United States
Securities and Exchange Commission
Washington, D.C. 20549
_____________________________________
Form 10-Q
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015March 31, 2016, or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-15451
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United Parcel Service, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 58-2480149 |
(State or Other Jurisdiction of Incorporation or Organization) | | (IRS Employer Identification No.) |
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55 Glenlake Parkway, NE Atlanta, Georgia | | 30328 |
(Address of Principal Executive Offices) | | (Zip Code) |
(404) 828-6000
(Registrant’s telephone number, including area code)
_____________________________________
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
There were 197,740,294192,217,866 Class A shares, and 698,448,250690,451,249 Class B shares, with a par value of $0.01 per share, outstanding at July 27, 2015.April 25, 2016.
UNITED PARCEL SERVICE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2015MARCH 31, 2016
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PART I—FINANCIAL INFORMATION |
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Item 2. | | |
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| Contractual Commitments | |
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Item 3. | | |
Item 4. | | |
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PART II—OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
PART I. FINANCIAL INFORMATION
Cautionary Statement About Forward-Looking Statements
This report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in the future tense, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof and similar terms are intended to be forward-looking statements. We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Our disclosure and analysis in this report, in our Annual Report on Form 10-K for the year ended December 31, 20142015 and in our other filings with the Securities and Exchange Commission contain some forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties include, but are not limited to: general economic conditions, both in the U.S. and internationally; significant competition on a local, regional, national, and international basis; changes in our relationships with our significant customers; the existing complex and stringent regulation in the U.S. and internationally, changes to which can impact our business; increased security requirements that may increase our costs of operations and reduce operating efficiencies; legal, regulatory or market responses to global climate change; negotiation and ratification of labor contracts; strikes, work stoppages and slowdowns by our employees; the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; changes in exchange rates or interest rates; our ability to maintain the image of our brand; breaches in data security; disruptions to the Internet or our technology infrastructure; our ability to accurately forecast our future capital investment needs; exposure to changing economic, political and social developments in international and emerging markets; changes in business strategy, government regulations, or economic or market conditions that may result in substantial impairment of our assets; increases in our expenses or funding obligations relating to employee health, and retiree health and our contributions toand/or pension benefits; the potential for various claims and litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters; our ability to realize the anticipated benefits from acquisitions, joint ventures or strategic alliances; our ability to manage insurance and claims expenses; and other risks discussed in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 20142015, or described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements.
Item 1. Financial Statements
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2015March 31, 2016 (unaudited) and December 31, 20142015
(In millions)
| | | June 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
ASSETS | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents | $ | 3,430 |
| | $ | 2,291 |
| $ | 3,887 |
| | $ | 2,730 |
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Marketable securities | 2,792 |
| | 992 |
| 2,380 |
| | 1,996 |
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Accounts receivable, net | 5,618 |
| | 6,661 |
| 6,241 |
| | 7,134 |
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Deferred income tax assets | 554 |
| | 590 |
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Other current assets | 1,374 |
| | 1,274 |
| 1,404 |
| | 1,348 |
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Total Current Assets | 13,768 |
| | 11,808 |
| 13,912 |
| | 13,208 |
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Property, Plant and Equipment, Net | 17,970 |
| | 18,281 |
| 18,285 |
| | 18,352 |
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Goodwill | 2,214 |
| | 2,184 |
| 3,440 |
| | 3,419 |
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Intangible Assets, Net | 878 |
| | 847 |
| 1,569 |
| | 1,549 |
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Non-Current Investments and Restricted Cash | 469 |
| | 489 |
| 484 |
| | 473 |
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Derivative Assets | 435 |
| | 515 |
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Deferred Income Tax Assets | 821 |
| | 652 |
| 328 |
| | 255 |
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Other Non-Current Assets | 696 |
| | 695 |
| 1,150 |
| | 1,055 |
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Total Assets | $ | 37,251 |
| | $ | 35,471 |
| $ | 39,168 |
| | $ | 38,311 |
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LIABILITIES AND SHAREOWNERS’ EQUITY | | | | | | |
Current Liabilities: | | | | | | |
Current maturities of long-term debt and commercial paper | $ | 3,252 |
| | $ | 923 |
| $ | 3,869 |
| | $ | 3,018 |
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Accounts payable | 2,150 |
| | 2,754 |
| 2,040 |
| | 2,587 |
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Accrued wages and withholdings | 2,148 |
| | 2,373 |
| 2,131 |
| | 2,253 |
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Hedge margin liabilities | 753 |
| | 548 |
| 641 |
| | 717 |
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Income taxes payable | | 538 |
| | 147 |
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Self-insurance reserves | 621 |
| | 656 |
| 663 |
| | 657 |
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Other current liabilities | 1,379 |
| | 1,385 |
| 1,216 |
| | 1,317 |
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Total Current Liabilities | 10,303 |
| | 8,639 |
| 11,098 |
| | 10,696 |
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Long-Term Debt | 9,900 |
| | 9,864 |
| 11,569 |
| | 11,316 |
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Pension and Postretirement Benefit Obligations | 11,814 |
| | 11,452 |
| 10,839 |
| | 10,638 |
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Deferred Income Tax Liabilities | | 104 |
| | 115 |
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Self-Insurance Reserves | 1,927 |
| | 1,916 |
| 1,778 |
| | 1,831 |
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Other Non-Current Liabilities | 1,339 |
| | 1,442 |
| 1,300 |
| | 1,224 |
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Shareowners’ Equity: | | | | | | |
Class A common stock (199 and 201 shares issued in 2015 and 2014) | 2 |
| | 2 |
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Class B common stock (698 and 705 shares issued in 2015 and 2014) | 7 |
| | 7 |
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Class A common stock (194 and 194 shares issued in 2016 and 2015) | | 2 |
| | 2 |
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Class B common stock (691 and 693 shares issued in 2016 and 2015) | | 7 |
| | 7 |
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Additional paid-in capital | — |
| | — |
| — |
| | — |
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Retained earnings | 5,668 |
| | 5,726 |
| 6,095 |
| | 6,001 |
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Accumulated other comprehensive loss | (3,727 | ) | | (3,594 | ) | (3,647 | ) | | (3,540 | ) |
Deferred compensation obligations | 50 |
| | 59 |
| 43 |
| | 51 |
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Less: Treasury stock (1 share in 2015 and 2014) | (50 | ) | | (59 | ) | |
Less: Treasury stock (1 share in 2016 and 2015) | | (43 | ) | | (51 | ) |
Total Equity for Controlling Interests | 1,950 |
| | 2,141 |
| 2,457 |
| | 2,470 |
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Total Equity for Non-Controlling Interests | 18 |
| | 17 |
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Noncontrolling Interests | | 23 |
| | 21 |
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Total Shareowners’ Equity | 1,968 |
| | 2,158 |
| 2,480 |
| | 2,491 |
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Total Liabilities and Shareowners’ Equity | $ | 37,251 |
| | $ | 35,471 |
| $ | 39,168 |
| | $ | 38,311 |
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See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share amounts)
(unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Revenue | $ | 14,095 |
| | $ | 14,268 |
| | $ | 28,072 |
| | $ | 28,047 |
| $ | 14,418 |
| | $ | 13,977 |
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Operating Expenses: | | | | | | | | | | |
Compensation and benefits | 7,502 |
| | 8,375 |
| | 15,066 |
| | 15,640 |
| 7,853 |
| | 7,564 |
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Repairs and maintenance | 357 |
| | 341 |
| | 707 |
| | 670 |
| 381 |
| | 350 |
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Depreciation and amortization | 510 |
| | 473 |
| | 1,016 |
| | 941 |
| 552 |
| | 506 |
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Purchased transportation | 1,777 |
| | 1,988 |
| | 3,631 |
| | 3,896 |
| 2,024 |
| | 1,854 |
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Fuel | 639 |
| | 980 |
| | 1,283 |
| | 1,952 |
| 434 |
| | 644 |
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Other occupancy | 230 |
| | 241 |
| | 524 |
| | 538 |
| 269 |
| | 294 |
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Other expenses | 1,120 |
| | 1,123 |
| | 2,212 |
| | 2,150 |
| 1,082 |
| | 1,092 |
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Total Operating Expenses | 12,135 |
| | 13,521 |
| | 24,439 |
| | 25,787 |
| 12,595 |
| | 12,304 |
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Operating Profit | 1,960 |
| | 747 |
| | 3,633 |
| | 2,260 |
| 1,823 |
| | 1,673 |
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Other Income and (Expense): | | | | | | | | | | |
Investment income | 4 |
| | 25 |
| | 8 |
| | 25 |
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Investment income and other | | 17 |
| | 4 |
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Interest expense | (86 | ) |
| (89 | ) | | (173 | ) | | (179 | ) | (93 | ) |
| (87 | ) |
Total Other Income and (Expense) | (82 | ) | | (64 | ) | | (165 | ) | | (154 | ) | (76 | ) | | (83 | ) |
Income Before Income Taxes | 1,878 |
| | 683 |
| | 3,468 |
| | 2,106 |
| 1,747 |
| | 1,590 |
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Income Tax Expense | 648 |
| | 229 |
| | 1,212 |
| | 741 |
| 616 |
| | 564 |
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Net Income | $ | 1,230 |
| | $ | 454 |
| | $ | 2,256 |
| | $ | 1,365 |
| $ | 1,131 |
| | $ | 1,026 |
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Basic Earnings Per Share | $ | 1.37 |
| | $ | 0.49 |
| | $ | 2.50 |
| | $ | 1.48 |
| $ | 1.27 |
| | $ | 1.13 |
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Diluted Earnings Per Share | $ | 1.35 |
| | $ | 0.49 |
| | $ | 2.48 |
| | $ | 1.47 |
| $ | 1.27 |
| | $ | 1.12 |
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STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Net income | $ | 1,230 |
| | $ | 454 |
| | $ | 2,256 |
| | $ | 1,365 |
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Net Income | | $ | 1,131 |
| | $ | 1,026 |
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Change in foreign currency translation adjustment, net of tax | 101 |
| | 39 |
| | (203 | ) | | 3 |
| 26 |
| | (304 | ) |
Change in unrealized gain (loss) on marketable securities, net of tax | (1 | ) | | 2 |
| | 1 |
| | 2 |
| 3 |
| | 2 |
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Change in unrealized gain (loss) on cash flow hedges, net of tax | (159 | ) | | (21 | ) | | 17 |
| | (41 | ) | (162 | ) | | 176 |
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Change in unrecognized pension and postretirement benefit costs, net of tax | 20 |
| | (127 | ) | | 52 |
| | (100 | ) | 26 |
| | 32 |
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Comprehensive income | $ | 1,191 |
| | $ | 347 |
| | $ | 2,123 |
| | $ | 1,229 |
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Comprehensive Income | | $ | 1,024 |
| | $ | 932 |
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See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
(unaudited)
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2015 | | 2014 | 2016 | | 2015 |
Cash Flows From Operating Activities: | | | | | | |
Net income | $ | 2,256 |
| | $ | 1,365 |
| $ | 1,131 |
| | $ | 1,026 |
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Adjustments to reconcile net income to net cash from operating activities: | | | | | | |
Depreciation and amortization | 1,016 |
| | 941 |
| 552 |
| | 506 |
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Pension and postretirement benefit expense | 539 |
| | 1,523 |
| 267 |
| | 270 |
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Pension and postretirement benefit contributions | (99 | ) | | (115 | ) | (43 | ) | | (47 | ) |
Settlement of postretirement benefit obligation | — |
| | (1,995 | ) | |
Self-insurance provision | (22 | ) | | (77 | ) | (48 | ) | | (30 | ) |
Deferred tax (benefit) | (140 | ) | | (192 | ) | |
Deferred tax (benefit) expense | | 5 |
| | (49 | ) |
Stock compensation expense | 328 |
| | 306 |
| 215 |
| | 194 |
|
Other (gains) losses | (51 | ) | | 144 |
| (91 | ) | | (5 | ) |
Changes in assets and liabilities, net of effect of acquisitions: | | | | |
Changes in assets and liabilities, net of effects of business acquisitions: | | | | |
Accounts receivable | 880 |
| | 585 |
| 1,082 |
| | 763 |
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Other current assets | 301 |
| | (269 | ) | 135 |
| | 219 |
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Accounts payable | (558 | ) | | (357 | ) | (571 | ) | | (571 | ) |
Accrued wages and withholdings | (179 | ) | | (241 | ) | (108 | ) | | (184 | ) |
Other current liabilities | 14 |
| | 207 |
| 136 |
| | 665 |
|
Other operating activities | (46 | ) | | 7 |
| 8 |
| | (6 | ) |
Net cash from operating activities | 4,239 |
| | 1,832 |
| 2,670 |
| | 2,751 |
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Cash Flows From Investing Activities: | | | | | | |
Capital expenditures | (958 | ) | | (813 | ) | (427 | ) | | (365 | ) |
Proceeds from disposals of property, plant and equipment | 8 |
| | 10 |
| 3 |
| | 2 |
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Purchases of marketable securities | (4,553 | ) | | (1,813 | ) | (1,599 | ) | | (1,909 | ) |
Sales and maturities of marketable securities | 2,840 |
| | 854 |
| 974 |
| | 943 |
|
Net (increase) decrease in finance receivables | (13 | ) | | 13 |
| (20 | ) | | (9 | ) |
Cash paid for business acquisitions | (90 | ) | | (22 | ) | |
Cash paid for business acquisitions, net of cash and cash equivalents acquired | | (6 | ) | | (10 | ) |
Other investing activities | (10 | ) | | (31 | ) | (33 | ) | | (9 | ) |
Net cash (used in) investing activities | (2,776 | ) | | (1,802 | ) | (1,108 | ) | | (1,357 | ) |
Cash Flows From Financing Activities: | | | | | | |
Net change in short-term debt | 2,319 |
| | 1,096 |
| (759 | ) | | 1,463 |
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Proceeds from borrowings | 1,572 |
| | 764 |
| 1,801 |
| | 1,566 |
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Repayments of borrowings | (1,488 | ) | | (1,020 | ) | (223 | ) | | (685 | ) |
Purchases of common stock | (1,348 | ) | | (1,379 | ) | (640 | ) | | (676 | ) |
Issuances of common stock | 140 |
| | 149 |
| 83 |
| | 72 |
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Dividends | (1,270 | ) | | (1,192 | ) | (666 | ) | | (636 | ) |
Other financing activities | (177 | ) | | (50 | ) | (36 | ) | | (205 | ) |
Net cash (used in) financing activities | (252 | ) | | (1,632 | ) | |
Net cash (used in) provided by financing activities | | (440 | ) | | 899 |
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Effect Of Exchange Rate Changes On Cash And Cash Equivalents | (72 | ) | | (7 | ) | 35 |
| | (102 | ) |
Net Increase (Decrease) In Cash And Cash Equivalents | 1,139 |
| | (1,609 | ) | 1,157 |
| | 2,191 |
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Cash And Cash Equivalents: | | | | | | |
Beginning of period | 2,291 |
| | 4,665 |
| 2,730 |
| | 2,291 |
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End of period | $ | 3,430 |
| | $ | 3,056 |
| $ | 3,887 |
| | $ | 4,482 |
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See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
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, 2015March 31, 2016, our results of operations for the three and six months ended June 30, 2015March 31, 2016 and 20142015, and cash flows for the sixthree months ended June 30, 2015March 31, 2016 and 20142015. 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, 20142015.
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, 2015March 31, 2016. The fair values of our investment securities are disclosed in note 4, recognized multiemployer pension withdrawal liabilities are disclosed in note 6, our short and long-term debt in note 89 and our derivative instruments in note 1314. 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 June 2014, the Financial Accounting Standards Board ("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 new guidance became effective for us in the first quarter of 2015, and did not have a material impact on our consolidated balance sheets and statements of income.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated balance sheets and statements of income.
Accounting Standards Issued But Not Yet Effective
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 the fair value using that practical expedient. This new guidance will be applied retrospectively and becomesbecame effective for us in the first quarter of 2016, but early adoption is permitted. At this time, we doand did not expect this new guidance to have a material impact on our consolidated balance sheetsfinancial position or results of operations.
In June 2014, the related disclosuresFASB 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 statements.position or results of operations.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position or results of operations.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounting Standards Issued But Not Yet Effective
In April 2015,March 2016, the FASB issued an accounting standards update that simplifies the income tax accounting and cash flow presentation related to simplifyshare-based compensation by requiring the presentationrecognition of debt issuance costs.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 standard amends existing guidanceupdate also makes several changes to require the presentation of debt issuance costs in the consolidated balance sheets as a direct deduction from the carrying amount of the associated debt liability instead of a deferred charge.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 consolidated 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 be applied retrospectivelycontinue 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 2016,2019, but early adoption is permitted. This new guidanceWe are currently evaluating this update to determine the full impact of its adoption, but we expect material changes on 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 balance sheets.financial position, results of operations or consolidated 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.
On July 9, In August 2015, the FASB voted to deferissued an accounting standards update that defers the effective date of thisthe new revenue recognition guidance byfor one year, to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date for periods beginning after December 15, 2016. At this time, we do not expect thisIn March 2016, the FASB issued an accounting standards update that further clarifies the May 2014 accounting standards update with respect to have a materialprinciple versus agent considerations in revenue from contracts with customers and has the same effective date as the original standard. We are currently evaluating these updates to determine the full impact on our consolidated balance sheets or statements of income.adoption.
Other accounting pronouncements issued, but not effective until after June 30, 2015,March 31, 2016, are not expected to have a material impact on our consolidated balance sheetsfinancial position or statementsresults of income.operations.
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, and 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 2015,2016, we granted Restricted Units under MIP to certain eligible management employees. Restricted Units granted under MIP will 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 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 5, 20154, 2016 (for U.S.-based employees), March 2, 2016 (for management committee employees) and March 30, 201521, 2016 (for international-based employees); therefore, the Restricted Unit grant wasUnits awarded were valued for stock compensation expense purposes using the closing New York Stock Exchange price of $101.46$96.25, $98.77 and $97.27$105.15 on those dates, respectively.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under LTIP to certain eligible management employees. For grants prior to 2014, 90% of the target award was divided into three substantially equal tranches, one for each calendar year in the three-year award cycle, using performance criteria targets established each year. The targets consisted of consolidated operating return on invested capital and growth in consolidated revenue. The remaining 10% of the total award was based upon our achievement of adjusted earnings per share compared to a target established at the grant date. The performance targets for these historical awards will continue to be determined each year, and the awards will continue to vest through 2016.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Beginning with the LTIP grant in the first quarter of 2014, 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-yearthree-year period (except in the case of death, disability, or retirement, in which case immediate vesting occurs on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets set forthestablished on the grant date. The range of percentage achievement can vary from 0% to 200% of the target award.
For the two-thirds of the award related to consolidated operating return on invested capital and growth in 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 atwith a share payoutgrant date fair value of 65.86%$135.57 per unit.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nonqualified Stock Options
During the first quarter of 2015,2016, 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 20152016 and 2014,2015, we granted 0.2 and 0.1 million stock options, respectively, at a weighted average grant price of $101.93$98.77 and $96.98,$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 $18.07$17.32 and $20.48$18.07 for 20152016 and 2014,2015, respectively, using the following assumptions:
| | | 2015 | | 2014 | 2016 | | 2015 |
Expected life (in years) | 7.5 |
| | 7.5 |
| 7.5 |
| | 7.5 |
|
Risk-free interest rate | 2.07 | % | | 2.40 | % | 1.66 | % | | 2.07 | % |
Expected volatility | 20.61 | % | | 24.26 | % | 23.60 | % | | 20.61 | % |
Expected dividend yield | 2.63 | % | | 2.56 | % | 2.94 | % | | 2.63 | % |
Compensation expense for share-based awards recognized in net income for the three months ended June 30,March 31, 2016 and 2015 was $215 and 2014 was $134 and $142$194 million pre-tax, respectively. Compensation expense for share-based awards recognized in net income for the six months ended June 30, 2015 and 2014 was $328 and $306 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, 2015March 31, 2016 and December 31, 20142015 (in millions):
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
June 30, 2015: | | | | | | | |
Current marketable securities: | | | | | | | |
U.S. government and agency debt securities | $ | 319 |
| | $ | 1 |
| | $ | — |
| | $ | 320 |
|
Mortgage and asset-backed debt securities | 82 |
| | — |
| | — |
| | 82 |
|
Corporate debt securities | 1,835 |
| | 1 |
| | (1 | ) | | 1,835 |
|
Other debt, equity and investment securities | 546 |
| | 11 |
| | (2 | ) | | 555 |
|
Total marketable securities | $ | 2,782 |
| | $ | 13 |
| | $ | (3 | ) | | $ | 2,792 |
|
| | | | | | | |
December 31, 2014: | | | | | | | |
Current marketable securities: | | | | | | | |
U.S. government and agency debt securities | $ | 321 |
| | $ | 1 |
| | $ | (1 | ) | | $ | 321 |
|
Mortgage and asset-backed debt securities | 89 |
| | 1 |
| | (1 | ) | | 89 |
|
Corporate debt securities | 534 |
| | — |
| | — |
| | 534 |
|
Other debt, equity and investment securities | 48 |
| | — |
| | — |
| | 48 |
|
Total marketable securities | $ | 992 |
| | $ | 2 |
| | $ | (2 | ) | | $ | 992 |
|
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
March 31, 2016: | | | | | | | |
Current trading marketable securities: | | | | | | | |
Corporate debt securities | $ | 910 |
| | $ | — |
| | $ | — |
| | $ | 910 |
|
Non-U.S. government debt securities (1) | 197 |
| | — |
| | — |
| | 197 |
|
Carbon credit investments (1) | 440 |
| | — |
| | (156 | ) | | 284 |
|
Total trading marketable securities | $ | 1,547 |
| | $ | — |
| | $ | (156 | ) | | $ | 1,391 |
|
| | | | | | | |
Current available-for-sale securities: | | | | | | | |
U.S. government and agency debt securities | $ | 335 |
| | $ | 2 |
| | $ | — |
| | $ | 337 |
|
Mortgage and asset-backed debt securities | 72 |
| | — |
| | — |
| | 72 |
|
Corporate debt securities | 572 |
| | 2 |
| | (1 | ) | | 573 |
|
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 | $ | 986 |
| | $ | 4 |
| | $ | (1 | ) | | $ | 989 |
|
| | | | | | | |
Total current marketable securities | $ | 2,533 |
| | $ | 4 |
| | $ | (157 | ) | | $ | 2,380 |
|
| | | | | | | |
| 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. |
Of the total estimated fair value in marketable securities listed above, $2.007 billion and $430 million as
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unrealized gains and losses(losses) recognized on trading securities in investment income withinand other on the statements of consolidated income. The remaining estimated fair value of marketable securities was classified as "available-for-sale", with related unrealized gainsincome for the three months ended March 31, 2016 and losses, net of tax, recognized in accumulated other comprehensive income ("AOCI").2015 were $(156) and $1 million, respectively.
Investment Other-Than-Temporary Impairments
We have concluded that no material other-than-temporary impairment losses existed as of June 30, 2015March 31, 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, 2015March 31, 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 | $ | 2,039 |
| | $ | 2,039 |
|
Due after one year through three years | 428 |
| | 428 |
|
Due after three years through five years | 14 |
| | 15 |
|
Due after five years | 73 |
| | 73 |
|
| 2,554 |
| | 2,555 |
|
Equity and other investment securities | 228 |
| | 237 |
|
| $ | 2,782 |
| | $ | 2,792 |
|
Table of Contents |
| | | | | | | |
| Cost | | Estimated Fair Value |
Due in one year or less | $ | 2,015 |
| | $ | 1,858 |
|
Due after one year through three years | 429 |
| | 430 |
|
Due after three years through five years | 15 |
| | 16 |
|
Due after five years | 72 |
| | 74 |
|
| 2,531 |
| | 2,378 |
|
Equity securities | 2 |
| | 2 |
|
| $ | 2,533 |
| | $ | 2,380 |
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash and Non-Current Investments and Restricted Cash
We had $442$442 million of restricted cash related to our self-insurance requirements as of June 30, 2015March 31, 2016 and December 31, 2014,2015 which is reported in “non-currentnon-current investments and restricted cash”cash on the consolidated balance sheets. This restricted cash is primarily invested in money market fundsfunds.
At March 31, 2016 and similar cash equivalent type assets.
At June 30, 2015 and December 31, 2014,2015, we held a $19$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 $8$23 and $28$12 million as of June 30, 2015March 31, 2016 and December 31, 2014,2015, respectively. The amounts described above are classified as “non-currentnon-current investments and restricted cash”cash on the consolidated balance sheets, while the quarterly change in investment fair value is recognized in "investment income"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, equity securities, and equity index funds and mostcertain U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “otherother non-current investments”investments in the tables below and as “otherother non-current assets”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 8.29%7.77% and 7.81%8.22% as of June 30, 2015March 31, 2016 and December 31, 2014,2015, 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, 2015March 31, 2016 and December 31, 20142015, 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 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance |
June 30, 2015: | | | | | | | | |
March 31, 2016: | | | | | | | | |
Marketable Securities: | | | | | | | | | | | | | | |
U.S. government and agency debt securities | $ | 320 |
| | $ | — |
| | $ | — |
| | $ | 320 |
| $ | 337 |
| | $ | — |
| | $ | — |
| | $ | 337 |
|
Mortgage and asset-backed debt securities | — |
| | 82 |
| | — |
| | 82 |
| — |
| | 72 |
| | — |
| | 72 |
|
Corporate debt securities | — |
| | 1,835 |
| | — |
| | 1,835 |
| — |
| | 1,483 |
| | — |
| | 1,483 |
|
Other debt, equity and investment securities | — |
| | 555 |
| | — |
| | 555 |
| |
U.S. state and local municipal debt securities | | — |
| | 2 |
| | — |
| | 2 |
|
Equity securities | | — |
| | 2 |
| | — |
| | 2 |
|
Non-U.S. government debt securities | | — |
| | 200 |
| | — |
| | 200 |
|
Carbon credit investments | | 284 |
| | — |
| | — |
| | 284 |
|
Total marketable securities | 320 |
| | 2,472 |
| | — |
| | 2,792 |
| 621 |
| | 1,759 |
| | — |
| | 2,380 |
|
Other non-current investments | 19 |
| | — |
| | 48 |
| | 67 |
| 19 |
| | — |
| | 27 |
| | 46 |
|
Total | $ | 339 |
| | $ | 2,472 |
| | $ | 48 |
| | $ | 2,859 |
| $ | 640 |
| | $ | 1,759 |
| | $ | 27 |
| | $ | 2,426 |
|
|
| | | | | | | | | | | | | | | |
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
|
| | | | | | | | | | | | | | | |
December 31, 2014: | | | | | | | |
Marketable Securities: | | | | | | | |
U.S. government and agency debt securities | $ | 321 |
| | $ | — |
| | $ | — |
| | $ | 321 |
|
Mortgage and asset-backed debt securities | — |
| | 89 |
| | — |
| | 89 |
|
Corporate debt securities | — |
| | 534 |
| | — |
| | 534 |
|
Other debt, equity and investment securities | — |
| | 48 |
| | — |
| | 48 |
|
Total marketable securities | 321 |
| | 671 |
| | — |
| | 992 |
|
Other non-current investments
| 19 |
| | — |
| | 64 |
| | 83 |
|
Total | $ | 340 |
| | $ | 671 |
| | $ | 64 |
| | $ | 1,075 |
|
The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended June 30, 2015March 31, 2016 and 20142015 (in millions): |
| | | | | | | | | | | |
| 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) | — |
| | (8 | ) | | (8 | ) |
Included in accumulated other comprehensive income (pre-tax) | — |
| | — |
| | — |
|
Purchases | — |
| | — |
| | — |
|
Sales | — |
| | — |
| | — |
|
Balance on June 30, 2015 | $ | — |
| | $ | 48 |
| | $ | 48 |
|
| | | | | |
|
| | | | | | | | | | | |
| | | | | |
| 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) | — |
| | (5 | ) | | (5 | ) |
Included in accumulated other comprehensive income (pre-tax) | — |
| | — |
| | — |
|
Purchases | — |
| | — |
| | — |
|
Sales | — |
| | — |
| | — |
|
Balance on March 31, 2016 | $ | — |
| | $ | 27 |
| | $ | 27 |
|
| | | | | |
| 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) | — |
| | (8 | ) | | (8 | ) |
Included in accumulated other comprehensive income (pre-tax) | — |
| | — |
| | — |
|
Purchases | — |
| | — |
| | — |
|
Sales | — |
| | — |
| | — |
|
Balance on March 31, 2015 | $ | — |
| | $ | 56 |
|
| $ | 56 |
|
There were no transfers of investments between Level 1 and Level 2 during the three months ended March 31, 2016 and 2015.
|
| | | | | | | | | | | |
| | | | | |
| Marketable Securities | | Other Non-Current Investments | | Total |
Balance on April 1, 2014 | $ | — |
| | $ | 99 |
| | $ | 99 |
|
Transfers into (out of) Level 3 | — |
| | — |
| | — |
|
Net realized and unrealized gains (losses): | | | | | |
Included in earnings (in investment income) | — |
| | (4 | ) | | (4 | ) |
Included in accumulated other comprehensive income (pre-tax) | — |
| | — |
| | — |
|
Purchases | — |
| | — |
| | — |
|
Sales | — |
| | — |
| | — |
|
Balance on June 30, 2014 | $ | — |
| | $ | 95 |
| | $ | 95 |
|
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, 2015 and 2014 (in millions):
|
| | | | | | | | | | | |
| | | | | |
| 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) | — |
| | (16 | ) | | (16 | ) |
Included in accumulated other comprehensive income (pre-tax) | — |
| | — |
| | — |
|
Purchases | — |
| | — |
| | — |
|
Sales | — |
| | — |
| | — |
|
Balance on June 30, 2015 | $ | — |
| | $ | 48 |
| | $ | 48 |
|
| | | | | |
| Marketable Securities | | Other Investments | | Total |
Balance on January 1, 2014 | $ | — |
| | 110 |
| | 110 |
|
Transfers into (out of) Level 3 | — |
| | — |
| | — |
|
Net realized and unrealized gains (losses): | | | | | |
Included in earnings (in investment income) | — |
| | (15 | ) | | (15 | ) |
Included in accumulated other comprehensive income (pre-tax) | — |
| | — |
| | — |
|
Purchases | — |
| | — |
| | — |
|
Sales | — |
| | — |
| | — |
|
Balance on June 30, 2014 | $ | — |
| | $ | 95 |
|
| $ | 95 |
|
There were no transfers of investments between Level 1 and Level 2 during the three and six months ended June 30, 2015 and 2014.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 2015March 31, 2016 and December 31, 20142015 consist of the following (in millions):
| | | 2015 | | 2014 | 2016 | | 2015 |
Vehicles | $ | 7,667 |
| | $ | 7,542 |
| $ | 8,214 |
| | $ | 8,111 |
|
Aircraft | 15,808 |
| | 15,801 |
| 15,817 |
| | 15,815 |
|
Land | 1,190 |
| | 1,145 |
| 1,285 |
| | 1,263 |
|
Buildings | 3,225 |
| | 3,276 |
| 3,332 |
| | 3,280 |
|
Building and leasehold improvements | 3,319 |
| | 3,266 |
| 3,520 |
| | 3,450 |
|
Plant equipment | 7,630 |
| | 7,649 |
| 8,149 |
| | 8,026 |
|
Technology equipment | 1,678 |
| | 1,608 |
| 1,688 |
| | 1,670 |
|
Equipment under operating leases | 30 |
| | 34 |
| 29 |
| | 30 |
|
Construction-in-progress | 398 |
| | 299 |
| 272 |
| | 273 |
|
| 40,945 |
| | 40,620 |
| 42,306 |
| | 41,918 |
|
Less: Accumulated depreciation and amortization | (22,975 | ) | | (22,339 | ) | (24,021 | ) | | (23,566 | ) |
| $ | 17,970 |
| | $ | 18,281 |
| $ | 18,285 |
| | $ | 18,352 |
|
We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor our otherall property, plant and equipment categories 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, 2015March 31, 2016 and 20142015.
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, 2015March 31, 2016 and 20142015 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Three Months Ended June 30: | | | | | | | | | | | |
Service cost | $ | 381 |
| | $ | 285 |
| | $ | 8 |
| | $ | 18 |
| | $ | 13 |
| | $ | 15 |
|
Interest cost | 424 |
| | 401 |
| | 30 |
| | 34 |
| | 11 |
| | 14 |
|
Expected return on assets | (622 | ) | | (565 | ) | | (4 | ) | | (6 | ) | | (16 | ) | | (15 | ) |
Amortization of: | | | | | | | | | | | |
Transition obligation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Prior service cost | 42 |
| | 43 |
| | 1 |
| | (4 | ) | | 1 |
| | (3 | ) |
Other net (gain) loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Actuarial (gain) loss | — |
| | — |
| | — |
| | 746 |
| | — |
| | — |
|
Settlement and curtailment loss | — |
| | — |
| | — |
| | $ | 320 |
| | — |
| | — |
|
Net periodic benefit cost | $ | 225 |
| | $ | 164 |
| | $ | 35 |
| | $ | 1,108 |
| | $ | 9 |
| | $ | 11 |
|
| | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Six Months Ended June 30: | | | | | | | | | | | |
Service cost | $ | 763 |
| | $ | 569 |
| | $ | 17 |
| | $ | 39 |
| | $ | 25 |
| | $ | 27 |
|
Interest cost | 847 |
| | 802 |
| | 61 |
| | 86 |
| | 22 |
| | 26 |
|
Expected return on assets | (1,244 | ) | | (1,129 | ) | | (8 | ) | | (12 | ) | | (31 | ) | | (30 | ) |
Amortization of: | | | | | | | | | | | |
Transition obligation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Prior service cost | 84 |
| | 85 |
| | 2 |
| | (3 | ) | | 1 |
| | (3 | ) |
Other net (gain) loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Actuarial (gain) loss | — |
| | — |
| | — |
| | 746 |
| | — |
| | — |
|
Settlement and curtailment loss | — |
| | — |
| | — |
| | $ | 320 |
| | — |
| | — |
|
Net periodic benefit cost | $ | 450 |
| | $ | 327 |
| | $ | 72 |
| | $ | 1,176 |
| | $ | 17 |
| | $ | 20 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
Service cost | $ | 352 |
| | $ | 382 |
| | $ | 7 |
| | $ | 9 |
| | $ | 12 |
| | $ | 12 |
|
Interest cost | 457 |
| | 423 |
| | 30 |
| | 31 |
| | 10 |
| | 11 |
|
Expected return on assets | (629 | ) | | (622 | ) | | (1 | ) | | (4 | ) | | (14 | ) | | (15 | ) |
Amortization of prior service cost | 42 |
| | 42 |
| | 1 |
| | 1 |
| | — |
| | — |
|
Net periodic benefit cost | $ | 222 |
| | $ | 225 |
| | $ | 37 |
| | $ | 37 |
| | $ | 8 |
| | $ | 8 |
|
During the first sixthree months of 2015,2016, we contributed $45$20 and $54$23 million to our company-sponsored pension and postretirement medical benefit plans, respectively. We also expect to contribute $1.075$1.216 billion and $50$78 million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively.
Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2015March 31, 2016 and December 31, 20142015 we had $875$870 and $878$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 4746 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, 2015March 31, 2016 and December 31, 20142015 was $834$902 and $913$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 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 ("Teamsters"), UPS agreed to provide supplemental benefits under the UPS/IBT Full-Time Employee 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 recognition of a $1.7 billion pension liability in 2007. Additionally, UPS agreed to provide coordinating benefits under the UPS/IBT Full-Time Employee 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 were 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 the following three requirements set forth in the MPRA:
that the proposed benefit suspensions, in the aggregate, be reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency, because the investment return and entry age assumptions used for this purpose in the CSPF proposed plan were not reasonable;
that the proposed benefit suspensions be equitably distributed across the participant and beneficiary population; and
that the notices of proposed benefit suspensions be written so as to be understood by the average plan participant.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Because the CSPF has asserted that it will become insolvent within ten years, it is possible that CSPF will propose a revised plan under the MPRA. Due to uncertainties, we are not able to estimate a range of additional obligations, if any, that could arise as a result of the CSPF situation, which amounts could be material. These uncertainties include the actions that may be taken by CSPF, the government or others, including whether CSPF will submit a revised benefit reduction plan, the terms and assumptions of any such proposed plan, how the regulations and standards under the MPRA are applied to any subsequently proposed plan, and the effect of discount rates and various other actuarial assumptions. Accordingly, we have not recognized any additional liability for coordinating benefits within the UPS/IBT Full-Time Employee Pension Plan.
Collective Bargaining Agreements
As of December 31, 2014,2015, we had approximately 270,000266,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”).Teamsters. In addition, our airline pilots, airline mechanics, ground mechanics and certain other employees are employed under other collective bargaining agreements. During the second quarter ofIn 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. InDuring the secondfirst quarter of 2014,2015, we remitted $278$53 million for these retroactive economic benefits; this payment had an immaterial impact on net income, as these retroactive economic benefits had been accrued since the July 31, 2013 expiration of the prior agreement.
In addition to the retroactive economic provisions of the NMA, there were certain changes to the delivery of healthcare benefits that were effective at various dates. These changes impact approximately 36,000 full-time and 73,000 part-time active employees covered by the NMA and the UPS Freight collective bargaining agreement (collectively referred to as the “NMA Group”), as well as approximately 16,000 employees covered by other collective bargaining agreements (the “Non-NMA Group”). These provisions are discussed further below in the "Changes to the Delivery of Active and Postretirement Healthcare Benefits" section.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. The ongoing contract negotiations between UPS and the IPA are in mediation by the National Mediation Board.
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.
Changes to the Delivery of Active and Postretirement Healthcare Benefits
Prior to ratification, the NMA Group and Non-NMA Group employees received their healthcare benefits through UPS-sponsored active and postretirement health and welfare benefit plans. Effective June 1, 2014, we ceased providing healthcare benefits to active NMA Group employees through these UPS-sponsored benefit plans, and the responsibility for providing healthcare benefits for active employees was assumed by three separate multiemployer healthcare funds (the “Funds”). The responsibility for providing healthcare benefits for the active Non-NMA Group employees was also assumed by the Funds on various dates up to January 1, 2015, depending on the ratification date of the applicable collective bargaining agreement. We will make contributions to the Funds based on negotiated fixed hourly or monthly contribution rates for the duration of the NMA and other applicable collective bargaining agreements.
Additionally, the Funds assumed the obligation to provide postretirement healthcare benefits to the employees in the NMA Group who retire on or after January 1, 2014. The postretirement healthcare benefit obligation for the employees in the Non-NMA Group was assumed by the Funds for employees retiring on or after January 1, 2014 or January 1, 2015, depending on the applicable collective bargaining agreement. In exchange for the assumption of the obligation to provide postretirement healthcare benefits to the NMA Group and Non-NMA Group, we transferred cash totaling $2.271billion to the Funds in the second quarter of 2014. UPS-sponsored health and welfare benefit plans retained responsibility for providing postretirement healthcare coverage for employees in the NMA Group who retired from UPS prior to January 1, 2014, and for employees in the Non-NMA Group who retired from UPS prior to the January 1, 2014 or January 1, 2015 effective date in the applicable collective bargaining agreement.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounting Impact of Health and Welfare Plan Changes
Income Statement Impact:
We recorded a pre-tax charge of $1.066 billion ($665 million after-tax) in the second quarter of 2014 for the health and welfare plan changes described above. The components of this charge, which was included in "compensation and benefits" expense in the statement of consolidated income, are as follows:
Partial Plan Curtailment: We recorded a $112 million pre-tax curtailment loss due to the elimination of future service benefit accruals. This curtailment loss represents the accelerated recognition of unamortized prior service costs.
Remeasurement of Postretirement Obligation: We recorded a $746 million pre-tax loss due to the remeasurement of the postretirement benefit obligations of the affected UPS-sponsored health and welfare benefit plans.
Settlement: We recorded a $208 million pre-tax settlement loss, which represents the recognition of unamortized actuarial losses associated with the postretirement obligation for the NMA Group.
Balance Sheet and Cash Flow Impact:
During the second quarter of 2014, as part of the health and welfare plan changes described previously, we transferred cash totaling $2.271 billion to the Funds, which was accounted for as a settlement of our postretirement benefit obligations. As of June 30, 2014, we had received approximately $375 million of cash tax benefits (through reduced U.S. Federal and state quarterly income tax payments) and we received the remaining cash tax benefits of approximately $479 million resulting from these payments over the remainder of 2014.
For NMA Group employees who retired prior to January 1, 2014 and remained with the UPS-sponsored health and welfare plans, the changes to the contributions, benefits and cost sharing provisions in these plans resulted in an increase in the postretirement benefit obligation, and a corresponding decrease in pre-tax AOCI, of $13 million upon ratification.
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, 2015March 31, 2016 and December 31, 20142015 (in millions):
| | | U.S. Domestic Package | | International Package | | Supply Chain & Freight | | Consolidated | U.S. Domestic Package | | International Package | | Supply Chain & Freight | | Consolidated |
December 31, 2014: | $ | — |
| | $ | 449 |
| | $ | 1,735 |
| | $ | 2,184 |
| |
December 31, 2015: | | $ | 715 |
| | $ | 425 |
| | $ | 2,279 |
| | $ | 3,419 |
|
Acquired | — |
| | — |
| | 72 |
| | 72 |
| — |
| | — |
| | — |
| | — |
|
Currency / Other | — |
| | (16 | ) | | (26 | ) | | (42 | ) | — |
| | 5 |
| | 16 |
| | 21 |
|
June 30, 2015: | $ | — |
| | $ | 433 |
| | $ | 1,781 |
| | $ | 2,214 |
| |
March 31, 2016: | | $ | 715 |
| | $ | 430 |
| | $ | 2,295 |
| | $ | 3,440 |
|
The goodwill acquired in the Supply Chain & Freight segment was related to our March 2015 acquisition of Poltraf Sp. z.o.o. ("Poltraf"), a Polish-based pharmaceutical logistics company recognized for its temperature-sensitive warehousing and transportation solutions, and our June 2015 acquisitions of Parcel Pro, Inc. ("Parcel Pro") and the Insured Parcel Services division of G4S International Logistics ("IPS"), which are businesses that provide services and insurance coverage for the transport of high value luxury goods. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition. Our purchase price allocations for Parcel Pro and IPS have not been finalized. These acquisitions were not material to our consolidated financial position or results of operations.
