United States
Securities and Exchange Commission
Washington, D.C. 20549
_____________________________________
Form 10-Q
(Mark One)
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ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017,March 31, 2021 or
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-15451
_____________________________________
United Parcel Service, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 58-2480149 |
(State or Other Jurisdiction of
Incorporation or Organization)
| | (IRS Employer
Identification No.)
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55 Glenlake Parkway NE Atlanta, GeorgiaN.E. , | Atlanta, | Georgia | | 30328 |
| (Address of Principal Executive Offices) | | (Zip Code) |
(404) 828-6000
(Registrant’s telephone number, including area code)
_____________________________________ ____________________
Securities registered pursuant to Section 12(b) of the Act:Former name, former address and former fiscal year, if changed since last report. | | | | | | | | | | | | | | |
| Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
| Class B common stock, par value $0.01 per share | | UPS | | New York Stock Exchange |
| 0.375% Senior Notes due 2023 | | UPS23A | | New York Stock Exchange |
| 1.625% Senior Notes due 2025 | | UPS25 | | New York Stock Exchange |
| 1% Senior Notes due 2028 | | UPS28 | | New York Stock Exchange |
| 1.500% Senior Notes due 2032 | | UPS32 | | New York Stock Exchange |
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 (§ 232.405 of this chapter) 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 the definitions of “accelerated filer”, “large accelerated filer”, and“accelerated filer”, “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 | | | | | | | | | | | | | | |
| Large accelerated filer | x | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
There were 174,673,900147,215,404 Class A shares, and 687,057,463723,317,204 Class B shares, with a par value of $0.01 per share, outstanding at October 24, 2017.April 22, 2021.
UNITED PARCEL SERVICE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2017
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| PART I—FINANCIAL INFORMATION |
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| Contractual Commitments | | |
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| Item 4. | | |
| PART II—OTHER INFORMATION | |
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| Item 6. | | |
PART I. FINANCIAL INFORMATION
Cautionary Statement About Forward-Looking Statements
This report, includes certainour Annual Report on Form 10-K for the year ended December 31, 2020 and our other filings with the Securities and Exchange Commission (“SEC”) contain and in the future may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in the future tense,other than those of current or historical fact, and all statements accompanied by terms such as “will,” “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof“plan” and similar terms, are intended to be forward-looking statements. We intend that all forward-lookingForward-looking statements we make will beare made subject to the safe harbor protectionprovisions 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 and in our other filings with the Securities and Exchange Commission containFrom time to time, we also include forward-looking statements regardingin other publicly disclosed materials. Such statements may relate to 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 statementsresults, and 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, many of which are outside of our control, include, but are not limited to:to, continued uncertainties related to the impact of the COVID-19 pandemic on our business and operations, financial performance and liquidity, our customers and suppliers, and on the global economy; changes in general economic conditions, both in the U.S. andor internationally; significant competition on a local, regional, national and international basis; changes in our relationships with our significant customers; changes in the existing complex and stringent regulationregulatory environment in the U.S. and internationally, changes to which can impact our business;or internationally; increased or more complex physical or data security requirements that may increase our costs of operations and reduce operating efficiencies;requirements; legal, regulatory or market responses to global climate change; negotiationresults of negotiations and ratificationratifications of labor contracts; strikes, work stoppages andor 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; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; our ability to maintain the image of our brand;brand image; our ability to attract and retain qualified employees; breaches in data security; disruptions to the Internet or our technology infrastructure; interruption ofinterruptions in or impacts on our business from natural or man mademan-made events or disasters including terrorism;terrorist attacks, epidemics or pandemics; 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; the potential for variousadditional U.S. or international tax liabilities; potential claims andor 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, dispositions, joint ventures or strategic alliances; our ability to realize the anticipated benefits from our transformation initiatives; cyclical and seasonal fluctuations in our operating results; our ability to manage insurance and claims expenses; and other risks discussed in our filings with the Securities and Exchange CommissionSEC from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2016 or described from time to time in our future reports2020 and subsequently filed with the Securities and Exchange Commission.reports. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictionsinformation 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
September 30, 2017March 31, 2021 (unaudited) and December 31, 2016
(In2020 (in millions)
| | | | September 30,
2017 | | December 31,
2016 | | March 31,
2021 | | December 31,
2020 |
| ASSETS | | | | ASSETS | | | |
| Current Assets: | | | | Current Assets: | |
| Cash and cash equivalents | $ | 3,418 |
| | $ | 3,476 |
| Cash and cash equivalents | $ | 7,731 | | | $ | 5,910 | |
| Marketable securities | 1,043 |
| | 1,091 |
| Marketable securities | 351 | | | 406 | |
| Accounts receivable | | Accounts receivable | 10,258 | | | 10,888 | |
| Less: Allowance for credit losses | | Less: Allowance for credit losses | (131) | | | (138) | |
| Accounts receivable, net | 6,937 |
| | 7,695 |
| Accounts receivable, net | 10,127 | | | 10,750 | |
| Assets held for sale | | Assets held for sale | 1,135 | | | 1,197 | |
| Other current assets | 1,512 |
| | 1,587 |
| Other current assets | 1,641 | | | 1,953 | |
| Total Current Assets | 12,910 |
| | 13,849 |
| Total Current Assets | 20,985 | | | 20,216 | |
| Property, Plant and Equipment, Net | 20,988 |
| | 18,800 |
| Property, Plant and Equipment, Net | 32,455 | | | 32,254 | |
| Operating Lease Right-Of-Use Assets | | Operating Lease Right-Of-Use Assets | 3,044 | | | 3,073 | |
| Goodwill | 3,838 |
| | 3,757 |
| Goodwill | 3,346 | | | 3,367 | |
| Intangible Assets, Net | 1,897 |
| | 1,758 |
| Intangible Assets, Net | 2,268 | | | 2,274 | |
| Non-Current Investments and Restricted Cash | 481 |
| | 476 |
| |
| Investments and Restricted Cash | | Investments and Restricted Cash | 25 | | | 25 | |
| Deferred Income Tax Assets | 318 |
| | 591 |
| Deferred Income Tax Assets | 243 | | | 527 | |
| Other Non-Current Assets | 924 |
| | 1,146 |
| Other Non-Current Assets | 946 | | | 672 | |
| Total Assets | $ | 41,356 |
| | $ | 40,377 |
| Total Assets | $ | 63,312 | | | $ | 62,408 | |
| LIABILITIES AND SHAREOWNERS’ EQUITY | | | | LIABILITIES AND SHAREOWNERS’ EQUITY | | | |
| Current Liabilities: | | | | Current Liabilities: | |
| Current maturities of long-term debt and commercial paper | $ | 4,555 |
| | $ | 3,681 |
| |
| Current maturities of long-term debt, commercial paper and finance leases | | Current maturities of long-term debt, commercial paper and finance leases | $ | 1,811 | | | $ | 2,623 | |
| Current maturities of operating leases | | Current maturities of operating leases | 548 | | | 560 | |
| Accounts payable | 2,808 |
| | 3,042 |
| Accounts payable | 6,305 | | | 6,455 | |
| Accrued wages and withholdings | 2,439 |
| | 2,317 |
| Accrued wages and withholdings | 3,701 | | | 3,569 | |
| Hedge margin liabilities | 48 |
| | 575 |
| |
| Self-insurance reserves | 713 |
| | 670 |
| Self-insurance reserves | 1,103 | | | 1,085 | |
| Accrued group welfare and retirement plan contributions | 640 |
| | 598 |
| Accrued group welfare and retirement plan contributions | 934 | | | 927 | |
| Liabilities to be disposed of | | Liabilities to be disposed of | 296 | | | 347 | |
| Other current liabilities | 964 |
| | 847 |
| Other current liabilities | 1,608 | | | 1,450 | |
| Total Current Liabilities | 12,167 |
| | 11,730 |
| Total Current Liabilities | 16,306 | | | 17,016 | |
| Long-Term Debt | 14,355 |
| | 12,394 |
| |
| Long-Term Debt and Finance Leases | | Long-Term Debt and Finance Leases | 21,916 | | | 22,031 | |
| Non-Current Operating Leases | | Non-Current Operating Leases | 2,524 | | | 2,540 | |
| Pension and Postretirement Benefit Obligations | 10,075 |
| | 12,694 |
| Pension and Postretirement Benefit Obligations | 9,594 | | | 15,817 | |
| Deferred Income Tax Liabilities | 75 |
| | 112 |
| Deferred Income Tax Liabilities | 1,997 | | | 488 | |
| Self-Insurance Reserves | 1,740 |
| | 1,794 |
| |
| Other Non-Current Liabilities | 1,405 |
| | 1,224 |
| Other Non-Current Liabilities | 3,816 | | | 3,847 | |
| Shareowners’ Equity: | | | | Shareowners’ Equity: | |
| Class A common stock (176 and 180 shares issued in 2017 and 2016, respectively) | 2 |
| | 2 |
| |
| Class B common stock (687 and 689 shares issued in 2017 and 2016, respectively) | 7 |
| | 7 |
| |
| Class A common stock (148 and 147 shares issued in 2021 and 2020, respectively) | | Class A common stock (148 and 147 shares issued in 2021 and 2020, respectively) | 2 | | | 2 | |
| Class B common stock (722 and 718 shares issued in 2021 and 2020, respectively) | | Class B common stock (722 and 718 shares issued in 2021 and 2020, respectively) | 7 | | | 7 | |
| Additional paid-in capital | — |
| | — |
| Additional paid-in capital | 1,049 | | | 865 | |
| Retained earnings | 5,724 |
| | 4,879 |
| Retained earnings | 10,748 | | | 6,896 | |
| Accumulated other comprehensive loss | (4,224 | ) | | (4,483 | ) | Accumulated other comprehensive loss | (4,659) | | | (7,113) | |
| Deferred compensation obligations | 37 |
| | 45 |
| Deferred compensation obligations | 15 | | | 20 | |
| Less: Treasury stock (1 share in 2017 and 2016) | (37 | ) | | (45 | ) | |
| Less: Treasury stock (0.4 shares in 2021 and 2020) | | Less: Treasury stock (0.4 shares in 2021 and 2020) | (15) | | | (20) | |
| Total Equity for Controlling Interests | 1,509 |
| | 405 |
| Total Equity for Controlling Interests | 7,147 | | | 657 | |
| Noncontrolling Interests | 30 |
| | 24 |
| |
| Noncontrolling interests | | Noncontrolling interests | 12 | | | 12 | |
| Total Shareowners’ Equity | 1,539 |
| | 429 |
| Total Shareowners’ Equity | 7,159 | | | 669 | |
| Total Liabilities and Shareowners’ Equity | $ | 41,356 |
| | $ | 40,377 |
| Total Liabilities and Shareowners’ Equity | $ | 63,312 | | | $ | 62,408 | |
|
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
March 31, | | |
| 2021 | | 2020 | | | | |
| Revenue | 22,908 | | | 18,035 | | | | | |
| Operating Expenses: | | | | | | | |
| Compensation and benefits | $ | 11,483 | | | $ | 10,086 | | | | | |
| Repairs and maintenance | 619 | | | 563 | | | | | |
| Depreciation and amortization | 722 | | | 648 | | | | | |
| Purchased transportation | 4,243 | | | 2,931 | | | | | |
| Fuel | 807 | | | 761 | | | | | |
| Other occupancy | 466 | | | 383 | | | | | |
| Other expenses | 1,803 | | | 1,591 | | | | | |
| Total Operating Expenses | 20,143 | | | 16,963 | | | | | |
| Operating Profit | 2,765 | | | 1,072 | | | | | |
| Other Income and (Expense): | | | | | | | |
| Investment income and other | 3,616 | | | 345 | | | | | |
| Interest expense | (177) | | | (167) | | | | | |
| Total Other Income and (Expense) | 3,439 | | | 178 | | | | | |
| Income Before Income Taxes | 6,204 | | | 1,250 | | | | | |
| Income Tax Expense | 1,412 | | | 285 | | | | | |
| Net Income | $ | 4,792 | | | $ | 965 | | | | | |
| Basic Earnings Per Share | $ | 5.50 | | | $ | 1.12 | | | | | |
| Diluted Earnings Per Share | $ | 5.47 | | | $ | 1.11 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| Revenue | $ | 15,978 |
| | $ | 14,928 |
| | $ | 47,043 |
| | $ | 43,975 |
|
| Operating Expenses: | | | | | | | |
| Compensation and benefits | 8,221 |
| | 7,857 |
| | 24,457 |
| | 23,448 |
|
| Repairs and maintenance | 398 |
| | 386 |
| | 1,180 |
| | 1,150 |
|
| Depreciation and amortization | 572 |
| | 554 |
| | 1,688 |
| | 1,661 |
|
| Purchased transportation | 2,652 |
| | 2,212 |
| | 7,461 |
| | 6,306 |
|
| Fuel | 636 |
| | 541 |
| | 1,873 |
| | 1,480 |
|
| Other occupancy | 282 |
| | 248 |
| | 845 |
| | 762 |
|
| Other expenses | 1,182 |
| | 1,096 |
| | 3,504 |
| | 3,273 |
|
| Total Operating Expenses | 13,943 |
| | 12,894 |
| | 41,008 |
| | 38,080 |
|
| Operating Profit | 2,035 |
| | 2,034 |
| | 6,035 |
| | 5,895 |
|
| Other Income and (Expense): | | | | | | | |
| Investment income and other | 20 |
| | 13 |
| | 49 |
| | 38 |
|
| Interest expense | (111 | ) |
| (94 | ) | | (324 | ) | | (281 | ) |
| Total Other Income and (Expense) | (91 | ) | | (81 | ) | | (275 | ) | | (243 | ) |
| Income Before Income Taxes | 1,944 |
| | 1,953 |
| | 5,760 |
| | 5,652 |
|
| Income Tax Expense | 680 |
| | 683 |
| | 1,954 |
| | 1,982 |
|
| Net Income | $ | 1,264 |
| | $ | 1,270 |
| | $ | 3,806 |
| | $ | 3,670 |
|
| Basic Earnings Per Share | $ | 1.45 |
| | $ | 1.44 |
| | $ | 4.36 |
| | $ | 4.15 |
|
| Diluted Earnings Per Share | $ | 1.45 |
| | $ | 1.44 |
| | $ | 4.34 |
| | $ | 4.13 |
|
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In millions)
(unaudited)
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| | 2021 | | 2020 | | | | |
| Net Income | $ | 4,792 | | | $ | 965 | | | | | |
| Change in foreign currency translation adjustment, net of tax | (82) | | | (141) | | | | | |
| Change in unrealized gain (loss) on marketable securities, net of tax | (4) | | | 2 | | | | | |
| Change in unrealized gain (loss) on cash flow hedges, net of tax | 114 | | | 217 | | | | | |
| Change in unrecognized pension and postretirement benefit costs, net of tax | 2,426 | | | 43 | | | | | |
| Comprehensive Income (Loss) | $ | 7,246 | | | $ | 1,086 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net Income | $ | 1,264 |
| | $ | 1,270 |
| | $ | 3,806 |
| | $ | 3,670 |
|
| Change in foreign currency translation adjustment, net of tax | 32 |
| | (7 | ) | | 86 |
| | (12 | ) |
| Change in unrealized gain (loss) on marketable securities, net of tax | — |
| | (1 | ) | | 1 |
| | 4 |
|
| Change in unrealized gain (loss) on cash flow hedges, net of tax | (86 | ) | | (64 | ) | | (278 | ) | | (183 | ) |
| Change in unrecognized pension and postretirement benefit costs, net of tax | 32 |
| | 27 |
| | 450 |
| | 80 |
|
| Comprehensive Income | $ | 1,242 |
| | $ | 1,225 |
| | $ | 4,065 |
| | $ | 3,559 |
|
See notes to unaudited, consolidated financial statements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
(unaudited)
| | | | | | | | | | | |
| | Three Months Ended
March 31, |
| | 2021 | | 2020 |
| Cash Flows From Operating Activities: | | | |
| Net income | $ | 4,792 | | | $ | 965 | |
| Adjustments to reconcile net income to net cash from operating activities: | | | |
| Depreciation and amortization | 722 | | | 648 | |
| Pension and postretirement benefit (income) expense | (3,024) | | | 160 | |
| Pension and postretirement benefit contributions | (215) | | | (222) | |
| Self-insurance reserves | 4 | | | 124 | |
| Deferred tax (benefit) expense | 942 | | | 86 | |
| Stock compensation expense | 315 | | | 231 | |
| Other (gains) losses | 57 | | | 33 | |
| Changes in assets and liabilities, net of effects of business acquisitions: | | | |
| Accounts receivable | 435 | | | 1,223 | |
| Other assets | 363 | | | 209 | |
| Accounts payable | (261) | | | (1,101) | |
| Accrued wages and withholdings | 199 | | | 83 | |
| Other liabilities | 180 | | | 102 | |
| Other operating activities | 22 | | | 9 | |
| Net cash from operating activities | 4,531 | | | 2,550 | |
| Cash Flows From Investing Activities: | | | |
| Capital expenditures | (834) | | | (933) | |
| Proceeds from disposals of property, plant and equipment | 10 | | | 1 | |
| Purchases of marketable securities | (78) | | | (80) | |
| Sales and maturities of marketable securities | 134 | | | 80 | |
| Net change in finance receivables | 11 | | | 3 | |
| Cash paid for business acquisitions, net of cash and cash equivalents acquired | (3) | | | 0 | |
| Other investing activities | (6) | | | (5) | |
| Net cash used in investing activities | (766) | | | (934) | |
| Cash Flows From Financing Activities: | | | |
| Net change in short-term debt | 697 | | | (91) | |
| Proceeds from long-term borrowings | 0 | | | 4,253 | |
| Repayments of long-term borrowings | (1,528) | | | (687) | |
| Purchases of common stock | 0 | | | (220) | |
| Issuances of common stock | 78 | | | 70 | |
| Dividends | (858) | | | (840) | |
| Other financing activities | (334) | | | (318) | |
| Net cash (used in) / from financing activities | (1,945) | | | 2,167 | |
| Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | 1 | | | (65) | |
| Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | 1,821 | | | 3,718 | |
| Cash, Cash Equivalents and Restricted Cash: | | | |
| Beginning of period | 5,910 | | | 5,238 | |
| End of period | $ | 7,731 | | | $ | 8,956 | |
| | | |
| | | |
| | | |
| | | |
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| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| Cash Flows From Operating Activities: | | | |
| Net income | $ | 3,806 |
| | $ | 3,670 |
|
| Adjustments to reconcile net income to net cash from operating activities: | | | |
| Depreciation and amortization | 1,688 |
| | 1,661 |
|
| Pension and postretirement benefit expense | 651 |
| | 804 |
|
| Pension and postretirement benefit contributions | (2,585 | ) | | (1,298 | ) |
| Self-insurance reserves | (17 | ) | | (38 | ) |
| Deferred tax (benefit) expense | 295 |
| | (150 | ) |
| Stock compensation expense | 463 |
| | 471 |
|
| Other (gains) losses | (21 | ) | | (165 | ) |
| Changes in assets and liabilities, net of effects of business acquisitions: | | | |
| Accounts receivable | 818 |
| | 782 |
|
| Other current assets | 185 |
| | 370 |
|
| Accounts payable | (411 | ) | | (276 | ) |
| Accrued wages and withholdings | 117 |
| | 46 |
|
| Other current liabilities | (580 | ) | | (491 | ) |
| Other operating activities | 9 |
| | (23 | ) |
| Net cash from operating activities | 4,418 |
| | 5,363 |
|
| Cash Flows From Investing Activities: | | | |
| Capital expenditures | (3,708 | ) | | (1,837 | ) |
| Proceeds from disposals of property, plant and equipment | 18 |
| | 76 |
|
| Purchases of marketable securities | (1,468 | ) | | (4,250 | ) |
| Sales and maturities of marketable securities | 1,582 |
| | 4,038 |
|
| Net (increase) decrease in finance receivables | (1 | ) | | 4 |
|
| Cash paid for business acquisitions, net of cash and cash equivalents acquired | (61 | ) | | (3 | ) |
| Other investing activities | 20 |
| | (55 | ) |
| Net cash used in investing activities | (3,618 | ) | | (2,027 | ) |
| Cash Flows From Financing Activities: | | | |
| Net change in short-term debt | (354 | ) | | (689 | ) |
| Proceeds from long-term borrowings | 5,328 |
| | 4,018 |
|
| Repayments of long-term borrowings | (2,450 | ) | | (2,323 | ) |
| Purchases of common stock | (1,346 | ) | | (2,007 | ) |
| Issuances of common stock | 177 |
| | 196 |
|
| Dividends | (2,085 | ) | | (1,987 | ) |
| Other financing activities | (184 | ) | | 11 |
|
| Net cash used in financing activities | (914 | ) | | (2,781 | ) |
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 56 |
| | 14 |
|
| Net Increase (Decrease) in Cash and Cash Equivalents | (58 | ) | | 569 |
|
| Cash and Cash Equivalents: | | | |
| Beginning of period | 3,476 |
| | 2,730 |
|
| End of period | $ | 3,418 |
| | $ | 3,299 |
|
See notes to unaudited, consolidated financial statements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Principles of Consolidation
In our opinion, theThe accompanying interim unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2017,March 31, 2021 and our results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the ninethree months ended September 30, 2017March 31, 2021 and 2016.2020. The results reported in these interim unaudited, 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 unaudited, 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.
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.2020.
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 September 30, 2017.March 31, 2021 and December 31, 2020. The fair values of our investment securities are disclosed in note 4,5, our recognized multiemployer pension withdrawal liabilities in note 6,8, our shortshort- and long-term debt in note 810 and our derivative instruments in note 13.16. 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 estimatesUse 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 consolidatedthese financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates
Although our estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. In particular, a number of estimates have been prepared onand will continue to be affected by the basisongoing COVID-19 pandemic. The severity, magnitude and duration of the most currentpandemic, and best informationthe resulting economic consequences, remain uncertain, rapidly changing and actual results could differ materially from those estimates.difficult to predict. As a result, our accounting estimates and assumptions may change significantly over time.
For interim unaudited, consolidated financial statement purposes, we provide for accruals under our various company-sponsored employee benefit plans for each three month period based on one quarter of the estimated annual expense.
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 2016,2020, the Financial Accounting Standards Board issued Accounting Standards Update ("FASB"ASU") issued an2020-04, Reference Rate Reform (Topic 848), to temporarily ease the potential burden in accounting standards update that simplified the income tax accountingfor reference rate reform. The standard provides optional expedients and cash flow presentation relatedexceptions for applying GAAP to share-based compensationcontracts, hedging relationships and other transactions affected by requiring the recognitionreference rate reform. The guidance was effective upon issuance and generally can be applied through December 31, 2022. While we do not currently anticipate any material impacts to our financial position, results of all excess tax benefits and deficiencies directly on the income statement and classification asoperations or cash flows from operating activities on the statementsreference rate reform, we continue to monitor our contracts and transactions for potential application of consolidated cash flows. This update also made several changes to thethis ASU.
For accounting for forfeitures and employee tax withholding on share-based compensation. This new guidance became effective for usstandards adopted in the first quarter of 2017 and we adopted theperiod ended March 31, 2020, refer to note 1 to our audited, consolidated financial statements of consolidated cash flows presentationin our Annual Report on a prospective basis. The impact to income tax expense in the statements of consolidated income was a benefit of $62 millionForm 10-K for the nine monthsyear ended September 30, 2017. There was no significant impact related to the adoption of the new accounting standard in the third quarter of 2017. Additionally, we have elected to continue estimating forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.
December 31, 2020. Other accounting pronouncements adopted during the periods covered by the unaudited, consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.
Accounting Standards Issued But Not Yet Effective
In August 2017, the FASBAccounting pronouncements issued an accounting standards update to enhance recognition of the economic results of hedging activities in the financial statements. In addition, this update makes certain targeted improvements to simplify the application of the hedge accounting guidance and increase transparency regarding the scope and results of its hedging activities. The guidance will generally be applied prospectively and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2017, the FASB issued an accounting standards update to provide clarity and reduce complexity on when to apply modification accounting to existing share-based payment awards. The guidance will generally be applied prospectively and becomes effective for us in the first quarter of 2018, 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 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 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”), 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 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 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 September 30, 2017 and 2016, non-service cost components amounted to a $216 and $105 million benefit ($575 and $313 million for the nine months ended September 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In January 2017, the FASB issued an accounting standards update 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 to have a material impact on our consolidated financial position, results of operations or cash flows.
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 September 30, 2017 and December 31, 2016, we classified $123 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 that requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with terms beyond twelve months. Although the distinction between operating and finance leases will continue to exist under the new standard, the recognition and measurement of expenses and cash flows will not change significantly from the current treatment. This new guidance requires modified retrospective application and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption on our consolidated financial position, results of operations, cash flows and related disclosures, as well as the impact of adoption on policies, practices and systems. As of December 31, 2016, we had $1.470 billion of future minimum operating lease commitments that are not currently recognized on our consolidated balance sheets. Therefore, we expect material changes to our consolidated balance sheets.
In January 2016, the FASB issued an accounting standards update which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The amendment will be effective for us beginning the first quarter of 2018. At this time, we do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued an accounting standards update that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services. 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 expect to adopt the standard using a full retrospective approach. We are currently evaluating this standard and the related updates, including the impact of adoption on policies, practices and systems.
At this stage in our 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 but do not expect it to be material.
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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In addition to completing our review of contracts and quantifying the impacts on the consolidated financial statements, we are currently analyzing our internal control over financial reporting framework to determine if controls should be added or modified as a result of adopting this standard. In addition, we are currently reviewing the impacts of this standard on our footnote disclosures for periods subsequent to January 1, 2018. At this stage in our review of the disclosure requirements, we expect that the adoption of this standard will result in several additional disclosures, including but not limited to additional information around our performance obligations, the timing of revenue recognition, remaining performance obligations at period end, contract assets and liabilities, and significant judgments made that impact the amount and timing of revenue from our contracts with customers.
Other accounting pronouncements issued,before, but not effective until after, September 30, 2017,March 31, 2021, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. REVENUE RECOGNITION
Revenue Recognition
Substantially all of our revenues are from contracts associated with the pickup, transportation and delivery of packages and freight (“transportation services”), whether carried out by or arranged by UPS, either domestically or internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services to customers, both domestically and internationally, through our global network of company-owned and leased distribution centers and field stocking locations.
Disaggregation of Revenue
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2021 | | 2020 | | | | |
| Revenue: | | | | | | | |
| Next Day Air | $ | 2,331 | | | $ | 2,055 | | | | | |
| Deferred | 1,260 | | | 1,197 | | | | | |
| Ground | 10,419 | | | 8,204 | | | | | |
| U.S. Domestic Package | 14,010 | | | 11,456 | | | | | |
| | | | | | | |
| Domestic | 928 | | | 688 | | | | | |
| Export | 3,493 | | | 2,561 | | | | | |
| Cargo & Other | 186 | | | 134 | | | | | |
| International Package | 4,607 | | | 3,383 | | | | | |
| | | | | | | |
| Forwarding | 2,072 | | | 1,373 | | | | | |
| Logistics | 1,104 | | | 845 | | | | | |
| Freight | 767 | | | 766 | | | | | |
| Other | 348 | | | 212 | | | | | |
| Supply Chain & Freight | 4,291 | | | 3,196 | | | | | |
| | | | | | | |
| Consolidated revenue | $ | 22,908 | | | $ | 18,035 | | | | | |
We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis of revenue recognition in accordance with GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as a 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. Within most of our contracts, the customer contracts with us to provide distinct services, such as transportation services. 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 based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In certain business units, such as Logistics, we sell customized, customer-specific solutions in which we integrate 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 dependent 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 are accounted for prospectively as the remaining performance obligations are distinct.
Payment Terms
Under the typical payment terms of our customer contracts, the customer pays at periodic intervals, which are generally seven days within our U.S. Domestic Package business, 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 contracts with customers.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principal vs. Agent Considerations
In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. GAAP requires us to evaluate, using a control model, 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). 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. Revenue and the associated purchased transportation costs are 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 reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimate of the current expected losses inherent in our accounts receivable at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, forward looking indicators, trends in customer payment frequency and judgments about the probable effects of relevant observable data, including present and future 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.
We decreased our allowance for expected credit losses by $7 million during the first quarter of 2021 based upon current forecasts that reflect improvements in the economic outlook. Our allowance for credit losses as of March 31, 2021 and December 31, 2020 was $131 and $138 million, respectively. Our total allowance for credit losses charged to expense, before recoveries, during the three months ended March 31, 2021 and 2020 was $41 and $69 million, respectively.
