|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Overview
The U.S. economic environment was mixed in 2016 as relatively stable consumer conditions were somewhat offset by continued weakness in industrial production and soft business investment. U.S. manufacturing has shown positive signs of growth in recent months, reaching a two-year high in the fourth quarter of 2016, and we continue to see modest GDP growth. Consumer confidence reached a high in the fourth quarter of 2016 and there were lower fuel prices coupled with the continuation of steady job growth throughout the year. Holiday retail sales grew 4% in 2016 as compared to last year, mainly driven by online sales, while the holiday season saw many categories of traditional brick and mortar stores struggle. Continued growth in e-commerce and omni-channel retail sales has driven package volume demand for residential products. Given these trends, our products most aligned with business-to-consumer shipments have experienced the strongest growth.
Outside the U.S., emerging markets have stabilized in recent months and most developed nations have seen modest growth. The impending exit of the United Kingdom from the European Union creates some uncertainty regarding its impact on global GDP. The uneven nature of economic growth worldwide and fluctuations in currency markets, particularly the strengthening of the U.S. Dollar, have continued shifting trade patterns and weakened demand in certain trade lanes. As a result of these circumstances, we continued to adjust our air capacity and cost structure in our transportation network to better match the prevailing volume 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 remained challenging in 2016, we have continued to undertake several initiatives in the U.S. and internationally to (1) improve the flexibility and capacity in our transportation network; (2) improve yield management; and (3) increase operational efficiency and contain costs across all segments. Most notably, the continued deployment of technology improvements (including several facility automation projects and the accelerated deployment of our On Road Integrated Optimization and Navigation system - "ORION") should continue to increase our network capacity and improve operational efficiency, flexibility and reliability. Additionally, we have continued to utilize newly expanded operating facilities to improve time-in-transit for shipments in each region.
Our consolidated results are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% Change
|
|
2016
|
|
2015
|
|
2014
|
|
2016/ 2015
|
|
2015/ 2014
|
Revenue (in millions)
|
$
|
60,906
|
|
|
$
|
58,363
|
|
|
$
|
58,232
|
|
|
4.4
|
%
|
|
0.2
|
%
|
Operating Expenses (in millions)
|
55,439
|
|
|
50,695
|
|
|
53,264
|
|
|
9.4
|
%
|
|
(4.8
|
)%
|
Operating Profit (in millions)
|
$
|
5,467
|
|
|
$
|
7,668
|
|
|
$
|
4,968
|
|
|
(28.7
|
)%
|
|
54.3
|
%
|
Operating Margin
|
9.0
|
%
|
|
13.1
|
%
|
|
8.5
|
%
|
|
|
|
|
Average Daily Package Volume (in thousands)
|
19,090
|
|
|
18,324
|
|
|
18,016
|
|
|
4.2
|
%
|
|
1.7
|
%
|
Average Revenue Per Piece
|
$
|
10.30
|
|
|
$
|
10.37
|
|
|
$
|
10.58
|
|
|
(0.7
|
)%
|
|
(2.0
|
)%
|
Net Income (in millions)
|
$
|
3,431
|
|
|
$
|
4,844
|
|
|
$
|
3,032
|
|
|
(29.2
|
)%
|
|
59.8
|
%
|
Basic Earnings Per Share
|
$
|
3.89
|
|
|
$
|
5.38
|
|
|
$
|
3.31
|
|
|
(27.7
|
)%
|
|
62.5
|
%
|
Diluted Earnings Per Share
|
$
|
3.87
|
|
|
$
|
5.35
|
|
|
$
|
3.28
|
|
|
(27.7
|
)%
|
|
63.1
|
%
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Items Affecting Comparability
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 "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, income tax expense and effective tax rate. These adjustments reflect the non-comparable items discussed below. 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 underlying operations results, and provide a useful baseline for analyzing trends in our underlying businesses. Additionally, these adjusted financial measures are used internally by management for the determination of incentive compensation awards, business unit operating performance analysis and business unit resource allocation.
The year-over-year comparisons of our financial results are affected by the following items (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Non-GAAP Adjustments
|
2016
|
|
2015
|
|
2014
|
Operating Expenses:
|
|
|
|
|
|
Defined Benefit Plans Mark-to-Market Charges
|
$
|
2,651
|
|
|
$
|
118
|
|
|
$
|
1,062
|
|
Health & Welfare Plan Charges
|
—
|
|
|
—
|
|
|
1,102
|
|
Total Adjustments to Operating Expenses
|
2,651
|
|
|
118
|
|
|
2,164
|
|
Income Tax Expense (Benefit) from the Items Above
|
(978
|
)
|
|
(39
|
)
|
|
(807
|
)
|
Total Adjustments to Net Income
|
$
|
1,673
|
|
|
$
|
79
|
|
|
$
|
1,357
|
|
These items have been excluded from comparisons of "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, income tax expense and effective tax rate in the discussion that follows. The income tax effects of these adjustments are calculated by multiplying the statutory tax rates applicable in each tax jurisdiction, including the U.S. federal jurisdiction and various U.S. state and non-U.S. jurisdictions, by the adjustments. The blended average of the applicable statutory tax rates in 2016, 2015 and 2014 were 36.9% , 33.1% and 37.2% respectively.
Defined Benefit Plans Mark-to-Market Charges
We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor for our pension and postretirement defined benefit plans immediately as part of net periodic benefit cost. We supplement the presentation of our operating profit and operating margin with "adjusted" measures that exclude the impact of the portion of net periodic benefit cost represented by the gains and losses recognized in excess of the 10% corridor and the related income tax effects.
The adjustments made to exclude these mark-to-market adjustments utilize the expected return on plan assets ($2.580 billion, $2.567 billion and $2.343 billion for 2016, 2015 and 2014, respectively) and the discount rates used for determining net periodic benefit cost. The non-adjusted net periodic benefit cost reflects the actual return on plan assets ($1.846 billion, $110 million and $2.600 billion for 2016, 2015 and 2014, respectively) and the discount rates used for measuring the projected benefit obligation as summarized in the table below. We believe excluding these mark-to-market charges from our adjusted results provides important supplemental information that reflects the anticipated long-term cost of our defined benefit plans and provides a benchmark for historical defined benefit cost trends that may provide a useful comparison of year-to-year financial performance without considering the short-term impact of changes in market interest rates, equity prices and similar factors.
In 2016, we recognized pre-tax mark-to-market losses in compensation and benefits expense of $2.651 billion on our pension and postretirement defined benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor. These charges impacted our U.S. Domestic Package segment ($1.908 billion), International Package segment ($425 million) and Supply Chain & Freight segment ($318 million).
In 2015, we recognized pre-tax mark-to-market losses in compensation and benefits expense of $118 million on our pension and postretirement defined benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor. These charges impacted our U.S. Domestic Package segment ($62 million), International Package segment ($44 million) and Supply Chain & Freight segment ($12 million).
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In 2014, we recognized pre-tax mark-to-market losses in compensation and benefits expense of $1.062 billion on our pension and postretirement defined benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor. These charges impacted our U.S. Domestic Package segment ($660 million), International Package segment ($200 million) and Supply Chain & Freight segment ($202 million).
The table below indicates the amounts associated with each component of the pre-tax mark-to-market loss, as well as the weighted-average actuarial assumptions used to determine our net periodic benefit costs, for each year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Components of mark-to-market gain (loss) (in millions):
|
|
2016
|
|
2015
|
|
2014
|
Discount rates
|
|
$
|
(1,953
|
)
|
|
$
|
1,624
|
|
|
$
|
(954
|
)
|
Return on assets
|
|
(732
|
)
|
|
(1,550
|
)
|
|
42
|
|
Demographic and assumption changes
|
|
34
|
|
|
(133
|
)
|
|
(150
|
)
|
Reclassification of prior year unrecognized benefit cost
|
|
—
|
|
|
(59
|
)
|
|
—
|
|
Total mark-to-market gain (loss)
|
|
$
|
(2,651
|
)
|
|
$
|
(118
|
)
|
|
$
|
(1,062
|
)
|
|
|
|
|
|
|
|
Weighted-average actuarial assumptions used to determine net periodic benefit cost:
|
|
2016
|
|
2015
|
|
2014
|
Expected rate of return on plan assets
|
|
8.65
|
%
|
|
8.66
|
%
|
|
8.66
|
%
|
Actual rate of return on plan assets
|
|
6.06
|
%
|
|
0.37
|
%
|
|
9.45
|
%
|
Discount rate used for net periodic benefit cost
|
|
4.81
|
%
|
|
4.36
|
%
|
|
5.24
|
%
|
Discount rate at measurement date
|
|
4.34
|
%
|
|
4.81
|
%
|
|
4.36
|
%
|
The $2.651, $0.118 and $1.062 billion pre-tax mark-to-market losses for the years ended December 31, 2016, 2015 and 2014, respectively, were comprised of the following components:
2016 - $2.651 billion pre-tax mark-to-market loss:
|
|
•
|
Discount Rates
($1.953 billion pre-tax loss):
The weighted-average discount rate for our pension and postretirement medical plans decreased from 4.81% at December 31, 2015 to 4.34% at December 31, 2016, primarily due to a decrease in credit spreads on AA-rated corporate bonds in 2016.
|
|
|
•
|
Return on Assets
($732 million pre-tax loss): In 2016, the actual 6.06% rate of return on plan assets fell short of our expected rate of return of 8.65%, primarily due to weak bond markets.
|
|
|
•
|
Demographic and Assumption Changes
($34 million pre-tax gain): This represents the difference between actual and estimated participant data and demographic factors, including items such as health care cost trends, compensation rate increases and rates of termination, retirement and mortality.
|
2015 - $118 million pre-tax mark-to-market loss:
|
|
•
|
Discount Rates
($1.624 billion pre-tax gain):
The weighted-average discount rate for our pension and postretirement medical plans increased from 4.36% at December 31, 2014 to 4.81% at December 31, 2015, primarily due to an increase in U.S. treasury yields and credit spreads on AA-rated corporate bonds in 2015.
|
|
|
•
|
Return on Assets
($1.550 billion pre-tax loss): In 2015, the actual 0.37% rate of return on plan assets fell short of our expected rate of return of 8.66%, primarily due to weak global equity markets.
|
|
|
•
|
Demographic and Assumption Changes
($133 million pre-tax loss): This represents the difference between actual and estimated participant data and demographic factors, including items such as health care cost trends, compensation rate increases, and rates of termination, retirement and mortality.
|
|
|
•
|
Reclassification of Prior Year Unrecognized Benefit Cost
($59 million pre-tax loss): Our mark-to-market accounting policy requires recognition of gains and losses in excess of a corridor equal to 10% of the plans' projected benefit obligations (or fair value of the plans' assets, if greater). The decrease in certain plans' projected benefit obligations resulted in a lower corridor, which required recognition of prior year unrecognized benefit costs for some of our plans.
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2014 - $1.062 billion pre-tax mark-to-market loss:
|
|
•
|
Discount Rates
($954 million pre-tax loss): The weighted-average discount rate for our pension and postretirement medical plans declined from 5.24% at December 31, 2013 to 4.36% at December 31, 2014. This overall decline in discount rates was primarily driven by a 122 basis point decline in the 30 year Treasury bond rate, but was partially offset by an increase in credit spreads on AA-rated 30 year bonds.
|
|
|
•
|
Return on Assets
($42 million pre-tax gain): In 2014, the actual rate of return on plan assets of 9.45% exceeded our expected rate of return of 8.66%, primarily due to gains in the world equity markets.
|
|
|
•
|
Demographic and Assumption Changes
($150 million pre-tax loss): The implementation of new U.S. mortality tables in 2014 resulted in an increased participant life expectancy assumption, which increased the overall projected benefit obligation for our plans.
|
Health and Welfare Plan Charges
In connection with the ratification of our national master agreement with the International Brotherhood of Teamsters ("Teamsters") in 2014, we incurred pre-tax charges totaling $1.102 billion associated with changes in the delivery of healthcare benefits to certain active and retired union employees. These one-time charges are discussed in further detail in the "Collective Bargaining Agreements" section and do not reflect the obligations of our on-going business. We believe adjusting for these charges provides important supplemental information that is reflective of long-term trends and that may provide useful comparison of year-to-year financial performance without considering the short-term impact of one-time health and welfare plan charges.
These charges impacted our U.S. Domestic Package segment ($990 million), International Package segment ($28 million) and Supply Chain & Freight segment ($84 million).
Rate Adjustments
Effective February 6, 2017, the U.S. fuel surcharge will be adjusted weekly and the U.S. Import fuel surcharge percentage will increase and be assessed independently of the U.S. Air and Export fuel surcharge.
Effective January 8, 2017, the Additional Handling charge will be assessed for any package with the longest side exceeding 48 inches, instead of 60 inches. Additionally, we will change the dimensional weight calculation for U.S. domestic services and UPS Standard from Canada import packages subject to UPS Daily rates. Also, transactional requests for refunds under the UPS Service Guarantee will not be paid where timely upload of package-level detail is not provided, as set forth in the UPS Tariff/Terms and Conditions of Service.
Effective December 26, 2016, UPS Ground rates and accessorial charges increased by an average net 4.9%. UPS Air and International services and accessorials, including UPS Air Freight rates within and between the U.S., Canada and Puerto Rico, increased an average net 4.9%. UPS Freight's Density-Based rate tariff will increase an average net of 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.
Expense Allocations
Certain operating expenses are allocated between our reporting segments based on activity-based costing methods. These activity-based costing methods require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates will directly impact the amount of expense allocated to each segment, and therefore the operating profit of each reporting segment. There were no significant changes in our expense allocation methodology during
2016
,
2015
or
2014
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
U.S. Domestic Package Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% Change
|
|
2016
|
|
2015
|
|
2014
|
|
2016/ 2015
|
|
2015/ 2014
|
Average Daily Package Volume (in thousands):
|
|
|
|
|
|
|
|
|
|
Next Day Air
|
1,379
|
|
|
1,316
|
|
|
1,274
|
|
|
4.8
|
%
|
|
3.3
|
%
|
Deferred
|
1,351
|
|
|
1,313
|
|
|
1,155
|
|
|
2.9
|
%
|
|
13.7
|
%
|
Ground
|
13,515
|
|
|
12,969
|
|
|
12,893
|
|
|
4.2
|
%
|
|
0.6
|
%
|
Total Avg. Daily Package Volume
|
16,245
|
|
|
15,598
|
|
|
15,322
|
|
|
4.1
|
%
|
|
1.8
|
%
|
Average Revenue Per Piece:
|
|
|
|
|
|
|
|
|
|
Next Day Air
|
$
|
19.20
|
|
|
$
|
19.66
|
|
|
$
|
20.42
|
|
|
(2.3
|
)%
|
|
(3.7
|
)%
|
Deferred
|
11.85
|
|
|
11.70
|
|
|
12.57
|
|
|
1.3
|
%
|
|
(6.9
|
)%
|
Ground
|
7.97
|
|
|
7.98
|
|
|
7.85
|
|
|
(0.1
|
)%
|
|
1.7
|
%
|
Total Avg. Revenue Per Piece
|
$
|
9.25
|
|
|
9.28
|
|
|
9.25
|
|
|
(0.3
|
)%
|
|
0.3
|
%
|
Operating Days in Period
|
255
|
|
|
254
|
|
|
253
|
|
|
|
|
|
Revenue (in millions):
|
|
|
|
|
|
|
|
|
|
Next Day Air
|
$
|
6,752
|
|
|
$
|
6,570
|
|
|
$
|
6,581
|
|
|
2.8
|
%
|
|
(0.2
|
)%
|
Deferred
|
4,082
|
|
|
3,903
|
|
|
3,672
|
|
|
4.6
|
%
|
|
6.3
|
%
|
Ground
|
27,467
|
|
|
26,274
|
|
|
25,598
|
|
|
4.5
|
%
|
|
2.6
|
%
|
Total Revenue
|
$
|
38,301
|
|
|
$
|
36,747
|
|
|
$
|
35,851
|
|
|
4.2
|
%
|
|
2.5
|
%
|
Operating Expenses (in millions):
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
$
|
35,284
|
|
|
$
|
31,980
|
|
|
$
|
32,992
|
|
|
10.3
|
%
|
|
(3.1
|
)%
|
Defined Benefit Plans Mark-to-Market Charges
|
(1,908
|
)
|
|
(62
|
)
|
|
(660
|
)
|
|
|
|
|
Health & Welfare Plan Charges
|
—
|
|
|
—
|
|
|
(990
|
)
|
|
|
|
|
Adjusted Operating Expenses
|
$
|
33,376
|
|
|
$
|
31,918
|
|
|
$
|
31,342
|
|
|
4.6
|
%
|
|
1.8
|
%
|
Operating Profit (in millions) and Operating Margin:
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
$
|
3,017
|
|
|
$
|
4,767
|
|
|
$
|
2,859
|
|
|
(36.7
|
)%
|
|
66.7
|
%
|
Adjusted Operating Profit
|
$
|
4,925
|
|
|
$
|
4,829
|
|
|
$
|
4,509
|
|
|
2.0
|
%
|
|
7.1
|
%
|
Operating Margin
|
7.9
|
%
|
|
13.0
|
%
|
|
8.0
|
%
|
|
|
|
|
Adjusted Operating Margin
|
12.9
|
%
|
|
13.1
|
%
|
|
12.6
|
%
|
|
|
|
|
Revenue
The change in overall revenue was impacted by the following factors for the years ended
December 31, 2016
and
2015
, compared with the corresponding prior year periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Rates /
Product Mix
|
|
Fuel
Surcharge
|
|
Total
Revenue
Change
|
Revenue Change Drivers:
|
|
|
|
|
|
|
|
2016/ 2015
|
4.6
|
%
|
|
0.2
|
%
|
|
(0.6
|
)%
|
|
4.2
|
%
|
2015/ 2014
|
2.2
|
%
|
|
2.7
|
%
|
|
(2.4
|
)%
|
|
2.5
|
%
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Volume
2016
compared to
2015
Our total volume increased across all products in 2016, largely due to continued growth in e-commerce and overall retail sales and the impact of one additional operating day. Business-to-consumer shipments, which represented more than 48% of total U.S. Domestic Package volume, grew nearly 9% for the year and 11.5% in the fourth quarter, which drove increases in both air and ground shipments. Business-to-business volume remained flat in 2016 due to revenue management initiatives and the overall slowing of the industrial manufacturing sector, offset by increased volume from the retail industry, including the use of our solutions for omni-channel (including ship-from-store and ship-to-store models) and returns shipping.
