NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Principles of Consolidation
In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of
March 31, 2018
, our results of operations for the
three
months ended
March 31, 2018
and
2017
, and cash flows for the
three
months ended
March 31, 2018
and
2017
. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any other period or the entire year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans for each three month period based on one quarter of the estimated annual expense.
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no material impact on our financial position or results of operations.
Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of
March 31, 2018
. The fair values of our investment securities are disclosed in note
5
, our recognized multiemployer pension withdrawal liabilities in note
7
, our short and long-term debt in note
9
and our derivative instruments in note
14
. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.
Accounting Estimates
The preparation of the accompanying interim, unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best information and actual results could differ materially from those estimates.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2
.
RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services ("
Revenue from Contracts with Customers")
. The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner depicting the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued a number of updates to this standard. Effective January 1, 2018, we adopted the requirements of this ASU using the full retrospective method. See note
3
for required disclosures pertaining to the new ASU.
In November 2016, the FASB issued an ASU that is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows ("
Restricted Cash")
. As a result of this update, restricted cash is included within cash and cash equivalents on our statements of consolidated cash flows. Effective January 1, 2018, we adopted the requirements of this ASU retrospectively.
In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost ("
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost")
. The update requires employers to report the current service cost component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented separately from service cost and outside of income from operations. As a result of this update, the net amount of interest cost, prior service cost and expected return on plan assets is now presented as other income. Effective January 1, 2018, we adopted the requirements of this ASU retrospectively, as required.
We have recast our consolidated financial statements from amounts previously reported due to the adoption of new revenue recognition, pension and restricted cash standards. Impacted consolidated balance sheet line items, which reflect the adoption of the new ASUs, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
As previously reported
|
|
Adjustments (a)
|
|
Adjustments (b)
|
|
Adjustments (c)
|
|
As Recast
|
Assets:
|
|
|
|
|
|
|
|
|
|
Other current assets
|
$
|
1,133
|
|
|
$
|
170
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,303
|
|
Total current assets
|
15,548
|
|
|
170
|
|
|
—
|
|
|
—
|
|
|
15,718
|
|
Deferred income tax assets
|
265
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
266
|
|
Total Assets
|
$
|
45,403
|
|
|
$
|
171
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,574
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
3,872
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,934
|
|
Accrued wages and withholdings
|
2,521
|
|
|
87
|
|
|
—
|
|
|
—
|
|
|
2,608
|
|
Other current liabilities
(1)
|
905
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
934
|
|
Total current liabilities
|
12,708
|
|
|
178
|
|
|
—
|
|
|
—
|
|
|
12,886
|
|
Deferred income tax liabilities
|
757
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
756
|
|
Shareowners' Equity:
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
5,858
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
5,852
|
|
Total Shareowners' Equity
|
1,030
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
1,024
|
|
Total Liabilities and Shareowners' Equity
|
$
|
45,403
|
|
|
$
|
171
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,574
|
|
(1) The caption "Other current liabilities" was presented separately from "Hedge margin liabilities" of
$17 million
in the Form 10-K at December 31, 2017. These captions have been collapsed in the consolidated balance sheets as of March 31, 2018 and December 31, 2017 included within this Form 10-Q.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated statement of operations, which reflects the adoption of the new ASUs, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
As previously reported
|
|
Adjustments (a)
|
|
Adjustments (b)
|
|
Adjustments (c)
|
|
As Recast
|
Revenue
|
$
|
15,315
|
|
|
$
|
195
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,510
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
8,131
|
|
|
—
|
|
|
180
|
|
|
—
|
|
|
8,311
|
|
Repairs and maintenance
|
390
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
390
|
|
Depreciation and amortization
|
554
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
554
|
|
Purchased Transportation
|
2,366
|
|
|
179
|
|
|
—
|
|
|
—
|
|
|
2,545
|
|
Fuel
|
621
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
621
|
|
Other occupancy
|
299
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
299
|
|
Other expenses
|
1,170
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
1,173
|
|
Total Operating Expenses
|
13,531
|
|
|
182
|
|
|
180
|
|
|
—
|
|
|
13,893
|
|
Operating Profit
|
1,784
|
|
|
13
|
|
|
(180
|
)
|
|
—
|
|
|
1,617
|
|
Other Income and (Expense):
|
|
|
|
|
|
|
|
|
|
Investment income and other
|
15
|
|
|
—
|
|
|
180
|
|
|
—
|
|
|
195
|
|
Interest expense
|
(102
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(102
|
)
|
Total Other Income and (Expense)
|
(87
|
)
|
|
—
|
|
|
180
|
|
|
—
|
|
|
93
|
|
Income Before Income Taxes
|
1,697
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
1,710
|
|
Income Tax Expense
|
539
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
544
|
|
Net Income
|
$
|
1,158
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,166
|
|
Basic earnings per share
|
$
|
1.32
|
|
|
$
|
0.01
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.33
|
|
Diluted earnings per share
|
$
|
1.32
|
|
|
$
|
0.01
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.33
|
|
(a) Recast to reflect the adoption of
Revenue from Contracts with Customers.
(b) Recast to reflect the adoption of
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
(c) Recast to reflect the adoption of
Restricted Cash.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited impacted consolidated statement of cash flows line items, which reflect the adoption of the new ASUs, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
As previously reported
|
|
Adjustments (a)
|
|
Adjustments (b)
|
|
Adjustments (c)
|
|
As Recast
|
Net Income
|
$
|
1,158
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,166
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
Deferred tax (benefit) expense
|
94
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
99
|
|
Other assets
|
397
|
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
383
|
|
Accounts payable
|
(675
|
)
|
|
2
|
|
|
—
|
|
|
—
|
|
|
(673
|
)
|
Accrued wages and withholdings
|
(35
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
(34
|
)
|
Other liabilities
|
(272
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(274
|
)
|
Cash flows from operating activities
|
239
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
239
|
|
Purchase of marketable securities
|
(519
|
)
|
|
—
|
|
|
—
|
|
|
10
|
|
|
(509
|
)
|
Net cash used in investing activities
|
(920
|
)
|
|
—
|
|
|
—
|
|
|
10
|
|
|
(910
|
)
|
Net decrease in cash, cash equivalents and restricted cash
|
(789
|
)
|
|
—
|
|
|
—
|
|
|
10
|
|
|
(779
|
)
|
Cash, cash equivalents and restricted cash at the beginning of period
|
3,476
|
|
|
—
|
|
|
—
|
|
|
445
|
|
|
3,921
|
|
Cash, cash equivalents and restricted cash at the end of period
|
$
|
2,687
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
455
|
|
|
$
|
3,142
|
|
(a) Recast to reflect the adoption of
Revenue from Contracts with Customers.
(b) Recast to reflect the adoption of
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
(c) Recast to reflect the adoption of
Restricted Cash.
In February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Effective January 1, 2018, we early-adopted this ASU and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. This resulted in a
$735 million
increase to retained earnings and a
$735 million
decrease to AOCI. Our current accounting policy for releasing income tax effects from other comprehensive income is based on a portfolio approach.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.
Accounting Standards Issued But Not Yet Effective
In August 2017, the FASB issued an ASU to enhance recognition of the economic results of hedging activities in the financial statements. In addition, this update makes certain targeted improvements to simplify the application of the hedge accounting guidance and increase transparency regarding the scope and results of hedging activities. The guidance will generally be applied prospectively and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In March 2017, the FASB issued an ASU to require the premium on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount would not be impacted by the proposed update. Under U.S. GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. Only in cases when an entity has a large number of similar securities is it allowed to consider estimates of principal prepayments. Amortization of the premium over the contractual life of the instrument can result in losses being recorded for the unamortized premium if the issuer exercises the call feature prior to maturity. The standard will be effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued an ASU to simplify the accounting for goodwill impairment. The update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard will be effective for us in the first quarter of 2020, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued an ASU that requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond twelve months. Although the distinction between operating and finance leases will continue to exist under the new standard, the recognition and measurement of expenses and cash flows will not change significantly from the current treatment. This new guidance requires modified retrospective application and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption on our consolidated financial position, results of operations, cash flows and related disclosures, as well as the impact of adoption on policies, practices and systems. Based on the preliminary evaluation of our lease portfolio, we believe the largest impact will be accounting for leases for real estate, as we have a large portfolio of leased properties. As of December 31, 2017, we had $
1.637
billion of future minimum operating lease commitments that are not currently recognized on our consolidated balance sheets. We expect material changes to our consolidated balance sheets as a result of the new standard.
