt				9,642			9,521
Less current maturities				(994	)		(853	)

Long-term debt			$	8,648		$	8,668

Sources of Credit

We are authorized to borrow up to $10.0 billion under the U.S. commercial paper program we maintain. We had $894 million outstanding under this program as of September 30, 2010, with an average interest rate of 0.16%. As of September 30, 2010, we have classified the entire commercial paper balance as a current liability in our consolidated balance sheet. We also maintain a European commercial paper program under which we are authorized to borrow up to €1.0 billion in a variety of currencies, however there were no amounts outstanding under this program as of September 30, 2010.

We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on April 14, 2011. Interest on any amounts we borrow under this facility would be charged at 90-day LIBOR plus a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to certain minimum rates and maximum rates based on our public debt ratings from Standard & Poor’s and Moody’s. If our public debt ratings are A / A2 or above, the minimum applicable margin is 0.50% and the maximum applicable margin is 1.50%; if our public debt ratings are lower than A / A2, the minimum applicable margin is 1.00% and the maximum applicable margin is 2.50%.

The second agreement provides revolving credit facilities of $1.0 billion, and expires on April 19, 2012. Interest on any amounts we borrow under this facility would be charged at 90-day LIBOR plus 15 basis points. At September 30, 2010, there were no outstanding borrowings under either of these facilities.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

After pricing and underwriting discounts, we received a total of $1.989 billion in cash proceeds from the offering. The proceeds from the offering were used for general corporate purposes, including the reduction of our outstanding commercial paper balance.

Debt Covenants

Our existing debt instruments and credit facilities do not have cross-default or ratings triggers, however these debt instruments and credit facilities do subject us to certain financial covenants. As of September 30, 2010 and for all prior periods, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of September 30, 2010, 10% of net tangible assets is equivalent to $2.341 billion, however we have no covered sale-leaseback transactions or secured indebtedness outstanding. Additionally, we are required to maintain a minimum net worth, as defined, of $5.0 billion on a quarterly basis. As of September 30, 2010, our net worth, as defined, was equivalent to $13.613 billion.

Fair Value of Debt

Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, is approximately $10.289 and $10.216 billion as of September 30, 2010 and December 31, 2009, respectively.

NOTE 9. LEGAL PROCEEDINGS AND CONTINGENCIES

We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. In one of these cases, Marlo v. UPS, which was certified as a class action in a California federal court in September 2004, plaintiffs allege that they improperly were denied overtime, and seek penalties for missed meal and rest periods, and interest and attorneys’ fees. Plaintiffs purport to represent a class of 1,300 full-time supervisors. In August 2005, the court granted summary judgment in favor of UPS on all claims, and plaintiffs appealed the ruling. In October 2007, the appeals court reversed the lower court’s ruling. In April 2008, the Court decertified the class and vacated the trial scheduled for that month. After decertification, some plaintiffs filed individual lawsuits raising the same allegations as in the underlying class action. These individual lawsuits are in various stages. We have denied any liability with respect to these claims and intend to vigorously defend ourselves in these cases. At this time, we have not determined the amount of any liability that may result from these matters or whether such liability, if any, would have a material adverse effect on our financial condition, results of operations, or liquidity.

In another case, Hohider v. UPS, which in July 2007 was certified as a class action in a Pennsylvania federal court, plaintiffs have challenged certain aspects of the Company’s interactive process for assessing requests for reasonable accommodation under the Americans with Disabilities Act. Plaintiffs purport to represent a class of over 35,000 current and former employees, and seek back-pay, and compensatory and punitive damages, as well as attorneys’ fees. In August 2007, the Third Circuit Court of Appeals granted our petition to hear the appeal of the trial court’s certification order. In July 2009, the Third Circuit issued its decision decertifying the class and remanding the case to the trial court for further proceedings. In August 2010, we reached a settlement with the plaintiffs and the case was dismissed. The settlement had no material adverse effect on our financial condition, results of operations, or liquidity.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Boxes Etc. centers to The UPS Store, The UPS Store business model, the representations made in connection with the rebranding and the sale of The UPS Store franchises, and UPS’s sale of services in the franchisees’ territories. In one of the actions, which is pending in California state court, the court certified a class consisting of all Mail Boxes Etc. branded stores that rebranded to The UPS Store in March 2003. We have denied any liability with respect to these claims and intend to defend ourselves vigorously. At this time, we have not determined the amount of any liability that may result from these matters or whether such liability, if any, would have a material adverse effect on our financial condition, results of operations, or liquidity.

In Barber Auto Sales v. UPS, which a federal court in Alabama certified as a class action in September 2009, the plaintiff asserts a breach of contract claim arising from UPS’s assessment of shipping charge corrections when UPS determines that the “dimensional weight” of packages is greater than reported by the shipper. We have denied any liability with respect to these claims and intend to vigorously defend ourselves in this case. At this time, we have not determined the amount of any liability that may result from this matter or whether such liability, if any, would have a material adverse effect on our financial condition, results of operations, or liquidity.

We are a defendant in various other lawsuits that arose in the normal course of business. We believe that the eventual resolution of these cases will not have a material adverse effect on our financial condition, results of operations, or liquidity.

As of December 31, 2009, we had approximately 254,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). These agreements run through July 31, 2013. We have approximately 2,800 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association (“IPA”), which becomes amendable at the end of 2011. In May 2010, we began the process of furloughing 170 of our airline pilots. Any additional furloughs will be phased in based on prevailing economic conditions. Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable in November 2006. We began formal negotiations with Teamsters Local 2727 in October 2006, and have been under the guidance of the National Mediation Board since January 2008. In addition, the majority (approximately 3,400) of our ground mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”). Our agreement with the IAM runs through July 31, 2014.

We participate in a number of trustee-managed multi-employer pension and health and welfare plans for employees covered under collective bargaining agreements. Several factors could cause us to make significantly higher future contributions to these plans, including unfavorable investment performance, changes in demographics, and increased benefits to participants. At this time, we are unable to determine the amount of additional future contributions, if any, or whether any material adverse effect on our financial condition, results of operations, or liquidity would result from our participation in these plans.

In January 2008, a class action complaint was filed in the United States District Court for the Eastern District of New York alleging price-fixing activities relating to the provision of freight forwarding services. UPS was not named in this case. On July 21, 2009, the plaintiffs filed a first amended complaint naming numerous global freight forwarders as defendants. UPS and UPS Supply Chain Solutions are among the 60 defendants named in the amended complaint. We intend to vigorously defend ourselves in this case. At this time, we have not determined the amount of any liability that may result from these matters or whether such liability, if any, would have a material adverse effect on our financial condition, results of operations, or liquidity.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Other Matters

We received a grand jury subpoena from the Antitrust Division of the U.S. Department of Justice (“DOJ”) regarding the DOJ’s investigation into certain pricing practices in the freight forwarding industry in December 2007.

In October 2007, June 2008, and February 2009, we received information requests from the European Commission (“Commission”) relating to its investigation of certain pricing practices in the freight forwarding industry, and subsequently responded to each request. On February 9, 2010, UPS received a Statement of Objections by the Commission. This document contains the Commission’s preliminary view with respect to alleged anticompetitive behavior in the freight forwarding industry by 18 freight forwarders, including UPS. Although it alleges anticompetitive behavior, it does not prejudge the Commission’s final decision, as to facts or law (which is subject to appeal to the European courts). The options available to the Commission include taking no action or imposing a monetary fine; the range of any potential action by the Commission is not reasonably estimable. Any decision imposing a fine would be subject to appeal. UPS has responded to the Statement of Objections, including at a July 2010 Commission hearing.

In August 2010, competition authorities in Brazil opened an administrative proceeding to investigate alleged anticompetitive behavior in the freight forwarding industry. Approximately 45 freight forwarding companies and individuals are named in the proceeding, including UPS, UPS SCS Transportes (Brasil) S.A., and a former employee in Brazil. UPS will have an opportunity to respond to these allegations.

We also received and responded to related information requests from competition authorities in other jurisdictions.

We are cooperating with each of these investigations, and intend to continue to vigorously defend ourselves. At this time, we are unable to determine the amount of any liability that may result from these matters or whether any such liability would have a material adverse effect on our financial condition, results of operations, or liquidity.

