United States

Securities and Exchange Commission

Washington, D.C. 20549

_____________________________________

Form 10-Q

(Mark One)



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

For the quarterly period ended June 30, ~~2017~~2018, or



¨	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

_____________________________________

United Parcel Service, Inc.

(Exact name of registrant as specified in its charter)



Delaware		58-2480149
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

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, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company”, and “emerging growth 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 ¨ Emerging growth 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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

There were ~~177,194,206~~166,955,793 Class A shares, and ~~688,774,014~~693,388,926 Class B shares, with a par value of $0.01 per share, outstanding at July ~~24, 2017.~~25, 2018.

~~UNITED PARCEL SERVICE, INC.~~

~~QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED~~ ~~JUNE 30, 2017~~

TABLE OF CONTENTS



PART I—FINANCIAL INFORMATION
	Cautionary Statement About Forward-Looking Statements	1
Item 1.	Financial Statements	2
	Consolidated Balance Sheets	2
	Statements of Consolidated Income	3
	Statements of Consolidated Comprehensive Income	3
	Statements of Consolidated Cash Flows	4
	Notes to Consolidated Financial Statements	5
	Note 1—Basis of Presentation and Accounting Policies	5
	Note 2—Recent Accounting Pronouncements	6
	Note 3—~~Stock-Based Compensation~~Revenue Recognition	811
	Note 4—~~Investments and Restricted Cash~~Stock-Based Compensation	1014
	Note 5—~~Property, Plant~~Investments and ~~Equipment~~	15
	~~Note 6—Employee Benefit Plans~~Restricted Cash	16
	Note ~~7—Goodwill~~6—Property, Plant and ~~Intangible Assets~~Equipment	19
	Note ~~8—Debt and Financing Arrangements~~7—Employee Benefit Plans	2120
	Note 8—Goodwill and Intangible Assets	23
	Note 9—~~Legal Proceedings~~Debt and ~~Contingencies~~Financing Arrangements	24
	Note 10—~~Shareowners’ Equity~~Legal Proceedings and Contingencies	26
	Note 11—~~Segment Information~~Shareowners’ Equity	3028
	Note 12—~~Earnings Per Share~~Segment Information	31
	Note 13—Earnings Per Share	33
	Note 14—Derivative Instruments and Risk Management	3234
	Note ~~14—~~15—Income Taxes	3840
	Note 16— Transformation Strategy	41
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3942
	Overview	3942
	Items Affecting Comparability	42
	Results of Operations - Segment Review	4044
	U.S. Domestic Package Operations	4145
	International Package Operations	4448
	Supply Chain & Freight Operations	4651
	Consolidated Operating Expenses	4853
	Other Income and (Expense)	5056
	Income Tax Expense	5056
	Liquidity and Capital Resources	5157
	Net Cash From Operating Activities	5157
	Net Cash Used in Investing Activities	5258
	Net Cash Used in Financing Activities	5359
	Sources of Credit	5461
	Contractual Commitments	5461
	Guarantees and Other Off-Balance Sheet Arrangements	5461
	Contingencies	5461
	Collective Bargaining Agreements	5561
	Recent Accounting Pronouncements	5561
	Rate Adjustments	5561
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5662
Item 4.	Controls and Procedures	5763
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	5864
Item 1A.	Risk Factors	5864
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5864
Item 6.	Exhibits	5965

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, ~~2016~~2017 and in our other filings with the Securities and Exchange Commission contain forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties 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 (including tax laws and regulations), changes to which can impact our business; increased physical or data 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; interruption of our business from natural or ~~manmade~~man-made disasters including terrorism; 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, retiree health and/or pension benefits; potential additional tax liabilities both in the U.S. and internationally; 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, ~~2016~~2017 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.~~statements, except as required by law.

Item 1. Financial Statements

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, ~~2017~~2018 (unaudited) and December 31, ~~2016~~2017

~~(In~~ (In millions)


	June 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents	$	3,544		$	3,476		$	4,214		$	3,320
Marketable securities	1,060			1,091			720			749
Accounts receivable, net	6,553			7,695			7,363			8,773
Current income taxes receivable							307			1,573
Other current assets	1,237			1,587			1,270			1,303
Total Current Assets	12,394			13,849			13,874			15,718
Property, Plant and Equipment, Net	19,841			18,800			23,901			22,118
Goodwill	3,845			3,757			3,837			3,872
Intangible Assets, Net	1,829			1,758			2,028			1,964
Non-Current Investments and Restricted Cash	479			476			306			483
Deferred Income Tax Assets	362			591			210			266
Other Non-Current Assets	974			1,146			1,067			1,153
Total Assets	$	39,724		$	40,377		$	45,223		$	45,574
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper	$	3,817		$	3,681		$	2,591		$	4,011
Accounts payable	2,648			3,042			3,785			3,934
Accrued wages and withholdings	2,293			2,317			2,549			2,608
Hedge margin liabilities	138			575
Self-insurance reserves	705			670			737			705
Accrued group welfare and retirement plan contributions	607			598			655			677
Other current liabilities	874			847			1,171			951
Total Current Liabilities	11,082			11,730			11,488			12,886
Long-Term Debt	14,257			12,394			20,120			20,278
Pension and Postretirement Benefit Obligations	9,981			12,694			7,026			7,061
Deferred Income Tax Liabilities	95			112			975			756
Self-Insurance Reserves	1,746			1,794			1,665			1,765
Other Non-Current Liabilities	1,289			1,224			1,593			1,804
Shareowners’ Equity:
Class A common stock (178 and 180 shares issued in 2017 and 2016, respectively)	2			2
Class B common stock (688 and 689 shares issued in 2017 and 2016, respectively)	7			7
Class A common stock (168 and 173 shares issued in 2018 and 2017, respectively)							2			2
Class B common stock (693 and 687 shares issued in 2018 and 2017, respectively)							7			7
Additional paid-in capital	—			—			—			—
Retained earnings	5,437			4,879			7,665			5,852
Accumulated other comprehensive loss	(4,202		)	(4,483		)	(5,346		)	(4,867		)
Deferred compensation obligations	36			45			31			37
Less: Treasury stock (1 share in 2017 and 2016)	(36		)	(45		)
Less: Treasury stock (1 share in 2018 and 2017)							(31		)	(37		)
Total Equity for Controlling Interests	1,244			405			2,328			994
Noncontrolling Interests	30			24			28			30
Total Shareowners’ Equity	1,274			429			2,356			1,024
Total Liabilities and Shareowners’ Equity	$	39,724		$	40,377		$	45,223		$	45,574

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 June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenue	$	15,750		$	14,629		$	31,065		$	29,047		$	17,456		$	15,927		$	34,569		$	31,437
Operating Expenses:
Compensation and benefits	8,105			7,738			16,236			15,591			9,024			8,284			18,069			16,595
Repairs and maintenance	392			383			782			764			423			392			857			782
Depreciation and amortization	562			555			1,116			1,107			542			562			1,138			1,116
Purchased transportation	2,443			2,070			4,809			4,094			3,209			2,614			6,354			5,159
Fuel	616			505			1,237			939			852			616			1,602			1,237
Other occupancy	264			245			563			514			321			264			682			563
Other expenses	1,152			1,095			2,322			2,177			1,312			1,158			2,574			2,331
Total Operating Expenses	13,534			12,591			27,065			25,186			15,683			13,890			31,276			27,783
Operating Profit	2,216			2,038			4,000			3,861			1,773			2,037			3,293			3,654
Other Income and (Expense):
Investment income and other	14			8			29			25			302			193			596			388
Interest expense	(111		)	(94		)	(213		)	(187		)	(149		)	(111		)	(302		)	(213		)
Total Other Income and (Expense)	(97		)	(86		)	(184		)	(162		)	153			82			294			175
Income Before Income Taxes	2,119			1,952			3,816			3,699			1,926			2,119			3,587			3,829
Income Tax Expense	735			683			1,274			1,299			441			735			757			1,279
Net Income	$	1,384		$	1,269		$	2,542		$	2,400		$	1,485		$	1,384		$	2,830		$	2,550
Basic Earnings Per Share	$	1.59		$	1.43		$	2.91		$	2.71		$	1.71		$	1.59		$	3.27		$	2.92
Diluted Earnings Per Share	$	1.58		$	1.43		$	2.90		$	2.69		$	1.71		$	1.58		$	3.25		$	2.91

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(In millions)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net Income	$	1,485		$	1,384		$	2,830		$	2,550
Change in foreign currency translation adjustment, net of tax	(78		)	24			(84		)	54
Change in unrealized gain (loss) on marketable securities, net of tax	—			1			(3		)	1
Change in unrealized gain (loss) on cash flow hedges, net of tax	332			(151		)	266			(192		)
Change in unrecognized pension and postretirement benefit costs, net of tax	38			386			77			418
Comprehensive Income	$	1,777		$	1,644		$	3,086		$	2,831

Three Months Ended
June 30, Six Months Ended
June 30,
2017 2016 2017 2016
Net Income $ 1,384
$ 1,269
$ 2,542
$ 2,400
Change in foreign currency translation adjustment, net of tax 24
(31 ) 54
(5 )
Change in unrealized gain (loss) on marketable securities, net of tax 1
2
1
5
Change in unrealized gain (loss) on cash flow hedges, net of tax (151 ) 43
(192 ) (119 )
Change in unrecognized pension and postretirement benefit costs, net of tax 386
27
418
53
Comprehensive Income $ 1,644
$ 1,310
$ 2,823
$ 2,334

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,
	2018			2017
Cash Flows From Operating Activities:
Net income	$	2,830		$	2,550
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	1,138			1,116
Pension and postretirement benefit expense	308			463
Pension and postretirement benefit contributions	(92		)	(2,530		)
Self-insurance reserves	(66		)	(17		)
Deferred tax (benefit) expense	142			180
Stock compensation expense	378			345
Other (gains) losses	180			(11		)
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	1,270			1,138
Other assets	1,345			420
Accounts payable	(260		)	(530		)
Accrued wages and withholdings	(9		)	(13		)
Other liabilities	22			(458		)
Other operating activities	14			(32		)
Net cash from operating activities	7,200			2,621
Cash Flows From Investing Activities:
Capital expenditures	(2,849		)	(2,009		)
Proceeds from disposals of property, plant and equipment	35			14
Purchases of marketable securities	(446		)	(1,082		)
Sales and maturities of marketable securities	453			1,111
Net (increase) decrease in finance receivables	(4		)	(16		)
Cash paid for business acquisitions, net of cash and cash equivalents acquired	(2		)	(57		)
Other investing activities	(7		)	14
Net cash used in investing activities	(2,820		)	(2,025		)
Cash Flows From Financing Activities:
Net change in short-term debt	68			(810		)
Proceeds from long-term borrowings	513			3,815
Repayments of long-term borrowings	(2,014		)	(1,220		)
Purchases of common stock	(521		)	(898		)
Issuances of common stock	125			132
Dividends	(1,507		)	(1,389		)
Other financing activities	(271		)	(186		)
Net cash used in financing activities	(3,607		)	(556		)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(51		)	30
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	722			70
Cash, Cash Equivalents and Restricted Cash:
Beginning of period	3,769			3,921
End of period	$	4,491		$	3,991

~~(unaudited)~~

Six Months Ended
June 30,
2017 2016
Cash Flows From Operating Activities:
Net income $ 2,542
$ 2,400
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 1,116
1,107
Pension and postretirement benefit expense 463
537
Pension and postretirement benefit contributions (2,530 ) (89 )
Self-insurance reserves (17 ) (25 )
Deferred tax (benefit) expense 175
(31 )
Stock compensation expense 345
346
Other (gains) losses (11 ) (105 )
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable 1,138
1,054
Other current assets 440
230
Accounts payable (534 ) (310 )
Accrued wages and withholdings (18 ) (73 )
Other current liabilities (456 ) (356 )
Other operating activities (32 ) 8
Net cash from operating activities 2,621
4,693
Cash Flows From Investing Activities:
Capital expenditures (2,009 ) (963 )
Proceeds from disposals of property, plant and equipment 14
11
Purchases of marketable securities (1,084 ) (3,131 )
Sales and maturities of marketable securities 1,111
2,340
Net (increase) decrease in finance receivables (16 ) (13 )
Cash paid for business acquisitions, net of cash and cash equivalents acquired (57 ) (3 )
Other investing activities 14
(35 )
Net cash used in investing activities (2,027 ) (1,794 )
Cash Flows From Financing Activities:
Net change in short-term debt (810 ) (1,781 )
Proceeds from borrowings 3,815
2,890
Repayments of borrowings (1,220 ) (1,134 )
Purchases of common stock (898 ) (1,329 )
Issuances of common stock 132
147
Dividends (1,389 ) (1,327 )
Other financing activities (186 ) (50 )
Net cash used in financing activities (556 ) (2,584 )
Effect Of Exchange Rate Changes On Cash And Cash Equivalents 30
14
Net Increase (Decrease) In Cash And Cash Equivalents 68
329
Cash And Cash Equivalents:
Beginning of period 3,476
2,730
End of period $ 3,544
$ 3,059

See notes to unaudited consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Principles of Consolidation

In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of June 30, ~~2017,~~2018, our results of operations for the three and six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, and cash flows for the six months ended June 30, ~~2017~~2018 and ~~2016.~~2017. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any other period or the entire year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans for each three month period based on one quarter of the estimated annual expense.

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

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of June 30, ~~2017.~~2018. The fair values of our investment securities are disclosed in note 45, our recognized multiemployer pension withdrawal liabilities in note 67, 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.

~~Self-Insurance Accruals~~

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

Workers’ compensation, automobile liability and general liability insurance claims may take several years to completely settle. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to fully resolve the claims. A number of factors can affect the actual cost of a claim, including the length of time the claim remains open, trends in healthcare costs and the results of related litigation. Furthermore, claims may emerge in future years for events that occurred in a prior year at a rate that differs from previous actuarial projections. Changes in state legislation with respect to workers' compensation can affect the adequacy of our self-insurance accruals. All of these factors can result in revisions to prior actuarial projections and produce a material difference between estimated and actual operating results. Prior to 2017, outside actuarial studies were performed semi-annually and we used the studies to estimate the liability in intervening quarters. Beginning in 2017, outside actuarial studies are now performed quarterly as we believe this provides us with better quarterly estimates of our outstanding workers compensation liability.

We sponsor a number of health and welfare insurance plans for our employees. These liabilities and related expenses are based on estimates of the number of employees and eligible dependents covered under the plans, anticipated medical usage by participants and overall trends in medical costs and inflation.

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.

Table of Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. 2. RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In ~~March 2016,~~May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that ~~simplified~~changes the ~~income tax accounting~~revenue recognition for companies that enter into contracts with customers to transfer goods or services ("Revenue from Contracts with Customers"). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner depicting the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued a number of updates to this standard. Effective January 1, 2018, we adopted the requirements of this ASU using the full retrospective method. See note 3 for required disclosures pertaining to the new ASU.

In November 2016, the FASB issued an ASU that is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows ("Restricted Cash"). As a result of this update, restricted cash is included within cash and cash ~~flow presentation related to share-based compensation by requiring the recognition of all excess tax benefits and deficiencies directly~~equivalents on ~~the income statement and classification as cash flows from operating activities on the~~our statements of consolidated cash flows. This update also made several changes to the accounting for forfeitures and employee tax withholding on share-based compensation. This new guidance became effective for us in the first quarter of 2017 andEffective January 1, 2018, we adopted the requirements of this ASU retrospectively.

In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost ("Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost"). The update requires employers to report the current service cost component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented separately from service cost and outside of income from operations. As a result of this update, the net amount of interest cost, prior service cost and expected return on plan assets is now presented as other income. Effective January 1, 2018, we adopted the requirements of this ASU retrospectively, as required.

We have recast our consolidated financial statements from amounts previously reported due to the adoption of new revenue recognition, pension and restricted cash standards. Impacted consolidated balance sheet line items, which reflect the adoption of the new ASUs, are as follows (in millions):



	December 31, 2017
	As previously reported		Adjustments (a)			Adjustments (b)		Adjustments (c)		As Recast
Assets:
Other current assets	$	1,133	$	170		$	—	$	—	$	1,303
Total current assets	15,548		170			—		—		15,718
Deferred income tax assets	265		1			—		—		266
Total Assets	$	45,403	$	171		$	—	$	—	$	45,574
Liabilities:
Accounts payable	$	3,872	$	62		$	—	$	—	$	3,934
Accrued wages and withholdings	2,521		87			—		—		2,608
Other current liabilities⁽¹⁾	905		29			—		—		934
Total current liabilities	12,708		178			—		—		12,886
Deferred income tax liabilities	757		(1		)	—		—		756
Shareowners' Equity:
Retained earnings	5,858		(6		)	—		—		5,852
Total Shareowners' Equity	1,030		(6		)	—		—		1,024
Total Liabilities and Shareowners' Equity	$	45,403	$	171		$	—	$	—	$	45,574

^{(1) The caption "Other current liabilities" was presented separately from "Hedge margin liabilities" of}^{$17 million}^{in the Form 10-K at December 31, 2017. These captions have been collapsed in the consolidated balance sheets as of June 30, 2018 and December 31, 2017 included within this Form 10-Q.}

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited consolidated statement of operations, which reflects the adoption of the new ASUs, is as follows (in millions):



	Three months ended June 30, 2017
	As previously reported			Adjustments (a)		Adjustments (b)			Adjustments (c)		As Recast
Revenue	$	15,750		$	177	$	—		$	—	$	15,927
Operating Expenses:
Compensation and benefits	8,105			—		179			—		8,284
Repairs and maintenance	392			—		—			—		392
Depreciation and amortization	562			—		—			—		562
Purchased transportation	2,443			171		—			—		2,614
Fuel	616			—		—			—		616
Other occupancy	264			—		—			—		264
Other expenses	1,152			6		—			—		1,158
Total Operating Expenses	13,534			177		179			—		13,890
Operating Profit	2,216			—		(179		)	—		2,037
Other Income and (Expense):
Investment income and other	14			—		179			—		193
Interest expense	(111		)	—		—			—		(111		)
Total Other Income and (Expense)	(97		)	—		179			—		82
Income Before Income Taxes	2,119			—		—			—		2,119
Income Tax Expense	735			—		—			—		735
Net Income	$	1,384		$	—	$	—		$	—	$	1,384
Basic earnings per share	$	1.59		$	—	$	—		$	—	$	1.59
Diluted earnings per share	$	1.58		$	—	$	—		$	—	$	1.58

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



	Six months ended June 30, 2017
	As previously reported			Adjustments (a)		Adjustments (b)			Adjustments (c)		As Recast
Revenue	$	31,065		$	372	$	—		$	—	$	31,437
Operating Expenses:
Compensation and benefits	16,236			—		359			—		16,595
Repairs and maintenance	782			—		—			—		782
Depreciation and amortization	1,116			—		—			—		1,116
Purchased transportation	4,809			350		—			—		5,159
Fuel	1,237			—		—			—		1,237
Other occupancy	563			—		—			—		563
Other expenses	2,322			9		—			—		2,331
Total Operating Expenses	27,065			359		359			—		27,783
Operating Profit	4,000			13		(359		)	—		3,654
Other Income and (Expense):
Investment income and other	29			—		359			—		388
Interest expense	(213		)	—		—			—		(213		)
Total Other Income and (Expense)	(184		)	—		359			—		175
Income Before Income Taxes	3,816			13		—			—		3,829
Income Tax Expense	1,274			5		—			—		1,279
Net Income	$	2,542		$	8	$	—		$	—	$	2,550
Basic earnings per share	$	2.91		$	0.01	$	—		$	—	$	2.92
Diluted earnings per share	$	2.90		$	0.01	$	—		$	—	$	2.91

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited impacted consolidated statement of cash flows ~~presentation~~line items, which reflect the adoption of the new ASUs, are as follows (in millions):



	Six months ended June 30, 2017
	As previously reported			Adjustments (a)			Adjustments (b)		Adjustments (c)		As Recast
Net Income	$	2,542		$	8		$	—	$	—	$	2,550
Adjustments to reconcile net income to net cash from operating activities:
Deferred tax (benefit) expense	175			5			—		—		180
Other assets	440			(20		)	—		—		420
Accounts payable	(534		)	4			—		—		(530		)
Accrued wages and withholdings	(18		)	5			—		—		(13		)
Other liabilities	(456		)	(2		)	—		—		(458		)
Cash flows from operating activities	2,621			—			—		—		2,621
Purchase of marketable securities	(1,084		)	—			—		2		(1,082		)
Net cash used in investing activities	(2,027		)	—			—		2		(2,025		)
Net decrease in cash, cash equivalents and restricted cash	68			—			—		2		70
Cash, cash equivalents and restricted cash at the beginning of period	3,476			—			—		445		3,921
Cash, cash equivalents and restricted cash at the end of period	$	3,544		$	—		$	—	$	447	$	3,991

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}

In February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Effective January 1, 2018, we early adopted this ASU and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. This resulted in a $735 million increase to retained earnings and a $735 million decrease to AOCI. Our current accounting policy for releasing income tax effects from other comprehensive income is based on a prospective basis. The impact to income tax expense in the statements of consolidated income, for the second quarter of 2017, was a benefit of $7 million ($62 million year-to-date). Additionally, we have elected to continue estimating forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.portfolio approach.

Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.

Accounting Standards Issued But Not Yet Effective

In ~~May~~August 2017, the FASB issued an ASU to enhance recognition of the economic results of hedging activities in the financial statements. In addition, this update makes certain targeted improvements to simplify the application of the hedge accounting ~~standards update to provide clarity~~guidance and ~~reduce complexity on when to apply modification accounting to existing share-based payment awards.~~increase transparency regarding the scope and results of hedging activities. The guidance will generally be applied prospectively and ~~will become~~becomes effective for ~~annual periods beginning after December 15, 2017,~~us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this ~~accounting standards update~~ASU to have a material impact on our consolidated financial position, results of operations or cash flows.

In March 2017, the FASB issued an ~~accounting standards update~~ASU to require the premium on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount would not be impacted by the proposed update. Under ~~current generally accepted accounting principles (“GAAP”),~~U.S. GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. Only in cases when an entity has a large number of similar securities is it allowed to consider estimates of principal prepayments. Amortization of the premium over the contractual life of the instrument can result in losses being recorded for the unamortized premium if the issuer exercises the call feature prior to maturity. The standard will be effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this ~~accounting standards update~~ASU to have a material impact on our consolidated financial position, results of operations or cash flows.

~~In March 2017, the FASB issued an accounting standards update to improve the presentation~~

Table of net periodic pension cost and net periodic postretirement benefit cost. The update requires employers to report the current service cost component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented separately from service cost and outside of income from operations. In accordance with the update, only the service cost component will be eligible for capitalization. The guidance in this update should be applied retrospectively for the presentation of service cost and other components of net benefit cost, and prospectively for the capitalization of the service cost component in assets, and becomes effective for us in the first quarter of 2018. As a result of this update, the net amount of interest cost, prior service cost and expected return on plan assets will be presented as other income. For the three months ended June 30, 2017 and 2016, non-service cost components amounted to a $179 and $104 million benefit ($359 and $208 million for the six months ended June 30, 2017 and 2016), respectively, which was recognized in "compensation and benefits" on the statements of consolidated income. After adoption, the non-service cost components will be recognized in "other income and expense"on the statements of consolidated income.Contents

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In January 2017, the FASB issued an ~~accounting standards update~~ASU to simplify the accounting for goodwill impairment. The update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard will be effective for us in the first quarter of 2020, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this ~~accounting standards update~~ASU to have a material impact on our consolidated financial position, results of operations or cash flows.

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~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

In November 2016, the FASB issued an accounting standards update that is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. The update should be applied retrospectively and becomes effective for us in the first quarter of 2018, but early adoption is permitted. As a result of this update, restricted cash will be included within cash and cash equivalents on our statements of consolidated cash flows. As of June 30, 2017 and December 31, 2016, we classified $112 and $310 million in restricted cash on our consolidated balance sheets in "non-current investments and restricted cash", respectively.

In August 2016, the FASB issued an accounting standards update that addresses the classification and presentation of specific cash flow issues that currently result in diverse practices. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will generally be applied retrospectively and becomes effective for us in the first quarter of 2018, but early adoption is permitted. We are currently evaluating the impact of this standard on our statements of consolidated cash flows, but do not expect this standard to have a material impact.

In February 2016, the FASB issued an ~~accounting standards update~~ASU that requires lessees to recognize a right-of-use asset and lease liability on ~~the~~their balance sheet for all leases with terms beyond twelve months. Although the distinction between operating and finance leases will continue to exist under the new standard, the recognition and measurement of expenses and cash flows will not change significantly from the current treatment. This new guidance requires modified retrospective application and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update and subsequent amendments to the original update to determine the full impact of its adoption on our consolidated financial position, results of operations, cash flows and related disclosures, as well as the impact of adoption on policies, practices and systems. We have reviewed and selected a new lease accounting system and are currently accumulating and processing lease data into the system. In addition, we are currently analyzing our internal control framework to determine if controls should be added or modified as a result of adopting this standard. Based on the preliminary evaluation of our lease portfolio, we believe the largest impact will be accounting for leases for real estate, as we have a large portfolio of leased properties that are currently accounted for as operating leases. As of December 31, ~~2016,~~2017, we had ~~$1.470~~$1.637 billion of future minimum operating lease commitments that are not currently recognized on our consolidated balance sheets. ~~Therefore, we~~We expect material changes to our consolidated balance ~~sheets.~~

~~In January 2016, the FASB issued an accounting standards update which addresses certain aspects~~sheets as a result of the recognition, measurement, presentation and disclosure of financial instruments. The amendment will be effective for us beginning the first quarter of 2018. At this time, we do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued an accounting standards update that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services. The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner depicting the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued a number of updates to this standard. We are planning to adopt the standard on January 1, 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this standard. We are currently evaluating this standard and the related updates, including which transition approach to use as well as the impact of adoption on policies, practices and systems.

At this stage in the evaluation, we have determined that revenue recognition will be accelerated for the transportation businesses as the standard requires revenue to be recognized as control is transferred to the customer over time rather than upon delivery. We are currently quantifying the impact of this change to the statements of consolidated income.

The standard also requires us to evaluate whether our businesses promise to transfer services to the customer itself (as a principal) or to arrange for services to be provided by another party (as an agent). To make that determination, the standard uses a control model rather than the risks-and-rewards model in current GAAP. Based on our evaluation of the control model, we determined that certain Supply Chain & Freight businesses act as the principal rather than the agent within their revenue arrangements. This change will require the affected businesses to report transportation revenue gross of associated purchase transportation costs rather than net of such amounts within the statements of consolidated income. We expect that this change will result in an approximately $720 million reclassification from operating expenses to revenue on the statement of consolidated income for the period ended December 31, 2016. This amount may change as we continue to evaluate other businesses. Additionally, contract reviews are ongoing, and more businesses could be impacted by the adoption of the standard.

Other accounting pronouncements issued, but not effective until after June 30, ~~2017,~~2018, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

710

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. REVENUE RECOGNITION

Revenue Recognition

Substantially all of our revenues are from contracts associated with the pick-up, transportation and delivery of packages and freight (referred to hereafter as “transportation services”), whether carried out by or arranged by UPS, both domestically and internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services to customers through our global network of company-owned and leased distribution centers and field stocking locations, both domestically and internationally.

Disaggregation of Revenue



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Revenue:
Next Day Air	$	1,830	$	1,752	$	3,614	$	3,417
Deferred	1,080		1,020		2,149		1,990
Ground	7,444		6,969		14,818		13,870
U.S. Domestic Package	10,354		9,741		20,581		19,277

Domestic	700		623		1,416		1,236
Export	2,747		2,426		5,419		4,763
Cargo & Other	155		122		300		246
International Package	3,602		3,171		7,135		6,245

Forwarding	1,659		1,347		3,264		2,613
Logistics	784		718		1,566		1,458
Freight	853		755		1,630		1,462
Other	204		195		393		382
Supply Chain & Freight	3,500		3,015		6,853		5,915

Consolidated revenue	$	17,456	$	15,927	$	34,569	$	31,437

We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. See note 2 for the adoption of new accounting standards.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis of revenue recognition in accordance with U.S. GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, the customer contracts with us to provide distinct services within a contract, such as transportation services of their goods. The vast majority of our contracts with customers for transportation services include only one performance obligation, the transportation services themselves. However, if a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.

In certain business units, such as Logistics, we sell customized customer-specific solutions in which we provide a significant service of integrating a complex set of tasks and components into a single capability (even if that single capability results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. In these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

Satisfaction of Performance Obligations

We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to another. Further, if we were unable to complete delivery to the final location, another entity would not need to reperform the transportation service already performed.

As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost measure of progress for our package delivery contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including ancillary or accessorial fees and reductions for estimated customer incentives, are recorded proportionally as costs are incurred. Costs to fulfill include labor and other direct costs and an allocation of indirect costs. For our freight and freight forwarding contracts, an output method of progress based on time-in-transit is utilized as the timing of costs incurred does not best depict the transfer of control to the customer. In our Logistics business we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount to which we have a right to invoice the customer.

Variable Consideration

It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the transaction price. These variable amounts are generally awarded upon achievement of certain incentive tiers or performance metrics. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts of revenue, which may be reduced by incentives or other contract provisions, in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of anticipated customer spending and all information (historical, current and forecasted) that is reasonably available to us.

Contract Modifications

Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct services. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that add additional distinct goods or services are treated as separate contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services. These contract modifications will be accounted for prospectively as the remaining performance obligations are distinct.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Payment Terms

Under the typical payment terms of our customer contracts, the customer pays at periodic intervals (i.e., every 14 days, 30 days, 45 days, etc.) for shipments included on invoices received. Invoices are generated each week on the week-ending day, which is Saturday for the majority of our U.S. Domestic Package business, but could be another day depending on the business unit or the specific agreement with the customer. It is not customary business practice to extend payment terms past 90 days, and as such, we do not have a practice of including a significant financing component within our revenue contracts with customers.

Principal vs. Agent Considerations

In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. U.S. GAAP requires us to evaluate whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model. Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. This required a change for certain of our Supply Chain & Freight businesses where previously revenue was reported net of associated purchased transportation costs. Revenue and the associated purchased transportation costs are now both reported on a gross basis within our statements of consolidated income.

Accounts Receivable, Net

Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when they are incurred, which requires us to make our best estimate of the probable losses inherent in our customer receivables at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, trends in customer payment frequency, and judgments about the probable effects of relevant observable data, including present economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk. Our total provision for doubtful accounts charged to expense before recoveries during the quarters ended June 30, 2018 and 2017 was $29 and $24 million, respectively and $41 and $63 million during six months ended June 30, 2018 and 2017, respectively.

Contract Assets and Liabilities

Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e., packages have been delivered), and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.

Our contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance payments and billings in excess of revenue represent payments received from our customers that will be earned over the contract term. Deferred revenue represents the amount of consideration due from customers related to in-transit shipments that has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the advance payment will be earned. We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which typically occurs within a short window after period-end. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.

Contract assets related to in-transit packages were $248 and $170 million at June 30, 2018 and December 31, 2017, respectively, net of deferred revenue related to in-transit packages of $231 and $174 million at June 30, 2018 and December 31, 2017, respectively. Contract assets are included within "Other current assets" in the consolidated balance sheets. Short-term contract liabilities related to advanced payments from customers were $8 and $31 million at June 30, 2018 and December 31, 2017, respectively. Short-term contract liabilities are included within "Other current liabilities" in the consolidated balance sheets. Long-term contract liabilities related to advanced payments from customers were $26 million at June 30, 2018 and $0 at December 31, 2017, respectively. Long-term contract liabilities are included within "Other Non-Current liabilities" in the consolidated balance sheets.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 34. STOCK-BASED COMPENSATION

We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units to eligible employees (restricted stock and stock units, restricted performance shares and performance units are herein referred to as "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date, and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.

The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.

Management Incentive Award Program ("MIP")

During the first quarter of ~~2017,~~2018, we granted Restricted Units under MIP to certain eligible management employees. Restricted Units granted under MIP generally vest over a five-year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death ~~disability~~ or ~~retirement,~~disability, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis (less estimated forfeitures) ratably over the requisite service ~~period.~~ period (except in the case of death, disability or retirement, in which case immediate expensing occurs).

Based on the date that the eligible management population and performance targets were approved for MIP, we determined the award measurement date to be February 7, ~~2017~~2018 (for U.S.-based employees), March 1, ~~2017~~2018 (for management committee employees) and March ~~27, 2017~~26, 2018 (for international-based employees); therefore, the Restricted Units awarded were valued for stock compensation expense purposes using the closing New York Stock Exchange price of ~~$105.69, $106.87~~$111.91, $106.43 and ~~$104.78~~$103.70 on those dates, respectively.

Long-Term Incentive Performance Award Program ("LTIP")

We award Restricted Units under LTIP to certain eligible management employees. The performance targets are equally-weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareowner return ("RTSR") relative to a peer group of companies. These Restricted Units generally vest at the end of a three-year period (except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets established on the grant date.

For the two-thirds of the award related to ~~consolidated operating return on invested capital~~ROIC and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these Restricted Units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. We recognize the grant date fair value of this portion of the award as compensation expense (less estimated forfeitures) ratably over the vesting period.

Based on the date that the eligible management population and performance targets were approved for the ~~2017~~2018 LTIP Award, we determined the award measurement date to be ~~March 24, 2017;~~May 9, 2018; therefore, the target Restricted Units awarded for ~~this portion~~the ROIC and growth in currency-constant consolidated revenue portions of the award were valued for stock compensation expense using the closing New York Stock Exchange price of ~~$105.05~~$111.40 on that date.

The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. This portion of the award was valued with a grant date fair value of $119.29 per unit and is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period.

The weighted-average assumptions used and the calculated weighted-average fair values of the RTSR portion of the LTIP awards granted in ~~2017~~2018 and ~~2016~~2017 are as follows:


	2017			2016			2018			2017
Risk-free interest rate	1.46		%	1.01		%	2.61		%	1.46		%
Expected volatility	16.59		%	16.45		%	16.51		%	16.59		%
Weighted-average fair value of units granted	$	119.29		$	135.57		$	137.53		$	119.29
Share payout	113.55		%	128.59		%	123.46		%	113.55		%

There is no expected dividend yield as units earn dividend equivalents.

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Non-Qualified Stock Options

During the first quarter of ~~2017,~~2018, we granted non-qualified stock option awards to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards generally vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant (except in the case of death ~~disability,~~ or ~~retirement,~~disability, in which case immediate vesting occurs). The options granted will expire ten years after the date of the grant. In the first quarter of ~~2017 and 2016,~~2018, we granted 0.3 and ~~0.2~~0.01 million stock options ~~respectively,~~ at a grant price of ~~$106.87~~$106.43 and ~~$98.77, respectively. The grant price was~~$104.45, respectively, which is based on the closing New York Stock Exchange price ofon March 1, ~~2017~~2018 and March ~~2, 2016,~~22, 2018, respectively. In the first quarter of 2017, we granted 0.3 million stock options at a grant price of $106.87, which is based on the closing New York Stock Exchange price on March 1, 2017.

The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the calculated weighted-average fair values of options granted in ~~2017~~2018 and ~~2016~~2017 are as follows:


	2017			2016			2018			2017
Expected dividend yield	2.89		%	2.94		%	2.93		%	2.89		%
Risk-free interest rate	2.15		%	1.66		%	2.84		%	2.15		%
Expected life (in years)	7.5			7.5			7.5			7.5
Expected volatility	17.81		%	23.60		%	16.72		%	17.81		%
Weighted-average fair value of options granted	$	14.70		$	17.32		$	15.23		$	14.70

Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the three months ended June 30, 2018 and 2017 was $139 and ~~2016 was~~ $133 ~~and $131~~ million, ~~pre-tax,~~ respectively. Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the six months ended June 30, 2018 and 2017 was $378 and ~~2016 was~~ $345 ~~and $346~~ million pre-tax, respectively.

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NOTE 45. ~~INVESTMENTS~~CASH AND ~~RESTRICTED CASH~~INVESTMENTS

The following is a summary of marketable securities classified as trading and available-for-sale as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in millions):


	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value		Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
June 30, 2017:
June 30, 2018:
Current trading marketable securities:
Corporate debt securities	$	353	$	—	$	—		$	353	$	75	$	—	$	—		$	75
Carbon credit investments ⁽¹⁾	87		1		—			88
Equity securities										2		—		—			2
Total trading marketable securities	$	440	$	1	$	—		$	441	77		—		—			77

Current available-for-sale securities:
U.S. government and agency debt securities	$	289	$	—	$	(2	)	$	287	306		1		(4		)	303
Mortgage and asset-backed debt securities	91		1		—			92		86		—		(1		)	85
Corporate debt securities	197		1		(1		)	197		243		—		(2		)	241
U.S. state and local municipal debt securities	38		—		—			38
Equity securities	2		—		—			2
Non-U.S. government debt securities	3		—		—			3		14		—		—			14
Total available-for-sale marketable securities	$	620	$	2	$	(3	)	$	619	649		1		(7		)	643

Total current marketable securities	$	1,060	$	3	$	(3	)	$	1,060	$	726	$	1	$	(7	)	$	720

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value		Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
December 31, 2016:
December 31, 2017:
Current trading marketable securities:
Corporate debt securities	$	427	$	—	$	—		$	427	$	75	$	—	$	—		$	75
Carbon credit investments ⁽¹⁾	80		10		—			90		77		16		—			93
Total trading marketable securities	$	507	$	10	$	—		$	517	152		16		—			168

Current available-for-sale securities:
U.S. government and agency debt securities	$	314	$	—	$	(2	)	$	312	286		—		(3		)	283
Mortgage and asset-backed debt securities	90		1		—			91		86		—		—			86
Corporate debt securities	167		—		(1		)	166		201		1		(1		)	201
Equity securities	2		—		—			2		2		—		—			2
Non-U.S. government debt securities	3		—		—			3		9		—		—			9
Total available-for-sale marketable securities	$	576	$	1	$	(3	)	$	574	584		1		(4		)	581

Total current marketable securities	$	1,083	$	11	$	(3	)	$	1,091	$	736	$	17	$	(4	)	$	749
⁽¹⁾ These investments are hedged with forward contracts that are not designated in hedging relationships. See Note 13 for offsetting statement of consolidated income impact.
⁽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.										⁽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.

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Investment Other-Than-Temporary Impairments

We have concluded that no material other-than-temporary impairment losses existed as of June 30, ~~2017~~2018. In making this determination, we considered the financial condition and prospects of the issuer, the magnitude of the losses compared with the investments’ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

Maturity Information

The amortized cost and estimated fair value of marketable securities at June 30, ~~2017,~~2018, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.


	Cost		Estimated Fair Value		Cost		Estimated Fair Value
Due in one year or less	$	410	$	410	$	193	$	193
Due after one year through three years	431		428		434		430
Due after three years through five years	19		19		24		23
Due after five years	111		113		73		72
	971		970		724		718
Equity and carbon credit investments	89		90
Equity securities					2		2
	$	1,060	$	1,060	$	726	$	720

Non-Current Investments and Restricted Cash

Non-current investments and restricted cash is primarily associated with our self-insurance requirements. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in various marketable ~~securities.~~securities and cash equivalents. Collateral provided is reflected in ~~"other investing activities"~~"Cash, Cash Equivalents and Restricted Cash" in the statements of consolidated cash flows. At June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we had ~~$447~~$277 and ~~$445~~$449 million in self-insurance investments and restricted cash, respectively.

We held a $19 ~~and $18~~ million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at June 30, ~~2017~~2018 and December 31, ~~2016, respectively.~~2017. The quarterly change in investment fair value is recognized in ~~"investment~~"Investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets, primarily real estate, of ~~$13~~$10 and $15 million as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

The amounts described above are classified as ~~“Non-current investments~~“Non-Current Investments and ~~restricted cash”~~Restricted Cash” in the consolidated balance sheets.

A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows is shown below (in millions):



	June 30, 2018		December 31, 2017		June 30, 2017
Cash and cash equivalents	$	4,214	$	3,320	$	3,544
Restricted cash	277		449		447
Total cash, cash equivalents and restricted cash	$	4,491	$	3,769	$	3,991

Fair Value Measurements

Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. ~~Government~~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.

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We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as ~~“other~~“Other non-current investments” in the tables below, and as ~~“other non-current assets”~~“Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were ~~7.75%~~8.11% and ~~8.06%~~7.56% as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis.

~~Table~~ The level 3 instruments measured on a recurring basis totaled $2 and $6 million as of ~~Contents~~

~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

June 30, 2018 and December 31, 2017, respectively.

The following table presents information about our investments measured at fair value on a recurring basis as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
June 30, 2017:
June 30, 2018:
Marketable Securities:
U.S. government and agency debt securities	$	287	$	—	$	—	$	287	$	303	$	—	$	—	$	303
Mortgage and asset-backed debt securities	—		92		—		92		—		85		—		85
Corporate debt securities	—		550		—		550		—		316		—		316
U.S. state and local municipal debt securities	—		38		—		38
Equity securities	—		2		—		2		—		2		—		2
Non-U.S. government debt securities	—		3		—		3		—		14		—		14
Carbon credit investments	88		—		—		88
Total marketable securities	375		685		—		1,060		303		417		—		720
Other non-current investments	19		—		9		28		19		—		2		21
Total	$	394	$	685	$	9	$	1,088	$	322	$	417	$	2	$	741

December 31, 2016:
Marketable Securities:
U.S. government and agency debt securities $ 312
$ —
$ —
$ 312
Mortgage and asset-backed debt securities —
91
—
91
Corporate debt securities —
593
—
593
Equity securities —
2
—
2
Non-U.S. government debt securities —
3
—
3
Carbon credit investments 90
—
—
90
Total marketable securities 402
689
—
1,091
Other non-current investments 18
—
13
31
Total $ 420
$ 689
$ 13
$ 1,122

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~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended June 30, 2017 and 2016 (in millions):~~

Marketable
Securities

Other
Non-Current
Investments
Total
Balance on April 1, 2017 $ —
$ 11
$ 11
Transfers into (out of) Level 3 —
—
—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other) —
(2 ) (2 )
Included in accumulated other comprehensive income (pre-tax) —
—
—
Purchases —
—
—
Sales —
—
—
Balance on June 30, 2017 $ —
$ 9
$ 9

Marketable
Securities

Other
Non-Current
Investments
Total
Balance on April 1, 2016 $ —
$ 27
$ 27
Transfers into (out of) Level 3 —
—
—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other) —
(5 ) (5 )
Included in accumulated other comprehensive income (pre-tax) —
—
—
Purchases —
—
—
Sales —
—
—
Balance on June 30, 2016 $ —
$ 22
$ 22

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~~The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the six months ended June 30, 2017 and 2016 (in millions):~~

Marketable
Securities

Other
Investments
Total
Balance on January 1, 2017 $ —
13
13
Transfers into (out of) Level 3 —
—
—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other) —
(4 ) (4 )
Included in accumulated other comprehensive income (pre-tax) —
—
—
Purchases —
—
—
Sales —
—
—
Balance on June 30, 2017 $ —
$ 9
$ 9

Marketable
Securities

Other
Investments
Total
Balance on January 1, 2016 $ —
32
32
Transfers into (out of) Level 3 —
—
—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other) —
(10 ) (10 )
Included in accumulated other comprehensive income (pre-tax) —
—
—
Purchases —
—
—
Sales —
—
—
Balance on June 30, 2016 $ —
$ 22

$ 22



December 31, 2017:
Marketable Securities:
U.S. government and agency debt securities	$	283	$	—	$	—	$	283
Mortgage and asset-backed debt securities			86		—		86
Corporate debt securities	—		276		—		276
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		9		—		9
Carbon credit investments	93		—		—		93
Total marketable securities	376		373		—		749
Other non-current investments	19		—		6		25
Total	$	395	$	373	$	6	$	774

There were no transfers of investments between Level 1 and Level 2 during the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.

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NOTE 56. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017 ~~consist~~consists of the following (in millions):


	2017			2016			2018			2017
Vehicles	$	8,879		$	8,638		$	9,435		$	9,365
Aircraft	15,678			15,653			16,811			16,248
Land	1,591			1,397			1,777			1,582
Buildings	3,571			3,439			4,195			4,035
Building and leasehold improvements	3,718			3,612			4,114			3,934
Plant equipment	8,714			8,430			9,952			9,387
Technology equipment	1,810			1,741			2,001			1,907
Equipment under operating leases	29			29			—			29
Construction-in-progress	1,598			735			2,915			2,239
	45,588			43,674			51,200			48,726
Less: Accumulated depreciation and amortization	(25,747		)	(24,874		)	(27,299		)	(26,608		)
	$	19,841		$	18,800		$	23,901		$	22,118

We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor ~~our~~all other property, plant and equipment categories for any indicators that the carrying value of the assets may not be recoverable. No impairment charges on property, plant and equipment were recorded during the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.