Contract Assets and Liabilities
Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e. packages have been delivered), and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.
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 $205 and $279 million as of March 31, 2021 and December 31, 2020, respectively, net of deferred revenue related to in-transit packages of $131 and $279 million as of March 31, 2021 and December 31, 2020, respectively. Contract assets are included within "Other current assets" in the consolidated balance sheets. Short-term contract liabilities related to advance payments from customers were $8 and $21 million as of March 31, 2021 and December 31, 2020, respectively. Short-term contract liabilities are included within "Other current liabilities" in the consolidated balance sheets. Long-term contract liabilities related to advance payments from customers were $26 million at both March 31, 2021 and December 31, 2020. Long-term contract liabilities are included within "Other Non-Current Liabilities" in the consolidated balance sheets.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. 4. STOCK-BASED COMPENSATION
We issue employee share-based awards under the UPS Incentive Compensation Plan,various incentive compensation plans, which permitspermit 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 theour 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, we grantedWe award Restricted Units under the MIP to certain eligible management employees. These 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 yearsone year following the grant date (except in the case of death, disability or retirement, in which case immediate vesting occurs). The entire grant value 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 the 2020 MIP, we determined the award measurement datedates to be February 7, 201710, 2021 (for U.S.-based employees), March 1, 2017 (for management committee employees)employees and executive management) and March 27, 201722, 2021 (for international-based employees); therefore, the Restricted Units awarded were valued for stock compensation expense purposes using the closing New York Stock Exchange ("NYSE") price of $105.69, $106.87$165.66, and $104.78$161.06 on those dates, respectively.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under the LTIP to certain eligible management employees. The performance targets are equally-weighted among consolidated operating return on invested capital, 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-yearthree-year performance 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 beis based on the percentage achievement of the performance targets established on the grant date.
For awards granted prior to 2020, the performance targets are equally weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareholder return ("RTSR") relative to a peer group of companies. For the two-thirds of the award related to consolidated operating return on invested capitalROIC 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. Based on the date that the eligible management population and performance targets were approved for the 2017 LTIP Award, we determined the award measurement date to be March 24, 2017; therefore, the target Restricted Units awarded for this portion of the award were valued for stock compensation expense using the closing New York Stock Exchange price of $105.05 on that date.
The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. This portion ofWe recognize the award was valued with a grant date fair value of $119.29this portion of the award (less estimated forfeitures) as compensation expense ratably over the vesting period.
Beginning with the LTIP grant that was made in the second quarter of 2020, the performance targets are equally weighted between adjusted earnings per unitshare and is recognized asadjusted cumulative free cash flow. The final number of Restricted Units earned will then be subject to adjustment based on RTSR relative to the Standard & Poors 500 Index ("S&P 500"). We determine the grant date fair value of the Restricted Units using a Monte Carlo model and recognize compensation expense (less estimated forfeitures) ratably over the vesting period. period, based on the number of awards expected to be earned.
For the 2020 award, the LTIP was divided into two measurement periods. The weighted-average assumptions usedfirst measurement period evaluated the achievement of the performance targets for 2020. The second measurement period will evaluate the achievement of the performance targets for the years 2021 through 2022. The performance targets for the second measurement period were approved on March 25, 2021 and the calculated weighted-average fair values oftarget Restricted Units awarded were valued at $167.66 on that date.
The eligible management employees and performance targets for the
RTSR portion of2021 LTIP award were also approved on March 25, 2021. We therefore determined this to be the
LTIP awards granted in 2017award measurement date and
2016 are as follows:the target Restricted Units awarded were valued at $166.52. |
| | | | | | | |
| | 2017 | | 2016 |
| Risk-free interest rate | 1.46 | % | | 1.00 | % |
| Expected volatility | 16.59 | % | | 16.46 | % |
| Weighted-average fair value of units granted | $ | 119.29 |
| | $ | 136.18 |
|
| Share payout | 113.55 | % | | 129.08 | % |
There is no expected dividend yield as units earn dividend equivalents.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average assumptions used and the calculated weighted-average fair values of the LTIP awards granted in 2021 and 2020 are as follows:
| | | | | | | | | | | | |
| 2021 | | 2020 | |
| Risk-free interest rate | 0.19 | % | | 0.15 | % | |
| Expected volatility | 30.70 | % | | 27.53 | % | |
| Weighted-average fair value of units granted | $ | 167.17 | | | $ | 92.77 | | |
| Share payout | 102.40 | % | | 101.00 | % | |
There is no expected dividend yield as units earn dividend equivalents.
Non-Qualified Stock Options
During the first quarter of 2017, we grantedWe grant non-qualified stock option awardsoptions to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards generally vest over a five-yearfive-year period with approximately 20% of the award vesting at each anniversary date of the grant date (except in the case of death, disability or retirement, in which case immediate vesting occurs). The options granted will expire ten10 years after the date of the grant. In the first quarter of 2017,2021, we granted 0.30.2 million stock options at a grant price of $106.87,$165.66, which is based onwas the NYSE closing New York Stock Exchange price on March 1, 2017. In the first and third quarter of 2016, we granted 0.2 and 0.1 million stock options at a grant price of $98.77 and $106.86, respectively. The grant price was based on the closing New York Stock Exchange price on March 2, 2016 and September 16, 2016, respectively.February 10, 2021.
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 20172021 and 20162020 are as follows:
| | | | | | | | | | | | | |
| 2021 | | 2020 | | |
| Expected dividend yield | 3.31 | % | | 3.51 | % | | |
| Risk-free interest rate | 0.84 | % | | 1.26 | % | | |
| Expected life (in years) | 7.5 | | 7.5 | | |
| Expected volatility | 23.15 | % | | 19.25 | % | | |
| Weighted-average fair value of options granted | $ | 23.71 | | | $ | 11.74 | | | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Expected dividend yield | 2.89 | % | | 2.95 | % |
| Risk-free interest rate | 2.15 | % | | 1.62 | % |
| Expected life (in years) | 7.5 |
| | 7.5 |
|
| Expected volatility | 17.81 | % | | 22.40 | % |
| Weighted-average fair value of options granted | $ | 14.70 |
| | $ | 16.46 |
|
CompensationPre-tax compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the three months ended September 30, 2017March 31, 2021 and 20162020 was $118$315 and $125$231 million, respectively. Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the nine months ended September 30, 2017 and 2016 was $463 and $471 million, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. CASH AND INVESTMENTS
NOTE 4. INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2017March 31, 2021 and December 31, 20162020 (in millions): |
| | | | | | | | | | | | | | | |
| | Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
| September 30, 2017: | | | | | | | |
| Current trading marketable securities: | | | | | | | |
| Corporate debt securities | $ | 159 |
| | $ | — |
| | $ | — |
| | $ | 159 |
|
Carbon credit investments (1) | 241 |
| | 46 |
| | — |
| | 287 |
|
| Total trading marketable securities | $ | 400 |
| | $ | 46 |
| | $ | — |
| | $ | 446 |
|
| | | | | | | | |
| Current available-for-sale securities: | | | | | | | |
| U.S. government and agency debt securities | $ | 286 |
| | $ | — |
| | $ | (1 | ) | | $ | 285 |
|
| Mortgage and asset-backed debt securities | 90 |
| | — |
| | — |
| | 90 |
|
| Corporate debt securities | 210 |
| | 1 |
| | — |
| | 211 |
|
| U.S. state and local municipal debt securities | — |
| | — |
| | — |
| | — |
|
| Equity securities | 2 |
| | — |
| | — |
| | 2 |
|
| Non-U.S. government debt securities | 9 |
| | — |
| | — |
| | 9 |
|
| Total available-for-sale marketable securities | $ | 597 |
| | $ | 1 |
| | $ | (1 | ) | | $ | 597 |
|
| | | | | | | | |
| Total current marketable securities | $ | 997 |
| | $ | 47 |
| | $ | (1 | ) | | $ | 1,043 |
|
| | | | | | | | |
| | Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
| December 31, 2016: | | | | | | | |
| Current trading marketable securities: | | | | | | | |
| Corporate debt securities | $ | 427 |
| | $ | — |
| | $ | — |
| | $ | 427 |
|
Carbon credit investments (1) | 80 |
| | 10 |
| | — |
| | 90 |
|
| Total trading marketable securities | $ | 507 |
| | $ | 10 |
| | $ | — |
| | $ | 517 |
|
| | | | | | | | |
| Current available-for-sale securities: | | | | | | | |
| U.S. government and agency debt securities | $ | 314 |
| | $ | — |
| | $ | (2 | ) | | $ | 312 |
|
| Mortgage and asset-backed debt securities | 90 |
| | 1 |
| | — |
| | 91 |
|
| Corporate debt securities | 167 |
| | — |
| | (1 | ) | | 166 |
|
| Equity securities | 2 |
| | — |
| | — |
| | 2 |
|
| Non-U.S. government debt securities | 3 |
| | — |
| | — |
| | 3 |
|
| Total available-for-sale marketable securities | $ | 576 |
| | $ | 1 |
| | $ | (3 | ) | | $ | 574 |
|
| | | | | | | | |
| Total current marketable securities | $ | 1,083 |
| | $ | 11 |
| | $ | (3 | ) | | $ | 1,091 |
|
(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. |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | |
| Cost | | Unrealized
Gains | | Unrealized
Losses | | Estimated
Fair Value |
| March 31, 2021: | | | | | | | |
| Current trading marketable securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Equity securities | $ | 2 | | | $ | 0 | | | $ | 0 | | | $ | 2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total trading marketable securities | 2 | | | 0 | | | 0 | | | 2 | |
| | | | | | | |
| Current available-for-sale securities: | | | | | | | |
| U.S. government and agency debt securities | 187 | | | 1 | | | 0 | | | 188 | |
| Mortgage and asset-backed debt securities | 3 | | | 0 | | | 0 | | | 3 | |
| Corporate debt securities | 144 | | | 3 | | | 0 | | | 147 | |
| | | | | | | |
| | | | | | | |
| Non-U.S. government debt securities | 11 | | | 0 | | | 0 | | | 11 | |
| | | | | | | |
| | | | | | | |
| Total available-for-sale marketable securities | 345 | | | 4 | | | 0 | | | 349 | |
| | | | | | | |
| Total current marketable securities | $ | 347 | | | $ | 4 | | | $ | 0 | | | $ | 351 | |
| | | | | | | |
| | Cost | | Unrealized
Gains | | Unrealized
Losses | | Estimated
Fair Value |
| December 31, 2020: | | | | | | | |
| Current trading marketable securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Equity securities | $ | 2 | | | $ | 0 | | | $ | 0 | | | $ | 2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total trading marketable securities | 2 | | | 0 | | | 0 | | | 2 | |
| | | | | | | |
| Current available-for-sale securities: | | | | | | | |
| U.S. government and agency debt securities | 181 | | | 3 | | | 0 | | | 184 | |
| Mortgage and asset-backed debt securities | 30 | | | 1 | | | 0 | | | 31 | |
| Corporate debt securities | 174 | | | 4 | | | 0 | | | 178 | |
| | | | | | | |
| | | | | | | |
| Non-U.S. government debt securities | 11 | | | 0 | | | 0 | | | 11 | |
| | | | | | | |
| | | | | | | |
| Total available-for-sale marketable securities | 396 | | | 8 | | | 0 | | | 404 | |
| | | | | | | |
| Total current marketable securities | $ | 398 | | | $ | 8 | | | $ | 0 | | | $ | 406 | |
|
Investment Other-Than-Temporary Impairments
We have concluded that no0 material other-than-temporary impairment losses existed as of September 30, 2017.March 31, 2021. In making this determination, we considered the financial condition and prospects of theeach 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Maturity Information
The amortized cost and estimated fair value of marketable securities at September 30, 2017,as of March 31, 2021 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 with or without prepayment penalties.
| | | | Cost | | Estimated Fair Value | | Cost | | Estimated
Fair Value |
| Due in one year or less | $ | 218 |
| | $ | 218 |
| Due in one year or less | $ | 35 | | | $ | 36 | |
| Due after one year through three years | 443 |
| | 442 |
| Due after one year through three years | 310 | | | 313 | |
| Due after three years through five years | 18 |
| | 18 |
| Due after three years through five years | 0 | | | 0 | |
| Due after five years | 75 |
| | 76 |
| Due after five years | 0 | | | 0 | |
| | 754 |
| | 754 |
| | 345 | | | 349 | |
| Equity and carbon credit investments | 243 |
| | 289 |
| |
| Equity securities | | Equity securities | 2 | | | 2 | |
| | $ | 997 |
| | $ | 1,043 |
| | $ | 347 | | | $ | 351 | |
Non-Current Investments and Restricted Cash
Non-current investments and restricted cash is primarily associated with our self-insurance requirements. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in various marketable securities. Collateral provided is reflected in "Other investing activities" in the statements of consolidated cash flows. At September 30, 2017 and December 31, 2016, we had $448 and $445 million in self-insurance investments and restricted cash, respectively.
We held a $19$22 and $18$23 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at September 30, 2017as of March 31, 2021 and December 31, 2016,2020, respectively. The quarterly change in investment fair value is recognized in "InvestmentInvestment income and other" onother in the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets primarily real estate, of $14$3 million and $13$2 million as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively.
The These amounts described above are classified as “Non-Current Investments and Restricted Cash”Cash in the consolidated balance sheets.
A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows is shown below (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | March 31,
2021 | | December 31, 2020 | | March 31,
2020 |
| Cash and cash equivalents | | $ | 7,731 | | | $ | 5,910 | | | $ | 8,955 | |
| Restricted cash | | 0 | | | 0 | | | 1 | |
| Total cash, cash equivalents and restricted cash | | $ | 7,731 | | | $ | 5,910 | | | $ | 8,956 | |
Fair Value Measurements
Marketable securities valued utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. government debt securities, as these securities all have quoted prices in active markets. Marketable securities valued utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “Other non-current investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 7.78% and 8.06% as of September 30, 2017 and December 31, 2016, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about our investments measured at fair value on a recurring basis as of September 30, 2017March 31, 2021 and December 31, 2016,2020, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Balance |
| March 31, 2021: | | | | | | | |
| Marketable Securities: | | | | | | | |
| U.S. government and agency debt securities | $ | 188 | | | $ | 0 | | | $ | 0 | | | $ | 188 | |
| Mortgage and asset-backed debt securities | 0 | | | 3 | | | 0 | | | 3 | |
| Corporate debt securities | 0 | | | 147 | | | 0 | | | 147 | |
| | | | | | | |
| Equity securities | 0 | | | 2 | | | 0 | | | 2 | |
| Non-U.S. government debt securities | 0 | | | 11 | | | 0 | | | 11 | |
| | | | | | | |
| | | | | | | |
| Total marketable securities | 188 | | | 163 | | | 0 | | | 351 | |
| Other non-current investments | 22 | | | 0 | | | 0 | | | 22 | |
| Total | $ | 210 | | | $ | 163 | | | $ | 0 | | | $ | 373 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| December 31, 2020: | | | | | | | |
| Marketable Securities: | | | | | | | |
| U.S. government and agency debt securities | $ | 184 | | | $ | 0 | | | $ | 0 | | | $ | 184 | |
| Mortgage and asset-backed debt securities | 0 | | | 31 | | | 0 | | | 31 | |
| Corporate debt securities | 0 | | | 178 | | | 0 | | | 178 | |
| | | | | | | |
| Equity securities | 0 | | | 2 | | | 0 | | | 2 | |
| | | | | | | |
| Non-U.S. government debt securities | 0 | | | 11 | | | 0 | | | 11 | |
| | | | | | | |
| Total marketable securities | 184 | | | 222 | | | 0 | | | 406 | |
| Other non-current investments | 23 | | | 0 | | | 0 | | | 23 | |
| Total | $ | 207 | | | $ | 222 | | | $ | 0 | | | $ | 429 | |
There were 0 transfers of investments between Level 1 and Level 2 during the three months ended March 31, 2021 or 2020.
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance |
| September 30, 2017: | | | | | | | |
| Marketable Securities: | | | | | | | |
| U.S. government and agency debt securities | $ | 285 |
| | $ | — |
| | $ | — |
| | $ | 285 |
|
| Mortgage and asset-backed debt securities | — |
| | 90 |
| | — |
| | 90 |
|
| Corporate debt securities | 21 |
| | 349 |
| | — |
| | 370 |
|
| Equity securities | — |
| | 2 |
| | — |
| | 2 |
|
| Non-U.S. government debt securities | — |
| | 9 |
| | — |
| | 9 |
|
| Carbon credit investments | 287 |
| | — |
| | — |
| | 287 |
|
| Total marketable securities | 593 |
| | 450 |
| | — |
| | 1,043 |
|
| Other non-current investments | 19 |
| | — |
| | 8 |
| | 27 |
|
| Total | $ | 612 |
| | $ | 450 |
| | $ | 8 |
| | $ | 1,070 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. ASSETS HELD FOR SALE
On January 24, 2021, we entered into a definitive agreement to divest our UPS Freight business to TFI International Inc. for $800 million, subject to working capital and other adjustments. The following table presentssummarizes the changescarrying values of the assets and liabilities classified as held for sale in our consolidated balance sheets as of March 31, 2021 and December 31, 2020 (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Assets: | | | |
| Accounts receivable, net | $ | 284 | | | $ | 263 | |
| Other current assets | 67 | | | 62 | |
| Property, plant and equipment, net | 949 | | | 940 | |
| Other non-current assets | 93 | | | 124 | |
| Total assets | 1,393 | | | 1,389 | |
| Valuation allowance | (258) | | | (192) | |
| Total assets held for sale | $ | 1,135 | | | $ | 1,197 | |
| | | |
| Liabilities: | | | |
| Accounts payable | $ | 47 | | | $ | 50 | |
| Other current liabilities | 118 | | | 112 | |
| Other non-current liabilities | 131 | | | 185 | |
| Total liabilities to be disposed of | $ | 296 | | | $ | 347 | |
| | | |
| Net assets held for sale | $ | 839 | | | $ | 850 | |
Self-insurance reserves for the UPS Freight business and obligations for benefits earned within UPS-sponsored pension and postretirement medical benefit plans will be retained by us at closing and are not included in the above Level 3 instruments measured onamounts presented above.
As of December 31, 2020, we recognized a recurring basis fortotal pre-tax impairment charge of $686 million ($629 million after tax), comprised of a goodwill impairment charge of $494 million and a valuation allowance of $192 million to adjust the three months ended Septembercarrying value of the disposal group to fair value less cost to sell.
As of March 31, 2021, we increased the valuation allowance by $66 million ($50 million after tax) to adjust the carrying value of the disposal group to our current estimate of fair value less cost to sell. This charge was recognized within Other expenses in the statements of consolidated income.
On April 30,
2017 and 2016 (in millions): |
| | | | | | | | | | | |
| | Marketable Securities | | Other Non-Current Investments | | Total |
| Balance on July 1, 2017 | $ | — |
| | $ | 9 |
| | $ | 9 |
|
| Transfers into (out of) Level 3 | — |
| | — |
| | — |
|
| Net realized and unrealized gains (losses): | | | | | |
| Included in earnings (in investment income and other) | — |
| | (1 | ) | | (1 | ) |
| Included in accumulated other comprehensive income (pre-tax) | — |
| | — |
| | — |
|
| Purchases | — |
| | — |
| | — |
|
| Sales | — |
| | — |
| | — |
|
| Balance on September 30, 2017 | $ | — |
| | $ | 8 |
| | $ | 8 |
|
|
| | | | | | | | | | | |
| | Marketable Securities | | Other Non-Current Investments | | Total |
| Balance on July 1, 2016 | $ | — |
| | $ | 22 |
| | $ | 22 |
|
| 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 September 30, 2016 | $ | — |
| | $ | 18 |
| | $ | 18 |
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the nine months ended September 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) | — |
| | (5 | ) | | (5 | ) |
| Included in accumulated other comprehensive income (pre-tax) | — |
| | — |
| | — |
|
| Purchases | — |
| | — |
| | — |
|
| Sales | — |
| | — |
| | — |
|
| Balance on September 30, 2017 | $ | — |
| | $ | 8 |
| | $ | 8 |
|
| | | | | | |
| | 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) | — |
| | (14 | ) | | (14 | ) |
| Included in accumulated other comprehensive income (pre-tax) | — |
| | — |
| | — |
|
| Purchases | — |
| | — |
| | — |
|
| Sales | — |
| | — |
| | — |
|
| Balance on September 30, 2016 | $ | — |
| | $ | 18 |
|
| $ | 18 |
|
There were no transfers of investments between Level 1 and Level 2 during the three and nine months ended September 30, 2017 and 2016.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of September 30, 2017March 31, 2021 and December 31, 2016 consist2020 consisted of the following (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Vehicles | $ | 9,901 | | | $ | 9,786 | |
| Aircraft | 20,844 | | | 20,549 | |
| Land | 2,042 | | | 2,052 | |
| Buildings | 5,445 | | | 5,425 | |
| Building and leasehold improvements | 4,960 | | | 4,921 | |
| Plant equipment | 14,821 | | | 14,684 | |
| Technology equipment | 2,736 | | | 2,626 | |
| Construction-in-progress | 1,889 | | | 2,048 | |
| 62,638 | | | 62,091 | |
| Less: Accumulated depreciation and amortization | (30,183) | | | (29,837) | |
| Property, Plant and Equipment, Net | $ | 32,455 | | | $ | 32,254 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Vehicles | $ | 9,124 |
| | $ | 8,638 |
|
| Aircraft | 15,708 |
| | 15,653 |
|
| Land | 1,568 |
| | 1,397 |
|
| Buildings | 3,789 |
| | 3,439 |
|
| Building and leasehold improvements | 3,796 |
| | 3,612 |
|
| Plant equipment | 8,850 |
| | 8,430 |
|
| Technology equipment | 1,858 |
| | 1,741 |
|
| Equipment under operating leases | 29 |
| | 29 |
|
| Construction-in-progress | 2,482 |
| | 735 |
|
| | 47,204 |
| | 43,674 |
|
| Less: Accumulated depreciation and amortization | (26,216 | ) | | (24,874 | ) |
| | $ | 20,988 |
| | $ | 18,800 |
|
Property, plant and equipment purchased on account was $454 and $319 million as of March 31, 2021 and December 31, 2020, respectively.
We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraftaviation fuel prices and other factors. Additionally, we monitor ourall other property, plant and equipment categories for any indicators that the carrying value of the assets may not be recoverable. NoWe recognized impairment charges on property, plant and equipmentof $24 million for the three months ended March 31, 2021 due to the timing of cancellation of certain facility expansion projects. We recognized these impairment charges within Other expenses in the statements of consolidated income. NaN impairment charges were recorded duringfor the three and nine months ended September 30, 2017 and 2016.March 31, 2020.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. 8. EMPLOYEE BENEFIT PLANS
Company-Sponsored Benefit Plans
Information about the net periodic benefit (income) cost for our company-sponsored pension and postretirement benefit plans for the three months ended March 31, 2021 and 2020 is as follows for the three and nine months ended September 30, 2017 and 2016 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Benefits | | U.S. Postretirement
Medical Benefits | | International
Pension Benefits |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Three Months Ended March 31: | | | | | | | | | | | |
| Service cost | $ | 553 | | | $ | 464 | | | $ | 7 | | | $ | 7 | | | $ | 19 | | | $ | 16 | |
| Interest cost | 488 | | | 494 | | | 19 | | | 23 | | | 10 | | | 10 | |
| Expected return on assets | (846) | | | (888) | | | (2) | | | (2) | | | (17) | | | (21) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Amortization of prior service cost | 33 | | | 55 | | | 2 | | | 2 | | | 0 | | | 0 | |
| | | | | | | | | | | |
| Actuarial (gain) loss | (3,290) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | | | |
| Net periodic benefit (income) cost | $ | (3,062) | | | $ | 125 | | | $ | 26 | | | $ | 30 | | | $ | 12 | | | $ | 5 | |
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| | U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Three Months Ended September 30: | | | | | | | | | | | |
| Service cost | $ | 382 |
| | $ | 353 |
| | $ | 7 |
| | $ | 7 |
| | $ | 15 |
| | $ | 12 |
|
| Interest cost | 445 |
| | 457 |
| | 28 |
| | 32 |
| | 10 |
| | 10 |
|
| Expected return on assets | (730 | ) | | (629 | ) | | (2 | ) | | (2 | ) | | (17 | ) | | (15 | ) |
| Amortization of prior service cost | 48 |
| | 41 |
| | 1 |
| | 1 |
| | 1 |
| | — |
|
| Net periodic benefit cost | $ | 145 |
| | $ | 222 |
| | $ | 34 |
| | $ | 38 |
| | $ | 9 |
| | $ | 7 |
|
| | | | | | | | | | | | |
| | U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Nine Months Ended September 30: | | | | | | | | | | | |
| Service cost | $ | 1,161 |
| | $ | 1,059 |
| | $ | 21 |
| | $ | 21 |
| | $ | 44 |
| | $ | 37 |
|
| Interest cost | 1,369 |
| | 1,371 |
| | 84 |
| | 92 |
| | 30 |
| | 31 |
|
| Expected return on assets | (2,154 | ) | | (1,887 | ) | | (5 | ) | | (4 | ) | | (49 | ) | | (44 | ) |
| Amortization of prior service cost | 144 |
| | 125 |
| | 5 |
| | 3 |
| | 1 |
| | — |
|
| Net periodic benefit cost | $ | 520 |
| | $ | 668 |
| | $ | 105 |
| | $ | 112 |
| | $ | 26 |
| | $ | 24 |
|
On January 24, 2021, we entered into a definitive agreement to divest our UPS Freight business, details of which are set out in note 6. Upon closing, certain U.S. pension and postretirement benefit plans will be subject to remeasurement of plan assets and benefit obligations.
During the first ninethree months of 2017,2021, we contributed $2.359 billion$22 and $226$193 million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We currently expect to contribute $18approximately $72 and $15$63 million over the remainder of the year to theour pension and U.S. postretirement medical benefit plans, respectively. Subject to market conditions, we continually evaluate opportunities for additional discretionary pension contributions.
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 reflected a curtailment gain of $1.525 billion resulting from the benefit plan changes that was partially offset by net actuarial losses of $956 million, driven by a reduction of approximately 32 basis points in the discount rate compared to December 31, 2016, offset by actual assets returns approximately 275 basis points above our expected return as of the remeasurement date. The net curtailment gain reduced the actuarial loss recorded in "Accumulated other comprehensive loss" in the equity section of the consolidated balance sheet. As actuarial losses were within the corridor (defined as 10% of the greater of the fair value of plan assets and the plan's projected benefit obligation), there was no impact to the statement of consolidated income 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 a UPS Retirement Contribution. For employees eligible to receive the Retirement Contribution, UPS contributes 3% to 8% 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Effective June 23, 2017, the Company amended the UPS 401(k) Savings Plan so that non-union employees who currently participate in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, earn a UPS Retirement Contribution beginning January 1, 2023. UPS will contribute 5% to 8% of eligible compensation to the UPS 401(k) Savings Plan based on years of vesting service. The amendment also provides for transition contributions for certain participants. There was no impact to the statement of consolidated income for the quarter ended June 30, 2017 as a result of the above changes.
Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under 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 September 30, 2017March 31, 2021 and December 31, 20162020, we had $861$835 and $866$837 million, respectively, recorded in "Other Non-Current Liabilities,"Other non-current liabilities as well as $7$8 and $6$7 million as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively, recorded in "OtherOther current liabilities" on our consolidated balance sheets associated with our previous withdrawal from a multiemployer pension plan. This liability is payable in equal monthly installments over a remaining term of approximately 4542 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 September 30, 2017March 31, 2021 and December 31, 20162020 was $891$916 million and $861 million,$1.0 billion, 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 weat which time UPS withdrew from the plan and fully fundedpaid a $6.1 billion withdrawal liability to satisfy our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability.benefits. 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. Under this withdrawal agreement, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with applicable law. The financial crisis of 2008 created extensive asset losses at the CSPF, contributing to the plan’s projected insolvency, at which time benefits would be reduced to the legally permitted Pension Benefit Guaranty Corporation ("PBGC") limits, triggering the coordination of benefits provision in the collective bargaining agreement.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which. This change in law for the first time ever allowedpermitted 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,(“Treasury”). In 2016, the U.S. Department of the Treasury rejected the proposed plan submitted by the CSPF. In light of its financial difficulties, the CSPF statinghad stated 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 believesbelieved a legislative solution to its fundingfunded status iswould be necessary and we expector that it would become insolvent in 2025, at which time benefits would be reduced to the CSPF will continue to explore options to avoid insolvency.applicable PBGC benefit levels.
