UNITED PARCEL SERVICE INC

Compensation and Benefits

Total compensation and benefits and adjusted total compensation and benefits increased in the first quarter. Compensation costs increased $97 million. The principal factors contributing to the increase were:

•Direct labor costs increased $199 million. Contractual wage rate increases for our U.S. union workforce resulted in an increase in costs of $328 million. This was partially offset by the impact of reductions in U.S. direct labor hours and administrative headcount due to volume declines, which reduced expense by $207 million. The remaining increase was driven by changes in seniority within our workforce. We expect wage rate growth to remain elevated on a year-over-year basis in the second quarter before moderating during the second half of 2024 as a result of the terms of our contract with the Teamsters.

•Management compensation costs decreased $73 million due to a reduction in incentive compensation expense and lower overall headcount.

Benefits costs increased $78 million for the quarter, and increased $35 million on an adjusted basis. The principal factors driving the increase were:

•Accruals for paid time off, payroll taxes and other costs increased $43 million, primarily due to contractual wage rate growth.

•Health and welfare costs increased $39 million, driven by increased contributions to multiemployer plans as a result of contractually-mandated rate increases.

•Workers' compensation expense decreased $29 million due to favorable developments in prior year claims counts.

•Pension and other postretirement benefits expense decreased $12 million as reductions in participating headcount more than offset increases in service costs under Company-sponsored plans due to lower discount rates and benefit increases under the terms of the Teamsters contract.

•Other employee benefits expense increased $37 million due to separation costs incurred as we continued to right-size our business for the future. On an adjusted basis, other employee benefits expense remained relatively flat.

Repairs and Maintenance

The decrease in repairs and maintenance expense was primarily due to the deferral of aircraft engine maintenance, as the declines in volume resulted in the temporary idling of certain aircraft. This was partially offset by an increase in routine repairs to buildings and facilities. We expect these expense trends to continue in the second quarter.

Depreciation and Amortization

We incurred higher depreciation expense as a result of facility automation and expansion projects coming into service. Amortization expense for capitalized software investments in support of our strategic initiatives increased, and we recorded additional amortization expense for intangible assets due to the acquisitions of MNX Global Logistics and Happy Returns in the fourth quarter of 2023.

Purchased Transportation

Third-party transportation expense charged to us by air, ocean and ground carriers decreased for the quarter. The changes were primarily driven by:

•Supply Chain Solutions expense decreased $123 million, driven by volume declines and lower market rates paid for services in our Forwarding businesses. This was partially offset by expense increases in our logistics operations due to business growth and the impact of the acquisition of MNX Global Logistics.

•U.S. Domestic expense decreased $116 million due to overall volume declines, a reduction in ground volume handled by third-party carriers and other network optimization initiatives. These decreases were partially offset by an increase in delivery costs for our SurePost product as a result of higher volume.

•International Package expense decreased $56 million, primarily due to declines in volume.

Fuel

The reduction in fuel expense for the quarter was driven by lower prices for jet fuel, diesel and gasoline, and the impact of lower volumes. Market prices and the manner in which we purchase fuel influence our costs. The majority of our fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the indices are correlated, each index may respond differently to changes in underlying prices, which in turn can drive variability in our costs.

Other Occupancy

Other occupancy expense increased for the quarter, primarily due to increases in property rents. A decrease in utilities expense as a result of declines in rates and usage was offset by higher costs related to winter weather events.

Other Expenses

Other expenses decreased $30 million for the quarter. We recorded a $41 million charge to write down the value of certain trade names acquired as part of our acquisition of Bomi Group as we consolidate our brands, and a $7 million impairment charge related to software licenses. Additionally, we incurred $55 million of transformation and other costs, including an expense related to a regulatory matter. On an adjusted basis, other expenses decreased $110 million, primarily due to the following:

•A reduction in outsourcing and consulting fees of $50 million driven by a decrease in project-based engagements and higher capitalization of third-party software development costs.

•Reductions in vehicle lease expense of $57 million due to volume declines.

•Claims expense decreased $20 million due to a reduction in the volume of customer claims.

These reductions were partly offset by:

•Credit loss increases of $47 million across our segments as a result of an increased number of customer bankruptcies and increases in reserves.

•RFID supplies for Smart Package Smart Facility increased $30 million as we expanded utilization.

•Hosted software application fees and other technology costs that support ongoing investments in our digital transformation increased $15 million.

Other expense reductions during the quarter were primarily associated with volume declines, including employee-related expenses, airline operational expenses, advertising costs and insurance.