10-Q 1 ups-3312013x10q.htm FORM 10-Q UPS-3.31.2013-10Q
United States
Securities and Exchange Commission
Washington, D.C. 20549
_____________________________________ 
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013, or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-15451
_____________________________________ 
United Parcel Service, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
58-2480149
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
55 Glenlake Parkway, NE Atlanta, Georgia
 
30328
(Address of Principal Executive Offices)
 
(Zip Code)
(404) 828-6000
(Registrant’s telephone number, including area code)
_____________________________________   

Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer  þ Accelerated filer  ¨ Non-accelerated filer  ¨    (Do not check if a smaller reporting company) Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
There were 219,656,583 Class A shares, and 724,684,764 Class B shares, with a par value of $0.01 per share, outstanding at April 24, 2013.



UNITED PARCEL SERVICE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 15—Termination of TNT Transaction
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
PART II—OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 5.
Item 6.



PART I. FINANCIAL INFORMATION

Cautionary Statement About Forward-Looking Statements
This report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in the future tense, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof and similar terms are intended to be forward-looking statements. We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Our disclosure and analysis in this report, in our Annual Report on Form 10-K for the year ended December 31, 2012 and in our other filings with the Securities and Exchange Commission contain some forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties are described in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012 and may also be described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements.

1


Item 1. Financial Statements
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2013 (unaudited) and December 31, 2012
(In millions)
 
March 31,
2013
 
December 31,
2012
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
6,456

 
$
7,327

Marketable securities
876

 
597

Accounts receivable, net
5,617

 
6,111

Deferred income tax assets
582

 
583

Other current assets
950

 
973

Total Current Assets
14,481

 
15,591

Property, Plant and Equipment, Net
17,888

 
17,894

Goodwill
2,151

 
2,173

Intangible Assets, Net
654

 
603

Non-Current Investments and Restricted Cash
406

 
307

Derivative Assets
488

 
535

Deferred Income Tax Assets
874

 
684

Other Non-Current Assets
1,063

 
1,076

Total Assets
$
38,005

 
$
38,863

LIABILITIES AND SHAREOWNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt and commercial paper
$
1,615

 
$
1,781

Accounts payable
1,956

 
2,278

Accrued wages and withholdings
1,903

 
1,927

Self-insurance reserves
762

 
763

Income taxes payable
589

 
399

Other current liabilities
1,209

 
1,242

Total Current Liabilities
8,034

 
8,390

Long-Term Debt
11,051

 
11,089

Pension and Postretirement Benefit Obligations
11,243

 
11,068

Self-Insurance Reserves
1,962

 
1,980

Other Non-Current Liabilities
1,672

 
1,603

Shareowners’ Equity:
 
 
 
Class A common stock (221 and 225 shares issued in 2013 and 2012)
2

 
3

Class B common stock (725 and 729 shares issued in 2013 and 2012)
7

 
7

Additional paid-in capital

 

Retained earnings
7,614

 
7,997

Accumulated other comprehensive loss
(3,595
)
 
(3,354
)
Deferred compensation obligations
66

 
78

Less: Treasury stock (1 share in 2013 and 2012)
(66
)
 
(78
)
Total Equity for Controlling Interests
4,028

 
4,653

Total Equity for Non-Controlling Interests
15

 
80

Total Shareowners’ Equity
4,043

 
4,733

Total Liabilities and Shareowners’ Equity
$
38,005

 
$
38,863


See notes to unaudited consolidated financial statements.

2


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share amounts)
(unaudited)
 
 
Three Months Ended
March 31,
 
2013
 
2012
 
Revenue
$
13,434

 
$
13,136

 
Operating Expenses:
 
 
 
 
Compensation and benefits
6,968

 
6,835

 
Repairs and maintenance
309

 
302

 
Depreciation and amortization
474

 
459

 
Purchased transportation
1,780

 
1,717

 
Fuel
1,006

 
1,025

 
Other occupancy
253

 
237

 
Other expenses
1,064

 
992

 
Total Operating Expenses
11,854

 
11,567

 
Operating Profit
1,580

 
1,569

 
Other Income and (Expense):
 
 
 
 
Investment income
5

 
6

 
Interest expense
(96
)

(94
)
 
Total Other Income and (Expense)
(91
)
 
(88
)
 
Income Before Income Taxes
1,489

 
1,481

 
Income Tax Expense
452

 
511

 
Net Income
$
1,037

 
$
970

 
Basic Earnings Per Share
$
1.09

 
$
1.01

 
Diluted Earnings Per Share
$
1.08

 
$
1.00

 

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
 
 
Three Months Ended
March 31,
 
 
2013
 
2012
 
Net income
$
1,037

 
$
970

 
Change in foreign currency translation adjustment, net of tax
(303
)
 
91

 
Change in unrealized gain (loss) on marketable securities, net of tax
(2
)
 
(1
)
 
Change in unrealized gain (loss) on cash flow hedges, net of tax
38

 
(41
)
 
Change in unrecognized pension and postretirement benefit costs, net of tax
26

 
34

 
Comprehensive income
$
796

 
$
1,053

 
See notes to unaudited consolidated financial statements.