Next Day Air volume increased 5.2% in 2016, due to strong growth in e-commerce. We also experienced increased volume for our deferred air services in 2016, particularly for those products most aligned with business-to-consumer shipping, such as our residential Second Day Air Package and Three Day Select products partially offset by decreases in our business-to-business deferred air volume.
The increase in ground volume in 2016 was driven by growth in residential ground and SurePost volume while business-to-business shipments remained flat. Accelerating growth in e-commerce drove demand for our SurePost service, with volume increasing 19% in 2016.
2015
compared to
2014
Our total volume increased in 2015, largely due to faster growing premium air products, continued growth in e-commerce and overall retail sales and the impact of one additional operating day. Business-to-consumer shipments, which represented more than 45% of total U.S. Domestic Package volume, grew nearly 3% for the year and drove increases in both air and ground shipments. Business-to-business volume grew 1% in 2015, largely due to increased volume from the retail industry including the use of our solutions for omni-channel (including ship-from-store and ship-to-store models) and returns shipping.
Among our air products, we experienced increased volume for our deferred air services in 2015, particularly for those products most aligned with business-to-consumer shipping, such as our residential Second Day Air Package and Three Day Select products. We also experienced solid growth in our business-to-business deferred air volume, largely due to increases in the retail sector. Next Day Air volume increased 3.3% in 2015, due to strong growth in e-commerce.
The increase in ground volume in 2015 was driven by growth in residential ground and SurePost volume and business-to-business shipping activity. The continued growth in e-commerce drove demand for our SurePost service, with volume increasing 3% in 2015. The increase in business-to-business ground volume was largely due to growth in omni-channel retail volume, the increased use of our returns service offerings and the growth in shipments from the retail sector.
Rates and Product Mix
2016
compared to
2015
Overall revenue per piece decreased 0.3% in 2016, and was impacted by changes in base rates, customer and product mix and fuel surcharge rates.
Ground revenue per piece decreased in 2016, primarily due to customer and product mix changes, which adversely impacted revenue per piece as a greater portion of volume in 2016, relative to 2015, came from residential customers and lighter-weight shipments as Surepost volume surged. Additionally, lower fuel surcharge rates contributed to the decline. These drivers more than offset the rate actions taken since the fourth quarter of 2015.
Revenue per piece for Next Day Air products declined in 2016, while our deferred air products increased. All products were negatively impacted by lower fuel surcharge rates. The Next Day Air revenue per piece decline was caused by a shift in customer and product mix as well as an increase in lighter-weight packages. We experienced relatively stronger growth in our lighter-weight business-to-consumer shipments, particularly our Next Day Air Saver product, which have lower average yields than our heavier-weight commercial shipments. Customer mix also adversely impacted Next Day Air revenue per piece, due to faster volume growth among our larger customers, which have a lower average yield than our small and middle-market customers. Deferred revenue per piece increased primarily due to heavier-weight packages partially offset by product mix.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue per piece for ground and air products was positively impacted by a base rate increase on December 28, 2015. UPS Ground rates and accessorial charges increased an average net 4.9%, while UPS Air services and accessorial charges increased an average net 5.2%. The surcharge increased for Over Maximum Packages and the index tables for the Ground and Air fuel surcharges were adjusted effective November 2, 2015. A charge for UPS’s Third-Party Billing Service was implemented, effective January 4, 2016. Additionally, the dimensions of ground packages incurring the UPS Additional Handling charge were changed effective June 6, 2016.
2015
compared to
2014
Overall revenue per piece increased 0.3% in 2015, and was impacted by changes in base rates, customer and product mix and fuel surcharge rates.
Revenue per piece for our ground and air products was positively impacted by an increase in base rates which took effect on December 29, 2014 and an increase in surcharge rates that took effect November 2, 2015. We implemented an average 4.9% net increase in base and accessorial rates on UPS Next Day Air, UPS 2nd Day Air, UPS 3 Day Select and UPS Ground. Additionally, a pricing change involving the application of dimensional weight pricing to all UPS Ground services took effect on December 29, 2014. On November 2, 2015, the surcharge increased for Over Maximum Packages and the indices for Ground, Air and International fuel surcharges were adjusted.
Revenue per piece decreased for our Next Day Air and deferred air products in 2015, as lower fuel surcharge rates more than offset the positive impact of the base rate increase. Product mix adversely impacted Next Day Air and deferred revenue per piece, as we experienced relatively stronger growth in our lighter-weight business-to-consumer shipments, which have lower average yields than our heavier-weight commercial shipments. Customer mix also adversely impacted Next Day Air and deferred revenue per piece, due to faster volume growth among our larger customers, which typically have a lower average yield than our small and middle-market customers.
Ground revenue per piece increased in 2015, primarily due to the base rate increase, the dimensional weight pricing change and product mix. Additionally, the revenue per piece for our traditional ground residential products was positively impacted by our decision not to pursue certain lower-yielding customer contract renewals. These factors were partially offset by declines in fuel surcharge rates as well as changes in customer mix, as we experienced faster volume growth among our larger customers.
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
|
|
2016
|
|
2015
|
|
2014
|
|
2016/ 2015
|
|
2015/ 2014
|
Next Day Air / Deferred
|
3.6
|
%
|
|
4.8
|
%
|
|
10.2
|
%
|
|
(1.2
|
)%
|
|
(5.4
|
)%
|
Ground
|
4.9
|
%
|
|
5.5
|
%
|
|
7.1
|
%
|
|
(0.6
|
)%
|
|
(1.6
|
)%
|
Total domestic fuel surcharge revenue decreased by $219 million in 2016 as a result of lower fuel surcharge rates caused by declining jet and diesel fuel prices, partially offset by the overall increase in package volume for the period. In 2015, total fuel surcharge revenue declined by $843 million as a result of lower fuel surcharge rates caused by declining jet and diesel fuel prices; however, the impact of lower fuel prices was partially mitigated by changes to the fuel surcharge indices, as well as the overall increase in package volume for the period.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Expenses
2016
compared to
2015
Operating expenses for the period increased $3.3 billion, which included a $1.8 billion increase increase in mark-to-market pension charges. Excluding the impact of the defined benefit plan mark-to-market charges, adjusted operating expenses for the segment increased $1.5 billion in 2016, primarily due to pick-up and delivery costs (up $814 million), the cost of operating our domestic integrated air and ground transportation network (up $282 million), the costs of package sorting (up $181 million) and accessorials and indirect operating costs (up $180 million). Adjusted operating expenses were impacted by several factors:
|
|
•
|
We incurred higher employee compensation, largely resulting from an increase in average daily union labor hours (up 4.2%) and growth in the overall size of the workforce partially offset by lower wage rates.
|
|
|
•
|
Employee benefit costs increased, largely due to increased employee healthcare, pension expense and workers' compensation expense.
|
|
|
•
|
We incurred lower fuel expense in 2016 primarily due to lower fuel prices and an increase in average miles per gallon. This was partially offset by higher fuel usage (due to an increase in aircraft block hours and vehicle miles driven.)
|
|
|
•
|
We incurred higher expenses for purchased transportation due to higher volume, partially offset by lower fuel surcharge rates passed to us from third-party carriers.
|
Total cost per piece increased 5.5% in 2016 compared to 2015 and was primarily impacted by a 540 basis point increase due to the defined benefit plan mark-to-market charge and the cost increases described previously. These increases were partially offset by the continued deployment of ORION, which has contained the growth of average daily vehicle miles driven, and the increased redirect of SurePost volume to optimize delivery density on UPS vehicles, which has reduced the delivery costs for business-to-consumer shipments.
2015
compared to
2014
Operating expenses decreased $1 billion in 2015, primarily due to $1.6 billion of health and welfare plan charges in 2014 that did not recur in 2015 and significantly less pension mark-to-market charges in 2015 compared to 2014. Excluding the impact of the health and welfare plan charges and pension mark-to-market charges, adjusted operating expenses for the segment increased $576 million in 2015, primarily due to pick-up and delivery costs (up $602 million), the costs of package sorting (up $172 million) and indirect operating costs (up $122 million). The cost increases were partially offset by a reduction in the cost of operating our domestic integrated air and ground transportation network (down $319 million). These costs were impacted by several factors:
|
|
•
|
We incurred higher employee compensation, largely resulting from an increase in average daily union labor hours (up 0.8%), union contractual wage rate increases and growth in the overall size of the workforce.
|
|
|
•
|
Employee benefit costs increased, largely due to increased employee healthcare, pension expense and workers compensation expense.
|
|
|
•
|
We incurred lower fuel expense in 2015 primarily due to lower fuel prices. This was partially offset by higher fuel usage (due to an increase in aircraft block hours and vehicle miles driven offset by an increase in average miles per gallon).
|
|
|
•
|
We incurred lower expenses associated with purchased transportation, primarily due to the decreased use of, and lower fuel surcharge rates passed to us from rail carriers and outside contract carriers.
|
Total cost per piece decreased 5.2% in 2015 compared to 2014 and was primarily impacted by a 480 basis point decrease due to the defined benefit plan mark-to-market charge and the cost increases described previously. Productivity improvements have continued to be realized through adjusting our air and ground networks to better match volume levels and utilizing technology to increase package sorting and delivery efficiency. The continued deployment of ORION has contained the average daily vehicle miles driven (down 0.4%) even as package volume increased (up 1.8%).
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Profit and Margin
2016
compared to
2015
Operating profit decreased $1.8 billion in 2016 compared with 2015, primarily due to a $1.8 billion increase in mark-to-market pension charges to operating expense. Operating margin decreased 510 basis points to 7.9%. Adjusted operating profit increased $96 million in 2016 compared with 2015, while the adjusted operating margin decreased 20 basis points to 12.9%. Revenue growth from increased volume and enhanced productivity through the continued deployment of ORION technology resulted in higher operating profit, but was offset by an unfavorable shift in customer and product mix, especially in the fourth quarter. The net impact of fuel also negatively impacted operating profit as fuel surcharge revenue decreased faster than fuel expense.
2015
compared to
2014
Operating profit increased $1.9 billion in 2015 compared with 2014, primarily due to $1.6 billion of health and welfare plan charges and pension mark-to-market charges that were significantly less in 2015. Operating margin increased 500 basis points to 13.0%. Adjusted operating profit increased $320 million in 2015 compared with 2014, while the adjusted operating margin increased 50 basis points to 13.1%. Overall volume growth allowed us to better leverage our transportation network, leading to improved productivity (resulting in a lower cost per piece) discussed previously. This was slightly offset by higher pension and healthcare costs, contractual union wage increases and the negative impact of fuel (fuel surcharge revenue decreased faster than fuel expense).
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
International Package Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% Change
|
|
2016
|
|
2015
|
|
2014
|
|
2016/ 2015
|
|
2015/ 2014
|
Average Daily Package Volume (in thousands):
|
|
|
|
|
|
|
|
|
|
Domestic
|
1,635
|
|
|
1,575
|
|
|
1,579
|
|
|
3.8
|
%
|
|
(0.3
|
)%
|
Export
|
1,210
|
|
|
1,151
|
|
|
1,115
|
|
|
5.1
|
%
|
|
3.2
|
%
|
Total Avg. Daily Package Volume
|
2,845
|
|
|
2,726
|
|
|
2,694
|
|
|
4.4
|
%
|
|
1.2
|
%
|
Average Revenue Per Piece:
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
5.85
|
|
|
$
|
6.06
|
|
|
$
|
6.97
|
|
|
(3.5
|
)%
|
|
(13.1
|
)%
|
Export
|
30.38
|
|
|
31.10
|
|
|
33.98
|
|
|
(2.3
|
)%
|
|
(8.5
|
)%
|
Total Avg. Revenue Per Piece
|
$
|
16.29
|
|
|
$
|
16.63
|
|
|
$
|
18.15
|
|
|
(2.0
|
)%
|
|
(8.4
|
)%
|
Operating Days in Period
|
255
|
|
|
254
|
|
|
253
|
|
|
|
|
|
Revenue (in millions):
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
2,441
|
|
|
$
|
2,425
|
|
|
$
|
2,784
|
|
|
0.7
|
%
|
|
(12.9
|
)%
|
Export
|
9,374
|
|
|
9,092
|
|
|
9,586
|
|
|
3.1
|
%
|
|
(5.2
|
)%
|
Cargo & Other
|
535
|
|
|
632
|
|
|
618
|
|
|
(15.3
|
)%
|
|
2.3
|
%
|
Total Revenue
|
$
|
12,350
|
|
|
$
|
12,149
|
|
|
$
|
12,988
|
|
|
1.7
|
%
|
|
(6.5
|
)%
|
Operating Expenses (in millions):
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
$
|
10,306
|
|
|
$
|
10,012
|
|
|
$
|
11,311
|
|
|
2.9
|
%
|
|
(11.5
|
)%
|
Defined Benefit Plan Mark-to-Market Charges
|
(425
|
)
|
|
(44
|
)
|
|
(200
|
)
|
|
|
|
|
Health & Welfare Plan Charges
|
—
|
|
|
—
|
|
|
(28
|
)
|
|
|
|
|
Adjusted Operating Expenses
|
$
|
9,881
|
|
|
$
|
9,968
|
|
|
$
|
11,083
|
|
|
(0.9
|
)%
|
|
(10.1
|
)%
|
Operating Profit (in millions) and Operating Margin:
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
$
|
2,044
|
|
|
$
|
2,137
|
|
|
$
|
1,677
|
|
|
(4.4
|
)%
|
|
27.4
|
%
|
Adjusted Operating Profit
|
$
|
2,469
|
|
|
$
|
2,181
|
|
|
$
|
1,905
|
|
|
13.2
|
%
|
|
14.5
|
%
|
Operating Margin
|
16.6
|
%
|
|
17.6
|
%
|
|
12.9
|
%
|
|
|
|
|
Adjusted Operating Margin
|
20.0
|
%
|
|
18.0
|
%
|
|
14.7
|
%
|
|
|
|
|
Currency Translation Benefit / (Cost)—(in millions)*:
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
$
|
(138
|
)
|
|
$
|
(880
|
)
|
Operating Expenses
|
|
|
|
|
|
|
146
|
|
|
858
|
|
Operating Profit
|
|
|
|
|
|
|
$
|
8
|
|
|
$
|
(22
|
)
|
|
|
|
*
|
Net of currency hedging; amount represents the change compared to the prior year.
|
Revenue
The change in overall revenue was impacted by the following factors for the years ended
December 31, 2016
and
2015
, compared with the corresponding prior year periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Rates /
Product Mix
|
|
Fuel
Surcharge
|
|
Currency
|
|
Total
Revenue
Change
|
Revenue Change Drivers:
|
|
|
|
|
|
|
|
|
|
2016/ 2015
|
4.8
|
%
|
|
(1.2
|
)%
|
|
(0.8
|
)%
|
|
(1.1
|
)%
|
|
1.7
|
%
|
2015/ 2014
|
1.6
|
%
|
|
1.9
|
%
|
|
(3.2
|
)%
|
|
(6.8
|
)%
|
|
(6.5
|
)%
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Volume
2016
compared to
2015
Our overall average daily volume increased in 2016, largely due to continued strength in business-to-consumer volume, as well as strong demand from several sectors including retail, industrial, high-tech and healthcare.
