Table	of	Contents

# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# FOR	ANNUAL	AND	TRANSITION	REPORTS

# PURSUANT	TO	SECTIONS	13	OR	15(d)	OF	THE

SECURITIES	EXCHANGE	ACT	OF	1934

(Mark	One)

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

For	the	fiscal	year	ended	December	31,	2012

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

# United	Parcel	Service,	Inc.

(Exact	Name	of	Registrant	as	Specified	in	Its	Charter)

Delaware

(State	or	Other	Jurisdiction	of

Incorporation	or	Organization)

55	Glenlake	Parkway,	N.E.	Atlanta,	Georgia

(Address	of	Principal	Executive	Offices)

Title	of	Each	Class

(I.R.S.	Employer Identification	No.)

(Zip	Code)

(Registrant's	telephone	number,	including	area	code)

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

Name	of	Each	Exchange	on	Which	Registered

Class	B	common	stock,	par	value	$.01	per	share New	York	Stock	Exchange

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

Class	A	common	stock,	par	value	$.01	per	share

(Title	of	Class)

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.				Yes		x				No		¨

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Exchange	Act.				Yes		¨				No		x

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		x				No		¨

Indicate	by	check	mark	whether	the	registrant	has	submitted	electronically	and	posted	on	its	corporate	Web	site,	if	any,	every	Interactive	Data	File	required	to	be	submitted	and	posted	pursuant	to	Rule	405	of	Regulation	S-T	during	the preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	submit	and	post	such	files).				Yes		x				No		¨

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	registrant's	knowledge,	in	definitive	proxy	or	information	statements incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.		x

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	a	non-accelerated	filer	or	a	smaller	reporting	company.	See	definition	of	"accelerated	filer",	"large	accelerated	filer"	and	"smaller	reporting company"	in	Rule	12b-2	of	the	Exchange	Act.	Check	one:

Large	accelerated	filer		x Accelerated	filer		¨ 	 Non-accelerated	filer		¨ Smaller	reporting	company		¨

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

The	aggregate	market	value	of	the	class	B	common	stock	held	by	non-affiliates	of	the	registrant	was	$57,146,565,574	as	of	June	30,	2012.	The	registrant's	class	A	common	stock	is	not	listed	on	a	national	securities	exchange	or	traded	in an	organized	over-the-counter	market,	but	each	share	of	the	registrant's	class	A	common	stock	is	convertible	into	one	share	of	the	registrant's	class	B	common	stock.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	the	registrant's	definitive	proxy	statement	for	its	annual	meeting	of	shareowners	scheduled	for	May	2,	2013	are	incorporated	by	reference	into	Part	III	of	this	report.

# ANNUAL	REPORT	ON	FORM	10-K

# PART	I

|  | PART	I |  |
| :--- | :--- | :--- |
| Item\t1. | Business | 1 |
|  | Overview | 1 |
|  | Business\tStrategy | 2 |
|  | Technology | 3 |
|  | Reporting\tSegments\tand\tProducts\t&\tServices | 4 |
|  | Sustainability | 7 |
|  | Community | 7 |
|  | Reputation | 8 |
|  | Employees | 8 |
|  | Safety | 8 |
|  | Competition | 9 |
|  | Competitive\tStrengths | 9 |
|  | Government\tRegulation | 10 |
|  | Where\tYou\tCan\tFind\tMore\tInformation | 11 |
| Item\t1A. | Risk\tFactors | 12 |
| Item\t1B. | Unresolved\tStaff\tComments | 16 |
| Item\t2. | Properties | 16 |
|  | Operating\tFacilities | 16 |
|  | Fleet | 17 |
| Item\t3. | Legal\tProceedings | 18 |
| Item\t4. | Mine\tSafety\tDisclosures | 18 |
|  | PART\tII |  |
| Item\t5. | Market\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 19 |
|  | Shareowner\tReturn\tPerformance\tGraph | 20 |
| Item\t6. | Selected\tFinancial\tData | 21 |
| Item\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 22 |
|  | Overview | 22 |
|  | Items\tAffecting\tComparability | 22 |
|  | U.S.\tDomestic\tPackage\tOperations | 24 |
|  | International\tPackage\tOperations | 28 |
|  | Supply\tChain\t&\tFreight\tOperations | 31 |
|  | Operating\tExpenses | 34 |
|  | Investment\tIncome\tand\tInterest\tExpense | 37 |
|  | Income\tTax\tExpense | 38 |
|  | Liquidity\tand\tCapital\tResources | 39 |
|  | New\tAccounting\tPronouncements | 48 |
|  | Critical\tAccounting\tPolicies\tand\tEstimates | 49 |
| Item\t7A. | Quantitative\tand\tQualitative\tDisclosures\tabout\tMarket\tRisk | 53 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 55 |
| Item\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 105 |
| Item\t9A. | Controls\tand\tProcedures | 105 |
| Item\t9B. | Other\tInformation | 107 |
|  | PART\tIII |  |
| Item\t10. | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 107 |
| Item\t11. | Executive\tCompensation | 108 |
| Item\t12. | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 108 |
| Item\t13. | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 108 |
| Item\t14. | Principal\tAccounting\tFees\tand\tServices | 108 |
|  | PART\tIV |  |
| Item\t15. | Exhibits\tand\tFinancial\tStatement\tSchedules | 109 |

# Cautionary	Statement	About	Forward-Looking	Statements

This	report	includes	certain	"forward-looking	statements"	within	the	meaning	of	the	Private	Securities	Litigation	Reform	Act	of	1995.	Statements	in	the	future tense,	and	all	statements	accompanied	by	terms	such	as	"believe,"	"project,"	"expect,"	"estimate,"	"assume,"	"intend,"	"anticipate,"	"target,"	"plan,"	and	variations thereof	and	similar	terms	are	intended	to	be	forward-looking	statements.	We	intend	that	all	forward-looking	statements	we	make	will	be	subject	to	safe	harbor	protection 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.

Our	disclosure	and	analysis	in	this	report,	in	our	Annual	Report	to	Shareholders	and	in	our	other	filings	with	the	Securities	and	Exchange	Commission	("SEC") contain	forward-looking	statements	regarding	our	intent,	belief	and	current	expectations	about	our	strategic	direction,	prospects	and	future	results.	From	time	to	time,	we also	provide	forward-looking	statements	in	other	materials	we	release	as	well	as	oral	forward-looking	statements.	Such	statements	give	our	current	expectations	or forecasts	of	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	such	forward-looking	statements	because	such	statements	speak	only	as	of	the	date	when made.

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	are	described	in	Part	I,	"Item	1A.	Risk	Factors"	and	may	also	be	described	from	time	to	time	in our	future	reports	filed	with	the	SEC.	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.

# Item	1. Business

# Overview

United	Parcel	Service,	Inc.	("UPS")	was	founded	in	1907	as	a	private	messenger	and	delivery	service	in	Seattle,	Washington.	Today,	UPS	is	the	world's	largest package	delivery	company,	a	leader	in	the	U.S.	less-than-truckload	industry	and	the	premier	provider	of	global	supply	chain	management	solutions.	We	deliver	packages each	business	day	for	1.1	million	shipping	customers	to	7.7	million	consignees	in	over	220	countries	and	territories.	In	2012,	we	delivered	an	average	of	16.3	million pieces	per	day	worldwide,	or	a	total	of	4.1	billion	packages.	Total	revenue	in	2012	was	$54.1	billion.

We	are	a	global	leader	in	logistics,	and	we	create	value	for	our	customers	through	solutions	that	lower	costs,	improve	service	and	provide	highly	customizable supply	chain	control	and	visibility.	Customers	are	attracted	to	our	broad	set	of	services	that	are	delivered	as	promised	through	our	integrated	ground,	air	and	ocean global	network.

Our	services	and	integrated	network	allow	shippers	to	simplify	their	supply	chains	by	using	fewer	carriers,	and	to	adapt	their	transportation	requirements	and expenditures	as	their	businesses	evolve.	Across	our	service	portfolio,	we	also	provide	control	and	visibility	of	customers'	inventories	and	supply	chains	via	our	UPS technology	platform.	The	information	flow	from	UPS	technology	drives	improvements	for	our	customers,	as	well	as	for	UPS,	in	reliability,	flexibility,	productivity	and efficiency.

Particularly	over	the	last	decade,	UPS	has	significantly	expanded	the	scope	of	our	capabilities	to	include	more	than	package	delivery.	Our	logistics	and distribution	capabilities	give	companies	the	power	to	easily	expand	their	businesses	to	new	markets	around	the	world.	By	leveraging	our	international	infrastructure, UPS	enables	our	customers	to	bridge	time	zones,	cultures,	distances	and	languages	to	keep	the	entire	supply	chain	moving	smoothly.

We	serve	the	global	market	for	logistics	services,	which	include	transportation,	distribution,	forwarding,	ground,	ocean	and	air	freight,	brokerage	and	financing. Our	technology	seamlessly	binds	our	service	portfolio.	We	have	three	reportable	segments:	U.S.	Domestic	Package,	International	Package	and	Supply	Chain	&	Freight, all	of	which	are	described	below.	For	financial	information	concerning	our	reportable	segments	and	geographic	regions,	refer	to	note	11	of	our	consolidated	financial statements.

# Business	Strategy

Customers	leverage	our	broad	array	of	services;	balanced	global	presence	in	North	America,	Europe,	Asia	and	Latin	America;	reliability;	industry-leading technology;	and	solutions	expertise	for	competitive	advantage	in	markets	where	they	choose	to	compete.	We	prudently	invest	to	expand	our	integrated	global	network and	our	service	portfolio.	Technology	investments	create	user-friendly	shipping,	e-commerce,	logistics	management	and	visibility	tools	for	our	customers,	while supporting	UPS's	ongoing	efforts	to	increase	operational	efficiencies.

Our	service	portfolio	and	investments	are	rewarded	with	among	the	best	returns	on	invested	capital	and	operating	margins	in	the	industry.	We	have	a	long	history of	sound	financial	management.	Our	balance	sheet	reflects	financial	strength	that	few	companies	can	match.	As	of	December	31,	2012,	we	had	a	balance	of	cash	and marketable	securities	of	approximately	$7.924	billion	and	shareowners'	equity	of	$4.733	billion.	Our	Moody's	and	Standard	&	Poor's	short-term	credit	ratings	are	P-1 and	A-1,	respectively,	and	our	Moody's	and	Standard	&	Poor's	long-term	credit	ratings	are	Aa3	and	A+,	respectively.	We	have	a	negative	outlook	from	Standard	& Poor's	and	a	stable	outlook	from	Moody's.	Cash	generation	is	a	significant	strength	of	UPS.	This	gives	us	strong	capacity	to	service	our	obligations	and	allows	for distributions	to	shareowners,	reinvestment	in	our	businesses	and	the	pursuit	of	growth	opportunities.

We	enable	and	are	the	beneficiaries	of	the	following	trends:

# Expansion	of	Global	Trade

Transcontinental	and	trade	across	borders	is	predicted	to	grow	at	rates	that	are	in	excess	of	the	growth	rates	of	U.S.	and	global	domestic	production	for	the foreseeable	future.	As	a	result,	U.S.	and	international	economies	are	becoming	more	inter-connected	and	dependent	on	foreign	trade.

UPS	plays	an	important	role	in	global	trade	and	is	uniquely	positioned	to	take	advantage	of	trade	growth,	wherever	it	occurs.	Our	balanced	global	presence	and productivity	enhancing	technologies	allow	customers	to	easily	expand	to	new	markets.	We	advocate	the	expansion	of	free	trade,	including	the	passage	of	regional	trade pacts	and	the	removal	of	trade	barriers.	Free	trade	is	a	catalyst	for	job	creation,	economic	growth	and	improved	living	standards;	additionally,	it	propels	our	growth.

# Emerging	Market	Growth

As	our	current	and	prospective	customers	look	to	emerging	markets	for	expansion,	we	make	long-term,	measured	investments	in	markets	where	our	customers choose	to	grow.	Our	investments	are	scaled	to	the	local	opportunity.	We	typically	follow	a	pattern	of	entering	a	market	through	the	introduction	of	import	and	export services,	expanding	domestically	with	a	partner	or	alliance,	and	then	ultimately	acquiring	domestic	operations	where	we	see	value	and	return.	China	is	a	prime	example of	this	strategy	as	we	continue	to	clear	hurdles	that	will	enable	us	to	realize	this	vision.	Our	two	key	air	hubs	in	Shanghai	and	Shenzhen	support	market	expansion through	increased	cargo	capacity	and	faster	intra-Asia	transit	times,	while	enabling	our	customers	to	ship	later	in	the	day.	Linkage	between	Asia	and	Europe	is	provided via	flights	between	Hong	Kong	and	our	recently	expanded	air	hub	in	Cologne,	Germany.

Taken	together,	these	two	trends	(expanding	global	trade	and	emerging	market	growth)	underscore	why	our	international	business	is	a	catalyst	for	UPS's	growth.

# Increasing	need	for	segment	expertise	in	the	integrated	carrier	space

We	provide	repeatable,	scalable	sector	solutions	for	our	customers.	We	invest	in	global	capabilities	and	create	value	propositions	for	certain	industries	where	there is	a	fit	between	our	customers'	needs	and	our	offerings.	Segments	where	we	bring	unique	value	propositions	include	health	care,	high-tech,	automotive	&	industrial manufacturing,	retail,	government	and	professional,	and	consumer	services.

The	health	care	industry	faces	complex	challenges,	including	the	continuing	expiration	of	drug	patents	and	the	shifting	landscape	of	regulatory	requirements	and drug	pricing	controls	that	differ	by	country.	To	counter	these	threats,	many	pharmaceutical	companies	have	embarked	on	global	expansion	strategies	that	require infrastructure.	UPS	has	aligned	our	resources	to	serve	these	needs	through	a	well-developed	supply	chain	management	capability	that	is	designed	to	satisfy	regulatory and	compliance	requirements.	Over	the	past	18	months,	we	opened	12	new	dedicated	health	care	facilities	on	four	continents.	We	also	expanded	our	health	care	network in	China,	India,	Australia	and	Brazil	and	are	in	the	process	of	expanding	five	existing	North	American	facilities.	In	total,	we	currently	operate	nearly	6	million	square feet	of	dedicated	health	care	distribution	space	across	an	integrated	network	of	37	facilities.	These	facilities	allow	us	to	provide	reliable,	secure,	cost-effective warehousing	and	distribution	for	pharmaceutical	firms'	supply	chains,	which,	in	turn,	allow	them	to	easily	navigate	across	and	within	borders.

We	also	continue	to	invest	in	health	care	focused	transportation	solutions,	such	as	UPS	Temperature	True.	UPS	Temperature	True	is	an	air	freight	solution specifically	designed	to	safeguard	temperature-sensitive	shipments	using	a	portfolio	of	specialized	containers	with	passive,	semi-active,	or	active	refrigeration.	This service	provides	door-to-door	transportation	of	sensitive	products	in	accordance	with	precise,	measurable	operating	procedures.	In	2012,	UPS	added	400	new	UPS Temperature	True	international	trade	lanes.	We	also	launched	UPS	Temperature	True	Small	Package	to	provide	optimized	packaging	solutions	to	ensure	product integrity	for	customers	with	smaller	format	shipments	of	environmentally-sensitive	products.

We	will	continue	to	expand	our	sector	offerings,	growing	not	only	our	physical	and	market	footprint,	but	also	our	expertise	and	technology	to	support	industry- specific	needs.	Our	growth	strategy	is	to	increase	the	number	of	customers	benefiting	from	these	sector	solutions	and	gain	their	associated	small	package	and	freight transportation.

# Outsourcing

Outsourcing	supply	chain	management	is	becoming	more	prevalent,	as	customers	increasingly	view	professional	management	and	operation	of	their	supply	chains as	a	strategic	advantage.	This	trend	enables	companies	to	focus	on	what	they	do	best.	We	can	meet	our	customers'	needs	for	outsourced	logistics	with	our	global capabilities	in	customized	forwarding,	transportation,	warehousing,	distribution,	delivery	and	post-sales	services.	As	we	move	deeper	into	customers'	supply	chains,	we do	so	with	a	shared	vision	on	how	to	best	serve	those	who	rely	on	our	customers.	We	integrate	our	technology	for	efficiencies,	visibility	and	control	to	ensure	that	we execute	as	promised.

# Retail	e-Commerce	Growth

Throughout	much	of	the	world,	e-commerce	growth	continues	to	outpace	traditional	lines	of	business.	We	continue	to	create	new	services,	supported	by	UPS technology,	that	complement	the	traditional	UPS	premium	home	delivery	service	to	address	the	needs	of	e-commerce	shippers	and	receivers	("consignees").	Our offerings	span	a	broad	spectrum	from	cost-sensitive	solutions	such	as	SurePost,	for	shipments	where	economy	takes	precedence	over	speed,	up	to	feature-rich	solutions, such	as	our	UPS	My	Choice	service	that	provides	consignees	with	revolutionary	visibility	and	control	of	their	inbound	shipments.

With	UPS	My	Choice,	consignees	direct	the	timing	and	location	of	their	deliveries	before	a	delivery	attempt	is	made.	Premium	features	include	online	delivery planners,	detailed	driver	instructions,	alternate	delivery	locations	and	a	two-hour	delivery	window.	Delivery	alerts	come	via	the	channel	chosen	by	the	consignee—email, SMS	text,	etc.	We	strive	to	give	our	customers	that	ship	using	UPS	My	Choice	the	best	delivery	experience	in	the	industry—delivery	on	the	first	attempt,	where	and when	their	customers	want	it.

# Technology

Technology	powers	logistics.	We	bring	industry-leading	UPS	technology	to	our	customers	who,	in	turn,	realize	increased	productivity,	greater	control	of	their supply	chains	and	improved	customer	experience	when	they	integrate	with	our	technology.	Customers	benefit	through	offerings	such	as:

•UPS	Quantum	View,	which	can	speed	up	the	revenue	cycle	(i.e.	faster	transit	times,	coupled	with	confirmation	of	delivery,	allow	shippers	to	collect	accounts receivable	more	quickly),	allow	for	inbound	volume	planning,	manage	third-party	shipping	costs,	automatically	notify	customers	of	incoming	shipments,	and	of course,	track	shipments	and	let	the	customer	react	if	a	specific	shipment	status	changes.

•Flex	Global	View,	which	provides	customs	alerts,	supplier	key	performance	indicators	and	inventory

monitoring.

•UPS	Paperless	Invoice,	which	enables	customers	to	submit	a	commercial	invoice	electronically	when	shipping	internationally.	This	eliminates	redundant	data entry	and	errors,	while	reducing	customs	holds	and	paper	waste.

•UPS	Import	Control,	which	gives	our	customers	the	ability	to	initiate	their	import	shipments,	define	billing	terms	and	assign	accounts	to	charge,	and	remove commercial	invoices	prior	to	delivery	to	a	third-party.

•UPS	Mobile	apps,	which	allow	our	customers	to	track,	ship	and	find	UPS	locations	from	mobile	devices,	are	among	the	top	downloaded	applications	for businesses.

•UPS	My	Choice,	which	focuses	on	the	consignee	and	transforms	the	residential	delivery	experience.	Receivers	direct	the	timing	and	circumstances	of	their deliveries.	This	innovative	service,	which	is	unmatched	in	our	industry,	is	powered	by	the	complex	integration	of	real-time	route	optimization	and	other technologies	with	our	delivery	network.	We	believe	that	UPS	My	Choice	gives	us	a	substantial	lead	over	the	competition.

Technology,	coupled	with	high-quality	UPS	employees,	forms	the	foundation	of	our	reliability	and	allows	us	to	take	customer	experience	to	a	higher	level.

Technology	delivers	value	to	our	customers	and	returns	to	our	shareholders.	Recent	advancements	that	evidence	further	gains	in	UPS's	operational	efficiency,	flexibility, reliability	and	customer	experience	include:

•Continuing	to	rollout	telematics	to	our	delivery	and	tractor-trailer	fleet.	Telematics	helps	UPS	determine	a	truck's	performance	and	condition	by	capturing	data on	more	than	200	elements,	including	speed,	RPM,	oil	pressure,	seat	belt	use,	number	of	times	the	truck	is	placed	in	reverse	and	idling	time.	Together,

improved	data	and	driver	coaching	help	reduce	fuel	consumption,	emissions	and	maintenance	costs,	while	improving	driver	safety.	Moreover,	customers experience	more	consistent	pickup	times	and	more	reliable	deliveries,	thereby	enhancing	their	profitability	and	competitiveness.

•Implementing	our	On	Road	Integrated	Optimization	and	Navigation	("ORION")	system,	which	employs	advanced	algorithms	to	determine	the	optimal	route for	each	delivery	while	meeting	service	commitments.

•Converting	our	package	cars	to	keyless	entry,	where	drivers	will	be	able	to	remotely	turn	the	engine	off	with	a	button	that	will	unlock	the	bulkhead	door	at	the same	time.

•Ramping	up	installations	of	our	Next	Generation	Small	Sort	("NGSS")	technology,	which	reduces	the	amount	of	memorization	required	to	sort	a	package,

thereby	improving	productivity	and	quality.	Employees	sort	packages	to	bins	tagged	with	flashing	lights,	rather	than	memorizing	addresses,	allowing	us	to dramatically	reduce	training	time.

# Reporting	Segments	and	Products	&	Services

As	a	global	leader	in	logistics,	UPS	offers	a	broad	range	of	domestic	and	export	delivery	services;	the	facilitation	of	international	trade;	and	the	deployment	of advanced	technology	to	more	efficiently	manage	the	world	of	business.	We	seek	to	streamline	our	customers'	shipment	processing	and	integrate	critical	transportation information	into	their	own	business	processes,	helping	them	to	create	supply	chain	efficiencies,	better	serve	their	customers	and	improve	their	cash	flows.

# Global	Small	Package

UPS's	global	small	package	operations	provide	time-definite	delivery	services	for	express	letters,	documents,	small	packages	and	palletized	freight	via	air	and ground	services.	We	provide	domestic	delivery	services	within	56	countries	and	export	services	to	more	than	220	countries	and	territories	around	the	world.	We	handle packages	that	weigh	up	to	150	pounds	and	are	up	to	165	inches	in	combined	length	and	girth	as	well	as	palletized	shipments	weighing	greater	than	150	pounds.	All	of our	package	services	are	supported	by	numerous	shipping,	visibility	and	billing	technologies.

UPS	handles	all	levels	of	service	(air,	ground,	domestic,	international,	commercial,	residential)	through	one	global	integrated	pickup	and	delivery	network.	All packages	are	commingled	throughout	their	journey	in	our	network,	except	when	necessary	to	meet	their	specific	service	commitments.	This	enables	one	UPS	driver	to pick	up	our	customers'	shipments,	for	any	of	our	services,	at	the	same	scheduled	time,	day	after	day.	Compared	to	companies	with	single	service	network	designs,	our integrated	network	uniquely	provides	operational	and	capital	efficiencies	while	being	easier	on	the	environment.

Upon	request,	we	offer	same-day	pickup	of	air	and	ground	packages.	Based	on	their	needs,	customers	can	schedule	pickups	for	one	to	five	days	a	week. Additionally,	we	provide	our	customers	with	easy	access	to	UPS,	with	over	154,000	domestic	and	international	entry	points	including:	39,100	drop	boxes;	2,100 customer	centers;	4,700	independently	owned	and	operated	locations	of	The	UPS	Store	worldwide;	6,700	Kiala	locations;	12,400	authorized	shipping	outlets	and commercial	counters;	5,900	alliance	locations;	and	83,900	UPS	drivers	who	can	accept	packages	provided	to	them.

With	the	growth	of	online	shopping,	our	customers'	needs	for	efficient	and	reliable	returns	have	increased.	To	this	end,	we	have	developed	a	robust	selection	of returns	services	that	are	available	in	over	100	countries.	Options	vary	based	on	customer	needs	and	country,	and	range	from	cost-effective	solutions	such	as	UPS Returns,	which	simply	enables	shippers	to	provide	their	customers	with	a	return	shipping	label,	to	services	as	specialized	as	UPS	Returns	Exchange.	With	this	new service,	the	UPS	driver	simplifies	product	exchanges	by	delivering	a	replacement	item	and	picking	up	a	return	item	in	the	same	stop,	and	assisting	with	the	re-packaging process.

We	operate	one	of	the	largest	airlines	in	the	world,	with	global	operations	centered	at	our	Worldport	hub	in	Louisville,	Kentucky.	Worldport	sort	capacity, currently	at	416,000	packages	per	hour,	has	expanded	over	the	years	due	to	volume	growth	and	a	centralization	effort.	Our	European	air	hub	is	located	in	Cologne, Germany,	and	we	maintain	Asia-Pacific	air	hubs	in	Shanghai,	China;	Shenzhen,	China;	Taipei,	Taiwan;	Incheon,	South	Korea;	Hong	Kong;	and	Singapore.	Our	regional air	hub	in	Canada	is	located	in	Hamilton,	Ontario,	and	our	regional	air	hub	for	Latin	America	and	the	Caribbean	is	in	Miami,	Florida.

In	the	U.S.,	Worldport	is	supported	by	our	regional	air	hubs	in	Hartford,	Connecticut;	Ontario,	California;	Philadelphia,	Pennsylvania;	and	Rockford,	Illinois.	This network	design	allows	for	cost-effective	package	processing	in	our	most	technology-enabled	facilities	while	enabling	us	to	use	fewer,	larger	and	more	fuel-efficient aircraft.	Our	U.S.	ground	fleet	serves	all	business	and	residential	zip	codes	in	the	contiguous	U.S.

# U.S.	Domestic	Package	Reporting	Segment

UPS	is	a	leader	in	time-definite,	money-back	guaranteed,	small	package	delivery	services.	We	offer	a	full	spectrum	of	U.S.	domestic	guaranteed	ground	and	air package	transportation	services.	Depending	on	the	delivery	speed	needed,	customers	can	select	from	a	range	of	guaranteed	time	and	day-definite	delivery	options.

•Customers	can	select	from	same	day,	next	day,	two	day	and	three	day	delivery	alternatives.	Many	of	these	services	offer	options	that	enable	customers	to specify	a	time	of	day	cut-off	for	their	delivery	(e.g.	by	8:30,	10:30,	noon,	end	of	day,	etc.).

•Customers	can	also	leverage	our	extensive	ground	network	to	ship	using	our	day-definite	guaranteed	ground	service	that	serves	every	U.S.	business	and residential	address.	UPS	delivers	more	ground	packages	than	any	other	carrier,	with	over	11	million	ground	packages	delivered	on	time	every	day	in	the	U.S., most	within	one	to	three	business	days.

•UPS	also	offers	UPS	SurePost,	an	economy	residential	ground	service	for	customers	with	non-urgent,	light	weight	residential	shipments.	UPS	SurePost	is	a contractual	residential	ground	service	that	combines	the	consistency	and	reliability	of	the	UPS	Ground	network	with	final	delivery	provided	by	the	U.S.	Postal Service.

# International	Package	Reporting	Segment

Our	International	Package	reporting	segment	includes	the	small	package	operations	in	Europe,	Asia,	Canada	and	Latin	America.	UPS	offers	a	wide	selection	of guaranteed,	day	and	time-definite	international	shipping	services.

•We	offer	three	guaranteed	time-definite	express	options	(Express	Plus,	Express	and	Express	Saver)	to	more	locations	than	any	other carrier.

•In	2013,	we	introduced	UPS	Worldwide	Express	Freight	for	palletized	shipments	over	150	pounds	from	37	points	of	origin	to	41	points	of	destination.	This service	meets	the	needs	of	international	customers	who	have	palletized	freight	shipments	that	require	the	same	speed	and	reliability	as	our	international	express package	service.	UPS	Worldwide	Express	Freight	leverages	our	unique	combination	of	package	and	freight	networks	to	provide	industry	leading	transit	times with	a	money-back	guarantee.

•For	international	shipments	that	do	not	require	express	services,	UPS	Worldwide	Expedited	offers	a	reliable,	deferred,	guaranteed	day-definite	service option.

•For	cross-border	ground	package	delivery,	we	offer	UPS	Transborder	Standard	delivery	services	within	Europe,	between	the	U.S.	and	Canada	and	between	the U.S.	and	Mexico.

Europe,	our	largest	region	outside	of	the	U.S.,	accounts	for	roughly	half	of	international	revenue	and	is	one	of	our	growth	engines.	Factors	contributing	to	this	are the	highly	fragmented	nature	of	the	market	and	the	fact	that	exports	make	up	a	significant	part	of	Europe's	GDP.	Given	our	well-known,	trusted	brand	and	distinctive integrated	network,	we	believe	there	is	continued	strong	potential	for	growth	in	small	package	exports	in	Germany,	the	U.K.,	France,	Italy,	Spain	and	the	Netherlands. Due	to	our	strong	growth,	we	are	expanding	our	main	European	air	hub	in	Cologne	by	70%	to	a	capacity	of	190,000	packages	per	hour.	Expansion	will	come	in	stages; the	first	stage	was	completed	in	the	fourth	quarter	of	2011,	with	the	final	stage	targeted	for	2013.

Asia	is	another	growth	engine	due	to	attractive	growth	rates	in	intra-Asia	trade	and	the	dynamic	Chinese	economy.	We	are	bringing	faster	time-in-transit	to customers	focused	on	intra-Asia	trade,	reducing	transit	days	from	Asia	to	Europe,	and	continuing	to	build	our	China	presence.	Our	recent	China	investments	include:

•Material	outlays	to	add	capabilities,	facilities	and	quality	employees.	We	are	building	awareness	and	relevance	while	demonstrating	superior	UPS performance.

•Opened	an	air	hub	in	Shenzhen	in	mid-

•Added	intra-Asia	and	around-the-world	flight	frequencies	allowing	customers	to	reach	more	of	Europe	the	next	day,	guaranteed,	than	any	other	express carrier.

We	serve	more	than	40	Asia-Pacific	countries	and	territories	through	more	than	two	dozen	alliances	with	local	delivery	companies	that	supplement	company- owned	operations.	In	Vietnam,	our	volume	has	doubled	since	entering	into	an	alliance	with	a	local	partner	in	2010.

# Additional	International	highlights	include	the	following:

•Since	our	2009	acquisition	of	Unsped	Paket	Servisi	San	ve	Ticaret	A.S.	in	Turkey,	we	have	seen	strong	export	and	domestic	growth	in	that country.

•In	South	and	Central	America,	we	benefit	from	the	strong	regional	economy.	Our	offerings	include	express	package	delivery	in	major	cities	as	well	as distribution	and	forwarding.

•We	continue	to	grow	our	business	organically	in	Mexico.	We	are	well	positioned	with	freight,	domestic,	international	and	distribution services.

•In	February	2012,	we	broadened	our	European	business-to-consumer	service	portfolio	by	acquiring	Kiala	S.A.,	a	Belgium-based	developer	of	a	platform	that enables	e-commerce	retailers	to	offer	consumers	the	option	of	having	goods	delivered	to	a	convenient	retail	location.

# Supply	Chain	&	Freight	Reporting	Segment

The	Supply	Chain	&	Freight	segment	consists	of	our	forwarding	and	logistics	services,	our	UPS	Freight	business,	and	our	financial	offerings	through	UPS Capital.	We	manage	supply	chains	in	over	195	countries	and	territories,	with	approximately	35	million	square	feet	of	distribution	space	worldwide.	Supply	chain complexity	creates	demand	for	a	global	service	offering	that	incorporates	transportation,	distribution	and	international	trade	and	brokerage	services,	with	financial	and information	services.	We	meet	this	demand	by	offering	a	broad	array	of	services,	which	are	described	below.

The	2011	acquisition	of	Italy-based	Pieffe	Group	("Pieffe")	supports	our	global	health	care	strategy,	which	has	seen	us	make	investments	to	better	serve	our growing	customer	base	in	the	pharmaceutical,	biotech	and	medical	device	industries.	Previously	family-owned,	Pieffe	is	a	pharmaceutical	logistics	business	with	more than	35	years	of	experience	offering	high-quality	storage,	distribution	and	cold	chain	solutions	to	some	of	the	world's	leading	pharmaceutical	brands.

# Freight	Forwarding

UPS	is	one	of	the	largest	U.S.	domestic	air	freight	carriers	and	among	the	top	international	air	freight	forwarders	globally.	UPS	offers	a	portfolio	of	guaranteed and	non-guaranteed	global	air	freight	services.	Additionally,	as	one	of	the	world's	leading	non-vessel	operating	common	carriers,	UPS	also	provides	ocean	freight	full- container	load	and	less-than	container	load	shipments	between	most	major	ports	around	the	world.

# Customs	Brokerage

UPS	is	among	the	world's	largest	customs	brokers	by	both	the	number	of	shipments	processed	annually	and	by	the	number	of	dedicated	brokerage	employees worldwide.	With	decades	of	customs	brokerage	experience,	we	provide	our	customers	with	customs	clearance,	trade	management	and	international	trade	consulting services.

# Logistics	and	Distribution

# UPS	Logistics	offers	the	following:

•Distribution	Services:	UPS's	comprehensive	distribution	services	are	provided	through	a	global	network	of	distribution	centers	that	manage	the	flow	of	goods from	receiving	to	storage	and	order	processing	to	shipment,	allowing	companies	to	save	time	and	money	by	minimizing	their	capital	investment	and	positioning products	closer	to	their	customers.

•Post	Sales:	Post	Sales	services	support	goods	after	they	have	been	delivered	or	installed	in	the	field.	The	four	core	service	offerings	within	Post	Sales	include: (1)	Critical	Parts	Fulfillment;	(2)	Reverse	Logistics;	(3)	Test,	Repair,	and	Refurbish;	and	(4)	Network	and	Parts	Planning.	We	leverage	our	global	distribution network	of	600+	field	stocking	locations	to	ensure	that	the	right	type	and	quantity	of	our	customers'	stock	is	in	the	right	locations	to	meet	the	needs	of	their end-customers.	With	this	service,	our	customers	are	able	to	minimize	spend	and	maximize	service.

•UPS	Mail	Innovations:	UPS	Mail	Innovations	offers	an	efficient,	cost-effective	method	for	sending	lightweight	parcels	and	flat	mail	to	global	addresses	from the	U.S.	We	pick	up	customers'	domestic	and	international	mail,	sort,	post,	manifest	and	then	expedite	the	secured	mail	containers	to	the	destination	postal service	for	last-mile	delivery.

# UPS	Freight

UPS	Freight	offers	regional,	inter-regional	and	long-haul	less-than-truckload	("LTL")	services,	as	well	as	full	truckload	services,	in	all	50	states,	Canada,	Puerto Rico,	Guam,	the	U.S.	Virgin	Islands	and	Mexico.	UPS	Freight	provides	reliable	LTL	service	backed	by	a	day-definite,	on-time	guarantee	at	no	additional	cost. Additionally,	many	user-friendly	small	package	technology	offerings	are	available	for	freight.	Applications	such	as	UPS	WorldShip,	Billing	Center,	and	Quantum	View allow	customers	to	process	and	track	LTL	shipments,	create	electronic	bills	of	lading	and	reconcile	billing.

# UPS	Capital

UPS	Capital	offers	a	range	of	services,	including	export	and	import	financing	to	help	improve	cash	flow,	risk	mitigation	offerings	to	protect	goods,	as	well	as payment	solutions	that	help	speed	the	conversion	cycle	of	payments.

# Sustainability

UPS's	business	and	corporate	responsibility	strategies	pursue	a	common	interest	to	increase	the	vitality	and	environmental	sustainability	of	the	global	economy	by aggregating	the	shipping	activity	of	millions	of	businesses	and	individuals	worldwide	into	a	single,	highly	efficient	logistics	network.	This	provides	benefits	to:

•UPS,	by	ensuring	strong	demand	for	our

services.

•The	economy,	by	making	global	supply	chains	more	efficient	and	less

expensive.

•The	environment,	by	enabling	our	global	customers	to	leverage	UPS's	carbon	efficiency	and	thereby	reduce	the	carbon	intensity	of	their	supply chains.

We	pursue	sustainable	business	practices	worldwide	through	operational	efficiency,	fleet	advances,	facility	engineering	projects,	and	conservation-enabling technology	and	service	offerings.	We	help	our	customers	to	do	the	same.

We	worked	with	the	non-profit	organization	Business	for	Social	Responsibility	("BSR")	to	evaluate	significant	sustainability	issues	(Economic,	Environmental	and Social),	and	ranked	each	issue	by	importance	based	on	multiple	stakeholder	feedback.	We	then	worked	with	BSR	to	develop	a	materiality	matrix	by	mapping	the	issues on	a	grid	with	two	axes:	"Importance	to	Stakeholder"	and	"Influence	on	Business	Success".	The	materiality	matrix	is	now	being	used	to	aid	in	prioritizing	our sustainability	strategy.	More	information	is	available	in	the	UPS	Corporate	Sustainability	Report.

Sustainability	highlights	in	2012	include:

•Rated	1st	in	Fortune	Magazine's	2012	"World's	Most	Admired"	for	the	Delivery Industry.

•One	of	Corporate	Responsibility's	"100	Best	Corporate	Citizens"	and	one	of	"The	Best	Corporate	Citizens	in	Government Contracting".

•Recognized	by	Ethisphere	Institute	as	one	of	the	"World's	Most	Ethical Companies".

•Named	to	Interbrands	"Best	Global	Brands"	for	the	8th	consecutive	year.	We	ranked	in	the	Top	100	in	brand	value	around	the	world	(#27)	and	were	the	only company	in	the	transportation	sector	to	make	the	list	in	2012.

•Recognized	as	a	constituent	of	the	Dow	Jones	Sustainability	Index	for	the	11th	consecutive

year.

•One	of	America's	Top	Organizations	for	Multicultural	Business	Opportunities	by

DiversityBusiness.com.

•Achieved	a	score	of	99%	in	response	to	the	Carbon	Disclosure	Project.	Our	Carbon	Disclosure	Leadership	Index	score	tied	one	other	company	for	the	highest in	the	U.S.

•Recognized	by	ClimateCounts.org	as	best	company	in	the	consumer	shipping	sector	for	the	4th	consecutive	year	and	was	the	second	highest	score	overall globally.

More	information	is	available	on	the	UPS	Sustainability	website.

# Community

We	believe	that	strong	communities	are	vital	to	the	success	of	our	company.	By	combining	our	philanthropy	with	the	volunteer	time	and	talents	of	our	employees, UPS	helps	drive	positive	change	for	organizations	and	communities	in	need	across	the	globe.	The	highlights	of	our	corporate	citizenship	efforts	in	2012	include:

•Local	non-profits	around	the	world	received	more	than	1.8	million	hours	of	volunteer	service	from	UPS	employees	participating	in	our	Neighbor-to-Neighbor program.

•The	UPS	Foundation,	our	charitable	organization,	oversaw	$98	million	in	donations	of	cash	and	in-kind	services	to	global	causes	primarily	in	four	focus	areas —community	safety,	environmental	sustainability,	diversity	and	volunteerism.

•UPS	employees,	both	active	and	retired,	contributed	$48	million	to	United	Way	last	year	which	was	matched	by	a	corporate	contribution	of	$7	million.	During the	2012	campaign,	employees	(both	active	and	retired)	pledged	an	additional	$51	million	to	United	Way.

•UPS	continued	to	help	save	lives	through	our	UPS	Humanitarian	Relief	program	by	providing	our	logistics	expertise	and	resources	to	aid	the	drought-stricken Sahel	region	of	Africa	and	areas	impacted	by	Hurricanes	Isaac	and	Sandy.

•Thousands	of	teenagers	and	novice	drivers	in	the	U.S.,	Canada,	the	U.K.,	and	Germany	participated	in	UPS	Road	Code.	This	safety	program	for	new	drivers features	UPS	employees	as	instructors	–	a	role	where	they	get	to	share	driving	knowledge	and	safety	tips	amassed	over	our	105-year	history	of	safe	driving.

# Reputation

Great	brands	require	connecting	with	customers.	In	working	to	develop	these	connections,	we	have	once	again	received	high	accolades	from	independent	brand evaluations.	In	2012,	we	were	pleased	that	UPS	earned	the	top	rating	in	our	industry	on	Interbrand's	Best	Global	Brands	and	Millward	Brown's	BrandZ	Most	Valuable Global	Brands.	UPS	also	was	named	to	industry-leading	positions	in	Fortune	Magazine's	Most	Admired	and	Harris	Interactive's	Reputation	Quotient	surveys.

# Employees

The	strength	of	our	company	is	our	people,	working	together	with	a	common	purpose.	We	had	approximately	399,000	employees	(excluding	temporary	seasonal employees)	as	of	December	31,	2012,	of	which	323,000	are	in	the	U.S.	and	76,000	are	located	internationally.	Our	global	workforce	includes	approximately	71,000 management	employees	(36%	of	whom	are	part-time)	and	328,000	hourly	employees	(46%	of	whom	are	part-time).

As	of	December	31,	2012,	we	had	approximately	249,000	employees	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with local	unions	affiliated	with	the	International	Brotherhood	of	Teamsters	("Teamsters").	These	agreements	run	through	July	31,	2013.

We	have	approximately	2,600	pilots	who	are	employed	under	a	collective	bargaining	agreement	with	the	Independent	Pilots	Association	("IPA"),	which	became amendable	at	the	end	of	2011.

Our	airline	mechanics	are	covered	by	a	collective	bargaining	agreement	with	Teamsters	Local	2727,	which	runs	through	November	1,	2013.	In	addition, approximately	3,100	of	our	ground	mechanics	who	are	not	employed	under	agreements	with	the	Teamsters	are	employed	under	collective	bargaining	agreements	with the	International	Association	of	Machinists	and	Aerospace	Workers	("IAM").	Our	agreement	with	the	IAM	runs	through	July	31,	2014.

The	experience	of	our	management	team	continues	to	be	an	organizational	strength.	Nearly	40%	of	our	full-time	managers	have	more	than	20	years	of	service with	UPS.

We	believe	that	our	relations	with	our	employees	are	good.	We	periodically	survey	all	our	employees	to	determine	their	level	of	job	satisfaction.	Areas	of	concern receive	management	attention	as	we	strive	to	keep	UPS	the	employer-of-choice	among	our	employees.	We	consistently	receive	numerous	awards	and	wide	recognition as	an	employer-of-choice,	resulting	in	part	from	our	emphasis	on	diversity	and	corporate	citizenship.

# Safety

Health	and	Safety	is	a	value	at	UPS	and	an	enduring	belief	that	the	wellbeing	of	our	people,	business	partners,	and	the	public	is	of	utmost	importance.	We	train	our people	to	avoid	injury	to	themselves	and	others	in	all	aspects	of	their	work.	We	do	not	tolerate	unsafe	work	practices.

We	use	an	all-encompassing	Comprehensive	Health	and	Safety	Process	("CHSP")	to	prevent	occupational	illnesses,	injuries,	and	auto	crashes,	as	well	as	promote wellness	through	the	development	of	workplace	programs.	The	foundation	of	this	process	is	our	co-chaired	employee	and	management	health	and	safety	committees. Together	they	conduct	facility	and	equipment	audits,	perform	work	practice	and	behavior	analysis,	conduct	training,	and	recommend	work	process	and	equipment changes.

# The	components	of	CHSP	are:

•Personal	Value	-	Which	is	the	foundation	and	forms	the	base	of	our	safety	and	wellness

culture.

•Management	Commitment	and	Employee	Involvement	-	Where	employees	take	an	active	role	in	their	own	safety	as	well	as	their	fellow	workers	and	are supported	by	management.

•Work	Site	Analysis	-	Which	includes	injury	and	auto	crash	data	analysis,	behavior	observations,	and	facility	and	equipment	audits	to	identify	gaps	and	develop solutions.	Our	operations	managers	are	responsible	for	their	employees'	safety	results.	We	investigate	every	injury	and	auto	crash	and	develop	prevention activities.

•Hazard	Prevention	and	Control	-	Where	solutions	are	developed	and	documented	to	ensure	identified	risks	have	been mitigated.

•Safety	Education	and	Training	-	Employees	who	are	healthy	and	well-trained	in	proper	methods	are	more	safe	and	efficient	in	performing	their	jobs.	Our approach	starts	with	training	the	trainer.	All	trainers	are	certified	to	ensure	that	they	have	the	skills	and	motivation	to	effectively	train	new	employees.	All	new employees	receive	safety	training	during	orientation	and	in	the	work	area.	In	addition,	each	new	driver	receives	extensive	classroom	and	online	training	as	well as	on-road	training,	followed	by	three	safety	training	rides	integrated	into	his	or	her	training	cycle.

# Other	components	to	ensure	the	safety	of	our	fleet	include:

•Recognition	-	We	have	a	well-defined	safe	driving	honor	plan	to	recognize	our	drivers	when	they	achieve	accident-free	milestones.	We	have	more	than	6,400 drivers	enshrined	in	our	coveted	Circle	of	Honor	for	drivers	who	have	driven	25	years	or	more	without	an	avoidable	auto	crash.

•Preventive	Maintenance	-	We	have	a	comprehensive	Preventive	Maintenance	Program	to	ensure	the	safety	of	our	fleet.	Our	fleet	is	managed	and	monitored electronically	to	ensure	that	each	vehicle	is	serviced	at	a	specific	time	to	prevent	malfunction	or	breakdown.

# Competition

We	are	the	largest	package	delivery	company	in	the	world,	in	terms	of	both	revenue	and	volume.	We	offer	a	broad	array	of	services	in	the	package	and	freight delivery	industry	and,	therefore,	compete	with	many	different	local,	regional,	national	and	international	companies.	Our	competitors	include	worldwide	postal	services, various	motor	carriers,	express	companies,	freight	forwarders,	air	couriers	and	others.	Through	our	supply	chain	service	offerings,	we	compete	with	a	number	of participants	in	the	supply	chain,	financial	services	and	information	technology	industries.

# Competitive	Strengths

# Our	competitive	strengths	include:

Integrated	Global	Network.				We	believe	that	our	integrated	global	ground	and	air	network	is	the	most	extensive	in	the	industry.	We	handle	all	levels	of	service (air,	ground,	domestic,	international,	commercial,	residential)	through	a	single	pickup	and	delivery	service	network.

Our	sophisticated	engineering	systems	allow	us	to	optimize	our	network	efficiency	and	asset	utilization	on	a	daily	basis.	This	unique,	integrated	global	business model	creates	consistent	and	superior	returns.

We	believe	we	have	the	most	comprehensive	integrated	delivery	and	information	services	portfolio	of	any	carrier	in	Europe.	In	other	regions	of	the	world,	we	rely on	both	our	own	and	local	service	providers'	capabilities	to	meet	our	service	commitments.

Global	Presence.				UPS	serves	more	than	220	countries	and	territories	around	the	world.	We	have	a	presence	in	all	of	the	world's	major	economies.

Leading-edge	Technology.				We	are	a	global	leader	in	developing	technology	that	helps	our	customers	optimize	their	shipping	and	logistics	business	processes	to lower	costs,	improve	service	and	increase	efficiency.

Technology	powers	virtually	every	service	we	offer	and	every	operation	we	perform.	Our	technology	offerings	are	initiated	by	our	customers'	needs.	We	offer	a variety	of	online	service	options	that	enable	our	customers	to	integrate	UPS	functionality	into	their	own	businesses	not	only	to	conveniently	send,	manage	and	track	their shipments,	but	also	to	provide	their	customers	with	better	information	services.	We	provide	the	infrastructure	for	an	Internet	presence	that	extends	to	tens	of	thousands	of customers	who	have	integrated	UPS	tools	directly	into	their	own	web	sites.

Broad	Portfolio	of	Services.				Our	portfolio	of	services	enables	customers	to	choose	the	delivery	option	that	is	most	appropriate	for	their	requirements.

Increasingly,	our	customers	benefit	from	business	solutions	that	integrate	many	UPS	services	in	addition	to	package	delivery.	For	example,	our	supply	chain	services— such	as	freight	forwarding,	customs	brokerage,	order	fulfillment,	and	returns	management—help	improve	the	efficiency	of	the	supply	chain	management	process.

Customer	Relationships.				We	focus	on	building	and	maintaining	long-term	customer	relationships.	We	serve	1.1	million	pick-up	customers	and	7.7	million delivery	customers	daily.	Cross-selling	small	package,	supply	chain	and	freight	services	across	our	customer	base	is	an	important	growth	mechanism	for	UPS.

Brand	Equity.				We	have	built	a	leading	and	trusted	brand	that	stands	for	quality	service,	reliability	and	product	innovation.	The	distinctive	appearance	of	our vehicles	and	the	professional	courtesy	of	our	drivers	are	major	contributors	to	our	brand	equity.

Distinctive	Culture.				We	believe	that	the	dedication	of	our	employees	results	in	large	part	from	our	distinctive	"employee-owner"	concept.	Our	employee	stock ownership	tradition	dates	from	1927,	when	our	founders,	who	believed	that	employee	stock	ownership	was	a	vital	foundation	for	successful	business,	first	offered	stock to	employees.	To	facilitate	employee	stock	ownership,	we	maintain	several	stock-based	compensation	programs.

Our	long-standing	policy	of	"promotion	from	within"	complements	our	tradition	of	employee	ownership,	and	this	policy	reduces	the	need	for	us	to	hire	managers and	executive	officers	from	outside	UPS.	The	majority	of	our	management	team	began	their	careers	as	full-time	or	part-time	hourly	UPS	employees,	and	have	spent their	entire	careers	with	us.	Many	of	our	executive	officers	have	more	than	30	years	of	service	with	UPS	and	have	accumulated	a	meaningful	ownership	stake	in	our company.	Therefore,	our	executive	officers	have	a	strong	incentive	to	effectively	manage	UPS,	which	benefits	all	our	shareowners.

Financial	Strength.				Our	balance	sheet	reflects	financial	strength	that	few	companies	can	match.	Our	financial	strength	gives	us	the	resources	to	achieve	global scale;	to	invest	in	employee	development,	technology,	transportation	equipment	and	facilities;	to	pursue	strategic	opportunities	that	facilitate	our	growth;	to	service	our obligations;	and	to	return	value	to	our	shareowners	in	the	form	of	dividends	and	share	repurchases.

# Government	Regulation

# Air	Operations

The	U.S.	Department	of	Transportation	("DOT"),	the	Federal	Aviation	Administration	("FAA"),	and	the	U.S.	Department	of	Homeland	Security,	through	the Transportation	Security	Administration	("TSA"),	have	regulatory	authority	over	United	Parcel	Service	Co.'s	("UPS	Airlines'")	air	transportation	services.	The	Federal Aviation	Act	of	1958,	as	amended,	is	the	statutory	basis	for	DOT	and	FAA	authority	and	the	Aviation	and	Transportation	Security	Act	of	2001,	as	amended,	is	the	basis for	TSA	aviation	security	authority.

The	DOT's	authority	primarily	relates	to	economic	aspects	of	air	transportation,	such	as	discriminatory	pricing,	non-competitive	practices,	interlocking	relations and	cooperative	agreements.	The	DOT	also	regulates,	subject	to	the	authority	of	the	President	of	the	United	States,	international	routes,	fares,	rates	and	practices,	and	is authorized	to	investigate	and	take	action	against	discriminatory	treatment	of	U.S.	air	carriers	abroad.	International	operating	rights	for	U.S.	airlines	are	usually	subject	to bilateral	agreement	between	the	U.S.	and	foreign	governments.	UPS	Airlines	has	international	route	operating	rights	granted	by	the	DOT	and	we	may	apply	for additional	authorities	when	those	operating	rights	are	available	and	are	required	for	the	efficient	operation	of	our	international	network.	The	efficiency	and	flexibility	of our	international	air	transportation	network	is	dependent	on	DOT	and	foreign	government	regulations	and	operating	restrictions.

The	FAA's	authority	primarily	relates	to	safety	aspects	of	air	transportation,	including	aircraft	operating	procedures,	transportation	of	hazardous	materials,	record keeping	standards	and	maintenance	activities,	and	personnel.	In	1988,	the	FAA	granted	us	an	operating	certificate,	which	remains	in	effect	so	long	as	we	meet	the	safety and	operational	requirements	of	the	applicable	FAA	regulations.	In	addition,	we	are	subject	to	non-U.S.	government	regulation	of	aviation	rights	involving	non-U.S. jurisdictions,	and	non-U.S.	customs	regulation.

FAA	regulations	mandate	an	aircraft	corrosion	control	program,	along	with	aircraft	inspection	and	repair	at	periodic	intervals	specified	by	approved	programs	and procedures,	for	all	aircraft.	Our	total	expenditures	under	these	programs	for	2012	were	not	material.	The	future	cost	of	repairs	pursuant	to	these	programs	may	fluctuate according	to	aircraft	condition,	age	and	the	enactment	of	additional	FAA	regulatory	requirements.

The	TSA	regulates	various	security	aspects	of	air	cargo	transportation	in	a	manner	consistent	with	the	TSA	mission	statement	to	"protect	the	Nation's transportation	systems	to	ensure	freedom	of	movement	for	people	and	commerce."	UPS	Airlines,	and	specified	airport	and	off-airport	locations,	are	regulated	under	TSA regulations	applicable	to	the	transportation	of	cargo	in	an	air	network.	In	addition,	personnel,	facilities	and	procedures	involved	in	air	cargo	transportation	must	comply with	TSA	regulations.

UPS	Airlines,	along	with	a	number	of	other	domestic	airlines,	participates	in	the	Civil	Reserve	Air	Fleet	("CRAF")	program.	Our	participation	in	the	CRAF program	allows	the	U.S.	Department	of	Defense	("DOD")	to	requisition	specified	UPS	Airlines	wide-body	aircraft	for	military	use	during	a	national	defense	emergency. The	DOD	compensates	us	for	the	use	of	aircraft	under	the	CRAF	program.	In	addition,	participation	in	CRAF	entitles	UPS	Airlines	to	bid	for	military	cargo	charter operations.