Other accounting pronouncements issued, but not effective until after
March 31, 2018
, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3
.
REVENUE RECOGNITION
Revenue Recognition
Substantially all of our revenues are from contracts associated with the pick-up, transportation and delivery of packages and freight (referred to hereafter as “transportation services”), whether carried out by or arranged by UPS, both domestically and internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services to customers through our global network of company-owned and leased distribution centers and field stocking locations, both domestically and internationally.
Disaggregation of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
Next Day Air
|
|
$
|
1,784
|
|
|
$
|
1,665
|
|
Deferred
|
|
1,069
|
|
|
970
|
|
Ground
|
|
7,374
|
|
|
6,901
|
|
U.S. Domestic Package
|
|
$
|
10,227
|
|
|
$
|
9,536
|
|
|
|
|
|
|
Domestic
|
|
$
|
716
|
|
|
$
|
613
|
|
Export
|
|
2,672
|
|
|
2,337
|
|
Cargo & Other
|
|
145
|
|
|
124
|
|
International Package
|
|
$
|
3,533
|
|
|
$
|
3,074
|
|
|
|
|
|
|
Forwarding
|
|
$
|
1,605
|
|
|
$
|
1,266
|
|
Logistics
|
|
782
|
|
|
740
|
|
Freight
|
|
777
|
|
|
707
|
|
Other
|
|
189
|
|
|
187
|
|
Supply Chain & Freight
|
|
$
|
3,353
|
|
|
$
|
2,900
|
|
|
|
|
|
|
Consolidated revenue
|
|
$
|
17,113
|
|
|
$
|
15,510
|
|
We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis of revenue recognition in accordance with U.S. GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, the customer contracts with us to provide distinct services within a contract, such as transportation services of their goods. The vast majority of our contracts with customers for transportation services include only one performance obligation, the transportation services themselves. However, if a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In certain of our business units, such as Logistics, we sell customized customer-specific solutions in which we provide a significant service of integrating a complex set of tasks and components into a single capability (even if that single capability results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. In these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.
Satisfaction of Performance Obligations
We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to another. Further, if we were unable to complete delivery to the final location, another entity would not need to reperform the transportation service already performed.
As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost measure of progress for our package delivery contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including ancillary or accessorial fees and reductions for estimated customer incentives, are recorded proportionally as costs are incurred. Costs to fulfill include labor and other direct costs and an allocation of indirect costs. For our freight and freight forwarding contracts, an output method of progress based on time-in-transit is utilized as the timing of costs incurred does not best depict the transfer of control to the customer. In our Logistics business we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount to which we have a right to invoice the customer.
Variable Consideration
It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the transaction price. These variable amounts are generally awarded upon achievement of certain incentive tiers or performance metrics. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts of revenue, which may be reduced by incentives or other contract provisions, in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of anticipated customer spending and all information (historical, current and forecasted) that is reasonably available to us.
Contract Modifications
Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct services. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that add additional distinct goods or services are treated as separate contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services. These contract modifications will be accounted for prospectively as the remaining performance obligations are distinct.
Payment Terms
Under the typical payment terms of our customer contracts, the customer pays at periodic intervals (i.e., every 14 days, 30 days, 45 days, etc.) for shipments included on invoices received. Invoices are generated each week on the week-ending day, which is Saturday for the majority of our U.S. Domestic Package business, but could be another day depending on the business unit or the specific agreement with the customer. It is not customary business practice to extend payment terms past 90 days, and as such, we do not have a practice of including a significant financing component within our revenue contracts with customers.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principal vs. Agent Considerations
In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. U.S. GAAP requires us to evaluate whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model. Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. This required a change for certain of our Supply Chain & Freight businesses where previously revenue was reported net of associated purchased transportation costs. Revenue and the associated purchased transportation costs are now both reported on a gross basis within our statement of consolidated income.
Accounts Receivable, Net
Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when they are incurred, which requires us to make our best estimate of the probable losses inherent in our customer receivables at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, trends in customer payment frequency, and judgments about the probable effects of relevant observable data, including present economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk. Our total provision for doubtful accounts charged to expense before recoveries during the quarters ended March 31, 2018 and 2017 was
$12
and
$39 million
, respectively.
Contract Assets and Liabilities
Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e., packages have been delivered), and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.
Our contract liabilities consist of advance payments and billings in excess of revenue and deferred revenue. Advance payments and billings in excess of revenue represent payments received from our customers that will be earned over the contract term. Deferred revenue represents the amount of revenue due from customers related to in-transit shipments that has not yet been earned based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the advance payment will be earned. We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which typically occurs within a short window after period-end. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.
Contract assets related to in-transit packages were
$175
and
$170 million
at March 31, 2018 and December 31, 2017, respectively, net of deferred revenue related to in-transit packages of
$224
and
$174 million
at March 31, 2018 and December 31, 2017, respectively. Contract assets are included within "Other current assets" in the consolidated balance sheets. Contract liabilities related to advanced payments from customers were
$35
and
$31 million
at March 31, 2018 and December 31, 2017, respectively. Contract liabilities are included within "Other current liabilities" in the consolidated balance sheets.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4
.
STOCK-BASED COMPENSATION
We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units to eligible employees (restricted stock and stock units, restricted performance shares and performance units are herein referred to as "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date, and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
During the first quarter of
2018
, we granted Restricted Units under MIP to certain eligible management employees. Restricted Units granted under MIP generally vest over a
five
-year period with approximately
20%
of the award vesting on January 15th of each of the years following the grant date (except in the case of death or disability, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis (less estimated forfeitures) ratably over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs).
Based on the date that the eligible management population and performance targets were approved for MIP, we determined the award measurement date to be February 7,
2018
(for U.S.-based employees), March 1,
2018
(for management committee employees) and March 26,
2018
(for international-based employees); therefore, the Restricted Units awarded were valued for stock compensation expense purposes using the closing New York Stock Exchange price of
$111.91
,
$106.43
and
$103.70
on those dates, respectively.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under LTIP to certain eligible management employees. The performance targets are equally-weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareowner return ("RTSR") relative to a peer group of companies. These Restricted Units 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 established on the grant date.
For the two-thirds of the award related to ROIC and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these Restricted 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. We recognize the grant date fair value of this portion of the award as compensation expense (less estimated forfeitures) ratably over the vesting period.
There were no LTIP awards granted in the first quarter of 2018.
Based on the date that the eligible management population and performance targets were approved for the 2017 LTIP Award, we determined the award measurement date to be March 24, 2017; therefore, the target Restricted Units awarded for the ROIC and growth in currency-constant consolidated revenue portions of the award were valued for stock compensation expense using the closing New York Stock Exchange price of
$105.05
on that date.
The weighted-average assumptions used and the calculated weighted-average fair values of the RTSR portion of the LTIP awards granted in
2017
are as follows:
|
|
|
|
|
|
2017
|
Risk-free interest rate
|
1.46
|
%
|
Expected volatility
|
16.59
|
%
|
Weighted-average fair value of units granted
|
$
|
119.29
|
|
Share payout
|
113.55
|
%
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
There is no expected dividend yield as units earn dividend equivalents.
Non-Qualified Stock Options
During the first quarter of
2018
, we granted non-qualified stock option awards to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards generally vest over a
five
-year period with approximately
20%
of the award vesting at each anniversary date of the grant (except in the case of death or disability, in which case immediate vesting occurs). The options granted will expire
ten
years after the date of the grant. In the first quarter of
2018
, we granted
0.3
and
0.01
million stock options at a grant price of
$106.43
and
$104.45
, respectively, which is based on the closing New York Stock Exchange price on March 1, 2018 and March 22, 2018, respectively. In the first quarter of 2017, we granted
0.3
million stock options at a grant price of $
106.87
, which is based on the closing New York Stock Exchange price on March 1, 2017.
