10-Q 1 ups-9302014x10q.htm FORM 10-Q UPS-9.30.2014-10Q
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 September 30, 2014, 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 202,881,932 Class A shares, and 702,344,384 Class B shares, with a par value of $0.01 per share, outstanding at November 3, 2014.



UNITED PARCEL SERVICE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2014
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 15—Termination of TNT Transaction
 
Note 16— Subsequent Events
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
PART II—OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.



PART I. FINANCIAL INFORMATION

Cautionary Statement About Forward-Looking Statements
This report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in the future tense, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof and similar terms are intended to be forward-looking statements. We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Our disclosure and analysis in this report, in our Annual Report on Form 10-K for the year ended December 31, 2013 and in our other filings with the Securities and Exchange Commission contain some forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties include, but are not limited to: general economic conditions, both in the U.S. and internationally; significant competition on a local, regional, national, and international basis; changes in our relationships with our significant customers; the existing complex and stringent regulation in the U.S. and internationally, changes to which can impact our business; increased security requirements that may increase our costs of operations and reduce operating efficiencies; legal, regulatory or market responses to global climate change; negotiation and ratification of labor contracts; strikes, work stoppages and slowdowns by our employees; the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; changes in exchange rates or interest rates; our ability to maintain the image of our brand; breaches in data security; disruptions to the Internet or our technology infrastructure; our ability to accurately forecast our future capital investment needs; exposure to changing economic, political and social developments in international and emerging markets; changes in business strategy, government regulations, or economic or market conditions that may result in further substantial impairment write-downs of our assets; increases in our expenses relating to employee health and retiree health and our contributions to pension benefits; the potential for various claims and litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters; our ability to realize the anticipated benefits from acquisitions, joint ventures or strategic alliances; our ability to manage insurance and claims expenses; and other risks discussed in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2013 or described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements.


1


Item 1. Financial Statements
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2014 (unaudited) and December 31, 2013
(In millions)
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
4,204

 
$
4,665

Marketable securities
1,367

 
580

Accounts receivable, net
5,822

 
6,502

Deferred income tax assets
591

 
684

Other current assets
1,334

 
956

Total Current Assets
13,318

 
13,387

Property, Plant and Equipment, Net
17,843

 
17,961

Goodwill
2,154

 
2,190

Intangible Assets, Net
828

 
775

Non-Current Investments and Restricted Cash
445

 
444

Derivative Assets
441

 
323

Other Non-Current Assets
877

 
1,132

Total Assets
$
35,906

 
$
36,212

LIABILITIES AND SHAREOWNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt and commercial paper
$
2,393

 
$
48

Accounts payable
2,112

 
2,478

Accrued wages and withholdings
2,178

 
2,325

Self-insurance reserves
567

 
719

Other current liabilities
1,846

 
1,561

Total Current Liabilities
9,096

 
7,131

Long-Term Debt
9,858

 
10,824

Pension and Postretirement Benefit Obligations
6,749

 
7,051

Deferred Income Tax Liabilities
1,276

 
1,244

Self-Insurance Reserves
1,932

 
2,059

Other Non-Current Liabilities
1,351

 
1,415

Shareowners’ Equity:
 
 
 
Class A common stock (203 and 212 shares issued in 2014 and 2013)
2

 
2

Class B common stock (706 and 712 shares issued in 2014 and 2013)
7

 
7

Additional paid-in capital

 

Retained earnings
6,229

 
6,925

Accumulated other comprehensive loss
(611
)
 
(460
)
Deferred compensation obligations
59

 
69

Less: Treasury stock (1 share in 2014 and 2013)
(59
)
 
(69
)
Total Equity for Controlling Interests
5,627

 
6,474

Total Equity for Non-Controlling Interests
17

 
14

Total Shareowners’ Equity
5,644

 
6,488

Total Liabilities and Shareowners’ Equity
$
35,906

 
$
36,212

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
September 30,
 
Nine Months Ended
September 30,
2014
 
2013
 
2014
 
2013
Revenue
$
14,290

 
$
13,521

 
$
42,337

 
$
40,462

Operating Expenses:
 
 
 
 
 
 
 
Compensation and benefits
7,217

 
6,961

 
22,857

 
20,910

Repairs and maintenance
341

 
311

 
1,011

 
929

Depreciation and amortization
485

 
460

 
1,426

 
1,400

Purchased transportation
2,049

 
1,781

 
5,945

 
5,292

Fuel
978

 
968

 
2,930

 
2,966

Other occupancy
241

 
225

 
779

 
703

Other expenses
1,025

 
1,011

 
3,175

 
3,136

Total Operating Expenses
12,336

 
11,717

 
38,123

 
35,336

Operating Profit
1,954

 
1,804

 
4,214

 
5,126

Other Income and (Expense):
 
 
 
 
 
 
 
Investment income
2

 
2

 
27

 
10

Interest expense
(87
)

(92
)
 
(266
)
 
(286
)
Total Other Income and (Expense)
(85
)
 
(90
)
 
(239
)
 