# Ground	Operations

Our	ground	transportation	of	packages	in	the	U.S.	is	subject	to	the	DOT's	jurisdiction	with	respect	to	the	regulation	of	routes	and	to	both	the	DOT's	and	the	states' jurisdiction	with	respect	to	the	regulation	of	safety,	insurance	and	hazardous	materials.	We	are	subject	to	similar	regulation	in	many	non-U.S.	jurisdictions.

The	Postal	Reorganization	Act	of	1970	created	the	U.S.	Postal	Service	as	an	independent	establishment	of	the	executive	branch	of	the	federal	government,	and created	the	Postal	Rate	Commission,	an	independent	agency,	to	recommend	postal	rates.	The	Postal	Accountability	and	Enhancement	Act	of	2006	amended	the	1970	Act to	give	the	re-named	Postal	Regulatory	Commission	revised	oversight	authority	over	many	aspects	of	the	Postal	Service,	including	postal	rates,	product	offerings	and service	standards.	We	sometimes	participate	in	the	proceedings	before	the	Postal	Regulatory	Commission	in	an	attempt	to	secure	fair	postal	rates	for	competitive services.

# Customs

We	are	subject	to	the	customs	laws	in	the	countries	in	which	we	operate,	regarding	the	import	and	export	of	shipments,	including	those	related	to	the	filing	of documents	on	behalf	of	client	importers	and	exporters.

# Environmental

We	are	subject	to	federal,	state	and	local	environmental	laws	and	regulations	across	all	of	our	business	units.	These	laws	and	regulations	cover	a	variety	of processes,	including,	but	not	limited	to:	proper	storage,	handling,	and	disposal	of	hazardous	and	other	waste;	managing	wastewater	and	stormwater;	monitoring	and maintaining	the	integrity	of	underground	storage	tanks;	complying	with	laws	regarding	clean	air,	including	those	governing	emissions;	protecting	against	and appropriately	responding	to	spills	and	releases;	and	communicating	the	presence	of	reportable	quantities	of	hazardous	materials	to	local	responders.	UPS	has	established site-	and	activity-specific	environmental	compliance	and	pollution	prevention	programs	to	address	our	environmental	responsibilities	and	remain	compliant.	In	addition, UPS	has	created	numerous	programs	which	seek	to	minimize	waste	and	prevent	pollution	within	our	operations.

# Other	Regulations

We	are	subject	to	numerous	other	U.S.	federal	and	state	laws	and	regulations,	in	addition	to	applicable	foreign	laws,	in	connection	with	our	package	and	non- package	businesses	in	the	countries	in	which	we	operate.	These	laws	and	regulations	include	those	enforced	by	U.S.	Customs	and	Border	Protection	and	other	agencies of	the	U.S.	Department	of	Homeland	Security,	the	U.S.	Department	of	Treasury,	the	Federal	Maritime	Commission,	the	U.S.	Drug	Enforcement	Administration,	the	U.S. Food	and	Drug	Administration	and	the	U.S.	Department	of	Agriculture.

# Where	You	Can	Find	More	Information

UPS	maintains	a	website	at	www.ups.com.	Our	annual	report	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8-K,	and	any	amendments	to those	reports	filed	or	furnished	pursuant	to	Section	13(a)	of	the	Securities	Exchange	Act	of	1934	are	made	available	through	our	website	www.investors.ups.com	as	soon as	reasonably	practical	after	we	electronically	file	or	furnish	the	reports	to	the	SEC.	Also	available	on	the	Corporation's	website	are	the	Company's	Corporate Governance	Guidelines	and	Committee	Charters.	However,	information	on	these	websites	is	not	incorporated	by	reference	into	this	report	or	any	other	report	filed	with or	furnished	to	the	SEC.

We	have	adopted	a	written	Code	of	Business	Conduct	that	applies	to	all	of	our	directors,	officers	and	employees,	including	our	principal	executive	officer	and senior	financial	officers.	It	is	available	in	the	governance	section	of	the	investor	relations	website,	located	at	www.investors.ups.com.	In	the	event	that	we	make	changes in,	or	provide	waivers	from,	the	provisions	of	the	Code	of	Business	Conduct	that	the	SEC	requires	us	to	disclose,	we	intend	to	disclose	these	events	in	the	governance section	of	our	investor	relations	website.

Our	Corporate	Governance	Guidelines	and	the	charters	for	our	Audit	Committee,	Compensation	Committee	and	Nominating	and	Corporate	Governance Committee	are	also	available	in	the	governance	section	of	the	investor	relations	website.

Our	sustainability	report,	which	describes	our	activities	that	support	our	commitment	to	acting	responsibly	and	contributing	to	society,	is	available	at www.sustainability.ups.com.	We	provide	the	addresses	to	our	internet	sites	solely	for	the	information	of	investors.	We	do	not	intend	any	addresses	to	be	active	links	or	to otherwise	incorporate	the	contents	of	any	website	into	this	report.

# Item	1A. Risk	Factors

You	should	carefully	consider	the	following	factors,	which	could	materially	affect	our	business,	financial	condition	or	results	of	operations.	You	should	read	these Risk	Factors	in	conjunction	with	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations"	in	Item	7	and	our	Consolidated	Financial Statements	and	related	notes	in	Item	8.

# General	economic	conditions,	both	in	the	U.S.	and	internationally,	may	adversely	affect	our	results	of	operations.

We	conduct	operations	in	over	220	countries	and	territories.	Our	U.S.	and	international	operations	are	subject	to	normal	cycles	affecting	the	economy	in	general,	as well	as	the	local	economic	environments	in	which	we	operate.	The	factors	that	create	cyclical	changes	to	the	economy	and	to	our	business	are	beyond	our	control,	and	it may	be	difficult	for	us	to	adjust	our	business	model	to	mitigate	the	impact	of	these	factors.	In	particular,	our	business	is	affected	by	levels	of	industrial	production, consumer	spending	and	retail	activity,	and	our	business,	financial	position	and	results	of	operations	could	be	materially	affected	by	adverse	developments	in	these aspects	of	the	economy.

# We	face	significant	competition	which	could	adversely	affect	our	business,	financial	position	and	results	of	operations.

We	face	significant	competition	on	a	local,	regional,	national	and	international	basis.	Our	competitors	include	the	postal	services	of	the	U.S.	and	other	nations, various	motor	carriers,	express	companies,	freight	forwarders,	air	couriers	and	others.	Competition	may	also	come	from	other	sources	in	the	future.	Some	of	our competitors	have	cost	and	organizational	structures	that	differ	from	ours	and	may	offer	services	and	pricing	terms	that	we	may	not	be	willing	or	able	to	offer.	If	we	are unable	to	timely	and	appropriately	respond	to	competitive	pressures,	our	business,	financial	position	and	results	of	operations	could	be	adversely	affected.

The	transportation	industry	continues	to	consolidate	and	competition	remains	strong.	As	a	result	of	consolidation,	our	competitors	may	increase	their	market	share and	improve	their	financial	capacity,	and	may	strengthen	their	competitive	positions.	Business	combinations	could	also	result	in	competitors	providing	a	wider	variety	of services	and	products	at	competitive	prices,	which	could	adversely	affect	our	financial	performance.

# Changes	in	our	relationships	with	our	significant	customers,	including	the	loss	or	reduction	in	business	from	one	or	more	of	them,	could	have	an	adverse	impact	on us.

Our	top	20	customers	account	for	less	than	10%	of	our	consolidated	revenue.	We	do	not	believe	the	loss	of	any	single	customer	would	materially	impair	our overall	financial	condition	or	results	of	operations;	however,	collectively,	some	of	these	large	customers	might	account	for	a	relatively	significant	portion	of	the	growth in	revenue	in	a	particular	quarter	or	year.	These	customers	can	drive	the	growth	in	revenue	for	particular	services	based	on	factors	such	as:	new	customer	product launches;	the	seasonality	associated	with	the	fourth	quarter	Holiday	season;	business	mergers	and	acquisitions;	and	the	overall	fast	growth	of	a	customer's	underlying business.	These	customers	could	choose	to	divert	all	or	a	portion	of	their	business	with	us	to	one	of	our	competitors,	demand	pricing	concessions	for	our	services,	require us	to	provide	enhanced	services	that	increase	our	costs,	or	develop	their	own	shipping	and	distribution	capabilities.	If	these	factors	drove	some	of	our	large	customers	to cancel	all	or	a	portion	of	their	business	relationships	with	us,	it	could	materially	impact	the	growth	in	our	business	and	the	ability	to	meet	our	current	and	long-term financial	forecasts.

# Our	business	is	subject	to	complex	and	stringent	regulation	in	the	U.S.	and	internationally.

We	are	subject	to	complex	and	stringent	aviation,	transportation,	environmental,	security,	labor,	employment	and	other	governmental	laws	and	regulations,	both	in the	U.S.	and	in	the	other	countries	in	which	we	operate.	In	addition,	our	business	is	impacted	by	laws	and	regulations	that	affect	global	trade,	including	tariff	and	trade policies,	export	requirements,	taxes	and	other	restrictions	and	charges.	Changes	in	laws,	regulations	and	the	related	interpretations	may	alter	the	landscape	in	which	we do	business	and	may	affect	our	costs	of	doing	business.	The	impact	of	new	laws	and	regulations	cannot	be	predicted.	Compliance	with	new	laws	and	regulations	may increase	our	operating	costs	or	require	significant	capital	expenditures.	Any	failure	to	comply	with	applicable	laws	or	regulations	in	the	U.S.	or	in	any	of	the	countries	in which	we	operate	could	result	in	substantial	fines	or	possible	revocation	of	our	authority	to	conduct	our	operations,	which	could	adversely	affect	our	financial performance.

# Increased	security	requirements	could	impose	substantial	costs	on	us	and	we	could	be	the	target	of	an	attack	or	have	a	security	breach.

As	a	result	of	concerns	about	global	terrorism	and	homeland	security,	governments	around	the	world	have	adopted	or	may	adopt	stricter	security	requirements	that will	result	in	increased	operating	costs	for	businesses	in	the	transportation	industry.	These	requirements	may	change	periodically	as	a	result	of	regulatory	and	legislative requirements	and	in	response	to	evolving	threats.	We	cannot	determine	the	effect	that	these	new	requirements	will	have	on	our	cost	structure	or	our	operating	results,	and these	rules	or	other	future	security	requirements	may	increase	our	costs	of	operations	and	reduce	operating	efficiencies.	Regardless	of	our	compliance	with	security requirements	or	the	steps	we	take	to	secure	our	facilities	or	fleet,	we	could	be	the	target	of	an	attack	or	security	breaches	could	occur,	which	could	adversely	affect	our operations	or	our	reputation.

# We	may	be	affected	by	global	climate	change	or	by	legal,	regulatory	or	market	responses	to	such	potential	change.

Concern	over	climate	change,	including	the	impact	of	global	warming,	has	led	to	significant	federal,	state	and	international	legislative	and	regulatory	efforts	to limit	greenhouse	gas	("GHG")	emissions.	For	example,	in	the	past	several	years,	the	U.S.	Congress	has	considered	various	bills	that	would	regulate	GHG	emissions. While	these	bills	have	not	yet	received	sufficient	Congressional	support	for	enactment,	some	form	of	federal	climate	change	legislation	is	possible	in	the	future.	Even	in the	absence	of	such	legislation,	the	Environmental	Protection	Agency,	spurred	by	judicial	interpretation	of	the	Clean	Air	Act,	may	regulate	GHG	emissions,	especially aircraft	or	diesel	engine	emissions,	and	this	could	impose	substantial	costs	on	us.	These	costs	include	an	increase	in	the	cost	of	the	fuel	and	other	energy	we	purchase	and capital	costs	associated	with	updating	or	replacing	our	aircraft	or	vehicles	prematurely.	Until	the	timing,	scope	and	extent	of	any	future	regulation	becomes	known,	we cannot	predict	its	effect	on	our	cost	structure	or	our	operating	results.	It	is	reasonably	possible	that	such	legislation	or	regulation	could	impose	material	costs	on	us. Moreover,	even	without	such	legislation	or	regulation,	increased	awareness	and	any	adverse	publicity	in	the	global	marketplace	about	the	GHGs	emitted	by	companies	in the	airline	and	transportation	industries	could	harm	our	reputation	and	reduce	customer	demand	for	our	services,	especially	our	air	services.

# Strikes,	work	stoppages	and	slowdowns	by	our	employees	could	adversely	affect	our	business,	financial	position	and	results	of	operations.

A	significant	number	of	our	employees	are	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with	local	unions	affiliated	with	the Teamsters	and	our	airline	pilots,	airline	mechanics,	ground	mechanics	and	certain	other	employees	are	employed	under	other	collective	bargaining	agreements.	Strikes, work	stoppages	and	slowdowns	by	our	employees	could	adversely	affect	our	ability	to	meet	our	customers'	needs,	and	customers	may	do	more	business	with competitors	if	they	believe	that	such	actions	or	threatened	actions	may	adversely	affect	our	ability	to	provide	services.	We	may	face	permanent	loss	of	customers	if	we are	unable	to	provide	uninterrupted	service,	and	this	could	adversely	affect	our	business,	financial	position	and	results	of	operations.	The	terms	of	future	collective bargaining	agreements	also	may	affect	our	competitive	position	and	results	of	operations.

# We	are	exposed	to	the	effects	of	changing	prices	of	energy,	including	gasoline,	diesel	and	jet	fuel,	and	interruptions	in	supplies	of	these	commodities.

Changing	fuel	and	energy	costs	may	have	a	significant	impact	on	our	operations.	We	require	significant	quantities	of	fuel	for	our	aircraft	and	delivery	vehicles	and are	exposed	to	the	risk	associated	with	variations	in	the	market	price	for	petroleum	products,	including	gasoline,	diesel	and	jet	fuel.	We	mitigate	our	exposure	to changing	fuel	prices	through	our	indexed	fuel	surcharges	and	we	may	also	enter	into	hedging	transactions	from	time	to	time.	If	we	are	unable	to	maintain	or	increase	our fuel	surcharges,	higher	fuel	costs	could	adversely	impact	our	operating	results.	Even	if	we	are	able	to	offset	the	cost	of	fuel	with	our	surcharges,	high	fuel	surcharges	may result	in	a	mix	shift	from	our	higher	yielding	air	products	to	lower	yielding	ground	products	or	an	overall	reduction	in	volume.	If	fuel	prices	rise	sharply,	even	if	we	are successful	in	increasing	our	fuel	surcharge,	we	could	experience	a	lag	time	in	implementing	the	surcharge,	which	could	adversely	affect	our	short-term	operating	results. There	can	be	no	assurance	that	our	hedging	transactions	will	be	effective	to	protect	us	from	changes	in	fuel	prices.	Moreover,	we	could	experience	a	disruption	in	energy supplies,	including	our	supply	of	gasoline,	diesel	and	jet	fuel,	as	a	result	of	war,	actions	by	producers,	or	other	factors	which	are	beyond	our	control,	which	could	have an	adverse	effect	on	our	business.

# Changes	in	exchange	rates	or	interest	rates	may	have	an	adverse	effect	on	our	results.

We	conduct	business	across	the	globe	with	a	significant	portion	of	our	revenue	derived	from	operations	outside	the	United	States.	Our	operations	in	international markets	are	affected	by	changes	in	the	exchange	rates	for	local	currencies,	and	in	particular	the	Euro,	British	Pound	Sterling,	Canadian	Dollar,	Chinese	Renminbi	and Hong	Kong	Dollar.

We	are	exposed	to	changes	in	interest	rates,	primarily	on	our	short-term	debt	and	that	portion	of	our	long-term	debt	that	carries	floating	interest	rates.	The	impact of	a	100-basis-point	change	in	interest	rates	affecting	our	debt	is	discussed	in	the	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk"	section	of	this	report.

We	monitor	and	manage	our	exposures	to	changes	in	currency	exchange	rates	and	interest	rates,	and	make	limited	use	of	derivative	instruments	to	mitigate	the impact	of	changes	in	these	rates	on	our	financial	position	and	results	of	operations;	however,	changes	in	exchange	rates	and	interest	rates	cannot	always	be	predicted	or hedged.

# If	we	are	unable	to	maintain	our	brand	image	and	corporate	reputation,	our	business	may	suffer.

Our	success	depends	in	part	on	our	ability	to	maintain	the	image	of	the	UPS	brand	and	our	reputation	for	providing	excellent	service	to	our	customers.	Service quality	issues,	actual	or	perceived,	even	when	false	or	unfounded,	could	tarnish	the	image	of	our	brand	and	may	cause	customers	to	use	other	companies.	Also,	adverse publicity	surrounding	labor	relations,	environmental	concerns,	security	matters,	political	activities	and	the	like,	or	attempts	to	connect	our	company	to	these	sorts	of issues,	either	in	the	United	States	or	other	countries	in	which	we	operate,	could	negatively	affect	our	overall	reputation	and	acceptance	of	our	services	by	customers. Damage	to	our	reputation	and	loss	of	brand	equity	could	reduce	demand	for	our	services	and	thus	have	an	adverse	effect	on	our	business,	financial	position	and	results of	operations,	and	could	require	additional	resources	to	rebuild	our	reputation	and	restore	the	value	of	our	brand.

# A	significant	privacy	breach	or	IT	system	disruption	could	adversely	affect	our	business	and	we	may	be	required	to	increase	our	spending	on	data	and	system security.

We	rely	on	information	technology	networks	and	systems,	including	the	Internet,	to	process,	transmit	and	store	electronic	information,	and	to	manage	or	support	a variety	of	business	processes	and	activities.	In	addition,	the	provision	of	service	to	our	customers	and	the	operation	of	our	network	involve	the	storage	and	transmission of	proprietary	information	and	sensitive	or	confidential	data,	including	personal	information	of	customers,	employees	and	others.	Our	information	technology	systems, some	of	which	are	managed	by	third-parties,	may	be	susceptible	to	damage,	disruptions	or	shutdowns	due	to	failures	during	the	process	of	upgrading	or	replacing software,	databases	or	components	thereof,	power	outages,	hardware	failures,	computer	viruses,	attacks	by	computer	hackers,	telecommunication	failures,	user	errors	or catastrophic	events.	Groups	of	hackers	may	also	act	in	a	coordinated	manner	to	launch	distributed	denial	of	service	attacks	or	other	coordinated	attacks	that	may	cause service	outages	or	other	interruptions.	In	addition,	breaches	in	security	could	expose	us,	our	customers	or	the	individuals	affected	to	a	risk	of	loss	or	misuse	of proprietary	information	and	sensitive	or	confidential	data.	Any	of	these	occurrences	could	result	in	disruptions	in	our	operations,	the	loss	of	existing	or	potential customers,	damage	to	our	brand	and	reputation,	and	litigation	and	potential	liability	for	the	company.	In	addition,	the	cost	and	operational	consequences	of	implementing further	data	or	system	protection	measures	could	be	significant.

# Severe	weather	or	other	natural	or	manmade	disasters	could	adversely	affect	our	business.

Severe	weather	conditions	and	other	natural	or	manmade	disasters,	including	storms,	floods,	fires	and	earthquakes,	may	result	in	decreased	revenues,	as	our customers	reduce	their	shipments,	or	increased	costs	to	operate	our	business,	which	could	have	an	adverse	effect	on	our	results	of	operations	for	a	quarter	or	year.	Any such	event	affecting	one	of	our	major	facilities	could	result	in	a	significant	interruption	in	or	disruption	of	our	business.

# We	make	significant	capital	investments	in	our	business	of	which	a	significant	portion	is	tied	to	projected	volume	levels.

We	require	significant	capital	investments	in	our	business	consisting	of	aircraft,	vehicles,	technology,	facilities	and	sorting	and	other	types	of	equipment	to	support both	our	existing	business	and	anticipated	growth.	Forecasting	projected	volume	involves	many	factors	which	are	subject	to	uncertainty,	such	as	general	economic trends,	changes	in	governmental	regulation	and	competition.	If	we	do	not	accurately	forecast	our	future	capital	investment	needs,	we	could	have	excess	capacity	or insufficient	capacity,	either	of	which	would	negatively	affect	our	revenues	and	profitability.	In	addition	to	forecasting	our	capital	investment	requirements,	we	adjust other	elements	of	our	operations	and	cost	structure	in	response	to	adverse	economic	conditions;	however,	these	adjustments	may	not	be	sufficient	to	allow	us	to	maintain our	operating	margins	in	a	weak	economy.

# We	derive	a	significant	portion	of	our	revenues	from	our	international	operations	and	are	subject	to	the	risks	of	doing	business	in	emerging	markets.

We	have	significant	international	operations	and	while	the	geographical	diversity	of	our	international	operations	helps	ensure	that	we	are	not	overly	reliant	on	a single	region	or	country,	we	are	continually	exposed	to	changing	economic,	political	and	social	developments	beyond	our	control.	Emerging	markets	are	typically	more volatile	than	those	in	the	developed	world,	and	any	broad-based	downturn	in	these	markets	could	reduce	our	revenues	and	adversely	affect	our	business,	financial position	and	results	of	operations.

# We	are	subject	to	changes	in	markets	and	our	business	plans	that	have	resulted,	and	may	in	the	future	result,	in	substantial	write-downs	of	the	carrying	value	of	our assets,	thereby	reducing	our	net	income.

Our	regular	review	of	the	carrying	value	of	our	assets	has	resulted,	from	time	to	time,	in	significant	impairments,	and	we	may	in	the	future	be	required	to recognize	additional	impairment	charges.	Changes	in	business	strategy,	government	regulations,	or	economic	or	market	conditions	have	resulted	and	may	result	in further	substantial	impairments	of	our	intangible,	fixed	or	other	assets	at	any	time	in	the	future.	In	addition,	we	have	been	and	may	be	required	in	the	future	to	recognize increased	depreciation	and	amortization	charges	if	we	determine	that	the	useful	lives	of	our	fixed	assets	are	shorter	than	we	originally	estimated.	Such	changes	could reduce	our	net	income.

# Employee	health	and	retiree	health	and	pension	benefit	costs	represent	a	significant	expense	to	us.

With	approximately	399,000	employees,	including	approximately	323,000	in	the	U.S.,	our	expenses	relating	to	employee	health	and	retiree	health	and	pension benefits	are	significant.	In	recent	years,	we	have	experienced	significant	increases	in	certain	of	these	costs,	largely	as	a	result	of	economic	factors	beyond	our	control, including,	in	particular,	ongoing	increases	in	health	care	costs	well	in	excess	of	the	rate	of	inflation	and	the	decreasing	trend	of	discount	rates	in	which	we	use	to	value our	pension	liabilities.	Continued	increasing	health	care	costs,	volatility	in	investment	returns	and	discount	rates,	as	well	as	changes	in	laws,	regulations	and	assumptions used	to	calculate	retiree	health	and	pension	benefit	expenses,	may	adversely	affect	our	business,	financial	position,	results	of	operations	or	require	significant contributions	to	our	pension	plans.

We	participate	in	a	number	of	trustee-managed	multiemployer	pension	and	health	and	welfare	plans	for	employees	covered	under	collective	bargaining agreements.	Several	factors	could	cause	us	to	make	significantly	higher	future	contributions	to	these	plans,	including	unfavorable	investment	performance,	increases	in health	care	costs,	changes	in	demographics	and	increased	benefits	to	participants.	At	this	time,	we	are	unable	to	determine	the	amount	of	additional	future	contributions, if	any,	or	whether	any	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity	could	result	from	our	participation	in	these	plans.

# We	may	be	subject	to	various	claims	and	lawsuits	that	could	result	in	significant	expenditures.

The	nature	of	our	business	exposes	us	to	the	potential	for	various	claims	and	litigation	related	to	labor	and	employment,	personal	injury,	property	damage,	business practices,	environmental	liability	and	other	matters.	Any	material	litigation	or	a	catastrophic	accident	or	series	of	accidents	could	have	a	material	adverse	effect	on	our business,	financial	position	and	results	of	operations.

# We	may	not	realize	the	anticipated	benefits	of	acquisitions,	joint	ventures	or	strategic	alliances.

As	part	of	our	business	strategy,	we	may	acquire	businesses	and	form	joint	ventures	or	strategic	alliances.	Whether	we	realize	the	anticipated	benefits	from	these transactions	depends,	in	part,	upon	the	successful	integration	between	the	businesses	involved,	the	performance	of	the	underlying	operation,	capabilities	or	technologies and	the	management	of	the	transacted	operations.	Accordingly,	our	financial	results	could	be	adversely	affected	by	our	failure	to	effectively	integrate	the	acquired operations,	unanticipated	performance	issues,	transaction-related	charges	or	charges	for	impairment	of	long-term	assets	that	we	acquire.

# Insurance	and	claims	expenses	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

We	have	a	combination	of	both	self-insurance	and	high-deductible	insurance	programs	for	the	risks	arising	out	of	the	services	we	provide	and	the	nature	of	our global	operations,	including	claims	exposure	resulting	from	cargo	loss,	personal	injury,	property	damage,	aircraft	and	related	liabilities,	business	interruption	and workers'	compensation.	Workers'	compensation,	automobile	and	general	liabilities	are	determined	using	actuarial	estimates	of	the	aggregate	liability	for	claims	incurred and	an	estimate	of	incurred	but	not	reported	claims,	on	an	undiscounted	basis.	Our	accruals	for	insurance	reserves	reflect	certain	actuarial	assumptions	and	management judgments,	which	are	subject	to	a	high	degree	of	variability.	If	the	number	or	severity	of	claims	for	which	we	are	retaining	risk	increases,	our	financial	condition	and results	of	operations	could	be	adversely	affected.	If	we	lose	our	ability	to	self-insure	these	risks,	our	insurance	costs	could	materially	increase	and	we	may	find	it	difficult to	obtain	adequate	levels	of	insurance	coverage.

# Item	1B. Unresolved	Staff	Comments

# Not	applicable.

# Item	2. Properties

# Operating	Facilities

We	own	our	headquarters,	which	are	located	in	Atlanta,	Georgia	and	consist	of	about	745,000	square	feet	of	office	space	on	an	office	campus,	and	our	UPS Supply	Chain	Solutions	group's	headquarters,	which	are	located	in	Alpharetta,	Georgia,	and	consist	of	about	310,000	square	feet	of	office	space.

We	also	own	our	29	principal	U.S.	package	operating	facilities,	which	have	floor	spaces	that	range	from	approximately	310,000	to	693,000	square	feet.	In addition,	we	have	a	1.9	million	square	foot	operating	facility	near	Chicago,	Illinois,	which	is	designed	to	streamline	shipments	between	East	Coast	and	West	Coast destinations,	and	we	own	or	lease	over	1,000	additional	smaller	package	operating	facilities	in	the	U.S.	The	smaller	of	these	facilities	have	vehicles	and	drivers	stationed for	the	pickup	of	packages	and	facilities	for	the	sorting,	transfer	and	delivery	of	packages.	The	larger	of	these	facilities	also	service	our	vehicles	and	equipment	and employ	specialized	mechanical	installations	for	the	sorting	and	handling	of	packages.

We	own	or	lease	more	than	800	facilities	that	support	our	international	package	operations	and	an	additional	574	facilities	that	support	our	freight	forwarding	and logistics	operations.	Our	freight	forwarding	and	logistics	operations	maintain	facilities	with	approximately	28.6	million	square	feet	of	floor	space.	We	own	and	operate	a logistics	campus	consisting	of	approximately	3.7	million	square	feet	in	Louisville,	Kentucky.

UPS	Freight	operates	210	service	centers	with	a	total	of	6	million	square	feet	of	floor	space.	UPS	Freight	owns	149	of	these	service	centers,	while	the	remainder are	occupied	under	operating	lease	agreements.	The	main	offices	of	UPS	Freight	are	located	in	Richmond,	Virginia	and	consist	of	about	217,000	square	feet	of	office space.

Our	aircraft	are	operated	in	a	hub	and	spokes	pattern	in	the	U.S.	Our	principal	air	hub	in	the	U.S.,	known	as	Worldport,	is	located	in	Louisville,	Kentucky.	The Worldport	facility	consists	of	over	5.2	million	square	feet	and	the	site	includes	approximately	596	acres.	Between	2009	and	2010,	we	completed	an	expansion	of	our Worldport	facility,	which	increased	the	sorting	capacity	to	approximately	416,000	packages	per	hour.	The	expansion,	which	cost	over	$1	billion,	involved	the	addition	of two	aircraft	load	/	unload	wings	to	the	hub	building,	followed	by	the	installation	of	high-speed	conveyor	and	computer	control	systems.

We	also	have	regional	air	hubs	in	Hartford,	Connecticut;	Ontario,	California;	Philadelphia,	Pennsylvania;	and	Rockford,	Illinois.	These	hubs	house	facilities	for the	sorting,	transfer	and	delivery	of	packages.	Our	European	air	hub	is	located	in	Cologne,	Germany,	and	we	maintain	Asia-Pacific	air	hubs	in	Shanghai,	China; Shenzhen,	China;	Taipei,	Taiwan;	Incheon,	South	Korea;	Hong	Kong;	and	Singapore.	Our	regional	air	hub	in	Canada	is	located	in	Hamilton,	Ontario,	and	our	regional air	hub	for	Latin	America	and	the	Caribbean	is	in	Miami,	Florida.

In	2011,	we	announced	plans	to	significantly	expand	our	European	air	hub	in	Cologne,	Germany.	The	expansion	project,	due	to	be	completed	by	the	end	of	2013, will	equip	the	existing	facility	with	additional	state-of-the-art	technology	and	will	include	a	major	extension	to	the	existing	building.	This	extension	would	be	partially dedicated	to	processing	larger	freight	shipments.	Together	these	initiatives	will	significantly	increase	the	hub's	package	sorting	capacity	from	today's	112,000	to 190,000	packages	per	hour.	The	total	cost	of	the	expansion	is	estimated	to	be	approximately	$200	million.

Over	the	past	several	years,	UPS	has	made	a	successful	transition	to	become	the	first	wholly-owned	foreign	express	carrier	in	China.	In	2008,	we	opened	the	UPS International	Air	Hub	at	Pudong	International	Airport,	which	was	built	on	a	parcel	totaling	2.4	million	square	feet	with	a	planned	sorting	capacity	of	17,000	packages per	hour.	The	hub	links	all	of	China	via	Shanghai	to	UPS's	international	network	with	direct	service	to	the	Americas,	Europe	and	Asia.	It	also	connects	points	served	in China	by	UPS	through	a	dedicated	service	provided	by	Yangtze	River	Express,	a	Chinese	all-cargo	airline.

In	February	2010,	we	opened	a	new	intra-Asia	air	hub	at	Shenzhen	Bao'an	International	Airport	in	China.	The	Shenzhen	facility	replaced	our	intra-Asia	air	hub	at Clark	Air	Force	Base	in	the	Philippines,	and	serves	as	our	primary	transit	hub	in	Asia.	The	facility	was	built	on	a	parcel	of	almost	1	million	square	feet,	and	has	a	sorting capacity	of	18,000	packages	per	hour.

Our	primary	information	technology	operations	are	consolidated	in	a	443,600	square	foot	owned	facility,	the	Ramapo	Ridge	facility,	which	is	located	on	a	39-acre site	in	Mahwah,	New	Jersey.	We	also	own	a	175,000	square	foot	facility	located	on	a	25-acre	site	in	Alpharetta,	Georgia,	which	serves	as	a	backup	to	the	main information	technology	operations	facility	in	New	Jersey.	This	facility	provides	production	functions	and	backup	capacity	in	the	event	that	a	power	outage	or	other disaster	incapacitates	the	main	data	center.	It	also	helps	to	meet	our	internal	communication	needs.

We	believe	that	our	facilities	are	adequate	to	support	our	current	operations.

# Fleet

# Aircraft

The	following	table	shows	information	about	our	aircraft	fleet	as	of	December	31,	2012:

| Description | Owned	and<br>Capital<br>Leases | Short-term<br>Leased	or<br>Chartered<br>From<br>Others | On<br>Order | Under<br>Option |
| :--- | :--- | :--- | :--- | :--- |
| Boeing\t747-400F | 11 | — | — | — |
| Boeing\t747-400BCF | 2 | — | — | — |
| Boeing\t757-200F | 75 | — | — | — |
| Boeing\t767-300ERF | 51 | — | 8 | — |
| Boeing\tMD-11F | 38 | — | — | — |
| Airbus\tA300-600F | 53 | — | — | — |
| Other | — | 332 | — | — |
| Total | 230 | 332 | 8 | — |

We	maintain	an	inventory	of	spare	engines	and	parts	for	each	aircraft.

All	of	the	aircraft	we	own	meet	Stage	IV	federal	noise	regulations	and	can	operate	at	airports	that	have	aircraft	noise	restrictions.

During	2012,	we	took	delivery	of	seven	Boeing	767-300ERF	aircraft.	We	have	firm	commitments	to	purchase	eight	Boeing	767-300ERF	freighters	to	be	delivered in	2013.

# Vehicles

We	operate	a	global	ground	fleet	of	approximately	101,000	package	cars,	vans,	tractors	and	motorcycles.	Our	ground	support	fleet	consists	of	32,000	pieces	of equipment	designed	specifically	to	support	our	aircraft	fleet,	ranging	from	non-powered	container	dollies	and	racks	to	powered	aircraft	main	deck	loaders	and	cargo tractors.	We	also	have	31,000	containers	used	to	transport	cargo	in	our	aircraft.

# Item	3. Legal	Proceedings

For	a	discussion	of	legal	proceedings	affecting	us	and	our	subsidiaries,	please	see	the	information	under	the	sub-caption	"Contingencies"	of	the	caption "Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations"	included	in	this	report.

# Item	4. Mine	Safety	Disclosures

# PART	II

# Item	5. Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity

# Securities

Our	class	A	common	stock	is	not	listed	on	a	national	securities	exchange	or	traded	in	an	organized	over-the-counter	market,	but	each	share	of	our	class	A	common stock	is	convertible	into	one	share	of	our	class	B	common	stock.

The	following	is	a	summary	of	our	class	B	common	stock	price	activity	and	dividend	information	for	2012	and	2011.	Our	class	B	common	stock	is	listed	on	the New	York	Stock	Exchange	under	the	symbol	"UPS".

|  | High | Low | Close | Dividends<br>Declared |
| :--- | :--- | :--- | :--- | :--- |
| 2012: |  |  |  |  |
| First\tQuarter | $81.79 | $72.15 | $80.72 | $0.57 |
| Second\tQuarter | $80.97 | $72.19 | $78.76 | $0.57 |
| Third\tQuarter | $80.52 | $71.18 | $71.57 | $0.57 |
| Fourth\tQuarter | $76.20 | $69.56 | $73.73 | $0.57 |
| 2011: |  |  |  |  |
| First\tQuarter | $76.99 | $70.22 | $74.32 | $0.52 |
| Second\tQuarter | $75.58 | $68.14 | $72.93 | $0.52 |
| Third\tQuarter | $75.79 | $60.75 | $63.15 | $0.52 |
| Fourth\tQuarter | $73.80 | $61.27 | $73.19 | $0.52 |

The	policy	of	our	Board	of	Directors	is	to	declare	dividends	out	of	current	earnings.	The	declaration	of	dividends	is	subject	to	the	discretion	of	the	Board	of Directors	and	will	depend	on	various	factors,	including	our	net	income,	financial	condition,	cash	requirements,	future	prospects,	and	other	relevant	factors.

On	February	14,	2013,	our	Board	declared	a	dividend	of	$0.62	per	share,	which	is	payable	on	March	12,	2013	to	shareowners	of	record	on	February	25,	2013.	This represents	an	8.8%	increase	from	the	previous	$0.57	quarterly	dividend	in	2012.

On	May	3,	2012,	the	Board	of	Directors	approved	a	share	repurchase	authorization	of	$5.0	billion,	which	replaced	an	authorization	previously	announced	in	2008. A	summary	of	repurchases	of	our	class	A	and	class	B	common	stock	during	the	fourth	quarter	of	2012	is	as	follows	(in	millions,	except	per	share	amounts):

|  | Total	Number<br>of	Shares<br>Purchased(1) | Average<br>Price	Paid<br>Per	Share(1) | Total	Number<br>of	Shares	Purchased<br>as	Part	of	Publicly<br>Announced	Program | Approximate	Dollar<br>Value	of	Shares	that<br>May	Yet	be	Purchased<br>Under	the	Program<br>(as	of	month-end) |
| :--- | :--- | :--- | :--- | :--- |
| October\t1—October\t31 | 0.6 | $73.64 | 0.6 | $4,169 |
| November\t1—November\t30 | 1.2 | 73.26 | 1.2 | 4,087 |
| December\t1—December\t31 | 1.7 | 73.40 | 1.6 | 3,970 |
| Total\tOctober\t1—December\t31 | 3.5 | $73.40 | 3.4 |  |

(1) Includes	shares	repurchased	through	our	publicly	announced	share	repurchase	program	and	shares	tendered	to	pay	the	exercise	price	and	tax	withholding	on employee	stock	options.

On	February	14,	2013,	the	Board	of	Directors	approved	a	new	share	repurchase	authorization	of	$10.0	billion,	which	replaced	the	2012	authorization.	The	new share	repurchase	authorization	has	no	expiration	date.	We	anticipate	repurchasing	approximately	$4.0	billion	of	shares	in	2013.

# Shareowner	Return	Performance	Graph

The	following	performance	graph	and	related	information	shall	not	be	deemed	"soliciting	material"	or	to	be	"filed"	with	the	SEC,	nor	shall	such	information	be incorporated	by	reference	into	any	future	filing	under	the	Securities	Act	of	1933	or	Securities	Exchange	Act	of	1934,	each	as	amended,	except	to	the	extent	that	the Company	specifically	incorporates	such	information	by	reference	into	such	filing.

The	following	graph	shows	a	five	year	comparison	of	cumulative	total	shareowners'	returns	for	our	class	B	common	stock,	the	Standard	&	Poor's	500	Index,	and the	Dow	Jones	Transportation	Average.	The	comparison	of	the	total	cumulative	return	on	investment,	which	is	the	change	in	the	quarterly	stock	price	plus	reinvested dividends	for	each	of	the	quarterly	periods,	assumes	that	$100	was	invested	on	December	31,	2007	in	the	Standard	&	Poor's	500	Index,	the	Dow	Jones	Transportation Average,	and	our	class	B	common	stock.

|  | 12/31/2007 | 12/31/2008 | 12/31/2009 | 12/31/2010 | 12/31/2011 | 12/31/2012 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| United\tParcel\tService,\tInc. | $100.00 | $80.20 | $86.42 | $112.60 | $116.97 | $121.46 |
| Standard\t&amp;\tPoor's\t500\tIndex | $100.00 | $63.00 | $79.67 | $91.68 | $93.61 | $108.59 |
| Dow\tJones\tTransportation\tAverage | $100.00 | $78.58 | $93.19 | $118.14 | $118.15 | $127.07 |

# Item	6. Selected	Financial	Data

The	following	table	sets	forth	selected	financial	data	for	each	of	the	five	years	in	the	period	ended	December	31,	2012	(in	millions,	except	per	share	amounts). This	financial	data	should	be	read	together	with	our	consolidated	financial	statements	and	related	notes,	Management's	Discussion	and	Analysis	of	Financial	Condition and	Results	of	Operations,	and	other	financial	data	appearing	elsewhere	in	this	report.

|  | 2012 | 2011 | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Selected\tIncome\tStatement\tData |  |  |  |  |  |
| Revenue: |  |  |  |  |  |
| U.S.\tDomestic\tPackage | $32,856 | $31,717 | $29,742 | $28,158 | $31,278 |
| International\tPackage | 12,124 | 12,249 | 11,133 | 9,699 | 11,293 |
| Supply\tChain\t&amp;\tFreight | 9,147 | 9,139 | 8,670 | 7,440 | 8,915 |
| Total\trevenue | 54,127 | 53,105 | 49,545 | 45,297 | 51,486 |
| Operating\texpenses: |  |  |  |  |  |
| Compensation\tand\tbenefits | 33,102 | 27,575 | 26,557 | 25,933 | 29,826 |
| Other | 19,682 | 19,450 | 17,347 | 15,856 | 20,041 |
| Total\toperating\texpenses | 52,784 | 47,025 | 43,904 | 41,789 | 49,867 |
| Operating\tprofit\t(loss): |  |  |  |  |  |
| U.S.\tDomestic\tPackage | 459 | 3,764 | 3,238 | 1,919 | 823 |
| International\tPackage | 869 | 1,709 | 1,831 | 1,279 | 1,246 |
| Supply\tChain\tand\tFreight | 15 | 607 | 572 | 310 | (450) |
| Total\toperating\tprofit | 1,343 | 6,080 | 5,641 | 3,508 | 1,619 |
| Other\tincome\t(expense): |  |  |  |  |  |
| Investment\tincome | 24 | 44 | 3 | 10 | 75 |
| Interest\texpense | (393) | (348) | (354) | (445) | (442) |
| Income\tbefore\tincome\ttaxes | 974 | 5,776 | 5,290 | 3,073 | 1,252 |
| Income\ttax\texpense | 167 | 1,972 | 1,952 | 1,105 | 597 |
| Net\tincome | $807 | $3,804 | $3,338 | $1,968 | $655 |
| Per\tshare\tamounts: |  |  |  |  |  |
| Basic\tearnings\tper\tshare | $0.84 | $3.88 | $3.36 | $1.97 | $0.64 |
| Diluted\tearnings\tper\tshare | $0.83 | $3.84 | $3.33 | $1.96 | $0.64 |
| Dividends\tdeclared\tper\tshare | $2.28 | $2.08 | $1.88 | $1.80 | $1.80 |
| Weighted\taverage\tshares\toutstanding: |  |  |  |  |  |
| Basic | 960 | 981 | 994 | 998 | 1,016 |
| Diluted | 969 | 991 | 1,003 | 1,004 | 1,022 |

# Item	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of

# Operation

The	U.S.	economic	expansion	has	continued	at	a	slow-to-moderate	pace	through	the	end	of	2012.	Continued	growth	in	retail	sales,	particularly	among	e-commerce retailers,	has	provided	for	expansion	in	the	overall	U.S.	small	package	delivery	market;	however,	recent	weakness	in	manufacturing	activity,	combined	with	the	uneven nature	of	the	overall	economic	recovery,	has	negatively	impacted	the	small	package	delivery	market.	Given	these	trends,	our	products	most	aligned	with	business-to- consumer	shipments	have	experienced	the	strongest	growth,	while	our	business-to-business	volume	continues	to	lag	overall	GDP	growth.

Outside	of	the	U.S.,	economic	growth	has	slowed	considerably	due	to	volatility	in	world	markets	and	fiscal	austerity	measures,	particularly	in	Europe.	This	slower global	economic	growth	has	created	an	environment	in	which	customers	are	more	likely	to	trade-down	from	premium	express	products	to	standard	delivery	products. Additionally,	the	uneven	nature	of	economic	growth	worldwide	has	led	to	shifting	trade	patterns	whereby	transcontinental	trade	is	being	pressured,	but	intra-regional trade	is	continuing	to	grow.	These	circumstances	have	led	us	to	adjust	our	air	capacity	and	cost	structure	in	our	transportation	network	to	the	prevailing	volume	mix levels.	Our	broad	portfolio	of	product	offerings	and	the	flexibilities	inherent	in	our	transportation	network	have	helped	us	adapt	to	these	changing	trends.

While	the	worldwide	economic	environment	has	been	challenging	in	2012,	we	have	continued	to	undertake	initiatives	to	improve	yield	management,	increase operational	efficiency	and	contain	costs	across	all	segments.	Continued	deployment	of	technology	improvements	should	lead	to	further	gains	in	our	operational efficiency,	flexibility	and	reliability,	thus	restraining	cost	increases	and	improving	margins.	In	our	International	Package	segment,	we	have	adjusted	our	air	network	and utilized	newly	constructed	or	expanded	operating	facilities	to	improve	time-in-transit	for	shipments	in	each	region.	We	have	also	continued	to	optimize	our	aircraft network	to	leverage	the	new	route	authority	we	have	gained	over	the	last	several	years	and	to	take	full	advantage	of	faster	growing	trade	lanes.	Additionally,	in	the	first quarter	of	2012,	we	acquired	Kiala	S.A.,	which	will	expand	our	service	offerings	for	business-to-consumer	deliveries	in	Europe.

Our	consolidated	results	are	presented	in	the	table	below:

|  | Year	Ended	December	31, | Year	Ended	December	31, |  | %	Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 | 2012\t/\t2011 | 2011\t/\t2010 |
| Revenue\t(in\tmillions) | $54,127 | $53,105 | $49,545 | 1.9\t% | 7.2% |
| Operating\tExpenses\t(in\tmillions) | 52,784 | 47,025 | 43,904 | 12.2\t% | 7.1% |
| Operating\tProfit\t(in\tmillions) | $1,343 | $6,080 | $5,641 | (77.9)% | 7.8% |
| Operating\tMargin | 2.5% | 11.4% | 11.4% |  |  |
| Average\tDaily\tPackage\tVolume\t(in\tthousands) | 16,295 | 15,797 | 15,574 | 3.2\t% | 1.4% |
| Average\tRevenue\tPer\tPiece | $10.82 | $10.82 | $10.24 | —\t% | 5.7% |
| Net\tIncome\t(in\tmillions) | $807 | $3,804 | $3,338 | (78.8)% | 14.0% |
| Basic\tEarnings\tPer\tShare | $0.84 | $3.88 | $3.36 | (78.4)% | 15.5% |
| Diluted\tEarnings\tPer\tShare | $0.83 | $3.84 | $3.33 | (78.4)% | 15.3% |

# Items	Affecting	Comparability

The	year-over-year	comparisons	of	our	financial	results	are	affected	by	the	following	items	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Operating\tExpenses: |  |  |  |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharge | $4,831 | $827 | $112 |
| \t\t\t\t\tMultiemployer\tPension\tPlan\tWithdrawal\tCharge | 896 | — | — |
| Restructuring\tCharge | — | — | 98 |
| Gains\ton\tSales\tof\tBusinesses | — | — | (20) |
| Gains\ton\tReal\tEstate\tTransactions | — | (33) | (109) |
| Income\tTax\tExpense\t(Benefit)\tfrom\tthe\tItems\tAbove | (2,145) | (287) | — |
| Charge\tfor\tChange\tin\tTax\tFiling\tStatus\tfor\tGerman\tSubsidiary | — | — | 76 |

# UNITED	PARCEL	SERVICE,	INC.	AND	SUBSIDIARIES

# MANAGEMENT'S	DISCUSSION	AND	ANALYSIS	OF	FINANCIAL	CONDITION	AND

# RESULTS	OF	OPERATIONS

These	items	have	been	excluded	from	comparisons	of	"adjusted"	operating	expenses,	operating	profit	and	operating	margin	in	the	discussion	that	follows.

# Defined	Benefit	Plans	Mark-to-Market	Charge

In	2012,	2011	and	2010,	we	incurred	pre-tax	mark-to-market	losses	of	$4.831	billion,	$827	million	and	$112	million,	respectively,	on	a	consolidated	basis	($3.023 billion,	$527	million	and	$75	million	after-tax,	respectively)	on	our	pension	and	postretirement	defined	benefit	plans	related	to	the	remeasurement	of	plan	assets	and liabilities	recognized	outside	of	a	10%	corridor.	These	mark-to-market	losses	for	2012,	2011	and	2010	primarily	resulted	from	decreases	in	the	discount	rates	used	to value	our	projected	benefit	obligations	in	each	year,	which	more	than	offset	the	impact	of	the	actual	rate	of	return	on	plan	assets	exceeding	the	expected	rate	of	return. These	losses,	which	were	recorded	in	compensation	and	benefits	expense	in	our	statements	of	consolidated	income,	impacted	each	of	our	three	reporting	segments	for 2012,	2011	and	2010.

# Multiemployer	Pension	Plan	Withdrawal	Charge

In	2012,	we	recognized	an	$896	million	pre-tax	charge	($559	million	after-tax)	for	the	establishment	of	a	withdrawal	liability	related	to	our	withdrawal	from	the New	England	Teamsters	and	Trucking	Industry	Pension	Fund	("New	England	Pension	Fund"),	a	multiemployer	pension	plan.	This	charge	was	recorded	in	compensation and	benefits	expense	in	our	statements	of	consolidated	income,	and	impacted	our	U.S.	Domestic	Package	segment.

# Restructuring	Charge

In	2010,	we	streamlined	the	management	structure	in	our	U.S.	Domestic	Package	segment,	and	incurred	a	restructuring	charge	associated	with	this	reorganization. This	pre-tax	charge	totaled	$98	million	($64	million	after-tax),	and	was	recorded	in	compensation	and	benefits	expense	in	our	statements	of	consolidated	income.	The charge	reflects	the	value	of	voluntary	retirement	benefits	and	severance	benefits,	as	well	as	the	accelerated	recognition	of	unvested	stock	compensation.

# Gain	on	Sales	of	Businesses

In	2010,	we	sold	our	UPS	Logistics	Technologies	business	unit	within	our	Supply	Chain	&	Freight	segment,	and	recognized	a	pre-tax	gain	of	$71	million	($44 million	after-tax).	Also	in	2010,	we	sold	a	specialized	transportation	business	in	Germany	within	our	Supply	Chain	&	Freight	segment,	and	incurred	a	pre-tax	loss	on	the sale	of	$51	million	($47	million	after-tax),	which	includes	a	fair	value	adjustment	loss	due	to	a	financial	guarantee	associated	with	this	business	sale.	The	gains	and losses	associated	with	these	transactions	are	recorded	in	other	operating	expenses	in	our	statements	of	consolidated	income.

# Gains	on	Real	Estate	Transactions

In	2011,	we	recognized	a	net	$33	million	pre-tax	gain	($20	million	after-tax)	on	a	consolidated	basis	on	certain	real	estate	transactions	(consisting	of	a	$48	million pre-tax	gain	in	our	Supply	Chain	&	Freight	segment,	and	a	$15	million	pre-tax	loss	in	our	U.S.	Domestic	Package	segment).	In	2010,	we	recognized	a	pre-tax	gain	of $109	million	($61	million	after-tax)	on	the	sale	of	real	estate	within	our	U.S.	Domestic	Package	segment.	The	gains	and	losses	associated	with	these	transactions	are recorded	in	other	operating	expenses	in	our	statements	of	consolidated	income.

# Charge	for	Change	in	Tax	Filing	Status	for	German	Subsidiary

In	2010,	we	changed	the	tax	status	of	a	German	subsidiary	that	was	taxable	in	the	U.S.	and	its	local	jurisdiction	to	one	that	is	solely	taxed	in	its	local	jurisdiction. As	a	result	of	this	change	in	tax	status,	we	recorded	a	non-cash	charge	of	$76	million	to	income	tax	expense,	which	resulted	primarily	from	the	write-off	of	related deferred	tax	assets	which	will	not	be	realizable	following	the	change	in	tax	status.

# Results	of	Operations—Segment	Review

The	results	and	discussions	that	follow	are	reflective	of	how	our	executive	management	monitors	the	performance	of	our	reporting	segments.	We	supplement	the reporting	of	our	financial	information	determined	under	generally	accepted	accounting	principles	("GAAP")	with	certain	non-GAAP	financial	measures,	including operating	profit,	operating	margin,	pre-tax	income,	net	income	and	earnings	per	share	adjusted	for	the	non-comparable	items	discussed	previously.	We	believe	that	these adjusted	measures	provide	meaningful	information	to	assist	investors	and	analysts	in	understanding	our	financial	results	and	assessing	our	prospects	for	future performance.	We	believe	these	adjusted	financial	measures	are	important	indicators	of	our	recurring	results	of	operations	because	they	exclude	items	that	may	not	be indicative	of,	or	are	unrelated	to,	our	core	operating	results,	and	provide	a	better	baseline	for	analyzing	trends	in	our	underlying	businesses.