We continued to experience export volume growth in 2016. The growth was mainly driven by our European and Asian operations, which experienced increases in volume to all regions of the world. European export volume increased in 2016, with particular strength in the
Europe-to-U.S. and intra-Europe
trade lanes. Asia export volume also increased in 2016, with growth in all trade lanes. However, U.S. export volume declined largely due to the impact of the stronger U.S. Dollar. Export volume growth was distributed across all products led by our Worldwide Express product.
The increase in domestic volume in 2016 was primarily due to growth in Italy, France, Turkey and Mexico.
2015
compared to
2014
Our overall average daily volume increased in 2015, largely due to continued strength in business-to-consumer volume, as well as strong demand from several sectors including healthcare and diversified vehicles and parts.
We continued to experience solid export volume growth in 2015. The growth was mainly driven by our European and Americas operations, which experienced solid increases in volume to most regions of the world. European export volume increased in 2015, with particular strength in the Europe-to-U.S., intra-European and Europe-to-Americas trade lanes. Americas export volume increased in 2015, with solid growth in the Americas-to-Europe and Americas-to-U.S. trade lanes. However, Asian export volume declined across all trade lanes due to the economic slowdown throughout the region, particularly China, while U.S. export volume declined largely due to the impact of the stronger U.S. Dollar. Export volume growth was led by our Transborder products, such as Transborder Standard and Transborder Express.
Domestic volume in 2015 decreased slightly from 2014 driven by selective revenue management initiatives focused on disciplined growth. Additionally, the results were impacted by slowing overall economic conditions in Germany and Canada.
Rates and Product Mix
2016
compared to
2015
Total average revenue per piece decreased 2.0% in 2016 impacted by a 110 basis point reduction from currency as well as lower fuel surcharge rates. These factors were partially offset by an increase in base rates, lower discounts and a shift in product mix as the growth in premium products continued to exceed the growth in our standard products.
On December 28, 2015, we implemented an average 5.2% net increase in base and accessorial rates for international shipments originating in the United States (Worldwide Express, Worldwide Saver, UPS Worldwide Expedited and UPS International Standard service). On November 2, 2015, the surcharge increased for Over Maximum Packages and the tables for Ground, Air and International fuel surcharges were adjusted. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market.
Export revenue per piece decreased 2.3% in 2016, impacted by a 50 basis point reduction from currency as well as lower fuel surcharge rates. These factors were partially offset by an increase in base rate, lower discounts and favorable package weight and characteristics.
Domestic revenue per piece decreased 3.5% in 2016, impacted by a 380 basis point reduction from currency as well as lower fuel surcharge rates. These factors were partially offset by an increase in base rates.
2015
compared to
2014
Total average revenue per piece decreased 8.4% in 2015 impacted by a 700 basis point reduction from currency as well as lower fuel surcharge revenues (discussed in detail under
Fuel Surcharges).
These factors were partially offset by the increases in base rates and revenue management activities.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On December 29, 2014, we implemented an average 4.9% net increase in base and accessorial rates for international shipments originating in the United States (Worldwide Express, Worldwide Saver, UPS Worldwide Expedited and UPS International Standard service). Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market.
Export revenue per piece decreased 8.5% in 2015 impacted by a 480 basis point reduction from currency as well as lower fuel surcharge revenues. These factors were partially offset by the increases in base rates and disciplined yield and growth initiatives in Europe.
Domestic revenue per piece decreased 13.1% in 2015 impacted by a 1,490 basis point reduction from currency as well as lower fuel surcharge revenues. These factors were partially offset by the increases to base rate and disciplined yield and growth initiatives in Europe and Canada.
Fuel Surcharges
We maintain fuel surcharges on our international air and ground services. The fuel surcharges for international air products originating inside or 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 decreased by $119 million in 2016, primarily due to price reductions in the fuel surcharge indices; however, this was partially offset by an increase in volume and changes in mix. Total international fuel surcharge revenue decreased by $516 million in 2015, primarily due to lower fuel prices; however, this was partially offset by an increase in volume and pricing changes made to the fuel surcharge indices.
Operating Expenses
2016
compared to
2015
Overall operating expenses increased by $294 million, which included a $381 million increase in mark-to-market pension charges. Excluding the impact of the defined benefit plan mark-to-market charges, adjusted operating expenses for the segment decreased $87 million in 2016 primarily due to currency exchange rate movements and lower fuel expense.
Operating expenses were impacted by changes in the cost of operating our international integrated air and ground network, which decreased $40 million, as well as pick-up and delivery costs, which decreased $143 million. The decreases in network and pick-up and delivery costs were largely due to the impact of currency exchange rate movements and lower fuel expense. Network cost reductions were somewhat offset by an increase in aircraft block hours (up 1.2% in 2016), driven by a 5.1% increase in international export volume and continuing air product service enhancements.
Operating expenses were also impacted in 2016 by a $96 million increase in indirect overhead, package sorting costs and other gains and losses.The total cost per piece for the segment decreased 1.8% in 2016.
2015
compared to
2014
Overall operating expenses decreased $1.299 billion in 2015, which included $156 million decrease due to mark-to-market pension adjustments. Overall adjusted operating expenses for the segment decreased $1.115 billion in 2015. This decrease was mostly due to currency exchange rate movements ($858 million) and lower fuel expense.
The decrease in operating expenses was impacted by the cost of operating our international integrated air and ground network, which decreased $617 million, as well as pick-up and delivery costs, which decreased $332 million. The decreases in network and pick-up and delivery costs were largely due to the impact of currency exchange rate movements, lower fuel expense and a reduction in expense for outside transportation carriers (due to lower fuel surcharges passed to us from the carriers). Additionally, network costs were mitigated by restraining the growth in aircraft block hours (down 1.1% in 2015), as a result of ongoing modifications to our air network; this was achieved with a 3.2% increase in international export volume and continuing air product service enhancements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The remaining decrease in operating expenses in 2015 was largely due to reductions of indirect operating costs and the cost of package sorting. Indirect operating costs decreased $130 million and the cost of package sorting decreased by $36 million. Both of these decreases were mainly attributable to the impact of currency.
The total cost per piece for the segment decreased 12.9% in 2015 impacted by a 147 basis point reduction in currency.
Operating Profit and Margin
2016
compared to
2015
Operating profit decreased $93 million in 2016 compared with 2015, which included a $381 million increase in operating expenses due to mark-to-market pension adjustments. Operating margin decreased 100 basis points to 16.6%. Adjusted operating profit increased by $288 million in 2016, while the adjusted operating margin increased 200 basis points to 20.0%. Operating profit and margin were positively affected by several factors including base rate increases, modifications to the fuel surcharge indices and currency exchange rate movements (including our currency hedging gains).
2015
compared to
2014
Operating profit increased $460 million in 2015 compared with 2014, which included a $156 million decrease in operating expenses due to mark-to-market pension adjustments. Operating margin increased 470 basis points to 17.6%. Adjusted operating profit increased by $276 million in 2015, while the adjusted operating margin increased 330 basis points to 18.0%. Operating profit and margin were positively affected by several factors including base rate increases, modifications to the fuel surcharge indices and the net impact of fuel (fuel expense declined at a faster rate than fuel surcharge revenue). These items were partially offset by the net impact of currency exchange rate movements (including our currency hedging gains), which reduced operating profit by $22 million when comparing 2015 with 2014.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Supply Chain & Freight Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% Change
|
|
2016
|
|
2015
|
|
2014
|
|
2016/ 2015
|
|
2015/ 2014
|
Freight LTL Statistics:
|
|
|
|
|
|
|
|
|
|
Revenue (in millions)
|
$
|
2,384
|
|
|
$
|
2,479
|
|
|
$
|
2,633
|
|
|
(3.8
|
)%
|
|
(5.8
|
)%
|
Revenue Per Hundredweight
|
$
|
23.44
|
|
|
$
|
22.94
|
|
|
$
|
22.64
|
|
|
2.2
|
%
|
|
1.3
|
%
|
Shipments (in thousands)
|
9,954
|
|
|
10,433
|
|
|
10,762
|
|
|
(4.6
|
)%
|
|
(3.1
|
)%
|
Shipments Per Day (in thousands)
|
39.3
|
|
|
41.2
|
|
|
42.5
|
|
|
(4.6
|
)%
|
|
(3.1
|
)%
|
Gross Weight Hauled (in millions of lbs)
|
10,167
|
|
|
10,808
|
|
|
11,632
|
|
|
(5.9
|
)%
|
|
(7.1
|
)%
|
Weight Per Shipment (in lbs)
|
1,021
|
|
|
1,036
|
|
|
1,081
|
|
|
(1.4
|
)%
|
|
(4.2
|
)%
|
Operating Days in Period
|
253
|
|
|
253
|
|
|
253
|
|
|
|
|
|
Revenue (in millions):
|
|
|
|
|
|
|
|
|
|
Forwarding and Logistics
|
$
|
6,793
|
|
|
$
|
5,900
|
|
|
$
|
5,758
|
|
|
15.1
|
%
|
|
2.5
|
%
|
Freight
|
2,736
|
|
|
2,881
|
|
|
3,048
|
|
|
(5.0
|
)%
|
|
(5.5
|
)%
|
Other
|
726
|
|
|
686
|
|
|
587
|
|
|
5.8
|
%
|
|
16.9
|
%
|
Total Revenue
|
$
|
10,255
|
|
|
$
|
9,467
|
|
|
$
|
9,393
|
|
|
8.3
|
%
|
|
0.8
|
%
|
Operating Expenses (in millions):
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
$
|
9,849
|
|
|
$
|
8,703
|
|
|
$
|
8,961
|
|
|
13.2
|
%
|
|
(2.9
|
)%
|
Defined Benefit Plans Mark-to-Market Charges
|
(318
|
)
|
|
(12
|
)
|
|
(202
|
)
|
|
|
|
|
Health & Welfare Plan Charges
|
—
|
|
|
—
|
|
|
(84
|
)
|
|
|
|
|
Adjusted Operating Expenses
|
$
|
9,531
|
|
|
$
|
8,691
|
|
|
$
|
8,675
|
|
|
9.7
|
%
|
|
0.2
|
%
|
Operating Profit (in millions) and Operating Margins:
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
$
|
406
|
|
|
$
|
764
|
|
|
$
|
432
|
|
|
(46.9
|
)%
|
|
76.9
|
%
|
Adjusted Operating Profit
|
$
|
724
|
|
|
$
|
776
|
|
|
$
|
718
|
|
|
(6.7
|
)%
|
|
8.1
|
%
|
Operating Margin
|
4.0
|
%
|
|
8.1
|
%
|
|
4.6
|
%
|
|
|
|
|
Adjusted Operating Margin
|
7.1
|
%
|
|
8.2
|
%
|
|
7.6
|
%
|
|
|
|
|
Currency Translation Benefit / (Cost)—(in millions)*:
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
$
|
(56
|
)
|
|
$
|
(249
|
)
|
Operating Expenses
|
|
|
|
|
|
|
59
|
|
|
279
|
|
Operating Profit
|
|
|
|
|
|
|
$
|
3
|
|
|
$
|
30
|
|
|
|
|
*
|
Amount represents the change compared to the prior year.
|
In August 2015, we acquired Coyote Logistics Midco, Inc ("Coyote"), a truckload freight brokerage company. Coyote's financial results are included in the above table within Forwarding and Logistics from the date of the acquisition, which has impacted the year-over-year comparability of revenue, operating expenses and operating profit.
In December 2016, we acquired Marken, a global provider of supply chain solutions to the life sciences industry and leader in clinical trials material storage and distribution. Marken's financial results are included in the above table within Forwarding and Logistics from the date of the acquisition and were not material to our results of operations.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue
2016
compared to
2015
Total revenue for the Supply Chain & Freight segment increased $788 million in 2016 compared to 2015. Forwarding and Logistics revenue increased $893 million in 2016 compared with 2015, primarily due to the Coyote acquisition midway through the third quarter of 2015. The increase was driven by Coyote, offset by a combination of volume and tonnage declines in our North American air freight and international air freight businesses (impacted by management focus to reduce lower-yielding accounts and softer market conditions). Additionally, revenue was adversely impacted by currency exchange rate movements and lower fuel surcharge rates (due to declining fuel prices). Revenue for our logistics products increased in 2016 as there was growth in our mail services and retail, aerospace, healthcare and automotive solutions.
UPS Freight revenue decreased $145 million in 2016, driven by lower tonnage (down 5.9% from the prior year) and a $73 million decrease in fuel surcharge revenue due to lower diesel fuel prices. The decline in shipments and the reduction in the weight per shipment were impacted by revenue management initiatives, an overall decline in market demand and customer mix. LTL revenue per hundredweight increased as LTL base rate increases averaging 4.9% took effect on October 26, 2015 and September 19, 2016.
Revenue for the other businesses within Supply Chain & Freight increased $40 million in 2016 due to revenue growth at UPS Capital Corporation, UPS Customer Solutions and the UPS Store.
2015
compared to
2014
Total revenue for the Supply Chain & Freight segment increased $74 million in 2015 compared to 2014. Forwarding and Logistics revenue increased $142 million in 2015 compared with 2014 primarily due to the Coyote acquisition midway through the third quarter of 2015. The increase driven by Coyote was partially offset by adverse impact of currency exchange rate movements, lower fuel surcharge rates (due to declining fuel prices) and volume and tonnage declines in our North American air freight and international air freight businesses (impacted by management focus on reducing lower-yielding accounts).
Revenue for our logistics products increased in 2015, as we experienced solid growth in our healthcare and aerospace solutions.
UPS Freight revenue decreased $167 million in 2015, driven by lower tonnage of 7.1% and a $157 million decrease in fuel surcharge revenue due to lower diesel fuel prices. The decline in average daily shipments and the reduction in weight per shipment was impacted by revenue management initiatives, customer mix and an overall decline in market demand. LTL revenue per hundredweight increased slightly, as LTL base rate increases averaging 4.9% took effect on December 29, 2014, covering non-contractual shipments in the United States, Canada and Mexico.
Revenue for the other businesses within Supply Chain & Freight increased $99 million in 2015 due to revenue growth from our service contracts with the U.S Postal Service and at The UPS Store, UPS Capital and UPS Customer Solutions.
Operating Expenses
2016
compared to
2015
Supply Chain & Freight operating expenses for the period increased $1.1 billion, which included a $306 million increase in mark-to-market pension charges. Forwarding and Logistics operating expenses increased $910 million, largely due to the acquisition of Coyote during the third quarter of 2015 and the increase in mark-to-market pension adjustment, partially offset by the impact of currency exchange rate movements and lower fuel expense. Purchased transportation expense increased by $862 million compared to 2015 largely due to the acquisition of Coyote. These increases were partially offset by a combination of lower volume and tonnage in our North American air freight and international air freight forwarding businesses, lower buy rates due to softer market conditions and the impact of foreign exchange rates.
UPS Freight operating expenses decreased $103 million in 2016 compared with 2015, primarily as a result of decreases in our network costs ($58 million) and pick-up and delivery costs ($34 million), offset in part by the increased mark-to-market pension charges. The declines in network costs and pick-up and delivery expenses were driven by a reduction in fuel expense and expense for outside transportation carriers (due to lower LTL volume and fuel surcharges passed to us by outside carriers). Total cost per LTL shipment increased by 2.7% compared with 2015 due to operating expenses declining at a faster rate than the reduction in tonnage and shipments.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other expenses for the other businesses within Supply Chain & Freight increased $33 million in 2016 compared with 2015 primarily due to UPS Capital, UPS Customer Solutions and the UPS Store.
2015
compared to
2014
Supply Chain & Freight operating expenses for the period decreased $258 million, which included a $190 million decrease due to the mark-to-market pension adjustments. Additionally, there were no health and welfare plan charges for 2015. Forwarding and Logistics operating expenses increased $91 million in 2015 compared with 2014. This increase was largely due to the acquisition of Coyote during the third quarter of 2015, partially offset by the impact of currency exchange rate movements, lower fuel expense and the mark-to-market adjustment. Purchased transportation expense increased by $37 million in 2015 due to the acquisition of Coyote offset by lower tonnage, fuel expense and the impact of foreign currency exchange rates. The remaining operating expense increase was related to several other expense categories, including payroll and benefits expense.
UPS Freight operating expenses decreased $151 million in 2015 compared with 2014. Total cost per LTL shipment decreased 1.9%, which was partially offset by the decrease in the mark-to-market pension charges and health and welfare changes. The decrease in operating expense was also due to the cost associated with operating our linehaul network (which decreased $142 million) and decreases in pick-up and delivery expenses. The decreases in network costs and pick-up and delivery expenses were driven by a reduction in fuel expense and expense for outside transportation carriers (largely due to lower LTL volume and fuel surcharges passed to us from the carriers).