NOTE 10. SHAREOWNERS’ EQUITY

Capital Stock, Additional Paid-In Capital, and Retained Earnings

We maintain two classes of common stock, which are distinguished from each other primarily by their respective voting rights. Class A shares are entitled to 10 votes per share, whereas Class B shares are entitled to one vote per share. Class A shares are primarily held by UPS employees and retirees, and these shares are fully convertible into Class B shares at any time. Class B shares are publicly traded on the New York Stock Exchange (NYSE) under the symbol “UPS.” Class A and B shares both have a $0.01 par value, and as of September 30, 2010, there were 4.6 billion Class A shares and 5.6 billion Class B shares authorized to be issued. Additionally, there are 200 million preferred shares, with a $0.01 par value, authorized to be issued; as of September 30, 2010, no preferred shares had been issued.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following is a roll-forward of our common stock, additional paid-in capital, and retained earnings accounts for the nine months ended September 30, 2010 and 2009 (in millions, except per share amounts):


	2010						2009
	Shares			Dollars			Shares			Dollars
Class A Common Stock:
Balance at beginning of period		285		$	3			314		$	3
Common stock purchases		(3	)		—			(7	)		—
Stock award plans		2			—			2			—
Common stock issuances		2			—			3			—
Conversions of Class A to Class B common stock		(22	)		—			(22	)		—

Class A shares issued at end of period		264		$	3			290		$	3

Class B Common Stock:
Balance at beginning of period		711		$	7			684		$	7
Common stock purchases		(6	)		—			(1	)		—
Conversions of Class A to Class B common stock		22			—			22			—

Class B shares issued at end of period		727		$	7			705		$	7

Additional Paid-In Capital:
Balance at beginning of period				$	2					$	—
Stock award plans					324						311
Common stock purchases					(491	)					(396	)
Common stock issuances					165						134

Balance at end of period				$	—					$	49

Retained Earnings:
Balance at beginning of period				$	12,745					$	12,412
Net income					2,369						1,395
Dividends ($1.41 and $1.35 per share)					(1,413	)					(1,354	)
Common stock purchases					(98	)					—

Balance at end of period				$	13,603					$	12,453

We repurchased a total of 9.3 million shares of Class A and Class B common stock for $589 million during the nine months ended September 30, 2010, and 7.8 million shares for $396 million during the nine months ended September 30, 2009. As of September 30, 2010, we had $5.414 billion of our share repurchase authorization remaining.

In February 2010, we entered into an accelerated share repurchase program with a large financial institution, which allowed us to repurchase $186 million of shares (3.0 million shares). The program was completed in April 2010.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accumulated Other Comprehensive Income (Loss)

We experience activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows, and unrecognized pension and postretirement benefit costs. The activity in AOCI for the nine months ended September 30, 2010 and 2009 is as follows (in millions):


	2010			2009
Foreign currency translation gain (loss):
Balance at beginning of period	$	37		$	(38	)
Aggregate adjustment for the period		(95	)		126

Balance at end of period		(58	)		88

Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of period		(27	)		(60	)
Current period changes in fair value (net of tax effect of $20, and $2)		34			23
Reclassification to earnings (net of tax effect of $6 and $6)		10			10

Balance at end of period		17			(27	)

Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of period		(200	)		(107	)
Current period changes in fair value (net of tax effect of $(34) and $(26))		(55	)		(43	)
Reclassification to earnings (net of tax effect of $(27) and $(74))		(46	)		(123	)

Balance at end of period		(301	)		(273	)

Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of period		(4,937	)		(5,437	)
Reclassification to earnings (net of tax effect of $78 and $70)		126			118

Balance at end of period		(4,811	)		(5,319	)

Accumulated other comprehensive income (loss) at end of period	$	(5,153	)	$	(5,531	)

Deferred Compensation Obligations and Treasury Stock

Activity in the deferred compensation program for the nine months ended September 30, 2010 and 2009 is as follows (in millions):


	2010						2009
	Shares			Dollars			Shares			Dollars
Deferred Compensation Obligations:
Balance at beginning of period				$	108					$	121
Reinvested dividends					3						3
Benefit payments					(10	)					(16	)

Balance at end of period				$	101					$	108

Treasury Stock:
Balance at beginning of period		(2	)	$	(108	)		(2	)	$	(121	)
Reinvested dividends		—			(3	)		—			(3	)
Benefit payments		—			10			—			16

Balance at end of period		(2	)	$	(101	)		(2	)	$	(108	)

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Noncontrolling Interests

We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. The noncontrolling interests currently on our balance sheets primarily relate to a joint venture in Dubai that operates in the Middle East, Turkey, and portions of the Central Asia region, which was formed in the third quarter of 2009. The activity related to our noncontrolling interests is presented below for the nine months ended September 30, 2010 and 2009 (in millions):


	2010		2009
Noncontrolling Interests:
Balance at beginning of period	$	66	$	—
Acquired noncontrolling interests		—		65
Dividends attributable to noncontrolling interests		—		—
Net income attributable to noncontrolling interests		—		—

Balance at end of period	$	66	$	65

NOTE 11. SEGMENT INFORMATION

We report our operations in three segments: U.S. Domestic Package operations, International Package operations, and Supply Chain & Freight operations. Package operations represent our most significant business and are broken down into regional operations around the world. Regional operations managers are responsible for both domestic and export operations within their geographic area.

U.S. Domestic Package

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

International Package

International Package operations include delivery to more than 200 countries and territories worldwide, including shipments wholly outside the United States, as well as shipments with either origin or distribution outside the United States. Our International Package reporting segment includes the operations of our Europe, Asia, and Americas operating segments.

Supply Chain & Freight

Supply Chain & Freight includes our forwarding and logistics operations, UPS Freight, and other aggregated business units. Our forwarding and logistics business provides services in more than 175 countries and territories worldwide, and includes supply chain design and management, freight distribution, customs brokerage, mail and consulting services. UPS Freight offers a variety of less-than-truckload (“LTL”) and truckload (“TL”) services to customers in North America. Other aggregated business units within this segment include Mail Boxes, Etc. (the franchisor of Mail Boxes, Etc. and The UPS Store) and UPS Capital.

In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income, interest expense, and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies included in the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009, with certain expenses allocated between the segments using activity-based costing methods. Unallocated assets are comprised primarily of cash, marketable securities, and investments in limited partnerships.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Segment information for the three and nine months ended September 30, 2010 and 2009 is as follows (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Revenue:
U.S. Domestic Package	$	7,291	$	6,868	$	21,662	$	20,606
International Package		2,676		2,422		8,086		6,908
Supply Chain & Freight		2,225		1,863		6,376		5,406

Consolidated	$	12,192	$	11,153	$	36,124	$	32,920

Operating Profit:
U.S. Domestic Package	$	1,020	$	514	$	2,330	$	1,374
International Package		419		313		1,367		900
Supply Chain & Freight		177		102		363		268

Consolidated	$	1,616	$	929	$	4,060	$	2,542

As discussed in Note 5, the U.S. Domestic Package segment operating profit was adversely impacted by a $181 million impairment charge in the first quarter of 2009, related to our McDonnell-Douglas DC-8-71 and DC-8-73 airframes, engines, and related parts. As discussed in Note 14, the U.S. Domestic Package segment operating profit was adversely impacted by a $98 million restructuring charge in the first quarter of 2010, while the Supply Chain & Freight segment operating profit was negatively impacted by a $38 million loss on the sale of a specialized transportation business unit in Germany. Additionally, in the third quarter 2010, we recognized a pre-tax gain of $109 million on the sale of real estate used in operations within our U.S. Domestic Package segment.

NOTE 12. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009 (in millions, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Numerator:
Net income attributable to common shareowners	$	991	$	549	$	2,369	$	1,395

Denominator:
Weighted average shares		990		994		991		995
Deferred compensation obligations		2		2		2		2
Vested portion of restricted shares		2		1		1		1

Denominator for basic earnings per share		994		997		994		998

Effect of dilutive securities:
Restricted performance units		3		2		3		2
Restricted stock units		6		5		6		4
Stock options		1		—		—		—

Denominator for diluted earnings per share		1,004		1,004		1,003		1,004

Basic earnings per share	$	1.00	$	0.55	$	2.38	$	1.40

Diluted earnings per share	$	0.99	$	0.55	$	2.36	$	1.39

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Diluted earnings per share for the three months ended September 30, 2010 and 2009 exclude the effect of 9.8 and 17.3 million shares of common stock (11.5 and 17.5 million for the nine months ended September 30, 2010 and 2009), respectively, that may be issued upon the exercise of employee stock options because such effect would be antidilutive.

NOTE 13. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT

Risk Management Policies

We are exposed to market risk, primarily related to foreign currency exchange rates, commodity prices, equity prices, and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, we enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates, commodity prices, equity prices, and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value for those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes.

Credit Risk Management

The forward contracts, swaps, and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines, and monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty. Additionally, the majority of our master agreements for derivatives provide for the early termination of any derivative transactions in the event that either the bank counterparty or UPS receives a credit rating below BBB by Standard & Poor’s or Baa2 by Moody’s, or ceases to be rated by either firm. We do not have any credit-risk triggers in our outstanding master agreements that require UPS or the bank counterparties to post collateral.

We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.

Accounting Policy for Derivative Instruments

We recognize all derivative instruments as assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge, or a hedge of a net investment in a foreign operation.

