10-Q 1 ups-9302015x10q.htm 10-Q 10-Q
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, 2015, 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 194,272,074 Class A shares, and 696,142,653 Class B shares, with a par value of $0.01 per share, outstanding at October 26, 2015.



UNITED PARCEL SERVICE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 8—Business Combinations
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rate Adjustments
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, 2014 and in our other filings with the Securities and Exchange Commission contain some forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties include, but are not limited to: general economic conditions, both in the U.S. and internationally; significant competition on a local, regional, national, and international basis; changes in our relationships with our significant customers; the existing complex and stringent regulation in the U.S. and internationally, changes to which can impact our business; increased security requirements that may increase our costs of operations and reduce operating efficiencies; legal, regulatory or market responses to global climate change; negotiation and ratification of labor contracts; strikes, work stoppages and slowdowns by our employees; the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; changes in exchange rates or interest rates; our ability to maintain the image of our brand; breaches in data security; disruptions to the Internet or our technology infrastructure; our ability to accurately forecast our future capital investment needs; exposure to changing economic, political and social developments in international and emerging markets; changes in business strategy, government regulations, or economic or market conditions that may result in substantial impairment of our assets; increases in our expenses or funding obligations relating to employee health, retiree health and/or pension benefits; the potential for various claims and litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters; our ability to realize the anticipated benefits from acquisitions, joint ventures or strategic alliances; our ability to manage insurance and claims expenses; and other risks discussed in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2014 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, 2015 (unaudited) and December 31, 2014
(In millions)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
3,441

 
$
2,291

Marketable securities
2,248

 
992

Accounts receivable, net
6,055

 
6,661

Deferred income tax assets
554

 
590

Other current assets
1,283

 
1,274

Total Current Assets
13,581

 
11,808

Property, Plant and Equipment, Net
18,163

 
18,281

Goodwill
3,442

 
2,184

Intangible Assets, Net
1,523

 
847

Non-Current Investments and Restricted Cash
483

 
489

Derivative Assets
455

 
515

Deferred Income Tax Assets
656

 
652

Other Non-Current Assets
699

 
695

Total Assets
$
39,002

 
$
35,471

LIABILITIES AND SHAREOWNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt and commercial paper
$
4,557

 
$
923

Accounts payable
2,058

 
2,754

Accrued wages and withholdings
2,317

 
2,373

Hedge margin liabilities
737

 
548

Self-insurance reserves
594

 
656

Other current liabilities
1,606

 
1,385

Total Current Liabilities
11,869

 
8,639

Long-Term Debt
10,044

 
9,864

Pension and Postretirement Benefit Obligations
11,992

 
11,452

Deferred Income Tax Liabilities
77

 
83

Self-Insurance Reserves
1,827

 
1,916

Other Non-Current Liabilities
1,245

 
1,359

Shareowners’ Equity:
 
 
 
Class A common stock (196 and 201 shares issued in 2015 and 2014)
2

 
2

Class B common stock (696 and 705 shares issued in 2015 and 2014)
7

 
7

Additional paid-in capital

 

Retained earnings
5,771

 
5,726

Accumulated other comprehensive loss
(3,851
)
 
(3,594
)
Deferred compensation obligations
51

 
59

Less: Treasury stock (1 share in 2015 and 2014)
(51
)
 
(59
)
Total Equity for Controlling Interests
1,929

 
2,141

Noncontrolling Interests
19

 
17

Total Shareowners’ Equity
1,948

 
2,158

Total Liabilities and Shareowners’ Equity
$
39,002

 
$
35,471

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,
2015
 
2014
 
2015
 
2014
Revenue
$
14,237

 
$
14,290

 
$
42,309

 
$
42,337

Operating Expenses:
 
 
 
 
 
 
 
Compensation and benefits
7,458

 
7,217

 
22,524

 
22,857

Repairs and maintenance
362

 
341

 
1,069

 
1,011

Depreciation and amortization
527

 
485

 
1,543

 
1,426

Purchased transportation
1,926

 
2,049

 
5,557

 
5,945

Fuel
617

 
978

 
1,900

 
2,930

Other occupancy
241

 
241

 
765

 
779

Other expenses
1,122

 
1,025

 
3,334

 
3,175

Total Operating Expenses
12,253

 
12,336

 
36,692

 
38,123

Operating Profit
1,984

 
1,954

 
5,617

 
4,214

Other Income and (Expense):
 
 
 
 
 
 
 
Investment income
4

 
2

 
12

 
27

Interest expense
(83
)

(87
)
 
(256
)
 
(266
)
Total Other Income and (Expense)
(79
)
 
(85
)
 
(244
)
 
(239
)
Income Before Income Taxes
1,905

 
1,869

 
5,373

 
3,975

Income Tax Expense
648

 
655

 
1,860

 
1,396

Net Income
$
1,257

 
$
1,214

 
$
3,513

 
$
2,579

Basic Earnings Per Share
$
1.40

 
$
1.33

 
$
3.90

 
$
2.81

Diluted Earnings Per Share
$
1.39

 
$
1.32

 
$
3.87

 
$
2.78


STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
1,257

 
$
1,214

 
$
3,513

 
$
2,579

Change in foreign currency translation adjustment, net of tax
(141
)
 