3


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
(unaudited)
 
 
Three Months Ended
March 31,
 
2013
 
2012
Cash Flows From Operating Activities:
 
 
 
Net income
$
1,037

 
$
970

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
474

 
459

Pension and postretirement benefit expense
283

 
238

Pension and postretirement benefit contributions
(57
)
 
(220
)
Self-insurance reserves
(19
)
 
11

Deferred taxes, credits and other
(181
)
 
(92
)
Stock compensation expense
157

 
162

Other (gains) losses
(207
)
 
80

Changes in assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable
421

 
585

Other current assets
21

 
(34
)
Accounts payable
(281
)
 
(276
)
Accrued wages and withholdings
(4
)
 
43

Other current liabilities
139

 
377

Other operating activities
(25
)
 
(23
)
Net cash from operating activities
1,758

 
2,280

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(453
)
 
(428
)
Proceeds from disposals of property, plant and equipment
12

 
19

Purchases of marketable securities
(501
)
 
(1,160
)
Sales and maturities of marketable securities
101

 
1,462

Net decrease in finance receivables
10

 
24

Cash paid for business acquisitions

 
(100
)
Other investing activities
78

 
(76
)
Net cash used in investing activities
(753
)
 
(259
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term debt
1,472

 
885

Proceeds from long-term borrowings
101

 
4

Repayments of long-term borrowings
(1,751
)
 

Purchases of common stock
(1,025
)
 
(547
)
Issuances of common stock
181

 
131

Dividends
(572
)
 
(534
)
Other financing activities
(252
)
 
112

Net cash provided by (used in) financing activities
(1,846
)
 
51

Effect Of Exchange Rate Changes On Cash And Cash Equivalents
(30
)
 
27

Net Increase (Decrease) In Cash And Cash Equivalents
(871
)
 
2,099

Cash And Cash Equivalents:
 
 
 
Beginning of period
7,327

 
3,034

End of period
$
6,456

 
$
5,133

See notes to unaudited consolidated financial statements.

4


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Principles of Consolidation
In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of March 31, 2013, our results of operations for the three months ended March 31, 2013 and 2012, and cash flows for the three months ended March 31, 2013 and 2012. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.
For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans and self-insurance reserves for each three month period based on one quarter of the estimated annual expense.
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on our financial position or results of operations.
Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of March 31, 2013. The fair values of our investment securities are disclosed in note 4, our short and long-term debt in note 8 and our derivative instruments in note 13. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.
Accounting Estimates
The preparation of the accompanying interim, unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best information and actual results could differ materially from those estimates.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In February 2013, the FASB issued an accounting standards update that adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. This update requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., the release due to cash flow hedges from interest rate contracts) and the income statement line items affected by the reclassification (e.g., interest income or interest expense). If a component is not required to be reclassified to net income in its entirety (e.g., the net periodic pension cost), companies would instead cross reference to the related footnote for additional information (e.g., the pension footnote). This update was effective for us beginning in the first quarter of 2013, and we have included the applicable disclosures in note 10.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements had an immaterial impact on our consolidated financial position and results of operations.
Accounting Standards Issued But Not Yet Effective
Accounting pronouncements issued, but not effective until after March 31, 2013, are not expected to have a significant impact on our consolidated financial position or results of operations.

5

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3. STOCK-BASED COMPENSATION
We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units, to eligible employees (Restricted stock and stock units, and restricted performance shares and performance units are herein referred to as "Restricted Units"). The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution plan are made in shares of UPS class A common stock.
Management Incentive Award
During the first quarter of 2013, we granted Restricted Units under the Management Incentive Award program to eligible U.S.-based management employees. Restricted Units under the Management Incentive Award program will generally vest over a five-year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis over the requisite service period. Based on the date that the eligible management population and performance targets were approved for the Management Incentive Award program, we determined the award measurement date to be February 5, 2013; therefore, the Restricted Unit grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $80.80 on that date.
Long-Term Incentive Performance Award
During the first quarter of 2013, we granted target Restricted Units under the UPS Long-Term Incentive Performance Award program to eligible management employees. Of the total 2013 target award, 90% of the target award will be divided into three substantially equal tranches, one for each calendar year in the three-year award cycle from 2013 to 2015, using performance criteria targets established each year. For 2013, those targets consist of consolidated operating return on invested capital and growth in consolidated revenue. The remaining 10% of the total 2013 target award will be based upon our achievement of adjusted earnings per share in 2015 compared to a target established at the grant date.
The number of Restricted Units earned each year will be the target number adjusted for the percentage achievement of performance criteria targets for the year. The percentage of achievement used to determine the Restricted Units earned may be a percentage less than or more than 100% of the target Restricted Units for each tranche. Based on the date that the eligible management population and performance targets were approved for the 2013 performance tranches, we determined the award measurement date to be March 1, 2013; therefore the target Restricted Units grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $82.87 on that date.
Nonqualified Stock Options
During the first quarter of 2013, we granted nonqualified stock option awards to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards generally vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The options granted will expire ten years after the date of the grant. In the first quarter of 2013 and 2012, we granted 0.2 million stock options each year at a weighted average grant price of $82.93 and $76.94, respectively. The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was $15.50 and $14.88 for 2013 and 2012, respectively, using the following assumptions:
 
2013
 
2012
Expected life (in years)
7.5

 
7.5

Risk-free interest rate
1.38
%
 
1.63
%
Expected volatility
24.85
%
 
25.06
%
Expected dividend yield
2.75
%
 
2.77
%
Compensation expense for share-based awards recognized in net income for the three months ended March 31, 2013 and 2012 was $157 and $162 million pre-tax, respectively.
 

6

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4. INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as available-for-sale as of March 31, 2013 and December 31, 2012 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2013
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
240

 
$
1

 
$

 
$
241

Mortgage and asset-backed debt securities
141

 
2

 

 
143

Corporate debt securities
417

 
4

 

 
421

U.S. state and local municipal debt securities
15

 

 

 
15

Other debt and equity securities
56

 
1

 
(1
)
 
56

Total marketable securities
$
869

 
$
8

 
$
(1
)
 
$
876

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2012
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
236

 
$
2

 
$

 
$
238

Mortgage and asset-backed debt securities
171

 
3

 

 
174

Corporate debt securities
158

 
5

 

 
163

U.S. state and local municipal debt securities
15

 

 

 
15

Other debt and equity securities
7

 

 

 
7

Total marketable securities
$
587

 
$
10

 
$

 
$
597

Investment Other-Than-Temporary Impairments
We have concluded that no other-than-temporary impairment losses existed as of March 31, 2013. In making this determination, we considered the financial condition and prospects of the issuers, the magnitude of the losses compared with the investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that we will be unable to collect all amounts due according to the contractual terms of the securities, the credit rating of the securities and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
Maturity Information
The amortized cost and estimated fair value of marketable securities at March 31, 2013, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
 
Cost
 
Estimated
Fair Value
Due in one year or less
$
340

 
$
341

Due after one year through three years
247

 
248

Due after three years through five years
59

 
59

Due after five years
221

 
226

 
867

 
874

Equity securities
2

 
2

 
$
869

 
$
876


7

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Non-Current Investments and Restricted Cash
We had $387 and $288 million of restricted cash related to our self-insurance requirements as of March 31, 2013 and December 31, 2012, respectively, which is reported in “Non-Current Investments and Restricted Cash” on the consolidated balance sheets. This restricted cash is invested in money market funds and similar cash-equivalent type assets.
At March 31, 2013 and December 31, 2012, we held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. This investment is classified as “Non-Current Investments and Restricted Cash” in the consolidated balance sheets with the quarterly change in investment value recognized in the statements of consolidated income.
Fair Value Measurements
Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “other investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) the risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 8.08% and 7.75% as of March 31, 2013 and December 31, 2012, respectively. These inputs and the resulting fair values are updated on a quarterly basis.
The following table presents information about our investments measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, 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, 2013
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
240

 
$
1

 
$

 
$
241

Mortgage and asset-backed debt securities

 
143

 

 
143

Corporate debt securities

 
421

 

 
421

U.S. state and local municipal debt securities

 
15

 

 
15

Other debt and equity securities

 
56

 

 
56

Total marketable securities
240

 
636

 

 
876

Other investments
19

 

 
150

 
169

Total
$
259

 
$
636

 
$
150

 
$
1,045

 

8

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance 
December 31, 2012
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
237

 
$
1

 
$

 
$
238

Mortgage and asset-backed debt securities

 
174

 

 
174

Corporate debt securities

 
163

 

 
163

U.S. state and local municipal debt securities

 
15

 

 
15

Other debt and equity securities

 
7

 

 
7

Total marketable securities
237

 
360

 

 
597

Other investments
19

 

 
163

 
182

Total
$
256

 
$
360

 
$
163

 
$
779

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended March 31, 2013 and 2012 (in millions):
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2013
$

 
$
163

 
$
163

Transfers into (out of) Level 3

 

 

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income)

 
(13
)
 
(13
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on March 31, 2013
$

 
$
150

 
$
150

 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2012
$

 
$
217

 
$
217

Transfers into (out of) Level 3

 

 

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income)

 
(13
)
 
(13
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on March 31, 2012
$

 
$
204

 
$
204

There were no transfers of investments between Level 1 and Level 2 during the three months ended March 31, 2013 and 2012.

9

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of March 31, 2013 and December 31, 2012 consist of the following (in millions):
 
2013
 
2012
Vehicles
$
6,335

 
$
6,344

Aircraft
15,305

 
15,164

Land
1,121

 
1,122

Buildings
3,206

 
3,138

Building and leasehold improvements
3,060

 
3,049

Plant equipment
7,073

 
7,010

Technology equipment
1,693

 
1,675

Equipment under operating leases
62

 
69

Construction-in-progress
452

 
470

 
38,307

 
38,041

Less: Accumulated depreciation and amortization
(20,419
)
 
(20,147
)
 
$
17,888

 
$
17,894

 
We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor our other property, plant and equipment categories for any indicators that the carrying value of the assets exceeds the fair value. There were no indicators of impairment in our property, plant and equipment, and no impairment charges were recorded, during the three months ended March 31, 2013 and 2012.
NOTE 6. EMPLOYEE BENEFIT PLANS
Company-Sponsored Benefit Plans
Information about net periodic benefit cost for our company-sponsored pension and postretirement benefit plans is as follows for the three months ended March 31, 2013 and 2012 (in millions):
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Three Months Ended March 31:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
338

 
$
249

 
$
26

 
$
22

 
$
15

 
$
15

Interest cost
362

 
353

 
46

 
52

 
11

 
11

Expected return on assets
(537
)
 
(492
)
 
(8
)
 
(4
)
 
(14
)
 
(12
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
43

 
43

 
1

 
1

 

 

Other net (gain) loss

 

 

 

 

 

Actuarial (gain) loss

 

 

 

 

 

Net periodic benefit cost
$
206

 
$
153

 
$
65

 
$
71

 
$
12

 
$
14

 
 
 
 
 
 
 
 
 
 
 
 
During the first three months of 2013, we contributed $28 million and $29 million to our company-sponsored pension and postretirement medical benefit plans, respectively. We also expect to contribute $72 and $81 million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively.