A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statement of consolidated income during the current period.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or a liability on the balance sheet that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statement of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.

A net investment hedge refers to the use of cross currency swaps, forward contracts, or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within other AOCI. The remainder of the change in value of such instruments is recorded in earnings.

Types of Hedges

Commodity Risk Management

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 on our business. We periodically enter into option contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel, and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We have designated and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.

Foreign Currency Risk Management

To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, the British Pound Sterling, and the Canadian Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with option contracts. We have designated and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur.

We have foreign currency denominated debt obligations and capital lease obligations associated with our aircraft. For some of these debt obligations and leases, we hedge the foreign currency denominated contractual payments using cross-currency interest rate swaps, which effectively convert the foreign currency denominated contractual payments into U.S. Dollar denominated payments. We have designated and account for these swaps as cash flow hedges of the forecasted contractual payments and, therefore, the resulting gains and losses from these hedges are recognized in the statement of consolidated income when the currency remeasurement gains and losses on the underlying debt obligations and leases are incurred.

Interest Rate Risk Management

Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments, including interest rate swaps and cross-currency 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 date, and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within our capital structure.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

We have designated and account for interest rate swaps that convert fixed rate interest payments into floating rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. Upon termination of the hedge relationship, any cumulative fair value adjustments to the debt instruments are amortized or accreted to interest expense on the effective yield method over the remaining term of the debt. We have designated and account for interest rate swaps that convert floating rate interest payments into fixed rate interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from fair value adjustments to the interest rate swap are recorded to AOCI.

We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings, using forward starting interest rate swaps, interest rate locks, or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.

Outstanding Positions

As of September 30, 2010 and December 31, 2009, the notional amounts of our outstanding derivative positions were as follows (in millions):


	September 30, 2010 Notional Value		December 31, 2009 Notional Value
Currency Hedges:
Euro	€	1,676	€	1,372
British Pound Sterling	£	935	£	692
Canadian Dollar	C$	273	C$	228

Interest Rate Hedges:
Fixed to Floating Interest Rate Swaps	$	3,475	$	3,751
Floating to Fixed Interest Rate Swaps	$	28	$	28

As of September 30, 2010, we had no outstanding commodity hedge positions. The maximum term over which we are hedging exposures to the variability of cash flow is 40 years.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet Recognition and Fair Value Measurements

The following table indicates the location on the balance sheet in which our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type, and the related fair values of those derivatives (in millions). The table is segregated between those derivative instruments that qualify and are designated as hedging instruments and those that are not, as well as by type of contract and whether the derivative is in an asset or liability position.


Asset Derivatives	Balance Sheet Location		Fair Value Hierarchy Level		September 30, 2010 Fair Value			December 31, 2009 Fair Value
Derivatives designated as hedges:
Foreign exchange contracts		Other current assets		Level 2	$	24		$	63
Foreign exchange contracts		Other non-current assets		Level 2		14			—
Interest rate contracts		Other non-current assets		Level 2		251			74

Total Asset Derivatives					$	289		$	137


Liability Derivatives	Balance Sheet Location		Fair Value Hierarchy Level		September 30, 2010 Fair Value			December 31, 2009 Fair Value
Derivatives designated as hedges:
Foreign exchange contracts		Other current liabilities		Level 2	$	(21	)	$	—
Foreign exchange contracts		Other non-current liabilities		Level 2		(153	)		(51	)
Interest rate contracts		Other non-current liabilities		Level 2		(10	)		(13	)

Derivatives not designated as hedges:
Interest rate contracts		Other non-current liabilities		Level 2		(2	)		(2	)

Total Liability Derivatives					$	(186	)	$	(66	)

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

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Income Statement Recognition:

The following table indicates the amount and location in the statement of consolidated income for the three and nine months ended September 30, 2010 and 2009 in which derivative gains and losses, as well as the related amounts reclassified from AOCI, have been recognized for those derivatives designated as cash flow hedges (in millions).

Three Months Ended September 30,



Derivative Instruments in Cash Flow Hedging Relationships	2010 Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			2009 Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		2010 Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			2009 Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Interest rate contracts	$	(2	)	$	(2	)		Interest Expense	$	(4	)	$	(4	)
Foreign exchange contracts		11			(103	)		Interest Expense		42			24
Foreign exchange contracts		(139	)		(65	)		Revenue		12			2
Commodity contracts		—			—			Revenue		—			—

Total	$	(130	)	$	(170	)			$	50		$	18

Nine Months Ended September 30,



Derivative Instruments in Cash Flow Hedging Relationships	2010 Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			2009 Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		2010 Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			2009 Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Interest rate contracts	$	(3	)	$	125			Interest Expense	$	(13	)	$	(10	)
Foreign exchange contracts		(100	)		(104	)		Interest Expense		(8	)		23
Foreign exchange contracts		14			(90	)		Revenue		94			102
Commodity contracts		—			—			Revenue		—			82

Total	$	(89	)	$	(69	)			$	73		$	197

As of September 30, 2010, $64 million of pre-tax losses related to cash flow hedges that are currently deferred in AOCI are expected to be reclassified to income over the 12 month period ending September 30, 2011. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions.

The amount of ineffectiveness recognized in income on derivative instruments designated in cash flow hedging relationships was immaterial for the three and nine months ended September 30, 2010 and 2009.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table indicates the amount and location in the statement of consolidated income in which derivative gains and losses, as well as the associated gains and losses on the underlying exposure, have been recognized for those derivatives designated as fair value hedges for the three and nine months ended September 30, 2010 and 2009 (in millions).


Derivative Instruments in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income		2010 Amount of Gain (Loss) Recognized in Income		2009 Amount of Gain (Loss) Recognized in Income		Hedged Items in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income		2010 Amount of Gain (Loss) Recognized in Income			2009 Amount of Gain (Loss) Recognized in Income
Three Months Ended September 30,
Interest rate contracts		Interest Expense	$	52	$	69	Fixed-Rate Debt and Capital Leases		Interest Expense	$	(52	)	$	(69	)
Nine Months Ended September 30,
Interest rate contracts		Interest Expense	$	224	$	95	Fixed-Rate Debt and Capital Leases		Interest Expense	$	(224	)	$	(95	)

Additionally, we maintain some interest rate swap and foreign exchange forward contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic hedge of a portfolio of interest bearing receivables, however the income statement impact of these hedges was not material for any period presented. These foreign exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement risks for certain assets and liabilities in our balance sheet. The following is a summary of the amounts recorded in the statement of consolidated income related to fair value changes and settlements of these foreign currency forward contracts not designated as hedges (in millions):


Derivative Instruments Not Designated in Hedging Relationships	Location of Gain (Loss) Recognized in Income	2010 Amount of Gain (Loss) Recognized in Income			2009 Amount of Gain (Loss) Recognized in Income
Three Months Ended September 30,
Foreign Exchange Contracts	Other Operating Expenses	$	(14	)	$	(12	)

Nine Months Ended September 30,
Foreign Exchange Contracts	Other Operating Expenses	$	11		$	(21	)

The foreign exchange forward contracts are settled at the end of each month, and therefore no asset or liability was recorded on the balance sheet at September 30, 2010.

NOTE 14. RESTRUCTURING COSTS AND RELATED EXPENSES

In the first quarter of 2010, we incurred restructuring costs associated with the termination of employees, facility consolidations and other costs directly related to restructuring initiatives. These initiatives resulted from the rationalization of acquired companies, as well as restructuring activities associated with cost containment and operational efficiency programs.

Supply Chain & Freight—Germany

In February 2010, we completed the sale of a specialized transportation and express freight business in Germany within our Supply Chain & Freight segment. As part of the sale transaction, we incurred certain costs associated with employee severance payments, other employee benefits, transition services, and leases on operating facilities and equipment. Additionally, we provided a guarantee for a period of two years for certain employee benefit payments being assumed by the buyer. We recorded a pre-tax loss of $38 million ($35 million after-tax) for this transaction in the first quarter of 2010, which included the costs associated with the sale transaction and the fair value of the guarantee.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

U.S. Domestic Package Restructuring

In an effort to improve performance in the U.S. Domestic Package segment, we announced a program to streamline our domestic management structure in January 2010. As part of this restructuring, we are reducing the number of domestic districts and regions in our U.S. small package operation, in order to better align our operations geographically and allow more local decision-making and resources to be deployed for our customers. Effective in April 2010, we reduced our U.S. regions from five to three and our U.S. districts from 46 to 20. The restructuring will eliminate approximately 1,800 management and administrative positions in the U.S. To facilitate this goal, approximately 1,100 employees were offered voluntary severance packages. Other impacted employees received severance benefits and access to support programs based on length of service. We recorded a pre-tax charge of $98 million ($64 million after-tax) in the first quarter of 2010 related to the costs of this program, which reflects the value of voluntary retirement benefits, severance benefits and accelerated vesting of stock compensation.