(251
)
 
(344
)
 
(248
)
Change in unrealized gain (loss) on marketable securities, net of tax

 
(1
)
 
1

 
1

Change in unrealized gain (loss) on cash flow hedges, net of tax
(11
)
 
210

 
6

 
169

Change in unrecognized pension and postretirement benefit costs,
   net of tax
28

 
27

 
80

 
(73
)
Comprehensive income
$
1,133

 
$
1,199

 
$
3,256

 
$
2,428

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,
 
2015
 
2014
Cash Flows From Operating Activities:
 
 
 
Net income
$
3,513

 
$
2,579

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
1,543

 
1,426

Pension and postretirement benefit expense
807

 
1,734

Pension and postretirement benefit contributions
(147
)
 
(163
)
Settlement of postretirement benefit obligation

 
(1,995
)
Self-insurance provision
(148
)
 
(277
)
Deferred tax (benefit) expense
(198
)
 
67

Stock compensation expense
452

 
430

Other (gains) losses
(79
)
 
202

Changes in assets and liabilities, net of effects of business acquisitions:
 
 
 
Accounts receivable
738

 
448

Other current assets
521

 
(60
)
Accounts payable
(745
)
 
(400
)
Accrued wages and withholdings
(5
)
 
(101
)
Other current liabilities
214

 
312

Other operating activities
(51
)
 
(11
)
Net cash from operating activities
6,415

 
4,191

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(1,648
)
 
(1,444
)
Proceeds from disposals of property, plant and equipment
14

 
28

Purchases of marketable securities
(6,074
)
 
(2,551
)
Sales and maturities of marketable securities
4,821

 
1,856

Net (increase) decrease in finance receivables
(11
)
 
23

Cash paid for business acquisitions, net of cash and cash equivalents acquired
(1,925
)
 
(22
)
Other investing activities
(136
)
 
(29
)
Net cash (used in) investing activities
(4,959
)
 
(2,139
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term debt
3,546

 
1,066

Proceeds from borrowings
1,927

 
1,286

Repayments of borrowings
(1,699
)
 
(1,021
)
Purchases of common stock
(2,028
)
 
(2,062
)
Issuances of common stock
194

 
203

Dividends
(1,899
)
 
(1,780
)
Other financing activities
(201
)
 
(105
)
Net cash (used in) financing activities
(160
)
 
(2,413
)
Effect Of Exchange Rate Changes On Cash And Cash Equivalents
(146
)
 
(100
)
Net Increase (Decrease) In Cash And Cash Equivalents
1,150

 
(461
)
Cash And Cash Equivalents:
 
 
 
Beginning of period
2,291

 
4,665

End of period
$
3,441

 
$
4,204

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, 2015, our results of operations for the three and nine months ended September 30, 2015 and 2014, and cash flows for the nine months ended September 30, 2015 and 2014. 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, 2014.
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, 2015. 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 9 and our derivative instruments in note 14. 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 September 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that simplifies the accounting for measurement-period adjustments related to business combinations. This update removes the requirement to retrospectively apply adjustments made to estimated amounts recognized in a business combination. This update permits the purchaser to adjust the estimated amounts in the reporting period in which the adjustment amounts are determined. This new guidance would have become effective for us in the first quarter of 2016; however, we have elected to early adopt this standard in the third quarter of 2015 as we expect it to reduce the complexity in the preparation of our consolidated financial statements. This accounting standards update did not have a material impact on our consolidated financial position or 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 became effective for us in the first quarter of 2015, and did not have a material impact 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.

5

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


Accounting Standards Issued But Not Yet Effective

In May 2015, the FASB issued an accounting standards update that changes the disclosure requirement for reporting investments at fair value. This update removes the requirement to categorize investments for which fair value is measured using the net asset value per share practical expedient within the fair value hierarchy. These disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. This new guidance will be applied retrospectively and becomes effective for us in the first quarter of 2016, but early adoption is permitted. At this time, we do not expect this new guidance to have a material impact on our consolidated balance sheets.

In April 2015, the FASB issued an accounting standards update to simplify the presentation of debt issuance costs. This update amends existing guidance to require the presentation of debt issuance costs in the consolidated balance sheets as a direct deduction from the carrying amount of the associated debt liability instead of a deferred charge. In August 2015, the FASB issued updated guidance pertaining to the presentation of debt issuance costs related to line-of-credit arrangements. This update allows an entity to defer and present debt issuance costs as an asset, subsequently amortizing the deferred debt issuance costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This new guidance will be applied retrospectively and becomes effective for us in the first quarter of 2016, but early adoption is permitted. At this time, we do not expect this new guidance to have a material impact on our consolidated balance sheets.
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. In August 2015, the FASB issued an accounting standards update that defers the effective date of the new revenue recognition guidance for one year to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date beginning after December 15, 2016. At this time, we do not expect this accounting standards update 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, 2015, 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, restricted performance shares and performance units are herein referred to as "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date, and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program, Coyote Restricted Stock Award and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
During the first quarter of 2015, we granted Restricted Units under MIP to certain eligible management employees. Restricted Units granted under MIP generally vest over a five-year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis over the requisite service period. Based on the date that the eligible management population and performance targets were approved for MIP, we determined the award measurement date to be February 5, 2015 (for U.S.-based employees) and March 30, 2015 (for international-based employees); therefore, the Restricted Units awarded were valued for stock compensation expense purposes using the closing New York Stock Exchange price of $101.46 and $97.27 on those dates, respectively.

