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. There were no significant changes to our allocation methodologies in the second quarter of 2025.

As a normal part of managing our air network, we routinely idle aircraft and engines temporarily for maintenance or to adjust network capacity. As of June 30, 2025, we had five 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 the second half of 2025. During the second quarter of 2025, we retired two fully depreciated MD-11s from operational service. We continue to evaluate possible retirements within our fleet and expect to retire one fully depreciated MD-11 from operational service in the second half of 2025.

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 $1.2 billion of our consolidated goodwill balance of $4.8 billion is represented by our Global Freight Forwarding, Roadie and Global Logistics and Distribution reporting units which, based on our July 1, 2024 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 higher than our expectations due to increases in purchased transportation rates, resulting from the expiration of a contract with our primary vendor. These cost increases began to dissipate in the second quarter of 2025 as we started utilizing alternative vendors. In the second quarter of 2025, we also took action to address the revenue quality in this business, and experienced improvements therein. 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 half of 2025, is now reported as part of our Healthcare Logistics and Distribution 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 June 30, 2025, challenging macroeconomic and uncertain geopolitical conditions, changes in global trade policy, 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.

U.S. Domestic Package

Revenue

The change in revenue was due to the following:

Comparative results were impacted by one less operating day in the first half of 2025. The growth in rates and product mix shown above includes the growth we experienced in our air cargo product during both the second quarter and the year-to-date periods in 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.

Volume

Average daily volume decreased for both the quarter and year-to-date periods, driven by our strategic execution of planned volume declines from our largest customer and decreases in our Ground Saver product as a result of our pricing actions on certain e-commerce volume, as well as macro dynamics on market demand. As a result, residential and commercial volume decreased for both the quarter and year-to-date periods. Business-to-business volume decreased 2.3% in the quarter (down 0.5% year to date), primarily driven by demand softness within the manufacturing and retail sectors partially offset by continued volume growth from SMBs who leverage our Digital Access Program and growth in returns. Business-to-consumer volume decreased 10.9% in the quarter (down 9.0% year to date), as a result of the factors discussed above, with declines from large customers, partially offset by continued growth in SMB from our Digital Access Program.

Within our Air products, average daily volume decreased 11.6% in the quarter (down 10.6% year to date), 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 6.6% for the quarter (down 4.6% year to date) driven by residential volume decreases of 10.0% for the quarter (down 7.9% year to date) which were primarily due to pricing actions we took, as described above.

Revenue Per Piece

Revenue per piece increased 5.5% for the quarter (up 5.0% year to date) due to favorable trends in customer and product mix as a result of the pricing actions discussed above. Package characteristics and fuel surcharges also contributed to the increase in revenue per piece.

Revenue per piece from both our Air and Ground products increased for both the quarter and year-to-date periods. In December 2024, we implemented an average 5.9% net increase in base and accessorial rates for both our Air and Ground products.

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 were flat for both the quarter and year-to-date periods as a result of the decline in volume, and the following:

•Ground and rail transportation decreased $406 million for the quarter (down $537 million year to date) driven by the insourcing of our Ground Saver product.

•Compensation and Benefits for our Air and Ground products increased $222 million for the quarter (up $341 million year to date) primarily driven by increased stops associated with the insourcing of our Ground Saver product and the impact of health and welfare and wage rate increases for our union workforce. This was partially offset by a decrease in management compensation cost due to a reduction in incentive compensation expense.

•Air cargo expense increased $180 million for the quarter (up $258 million year to date) as we fully onboarded our contract with the USPS during the fourth quarter of 2024.

Our non-GAAP adjusted operating expenses exclude the impact of asset impairment charges of $5 million in the 2024 year-to-date period as well as transformation strategy costs of $66 and $8 million within the U.S. Domestic Package segment in the second quarters of 2025 and 2024, respectively and $98 and $17 million in the 2025 and 2024 year-to-date periods, respectively. Transformation strategy costs reflected within the U.S. Domestic Package segment during the 2025 and 2024 periods relate to our Fit to Serve and Transformation 2.0 programs. These costs in the 2025 periods also include 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 increased 6.1% during the second quarter of 2025 (up 4.9% year to date). Non-GAAP adjusted cost per piece increased 5.6% during the second quarter of 2025 (up 4.6% year to date). The increase in cost per piece was primarily driven by increased compensation and benefits costs from Ground Saver volume in addition to lower average daily volume, due primarily to the strategic execution of planned volume declines from our largest customer as discussed above, which were not fully offset by the benefits of our cost saving initiatives.

As a result of the factors described above, operating profit decreased $72 million for the quarter (up $74 million year to date), with operating margin decreasing 50 basis points to 6.5% for the quarter (up 20 basis points to 6.6% year to date). Non-GAAP adjusted operating profit decreased $14 million for the quarter (up $150 million year to date), with non-GAAP adjusted operating margin remaining unchanged at 7.0% for the quarter (up 50 basis points to 7.0% year to date). Non-GAAP adjusted operating profit excludes the impact of operating expense adjustments discussed above.