Operating expenses for the other businesses within Supply Chain & Freight increased $76 million in 2015 compared with 2014 primarily due to UPS Capital and our service contracts with the U.S. Postal Service.
Operating Profit and Margin
2016
compared to
2015
Supply Chain & Freight operating profit decreased $358 million in 2016 compared with 2015, which includes a $306 million increase in the mark-to-market pension adjustments. Operating profit for Forwarding and Logistics, which includes Coyote, decreased $17 million in 2016 compared with 2015. Operating results for the North American air freight and international air freight forwarding businesses declined, as buy and sell spreads for capacity decreased. Profitability in ocean freight slightly declined due to margin compression from soft market conditions. Operating profit for the logistics unit increased slightly from 2016 compared to 2015.
Operating profit for the freight unit decreased $42 million in 2016 compared with 2015, as a decline in tonnage and increase in pension cost more than offset the increased LTL revenue per hundredweight realized during the year.
The combined operating profit for all of our other businesses in this segment increased $7 million in 2016, primarily due to higher operating profit at UPS Capital, UPS Customer Solutions and the UPS Store.
2015
compared to
2014
Supply Chain & Freight operating profit increased $332 million in 2015 compared with 2014, which includes a $190 million decrease in the mark-to-market pension adjustments and a $84 million decrease in health and wealth plan change. Operating profit for the Forwarding and Logistics unit increased by $51 million in 2015 compared with 2014, primarily due to improved results in our international air business, partially offset by the impact of Coyote acquisition costs. The net impact of fuel costs and revenue management initiatives had a positive impact on operating profit. Operating results for the international air forwarding business improved, as the rates at which we procure capacity from third-party air carriers decreased faster than the rates we charge our customers. Profitability in our ocean freight unit grew largely as a result of transportation expense decreasing at a faster rate than the rates we charge our customers.
However, operating profit for the logistics unit declined, as investments in technology and infrastructure continued to pressure distribution margins during 2015.
Operating profit for our freight unit decreased $16 million in 2015 compared with 2014, as declines in tonnage and increased pension costs more than offset the increased LTL revenue per hundredweight realized during the year.
The combined operating profit for all of our other businesses in this segment increased $23 million in 2015, primarily due to higher operating profit at UPS Capital and our service contracts with the U.S. Postal Service.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% Change
|
|
2016
|
|
2015
|
|
2014
|
|
2016/ 2015
|
|
2015/ 2014
|
Operating Expenses (in millions):
|
|
|
|
|
|
|
|
|
|
Compensation and Benefits:
|
$
|
34,770
|
|
|
$
|
31,028
|
|
|
$
|
32,045
|
|
|
12.1
|
%
|
|
(3.2
|
)%
|
Defined Benefit Plans Mark-to-Market Charges
|
(2,651
|
)
|
|
(118
|
)
|
|
(1,062
|
)
|
|
|
|
|
Health & Welfare Plan Charges
|
—
|
|
|
—
|
|
|
(1,102
|
)
|
|
|
|
|
Adjusted Compensation and Benefits
|
32,119
|
|
|
30,910
|
|
|
29,881
|
|
|
3.9
|
%
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
Repairs and Maintenance
|
1,538
|
|
|
1,400
|
|
|
1,371
|
|
|
9.9
|
%
|
|
2.1
|
%
|
Depreciation and Amortization
|
2,224
|
|
|
2,084
|
|
|
1,923
|
|
|
6.7
|
%
|
|
8.4
|
%
|
Purchased Transportation
|
9,129
|
|
|
8,043
|
|
|
8,460
|
|
|
13.5
|
%
|
|
(4.9
|
)%
|
Fuel
|
2,118
|
|
|
2,482
|
|
|
3,883
|
|
|
(14.7
|
)%
|
|
(36.1
|
)%
|
Other Occupancy
|
1,037
|
|
|
1,022
|
|
|
1,044
|
|
|
1.5
|
%
|
|
(2.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
Other Expenses
|
4,623
|
|
|
4,636
|
|
|
4,538
|
|
|
(0.3
|
)%
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
$
|
55,439
|
|
|
$
|
50,695
|
|
|
$
|
53,264
|
|
|
9.4
|
%
|
|
(4.8
|
)%
|
Adjusted Total Operating Expenses
|
$
|
52,788
|
|
|
$
|
50,577
|
|
|
$
|
51,100
|
|
|
4.4
|
%
|
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
Currency Translation Cost / (Benefit)*
|
|
|
|
|
|
|
$
|
(205
|
)
|
|
$
|
(1,137
|
)
|
|
|
|
*
|
Amount represents the change compared to the prior year.
|
Compensation and Benefits
2016
compared to
2015
Total compensation and benefits increased $3.74 billion in 2016 compared to 2015. Excluding the impact of the defined benefit plans mark-to-market charges, adjusted compensation and benefits expense increased $1.21 billion in 2016.
Employee payroll costs increased $609 million in 2016 compared with 2015, largely due to higher U.S. domestic hourly and management compensation costs and the acquisition of Coyote during the third quarter of 2015. Total compensation costs increased 3.2%, while consolidated average daily volume growth was 4.2%. U.S. domestic compensation costs for hourly employees increased largely due to increased headcount, contractual union wage increases and a 4.2% increase in average daily union labor hours. Compensation costs for management employees increased primarily due to merit salary increases and growth in the overall size of the workforce, partially offset by lower incentive compensation.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Benefits expense increased $3.13 billion in 2016 compared to 2015, primarily due to increased pension costs, health and welfare costs, workers' compensation expenses, vacation, holiday and excused absence expenses and payroll taxes. These factors are discussed further as follows:
|
|
•
|
Pension costs increased $2.63 billion in 2016 compared to 2015, primarily due to $2.53 billion in defined benefit plans mark-to-market charges. Additionally, expenses increased for multiemployer pension plans due to increased contribution rates and headcount.
|
|
|
•
|
Health and welfare costs increased $277 million in 2016, largely due to increased contributions to multiemployer plans resulting from contractual contribution rate increases and an overall increase in the size of the workforce.
|
|
|
•
|
Vacation, holiday, excused absence and payroll tax expense increased $125 million in 2016, due to salary increases and growth in the overall size of the workforce.
|
|
|
•
|
Workers' compensation expense increased $96 million in 2016.
I
nsurance 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, and take into account a number of factors, including our history of claim losses, payroll growth and the impact of safety improvement initiatives. In 2015, we experienced more favorable actuarial adjustments, resulting in increased expense in 2016.
|
2015
compared to
2014
Total compensation and benefits decreased $1.02 billion in 2015 compared to 2014. Excluding the impact of the defined benefit plans mark-to-market charges and the health and welfare plan charges, adjusted compensation and benefits expense increased $1.03 billion in 2015.
Employee payroll costs increased $351 million in 2015, compared with 2014, largely due to contractual union wage rate increases, a 1.2% increase in union labor hours, higher incentive compensation and a merit salary increase for management employees, partially offset by productivity improvements and the impact of currency exchange rates. The increase in average daily union labor hours was impacted by volume growth. Additionally, adverse weather conditions in the early part of 2014 contributed to a decrease in labor hours in the comparison between 2015 and 2014.
Benefits expense decreased $1.37 billion in 2015 compared to 2014, primarily due to increased pension costs, health and welfare costs, workers' compensation expenses, vacation, holiday and excused absence expenses and payroll taxes. These factors are discussed further as follows:
|
|
•
|
Pension cost decreased $605 million in 2015 compared to 2014, primarily due to a decrease of $944 million in defined benefit plans mark-to-market charges. The decrease in mark-to-market charges was partially offset by an increase in expenses in company-sponsored pension plans (largely due to lower discount rates used to determine ongoing pension cost for 2015) and multiemployer pension plans (due to both increased contribution rates and higher union labor hours).
|
|
|
•
|
Health and welfare costs decreased $834 million compared to 2014, largely due to a decrease of $1.10 billion related to the impact of the 2014 health and welfare plan charges. The decrease in plan charges was partially offset by contractual contribution rate increases and higher union labor hours.
|
|
|
•
|
Workers' compensation expense increased $36 million in 2015. 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, and take into account a number of factors including our history of claim losses, payroll growth and the impact of safety improvement initiatives. In 2015, we experienced less favorable actuarial expense adjustments than the prior year as well as increased program costs and taxes.
|
|
|
•
|
Vacation, holiday and excused absence expense increased $32 million in 2015, due to an increase in the overall number of employees and increased vacation entitlements earned based on employees' years of service; however, these factors were partially offset by the impact of currency exchange rates.
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Repairs and Maintenance
2016
compared to
2015
The $138 million increase in repairs and maintenance expense in 2016 was primarily due to an increase in airframe and aircraft engine maintenance resulting from increased air volume and increased vehicle maintenance costs in our global package and freight operations, primarily due to the growth in the size of our vehicle fleet.
2015
compared to
2014
The $29 million increase in repairs and maintenance expense in 2015 was primarily due to an increase in airframe and aircraft engine repair and component replacement costs, largely in our Boeing 747 and 767 aircraft fleets. The remaining increase was largely due to increased vehicle maintenance costs in our global package and freight operations, primarily due to the growth in the size of our vehicle fleet.
Depreciation and Amortization
2016
compared to
2015
Depreciation and amortization expense increased $140 million in 2016 compared with 2015, primarily due to the following factors: (1) depreciation expense for buildings and facilities increased due to leasehold improvements and purchases of new equipment; (2) increase in amortization expense largely due to new internally developed capitalized software, as well as intangible assets resulting from business acquisitions and (3) depreciation expense on vehicles increased due to 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 and UPS Freight operations.
2015
compared to
2014
Depreciation and amortization expense increased $161 million in 2015 compared with 2014, primarily due to three factors: (1) amortization expense increased largely due to new internally developed capitalized software, as well as intangible assets resulting from business acquisitions; (2) depreciation expense for buildings and facilities increased due to new leasehold improvements and purchases of new equipment and (3) depreciation expense on vehicles increased due to 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 and UPS Freight operations.
Purchased Transportation
2016
compared to
2015
The $1.086 billion increase in purchased transportation expense charged to us by third-party air, ocean and truck carriers in 2016 was driven by several factors:
|
|
•
|
Expense for our forwarding and logistics business increased $840 million in 2016, primarily due to the acquisition of Coyote and increased volume and rates for mail services; these items were partially offset by a combination of decreased volume and tonnage in our North American air freight and international air freight forwarding business, lower buy rates in international air freight due to softer market conditions and the impact of foreign currency exchange rates.
|
|
|
•
|
U.S. Domestic Package expense increased $130 million in 2016, primarily due to increased volume and rates, partially offset by lower fuel surcharges passed to us from rail carriers and outside contract carriers.
|
|
|
•
|
International Package expense increased $112 million in 2016, primarily due to increased usage of third-party carriers; this was partially offset by the impact of currency exchange rate movements as well as lower fuel surcharges passed to us from outside transportation providers.
|
|
|
•
|
UPS Freight expense decreased $18 million in 2016, largely due to decreased LTL shipments and the resulting decreased use of, and lower fuel surcharges passed to us from, outside transportation carriers.
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2015
compared to
2014
The $417 million decrease in purchased transportation expense charged to us by third-party air, ocean and truck carriers in 2015 was driven by several factors:
|
|
•
|
U.S. Domestic Package expense decreased $322 million in 2015, primarily due to the decreased use of, and lower fuel surcharge rates passed to us from rail carriers and outside contract carriers. Additionally, adverse weather conditions in the early months of 2014 resulted in the additional use of outside contract carriers, which impacted the comparison with 2015.
|
|
|
•
|
International Package expense decreased $64 million in 2015, primarily due to to the impact of currency exchange rate movements and lower fuel surcharges passed from outside transportation providers. These factors were partially offset by international volume growth.
|
|
|
•
|
UPS Freight expense decreased $68 million in 2015, largely due to decreased LTL shipments and fuel efficiency, and the resulting decreased use of, and lower fuel surcharges passed to us from, outside transportation carriers.
|
|
|
•
|
The expense for Forwarding and Logistics and other businesses increased $37 million in 2015 primarily due to the acquisition of Coyote; however, this was offset by the impact of decreased volume and tonnage in our international and North American air freight businesses, the impact of currency exchange movements and lower fuel surcharges passed to us from outside transportation providers.
|
Fuel
2016
compared to
2015
The $364 million decrease in fuel expense in 2016 was primarily due to lower jet fuel, diesel and unleaded gasoline prices, which decreased fuel expense by $461 million. The lower fuel prices were partially offset by increased fuel consumption, primarily due to increases in total aircraft block hours and Domestic Package delivery stops (due to higher volume), which increased expense by $97 million and lower alternative fuel and tax credits.
2015
compared to
2014
The $1.401 billion decrease in fuel expense in 2015 was primarily due to lower fuel prices, which decreased fuel expense by $1.383 billion. Increases in fuel efficiency, fuel hedging activities, alternative fuel credits and fewer miles driven by UPS Freight and International Package decreased expense by $99 million. These decreases were partially offset by an increase of $82 million related to increases in aircraft block hours and Domestic Package delivery stops and miles driven due to higher volume.
Other Occupancy
2016
compared to
2015
The $15 million increase in other occupancy expense in 2016 was largely due to higher facility rent expense, partially offset by lower utilities and snow removal costs at our operating facilities.
2015
compared to
2014
The $22 million decrease in other occupancy expense in 2015 was largely due to a decrease in facility rent expense and utility costs, but partially offset by an increase in facility maintenance expense.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Expenses
2016
compared to
2015
The $13 million decrease in other expenses in 2016 was largely due to a decrease in overall auto liability insurance, offset by an increase in outside professional services.
2015
compared to
2014
The $98 million increase in other expenses in 2015 was caused by a number of factors. Automotive liability insurance
expense increased $36 million largely due to established estimates of the loss that will ultimately be incurred on reported claims, as well as estimates of claims that have been incurred but not reported, and take into account a number of factors including our history of claim losses. Outside professional service fees increased $16 million primarily due to transaction costs associated with Coyote. Advertising expense increased $15 million mostly driven by the "United Problem Solver" campaign. We also incurred increases in several other expense categories, including software license fees, computer supplies and employee expense reimbursement. These increases were partially offset by lower bad debt expense and other items.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Investment Income and Interest Expense
The following table sets forth investment income and interest expense for the years ended
December 31, 2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% Change
|
|
2016
|
|
2015
|
|
2014
|
|
2016/ 2015
|
|
2015/ 2014
|
Investment Income and Other
|
$
|
50
|
|
|
$
|
15
|
|
|
$
|
22
|
|
|
NA
|
|
|
(31.8
|
)%
|
Interest Expense
|
$
|
(381
|
)
|
|
$
|
(341
|
)
|
|
$
|
(353
|
)
|
|
11.7
|
%
|
|
(3.4
|
)%
|
Investment Income and Other
2016
compared to
2015
The growth in investment income and other in 2016 as compared to 2015 was primarily due to a decrease in losses from fair value adjustments on real estate partnerships, higher interest income and unrealized gains on investments and a benefit from foreign currency exchange rate movements.
2015
compared to
2014
The decrease in investment income was primarily due to lower realized gains on the sale of investments in 2015 compared with 2014, and a decline in interest income. This was partially offset by a decrease in losses from fair value adjustments on real estate partnerships.
Interest Expense
2016
compared to
2015
Interest expense increased in 2016 as compared to 2015 primarily due to an increase in average outstanding commercial paper balances, an increase in long-term debt and higher effective interest rates on senior notes.
2015
compared to
2014
Interest expense decreased in 2015 compared with 2014 largely due to a decrease in effective interest rates related to the termination of our British Pound Sterling cross-currency interest rate swaps, the prior year repayment of senior notes at maturity and the impact of foreign currency. This was partially offset by an increase in average outstanding commercial paper and long-term debt.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Tax Expense
The following table sets forth income tax expense and our effective tax rate for the years ended
December 31, 2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
% Change
|
|
2016
|
|
2015
|
|
2014
|
|
2016/ 2015
|
|
2015/ 2014
|
Income Tax Expense:
|
$
|
1,705
|
|
|
$
|
2,498
|
|
|
$
|
1,605
|
|
|
(31.7
|
)%
|
|
55.6
|
%
|
Income Tax Impact of:
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans Mark-to-Market Charge
|
978
|
|
|
39
|
|
|
392
|
|
|
|
|
|
Health & Welfare Plan Charges
|
—
|
|
|
—
|
|
|
415
|
|
|
|
|
|
Adjusted Income Tax Expense
|
$
|
2,683
|
|
|
$
|
2,537
|
|
|
$
|
2,412
|
|
|
5.8
|
%
|
|
5.2
|
%
|
Effective Tax Rate
|
33.2
|
%
|
|
34.0
|
%
|
|
34.6
|
%
|
|
|
|
|
Adjusted Effective Tax Rate
|
34.5
|
%
|
|
34.0
|
%
|
|
35.5
|
%
|
|
|
|
|
Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions we operate in and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year but may not be consistent from year to year.
Our effective tax rate decreased to
33.2%
in
2016
, compared with
34.0%
in
2015
and 34.6% in 2014, primarily due to the effects of the following discrete tax items and recurring factors:
2016 Discrete Items
In the fourth quarter of 2016, we recognized an income tax benefit of
$978
million related to pre-tax mark-to-market losses of
$2.651
billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average statutory tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
2015 Discrete Items
During the third quarter of 2015 and after the filing of our annual federal tax returns, we reconciled our deferred tax balances and identified adjustments to be made with respect to prior years’ deferred tax balances. The adjustments resulted in a reduction of income tax expense of $
66
million.
In connection with our acquisition of Coyote Logistics (see
note 7
), we distributed $
500
million of cash held by a Canadian subsidiary to its U.S. parent during the fourth quarter of 2015. As a result of the distribution, we recorded additional net income tax expense of $
28
million.
In the fourth quarter of 2015, we recognized an income tax benefit of $
39
million related to pre-tax mark-to-market losses of $
118
million on our pension and postretirement defined benefit plans. This income tax benefit was generated at a lower average statutory tax rate than our U.S. federal statutory tax rate because it was due, in part, to non-U.S. benefit plans.
Other favorable rate impacting items in 2015 include: resolution of several U.S. state and local tax matters; the extension of favorable U.S. federal tax provisions associated with the Protecting Americans from Tax Hikes Act of 2015 related to research and development tax credits and work opportunity tax credits; and the execution of two bilateral advance pricing agreements. These agreements established intercompany transfer pricing arrangements between the U.S. and certain non-U.S. jurisdictions related to our small package operations for tax years 2010 through 2019.
2014 Discrete Items
In 2014, we recorded a $415 million tax benefit related to a pre-tax charge of $1.102 billion for certain health and welfare plan changes (see note 5). This income tax benefit was generated at a higher average statutory tax rate than our U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In the fourth quarter of 2014, we recognized an income tax benefit of $392 million related to pre-tax mark-to-market losses of $1.062 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average statutory tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
As described in the
Items Affecting Comparability
section, certain items have been excluded from comparisons of "adjusted" income taxes in the discussion that follows.
2016
compared to
2015
Our adjusted effective tax rate increased to 34.5% in 2016 from 34.0% in 2015 primarily due to a decrease in favorable discrete tax adjustments relative to 2015 partially offset by favorable changes in the proportion of our taxable income in certain U.S. and non-U.S. jurisdictions relative to total pre-tax income.
2015
compared to
2014
Our adjusted effective tax rate decreased to 34.0% in 2015 from 35.5% in 2014 primarily due to favorable discrete tax adjustments related to: (1) prior years' deferred tax balances; (2) execution of advance pricing agreements with certain foreign tax jurisdictions; (3) resolution of several U.S. state and local tax matters; and (4) the extension of several previously expired U.S. tax provisions in 2015. These benefits were partially offset by the additional U.S. tax expense associated with a cash distribution from a Canadian subsidiary to its U.S. parent.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash Flows From Operating Activities
The following is a summary of the significant sources (uses) of cash from operating activities (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net Income
|
$
|
3,431
|
|
|
$
|
4,844
|
|
|
$
|
3,032
|
|
Non-cash operating activities(a)
|
6,444
|
|
|
4,122
|
|
|
5,901
|
|
Pension and postretirement plan contributions (UPS-sponsored plans)
|
(2,668
|
)
|
|
(1,229
|
)
|
|
(1,258
|
)
|
Settlement of postretirement benefit obligation
|
—
|
|
|
—
|
|
|
(2,271
|
)
|
Hedge margin receivables and payables
|
(142
|
)
|
|
170
|
|
|
421
|
|
Income tax receivables and payables
|
(505
|
)
|
|
(6
|
)
|
|
(224
|
)
|
Changes in working capital and other non-current assets and liabilities
|
(62
|
)
|
|
(418
|
)
|
|
91
|
|
Other operating activities
|
(25
|
)
|
|
(53
|
)
|
|
34
|
|
Net cash from operating activities
|
$
|
6,473
|
|
|
$
|
7,430
|
|
|
$
|
5,726
|
|
|
|
(a)
|
Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, provisions for uncollectible accounts, pension and postretirement benefit expense, stock compensation expense and other non-cash items.
|
Cash from operating activities remained strong throughout 2014 to 2016. Operating cash flow was adversely impacted by $1.527 billion in 2014 and $33 million in 2015 due to certain transactions resulting from the ratification of our collective bargaining agreement with the Teamsters. These transactions are discussed further in the "Collective Bargaining Agreements" section:
|
|
•
|
We paid $2.271 billion in 2014 to settle postretirement benefit obligations for certain union employees.
|
|
|
•
|
We paid $176 million in 2014 for retroactive economic benefits under the collective bargaining agreement that were related to the period between August through December of 2013.
|
|
|
•
|
During 2014, we received cash tax benefits of $920 million from the items described above (through reduced U.S. Federal and state quarterly income tax payments).
|
|
|
•
|
We paid $53 million in 2015 for additional retroactive economic benefits under the collective bargaining agreement and we received $20 million of cash tax benefits (through reduced U.S. Federal and state quarterly income tax payments) from the payment.
|
Most of the remaining variability in operating cash flows during the 2014 to 2016 time period relates to the funding of our company-sponsored pension and postretirement benefit plans (and related cash tax deductions). 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.
|
|
•
|
We made discretionary contributions to our three primary company-sponsored U.S. pension plans totaling $2.461, $1.030 and 1.042 billion in 2016, 2015 and 2014, respectively.
|
|
|
•
|
The remaining contributions from 2014 to 2016 were largely due to contributions to our international pension plans and U.S. postretirement medical benefit plans.
|
Apart from the transactions described above, operating cash flow was impacted by changes in our working capital position, payments for income taxes and changes in hedge margin payables and receivables. Cash payments for income taxes were $2.064, $1.913 and $1.524 billion for 2016, 2015 and 2014, respectively, and were primarily impacted by the timing of current tax deductions. The net hedge margin collateral (paid)/received from derivative counterparties was $(142), $170 and $421 million during 2016, 2015 and 2014, respectively, due to changes in the fair value of the derivative contracts used in our currency and interest rate hedging programs.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As of
December 31, 2016
, the total of our worldwide holdings of cash, cash equivalents and marketable securities were $
4.567 billion
, of which $2.192 billion was held by foreign subsidiaries. The amount of cash, cash equivalents and marketable securities 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, cash equivalents and marketable securities held by foreign subsidiaries would be subject to tax if such amounts were repatriated in the form of dividends; however, not all international 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.
Cash Flows From Investing Activities
Our primary sources (uses) of cash for investing activities were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net cash used in investing activities
|
$
|
(2,566
|
)
|
|
$
|
(5,309
|
)
|
|
$
|
(2,801
|
)
|
Capital Expenditures:
|
|
|
|
|
|
Buildings and facilities
|
$
|
(1,316
|
)
|
|
$
|
(996
|
)
|
|
$
|
(808
|
)
|
Aircraft and parts
|
(350
|
)
|
|
(27
|
)
|
|
(44
|
)
|
Vehicles
|
(864
|
)
|
|
(936
|
)
|
|
(1,061
|
)
|
Information technology
|
(435
|
)
|
|
(420
|
)
|
|
(415
|
)
|
Total Capital Expenditures:
|
$
|
(2,965
|
)
|
|
$
|
(2,379
|
)
|
|
$
|
(2,328
|
)
|
Capital Expenditures as a % of Revenue
|
4.9
|
%
|
|
4.1
|
%
|
|
4.0
|
%
|
Other Investing Activities:
|
|
|
|
|
|
Proceeds from disposals of property, plant and equipment
|
$
|
88
|
|
|
$
|
26
|
|
|
$
|
53
|
|
Net decrease in finance receivables
|
$
|
9
|
|
|
$
|
5
|
|
|
$
|
44
|
|
Net (purchases) sales of marketable securities
|
$
|
908
|
|
|
$
|
(1,027
|
)
|
|
$
|
(419
|
)
|
Cash paid for business acquisitions
|
$
|
(547
|
)
|
|
$
|
(1,904
|
)
|
|
$
|
(88
|
)
|
Other investing activities
|
$
|
(59
|
)
|
|
$
|
(30
|
)
|
|
$
|
(63
|
)
|
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 2017 will be approximately $4 billion.
Capital spending on aircraft increased in 2016 compared to the 2014 to 2015 periods, due to firm commitments to purchase 14 new Boeing 747-8F cargo aircraft. Capital spending on vehicles decreased during the 2014 to 2016 period in our U.S. and international package businesses and our freight unit, largely due to the timing of vehicle replacements. Capital expenditures on buildings and facilities also increased in the 2014 to 2016 period, and included hub automation and capacity expansion projects in the U.S. during 2016, as well as expansion and new construction projects at facilities in Europe and Asia.
The proceeds from the disposal of property, plant and equipment were largely due to proceeds from insurance recoveries in 2014 to 2016. The net decline in finance receivables in the 2014 to 2016 period was 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 fluctuate from period to period.
Cash paid for business acquisitions in the 2014 to 2016 period was largely due to the acquisitions of i-parcel LLC (2014), Polar Speed Distribution Limited (2014), Poltraft Sp. z.o.o. (2015), Parcel Pro, Inc. (2015), Coyote Logistics Midco, Inc. (2015) and Marken (2016), as well as other smaller acquisitions.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other investing activities are impacted by changes in our non-current investments and restricted cash balances, capital contributions into certain investment partnerships and various other items. In 2016, 2015 and 2014, we increased the non-current investments and restricted cash balance associated with our self-insurance requirements by $3, $0 and $17 million, respectively.
Cash Flows From Financing Activities
Our primary sources (uses) of cash for financing activities were as follows (amounts in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net cash used in financing activities
|
$
|
(3,140
|
)
|
|
$
|
(1,565
|
)
|
|
$
|
(5,161
|
)
|
Share Repurchases:
|
|
|
|
|
|
Cash expended for shares repurchased
|
$
|
(2,678
|
)
|
|
$
|
(2,702
|
)
|
|
$
|
(2,695
|
)
|
Number of shares repurchased
|
(25.4
|
)
|
|
(26.8
|
)
|
|
(26.4
|
)
|
Shares outstanding at year-end
|
868
|
|
|
886
|
|
|
905
|
|
Percent reduction in shares outstanding
|
(2.0
|
)%
|
|
(2.1
|
)%
|
|
(2.0
|
)%
|
Dividends:
|
|
|
|
|
|
Dividends declared per share
|
$
|
3.12
|
|
|
$
|
2.92
|
|
|
$
|
2.68
|
|
Cash expended for dividend payments
|
$
|
(2,643
|
)
|
|
$
|
(2,525
|
)
|
|
$
|
(2,366
|
)
|
Borrowings:
|
|
|
|
|
|
Net borrowings (repayments) of debt principal
|
$
|
2,034
|
|
|
$
|
3,588
|
|
|
$
|
(169
|
)
|
Other Financing Activities:
|
|
|
|
|
|
Cash received for common stock issuances
|
$
|
245
|
|
|
$
|
249
|
|
|
$
|
274
|
|
Other financing activities
|
$
|
(98
|
)
|
|
$
|
(175
|
)
|
|
$
|
(205
|
)
|
Capitalization:
|
|
|
|
|
|
Total debt outstanding at year-end
|
$
|
16,075
|
|
|
$
|
14,334
|
|
|
$
|
10,779
|
|
Total shareowners’ equity at year-end
|
429
|
|
|
2,491
|
|
|
2,158
|
|
Total capitalization
|
$
|
16,504
|
|
|
$
|
16,825
|
|
|
$
|
12,937
|
|
In
May 2016
, the Board of Directors approved a share repurchase authorization of $
8.0
billion, which replaced an authorization previously announced in 2013.The share repurchase authorization has no expiration date. During the first quarter of 2016, we exercised a capped call option that we entered into in 2015, which allowed us to repurchase 0.2 million class B shares. The $25 million premium payment for this capped call option was classified as other financing activities in 2015. As of
December 31, 2016
, we had $
6.155
billion of this share repurchase authorization remaining. Share repurchases may take the form of accelerated share repurchases, open market purchases, or other such methods as we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the program. We anticipate repurchasing approximately $
1.8
billion of shares in
2017
.
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 2017, we increased our quarterly dividend payment from $0.78 to $0.83 per share, a 6% increase.
Issuances of debt in 2016 consisted of floating rate senior notes totaling $226 million, two series of fixed rate senior notes each $500 million and euro denominated fixed rate senior note totaling €500 million ($549 million). Issuances of debt in 2015 consisted of floating rate senior notes totaling $144 million, euro denominated floating rate senior notes totaling €500 million ($547 million), euro denominated fixed rate senior notes totaling €700 million ($765 million) and facility bonds associated with our Philadelphia, Pennsylvania airport facilities totaling $100 million. The remainder consisted primarily of commercial paper. Issuances of debt in 2014 consisted primarily of commercial paper.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In 2016, there were no repayments of fixed rate senior notes and floating rate senior notes. Repayments of debt in 2015 consisted primarily of the maturity of our $100 million facility bonds associated with our Philadelphia, Pennsylvania airport facilities. Repayments of debt in 2014 consisted primarily of the maturity of our $1.0 billion senior fixed rate notes in April 2014. The remaining repayments of debt during the 2014 through 2016 time period included paydowns of commercial paper 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.
The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. The following is a summary of our commercial paper program (amount in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance at year-end
|
|
Outstanding balance at year-end
|
|
Average balance outstanding
|
|
Average balance outstanding
|
|
Average interest rate
|
2016
|
|
|
|
|
|
|
|
|
|
USD
|
$
|
2,406
|
|
|
$
|
2,406
|
|
|
$
|
1,838
|
|
|
$
|
1,838
|
|
|
0.44
|
%
|
EUR
|
€
|
801
|
|
|
$
|
844
|
|
|
€
|
776
|
|
|
$
|
817
|
|
|
(0.28
|
)%
|
GBP
|
£
|
—
|
|
|
$
|
—
|
|
|
£
|
94
|
|
|
$
|
116
|
|
|
0.5
|
%
|
Total
|
|
|
$
|
3,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance at year-end
|
|
Outstanding balance at year-end
|
|
Average balance outstanding
|
|
Average balance outstanding
|
|
Average interest rate
|
2015
|
|
|
|
|
|
|
|
|
|
USD
|
$
|
2,279
|
|
|
$
|
2,279
|
|
|
$
|
2,159
|
|
|
$
|
2,159
|
|
|
0.13
|
%
|
EUR
|
€
|
310
|
|
|
$
|
339
|
|
|
€
|
10
|
|
|
$
|
11
|
|
|
(0.09
|
)%
|
GBP
|
£
|
234
|
|
|
$
|
347
|
|
|
£
|
241
|
|
|
$
|
368
|
|
|
0.5
|
%
|
Total
|
|
|
$
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance at year-end
|
|
Outstanding balance at year-end
|
|
Average balance outstanding
|
|
Average balance outstanding
|
|
Average interest rate
|
2014
|
|
|
|
|
|
|
|
|
|
USD
|
$
|
772
|
|
|
$
|
772
|
|
|
$
|
1,356
|
|
|
$
|
1,356
|
|
|
0.1
|
%
|
The variation in cash received from common stock issuances was primarily due to the level of stock option exercises by employees in the 2014 through 2016 period.
The cash outflows in other financing activities were impacted by several factors. Net cash outflows from the premium payments and settlements of capped call options for the purchase of UPS class B shares were $(54), $(17) and $(47) million for 2016, 2015 and 2014, respectively. Cash outflows related to the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards were $167, $217, and $224 million for 2016, 2015 and 2014, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sources of Credit
See
note 8
to the audited consolidated financial statements for a discussion of our available credit and debt covenants.
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, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment Type
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
After 2021
|
|
Total
|
Capital Leases
|
$
|
72
|
|
|
$
|
70
|
|
|
$
|
62
|
|
|
$
|
56
|
|
|
$
|
39
|
|
|
$
|
370
|
|
|
$
|
669
|
|
Operating Leases
|
368
|
|
|
302
|
|
|
221
|
|
|
168
|
|
|
111
|
|
|
300
|
|
|
1,470
|
|
Debt Principal
|
3,635
|
|
|
756
|
|
|
1,001
|
|
|
528
|
|
|
1,501
|
|
|
8,136
|
|
|
15,557
|
|
Debt Interest
|
362
|
|
|
345
|
|
|
315
|
|
|
286
|
|
|
273
|
|
|
4,302
|
|
|
5,883
|
|
Purchase Commitments
|
1,358
|
|
|
1,151
|
|
|
758
|
|
|
286
|
|
|
17
|
|
|
45
|
|
|
3,615
|
|
Pension Fundings
|
2,291
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,291
|
|
Other Liabilities
|
10
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Total
|
$
|
8,096
|
|
|
$
|
2,629
|
|
|
$
|
2,357
|
|
|
$
|
1,324
|
|
|
$
|
1,941
|
|
|
$
|
13,153
|
|
|
$
|
29,500
|
|
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 8
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, 2016
. 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 assets, goods or services that are legally binding, including contracts for aircraft, construction of new or expanded facilities and orders for technology equipment and vehicles. As of
December 31, 2016
, we have firm commitments to purchase 14 new Boeing 747-8F cargo aircraft. The 14 aircraft are to be delivered between 2017 and 2020. Options for 14 additional 747-8F cargo aircraft are also included in the contract, but are not included in the commitment table above.
Pension fundings represent a voluntary contribution for 2017. There are no anticipated required minimum cash contributions to our qualified U.S. pension plans (these plans are discussed further in
note 4
to the consolidated financial statements). 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, discount rates and changes to pension plan funding regulations. A decline in discount rates or a sustained significant decline in the world equity or bond markets could result in our domestic pension plans being subject to significantly higher minimum funding requirements. Actual contributions made in future years could materially differ from the amounts shown in the table above, and consequently required minimum contributions beyond 2019 cannot be reasonably estimated.
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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 $
200 million
of liabilities for uncertain tax positions because we are uncertain if or when such amounts will ultimately be settled in cash. Uncertain tax positions are further discussed in
note 13
to the consolidated financial statements.
As of
December 31, 2016
, we had outstanding letters of credit totaling approximately $
1.89
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, 2016
, we had $
730
million of surety bonds written. As of
December 31, 2016
, we had unfunded loan commitments totaling $
149
million associated with UPS Capital.
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
See
note 4
to the audited consolidated financial statements for a discussion of pension related matters and
note 9
for a discussion of judicial proceedings and other matters arising from the conduct of our business activities.
Collective Bargaining Agreements
Status of Collective Bargaining Agreements
As of December 31, 2016, we had approximately
268,000
employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. During 2014, the Teamsters ratified a new national master agreement (“NMA”) with UPS that will expire on July 31, 2018. The economic provisions in the NMA included wage rate increases, as well as increased contribution rates for healthcare and pension benefits. Most of these economic provisions were retroactive to August 1, 2013, which was the effective date of the NMA. In the second quarter of 2014, we remitted $278 million for these retroactive economic benefits; this payment had an immaterial impact on net income, as these retroactive economic benefits had been accrued since the July 31, 2013 expiration of the prior agreement.
In addition to the retroactive economic provisions of the NMA, there were certain changes to the delivery of healthcare benefits that were effective at various dates. These changes impact approximately 36,000 full-time and 73,000 part-time active employees covered by the NMA and the UPS Freight collective bargaining agreement (collectively referred to as the “NMA Group”), as well as approximately 16,000 employees covered by other collective bargaining agreements (the “Non-NMA Group”). These provisions are discussed further below in the "Changes to the Delivery of Active and Postretirement Healthcare Benefits" section.
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. On August 31, 2016, the IPA members voted to ratify a new five-year labor contract. Terms of the agreement became effective September 1, 2016 and run through September 1, 2021. The economic provisions in the agreement included pay increases, a signing bonus and enhanced pension benefits.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727. In addition, approximately
3,000
of our auto and maintenance 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”) that will expire on July 31, 2019.
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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Changes to the Delivery of Active and Postretirement Healthcare Benefits
Prior to ratification, the NMA Group and Non-NMA Group employees received their healthcare benefits through UPS-sponsored active and postretirement health and welfare benefit plans. Effective June 1, 2014, we ceased providing healthcare benefits to active NMA Group employees through these UPS-sponsored benefit plans, and the responsibility for providing healthcare benefits for active employees was assumed by three separate multiemployer healthcare funds (the “Funds”). The responsibility for providing healthcare benefits for the active Non-NMA Group employees was also assumed by the Funds on various dates up to January 1, 2015, depending on the ratification date of the applicable collective bargaining agreement. We will make contributions to the Funds based on negotiated fixed hourly or monthly contribution rates for the duration of the NMA and other applicable collective bargaining agreements.
Additionally, the Funds assumed the obligation to provide postretirement healthcare benefits to the employees in the NMA Group who retire on or after January 1, 2014. The postretirement healthcare benefit obligation for the employees in the Non-NMA Group was assumed by the Funds for employees retiring on or after January 1, 2014 or January 1, 2015, depending on the applicable collective bargaining agreement. In exchange for the assumption of the obligation to provide postretirement healthcare benefits to the NMA Group and Non-NMA Group, we transferred cash totaling $2.271 billion to the Funds in the second quarter of 2014. UPS-sponsored health and welfare benefit plans retained responsibility for providing postretirement healthcare coverage for employees in the NMA Group who retired from UPS prior to January 1, 2014, and for employees in the Non-NMA Group who retire from UPS prior to the January 1, 2014 or January 1, 2015 effective date in the applicable collective bargaining agreement.
Accounting Impact of Health and Welfare Plan Changes
Income Statement Impact:
We recorded a pre-tax charge of $1.066 billion ($665 million after-tax) in the second quarter of 2014 for the health and welfare plan changes described above. The components of this charge, which was included in "compensation and benefits" expense in the statement of consolidated income, are as follows:
|
|
•
|
Partial Plan Curtailment
: We recorded a $112 million pre-tax curtailment loss due to the elimination of future service benefit accruals. This curtailment loss represents the accelerated recognition of unamortized prior service costs.
|
|
|
•
|
Remeasurement of Postretirement Obligation
: We recorded a $746 million pre-tax loss due to the remeasurement of the postretirement benefit obligations of the affected UPS-sponsored health and welfare benefit plans.
|
|
|
•
|
Settlement
: We recorded a $208 million pre-tax settlement loss, which represents the recognition of unamortized actuarial losses associated with the postretirement obligation for the NMA Group.
|
We recorded an additional pre-tax charge of $36 million ($22 million after-tax) in the fourth quarter of 2014 upon ratification of the collective bargaining agreements covering the Non-NMA Group, related to the remeasurement and settlement of the postretirement benefit obligation associated with those employees.
Balance Sheet and Cash Flow Impact:
During 2014, as part of the health and welfare plan changes described previously, we transferred cash totaling $2.271 billion to the Funds, which was accounted for as a settlement of our postretirement benefit obligations. We received approximately $854 million of cash tax benefits (through reduced U.S. Federal and state quarterly income tax payments) in 2014.
For NMA Group employees who retired prior to January 1, 2014 and remained with the UPS-sponsored health and welfare plans, the changes to the contributions, benefits and cost sharing provisions in these plans resulted in an increase in the postretirement benefit obligation, and a corresponding decrease in pre-tax accumulated other comprehensive income, of $13 million upon ratification.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Anticipated Benefits of Health and Welfare Plan Changes
We believe we have obtained several benefits as a result of these health and welfare plan changes, including:
|
|
•
|
Liability Transfer
: We have removed a significant liability from our balance sheet, which helps to reduce uncertainty around potential changes to healthcare laws and regulations, control the volatility of healthcare inflation, and removes the risk associated with providing future retiree healthcare.
|
|
|
•
|
Negotiated Healthcare Costs:
Using the model of a defined contribution plan allows us to negotiate our contributions towards healthcare costs going forward, and provides more certainty of costs over the contract period.
|
Minimize Impact of Healthcare Law Changes:
Multiemployer plans have several advantages under the Patient Protection and Affordable Care Act of 2010, including reduced transitional fees and the ability to limit the impact of future excise taxes.
Mitigate Demographic Issues:
This helps reduce the potential impact of increased early retirements by employees.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
New Accounting Pronouncements
Recently Adopted Accounting Standards
See
note 1
to the audited consolidated financial statements for a discussion of recently adopted accounting standards.
Accounting Standards Issued But Not Yet Effective
See
note 1
to the audited consolidated financial statements for a discussion of accounting standards issued, but not yet effective.
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.
Contingencies
As discussed in
note 9
to our consolidated financial statements, we are involved in various legal proceedings and contingencies. 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, 2016
. In addition, we have certain contingent liabilities that have not been recognized as of
December 31, 2016
, 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 U.S. Domestic Package, Europe, Asia, Americas and ISMEA (Indian Subcontinent, Middle East and Africa) reporting units in the International Package reporting segment, and the Forwarding, Logistics, UPS Mail Innovations, UPS Freight, The UPS Store, UPS Capital, Marken and Coyote Logistics reporting units in the Supply Chain & Freight reporting segment. Our annual goodwill impairment testing date is October 1
st
for each reporting unit owned at the testing date. 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 appropriate. 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, capital expenditures 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 routinely monitor market conditions and other factors to determine if interim impairment tests are necessary. 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
2016
,
2015
or
2014
. 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 for any of our reporting units as of our most recent goodwill testing date (October 1,
2016
) would not result in a goodwill impairment charge.
A trade name with a carrying value of
$200
million and licenses with a carrying value of $
4
million as of
December 31, 2016
are considered to be indefinite-lived intangibles, and therefore are not amortized. Impairment tests for indefinite-lived intangibles are performed on an annual basis. We determined that the income approach, specifically the relief from royalty method, is the most appropriate valuation method for the trade name. The estimated fair value of the trade name is compared to the carrying value of the asset. If the carrying value of the trade name exceeds its estimated fair value, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value. This valuation approach requires that we make a number of assumptions to estimate fair value. These assumptions include projections of future revenues, market royalty rates, tax rates, discount rates and other relevant variables. The projections we use in the model are updated annually and will change over time based on the historical performance and changing business conditions.
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. There were no impairments of any indefinite-lived or finite-lived intangible assets in
2016
,
2015
or
2014
.
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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, (2) differences between the expected and the actual return on plan assets, (3) changes in demographic assumptions including mortality, (4) participant experience different from demographic assumptions and (5) changes in coordinating benefits with plans not sponsored by UPS.
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 (herein referred to as "ongoing net periodic benefit cost"), primarily service and interest costs and the expected return on plan assets, are reported on a quarterly basis.
The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate, return on assets, and healthcare cost trend rate for our pension and postretirement benefit plans, and the resulting increase (decrease) on our obligations and expense as of, and for the year ended,
December 31, 2016
(in millions).
|
|
|
|
|
|
|
|
|
Pension Plans
|
25 Basis Point
Increase
|
|
25 Basis Point
Decrease
|
Discount Rate:
|
|
|
|
Effect on ongoing net periodic benefit cost
|
$
|
(51
|
)
|
|
$
|
59
|
|
Effect on net periodic benefit cost for amounts recognized outside the 10% corridor
|
(1,496
|
)
|
|
1,603
|
|
Effect on projected benefit obligation
|
(1,674
|
)
|
|
1,782
|
|
Return on Assets:
|
|
|
|
Effect on ongoing net periodic benefit cost
(1)
|
(74
|
)
|
|
74
|
|
Effect on net periodic benefit cost for amounts recognized outside the 10% corridor
(2)
|
(73
|
)
|
|
73
|
|
|
|
|
|
Postretirement Medical Plans
|
|
|
|
Discount Rate:
|
|
|
|
Effect on ongoing net periodic benefit cost
|
3
|
|
|
(2
|
)
|
Effect on net periodic benefit cost for amounts recognized outside the 10% corridor
|
(11
|
)
|
|
13
|
|
Effect on accumulated postretirement benefit obligation
|
(59
|
)
|
|
70
|
|
Health Care Cost Trend Rate:
|
|
|
|
Effect on ongoing net periodic benefit cost
|
1
|
|
|
(1
|
)
|
Effect on net periodic benefit cost for amounts recognized outside the 10% corridor
|
11
|
|
|
(10
|
)
|
Effect on accumulated postretirement benefit obligation
|
16
|
|
|
(18
|
)
|
|
|
(1)
|
Amount calculated based on 25 basis point increase / decrease in the expected return on assets.
|
|
|
(2)
|
Amount calculated based on 25 basis point increase / decrease in the actual return on assets.
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pension Backstop
UPS was a contributing employer to the Central State Pensions Fund ("CSPF") until 2007 when we withdrew from the plan and fully funded our allocable shares of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters ("IBT"), UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan ("UPS/IBT Plan") for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 ("the UPS Transfer Group") in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF.
In December 2014, Congress passed the Multiemployer Pension Reform Act ("MPRA") which for the first time ever allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants, including the UPS Transfer Group. We vigorously challenged the proposed benefit reduction plan because we believed that it did not comply with the law and the CSPF failed to comply with its contractual obligation to obtain our consent to reduce benefits to the UPS Transfer Group under the terms of the withdrawal agreement with the CSPF. On May 6, 2016, the U.S. Department of Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of requirements set forth in the MPRA.
The CSPF has asserted that it will become insolvent in 2025, which could lead to the reduction of retirement benefits. Although there are numerous factors that could affect the CSPF's funding status, if the CSPF were to become insolvent as they have projected, UPS may be required to provide coordinating benefits, thereby increasing the current projected benefits obligation for the UPS/IBT plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.
The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of significant uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to which benefits are paid by the Pension Benefit Guaranty Corporation, our ability to successfully defend our legal positions as well as the effect of discount rates and various other actuarial assumptions.
We account for this potential obligation under Accounting Standards Codification Topic 715 - Compensation - Retirement Benefits ("ASC 715"). Under ASC 715 we are required to provide a best estimate of various actuarial assumptions, including the eventual outcome this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely solution to this matter and the broader systemic problems facing multi-employer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities. Our best estimate as of the measurement date of December 31, 2016 does not incorporate this solution. Rather, our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will make another MPRA filing to forestall insolvency without reducing benefits to the UPS Transfer Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing we would be in a strong legal position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction, without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate as of the measurement date of December 31, 2016 is that there is no liability to be recognized for additional coordinating benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as these uncertainties are resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in accordance with ASC 715.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Depreciation, Residual Value and Impairment of Fixed Assets
As of
December 31, 2016
, we had $
18.8 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 appropriate. 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 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 could 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).
There were no impairment charges on our property, plant and equipment during
2016
,
2015
and
2014
.
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, pension assets, 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, 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 and interest rates is presented in the “Quantitative and Qualitative Disclosures about Market Risk” section of this report.
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, technology and trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 deferred 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 tax, interest and penalties related to 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 the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement. The difference between the amount of recognizable tax benefit and the total amount of tax benefit from positions filed or to be filed with the tax authorities is recorded as a liability for uncertain tax benefits. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate 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, 2016
and
2015
was $
102
and $
118
million, respectively. Our total provision for doubtful accounts charged to expense during the years ended
December 31, 2016
,
2015
and
2014
was $
116
, $
121
and $
143
million, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTE 11. STOCK-BASED COMPENSATION
The UPS Incentive Compensation Plan permits the grant of non-qualified 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 restricted stock units and restricted performance units (collectively referred to as "Restricted Units"), stock options and other permitted awards will reduce the share reserve by
one
share. We had
17
million
shares available to be issued under the Incentive Compensation Plan as of
December 31, 2016
.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the Coyote Restricted Stock Award, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. These awards are discussed in the following paragraphs. The total expense recognized in our income statement under all stock compensation award programs was
$591
,
$574
and $
536
million during
2016
,
2015
and
2014
, respectively. The associated income tax benefit recognized in our income statement was $
219
, $
215
and $
199
million during
2016
,
2015
and
2014
, respectively. The cash income tax benefit received from the exercise of stock options and the lapsing of Restricted Units was $
207
, $
252
and $
261
million during
2016
,
2015
and
2014
, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management Incentive Award Program ("MIP")
Non-executive management earning the right to receive the Management Incentive Award are determined annually by the Salary Committee, which is comprised of executive officers of UPS. Awards granted to executive officers are determined annually by the Compensation Committee of the UPS Board of Directors. Our Management Incentive Award 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). The other one-third to one-half of the award is
e
lectable 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 Award 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.
Coyote Restricted Stock Award
In August 2015 we acquired Coyote, a U.S.-based truckload freight brokerage company. During the third quarter of 2015, we granted Restricted Units to certain eligible Coyote management employees. The vesting of Restricted Units granted under this award will vary between
one
and
four
years with an equal number of restricted units vesting at each anniversary date. The entire grant is expensed on a straight-line basis over the requisite service period (except in the case of death, disability or retirement, in which case immediate vesting occurs).
Long-Term Incentive Performance Award granted prior to 2014
We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible employees. The Restricted Units ultimately granted under the Long-Term Incentive Performance Award program were based upon the achievement of certain performance measures, including growth in consolidated revenue and operating return on invested capital during the performance award cycle, and other measures, including the achievement of an adjusted earnings per share target over the entire three-year performance award cycle. The last award granted under this program fully vested in the first quarter of 2016.
As of
December 31, 2016
, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our Management Incentive Award program, Coyote Restricted Stock Award and Long-Term Incentive Performance Award program (granted prior to 2014):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Weighted-Average Remaining
Contractual Term
(in years)
|
|
Aggregate Intrinsic
Value (in millions)
|
Nonvested at January 1, 2016
|
11,012
|
|
|
$
|
90.71
|
|
|
|
|
|
Vested
|
(5,180
|
)
|
|
87.79
|
|
|
|
|
|
Granted
|
5,446
|
|
|
97.04
|
|
|
|
|
|
Reinvested Dividends
|
348
|
|
|
N/A
|
|
|
|
|
|
Forfeited / Expired
|
(151
|
)
|
|
95.23
|
|
|
|
|
|
Nonvested at December 31, 2016
|
11,475
|
|
|
$
|
94.32
|
|
|
1.42
|
|
$
|
1,315
|
|
Restricted Units Expected to Vest
|
11,129
|
|
|
$
|
94.33
|
|
|
1.41
|
|
$
|
1,276
|
|
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
2016
,
2015
and
2014
was $
97.04
, $
100.63
and $
92.35
, respectively. The total fair value of Restricted Units vested was $
445
, $
564
and $
579
million in
2016
,
2015
and
2014
, respectively. As of
December 31, 2016
, there was $
512
million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted-average period of
three
years and two months.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Incentive Performance Award granted after 2013
We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible employees. Beginning with the Long-Term Incentive Performance grant in 2014, the performance targets are equally-weighted among consolidated operating return on invested capital, growth in currency-constant consolidated revenue and total shareowner return relative ("RTSR") to a peer group of companies. The Restricted Units granted under this award generally vest at the end of a
three
-year period (except in the case of death disability or retirement, in which case immediate vesting occurs on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets set forth on the grant date. The range of percentage achievement can vary from
0%
to
200%
of the target award.
For the
two-thirds
of the award related to consolidated operating return on invested capital and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining
one-third
of the award related to RTSR is valued using a Monte Carlo model. This portion of the award is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period.
The weighted-average assumptions used, by year, and the calculated weighted-average fair values of the RTSR portion of the grants, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
1.00
|
%
|
|
0.89
|
%
|
|
0.65
|
%
|
Expected volatility
|
16.46
|
%
|
|
15.53
|
%
|
|
17.02
|
%
|
Weighted-average fair value of units granted
|
$
|
136.18
|
|
|
$
|
63.64
|
|
|
$
|
106.52
|
|
Share payout
|
129.08
|
%
|
|
65.86
|
%
|
|
109.84
|
%
|
There is no expected dividend yield as units earn dividend equivalents.
As of
December 31, 2016
, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our Long-Term Incentive Performance Award program (granted after 2013):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Weighted-Average Remaining
Contractual Term
(in years)
|
|
Aggregate Intrinsic
Value (in millions)
|
Nonvested at January 1, 2016
|
1,615
|
|
|
$
|
96.80
|
|
|
|
|
|
Vested
|
(800
|
)
|
|
97.02
|
|
|
|
|
|
Granted
|
926
|
|
|
105.50
|
|
|
|
|
|
Reinvested Dividends
|
70
|
|
|
N/A
|
|
|
|
|
|
Forfeited / Expired
|
(128
|
)
|
|
99.70
|
|
|
|
|
|
Nonvested at December 31, 2016
|
1,683
|
|
|
$
|
101.36
|
|
|
1.53
|
|
$
|
193
|
|
Performance Units Expected to Vest
|
1,590
|
|
|
$
|
101.44
|
|
|
1.56
|
|
$
|
182
|
|
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
2016
,
2015
and 2014 was
$105.50
,
$96.64
and $
96.98
, respectively. The total fair value of Restricted Units vested was $
13
and $
5
million in
2016
and
2015
, respectively. As of
December 31, 2016
, there was $
92
million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted-average period of one year and nine months.
Non-qualified 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 UPS 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Executive officers and certain senior managers receive a non-qualified stock option grant annually, in which the value granted 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. The options granted will expire ten years after the date of the grant. 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.
The following is an analysis of options to purchase shares of class A common stock issued and outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average Remaining
Contractual Term
(in years)
|
|
Aggregate Intrinsic
Value (in millions)
|
Outstanding at January 1, 2016
|
2,771
|
|
|
$
|
77.33
|
|
|
|
|
|
Exercised
|
(1,186
|
)
|
|
77.63
|
|
|
|
|
|
Granted
|
259
|
|
|
100.92
|
|
|
|
|
|
Forfeited / Expired
|
(16
|
)
|
|
80.88
|
|
|
|
|
|
Outstanding at December 31, 2016
|
1,828
|
|
|
$
|
80.45
|
|
|
4.26
|
|
$
|
62
|
|
Options Vested and Expected to Vest
|
1,828
|
|
|
$
|
80.45
|
|
|
4.26
|
|
$
|
62
|
|
Exercisable at December 31, 2016
|
1,410
|
|
|
$
|
75.07
|
|
|
3.01
|
|
$
|
56
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Expected dividend yield
|
2.95
|
%
|
|
2.63
|
%
|
|
2.56
|
%
|
Risk-free interest rate
|
1.62
|
%
|
|
2.07
|
%
|
|
2.40
|
%
|
Expected life in years
|
7.5
|
|
|
7.5
|
|
|
7.5
|
|
Expected volatility
|
22.40
|
%
|
|
20.61
|
%
|
|
24.26
|
%
|
Weighted-average fair value of options granted
|
$
|
16.46
|
|
|
$
|
18.07
|
|
|
$
|
20.48
|
|
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 $
72
, $
56
and $
85
million during
2016
,
2015
and
2014
, respectively, from option holders resulting from the exercise of stock options. The total intrinsic value of options exercised during
2016
,
2015
and
2014
was
$24
,
$31
and
$47
million, respectively. As of
December 31, 2016
, there was $
1
million of total unrecognized compensation cost related to nonvested options. That cost is expected to be recognized over a weighted-average period of
three
years and
seven
months.
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise Price Range
|
Shares
(in thousands)
|
|
Average Life
(in years)
|
|
Weighted-Average
Exercise
Price
|
|
Shares
(in thousands)
|
|
Weighted-Average
Exercise
Price
|
$55.01 - $70.00
|
201
|
|
|
2.93
|
|
$
|
62.42
|
|
|
201
|
|
|
$
|
62.42
|
|
$70.01 - $80.00
|
937
|
|
|
1.79
|
|
72.42
|
|
|
921
|
|
|
72.34
|
|
$80.01 - $90.00
|
147
|
|
|
6.17
|
|
82.94
|
|
|
115
|
|
|
82.92
|
|
$90.01 - $110.00
|
543
|
|
|
8.49
|
|
100.31
|
|
|
173
|
|
|
99.14
|
|
|
1,828
|
|
|
4.26
|
|
$
|
80.45
|
|
|
1,410
|
|
|
$
|
75.07
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
0.9
,
0.9
and
0.9
million shares at average prices of
$99.27
,
$95.41
and
$95.67
per share during
2016
,
2015
and
2014
, respectively. This plan is not considered to be compensatory, and therefore no compensation cost is measured for the employees’ purchase rights.
NOTE 12. 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 products 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, Americas and ISMEA (Indian Subcontinent, Middle East and Africa) operating segments.
Supply Chain & Freight
Supply Chain & Freight includes our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units. Our forwarding, logistics and Coyote units provide services in more than
195
countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, truckload freight brokerage, distribution and post-sales services, 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 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 and other, 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information as of, and for the years ended, December 31 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
38,301
|
|
|
$
|
36,747
|
|
|
$
|
35,851
|
|
International Package
|
12,350
|
|
|
12,149
|
|
|
12,988
|
|
Supply Chain & Freight
|
10,255
|
|
|
9,467
|
|
|
9,393
|
|
Consolidated
|
$
|
60,906
|
|
|
$
|
58,363
|
|
|
$
|
58,232
|
|
Operating Profit:
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
3,017
|
|
|
$
|
4,767
|
|
|
$
|
2,859
|
|
International Package
|
2,044
|
|
|
2,137
|
|
|
1,677
|
|
Supply Chain & Freight
|
406
|
|
|
764
|
|
|
432
|
|
Consolidated
|
$
|
5,467
|
|
|
$
|
7,668
|
|
|
$
|
4,968
|
|
Assets:
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
23,191
|
|
|
$
|
21,701
|
|
|
$
|
20,708
|
|
International Package
|
8,193
|
|
|
7,858
|
|
|
7,850
|
|
Supply Chain & Freight
|
7,806
|
|
|
7,728
|
|
|
6,004
|
|
Unallocated
|
1,187
|
|
|
1,024
|
|
|
878
|
|
Consolidated
|
$
|
40,377
|
|
|
$
|
38,311
|
|
|
$
|
35,440
|
|
Depreciation and Amortization Expense:
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
1,479
|
|
|
$
|
1,408
|
|
|
$
|
1,276
|
|
International Package
|
491
|
|
|
475
|
|
|
478
|
|
Supply Chain & Freight
|
254
|
|
|
201
|
|
|
169
|
|
Consolidated
|
$
|
2,224
|
|
|
$
|
2,084
|
|
|
$
|
1,923
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue by product type for the years ended December 31 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
U.S. Domestic Package:
|
|
|
|
|
|
Next Day Air
|
$
|
6,752
|
|
|
$
|
6,570
|
|
|
$
|
6,581
|
|
Deferred
|
4,082
|
|
|
3,903
|
|
|
3,672
|
|
Ground
|
27,467
|
|
|
26,274
|
|
|
25,598
|
|
Total U.S. Domestic Package
|
38,301
|
|
|
36,747
|
|
|
35,851
|
|
International Package:
|
|
|
|
|
|
Domestic
|
2,441
|
|
|
2,425
|
|
|
2,784
|
|
Export
|
9,374
|
|
|
9,092
|
|
|
9,586
|
|
Cargo
|
535
|
|
|
632
|
|
|
618
|
|
Total International Package
|
12,350
|
|
|
12,149
|
|
|
12,988
|
|
Supply Chain & Freight:
|
|
|
|
|
|
Forwarding and Logistics
|
6,793
|
|
|
5,900
|
|
|
5,758
|
|
Freight
|
2,736
|
|
|
2,881
|
|
|
3,048
|
|
Other
|
726
|
|
|
686
|
|
|
587
|
|
Total Supply Chain & Freight
|
10,255
|
|
|
9,467
|
|
|
9,393
|
|
Consolidated
|
$
|
60,906
|
|
|
$
|
58,363
|
|
|
$
|
58,232
|
|
Geographic information as of, and for the years ended, December 31 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
United States:
|
|
|
|
|
|
Revenue
|
$
|
48,013
|
|
|
$
|
45,309
|
|
|
$
|
43,840
|
|
Long-lived assets
|
$
|
19,253
|
|
|
$
|
18,196
|
|
|
$
|
15,902
|
|
International:
|
|
|
|
|
|
Revenue
|
$
|
12,893
|
|
|
$
|
13,054
|
|
|
$
|
14,392
|
|
Long-lived assets
|
$
|
5,898
|
|
|
$
|
5,828
|
|
|
$
|
6,105
|
|
Consolidated:
|
|
|
|
|
|
Revenue
|
$
|
60,906
|
|
|
$
|
58,363
|
|
|
$
|
58,232
|
|
Long-lived assets
|
$
|
25,151
|
|
|
$
|
24,024
|
|
|
$
|
22,007
|
|
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, 2016
,
2015
or
2014
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. INCOME TAXES
The income tax expense (benefit) for the years ended
December 31
consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
U.S. Federal
|
$
|
1,338
|
|
|
$
|
1,634
|
|
|
$
|
932
|
|
U.S. State and Local
|
67
|
|
|
88
|
|
|
103
|
|
Non-U.S.
|
177
|
|
|
236
|
|
|
185
|
|
Total Current
|
1,582
|
|
|
1,958
|
|
|
1,220
|
|
Deferred:
|
|
|
|
|
|
U.S. Federal
|
103
|
|
|
469
|
|
|
427
|
|
U.S. State and Local
|
31
|
|
|
65
|
|
|
(11
|
)
|
Non-U.S.
|
(11
|
)
|
|
6
|
|
|
(31
|
)
|
Total Deferred
|
123
|
|
|
540
|
|
|
385
|
|
Total Income Tax Expense
|
$
|
1,705
|
|
|
$
|
2,498
|
|
|
$
|
1,605
|
|
Income before income taxes includes the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
4,322
|
|
|
$
|
6,348
|
|
|
$
|
3,819
|
|
Non-U.S.
|
814
|
|
|
994
|
|
|
818
|
|
Total Income Before Income Taxes:
|
$
|
5,136
|
|
|
$
|
7,342
|
|
|
$
|
4,637
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Statutory U.S. federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
U.S. state and local income taxes (net of federal benefit)
|
1.5
|
|
|
1.7
|
|
|
1.2
|
|
Non-U.S. tax rate differential
|
(2.4
|
)
|
|
(1.2
|
)
|
|
(2.4
|
)
|
Nondeductible/nontaxable items
|
0.8
|
|
|
0.2
|
|
|
1.3
|
|
U.S. federal tax credits
|
(1.2
|
)
|
|
(1.3
|
)
|
|
(1.5
|
)
|
Other
|
(0.5
|
)
|
|
(0.4
|
)
|
|
1.0
|
|
Effective income tax rate
|
33.2
|
%
|
|
34.0
|
%
|
|
34.6
|
%
|
Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions we operate in and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year.
Our effective tax rate decreased to
33.2%
in
2016
, compared with
34.0%
in
2015
and
34.6%
in 2014, primarily due to the effects of the aforementioned recurring factors and the following discrete tax items:
2016 Discrete Items
In the fourth quarter of 2016, we recognized an income tax benefit of
$978
million related to pre-tax mark-to-market losses of
$2.651
billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average statutory tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
2015 Discrete Items
During the third quarter of 2015 and after the filing of our annual federal tax returns, we reconciled our deferred tax balances and identified adjustments to be made with respect to prior years’ deferred tax balances. The adjustments resulted in a reduction of income tax expense of $
66
million.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with our acquisition of Coyote Logistics (see
note 7
), we distributed $
500
million of cash held by a Canadian subsidiary to its U.S. parent during the fourth quarter of 2015. As a result of the distribution, we recorded additional net income tax expense of $
28
million.
In the fourth quarter of 2015, we recognized an income tax benefit of $
39
million related to pre-tax mark-to-market losses of $
118
million on our pension and postretirement defined benefit plans. This income tax benefit was generated at a lower average statutory tax rate than our U.S. federal statutory tax rate because it was due, in part, to non-U.S. benefit plans.
Other favorable rate impacting items in 2015 include: resolution of several U.S. state and local tax matters; the extension of favorable U.S. federal tax provisions associated with the Protecting Americans from Tax Hikes Act of 2015 related to research and development tax credits and work opportunity tax credits; and the execution of two bilateral advance pricing agreements. These agreements established intercompany transfer pricing arrangements between the U.S. and certain non-U.S. jurisdictions related to our small package operations for tax years 2010 through 2019.
2014 Discrete Items
In 2014, we recorded a $
415
million tax benefit related to a pre-tax charge of $
1.102
billion for certain health and welfare plan changes (see note 5). This income tax benefit was generated at a higher average statutory tax rate than our U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
In the fourth quarter of 2014, we recognized an income tax benefit of $
392
million related to pre-tax mark-to-market losses of $
1.062
billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average statutory tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
Other Items
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 $
21
, $
25
and $
21
million for
2016
,
2015
, and
2014
, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income tax assets and liabilities are comprised of the following at
December 31
(in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Fixed assets and capitalized software
|
$
|
(4,782
|
)
|
|
$
|
(4,776
|
)
|
Other
|
(756
|
)
|
|
(699
|
)
|
Deferred tax liabilities
|
(5,538
|
)
|
|
(5,475
|
)
|
|
|
|
|
Pension and postretirement benefits
|
4,236
|
|
|
3,915
|
|
Loss and credit carryforwards
|
229
|
|
|
261
|
|
Insurance reserves
|
733
|
|
|
730
|
|
Stock compensation
|
297
|
|
|
256
|
|
Other
|
681
|
|
|
650
|
|
Deferred tax assets
|
6,176
|
|
|
5,812
|
|
Deferred tax assets valuation allowance
|
(159
|
)
|
|
(197
|
)
|
Deferred tax asset (net of valuation allowance)
|
6,017
|
|
|
5,615
|
|
|
|
|
|
Net deferred tax asset
|
$
|
479
|
|
|
$
|
140
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
Deferred tax assets
|
$
|
591
|
|
|
$
|
255
|
|
Deferred tax liabilities
|
(112
|
)
|
|
(115
|
)
|
Net deferred tax asset
|
$
|
479
|
|
|
$
|
140
|
|
The valuation allowance changed by $
(38)
, $
(11)
and $
(43)
million during the years ended
December 31, 2016
,
2015
and
2014
, respectively.