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NOTE 67. 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, ~~2017~~2018 and ~~2016~~2017 (in millions):


	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits						U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2017			2016			2017			2016			2017			2016			2018			2017			2018			2017			2018			2017
Three Months Ended June 30:
Service cost	$	389		$	353		$	7		$	7		$	14		$	13		$	415		$	389		$	7		$	7		$	16		$	14
Interest cost	462			457			28			30			10			11			450			462			26			28			11			10
Expected return on assets	(712		)	(629		)	(1		)	(1		)	(16		)	(15		)	(800		)	(712		)	(2		)	(1		)	(19		)	(16		)
Amortization of prior service cost	48			42			2			1			—			—			48			48			2			2			—			—
Net periodic benefit cost	$	187		$	223		$	36		$	37		$	8		$	9		$	113		$	187		$	33		$	36		$	8		$	8

	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits						U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2017			2016			2017			2016			2017			2016			2018			2017			2018			2017			2018			2017
Six Months Ended June 30:
Service cost	$	779		$	706		$	14		$	14		$	29		$	25		$	831		$	779		$	14		$	14		$	32		$	29
Interest cost	924			914			56			60			20			21			899			924			52			56			23			20
Expected return on assets	(1,424		)	(1,258		)	(3		)	(2		)	(32		)	(29		)	(1,601		)	(1,424		)	(4		)	(3		)	(39		)	(32		)
Amortization of prior service cost	96			84			4			2			—			—			97			96			4			4			—			—
Net periodic benefit cost	$	375		$	446		$	71		$	74		$	17		$	17		$	226		$	375		$	66		$	71		$	16		$	17

During the first six months of ~~2017,~~2018, we contributed ~~$2.334 billion~~$50 and ~~$196~~$42 million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We ~~also~~currently expect to contribute ~~$43~~$48 and ~~$45~~$37 million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively. Subject to market conditions, we continually evaluate opportunities for additional discretionary pension contributions.

The components of net periodic benefit cost other than current service cost are presented within “Investment income and other” in the statements of consolidated income.

Plan Amendments and Curtailments

~~The UPS Retirement Plan was closed to new non-union participants effective July 1, 2016.~~ In the quarter ended June 30, 2017, we amended the UPS Retirement Plan and the UPS Excess Coordinating Benefit Plan ~~(single-employer defined benefit pension plans sponsored by UPS)~~ to cease accruals of additional benefits for future service and compensation for non-union participants effective January 1, 2023. We remeasured plan assets and pension benefit obligations for the affected pension plans as of June 30, 2017, resulting in a net actuarial gain of $569 million. This ~~reflects~~reflected a curtailment gain of $1.525 billion resulting from the benefit plan changes that was partially offset by net actuarial losses of $956 million, driven by a reduction of approximately 32 basis points in the discount rate compared to December 31, 2016, offset by actual assets returns approximately 275 basis points above our expected return as of the remeasurement date. The net curtailment gain reduced the actuarial loss recorded in ~~"accumulated~~"Accumulated other comprehensive loss" in the equity section of the consolidated balance ~~sheet.~~sheets. As actuarial losses ~~are~~were within the corridor (defined as 10% of the greater of the fair value of plan assets and the plan's projected benefit obligation), there iswas no impact to the ~~statement~~statements of consolidated income ~~for the quarter ended June 30, 2017.~~

~~Effective July 1, 2016, the Company amended the UPS 401(k) Savings Plan so that employees who would have been eligible for participation in the UPS Retirement Plan instead began earning~~as a ~~UPS Retirement Contribution. For employees eligible to receive the Retirement Contribution, UPS contributes 3% to 8%~~result of eligible pay to the UPS 401(k) Savings Plan based on years of vesting service and business unit. Contributions are made annually in cash to the accounts of participants who are employed on December 31st of each calendar year.

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~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

this remeasurement.

Effective June 23, 2017, the Company amended the UPS 401(k) Savings Plan so that non-union employees who currently participate in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, earn a UPS Retirement Contribution beginning January 1, 2023. UPS will contribute 5% to 8% of eligible compensation to the UPS 401(k) Savings Plan based on years of vesting service. The amendment also provides for transition contributions for certain participants. There was no impact to the ~~statement~~statements of consolidated income for the ~~quarter~~three and six months ended June 30, ~~2017~~2018 as a result of the above changes.

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Multiemployer Benefit Plans

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

As of June 30, ~~2017~~2018 and December 31, ~~2016~~2017 we had ~~$862~~$856 and ~~$866~~$859 million, respectively, recorded in ~~"other~~"Other non-current ~~liabilities,"~~liabilities" as well as $6$8 million as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017, recorded in ~~"other~~"Other current ~~liabilities,"~~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 4544 years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of this withdrawal liability as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017 was ~~$888~~$841 and ~~$861~~$921 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.

UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the plan and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF.

In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants, including the UPS Transfer Group. We vigorously challenged the proposed benefit reduction plan because we believed that it did not comply with the law and that the CSPF failed to comply with its contractual obligation to obtain our consent to reduce benefits to the UPS Transfer Group under the terms of the withdrawal agreement with the CSPF. On May 6, 2016, the U.S. Department of the Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of requirements set forth in the MPRA.

The CSPF has asserted that it will become insolvent in 2025 which could lead to the reduction of retirement benefits. Although there are numerous factors that could affect the CSPF’s funding status, if the CSPF were to become insolvent as they have projected, UPS may be required to provide coordinating benefits, thereby increasing the current projected benefit obligation for the UPS/IBT Plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.

The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of significant uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to which benefits are paid by the Pension Benefit Guaranty Corporation and our ability to successfully defend our legal positions, as well as the effect of discount rates and various other actuarial assumptions.

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We account for this potential obligation under Accounting Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”). Under ASC 715 we are required to provide a best estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely solution to this matter and the broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities. Our best estimate as of the measurement date of December 31, ~~2016 does~~2017 did not incorporate this solution. ~~Rather, our~~However, if a future change in law resulted in an obligation to provide coordinating benefits under the UPS/IBT Plan, it may be a significant event, and may require us to remeasure the plan assets and projected benefit obligation of the UPS/IBT Plan at the date the law is enacted.

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Our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will ~~make~~submit another MPRA filing to forestall insolvency without reducing benefits to the UPS Transfer Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing, we would be in a strong legal position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction, without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate as of the measurement date of December 31, ~~2016 is~~2017, was that there is no liability to be recognized for additional coordinating benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as ~~these~~the uncertainties are resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in accordance with ASC 715.

Collective Bargaining Agreements

As of December 31, ~~2016,~~2017, we had approximately ~~268,000~~280,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. ~~During 2014,~~These agreements ran through July 31, 2018. We reached tentative agreements with the Teamsters ~~ratified a~~on two new five-year contracts in the U.S. Domestic Package and UPS Freight business units on June 21, 2018 and on July 13, 2018, respectively, while several local U.S. Domestic Package supplemental agreements require additional negotiation and approval before ratification occurs. We are in the process of ratifying the new national master ~~agreement (“NMA”) with UPS~~agreements and negotiating and ratifying the related supplemental agreements, all of which will be retroactively effective as of August 1, 2018. As of the date of this filing, there can be no assurance that our efforts will ~~expire on July 31, 2018. The economic provisions in~~be successful or that the ~~NMA included wage rate increases, as well as increased contribution rates for healthcare and pension benefits.~~ultimate resolution of these matters will not adversely affect our business, financial position, results of operations or liquidity.

We have approximately ~~2,600~~2,700 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA")~~. During 2016, the IPA members voted to ratify a new five-year labor contract. Terms of the agreement became effective September 1, 2016 and run~~, which runs through September 1, 2021. ~~The economic provisions in the agreement included pay increases, a signing bonus and enhanced pension benefits.~~

Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727. In addition, approximately ~~3,000~~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.

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NOTE 78. GOODWILL AND INTANGIBLE ASSETS

The following table indicates the allocation of goodwill by reportable segment as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in millions):


	U.S. Domestic Package		International Package		Supply Chain & Freight		Consolidated		U.S. Domestic Package		International Package			Supply Chain & Freight			Consolidated
December 31, 2016:	$	715	$	407	$	2,635	$	3,757
December 31, 2017:									$	715	$	435		$	2,722		$	3,872
Acquired	—		18		21		39		—		—			—			—
Currency / Other	—		11		38		49		—		(11		)	(24		)	(35		)
June 30, 2017:	$	715	$	436	$	2,694	$	3,845
June 30, 2018:									$	715	$	424		$	2,698		$	3,837

The goodwill acquired in the Supply Chain & Freight segment was related to our January 2017 acquisition of Freightex Ltd. ("Freightex"), a U.K.-based asset-light provider of truckload, less-than truckload and specialized over-the-road services. The acquisition of Freightex was paid for with cash from operations. The acquisition of Freightex was not material to our consolidated financial position or results of operations.

The goodwill acquired in the International Package segment was related to our June 2017 acquisition of Eirpost Group Unlimited Company ("Nightline"), an Ireland-based express delivery and logistics company. The acquisition of Nightline was paid for with cash from operations. The acquisition of Nightline was not material to our consolidated financial position or results of operations.

In December 2016, we acquired Maze 1 Limited ("Marken"), a global provider of supply chain solutions to the life sciences industry and leader in clinical trials material storage and distribution, for approximately $570 million. As of June 30, 2017, we had no material changes to our estimated fair values of assets acquired and liabilities assumed. The financial results of Marken are included in the Supply Chain & Freight segment from the date of acquisition and were not material to our results of operations.

The estimates of the fair value of assets acquired and liabilities assumed are subject to change based on the completion of purchase accounting. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition.

~~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.

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The following is a summary of intangible assets as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in millions):


	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
June 30, 2017:
June 30, 2018:
Capitalized software	$	3,100	$	(2,229	)	$	871	$	3,507	$	(2,404	)	$	1,103
Licenses	126		(63		)	63		115		(23		)	92
Franchise rights	128		(93		)	35		145		(101		)	44
Customer relationships	744		(123		)	621		741		(182		)	559
Trade name	200		—			200		200		—			200
Trademarks, patents and other	70		(31		)	39		55		(25		)	30
Total Intangible Assets, Net	$	4,368	$	(2,539	)	$	1,829	$	4,763	$	(2,735	)	$	2,028
December 31, 2016:
December 31, 2017:
Capitalized software	$	2,933	$	(2,157	)	$	776	$	3,273	$	(2,310	)	$	963
Licenses	131		(70		)	61		114		(10		)	104
Franchise rights	128		(90		)	38		144		(97		)	47
Customer relationships	724		(85		)	639		776		(160		)	616
Trade name	200		—			200		200		—			200
Trademarks, patents and other	67		(23		)	44		71		(37		)	34
Total Intangible Assets, Net	$	4,183	$	(2,425	)	$	1,758	$	4,578	$	(2,614	)	$	1,964

As of June 30, ~~2017,~~2018, we had a trade name with a carrying value of $200 million and licenses with a carrying value of $4$5 million, which are deemed to be indefinite-lived intangible assets and are included in the table above. Impairment tests for the finite-lived intangible assets are only performed when a triggering event occurs that may indicate that the carrying value of the intangible may not be recoverable. There was a $12 million impairment of a finite-lived asset in the second quarter of 2018.

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NOTE 89. DEBT AND FINANCING ARRANGEMENTS

The carrying value of our outstanding debt as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017 consists of the following (in millions):

Principal
Amount
Carrying Value
Maturity 2017 2016
Commercial paper $ 3,383
2017-2018 $ 3,383
$ 3,250
Fixed-rate senior notes:
1.125% senior notes 375
2017 374
374
5.50% senior notes 750
2018 759
769
5.125% senior notes 1,000
2019 1,033
1,043
3.125% senior notes 1,500
2021 1,576
1,584
2.40% senior notes 500
2026 497
497
2.45% senior notes 1,000
2022 990
986
2.35% senior notes 600
2022 596
—
6.20% senior notes 1,500
2038 1,482
1,481
4.875% senior notes 500
2040 489
489
3.625% senior notes 375
2042 367
367
3.40% senior notes 500
2046 491
491
Floating rate senior notes 400
2022 398
—
8.375% Debentures:
8.375% debentures 424
2020 456
461
8.375% debentures 276
2030 282
282
Pound Sterling notes:
5.50% notes 86
2031 81
76
5.125% notes 590
2050 564
535
Euro senior notes:
1.625% notes 798
2025 793
732
1.00% notes 570
2028 566
523
Floating rate senior notes 570
2020 569
525
Canadian senior notes:
2.125% notes 577
2024 573
—
Floating rate senior notes 979
2049-2067 969
824
Capital lease obligations 448
2017-3005 448
447
Facility notes and bonds 320
2029-2045 319
319
Other debt 19
2017-2022 19
20
Total debt $ 18,040
18,074
16,075
Less: Current maturities (3,817 ) (3,681 )
Long-term debt $ 14,257
$ 12,394

~~Debt Classification~~

We have classified our 5.50% senior notes due January 2018 with a principal balance of $750 million as a long-term liability, based on our intent and ability to refinance the debt as of June 30, 2017. We have also classified certain floating rate senior notes that are putable by the note holders as a long-term liability, due to our intent and ability to refinance the debt if the put option is exercised by the note holders.

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~~Debt Issuances~~

In March, we issued floating rate senior notes in principal amount of $147 million. These notes bear interest at three-month LIBOR less 30 basis points and mature in 2067. 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.

~~On May 16, 2017 we issued U.S. senior rate notes. These senior notes consist of two separate series, as follows:~~

Two series of notes, in the principle amounts of $600 and $400 million were issued. These notes bear interest at a 2.35% fixed rate and at a three-month LIBOR plus 38 basis points, respectively, and mature May 2022. Interest on the fixed rate senior notes will be paid semi-annually, beginning November 2017. Interest on the floating rate senior notes will be paid quarterly beginning August 2017. The 2.35% notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points and accrued interest. The floating rate senior notes are not callable.

~~On May 18, 2017 we issued Canadian senior notes. These senior notes consist of a single series as follows:~~

Notes in the principal amount of C$750 million ($547 million), and bear a 2.125% fixed interest rate were issued. Interest on the notes is payable semi-annually beginning November 2017. The notes are callable at our option, in whole or in part at the Government of Canada yield plus 21.5 basis points, and on or after the par call date, at par value.



	Principal Amount			Carrying Value
	Principal Amount		Maturity	2018			2017
Commercial paper	$	2,530	2018 - 2019	$	2,530		$	3,203
Fixed-rate senior notes:
5.500% senior notes	750		2018	—			751
5.125% senior notes	1,000		2019	1,007			1,019
3.125% senior notes	1,500		2021	1,516			1,549
2.050% senior notes	700		2021	697			696
2.450% senior notes	1,000		2022	956			979
2.350% senior notes	600		2022	597			597
2.500% senior note	1,000		2023	993			992
2.800% senior note	500		2024	496			495
2.400% senior note	500		2026	497			497
3.050% senior note	1,000		2027	991			990
6.200% senior notes	1,500		2038	1,482			1,482
4.875% senior notes	500		2040	490			489
3.625% senior notes	375		2042	368			368
3.400% senior notes	500		2046	491			491
3.750 % senior notes	1,150		2047	1,136			1,135
Floating-rate senior notes:
Floating-rate senior notes	350		2021	348			348
Floating-rate senior notes	400		2022	398			398
Floating-rate senior notes	500		2023	499			496
Floating-rate senior notes	1,043		2049-2067	1,030			1,032
8.375% Debentures:
8.375% debentures	424		2020	436			447
8.375% debentures	276		2030	281			282
Pound Sterling notes:
5.500% notes	88		2031	87			84
5.125% notes	600		2050	566			586
Euro senior notes:
0.375% notes	816		2023	810			832
1.625% notes	816		2025	811			833
1.000% notes	583		2028	579			595
1.500% notes	583		2032	578			594
Floating-rate senior notes	583		2020	581			598
Canadian senior notes:
2.125% notes	566		2024	563			593
Capital lease obligations	563		2018-3005	563			500
Facility notes and bonds	320		2029-2045	321			319
Other debt	13		2018-2022	13			19
Total debt	$	23,629		22,711			24,289
Less: Current maturities				(2,591		)	(4,011		)
Long-term debt				$	20,120		$	20,278

Commercial Paper

We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as of June 30, ~~2017: $2.299~~2018: $2.343 billion with an average interest rate of ~~0.92%~~1.88% and ~~€951~~€160 million ($~~1.084 billion)~~187 million) with an average interest rate of ~~-0.39%~~-0.41%. As of June 30, ~~2017,~~2018, we have classified the entire commercial paper balance as a current liability on our consolidated balance ~~sheet.~~sheets.

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Debt Classification

We have classified our 5.125% senior notes due April 2019 with a principal balance of $1.0 billion as long-term debt based on our intent and ability to refinance the debt as of June 30, 2018. We have classified certain floating-rate senior notes that are putable by the note holders as long-term debt, due to our intent and ability to refinance the debt if the put option is exercised by the note holders.

Debt Repayments

On January 15, 2018, our $750 million 5.500% senior notes matured and were repaid in full.

Sources of Credit

We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of ~~$1.5~~$4.5 billion, and expires on March ~~23, 2018.~~22, 2019. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of June 30, ~~2017.~~2018.

The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 24, 2022. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of June 30, ~~2017.~~

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2018.

Debt Covenants

Our existing debt instruments and credit facilities subject us to certain financial covenants. As of June 30, ~~2017~~2018 and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of June 30, ~~2017,~~2018, 10% of net tangible assets was equivalent to ~~$2.297~~$2.787 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 ~~$18.897~~$23.405 and ~~$17.134~~$25.206 billion as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.

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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. ~~We have filed a~~Defendants’ motion to decertify the class ~~which~~ was ~~heard~~granted in ~~May 2017. A trial setting conference is scheduled for~~ August 2017.

~~There~~ The plaintiff has filed a notice of appeal, and further proceedings in the trial court are ~~multiple factors that prevent us from being able~~stayed pending resolution by the California Court of Appeal. In May 2018, we reached an agreement to ~~estimate~~resolve the ~~amount of loss, if any, that may result from the remaining aspects~~case for an immaterial amount. Final resolution 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 ablematter is subject to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

~~In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal~~ court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. The Court granted summary judgment motions filed by UPS and FedEx, entered judgment in favor of UPS and FedEx, and dismissed the case. Plaintiff appealed to the Court of Appeals for the Ninth Circuit, briefing is complete and oral argument was heard in March 2017. The Antitrust Division of the U.S. Department of Justice (“DOJ”) opened a civil investigation of our policies and practices for dealing with third-party negotiators. We have cooperated with this investigation. We deny any liability with respect to these matters and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) the DOJ investigation is pending; (2) the Court granted our motion for summary judgment; and (3) the appeal remains pending. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

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approval.

We are a defendant in Ryan Wright and Julia Zislin v. United Parcel Service Canada Ltd., an action brought on behalf of a certified class of customers in the Superior Court of Justice in Ontario, Canada. Plaintiffs filed suit in February 2007, alleging inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court in August 2011, when it dismissed plaintiffs' complaint under the Criminal Code and granted plaintiffs' complaint of inadequate disclosure. We appealed the Court's decision pertaining to inadequate disclosure in September ~~2011 and continue~~2011. In June 2018, we reached an agreement to ~~vigorously defend all other allegations. There are multiple factors that prevent us from being able to estimate~~resolve 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 ultimatecase for an immaterial amount. Final resolution of this ~~matter. Accordingly, at this time, we are not able~~matter is subject 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.court approval.

In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern District of New York, arising from alleged shipments of cigarettes to New York State and City residents. The complaint asserted claims under various federal and state laws. The complaint also included a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. On March 24, 2017, the District Court issued an opinion and order finding liability against UPS on each of the plaintiffs’ causes of action. On May 25, 2017, the District Court issued a corrected opinion and order on liability and an order awarding the plaintiffs damages of $9.4 million and penalties of $237.6 million. An accrual of $9.4 million with respect to the damages awarded by the court is included on our consolidated balance ~~sheet~~sheets at June 30, ~~2017.~~2018. We estimate that the amount of losses could be up to $247 million, plus interest; however, the amount of penalties ultimately payable, if any, is subject to a variety of complex factors and potential outcomes that remain to be determined in future legal proceedings. Consequently, we are unable to reasonably estimate a likely amount of loss within that range. We strongly disagree with the District Court’s analysis and conclusions, and have ~~filed a notice of appeal from the judgment~~appealed to the United States Court of Appeals for the Second Circuit. The briefing is now complete and we expect oral argument will be scheduled during 2018.

~~In May 2016, a purported shareowner derivative suit was filed in the Delaware Court~~

Table of Chancery naming certain of UPS’s current and former officers and directors as defendants, alleging that they breached their fiduciary duties by failing to monitor UPS’s compliance with the Assurance of Discontinuance and other federal and state laws relating to cigarette deliveries. The Company’s and individual defendants’ motion to dismiss was heard in October 2016. In January 2017, the Court of Chancery dismissed the plaintiffs' suit in its entirety. No appeal was filed and the deadline for doing so has lapsed.Contents

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Other Matters

In October 2015, the DOJ informed us of an industry-wide inquiry into the transportation of mail under the United States Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a Civil Investigative Demand seeking certain information relating to our contracts. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating with the DOJ. We are unable to predict what action, if any, might be taken in the future by any government authorities as a result of their investigation. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

In August 2016, Spain’s National Markets and Competition Commission (“CNMC”) ~~opened~~announced an investigation into 10 companies in the commercial delivery and parcel industry, including UPS, related to alleged ~~nonaggression~~ agreements to allocate customers. In May 2017, UPS received a Statement of Objections issued by the CNMC. In July 2017, UPS received a Proposed Decision ~~Proposal~~ from the CNMC. ~~These documents do not prejudge~~On March 8, 2018, the CNMC adopted a final decision, ~~(which~~finding an infringement and imposing a fine on UPS of €19.2 million. In May 2018, UPS applied for a suspension of the implementation of the decision (including payment of the fine) and appealed the decision on the merits. The appeal is ~~subject~~pending.There are multiple factors that prevent us from being able to ~~appeal) as~~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 ~~facts~~the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

In February 2018 the Turkish competition authority (“Authority”) opened an investigation into nine companies (including UPS) in the small package industry related to alleged customer allocations in violation of Turkish competition law. In April 2018, the Authority consolidated this investigation with two other investigations involving similar allegations. The consolidated investigation involves a total of 32 companies, including UPS. The investigation is in its early stages. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

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

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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 par value, and as of June 30, ~~2017,~~2018, there were 4.6 billion class A shares and 5.6 billion class B shares authorized to be issued. Additionally, there are 200 million preferred shares, with a $0.01 par value, authorized to be issued. As of June 30, ~~2017,~~2018, no preferred shares had been issued.