# U.S.	Domestic	Package	Operations

|  | 2012 | Year	Ended	December	31,<br>2011 | 2010 | %	Change<br>2012	/	2011 | 2011	/	2010 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Average\tDaily\tPackage\tVolume\t(in\tthousands): |  |  |  |  |  |
| Next\tDay\tAir | 1,277 | 1,206 | 1,205 | 5.9\t% | 0.1% |
| Deferred | 1,031 | 975 | 941 | 5.7\t% | 3.6% |
| Ground | 11,588 | 11,230 | 11,140 | 3.2\t% | 0.8% |
| Total\tAvg.\tDaily\tPackage\tVolume | 13,896 | 13,411 | 13,286 | 3.6\t% | 0.9% |
| Average\tRevenue\tPer\tPiece: |  |  |  |  |  |
| Next\tDay\tAir | $19.93 | $20.33 | $19.14 | (2.0)% | 6.2% |
| Deferred | 13.06 | 13.32 | 12.50 | (2.0)% | 6.6% |
| Ground | 7.89 | 7.78 | 7.43 | 1.4\t% | 4.7% |
| Total\tAvg.\tRevenue\tPer\tPiece | $9.38 | $9.31 | $8.85 | 0.8\t% | 5.2% |
| Operating\tDays\tin\tPeriod | 252 | 254 | 253 |  |  |
| Revenue\t(in\tmillions): |  |  |  |  |  |
| Next\tDay\tAir | $6,412 | $6,229 | $5,835 | 2.9\t% | 6.8% |
| Deferred | 3,392 | 3,299 | 2,975 | 2.8\t% | 10.9% |
| Ground | 23,052 | 22,189 | 20,932 | 3.9\t% | 6.0% |
| Total\tRevenue | $32,856 | $31,717 | $29,742 | 3.6\t% | 6.6% |
| Operating\tExpenses\t(in\tmillions): |  |  |  |  |  |
| Operating\tExpenses | $32,397 | $27,953 | $26,504 | 15.9\t% | 5.5% |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharge | (3,177) | (479) | (31) |  |  |
| Restructuring\tCharge | — | — | (98) |  |  |
| Gains\t(Losses)\ton\tReal\tEstate\tTransactions | — | (15) | 109 |  |  |
| Multiemployer\tPension\tPlan\tWithdrawal\tCharge | (896) | — | — |  |  |
| Adjusted\tOperating\tExpenses | $28,324 | $27,459 | $26,484 | 3.2\t% | 3.7% |
| Operating\tProfit\t(in\tmillions)\tand\tOperating\tMargin: |  |  |  |  |  |
| Operating\tProfit | $459 | $3,764 | $3,238 | (87.8)% | 16.2% |
| Adjusted\tOperating\tProfit | $4,532 | $4,258 | $3,258 | 6.4\t% | 30.7% |
| Operating\tMargin | 1.4% | 11.9% | 10.9% |  |  |
| Adjusted\tOperating\tMargin | 13.8% | 13.4% | 11.0% |  |  |

# Revenue

The	change	in	overall	revenue	was	impacted	by	the	following	factors	for	the	years	ended	December	31,	2012	and	2011,	compared	with	the	corresponding	prior year	periods:

|  | Volume | Rates	/<br>Product	Mix | Fuel<br>Surcharge | Total<br>Revenue<br>Change |
| :--- | :--- | :--- | :--- | :--- |
| Revenue\tChange\tDrivers: |  |  |  |  |
| 2012\t/\t2011 | 2.8% | 0.6% | 0.2% | 3.6% |
| 2011\t/\t2010 | 1.3% | 2.3% | 3.0% | 6.6% |

# Volume

Our	overall	volume	increased	in	2012	compared	with	2011,	largely	due	to	continued	solid	growth	in	retail	e-commerce	and	strong	customer	demand	for	our lightweight	products.	Business-to-consumer	shipments,	which	represent	slightly	over	40%	of	total	U.S.	Domestic	Package	volume,	grew	rapidly	and	drove	growth	in both	air	and	ground	shipments;	however,	business-to-business	volume	remained	relatively	flat	in	2012	compared	with	2011.	This	can	be	attributed	to	multiple	trends	that have	prevailed	over	the	past	few	years,	including	the	migration	of	traditional	retail	to	online	retail,	the	lack	of	growth	in	small	and	medium-size	enterprises	and	reduced business	investments	attributed	to	policy	uncertainty.

Among	our	air	products,	Next	Day	Air	letter	and	package	volume	both	experienced	solid	increases	in	2012,	with	particular	growth	in	our	Next	Day	Air	Saver products.	The	higher	volume	for	our	deferred	air	products,	which	increased	5.7%	for	the	year,	was	primarily	due	to	healthy	demand	for	our	residential	package	services. The	overall	growth	in	our	air	products	was	driven	primarily	by	business-to-consumer	shipments	from	e-commerce	retailers,	while	our	business-to-business	air	volume declined	slightly.

The	increase	in	ground	volume	in	2012	was	driven	by	our	lightweight	service	offerings,	including	SurePost,	which	target	low-cost,	non-urgent	residential deliveries.	Volume	for	these	lightweight	products	grew	significantly,	and	accounted	for	approximately	40%	of	the	total	increase	in	ground	shipments.	Outside	of	these lightweight	service	offerings,	volume	for	our	traditional	ground	residential	services	also	experienced	an	increase	in	2012.	Overall	ground	volume	growth	continues	to	be driven	by	business-to-consumer	shipping	activity	from	e-commerce	retailers,	while	our	business-to-business	ground	volume	was	flat	in	2012	compared	with	2011.

Our	overall	volume	increased	slightly	in	2011	compared	with	2010,	and	was	largely	impacted	by	the	slowing	U.S.	economy	during	the	first	three	quarters	of	the year.	Business-to-consumer	shipments,	which	represented	approximately	40%	of	total	U.S.	Domestic	Package	volume,	experienced	stronger	growth	than	business-to- business	volume.	Volume	growth	accelerated	in	the	fourth	quarter,	with	average	daily	volume	increasing	3.8%	over	the	fourth	quarter	of	2010.

Among	our	air	products,	we	experienced	a	4.8%	increase	in	Next	Day	and	Second	Day	air	package	volume,	as	a	result	of	retail	sales	growth,	with	particular growth	in	our	Next	Day	Air	Saver	product.	Air	letter	volume	declined,	largely	due	to	weakness	in	the	financial	and	other	service	industries.	Within	ground,	our lightweight	products	experienced	robust	growth	during	2011.	During	the	fourth	quarter	of	2011,	volume	growth	accelerated	to	12.3%	and	3.5%	in	our	deferred	and ground	products,	respectively,	compared	with	the	fourth	quarter	of	2010.	These	increases	were	primarily	driven	by	higher	business-to-consumer	shipment	activity	during the	holiday	season.

# Rates	and	Product	Mix

Overall	revenue	per	piece	increased	0.8%	in	2012	compared	with	2011,	and	was	impacted	by	changes	in	base	rates,	product	mix	and	fuel	surcharge	rates,	as discussed	below.

Revenue	per	piece	for	our	Next	Day	Air	and	deferred	products	decreased	in	2012	compared	with	2011,	as	declines	in	fuel	surcharge	rates	and	product	mix	changes more	than	offset	the	impact	of	a	base	rate	increase	that	took	effect	in	early	2012.	Changes	in	product	mix	negatively	impacted	revenue	per	piece	for	our	air	products,	as our	lightweight	service	offerings	accounted	for	a	larger	portion	of	our	overall	air	volume	in	2012	compared	with	2011,	and	our	Next	Day	Air	Saver	volume	continued	to grow	at	a	faster	rate	than	our	premium	Next	Day	Air	services.

Ground	revenue	per	piece	increased	in	2012	compared	with	2011,	primarily	due	to	a	base	rate	increase	that	took	effect	in	early	2012;	however,	this	was	partially offset	by	product	mix	changes,	as	strong	volume	growth	in	our	lightweight	service	offerings	resulted	in	these	relatively	lower-yielding	products	accounting	for	a	greater portion	of	our	overall	volume	in	2012,	compared	with	2011.

Revenue	per	piece	for	our	ground	and	air	products	was	positively	impacted	by	an	increase	in	base	rates	that	took	effect	on	January	2,	2012.	We	increased	the	base rates	6.9%	on	UPS	Next	Day	Air,	UPS	2nd	Day	Air	and	UPS	3	Day	Select,	and	5.9%	on	UPS	Ground,	while	reducing	our	fuel	surcharge	indices	(discussed	further below).	Other	pricing	changes	included	an	increase	in	the	residential	surcharge,	and	an	increase	in	the	delivery	area	surcharge	on	certain	residential	and	commercial services.	These	rate	changes	are	customary	and	occur	on	an	annual	basis.

Overall	revenue	per	piece	increased	for	our	ground	and	air	products	during	2011	due	to	a	combination	of	base	price	increases	and	fuel	surcharge	rate	changes, which	are	discussed	further	below.	The	overall	revenue	per	piece	increase	was	also	positively	affected	by	our	focus	on	revenue	management	initiatives.	In	addition,	the revenue	per	piece	increase	for	our	air	products	was	positively	impacted	by	the	overall	mix	shift	from	letters	to	packages.	Comparing	the	fourth	quarter	of	2011	with 2010,	the	average	revenue	per	piece	increase	slowed	to	3.4%	due	to	the	higher	volume	of	lighter-weight	business-to-consumer	packages.

Revenue	per	piece	for	our	ground	and	air	products	was	also	impacted	by	an	increase	in	base	rates	that	took	effect	on	January	3,	2011.	We	increased	the	base	rates 6.9%	on	UPS	Next	Day	Air,	UPS	2nd	Day	Air,	and	UPS	3	Day	Select,	and	5.9%	on	UPS	Ground,	while	reducing	our	fuel	surcharge	indices	(discussed	further	below). Other	pricing	changes	included	an	increase	in	the	residential	surcharge,	and	an	increase	in	the	delivery	area	surcharge	on	both	residential	and	commercial	services	to certain	ZIP	codes.

# Fuel	Surcharges

UPS	applies	a	fuel	surcharge	on	our	domestic	air	and	ground	services.	The	air	fuel	surcharge	is	based	on	the	U.S.	Department	of	Energy's	("DOE")	Gulf	Coast spot	price	for	a	gallon	of	kerosene-type	jet	fuel,	while	the	ground	fuel	surcharge	is	based	on	the	DOE's	On-Highway	Diesel	Fuel	Price.	Based	on	published	rates,	the average	fuel	surcharge	rates	for	domestic	air	and	ground	products	were	as	follows:

|  |  | Year	Ended	December	31, |  | %	Point	Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 | 2012\t/\t2011 | 2011\t/\t2010 |
| Next\tDay\tAir\t/\tDeferred | 13.0% | 13.3% | 8.0% | (0.3)% | 5.3% |
| Ground | 8.0% | 8.0% | 5.6% | —\t% | 2.4% |

In	connection	with	our	base	rate	increases	on	January	2,	2012	and	January	3,	2011,	we	modified	the	fuel	surcharge	on	air	and	ground	services	by	reducing	the index	used	to	determine	the	fuel	surcharge	by	2%	and	1%,	respectively,	each	year.	In	2012,	these	index	reductions	offset	the	increase	in	jet	and	diesel	fuel	prices, resulting	in	a	small	decrease	in	the	average	air	fuel	surcharge	rate	and	no	change	in	the	average	ground	surcharge	rate.	The	2011	increases	in	the	air	and	ground	fuel surcharge	rates	were	due	to	the	significant	increases	in	jet	and	diesel	fuel	prices,	but	partially	offset	by	the	reductions	in	the	index	on	both	the	air	and	ground	surcharges. Total	domestic	fuel	surcharge	revenue	increased	$54	and	$884	million	in	2012	and	2011,	respectively,	primarily	due	to	volume	growth	in	2012	and	the	higher	fuel surcharge	rates	in	2011.

# Operating	Expenses

Overall	adjusted	operating	expenses	for	the	segment	increased	$865	million	in	2012	compared	with	2011.	This	increase	was	primarily	due	to	pick-up	and	delivery costs,	which	grew	$682	million,	as	well	as	the	cost	of	operating	our	domestic	integrated	air	and	ground	network,	which	increased	$238	million	for	the	year.	The	growth in	pick-up	and	delivery	and	network	costs	was	largely	due	to	increased	volume	and	higher	employee	compensation	costs,	which	were	impacted	by	a	union	contractual wage	increase	(package	driver	wage	rates	rose	2.0%),	an	increase	in	driver	hours	(up	1.1%)	and	increased	employee	health	care	costs.	These	increases	were	partially offset	by	reductions	in	indirect	operating	costs	of	$79	million	in	2012,	largely	due	to	a	decrease	in	the	expense	for	management	incentive	awards.

Cost	increases	have	been	moderated	as	we	adjust	our	air	and	ground	networks	to	better	match	higher	volume	levels,	and	utilize	technology	to	increase	package sorting	efficiency.	Improved	delivery	densities,	particularly	for	our	residential	products,	have	also	contained	increases	in	cost.	These	network	improvements	allowed	us to	process	the	3.6%	volume	growth	more	efficiently.	Some	of	the	primary	drivers	of	expense	increased	at	a	slower	rate	than	the	growth	in	volume,	including	average daily	direct	labor	hours	(up	1.1%),	aircraft	block	hours	(up	0.5%)	and	miles	driven	(up	1.3%),	resulting	in	the	total	cost	per	piece	increasing	only	0.3%.

Overall	adjusted	operating	expenses	for	the	segment	increased	$975	million	in	2011	compared	with	2010,	while	the	total	adjusted	cost	per	piece	increased	2.3%	for the	year.	A	large	component	of	this	increase	related	to	the	cost	of	operating	our	domestic	integrated	air	and	ground	network,	which	increased	$579	million	in	2011 largely	due	to	higher	fuel	costs,	as	well	as	an	increase	in	aircraft	repair	and	maintenance	expenses	and	higher	rates	passed	to	us	from	outside	transportation	carriers, primarily	railroads.	Pickup	and	delivery	costs	increased	$354	million	in	2011	compared	to	2010,	primarily	as	a	result	of	higher	fuel	prices	and	a	3.1%	union	contractual driver	wage	increase.

Cost	increases	were	mitigated	due	to	network	efficiencies	that	we	achieved,	as	we	adjusted	our	air	and	ground	networks	to	better	match	volume	levels,	and continued	to	utilize	our	expanded	Worldport	facility	to	operate	larger	aircraft	and	to	increase	package	sorting	efficiency.	These	network	efficiency	improvements resulted	in	a	0.8%	reduction	in	total	labor	hours	and	a	0.8%	reduction	in	miles	driven	in	2011	compared	with	2010.	Increased	delivery	densities	as	a	result	of	improved planning	and	technology,	and	growth	in	our	SurePost	product,	also	contained	increases	in	cost.

# Operating	Profit	and	Margin

The	increase	in	adjusted	operating	profit	in	2012	compared	with	2011	was	largely	due	to	the	revenue	growth	and	the	achievement	of	significant	operating	leverage, but	partially	offset	by	the	impact	of	having	two	less	operating	days	during	2012.	Overall	volume	growth	allowed	us	to	better	leverage	our	transportation	network, resulting	in	productivity	improvements	and	better	pick-up	and	delivery	density,	which	favorably	impacted	our	operating	margins;	however,	these	trends	were	somewhat offset	by	changes	in	customer	and	product	mix,	which	combined	to	adversely	affect	our	revenue	per	piece.	Additionally,	Hurricane	Sandy	negatively	impacted	operating profit	by	approximately	$75	million	in	2012.

These	factors	drove	a	40	basis	point	increase	in	our	adjusted	operating	margin	in	2012,	compared	with	2011,	resulting	in	the	6.4%	increase	in	adjusted	operating

# profit.

Higher	adjusted	operating	profit	during	2011	compared	with	2010	was	driven	by	the	increased	network	efficiencies,	combined	with	large	improvements	in	revenue per	piece	and	a	small	increase	in	volume.	Fourth	quarter	2011	adjusted	operating	profit	was	particularly	strong,	with	adjusted	operating	margins	of	15.2%	in	comparison to	12.6%	in	the	fourth	quarter	of	2010.	Significant	volume	growth	in	the	business-to-consumer	sector,	along	with	cost	control	efforts	and	network	efficiencies,	were	the primary	factors	for	the	fourth	quarter	2011	performance.

# International	Package	Operations

|  | 2012 | Year	Ended	December	31,<br>2011 | 2010 | %	Change<br>2012	/	2011 | 2011	/	2010 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Average\tDaily\tPackage\tVolume\t(in\tthousands): |  |  |  |  |  |
| Domestic | 1,427 | 1,444 | 1,403 | (1.2)% | 2.9\t% |
| Export | 972 | 942 | 885 | 3.2\t% | 6.4\t% |
| Total\tAvg.\tDaily\tPackage\tVolume | 2,399 | 2,386 | 2,288 | 0.5\t% | 4.3\t% |
| Average\tRevenue\tPer\tPiece: |  |  |  |  |  |
| Domestic | $7.04 | $7.17 | $6.66 | (1.8)% | 7.7\t% |
| Export | 36.88 | 37.85 | 36.77 | (2.6)% | 2.9\t% |
| Total\tAvg.\tRevenue\tPer\tPiece | $19.13 | $19.28 | $18.31 | (0.8)% | 5.3\t% |
| Operating\tDays\tin\tPeriod | 252 | 254 | 253 |  |  |
| Revenue\t(in\tmillions): |  |  |  |  |  |
| Domestic | $2,531 | $2,628 | $2,365 | (3.7)% | 11.1\t% |
| Export | 9,033 | 9,056 | 8,234 | (0.3)% | 10.0\t% |
| Cargo | 560 | 565 | 534 | (0.9)% | 5.8\t% |
| Total\tRevenue | $12,124 | $12,249 | $11,133 | (1.0)% | 10.0\t% |
| Operating\tExpenses\t(in\tmillions): |  |  |  |  |  |
| Operating\tExpenses | $11,255 | $10,540 | $9,302 | 6.8\t% | 13.3\t% |
| Defined\tBenefit\tPlan\tMark-to-Market\tCharge | (941) | (171) | (42) |  |  |
| Adjusted\tOperating\tExpenses | $10,314 | $10,369 | $9,260 | (0.5)% | 12.0\t% |
| Operating\tProfit\t(in\tmillions)\tand\tOperating\tMargin: |  |  |  |  |  |
| Operating\tProfit | $869 | $1,709 | $1,831 | (49.2)% | (6.7)% |
| Adjusted\tOperating\tProfit | $1,810 | $1,880 | $1,873 | (3.7)% | 0.4\t% |
| Operating\tMargin | 7.2% | 14.0% | 16.4% |  |  |
| Adjusted\tOperating\tMargin | 14.9% | 15.3% | 16.8% |  |  |
| Currency\tTranslation\tBenefit\t/\t(Cost)—(in\tmillions)*: |  |  |  |  |  |
| Revenue |  |  |  | $(231) | $75 |
| Operating\tExpenses |  |  |  | 265 | (198) |
| Operating\tProfit |  |  |  | $34 | $(123) |

* Net	of	currency	hedging;	amount	represents	the	change	compared	to	the	prior	year.

|  | Volume | Rates	/<br>Product	Mix | Fuel<br>Surcharge | Currency | Total<br>Revenue<br>Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Revenue\tChange\tDrivers: |  |  |  |  |  |
| 2012\t/\t2011 | (0.2)% | 1.0% | 0.1% | (1.9)% | (1.0)% |
| 2011\t/\t2010 | 4.7\t% | 0.6% | 4.0% | 0.7\t% | 10.0\t% |

Our	overall	average	daily	volume	increased	slightly	in	2012	compared	with	2011,	as	the	worldwide	economic	slowdown	and	the	associated	impact	on	global	trade restrained	the	growth	of	the	international	small	package	market.

Export	volume	increased	in	2012	compared	with	2011,	as	growth	was	achieved	in	several	key	trade	lanes.	Asia	to	U.S.	export	volume	increased,	and	was	favorably impacted	by	new	technology	sector	product	launches	from	several	customers.	Intra-regional	export	volume	increased	in	Europe	and	Asia,	as	more	regional	sourcing	by customers	led	to	growth	in	our	Transborder	products.	U.S.	export	volume	declined,	particularly	exports	from	the	U.S.	to	Europe,	as	economic	weakness	within	the European	Union	negatively	impacted	volume.	Additionally,	overall	export	volume	continued	to	shift	towards	our	less	premium	products,	such	as	Transborder	Standard and	Worldwide	Expedited,	as	compared	with	our	premium	express	products,	such	as	Worldwide	Express,	primarily	due	to	the	impact	of	the	weaker	economic	conditions on	our	customers	internationally.

Domestic	volume	decreased	during	2012	compared	with	2011,	and	was	negatively	impacted	by	economic	weakness	across	Europe;	however,	this	was	partially offset	by	domestic	volume	growth	in	the	U.K.	and	Canada.

Export	volume	increased	in	2011	compared	to	2010,	primarily	due	to	growth	in	key	markets	in	Europe	and	the	Americas.	Our	Transborder	products	experienced significant	volume	growth,	particularly	in	key	countries	within	Europe.	Volume	for	our	premium	Worldwide	Express	and	Worldwide	Expedited	products	increased	as well,	particularly	in	the	Asia-to-Europe,	Europe-to-Americas	and	Europe-to-Asia	export	trade	lanes.	Additionally,	intra-Asia	export	volume	experienced	solid	growth during	2011	compared	with	2010,	and	was	impacted	by	the	continued	economic	growth	in	Asia	overall.	Our	export	volume	growth	slowed	in	the	latter	half	of	2011, largely	due	to	decelerating	growth	in	exports	out	of	China	and	the	rest	of	Asia,	as	well	as	difficult	comparisons	with	a	relatively	strong	latter	half	of	2010.

Domestic	volume	increases	were	driven	by	continued	growth	in	key	markets,	including	Germany,	France	and	Poland.

Total	average	revenue	per	piece	increased	1.5%	in	2012	on	a	currency-adjusted	basis,	and	was	impacted	by	base	rate	increases,	as	well	as	changes	in	product	mix and	fuel	surcharge	rates,	which	are	discussed	below.

Currency-adjusted	export	revenue	per	piece	decreased	1.3%	for	the	year,	as	the	shift	in	product	mix	from	our	premium	express	products	to	our	standard	products more	than	offset	the	increase	in	base	rates.	Additionally,	currency-adjusted	export	revenue	per	piece	was	adversely	impacted	by	a	shortening	of	average	trade	lanes,	as we	experienced	greater	volume	growth	among	our	lower-yielding	Transborder	and	Trade	Direct	products	relative	to	our	higher-yielding	transcontinental	volume.

Currency-adjusted	domestic	revenue	per	piece	increased	3.8%	for	the	year,	largely	due	to	base	rate	increases.

On	January	2,	2012,	we	increased	the	base	rates	6.9%	for	international	shipments	originating	in	the	United	States	(Worldwide	Express,	Worldwide	Express	Plus, UPS	Worldwide	Expedited	and	UPS	International	Standard	service),	while	reducing	the	fuel	surcharge	indices.	Rate	changes	for	shipments	originating	outside	the	U.S. are	made	throughout	the	year	and	vary	by	geographic	market.

Total	average	revenue	per	piece	increased	4.6%	for	2011	on	a	currency-adjusted	basis,	and	was	impacted	by	base	rate	increases,	as	well	as	changes	in	product	mix and	fuel	surcharge	rates,	which	are	discussed	below.

Export	revenue	per	piece	increased,	largely	due	to	a	combination	of	higher	fuel	surcharge	rates	and	base	rate	increases,	which	are	discussed	further	below. Currency-adjusted	export	revenue	per	piece	increased	3.0%	for	2011	compared	with	2010.	Product	mix	adversely	impacted	export	revenue	per	piece,	due	to	robust growth	among	our	Transborder	products.	Revenue	per	piece	was	also	negatively	impacted	as	average	trade	lanes	shortened,	due	to	volume	declines	in	the	higher- yielding	Asia-to-U.S.	export	lane,	and	higher	volume	growth	among	the	relatively	lower-yielding	intra-Europe	and	intra-Asia	export	lanes.

Domestic	revenue	per	piece	increased	3.9%	on	a	currency-adjusted	basis	for	2011,	largely	due	to	comparatively	faster	growth	in	our	premium	express	products.

In	connection	with	our	base	rate	increases	on	January	2,	2012	and	January	3,	2011,	we	modified	the	fuel	surcharges	on	certain	U.S.-related	international	air services	by	reducing	the	index	used	to	determine	the	fuel	surcharge	by	2%	in	each	of	the	two	years.	The	fuel	surcharges	for	air	products	originating	outside	the	United States	are	indexed	to	the	DOE's	Gulf	Coast	spot	price	for	a	gallon	of	kerosene-type	jet	fuel,	while	the	fuel	surcharges	for	ground	products	originating	outside	the	United States	are	indexed	to	fuel	prices	in	the	international	region	or	country	where	the	shipment	takes	place.	Total	international	fuel	surcharge	revenue	increased	by	$11	and $449	million	in	2012	and	2011,	respectively,	due	to	higher	fuel	surcharge	rates	caused	by	increased	fuel	prices	as	well	as	an	increase	in	international	air	volume.

Overall	adjusted	operating	expenses	for	the	segment	decreased	$55	million	in	2012	compared	with	2011.	The	largest	component	of	this	decrease	related	to	the	cost of	operating	our	international	integrated	air	and	ground	network,	which	decreased	$117	million.	This	decrease	primarily	resulted	from	cost	control	initiatives,	including	a 1.8%	reduction	in	average	daily	aircraft	block	hours	resulting	from	ongoing	modifications	to	our	air	network.	The	cost	of	pick-up	and	delivery	decreased	$53	million, largely	due	to	the	impact	of	currency	exchange	rate	movements	and	in-country	cost	control	initiatives.

Partially	offsetting	these	cost	reductions	was	an	increase	in	indirect	operating	costs,	which	increased	$143	million	in	2012	compared	with	2011.	This	increase	was impacted	by	our	investment	in	enhanced	security	screening	for	our	international	locations	and	expenses	associated	with	business	acquisition	activities,	including	our proposed	acquisition	of	TNT	Express	N.V.	(see	note	16	to	the	consolidated	financial	statements)	as	well	as	the	February	2012	acquisition	of	Kiala	S.A.

Excluding	the	impact	of	currency	exchange	rate	changes,	the	total	cost	per	piece	for	the	segment	increased	2.3%	in	2012	compared	with	2011.

Overall	adjusted	operating	expenses	for	the	segment	increased	$1.109	billion	in	2011	compared	with	2010.	The	impact	of	foreign	currency	exchange	rate	changes resulted	in	an	adverse	impact	on	operating	expense	comparisons	between	2011	and	2010	of	$198	million.	Excluding	the	impact	of	currency	exchange	rate	changes,	the total	adjusted	cost	per	piece	for	the	segment	increased	4.7%	for	the	year.

The	increase	in	adjusted	operating	expenses,	excluding	the	impact	of	currency,	was	largely	due	to	the	increased	cost	of	operating	our	international	integrated	air and	ground	network,	and	also	higher	pick-up	and	delivery	costs.	Network	costs	increased	$745	million	for	the	year,	largely	due	to	higher	fuel	costs	and	increased	block hours,	as	well	as	an	increase	in	aircraft	repair	and	maintenance	expenses.	Pick-up	and	delivery	costs	increased	$123	million	for	the	year,	primarily	as	a	result	of	higher fuel	prices	and	increased	package	volume.

Adjusted	operating	margin	declined	40	basis	points	in	2012	compared	with	2011,	as	the	product	mix	shift	from	our	premium	express	products	to	our	standard products	in	2012	reduced	margins	in	this	segment.	Additionally,	the	volume	declines	in	certain	key	transcontinental	trade	lanes	during	portions	of	2012	also	adversely impacted	margins,	since	these	routes	have	a	larger	cost	infrastructure	(relative	to	the	remainder	of	the	International	Package	segment)	to	support	the	air	express	volume in	each	region.	These	factors	were	mitigated,	however,	from	benefits	derived	from	air	network	adjustments,	cost	containment	programs	and	the	positive	impact	from foreign	currency	exchange	rate	fluctuations.	As	a	result,	we	experienced	a	3.7%	decline	in	adjusted	operating	profit	in	2012	compared	with	2011.

Adjusted	operating	profit	increased	slightly	in	2011	compared	with	2010,	while	the	segment	operating	margin	declined	for	the	year	due	to	several	factors.	The overall	increase	in	adjusted	operating	profit	was	largely	due	to	the	volume	and	revenue	per	piece	increases	previously	discussed;	however,	the	impact	of	these	items	was largely	offset	by	excess	capacity	and	the	adverse	impact	of	fuel	prices	and	currency	exchange	rate	movements.	Volume	softness	in	the	Asia-to-U.S.	trade	lane	in	the latter	half	of	2011	resulted	in	excess	transportation	capacity,	which	negatively	affected	margins	while	our	transportation	network	was	being	adjusted	for	the	slowing demand.	Fluctuations	in	foreign	currency	exchange	rates	(net	of	our	hedging	programs)	resulted	in	an	adverse	impact	on	operating	profit	comparisons	between	2011	and 2010	of	$123	million.	Additionally,	fuel	prices	negatively	affected	the	operating	profit	comparison	between	2011	and	2010,	as	fuel	expense	increased	at	a	faster	pace than	fuel	surcharge	revenue.	These	factors	resulted	in	a	decrease	in	the	operating	margin	in	2011	compared	with	2010.

# Supply	Chain	&	Freight	Operations

|  | 2012 | Year	Ended	December	31,<br>2011 | 2010 | %	Change<br>2012	/	2011 | 2011	/	2010 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Freight\tLTL\tStatistics: |  |  |  |  |  |
| Revenue\t(in\tmillions) | $2,377 | $2,299 | $2,002 | 3.4\t% | 14.8% |
| Revenue\tPer\tHundredweight | $21.73 | $21.17 | $19.18 | 2.6\t% | 10.4% |
| Shipments\t(in\tthousands) | 10,136 | 10,247 | 9,952 | (1.1)% | 3.0% |
| Shipments\tPer\tDay\t(in\tthousands) | 40.1 | 40.5 | 39.5 | (1.1)% | 2.5% |
| Gross\tWeight\tHauled\t(in\tmillions\tof\tlbs) | 10,939 | 10,858 | 10,440 | 0.7\t% | 4.0% |
| Weight\tPer\tShipment\t(in\tlbs) | 1,079 | 1,060 | 1,049 | 1.8\t% | 1.0% |
| Operating\tDays\tin\tPeriod | 253 | 253 | 252 |  |  |
| Revenue\t(in\tmillions): |  |  |  |  |  |
| Forwarding\tand\tLogistics | $5,977 | $6,103 | $6,022 | (2.1)% | 1.3% |
| Freight | 2,640 | 2,563 | 2,208 | 3.0\t% | 16.1% |
| Other | 530 | 473 | 440 | 12.1\t% | 7.5% |
| Total\tRevenue | $9,147 | $9,139 | $8,670 | 0.1\t% | 5.4% |
| Operating\tExpenses\t(in\tmillions): |  |  |  |  |  |
| Operating\tExpenses | $9,132 | $8,532 | $8,098 | 7.0\t% | 5.4% |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharge | (713) | (177) | (39) |  |  |
| Gains\ton\tReal\tEstate\tTransactions | — | 48 | — |  |  |
| Gains\ton\tSales\tof\tBusinesses | — | — | 20 |  |  |
| Adjusted\tOperating\tExpenses | $8,419 | $8,403 | $8,079 | 0.2\t% | 4.0% |
| Operating\tProfit\t(in\tmillions)\tand\tOperating\tMargins: |  |  |  |  |  |
| Operating\tProfit | $15 | $607 | $572 | (97.5)% | 6.1% |
| Adjusted\tOperating\tProfit | $728 | $736 | $591 | (1.1)% | 24.5% |
| Operating\tMargin | 0.2% | 6.6% | 6.6% |  |  |
| Adjusted\tOperating\tMargin | 8.0% | 8.1% | 6.8% |  |  |
| Currency\tTranslation\tBenefit\t/\t(Cost)—(in\tmillions)*: |  |  |  |  |  |
| Revenue |  |  |  | $(100) | $139 |
| Operating\tExpenses |  |  |  | 97 | (132) |
| Operating\tProfit |  |  |  | $(3) | $7 |

* Amount	represents	the	change	compared	to	the	prior	year.

Forwarding	and	logistics	revenue	decreased	$126	million	in	2012	compared	with	2011.	Forwarding	revenue	decreased	in	2012,	primarily	due	to	lower	rates	in	our air	forwarding	business	and	the	adverse	impact	of	foreign	currency	exchange	rates;	however,	this	was	partially	offset	by	improved	tonnage	in	both	our	air	and	ocean forwarding	businesses.	The	reduction	in	rates	in	the	air	forwarding	business	was	largely	due	to	industry	overcapacity	in	key	trade	lanes,	particularly	the	Asia-outbound market.	In	our	logistics	products,	revenue	increased	in	2012	as	we	experienced	robust	growth	in	our	mail	services	and	health	care	solutions.	The	improved	revenue	in	our health	care	solutions	business	was	driven	by	organic	growth	as	well	as	the	December	2011	acquisition	of	Pieffe	Group.

Freight	revenue	increased	$77	million	for	the	year,	driven	by	an	increase	in	LTL	revenue	per	hundredweight	and	in	gross	weight	hauled;	however,	these	factors were	somewhat	offset	by	a	decline	in	average	daily	LTL	shipments.	The	increase	in	LTL	revenue	per	hundredweight	was	largely	due	to	our	focus	on	yield	management and	profitable	revenue	growth,	as	well	as	a	general	rate	increase	averaging	5.9%	that	took	effect	on	July	16,	2012,	covering	non-contractual	shipments	in	the	United States,	Canada	and	Mexico.	The	decline	in	average	daily	LTL	shipments	in	2012	was	impacted	by	increased	competitiveness	in	the	LTL	market	and	the	slowdown	in	the U.S.	economy.	Fuel	surcharge	revenue	increased	by	$16	million	for	2012	compared	with	the	prior	year,	due	to	changes	in	diesel	fuel	prices	and	overall	LTL	shipment volume.

The	other	businesses	within	Supply	Chain	&	Freight	increased	revenue	by	$57	million	in	2012	compared	with	2011,	primarily	due	to	growth	at	The	UPS	Store, UPS	Customer	Solutions	and	our	contract	to	provide	domestic	air	transportation	services	for	the	U.S.	Postal	Service.

Forwarding	and	logistics	revenue	increased	$81	million	in	2011	compared	with	2010,	primarily	due	to	growth	in	our	logistics	services,	where	we	experienced solid	growth	in	our	mail	services,	retail	and	health	care	solutions.	Forwarding	revenue	decreased	primarily	due	to	volume	and	tonnage	declines	in	our	air	and	ocean forwarding	businesses,	as	well	as	lower	third-party	transportation	carrier	rates.	The	tonnage	decrease	was	mainly	the	result	of	revenue	management	initiatives	that improve	the	matching	of	customer	pricing	with	market	conditions,	as	well	as	the	impact	of	the	global	economic	slowdown.

Freight	revenue	increased	$355	million	in	2011	compared	with	2010,	primarily	due	to	growth	in	LTL	shipments,	an	increase	in	base	rates,	and	increased	fuel surcharge	rates.	LTL	shipments	per	day	increased	in	2011,	largely	due	to	improving	LTL	market	conditions	in	the	first	half	of	the	year	and	an	increase	in	market	share. However,	volume	declined	in	the	latter	half	of	the	year,	and	was	impacted	by	our	focus	on	yield	management	and	also	due	to	the	overall	LTL	market	being	adversely impacted	by	the	slowing	economy.	LTL	revenue	per	hundredweight	increased,	primarily	as	a	result	of	a	base	rate	increase	that	took	effect	during	the	year,	negotiated increases	on	existing	contract	rates	and	higher	fuel	surcharge	rates,	as	total	fuel	surcharge	revenue	increased	$159	million	for	the	year	driven	by	higher	diesel	fuel	prices. An	increase	in	base	prices	took	effect	on	August	1,	2011,	as	our	freight	unit	increased	minimum	charge,	LTL	and	TL	rates	an	average	of	6.9%,	covering	non-contractual shipments	in	the	United	States,	Canada	and	Mexico.

The	other	businesses	within	Supply	Chain	&	Freight	experienced	a	$33	million	increase	in	revenue,	primarily	due	to	growth	at	UPS	Capital,	the	UPS	Store,	UPS Customer	Solutions	and	our	contract	to	provide	domestic	air	transportation	services	for	the	U.S.	Postal	Service.

Forwarding	and	logistics	adjusted	operating	expenses	decreased	$97	million	in	2012	compared	with	2011,	due	to	several	factors.	Purchased	transportation	expense fell	by	$65	million	in	2012,	primarily	due	to	lower	rates	charged	to	us	by	third-party	transportation	carriers	(though	this	briefly	reversed	in	the	fourth	quarter). Compensation	and	benefits	expense	declined	by	$28	million	in	2012,	largely	due	to	reduced	payroll	and	lower	management	incentive	compensation	costs.	These	factors were	partially	offset	by	a	$10	million	increase	in	depreciation	and	amortization,	due	to	the	amortization	of	intangible	assets	associated	with	our	acquisition	of	Pieffe Group	and	the	continued	investment	in	technology	and	facilities	in	our	health	care	logistics	business.

Freight	adjusted	operating	expenses	increased	$57	million	in	2012,	while	the	total	cost	per	LTL	shipment	increased	3.8%	for	the	year.	The	largest	component	of this	increase	related	to	the	cost	of	operating	our	linehaul	network,	which	grew	by	$40	million	for	the	year,	primarily	as	a	result	of	an	increase	in	tonnage,	coupled	with wage	and	purchased	transportation	increases.	Pick-up	and	delivery	costs	increased	$12	million	for	the	year,	largely	due	to	the	increase	in	tonnage	as	well	as	contractual driver	wage	increases	of	3.5%.	Rising	diesel	fuel	prices	increased	the	fuel	expense	for	our	fleet,	as	well	as	increased	the	fuel	surcharge	rates	passed	to	us	from	third- party	transportation	carriers.	These	factors	were,	however,	partially	offset	by	productivity	improvements.

Adjusted	operating	expenses	for	the	other	businesses	within	Supply	Chain	&	Freight	increased	$56	million	in	2012	compared	with	2011.

Forwarding	and	logistics	adjusted	operating	expenses	were	flat	in	2011	compared	with	2010.	Purchased	transportation	expense	declined	by	$87	million	in	2011, due	to	lower	air	freight	volume	as	well	as	lower	rates	passed	to	us	from	third-party	transportation	carriers.	The	reduction	in	third-party	carrier	rates	was	largely	due	to over-capacity	in	the	Asia-to-U.S.	trade	lane	that	began	in	the	latter	half	of	2010	and	continued	into	the	first	half	of	2011.	This	reduction	in	purchased	transportation	costs was	offset	by	increases	in	several	other	expense	categories,	including	other	occupancy	costs,	depreciation	and	amortization,	repairs	and	maintenance,	and	other	expenses.

Freight	operating	expenses	increased	$317	million	for	2011	on	an	adjusted	basis,	with	the	total	cost	per	LTL	shipment	increasing	10.0%	for	the	year.	The	two largest	components	of	this	increase	relate	to	the	cost	of	operating	our	linehaul	network,	which	increased	$134	million	in	2011,	and	pick-up,	delivery	and	dock	costs, which	increased	$112	million	for	the	year.	We	incurred	higher	fuel	costs	operating	our	vehicle	fleet,	as	well	as	higher	fuel	surcharge	rates	passed	to	us	from	outside transportation	carriers,	as	a	result	of	higher	diesel	fuel	prices	and	increased	volume.	Additionally,	compensation	and	benefit	costs	increased	primarily	as	a	result	of	higher pension	and	health	care	costs,	and	effective	wage	increases	of	4.1%	for	drivers	in	our	linehaul	network	and	3.5%	for	drivers	and	dock	workers	in	our	pick-up	and delivery	network.	These	expense	increases	were	somewhat	offset	by	improved	productivity	measures,	including	pick-up	and	delivery	stops	per	hour,	dock	bills	per	hour and	improved	linehaul	network	utilization.

Expenses	for	the	other	businesses	within	Supply	Chain	&	Freight	increased	$6	million	in	2011	compared	to	2010,	and	the	increases	were	spread	among	several operating	expense	categories	and	business	units.

Adjusted	operating	profit	for	the	forwarding	and	logistics	unit	decreased	by	$29	million	in	2012	compared	with	2011.	This	decrease	was	primarily	due	to	reduced profitability	in	our	international	air	forwarding	business,	as	European	economic	uncertainty,	slower	growth	in	China	and	a	sluggish	U.S.	economy	all	contributed	to	a reduction	in	overall	air	freight	market	demand.	This	lower	demand	pressured	the	rates	we	charge	to	our	customers,	which	more	than	offset	the	reduced	rates	we	incur from	third-party	transportation	carriers,	and	thereby	led	to	a	decline	in	our	operating	margin.	Operating	profit	for	our	logistics	business	declined	in	2012	compared	with 2011,	largely	due	to	increased	depreciation	expense	resulting	from	the	continued	investment	in	technology	and	facilities	for	our	global	health	care	business.

Adjusted	operating	profit	for	our	freight	unit	increased	$20	million	in	2012	compared	with	2011,	as	gains	in	productivity	(including	pick-up	and	delivery	stops	per hour,	dock	bills	per	hour	and	linehaul	network	utilization)	as	well	as	improved	yields,	more	than	offset	the	overall	decline	in	volume.

The	combined	adjusted	operating	profit	for	all	of	our	other	businesses	in	this	segment	increased	$1	million	in	2012	compared	with	2011,	largely	due	to	growth from	our	contract	to	provide	domestic	air	transportation	services	for	the	U.S.	Postal	Service.

The	forwarding	and	logistics	unit	experienced	an	$80	million	increase	in	adjusted	operating	profit	in	2011	compared	with	2010,	largely	due	to	revenue management	initiatives	and	cost	containment	in	our	forwarding	unit,	which	improved	operating	leverage.	Additionally,	excess	market	capacity,	especially	in	the	Asia-to- U.S.	trade	lane,	reduced	our	purchased	transportation	costs	and	improved	the	operating	profitability	in	this	business.	Our	logistics	business	had	a	small	decrease	in operating	profit	in	2011,	primarily	due	to	our	continued	investment	in	expanding	our	global	health	care	capabilities.

Our	freight	unit	had	an	increase	of	$38	million	in	adjusted	operating	profit	in	2011	compared	with	2010,	primarily	due	to	increased	yields,	volume	growth	and improved	productivity	in	our	operations.

The	combined	operating	income	for	all	of	our	other	businesses	in	this	segment	increased	$27	million	in	2011,	primarily	due	to	improved	results	at	our	UPS Capital	unit.

|  | 2012 | Year	Ended	December	31,<br>2011 | 2010 | %	Change<br>2012	/	2011 | 2011	/	2010 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Operating\tExpenses\t(in\tmillions): |  |  |  |  |  |
| Compensation\tand\tBenefits | $33,102 | $27,575 | $26,557 | 20.0\t% | 3.8\t% |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharge | (4,831) | (827) | (112) |  |  |
| Multiemployer\tPension\tPlan\tWithdrawal\tCharge | (896) | — | — |  |  |
| Restructuring\tCharge | — | — | (98) |  |  |
| Adjusted\tCompensation\tand\tBenefits | 27,375 | 26,748 | 26,347 | 2.3\t% | 1.5\t% |
| Repairs\tand\tMaintenance | 1,228 | 1,286 | 1,131 | (4.5)% | 13.7\t% |
| Depreciation\tand\tAmortization | 1,858 | 1,782 | 1,792 | 4.3\t% | (0.6)% |
| Purchased\tTransportation | 7,354 | 7,232 | 6,640 | 1.7\t% | 8.9\t% |
| Fuel | 4,090 | 4,046 | 2,972 | 1.1\t% | 36.1\t% |
| Other\tOccupancy | 902 | 943 | 939 | (4.3)% | 0.4\t% |
| Other\tExpenses | 4,250 | 4,161 | 3,873 | 2.1\t% | 7.4\t% |
| Gains\ton\tReal\tEstate\tTransactions | — | 33 | 109 |  |  |
| Gains\ton\tSales\tof\tBusinesses | — | — | 20 |  |  |
| Adjusted\tOther\tExpenses | 4,250 | 4,194 | 4,002 | 1.3\t% | 4.8\t% |
| Total\tOperating\tExpenses | $52,784 | $47,025 | $43,904 | 12.2\t% | 7.1\t% |
| Adjusted\tTotal\tOperating\tExpenses | $47,057 | $46,231 | $43,823 | 1.8\t% | 5.5\t% |
| Currency\tTranslation\tCost\t/\t(Benefit)* |  |  |  | $(362) | $330 |

# Compensation	and	Benefits

Employee	payroll	costs	increased	$183	million	in	2012	compared	with	2011,	largely	due	to	contractual	union	wage	rate	increases	that	took	effect	under	our collective	bargaining	agreement	with	the	Teamsters,	as	well	as	an	increase	in	total	union	labor	hours;	however,	this	was	partially	offset	by	a	decline	in	management payroll	costs	due	to	a	reduction	in	incentive	compensation	expense.

Adjusted	benefits	expense	increased	$444	million	in	2012	compared	with	2011,	primarily	due	to	higher	pension	expense,	increased	health	and	welfare	costs	and changes	in	the	expense	associated	with	our	self-insurance	for	workers'	compensation	claims,	as	follows:

•Adjusted	pension	expense	increased	$200	million	in	2012	compared	with	2011,	due	to	higher	union	contribution	rates	for	multiemployer	pension	plans combined	with	increased	service	and	interest	costs	for	company-sponsored	plans.	The	increase	in	service	and	interest	costs	for	company-sponsored	plans	was largely	due	to	continued	service	accruals	and	lower	discount	rates.

•Health	and	welfare	costs	increased	$157	million	in	2012	compared	with	2011,	largely	due	to	higher	medical	claims	and	the	impact	of	several	provisions	of	the Patient	Protection	and	Affordable	Care	Act	of	2010.

•The	expense	associated	with	our	self-insurance	programs	for	workers'	compensation	claims	increased	$60	million	in	2012	compared	with	2011.	Insurance reserves	are	established	for	estimates	of	the	loss	that	we	will	ultimately	incur	on	reported	workers'	compensation	claims,	as	well	as	estimates	of	claims	that	have been	incurred	but	not	reported.	Insurance	reserves	also	take	into	account	a	number	of	factors	including	our	history	of	claim	losses,	payroll	growth	and	the impact	of	safety	improvement	initiatives.	The	increase	in	expense	in	2012	was	largely	impacted	by	increased	payroll	estimates,	changes	in	state	workers' compensation	laws,	and	medical	inflation.

Employee	payroll	costs	increased	$237	million	in	2011	compared	with	2010,	largely	due	to	contractual	union	wage	rate	increases	that	took	effect	under	our collective	bargaining	agreement	with	the	Teamsters,	but	partially	offset	by	a	decline	in	union	labor	hours.	Management	payroll	costs	declined	slightly,	primarily	due	to	a lower	management	incentive	award.

Adjusted	benefits	expense	increased	$164	million	in	2011	compared	with	2010,	primarily	due	to	higher	employee	health	and	welfare	costs	and	expense	associated with	our	self-insurance	for	workers'	compensation	claims,	but	partially	offset	by	a	decline	in	pension	expense.	These	factors	are	discussed	further	as	follows:

•Employee	health	and	welfare	program	costs	increased	$132	million	in	2011,	and	were	impacted	by	higher	required	union	plan	contribution	rates	and	general health	care	inflation.

•The	expense	associated	with	our	self-insurance	programs	for	workers'	compensation	claims	increased	by	$48	million	in	2011.	In	2010,	we	experienced	more favorable	actuarial	expense	adjustments	compared	with	2011,	thus	leading	to	the	increase	in	expense	in	2011.

•Adjusted	pension	expense	decreased	$50	million	in	2011	due	to	several	factors.	Most	significantly,	contributions	to	the	company-sponsored	pension	plans	in 2011	increased	the	expected	return	on	assets	used	for	expense	calculation	purposes.	The	increase	in	the	expected	return	on	assets	more	than	offset	increased service	and	interest	costs	(due	to	a	decline	in	discount	rates),	resulting	in	a	net	reduction	in	pension	expense.	This	was	partially	offset	by	higher	contribution rates	for	multiemployer	pension	plans,	as	well	as	the	reinstatement	of	matching	contributions	to	our	primary	employee	defined	contribution	savings	plan.

# Repairs	and	Maintenance

The	decrease	in	repairs	and	maintenance	expense	was	largely	due	to	lower	aircraft	maintenance	costs,	which	decreased	$77	million	in	2012	compared	with	2011. This	decrease	resulted	primarily	from	a	0.8%	reduction	in	average	daily	aircraft	block	hours,	and	the	conversion	of	an	engine	maintenance	agreement	with	an	outside vendor	from	a	cost	reimbursement	approach	to	a	fixed	rate	per	flight	hour.	Additionally,	aircraft	maintenance	expense	declined	due	to	a	reduction	in	the	number	of scheduled	maintenance	checks	for	our	Airbus	A300-600F,	Boeing	757-200F	and	Boeing	MD-11F	aircraft.

The	increase	in	repairs	and	maintenance	expense	was	largely	due	to	aircraft	maintenance	costs,	which	increased	$121	million	in	2011	compared	with	2010.	This increase	resulted	from	an	increase	in	flight	hours	due	to	higher	air	volume,	additional	scheduled	maintenance	checks	and	higher	contractual	maintenance	rates.	The remaining	increase	in	repairs	and	maintenance	expense	primarily	relates	to	higher	maintenance	costs	on	our	office	buildings	and	operating	facilities.

# Depreciation	and	Amortization

The	increase	in	depreciation	and	amortization	expense	was	primarily	due	to	higher	depreciation	expense	on	vehicles	of	$57	million	in	2012	compared	with	2011, resulting	from	the	replacement	of	older,	fully-depreciated	vehicles,	technology	upgrades	on	new	vehicles	and	an	overall	increase	in	the	size	of	our	vehicle	fleet	in	our U.S.	Domestic	package	operations.

The	decrease	in	depreciation	and	amortization	expense	in	2011	was	primarily	the	result	of	a	reduction	in	depreciation	expense	on	technology	equipment	and software.	This	decline	was	primarily	related	to	certain	technology	hardware	and	capitalized	software	becoming	fully	depreciated.

# Purchased	Transportation

The	increase	in	purchased	transportation	expense	charged	to	us	by	third-party	air,	ocean	and	truck	carriers	in	2012	compared	with	2011	was	impacted	by	several factors.	We	incurred	a	$187	million	increase	in	purchased	transportation	expense	for	2012	in	our	U.S.	Domestic	Package	segment,	primarily	due	to	higher	fees	paid	to the	U.S.	Postal	Service	associated	with	the	strong	volume	growth	in	our	SurePost	product,	and	higher	rates	passed	to	us	from	rail	carriers.	This	was	partially	offset	by	a $65	million	decrease	in	expense	in	our	freight	forwarding	business,	largely	as	a	result	of	lower	rates	charged	to	us	by	third-party	air	carriers.

The	increase	in	purchased	transportation	in	2011	was	caused	by	a	combination	of	higher	volume,	as	well	as	increased	fuel	surcharges	and	base	rates	charged	to	us by	third-party	air,	ocean	and	truck	carriers	across	all	segments.	The	combination	of	these	factors	increased	expense	by	$387	million	in	2011.	Additionally,	we	incurred	a $97	million	increase	in	expense	in	2011	for	the	use	of	rail	carriers,	which	was	due	primarily	to	higher	rates	and	fuel	surcharges,	as	well	as	increased	volumes.	The remaining	increase	in	expense	for	2011	was	primarily	due	to	foreign	currency	exchange	rate	changes.

The	fuel	expense	increase	in	2012	compared	with	2011	was	largely	due	to	higher	fuel	prices,	which	increased	expense	by	$116	million;	however,	this	was	partially offset	by	lower	usage	of	fuel	products,	which	decreased	expense	by	$72	million.	The	lower	fuel	usage	was	largely	due	to	the	decrease	in	total	aircraft	block	hours	and vehicle	miles	driven.

The	increase	in	fuel	expense	in	2011	compared	with	2010	was	primarily	caused	by	higher	prices	for	jet-A	fuel,	diesel	and	unleaded	gasoline,	which	increased expense	by	$982	million.	Higher	usage	of	these	products	in	our	operations	accounted	for	the	remaining	increase	in	expense	of	$92	million	in	2011.

# Other	Occupancy

Other	occupancy	expense	decreased	in	2012	compared	with	2011,	primarily	due	to	reductions	in	personal	property	and	real	estate	taxes	combined	with	a	decrease in	utilities	expense.	The	relatively	warm	winter	in	the	United	States,	combined	with	lower	natural	gas	prices,	helped	to	reduce	heating	and	snow	removal	costs	in	our facilities	during	the	early	months	of	2012.

Other	occupancy	expense	increased	in	2011	compared	with	2010,	primarily	due	to	an	increase	in	utilities	expense	resulting	from	increased	electricity	costs	in	our facilities.	The	remainder	of	the	increase	is	primarily	due	to	higher	rent	expense	resulting	from	increased	rates	on	warehouses.

# Other	Expenses

Adjusted	other	expenses	increased	in	2012	compared	with	2011,	primarily	due	to	an	increase	in	transportation	equipment	rentals,	bad	debt	expense	and	auto liability	insurance,	as	well	as	expenses	incurred	in	2012	related	to	the	proposed	TNT	Express	N.V.	acquisition.	These	increases	were	partially	offset	by	a	reduction	in employee	relocation	expenses	and	a	decline	in	package	claims	expense.	Additionally,	2012	adjusted	other	expenses	were	reduced	by	a	$9	million	gain	on	the	sale	of	a distribution	facility	in	our	Supply	Chain	&	Freight	segment.

The	increase	in	adjusted	other	expenses	in	2011	compared	with	2010	was	caused	by	several	factors,	including	foreign	currency	remeasurement	losses,	advertising costs,	employee	expense	reimbursements,	equipment	rentals,	air	cargo	handling	costs	and	data	processing	fees.	These	increases	were	partially	offset	by	a	reduction	in bad	debt	and	employee	relocation	expenses.

# Investment	Income	and	Interest	Expense

The	following	table	sets	forth	investment	income	and	interest	expense	for	the	years	ended	December	31,	2012,	2011	and	2010	(in	millions):

|  |  | Year	Ended	December	31, |  | %	Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 | 2012\t/\t2011 | 2011\t/\t2010 |
| Investment\tIncome | $24 | $44 | $3 | (45.5)% | N/A |
| Interest\tExpense | $(393) | $(348) | $(354) | 12.9\t% | (1.7)% |

# Investment	Income

The	decrease	in	investment	income	in	2012	compared	with	2011	was	primarily	caused	by	an	$8	million	decline	in	fair	value	adjustments	and	an	$25	million decline	in	realized	gains	on	sales	of	investments.	These	declines	were	partially	offset	by	an	increase	in	interest	income,	largely	due	to	having	a	higher	average	balance	of interest-earning	cash	and	investments	in	our	portfolio	in	2012	compared	with	2011.

The	increase	in	investment	income	in	2011	compared	with	2010	was	caused	by	a	combination	of	factors.	During	2011,	we	realized	$20	million	in	net	gains	on	the sales	of	auction	rate	securities,	preferred	equity	securities	and	an	S&P	500	index	fund,	as	well	as	a	mark-to-market	gain	on	investments.	In	2010,	we	recorded	a	$21 million	impairment	on	certain	asset-backed	auction	rate	securities,	which	resulted	from	provisions	that	allowed	the	issuers	of	the	securities	to	subordinate	our	holdings to	newly-issued	debt	or	to	tender	for	the	securities	at	less	than	their	par	value.	Additionally	in	2010,	we	recorded	an	$8	million	loss	on	the	sale	of	auction	rate	securities. The	remaining	change	in	investment	income	was	caused	by	a	lower	yield	earned	on	our	invested	assets;	however,	this	was	largely	offset	by	a	higher	average	balance	of interest-earning	investments	in	our	portfolio.

# Interest	Expense

Interest	expense	increased	in	2012	compared	with	2011,	largely	due	to	a	higher	average	balance	of	debt	outstanding,	as	well	as	a	higher	effective	interest	rate incurred	on	our	debt.	The	higher	effective	interest	rate	largely	resulted	from	two	factors:	(1)	having	a	greater	proportion	of	fixed-rate	debt	outstanding	relative	to	lower- yielding	variable	rate	debt	and	(2)	an	increase	in	the	interest	rate	indices	underlying	our	variable-rate	debt	and	swaps	in	2012.	Additionally,	interest	expense	increased	in 2012	compared	with	2011	due	to	unfavorable	fair	value	adjustments	on	interest	rate	swaps	that	have	not	been	designated	as	hedges,	as	well	as	the	imputation	of	interest expense	on	the	multiemployer	pension	withdrawal	liability	related	to	the	New	England	Pension	Fund.

Interest	expense	declined	slightly	in	2011	due	to	a	lower	average	interest	rate	incurred	on	variable	rate	debt	and	interest	rate	swaps,	which	reduced	expense	by	$60 million	for	2011	compared	with	2010.	However,	this	was	largely	offset	as	a	result	of	a	higher	average	balance	of	outstanding	debt	in	2011	compared	with	2010.

# Income	Tax	Expense

The	following	table	sets	forth	income	tax	expense	and	our	effective	tax	rate	for	the	years	ended	December	31,	2012,	2011	and	2010	(in	millions):

|  | Year	Ended	December	31, | Year	Ended	December	31, |  | %	Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 | 2012\t/\t2011 | 2011\t/\t2010 |
| Income\tTax\tExpense | $167 | $1,972 | $1,952 | (91.5)% | 1.0% |
| Income\tTax\tImpact\tof: |  |  |  |  |  |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharge | 1,808 | 300 | 37 |  |  |
| Multiemployer\tPension\tPlan\tWithdrawal\tCharge | 337 | — | — |  |  |
| Restructuring\tCharge | — | — | 34 |  |  |
| Gain\ton\tSales\tof\tBusinesses | — | — | (23) |  |  |
| Gain\ton\tReal\tEstate\tTransactions | — | (13) | (48) |  |  |
| Change\tin\tTax\tFiling\tStatus\tfor\tGerman\tSubsidiary | — | — | (76) |  |  |
| Adjusted\tIncome\tTax\tExpense | $2,312 | $2,259 | $1,876 | 2.3\t% | 20.4% |
| Effective\tTax\tRate | 17.1% | 34.1% | 36.9% |  |  |
| Adjusted\tEffective\tTax\tRate | 34.5% | 34.4% | 34.9% |  |  |

Our	adjusted	effective	tax	rate	increased	in	2012	compared	with	2011	primarily	due	to	the	expiration	of	certain	U.S.	tax	credit	provisions	at	the	end	of	2011,	and	a decrease	in	the	relative	benefit	of	other	deductions	and	tax	credits	that	do	not	increase	in	proportion	to	increases	in	pre-tax	income.	Adjusted	income	tax	expense increased	in	2012	compared	with	2011	primarily	due	to	higher	pre-tax	income	and	the	factors	described	above.

Adjusted	income	tax	expense	increased	primarily	due	to	higher	pre-tax	income.	Our	adjusted	effective	tax	rate	declined	in	2011	compared	with	2010	as	a	result	of several	factors,	including	changes	in	deferred	tax	asset	valuation	allowances,	the	relative	proportion	of	taxable	income	in	certain	non-U.S.	jurisdictions,	and	favorable developments	with	U.S.	state	tax	audit	and	litigation	matters.

# Liquidity	and	Capital	Resources

# Operating	Activities

The	following	is	a	summary	of	the	significant	sources	(uses)	of	cash	from	operating	activities	(amounts	in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $807 | $3,804 | $3,338 |
| Non-cash\toperating\tactivities(a) | 7,301 | 4,505 | 4,398 |
| Pension\tand\tpostretirement\tplan\tcontributions\t(UPS-sponsored\tplans) | (917) | (1,436) | (3,240) |
| Income\ttax\treceivables\tand\tpayables | 280 | 236 | (319) |
| Changes\tin\tworking\tcapital\tand\tother\tnoncurrent\tassets\tand\tliabilities | (148) | (12) | (340) |
| Other\toperating\tactivities | (107) | (24) | (2) |
| Net\tcash\tfrom\toperating\tactivities | $7,216 | $7,073 | $3,835 |

(a) Represents	depreciation	and	amortization,	gains	and	losses	on	derivative	and	foreign	exchange	transactions,	deferred	income	taxes,	provisions	for	uncollectible accounts,	pension	and	postretirement	benefit	expense,	stock	compensation	expense,	impairment	charges	and	other	non-cash	items.

Cash	from	operating	activities	remained	strong	throughout	the	2010	to	2012	time	period.	Operating	cash	flow	was	favorably	impacted	in	2012,	compared	with 2011,	by	lower	contributions	into	our	defined	benefit	pension	and	postretirement	benefit	plans;	however,	this	was	partially	offset	by	changes	in	our	working	capital position,	which	was	impacted	by	overall	growth	in	the	business.	The	change	in	the	cash	flows	for	income	tax	receivables	and	payables	in	2011	and	2010	was	primarily related	to	the	timing	of	discretionary	pension	contributions	during	2010,	as	discussed	further	in	the	following	paragraph.

Except	for	discretionary	or	accelerated	fundings	of	our	plans,	contributions	to	our	company-sponsored	pension	plans	have	largely	varied	based	on	whether	any minimum	funding	requirements	are	present	for	individual	pension	plans.

•In	2012,	we	made	a	$355	million	required	contribution	to	the	UPS	IBT	Pension

Plan.

•In	2011,	we	made	a	$1.2	billion	contribution	to	the	UPS	IBT	Pension	Plan,	which	satisfied	our	2011	contribution	requirements	and	also	approximately	$440 million	in	contributions	that	would	not	have	been	required	until	after	2011.

•In	2010,	we	made	$2.0	billion	in	discretionary	contributions	to	our	UPS	Retirement	and	UPS	Pension	Plans,	and	$980	million	in	required	contributions	to	our UPS	IBT	Pension	Plan.

•The	remaining	contributions	in	the	2010	through	2012	period	were	largely	due	to	contributions	to	our	international	pension	plans	and	U.S.	postretirement medical	benefit	plans.

As	discussed	further	in	the	"Contractual	Commitments"	section,	we	have	minimum	funding	requirements	in	the	next	several	years,	primarily	related	to	the	UPS IBT	Pension,	UPS	Retirement	and	UPS	Pension	plans.

As	of	December	31,	2012,	the	total	of	our	worldwide	holdings	of	cash	and	cash	equivalents	was	$7.327	billion.	Approximately	$4.211	billion	of	this	amount	was held	in	European	subsidiaries	with	the	intended	purpose	of	completing	the	acquisition	of	TNT	Express	N.V.	(see	note	16	to	the	consolidated	financial	statements). Excluding	this	portion	of	cash	held	outside	the	U.S.	for	acquisition-related	purposes,	approximately	50%-60%	of	the	remaining	cash	and	cash	equivalents	are	held	by foreign	subsidiaries	throughout	the	year.	The	amount	of	cash	held	by	our	U.S.	and	foreign	subsidiaries	fluctuates	throughout	the	year	due	to	a	variety	of	factors, including	the	timing	of	cash	receipts	and	disbursements	in	the	normal	course	of	business.	Cash	provided	by	operating	activities	in	the	United	States	continues	to	be	our primary	source	of	funds	to	finance	domestic	operating	needs,	capital	expenditures,	share	repurchases	and	dividend	payments	to	shareowners.	To	the	extent	that	such amounts	represent	previously	untaxed	earnings,	the	cash	held	by	foreign	subsidiaries	would	be	subject	to	tax	if	such	amounts	were	repatriated	in	the	form	of	dividends; however,	not	all	international	cash	balances	would	have	to	be	repatriated	in	the	form	of	a	dividend	if	returned	to	the	U.S.	When	amounts	earned	by	foreign	subsidiaries are	expected	to	be	indefinitely	reinvested,	no	accrual	for	taxes	is	provided.

# Investing	Activities

Our	primary	sources	(uses)	of	cash	for	investing	activities	were	as	follows	(amounts	in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tcash\tused\tin\tinvesting\tactivities | $(1,335) | $(2,537) | $(654) |
| Capital\tExpenditures: |  |  |  |
| Buildings\tand\tfacilities | $(506) | $(373) | $(352) |
| Aircraft\tand\tparts | (568) | (598) | (416) |
| Vehicles | (672) | (659) | (339) |
| Information\ttechnology | (407) | (375) | (282) |
|  | $(2,153) | $(2,005) | $(1,389) |
| Capital\tExpenditures\tas\ta\t%\tof\tRevenue | 4.0% | 3.8% | 2.8% |
| Other\tInvesting\tActivities: |  |  |  |
| Proceeds\tfrom\tdisposals\tof\tproperty,\tplant\tand\tequipment | $95 | $27 | $304 |
| Net\tdecrease\tin\tfinance\treceivables | $101 | $184 | $108 |
| Net\t(purchases)\tsales\tof\tmarketable\tsecurities | $628 | $(413) | $30 |
| Cash\treceived\t(paid)\tfor\tbusiness\tacquisitions\tand\tdispositions | $(100) | $(73) | $63 |
| Other\tinvesting\tactivities | $94 | $(257) | $230 |

We	have	commitments	for	the	purchase	of	aircraft,	vehicles,	equipment	and	real	estate	to	provide	for	the	replacement	of	existing	capacity	and	anticipated	future growth.	We	generally	fund	our	capital	expenditures	with	our	cash	from	operations.	Future	capital	spending	for	anticipated	growth	and	replacement	assets	will	depend	on a	variety	of	factors,	including	economic	and	industry	conditions.	We	anticipate	that	our	capital	expenditures	for	2013	will	be	approximately	$2.4	billion,	or approximately	4%	of	revenue.

Capital	spending	on	aircraft	over	the	2010	to	2012	period	was	largely	due	to	scheduled	deliveries	of	previous	orders	for	the	Boeing	767-300ERF	and	747-400F aircraft.	Capital	spending	on	vehicles	increased	during	the	2010	to	2012	period	in	our	U.S.	and	international	package	businesses	and	our	freight	unit,	due	to	vehicle replacements,	technology	enhancements	and	new	vehicle	orders	to	support	volume	growth.	Capital	expenditures	on	buildings	and	facilities	increased	in	2012,	due	to expansion	and	new	construction	projects	at	facilities	in	Europe	and	Asia,	including	a	$200	million	expansion	at	our	European	air	hub	in	Cologne,	Germany	that	began	in 2011	and	will	be	completed	in	2013.

The	proceeds	from	the	disposal	of	property,	plant	and	equipment	were	largely	due	to	real	estate	and	aircraft	sales	during	the	2010	through	2012	period,	as	well	as the	proceeds	from	insurance	recoveries	in	2010.	The	net	decline	in	finance	receivables	in	the	2010	through	2012	period	is	primarily	due	to	customer	paydowns	and	loan sales	activity,	primarily	in	our	commercial	lending,	asset-based	lending	and	leasing	portfolios.	The	purchases	and	sales	of	marketable	securities	are	largely	determined	by liquidity	needs	and	the	periodic	rebalancing	of	investment	types,	and	will	therefore	fluctuate	from	period	to	period.

The	cash	paid	for	business	acquisitions	in	2012	and	2011	was	largely	due	to	the	acquisitions	of	Kiala	S.A.	in	Belgium	and	Pieffe	Group	in	Italy,	respectively.	The cash	received	from	business	dispositions	in	2010	was	largely	due	to	the	sale	of	UPS	Logistics	Technologies,	Inc.

Other	investing	activities	are	impacted	by	the	cash	settlement	of	derivative	contracts	used	in	our	currency	hedging	programs,	and	the	timing	of	aircraft	purchase contract	deposits	on	our	Boeing	767-300ERF	and	747-400F	aircraft	orders.	We	received	(paid)	cash	related	to	purchases	and	settlements	of	energy	and	currency derivative	contracts	used	in	our	hedging	programs	of	$41,	$(78)	and	$111	million	during	2012,	2011	and	2010,	respectively.

# Financing	Activities

Our	primary	sources	(uses)	of	cash	for	financing	activities	are	as	follows	(amounts	in	millions,	except	per	share	data):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tcash\tused\tin\tfinancing\tactivities | $(1,817) | $(4,862) | $(1,346) |
| Share\tRepurchases: |  |  |  |
| Cash\texpended\tfor\tshares\trepurchased | $(1,621) | $(2,665) | $(817) |
| Number\tof\tshares\trepurchased | (21.8) | (38.7) | (12.4) |
| Shares\toutstanding\tat\tyear-end | 953 | 963 | 991 |
| Percent\treduction\tin\tshares\toutstanding | (1.0)% | (2.8)% | (0.3)% |
| Dividends: |  |  |  |
| Dividends\tdeclared\tper\tshare | $2.28 | $2.08 | $1.88 |
| Cash\texpended\tfor\tdividend\tpayments | $(2,130) | $(1,997) | $(1,818) |
| Borrowings: |  |  |  |
| Net\tborrowings\t(repayments)\tof\tdebt\tprincipal | $1,729 | $(95) | $1,246 |
| Other\tFinancing\tActivities: |  |  |  |
| Cash\treceived\tfor\tcommon\tstock\tissuances | $301 | $290 | $218 |
| Other\tfinancing\tactivities | $(96) | $(395) | $(175) |
| Capitalization: |  |  |  |
| Total\tdebt\toutstanding\tat\tyear-end | $12,870 | $11,128 | $10,846 |
| Total\tshareowners'\tequity\tat\tyear-end | 4,733 | 7,108 | 8,047 |
| Total\tcapitalization | $17,603 | $18,236 | $18,893 |
| Debt\tto\tTotal\tCapitalization\t% | 73.1\t% | 61.0\t% | 57.4\t% |

On	May	3,	2012,	the	Board	of	Directors	approved	a	share	repurchase	authorization	of	$5.0	billion,	which	replaced	an	authorization	previously	announced	in	2008. As	of	December	31,	2012,	we	had	$3.970	billion	of	this	share	repurchase	authorization	remaining.	On	February	14,	2013,	the	Board	of	Directors	approved	a	new	share repurchase	authorization	of	$10.0	billion,	which	replaced	the	2012	authorization.	This	new	share	repurchase	authorization	has	no	expiration	date.	We	anticipate repurchasing	approximately	$4.0	billion	of	shares	in	2013.

The	declaration	of	dividends	is	subject	to	the	discretion	of	the	Board	of	Directors	and	will	depend	on	various	factors,	including	our	net	income,	financial condition,	cash	requirements,	future	prospects,	and	other	relevant	factors.	We	expect	to	continue	the	practice	of	paying	regular	cash	dividends.	In	February	2013,	we increased	our	quarterly	dividend	payment	from	$0.57	to	$0.62	per	share,	an	8.8%	increase.

Issuances	of	debt	in	2012	consisted	primarily	of	senior	fixed	rate	note	offerings	totaling	$1.75	billion,	the	proceeds	of	which	were	used	to	repay	the	principal balance	of	our	$1.75	billion	notes	that	matured	on	January	15,	2013.	In	2011,	issuances	of	debt	consisted	primarily	of	commercial	paper	and	five	new	aircraft	leases.	In 2010,	issuances	of	debt	consisted	of	senior	fixed	rate	note	offerings	totaling	$2.0	billion,	the	proceeds	of	which	were	used	to	make	discretionary	contributions	to	UPS- sponsored	pension	plans	and	other	general	corporate	purposes.

Repayments	of	debt	in	2012,	2011	and	2010	consisted	primarily	of	paydowns	of	commercial	paper,	early	redemptions	of	our	UPS	Notes	program	and	certain facilities	bonds,	and	scheduled	principal	payments	on	our	capitalized	lease	obligations.	We	consider	the	overall	fixed	and	floating	interest	rate	mix	of	our	portfolio	and the	related	overall	cost	of	borrowing	when	planning	for	future	issuances	and	non-scheduled	repayments	of	debt.

We	had	no	commercial	paper	outstanding	at	December	31,	2012	and	2011.	The	amount	of	commercial	paper	outstanding	fluctuates	throughout	each	year	based	on daily	liquidity	needs.	The	average	commercial	paper	balance	was	$962	million	and	the	average	interest	rate	paid	was	0.07%	in	2012	($849	million	and	0.08%	in	2011, respectively).

Cash	received	from	common	stock	issuances	to	employees	increased	primarily	due	to	additional	stock	option	exercises	in	2012	and	2011.	The	cash	outflows	in other	financing	activities	are	largely	due	to	repurchases	of	shares	from	employees	to	satisfy	tax	withholding	obligations,	as	well	as	certain	hedging	activities	on forecasted	debt	issuances	and	premiums	paid	on	capped	call	options	for	the	purchase	of	UPS	class	B	shares.	In	conjunction	with	the	senior	fixed	rate	debt	offerings	in 2012	and	2010,	we	settled	several	interest	rate	derivatives	that	were	designated	as	hedges	of	these	debt	offerings,	which	resulted	in	cash	inflows	(outflows)	of	$(70)	and $7	million,	respectively.	During	2012,	the	expiration	and	settlement	of	several	capped	call	options	for	the	purchase	of	UPS	class	B	shares	resulted	in	a	cash	inflow	of $206	million	in	premiums,	while	the	initial	premium	payments	for	these	options	in	2011	resulted	in	a	cash	outflow	of	$200	million	during	that	year.

# Sources	of	Credit

We	are	authorized	to	borrow	up	to	$10.0	billion	under	our	U.S.	commercial	paper	program.	We	also	maintain	a	European	commercial	paper	program	under	which we	are	authorized	to	borrow	up	to	€1.0	billion	in	a	variety	of	currencies.	0	amounts	were	outstanding	under	these	programs	as	of	December	31,	2012.	The	amount	of commercial	paper	outstanding	under	these	programs	in	2013	is	expected	to	fluctuate.

We	maintain	two	credit	agreements	with	a	consortium	of	banks.	One	of	these	agreements	provides	revolving	credit	facilities	of	$1.5	billion,	and	expires	on April	11,	2013.	Generally,	amounts	outstanding	under	this	facility	bear	interest	at	a	periodic	fixed	rate	equal	to	LIBOR	for	the	applicable	interest	period	and	currency denomination,	plus	an	applicable	margin.	Alternatively,	a	fluctuating	rate	of	interest	equal	to	Citibank's	publicly	announced	base	rate,	plus	an	applicable	margin,	may	be used	at	our	discretion.	In	each	case,	the	applicable	margin	for	advances	bearing	interest	based	on	LIBOR	is	a	percentage	determined	by	quotations	from	Markit	Group Ltd.	for	our	1-year	credit	default	swap	spread,	subject	to	a	minimum	rate	of	0.10%	and	a	maximum	rate	of	0.75%.	The	applicable	margin	for	advances	bearing	interest based	on	the	base	rate	is	1.00%	below	the	applicable	margin	for	LIBOR	advances	(but	not	lower	than	0.00%).	We	are	also	able	to	request	advances	under	this	facility based	on	competitive	bids	for	the	applicable	interest	rate.	There	were	no	amounts	outstanding	under	this	facility	as	of	December	31,	2012.

The	second	agreement	provides	revolving	credit	facilities	of	$1.0	billion,	and	expires	on	April	12,	2017.	Generally,	amounts	outstanding	under	this	facility	bear interest	at	a	periodic	fixed	rate	equal	to	LIBOR	for	the	applicable	interest	period	and	currency	denomination,	plus	an	applicable	margin.	Alternatively,	a	fluctuating	rate of	interest	equal	to	Citibank's	publicly	announced	base	rate,	plus	an	applicable	margin,	may	be	used	at	our	discretion.	In	each	case,	the	applicable	margin	for	advances bearing	interest	based	on	LIBOR	is	a	percentage	determined	by	quotations	from	Markit	Group	Ltd.	for	our	credit	default	swap	spread,	interpolated	for	a	period	from	the date	of	determination	of	such	credit	default	swap	spread	in	connection	with	a	new	interest	period	until	the	latest	maturity	date	of	this	facility	then	in	effect	(but	not	less than	a	period	of	one	year).	The	applicable	margin	is	subject	to	certain	minimum	rates	and	maximum	rates	based	on	our	public	debt	ratings	from	Standard	&	Poor's Rating	Service	and	Moody's	Investors	Service.	The	minimum	applicable	margin	rates	range	from	0.100%	to	0.375%,	and	the	maximum	applicable	margin	rates	range from	0.750%	to	1.250%.	The	applicable	margin	for	advances	bearing	interest	based	on	the	base	rate	is	1.00%	below	the	applicable	margin	for	LIBOR	advances	(but	not less	than	0.00%).	We	are	also	able	to	request	advances	under	this	facility	based	on	competitive	bids.	There	were	no	amounts	outstanding	under	this	facility	as	of December	31,	2012.

Our	existing	debt	instruments	and	credit	facilities	subject	us	to	certain	financial	covenants.	As	of	December	31,	2012	and	for	all	prior	periods	presented,	we	have satisfied	these	financial	covenants.	These	covenants	limit	the	amount	of	secured	indebtedness	that	we	may	incur,	and	limit	the	amount	of	attributable	debt	in	sale- leaseback	transactions,	to	10%	of	net	tangible	assets.	As	of	December	31,	2012,	10%	of	net	tangible	assets	is	equivalent	to	$2.770	billion;	however,	we	have	no	covered sale-leaseback	transactions	or	secured	indebtedness	outstanding.	Additionally,	we	are	required	to	maintain	a	minimum	net	worth,	as	defined,	of	$5.0	billion	on	a quarterly	basis.	As	of	December	31,	2012,	our	net	worth,	as	defined,	was	equivalent	to	$8.007	billion.	We	do	not	expect	these	covenants	to	have	a	material	impact	on	our financial	condition	or	liquidity.

# Guarantees	and	Other	Off-Balance	Sheet	Arrangements

We	do	not	have	guarantees	or	other	off-balance	sheet	financing	arrangements,	including	variable	interest	entities,	which	we	believe	could	have	a	material	impact on	financial	condition	or	liquidity.

# Contractual	Commitments

We	have	contractual	obligations	and	commitments	in	the	form	of	capital	leases,	operating	leases,	debt	obligations,	purchase	commitments,	and	certain	other liabilities.	We	intend	to	satisfy	these	obligations	through	the	use	of	cash	flow	from	operations.	The	following	table	summarizes	the	expected	cash	outflow	to	satisfy	our contractual	obligations	and	commitments	as	of	December	31,	2012	(in	millions):

| Commitment	Type | 2013 | 2014 | 2015 | 2016 | 2017 | After	2017 | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Capital\tLeases | $55 | $52 | $50 | $49 | $48 | $426 | $680 |
| Operating\tLeases | 342 | 271 | 203 | 145 | 118 | 358 | 1,437 |
| Debt\tPrincipal | 1,750 | 1,000 | 101 | 1 | 375 | 8,765 | 11,992 |
| Debt\tInterest | 322 | 294 | 287 | 285 | 285 | 4,759 | 6,232 |
| Purchase\tCommitments | 629 | 103 | 22 | 14 | 7 | — | 775 |
| Pension\tFundings | — | — | 563 | 1,020 | 1,058 | 986 | 3,627 |
| Other\tLiabilities | 64 | 58 | 43 | 23 | 10 | 5 | 203 |
| Total | $3,162 | $1,778 | $1,269 | $1,537 | $1,901 | $15,299 | $24,946 |

Our	capital	lease	obligations	relate	primarily	to	leases	on	aircraft.	Capital	leases,	operating	leases,	and	purchase	commitments,	as	well	as	our	debt	principal obligations,	are	discussed	further	in	note	7	to	our	consolidated	financial	statements.	The	amount	of	interest	on	our	debt	was	calculated	as	the	contractual	interest payments	due	on	our	fixed-rate	debt,	in	addition	to	interest	on	variable	rate	debt	that	was	calculated	based	on	interest	rates	as	of	December	31,	2012.	The	calculations	of debt	interest	take	into	account	the	effect	of	interest	rate	swap	agreements.	For	debt	denominated	in	a	foreign	currency,	the	U.S.	Dollar	equivalent	principal	amount	of	the debt	at	the	end	of	the	year	was	used	as	the	basis	to	calculate	future	interest	payments.

Purchase	commitments	represent	contractual	agreements	to	purchase	goods	or	services	that	are	legally	binding,	the	largest	of	which	are	orders	for	aircraft,	engines, and	parts.	As	of	December	31,	2012,	we	have	firm	commitments	to	purchase	eight	Boeing	767-300ERF	aircraft	to	be	delivered	in	2013.

Pension	fundings	represent	the	anticipated	required	cash	contributions	that	will	be	made	to	our	qualified	U.S.	pension	plans	(these	plans	are	discussed	further	in note	4	to	the	consolidated	financial	statements).	The	pension	funding	requirements	were	estimated	under	the	provisions	of	the	Pension	Protection	Act	of	2006	and	the Employee	Retirement	Income	Security	Act	of	1974,	using	discount	rates,	asset	returns	and	other	assumptions	appropriate	for	these	plans.	In	July	2012,	federal	legislation was	signed	into	law	that	allows	pension	plan	sponsors	to	use	higher	interest	rate	assumptions	(based	on	a	25-year	rate	history)	in	valuing	plan	liabilities	and	determining funding	obligations.	As	a	result	of	this	legislation,	we	are	not	subject	to	required	contributions	in	2013	and	2014	for	our	domestic	pension	plans.	The	amount	of	any minimum	funding	requirement,	as	applicable,	for	these	plans	could	change	significantly	in	future	periods,	depending	on	many	factors,	including	future	plan	asset	returns and	discount	rates.	A	sustained	significant	decline	in	the	world	equity	markets,	and	the	resulting	impact	on	our	pension	assets	and	investment	returns,	could	result	in	our domestic	pension	plans	being	subject	to	significantly	higher	minimum	funding	requirements.	To	the	extent	that	the	funded	status	of	these	plans	in	future	years	differs from	our	current	projections,	the	actual	contributions	made	in	future	years	could	materially	differ	from	the	amounts	shown	in	the	table	above.

As	discussed	in	note	5	to	our	consolidated	financial	statements,	we	are	not	currently	subject	to	any	minimum	contributions	or	surcharges	with	respect	to	the multiemployer	pension	and	health	and	welfare	plans	in	which	we	participate.	Contribution	rates	to	these	multiemployer	pension	and	health	and	welfare	plans	are established	through	the	collective	bargaining	process.	As	we	are	not	subject	to	any	minimum	contribution	levels,	we	have	not	included	any	amounts	in	the	contractual commitments	table	with	respect	to	these	multiemployer	plans.

The	contractual	payments	due	for	"other	liabilities"	primarily	include	commitment	payments	related	to	our	investment	in	certain	partnerships.	The	table	above does	not	include	approximately	$232	million	of	liabilities	for	uncertain	tax	positions	because	we	are	uncertain	if	or	when	such	amounts	will	ultimately	be	settled	in	cash. In	addition,	we	also	have	recognized	assets	associated	with	uncertain	tax	positions	in	excess	of	the	related	liabilities	such	that	we	do	not	believe	a	net	contractual obligation	exists	to	the	taxing	authorities.	Uncertain	tax	positions	are	further	discussed	in	note	12	to	the	consolidated	financial	statements.

As	of	December	31,	2012,	we	had	outstanding	letters	of	credit	totaling	approximately	$1.369	billion	issued	in	connection	with	our	self-insurance	reserves	and other	routine	business	requirements.	We	also	issue	surety	bonds	as	an	alternative	to	letters	of	credit	in	certain	instances,	and	as	of	December	31,	2012,	we	had	$584 million	of	surety	bonds	written.	As	of	December	31,	2012,	we	had	unfunded	loan	commitments	totaling	$157	million	associated	with	our	financial	business.

We	believe	that	funds	from	operations	and	borrowing	programs	will	provide	adequate	sources	of	liquidity	and	capital	resources	to	meet	our	expected	long-term needs	for	the	operation	of	our	business,	including	anticipated	capital	expenditures,	for	the	foreseeable	future.

# Contingencies

We	are	involved	in	a	number	of	judicial	proceedings	and	other	matters	arising	from	the	conduct	of	our	business	activities.

Although	there	can	be	no	assurance	as	to	the	ultimate	outcome,	we	have	generally	denied,	or	believe	we	have	a	meritorious	defense	and	will	deny,	liability	in	all litigation	pending	against	us,	including	(except	as	otherwise	noted	herein)	the	matters	described	below,	and	we	intend	to	defend	vigorously	each	case.	We	have	accrued for	legal	claims	when,	and	to	the	extent	that,	amounts	associated	with	the	claims	become	probable	and	can	be	reasonably	estimated.	The	actual	costs	of	resolving	legal claims	may	be	substantially	higher	or	lower	than	the	amounts	accrued	for	those	claims.

For	those	matters	as	to	which	we	are	not	able	to	estimate	a	possible	loss	or	range	of	loss,	we	are	not	able	to	determine	whether	the	loss	will	have	a	material	adverse effect	on	our	business,	financial	condition	or	results	of	operations	or	liquidity.	For	matters	in	this	category,	we	have	indicated	in	the	descriptions	that	follow	the	reasons that	we	are	unable	to	estimate	the	possible	loss	or	range	of	loss.

# Judicial	Proceedings

We	are	a	defendant	in	a	number	of	lawsuits	filed	in	state	and	federal	courts	containing	various	class	action	allegations	under	state	wage-and-hour	laws.	At	this time,	we	do	not	believe	that	any	loss	associated	with	these	matters,	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity.

UPS	and	our	subsidiary	Mail	Boxes	Etc.,	Inc.	are	defendants	in	a	lawsuit	in	California	Superior	Court	about	the	rebranding	of	The	UPS	Store	franchises.		In	the Morgate	case,	the	plaintiffs	are	125	individual	franchisees	who	did	not	rebrand	to	The	UPS	Store	and	a	certified	class	of	all	franchisees	who	did	rebrand.	The	trial	court entered	judgment	against	a	bellwether	individual	plaintiff,	which	was	affirmed	in	January	2012.	The	trial	court	granted	our	motion	for	summary	judgment	against	the certified	class,	which	was	reversed	in	January	2012.

There	are	multiple	factors	that	prevent	us	from	being	able	to	estimate	the	amount	of	loss,	if	any,	that	may	result	from	whatever	remaining	aspects	of	this	case proceeds,	including:	(1)	we	are	vigorously	defending	ourselves	and	believe	we	have	a	number	of	meritorious	legal	defenses;	and	(2)	it	remains	uncertain	what	evidence of	damages,	if	any,	plaintiffs	will	be	able	to	present.	Accordingly,	at	this	time,	we	are	not	able	to	estimate	a	possible	loss	or	range	of	loss	that	may	result	from	this	matter or	to	determine	whether	such	loss,	if	any,	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity.

In	AFMS	LLC	v.	UPS	and	FedEx	Corporation,	a	lawsuit	filed	in	federal	court	in	the	Central	District	of	California	in	August	2010,	the	plaintiff	asserts	that	UPS and	FedEx	violated	U.S.	antitrust	law	by	conspiring	to	refuse	to	negotiate	with	third-party	negotiators	retained	by	shippers	and	by	individually	imposing	policies	that prevent	shippers	from	using	such	negotiators.	The	case	is	scheduled	to	go	to	trial	in	August	2013.	The	Antitrust	Division	of	the	U.S.	Department	of	Justice	("DOJ")	has an	ongoing	civil	investigation	of	our	policies	and	practices	for	dealing	with	third-party	negotiators.	We	are	cooperating	with	this	investigation.	We	deny	any	liability with	respect	to	these	matters	and	intend	to	vigorously	defend	ourselves.	There	are	multiple	factors	that	prevent	us	from	being	able	to	estimate	the	amount	of	loss,	if	any, that	may	result	from	these	matters	including:	(1)	we	believe	that	we	have	a	number	of	meritorious	defenses;	(2)	discovery	is	ongoing;	and	(3)	the	DOJ	investigation	is ongoing.	Accordingly,	at	this	time,	we	are	not	able	to	estimate	a	possible	loss	or	range	of	loss	that	may	result	from	these	matters	or	to	determine	whether	such	loss,	if any,	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity.

In	Canada,	four	purported	class-action	cases	were	filed	against	us	in	British	Columbia	(2006);	Ontario	(2007)	and	Québec	(2006	and	2013).	The	cases	each	allege inadequate	disclosure	concerning	the	existence	and	cost	of	brokerage	services	provided	by	us	under	applicable	provincial	consumer	protection	legislation	and infringement	of	interest	restriction	provisions	under	the	Criminal	Code	of	Canada.	The	British	Columbia	class	action	was	declared	inappropriate	for	certification	and dismissed	by	the	trial	judge.	That	decision	was	upheld	by	the	British	Columbia	Court	of	Appeal	in	March	2010,	which	ended	the	case	in	our	favor.	The	Ontario	class action	was	certified	in	September	2011.	Partial	summary	judgment	was	granted	to	us	and	the	plaintiffs	by	the	Ontario	motions	court.	The	complaint	under	the	Criminal Code	was	dismissed.	No	appeal	is	being	taken	from	that	decision.	The	allegations	of	inadequate	disclosure	were	granted	and	we	are	appealing	that	decision.	The	motion to	authorize	the	2006	Québec	litigation	as	a	class	action	was	dismissed	by	the	motions	judge	in	October	2012;	there	was	no	appeal,	which	ended	that	case	in	our	favor. The	2013	Québec	litigation	is	in	the	earliest	stages.	We	deny	all	liability	and	are	vigorously	defending	the	two	outstanding	cases.	There	are	multiple	factors	that	prevent us	from	being	able	to	estimate	the	amount	of	loss,	if	any,	that	may	result	from	these	matters,	including:	(1)	we	are	vigorously	defending	ourselves	and	believe	that	we have	a	number	of	meritorious	legal	defenses;	and	(2)	there	are	unresolved	questions	of	law	and	fact	that	could	be	important	to	the	ultimate	resolution	of	these	matters. Accordingly,	at	this	time,	we	are	not	able	to	estimate	a	possible	loss	or	range	of	loss	that	may	result	from	these	matters	or	to	determine	whether	such	loss,	if	any,	would have	a	material	adverse	effect	on	our	financial	condition,	results	of	operation	or	liquidity.

# Other	Matters

In	May	and	December	2007	and	August	2008	we	received	and	responded	to	grand	jury	subpoenas	from	the	DOJ	in	the	Northern	District	of	California	in connection	with	an	investigation	by	the	Drug	Enforcement	Administration.	We	also	have	responded	to	informal	requests	for	information	in	connection	with	this investigation,	which	relates	to	transportation	of	packages	on	behalf	of	online	pharmacies	that	may	have	operated	illegally.	We	have	been	cooperating	with	this investigation	and	are	exploring	the	possibility	of	resolving	this	matter,	which	could	include	our	undertaking	further	enhancements	to	our	compliance	program	and	a payment.	Such	a	payment	may	exceed	the	amounts	previously	accrued	with	respect	to	this	matter,	but	we	do	not	expect	that	the	amount	of	such	additional	loss	would have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity.

We	received	a	grand	jury	subpoena	from	the	Antitrust	Division	of	the	DOJ	regarding	the	DOJ's	investigation	into	certain	pricing	practices	in	the	freight	forwarding industry	in	December	2007.	In	January	2013,	we	received	a	letter	from	the	DOJ	confirming	that	it	is	not	pursuing	a	case	against	UPS	with	respect	to	the	investigation.

In	August	2010,	competition	authorities	in	Brazil	opened	an	administrative	proceeding	to	investigate	alleged	anticompetitive	behavior	in	the	freight	forwarding industry.	Approximately	45	freight	forwarding	companies	and	individuals	are	named	in	the	proceeding,	including	UPS,	UPS	SCS	Transportes	(Brasil)	S.A.,	and	a former	employee	in	Brazil.	UPS	will	have	an	opportunity	to	respond	to	these	allegations.	In	November	2012,	we	also	received	a	request	for	information	related	to	similar matters	from	authorities	in	Singapore.

We	are	cooperating	with	each	of	these	investigations,	and	intend	to	continue	to	vigorously	defend	ourselves.	There	are	multiple	factors	that	prevent	us	from	being able	to	estimate	the	amount	of	loss,	if	any,	that	may	result	from	these	matters	including:	(1)	we	are	vigorously	defending	each	matter	and	believe	that	we	have	a	number of	meritorious	legal	defenses;	(2)	there	are	unresolved	questions	of	law	that	could	be	of	importance	to	the	ultimate	resolutions	of	these	matters,	including	the	calculation of	any	potential	fine;	and	(3)	there	is	uncertainty	about	the	time	period	that	is	the	subject	of	the	investigations.	Accordingly,	at	this	time,	we	are	not	able	to	estimate	a possible	loss	or	range	of	loss	that	may	result	from	these	matters	or	to	determine	whether	such	loss,	if	any,	would	have	a	material	adverse	effect	on	our	financial condition,	results	of	operations	or	liquidity.

In	January	2008,	a	class	action	complaint	was	filed	in	the	United	States	District	Court	for	the	Eastern	District	of	New	York	alleging	price-fixing	activities	relating to	the	provision	of	freight	forwarding	services.	UPS	was	not	named	in	this	case.	In	July	2009,	the	plaintiffs	filed	a	first	amended	complaint	naming	numerous	global freight	forwarders	as	defendants.	UPS	and	UPS	Supply	Chain	Solutions	are	among	the	60	defendants	named	in	the	amended	complaint.	The	plaintiffs	filed	a	Second Amended	Complaint	in	October	2010,	which	we	moved	to	dismiss.	In	August	2012,	the	Court	granted	our	motion	to	dismiss	all	claims	relevant	to	UPS	in	the	Second Amended	Complaint,	with	leave	to	amend.	The	plaintiffs	filed	a	Third	Amended	Complaint	in	November	2012.	We	intend	to	file	another	motion	to	dismiss,	and	to otherwise	vigorously	defend	ourselves	in	this	case.	There	are	multiple	factors	that	prevent	us	from	being	able	to	estimate	the	amount	of	loss,	if	any,	that	may	result	from these	matters	including:	(1)	the	court	has	dismissed	the	complaint	once	but	has	not	considered	the	adequacy	of	the	amended	complaint;	(2)	the	scope	and	size	of	the proposed	class	is	ill-defined;	(3)	there	are	significant	legal	questions	about	the	adequacy	and	standing	of	the	putative	class	representatives;	and	(4)	we	believe	that	we have	a	number	of	meritorious	legal	defenses.	Accordingly,	at	this	time,	we	are	not	able	to	estimate	a	possible	loss	or	range	of	loss	that	may	result	from	these	matters	or to	determine	whether	such	loss,	if	any,	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity.

We	are	a	defendant	in	various	other	lawsuits	that	arose	in	the	normal	course	of	business.	We	do	not	believe	that	the	eventual	resolution	of	these	other	lawsuits (either	individually	or	in	the	aggregate),	including	any	reasonably	possible	losses	in	excess	of	current	accruals,	will	have	a	material	adverse	effect	on	our	financial condition,	results	of	operations	or	liquidity.

# Tax	Matters

In	June	2011,	we	received	an	IRS	Revenue	Agent	Report	(RAR)	covering	excise	taxes	for	tax	years	2003	through	2007,	in	addition	to	the	income	tax	matters described	in	note	12	to	the	consolidated	financial	statements.	The	excise	tax	RAR	proposed	two	alternate	theories	for	asserting	additional	excise	tax	on	transportation	of property	by	air.	We	disagreed	with	these	proposed	excise	tax	theories	and	related	adjustments.	We	filed	protests	and,	in	the	third	quarter	of	2011,	the	IRS	responded	to our	protests	and	forwarded	the	case	to	IRS	Appeals.

In	the	third	quarter	of	2012,	following	the	Appeals	Opening	Conference	in	July	2012,	we	had	settlement	discussions	which	we	expect	will	lead	to	a	complete resolution	of	all	excise	tax	matters	and	correlative	income	tax	refund	claims	for	the	2003	through	2007	tax	years	within	the	next	twelve	months.	We	do	not	believe	the ultimate	resolution	of	these	matters	will	have	a	material	effect	on	our	financial	condition,	results	of	operations	or	liquidity.

# Collective	Bargaining	Agreements

As	of	December	31,	2012,	we	had	approximately	249,000	employees	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with local	unions	affiliated	with	the	International	Brotherhood	of	Teamsters	("Teamsters").	These	agreements	run	through	July	31,	2013.	We	have	approximately	2,600	pilots who	are	employed	under	a	collective	bargaining	agreement	with	the	Independent	Pilots	Association	("IPA"),	which	became	amendable	at	the	end	of	2011.	Our	airline mechanics	are	covered	by	a	collective	bargaining	agreement	with	Teamsters	Local	2727,	which	runs	through	November	1,	2013.	In	addition,	approximately	3,100	of	our ground	mechanics	who	are	not	employed	under	agreements	with	the	Teamsters	are	employed	under	collective	bargaining	agreements	with	the	International	Association of	Machinists	and	Aerospace	Workers	("IAM").	Our	agreement	with	the	IAM	runs	through	July	31,	2014.

# Multiemployer	Benefit	Plans

We	contribute	to	a	number	of	multiemployer	defined	benefit	and	health	and	welfare	plans	under	terms	of	collective	bargaining	agreements	that	cover	our	union represented	employees.	Our	current	collective	bargaining	agreements	set	forth	the	annual	contribution	increases	allotted	to	the	plans	that	we	participate	in,	and	we	are	in compliance	with	these	contribution	rates.	These	limitations	will	remain	in	effect	throughout	the	terms	of	the	existing	collective	bargaining	agreements.

In	the	third	quarter	of	2012,	we	reached	an	agreement	with	the	New	England	Pension	Fund,	a	multiemployer	pension	plan	in	which	UPS	is	a	participant,	to restructure	the	pension	liabilities	for	approximately	10,200	UPS	employees	represented	by	the	Teamsters.	The	agreement	reflects	a	decision	by	the	New	England Pension	Fund's	trustees	to	restructure	the	fund	through	plan	amendments	to	utilize	a	"two	pool	approach",	which	effectively	subdivides	the	plan	assets	and	liabilities between	two	groups	of	beneficiaries.	As	part	of	this	agreement,	UPS	agreed	to	withdraw	from	the	original	pool	of	the	New	England	Pension	Fund	of	which	it	had historically	been	a	participant,	and	reenter	the	New	England	Pension	Fund's	newly-established	pool	as	a	new	employer.

Upon	ratification	of	the	agreement	by	the	Teamsters	in	September	2012,	we	withdrew	from	the	original	pool	of	the	New	England	Pension	Fund	and	incurred	an undiscounted	withdrawal	liability	of	$2.162	billion	to	be	paid	in	equal	monthly	installments	over	50	years.	The	undiscounted	withdrawal	liability	was	calculated	by independent	actuaries	employed	by	the	New	England	Pension	Fund,	in	accordance	with	the	governing	plan	documents	and	the	applicable	requirements	of	the	Employee Retirement	Income	Security	Act	of	1974.	In	the	third	quarter	of	2012,	we	recorded	a	charge	to	expense	to	establish	an	$896	million	withdrawal	liability	on	our	balance sheet,	which	represents	the	present	value	of	the	$2.162	billion	future	payment	obligation	discounted	at	a	4.25%	interest	rate.	This	discount	rate	represents	the	estimated credit-adjusted	market	rate	of	interest	at	which	we	could	obtain	financing	of	a	similar	maturity	and	seniority.

As	part	of	this	agreement,	we	believe	that	UPS,	the	New	England	Pension	Fund	and	our	affected	employees	have	obtained	several	benefits,	including:

•The	old	pool	of	the	New	England	Pension	Fund	has	historically	had,	and	would	likely	continue	to	have,	funding	challenges;	this	represented	a	risk	to	UPS of	having	to	face	higher	future	contribution	requirements,	as	well	as	a	risk	to	the	security	of	the	pension	benefits	of	those	UPS	employees	who	participate in	the	New	England	Pension	Fund.	The	50	year	fixed	payment	obligation	should	improve	the	funded	status	of	the	New	England	Pension	Fund	over	time, while	reducing	the	risk	to	UPS	of	significantly	higher	future	contribution	requirements.

•The	newly-established	pool	provides	better	protections	for	new	participating	employers.	This	pool	uses	a	direct-attribution	methodology	for	calculating	any potential	future	withdrawal	liabilities,	which	reduces	our	exposure	to	the	liabilities	of	other	participating	employers.	Additionally,	this	pool	contains provisions	designed	to	maintain	a	fully-funded	status,	including	automatic	benefit	reductions	and/or	increased	employee	contributions	in	the	event	of	an underfunded	situation	occurring.

•As	part	of	the	agreement,	we	were	able	to	freeze	our	hourly	pension	contribution	rate	to	the	newly-established	pool	of	the	New	England	Pension	Fund	for	a period	of	10	years,	which	provides	cash	flow	visibility	for	both	UPS	and	the	New	England	Pension	Fund.

The	$896	million	charge	to	expense	recorded	in	the	third	quarter	of	2012	is	included	in	"compensation	and	benefits	expense"	in	the	consolidated	statement	of income,	while	the	corresponding	withdrawal	liability	is	included	in	"other	non-current	liabilities"	on	the	consolidated	balance	sheet.	We	will	impute	interest	on	the withdrawal	liability	using	the	4.25%	discount	rate,	while	the	monthly	payments	made	to	the	New	England	Pension	Fund	will	reduce	the	remaining	balance	of	the withdrawal	liability.

Our	status	in	the	newly-established	pool	of	the	New	England	Pension	Fund	is	accounted	for	as	the	participation	in	a	new	multiemployer	pension	plan,	and	therefore we	will	recognize	expense	based	on	the	contractually-required	contribution	for	each	period,	and	we	will	recognize	a	liability	for	any	contributions	due	and	unpaid	at	the end	of	a	reporting	period.

# Rate	Adjustments

In	June	2012,	our	UPS	Freight	unit	announced	a	general	rate	increase	averaging	5.9%,	covering	non-contractual	shipments	in	the	United	States,	Canada	and Mexico.	The	rate	adjustment	took	effect	on	July	16,	2012,	and	applies	to	minimum	charge,	LTL	rates	and	accessorial	charges.

In	November	2012,	we	announced	an	increase	in	base	rates	and	changes	in	our	fuel	surcharge	for	package	shipments	that	took	effect	December	31,	2012, including	the	following:

•UPS	Ground	service	rates	increased	an	average	net	4.9%	through	a	combination	of	a	5.9%	increase	in	rates	and	a	1%	reduction	in	the	index	used	to	determine the	ground	fuel	surcharge.

•UPS	Next	Day	Air,	UPS	2nd	Day	Air,	UPS	3	Day	Select,	and	international	air	shipments	originating	in	the	United	States	(including	Worldwide	Express, Worldwide	Express	Plus,	UPS	Worldwide	Expedited	and	UPS	International	Standard	Service)	increased	an	average	net	4.5%,	through	a	combination	of	a 6.5%	increase	in	base	rates	and	a	2%	reduction	in	the	index	used	to	determine	the	air	fuel	surcharge.

•UPS	Next	Day	Air	Freight,	UPS	2nd	Day	Air	Freight,	and	UPS	3	Day	Freight	rates	for	shipments	within	and	between	the	U.S.,	Canada,	and	Puerto	Rico increased	4.9%.	UPS	Express	Freight	rates	for	shipments	originating	in	the	U.S.	also	increased	4.9%.

These	rate	changes	are	customary	and	occur	on	an	annual	basis.	Rate	changes	for	shipments	originating	outside	the	U.S.	are	made	throughout	the	year	and	vary	by geographic	market.

# New	Accounting	Pronouncements

# Recently	Adopted	Accounting	Standards

In	May	2011,	the	Financial	Accounting	Standards	Board	("FASB")	issued	an	Accounting	Standards	Update	to	disclosure	requirements	for	fair	value	measurement. These	amendments,	which	became	effective	for	us	in	the	first	quarter	of	2012,	result	in	a	common	definition	of	fair	value	and	common	measurement	and	disclosure requirements	between	U.S.	GAAP	and	IFRS.	Consequently,	the	amendments	change	some	fair	value	measurement	principles	and	disclosure	requirements.	The implementation	of	this	amended	accounting	guidance	had	an	immaterial	impact	on	our	consolidated	financial	position	and	results	of	operations.

In	June	2011,	the	FASB	issued	an	Accounting	Standards	Update	that	increases	the	prominence	of	items	reported	in	other	comprehensive	income	in	the	financial statements.	This	update	requires	companies	to	present	comprehensive	income	in	a	single	statement	below	net	income	or	in	a	separate	statement	of	comprehensive income	immediately	following	the	income	statement.	This	requirement	became	effective	for	us	beginning	with	the	first	quarter	of	2012,	and	we	have	included	the required	presentation	in	all	applicable	filings	since	that	date.

In	July	2012,	the	FASB	issued	an	Accounting	Standards	Update	that	added	an	optional	qualitative	assessment	for	determining	whether	an	indefinite-lived intangible	asset	is	impaired.	The	objective	of	this	update	is	to	reduce	the	cost	and	complexity	of	performing	an	impairment	test	for	indefinite-lived	intangible	assets	by allowing	an	entity	the	option	to	make	a	qualitative	evaluation	about	the	likelihood	of	an	intangible	impairment	to	determine	whether	it	should	calculate	the	fair	value	of the	asset.	This	accounting	standards	update	also	amends	existing	guidance	by	expanding	upon	the	examples	of	events	and	circumstances	that	an	entity	should	consider between	annual	impairment	tests	in	determining	whether	it	is	more	likely	than	not	that	the	fair	value	of	the	intangible	asset	is	less	than	its	carrying	amount.	We	adopted this	accounting	standard	update	and	applied	its	provisions	to	certain	of	our	intangible	assets	for	our	annual	impairment	testing	as	of	October	1,	2012.

Other	accounting	pronouncements	adopted	during	the	periods	covered	by	the	consolidated	financial	statements	had	an	immaterial	impact	on	our	consolidated financial	position	and	results	of	operations.

# Accounting	Standards	Issued	But	Not	Yet	Effective

In	February	2013,	the	FASB	issued	an	accounting	standards	update	that	adds	new	disclosure	requirements	for	items	reclassified	out	of	accumulated	other comprehensive	income.	This	update	requires	that	companies	present	either	in	a	single	note	or	parenthetically	on	the	face	of	the	financial	statements,	the	effect	of significant	amounts	reclassified	from	each	component	of	accumulated	other	comprehensive	income	based	on	its	source	(e.g.,	the	release	due	to	cash	flow	hedges	from interest	rate	contracts)	and	the	income	statement	line	items	affected	by	the	reclassification	(e.g.,	interest	income	or	interest	expense).	If	a	component	is	not	required	to	be reclassified	to	net	income	in	its	entirety	(e.g.,	the	net	periodic	pension	cost),	companies	would	instead	cross	reference	to	the	related	footnote	for	additional	information (e.g.,	the	pension	footnote).	This	update	is	effective	for	us	beginning	in	the	first	quarter	of	2013.

Other	accounting	pronouncements	issued,	but	not	effective	until	after	December	31,	2012,	are	not	expected	to	have	a	significant	impact	on	our	consolidated financial	position	or	results	of	operations.

# Critical	Accounting	Policies	and	Estimates

Our	discussion	and	analysis	of	our	financial	condition	and	results	of	operations	are	based	on	our	consolidated	financial	statements,	which	are	prepared	in accordance	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	As	indicated	in	note	1	to	our	consolidated	financial	statements,	the	amounts	of assets,	liabilities,	revenue,	and	expenses	reported	in	our	financial	statements	are	affected	by	estimates	and	judgments	that	are	necessary	to	comply	with	generally accepted	accounting	principles.	We	base	our	estimates	on	prior	experience	and	other	assumptions	that	we	consider	reasonable	to	our	circumstances.	Actual	results	could differ	from	our	estimates,	which	would	affect	the	related	amounts	reported	in	our	consolidated	financial	statements.	While	estimates	and	judgments	are	applied	in arriving	at	many	reported	amounts,	we	believe	that	the	following	matters	may	involve	a	higher	degree	of	judgment	and	complexity.

As	discussed	in	note	8	to	our	consolidated	financial	statements,	we	are	involved	in	various	legal	proceedings	and	contingencies.	We	record	a	liability	based	on	our estimate	of	the	probable	cost	of	the	resolution	of	a	contingency.	The	actual	resolution	of	these	contingencies	may	differ	from	our	estimates.	If	a	contingency	is	settled	for an	amount	greater	than	our	estimate,	a	future	charge	to	income	would	result.	Likewise,	if	a	contingency	is	settled	for	an	amount	that	is	less	than	our	estimate,	a	future credit	to	income	would	result.

The	events	that	may	impact	our	contingent	liabilities	are	often	unique	and	generally	are	not	predictable.	At	the	time	a	contingency	is	identified,	we	consider	all relevant	facts	as	part	of	our	evaluation.	We	record	a	liability	for	a	loss	when	the	loss	is	probable	of	occurring	and	reasonably	estimable.	Events	may	arise	that	were	not anticipated	and	the	outcome	of	a	contingency	may	result	in	a	loss	to	us	that	differs	from	our	previously	estimated	liability.	These	factors	could	result	in	a	material difference	between	estimated	and	actual	operating	results.	Contingent	losses	that	are	probable	and	estimable,	excluding	those	related	to	income	taxes	and	self-insurance which	are	discussed	further	below,	were	not	material	to	our	financial	position	or	results	of	operations	as	of,	and	for	the	year	ended,	December	31,	2012.	In	addition,	we have	certain	contingent	liabilities	that	have	not	been	recognized	as	of	December	31,	2012,	because	a	loss	is	not	reasonably	estimable.