The remaining 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, 2015March 31, 2016 and December 31, 20142015 (in millions):
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
June 30, 2015: | | | | | | |
March 31, 2016: | | | | | | |
Capitalized software | $ | 2,613 |
| | $ | (1,934 | ) | | $ | 679 |
| $ | 2,798 |
| | $ | (2,071 | ) | | $ | 727 |
|
Licenses | 214 |
| | (152 | ) | | 62 |
| 214 |
| | (127 | ) | | 87 |
|
Franchise rights | 121 |
| | (80 | ) | | 41 |
| 132 |
| | (85 | ) | | 47 |
|
Customer lists | 144 |
| | (71 | ) | | 73 |
| |
Customer relationships | | 512 |
| | (47 | ) | | 465 |
|
Trade name | | 200 |
| | — |
| | 200 |
|
Trademarks, patents, and other | 35 |
| | (12 | ) | | 23 |
| 62 |
| | (19 | ) | | 43 |
|
Total Intangible Assets, Net | $ | 3,127 |
|
| $ | (2,249 | ) | | $ | 878 |
| $ | 3,918 |
|
| $ | (2,349 | ) | | $ | 1,569 |
|
December 31, 2014: | | | | | | |
December 31, 2015: | | | | | | |
Capitalized software | $ | 2,641 |
| | $ | (1,997 | ) | | $ | 644 |
| $ | 2,739 |
| | $ | (2,026 | ) | | $ | 713 |
|
Licenses | 217 |
| | (133 | ) | | 84 |
| 189 |
| | (116 | ) | | 73 |
|
Franchise rights | 117 |
| | (77 | ) | | 40 |
| 125 |
| | (83 | ) | | 42 |
|
Customer lists | 123 |
| | (66 | ) | | 57 |
| |
Customer list | | 511 |
| | (35 | ) | | 476 |
|
Trade name | | 200 |
| | — |
| | 200 |
|
Trademarks, patents, and other | 31 |
| | (9 | ) | | 22 |
| 61 |
| | (16 | ) | | 45 |
|
Total Intangible Assets, Net | $ | 3,129 |
| | $ | (2,282 | ) | | $ | 847 |
| $ | 3,825 |
| | $ | (2,276 | ) | | $ | 1,549 |
|
As of March 31, 2016, we had a trade name with a carrying value of $200 million and licenses with a carrying value of $5 million, which are deemed to be indefinite-lived intangible assets and are included in the table above.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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. 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 89. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt as of June 30, 2015March 31, 2016 and December 31, 20142015 consists of the following (in millions):
| | | Principal Amount | | Carrying Value | Principal Amount | | Carrying Value |
| | Maturity | | 2015 | | 2014 | | Maturity | | 2016 | | 2015 |
Commercial paper | $ | 3,210 |
| | 2015 | | $ | 3,209 |
| | $ | 772 |
| $ | 3,810 |
| | 2016 | | $ | 3,809 |
| | $ | 2,965 |
|
Fixed-rate senior notes: | | | | | | | | | | |
1.125% senior notes | 375 |
| | 2017 | | 372 |
| | 370 |
| 375 |
| | 2017 | | 374 |
| | 372 |
|
5.50% senior notes | 750 |
| | 2018 | | 798 |
| | 802 |
| 750 |
| | 2018 | | 787 |
| | 787 |
|
5.125% senior notes | 1,000 |
| | 2019 | | 1,073 |
| | 1,076 |
| 1,000 |
| | 2019 | | 1,075 |
| | 1,064 |
|
3.125% senior notes | 1,500 |
| | 2021 | | 1,612 |
| | 1,617 |
| 1,500 |
| | 2021 | | 1,648 |
| | 1,613 |
|
2.45% senior notes | 1,000 |
| | 2022 | | 975 |
| | 977 |
| 1,000 |
| | 2022 | | 1,028 |
| | 991 |
|
6.20% senior notes | 1,500 |
| | 2038 | | 1,481 |
| | 1,481 |
| 1,500 |
| | 2038 | | 1,481 |
| | 1,481 |
|
4.875% senior notes | 500 |
| | 2040 | | 489 |
| | 489 |
| 500 |
| | 2040 | | 489 |
| | 489 |
|
3.625% senior notes | 375 |
| | 2042 | | 368 |
| | 367 |
| 375 |
| | 2042 | | 367 |
| | 367 |
|
8.375% Debentures: | | | | | | | | | | |
8.375% debentures | 424 |
| | 2020 | | 477 |
| | 480 |
| 424 |
| | 2020 | | 480 |
| | 474 |
|
8.375% debentures | 276 |
| | 2030 | | 283 |
| | 283 |
| 276 |
| | 2030 | | 282 |
| | 282 |
|
Pound Sterling notes: | | | | | | | | | | |
5.50% notes | 105 |
| | 2031 | | 101 |
| | 99 |
| 96 |
| | 2031 | | 89 |
| | 92 |
|
5.125% notes | 717 |
| | 2050 | | 683 |
| | 673 |
| 654 |
| | 2050 | | 623 |
| | 638 |
|
Euro Senior notes: | | | | | | |
1.625% notes | | 797 |
| | 2025 | | 790 |
| | 759 |
|
Floating rate senior notes | | 569 |
| | 2020 | | 567 |
| | 544 |
|
Floating rate senior notes | 463 |
| | 2049-2064 | | 459 |
| | 459 |
| 725 |
| | 2049-2066 | | 717 |
| | 600 |
|
Capital lease obligations | 434 |
| | 2015-3005 | | 434 |
| | 505 |
| 479 |
| | 2016-3005 | | 479 |
| | 475 |
|
Facility notes and bonds | 320 |
| | 2015-2036 | | 320 |
| | 320 |
| 320 |
| | 2016-2045 | | 320 |
| | 319 |
|
Other debt | 18 |
| | 2015-2022 | | 18 |
| | 17 |
| 33 |
| | 2016-2022 | | 33 |
| | 22 |
|
Total Debt | $ | 12,967 |
| | 13,152 |
| | 10,787 |
| $ | 15,183 |
| | 15,438 |
| | 14,334 |
|
Less: Current Maturities | | | (3,252 | ) | | (923 | ) | | | (3,869 | ) | | (3,018 | ) |
Long-term Debt | | | $ | 9,900 |
| | $ | 9,864 |
| | | $ | 11,569 |
| | $ | 11,316 |
|
Debt Issuances
In March 2016, we issued floating rate senior notes with a principal balance of $118 million. As the proceeds for these notes were not received until April 2016, we recognized a receivable in other current assets in our consolidated balance sheet as of March 31, 2016. 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$10.0 billion under thea U.S. commercial paper program we maintain.and €5.0 billion (in a variety of currencies) under an European commercial paper program. We had $2.547 billionthe following amounts outstanding under this programthese programs as of June 30, 2015,March 31, 2016: $2.926 billion with an average interest rate of 0.10%. We also maintain a European commercial paper program under which we are authorized to borrow up to €5.0 billion in a variety of currencies. We had £4200.41%, €630 million ($662718 million) outstanding under this program as of June 30, 2015 with an average interest rate of 0.49%-0.18% and £115 million ($165 million) with an average interest rate of 0.54%. As of June 30, 2015,March 31, 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$1.5 billion, and expires on March 26, 2016.24, 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, 2015.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The second agreement provides revolving credit facilities of $3.0$3.0 billion, and expires on March 27, 2020.25, 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, 2015.March 31, 2016.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of June 30, 2015March 31, 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, 2015,March 31, 2016, 10% of net tangible assets was equivalent to $2.386$2.306 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 $14.337$17.243 and $12.257$15.524 billion as of June 30, 2015March 31, 2016 and December 31, 2014,2015, 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 910. 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. The court hasTrial is scheduled a trial for November 2015, limited to the claim of the class representative. After that trial is complete, the court will consider how to proceed with respect to the claims of the other class members.January 2017.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. The Antitrust Division of the U.S. Department of Justice (“DOJ”) has an open 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) plaintiff has filed a notice of appeal. 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 January 2008, a class action complaint was filed in the United States District Court for the Eastern District of New York alleging price-fixing activities relating to the provision of freight forwarding services. UPS was not named in this case. In July 2009, the plaintiffs filed a First Amended Complaint naming numerous global freight forwarders as defendants. UPS and UPS Supply Chain Solutions are among the 60 defendants named in the amended complaint. After two rounds of motions to dismiss, in October 2014, UPS entered into a settlement agreement with the plaintiffs to settle the remaining claims asserted against UPS for an immaterial amount. The court granted preliminaryentered an order granting final approval of the settlement on December 16, 2014. The settlement is subject to final court approval, which is currently scheduled to be considered by the Court on November 2, 2015.in January 2016.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. UPS intends to continue to defend itself in these proceedings. In November 2012, the Commerce Commission of Singapore initiated an investigation with respect to similar matters. On May 29, 2015, the Commerce Commission of Singapore informed UPS that it was closing the investigation with no action.
We are cooperating with each of these investigations,the Brazil 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 investigations.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 January 2014, we received a Civil Investigative Demand from the DOJ seeking documents related to possible damages under the False Claims Act ("FCA") in connection with delivery services provided to government customers where guaranteed commitment times allegedly were not met. The General Services Administration - Office of Inspector General had previously sought similar documents. We also have been contacted by multiple states requesting this information. The Company cooperated with these inquiries. The Company reached agreements in principle during the second quarter of 2015 with the DOJ and a group of state and local governments to resolve all of their respective claims. We do not believe that the terms of the settlements will 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 court held a hearing on our motion to dismiss in July 2015.Discovery 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 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.
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 1011. 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$0.01 par value, and as of June 30, 2015,March 31, 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$0.01 par value, authorized to be issued; asissued. As of June 30, 2015, March 31, 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 sixthree months ended June 30, 2015March 31, 2016 and 20142015 (in millions, except per share amounts):
| | | 2015 | | 2014 | 2016 | | 2015 |
| Shares | | Dollars | | Shares | | Dollars | Shares | | Dollars | | Shares | | Dollars |
Class A Common Stock | | | | | | | | | | | | | | |
Balance at beginning of period | 201 |
| | $ | 2 |
| | 212 |
| | $ | 2 |
| 194 |
| | $ | 2 |
| | 201 |
| | $ | 2 |
|
Common stock purchases | (2 | ) | | — |
| | (3 | ) | | — |
| (2 | ) | | — |
| | (1 | ) | | — |
|
Stock award plans | 4 |
| | — |
| | 4 |
| | — |
| 4 |
| | — |
| | 2 |
| | — |
|
Common stock issuances | 1 |
| | — |
| | 1 |
| | — |
| 1 |
| | — |
| | 1 |
| | — |
|
Conversions of class A to class B common stock | (5 | ) | | — |
| | (6 | ) | | — |
| (3 | ) | | — |
| | (2 | ) | | — |
|
Class A shares issued at end of period | 199 |
| | $ | 2 |
| | 208 |
| | $ | 2 |
| 194 |
| | $ | 2 |
| | 201 |
| | $ | 2 |
|
Class B Common Stock | | | | | | | | | | | | | | |
Balance at beginning of period | 705 |
| | $ | 7 |
| | 712 |
| | $ | 7 |
| 693 |
| | $ | 7 |
| | 705 |
| | $ | 7 |
|
Common stock purchases | (12 | ) | | — |
| | (11 | ) | | — |
| (5 | ) | | — |
| | (6 | ) | | — |
|
Conversions of class A to class B common stock | 5 |
| | — |
| | 6 |
| | — |
| 3 |
| | — |
| | 2 |
| | — |
|
Class B shares issued at end of period | 698 |
| | $ | 7 |
| | 707 |
| | $ | 7 |
| 691 |
| | $ | 7 |
| | 701 |
| | $ | 7 |
|
Additional Paid-In Capital | | | | | | | | | | | | | | |
Balance at beginning of period | | | $ | — |
| | | | $ | — |
| | | $ | — |
| | | | $ | — |
|
Stock award plans | | | 265 |
| | | | 232 |
| | | 137 |
| | | | 124 |
|
Common stock purchases | | | (392 | ) | | | | (481 | ) | | | (336 | ) | | | | (126 | ) |
Common stock issuances | | | 173 |
| | | | 147 |
| | | 96 |
| | | | 101 |
|
Option premiums received (paid) | | | (46 | ) | | | | 102 |
| | | 103 |
| | | | (99 | ) |
Balance at end of period | | | $ | — |
| | | | $ | — |
| | | $ | — |
| | | | $ | — |
|
Retained Earnings | | | | | | | | | | | | | | |
Balance at beginning of period | | | $ | 5,726 |
| | | | $ | 6,925 |
| | | $ | 6,001 |
| | | | $ | 5,726 |
|
Net income attributable to common shareowners | | | 2,256 |
| | | | 1,365 |
| | | 1,131 |
| | | | 1,026 |
|
Dividends ($1.46 and $1.34 per share) | | | (1,348 | ) | | | | (1,253 | ) | |
Dividends ($0.78 and $0.73 per share) | | | | (718 | ) | | | | (683 | ) |
Common stock purchases | | | (966 | ) | | | | (882 | ) | | | (319 | ) | | | | (561 | ) |
Balance at end of period | | | $ | 5,668 |
| | | | $ | 6,155 |
| | | $ | 6,095 |
| | | | $ | 5,508 |
|
In total, weWe repurchased 13.56.6 million shares of class A and class B common stock for $1.358 billion$655 million during the sixthree months ended June 30, 2015,March 31, 2016, and 13.76.8 million shares for $1.363 billion$687 million during the sixthree months ended June 30, 2014.March 31, 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 first quarter were 6.8 million shares for $680 million. In February 2013, the Board of Directors approved a share repurchase authorization of $10.0 billion, which has no expiration date. As of March 31, 2016, we had $761 million of this share repurchase authorization available. In May 2016, the Board of Directors approved a new share repurchase authorization of $10.0$8.0 billion, which has no expiration date. As of June 30, 2015, we had $2.794 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 secondfirst quarter of 2015,2016, we entered into an accelerated share repurchase program which allowed us to repurchase 4.03.0 million shares for $400$300 million. The program was completed in June 2015.March 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 $(46)$103 and $102$(99) million during the first sixthree months of 20152016 and 2014,2015, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of June 30, 2015,March 31, 2016, we had outstanding options for the purchase of 2.30.6 million shares with a weighted average strike price of $89.91$81.97 per share that will settle in the third and fourth quarterssecond quarter of 2015.2016.
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 sixthree months ended June 30, 2015March 31, 2016 and 20142015 is as follows (in millions):
| | | 2015 | | 2014 | 2016 | | 2015 |
Foreign currency translation gain (loss): | | | | | | |
Balance at beginning of period | $ | (457 | ) | | $ | (126 | ) | $ | (897 | ) | | $ | (457 | ) |
Reclassification to earnings (no tax impact in either period) | — |
| | — |
| |
Translation adjustment (net of tax effect of $0 and $3) | (203 | ) | | 3 |
| |
Translation adjustment (no tax impact in either period) | | 26 |
| | (304 | ) |
Balance at end of period | (660 | ) | | (123 | ) | (871 | ) | | (761 | ) |
Unrealized gain (loss) on marketable securities, net of tax: | | | | | | |
Balance at beginning of period | — |
| | (1 | ) | (1 | ) | | — |
|
Current period changes in fair value (net of tax effect of $0 and $1) | 1 |
| | 2 |
| |
Current period changes in fair value (net of tax effect of $2 and $1) | | 3 |
| | 2 |
|
Reclassification to earnings (no tax impact in either period) | — |
| | — |
| — |
| | — |
|
Balance at end of period | 1 |
| | 1 |
| 2 |
| | 2 |
|
Unrealized gain (loss) on cash flow hedges, net of tax: | | | | | | |
Balance at beginning of period | 61 |
| | (219 | ) | 67 |
| | 61 |
|
Current period changes in fair value (net of tax effect of $56 and $(27)) | 91 |
| | (44 | ) | |
Reclassification to earnings (net of tax effect of $(45) and $1) | (74 | ) | | 3 |
| |
Current period changes in fair value (net of tax effect of $(60) and $120) | | (100 | ) | | 199 |
|
Reclassification to earnings (net of tax effect of $(38) and $(14)) | | (62 | ) | | (23 | ) |
Balance at end of period | 78 |
| | (260 | ) | (95 | ) | | 237 |
|
Unrecognized pension and postretirement benefit costs, net of tax: | | | | | | |
Balance at beginning of period | (3,198 | ) | | (114 | ) | (2,709 | ) | | (3,198 | ) |
Reclassification to earnings (net of tax effect of $35 and $430) | 52 |
| | 715 |
| |
Remeasurement of plan assets and liabilities (net of tax effect of $0 and $(488)) | — |
| | (815 | ) | |
Reclassification to earnings (net of tax effect of $17 and $17) | | 26 |
| | 26 |
|
Remeasurement of plan assets and liabilities (net of tax effect of $0 and $3) | | — |
| | 6 |
|
Balance at end of period | (3,146 | ) | | (214 | ) | (2,683 | ) | | (3,166 | ) |
Accumulated other comprehensive income (loss) at end of period | $ | (3,727 | ) | | $ | (596 | ) | $ | (3,647 | ) | | $ | (3,688 | ) |
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, 2015March 31, 2016 and 20142015 is as follows (in millions):
|
| | | | | | | | | |
Three Months Ended June 30: | | | | | |
| Amount Reclassified from AOCI | | Affected Line Item in the Income Statement |
| 2015 | | 2014 | |
Unrealized gain (loss) on marketable securities: | | | | | |
Realized gain (loss) on sale of securities | $ | — |
| | $ | — |
| | Investment income |
Income tax (expense) benefit | — |
| | — |
| | Income tax expense |
Impact on net income | — |
| | — |
| | Net income |
Unrealized gain (loss) on cash flow hedges: | | | | | |
Interest rate contracts | (6 | ) | | (5 | ) | | Interest expense |
Foreign exchange contracts | 11 |
| | 20 |
| | Interest expense |
Foreign exchange contracts | 77 |
| | (12 | ) | | Revenue |
Income tax (expense) benefit | (31 | ) | | (2 | ) | | Income tax expense |
Impact on net income | 51 |
| | 1 |
| | Net income |
Unrecognized pension and postretirement benefit costs: | | | | | |
Prior service costs | (44 | ) | | (36 | ) | | Compensation and benefits |
Settlement and curtailment loss | — |
| | (320 | ) | | Compensation and benefits |
Remeasurement of benefit obligation | — |
| | (746 | ) | | Compensation and benefits |
Income tax (expense) benefit | 18 |
| | 414 |
| | Income tax expense |
Impact on net income | (26 | ) | | (688 | ) | | Net income |
| | | | | |
Total amount reclassified for the period | $ | 25 |
| | $ | (687 | ) | | Net income |
| | | | | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | Amount Reclassified from AOCI | | Affected Line Item in the Income Statement |
Six Months Ended June 30: | | | | | |
| Amount Reclassified from AOCI | | Affected Line Item in the Income Statement | 2016 | | 2015 | | Affected Line Item in the Income Statement |
| 2015 | | 2014 | | |
Unrealized gain (loss) on marketable securities: | | | | | |
Realized gain (loss) on sale of securities | $ | — |
| | $ | — |
| | Investment income | |
Income tax (expense) benefit | — |
| | — |
| | Income tax expense | |
Impact on net income | — |
| | — |
| | Net income | |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | |
Interest rate contracts | (12 | ) | | (11 | ) | | Interest expense | $ | (6 | ) | | $ | (6 | ) | | Interest expense |
Foreign exchange contracts | (25 | ) | | 28 |
| | Interest expense | — |
| | (36 | ) | | Interest expense |
Foreign exchange contracts | 156 |
| | (21 | ) | | Revenue | 106 |
| | 79 |
| | Revenue |
Income tax (expense) benefit | (45 | ) | | 1 |
| | Income tax expense | (38 | ) | | (14 | ) | | Income tax expense |
Impact on net income | 74 |
| | (3 | ) | | Net income | 62 |
| | 23 |
| | Net income |
Unrecognized pension and postretirement benefit costs: | | | | | | | | |
Prior service costs | (87 | ) | | (79 | ) | | Compensation and benefits | (43 | ) | | (43 | ) | | Compensation and benefits |
Settlement and curtailment loss | — |
| | (320 | ) | | Compensation and benefits | |
Remeasurement of benefit obligation | — |
| | (746 | ) | | Compensation and benefits | |
Income tax (expense) benefit | 35 |
| �� | 430 |
| | Income tax expense | 17 |
| | 17 |
| | Income tax expense |
Impact on net income | (52 | ) | | (715 | ) | | Net income | (26 | ) | | (26 | ) | | Net income |
| | | | | |
Total amount reclassified for the period | $ | 22 |
| | $ | (718 | ) | | Net income | $ | 36 |
| | $ | (3 | ) | | Net income |
Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the sixthree months ended June 30, 2015March 31, 2016 and 20142015 is as follows (in millions):
| | | 2015 | | 2014 | 2016 | | 2015 |
Shares | | Dollars | | Shares | | Dollars | Shares | | Dollars | | Shares | | Dollars |
Deferred Compensation Obligations: | | | | | | | | | | | | | | |
Balance at beginning of period | | | $ | 59 |
| | | | $ | 69 |
| | | $ | 51 |
| | | | $ | 59 |
|
Reinvested dividends | | | 2 |
| | | | 1 |
| | | 1 |
| | | | 1 |
|
Benefit payments | | | (11 | ) | | | | (12 | ) | | | (9 | ) | | | | (11 | ) |
Balance at end of period | | | $ | 50 |
| | | | $ | 58 |
| | | $ | 43 |
| | | | $ | 49 |
|
Treasury Stock: | | | | | | | | | | | | | | |
Balance at beginning of period | (1 | ) | | $ | (59 | ) | | (1 | ) | | $ | (69 | ) | (1 | ) | | $ | (51 | ) | | (1 | ) | | $ | (59 | ) |
Reinvested dividends | — |
| | (2 | ) | | — |
| | (1 | ) | — |
| | (1 | ) | | — |
| | (1 | ) |
Benefit payments | — |
| | 11 |
| | — |
| | 12 |
| — |
| | 9 |
| | — |
| | 11 |
|
Balance at end of period | (1 | ) | | $ | (50 | ) | | (1 | ) | | $ | (58 | ) | (1 | ) | | $ | (43 | ) | | (1 | ) | | $ | (49 | ) |
Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests increased $1$2 and $3$1 million for the sixthree months ended June 30,March 31, 2016 and 2015, and 2014, respectively, mainly due to noncontrolling interests associated with acquisitions during the period. respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1112. 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 and freight units, as well asUPS Freight and other aggregated businesses.business units. Our forwarding, logistics and logistics business providesCoyote units provide services in more than 195 countries and territories worldwide, and includes supply chain designinclude North American and management,international air and ocean freight distribution,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 and other, interest expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 20142015, with certain expenses allocated between the segments using activity-based costing methods. Unallocated assets are comprised primarily of cash, marketable securities and investments in limited partnerships.