TheWe account for the potential obligation to pay coordinating benefits fromto 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We account for this potential obligationUPS Transfer Group under Accounting Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”). Under ASC 715 we are required, which requires us 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 matterdate and the broader systemic problems facing multiemployer pension plans is intervention by the federal government,at interim periods when a significant event occurs. ASC 715 does not permit anticipation of changes in law in makingwhen developing a best estimate of pension liabilities. Ourestimate.
At the December 31, 2020 measurement date, we developed our best estimate for the potential obligation to pay coordinating benefits to the UPS Transfer Group using a deterministic cash flow projection that reflected estimated CSPF cash flows and investment earnings, the lack of legislative action having been taken, the expectation of payment of guaranteed benefits by the PBGC and the lack of a benefit reduction plan under MPRA having been filed by the CSPF. As a result, our best estimate at that time of the obligation for coordinating benefits that may have been required to be directly provided by the UPS/IBT Plan to the UPS Transfer Group was $5.5 billion.
In March 2021, the American Rescue Plan Act (“ARPA”) was enacted into law. The ARPA contains provisions that allow for qualifying financially distressed multiemployer pension plans to apply for special financial assistance from the PBGC, which will be funded by Treasury. Following approval of an application, a qualifying multiemployer pension plan will receive a lump sum payment to enable it to continue paying unreduced benefits through 2051. The multiemployer plan is not obligated to repay the special financial assistance. The ARPA is intended to prevent both the PBGC and certain financially distressed multiemployer pension plans, including the CSPF, from becoming insolvent through 2051. We expect that the CSPF will apply for special financial assistance during 2021 in order to continue payment of unreduced benefits through 2051.
The passage of the ARPA and the expected receipt of special financial assistance by the CSPF currently obviates our obligation to provide additional coordinating benefits to the UPS Transfer Group through 2051. These matters also triggered a remeasurement under ASC 715. Accordingly, we remeasured the plan assets and pension benefit obligation of the UPS/IBT Plan as of March 31, 2021.
The interim remeasurement resulted in an actuarial gain of $6.4 billion, reflecting reduction of the measurement dateliability for coordinating benefits of $5.1 billion and a gain from other updated actuarial assumptions of $1.3 billion. The assumption gain reflects a $1.6 billion benefit from a 72 basis point increase in the discount rate compared to December 31, 2016 does not incorporate2020, offset by $0.3 billion asset loss resulting from actual asset returns approximately 220 basis points below our expected return. As a result, $3.1 billion of the actuarial gain was recorded in accumulated other comprehensive income within the equity section of the consolidated balance sheet. The remaining pre-tax actuarial gain of $3.3 billion ($2.5 billion after tax) that exceeded the corridor (defined as 10% of the greater of the fair value of plan assets and the plan's projected benefit obligation) was recognized as a mark-to-market gain in the statement of consolidated income for the quarter ended March 31, 2021.
The future value of this solution. Rather,estimate will continue to be influenced by a number of factors, including interpretations of the ARPA, future legislative actions, actuarial assumptions and the ability of the PBGC to sustain its commitments. Actual events may result in a change in our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will make another MPRA filing to forestall insolvency without reducing benefits to the UPS Transfer Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing we would be in a strong legal position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction, without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate as of the measurement date of December 31, 2016 is that there is no liability to be recognized for additional coordinating benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as these uncertainties are resolved.obligation. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in accordance with ASC 715.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Collective Bargaining Agreements
As of December 31, 2016, we hadWe have approximately 268,000327,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. During 2014, the Teamsters, ratified a new national master agreement (“NMA”) withof which approximately 11,000 are employees of UPS that will expire onFreight. These agreements run through July 31, 2018. The economic provisions in the NMA included wage rate increases, as well as increased contribution rates for healthcare and pension benefits.2023.
We have approximately 2,6003,000 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 theThis collective bargaining agreement became effectivebecomes amendable September 1, 2016 and run through September 1, 2021. The economic provisions in the agreement included pay increases, a signing bonus and enhanced pension benefits.2023.
OurWe have approximately 1,600 airline mechanics who are covered by a collective bargaining agreement with Teamsters Local 2727 which becamebecomes amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727.2023. In addition, approximately 3,0003,400 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. The collective bargaining agreement with the IAM runs through July 31, 2019.2024.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. 9. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of September 30, 2017March 31, 2021 and December 31, 20162020 (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, 2020: | | December 31, 2020: | $ | 715 | | | $ | 422 | | | $ | 2,230 | | | $ | 3,367 | |
| Acquired | — |
| | 18 |
| | 25 |
| | 43 |
| Acquired | 0 | | | 0 | | | 0 | | | 0 | |
| Currency / Other | — |
| | 14 |
| | 24 |
| | 38 |
| Currency / Other | 0 | | | (9) | | | (12) | | | (21) | |
| September 30, 2017: | $ | 715 |
| | $ | 439 |
| | $ | 2,684 |
| | $ | 3,838 |
| |
| March 31, 2021: | | March 31, 2021: | $ | 715 | | | $ | 413 | | | $ | 2,218 | | | $ | 3,346 | |
The goodwill acquired in the Supply Chain & Freight segment was predominately 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 remaining goodwill acquired in the Supply Chain & Freight segment was related to other, smaller acquisitions immaterial 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 September 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 immaterial purchase accounting adjustments and the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
Goodwill Impairment and Annual Assessment Date Change
During the third quarter of 2017, we changed the measurement date of our annual goodwill impairment test from October 1st to July 1st. This change better aligns the timing of the goodwill impairment test with our long-term business planning process. The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or avoidance of an impairment charge.
We completed our annual goodwill impairment valuation for all reporting units and indefinite lived intangible assets as of July 1, 2017, and determined that goodwill is not impaired. We will continue to monitor each reporting unit for triggering events that might require an update to our annual impairment evaluation between the annual assessment date and December 31, 2017. There were no triggering events identified during the third quarter of 2017.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of intangible assets as of September 30, 2017March 31, 2021 and December 31, 20162020 (in millions):
| | | | | | | | | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Value |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | |
| September 30, 2017: | | | | | | |
| March 31, 2021: | | March 31, 2021: | | | | | |
| Capitalized software | $ | 3,192 |
| | $ | (2,269 | ) | | $ | 923 |
| Capitalized software | $ | 4,610 | | | $ | (3,027) | | | $ | 1,583 | |
| Licenses | 165 |
| | (71 | ) | | 94 |
| Licenses | 102 | | | (44) | | | 58 | |
| Franchise rights | 128 |
| | (95 | ) | | 33 |
| Franchise rights | 168 | | | (114) | | | 54 | |
| Customer relationships | 751 |
| | (141 | ) | | 610 |
| Customer relationships | 725 | | | (359) | | | 366 | |
| Trade name | 200 |
| | — |
| | 200 |
| Trade name | 200 | | | 0 | | | 200 | |
| Trademarks, patents and other | 72 |
| | (35 | ) | | 37 |
| Trademarks, patents and other | 22 | | | (15) | | | 7 | |
| Total Intangible Assets, Net | $ | 4,508 |
|
| $ | (2,611 | ) | | $ | 1,897 |
| Total Intangible Assets, Net | $ | 5,827 | | | $ | (3,559) | | | $ | 2,268 | |
| December 31, 2016: | | | | | | |
| December 31, 2020: | | December 31, 2020: | | | | | |
| Capitalized software | $ | 2,933 |
| | $ | (2,157 | ) | | $ | 776 |
| Capitalized software | $ | 4,531 | | | $ | (2,962) | | | $ | 1,569 | |
| Licenses | 131 |
| | (70 | ) | | 61 |
| Licenses | 100 | | | (37) | | | 63 | |
| Franchise rights | 128 |
| | (90 | ) | | 38 |
| Franchise rights | 165 | | | (113) | | | 52 | |
| Customer relationships | 724 |
| | (85 | ) | | 639 |
| Customer relationships | 729 | | | (344) | | | 385 | |
| Trade name | 200 |
| | — |
| | 200 |
| Trade name | 200 | | | 0 | | | 200 | |
| Trademarks, patents and other | 67 |
| | (23 | ) | | 44 |
| Trademarks, patents and other | 18 | | | (13) | | | 5 | |
| Total Intangible Assets, Net | $ | 4,183 |
| | $ | (2,425 | ) | | $ | 1,758 |
| Total Intangible Assets, Net | $ | 5,743 | | | $ | (3,469) | | | $ | 2,274 | |
As of September 30, 2017,March 31, 2021, we had a trade name with a carrying value of $200 million and licenses with a carrying value of $5$4 million, which are deemed to be indefinite-lived intangible assets and are included in the table above.
Impairment tests for finite-lived intangible assets are performed when a triggering event occurs that may indicate that the carrying value of the intangible asset may not be recoverable. We recorded $6 million in impairment charges for finite-lived intangible assets during the three months ended March 31, 2021. There were 0 impairment charges during the same period of 2020.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. 10. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt obligations as of September 30, 2017March 31, 2021 and December 31, 20162020 consists of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal
Amount | | | | Carrying Value | | | | | | | | |
| | Maturity | | 2021 | | 2020 | | | | | | | | |
| Commercial paper | $ | 697 | | | 2021 | | $ | 697 | | | $ | 15 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Fixed-rate senior notes: | | | | | | | | | | | | | | | |
| 3.125% senior notes | 0 | | | 2021 | | 0 | | | 1,507 | | | | | | | | | |
| 2.050% senior notes | 700 | | | 2021 | | 700 | | | 700 | | | | | | | | | |
| 2.450% senior notes | 1,000 | | | 2022 | | 1,028 | | | 1,028 | | | | | | | | | |
| 2.350% senior notes | 600 | | | 2022 | | 599 | | | 599 | | | | | | | | | |
| 2.500% senior notes | 1,000 | | | 2023 | | 997 | | | 997 | | | | | | | | | |
| 2.800% senior notes | 500 | | | 2024 | | 498 | | | 498 | | | | | | | | | |
| 2.200% senior notes | 400 | | | 2024 | | 398 | | | 398 | | | | | | | | | |
| 3.900% senior notes | 1,000 | | | 2025 | | 995 | | | 995 | | | | | | | | | |
| 2.400% senior notes | 500 | | | 2026 | | 498 | | | 498 | | | | | | | | | |
| 3.050% senior notes | 1,000 | | | 2027 | | 993 | | | 993 | | | | | | | | | |
| 3.400% senior notes | 750 | | | 2029 | | 746 | | | 746 | | | | | | | | | |
| 2.500% senior notes | 400 | | | 2029 | | 397 | | | 397 | | | | | | | | | |
| 4.450% senior notes | 750 | | | 2030 | | 744 | | | 743 | | | | | | | | | |
| 6.200% senior notes | 1,500 | | | 2038 | | 1,483 | | | 1,483 | | | | | | | | | |
| 5.200% senior notes | 500 | | | 2040 | | 493 | | | 493 | | | | | | | | | |
| 4.875% senior notes | 500 | | | 2040 | | 490 | | | 490 | | | | | | | | | |
| 3.625% senior notes | 375 | | | 2042 | | 368 | | | 368 | | | | | | | | | |
| 3.400% senior notes | 500 | | | 2046 | | 491 | | | 491 | | | | | | | | | |
| 3.750% senior notes | 1,150 | | | 2047 | | 1,137 | | | 1,137 | | | | | | | | | |
| 4.250% senior notes | 750 | | | 2049 | | 742 | | | 742 | | | | | | | | | |
| 3.400% senior notes | 700 | | | 2049 | | 688 | | | 688 | | | | | | | | | |
| 5.300% senior notes | 1,250 | | | 2050 | | 1,231 | | | 1,231 | | | | | | | | | |
| Floating-rate senior notes: | | | | | | | | | | | | | | | |
| Floating-rate senior notes | 350 | | | 2021 | | 350 | | | 350 | | | | | | | | | |
| Floating-rate senior notes | 400 | | | 2022 | | 400 | | | 399 | | | | | | | | | |
| Floating-rate senior notes | 500 | | | 2023 | | 499 | | | 499 | | | | | | | | | |
| Floating-rate senior notes | 1,039 | | | 2049-2067 | | 1,027 | | | 1,027 | | | | | | | | | |
| 8.375% Debentures: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 8.375% debentures | 276 | | | 2030 | | 281 | | | 281 | | | | | | | | | |
| Pound Sterling Notes: | | | | | | | | | | | | | | | |
| 5.500% notes | 91 | | | 2031 | | 91 | | | 90 | | | | | | | | | |
| 5.125% notes | 626 | | | 2050 | | 594 | | | 586 | | | | | | | | | |
| Euro Senior Notes: | | | | | | | | | | | | | | | |
| 0.375% senior notes | 821 | | | 2023 | | 818 | | | 857 | | | | | | | | | |
| 1.625% senior notes | 821 | | | 2025 | | 818 | | | 856 | | | | | | | | | |
| 1.000% senior notes | 587 | | | 2028 | | 584 | | | 611 | | | | | | | | | |
| 1.500% senior notes | 587 | | | 2032 | | 583 | | | 611 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Canadian senior notes: | | | | | | | | | | | | | | | |
| 2.125% senior notes | 594 | | | 2024 | | 592 | | | 583 | | | | | | | | | |
| Finance lease obligations | 352 | | | 2021-2159 | | 352 | | | 342 | | | | | | | | | |
| Facility notes and bonds | 320 | | | 2029-2045 | | 320 | | | 320 | | | | | | | | | |
| Other debt | 5 | | | 2021-2025 | | 5 | | | 5 | | | | | | | | | |
| Total debt | $ | 23,891 | | | | | 23,727 | | | 24,654 | | | | | | | | | |
| Less: current maturities | | | | | (1,811) | | | (2,623) | | | | | | | | | |
| Long-term debt | | | | | $ | 21,916 | | | $ | 22,031 | | | | | | | | | |
|
| | | | | | | | | | | | | |
| | Principal Amount | | | | Carrying Value |
| | | Maturity | | 2017 | | 2016 |
| Commercial paper | $ | 4,120 |
| | 2017-2018 | | $ | 4,120 |
| | $ | 3,250 |
|
| Fixed-rate senior notes: | | | | | | | |
| 1.125% senior notes | 375 |
| | 2017 | | 375 |
| | 374 |
|
| 5.50% senior notes | 750 |
| | 2018 | | 755 |
| | 769 |
|
| 5.125% senior notes | 1,000 |
| | 2019 | | 1,027 |
| | 1,043 |
|
| 3.125% senior notes | 1,500 |
| | 2021 | | 1,567 |
| | 1,584 |
|
| 2.40% senior notes | 500 |
| | 2026 | | 497 |
| | 497 |
|
| 2.45% senior notes | 1,000 |
| | 2022 | | 989 |
| | 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 | | 368 |
| | 367 |
|
| 3.40% senior notes | 500 |
| | 2046 | | 491 |
| | 491 |
|
| Floating rate senior notes | 400 |
| | 2022 | | 398 |
| | — |
|
| 8.375% Debentures: | | | | | | | |
| 8.375% debentures | 424 |
| | 2020 | | 453 |
| | 461 |
|
| 8.375% debentures | 276 |
| | 2030 | | 282 |
| | 282 |
|
| Pound Sterling notes: | | | | | | | |
| 5.50% notes | 89 |
| | 2031 | | 84 |
| | 76 |
|
| 5.125% notes | 609 |
| | 2050 | | 582 |
| | 535 |
|
| Euro senior notes: | | | | | | | |
| 1.625% notes | 827 |
| | 2025 | | 822 |
| | 732 |
|
| 1.00% notes | 591 |
| | 2028 | | 587 |
| | 523 |
|
| Floating rate senior notes | 591 |
| | 2020 | | 589 |
| | 525 |
|
| Canadian senior notes: | | | | | | | |
| 2.125% notes | 603 |
| | 2024 | | 600 |
| | — |
|
| Floating rate senior notes | 979 |
| | 2049-2067 | | 969 |
| | 824 |
|
| Capital lease obligations | 450 |
| | 2017-3005 | | 450 |
| | 447 |
|
| Facility notes and bonds | 320 |
| | 2029-2045 | | 320 |
| | 319 |
|
| Other debt | 18 |
| | 2017-2022 | | 18 |
| | 20 |
|
| Total debt | $ | 18,897 |
| | | | 18,910 |
| | 16,075 |
|
| Less: Current maturities | | | | | (4,555 | ) | | (3,681 | ) |
| Long-term debt | | | | | $ | 14,355 |
| | $ | 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 September 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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), which bear interest at a 2.125% fixed interest rate and mature May 2024. 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.
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. WeAs of March 31, 2021, we had the following amountsU.S. commercial paper outstanding under these programs as of September 30, 2017: $2.775 billion$697 million with an average interest rate of 1.07%0.06% and €1.139 billion ($1.345 billion) with an average interest rate of -0.41%.0 outstanding balances under our European commercial paper program. As of September 30, 2017,March 31, 2021, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheet.sheets. The amount of commercial paper outstanding under these programs in 2021 is expected to fluctuate.
Debt Classification
We have classified certain floating-rate senior notes that are redeemable at the option of the note holder as long-term liabilities on our consolidated balance sheets, due to our intent and ability to refinance the debt if the put option is exercised.
Debt Repayments
On January 15, 2021, our 3.125% senior notes with a principle balance of $1.5 billion matured and were repaid in full.
Sources of Credit
We maintain two2 credit agreements with a consortium of banks. OneThe first of these agreements provides revolving credit facilities of $1.5$2.0 billion, and expires on March 23, 2018. Generally, amountsDecember 7, 2021. Amounts outstanding under this agreement bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus a margin of 0.875%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; or (3) LIBOR for a one-month interest period plus 1.00%, may be used at our discretion.
The second agreement provides revolving credit facilities of $2.5 billion, and expires on December 11, 2023. 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 announcedthe rate of interest last quoted by The Wall Street Journal as the prime rate;rate in the United States; (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
The applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-yearone-year credit default swap spread subject to a minimum rate of 0.10% and a maximum rate of 0.75% per annum. The rate is interpolated for a period of time from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of the facility then in effect (but not less than a period of one year).
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%0%). We are also able to request advances under this facilitythese facilities based on competitive bids for the applicable interest rate.
There were no0 amounts outstanding under this facilitythese facilities as of September 30, 2017.
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 September 30, 2017.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
31, 2021.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of September 30, 2017March 31, 2021, 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 September 30, 2017,March 31, 2021, 10% of net tangible assets was equivalent to $2.345 billion; however,$4.1 billion and we have nohad 0 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 Companyus for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately $19.746$26.3 and $17.134$28.3 billion as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. LEASES
We recognize a right-of-use ("ROU") asset and lease liability for all leases. Some of our leases contain both lease and non-lease components, which we have elected to treat as a single lease component. We have also elected not to recognize leases that have an original lease term, including reasonably certain renewal or purchase options, of twelve months or less in our consolidated balance sheets for all classes of underlying assets. Lease costs for short-term leases are recognized on a straight-line basis over the lease term. We elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are, or contain, leases, lease classification and determination of initial direct costs.
We lease property and equipment under finance and operating leases. We have finance and operating leases for package centers, airport facilities, warehouses, office space, aircraft, aircraft engines, information technology equipment (primarily mainframes, servers and copiers), vehicles and various other equipment used in operating our business. Certain leases for real estate and aircraft contain options to purchase, extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain and if the optional period and payments should be included in the calculation of the associated ROU asset and lease liability. In making this determination, we consider all relevant economic factors that would compel us to exercise or not exercise an option.
When our leases contain future payments that are dependent on an index or rate, such as the consumer price index, we initially measure the lease liability and ROU asset using the index or rate at the commencement date. In subsequent periods, lease payments dependent on an index or rate are not remeasured. Rather, changes to payments due to a change in an index or rate are recognized in our statements of consolidated income in the period of the change.
When available, we use the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of our leases. For these leases, we use an estimate of our incremental borrowing rate to discount lease payments based on information available at lease commencement. The incremental borrowing rate is derived using multiple inputs including our credit rating, the impact of full collateralization, lease term and denominated currency. The remaining lease terms vary from 1 month to 139 years.
Aircraft
In addition to the aircraft that we own, we have leases for 314 aircraft. Of these leased aircraft, 24 are classified as finance leases, 17 are classified as operating leases and the remaining 273 are classified as short-term leases. A majority of the obligations associated with the aircraft classified as finance leases have been legally defeased. Most of our long-term aircraft operating leases are operated by a third party to handle package and cargo volume in geographic regions where, due to government regulations, we are restricted from operating an airline.
In order to meet customers' needs, we charter aircraft to handle package and cargo volume on certain international trade lanes and domestic routes. Due to the nature of these agreements, primarily being that either party can cancel the agreement with short notice, we have classified these as short-term leases. Additionally, the lease payments associated with these charter agreements are variable in nature based on the number of hours flown.
Real Estate
We have operating and finance leases for package centers, airport facilities, warehouses, office space and expansion facilities utilized during peak shipping periods. Many of our leases contain charges for common area maintenance or other expenses that are updated based on landlord estimates. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the ROU asset and associated lease liability.
Some of our real estate leases contain options to renew or extend the lease or terminate the lease before the expiration date. These options are factored into the determination of the lease term and lease payments when their exercise is considered to be reasonably certain.
We also enter into real estate leases that contain lease incentives, such as tenant improvement allowances or move-in allowances, that are received or receivable at lease commencement. These incentives reduce lease payments for classification purposes and reduce the initial ROU asset. When lease incentives are receivable at lease commencement, they also reduce the initial lease liability.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
From time to time, we enter into leases with the intention of purchasing the property, either through purchase options with a fixed price or a purchase agreement negotiated contemporaneously with the lease agreement. We classify these leases as finance leases and include the purchase date and purchase price in the determination of the lease term and lease payments, respectively, when the option to exercise or purchase is reasonably certain.
Transportation equipment and other equipment
We enter into both long-term and short-term leases for transportation equipment to supplement our capacity or meet contractual demands. Some of these assets are leased on a month-to-month basis and the leases can be terminated without penalty. The lease term for these types of leases is determined by the length of the underlying customer contract or based on the judgment of the business unit. We also enter into multi-year leases for trailers to increase capacity during periods of high demand, which are typically only used for 90-120 days during the year. These leases are treated as short-term as the cumulative right-of-use is less than 12 months over the term of the contract.
The remainder of our leases are primarily related to equipment used in our air operations, vehicles required to meet capacity needs during periods of higher demand for our shipping services, technology equipment and office equipment used in our facilities.
Some of our transportation and technology equipment leases require us to make additional lease payments based on the underlying usage of the assets. Due to the variable nature of these costs, these are expensed as incurred and are not included in the ROU asset and lease liability.
The components of lease expense for the three months ended March 31, 2021 and 2020 were as follows (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2021 | | 2020 | | | | |
| Operating lease costs | $ | 175 | | | $ | 175 | | | | | |
| Finance lease costs: | | | | | | | |
| Amortization of assets | 23 | | | 18 | | | | | |
| Interest on lease liabilities | 4 | | | 5 | | | | | |
| Total finance lease costs | 27 | | | 23 | | | | | |
| Variable lease costs | 65 | | | 58 | | | | | |
| Short-term lease costs | 279 | | | 203 | | | | | |
| Total lease costs | $ | 546 | | | $ | 459 | | | | | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental information related to leases and location within our consolidated balance sheets are as follows (in millions, except lease term and discount rate):
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| Operating Leases: | | | |
| Operating lease right-of-use assets | $ | 3,044 | | | $ | 3,073 | |
| | | |
| Current maturities of operating leases | $ | 548 | | | $ | 560 | |
| Non-current operating leases | 2,524 | | | 2,540 | |
| Total operating lease liabilities | $ | 3,072 | | | $ | 3,100 | |
| | | |
| Finance Leases: | | | |
| Property, plant and equipment, net | $ | 1,167 | | | $ | 1,225 | |
| | | |
| Current maturities of long-term debt, commercial paper and finance leases | $ | 61 | | | $ | 56 | |
| Long-term debt and finance leases | 291 | | | 286 | |
| Total finance lease liabilities | $ | 352 | | | $ | 342 | |
| | | |
| Weighted average remaining lease term (in years): | | | |
| Operating leases | 12.4 | | 11.2 |
| Finance leases | 8.9 | | 9.3 |
| | | |
| Weighted average discount rate: | | | |
| Operating leases | 2.17 | % | | 2.28 | % |
| Finance leases | 4.02 | % | | 4.14 | % |
Supplemental cash flow information related to leases is as follows (in millions):
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| Cash paid for amounts included in measurement of liabilities: | | | |
| Operating cash flows from operating leases | $ | 171 | | | $ | 175 | |
| Operating cash flows from finance leases | 1 | | | 2 | |
| Financing cash flows from finance leases | 13 | | | 6 | |
| | | |
| Right-of-use assets obtained in exchange for lease liabilities: | | | |
| Operating leases | $ | 174 | | | $ | 305 | |
| Finance leases | 23 | | | 10 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease liabilities as of March 31, 2021 are as follows (in millions):
| | | | | | | | | | | |
| Finance Leases | | Operating Leases |
| 2021 | $ | 61 | | | $ | 457 | |
| 2022 | 70 | | | 569 | |
| 2023 | 55 | | | 467 | |
| 2024 | 34 | | | 344 | |
| 2025 | 29 | | | 266 | |
| Thereafter | 188 | | | 1,504 | |
| Total lease payments | 437 | | | 3,607 | |
| Less: Imputed interest | (85) | | | (535) | |
| Total lease obligations | 352 | | | 3,072 | |
| Less: Current obligations | (61) | | | (548) | |
| Long-term lease obligations | $ | 291 | | | $ | 2,524 | |
As of March 31, 2021, we have additional leases which have not commenced of $178 million. These leases will commence in 2021 and 2022 when we are granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. 12. LEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business activities.
business.
Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious defensedefenses and will deny, liability in all litigation pending against us,matters, including (except as otherwise noted herein) the matters described below, and we intend to vigorously defend vigorously each case.matter. We have accrued foraccrue amounts associated with legal claimsproceedings when and to the extent that, amounts associated with the claims becomea loss becomes probable and can be reasonably estimated. The actual costs of resolving legal claimsproceedings may be substantially higher or lower than the amounts accrued foron those claims.
For those matters as to which we are not able to estimate a possible loss or range of loss,losses, we are not able to determine whether theany such loss will have a material adverse effectimpact on our business, financial condition or results of operations or liquidity.financial condition. For these matters, in this category, we have indicated in the descriptions that followdescribed the reasons that we are unable to estimate thea possible loss or range of loss.losses.
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 wouldany such matter will have a material adverse effectimpact 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 behalffinancial condition. One of a certified class of all franchisees who chose to rebrand their Mail Boxes Etc. franchises to The UPS Store in March 2003. Plaintiff alleges that UPS and The UPS Store, Inc. misrepresented and omitted facts to the class about the market tests that were conducted before offering the class the choice of whether to rebrand to The UPS Store. Defendants’ motion to decertify the class was granted in August 2017. The plaintiff has filed a notice of appeal, and further proceedings in the trial court are stayed pending resolution by the California Court of Appeal. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from the remaining aspects of this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present; and (3) plaintiff’s notice of appeal is pending. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In AFMS LLCthese matters, Hughes v. UPS Supply Chain Solutions, Inc. and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. The Court granted summary judgment motions filed by UPS and FedEx, entered judgment in favor of UPS and FedEx, and dismissed the case. Plaintiff appealed to the Court of Appeals for the Ninth Circuit. In August 2017, the Ninth Circuit affirmed the District Court's order dismissing the case. AFMS filed a petition for rehearing in September 2017, which was denied. 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, although the DOJ has not communicated with us for over five years. We deny any liability with respect to these matters and intend to vigorously defend ourselves in the event that any of these proceedings were to continue. 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 may be pending; and (2) AFMS may seek discretionary review by the U.S. Supreme Court. If AFMS does not seek discretionary review or it is denied, its case is concluded. 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.