# Goodwill	and	Intangible	Impairment

We	perform	impairment	testing	of	goodwill	for	each	of	our	reporting	units	on	an	annual	basis.	Our	reporting	units	are	comprised	of	the	Europe,	Asia,	and Americas	reporting	units	in	the	International	Package	reporting	segment,	and	the	Forwarding,	Logistics,	UPS	Freight,	MBE	/	The	UPS	Store	and	UPS	Capital	reporting units	in	the	Supply	Chain	&	Freight	reporting	segment.	Our	annual	goodwill	impairment	testing	date	is	October	1st	for	each	reporting	unit.	In	assessing	goodwill	for impairment,	we	initially	evaluate	qualitative	factors	to	determine	if	it	is	more	likely	than	not	that	the	fair	value	of	a	reporting	unit	is	less	than	its	carrying	amount.	If	the qualitative	assessment	is	not	conclusive	and	it	is	necessary	to	calculate	the	fair	value	of	a	reporting	unit,	then	we	utilize	a	two-step	process	to	test	goodwill	for impairment.	First,	a	comparison	of	the	fair	value	of	the	applicable	reporting	unit	with	the	aggregate	carrying	value,	including	goodwill,	is	performed.	If	the	carrying amount	of	a	reporting	unit	exceeds	the	reporting	unit's	fair	value,	we	perform	the	second	step	of	the	goodwill	impairment	test	to	determine	the	amount	of	impairment loss.	The	second	step	includes	comparing	the	implied	fair	value	of	the	affected	reporting	unit's	goodwill	with	the	carrying	value	of	that	goodwill.

We	primarily	determine	the	fair	value	of	our	reporting	units	using	a	discounted	cash	flow	model	("DCF	model"),	and	supplement	this	with	observable	valuation multiples	for	comparable	companies,	as	applicable.	The	completion	of	the	DCF	model	requires	that	we	make	a	number	of	significant	assumptions	to	produce	an	estimate of	future	cash	flows.	These	assumptions	include	projections	of	future	revenue,	costs	and	working	capital	changes.	In	addition,	we	make	assumptions	about	the	estimated cost	of	capital	and	other	relevant	variables,	as	required,	in	estimating	the	fair	value	of	our	reporting	units.	The	projections	that	we	use	in	our	DCF	model	are	updated annually	and	will	change	over	time	based	on	the	historical	performance	and	changing	business	conditions	for	each	of	our	reporting	units.	The	determination	of	whether goodwill	is	impaired	involves	a	significant	level	of	judgment	in	these	assumptions,	and	changes	in	our	business	strategy,	government	regulations	or	economic	or	market conditions	could	significantly	impact	these	judgments.	We	will	continue	to	monitor	market	conditions	and	other	factors	to	determine	if	interim	impairment	tests	are necessary	in	future	periods.	If	impairment	indicators	are	present	in	future	periods,	the	resulting	impairment	charges	could	have	a	material	impact	on	our	results	of operations.

None	of	the	reporting	units	incurred	any	goodwill	impairment	charges	in	2012,	2011	or	2010.	Changes	in	our	forecasts	could	cause	carrying	values	of	our reporting	units	to	exceed	their	fair	values	in	future	periods,	potentially	resulting	in	a	goodwill	impairment	charge.	A	10%	decrease	in	the	estimated	fair	value	of	our reporting	units	as	of	our	most	recent	goodwill	testing	date	(October	1,	2012)	would	not	result	in	a	goodwill	impairment	charge.

Licenses	with	a	carrying	value	of	$5	million	as	of	December	31,	2012	are	deemed	to	be	indefinite-lived	intangibles,	and	therefore	are	not	amortized.	Impairment tests	for	indefinite-lived	intangibles	are	performed	on	an	annual	basis.	All	of	our	remaining	recorded	intangible	assets	are	deemed	to	be	finite-lived	intangibles,	and	are thus	amortized	over	their	estimated	useful	lives.	Impairment	tests	for	these	intangible	assets	are	only	performed	when	a	triggering	event	occurs	that	indicates	that	the carrying	value	of	the	intangible	may	not	be	recoverable	based	on	the	undiscounted	future	cash	flows	of	the	intangible.	If	the	carrying	amount	of	the	intangible	is determined	not	to	be	recoverable,	a	write-down	to	fair	value	is	recorded.	Fair	values	are	determined	based	on	a	DCF	model.	No	impairments	of	indefinite-lived	or	finite- lived	intangible	assets	were	recognized	in	2012,	2011	or	2010.

# Self-Insurance	Accruals

We	self-insure	costs	associated	with	workers'	compensation	claims,	automotive	liability,	health	and	welfare	and	general	business	liabilities,	up	to	certain	limits. Insurance	reserves	are	established	for	estimates	of	the	loss	that	we	will	ultimately	incur	on	reported	claims,	as	well	as	estimates	of	claims	that	have	been	incurred	but	not yet	reported.	Recorded	balances	are	based	on	reserve	levels,	which	incorporate	historical	loss	experience	and	judgments	about	the	present	and	expected	levels	of	cost	per claim.	Trends	in	actual	experience	are	a	significant	factor	in	the	determination	of	such	reserves.	We	believe	our	estimated	reserves	for	such	claims	are	adequate,	but actual	experience	in	claim	frequency	and/or	severity	could	materially	differ	from	our	estimates	and	affect	our	results	of	operations.

Workers'	compensation,	automobile	liability	and	general	liability	insurance	claims	may	take	several	years	to	completely	settle.	Consequently,	actuarial	estimates are	required	to	project	the	ultimate	cost	that	will	be	incurred	to	fully	resolve	the	claims.	A	number	of	factors	can	affect	the	actual	cost	of	a	claim,	including	the	length	of time	the	claim	remains	open,	trends	in	health	care	costs	and	the	results	of	related	litigation.	Furthermore,	claims	may	emerge	in	future	years	for	events	that	occurred	in	a prior	year	at	a	rate	that	differs	from	previous	actuarial	projections.	Changes	in	state	legislation	with	respect	to	workers'	compensation	can	affect	the	adequacy	of	our	self- insurance	accruals.	All	of	these	factors	can	result	in	revisions	to	prior	actuarial	projections	and	produce	a	material	difference	between	estimated	and	actual	operating results.

We	sponsor	a	number	of	health	and	welfare	insurance	plans	for	our	employees.	These	liabilities	and	related	expenses	are	based	on	estimates	of	the	number	of employees	and	eligible	dependents	covered	under	the	plans,	anticipated	medical	usage	by	participants	and	overall	trends	in	medical	costs	and	inflation.	Actual	results may	differ	from	these	estimates	and,	therefore,	produce	a	material	difference	between	estimated	and	actual	operating	results.

# Fair	Value	Measurements

In	the	normal	course	of	business,	we	hold	and	issue	financial	instruments	that	contain	elements	of	market	risk,	including	derivatives,	marketable	securities,	finance receivables,	other	investments	and	debt.	Certain	of	these	financial	instruments	are	required	to	be	recorded	at	fair	value,	principally	derivatives,	marketable	securities, pension	assets	and	certain	other	investments.	Fair	values	are	based	on	listed	market	prices,	when	such	prices	are	available.	To	the	extent	that	listed	market	prices	are	not available,	fair	value	is	determined	based	on	other	relevant	factors,	including	dealer	price	quotations.	Certain	financial	instruments,	including	over-the-counter	derivative instruments,	are	valued	using	pricing	models	that	consider,	among	other	factors,	contractual	and	market	prices,	correlations,	time	value,	credit	spreads	and	yield	curve volatility	factors.	Changes	in	the	fixed	income,	equity,	foreign	exchange	and	commodity	markets	will	impact	our	estimates	of	fair	value	in	the	future,	potentially affecting	our	results	of	operations.	A	quantitative	sensitivity	analysis	of	our	exposure	to	changes	in	commodity	prices,	foreign	currency	exchange	rates,	interest	rates	and equity	prices	is	presented	in	the	"Market	Risk"	section	of	this	report.

# Pension	and	Postretirement	Medical	Benefits

Our	pension	and	other	postretirement	benefit	costs	are	calculated	using	various	actuarial	assumptions	and	methodologies.	These	assumptions	include	discount rates,	health	care	cost	trend	rates,	inflation,	compensation	increase	rates,	expected	returns	on	plan	assets,	mortality	rates	and	other	factors.	The	assumptions	utilized	in recording	the	obligations	under	our	plans	represent	our	best	estimates,	and	we	believe	that	they	are	reasonable,	based	on	information	as	to	historical	experience	and performance	as	well	as	other	factors	that	might	cause	future	expectations	to	differ	from	past	trends.

Differences	in	actual	experience	or	changes	in	assumptions	may	affect	our	pension	and	other	postretirement	obligations	and	future	expense.	The	primary	factors contributing	to	actuarial	gains	and	losses	each	year	are	(1)	changes	in	the	discount	rate	used	to	value	pension	and	postretirement	benefit	obligations	as	of	the measurement	date	and	(2)	differences	between	the	expected	and	the	actual	return	on	plan	assets.

We	recognize	changes	in	the	fair	value	of	plan	assets	and	net	actuarial	gains	or	losses	in	excess	of	a	corridor	(defined	as	10%	of	the	greater	of	the	fair	value	of	plan assets	or	the	plans'	projected	benefit	obligations)	in	pension	expense	annually	at	December	31st	each	year.	The	remaining	components	of	pension	expense,	primarily service	and	interest	costs	and	the	expected	return	on	plan	assets,	are	recorded	on	a	quarterly	basis.

The	following	sensitivity	analysis	shows	the	impact	of	a	25	basis	point	change	in	the	assumed	discount	rate,	expected	return	on	assets,	and	health	care	cost	trend rate	for	our	pension	and	postretirement	benefit	plans,	and	the	resulting	increase	(decrease)	on	our	obligations	and	expense	(excluding	the	impact	of	actuarial	gains	and losses	recognized	outside	of	the	corridor)	as	of,	and	for	the	year	ended,	December	31,	2012	(in	millions).

|  | 25	Basis	Point<br>Increase | 25	Basis	Point<br>Decrease |
| :--- | :--- | :--- |
| Pension\tPlans |  |  |
| Discount\tRate: |  |  |
| Effect\ton\tongoing\tnet\tperiodic\tbenefit\tcost | $(50) | $50 |
| Effect\ton\tprojected\tbenefit\tobligation | (1,427) | 1,496 |
| Return\ton\tAssets: |  |  |
| Effect\ton\tongoing\tnet\tperiodic\tbenefit\tcost | (58) | 58 |
| Postretirement\tMedical\tPlans |  |  |
| Discount\tRate: |  |  |
| Effect\ton\tongoing\tnet\tperiodic\tbenefit\tcost | — | — |
| Effect\ton\taccumulated\tpostretirement\tbenefit\tobligation | (119) | 124 |
| Health\tCare\tCost\tTrend\tRate: |  |  |
| Effect\ton\tongoing\tnet\tperiodic\tbenefit\tcost | 1 | (1) |
| Effect\ton\taccumulated\tpostretirement\tbenefit\tobligation | 14 | (17) |

Expense	is	expected	to	increase	in	2013	compared	with	2012,	due	primarily	to	the	decline	in	the	discount	rate	used	to	determine	expense	from	5.58%	for	2012	to 4.38%	for	2013.	This	is	partially	offset	by	the	contributions	to	the	plans	in	2012,	that	increased	the	expected	return	on	assets	used	for	expense	calculation	purposes.

# Depreciation,	Residual	Value	and	Impairment	of	Fixed	Assets

As	of	December	31,	2012,	we	had	$17.894	billion	of	net	fixed	assets,	the	most	significant	category	of	which	is	aircraft.	In	accounting	for	fixed	assets,	we	make estimates	about	the	expected	useful	lives	and	the	expected	residual	values	of	the	assets,	and	the	potential	for	impairment	based	on	the	fair	values	of	the	assets	and	the cash	flows	generated	by	these	assets.

In	estimating	the	lives	and	expected	residual	values	of	aircraft,	we	have	relied	upon	actual	experience	with	the	same	or	similar	aircraft	types.	Subsequent	revisions to	these	estimates	could	be	caused	by	changes	to	our	maintenance	program,	changes	in	the	utilization	of	the	aircraft,	governmental	regulations	on	aging	aircraft	and changing	market	prices	of	new	and	used	aircraft	of	the	same	or	similar	types.	We	periodically	evaluate	these	estimates	and	assumptions,	and	adjust	the	estimates	and assumptions	as	necessary.	Adjustments	to	the	expected	lives	and	residual	values	are	accounted	for	on	a	prospective	basis	through	depreciation	expense.

We	review	long-lived	assets	for	impairment	when	circumstances	indicate	the	carrying	amount	of	an	asset	may	not	be	recoverable	based	on	the	undiscounted	future cash	flows	of	the	asset.	If	the	carrying	amount	of	the	asset	is	determined	not	to	be	recoverable,	a	write-down	to	fair	value	is	recorded.	Fair	values	are	determined	based on	quoted	market	values,	discounted	cash	flows	or	external	appraisals,	as	applicable.	We	review	long-lived	assets	for	impairment	at	the	individual	asset	or	the	asset group	level	for	which	the	lowest	level	of	independent	cash	flows	can	be	identified.	The	circumstances	that	would	indicate	potential	impairment	may	include,	but	are	not limited	to,	a	significant	change	in	the	extent	to	which	an	asset	is	utilized,	a	significant	decrease	in	the	market	value	of	an	asset	and	operating	or	cash	flow	losses associated	with	the	use	of	the	asset.	In	estimating	cash	flows,	we	project	future	volume	levels	for	our	different	air	express	products	in	all	geographic	regions	in	which	we do	business.	Adverse	changes	in	these	volume	forecasts,	or	a	shortfall	of	our	actual	volume	compared	with	our	projections,	could	result	in	our	current	aircraft	capacity exceeding	current	or	projected	demand.	This	situation	would	lead	to	an	excess	of	a	particular	aircraft	type,	resulting	in	an	aircraft	impairment	charge	or	a	reduction	of the	expected	life	of	an	aircraft	type	(thus	resulting	in	increased	depreciation	expense).

In	2012,	2011	and	2010,	there	were	no	indicators	of	impairment	in	our	property,	plant	and	equipment,	and	no	impairment	charges	were	recorded	in	any	period.

# Income	Taxes

We	make	certain	estimates	and	judgments	in	determining	income	tax	expense	for	financial	statement	purposes.	These	estimates	and	judgments	occur	in	the calculation	of	income	by	legal	entity	and	jurisdiction,	tax	credits,	benefits,	and	deductions,	and	in	the	calculation	of	certain	tax	assets	and	liabilities,	which	arise	from differences	in	the	timing	of	recognition	of	revenue	and	expense	for	tax	and	financial	statement	purposes,	as	well	as	the	interest	and	penalties	related	to	these	uncertain	tax positions.	Significant	changes	to	these	estimates	may	result	in	an	increase	or	decrease	to	our	tax	provision	in	a	subsequent	period.

We	assess	the	likelihood	that	we	will	be	able	to	recover	our	deferred	tax	assets.	If	recovery	is	not	likely,	we	must	increase	our	provision	for	taxes	by	recording	a valuation	allowance	against	the	deferred	tax	assets	that	we	estimate	will	not	ultimately	be	recoverable.	We	believe	that	we	will	ultimately	recover	a	substantial	majority of	the	deferred	tax	assets	recorded	on	our	consolidated	balance	sheets.	However,	should	there	be	a	change	in	our	ability	to	recover	our	deferred	tax	assets,	our	tax provision	would	increase	in	the	period	in	which	we	determined	that	the	recovery	was	not	likely.

The	calculation	of	our	tax	liabilities	involves	dealing	with	uncertainties	in	the	application	of	complex	tax	regulations.	We	recognize	liabilities	for	uncertain	tax positions	based	on	a	two-step	process.	The	first	step	is	to	evaluate	the	tax	position	for	recognition	by	determining	if	the	weight	of	available	evidence	indicates	that	it	is more	likely	than	not	that	the	position	will	be	sustained	on	audit,	including	resolution	of	related	appeals	or	litigation	processes,	if	any.	Once	it	is	determined	that	the position	meets	the	recognition	threshold,	the	second	step	requires	us	to	estimate	and	measure	the	tax	benefit	as	the	largest	amount	that	is	more	likely	than	not	to	be realized	upon	ultimate	settlement.	It	is	inherently	difficult	and	subjective	to	estimate	such	amounts,	as	we	have	to	determine	the	probability	of	various	possible outcomes.	We	reevaluate	these	uncertain	tax	positions	on	a	quarterly	basis.	This	evaluation	is	based	on	factors	including,	but	not	limited	to,	changes	in	facts	or circumstances,	changes	in	tax	law,	effectively	settled	issues	under	audit,	and	new	audit	activity.	Such	a	change	in	recognition	or	measurement	could	result	in	the recognition	of	a	tax	benefit	or	an	additional	charge	to	the	tax	provision.

# Allowance	for	Doubtful	Accounts

Losses	on	accounts	receivable	are	recognized	when	they	are	incurred,	which	requires	us	to	make	our	best	estimate	of	the	probable	losses	inherent	in	our	customer receivables	at	each	balance	sheet	date.	These	estimates	require	consideration	of	historical	loss	experience	adjusted	for	current	conditions,	trends	in	customer	payment frequency,	and	judgments	about	the	probable	effects	of	relevant	observable	data,	including	present	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.	Deterioration	in macroeconomic	variables	could	result	in	our	ultimate	loss	exposures	on	our	accounts	receivable	being	significantly	higher	than	what	we	have	currently	estimated	and reserved	for	in	our	allowance	for	doubtful	accounts.	Our	total	allowance	for	doubtful	accounts	as	of	December	31,	2012	and	2011	was	$127	and	$117	million, respectively.	Our	total	provision	for	doubtful	accounts	charged	to	expense	during	the	years	ended	December	31,	2012,	2011	and	2010	was	$155,	$147	and	$199	million, respectively.

# Item	7A. Quantitative	and	Qualitative	Disclosures	about	Market

We	are	exposed	to	market	risk	from	changes	in	certain	commodity	prices,	foreign	currency	exchange	rates,	interest	rates	and	equity	prices.	All	of	these	market risks	arise	in	the	normal	course	of	business,	as	we	do	not	engage	in	speculative	trading	activities.	In	order	to	manage	the	risk	arising	from	these	exposures,	we	utilize	a variety	of	commodity,	foreign	exchange	and	interest	rate	forward	contracts,	options	and	swaps.	A	discussion	of	our	accounting	policies	for	derivative	instruments	and further	disclosures	are	provided	in	note	14	to	the	consolidated	financial	statements.

# Commodity	Price	Risk

We	are	exposed	to	changes	in	the	prices	of	refined	fuels,	principally	jet-A,	diesel	and	unleaded	gasoline,	as	well	as	changes	in	the	price	of	natural	gas.	Currently, the	fuel	surcharges	that	we	apply	to	our	domestic	and	international	package	and	LTL	services	are	the	primary	means	of	reducing	the	risk	of	adverse	fuel	price	changes. Additionally,	we	periodically	use	a	combination	of	option	contracts	to	provide	partial	protection	from	changing	fuel	and	energy	prices.	As	of	December	31,	2012	and 2011,	however,	we	had	no	commodity	option	contracts	outstanding.

# Foreign	Currency	Exchange	Risk

We	have	foreign	currency	risks	related	to	our	revenue,	operating	expenses	and	financing	transactions	in	currencies	other	than	the	local	currencies	in	which	we operate.	We	are	exposed	to	currency	risk	from	the	potential	changes	in	functional	currency	values	of	our	foreign	currency-denominated	assets,	liabilities	and	cash	flows. Our	most	significant	foreign	currency	exposures	relate	to	the	Euro,	the	British	Pound	Sterling,	Canadian	Dollar,	Chinese	Renminbi	and	Hong	Kong	Dollar.	We	use	a combination	of	purchased	and	written	options	and	forward	contracts	to	hedge	forecasted	cash	flow	currency	exposures.	These	derivative	instruments	generally	cover forecasted	foreign	currency	exposures	for	periods	of	12	to	24	months.	Additionally,	we	utilize	cross-currency	interest	rate	swaps	to	hedge	the	currency	risk	inherent	in the	interest	and	principal	payments	associated	with	foreign	currency	denominated	debt	obligations.	The	terms	of	these	swap	agreements	are	commensurate	with	the underlying	debt	obligations.

# Interest	Rate	Risk

We	have	issued	debt	instruments,	including	debt	associated	with	capital	leases,	that	accrue	expense	at	fixed	and	floating	rates	of	interest.	We	use	a	combination	of interest	rate	swaps	as	part	of	our	program	to	manage	the	fixed	and	floating	interest	rate	mix	of	our	total	debt	portfolio	and	related	overall	cost	of	borrowing.	The	notional amount,	interest	payment	and	maturity	dates	of	the	swaps	match	the	terms	of	the	associated	debt.	We	also	utilize	forward	starting	swaps	and	similar	instruments	to	lock in	all	or	a	portion	of	the	borrowing	cost	of	anticipated	debt	issuances.	Our	floating	rate	debt	and	interest	rate	swaps	subject	us	to	risk	resulting	from	changes	in	short- term	(primarily	LIBOR)	interest	rates.

We	also	are	subject	to	interest	rate	risk	with	respect	to	our	pension	and	postretirement	benefit	obligations,	as	changes	in	interest	rates	will	effectively	increase	or decrease	our	liabilities	associated	with	these	benefit	plans,	which	also	results	in	changes	to	the	amount	of	pension	and	postretirement	benefit	expense	recognized	in future	periods.

We	have	investments	in	debt	securities,	as	well	as	cash-equivalent	instruments,	some	of	which	accrue	income	at	variable	rates	of	interest.	Additionally,	we	hold	a portfolio	of	finance	receivables	that	accrue	income	at	fixed	and	floating	rates	of	interest.

# Equity	Price	Risk

We	hold	investments	in	various	common	equity	securities	that	are	subject	to	price	risk.	These	securities	are	primarily	in	the	form	of	equity	index	funds.

# Sensitivity	Analysis

The	following	analysis	provides	quantitative	information	regarding	our	exposure	to	commodity	price	risk,	foreign	currency	exchange	risk,	interest	rate	risk	and equity	price	risk	embedded	in	our	existing	financial	instruments.	We	utilize	valuation	models	to	evaluate	the	sensitivity	of	the	fair	value	of	financial	instruments	with exposure	to	market	risk	that	assume	instantaneous,	parallel	shifts	in	exchange	rates,	interest	rate	yield	curves	and	commodity	and	equity	prices.	For	options	and instruments	with	non-linear	returns,	models	appropriate	to	the	instrument	are	utilized	to	determine	the	impact	of	market	shifts.

There	are	certain	limitations	inherent	in	the	sensitivity	analyses	presented,	primarily	due	to	the	assumption	that	exchange	rates	change	in	a	parallel	fashion	and	that interest	rates	change	instantaneously.	In	addition,	the	analyses	are	unable	to	reflect	the	complex	market	reactions	that	normally	would	arise	from	the	market	shifts modeled.	While	this	is	our	best	estimate	of	the	impact	of	the	specified	interest	rate	scenarios,	these	estimates	should	not	be	viewed	as	forecasts.	We	adjust	the	fixed	and floating	interest	rate	mix	of	our	interest	rate	sensitive	assets	and	liabilities	in	response	to	changes	in	market	conditions.	Additionally,	changes	in	the	fair	value	of	foreign currency	derivatives	and	commodity	derivatives	are	offset	by	changes	in	the	cash	flows	of	the	underlying	hedged	foreign	currency	and	commodity	transactions.

| (in	millions) | 2012 | 2011 |
| :--- | :--- | :--- |
| Change\tin\tFair\tValue: |  |  |
| Currency\tDerivatives(1) | $(1) | $(64) |
| Change\tin\tAnnual\tExpense: |  |  |
| Variable\tRate\tDebt(2) | $7 | $7 |
| Interest\tRate\tDerivatives(2) | $106 | $71 |
| (1) |  |  |

(1) The	potential	change	in	fair	value	from	a	hypothetical	10%	weakening	of	the	U.S.	Dollar	against	local	currency	exchange	rates	across	all maturities.

(2) The	potential	change	in	annual	interest	expense	resulting	from	a	hypothetical	100	basis	point	increase	in	short-term	interest	rates,	applied	to	our	variable	rate debt	and	swap	instruments	(excluding	hedges	of	anticipated	debt	issuances).

The	sensitivity	of	our	pension	and	postretirement	benefit	obligations	to	changes	in	interest	rates	is	quantified	in	"Critical	Accounting	Policies	and	Estimates".	The sensitivity	in	the	fair	value	and	interest	income	of	our	marketable	securities	due	to	changes	in	equity	prices	and	interest	rates,	respectively,	was	not	material	as	of December	31,	2012	and	2011.	The	sensitivity	in	the	fair	value	and	interest	income	of	our	finance	receivables	due	to	changes	in	interest	rates	was	also	not	material	as	of December	31,	2012	and	2011.

# Item	8. Financial	Statements	and	Supplementary

| Report	of	Independent	Registered	Public	Accounting	Firm | 56 |
| :--- | :--- |
| Consolidated\tBalance\tSheets | 57 |
| Statements\tof\tConsolidated\tIncome | 58 |
| Statements\tof\tConsolidated\tComprehensive\tIncome | 58 |
| Statements\tof\tConsolidated\tCash\tFlows | 59 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 60 |
| Note\t1—Summary\tof\tAccounting\tPolicies | 60 |
| Note\t2—Cash\tand\tInvestments | 64 |
| Note\t3—Property,\tPlant\tand\tEquipment | 67 |
| Note\t4—Company-Sponsored\tEmployee\tBenefit\tPlans | 68 |
| Note\t5—Multiemployer\tEmployee\tBenefit\tPlans | 76 |
| Note\t6—Business\tAcquisitions,\tGoodwill\tand\tIntangible\tAssets | 79 |
| Note\t7—Debt\tand\tFinancing\tArrangements | 81 |
| Note\t8—Legal\tProceedings\tand\tContingencies | 85 |
| Note\t9—Shareowners'\tEquity | 87 |
| Note\t10—Stock-Based\tCompensation | 90 |
| Note\t11—Segment\tand\tGeographic\tInformation | 92 |
| Note\t12—Income\tTaxes | 94 |
| Note\t13—Earnings\tPer\tShare | 97 |
| Note\t14—Derivative\tInstruments\tand\tRisk\tManagement | 98 |
| Note\t15—Restructuring\tCosts\tand\tBusiness\tDispositions | 103 |
| Note\t16—Subsequent\tEvents | 103 |
| Note\t17—Quarterly\tInformation | 104 |

# Report	of	Independent	Registered	Public	Accounting	Firm

# Board	of	Directors	and	Shareowners

# Atlanta,	Georgia

We	have	audited	the	accompanying	consolidated	balance	sheets	of	United	Parcel	Service,	Inc.	and	subsidiaries	(the	"Company")	as	of	December	31,	2012	and 2011,	and	the	related	statements	of	consolidated	income,	consolidated	comprehensive	income,	and	consolidated	cash	flows	for	each	of	the	three	years	in	the	period	ended December	31,	2012.	These	financial	statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on	these	financial statements	based	on	our	audits.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on	a test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and	significant estimates	made	by	management,	as	well	as	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

In	our	opinion,	such	consolidated	financial	statements	present	fairly,	in	all	material	respects,	the	financial	position	of	United	Parcel	Service,	Inc.	and	subsidiaries at	December	31,	2012	and	2011,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2012,	in	conformity with	accounting	principles	generally	accepted	in	the	United	States	of	America.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	Company's	internal	control	over financial	reporting	as	of	December	31,	2012,	based	on	the	criteria	established	in	Internal	Control—Integrated	Framework	issued	by	the	Committee	of	Sponsoring Organizations	of	the	Treadway	Commission	and	our	report	dated	February	28,	2013	expressed	an	unqualified	opinion	on	the	Company's	internal	control	over	financial reporting.

# CONSOLIDATED	BALANCE	SHEETS

# (In	millions)

| ASSETS | 2012 | 2011 |
| :--- | :--- | :--- |
| Current\tAssets: |  |  |
| Cash\tand\tcash\tequivalents | $7,327 | $3,034 |
| Marketable\tsecurities | 597 | 1,241 |
| Accounts\treceivable,\tnet | 6,111 | 6,246 |
| Deferred\tincome\ttax\tassets | 583 | 611 |
| Other\tcurrent\tassets | 973 | 1,152 |
| Total\tCurrent\tAssets | 15,591 | 12,284 |
| Property,\tPlant\tand\tEquipment,\tNet | 17,894 | 17,621 |
| Goodwill | 2,173 | 2,101 |
| Intangible\tAssets,\tNet | 603 | 585 |
| Investments\tand\tRestricted\tCash | 307 | 303 |
| Derivative\tAssets | 535 | 483 |
| Deferred\tIncome\tTax\tAssets | 684 | 118 |
| Other\tNon-Current\tAssets | 1,076 | 1,206 |
| Total\tAssets | $38,863 | $34,701 |
| LIABILITIES\tAND\tSHAREOWNERS'\tEQUITY |  |  |
| Current\tLiabilities: |  |  |
| Current\tmaturities\tof\tlong-term\tdebt\tand\tcommercial\tpaper | $1,781 | $33 |
| Accounts\tpayable | 2,278 | 2,300 |
| Accrued\twages\tand\twithholdings | 1,927 | 1,843 |
| Self-insurance\treserves | 763 | 781 |
| Other\tcurrent\tliabilities | 1,641 | 1,557 |
| Total\tCurrent\tLiabilities | 8,390 | 6,514 |
| Long-Term\tDebt | 11,089 | 11,095 |
| Pension\tand\tPostretirement\tBenefit\tObligations | 11,068 | 5,505 |
| Deferred\tIncome\tTax\tLiabilities | 48 | 1,900 |
| Self-Insurance\tReserves | 1,980 | 1,806 |
| Other\tNon-Current\tLiabilities | 1,555 | 773 |
| Shareowners'\tEquity: |  |  |
| Class\tA\tcommon\tstock\t(225\tand\t240\tshares\tissued\tin\t2012\tand\t2011) | 3 | 3 |
| Class\tB\tcommon\tstock\t(729\tand\t725\tshares\tissued\tin\t2012\tand\t2011) | 7 | 7 |
| Additional\tpaid-in\tcapital | — | — |
| Retained\tearnings | 7,997 | 10,128 |
| Accumulated\tother\tcomprehensive\tloss | (3,354) | (3,103) |
| Deferred\tcompensation\tobligations | 78 | 88 |
| Less:\tTreasury\tstock\t(1\tand\t2\tshares\tin\t2012\tand\t2011) | (78) | (88) |
| Total\tEquity\tfor\tControlling\tInterests | 4,653 | 7,035 |
| Noncontrolling\tInterests | 80 | 73 |
| Total\tShareowners'\tEquity | 4,733 | 7,108 |
| Total\tLiabilities\tand\tShareowners'\tEquity | $38,863 | $34,701 |

# STATEMENTS	OF	CONSOLIDATED	INCOME

# (In	millions,	except	per	share	amounts)

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Revenue | $54,127 | $53,105 | $49,545 |
| Operating\tExpenses: |  |  |  |
| Compensation\tand\tbenefits | 33,102 | 27,575 | 26,557 |
| Repairs\tand\tmaintenance | 1,228 | 1,286 | 1,131 |
| Depreciation\tand\tamortization | 1,858 | 1,782 | 1,792 |
| Purchased\ttransportation | 7,354 | 7,232 | 6,640 |
| Fuel | 4,090 | 4,046 | 2,972 |
| Other\toccupancy | 902 | 943 | 939 |
| Other\texpenses | 4,250 | 4,161 | 3,873 |
| Total\tOperating\tExpenses | 52,784 | 47,025 | 43,904 |
| Operating\tProfit | 1,343 | 6,080 | 5,641 |
| Other\tIncome\tand\t(Expense): |  |  |  |
| Investment\tincome | 24 | 44 | 3 |
| Interest\texpense | (393) | (348) | (354) |
| Total\tOther\tIncome\tand\t(Expense) | (369) | (304) | (351) |
| Income\tBefore\tIncome\tTaxes | 974 | 5,776 | 5,290 |
| Income\tTax\tExpense | 167 | 1,972 | 1,952 |
| Net\tIncome | $807 | $3,804 | $3,338 |
| Basic\tEarnings\tPer\tShare | $0.84 | $3.88 | $3.36 |
| Diluted\tEarnings\tPer\tShare | $0.83 | $3.84 | $3.33 |

# STATEMENTS	OF	CONSOLIDATED	COMPREHENSIVE	INCOME

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $807 | $3,804 | $3,338 |
| Change\tin\tforeign\tcurrency\ttranslation\tadjustment,\tnet\tof\ttax | 294 | (92) | (105) |
| Change\tin\tunrealized\tgain\t(loss)\ton\tmarketable\tsecurities,\tnet\tof\ttax | — | (6) | 39 |
| Change\tin\tunrealized\tgain\t(loss)\ton\tcash\tflow\thedges,\tnet\tof\ttax | (82) | 35 | (39) |
| Change\tin\tunrecognized\tpension\tand\tpostretirement\tbenefit\tcosts,\tnet\tof\ttax | (463) | (405) | (813) |
| Comprehensive\tincome | $556 | $3,336 | $2,420 |

See	notes	to	consolidated	financial	statements.

# STATEMENTS	OF	CONSOLIDATED	CASH	FLOWS

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Cash\tFlows\tFrom\tOperating\tActivities: |  |  |  |
| Net\tincome | $807 | $3,804 | $3,338 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tfrom\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 1,858 | 1,782 | 1,792 |
| Pension\tand\tpostretirement\tbenefit\texpense | 5,753 | 1,660 | 1,136 |
| Pension\tand\tpostretirement\tbenefit\tcontributions | (917) | (1,436) | (3,240) |
| Self-insurance\treserves | 156 | 53 | 45 |
| Deferred\ttaxes,\tcredits\tand\tother | (1,199) | 241 | 919 |
| Stock\tcompensation\texpense | 547 | 524 | 519 |
| Other\t(gains)\tlosses | 186 | 245 | (13) |
| Changes\tin\tassets\tand\tliabilities,\tnet\tof\teffect\tof\tacquisitions: |  |  |  |
| Accounts\treceivable | (124) | (657) | (532) |
| Other\tcurrent\tassets | 10 | 107 | (206) |
| Accounts\tpayable | (58) | 249 | 265 |
| Accrued\twages\tand\twithholdings | 98 | 339 | 98 |
| Other\tcurrent\tliabilities | 206 | 186 | (284) |
| Other\toperating\tactivities | (107) | (24) | (2) |
| Net\tcash\tfrom\toperating\tactivities | 7,216 | 7,073 | 3,835 |
| Cash\tFlows\tFrom\tInvesting\tActivities: |  |  |  |
| Capital\texpenditures | (2,153) | (2,005) | (1,389) |
| Proceeds\tfrom\tdisposals\tof\tproperty,\tplant\tand\tequipment | 95 | 27 | 304 |
| Purchases\tof\tmarketable\tsecurities | (2,357) | (4,903) | (2,490) |
| Sales\tand\tmaturities\tof\tmarketable\tsecurities | 2,985 | 4,490 | 2,520 |
| Net\tdecrease\tin\tfinance\treceivables | 101 | 184 | 108 |
| Cash\treceived\t(paid)\tfor\tbusiness\tacquisitions\tand\tdispositions | (100) | (73) | 63 |
| Other\tinvesting\tactivities | 94 | (257) | 230 |
| Net\tcash\tused\tin\tinvesting\tactivities | (1,335) | (2,537) | (654) |
| Cash\tFlows\tFrom\tFinancing\tActivities: |  |  |  |
| Net\tchange\tin\tshort-term\tdebt | — | (183) | (481) |
| Proceeds\tfrom\tlong-term\tborrowings | 1,745 | 279 | 2,195 |
| Repayments\tof\tlong-term\tborrowings | (16) | (191) | (468) |
| Purchases\tof\tcommon\tstock | (1,621) | (2,665) | (817) |
| Issuances\tof\tcommon\tstock | 301 | 290 | 218 |
| Dividends | (2,130) | (1,997) | (1,818) |
| Other\tfinancing\tactivities | (96) | (395) | (175) |
| Net\tcash\tused\tin\tfinancing\tactivities | (1,817) | (4,862) | (1,346) |
| Effect\tOf\tExchange\tRate\tChanges\tOn\tCash\tAnd\tCash\tEquivalents | 229 | (10) | (7) |
| Net\tIncrease\t(Decrease)\tIn\tCash\tAnd\tCash\tEquivalents | 4,293 | (336) | 1,828 |
| Cash\tAnd\tCash\tEquivalents: |  |  |  |
| Beginning\tof\tperiod | 3,034 | 3,370 | 1,542 |
| End\tof\tperiod | $7,327 | $3,034 | $3,370 |
| Cash\tPaid\tDuring\tThe\tPeriod\tFor: |  |  |  |
| Interest\t(net\tof\tamount\tcapitalized) | $381 | $248 | $340 |
| Income\ttaxes | $1,988 | $1,527 | $1,312 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# NOTE	1.	SUMMARY	OF	ACCOUNTING	POLICIES

# Basis	of	Financial	Statements	and	Business	Activities

The	accompanying	consolidated	financial	statements	have	been	prepared	in	accordance	with	accounting	principles	generally	accepted	in	the	United	States ("GAAP"),	and	include	the	accounts	of	United	Parcel	Service,	Inc.,	and	all	of	its	consolidated	subsidiaries	(collectively	"UPS"	or	the	"Company").	All	intercompany balances	and	transactions	have	been	eliminated.

UPS	concentrates	its	operations	in	the	field	of	transportation	services,	primarily	domestic	and	international	letter	and	package	delivery.	Through	our	Supply Chain	&	Freight	subsidiaries,	we	are	also	a	global	provider	of	specialized	transportation,	logistics,	and	financial	services.

# Use	of	Estimates

The	preparation	of	our	consolidated	financial	statements	requires	the	use	of	estimates	and	assumptions	that	affect	the	reported	amounts	of	assets	and	liabilities,	the reported	amounts	of	revenues	and	expenses	and	the	disclosure	of	contingencies.	Estimates	have	been	prepared	on	the	basis	of	the	most	current	and	best	information,	and actual	results	could	differ	materially	from	those	estimates.

# Revenue	Recognition

U.S.	Domestic	and	International	Package	Operations—Revenue	is	recognized	upon	delivery	of	a	letter	or	package.

Forwarding	and	Logistics—Freight	forwarding	revenue	and	the	expense	related	to	the	transportation	of	freight	are	recognized	at	the	time	the	services	are performed.	Material	management	and	distribution	revenue	is	recognized	upon	performance	of	the	service	provided.	Customs	brokerage	revenue	is	recognized	upon completing	documents	necessary	for	customs	entry	purposes.

Freight—Revenue	is	recognized	upon	delivery	of	a	less-than-truckload	("LTL")	or	truckload	("TL")	shipment.

We	utilize	independent	contractors	and	third-party	carriers	in	the	performance	of	some	transportation	services.	In	situations	where	we	act	as	principal	party	to	the transaction,	we	recognize	revenue	on	a	gross	basis;	in	circumstances	where	we	act	as	an	agent,	we	recognize	revenue	net	of	the	cost	of	the	purchased	transportation.

Financial	Services—Income	on	loans	and	direct	finance	leases	is	recognized	on	the	effective	interest	method.	Accrual	of	interest	income	is	suspended	at	the	earlier of	the	time	at	which	collection	of	an	account	becomes	doubtful	or	the	account	becomes	90	days	delinquent.	Income	on	operating	leases	is	recognized	on	the	straight-line method	over	the	terms	of	the	underlying	leases.

# Cash	and	Cash	Equivalents

Cash	and	cash	equivalents	consist	of	highly	liquid	investments	that	are	readily	convertible	into	cash.	We	consider	securities	with	maturities	of	three	months	or	less, when	purchased,	to	be	cash	equivalents.	The	carrying	amount	of	these	securities	approximates	fair	value	because	of	the	short-term	maturity	of	these	instruments.

# Investments

Marketable	securities	are	classified	as	available-for-sale	and	are	carried	at	fair	value,	with	related	unrealized	gains	and	losses	reported,	net	of	tax,	as	accumulated other	comprehensive	income	("AOCI"),	a	separate	component	of	shareowners'	equity.	The	amortized	cost	of	debt	securities	is	adjusted	for	amortization	of	premiums and	accretion	of	discounts	to	maturity.	Such	amortization	and	accretion	is	included	in	investment	income,	along	with	interest	and	dividends.	The	cost	of	securities	sold	is based	on	the	specific	identification	method;	realized	gains	and	losses	resulting	from	such	sales	are	included	in	investment	income.

We	periodically	review	our	investments	for	indications	of	other	than	temporary	impairment	considering	many	factors,	including	the	extent	and	duration	to	which	a security's	fair	value	has	been	less	than	its	cost,	overall	economic	and	market	conditions	and	the	financial	condition	and	specific	prospects	for	the	issuer.	Impairment	of investment	securities	results	in	a	charge	to	income	when	a	market	decline	below	cost	is	other	than	temporary.

# Accounts	Receivable

Losses	on	accounts	receivable	are	recognized	when	they	are	incurred,	which	requires	us	to	make	our	best	estimate	of	the	probable	losses	inherent	in	our	customer receivables	at	each	balance	sheet	date.	These	estimates	require	consideration	of	historical	loss	experience,	adjusted	for	current	conditions,	trends	in	customer	payment frequency,	and	judgments	about	the	probable	effects	of	relevant	observable	data,	including	present	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.

Our	total	allowance	for	doubtful	accounts	as	of	December	31,	2012	and	2011	was	$127	and	$117	million,	respectively.	Our	total	provision	for	doubtful	accounts charged	to	expense	during	the	years	ended	December	31,	2012,	2011	and	2010	was	$155,	$147	and	$199	million,	respectively.

# Inventories

Jet	fuel,	diesel,	and	unleaded	gasoline	inventories	are	valued	at	the	lower	of	average	cost	or	market.	Fuel	and	other	materials	and	supplies	inventories	are recognized	as	inventory	when	purchased,	and	then	charged	to	expense	when	used	in	our	operations.	Total	inventories	were	$393	and	$345	million	as	of	December	31, 2012	and	2011,	respectively,	and	are	included	in	"other	current	assets"	on	the	consolidated	balance	sheet.

# Property,	Plant	and	Equipment

Property,	plant	and	equipment	are	carried	at	cost.	Depreciation	and	amortization	are	provided	by	the	straight-line	method	over	the	estimated	useful	lives	of	the assets,	which	are	as	follows:	Vehicles—6	to	15	years;	Aircraft—12	to	30	years;	Buildings—20	to	40	years;	Leasehold	Improvements—terms	of	leases;	Plant	Equipment —6	to	8.25	years;	Technology	Equipment—3	to	5	years.	The	costs	of	major	airframe	and	engine	overhauls,	as	well	as	routine	maintenance	and	repairs,	are	charged	to expense	as	incurred.

Interest	incurred	during	the	construction	period	of	certain	property,	plant	and	equipment	is	capitalized	until	the	underlying	assets	are	placed	in	service,	at	which time	amortization	of	the	capitalized	interest	begins,	straight-line,	over	the	estimated	useful	lives	of	the	related	assets.	Capitalized	interest	was	$18,	$17	and	$18	million for	2012,	2011,	and	2010,	respectively.

We	review	long-lived	assets	for	impairment	when	circumstances	indicate	the	carrying	amount	of	an	asset	may	not	be	recoverable	based	on	the	undiscounted	future cash	flows	of	the	asset.	If	the	carrying	amount	of	the	asset	is	determined	not	to	be	recoverable,	a	write-down	to	fair	value	is	recorded.	Fair	values	are	determined	based on	quoted	market	values,	discounted	cash	flows,	or	external	appraisals,	as	applicable.	We	review	long-lived	assets	for	impairment	at	the	individual	asset	or	the	asset group	level	for	which	the	lowest	level	of	independent	cash	flows	can	be	identified.

# Goodwill	and	Intangible	Assets

Costs	of	purchased	businesses	in	excess	of	net	identifiable	assets	acquired	(goodwill),	and	indefinite-lived	intangible	assets	are	tested	for	impairment	at	least annually,	unless	changes	in	circumstances	indicate	an	impairment	may	have	occurred	sooner.	We	are	required	to	test	goodwill	on	a	"reporting	unit"	basis.	A	reporting unit	is	the	operating	segment	unless,	for	businesses	within	that	operating	segment,	discrete	financial	information	is	prepared	and	regularly	reviewed	by	management,	in which	case	such	a	component	business	is	the	reporting	unit.

In	assessing	goodwill	for	impairment,	we	initially	evaluate	qualitative	factors	to	determine	if	it	is	more	likely	than	not	that	the	fair	value	of	a	reporting	unit	is	less than	its	carrying	amount.	We	consider	several	factors,	including	macroeconomic	conditions,	industry	and	market	conditions,	overall	financial	performance	of	the reporting	unit,	changes	in	management,	strategy	or	customers,	and	relevant	reporting	unit	specific	events	such	as	a	change	in	the	carrying	amount	of	net	assets,	a	more- likely-than-not	expectation	of	selling	or	disposing	all,	or	a	portion,	of	a	reporting	unit,	and	the	testing	for	recoverability	of	a	significant	asset	group	within	a	reporting unit.	If	this	qualitative	assessment	results	in	a	conclusion	that	it	is	more	likely	than	not	that	the	fair	value	of	a	reporting	unit	exceeds	the	carrying	value,	then	no	further testing	is	performed	for	that	reporting	unit.

If	the	qualitative	assessment	is	not	conclusive	and	it	is	necessary	to	calculate	the	fair	value	of	a	reporting	unit,	then	we	utilize	a	two-step	process	to	test	goodwill for	impairment.	First,	a	comparison	of	the	fair	value	of	the	applicable	reporting	unit	with	the	aggregate	carrying	value,	including	goodwill,	is	performed.	If	the	carrying amount	of	a	reporting	unit	exceeds	its	calculated	fair	value,	then	the	second	step	is	performed,	and	an	impairment	charge	is	recognized	for	the	amount,	if	any,	by	which the	carrying	amount	of	goodwill	exceeds	its	implied	fair	value.	We	primarily	determine	the	fair	value	of	our	reporting	units	using	a	discounted	cash	flow	model,	and supplement	this	with	observable	valuation	multiples	for	comparable	companies,	as	applicable.

Finite-lived	intangible	assets,	including	trademarks,	licenses,	patents,	customer	lists,	non-compete	agreements	and	franchise	rights	are	amortized	on	a	straight-line basis	over	the	estimated	useful	lives	of	the	assets,	which	range	from	2	to	20	years.	Capitalized	software	is	amortized	over	periods	ranging	from	3	to	5	years.

We	self-insure	costs	associated	with	workers'	compensation	claims,	automotive	liability,	health	and	welfare,	and	general	business	liabilities,	up	to	certain	limits. Insurance	reserves	are	established	for	estimates	of	the	loss	that	we	will	ultimately	incur	on	reported	claims,	as	well	as	estimates	of	claims	that	have	been	incurred	but	not yet	reported.	Recorded	balances	are	based	on	reserve	levels,	which	incorporate	historical	loss	experience	and	judgments	about	the	present	and	expected	levels	of	cost	per claim.

# Pension	and	Postretirement	Benefits

We	incur	certain	employment-related	expenses	associated	with	pension	and	postretirement	medical	benefits.	These	pension	and	postretirement	medical	benefit costs	for	company-sponsored	benefit	plans	are	calculated	using	various	actuarial	assumptions	and	methodologies,	including	discount	rates,	expected	returns	on	plan assets,	health	care	cost	trend	rates,	inflation,	compensation	increase	rates,	mortality	rates,	and	other	factors.	Actuarial	assumptions	are	reviewed	on	an	annual	basis, unless	circumstances	require	an	interim	remeasurement	date	for	any	of	our	plans.

We	participate	in	a	number	of	trustee-managed	multiemployer	pension	and	health	and	welfare	plans	for	employees	covered	under	collective	bargaining agreements.	Our	contributions	to	these	plans	are	determined	in	accordance	with	the	respective	collective	bargaining	agreements.	We	recognize	expense	for	the contractually	required	contribution	for	each	period,	and	we	recognize	a	liability	for	any	contributions	due	and	unpaid	(included	in	"other	current	liabilities").

Income	taxes	are	accounted	for	on	an	asset	and	liability	approach	that	requires	the	recognition	of	deferred	tax	assets	and	liabilities	for	the	expected	future	tax consequences	of	events	that	have	been	recognized	in	our	consolidated	financial	statements	or	tax	returns.	In	estimating	future	tax	consequences,	we	generally	consider all	expected	future	events	other	than	proposed	changes	in	the	tax	law	or	rates.	Valuation	allowances	are	provided	if	it	is	more	likely	than	not	that	a	deferred	tax	asset	will not	be	realized.

We	recognize	liabilities	for	uncertain	tax	positions	based	on	a	two-step	process.	The	first	step	is	to	evaluate	the	tax	position	for	recognition	by	determining	if	the weight	of	available	evidence	indicates	that	it	is	more	likely	than	not	that	the	position	will	be	sustained	on	audit,	including	resolution	of	related	appeals	or	litigation processes,	if	any.	Once	it	is	determined	that	the	position	meets	the	recognition	threshold,	the	second	step	requires	us	to	estimate	and	measure	the	tax	benefit	as	the	largest amount	that	is	more	likely	than	not	to	be	realized	upon	ultimate	settlement.	It	is	inherently	difficult	and	subjective	to	estimate	such	amounts,	as	we	have	to	determine	the probability	of	various	possible	outcomes.	We	reevaluate	these	uncertain	tax	positions	on	a	quarterly	basis.	This	evaluation	is	based	on	factors	including,	but	not	limited to,	changes	in	facts	or	circumstances,	changes	in	tax	law,	effectively	settled	issues	under	audit,	and	new	audit	activity.	Such	a	change	in	recognition	or	measurement could	result	in	the	recognition	of	a	tax	benefit	or	an	additional	charge	to	the	tax	provision.

# Foreign	Currency	Translation

We	translate	the	results	of	operations	of	our	foreign	subsidiaries	using	average	exchange	rates	during	each	period,	whereas	balance	sheet	accounts	are	translated using	exchange	rates	at	the	end	of	each	period.	Balance	sheet	currency	translation	adjustments	are	recorded	in	AOCI.	Currency	transaction	gains	and	losses,	net	of hedging,	included	in	other	operating	expenses	were	pre-tax	gains	(losses)	of	$10,	$(1)	and	$7	million	in	2012,	2011	and	2010,	respectively.

# Stock-Based	Compensation

All	share-based	awards	to	employees	are	measured	based	on	their	fair	values	and	expensed	over	the	period	during	which	an	employee	is	required	to	provide service	in	exchange	for	the	award	(the	vesting	period).	We	issue	employee	share-based	awards	under	the	UPS	Incentive	Compensation	Plan	that	are	subject	to	specific vesting	conditions;	generally,	the	awards	cliff	vest	or	vest	ratably	over	a	three	or	five	year	period,	"the	nominal	vesting	period,"	or	at	the	date	the	employee	retires	(as defined	by	the	plan),	if	earlier.	Compensation	cost	is	recognized	immediately	for	awards	granted	to	retirement-eligible	employees,	or	over	the	period	from	the	grant	date to	the	date	retirement	eligibility	is	achieved,	if	that	is	expected	to	occur	during	the	nominal	vesting	period.

Our	financial	assets	and	liabilities	measured	at	fair	value	on	a	recurring	basis	have	been	categorized	based	upon	a	fair	value	hierarchy.	Level	1	inputs	utilize quoted	prices	in	active	markets	for	identical	assets	or	liabilities.	Level	2	inputs	are	based	on	other	observable	market	data,	such	as	quoted	prices	for	similar	assets	and liabilities,	and	inputs	other	than	quoted	prices	that	are	observable,	such	as	interest	rates	and	yield	curves.	Level	3	inputs	are	developed	from	unobservable	data	reflecting our	own	assumptions,	and	include	situations	where	there	is	little	or	no	market	activity	for	the	asset	or	liability.

Certain	non-financial	assets	and	liabilities	are	measured	at	fair	value	on	a	nonrecurring	basis,	including	property,	plant,	and	equipment,	goodwill	and	intangible assets.	These	assets	are	not	measured	at	fair	value	on	a	recurring	basis;	however,	they	are	subject	to	fair	value	adjustments	in	certain	circumstances,	such	as	when	there	is evidence	of	an	impairment.	A	general	description	of	the	valuation	methodologies	used	for	assets	and	liabilities	measured	at	fair	value,	including	the	general classification	of	such	assets	and	liabilities	pursuant	to	the	valuation	hierarchy,	is	included	in	each	footnote	with	fair	value	measurements	present.

# Derivative	Instruments

All	financial	derivative	instruments	are	recorded	on	our	consolidated	balance	sheets	at	fair	value.	Derivatives	not	designated	as	hedges	must	be	adjusted	to	fair value	through	income.	If	a	derivative	is	designated	as	a	hedge,	depending	on	the	nature	of	the	hedge,	changes	in	its	fair	value	that	are	considered	to	be	effective,	as defined,	either	offset	the	change	in	fair	value	of	the	hedged	assets,	liabilities	or	firm	commitments	through	income,	or	are	recorded	in	AOCI	until	the	hedged	item	is recorded	in	income.	Any	portion	of	a	change	in	a	hedge's	fair	value	that	is	considered	to	be	ineffective,	or	is	excluded	from	the	measurement	of	effectiveness,	is recorded	immediately	in	income.

# Changes	in	Presentation

Certain	prior	year	amounts	have	been	reclassified	to	conform	to	the	current	year	presentation.	These	reclassifications	had	no	impact	on	our	financial	position	or results	of	operations.

# NOTE	2.	CASH	AND	INVESTMENTS

The	following	is	a	summary	of	marketable	securities	classified	as	available-for-sale	at	December	31,	2012	and	2011	(in	millions):

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| 2012 |  |  |  |  |
| Current\tmarketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $236 | $2 | $— | $238 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | 171 | 3 | — | 174 |
| Corporate\tdebt\tsecurities | 158 | 5 | — | 163 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | 15 | — | — | 15 |
| Other\tdebt\tand\tequity\tsecurities | 7 | — | — | 7 |
| Total\tmarketable\tsecurities | $587 | $10 | $— | $597 |

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| 2011 |  |  |  |  |
| Current\tmarketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $184 | $3 | $— | $187 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | 188 | 4 | (1) | 191 |
| Corporate\tdebt\tsecurities | 835 | 4 | (2) | 837 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | 15 | — | — | 15 |
| Other\tdebt\tand\tequity\tsecurities | 10 | 1 | — | 11 |
| Total\tmarketable\tsecurities | $1,232 | $12 | $(3) | $1,241 |

The	gross	realized	gains	on	sales	of	marketable	securities	totaled	$15,	$49	and	$24	million	in	2012,	2011,	and	2010,	respectively.	The	gross	realized	losses	totaled $6,	$20	and	$18	million	in	2012,	2011,	and	2010,	respectively.	There	were	no	impairment	losses	recognized	on	marketable	securities	during	2012	or	2011,	while impairment	losses	totaled	$21	million	during	2010	(discussed	further	below).

# Investment	Other-Than-Temporary	Impairments

We	have	concluded	that	no	other-than-temporary	impairment	losses	existed	as	of	December	31,	2012.	In	making	this	determination,	we	considered	the	financial condition	and	prospects	of	the	issuer,	the	magnitude	of	the	losses	compared	with	the	investments'	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.

During	the	second	quarter	of	2010,	we	recorded	impairment	losses	on	certain	asset-backed	auction	rate	securities.	The	impairment	charge	resulted	from	provisions that	allow	the	issuers	of	the	securities	to	subordinate	our	holdings	to	newly	issued	debt	or	to	tender	for	the	securities	at	less	than	their	par	value.	These	securities,	which had	a	cost	basis	of	$128	million,	were	written	down	to	their	fair	value	of	$107	million	as	of	June	30,	2010,	as	an	other-than-temporary	impairment.	The	$21	million	total impairment	charge	during	the	second	quarter	was	recorded	as	a	loss	in	investment	income	on	the	statement	of	consolidated	income.

# Maturity	Information

The	amortized	cost	and	estimated	fair	value	of	marketable	securities	at	December	31,	2012,	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	without	prepayment	penalties.

|  | Cost | Estimated<br>Fair	Value |
| :--- | :--- | :--- |
| Due\tin\tone\tyear\tor\tless | $37 | $37 |
| Due\tafter\tone\tyear\tthrough\tthree\tyears | 251 | 252 |
| Due\tafter\tthree\tyears\tthrough\tfive\tyears | 49 | 49 |
| Due\tafter\tfive\tyears | 248 | 257 |
|  | 585 | 595 |
| Equity\tsecurities | 2 | 2 |
|  | $587 | $597 |

# Non-Current	Investments	and	Restricted	Cash

Restricted	cash	and	cash	equivalents	relate	to	our	self-insurance	requirements.	We	entered	into	an	escrow	agreement	with	an	insurance	carrier	to	guarantee	our self-insurance	obligations.	This	agreement	requires	us	to	provide	cash	collateral	to	the	insurance	carrier,	which	is	reported	in	"Investments	and	Restricted	Cash"	on	our consolidated	balance	sheets.	Additional	cash	collateral	provided	is	reflected	in	other	investing	activities	in	the	statements	of	consolidated	cash	flows.	This	restricted	cash is	invested	in	money	market	funds	and	similar	cash	equivalent	type	assets.	As	of	December	31,	2012	and	2011,	we	had	$288	and	$286	million	in	restricted	cash, respectively.

We	held	a	$19	and	$17	million	investment	in	a	variable	life	insurance	policy	to	fund	benefits	for	the	UPS	Excess	Coordinating	Benefit	Plan	at	December	31,	2012 and	2011,	respectively.	This	investment	is	classified	as	"Investments	and	Restricted	Cash"	in	the	consolidated	balance	sheets	with	the	quarterly	change	in	investment value	recognized	in	investment	income	on	the	statements	of	consolidated	income.

Marketable	securities	utilizing	Level	1	inputs	include	active	exchange-traded	equity	securities	and	equity	index	funds,	and	most	U.S.	Government	debt	securities, as	these	securities	all	have	quoted	prices	in	active	markets.	Marketable	securities	utilizing	Level	2	inputs	include	non-auction	rate	asset-backed	securities,	corporate bonds	and	municipal	bonds.	These	securities	are	valued	using	market	corroborated	pricing,	matrix	pricing	or	other	models	that	utilize	observable	inputs	such	as	yield curves.

We	maintain	holdings	in	certain	investment	partnerships	that	are	measured	at	fair	value	utilizing	Level	3	inputs	(classified	as	"other	investments"	in	the	tables below,	and	as	"Other	Non-Current	Assets"	in	the	consolidated	balance	sheets).	These	partnership	holdings	do	not	have	quoted	prices,	nor	can	they	be	valued	using inputs	based	on	observable	market	data.	These	investments	are	valued	internally	using	a	discounted	cash	flow	model	with	two	significant	inputs:	(1)	the	after-tax	cash flow	projections	for	each	partnership,	and	(2)	a	risk-adjusted	discount	rate	consistent	with	the	duration	of	the	expected	cash	flows	for	each	partnership.	The	weighted- average	discount	rates	used	to	value	these	investments	were	7.75%	and	7.91%	as	of	December	31,	2012	and	2011,	respectively.	These	inputs	and	the	resulting	fair	values are	updated	on	a	quarterly	basis.

The	following	table	presents	information	about	our	investments	measured	at	fair	value	on	a	recurring	basis	as	of	December	31,	2012	and	2011,	and	indicates	the fair	value	hierarchy	of	the	valuation	techniques	utilized	to	determine	such	fair	value	(in	millions).

|  | Quoted<br>Prices	in<br>Active<br>Markets	for<br>Identical<br>Assets<br>(Level	1) | Significant<br>Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Total |
| :--- | :--- | :--- | :--- | :--- |
| 2012 |  |  |  |  |
| Marketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $237 | $1 | $— | $238 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | — | 174 | — | 174 |
| Corporate\tdebt\tsecurities | — | 163 | — | 163 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | — | 15 | — | 15 |
| Other\tdebt\tand\tequity\tsecurities | — | 7 | — | 7 |
| Total\tmarketable\tsecurities | 237 | 360 | — | 597 |
| Other\tinvestments | 19 | — | 163 | 182 |
| Total | $256 | $360 | $163 | $779 |

|  | Quoted<br>Prices	in<br>Active<br>Markets	for<br>Identical<br>Assets<br>(Level	1) | Significant<br>Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Total |
| :--- | :--- | :--- | :--- | :--- |
| 2011 |  |  |  |  |
| Marketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $187 | $— | $— | $187 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | — | 191 | — | 191 |
| Corporate\tdebt\tsecurities | — | 837 | — | 837 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | — | 15 | — | 15 |
| Other\tdebt\tand\tequity\tsecurities | — | 11 | — | 11 |
| Total\tmarketable\tsecurities | 187 | 1,054 | — | 1,241 |
| Other\tinvestments | 17 | — | 217 | 234 |
| Total | $204 | $1,054 | $217 | $1,475 |

The	following	table	presents	the	changes	in	the	above	Level	3	instruments	measured	on	a	recurring	basis	for	the	years	ended	December	31,	2012	and	2011	(in millions).

|  | Marketable<br>Securities | Other<br>Investments | Total |
| :--- | :--- | :--- | :--- |
| Balance\ton\tJanuary\t1,\t2011 | $138 | $267 | $405 |
| Transfers\tinto\t(out\tof)\tLevel\t3 | — | — | — |
| Net\trealized\tand\tunrealized\tgains\t(losses): |  |  |  |
| Included\tin\tearnings\t(in\tinvestment\tincome) | — | (50) | (50) |
| Included\tin\taccumulated\tother\tcomprehensive\tincome\t(pre-tax) | — | — | — |
| Purchases | — | — | — |
| Settlements | (138) | — | (138) |
| Balance\ton\tDecember\t31,\t2011 | $— | $217 | $217 |
| Transfers\tinto\t(out\tof)\tLevel\t3 | — | — | — |
| Net\trealized\tand\tunrealized\tgains\t(losses): |  |  |  |
| Included\tin\tearnings\t(in\tinvestment\tincome) | — | (54) | (54) |
| Included\tin\taccumulated\tother\tcomprehensive\tincome\t(pre-tax) | — | — | — |
| Purchases | — | — | — |
| Settlements | — | — | — |
| Balance\ton\tDecember\t31,\t2012 | $— | $163 | $163 |

# NOTE	3.	PROPERTY,	PLANT	AND	EQUIPMENT

Property,	plant	and	equipment,	including	both	owned	assets	as	well	as	assets	subject	to	capital	leases,	consists	of	the	following	as	of	December	31	(in	millions):

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Vehicles | $6,344 | $5,981 |
| Aircraft | 15,164 | 14,616 |
| Land | 1,122 | 1,114 |
| Buildings | 3,138 | 3,095 |
| Building\tand\tleasehold\timprovements | 3,049 | 2,943 |
| Plant\tequipment | 7,010 | 6,803 |
| Technology\tequipment | 1,675 | 1,593 |
| Equipment\tunder\toperating\tleases | 69 | 93 |
| Construction-in-progress | 470 | 303 |
|  | 38,041 | 36,541 |
| Less:\tAccumulated\tdepreciation\tand\tamortization | (20,147) | (18,920) |
|  | $17,894 | $17,621 |

We	continually	monitor	our	aircraft	fleet	utilization	in	light	of	current	and	projected	volume	levels,	aircraft	fuel	prices	and	other	factors.	Additionally,	we	monitor our	other	property,	plant	and	equipment	categories	for	any	indicators	that	the	carrying	value	of	the	assets	exceed	the	fair	value.	In	2012,	2011	and	2010,	there	were	no indicators	of	impairment	in	our	property,	plant	and	equipment,	and	no	impairment	charges	were	recorded	in	any	period.

# NOTE	4.	COMPANY-SPONSORED	EMPLOYEE	BENEFIT	PLANS

We	sponsor	various	retirement	and	pension	plans,	including	defined	benefit	and	defined	contribution	plans	which	cover	our	employees	worldwide.

# U.S.	Pension	Benefits

In	the	U.S.	we	maintain	the	following	single-employer	defined	benefit	pension	plans:	UPS	Retirement	Plan,	UPS	Pension	Plan,	UPS	IBT	Pension	Plan	and	the UPS	Excess	Coordinating	Benefit	Plan,	a	non-qualified	plan.

The	UPS	Retirement	Plan	is	noncontributory	and	includes	substantially	all	eligible	employees	of	participating	domestic	subsidiaries	who	are	not	members	of	a collective	bargaining	unit,	as	well	as	certain	employees	covered	by	a	collective	bargaining	agreement.	This	plan	generally	provides	for	retirement	benefits	based	on average	compensation	levels	earned	by	employees	prior	to	retirement.	Benefits	payable	under	this	plan	are	subject	to	maximum	compensation	limits	and	the	annual benefit	limits	for	a	tax	qualified	defined	benefit	plan	as	prescribed	by	the	Internal	Revenue	Service	("IRS").

The	UPS	Excess	Coordinating	Benefit	Plan	is	a	non-qualified	plan	that	provides	benefits	to	certain	participants	in	the	UPS	Retirement	Plan	for	amounts	that exceed	the	benefit	limits	described	above.

The	UPS	Pension	Plan	is	noncontributory	and	includes	certain	eligible	employees	of	participating	domestic	subsidiaries	and	members	of	collective	bargaining units	that	elect	to	participate	in	the	plan.	This	plan	generally	provides	for	retirement	benefits	based	on	service	credits	earned	by	employees	prior	to	retirement.

The	UPS	IBT	Pension	Plan	is	noncontributory	and	includes	employees	that	were	previously	members	of	the	Central	States,	Southeast	and	Southwest	Areas Pension	Fund	("Central	States	Pension	Fund"),	a	multiemployer	pension	plan,	in	addition	to	other	eligible	employees	who	are	covered	under	certain	collective bargaining	agreements.

# U.S.	Postretirement	Medical	Benefits

We	also	sponsor	postretirement	medical	plans	in	the	U.S.	that	provide	health	care	benefits	to	our	retirees	who	meet	certain	eligibility	requirements	and	who	are	not otherwise	covered	by	multiemployer	plans.	Generally,	this	includes	employees	with	at	least	10	years	of	service	who	have	reached	age	55	and	employees	who	are eligible	for	postretirement	medical	benefits	from	a	Company-sponsored	plan	pursuant	to	collective	bargaining	agreements.	We	have	the	right	to	modify	or	terminate certain	of	these	plans.	These	benefits	have	been	provided	to	certain	retirees	on	a	noncontributory	basis;	however,	in	many	cases,	retirees	are	required	to	contribute	all	or	a portion	of	the	total	cost	of	the	coverage.

# International	Pension	Benefits

We	also	sponsor	various	defined	benefit	plans	covering	certain	of	our	international	employees.	The	majority	of	our	international	obligations	are	for	defined	benefit plans	in	Canada	and	the	United	Kingdom.	In	addition,	many	of	our	international	employees	are	covered	by	government-sponsored	retirement	and	pension	plans.	We	are not	directly	responsible	for	providing	benefits	to	participants	of	government-sponsored	plans.

# Defined	Contribution	Plans

We	also	sponsor	several	defined	contribution	plans	for	all	employees	not	covered	under	collective	bargaining	agreements,	and	for	certain	employees	covered under	collective	bargaining	agreements.	The	Company	matches,	in	shares	of	UPS	common	stock	or	cash,	a	portion	of	the	participating	employees'	contributions.	In early	2009,	we	suspended	the	company	matching	contributions	to	the	primary	employee	defined	contribution	plan.	A	revised	program	of	company	matching contributions	was	reinstated	effective	January	1,	2011.	Matching	contributions	charged	to	expense	were	$83,	$80	and	$4	million	for	2012,	2011	and	2010,	respectively.

Contributions	are	also	made	to	defined	contribution	money	purchase	plans	under	certain	collective	bargaining	agreements.	Amounts	charged	to	expense	were	$80, $76	and	$78	million	for	2012,	2011	and	2010,	respectively.

# Net	Periodic	Benefit	Cost

Information	about	net	periodic	benefit	cost	for	the	company-sponsored	pension	and	postretirement	benefit	plans	is	as	follows	(in	millions):

|  | 2012 | U.S.	Pension	Benefits<br>2011 | 2010 | 2012 | U.S.	Postretirement<br>Medical	Benefits<br>2011 | 2010 | 2012 | International<br>Pension	Benefits<br>2011 | 2010 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Net\tPeriodic\tCost: |  |  |  |  |  |  |  |  |  |
| Service\tcost | $998 | $870 | $723 | $89 | $89 | $86 | $41 | $34 | $24 |
| Interest\tcost | 1,410 | 1,309 | 1,199 | 208 | 207 | 214 | 41 | 39 | 34 |
| Expected\treturn\ton\tassets | (1,970) | (1,835) | (1,381) | (18) | (16) | (22) | (47) | (43) | (36) |
| Amortization\tof: |  |  |  |  |  |  |  |  |  |
| Transition\tobligation | — | — | — | — | — | — | — | — | — |
| Prior\tservice\tcost | 173 | 171 | 172 | 5 | 7 | 4 | 2 | 1 | 1 |
| Actuarial\t(gain)\tloss | 4,388 | 736 | 70 | 374 | — | — | 69 | 91 | 42 |
| Other | — | — | — | — | — | — | (10) | — | 6 |
| Net\tperiodic\tbenefit\tcost | $4,999 | $1,251 | $783 | $658 | $287 | $282 | $96 | $122 | $71 |

# Actuarial	Assumptions

The	table	below	provides	the	weighted-average	actuarial	assumptions	used	to	determine	the	net	periodic	benefit	cost.

A	discount	rate	is	used	to	determine	the	present	value	of	our	future	benefit	obligations.	To	determine	our	discount	rate	for	our	U.S.	pension	and	other postretirement	benefit	plans,	we	use	a	bond	matching	approach	to	select	specific	bonds	that	would	satisfy	our	projected	benefit	payments.	We	believe	the	bond	matching approach	reflects	the	process	we	would	employ	to	settle	our	pension	and	postretirement	benefit	obligations.	For	our	international	plans,	the	discount	rate	is	determined by	matching	the	expected	cash	flows	of	a	sample	plan	of	similar	duration	to	a	yield	curve	based	on	long-term,	high	quality	fixed	income	debt	instruments	available	as	of the	measurement	date.	For	2012,	each	basis	point	increase	in	the	discount	rate	decreases	the	projected	benefit	obligation	by	approximately	$57	million	and	$5	million	for pension	and	postretirement	medical	benefits,	respectively.	These	assumptions	are	updated	each	measurement	date,	which	is	typically	annually.

An	assumption	for	expected	return	on	plan	assets	is	used	to	determine	a	component	of	net	periodic	benefit	cost	for	the	fiscal	year.	This	assumption	for	our	U.S. plans	was	developed	using	a	long-term	projection	of	returns	for	each	asset	class,	and	taking	into	consideration	our	target	asset	allocation.	The	expected	return	for	each asset	class	is	a	function	of	passive,	long-term	capital	market	assumptions	and	excess	returns	generated	from	active	management.	The	capital	market	assumptions	used	are provided	by	independent	investment	advisors,	while	excess	return	assumptions	are	supported	by	historical	performance,	fund	mandates	and	investment	expectations.	In addition,	we	compare	the	expected	return	on	asset	assumption	with	the	average	historical	rate	of	return	these	plans	have	been	able	to	generate.

For	plans	outside	the	U.S.,	consideration	is	given	to	local	market	expectations	of	long-term	returns.	Strategic	asset	allocations	are	determined	by	country,	based	on the	nature	of	liabilities	and	considering	the	demographic	composition	of	the	plan	participants.

Health	care	cost	trends	are	used	to	project	future	postretirement	benefits	payable	from	our	plans.	For	year-end	2012	U.S.	plan	obligations,	future	postretirement medical	benefit	costs	were	forecasted	assuming	an	initial	annual	increase	of	7.5%,	decreasing	to	5.0%	by	the	year	2018	and	with	consistent	annual	increases	at	those ultimate	levels	thereafter.

Assumed	health	care	cost	trends	can	have	a	significant	effect	on	the	amounts	reported	for	the	U.S.	postretirement	medical	plans.	A	one-percent	change	in	assumed health	care	cost	trend	rates	would	have	had	the	following	effects	on	2012	results	(in	millions):

# Benefit	Obligations	and	Fair	Value	of	Plan	Assets

The	following	table	provides	a	reconciliation	of	the	changes	in	the	plans'	benefit	obligations	and	fair	value	of	plan	assets	as	of	the	respective	measurement	dates	in each	year	(in	millions).

|  | U.S.	Pension	Benefits<br>2012 | 2011 | U.S.	Postretirement<br>Medical	Benefits<br>2012 | 2011 | International<br>Pension<br>Benefits<br>2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Benefit\tObligations: |  |  |  |  |  |  |
| Projected\tbenefit\tobligation\tat\tbeginning\tof\tyear | $24,386 | $21,342 | $3,836 | $3,597 | $841 | $680 |
| Service\tcost | 998 | 870 | 89 | 89 | 41 | 34 |
| Interest\tcost | 1,410 | 1,309 | 208 | 207 | 41 | 39 |
| Gross\tbenefits\tpaid | (774) | (657) | (233) | (219) | (20) | (15) |
| Plan\tparticipants'\tcontributions | — | — | 16 | 16 | 4 | 1 |
| Plan\tamendments | (2) | 3 | 1 | (24) | — | 7 |
| Actuarial\t(gain)/loss | 5,850 | 1,519 | 495 | 170 | 112 | 99 |
| Foreign\tcurrency\texchange\trate\tchanges | — | — | — | — | 24 | (4) |
| Curtailments\tand\tsettlements | — | — | — | — | (5) | — |
| Other | — | — | — | — | 51 | — |
| Projected\tbenefit\tobligation\tat\tend\tof\tyear | $31,868 | $24,386 | $4,412 | $3,836 | $1,089 | $841 |

|  | U.S.	Pension	Benefits<br>2012 | 2011 | U.S.	Postretirement<br>Medical	Benefits<br>2012 | 2011 | International<br>Pension<br>Benefits<br>2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Fair\tValue\tof\tPlan\tAssets: |  |  |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tbeginning\tof\tyear | $22,663 | $20,092 | $174 | $233 | $613 | $561 |
| Actual\treturn\ton\tplan\tassets | 2,684 | 1,956 | 19 | 9 | 56 | 10 |
| Employer\tcontributions | 368 | 1,272 | 475 | 108 | 74 | 56 |
| Plan\tparticipants'\tcontributions | — | — | 16 | 16 | 1 | 1 |
| Gross\tbenefits\tpaid | (774) | (657) | (233) | (219) | (20) | (15) |
| Foreign\tcurrency\texchange\trate\tchanges | — | — | — | — | 20 | — |
| Curtailments\tand\tsettlements | — | — | — | — | (4) | — |
| Other | — | — | 9 | 27 | 61 | — |
| Fair\tvalue\tof\tplan\tassets\tat\tend\tof\tyear | $24,941 | $22,663 | $460 | $174 | $801 | $613 |

# Funded	Status

The	following	table	discloses	the	funded	status	of	our	plans	and	the	amounts	recognized	in	our	balance	sheet	as	of	December	31	(in	millions):

|  | U.S.	Pension	Benefits<br>2012 | 2011 | U.S.	Postretirement<br>Medical	Benefits<br>2012 | 2011 | International<br>Pension<br>	Benefits<br>2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Funded\tStatus: |  |  |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets | $24,941 | $22,663 | $460 | $174 | $801 | $613 |
| Benefit\tobligation | (31,868) | (24,386) | (4,412) | (3,836) | (1,089) | (841) |
| Funded\tstatus\trecognized\tat\tDecember\t31 | $(6,927) | $(1,723) | $(3,952) | $(3,662) | $(288) | $(228) |
| Funded\tStatus\tAmounts\tRecognized\tin\tour\tBalance\tSheet: |  |  |  |  |  |  |
| Other\tnon-current\tassets | $— | $— | $— | $— | $26 | $1 |
| Other\tcurrent\tliabilities | (14) | (13) | (108) | (93) | (3) | (3) |
| Pension\tand\tpostretirement\tbenefit\tobligations | (6,913) | (1,710) | (3,844) | (3,569) | (311) | (226) |
| Net\tliability\tat\tDecember\t31 | $(6,927) | $(1,723) | $(3,952) | $(3,662) | $(288) | $(228) |
| Amounts\tRecognized\tin\tAOCI: |  |  |  |  |  |  |
| Unrecognized\tnet\tprior\tservice\tcost | $(1,318) | $(1,492) | $(79) | $(82) | $(13) | $(14) |
| Unrecognized\tnet\tactuarial\tloss | (3,187) | (2,439) | (441) | (307) | (86) | (52) |
| Gross\tunrecognized\tcost\tat\tDecember\t31 | (4,505) | (3,931) | (520) | (389) | (99) | (66) |
| Deferred\ttax\tasset\tat\tDecember\t31 | 1,694 | 1,479 | 196 | 146 | 26 | 16 |
| Net\tunrecognized\tcost\tat\tDecember\t31 | $(2,811) | $(2,452) | $(324) | $(243) | $(73) | $(50) |

The	accumulated	benefit	obligation	for	our	pension	plans	as	of	the	measurement	dates	in	2012	and	2011	was	$30.350	and	$23.307	billion,	respectively.

Benefit	payments	under	the	pension	plans	include	$16	and	$14	million	paid	from	employer	assets	in	both	2012	and	2011.	Benefit	payments	(net	of	participant contributions)	under	the	postretirement	medical	benefit	plans	include	$110	and	$108	million	paid	from	employer	assets	in	2012	and	2011,	respectively.	Such	benefit payments	from	employer	assets	are	also	categorized	as	employer	contributions.

At	December	31,	2012	and	2011,	the	projected	benefit	obligation,	the	accumulated	benefit	obligation,	and	the	fair	value	of	plan	assets	for	pension	plans	with benefit	obligations	in	excess	of	plan	assets	were	as	follows	(in	millions):

|  | Projected	Benefit	Obligation<br>Exceeds	the	Fair	Value	of		Plan<br>Assets<br>2012 | 2011 | Accumulated	Benefit	Obligation<br>Exceeds	the	Fair	Value	of		Plan<br>Assets<br>2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- |
| U.S.\tPension\tBenefits |  |  |  |  |
| Projected\tbenefit\tobligation | $31,868 | $24,386 | $31,868 | $7,499 |
| Accumulated\tbenefit\tobligation | 29,382 | 22,574 | 29,382 | 7,395 |
| Fair\tvalue\tof\tplan\tassets | 24,941 | 22,663 | 24,941 | 6,646 |
| International\tPension\tBenefits |  |  |  |  |
| Projected\tbenefit\tobligation | $1,028 | $814 | $678 | $499 |
| Accumulated\tbenefit\tobligation | 917 | 714 | 606 | 448 |
| Fair\tvalue\tof\tplan\tassets | 723 | 594 | 388 | 296 |

The	accumulated	postretirement	benefit	obligation	exceeds	plan	assets	for	all	of	our	U.S.	postretirement	medical	benefit	plans.

# Pension	and	Postretirement	Plan	Assets

The	applicable	benefit	plan	committees	establish	investment	guidelines	and	strategies,	and	regularly	monitor	the	performance	of	the	funds	and	portfolio	managers. Our	investment	guidelines	address	the	following	items:	governance,	general	investment	beliefs	and	principles,	investment	objectives,	specific	investment	goals,	process for	determining/maintaining	the	asset	allocation	policy,	long-term	asset	allocation,	rebalancing,	investment	restrictions/prohibited	transactions,	portfolio	manager structure	and	diversification	(which	addresses	limits	on	the	amount	of	investments	held	by	any	one	manager	to	minimize	risk),	portfolio	manager	selection	criteria,	plan evaluation,	portfolio	manager	performance	review	and	evaluation	and	risk	management	(including	various	measures	used	to	evaluate	risk	tolerance).

Our	investment	strategy	with	respect	to	pension	assets	is	to	invest	the	assets	in	accordance	with	applicable	laws	and	regulations.	The	long-term	primary	objectives for	our	pension	assets	are	to:	(1)	provide	for	a	reasonable	amount	of	long-term	growth	of	capital,	with	prudent	exposure	to	risk;	and	protect	the	assets	from	erosion	of purchasing	power;	(2)	provide	investment	results	that	meet	or	exceed	the	plans'	expected	long-term	rate	of	return;	and	(3)	match	the	duration	of	the	liabilities	and	assets of	the	plans	to	reduce	the	potential	risk	of	large	employer	contributions	being	necessary	in	the	future.	The	plans	strive	to	meet	these	objectives	by	employing	portfolio managers	to	actively	manage	assets	within	the	guidelines	and	strategies	set	forth	by	the	benefit	plan	committees.	These	managers	are	evaluated	by	comparing	their performance	to	applicable	benchmarks.

The	fair	values	of	U.S.	pension	and	postretirement	benefit	plan	assets	by	asset	category	as	of	December	31,	2012	are	presented	below	(in	millions),	as	well	as	the percentage	that	each	category	comprises	of	our	total	plan	assets	and	the	respective	target	allocations.

|  | Level	1 | Level	2 | Level	3 | Total<br>Assets | Percentage	of<br>Plan	Assets	-<br>2012 | Target<br>Allocation<br>2012 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Asset\tCategory: |  |  |  |  |  |  |
| Cash\tand\tcash\tequivalents | $103 | $139 | $— | $242 | 0.9% | 0-5 |
| Equity\tSecurities: |  |  |  |  |  |  |
| U.S.\tLarge\tCap | 2,548 | 2,162 | — | 4,710 |  |  |
| U.S.\tSmall\tCap | 450 | 31 | — | 481 |  |  |
| Emerging\tMarkets | 1,160 | 123 | — | 1,283 |  |  |
| Global\tEquity | 2,242 | — | — | 2,242 |  |  |
| International\tEquity | 442 | 694 | — | 1,136 |  |  |
| Total\tEquity\tSecurities | 6,842 | 3,010 | — | 9,852 | 38.8 | 35-55 |
| Fixed\tIncome\tSecurities: |  |  |  |  |  |  |
| U.S.\tGovernment\tSecurities | 4,008 | 443 | — | 4,451 |  |  |
| Corporate\tBonds | 9 | 3,113 | 138 | 3,260 |  |  |
| Global\tBonds | — | 457 | — | 457 |  |  |
| Municipal\tBonds | — | 83 | — | 83 |  |  |
| Total\tFixed\tIncome\tSecurities | 4,017 | 4,096 | 138 | 8,251 | 32.5 | 25-35 |
| Other\tInvestments: |  |  |  |  |  |  |
| Hedge\tFunds | — | — | 2,829 | 2,829 | 11.1 | 5-15 |
| Private\tEquity | — | — | 1,416 | 1,416 | 5.6 | 1-10 |
| Real\tEstate | 177 | 23 | 1,039 | 1,239 | 4.9 | 1-10 |
| Structured\tProducts(1) | — | 210 | — | 210 | 0.8 | 0-5 |
| Other(2) | — | — | 1,362 | 1,362 | 5.4 | 1-10 |
| Total\tU.S.\tPlan\tAssets | $11,139 | $7,478 | $6,784 | $25,401 | 100.0% |  |

(1)	Represents	mortgage	and	asset-backed	securities.

(2)	Represents	global	balanced-risk	commingled	funds,	consisting	primarily	of	equity,	bonds,	and	some	currencies	and	commodities.

|  | Level	1 | Level	2 | Level	3 | Total<br>Assets | Percentage	of<br>Plan	Assets	-<br>2011 | Target<br>Allocation<br>2011 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Asset\tCategory: |  |  |  |  |  |  |
| Cash\tand\tcash\tequivalents | $74 | $1 | $— | $75 | 0.3% | 0-5 |
| Equity\tSecurities: |  |  |  |  |  |  |
| U.S.\tLarge\tCap | 2,264 | 2,460 | — | 4,724 |  |  |
| U.S.\tSmall\tCap | 706 | 27 | — | 733 |  |  |
| Emerging\tMarkets | 533 | 264 | — | 797 |  |  |
| Global\tEquity | 1,115 | 12 | — | 1,127 |  |  |
| International\tEquity | 810 | 1,091 | — | 1,901 |  |  |
| Total\tEquity\tSecurities | 5,428 | 3,854 | — | 9,282 | 40.7 | 35-55 |
| Fixed\tIncome\tSecurities: |  |  |  |  |  |  |
| U.S.\tGovernment\tSecurities | 3,374 | 1,131 | — | 4,505 |  |  |
| Corporate\tBonds | 9 | 3,462 | 80 | 3,551 |  |  |
| Global\tBonds | 38 | 69 | — | 107 |  |  |
| Municipal\tBonds | — | 121 | — | 121 |  |  |
| Total\tFixed\tIncome\tSecurities | 3,421 | 4,783 | 80 | 8,284 | 36.3 | 20-40 |
| Other\tInvestments: |  |  |  |  |  |  |
| Hedge\tFunds | — | — | 2,132 | 2,132 | 9.3 | 5-15 |
| Private\tEquity | — | — | 1,354 | 1,354 | 5.9 | 1-10 |
| Real\tEstate | 151 | — | 948 | 1,099 | 4.8 | 1-10 |
| Other(1) | — | — | 611 | 611 | 2.7 | 1-10 |
| Total\tU.S.\tPlan\tAssets | $9,074 | $8,638 | $5,125 | $22,837 | 100.0% |  |

There	were	no	UPS	class	A	or	B	shares	of	common	stock	directly	held	in	plan	assets	as	of	December	31,	2012	or	December	31,	2011.

Pension	assets	utilizing	Level	1	inputs	include	fair	values	of	equity	investments,	corporate	debt	instruments,	and	U.S.	government	securities	that	were	determined by	closing	prices	for	those	securities	traded	on	national	stock	exchanges,	while	securities	traded	in	the	over-the-counter	market	and	listed	securities	for	which	no	sale	was reported	on	the	valuation	date	are	valued	at	the	mean	between	the	last	reported	bid	and	asked	prices.

Level	2	assets	include	certain	bonds	that	are	valued	based	on	yields	currently	available	on	comparable	securities	of	other	issues	with	similar	credit	ratings, mortgage-backed	securities	that	are	valued	based	on	cash	flow	and	yield	models	using	acceptable	modeling	and	pricing	conventions,	and	certain	investments	that	are pooled	with	other	investments	held	by	the	trustee	in	a	commingled	employee	benefit	trust	fund.	The	investments	in	the	commingled	funds	are	valued	by	taking	the percentage	owned	by	the	respective	plan	in	the	underlying	net	asset	value	of	the	trust	fund,	which	was	determined	in	accordance	with	the	paragraph	above.

Certain	investments'	estimated	fair	value	is	based	on	unobservable	inputs	that	are	not	corroborated	by	observable	market	data	and	are	thus	classified	as	Level	3. These	investments	include	commingled	funds	comprised	of	corporate	and	government	bonds,	hedge	funds,	real	estate	investments	and	private	equity	funds.	The commingled	funds	are	valued	using	net	asset	values,	adjusted,	as	appropriate,	for	investment	fund	specific	inputs	determined	to	be	significant	to	the	valuation. Investments	in	hedge	funds	are	valued	using	reported	net	asset	values	as	of	December	31.	These	assets	are	primarily	invested	in	a	portfolio	of	diversified,	direct investments	and	funds	of	hedge	funds.	Real	estate	investments	and	private	equity	funds	are	valued	using	fair	values	per	the	most	recent	partnership	audited	financial reports,	adjusted	as	appropriate	for	any	lag	between	the	date	of	the	financial	reports	and	December	31.	The	real	estate	investments	consist	of	U.S.	and	non-U.S.	real estate	investments	and	are	broadly	diversified.	The	fair	values	may,	due	to	the	inherent	uncertainty	of	valuation	for	those	alternative	investments,	differ	significantly from	the	values	that	would	have	been	used	had	a	ready	market	for	the	alternative	investments	existed,	and	the	differences	could	be	material.

As	of	December	31,	2012	and	2011,	$2.960	and	$3.895	billion	of	plan	assets	are	held	in	commingled	stock	funds	that	hold	U.S.	and	international	public	market securities.	The	plans	held	the	right	to	liquidate	positions	in	these	commingled	stock	funds	at	any	time,	subject	only	to	a	brief	notification	period.	No	unfunded commitments	existed	with	respect	to	these	commingled	stock	funds	at	December	31,	2012.

As	of	December	31,	2012	and	2011,	the	plans	hold	$2.455	and	$2.302	billion	of	investments	in	limited	partnership	interests	in	various	private	equity	and	real estate	funds.	Limited	provision	exists	for	the	redemption	of	these	interests	by	the	general	partners	that	invest	in	these	funds	until	the	end	of	the	term	of	the	partnerships, typically	ranging	between	12	and	18	years	from	the	date	of	inception.	An	active	secondary	market	exists	for	similar	partnership	interests,	although	no	particular	value (discount	or	premium)	can	be	guaranteed.	At	December	31,	2012,	unfunded	commitments	to	such	limited	partnerships	totaling	approximately	$626	million	are	expected to	be	contributed	over	the	remaining	investment	period,	typically	ranging	between	three	and	six	years.

As	of	December	31,	2012	and	2011,	$4.191	and	$2.743	billion	of	plan	investments	are	held	in	hedge	funds	that	pursue	multiple	strategies	to	diversify	risk	and reduce	volatility.	Most	of	these	funds	allow	redemptions	either	quarterly	or	semi-annually	after	a	two	to	three	month	notice	period,	while	other	funds	allow	for redemption	after	only	a	brief	notification	period	with	no	restriction	on	redemption	frequency.	No	unfunded	commitments	existed	with	respect	to	these	hedge	funds	as	of December	31,	2012.

The	following	tables	presents	the	changes	in	the	Level	3	instruments	measured	on	a	recurring	basis	for	the	years	ended	December	31,	2012	and	2011	(in	millions):

|  | Corporate<br>Bonds | Hedge<br>Funds | Real<br>Estate | Private<br>Equity | Other | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Balance\ton\tJanuary\t1,\t2011 | $193 | $1,765 | $789 | $1,309 | $258 | $4,314 |
| Actual\tReturn\ton\tAssets: |  |  |  |  |  |  |
| Assets\tHeld\tat\tEnd\tof\tYear | (14) | 69 | 144 | 145 | 53 | 397 |
| Assets\tSold\tDuring\tthe\tYear | 3 | 22 | 5 | — | — | 30 |
| Purchases | 57 | 457 | 150 | 164 | 300 | 1,128 |
| Sales | (159) | (181) | (140) | (264) | — | (744) |
| Settlements | — | — | — | — | — | — |
| Transfers\tInto\t(Out\tof)\tLevel\t3 | — | — | — | — | — | — |
| Balance\ton\tDecember\t31,\t2011 | $80 | $2,132 | $948 | $1,354 | $611 | $5,125 |
| Actual\tReturn\ton\tAssets: |  |  |  |  |  |  |
| Assets\tHeld\tat\tEnd\tof\tYear | 1 | 59 | 85 | 163 | 151 | 459 |
| Assets\tSold\tDuring\tthe\tYear | (3) | 5 | 4 | — | — | 6 |
| Purchases | 71 | 1,300 | 144 | 184 | 600 | 2,299 |
| Sales | (11) | (667) | (142) | (285) | — | (1,105) |
| Settlements | — | — | — | — | — | — |
| Transfers\tInto\t(Out\tof)\tLevel\t3 | — | — | — | — | — | — |
| Balance\ton\tDecember\t31,\t2012 | $138 | $2,829 | $1,039 | $1,416 | $1,362 | $6,784 |

The	fair	value	disclosures	above	have	not	been	provided	for	our	international	pension	benefit	plans	since	asset	allocations	are	determined	and	managed	at	the individual	country	level.	In	general,	the	asset	allocations	for	these	plans	were	approximately	56%	in	equity	securities,	34%	in	debt	securities	and	10%	in	other	securities in	2012	(approximately	55%,	35%,	and	10%	in	2011,	respectively).	The	amount	of	assets	having	significant	unobservable	inputs	(Level	3),	if	any,	in	these	plans	would be	immaterial	to	our	financial	statements.

# Accumulated	Other	Comprehensive	Income

The	estimated	amounts	of	prior	service	cost	in	AOCI	expected	to	be	amortized	and	recognized	as	a	component	of	net	periodic	benefit	cost	in	2013	are	as	follows (in	millions):

|  | U.S.	Pension	Benefits | U.S.	Postretirement<br>Medical	Benefits | International	Pension<br>Benefits |
| :--- | :--- | :--- | :--- |
| Prior\tservice\tcost\t/\t(benefit) | $172 | $4 | $2 |

# Expected	Cash	Flows

Information	about	expected	cash	flows	for	the	pension	and	postretirement	benefit	plans	is	as	follows	(in	millions):

|  | U.S.<br>Pension	Benefits | U.S.	Postretirement<br>Medical	Benefits | International	Pension<br>Benefits |
| :--- | :--- | :--- | :--- |
| Employer\tContributions: |  |  |  |
| 2013\t(expected)\tto\tplan\ttrusts | $— | $— | $76 |
| 2013\t(expected)\tto\tplan\tparticipants | 14 | 111 | 3 |
| Expected\tBenefit\tPayments: |  |  |  |
| 2013 | $798 | $255 | $20 |
| 2014 | 887 | 237 | 22 |
| 2015 | 978 | 254 | 25 |
| 2016 | 1,076 | 271 | 27 |
| 2017 | 1,182 | 288 | 30 |
| 2018\t-\t2022 | 7,815 | 1,575 | 199 |

Our	funding	policy	for	U.S.	plans	is	to	contribute	amounts	annually	that	are	at	least	equal	to	the	amounts	required	by	applicable	laws	and	regulations,	or	to	directly fund	payments	to	plan	participants,	as	applicable.	International	plans	will	be	funded	in	accordance	with	local	regulations.	Additional	discretionary	contributions	may	be made	when	deemed	appropriate	to	meet	the	long-term	obligations	of	the	plans.	Expected	benefit	payments	for	pensions	will	be	primarily	paid	from	plan	trusts.	Expected benefit	payments	for	postretirement	medical	benefits	will	be	paid	from	plan	trusts	and	corporate	assets.

# NOTE	5.	MULTIEMPLOYER	EMPLOYEE	BENEFIT	PLANS

We	contribute	to	a	number	of	multiemployer	defined	benefit	plans	under	the	terms	of	collective	bargaining	agreements	that	cover	our	union-represented employees.	These	plans	generally	provide	for	retirement,	death	and/or	termination	benefits	for	eligible	employees	within	the	applicable	collective	bargaining	units,	based on	specific	eligibility/participation	requirements,	vesting	periods	and	benefit	formulas.	The	risks	of	participating	in	these	multiemployer	plans	are	different	from	single- employer	plans	in	the	following	aspects:

•Assets	contributed	to	the	multiemployer	plan	by	one	employer	may	be	used	to	provide	benefits	to	employees	of	other	participating employers.

•If	a	participating	employer	stops	contributing	to	the	multiemployer	plan,	the	unfunded	obligations	of	the	plan	may	be	borne	by	the	remaining	participating employers.

•If	we	choose	to	stop	participating	in	some	of	our	multiemployer	plans,	we	may	be	required	to	pay	those	plans	an	amount	based	on	the	underfunded	status	of	the plan,	referred	to	as	a	withdrawal	liability.	However,	cessation	of	participation	in	a	multiemployer	plan	and	subsequent	payment	of	any	withdrawal	liability	is subject	to	the	collective	bargaining	process.

The	discussion	that	follows	sets	forth	the	financial	impact	on	our	results	of	operations	and	cash	flows	for	the	years	ended	December	31,	2012,	2011	and	2010	from our	participation	in	multiemployer	benefit	plans.	Several	factors	could	cause	us	to	make	significantly	higher	future	contributions	to	these	plans,	including	unfavorable investment	performance,	changes	in	demographics	and	increased	benefits	to	participants.	However,	all	surcharges	are	subject	to	the	collective	bargaining	process.	At	this time,	we	are	unable	to	determine	the	amount	of	additional	future	contributions,	if	any,	or	whether	any	material	adverse	effect	on	our	financial	condition,	results	of operations	or	liquidity	would	result	from	our	participation	in	these	plans.

The	number	of	employees	covered	by	our	multiemployer	plans	has	remained	consistent	over	the	past	three	years,	and	there	have	been	no	significant	changes	that affect	the	comparability	of	2012,	2011	and	2010	contributions.	We	recognize	expense	for	the	contractually-required	contribution	for	each	period,	and	we	recognize	a liability	for	any	contributions	due	and	unpaid	at	the	end	of	a	reporting	period.

# Multiemployer	Pension	Plans

The	following	table	outlines	our	participation	in	multiemployer	pension	plans	for	the	periods	ended	December	31,	2012,	2011	and	2010,	and	sets	forth	our calendar	year	contributions	into	each	plan.	The	"EIN/Pension	Plan	Number"	column	provides	the	Employer	Identification	Number	("EIN")	and	the	three-digit	plan number.	The	most	recent	Pension	Protection	Act	zone	status	available	in	2012	and	2011	relates	to	the	plans'	two	most	recent	fiscal	year-ends.	The	zone	status	is	based on	information	that	we	received	from	the	plans'	administrators	and	is	certified	by	each	plan's	actuary.	Among	other	factors,	plans	certified	in	the	red	zone	are	generally less	than	65%	funded,	plans	certified	in	the	orange	zone	are	both	less	than	80%	funded	and	have	an	accumulated	funding	deficiency	or	are	expected	to	have	a	deficiency in	any	of	the	next	six	plan	years,	plans	certified	in	the	yellow	zone	are	less	than	80%	funded,	and	plans	certified	in	the	green	zone	are	at	least	80%	funded.	The	"FIP/RP Status	Pending/Implemented"	column	indicates	whether	a	financial	improvement	plan	("FIP")	for	yellow/orange	zone	plans,	or	a	rehabilitation	plan	("RP")	for	red	zone plans,	is	either	pending	or	has	been	implemented.	As	of	December	31,	2012,	all	plans	that	have	either	a	FIP	or	RP	requirement	have	had	the	respective	FIP	or	RP implemented.

Our	collectively-bargained	contributions	satisfy	the	requirements	of	all	implemented	FIPs	and	RPs	and	do	not	currently	require	the	payment	of	any	surcharges.	In addition,	minimum	contributions	outside	of	the	agreed	upon	contractual	rate	are	not	required.	For	the	plans	detailed	in	the	following	table,	the	expiration	date	of	the associated	collective	bargaining	agreements	is	July	31,	2013,	with	the	exception	of	the	Automotive	Industries	Pension	Plan	and	the	IAM	National	Pension	Fund	/ National	Pension	Plan	which	both	have	a	July	31,	2014	expiration	date.	For	all	plans	detailed	in	the	following	table,	we	provided	more	than	5%	of	the	total	plan contributions	from	all	employers	for	2012,	2011	and	2010	(as	disclosed	in	the	Form	5500	for	each	respective	plan).

Certain	plans	have	been	aggregated	in	the	"All	Other	Multiemployer	Pension	Plans"	line	in	the	following	table,	as	the	contributions	to	each	of	these	individual plans	are	not	material.

In	the	third	quarter	of	2012,	we	reached	an	agreement	with	the	New	England	Teamsters	and	Trucking	Industry	Pension	Fund	("New	England	Pension	Fund"),	a multiemployer	pension	plan	in	which	UPS	is	a	participant,	to	restructure	the	pension	liabilities	for	approximately	10,200	UPS	employees	represented	by	the	Teamsters. The	agreement	reflects	a	decision	by	the	New	England	Pension	Fund's	trustees	to	restructure	the	fund	through	plan	amendments	to	utilize	a	"two	pool	approach",	which effectively	subdivides	the	plan	assets	and	liabilities	between	two	groups	of	beneficiaries.	As	part	of	this	agreement,	UPS	agreed	to	withdraw	from	the	original	pool	of the	New	England	Pension	Fund	of	which	it	had	historically	been	a	participant,	and	reenter	the	New	England	Pension	Fund's	newly-established	pool	as	a	new	employer.

Upon	ratification	of	the	agreement	by	the	Teamsters	in	September	2012,	we	withdrew	from	the	original	pool	of	the	New	England	Pension	Fund	and	incurred	an undiscounted	withdrawal	liability	of	$2.162	billion	to	be	paid	in	equal	monthly	installments	over	50	years.	The	undiscounted	withdrawal	liability	was	calculated	by independent	actuaries	employed	by	the	New	England	Pension	Fund,	in	accordance	with	the	governing	plan	documents	and	the	applicable	requirements	of	the	Employee Retirement	Income	Security	Act	of	1974.	During	2012,	we	recorded	a	charge	to	expense	to	establish	an	$896	million	withdrawal	liability	on	our	consolidated	balance sheet,	which	represents	the	present	value	of	the	$2.162	billion	future	payment	obligation	discounted	at	a	4.25%	interest	rate.	This	discount	rate	represents	the	estimated credit-adjusted	market	rate	of	interest	at	which	we	could	obtain	financing	of	a	similar	maturity	and	seniority.	As	this	agreement	is	not	a	contribution	to	the	plan,	the amounts	reflected	in	the	previous	table	do	not	include	this	$896	million	non-cash	transaction.

# Multiemployer	Health	and	Welfare	Plans

We	also	contribute	to	several	multiemployer	health	and	welfare	plans	that	cover	both	active	and	retired	employees.	Health	care	benefits	are	provided	to participants	who	meet	certain	eligibility	requirements	as	covered	under	the	applicable	collective	bargaining	unit.	The	following	table	sets	forth	our	calendar	year	plan contributions.	Certain	plans	have	been	aggregated	in	the	"All	Other	Multiemployer	Health	and	Welfare	Plans"	line	in	the	table,	as	the	contributions	to	each	of	these individual	plans	are	not	material.

| Health	and	Welfare	Fund | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Bay\tArea\tDelivery\tDrivers | $28 | $27 | $26 |
| Central\tPennsylvania\tTeamsters\tHealth\t&amp;\tPension\tFund | 19 | 18 | 17 |
| Central\tStates,\tSouth\tEast\t&amp;\tSouth\tWest\tAreas\tHealth\tand\tWelfare\tFund | 471 | 452 | 441 |
| Delta\tHealth\tSystems—East\tBay\tDrayage\tDrivers | 24 | 17 | 15 |
| Employer—Teamster\tLocal\tNos.\t175\t&amp;\t505 | 8 | 8 | 7 |
| Joint\tCouncil\t#83\tHealth\t&amp;\tWelfare\tFund | 25 | 25 | 25 |
| Local\t191\tTeamsters\tHealth\tFund | 9 | 9 | 9 |
| Local\t401\tTeamsters\tHealth\t&amp;\tWelfare\tFund | 6 | 6 | 5 |
| Local\t804\tWelfare\tTrust\tFund | 62 | 58 | 54 |
| Milwaukee\tDrivers\tPension\tTrust\tFund—Milwaukee\tDrivers\tHealth\tand\tWelfare\tTrust\tFund | 29 | 28 | 27 |
| Montana\tTeamster\tEmployers\tTrust | 6 | 6 | 6 |
| New\tYork\tState\tTeamsters\tHealth\t&amp;\tHospital\tFund | 44 | 41 | 40 |
| North\tCoast\tBenefit\tTrust | 7 | 7 | 7 |
| Northern\tCalifornia\tGeneral\tTeamsters\t(DELTA) | 75 | 73 | 70 |
| Northern\tNew\tEngland\tBenefit\tTrust | 33 | 32 | 31 |
| Oregon\t/\tTeamster\tEmployers\tTrust | 27 | 27 | 25 |
| Teamsters\t170\tHealth\t&amp;\tWelfare\tFund | 12 | 12 | 12 |
| Teamsters\tBenefit\tTrust | 32 | 29 | 27 |
| Teamsters\tLocal\t251\tHealth\t&amp;\tInsurance\tPlan | 10 | 10 | 10 |
| Teamsters\tLocal\t404\tHealth\t&amp;\tInsurance\tPlan | 6 | 6 | 6 |
| Teamsters\tLocal\t638\tHealth\tFund | 29 | 28 | 27 |
| Teamsters\tLocal\t639—Employers\tHealth\t&amp;\tPension\tTrust\tFunds | 22 | 22 | 21 |
| Teamsters\tLocal\t671\tHealth\tServices\t&amp;\tInsurance\tPlan | 12 | 13 | 12 |
| Teamsters\tUnion\t25\tHealth\tServices\t&amp;\tInsurance\tPlan | 36 | 34 | 33 |
| Teamsters\tUnion\tLocal\t677\tHealth\tServices\t&amp;\tInsurance\tPlan | 8 | 8 | 7 |
| Truck\tDrivers\tand\tHelpers\tLocal\t355\tBaltimore\tArea\tHealth\t&amp;\tWelfare\tFund | 13 | 12 | 12 |
| Utah-Idaho\tTeamsters\tSecurity\tFund | 16 | 15 | 15 |
| Washington\tTeamsters\tWelfare\tTrust | 32 | 30 | 27 |
| All\tOther\tMultiemployer\tHealth\tand\tWelfare\tPlans | 55 | 50 | 52 |
| Total\tContributions | $1,156 | $1,103 | $1,066 |

# NOTE	6.	BUSINESS	ACQUISITIONS,	GOODWILL	AND	INTANGIBLE	ASSETS

The	following	table	indicates	the	allocation	of	goodwill	by	reportable	segment	(in	millions):

|  | U.S.	Domestic<br>Package | International<br>Package | Supply	Chain	&amp;<br>Freight | Consolidated |
| :--- | :--- | :--- | :--- | :--- |
| Balance\ton\tJanuary\t1,\t2011 | $— | $377 | $1,704 | $2,081 |
| Acquired | — | — | 46 | 46 |
| Currency\t/\tOther | — | (16) | (10) | (26) |
| Balance\ton\tDecember\t31,\t2011 | $— | $361 | $1,740 | $2,101 |
| Acquired | — | 67 | — | 67 |
| Currency\t/\tOther | — | 2 | 3 | 5 |
| Balance\ton\tDecember\t31,\t2012 | $— | $430 | $1,743 | $2,173 |

# Business	Acquisitions

The	increase	in	goodwill	within	the	International	Package	segment	in	2012	was	due	to	the	February	acquisition	of	Kiala	S.A.	("Kiala"),	a	Belgium-based	developer of	a	platform	that	enables	e-commerce	retailers	to	offer	their	shoppers	the	option	of	having	goods	delivered	to	a	convenient	retail	location.	Kiala	currently	operates	in Belgium,	France,	Luxembourg,	the	Netherlands	and	Spain.	The	acquisition	broadens	our	service	portfolio	for	business-to-consumer	deliveries.

The	increase	in	goodwill	within	the	Supply	Chain	&	Freight	segment	in	2011	was	due	to	the	December	acquisition	of	the	Pieffe	Group	("Pieffe"),	an	Italian pharmaceutical	logistics	company.	Pieffe	offers	storage,	distribution	and	other	logistics	services	to	some	of	the	world's	leading	pharmaceutical	companies.

Pro	forma	results	of	operations	have	not	been	presented	for	these	acquisitions,	because	the	effects	of	these	transactions	were	not	material.	The	results	of	operations of	these	acquired	companies	have	been	included	in	our	statements	of	consolidated	income	from	the	date	of	acquisition.

The	remaining	change	in	goodwill	for	both	the	International	Package	and	Supply	Chain	&	Freight	segments	was	due	to	the	impact	of	changes	in	the	value	of	the U.S.	Dollar	on	the	translation	of	non-U.S.	Dollar	goodwill	balances.

# Goodwill	Impairment

We	test	our	goodwill	for	impairment	annually,	as	of	October	1st,	on	a	reporting	unit	basis.	Our	reporting	units	are	comprised	of	the	Europe,	Asia,	and	Americas reporting	units	in	the	International	Package	reporting	segment,	and	the	Forwarding,	Logistics,	UPS	Freight,	MBE	/	The	UPS	Store,	and	UPS	Capital	reporting	units	in the	Supply	Chain	&	Freight	reporting	segment.

In	assessing	our	goodwill	for	impairment,	we	initially	evaluate	qualitative	factors	to	determine	if	it	is	more	likely	than	not	that	the	fair	value	of	a	reporting	unit	is less	than	its	carrying	amount.	If	the	qualitative	assessment	is	not	conclusive	and	it	is	necessary	to	calculate	the	fair	value	of	a	reporting	unit,	then	we	utilize	a	two-step process	to	test	goodwill	for	impairment.	First,	a	comparison	of	the	fair	value	of	the	applicable	reporting	unit	with	the	aggregate	carrying	value,	including	goodwill,	is performed.	We	primarily	determine	the	fair	value	of	our	reporting	units	using	a	discounted	cash	flow	model,	and	supplement	this	with	observable	valuation	multiples	for comparable	companies,	as	applicable.	If	the	carrying	amount	of	a	reporting	unit	exceeds	the	reporting	unit's	fair	value,	we	perform	the	second	step	of	the	goodwill impairment	test	to	determine	the	amount	of	impairment	loss.	The	second	step	includes	comparing	the	implied	fair	value	of	the	affected	reporting	unit's	goodwill	with	the carrying	value	of	that	goodwill.

We	did	not	have	any	goodwill	impairment	charges	in	2012,	2011	or	2010.	Cumulatively,	our	Supply	Chain	&	Freight	reporting	segment	has	recorded	goodwill impairment	charges	of	$622	million,	while	our	International	and	U.S.	Domestic	Package	segments	have	not	recorded	any	impairment	charges.

# Intangible	Assets

The	following	is	a	summary	of	intangible	assets	at	December	31,	2012	and	2011	(in	millions):

|  | Gross	Carrying<br>Amount | Accumulated<br>Amortization | Net	Carrying<br>Value | Weighted-<br>Average<br>Amortization<br>Period<br>(in	years) |
| :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2012 |  |  |  |  |
| Trademarks,\tlicenses,\tpatents,\tand\tother | $163 | $(80) | $83 | 5.5 |
| Customer\tlists | 131 | (79) | 52 | 11.5 |
| Franchise\trights | 117 | (64) | 53 | 20.0 |
| Capitalized\tsoftware | 2,197 | (1,782) | 415 | 3.1 |
| Total\tIntangible\tAssets,\tNet | $2,608 | $(2,005) | $603 | 4.4 |
| December\t31,\t2011 |  |  |  |  |
| Trademarks,\tlicenses,\tpatents,\tand\tother | $146 | $(54) | $92 |  |
| Customer\tlists | 120 | (66) | 54 |  |
| Franchise\trights | 109 | (58) | 51 |  |
| Capitalized\tsoftware | 2,014 | (1,626) | 388 |  |
| Total\tIntangible\tAssets,\tNet | $2,389 | $(1,804) | $585 |  |

Licenses	with	a	carrying	value	of	$5	million	as	of	December	31,	2012	are	deemed	to	be	indefinite-lived	intangibles,	and	therefore	are	not	amortized.	Impairment tests	for	indefinite-lived	intangibles	are	performed	on	an	annual	basis.	All	of	our	other	recorded	intangible	assets	are	deemed	to	be	finite-lived	intangibles,	and	are	thus amortized	over	their	estimated	useful	lives.	Impairment	tests	for	these	intangible	assets	are	only	performed	when	a	triggering	event	occurs	that	indicates	that	the	carrying value	of	the	intangible	may	not	be	recoverable.	There	were	no	impairments	of	any	finite-lived	or	indefinite-lived	intangible	assets	in	2012,	2011	or	2010.

Amortization	of	intangible	assets	was	$244,	$228	and	$224	million	during	2012,	2011	or	2010,	respectively.	Expected	amortization	of	finite-lived	intangible assets	recorded	as	of	December	31,	2012	for	the	next	five	years	is	as	follows	(in	millions):	2013—$252;	2014—$168;	2015—$94;	2016—$14;	2017—$13. Amortization	expense	in	future	periods	will	be	affected	by	business	acquisitions,	software	development,	licensing	agreements,	sponsorships	and	other	factors.

# NOTE	7.	DEBT	AND	FINANCING	ARRANGEMENTS

The	following	table	sets	forth	the	principal	amount,	maturity	or	range	of	maturities,	as	well	as	the	carrying	value	of	our	debt	obligations,	as	of	December	31,	2012 and	2011	(in	millions).	The	carrying	value	of	these	debt	obligations	can	differ	from	the	principal	amount	due	to	the	impact	of	unamortized	discounts	or	premiums	and valuation	adjustments	resulting	from	interest	rate	swap	hedging	relationships.

|  | Principal |  | Carrying	Value |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Amount | Maturity | 2012 | 2011 |
| Commercial\tpaper | $— |  | $— | $— |
| Fixed-rate\tsenior\tnotes: |  |  |  |  |
| 4.50%\tsenior\tnotes | 1,750 | 2013 | 1,751 | 1,778 |
| 3.875%\tsenior\tnotes | 1,000 | 2014 | 1,033 | 1,050 |
| 1.125%\tsenior\tnotes | 375 | 2017 | 373 | — |
| 5.50%\tsenior\tnotes | 750 | 2018 | 851 | 841 |
| 5.125%\tsenior\tnotes | 1,000 | 2019 | 1,140 | 1,119 |
| 3.125%\tsenior\tnotes | 1,500 | 2021 | 1,655 | 1,641 |
| 2.45%\tsenior\tnotes | 1,000 | 2022 | 996 | — |
| 6.20%\tsenior\tnotes | 1,500 | 2038 | 1,480 | 1,480 |
| 4.875%\tsenior\tnotes | 500 | 2040 | 489 | 489 |
| 3.625%\tsenior\tnotes | 375 | 2042 | 367 | — |
| 8.375%\tDebentures: |  |  |  |  |
| 8.375%\tdebentures | 424 | 2020 | 512 | 504 |
| 8.375%\tdebentures | 276 | 2030 | 284 | 284 |
| Pound\tSterling\tNotes: |  |  |  |  |
| \t\t\t\t\t5.50%\tnotes | 107 | 2031 | 103 | 99 |
| \t\t\t\t\t5.13%\tnotes | 734 | 2050 | 699 | 678 |
| Floating\trate\tsenior\tnotes | 378 | 2049\t–\t2053 | 374 | 376 |
| Capital\tlease\tobligations | 440 | 2013\t–\t3004 | 440 | 469 |
| Facility\tnotes\tand\tbonds | 320 | 2015\t–\t2036 | 320 | 320 |
| Other\tdebt | 3 | 2013\t-\t2022 | 3 | — |
| Total\tdebt | $12,432 |  | 12,870 | 11,128 |
| Less:\tcurrent\tmaturities |  |  | (1,781) | (33) |
| Long-term\tdebt |  |  | $11,089 | $11,095 |

# Commercial	Paper

We	are	authorized	to	borrow	up	to	$10.0	billion	under	our	U.S.	commercial	paper	program.	We	also	maintain	a	European	commercial	paper	program	under	which we	are	authorized	to	borrow	up	to	€1.0	billion	in	a	variety	of	currencies.	No	amounts	were	outstanding	under	these	programs	as	of	December	31,	2012.	The	amount	of commercial	paper	outstanding	under	these	programs	in	2013	is	expected	to	fluctuate.

# Fixed	Rate	Senior	Notes

We	have	completed	several	offerings	of	fixed	rate	senior	notes.	All	of	the	notes	pay	interest	semiannually,	and	allow	for	redemption	of	the	notes	by	UPS	at	any time	by	paying	the	greater	of	the	principal	amount	or	a	"make-whole"	amount,	plus	accrued	interest.	We	subsequently	entered	into	interest	rate	swaps	on	several	of	these notes,	which	effectively	converted	the	fixed	interest	rates	on	the	notes	to	variable	LIBOR-based	interest	rates.	The	average	interest	rate	payable	on	these	notes,	including the	impact	of	the	interest	rate	swaps,	for	2012	and	2011,	respectively,	were	as	follows:

|  | Principal |  | Average	Effective<br>Interest	Rate | Average	Effective<br>Interest	Rate |
| :--- | :--- | :--- | :--- | :--- |
|  | Value | Maturity | 2012 | 2011 |
| 4.50%\tsenior\tnotes | 1,750 | 2013 | 2.51% | 2.39% |
| 3.875%\tsenior\tnotes | 1,000 | 2014 | 1.14% | 0.99% |
| 1.125%\tsenior\tnotes | 375 | 2017 | 0.57% | —% |
| 5.50%\tsenior\tnotes | 750 | 2018 | 2.71% | 2.53% |
| 5.125%\tsenior\tnotes | 1,000 | 2019 | 2.20% | 2.04% |
| 3.125%\tsenior\tnotes | 1,500 | 2021 | 1.28% | 0.52% |
| 2.45%\tsenior\tnotes | 1,000 | 2022 | 0.86% | —% |

The	8.375%	debentures	consist	of	two	separate	tranches,	as	follows:

•$276	million	of	the	debentures	have	a	maturity	of	April	1,	2030.	These	debentures	have	an	8.375%	interest	rate	until	April	1,	2020,	and,	thereafter,	the	interest rate	will	be	7.62%	for	the	final	10	years.	These	debentures	are	redeemable	in	whole	or	in	part	at	our	option	at	any	time.	The	redemption	price	is	equal	to	the greater	of	100%	of	the	principal	amount	and	accrued	interest	or	the	sum	of	the	present	values	of	the	remaining	scheduled	payout	of	principal	and	interest thereon	discounted	to	the	date	of	redemption	at	a	benchmark	treasury	yield	plus	five	basis	points	plus	accrued	interest.

•$424	million	of	the	debentures	have	a	maturity	of	April	1,	2020.	These	debentures	are	not	subject	to	redemption	prior	to

maturity.

Interest	is	payable	semiannually	on	the	first	of	April	and	October	for	both	debentures	and	neither	debenture	is	subject	to	sinking	fund	requirements.	We	subsequently entered	into	interest	rate	swaps	on	the	2020	notes,	which	effectively	converted	the	fixed	interest	rates	on	the	notes	to	variable	LIBOR-based	interest	rates.	The	average interest	rate	payable	on	the	2020	notes,	including	the	impact	of	the	interest	rate	swaps,	for	2012	and	2011	was	5.73%	and	5.97%,	respectively.

# Floating	Rate	Senior	Notes

The	floating	rate	senior	notes	bear	interest	at	one-month	LIBOR	less	45	basis	points.	The	average	interest	rate	for	2012	and	2011	was	0.00%	for	both	years.	These notes	are	callable	at	various	times	after	30	years	at	a	stated	percentage	of	par	value,	and	putable	by	the	note	holders	at	various	times	after	10	years	at	a	stated	percentage of	par	value.	The	notes	have	maturities	ranging	from	2049	through	2053.	In	2012	and	2011,	we	redeemed	notes	with	a	principal	value	of	$2	and	$10	million, respectively,	after	put	options	were	exercised	by	the	note	holders.

# Capital	Lease	Obligations

We	have	certain	property,	plant	and	equipment	subject	to	capital	leases.	Some	of	the	obligations	associated	with	these	capital	leases	have	been	legally	defeased. The	recorded	value	of	our	property,	plant	and	equipment	subject	to	capital	leases	is	as	follows	as	of	December	31	(in	millions):

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Vehicles | $63 | $35 |
| Aircraft | 2,282 | 2,282 |
| Buildings | 65 | 24 |
| Plant\tEquipment | 2 | 2 |
| Technology\tEquipment | 3 | 1 |
| Accumulated\tamortization | (611) | (457) |
|  | $1,804 | $1,887 |

These	capital	lease	obligations	have	principal	payments	due	at	various	dates	from	2013	through	3004.

# Facility	Notes	and	Bonds

We	have	entered	into	agreements	with	certain	municipalities	to	finance	the	construction	of,	or	improvements	to,	facilities	that	support	our	U.S.	Domestic	Package and	Supply	Chain	&	Freight	operations	in	the	United	States.	These	facilities	are	located	around	airport	properties	in	Louisville,	Kentucky;	Dallas,	Texas;	and Philadelphia,	Pennsylvania.	Under	these	arrangements,	we	enter	into	a	lease	or	loan	agreement	that	covers	the	debt	service	obligations	on	the	bonds	issued	by	the municipalities,	as	follows:

•Bonds	with	a	principal	balance	of	$149	million	issued	by	the	Louisville	Regional	Airport	Authority	associated	with	our	Worldport	facility	in	Louisville,

Kentucky.	The	bonds,	which	are	due	in	January	2029,	bear	interest	at	a	variable	rate,	and	the	average	interest	rates	for	2012	and	2011	were	0.15%	and	0.11%, respectively.

•Bonds	with	a	principal	balance	of	$42	million	and	due	in	November	2036	issued	by	the	Louisville	Regional	Airport	Authority	associated	with	our	air	freight facility	in	Louisville,	Kentucky.	The	bonds	bear	interest	at	a	variable	rate,	and	the	average	interest	rates	for	2012	and	2011	were	0.15%	and	0.11%,	respectively.

•Bonds	with	a	principal	balance	of	$29	million	issued	by	the	Dallas	/	Fort	Worth	International	Airport	Facility	Improvement	Corporation	associated	with	our Dallas,	Texas	airport	facilities.	The	bonds	are	due	in	May	2032	and	bear	interest	at	a	variable	rate,	however	the	variable	cash	flows	on	the	obligation	have	been swapped	to	a	fixed	5.11%.

•Bonds	with	a	principal	balance	of	$100	million	issued	by	the	Delaware	County,	Pennsylvania	Industrial	Development	Authority	associated	with	our Philadelphia,	Pennsylvania	airport	facilities.	The	bonds,	which	are	due	in	December	2015,	bear	interest	at	a	variable	rate,	and	the	average	interest	rates	for	2012 and	2011	were	0.13%	and	0.11%,	respectively.

# Pound	Sterling	Notes

The	Pound	Sterling	notes	consist	of	two	separate	tranches,	as	follows:

•Notes	with	a	principal	amount	of	£66	million	accrue	interest	at	a	5.50%	fixed	rate,	and	are	due	in	February	2031.	These	notes	are	not callable.

•Notes	with	a	principal	amount	of	£455	million	accrue	interest	at	a	5.13%	fixed	rate,	and	are	due	in	February	2050.	These	notes	are	callable	at	our	option	at	a redemption	price	equal	to	the	greater	of	100%	of	the	principal	amount	and	accrued	interest,	or	the	sum	of	the	present	values	of	the	remaining	scheduled	payout of	principal	and	interest	thereon	discounted	to	the	date	of	redemption	at	a	benchmark	U.K.	government	bond	yield	plus	15	basis	points	and	accrued	interest.

We	maintain	cross-currency	interest	rate	swaps	to	hedge	the	foreign	currency	risk	associated	with	the	bond	cash	flows	for	both	tranches	of	these	bonds.	The	average fixed	interest	rate	payable	on	the	swaps	is	5.72%.

We	lease	certain	aircraft,	facilities,	land,	equipment	and	vehicles	under	operating	leases,	which	expire	at	various	dates	through	2038.	Certain	of	the	leases	contain escalation	clauses	and	renewal	or	purchase	options.	Rent	expense	related	to	our	operating	leases	was	$619,	$629	and	$615	million	for	2012,	2011	and	2010,	respectively.

The	following	table	sets	forth	the	aggregate	minimum	lease	payments	under	capital	and	operating	leases,	the	aggregate	annual	principal	payments	due	under	our long-term	debt,	and	the	aggregate	amounts	expected	to	be	spent	for	purchase	commitments	(in	millions).

| Year | Capital<br>Leases | Operating<br>Leases | Debt<br>Principal | Purchase<br>Commitments |
| :--- | :--- | :--- | :--- | :--- |
| 2013 | $55 | $342 | $1,750 | $629 |
| 2014 | 52 | 271 | 1,000 | 103 |
| 2015 | 50 | 203 | 101 | 22 |
| 2016 | 49 | 145 | 1 | 14 |
| 2017 | 48 | 118 | 375 | 7 |
| After\t2017 | 426 | 358 | 8,765 | — |
| Total | 680 | $1,437 | $11,992 | $775 |
| Less:\timputed\tinterest | (240) |  |  |  |
| Present\tvalue\tof\tminimum\tcapitalized\tlease\tpayments | 440 |  |  |  |
| Less:\tcurrent\tportion | (31) |  |  |  |
| Long-term\tcapitalized\tlease\tobligations | $409 |  |  |  |

As	of	December	31,	2012,	we	had	outstanding	letters	of	credit	totaling	approximately	$1.369	billion	issued	in	connection	with	our	self-insurance	reserves	and other	routine	business	requirements.	We	also	issue	surety	bonds	as	an	alternative	to	letters	of	credit	in	certain	instances,	and	as	of	December	31,	2012,	we	had	$584 million	of	surety	bonds	written.

# Available	Credit

# Debt	Covenants

# Fair	Value	of	Debt

Based	on	the	borrowing	rates	currently	available	to	the	Company	for	long-term	debt	with	similar	terms	and	maturities,	the	fair	value	of	long-term	debt,	including current	maturities,	is	approximately	$14.658	and	$12.035	billion	as	of	December	31,	2012	and	2011,	respectively.	We	utilized	Level	2	inputs	in	the	fair	value	hierarchy of	valuation	techniques	to	determine	the	fair	value	of	all	of	our	debt	instruments.

# NOTE	8.	LEGAL	PROCEEDINGS	AND	CONTINGENCIES

In	June	2011,	we	received	an	IRS	Revenue	Agent	Report	(RAR)	covering	excise	taxes	for	tax	years	2003	through	2007,	in	addition	to	the	income	tax	matters described	in	note	12.	The	excise	tax	RAR	proposed	two	alternate	theories	for	asserting	additional	excise	tax	on	transportation	of	property	by	air.	We	disagreed	with	these proposed	excise	tax	theories	and	related	adjustments.	We	filed	protests	and,	in	the	third	quarter	of	2011,	the	IRS	responded	to	our	protests	and	forwarded	the	case	to	IRS Appeals.

# NOTE	9.	SHAREOWNERS'	EQUITY

# Capital	Stock,	Additional	Paid-In	Capital,	and	Retained	Earnings

We	maintain	two	classes	of	common	stock,	which	are	distinguished	from	each	other	by	their	respective	voting	rights.	Class	A	shares	of	UPS	are	entitled	to	10 votes	per	share,	whereas	class	B	shares	are	entitled	to	one	vote	per	share.	Class	A	shares	are	primarily	held	by	UPS	employees	and	retirees,	as	well	as	trusts	and descendants	of	the	Company's	founders,	and	these	shares	are	fully	convertible	into	class	B	shares	at	any	time.	Class	B	shares	are	publicly	traded	on	the	New	York	Stock Exchange	("NYSE")	under	the	symbol	"UPS."	Class	A	and	B	shares	both	have	a	$0.01	par	value,	and	as	of	December	31,	2012,	there	were	4.6	billion	class	A	shares	and 5.6	billion	class	B	shares	authorized	to	be	issued.	Additionally,	there	are	200	million	preferred	shares	authorized	to	be	issued,	with	a	par	value	of	$0.01	per	share;	as	of December	31,	2012,	no	preferred	shares	had	been	issued.

The	following	is	a	rollforward	of	our	common	stock,	additional	paid-in	capital,	and	retained	earnings	accounts	(in	millions,	except	per	share	amounts):

|  | 2012<br>Shares | Dollars | 2011<br>Shares | Dollars | 2010<br>Shares | Dollars |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Class\tA\tCommon\tStock |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 240 | $3 | 258 | $3 | 285 | $3 |
| Common\tstock\tpurchases | (9) | — | (7) | — | (6) | — |
| Stock\taward\tplans | 8 | — | 7 | — | 6 | — |
| Common\tstock\tissuances | 3 | — | 3 | — | 3 | — |
| Conversions\tof\tclass\tA\tto\tclass\tB\tcommon\tstock | (17) | — | (21) | — | (30) | — |
| Class\tA\tshares\tissued\tat\tend\tof\tyear | 225 | $3 | 240 | $3 | 258 | $3 |
| Class\tB\tCommon\tStock |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 725 | $7 | 735 | $7 | 711 | $7 |
| Common\tstock\tpurchases | (13) | — | (31) | — | (6) | — |
| Conversions\tof\tclass\tA\tto\tclass\tB\tcommon\tstock | 17 | — | 21 | — | 30 | — |
| Class\tB\tshares\tissued\tat\tend\tof\tyear | 729 | $7 | 725 | $7 | 735 | $7 |
| Additional\tPaid-In\tCapital |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $— |  | $— |  | $2 |
| Stock\taward\tplans | 444 | 444 | 388 | 388 | 398 | 398 |
| Common\tstock\tpurchases | (943) | (943) | (475) | (475) | (649) | (649) |
| Common\tstock\tissuances | 293 | 293 | 287 | 287 | 249 | 249 |
| Option\tPremiums\tReceived\t(Paid) |  | 206 |  | (200) |  | — |
| Balance\tat\tend\tof\tyear |  | $— |  | $— |  | $— |
| Retained\tEarnings |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $10,128 |  | $10,604 |  | $9,335 |
| Net\tincome\tattributable\tto\tcontrolling\tinterests | 807 | 807 | 3,804 | 3,804 |  | 3,338 |
| Dividends\t($2.28,\t$2.08\tand\t$1.88\tper\tshare) | (2,243) | (2,243) |  | (2,086) |  | (1,909) |
| Common\tstock\tpurchases |  | (695) |  | (2,194) |  | (160) |
| Balance\tat\tend\tof\tyear |  | $7,997 |  | $10,128 |  | $10,604 |

For	the	years	ended	December	31,	2012,	2011	and	2010,	we	repurchased	a	total	of	21.8,	38.7	and	12.4	million	shares	of	class	A	and	class	B	common	stock	for $1.638	billion,	$2.669	billion	and	$809	million,	respectively.	On	May	3,	2012,	the	Board	of	Directors	approved	a	share	repurchase	authorization	of	$5.0	billion,	which replaced	an	authorization	previously	announced	in	2008.	As	of	December	31,	2012,	we	had	$3.970	billion	of	this	share	repurchase	authorization	remaining.	On February	14,	2013,	the	Board	of	Directors	approved	a	new	share	repurchase	authorization	of	$10.0	billion,	which	replaced	the	2012	authorization.	This	new	share repurchase	authorization	has	no	expiration	date.

In	order	to	lower	the	average	cost	of	acquiring	shares	in	our	ongoing	share	repurchase	program,	we	periodically	enter	into	structured	repurchase	agreements involving	the	use	of	capped	call	options	for	the	purchase	of	UPS	class	B	shares.	We	pay	a	fixed	sum	of	cash	upon	execution	of	each	agreement	in	exchange	for	the	right to	receive	either	a	pre-determined	amount	of	cash	or	stock.	Upon	expiration	of	each	agreement,	if	the	closing	market	price	of	our	common	stock	is	above	the	pre- determined	price,	we	will	have	our	initial	investment	returned	with	a	premium	in	either	cash	or	shares	(at	our	election).	If	the	closing	market	price	of	our	common	stock is	at	or	below	the	pre-determined	price,	we	will	receive	the	number	of	shares	specified	in	the	agreement.	During	2012,	we	did	not	pay	premiums	on	options	for	the purchase	of	shares;	however,	we	received	$206	million	in	premiums	for	options	that	were	entered	into	during	2011	that	expired	during	2012.	During	2011,	we	settled options	that	resulted	in	the	repurchase	of	0.8	million	shares	at	$65.11	per	share,	as	well	as	the	receipt	of	$6	million	in	premiums	(in	excess	of	our	initial	investment).

# Accumulated	Other	Comprehensive	Income	(Loss)

We	incur	activity	in	AOCI	for	unrealized	holding	gains	and	losses	on	available-for-sale	securities,	foreign	currency	translation	adjustments,	unrealized	gains	and losses	from	derivatives	that	qualify	as	hedges	of	cash	flows	and	unrecognized	pension	and	postretirement	benefit	costs.	The	activity	in	AOCI	is	as	follows	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Foreign\tcurrency\ttranslation\tgain\t(loss): |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $(160) | $(68) | $37 |
| Aggregate\tadjustment\tfor\tthe\tyear\t(net\tof\ttax\teffect\tof\t$(9),\t$11\tand\t$(34)) | 294 | (92) | (105) |
| Balance\tat\tend\tof\tyear | 134 | (160) | (68) |
| Unrealized\tgain\t(loss)\ton\tmarketable\tsecurities,\tnet\tof\ttax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 6 | 12 | (27) |
| Current\tperiod\tchanges\tin\tfair\tvalue\t(net\tof\ttax\teffect\tof\t$4,\t$11\tand\t$17) | 6 | 18 | 30 |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$(3),\t$(14)\tand\t$6) | (6) | (24) | 9 |
| Balance\tat\tend\tof\tyear | 6 | 6 | 12 |
| Unrealized\tgain\t(loss)\ton\tcash\tflow\thedges,\tnet\tof\ttax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (204) | (239) | (200) |
| Current\tperiod\tchanges\tin\tfair\tvalue\t(net\tof\ttax\teffect\tof\t$(25),\t$(16)\tand\t$(4)) | (43) | (26) | (7) |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$(24),\t$37\tand\t$(19)) | (39) | 61 | (32) |
| Balance\tat\tend\tof\tyear | (286) | (204) | (239) |
| Unrecognized\tpension\tand\tpostretirement\tbenefit\tcosts,\tnet\tof\ttax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (2,745) | (2,340) | (1,527) |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$1,876,\t$378\tand\t$150) | 3,135 | 628 | 245 |
| Net\tactuarial\tgain\t(loss)\tand\tprior\tservice\tcost\tresulting\tfrom\tremeasurements\tof\tplan\tassets\tand\tliabilities\t(net\nof\ttax\teffect\tof\t$(2,151),\t$(622)\tand\t$(633)) | (3,598) | (1,033) | (1,058) |
| Balance\tat\tend\tof\tyear | (3,208) | (2,745) | (2,340) |
| Accumulated\tother\tcomprehensive\tincome\t(loss)\tat\tend\tof\tyear | $(3,354) | $(3,103) | $(2,635) |

# Deferred	Compensation	Obligations	and	Treasury	Stock

We	maintain	a	deferred	compensation	plan	whereby	certain	employees	were	previously	able	to	elect	to	defer	the	gains	on	stock	option	exercises	by	deferring	the shares	received	upon	exercise	into	a	rabbi	trust.	The	shares	held	in	this	trust	are	classified	as	treasury	stock,	and	the	liability	to	participating	employees	is	classified	as "deferred	compensation	obligations"	in	the	shareowners'	equity	section	of	the	consolidated	balance	sheets.	The	number	of	shares	needed	to	settle	the	liability	for deferred	compensation	obligations	is	included	in	the	denominator	in	both	the	basic	and	diluted	earnings	per	share	calculations.	Employees	are	generally	no	longer	able	to defer	the	gains	from	stock	options	exercised	subsequent	to	December	31,	2004.	Activity	in	the	deferred	compensation	program	for	the	years	ended	December	31,	2012, 2011	and	2010	is	as	follows	(in	millions):

|  | 2012<br>Shares | Dollars | 2011<br>Shares | Dollars | 2010<br>Shares | Dollars |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Deferred\tCompensation\tObligations |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $88 |  | $103 |  | $108 |
| Reinvested\tdividends |  | 3 |  | 4 |  | 4 |
| Options\texercise\tdeferrals |  | — |  | — |  | 1 |
| Benefit\tpayments |  | (13) |  | (19) |  | (10) |
| Balance\tat\tend\tof\tyear |  | $78 |  | $88 |  | $103 |
| Treasury\tStock |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (2) | $(88) | (2) | $(103) | (2) | $(108) |
| Reinvested\tdividends | — | (3) | — | (4) | — | (4) |
| Options\texercise\tdeferrals | — | — | — | — | — | (1) |
| Benefit\tpayments | 1 | 13 | — | 19 | — | 10 |
| Balance\tat\tend\tof\tyear | (1) | $(78) | (2) | $(88) | (2) | $(103) |

# Noncontrolling	Interests

We	have	noncontrolling	interests	in	certain	consolidated	subsidiaries	in	our	International	Package	and	Supply	Chain	&	Freight	segments,	the	largest	of	which relates	to	a	joint	venture	that	operates	in	the	Middle	East,	Turkey,	and	portions	of	the	Central	Asia	region.	The	activity	related	to	our	noncontrolling	interests	is	presented below	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Noncontrolling\tInterests |  |  |  |
| Balance\tat\tbeginning\tof\tperiod | $73 | $68 | $66 |
| Acquired\tnoncontrolling\tinterests | 7 | 5 | 2 |
| Dividends\tattributable\tto\tnoncontrolling\tinterests | — | — | — |
| Net\tincome\tattributable\tto\tnoncontrolling\tinterests | — | — | — |
| Balance\tat\tend\tof\tperiod | $80 | $73 | $68 |

# NOTE	10.	STOCK-BASED	COMPENSATION

# Incentive	Compensation	Plan

The	UPS	Incentive	Compensation	Plan	permits	the	grant	of	nonqualified	and	incentive	stock	options,	stock	appreciation	rights,	restricted	stock	and	stock	units, and	restricted	performance	shares	and	units,	to	eligible	employees.	The	number	of	shares	reserved	for	issuance	under	the	Incentive	Compensation	Plan	is	27	million.

Each	share	issued	pursuant	to	an	option	and	each	share	issued	subject	to	the	exercised	portion	of	a	stock	appreciation	right	will	reduce	the	share	reserve	by	one	share. Each	share	issued	pursuant	to	restricted	stock	and	stock	units,	and	restricted	performance	shares	and	units,	will	reduce	the	share	reserve	by	one	share.	As	of December	31,	2012,	stock	options,	restricted	performance	units	and	restricted	stock	units	had	been	granted	under	the	Incentive	Compensation	Plan.	We	had	27	million shares	available	to	be	issued	under	the	Incentive	Compensation	Plan	as	of	December	31,	2012.

# Management	Incentive	Award

Non-executive	management	earning	the	right	to	receive	Management	Incentive	Awards	are	determined	annually	by	the	Salary	Committee,	which	is	comprised	of executive	officers	of	the	Company.	Awards	granted	to	executive	officers	are	determined	annually	by	the	Compensation	Committee	of	the	UPS	Board	of	Directors.	Our Management	Incentive	Awards	program	provides,	with	certain	exceptions,	that	one-half	to	two-thirds	of	the	annual	Management	Incentive	Award	will	be	made	in Restricted	Units	(depending	upon	the	level	of	management	involved),	which	generally	vest	over	a	five-year	period.	The	other	one-third	to	one-half	of	the	award	is	in	the form	of	cash	or	unrestricted	shares	of	class	A	common	stock,	and	is	fully	vested	at	the	time	of	grant.

Upon	vesting,	Restricted	Units	result	in	the	issuance	of	the	equivalent	number	of	UPS	class	A	common	shares	after	required	tax	withholdings.	Except	in	the	case of	death,	disability,	or	retirement,	Restricted	Units	granted	for	our	Management	Incentive	Awards	and	previous	Long-Term	Incentive	Program	generally	vest	over	a	five year	period	with	approximately	20%	of	the	award	vesting	at	each	anniversary	date	of	the	grant.	The	entire	grant	is	expensed	on	a	straight-line	basis	over	the	requisite service	period.	All	Restricted	Units	granted	are	subject	to	earlier	cancellation	or	vesting	under	certain	conditions.	Dividends	earned	on	Restricted	Units	are	reinvested	in additional	Restricted	Units	at	each	dividend	payable	date.

# Long-Term	Incentive	Performance	Award

We	also	award	Restricted	Units	in	conjunction	with	our	Long-Term	Incentive	Performance	Awards	program	to	certain	eligible	employees.	The	Restricted	Units ultimately	granted	under	the	Long-Term	Incentive	Performance	Awards	program	will	be	based	upon	the	achievement	of	certain	performance	measures,	including growth	in	consolidated	revenue	and	operating	return	on	invested	capital,	each	year	during	the	performance	award	cycle,	and	other	measures,	including	growth	in consolidated	earnings	per	share,	over	the	entire	three	year	performance	award	cycle.	The	Restricted	Units	granted	under	this	program	vest	at	the	end	of	the	three	year performance	award	cycle.

As	of	December	31,	2012,	we	had	the	following	Restricted	Units	outstanding,	including	reinvested	dividends:

|  | Shares<br>(in	thousands) | Weighted<br>Average<br>Grant	Date<br>Fair	Value | Weighted	Average	Remaining<br>Contractual	Term<br>(in	years) | Aggregate	Intrinsic<br>Value	(in	millions) |
| :--- | :--- | :--- | :--- | :--- |
| Nonvested\tat\tJanuary\t1,\t2012 | 15,839 | $62.98 |  |  |
| Vested | (8,914) | 63.99 |  |  |
| Granted | 7,423 | 77.21 |  |  |
| Reinvested\tDividends | 568 | N/A |  |  |
| Forfeited\t/\tExpired | (272) | 67.51 |  |  |
| Nonvested\tat\tDecember\t31,\t2012 | 14,644 | $68.71 | 1.57 | $1,080 |
| Restricted\tUnits\tExpected\tto\tVest | 14,172 | $68.61 | 1.55 | $1,045 |

The	fair	value	of	each	Restricted	Unit	is	the	NYSE	closing	price	of	class	B	common	stock	on	the	date	of	grant.	The	weighted-average	grant	date	fair	value	of Restricted	Units	granted	during	2012,	2011	and	2010	was	$77.21,	$69.53	and	$66.36,	respectively.	The	total	fair	value	of	Restricted	Units	vested	was	$627,	$557	and $523	million	in	2012,	2011	and	2010,	respectively.	As	of	December	31,	2012,	there	was	$571	million	of	total	unrecognized	compensation	cost	related	to	nonvested Restricted	Units.	That	cost	is	expected	to	be	recognized	over	a	weighted	average	period	of	3	years	and	1	month.

# Nonqualified	Stock	Options

We	maintain	fixed	stock	option	plans,	under	which	options	are	granted	to	purchase	shares	of	UPS	class	A	common	stock.	Stock	options	granted	in	connection	with the	Incentive	Compensation	Plan	must	have	an	exercise	price	at	least	equal	to	the	NYSE	closing	price	of	UPS	class	B	common	stock	on	the	date	the	option	is	granted.

Executive	officers	and	certain	senior	managers	annually	receive	non-qualified	stock	options	of	which	the	value	is	determined	as	a	percentage	of	salary.	Options granted	generally	vest	over	a	five	year	period	with	approximately	20%	of	the	award	vesting	at	each	anniversary	date	of	the	grant.	All	options	granted	are	subject	to earlier	cancellation	or	vesting	under	certain	conditions.	Option	holders	may	exercise	their	options	via	the	tender	of	cash	or	class	A	common	stock,	and	new	class	A shares	are	issued	upon	exercise.	Options	granted	to	eligible	employees	will	be	granted	annually	during	the	first	quarter	of	each	year.

The	following	is	an	analysis	of	options	to	purchase	shares	of	class	A	common	stock	issued	and	outstanding:

|  | Shares<br>(in	thousands) | Average<br>Exercise<br>Price | Weighted	Average	Remaining<br>Contractual	Term<br>(in	years) | Aggregate	Intrinsic<br>Value	(in	millions) |
| :--- | :--- | :--- | :--- | :--- |
| Outstanding\tat\tJanuary\t1,\t2012 | 13,199 | $70.18 |  |  |
| Exercised | (2,778) | 63.50 |  |  |
| Granted | 187 | 76.94 |  |  |
| Forfeited\t/\tExpired | (13) | 82.74 |  |  |
| Outstanding\tat\tDecember\t31,\t2012 | 10,595 | $72.04 | 3.03 | $34 |
| Options\tVested\tand\tExpected\tto\tVest | 10,595 | $72.04 | 3.03 | $34 |
| Exercisable\tat\tDecember\t31,\t2012 | 10,115 | $72.09 | 2.79 | $32 |

The	fair	value	of	each	option	grant	is	estimated	using	the	Black-Scholes	option	pricing	model.	The	weighted	average	assumptions	used,	by	year,	and	the	calculated weighted	average	fair	values	of	options,	are	as	follows:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Expected\tdividend\tyield | 2.77% | 2.77% | 2.70% |
| Risk-free\tinterest\trate | 1.63% | 2.90% | 3.30% |
| Expected\tlife\tin\tyears | 7.5 | 7.5 | 7.5 |
| Expected\tvolatility | 25.06% | 24.26% | 23.59% |
| Weighted\taverage\tfair\tvalue\tof\toptions\tgranted | $14.88 | $15.92 | $14.83 |

Expected	volatilities	are	based	on	the	historical	returns	on	our	stock	and	the	implied	volatility	of	our	publicly-traded	options.	The	expected	dividend	yield	is	based on	the	recent	historical	dividend	yields	for	our	stock,	taking	into	account	changes	in	dividend	policy.	The	risk-free	interest	rate	is	based	on	the	term	structure	of	interest rates	at	the	time	of	the	option	grant.	The	expected	life	represents	an	estimate	of	the	period	of	time	options	are	expected	to	remain	outstanding,	and	we	have	relied	upon	a combination	of	the	observed	exercise	behavior	of	our	prior	grants	with	similar	characteristics,	the	vesting	schedule	of	the	grants,	and	an	index	of	peer	companies	with similar	grant	characteristics	in	estimating	this	variable.

We	received	cash	of	$122,	$92	and	$60	million	during	2012,	2011	and	2010,	respectively,	from	option	holders	resulting	from	the	exercise	of	stock	options.	We received	a	tax	benefit	of	$3,	$6	and	$4	million	during	2012,	2011	and	2010,	respectively,	from	the	exercise	of	stock	options,	which	is	reported	as	cash	from	financing activities	in	the	cash	flow	statement.

The	total	intrinsic	value	of	options	exercised	during	2012,	2011	and	2010	was	$39,	$31	and	$18	million,	respectively.	As	of	December	31,	2012,	there	was	$2 million	of	total	unrecognized	compensation	cost	related	to	nonvested	options.	That	cost	is	expected	to	be	recognized	over	a	weighted	average	period	of	3	years	and 4	months.

The	following	table	summarizes	information	about	stock	options	outstanding	and	exercisable	at	December	31,	2012:

|  |  | Options	Outstanding |  | Options	Exercisable | Options	Exercisable |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Exercise\tPrice\tRange | Shares\n(in\tthousands) | Average\tLife\n(in\tyears) | Average\nExercise\nPrice | Shares\n(in\tthousands) | Average\nExercise\nPrice |
| $50.01\t-\t$60.00 | 211 | 6.35 | $55.83 | 133 | $55.83 |
| $60.01\t-\t$70.00 | 1,337 | 1.20 | 62.98 | 1,257 | 62.72 |
| $70.01\t-\t$80.00 | 6,858 | 3.19 | 71.47 | 6,536 | 71.27 |
| $80.01\t-\t$90.00 | 2,189 | 3.33 | 80.92 | 2,189 | 80.92 |
|  | 10,595 | 3.03 | $72.04 | 10,115 | $72.09 |

# Discounted	Employee	Stock	Purchase	Plan

We	maintain	an	employee	stock	purchase	plan	for	all	eligible	employees.	Under	this	plan,	shares	of	UPS	class	A	common	stock	may	be	purchased	at	quarterly intervals	at	95%	of	the	NYSE	closing	price	of	UPS	class	B	common	stock	on	the	last	day	of	each	quarterly	period.	Employees	purchased	1.2,	1.3	and	1.5	million	shares at	average	prices	of	$72.17,	$66.86	and	$57.98	per	share	during	2012,	2011,	and	2010,	respectively.	This	plan	is	not	considered	to	be	compensatory,	and	therefore	no compensation	cost	is	measured	for	the	employees'	purchase	rights.

# NOTE	11.	SEGMENT	AND	GEOGRAPHIC	INFORMATION

We	report	our	operations	in	three	segments:	U.S.	Domestic	Package	operations,	International	Package	operations	and	Supply	Chain	&	Freight	operations.	Package operations	represent	our	most	significant	business	and	are	broken	down	into	regional	operations	around	the	world.	Regional	operations	managers	are	responsible	for	both domestic	and	export	operations	within	their	geographic	area.

# U.S.	Domestic	Package

Domestic	Package	operations	include	the	time-definite	delivery	of	letters,	documents	and	packages	throughout	the	United	States.

# International	Package

International	Package	operations	include	delivery	to	more	than	220	countries	and	territories	worldwide,	including	shipments	wholly	outside	the	United	States,	as well	as	shipments	with	either	origin	or	destination	outside	the	United	States.	Our	International	Package	reporting	segment	includes	the	operations	of	our	Europe,	Asia and	Americas	operating	segments.

# Supply	Chain	&	Freight

Supply	Chain	&	Freight	includes	our	forwarding	and	logistics	operations,	UPS	Freight	and	other	aggregated	business	units.	Our	forwarding	and	logistics	business provides	services	in	more	than	195	countries	and	territories	worldwide,	and	includes	supply	chain	design	and	management,	freight	distribution,	customs	brokerage,	mail and	consulting	services.	UPS	Freight	offers	a	variety	of	LTL	and	TL	services	to	customers	in	North	America.	Other	aggregated	business	units	within	this	segment include	Mail	Boxes	Etc.	(the	franchisor	of	Mail	Boxes	Etc.	and	The	UPS	Store)	and	UPS	Capital.

In	evaluating	financial	performance,	we	focus	on	operating	profit	as	a	segment's	measure	of	profit	or	loss.	Operating	profit	is	before	investment	income,	interest expense	and	income	taxes.	The	accounting	policies	of	the	reportable	segments	are	the	same	as	those	described	in	the	summary	of	accounting	policies	(see	note	1),	with certain	expenses	allocated	between	the	segments	using	activity-based	costing	methods.	Unallocated	assets	are	comprised	primarily	of	cash,	marketable	securities,	and certain	investment	partnerships.

Segment	information	as	of,	and	for	the	years	ended,	December	31	is	as	follows	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Revenue: |  |  |  |
| U.S.\tDomestic\tPackage | $32,856 | $31,717 | $29,742 |
| International\tPackage | 12,124 | 12,249 | 11,133 |
| Supply\tChain\t&amp;\tFreight | 9,147 | 9,139 | 8,670 |
| Consolidated | $54,127 | $53,105 | $49,545 |
| Operating\tProfit: |  |  |  |
| U.S.\tDomestic\tPackage | $459 | $3,764 | $3,238 |
| International\tPackage | 869 | 1,709 | 1,831 |
| Supply\tChain\t&amp;\tFreight | 15 | 607 | 572 |
| Consolidated | $1,343 | $6,080 | $5,641 |
| Assets: |  |  |  |
| U.S.\tDomestic\tPackage | $19,934 | $19,300 | $18,425 |
| International\tPackage | 11,248 | 6,729 | 6,228 |
| Supply\tChain\t&amp;\tFreight | 6,610 | 6,588 | 6,283 |
| Unallocated | 1,071 | 2,084 | 2,661 |
| Consolidated | $38,863 | $34,701 | $33,597 |
| Depreciation\tand\tAmortization\tExpense: |  |  |  |
| U.S.\tDomestic\tPackage | $1,220 | $1,154 | $1,174 |
| International\tPackage | 475 | 474 | 443 |
| Supply\tChain\t&amp;\tFreight | 163 | 154 | 175 |
| Consolidated | $1,858 | $1,782 | $1,792 |

Revenue	by	product	type	for	the	years	ended	December	31	is	as	follows	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| U.S.\tDomestic\tPackage: |  |  |  |
| Next\tDay\tAir | $6,412 | $6,229 | $5,835 |
| Deferred | 3,392 | 3,299 | 2,975 |
| Ground | 23,052 | 22,189 | 20,932 |
| Total\tU.S.\tDomestic\tPackage | 32,856 | 31,717 | 29,742 |
| International\tPackage: |  |  |  |
| Domestic | 2,531 | 2,628 | 2,365 |
| Export | 9,033 | 9,056 | 8,234 |
| Cargo | 560 | 565 | 534 |
| Total\tInternational\tPackage | 12,124 | 12,249 | 11,133 |
| Supply\tChain\t&amp;\tFreight: |  |  |  |
| Forwarding\tand\tLogistics | 5,977 | 6,103 | 6,022 |
| Freight | 2,640 | 2,563 | 2,208 |
| Other | 530 | 473 | 440 |
| Total\tSupply\tChain\t&amp;\tFreight | 9,147 | 9,139 | 8,670 |
| Consolidated | $54,127 | $53,105 | $49,545 |

Geographic	information	as	of,	and	for	the	years	ended,	December	31	is	as	follows	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| United\tStates: |  |  |  |
| Revenue | $40,428 | $39,347 | $36,795 |
| Long-lived\tassets | $16,262 | $16,085 | $16,693 |
| International: |  |  |  |
| Revenue | $13,699 | $13,758 | $12,750 |
| Long-lived\tassets | $5,312 | $5,220 | $5,047 |
| Consolidated: |  |  |  |
| Revenue | $54,127 | $53,105 | $49,545 |
| Long-lived\tassets | $21,574 | $21,305 | $21,740 |

Long-lived	assets	include	property,	plant	and	equipment,	pension	and	postretirement	benefit	assets,	long-term	investments,	goodwill,	and	intangible	assets.

No	countries	outside	of	the	United	States,	nor	any	individual	customers,	provided	10%	or	more	of	consolidated	revenue	for	the	years	ended	December	31,	2012, 2011	or	2010.

# NOTE	12.	INCOME	TAXES

The	income	tax	expense	(benefit)	for	the	years	ended	December	31	consists	of	the	following	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Current: |  |  |  |
| U.S.\tFederal | $1,901 | $1,371 | $776 |
| U.S.\tState\tand\tLocal | 182 | 121 | 119 |
| Non-U.S. | 167 | 166 | 161 |
| Total\tCurrent | 2,250 | 1,658 | 1,056 |
| Deferred: |  |  |  |
| U.S.\tFederal | (1,871) | 262 | 828 |
| U.S.\tState\tand\tLocal | (201) | 44 | 98 |
| Non-U.S. | (11) | 8 | (30) |
| Total\tDeferred | (2,083) | 314 | 896 |
| Total | $167 | $1,972 | $1,952 |

Income	before	income	taxes	includes	the	following	components	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| United\tStates | $384 | $5,309 | $4,586 |
| Non-U.S. | 590 | 467 | 704 |
|  | $974 | $5,776 | $5,290 |

A	reconciliation	of	the	statutory	federal	income	tax	rate	to	the	effective	income	tax	rate	for	the	years	ended	December	31	consists	of	the	following:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Statutory\tU.S.\tfederal\tincome\ttax\trate | 35.0\t% | 35.0\t% | 35.0\t% |
| U.S.\tstate\tand\tlocal\tincome\ttaxes\t(net\tof\tfederal\tbenefit) | — | 2.0 | 2.4 |
| Non-U.S.\ttax\trate\tdifferential | (6.1) | (0.4) | (0.7) |
| Nondeductible/nontaxable\titems | (0.4) | (0.1) | 0.3 |
| U.S.\tfederal\ttax\tcredits | (7.4) | (1.7) | (1.9) |
| Other | (4.0) | (0.7) | 1.8 |
| Effective\tincome\ttax\trate | 17.1\t% | 34.1\t% | 36.9\t% |

Our	effective	tax	rate	declined	to	17.1%	in	2012	compared	with	34.1%	in	2011	largely	due	to	the	significance	of	U.S.	Federal	tax	credits	and	the	proportion	of taxable	income	in	certain	non-U.S.	jurisdictions	relative	to	total	pre-tax	income.

In	the	third	quarter	of	2010,	we	recognized	a	$40	million	tax	benefit	associated	with	the	release	of	a	valuation	allowance	against	deferred	tax	assets	in	our international	package	operations,	partially	offset	by	tax	provided	for	interest	earned	on	refunds.

In	the	first	quarter	of	2010,	we	changed	the	tax	status	of	a	German	subsidiary	that	was	taxable	in	the	U.S.	and	its	local	jurisdiction	to	one	that	is	taxed	solely	in	its local	jurisdiction.	This	change	was	made	primarily	to	allow	for	more	flexibility	in	funding	this	subsidiary's	operations	with	local	liquidity	sources,	improve	the	cash	flow position	in	the	U.S.,	and	help	mitigate	future	currency	remeasurement	risk.	As	a	result	of	this	change	in	tax	status,	we	recorded	a	non-cash	charge	of	$76	million,	which resulted	primarily	from	the	write-off	of	related	deferred	tax	assets	which	will	not	be	realizable	following	the	change	in	tax	status.

Beginning	in	2012,	we	were	granted	a	tax	incentive	for	certain	of	our	non-U.S.	operations,	which	is	effective	through	December	31,	2017	and	may	be	extended through	December	31,	2022	if	additional	requirements	are	satisfied.	The	tax	incentive	is	conditional	upon	our	meeting	specific	employment	and	investment	thresholds. The	impact	of	this	tax	incentive	decreased	non-U.S.	tax	expense	by	$22	million,	or	$0.02	per	share,	for	2012.

Deferred	tax	liabilities	and	assets	are	comprised	of	the	following	at	December	31	(in	millions):

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Property,\tplant\tand\tequipment | $(3,624) | $(3,607) |
| Goodwill\tand\tintangible\tassets | (1,035) | (951) |
| Other | (617) | (554) |
| Deferred\ttax\tliabilities | (5,276) | (5,112) |
| Pension\tand\tpostretirement\tbenefits | 4,608 | 2,106 |
| Loss\tand\tcredit\tcarryforwards\t(non-U.S.\tand\tstate) | 258 | 259 |
| Insurance\treserves | 737 | 696 |
| Vacation\tpay\taccrual | 209 | 208 |
| Stock\tcompensation | 159 | 211 |
| Other | 708 | 635 |
| Deferred\ttax\tassets | 6,679 | 4,115 |
| Deferred\ttax\tassets\tvaluation\tallowance | (220) | (205) |
| Deferred\ttax\tasset\t(net\tof\tvaluation\tallowance) | 6,459 | 3,910 |
| Net\tdeferred\ttax\tasset\t(liability) | $1,183 | $(1,202) |
| Amounts\trecognized\tin\tthe\tconsolidated\tbalance\tsheets: |  |  |
| Current\tdeferred\ttax\tassets | $583 | $611 |
| Current\tdeferred\ttax\tliabilities\t(included\tin\tother\tcurrent\tliabilities) | (36) | (31) |
| Non-current\tdeferred\ttax\tassets | 684 | 118 |
| Non-current\tdeferred\ttax\tliabilities | (48) | (1,900) |
| Net\tdeferred\ttax\tasset\t(liability) | $1,183 | $(1,202) |

We	have	U.S.	state	and	local	operating	loss	and	credit	carryforwards	as	follows	(in	millions):

The	operating	loss	carryforwards	expire	at	varying	dates	through	2032.	The	state	credits	can	be	carried	forward	for	periods	ranging	from	three	years	to	indefinitely.

We	also	have	non-U.S.	loss	carryforwards	of	approximately	$842	million	as	of	December	31,	2012,	the	majority	of	which	may	be	carried	forward	indefinitely.	As indicated	in	the	table	above,	we	have	established	a	valuation	allowance	for	certain	non-U.S.	and	state	carryforwards,	due	to	the	uncertainty	resulting	from	a	lack	of previous	taxable	income	within	the	applicable	tax	jurisdictions.

Undistributed	earnings	of	foreign	subsidiaries	amounted	to	approximately	$3.575	billion	at	December	31,	2012.	Those	earnings	are	considered	to	be	indefinitely reinvested	and,	accordingly,	no	deferred	income	taxes	have	been	provided	thereon.	Upon	distribution	of	those	earnings	in	the	form	of	dividends	or	otherwise,	we	would be	subject	to	income	taxes	and	withholding	taxes	payable	in	various	jurisdictions,	which	could	potentially	be	offset	by	foreign	tax	credits.	Determination	of	the	amount of	unrecognized	deferred	income	tax	liability	is	not	practicable	because	of	the	complexities	associated	with	its	hypothetical	calculation.

