United States

Securities and Exchange Commission

Washington, D.C. 20549

_____________________________________ 

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number 001-15451

_____________________________________ 

United Parcel Service, Inc.

(Exact name of registrant as specified in its charter)

Delaware			58-2480149
(State or Other Jurisdiction of Incorporation or Organization)			(IRS Employer Identification No.)
55 Glenlake Parkway N.E. ,	Atlanta,	Georgia	30328
(Address of Principal Executive Offices)			(Zip Code)

(404) 828-6000

(Registrant’s telephone number, including area code)

____________________ 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Class B common stock, par value $0.01 per share	UPS	New York Stock Exchange
0.375% Senior Notes due 2023	UPS23A	New York Stock Exchange
1.625% Senior Notes due 2025	UPS25	New York Stock Exchange
1% Senior Notes due 2028	UPS28	New York Stock Exchange
1.500% Senior Notes due 2032	UPS32	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐   No  ☑

There were 139,983,977 Class A shares, and 729,158,173 Class B shares, with a par value of $0.01 per share, outstanding at October 24, 2021.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
	Cautionary Statement About Forward-Looking Statements	1
Item 1.	Financial Statements	2
	Consolidated Balance Sheets	2
	Statements of Consolidated Income	3
	Statements of Consolidated Comprehensive Income (Loss)	3
	Statements of Consolidated Cash Flows	4
	Notes to Unaudited, Consolidated Financial Statements	5
	Note 1—Basis of Presentation and Accounting Policies	5
	Note 2—Recent Accounting Pronouncements	6
	Note 3—Revenue Recognition	7
	Note 4—Stock-Based Compensation	10
	Note 5—Cash and Investments	12
	Note 6—Assets Held for Sale	15
	Note 7—Property, Plant and Equipment	16
	Note 8—Employee Benefit Plans	17
	Note 9—Goodwill and Intangible Assets	20
	Note 10—Debt and Financing Arrangements	21
	Note 11—Leases	24
	Note 12—Legal Proceedings and Contingencies	28
	Note 13—Shareowners’ Equity	29
	Note 14—Segment Information	35
	Note 15—Earnings Per Share	36
	Note 16—Derivative Instruments and Risk Management	37
	Note 17—Income Taxes	43
	Note 18—Transformation Strategy Costs	44
	Note 19—Subsequent Events	45
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
	Overview	46
	Supplemental Information - Items Affecting Comparability	48
	Results of Operations - Segment Review	50
	U.S. Domestic Package Operations	51
	International Package Operations	54
	Supply Chain Solutions Operations	57
	Consolidated Operating Expenses	59
	Other Income and (Expense)	62
	Income Tax Expense	63
	Liquidity and Capital Resources	64
	Cash Flows From Operating Activities	64
	Cash Flows From Investing Activities	66
	Cash Flows From Financing Activities	67
	Sources of Credit	68
	Contractual Commitments	68
	Guarantees and Other Off-Balance Sheet Arrangements	68
	Legal Proceedings and Contingencies	68
	Collective Bargaining Agreements	68
	Recent Accounting Pronouncements	69
	Rate Adjustments	70
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	71
Item 4.	Controls and Procedures	72
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 6.	Exhibits	75

PART I. FINANCIAL INFORMATION

Cautionary Statement About Forward-Looking Statements

This report, our Annual Report on Form 10-K for the year ended December 31, 2020 and our other filings with the Securities and Exchange Commission contain and in the future may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than those of current or historical fact, and all statements accompanied by terms such as “will,” “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan” and similar terms, are intended to be forward-looking statements. Forward-looking statements are made subject to the safe harbor provisions of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