NOTE 15. INCOME TAXES

In the first quarter of 2010, we changed the tax status of a German subsidiary that was taxable in the U.S. and its local jurisdiction to one that is taxed solely in its local jurisdiction. This change was made primarily to allow for more flexibility in funding this subsidiary’s operations with local liquidity sources, improve the cash flow position in the U.S., and help mitigate future currency re-measurement risk. As a result of this change in tax status, we recorded a non-cash charge of $76 million, which resulted primarily from the write-off of related deferred tax assets which will not be realizable following the change in tax status.

In the third quarter of 2010, we recognized a $40 million tax benefit associated with the release of a valuation allowance against deferred tax assets in our international package operations. However, this item was offset by tax provided for interest earned on refunds and changes in our projected jurisdictional profit mix. The net impact to our third quarter and year-to-date 2010 provision for these items was not material.

We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. During the third quarter of 2009, we received a refund of $271 million as a result of the resolution of tax years 1999 through 2002 with the Internal Revenue Service (“IRS”) Appeals Office. During the second quarter of 2010, we resolved all unagreed issues with the IRS Appeals Office for tax years 2003 and 2004 and we received a refund of $139 million for these tax years in October 2010. This amount is included as a current income tax receivable in the accompanying consolidated balance sheets.

We have substantially resolved all U.S. federal income tax matters for tax years prior to 2005. Along with the audit for tax years 2005 through 2007, the IRS is currently examining non-income based taxes, including employment and excise taxes, which could lead to proposed assessments. The IRS has not presented an official position with regard to these taxes at this time, and therefore we are not able to determine the technical merit of any potential assessment. We anticipate receipt of the IRS reports on non-income tax matters by the end of 2010. We have filed all required U.S. state and local returns reporting the result of the resolution of the U.S. federal income tax audit of the tax years 1999 through 2002. We expect to file all required U.S. state and local returns reporting the result of the resolution of the U.S. federal income tax audit of the tax years 2003 and 2004 by the end of 2010. A limited number of U.S. state and local matters are the subject of ongoing audits, administrative appeals or litigation.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement About Forward-Looking Statements

This report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in the future tense, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof and similar terms are intended to be forward-looking statements. We intend that all forward-looking statements we make will be subject to safe harbor protection 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.

Our discussion and analysis in this report, in our Annual Report to Shareholders and in our other filings with the Securities and Exchange filings contain some forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of 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 such forward-looking statements because such statements speak only as of the date when made.

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, those described in our Annual Report on Form 10-K for the year ended December 31, 2009 and those described from time to time in our reports subsequently filed with the Securities and Exchange Commission. 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.

Overview

Our U.S. Domestic Package, International Package, and Supply Chain & Freight segments benefitted from the improving worldwide economic situation in 2010 compared with 2009, leading to improvements in volume, revenue, and operating profit. Significant portions of the world economy are experiencing improved economic growth, international trade, inventory rebuilding, and retail sales. These trends allow us to leverage our transportation network, and provided for stronger operating results in the first nine months of 2010 than in the same period of 2009.

In addition to the improved volume and revenue trends, cost containment initiatives and better network efficiencies achieved over the last several quarters also positively impacted our results. We have continued to invest in our transportation network. During the first half of 2010 we opened the second phase of our Worldport expansion, which will allow the use of larger and more fuel-efficient aircraft and further improve network efficiencies. We opened our new intra-Asia air hub in Shenzhen, China, which will allow us to better serve our customers by reducing time in transit for shipments in the region. We have also streamlined our domestic management structure, sold a non-core supply chain business, and continued to better align our cost structure with current volume levels.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Our consolidated results are presented in the table below:


	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2010			2009			%			2010			2009			%
Revenue (in millions)	$	12,192		$	11,153			9.3	%	$	36,124		$	32,920			9.7	%
Operating Expenses (in millions)		10,576			10,224			3.4	%		32,064			30,378			5.6	%

Operating Profit (in millions)	$	1,616		$	929			74.0	%	$	4,060		$	2,542			59.7	%
Operating Margin		13.3	%		8.3	%					11.2	%		7.7	%
Average Daily Package Volume (in thousands)		14,969			14,261			5.0	%		14,898			14,358			3.8	%
Average Revenue Per Piece	$	10.27		$	9.90			3.7	%	$	10.32		$	9.87			4.6	%
Net Income (in millions)	$	991		$	549			80.5	%	$	2,369		$	1,395			69.8	%
Basic Earnings Per Share	$	1.00		$	0.55			81.8	%	$	2.38		$	1.40			70.0	%
Diluted Earnings Per Share	$	0.99		$	0.55			80.0	%	$	2.36		$	1.39			69.8	%

Items Affecting Comparability

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


	Three Months Ended September 30,					Nine Months Ended September 30,
	2010			2009		2010			2009
Operating Expenses:
Aircraft Impairment Charge	$	—		$	—	$	—		$	181
Restructuring Charge		—			—		98			—
Loss on Sale of Business		—			—		38			—
Gain on Sale of Real Estate		(109	)		—		(109	)		—
Interest Expense:
Currency Remeasurement Charge		—			—		—			77
Income Tax Expense:
Income Tax Expense (Benefit) from the Items Above		48			—		11			(94	)
Change in Tax Filing Status for German Subsidiary		—			—		76			—

Aircraft Impairment Charge

In the first quarter of 2009, we completed an impairment assessment of our McDonnell-Douglas DC-8 aircraft fleet, and recorded a pre-tax impairment charge of $181 million ($116 million after-tax), which affected our U.S. Domestic Package segment.

Restructuring Charge

In the first quarter of 2010, we reorganized the management structure in our U.S. Domestic Package segment, and incurred a restructuring charge associated with this reorganization. This pre-tax charge totaled $98 million ($64 million after-tax), and reflects the value of voluntary retirement benefits, severance benefits and unvested stock compensation.

Loss on Sale of Business

In the first quarter of 2010, we sold a specialized transportation business in Germany within our Supply Chain & Freight segment, and incurred a pre-tax loss on the sale of $38 million ($35 million after-tax).

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Gain on Sale of Real Estate

In the third quarter of 2010, we recognized a pre-tax gain of $109 million ($61 million after-tax) on the sale of real estate within our U.S. Domestic Package segment.

Currency Remeasurement Charge

In the second quarter of 2009, we took a $77 million pre-tax charge ($48 million after-tax) for the remeasurement of certain obligations denominated in foreign currencies, in which hedge accounting was not able to be applied.

Change in Tax Filing Status for German Subsidiary

In the first quarter of 2010, we changed the tax status of a German subsidiary that was taxable in the U.S. and its local jurisdiction to one that is solely taxed in its local jurisdiction. As a result of this change in tax status, we recorded a non-cash charge of $76 million to income tax expense, which resulted primarily from the write-off of related deferred tax assets which will not be realizable following the change in tax status.

Results of Operations—Segment Review

The results and discussions that follow are reflective of how our executive management monitors the performance of our reporting segments. We supplement the reporting of our financial information determined under generally accepted accounting principles (“GAAP”) with certain non-GAAP financial measures, including operating profit, operating margin, pre-tax income, effective tax rate, net income and earnings per share adjusted for the non-comparable items discussed previously. We believe that these adjusted measures provide meaningful information to assist investors and analysts in understanding our financial results and assessing our prospects for future performance. We believe these adjusted financial measures are important indicators of our results of operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results, and provide a better baseline for analyzing trends in our underlying businesses.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

U.S. Domestic Package Operations


	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2010			2009			%			2010			2009			%
Revenue (in millions):
Next Day Air	$	1,466		$	1,348			8.8	%	$	4,311		$	4,044			6.6	%
Deferred		696			664			4.8	%		2,088			2,009			3.9	%
Ground		5,129			4,856			5.6	%		15,263			14,553			4.9	%

Total Revenue	$	7,291		$	6,868			6.2	%	$	21,662		$	20,606			5.1	%
Average Daily Package Volume (in thousands):
Next Day Air		1,181			1,144			3.2	%		1,169			1,171			(0.2	)%
Deferred		856			856			0.0	%		866			878			(1.4	)%
Ground		10,693			10,287			3.9	%		10,656			10,424			2.2	%

Total Avg. Daily Package Volume		12,730			12,287			3.6	%		12,691			12,473			1.7	%
Average Revenue Per Piece:
Next Day Air	$	19.40		$	18.13			7.0	%	$	19.31		$	17.99			7.3	%
Deferred		12.70			11.93			6.5	%		12.62			11.92			5.9	%
Ground		7.49			7.26			3.2	%		7.50			7.27			3.2	%
Total Avg. Revenue Per Piece	$	8.95		$	8.60			4.1	%	$	8.94		$	8.60			4.0	%
Operating Profit (in millions):
Operating Profit	$	1,020		$	514			98.4	%	$	2,330		$	1,374			69.6	%
Impact of Restructuring Charge		—			—						98			—
Gain on Sale of Real Estate		(109	)		—						(109	)		—
Impact of Aircraft Impairment Charge		—			—						—			181

Adjusted Operating Profit	$	911		$	514			77.2	%	$	2,319		$	1,555			49.1	%
Operating Margin		14.0	%		7.5	%					10.8	%		6.7	%
Adjusted Operating Margin		12.5	%		7.5	%					10.7	%		7.5	%
Operating Days in Period		64			65						191			192

Volume

In the third quarter of 2010, our overall volume increased as improvements in industrial production and retail sales increased overall demand in the U.S. small package market. Among our air products, package volume increased as inventory rebuilding in the manufacturing and retailing sectors contributed to growth. However, our letter volume declined largely due to weakness in the financial and other service industries. The increased volume for our ground products was driven by higher commercial ground volume and growth in our basic product, reflecting the impact of the strengthening economy. The growth in average daily volume was positively impacted by differences in the timing of the July fourth holiday between the third quarter of 2010 and 2009.

