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 12 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. 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 first quarter of 2026.

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 March 31, 2026, we had two aircraft temporarily idled for an average period of approximately seven 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 operational service during the fourth quarter of 2026. Following the permanent grounding and retirement of our MD‑11 fleet in the fourth quarter of 2025, we experienced increased third-party lease expense to address capacity constraints. During the first quarter of 2026, we took delivery of three Boeing 767-300 aircraft, which were accounted for as finance leases, and began to reduce the associated third-party expense.

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 fair value of a reporting unit is less than its carrying amount. Testing goodwill for impairment requires that we make a number of significant assumptions, including assumptions related to projections of future revenues, costs, capital expenditures, working capital, our cost of capital, long-term growth rates, market comparables and discount rates. We are also required to make assumptions relating to our overall business and operating strategy, and the regulatory and market environment.

For each of our reporting units, we continue to monitor the impact of macroeconomic conditions and business performance on our estimates of fair value. During the three months ended March 31, 2026, none of our reporting units had indications that an impairment was more likely than not. As of our July 1, 2025 testing date, approximately $877 million and $738 million of our $4.8 billion consolidated goodwill balance was represented by our Global Freight Forwarding ("GFF") and Healthcare Logistics and Distribution ("HLD") reporting units, respectively, included in SCS. Based on our most recent annual impairment evaluation, both reporting units exhibited a limited excess of fair value above carrying value and reflect a greater risk of an impairment occurring in future periods. An interim quantitative test for goodwill impairment performed in the fourth quarter of 2025 on the GFF reporting unit did not result in an impairment. For further discussion see note 7 to the audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 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. These factors or a combination thereof could result in a non-cash 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:

The growth in rates and product mix shown above includes contributions from our air cargo product, which is measured by dimensional weight rather than on a per piece basis and therefore does not impact the volume and revenue per piece discussions below.

Volume

Average daily volume decreased, driven by our continued execution of planned volume declines from our largest customer and deliberate actions to remove certain lower-yielding e-commerce volume, reflecting our ongoing revenue quality actions and challenging market conditions. These overall declines were partially offset by continued growth from SMBs who leveraged our Digital Access Program ("DAP").

Residential ("business-to-consumer") and commercial ("business-to-business") volume declined. Business-to-consumer volume decreased 10.4%, due to the actions discussed above. Business-to-business volume decreased 5.1%, primarily driven by the retail sector.

Within our Air products, average daily volume decreased 9.0%, driven by the continued execution of planned volume declines from our largest customer, partially offset by growth in the healthcare sector.

Ground average daily volume decreased 7.9%, driven primarily by the business-to-consumer volume reductions discussed above.

Revenue Per Piece

Revenue per piece increased 6.5%, driven by an average 5.9% net increase in base and accessorial rates implemented throughout 2025, favorable customer and product mix and higher fuel surcharges.

Fuel Surcharges

We apply a fuel surcharge on our domestic air and ground services that adjusts weekly and is intended to mitigate the impact of fuel price volatility. 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. During the first quarter of 2026, the conflict in the Middle East resulted in higher fuel costs and higher fuel surcharge rates. Fuel surcharge revenue increased $146 million for the quarter primarily as a result of higher fuel surcharge rates, partially offset by the impact of lower volume.

Operating expenses increased, primarily due to higher facility and transportation and other expenses, partially offset by cost reductions from execution of our Network Reconfiguration and Efficiency Reimagined initiatives primarily within compensation and benefits.

The change in operating expenses included the following:

•Facility and transportation related costs increased $341 million, primarily due to higher fees paid to the USPS associated with outsourcing our Ground Saver product, increased expense related to routine repairs and maintenance and higher weather-related costs.

•Other expenses increased $180 million, driven primarily by higher third-party lease expense to address capacity constraints resulting from fourth quarter 2025 aircraft retirements, partially offset by gains on sales of properties.

•Compensation and benefits expense decreased $392 million, driven by reductions in headcount as we executed our Network Reconfiguration and Efficiency Reimagined initiatives, fewer labor hours resulting from fewer stops associated with the outsourcing of our Ground Saver product and lower volume as described above. Lower pension and health and welfare costs within our U.S. union workforce also contributed to the decrease, partially offset by increases in transition costs and excess operational staffing associated with outsourcing our Ground Saver product, increases in contractual wage rates and higher workers' compensation expense due to less favorable development in prior year claims.

Our non-GAAP adjusted operating expenses exclude the impact of transformation strategy costs of $50 and $32 million in the first quarters of 2026 and 2025, respectively. Transformation strategy costs during both periods related to our Network Reconfiguration and Efficiency Reimagined programs. Costs in the 2025 period also included costs related to our Transformation 2.0 and Fit to Serve programs. These primarily consisted of 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 9.7% during the first quarter of 2026 primarily driven by higher fees paid to the USPS and transition costs and excess operational staffing associated with outsourcing our Ground Saver product to the USPS, higher third‑party lease expense to address capacity constraints resulting from aircraft retirements, higher weather-related costs, contractual wage rate increases and lower average daily volume. Non-GAAP adjusted cost per piece increased 9.5%.

As a result of the factors described above, operating profit decreased $464 million, with operating margin decreasing 320 basis points to 3.6%. Non-GAAP adjusted operating profit decreased $446 million, with non-GAAP adjusted operating margin decreasing 300 basis points to 4.0%.