UNITED PARCEL SERVICE INC

The results and discussions that follow are reflective of how management monitors and evaluates the performance of our segments as defined in note 13 to the unaudited, consolidated financial statements.

Certain operating expenses are allocated between our reporting segments using activity-based costing methods. These activity-based costing methods require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates would directly impact the amount of expense allocated to each segment and therefore the operating profit of each reporting segment. Our allocation methodologies are refined periodically, or as necessary to reflect changes in our businesses.

As a normal part of managing our air network, we routinely idle aircraft and engines temporarily for maintenance or to adjust network capacity. As a result of the reduction in air volumes, as of March 31, 2025, we had three aircraft temporarily idled for an average period of approximately eight months in order to better match capacity with current demand. Temporarily idled assets are classified as held-and-used, and we continue to record depreciation expense for these assets. We expect these aircraft to return to revenue service during 2025. We continue to evaluate possible retirements within our MD-11 fleet and during the remainder of 2025, we expect to retire three fully depreciated MD-11s from operational service.

We test goodwill for impairment annually at July 1 and between annual tests if an event occurs or circumstances change that would indicate that it is more likely than not that the carrying value thereof may be impaired. Testing goodwill for impairment requires that we make a number of significant assumptions, including assumptions related to future revenues, costs, capital expenditures, working capital, our cost of capital, long-term growth rates and market comparables. We are also required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment.

Approximately $1.1 billion of our consolidated goodwill balance of $4.7 billion is represented by our Global Freight Forwarding, Roadie and Global Logistics and Distribution reporting units which, based on our annual impairment evaluation, exhibited a limited excess of fair value above carrying value and reflect a greater risk of an impairment occurring in future periods. During the first quarter of 2025, our Mail Innovations reporting unit experienced cost increases inconsistent with our expectations due to increases in purchased transportation rates which resulted from the expiration of our previous contract with our primary vendor. We are evaluating additional vendors for this business. We are also addressing the revenue quality in the business. Depending on the outcome of these actions, our expectations for the future performance of this reporting unit could be materially affected. Approximately $295 million in goodwill is represented by our Mail Innovations reporting unit. Additionally, Frigo-Trans, which was acquired during the first quarter of 2025, will be reported as part of our Healthcare Logistics and Distribution ("HLD") reporting unit.

We continue to monitor all of our reporting units subsequent to the most recent annual test and, while we do not believe it is more likely than not that our reporting units' fair values are less than their carrying values as of March 31, 2025, challenging macroeconomic and uncertain geopolitical conditions, actual reporting unit performance, revisions to our forecasts of future performance or other factors, including market comparables, may negatively impact certain estimates and assumptions that we use in determining our reporting units' fair values. Such impacts may be more pronounced for reporting units whose fair values do not significantly exceed their carrying values. Any of these factors or a combination thereof could result in an impairment charge in one or more of our reporting units during a future period. We continue to monitor business performance and external factors affecting our reporting units.

U.S. Domestic Package

Revenue

The change in revenue was due to the following:

Comparative results were impacted by one additional operating day in the first quarter of 2024. The growth in rates / product mix shown above includes the growth we experienced in our air cargo product during the first quarter of 2025, as air cargo under our contract with the USPS was fully onboarded during the fourth quarter of 2024. Air cargo is measured by dimensional weight, not on a per piece basis, and therefore does not impact the volume and revenue per piece discussions below. We expect revenue in the second quarter to be down due to planned volume decreases, partially offset by continued growth in air cargo.

Volume

Average daily volume decreased in line with our expectations for the quarter, driven by glide down of volume with our largest customer and challenging macroeconomic conditions. Decreases in residential volume were partially offset by an increase in commercial volume and continued volume growth from SMBs leveraging our Digital Access Program.

Business-to-consumer volume decreased 7.0%, as a result of the factors discussed above, with declines from both large customers and SMBs, partially offset by continued growth within our Digital Access Program.

Business-to-business volume increased 1.5%. Volume growth was driven by returns and increases across a number of sectors including healthcare and technology.

Within our Air products, average daily volume decreased 9.5%, driven by the continued execution under the contract terms with our largest customer, partially offset by increased demand from the healthcare and technology sectors.

Ground average daily volume decreased 2.5% driven by a decrease in residential volume of 5.7%, primarily due to pricing actions we took on lower yielding e-commerce customer volumes and the planned glide down from our largest customer. This decrease was partially offset by an increase in commercial volume of 2.0%, primarily driven by increases across certain large customers.

Revenue Per Piece

Revenue per piece increased 4.5% due to favorable trends in customer mix, base rates and package characteristics.

Revenue per piece from our Air and Ground products increased. In December 2024, we implemented an average 5.9% net increase in base and accessorial rates for both our Air and Ground products, which favorably impacted revenue per piece.

Fuel Surcharges

We apply a fuel surcharge on our domestic air and ground services that adjusts weekly. Our air fuel surcharge is based on the U.S. Department of Energy's ("DOE") Gulf Coast spot price for a gallon of kerosene-type fuel, and our ground fuel surcharge is based on the DOE's On-Highway Diesel Fuel price.

Operating expenses and non-GAAP adjusted operating expenses increased for the quarter. The costs of operating our integrated air and ground network increased by approximately $110 million. These increases were partially offset by a decrease of approximately $60 million in pickup and delivery costs and a decrease in package sortation costs of approximately $20 million. These changes were primarily driven by:

•An increase in compensation and benefits expense which was driven by increased stops associated with insourcing the delivery of our Ground Saver product and the impact of wage rate increases for our union workforce.

•A reduction in purchased transportation expense driven by insourcing the delivery of our Ground Saver product.

•A reduction in expense due to the impact of one less operating day, average daily volume decrease of 3.5% and our Network Reconfiguration and Efficiency Reimagined initiatives.

Our non-GAAP adjusted operating expenses exclude the impact of transformation strategy costs which were $32 and $9 million within the U.S. Domestic Package segment in the first quarter of 2025 and 2024, respectively. Transformation strategy costs reflected within the U.S. Domestic Package segment during both periods were related to our Fit to Serve and Transformation 2.0 programs. The first quarter of 2025 also reflects transformation strategy costs related to our Network Reconfiguration and Efficiency Reimagined programs. Within these programs, we incurred compensation and benefits costs, as well as fees paid to outside professional service providers. See Supplemental Information - Items Affecting Comparability for additional discussion of transformation strategy costs excluded from our non-GAAP financial measures.

Cost per piece and non-GAAP adjusted cost per piece both increased 3.7% in the 2025 period. The increase in cost per piece was primarily driven by lower average daily volume, due primarily to the planned volume reductions from our largest customer as discussed above, which were not fully offset by the benefits of our cost saving initiatives. We anticipate cost per piece will show year-over-year growth in the second quarter.

As a result of the factors described above, operating profit increased $146 million, with operating margin increasing 100 basis points to 6.8%. Non-GAAP adjusted operating profit increased $164 million, with non-GAAP adjusted operating margin increasing 110 basis points to 7.0%. Non-GAAP adjusted operating profit excludes the impact of operating expense adjustments discussed above.