From time to time, we also include written or oral forward-looking statements in other publicly disclosed materials. Such statements may relate to our intent, belief, forecasts of, or current expectations about our strategic direction, prospects, future results, or future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any forward-looking statements because such statements speak only as of the date when made and the future, by its very nature, cannot be predicted with certainty.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties, include, but are not limited to: continued uncertainties related to the impact of the COVID-19 pandemic on our business and operations, financial performance and liquidity, our customers and suppliers, and on the global economy; changes in general economic conditions, in the U.S. or internationally; significant competition on a local, regional, national and international basis; changes in our relationships with our significant customers; changes in the regulatory environment in the U.S. or internationally; increased or more complex physical or data security requirements; legal, regulatory or market responses to global climate change; results of negotiations and ratifications of labor contracts; strikes, work stoppages or slowdowns by our employees; the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; changes in exchange rates or interest rates; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; our ability to maintain our brand image; our ability to attract and retain qualified employees; breaches in data security; disruptions to the Internet or our technology infrastructure; interruptions in or impacts on our business from natural or man-made events or disasters including terrorist attacks, epidemics or pandemics; our ability to accurately forecast our future capital investment needs; exposure to changing economic, political and social developments in international and emerging markets; changes in business strategy, government regulations, or economic or market conditions that may result in impairment of our assets; increases in our expenses or funding obligations relating to employee health, retiree health and/or pension benefits; potential additional U.S. or international tax liabilities; potential claims or litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters; our ability to realize the anticipated benefits from acquisitions, dispositions, joint ventures or strategic alliances; our ability to realize the anticipated benefits from our transformation initiatives; cyclical and seasonal fluctuations in our operating results; our ability to manage insurance and claims expenses; and other risks discussed in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2020 and subsequently filed reports. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements, except as required by law.

1

Item 1. Financial Statements

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2021 (unaudited) and December 31, 2020 (in millions)

	September 30, 2021		December 31, 2020
ASSETS
Current Assets:
Cash and cash equivalents	$	10,212	$	5,910
Marketable securities	348		406
Accounts receivable	10,602		10,888
Less: Allowance for credit losses	(128)		(138)
Accounts receivable, net	10,474		10,750
Assets held for sale	—		1,197
Other current assets	1,809		1,953
Total Current Assets	22,843		20,216
Property, Plant and Equipment, Net	32,859		32,254
Operating Lease Right-Of-Use Assets	3,460		3,073
Goodwill	3,332		3,367
Intangible Assets, Net	2,224		2,274
Investments and Restricted Cash	24		25
Deferred Income Tax Assets	181		527
Other Non-Current Assets	816		672
Total Assets	$	65,739	$	62,408
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt, commercial paper and finance leases	$	1,268	$	2,623
Current maturities of operating leases	552		560
Accounts payable	6,445		6,455
Accrued wages and withholdings	3,805		3,569
Self-insurance reserves	1,093		1,085
Accrued group welfare and retirement plan contributions	957		927
Liabilities to be disposed of	—		347
Other current liabilities	1,352		1,450
Total Current Liabilities	15,472		17,016
Long-Term Debt and Finance Leases	20,838		22,031
Non-Current Operating Leases	2,938		2,540
Pension and Postretirement Benefit Obligations	7,672		15,817
Deferred Income Tax Liabilities	2,775		488
Other Non-Current Liabilities	3,987		3,847
Shareowners’ Equity:
Class A common stock (141 and 147 shares issued in 2021 and 2020, respectively)	2		2
Class B common stock (728 and 718 shares issued in 2021 and 2020, respectively)	7		7
Additional paid-in capital	1,088		865
Retained earnings	13,973		6,896
Accumulated other comprehensive loss	(3,029)		(7,113)
Deferred compensation obligations	16		20
Less: Treasury stock (0.3 shares in 2021 and 0.4 shares in 2020)	(16)		(20)
Total Equity for Controlling Interests	12,041		657
Noncontrolling interests	16		12
Total Shareowners’ Equity	12,057		669
Total Liabilities and Shareowners’ Equity	$	65,739	$	62,408

See notes to unaudited, consolidated financial statements.

2

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(In millions, except per share amounts)

(unaudited)

 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	23,184	$	21,238	$	69,516	$	59,732
Operating Expenses:
Compensation and benefits	11,148		11,077		33,958		32,006
Repairs and maintenance	619		576		1,837		1,693
Depreciation and amortization	738		677		2,199		1,986
Purchased transportation	4,638		3,937		13,327		10,584
Fuel	950		618		2,672		1,878
Other occupancy	384		376		1,252		1,114
Other expenses	1,811		1,614		5,352		4,824
Total Operating Expenses	20,288		18,875		60,597		54,085
Operating Profit	2,896		2,363		8,919		5,647
Other Income and (Expense):
Investment income and other	274		338		4,235		1,011
Interest expense	(177)		(176)		(521)		(526)
Total Other Income and (Expense)	97		162		3,714		485
Income Before Income Taxes	2,993		2,525		12,633		6,132
Income Tax Expense	664		568		2,836		1,442
Net Income	$	2,329	$	1,957	$	9,797	$	4,690
Basic Earnings Per Share	$	2.66	$	2.25	$	11.21	$	5.42
Diluted Earnings Per Share	$	2.65	$	2.24	$	11.16	$	5.39

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(In millions)

(unaudited)

 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net Income	$	2,329	$	1,957	$	9,797	$	4,690
Change in foreign currency translation adjustment, net of tax	(106)		65		(140)		(66)
Change in unrealized gain (loss) on marketable securities, net of tax	—		(2)		(5)		3
Change in unrealized gain (loss) on cash flow hedges, net of tax	112		(195)		180		(92)
Change in unrecognized pension and postretirement benefit costs, net of tax	29		43		4,049		130
Comprehensive Income (Loss)	$	2,364	$	1,868	$	13,881	$	4,665

See notes to unaudited, consolidated financial statements.

3

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

(unaudited)

	Nine Months Ended September 30,
	2021		2020
Cash Flows From Operating Activities:
Net income	$	9,797	$	4,690
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	2,199		1,986
Pension and postretirement benefit (income) expense	(2,656)		481
Pension and postretirement benefit contributions	(331)		(1,307)
Self-insurance reserves	122		388
Deferred tax (benefit) expense	1,271		566
Stock compensation expense	700		508
Other (gains) losses	33		164
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	(21)		352
Other assets	256		391
Accounts payable	20		(450)
Accrued wages and withholdings	306		1,330
Other liabilities	65		120
Other operating activities	—		64
Net cash from operating activities	11,761		9,283
Cash Flows From Investing Activities:
Capital expenditures	(2,570)		(3,219)
Proceeds from disposal of businesses, property, plant and equipment	870		10
Purchases of marketable securities	(197)		(202)
Sales and maturities of marketable securities	257		309
Net change in finance receivables	28		24
Cash paid for business acquisitions, net of cash and cash equivalents acquired	(12)		(13)
Other investing activities	24		(15)
Net cash used in investing activities	(1,600)		(3,106)
Cash Flows From Financing Activities:
Net change in short-term debt	—		(1,924)
Proceeds from long-term borrowings	—		5,003
Repayments of long-term borrowings	(2,613)		(2,746)
Purchases of common stock	(500)		(224)
Issuances of common stock	196		214
Dividends	(2,578)		(2,528)
Other financing activities	(361)		(351)
Net cash used in financing activities	(5,856)		(2,556)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(3)		(19)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	4,302		3,602
Cash, Cash Equivalents and Restricted Cash:
Beginning of period	5,910		5,238
End of period	$	10,212	$	8,840

See notes to unaudited, consolidated financial statements.

4

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Principles of Consolidation

The accompanying interim unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2021, our results of operations for the three and nine months ended September 30, 2021 and 2020 and our cash flows for the nine months ended September 30, 2021 and 2020. The results reported in these interim unaudited, consolidated financial statements should not be regarded as indicative of results that may be expected for any other period or the entire year. The interim unaudited, consolidated financial statements should be read in conjunction with the audited, consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of September 30, 2021 and December 31, 2020. The fair values of our investment securities are disclosed in note 5, our recognized multiemployer pension withdrawal liabilities in note 8, our short- and long-term debt in note 10 and our derivative instruments in note 16. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.

Use of Estimates

The preparation of the accompanying interim unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of these financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

Although our estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. In particular, a number of estimates have been and will continue to be affected by the ongoing COVID-19 pandemic. The severity, magnitude and duration of the pandemic, and the resulting economic consequences, remain uncertain, rapidly changing and difficult to predict. As a result, our accounting estimates and assumptions may change significantly over time.

For interim unaudited, consolidated financial statement purposes, we provide for accruals under our various company-sponsored employee benefit plans for each three month period based on one quarter of the estimated annual expense.

5

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848), to temporarily ease the potential burden in accounting for reference rate reform. The standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The guidance was effective upon issuance and generally can be applied through December 31, 2022. While there has been no material impact so far to our financial position, results of operations or cash flows from reference rate reform, we continue to monitor our contracts and transactions for potential application of this ASU.

For accounting standards adopted in the period ended September 30, 2020, refer to note 1 to our audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020. Other accounting pronouncements adopted during the periods covered by the unaudited, consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.

Accounting Standards Issued But Not Yet Effective

Accounting pronouncements issued before, but not effective until after, September 30, 2021, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

6

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. REVENUE RECOGNITION

Revenue Recognition

Substantially all of our revenues are from contracts associated with the pickup, transportation and delivery of packages and freight (“transportation services”), whether carried out or arranged by UPS, either domestically or internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services to customers, both domestically and internationally, through our global network of company-owned and leased distribution centers and field stocking locations.

Disaggregation of Revenue

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue:
Next Day Air	$	2,415	$	2,098	$	7,202	$	6,137
Deferred	1,304		1,378		3,877		3,873
Ground	10,489		9,749		31,541		27,745
U.S. Domestic Package	14,208		13,225		42,620		37,755
Domestic	852		776		2,716		2,183
Export	3,641		3,153		10,808		8,538
Cargo & Other	227		158		620		454
International Package	4,720		4,087		14,144		11,175
Forwarding	2,625		1,753		7,006		4,897
Logistics	1,158		1,040		3,424		2,862
Freight	—		870		1,064		2,360
Other	473		263		1,258		683
Supply Chain Solutions	4,256		3,926		12,752		10,802
Consolidated revenue	$	23,184	$	21,238	$	69,516	$	59,732

We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis of revenue recognition in accordance with GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as a single contract, and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Within most of our contracts, the customer contracts with us to provide distinct services, such as transportation services. The vast majority of our contracts with customers for transportation services include only one performance obligation; the transportation services themselves. However, if a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.

7

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In certain business units, such as Logistics, we sell customized, customer-specific solutions in which we integrate a complex set of tasks and components into a single capability (even if that single capability results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. In these cases, we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

Satisfaction of Performance Obligations

We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to another. Further, if we were unable to complete delivery to the final location, another entity would not need to reperform the transportation service already performed.

As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost measure of progress for our package delivery contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including ancillary or accessorial fees and reductions for estimated customer incentives, are recorded proportionally as costs are incurred. Costs to fulfill include labor and other direct costs and an allocation of indirect costs. For our freight forwarding contracts, an output method of progress based on time-in-transit is utilized as the timing of costs incurred does not best depict the transfer of control to the customer. In our Logistics business, we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such, we recognize revenue in the amount to which we have a right to invoice the customer.

Variable Consideration

It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the transaction price. These variable amounts are generally dependent upon achievement of certain incentive tiers or performance metrics. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts of revenue, which may be reduced by incentives or other contract provisions, in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of anticipated customer spending and all information (historical, current and forecasted) that is reasonably available to us.

Contract Modifications

Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct services. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Contract modifications that add additional distinct goods or services are treated as separate contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services. These contract modifications are accounted for prospectively as the remaining performance obligations are distinct.

Payment Terms

Under the typical payment terms of our customer contracts, the customer pays at periodic intervals, which are generally seven days within our U.S. Domestic Package business, for shipments included on invoices received. Invoices are generated each week on the week-ending day, which is Saturday for the majority of our U.S. Domestic Package business, but could be another day depending on the business unit or the specific agreement with the customer. It is not customary business practice to extend payment terms past 90 days, and as such, we do not have a practice of including a significant financing component within our contracts with customers.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principal vs. Agent Considerations

In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. GAAP requires us to evaluate, using a control model, whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent). Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. Revenue and the associated purchased transportation costs are both reported on a gross basis within our statements of consolidated income.

Accounts Receivable, Net

Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimate of the current expected losses inherent in our accounts receivable at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, forward looking indicators, trends in customer payment frequency and judgments about the probable effects of relevant observable data, including present and future economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk.

In the third quarter of 2021, we increased our allowance for expected credit losses by $5 million (a decrease of $10 million year to date) based upon current forecasts that reflect changes in the economic outlook. Our allowance for credit losses as of September 30, 2021 and December 31, 2020 was $128 and $138 million, respectively. Amounts for credit losses charged to expense, before recoveries, during the three months ended September 30, 2021 and 2020 were $48 and $51 million, respectively, and for the nine months ended September 30, 2021 and 2020, were $128 and $204 million, respectively.

Contract Assets and Liabilities

Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e. packages have been delivered) and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.

Contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance payments and billings in excess of revenue represent payments received from our customers that will be earned over the contract term. Deferred revenue represents the amount of consideration due from customers related to in-transit shipments that has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the advance payment will be earned. We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which typically occurs within a short window after period-end. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.

Contract assets related to in-transit packages were $339 and $279 million as of September 30, 2021 and December 31, 2020, respectively, net of deferred revenue related to in-transit packages of $359 and $279 million as of September 30, 2021 and December 31, 2020, respectively. Contract assets are included within "Other current assets" in the consolidated balance sheets. Short-term contract liabilities related to advance payments from customers were $35 and $21 million as of September 30, 2021 and December 31, 2020, respectively. Short-term contract liabilities are included within "Other current liabilities" in the consolidated balance sheets. Long-term contract liabilities related to advance payments from customers were $26 million as of both September 30, 2021 and December 31, 2020. Long-term contract liabilities are included within "Other Non-Current Liabilities" in the consolidated balance sheets.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. STOCK-BASED COMPENSATION

We issue share-based awards under various incentive compensation plans, including non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units ("RSUs") and restricted performance shares and performance units ("RPUs", collectively with RSUs, "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.

Our primary equity compensation programs are the UPS Management Incentive Award program (the "MIP"), the UPS Long-Term Incentive Performance Award program (the "LTIP") and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to our primary employee defined contribution savings plan are made in shares of UPS class A common stock.

Management Incentive Award Program ("MIP")

RPUs issued under the MIP vest one year following the grant date based on continued employment with the Company (except in the case of death, disability or retirement, in which case immediate vesting occurs). The grant value is expensed on a straight-line basis (less estimated forfeitures) over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs).

Based on the date of Compensation Committee approval of the 2020 MIP award, we determined the award measurement dates to be February 10, 2021 (for U.S.-based employees and executive management) and March 22, 2021 (for international employees). The RPUs issued under the MIP were valued for stock compensation expense purposes using the closing New York Stock Exchange ("NYSE") prices of $165.66 and $161.06 on those dates.

Long-Term Incentive Performance Award Program ("LTIP")

RPUs issued under the LTIP vest at the end of a three-year performance period, assuming continued employment with the Company (except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis). The final number of RPUs earned is based on achievement of the performance targets established on the grant date.

For LTIP awards with a performance period ending December 31, 2021, the performance targets are equally weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareholder return ("RTSR") relative to a peer group of companies. For the two-thirds of the award related to ROIC and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these RPUs (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award is valued using a Monte Carlo model. We recognize the grant date fair value of this portion of the award (less estimated forfeitures) as compensation expense ratably over the vesting period.

For LTIP awards with a performance period ending in 2022 or later, the performance targets are equally weighted between adjusted earnings per share and adjusted cumulative free cash flow. The final number of RPUs earned will then be subject to adjustment based on RTSR relative to the Standard & Poors 500 Index ("S&P 500"). We determine the grant date fair value of the RPUs using a Monte Carlo model and recognize compensation expense (less estimated forfeitures) ratably over the vesting period, based on the number of awards expected to be earned.

For the 2020 LTIP award, the performance period was divided into two measurement periods. The first measurement period evaluated the achievement of the performance targets for 2020. The second measurement period will evaluate the achievement of the performance targets for the years 2021 and 2022. The performance targets for the second measurement period were approved on March 25, 2021 and the target RPUs awarded were valued at $167.66 on that date.

Based on the date of Compensation Committee approval of the 2021 LTIP award performance targets, we determined March 25, 2021 to be the award measurement date and the target RPUs awarded were valued at $166.52.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The weighted-average assumptions used and the weighted-average fair values of the LTIP awards granted in 2021 and 2020 are as follows:

	2021			2020
Risk-free interest rate	0.19		%	0.15		%
Expected volatility	30.70		%	27.53		%
Weighted-average fair value of RPUs granted	$	167.31		$	92.77
Share payout	102.40		%	101.00		%

There is no expected dividend yield as units earn dividend equivalents.

Non-Qualified Stock Options

We grant non-qualified stock options to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards vest over a five-year period with approximately 20% of the award vesting at each anniversary of the grant date (except in the case of death, disability or retirement, in which case immediate vesting occurs). The option grants expire 10 years after the date of the grant. In the first quarter of 2021, we granted 0.2 million stock options at a grant price of $165.66, which was the NYSE closing price on February 10, 2021.

The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the weighted-average fair values of options granted in 2021 and 2020 are as follows:

	2021			2020
Expected dividend yield	3.31		%	3.51		%
Risk-free interest rate	0.84		%	1.26		%
Expected life (in years)	7.5			7.5
Expected volatility	23.15		%	19.25		%
Weighted-average fair value of options granted	$	23.71		$	11.74

Pre-tax compensation expense for share-based awards recognized in Compensation and benefits on the statements of consolidated income for the three months ended September 30, 2021 and 2020 was $179 and $140 million, respectively, and for the nine months ended September 30, 2021 and 2020 was $700 and $508 million, respectively.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. CASH AND INVESTMENTS

The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2021 and December 31, 2020 (in millions):

	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
September 30, 2021:
Current trading marketable securities:
Equity securities	$	2	$	—	$	—	$	2
Total trading marketable securities	2		—		—		2
Current available-for-sale securities:
U.S. government and agency debt securities	222		1		—		223
Mortgage and asset-backed debt securities	—		—		—		—
Corporate debt securities	113		2		—		115
U.S. state and local municipal debt securities	5		—		—		5
Non-U.S. government debt securities	3		—		—		3
Total available-for-sale marketable securities	343		3		—		346
Total current marketable securities	$	345	$	3	$	—	$	348
	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
December 31, 2020:
Current trading marketable securities:
Equity securities	$	2	$	—	$	—	$	2
Total trading marketable securities	2		—		—		2
Current available-for-sale securities:
U.S. government and agency debt securities	181		3		—		184
Mortgage and asset-backed debt securities	30		1		—		31
Corporate debt securities	174		4		—		178
U.S. state and local municipal debt securities	—		—		—		—
Non-U.S. government debt securities	11		—		—		11
Total available-for-sale marketable securities	396		8		—		404
Total current marketable securities	$	398	$	8	$	—	$	406

Investment Impairments

We have concluded that no material impairment losses existed as of September 30, 2021. In making this determination, we considered the financial condition and prospects of each issuer, the magnitude of the losses compared with the cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Maturity Information

The amortized cost and estimated fair value of marketable securities as of September 30, 2021 by contractual maturity are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations with or without prepayment penalties.

	Cost		Estimated Fair Value
Due in one year or less	$	35	$	35
Due after one year through three years	306		309
Due after three years through five years	2		2
Due after five years	—		—
	343		346
Equity securities	2		2
	$	345	$	348

Non-Current Investments and Restricted Cash

We held a $23 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan as of both September 30, 2021 and December 31, 2020. The change in investment fair value is recognized in Investment income and other in the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets of $1 million and $2 million as of September 30, 2021 and December 31, 2020, respectively. These amounts are classified as Investments and Restricted Cash in the consolidated balance sheets.

A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows is shown below (in millions):

	September 30, 2021		December 31, 2020		September 30, 2020
Cash and cash equivalents	$	10,212	$	5,910	$	8,839
Restricted cash	—		—		1
Total cash, cash equivalents and restricted cash	$	10,212