We are a defendant in Ryan Wright and Julia Zislin v. United Parcel Service, Canada Ltd., anInc. had previously been certified as a class action broughtin Kentucky state court. In the second quarter of 2019, the court granted our motion for judgment on behalf of a certified class of customers in the Superior Court of Justice in Ontario, Canada. Plaintiffs filed suit in February 2007, alleging inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court in August 2011, when it dismissed plaintiffs' complaint under the Criminal Code and granted plaintiffs' complaint of inadequate disclosure. We appealed the Court's decision pertaining to inadequate disclosure in September 2011. In October 2017, we reached an agreement in principle to resolve the case for an immaterial amount. Final resolution of this matter is subjectpleadings related to the negotiation, execution and delivery of a settlement agreement and court approval.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern District of New York, arising from alleged shipments of cigarettes to New York State and City residents.wage-and-hour claims. The complaint asserted claims under various federal and state laws. The complaint also included a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. On March 24, 2017, the District Court issued an opinion and order finding liability against UPS on each of the plaintiffs’ causes of action. On May 25, 2017, the District Court issued a corrected opinion and order on liability and an order awarding the plaintiffs damages of $9.4 million and penalties of $237.6 million. An accrual of $9.4 million with respect to the damages awarded by the court is included on our consolidated balance sheet at September 30, 2017. We estimate that the amount of losses could be up to $247 million, plus interest; however, the amount of penalties ultimately payable, if any, is subject to a variety of complex factors and potential outcomes that remain to be determined in future legal proceedings. Consequently, we are unable to reasonably estimate a likely amount of loss within that range. We strongly disagree with the District Court’s analysis and conclusions, and have appealed to the United States Court of Appeals for the Second Circuit. UPS filed its opening brief with the Appellate Court in October 2017.this decision.
Other Matters
In October 2015, the DOJDepartment of Justice ("DOJ") informed us of an industry-wide inquiry into the transportation of mail under the United States Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a Civil Investigative Demand seeking certain information relating to our contracts. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating with the DOJ. The CompanyAn immaterial accrual with respect to this matter is included in our consolidated balance sheets. We do not believe that any loss from this matter would have a material impact on our operations or financial condition, although 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”) openedannounced 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 documentsOn March 8, 2018, the CNMC adopted a final decision, finding an infringement and imposing an immaterial fine on UPS. UPS appealed the decision and in September 2018, obtained a suspension of the implementation of the decision (including payment of the fine). The appeal is pending. We do not prejudge the final decision (which is subject to appeal) as to facts or law. There are multiple factorsbelieve that prevent us from being able to estimate the amount ofany loss if any, that may result from this matter including: (1) wewould have a material impact on our operations or financial condition. We are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) theredefenses. There are also 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 defendantparty in various other lawsuitsmatters that arose in the normal course of business. We do not believe that the eventual resolution of these other lawsuitsmatters (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material adverse effectimpact on our financial condition, results of operations or liquidity.financial condition.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. 13. SHAREOWNERS' EQUITY
Capital Stock, Additional Paid-In Capital, and Retained Earnings and Non-Controlling Minority Interests
We maintain twoare authorized to issue 2 classes of common stock, which are distinguished from each other primarily by their respective voting rights. Class A shares of UPS are entitled to 10 votes per share, whereas class B shares are entitled to one1 vote per share. Class A shares are primarily held by UPS employees and retirees, as well as trusts and descendants of the Company's founders, 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 ExchangeNYSE under the symbol “UPS”. Class A and B shares both have a $0.01 par value, and as of September 30, 2017,March 31, 2021, 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.issued, with a par value of $0.01 per share. As of September 30, 2017, noMarch 31, 2021, 0 preferred shares had been issued.
The following is a rollforward of our common stock, additional paid-in capital, and retained earnings and non-controlling minority interests accounts for the ninethree months ended September 30, 2017March 31, 2021 and 20162020 (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| | Shares | | Dollars | | Shares | | Dollars |
| Class A Common Stock | | | | | | | |
| Balance at beginning of period | 147 | | | $ | 2 | | | 156 | | | $ | 2 | |
| Common stock purchases | 0 | | | 0 | | | 0 | | | 0 | |
| Stock award plans | 4 | | | 0 | | | 4 | | | 0 | |
| Common stock issuances | 1 | | | 0 | | | 2 | | | 0 | |
| Conversions of class A to class B common stock | (4) | | | 0 | | | (4) | | | 0 | |
| Class A shares issued at end of period | 148 | | | $ | 2 | | | 158 | | | $ | 2 | |
| Class B Common Stock | | | | | | | |
| Balance at beginning of period | 718 | | | $ | 7 | | | 701 | | | $ | 7 | |
| Common stock purchases | 0 | | | 0 | | | (2) | | | 0 | |
| Conversions of class A to class B common stock | 4 | | | 0 | | | 4 | | | 0 | |
| Class B shares issued at end of period | 722 | | | $ | 7 | | | 703 | | | $ | 7 | |
| Additional Paid-In Capital | | | | | | | |
| Balance at beginning of period | | | $ | 865 | | | | | $ | 150 | |
| Common stock purchases | | | 0 | | | | | (217) | |
| Stock award plans | | | 30 | | | | | (67) | |
| Common stock issuances | | | 154 | | | | | 163 | |
| | | | | | | |
| | | | | | |
| Balance at end of period | | | $ | 1,049 | | | | | $ | 29 | |
| Retained Earnings | | | | | | | |
| Balance at beginning of period | | | $ | 6,896 | | | | | $ | 9,105 | |
| Net income attributable to common shareowners | | | 4,792 | | | | | 965 | |
Dividends ($1.02 and $1.01 per share) (1) | | | (938) | | | | | (933) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other | | | (2) | | | | | 0 | |
| Balance at end of period | | | $ | 10,748 | | | | | $ | 9,137 | |
| Non-Controlling Minority Interest | | | | | | | |
| Balance at beginning of period | | | $ | 12 | | | | | $ | 16 | |
| Change in non-controlling minority interest | | | 0 | | | | | (2) | |
| Balance at end of period | | | $ | 12 | | | | | $ | 14 | |
(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $80 and $93 million as of March 31, 2021 and March 31, 2020, respectively, that were settled in shares of class A common stock. |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Shares | | Dollars | | Shares | | Dollars |
| Class A Common Stock | | | | | | | |
| Balance at beginning of period | 180 |
| | $ | 2 |
| | 194 |
| | $ | 2 |
|
| Common stock purchases | (3 | ) | | — |
| | (4 | ) | | — |
|
| Stock award plans | 4 |
| | — |
| | 5 |
| | — |
|
| Common stock issuances | 2 |
| | — |
| | 2 |
| | — |
|
| Conversions of class A to class B common stock | (7 | ) | | — |
| | (12 | ) | | — |
|
| Class A shares issued at end of period | 176 |
| | $ | 2 |
| | 185 |
| | $ | 2 |
|
| Class B Common Stock | | | | | | | |
| Balance at beginning of period | 689 |
| | $ | 7 |
| | 693 |
| | $ | 7 |
|
| Common stock purchases | (9 | ) | | — |
| | (16 | ) | | — |
|
| Conversions of class A to class B common stock | 7 |
| | — |
| | 12 |
| | — |
|
| Class B shares issued at end of period | 687 |
| | $ | 7 |
| | 689 |
| | $ | 7 |
|
| Additional Paid-In Capital | | | | | | | |
| Balance at beginning of period | | | $ | — |
| | | | $ | — |
|
| Stock award plans | | | 283 |
| | | | 423 |
|
| Common stock purchases | | | (604 | ) | | | | (811 | ) |
| Common stock issuances | | | 268 |
| | | | 233 |
|
| Option premiums received (paid) | | | 53 |
| | | | 155 |
|
| Balance at end of period | | | $ | — |
| | | | $ | — |
|
| Retained Earnings | | | | | | | |
| Balance at beginning of period | | | $ | 4,879 |
| | | | $ | 6,001 |
|
| Net income attributable to common shareowners | | | 3,806 |
| | | | 3,670 |
|
| Dividends ($2.49 and $2.34 per share) | | | (2,213 | ) | | | | (2,093 | ) |
| Common stock purchases | | | (748 | ) | | | | (1,193 | ) |
| Balance at end of period | | | $ | 5,724 |
| | | | $ | 6,385 |
|
We repurchased 12.3 million shares of class A and class B common stock for $1.352 billion during the nine months ended September 30, 2017, and 19.3 million shares for $2.004 billion during the nine months ended September 30, 2016. In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion for shares of class A and class B common stock, which has no expiration date. As of September 30, 2017,March 31, 2021, we had $4.803$2.1 billion of this share repurchase authorization available.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
From time to time, we enter intoaccelerated share repurchase programs, with large financial institutions to assist in our buybackopen market purchases or other methods we deem appropriate. The timing of company stock. These programs allow usshare repurchases will depend upon market conditions. Unless terminated earlier by the Board, the program will expire when we have purchased all shares authorized for repurchase under the program. We have currently suspended stock repurchases under this program and as of March 31, 2021, we have no plans to repurchase ourshares.
We did 0t repurchase any shares at a price belowunder this program during the weighted average UPS share price for a given period.three months ended March 31, 2021. During the third quarterthree months ended March 31, 2020, we repurchased 2.1 million shares of 2017, 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 UPSclass A and 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 abovefor $217 million ($220 million in repurchases are reported on the pre-determined price, we will have our initial investment returned with a premiumstatements of consolidated cash flows due to the timing of settlements).
Movements in either cash or shares (at our election). If the closing market priceadditional paid-in capital in respect 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 net premiums of $53 and $155 millionaward plans comprise accruals for unvested awards, offset by adjustments for awards that vest during the first nine months of 2017 and 2016, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of September 30, 2017, we had outstanding options for the purchase of 0.5 million shares with a weighted average strike price of $97.57 per share that will settle in the fourth quarter of 2017.period.
Accumulated Other Comprehensive Income (Loss)
We recognize activity in Accumulated Other Comprehensive Income (Loss) ("AOCI")AOCI for foreign currency translation adjustments, unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in AOCI for the ninethree months ended September 30, 2017March 31, 2021 and 2016 is2020 was as follows (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Foreign currency translation gain (loss): | | | |
| Balance at beginning of period | $ | (1,016 | ) | | $ | (897 | ) |
| Translation adjustment (net of tax effect of $(146) and $24) | 86 |
| | (12 | ) |
| Balance at end of period | (930 | ) | | (909 | ) |
| Unrealized gain (loss) on marketable securities, net of tax: | | | |
| Balance at beginning of period | (1 | ) | | (1 | ) |
| Current period changes in fair value (net of tax effect of $1 and $3) | 2 |
| | 4 |
|
| Reclassification to earnings (no tax impact in either period) | (1 | ) | | — |
|
| Balance at end of period | — |
| | 3 |
|
| Unrealized gain (loss) on cash flow hedges, net of tax: | | | |
| Balance at beginning of period | (45 | ) | | 67 |
|
| Current period changes in fair value (net of tax effect of $(162) and $(15)) | (269 | ) | | (24 | ) |
| Reclassification to earnings (net of tax effect of $(6) and $(96)) | (9 | ) | | (159 | ) |
| Balance at end of period | (323 | ) | | (116 | ) |
| Unrecognized pension and postretirement benefit costs, net of tax: | | | |
| Balance at beginning of period | (3,421 | ) | | (2,709 | ) |
Remeasurement of plan assets and liabilities (net of tax effect of $214 and $0) (1) | 356 |
| | — |
|
| Reclassification to earnings (net of tax effect of $56 and $48) | 94 |
| | 80 |
|
| Balance at end of period | (2,971 | ) | | (2,629 | ) |
| Accumulated other comprehensive income (loss) at end of period | $ | (4,224 | ) | | $ | (3,651 | ) |
| | | | |
(1) See note 6 for further information about plan curtailments resulting in remeasurement of plan assets and liabilities. |
| | | | | | | | | | | |
| Three Months Ended March 31: | 2021 | | 2020 |
| Foreign Currency Translation Gain (Loss), Net of Tax: | | | |
| Balance at beginning of period | $ | (981) | | | $ | (1,078) | |
| | | |
| Translation adjustment (net of tax effect of $30 and $13) | (82) | | | (141) | |
| | | |
| Balance at end of period | (1,063) | | | (1,219) | |
| Unrealized Gain (Loss) on Marketable Securities, Net of Tax: | | | |
| Balance at beginning of period | 6 | | | 4 | |
| Current period changes in fair value (net of tax effect of $0 and $0) | (1) | | | 2 | |
| | | |
| Reclassification to earnings (net of tax effect of $0 and $0) | (3) | | | 0 | |
| Balance at end of period | 2 | | | 6 | |
| Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax: | | | |
| Balance at beginning of period | (223) | | | 112 | |
| Current period changes in fair value (net of tax effect of $39 and $83) | 124 | | | 263 | |
| | | |
| Reclassification to earnings (net of tax effect of $(3) and $(15)) | (10) | | | (46) | |
| Balance at end of period | (109) | | | 329 | |
| Unrecognized Pension and Postretirement Benefit Costs, Net of Tax: | | | |
| Balance at beginning of period | (5,915) | | | (5,035) | |
| | | |
| Net actuarial gain (loss) resulting from remeasurements of plan assets and liabilities (net of tax effect of $1,544 and $0) | 4,901 | | | 0 | |
| Reclassification to earnings (net of tax effect of $(780) and $14) | (2,475) | | | 43 | |
| Balance at end of period | (3,489) | | | (4,992) | |
| Accumulated other comprehensive income (loss) at end of period | $ | (4,659) | | | $ | (5,876) | |
| | | |
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three and nine months ended September 30, 2017March 31, 2021 and 2016 is2020 was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Amount Reclassified from AOCI | | Affected Line Item in the Income Statement |
| Three Months Ended March 31: | 2021 | | 2020 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Unrealized Gain (Loss) on Marketable Securities: | | | | | |
| Realized gain (loss) on sale of securities | $ | 3 | | | $ | 0 | | | Investment income and other |
| Income tax (expense) benefit | 0 | | | 0 | | | Income tax expense |
| Impact on net income | 3 | | | 0 | | | Net income |
| Unrealized Gain (Loss) on Cash Flow Hedges: | | | | | |
| Interest rate contracts | (2) | | | (3) | | | Interest expense |
| Foreign exchange contracts | 15 | | | 64 | | | Revenue |
| | | | | |
| | | | | |
| Income tax (expense) benefit | (3) | | | (15) | | | Income tax expense |
| Impact on net income | 10 | | | 46 | | | Net income |
| Unrecognized Pension and Postretirement Benefit Costs: | | | | | |
| Prior service costs | (35) | | | (57) | | | Investment income and other |
| | | | | |
| Remeasurement of benefit obligation | 3,290 | | | 0 | | | Investment income and other |
| Income tax (expense) benefit | (780) | | | 14 | | | Income tax expense |
| Impact on net income | 2,475 | | | (43) | | | Net income |
| Total amount reclassified for the period | $ | 2,488 | | | $ | 3 | | | Net income |
| | | | | |
Deferred Compensation Obligations and Treasury Stock
We maintain a deferred compensation plan whereby certain employees were previously able to elect to defer the gains on stock option exercises by deferring the shares received upon exercise into a rabbi trust. The shares held in this trust are classified as treasury stock, and the liability to participating employees is classified as “Deferred compensation obligations” in the shareowners’ equity section of the consolidated balance sheets. The number of shares needed to settle the liability for deferred compensation obligations is included in the denominator in both the basic and diluted earnings per share calculations. Employees are generally no longer able to defer the gains from stock options exercised subsequent to December 31, 2004.
Activity in the deferred compensation program for the three months ended March 31, 2021 and 2020 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Three Months Ended March 31: | Shares | | Dollars | | Shares | | Dollars |
| Deferred Compensation Obligations: | | | | | | | |
| Balance at beginning of period | | | $ | 20 | | | | | $ | 26 | |
| Reinvested dividends | | | 0 | | | | | 0 | |
| Benefit payments | | | (5) | | | | | (7) | |
| Balance at end of period | | | $ | 15 | | | | | $ | 19 | |
| Treasury Stock: | | | | | | | |
| Balance at beginning of period | 0 | | | $ | (20) | | | 0 | | | $ | (26) | |
| Reinvested dividends | 0 | | | 0 | | | 0 | | | 0 | |
| Benefit payments | 0 | | | 5 | | | 0 | | | 7 | |
| Balance at end of period | 0 | | | $ | (15) | | | 0 | | | $ | (19) | |
|
| | | | | | | | | |
| Three Months Ended September 30: | | | | | |
| | Amount Reclassified from AOCI | | Affected Line Item in the Income Statement |
| | 2017 | | 2016 | |
| Unrealized gain (loss) on marketable securities: | | | | | |
| Realized gain on sale of securities | $ | 1 |
| | $ | — |
| | Investment income |
| Income tax expense | — |
| | — |
| | Income tax expense |
| Impact on net income | 1 |
| | — |
| | Net income |
| Unrealized gain (loss) on cash flow hedges: | | | | | |
| Interest rate contracts | (6 | ) | | (7 | ) | | Interest expense |
| Foreign exchange contracts | 3 |
| | 83 |
| | Revenue |
| Income tax (expense) benefit | 1 |
| | (29 | ) | | Income tax expense |
| Impact on net income | (2 | ) | | 47 |
| | Net income |
| Unrecognized pension and postretirement benefit costs: | | | | | |
| Prior service costs | (50 | ) | | (42 | ) | | Compensation and benefits |
| Income tax benefit | 19 |
| | 15 |
| | Income tax expense |
| Impact on net income | (31 | ) | | (27 | ) | | Net income |
| | | | | | |
| Total amount reclassified for the period | $ | (32 | ) | | $ | 20 |
| | Net income |
|
| | | | | | | | | |
| Nine Months Ended September 30: | | | | | |
| | Amount Reclassified from AOCI | | Affected Line Item in the Income Statement |
| | 2017 | | 2016 | |
| Unrealized gain (loss) on marketable securities: | | | | | |
| Realized gain on sale of securities | $ | 1 |
| | $ | — |
| | Investment income |
| Income tax expense | — |
| | — |
| | Income tax expense |
| Impact on net income | 1 |
| | — |
| | Net income |
| Unrealized gain (loss) on cash flow hedges: | | | | | |
| Interest rate contracts | (20 | ) | | (19 | ) | | Interest expense |
| Foreign exchange contracts | 35 |
| | 274 |
| | Revenue |
| Income tax expense | (6 | ) | | (96 | ) | | Income tax expense |
| Impact on net income | 9 |
| | 159 |
| | Net income |
| Unrecognized pension and postretirement benefit costs: | | | | | |
| Prior service costs | (150 | ) | | (128 | ) | | Compensation and benefits |
| Income tax benefit | 56 |
| | 48 |
| | Income tax expense |
| Impact on net income | (94 | ) | | (80 | ) | | Net income |
| | | | | | |
| Total amount reclassified for the period | $ | (84 | ) | | $ | 79 |
| | Net income |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the nine months ended September 30, 2017 and 2016 is as follows (in millions):
|
| | | | | | | | | | | | | |
| | 2017 | | 2016 |
| Shares | | Dollars | | Shares | | Dollars |
| Deferred Compensation Obligations: | | | | | | | |
| Balance at beginning of period | | | $ | 45 |
| | | | $ | 51 |
|
| Reinvested dividends | | | 2 |
| | | | 2 |
|
| Benefit payments | | | (10 | ) | | | | (9 | ) |
| Balance at end of period | | | $ | 37 |
| | | | $ | 44 |
|
| Treasury Stock: | | | | | | | |
| Balance at beginning of period | (1 | ) | | $ | (45 | ) | | (1 | ) | | $ | (51 | ) |
| Reinvested dividends | — |
| | (2 | ) | | — |
| | (2 | ) |
| Benefit payments | — |
| | 10 |
| | — |
| | 9 |
|
| Balance at end of period | (1 | ) | | $ | (37 | ) | | (1 | ) | | $ | (44 | ) |
Noncontrolling Interests:NOTE 14. SEGMENT INFORMATION
We have noncontrolling interestsreport our operations in certain consolidated subsidiaries in our3 segments: U.S. Domestic Package, International Package and Supply Chain & Freight segments. Noncontrolling interests increased $6 and $3 million for the nine months ended September 30, 2017 and 2016, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SEGMENT INFORMATION
We report our operations in three segments: U.S. Domestic Package operations, International Package operations and Supply Chain & Freight operations.Freight. 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
U.S. 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 theour operations of ourin 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 LogisticsUPS Mail Innovations units provide services in more than 195200 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. On April 30, 2021, we completed the previously announced divestiture of our UPS Freight business, details of which are set out in note 6. Coyote offers truckload brokerage services primarily in the U.S.United States. Marken is a global provider of supply chain solutions to the healthcare and life sciences industry.industry, specializing in clinical trials logistics. 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 oftax expense. Certain expenses are allocated between the reportable segments are the sameusing activity-based costing methods as those described in the summary of accounting policies included in theaudited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016, with certain expenses allocated between2020, and in the segments using activity-based costing methods."Results of Operations - Segment Review" section of Management's Discussion and Analysis included in this report.
Segment information for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 is as follows (in millions):
| | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
March 31, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2021 | | 2020 | |
| Revenue: | | | | | | | | Revenue: | | | | |
| U.S. Domestic Package | $ | 9,649 |
| | $ | 9,289 |
| | $ | 28,929 |
| | $ | 27,388 |
| U.S. Domestic Package | $ | 14,010 | | | $ | 11,456 | | |
| International Package | 3,364 |
| | 3,024 |
| | 9,585 |
| | 9,015 |
| International Package | 4,607 | | | 3,383 | | |
| Supply Chain & Freight | 2,965 |
| | 2,615 |
| | 8,529 |
| | 7,572 |
| Supply Chain & Freight | 4,291 | | | 3,196 | | |
| Consolidated | $ | 15,978 |
| | $ | 14,928 |
| | $ | 47,043 |
| | $ | 43,975 |
| |
| Consolidated revenue | | Consolidated revenue | $ | 22,908 | | | $ | 18,035 | | |
| Operating Profit: | | | | | | | | Operating Profit: | | | | |
| U.S. Domestic Package | $ | 1,182 |
| | $ | 1,252 |
| | $ | 3,653 |
| | $ | 3,587 |
| U.S. Domestic Package | $ | 1,359 | | | $ | 364 | | |
| International Package | 627 |
| | 576 |
| | 1,739 |
| | 1,763 |
| International Package | 1,085 | | | 551 | | |
| Supply Chain & Freight | 226 |
| | 206 |
| | 643 |
| | 545 |
| Supply Chain & Freight | 321 | | | 157 | | |
| Consolidated | $ | 2,035 |
| | $ | 2,034 |
| | $ | 6,035 |
| | $ | 5,895 |
| |
| Consolidated operating profit | | Consolidated operating profit | $ | 2,765 | | | $ | 1,072 | | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. 15. 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 nine months ended September 30, 2017March 31, 2021 and 20162020 (in millions, except per share amounts):
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| 2021 | | 2020 | | | | |
| Numerator: | | | | | | | |
| Net income attributable to common shareowners | $ | 4,792 | | $ | 965 | | | | |
| Denominator: | | | | | | | |
| Weighted average shares | 867 | | 858 | | | | |
| | | | | | | |
| Vested portion of restricted units | 5 | | 6 | | | | |
| Denominator for basic earnings per share | 872 | | 864 | | | | |
| Effect of dilutive securities: | | | | | | | |
| Restricted units | 3 | | 5 | | | | |
| Stock options | 1 | | 0 | | | | |
| Denominator for diluted earnings per share | 876 | | 869 | | | | |
| Basic earnings per share | $ | 5.50 | | $ | 1.12 | | | | |
| Diluted earnings per share | $ | 5.47 | | $ | 1.11 | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| Numerator: | | | | | | | |
| Net income attributable to common shareowners | $ | 1,264 |
| | $ | 1,270 |
| | $ | 3,806 |
| | $ | 3,670 |
|
| Denominator: | | | | | | | |
| Weighted average shares | 864 |
| | 876 |
| | 867 |
| | 880 |
|
| Deferred compensation obligations | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Vested portion of restricted units | 4 |
| | 3 |
| | 4 |
| | 4 |
|
| Denominator for basic earnings per share | 869 |
| | 880 |
| | 872 |
| | 885 |
|
| Effect of dilutive securities: | | | | | | | |
| Restricted units | 4 |
| | 4 |
| | 3 |
| | 3 |
|
| Stock options | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Denominator for diluted earnings per share | 874 |
| | 885 |
| | 876 |
| | 889 |
|
| Basic earnings per share | $ | 1.45 |
| | $ | 1.44 |
| | $ | 4.36 |
| | $ | 4.15 |
|
| Diluted earnings per share | $ | 1.45 |
| | $ | 1.44 |
| | $ | 4.34 |
| | $ | 4.13 |
|
There were no antidilutive securities for the three months ended September 30, 2017. Diluted earnings per share for the three months ended September 30, 2016March 31, 2021 and 2020 excluded the effect of 0.10.2 and 1.2 million shares of common stock, (0.2 million for the nine months ended September 30, 2017 and 2016),respectively, that may be issued upon the exercise of employee stock options because such effect would behave been antidilutive.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. 16. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
We are exposed to market risk, primarily related toChanges in fuel prices, interest rates and foreign currency exchange rates commodity pricesimpact our results of operations and interest rates. These exposures arewe actively monitored by management.monitor these exposures. To manage the volatility relating to certainimpact of these exposures, we may 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 exchange 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 forfrom 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 seek to 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 riskcounterparties 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.
As of March 31, 2021 and December 31, 2020, we held cash collateral of $122 and $146 million, respectively, under these agreements. This collateral is included in "Cash and cash equivalents" in the consolidated balance sheets and its use by UPS is not restricted. As of March 31, 2021 and December 31, 2020, we were required to post $49 and $158 million, respectively, of cash collateral 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 September 30, 2017 and December 31, 2016, we held cash collateral of $48 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 September 30, 2017 and December 31, 2016, $104 million and $0, respectively, of additional collateral was required to be posted with our counterparties. The aggregate fair value of instruments not covered by the zero threshold bilateral collateral provisions were in a net liability position of $47 and $10 million at September 30, 2017 and December 31, 2016, 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 recognizeAs of March 31, 2021, all derivativeof our instruments as assets or liabilitieswere covered by the zero threshold bilateral collateral provision. As of December 31, 2020 there were 0 instruments 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 hedgingliability position that were not covered by the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statements of consolidated income during the current period.
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.
A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the foreign currency translation adjustment within AOCI. The remainder of the change in value of such instruments is recorded in earnings.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
zero threshold bilateral collateral provisions.
Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply to our domestic and international package and LTLless-than-truckload ("LTL") services are the primary means of reducing the risk of adverse fuel price changes on our business. We periodically enter into option contracts on energy commodity productsIn order to managemitigate 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 componentimpact of fuel expense or revenue whensurcharges imposed on us by outside carriers, we regularly adjust the underlying transactions occur.rates we charge for our freight brokerage, inter-modal and truckload services.
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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 investmentInvestment income (expense) 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 substantially complete liquidation of the foreign entity.entity, upon which they are recognized as a component of Investment income (expense) and other.
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. Interest rate swaps allow us to maintain a target range of floating-rate debt within our capital structure. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within our capital structure.
We have designated and account for the majority of our interest rate swaps that convert fixed ratefixed-rate interest payments into floating ratefloating-rate interest payments as hedges of the fair value hedges 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 ratefloating-rate interest payments into fixed ratefixed-rate interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from fair value adjustments to thethese interest rate swaps are recorded to AOCI.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings by using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Outstanding Positions
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, the notional amounts of our outstanding derivative positions were as follows (in millions):
| | | | September 30, 2017 | | December 31, 2016 | | March 31, 2021 | | December 31, 2020 |
| Currency hedges: | | | | | Currency hedges: | | | |
| Euro | EUR | 4,141 |
| | EUR | 3,702 |
| Euro | EUR | 3,885 | | | EUR | 4,197 | |
| British Pound Sterling | GBP | 1,758 |
| | GBP | 1,380 |
| British Pound Sterling | GBP | 1,346 | | | GBP | 1,400 | |
| Canadian Dollar | CAD | 1,244 |
| | CAD | 1,053 |
| Canadian Dollar | CAD | 1,497 | | | CAD | 1,576 | |
| Indian Rupee | INR | — |
| | INR | 76 |
| |
| Mexican Peso | MXN | 166 |
| | MXN | — |
| |
| Japanese Yen | JPY | 3,363 |
| | JPY | 3,972 |
| |
| Singapore Dollar | SGD | 15 |
| | SGD | 32 |
| |
| Hong Kong Dollar | | Hong Kong Dollar | HKD | 3,352 | | | HKD | 3,717 | |
| | | | | | | | | |
| Interest rate hedges: | | | | | Interest rate hedges: | |
| Fixed to Floating Interest Rate Swaps | $ | 5,799 |
| | $ | 5,799 |
| Fixed to Floating Interest Rate Swaps | USD | 1,000 | | | USD | 3,250 | |
| Floating to Fixed Interest Rate Swaps | $ | 778 |
| | $ | 778 |
| Floating to Fixed Interest Rate Swaps | USD | 28 | | | USD | 778 | |
| | | | | | |
| Investment market price hedges: | | | | | |
| Marketable Securities | EUR | 204 |
| | EUR | 76 |
| |
|
As of September 30, 2017,March 31, 2021 and December 31, 2020, we had no0 outstanding commodity hedge positions.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet Recognition and Fair Value Measurements
The following table indicates the location onin the consolidated balance sheets in whichwhere 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.derivatives.
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 ourin the 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 onin the consolidated balance sheets had we elected to apply the right of offset.offset:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Hierarchy Level | | Gross Amounts Presented in Consolidated Balance Sheets | | Net Amounts if Right of
Offset had been Applied |
| Asset Derivatives | | Balance Sheet Location | | | March 31,
2021 | | December 31,
2020 | | March 31,
2021 | | December 31,
2020 |
| Derivatives designated as hedges: | | | | | | | | | | | | |
| Foreign currency exchange contracts | | Other current assets | | Level 2 | | $ | 93 | | | $ | 56 | | | $ | 78 | | | $ | 45 | |
| Interest rate contracts | | Other current assets | | Level 2 | | 0 | | | 2 | | | 0 | | | 2 | |
| | | | | | | | | | | | |
| Foreign currency exchange contracts | | Other non-current assets | | Level 2 | | 67 | | | 35 | | | 28 | | | 4 | |
| Interest rate contracts | | Other non-current assets | | Level 2 | | 24 | | | 29 | | | 21 | | | 26 | |
| Derivatives not designated as hedges: | | | | | | | | | | | | |
| Foreign currency exchange contracts | | Other current assets | | Level 2 | | 1 | | | 4 | | | 1 | | | 4 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total Asset Derivatives | | | | | | $ | 185 | | | $ | 126 | | | $ | 128 | | | $ | 81 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | 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 | | | September 30,
2017 | | December 31,
2016 | | September 30,
2017 | | December 31,
2016 |
| Derivatives designated as hedges: | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | Level 2 | | $ | 21 |
| | $ | 176 |
| | $ | 15 |
| | $ | 176 |
|
| Interest rate contracts | Other current assets | | Level 2 | | 4 |
| | — |
| | 4 |
| | — |
|
| Foreign exchange contracts | Other non-current assets | | Level 2 | | 3 |
| | 131 |
| | — |
| | 126 |
|
| Interest rate contracts | Other non-current assets | | Level 2 | | 88 |
| | 137 |
| | 75 |
| | 119 |
|
| Derivatives not designated as hedges: | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | Level 2 | | — |
| | 1 |
| | — |
| | 1 |
|
| Interest rate contracts | Other non-current assets | | Level 2 | | 34 |
| | 42 |
| | 33 |
| | 40 |
|
| Total Asset Derivatives | | | | | $ | 150 |
| | $ | 487 |
| | $ | 127 |
| | $ | 462 |
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | Fair Value Hierarchy Level | | Gross Amounts Presented in Consolidated Balance Sheets | | Net Amounts if Right of Offset had been Applied | | Fair Value Hierarchy Level | | Gross Amounts Presented in
Consolidated Balance Sheets | | Net Amounts if Right of
Offset had been Applied |
| Liability Derivatives | Balance Sheet Location | | September 30,
2017 | | December 31,
2016 | | September 30,
2017 | | December 31,
2016 | Liability Derivatives | | Balance Sheet Location | | March 31,
2021 | | December 31,
2020 | | March 31,
2021 | | December 31,
2020 |
| Derivatives designated as hedges: | | | | | | | | | Derivatives designated as hedges: | | | | | | | | | | | | |
| Foreign exchange contracts | Other current liabilities | | Level 2 | | $ | 62 |
| | $ | — |
| | $ | 56 |
| | $ | — |
| |
| Interest rate contracts | Other current liabilities | | Level 2 | | — |
| | 1 |
| | — |
| | 1 |
| |
| Foreign exchange contracts | Other non-current liabilities | | Level 2 | | 155 |
| | 6 |
| | 152 |
| | 1 |
| |
| Foreign currency exchange contracts | | Foreign currency exchange contracts | | Other current liabilities | | Level 2 | | $ | 26 | | | $ | 34 | | | $ | 11 | | | $ | 23 | |
| | Foreign currency exchange contracts | | Foreign currency exchange contracts | | Other non-current liabilities | | Level 2 | | 73 | | | 142 | | | 34 | | | 111 | |
| Interest rate contracts | Other non-current liabilities | | Level 2 | | 18 |
| | 21 |
| | 5 |
| | 3 |
| Interest rate contracts | | Other non-current liabilities | | Level 2 | | 11 | | | 13 | | | 8 | | | 10 | |
| Derivatives not designated as hedges: | | | | | | | | | Derivatives not designated as hedges: | |
| Foreign exchange contracts | Other current liabilities | | Level 2 | | — |
| | — |
| | — |
| | — |
| |
| Investment market price contracts | Other current liabilities | | Level 2 | | 47 |
| | 10 |
| | 47 |
| | 10 |
| |
| Foreign currency exchange contracts | | Foreign currency exchange contracts | | Other current liabilities | | Level 2 | | 0 | | | 2 | | | 0 | | | 2 | |
| Interest rate contracts | Other non-current liabilities | | Level 2 | | 5 |
| | 7 |
| | 4 |
| | 5 |
| Interest rate contracts | | Other current liabilities | | Level 2 | | 0 | | | 1 | | | 0 | | | 1 | |
| | Total Liability Derivatives | | $ | 287 |
| | $ | 45 |
| | $ | 264 |
| | $ | 20 |
| Total Liability Derivatives | | $ | 110 | | | $ | 192 | | | $ | 53 | | | $ | 147 | |
Our foreign currency exchange, 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. As of March 31, 2021 and December 31, 2020 we did 0t have any derivatives that were classified as Level 1 (valued using quoted prices in active markets for identical assets) or Level 3 (valued using significant unobservable inputs).
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet Location of Hedged Item in Fair Value Hedges
The following table indicates the amounts that were recorded in the consolidated balance sheets related to cumulative basis adjustments for fair value hedges as of March 31, 2021 and December 31, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included | | Carrying Amount
of Hedged Liabilities | | Cumulative Amount
of Fair Value Hedge
Adjustments | | Carrying Amount
of Hedged Liabilities | | Cumulative Amount
of Fair Value Hedge
Adjustments |
| March 31, 2021 | | March 31, 2021 | | December 31, 2020 | | December 31, 2020 |
| | | | | | | | |
| Long-term debt and finance leases | | $ | 1,309 | | | $ | 35 | | | $ | 2,816 | | | $ | 42 | |
The cumulative amount of fair value hedging losses remaining for any hedged assets and liabilities for which hedge accounting has been discontinued as of March 31, 2021 is $6 million. These amounts will be recognized over the next 10 years.
Income Statement and AOCI Recognition
The following table indicates the amount of gains and losses(losses) that have been recognized in the statements of consolidated income for fair value and cash flow hedges, as well as the associated gain or (loss) for the underlying hedged item for fair value hedges for the three months ended March 31, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, |
Location and Amount of Gain (Loss) Recognized in Income
on Fair Value and Cash Flow Hedging Relationships | | 2021 | | | | 2020 |
| Revenue | | Interest Expense | | Investment Income and Other | | Revenue | | Interest Expense | | Investment Income and Other |
| Gain or (loss) on fair value hedging relationships: | | | | | | | | | | | | |
| Interest Contracts: | | | | | | | | | | | | |
| Hedged items | | $ | 0 | | | $ | 6 | | | $ | 0 | | | $ | 0 | | | $ | (36) | | | $ | 0 | |
| Derivatives designated as hedging instruments | | 0 | | | (6) | | | 0 | | | 0 | | | 36 | | | 0 | |
| Gain or (loss) on cash flow hedging relationships: | | | | | | | | | | | | |
| Interest Contracts: | | | | | | | | | | | | |
| Amount of gain or (loss) reclassified from accumulated other comprehensive income | | 0 | | | (2) | | | 0 | | | 0 | | | (3) | | | 0 | |
| Foreign Exchange Contracts: | | | | | | | | | | | | |
| Amount of gain or (loss) reclassified from accumulated other comprehensive income | | 15 | | | 0 | | | 0 | | | 64 | | | 0 | | | 0 | |
| Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded | | $ | 15 | | | $ | (2) | | | $ | 0 | | | $ | 64 | | | $ | (3) | | | $ | 0 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table indicates the amount of gains and (losses) that have been recognized in AOCI for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 for those derivatives designated as cash flow hedges (in millions):
| | | Three Months Ended September 30: | | | | | |
| Three Months Ended March 31: | | Three Months Ended March 31: | | |
| Derivative Instruments in Cash Flow Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion) | Derivative Instruments in Cash Flow Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Derivatives | |
| | 2017 | | 2016 | | 2021 | | 2020 | |
| Interest rate contracts | | $ | — |
| | $ | — |
| Interest rate contracts | | $ | 3 | | | $ | (1) | | |
| Foreign exchange contracts | | (141 | ) | | (27 | ) | Foreign exchange contracts | | 160 | | | 347 | | |
| | Total | | $ | (141 | ) | | $ | (27 | ) | Total | | $ | 163 | | | $ | 346 | | |
| | | | | | | | | | |
| Nine Months Ended September 30: | | | | | |
| Derivative Instruments in Cash Flow Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion) | |
| | 2017 | | 2016 | |
| Interest rate contracts | | $ | — |
| | $ | (3 | ) | |
| Foreign exchange contracts | | (431 | ) | | (36 | ) | |
| Total | | $ | (431 | ) | | $ | (39 | ) | |
| | | |
As of September 30, 2017,March 31, 2021, there are $108were $67 million of pre-tax lossesgains 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 September 30, 2018.ending March 31, 2022. 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 flowflows is approximately 1512 years.
The amount of ineffectiveness recognized in income on derivative instruments designated in cash flow hedging relationships was immaterial for the three and nine months ended September 30, 2017 and 2016.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table indicates the amount of gains and losses(losses) that have been recognized in AOCI within foreign currency translation adjustment for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 for those instruments designated as net investment hedges (in millions):
|
| | | | | | | | |
| Three Months Ended September 30: | | | | |
| Non-derivative Instruments in Net Investment Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion) |
| | 2017 | | 2016 |
| Foreign denominated debt | | $ | (142 | ) | | $ | (7 | ) |
| Total | | $ | (142 | ) | | $ | (7 | ) |
| | | | | |
| Nine Months Ended September 30: | | | | |
| Non-derivative Instruments in Net Investment Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion) |
| | 2017 | | 2016 |
| Foreign denominated debt | | $ | (389 | ) | | (30 | ) |
| Total | | $ | (389 | ) | | $ | (30 | ) |
The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging relationships was immaterial for the three and nine months ended September 30, 2017 and 2016.
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 nine months ended September 30, 2017 and 2016 (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 |
| | 2017 | | 2016 | | | | 2017 | | 2016 |
| Three Months Ended September 30: | | | | | | | |
| Interest rate contracts | Interest Expense | | $ | (18 | ) | | $ | (59 | ) | | Fixed-Rate Debt | | Interest Expense | | $ | 18 |
| | $ | 59 |
|
| Nine Months Ended September 30: | | | | | | | | | | |
| Interest rate contracts | Interest Expense | | $ | (41 | ) | | $ | 56 |
| | Fixed-Rate Debt | | Interest Expense | | $ | 41 |
| | $ | (56 | ) |
| | | | | | | | | | | | | | |
| Three Months Ended March 31: | | | | |
| Non-derivative Instruments in Net Investment Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Debt |
| 2021 | | 2020 |
| Foreign denominated debt | | $ | 124 | | | $ | 150 | |
| Total | | $ | 124 | | | $ | 150 | |
| | | | |
| | |
| | | |
| | | | |
| | | | |
| | | | |
Additionally, we maintain some interest rate swaps, foreign currency exchange forwards and investment market price forward contracts that are not designated as hedges. TheseThe interest rate swap contracts are intended to provide an economic hedge of a portfolioportions of interest bearing receivables. Theseour outstanding debt. The foreign currency exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement and settlement risk for certain assets and liabilities onin our consolidated balance sheets. TheseThe 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 optionsexchange forward contracts 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 exchange contracts. These transactions provide an economic offset that effectively eliminates the effects of changes in market valuation.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these interest rate swaps, foreign currency forward and investment market price forward contracts not designated as hedges for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 (in millions):
| | | | | | | | | | | | | | | | | | | | |
Derivative Instruments Not Designated in
Hedging Relationships | | Location of Gain (Loss)
Recognized in Income | | Amount of Gain (Loss) Recognized in Income |
| | 2021 | | 2020 |
| Three Months Ended March 31: | | | | | | |
| Interest rate contracts | | Interest expense | | $ | 0 | | | $ | (2) | |
| | | | | | |
| | | | | | |
| Foreign exchange contracts | | Investment income and other | | (6) | | | (51) | |
| | | | | | |
| | | | | | |
| Total | | | | $ | (6) | | | $ | (53) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | |
Derivative Instruments Not Designated in Hedging Relationships | Location of Gain (Loss) Recognized in Income | | Amount of Gain (Loss) Recognized in Income |
| | 2017 | | 2016 |
| Three Months Ended September 30: | | | | | |
| Interest rate contracts | Interest expense | | $ | (2 | ) | | $ | (2 | ) |
| Foreign exchange contracts | Investment income and other | | 14 |
| | (11 | ) |
| Investment market price contracts | Investment income and other | | (45 | ) | | (28 | ) |
| | | | $ | (33 | ) | | $ | (41 | ) |
| Nine Months Ended September 30: | | | | | |
| Interest rate contracts | Interest expense | | $ | (6 | ) | | $ | (6 | ) |
| Foreign exchange contracts | Investment income and other | | 34 |
| | $ | (117 | ) |
| Investment market price contracts | Investment income and other | | (37 | ) | | 152 |
|
| | | | $ | (9 | ) | | $ | 29 |
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. 17. INCOME TAXES
Our effective tax rate for both the three months ended March 31, 2021 and March 31, 2020 was 35.0%approximately 22.8%. The recognition in the third quarter of 2017 and 2016 (33.9% year-to-date in 2017 compared to 35.1% in the same period of 2016). In the first quarter of 2017, we adopted a new accounting standard that requires the recognitionincome tax of excess tax benefits related to share-based compensation in income tax expense (see note 2), which resulted in discrete tax benefitsreduced our effective rate by 1.1% for the ninethree months ended September 30, 2017March 31, 2021 compared to 0.7% in the same period of $62 million and reduced2020. Other items that impacted our year-to-date effective tax rate by 1.1%. There was no significant impact related to the adoption of the new accounting standard in the thirdfirst quarter of 2017.2021 compared to 2020 included unfavorable changes in uncertain tax positions.
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2016,2020, 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 statutestatutes of limitations or other unforeseen circumstances.
In the first quarter of 2021, we recognized an income tax expense of $788 million related to pre-tax mark-to-market income of $3.3 billion on our pension and postretirement defined benefit plans. This income tax expense was generated at a higher average tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
As discussed in note 18, we recognized pre-tax transformation strategy costs of $118 million in the first quarter of 2021 compared to $45 million in the first quarter of 2020. As a result, we recorded an additional income tax benefit of $28 million in the first quarter of 2021 compared to $10 million in the first quarter of 2020. This benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate primarily due to the effect of U.S. state and local taxes and foreign taxes.
We recorded a pre-tax valuation allowance against assets held for sale of $66 million during the first quarter of 2021. As a result, we recorded an additional income tax benefit of $16 million. This income tax benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. TRANSFORMATION STRATEGY COSTS
In 2018, we launched a multi-year, enterprise-wide transformation strategy impacting our organization. The program includes investments, as well as changes in processes and technology, that impact global direct and indirect operating costs.
The table below presents the transformation strategy costs for the three months ended March 31, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2021 | | 2020 | | | | |
| Transformation Strategy Costs: | | | | | | | |
| Compensation and benefits | $ | 76 | | | $ | 12 | | | | | |
| Total other expenses | 42 | | | 33 | | | | | |
| Total Transformation Strategy Costs | $ | 118 | | | $ | 45 | | | | | |
| | | | | | | |
| Income Tax Benefit from Transformation Strategy Costs | (28) | | | (10) | | | | | |
| After Tax Transformation Strategy Costs | $ | 90 | | | $ | 35 | | | | | |
The income tax effects of transformation strategy costs are calculated by multiplying the amount of the adjustments by the statutory tax rates applicable in each tax jurisdiction.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. SUBSEQUENT EVENTS
On April 1, 2021, our 2.050% fixed-rate senior notes with a principal balance of $700 million and our floating-rate senior notes with a principal balance of $350 million matured and were repaid in full.
On April 30, 2021, we completed the previously announced divestiture of our UPS Freight business to TFI International Inc. We intend to use the proceeds received from this divestiture to repay outstanding indebtedness. Prior to the completion of this transaction, the results of our UPS Freight business were reported in our Supply Chain & Freight reporting segment. Following the completion of this transaction and beginning in the quarter ending June 30, 2021, we intend to rename this reporting segment our Supply Chain Solutions reporting segment. No other changes are being made to this segment that would impact prior period results.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
DuringWe continue to make progress implementing our Customer First, People Led, Innovation Driven strategy, which focuses on transforming nearly every aspect of our business, improving our financial performance, providing the thirdbest customer experience and benefiting our shareowners. The Customer First component of our strategy focuses on, among other things, enhancing the capabilities that we believe our customers value the most: speed and ease of access to our services. As a result, we are continuing to expand our weekend operations and enhance our digital access program.
In the first quarter, overall growth was driven by business-to-consumer demand that resulted from elevated e-commerce activity due to the ongoing COVID-19 pandemic. We continued to experience strong volume growth from small- and medium-sized businesses ("SMBs"), largely driven by our efforts to improve time-in-transit in our U.S. ground network and the ease of 2017, we produced solid operating results, despite the impact of several natural disasters that slowed U.S. regional economic activity. Consolidated revenue increased 7.0% to $15.978 billionaccessing our services. Business-to-business activity grew in our International Package segment for the third quarter, of 2017 when compared to 2016. For the year-to-date period, consolidated revenue increased 7.0% to $47.043 billion from $43.975 billion. Revenue for third quarter and year-to-date periods increased in all segments and major product categories, due to expanded customer demand spread across the company's broad portfolio. These factors were partially offset by impacts from both the natural disasters and operating costs associated with investment strategies, including facility construction and Saturday operations deploymentbut declined in our U.S. Domestic segment.Package segment until March, when we began to experience growth. Overall, we continue to expect the higher level of residential deliveries to persist. In our Supply Chain & Freight segment, market demand was elevated in nearly all business units, led by Forwarding and our healthcare activities.
Operating profitAs previously disclosed, on January 24, 2021, we entered into a definitive agreement to divest our UPS Freight business. The transaction closed on April 30, 2021.
On March 11, 2021, the American Rescue Plan Act ("ARPA") was signed into law. The ARPA is intended to prevent certain multiemployer pension plans from becoming insolvent through 2051. Enactment of the ARPA resulted in a reduction of our liability for potential coordinating benefits related to the Central States Pension Fund, triggering a remeasurement of our UPS/IBT Full Time Employee Pension Plan ("UPS/IBT Plan").
Highlights of our consolidated results for the three months ended September 30, 2017 was $2.035 billion, driven by strong performanceMarch 31, 2021 and 2020, which are discussed in themore detail below, include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2021 | | 2020 | | $ | | % | | | | | | | | |
| Revenue (in millions) | $ | 22,908 | | | $ | 18,035 | | | $ | 4,873 | | | 27.0 | % | | | | | | | | |
| Operating Expenses (in millions) | 20,143 | | | 16,963 | | | 3,180 | | | 18.7 | % | | | | | | | | |
| Operating Profit (in millions) | $ | 2,765 | | $ | 1,072 | | | $ | 1,693 | | | 157.9 | % | | | | | | | | |
| Operating Margin | 12.1 | % | | 5.9 | % | | | | | | | | | | | | |
| Net Income (in millions) | $ | 4,792 | | | $ | 965 | | | $ | 3,827 | | | 396.6 | % | | | | | | | | |
| Basic Earnings Per Share | $ | 5.50 | | | $ | 1.12 | | | $ | 4.38 | | | 391.1 | % | | | | | | | | |
| Diluted Earnings Per Share | $ | 5.47 | | | $ | 1.11 | | | $ | 4.36 | | | 392.8 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Operating Days | 63 | | | 64 | | | | | | | | | | | | | |
| Average Daily Package Volume (in thousands) | 24,145 | | | 21,125 | | | | | 14.3 | % | | | | | | | | |
| Average Revenue Per Piece | $ | 12.12 | | | $ | 10.88 | | | $ | 1.24 | | | 11.4 | % | | | | | | | | |
•Revenue increased in all segments, with double digit revenue per piece growth in both our U.S. Domestic Package and International Package and Supply Chain & Freight segments. For the year-to-date period, operating profit was up 2.4% to $6.035 billion.
•Average daily package volume increased, 4.6% for the third quarter of 2017driven by growth in business-to-consumer shipping.
•Operating expenses increased primarily due to volume growth.
•Operating profit increased and 4.5% year-to-date. operating margin expanded in all segments.
•We reported third quarter 2017 net income of $1.264$4.8 billion and diluted earnings per share of $1.45, compared to 2016 net income of $1.270 billion and$5.47. Adjusted diluted earnings per share was $2.77 after adjusting for the after-tax impacts of:
◦a pension mark-to-market gain recognized outside of $1.44. On a year-to-date basis, net income was $3.80610% corridor of $2.5 billion and increased 3.7% in 2017 as compared to 2016 asor $2.86 per diluted earnings per share increased 5.1% to $4.34.
Our consolidated results are presented in the table below:share;
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2017 | | 2016 | | % | | 2017 | | 2016 | | % |
| Revenue (in millions) | $ | 15,978 |
| | $ | 14,928 |
| | 7.0 | % | | $ | 47,043 |
| | $ | 43,975 |
| | 7.0 | % |
| Operating Expenses (in millions) | 13,943 |
| | 12,894 |
| | 8.1 | % | | 41,008 |
| | 38,080 |
| | 7.7 | % |
| Operating Profit (in millions) | $ | 2,035 |
| | $ | 2,034 |
| | — | % | | $ | 6,035 |
| | $ | 5,895 |
| | 2.4 | % |
| Operating Margin | 12.7 | % | | 13.6 | % | | | | 12.8 | % | | 13.4 | % | | |
| Average Daily Package Volume (in thousands) | 18,988 |
| | 18,152 |
| | 4.6 | % | | 18,702 |
| | 17,891 |
| | 4.5 | % |
| Average Revenue Per Piece | $ | 10.77 |
| | $ | 10.49 |
| | 2.7 | % | | $ | 10.68 |
| | $ | 10.48 |
| | 1.9 | % |
| Net Income (in millions) | $ | 1,264 |
| | $ | 1,270 |
| | (0.5 | )% | | $ | 3,806 |
| | $ | 3,670 |
| | 3.7 | % |
| Basic Earnings Per Share | $ | 1.45 |
| | $ | 1.44 |
| | 0.7 | % | | $ | 4.36 |
| | $ | 4.15 |
| | 5.1 | % |
| Diluted Earnings Per Share | $ | 1.45 |
| | $ | 1.44 |
| | 0.7 | % | | $ | 4.34 |
| | $ | 4.13 |
| | 5.1 | % |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
◦transformation strategy costs of $90 million or $0.10 per diluted share; and
Results◦a valuation allowance against assets held for sale of Operations - Segment Review$50 million or $0.06 per diluted share.
In the U.S. Domestic Package segment, volume and revenue growth was highest in our Ground residential products. Revenue and revenue per piece increased due to a favorable shift in customer mix, with a significant increase in SMB volume, base rate increases and capacity surcharges. The increase in residential delivery volume drove increases in headcount, delivery stops per day, average daily miles driven and average daily union labor hours, all of which increased expense. Our investments to improve time-in-transit within our U.S. ground network also increased expense for the quarter.
The resultsInternational Package segment experienced volume and discussions that follow are reflectiverevenue growth across all regions, driven by growth from both large customers and SMBs. Revenue and revenue per piece increased due to growth in premium and non-premium products, base rate increases and capacity surcharges. Residential delivery volume growth drove an increase in third-party pickup and delivery expense.
In the Supply Chain & Freight segment, growth was primarily driven by our Forwarding and mail services businesses. The Forwarding business continued to benefit from strong outbound demand from Asia and the application of how our executive management monitorscapacity surcharges for air freight as the performanceimpacts of our reporting segments.COVID-19 continued to constrain capacity in the air cargo market. Mail services benefited from the growth in e-commerce activity and favorable changes in shipment characteristics. Healthcare operations experienced strong and broad-based growth, which included COVID-19 relief efforts. Expense increases were driven by higher third party transportation costs.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Supplemental Information - Items Affecting Comparability
We supplement the reporting of our financial information determined under generally accepted accounting principles (“GAAP”("GAAP") with certain non-GAAP financial measures, including as applicable, "adjusted" compensation and benefits, operating expenses, operating profit, operating margin, other income and (expense), income before income taxes, income tax expense, and effective tax rate.rate, net income and earnings per share. We believe that these adjusted financial measures provide additional meaningful information to assist investors and analystsusers of our financial statements 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 operationsongoing performance because they exclude items that may not be indicative of, or are unrelated to, our underlying operating results,operations and may provide a useful baseline for analyzing trends in our underlying businesses. Additionally, theseThese 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.allocation and in connection with incentive compensation award determinations.
Adjusted amounts reflect the following:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| Non-GAAP Adjustments | | 2021 | | 2020 | | | | |
| Operating Expenses: | | | | | | | | |
| Transformation Strategy and Other Costs | | $ | 184 | | | $ | 45 | | | | | |
| Total Adjustments to Operating Expenses | | $ | 184 | | | $ | 45 | | | | | |
| | | | | | | | |
| Other Income and (Expense): | | | | | | | | |
| Defined Benefit Plan Mark-to-Market Gain | | $ | (3,290) | | | $ | — | | | | | |
| Total Adjustments to Other Income and (Expense) | | $ | (3,290) | | | $ | — | | | | | |
| | | | | | | | |
| Total Adjustments to Income Before Income Taxes | | $ | (3,106) | | | $ | 45 | | | | | |
| | | | | | | | |
| Income Tax Expense (Benefit) from Defined Benefit Plan Mark-to-Market Gain | | $ | 788 | | | $ | — | | | | | |
| Income Tax Expense (Benefit) from Transformation Strategy and Other Costs | | (44) | | | (10) | | | | | |
| Total Adjustments to Income Tax Expense | | $ | 744 | | | $ | (10) | | | | | |
| | | | | | | | |
| Total Adjustments to Net Income | | $ | (2,362) | | | $ | 35 | | | | | |
Transformation strategy and other costs include a valuation allowance against assets held for sale of $66 million. For additional information regarding assets held for sale, see note 6 to the unaudited, consolidated financial statements included within this report. For additional information regarding our transformation strategy costs see note 18.
We also supplement the reporting of our revenue, revenue per piece and operating profit with similar non-GAAPadjusted measures that exclude the period-over-periodperiod 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 businessessegments on athis 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 profitamounts 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.
Adjusted financial measures should not be considered in isolation or as a substitute for the related GAAP measures. Our adjusted financial measures may differ from similar measures used by other companies.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Defined Benefit Plan Mark-to-Market Gain
We incur certain employment-related expenses associated with pension and postretirement medical benefits. These pension and postretirement medical benefit costs for company-sponsored defined benefit plans are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS. Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement of any of our plans.
We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor for our pension and postretirement defined benefit plans immediately as part of other pension income (expense). We supplement the presentation of our income before income taxes, net income and earnings per share with adjusted measures that exclude the impact of gains and losses recognized in excess of the 10% corridor and the related income tax effects. We believe excluding these mark-to-market impacts provides important supplemental information by removing the volatility associated with short-term changes in market interest rates, equity values and similar factors.
As a result of the ARPA, we remeasured the UPS/IBT Plan assets and pension benefit obligation and recognized a pre-tax mark-to-market gain outside of the 10% corridor of $3.3 billion ($2.5 billion after-tax). For additional information, refer to note 8 to the unaudited, consolidated financial statements included within this report.
The components of this gain, which are included in “Other Income and (Expense)” in the statements of consolidated income, are as follows:
•Coordinating benefits attributable to the Central States Pension Fund ($1.8 billion pre-tax gain): This represents the reduction of the liability for potential coordinating benefits that may have been required to be paid related to the Central States Pension Fund.
•Discount rates ($1.8 billion pre-tax gain): The discount rate for the UPS/IBT Plan increased from 2.98% as of December 31, 2020 to 3.70% as of March 31, 2021, primarily due to an increase in U.S. treasury yields.
•Return on assets ($0.3 billion pre-tax loss): In the first quarter of 2021, the actual rate of return on plan assets was approximately 220 basis points lower than our expected rate of return, primarily due to weaker than expected global equity and U.S. bond market performance.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - Segment Review
The results and discussions that follow are reflective of how management monitors and evaluates the performance of our reporting segments.
Certain operating expenses are allocated between our reporting segments based onusing 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 businesses.
Beginning in the first quarter of 2021, we updated our cost allocation methodology for aircraft engine maintenance expense to better align with aircraft utilization by segment. This change resulted in a reallocation of expense from our U.S. Domestic Package segment to our International Package segment of approximately $15 million for the quarter. There were no other significant changes in our expense allocation methodologies that affect period over period comparisons during 20172021 or 2016.2020.
Following completion of the divestiture of our UPS Freight business, we intend to rename our Supply Chain & Freight reporting segment. For additional information, see note 19 to the unaudited, consolidated financial statements included within this report.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
U.S. Domestic Package Operations
| | | | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | Three Months Ended March 31, | | Change | |
| 2017 | | 2016 | | % | | 2017 | | 2016 | | % | 2021 | | 2020 | | $ | | % | |
| Average Daily Package Volume (in thousands): | | | | | | | | | | | | Average Daily Package Volume (in thousands): | | | | | | | |
| Next Day Air | 1,470 |
| | 1,361 |
| | 8.0 | % | | 1,393 |
| | 1,313 |
| | 6.1 | % | Next Day Air | 2,012 | | | 1,883 | | | 6.9 | % | |
| Deferred | 1,240 |
| | 1,260 |
| | (1.6 | )% | | 1,246 |
| | 1,195 |
| | 4.3 | % | Deferred | 1,513 | | | 1,492 | | | 1.4 | % | |
| Ground | 13,175 |
| | 12,743 |
| | 3.4 | % | | 13,069 |
| | 12,652 |
| | 3.3 | % | Ground | 16,827 | | | 14,669 | | | 14.7 | % | |
| Total Avg. Daily Package Volume | 15,885 |
| | 15,364 |
| | 3.4 | % | | 15,708 |
| | 15,160 |
| | 3.6 | % | |
| Total Average Daily Package Volume | | Total Average Daily Package Volume | 20,352 | | | 18,044 | | | | 12.8 | % | |
| Average Revenue Per Piece: | | | | | | | | | | | | Average Revenue Per Piece: | | |
| Next Day Air | $ | 19.08 |
| | $ | 19.59 |
| | (2.6 | )% | | $ | 19.48 |
| | $ | 19.51 |
| | (0.2 | )% | Next Day Air | $ | 18.39 | | | $ | 17.05 | | | $ | 1.34 | | | 7.9 | % | |
| Deferred | 12.83 |
| | 11.99 |
| | 7.0 | % | | 12.57 |
| | 12.12 |
| | 3.7 | % | Deferred | 13.22 | | | 12.54 | | | 0.68 | | | 5.4 | % | |
| Ground | 8.29 |
| | 8.11 |
| | 2.2 | % | | 8.31 |
| | 8.11 |
| | 2.5 | % | Ground | 9.83 | | | 8.74 | | | 1.09 | | | 12.5 | % | |
| Total Avg. Revenue Per Piece | $ | 9.64 |
| | $ | 9.45 |
| | 2.0 | % | | $ | 9.64 |
| | $ | 9.41 |
| | 2.4 | % | |
| Total Average Revenue Per Piece | | Total Average Revenue Per Piece | $ | 10.93 | | | $ | 9.92 | | | $ | 1.01 | | | 10.2 | % | |
| Operating Days in Period | 63 |
| | 64 |
| | | | 191 |
| | 192 |
| | | Operating Days in Period | 63 | | | 64 | | | |
| Revenue (in millions): | | | | | | | | | | | | Revenue (in millions): | | |
| Next Day Air | $ | 1,767 |
| | $ | 1,706 |
| | 3.6 | % | | $ | 5,183 |
| | $ | 4,918 |
| | 5.4 | % | Next Day Air | $ | 2,331 | | | $ | 2,055 | | | $ | 276 | | | 13.4 | % | |
| Deferred | 1,002 |
| | 967 |
| | 3.6 | % | | 2,992 |
| | 2,781 |
| | 7.6 | % | Deferred | 1,260 | | | 1,197 | | | 63 | | | 5.3 | % | |
| Ground | 6,880 |
| | 6,616 |
| | 4.0 | % | | 20,754 |
| | 19,689 |
| | 5.4 | % | Ground | 10,419 | | | 8,204 | | | 2,215 | | | 27.0 | % | |
| Total Revenue | $ | 9,649 |
| | $ | 9,289 |
| | 3.9 | % | | $ | 28,929 |
| | $ | 27,388 |
| | 5.6 | % | Total Revenue | $ | 14,010 | | | $ | 11,456 | | | $ | 2,554 | | | 22.3 | % | |
| Operating Expenses (in millions) | $ | 8,467 |
| | $ | 8,037 |
| | 5.4 | % | | $ | 25,276 |
| | $ | 23,801 |
| | 6.2 | % | |
| Operating Profit (in millions) | $ | 1,182 |
| | $ | 1,252 |
| | (5.6 | )% | | $ | 3,653 |
| | $ | 3,587 |
| | 1.8 | % | |
| Operating Expenses (in millions): | | Operating Expenses (in millions): | | |
| Operating Expenses | | Operating Expenses | $ | 12,651 | | | $ | 11,092 | | | $ | 1,559 | | | 14.1 | % | |
| Transformation Strategy Costs | | Transformation Strategy Costs | (104) | | | (37) | | | (67) | | | 181.1 | % | |
| Adjusted Operating Expense | | Adjusted Operating Expense | $ | 12,547 | | | $ | 11,055 | | | $ | 1,492 | | | 13.5 | % | |
| Operating Profit (in millions) and Operating Margin: | | Operating Profit (in millions) and Operating Margin: | | |
| Operating Profit | | Operating Profit | $ | 1,359 | | | $ | 364 | | | $ | 995 | | | 273.4 | % | |
| Adjusted Operating Profit | | Adjusted Operating Profit | $ | 1,463 | | | $ | 401 | | | $ | 1,062 | | | 264.8 | % | |
| Operating Margin | 12.2 | % | | 13.5 | % | | | | 12.6 | % | | 13.1 | % | | | Operating Margin | 9.7 | % | | 3.2 | % | | |
| Adjusted Operating Margin | | Adjusted Operating Margin | 10.4 | % | | 3.5 | % | | |
Revenue
The change in overall revenue was impacted bydue to the following factors in 2017 compared with the corresponding period of 2016:factors:
|
| | | | | | | | | | | |
| | Volume | | Rates / Product Mix | | Fuel Surcharge | | Total Revenue Change |
| Revenue Change Drivers: | | | | | | | |
| Third quarter 2017 vs. 2016 | 1.8 | % | | 1.5 | % | | 0.6 | % | | 3.9 | % |
| Year-to-date 2017 vs. 2016 | 3.1 | % | | 1.8 | % | | 0.7 | % | | 5.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Volume | | Rates /
Product Mix | | Fuel
Surcharge | | Total Revenue
Change |
| Revenue Change Drivers: | | | | | | | |
| First quarter 2021 vs. 2020 | 11.0 | % | | 10.6 | % | | 0.7 | % | | 22.3 | % |
| | | | | | | |
Volume
Our overallAverage daily volume increased across all products in the thirdfirst quarter, and year-to-date periodsdespite the impact of 2017 compared with 2016, despite having one less operating day, largely due towith growth strongest in residential ground services. Business-to-consumer volume grew by approximately 24% year over year, driven by continued e-commerce growth. Volume growth in overall retail sales, of which e-commerce continues to represent a larger percentage of the total growth. Business-to-consumer shipments, which represented more than 48% of the totalcame from both SMBs and large customers. SMB volume grew 35.6% for the quarter drove increases in both air and ground shipments. Business-to-business shipments decreased slightly in the third quarter and year-to-date periods of 2017 compared with 2016, largely due to headwinds from adverse weather events and declines in volume related to large technology product launches in the prior year.
Among our air products, volume increased in the third quarter and year-to-date periods of 2017 for our Next Day Air services. Volume for our deferred air services was down in the third quarter, largely due to a shift from deferred air to Next Day Air products; however, volume increased on a year-to-date basis. Solid air volume growth continued for those products most aligned with business-to-consumer shipping, including our residential 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 a decline in Next Day Air letter volume, largely due to declines in the professional services industry as a result of investments to improve time-in-transit in our ground network and to expand our digital access platform.
Business-to-consumer shipments represented approximately 60% of total average daily volume in the first quarter, compared to approximately 55% in the first quarter of 2020. We believe the COVID-19 pandemic accelerated a long-term market shift towards e-commerce that will result in the level of residential deliveries remaining elevated. Business-to-business shipments decreased 0.6% for the quarter, but experienced year over year growth of 8.0% in March as businesses continued growth in digitization.
to reopen.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The increaseAverage daily volume increased in ground volume in the third quarterboth our Next Day Air and year-to-date periods of 2017 wasDeferred products, driven by increased residential demand as a result of the growth in residential grounde-commerce. This was slightly offset by declines in business-to-business shipments. We continued to experience declines in Second Day Letter and Second Day Package volume, due to ongoing shifts in customer preferences.
Ground Residential and SurePost volume, which benefited from continued e-commerce demand. Business-to-business shipments decreased slightly inaverage daily volumes increased by 24% and 35%, respectively, for the quarter, driven by changes in customer mix and year-to-date periods, largely due to adverse weather events. This decline was offset by an increasee-commerce activity. Ground Commercial volume declined overall for the quarter; however, we experienced Ground Commercial growth in our returns shipping services.March from certain sectors of the economy.
Rates and Product Mix
Overall revenue per piece increased 2.0% forin the thirdfirst quarter of 2017 (2.4% year-to-date) compared with the same period of 2016 and was impacted by changesdue to increases in base rates, favorable changes in customer and product mix and fuel surcharge rates.
Revenue per piececontinued application of capacity-driven surcharges. Rates for our ground and air products was positively impacted by a base rate increase on December 26, 2016. UPS Ground rates and UPS Air services rates increased an average net 4.9%. Additionally, effective January 8, 2017, we changed the dimensional weight calculation for packages subject to UPS daily rates.
In the first quarter of 2017, we began in December 2020 and our expanded Saturday ground operations to several metropolitan areasSurePost rates also increased in the U.S. As of September 30, 2017, Saturday service is available in approximately 4,200 cities and towns in the United States and is expected to cover approximately 50% of the population by the end of 2017. 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 pickup is requested.December 2020.
Revenue per piece increases for our Next Day Air services decreasedand Deferred products were driven by base rates increases and shifts in the third quartercustomer and year-to-date periods of 2017 compared with 2016. Theproduct mix, partially offset by a decrease in Next Day Air revenue per piece was primarily driven by a shift in product mix, as our lower yielding products experienced much larger volume growth than our higher yielding products. This shift was offset slightly by an increase in the average billable weight per piece. Revenue per piece offor our deferred air servicesGround products increased in the third quarter and year-to-date periods of 2017 compared with 2016. Deferred revenue per piece increased primarily due to an increase in average weight per piece, but was partially offset by an unfavorable shift in product mix. All products were positively impacted by higher fuel surcharge rates for the third quarter and year-to-date periods.
Ground revenue per piece increased for the third quarter and year-to-date periods of 2017, primarily due to base rate increases and an increasea shift in customer mix, slightly offset by a decrease in average billable weight per piece. These factors were partially offset by changes in product mix, as we experienced faster volume growth in our SurePost product.
Fuel Surcharges
UPS appliesWe apply a fuel surcharge on ourto domestic air and ground services.services that is adjusted weekly. 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 airAir and groundGround products were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | % Point Change | | | | |
| | 2021 | | 2020 | | 2021 vs 2020 | | | | | | |
| Next Day Air / Deferred | 5.9 | % | | 5.9 | % | | — | % | | | | | | |
| Ground | 7.2 | % | | 7.2 | % | | — | % | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2017 |
| 2016 | | % Point | | 2017 | | 2016 | | % Point |
| Next Day Air / Deferred | 5.0 | % | | 4.1 | % | | 0.9 | % | | 4.8 | % | | 3.3 | % | | 1.5 | % |
| Ground | 5.4 | % | | 5.1 | % | | 0.3 | % | | 5.4 | % | | 4.8 | % | | 0.6 | % |
Effective February 6, 2017, the U.S.While fluctuations in fuel surcharge ratespercentages can be significant from period to period, fuel surcharges are reset weekly insteadonly one of monthly. In addition, the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price indices have moved from a two month to a two week lag.and additional charges for these services and the pricing discounts offered.
Total domestic fuel surcharge revenue increased by $50$75 million in the thirdfirst quarter of 2017primarily as a result of higher fuel surcharge rates causedvolume growth and shifts in product mix.
Operating Expenses
Operating expenses, and operating expenses excluding the year over year impact of transformation strategy costs, increased in the first quarter, driven by increasing jeta $670 million increase in pickup and diesel fuel prices,delivery costs. In addition, the costs of operating our domestic integrated air and ground network increased $461 million, the costs of package sorting increased $154 million and other indirect operating costs increased $207 million. The increases in expense were driven by several factors:
•Employee compensation and benefit costs increased $975 million, largely resulting from:
◦residential volume growth and an increase in average daily direct union labor hours of 13.3%;
◦union pay rate increases that were partially offset by productivity improvements; and
◦management payroll increases as well asa result of salary increases, growth in the overall increasesize of the workforce and increases in package volume duringincentive compensation and commission payments.
We incurred higher employee benefit expenses due to additional headcount, contractual contribution rate increases to union multiemployer plans and higher service costs for our company-sponsored pension and postretirement plans, primarily driven by lower discount rates used to measure 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 $209 million.projected benefit obligations of these plans.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Expenses
Operating expenses for the segment increased $430 million in the•Higher third quarter of 2017 compared with the same period of 2016 primarily due to pick-up and deliveryparty transportation costs (up $181 million), the costs of operating our domestic integrated air and ground network (up $169 million) and the cost of package sorting (up $51 million). The growth in pick-up and delivery and network costs was largely due to increased volume and higher employee compensation costs, which were impacted by an increase in average daily union labor hours (up 6.2%), an increase in employee healthcare expenses and growth in the overall size of the workforce. Additionally, average daily aircraft block hours increased 11.0% for the quarter, which were driven by additional SurePost volume, increased Next Day Air volume, modificationsutilization of outside carriers as part of our investments to improve time-in-transit within our airU.S. ground network and adverse weather events. rate increases.
•We also incurred higher fuel costs associated with outside contract carriers, primarilyas a result of volume growth and higher average daily miles driven, as well as increases in the price of diesel and gasoline, partially offset by lower prices for jet fuel.
Our self-insured automobile liability losses decreased by $76 million compared to the first quarter of 2020 due to volume growth (including SurePost), higher fuel surcharges passed to us by carriers and general rate increases.
On a year-to-date basis, operating expenses for the segment increased $1.475 billion, largely due to pick-up and delivery costs (up $591 million), network costs (up $582 million), the cost of package sorting (up $142 million) and an increasefavorable developments in indirect operating costs (up $136 million). These expenses were primarily due to higher volume, increased employee compensation costs, adverse weather conditions and a 7.2% increase in average daily block hours.case reserves.
Total cost per piece, and cost per piece excluding the year over year impact of transformation strategy costs, increased 3.5% for the third quarter of 2017 compared with the same period of 2016 (3.0% year-to-date). The increased expenses in the third quarter2.7% 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. Costs were further impacted by the hurricanes in the southern United States and rising fuel prices. In order to contain costs, we continually adjust our air and ground networks to better match higher volume levels. In addition, we continue to deploy and utilize technology to increase package sorting and delivery productivity.2.2%, respectively.
Operating Profit and Margin
OperatingAs a result of the factors described above, operating profit decreased $70increased $995 million forin the thirdfirst quarter, of 2017 compared with 2016 (up $66 million year-to-date), and operating margin decreased 130margins increasing 650 basis points to 12.2% (down 509.7%. Excluding the year over year impact of transformation strategy costs, adjusted operating profit increased $1.1 billion in the first quarter, with adjusted operating margins increasing 690 basis points to 12.6% year-to-date)10.4%. There was one less operating day for the third quarter of 2017 compared with the third quarter of 2016. Additionally, operating profit was negatively impacted by more than $50 million associated with the hurricanes and approximately $40 million for the continued investments in new buildings and deployment of Saturday operations. There was an adverse impact from higher purchase transportation costs and from fuel, as fuel expense increased at a faster pace than fuel surcharge revenue.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
International Package Operations | | | | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change | | Three Months Ended March 31, | | Change | |
| | 2017 | | 2016 | | % | | 2017 | | 2016 | | % | | 2021 | | 2020 | | $ | | % | |
| Average Daily Package Volume (in thousands): | | | | | | | | | | | | Average Daily Package Volume (in thousands): | | | | | | | | |
| Domestic | 1,704 |
| | 1,612 |
| | 5.7 | % | | 1,667 |
| | 1,576 |
| | 5.8 | % | Domestic | 2,010 | | | 1,668 | | | 20.5 | % | |
| Export | 1,399 |
| | 1,176 |
| | 19.0 | % | | 1,327 |
| | 1,155 |
| | 14.9 | % | Export | 1,783 | | | 1,413 | | | 26.2 | % | |
| Total Avg. Daily Package Volume | 3,103 |
| | 2,788 |
| | 11.3 | % | | 2,994 |
| | 2,731 |
| | 9.6 | % | |
| Total Average Daily Package Volume | | Total Average Daily Package Volume | 3,793 | | | 3,081 | | | 23.1 | % | |
| Average Revenue Per Piece: | | | | | | | | | | | | Average Revenue Per Piece: | | |
| Domestic | $ | 6.27 |
| | $ | 5.90 |
| | 6.3 | % | | $ | 5.99 |
| | $ | 5.96 |
| | 0.5 | % | Domestic | $ | 7.33 | | | $ | 6.44 | | | $ | 0.89 | | | 13.8 | % | |
| Export | 29.00 |
| | 30.35 |
| | (4.4 | )% | | 28.79 |
| | 30.72 |
| | (6.3 | )% | Export | 31.10 | | | 28.32 | | | 2.78 | | | 9.8 | % | |
| Total Avg. Revenue Per Piece | $ | 16.52 |
| | $ | 16.21 |
| | 1.9 | % | | $ | 16.10 |
| | $ | 16.43 |
| | (2.0 | )% | |
| Total Average Revenue Per Piece | | Total Average Revenue Per Piece | $ | 18.50 | | | $ | 16.48 | | | $ | 2.02 | | | 12.3 | % | |
| Operating Days in Period | 63 |
| | 64 |
| | | | 191 |
| | 192 |
| | | Operating Days in Period | 63 | | | 64 | | | |
| Revenue (in millions): | | | | | | | | | | | | Revenue (in millions): | | |
| Domestic | $ | 673 |
| | $ | 609 |
| | 10.5 | % | | $ | 1,906 |
| | $ | 1,804 |
| | 5.7 | % | Domestic | $ | 928 | | | $ | 688 | | | $ | 240 | | | 34.9 | % | |
| Export | 2,556 |
| | 2,284 |
| | 11.9 | % | | 7,298 |
| | 6,813 |
| | 7.1 | % | Export | 3,493 | | | 2,561 | | | 932 | | | 36.4 | % | |
| Cargo and Other | 135 |
| | 131 |
| | 3.1 | % | | 381 |
| | 398 |
| | (4.3 | )% | Cargo and Other | 186 | | | 134 | | | 52 | | | 38.8 | % | |
| Total Revenue | $ | 3,364 |
| | $ | 3,024 |
| | 11.2 | % | | $ | 9,585 |
| | $ | 9,015 |
| | 6.3 | % | Total Revenue | $ | 4,607 | | | $ | 3,383 | | | $ | 1,224 | | | 36.2 | % | |
| Operating Expenses (in millions) | $ | 2,737 |
| | $ | 2,448 |
| | 11.8 | % | | $ | 7,846 |
| | $ | 7,252 |
| | 8.2 | % | |
| Operating Profit (in millions) | $ | 627 |
| | $ | 576 |
| | 8.9 | % | | $ | 1,739 |
| | $ | 1,763 |
| | (1.4 | )% | |
| Operating Expenses (in millions): | | Operating Expenses (in millions): | | |
| Operating Expenses | | Operating Expenses | $ | 3,522 | | | $ | 2,832 | | | $ | 690 | | | 24.4 | % | |
| Transformation Strategy Costs | | Transformation Strategy Costs | (6) | | | (7) | | | 1 | | | (14.3) | % | |
| Adjusted Operating Expenses | | Adjusted Operating Expenses | $ | 3,516 | | | $ | 2,825 | | | $ | 691 | | | 24.5 | % | |
| Operating Profit (in millions) and Operating Margin: | | Operating Profit (in millions) and Operating Margin: | | |
| Operating Profit | | Operating Profit | $ | 1,085 | | | $ | 551 | | | $ | 534 | | | 96.9 | % | |
| Adjusted Operating Profit | | Adjusted Operating Profit | $ | 1,091 | | | $ | 558 | | | $ | 533 | | | 95.5 | % | |
| Operating Margin | 18.6 | % | | 19.0 | % | | | | 18.1 | % | | 19.6 | % | | | Operating Margin | 23.6 | % | | 16.3 | % | | |
| Adjusted Operating Margin | | Adjusted Operating Margin | 23.7 | % | | 16.5 | % | | |
| Currency Benefit / (Cost) – (in millions)*: | Currency Benefit / (Cost) – (in millions)*: | | | | | | | | | | | Currency Benefit / (Cost) – (in millions)*: | | |
| Revenue | | | | | $ | (12 | ) | | | | | | $ | (352 | ) | Revenue | | $ | 176 | | | |
| Operating Expenses | | | | | (50 | ) | | | | | | 57 |
| Operating Expenses | | (137) | | | |
| Operating Profit | | | | | $ | (62 | ) | | | | | | $ | (295 | ) | Operating Profit | | $ | 39 | | | |
| * 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 compared with the corresponding period of 2016:
|
| | | | | | | | | | | | | | |
| | Volume | | Rates / Product Mix | | Fuel Surcharge | | Currency | | Total Revenue Change |
| Revenue Change Drivers: | | | | | | | | | |
| Third quarter 2017 vs. 2016 | 9.6 | % | | (0.2 | )% | | 2.2 | % | | (0.4 | )% | | 11.2 | % |
| Year-to-date 2017 vs. 2016 | 6.4 | % | | 1.4 | % | | 2.4 | % | | (3.9 | )% | | 6.3 | % |
Volume
Our overall average daily volume increased in the third quarter and year-to-date periods of 2017 compared with 2016 with growth across both export and domestic products. The growth was due to increased demand across a number of sectors, including retail, high tech, industrial manufacturing and healthcare. Both business-to-business and business-to-consumer shipments showed strong growth rates.the following:
Export volume in the third quarter and year-to-date periods of 2017 grew across all major trade lanes, mainly driven by our European operations. Europe export volume showed significant growth to all regions, particularly in the Europe-to-U.S., Europe-to-Americas and intra-Europe trade lanes. Export volume into the U.S. grew in all trade lanes, led by the Americas and Europe regions. Export volume growth was strong across all major products, with a continued shift towards our premium express products, such as Worldwide Express and Transborder Express services. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Volume | | Rates /
Product Mix | | Fuel
Surcharge | | Currency | | Total Revenue
Change |
| Revenue Change Drivers: | | | | | | | | | |
| First quarter 2021 vs. 2020 | 21.2 | % | | 7.8 | % | | 2.0 | % | | 5.2 | % | | 36.2 | % |
| | | | | | | | | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Volume
The increase in domesticAverage daily volume increased in the thirdfirst quarter for both domestic and year-to-date periods of 2017 wasexport products, with growth across all customer segments. Business-to-consumer volume increased 78% in the first quarter, driven by solidstrong growth from the retail sector due to the continued growth of e-commerce. Business-to-business volume increased 10% in the first quarter, with growth increasing as the quarter progressed, reaching 24% in March as countries continued to resume commercial activities.
Export volume increased across all regions, led by Europe and Asia. Europe export volume growth was highest on the Europe to U.S. and intra-Europe trade lanes, while United Kingdom trade with Europe experienced a slight decline as a result of Brexit challenges. Asia export volume growth was strongest on the Asia to U.S. trade lane. We experienced volume growth from both our large customers and SMBs, with SMB growth across all regions. Our premium products saw volume growth of 34% for the quarter, driven by our Worldwide Express and Transborder Express products. Volume growth for our non-premium products was 30%, primarily driven by our Transborder Standard product.
Domestic volume increased in many of our markets, with growth strongest in Canada as well as several key marketscountries in Europe.western Europe, primarily due to residential volume growth driven by e-commerce.
Rates and Product Mix
OnIn December 26, 2016,2020, 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. In response to capacity constraints resulting from the COVID-19 pandemic, we implemented surcharges on certain lanes beginning in the second quarter of 2020.
Foreign currency fluctuations had an unfavorable impact on revenue per piece for the third quarter and year-to-date periods of 2017 compared with 2016. Total average revenue per piece increased 1.9%12.3% as a result of changes in the third quarter of 2017 compared to 2016, which was partially offset by a 40 basis point reduction from currency impact. Total average revenue per piece decreased 2.0% year-to-date compared to 2016, primarily due to a 370 basis point reduction from the impact of currency. Additionally, growth in shorter average trade lanes had a negative impact on revenue per piece during the third quarter of 2017customer and year-to-date periods. These factors were partially offset by an increase in fuel surcharge revenue, as well as an increase in base rates and a 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 4.4% in the third quarter of 2017 (6.3% year-to-date) compared with 2016, primarily due to a 150 basis point reduction fromcapacity surcharges, favorable currency movements and fuel surcharges. Excluding the impact of currency, (400 basis point reduction 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 strong volume growth of premium products.increased 7.8%.
Domestic revenue per piece increased 6.3% in the third quarter of 2017 compared with 2016 primarily13.8% due to a 460 basis point increase from the impact of currency. Domestic revenue per piece for the year-to-date period remained relatively flat due to a 200 basis point reduction fromchanges in customer and product mix, capacity surcharges and favorable currency movements. Excluding the impact of currency, offset by an increaserevenue per piece increased 6.7%.
Export revenue per piece increased 9.8% primarily due to changes in base ratescustomer and higherproduct mix, capacity surcharges, favorable currency movements and fuel surcharges. Excluding the impact of currency, revenue per piece increased 6.1%.
Fuel Surcharges
We maintain fuel surcharges on our international air and ground services. The fuel surchargessurcharge for international air productsservices originating inside or outside the United States areU.S. is largely indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel, while thefuel. The fuel surcharges for ground productsservices originating outside the United StatesU.S. are indexed to fuel prices in the international region or country where the shipment takes place.originates.
While fluctuations can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges and the pricing discounts offered. Total international fuel surcharge revenue increased $72by $89 million for the third quarteras a result of 2017 ($214 million year-to-date) compared with 2016, due to volume increases, higher fuel pricesgrowth and pricing changes made to thein customer and product mix, partially offset by declines in fuel surcharge indices from a two month to a two week lag.indices.
