NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
.
BASIS OF PRESENTATION
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 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
June 30, 2016
, our results of operations for the
three and six
months ended
June 30, 2016
and
2015
, and cash flows for the
six
months ended
June 30, 2016
and
2015
. 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, 2015
.
For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans and self-insurance reserves 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
June 30, 2016
. The fair values of our investment securities are disclosed in note
4
, recognized multiemployer pension withdrawal liabilities in note
6
, 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.
NOTE
2
.
RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In May 2015, the FASB issued an accounting standards update that changes the disclosure requirement for reporting investments at fair value. This update removes the requirement to categorize investments for which fair value is measured using the net asset value per share practical expedient within the fair value hierarchy. These disclosures are limited to investments for which the entity has elected to measure fair value using the practical expedient. This guidance became effective for us in the first quarter of 2016 and did not have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2014, the FASB issued an accounting standards update for companies that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. This guidance became effective for us in the first quarter of 2015 and did not have a material impact on our consolidated financial position, results of operations or cash flows.
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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounting Standards Issued But Not Yet Effective
In March 2016, the FASB issued an accounting standards update that simplifies the income tax accounting and cash flow presentation related to share-based compensation by requiring the recognition of all excess tax benefits and deficiencies directly on the income statement and classification as cash flows from operating activities on the statement of cash flows. This update also makes several changes to the accounting for forfeitures and employee tax withholding on share-based compensation. This new guidance becomes effective for us in the first quarter of 2017, but early adoption is permitted. At this time, we do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued an accounting standards update that requires all leases with terms beyond twelve months to be recognized on the balance sheet. 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 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, but we expect material changes to our consolidated financial position.
In January 2016, the FASB issued an accounting standards update which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The amendment will be effective for us beginning the first quarter of 2018. At this time, we do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued an accounting standards update that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services. This amended guidance requires revenue to be recognized in an amount that reflects the consideration to which the company expects to be entitled for those goods and services when the performance obligation has been satisfied. This amended guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. In August 2015, the FASB issued an accounting standards update that defers the effective date of the new revenue recognition guidance for one year, to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for periods beginning after December 15, 2016. In March 2016, the FASB issued an accounting standards update that further clarifies the May 2014 accounting standards update with respect to principle versus agent considerations in revenue from contracts with customers. In the second quarter of 2016, the FASB issued two accounting standard updates that provide additional guidance when identifying performance obligations and licenses as well as allowing for certain narrow scope improvements and practical expedients. These accounting standard updates have the same effective date as the original standard. We are currently evaluating these updates to determine the full impact of adoption.
Other accounting pronouncements issued, but not effective until after
June 30, 2016
, 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
.
STOCK-BASED COMPENSATION
We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of nonqualified 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
2016
, 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, disability, or retirement, 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. 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 4,
2016
(for U.S.-based employees), March 2, 2016 (for management committee employees) and March 21,
2016
(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
$96.25
,
$98.77
and
$105.15
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 adjusted consolidated operating return on invested capital, growth in adjusted consolidated revenue and total shareowner return 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 consolidated operating return on invested capital and growth in 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. Based on the date that the eligible management population and performance targets were approved for the 2016 LTIP Award, we determined the award measurement date to be March 24, 2016; therefore, the target Restricted Units awarded for this portion of the award were valued for stock compensation expense using the closing New York Stock Exchange price of
$105.43
on that date.
The remaining one-third of the award related to total shareowner return relative to a peer group is valued using a Monte Carlo model. The model utilized the following assumptions: expected volatility of
16.45%
based on historical stock volatility, a risk-free rate of return of
1.01%
and no expected dividend yield because the units earn dividend equivalents. This portion of the award was valued with a grant date fair value of
$135.57
per unit and is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nonqualified Stock Options
During the first quarter of
2016
, we granted nonqualified 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, disability, or retirement, in which case immediate vesting occurs). The options granted will expire
ten
years after the date of the grant. In the first quarter of
2016
and
2015
, we granted
0.2
million stock options, respectively, at a grant price of
$98.77
and $
101.93
, respectively. The grant price was based on the closing New York Stock Exchange price of March 2, 2016 and March 2, 2015, respectively. The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was
$17.32
and $
18.07
for
2016
and
2015
, respectively, using the following assumptions:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Expected life (in years)
|
7.5
|
|
|
7.5
|
|
Risk-free interest rate
|
1.66
|
%
|
|
2.07
|
%
|
Expected volatility
|
23.60
|
%
|
|
20.61
|
%
|
Expected dividend yield
|
2.94
|
%
|
|
2.63
|
%
|
Compensation expense for share-based awards recognized in net income for the three months ended June 30, 2016 and 2015 was
$131
and
$134
million pre-tax, respectively. Compensation expense for share-based awards recognized in net income for the
six
months ended
June 30, 2016
and
2015
was $
346
and $
328
million pre-tax, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4
.
INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as trading and available-for-sale as of
June 30, 2016
and
December 31, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
June 30, 2016:
|
|
|
|
|
|
|
|
Current trading marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
1,358
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,358
|
|
Carbon credit investments
(1)
|
431
|
|
|
—
|
|
|
(178
|
)
|
|
253
|
|
Total trading marketable securities
|
$
|
1,789
|
|
|
$
|
—
|
|
|
$
|
(178
|
)
|
|
$
|
1,611
|
|
|
|
|
|
|
|
|
|
Current available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
339
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
343
|
|
Mortgage and asset-backed debt securities
|
77
|
|
|
1
|
|
|
—
|
|
|
78
|
|
Corporate debt securities
|
573
|
|
|
2
|
|
|
—
|
|
|
575
|
|
U.S. state and local municipal debt securities
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Equity Securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total available-for-sale marketable securities
|
$
|
995
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
1,002
|
|
|
|
|
|
|
|
|
|
Total current marketable securities
|
$
|
2,784
|
|
|
$
|
7
|
|
|
$
|
(178
|
)
|
|
$
|
2,613
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
December 31, 2015:
|
|
|
|
|
|
|
|
Current trading marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
715
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
715
|
|
Non-U.S. government debt securities
(1)
|
363
|
|
|
—
|
|
|
—
|
|
|
363
|
|
Carbon credit investments
(1)
|
347
|
|
|
9
|
|
|
(5
|
)
|
|
351
|
|
Total trading marketable securities
|
$
|
1,425
|
|
|
$
|
9
|
|
|
$
|
(5
|
)
|
|
$
|
1,429
|
|
|
|
|
|
|
|
|
|
Current available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
341
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
340
|
|
Mortgage and asset-backed debt securities
|
74
|
|
|
1
|
|
|
(1
|
)
|
|
74
|
|
Corporate debt securities
|
147
|
|
|
—
|
|
|
(1
|
)
|
|
146
|
|
U.S. state and local municipal debt securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Equity securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total available-for-sale marketable securities
|
$
|
569
|
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
|
$
|
567
|
|
|
|
|
|
|
|
|
|
Total current marketable securities
|
$
|
1,994
|
|
|
$
|
10
|
|
|
$
|
(8
|
)
|
|
$
|
1,996
|
|
(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
June 30, 2016
. In making this determination, we considered the financial condition and prospects of the issuers, the magnitude of the losses compared with the investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that we will be unable to collect all amounts due according to the contractual terms of the securities, the credit rating of the securities 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
June 30, 2016
, 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
|
$
|
1,816
|
|
|
$
|
1,816
|
|
Due after one year through three years
|
449
|
|
|
452
|
|
Due after three years through five years
|
15
|
|
|
15
|
|
Due after five years
|
71
|
|
|
75
|
|
|
2,351
|
|
|
2,358
|
|
Equity and carbon credit investments
|
433
|
|
|
255
|
|
|
$
|
2,784
|
|
|
$
|
2,613
|
|
Non-Current Investments and Restricted Cash
We had $
444
and $
442
million of restricted cash related to our self-insurance requirements as of
June 30, 2016
and
December 31, 2015
which is reported in non-current investments and restricted cash on the consolidated balance sheets. This restricted cash is primarily invested in money market funds.
At
June 30, 2016
and
December 31, 2015
, we held a
$19
million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets of
$22
and
$12
million as of
June 30, 2016
and
December 31, 2015
, respectively. The amounts described above are classified as non-current investments and restricted cash on the consolidated balance sheets, while the quarterly change in investment fair value is recognized in investment income and other on the statements of consolidated income.
Fair Value Measurements
Marketable securities utilizing Level 1 inputs include active exchange-traded carbon credit investments and certain U.S. Government debt securities, as these securities have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed and equity securities and corporate, government, and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as other 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) the 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
7.50%
and
8.22%
as of
June 30, 2016
and
December 31, 2015
, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about our investments measured at fair value on a recurring basis as of
June 30, 2016
and
December 31, 2015
, 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
|
June 30, 2016:
|
|
|
|
|
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
343
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
343
|
|
Mortgage and asset-backed debt securities
|
—
|
|
|
78
|
|
|
—
|
|
|
78
|
|
Corporate debt securities
|
—
|
|
|
1,932
|
|
|
—
|
|
|
1,932
|
|
U.S. state and local municipal debt securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Equity securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Carbon credit investments
|
253
|
|
|
—
|
|
|
—
|
|
|
253
|
|
Total marketable securities
|
596
|
|
|
2,017
|
|
|
—
|
|
|
2,613
|
|
Other non-current investments
|
19
|
|
|
—
|
|
|
22
|
|
|
41
|
|
Total
|
$
|
615
|
|
|
$
|
2,017
|
|
|
$
|
22
|
|
|
$
|
2,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
340
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
340
|
|
Mortgage and asset-backed debt securities
|
—
|
|
|
74
|
|
|
—
|
|
|
74
|
|
Corporate debt securities
|
—
|
|
|
861
|
|
|
—
|
|
|
861
|
|
U.S. state and local municipal debt securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Equity securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
—
|
|
|
366
|
|
|
—
|
|
|
366
|
|
Carbon credit investments
|
351
|
|
|
—
|
|
|
—
|
|
|
351
|
|
Total marketable securities
|
691
|
|
|
1,305
|
|
|
—
|
|
|
1,996
|
|
Other non-current investments
|
19
|
|
|
—
|
|
|
32
|
|
|
51
|
|
Total
|
$
|
710
|
|
|
$
|
1,305
|
|
|
$
|
32
|
|
|
$
|
2,047
|
|
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
June 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Securities
|
|
Other
Non-Current
Investments
|
|
Total
|
Balance on April 1, 2016
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
27
|
|
Transfers into (out of) Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Net realized and unrealized gains (losses):
|
|
|
|
|
|
Included in earnings (in investment income and other)
|
—
|
|
|
(5
|
)
|
|
(5
|
)
|
Included in accumulated other comprehensive income (pre-tax)
|
—
|
|
|
—
|
|
|
—
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
Balance on June 30, 2016
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Securities
|
|
Other
Non-Current
Investments
|
|
Total
|
Balance on April 1, 2015
|
$
|
—
|
|
|
$
|
56
|
|
|
$
|
56
|
|
Transfers into (out of) Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Net realized and unrealized gains (losses):
|
|
|
|
|
|
Included in earnings (in investment income and other)
|
—
|
|
|
(8
|
)
|
|
(8
|
)
|
Included in accumulated other comprehensive income (pre-tax)
|
—
|
|
|
—
|
|
|
—
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
Balance on June 30, 2015
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
48
|
|
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
six
months ended
June 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Securities
|
|
Other
Investments
|
|
Total
|
Balance on January 1, 2016
|
$
|
—
|
|
|
32
|
|
|
32
|
|
Transfers into (out of) Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Net realized and unrealized gains (losses):
|
|
|
|
|
|
Included in earnings (in investment income and other)
|
—
|
|
|
(10
|
)
|
|
(10
|
)
|
Included in accumulated other comprehensive income (pre-tax)
|
—
|
|
|
—
|
|
|
—
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
Balance on June 30, 2016
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
Marketable
Securities
|
|
Other
Investments
|
|
Total
|
Balance on January 1, 2015
|
$
|
—
|
|
|
64
|
|
|
64
|
|
Transfers into (out of) Level 3
|
—
|
|
|
—
|
|
|
—
|
|
Net realized and unrealized gains (losses):
|
|
|
|
|
|
Included in earnings (in investment income and other)
|
—
|
|
|
(16
|
)
|
|
(16
|
)
|
Included in accumulated other comprehensive income (pre-tax)
|
—
|
|
|
—
|
|
|
—
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
Balance on June 30, 2015
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
48
|
|
There were no transfers of investments between Level 1 and Level 2 during the
three and six
months ended
June 30, 2016
and
2015
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5
.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of
June 30, 2016
and
December 31, 2015
consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Vehicles
|
$
|
8,242
|
|
|
$
|
8,111
|
|
Aircraft
|
15,820
|
|
|
15,815
|
|
Land
|
1,290
|
|
|
1,263
|
|
Buildings
|
3,378
|
|
|
3,280
|
|
Building and leasehold improvements
|
3,558
|
|
|
3,450
|
|
Plant equipment
|
8,191
|
|
|
8,026
|
|
Technology equipment
|
1,699
|
|
|
1,670
|
|
Equipment under operating leases
|
29
|
|
|
30
|
|
Construction-in-progress
|
393
|
|
|
273
|
|
|
42,600
|
|
|
41,918
|
|
Less: Accumulated depreciation and amortization
|
(24,349
|
)
|
|
(23,566
|
)
|
|
$
|
18,251
|
|
|
$
|
18,352
|
|
We monitor all property, plant and equipment for any indicators of potential impairment. No impairment charges on property, plant and equipment were recorded during the
three and six
months ended
June 30, 2016
and
2015
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6
.
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 and six
months ended
June 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Three Months Ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
353
|
|
|
$
|
381
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
13
|
|
|
$
|
13
|
|
Interest cost
|
457
|
|
|
424
|
|
|
30
|
|
|
30
|
|
|
11
|
|
|
11
|
|
Expected return on assets
|
(629
|
)
|
|
(622
|
)
|
|
(1
|
)
|
|
(4
|
)
|
|
(15
|
)
|
|
(16
|
)
|
Amortization of prior service cost
|
42
|
|
|
42
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Net periodic benefit cost
|
$
|
223
|
|
|
$
|
225
|
|
|
$
|
37
|
|
|
$
|
35
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Six Months Ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
706
|
|
|
$
|
763
|
|
|
$
|
14
|
|
|
$
|
17
|
|
|
$
|
25
|
|
|
$
|
25
|
|
Interest cost
|
914
|
|
|
847
|
|
|
60
|
|
|
61
|
|
|
21
|
|
|
22
|
|
Expected return on assets
|
(1,258
|
)
|
|
(1,244
|
)
|
|
(2
|
)
|
|
(8
|
)
|
|
(29
|
)
|
|
(31
|
)
|
Amortization of prior service cost
|
84
|
|
|
84
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
1
|
|
Net periodic benefit cost
|
$
|
446
|
|
|
$
|
450
|
|
|
$
|
74
|
|
|
$
|
72
|
|
|
$
|
17
|
|
|
$
|
17
|
|
During the first
six
months of
2016
, we contributed
$44
and
$45
million to our company-sponsored pension and postretirement medical benefit plans, respectively. We also expect to contribute
$1.192
billion and
$56
million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively.
The UPS Retirement Plan (a single-employer defined benefit pension plan sponsored by UPS) was closed to new non-union participants effective July 1, 2016. The Company amended the UPS 401(k) Savings Plan so that employees who previously would have been eligible for participation in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, begin receiving a UPS Retirement Contribution. For employees eligible to receive the Retirement Contribution, UPS will contribute
3%
to
8%
of eligible pay to the UPS 401(k) Savings Plan based on years of vesting service and business unit. Contributions will be made annually in cash to the accounts of participants who are employed on December 31 of each calendar year and become vested after the employee reaches three complete years of service.
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.
As of
June 30, 2016
and
December 31, 2015
we had $
869
and
$872 million
, respectively, recognized in "other non-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
46
years. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value of this withdrawal liability as of
June 30, 2016
and
December 31, 2015
was $
942
and $
841 million
, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever allowed multi-employer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government oversight. On September 25, 2015, the Central States Pension Fund ("CSPF") submitted a proposed pension benefit
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
reduction plan to the U.S. Department of Treasury under the MPRA. The CSPF plan proposed to make retirement benefit reductions to CSPF participants, including to the benefits of UPS employee participants retiring on or after January 1, 2008. In 2007, UPS fully funded its allocable share of the unfunded vested benefits in CSPF when it was agreed that UPS could withdraw from CSPF in consideration of a
$6.1 billion
withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters, UPS also agreed to provide coordinating benefits under the UPS/IBT Full-Time Employee Pension Plan (the “UPS/IBT Pension Plan”) to offset the effect of certain benefit reductions by CSPF applicable to UPS participants retiring on or after January 1, 2008, which resulted in the recognition of a
$1.7 billion
pension liability in 2007. Additionally, UPS agreed to provide coordinating benefits under the UPS/IBT Pension Plan to offset certain benefit reductions in the event that benefits were lawfully reduced in the future by CSPF.
We vigorously challenged the proposed benefit reduction plan because we believed that it did not comply with the law and that certain actions by CSPF were invalid. In April 2016, we estimated that we would be required to record a 2016 charge of approximately $
3.2
billion to $
3.8
billion, if the CSPF pension benefit reduction plan was approved and implemented as proposed. On May 6, 2016, the U.S. Department of Treasury rejected the proposed plan submitted by CSPF, stating that it had determined that the CSPF plan failed to satisfy a number of requirements set forth in the MPRA.
The CSPF has asserted that it will become insolvent within ten years which could lead to the reduction of retirement benefits. As a result, it is possible that the CSPF will continue to explore options for making retirement benefit reductions to plan participants to forestall insolvency. If the CSPF reduces benefits to plan participants, UPS may be required to provide coordinating benefits under the UPS/IBT Pension Plan, thereby increasing the projected benefit obligation for the UPS/IBT Pension Plan. The potential for benefit reductions to CSPF plan participants is subject to a number of uncertainties, including actions that may be taken by CSPF, the federal government or others. These actions include whether the CSPF will submit a revised benefit reduction plan, the effect of discount rates and various other actuarial assumptions and the extent to which benefits are guaranteed by the Pension Benefit Guaranty Corporation. Due to the numerous uncertainties that could affect whether, and the extent to which, benefits to CSPF plan participants are reduced, we are not currently able to estimate a range of additional obligations, if any, that could arise to UPS. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Pension Plan in accordance with Accounting Standards Codification Topic 715 - Compensation - Retirement Benefits. We have not recognized any liability for additional coordinating benefits at this time, but the current projected benefit obligation for the UPS/IBT Pension Plan could significantly increase as a result of these matters.