10

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


As of December 31, 2012, we had approximately 249,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). These agreements run through July 31, 2013. On April 25, 2013, we reached a tentative agreement with the Teamsters on two, new five-year contracts in the U.S. Domestic Package and UPS Freight business units. Subject to ratification by the UPS Teamster-represented employees, the new agreements would take effect on August 1, 2013. We have approximately 2,600 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association, which became amendable at the end of 2011. Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which runs through November 1, 2013. In addition, approximately 3,100 of our ground 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”). Our agreement with the IAM runs through July 31, 2014.
Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under terms of collective bargaining agreements that cover our union represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations will remain in effect throughout the terms of the existing collective bargaining agreements.

NOTE 7. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of March 31, 2013 and December 31, 2012 (in millions):
 
U.S. Domestic
Package
 
International
Package
 
Supply Chain &
Freight
 
Consolidated
December 31, 2012:
$

 
$
430

 
$
1,743

 
$
2,173

Acquired

 

 

 

Currency / Other

 
(12
)
 
(10
)
 
(22
)
March 31, 2013:

 
$
418

 
$
1,733

 
$
2,151

The change in goodwill for both the International Package and Supply Chain & Freight segments was due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
The following is a summary of intangible assets as of March 31, 2013 and December 31, 2012 (in millions):
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
March 31, 2013:
 
 
 
 
 
Trademarks, licenses, patents, and other
$
211

 
$
(89
)
 
$
122

Customer lists
129

 
(81
)
 
48

Franchise rights
117

 
(66
)
 
51

Capitalized software
2,259

 
(1,826
)
 
433

Total Intangible Assets, Net
$
2,716

 
$
(2,062
)
 
$
654

December 31, 2012:
 
 
 
 
 
Trademarks, licenses, patents, and other
$
163

 
$
(80
)
 
$
83

Customer lists
131

 
(79
)
 
52

Franchise rights
117

 
(64
)
 
53

Capitalized software
2,197

 
(1,782
)
 
415

Total Intangible Assets, Net
$
2,608

 
$
(2,005
)
 
$
603


11

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt as of March 31, 2013 and December 31, 2012 consists of the following (in millions):
 
Principal
 
 
Carrying Value
 
Amount
Maturity
 
2013
 
2012
Commercial paper
$
1,572

 
 
$
1,572

 
$

Fixed-rate senior notes:
 
 
 
 
 
 
4.50% senior notes

2013
 

 
1,751

3.875% senior notes
1,000

2014
 
1,027

 
1,033

1.125% senior notes
375

2017
 
372

 
373

5.50% senior notes
750

2018
 
844

 
851

5.125% senior notes
1,000

2019
 
1,130

 
1,140

3.125% senior notes
1,500

2021
 
1,645

 
1,655

2.45% senior notes
1,000

2022
 
988

 
996

6.20% senior notes
1,500

2038
 
1,481

 
1,480

4.875% senior notes
500

2040
 
489

 
489

3.625% senior notes
375

2042
 
367

 
367

8.375% Debentures:
 
 
 
 
 
 
8.375% debentures
424

2020
 
506

 
512

8.375% debentures
276

2030
 
284

 
284

Pound Sterling notes:
 
 
 
 
 
 
5.50% notes
101

2031
 
96

 
103

5.13% notes
688

2050
 
656

 
699

Floating rate senior notes
377

2049-2053
 
373

 
374

Capital lease obligations
513

2013-3004
 
513

 
440

Facility notes and bonds
320

2015-2036
 
320

 
320

Other debt
3

2013-2022
 
3

 
3

Total Debt
$
12,274

 
 
12,666

 
12,870

Less: Current Maturities
 
 
 
(1,615
)
 
(1,781
)
Long-term Debt
 
 
 
$
11,051

 
$
11,089


Debt Repayments
On January 15, 2013, our $1.75 billion 4.5% senior notes matured and were repaid in full.
Sources of Credit
We are authorized to borrow up to $10.0 billion under the U.S. commercial paper program we maintain. We had $1.514 billion outstanding under this program as of March 31, 2013, with an average interest rate of 0.08%. We also maintain a European commercial paper program under which we are authorized to borrow up to €1.0 billion in a variety of currencies. As of March 31, 2013, there was €45 million ($58 million) outstanding under this program, with an average interest rate of 0.02%. As of March 31, 2013, we have classified the entire commercial paper balance as a current liability in our consolidated balance sheets.

12

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on March 28, 2014. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of March 31, 2013.
The second agreement provides revolving credit facilities of $1.0 billion, and expires on March 29, 2018. 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 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 applicable margin is subject to certain minimum rates and maximum rates based on our public debt ratings from Standard & Poor’s Rating Service and Moody’s Investors Service. The minimum applicable margin rates range from 0.100% to 0.375%, and the maximum applicable margin rates range from 0.750% to 1.250%, per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of March 31, 2013.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of March 31, 2013 and for all prior periods, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of March 31, 2013, 10% of net tangible assets was equivalent to $2.717 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.
Fair Value of Debt
Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately $14.156 and $14.658 billion as of March 31, 2013 and December 31, 2012, 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.
NOTE 9. LEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business activities.
Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious defense and will deny, liability in all litigation pending against us, including (except as otherwise noted herein) the matters described below, and we intend to defend vigorously each case. We have accrued for legal claims when, and to the extent that, amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.
For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible loss or range of loss.

13

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Judicial Proceedings
We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with these matters, would have a material adverse effect on our financial condition, results of operations or liquidity.
UPS and our subsidiary Mail Boxes Etc., Inc. are defendants in a lawsuit in California Superior Court about the rebranding of The UPS Store franchises.  In the Morgate case, the plaintiffs are 125 individual franchisees who did not rebrand to The UPS Store and a certified class of all franchisees who did rebrand. The trial court entered judgment against a bellwether individual plaintiff, which was affirmed in January 2012. The trial court granted our motion for summary judgment against the certified class, which was reversed in January 2012.  In March 2013, we reached a settlement in principle with the remaining individual plaintiffs. We believe the ultimate settlement of this matter will not have a material adverse effect on our financial condition, results of operations or liquidity.
There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from whatever remaining aspects of this case proceeds, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; and (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. The case is scheduled to go to trial in February 2014. The Antitrust Division of the U.S. Department of Justice (“DOJ”) has an ongoing civil investigation of our policies and practices for dealing with third-party negotiators. We are cooperating with this investigation. We deny any liability with respect to these matters and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) we believe that we have a number of meritorious defenses; (2) briefing of dispositive motions is ongoing; and (3) the DOJ investigation is ongoing. 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.
In Canada, four purported class-action cases were filed against us in British Columbia (2006); Ontario (2007) and Québec (2006 and 2013). The cases each allege inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. The British Columbia class action was declared inappropriate for certification and dismissed by the trial judge. That decision was upheld by the British Columbia Court of Appeal in March 2010, which ended the case in our favor. The Ontario class action was certified in September 2011. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court. The complaint under the Criminal Code was dismissed. No appeal is being taken from that decision. The allegations of inadequate disclosure were granted and we are appealing that decision. The motion to authorize the 2006 Québec litigation as a class action was dismissed by the motions judge in October 2012; there was no appeal, which ended that case in our favor. The 2013 Québec litigation also has been dismissed. We deny all liability and are vigorously defending the one outstanding case in Ontario. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operation or liquidity.
Other Matters
On March 29, 2013, we entered into a Non-Prosecution Agreement (“NPA”) with the United States Attorney's Office in the Northern District of California in connection with an investigation by the Drug Enforcement Administration of shipments by illicit online pharmacies. Under the NPA, we forfeited $40 million to the government, admitted to a Statement of Facts describing the conduct leading to the agreement, and agreed to implement an online pharmacy compliance program. The term of the NPA is two years, although we can petition the government to shorten that term in its discretion to one year. The NPA did not have a material impact on our results of operations for the first quarter of 2013.

14

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


In August 2010, competition authorities in Brazil opened an administrative proceeding to investigate alleged anticompetitive behavior in the freight forwarding industry. Approximately 45 freight forwarding companies and individuals are named in the proceeding, including UPS, UPS SCS Transportes (Brasil) S.A., and a former employee in Brazil. UPS will have an opportunity to respond to these allegations. In November 2012, we also received a request for information related to similar matters from authorities in Singapore.
We are cooperating with each of these investigations, and intend to continue to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) we are vigorously defending each matter and believe that we have a number of meritorious legal defenses; (2) there are unresolved questions of law that could be of importance to the ultimate resolutions of these matters, including the calculation of any potential fine; and (3) there is uncertainty about the time period that is the subject of the investigations. 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.
In January 2008, a class action complaint was filed in the United States District Court for the Eastern District of New York alleging price-fixing activities relating to the provision of freight forwarding services. UPS was not named in this case. In July 2009, the plaintiffs filed a first amended complaint naming numerous global freight forwarders as defendants. UPS and UPS Supply Chain Solutions are among the 60 defendants named in the amended complaint. The plaintiffs filed a Second Amended Complaint in October 2010, which we moved to dismiss. In August 2012, the Court granted our motion to dismiss all claims relevant to UPS in the Second Amended Complaint, with leave to amend. The plaintiffs filed a Third Amended Complaint in November 2012. We have filed another motion to dismiss, and will otherwise vigorously defend ourselves in this case. 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 court has dismissed the complaint once but has not considered the adequacy of the amended complaint; (2) the scope and size of the proposed class is ill-defined; (3) there are significant legal questions about the adequacy and standing of the putative class representatives; and (4) we believe that we have a number of meritorious legal defenses. 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 various other lawsuits that arose in the normal course of business. We do not believe that the eventual resolution of these other lawsuits (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material adverse effect on our financial condition, results of operations or liquidity.
Tax Matters
In June 2011, we received an IRS Revenue Agent Report ("RAR") covering excise taxes for tax years 2003 through 2007, in addition to the income tax matters described in note 14. The excise tax RAR proposed two alternate theories for asserting additional excise tax on transportation of property by air. We disagreed with these proposed excise tax theories and related adjustments. We filed protests and, in the third quarter of 2011, the IRS responded to our protests and forwarded the case to IRS Appeals.
Beginning in the third quarter of 2012 and continuing through the first quarter of 2013, we had settlement discussions with the Appeals team. In the first quarter of 2013, we reached settlement terms for a complete resolution of all excise tax matters and correlative income tax refund claims for the 2003 through 2007 tax years. The final resolution of these matters did not materially impact our financial condition, results of operations or liquidity.


15

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10. SHAREOWNERS' EQUITY
Capital Stock, Additional Paid-In Capital and Retained Earnings
We maintain two classes of common stock, which are distinguished from each other primarily by their respective voting rights. Class A shares are entitled to 10 votes per share, whereas class B shares are entitled to one vote per share. Class A shares are primarily held by UPS employees and retirees, and these shares are fully convertible into class B shares at any time. Class B shares are publicly traded on the New York Stock Exchange under the symbol “UPS.” Class A and B shares both have a $0.01 par value, and as of March 31, 2013, there were 4.6 billion class A shares and 5.6 billion class B shares authorized to be issued. Additionally, there are 200 million preferred shares, with a $0.01 par value, authorized to be issued; as of March 31, 2013, no preferred shares had been issued.
 
The following is a rollforward of our common stock, additional paid-in capital and retained earnings accounts for the three months ended March 31, 2013 and 2012 (in millions, except per share amounts):
 
2013
 
2012
 
Shares
 
Dollars
 
Shares
 
Dollars
Class A Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
225

 
$
3

 
240

 
$
3

Common stock purchases
(2
)
 
(1
)
 
(2
)
 

Stock award plans
3

 

 
2

 

Common stock issuances
1

 

 
1

 

Conversions of class A to class B common stock
(6
)
 

 
(5
)
 

Class A shares issued at end of period
221

 
$
2

 
236

 
$
3

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
729

 
$
7

 
725

 
$
7

Common stock purchases
(10
)
 

 
(5
)
 

Conversions of class A to class B common stock
6

 

 
5

 

Class B shares issued at end of period
725

 
$
7

 
725

 
$
7

Additional Paid-In Capital
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$

 
 
 
$

Stock award plans
 
 
216

 
 
 
210

Common stock purchases
 
 
(186
)
 
 
 
(428
)
Common stock issuances
 
 
70

 
 
 
63

Option premiums received (paid)
 
 
(100
)
 
 
 
155

Balance at end of period
 
 
$

 
 
 
$

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
7,997

 
 
 
$
10,128

Net income attributable to common shareowners
 
 
1,037

 
 
 
970

Dividends ($0.62 and $0.57 per share)
 
 
(594
)
 
 
 
(551
)
Common stock purchases
 
 
(826
)
 
 
 
(114
)
Balance at end of period
 
 
$
7,614

 
 
 
$
10,433

In total, we repurchased a total of 12.2 million shares of class A and class B common stock for $1.013 billion during the three months ended March 31, 2013, and 7.1 million shares for $542 million during the three months ended March 31, 2012. On February 14, 2013, the Board of Directors approved a new share repurchase authorization of $10.0 billion, which replaced an authorization previously announced in 2012. The new share repurchase authorization has no expiration date. Share repurchases may take the form of accelerated share repurchases, open market purchases, or other such methods as we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the program.

16

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


During the first quarter of 2013, we entered into an accelerated share repurchase program, which allowed us to repurchase $500 million of shares (6.0 million shares). The program was completed in March 2013.
In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. During the three months ended March 31, 2013, we paid premiums of $100 million on options for the purchase of 1.4 million shares that will settle in the second quarter of 2013. During the three months ended March 31, 2012, we received $155 million in premiums for options that were entered into during 2011 that expired in 2012, including $5 million in premiums in excess of our initial investment.

Accumulated Other Comprehensive Income (Loss)
We experience activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in AOCI for the three months ended March 31, 2013 and 2012 is as follows (in millions):
 
2013
 
2012
Foreign currency translation gain (loss):
 
 
 
Balance at beginning of period
$
134

 
$
(160
)
Reclassification to earnings (no tax impact in either period)
(161
)
 

Translation adjustment (net of tax effect of $6 and $(11))
(142
)
 
91

Balance at end of period
(169
)
 
(69
)
Unrealized gain (loss) on marketable securities, net of tax:
 
 
 
Balance at beginning of period
6

 
6

Current period changes in fair value (net of tax effect of $(1) and $0)
(2
)
 
1

Reclassification to earnings (net of tax effect of $0 and $(1))

 
(2
)
Balance at end of period
4

 
5

Unrealized gain (loss) on cash flow hedges, net of tax:
 
 
 
Balance at beginning of period
(286
)
 
(204
)
Current period changes in fair value (net of tax effect of $(7) and $(25))
(11
)
 
(42
)
Reclassification to earnings (net of tax effect of $30 and $0)
49

 
1

Balance at end of period
(248
)
 
(245
)
Unrecognized pension and postretirement benefit costs, net of tax:
 
 
 
Balance at beginning of period
(3,208
)
 
(2,745
)
Reclassification to earnings (net of tax effect of $18 and $16)
26

 
28

Adjustment for Early Retirement Reinsurance Program (net of tax effect of $0 and $4)

 
6

Balance at end of period
(3,182
)
 
(2,711
)
Accumulated other comprehensive income (loss) at end of period
$
(3,595
)
 
$
(3,020
)

17

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three months ended March 31, 2013 and 2012 is as follows (in millions):
 
2013 Amount Reclassified from AOCI
 
2012 Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
Foreign currency translation gain (loss):
 
 
 
 
 
Liquidation of foreign subsidiary
$
161

 
$

 
Other expenses
Income tax (expense) benefit

 

 
Income tax expense
Impact on net income
161

 

 
Net income
Unrealized gain (loss) on marketable securities:
 
 
 
 
 
Realized gain (loss) on sale of securities

 
3

 
Investment income
Income tax (expense) benefit

 
(1
)
 
Income tax expense
Impact on net income

 
2

 
Net income
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
(5
)
 
(5
)
 
Interest expense
Foreign exchange contracts
(50
)
 
16

 
Interest expense
Foreign exchange contracts
(14
)
 
(12
)
 
Revenue
Commodity contracts
(10
)
 

 
Fuel expense
Income tax (expense) benefit
30

 

 
Income tax expense
Impact on net income
(49
)
 
(1
)
 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(44
)
 
(44
)
 
Compensation and benefits
Income tax (expense) benefit
18

 
16

 
Income tax expense
Impact on net income
(26
)
 
(28
)
 
Net income
 
 
 
 
 
 
Total amount reclassified for the period
$
86

 
$
(27
)
 
Net income
Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the three months ended March 31, 2013 and 2012 is as follows (in millions):
 
2013
 
2012
Shares
 
Dollars
 
Shares
 
Dollars
Deferred Compensation Obligations:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
78

 
 
 
$
88

Reinvested dividends
 
 
1

 
 
 
1

Benefit payments
 
 
(13
)
 
 
 
(13
)
Balance at end of period
 
 
$
66

 
 
 
$
76

Treasury Stock:
 
 
 
 
 
 
 
Balance at beginning of period
(1
)
 
$
(78
)
 
(2
)
 
$
(88
)
Reinvested dividends

 
(1
)
 

 
(1
)
Benefit payments

 
13

 

 
13

Balance at end of period
(1
)
 
$
(66
)
 
(2
)
 
$
(76
)


18

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. The activity related to our noncontrolling interests is presented below for the three months ended March 31, 2013 and 2012 (in millions):
 
2013
 
2012
Noncontrolling Interests:
 
 
 
Balance at beginning of period
$
80

 
$
73

Acquired noncontrolling interests
(65
)
 
3

Dividends attributable to noncontrolling interests

 

Net income attributable to noncontrolling interests

 

Balance at end of period
$
15

 
$
76


The reduction in our noncontrolling interests in 2013 primarily relates to our purchase of the remaining noncontrolling interest in a joint venture that operates in the Middle East, Turkey and portions of the Central Asia region for $70 million. After this transaction, we own 100% of this entity.
NOTE 11. SEGMENT INFORMATION
We report our operations in three segments: U.S. Domestic Package operations, International Package operations and Supply Chain & Freight operations. Package operations represent our most significant business and are broken down into regional operations around the world. Regional operations managers are responsible for both domestic and export operations within their geographic area.
U.S. Domestic Package
Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the United States.
International Package
International Package operations include delivery to more than 220 countries and territories worldwide, including shipments wholly outside the United States, as well as U.S. export and U.S. import shipments. Our International Package reporting segment includes the operations of our Europe, Asia and Americas operating segments.
Supply Chain & Freight
Supply Chain & Freight includes the operations of our forwarding, logistics and freight units, as well as other aggregated businesses. Our forwarding and logistics business provides services in more than 195 countries and territories worldwide, and includes supply chain design and management, freight distribution, customs brokerage, mail and consulting services. UPS Freight offers a variety of less-than-truckload (“LTL”) and truckload (“TL”) services to customers in North America. Other aggregated business units within this segment include The UPS Store and UPS Capital.
In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income, interest expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012, with certain expenses allocated between the segments using activity-based costing methods. Unallocated assets are comprised primarily of cash, marketable securities and investments in limited partnerships.

19

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Segment information for the three months ended March 31, 2013 and 2012 is as follows (in millions):
 
Three Months Ended
March 31,
 
 
2013
 
2012
 
Revenue:
 
 
 
 
U.S. Domestic Package
$
8,271

 
$
8,004

 
International Package
2,978

 
2,966

 
Supply Chain & Freight
2,185

 
2,166

 
Consolidated
$
13,434

 
$
13,136

 
Operating Profit:
 
 
 
 
U.S. Domestic Package
$
1,085

 
$
995

 
International Package
352

 
408

 
Supply Chain & Freight
143

 
166

 
Consolidated
$
1,580

 
$
1,569

 

 
NOTE 12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2013 and 2012 (in millions, except per share amounts):
 
Three Months Ended
March 31,
 
2013
 
2012
 
Numerator:
 
 
 
 
Net income attributable to common shareowners
$
1,037

 
$
970

 
Denominator:
 
 
 
 
Weighted average shares
949

 
959

 
Deferred compensation obligations
1

 
2

 
Vested portion of restricted shares
2

 
1

 
Denominator for basic earnings per share
952

 
962

 
Effect of dilutive securities:
 
 
 
 
Restricted shares
7

 
9

 
Stock options
1

 
1

 
Denominator for diluted earnings per share
960

 
972

 
Basic earnings per share
$
1.09

 
$
1.01

 
Diluted earnings per share
$
1.08

 
$
1.00

 
Diluted earnings per share for the three months ended March 31, 2013 and 2012 exclude the effect of 0.2 and 2.6 million shares of common stock, respectively, that may be issued upon the exercise of employee stock options because such effect would be antidilutive.

20

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
We are exposed to market risk, primarily related to foreign exchange rates, commodity prices and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, we enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates, commodity prices and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value for those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Credit Risk Management
The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines, and monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.
 We have agreements with substantially all of our active counterparties containing early termination rights and/or bilateral collateral provisions whereby cash is required whenever the net fair value of derivatives associated with those counterparties exceed specific thresholds. Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) would typically require an increase in the amount of collateral required of the counterparty and/or allow us to take additional protective measures such as early termination of trades. At March 31, 2013, we held cash collateral of $48 million under these agreements.
In connection with the agreements described above, we could also be required to provide 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 our credit rating and the net fair value of the associated derivatives with each counterparty. At March 31, 2013, the aggregate fair value of the instruments covered by these contractual features that were in a net liability position was $188 million; however, we were not required to post any collateral with our counterparties as of that date.
We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
Accounting Policy for Derivative Instruments
We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.
A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statements of consolidated income during the current period.
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.
A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within other AOCI. The remainder of the change in value of such instruments is recorded in earnings.

21

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. We periodically enter into option contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We have designated and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.
Foreign Currency Risk Management
To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, the British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with option contracts. We have designated and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur.
We also hedge portions of our anticipated cash settlements of intercompany transactions subject to foreign currency remeasurement using foreign currency forward contracts. We have designated 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 other operating expense when the underlying transactions are subject to currency remeasurement.
We have foreign currency denominated debt obligations and capital lease obligations associated with our aircraft. For some of these debt obligations and leases, we hedge the foreign currency denominated contractual payments using cross-currency interest rate swaps, which effectively convert the foreign currency denominated contractual payments into U.S. Dollar denominated payments. We have designated and account for these swaps as cash flow hedges of the forecasted contractual payments; therefore, the resulting gains and losses from these hedges are recognized in the statements of consolidated income when the currency remeasurement gains and losses on the underlying debt obligations and leases are incurred.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments, including interest rate swaps and cross-currency interest rate swaps, as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within our capital structure.
We have designated and account for the majority of our interest rate swaps that convert fixed rate interest payments into floating rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We have designated and account for interest rate swaps that convert floating rate interest payments into fixed rate interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from fair value adjustments to the interest rate swaps are recorded to AOCI.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings, 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.

22

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Outstanding Positions
As of March 31, 2013 and December 31, 2012, the notional amounts of our outstanding derivative positions were as follows (in millions):
 
March 31, 2013
 
December 31, 2012
Currency hedges:
 
 
 
 
 
Euro
EUR
1,890

 
EUR
1,783

British Pound Sterling
GBP
753

 
GBP
797

Canadian Dollar
CAD
296

 
CAD
341

United Arab Emirates Dirham
AED

 
AED
551

Mexican Peso
MXN
2,300

 
MXN

Malaysian Ringgit
MYR
600

 
MYR
500

 
 
 
 
 
 
Interest rate hedges:
 
 
 
 
 
Fixed to Floating Interest Rate Swaps
$
6,049

 
$
7,274

Floating to Fixed Interest Rate Swaps
$
781

 
$
781

Interest Rate Basis Swaps
$
2,500

 
$
2,500

 
 
 
 
 
 
Commodity hedges:
 
 
 
 
 
Heating Oil Swaps
Gal
100

 
Gal

Ultra Low Sulfur Diesel Swaps
Gal
98

 
Gal


Balance Sheet Recognition and Fair Value Measurements
The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives (in millions). The table is segregated between those derivative instruments that qualify and are designated as hedging instruments and those that are not, as well as by type of contract and whether the derivative is in an asset or liability position.
We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded on our consolidated balance sheets. The columns labeled "Net Amounts if Right of Offset had been Applied" indicate the potential net fair value positions by type of contract and location on the consolidated balance sheets had we elected to apply the right of offset.
 
 
 
Fair Value
 
Gross Amounts Presented in
Consolidated Balance Sheets
 
Net Amounts if Right of
Offset had been Applied
Asset Derivatives
Balance Sheet Location
 
Hierarchy Level
 
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
December 31, 2012
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
Level 2
 
$
67

 
$
27

 
$
67

 
$
27

Interest rate contracts
Other current assets
 
Level 2
 

 
1

 

 
1

Commodity contracts
Other current assets
 
Level 2
 
3

 

 
3

 

Foreign exchange contracts
Other non-current assets
 
Level 2
 
14

 
14

 
14

 
12

Interest rate contracts
Other non-current assets
 
Level 2
 
382

 
420

 
362

 
406

Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
Level 2
 

 
3

 

 
3

Interest rate contracts
Other non-current assets
 
Level 2
 
92

 
101

 
84

 
91

Total Asset Derivatives
 
 
 
 
$
558

 
$
566

 
$
530

 
$
540

 
 
 
 
 
 
 
 
 
 
 
 
 

23

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value
 
Gross Amounts Presented in
Consolidated Balance Sheets
 
Net Amounts if Right of
Offset had been Applied
Liability Derivatives
Balance Sheet Location
 
Hierarchy Level
 
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
December 31, 2012
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current liabilities
 
Level 2
 
$
12

 
$

 
$
12

 
$

Foreign exchange contracts
Other non-current liabilities
 
Level 2
 
134

 
103

 
134

 
101

Interest rate contracts
Other non-current liabilities
 
Level 2
 
20

 
14

 

 

Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current liabilities
 
Level 2
 
3

 
1

 
3

 
1

Interest rate contracts
Other non-current liabilities
 
Level 2
 
32

 
41

 
24

 
31

Total Liability Derivatives
 
 
 
 
$
201

 
$
159

 
$
173

 
$
133

Our foreign currency, interest rate and energy 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 commodity forward prices; therefore, these derivatives are classified as Level 2.
Income Statement Recognition
The following table indicates the amount of gains and losses that have been recognized in other comprehensive income for the three months ended March 31, 2013 and 2012 for those derivatives designated as cash flow hedges (in millions):
Three Months Ended March 31:
 
 
 
 
 
 
 
2013
 
2012
 
Derivative Instruments in Cash Flow
Hedging Relationships
 
Amount of Gain (Loss)Recognized in
OCI on Derivative (Effective Portion)
 
Amount of Gain (Loss) Recognized in
OCI on Derivative (Effective Portion)
 
Interest rate contracts
 
$
1

 
$
(8
)
 
Foreign exchange contracts
 
(1
)
 
(59
)
 
Commodity contracts
 
(18
)
 

 
Total
 
$
(18
)
 
$