Segment information for the three and six months ended June 30, 2015March 31, 2016 and 20142015 is as follows (in millions):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, | |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | |
Revenue: | | | | | | | | | | | |
U.S. Domestic Package | $ | 8,808 |
| | $ | 8,668 |
| | $ | 17,622 |
| | $ | 17,156 |
| $ | 9,084 |
| | $ | 8,814 |
| |
International Package | 3,045 |
| | 3,252 |
| | 6,015 |
| | 6,379 |
| 2,914 |
| | 2,970 |
| |
Supply Chain & Freight | 2,242 |
| | 2,348 |
| | 4,435 |
| | 4,512 |
| 2,420 |
| | 2,193 |
| |
Consolidated | $ | 14,095 |
| | $ | 14,268 |
| | $ | 28,072 |
| | $ | 28,047 |
| $ | 14,418 |
| | $ | 13,977 |
| |
Operating Profit: | | | | | | | | | | | |
U.S. Domestic Package | $ | 1,201 |
| | $ | 209 |
| | $ | 2,225 |
| | $ | 1,136 |
| $ | 1,102 |
| | $ | 1,024 |
| |
International Package | 552 |
| | 444 |
| | 1,050 |
| | 882 |
| 574 |
| | 498 |
| |
Supply Chain & Freight | 207 |
| | 94 |
| | 358 |
| | 242 |
| 147 |
| | 151 |
| |
Consolidated | $ | 1,960 |
| | $ | 747 |
| | $ | 3,633 |
| | $ | 2,260 |
| $ | 1,823 |
| | $ | 1,673 |
| |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1213. 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, 2015March 31, 2016 and 20142015 (in millions, except per share amounts):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Numerator: | | | | | | | | | | |
Net income attributable to common shareowners | $ | 1,230 |
| | $ | 454 |
| | $ | 2,256 |
| | $ | 1,365 |
| $ | 1,131 |
| | $ | 1,026 |
|
Denominator: | | | | | | | | | | |
Weighted average shares | 899 |
| | 916 |
| | 901 |
| | 918 |
| 885 |
| | 903 |
|
Deferred compensation obligations | 1 |
| | 1 |
| | 1 |
| | 1 |
| 1 |
| | 1 |
|
Vested portion of restricted units | 1 |
| | 1 |
| | 1 |
| | 1 |
| 3 |
| | 2 |
|
Denominator for basic earnings per share | 901 |
| | 918 |
| | 903 |
| | 920 |
| 889 |
| | 906 |
|
Effect of dilutive securities: | | | | | | | | | | |
Restricted units | 6 |
| | 8 |
| | 7 |
| | 8 |
| 4 |
| | 6 |
|
Stock options | 1 |
| | 1 |
| | 1 |
| | 1 |
| 1 |
| | 1 |
|
Denominator for diluted earnings per share | 908 |
| | 927 |
| | 911 |
| | 929 |
| 894 |
| | 913 |
|
Basic earnings per share | $ | 1.37 |
| | $ | 0.49 |
| | $ | 2.50 |
| | $ | 1.48 |
| $ | 1.27 |
| | $ | 1.13 |
|
Diluted earnings per share | $ | 1.35 |
| | $ | 0.49 |
| | $ | 2.48 |
| | $ | 1.47 |
| $ | 1.27 |
| | $ | 1.12 |
|
Diluted earnings per share for the three months ended June 30,March 31, 2016 and 2015 and 2014 excluded the effect of 0.20.5 and 0.10.2 million shares of common stock, respectively, (0.2 and 0.1 million for the six months ended June 30, 2015 and 2014, 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 1314. 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, 2015March 31, 2016 and December 31, 2014,2015, we held cash collateral of $753$641 and $548$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 required to post $4$1 million and $1 million$0 in collateral with our counterparties as of June 30, 2015March 31, 2016 and December 31, 2014,2015, respectively. 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 cumulativeforeign 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 have designatednormally 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 have designatednormally 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 have designatednormally 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 operating expense when the underlying transactions are subject to currency remeasurement.
We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of foreign denominated debt as the hedging instrument allows the debt to be remeasured to foreign currency translation adjustment within AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedging is recognized as a component of investment income and other. Balances in the cumulative translation adjustment accounts remain until the sale or complete liquidation of the foreign entity.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within our capital structure.
We have designated and account for the majority of our interest rate swaps that convert fixed rate interest payments into floating rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We have designatednormally 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. The gains and losses resulting from fair value adjustments to the interest rate swaps are recorded to AOCI.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings, using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Outstanding Positions
As of June 30, 2015March 31, 2016 and December 31, 2014,2015, the notional amounts of our outstanding derivative positions were as follows (in millions):
| | | June 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
Currency hedges: | | | | | | | | |
British Pound Sterling | GBP | 1,282 |
| | GBP | 1,149 |
| GBP | 1,056 |
| | GBP | 1,140 |
|
Canadian Dollar | CAD | 320 |
| | CAD | 293 |
| CAD | 933 |
| | CAD | 177 |
|
Euro | EUR | 2,148 |
| | EUR | 2,833 |
| EUR | 3,579 |
| | EUR | 3,750 |
|
Indian Rupee | INR | 231 |
| | INR | 85 |
| |
Malaysian Ringgit | MYR | — |
| | MYR | 150 |
| |
Mexican Peso | MXN | 5,977 |
| | MXN | 152 |
| MXN | 2,004 |
| | MXN | 3,863 |
|
Japanese Yen | | JPY | 18,000 |
| | JPY | 20,000 |
|
| | | | | | | | |
Interest rate hedges: | | | | | | | | |
Fixed to Floating Interest Rate Swaps | $ | 5,799 |
| | $ | 5,799 |
| $ | 5,799 |
| | $ | 5,799 |
|
Floating to Fixed Interest Rate Swaps | $ | 779 |
| | $ | 779 |
| $ | 778 |
| | $ | 778 |
|
Interest Rate Basis Swaps | $ | — |
| | $ | 1,500 |
| |
| | | | | | | | |
Investment market price hedges: | | | | | | | | |
Marketable Securities | EUR | 202 |
| | EUR | — |
| EUR | 389 |
| | EUR | 496 |
|
As of March 31, 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 | | 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, 2015 | | December 31, 2014 | | June 30, 2015 | | December 31, 2014 | Balance Sheet Location | | March 31, 2016 | | December 31, 2015 | | March 31, 2016 | | December 31, 2015 |
Derivatives designated as hedges: | | | | | | | | | | | | | | | | |
Foreign exchange contracts | Other current assets | | Level 2 | | $ | 337 |
| | $ | 204 |
| | $ | 337 |
| | $ | 204 |
| Other current assets | | Level 2 | | $ | 257 |
| | $ | 408 |
| | $ | 256 |
| | $ | 408 |
|
Foreign exchange contracts | Derivative assets
| | Level 2 | | 161 |
| | 229 |
| | 161 |
| | 229 |
| Other non-current assets | | Level 2 | | 28 |
| | 92 |
| | 23 |
| | 92 |
|
Interest rate contracts | Derivative assets
| | Level 2 | | 218 |
| | 227 |
| | 185 |
| | 194 |
| Other non-current assets | | Level 2 | | 293 |
| | 204 |
| | 279 |
| | 185 |
|
Derivatives not designated as hedges: | | | | | | | | | | | | | | | | |
Foreign exchange contracts | Other current assets | | Level 2 | | 19 |
| | 2 |
| | 19 |
| | 2 |
| Other current assets | | Level 2 | | — |
| | 2 |
| | — |
| | — |
|
Investment market price contracts | Other current assets | | Level 2 | | 1 |
| | — |
| | — |
| | — |
| Other current assets | | Level 2 | | 159 |
| | 5 |
| | 159 |
| | — |
|
Interest rate contracts | Derivative assets | | Level 2 | | 56 |
| | 59 |
| | 54 |
| | 57 |
| Other non-current assets | | Level 2 | | 75 |
| | 57 |
| | 66 |
| | 53 |
|
Total Asset Derivatives | | $ | 792 |
| | $ | 721 |
| | $ | 756 |
| | $ | 686 |
| | $ | 812 |
| | $ | 768 |
| | $ | 783 |
| | $ | 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 | | 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, 2015 | | December 31, 2014 | | June 30, 2015 | | December 31, 2014 | Balance Sheet Location | | March 31, 2016 | | December 31, 2015 | | March 31, 2016 | | December 31, 2015 |
Derivatives designated as hedges: | | | | | | | | | | | | | | | | |
Foreign exchange contracts | Other non-current liabilities | | Level 2 | | $ | — |
| | $ | 34 |
| | $ | — |
| | $ | 34 |
| Other current liabilities | | Level 2 | | $ | 3 |
| | $ | — |
| | $ | 2 |
| | $ | — |
|
Foreign exchange contracts | | Other non-current liabilities | | Level 2 | | 41 |
| | — |
| | 36 |
| | — |
|
Interest rate contracts | Other non-current liabilities | | Level 2 | | 34 |
| | 35 |
| | 1 |
| | 2 |
| Other non-current liabilities | | Level 2 | | 14 |
| | 19 |
| | — |
| | — |
|
Derivatives not designated as hedges: | | | | | | | | | | | | | | | | |
Foreign exchange contracts | Other current liabilities | | Level 2 | | 2 |
| | — |
| | 2 |
| | — |
| Other current liabilities | | Level 2 | | 7 |
| | 12 |
| | 7 |
| | 10 |
|
Interest rate contracts | Other current liabilities | | Level 2 | | — |
| | 1 |
| | — |
| | 1 |
| |
Investment market price contracts | Other current liabilities | | Level 2 | | 10 |
| | — |
| | 9 |
| | — |
| Other current liabilities | | Level 2 | | — |
| | 9 |
| | — |
| | 4 |
|
Interest rate contracts | Other non-current liabilities | | Level 2 | | 8 |
| | 7 |
| | 6 |
| | 5 |
| Other non-current liabilities | | Level 2 | | 33 |
| | 13 |
| | 24 |
| | 9 |
|
Total Liability Derivatives | | $ | 54 |
| | $ | 77 |
| | $ | 18 |
| | $ | 42 |
| | $ | 98 |
| | $ | 53 |
| | $ | 69 |
| | $ | 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, 2015March 31, 2016 and 20142015 for those derivatives designated as cash flow hedges (in millions):
| | Three Months Ended June 30: | | | | | |
Three Months Ended March 31: | | | | | |
Derivative Instruments in Cash Flow Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion) | | Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion) |
| 2015 | | 2014 | | 2016 | | 2015 |
Interest rate contracts | | $ | 1 |
| | $ | (1 | ) | | $ | (2 | ) | | $ | (1 | ) |
Foreign exchange contracts | | (173 | ) | | (31 | ) | | (158 | ) | | 320 |
|
Total | | $ | (172 | ) | | $ | (32 | ) | | $ | (160 | ) | | $ | 319 |
|
| | | | | |
Six Months Ended June 30: | | | | | |
Derivative Instruments in Cash Flow Hedging Relationships | | Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) | |
| 2015 | | 2014 | |
Interest rate contracts | | $ | — |
| | $ | (3 | ) | |
Foreign exchange contracts | | 147 |
| | (68 | ) | |
Total | | $ | 147 |
| | $ | (71 | ) | |
As of June 30, 2015, $278March 31, 2016, $200 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, 2016.March 31, 2017. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions. The maximum term over which we are hedging exposures to the variability of cash flow is 1716 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, 2015March 31, 2016 and 2014.2015.
The following table indicates the amount of gains and losses that have been recognized in AOCI within foreign currency translation adjustment for the three months ended March 31, 2016 and 2015 for those instruments designated as net investment hedges (in millions):
|
| | | | | | | | |
Three Months Ended March 31: | | | | |
Non-derivative Instruments in Net Investment Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion) |
| 2016 | | 2015 |
Foreign denominated debt | | $ | (85 | ) | | $ | — |
|
Total | | $ | (85 | ) | | $ | — |
|
The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging relationships was immaterial for the three months ended March 31, 2016 and 2015.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table indicates the amount and location in the statements of consolidated income in which derivative gains and losses, as well as the associated gains and losses on the underlying exposure, have been recognized for those derivatives designated as fair value hedges for the three and six months ended June 30, 2015March 31, 2016 and 20142015 (in millions):
| | Derivative Instruments in Fair Value Hedging Relationships | Location of Gain (Loss) Recognized in Income | | Amount of Gain (Loss) Recognized in Income | | Hedged Items in Fair Value Hedging Relationships | | Location of Gain (Loss) Recognized In Income | | Amount of Gain (Loss) Recognized in Income | 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 |
| 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Three Months Ended June 30: | | | | | |
Interest rate contracts | Interest Expense | | $ | (64 | ) | | $ | 53 |
| | Fixed-Rate Debt and Capital Leases | | Interest Expense | | $ | 64 |
| | $ | (53 | ) | Interest Expense | | $ | 95 |
| | $ | 55 |
| | Fixed-Rate Debt | | Interest Expense | | $ | (95 | ) | | $ | (55 | ) |
Six Months Ended June 30: | | | | | | | |
Interest rate contracts | Interest Expense | | $ | (9 | ) | | $ | 83 |
| | Fixed-Rate Debt and Capital Leases | | Interest Expense | | $ | 9 |
| | $ | (83 | ) | |
Additionally, we maintain some interest rate swap,swaps, foreign currency forward,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 eliminateeliminates the effects of changes in market valuation.
The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these interest rate swaps, foreign currency forward and investment market price forward contracts not designated as hedges for the three and six months ended June 30,March 31, 2016 and 2015 and 2014 (in millions):
| | Derivative Instruments Not Designated in Hedging Relationships | Location of Gain (Loss) Recognized in Income | | Amount of Gain (Loss) Recognized in Income | Location of Gain (Loss) Recognized in Income | | Amount of Gain (Loss) Recognized in Income |
| 2015 | | 2014 | | 2016 | | 2015 |
Three Months Ended June 30: | | | | | |
Interest rate contracts | Interest Expense | | $ | (2 | ) | | $ | (1 | ) | Interest Expense | | $ | (2 | ) | | $ | (1 | ) |
Foreign exchange contracts | Other Operating Expenses | | (5 | ) | | (2 | ) | |
Foreign exchange contracts | Investment Income | | 33 |
| | 2 |
| Other Operating Expenses | | — |
| | 21 |
|
Foreign exchange contracts | Interest Expense | | 36 |
| | — |
| Investment Income and other | | (41 | ) | | 2 |
|
Investment market price contracts | Investment Income | | (7 | ) | | — |
| Investment Income and other | | 155 |
| | (2 | ) |
| | $ | 55 |
| | $ | (1 | ) | | $ | 112 |
| | $ | 20 |
|
Six Months Ended June 30: | | | | | |
Interest rate contracts | Interest Expense | | $ | (3 | ) | | $ | (3 | ) | |
Foreign exchange contracts | Other Operating Expenses | | 16 |
| | (4 | ) | |
Foreign exchange contracts | Investment Income | | 35 |
| | 2 |
| |
Foreign exchange contracts | Interest Expense | | 36 |
| | — |
| |
Investment market price contracts
| Investment Income | | (9 | ) | | — |
| |
| | $ | 75 |
| | $ | (5 | ) | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1415. INCOME TAXES
Our consolidated effective tax rate increaseddecreased to 34.5%35.3% in the secondfirst quarter of 20152016 compared with 33.5%35.5% in the same period of 2014,2015, primarily due to the $1.066 billion pre-tax charge in the prior year associated with certain health and welfare benefit plan changes, which generated a tax benefit at a rate higher than the consolidated effective tax rate. This was partially offset by favorable changes in the proportion of our taxable income in certain U.S. and non-U.S. jurisdictions and an increase in U.S. Federal and state tax credits realized in comparison to amounts previously estimated.
On a year-to-date basis, our consolidated effective tax rate decreased to 34.9% in 2015 from 35.2% in 2014, due to favorable changes in the proportion of our taxable income in certain U.S. and non-U.S. jurisdictions and an increasejurisdictions. This was partially offset by a decrease in U.S. Federal and state tax credits realized in comparisonrelative to amounts previously estimated.
In July 2013, we began resolution discussions with IRS Appeals on several income tax matters. In the second quarter of 2014, we reached a final resolution with IRS Appeals on all income tax matters for the 2005 through 2007 tax years and received a net refund of tax and interest totaling $145 million during the second quarter of 2014. The resolution of these matters and subsequent refund of tax and interest did not have a material impact on nettotal pre-tax income.
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2014,2015, 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 the timing of interest deductions andvarious state filing positions, the allocation of income and expense between tax jurisdictions.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. At this time, an estimate of the range of the reasonably possible change cannot be made.
NOTE 15. SUBSEQUENT EVENT
On July 31, 2015, we announced that we have entered into a definitive purchase agreement to acquire Coyote Logistics Holdings, LLC, a technology-driven, non-asset based truckload freight brokerage company for $1.8 billion. The closing, which is subject to customary conditions and regulatory approvals, is expected to take place in the third quarter of 2015. The transaction will be financed with available cash resources and through existing and new debt arrangements.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
The U.S. economic environment has beencontinued to be mixed this year as improvedrelatively stable consumer conditions wereare somewhat offset by deceleratingcontinued declines in industrial production, growth, which is now at its slowest pace in over five years. As a result, lower than expectedsoft business investment and higher inventory levels. We continue to see modest GDP growth has hinderedwith the first quarter slowing sequentially and year over year, yet U.S. manufacturing remains weak, hindering the pace of expansion in the overall small package delivery market. Low inflation persistsand low fuel prices continued in the economy, giving consumers more purchasing power despite weakmuted wage growth. The strengthening U.S. Dollar resulted in shifting trade patterns with U.S. exportContinued growth slowing while imports grew at a faster rate. Growth in e-commerce and omni-channel retail sales has driven package volume demand for both commercial and residential products. Given these trends, overall volume grew moderately during the secondfirst quarter andof 2016, with those products mostmostly aligned with the retail industry experiencedand e-commerce experiencing the fastestmost growth.
Economic conditionsOutside of the U.S., global growth forecasts continue to improveweaken, with global GDP expected to grow less than previous forecasts. Much of the weakness outside of the U.S. stems from difficulties in Europe, which is benefiting from both low oil prices and a weak Euro. Solid economic growth in Asia has continued, though growth in China has slowed.emerging markets, while developed nations experience solid growth. The uneven nature of economic growth worldwide combined with a trend towards more intra-regional trade, has continued the shifting of trade patterns and resulted in overcapacityweakened demand in certain trade lanes. These factors have created an environment in which customers are more likely to trade-down from premium express products to standard delivery products in both Europe and Asia. As a result of these circumstances, we have continued to adjust our air capacity and cost structure in our transportation network to better match the prevailing volume mix levels. Our broad portfolio of product offerings and the flexibilities inherent in our transportation network have helped us adapt to these changing trends.