The following is a rollforward of our common stock, additional paid-in capital and retained earnings accounts for the six months ended June 30, ~~2017~~2018 and ~~2016~~2017 (in millions, except per share amounts):


	2017					2016					2018					2017
	Shares		Dollars			Shares		Dollars			Shares		Dollars			Shares		Dollars
Class A Common Stock
Balance at beginning of period	180		$	2		194		$	2		173		$	2		180		$	2
Common stock purchases	(2	)	—			(3	)	—			(2	)	—			(2	)	—
Stock award plans	4		—			4		—			3		—			4		—
Common stock issuances	1		—			2		—			2		—			1		—
Conversions of class A to class B common stock	(5	)	—			(8	)	—			(8	)	—			(5	)	—
Class A shares issued at end of period	178		$	2		189		$	2		168		$	2		178		$	2
Class B Common Stock
Balance at beginning of period	689		$	7		693		$	7		687		$	7		689		$	7
Common stock purchases	(6	)	—			(10	)	—			(2	)	—			(6	)	—
Conversions of class A to class B common stock	5		—			8		—			8		—			5		—
Class B shares issued at end of period	688		$	7		691		$	7		693		$	7		688		$	7
Additional Paid-In Capital
Balance at beginning of period			$	—				$	—				$	—				$	—
Stock award plans			157					289					170					157
Common stock purchases			(412		)			(561		)			(383		)			(412		)
Common stock issuances			203					168					232					203
Option premiums received (paid)			52					104					(19		)			52
Balance at end of period			$	—				$	—				$	—				$	—
Retained Earnings
Balance at beginning of period			$	4,879				$	6,001				$	5,852				$	4,880
Net income attributable to common shareowners			2,542					2,400					2,830					2,550
Dividends ($1.66 and $1.56 per share)			(1,495		)			(1,409		)
Dividends ($1.82 and $1.66 per share)													(1,624		)			(1,495		)
Common stock purchases			(489		)			(769		)			(128		)			(489		)
Reclassification from AOCI pursuant to the early adoption of ASU 2018-02													735					—
Balance at end of period			$	5,437				$	6,223				$	7,665				$	5,446

We repurchased ~~8.4~~4.4 million shares of class A and class B common stock for $511 million during the six months ended June 30, 2018, and 8.4 million shares for $901 million during the six months ended June 30, ~~2017, and 13.1 million shares for $1.330 billion during the six months ended June 30, 2016.~~2017. In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion, which has no expiration date. As of June 30, ~~2017,~~2018, we had ~~$5.253~~$3.828 billion of this share repurchase authorization available.

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From time to time, we enter into share repurchase programs with large financial institutions to assist in our buyback of company stock. These programs allow us to repurchase our shares at a price below the weighted average UPS share price for a given period. During the second quarter of ~~2017,~~2018, we did not enter into any accelerated share repurchase transactions.

In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We ~~received~~paid net premiums of ~~$52 and $104~~$19 million during the first six months of ~~2017~~2018 and ~~2016, respectively,~~received $52 million during the first six months 2017, related to entering into and settling capped call options for the purchase of class B shares. As of June 30, ~~2017,~~2018, we had outstanding options for the purchase of ~~0.5~~0.7 million shares with a weighted average strike price of ~~$94.49~~$99.98 per share that will settle ~~in the third quarter of 2017.~~during 2018.

Accumulated Other Comprehensive Income (Loss)

We recognize activity in ~~Accumulated Other Comprehensive Income (loss) ("AOCI")~~AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. Additionally, effective January 1, 2018, we early adopted an ASU that allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act (see note 2 for further information). The activity in AOCI for the six months ended June 30, ~~2017~~2018 and ~~2016~~2017 is as follows (in millions):


	2017			2016			2018			2017
Foreign currency translation gain (loss):
Foreign currency translation gain (loss), net of tax:
Balance at beginning of period	$	(1,016	)	$	(897	)	$	(930	)	$	(1,016	)
Translation adjustment (net tax effect of $(93) and $0)	54			(5		)
Translation adjustment (net of tax effect of $25 and $(93))							(84		)	54
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02							(47		)	—
Balance at end of period	(962		)	(902		)	(1,061		)	(962		)
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of period	(1		)	(1		)	(2		)	(1		)
Current period changes in fair value (net of tax effect of $0 and $4)	1			5
Current period changes in fair value (net of tax effect of $(1) and $0)							(4		)	1
Reclassification to earnings (net of tax effect of $1 and $0)							1			—
Balance at end of period	—			4			(5		)	—
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of period	(45		)	67			(366		)	(45		)
Current period changes in fair value (net of tax effect of $(109) and $(5))	(181		)	(7		)
Reclassification to earnings (net of tax effect of $(7) and $(67))	(11		)	(112		)
Current period changes in fair value (net of tax effect of $67 and $(109))							210			(181		)
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02							(79		)	—
Reclassification to earnings (net of tax effect of $18 and $(7))							56			(11		)
Balance at end of period	(237		)	(52		)	(179		)	(237		)
Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of period	(3,421		)	(2,709		)	(3,569		)	(3,421		)
Remeasurement of plan assets and liabilities (net of tax effect of $214 and $0) ⁽¹⁾	355			—
Reclassification to earnings (net of tax effect of $37 and $33)	63			53
Remeasurement of plan assets and liabilities (net of tax effect of $0 and $214) ⁽¹⁾							—			355
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02							(609		)	—
Reclassification to earnings (net of tax effect of $24 and $37)							77			63
Balance at end of period	(3,003		)	(2,656		)	(4,101		)	(3,003		)
Accumulated other comprehensive income (loss) at end of period	$	(4,202	)	$	(3,606	)	$	(5,346	)	$	(4,202	)

⁽¹⁾See note 6 for further information about plan curtailments resulting in remeasurement of plan assets and liabilities.
⁽¹⁾See note 7 for further information about plan curtailments resulting in remeasurement of plan assets and liabilities.							⁽¹⁾See note 7 for further information about plan curtailments resulting in remeasurement of plan assets and liabilities.

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Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 is as follows (in millions):


Three Months Ended June 30:
	Amount Reclassified from AOCI						Affected Line Item in the Income Statement	Amount Reclassified from AOCI						Affected Line Item in the Income Statement
	2017			2016				2018			2017
Unrealized gain (loss) on marketable securities:
Realized loss on sale of securities								$	—		$	—		Investment income and other
Income tax (expense) benefit								—			—			Income tax expense
Impact on net income								—			—			Net income
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts	$	(7	)	$	(6	)	Interest expense	(6		)	(7		)	Interest expense
Foreign exchange contracts	7			85			Revenue	(20		)	7			Revenue
Income tax (expense) benefit	—			(29		)	Income tax expense	6			—			Income tax expense
Impact on net income	—			50			Net income	(20		)	—			Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs	(50		)	(43		)	Compensation and benefits	(50		)	(50		)	Investment income and other
Income tax (expense) benefit	19			16			Income tax expense	12			19			Income tax expense
Impact on net income	(31		)	(27		)	Net income	(38		)	(31		)	Net income

Total amount reclassified for the period	$	(31	)	$	23		Net income	$	(58	)	$	(31	)	Net income

Six Months Ended June 30:
Amount Reclassified from AOCI Affected Line Item in the Income Statement
2017 2016
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts $ (14 ) $ (12 ) Interest expense
Foreign exchange contracts 32
191
Revenue
Income tax (expense) benefit (7 ) (67 ) Income tax expense
Impact on net income 11
112
Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs (100 ) (86 ) Compensation and benefits
Income tax (expense) benefit 37
33
Income tax expense
Impact on net income (63 ) (53 ) Net income

Total amount reclassified for the period $ (52 ) $ 59
Net income



Six Months Ended June 30:
	Amount Reclassified from AOCI						Affected Line Item in the Income Statement
	2018			2017			Affected Line Item in the Income Statement
Unrealized gain (loss) on marketable securities:
Realized loss on sale of securities	(2		)	—			Investment income and other
Income tax (expense) benefit	1			—			Income tax expense
Impact on net income	(1		)	—			Net income
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts	(12		)	(14		)	Interest expense
Foreign exchange contracts	(62		)	32			Revenue
Income tax (expense) benefit	18			(7		)	Income tax expense
Impact on net income	(56		)	11			Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs	(101		)	(100		)	Investment income and other
Income tax (expense) benefit	24			37			Income tax expense
Impact on net income	(77		)	(63		)	Net income

Total amount reclassified for the period	$	(134	)	$	(52	)	Net income

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Deferred Compensation Obligations and Treasury Stock

Activity in the deferred compensation program for the six months ended June 30, ~~2017~~2018 and ~~2016~~2017 is as follows (in millions):


	2017					2016					2018					2017
	Shares		Dollars			Shares		Dollars			Shares		Dollars			Shares		Dollars
Deferred Compensation Obligations:
Balance at beginning of period			$	45				$	51				$	37				$	45
Reinvested dividends			1					1					1					1
Benefit payments			(10		)			(8		)			(7		)			(10		)
Balance at end of period			$	36				$	44				$	31				$	36
Treasury Stock:
Balance at beginning of period	(1	)	$	(45	)	(1	)	$	(51	)	(1	)	$	(37	)	(1	)	$	(45	)
Reinvested dividends	—		(1		)	—		(1		)	—		(1		)	—		(1		)
Benefit payments	—		10			—		8			—		7			—		10
Balance at end of period	(1	)	$	(36	)	(1	)	$	(44	)	(1	)	$	(31	)	(1	)	$	(36	)

Noncontrolling Interests:

We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests decreased $2 million and increased $6 ~~and $3~~ million for the six months ended June 30, 2018 and 2017, ~~and 2016,~~ respectively.

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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 products within their geographic area.

U.S. Domestic Package

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

International Package

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

Supply Chain & Freight

Supply Chain & Freight includes our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units. Our Forwarding, Logistics and ~~Logistics~~UPS Mail Innovations business units provide services in more than ~~195~~200 countries and territories worldwide and include international air and ocean freight forwarding, customs ~~brokerage, truckload freight~~ brokerage, distribution and post-sales services, mail and consulting services. UPS Freight offers a variety of less-than-truckload ("LTL") and truckload ("TL") services to customers in North America. Coyote offers truckload brokerage services primarily in the ~~U.S.~~United States. Marken ~~provides specialized healthcare logistics in Europe.~~is a global provider of supply chain solutions to the life sciences industry. Other aggregated business units within this segment include The UPS Store and UPS Capital.

In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income and other, interest expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, ~~2016, with certain~~2017 and updated in note 2 and note 3 for

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newly adopted accounting standards. Certain expenses are allocated between the segments using activity-based costing methods. ~~Unallocated assets are comprised primarily of cash, marketable securities and certain investment partnerships.~~

Segment information for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 is as follows (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Revenue:
U.S. Domestic Package	$	9,745	$	9,015	$	19,280	$	18,099	$	10,354	$	9,741	$	20,581	$	19,277
International Package	3,163		3,077		6,221		5,991		3,602		3,171		7,135		6,245
Supply Chain & Freight	2,842		2,537		5,564		4,957		3,500		3,015		6,853		5,915
Consolidated	$	15,750	$	14,629	$	31,065	$	29,047	$	17,456	$	15,927	$	34,569	$	31,437
Operating Profit:
U.S. Domestic Package	$	1,395	$	1,233	$	2,471	$	2,335	$	939	$	1,255	$	1,695	$	2,205
International Package	583		613		1,112		1,187		618		570		1,212		1,088
Supply Chain & Freight	238		192		417		339		216		212		386		361
Consolidated	$	2,216	$	2,038	$	4,000	$	3,861	$	1,773	$	2,037	$	3,293	$	3,654

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NOTE 1213. EARNINGS PER SHARE

The earnings per share amounts are the same for class A and class B common shares as the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 (in millions, except per share amounts):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Numerator:
Net income attributable to common shareowners	$	1,384	$	1,269	$	2,542	$	2,400	$	1,485	$	1,384	$	2,830	$	2,550
Denominator:
Weighted average shares	867		881		868		883		861		867		861		868
Deferred compensation obligations	1		1		1		1		1		1		1		1
Vested portion of restricted units	4		4		4		3		4		4		4		4
Denominator for basic earnings per share	872		886		873		887		866		872		866		873
Effect of dilutive securities:
Restricted units	3		3		3		4		3		3		3		3
Stock options	1		1		1		1		1		1		1		1
Denominator for diluted earnings per share	876		890		877		892		870		876		870		877
Basic earnings per share	$	1.59	$	1.43	$	2.91	$	2.71	$	1.71	$	1.59	$	3.27	$	2.92
Diluted earnings per share	$	1.58	$	1.43	$	2.90	$	2.69	$	1.71	$	1.58	$	3.25	$	2.91

There were no antidilutive shares for the three months ended June 30, 2018. Diluted earnings per share for the three months ended June 30, 2017 ~~and 2016~~ excluded the effect of 0.3 ~~and 0.2~~ million shares of common stock ~~respectively (0.3~~(0.1 and 0.3 million for the six months ended June 30, 2018 and 2017, ~~and 2016)~~respectively), that may be issued upon the exercise of employee stock options, because such effect would be antidilutive.

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NOTE 1314. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT

Risk Management Policies

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

Credit Risk Management

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

At June 30, 2018 and December 31, 2017, we held cash collateral of $82 and $17 million, respectively, under these agreements; this collateral is included in "Cash and cash equivalents" on the consolidated balance sheets and its use by UPS is not restricted. At June 30, 2018 and December 31, 2017, $22 and $174 million, respectively, of additional collateral was required to be posted with our counterparties.

Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. At June 30, 2017 and December 31, 2016, we held cash collateral of $138 and $575 million, respectively, under these agreements; this collateral is included in "cash and cash equivalents" on the consolidated balance sheets and its use by UPS is not restricted.

~~In connection with the agreements described above,~~Alternatively, we could be required to provide additional collateral or terminate transactions with certain counterparties in the event of a downgrade of our credit rating. The amount of collateral required would be determined by the net fair value of the associated derivatives with each counterparty. ~~At June 30, 2017~~We have not historically incurred, and ~~December 31, 2016, $19 million and $0, respectively,~~do not expect to incur in the future, any losses as a result of ~~additional collateral was required to be posted with our counterparties.~~ counterparty default.

The aggregate fair value of instruments not covered by the zero threshold bilateral collateral provisions were in a net liability position of $1$0 and ~~$10~~$16 million at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

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

Accounting Policy for Derivative Instruments

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

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

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

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

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Types of Hedges

Commodity Risk Management

Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. In order to mitigate the impact of fuel surcharge imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services. We periodically enter into ~~option~~derivative contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We normally designate and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.

Foreign Currency Risk Management

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

We also hedge portions of our anticipated cash settlements of intercompany transactions and interest payments on certain debt subject to foreign currency remeasurement using foreign currency forward contracts. We normally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions; therefore, the resulting gains and losses from these hedges are recognized as a component of investment income and other when the underlying transactions are subject to currency remeasurement.

We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of foreign denominated debt as the hedging instrument allows the debt to be remeasured to foreign currency translation adjustment within AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedging is recognized as a component of investment income and other. Balances in the cumulative translation adjustment accounts remain until the sale or complete liquidation of the foreign entity.

Interest Rate Risk Management

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

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

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

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Outstanding Positions

As of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the notional amounts of our outstanding derivative positions were as follows (in millions):


	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Currency hedges:
Euro	EUR	3,277	EUR	3,702	EUR	4,642	EUR	4,942
British Pound Sterling	GBP	1,753	GBP	1,380	GBP	1,778	GBP	1,736
Canadian Dollar	CAD	1,231	CAD	1,053	CAD	1,410	CAD	1,259
Indian Rupee	INR	262	INR	76
Mexican Peso	MXN	19	MXN	—	MXN	—	MXN	169
Japanese Yen	JPY	3,581	JPY	3,972
Singapore Dollar	SGD	17	SGD	32	SGD	27	SGD	11

Interest rate hedges:
Fixed to Floating Interest Rate Swaps	$	5,799	$	5,799	USD	4,674	USD	5,424
Floating to Fixed Interest Rate Swaps	$	778	$	778	USD	778	USD	778

Investment market price hedges:
Marketable Securities	EUR	77	EUR	76	EUR	—	EUR	64

As of June 30, ~~2017,~~2018, we had no outstanding commodity hedge positions.

Balance Sheet Recognition and Fair Value Measurements

The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives (in millions). The table is segregated between those derivative instruments that qualify and are designated as hedging instruments and those that are not, as well as by type of contract and whether the derivative is in an asset or liability position.

We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded on our consolidated balance sheets. The columns labeled "Net Amounts if Right of Offset had been Applied" indicate the potential net fair value positions by type of contract and location on the consolidated balance sheets had we elected to apply the right of offset.


		Fair Value Hierarchy Level		Gross Amounts Presented in Consolidated Balance Sheets								Net Amounts if Right of Offset had been Applied									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, 2017				December 31, 2016				June 30, 2017				December 31, 2016			Balance Sheet Location			Fair Value Hierarchy Level	June 30, 2018				December 31, 2017				June 30, 2018				December 31, 2017
Derivatives designated as hedges:
Foreign exchange contracts	Other current assets	Fair Value Hierarchy Level	Level 2		$	46			$	176			$	38			$	176		Other current assets		Level 2		$	46			$	2			$	22			$	—
Interest rate contracts	Other current assets	Level 2		7				—				7				—			Other current assets		Level 2		6				1				6				1
Foreign exchange contracts	Other non-current assets	Level 2		6				131				1				126			Other non-current assets		Level 2		87				1				51				—
Interest rate contracts	Other non-current assets	Level 2		103				137				89				119			Other non-current assets		Level 2		14				59				3				43
Derivatives not designated as hedges:
Foreign exchange contracts	Other current assets	Level 2		2				1				2				1			Other current assets		Level 2		3				18				3				17
Foreign exchange contracts																			Other non-current assets		Level 2		1				—				1				—
Interest rate contracts	Other non-current assets	Level 2		38				42				36				40			Other non-current assets		Level 2		22				26				22				26
Total Asset Derivatives				$	202			$	487			$	173			$	462						$	179			$	107			$	108			$	87

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		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, 2017				December 31, 2016				June 30, 2017				December 31, 2016			Balance Sheet Location			Fair Value Hierarchy Level	June 30, 2018				December 31, 2017				June 30, 2018				December 31, 2017
Derivatives designated as hedges:
Foreign exchange contracts	Other current liabilities	Fair Value Hierarchy Level	Level 2		$	18			$	—			$	11			$	—		Other current liabilities		Level 2		$	35			$	93			$	11			$	91
Interest rate contracts	Other current liabilities	Level 2		1				1				—				1
Foreign exchange contracts	Other non-current liabilities	Level 2		74				6				68				1			Other non-current liabilities		Level 2		54				194				18				193
Interest rate contracts	Other non-current liabilities	Level 2		17				21				4				3			Other non-current liabilities		Level 2		60				28			��	49				12
Derivatives not designated as hedges:
Foreign exchange contracts	Other current liabilities	Level 2		—				—				—				—			Other current liabilities		Level 2		1				1				1				—
Investment market price contracts	Other current liabilities	Level 2		1				10				1				10			Other current liabilities		Level 2		—				16				—				16
Interest rate contracts	Other non-current liabilities	Level 2		7				7				5				5
Foreign exchange contracts																			Other non-current liabilities		Level 2		1				—				1				—
Total Liability Derivatives				$	118			$	45			$	89			$	20						$	151			$	332			$	80			$	312

Our foreign currency, interest rate and investment market price derivatives are largely comprised of over-the-counter derivatives, which are primarily valued using pricing models that rely on market observable inputs such as yield curves, currency exchange rates and investment forward prices; therefore, these derivatives are classified as Level 2.

Income Statement and AOCI Recognition

The following table indicates the amount of gains and losses that have been recognized in AOCI for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 for those derivatives designated as cash flow hedges (in millions):


Three Months Ended June 30:
Derivative Instruments in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)						Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
Derivative Instruments in Cash Flow Hedging Relationships	2017			2016			2018		2017
Interest rate contracts	$	—		$	(1	)	$	1	$	—
Foreign exchange contracts	(243		)	149			411		(243		)
Total	$	(243	)	$	148		$	412	$	(243	)

Six Months Ended June 30:
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)
Derivative Instruments in Cash Flow Hedging Relationships	2017			2016			2018		2017
Interest rate contracts	$	—		$	(3	)	$	2	$	—
Foreign exchange contracts	(290		)	(9		)	275		(290		)
Total	$	(290	)	$	(12	)	$	277	$	(290	)

As of June 30, ~~2017, $43~~2018, there are $38 million of pre-tax losses related to cash flow hedges that are currently deferred in AOCI that are expected to be reclassified to income over the 12 month period ended June 30, ~~2018.~~2019. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions. The maximum term over which we are hedging exposures to the variability of cash flow is 15approximately 14 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, ~~2017~~2018 and ~~2016.~~

2017.

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The following table indicates the amount of gains and losses that have been recognized in AOCI within foreign currency translation adjustment for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 for those instruments designated as net investment hedges (in millions):


Three Months Ended June 30:
Non-derivative Instruments in Net Investment Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)						Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
	2017			2016			2018		2017
Foreign denominated debt	$	(210	)	$	62		$	218	$	(210	)
Total	$	(210	)	$	62		$	218	$	(210	)

Six Months Ended June 30:
Non-derivative Instruments in Net Investment Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)						Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
	2017			2016			2018		2017
Foreign denominated debt	$	(247	)	(23		)	$	138	(247		)
Total	$	(247	)	$	(23	)	$	138	$	(247	)

The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging relationships was immaterial for the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~

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2017.

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, ~~2017~~2018 and ~~2016~~2017 (in millions):


Derivative Instruments in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income	Derivative Amount of Gain (Loss) Recognized in Income					Hedged Items in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized In Income		Hedged Items Amount of Gain (Loss) Recognized in Income							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
Derivative Instruments in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income	2017			2016			Location of Gain (Loss) Recognized In Income	2017				2016				Location of Gain (Loss) Recognized in Income	2018				2017					2018			2017
Three Months Ended June 30:	Three Months Ended June 30:						Hedged Items in Fair Value Hedging Relationships											Three Months Ended June 30:
Interest rate contracts	Interest Expense	$	2		$	20	Fixed-Rate Debt	Interest Expense		$	(2	)		$	(20	)	Interest Expense		$	(19	)		$	2		Hedged Items in Fair Value Hedging Relationships	Fixed-Rate Debt	Location of Gain (Loss) Recognized In Income	Interest Expense		$	19			$	(2	)
Six Months Ended June 30:	Six Months Ended June 30:																Six Months Ended June 30:
Interest rate contracts	Interest Expense	$	(22	)	$	115	Fixed-Rate Debt	Interest Expense		$	22			$	(115	)	Interest Expense		$	(73	)		$	(22	)	Fixed-Rate Debt		Interest Expense	$	73			$	22

Additionally, we maintain some interest rate swaps, foreign currency forwards and investment market price forward contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic hedge of ~~a portfolio~~portions of ~~interest bearing receivables.~~our outstanding debt. These foreign exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement and settlement risk for certain assets and liabilities on our consolidated balance sheets. These investment market price forward contracts are intended to provide an economic offset to fair value fluctuations of certain investments in marketable securities.

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

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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, ~~2017~~2018 and ~~2016~~2017 (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
	Location of Gain (Loss) Recognized in Income	2017			2016			Location of Gain (Loss) Recognized in Income	2018			2017
Three Months Ended June 30:
Interest rate contracts	Interest expense	$	(2	)	$	(2	)	Interest expense	$	(2	)	$	(2	)
Foreign exchange contracts	Investment income and other	14			(65		)	Investment income and other	(67		)	14
Investment market price contracts	Investment income and other	(18		)	25			Investment income and other	—			(18		)
		$	(6	)	$	(42	)
Total									$	(69	)	$	(6	)
Six Months Ended June 30:
Interest rate contracts	Interest expense	$	(4	)	$	(4	)	Interest expense	$	(4	)	$	(4	)
Foreign exchange contracts	Investment income and other	20			$	(106	)	Investment income and other	(59		)	$	20
Investment market price contracts	Investment income and other	8			180			Investment income and other	16			8
		$	24		$	70
Total									$	(47	)	$	24

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NOTE 1415. INCOME TAXES

Our effective tax rate decreased to ~~34.7%~~22.9% in the second quarter of ~~2017~~2018 from ~~35.0%~~34.7% in the same period of ~~2016 (33.4%~~2017 (21.1% year-to-date in ~~2017~~2018 compared to ~~35.1%~~33.4% in the same period of ~~2016)~~2017). The decrease in our effective tax rate was primarily due to the impact of the Tax Act, discussed further below, which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. In ~~the first quarter of 2017, we adopted a new accounting standard that requires~~addition, the recognition of excess tax benefits related to share-based compensation in income tax ~~expense (see note~~ 2~~), which resulted in discrete tax benefits for the three months ended June 30, 2017 of $7 million ($62 million year-to-date) and~~ reduced our second quarter 2017 effective rate by 0.3%, with no effective rate impact during the second quarter of 2018 (1.3% year-to-date in 2018 compared to 1.6% in the same period of 2017). Other factors that impacted our effective tax rate ~~by 0.3% (1.6% year-to-date).~~in the second quarter and year-to-date periods of 2018 compared with the same periods of 2017 include favorable resolutions of uncertain tax positions, favorable U.S. state and local tax law changes and favorable tax provisions enacted in the Bipartisan Budget Act of 2018.

As discussed in note 16, we recognized pre-tax transformation strategy costs of $263 million in the second quarter of 2018. As a result, we recorded an income tax benefit of $63 million. This benefit was generated at a higher average tax rate than the 2018 U.S. federal statutory rate primarily due to the effect of U.S. state and local taxes.

As discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, we have recognized liabilities for uncertain tax positions. We reevaluate these uncertain tax positions on a quarterly basis. A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. However, an estimate of the range of reasonably possible outcomes cannot be made. Items that may cause changes to unrecognized tax benefits include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statute of limitations or other unforeseen circumstances.

Tax Cuts and Jobs Act

On December 22, 2017, the United States enacted into law the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including a permanent corporate rate reduction to 21% and a transition to a territorial international system effective in 2018. The Tax Act also includes provisions that affected 2017, including: (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries ("Transition Tax") that is payable over eight years; (2) requiring a remeasurement of all U.S. deferred tax assets and liabilities to the newly enacted corporate tax rate of 21%; and (3) providing for additional first-year depreciation that allows full expensing of qualified property placed into service after September 27, 2017.

In late December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under U.S. GAAP. If a company's accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. Accordingly, we recorded provisional estimates in the year ended December 31, 2017 related to our Transition Tax liability, our change in indefinite reinvestment assertion for certain foreign subsidiaries and the remeasurement of our U.S. net deferred tax liabilities.

To calculate the amount of Transition Tax, we must determine, in addition to other factors, the amount of post-1986 earnings and profits ("E&P") of the foreign subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings. We were able to make a reasonable estimate of the Transition Tax and recorded a provisional liability of $310 million in the year ended December 31, 2017; however, there are certain factors that could impact our provisional estimate.

First, several of our foreign subsidiaries have a fiscal year-end other than December 31, and E&P for these subsidiaries cannot be precisely calculated until their fiscal years conclude during 2018. Second, we continue to gather additional information needed to precisely estimate the impact of the Transition Tax on our U.S. state and local tax liabilities given the complexity of the relevant state laws. Finally, we expect additional regulatory guidance and technical clarifications from the U.S. Department of the Treasury and Internal Revenue Service that could change our provisional estimate of the Transition Tax.

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As the U.S. has moved to a territorial system, we have changed our indefinite reinvestment assertion with respect to the earnings of certain foreign subsidiaries. As a result, we recorded a provisional deferred tax liability and corresponding increase to deferred tax expense of $24 million in the year ended December 31, 2017. There are certain factors, discussed above with regard to the Transition Tax, which could also impact our provisional estimate for the change in indefinite reinvestment assertion. For all other foreign subsidiaries, we continue to assert that these earnings are indefinitely reinvested. We will continue to evaluate our indefinite reinvestment assertion for all foreign subsidiaries in light of the Tax Act and our provisional estimate is subject to change.

For our net U.S. deferred tax liabilities, we recorded a provisional decrease of $606 million with a corresponding reduction to deferred tax expense of $606 million for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analysis related to the Tax Act, including, but not limited to, completing the analysis of our 2017 capital expenditures that qualify for full expensing and the state tax effect of adjustments made to federal temporary differences.

We have not made any measurement period adjustments related to our provisional estimates through the second quarter of 2018. We are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the prescribed measurement period.

NOTE 16. TRANSFORMATION STRATEGY

In the first quarter of 2018, we launched the first phase of a multi-year, enterprise-wide transformation strategy that is expected to impact our organization. Over the course of the next few years additional phases will be implemented. The program includes investments impacting global direct and indirect operating costs, as well as changes in processes and technology.

As part of this multi-phased transformation strategy, in April 2018, we announced that a select group of non-operations, retirement-eligible U.S. management employees were informed of their eligibility for participation in a special Voluntary Retirement Plan (VRP). Under the VRP, eligible employees were offered a financial buyout to retire. Those who have elected to participate in the voluntary retirement program will separate in phases to maintain an orderly transition. The special VRP offer does not change the design, or eligibility for, UPS retirement plans. This initiative will reduce headcount and lower ongoing operating expense.

During the quarter ended June 30, 2018, we recorded a pre-tax charge of $192 million related to severance pay and benefits. The charge is included within the "Compensation and benefits" line item in the statements of consolidated income. In addition, a $71 million pre-tax charge for other transformation related costs was also recorded. There were no comparable costs for the first six months of 2017.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The U.S. economic environment has generally improved with stable consumer conditions. While there is modest improvement in industrial production, growth is slower than originally anticipated. Business-to-business volume growth is influenced by the retail industry. Retail growth continued inDuring the second quarter ~~mainly driven by online sales. Continued~~of 2018, our business units produced strong revenue growth across all three segments. We realized improvements in ~~e-commerce and omni-channel retail sales has driven package volume demand for residential products. Shipments and~~ revenue per piece ~~have increased on~~as pricing and growth initiatives drove an increase in yields in each of our major products.

On a ~~consolidated~~year-to-date basis, we produced solid operating results in both our International Package and ~~across all products in our~~Supply Chain & Freight segments. The U.S. Domestic Package segment realized revenue growth driven by yield improvement across all products and ~~given these trends in the retail industry, products most aligned with business-to-consumer shipments have experienced the strongest~~solid volume growth.

~~Outside~~ This revenue growth was offset by additional costs related to our transformation strategy, continuing deployment of ~~the U.S., emerging markets have stabilized in recent months and most developed nations have seen modest growth. Our broad portfolio of product offerings~~Saturday operations, higher pension expenses and the ~~flexibilities inherent in~~impact of bringing new facility and technology projects on-line. The benefits of our ~~transportation network have supported our international growth. Demand for our export products has remained high. Europe continues to lead the way, with~~efficiency and growth ~~in key trade lanes as well as intra-Europe shipments. Trade from Asia to the United States remained strong during the second quarter.~~

~~We have continued several~~ initiatives in the U.S. will not be fully realized until future periods.

Consolidated revenue increased 9.6% to $17.456 billion for the second quarter of 2018 when compared to 2017. For the year-to-date period, consolidated revenue increased 10.0% to $34.569 billion in 2018 from $31.437 billion in 2017. Revenue for the second quarter increased in all segments and ~~internationally~~major product categories as demand for our services remained strong. Operating profit was $1.773 billion for the three months ended June 30, 2018 and $3.293 billion for the six months ended June 30, 2018, compared to ~~(1) improve~~$2.037 and $3.654 billion for the ~~flexibility~~three and ~~capacity~~six months ended June 30, 2017, respectively.

Average daily package volume increased 3.0% for the second quarter of 2018 and 3.8% year-to-date. We reported second quarter 2018 net income of $1.485 billion which increased 7.3% in ~~our transportation network; (2) improve yield management;~~2018 compared to 2017 as diluted earnings per share increased 8.2% to $1.71 in 2018. On a year-to-date basis, net income was $2.830 billion and (3) increase operational efficiency and contain costs across all segments. Most notably, expansion and construction of new facilities, along with the continued deployment of technology improvements, should continueincreased 11.0% in 2018 compared to ~~increase our network capacity and improve operational efficiency, flexibility and reliability.~~2017 as diluted earnings per share increased 11.7% to $3.25.

Our consolidated results are presented in the table below:


	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change		Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2017			2016			%		2017			2016			%		2018			2017			%		2018			2017			%
Revenue (in millions)	$	15,750		$	14,629		7.7	%	$	31,065		$	29,047		6.9	%	$	17,456		$	15,927		9.6	%	$	34,569		$	31,437		10.0	%
Operating Expenses (in millions)	13,534			12,591			7.5	%	27,065			25,186			7.5	%	15,683			13,890			12.9	%	31,276			27,783			12.6	%
Operating Profit (in millions)	$	2,216		$	2,038		8.7	%	$	4,000		$	3,861		3.6	%	$	1,773		$	2,037		(13.0	)%	$	3,293		$	3,654		(9.9	)%
Operating Margin	14.1		%	13.9		%			12.9		%	13.3		%			10.2		%	12.8		%			9.5		%	11.6		%
Average Daily Package Volume (in thousands)	18,580			17,687			5.0	%	18,561			17,761			4.5	%	19,148			18,582			3.0	%	19,271			18,565			3.8	%
Average Revenue Per Piece	$	10.75		$	10.57		1.7	%	$	10.63		$	10.48		1.4	%	$	11.26		$	10.76		4.6	%	$	11.11		$	10.64		4.4	%
Net Income (in millions)	$	1,384		$	1,269		9.1	%	$	2,542		$	2,400		5.9	%	$	1,485		$	1,384		7.3	%	$	2,830		$	2,550		11.0	%
Basic Earnings Per Share	$	1.59		$	1.43		11.2	%	$	2.91		$	2.71		7.4	%	$	1.71		$	1.59		7.5	%	$	3.27		$	2.92		12.0	%
Diluted Earnings Per Share	$	1.58		$	1.43		10.5	%	$	2.90		$	2.69		7.8	%	$	1.71		$	1.58		8.2	%	$	3.25		$	2.91		11.7	%

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Items Affecting Comparability

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



	Three Months Ended June 30:					Six Months Ended June 30:
Non-GAAP Adjustments	2018			2017		2018			2017
Operating Expenses:
Transformation Strategy Costs	$	263		$	—	$	263		$	—
Total Adjustments to Operating Expenses	263			—		263			—
Income Tax Benefit from Transformation Strategy Costs	(63		)	—		(63		)	—
Total Adjustments to Net Income	$	200		$	—	$	200		$	—

Transformation strategy costs described in note 16 to the unaudited consolidated financial statements have been excluded from comparisons of "adjusted" compensation and benefits, other operating expenses, operating profit, operating margin, income tax expense and effective tax rate. The pre-tax transformation strategy costs totaled $263 million ($200 million after-tax), and reflect voluntary retirement plan severance costs of $192 million and other costs of $71 million. The income tax effects of the transformation strategy costs are calculated by multiplying the amount of the adjustments by the statutory tax rates applicable in each tax jurisdiction.

We believe this adjusted information provides useful comparison of year-to-year ongoing operating performance without considering the short-term impact of transformation strategy costs. We evaluate the performance of our businesses on an adjusted basis.

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Results of Operations - Segment Review

The results and discussions that follow are reflective of how our executive management monitors the performance of our reporting segments.

We supplement the reporting of our financial information determined under generally accepted accounting principles (“U.S. GAAP”) with certain non-GAAP financial measures including, as applicable, "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, other pension income or expense, income tax expense and effective tax rate. We believe that these adjusted financial measures provide meaningful information to assist investors and analysts in understanding our financial results and assessing our prospects for future performance. We believe these adjusted financial measures are important indicators of our recurring results of operations because they exclude items that may not be indicative of, or are unrelated to, our underlying operating results, and provide a useful baseline for analyzing trends in our underlying businesses. Additionally, these adjusted financial measures are used internally by management for the determination of incentive compensation awards, business unit operating performance analysis and business unit resource allocation.

Non-GAAP financial measures should be considered in addition to, and not as an alternative for, our reported results prepared in accordance with U.S. GAAP. Our non-GAAP financial information does not represent a comprehensive basis of accounting. Therefore, our non-GAAP financial information may not be comparable to similarly titled measures reported by other companies.

We supplement the reporting of our revenue, revenue per piece and operating profit with similar non-GAAP measures that exclude the period-over-period impact of foreign currency exchange rate changes and hedging activities. We believe currency-neutral revenue, revenue per piece and operating profit information allows users of our financial statements to understand growth trends in our products and results. We evaluate the performance of our International Package and Supply Chain & Freight businesses on a currency-neutral basis.

Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reported U.S. dollar revenue, revenue per piece and operating profit by the current period average exchange rates to derive current period local currency revenue, revenue per piece and operating profit. The derived current period local currency revenue, revenue per piece and operating profit are then multiplied by the average foreign exchange rates used to translate the comparable results for each month in the prior year period (including the period over period impact of foreign currency revenue hedging activities). The difference between the current period reported U.S. dollar revenue, revenue per piece and operating profit and the derived current period U.S. dollar revenue, revenue per piece and operating profit is the period over period impact of currency fluctuations.

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. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our business. There were no significant changes in our expense allocation methodologies during ~~2017~~2018 or ~~2016.~~2017.

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U.S. Domestic Package Operations


	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change		Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2017			2016			%		2017			2016			%		2018			2017			%		2018			2017			%
Average Daily Package Volume (in thousands):
Next Day Air	1,395			1,311			6.4	%	1,356			1,289			5.2	%	1,424			1,396			2.0	%	1,430			1,355			5.5	%
Deferred	1,253			1,129			11.0	%	1,249			1,163			7.4	%	1,226			1,253			(2.2	)%	1,261			1,248			1.0	%
Ground	13,019			12,489			4.2	%	13,016			12,606			3.3	%	13,420			13,012			3.1	%	13,483			13,011			3.6	%
Total Avg. Daily Package Volume	15,667			14,929			4.9	%	15,621			15,058			3.7	%	16,070			15,661			2.6	%	16,174			15,614			3.6	%
Average Revenue Per Piece:
Next Day Air	$	19.62		$	19.51		0.6	%	$	19.68		$	19.47		1.1	%	$	20.08		$	19.61		2.4	%	$	19.74		$	19.70		0.2	%
Deferred	12.72			12.44			2.3	%	12.45			12.19			2.1	%	13.76			12.72			8.2	%	13.31			12.46			6.8	%
Ground	8.37			8.11			3.2	%	8.33			8.10			2.8	%	8.67			8.37			3.6	%	8.59			8.33			3.1	%
Total Avg. Revenue Per Piece	$	9.72		$	9.44		3.0	%	$	9.64		$	9.39		2.7	%	$	10.07		$	9.72		3.6	%	$	9.94		$	9.65		3.0	%
Operating Days in Period	64			64					128			128					64			64					128			128
Revenue (in millions):
Next Day Air	$	1,752		$	1,637		7.0	%	$	3,416		$	3,212		6.4	%	$	1,830		$	1,752		4.5	%	$	3,614		$	3,417		5.8	%
Deferred	1,020			899			13.5	%	1,990			1,814			9.7	%	1,080			1,020			5.9	%	2,149			1,990			8.0	%
Ground	6,973			6,479			7.6	%	13,874			13,073			6.1	%	7,444			6,969			6.8	%	14,818			13,870			6.8	%
Total Revenue	$	9,745		$	9,015		8.1	%	$	19,280		$	18,099		6.5	%	$	10,354		$	9,741		6.3	%	$	20,581		$	19,277		6.8	%
Operating Expenses (in millions)	$	8,350		$	7,782		7.3	%	$	16,809		$	15,764		6.6	%
Operating Expenses (in millions):
Operating Expenses																	$	9,415		$	8,486		10.9	%	$	18,886		$	17,072		10.6	%
Transformation Strategy Costs																	(196		)	—			N/A		(196		)	—			N/A
Adjusted Operating Expense																	$	9,219		$	8,486		8.6	%	$	18,690		$	17,072		9.5	%
Operating Profit (in millions) and Operating Margin:
Operating Profit (in millions)	$	1,395		$	1,233		13.1	%	$	2,471		$	2,335		5.8	%	$	939		$	1,255		(25.2	)%	$	1,695		$	2,205		(23.1	)%
Adjusted Operating Profit																	$	1,135		$	1,255		(9.6	)%	$	1,891		$	2,205		(14.2	)%
Operating Margin	14.3		%	13.7		%			12.8		%	12.9		%			9.1		%	12.9		%			8.2		%	11.4		%
Adjusted Operating Margin																	11.0		%	12.9		%			9.2		%	11.4		%

Revenue

The change in overall revenue was impacted by the following factors in ~~2017~~2018 compared with the corresponding period of ~~2016:~~2017:

Volume
Rates /
Product Mix

Fuel
Surcharge

Total Revenue
Change
Net Revenue Change Drivers:
Second quarter 2017 vs. 2016 4.9 % 2.0 % 1.2 % 8.1 %
Year-to-date 2017 vs. 2016 3.7 % 1.9 % 0.9 % 6.5 %



	Volume		Rates / Product Mix		Fuel Surcharge		Total Revenue Change
Revenue Change Drivers:
Second quarter 2018 vs. 2017	2.6	%	2.1	%	1.6	%	6.3	%
Year-to-date 2018 vs. 2017	3.6	%	1.8	%	1.4	%	6.8	%

Volume

Our overall volume increased in the second quarter and year-to-date periods of ~~2017~~2018 compared with ~~2016,~~2017, largely due to continued growth in overall retail sales, of which e-commerce continues to represent a larger percentage of the total ~~growth.~~ growth. Growth was focused within the retail, healthcare, manufacturing and automotive industry verticals.

Business-to-consumer shipments, which represented ~~more than 47%~~approximately 49% of the total U.S. Domestic Package volume ~~grew more than 10%~~ for the quarter, grew 7% (up 8.7% year-to-date) and drove overall increases in both air and ground shipments. Business-to-business shipments ~~increased~~decreased slightly ~~in the second quarter of 2017 compared with 2016, largely due to increased volume from the retail industry and the use of our solutions for returns shipping.~~

~~Among our air products, volume increased~~ in the second quarter and year-to-date periods of ~~2017 for both our Next Day Air and deferred services. Solid air volume growth continued for those products most aligned~~2018 compared with business-to-consumer shipping, including our residential Next Day Air Saver and residential Second Day Air package products as consumers continue to demand faster delivery options. This growth was slightly offset by a decline in Next Day Air letter volume, partly due to declines in the professional services industry as a result of continued growth in digitization.

The increase in ground volume in the second quarter and year-to-date periods of 2017 was driven by growth in residential ground and SurePost volume, which benefited from continued demand for e-commerce. Business-to-business shipments increased slightly in the quarter, driven by increased volume from returns.2017.

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Among our air products, volume increased in the second quarter and year-to-date periods of 2018 for our Next Day Air services. Solid air volume growth continued for those products most aligned with business-to-consumer shipping, including our residential Next Day Air, Next Day Air Saver and residential Three Day Select package products, as consumers continue to demand faster and more economical delivery options. This growth was slightly offset by declines in residential Saver letter and Second Day package volume due to shifts in customer preferences. Commercial air product volume decreased slightly for both the second quarter and year-to-date periods of 2018 compared to 2017.

The increase in ground volume in the second quarter and year-to-date periods of 2018 was driven by growth in residential Ground and SurePost volume, which benefited from continued e-commerce demand. Business-to-business shipments decreased slightly in the second quarter and year-to-date periods of 2018 compared with 2017.

Rates and Product Mix

Overall revenue per piece increased ~~3.0%~~3.6% for the second quarter of ~~2017 (2.7%~~2018 (3.0% year-to-date) compared with the same period of ~~2016~~2017 and was impacted by changes in base rates, customer and product mix and fuel surcharge rates.

Revenue per piece for ground and air products was positively impacted by a base rate increase on December ~~26, 2016.~~24, 2017. UPS Ground rates and UPS Air services rates increased an average net 4.9%. Additionally, effective ~~January 8, 2017,~~June 4, 2018, we ~~changed~~increased the ~~dimensional weight calculation~~surcharge for ~~packages subject to UPS daily rates.~~Over Maximum Limits and Oversize Pallet Handling and a shipping charge correction audit fee will be assessed.

In the first quarter of 2017, we began our expanded Saturday ground operations to several metropolitan areas in the U.S. As of June 2018, Saturday service is available in approximately 5,000 cities and towns in the United States covering over 50% of the population. A Saturday pickup ~~is available for shipments in select areas. A Saturday~~ stop charge ~~that varies depending on the pickup service selected~~ went into effect on May 1, 2017 and ~~will be applied any time a Saturday~~varies depending on the pickup ~~is requested.~~service selected.

Revenue per piece for ~~both~~ our Next Day Air ~~and deferred~~ services increased in the second quarter and year-to-date periods of ~~2017~~2018 compared with ~~2016. All products were positively impacted by higher fuel surcharge rates.~~2017. The increase in Next Day Air revenue per piece was driven by an increase in average weight per piece, partially offset by a shift in customer and product mix. We experienced slightly stronger growth in our business-to-business shipments, particularly our Next Day Air commercial package product. Deferred revenue per piece increased primarily due to an increase in base rates driven by pricing initiatives, an increase in average billable weight per piece ~~but was partially~~and higher fuel surcharges, which more than offset by an unfavorable shift in ~~product~~customer mix.

Revenue per piece for our deferred air services increased in the second quarter and year-to-date periods of 2018 compared with 2017 due to an increase in average billable weight per piece and a favorable shift in customer mix. All products were positively impacted by higher fuel surcharge rates for the second quarter and year-to-date periods of 2018.

Ground revenue per piece increased for the second quarter and year-to-date periods of ~~2017,~~2018, primarily due to base rate increases and ~~an increase in average weight per piece.~~higher fuel surcharge rates. These factors were partially offset by changes in customer and product mix, as we experienced faster volume growth in our SurePost ~~product.~~product and a decrease in average billable weight per piece.

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 June 30,				Change		Six Months Ended June 30,				Change
	2017		2016		% Point		2017		2016		% Point		2018		2017		% Point		2018		2017		% Point
Next Day Air / Deferred	4.6	%	2.8	%	1.8	%	4.7	%	3.0	%	1.7	%	7.8	%	4.6	%	3.2	%	7.4	%	4.7	%	2.7	%
Ground	5.5	%	4.4	%	1.1	%	5.4	%	4.7	%	0.7	%	6.8	%	5.5	%	1.3	%	6.6	%	5.4	%	1.2	%

Effective February 6, 2017, the U.S. fuel surcharge rates are reset weekly instead of monthly. In addition, the price indices have moved from a two month to a two week lag. Effective April 2, 2018, UPS created separate fuel surcharges for Domestic Air shipments and International Air export shipments. These surcharges are based on the U.S. Gulf Coast Jet Fuel price and are adjusted weekly. Additionally, effective June 11, 2018, the Ground Fuel Surcharge increased by 0.50% for all thresholds. These surcharges will continue to be based on the national U.S. Average On Highway Diesel Fuel price and adjusted weekly.

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Total domestic fuel surcharge revenue increased by ~~$111~~$153 million in the second quarter of ~~2017~~2018 as a result of higher fuel surcharge rates caused by increasing jet and diesel fuel prices, as well as the overall increase in package volume during the quarter. In addition to the factors above, fuel surcharge revenue was positively impacted by the changes to the fuel surcharge calculation, as the rates and price indices are updated more frequently to better align with prevailing market rates. On a year-to-date basis, fuel surcharge revenue increased by ~~$159~~$270 million.

Operating Expenses

Operating expenses for the segment increased ~~$568~~$929 million in the second quarter of ~~2017~~2018 compared with the same period of ~~2016 ($1.045 billion year-to-date) due to several factors. The increase was~~2017, which included $196 million of transformation strategy costs. Excluding the impact of transformation strategy costs, operating expenses for the segment increased $733 million in second quarter of 2018, primarily due to ~~increases in pick-up~~pickup and delivery costs ~~which grew $231 million, as well as~~(up $269 million), the ~~cost~~costs of operating our domestic integrated air and ground network ~~which~~(up $426 million) and the costs of package sorting (up $139 million), offset by a reduction in indirect operating costs (down $101 million) for the quarter. Higher pension expense and expansion of our technology-enabled network increased ~~$211 million ($411 million and $412 million, respectively, year-to-date).~~ expenses in the second quarter of 2018.

The growth in ~~pick-up~~pickup and delivery and network costs was ~~largely attributable to increased volume and~~impacted by several factors:

We incurred higher employee compensation and benefit costs largely resulting from volume growth, which ~~were~~ impacted by an increase in average daily ~~driver~~union labor hours (up ~~5.0%~~5.8%), scheduled union pay rate and benefit increases and growth in the overall size of the workforce due to facility expansions. Labor hour increases were also related to the significant expansion in Saturday operations. In addition, pension expense increased due to lower year end discount rates used to measure the pension benefit obligation, driving higher service costs.

We incurred higher fuel expense in the second quarter of 2018 primarily due to higher fuel prices, expansion of our air network and increased volume which resulted in higher fuel usage (an increase in package delivery miles driven of 4.8% and an increase in ~~employee healthcare expenses (due to headcount and contractual contribution rate increases to multiemployer plans)~~aircraft block hours of 14.7%). ~~These increases were partially offset by favorable workers' compensation results.~~

We ~~also~~ incurred higher costs associated with outside contract carriers primarily due to volume growth (including SurePost), higher fuel surcharges passed ~~onto~~to us by carriers and general rate increases. ~~Additionally, average daily aircraft block hours increased 7.7% for the quarter (5.4% year-to-date), which were driven by increased volume and modifications to our air network.~~

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~~RESULTS OF OPERATIONS~~

~~The remaining increase in~~On a year-to-date basis, operating expenses for the ~~quarter and~~segment increased $1.814 billion which included $196 million of transformation strategy costs. Excluding the impact of transformation strategy costs, operating expenses for the segment increased $1.618 billion for the year-to-date periods ~~was~~of 2018, largely due to pickup and delivery costs (up $609 million), network costs (up $804 million), the ~~costs~~cost of package sorting ~~which increased $52 million for the quarter ($92 million year-to-date) due to increased daily volume,~~(up $283 million) and a reduction in indirect operating costs ~~which~~(down $78 million). These expenses were primarily due to higher volume, increased ~~$68 million for the quarter ($110 million year-to-date). The increased expenses~~employee compensation costs, fuel prices and a 15.8% increase in the second quarter and year-to-date periods of 2017 were also driven by start-up costs of several investments underway to further expand and modernize our air and ground networks, as well as the costs of implementing Saturday operations in additional markets.average daily block hours.

Total cost per piece increased ~~2.3%~~8.1% for the second quarter of ~~2017~~2018 compared with the ~~second quarter~~same period of ~~2016 (2.8%~~2017 (6.8% year-to-date)~~, due~~ which includes transformation strategy costs of $196 million. The cost per piece increase was primarily driven by costs related to ~~a 70 basis point impact from fuel increases and~~ the ~~cost increases described previously. In order to contain costs, we continually adjust~~improvement of our air and ground networks, including additional aircraft leases to ~~better match~~improve our air service reliability, costs related to the implementation of Saturday operations in additional markets, new facility and technology projects and higher ~~volume levels. In addition, we continue to deploy and utilize technology to increase package sorting and delivery efficiency.~~pension expense. Costs were negatively impacted by rising fuel prices.

Operating Profit and Margin

Operating profit ~~increased $162~~decreased $316 million for the second quarter of ~~2017~~2018 compared with ~~2016 ($136~~2017 (down $510 million year-to-date), aswith operating ~~margin increased 60~~margins decreasing 380 basis points to ~~14.3%~~9.1% (down 10320 basis points to ~~12.8%~~8.2% year-to-date). ~~Overall~~Without the impact of transformation strategy costs, operating profit decreased $120 million for the second quarter and $314 million year-to-date with operating margins decreasing 190 basis points and 220 basis points, respectively. Net fuel had a slightly positive impact on operating profit. Higher purchased transportation costs due to volume growth ~~allowed us to better leverage our transportation network, resulting~~and an increase in ~~better pick-up and delivery density supported~~employee benefit costs driven by ~~the deployment of ORION. Operating~~lower pension discount rates further weighed on profits. Additionally, operating profit was ~~also positively~~negatively impacted by ~~the net impact~~costs related to continued investments in our air and ground networks, including implementation of ~~fuel, as fuel surcharge rates declined at a slower pace than fuel prices,~~Saturday operations in additional markets and ~~due to changes to the calculation~~new facility and technology projects. The benefits of ~~fuel surcharge rates discussed previously.~~

these projects will not be fully realized until future periods.

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International Package Operations


	Three Months Ended June 30,						Change			Six Months Ended June 30,						Change			Three Months Ended June 30,						Change			Six Months Ended June 30,						Change
	2017			2016			%			2017			2016			%			2018			2017			%			2018			2017			%
Average Daily Package Volume (in thousands):
Domestic	1,619			1,599			1.3		%	1,648			1,558			5.8		%	1,654			1,621			2.0		%	1,662			1,652			0.6		%
Export	1,294			1,159			11.6		%	1,292			1,145			12.8		%	1,424			1,300			9.5		%	1,435			1,299			10.5		%
Total Avg. Daily Package Volume	2,913			2,758			5.6		%	2,940			2,703			8.8		%	3,078			2,921			5.4		%	3,097			2,951			5.0		%
Average Revenue Per Piece:
Domestic	$	5.99		$	6.07		(1.3		)%	$	5.85		$	5.99		(2.3		)%	$	6.61		$	6.01		10.0		%	$	6.66		$	5.85		13.8		%
Export	29.22			31.36			(6.8		)%	28.67			30.90			(7.2		)%	30.14			29.16			3.4		%	29.50			28.65			3.0		%
Total Avg. Revenue Per Piece	$	16.31		$	16.70		(2.3		)%	$	15.88		$	16.54		(4.0		)%	$	17.50		$	16.31		7.3		%	$	17.24		$	15.88		8.6		%
Operating Days in Period	64			64						128			128						64			64						128			128
Revenue (in millions):
Domestic	$	621		$	621		—		%	$	1,233		$	1,195		3.2		%	$	700		$	623		12.4		%	$	1,416		$	1,236		14.6		%
Export	2,420			2,326			4.0		%	4,742			4,529			4.7		%	2,747			2,426			13.2		%	5,419			4,763			13.8		%
Cargo and Other	122			130			(6.2		)%	246			267			(7.9		)%	155			122			27.0		%	300			246			22.0		%
Total Revenue	$	3,163		$	3,077		2.8		%	$	6,221		$	5,991		3.8		%	$	3,602		$	3,171		13.6		%	$	7,135		$	6,245		14.3		%
Operating Expenses (in millions)	$	2,580		$	2,464		4.7		%	$	5,109		$	4,804		6.3		%
Operating Expenses (in millions):
Operating Expenses																			$	2,984		$	2,601		14.7		%	$	5,923		$	5,157		14.9		%
Transformation Strategy Costs																			(36		)	—						(36		)	—
Adjusted Operating Expenses																			$	2,948		$	2,601		13.3		%	$	5,887		$	5,157		14.2		%
Operating Profit (in millions) and Operating Margin:																			Operating Profit (in millions) and Operating Margin:
Operating Profit (in millions)	$	583		$	613		(4.9		)%	$	1,112		$	1,187		(6.3		)%	$	618		$	570		8.4		%	$	1,212		$	1,088		11.4		%
Adjusted Operating Profit																			$	654		$	570		14.7		%	$	1,248		$	1,088		14.7		%
Operating Margin	18.4		%	19.9		%				17.9		%	19.8		%				17.2		%	18.0		%				17.0		%	17.4		%
Adjusted Operating Margin																			18.2		%	18.0		%				17.5		%	17.4		%
Currency Benefit / (Cost) – (in millions)*:	Currency Benefit / (Cost) – (in millions)*:																		Currency Benefit / (Cost) – (in millions)*:
Revenue							$	(170	)							$	(340	)							$	113								$	306
Operating Expenses							56									107									(91		)							(262		)
Operating Profit							$	(114	)							$	(233	)							$	22								$	44
* Net of currency hedging; amount represents the change in currency translation compared to the prior year.	* Net of currency hedging; amount represents the change in currency translation compared to the prior year.																		* Net of currency hedging; amount represents the change in currency translation compared to the prior year.

Revenue

The change in overall revenue was impacted by the following factors in ~~2017~~2018 compared with the corresponding period of ~~2016:~~2017:

Volume
Rates /
Product Mix

Fuel
Surcharge
Currency
Total Revenue
Change
Net Revenue Change Drivers:
Second quarter 2017 vs. 2016 5.6 % (0.2 )% 2.9 % (5.5 )% 2.8 %
Year-to-date 2017 vs. 2016 8.8 % (1.9 )% 2.6 % (5.7 )% 3.8 %



	Volume		Rates / Product Mix		Fuel Surcharge		Currency		Total Revenue Change
Revenue Change Drivers:
Second quarter 2018 vs. 2017	5.4	%	1.3	%	3.3	%	3.6	%	13.6	%
Year-to-date 2018 vs. 2017	5.0	%	1.4	%	3.0	%	4.9	%	14.3	%

Volume

Our overall average daily volume increased in the second quarter and year-to-date ~~periods~~ of ~~2017~~2018 compared with ~~2016~~2017 with growth across ~~both~~ export ~~and~~products while domestic ~~products.~~products grew slightly. The growth was due to increased demand across a number of sectors, including retail, ~~healthcare~~high tech, industrial manufacturing and ~~industrial manufacturing. Additionally, business-to-consumer~~healthcare. Business-to-consumer shipments showed strong growth rates.

Export volume in the second quarter and year-to-date periods of 2017 grew across all major trade lanes, mainly driven by our European and Asian operations. Europe and Asia export volume showed significant growth to all regions, particularly in the Asia-to-U.S., Asia-to-Americas, Europe-to-U.S. and Europe-to-Americas trade lanes. Export volume into the U.S. grew in all trade lanes, led by the Asia and Europe regions. Export volume growth was strong across all major products, with a continued shift towards our premium express products, such as our Worldwide Express services, which outpaced the growth in our standard products.

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~~The increase~~Export volume in ~~domestic~~the second quarter of 2018 as well as year-to-date grew across most major trade lanes, mainly driven by our European operations. European export volume showed growth to all regions, particularly in the Europe-to-U.S., Europe-to-Americas and intra-Europe trade lanes. Export volume from the U.S. grew in all trade lanes, led by the Europe and Asia Pacific regions. Export volume growth was strong across most major products, with a continued shift towards our premium express products, such as Worldwide Express and Transborder Express services.

Domestic volume growth remained stable in the second quarter and year-to-date ~~periods of 2017 was driven by solid volume growth in several key markets in Europe, including the U.K., Italy, France, Netherlands and Poland.~~2018.

Rates and Product Mix

On December ~~26, 2016,~~24, 2017 we implemented an average 4.9% net increase in base and accessorial rates for international shipments originating in the United States. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market.

~~Foreign currency fluctuations had a significant unfavorable impact on revenue per piece for the second quarter and year-to-date periods of 2017 compared with 2016.~~ Total average revenue per piece ~~decreased 2.3%~~increased 7.3% in the second quarter of 2018 (8.6% year-to-date) compared to 2017, ~~(4.0% year-to-date),~~ primarily due to a ~~540~~350 basis point ~~reduction~~increase from ~~the impact of~~ currency ~~(550~~(480 basis point ~~reduction~~increase year-to-date). Additionally, ~~growth in shorter~~total average ~~trade lanes had a negative impact on~~ revenue per piece ~~during the second quarter of 2017 and year to date periods. These factors were partially offset~~was impacted by an increase in fuel surcharge revenue, as well as ~~an increase in base rates and~~ a favorable shift in product mix, as the growth in higher yielding premium products continued to exceed the growth in our standard products.

Export revenue per piece ~~decreased 6.8%~~increased 3.4% in the second quarter of ~~2017~~2018 (3.0% year-to-date) compared with ~~2016 (7.2% year-to-date),~~2017, primarily due to a ~~510~~250 basis point ~~reduction~~increase from ~~the impact of~~ currency ~~(530~~(340 basis point ~~reduction~~increase year-to-date) ~~and a shift in customer mix.~~. Additionally, export revenue per piece was ~~adversely~~ impacted ~~by shorter average trade lanes due to faster growth in intra-regional shipments. These factors were partially offset~~ by an increase in ~~base rates, higher~~ fuel ~~surcharges and double digit (revenue) growth of Worldwide Express products.~~surcharge revenue from commodity prices, offset by shifts in product mix.

Domestic revenue per piece ~~decreased 1.3%~~increased 10.0% in the second quarter of ~~2017~~2018 (13.8% year-to-date) compared with ~~2016 (2.3% year-to-date), primarily due to a 590 basis point reduction~~2017. Of the second quarter increase, 6.8% is from the impact of currency ~~(530 basis point reduction~~(9.9% year-to-date). The ~~currency impact was partially offset by an~~remaining increase ~~in base rates and~~is due to higher fuel surcharges.

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 increased ~~$97~~$118 million for the second quarter of ~~2017~~2018 ($219 million year-to-date) compared with ~~2016 ($168 million year-to-date),~~2017, due to volume increases and higher fuel ~~prices and pricing changes made to the fuel surcharge indices from a two month to a two week lag.~~prices.

Operating Expenses

Overall expenses increased by $383 million in the second quarter of 2018 ($766 million year-to-date) compared to 2017, including a $36 million increase in transformation strategy costs. Excluding the impact of the transformation strategy costs, operating expenses for the segment increased ~~$116~~$347 million in the second quarter of ~~2017~~2018 ($~~305~~730 million year-to-date) ~~compared with 2016. This increase was driven by~~. These increases are primarily due to currency exchange rate movements ($91 million second quarter and $262 million year-to-date) as well as increases in the costs of operating our air and ground networks and pickup and delivery costs from increased volumes and higher fuel ~~prices, but was partially offset by currency fluctuations.~~prices.

The costs of operating our international integrated air and ground network increased ~~$124~~$168 million for the second quarter of ~~2017~~2018 ($291 million year-to-date) compared with ~~2016 ($248 million year-to-date).~~2017. The increase in network costs ~~were~~was largely driven by higher fuel prices and a ~~4.0%~~1.6% increase in aircraft block hours in the second quarter of ~~2017 (3.2% increase~~2018 (2.7% year-to-date) ~~and higher fuel prices.~~. Additionally, ~~pick-up~~pickup and delivery costs increased ~~$54~~$112 million in the second quarter of ~~2017~~2018 ($267 million year-to-date) compared with ~~2016 ($95 million year-to-date),~~2017, largely due to higher fuel price and increased volume.

The remaining change in operating expenses in the second quarter of ~~2017~~2018 and year-to-date compared with ~~2016~~2017, was largely due to an increase in the costs of package sorting and ~~decreases~~an increase in indirect operating ~~cost.~~costs.

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Operating Profit and Margin

Operating profit ~~decreased $30~~increased $48 million in the second quarter of ~~2017~~2018 compared with ~~2016~~2017 ($75124 million year-to-date), ~~while~~with operating margin ~~decreased 150~~decreasing 80 basis points to ~~18.4% (190~~17.2% (down 40 basis points to ~~17.9%~~17% year-to-date). ~~Currency impacts~~Without the impact of ~~$114~~transformation strategy costs, operating profit increased $84 million for the second quarter and $160 million year-to-date with operating margin increasing 20 basis points and 10 basis points, respectively. The second quarter and year-to-date results were driven by higher yielding premium products, increased volume and revenue growth across all regions and the benefit of ~~2017 ($233~~currency exchange rate movements of $22 million ~~year-to-date) decreased operating profit due to volatility of both hedged~~ and ~~unhedged currencies.~~$44 million, respectively.

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Supply Chain & Freight Operations

Three Months Ended
June 30, Change Six Months Ended
June 30, Change
2017
2016 % 2017 2016 %
Freight LTL Statistics:
Revenue (in millions) $ 652
$ 600
8.7 % $ 1,270
$ 1,164
9.1 %
Revenue Per Hundredweight $ 23.62
$ 23.47
0.6 % $ 23.60
$ 23.36
1.0 %
Shipments (in thousands) 2,633
2,540
3.7 % 5,150
4,956
3.9 %
Shipments Per Day (in thousands) 41.1
39.7
3.7 % 40.2
38.7
3.9 %
Gross Weight Hauled (in millions of lbs) 2,762
2,556
8.1 % 5,381
4,982
8.0 %
Weight Per Shipment (in lbs) 1,049
1,006
4.3 % 1,045
1,005
4.0 %
Operating Days in Period 64
64
128
128

Revenue (in millions):
Forwarding and Logistics $ 1,893
$ 1,659
14.1 % $ 3,720
$ 3,245
14.6 %
Freight 753
693
8.7 % 1,462
1,349
8.4 %
Other 196
185
6.0 % 382
363
5.2 %
Total Revenue $ 2,842
$ 2,537
12.0 % $ 5,564
$ 4,957
12.2 %
Operating Expenses (in millions): $ 2,604
$ 2,345
11.0 % $ 5,147
$ 4,618
11.5 %
Operating Profit (in millions): $ 238
$ 192
24.0 % $ 417
$ 339
23.0 %
Operating Margin 8.4 % 7.6 % 7.5 % 6.8 %
Currency Benefit / (Cost) – (in millions)*: $ $
Revenue $ (14 ) $ (24 )
Operating Expenses 14
23
Operating Profit $ —
$ (1 )
* Amount represents the change in currency translation compared to the prior year.

In December 2016, we acquired Marken, a global provider of supply chain solutions to the life sciences industry and leader in clinical trials material storage and distribution. Marken's financial results are included in the above table within Forwarding and Logistics from the date of the acquisition, which has impacted the year-over-year comparability of revenue, operating expenses and operating profit.