(276
)
Income Before Income Taxes
1,869

 
1,714

 
3,975

 
4,850

Income Tax Expense
655

 
617

 
1,396

 
1,645

Net Income
$
1,214

 
$
1,097

 
$
2,579

 
$
3,205

Basic Earnings Per Share
$
1.33

 
$
1.17

 
$
2.81

 
$
3.40

Diluted Earnings Per Share
$
1.32

 
$
1.16

 
$
2.78

 
$
3.37


STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
1,214

 
$
1,097

 
$
2,579

 
$
3,205

Change in foreign currency translation adjustment, net of tax
(251
)
 
67

 
(248
)
 
(260
)
Change in unrealized gain (loss) on marketable securities, net of tax
(1
)
 
1

 
1

 
(7
)
Change in unrealized gain (loss) on cash flow hedges, net of tax
210

 
12

 
169

 
70

Change in unrecognized pension and postretirement benefit costs, net
     of tax
27

 
28

 
(73
)
 
82

Comprehensive income
$
1,199

 
$
1,205

 
$
2,428

 
$
3,090

See notes to unaudited consolidated financial statements.

3


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
(unaudited)
 
Nine Months Ended
September 30,
 
2014
 
2013
Cash Flows From Operating Activities:
 
 
 
Net income
$
2,579

 
$
3,205

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
1,426

 
1,400

Pension and postretirement benefit expense
1,734

 
835

Pension and postretirement benefit contributions
(163
)
 
(158
)
Settlement of postretirement benefit obligation
(1,995
)
 

Self-insurance reserves
(277
)
 
(68
)
Deferred tax expense (benefit)
67

 
(395
)
Stock compensation expense
430

 
406

Other (gains) losses
202

 
(48
)
Changes in assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable
448

 
417

Other current assets
(60
)
 
11

Accounts payable
(400
)
 
(429
)
Accrued wages and withholdings
(101
)
 
121

Other current liabilities
312

 
(154
)
Other operating activities
(11
)
 
(83
)
Net cash from operating activities
4,191

 
5,060

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(1,444
)
 
(1,605
)
Proceeds from disposals of property, plant and equipment
28

 
90

Purchases of marketable securities
(2,551
)
 
(2,475
)
Sales and maturities of marketable securities
1,856

 
1,493

Net decrease in finance receivables
23

 
28

Cash paid for business acquisitions
(22
)
 
(20
)
Other investing activities
(29
)
 
26

Net cash used in investing activities
(2,139
)
 
(2,463
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term debt
1,066

 
1,653

Proceeds from long-term borrowings
1,286

 
100

Repayments of long-term borrowings
(1,021
)
 
(1,861
)
Purchases of common stock
(2,062
)
 
(2,866
)
Issuances of common stock
203

 
368

Dividends
(1,780
)
 
(1,702
)
Other financing activities
(105
)
 
(408
)
Net cash used in financing activities
(2,413
)
 
(4,716
)
Effect Of Exchange Rate Changes On Cash And Cash Equivalents
(100
)
 
(26
)
Net Increase (Decrease) In Cash And Cash Equivalents
(461
)
 
(2,145
)
Cash And Cash Equivalents:
 
 
 
Beginning of period
4,665

 
7,327

End of period
$
4,204

 
$
5,182

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 September 30, 2014, our results of operations for the three and nine months ended September 30, 2014 and 2013, and cash flows for the nine months ended September 30, 2014 and 2013. 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, 2013.
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 September 30, 2014. The fair values of our investment securities are disclosed in note 4, recognized multiemployer pension withdrawal liabilities are disclosed in note 6, our short and long-term debt in note 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 January 2014, the FASB issued an accounting standards update that adds new disclosure requirements for investments in qualified affordable housing projects through limited liability entities. If certain conditions are met, the cost of an entity's investment in proportion to the tax credits and other tax benefits it receives may be amortized and included as a component of income tax expense. In January 2008, we adopted the fair value option for our investments in certain investment partnerships that were previously accounted for under the equity method; therefore, this accounting standards update did not have any effect on our consolidated financial position or results of operations.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position or results of operations.
Accounting Standards Issued But Not Yet Effective
In April 2014, the FASB issued an accounting standards update that changes the requirements for reporting discontinued operations. This update will have the impact of reducing the frequency of disposals reported as discontinued operations, by requiring such a disposal to represent a strategic shift that has a major effect on an entity's operations and financial results. This update also expands the disclosures for discontinued operations, and requires new disclosures related to individually significant disposals that do not qualify as discontinued operations. This new guidance becomes effective for us prospectively in the first quarter of 2015. This amended guidance will only have a potential impact to the extent that we discontinue any operations in future periods.