Revenue Per Piece

Overall revenue per piece increased for our ground and air products in the third quarter of 2010, due to a combination of base price increases, fuel surcharge rate changes, and a shift in product mix. The revenue per piece for our air products improved due to increased fuel surcharge rates, higher average package weights, and relatively higher growth in our premium products such as Next Day Air Early AM package. The improvement in revenue per piece for our ground products was due to increased fuel surcharge rates, but was partially offset by a mix shift towards lower yielding products.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

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Revenue per piece for our ground and air products was also impacted by an increase in base rates that took effect on January 4, 2010. We increased the base rates 6.9% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day Select, and 4.9% on UPS Ground. Other pricing changes included an increase in the residential surcharge, and an increase in the delivery area surcharge on both residential and commercial services to certain ZIP codes. These rate changes are customary and occur on an annual basis.

Fuel Surcharges

UPS applies a fuel surcharge on our domestic air and ground services. The air fuel surcharge is based on the U.S. Department of Energy’s Gulf Coast spot price for a gallon of kerosene-type jet fuel, while the ground fuel surcharge is based on the U.S. Department of Energy’s On-Highway Diesel Fuel Price. Based on published rates, the average fuel surcharge for domestic air and ground products was as follows:


	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2010			2009			% Point			2010			2009			% Point
Next Day Air / Deferred		7.5	%		4.8	%		2.7	%		7.7	%		2.9	%		4.8	%
Ground		5.7	%		3.3	%		2.4	%		5.5	%		3.1	%		2.4	%

On January 4, 2010, we modified the fuel surcharge on air services by reducing the index used to determine the fuel surcharge by 2%. Additionally, we adjusted the fuel surcharge tables to better align the surcharges between our air and ground products, and to reduce the volatility of air surcharges when fuel prices fluctuate. The increase in the air and ground fuel surcharges in the third quarter of 2010 was due to the significant increase in jet and diesel fuel prices, but was partially offset by the reduction in the index on the air surcharge. Total domestic fuel surcharge revenue, net of the impact of hedging, increased by $149 million in third quarter of 2010 ($459 million year-to-date), primarily due to the higher fuel surcharge rates discussed above, as well as the increase in volume for our ground products.

Operating Profit and Margin

Operating profit in 2010 was positively impacted by the overall economic growth in the U.S., which drove increased volume and yields. Combined with increased network efficiencies and cost containment initiatives, this resulted in strong operating leverage. Network efficiencies have been gained over the last several quarters, as we adjusted our air and ground networks to better match volume levels, and utilized our expanded Worldport facility to utilize larger aircraft as well as increase package sorting efficiency. These changes have resulted in cost savings through fewer aircraft block hours, labor hours in our operations, and vehicle miles driven. The combination of these factors led to an increase in the operating margin in 2010 compared with the corresponding period in 2009.

Operating profit also benefited from the approximate two month time lag between fuel price changes and when the monthly surcharge rates are applied to package shipments. Rapid declines in fuel prices in the first half of 2009 reduced the air fuel surcharge rate significantly for a portion of the third quarter of 2009. Subsequent increases in fuel prices, and the impact on the fuel surcharge, resulted in fuel positively impacting the change in operating profit in 2010 compared with 2009.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

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International Package Operations


	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2010			2009			%			2010			2009			%
Revenue (in millions):
Domestic	$	569		$	536			6.2	%	$	1,714		$	1,478			16.0	%
Export		1,975			1,770			11.6	%		5,992			5,133			16.7	%
Cargo		132			116			13.8	%		380			297			27.9	%

Total Revenue	$	2,676		$	2,422			10.5	%	$	8,086		$	6,908			17.1	%
Average Daily Package Volume (in thousands):
Domestic		1,376			1,207			14.0	%		1,359			1,128			20.5	%
Export		863			767			12.5	%		848			757			12.0	%

Total Avg. Daily Package Volume		2,239			1,974			13.4	%		2,207			1,885			17.1	%
Average Revenue Per Piece:
Domestic	$	6.46		$	6.83			(5.4	)%	$	6.60		$	6.82			(3.2	)%
Export		35.76			35.50			0.7	%		36.99			35.32			4.7	%
Total Avg. Revenue Per Piece	$	17.75		$	17.97			(1.2	)%	$	18.28		$	18.27			0.1	%
Average Revenue Per Piece (Currency-Adjusted)*
Domestic	$	6.46		$	6.59			(2.0	)%	$	6.60		$	6.91			(4.5	)%
Export		35.76			34.68			3.1	%		36.99			35.34			4.7	%
Total Avg. Revenue Per Piece	$	17.75		$	17.51			1.4	%	$	18.28		$	18.33			(0.3	)%
*2009 revenue adjusted to 2010 currency exchange rates.
Operating Profit (in millions)	$	419		$	313			33.9	%	$	1,367		$	900			51.9	%
Operating Margin		15.7	%		12.9	%					16.9	%		13.0	%
Operating Days in Period		64			65						191			192
Currency Translation Benefit / (Cost)—(in millions)*:
Revenue	$	(62	)							$	21
Operating Profit	$	(3	)							$	5

*	Net of currency hedging; amount represents the change compared to the prior year.

Volume

Export volume increased for the quarter, primarily due to strong growth in Asia, where volume grew 34%. Europe export also had strong volume growth for the quarter, increasing 13% compared with the prior year, as the worldwide economy and world trade continued to improve. In 2010, we experienced an overall lengthening of trade lanes, as inter-regional trade increased (especially in our Asia-to-Europe and Asia-to-U.S. export lanes), leading to relatively stronger growth for our higher yielding products. Our premium Worldwide Express and Expedited products grew at a relatively faster rate than our standard transborder and trade direct products.

Non-U.S. domestic volume increased 14% for the quarter, due in part to the acquisition of Unsped Paket Servisi San ve Ticaret A.S. (“Unsped”) in Turkey in the third quarter of 2009. Excluding the acquisition of Unsped, non-U.S. domestic volume growth increased 11%, led by the strength in core European markets, Canada and Mexico.

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Revenue Per Piece

Export revenue per piece increased slightly for the third quarter of 2010, largely due to higher fuel surcharge rates and base rate increases, as well as the impact of product mix as higher-yielding products (such as Worldwide Express and Worldwide Expedited) grew at a relatively faster pace. The impact of currency, net of hedging, resulted in a decrease to revenue growth during the quarter. Domestic revenue per piece decreased, primarily due to the impact of lower-yielding domestic packages from the Unsped acquisition. Total average revenue per piece increased 1.4% for the quarter on a currency-adjusted basis.

On January 4, 2010, we increased the base rates 6.9% for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service). Rate changes for shipments originating outside the U.S. were made throughout the year and varied by geographic market.

Fuel Surcharges

On January 4, 2010, we modified the fuel surcharge on certain U.S.-related international air services by reducing the index used to determine the fuel surcharge by 2%. Additionally, we adjusted the fuel surcharge tables to reduce the volatility of air surcharges when fuel prices fluctuate. The fuel surcharges for products originating outside the United States continue to be indexed to fuel prices in the international region where the shipment takes place. Total international fuel surcharge revenue increased by $61 million for the third quarter in 2010 ($246 million year-to-date), due to higher fuel surcharge rates caused by increased fuel prices as well as an increase in international air volume.

Operating Profit and Margin

The increase in operating profit for the third quarter of 2010 was primarily driven by volume increases in all major regions and trade lanes worldwide. Additionally, network efficiencies and cost containment initiatives created operating leverage which contributed to the increase in operating profits. During the quarter, our in-country cost per piece declined 2.5%. These factors led to an increase in the operating margin in 2010 compared with the corresponding period in 2009.

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Supply Chain & Freight Operations


	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2010			2009			%			2010			2009			%
Revenue (in millions):
Forwarding and Logistics	$	1,536		$	1,250			22.9	%	$	4,425		$	3,630			21.9	%
Freight		581			509			14.1	%		1,628			1,470			10.7	%
Other		108			104			3.8	%		323			306			5.6	%

Total Revenue	$	2,225		$	1,863			19.4	%	$	6,376		$	5,406			17.9	%
Freight LTL Statistics:
Revenue (in millions)	$	527		$	474			11.2	%	$	1,476		$	1,369			7.8	%
Revenue Per Hundredweight	$	18.99		$	17.91			6.0	%	$	18.91		$	17.49			8.1	%
Shipments (in thousands)		2,647			2,599			1.9	%		7,447			7,553			(1.4	)%
Shipments Per Day (in thousands)		41.4			40.6			1.9	%		39.0			39.5			(1.4	)%
Gross Weight Hauled (in millions of lbs)		2,776			2,647			4.9	%		7,805			7,824			(0.2	)%
Weight Per Shipment (in lbs)		1,049			1,019			2.9	%		1,048			1,036			1.2	%
Operating Days in Period		64			64						191			191
Operating Profit (in millions):
Operating Profit	$	177		$	102			73.5	%	$	363		$	268			35.4	%
Impact of Loss on Sale of Business		—			—						38			—

Adjusted Operating Profit	$	177		$	102			73.5	%	$	401		$	268			49.6	%
Operating Margin		8.0	%		5.5	%					5.7	%		5.0	%
Adjusted Operating Margin		8.0	%		5.5	%					6.3	%		5.0	%
Currency Translation Benefit / (Cost) – (in millions)*:
Revenue	$	(9	)							$	139
Operating Profit		2									6

*	Net of currency hedging; amount represents the change compared to the prior year.

Revenue

Forwarding and logistics revenue increased in the third quarter of 2010, primarily due to growth in the demand for forwarding as a result of the continued expansion of the global economy, inventory rebuilding and international trade. Both air freight and ocean freight experienced solid revenue growth, and were impacted by higher volumes, fuel surcharges, and other accessorial charges. Overall tonnage in our international air freight, North American air freight and ocean freight businesses increased 18%, 10% and 8%, respectively, for the third quarter of 2010 compared with the prior year. In our logistics products, we experienced growth in mail services and distribution revenue, with solid increases being achieved in the healthcare and technology sectors.

Freight revenue increased, primarily due to higher fuel surcharge rates and a base rate increase that took effect in January 2010. Average LTL shipments per day, weight per shipment and LTL revenue per hundredweight all increased during the quarter, largely due to our strategy of maintaining our focus on yields and targeting certain customer segments. The increase in LTL revenue per hundredweight was primarily due to an increase in base prices that took effect in January 2010, as UPS Freight increased minimum charge, LTL and TL rates an average of 5.7%, covering non-contractual shipments in the United States, Canada and Mexico. Additionally, LTL revenue per hundredweight increased as a result of higher fuel surcharge rates, as total fuel surcharge revenue increased $22 million for the quarter ($77 million year-to-date) primarily resulting from higher diesel fuel prices.

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The other businesses within Supply Chain & Freight experienced an increase in revenue. A primary driver of this increase was our UPS Customer Solutions business, which provides a range of services (e.g. project management, industrial engineering, transportation fleet services, distribution network analysis, package engineering and package visibility).

Operating Profit and Margin

Operating profit in the forwarding unit increased during third quarter of 2010, largely due to a strong increase in tonnage in our air and ocean forwarding businesses. On a year-to-date basis, operating profit increased, but was partially offset by capacity constraints from outside carriers in the first half of 2010. Capacity constraints led to rapidly escalating rates on air freight which could not be passed on to customers in a timely manner, resulting in a negative impact to our operating profit and margin. This situation has improved throughout 2010, as capacity constraints have lessened and we were able to implement revenue management plans which better matched customer pricing with market conditions. Our logistics unit had a solid increase in profitability for the quarter, which was driven primarily by an expansion of operating margins due to operating efficiencies and a focus on higher margin industry sectors.

Operating profit for our UPS Freight unit decreased during the third quarter of 2010 compared with the prior year, due to a prior year reduction in vacation accruals resulting from modifications in vacation policies and changes in the workforce coverage of our individual plans. Excluding the impact of the reduction in vacation accruals, this unit achieved an increase in operating profit largely due to better productivity, increases in base pricing and volume. Productivity metrics increased, including increases in pickup and delivery stops per hour and linehaul utilization.

All of the remaining businesses within this segment had an operating profit during the quarter and year-to-date periods. Third quarter operating profit increased over the third quarter 2009 largely due to improved results in our financial unit. However, year-to-date combined profit for these businesses was lower than the comparable period of 2009, primarily due to the gain on sale of substantially all our international Mail Boxes Etc. operations during the second quarter of 2009.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

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Operating Expenses


	Three Months Ended September 30,					Change			Nine Months Ended September 30,						Change
	2010			2009		%			2010			2009			%
Operating Expenses (in millions):
Compensation and Benefits	$	6,411		$	6,341		1.1	%	$	19,465		$	19,003			2.4	%
Impact of Restructuring Charge		—			—					(98	)		—

Adjusted Compensation and Benefits		6,411			6,341		1.1	%		19,367			19,003			1.9	%
Repairs and Maintenance		282			265		6.4	%		837			814			2.8	%
Depreciation and Amortization		448			441		1.6	%		1,348			1,297			3.9	%
Purchased Transportation		1,656			1,298		27.6	%		4,770			3,698			29.0	%
Fuel		724			635		14.0	%		2,119			1,670			26.9	%
Other Occupancy		222			241		(7.9	)%		700			738			(5.1	)%
Other Expenses		833			1,003		(16.9	)%		2,825			3,158			(10.5	)%
Impact of Aircraft Impairment Charge		—			—					—			(181	)
Impact of Loss on Sale of Business		—			—					(38	)		—
Impact of Gain on Sale of Real Estate		109			—					109			—

Adjusted Other Expenses		942			1,003		(6.1	)%		2,896			2,977			(2.7	)%

Total Operating Expenses	$	10,576		$	10,224		3.4	%	$	32,064		$	30,378			5.6	%
Adjusted Total Operating Expenses		10,685			10,224		4.5	%		32,037			30,197			6.1	%
Currency Translation (Benefit) Cost	$	(70	)						$	149

Compensation and Benefits

The increases in compensation and benefits expense during the third quarter and year-to-date periods of 2010 compared with 2009 were impacted by several items. Third quarter and year-to-date payroll costs increased, largely due to higher accruals for management incentive compensation plans resulting from improved company financial results. Union payroll costs also increased due to contractual wage increases. These factors were partially offset by a decline in union labor hours, as well as, a reduction in management salary costs resulting from a decrease in the total number of management employees through attrition combined with voluntary and involuntary workforce reductions.

Benefits expense decreased for the third quarter of 2010, largely due to reductions in employee health and welfare costs. The third quarter reduction in health and welfare costs was primarily driven by reductions in the total number of management employees, and union employees covered by UPS-sponsored health and welfare benefit plans. Benefits expense increased in the year-to-date period of 2010, due largely to increases in pension expense, and relocation-related benefit costs for management employees. Pension expense increases resulted primarily from higher union contribution rates for multi-employer pension plans. The relocation benefit costs relate to the restructuring of our domestic package operations that occurred in the first quarter of 2010.

Repairs and Maintenance

Repairs and maintenance expense increased during the third quarter and year-to-date periods of 2010, largely due to higher costs for maintenance on our vehicle fleet.

Depreciation and Amortization

Depreciation and amortization expense increased in the third quarter and year-to-date periods of 2010, primarily as a result of higher depreciation expense on equipment and facilities, as Worldport assets added in the

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

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recent expansion began to be depreciated. Amortization of intangible assets also increased as a result of new intangibles recognized related to the Unsped acquisition in Turkey in the third quarter of 2009, as well as corporate sponsorships entered into in 2010.

Purchased Transportation

The increases in purchased transportation in the third quarter and year-to-date periods of 2010 were driven by higher freight forwarding volume in Asia and Europe, as well as increased fuel surcharge rates charged to us by third-party carriers as a result of higher fuel prices.

Fuel

The increases in fuel expense in the third quarter and year-to-date periods of 2010 were caused primarily by higher prices for jet-A fuel, diesel, and unleaded gasoline, as well as a slight increase in usage of these products in our operations.

Other Occupancy

The decreases in other occupancy expense in the third quarter and year-to-date periods of 2010 were primarily due to decreased labor and overhead expenses and lower rent expense on leased facilities.