6

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


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. 
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 65.86% 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 2015 LTIP Award, we determined the award measurement date to be March 26, 2015; therefore the target Restricted Units awarded were valued for stock compensation expense using the closing New York Stock Exchange price of $96.64 on that date.
Coyote Restricted Stock Award
In August 2015, we acquired Coyote Logistics Midco, Inc ("Coyote"), a US-based truckload freight brokerage company. During the third quarter of 2015, we granted Restricted Units to certain eligible Coyote management employees. The vesting of Restricted Units granted under this award will vary between one and four years with an equal number of restricted units vesting at each anniversary date. The entire grant is expensed on a straight-line basis over the requisite service period (except in the case of death, disability, or retirement, in which case immediate vesting occurs). Based on the date that the eligible management population was approved for the award, we determined the award measurement date to be August 18, 2015; therefore target Restricted Units awarded were valued for stock compensation expense using the closing New York Stock Exchange price of $102.76 on that date.
Nonqualified Stock Options
During the first quarter of 2015, 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 2015 and 2014, we granted 0.2 and 0.1 million stock options, respectively, at a weighted average grant price of $101.93 and $96.98, respectively. The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was $18.07 and $20.48 for 2015 and 2014, respectively, using the following assumptions:
 
2015
 
2014
Expected life (in years)
7.5

 
7.5

Risk-free interest rate
2.07
%
 
2.40
%
Expected volatility
20.61
%
 
24.26
%
Expected dividend yield
2.63
%
 
2.56
%
Compensation expense for share-based awards recognized in net income for the three months ended September 30, 2015 and 2014 was $124 million pre-tax in each period. Compensation expense for share-based awards recognized in net income for the nine months ended September 30, 2015 and 2014 was $452 and $430 million pre-tax, respectively.


7

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


NOTE 4. INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2015 and December 31, 2014 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
September 30, 2015:
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
1,049

 
$

 
$

 
$
1,049

Other investment securities

410

 
36

 

 
446

Total trading marketable securities
$
1,459

 
$
36

 
$

 
$
1,495

 
 
 
 
 
 
 
 
Current available-for-sale marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
327

 
$
2

 
$

 
$
329

Mortgage and asset-backed debt securities
77

 

 

 
77

Corporate debt securities
339

 
1

 
(1
)
 
339

Other investment securities
8

 

 

 
8

Total available-for-sale marketable securities
$
751

 
$
3

 
$
(1
)
 
$
753

 
 
 
 
 
 
 
 
Total current marketable securities
$
2,210

 
$
39

 
$
(1
)
 
$
2,248

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2014:
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
388

 
$

 
$

 
$
388

Other investment securities

42

 

 

 
42

Total trading marketable securities
$
430

 
$

 
$

 
$
430

 
 
 
 
 
 
 
 
Current available-for-sale marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
321

 
$
1

 
$
(1
)
 
$
321

Mortgage and asset-backed debt securities
89

 
1

 
(1
)
 
89

Corporate debt securities
146

 

 

 
146

Other investment securities


6

 

 

 
6

Total available-for-sale marketable securities
$
562

 
$
2

 
$
(2
)
 
$
562

 
 
 
 
 
 
 
 
Total current marketable securities
$
992

 
$
2

 
$
(2
)
 
$
992

The net unrealized gains included in net income related to trading securities still held on the consolidated balance sheets for the three months ended September 30, 2015 and 2014 were $27 and $0 million, respectively ($36 and $0 million, respectively, for the nine months ended September 30, 2015 and 2014).
Investment Other-Than-Temporary Impairments
We have concluded that no material other-than-temporary impairment losses existed as of September 30, 2015. 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.

8

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


Maturity Information
The amortized cost and estimated fair value of marketable securities at September 30, 2015, 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
$
1,423

 
$
1,423

Due after one year through three years
420

 
421

Due after three years through five years
14

 
15

Due after five years
71

 
71

 
1,928

 
1,930

Equity and other investment securities
282

 
318

 
$
2,210

 
$
2,248

Restricted Cash and Non-Current Investments
We had restricted cash of $100 million related to proceeds from the Delaware County, Pennsylvania Industrial Development Authority facility bond issued in September 2015. The proceeds will be used to extinguish an existing facility bond due in December 2015. The restricted cash is reported in “other current assets” on the consolidated balance sheets.
We had $442 million of restricted cash related to our self-insurance requirements as of September 30, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, we held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets of $22 and $28 million as of September 30, 2015 and December 31, 2014, respectively. The amounts described above are classified as “non-current investments and restricted cash” on the consolidated balance sheets, while the quarterly change in investment fair value is recognized in "investment income" on 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 non-current investments” in the tables below and as “other non-current assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership and (2) 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 8.13% and 7.81% as of September 30, 2015 and December 31, 2014, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis.