5

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


In May 2014, the FASB issued an accounting standards update that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services. This amended guidance requires revenue to be recognized in an amount that reflects the consideration to which the company expects to be entitled for those goods and services when the performance obligation has been satisfied. This amended guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. This amended guidance is effective for us beginning in the first quarter of 2017 and early adoption is not permitted. We are currently evaluating the impact that this amended guidance will have on our consolidated financial position and results of operations.
In June 2014, the FASB issued an accounting standards update for companies that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. This new guidance becomes effective for us beginning in the first quarter of 2015, but early adoption is permitted. This new guidance is not expected to have a material impact on our consolidated financial position or results of operations.
Other accounting pronouncements issued, but not effective until after September 30, 2014, are not expected to have a material impact on our consolidated financial position or results of operations.
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 savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
During the first quarter of 2014, we granted Restricted Units under MIP to eligible management employees. Restricted Units granted under MIP will generally vest over a five-year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis over the requisite service period. Based on the date that the eligible management population and performance targets were approved for MIP, we determined the award measurement date to be February 4, 2014 (for U.S.-based employees) and March 17, 2014 (for international-based employees); therefore, the Restricted Unit grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $93.89 and $96.99 on those dates, respectively.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under LTIP to certain eligible management employees. For grants prior to 2014, 90% of the target award was divided into three substantially equal tranches, one for each calendar year in the three-year award cycle, using performance criteria targets established each year.  The targets consisted of consolidated operating return on invested capital and growth in consolidated revenue.  The remaining 10% of the total award was based upon our achievement of adjusted earnings per share compared to a target established at the grant date.  The performance targets for these historical awards will continue to be determined each year, and the awards will continue to vest through 2016.
Beginning with the LTIP grant in the first quarter of 2014, the performance targets are equally-weighted among consolidated operating return on invested capital, growth in consolidated revenue, and total shareowner return relative to a peer group of companies.  These Restricted Units generally vest at the end of a three-year period (except in the case of death, disability, or retirement, in which case immediate vesting occurs on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets set forth on the grant date.  The range of percentage achievement can vary from 0% to 200% of the target award. 

6

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


For the two-thirds of the award related to consolidated operating return on invested capital and growth in consolidated revenue, we recognize the grant-date fair value of these Restricted Units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned.  The remaining one-third of the award related to total shareowner return relative to a peer group is valued using a Monte Carlo model.  This portion of the award was valued at a share payout of 109.84% of the target grant, and is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period.  Based on the date that the eligible management population and performance targets were approved for the 2014 LTIP Award, we determined the award measurement date to be March 4, 2014; therefore the target Restricted Units grant was valued for stock compensation expense using the closing New York Stock Exchange price of $96.98 on that date.
Nonqualified Stock Options
During the first quarter of 2014, 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 2014 and 2013, we granted 0.1 and 0.2 million stock options, respectively, at a weighted average grant price of $96.98 and $82.93, respectively. The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was $20.48 and $15.50 for 2014 and 2013, respectively, using the following assumptions:
 
2014
 
2013
Expected life (in years)
7.5

 
7.5

Risk-free interest rate
2.40
%
 
1.38
%
Expected volatility
24.26
%
 
24.85
%
Expected dividend yield
2.56
%
 
2.75
%
Compensation expense for share-based awards recognized in net income for the three months ended September 30, 2014 and 2013 was $124 and $118 million pre-tax, respectively. Compensation expense for share-based awards recognized in net income for the nine months ended September 30, 2014 and 2013 was $430 and $406 million pre-tax, respectively.

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, 2014 and December 31, 2013 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
September 30, 2014
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
338

 
$

 
$
(1
)
 
$
337

Mortgage and asset-backed debt securities
95

 
1

 
(1
)
 
95

Corporate debt securities
817

 
1

 

 
818

Other debt and equity securities
117

 

 

 
117

Total marketable securities
$
1,367

 
$
2

 
$
(2
)
 
$
1,367

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
355

 
$

 
$
(1
)
 
$
354

Mortgage and asset-backed debt securities
76

 
1

 
(2
)
 
75

Corporate debt securities
146

 
1

 
(1
)
 
146

Other debt and equity securities
5

 

 

 
5

Total marketable securities
$
582

 
$
2

 
$
(4
)
 
$
580


7

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


Of the total investments in marketable securities listed above, $780 million and $0 as of September 30, 2014 and December 31, 2013, respectively, have been classified as "trading", with unrealized gains and losses recognized in investment income within the statements of consolidated income.
Investment Other-Than-Temporary Impairments
We have concluded that no other-than-temporary impairment losses existed as of September 30, 2014. 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 September 30, 2014, 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
$
807

 
$
807

Due after one year through three years
450

 
450

Due after three years through five years
15

 
15

Due after five years
93

 
93

 
1,365

 
1,365

Equity securities
2

 
2

 
$
1,367

 
$
1,367

Non-Current Investments and Restricted Cash
We had $426 and $425 million of restricted cash related to our self-insurance requirements as of September 30, 2014 and December 31, 2013, 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 September 30, 2014 and December 31, 2013, 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 8.15% and 8.65% as of September 30, 2014 and December 31, 2013, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis.

8

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, 2014 and December 31, 2013, 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 
September 30, 2014
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
337

 
$

 
$

 
$
337

Mortgage and asset-backed debt securities

 
95

 

 
95

Corporate debt securities

 
818

 

 
818

Other debt and equity securities

 
117

 

 
117

Total marketable securities
337

 
1,030

 

 
1,367

Other investments
19

 

 
84

 
103

Total
$
356

 
$
1,030

 
$
84

 
$
1,470

December 31, 2013
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
353

 
$
1

 
$

 
$
354

Mortgage and asset-backed debt securities

 
75

 

 
75

Corporate debt securities

 
146

 

 
146

Other debt and equity securities

 
5

 

 
5

Total marketable securities
353

 
227

 

 
580

Other investments
19

 