Operating Expenses
OverallOperating expenses, and operating expenses excluding the year over year impact of transformation strategy costs, increased for the segment increased $289 million in the thirdfirst quarter of 2017 ($5942021. Pickup and delivery costs increased $310 million year-to-date) compared to 2016. The third quarter increase was driven by currency fluctuations, increased volumesas volume growth and higher fuel prices. Thean increase in the year-to-date period wasresidential deliveries drove additional third-party pickup and delivery expense. Package sorting costs also driven by increased volumes and higher fuel prices, but was partially offset by currency fluctuations.$69 million as a result of volume growth.
The costs of operating our integrated international integrated air and ground network increased $103$204 million, for the third quarter of 2017 ($313 million year-to-date) compared with 2016. The increase in network costs was largely driven by a 3.2% increaseoverall volume growth. This volume growth, together with additional flights to support outbound demand from Asia, resulted in aircraftincreased block hours in the third quarter and year-to-date periods of 2017 and higherwhich were partially offset by lower jet fuel prices. Additionally, pick-up and delivery costs increased $97 million in the third quarter of 2017 compared with 2016 ($156 million year-to-date), largely due to increased volume.
The remaining change in operating expenses in the third quarter of 2017 and year-to-date periods of 2017 compared with 2016 was largely due to an increase in the costs of package sorting and an increase in indirect operating costs.
Operating Profit and Margin
Operating profit increased $51 million in the third quarter of 2017 compared to 2016 while operating margin decreased 40 basis points to 18.6%. For the year-to-date period, operating profit decreased $24 million and operating margin decreased 150 basis points to 18.1%. The third quarter and year-to-date periods were both negatively impacted by currency exchange rate movements of $62 million and $295 million respectively, due to volatility of both hedged and unhedged currencies. However, volume and revenue growth in the third quarter and year-to-date periods offset the impacts of currency.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Supply Chain & Freight Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2017 |
| 2016 | | % | | 2017 | | 2016 | | % |
| Freight LTL Statistics: | | | | | | | | | | | |
| Revenue (in millions) | $ | 673 |
| | $ | 616 |
| | 9.3 | % | | $ | 1,943 |
| | $ | 1,780 |
| | 9.2 | % |
| Revenue Per Hundredweight | $ | 24.47 |
| | $ | 23.63 |
| | 3.6 | % | | $ | 23.90 |
| | $ | 23.46 |
| | 1.9 | % |
| Shipments (in thousands) | 2,589 |
| | 2,551 |
| | 1.5 | % | | 7,739 |
| | 7,507 |
| | 3.1 | % |
| Shipments Per Day (in thousands) | 41.1 |
| | 39.9 |
| | 3.0 | % | | 40.5 |
| | 39.1 |
| | 3.6 | % |
| Gross Weight Hauled (in millions of lbs) | 2,750 |
| | 2,607 |
| | 5.5 | % | | 8,131 |
| | 7,589 |
| | 7.1 | % |
| Weight Per Shipment (in lbs) | 1,062 |
| | 1,022 |
| | 3.9 | % | | 1,051 |
| | 1,011 |
| | 4.0 | % |
| Operating Days in Period | 63 |
| | 64 |
| | | | 191 |
| | 192 |
| | |
| Revenue (in millions): | | | | | | | | | | | |
| Forwarding and Logistics | $ | 1,989 |
| | $ | 1,735 |
| | 14.6 | % | | $ | 5,709 |
| | $ | 4,980 |
| | 14.6 | % |
| Freight | 778 |
| | 701 |
| | 11.0 | % | | 2,240 |
| | 2,050 |
| | 9.3 | % |
| Other | 198 |
| | 179 |
| | 10.6 | % | | 580 |
| | 542 |
| | 7.0 | % |
| Total Revenue | $ | 2,965 |
| | $ | 2,615 |
| | 13.4 | % | | $ | 8,529 |
| | $ | 7,572 |
| | 12.6 | % |
| Operating Expenses (in millions): | $ | 2,739 |
| | $ | 2,409 |
| | 13.7 | % | | $ | 7,886 |
| | $ | 7,027 |
| | 12.2 | % |
| Operating Profit (in millions): | $ | 226 |
| | $ | 206 |
| | 9.7 | % | | $ | 643 |
| | $ | 545 |
| | 18.0 | % |
| Operating Margin | 7.6 | % | | 7.9 | % | | | | 7.5 | % | | 7.2 | % | | |
| Currency Benefit / (Cost) – (in millions)*: | | | | $ | | | | | | $ |
| Revenue | | | | | $ | 9 |
| | | | | | $ | (15 | ) |
| Operating Expenses | | | | | (9 | ) | | | | | | 14 |
|
| Operating Profit | | | | | $ | — |
| | | | | | $ | (1 | ) |
| * Amount represents the change in currency translation compared to the prior year. | | | | | | |
In December 2016,addition to variability in usage and market prices, the manner in which we acquired Marken,purchase fuel also influences the net impact of costs on our results. The majority of our contracts for fuel purchases utilize index-based pricing formulas plus or minus a global providerfixed locational/supplier differential. While many of supply chain solutions to the life sciences industry and leader in clinical trials material storage and distribution. Marken's financial resultsindices are includedaligned, each index may fluctuate at a different pace, driving variability in the above table within Forwarding and Logistics fromprices paid for fuel. Because of this, our operating results may be affected should the datemarket price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the acquisition, which has impacted the year-over-year comparability of revenue,short-term.
The remaining increase in operating expenses was driven by other indirect costs.
Operating Profit and Margin
Operating profit increased 96.9% to $1.1 billion, with operating profit.
Revenue
Total revenue formargin increasing 730 basis points to 23.6%. Excluding the Supply Chain & Freight segmentyear over year impact of transformation strategy costs, adjusted operating profit increased, $350 million for the third quarter of 2017 ($957 million year-to-date) comparedwith adjusted operating margin increasing 720 basis points to 2016.
Forwarding and Logistics revenue increased $254 million in the third quarter of 2017 ($729 million year-to-date) compared with 2016, primarily due to increased truckload brokerage freight volume movement, and tonnage increases in our international freight forwarding businesses, which were impacted by improving overall market demand. Our North American freight forwarding business showed a slight decline in revenues in the third quarter of 2017 as increases in tonnage were offset by a shift in product mix. However, on a year-to-date basis, North American freight forwarding revenue23.7%. Operating profit increased as a result of increases in tonnage. Revenue for our logistics services increased in the third quarter and year-to-date periods of 2017 compared with 2016, as we experienced growth in our mail services, retail and aerospace solutions offset by declines among our high tech customers. Additionally, the Marken acquisition in 2016 contributed to the increase in revenue. A positive impact of currency exchange rates was realized on revenues in the third quarter of 2017, while the year-to-date impact was negative.
factors described above.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Supply Chain & Freight Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2021 | | 2020 | | $ | | % | | | | | | | | |
| Freight LTL Statistics: | | | | | | | | | | | | | | | |
| Revenue (in millions) | $ | 634 | | | $ | 637 | | | $ | (3) | | | (0.5) | % | | | | | | | | |
| Revenue Per Hundredweight | $ | 29.63 | | | $ | 26.50 | | | $ | 3.13 | | | 11.8 | % | | | | | | | | |
| Shipments (in thousands) | 2,060 | | | 2,225 | | | | | (7.4) | % | | | | | | | | |
| Shipments Per Day (in thousands) | 32.7 | | | 34.8 | | | | | (6.0) | % | | | | | | | | |
| Gross Weight Hauled (in millions of lbs) | 2,140 | | | 2,404 | | | | | (11.0) | % | | | | | | | | |
| Weight Per Shipment (in lbs) | 1,039 | | | 1,081 | | | | | (3.9) | % | | | | | | | | |
| Operating Days in Period | 63 | | | 64 | | | | | | | | | | | | | |
| Revenue (in millions): | | | | | | | | | | | | | | | |
| Forwarding | $ | 2,072 | | | $ | 1,373 | | | $ | 699 | | | 50.9 | % | | | | | | | | |
| Logistics | 1,104 | | | 845 | | | 259 | | | 30.7 | % | | | | | | | | |
| Freight | 767 | | | 766 | | | 1 | | | 0.1 | % | | | | | | | | |
| Other | 348 | | | 212 | | | 136 | | | 64.2 | % | | | | | | | | |
| Total Revenue | $ | 4,291 | | | $ | 3,196 | | | $ | 1,095 | | | 34.3 | % | | | | | | | | |
| Operating Expenses (in millions): | | | | | | | | | | | | | | | |
| Operating Expenses | $ | 3,970 | | | $ | 3,039 | | | $ | 931 | | | 30.6 | % | | | | | | | | |
| Transformation Strategy and Other Costs | (74) | | | (1) | | | (73) | | | N/M | | | | | | | | |
| Adjusted Operating Expenses: | $ | 3,896 | | | $ | 3,038 | | | $ | 858 | | | 28.2 | % | | | | | | | | |
| Operating Profit (in millions) and Operating Margin: | | | | | | | | | | | | | | |
| Operating Profit | $ | 321 | | | $ | 157 | | | $ | 164 | | | 104.5 | % | | | | | | | | |
| Adjusted Operating Profit | $ | 395 | | | $ | 158 | | | $ | 237 | | | 150.0 | % | | | | | | | | |
| Operating Margin | 7.5 | % | | 4.9 | % | | | | | | | | | | | | |
| Adjusted Operating Margin | 9.2 | % | | 4.9 | % | | | | | | | | | | | | |
| Currency Benefit / (Cost) – (in millions)*: | | | | | | | | | | | | | | |
| Revenue | | | | | $ | 45 | | | | | | | | | | | |
| Operating Expenses | | | | | (47) | | | | | | | | | | | |
| Operating Profit | | | | | $ | (2) | | | | | | | | | | | |
| * Amount represents the change in currency translation compared to the prior year. | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2021 | | 2020 | | $ | | % | | | | | | | | |
| Transformation Strategy Costs (in millions): | | | | | | | | | | | | | | | |
| Forwarding | $ | 5 | | | $ | 1 | | | $ | 4 | | | 400.0 | % | | | | | | | | |
| Logistics | 2 | | | — | | | 2 | | | N/A | | | | | | | | |
| Freight | 1 | | | — | | | 1 | | | N/A | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total Transformation Strategy Costs | $ | 8 | | | $ | 1 | | | $ | 7 | | | N/M | | | | | | | | |
In January 2021, we entered into a definitive agreement to divest our UPS Freight business. As of December 31, 2020, we classified certain assets and liabilities of UPS Freight as held for sale in the consolidated balance sheet. In the first quarter of 2021, we recognized an additional valuation allowance of $66 million. See note 6 to the unaudited, consolidated financial statements for additional information.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue
Total revenue for the Supply Chain & Freight segment increased $1.1 billion in the first quarter.
Forwarding revenue increased in the first quarter. In our international air freight business, revenue growth was primarily driven by year over year increases in market rates and by capacity surcharges, as well as continued strong outbound demand from Asia. Ocean freight forwarding revenue increased due to Asia-export volume growth and higher market rates. Revenue in our truckload brokerage business increased due to volume growth and higher market rates.
Within Logistics, revenue in our mail services business increased as a result of volume growth, a favorable shift in product characteristics and annual rate increases. Our healthcare logistics operations experienced strong revenue growth across a broad range of customers.COVID-19 relief efforts also contributed to this growth.
UPS Freight revenue increased $77 millionwas relatively flat in the third quarter of 2017 ($190 million year-to-date), drivenfirst quarter. Revenue from our Ground with Freight Pricing product grew; however this growth was largely offset by increases in weight per shipment and shipments. These increases were impacted by an overall improvement in market demand and customer mix. LTL revenue per hundredweight increased slightly 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 in the U.S., Canada and Mexico. Fuel surcharge revenue also increased $16 million in the third quarter ($48 million year-to-date), due to changes in overall LTL shipmentlower volume and diesel fuel prices.revenue in our truckload businesses.
Revenue for the other businesses within Supply Chain & Freight increased, $19 million ($38 million year-to-date) due to revenuedriven by growth from UPS Capital and UPS Customer Solutions,in our logistics consulting services, as well as additional volume from service contracts with the U.S. Postal Service.
Operating Expenses
Total operating expenses for the Supply Chain & Freight segment, and operating expenses excluding the year over year impact of transformation strategy and other costs, increased $330 million in the third quarter of 2017 ($859 million year-to-date) compared to 2016.first quarter.
Forwarding operating expenses increased $624 million. Purchased transportation increased $591 million due to cost per load and volume increases in our truckload brokerage business, as well as higher market rates and volumes in our international air freight and ocean freight businesses.
Logistics operating expenses increased $250$224 million, for the third quarter of 2017 ($672 million year-to-date) compared with 2016, largely due to increaseddriven by higher purchased transportation expense in mail services as a result of volume growth and the acquisition of Marken, partially offset by operating efficiencies. Additionally, during the second quarter of 2017, we received a $20 million favorable legal settlement. Purchased transportation expense increased $215 million in the third quarter of 2017 ($625 million year-to-date) compared to 2016, due to the acquisition of Marken,carrier rate increases, as well as increased truckload brokerage freight movement and the resulting increased fuel surcharges passed to us from outside transportation providers. Increased tonnage and third-party air carrier procurement rates in our North American and international air freight forwarding businesses, and increased volume and rates for mail services, also contributed to purchased transportation expenses. We realized a positive impact of currency exchange rates on operating expensesgrowth in the third quarter of 2017, while the year-to-date impact was negative.healthcare sector.
UPS Freight operating expenses increased $77decreased $2 million forin the third quarterfirst quarter. The impact of 2017 ($171 million year-to-date) compared to 2016. Total cost per LTL shipment increased 7.7% for the third quarter of 2017 (4.8% year-to-date) compared with 2016. The increaselower volumes in operating expense wasour less-than-truckload ("LTL") and truckload businesses and a year over year reduction in self-insurance costs were largely due to costs associated with operating our linehaul network ($34 million over the prior year quarter and $94 million year-to-date) and increases in pick-up and delivery costs ($26 million over the prior year quarter and $58 million year-to-date). The network costs and pick-up and delivery expenses were drivenoffset by higher fuel cost and higher expense for outside transportation carriers (largely due to LTL volume growth and fuel surcharges passed to us by outside carriers). Operating expensesan additional valuation allowance related to our casualty self-insurance reserves also increased both for the quarter and year-to-date.divestiture of UPS Freight.
Operating expensesExpense for the other businesses within Supply Chain & Freight increased $3 milliondue to growth in 2017 ($16 million year-to-date) compared with 2016.our logistics consulting services and additional volume from the U.S. Postal Service.
Operating Profit and Margin
Total operatingOperating profit for the Supply Chain & Freight segment increased $20$164 million in the thirdfirst quarter, of 2017 ($98 million year-to-date) compared with 2016. Theoperating margin increasing 260 basis points to 7.5%. Excluding the year over year impact of currency was neutral for both the quartertransformation strategy and year-to-date.
Operatingother costs, adjusted operating profit for the Forwarding and Logistics units increased $4$237 million, in the third quarter of 2017 ($57 million year-to-date) compared with 2016.adjusted operating margin increasing 430 basis points to 9.2%. Operating profit and margins for the North American air freight business decreased in the third quarter of 2017 due to a shift in product mix and capacity constraints. On a year-to-date basis,adjusted operating profit and margins forincreased as a result of the North American air freight business increased due to higher volumes. Operating profit and margins in our international air freight forwarding business increased due to volume increases and higher revenue per kilo, slightly offset by higher rates at which we procure capacity from third-party air carriers. 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. Additionally, the Marken acquisition in 2016 contributed to the increase in operating profit.factors described above.
UPS Freight operating profit remained flat in the third quarter of 2017 ($19 million increase year-to-date) compared with 2016, as increased volume, tonnage and pricing were offset by increased purchased transportation costs as well as higher casualty self-insurance reserves.
The combined operating profit for all of our other businesses in this segment increased $16 million in 2017 ($22 million year-to-date) compared to 2016.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Change | | | | |
| | 2021 | | 2020 | | $ | | % | | | | | | | | |
| Operating Expenses (in millions): | | | | | | | | | | | | | | | |
| Compensation and benefits | $ | 11,483 | | | $ | 10,086 | | | $ | 1,397 | | | 13.9 | % | | | | | | | | |
| Transformation Strategy and Other Costs | (76) | | | (12) | | | (64) | | | N/M | | | | | | | | |
| Adjusted Compensation and benefits | $ | 11,407 | | | $ | 10,074 | | | $ | 1,333 | | | 13.2 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Repairs and maintenance | $ | 619 | | | $ | 563 | | | $ | 56 | | | 9.9 | % | | | | | | | | |
| Depreciation and amortization | 722 | | | 648 | | | 74 | | | 11.4 | % | | | | | | | | |
| Purchased transportation | 4,243 | | | 2,931 | | | 1,312 | | | 44.8 | % | | | | | | | | |
| Fuel | 807 | | | 761 | | | 46 | | | 6.0 | % | | | | | | | | |
| Other occupancy | 466 | | | 383 | | | 83 | | | 21.7 | % | | | | | | | | |
| Other expenses | 1,803 | | | 1,591 | | | 212 | | | 13.3 | % | | | | | | | | |
| Total Other expenses | 8,660 | | | 6,877 | | | 1,783 | | | 25.9 | % | | | | | | | | |
| Transformation Strategy and Other Costs | (108) | | | (33) | | | (75) | | | 227.3 | % | | | | | | | | |
| Adjusted Total Other expenses | $ | 8,552 | | | $ | 6,844 | | | $ | 1,708 | | | 25.0 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total Operating Expenses | $ | 20,143 | | | $ | 16,963 | | | $ | 3,180 | | | 18.7 | % | | | | | | | | |
| Adjusted Total Operating Expenses | $ | 19,959 | | | $ | 16,918 | | | $ | 3,041 | | | 18.0 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Currency (Benefit) / Cost - (in millions)* | | | | | $ | 184 | | | | | | | | | | | |
| * Amount represents the change in currency translation compared to the prior year. | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2017 | | 2016 | | % | | 2017 | | 2016 | | % |
| Operating Expenses (in millions): | | | | | | | | | | | |
| Compensation and Benefits | $ | 8,221 |
| | $ | 7,857 |
| | 4.6 | % | | $ | 24,457 |
| | $ | 23,448 |
| | 4.3 | % |
| Repairs and Maintenance | 398 |
| | 386 |
| | 3.1 | % | | 1,180 |
| | 1,150 |
| | 2.6 | % |
| Depreciation and Amortization | 572 |
| | 554 |
| | 3.2 | % | | 1,688 |
| | 1,661 |
| | 1.6 | % |
| Purchased Transportation | 2,652 |
| | 2,212 |
| | 19.9 | % | | 7,461 |
| | 6,306 |
| | 18.3 | % |
| Fuel | 636 |
| | 541 |
| | 17.6 | % | | 1,873 |
| | 1,480 |
| | 26.6 | % |
| Other Occupancy | 282 |
| | 248 |
| | 13.7 | % | | 845 |
| | 762 |
| | 10.9 | % |
| Other Expenses | 1,182 |
| | 1,096 |
| | 7.8 | % | | 3,504 |
| | 3,273 |
| | 7.1 | % |
| Total Operating Expenses | $ | 13,943 |
| | $ | 12,894 |
| | 8.1 | % | | $ | 41,008 |
| | $ | 38,080 |
| | 7.7 | % |
| | | | | | | | | | | | |
| Currency (Benefit) / Cost - (in millions)* | | | | | $ | 59 |
| | | | | | $ | (71 | ) |
| * Amount represents the change in currency translation compared to the prior year. | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Change | | | | |
| | 2021 | | 2020 | | $ | | % | | | | | | | | |
| Adjustments to Operating Expenses (in millions): | | | | | | | | | | | | | | | |
| Transformation Strategy Costs: | | | | | | | | | | | | | | |
| Compensation | $ | 6 | | | $ | 8 | | | $ | (2) | | | (25.0) | % | | | | | | | | |
| Benefits | 70 | | | 4 | | | 66 | | | N/M | | | | | | | | |
| | | | | | | | | | | | | | | |
| Other occupancy | 1 | | | 2 | | | (1) | | | (50.0) | % | | | | | | | | |
| Other expenses | 41 | | | 31 | | | 10 | | | 32.3 | % | | | | | | | | |
| Total Transformation Strategy Costs | $ | 118 | | | $ | 45 | | | $ | 73 | | | 162.2 | % | | | | | | | | |
| Valuation allowance on assets held for sale: | | | | | | | | | | | | | | | |
| Other expenses | $ | 66 | | | $ | — | | | $ | 66 | | | N/A | | | | | | | | |
| Total Adjustments to Operating Expenses | $ | 184 | | | $ | 45 | | | $ | 139 | | | 308.9 | % | | | | | | | | |
Compensation and Benefits
Employee payrollTotal compensation and benefits, and total compensation and benefits excluding the year over year impact of transformation strategy costs, increased $284 million forin the thirdfirst quarter of 2017 ($705 million year-to-date) compared with 2016, largely due to higher U.S. domestic hourly and management compensation costs. Total compensation costs increased 5.9% for the third quarter 2017 (4.9% year-to-date), while consolidated average daily volume growth was 4.6% (4.5% year-to-date). U.S. Domestic compensation costs for hourly employees increased largely due to contractual union wage increases and higher volume growth driving headcount increases and a 6.2% increase in average daily union labor hours (5.0% year-to-date). Compensation costs for management employees increased primarily due to merit salary increases and growth in the overall size of the workforce.2021.
Benefits expense increased $80 million for the third quarter of 2017 ($304 million year-to-date) compared with 2016 primarily due to the following factors:
Health and welfare costs increased $55 million for the third quarter ($169 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 expense decreased $27 million for the third quarter ($2 million year-to-date), primarily due to asset returns in company sponsored plans driven by discretionary contributions. This decrease was offset by additional expense for multiemployer pension plans, which was impacted by contractual contribution rate increases and an overall increase in the size of the workforce.
Vacation, holiday, bonus, excused absence, payroll tax and other expenses increased $49 million for the third quarter ($159 million year-to-date), due to salary increases and growth in the overall size of the workforce.
Workers' compensation expense was relatively flat in the third quarter (down $22 million year-to-date), as increases in work hours, medical trends and wage increases were mainly offset by favorable adjustments from actuarial studies. Insurance reserves are established for estimates of the loss that we will ultimately incur on reported workers' compensation claims, as well as estimates of claims that have been incurred but not reported, and take into account a number of factors including our history of claim losses, payroll growth and the impact of safety improvement initiatives.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Total compensation costs increased $795 million or 13.5%. Excluding the year over year impact of transformation strategy costs, adjusted total compensation costs increased $797 million, driven by higher U.S. Domestic direct labor costs as a result of growth in average daily volume. This volume growth drove additional headcount and an increase in average daily union hours of 13.3%. Contractual union wage increases also contributed to the increase in compensation costs for hourly employees. Compensation costs for management employees increased due to salary increases, growth in the overall size of the workforce and increases in incentive compensation and commission payments.
Benefits costs increased $602 million or 14.4%. Excluding the year over year impact of transformation strategy costs, adjusted benefits costs increased $536 million as a result of:
•Health and welfare costs increased $164 million, primarily as a result of increased contributions to multiemployer plans driven by the overall increase in the size of the workforce and contractual rate increases.
•Pension and other postretirement benefits increased $225 million due to higher service costs for company-sponsored plans, primarily driven by a reduction in discount rates, as well as increased contributions to multiemployer plans as a result of contractually-mandated contribution increases and the overall increase in the size of the workforce.
•Vacation, excused absence, payroll taxes and other costs increased $156 million, primarily driven by salary and wage increases and growth in the overall size of the workforce, as well as additional discretionary bonus payments.
•Workers' compensation costs decreased $9 million driven by favorable developments in claims reserves that were partially offset by growth in hours, medical trends and wage increases.
Repairs and Maintenance
The $12 million increase in repairs andWe incurred higher costs for aircraft engine maintenance, expense for the third quarter of 2017 ($30 million year-to-date) compared with 2016 was primarily due to routine repairs tothe increase in operating activity as well as the replacement of parts on certain types of aircraft. Repairs and maintenance for buildings and facilities and vehicle maintenance costs.also increased, primarily as a result of additional facilities coming into service.
Depreciation and Amortization
Depreciation and amortization expense increased $18 millionas a result of investments in facility automation and capacity expansion projects that came online after the thirdfirst quarter of 2017 ($27 million year-to-date) compared with 2016, primarily due to the following factors: (1) depreciation expense on vehicles increased due to an overall increase2020, as well as growth in the size of our vehicle fleetand aircraft fleets and additional investments 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 in conjunction with the Marken acquisition. These factors were largely offset by a decrease in amortization expense related to longer lived internally developed capitalized software.
Purchased Transportation
The $440 millionoverall increase in purchasedthird-party transportation expense charged to us by third-party air, rail, ocean and truck carriers for the third quarter of 2017 ($1.155 billion year-to-date) compared with 2016 was primarily driven by the following factors:by:
Expense for our •Forwarding and Logistics businessesexpense increased $215$724 million, in the third quarter of 2017 ($625 million year-to-date) compared to 2016, primarily due to increased truckload brokeragemarket rates in our international air freight loads per daybusiness, as well as volume growth and the resulting increased fuel surcharges passed to us from outside transportation providers; increased volume and rates forrate increases in our ocean freight, mail services and truckload brokerage businesses.
•U.S. Domestic Package expense increased tonnage$296 million resulting from investments to improve time-in-transit in our North AmericanU.S. ground network. Additionally, increases in SurePost volume and international air freight forwarding businesses. Additionally, purchasedgrowth in our other products resulted in approximately $70 million of incremental third-party transportation expense increased due to the acquisition of Marken in December 2016.cost.
•International Package expense increased $85$253 million, in the third quarter of 2017 ($167 million year-to-date) compared to 2016, primarily due to the increased usage ofvolume increases in Asia and Europe that drove higher third-party carriers (higher volume); higher fuel surcharges passed to us from outside transportation providerspickup and andelivery cost and unfavorable impact of currency exchange rate movements.
Expense for our U.S. Domestic Package segment increased $76 million for the third quarter of 2017 ($217 million year-to-date) compared to 2016, primarily due to increased volume (including SurePost), rates and higher fuel surcharges passed to us from outside contract carriers.
Expense for our UPS Freight business increased $53 million in the third quarter of 2017 ($115 million year-to-date) compared to 2016, due to an increase in LTL shipments and higher fuel surcharges passed to us from outside transportation providers.
Fuel
The $95 million increase in fuel expense for the third quarter of 2017 ($393 million year-to-date) compared with 2016 was primarily due to higher jet fuel, diesel and unleaded gasoline prices, which increased fuel expensedriven by $61 million ($295 million year-to-date). Additionally, increased fuel consumption, primarily due to increasesan increase in total aircraft block hours and Domestic Package delivery miles driven as a result of increased expense by $40 million in the third quarter of 2017 ($114 million year-to-date).package volume. These increases were partially offset by increasedlower jet fuel efficiency.prices.
Other Occupancy
Other occupancy expense, increased $34 million inand other occupancy expense excluding the third quarteryear over year impact of 2017 ($83 million year-to-date) as compared to 2016, primarilytransformation strategy costs, increased due to an increase in utilityadditional operating facilities coming into service and higher costs and the expansion of facilities.for weather related expenses, such as snow removal.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Expenses
The $86Other expenses, and other expenses excluding the year over year impact of transformation strategy and other costs, increased as a result of the following:
•Other operational expenses, including vehicle and equipment rentals, increased $74 million increase in other expense in the third quarteras a result of 2017 ($231volume growth.
•Professional fees related to business support services increased $32 million.
•Asset impairments increased $24 million year-to-date) compared with 2016 was attributable to a number of factors:
Transportation equipment rental expense increased by $13 million in the third quarter of 2017 ($30 million year-to-date) and was affecteddriven by the growthtiming of cancellation of certain facility expansion projects.
•Other increases included reserves for certain tax positions and legal contingencies, payment processing fees, non-income based taxes, package claims and information technology expenses. These were largely offset by reductions in package volume.
Automotiveself-insured automobile liability insurance expense increased by $3claims of $91 million in the third quarter of 2017 ($34 million year-to-date) largely due to more miles driven, medical rate trendsimprovements in claims experience, allowances for credit losses and unfavorable severity experience trends.employee expense reimbursements.