We have a U.S. federal capital loss carryforward of $
33
million as of December 31, 2016 which expires December 31, 2021. In addition, we have U.S. state and local operating loss and credit carryforwards as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
U.S. state and local operating loss carryforwards
|
$
|
603
|
|
|
$
|
894
|
|
U.S. state and local credit carryforwards
|
$
|
70
|
|
|
$
|
53
|
|
The U.S. state and local operating loss carryforwards expire at varying dates through
2036
. The U.S. state and local credits can be carried forward for periods ranging from
three years
to indefinitely. We also have non-U.S. loss carryforwards of $
479
million as of
December 31, 2016
, 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
$5.504 billion
at December 31, 2016. 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity related to our unrecognized tax benefits (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
Interest
|
|
Penalties
|
Balance at January 1, 2014
|
$
|
191
|
|
|
$
|
40
|
|
|
$
|
4
|
|
Additions for tax positions of the current year
|
15
|
|
|
—
|
|
|
—
|
|
Additions for tax positions of prior years
|
51
|
|
|
13
|
|
|
—
|
|
Reductions for tax positions of prior years for:
|
|
|
|
|
|
Changes based on facts and circumstances
|
(74
|
)
|
|
(8
|
)
|
|
—
|
|
Settlements during the period
|
(10
|
)
|
|
(2
|
)
|
|
—
|
|
Lapses of applicable statute of limitations
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Balance at December 31, 2014
|
172
|
|
|
42
|
|
|
3
|
|
Additions for tax positions of the current year
|
24
|
|
|
—
|
|
|
—
|
|
Additions for tax positions of prior years
|
45
|
|
|
21
|
|
|
3
|
|
Reductions for tax positions of prior years for:
|
|
|
|
|
|
Changes based on facts and circumstances
|
(85
|
)
|
|
(8
|
)
|
|
—
|
|
Settlements during the period
|
(6
|
)
|
|
(2
|
)
|
|
—
|
|
Lapses of applicable statute of limitations
|
(2
|
)
|
|
—
|
|
|
—
|
|
Balance at December 31, 2015
|
148
|
|
|
53
|
|
|
6
|
|
Additions for tax positions of the current year
|
17
|
|
|
—
|
|
|
—
|
|
Additions for tax positions of prior years
|
20
|
|
|
10
|
|
|
—
|
|
Reductions for tax positions of prior years for:
|
|
|
|
|
|
Changes based on facts and circumstances
|
(41
|
)
|
|
(13
|
)
|
|
—
|
|
Settlements during the period
|
—
|
|
|
—
|
|
|
—
|
|
Lapses of applicable statute of limitations
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2016
|
$
|
144
|
|
|
$
|
50
|
|
|
$
|
6
|
|
The total amount of gross unrecognized tax benefits as of
December 31, 2016
,
2015
and
2014
that, if recognized, would affect the effective tax rate were $
142
, $
147
and $
166
million, respectively. Our continuing policy 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
2013
.
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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
|
Net income attributable to common shareowners
|
$
|
3,431
|
|
|
$
|
4,844
|
|
|
$
|
3,032
|
|
Denominator:
|
|
|
|
|
|
Weighted-average shares
|
878
|
|
|
896
|
|
|
913
|
|
Deferred compensation obligations
|
1
|
|
|
1
|
|
|
1
|
|
Vested portion of restricted shares
|
4
|
|
|
4
|
|
|
2
|
|
Denominator for basic earnings per share
|
883
|
|
|
901
|
|
|
916
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
Restricted performance units
|
3
|
|
|
4
|
|
|
7
|
|
Stock options
|
1
|
|
|
1
|
|
|
1
|
|
Denominator for diluted earnings per share
|
887
|
|
|
906
|
|
|
924
|
|
Basic Earnings Per Share
|
$
|
3.89
|
|
|
$
|
5.38
|
|
|
$
|
3.31
|
|
Diluted Earnings Per Share
|
$
|
3.87
|
|
|
$
|
5.35
|
|
|
$
|
3.28
|
|
Diluted earnings per share for the years ended
December 31, 2016
,
2015
and
2014
exclude the effect of
0.2
,
0.2
and
0.1
million shares, respectively, of common stock that may be issued upon the exercise of employee stock options because such effect would be antidilutive.
NOTE 15. 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 by monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.
We have agreements with all of our active counterparties (covering the majority of our derivative positions) containing early termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of derivatives associated with those counterparties. Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. At
December 31, 2016
and
2015
, we held cash collateral of $
575
and $
717
million, respectively, under these agreements; this collateral is included in "cash and cash equivalents" on the consolidated balance sheets and its use by UPS is not restricted.
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 credit rating. The amount of collateral required would be determined by the net fair value of the associated derivatives with each counterparty. At December 31, 2016 and 2015,
no
collateral was required to be posted with any of our counterparties; however, the aggregate fair value of instruments not covered by the zero threshold bilateral collateral provisions that were in a net liability position was $
10
million at December 31, 2016.
We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and future 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 have designated 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, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with foreign currency option and forward 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 investment income and other when the underlying transactions are subject to currency remeasurement.
We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of foreign denominated debt as the hedging instrument allows the debt to be remeasured to cumulative translation adjustment within AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedging is recognized as a component of investment income and other. Balances in the cumulative translation adjustment accounts remain until the sale or liquidation of the foreign entity.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments 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 date and maturity date 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 the majority of our 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 swaps 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, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Currency Hedges:
|
|
|
|
|
|
Euro
|
EUR
|
|
3,702
|
|
|
3,750
|
|
British Pound Sterling
|
GBP
|
|
1,380
|
|
|
1,140
|
|
Canadian Dollar
|
CAD
|
|
1,053
|
|
|
177
|
|
Indian Rupee
|
INR
|
|
76
|
|
|
—
|
|
Mexican Peso
|
MXN
|
|
—
|
|
|
3,863
|
|
Japanese Yen
|
JPY
|
|
3,972
|
|
|
20,000
|
|
Singapore Dollar
|
SGD
|
|
32
|
|
|
—
|
|
|
|
|
|
|
|
Interest Rate Hedges:
|
|
|
|
|
|
Fixed to Floating Interest Rate Swaps
|
USD
|
|
5,799
|
|
|
5,799
|
|
Floating to Fixed Interest Rate Swaps
|
USD
|
|
778
|
|
|
778
|
|
|
|
|
|
|
|
Investment Market Price Hedges:
|
|
|
|
|
|
Marketable Securities
|
EUR
|
|
76
|
|
|
496
|
|
As of
December 31, 2016
, we had no outstanding commodity hedge positions.
The maximum term over which we are hedging exposures to the variability of cash flow is
16
years.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet Recognition
The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have been recognized, and the related fair values of those derivatives as of
December 31, 2016
and
2015
(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.
We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded on our consolidated balance sheets. The columns labeled "net amounts if right of offset had been applied" indicate the potential net fair value positions by type of contract and location on the consolidated balance sheets had we elected to apply the right of offset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Presented in
Consolidated Balance Sheets
|
|
Net Amounts if Right of
Offset had been Applied
|
Asset Derivatives
|
Balance Sheet Location
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
$
|
176
|
|
|
$
|
408
|
|
|
$
|
176
|
|
|
$
|
408
|
|
Foreign exchange contracts
|
Other non-current assets
|
|
131
|
|
|
92
|
|
|
126
|
|
|
92
|
|
Interest rate contracts
|
Other non-current assets
|
|
137
|
|
|
204
|
|
|
119
|
|
|
185
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
1
|
|
|
2
|
|
|
1
|
|
|
—
|
|
Investment market price contracts
|
Other current assets
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Interest rate contracts
|
Other non-current assets
|
|
42
|
|
|
57
|
|
|
40
|
|
|
53
|
|
Total Asset Derivatives
|
|
|
$
|
487
|
|
|
$
|
768
|
|
|
$
|
462
|
|
|
$
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Presented in
Consolidated Balance Sheets
|
|
Net Amounts if Right of
Offset had been Applied
|
Liability Derivatives
|
Balance Sheet Location
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Derivatives Designated As Hedges:
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
Other current liabilities
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Foreign exchange contracts
|
Other non-current liabilities
|
|
6
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
21
|
|
|
19
|
|
|
3
|
|
|
—
|
|
Derivatives Not Designated As Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current liabilities
|
|
—
|
|
|
12
|
|
|
—
|
|
|
10
|
|
Interest rate contracts
|
Other current liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investment market price contracts
|
Other current liabilities
|
|
10
|
|
|
9
|
|
|
10
|
|
|
4
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
7
|
|
|
13
|
|
|
5
|
|
|
9
|
|
Total Liability Derivatives
|
|
|
$
|
45
|
|
|
$
|
53
|
|
|
$
|
20
|
|
|
$
|
23
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Statement and AOCI Recognition
The following table indicates the amount of gains and losses that have been recognized in AOCI within "unrealized gain (loss) on cash flow hedges" for the years ended
December 31, 2016
and
2015
for those derivatives designated as cash flow hedges (in millions):
|
|
|
|
|
|
|
|
|
|
Derivative Instruments in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on
Derivative (Effective Portion)
|
|
2016
|
|
2015
|
Interest rate contracts
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
Foreign exchange contracts
|
|
198
|
|
|
275
|
|
Total
|
|
$
|
199
|
|
|
$
|
274
|
|
As of
December 31, 2016
, $
92
million of pre-tax gains 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, 2017
. 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, 2016
,
2015
and
2014
.
The following table indicates the amount of gains and losses that have been recognized in AOCI within "foreign currency translation gain (loss)" for the years ended
December 31, 2016
and
2015
for those instruments designated as net investment hedges (in millions):
|
|
|
|
|
|
|
|
|
|
Non-derivative Instruments in Net Investment Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on
Debt (Effective Portion)
|
|
2016
|
|
2015
|
Foreign denominated debt
|
|
$
|
119
|
|
|
$
|
(33
|
)
|
Total
|
|
$
|
119
|
|
|
$
|
(33
|
)
|
The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging relationships was immaterial for the years ended
December 31, 2016
,
2015
and
2014
.
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, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
in Fair Value Hedging
Relationships
|
|
Location of
Gain (Loss)
Recognized in
Income
|
|
Amount of Gain (Loss)
Recognized in Income
|
|
Hedged Items in
Fair Value Hedging
Relationships
|
|
Location of
Gain (Loss)
Recognized in
Income
|
|
Amount of Gain (Loss)
Recognized in Income
|
|
|
2016
|
|
2015
|
|
|
|
2016
|
|
2015
|
Interest rate contracts
|
|
Interest Expense
|
|
$
|
(71
|
)
|
|
$
|
(7
|
)
|
|
Fixed-Rate Debt
and Capital Leases
|
|
Interest Expense
|
|
$
|
71
|
|
|
$
|
7
|
|
Additionally, we maintain some interest rate swaps, foreign currency forwards, investment market price forwards and commodity contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic hedge of portions of our outstanding debt. 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 investment market price forward contracts are intended to provide an economic offset to fair value fluctuations of certain investments in marketable securities. These commodity contracts are intended to provide a short-term economic offset to fuel expense changes due to price fluctuations.
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 impact of changes in market valuation.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 forwards, interest rate swaps, investment market price and commodity contracts not designated as hedges for the years ended
December 31, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated in
Hedging Relationships
|
|
Location of Gain
(Loss) Recognized
in Income
|
|
Amount of Gain (Loss) Recognized in Income
|
|
|
2016
|
|
2015
|
Commodity contracts
|
|
Fuel Expense
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
Foreign exchange contracts
|
|
Other Operating Expenses
|
|
—
|
|
|
22
|
|
Foreign exchange contracts
|
|
Investment income and other
|
|
(145
|
)
|
|
43
|
|
Investment market price contracts
|
|
Investment income and other
|
|
(5
|
)
|
|
(5
|
)
|
Foreign exchange contracts
|
|
Interest Expense
|
|
—
|
|
|
(14
|
)
|
Interest rate contracts
|
|
Interest Expense
|
|
(8
|
)
|
|
(7
|
)
|
Total
|
|
|
|
$
|
(158
|
)
|
|
$
|
37
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
Our foreign currency, interest rate and investment market price 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, 2016
and
2015
by hedge type are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
2016
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
$
|
—
|
|
|
$
|
308
|
|
|
$
|
—
|
|
|
$
|
308
|
|
Interest Rate Contracts
|
|
—
|
|
|
179
|
|
|
—
|
|
|
179
|
|
Total
|
|
$
|
—
|
|
|
$
|
487
|
|
|
$
|
—
|
|
|
$
|
487
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
Investment Market Price Contracts
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Interest Rate Contracts
|
|
—
|
|
|
29
|
|
|
—
|
|
|
29
|
|
Total
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
2015
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
$
|
—
|
|
|
$
|
502
|
|
|
$
|
—
|
|
|
$
|
502
|
|
Investment Market Price Contracts
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Interest Rate Contracts
|
|
—
|
|
|
261
|
|
|
—
|
|
|
261
|
|
Total
|
|
$
|
—
|
|
|
$
|
768
|
|
|
$
|
—
|
|
|
$
|
768
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
Investment Market Price Contracts
|
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
Interest Rate Contracts
|
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
Total
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
53
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. 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
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
9,084
|
|
|
$
|
8,814
|
|
|
$
|
9,015
|
|
|
$
|
8,808
|
|
|
$
|
9,289
|
|
|
$
|
8,860
|
|
|
$
|
10,913
|
|
|
$
|
10,265
|
|
International Package
|
2,914
|
|
|
2,970
|
|
|
3,077
|
|
|
3,045
|
|
|
3,024
|
|
|
2,959
|
|
|
3,335
|
|
|
3,175
|
|
Supply Chain & Freight
|
2,420
|
|
|
2,193
|
|
|
2,537
|
|
|
2,242
|
|
|
2,615
|
|
|
2,418
|
|
|
2,683
|
|
|
2,614
|
|
Total revenue
|
14,418
|
|
|
13,977
|
|
|
14,629
|
|
|
14,095
|
|
|
14,928
|
|
|
14,237
|
|
|
16,931
|
|
|
16,054
|
|
Operating Profit (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic Package
|
1,102
|
|
|
1,024
|
|
|
1,233
|
|
|
1,201
|
|
|
1,252
|
|
|
1,258
|
|
|
(570
|
)
|
|
1,284
|
|
International Package
|
574
|
|
|
498
|
|
|
613
|
|
|
552
|
|
|
576
|
|
|
507
|
|
|
281
|
|
|
580
|
|
Supply Chain & Freight
|
147
|
|
|
151
|
|
|
192
|
|
|
207
|
|
|
206
|
|
|
219
|
|
|
(139
|
)
|
|
187
|
|
Total operating profit
|
1,823
|
|
|
1,673
|
|
|
2,038
|
|
|
1,960
|
|
|
2,034
|
|
|
1,984
|
|
|
(428
|
)
|
|
2,051
|
|
Net Income
|
$
|
1,131
|
|
|
$
|
1,026
|
|
|
$
|
1,269
|
|
|
$
|
1,230
|
|
|
$
|
1,270
|
|
|
$
|
1,257
|
|
|
$
|
(239
|
)
|
|
$
|
1,331
|
|
Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.27
|
|
|
$
|
1.13
|
|
|
$
|
1.43
|
|
|
$
|
1.37
|
|
|
$
|
1.44
|
|
|
$
|
1.40
|
|
|
$
|
(0.27
|
)
|
|
$
|
1.49
|
|
Diluted
|
$
|
1.27
|
|
|
$
|
1.12
|
|
|
$
|
1.43
|
|
|
$
|
1.35
|
|
|
$
|
1.44
|
|
|
$
|
1.39
|
|
|
$
|
(0.27
|
)
|
|
$
|
1.48
|
|
Operating profit for the quarter ended
December 31, 2016
was impacted by
a
mark-to-market loss of $
2.651
billion on our pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor (allocated as follows—U.S. Domestic Package $
1.908
billion, International Package $
425
million and Supply Chain & Freight $
318
million). This loss reduced fourth quarter net income by $
1.673
billion, and basic and diluted earnings per share by $
1.91
.
Operating profit for the quarter ended
December 31, 2015
was impacted by a mark-to-market loss of $
118
million on our pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor (allocated as follows—U.S. Domestic Package $
62
million, International Package $
44
million and Supply Chain & Freight $
12
million). This loss reduced net income by $
79
million, and basic and diluted earnings per share by $
0.09
.