 
110

 
129

Total
$
372

 
$
227

 
$
110

 
$
709

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended September 30, 2014 and 2013 (in millions):
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on July 1, 2014
$

 
$
95

 
$
95

Transfers into (out of) Level 3

 

 

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

 
(11
)
 
(11
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on September 30, 2014
$

 
$
84

 
$
84

 
 
 
 
 
 
Balance on July 1, 2013
$

 
$
136

 
$
136

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 September 30, 2013
$

 
$
123

 
$
123


9

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, 2014 and 2013 (in millions):
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2014
$

 
110

 
110

Transfers into (out of) Level 3

 

 

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

 
(26
)
 
(26
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on September 30, 2014
$

 
$
84

 
$
84

 
 
 
 
 
 
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)

 
(40
)
 
(40
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on September 30, 2013
$

 
$
123


$
123

There were no transfers of investments between Level 1 and Level 2 during the three and nine months ended September 30, 2014 and 2013.

NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of September 30, 2014 and December 31, 2013 consist of the following (in millions):
 
2014
 
2013
Vehicles
$
7,209

 
$
6,762

Aircraft
15,791

 
15,772

Land
1,155

 
1,163

Buildings
3,300

 
3,260

Building and leasehold improvements
3,175

 
3,116

Plant equipment
7,368

 
7,221

Technology equipment
1,621

 
1,569

Equipment under operating leases
37

 
44

Construction-in-progress
287

 
244

 
39,943

 
39,151

Less: Accumulated depreciation and amortization
(22,100
)
 
(21,190
)
 
$
17,843

 
$
17,961

 
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 and nine months ended September 30, 2014 and 2013.

10

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


NOTE 6. EMPLOYEE BENEFIT PLANS
Company-Sponsored Benefit Plans
Information about net periodic benefit cost for our company-sponsored pension and postretirement benefit plans is as follows for the three and nine months ended September 30, 2014 and 2013 (in millions):
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Three Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
284

 
$
337

 
$
12

 
$
20

 
$
10

 
$
11

Interest cost
401

 
362

 
33

 
46

 
12

 
11

Expected return on assets
(564
)
 
(537
)
 
(6
)
 
(8
)
 
(15
)
 
(14
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
42

 
44

 
1

 
1

 
1

 

Other net (gain) loss

 

 

 

 

 

Actuarial (gain) loss

 

 

 

 

 

Settlement and curtailment loss

 

 

 

 

 

Net periodic benefit cost
$
163

 
$
206

 
$
40

 
$
59

 
$
8

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Nine Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
853

 
$
1,012

 
$
51

 
$
72

 
$
37

 
$
37

Interest cost
1,203

 
1,087

 
119

 
139

 
38

 
33

Expected return on assets
(1,693
)
 
(1,611
)
 
(18
)
 
(25
)
 
(45
)
 
(42
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
127

 
130

 
(2
)
 
3

 
(2
)
 

Other net (gain) loss

 

 

 

 

 

Actuarial (gain) loss

 

 
746

 

 

 

Settlement and curtailment loss

 

 
320

 

 

 

Net periodic benefit cost
$
490

 
$
618

 
$
1,216

 
$
189

 
$
28

 
$
28

During the first nine months of 2014, we contributed $71 and $92 million to our company-sponsored pension and postretirement medical benefit plans, respectively. We also expect to contribute $49 and $36 million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively.
Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.

11

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


As of September 30, 2014 and December 31, 2013 we had $879 and $884 million, respectively, recognized in "Other Non-Current Liabilities" on our consolidated balance sheets associated with our previous withdrawal from a multiemployer pension plan. This liability is payable in equal monthly installments over a remaining term of approximately 48 years. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value of this withdrawal liability as of September 30, 2014 and December 31, 2013 was $850 and $783 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.
Status of Collective Bargaining Agreements
As of December 31, 2013, we had approximately 253,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). These agreements ran through July 31, 2013, but had been indefinitely extended pending the ratification of a new agreement with the Teamsters. On April 24, 2014, the Teamsters ratified a new national master agreement with UPS that will expire on July 31, 2018 (discussed further below).
We have approximately 2,600 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which became amendable at the end of 2011. In February 2014, UPS and the IPA requested mediation by the National Mediation Board for the ongoing contract negotiations.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”). Our previous agreements with the IAM ran through July 31, 2014; on July 28, 2014, the IAM ratified new collective bargaining agreements that will expire on July 31, 2019.
Ratification of New Collective Bargaining Agreements
On April 24, 2014, the Teamsters ratified a new national master agreement (“NMA”) with UPS that will expire on July 31, 2018. The UPS Freight business unit ratified its national master agreement in January 2014.
The economic provisions in the NMA include wage rate increases, as well as increased contribution rates for healthcare and pension benefits. Most of these economic provisions are retroactive to August 1, 2013, which is the effective date of the NMA. In the second quarter of 2014, we remitted $278 million for these retroactive economic benefits; this payment had an immaterial impact on net income, as these retroactive economic benefits had been accrued since the July 31, 2013 expiration of the prior agreement.
In addition to the retroactive economic provisions of the NMA, there are certain changes to the delivery of healthcare benefits that are effective at various dates. These changes impact approximately 36,000 full-time and 73,000 part-time active employees covered by the NMA and the UPS Freight collective bargaining agreement (collectively referred to as the “NMA Group”), as well as approximately 16,000 employees covered by other collective bargaining agreements (the “Non-NMA Group”). These provisions are discussed further below.
Changes to the Delivery of Active and Postretirement Healthcare Benefits
Prior to ratification, the NMA Group and Non-NMA Group employees received their healthcare benefits through UPS-sponsored active and postretirement health and welfare benefit plans. Effective June 1, 2014, we ceased providing healthcare benefits to active NMA Group employees through these UPS-sponsored benefit plans, and the responsibility for providing healthcare benefits for active employees was assumed by three separate multiemployer healthcare funds (the “Funds”). The responsibility for providing healthcare benefits for the active Non-NMA Group employees will also be assumed by the Funds on dates ranging from October 1, 2014 through January 1, 2015, depending on the ratification date of the applicable collective bargaining agreement. We will make contributions to the Funds based on negotiated fixed hourly or monthly contribution rates for the duration of the NMA and other applicable collective bargaining agreements.