Other Expenses

The decreases in other expenses in the third quarter and year-to-date periods of 2010 were largely due to reductions in bad debt expense and foreign currency transaction expense, which reflected gains during 2010 compared to losses in 2009. Additionally, we incurred a loss on the sale of a French repair business in the third quarter of 2009.

Additional expense reductions for the quarter and year-to-date periods were due to cost containment programs, including reductions in telecom costs, office supplies, and outside professional fees. We also incurred lower expenses associated with auto liability insurance and customer claims for lost or damaged packages.

Investment Income (Loss) and Interest Expense


	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2010			2009			%			2010			2009			%
Investment Income (Loss) and Interest Expense (in millions):
Investment Income (Loss)	$	15		$	6			150.0	%	$	(7	)	$	(3	)		133.3	%
Interest Expense	$	(91	)	$	(93	)		(2.2	)%	$	(260	)	$	(356	)		(27.0	)%
Impact of Currency Remeasurement Charge		—			—						—			77

Adjusted Interest Expense	$	(76	)	$	(87	)		(12.6	)%	$	(267	)	$	(282	)		(5.3	)%

Investment Income

The increase in investment income for the third quarter in 2010 was largely due to higher realized gains on sales of investments and a higher average balance of funds invested compared with the prior year.

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On a year-to-date basis, the increase in investment losses in 2010 was primarily due to a lower yield earned on our invested assets as a result of declines in short-term interest rates in the United States, as well as higher impairment losses on our holdings of auction rate and preferred securities.

Interest Expense

The decrease in interest expense for the third quarter and year-to-date periods in 2010 was primarily due to lower average debt balances. This was partially offset by lower capitalized interest, due to the recent completion of several large construction projects, including our Worldport expansion.

Income Tax Expense

The following table presents an analysis of income tax expense (in millions) and our effective income tax rate:


	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2010			2009			%			2010			2009			%
Income Tax Expense	$	549		$	293			87.4	%	$	1,424		$	788			80.7	%
Impact of Change in Tax Filing Status for German Subsidiary		—			—						(76	)		—
Impact of Loss on Sale of Business		—			—						3			—
Impact of Restructuring Charge		—			—						34			—
Impact of Gain on Sale of Real Estate		(48	)		—						(48	)		—
Impact of Aircraft Impairment Charge		—			—						—			65
Impact Currency Remeasurement Charge		—			—						—			29

Adjusted Income Tax Expense	$	501		$	293			71.0	%	$	1,337		$	882			51.6	%
Effective Tax Rate		35.6	%		34.8	%					37.5	%		36.1	%
Adjusted Effective Tax Rate		35.0	%		34.8	%					35.0	%		36.1	%

Income tax expense increased primarily due to higher pre-tax income. Our effective tax rate increased in the third quarter of 2010 compared to 2009, primarily due to the tax effect of the gain on the sale of real estate in the third quarter of 2010 occurring at a relatively high marginal tax rate.

On a year-to-date basis, the increase in our effective tax rate in 2010 compared with 2009 was impacted by the higher marginal tax rate applied to the gain on the sale of real estate, as well as, the change in the tax filing status of a German subsidiary that occurred in the first quarter of 2010. Additionally, we are currently unable to recognize the entire potential tax benefit of tax loss carryforwards generated from the sale of a Supply Chain & Freight business in Germany in the first quarter of 2010.

Excluding these items, our adjusted year-to-date effective tax rate decreased in 2010 compared to 2009 primarily due to the effect of having a higher proportion of our taxable income in 2010 being subject to tax outside the United States, where statutory tax rates are generally lower.

In addition to the tax effect of the items described above, we recognized a $40 million tax benefit in the third quarter of 2010 associated with the release of a valuation allowance against deferred tax assets in our International Package business. However, this item was offset by unfavorable return-to-provision adjustments for our 2009 U.S. federal tax return, which was completed during the third quarter, and changes in our projected

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jurisdictional profit mix. The net impact to our consolidated third quarter and year-to-date 2010 provision for these items was not material.

Our year-to-date 2009 income tax provision was increased as a result of providing a valuation allowance of $14 million against certain deferred tax assets in our International Package business.

Liquidity and Capital Resources

Net Cash From Operating Activities

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


	Nine months ended September 30,
	2010			2009
Net income	$	2,369		$	1,395
Non-cash operating activities (a)		2,347			2,835
Pension and postretirement plan contributions (UPS-sponsored plans)		(1,069	)		(758	)
Changes in working capital and other noncurrent assets and liabilities		269			691
Other operating activities		7			70

Net cash from operating activities	$	3,923		$	4,233

(a)	Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, provisions for uncollectible accounts, pension and postretirement benefit expense, stock compensation expense, impairment charges, and other non-cash items.

The increase in consolidated net income was more than offset by higher pension contributions and changes in our working capital needs, which resulted in a reduction of operating cash flow in 2010 compared with the same period of 2009. Contributions to our company-sponsored pension plans have varied based primarily on whether any minimum funding requirements are present for individual pension plans. The increase in contributions in 2010 was largely due to minimum funding requirements related to the UPS IBT Pension Plan. As discussed in Note 6 to the unaudited consolidated financial statements, we expect to contribute $165 million to our company-sponsored pension and postretirement medical benefit plans over the remainder of 2010. We are currently evaluating whether to accelerate a portion of our required future contributions for our primary domestic pension plans into the fourth quarter of 2010.

Our working capital needs normally decline after our peak shipping season in the fourth quarter of each year. In 2009, we experienced a historically large reduction of our working capital position as a result of the economic recession. In 2010, our working capital position has declined by a relatively smaller amount, as economic conditions and our overall business have improved.

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Net Cash Used In Investing Activities

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


	Nine months ended September 30,
	2010			2009
Net cash used in investing activities	$	(493	)	$	(879	)

Capital Expenditures:
Buildings and facilities	$	(254	)	$	(475	)
Aircraft and parts		(345	)		(413	)
Vehicles		(204	)		(132	)
Information technology		(208	)		(165	)

	$	(1,011	)	$	(1,185	)

Capital Expenditures as a % of Revenue		2.8	%		3.6	%

Other Investing Activities:
Proceeds from disposals of property, plant and equipment	$	294		$	40
Net (increase) decrease in finance receivables	$	76		$	206
Net (purchases) sales of marketable securities	$	(33	)	$	(12	)
Other sources (uses) of cash from investing activities	$	181		$	72

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. We generally fund our capital expenditures with our cash from operations. In 2010, capital spending on buildings and facilities declined, as a result of the completion of the most recent expansion of our Worldport facility in Louisville, KY and our intra-Asia hub in Shenzhen, China. Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions.

The increase in proceeds from the disposal of property, plant and equipment is largely due to real estate sales and the proceeds from insurance recoveries in 2010. The net change in finance receivables is primarily due to customer paydowns and new loan origination activity, primarily in our commercial lending, asset-based lending and leasing portfolios. The purchases and sales of marketable securities are largely determined by liquidity needs, and will therefore fluctuate from period to period. Other investing activities include the cash settlement of derivative contracts used in our energy and currency hedging programs, the timing of aircraft purchase contract deposits on our Boeing 767-300 and Boeing 747-400 aircraft orders, and changes in restricted cash balances.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Net Cash Used In Financing Activities

Our primary uses of cash flows for financing activities are to repurchase shares, pay cash dividends, and repay debt principal, as follows (amounts in millions, except per share data):


	Nine months ended September 30,
	2010			2009
Net cash provided by (used in) financing activities	$	(1,939	)	$	(1,661	)

Share Repurchases:
Cash expended for shares repurchased	$	(599	)	$	(395	)
Number of shares repurchased		(9.3	)		(7.8	)
Shares outstanding at period end		989			993
Percent reduction in shares outstanding		(0.5	)%		(0.3	)%

Dividends:
Dividends declared per share	$	1.41		$	1.35
Cash expended for dividend payments	$	(1,363	)	$	(1,313	)

Borrowings:
Net borrowings (repayments) of debt principal	$	(68	)	$	226

Other Financing Activities:
Cash received for common stock issuances	$	151		$	104
Other sources (uses) of cash from financing activities	$	(60	)	$	(283	)

Capitalization (as of September 30 each year):
Total debt outstanding at period end	$	9,642		$	10,305
Total shareowners’ equity at period end		8,526			7,046

Total capitalization	$	18,168		$	17,351
Debt to Total Capitalization %		53.1	%		59.4	%

As a result of the uncertain economic environment, we have slowed our share repurchase activity during the 2009 and 2010 periods. We currently intend to repurchase shares in 2010 at a rate that will more than offset the dilution from our stock compensation programs. As of September 30, 2010, we had $5.414 billion of our existing share repurchase authorization remaining.