	Three Months Ended June 30,						Change			Six Months Ended June 30,						Change
	2018			2017			%			2018			2017			%
Freight LTL Statistics:
Revenue (in millions)	$	726		$	654		11.0		%	$	1,387		$	1,270		9.2		%
Revenue Per Hundredweight	$	25.36		$	23.62		7.4		%	$	25.08		$	23.61		6.2		%
Shipments (in thousands)	2,639			2,639			—		%	5,107			5,149			(0.8		)%
Shipments Per Day (in thousands)	41.2			41.2			—		%	39.9			40.2			(0.8		)%
Gross Weight Hauled (in millions of lbs)	2,861			2,767			3.4		%	5,531			5,380			2.8		%
Weight Per Shipment (in lbs)	1,084			1,049			3.3		%	1,083			1,045			3.6		%
Operating Days in Period	64			64						128			128
Revenue (in millions):
Forwarding	$	1,659		$	1,347		23.2		%	$	3,264		$	2,613		24.9		%
Logistics	784			718			9.2		%	1,566			1,458			7.4		%
Freight	853			755			13.0		%	1,630			1,462			11.5		%
Other	204			195			4.6		%	393			382			2.9		%
Total Revenue	$	3,500		$	3,015		16.1		%	$	6,853		$	5,915		15.9		%
Operating Expenses (in millions):
Operating Expenses	$	3,284		$	2,803		17.2		%	$	6,467		$	5,554		16.4		%
Transformation Strategy Costs	(31		)	—						(31		)	—
Adjusted Operating Expenses:	$	3,253		$	2,803		16.1		%	$	6,436		$	5,554		15.9		%
Operating Profit (in millions) and Operating Margin:
Operating Profit (in millions):	$	216		$	212		1.9		%	$	386		$	361		6.9		%
Adjusted Operating Profit	$	247		$	212		16.5		%	$	417		$	361		15.5		%
Operating Margin	6.2		%	7.0		%				5.6		%	6.1		%
Adjusted Operating Margin	7.1		%	7.0		%				6.1		%	6.1		%
Currency Benefit / (Cost) – (in millions)*:
Revenue							$	29								$	80
Operating Expenses							(31		)							(81		)
Operating Profit							$	(2	)							$	(1	)
* Amount represents the change in currency translation compared to the prior year.

Revenue

Total revenue for the Supply Chain & Freight segment increased ~~$305~~$485 million for the second quarter of ~~2017~~2018 ($~~607~~938 million year-to-date) compared to ~~2016.~~2017.

Forwarding ~~and Logistics~~ revenue increased ~~$234~~$312 million in the second quarter of ~~2017~~2018 ($~~475~~651 million year-to-date) compared with ~~2016,~~2017, primarily due to increased truckload brokerage freight volume as well as tonnage increases and sell price improvements in ~~both~~our international air freight forwarding business. Revenue in our truckload brokerage business was driven by robust demand and tight capacity in the truckload brokerage market. The increases in our international air freight forwarding business were driven by rising demand, with the Asia-to-U.S lane experiencing particularly strong growth. Our North American air freight forwarding ~~businesses, which were impacted by improving overall market demand. This was partially offset by lower sell rates and currency exchange rate movements. Revenue for our logistics products increased~~business showed a slight increase in revenues in the second quarter of 2018 and year-to-date, ~~periods of 2017 compared with 2016,~~ as ~~we experienced growth~~decreases in ~~our mail services, retail and aerospace solutions; however this was partially~~tonnage were offset by ~~the adverse impact of currency exchange rates and declines among our high tech customers. Additionally, the Marken acquisition in 2016 and~~higher prices.

Logistics revenues increased ~~Coyote freight volume movement contributed to increased revenue.~~

~~UPS Freight revenue increased $60~~by $66 million in the second quarter of ~~2017~~2018 ($~~113~~108 million year-to-date)~~, driven by increases in tonnage and shipments. These increases were impacted by an overall improvement in market demand and customer mix. LTL revenue per hundredweight increased slightly~~ compared with 2017, as ~~LTL base rate increases, averaging 4.9%, took effect September 19, 2016. Additionally, effective June 26, 2017, LTL base rates increased by an additional 4.9% for certain shipments~~we experienced growth in the ~~U.S., Canada~~retail, healthcare and ~~Mexico. Fuel surcharge revenue also increased $15 million in the second quarter ($34 million year-to-date), due to changes in overall LTL shipment volume and diesel fuel prices.~~manufacturing sectors.

Revenue for the other businesses within Supply Chain & Freight increased $11 million ($19 million year-to-date) due to revenue growth from UPS Capital and UPS Customer Solutions, as well as service contracts with the U.S. Postal Service.

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UPS Freight revenue increased $98 million in the second quarter of 2018 ($168 million year-to-date) driven by increases in average weight per shipment from improved customer mix due to middle market growth. LTL revenue per hundredweight increased 7.4% during the second quarter (6.2% year-to-date) as LTL base rate increases for certain shipments in the U.S., Canada and Mexico, averaging 5.9%, took effect March 26, 2018. Fuel surcharge revenue also increased $29 million in the second quarter ($49 million year-to-date), due to changes in overall LTL shipment volume and diesel fuel prices.

Operating Expenses

Total operating expenses for the Supply Chain & Freight segment increased ~~$259~~$481 million in the second quarter of ~~2017~~2018 ($~~529~~913 million year-to-date) compared to ~~2016.~~

~~Forwarding and Logistics~~2017. Excluding the $31 million impact related to transformation strategy costs, operating expenses increased ~~$208~~$450 million in the second quarter of 2018 ($882 million year-to-date).

Forwarding operating expenses increased $315 million for the second quarter of ~~2017~~2018 ($~~422~~644 million year-to-date) compared with ~~2016,~~2017. Prior year operating expenses for the second quarter and year-to-date periods of 2017 included a $20 million favorable legal settlement. Excluding costs related to the transformation strategy, forwarding operating expenses increased $310 million for the second quarter of 2018 ($639 million year-to-date) compared with 2017, largely due to increased purchased transportation and the acquisition of Marken, partially offset by operating efficiencies, impacts of a second quarter $20 million favorable legal settlement and the impact of currency exchange rate movements.transportation. Purchased transportation expense increased ~~$209~~$252 million in the second quarter of ~~2017~~2018 ($~~410~~544 million year-to-date) compared to ~~2016,~~2017 primarily due to ~~the acquisition of Marken, as well as~~ increased ~~Coyote~~truckload brokerage freight ~~movement~~volume and the resulting ~~increased fuel surcharges~~costs passed to us from outside transportation providers. Increased tonnage and ~~third party~~third-party air carrier procurement rates in our North American and international air freight forwarding ~~business and increased volume and rates for mail services~~businesses also contributed to the increase in purchased transportation expenses.

Logistics operating expenses increased $69 million for the second quarter of 2018 ($102 million year-to-date) compared with 2017. Excluding costs related to the transformation strategy, logistics operating expenses increased $53 million for the second quarter of 2018 ($86 million year-to-date) compared with 2017. The increases were driven by purchased transportation expense, costs associated with retail facility expansions and strategic information technology investments.

UPS Freight operating expenses increased ~~$43~~$99 million for the second quarter of ~~2017~~2018 ($94172 million year-to-date) compared with 2017. Excluding costs related to ~~2016. Total cost per LTL shipment~~the transformation strategy, UPS Freight operating expenses increased ~~2.4%~~$93 million for the second quarter of ~~2017 (3.4%~~2018 ($166 million year-to-date) compared ~~with 2016.~~to 2017. The increase in operating ~~expense~~expenses was largely due to costs associated with operating our linehaul network ($2934 million over the prior year ~~quarter~~ and ~~$60~~$61 million year-to-date) and increases in ~~pick-up~~pickup and delivery costs ($1330 million over the prior year ~~quarter~~ and ~~$32~~$45 million year-to-date). The linehaul network ~~costs~~ and ~~pick-up~~pickup and delivery ~~expenses~~costs were driven by higher fuel ~~cost~~costs and ~~higher~~ expense for outside transportation carriers, ~~(largely due to LTL volume growth and~~including fuel surcharges passed on to us by outside ~~carriers).~~

~~Operating~~carriers. Additionally, expenses ~~for the other businesses within Supply Chain & Freight~~associated with our ground-freight pricing product increased $8$21 million in ~~2017~~the second quarter ($1338 million year-to-date) ~~compared with 2016.~~due to increases in overall volume.

Operating Profit and Margin

Total operating profit for the Supply Chain & Freight segment increased ~~$46~~$4 million in the second quarter of ~~2017~~2018 ($7825 million year-to-date) compared with ~~2016.~~

~~Operating~~2017, which includes a $31 million impact related to transformation strategy costs. Excluding the impact of transformation strategy, operating profit for the ~~Forwarding and Logistics units~~second quarter increased ~~$26~~$35 million in($56 million year-to-date). The prior year operating profit for the second quarter and year-to-date periods of 2017 ~~($53~~was impacted by a $20 million year-to-date) compared with 2016. Operating profit and margins for the North American air freight business improved due to tonnage growth and widening of the spreads between the rates we charge our customers and the rates we procure capacity from third party air carriers. Operating profit and margins in our international air freight forwarding business remained flat. Ocean freight profitability was flat as lower shipment volume and margin compression due to over capacity were offset by operating expense reductions. Operating profit for the logistics units improved from 2017 compared to 2016, due to strong performance in the U.S. as well as within our mail services.

UPS Freight operating profit increased $17 million in the second quarter of 2017 ($19 million year-to-date) compared with 2016, due to increased volume, tonnage and pricing, partially offset by increased purchased transportation costs.

~~The combined operating profit for all of our other businesses in this segment increased $3 million in 2017 ($6 million year-to-date) compared to 2016.~~favorable legal settlement.

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Consolidated Operating Expenses


	Three Months Ended June 30,				Change			Six Months Ended June 30,				Change			Three Months Ended June 30,					Change			Six Months Ended June 30,					Change
	2017		2016		%			2017		2016		%			2018			2017		%			2018			2017		%
Operating Expenses (in millions):
Compensation and Benefits	$	8,105	$	7,738	4.7		%	$	16,236	$	15,591	4.1		%	$	9,024		$	8,284	8.9		%	$	18,069		$	16,595	8.9		%
Voluntary Retirement Program															(192		)	—					(192		)	—
Adjusted Compensation and Benefits															8,832			8,284		6.6		%	17,877			16,595		7.7		%

Repairs and Maintenance	392		383		2.3		%	782		764		2.4		%	423			392		7.9		%	857			782		9.6		%
Depreciation and Amortization	562		555		1.3		%	1,116		1,107		0.8		%	542			562		(3.6		)%	1,138			1,116		2.0		%
Purchased Transportation	2,443		2,070		18.0		%	4,809		4,094		17.5		%	3,209			2,614		22.8		%	6,354			5,159		23.2		%
Fuel	616		505		22.0		%	1,237		939		31.7		%	852			616		38.3		%	1,602			1,237		29.5		%
Other Occupancy	264		245		7.8		%	563		514		9.5		%	321			264		21.6		%	682			563		21.1		%
Other Expenses	1,152		1,095		5.2		%	2,322		2,177		6.7		%	1,312			1,158		13.3		%	2,574			2,331		10.4		%
Total Other Expenses															6,659			5,606		18.8		%	13,207			11,188		18.0		%
Transformation Strategy Costs															(71		)	—					(71		)	—
Adjusted Total Other Expenses															6,588			5,606		17.5		%	13,136			11,188		17.4		%

Total Operating Expenses	$	13,534	$	12,591	7.5		%	$	27,065	$	25,186	7.5		%	$	15,683		$	13,890	12.9		%	$	31,276		$	27,783	12.6		%
Adjusted Total Operating Expenses															$	15,420		$	13,890	11.0		%	$	31,013		$	27,783	11.6		%


Currency (Benefit) / Cost - (in millions)*					$	(70	)					$	(130	)						$	122							$	343
* Amount represents the change in currency translation compared to the prior year.	* Amount represents the change in currency translation compared to the prior year.														* Amount represents the change in currency translation compared to the prior year.

Compensation and Benefits

~~Employee payroll costs~~Total compensation and benefits increased ~~$278~~$740 million for the second quarter of ~~2017~~2018 ($~~421~~1.474 billion year-to-date) compared with 2017. Excluding the impact of the voluntary retirement program costs of $192 million, compensation and benefits costs increased $548 million for the second quarter of 2018 ($1.282 billion year-to-date).

Employee payroll costs increased $332 million for the second quarter of 2018 ($805 million year-to-date) compared with ~~2016~~2017, largely due to higher U.S. domestic hourly and management compensation costs. Total compensation costs increased ~~5.9%~~6.7% for the second quarter ~~2017 (4.4% year-to-date), while consolidated average daily volume growth was 5.0% (4.5%~~of 2018 (8.1% year-to-date). U.S. ~~domestic~~Domestic compensation costs for hourly employees increased largely due to ~~contractual union wage increases,~~higher volume growth, which drove an increase in headcount ~~increases~~ and a ~~6.5%~~5.8% increase in average daily union labor hours ~~(4.4%~~(7.3% increase year-to-date)., in addition to contractual union wage increases. Compensation costs for management employees increased primarily due to merit salary increases and growth in the overall size of the ~~workforce.~~workforce due to facility expansions.

Benefits expense increased ~~$89~~$408 million for the second quarter of ~~2017~~2018 ($~~224~~669 million year-to-date) compared with ~~2016~~2017. Excluding the impact of the voluntary retirement program cost of $192 million, benefits costs increased $216 million for the second quarter of 2018 ($477 million year-to-date) primarily due to the following factors:

Health and welfare costs increased ~~$59~~$75 million for the second quarter ($~~114~~153 million year-to-date), largely due to increased contributions to multiemployer plans resulting from contractual contribution rate increases and an overall increase in the size of the workforce.

Pension and retirement benefits expense increased ~~$16~~$83 million for the second quarter ($24157 million year-to-date), primarily due to ~~additional expense for~~contractually mandated contribution rate increases to multiemployer pension plans ~~which were impacted by contractual contribution rate increases~~ and lower pension discount rates at year-end, driving an ~~overall~~ increase in ~~the size of the workforce.~~service costs. These increases were ~~mostly~~partially offset by ~~a decrease in cost from asset earnings on discretionary contributions to company sponsored plans and a favorable mortality assumption change, net of higher costs~~lower Pension Benefit Guaranty Corporation premiums due to ~~lower discount rates.~~prior voluntary pension contributions, as well as the amendment of the UPS Retirement Plan in the prior year.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Vacation, holiday, bonus, excused absence, payroll tax and other expenses increased ~~$49~~$72 million for the second quarter ($~~110~~159 million year-to-date), ~~due to~~primarily driven by salary increases and growth in the overall size of the workforce.

Workers' compensation expense decreased ~~$35~~$14 million infor the second quarter ~~($24~~(increased $8 million year-to-date)~~, as we experienced a more favorable quarterly actuarial adjustment. This decrease was partially offset by increases in work hours, medical trends and wage increases.~~. Insurance reserves are established ~~for~~based on actuarial estimates of the loss that we will ultimately incur on reported workers' compensation claims, as well as estimates of claims that have been incurred but not reported, and take into account a number of factors including our history of claim losses, payroll growth and the impact of safety improvement initiatives.

Repairs and Maintenance

The $31 million increase in repairs and maintenance expense for the second quarter of 2018 ($75 million year-to-date) compared with 2017 was primarily due to routine repairs to buildings and facilities and maintenance of our transportation equipment and aircraft.

Depreciation and Amortization

Depreciation and amortization expense was impacted by various factors including the timing of projects coming online.

Purchased Transportation

The $595 million increase in purchased transportation expense charged to us by third-party air, rail, ocean and truck carriers for the second quarter of 2018 ($1.195 billion year-to-date) compared with 2017 was primarily driven by the following factors:

Forwarding and logistics expense increased $295 million in the second quarter of 2018 ($604 million year-to-date) compared to 2017, primarily due to increased truckload brokerage freight loads per day and increased tonnage and rates in our North American and international air freight forwarding businesses. The increase for the second quarter and year-to-date periods of 2018 is also due to higher fuel surcharges passed on to us by outside carriers.

International Package expense increased $83 million in the second quarter of 2018 ($173 million year-to-date) compared to 2017, primarily due to the increased usage of third-party carriers (due to higher volume) and an unfavorable impact from currency exchange rate movements. Additionally, increased fuel surcharges passed on to us by outside carriers increased during the second quarter and year-to-date periods of 2018.

U.S. Domestic Package expense increased $115 million for the second quarter of 2018 ($216 million year-to-date) compared to 2017, primarily due to increased volume (including SurePost), as well as higher rates and fuel surcharges passed to us from outside contract carriers and rail carriers.

UPS Freight expense increased $47 million in the second quarter of 2018 ($96 million year-to-date) compared to 2017, primarily due to increases in our ground freight pricing product, LTL shipments and higher fuel surcharges passed to us from outside transportation providers.

We incurred additional purchased transportation expense of $56 million in the second quarter of 2018 ($106 million year-to-date) compared to 2017 related to leasing additional aircraft to handle increases in air volume and related higher jet fuel surcharges.

Fuel

The $236 million increase in fuel expense for the second quarter of 2018 ($365 million year-to-date) compared with 2017 was primarily due to higher jet fuel, diesel and unleaded gasoline prices, which increased fuel expense by $197 million ($313 million year-to-date). Additionally, increased fuel consumption, primarily due to increases in total aircraft block hours and Domestic and International Package delivery miles driven, increased expense by $36 million in the second quarter of 2018 ($85 million year-to-date).

Other Occupancy

Other occupancy expense increased $57 million in the second quarter of 2018 ($119 million year-to-date) compared to 2017, primarily due to an increase in real estate and other property taxes, utility costs and rent related to the expansion of new facilities.

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~~Repairs and Maintenance~~Other Expenses

The $9$154 million increase in ~~repairs and maintenance expense for the second quarter of 2017 ($18 million year-to-date) compared with 2016 was primarily due to routine repairs to buildings and facilities.~~

~~Depreciation and Amortization~~

~~Depreciation and amortization expense increased $7 million~~other expenses in the second quarter of ~~2017~~2018 ($9 million year-to-date)compared with 2016, primarily due to the following 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 facilities due to facility automation and capacity expansion projects and (3) amortization expense of intangible assets acquired from Marken. These factors were largely offset by a decrease in amortization expense related to longer lived internally developed capitalized software.

~~Purchased Transportation~~

~~The $373 million increase in purchased transportation expense charged to us by third-party air, rail, ocean and truck carriers for the second quarter of 2017 ($715~~243 million year-to-date) compared with ~~2016~~2017 was primarily ~~driven by~~attributable to increases in transportation equipment rental, outside professional service costs, auto liability insurance, security protection, non-income based state and local taxes and data processing. Additionally, costs related to our transformation strategy contributed to the ~~following factors:~~

~~Expense for our Forwarding and Logistics businesses increased $209 million~~increase in the second quarter ~~($410 million year-to-date), primarily due to increased Coyote freight loads per day~~ and the resulting increased fuel surcharges passed to us from outside transportation providers; increased volume and rates for mail services and international air freight forwarding. Additionally, purchased transportation expense increased due to the acquisitionyear-to-date periods of ~~Marken in December 2016.~~

International Package expense increased $33 million in the second quarter ($82 million year-to-date), primarily due to the increased usage of third party carriers (higher volume) and higher fuel surcharges passed to us from outside transportation providers. These items were partially offset by the impact of currency exchange rate movements.

Expense for our U.S. Domestic Package segment increased $83 million for the second quarter ($141 million year-to-date), primarily due to increased volume, rates and higher fuel surcharges passed to us from outside contract carriers.

Expense for our UPS Freight business increased $36 million in the second quarter ($62 million year-to-date), due to an increase in LTL shipments and higher fuel surcharges passed to us from outside transportation providers.

~~Fuel~~

~~The $111 million increase in fuel expense for the second quarter of 2017 ($298 million year-to-date)~~2018 compared with 2016 was primarily due to higher jet fuel, diesel and unleaded gasoline prices, which increased fuel expense by $71 million ($234 million year-to-date). Additionally, increased alternative fuel costs and increased fuel consumption, primarily due to increases in total aircraft block hours and Domestic Package delivery miles driven, increased expense by $47 million in the second quarter of 2017 ($74 million year-to-date). These increases were partially offset by increased fuel efficiency.

~~Other Occupancy~~

Other occupancy expense increased $19 million in the second quarter of 2017 ($49 million year-to-date) as compared to 2016 primarily due to an increase in utility costs and the expansion in the number of facilities.

~~Other Expenses~~

~~The $57 million increase in other expense in the second quarter of 2017 ($145 million year-to-date) compared with 2016 was attributable to a number of factors:~~

~~Transportation equipment rental expense increased by $12 million in the second quarter of 2017 ($17 million year-to-date) and was affected by the growth in package volume.~~

Automotive liability insurance expense increased by $26 million in the second quarter of 2017 ($31 million year-to-date) largely due to more miles driven, medical rate trends and unfavorable severity experience trends.

We also incurred increases in several other expense categories, including bad debt expense, professional service fees, advertising and maintenance agreements, slightly offset by the impacts from a favorable legal settlement.2017.

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Other Income and (Expense)

The following table sets forth investment income and other and interest expense for the three and six months ended June 30, 2018 and 2017:


	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change		Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2017			2016			%		2017			2016			%		2018			2017			%		2018			2017			%
(in millions)
Investment income and other	$	14		$	8		75.0	%	$	29		$	25		16.0	%	$	302		$	193		56.5	%	$	596		$	388		53.6	%
Interest expense	$	(111	)	$	(94	)	18.1	%	$	(213	)	$	(187	)	13.9	%	$	(149	)	$	(111	)	34.2	%	$	(302	)	$	(213	)	41.8	%

Investment Income and Other

The ~~growth~~increase in investment income and other for the second quarter and year-to-date periods of ~~2017,~~2018, as compared to ~~2016, was~~2017 is primarily due to other pension income. Expected returns on plan assets increased as a ~~decrease in losses from fair value adjustments on real estate partnerships~~result of higher voluntary contributions and higher ~~yields~~actual returns on ~~invested~~plan assets ~~offset by foreign currency exchange rate movements.~~in 2017. Pension interest cost decreased as a result of lower year-end discount rates and the 2017 amendment of the UPS Retirement Plan described in note 7 to the unaudited consolidated financial statements.