9

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, 2015 and December 31, 2014, 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, 2015:
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
329

 
$

 
$

 
$
329

Mortgage and asset-backed debt securities

 
77

 

 
77

Corporate debt securities

 
1,388

 

 
1,388

Other debt, equity and investment securities

 
454

 

 
454

Total marketable securities
329

 
1,919

 

 
2,248

Other non-current investments
19

 

 
40

 
59

Total
$
348

 
$
1,919

 
$
40

 
$
2,307

December 31, 2014:
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
321

 
$

 
$

 
$
321

Mortgage and asset-backed debt securities

 
89

 

 
89

Corporate debt securities

 
534

 

 
534

Other debt, equity and investment securities

 
48

 

 
48

Total marketable securities
321

 
671

 

 
992

Other non-current investments

19

 

 
64

 
83

Total
$
340

 
$
671

 
$
64

 
$
1,075


The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended September 30, 2015 and 2014 (in millions):    
 
Marketable
Securities
 
Other
Non-Current
Investments
 
Total
Balance on July 1, 2015
$

 
$
48

 
$
48

Transfers into (out of) Level 3

 

 

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

 
(8
)
 
(8
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on September 30, 2015
$

 
$
40

 
$
40

 
 
 
 
 
 


10

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


 
 
 
 
 
 
 
Marketable
Securities
 
Other
Non-Current
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


The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the nine months ended September 30, 2015 and 2014 (in millions):    
 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2015
$

 
64

 
64

Transfers into (out of) Level 3

 

 

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

 
(24
)
 
(24
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on September 30, 2015
$

 
$
40

 
$
40

 
 
 
 
 
 
 
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

There were no transfers of investments between Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.


11

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


NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of September 30, 2015 and December 31, 2014 consist of the following (in millions):
 
2015
 
2014
Vehicles
$
7,916

 
$
7,542

Aircraft
15,813

 
15,801

Land
1,185

 
1,145

Buildings
3,214

 
3,276

Building and leasehold improvements
3,349

 
3,266

Plant equipment
7,764

 
7,649

Technology equipment
1,690

 
1,608

Equipment under operating leases
30

 
34

Construction-in-progress
475

 
299

 
41,436

 
40,620

Less: Accumulated depreciation and amortization
(23,273
)
 
(22,339
)
 
$
18,163

 
$
18,281

 
We monitor all property, plant and equipment for any indicators of potential impairment. No impairment charges on property, plant and equipment were recorded during the three and nine months ended September 30, 2015 and 2014.

12

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, 2015 and 2014 (in millions):
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Three Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
382

 
$
284

 
$
8

 
$
12

 
$
12

 
$
10

Interest cost
423

 
401

 
30

 
33

 
11

 
12

Expected return on assets
(622
)
 
(564
)
 
(5
)
 
(6
)
 
(15
)
 
(15
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
42

 
42

 
2

 
1

 

 
1

Other net (gain) loss

 

 

 

 

 

Actuarial (gain) loss

 

 

 

 

 

Settlement and curtailment loss

 

 

 

 

 

Net periodic benefit cost
$
225

 
$
163

 
$
35

 
$
40

 
$
8

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Nine Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
1,145

 
$
853

 
$
25

 
$
51

 
$
37

 
$
37

Interest cost
1,270

 
1,203

 
91

 
119

 
33

 
38

Expected return on assets
(1,866
)
 
(1,693
)
 
(13
)
 
(18
)
 
(46
)
 
(45
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
126

 
127

 
4

 
(2
)
 
1

 
(2
)
Other net (gain) loss

 

 

 

 

 

Actuarial (gain) loss

 

 

 
746

 

 

Settlement and curtailment loss

 

 

 
320

 

 

Net periodic benefit cost
$
675

 
$
490

 
$
107

 
$
1,216

 
$
25

 
$
28

During the first nine months of 2015, we contributed $66 and $81 million to our company-sponsored pension and postretirement medical benefit plans, respectively. We also expect to contribute $1.054 billion and $23 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.

