United Parcel Service, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

LEASES

LEASES

6 Months Ended

Jun. 30, 2021

We recognize a right-of-use ("ROU") asset and lease liability for all leases. Some of our leases contain both lease and non-lease components, which we have elected to treat as a single lease component. We have also elected not to recognize leases that have an original lease term, including reasonably certain renewal or purchase options, of twelve months or less in our consolidated balance sheets for all classes of underlying assets. Lease costs for short-term leases are recognized on a straight-line basis over the lease term. We elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are, or contain, leases, lease classification and determination of initial direct costs.

We lease property and equipment under finance and operating leases. We have finance and operating leases for package centers, airport facilities, warehouses, office space, aircraft, aircraft engines, information technology equipment (primarily mainframes, servers and copiers), vehicles and various other equipment used in operating our business. Certain leases for real estate and aircraft contain options to purchase, extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain and if the optional period and payments should be included in the calculation of the associated ROU asset and lease liability. In making this determination, we consider all relevant economic factors that would compel us to exercise or not exercise an option.

When our leases contain future payments that are dependent on an index or rate, such as the consumer price index, we initially measure the lease liability and ROU asset using the index or rate at the commencement date. In subsequent periods, lease payments dependent on an index or rate are not remeasured. Rather, changes to payments due to a change in an index or rate are recognized in our statements of consolidated income in the period of the change.

When available, we use the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of our leases. For these leases, we use an estimate of our incremental borrowing rate to discount lease payments based on information available at lease commencement. The incremental borrowing rate is derived using multiple inputs including our credit rating, the impact of full collateralization, lease term and denominated currency. The remaining lease terms vary from 1 month to 139 years.

Aircraft

In addition to the aircraft that we own, we have leases for 316 aircraft. Of these leased aircraft, 22 are classified as finance leases, 18 are classified as operating leases and the remaining 276 are classified as short-term leases. A majority of the obligations associated with the aircraft classified as finance leases have been legally defeased. Most of our long-term aircraft operating leases are operated by a third party to handle package and cargo volume in geographic regions where, due to government regulations, we are restricted from operating an airline.

In order to meet customers' needs, we charter aircraft to handle package and cargo volume on certain international trade lanes and domestic routes. Due to the nature of these agreements, primarily being that either party can cancel the agreement with short notice, we have classified these as short-term leases. Additionally, the lease payments associated with these charter agreements are variable in nature based on the number of hours flown.

Real Estate

We have operating and finance leases for package centers, airport facilities, warehouses, office space and expansion facilities utilized during peak shipping periods. Many of our leases contain charges for common area maintenance or other expenses that are updated based on landlord estimates. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the ROU asset and associated lease liability.

Some of our real estate leases contain options to renew or extend the lease or terminate the lease before the expiration date. These options are factored into the determination of the lease term and lease payments when their exercise is considered to be reasonably certain.

We also enter into real estate leases that contain lease incentives, such as tenant improvement allowances or move-in allowances, that are received or receivable at lease commencement. These incentives reduce lease payments for classification purposes and reduce the initial ROU asset. When lease incentives are receivable at lease commencement, they also reduce the initial lease liability.

From time to time, we enter into leases with the intention of purchasing the property, either through purchase options with a fixed price or a purchase agreement negotiated contemporaneously with the lease agreement. We classify these leases as finance leases and include the purchase date and purchase price in the determination of the lease term and lease payments, respectively, when the option to exercise or purchase is reasonably certain.

Transportation equipment and other equipment

We enter into both long-term and short-term leases for transportation equipment to supplement our capacity or meet contractual demands. Some of these assets are leased on a month-to-month basis and the leases can be terminated without penalty. The lease term for these types of leases is determined by the length of the underlying customer contract or based on the judgment of the business unit. We also enter into multi-year leases for trailers to increase capacity during periods of high demand, which are typically only used for 90-120 days during the year. These leases are treated as short-term as the cumulative right of use is less than 12 months over the term of the contract.

The remainder of our leases are primarily related to equipment used in our air operations, vehicles required to meet capacity needs during periods of higher demand for our shipping services, technology equipment and office equipment used in our facilities.

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

The components of lease expense for the three and six months ended June 30, 2021 and 2020 were as follows (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Operating lease costs	$	179	$	172	$	354	$	347
Finance lease costs:
Amortization of assets	23		20		46		38
Interest on lease liabilities	3		5		7		10
Total finance lease costs	26		25		53		48
Variable lease costs	62		55		127		113
Short-term lease costs	251		253		530		456
Total lease costs	$	518	$	505	$	1,064	$	964

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


	June 30, 2021			December 31, 2020
Operating Leases:
Operating lease right-of-use assets	$	3,568		$	3,073

Current maturities of operating leases	$	556		$	560
Non-current operating leases	3,038			2,540
Total operating lease liabilities	$	3,594		$	3,100

Finance Leases:
Property, plant and equipment, net	$	1,145		$	1,225

Current maturities of long-term debt, commercial paper and finance leases	$	65		$	56
Long-term debt and finance leases	354			286
Total finance lease liabilities	$	419		$	342

Weighted average remaining lease term (in years):
Operating leases	12.1			11.2
Finance leases	11.0			9.3

Weighted average discount rate:
Operating leases	1.99		%	2.28		%
Finance leases	3.82		%	4.14		%

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


	Six Months Ended June 30,
	2021		2020
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases	$	364	$	338
Operating cash flows from finance leases	7		10
Financing cash flows from finance leases	33		33

Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	854	$	403
Finance leases	113		49

Maturities of lease liabilities as of June 30, 2021 are as follows (in millions):


	Finance Leases		Operating Leases
2021	$	40	$	305
2022	76		609
2023	60		515
2024	39		426
2025	34		382
Thereafter	279		1,902
Total lease payments	528		4,139
Less: Imputed interest	(109)		(545)
Total lease obligations	419		3,594
Less: Current obligations	(65)		(556)
Long-term lease obligations	$	354	$	3,038

As of June 30, 2021, we had $175 million of additional leases which had not commenced. These leases will commence in 2021 and 2022 when we are granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained.