10-Q 1 ups-3312016x10q.htm 10-Q SEC Document

United States
Securities and Exchange Commission
Washington, D.C. 20549
_____________________________________ 
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016, 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 192,217,866 Class A shares, and 690,451,249 Class B shares, with a par value of $0.01 per share, outstanding at April 25, 2016.



UNITED PARCEL SERVICE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2015 and in our other filings with the Securities and Exchange Commission contain forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties include, but are not limited to: general economic conditions, both in the U.S. and internationally; significant competition on a local, regional, national, and international basis; changes in our relationships with our significant customers; the existing complex and stringent regulation in the U.S. and internationally, 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, 2015, 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
March 31, 2016 (unaudited) and December 31, 2015
(In millions)
 
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
3,887

 
$
2,730

Marketable securities
2,380

 
1,996

Accounts receivable, net
6,241

 
7,134

Other current assets
1,404

 
1,348

Total Current Assets
13,912

 
13,208

Property, Plant and Equipment, Net
18,285

 
18,352

Goodwill
3,440

 
3,419

Intangible Assets, Net
1,569

 
1,549

Non-Current Investments and Restricted Cash
484

 
473

Deferred Income Tax Assets
328

 
255

Other Non-Current Assets
1,150

 
1,055

Total Assets
$
39,168

 
$
38,311

LIABILITIES AND SHAREOWNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt and commercial paper
$
3,869

 
$
3,018

Accounts payable
2,040

 
2,587

Accrued wages and withholdings
2,131

 
2,253

Hedge margin liabilities
641

 
717

Income taxes payable
538

 
147

Self-insurance reserves
663

 
657

Other current liabilities
1,216

 
1,317

Total Current Liabilities
11,098

 
10,696

Long-Term Debt
11,569

 
11,316

Pension and Postretirement Benefit Obligations
10,839

 
10,638

Deferred Income Tax Liabilities
104

 
115

Self-Insurance Reserves
1,778

 
1,831

Other Non-Current Liabilities
1,300

 
1,224

Shareowners’ Equity:
 
 
 
Class A common stock (194 and 194 shares issued in 2016 and 2015)
2

 
2

Class B common stock (691 and 693 shares issued in 2016 and 2015)
7

 
7

Additional paid-in capital

 

Retained earnings
6,095

 
6,001

Accumulated other comprehensive loss
(3,647
)
 
(3,540
)
Deferred compensation obligations
43

 
51

Less: Treasury stock (1 share in 2016 and 2015)
(43
)
 
(51
)
Total Equity for Controlling Interests
2,457

 
2,470

Noncontrolling Interests
23

 
21

Total Shareowners’ Equity
2,480

 
2,491

Total Liabilities and Shareowners’ Equity
$
39,168

 
$
38,311

See notes to unaudited consolidated financial statements.

2


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share amounts)
(unaudited)
 
 
Three Months Ended
March 31,
2016
 
2015
Revenue
$
14,418

 
$
13,977

Operating Expenses:
 
 
 
Compensation and benefits
7,853

 
7,564

Repairs and maintenance
381

 
350

Depreciation and amortization
552

 
506

Purchased transportation
2,024

 
1,854

Fuel
434

 
644

Other occupancy
269

 
294

Other expenses
1,082

 
1,092

Total Operating Expenses
12,595

 
12,304

Operating Profit
1,823

 
1,673

Other Income and (Expense):
 
 
 
Investment income and other
17

 
4

Interest expense
(93
)

(87
)
Total Other Income and (Expense)
(76
)
 
(83
)
Income Before Income Taxes
1,747

 
1,590

Income Tax Expense
616

 
564

Net Income
$
1,131

 
$
1,026

Basic Earnings Per Share
$
1.27

 
$
1.13

Diluted Earnings Per Share
$
1.27

 
$
1.12


STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
 
 
Three Months Ended
March 31,
 
2016
 
2015
Net Income
$
1,131

 
$
1,026

Change in foreign currency translation adjustment, net of tax
26

 
(304
)
Change in unrealized gain (loss) on marketable securities, net of tax
3

 
2

Change in unrealized gain (loss) on cash flow hedges, net of tax
(162
)
 
176

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

 
32

Comprehensive Income
$
1,024

 
$
932

See notes to unaudited consolidated financial statements.

3


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
(unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
Net income
$
1,131

 
$
1,026

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
552

 
506

Pension and postretirement benefit expense
267

 
270

Pension and postretirement benefit contributions
(43
)
 
(47
)
Self-insurance provision
(48
)
 
(30
)
Deferred tax (benefit) expense
5

 
(49
)
Stock compensation expense
215

 
194

Other (gains) losses
(91
)
 
(5
)
Changes in assets and liabilities, net of effects of business acquisitions:
 
 
 
Accounts receivable
1,082

 
763

Other current assets
135

 
219

Accounts payable
(571
)
 
(571
)
Accrued wages and withholdings
(108
)
 
(184
)
Other current liabilities
136

 
665

Other operating activities
8

 
(6
)
Net cash from operating activities
2,670

 
2,751

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(427
)
 
(365
)
Proceeds from disposals of property, plant and equipment
3

 
2

Purchases of marketable securities
(1,599
)
 
(1,909
)
Sales and maturities of marketable securities
974

 
943

Net (increase) decrease in finance receivables
(20
)
 
(9
)
Cash paid for business acquisitions, net of cash and cash equivalents acquired
(6
)
 
(10
)
Other investing activities
(33
)
 
(9
)
Net cash (used in) investing activities
(1,108
)
 
(1,357
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term debt
(759
)
 
1,463

Proceeds from borrowings
1,801

 
1,566

Repayments of borrowings
(223
)
 
(685
)
Purchases of common stock
(640
)
 
(676
)
Issuances of common stock
83

 
72

Dividends
(666
)
 
(636
)
Other financing activities
(36
)
 
(205
)
Net cash (used in) provided by financing activities
(440
)
 
899

Effect Of Exchange Rate Changes On Cash And Cash Equivalents
35

 
(102
)
Net Increase (Decrease) In Cash And Cash Equivalents
1,157

 
2,191

Cash And Cash Equivalents:
 
 
 
Beginning of period
2,730

 
2,291

End of period
$
3,887

 
$
4,482

See notes to unaudited consolidated financial statements.

4


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Principles of Consolidation
In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of March 31, 2016, our results of operations for the three months ended March 31, 2016 and 2015, and cash flows for the three months ended March 31, 2016 and 2015. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any other period or the entire year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.
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 material impact on our financial position or results of operations.
Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of March 31, 2016. The fair values of our investment securities are disclosed in note 4, recognized multiemployer pension withdrawal liabilities 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 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 guidance became effective for us in the first quarter of 2016, and 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 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 March 2016, the FASB issued an accounting standards update that simplifies the income tax accounting and cash flow presentation related to share-based compensation by requiring the recognition of all excess tax benefits and deficiencies directly on the income statement and classification as cash flows from operating activities on the statement of cash flows. This update also makes several changes to the accounting for forfeitures and employee tax withholding on share-based compensation. This new guidance becomes effective for us in the first quarter of 2017, but early adoption is permitted. At this time, we do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or consolidated cash flows.

In February 2016, the FASB issued an accounting standards update that requires all leases with terms beyond twelve months to be recognized on the balance sheet. Although the distinction between operating and finance leases will continue to exist under the new standard, the recognition and measurement of expenses and cash flows will not change significantly from current treatment. This new guidance requires modified retrospective application and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption, but we expect material changes on our consolidated financial position.

In January 2016, the FASB issued an accounting standards update which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The amendment will be effective for us beginning the first quarter of 2018. At this time, we do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or consolidated cash flows.
In May 2014, the FASB issued an accounting standards update that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services. 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 for periods beginning after December 15, 2016. In March 2016, the FASB issued an accounting standards update that further clarifies the May 2014 accounting standards update with respect to principle versus agent considerations in revenue from contracts with customers and has the same effective date as the original standard. We are currently evaluating these updates to determine the full impact of adoption.
Other accounting pronouncements issued, but not effective until after March 31, 2016, are not expected to have a material impact on our consolidated financial position or results of operations.

6

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


NOTE 3. STOCK-BASED COMPENSATION
We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units, to eligible employees (restricted stock and stock units, restricted performance shares and performance units are herein referred to as "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date, and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
During the first quarter of 2016, 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 4, 2016 (for U.S.-based employees), March 2, 2016 (for management committee employees) and March 21, 2016 (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 $96.25, $98.77 and $105.15 on those dates, respectively.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under LTIP to certain eligible management employees. The performance targets are equally-weighted among adjusted consolidated operating return on invested capital, growth in adjusted 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 established on the grant date. 
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.  Based on the date that the eligible management population and performance targets were approved for the 2016 LTIP Award, we determined the award measurement date to be March 24, 2016; therefore, the target Restricted Units awarded for this portion of the award were valued for stock compensation expense using the closing New York Stock Exchange price of $105.43 on that date.
The remaining one-third of the award related to total shareowner return relative to a peer group is valued using a Monte Carlo model. The model utilized the following assumptions: expected volatility of 16.45% based on historical stock volatility, a risk-free rate of return of 1.01% and no expected dividend yield because the units earn dividend equivalents.  This portion of the award was valued with a grant date fair value of $135.57 per unit. 

7

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


Nonqualified Stock Options
During the first quarter of 2016, 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 2016 and 2015, we granted 0.2 million stock options, respectively, at a grant price of $98.77 and $101.93, respectively. The grant price was based on the closing New York Stock Exchange price of March 2, 2016 and March 2, 2015, respectively. The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was $17.32 and $18.07 for 2016 and 2015, respectively, using the following assumptions:
 
2016
 
2015
Expected life (in years)
7.5

 
7.5

Risk-free interest rate
1.66
%
 
2.07
%
Expected volatility
23.60
%
 
20.61
%
Expected dividend yield
2.94
%
 
2.63
%
Compensation expense for share-based awards recognized in net income for the three months ended March 31, 2016 and 2015 was $215 and $194 million pre-tax, respectively.


8

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 March 31, 2016 and December 31, 2015 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2016:
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
910

 
$

 
$

 
$
910

Non-U.S. government debt securities (1)
197

 

 

 
197

Carbon credit investments (1)
440

 

 
(156
)
 
284

Total trading marketable securities
$
1,547

 
$

 
$
(156
)
 
$
1,391

 
 
 
 
 
 
 
 
Current available-for-sale securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
335

 
$
2

 
$

 
$
337

Mortgage and asset-backed debt securities
72

 

 

 
72

Corporate debt securities
572

 
2

 
(1
)
 
573

U.S. state and local municipal debt securities
2

 

 

 
2

Equity Securities
2

 

 

 
2

Non-U.S. government debt securities
3

 

 

 
3

Total available-for-sale marketable securities
$
986

 
$
4

 
$
(1
)
 
$
989

 
 
 
 
 
 
 
 
Total current marketable securities
$
2,533

 
$
4

 
$
(157
)
 
$
2,380

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2015:
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
715

 
$

 
$

 
$
715

Non-U.S. government debt securities (1)
363

 

 

 
363

Carbon credit investments (1)
347

 
9

 
(5
)
 
351

Total trading marketable securities
$
1,425

 
$
9

 
$
(5
)
 
$
1,429

 
 
 
 
 
 
 
 
Current available-for-sale securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
341

 
$

 
$
(1
)
 
$
340

Mortgage and asset-backed debt securities
74

 
1

 
(1
)
 
74

Corporate debt securities
147

 

 
(1
)
 
146

U.S. state and local municipal debt securities
2

 

 

 
2

Equity securities
2

 

 

 
2

Non-U.S. government debt securities
3

 

 

 
3

Total available-for-sale marketable securities
$
569

 
$
1

 
$
(3
)
 
$
567

 
 
 
 
 
 
 
 
Total current marketable securities
$
1,994

 
$
10

 
$
(8
)
 
$
1,996

(1) These investments are hedged with forward contracts that are not designated in hedging relationships. See Note 14 for offsetting statement of consolidated income impact.


9

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


The unrealized gains and (losses) recognized on trading securities in investment income and other on the statements of consolidated income for the three months ended March 31, 2016 and 2015 were $(156) and $1 million, respectively.
Investment Other-Than-Temporary Impairments
We have concluded that no material other-than-temporary impairment losses existed as of March 31, 2016. In making this determination, we considered the financial condition and prospects of the issuers, the magnitude of the losses compared with the investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that we will be unable to collect all amounts due according to the contractual terms of the securities, the credit rating of the securities and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
Maturity Information
The amortized cost and estimated fair value of marketable securities at March 31, 2016, 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
$
2,015

 
$
1,858

Due after one year through three years
429

 
430

Due after three years through five years
15

 
16

Due after five years
72

 
74

 
2,531

 
2,378

Equity securities
2

 
2

 
$
2,533

 
$
2,380

Restricted Cash and Non-Current Investments
We had $442 million of restricted cash related to our self-insurance requirements as of March 31, 2016 and December 31, 2015 which is reported in non-current investments and restricted cash on the consolidated balance sheets. This restricted cash is primarily invested in money market funds.
At March 31, 2016 and December 31, 2015, 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 $23 and $12 million as of March 31, 2016 and December 31, 2015, 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 and other on the statements of consolidated income.
Fair Value Measurements
Marketable securities utilizing Level 1 inputs include active exchange-traded carbon credit investments, equity securities, equity index funds and certain U.S. Government debt securities, as these securities 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 7.77% and 8.22% as of March 31, 2016 and December 31, 2015, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis.

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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 March 31, 2016 and December 31, 2015, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance 
March 31, 2016:
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
337

 
$

 
$

 
$
337

Mortgage and asset-backed debt securities

 
72

 

 
72

Corporate debt securities

 
1,483

 

 
1,483

U.S. state and local municipal debt securities

 
2

 

 
2

Equity securities

 
2

 

 
2

Non-U.S. government debt securities

 
200

 

 
200

Carbon credit investments
284

 

 

 
284

Total marketable securities
621

 
1,759

 

 
2,380

Other non-current investments
19

 

 
27

 
46

Total
$
640

 
$
1,759

 
$
27

 
$
2,426

December 31, 2015:
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
340

 
$

 
$

 
$
340

Mortgage and asset-backed debt securities

 
74

 

 
74

Corporate debt securities

 
861

 

 
861

U.S. state and local municipal debt securities

 
2

 

 
2

Equity securities

 
2

 

 
2

Non-U.S. government debt securities

 
366

 

 
366

Carbon credit investments
351

 

 

 
351

Total marketable securities
691

 
1,305

 

 
1,996

Other non-current investments

19

 

 
32

 
51

Total
$
710

 
$
1,305

 
$
32

 
$
2,047



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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 three months ended March 31, 2016 and 2015 (in millions):    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2016
$

 
32

 
32

Transfers into (out of) Level 3

 

 

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

 
(5
)
 
(5
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on March 31, 2016
$

 
$
27

 
$
27

 
 
 
 
 
 
 
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)

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

 

 

Purchases

 

 

Sales

 

 

Balance on March 31, 2015
$

 
$
56


$
56

There were no transfers of investments between Level 1 and Level 2 during the three months ended March 31, 2016 and 2015.


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


NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of March 31, 2016 and December 31, 2015 consist of the following (in millions):
 
2016
 
2015
Vehicles
$
8,214

 
$
8,111

Aircraft
15,817

 
15,815

Land
1,285

 
1,263

Buildings
3,332

 
3,280

Building and leasehold improvements
3,520

 
3,450

Plant equipment
8,149

 
8,026

Technology equipment
1,688

 
1,670

Equipment under operating leases
29

 
30

Construction-in-progress
272

 
273

 
42,306

 
41,918

Less: Accumulated depreciation and amortization
(24,021
)
 
(23,566
)
 
$
18,285

 
$
18,352

 
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 months ended March 31, 2016 and 2015.

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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 months ended March 31, 2016 and 2015 (in millions):
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost
$
352

 
$
382

 
$
7

 
$
9

 
$
12

 
$
12

Interest cost
457

 
423

 
30

 
31

 
10

 
11

Expected return on assets
(629
)
 
(622
)
 
(1
)
 
(4
)
 
(14
)
 
(15
)
Amortization of prior service cost
42

 
42

 
1

 
1

 

 

Net periodic benefit cost
$
222

 
$
225

 
$
37

 
$
37

 
$
8

 
$
8

During the first three months of 2016, we contributed $20 and $23 million to our company-sponsored pension and postretirement medical benefit plans, respectively. We also expect to contribute $1.216 billion and $78 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.
As of March 31, 2016 and December 31, 2015 we had $870 and $872 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 46 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 March 31, 2016 and December 31, 2015 was $902 and $841 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever allowed multi-employer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government oversight. On September 25, 2015, the Central States Pension Fund ("CSPF") submitted a proposed pension benefit reduction plan to the U.S. Department of Treasury under the MPRA. The CSPF plan proposed 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 CSPF when it was agreed that UPS could withdraw from CSPF in consideration of a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters ("Teamsters"), UPS agreed to provide supplemental benefits under the UPS/IBT Full-Time Employee Pension Plan to offset the effect of certain benefit reductions by CSPF applicable to UPS participants retiring on or after January 1, 2008, which resulted in recognition of a $1.7 billion pension liability in 2007. Additionally, UPS agreed to provide coordinating benefits under the UPS/IBT Full-Time Employee Pension Plan to offset certain benefit reductions in the event that benefits were lawfully reduced in the future by CSPF.
We vigorously challenged the proposed benefit reduction plan because we believed that it did not comply with the law and that certain actions by CSPF were invalid. In April 2016, we estimated that we would be required to record a 2016 charge of approximately $3.2 billion to $3.8 billion, if the CSPF pension benefit reduction plan were approved and implemented as proposed. On May 6, 2016, the U.S. Department of Treasury rejected the proposed plan submitted by CSPF, stating that it had determined that the CSPF plan failed to satisfy the following three requirements set forth in the MPRA:
that the proposed benefit suspensions, in the aggregate, be reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency, because the investment return and entry age assumptions used for this purpose in the CSPF proposed plan were not reasonable;
that the proposed benefit suspensions be equitably distributed across the participant and beneficiary population; and
that the notices of proposed benefit suspensions be written so as to be understood by the average plan participant.

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


Because the CSPF has asserted that it will become insolvent within ten years, it is possible that CSPF will propose a revised plan under the MPRA. Due to uncertainties, we are not able to estimate a range of additional obligations, if any, that could arise as a result of the CSPF situation, which amounts could be material. These uncertainties include the actions that may be taken by CSPF, the government or others, including whether CSPF will submit a revised benefit reduction plan, the terms and assumptions of any such proposed plan, how the regulations and standards under the MPRA are applied to any subsequently proposed plan, and the effect of discount rates and various other actuarial assumptions. Accordingly, we have not recognized any additional liability for coordinating benefits within the UPS/IBT Full-Time Employee Pension Plan.
Collective Bargaining Agreements
As of December 31, 2015, we had approximately 266,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. In addition, our airline pilots, airline mechanics, ground mechanics and certain other employees are employed under other collective bargaining agreements. In 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. During the first quarter of 2015, we remitted $53 million for these retroactive economic benefits.
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. We are currently in negotiations with Teamsters Local 2727 for a new agreement. 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.

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 March 31, 2016 and December 31, 2015 (in millions):
 
U.S. Domestic
Package
 
International
Package
 
Supply Chain &
Freight
 
Consolidated
December 31, 2015:
$
715

 
$
425

 
$
2,279

 
$
3,419

Acquired

 

 

 

Currency / Other

 
5

 
16

 
21

March 31, 2016:
$
715

 
$
430

 
$
2,295

 
$
3,440

The change in goodwill for both the International Package and Supply Chain & Freight segments was primarily due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
The following is a summary of intangible assets as of March 31, 2016 and December 31, 2015 (in millions):
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
March 31, 2016:
 
 
 
 
 
Capitalized software
$
2,798

 
$
(2,071
)
 
$
727

Licenses
214

 
(127
)
 
87

Franchise rights
132

 
(85
)
 
47

Customer relationships
512

 
(47
)
 
465

Trade name
200

 

 
200

Trademarks, patents, and other
62

 
(19
)
 
43

Total Intangible Assets, Net
$
3,918


$
(2,349
)
 
$
1,569

December 31, 2015:
 
 
 
 
 
Capitalized software
$
2,739

 
$
(2,026
)
 
$
713

Licenses
189

 
(116
)
 
73

Franchise rights
125

 
(83
)
 
42

Customer list
511

 
(35
)
 
476

Trade name
200

 

 
200

Trademarks, patents, and other
61

 
(16
)
 
45

Total Intangible Assets, Net
$
3,825

 
$
(2,276
)
 
$
1,549


As of March 31, 2016, we had a trade name with a carrying value of $200 million and licenses with a carrying value of $5 million, which are deemed to be indefinite-lived intangible assets and are included in the table above.

16

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



NOTE 8. BUSINESS COMBINATIONS
In 2016 and 2015, we acquired several businesses that were not material, individually or in the aggregate, to our consolidated financial position or results of operations. These acquisitions were funded with cash from operations. In March 2015, we acquired Poltraf Sp z.o.o. ("Poltraf"), a Polish-based pharmaceutical logistics company recognized for its temperature-sensitive warehousing and transportation solutions. In May 2015 and June 2015, we acquired Parcel Pro, Inc. ("Parcel Pro") and the Insured Parcel Services division of G4S International Logistics ("IPS"), respectively. These businesses provide services and insurance coverage for the transport of high value luxury goods.
In August 2015, we acquired Coyote Logistics Midco, Inc. ("Coyote"), a U.S.-based truckload freight brokerage company, for $1.829 billion. This acquisition allows us to expand our existing portfolio by adding large scale truckload freight brokerage and transportation management services to our Supply Chain & Freight reporting segment. In addition, we expect to benefit from synergies in purchased transportation, backhaul utilization, cross-selling to customers, as well as technology systems and industry best practices. The acquisition was funded using cash from operations and issuances of commercial paper.
The estimates of deferred income taxes and goodwill are subject to change based on final determination of fair values of acquired assets and assumed liabilities. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition. No material changes in the purchase price allocation have been made since December 31, 2015.
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 March 31, 2016 and December 31, 2015 consists of the following (in millions):
 
Principal
Amount
 
 
 
Carrying Value
 
 
Maturity
 
2016
 
2015
Commercial paper
$
3,810

 
2016
 
$
3,809

 
$
2,965

Fixed-rate senior notes:
 
 
 
 
 
 
 
1.125% senior notes
375

 
2017
 
374

 
372

5.50% senior notes
750

 
2018
 
787

 
787

5.125% senior notes
1,000

 
2019
 
1,075

 
1,064

3.125% senior notes
1,500

 
2021
 
1,648

 
1,613

2.45% senior notes
1,000

 
2022
 
1,028

 
991

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
 
480

 
474

8.375% debentures
276

 
2030
 
282

 
282

Pound Sterling notes:
 
 
 
 
 
 
 
5.50% notes
96

 
2031
 
89

 
92

5.125% notes
654

 
2050
 
623

 
638

Euro Senior notes:
 
 
 
 
 
 
 
1.625% notes
797

 
2025
 
790

 
759

Floating rate senior notes
569

 
2020
 
567

 
544

Floating rate senior notes
725

 
2049-2066
 
717

 
600

Capital lease obligations
479

 
2016-3005
 
479

 
475

Facility notes and bonds
320

 
2016-2045
 
320

 
319

Other debt
33

 
2016-2022
 
33

 
22

Total Debt
$
15,183

 
 
 
15,438

 
14,334

Less: Current Maturities
 
 
 
 
(3,869
)
 
(3,018
)
Long-term Debt
 
 
 
 
$
11,569

 
$
11,316

Debt Issuances
In March 2016, we issued floating rate senior notes with a principal balance of $118 million. As the proceeds for these notes were not received until April 2016, we recognized a receivable in other current assets in our consolidated balance sheet as of March 31, 2016. These notes bear interest at three-month LIBOR less 30 basis points and mature in 2066. These notes are callable at various times after 30 years at a stated percentage of par value, and putable by the note holders at various times after one year at a stated percentage of par value.
Sources of Credit
We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under an European commercial paper program. We had the following amounts outstanding under these programs as of March 31, 2016: $2.926 billion with an average interest rate of 0.41%, €630 million ($718 million) with an average interest rate of -0.18% and £115 million ($165 million) with an average interest rate of 0.54%. As of March 31, 2016, 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 24, 2017. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of March 31, 2016.
The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 25, 2021. 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 March 31, 2016.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of March 31, 2016 and for all prior periods, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of March 31, 2016, 10% of net tangible assets was equivalent to $2.306 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 $17.243 and $15.524 billion as of March 31, 2016 and December 31, 2015, 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.

19

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


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.
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. Trial is scheduled for January 2017.
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.

20

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


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 entered an order granting final approval of the settlement in January 2016.
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 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. Discovery is ongoing and trial is scheduled for September, 2016. 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.
On May 2, 2016, a purported shareowner derivative suit was filed in the Delaware Court of Chancery naming certain of UPS’s current officers and directors as defendants, alleging that they breached their fiduciary duties by failing to monitor UPS’s compliance with the Assurance of Discontinuance and other federal and state laws relating to cigarette deliveries.
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 March 31, 2016, there were 4.6 billion class A shares and 5.6 billion class B shares authorized to be issued. Additionally, there are 200 million preferred shares, with a $0.01 par value, authorized to be issued. As of March 31, 2016, no preferred shares had been issued.
 
The following is a rollforward of our common stock, additional paid-in capital and retained earnings accounts for the three months ended March 31, 2016 and 2015 (in millions, except per share amounts):
 
2016
 
2015
 
Shares
 
Dollars
 
Shares
 
Dollars
Class A Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
194

 
$
2

 
201

 
$
2

Common stock purchases
(2
)
 

 
(1
)
 

Stock award plans
4

 

 
2

 

Common stock issuances
1

 

 
1

 

Conversions of class A to class B common stock
(3
)
 

 
(2
)
 

Class A shares issued at end of period
194

 
$
2

 
201

 
$
2

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
693

 
$
7

 
705

 
$
7

Common stock purchases
(5
)
 

 
(6
)
 

Conversions of class A to class B common stock
3

 

 
2

 

Class B shares issued at end of period
691

 
$
7

 
701

 
$
7

Additional Paid-In Capital
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$

 
 
 
$

Stock award plans
 
 
137

 
 
 
124

Common stock purchases
 
 
(336
)
 
 
 
(126
)
Common stock issuances
 
 
96

 
 
 
101

Option premiums received (paid)
 
 
103

 
 
 
(99
)
Balance at end of period
 
 
$

 
 
 
$

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
6,001

 
 
 
$
5,726

Net income attributable to common shareowners
 
 
1,131

 
 
 
1,026

Dividends ($0.78 and $0.73 per share)
 
 
(718
)
 
 
 
(683
)
Common stock purchases
 
 
(319
)
 
 
 
(561
)
Balance at end of period
 
 
$
6,095

 
 
 
$
5,508

We repurchased 6.6 million shares of class A and class B common stock for $655 million during the three months ended March 31, 2016, and 6.8 million shares for $687 million during the three months ended March 31, 2015. During the first quarter of 2016, we also exercised a capped call option that we entered into in 2015 for which we received 0.2 million UPS class B shares. The $25 million premium payment for this capped call option reduced shareowners' equity in 2015. In total, shares repurchased and received in the first quarter were 6.8 million shares for $680 million. In February 2013, the Board of Directors approved a share repurchase authorization of $10.0 billion, which has no expiration date. As of March 31, 2016, we had $761 million of this share repurchase authorization available. In May 2016, the Board of Directors approved a new share repurchase authorization of $8.0 billion, which has no expiration date.

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 first quarter of 2016, we entered into an accelerated share repurchase program which allowed us to repurchase 3.0 million shares for $300 million. The program was completed in March 2016.
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 $103 and $(99) million during the first three months of 2016 and 2015, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of March 31, 2016, we had outstanding options for the purchase of 0.6 million shares with a weighted average strike price of $81.97 per share that will settle in the second 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 three months ended March 31, 2016 and 2015 is as follows (in millions):
 
2016
 
2015
Foreign currency translation gain (loss):
 
 
 
Balance at beginning of period
$
(897
)
 
$
(457
)
Translation adjustment (no tax impact in either period)
26

 
(304
)
Balance at end of period
(871
)
 
(761
)
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 $2 and $1)
3

 
2

Reclassification to earnings (no tax impact in either period)

 

Balance at end of period
2

 
2

Unrealized gain (loss) on cash flow hedges, net of tax:
 
 
 
Balance at beginning of period
67

 
61

Current period changes in fair value (net of tax effect of $(60) and $120)
(100
)
 
199

Reclassification to earnings (net of tax effect of $(38) and $(14))
(62
)
 
(23
)
Balance at end of period
(95
)
 
237

Unrecognized pension and postretirement benefit costs, net of tax:
 
 
 
Balance at beginning of period
(2,709
)
 
(3,198
)
Reclassification to earnings (net of tax effect of $17 and $17)
26

 
26

Remeasurement of plan assets and liabilities (net of tax effect of $0 and $3)

 
6

Balance at end of period
(2,683
)
 
(3,166
)
Accumulated other comprehensive income (loss) at end of period
$
(3,647
)
 
$
(3,688
)




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 months ended March 31, 2016 and 2015 is as follows (in millions):
 
Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
 
2016
 
2015
 
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
$
(6
)
 
$
(6
)
 
Interest expense
Foreign exchange contracts

 
(36
)
 
Interest expense
Foreign exchange contracts
106

 
79

 
Revenue
Income tax (expense) benefit
(38
)
 
(14
)
 
Income tax expense
Impact on net income
62

 
23

 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(43
)
 
(43
)
 
Compensation and benefits
Income tax (expense) benefit
17

 
17

 
Income tax expense
Impact on net income
(26
)
 
(26
)
 
Net income
Total amount reclassified for the period
$
36

 
$
(3
)
 
Net income
Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the three months ended March 31, 2016 and 2015 is as follows (in millions):
 
2016
 
2015
Shares
 
Dollars
 
Shares
 
Dollars
Deferred Compensation Obligations:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
51

 
 
 
$
59

Reinvested dividends
 
 
1

 
 
 
1

Benefit payments
 
 
(9
)
 
 
 
(11
)
Balance at end of period
 
 
$
43

 
 
 
$
49

Treasury Stock:
 
 
 
 
 
 
 
Balance at beginning of period
(1
)
 
$
(51
)
 
(1
)
 
$
(59
)
Reinvested dividends

 
(1
)
 

 
(1
)
Benefit payments

 
9

 

 
11

Balance at end of period
(1
)
 
$
(43
)
 
(1
)
 
$
(49
)

Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests increased $2 and $1 million for the three months ended March 31, 2016 and 2015, respectively.


24

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


NOTE 12. SEGMENT INFORMATION
We report our operations in three segments: U.S. Domestic Package operations, International Package operations and Supply Chain & Freight operations. Package operations represent our most significant business and are broken down into regional operations around the world. Regional operations managers are responsible for both domestic and export operations within their geographic area.
U.S. Domestic Package
Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the United States.
International Package
International Package operations include delivery to more than 220 countries and territories worldwide, including shipments wholly outside the United States, as well as U.S. export and U.S. import shipments. Our International Package reporting segment includes the operations of our Europe, Asia, Americas and ISMEA (Indian Subcontinent, Middle East and Africa) operating segments.
Supply Chain & Freight
Supply Chain & Freight includes the operations of our forwarding, logistics, Coyote and UPS Freight and other aggregated business units. Our forwarding, logistics and Coyote units provide services in more than 195 countries and territories worldwide, and include North American and international air and ocean freight forwarding, customs brokerage, truckload freight brokerage, distribution and post-sales services and mail and consulting services. UPS Freight offers a variety of less-than-truckload (“LTL”) and truckload (“TL”) services to customers in North America. Other aggregated business units within this segment include The UPS Store and UPS Capital.
In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income and other, interest expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015, with certain expenses allocated between the segments using activity-based costing methods. Unallocated assets are comprised primarily of cash, marketable securities and investments in limited partnerships.
Segment information for the three months ended March 31, 2016 and 2015 is as follows (in millions):
 
Three Months Ended
March 31,
 
 
2016
 
2015
 
Revenue:
 
 
 
 
U.S. Domestic Package
$
9,084

 
$
8,814

 
International Package
2,914

 
2,970

 
Supply Chain & Freight
2,420

 
2,193

 
Consolidated
$
14,418

 
$
13,977

 
Operating Profit:
 
 
 
 
U.S. Domestic Package
$
1,102

 
$
1,024

 
International Package
574

 
498

 
Supply Chain & Freight
147

 
151

 
Consolidated
$
1,823

 
$
1,673

 

 

25

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


NOTE 13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2016 and 2015 (in millions, except per share amounts):
 
Three Months Ended
March 31,
2016
 
2015
Numerator:
 
 
 
Net income attributable to common shareowners
$
1,131

 
$
1,026

Denominator:
 
 
 
Weighted average shares
885

 
903

Deferred compensation obligations
1

 
1

Vested portion of restricted units
3

 
2

Denominator for basic earnings per share
889

 
906

Effect of dilutive securities:
 
 
 
Restricted units
4

 
6

Stock options
1

 
1

Denominator for diluted earnings per share
894

 
913

Basic earnings per share
$
1.27

 
$
1.13

Diluted earnings per share
$
1.27

 
$
1.12

Diluted earnings per share for the three months ended March 31, 2016 and 2015 excluded the effect of 0.5 and 0.2 million shares of common stock, respectively, that may be issued upon the exercise of employee stock options because such effect would be antidilutive.

26

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


NOTE 14. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
We are exposed to market risk, primarily related to foreign exchange rates, commodity prices and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, we enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates, commodity prices and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value for those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Credit Risk Management
The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines, and by monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.
 We have agreements with all of our active counterparties (covering the majority of our derivative positions) containing early termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of derivatives associated with those counterparties. Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. At March 31, 2016 and December 31, 2015, we held cash collateral of $641 and $717 million, respectively, under these agreements; this collateral is included in "cash and cash equivalents" on the consolidated balance sheets and its use by UPS is not restricted.
In connection with the zero threshold bilateral collateral provisions described above, we were required to post $1 million and $0 in collateral with our counterparties as of March 31, 2016 and December 31, 2015, respectively. As of those dates, there were no instruments in a net liability position that were not covered by the zero threshold bilateral collateral provisions. Additionally, in connection with the agreements described above, we could be required to terminate transactions with certain counterparties in the event of a downgrade of our credit rating.
We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
Accounting Policy for Derivative Instruments
We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.
A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statements of consolidated income during the current period.
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.
A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the foreign currency translation adjustment within AOCI. The remainder of the change in value of such instruments is recorded in earnings.

27

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


Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. We periodically enter into option contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We normally designate and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.
Foreign Currency Risk Management
To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with option and forward contracts. We normally designate and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur.
We also hedge portions of our anticipated cash settlements of intercompany transactions and interest payments on certain debt subject to foreign currency remeasurement using foreign currency forward contracts. We normally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions; therefore, the resulting gains and losses from these hedges are recognized as a component of investment income and other when the underlying transactions are subject to currency remeasurement.
We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of foreign denominated debt as the hedging instrument allows the debt to be remeasured to foreign currency translation adjustment within AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedging is recognized as a component of investment income and other. Balances in the cumulative translation adjustment accounts remain until the sale or complete liquidation of the foreign entity.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within our capital structure.
We have designated and account for the majority of our interest rate swaps that convert fixed rate interest payments into floating rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We normally designate and account for interest rate swaps that convert floating rate interest payments into fixed rate interest payments as cash flow hedges of the forecasted payment obligations.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings, using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.

28

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


Outstanding Positions
As of March 31, 2016 and December 31, 2015, the notional amounts of our outstanding derivative positions were as follows (in millions):
 
March 31, 2016
 
December 31, 2015
Currency hedges:
 
 
 
 
 
British Pound Sterling
GBP
1,056

 
GBP
1,140

Canadian Dollar
CAD
933

 
CAD
177

Euro
EUR
3,579

 
EUR
3,750

Mexican Peso
MXN
2,004

 
MXN
3,863

Japanese Yen
JPY
18,000

 
JPY
20,000

 
 
 
 
 
 
Interest rate hedges:
 
 
 
 
 
Fixed to Floating Interest Rate Swaps
$
5,799

 
$
5,799

Floating to Fixed Interest Rate Swaps
$
778

 
$
778

 
 
 
 
 
 
Investment market price hedges:
 
 
 
 
 
Marketable Securities
EUR
389

 
EUR
496

As of March 31, 2016, we had no outstanding commodity hedge positions.
Balance Sheet Recognition and Fair Value Measurements
The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives (in millions). The table is segregated between those derivative instruments that qualify and are designated as hedging instruments and those that are not, as well as by type of contract and whether the derivative is in an asset or liability position.
We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded on our consolidated balance sheets. The columns labeled "Net Amounts if Right of Offset had been Applied" indicate the potential net fair value positions by type of contract and location on the consolidated balance sheets had we elected to apply the right of offset.
 
 
 
Fair Value Hierarchy Level
 
Gross Amounts Presented in
Consolidated Balance Sheets
 
Net Amounts if Right of
Offset had been Applied
Asset Derivatives
Balance Sheet Location
 
 
March 31,
2016
 
December 31,
2015
 
March 31,
2016
 
December 31,
2015
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
Level 2
 
$
257

 
$
408

 
$
256

 
$
408

Foreign exchange contracts
Other non-current assets
 
Level 2
 
28

 
92

 
23

 
92

Interest rate contracts
Other non-current assets
 
Level 2
 
293

 
204

 
279

 
185

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

 
2

 

 

Investment market price contracts
Other current assets
 
Level 2
 
159

 
5

 
159

 

Interest rate contracts
Other non-current assets
 
Level 2
 
75

 
57

 
66

 
53

Total Asset Derivatives
 
 
 
 
$
812

 
$
768

 
$
783

 
$
738


29

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


 
 
 
Fair Value Hierarchy Level
 
Gross Amounts Presented in
Consolidated Balance Sheets
 
Net Amounts if Right of
Offset had been Applied
Liability Derivatives
Balance Sheet Location
 
 
March 31,
2016
 
December 31,
2015
 
March 31,
2016
 
December 31,
2015
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other current liabilities
 
Level 2
 
$
3

 
$

 
$
2

 
$

Foreign exchange contracts
Other non-current liabilities
 
Level 2
 
41

 

 
36

 

Interest rate contracts
Other non-current liabilities
 
Level 2
 
14

 
19

 

 

Derivatives not designated as hedges:
 
 
&#