13

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


As of September 30, 2015 and December 31, 2014 we had $873 and $878 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 47 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, 2015 and December 31, 2014 was $854 and $913 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.
Collective Bargaining Agreements
As of December 31, 2014, we had approximately 270,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). In addition, our airline pilots, airline mechanics, ground mechanics and certain other employees are employed under other collective bargaining agreements. During the second quarter of 2014, the Teamsters ratified a new national master agreement (“NMA”) with UPS that will expire on July 31, 2018. The economic provisions in the NMA included wage rate increases, as well as increased contribution rates for healthcare and pension benefits. Most of these economic provisions were retroactive to August 1, 2013, which was the effective date of the NMA. 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 were certain changes to the delivery of healthcare benefits that were effective at various dates. These changes impact approximately 36,000 full-time and 73,000 part-time active employees covered by the NMA and the UPS Freight collective bargaining agreement (collectively referred to as the “NMA Group”), as well as approximately 16,000 employees covered by other collective bargaining agreements (the “Non-NMA Group”). These provisions are discussed further below in the "Changes to the Delivery of Active and Postretirement Healthcare Benefits" section.
On September 25, 2015, the Central States Pension Fund ("CSPF") submitted a proposed pension rescue plan to the U.S. Department of Treasury under the Multiemployer Pension Reform Act of 2014 ("MPRA").  The CSPF plan proposes to make retirement benefit reductions to CSPF participants, including to the benefits of UPS employee participants retiring on or after January 1, 2008.  In 2007, UPS fully funded its allocable share of the unfunded vested benefits in the CSPF when it was agreed that UPS could withdraw from the CSPF.  Under a collective bargaining agreement with the IBT, UPS agreed to provide supplemental benefits under the UPS/IBT Full-Time Employee Pension Plan to offset the effect of certain benefit reductions by the CSPF applicable to UPS participants retiring on or after January 1, 2008.  UPS is reviewing the CSPF’s proposed plan to evaluate the validity of the actions taken by the CSPF, the plan’s compliance with the MPRA and its potential impact on UPS’s funding obligations under the UPS/IBT Full-Time Employee Pension Plan.
We are not able to estimate a range of additional obligations, if any, or determine whether any such amounts are material, due to uncertainties regarding the validity of actions taken by the CSPF, incomplete information regarding the CSPF’s proposed benefit reductions, uncertainties regarding the process and standards under the MPRA, whether the proposed plan complies with the MPRA, the effect of various discount rates and other actuarial assumptions. We intend to vigorously challenge any proposed plan that does not fully comply with the law.
We have approximately 2,600 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which became amendable at the end of 2011. The ongoing contract negotiations between UPS and the IPA are in mediation by the National Mediation Board.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”) that will expire on July 31, 2019.
Changes to the Delivery of Active and Postretirement Healthcare Benefits
Prior to ratification, the NMA Group and Non-NMA Group employees received their healthcare benefits through UPS-sponsored active and postretirement health and welfare benefit plans. Effective June 1, 2014, we ceased providing healthcare benefits to active NMA Group employees through these UPS-sponsored benefit plans, and the responsibility for providing healthcare benefits for active employees was assumed by three separate multiemployer healthcare funds (the “Funds”). The responsibility for providing healthcare benefits for the active Non-NMA Group employees was also assumed by the Funds on various dates up to January 1, 2015, depending on the ratification date of the applicable collective bargaining agreement. We will make contributions to the Funds based on negotiated fixed hourly or monthly contribution rates for the duration of the NMA and other applicable collective bargaining agreements.

14

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 was assumed by the Funds for employees retiring on or after January 1, 2014 or January 1, 2015, depending on the applicable collective bargaining agreement. In exchange for the assumption of the obligation to provide postretirement healthcare benefits to the NMA Group and Non-NMA Group, we transferred cash totaling $2.271 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 retired 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
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 were included in "compensation and benefits" expense in the statement of consolidated income, are as follows:
Partial Plan Curtailment: We recorded a $112 million pre-tax curtailment loss due to the elimination of future service benefit accruals. This curtailment loss represents the accelerated recognition of unamortized prior service costs.
Remeasurement of Postretirement Obligation: We recorded a $746 million pre-tax loss due to the remeasurement of the postretirement benefit obligations of the affected UPS-sponsored health and welfare benefit plans.
Settlement: We recorded a $208 million pre-tax settlement loss, which represents the recognition of unamortized actuarial losses associated with the postretirement obligation for the NMA Group.
Balance Sheet and Cash Flow Impact:
During the second quarter of 2014, as part of the health and welfare plan changes described previously, we transferred cash totaling $2.271 billion to the Funds, which was accounted for as a settlement of our postretirement benefit obligations. As of September 30, 2014, we had received approximately $563 million of cash tax benefits (through reduced U.S. Federal and state quarterly income tax payments) and we received the remaining cash tax benefits of approximately $291 million resulting from these payments over the remainder of 2014.
For NMA Group employees who retired prior to January 1, 2014 and remained with the UPS-sponsored health and welfare plans, the changes to the contributions, benefits and cost sharing provisions in these plans resulted in an increase in the postretirement benefit obligation, and a corresponding decrease in pre-tax AOCI, of $13 million upon ratification.




15

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, 2015 and December 31, 2014 (in millions):
 
U.S. Domestic
Package
 
International
Package
 
Supply Chain &
Freight
 
Consolidated
December 31, 2014:
$

 
$
449

 
$
1,735

 
$
2,184

Acquired
709

 

 
609

 
1,318

Currency / Other

 
(23
)
 
(37
)
 
(60
)
September 30, 2015:
$
709

 
$
426

 
$
2,307

 
$
3,442

The goodwill acquired in the U.S Domestic Package segment was related to our August 2015 acquisition of Coyote Logistics Midco, Inc ("Coyote"). The goodwill acquired in the Supply Chain & Freight segment was related to our August 2015 acquisition of Coyote, our May 2015 acquisition of Parcel Pro, Inc. ("Parcel Pro"), our June 2015 acquisition of the Insured Parcel Services division of G4S International Logistics ("IPS") and our March 2015 acquisition of Poltraf Sp. z.o.o. ("Poltraf"). The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition. The purchase price allocations for Coyote, Parcel Pro, and IPS have not been finalized. See note 8 for further discussion of these acquisitions.
The majority of 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, 2015 and December 31, 2014 (in millions):
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
September 30, 2015:
 
 
 
 
 
Capitalized software
$
2,672

 
$
(1,979
)
 