The	following	table	summarizes	the	activity	related	to	our	unrecognized	tax	benefits	(in	millions):

|  | Tax | Interest | Penalties |
| :--- | :--- | :--- | :--- |
| Balance\tat\tJanuary\t1,\t2010 | $266 | $86 | $8 |
| Additions\tfor\ttax\tpositions\tof\tthe\tcurrent\tyear | 16 | — | — |
| Additions\tfor\ttax\tpositions\tof\tprior\tyears | 45 | 25 | 2 |
| Reductions\tfor\ttax\tpositions\tof\tprior\tyears\tfor: |  |  |  |
| Changes\tbased\ton\tfacts\tand\tcircumstances | (27) | (10) | (3) |
| Settlements\tduring\tthe\tperiod | (6) | (3) | — |
| Lapses\tof\tapplicable\tstatute\tof\tlimitations | (10) | (3) | — |
| Balance\tat\tDecember\t31,\t2010 | 284 | 95 | 7 |
| Additions\tfor\ttax\tpositions\tof\tthe\tcurrent\tyear | 13 | — | — |
| Additions\tfor\ttax\tpositions\tof\tprior\tyears | 17 | 6 | — |
| Reductions\tfor\ttax\tpositions\tof\tprior\tyears\tfor: |  |  |  |
| Changes\tbased\ton\tfacts\tand\tcircumstances | (50) | (9) | (2) |
| Settlements\tduring\tthe\tperiod | (11) | (19) | (1) |
| Lapses\tof\tapplicable\tstatute\tof\tlimitations | (1) | — | (1) |
| Balance\tat\tDecember\t31,\t2011 | 252 | 73 | 3 |
| Additions\tfor\ttax\tpositions\tof\tthe\tcurrent\tyear | 13 | — | — |
| Additions\tfor\ttax\tpositions\tof\tprior\tyears | 7 | 9 | 1 |
| Reductions\tfor\ttax\tpositions\tof\tprior\tyears\tfor: |  |  |  |
| Changes\tbased\ton\tfacts\tand\tcircumstances | (22) | (18) | — |
| Settlements\tduring\tthe\tperiod | (3) | (7) | — |
| Lapses\tof\tapplicable\tstatute\tof\tlimitations | (15) | (4) | — |
| Balance\tat\tDecember\t31,\t2012 | $232 | $53 | $4 |

The	total	amount	of	gross	unrecognized	tax	benefits	as	of	December	31,	2012,	2011	and	2010	that,	if	recognized,	would	affect	the	effective	tax	rate	was	$224, $247	and	$283	million,	respectively.	We	also	had	gross	recognized	tax	benefits	of	$280,	$291	and	$326	million	recorded	as	of	December	31,	2012,	2011	and	2010, respectively,	associated	with	outstanding	refund	claims	for	prior	tax	years.	Therefore,	we	had	a	net	receivable	recorded	with	respect	to	prior	years'	income	tax	matters	in the	accompanying	consolidated	balance	sheets.	Additionally,	we	have	recognized	a	receivable	for	interest	of	$23,	$27	and	$32	million	for	the	recognized	tax	benefits associated	with	outstanding	refund	claims	as	of	December	31,	2012,	2011	and	2010,	respectively.	Our	continuing	practice	is	to	recognize	interest	and	penalties	associated with	income	tax	matters	as	a	component	of	income	tax	expense.

We	file	income	tax	returns	in	the	U.S.	federal	jurisdiction,	most	U.S.	state	and	local	jurisdictions,	and	many	non-U.S.	jurisdictions.	We	have	substantially	resolved all	U.S.	federal	income	tax	matters	for	tax	years	prior	to	2005.	During	the	fourth	quarter	of	2010,	we	received	a	refund	of	$139	million	as	a	result	of	the	resolution	of	tax years	2003	through	2004	with	the	IRS	Appeals	Office.	We	have	filed	all	required	U.S.	state	and	local	returns	reporting	the	result	of	the	resolution	of	the	U.S.	federal income	tax	audit	of	the	tax	years	2003	and	2004.	A	limited	number	of	U.S.	state	and	local	matters	are	the	subject	of	ongoing	audits,	administrative	appeals	or	litigation.

In	June	2011,	we	received	an	IRS	Revenue	Agent	Report	(RAR)	covering	income	taxes	for	tax	years	2005	through	2007,	in	addition	to	the	excise	tax	matters described	in	note	8.	The	income	tax	RAR	proposed	adjustments	related	to	the	value	of	acquired	software	and	intangibles,	research	credit	expenditures,	and	the	amount	of deductible	costs	associated	with	our	British	Pound	Sterling	Notes	exchange	offer	completed	in	May	2007.	Receipt	of	the	RAR	represents	only	the	conclusion	of	the examination	process.	We	disagree	with	some	of	the	proposed	adjustments	related	to	these	matters.	Therefore,	we	filed	protests	and,	in	the	third	quarter	of	2011,	the	IRS responded	to	our	protests	and	forwarded	the	case	to	IRS	Appeals.

We	expect	to	begin	discussions	of	these	income	tax	matters	with	IRS	Appeals	within	the	next	twelve	months.	It	should	be	noted,	however,	that	the	ultimate resolution	of	these	matters	will	result	in	a	refund	to	UPS	-	even	according	to	the	adjustments	proposed	by	the	IRS.

At	this	time,	we	do	not	believe	the	ultimate	resolution	of	these	income	tax	matters	will	have	a	material	effect	on	our	financial	condition,	results	of	operations,	or liquidity.

A	number	of	years	may	elapse	before	an	uncertain	tax	position	is	audited	and	ultimately	settled.	It	is	difficult	to	predict	the	ultimate	outcome	or	the	timing	of resolution	for	uncertain	tax	positions.	It	is	reasonably	possible	that	the	amount	of	unrecognized	tax	benefits	could	significantly	increase	or	decrease	within	the	next twelve	months.	Items	that	may	cause	changes	to	unrecognized	tax	benefits	include	the	timing	of	interest	deductions	and	the	allocation	of	income	and	expense	between tax	jurisdictions.	These	changes	could	result	from	the	settlement	of	ongoing	litigation,	the	completion	of	ongoing	examinations,	the	expiration	of	the	statute	of limitations	or	other	unforeseen	circumstances.	At	this	time,	an	estimate	of	the	range	of	the	reasonably	possible	change	cannot	be	made.

# NOTE	13.	EARNINGS	PER	SHARE

The	following	table	sets	forth	the	computation	of	basic	and	diluted	earnings	per	share	(in	millions,	except	per	share	amounts):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Numerator: |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tshareowners | $807 | $3,804 | $3,338 |
| Denominator: |  |  |  |
| Weighted\taverage\tshares | 957 | 977 | 991 |
| Deferred\tcompensation\tobligations | 1 | 2 | 2 |
| Vested\tportion\tof\trestricted\tshares | 2 | 2 | 1 |
| Denominator\tfor\tbasic\tearnings\tper\tshare | 960 | 981 | 994 |
| Effect\tof\tdilutive\tsecurities: |  |  |  |
| Restricted\tperformance\tunits | 3 | 3 | 3 |
| Restricted\tstock\tunits | 5 | 6 | 6 |
| Stock\toptions | 1 | 1 | — |
| Denominator\tfor\tdiluted\tearnings\tper\tshare | 969 | 991 | 1,003 |
| Basic\tearnings\tper\tshare | $0.84 | $3.88 | $3.36 |
| Diluted\tearnings\tper\tshare | $0.83 | $3.84 | $3.33 |

Diluted	earnings	per	share	for	the	years	ended	December	31,	2012,	2011,	and	2010	exclude	the	effect	of	2.6,	7.4	and	11.1	million	shares,	respectively,	of	common stock	that	may	be	issued	upon	the	exercise	of	employee	stock	options	because	such	effect	would	be	antidilutive.

# NOTE	14.	DERIVATIVE	INSTRUMENTS	AND	RISK	MANAGEMENT

# Risk	Management	Policies

We	are	exposed	to	market	risk,	primarily	related	to	foreign	exchange	rates,	commodity	prices	and	interest	rates.	These	exposures	are	actively	monitored	by management.	To	manage	the	volatility	relating	to	certain	of	these	exposures,	we	enter	into	a	variety	of	derivative	financial	instruments.	Our	objective	is	to	reduce,	where it	is	deemed	appropriate	to	do	so,	fluctuations	in	earnings	and	cash	flows	associated	with	changes	in	foreign	currency	rates,	commodity	prices	and	interest	rates.	It	is	our policy	and	practice	to	use	derivative	financial	instruments	only	to	the	extent	necessary	to	manage	exposures.	As	we	use	price	sensitive	instruments	to	hedge	a	certain portion	of	our	existing	and	anticipated	transactions,	we	expect	that	any	loss	in	value	for	those	instruments	generally	would	be	offset	by	increases	in	the	value	of	those hedged	transactions.	We	do	not	hold	or	issue	derivative	financial	instruments	for	trading	or	speculative	purposes.

# Credit	Risk	Management

The	forward	contracts,	swaps	and	options	discussed	below	contain	an	element	of	risk	that	the	counterparties	may	be	unable	to	meet	the	terms	of	the	agreements. However,	we	minimize	such	risk	exposures	for	these	instruments	by	limiting	the	counterparties	to	banks	and	financial	institutions	that	meet	established	credit	guidelines, and	monitoring	counterparty	credit	risk	to	prevent	concentrations	of	credit	risk	with	any	single	counterparty.

We	have	agreements	with	substantially	all	of	our	active	counterparties	containing	early	termination	rights	and/or	bilateral	collateral	provisions	whereby	cash	is required	whenever	the	net	fair	value	of	derivatives	associated	with	those	counterparties	exceed	specific	thresholds.	Events,	such	as	a	credit	rating	downgrade	(depending on	the	ultimate	rating	level)	would	typically	require	an	increase	in	the	amount	of	collateral	required	of	the	counterparty	and/or	allow	us	to	take	additional	protective measures	such	as	early	termination	of	trades.	At	December	31,	2012,	we	held	cash	collateral	of	$59	million	under	these	agreements.

In	connection	with	the	agreements	described	above,	we	could	also	be	required	to	provide	additional	collateral	or	terminate	transactions	with	certain	counterparties in	the	event	of	a	downgrade	of	our	debt	rating.	The	amount	of	additional	collateral	is	a	fixed	incremental	amount.	At	December	31,	2012	the	aggregate	fair	value	of	the instruments	covered	by	these	contractual	features	that	were	in	a	net	liability	position	was	$129	million;	however,	we	were	not	required	to	post	any	collateral	with	our counterparties	as	of	that	date.

We	have	not	historically	incurred,	and	do	not	expect	to	incur	in	the	future,	any	losses	as	a	result	of	counterparty	default.

# Accounting	Policy	for	Derivative	Instruments

We	recognize	all	derivative	instruments	as	assets	or	liabilities	in	the	consolidated	balance	sheets	at	fair	value.	The	accounting	for	changes	in	the	fair	value	of	a derivative	instrument	depends	on	whether	it	has	been	designated	and	qualifies	as	part	of	a	hedging	relationship	and,	further,	on	the	type	of	hedging	relationship.	For those	derivative	instruments	that	are	designated	and	qualify	as	hedging	instruments,	a	company	must	designate	the	derivative,	based	upon	the	exposure	being	hedged,	as a	cash	flow	hedge,	a	fair	value	hedge	or	a	hedge	of	a	net	investment	in	a	foreign	operation.

A	cash	flow	hedge	refers	to	hedging	the	exposure	to	variability	in	expected	future	cash	flows	that	is	attributable	to	a	particular	risk.	For	derivative	instruments	that are	designated	and	qualify	as	a	cash	flow	hedge,	the	effective	portion	of	the	gain	or	loss	on	the	derivative	instrument	is	reported	as	a	component	of	AOCI,	and reclassified	into	earnings	in	the	same	period	during	which	the	hedged	transaction	affects	earnings.	The	remaining	gain	or	loss	on	the	derivative	instrument	in	excess	of the	cumulative	change	in	the	present	value	of	future	cash	flows	of	the	hedged	item,	or	hedge	components	excluded	from	the	assessment	of	effectiveness,	are	recognized in	the	statements	of	consolidated	income	during	the	current	period.

A	fair	value	hedge	refers	to	hedging	the	exposure	to	changes	in	the	fair	value	of	an	existing	asset	or	liability	on	the	consolidated	balance	sheets	that	is	attributable to	a	particular	risk.	For	derivative	instruments	that	are	designated	and	qualify	as	a	fair	value	hedge,	the	gain	or	loss	on	the	derivative	instrument	is	recognized	in	the statements	of	consolidated	income	during	the	current	period,	as	well	as	the	offsetting	gain	or	loss	on	the	hedged	item.

A	net	investment	hedge	refers	to	the	use	of	cross	currency	swaps,	forward	contracts	or	foreign	currency	denominated	debt	to	hedge	portions	of	our	net	investments in	foreign	operations.	For	hedges	that	meet	the	effectiveness	requirements,	the	net	gains	or	losses	attributable	to	changes	in	spot	exchange	rates	are	recorded	in	the cumulative	translation	adjustment	within	AOCI.	The	remainder	of	the	change	in	value	of	such	instruments	is	recorded	in	earnings.

# Types	of	Hedges

# Commodity	Risk	Management

Currently,	the	fuel	surcharges	that	we	apply	to	our	domestic	and	international	package	and	LTL	services	are	the	primary	means	of	reducing	the	risk	of	adverse	fuel price	changes	on	our	business.	We	periodically	enter	into	option	contracts	on	energy	commodity	products	to	manage	the	price	risk	associated	with	forecasted transactions	involving	refined	fuels,	principally	jet-A,	diesel	and	unleaded	gasoline.	The	objective	of	the	hedges	is	to	reduce	the	variability	of	cash	flows,	due	to changing	fuel	prices,	associated	with	the	forecasted	transactions	involving	those	products.	We	designate	and	account	for	these	contracts	as	cash	flow	hedges	of	the underlying	forecasted	transactions	involving	these	fuel	products	and,	therefore,	the	resulting	gains	and	losses	from	these	hedges	are	recognized	as	a	component	of	fuel expense	or	revenue	when	the	underlying	transactions	occur.

# Foreign	Currency	Risk	Management

To	protect	against	the	reduction	in	value	of	forecasted	foreign	currency	cash	flows	from	our	international	package	business,	we	maintain	a	foreign	currency	cash flow	hedging	program.	Our	most	significant	foreign	currency	exposures	relate	to	the	Euro,	the	British	Pound	Sterling,	Canadian	Dollar,	Chinese	Renminbi	and	Hong Kong	Dollar.	We	hedge	portions	of	our	forecasted	revenue	denominated	in	foreign	currencies	with	option	contracts.	We	have	designated	and	account	for	these	contracts as	cash	flow	hedges	of	anticipated	foreign	currency	denominated	revenue	and,	therefore,	the	resulting	gains	and	losses	from	these	hedges	are	recognized	as	a	component of	international	package	revenue	when	the	underlying	sales	transactions	occur.

We	also	hedge	portions	of	our	anticipated	cash	settlements	of	intercompany	transactions	subject	to	foreign	currency	remeasurement	using	foreign	currency forward	contracts.	We	have	designated	and	account	for	these	contracts	as	cash	flow	hedges	of	forecasted	foreign	currency	denominated	transactions,	and	therefore	the resulting	gains	and	losses	from	these	hedges	are	recognized	as	a	component	of	other	operating	expense	when	the	underlying	transactions	are	subject	to	currency remeasurement.

We	have	foreign	currency	denominated	debt	obligations	and	capital	lease	obligations	associated	with	our	aircraft.	For	some	of	these	debt	obligations	and	leases, we	hedge	the	foreign	currency	denominated	contractual	payments	using	cross-currency	interest	rate	swaps,	which	effectively	convert	the	foreign	currency	denominated contractual	payments	into	U.S.	Dollar	denominated	payments.	We	have	designated	and	account	for	these	swaps	as	cash	flow	hedges	of	the	forecasted	contractual payments	and,	therefore,	the	resulting	gains	and	losses	from	these	hedges	are	recognized	in	the	statements	of	consolidated	income	when	the	currency	remeasurement gains	and	losses	on	the	underlying	debt	obligations	and	leases	are	incurred.

# Interest	Rate	Risk	Management

Our	indebtedness	under	our	various	financing	arrangements	creates	interest	rate	risk.	We	use	a	combination	of	derivative	instruments,	including	interest	rate	swaps and	cross-currency	interest	rate	swaps,	as	part	of	our	program	to	manage	the	fixed	and	floating	interest	rate	mix	of	our	total	debt	portfolio	and	related	overall	cost	of borrowing.	The	notional	amount,	interest	payment	and	maturity	dates	of	the	swaps	match	the	terms	of	the	associated	debt	being	hedged.	Interest	rate	swaps	allow	us	to maintain	a	target	range	of	floating	rate	debt	within	our	capital	structure.

We	have	designated	and	account	for	interest	rate	swaps	that	convert	fixed	rate	interest	payments	into	floating	rate	interest	payments	as	hedges	of	the	fair	value	of the	associated	debt	instruments.	Therefore,	the	gains	and	losses	resulting	from	fair	value	adjustments	to	the	interest	rate	swaps	and	fair	value	adjustments	to	the associated	debt	instruments	are	recorded	to	interest	expense	in	the	period	in	which	the	gains	and	losses	occur.	We	have	designated	and	account	for	interest	rate	swaps that	convert	floating	rate	interest	payments	into	fixed	rate	interest	payments	as	cash	flow	hedges	of	the	forecasted	payment	obligations.	The	gains	and	losses	resulting from	fair	value	adjustments	to	the	interest	rate	swap	are	recorded	to	AOCI.

We	periodically	hedge	the	forecasted	fixed-coupon	interest	payments	associated	with	anticipated	debt	offerings,	using	forward	starting	interest	rate	swaps,	interest rate	locks	or	similar	derivatives.	These	agreements	effectively	lock	a	portion	of	our	interest	rate	exposure	between	the	time	the	agreement	is	entered	into	and	the	date when	the	debt	offering	is	completed,	thereby	mitigating	the	impact	of	interest	rate	changes	on	future	interest	expense.	These	derivatives	are	settled	commensurate	with the	issuance	of	the	debt,	and	any	gain	or	loss	upon	settlement	is	amortized	as	an	adjustment	to	the	effective	interest	yield	on	the	debt.

# Outstanding	Positions

The	notional	amounts	of	our	outstanding	derivative	positions	were	as	follows	as	of	December	31,	2012	and	2011	(in	millions):

|  |  | 2012 | 2011 |
| :--- | :--- | :--- | :--- |
| Currency\tHedges: |  |  |  |
| Euro | EUR | 1,783 | 1,685 |
| British\tPound\tSterling | GBP | 797 | 870 |
| Canadian\tDollar | CAD | 341 | 318 |
| United\tArab\tEmirates\tDirham | AED | 551 | — |
| Malaysian\tRinggit | MYR | 500 | — |
| Interest\tRate\tHedges: |  |  |  |
| Fixed\tto\tFloating\tInterest\tRate\tSwaps | USD | 7,274 | 6,424 |
| Floating\tto\tFixed\tInterest\tRate\tSwaps | USD | 781 | 791 |
| Interest\tRate\tBasis\tSwaps | USD | 2,500 | — |

As	of	December	31,	2012,	we	had	no	outstanding	commodity	hedge	positions.	The	maximum	term	over	which	we	are	hedging	exposures	to	the	variability	of	cash flow	is	37	years.

# Balance	Sheet	Recognition

The	following	table	indicates	the	location	on	the	balance	sheet	in	which	our	derivative	assets	and	liabilities	have	been	recognized,	and	the	related	fair	values	of those	derivatives	as	of	December	31,	2012	and	2011	(in	millions).	The	table	is	segregated	between	those	derivative	instruments	that	qualify	and	are	designated	as hedging	instruments	and	those	that	are	not,	as	well	as	by	type	of	contract	and	whether	the	derivative	is	in	an	asset	or	liability	position.

| Asset	Derivatives | Balance	Sheet	Location | Fair	Value<br>Hierarchy<br>Level | 2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- |
| Derivatives\tdesignated\tas\thedges: |  |  |  |  |
| Foreign\texchange\tcontracts | Other\tcurrent\tassets | Level\t2 | $27 | $164 |
| Interest\trate\tcontracts | Other\tcurrent\tassets | Level\t2 | 1 | — |
| Foreign\texchange\tcontracts | Other\tnon-current\tassets | Level\t2 | 14 | — |
| Interest\trate\tcontracts | Other\tnon-current\tassets | Level\t2 | 420 | 401 |
| Derivatives\tnot\tdesignated\tas\thedges: |  |  |  |  |
| Foreign\texchange\tcontracts | Other\tcurrent\tassets | Level\t2 | 3 | 2 |
| Interest\trate\tcontracts | Other\tnon-current\tassets | Level\t2 | 101 | 82 |
| Total\tAsset\tDerivatives |  |  | $566 | $649 |

| Liability	Derivatives | Balance	Sheet	Location | Fair	Value<br>Hierarchy<br>Level | 2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- |
| Derivatives\tdesignated\tas\thedges: |  |  |  |  |
| Foreign\texchange\tcontracts | Other\tnon-current\tliabilities | Level\t2 | 103 | 185 |
| Interest\trate\tcontracts | Other\tnon-current\tliabilities | Level\t2 | 14 | 13 |
| Derivatives\tnot\tdesignated\tas\thedges: |  |  |  |  |
| Foreign\texchange\tcontracts | Other\tcurrent\tliabilities | Level\t2 | 1 | — |
| Interest\trate\tcontracts | Other\tnon-current\tliabilities | Level\t2 | 41 | 10 |
| Total\tLiability\tDerivatives |  |  | $159 | $208 |

# Income	Statement	Recognition

The	following	table	indicates	the	amount	and	location	in	the	statements	of	consolidated	income	in	which	derivative	gains	and	losses,	as	well	as	the	related	amounts reclassified	from	AOCI,	have	been	recognized	for	those	derivatives	designated	as	cash	flow	hedges	for	the	years	ended	December	31,	2012	and	2011	(in	millions):

|  |  |  | Location	of	Gain | Amount	of	Gain	(Loss)	Reclassified	from | Amount	of	Gain	(Loss)	Reclassified	from |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Amount\tof\tGain\t(Loss)\tRecognized\tin\tOCI\ton | Amount\tof\tGain\t(Loss)\tRecognized\tin\tOCI\ton | (Loss)\tReclassified | Accumulated\tOCI\tinto\tIncome\t(Effective | Accumulated\tOCI\tinto\tIncome\t(Effective |
| Derivative\tInstruments\tin\tCash\nFlow\tHedging\tRelationships | Derivative\t(Effective\tPortion)\n2012 | 2011 | from\tAccumulated\nOCI\tinto\tIncome\n(Effective\tPortion) | Portion)\n2012 | 2011 |
| Interest\trate\tcontracts | $(71) | $(6) | Interest\tExpense | $(22) | $(19) |
| Foreign\texchange\tcontracts | 84 | (85) | Interest\tExpense | 24 | 13 |
| Foreign\texchange\tcontracts | (5) | 5 | Other\tOperating\tExpense | — | — |
| Foreign\texchange\tcontracts | (76) | 35 | Revenue | 61 | (101) |
| Commodity\tcontracts | — | 9 | Fuel\tExpense | — | 9 |
| Total | $(68) | $(42) |  | $63 | $(98) |

As	of	December	31,	2012,	$58	million	of	pre-tax	losses	related	to	cash	flow	hedges	that	are	currently	deferred	in	AOCI	are	expected	to	be	reclassified	to	income over	the	12	month	period	ended	December	31,	2013.	The	actual	amounts	that	will	be	reclassified	to	income	over	the	next	12	months	will	vary	from	this	amount	as	a result	of	changes	in	market	conditions.

The	amount	of	ineffectiveness	recognized	in	income	on	derivative	instruments	designated	in	cash	flow	hedging	relationships	was	immaterial	for	the	years	ended December	31,	2012,	2011	and	2010.

The	following	table	indicates	the	amount	and	location	in	the	statements	of	consolidated	income	in	which	derivative	gains	and	losses,	as	well	as	the	associated gains	and	losses	on	the	underlying	exposure,	have	been	recognized	for	those	derivatives	designated	as	fair	value	hedges	for	the	years	ended	December	31,	2012	and	2011 (in	millions):

Additionally,	we	maintain	some	foreign	exchange	forward	and	interest	rate	swap	contracts	that	are	not	designated	as	hedges.	These	foreign	exchange	forward contracts	are	intended	to	provide	an	economic	offset	to	foreign	currency	remeasurement	risks	for	certain	assets	and	liabilities	in	our	consolidated	balance	sheets.	These interest	rate	swap	contracts	are	intended	to	provide	an	economic	hedge	of	a	portfolio	of	interest	bearing	receivables.	The	income	statement	impact	of	these	hedges	was not	material	for	any	period	presented.

We	also	periodically	terminate	interest	rate	swaps	and	foreign	currency	options	by	entering	into	offsetting	swap	and	foreign	currency	positions	with	different counterparties.	As	part	of	this	process,	we	de-designate	our	original	swap	and	foreign	currency	contracts.	These	transactions	provide	an	economic	offset	that	effectively eliminates	the	effects	of	changes	in	market	valuation.

We	have	entered	into	several	interest	rate	basis	swaps,	which	effectively	convert	cash	flows	based	on	variable	LIBOR-based	interest	rates	to	cash	flows	based	on the	prevailing	federal	funds	interest	rate.	These	swaps	are	not	designated	as	hedges,	and	all	amounts	related	to	fair	value	changes	and	settlements	are	recorded	to	interest expense	in	the	statements	of	consolidated	income.

The	following	is	a	summary	of	the	amounts	recorded	in	the	statements	of	consolidated	income	related	to	fair	value	changes	and	settlements	of	these	foreign currency	forward	and	interest	rate	swap	contracts	not	designated	as	hedges	for	the	years	ended	December	31,	2012	and	2011	(in	millions):

|  | Location	of	Gain | Amount	of	Gain	(Loss)	Recognized	in	Income | Amount	of	Gain	(Loss)	Recognized	in	Income |
| :--- | :--- | :--- | :--- |
| Derivative\tInstruments\tNot\tDesignated\tin\nHedging\tRelationships | (Loss)\tRecognized\nin\tIncome | 2012 | 2011 |
| Foreign\texchange\tcontracts | Revenue | $2 | $— |
| Foreign\texchange\tcontracts | Other\tOperating\tExpenses | 19 | 2 |
| Foreign\texchange\tcontracts | Investment\tIncome | (22) | — |
| Interest\trate\tcontracts | Interest\tExpense | (12) | (8) |
| Total |  | $(13) | $(6) |

Our	foreign	currency,	interest	rate	and	energy	derivatives	are	largely	comprised	of	over-the-counter	derivatives,	which	are	primarily	valued	using	pricing	models that	rely	on	market	observable	inputs	such	as	yield	curves,	currency	exchange	rates	and	commodity	forward	prices,	and	therefore	are	classified	as	Level	2.	The	fair	values of	our	derivative	assets	and	liabilities	as	of	December	31,	2012	and	2011	by	hedge	type	are	as	follows	(in	millions):

|  | Quoted	Prices	in<br>Active	Markets	for<br>Identical	Assets<br>(Level	1) | Significant<br>Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Total |
| :--- | :--- | :--- | :--- | :--- |
| 2012 |  |  |  |  |
| Assets |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $44 | $— | $44 |
| Interest\tRate\tContracts | — | 522 | — | 522 |
| Total | $— | $566 | $— | $566 |
| Liabilities |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $104 | $— | $104 |
| Interest\tRate\tContracts | — | 55 | — | 55 |
| Total | $— | $159 | $— | $159 |

|  | Quoted	Prices	in<br>Active	Markets	for<br>Identical	Assets<br>(Level	1) | Significant<br>Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Total |
| :--- | :--- | :--- | :--- | :--- |
| 2011 |  |  |  |  |
| Assets |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $166 | $— | $166 |
| Interest\tRate\tContracts | — | 483 | — | 483 |
| Total | $— | $649 | $— | $649 |
| Liabilities |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $185 | $— | $185 |
| Interest\tRate\tContracts | — | 23 | — | 23 |
| Total | $— | $208 | $— | $208 |

# NOTE	15.	RESTRUCTURING	COSTS	AND	BUSINESS	DISPOSITIONS

We	have	incurred	restructuring	costs	associated	with	the	termination	of	employees,	facility	consolidations	and	other	costs	directly	related	to	restructuring initiatives.	These	initiatives	have	resulted	from	the	integration	of	acquired	companies,	as	well	as	restructuring	activities	associated	with	cost	containment	and	operational efficiency	programs.	Additionally,	we	have	sold	or	shut-down	certain	non-core	business	units	in	2010,	and	recorded	gains	or	losses	upon	the	sale,	as	well	as	costs associated	with	each	transaction.

# Supply	Chain	&	Freight—Germany

In	February	2010,	we	completed	the	sale	of	a	specialized	transportation	and	express	freight	business	in	Germany	within	our	Supply	Chain	&	Freight	segment.	As part	of	the	sale	transaction,	we	incurred	certain	costs	associated	with	employee	severance	payments,	other	employee	benefits,	transition	services,	and	leases	on	operating facilities	and	equipment.	Additionally,	we	provided	a	guarantee	for	a	period	of	two	years	from	the	date	of	sale	for	certain	employee	benefit	payments	being	assumed	by the	buyer.	We	recorded	a	pre-tax	loss	of	$51	million	($47	million	after-tax)	for	this	transaction	in	2010,	which	included	the	costs	associated	with	the	sale	transaction	and the	fair	value	of	the	guarantee.	This	loss	is	recorded	in	the	caption	"other	expenses"	in	the	statements	of	consolidated	income.

# Supply	Chain	&	Freight—United	States

In	December	2010,	we	completed	the	sale	of	our	UPS	Logistics	Technologies,	Inc.	business	unit,	which	produced	transportation	routing	and	fleet	management systems.	We	recognized	a	$71	million	pre-tax	gain	on	the	sale	($44	million	after	tax),	which	is	included	in	the	caption	"other	expenses"	in	the	consolidated	income statement,	and	is	included	in	the	results	of	our	Supply	Chain	&	Freight	segment.	The	operating	results	of	the	UPS	Logistics	Technologies,	Inc	business	unit	were	not material	to	our	consolidated	or	segment	operating	results	in	any	of	the	periods	presented.

# U.S.	Domestic	Package	Restructuring

In	an	effort	to	improve	performance	in	the	U.S.	Domestic	Package	segment,	we	announced	a	program	to	streamline	our	domestic	management	structure	in	January 2010.	As	part	of	this	restructuring,	we	reduced	the	number	of	domestic	districts	and	regions	in	our	U.S.	small	package	operation	in	order	to	better	align	our	operations geographically	and	allow	more	local	decision-making	and	resources	to	be	deployed	for	our	customers.	Effective	in	April	2010,	we	reduced	our	U.S.	regions	from	five	to three	and	our	U.S.	districts	from	46	to	20.	The	restructuring	eliminated	approximately	1,800	management	and	administrative	positions	in	the	U.S.	Approximately	1,100 employees	were	offered	voluntary	severance	packages,	while	other	impacted	employees	received	severance	benefits	based	on	length	of	service,	and	access	to	support programs.	We	recorded	a	pre-tax	charge	of	$98	million	($64	million	after-tax)	in	the	first	quarter	of	2010	related	to	the	costs	of	this	program,	which	reflects	the	value	of voluntary	retirement	benefits,	severance	benefits	and	unvested	stock	compensation.	During	the	remainder	of	2010,	we	incurred	additional	costs	related	to	the	relocation of	employees	and	other	restructuring	activities,	however	those	costs	were	offset	by	savings	from	the	staffing	reductions.

# NOTE	16.	SUBSEQUENT	EVENTS

On	January	30,	2013,	the	European	Commission	issued	a	formal	decision	prohibiting	our	proposed	acquisition	of	TNT	Express	N.V.	("TNT	Express").	As	a	result of	the	prohibition	by	the	European	Commission,	the	condition	of	our	offer	requiring	European	Union	competition	clearance	was	not	fulfilled,	and	our	proposed acquisition	of	TNT	Express	could	not	be	completed.	Given	this	outcome,	UPS	and	TNT	Express	entered	a	separate	agreement	to	terminate	the	merger	protocol,	and	we withdrew	our	formal	offer	for	TNT	Express.	Under	this	termination	agreement,	we	have	paid	a	break-up	fee	to	TNT	Express	of	€200	million	(approximately	$268 million)	in	the	first	quarter	of	2013.

In	January	2013,	we	purchased	the	noncontrolling	interest	in	our	joint	venture	that	operates	in	the	Middle	East,	Turkey,	and	portions	of	the	Central	Asia	region	(see note	9),	for	$70	million.	After	this	transaction,	we	own	100%	of	this	entity.

# NOTE	17.	QUARTERLY	INFORMATION	(unaudited)

Our	revenue,	segment	operating	profit,	net	income,	basic	and	diluted	earnings	per	share	on	a	quarterly	basis	are	presented	below	(in	millions,	except	per	share amounts):

|  | First	Quarter<br>2012 | 2011 | Second	Quarter<br>2012 | 2011 | Third	Quarter<br>2012 | 2011 | Fourth	Quarter<br>2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Revenue: |  |  |  |  |  |  |  |  |
| U.S.\tDomestic\tPackage | $8,004 | $7,543 | $8,058 | $7,737 | $7,861 | $7,767 | $8,933 | $8,670 |
| International\tPackage | 2,966 | 2,900 | 3,014 | 3,139 | 2,943 | 3,057 | 3,201 | 3,153 |
| Supply\tChain\t&amp;\tFreight | 2,166 | 2,139 | 2,277 | 2,315 | 2,267 | 2,342 | 2,437 | 2,343 |
| Total\trevenue | 13,136 | 12,582 | 13,349 | 13,191 | 13,071 | 13,166 | 14,571 | 14,166 |
| Operating\tprofit\t(loss): |  |  |  |  |  |  |  |  |
| U.S.\tDomestic\tPackage | 995 | 880 | 1,134 | 997 | 129 | 1,046 | (1,799) | 841 |
| International\tPackage | 408 | 453 | 454 | 505 | 449 | 417 | (442) | 334 |
| Supply\tChain\t&amp;\tFreight | 166 | 139 | 202 | 243 | 188 | 203 | (541) | 22 |
| Total\toperating\tprofit\t(loss) | 1,569 | 1,472 | 1,790 | 1,745 | 766 | 1,666 | (2,782) | 1,197 |
| Net\tincome\t(loss) | $970 | $915 | $1,116 | $1,092 | $469 | $1,072 | $(1,748) | $725 |
| Net\tincome\t(loss)\tper\tshare: |  |  |  |  |  |  |  |  |
| Basic | $1.01 | $0.92 | $1.16 | $1.11 | $0.49 | $1.10 | $(1.83) | $0.75 |
| Diluted | $1.00 | $0.91 | $1.15 | $1.09 | $0.48 | $1.09 | $(1.83) | $0.74 |

Operating	profit	for	the	quarter	ended	September	30,	2012	was	impacted	by	a	charge	for	the	establishment	of	a	withdrawal	liability	related	to	our	withdrawal	from the	New	England	Teamsters	and	Trucking	Industry	Pension	Fund,	a	multiemployer	pension	plan.	This	charge	reduced	the	operating	profit	for	the	U.S.	Domestic Package	segment	by	$896	million,	net	income	by	$559	million	and	basic	and	diluted	earnings	per	share	by	$0.58.

Operating	profit	for	the	quarter	ended	December	31,	2012	was	impacted	by	a	mark-to-market	loss	on	our	pension	and	postretirement	benefit	plans	related	to	the remeasurement	of	plan	assets	and	liabilities	recognized	outside	of	a	10%	corridor	of	$4.831	billion	(allocated	as	follows—U.S.	Domestic	Package	$3.177	billion, International	Package	$941	million,	Supply	Chain	&	Freight	$713	million).	This	loss	reduced	net	income	by	$3.023	billion,	and	basic	and	diluted	earnings	per	share	by $3.16.

Operating	profit	for	the	quarter	ended	June	30,	2011	was	impacted	by	gains	and	losses	on	certain	real	estate	transactions,	including	a	$15	million	loss	in	the	U.S. Domestic	Package	segment	and	a	$48	million	gain	in	the	Supply	Chain	&	Freight	segment.	The	combined	impact	of	these	transactions	increased	net	income	by	$20 million,	and	basic	and	diluted	earnings	per	share	by	$0.02.

Operating	profit	for	the	quarter	ended	December	31,	2011	was	impacted	by	a	mark-to-market	loss	on	our	pension	and	postretirement	benefit	plans	related	to	the remeasurement	of	plan	assets	and	liabilities	recognized	outside	of	a	10%	corridor	of	$827	million	(allocated	as	follows—U.S.	Domestic	Package	$479	million, International	Package	$171	million,	Supply	Chain	&	Freight	$177	million).	This	loss	reduced	net	income	by	$527	million,	and	basic	and	diluted	earnings	per	share	by $0.54.

# Item	9. Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial

# Disclosure

None.

# Item	9A. Controls	and	Procedures

# Evaluation	of	Disclosure	Controls	and	Procedures:

As	of	the	end	of	the	period	covered	by	this	report,	management,	including	our	chief	executive	officer	and	chief	financial	officer,	evaluated	the	effectiveness	of	the design	and	operation	of	our	disclosure	controls	and	procedures	and	internal	controls	over	financial	reporting.	Based	upon,	and	as	of	the	date	of,	the	evaluation,	our	chief executive	officer	and	chief	financial	officer	concluded	that	the	disclosure	controls	and	procedures	and	internal	controls	over	financial	reporting	were	effective	to	ensure that	information	required	to	be	disclosed	in	the	reports	we	file	and	submit	under	the	Exchange	Act	is	recorded,	processed,	summarized	and	reported	as	and	when required	and	is	accumulated	and	communicated	to	our	management,	including	the	Chief	Executive	Officer	and	Chief	Financial	Officer,	as	appropriate	to	allow	timely decisions	regarding	required	disclosure.

# Changes	in	Internal	Control	over	Financial	Reporting:

There	were	no	changes	in	the	Company's	internal	controls	over	financial	reporting	during	the	quarter	ended	December	31,	2012	that	have	materially	affected,	or are	reasonably	likely	to	materially	affect,	the	Company's	internal	control	over	financial	reporting.

# Management's	Report	on	Internal	Control	Over	Financial	Reporting:

UPS	management	is	responsible	for	establishing	and	maintaining	adequate	internal	controls	over	financial	reporting	for	United	Parcel	Service,	Inc.	and	its subsidiaries	(the	"Company").	Based	on	the	criteria	for	effective	internal	control	over	financial	reporting	established	in	Internal	Control—Integrated	Framework	issued by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission,	management	has	assessed	the	Company's	internal	control	over	financial	reporting	as effective	as	of	December	31,	2012.	The	independent	registered	public	accounting	firm	of	Deloitte	&	Touche	LLP,	as	auditors	of	the	consolidated	balance	sheets	of United	Parcel	Service,	Inc.	and	its	subsidiaries	as	of	December	31,	2012	and	the	related	consolidated	statements	of	income,	comprehensive	income	and	cash	flows	for the	year	ended	December	31,	2012,	has	issued	an	attestation	report	on	the	Company's	internal	control	over	financial	reporting,	which	is	included	herein.

/s/	United	Parcel	Service,	Inc.

We	have	audited	the	internal	control	over	financial	reporting	of	United	Parcel	Service,	Inc.	and	subsidiaries	(the	"Company")	as	of	December	31,	2012,	based	on criteria	established	in	Internal	Control—Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.	The	Company's management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial reporting,	included	in	the	accompanying	Management's	Report	on	Internal	Control	Over	Financial	Reporting.	Our	responsibility	is	to	express	an	opinion	on	the Company's	internal	control	over	financial	reporting	based	on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our audit	included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	testing	and	evaluating	the	design and	operating	effectiveness	of	internal	control	based	on	the	assessed	risk,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We believe	that	our	audit	provides	a	reasonable	basis	for	our	opinion.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	by,	or	under	the	supervision	of,	the	company's	principal	executive	and	principal financial	officers,	or	persons	performing	similar	functions,	and	effected	by	the	company's	board	of	directors,	management,	and	other	personnel	to	provide	reasonable assurance	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted accounting	principles.	A	company's	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the company	are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and	(3)	provide	reasonable	assurance	regarding prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	the	inherent	limitations	of	internal	control	over	financial	reporting,	including	the	possibility	of	collusion	or	improper	management	override	of	controls, material	misstatements	due	to	error	or	fraud	may	not	be	prevented	or	detected	on	a	timely	basis.	Also,	projections	of	any	evaluation	of	the	effectiveness	of	the	internal control	over	financial	reporting	to	future	periods	are	subject	to	the	risk	that	the	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of compliance	with	the	policies	or	procedures	may	deteriorate.

In	our	opinion,	the	Company	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2012,	based	on	the	criteria established	in	Internal	Control—Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	financial	statements as	of	and	for	the	year	ended	December	31,	2012	of	the	Company	and	our	report	dated	February	28,	2013	expressed	an	unqualified	opinion	on	those	financial	statements.

# Item	9B. Other	Information

# PART	III

# Item	10.Directors,	Executive	Officers	and	Corporate

# Governance

# Executive	Officers	of	the	Registrant

| Name	and	Office | Age | the	Last	Five	Years |
| :--- | :--- | :--- |
| David\tP.\tAbney | 57 | Senior\tVice\tPresident\tand\tChief\tOperating\tOfficer\t(2007\t–\tpresent), |
| Senior\tVice\tPresident\tand\tChief\tOperating\tOfficer |  | President,\tUPS\tAirlines\t(2007\t–\t2008),\tSenior\tVice\tPresident\tand |
|  |  | President,\tUPS\tInternational\t(2003\t–\t2007). |
| David\tA.\tBarnes | 57 | Senior\tVice\tPresident\tand\tChief\tInformation\tOfficer\t(2005\t–\tpresent). |
| Senior\tVice\tPresident\tand\tChief\tInformation\tOfficer |  |  |
| Daniel\tJ.\tBrutto | 56 | Senior\tVice\tPresident\tand\tPresident,\tUPS\tInternational\t(2008\t– |
| Senior\tVice\tPresident\tand\tPresident,\tUPS\tInternational |  | present),\tPresident,\tGlobal\tFreight\tForwarding\t(2006\t–\t2007), |
|  |  | Corporate\tController\t(2004\t–\t2006). |
| D.\tScott\tDavis | 61 | Chairman\tand\tChief\tExecutive\tOfficer\t(2008\t–\tpresent),\tVice |
| Chairman\tand\tChief\tExecutive\tOfficer |  | Chairman\t(2006\t–\t2007),\tSenior\tVice\tPresident,\tChief\tFinancial |
|  |  | Officer\tand\tTreasurer\t(2001\t–\t2007),\tDirector\t(2006\t–\tpresent). |
| Alan\tGershenhorn | 54 | Senior\tVice\tPresident,\tWorldwide\tSales,\tMarketing\tand\tStrategy |
| Senior\tVice\tPresident |  | (2011\t–\tpresent),\tSenior\tVice\tPresident,\tWorldwide\tSales\tand |
|  |  | Marketing\t(2008\t–\t2010),\tSenior\tVice\tPresident\tand\tPresident,\tUPS |
|  |  | International\t(2007),\tPresident,\tUPS\tSupply\tChain\tSolutions\t–\tAsia |
|  |  | and\tEurope\t(2006). |
| Myron\tGray | 55 | Senior\tVice\tPresident,\tU.S.\tOperations\t(2009\t–\tpresent),\tVice |
| Senior\tVice\tPresident |  | President,\tAmericas\tRegion\t(2008\t–\t2009),\tVice\tPresident,\tNorth |
|  |  | Central\tRegion\t(2004\t–\t2008). |
| Kurt\tP.\tKuehn | 58 | Senior\tVice\tPresident\tand\tChief\tFinancial\tOfficer\t(2008\t–\tpresent), |
| Senior\tVice\tPresident\tand\tChief\tFinancial\tOfficer |  | Treasurer\t(2008\t–\t2010),\tSenior\tVice\tPresident,\tWorldwide\tSales\tand |
|  |  | Marketing\t(2004\t–\t2007). |
| Teri\tP.\tMcClure | 49 | Senior\tVice\tPresident\tof\tLegal,\tCompliance\tand\tPublic\tAffairs, |
| Senior\tVice\tPresident,\tGeneral\tCounsel\tand |  | General\tCounsel\tand\tCorporate\tSecretary\t(2006\t–\tpresent),\tCorporate |
| Corporate\tSecretary |  | Legal\tDepartment\tManager\t(2005\t–\t2006). |
| John\tJ.\tMcDevitt | 54 | Senior\tVice\tPresident,\tHuman\tResources\tand\tLabor\tRelations\t(2012\t– |
| Senior\tVice\tPresident |  | Present),\tSenior\tVice\tPresident,\tGlobal\tTransportation\tServices\tand |
|  |  | Labor\tRelations\t(2005\t–\t2011). |
| Christine\tM.\tOwens | 57 | Senior\tVice\tPresident,\tCommunications\tand\tBrand\tManagement\t(2005 |
| Senior\tVice\tPresident |  | –\tpresent). |

Information	about	our	directors	is	presented	under	the	caption	"Election	of	Directors"	in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to be	held	on	May	2,	2013	and	is	incorporated	herein	by	reference.

Information	about	our	Audit	Committee	is	presented	under	the	caption	"Election	of	Directors—Committees	of	the	Board	of	Directors—Audit	Committee"	in	our definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	2,	2013	and	is	incorporated	herein	by	reference.

Information	about	our	Code	of	Business	Conduct	is	presented	under	the	caption	"Where	You	Can	Find	More	Information"	in	Part	I,	Item	1	of	this	report.

Information	about	our	compliance	with	Section	16	of	the	Exchange	Act	of	1934,	as	amended,	is	presented	under	the	caption	"Section	16(a)	Beneficial	Ownership Reporting	Compliance"	in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	2,	2013	and	is	incorporated	herein	by	reference.

# Item	11.Executive	Compensation

Information	about	executive	compensation	is	presented	under	the	captions	"Compensation	Discussion	and	Analysis,"	"Compensation	of	Executive	Officers," "Compensation	of	Directors,"	"Report	of	the	Compensation	Committee"	and	"Compensation	Committee	Interlocks	and	Insider	Participation"	in	our	definitive	Proxy Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	2,	2013	and	is	incorporated	herein	by	reference.

# Item	12.Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder

# Matters

Information	about	security	ownership	is	presented	under	the	caption	"Beneficial	Ownership	of	Common	Stock"	in	our	definitive	Proxy	Statement	for	the	Annual Meeting	of	Shareowners	to	be	held	on	May	2,	2013	and	is	incorporated	herein	by	reference.

Information	about	our	equity	compensation	plans	is	presented	under	the	caption	"Equity	Compensation	Plans"	in	our	definitive	Proxy	Statement	for	the	Annual Meeting	of	Shareowners	to	be	held	on	May	2,	2013	and	is	incorporated	herein	by	reference.

# Item	13.Certain	Relationships	and	Related	Transactions,	and	Director

# Independence

Information	about	transactions	with	related	persons	is	presented	under	the	caption	"Related	Person	Transactions"	in	our	definitive	Proxy	Statement	for	the	Annual Meeting	of	Shareowners	to	be	held	on	May	2,	2013	and	is	incorporated	herein	by	reference.

Information	about	director	independence	is	presented	under	the	caption	"Election	of	Directors—Director	Independence"	in	our	definitive	Proxy	Statement	for	the Annual	Meeting	of	Shareowners	to	be	held	on	May	2,	2013	and	is	incorporated	herein	by	reference.

# Item	14.Principal	Accounting	Fees	and	Services

Information	about	aggregate	fees	billed	to	us	by	our	principal	accountant	is	presented	under	the	caption	"Principal	Accounting	Firm	Fees"	in	our	definitive	Proxy Statement	for	the	Annual	Meetings	of	Shareowners	to	be	held	on	May	2,	2013	and	is	incorporated	herein	by	reference.

# PART	IV

# Item	15.Exhibits	and	Financial	Statement

# Schedules

# (a)	1.	Financial	Statements.

See	Item	8	for	the	financial	statements	filed	with	this	report.

# 2.	Financial	Statement	Schedules.

# 3.	List	of	Exhibits.

See	the	Exhibit	Index	for	a	list	of	the	exhibits	incorporated	by	reference	into	or	filed	with	this	report.

# (b)	Exhibits	required	by	Item	601	of	Regulation	S-K.

# (c)	Financial	Statement	Schedules.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	United	Parcel	Service,	Inc.	has	duly	caused	this	report	to	be	signed	on its	behalf	by	the	undersigned,	thereunto	duly	authorized.

(REGISTRANT)

# D.	Scott	Davis

Chairman	and

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	Registrant	and	in the	capacities	and	on	the	dates	indicated.

Kevin	M.	Warsh

# EXHIBIT	INDEX

(1)				Amendment	No.	1	to	the	UPS	Retirement	Plan	(incorporated	by	reference	to	Exhibit	10.2(1)	to	the	2010	Annual	Report	on	Form	10-K).

(2)	Amendment	No.	2	to	the	UPS	Retirement	Plan	(incorporated	by	reference	to	Exhibit	10.1(2)	to	the	2011	Annual	Report	on	Form	10-K).

†(4)	Amendment	No.	4	to	the	UPS	Retirement	Plan.

10.2 — UPS	Savings	Plan,	as	Amended	and	Restated	(incorporated	by	reference	to	Exhibit	10.3	to	2008	Annual	Report	on	Form	10-K).

(4)	Amendment	No.	4	to	the	UPS	Savings	Plan	(incorporated	by	reference	to	Exhibit	10.2(4)	to	the	2011	Annual	Report	on	Form	10-K).

†(6)	Amendment	No.	6	to	the	UPS	Savings	Plan.

10.3 — Credit	Agreement	(364-Day	Facility)	dated	April	12,	2012	among	United	Parcel	Service,	Inc.,	the	initial	lenders	named	therein,	Citigroup	Global Markets	Inc.	and	J.P.	Morgan	Securities	LLC	as	joint	lead	arrangers	and	joint	bookrunners,	Barclays	Capital	and	BNP	Paribas	Securities	Corp.	as	co- lead	arrangers,	Barclays	Bank	PLC	and	BNP	Paribas	as	co-documentation	agents,	Citibank,	N.A.	as	administrative	agent,	and	JPMorgan	Chase	Bank, N.A.	as	syndication	agent	(incorporated	by	reference	to	Exhibit	10.1	to	Form	10-Q	for	the	Quarter	Ended	March	31,	2012).

10.4 — Credit	Agreement	(5-Year	Facility)	dated	April	12,	2012	among	United	Parcel	Service,	Inc.,	the	initial	lenders	named	therein,	Citigroup	Global Markets	Inc.	and	J.P.	Morgan	Securities	LLC	as	joint	lead	arrangers	and	joint	bookrunners,	Barclays	Capital	and	BNP	Paribas	Securities	Corp.	as	co- lead	arrangers,	Barclays	Bank	PLC	and	BNP	Paribas	as	co-documentation	agents,	Citibank,	N.A.	as	administrative	agent,	and	JPMorgan	Chase	Bank, N.A.	as	syndication	agent	(incorporated	by	reference	to	Exhibit	10.2	to	Form	10-Q	for	the	Quarter	Ended	March	31,	2012).

10.6 — United	Parcel	Service,	Inc.	2009	Omnibus	Incentive	Compensation	Plan	(incorporated	by	reference	to	Annex	II	to	the	Definitive	Proxy	Statement,	filed on	March	13,	2009).

(1)				Form	of	Long-Term	Incentive	Performance	Award	Agreement	(incorporated	by	reference	to	Exhibit	10.3	to	the	Quarterly	Report	on	Form	10-Q for	the	quarter	ended	March	31,	2011).

(2)				Form	of	Non-Management	Director	Restricted	Stock	Unit	Award	(incorporated	by	reference	to	Exhibit	10.2	to	the	Quarterly	Report	on	Form	10- Q	for	the	quarter	ended	March	31,	2010).

(3)				UPS	Management	Incentive	Program	Terms	and	Conditions	effective	as	of	January	1,	2011	(incorporated	by	reference	to	Exhibit	10.10(3)	to	the 2010	Annual	Report	on	Form	10-K).

(4)	UPS	Stock	Option	Program	Terms	and	Conditions	effective	as	of	January	1,	2012	(incorporated	by	reference	to	Exhibit	10.7(4)	to	the	2011	Annual Report	on	Form	10-K).

(5)	UPS	Long-Term	Incentive	Performance	Program	Terms	and	Conditions	effective	as	of	January	1,	2012	(incorporated	by	reference	to	Exhibit 10.7(5)	to	the	2011	Annual	Report	on	Form	10-K).

10.7 — Form	of	UPS	Deferred	Compensation	Plan	(incorporated	by	reference	to	Exhibit	10.11	to	the	2010	Annual	Report	on	Form	10-K).

†(1)				Amendment	No.	1	to	the	UPS	Deferred	Compensation	Plan.

(1)				Amendment	No.	1	to	the	Discounted	Employee	Stock	Purchase	Plan	(incorporated	by	reference	to	Exhibit	10.12(1)	to	the	2005	Annual	Report on	Form	10-K).

†(3)				Amendment	No.	3	to	the	Discounted	Employee	Stock	Purchase	Plan.

†32.2 —		 Certification	of	the	Chief	Financial	Officer	Pursuant	to	18	U.S.C.	Section	1350,	as	Adopted	Pursuant	to	Section	906	of	the	Sarbanes-Oxley	Act	of 2002.

††101 —		 The	following	financial	information	from	the	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2011,	formatted	in	XBRL	(Extensible Business	Reporting	Language):	(i)	the	Consolidated	Balance	Sheets,	(ii)	the	Consolidated	Statements	of	Income,	(iii)	the	Consolidated	Statements	of Comprehensive	Income,	(iv)	the	Consolidated	Statements	of	Cash	Flows,	and	(v)	the	Notes	to	the	Consolidated	Financial	Statements.

† Filed	herewith.

†† Furnished	electronically	herewith.


what is the roi of an investment in ups from 2008 to 2009?