Collective Bargaining Agreements
As of December 31, 2015, we had approximately
266,000
employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. In addition, our airline pilots, airline mechanics, ground mechanics and certain other employees are employed under other collective bargaining agreements. In 2014, the Teamsters ratified a new national master agreement (“NMA”) with UPS that will expire on July 31, 2018. The economic provisions in the NMA included wage rate increases, as well as increased contribution rates for healthcare and pension benefits. Most of these economic provisions were retroactive to August 1, 2013, which was the effective date of the NMA. During the first quarter of 2015, we remitted $
53
million for these retroactive economic benefits.
We have approximately
2,600
pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which became amendable at the end of 2011. On June 30, 2016, the IPA and the Company announced a tentative agreement on a new five-year labor contract. The contract must be ratified by a majority of UPS's 2,600 pilots. The vote by the pilots will be completed on August 31. If ratified, the new contract will become effective on September 1, 2016, and become amendable on 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 for a new agreement. 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7
.
GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of
June 30, 2016
and
December 31, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic
Package
|
|
International
Package
|
|
Supply Chain &
Freight
|
|
Consolidated
|
December 31, 2015:
|
$
|
715
|
|
|
$
|
425
|
|
|
$
|
2,279
|
|
|
$
|
3,419
|
|
Acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Currency / Other
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
8
|
|
June 30, 2016:
|
$
|
715
|
|
|
$
|
427
|
|
|
$
|
2,285
|
|
|
$
|
3,427
|
|
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
June 30, 2016
and
December 31, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
June 30, 2016:
|
|
|
|
|
|
Capitalized software
|
$
|
2,865
|
|
|
$
|
(2,123
|
)
|
|
$
|
742
|
|
Licenses
|
211
|
|
|
(135
|
)
|
|
76
|
|
Franchise rights
|
128
|
|
|
(86
|
)
|
|
42
|
|
Customer relationships
|
509
|
|
|
(59
|
)
|
|
450
|
|
Trade name
|
200
|
|
|
—
|
|
|
200
|
|
Trademarks, patents and other
|
58
|
|
|
(18
|
)
|
|
40
|
|
Total Intangible Assets, Net
|
$
|
3,971
|
|
|
$
|
(2,421
|
)
|
|
$
|
1,550
|
|
December 31, 2015:
|
|
|
|
|
|
Capitalized software
|
$
|
2,739
|
|
|
$
|
(2,026
|
)
|
|
$
|
713
|
|
Licenses
|
189
|
|
|
(116
|
)
|
|
73
|
|
Franchise rights
|
125
|
|
|
(83
|
)
|
|
42
|
|
Customer relationships
|
511
|
|
|
(35
|
)
|
|
476
|
|
Trade name
|
200
|
|
|
—
|
|
|
200
|
|
Trademarks, patents and other
|
61
|
|
|
(16
|
)
|
|
45
|
|
Total Intangible Assets, Net
|
$
|
3,825
|
|
|
$
|
(2,276
|
)
|
|
$
|
1,549
|
|
As of
June 30, 2016
, we had a trade name with a carrying value of $
200
million and licenses with a carrying value of $
4
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
8
.
BUSINESS COMBINATIONS
In 2016 and 2015, we acquired several businesses that were not material, individually or in the aggregate, to our consolidated financial position or results of operations. These acquisitions were funded with cash from operations. In March 2015, we acquired Poltraf Sp z.o.o. ("Poltraf"), a Polish-based pharmaceutical logistics company recognized for its temperature-sensitive warehousing and transportation solutions. In May 2015 and June 2015, we acquired Parcel Pro, Inc. ("Parcel Pro") and the Insured Parcel Services division of G4S International Logistics ("IPS"), respectively. These businesses provide services and insurance coverage for the transport of high value luxury goods.
In August 2015, we acquired Coyote Logistics Midco, Inc. ("Coyote"), a U.S.-based truckload freight brokerage company, for
$1.829 billion
. This acquisition allows us to expand our existing portfolio by adding large scale truckload freight brokerage and transportation management services to our Supply Chain & Freight reporting segment. In addition, we expect to benefit from synergies in purchased transportation, backhaul utilization, cross-selling to customers, as well as technology systems and industry best practices. The acquisition was funded using cash from operations and issuances of commercial paper.
The estimates of deferred income taxes and goodwill are subject to change based on final determination of fair values of acquired assets and assumed liabilities, which will occur in the third quarter of 2016. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition. No material changes in the purchase price allocation have been made since December 31, 2015.
The financial results of these acquired businesses are included in the Supply Chain & Freight segment from the date of acquisition and were not material to our results of operations.