$
693

Licenses
214

 
(163
)
 
51

Franchise rights
122

 
(81
)
 
41

Customer relationships
513

 
(22
)
 
491

Trademarks, patents, and other
261

 
(14
)
 
247

Total Intangible Assets, Net
$
3,782


$
(2,259
)
 
$
1,523

December 31, 2014:
 
 
 
 
 
Capitalized software
$
2,641

 
$
(1,997
)
 
$
644

Licenses
217

 
(133
)
 
84

Franchise rights
117

 
(77
)
 
40

Customer relationships
123

 
(66
)
 
57

Trademarks, patents, and other
31

 
(9
)
 
22

Total Intangible Assets, Net
$
3,129

 
$
(2,282
)
 
$
847

As described in note 8, intangible assets increased by $658 million related to the acquisition of Coyote in the third quarter of 2015.


16

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


NOTE 8. BUSINESS COMBINATIONS
In March 2015, we acquired Poltraf, a Polish-based pharmaceutical logistics company recognized for its temperature-sensitive warehousing and transportation solutions. In May 2015, we acquired Parcel Pro and in June 2015, we acquired IPS, both are businesses that provide services and insurance coverage for the transport of high value luxury goods. These acquisitions were funded with cash from operations. These acquisitions were not material to our consolidated financial position or results of operations.
In August 2015, we acquired Coyote, a U.S.-based truckload freight brokerage company for $1.853 billion. This acquisition will allow us to expand our existing portfolio by adding large scale truckload freight brokerage and transportation management services to our existing supply chain and freight businesses. The acquisition was funded using cash from operations and issuances of commercial paper.
The following table summarizes the estimated fair values of the Coyote assets acquired and liabilities assumed at the acquisition date. We have engaged a third-party to prepare valuations for certain intangible assets; therefore, the initial estimates of purchase price, intangible assets, goodwill and deferred income taxes are subject to change. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition.

Coyote Assets Acquired and (Liabilities) Assumed

 
As of Acquisition Date
(in millions)

Cash and cash equivalents
 
$
19

Accounts receivable
 
249

Current deferred income tax assets
 
11

Other current assets
 
2

Property, plant, and equipment
 
17

Goodwill
 
1,246

Intangible assets
 
658

Restricted cash and non-current marketable securities
 
2

Accounts payable and other current liabilities
 
(134
)
Non-current deferred income tax liability
 
(215
)
Other non-current liabilities
 
(2
)
    Total purchase price
 
$
1,853


The goodwill recognized of approximately $1.246 billion is attributable to synergies anticipated from more efficient usage of our existing transportation networks and the assembled workforce of Coyote. We have allocated $709 and $537 million of the recognized goodwill to the U.S. Domestic Package and Supply Chain & Freight segments, respectively. None of the goodwill is expected to be deductible for income tax purposes.
The intangible assets acquired of approximately $658 million primarily consist of $426 million of customer relationships (amortized over 10 years), $27 million of non-compete agreements (amortized over 4 years), and $200 million of trademarks and trade name, which have an indefinite useful life. As noted earlier, the fair value of the acquired intangible assets are estimates and are subject to change depending on the final valuation report. The carrying value of acquired accounts receivable approximates fair value.
We recognized approximately $17 million of acquisition related costs that were expensed in the current period. These costs are included in "other expenses" within the statements of consolidated income.
The financial results of these acquired businesses are included in the Supply Chain & Freight segment from the date of acquisition and were not material to our results of operations.


17

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


NOTE 9. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt as of September 30, 2015 and December 31, 2014 consists of the following (in millions):
 
Principal
Amount
 
 
 
Carrying Value
 
 
Maturity
 
2015
 
2014
Commercial paper
$
4,402

 
2015
 
$
4,401

 
$
772

Fixed-rate senior notes:
 
 
 
 
 
 
 
1.125% senior notes
375

 
2017
 
374

 
370

5.50% senior notes
750

 
2018
 
798

 
802

5.125% senior notes
1,000

 
2019
 
1,082

 
1,076

3.125% senior notes
1,500

 
2021
 
1,641

 
1,617

2.45% senior notes
1,000

 
2022
 
1,006

 
977

6.20% senior notes
1,500

 
2038
 
1,482

 
1,481

4.875% senior notes
500

 
2040
 
489

 
489

3.625% senior notes
375

 
2042
 
368

 
367

8.375% Debentures:
 
 
 
 
 
 
 
8.375% debentures
424

 
2020
 
483

 
480

8.375% debentures
276

 
2030
 
283

 
283

Pound Sterling notes:
 
 
 
 
 
 
 
5.50% notes
101

 
2031
 
97

 
99

5.125% notes
690

 
2050
 
655

 
673

Floating rate senior notes
567

 
2049-2065
 
562

 
459

Capital lease obligations
431

 
2015-3005
 
431

 
505

Facility notes and bonds
420

 
2015-2045
 
420

 
320

Other debt
29

 
2015-2022
 
29

 
17

Total Debt
$
14,340

 
 
 
14,601

 
10,787

Less: Current Maturities
 
 
 
 
(4,557
)
 
(923
)
Long-term Debt
 
 
 
 
$
10,044

 
$
9,864

Debt Issuances
In September 2015, we issued floating rate senior notes with principal balances of $104 million that bear interest at three-month LIBOR less 30 basis points. These notes mature in 2065.
In September 2015, we entered into an agreement with the Delaware County, Pennsylvania Industrial Development Authority, associated with our Philadelphia, Pennsylvania airport facilities, for bonds issued with a principal balance of $100 million. These bonds, which are due September 2045, bear interest at a variable rate.
Sources of Credit
We are authorized to borrow up to $10.0 billion under the U.S. commercial paper program we maintain. We had $4.060 billion outstanding under this program as of September 30, 2015, with an average interest rate of 0.14%. We also maintain a European commercial paper program under which we are authorized to borrow up to €5.0 billion in a variety of currencies. We had £225 million ($342 million) outstanding under this program as of September 30, 2015 with an average interest rate of 0.50%. As of September 30, 2015, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheet.

18

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 26, 2016. 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, 2015.
The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 27, 2020. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of September 30, 2015.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of September 30, 2015 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, 2015, 10% of net tangible assets was equivalent to $2.217 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 $15.697 and $12.257 billion as of September 30, 2015 and December 31, 2014, 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 10. 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.

19

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 court has scheduled a trial for February 2016, limited to the claim of the class representative. After that trial is complete, the court will consider how to proceed with respect to the claims of the other class members.
There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from the remaining aspects of this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; and (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. UPS and FedEx have moved for summary judgment. The Court granted these motions on April 30, 2015, entered judgment in favor of UPS and FedEx, and dismissed the case. On May 21, 2015, plaintiff filed a notice of appeal to the Court of Appeals for the Ninth Circuit. The Antitrust Division of the U.S. Department of Justice (“DOJ”) has an open civil investigation of our policies and practices for dealing with third-party negotiators. We have cooperated with this investigation. We deny any liability with respect to these matters and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) the DOJ investigation is pending; (2) the Court granted our motion for summary judgment; and (3) plaintiff has filed a notice of appeal. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In Canada, four purported class-action cases were filed against us in British Columbia (2006); Ontario (2007) and Québec (2006 and 2013). The cases each allege inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. The British Columbia class action was declared inappropriate for certification and dismissed by the trial judge. That decision was upheld by the British Columbia Court of Appeal in March 2010, which ended the case in our favor. The Ontario class action was certified in September 2011. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court. The complaint under the Criminal Code was dismissed. No appeal is being taken from that decision. The allegations of inadequate disclosure were granted and we are appealing that decision. The motion to authorize the 2006 Québec litigation as a class action was dismissed by the motions judge in October 2012; there was no appeal, which ended that case in our favor. The 2013 Québec litigation also has been dismissed. We deny all liability and are vigorously defending the one outstanding case in Ontario. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
Other Matters
In January 2008, a class action complaint was filed in the United States District Court for the Eastern District of New York alleging price-fixing activities relating to the provision of freight forwarding services. UPS was not named in this case. In July 2009, the plaintiffs filed a First Amended Complaint naming numerous global freight forwarders as defendants. UPS and UPS Supply Chain Solutions are among the 60 defendants named in the amended complaint. After two rounds of motions to dismiss, in October 2014, UPS entered into a settlement agreement with the plaintiffs to settle the remaining claims asserted against UPS for an immaterial amount. The court granted preliminary approval of the settlement on December 16, 2014. The settlement is subject to final court approval, which is currently scheduled to be considered by the Court in November 2015.

20

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


In August 2010, competition authorities in Brazil opened an administrative proceeding to investigate alleged anticompetitive behavior in the freight forwarding industry. Approximately 45 freight forwarding companies and individuals are named in the proceeding, including UPS, UPS SCS Transportes (Brasil) S.A., and a former employee in Brazil. UPS submitted its written defenses to these allegations in April 2014.
We are cooperating with the Brazil investigation, and intend to continue to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter including: (1) we are vigorously defending the matter and believe that we have a number of meritorious legal defenses; (2) there are unresolved questions of law that could be of importance to the ultimate resolutions of this matter, including the calculation of any potential fine; and (3) there is uncertainty about the time period that is the subject of the investigation. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In January 2014, we received a Civil Investigative Demand from the DOJ seeking documents related to possible damages under the False Claims Act ("FCA") in connection with delivery services provided to government customers where guaranteed commitment times allegedly were not met. The General Services Administration - Office of Inspector General had previously sought similar documents. We also have been contacted by multiple states requesting this information. The Company cooperated with these inquiries and has reached agreements with the DOJ and a group of state and local governments to resolve all of their respective claims. The terms of the settlements did not have a material adverse effect on our financial condition, results of operations or liquidity.
In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern District of New York, arising from alleged shipments of cigarettes to New York State and City residents. The complaint asserts claims under various federal and state laws.  The complaint also includes a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. In September 2015, the Court granted in part UPS’s motion to dismiss, dismissing some of plaintiffs’ claims but permitting others to proceed. Discovery is ongoing. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious factual and legal defenses; and (2) it remains uncertain what evidence of their claims and damages, if any, plaintiffs will be able to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
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.