12

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


Additionally, the Funds assumed the obligation to provide postretirement healthcare benefits to the employees in the NMA Group who retire on or after January 1, 2014. The postretirement healthcare benefit obligation for the employees in the Non-NMA Group will be assumed by the Funds for employees retiring on or after January 1, 2014 or January 1, 2015, depending on the applicable collective bargaining agreement. In exchange for the assumption of the obligation to provide postretirement healthcare benefits to the NMA Group and Non-NMA Group, we transferred cash totaling $2.271 billion to the Funds in the second quarter of 2014. UPS-sponsored health and welfare benefit plans retained responsibility for providing postretirement healthcare coverage for employees in the NMA Group who retired from UPS prior to January 1, 2014, and for employees in the Non-NMA Group who retire from UPS prior to the January 1, 2014 or January 1, 2015 effective date in the applicable collective bargaining agreement.
Accounting Impact of Health and Welfare Plan Changes
Year-to-Date 2014 - Income Statement Impact:
We recorded a pre-tax charge of $1.066 billion ($665 million after-tax) in the second quarter of 2014 for the health and welfare plan changes described above. The components of this charge, which was included in "Compensation and benefits" expense on the statement of consolidated income, are as follows:
Partial Plan Curtailment: We recorded a $112 million pre-tax curtailment loss due to the elimination of future service benefit accruals. This curtailment loss represents the accelerated recognition of unamortized prior service costs.
Remeasurement of Postretirement Obligation: We recorded a $746 million pre-tax loss due to the remeasurement of the postretirement benefit obligations of the affected UPS-sponsored health and welfare benefit plans.
Settlement: We recorded a $208 million pre-tax settlement loss, which represents the recognition of unamortized actuarial losses associated with the postretirement obligation for the NMA Group.
Year-to-Date 2014 - Balance Sheet and Cash Flow Impact:
During the second quarter of 2014, we transferred cash totaling $2.271 billion to the Funds for the assumption of the postretirement healthcare benefit obligations. Of this cash transfer amount, $1.995 billion was accounted for as a settlement of our postretirement obligation for the NMA Group, while the remaining $276 million was accounted for as a prepaid deposit asset (recorded in "Other Current Assets" on the consolidated balance sheets) until the ratification of the collective bargaining agreements covering the Non-NMA Group. We have received approximately $563 million of cash tax benefits (through reduced U.S. Federal and state quarterly income tax payments) as of September 30, 2014, and we anticipate receiving the remaining cash tax benefits of approximately $291 million resulting from these payments over the remainder of 2014.
For NMA Group employees who retired prior to January 1, 2014 and remain with the UPS-sponsored health and welfare plans, the changes to the contributions, benefits and cost sharing provisions in these plans resulted in an increase in the postretirement benefit obligation, and a corresponding decrease in pre-tax accumulated other comprehensive income, of $13 million upon ratification.
After the remeasurement and settlement of the obligation for the NMA Group, as well as normal expense and contribution activity, the total postretirement medical benefit obligation was reduced by $946 million, from $3.691 billion at December 31, 2013 to $2.745 billion at September 30, 2014.
Remainder of 2014:
Upon ratification of the collective bargaining agreements covering the Non-NMA Group, we plan to record a pre-tax charge of approximately $31 million for the remeasurement and settlement of the postretirement obligation associated with these employees. At the same time, the $276 million prepaid deposit asset, described previously, will be used to settle the postretirement benefit obligation for the Non-NMA Group. We anticipate the ratification of these agreements covering the Non-NMA Group will occur prior to December 31, 2014.
Based on the anticipated expense and contribution levels for the remainder of 2014, in addition to the remeasurement and settlement of the obligations, we expect that the total postretirement medical benefit obligation will be reduced by approximately $1.153 billion, from $3.691 billion at December 31, 2013 to approximately $2.538 billion at December 31, 2014.
The accounting charges and other amounts described above are estimates based on actuarial valuation assumptions, and will be updated as necessary for any changes in discount rates, final collective bargaining agreement details and similar factors for the Non-NMA Group.


13

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


NOTE 7. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of September 30, 2014 and December 31, 2013 (in millions):
 
U.S. Domestic
Package
 
International
Package
 
Supply Chain &
Freight
 
Consolidated
December 31, 2013:
$

 
$
420

 
$
1,770

 
$
2,190

Acquired

 

 
11

 
11

Currency / Other

 
(14
)
 
(33
)
 
(47
)
September 30, 2014:
$

 
$
406

 
$
1,748

 
$
2,154

The goodwill acquired in the Supply Chain & Freight segment was related to our February 2014 acquisition of Polar Speed Distribution Limited ("Polar Speed"), a U.K.-based company that provides temperature-sensitive pharmaceutical supply chain solutions in the U.K. and continental Europe. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition. The acquisition of Polar Speed was not material to our consolidated financial position or results of operations.
The remaining change in goodwill for both the International Package and Supply Chain & Freight segments was 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 September 30, 2014 and December 31, 2013 (in millions):
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
September 30, 2014:
 
 
 
 
 
Capitalized software
$
2,599

 
$
(1,983
)
 
$
616

Licenses
224

 
(132
)
 
92

Franchise rights
116

 
(75
)
 
41

Customer lists
121

 
(63
)
 
58

Trademarks, patents, and other
34

 
(13
)
 
21

Total Intangible Assets, Net
$
3,094


$
(2,266
)
 
$
828

December 31, 2013:
 
 
 
 
 
Capitalized software
$
2,420

 
$
(1,897
)
 
$
523

Licenses
220

 
(97
)
 
123

Franchise rights
117

 
(70
)
 
47

Customer lists
118

 
(62
)
 
56

Trademarks, patents, and other
37

 
(11
)
 
26

Total Intangible Assets, Net
$
2,912

 
$
(2,137
)
 
$
775


14

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 September 30, 2014 and December 31, 2013 consists of the following (in millions):
 
Principal
Amount
 
 
 
Carrying Value
 
 
Maturity
 
2014
 
2013
Commercial paper
$
2,352

 
2014 - 2015
 
$
2,352

 
$

Fixed-rate senior notes:
 
 
 
 
 
 
 
3.875% senior notes

 
2014
 

 
1,007

1.125% senior notes
375

 
2017
 
368

 
367

5.50% senior notes
750

 
2018
 
804

 
821

5.125% senior notes
1,000

 
2019
 
1,072

 
1,079

3.125% senior notes
1,500

 
2021
 
1,597

 
1,579

2.45% senior notes
1,000

 
2022
 
952

 
913

6.20% senior notes
1,500

 
2038
 
1,481

 
1,481

4.875% senior notes
500

 
2040
 
489

 
489

3.625% senior notes
375

 
2042
 
367

 
367

8.375% Debentures:
 
 
 
 
 
 
 
8.375% debentures
424

 
2020
 
477

 
479

8.375% debentures
276

 
2030
 
283

 
283

Pound Sterling notes:
 
 
 
 
 
 
 
5.50% notes
108

 
2031
 
104

 
105

5.125% notes
735

 
2050
 
701

 
714

Floating rate senior notes
372

 
2049-2053
 
369

 
370

Capital lease obligations
499

 
2014-3004
 
499

 
473

Facility notes and bonds
320

 
2015-2036
 
320

 
320

Other debt
16

 
2014-2022
 
16

 
25

Total Debt
$
12,102

 
 
 
12,251

 
10,872

Less: Current Maturities
 
 
 
 
(2,393
)
 
(48
)
Long-term Debt
 
 
 
 
$
9,858

 
$
10,824

Debt Repayments
On April 1, 2014, our $1.0 billion 3.875% senior notes matured and were repaid in full. The principal balance of the senior notes was repaid from the proceeds of short-term commercial paper issuances.
Sources of Credit
We are authorized to borrow up to $10.0 billion under the U.S. commercial paper program we maintain. We had $2.352 billion outstanding under this program as of September 30, 2014, with an average interest rate of 0.11%. We also maintain a European commercial paper program under which we are authorized to borrow up to €5.0 billion in a variety of currencies. As of September 30, 2014, there were no amounts outstanding under this program. As of September 30, 2014, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheet.

15

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 27, 2015. 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 September 30, 2014.
The second agreement provides revolving credit facilities of $1.0 billion, and expires on March 28, 2019. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 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, 2014.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of September 30, 2014 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 September 30, 2014, 10% of net tangible assets was equivalent to $2.383 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 $13.516 and $11.756 billion as of September 30, 2014 and December 31, 2013, 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.

16

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 The UPS Store, Inc., are defendants in Morgate v. The UPS Store, Inc. et al. an action in the Los Angeles Superior Court brought on behalf of a certified class of all franchisees who chose to rebrand their Mail Boxes Etc. franchises to The UPS Store in March 2003. Plaintiff alleges that UPS and The UPS Store, Inc. misrepresented and omitted facts to the class about the market tests that were conducted before offering the class the choice of whether to rebrand to The UPS Store. The trial is scheduled for June 2015.
There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from the remaining aspects of this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; and (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. UPS and FedEx have moved for summary judgment.  There has been no ruling on those motions.  The case does not have a trial date scheduled. 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) the Court has not ruled on the pending dispositive motions; and (3) the DOJ investigation is pending. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In Canada, four purported class-action cases were filed against us in British Columbia (2006); Ontario (2007) and Québec (2006 and 2013). The cases each allege inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. The British Columbia class action was declared inappropriate for certification and dismissed by the trial judge. That decision was upheld by the British Columbia Court of Appeal in March 2010, which ended the case in our favor. The Ontario class action was certified in September 2011. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court. The complaint under the Criminal Code was dismissed. No appeal is being taken from that decision. The allegations of inadequate disclosure were granted and we are appealing that decision. The motion to authorize the 2006 Québec litigation as a class action was dismissed by the motions judge in October 2012; there was no appeal, which ended that case in our favor. The 2013 Québec litigation also has been dismissed. We deny all liability and are vigorously defending the one outstanding case in Ontario. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

17

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


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. We have petitioned the government to shorten that term in its discretion to a lesser period pursuant to the terms of the NPA. The NPA did not have a material impact on our financial condition, results of operations or liquidity in 2013.
In August 2010, competition authorities in Brazil opened an administrative proceeding to investigate alleged anticompetitive behavior in the freight forwarding industry. Approximately 45 freight forwarding companies and individuals are named in the proceeding, including UPS, UPS SCS Transportes (Brasil) S.A., and a former employee in Brazil. UPS submitted its written defenses to these allegations in April 2014. UPS intends to continue to defend itself in these proceedings. In November 2012, the Commerce Commission of Singapore initiated an investigation with respect to similar matters.
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 filed another motion to dismiss. In January 2014, the Court dismissed UPS from one of the claims in the Third Amended Complaint with prejudice, but denied UPS's motion to dismiss with respect to the other claims asserted against UPS. In June 2014, UPS entered into an agreement in principle with the plaintiffs to settle the remaining claims asserted against UPS for an immaterial amount. This agreement in principle is subject to the negotiation of final settlement documents and court approval of the settlement.
In January 2014, we received a Civil Investigative Demand from the Department of Justice seeking documents related to possible violations of the False Claims Act ("FCA") in connection with delivery services provided to government customers where guaranteed commitment times allegedly were not met. The General Services Administration - Office of Inspector General had previously sought similar documents. We have been contacted by some states requesting similar information. The Company has been cooperating with these inquiries.
It is not possible to predict the potential outcome of these matters at this stage, or to reasonably estimate the range or amount of possible loss, if any, that may result from these investigations based on a number of factors, including: (1)  the investigations are not complete; (2) these matters are at an early stage and there are unresolved questions of law and fact that could be of importance to the ultimate resolution of these matters; (3) the scope and size of potentially affected government customers and the time period covered by potential claims remains uncertain; and (4) our current intention to vigorously defend any claims of FCA violations. 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.



18

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 on a one-to-one basis into class B shares at any time. Class B shares are publicly traded on the New York Stock Exchange under the symbol “UPS”. Class A and B shares both have a $0.01 par value, and as of September 30, 2014, 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 September 30, 2014, 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 nine months ended September 30, 2014 and 2013 (in millions, except per share amounts):
 
2014
 
2013
 
Shares
 
Dollars
 
Shares
 
Dollars
Class A Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
212

 
$
2

 
225

 
$
3

Common stock purchases
(4
)
 

 
(6
)
 
(1
)
Stock award plans
4

 

 
6

 

Common stock issuances
2

 

 
3

 

Conversions of class A to class B common stock
(11
)
 

 
(14
)
 

Class A shares issued at end of period
203

 
$
2

 
214

 
$
2

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
712

 
$
7

 
729

 
$
7

Common stock purchases
(17
)
 

 
(27
)
 

Conversions of class A to class B common stock
11

 

 
14

 

Class B shares issued at end of period
706

 
$
7

 
716

 
$
7

Additional Paid-In Capital
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$

 
 
 
$

Stock award plans
 
 
359

 
 
 
493

Common stock purchases
 
 
(630
)
 
 
 
(513
)
Common stock issuances
 
 
218

 
 
 
216

Option premiums received (paid)
 
 
53

 
 
 
(196
)
Balance at end of period
 
 
$

 
 
 
$

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
6,925

 
 
 
$
7,997

Net income attributable to common shareowners
 
 
2,579

 
 
 
3,205

Dividends ($2.01 and $1.86 per share)
 
 
(1,863
)
 
 
 
(1,770
)
Common stock purchases
 
 
(1,412
)
 
 
 
(2,330
)
Balance at end of period
 
 
$
6,229

 
 
 
$
7,102

In total, we repurchased 20.6 million shares of class A and class B common stock for $2.042 billion during the nine months ended September 30, 2014, and 33.3 million shares for $2.844 billion during the nine months ended September 30, 2013. In February 2013, the Board of Directors approved a new share repurchase authorization of $10.0 billion, which has no expiration date. Share repurchases may take the form of accelerated share repurchases, open market purchases, or other such methods as we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the program. As of September 30, 2014, we had $4.772 billion of this share repurchase authorization available.