The declaration of dividends is subject to the discretion of the Board of Directors and will depend on various factors, including our net income, financial condition, cash requirements, future prospects, and other relevant factors. We maintained our quarterly cash dividend payment at $0.47 per share in the third quarter of 2010, compared with the previous $0.45 quarterly dividend rate in 2009. We expect to continue the practice of paying regular cash dividends.

Issuances of debt in 2010 consisted primarily of commercial paper, while in 2009 issuances consisted primarily of commercial paper and an offering of fixed rate senior notes (discussed further below). Repayments of debt consisted primarily of paydowns of commercial paper, scheduled principal payments on our capitalized lease obligations and early redemptions of our retail UPS Notes program. 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

In March 2009, we completed an offering of $1.0 billion of 3.875% senior notes due April 2014, and $1.0 billion of 5.125% senior notes due April 2019. These notes pay interest semiannually, and we may redeem the notes at any time by paying the greater of the principal amount or a “make-whole” amount, plus accrued interest. After pricing and underwriting discounts, we received a total of $1.989 billion in cash proceeds from the offering. The proceeds from the offering were used for general corporate purposes, including the reduction of our outstanding commercial paper balance.

The cash outflows in other financing activities primarily relate to hedging activities. In conjunction with the senior fixed rate debt offering in the first quarter of 2009, we settled several interest rate derivatives that were designated as hedges of these debt offerings, which resulted in a cash outflow of $243 million.

Sources of Credit

We are authorized to borrow up to $10.0 billion under our U.S. commercial paper program. We had $894 million outstanding under this program as of September 30, 2010, with an average interest rate of 0.16%. All of this commercial paper was classified as a current liability as of September 30, 2010. We also maintain a European commercial paper program under which we are authorized to borrow up to €1.0 billion in a variety of currencies, however no amounts were outstanding under this program as of September 30, 2010.

Our Moody’s and Standard & Poor’s short-term credit ratings are P-1 and A-1+, respectively. Our Moody’s and Standard & Poor’s long-term credit ratings are Aa3 and AA-, respectively. During the third quarter, Standard & Poor’s reaffirmed our credit ratings, and revised their outlook for UPS from negative to stable. We continue to have a stable outlook from Moody’s as well.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Except as described in this quarterly report, the nature and amounts of our payment obligations under our debt, capital and operating lease agreements, purchase commitments, and other liabilities as of September 30, 2010 have not materially changed from those at December 31, 2009, as described in our Annual Report on Form 10-K for the year ended December 31, 2009.

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, such as commitments for aircraft purchases, for the foreseeable future.

Guarantees and Other Off-Balance Sheet Arrangements

We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, which we believe could have a material impact on our financial condition or liquidity.

Contingencies

UPS and our subsidiary Mail Boxes Etc., Inc. are defendants in various lawsuits brought by franchisees who operate Mail Boxes Etc. centers and The UPS Store locations. These lawsuits relate to the rebranding of Mail Boxes Etc. centers to The UPS Store, The UPS Store business model, the representations made in connection with the rebranding and the sale of The UPS Store franchises, and UPS’s sale of services in the franchisees’ territories. In one of the actions, which is pending in California state court, the court certified a class consisting of all Mail Boxes Etc. branded stores that rebranded to The UPS Store in March 2003. We have denied any liability with respect to these claims and intend to defend ourselves vigorously. At this time, we have not determined the amount of any liability that may result from these matters or whether such liability, if any, would have a material adverse effect on our financial condition, results of operations, or liquidity.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Other Matters

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

industry, and subsequently responded to each request. On February 9, 2010, UPS received a Statement of Objections by the Commission. This document contains the Commission’s preliminary view with respect to alleged anticompetitive behavior in the freight forwarding industry by 18 freight forwarders, including UPS. Although it alleges anticompetitive behavior, it does not prejudge the Commission’s final decision, as to facts or law (which is subject to appeal to the European courts). The options available to the Commission include taking no action or imposing a monetary fine; the range of any potential action by the Commission is not reasonably estimable. Any decision imposing a fine would be subject to appeal. UPS has responded to the Statement of Objections, including at a July 2010 Commission hearing, and we intend to continue to vigorously defend ourselves in this proceeding.

We also received and responded to related information requests from competition authorities in other jurisdictions.

Health Care Legislation

Rate Adjustments

In October 2010, we announced that an increase in base rates and changes in our fuel surcharge for package shipments that will take effect January 3, 2011. UPS Ground service rates will increase a net 4.9% through a combination of a 5.9% increase in rates and a 1% reduction in the index used to determine the ground fuel surcharge. UPS Next Day Air, UPS 2nd Day Air, UPS 3 Day Select, and international air shipments originating in the United States (including Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard Service) will increase a net 4.9%, through a combination of a 6.9% increase in base rates and a 2% reduction in the index used to determine the air fuel surcharge. These rate changes are customary and occur on an annual basis. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market.

Also in October 2010, we announced a 5.9% general rate increase for our UPS Freight LTL unit, which took effect October 18, 2010. The increase covers non-contractual shipments in the U.S., Canada and Mexico, and applies to minimum charge, LTL rates and accessorial charges.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Recent Accounting Pronouncements

Adoption of New Accounting Standards

There were no accounting standards adopted during the nine months ended September 30, 2010 that had a material impact on our consolidated financial statements.

Standards Issued But Not Yet Effective

Other new pronouncements issued but not effective until after September 30, 2010 are not expected to have a significant effect on our consolidated financial position or results of operations.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in foreign currency exchange rates, interest rates, equity prices, and certain commodity prices. This market risk arises in the normal course of business, as we do not engage in speculative trading activities. In order to manage the risks arising from these exposures, we utilize a variety of foreign exchange, interest rate, equity and commodity forward contracts, options, and swaps.

The total fair value asset (liability) of our derivative financial instruments is summarized in the following table (in millions):


	September 30, 2010			December 31, 2009
	September 30, 2010			December 31, 2009
Energy Derivatives	$	—		$	—
Currency Derivatives		(136	)		12
Interest Rate Derivatives		239			59

	$	103		$	71

Our market risks, hedging strategies, and financial instrument positions at September 30, 2010 have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009. The fair value changes between December 31, 2009 and September 30, 2010 in the table above are primarily due to interest rate and foreign currency exchange rate changes between those dates, as well as normal settlements of derivative positions.

The forward contracts, swaps, and options previously discussed contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines. We do not expect to incur any losses as a result of counterparty default.

The information concerning market risk under the caption “Quantitative and Qualitative Disclosures about Market Risk” on pages 49-50 of our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2009, is hereby incorporated by reference in this Quarterly Report on Form 10-Q.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)). Based upon that evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management to allow their timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting:

There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

For a discussion of legal proceedings affecting us and our subsidiaries, please see the information under the sub-caption “Contingencies” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report.

Item 1A.

Risk Factors

There have been no material changes to the risk factors described in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) A summary of our repurchases of our Class A and Class B common stock during the third quarter of 2010 is as follows (in millions, except per share amounts):


	Total Number of Shares Purchased(a)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
July 1 – July 31, 2010		0.4	$	60.00		0.4	$	5,555
August 1 – August 31, 2010		1.5		64.95		1.4		5,465
September 1 – September 30, 2010		0.8		67.72		0.7		5,414

Total July 1 – September 30, 2010		2.7	$	64.22		2.5

(a)	Includes shares repurchased through our publicly announced share repurchase program and shares tendered to pay the exercise price and tax withholding on employee stock options.

In January 2008, the Board of Directors authorized an increase in our share repurchase authorization to $10.0 billion. Share repurchases may take the form of accelerated share repurchases, open market purchases, or other such methods as we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the program.

Item 3.

Defaults Upon Senior Securities

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

These exhibits are either incorporated by reference into this report or filed with this report as indicated below.

Index to Exhibits:



3.1	—	Restated Certificate of Incorporation of United Parcel Service, Inc. dated May 6, 2010 (incorporated by reference to Exhibit 3.3 to Form 8-K, filed on May 12, 2010).

3.2	—	Amended and Restated Bylaws of United Parcel Service, Inc. dated May 6, 2010 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed on May 12, 2010).

11	—	Statement regarding Computation of per Share Earnings (incorporated by reference to Note 12 to “Item 1. Financial Statements” of this quarterly report on Form 10-Q).

†12	—	Computation of Ratio of Earnings to Fixed Charges.

†31.1	—	Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

†31.2	—	Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

†32.1	—	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

†32.2	—	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

††101	—	The following financial information from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.

†	Filed herewith.

††	Furnished electronically herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	UNITED PARCEL SERVICE, INC. (Registrant)

Date: November 5, 2010	By:	/s/ KURT P. KUEHN
		Kurt P. Kuehn
		*Senior Vice President and*
		*Chief Financial Officer*
		*(Duly Authorized Officer and* *Principal Accounting Officer)*