While the worldwide economic environment has remained challenging in 2015,2016, we have continued to undertake several initiatives in the U.S. and internationally to (1) improve the flexibility and capacity in our transportation network; (2) improve yield management; and (3) increase operational efficiency and contain costs across all segments. Most notably, the continued deployment of technology improvements (including several facility automation projects and the accelerated deployment of our On Road Integrated Optimization and Navigation system - "ORION") should continue to increase our network capacity and improve operational efficiency, flexibility and reliability. Additionally, we have continued to adjust our transportation network and utilize newly expanded operating facilities to improve time-in-transit for shipments in each region.
Our consolidated results are presented in the table below:
| | | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | % | | 2015 | | 2014 | | % | 2016 | | 2015 | | % |
Revenue (in millions) | $ | 14,095 |
| | $ | 14,268 |
| | (1.2 | )% | | $ | 28,072 |
| | $ | 28,047 |
| | 0.1 | % | $ | 14,418 |
| | $ | 13,977 |
| | 3.2 | % |
Operating Expenses (in millions) | 12,135 |
| | 13,521 |
| | (10.3 | )% | | 24,439 |
| | 25,787 |
| | (5.2 | )% | 12,595 |
| | 12,304 |
| | 2.4 | % |
Operating Profit (in millions) | $ | 1,960 |
| | $ | 747 |
| | 162.4 | % | | $ | 3,633 |
| | $ | 2,260 |
| | 60.8 | % | $ | 1,823 |
| | $ | 1,673 |
| | 9.0 | % |
Operating Margin | 13.9 | % | | 5.2 | % | | | | 12.9 | % | | 8.1 | % | | | 12.6 | % | | 12.0 | % | | |
Average Daily Package Volume (in thousands) | 17,210 |
| | 16,859 |
| | 2.1 | % | | 17,338 |
| | 16,929 |
| | 2.4 | % | 17,834 |
| | 17,470 |
| | 2.1 | % |
Average Revenue Per Piece | $ | 10.61 |
| | $ | 10.91 |
| | (2.7 | )% | | $ | 10.59 |
| | $ | 10.81 |
| | (2.0 | )% | $ | 10.39 |
| | $ | 10.56 |
| | (1.6 | )% |
Net Income (in millions) | $ | 1,230 |
| | $ | 454 |
| | 170.9 | % | | $ | 2,256 |
| | $ | 1,365 |
| | 65.3 | % | $ | 1,131 |
| | $ | 1,026 |
| | 10.2 | % |
Basic Earnings Per Share | $ | 1.37 |
| | $ | 0.49 |
| | 179.6 | % | | $ | 2.50 |
| | $ | 1.48 |
| | 68.9 | % | $ | 1.27 |
| | $ | 1.13 |
| | 12.4 | % |
Diluted Earnings Per Share | $ | 1.35 |
| | $ | 0.49 |
| | 175.5 | % | | $ | 2.48 |
| | $ | 1.47 |
| | 68.7 | % | $ | 1.27 |
| | $ | 1.12 |
| | 13.4 | % |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Items Affecting Comparability
The year-over-year comparisons of our financial results were affected by the following item (amounts in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Operating Expenses: | | | | | | | |
Health and Welfare Plan Charges | $ | — |
| | $ | 1,066 |
| | $ | — |
| | $ | 1,066 |
|
Income Tax Expense: | | | | | | | |
Income Tax Expense (Benefit) from the Item Above | — |
| | (401 | ) | | — |
| | (401 | ) |
These items have been excluded from comparisons of "adjusted" operating expenses, operating profit and operating margin in the discussion that follows.
Health and Welfare Plan Charges
In connection with the ratification of our national master agreement with the International Brotherhood of Teamsters ("Teamsters") in the second quarter of 2014, we incurred pre-tax charges totaling $1.066 billion ($665 million after-tax) associated with changes in the delivery of healthcare benefits to certain active and retired union employees. These charges are discussed in further detail in note 6 to the unaudited consolidated financial statements. These charges impacted our U.S. Domestic Package segment ($957 million), International Package segment ($27 million) and Supply Chain & Freight segment ($82 million).
Results of Operations—Segment Review
The results and discussions that follow are reflective of how our executive management monitors the performance of our reporting segments. From time to time, we supplement the reporting of our financial information determined under generally accepted accounting principles (“GAAP”) with certain non-GAAP financial measures, including, as applicable, "adjusted" operating profit, operating margin, income before income taxes, effective tax rate, net income and earnings per share adjusted for the non-comparable items. We believe that these adjusted measures provide meaningful information to assist investors and analysts in understanding our financial results and assessing our prospects for future performance. We believe these adjusted financial measures are important indicators of our results of operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results and provide a better baseline for analyzing trends in our underlying businesses.
Certain operating expenses are allocated between our reporting segments based on activity-based costing methods. These activity-based costing methods require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates will directly impact the amount of expense allocated to each segment and therefore the operating profit of each reporting segment. There were no significant changes in our expense allocation methodologies during 20152016 or 20142015.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
U.S. Domestic Package Operations
| | | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | Three Months Ended March 31, | | Change |
2015 | | 2014 | | % | | 2015 | | 2014 | | % | 2016 | | 2015 | | % |
Average Daily Package Volume (in thousands): | | | | | | | | | | | | | | | | |
Next Day Air | 1,241 |
| | 1,233 |
| | 0.6 | % | | 1,235 |
| | 1,242 |
| | (0.6 | )% | 1,266 |
| | 1,229 |
| | 3.0 | % |
Deferred | 1,132 |
| | 988 |
| | 14.6 | % | | 1,175 |
| | 1,036 |
| | 13.4 | % | 1,196 |
| | 1,218 |
| | (1.8 | )% |
Ground | 12,192 |
| | 12,085 |
| | 0.9 | % | | 12,255 |
| | 12,082 |
| | 1.4 | % | 12,725 |
| | 12,321 |
| | 3.3 | % |
Total Avg. Daily Package Volume | 14,565 |
| | 14,306 |
| | 1.8 | % | | 14,665 |
| | 14,360 |
| | 2.1 | % | 15,187 |
| | 14,768 |
| | 2.8 | % |
Average Revenue Per Piece: | | | | | | | | | | | | | | | | |
Next Day Air | $ | 20.03 |
| | $ | 20.73 |
| | (3.4 | )% | | $ | 20.07 |
| | $ | 20.45 |
| | (1.9 | )% | $ | 19.44 |
| | $ | 20.11 |
| | (3.3 | )% |
Deferred | 12.12 |
| | 13.05 |
| | (7.1 | )% | | 11.89 |
| | 12.77 |
| | (6.9 | )% | 11.95 |
| | 11.68 |
| | 2.3 | % |
Ground | 8.12 |
| | 8.03 |
| | 1.1 | % | | 8.16 |
| | 7.98 |
| | 2.3 | % | 8.10 |
| | 8.19 |
| | (1.1 | )% |
Total Avg. Revenue Per Piece | $ | 9.45 |
| | $ | 9.47 |
| | (0.2 | )% | | $ | 9.46 |
| | $ | 9.41 |
| | 0.5 | % | $ | 9.35 |
| | $ | 9.47 |
| | (1.3 | )% |
Operating Days in Period | 64 |
| | 64 |
| | | | 127 |
| | 127 |
| | | 64 |
| | 63 |
| | |
Revenue (in millions): | | | | | | | | | | | | | | | | |
Next Day Air | $ | 1,591 |
| | $ | 1,636 |
| | (2.8 | )% | | $ | 3,148 |
| | $ | 3,226 |
| | (2.4 | )% | $ | 1,575 |
| | $ | 1,557 |
| | 1.2 | % |
Deferred | 878 |
| | 825 |
| | 6.4 | % | | 1,774 |
| | 1,680 |
| | 5.6 | % | 915 |
| | 896 |
| | 2.1 | % |
Ground | 6,339 |
| | 6,207 |
| | 2.1 | % | | 12,700 |
| | 12,250 |
| | 3.7 | % | 6,594 |
| | 6,361 |
| | 3.7 | % |
Total Revenue | $ | 8,808 |
| | $ | 8,668 |
| | 1.6 | % | | $ | 17,622 |
| | $ | 17,156 |
| | 2.7 | % | $ | 9,084 |
| | $ | 8,814 |
| | 3.1 | % |
Operating Expenses (in millions) | | | | |
|
| | | | | | | $ | 7,982 |
| | $ | 7,790 |
| | 2.5 | % |
Operating Expenses | $ | 7,607 |
| | $ | 8,459 |
| | (10.1 | )% | | $ | 15,397 |
| | $ | 16,020 |
| | (3.9 | )% | |
Health and Welfare Plan Charges | — |
| | (957 | ) | | | | — |
| | (957 | ) | | | |
Adjusted Operating Expenses | $ | 7,607 |
| | $ | 7,502 |
| | 1.4 | % | | $ | 15,397 |
| | $ | 15,063 |
| | 2.2 | % | |
Operating Profit (in millions) and Margin: | | | | | | | | | | | | |
Operating Profit | $ | 1,201 |
| | $ | 209 |
| | N/A |
| | $ | 2,225 |
| | $ | 1,136 |
| | 95.9 | % | |
Adjusted Operating Profit | $ | 1,201 |
| | $ | 1,166 |
| | 3.0 | % | | $ | 2,225 |
| | $ | 2,093 |
| | 6.3 | % | |
Operating Profit (in millions) | | $ | 1,102 |
| | $ | 1,024 |
| | 7.6 | % |
Operating Margin | 13.6 | % | | 2.4 | % | | | | 12.6 | % | | 6.6 | % | | | 12.1 | % | | 11.6 | % | | |
Adjusted Operating Margin | 13.6 | % | | 13.5 | % | | | | 12.6 | % | | 12.2 | % | | | |
Revenue
The change in overall revenue was impacted by the following factors in 20152016 compared with the corresponding periodsperiod of 2014:2015:
|
| | | | | | | | | | | |
| Volume | | Rates / Product Mix | | Fuel Surcharge | | Total Revenue Change |
Net Revenue Change Drivers: | | | | | | | |
Second quarter 2015 vs. 2014 | 1.8 | % | | 2.5 | % | | (2.7 | )% | | 1.6 | % |
Year-to-date 2015 vs. 2014 | 2.1 | % | | 2.8 | % | | (2.2 | )% | | 2.7 | % |
|
| | | | | | | | | | | |
| Volume | | Rates / Product Mix | | Fuel Surcharge | | Total Revenue Change |
Net Revenue Change Drivers: | | | | | | | |
First quarter 2016 vs. 2015 | 4.5 | % | | (0.2 | )% | | (1.2 | )% | | 3.1 | % |
Volume
Our total volume increased in the secondfirst quarter and year-to-date periods of 20152016 compared with 2014, as we
experienced balanced2015, primarily due to continued growth in e-commerce and one additional operating day. Business-to-consumer shipments, which represent approximately 45% of total U.S. Domestic Package volume, grew more than 6% for the first quarter of 2016 due to increases in both business-to-consumerair and business-to-businessground shipments.
UPS SurePost had strong volume growth in the first quarter of 2016. Business-to-business shipments increased 1.6% and wereslightly driven by the retail industry includingreturns services, partially offset by the overall slowing of the industrial manufacturing and professional services sectors.
Among our air products, volume increased by 3% for Next Day Air services in the first quarter of 2016, particularly for those products most aligned with business-to-consumer shipping. Deferred air product volume decreased slightly, after five previous quarters of double digit growth, due to product and customer mix.
The increase in ground volume in the first quarter of 2016 was driven by both business-to-consumer and business-to-business shipping activity. The growth was fueled by e-commerce, which resulted in increased use of our solutions for
omni-channel (e.g. ship-from-storereturns and ship-to-store models) and returns shipping. Continued strength in e-commerce resulted in business-to-consumer volume growth of 2% in the second quarter of 2015; however, the pace of growth moderated due to a second quarter benefit in 2014 for a large one-time catalog shipment and the decision to not pursue several lower-yielding customer contract renewals in late 2014 and early 2015.SurePost services.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Among our air products, we experienced strong volume growth for our deferred air services in the second quarter and year-to-date periods of 2015, particularly for those products most aligned with business-to-consumer shipping, such as our residential Second Day Air and Three Day Select products. We also experienced solid growth in our business-to-business deferred air volume, largely due to growth in the retail sector. Next Day Air volume increased slightly for the second quarter, due to growth in shipping activity from the financial services sector. The growth in premium and deferred air volume continues to be impacted by economic conditions and changes in our customers' supply chain networks; the combination of these factors influences their sensitivity towards the price and speed of shipments, and therefore the use of our premium air services.
The increase in ground volume in the second quarter of 2015 was driven by solid growth in SurePost volume and business-to-business shipping activity. The continued growth in e-commerce drove demand for our SurePost service, with volume increasing over 8% in the second quarter of 2015 compared with the same period of 2014. The increase in business-to-business ground volume was largely due to growth in omni-channel retail volume, the increased use of our returns service offerings, and the growth in shipments from the retail sector.
Rates and Product Mix
Overall revenue per piece was relatively flatdecreased 1.3% for the secondfirst quarter of 20152016 compared with the same period of 2014 (increased 0.5% year-to-date), and was impacted by2015, primarily due to lower fuel surcharge rates as well as changes in base rates, dimensional weight pricing, customer and product mixmix. These factors were partially offset by base rate increases.
Revenue per piece was positively impacted by a base rate increase on December 28, 2015. UPS Ground rates and accessorial charges increased an average net 4.9%, while UPS Air services and accessorial charges increased an average net 5.2%. Additionally, the surcharge increased for Over Maximum Packages, and the index tables for the Ground and Air fuel surcharge rates.surcharges were adjusted effective November 2, 2015. A charge for UPS’s Third-Party Billing Service was implemented, effective January 4, 2016.
Revenue per piece for our ground anddeferred air products was positively impacted by an increaseincreased in base rates which took effect on December 29, 2014. We implemented an average 4.9% net increase in base and accessorial rates on UPSthe first quarter of 2016, while Next Day Air UPS 2nd Day Air and UPS 3 Day Select and UPS Ground. Additionally, the pricing change involving the application of dimensional weight pricing to all UPS Ground services also took effect on December 29, 2014.
Revenue per piece for ourdeclined. All products were negatively impacted by lower fuel surcharge rates. The Next Day Air and deferred air products declined in the second quarter and year-to-date periods of 2015, as lower fuel surcharge rates more than offset the positive impact of the base rate increase. Product mix adversely impacted deferred revenue per piece as wedecline was caused by a shift in customer and product mix. We experienced relatively stronger growth in our lighter-weight business-to-consumer shipments, which have lower average yields than our heavier-weight commercial shipments. Customer mix also adversely impacted deferredshipments along with a shift towards our Next Day Air Saver products. Deferred revenue per piece increased primarily due to the faster volume growth among our larger customers, which typically have a lower average yield than our small and middle-market customers.heavier-weight packages on business-to-consumer shipments.
Overall ground revenue per piece increaseddecreased in the secondfirst quarter and year-to-date periods of 2015,2016, primarily due to the base rate increase, the dimensional weight pricing change and an increasea decrease in the average weight per package.piece and lower fuel surcharges. Additionally, thecustomer and product mix changes adversely impacted revenue per piece for our traditional groundas a greater portion of overall volume in 2016, relative to 2015, came from residential products was positively impacted by our decision not to pursue several lower-yielding customer contract renewals. These factors were partially offset by declines in fuel surcharge rates as well as changes in customer mix, as we experienced fastercustomers and lighter-weight shipments (including strong volume growth among our larger customers.in SurePost). These drivers more than offset the rate actions taken since the fourth quarter of 2015.
Fuel Surcharges
UPS applies a fuel surcharge on our domestic air and ground services. The air fuel surcharge is based on the U.S. Department of Energy’s (“DOE”) Gulf Coast spot price for a gallon of kerosene-type jet fuel, while the ground fuel surcharge is based on the DOE’s On-Highway Diesel Fuel price. Based on published rates, the average fuel surcharges for domestic air and ground products were as follows:
| | | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 |
| 2014 | | % Point | | 2015 | | 2014 | | % Point | 2016 |
| 2015 | | % Point |
Next Day Air / Deferred | 4.6 | % | | 10.7 | % | | (6.1 | )% | | 4.9 | % | | 10.6 | % | | (5.7 | )% | 3.0 | % | | 5.3 | % | | (2.3 | )% |
Ground | 5.3 | % | | 7.5 | % | | (2.2 | )% | | 5.8 | % | | 7.3 | % | | (1.5 | )% | 4.9 | % | | 6.3 | % | | (1.4 | )% |
Total domestic fuel surcharge revenue decreased by $233$105 million in the secondfirst quarter of 2015 ($375 million year-to-date)2016 as a result of lower fuel surcharge rates caused by declining jet and diesel fuel prices; however, the impact of lower fuel prices was partially mitigated by pricing changes to the fuel surcharge indices, as well as the overall increase in package volume for the quarter.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Expenses
Adjusted operatingOperating expenses for the segment increased $105$192 million in the secondfirst quarter of 2015 ($334 million year-to-date),2016, primarily due to increases in pick-up and delivery costs ($95138 million), indirect operating costs ($54 million) and the costcosts of package sorting ($3627 million) and indirect operating costs ($50 million) for the quarter ($268, $73 and $100 million, respectively, year-to-date). These cost increases were largely due to the additional operating day and higher employee compensation expenses, which were impacted by (1) an increase in average daily union labor hours (up 1.8%(1.8%) to support volume growth,growth; (2) an increase in employee pension and healthcare costs (due to lower discountwage rates and updated mortality assumptions for UPS-sponsored pension plans, and higher contribution rates and labor hours for multiemployer plans),(1%); and (3) an increase in worker's compensation expenseshealth and welfare costs (due to actuarial adjustmentsheadcount and contractual contribution rate increases to self-insurance reserve liabilities)multiemployer plans). TheThese cost increases were partially offset by a $21 million reduction in the cost of operating our domestic integrated air and ground transportation network, declined $76 million ($107 million year-to-date), largelyprimarily due to lower fuel prices and purchased transportation costs.
Adjusted totalTotal cost per piece decreased slightly by 0.4%1.9% for the secondfirst quarter of 20152016 compared with the secondfirst quarter of 2014 (flat year-to-date),2015, as the cost increases described previously were more than offset by productivity gains, lower fuel costs and improved pick-up and delivery densities.lower weather related costs. Productivity improvements have continued to be realized through adjusting our air and ground networks to better match volume levels and utilizing technology to increase package sorting and delivery efficiency. The continued deployment of ORION has contained the growth of average daily vehicle miles driven, while the increased redirect of SurePost volume to optimize delivery density on UPS vehicles has reduced the delivery costcosts for business-to-consumer shipments.