19

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


From time to time, we enter into share repurchase programs with large financial institutions to assist in our buyback of company stock. These programs allow us to repurchase our shares at a price below the weighted average UPS share price for a given period. During the third quarter of 2014, we entered into an accelerated share repurchase program which allowed us to repurchase 3.9 million shares for $375 million. The program was completed in September 2014.
In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We received (paid) net premiums of $53 and ($196) million during the first nine months of 2014 and 2013, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of September 30, 2014, we had outstanding options for the purchase of 0.6 million shares, with a strike price of $86.18 per share, that will settle in the fourth quarter of 2014.
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 nine months ended September 30, 2014 and 2013 is as follows (in millions):
 
2014
 
2013
Foreign currency translation gain (loss):
 
 
 
Balance at beginning of period
$
(126
)
 
$
134

Reclassification to earnings (no tax impact in either period)

 
(161
)
Translation adjustment (net of tax effect of $11 and $(2))
(248
)
 
(99
)
Balance at end of period
(374
)
 
(126
)
Unrealized gain (loss) on marketable securities, net of tax:
 
 
 
Balance at beginning of period
(1
)
 
6

Current period changes in fair value (net of tax effect of $1 and $(5))
1

 
(7
)
Reclassification to earnings (no tax impact in either period)

 

Balance at end of period

 
(1
)
Unrealized gain (loss) on cash flow hedges, net of tax:
 
 
 
Balance at beginning of period
(219
)
 
(286
)
Current period changes in fair value (net of tax effect of $77 and $3)
129

 
6

Reclassification to earnings (net of tax effect of $24 and $39)
40

 
64

Balance at end of period
(50
)
 
(216
)
Unrecognized pension and postretirement benefit costs, net of tax:
 
 
 
Balance at beginning of period
(114
)
 
(3,208
)
Reclassification to earnings (net of tax effect of $447 and $51)
742

 
82

Remeasurement of plan assets and liabilities (net of tax effect of $(488) and $0)
(815
)
 

Balance at end of period
(187
)
 
(3,126
)
Accumulated other comprehensive income (loss) at end of period
$
(611
)
 
$
(3,469
)




20

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, 2014 and 2013 is as follows (in millions):
Three Months Ended September 30:
 
 
 
 
 
 
Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
 
2014
 
2013
 
Foreign currency translation gain (loss):
 
 
 
 
 
Liquidation of foreign subsidiary
$

 
$

 
Other expenses
Income tax (expense) benefit

 

 
Income tax expense
Impact on net income

 

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

 

 
Investment income
Income tax (expense) benefit

 

 
Income tax expense
Impact on net income

 

 
Net income
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
(6
)
 
(6
)
 
Interest expense
Foreign exchange contracts
(43
)
 
44

 
Interest expense
Foreign exchange contracts
(11
)
 
(13
)
 
Revenue
Commodity contracts

 

 
Fuel expense
Income tax (expense) benefit
23

 
(9
)
 
Income tax expense
Impact on net income
(37
)
 
16

 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(44
)
 
(45
)
 
Compensation and benefits
Settlement and curtailment loss

 

 
Compensation and benefits
Remeasurement of benefit obligation

 

 
Compensation and benefits
Income tax (expense) benefit
17

 
17

 
Income tax expense
Impact on net income
(27
)
 
(28
)
 
Net income
 
 
 
 
 
 
Total amount reclassified for the period
$
(64
)
 
$
(12
)
 
Net income
 
 
 
 
 
 

21

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


Nine Months Ended September 30:
 
 
 
 
 
 
Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
 
2014
 
2013
 
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

 

 
Investment income
Income tax (expense) benefit

 

 
Income tax expense
Impact on net income

 

 
Net income
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
(17
)
 
(16
)
 
Interest expense
Foreign exchange contracts
(15
)
 

 
Interest expense
Foreign exchange contracts
(32
)
 
(39
)
 
Revenue
Commodity contracts

 
(48
)
 
Fuel expense
Income tax (expense) benefit
24

 
39

 
Income tax expense
Impact on net income
(40
)
 
(64
)
 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(123
)
 
(133
)
 
Compensation and benefits
Settlement and curtailment loss
(320
)
 

 
Compensation and benefits
Remeasurement of benefit obligation
(746
)
 

 
Compensation and benefits
Income tax (expense) benefit
447

 
51

 
Income tax expense
Impact on net income
(742
)
 
(82
)
 
Net income
 
 
 
 
 
 
Total amount reclassified for the period
$
(782
)
 
$
15

 
Net income

Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the nine months ended September 30, 2014 and 2013 is as follows (in millions):
 
2014
 
2013
Shares
 
Dollars
 
Shares
 
Dollars
Deferred Compensation Obligations:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
69

 
 
 
$
78

Reinvested dividends
 
 
2

 
 
 
3

Benefit payments
 
 
(12
)
 
 
 
(13
)
Balance at end of period
 
 
$
59

 
 
 
$
68

Treasury Stock:
 
 
 
 
 
 
 
Balance at beginning of period
(1
)
 
$
(69
)
 
(1
)
 
$
(78
)
Reinvested dividends

 
(2
)
 

 
(3
)
Benefit payments

 
12

 

 
13

Balance at end of period
(1
)
 
$
(59
)
 
(1
)
 
$
(68
)

22

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 nine months ended September 30, 2014 and 2013 (in millions):
 
2014
 
2013
Noncontrolling Interests:
 
 
 
Balance at beginning of period
$
14

 
$
80

Acquired noncontrolling interests
3

 
(67
)
Dividends attributable to noncontrolling interests

 

Net income attributable to noncontrolling interests

 

Balance at end of period
$
17

 
$
13


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