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the calculated weighted-average fair values of options granted in
2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Expected dividend yield
|
2.93
|
%
|
|
2.89
|
%
|
Risk-free interest rate
|
2.84
|
%
|
|
2.15
|
%
|
Expected life (in years)
|
7.5
|
|
|
7.5
|
|
Expected volatility
|
16.72
|
%
|
|
17.81
|
%
|
Weighted-average fair value of options granted
|
$
|
15.23
|
|
|
$
|
14.70
|
|
Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the three months ended
March 31, 2018
and
2017
was $
239
and $
212
million, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5
.
CASH AND INVESTMENTS
The following is a summary of marketable securities classified as trading and available-for-sale as of
March 31, 2018
and
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
March 31, 2018:
|
|
|
|
|
|
|
|
Current trading marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75
|
|
Equity Securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total trading marketable securities
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
Current available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
312
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
308
|
|
Mortgage and asset-backed debt securities
|
32
|
|
|
—
|
|
|
(1
|
)
|
|
31
|
|
Corporate debt securities
|
229
|
|
|
1
|
|
|
(2
|
)
|
|
228
|
|
U.S. state and local municipal debt securities
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
Non-U.S. government debt securities
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Total available-for-sale marketable securities
|
$
|
594
|
|
|
$
|
1
|
|
|
$
|
(7
|
)
|
|
$
|
588
|
|
|
|
|
|
|
|
|
|
Total current marketable securities
|
$
|
671
|
|
|
$
|
1
|
|
|
$
|
(7
|
)
|
|
$
|
665
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
December 31, 2017:
|
|
|
|
|
|
|
|
Current trading marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75
|
|
Carbon credit investments
(1)
|
77
|
|
|
16
|
|
|
—
|
|
|
93
|
|
Total trading marketable securities
|
$
|
152
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
168
|
|
|
|
|
|
|
|
|
|
Current available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
286
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
283
|
|
Mortgage and asset-backed debt securities
|
86
|
|
|
—
|
|
|
—
|
|
|
86
|
|
Corporate debt securities
|
201
|
|
|
1
|
|
|
(1
|
)
|
|
201
|
|
Equity securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Total available-for-sale marketable securities
|
$
|
584
|
|
|
$
|
1
|
|
|
$
|
(4
|
)
|
|
$
|
581
|
|
|
|
|
|
|
|
|
|
Total current marketable securities
|
$
|
736
|
|
|
$
|
17
|
|
|
$
|
(4
|
)
|
|
$
|
749
|
|
(1)
These investments are hedged with forward contracts that are not designated in hedging relationships. See Note 14 for offsetting statement of consolidated income impact.
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Investment Other-Than-Temporary Impairments
We have concluded that no material other-than-temporary impairment losses existed as of
March 31, 2018
. In making this determination, we considered the financial condition and prospects of the issuer, the magnitude of the losses compared with the investments’ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
Maturity Information
The amortized cost and estimated fair value of marketable securities at
March 31, 2018
, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Estimated
Fair Value
|
Due in one year or less
|
$
|
129
|
|
|
$
|
129
|
|
Due after one year through three years
|
434
|
|
|
429
|
|
Due after three years through five years
|
22
|
|
|
21
|
|
Due after five years
|
84
|
|
|
84
|
|
|
669
|
|
|
663
|
|
Equity and carbon credit investments
|
2
|
|
|
2
|
|
|
$
|
671
|
|
|
$
|
665
|
|
Non-Current Investments and Restricted Cash
Non-current investments and restricted cash is primarily associated with our self-insurance requirements. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in various marketable securities. Collateral provided is reflected in "Cash, cash equivalents and restricted cash" in the statements of consolidated cash flows. At
March 31, 2018
and
December 31, 2017
, we had $
282
and $
449
million in self-insurance investments and restricted cash, respectively.
We held a
$19 million
investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at
March 31, 2018
and
December 31, 2017
. The quarterly change in investment fair value is recognized in "Investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets, primarily real estate, of
$10
and $
15
million as of
March 31, 2018
and
December 31, 2017
, respectively.
The amounts described above are classified as “Non-Current Investments and Restricted Cash” in the consolidated balance sheets.
A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows is shown below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
March 31, 2017
|
Cash and cash equivalents
|
|
$
|
3,544
|
|
|
$
|
3,320
|
|
|
$
|
2,687
|
|
Restricted cash
|
|
282
|
|
|
449
|
|
|
455
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
3,826
|
|
|
$
|
3,769
|
|
|
$
|
3,142
|
|
Fair Value Measurements
Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “Other non-current investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were
7.92%
and
7.56%
as of
March 31, 2018
and
December 31, 2017
, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis.
The following table presents information about our investments measured at fair value on a recurring basis as of
March 31, 2018
and
December 31, 2017
, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balance
|
March 31, 2018:
|
|
|
|
|
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
308
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
308
|
|
Mortgage and asset-backed debt securities
|
—
|
|
|
31
|
|
|
—
|
|
|
31
|
|
Corporate debt securities
|
—
|
|
|
303
|
|
|
—
|
|
|
303
|
|
U.S. state and local municipal debt securities
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Equity securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
Total marketable securities
|
308
|
|
|
357
|
|
|
—
|
|
|
665
|
|
Other non-current investments
|
19
|
|
|
—
|
|
|
3
|
|
|
22
|
|
Total
|
$
|
327
|
|
|
$
|
357
|
|
|
$
|
3
|
|
|
$
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
283
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
283
|
|
Mortgage and asset-backed debt securities
|
|
|
|
86
|
|
|
—
|
|
|
86
|
|
Corporate debt securities
|
—
|
|
|
276
|
|
|
—
|
|
|
276
|
|
Equity securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
Carbon credit investments
|
93
|
|
|
—
|
|
|
—
|
|
|
93
|
|
Total marketable securities
|
376
|
|
|
373
|
|
|
—
|
|
|
749
|
|
Other non-current investments
|
19
|
|
|
—
|
|
|
6
|
|
|
25
|
|
Total
|
$
|
395
|
|
|
$
|
373
|
|
|
$
|
6
|
|
|
$
|
774
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the
three
months ended
March 31, 2018
and
2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Securities
|
|
Other
Non-Current
Investments
|
|
Total
|
Balance on January 1, 2018
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
6
|
|
Transfers into (out of) Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Net realized and unrealized gains (losses):
|
|
|
|
|
|
Included in earnings (in investment income and other)
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Included in accumulated other comprehensive income (pre-tax)
|
—
|
|
|
—
|
|
|
—
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
Balance on March 31, 2018
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Securities
|
|
Other
Non-Current
Investments
|
|
Total
|
Balance on January 1, 2017
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
13
|
|
Transfers into (out of) Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Net realized and unrealized gains (losses):
|
|
|
|
|
|
Included in earnings (in investment income and other)
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Included in accumulated other comprehensive income (pre-tax)
|
—
|
|
|
—
|
|
|
—
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
Balance on March 31, 2017
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
11
|
|
There were
no
transfers of investments between Level 1 and Level 2 during the
three
months ended
March 31, 2018
and
2017
.
|
|
|
|
|
|
|
Marketable
Securities
|
|
Other
Investments
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6
.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of
March 31, 2018
and
December 31, 2017
consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Vehicles
|
$
|
9,422
|
|
|
$
|
9,365
|
|
Aircraft
|
16,444
|
|
|
16,248
|
|
Land
|
1,782
|
|
|
1,582
|
|
Buildings
|
4,150
|
|
|
4,035
|
|
Building and leasehold improvements
|
4,049
|
|
|
3,934
|
|
Plant equipment
|
9,833
|
|
|
9,387
|
|
Technology equipment
|
1,956
|
|
|
1,907
|
|
Equipment under operating leases
|
—
|
|
|
29
|
|
Construction-in-progress
|
2,673
|
|
|
2,239
|
|
|
50,309
|
|
|
48,726
|
|
Less: Accumulated depreciation and amortization
|
(27,070
|
)
|
|
(26,608
|
)
|
|
$
|
23,239
|
|
|
$
|
22,118
|
|
We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor all other property, plant and equipment categories for any indicators that the carrying value of the assets may not be recoverable.
No
impairment charges on property, plant and equipment were recorded during the
three
months ended
March 31, 2018
and
2017
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7
.
EMPLOYEE BENEFIT PLANS
Company-Sponsored Benefit Plans
Information about net periodic benefit cost for our company-sponsored pension and postretirement benefit plans is as follows for the
three
months ended
March 31, 2018
and
2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Three Months Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
416
|
|
|
$
|
390
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
16
|
|
|
$
|
15
|
|
Interest cost
|
449
|
|
|
462
|
|
|
26
|
|
|
28
|
|
|
12
|
|
|
10
|
|
Expected return on assets
|
(801
|
)
|
|
(712
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(20
|
)
|
|
(16
|
)
|
Amortization of prior service cost
|
49
|
|
|
48
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
113
|
|
|
$
|
188
|
|
|
$
|
33
|
|
|
$
|
35
|
|
|
$
|
8
|
|
|
$
|
9
|
|
During the first
three
months of
2018
, we contributed $
24
and
$20
million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We currently expect to contribute
$74
and
$59
million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively. Subject to market conditions, we continually evaluate opportunities for additional discretionary pension contributions.
The components of net periodic benefit cost other than current service cost are presented within “Investment income and other” in the statements of consolidated income.
Plan Amendments and Curtailments
In the quarter ended June 30, 2017, we amended the UPS Retirement Plan and the UPS Excess Coordinating Benefit Plan to cease accruals of additional benefits for future service and compensation for non-union participants effective January 1, 2023. We remeasured plan assets and pension benefit obligations for the affected pension plans as of June 30, 2017, resulting in a net actuarial gain of
$569
million. This reflected a curtailment gain of
$1.525
billion resulting from the benefit plan changes that was partially offset by net actuarial losses of
$956
million, driven by a reduction of approximately
32
basis points in the discount rate compared to December 31, 2016, offset by actual assets returns approximately
275
basis points above our expected return as of the remeasurement date. The net curtailment gain reduced the actuarial loss recorded in "Accumulated other comprehensive loss" in the equity section of the consolidated balance sheet. As actuarial losses were within the corridor (defined as
10%
of the greater of the fair value of plan assets and the plan's projected benefit obligation), there was no impact to the statement of consolidated income as a result of this remeasurement.
Effective June 23, 2017, the Company amended the UPS 401(k) Savings Plan so that non-union employees who currently participate in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, earn a UPS Retirement Contribution beginning January 1, 2023. UPS will contribute
5%
to
8%
of eligible compensation to the UPS 401(k) Savings Plan based on years of vesting service. The amendment also provides for transition contributions for certain
participants. There was no impact to the statement of consolidated income for the quarter ended March 31, 2018 as a result of the above changes.
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 on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of
March 31, 2018
and
December 31, 2017
we had $
857
and
$859 million
, respectively, recorded in "Other non-current liabilities," as well as
$8 million
as of
March 31, 2018
and
December 31, 2017
, recorded in "Other current liabilities," on our consolidated balance sheets associated with our previous withdrawal from a multiemployer pension plan. This liability is payable in equal monthly installments over a remaining term of approximately
45
years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of this withdrawal liability as of
March 31, 2018
and
December 31, 2017
was $
868
and $
921 million
, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.
UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the plan and fully funded our allocable share 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 the 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 that 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 the 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 benefit 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 and 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 of 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 multiemployer 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, 2017 did not incorporate this solution. However, if a future change in law resulted in an obligation to provide coordinating benefits under the UPS/IBT Plan, it may be a significant event, and may require us to remeasure the plan assets and projected benefit obligation of the UPS/IBT Plan at the date the law is enacted.
Our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will submit 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, 2017, was 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 the 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
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Collective Bargaining Agreements
As of December 31, 2017, we had approximately
280,000
employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. These agreements run through July 31, 2018. We have approximately
2,700
pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which runs through September 1, 2021. 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
3,100
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.
NOTE
8
.
GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of
March 31, 2018
and
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic
Package
|
|
International
Package
|
|
Supply Chain &
Freight
|
|
Consolidated
|
December 31, 2017:
|
$
|
715
|
|
|
$
|
435
|
|
|
$
|
2,722
|
|
|
$
|
3,872
|
|
Acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Currency / Other
|
—
|
|
|
3
|
|
|
18
|
|
|
21
|
|
March 31, 2018:
|
$
|
715
|
|
|
$
|
438
|
|
|
$
|
2,740
|
|
|
$
|
3,893
|
|
The change in goodwill for both the International Package and Supply Chain & Freight segments was primarily due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
The following is a summary of intangible assets as of
March 31, 2018
and
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
March 31, 2018:
|
|
|
|
|
|
Capitalized software
|
$
|
3,402
|
|
|
$
|
(2,357
|
)
|
|
$
|
1,045
|
|
Licenses
|
114
|
|
|
(17
|
)
|
|
97
|
|
Franchise rights
|
146
|
|
|
(99
|
)
|
|
47
|
|
Customer relationships
|
777
|
|
|
(174
|
)
|
|
603
|
|
Trade name
|
200
|
|
|
—
|
|
|
200
|
|
Trademarks, patents and other
|
68
|
|
|
(35
|
)
|
|
33
|
|
Total Intangible Assets, Net
|
$
|
4,707
|
|
|
$
|
(2,682
|
)
|
|
$
|
2,025
|
|
December 31, 2017:
|
|
|
|
|
|
Capitalized software
|
$
|
3,273
|
|
|
$
|
(2,310
|
)
|
|
$
|
963
|
|
Licenses
|
114
|
|
|
(10
|
)
|
|
104
|
|
Franchise rights
|
144
|
|
|
(97
|
)
|
|
47
|
|
Customer relationships
|
776
|
|
|
(160
|
)
|
|
616
|
|
Trade name
|
200
|
|
|
—
|
|
|
200
|
|
Trademarks, patents and other
|
71
|
|
|
(37
|
)
|
|
34
|
|
Total Intangible Assets, Net
|
$
|
4,578
|
|
|
$
|
(2,614
|
)
|
|
$
|
1,964
|
|
As of
March 31, 2018
, we had a trade name with a carrying value of $
200
million and licenses with a carrying value of $
5
million, which are deemed to be indefinite-lived intangible assets and are included in the table above.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9
.
DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt as of
March 31, 2018
and
December 31, 2017
consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Amount
|
|
|
|
Carrying Value
|
|
|
Maturity
|
|
2018
|
|
2017
|
Commercial paper
|
$
|
2,622
|
|
|
2018
|
|
$
|
2,622
|
|
|
$
|
3,203
|
|
Fixed-rate senior notes:
|
|
|
|
|
|
|
|
5.500% senior notes
|
750
|
|
|
2018
|
|
—
|
|
|
751
|
|
5.125% senior notes
|
1,000
|
|
|
2019
|
|
1,010
|
|
|
1,019
|
|
3.125% senior notes
|
1,500
|
|
|
2021
|
|
1,526
|
|
|
1,549
|
|
2.050% senior notes
|
700
|
|
|
2021
|
|
697
|
|
|
696
|
|
2.450% senior notes
|
1,000
|
|
|
2022
|
|
961
|
|
|
979
|
|
2.350% senior notes
|
600
|
|
|
2022
|
|
597
|
|
|
597
|
|
2.500% senior note
|
1,000
|
|
|
2023
|
|
993
|
|
|
992
|
|
2.800% senior note
|
500
|
|
|
2024
|
|
496
|
|
|
495
|
|
2.400% senior note
|
500
|
|
|
2026
|
|
497
|
|
|
497
|
|
3.050% senior note
|
1,000
|
|
|
2027
|
|
991
|
|
|
990
|
|
6.200% senior notes
|
1,500
|
|
|
2038
|
|
1,482
|
|
|
1,482
|
|
4.875% senior notes
|
500
|
|
|
2040
|
|
490
|
|
|
489
|
|
3.625% senior notes
|
375
|
|
|
2042
|
|
368
|
|
|
368
|
|
3.400% senior notes
|
500
|
|
|
2046
|
|
491
|
|
|
491
|
|
3.750 % senior notes
|
1,150
|
|
|
2047
|
|
1,136
|
|
|
1,135
|
|
Floating-rate senior notes:
|
|
|
|
|
|
|
|
|
|
|
Floating-rate senior notes
|
350
|
|
|
2021
|
|
349
|
|
|
348
|
|
Floating-rate senior notes
|
400
|
|
|
2022
|
|
398
|
|
|
398
|
|
Floating-rate senior notes
|
500
|
|
|
2023
|
|
498
|
|
|
496
|
|
Floating-rate senior notes
|
1,043
|
|
|
2049-2067
|
|
1,031
|
|
|
1,032
|
|
8.375% Debentures:
|
|
|
|
|
|
|
|
8.375% debentures
|
424
|
|
|
2020
|
|
441
|
|
|
447
|
|
8.375% debentures
|
276
|
|
|
2030
|
|
282
|
|
|
282
|
|
Pound Sterling notes:
|
|
|
|
|
|
|
|
5.500% notes
|
93
|
|
|
2031
|
|
88
|
|
|
84
|
|
5.125% notes
|
640
|
|
|
2050
|
|
610
|
|
|
586
|
|
Euro senior notes:
|
|
|
|
|
|
|
|
0.375% notes
|
862
|
|
|
2023
|
|
856
|
|
|
832
|
|
1.625% notes
|
862
|
|
|
2025
|
|
856
|
|
|
833
|
|
1.000% notes
|
616
|
|
|
2028
|
|
612
|
|
|
595
|
|
1.500% notes
|
616
|
|
|
2032
|
|
611
|
|
|
594
|
|
Floating-rate senior notes
|
616
|
|
|
2020
|
|
614
|
|
|
598
|
|
Canadian senior notes:
|
|
|
|
|
|
|
|
2.125% notes
|
580
|
|
|
2024
|
|
577
|
|
|
593
|
|
Capital lease obligations
|
580
|
|
|
2018-3005
|
|
580
|
|
|
500
|
|
Facility notes and bonds
|
320
|
|
|
2029-2045
|
|
319
|
|
|
319
|
|
Other debt
|
13
|
|
|
2018-2022
|
|
13
|
|
|
19
|
|
Total debt
|
$
|
23,988
|
|
|
|
|
23,092
|
|
|
24,289
|
|
Less: Current maturities
|
|
|
|
|
(2,683
|
)
|
|
(4,011
|
)
|
Long-term debt
|
|
|
|
|
$
|
20,409
|
|
|
$
|
20,278
|
|
Commercial Paper
We are authorized to borrow up to $
10.0
billion under a U.S. commercial paper program and €
5.0
billion (in a variety of currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as of
March 31, 2018
: $
2.511
billion with an average interest rate of
1.73%
and €
90
million ($
111
million) with an average interest rate of -
0.43%
. As of
March 31, 2018
, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheet.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Debt Classification
We have classified certain floating-rate senior notes that are putable by the note holders as a long-term liability, due to our intent and ability to refinance the debt if the put option is exercised by the note holders.
Debt Repayments
On January 15, 2018, our $
750
million
5.500%
senior notes matured and were repaid in full.
Sources of Credit
We maintain
two
credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of
$4.5
billion, and expires on
March 22, 2019
. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus
0.50%
; and (3) LIBOR for a one month interest period plus
1.00%
, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of
0.10%
and a maximum rate of
0.75%
. The applicable margin for advances bearing interest based on the prime rate is
1.00%
below the applicable margin for LIBOR advances (but not lower than
0.00%
). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of
March 31, 2018
.
The second agreement provides revolving credit facilities of $
3.0
billion, and expires on
March 24, 2022
. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus
0.50%
; and (3) LIBOR for a one month interest period plus
1.00%
, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The minimum applicable margin rate is
0.10%
and the maximum applicable margin rate is
0.75%
per annum. The applicable margin for advances bearing interest based on the prime rate is
1.00%
below the applicable margin for LIBOR advances (but not less than
0.00%
). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of
March 31, 2018
.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of
March 31, 2018
and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to
10%
of net tangible assets. As of
March 31, 2018
, 10% of net tangible assets was equivalent to
$2.740
billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.
Fair Value of Debt
Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately $
23.968
and $
25.206
billion as of
March 31, 2018
and
December 31, 2017
, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10
.
LEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business activities.
Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious defense and will deny, liability in all litigation pending against us, including (except as otherwise noted herein) the matters described below, and we intend to defend vigorously each case. We have accrued for legal claims when, and to the extent that, amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.
For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible loss or range of loss.
Judicial Proceedings
We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with these matters would have a material adverse effect on our financial condition, results of operations or liquidity.
UPS and our subsidiary The UPS Store, Inc. are defendants in Morgate v. The UPS Store, Inc. et al., an action in the Los Angeles Superior Court brought on behalf of a certified class of all franchisees who chose to rebrand their Mail Boxes Etc. franchises to The UPS Store in March 2003. Plaintiff alleges that UPS and The UPS Store, Inc. misrepresented and omitted facts to the class about the market tests that were conducted before offering the class the choice of whether to rebrand to The UPS Store. Defendants’ motion to decertify the class was granted in August 2017. The plaintiff has filed a notice of appeal, and further proceedings in the trial court are stayed pending resolution by the California Court of Appeal. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from the remaining aspects of this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present; and (3) plaintiff’s notice of appeal is pending. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. The Court granted summary judgment motions filed by UPS and FedEx, entered judgment in favor of UPS and FedEx, and dismissed the case. Plaintiff appealed to the Court of Appeals for the Ninth Circuit. In August 2017, the Ninth Circuit affirmed the District Court's order dismissing the case. AFMS filed a petition for rehearing in September 2017, which was denied. AFMS filed a Petition for Writ of Certiorari in the Supreme Court, which was denied on February 26, 2018. The Antitrust Division of the U.S. Department of Justice (“DOJ”) opened a civil investigation of our policies and practices for dealing with third-party negotiators. These matters are now concluded with no liability to UPS.
We are a defendant in Ryan Wright and Julia Zislin v. United Parcel Service Canada Ltd., an action brought on behalf of a certified class of customers in the Superior Court of Justice in Ontario, Canada. Plaintiffs filed suit in February 2007, alleging inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court in August 2011, when it dismissed plaintiffs' complaint under the Criminal Code and granted plaintiffs' complaint of inadequate disclosure. We appealed the Court's decision pertaining to inadequate disclosure in September 2011. In October 2017, we reached an agreement in principle to resolve the case for an immaterial amount. Final resolution of this matter is subject to the negotiation, execution and delivery of a settlement agreement and court approval.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern District of New York, arising from alleged shipments of cigarettes to New York State and City residents. The complaint asserted claims under various federal and state laws. The complaint also included a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. On March 24, 2017, the District Court issued an opinion and order finding liability against UPS on each of the plaintiffs’ causes of action. On May 25, 2017, the District Court issued a corrected opinion and order on liability and an order awarding the plaintiffs damages of $
9.4
million and penalties of $
237.6
million. An accrual of $
9.4
million with respect to the damages awarded by the court is included on our consolidated balance sheet at
March 31, 2018
. We estimate that the amount of losses could be up to $
247
million, plus interest; however, the amount of penalties ultimately payable, if any, is subject to a variety of complex factors and potential outcomes that remain to be determined in future legal proceedings. Consequently, we are unable to reasonably estimate a likely amount of loss within that range. We strongly disagree with the District Court’s analysis and conclusions, and have appealed to the United States Court of Appeals for the Second Circuit. UPS filed its opening brief with the Appellate Court in October 2017 the State and City of New York filed their brief on February 21, 2018. We expect oral argument will be scheduled during 2018.
Other Matters
In October 2015, the DOJ informed us of an industry-wide inquiry into the transportation of mail under the United States Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a Civil Investigative Demand seeking certain information relating to our contracts. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating with the DOJ. The Company is unable to predict what action, if any, might be taken in the future by any government authorities as a result of their investigation. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In August 2016, Spain’s National Markets and Competition Commission (“CNMC”) opened an investigation into
10
companies in the commercial delivery and parcel industry, including UPS, related to alleged agreements to allocate customers. In May 2017, UPS received a Statement of Objections issued by the CNMC. In July 2017, UPS received a Proposed Decision from the CNMC. On March 8, 2018, the CNMC adopted a final decision, finding an infringement and imposing a fine on UPS of €
19.2
million. UPS will seek a suspension of the implementation of the decision (including payment of the fine) and intends to appeal the decision on the merits. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In February 2018 the Turkish competition authority opened an investigation into nine companies (including UPS) in the small package industry related to alleged customer allocations in violation of Turkish competition law. The investigation is in its early stages. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
We are a defendant in various other lawsuits that arose in the normal course of business. We do not believe that the eventual resolution of these other lawsuits (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material adverse effect on our financial condition, results of operations or liquidity.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11
.
SHAREOWNERS' EQUITY
Capital Stock, Additional Paid-In Capital and Retained Earnings
We maintain
two
classes of common stock, which are distinguished from each other primarily by their respective voting rights. Class A shares are entitled to
10
votes per share, whereas class B shares are entitled to
one
vote per share. Class A shares are primarily held by UPS employees and retirees, and these shares are fully convertible on a one-to-one basis into class B shares at any time. Class B shares are publicly traded on the New York Stock Exchange under the symbol “UPS”. Class A and B shares both have a
$0.01
par value, and as of
March 31, 2018
, there were
4.6
billion class A shares and
5.6
billion class B shares authorized to be issued. Additionally, there are
200
million preferred shares, with a
$0.01
par value, authorized to be issued. As of
March 31, 2018
,
no
preferred shares had been issued.
The following is a rollforward of our common stock, additional paid-in capital and retained earnings accounts for the
three
months ended
March 31, 2018
and
2017
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Class A Common Stock
|
|
|
|
|
|
|
|
Balance at beginning of period
|
173
|
|
|
$
|
2
|
|
|
180
|
|
|
$
|
2
|
|
Common stock purchases
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Stock award plans
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Common stock issuances
|
2
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Conversions of class A to class B common stock
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
Class A shares issued at end of period
|
174
|
|
|
$
|
2
|
|
|
180
|
|
|
$
|
2
|
|
Class B Common Stock
|
|
|
|
|
|
|
|
Balance at beginning of period
|
687
|
|
|
$
|
7
|
|
|
689
|
|
|
$
|
7
|
|
Common stock purchases
|
(1
|
)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
Conversions of class A to class B common stock
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Class B shares issued at end of period
|
689
|
|
|
$
|
7
|
|
|
689
|
|
|
$
|
7
|
|
Additional Paid-In Capital
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Stock award plans
|
|
|
20
|
|
|
|
|
15
|
|
Common stock purchases
|
|
|
(136
|
)
|
|
|
|
(174
|
)
|
Common stock issuances
|
|
|
155
|
|
|
|
|
132
|
|
Option premiums received (paid)
|
|
|
(39
|
)
|
|
|
|
27
|
|
Balance at end of period
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Retained Earnings
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
5,852
|
|
|
|
|
$
|
4,880
|
|
Net income attributable to common shareowners
|
|
|
1,345
|
|
|
|
|
1,166
|
|
Dividends ($0.91 and $0.83 per share)
|
|
|
(840
|
)
|
|
|
|
(774
|
)
|
Common stock purchases
|
|
|
(119
|
)
|
|
|
|
(275
|
)
|
Reclassification from AOCI pursuant to the early adoption of ASU 2018-02
|
|
|
735
|
|
|
|
|
—
|
|
Balance at end of period
|
|
|
$
|
6,973
|
|
|
|
|
$
|
4,997
|
|
We repurchased
2.2
million shares of class A and class B common stock for
$255
million during the
three
months ended
March 31, 2018
, and
4.2
million shares for
$449
million during the
three
months ended
March 31, 2017
. In May 2016, the Board of Directors approved a share repurchase authorization of
$8.0
billion, which has no expiration date. As of
March 31, 2018
, we had
$4.084 billion
of this share repurchase authorization available.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
From time to time, we enter into share repurchase programs with large financial institutions to assist in our buyback of company stock. These programs allow us to repurchase our shares at a price below the weighted average UPS share price for a given period. During the
first
quarter of 2018, we did not enter into any accelerated share repurchase transactions.
In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We paid net premiums of
$39
million during the first
three
months of
2018
and received
$27
million during the first
three
months
2017
, related to entering into and settling capped call options for the purchase of class B shares. As of
March 31, 2018
, we had outstanding options for the purchase of
0.9
million shares with a weighted average strike price of
$102.57
per share that will settle during 2018.
Accumulated Other Comprehensive Income (Loss)
We recognize activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. Additionally, effective January 1, 2018, we early adopted an ASU that allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act (see note 2 for further information). The activity in AOCI for the
three
months ended
March 31, 2018
and
2017
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Foreign currency translation gain (loss), net of tax:
|
|
|
|
Balance at beginning of period
|
$
|
(930
|
)
|
|
$
|
(1,016
|
)
|
Translation adjustment (net of tax effect of $(9) and $(14))
|
(6
|
)
|
|
30
|
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
|
(47
|
)
|
|
—
|
|
Balance at end of period
|
(983
|
)
|
|
(986
|
)
|
Unrealized gain (loss) on marketable securities, net of tax:
|
|
|
|
Balance at beginning of period
|
(2
|
)
|
|
(1
|
)
|
Current period changes in fair value (net of tax effect of $(1) and $0)
|
(4
|
)
|
|
—
|
|
Reclassification to earnings (net of tax effect of $1 and $0)
|
1
|
|
|
—
|
|
Balance at end of period
|
(5
|
)
|
|
(1
|
)
|
Unrealized gain (loss) on cash flow hedges, net of tax:
|
|
|
|
Balance at beginning of period
|
(366
|
)
|
|
(45
|
)
|
Current period changes in fair value (net of tax effect of $(33) and $(17))
|
(102
|
)
|
|
(30
|
)
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
|
(79
|
)
|
|
—
|
|
Reclassification to earnings (net of tax effect of $12 and $(7))
|
36
|
|
|
(11
|
)
|
Balance at end of period
|
(511
|
)
|
|
(86
|
)
|
Unrecognized pension and postretirement benefit costs, net of tax:
|
|
|
|
Balance at beginning of period
|
(3,569
|
)
|
|
(3,421
|
)
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
|
(609
|
)
|
|
—
|
|
Reclassification to earnings (net of tax effect of $12 and $18)
|
39
|
|
|
32
|
|
Balance at end of period
|
(4,139
|
)
|
|
(3,389
|
)
|
Accumulated other comprehensive income (loss) at end of period
|
$
|
(5,638
|
)
|
|
$
|
(4,462
|
)
|
|
|
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the
three
months ended
March 31, 2018
and
2017
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31:
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
Affected Line Item in the Income Statement
|
|
2018
|
|
2017
|
|
Unrealized gain (loss) on marketable securities:
|
|
|
|
|
|
Realized loss on sale of securities
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
Investment income
|
Income tax expense
|
1
|
|
|
—
|
|
|
Income tax expense
|
Impact on net income
|
(1
|
)
|
|
—
|
|
|
Net income
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
Interest rate contracts
|
(6
|
)
|
|
(7
|
)
|
|
Interest expense
|
Foreign exchange contracts
|
(42
|
)
|
|
25
|
|
|
Revenue
|
Income tax (expense) benefit
|
12
|
|
|
(7
|
)
|
|
Income tax expense
|
Impact on net income
|
(36
|
)
|
|
11
|
|
|
Net income
|
Unrecognized pension and postretirement benefit costs:
|
|
|
|
|
|
Prior service costs
|
(51
|
)
|
|
(50
|
)
|
|
Compensation and benefits
|
Income tax benefit
|
12
|
|
|
18
|
|
|
Income tax expense
|
Impact on net income
|
(39
|
)
|
|
(32
|
)
|
|
Net income
|
|
|
|
|
|
|
Total amount reclassified for the period
|
$
|
(76
|
)
|
|
$
|
(21
|
)
|
|
Net income
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the
three
months ended
March 31, 2018
and
2017
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Deferred Compensation Obligations:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
37
|
|
|
|
|
$
|
45
|
|
Reinvested dividends
|
|
|
1
|
|
|
|
|
1
|
|
Benefit payments
|
|
|
(7
|
)
|
|
|
|
(10
|
)
|
Balance at end of period
|
|
|
$
|
31
|
|
|
|
|
$
|
36
|
|
Treasury Stock:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(1
|
)
|
|
$
|
(37
|
)
|
|
(1
|
)
|
|
$
|
(45
|
)
|
Reinvested dividends
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Benefit payments
|
—
|
|
|
7
|
|
|
—
|
|
|
10
|
|
Balance at end of period
|
(1
|
)
|
|
$
|
(31
|
)
|
|
(1
|
)
|
|
$
|
(36
|
)
|
Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests increased
$1 million
for the
three
months ended
March 31, 2018
and
2017
, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12
.
SEGMENT 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 UPS Mail Innovations business units provide services in more than
200
countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, distribution and post-sales services, mail and consulting services. UPS Freight offers a variety of less-than-truckload ("LTL") and truckload ("TL") services to customers in North America. Coyote offers truckload brokerage services primarily in the United States. Marken is a global provider of supply chain solutions to the life sciences industry. 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 included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2017
and updated in note
3
for newly adopted accounting standards. Certain expenses are allocated between the segments using activity-based costing methods.
Segment information for the
three
months ended
March 31, 2018
and
2017
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
U.S. Domestic Package
|
$
|
10,227
|
|
|
$
|
9,536
|
|
International Package
|
3,533
|
|
|
3,074
|
|
Supply Chain & Freight
|
3,353
|
|
|
2,900
|
|
Consolidated
|
$
|
17,113
|
|
|
$
|
15,510
|
|
Operating Profit:
|
|
|
|
U.S. Domestic Package
|
$
|
756
|
|
|
$
|
950
|
|
International Package
|
594
|
|
|
518
|
|
Supply Chain & Freight
|
170
|
|
|
149
|
|
Consolidated
|
$
|
1,520
|
|
|
$
|
1,617
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13
.
EARNINGS PER SHARE
The earnings per share amounts are the same for class A and class B common shares as the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.
The following table sets forth the computation of basic and diluted earnings per share for the
three
months ended
March 31, 2018
and
2017
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net income attributable to common shareowners
|
$
|
1,345
|
|
|
$
|
1,166
|
|
Denominator:
|
|
|
|
Weighted average shares
|
861
|
|
|
869
|
|
Deferred compensation obligations
|
1
|
|
|
1
|
|
Vested portion of restricted units
|
4
|
|
|
4
|
|
Denominator for basic earnings per share
|
866
|
|
|
874
|
|
Effect of dilutive securities:
|
|
|
|
Restricted units
|
4
|
|
|
4
|
|
Stock options
|
—
|
|
|
1
|
|
Denominator for diluted earnings per share
|
870
|
|
|
879
|
|
Basic earnings per share
|
$
|
1.55
|
|
|
$
|
1.33
|
|
Diluted earnings per share
|
$
|
1.55
|
|
|
$
|
1.33
|
|
Diluted earnings per share for the
three
months ended
March 31, 2018
and
2017
excluded the effect of
0.3
million shares of common stock that may be issued upon the exercise of employee stock options because such effect would be antidilutive.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14
.
DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
Changes in fuel prices, interest rates and foreign exchange rates impact our results of operations. These exposures are actively monitored by management. To manage the impact of these exposures, we enter into a variety of derivative financial instruments. Our objective is to manage, 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.
At
March 31, 2018
and
December 31, 2017
, we held cash collateral of $
0
and $
17
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. At
March 31, 2018
and
December 31, 2017
,
$406
and
$174 million
, respectively, of additional collateral was required to be posted with our 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. Alternatively, we could 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. We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
The aggregate fair value of instruments not covered by the zero threshold bilateral collateral provisions were in a net liability position of
$0
and
$16 million
at
March 31, 2018
and
December 31, 2017
, respectively.
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 foreign currency translation adjustment within AOCI. The remainder of the change in value of such instruments is recorded in earnings.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. In order to mitigate the impact of fuel surcharge imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services. We periodically enter into derivative 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 normally designate and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.
Foreign Currency Risk Management
To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with option and forward contracts. We normally designate 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 and interest payments on certain debt subject to foreign currency remeasurement using foreign currency forward contracts. We normally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions; 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 foreign currency 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 complete liquidation of the foreign entity.
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 by 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Outstanding Positions
As of
March 31, 2018
and
December 31, 2017
, the notional amounts of our outstanding derivative positions were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Currency hedges:
|
|
|
|
|
|
Euro
|
EUR
|
4,652
|
|
|
EUR
|
4,942
|
|
British Pound Sterling
|
GBP
|
1,785
|
|
|
GBP
|
1,736
|
|
Canadian Dollar
|
CAD
|
1,393
|
|
|
CAD
|
1,259
|
|
Mexican Peso
|
MXN
|
—
|
|
|
MXN
|
169
|
|
Singapore Dollar
|
SGD
|
21
|
|
|
SGD
|
11
|
|
|
|
|
|
|
|
Interest rate hedges:
|
|
|
|
|
|
Fixed to Floating Interest Rate Swaps
|
$
|
4,674
|
|
|
$
|
5,424
|
|
Floating to Fixed Interest Rate Swaps
|
$
|
778
|
|
|
$
|
778
|
|
|
|
|
|
|
|
Investment market price hedges:
|
|
|
|
|
|
Marketable Securities
|
EUR
|
—
|
|
|
EUR
|
64
|
|
As of
March 31, 2018
, we had no outstanding commodity hedge positions.
Balance Sheet Recognition and Fair Value Measurements
The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives (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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Gross Amounts Presented in
Consolidated Balance Sheets
|
|
Net Amounts if Right of
Offset had been Applied
|
Asset Derivatives
|
Balance Sheet Location
|
|
|
March 31,
2018
|
|
December 31,
2017
|
|
March 31,
2018
|
|
December 31,
2017
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
Level 2
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate contracts
|
Other current assets
|
|
Level 2
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Foreign exchange contracts
|
Other non-current assets
|
|
Level 2
|
|
9
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Interest rate contracts
|
Other non-current assets
|
|
Level 2
|
|
31
|
|
|
59
|
|
|
10
|
|
|
43
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
Level 2
|
|
14
|
|
|
18
|
|
|
16
|
|
|
17
|
|
Foreign exchange contracts
|
Other non-current assets
|
|
Level 2
|
|
8
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Interest rate contracts
|
Other non-current assets
|
|
Level 2
|
|
24
|
|
|
26
|
|
|
24
|
|
|
26
|
|
Total Asset Derivatives
|
|
|
|
|
$
|
90
|
|
|
$
|
107
|
|
|
$
|
58
|
|
|
$
|
87
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Gross Amounts Presented in
Consolidated Balance Sheets
|
|
Net Amounts if Right of
Offset had been Applied
|
Liability Derivatives
|
Balance Sheet Location
|
|
|
March 31,
2018
|
|
December 31,
2017
|
|
March 31,
2018
|
|
December 31,
2017
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current liabilities
|
|
Level 2
|
|
$
|
144
|
|
|
$
|
93
|
|
|
$
|
140
|
|
|
$
|
91
|
|
Interest rate contracts
|
Other current liabilities
|
|
Level 2
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign exchange contracts
|
Other non-current liabilities
|
|
Level 2
|
|
249
|
|
|
194
|
|
|
240
|
|
|
193
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
Level 2
|
|
51
|
|
|
28
|
|
|
30
|
|
|
12
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current liabilities
|
|
Level 2
|
|
15
|
|
|
1
|
|
|
17
|
|
|
—
|
|
Investment market price contracts
|
Other current liabilities
|
|
Level 2
|
|
—
|
|
|
16
|
|
|
—
|
|
|
16
|
|
Foreign exchange contracts
|
Other non-current liabilities
|
|
Level 2
|
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
Level 2
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Liability Derivatives
|
|
|
|
|
$
|
466
|
|
|
$
|
332
|
|
|
$
|
434
|
|
|
$
|
312
|
|
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 investment forward prices; therefore, these derivatives are classified as Level 2.
Income Statement and AOCI Recognition
The following table indicates the amount of gains and losses that have been recognized in AOCI for the
three months
ended
March 31, 2018
and
2017
for those derivatives designated as cash flow hedges (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31:
|
|
|
|
|
Derivative Instruments in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
|
|
2018
|
|
2017
|
Interest rate contracts
|
|
$
|
1
|
|
|
$
|
—
|
|
Foreign exchange contracts
|
|
(136
|
)
|
|
(47
|
)
|
Total
|
|
$
|
(135
|
)
|
|
$
|
(47
|
)
|
As of
March 31, 2018
, there are $
198
million of pre-tax losses related to cash flow hedges that are currently deferred in AOCI that are expected to be reclassified to income over the 12 month period ended
March 31, 2019
. 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 maximum term over which we are hedging exposures to the variability of cash flow is approximately
15
years.
The amount of ineffectiveness recognized in income on derivative instruments designated in cash flow hedging relationships was immaterial for the
three months
ended
March 31, 2018
and
2017
.
The following table indicates the amount of gains and losses that have been recognized in AOCI within foreign currency translation adjustment for the
three months
ended
March 31, 2018
and
2017
for those instruments designated as net investment hedges (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31:
|
|
|
|
|
Non-derivative Instruments in Net Investment Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
|
|
2018
|
|
2017
|
Foreign denominated debt
|
|
$
|
(80
|
)
|
|
$
|
(37
|
)
|
Total
|
|
$
|
(80
|
)
|
|
$
|
(37
|
)
|
The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging relationships was immaterial for the
three months
ended
March 31, 2018
and
2017
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
three months
ended
March 31, 2018
and
2017
(in millions):
|
|
|
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Derivative Instruments
in Fair Value
Hedging Relationships
|
Location of Gain (Loss) Recognized in Income
|
|
Derivative Amount of Gain (Loss) Recognized in Income
|
|
Hedged Items in
Fair Value
Hedging
Relationships
|
|
Location of
Gain (Loss)
Recognized In
Income
|
|
Hedged Items Amount of Gain (Loss)
Recognized in Income
|
|
2018
|
|
2017
|
|
|
|
2018
|
|
2017
|
Interest rate contracts
|
Interest Expense
|
|
$
|
(54
|
)
|
|
$
|
(24
|
)
|
|
Fixed-Rate
Debt
|
|
Interest
Expense
|
|
$
|
54
|
|
|
$
|
24
|
|
Additionally, we maintain some interest rate swaps, foreign currency forwards and investment market price forward 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 and settlement risk for certain assets and liabilities on 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.
We also periodically terminate interest rate swaps and foreign currency options by entering into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original swap and foreign currency contracts. These transactions provide an economic offset that effectively eliminates the effects of changes in market valuation.
The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these interest rate swaps, foreign currency forward and investment market price forward contracts not designated as hedges for the
three months
ended
March 31, 2018
and
2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated in
Hedging Relationships
|
Location of Gain (Loss)
Recognized in Income
|
|
Amount of Gain (Loss)
Recognized in Income
|
|
2018
|
|
2017
|
Three Months Ended March 31:
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
Foreign exchange contracts
|
Investment income and other
|
|
8
|
|
|
6
|
|
Investment market price contracts
|
Investment income and other
|
|
16
|
|
|
26
|
|
Total
|
|
|
$
|
22
|
|
|
$
|
30
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15
.
INCOME TAXES
Our effective tax rate for the three months ended
March 31, 2018
was approximately
19.0%
compared with
31.8%
in the same period of 2017. The decrease in our effective tax rate was primarily due to the impact of the Tax Act, discussed further below, which reduced the U.S. federal corporate income tax rate from
35%
to
21%
effective January 1, 2018. In addition, the recognition of excess tax benefits related to share-based compensation in income tax expense reduced our effective tax rate by
2.7%
for the three months ended
March 31, 2018
compared to
3.2%
in the same period of 2017. Other factors that impacted our effective tax rate in the first quarter of 2018 compared with the same period of 2017 include favorable resolutions of uncertain tax positions and favorable tax provisions enacted in the Bipartisan Budget Act of 2018.
As discussed in our Annual Report on Form 10-K for the year ended
December 31, 2017
, we have recognized liabilities for uncertain tax positions. We reevaluate these uncertain tax positions on a quarterly basis. 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. However, an estimate of the range of reasonably possible outcomes cannot be made. 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.
Tax Cuts and Jobs Act
On December 22, 2017, the United States enacted into law the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including a permanent corporate rate reduction to
21%
and a transition to a territorial international system effective in 2018. The Tax Act also includes provisions that affected 2017, including: (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries ("Transition Tax") that is payable over eight years; (2) requiring a remeasurement of all U.S. deferred tax assets and liabilities to the newly enacted corporate tax rate of
21%
; and (3) providing for additional first-year depreciation that allows full expensing of qualified property placed into service after September 27, 2017.
In late December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under U.S. GAAP. If a company's accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. Accordingly, we recorded provisional estimates in the year ended December 31, 2017 related to our Transition Tax liability, our change in indefinite reinvestment assertion for certain foreign subsidiaries and the remeasurement of our U.S. net deferred tax liabilities.
To calculate the amount of Transition Tax, we must determine, in addition to other factors, the amount of post-1986 earnings and profits ("E&P") of the foreign subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings. We were able to make a reasonable estimate of the Transition Tax and recorded a provisional liability of
$310
million in the year ended December 31, 2017; however, there are certain factors that could impact our provisional estimate.
First, several of our foreign subsidiaries have a fiscal year-end other than December 31, and E&P for these subsidiaries cannot be precisely calculated until their fiscal years conclude during 2018. Second, we continue to gather additional information needed to precisely estimate the impact of the Transition Tax on our U.S. state and local tax liabilities given the complexity of the relevant state laws. Finally, we expect additional regulatory guidance and technical clarifications from the U.S. Department of the Treasury and Internal Revenue Service that could change our provisional estimate of the Transition Tax.
As the U.S. has moved to a territorial system, we have changed our indefinite reinvestment assertion with respect to the earnings of certain foreign subsidiaries. As a result, we recorded a provisional deferred tax liability and corresponding increase to deferred tax expense of
$24
million in the year ended December 31, 2017. There are certain factors, discussed above with regard to the Transition Tax, which could also impact our provisional estimate for the change in indefinite reinvestment assertion. For all other foreign subsidiaries, we continue to assert that these earnings are indefinitely reinvested. We will continue to evaluate our indefinite reinvestment assertion for all foreign subsidiaries in light of the Tax Act and our provisional estimate is subject to change.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For our net U.S. deferred tax liabilities, we recorded a provisional decrease of $
606
million with a corresponding reduction to deferred tax expense of
$606
million for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, completing the analysis of our 2017 capital expenditures that qualify for full expensing and the state tax effect of adjustments made to federal temporary differences.
We have not made any measurement period adjustments related to our provisional estimates during the first quarter of 2018. We are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the prescribed measurement period.
NOTE
16
. SUBSEQUENT EVENTS
On April 25, 2018, we announced that a select group of non-operations, retirement-eligible U.S. management employees were informed of their eligibility for participation in a special Voluntary Retirement Plan (VRP). Under the VRP, eligible employees will be offered a financial buyout to retire. The voluntary retirement program is designed to occur in phases to help maintain an orderly transition among those eligible to retire. The special VRP offer does not change the design, nor eligibility for, UPS retirement plans. This initiative will reduce headcount and lower on-going operating expense.