Operating Profit and Margin
Adjusted operating profit increased $35 million for the second quarter of 2015 compared with 2014 ($132 million year-to-date), while the adjusted operating margin increased 10 basis points to 13.6% (40 basis points to 12.6% year-to-date). Overall volume growth allowed us to better leverage our transportation network, leading to improved productivity and better pick-up and delivery density. Additionally, while declining fuel prices had a minimal negative impact on operating profit ($8 million) for the current year-to-date period of 2015 as compared to 2014, there was a negative $43 million impact on operating profit for the second quarter of 2015 compared with the same period of 2014 as fuel surcharge revenue decreased at a faster rate than fuel expense.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
International Package Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2015 | | 2014 | | % | | 2015 | | 2014 | | % |
Average Daily Package Volume (in thousands): | | | | | | | | | | | |
Domestic | 1,530 |
| | 1,496 |
| | 2.3 | % | | 1,553 |
| | 1,513 |
| | 2.6 | % |
Export | 1,115 |
| | 1,057 |
| | 5.5 | % | | 1,120 |
| | 1,056 |
| | 6.1 | % |
Total Avg. Daily Package Volume | 2,645 |
| | 2,553 |
| | 3.6 | % | | 2,673 |
| | 2,569 |
| | 4.0 | % |
Average Revenue Per Piece: | | | | | | | | | | | |
Domestic | $ | 6.13 |
| | $ | 7.23 |
| | (15.2 | )% | | $ | 6.11 |
| | $ | 7.18 |
| | (14.9 | )% |
Export | 31.99 |
| | 35.60 |
| | (10.1 | )% | | 31.52 |
| | 35.10 |
| | (10.2 | )% |
Total Avg. Revenue Per Piece | $ | 17.03 |
| | $ | 18.97 |
| | (10.2 | )% | | $ | 16.76 |
| | $ | 18.66 |
| | (10.2 | )% |
Operating Days in Period | 64 |
| | 64 |
| | | | 127 |
| | 127 |
| | |
Revenue (in millions): | | | | | | | | | | | |
Domestic | $ | 600 |
| | $ | 692 |
| | (13.3 | )% | | $ | 1,205 |
| | $ | 1,380 |
| | (12.7 | )% |
Export | 2,283 |
| | 2,408 |
| | (5.2 | )% | | 4,483 |
| | 4,707 |
| | (4.8 | )% |
Cargo and Other | 162 |
| | 152 |
| | 6.6 | % | | 327 |
| | 292 |
| | 12.0 | % |
Total Revenue | $ | 3,045 |
| | $ | 3,252 |
| | (6.4 | )% | | $ | 6,015 |
| | $ | 6,379 |
| | (5.7 | )% |
Operating Expenses (in millions) | | | | |
|
| | | | | |
|
|
Operating Expenses | $ | 2,493 |
| | $ | 2,808 |
| | (11.2 | )% | | $ | 4,965 |
| | $ | 5,497 |
| | (9.7 | )% |
Health and Welfare Plan Charges | — |
| | (27 | ) | | | | — |
| | (27 | ) | | |
Adjusted Operating Expenses | $ | 2,493 |
| | $ | 2,781 |
| | (10.4 | )% | | $ | 4,965 |
| | $ | 5,470 |
| | (9.2 | )% |
Operating Profit (in millions) and Operating Margin: | | | | | | | | | | |
Operating Profit | $ | 552 |
| | $ | 444 |
| | 24.3 | % | | $ | 1,050 |
| | $ | 882 |
| | 19.0 | % |
Adjusted Operating Profit | $ | 552 |
| | $ | 471 |
| | 17.2 | % | | $ | 1,050 |
| | $ | 909 |
| | 15.5 | % |
Operating Margin | 18.1 | % | | 13.7 | % | | | | 17.5 | % | | 13.8 | % | | |
Adjusted Operating Margin | 18.1 | % | | 14.5 | % | | | | 17.5 | % | | 14.2 | % | | |
Currency Benefit / (Cost)—(in millions)*: | | | | $ | | | | | | $ |
Revenue | | | | | $ | (251 | ) | | | | | | $ | (478 | ) |
Operating Expenses | | | | | 237 |
| | | | | | 453 |
|
Operating Profit | | | | | $ | (14 | ) | | | | | | $ | (25 | ) |
* Net of currency hedging; amount represents the change compared to the prior year. Includes impact of translation and transaction gains and losses. | | | | | | | | | | | |
Operating Profit and MarginRevenue
The change in overall revenue was impacted byOperating profit increased $78 million for the following factors in 2015first quarter of 2016 compared with 2015, as operating margin increased 50 basis points to 12.1%. Productivity improvements supported by continued technology deployment, combined with lower fuel costs resulted in a 1.9% decrease in cost per piece and more than offset the corresponding perioddecline in revenue per piece, which was mainly driven by lower fuel surcharge rates. These changes along with increased shipment volume resulted in higher operating profit compared to the first quarter of 2014:2015.
|
| | | | | | | | | | | | | | |
| Volume | | Rates / Product Mix | | Fuel Surcharge | | Currency | | Total Revenue Change |
Net Revenue Change Drivers: | | | | | | | | | |
Second quarter 2015 vs. 2014 | 3.6 | % | | 1.2 | % | | (3.5 | )% | | (7.7 | )% | | (6.4 | )% |
Year-to-date 2015 vs. 2014 | 4.0 | % | | 0.9 | % | | (3.1 | )% | | (7.5 | )% | | (5.7 | )% |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
International Package Operations |
| | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2016 | | 2015 | | % |
Average Daily Package Volume (in thousands): | | | | | |
Domestic | 1,517 |
| | 1,577 |
| | (3.8 | )% |
Export | 1,130 |
| | 1,125 |
| | 0.4 | % |
Total Avg. Daily Package Volume | 2,647 |
| | 2,702 |
| | (2.0 | )% |
Average Revenue Per Piece: | | | | | |
Domestic | $ | 5.91 |
| | $ | 6.09 |
| | (3.0 | )% |
Export | 30.46 |
| | 31.04 |
| | (1.9 | )% |
Total Avg. Revenue Per Piece | $ | 16.39 |
| | $ | 16.48 |
| | (0.5 | )% |
Operating Days in Period | 64 |
| | 63 |
| | |
Revenue (in millions): | | | | | |
Domestic | $ | 574 |
| | $ | 605 |
| | (5.1 | )% |
Export | 2,203 |
| | 2,200 |
| | 0.1 | % |
Cargo and Other | 137 |
| | 165 |
| | (17.0 | )% |
Total Revenue | $ | 2,914 |
| | $ | 2,970 |
| | (1.9 | )% |
Operating Expenses (in millions) | $ | 2,340 |
| | $ | 2,472 |
| | (5.3 | )% |
Operating Profit (in millions) | $ | 574 |
| | $ | 498 |
| | 15.3 | % |
Operating Margin | 19.7 | % | | 16.8 | % | | |
Currency Benefit / (Cost) – (in millions)*: | | | | |
Revenue | | | | | $ | (59 | ) |
Operating Expenses | | | | | 57 |
|
Operating Profit | | | | | $ | (2 | ) |
* Net of currency hedging; amount represents the change compared to the prior year. Includes impact of translation and transaction gains and losses. |
Revenue
The change in overall revenue was impacted by the following factors in 2016 compared with the corresponding period of 2015:
|
| | | | | | | | | | | | | | |
| Volume | | Rates / Product Mix | | Fuel Surcharge | | Currency | | Total Revenue Change |
Net Revenue Change Drivers: | | | | | | | | | |
First quarter 2016 vs. 2015 | (0.5 | )% | | 2.5 | % | | (1.9 | )% | | (2.0 | )% | | (1.9 | )% |
Volume
Our overall average daily volume increaseddecreased in the secondfirst quarter and year-to-date periods of 2015 when compared to 2014,2016, largely due to robust demand from several industries includingrevenue management initiatives, and slower economic growth. Total volume growth was negatively impacted due to fewer local operating days, mostly due to the retail, healthcare, industrial and diversified vehicles and parts sectors.timing of the Easter holiday.
The export volume growth in the secondfirst quarter and year-to-date periods of 20152016 was mainly driven by our EuropeanAsian and Americas operations, which experienced a solid increaseincreases in volume to allmost regions of the world. EuropeanExport volume into the U.S. grew in all trade lanes. Asian export volume showed particular strength in the Asia-to-U.S. and Asia-to-Europe trade lanes. Americas export volume increased nearly 9% for the quarter, with particular strength in the intra-European trade lanes and the Europe-to-U.S. trade lane. We also experienced export volumesolid growth in the Americas, largely in the Canada-to-U.S.Americas-to-Europe and Mexico-to-U.S.Americas-to-U.S. trade lanes. While overall Asian export volume declined slightly, growth in the Asian-to-U.S. trade lane remained strong. However, U.S. export volume declined, largely due to the impact of the stronger U.S. Dollar, partially offset by growth in the U.S.-to-Europe trade lane. Overall export volume growth was pressuredmixed by the strengthening U.S. Dollar. Export volume continued to be ledproduct as we experienced growth in our premium express products, offset by declines in our standard products, such as Transborder Standard and Worldwide Standard. Increased growth momentum was also experienced within our export premium products, such as Worldwide Express and Transborder Express.products.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The increasedecrease in domestic volume in the secondfirst quarter of 2016 was primarily due to revenue management initiatives and year-to-date periods of 2015 was driven by solid volume growthslowing market conditions in Germany, Canada Italy, Turkey and the United Kingdom.
Rates and Product Mix
Total average revenue per piece declined 2.4%decreased 0.5% in the secondfirst quarter of 2015 on a currency-adjusted basis (2.5% year-to-date), and was impacted by changes in2016 including the impact of lower fuel surcharge rates and shifts in product mix, whicha 210 basis point reduction from the impact of currency. These factors were partially offset by an increase in base rates.rates and a shift in product mix towards premium products.
On December 29, 2014,28, 2015, we implemented an average 4.9%5.2% net increase in base and accessorial rates for international shipments originating in the United States (Worldwide Express, Worldwide Saver, UPS Worldwide Expedited and UPS International Standard service). Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market.
Currency-adjusted exportExport revenue per piece decreased 4.6%1.9% in the secondfirst quarter of 2015 (4.8% year-to-date) due to2016 including the impact of lower fuel surcharge revenue, shorter average trade lanes (due to faster growthrates and a 120 basis point reduction from the impact of currency. These factors were partially offset by an increase in intra-regional shipments)base rates and a shift in product mix fromtowards our premium express products to our standard products (volume for our standard products increased approximately 7%, while volume for our premium express products increased approximately 4%). These factors more than offset the increase in base rates.services.
Currency-adjusted domesticDomestic revenue per piece increased 0.8%decreased 3.0% in the secondfirst quarter of 2015 (0.5% year-to-date) largely due to base rate increases, but was mostly2016 including the impact of lower fuel surcharge rates and a 580 basis point reduction from the impact of currency. These factors were partially offset by declining fuel surchargean increase in base rates.
Fuel Surcharges
We maintain fuel surcharges on our international air and ground services. The fuel surcharges for international air products originating inside or outside the United States are indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel, while the fuel surcharges for ground products originating outside the United States are indexed to fuel prices in the international region or country where the shipment takes place. Total international fuel surcharge revenue decreased by $141$60 million for the secondfirst quarter of 20152016 compared with 2014 ($251 million year-to-date),2015, primarily due to lower fuel prices; however, this was partially offset by an increase in overall volume and pricing changes made to the fuel surcharge indices.
Operating Expenses
Overall adjusted operating expenses for the segment decreased $288$132 million in the secondfirst quarter of 20152016 compared with 2014 ($505 million year-to-date).2015. This decrease was mostly driven bydue to lower fuel prices and a $57 million decrease from currency exchange rate movements and lower fuel expense, which were somewhat offset by volume growth.movements.
The decrease in operating expenses was drivenimpacted by the cost of operating our international integrated air and ground network, which decreased $147$70 million, ($291 million year-to-date), as well as pick-up and delivery costs, which decreased $87 million ($155 million year-to-date).$75 million. The decreases in network and pick-up and delivery costs were largely driven bydue to cost containment initiatives, the impact of currency exchange rate movements and lower fuel expense, and a reduction in expense for outside transportation carriers (largely due to lower fuel surcharges passed to us from the carriers).expense. Additionally, network costs were mitigated by restraining thecontained growth in aircraft block hours (down 0.3% in the second quarter and 0.1% year-to-date),(1.2% decrease) as a result of ongoing modifications to our air network; this reduction in block hours was achieved even with a 5.5%0.4% increase in secondfirst quarter international export volume (6.1% year-to-date) and continuing air product service enhancements.
The remaining change in operating expenses in the first quarter of 2016 compared with 2015 was largely due to an increase in indirect operating costs, but partially offset by reductions in the costs of package sorting.
Operating Profit and Margin
Operating profit increased $76 million in the first quarter of 2016 compared with 2015, while operating margin increased by 290 basis points to 19.7%. Operating profit and margin were positively affected by several factors including revenue management initiatives, modifications to the fuel surcharge indices, net impact of fuel, network management and cost containment initiatives. These items were partially offset by the net impact of currency.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The remaining decrease in operating expenses in the second quarter of 2015 was largely due to reductions of indirect operating costs and the cost of package sorting. Indirect operating costs, which decreased $42 million ($56 million year-to-date), were affected by various factors including the impact of currency and lower rent expense. The cost of package sorting decreased by $7 million ($8 million year-to-date), largely due to the impact of currency, but was somewhat offset by volume growth.
Excluding the impact of currency exchange rate changes, the total adjusted cost per piece for the segment decreased 5.3% in the second quarter of 2015 compared with 2014 (4.9% year-to-date).
Operating Profit and Margin
Adjusted operating profit increased by $81 million in the second quarter of 2015 compared with 2014 ($141 million year-to-date), while the adjusted operating margin increased by 360 basis points to 18.1% (330 basis points to 17.5% year-to-date). Operating profit and margin were positively affected by base rate increases and volume growth, which allowed us to better leverage our transportation network and drive improvements in productivity. Additionally, declining fuel prices and network management contributed a $32 million benefit to operating profit ($97 million year-to-date), as fuel expense declined at a faster rate than fuel surcharge revenue. These items were partially offset by the net impact of currency (remeasurement and translation gains and losses), which negatively impacted operating profit by $14 million when comparing the second quarter of 2015 with 2014 ($25 million year-to-date).
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Supply Chain & Freight Operations | | | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 |
| 2014 | | % | | 2015 | | 2014 | | % | 2016 |
| 2015 | | % |
Freight LTL Statistics: | | | | | | | | | | | | | | | | |
Revenue (in millions) | $ | 647 |
| | $ | 672 |
| | (3.7 | )% | | $ | 1,256 |
| | $ | 1,275 |
| | (1.5 | )% | $ | 564 |
| | $ | 609 |
| | (7.4 | )% |
Revenue Per Hundredweight | $ | 22.81 |
| | $ | 22.50 |
| | 1.4 | % | | $ | 22.79 |
| | $ | 22.51 |
| | 1.2 | % | $ | 23.25 |
| | $ | 22.77 |
| | 2.1 | % |
Shipments (in thousands) | 2,728 |
| | 2,736 |
| | (0.3 | )% | | 5,302 |
| | 5,223 |
| | 1.5 | % | 2,416 |
| | 2,574 |
| | (6.1 | )% |
Shipments Per Day (in thousands) | 42.6 |
| | 42.7 |
| | (0.3 | )% | | 41.7 |
| | 41.1 |
| | 1.5 | % | 37.8 |
| | 40.9 |
| | (7.6 | )% |
Gross Weight Hauled (in millions of lbs) | 2,836 |
| | 2,985 |
| | (5.0 | )% | | 5,512 |
| | 5,663 |
| | (2.7 | )% | 2,426 |
| | 2,676 |
| | (9.3 | )% |
Weight Per Shipment (in lbs) | 1,040 |
| | 1,091 |
| | (4.7 | )% | | 1,040 |
| | 1,084 |
| | (4.1 | )% | 1,004 |
| | 1,040 |
| | (3.5 | )% |
Operating Days in Period | 64 |
| | 64 |
| | | | 127 |
| | 127 |
| | | 64 |
| | 63 |
| | |
Revenue (in millions): | | | | | | | | | | | | | | | | |
Forwarding and Logistics | $ | 1,319 |
| | $ | 1,432 |
| | (7.9 | )% | | $ | 2,649 |
| | $ | 2,765 |
| | (4.2 | )% | $ | 1,586 |
| | $ | 1,330 |
| | 19.2 | % |
Freight | 752 |
| | 771 |
| | (2.5 | )% | | 1,462 |
| | 1,465 |
| | (0.2 | )% | 656 |
| | 710 |
| | (7.6 | )% |
Other | 171 |
| | 145 |
| | 17.9 | % | | 324 |
| | 282 |
| | 14.9 | % | 178 |
| | 153 |
| | 16.3 | % |
Total Revenue | $ | 2,242 |
| | $ | 2,348 |
| | (4.5 | )% | | $ | 4,435 |
| | $ | 4,512 |
| | (1.7 | )% | $ | 2,420 |
| | $ | 2,193 |
| | 10.4 | % |
Operating Expenses (in millions) | | | | | | | | | | | | |
Operating Expenses | $ | 2,035 |
| | $ | 2,254 |
| | (9.7 | )% | | $ | 4,077 |
| | $ | 4,270 |
| | (4.5 | )% | |
Health and Welfare Plan Charges | — |
| | (82 | ) | |
|
| | — |
| | (82 | ) | |
|
| |
Adjusted Operating Expenses | $ | 2,035 |
| | $ | 2,172 |
| | (6.3 | )% | | $ | 4,077 |
| | $ | 4,188 |
| | (2.7 | )% | |
Operating Profit (in millions) and Margin: | | | | | | | | | | | | |
Operating Profit | $ | 207 |
| | $ | 94 |
| | 120.2 | % | | $ | 358 |
| | $ | 242 |
| | 47.9 | % | |
Adjusted Operating Profit | $ | 207 |
| | $ | 176 |
| | 17.6 | % | | $ | 358 |
| | $ | 324 |
| | 10.5 | % | |
Operating Expenses (in millions): | | $ | 2,273 |
| | $ | 2,042 |
| | 11.3 | % |
Operating Profit (in millions): | | $ | 147 |
| | $ | 151 |
| | (2.6 | )% |
Operating Margin | 9.2 | % | | 4.0 | % | | | | 8.1 | % | | 5.4 | % | | | 6.1 | % | | 6.9 | % | | |
Adjusted Operating Margin | 9.2 | % | | 7.5 | % | | | | 8.1 | % | | 7.2 | % | | | |
Currency Benefit / (Cost) – (in millions)*: | Currency Benefit / (Cost) – (in millions)*: | | | | $ | | | | | | $ | Currency Benefit / (Cost) – (in millions)*: | | | | |
Revenue | | | | | $ | (68 | ) | | | | | | $ | (128 | ) | | | | | $ | (23 | ) |
Operating Expenses | | | | | 75 |
| | | | | | 143 |
| | | | | 26 |
|
Operating Profit | | | | | $ | 7 |
| | | | | | $ | 15 |
| | | | | $ | 3 |
|
* Amount represents the change compared to the prior year. Includes impact of translation and transaction gains and losses. | | | | | | | | | | | | * Amount represents the change compared to the prior year. Includes impact of translation and transaction gains and losses. |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue
Total revenue for the Supply Chain & Freight segment increased $227 million. Forwarding and logistics revenue decreased $113increased $256 million in the secondfirst quarter of 20152016. Excluding the effect of Coyote, revenue decreased $179 million in the first quarter of 2016 compared with 2014 ($116 million year-to-date),2015 largely due to a combination of volume and tonnage declines in our international and North American air freight businesses (impacted by management focus on reducing lower-yielding accounts and softer market conditions), lower rates charged to our customers (largely due to overcapacity in the market), as well as the adverse impact of currency exchange rate movements and lower fuel surcharge rates (due to declining fuel prices) and volume and tonnage declines in our international air freight business (impacted by management focus on reducing lower-yielding accounts). Revenue for our logistics products increased in the secondfirst quarter and year-to-date periods of 20152016 compared with 2014,2015, as we experienced solid growth in our mail services, healthcare, aerospace and aerospaceindustrial manufacturing distribution solutions; however, this was partially offset by the adverse impact of currency exchange rates and revenue declines among our high tech customers.
Freight revenue decreased $19$54 million in the secondfirst quarter of 2015 ($3 million year-to-date),2016, driven by lower average weight per shipment of 4.7% (4.1% year-to-date)a 9.3% decline in tonnage, a 6.1% decrease in shipments and a $39$32 million decrease ($66 million year-to-date) in fuel surcharge revenue due to lower diesel fuel prices. While average dailyThe decline in shipments remained flat,and the reduction in weight per shipment waswere impacted by changesrevenue management initiatives, a decline in industry mix (higher proportion of lower-weight retail industry volume)market demand and customer mix (reduction of lower-yielding customer accounts).mix. LTL Revenue per hundredweight increased slightly, as LTL base rate increases averaging 4.9% took effect on December 29, 2014,28, 2015, covering non-contractual shipments in the United States, Canada and Mexico.
Revenue for the other businesses within Supply Chain & Freight increased $26$25 million in the secondfirst quarter of 2015 ($42 million year-to-date),2016, due to revenue growth at The UPS Store, UPS Capital and UPS Customer Solutions, as well as revenue from contractual domestic air transportation services provided to the U.S. Postal Service.
Operating Expenses
Forwarding and logistics adjusted operating expenses decreased $142 million for the second quarter of 2015 compared with 2014 ($148 million year-to-date). This decrease was mostly driven by currency exchange rate movements and lower fuel expense.
Purchased transportation expense decreased by $112 million in the second quarter ($123 million year-to-date), primarily due to the impact of foreign currency exchange rates, lower volume and tonnage in our international air freight forwarding business, lower base rates and lower fuel surcharge rates charged to us by third-party transportation carriers. The remaining operating expense decrease in forwarding and logistics was related to several other expense categories, including depreciation, security costs and payroll and benefits.
Freight adjusted operating expenses decreased $9 million in the second quarter of 2015. Total adjusted cost per LTL shipment decreased by 1.8%. The decrease in adjusted operating expense was largely due to the cost associated with operating our linehaul network, which decreased $26 million, and was driven by a reduction in expense for outside transportation carriers (largely due to lower fuel surcharges passed to us from the carriers). These benefits were partially offset by an increase in pick-up and delivery expenses of $3 million and other operating expenses of $14 million. The increase in pick-up and delivery costs were primarily due to contractual union wage increases, while the growth in other operating expenses was largely due to higher pension costs (impacted by lower discount rates for UPS-sponsored plans) and increased health and welfare expenses (impacted by higher contribution rates into multiemployer plans).
On a year-to-date basis, Freight adjusted operating expenses increased $13 million. The increase in adjusted operating expense was largely due to pick-up and delivery expenses (increase of $10 million) and other operating expenses (increase of $32 million), partially offset by a decrease in the cost of operating our linehaul network (decrease of $27 million).
Operating expenses for the other businesses within Supply Chain & Freight increased $14 million in the second quarter of 2015 compared with 2014 ($24 million year-to-date).