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
June 30, 2016
and
December 31, 2015
consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Amount
|
|
|
|
Carrying Value
|
|
|
Maturity
|
|
2016
|
|
2015
|
Commercial paper
|
$
|
2,751
|
|
|
2016
|
|
$
|
2,749
|
|
|
$
|
2,965
|
|
Fixed-rate senior notes:
|
|
|
|
|
|
|
|
1.125% senior notes
|
375
|
|
|
2017
|
|
375
|
|
|
372
|
|
5.50% senior notes
|
750
|
|
|
2018
|
|
784
|
|
|
787
|
|
5.125% senior notes
|
1,000
|
|
|
2019
|
|
1,073
|
|
|
1,064
|
|
3.125% senior notes
|
1,500
|
|
|
2021
|
|
1,656
|
|
|
1,613
|
|
2.45% senior notes
|
1,000
|
|
|
2022
|
|
1,042
|
|
|
991
|
|
6.20% senior notes
|
1,500
|
|
|
2038
|
|
1,481
|
|
|
1,481
|
|
4.875% senior notes
|
500
|
|
|
2040
|
|
489
|
|
|
489
|
|
3.625% senior notes
|
375
|
|
|
2042
|
|
367
|
|
|
367
|
|
8.375% Debentures:
|
|
|
|
|
|
|
|
8.375% debentures
|
424
|
|
|
2020
|
|
480
|
|
|
474
|
|
8.375% debentures
|
276
|
|
|
2030
|
|
282
|
|
|
282
|
|
Pound Sterling notes:
|
|
|
|
|
|
|
|
5.50% notes
|
89
|
|
|
2031
|
|
82
|
|
|
92
|
|
5.125% notes
|
611
|
|
|
2050
|
|
574
|
|
|
638
|
|
Euro Senior notes:
|
|
|
|
|
|
|
|
1.625% notes
|
778
|
|
|
2025
|
|
771
|
|
|
759
|
|
Floating rate senior notes
|
555
|
|
|
2020
|
|
553
|
|
|
544
|
|
Floating rate senior notes
|
798
|
|
|
2049-2066
|
|
790
|
|
|
600
|
|
Capital lease obligations
|
466
|
|
|
2016-3005
|
|
466
|
|
|
475
|
|
Facility notes and bonds
|
320
|
|
|
2016-2045
|
|
319
|
|
|
319
|
|
Other debt
|
32
|
|
|
2016-2022
|
|
33
|
|
|
22
|
|
Total Debt
|
14,100
|
|
|
|
|
14,366
|
|
|
14,334
|
|
Less: Current Maturities
|
|
|
|
|
(2,816
|
)
|
|
(3,018
|
)
|
Long-term Debt
|
|
|
|
|
$
|
11,550
|
|
|
$
|
11,316
|
|
Debt Issuances
In March 2016, we issued floating rate senior notes with a principal balance of
$118 million
and in June 2016, we issued an additional $
74
million of floating rate senior notes. These notes bear interest at three-month LIBOR less
30
basis points and mature in
2066
. These notes are callable at various times after
30
years at a stated percentage of par value, and putable by the note holders at various times after
one
year at a stated percentage of par value.
Sources of Credit
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
June 30, 2016
: $
1.952
billion with an average interest rate of
0.47%
and €
718
million ($
797
million) with an average interest rate of
-0.31%
. As of
June 30, 2016
, 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
We maintain
two
credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of
$1.5
billion, and expires on
March 24, 2017
. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to 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
June 30, 2016
.
The second agreement provides revolving credit facilities of $
3.0
billion, and expires on
March 25, 2021
. 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
June 30, 2016
.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of
June 30, 2016
and for all prior periods, 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
June 30, 2016
, 10% of net tangible assets was equivalent to
$2.340
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 $
16.463
and $
15.524
billion as of
June 30, 2016
and
December 31, 2015
, 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. Trial is scheduled for mid-2017.
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; and (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. UPS and FedEx have moved for summary judgment. The Court granted these motions on April 30, 2015, entered judgment in favor of UPS and FedEx, and dismissed the case. On May 21, 2015, plaintiff filed a notice of appeal to the Court of Appeals for the Ninth Circuit. Briefing is complete, and oral argument will be scheduled. 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. We have cooperated with this investigation. We deny any liability with respect to these matters and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) the DOJ investigation is pending; (2) the Court granted our motion for summary judgment; and (3) the appeal remains pending. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In Canada,
four
purported class-action cases were filed against us in British Columbia (2006); Ontario (2007) and Québec (2006 and 2013). The cases each allege inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. The British Columbia class action was declared inappropriate for certification and dismissed by the trial judge. That decision was upheld by the British Columbia Court of Appeal in March 2010, which ended the case in our favor. The Ontario class action was certified in September 2011. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court. The complaint under the Criminal Code was dismissed. No appeal is being taken from that decision. The allegations of inadequate disclosure were granted and we are appealing that decision. The motion to authorize the 2006 Québec litigation as a class action was dismissed by the motions judge in October 2012; there was no appeal, which ended that case in our favor. The 2013 Québec litigation also has been dismissed. We deny all liability and are vigorously defending the
one
outstanding case in Ontario. 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.
Other Matters
In August 2010, competition authorities in Brazil opened an administrative proceeding to investigate alleged anticompetitive behavior in the freight forwarding industry. Approximately
45
freight forwarding companies and individuals are named in the proceeding, including UPS, UPS SCS Transportes (Brasil) S.A., and a former employee in Brazil. UPS submitted its written defenses to these allegations in April 2014. We are cooperating with this investigation, and intend to continue to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter including: (1) we are vigorously defending the matter and believe that we have a number of meritorious legal defenses; (2) there are unresolved questions of law that could be of importance to the ultimate resolutions of this matter, including the calculation of any potential fine; and (3) there is uncertainty about the time period that is the subject of the 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 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 asserts claims under various federal and state laws. The complaint also includes a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. The pre-trial process is ongoing and trial is scheduled for September, 2016. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious factual and legal defenses; and (2) it remains uncertain what evidence of their claims and damages, if any, plaintiffs will be able to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
On May 2, 2016, a purported shareowner derivative suit was filed in the Delaware Court of Chancery naming certain of UPS’s current and former officers and directors as defendants, alleging that they breached their fiduciary duties by failing to monitor UPS’s compliance with the Assurance of Discontinuance and other federal and state laws relating to cigarette deliveries. The Company and the individual defendants have filed a motion to dismiss.
