UNITED PARCEL SERVICE INC

(1) Amount represents the change in currency translation compared to the prior year.

Compensation and Benefits

Total compensation and benefits and adjusted total compensation and benefits increased for both the second quarter and year to date. Compensation costs increased $259 million for the quarter (up $356 million year to date) and on an adjusted basis increased $256 million for the quarter (up $352 million year to date). The principal factors contributing to the overall increase were:

•Direct labor costs increased $349 million for the quarter (up $549 million year to date). Contractual wage rate increases for our U.S. union workforce resulted in an increase in costs of $299 million for the quarter (up $627 million year to date). Productivity improvements reduced direct labor cost by $41 million for the second quarter (down $43 million year to date). Additionally, the impact of lower volumes in the first quarter reduced year-to-date expense by $207 million. The remaining increase for both the quarter and year to date was primarily due to changes in seniority within our workforce. We expect wage rate growth to moderate beginning in the second half of the year as a result of the terms of our contract with the Teamsters.

•Management compensation costs decreased $80 million for the quarter (down $154 million year to date) due to a reduction in incentive compensation expense and lower overall headcount.

Benefits costs increased $48 million for the second quarter (up $126 million year to date) and on an adjusted basis increased $140 million for the second quarter (up $176 million year to date). The principal factors driving the overall increase were:

•Accruals for paid time off, payroll taxes and other costs increased $151 million for the quarter (up $194 million year to date), primarily due to contractual wage rate growth.

•Health and welfare costs increased $52 million for the quarter (up $92 million year to date), driven by increased contributions to multiemployer plans as a result of contractually-mandated rate increases.

•Workers' compensation expense decreased $61 million for the quarter (down $90 million year to date) due to favorable developments in prior year claims counts and a reduction in hours worked.

•Other employee benefits expense decreased $89 million for the quarter (down $52 million year to date) due to higher separation costs incurred in 2023 as we continue to right-size our business. On an adjusted basis, other employee benefits expense remained relatively flat.

Repairs and Maintenance

The increase in repairs and maintenance expense for both the second quarter and year to date was primarily attributable to higher routine repairs to buildings and facilities. During the second quarter, we also incurred additional aircraft engine maintenance expense due to the timing of required maintenance cycles. We expect these expense trends to continue in the second half of 2024.

Depreciation and Amortization

We incurred higher depreciation expense in the second quarter and year to date as a result of facility automation and expansion projects aligned with our strategic objectives. Amortization expense for capitalized software investments in support of our strategic initiatives increased for both periods, and we recorded additional amortization expense for intangible assets arising from 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 increased for the quarter, but decreased year to date. The changes were primarily driven by:

•Supply Chain Solutions expense increased $64 million for the second quarter, driven by growth in healthcare logistics and the impact of the acquisition of MNX Global Logistics, as well as volume growth in our digital businesses. These impacts were partially offset by expense declines in truckload brokerage due to lower volumes and market rates paid for services. Year to date, expense decreased $59 million as the impact of volume declines and lower market rates across our forwarding businesses more than offset increases in our logistics businesses.

•U.S. Domestic expense increased $34 million for the second quarter, but decreased $82 million year to date. Volume growth in our SurePost product drove an increase in delivery costs of $85 million for the quarter (up $132 million year to date). For the quarter, this was partially offset by a reduction in ground volume handled by third-party carriers. Year to date, volume declines in the first quarter, together with the impact of network optimization initiatives, resulted in lower utilization of third-party ground and rail carriers and drove the overall reduction in expense.

•International Package expense was relatively flat for the second quarter. Year to date, expense decreased $53 million, as the decline in volume resulted in lower utilization of third-party transportation services.

Fuel

The increase in fuel expense for the quarter was mainly attributable to higher prices for jet fuel. Year to date, overall fuel expense decreased, driven by the combination of lower prices for jet fuel and the impact of volume declines in the first quarter, as well as lower prices for diesel and gasoline. 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 and year to date, 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 during the first quarter.

Other Expenses

Other expenses remained relatively flat, increasing $9 million for the second quarter but decreasing $21 million year to date. During the second quarter, we made a $94 million payment, including interest, to settle a previously-disclosed challenge by Italian tax authorities to the deductibility of Value Added Tax payments by UPS to certain third-party service providers. We incurred $12 million of transformation and other costs for the quarter ($67 million year to date), including an additional expense related to a regulatory matter recorded in the first quarter. Also in the first 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 consolidated our brands and a $7 million impairment charge related to software licenses.

On an adjusted basis, other expenses decreased $61 million for the quarter (down $171 million year to date), primarily due to the following:

•A reduction in outsourcing and consulting fees of $60 million for the quarter (down $110 million year to date) driven by a decrease in project-based engagements and higher capitalization of third-party software development costs.

•Reductions in vehicle lease expense of $40 million for the quarter (down $97 million year to date), due to network optimization efforts and volume declines in the first quarter.

•Claims expense decreases of $10 million for the quarter (down $30 million year to date) due to a reduction in the volume of customer claims.

These reductions were partly offset by:

•Credit losses increased $17 million for the quarter (up $64 million year to date) 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 $20 million for the quarter (up $50 million year to date) as we continued to expand utilization.

•Hosted software application fees and other technology costs increased $17 million for the quarter (up $32 million year to date) as we continue to make investments in support of our digital transformation.

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