Operating Profit and Margin
Adjusted operating profit for the forwarding and logistics unit increased by $29 million in the second quarter of 2015 compared with 2014 ($32 million year-to-date), and was impacted by several factors. Operating results for the international air forwarding business improved, as the rates at which we procure capacity from third party air carriers decreased faster than the rates we charge our customers. The net impact of currency (remeasurement and translation gains and losses) and revenue management initiatives had a positive impact on operating profit. We also increased profitability in our ocean freight and mail services units for the quarter, as a result of cost controls and solid operating margin increases; despite a slight decline in ocean freight shipments in tonnage. However, investments in technology and infrastructure continued to pressure distribution margins during the second quarter of 2015.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AdjustedOperating Expenses
Total operating expenses for the Supply Chain & Freight segment increased $231 million. Forwarding and logistics operating expenses increased $265 million for the first quarter of 2016 compared with 2015. This increase was largely due to the acquisition of Coyote during the third quarter of 2015 offset by the impact of currency exchange rate movements and lower fuel expense. Purchased transportation expense increased by $212 million in the first quarter due to the acquisition of Coyote, as well as increased volume and rates for mail services. These increases were partially offset by a combination of lower volume and tonnage in our international and North American air freight forwarding businesses, lower buy rates due to softer market conditions and the impact of foreign currency exchange rates.
Freight operating expenses decreased $56 million in the first quarter of 2016 compared with 2015. Total cost per LTL shipment decreased by 1.3%. The decrease in operating expense was largely due to the cost associated with operating our linehaul network (which decreased $28 million), decreases in pick-up and delivery expenses (which decreased $14 million) and decreases in other expenses (which decreased $4 million). The declines in network costs and pick-up and delivery expenses were driven by a reduction in fuel expense and expense for outside transportation carriers (largely due to lower LTL volume and fuel surcharges passed to us by outside carriers).
Operating expenses for the other businesses within Supply Chain & Freight increased $22 million in the first quarter of 2016 compared with 2015.
Operating Profit and Margin
Total operating profit for the Supply Chain & Freight segment decreased $4 million. The net impact of currency and revenue management initiatives, however, had a positive impact on operating profit. Operating profit for the forwarding and logistics units decreased by $9 million in the first quarter of 2016 compared with 2015, primarily due to volume and tonnage declines. Operating profit and margins for the international air freight forwarding business improved as the spread between the rates we charge our customers and the rates at which we procure capacity from third party air carriers increased. Operating profit and margins in our North American air freight and ocean freight businesses declined due to a shift to less premium products in the North American air freight market and excess capacity in the ocean market, which put downward pressure on sell rates. In addition, operating profit for the logistics unit declined, primarily due to increased purchase transportation costs.
Operating profit for our freight unit decreased $10increased $2 million in the secondfirst quarter of 20152016 compared with 2014 ($16 million year-to-date),2015, as increased pension and healthcare costs, contractual union wage increases and declines in tonnage more than offset the increased yields and productivity realized during the quarter.more than offset decreased tonnage.
The combined operating profit for all of our other businesses in this segment increased $12$3 million in the secondfirst quarter of 20152016 compared with 2014 ($18 million year-to-date), primarily due to higher operating profit at The UPS Store, UPS Capital and UPS Customer Solutions, as well as the contractual domestic air transportation services provided to the U.S. Postal Service.2015.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated Operating Expenses
| | | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | % | | 2015 | | 2014 | | % | 2016 | | 2015 | | % |
Operating Expenses (in millions): | | | | | | | | | | | | | | | | |
Compensation and Benefits | $ | 7,502 |
| | $ | 8,375 |
| | (10.4 | )% | | $ | 15,066 |
| | $ | 15,640 |
| | (3.7 | )% | $ | 7,853 |
| | $ | 7,564 |
| | 3.8 | % |
Health and Welfare Plan Charges | — |
| | (1,066 | ) | | | | | | (1,066 | ) | | | |
Adjusted Compensation and Benefits | 7,502 |
| | 7,309 |
| | 2.6 | % | | 15,066 |
| | 14,574 |
| | 3.4 | % | |
| | | | | | | | | | | | |
Repairs and Maintenance | 357 |
| | 341 |
| | 4.7 | % | | 707 |
| | 670 |
| | 5.5 | % | 381 |
| | 350 |
| | 8.9 | % |
Depreciation and Amortization | 510 |
| | 473 |
| | 7.8 | % | | 1,016 |
| | 941 |
| | 8.0 | % | 552 |
| | 506 |
| | 9.1 | % |
Purchased Transportation | 1,777 |
| | 1,988 |
| | (10.6 | )% | | 3,631 |
| | 3,896 |
| | (6.8 | )% | 2,024 |
| | 1,854 |
| | 9.2 | % |
Fuel | 639 |
| | 980 |
| | (34.8 | )% | | 1,283 |
| | 1,952 |
| | (34.3 | )% | 434 |
| | 644 |
| | (32.6 | )% |
Other Occupancy | 230 |
| | 241 |
| | (4.6 | )% | | 524 |
| | 538 |
| | (2.6 | )% | 269 |
| | 294 |
| | (8.5 | )% |
Other Expenses | 1,120 |
| | 1,123 |
| | (0.3 | )% | | 2,212 |
| | 2,150 |
| | 2.9 | % | 1,082 |
| | 1,092 |
| | (0.9 | )% |
Total Operating Expenses | | $ | 12,595 |
| | $ | 12,304 |
| | 2.4 | % |
| | | | | | | | | | | | | | | | |
Total Operating Expenses | $ | 12,135 |
| | $ | 13,521 |
| | (10.3 | )% | | $ | 24,439 |
| | $ | 25,787 |
| | (5.2 | )% | |
Adjusted Total Operating Expenses | $ | 12,135 |
| | $ | 12,455 |
| | (2.6 | )% | | $ | 24,439 |
| | $ | 24,721 |
| | (1.1 | )% | |
| | | | | | | | | | | | |
| | | | | $ | | | | | | $ | |
Currency (Benefit) Cost | | | | | $ | (312 | ) | | | | | | $ | (596 | ) | |
Currency (Benefit) Cost - (in millions)* | | | | | | $ | (83 | ) |
* Amount represents the change compared to the prior year. Includes impact of translation and transaction gains and losses. | | * Amount represents the change compared to the prior year. Includes impact of translation and transaction gains and losses. |
Compensation and Benefits
Compensation costs increased $78$169 million for the secondfirst quarter of 20152016 compared with 2014 ($151 million year-to-date). Compensation2015 largely due to higher U.S. domestic hourly and management compensation costs and the acquisition of Coyote during the third quarter of 2015. U.S. domestic compensation costs for hourly employees increased largely due to contractual union wage increases and a 1.8% increase in average daily union labor hours. The increase in average daily labor hours in the second quarter (1.9% year-to-date), which was impacted byless than daily volume growth and an overall increase in the size of the workforce.due to productivity gains. Compensation costs for management employees increased primarily due to a merit salary increase, growth in the overall size of the workforce and an increase in incentive compensation.
Adjusted benefitsBenefits expense increased $115$120 million for the secondfirst quarter of 20152016 compared with 2014 ($341 million year-to-date),2015, primarily due to increased health and welfare costs, pension expense and vacation, holiday and excused absence expenses and workersexpenses; these factors were partially offset by decreased workers' compensation costs. These factors are discussed further as follows:
Adjusted healthHealth and welfare costs increased $29$95 million for the secondfirst quarter, of 2015 compared with 2014 ($82 million year-to-date), largely due to increased contributions to multiemployer plans resulting from contractual contribution rate increases, an overall increase in the size of the workforce and higher union labor hours.one additional operating day.
Pension expense increased $84$23 million for the secondfirst quarter of 2015 compared with 2014 ($167 million year-to-date). The expense for UPS-sponsored pension plans increasedprimarily due to lower discount rates, changes in mortality assumptions and higher Pension Benefit Guaranty Corporation premiums. Theadditional expense for multiemployer pension plans, increased due towhich were impacted by contractual contribution rate increases and higher union labor hours.one additional operating day.
Vacation, holiday and excused absence expense increased $11$19 million infor the secondfirst quarter, of 2015 compared with 2014 ($24 million year-to-date), due to salary increases, and growth in the overall size of the workforce.workforce and one additional operating day.
WorkersWorkers' compensation expense increased $1decreased $26 million in the second quarter of 2015 compared with 2014 ($63 million year-to-date).first quarter. Insurance reserves are established for estimates of the loss that we will ultimately incur on reported worker'sworkers' compensation claims, as well as estimates of claims that have been incurred but not reported, and take into account a number of factors including our history of claim losses, payroll growth and the impact of safety improvement initiatives. WeIn the first quarter of 2016, we experienced lessmore favorable actuarial adjustments in 2015 compared with 2014,2015, resulting in decreased expense.
Repairs and Maintenance
The $31 million increase in repairs and maintenance expense for the increased expense.first quarter of 2016 compared with 2015 was primarily due to higher aircraft engine repair costs and one additional operating day.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Repairs and Maintenance
The $16 million increase in repairs and maintenance expense for the second quarter ($37 million year-to-date) was primarily due to higher aircraft engine repair and component replacement costs, largely in our Boeing 747 and 767 aircraft fleets.
Depreciation and Amortization
Depreciation and amortization expense increased $37$46 million in the secondfirst quarter of 20152016 compared with 2014 ($75 million year-to-date),2015, primarily due to twothree factors: (1) Depreciation expense on vehicles increased due to the replacement of older, fully-depreciated vehicles, technology upgrades on new vehicles and an overall increase in the size of our vehicle fleet in our U.S. Domestic Package and UPS Freight operations; (2) Depreciation expense for buildings and (2)facilities increased due to leasehold improvements and purchases of new equipment and (3) Amortization expense increased largely due to new internally developed capitalized software, as well as intangible assets resulting from business acquisitions.
Purchased Transportation
The $211$170 million decreaseincrease in purchased transportation expense charged to us by third-party air, rail, ocean and truck carriers for the secondfirst quarter of 2015,2016 compared with 2014 ($265 million year-to-date),2015 was primarily driven by several factors:
Expense for our U.S. Domestic Package segment decreased $83forwarding and logistics business increased $212 million forin the secondfirst quarter ($123 million year-to-date), primarily due to lower fuel surcharges passed to us from rail carriers, as well as the lower overall usageacquisition of outside transportation carriers. The usageCoyote and increased volume and rates for mail services; these items were partially offset by the impact of outside transportation carriersdecreased volume and tonnage in 2015 compared with 2014 has been impacted by several factors, including rail carrier service issuesour international and adverse weather conditions.North American air freight and ocean businesses and the impact of currency exchange rate movements.
Expense for our International Package segment decreased $11increased $10 million in the secondfirst quarter, ($31 million year-to-date), primarily due to the increased usage of third party carriers; these items were partially offset by the impact of currency exchange rate movements as well as lower fuel surcharges passed to us from outside transportation providers. These factors were partially offset by international volume growth.
Expense for our U.S. Domestic Package segment decreased $25 million for the first quarter, primarily due to decreased use of, and lower fuel surcharges passed to us from, rail carriers and outside contract carriers.
Expense for our UPS Freight business decreased $5$27 million in the secondfirst quarter due to lower tonnage and fuel surcharges from outside transportation providers. Year-to-date expense increased $12 million year-to-date, largely due to increaseda decrease in LTL and brokerage volume, which resulted in the increased use of outside transportation carriers.
Expense for our forwarding and logistics business decreased $112 million in the second quarter ($123 million year-to-date), largely due to decreased volume and tonnage in our international air freight business, the impact of currency exchange rate movementsshipments and lower fuel surcharges passed to us from outside transportation carriers.providers.
Fuel
The $341$210 million decrease in fuel expense for the secondfirst quarter of 2015 ($669 million year-to-date),2016 compared with 2014,2015 was driven byprimarily due to lower jet fuel, diesel and unleaded gasoline prices, which resulted in a decreasedecreased fuel expense by $212 million. Increases in fuel efficiency, alternative fuel credits and the impact of fewer miles driven in our Freight business unit decreased expense of $325 million for the second quarter ($673 million year-to-date). There was also lower fuel usage, which resulted in an overall decrease in expense of $16 million for the second quarter (flat year-to-date), largely due to an increase in average miles per gallon, which wasby $22 million. These decreases were partially offset by an increaseincreases in vehicle miles driven andtotal aircraft block hours dueand Domestic Package delivery stops (due to volume growth.higher volume), which combined to increase expense by $24 million in the first quarter of 2016.
Other Occupancy
The $11$25 million decrease in other occupancy expense in the second quarter of 2015 ($14 million year-to-date) was primarilylargely due to a declinedecrease in facility rent expense, natural gas and electric utility expenses. This decline was impacted by lower energy pricescosts and power usage.snow removal costs at our operating facilities in the first quarter of 2016.
Other Expenses
Other expenses were relatively flatThe $10 million decrease in other expense in the secondfirst quarter of 2016 compared with 2015 while increasing $62 million on a year-to-date basis. Transportation equipment rental expense increased $14 million year-to-date and was driven by the growth in package volume. Automotive liability insurance expense increased $14 million year-to-date largely due to actuarial adjustments to our self-insurance reserve liabilities. We also incurred increases in several other expense categories on a year-to-date basis, including transportation security costs, advertising expenses, credit card fees, employee expense reimbursements (related to the implementationlower utilization of ORION) and legal contingency expenses.third party tractor rentals.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Income and (Expense)
|
| | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2016 | | 2015 | | % |
(in millions) | | | | | |
Investment income and other | $ | 17 |
| | $ | 4 |
| | NA |
|
Interest expense | $ | (93 | ) | | $ | (87 | ) | | 6.9 | % |
Investment Income and Interest Expense
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
| 2015 | | 2014 | | % | | 2015 | | 2014 | | % |
(in millions) | | | | | | | | | | | |
Investment Income | $ | 4 |
| | $ | 25 |
| | (84.0 | )% | | $ | 8 |
| | $ | 25 |
| | (68.0 | )% |
Interest Expense | $ | (86 | ) | | $ | (89 | ) | | (3.4 | )% | | $ | (173 | ) | | $ | (179 | ) | | (3.4 | )% |
Investment IncomeOther
The decreasegrowth in investment income and other for the secondfirst quarter and year-to-date of 20152016 was primarily due to a $11 million decrease in realized gains on the sales of investments ($11 million decrease year-to-date) and $5 million decreaselosses from fair value adjustments on real estate partnerships, ($1 million decrease year-to-date). The remaining decline in investmenthigher interest income of $5 million ($5 million year-to-date) was primarily due to decreases in lease income, fluctuations of investment balances and interest rates earnedrealized gains on invested assets.investments and the benefit from foreign currency exchange rate movements.
Interest Expense
Interest expense decreasedincreased in the secondfirst quarter and year-to-date periods of 20152016 largely due to having lower-yieldingan increase in the average outstanding commercial paper comprise a greater proportion of our overalland long-term debt as well asand higher effective interest rates on senior notes. This was partially offset by a decrease in effective interest rates mainly duerelated to the termination of our British Pound Sterling cross-currency interest rate swaps.swaps and the impact of foreign currency.
Income Tax Expense
| | | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | Three Months Ended March 31, | | Change |
| 2015 | | 2014 | | % | | 2015 | | 2014 | | % | 2016 | | 2015 | | % |
(in millions) | | | | | | | | | | | | | | | | |
Income Tax Expense | $ | 648 |
| | $ | 229 |
| | 183.0 | % | | $ | 1,212 |
| | $ | 741 |
| | 63.6 | % | $ | 616 |
| | $ | 564 |
| | 9.2 | % |
Health and Welfare Plan Charges | — |
| | 401 |
| | | | — |
| | 401 |
| | | |
Adjusted Income Tax Expense | $ | 648 |
| | $ | 630 |
| | 2.9 | % | | $ | 1,212 |
| | $ | 1,142 |
| | 6.1 | % | |
Effective Tax Rate | 34.5 | % | | 33.5 | % | | | | 34.9 | % | | 35.2 | % | | | 35.3 | % | | 35.5 | % | | |
Adjusted Effective Tax Rate | 34.5 | % | | 36.0 | % | | | | 34.9 | % | | 36.0 | % | | | |
Our adjusted consolidated effective tax rate decreased to 34.5%35.3% in the secondfirst quarter of 20152016 from 36.0%35.5% in the same period of 2014 (34.9% and 36.0% year-to-date, respectively)2015, primarily due to favorable changes in the proportion of our taxable income in certain U.S. and non-U.S. jurisdictions and an increasejurisdictions. This was partially offset by a decrease in U.S. Federal and state tax credits realized in comparisonrelative to amounts previously estimated.total pre-tax income.
Our consolidated effective tax rate increased to 34.5% in the second quarter of 2015 compared with 33.5% in the same period of 2014, primarily due to the $1.066 billion pre-tax charge in the prior year associated with certain health and welfare benefit plan changes, which generated a tax benefit at a rate higher than the consolidated effective tax rate. This was partially offset by favorable changes in the proportion of our taxable income in certain U.S. and non-U.S. jurisdictions and an increase in U.S. Federal and state tax credits realized in comparison to amounts previously estimated.
On a year-to-date basis, our consolidated effective tax rate decreased to 34.9% in 2015 from 35.2% in 2014 due to favorable changes in the proportion of our taxable income in certain U.S. and non-U.S. jurisdictions and an increase in U.S. Federal and state tax credits realized in comparison to amounts previously estimated.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Net Cash From Operating Activities
The following is a summary of the significant sources (uses) of cash from operating activities (amounts in millions):
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2015 | | 2014 | 2016 | | 2015 |
Net income | $ | 2,256 |
| | $ | 1,365 |
| $ | 1,131 |
| | $ | 1,026 |
|
Non-cash operating activities (a) | 1,670 |
| | 2,645 |
| 900 |
| | 886 |
|
Pension and postretirement plan contributions (UPS-sponsored plans) | (99 | ) | | (115 | ) | (43 | ) | | (47 | ) |
Settlement of postretirement benefit obligation | — |
| | (1,995 | ) | |
Hedge margin receivables and payables | 202 |
| | 52 |
| (76 | ) | | 364 |
|
Income tax receivables and payables | 115 |
| | 69 |
| 470 |
| | 505 |
|
Changes in working capital and other non-current assets and liabilities | 141 |
| | (196 | ) | 280 |
| | 23 |
|
Other sources (uses) of cash from operating activities | (46 | ) | | 7 |
| 8 |
| | (6 | ) |
Net cash from operating activities | $ | 4,239 |
| | $ | 1,832 |
| $ | 2,670 |
| | $ | 2,751 |
|
___________________
| |
(a) | Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, provisions for uncollectible accounts, pension and postretirement benefit expense, stock compensation expense, and other non-cash items. |
Operating cash flow was adversely impacted by $2.062 billion in 2014 and $43decreased $81 million in 2015 due to certain transactions resulting from the ratificationfirst quarter of our collective bargaining agreement with the Teamsters:
We paid $1.995 billion to settle postretirement benefit obligations for certain Teamster employees, and paid an additional $276 million that was accounted for as a deposit until the ratification of certain other collective bargaining agreements.
We paid $204 million in 2014 for retroactive economic benefits under the collective bargaining agreement that were related to the period between August through December of 2013.
As of June 30, 2014, we received cash tax benefits of $413 million from the payments described above (through reduced U.S. Federal and State quarterly income tax payments).
We paid $53 million in 2015 for additional retroactive economic benefits and through June 30, 2015 we have received $10 million of cash tax benefits (through reduced U.S. Federal and State quarterly income tax payments).
Apart from the transactions described above, operating cash flow increased approximately $388 million in 20152016 compared with 2014,2015, largely due to higher net income, improvements in our working capital position, changes in hedge margin payables and receivables reduced payments forpartially offset by higher net income taxes and reduced pension and postretirement plan contributions.improvements in our working capital position. The net hedge margin collateral received from derivative counterparties increaseddecreased by approximately $150$440 million in 20152016 relative to 2014,2015, due to the increaseda decreased net fair value asset position of the derivative contracts used in our currency and interest rate hedging programs. The net cash payments for income taxes decreased in 2015 compared with 2014, and were impacted by the timing of current tax deductions and the receipt of tax refunds. The factors above wereThis decrease was partially offset by an increase in net income of $105 million and an improvement in working capital position of $257 million in 2016 relative to 2015. The improved working capital position in 2016 was primarily driven by decreased average days outstanding on accounts receivable and changes in the impactgeneral timing of a legal settlement.cash receipts and payments.
As of June 30, 2015March 31, 2016, our worldwide holdings of cash, and cash equivalents and marketable securities were $3.430$6.267 billion,, of which $1.272$2.326 billion was held by non-U.S. subsidiaries. The amount of cash, cash equivalents and marketable securities held by our U.S. and non-U.S subsidiaries fluctuates throughout the year due to a variety of factors, including the timing of cash receipts and disbursements in the normal course of business. Cash provided by operating activities in the U.S. continues to be our primary source of funds to finance U.S. operating needs, capital expenditures, share repurchases and dividend payments to shareowners. To the extent that such amounts represent previously untaxed earnings, the cash, cash equivalents and marketable securities held by non-U.S. subsidiaries could be subject to tax if such amounts were repatriated in the form of dividends; however, not all non-U.S. cash balances would have to be repatriated in the form of a dividend if returned to the U.S. When amounts earned by non-U.S. subsidiaries are expected to be indefinitely reinvested, no accrual for taxes is provided.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Cash Used In Investing Activities
Our primary sources (uses) of cash for investing activities were as follows (amounts in millions):
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2015 | | 2014 | 2016 | | 2015 |
Net cash (used in) investing activities | $ | (2,776 | ) | | $ | (1,802 | ) | $ | (1,108 | ) | | $ | (1,357 | ) |
| | | | | | |
Capital Expenditures: | | | | | | |
Buildings and facilities | $ | (387 | ) | | $ | (207 | ) | $ | (185 | ) | | $ | (192 | ) |
Aircraft and parts | (12 | ) | | (25 | ) | (9 | ) | | (5 | ) |
Vehicles | (341 | ) | | (385 | ) | (147 | ) | | (82 | ) |
Information technology | (218 | ) | | (196 | ) | (86 | ) | | (86 | ) |
| $ | (958 | ) | | $ | (813 | ) | $ | (427 | ) | | $ | (365 | ) |
| | | | | | |
Capital Expenditures as a % of Revenue | 3.4 | % | | 2.9 | % | (3.0 | )% | | (2.6 | )% |
| | | | | | |
Other Investing Activities: | | | | | | |
Proceeds from disposals of property, plant and equipment | $ | 8 |
| | $ | 10 |
| $ | 3 |
| | $ | 2 |
|
Net decrease (increase) in finance receivables | $ | (13 | ) | | $ | 13 |
| |
Net sales, maturities, and (purchases) of marketable securities | $ | (1,713 | ) | | $ | (959 | ) | |
Net (increase) in finance receivables | | $ | (20 | ) | | $ | (9 | ) |
Net (purchases) of marketable securities | | $ | (625 | ) | | $ | (966 | ) |
Cash paid for business acquisitions | $ | (90 | ) | | $ | (22 | ) | $ | (6 | ) | | $ | (10 | ) |
Other (uses) of cash for investing activities | $ | (10 | ) | | $ | (31 | ) | $ | (33 | ) | | $ | (9 | ) |
We have commitments for the purchase of vehicles, equipment and real estate to provide for the replacement of existing capacity and anticipated future growth. We generally fund our capital expenditures with our cash from operations. Capital spending on buildings and facilities increasedand information technology remained relatively flat in the first sixthree months of 20152016 compared with 2014 due to several facility automation and capacity expansion projects as well as the timing of payments for property, plant and equipment acquired in 2014 but not paid for until 2015. Capital spending on aircraft in both 20152016 and 20142015 primarily related to purchases of rotable parts for our existing aircraft fleet. Capital spending on vehicles decreasedincreased in the first sixthree months of 20152016 in our U.S. and international package businesses, largely due to the timing of vehicle replacements. Capital spending on technology increased inreplacements and expansion of the first six months of 2015, largely dueoverall vehicle fleet to new capitalized software projects and increased spending on hardware.support volume growth.
Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions. We anticipate that our capital expenditures for 20152016 will be approximately $3.0$2.8 billion.
The net changes in finance receivables were primarily due to growth in our cargo finance products and loan principal paydowns in our business credit and leasing portfolios. The purchases and sales of marketable securities are largely determined by liquidity needs and the periodic rebalancing of investment types, and will therefore fluctuate from period to period.
The cash paid for business acquisitions in 2016 was related to our acquisition of area franchise rights related to The UPS Store. The cash paid for business acquisitions in the first quarter of 2015 was primarily related to our acquisitionsacquisition of Poltraf Sp. z.o.o., Parcel Pro, Inc., and the Insured Parcel Services Division of G4S International Logistics in 2015, and Polar Speed Distribution Limited during 2014. Other investing activities include capital contributions into certain investment partnerships, changes in restricted cash balances and various other items.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Cash From (Used in) Financing Activities
Our primary sources (uses) of cash for financing activities are as follows (amounts in millions, except per share data):
| | | Six Months Ended June 30, | Three Months Ended March 31, |
2015 | | 2014 | 2016 | | 2015 |
Net cash (used in) financing activities | $ | (252 | ) | | $ | (1,632 | ) | |
Net cash (used in) provided by financing activities | | $ | (440 | ) | | $ | 899 |
|
Share Repurchases: | | | | | | |
Cash expended for shares repurchased | $ | (1,348 | ) | | $ | (1,379 | ) | $ | (640 | ) | | $ | (676 | ) |
Number of shares repurchased | (13.5 | ) | | (13.7 | ) | (6.8 | ) | | (6.8 | ) |
Shares outstanding at period end | 896 |
| | 914 |
| 884 |
| | 901 |
|
Percent reduction in shares outstanding | (1.0 | )% | | (1.0 | )% | (0.2 | )% | | (0.4 | )% |
Dividends: | | | | | | |
Dividends declared per share | $ | 1.46 |
| | $ | 1.34 |
| $ | 0.78 |
| | $ | 0.73 |
|
Cash expended for dividend payments | $ | (1,270 | ) | | $ | (1,192 | ) | $ | (666 | ) | | $ | (636 | ) |
Borrowings: | | | | | | |
Net borrowings of debt principal | $ | 2,403 |
| | $ | 840 |
| $ | 819 |
| | $ | 2,344 |
|
Other Financing Activities: | | | | | | |
Cash received for common stock issuances | $ | 140 |
| | $ | 149 |
| $ | 83 |
| | $ | 72 |
|
Other (uses) of cash for financing activities | $ | (177 | ) | | $ | (50 | ) | $ | (36 | ) | | $ | (205 | ) |
Capitalization (as of June 30 each year): | | | | |
Capitalization (as of March 31 each year): | | | | |
Total debt outstanding at period end | $ | 13,152 |
| | $ | 11,842 |
| $ | 15,438 |
| | $ | 13,104 |
|
Total shareowners’ equity at period end | 1,968 |
| | 5,585 |
| 2,480 |
| | 1,847 |
|
Total capitalization | $ | 15,120 |
| | $ | 17,427 |
| $ | 17,918 |
| | $ | 14,951 |
|
Debt to Total Capitalization % | 87.0 | % | | 68.0 | % | 86.2 | % | | 87.6 | % |
We repurchased a total of 13.56.6 million shares of class A and class B common stock for $1.358 billion$655 million in the first sixthree months of 2016, and 6.8 million shares for $687 million for the first three months of 2015 ($640 and 13.7$676 million shares for $1.363 billion for the first six months of 2014 ($1.348 and $1.379 billion in repurchases for 20152016 and 2014,2015, respectively, are reported on the statements of consolidated cash flows statement due to unsettled repurchases). During the timingfirst quarter of settlements). 2016, we also exercised a capped call option that we entered into in 2015 which allowed us to repurchase 0.2 million class B shares. The $25 million premium payment for this capped call option was classified as an other financing activity in 2015. In total, shares repurchased and received in the first quarter were 6.8 million shares for $680 million.
In February 2013, the Board of Directors approved a share repurchase authorization of $10.0 billion, which has no expiration date. As of March 31, 2016, we had $761 million of this share repurchase authorization available. In May 2016, the Board of Directors approved a new share repurchase authorization of $10.0$8.0 billion, which has no expiration date. As of June 30, 2015, we had $2.794 billion of this share repurchase authorization available.
Share repurchases may take the form of accelerated share repurchases, open market purchases, or other such methods as we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the program. We anticipate repurchasing a total of approximately $2.7 billion of shares in 2015.2016.
The declaration of dividends is subject to the discretion of the Board of Directors and will depend on various factors, including our net income, financial condition, cash requirements, future prospects and other relevant factors. We increased our quarterly cash dividend payment to $0.73$0.78 per share in 20152016, compared with the previous $0.67$0.73 quarterly dividend rate in 20142015. We expect to continue the practice of paying regular cash dividends.
Issuances and repayments of debt in the first sixthree months of 20152016 and 20142015 consisted primarily of commercial paper.paper and the issuance of $118 million of floating rate senior notes in March 2016. We consider the overall fixed and floating interest rate mix of our portfolio and the related overall cost of borrowing when planning for future issuances and non-scheduled repayments of debt.
We had $2.547 billion outstanding under our U.S. commercial paper program, and an additional £420 million ($662 million) outstanding under our European commercial paper program, as of June 30, 2015. The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. The average commercial paper balance outstanding was $1.568 billion and $416 million for the U.S. and European commercial paper programs, respectively, during the six months ended June 30, 2015. The average interest rate paid was 0.12% and 0.49% for the U.S. and European commercial paper programs, respectively, during the six months ended June 30, 2015.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As of March 31, 2016, our commercial paper programs had $3.809 billion outstanding in a variety of currencies, which includes $2.926 billion, €630 million ($718 million) and £115 million ($165 million). The average balance of our U.S. dollar denominated commercial paper was $556 million and the average interest rate paid was 0.39% during the three months ended March 31, 2016. The average balance of our pound sterling denominated commercial paper was £68 million ($98 million) and the average interest rate paid was 0.51% during the three months ended March 31, 2016. The average balance of our euro denominated commercial paper was €123 million ($135 million) and the average interest rate received was -0.13% during the three months ended March 31, 2016. The amount of commercial paper outstanding fluctuates throughout the year based on liquidity needs.
The variation in cash received from common stock issuances to employees was primarily due to the level of stock option exercises during the first sixthree months of 20152016 and 20142015.
The cash outflows in other financing activities were impacted by several factors. Cash inflows (outflows) from the premium payments and settlements of capped call options for the purchase of UPS class B shares were ($46)$103 and $102($99) million during the first sixthree months of 20152016 and 20142015, respectively. Cash outflows related to the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards was $175$155 and $154$142 million during the first sixthree months of 20152016 and 20142015, respectively.
Sources of Credit
See note 89 to the unaudited consolidated financial statements for a discussion of our available credit and the financial covenants that we are subject to as part of our credit agreements.
Our Moody’s and Standard & Poor’s short-term credit ratings are P-1 and A-1, respectively. Our Moody’s and Standard & Poor’s long-term credit ratings are Aa3 and A+, respectively. We currently have a stable outlook from Standard & Poor’s and a negative outlook from Moody's.
Except as described in this quarterly report, the nature and amounts of our payment obligations under our debt, capital and operating lease agreements, purchase commitments, and other liabilities as of June 30, 2015 have not materially changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2014.
We believe that funds from operations and borrowing programs will provide adequate sources of liquidity and capital resources to meet our expected long-term needs for the operation of our business, including anticipated capital expenditures, for the foreseeable future.Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, which we believe could have a material impact on our financial condition or liquidity.
Contingencies
See note 910 and note 6 to the unaudited consolidated financial statements for a discussion of judicial proceedings and other matters arising from the conduct of our business activities, and note 1415 for a discussion of income tax related matters.
Contractual Commitments
On July 31, 2015, we announced that we have entered into a definitive purchase agreement to acquire Coyote Logistics Holdings, LLC, a technology-driven, non-asset based truckload freight brokerage company for $1.8 billion. The closing, which is subject to customary conditions and regulatory approvals, is expected to take place in the third quarter of 2015. The transaction will be financed with available cash resources and through existing and new debt arrangements.
Collective Bargaining Agreements
Status of Collective Bargaining Agreements
See note 6 to the unaudited consolidated financial statements for a discussion of the status of our collective bargaining agreements.
Multiemployer Benefit Plans
See note 6 to the unaudited consolidated financial statements for a discussion of our participation in multiemployer benefit plans.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Recent Accounting Pronouncements
Adoption of New Accounting Standards
See note 2 to the unaudited consolidated financial statements for a discussion of recently adopted accounting standards.
Accounting Standards Issued But Not Yet Effective
See note 2 to the unaudited consolidated financial statements for a discussion of accounting standards issued, but not yet effective.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates, interest rates and equity prices, and certain commodity prices. ThisAll of these market risk arisesrisks arise in the normal course of business, as we do not engage in speculative trading activities. In order to manage the risk arising from these exposures, we utilize a variety of commodity, foreign exchange and interest rate investment and commodity forward contracts, options and swaps. A discussion of our accounting policies for derivative instruments and further disclosures are provided in note 14 to the unaudited consolidated financial statements.
The total fair value asset (liability) of our derivative financial instruments is summarized in the following table (in millions):
| | | June 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
Currency Derivatives | $ | 515 |
| | $ | 401 |
| $ | 234 |
| | $ | 490 |
|
Interest Rate Derivatives | 232 |
| | 243 |
| 321 |
| | 229 |
|
Investment Market Price Derivatives | (9 | ) | | — |
| 159 |
| | (4 | ) |
| $ | 738 |
| | $ | 644 |
| $ | 714 |
| | $ | 715 |
|
Our market risks, hedging strategies and financial instrument positions at June 30, 2015March 31, 2016 have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.2015. In 2015,2016, we entered into several foreign currency forwards on the Euro, British Pound Sterling, Indian RupeeCanadian Dollar, Japanese Yen and Mexican Peso, as well as terminated forwards that expired during the first sixthree months of 2015.2016. We terminatedalso entered into several foreign currency option positionsoptions on the Euro, British Pound Sterling and Canadian Dollar, as well as terminated currency option positions that expired during the first sixthree months of 2015. During the second quarter, we terminated our British Pound Sterling cross-currency interest rate swaps that would have matured in 2031 and 2050 and entered into new foreign currency forwards to manage the underlying currency volatility on our foreign currency denominated debt obligations.2016. We also entered into new forwards to manage the market value fluctuations of certain investments in marketable securities. The remaining fair value changes between December 31, 20142015 and June 30, 2015March 31, 2016 in the preceding table are primarily due to interest rate, and foreign currency exchange rate and market price changes between those dates.
The forward contracts, swaps and options previously discussed 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 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. Under these agreements, we held cash collateral of $753641 million and were required to post $4cash collateral of $1 million in collateral with our counterparties as of June 30, 2015March 31, 2016.
We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
The information concerning market risk in Item 7A under the caption “Quantitative and Qualitative Disclosures about Market Risk” on pages 58-59 of our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 20142015, is hereby incorporated by reference in this report.
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Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures:
As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)). The scope of their evaluation of the effectiveness of our disclosure controls and procedures does not include any disclosure controls or procedures of Coyote, which was acquired in August 2015. The acquired business constituted approximately three percent of total assets, three percent of revenues and less than one percent of net income of the unaudited consolidated financial statement amounts as of and for the quarter ended March 31, 2016. Further discussion of this acquisition can be found in note 8 "Business Combinations" to our unaudited consolidated financial statements. This exclusion is in accordance with the SEC's general guidance that a recently acquired business may be omitted from the scope of the assessment following the acquisition.
Based upon that evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms; and (2) accumulated and communicated to our management to allow their timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting:
There were no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2015March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
For a discussion of legal proceedings affecting us and our subsidiaries, please see note 910 and note 6 to the unaudited consolidated financial statements included in this report.
There have been no material changes to the risk factors described in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014.2015 other than as described below.
Employee health and retiree health and pension benefit costs represent a significant expense to us.
In addition to our ongoing multi-employer pension plan obligations, we face additional exposure with respect to benefits earned in the Central States Pension Fund (the "CSPF"), from which UPS withdrew in 2007 in return for fully funding its allocable share of unfunded vested benefits thereunder. Under a collective bargaining agreement with the IBT, UPS agreed to provide supplemental benefits under the UPS/IBT Full-Time Employee 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 recognition of a $1.7 billion pension liability in 2007. Additionally, UPS agreed to provide coordinating benefits under the UPS/IBT Full-Time Employee Pension Plan to offset certain benefit reductions in the event that benefits were lawfully reduced in the future by CSPF. We have no other multi-employer pension plans subject to such a coordinated benefits backstop. In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever allowed multi-employer pension plans such as CSPF to reduce benefit payments to retirees, subject to specific guidelines in the statute and government oversight. In 2015, CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of Treasury under MPRA which proposes to make retirement benefit reductions to CSPF participants, including to the benefits of certain UPS employee participants. 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 were approved and implemented as proposed.
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. 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 the following three requirements set forth in the MPRA:
that the proposed benefit suspensions, in the aggregate, be reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency, because the investment return and entry age assumptions used for this purpose in the CSPF proposed plan were not reasonable;
that the proposed benefit suspensions be equitably distributed across the participant and beneficiary population; and
that the notices of proposed benefit suspensions be written so as to be understood by the average plan participant.
Because the CSPF has asserted that it will become insolvent within ten years, it is possible that CSPF will propose a revised plan under the MPRA. Due to uncertainties, we are not able to estimate a range of additional obligations, if any, that could arise as a result of the CSPF situation, which amounts could be material. These uncertainties include the actions that may be taken by CSPF, the government or others, including whether CSPF will submit a revised benefit reduction plan, the terms and assumptions of any such proposed plan, how the regulations and standards under the MPRA are applied to any subsequently proposed plan, and the effect of discount rates and various other actuarial assumptions. Accordingly, we have not recognized any additional liability for coordinating benefits within the UPS/IBT Full-Time Employee Pension Plan.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(c) A summary of our repurchases of our class A and class B common stock during the secondfirst quarter of 20152016 is as follows (in millions, except per share amounts):
|
| | | | | | | | | | | | | |
| Total Number of Shares Purchased(1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program |
April 1 – April 30, 2015 | 4.5 |
| | $ | 99.83 |
| | 4.3 |
| | $ | 3,039 |
|
May 1 – May 31, 2015 | 0.9 |
| | 101.17 |
| | 0.8 |
| | 2,955 |
|
June 1 – June 30, 2015 | 1.6 |
| | 100.14 |
| | 1.6 |
| | 2,794 |
|
Total April 1 – June 30, 2015 | 7.0 |
| | $ | 100.07 |
| | 6.7 |
| | |
|
| | | | | | | | | | | | | |
| Total Number of Shares Purchased(1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program |
January 1 – January 31, 2016 (2) | 0.8 |
| | $ | 93.34 |
| | 0.8 |
| | $ | 1,364 |
|
February 1 – February 29, 2016 | 4.2 |
| | 99.23 |
| | 4.0 |
| | 964 |
|
March 1 – March 31, 2016 | 2.4 |
| | 101.65 |
| | 2.0 |
| | 761 |
|
Total January 1 – March 31, 2016 | 7.4 |
| | $ | 99.23 |
| | 6.8 |
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_________________
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(1) | Includes shares repurchased through our publicly announced share repurchase program and shares tendered to pay the exercise price and tax withholding on employee stock options. |
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(2) | Includes 0.2 million shares related to the exercise of a capped call option which was entered into during 2015 and exercised in the first quarter of 2016. |
In February 2013, the Board of Directors approved a share repurchase authorization of $10.0 billion, which has no expiration date. In May 2016, the Board of Directors approved a new share repurchase authorization of $10.0$8.0 billion, which has no expiration date.
Share repurchases may take the form of accelerated share repurchases, open market purchases, or other such methods as we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the program. We anticipate repurchasing a total of approximately $2.7 billion of shares in 2015.2016.
These exhibits are either incorporated by reference into this report or filed with this report as indicated below.
Index to Exhibits:
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| | | | | |
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3.1 |
| | — | | Form of Restated Certificate of Incorporation of United Parcel Service, Inc. (incorporated by reference to Exhibit 3.2 to Form 8-K filed on May 12, 2010). |
| | |
3.2 |
| | — | | Amended and Restated Bylaws of United Parcel Service, Inc. as of February 14, 2013 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed on February 19, 2013). |
| | | | |
10.14.1 |
| | — | | Credit Agreement (364-Day Facility) datedForm of Note for Floating Rate Senior Notes due March 27, 2015 among United Parcel Service, Inc., the initial lenders named therein, J.P. Morgan Securities LLC, Citigroup Global Markets, Inc., Barclays Bank PLC, BNP Paribas Securities Corp. and SG Americas Securities, LLC as joint lead arrangers and joint bookrunners, Barclays Bank PLC, BNP Paribas and Société Générale as co-documentation agents, Citibank, N.A. as syndication agent, and JPMorgan Chase Bank, N.A. as administrative agent15, 2066 (incorporated by reference to Exhibit 10.14.1 to Form 10-Q for the quarter ending March 31, 2015). |
| | | | |
10.2 |
| | — | | Credit Agreement (5 Year Facility) dated March 27, 2015 among United Parcel Service, Inc., the initial lenders named therein, J.P. Morgan Securities LLC, Citigroup Global Markets, Inc., Barclays Bank PLC, BNP Paribas Securities Corp. and SG Americas Securities, LLC as joint lead arrangers and joint bookrunners, Barclays Bank PLC, BNP Paribas and Société Générale as co-documentation agents, Citibank, N.A. as syndication agent, and JPMorgan Chase Bank, N.A. as administrative agent (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ending March 31, 2015)8-K filed on April 1, 2016). |
| | | | |
11 |
| | — | | Statement regarding Computation of per Share Earnings (incorporated by reference to Note 12 to13 in “Item 1. Financial Statements” of this quarterly report on Form 10-Q). |
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†12 |
| | — | | Computation of Ratio of Earnings to Fixed Charges. |
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†31.1 |
| | — | | Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
†31.2 |
| | — | | Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
†32.1 |
| | — | | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
†32.2 |
| | — | | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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††101 |
| | — | | The following financial information from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2015,March 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Statements of Consolidated Income, (iii) the Statements of Consolidated Comprehensive Income, (iv) the Statements of Consolidated Cash Flows, and (v) the Notes to the Consolidated Financial Statements. |
___________________
|
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†† | Filed electronically herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | |
| | UNITED PARCEL SERVICE, INC. (Registrant) |
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Date: | August 7, 2015May 10, 2016 | By: | | /S/ RICHARD N. PERETZ |
| | | | Richard N. Peretz |
| | | | Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Accounting Officer) |