Interest Expense

Interest expense increased in the second quarter and year-to-date periods of ~~2017,~~2018, as compared to ~~2016,~~2017, primarily due to an increase in ~~average outstanding commercial paper balances, an increase in~~ long-term debt balances and ~~higher~~ effective interest rates, ~~on senior notes.~~partially offset by higher capitalized interest related to several large construction projects.

Income Tax Expense

The following table sets forth income tax expense and our effective tax rate for the three and six months ended June 30, 2018 and 2017:


	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change		Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2017			2016			%		2017			2016			%		2018			2017			%		2018			2017			%
(in millions)
Income Tax Expense	$	735		$	683		7.6	%	$	1,274		$	1,299		(1.9	)%	$	441		$	735		(40.0	)%	$	757		$	1,279		(40.8	)%
Income Tax Impact of:
Transformation Strategy Costs																	63			—					63			—
Adjusted Income Tax Expense																	$	504		$	735		(31.4	)%	$	820		$	1,279		(35.9	)%
Effective Tax Rate	34.7		%	35.0		%			33.4		%	35.1		%			22.9		%	34.7		%			21.1		%	33.4		%
Adjusted Effective Tax Rate																	23.0		%	34.7		%			21.3		%	33.4		%

Our effective tax rate decreased to ~~34.7%~~22.9% in the second quarter of ~~2017~~2018 from ~~35.0%~~34.7% in the same period of ~~2016 (33.4%~~2017 (21.1% year-to-date in ~~2017~~2018 compared to ~~35.1%~~33.4% in the same period of ~~2016)~~2017). The decrease in our effective tax rate was primarily due to the impact of the Tax Cuts and Jobs Act which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. In ~~the first quarter of 2017, we adopted a new accounting standard that requires~~addition, the recognition of excess tax benefits related to share-based compensation in income tax ~~expense, which resulted in discrete tax benefits for the three months ended June 30, 2017 of $7 million ($62 million year-to-date) and~~ reduced our second quarter 2017 effective ~~tax~~ rate by 0.3% ~~(1.6% year-to-date)~~, with no effective rate impact during the second quarter of 2018 (1.3% year-to-date in 2018 compared to 1.6% in the same period of 2017). See note 2 ~~and note 14~~15 to the unaudited consolidated financial ~~statements.~~statements for additional information. Other factors that impacted our effective tax rate in the second quarter and year-to-date periods of 2018 compared with the same periods of 2017 include favorable resolutions of uncertain tax positions, favorable U.S. state and local tax law changes and favorable tax provisions enacted in the Bipartisan Budget Act of 2018.

As discussed in note 16 to the unaudited consolidated financial statements, we recognized pre-tax transformation strategy costs of $263 million in the second quarter of 2018. As a result, we recorded an income tax benefit of $63 million. This benefit was generated at a higher average tax rate than the 2018 U.S. federal statutory rate primarily due to the effect of the U.S. state and local taxes.

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Liquidity and Capital Resources

As of June 30, 2018, we had $4.934 billion in cash, cash equivalents and marketable securities. We believe that our current cash position, access to capital markets and cash flows generated from operations should be adequate not only for operating requirements but also to enable us to complete our capital expenditure programs, transformation strategy and to fund dividend payments, share repurchases and long-term debt payments through the next several fiscal years. We regularly evaluate opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund ongoing cash needs.

Cash Flows From Operating Activities

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


	Six Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2018			2017
Net income	$	2,542		$	2,400		$	2,830		$	2,550
Non-cash operating activities (a)	2,071			1,829			2,080			2,076
Pension and postretirement benefit contributions (UPS-sponsored plans)	(2,530		)	(89		)	(92		)	(2,530		)
Hedge margin receivables and payables	(456		)	136			(217		)	(456		)
Income tax receivables and payables	336			45			1,194			336
Changes in working capital and other non-current assets and liabilities	690			364			1,391			677
Other operating activities	(32		)	8			14			(32		)
Net cash from operating activities	$	2,621		$	4,693		$	7,200		$	2,621

___________________


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

Net cash from operating activities ~~decreased $2.072~~increased $4.579 billion inthrough the second quarter of ~~2017~~2018 compared ~~with 2016,~~to 2017, largely due to ~~higher~~lower pension and postretirement benefit contributions, ~~and reduced receipts of~~changes in hedge margin ~~collateral~~payables and receivables, increased net cash receipts from ~~counterparties.~~ income taxes and improvements in working capital.

We made ~~discretionary~~ contributions to our ~~three primary~~ company-sponsored pension and U.S. ~~pension~~postretirement medical benefit plans totaling ~~$2.446~~$2.530 billion ~~year-to-date~~during the six months of 2017, ~~with no comparable payment~~compared to $92 million in ~~2016.~~2018. The net hedge margin collateral ~~received from~~paid to our derivative counterparties decreased by ~~$592~~$239 million in ~~2017~~the first six months of 2018 relative to ~~2016,~~2017, due to ~~settlements and decreased~~the change in net fair value ~~asset positions~~ of ~~the~~our derivative contracts used in our currency and interest rate hedging programs. ~~These items were partially offset~~The net cash receipts from income taxes increased in the first six months of 2018 compared to 2017, primarily due to the timing of a $5.0 billion pension contribution made in December 2017 which resulted in a tax refund in the first quarter of 2018. Apart from the transactions described above, operating cash flow was impacted by ~~$142 million higher net income, $326 million~~ improvements in our working capital position and $291 million increase in net cash tax receipts. The improvement in our working capital position in 2017 was primarily driven by favorable changes in the timing of cash receipts and payments. Net cash receipts for income taxes increased in 2017 compared with 2016 and were impacted by the receipt of refunds and timing of estimated tax payments relative to changes in estimates for the underlying tax liabilities.position.

As of June 30, ~~2017,~~2018, our worldwide holdings of cash, cash equivalents and marketable securities ~~were $4.604~~was $4.934 billion, of which ~~$2.293~~$2.517 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 international profits represent previously untaxed earnings,~~All cash, cash equivalents and marketable securities held by ~~non-U.S.~~foreign subsidiaries ~~could~~are generally available for distribution to the U.S. without any U.S. federal income taxes. Any such distributions may 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~~foreign withholding and U.S. state taxes. When amounts earned by ~~non-U.S.~~foreign subsidiaries are expected to be indefinitely reinvested, no accrual for taxes is provided.

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Cash Flows From Investing Activities

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


	Six Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2018			2017
Net cash used in investing activities	$	(2,027	)	$	(1,794	)	$	(2,820	)	$	(2,025	)

Capital Expenditures:
Buildings and facilities	$	(1,083	)	$	(473	)
Buildings, facilities and plant equipment							$	(1,461	)	$	(1,083	)
Aircraft and parts	(332		)	(14		)	(741		)	(332		)
Vehicles	(329		)	(282		)	(275		)	(329		)
Information technology	(265		)	(194		)	(372		)	(265		)
	$	(2,009	)	$	(963	)
Total Capital Expenditures							$	(2,849	)	$	(2,009	)

Capital Expenditures as a % of Revenue	(6.5		)%	(3.3		)%	(8.2		)%	(6.4		)%

Other Investing Activities:
Proceeds from disposals of property, plant and equipment	$	14		$	11		$	35		$	14
Net (increase) decrease in finance receivables	$	(16	)	$	(13	)	$	(4	)	$	(16	)
Net (purchases), sales and maturities of marketable securities	$	27		$	(791	)	$	7		$	29
Cash paid for business acquisitions, net of cash and cash equivalents acquired	$	(57	)	$	(3	)	$	(2	)	$	(57	)
Other investing activities	$	14		$	(35	)	$	(7	)	$	14

We have commitments for the purchase of aircraft, vehicles, equipment and real estate to provide for anticipated future growth and the replacement of existing ~~capacity and anticipated future growth.~~capacity. We generally fund our capital expenditures with our cash from operations. Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions. We anticipate that our total capital expenditures for 2018 will be approximately $6.5 to $7.0 billion.

Capital spending on buildings, facilities and ~~facilities~~plant equipment increased in the first six months of ~~2017~~2018 in our U.S. and international package businesses, largely due to several facility automation and capacity expansion projects. ~~Capital~~Compared to 2017, capital spending on aircraft increased ~~in 2017 compared to 2016,~~ due to contract deposits on open aircraft orders ~~on 14 new Boeing 747-8F cargo aircraft and three previously owned Boeing 767-300 cargo aircraft,~~as well as final payments associated with ~~scheduled deliveries starting in 2017.~~the delivery of aircraft. Capital spending on information technology increased in the first six months of ~~2017 compared to the corresponding period of 2016, largely~~2018 due to ~~the timing~~further development of ~~purchases of hardware~~technology enabled enhancements and capitalized software projects. Capital spending on vehicles ~~increased~~decreased in the first six months of 2018, relative to 2017, ~~in our U.S. and international package businesses,~~ largely due to the timing of vehicle replacements.

~~Future capital spending will depend on a variety~~The proceeds from the disposal of ~~factors, including economic~~property, plant and ~~industry conditions. We anticipate that our capital expenditures for~~equipment increased in 2018 compared to 2017, ~~will be approximately $4.1 to $4.6 billion, which includes planned purchase deposits for aircraft on order.~~

~~The net change in finance receivables was primarily~~largely due to ~~growth in our cargo finance products offset by loan principal paydowns in our business credit and leasing portfolios. The purchases~~the disposal of owned equipment under an operating lease. Purchases and sales of marketable securities are largely determined by liquidity needs and the periodic rebalancing of investment types and will fluctuate from period to period.

~~Cash~~The cash paid for business acquisitions in 2018 was related to our acquisition of area franchise rights related to The UPS Store. The cash paid for business acquisitions during the first six months of 2017 ~~compared to 2016~~ was related to ~~our acquisition~~the purchases of Freightex ~~Ltd (2017), Nightline (2017)~~ and ~~area franchise rights related to The UPS Store (2016).~~Nightline. Other investing activities are impacted by changes in our non-current investments, ~~and restricted cash balances,~~ capital contributions into certain investment partnerships and various other items.

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Cash Flows From Financing Activities

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


	Six Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2018			2017
Net cash used in financing activities	$	(556	)	$	(2,584	)	$	(3,607	)	$	(556	)
Share Repurchases:
Cash expended for shares repurchased	$	(898	)	$	(1,329	)	$	(521	)	$	(898	)
Number of shares repurchased	8.4			13.3			(4.4		)	(8.4		)
Shares outstanding at period end	865			879			860			865
Percent reduction in shares outstanding	(0.3		)%	(0.8		)%
Percent increase (decrease) in shares outstanding							0.1		%	(0.3		)%
Dividends:
Dividends declared per share	$	1.66		$	1.56		$	1.82		$	1.66
Cash expended for dividend payments	$	(1,389	)	$	(1,327	)	$	(1,507	)	$	(1,389	)
Borrowings:
Net borrowings of debt principal	$	1,785		$	(25	)
Net borrowings (repayments) of debt principal							$	(1,433	)	$	1,785
Other Financing Activities:
Cash received for common stock issuances	$	132		$	147		$	125		$	132
Other financing activities	$	(186	)	$	(50	)	$	(271	)	$	(186	)
Capitalization:
Total debt outstanding at period end	$	18,074		$	14,366		$	22,711		$	18,074
Total shareowners’ equity at period end	1,274			2,650			2,356			1,283
Total capitalization	$	19,348		$	17,016		$	25,067		$	19,357
Debt to Total Capitalization %	93.4		%	84.4		%	90.6		%	93.4		%

We repurchased a total of ~~8.4~~4.4 million shares of class A and class B common stock for $511 million in the first six months of 2018, and 8.4 million shares for $901 million in the first six months of 2017 ($521 and ~~13.1~~$898 million ~~shares for $1.330 billion in the first six months of 2016 ($898 million and $1.329 billion~~ in repurchases for ~~2017~~2018 and ~~2016,~~2017, respectively, are reported on the statements of consolidated cash flows due to unsettled repurchases).

In May 2016, the Board of Directors approved a new share repurchase authorization of $8.0 billion, which has no expiration date. As of June 30, ~~2017,~~2018, we had ~~$5.253~~$3.828 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 approximately ~~$1.8~~$1.0 billion of shares in ~~2017.~~2018.

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 ~~$0.83~~$0.91 per share in ~~2017~~2018, compared with the previous ~~$0.78~~$0.83 quarterly dividend rate in ~~2016~~2017. We expect to continue the practice of paying regular cash dividends.

~~Issuance~~Issuances of debt in the first six months of 2018 and 2017 consisted primarily of commercial paper. Additionally, in 2017 we issued debt of fixed rate senior notes of $600 million, Canadian dollar denominated fixed rate senior notes of C$750 million ($547 million) and ~~floating rate~~floating-rate senior notes of ~~$400 million in May 2017 and $147 million in March 2017. Repayments~~$547 million. Repayment of debt in ~~the first~~ ~~six~~ ~~months of~~ ~~2017~~ ~~and~~ ~~2016~~2018 consisted primarily of ~~commercial paper.~~our $750 million 5.50% fixed-rate senior notes that matured in January 2018. In the first six months of 2017 there were no comparable repayments of fixed-rate or floating-rate senior notes. 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.

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We have classified our 5.50% senior notes due January 2018 with a principal balance $750 million, as a long-term liability, based on our intent and ability as of June 30, 2017 to refinance the debt. We have also classified certain floating rate senior notes that are putable by the note holders as a long-term liability, due to our intent and ability to refinance the debt if the put option is exercised by the note holders.

As of June 30, 2017, our commercial paper programs had $3.383 billion outstanding, which includes $2.299 billion and €951 million ($1.084 billion). The average balance of our U.S. dollar denominated commercial paper was $2.465 billion and the average interest rate paid was 0.73% during the six months ended June 30, 2017. The average balance of our euro denominated commercial paper was €806 million ($919 million) and the average interest rate was -0.38% during the six months ended June 30, 2017. The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. The following is a summary of our commercial paper program (in millions):

~~The variation in cash received from common stock issuances to employees was primarily due to the level of stock option exercises during the first~~ ~~six~~ ~~months of~~ ~~2017~~ ~~and~~ ~~2016~~.



	Functional currency outstanding balance at quarter-end		Outstanding balance at quarter-end ($)		Average balance outstanding		Average balance outstanding ($)		Average interest rate
2018
USD	$	2,343	$	2,343	$	2,547	$	2,547	1.63	%
EUR	€	160	187		€	164	$	199	(0.40	)%
Total			$	2,530

The cash outflows in other financing activities were impacted by several factors. ~~Cash~~Net cash inflows (outflows) from the premium payments and settlements of capped call options for the purchase of UPS class B shares were ~~$52~~$(19) and ~~$104~~$52 million during the first six months of ~~2017~~2018 and ~~2016~~2017, respectively. Cash outflows related to the repurchase of shares to satisfy tax withholding obligations on vested employee stock awards were ~~$232~~$250 and ~~$169~~$232 million during the first six months of ~~2017~~2018 and ~~2016~~2017, respectively.

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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.

Contractual Commitments

There have been no material changes to the contractual commitments described in Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 other than as described below.

We have contractual obligations and commitments for the purchase of aircraft, vehicles, technology equipment and building and leasehold improvements. New purchase commitments will provide additional capacity for increased demand for our air and ground network, hub automation and other expansion projects. Including these additional obligations, the expected cash outflow to satisfy our total purchase commitments iswill be as follows (in millions): ~~2017~~2018 (remaining) - ~~$1,562; 2018 - $1,851;~~$3,048; 2019 - ~~$744;~~$3,487; 2020 - ~~$253;~~$1,658; 2021 - ~~$45;~~$1,062; 2022 - $178; and thereafter - ~~$24.~~

~~Pension fundings represent voluntary contributions of $2.446 billion to our~~ qualified U.S. pension plans which were made in the first half of 2017. There are no anticipated required minimum cash contributions to our qualified U.S. pension plans (these plans are discussed further in note 6 ~~to the consolidated financial statements).~~$13.

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 67 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.

~~Table of Contents~~

~~UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND~~

~~RESULTS OF OPERATIONS~~

Collective Bargaining Agreements

Status of Collective Bargaining Agreements

See note 67 to the unaudited consolidated financial statements for a discussion of the status of our collective bargaining agreements.

Multiemployer Benefit Plans

See note 67 to the unaudited consolidated financial statements for a discussion of our participation in multiemployer benefit plans.

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.

Rate Adjustments

~~On June 19, 2017, we announced a new peak charge applicable during selected weeks in November~~Effective July 9, 2018, the UPS Tariff/Terms and ~~December 2017 for U.S. Residential, Large Packages~~Conditions of Service and ~~packages Over Maximum Limits. The new charge is designed to enable~~the UPS ~~to continue to offset some of the additional expenses incurred during significant volume surges.~~Rate and Service Guides have each been updated.


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. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. In order to manage the risk arising from these exposures, we utilize a variety of commodity, foreign exchange and interest rate forward contracts, options and swaps. A discussion of our accounting policies for derivative instruments and further disclosures ~~are~~is provided in note 1314 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, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Currency Derivatives	$	(38	)	$	302		$	46		$	(267	)
Interest Rate Derivatives	123			150			(18		)	58
Investment Market Price Derivatives	(1		)	(10		)	—			(16		)
	$	84		$	442		$	28		$	(225	)

Our market risks, hedging strategies and financial instrument positions at June 30, ~~2017~~2018 have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. In ~~2016,~~2018, we entered into several foreign currency forwards on the Euro, British Pound Sterling, Canadian Dollar, ~~Japanese Yen,~~ Mexican Peso and Singapore Dollar, and ~~Indian Rupee, as well as terminated~~had forwards ~~that expired during the first six months of 2017.~~and market price derivatives expire. We ~~entered into several~~had foreign currency options on the Euro, British Pound Sterling and Canadian Dollar ~~as well as terminated currency option positions~~ that expired during the first six months of 2017. We entered into new forwards to manage the market value fluctuations of certain investments in marketable securities, as well as terminated forwards that expired during the first six months of 2017.2018. The remaining fair value changes between December 31, ~~2016~~2017 and June 30, ~~2017~~2018 in the preceding table are primarily due to interest rate and foreign currency exchange rate ~~and market price changes~~fluctuations between those dates.

The foreign currency 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 ~~$138~~$82 million and were required to post ~~$19~~$22 million in cash collateral with our counterparties as of June 30, ~~2017.~~2018.

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” of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017, is hereby incorporated by reference in this report.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and ~~Procedures:~~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 Rule 13a-15(e) ofunder the Securities Exchange Act of 1934, as amended ~~( the~~(the “Exchange Act”)). 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:~~Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

For a discussion of legal proceedings affecting us and our subsidiaries, ~~please~~ see note 910 to the unaudited consolidated financial statements included in this report.


Item 1A.	Risk Factors

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, ~~2016.~~

2017.


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 second quarter of ~~2017~~2018 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, 2017 1.3
$ 106.17
1.2
$ 5,575
May 1 – May 31, 2017 1.6
105.71
1.5
$ 5,415
June 1 – June 30, 2017 1.5
109.06
1.5
$ 5,253
Total April 1 – June 30, 2017 4.4
$ 107.02
4.2



	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, 2018	0.7	$	108.10	0.7	$	4,012
May 1 – May 31, 2018	0.7	114.88		0.7	3,926
June 1 – June 30, 2018	0.8	116.07		0.8	3,828
Total April 1 – June 30, 2018	2.2	$	113.12	2.2

_________________


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

In May 2016, the Board of Directors approved a new share repurchase authorization of $8.0 billion, which has no expiration date.


Item 6.	Exhibits

The following exhibits are either incorporated by reference into this report or filed with this report as indicated below.




3.1	—	Restated Certificate of Incorporation of United Parcel Service, Inc. (incorporated by reference to Exhibit 3.3 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).

~~4.1~~	—	~~Form of Note for Floating Rate Senior Notes due March 15, 2067 (incorporated by reference to Exhibit 4.1 to Form 8-K filed on March 31, 2017).~~

~~4.2~~	—	~~Form of Note for Floating Rate Senior Notes due May 16, 2022 (incorporated by reference to Exhibit 4.1 to Form 8-K filed on May 16, 2017).~~

~~4.3~~	—	~~Form of Note 2.350% Senior Noted due May 16, 2022 (incorporated by reference to Exhibit 4.2 to Form 8-K filed on May 16, 2017).~~

~~4.4~~	—	~~Form of Note for 2.125% Senior Notes due May 21, 2024 (incorporated by reference to Exhibit 4.2 to Form 8-K filed on May 18, 2017).~~

~~10.1~~	—	~~Amended and Restated UPS 401(k) Savings Plan effective January 1, 2017 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 27, 2017)~~.

~~10.2~~	—	~~Amendment Four to the Amended and Restated UPS Retirement Plan effective June 23, 2017 (incorporated by reference to Exhibit 10.2 to Form 8-K filed on June 27, 2017).~~

~~10.3~~	—	~~Amended and Restated UPS Restoration Savings Plan effective January 1, 2017 (incorporated by reference to Exhibit 10.3 to Form 8-K filed on June 27, 2017).~~

~~10.4~~	—	~~Amendment One to the UPS Excess Coordinating Benefit Plan effective June 23, 2017 (incorporated by reference to Exhibit 10.4 to Form 8-K filed on June 27, 2017).~~

11	—	Statement regarding Computation of per Share Earnings (incorporated by reference to Note 1213 in “Part I, Item 1. Financial Statements” of this Quarterly Report on Form 10-Q).

†12	—	Computation of Ratio of Earnings to Fixed Charges.

†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.

†101	—	The following financial information from ~~the~~this Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2017,~~2018, 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.

___________________



†	Filed 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.



		UNITED PARCEL SERVICE, INC. (Registrant)

Date:	August ~~3, 2017~~2, 2018	By:	/S/ RICHARD N. PERETZ
			Richard N. Peretz
			Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Accounting Officer)

6066



	Marketable Securities		Other Non-Current Investments			Total
Balance on April 1, 2017	$	—	$	11		$	11
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other)	—		(2		)	(2		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on June 30, 2017	$	—	$	9		$	9



	Marketable Securities		Other Investments			Total
Balance on January 1, 2017	$	—	13			13
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other)	—		(4		)	(4		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on June 30, 2017	$	—	$	9		$	9

	Marketable Securities		Other Investments			Total
Balance on January 1, 2016	$	—	32			32
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income and other)	—		(10		)	(10		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on June 30, 2016	$	—	$	22		$	22