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
June 30, 2016
, 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
June 30, 2016
,
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
six
months ended
June 30, 2016
and
2015
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Class A Common Stock
|
|
|
|
|
|
|
|
Balance at beginning of period
|
194
|
|
|
2
|
|
|
201
|
|
|
$
|
2
|
|
Common stock purchases
|
(3
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Stock award plans
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Common stock issuances
|
2
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Conversions of class A to class B common stock
|
(8
|
)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
Class A shares issued at end of period
|
189
|
|
|
2
|
|
|
199
|
|
|
$
|
2
|
|
Class B Common Stock
|
|
|
|
|
|
|
|
Balance at beginning of period
|
693
|
|
|
$
|
7
|
|
|
705
|
|
|
$
|
7
|
|
Common stock purchases
|
(10
|
)
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
Conversions of class A to class B common stock
|
8
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Class B shares issued at end of period
|
691
|
|
|
7
|
|
|
698
|
|
|
$
|
7
|
|
Additional Paid-In Capital
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Stock award plans
|
|
|
289
|
|
|
|
|
265
|
|
Common stock purchases
|
|
|
(561
|
)
|
|
|
|
(392
|
)
|
Common stock issuances
|
|
|
168
|
|
|
|
|
173
|
|
Option premiums received (paid)
|
|
|
104
|
|
|
|
|
(46
|
)
|
Balance at end of period
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Retained Earnings
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
6,001
|
|
|
|
|
$
|
5,726
|
|
Net income attributable to common shareowners
|
|
|
2,400
|
|
|
|
|
2,256
|
|
Dividends ($1.56 and $1.46 per share)
|
|
|
(1,409
|
)
|
|
|
|
(1,348
|
)
|
Common stock purchases
|
|
|
(769
|
)
|
|
|
|
(966
|
)
|
Balance at end of period
|
|
|
$
|
6,223
|
|
|
|
|
$
|
5,668
|
|
We repurchased
13.1
million shares of class A and class B common stock for
$1.330
billion during the
six
months ended
June 30, 2016
, and
13.5
million shares for
$1.358
billion during the
six
months ended
June 30, 2015
. During the first quarter of 2016, we also exercised a capped call option that we entered into in 2015 for which we received
0.2 million
UPS class B shares. The
$25 million
premium payment for this capped call option reduced shareowners' equity in 2015. In total, shares repurchased and received in the six months ended
June 30, 2016
were
13.3 million
shares for
$1.355 billion
. In May 2016, the Board of Directors approved a share repurchase authorization of
$8.0
billion, which has no expiration date. As of
June 30, 2016
, we had
$7.505 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
second
quarter of 2016, we entered into an accelerated share repurchase program which allowed us to repurchase
2.9
million shares for $
300
million. The program was completed in June 2016.
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 received (paid) net premiums of
$104
and
$(46)
million during the first
six
months of
2016
and
2015
, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of
June 30, 2016
, we had outstanding options for the purchase of
0.5
million shares with a weighted average strike price of $
92.98
per share that will settle in the third quarter of 2016.
Accumulated Other Comprehensive Income (Loss)
We experience activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in AOCI for the
six
months ended
June 30, 2016
and
2015
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Foreign currency translation gain (loss):
|
|
|
|
Balance at beginning of period
|
$
|
(897
|
)
|
|
$
|
(457
|
)
|
Translation adjustment (no tax impact in either period)
|
(5
|
)
|
|
(203
|
)
|
Balance at end of period
|
(902
|
)
|
|
(660
|
)
|
Unrealized gain (loss) on marketable securities, net of tax:
|
|
|
|
Balance at beginning of period
|
(1
|
)
|
|
—
|
|
Current period changes in fair value (net of tax effect of $4 and $0)
|
5
|
|
|
1
|
|
Reclassification to earnings (no tax impact in either period)
|
—
|
|
|
—
|
|
Balance at end of period
|
4
|
|
|
1
|
|
Unrealized gain (loss) on cash flow hedges, net of tax:
|
|
|
|
Balance at beginning of period
|
67
|
|
|
61
|
|
Current period changes in fair value (net of tax effect of $(5) and $56)
|
(7
|
)
|
|
91
|
|
Reclassification to earnings (net of tax effect of $(67) and $(45))
|
(112
|
)
|
|
(74
|
)
|
Balance at end of period
|
(52
|
)
|
|
78
|
|
Unrecognized pension and postretirement benefit costs, net of tax:
|
|
|
|
Balance at beginning of period
|
(2,709
|
)
|
|
(3,198
|
)
|
Reclassification to earnings (net of tax effect of $33 and $35)
|
53
|
|
|
52
|
|
Balance at end of period
|
(2,656
|
)
|
|
(3,146
|
)
|
Accumulated other comprehensive income (loss) at end of period
|
$
|
(3,606
|
)
|
|
$
|
(3,727
|
)
|
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 and six
months ended
June 30, 2016
and
2015
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30:
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
Affected Line Item in the Income Statement
|
|
2016
|
|
2015
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
Interest rate contracts
|
$
|
(6
|
)
|
|
$
|
(6
|
)
|
|
Interest expense
|
Foreign exchange contracts
|
—
|
|
|
11
|
|
|
Interest expense
|
Foreign exchange contracts
|
85
|
|
|
77
|
|
|
Revenue
|
Income tax (expense) benefit
|
(29
|
)
|
|
(31
|
)
|
|
Income tax expense
|
Impact on net income
|
50
|
|
|
51
|
|
|
Net income
|
Unrecognized pension and postretirement benefit costs:
|
|
|
|
|
|
Prior service costs
|
(43
|
)
|
|
(44
|
)
|
|
Compensation and benefits
|
Income tax (expense) benefit
|
16
|
|
|
18
|
|
|
Income tax expense
|
Impact on net income
|
(27
|
)
|
|
(26
|
)
|
|
Net income
|
Total amount reclassified for the period
|
$
|
23
|
|
|
$
|
25
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30:
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
Affected Line Item in the Income Statement
|
|
2016
|
|
2015
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
Interest rate contracts
|
(12
|
)
|
|
(12
|
)
|
|
Interest expense
|
Foreign exchange contracts
|
—
|
|
|
(25
|
)
|
|
Interest expense
|
Foreign exchange contracts
|
191
|
|
|
156
|
|
|
Revenue
|
Income tax (expense) benefit
|
(67
|
)
|
|
(45
|
)
|
|
Income tax expense
|
Impact on net income
|
112
|
|
|
74
|
|
|
Net income
|
Unrecognized pension and postretirement benefit costs:
|
|
|
|
|
|
Prior service costs
|
(86
|
)
|
|
(87
|
)
|
|
Compensation and benefits
|
Income tax (expense) benefit
|
33
|
|
|
35
|
|
|
Income tax expense
|
Impact on net income
|
(53
|
)
|
|
(52
|
)
|
|
Net income
|
Total amount reclassified for the period
|
$
|
59
|
|
|
$
|
22
|
|
|
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
six
months ended
June 30, 2016
and
2015
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Deferred Compensation Obligations:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
51
|
|
|
|
|
$
|
59
|
|
Reinvested dividends
|
|
|
1
|
|
|
|
|
2
|
|
Benefit payments
|
|
|
(8
|
)
|
|
|
|
(11
|
)
|
Balance at end of period
|
|
|
$
|
44
|
|
|
|
|
$
|
50
|
|
Treasury Stock:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(1
|
)
|
|
$
|
(51
|
)
|
|
(1
|
)
|
|
$
|
(59
|
)
|
Reinvested dividends
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
Benefit payments
|
—
|
|
|
8
|
|
|
—
|
|
|
11
|
|
Balance at end of period
|
(1
|
)
|
|
$
|
(44
|
)
|
|
(1
|
)
|
|
$
|
(50
|
)
|
Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests increased
$3
and
$1 million
for the
six
months ended
June 30, 2016
and
2015
, 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 operations within their geographic area.
U.S. Domestic Package
Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the United States.
International Package
International Package operations include delivery to more than
220
countries and territories worldwide, including shipments wholly outside the United States, as well as U.S. export and U.S. import shipments. 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 the operations of our forwarding, logistics, Coyote, UPS Freight and other aggregated business units. Our forwarding, logistics and Coyote units provide services in more than
195
countries and territories worldwide, and include North American and international air and ocean freight forwarding, customs brokerage, truckload freight brokerage, distribution and post-sales services and mail and consulting services. UPS Freight offers a variety of less-than-truckload (“LTL”) and truckload (“TL”) services to customers in North America. Other aggregated business units within this segment include The UPS Store and UPS Capital.
In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income, 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, 2015
, with certain expenses allocated between the segments using activity-based costing methods.
Segment information for the
three and six
months ended
June 30, 2016
and
2015
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
9,015
|
|
|
$
|
8,808
|
|
|
$
|
18,099
|
|
|
$
|
17,622
|
|
International Package
|
3,077
|
|
|
3,045
|
|
|
5,991
|
|
|
6,015
|
|
Supply Chain & Freight
|
2,537
|
|
|
2,242
|
|
|
4,957
|
|
|
4,435
|
|
Consolidated
|
$
|
14,629
|
|
|
$
|
14,095
|
|
|
$
|
29,047
|
|
|
$
|
28,072
|
|
Operating Profit:
|
|
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
1,233
|
|
|
$
|
1,201
|
|
|
$
|
2,335
|
|
|
$
|
2,225
|
|
International Package
|
613
|
|
|
552
|
|
|
1,187
|
|
|
1,050
|
|
Supply Chain & Freight
|
192
|
|
|
207
|
|
|
339
|
|
|
358
|
|
Consolidated
|
$
|
2,038
|
|
|
$
|
1,960
|
|
|
$
|
3,861
|
|
|
$
|
3,633
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13
.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the
three and six
months ended
June 30, 2016
and
2015
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to common shareowners
|
$
|
1,269
|
|
|
$
|
1,230
|
|
|
$
|
2,400
|
|
|
$
|
2,256
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares
|
881
|
|
|
899
|
|
|
883
|
|
|
901
|
|
Deferred compensation obligations
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Vested portion of restricted units
|
4
|
|
|
1
|
|
|
3
|
|
|
1
|
|
Denominator for basic earnings per share
|
886
|
|
|
901
|
|
|
887
|
|
|
903
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Restricted units
|
3
|
|
|
6
|
|
|
4
|
|
|
7
|
|
Stock options
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Denominator for diluted earnings per share
|
890
|
|
|
908
|
|
|
892
|
|
|
911
|
|
Basic earnings per share
|
$
|
1.43
|
|
|
$
|
1.37
|
|
|
$
|
2.71
|
|
|
$
|
2.50
|
|
Diluted earnings per share
|
$
|
1.43
|
|
|
$
|
1.35
|
|
|
$
|
2.69
|
|
|
$
|
2.48
|
|
Diluted earnings per share for the
three
months ended
June 30, 2016
and
2015
excluded the effect of
0.2
and
0.2
million shares of common stock, respectively (
0.3
and
0.2
million for the six months ended June 30, 2016 and 2015, respectively) 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
We are exposed to market risk, primarily related to foreign exchange rates, commodity prices and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, we enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates, commodity prices and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value for those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Credit Risk Management
The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines, and by monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.
We have agreements with all of our active counterparties (covering the majority of our derivative positions) containing early termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of derivatives associated with those counterparties. Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. At
June 30, 2016
and
December 31, 2015
, we held cash collateral of $
582
and $
717
million, respectively, under these agreements; this collateral is included in "cash and cash equivalents" on the consolidated balance sheets and its use by UPS is not restricted.
In connection with the zero threshold bilateral collateral provisions described above, we were not required to post any collateral with our counterparties as of
June 30, 2016
and
December 31, 2015
. As of those dates, there were no instruments in a net liability position that were not covered by the zero threshold bilateral collateral provisions. Additionally, in connection with the agreements described above, we could be required to terminate transactions with certain counterparties in the event of a downgrade of our credit rating.
We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
Accounting Policy for Derivative Instruments
We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.
A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statements of consolidated income during the current period.
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.
A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the 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. We periodically enter into option contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We 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 normally designate 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.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings, using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Outstanding Positions
As of
June 30, 2016
and
December 31, 2015
, the notional amounts of our outstanding derivative positions were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Currency hedges:
|
|
|
|
|
|
British Pound Sterling
|
GBP
|
983
|
|
|
GBP
|
1,140
|
|
Canadian Dollar
|
CAD
|
919
|
|
|
CAD
|
177
|
|
Euro
|
EUR
|
3,492
|
|
|
EUR
|
3,750
|
|
Indian Rupee
|
INR
|
284
|
|
|
INR
|
—
|
|
Mexican Peso
|
MXN
|
117
|
|
|
MXN
|
3,863
|
|
Japanese Yen
|
JPY
|
8,200
|
|
|
JPY
|
20,000
|
|
|
|
|
|
|
|
Interest rate hedges:
|
|
|
|
|
|
Fixed to Floating Interest Rate Swaps
|
$
|
5,799
|
|
|
$
|
5,799
|
|
Floating to Fixed Interest Rate Swaps
|
$
|
778
|
|
|
$
|
778
|
|
|
|
|
|
|
|
Investment market price hedges:
|
|
|
|
|
|
Marketable Securities
|
EUR
|
465
|
|
|
EUR
|
496
|
|
As of June 30, 2016, 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
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
June 30,
2016
|
|
December 31,
2015
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
Level 2
|
|
$
|
245
|
|
|
$
|
408
|
|
|
$
|
244
|
|
|
$
|
408
|
|
Foreign exchange contracts
|
Other non-current assets
|
|
Level 2
|
|
71
|
|
|
92
|
|
|
66
|
|
|
92
|
|
Interest rate contracts
|
Other non-current assets
|
|
Level 2
|
|
312
|
|
|
204
|
|
|
297
|
|
|
185
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
Level 2
|
|
1
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Investment market price contracts
|
Other current assets
|
|
Level 2
|
|
181
|
|
|
5
|
|
|
181
|
|
|
—
|
|
Interest rate contracts
|
Other non-current assets
|
|
Level 2
|
|
78
|
|
|
57
|
|
|
68
|
|
|
53
|
|
Total Asset Derivatives
|
|
|
|
|
$
|
888
|
|
|
$
|
768
|
|
|
$
|
856
|
|
|
$
|
738
|
|
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
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
June 30,
2016
|
|
December 31,
2015
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current liabilities
|
|
Level 2
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Foreign exchange contracts
|
Other non-current liabilities
|
|
Level 2
|
|
13
|
|
|
—
|
|
|
9
|
|
|
—
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
Level 2
|
|
15
|
|
|
19
|
|
|
—
|
|
|
—
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current liabilities
|
|
Level 2
|
|
15
|
|
|
12
|
|
|
14
|
|
|
10
|
|
Investment market price contracts
|
Other current liabilities
|
|
Level 2
|
|
—
|
|
|
9
|
|
|
—
|
|
|
4
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
Level 2
|
|
38
|
|
|
13
|
|
|
28
|
|
|
9
|
|
Total Liability Derivatives
|
|
|
|
|
$
|
85
|
|
|
$
|
53
|
|
|
$
|
53
|
|
|
$
|
23
|
|
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 and six
months ended
June 30, 2016
and
2015
for those derivatives designated as cash flow hedges (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30:
|
|
|
|
|
Derivative Instruments in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
|
|
June 30, 2016
|
|
|
2015
|
Interest rate contracts
|
|
(1
|
)
|
|
$
|
1
|
|
Foreign exchange contracts
|
|
149
|
|
|
(173
|
)
|
Total
|
|
$
|
148
|
|
|
$
|
(172
|
)
|
|
|
|
|
|
Six Months Ended June 30:
|
|
|
|
|
Derivative Instruments in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
|
|
2016
|
|
2015
|
Interest rate contracts
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
Foreign exchange contracts
|
|
(9
|
)
|
|
147
|
|
Total
|
|
$
|
(12
|
)
|
|
$
|
147
|
|
As of
June 30, 2016
, $
179
million of pre-tax gains related to cash flow hedges that are currently deferred in AOCI are expected to be reclassified to income over the 12 month period ended
June 30, 2017
. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions. The maximum term over which we are hedging exposures to the variability of cash flow is
16
years.
The amount of ineffectiveness recognized in income on derivative instruments designated in cash flow hedging relationships was immaterial for the
three and six
months ended
June 30, 2016
and
2015
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table indicates the amount of gains and losses that have been recognized in AOCI within foreign currency translation adjustment for the
three and six
months ended
June 30, 2016
and
2015
for those instruments designated as net investment hedges (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30:
|
|
|
|
|
Non-derivative Instruments in Net Investment Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
|
|
2016
|
|
2015
|
Foreign denominated debt
|
|
$
|
62
|
|
|
$
|
—
|
|
Total
|
|
$
|
62
|
|
|
$
|
—
|
|
|
|
|
|
|
Six Months Ended June 30:
|
|
|
|
|
Non-derivative Instruments in Net Investment Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
|
|
2016
|
|
2015
|
Foreign denominated debt
|
|
$
|
(23
|
)
|
|
—
|
|
Total
|
|
$
|
(23
|
)
|
|
$
|
—
|
|
The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging relationships was immaterial for the three and six months ended June 30, 2016 and 2015.
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 and six
months ended
June 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
2016
|
|
2015
|
|
|
|
2016
|
|
2015
|
Three Months Ended June 30:
|
|
|
|
|
|
|
|
Interest rate contracts
|
Interest Expense
|
|
$
|
20
|
|
|
$
|
(64
|
)
|
|
Fixed-Rate
Debt
|
|
Interest
Expense
|
|
$
|
(20
|
)
|
|
$
|
64
|
|
Six Months Ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
Interest
Expense
|
|
$
|
115
|
|
|
$
|
(9
|
)
|
|
Fixed-Rate
Debt and
Capital Leases
|
|
Interest
Expense
|
|
$
|
(115
|
)
|
|
$
|
9
|
|
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 a portfolio of interest bearing receivables. 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these interest rate swaps, foreign currency forward and investment market price forward contracts not designated as hedges for the
three and six
months ended
June 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated in
Hedging Relationships
|
Location of Gain (Loss)
Recognized in Income
|
|
Amount of Gain (Loss)
Recognized in Income
|
|
2016
|
|
2015
|
Three Months Ended June 30:
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
Foreign exchange contracts
|
Other Operating Expenses
|
|
—
|
|
|
(5
|
)
|
Foreign exchange contracts
|
Investment income and other
|
|
(65
|
)
|
|
33
|
|
Foreign exchange contracts
|
Interest expense
|
|
—
|
|
|
36
|
|
Investment market price contracts
|
Investment income and other
|
|
25
|
|
|
(7
|
)
|
|
|
|
$
|
(42
|
)
|
|
$
|
55
|
|
Six Months Ended June 30:
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
Foreign exchange contracts
|
Other Operating Expenses
|
|
—
|
|
|
16
|
|
Foreign exchange contracts
|
Investment income and other
|
|
(106
|
)
|
|
35
|
|
Foreign exchange contracts
|
Interest expense
|
|
—
|
|
|
36
|
|
Investment market price contracts
|
Investment income and other
|
|
180
|
|
|
(9
|
)
|
|
|
|
$
|
70
|
|
|
$
|
75
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15
.
INCOME TAXES
Our effective tax rate increased to
35.0%
in the
second
quarter of
2016
from
34.5%
in the same period of
2015
(
35.1%
year-to-date in
2016
compared to
34.9%
in the same period of
2015
), primarily due to a decrease in U.S. Federal and state tax credits relative to total pre-tax income. This was offset by favorable changes in the proportion of our taxable income in certain U.S. and non-U.S. jurisdictions
As discussed in our Annual Report on Form 10-K for the year ended
December 31, 2015
, 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 various state filing positions, the allocation of income and expense between tax jurisdictions and other transfer pricing matters. 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.