We also incurred increases in several other expense categories, including professional service fees and maintenance agreements, partially offset by a decrease in advertising expense and the impacts from a favorable legal settlement in the second quarter of 2017.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Income and (Expense)
The following table sets forth investment income and other and interest expense for the three months ended March 31, 2021 and 2020 (in millions): |
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2017 | | 2016 | | % | | 2017 | | 2016 | | % |
| (in millions) | | | | | | | | | | | |
| Investment income and other | $ | 20 |
| | $ | 13 |
| | 53.8 | % | | $ | 49 |
| | $ | 38 |
| | 28.9 | % |
| Interest expense | $ | (111 | ) | | $ | (94 | ) | | 18.1 | % | | $ | (324 | ) | | $ | (281 | ) | | 15.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2021 | | 2020 | | $ | | % | | | | | | | | |
| Investment Income and Other | $ | 3,616 | | | $ | 345 | | | $ | 3,271 | | | N/M | | | | | | | | |
| Defined Benefit Plan Mark-to-Market Gain | $ | (3,290) | | | $ | — | | | $ | (3,290) | | | N/A | | | | | | | | |
| Adjusted Investment Income and Other | $ | 326 | | | $ | 345 | | | $ | (19) | | | (5.5) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Interest Expense | (177) | | | (167) | | | (10) | | | 6.0 | % | | | | | | | | |
| Total Other Income and (Expense) | $ | 3,439 | | | $ | 178 | | | $ | 3,261 | | | N/M | | | | | | | | |
| Adjusted Other Income and (Expense) | $ | 149 | | | $ | 178 | | | $ | (29) | | | (16.3) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
Investment Income and Other
The growthInvestment income and other increased $3.3 billion, inclusive of a defined benefit plan mark-to-market gain recognized in March 2021. Excluding the impact of this mark-to-market gain, adjusted investment income and other for the third quarter and year-to-date periods of 2017, as compared to 2016, wasdecreased $19 million, primarily due to a decrease in other pension income, which includes expected investment returns on pension assets, net of interest cost on projected benefit obligations and prior service costs.
•Expected returns on pension assets decreased as a result of a reduction in the expected rate of return assumption, partially offset by a higher asset base due to discretionary contributions and positive asset returns in 2020.
•Pension interest cost decreased due to the impact of lower year end discount rates that was partially offset by ongoing plan growth and an increase in projected benefit obligations.
Additional impacts included foreign currency losses, from fair value adjustments on real estate partnerships and higherlower yields on invested assets offset by foreign currency exchange rate movements.and a gain from fair value changes in certain non-current investments.
Interest Expense
Interest expense increased, inprimarily driven by the thirdeffect of debt issuances at the end of the first quarter and year-to-date periods of 2017, as compared to 2016, primarily due to an increase in2020 partially offset by lower average outstanding commercial paper balances an increase in long-term debt and higher effective interest rates on senior notes.
Income Tax Expensefloating rate debt and commercial paper.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Change | | Nine Months Ended
September 30, | | Change |
| | 2017 | | 2016 | | % | | 2017 | | 2016 | | % |
| (in millions) | | | | | | | | | | | |
| Income Tax Expense | $ | 680 |
| | $ | 683 |
| | (0.4 | )% | | $ | 1,954 |
| | $ | 1,982 |
| | (1.4 | )% |
| Effective Tax Rate | 35.0 | % | | 35.0 | % | | | | 33.9 | % | | 35.1 | % | | |
Our effective tax rate was 35.0% in the third quarter of 2017 and 2016 (33.9% year-to-date in 2017 compared to 35.1% in the same period of 2016). In the first quarter of 2017, we adopted a new accounting standard that requires the recognition of excess tax benefits related to share-based compensation in income tax expense, which resulted in discrete tax benefits for the nine months ended September 30, 2017 of $62 million and reduced our year-to-date effective tax rate by 1.1%. There was no significant impact related to the adoption of the new accounting standard in the third quarter of 2017. See note 2 and note 14 to the unaudited consolidated financial statements for additional discussion.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Tax Expense
The following table sets forth our income tax expense and effective tax rate for the three months ended March 31, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | |
| | 2021 | | 2020 | | $ | | % | |
| Income Tax Expense | $ | 1,412 | | | $ | 285 | | | $ | 1,127 | | | 395.4 | % | |
| Income Tax Impact of: | | | | | | | | |
| Defined Benefit Plan Mark-to-Market Gain | (788) | | — | | (788) | | | N/A | |
| Transformation Strategy and Other Costs | 44 | | 10 | | 34 | | | 340.0 | % | |
| Adjusted Income Tax Expense | $ | 668 | | $ | 295 | | $ | 373 | | | 126.4 | % | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Effective Tax Rate | 22.8 | % | | 22.8 | % | | | | | |
| Adjusted Effective Tax Rate | 21.6 | % | | 22.8 | % | | | | | |
| | | | | | | | |
For additional information on our income tax expense and effective tax rate, see note 17 to the unaudited, consolidated financial statements included in this report.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of September 30, 2017,March 31, 2021, we had $4.461$8.1 billion in cash, cash equivalents and marketable securities. We believe that our currentthese positions, expected cash position,from operations, access to the long-term debtcommercial paper programs and capital markets and cash flow generated from operations shouldother available liquidity options will be adequate not only forto fund our operating requirements, but also to enable us to complete ourplanned capital expenditure programsexpenditures, pension contributions, transformation strategy costs, debt obligations and to fund dividend payments, share repurchases and long-term debt payments through the next several fiscal years. In addition, we have funds available from our commercial paper program and the ability to obtain alternative sources of financing.planned shareowner returns. We regularly evaluate opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund ongoing cash needs.operations. As previously disclosed, we have suspended share repurchases under our stock repurchase program and do not have plans to repurchase shares at this time.
Cash Flows From Operating Activities
The following is a summary of the significant sources (uses) of cash from operating activities (amounts in(in millions):
| | | | Nine Months Ended
September 30, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2021 | | 2020 |
| Net income | $ | 3,806 |
| | $ | 3,670 |
| Net income | $ | 4,792 | | | $ | 965 | |
| Non-cash operating activities (a) | 3,059 |
| | 2,583 |
| Non-cash operating activities (a) | (984) | | | 1,282 | |
| Pension and postretirement benefit contributions (UPS-sponsored plans) | (2,585 | ) | | (1,298 | ) | |
| Pension and postretirement benefit plan contributions (company-sponsored plans) | | Pension and postretirement benefit plan contributions (company-sponsored plans) | (215) | | | (222) | |
| | Hedge margin receivables and payables | (632 | ) | | (230 | ) | Hedge margin receivables and payables | 85 | | | 211 | |
| Income tax receivables and payables | 152 |
| | 100 |
| Income tax receivables and payables | 353 | | | 102 | |
| Changes in working capital and other non-current assets and liabilities | 609 |
| | 561 |
| Changes in working capital and other non-current assets and liabilities | 478 | | | 203 | |
| Other operating activities | 9 |
| | (23 | ) | Other operating activities | 22 | | | 9 | |
| Net cash from operating activities | $ | 4,418 |
| | $ | 5,363 |
| Net cash from operating activities | $ | 4,531 | | | $ | 2,550 | |
___________________
| |
(a) | Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, provisions for uncollectible accounts, pension and postretirement benefit expense, stock compensation expense, and other non-cash items. |
(a)Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, allowances for expected credit losses, amortization of operating lease assets, pension and postretirement benefit plan expense, stock compensation expense, changes in casualty self-insurance reserves, goodwill and other asset impairment charges and other non-cash items.
Net cash from operating activities decreased $945 million throughincreased $2.0 billion in the thirdfirst quarter, of 2017 compared with 2016, largelyand was impacted by the following:
•Income taxes payable increased due to higher pensionincome and postretirement benefit contributions and reduced receiptsthe timing of hedge margin collateral from counterparties. We made contributionspayments.
•Contributions to our company-sponsored pension and U.S. postretirement medical benefit plans totaling $2.585 and $1.298 billion year-to-date 2017 and 2016, respectively. Thetotaled $215 million during 2021 compared to $222 million in 2020.
•Our net hedge margin collateral received from derivative counterpartiesposition decreased by $402$126 million in 2017 relative to 2016, due to settlements and decreased netchanges in the fair value asset positions of the derivative contracts used in our currency and interest rate hedging programs. These items were partially offset by $136 million higher net income, $48 million improvements
•Favorable changes in our working capital positionlargely resulted from lower interest payments on outstanding debt and $52 million increasechanges in net cash tax receipts. The improvementincentive compensation plan payouts and other compensation-related items. Additionally, we benefited from a reduction in working capital as increases in our accounts payable outpaced growth in our accounts receivable.
As part of our ongoing efforts to improve our working capital position in 2017 was primarily driven by favorable changesefficiency, certain financial institutions offer a Supply Chain Finance ("SCF") program to certain of our suppliers. We agree commercial terms with our suppliers, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the timingSCF program. Suppliers issue invoices to us based on the agreed-upon contractual terms. If they participate in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, to sell to the financial institutions. Our suppliers’ voluntary inclusion of invoices in the SCF program has no bearing on our payment terms. No guarantees are provided by us under the SCF program. We have no economic interest in a supplier’s decision to participate, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Amounts due to our suppliers that participate in the SCF program are included in accounts payable in our consolidated balance sheets. We have been informed by the participating financial institutions that as of March 31, 2021 and 2020, suppliers sold them $343 and $387 million, respectively, of our outstanding payment obligations. Amounts due to suppliers that participate in the SCF program may be reflected in cash flows from operating activities or cash flows from investing activities in our consolidated statements of cash receipts and payments.flows. Amounts settled through the SCF program totaled approximately $267 million for the three months ended March 31, 2021.
As of September 30, 2017,March 31, 2021, approximately $3.2 billion of our total worldwide holdings of cash, cash equivalents and marketable securities was $4.461 billion, of which $2.296 billion waswere held by non-U.S.foreign subsidiaries. The amount of cash, cash equivalents and marketable securities held by our U.S. and non-U.Sforeign 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.domestic operating needs, capital expenditures, share repurchases, pension contributions 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 couldare 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 theforeign 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cash Flows From Investing Activities
Our primary sources (uses) of cash from investing activities were as follows (amounts in(in millions):
| | | | Nine Months Ended
September 30, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2021 | | 2020 |
| Net cash used in investing activities | $ | (3,618 | ) | | $ | (2,027 | ) | Net cash used in investing activities | $ | (766) | | | $ | (934) | |
| | | | | | | | |
| Capital Expenditures: | | | | Capital Expenditures: | |
| Buildings and facilities | $ | (2,024 | ) | | $ | (948 | ) | |
| Buildings, facilities and plant equipment | | Buildings, facilities and plant equipment | $ | (325) | | | $ | (519) | |
| Aircraft and parts | (590 | ) | | (20 | ) | Aircraft and parts | (239) | | | (179) | |
| Vehicles | (685 | ) | | (547 | ) | Vehicles | (135) | | | (62) | |
| Information technology | (409 | ) | | (322 | ) | Information technology | (135) | | | (173) | |
| | $ | (3,708 | ) | | $ | (1,837 | ) | | $ | (834) | | | $ | (933) | |
| | | | | | | | |
| Capital Expenditures as a % of Revenue | (7.9 | )% | | (4.2 | )% | |
| Capital Expenditures as a % of revenue | | Capital Expenditures as a % of revenue | 3.6 | % | | 5.2 | % |
| | | | | |
| Other Investing Activities: | | | | Other Investing Activities: | |
| Proceeds from disposals of property, plant and equipment | $ | 18 |
| | $ | 76 |
| Proceeds from disposals of property, plant and equipment | $ | 10 | | | $ | 1 | |
| Net (increase) decrease in finance receivables | $ | (1 | ) | | $ | 4 |
| |
| Net change in finance receivables | | Net change in finance receivables | $ | 11 | | | $ | 3 | |
| Net (purchases), sales and maturities of marketable securities | $ | 114 |
| | $ | (212 | ) | Net (purchases), sales and maturities of marketable securities | $ | 56 | | | $ | — | |
| Cash paid for business acquisitions, net of cash and cash equivalents acquired | $ | (61 | ) | | $ | (3 | ) | Cash paid for business acquisitions, net of cash and cash equivalents acquired | $ | (3) | | | $ | — | |
| Other investing activities | $ | 20 |
| | $ | (55 | ) | Other investing activities | $ | (6) | | | $ | (5) | |
We have commitments for the purchase of aircraft, vehicles, equipment and real estate to provide for the replacement of existing capacity and anticipated future growth. We generally fund our capital expenditures with our cash from operations.
Capital spending on buildings and facilities increased in the first nine months of 2017 in our U.S. and international package businesses, largely due to several facility automation and capacity expansion projects. Capital spending on aircraft increased in 2017 compared to 2016, due to contract deposits on open aircraft orders on 13 new Boeing 747-8F cargo aircraft and one previously owned Boeing 767-300 cargo aircraft, and final payments associated with the delivery of one Boeing 747-8F and two previously owned Boeing 767-300 cargo aircraft. Capital spending on information technology increased in the first nine months of 2017 compared to the corresponding period of 2016, largely due to the timing of purchases of hardware and capitalized software projects. Capital spending on vehicles increased in the first nine months of 2017 in our U.S. and international package businesses, largely due to the timing of vehicle replacements.
Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions. Our current investment program anticipates maintenance of buildings, facilities and plant equipment, as well as investments in technology initiatives and additional network capabilities. We anticipatecurrently expect that our total capital expenditures for 2017 will be approximately $4.6 to $5.3$4.0 billion which includes planned purchasein 2021.
Capital expenditures on buildings, facilities and plant equipment decreased in our global small package business, as we reduced spending on facility expansion projects. Capital spending on aircraft increased as we made final payments associated with the delivery of aircraft, partially offset by a reduction in contract deposits foron open aircraft on order.orders.
The net change in finance receivables was primarily due to growthreductions in outstanding balances within our cargo finance products offset by loan principal paydowns in our business credit and leasing portfolios. The purchasesPurchases and sales of marketable securities are largely determined by liquidity needs and the periodic rebalancing of investment types, and will fluctuate from period to period.
Cash paid for business acquisitions during the first nine months of 2017 wasin 2021 related to the purchases of Freightex, Nightline and other smaller acquisitions compared to the acquisition of The UPS Store area franchise rights for The UPS Store. There was no cash paid for business acquisitions in 2016.the first three months of 2020. Other investing activities arewere impacted by changes in our non-current investments, and restricted cash balances, capital contributions into certain investment partnershipspurchase contract deposits and various other items.
On April 30, 2021, we completed the previously announced divestiture of our UPS Freight business to TFI International Inc. We intend to use the proceeds received from this divestiture to repay outstanding indebtedness.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cash Flows From Financing Activities
Our primary sources (uses) of cash from financing activities arewere as follows (amounts in millions, except per share data):
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| 2021 | | 2020 |
| Net cash (used in) / from financing activities | $ | (1,945) | | | $ | 2,167 | |
| Share Repurchases: | | | |
| Cash expended for shares repurchased | — | | | (220) | |
| Number of shares repurchased | — | | | (2.1) | |
| Shares outstanding at period end | 870 | | | 861 | |
| Percent increase (decrease) in shares outstanding | 0.6 | % | | 0.5 | % |
| Dividends: | | | |
| Dividends declared per share | $ | 1.02 | | | $ | 1.01 | |
| Cash expended for dividend payments | $ | (858) | | | $ | (840) | |
| Borrowings: | | | |
| Net borrowings (repayments) of debt principal | $ | (831) | | | $ | 3,475 | |
| Other Financing Activities: | | | |
| Cash received for common stock issuances | $ | 78 | | | $ | 70 | |
| Other financing activities | $ | (334) | | | $ | (318) | |
| Capitalization: | | | |
| Total debt outstanding at period end | 23,727 | | | 28,601 | |
| Total shareowners’ equity at period end | 7,159 | | | 3,313 | |
| Total capitalization | $ | 30,886 | | | $ | 31,914 | |
| | | |
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| 2017 | | 2016 |
| Net cash used in financing activities | $ | (914 | ) | | $ | (2,781 | ) |
| Share Repurchases: | | | |
| Cash expended for shares repurchased | $ | (1,346 | ) | | $ | (2,007 | ) |
| Number of shares repurchased | (12.3 | ) | | (19.5 | ) |
| Shares outstanding at period end | 862 |
| | 873 |
|
| Percent reduction in shares outstanding | (0.7 | )% | | (1.5 | )% |
| Dividends: | | | |
| Dividends declared per share | $ | 2.49 |
| | $ | 2.34 |
|
| Cash expended for dividend payments | $ | (2,085 | ) | | $ | (1,987 | ) |
| Borrowings: | | | |
| Net borrowings of debt principal | $ | 2,524 |
| | $ | 1,006 |
|
| Other Financing Activities: | | | |
| Cash received for common stock issuances | $ | 177 |
| | $ | 196 |
|
| Other financing activities | $ | (184 | ) | | $ | 11 |
|
| Capitalization: | | | |
| Total debt outstanding at period end | $ | 18,910 |
| | $ | 15,326 |
|
| Total shareowners’ equity at period end | 1,539 |
| | 2,767 |
|
| Total capitalization | $ | 20,449 |
| | $ | 18,093 |
|
| Debt to Total Capitalization % | 92.5 | % | | 84.7 | % |
We have suspended share repurchases under our stock repurchase program and therefore we did not repurchase any shares under this program during the three months ended March 31, 2021. We repurchased a total of 12.32.1 million shares of class A and class B common stock for $1.352 billion$217million in the first nine monthsquarter of 2017, and 19.32020 ($220 million shares for $2.004 billion in the first nine months of 2016 ($1.346 and $2.007 billion in repurchases for 2017 and 2016, respectively, areis reported on the statementsstatement of consolidated cash flows due to unsettled repurchases).
In May 2016, the Boardtiming of Directors approved a newsettlements). For additional information on our share repurchase authorization of $8.0 billion, which has no expiration date. As of September 30, 2017, we had $4.803 billion ofactivities, see note 13 to the unaudited, consolidated financial statements included in this share repurchase authorization available.report.
Share repurchases may take the form of accelerated share repurchases, open market purchases or other such methods as we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the program. We anticipate repurchasing approximately $1.8 billion of shares in 2017.
The declaration of dividends is subject to the discretion of the Board of Directors and will dependdepends on various factors, including our net income, financial condition, cash requirements, future prospects and other relevant factors. We expect to continue paying regular cash dividends. We increased our quarterly cash dividend payment to $0.83$1.02 per share in 2017,2021, compared with the previous $0.78 quarterly dividend rateto $1.01 in 2016. We expect to continue the practice of paying regular cash dividends.2020.
IssuanceIssuances of debt in the first nine monthsquarter of 20172021 consisted of fixed rateborrowings under our commercial paper program. Repayments of debt for the first quarter of 2021 included fixed-rate senior notes totaling $1.5 billion, commercial paper and scheduled principal payments on our finance lease obligations. In the first quarter of 2020, issuances of debt consisted primarily of fixed-rate senior notes of $600 million, Canadian dollar denominated fixed rate senior notes of C$750 million ($547 million)varying maturities totaling $3.5 billion, as well as borrowings under our commercial paper program. Repayments included commercial paper and floating rate senior notes of $400 and $147 million in May and March 2017, respectively. Repayments of debt in the first nine months of 2017 and 2016 consisted primarily of commercial paper. scheduled principal payments on our finance lease obligations.
We consider the overall fixed and floating interest rate mix of our portfolio and the related overall cost of borrowing when planning for future issuances and non-scheduled repayments of debt.
Additionally, $1.1 billion of senior notes matured on April 1, 2021 and was repaid in full.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 September 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 September 30, 2017, our commercial paper programs had $4.120 billion outstanding, which includes $2.775 billion and €1.139 billion ($1.345 billion). The average balance of our U.S. dollar denominated commercial paper was $2.258 billion and the average interest rate paid was 0.81% during the nine months ended September 30, 2017. The average balance of our euro denominated commercial paper was €1.381 billion ($1.632 billion) and the average interest rate was -0.39% during the nine months ended September 30, 2017. The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. The following is a summary of our commercial paper program (in millions):
The variation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Functional currency outstanding balance at quarter-end | | Outstanding balance at quarter-end ($) | | Average balance outstanding | | Average balance outstanding ($) | | Average interest rate |
| 2021 | | | | | | | | | |
| USD | $ | 697 | | | $ | 697 | | | $ | 141 | | | $ | 141 | | | 0.06 | % |
| | | | | | | | | |
| | | | | | | | | |
| Total | | | $ | 697 | | | | | | | |
We had no outstanding balances under our European commercial paper program in cash received from common stock issuances to employees was primarily due to the level of stock option exercises during the first ninethree months of 2017 and 2016.2021.
The cash outflows inCash flows for other financing activities were impacteddriven by several factors. Cash inflows from the premium payments and settlements of capped call options for the purchase of UPS class B shares were $53 and $155 million during the first nine months of 2017 and 2016, respectively. Cash outflows related to the repurchase of shares to satisfy tax withholding obligations on vested employee stock awardsawards. Cash outflows were $236$330 and $159$310 million duringin the first ninethree months of 20172021 and 2016,2020, respectively. The increase was driven by changes in payment levels for certain of our awards.
Sources of Credit
See note 810 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 CommitmentsGuarantees and Other Off-Balance Sheet Arrangements
There have been no material changes to the contractual commitments described in Part II, Item 7Except as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 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 is as follows (in millions): 2017 (remaining) - $761; 2018 - $2,304; 2019 - $932; 2020, - $295; 2021 - $55; and thereafter - $27.
Pension fundings represent discretionary contributions of $2.446 billion to our qualified pension and U.S. postretirement plans which were made during the first nine months 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).
Guarantees and Other Off-Balance Sheet Arrangements
Wewe 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.
Legal Proceedings and Contingencies
See note 98 and note 612 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 1417 for a discussion of income tax related matters.
Collective Bargaining Agreements
See note 8 to the unaudited, consolidated financial statements for a discussion of the status of our collective bargaining agreements.
Multiemployer Benefit Plans
See note 8 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.
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 6 to the unaudited consolidated financial statements for a discussion of the status of our collective bargaining agreements.
Multiemployer Benefit Plans
See note 6 to the unaudited consolidated financial statements for a discussion of our participation in multiemployer benefit plans.
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
The following changes will take effectFrom time to time we adjust published rates applicable to our services. These rates, when published, are made available onDecember 24, 2017: our website at www.ups.com. We provide the address to our internet site solely for information. We do not intend for this address to be an active link or to otherwise incorporate the contents of any website into this or any other report we file with the Securities and Exchange Commission.
64
| |
• | The rates for UPSGround, UPS Air and International services, as well as UPS Air Freight rates within and between the U.S., Canada and Puerto Rico, will increase an average net 4.9%.
|
The dimensional weight divisor for packages less than or equal to one cubic foot in size (1,728 cubic inches) will be 139 for all U.S. domestic services subject to Daily Rates or Alaska and Hawaii Rates.
Criteria and pricing for Additional Handling and Large Package surcharges will change.
The rates for UPS Freight non-contractual less-than-truckload (LTL) shipments will increase an average net 4.9% effective December 24, 2017.
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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 provided in note 1316 to the unaudited, consolidated financial statements.
The total net fair value asset (liability) of our derivative financial instruments is summarized in the following table (in millions):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Currency Derivatives | $ | 62 | | | $ | (83) | |
| | | |
| Interest Rate Derivatives | 13 | | | 17 | |
| | | |
| $ | 75 | | | $ | (66) | |
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Currency Derivatives | $ | (193 | ) | | $ | 302 |
|
| Interest Rate Derivatives | 103 |
| | 150 |
|
| Investment Market Price Derivatives | (47 | ) | | (10 | ) |
| | $ | (137 | ) | | $ | 442 |
|
Our market risks, hedging strategies and financial instrument positions at September 30, 2017as of March 31, 2021 have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2020. In 2016,2021, we entered into several foreign currency forwardsexchange forward contracts on the Euro, British Pound Sterling, Canadian Dollar Japanese Yen, Mexican Peso, Singaporeand Hong Kong Dollar, and Indian Rupee, as well as terminated forwards that expired during the first nine months of 2017. We entered into several foreign currency options on the Euro, British Pound Sterling and Canadian Dollar, as well as terminated currency option positions that expired during the first nine 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 nine months of 2017.had forward contracts expire. The remaining fair value changes between December 31, 20162020 and September 30, 2017March 31, 2021 in the preceding table are primarily due to interest rate and foreign currency exchange rate and market price changesfluctuations between those dates.
The foreign exchange 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,As of March 31, 2021, we held cash collateral of $48$122 million and were required to post $104 million in cash collateral of $49 million with our counterparties as of September 30, 2017.under these agreements.
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, 2016,2020 is hereby incorporated by reference in this report.reference.
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Item 4. | Controls and Procedures |
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 officerPrincipal Executive Officer and chief financial officer,Principal Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in RuleRules 13a-15(e) ofand 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”("Exchange Act")). Based upon, thatand as of the date of, the evaluation, our chief executive officerPrincipal Executive Officer and chief financial officerPrincipal Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file orand submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securitiesas and Exchange Commission ruleswhen required and forms; and (2)is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow their timely decisions regarding required disclosure.
Changes in Internal Control overOver Financial Reporting:Reporting
There were no changes in the Company’sour internal control over financial reporting during the quarter ended September 30, 2017March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that more of our employees are working remotely during the COVID-19 pandemic. We have enhanced our oversight and monitoring during the close and reporting process and we are continually monitoring and assessing the effects of the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
For a discussion of material legal proceedings affecting us and our subsidiaries, pleasethe Company, see note 912 to the unaudited, consolidated financial statements included in this report.
There have been no material changes toItem 1A.Risk Factors
The occurrence of any of the significant risk factors described in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2016.2020 could materially affect us, including impacting our business, financial condition, results of operations, stock price or credit rating, as well as our reputation. These risks are not the only ones we face. We could also be materially adversely affected by other events, factors or uncertainties that are unknown to us, or that we do not currently consider to be significant.
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Item 2. | Item 2.Unregistered Sales of Equity Securities and Use of Proceeds |
(c) A summary of repurchasesEquity Securities and Use of our class A and class B common stock during the third quarter of 2017 is as follows (in millions, except per share amounts):Proceeds
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| | | | | | | | | | | | | |
| | 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 |
| July 1 – July 31, 2017 | 1.3 |
| | $ | 111.37 |
| | 1.3 |
| | $ | 5,111 |
|
| August 1 – August 31, 2017 | 1.4 |
| | 113.14 |
| | 1.4 |
| | $ | 4,946 |
|
| September 1 – September 30, 2017 | 1.2 |
| | 116.92 |
| | 1.2 |
| | $ | 4,803 |
|
| Total July 1 – September 30, 2017 | 3.9 |
| | $ | 113.73 |
| | 3.9 |
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_________________
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(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.
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In May 2016, the Board of Directors approved a new share repurchase authorization of $8.0 billion which has no expiration date.
Share repurchases may take the formfor shares of acceleratedclass A and class B common stock. We have currently suspended share repurchases open market purchases, or other such methods asunder our stock repurchase program. As of March 31, 2021, we deem appropriate. The timing ofhad $2.1 billion available under our share repurchases will depend upon market conditions. Unless terminated earlier byrepurchase authorization.
For additional information on our share repurchase activities, see note 13 to the resolutionunaudited, consolidated financial statements included in this report.
Item 6.Exhibits
The following exhibits are either incorporated by reference into this report or filed with this report as indicated below.
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| 3.1 |
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| 3.2 |
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1110.1 |
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†1231.1 |
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†31.1 |
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†31.2 |
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†32.1 |
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†32.2 |
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†101 |
| — | — | | The following unaudited financial information from thethis Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,March 31, 2021 is formatted in Inline XBRL (Extensible(Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Statements of Consolidated Income, (iii) the Statements of Consolidated Comprehensive Income (Loss), (iv) the Statements of Consolidated Cash Flows, and (v) the Notes to the Consolidated Financial Statements. |
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| 104 | | — | | Cover Page Interactive Data File - The cover page from this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 is formatted in Inline XBRL (included as Exhibit 101). |
___________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | | | | | | | | | | |
| | UNITED PARCEL SERVICE, INC.
(Registrant) |
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| Date: | May 5, 2021 | By: | | (Registrant)/S/ BRIAN O. NEWMAN
|
| | | | Brian O. Newman |
Date: | November 2, 2017 | By: | | /S/ RICHARD N. PERETZ
|
| | | | Richard N. Peretz |
| | | | Senior Vice President, Chief Financial Officer and Treasurer |
| | | | (Duly Authorized Officer andPrincipal AccountingFinancial Officer) |