21

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


NOTE 11. 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, 2015, 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, 2015, 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, 2015 and 2014 (in millions, except per share amounts):
 
2015
 
2014
 
Shares
 
Dollars
 
Shares
 
Dollars
Class A Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
201

 
$
2

 
212

 
$
2

Common stock purchases
(3
)
 

 
(4
)
 

Stock award plans
4

 

 
4

 

Common stock issuances
2

 

 
2

 

Conversions of class A to class B common stock
(8
)
 

 
(11
)
 

Class A shares issued at end of period
196

 
$
2

 
203

 
$
2

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
705

 
$
7

 
712

 
$
7

Common stock purchases
(17
)
 

 
(17
)
 

Conversions of class A to class B common stock
8

 

 
11

 

Class B shares issued at end of period
696

 
$
7

 
706

 
$
7

Additional Paid-In Capital
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$

 
 
 
$

Stock award plans
 
 
391

 
 
 
359

Common stock purchases
 
 
(567
)
 
 
 
(630
)
Common stock issuances
 
 
245

 
 
 
218

Option premiums received (paid)
 
 
(69
)
 
 
 
53

Balance at end of period
 
 
$

 
 
 
$

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
5,726

 
 
 
$
6,925

Net income attributable to common shareowners
 
 
3,513

 
 
 
2,579

Dividends ($2.19 and $2.01 per share)
 
 
(2,000
)
 
 
 
(1,863
)
Common stock purchases
 
 
(1,468
)
 
 
 
(1,412
)
Balance at end of period
 
 
$
5,771

 
 
 
$
6,229

In total, we repurchased 20.2 million shares of class A and class B common stock for $2.035 billion during the nine months ended September 30, 2015, and 20.6 million shares for $2.042 billion during the nine months ended September 30, 2014. In February 2013, the Board of Directors approved a new share repurchase authorization of $10.0 billion, which has no expiration date. As of September 30, 2015, we had $2.117 billion of this share repurchase authorization available.

22

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 2015, we entered into an accelerated share repurchase program which allowed us to repurchase 3.9 million shares for $400 million. The program was completed in September 2015.
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 $(69) and $53 million during the first nine months of 2015 and 2014, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of September 30, 2015, we had outstanding options for the purchase of 2.6 million shares, with a weighted average strike price of $88.49 per share, that will settle in the fourth quarter of 2015 and first quarter of 2016.
Accumulated Other Comprehensive Income (Loss)
We experience activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in AOCI for the nine months ended September 30, 2015 and 2014 is as follows (in millions):
 
2015
 
2014
Foreign currency translation gain (loss):
 
 
 
Balance at beginning of period
$
(457
)
 
$
(126
)
Translation adjustment (net of tax effect of $0 and $11)
(344
)
 
(248
)
Balance at end of period
(801
)
 
(374
)
Unrealized gain (loss) on marketable securities, net of tax:
 
 
 
Balance at beginning of period

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

 
1

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
61

 
(219
)
Current period changes in fair value (net of tax effect of $71 and $77)
119

 
129

Reclassification to earnings (net of tax effect of $(67) and $24)
(113
)
 
40

Balance at end of period
67

 
(50
)
Unrecognized pension and postretirement benefit costs, net of tax:
 
 
 
Balance at beginning of period
(3,198
)
 
(114
)
Reclassification to earnings (net of tax effect of $51 and $447)
80

 
742

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

 
(815
)
Balance at end of period
(3,118
)
 
(187
)
Accumulated other comprehensive income (loss) at end of period
$
(3,851
)
 
$
(611
)




23

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, 2015 and 2014 is as follows (in millions):
Three Months Ended September 30:
 
 
 
 
 
 
Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
 
2015
 
2014
 
Unrealized gain (loss) on marketable securities:
 
 
 
 
 
Realized gain (loss) on sale of securities
$

 
$

 
Investment income
Income tax (expense) benefit

 

 
Income tax expense
Impact on net income

 

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

 
(43
)
 
Interest expense
Foreign exchange contracts
67

 
(11
)
 
Revenue
Income tax (expense) benefit
(22
)
 
23

 
Income tax expense
Impact on net income
39

 
(37
)
 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(44
)
 
(44
)
 
Compensation and benefits
Settlement and curtailment loss

 

 
Compensation and benefits
Remeasurement of benefit obligation

 

 
Compensation and benefits
Income tax (expense) benefit
16

 
17

 
Income tax expense
Impact on net income
(28
)
 
(27
)
 
Net income
 
 
 
 
 
 
Total amount reclassified for the period
$
11

 
$
(64
)
 
Net income
 
 
 
 
 
 

24

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
 
2015
 
2014
 
Unrealized gain (loss) on marketable securities:
 
 
 
 
 
Realized gain (loss) on sale of securities
$

 
$

 
Investment income
Income tax (expense) benefit

 

 
Income tax expense
Impact on net income

 

 
Net income
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
(18
)
 
(17
)
 
Interest expense
Foreign exchange contracts
(25
)
 
(15
)
 
Interest expense
Foreign exchange contracts
223

 
(32
)
 
Revenue
Income tax (expense) benefit
(67
)
 
24

 
Income tax expense
Impact on net income
113

 
(40
)
 
Net income
Unrecognized pension and postretirement benefit costs: