NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES
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 ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim, unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of
June 30, 2019
, our results of operations for the
three and six
months ended
June 30, 2019
and
2018
, and our cash flows for the
six
months ended
June 30, 2019
and
2018
. The results reported in these interim, unaudited, consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any other period or the entire year. The interim, unaudited, consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2018
.
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
June 30, 2019
and December 31, 2018. The fair values of our investment securities are disclosed in note
5
, our recognized multiemployer pension withdrawal liabilities in note
7
, our short and long-term debt in note
9
and our derivative instruments in note
15
. 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.
Use of 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 interim, unaudited, 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.
For interim, unaudited, consolidated financial statement purposes, we provide for accruals under our various employee benefit plans for each three month period based on one quarter of the estimated annual expense.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2
.
RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2016-02,
Leases (Topic 842)
, which requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond twelve months. The new standard also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. Effective January 1, 2019, we adopted the requirements of this ASU using the modified retrospective approach. The adoption on January 1, 2019 resulted in the recognition of right-of-use assets for operating leases of approximately
$2.65 billion
and operating lease liabilities of approximately
$2.70 billion
. The consolidated financial statements for the period ended June 30, 2019 are presented under the new standard, while comparative periods presented have not been adjusted and continue to be reported in accordance with the previous standard.
We elected the transition package of practical expedients permitted within the standard. In accordance with the package of practical expedients, we did not reassess initial direct costs, lease classification, or whether our contracts contain or are leases. We also made an accounting policy election to not recognize right-of-use assets and liabilities for leases with an original lease term of twelve months or less, unless the leases include options to renew or purchase the underlying asset that are reasonably certain to be exercised. See note
10
for additional disclosures required by this ASU.
In March 2017, the FASB issued an ASU requiring the premium on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount is not impacted by the update. We adopted this standard on January 1, 2019. It did not have a material impact on our consolidated financial position, results of operations or cash flows.
In August 2017, the FASB issued an ASU to enhance recognition of the economic results of hedging activities in the financial statements. In addition, this update makes certain targeted improvements to simplify the application of hedge accounting guidance and increase transparency regarding the scope and results of hedging activities. We adopted this standard on January 1, 2019. It did not have a material impact on our consolidated financial position, results of operations or cash flows but did require additional disclosures. See note
15
for required disclosures pertaining to this ASU.
For accounting standards adopted in the period ended June 30, 2018, refer to note 1 to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2018
.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.
Accounting Standards Issued But Not Yet Effective
In June 2016, the FASB issued an ASU introducing an expected credit loss methodology for the measurement of financial assets not accounted for at fair value. The methodology replaces the probable, incurred loss model for those assets. The standard will be effective for us in the first quarter of 2020. We are evaluating the full impact of its adoption on our consolidated financial statements and internal control over financial reporting environment, but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued an ASU to simplify the accounting for goodwill impairment. The update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under this ASU, goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard will be effective for us in the first quarter of 2020. We continue to evaluate this update to determine the full impact of its adoption but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.
Other accounting pronouncements issued, but not effective until after
June 30, 2019
, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3
.
REVENUE RECOGNITION
Revenue Recognition
Substantially all of our revenues are from contracts associated with the pick-up, transportation and delivery of packages and freight (“transportation services”), whether carried out by or arranged by UPS, both domestically and internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services to customers through our global network of company-owned and leased distribution centers and field stocking locations, both domestically and internationally.
Disaggregation of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
|
|
|
Next Day Air
|
|
$
|
2,173
|
|
|
$
|
1,830
|
|
|
$
|
4,014
|
|
|
$
|
3,614
|
|
Deferred
|
|
1,157
|
|
|
1,080
|
|
|
2,246
|
|
|
2,149
|
|
Ground
|
|
7,820
|
|
|
7,444
|
|
|
15,370
|
|
|
14,818
|
|
U.S. Domestic Package
|
|
11,150
|
|
|
10,354
|
|
|
21,630
|
|
|
20,581
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
690
|
|
|
700
|
|
|
1,380
|
|
|
1,416
|
|
Export
|
|
2,668
|
|
|
2,747
|
|
|
5,299
|
|
|
5,419
|
|
Cargo & Other
|
|
147
|
|
|
155
|
|
|
285
|
|
|
300
|
|
International Package
|
|
3,505
|
|
|
3,602
|
|
|
6,964
|
|
|
7,135
|
|
|
|
|
|
|
|
|
|
|
Forwarding
|
|
1,496
|
|
|
1,659
|
|
|
2,912
|
|
|
3,264
|
|
Logistics
|
|
833
|
|
|
784
|
|
|
1,665
|
|
|
1,566
|
|
Freight
|
|
861
|
|
|
853
|
|
|
1,634
|
|
|
1,630
|
|
Other
|
|
203
|
|
|
204
|
|
|
403
|
|
|
393
|
|
Supply Chain & Freight
|
|
3,393
|
|
|
3,500
|
|
|
6,614
|
|
|
6,853
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
$
|
18,048
|
|
|
$
|
17,456
|
|
|
$
|
35,208
|
|
|
$
|
34,569
|
|
We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis of revenue recognition in accordance with U.S. GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Within most of our contracts, the customer contracts with us to provide distinct services, such as transportation services. The vast majority of our contracts with customers for transportation services include only one performance obligation; the transportation services themselves. However, if a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In certain business units, such as Logistics, we sell customized, customer-specific solutions in which we provide a significant service of integrating a complex set of tasks and components into a single capability (even if that single capability results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. In these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.
Satisfaction of Performance Obligations
We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to another. Further, if we were unable to complete delivery to the final location, another entity would not need to reperform the transportation service already performed.
As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost measure of progress for our package delivery contracts because it best depicts the transfer of control to the customer, which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including ancillary or accessorial fees and reductions for estimated customer incentives, are recorded proportionally as costs are incurred. Costs to fulfill include labor and other direct costs and an allocation of indirect costs. For our freight and freight forwarding contracts, an output method of progress based on time-in-transit is utilized as the timing of costs incurred does not best depict the transfer of control to the customer. In our Logistics business we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount to which we have a right to invoice the customer.
Variable Consideration
It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the transaction price. These variable amounts are generally dependent upon achievement of certain incentive tiers or performance metrics. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts of revenue, which may be reduced by incentives or other contract provisions, in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of anticipated customer spending and all information (historical, current and forecasted) that is reasonably available to us.
Contract Modifications
Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct services. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Contract modifications that add additional distinct goods or services are treated as separate contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services. These contract modifications are accounted for prospectively as the remaining performance obligations are distinct.
Payment Terms
Under the typical payment terms of our customer contracts, the customer pays at periodic intervals (i.e., every 14 days, 30 days, 45 days, etc.) for shipments included on invoices received. Invoices are generated each week on the week-ending day, which is Saturday for the majority of our U.S. Domestic Package business, but could be another day depending on the business unit or the specific agreement with the customer. It is not customary business practice to extend payment terms past 90 days, and as such, we do not have a practice of including a significant financing component within our revenue contracts with customers.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principal vs. Agent Considerations
In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. U.S. GAAP requires us to evaluate, using a control model, whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent). Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. Revenue and the associated purchased transportation costs are both reported on a gross basis within our statements of consolidated income.
Accounts Receivable, Net
Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when they are incurred, which requires us to make our best estimate of the probable losses inherent in our customer receivables at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, trends in customer payment frequency, and judgments about the probable effects of relevant observable data, including present economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk. Our total provision for doubtful accounts charged to expense before recoveries during the quarters ended
June 30, 2019
and 2018 was
$68
and
$29 million
, respectively, and $
105
and $
41
million during the six months ended June 30, 2019 and 2018, respectively.
Contract Assets and Liabilities
Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e., packages have been delivered), and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.
Contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance payments and billings in excess of revenue represent payments received from our customers that will be earned over the contract term. Deferred revenue represents the amount of consideration due from customers related to in-transit shipments that has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the advance payment will be earned. We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which typically occurs within a short window after period-end. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.
Contract assets related to in-transit packages were
$174
and
$234 million
at
June 30, 2019
and December 31, 2018, respectively, net of deferred revenue related to in-transit packages of
$226
and
$236 million
at
June 30, 2019
and December 31, 2018, respectively. Contract assets are included within "Other current assets" in the consolidated balance sheets. Short-term contract liabilities related to advanced payments from customers were $
8
and
$5 million
at
June 30, 2019
and December 31, 2018, respectively. Short-term contract liabilities are included within "Other current liabilities" in the consolidated balance sheets. Long-term contract liabilities related to advanced payments from customers were
$26 million
at
June 30, 2019
and December 31, 2018, respectively. Long-term contract liabilities are included within "Other Non-Current Liabilities" in the consolidated balance sheets.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4
.
STOCK-BASED COMPENSATION
We issue employee share-based awards under various incentive compensation plans, which permit the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units to eligible employees (restricted stock and stock units, restricted performance shares and performance units are herein referred to as "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date, and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
We award Restricted Units under MIP to certain eligible management employees. For Restricted Units granted under MIP prior to
2019
, vesting generally occurs 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 or disability, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis (less estimated forfeitures) ratably over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs). These historical awards will continue to vest through 2023.
Beginning with the MIP grant in the first quarter of
2019
, Restricted Units vest one year following the grant date (except in the case of death or disability, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis (less estimated forfeitures) ratably over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs).
Based on the date that the eligible management population and performance targets were approved for the 2018 MIP award (granted in the first quarter of 2019), we determined the award measurement dates to be February 6,
2019
(for U.S.-based employees other than management committee employees), February 14,
2019
(for management committee employees) and March 25,
2019
(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
$108.82
,
$111.80
and
$106.90
on those dates, respectively.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under LTIP to certain eligible management employees. 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. The performance targets are equally-weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareowner return ("RTSR") relative to a peer group of companies.
For the two-thirds of the award related to ROIC and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these Restricted Units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. We recognize the grant date fair value of this portion of the award (less estimated forfeitures) as compensation expense ratably over the vesting period.
Based on the date that the eligible management population and performance targets were approved for the 2019 LTIP award, we determined the award measurement date to be March 22, 2019; therefore, the target Restricted Units awarded for the ROIC and growth in currency-constant consolidated revenue portions of the award were valued for stock compensation expense using the closing New York Stock Exchange price of
$107.35
on that date.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average assumptions used and the calculated weighted-average fair values of the RTSR portion of the LTIP awards granted in
2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Risk-free interest rate
|
2.24
|
%
|
|
2.61
|
%
|
Expected volatility
|
19.61
|
%
|
|
16.51
|
%
|
Weighted-average fair value of units granted
|
$
|
123.40
|
|
|
$
|
137.57
|
|
Share payout
|
114.95
|
%
|
|
123.46
|
%
|
There is no expected dividend yield as units earn dividend equivalents.
Non-Qualified Stock Options
We grant non-qualified 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 of the grant date (except in the case of death or disability, in which case immediate vesting occurs). The options granted expire
10 years
after the date of the grant. In the first quarter of
2019
, we granted
0.3
million stock options at a grant price of
$111.80
, which is based on the closing New York Stock Exchange price on February 14, 2019. In the first quarter of 2018, we granted
0.3
million and
0.01
million stock options at a grant price of $
106.43
and $
104.45
, respectively, which is based on the closing New York Stock Exchange price on March 1, 2018 and March 22, 2018, respectively.
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the calculated weighted-average fair values of options granted in
2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Expected dividend yield
|
2.93
|
%
|
|
2.93
|
%
|
Risk-free interest rate
|
2.60
|
%
|
|
2.84
|
%
|
Expected life (in years)
|
7.5
|
|
|
7.5
|
|
Expected volatility
|
17.79
|
%
|
|
16.72
|
%
|
Weighted-average fair value of options granted
|
$
|
16.39
|
|
|
$
|
15.23
|
|
Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the three months ended
June 30, 2019
and
2018
was $
205
and $
139
million pre-tax, respectively. Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the six months ended
June 30, 2019
and
2018
was $
513
and
$378
million pre-tax, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5
.
CASH AND INVESTMENTS
The following is a summary of marketable securities classified as trading and available-for-sale as of
June 30, 2019
and
December 31, 2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
June 30, 2019:
|
|
|
|
|
|
|
|
Current trading marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
114
|
|
Equity securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total trading marketable securities
|
116
|
|
|
—
|
|
|
—
|
|
|
116
|
|
|
|
|
|
|
|
|
|
Current available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
295
|
|
|
4
|
|
|
(1
|
)
|
|
298
|
|
Mortgage and asset-backed debt securities
|
69
|
|
|
1
|
|
|
—
|
|
|
70
|
|
Corporate debt securities
|
220
|
|
|
2
|
|
|
—
|
|
|
222
|
|
Non-U.S. government debt securities
|
19
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Total available-for-sale marketable securities
|
603
|
|
|
7
|
|
|
(1
|
)
|
|
609
|
|
|
|
|
|
|
|
|
|
Total current marketable securities
|
$
|
719
|
|
|
$
|
7
|
|
|
$
|
(1
|
)
|
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
December 31, 2018:
|
|
|
|
|
|
|
|
Current trading marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
137
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137
|
|
Equity securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total trading marketable securities
|
139
|
|
|
—
|
|
|
—
|
|
|
139
|
|
|
|
|
|
|
|
|
|
Current available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
297
|
|
|
1
|
|
|
(1
|
)
|
|
297
|
|
Mortgage and asset-backed debt securities
|
82
|
|
|
—
|
|
|
(1
|
)
|
|
81
|
|
Corporate debt securities
|
275
|
|
|
—
|
|
|
(2
|
)
|
|
273
|
|
Non-U.S. government debt securities
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Total available-for-sale marketable securities
|
674
|
|
|
1
|
|
|
(4
|
)
|
|
671
|
|
|
|
|
|
|
|
|
|
Total current marketable securities
|
$
|
813
|
|
|
$
|
1
|
|
|
$
|
(4
|
)
|
|
$
|
810
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Investment Other-Than-Temporary Impairments
We have concluded that no material other-than-temporary impairment losses existed as of
June 30, 2019
. In making this determination, we considered the financial condition and prospects of the issuer, the magnitude of the losses compared with the investments’ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
Maturity Information
The amortized cost and estimated fair value of marketable securities at
June 30, 2019
, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Estimated
Fair Value
|
Due in one year or less
|
$
|
147
|
|
|
$
|
147
|
|
Due after one year through three years
|
472
|
|
|
474
|
|
Due after three years through five years
|
21
|
|
|
22
|
|
Due after five years
|
77
|
|
|
80
|
|
|
717
|
|
|
723
|
|
Equity securities
|
2
|
|
|
2
|
|
|
$
|
719
|
|
|
$
|
725
|
|
Non-Current Investments and Restricted Cash
Non-current investments and restricted cash are primarily associated with our self-insurance programs. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in various marketable securities and cash equivalents. Collateral provided is reflected in "Cash, Cash Equivalents and Restricted Cash" in the statements of consolidated cash flows. At
June 30, 2019
and
December 31, 2018
, we had $
144
and $
142
million, respectively, in self-insurance investments and restricted cash.
We held a
$20
and
$19 million
investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at
June 30, 2019
and
December 31, 2018
, respectively. The quarterly change in investment fair value is recognized in "Investment income and other" in the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets of
$3
and $
9
million as of
June 30, 2019
and
December 31, 2018
, respectively.
The amounts described above are classified as “Investments and Restricted Cash” in the consolidated balance sheets.
A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
June 30, 2018
|
Cash and cash equivalents
|
|
$
|
4,072
|
|
|
$
|
4,225
|
|
|
$
|
4,214
|
|
Restricted cash
|
|
144
|
|
|
142
|
|
|
277
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
4,216
|
|
|
$
|
4,367
|
|
|
$
|
4,491
|
|
Fair Value Measurements
Marketable securities valued utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. government debt securities, as these securities all have quoted prices in active markets. Marketable securities valued utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “Other non-current investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were
7.45%
and
8.16%
as of
June 30, 2019
and
December 31, 2018
, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis. The level 3 instruments measured on a recurring basis totaled
$1
and
$2 million
as of
June 30, 2019
and
December 31, 2018
, respectively.
The following table presents information about our investments measured at fair value on a recurring basis as of
June 30, 2019
and
December 31, 2018
, 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
|
June 30, 2019:
|
|
|
|
|
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
298
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
298
|
|
Mortgage and asset-backed debt securities
|
—
|
|
|
70
|
|
|
—
|
|
|
70
|
|
Corporate debt securities
|
—
|
|
|
336
|
|
|
—
|
|
|
336
|
|
Equity securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
—
|
|
|
19
|
|
|
—
|
|
|
19
|
|
Total marketable securities
|
298
|
|
|
427
|
|
|
—
|
|
|
725
|
|
Other non-current investments
|
20
|
|
|
—
|
|
|
1
|
|
|
21
|
|
Total
|
$
|
318
|
|
|
$
|
427
|
|
|
$
|
1
|
|
|
$
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
297
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
297
|
|
Mortgage and asset-backed debt securities
|
—
|
|
|
81
|
|
|
—
|
|
|
81
|
|
Corporate debt securities
|
—
|
|
|
410
|
|
|
—
|
|
|
410
|
|
Equity securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
—
|
|
|
20
|
|
|
—
|
|
|
20
|
|
Total marketable securities
|
297
|
|
|
513
|
|
|
—
|
|
|
810
|
|
Other non-current investments
|
19
|
|
|
—
|
|
|
2
|
|
|
21
|
|
Total
|
$
|
316
|
|
|
$
|
513
|
|
|
$
|
2
|
|
|
$
|
831
|
|
There were
no
transfers of investments between Level 1 and Level 2 during the
six
months ended
June 30, 2019
or
2018
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6
.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of
June 30, 2019
and
December 31, 2018
consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Vehicles
|
$
|
9,975
|
|
|
$
|
9,820
|
|
Aircraft
|
17,908
|
|
|
17,499
|
|
Land
|
2,073
|
|
|
2,000
|
|
Buildings
|
4,890
|
|
|
4,808
|
|
Building and leasehold improvements
|
4,531
|
|
|
4,323
|
|
Plant equipment
|
12,165
|
|
|
11,833
|
|
Technology equipment
|
2,160
|
|
|
2,093
|
|
Construction-in-progress
|
2,847
|
|
|
2,112
|
|
|
56,549
|
|
|
54,488
|
|
Less: Accumulated depreciation and amortization
|
(28,454
|
)
|
|
(27,912
|
)
|
|
$
|
28,095
|
|
|
$
|
26,576
|
|
As part of our ongoing investment in transformation, in 2018 we made prospective revisions to our estimates of useful lives for building improvements, vehicles and plant equipment which in general had the effect of lengthening the useful lives of these categories. In the
second
quarter of 2019, we made capital investments in property, plant and equipment, net of disposals and fully-depreciated assets, that resulted in an increase in depreciation expense of $
95
million and a decrease in net income of $
73
million or $
0.08
per share on a basic and diluted basis. The increase in depreciation expense was offset by the effect of lengthening the useful lives of various asset categories, in the latter half of 2018, which resulted in a decrease in depreciation expense of $
54
million and an increase in net income of $
41
million or
$0.05
per share on a basic and diluted basis. Combining both impacts resulted in a net increase of $
41
million in depreciation expense, and a net decrease in net income of $
32
million or $
0.03
per share on both a basic and diluted basis.
For the six months ended June 30, 2019, the impact of our ongoing capital investments in property, plant and equipment, net of disposals and fully-depreciated assets, resulted in an increase in depreciation expense of $
185
million and a decrease in net income of $
142
million or $
0.16
per share on a basic and diluted basis. The increase in depreciation expense was offset by the effect of lengthening the useful lives of various asset categories, in the latter half of 2018, which resulted in a decrease in depreciation expense of $
181
million and an increase in net income of $
139
million or $
0.16
per share on a basic and diluted basis. Combining both impacts resulted in a net increase of $
4
million in depreciation expense, and a decrease in net income of $
3
million or $
0.00
per share on both a basic and diluted basis.
We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor all other property, plant and equipment categories for any indicators that the carrying value of the assets may not be recoverable.
No
impairment charges on property, plant and equipment were recorded during the
six
months ended
June 30, 2019
or
2018
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7
.
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 six
months ended
June 30, 2019
and
2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Three Months Ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
360
|
|
|
$
|
415
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
$
|
14
|
|
|
$
|
16
|
|
Interest cost
|
517
|
|
|
450
|
|
|
27
|
|
|
26
|
|
|
11
|
|
|
11
|
|
Expected return on assets
|
(783
|
)
|
|
(800
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(19
|
)
|
|
(19
|
)
|
Amortization of prior service cost
|
55
|
|
|
48
|
|
|
1
|
|
|
2
|
|
|
1
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
149
|
|
|
$
|
113
|
|
|
$
|
32
|
|
|
$
|
33
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Six Months Ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
719
|
|
|
$
|
831
|
|
|
$
|
12
|
|
|
$
|
14
|
|
|
$
|
28
|
|
|
$
|
32
|
|
Interest cost
|
1,034
|
|
|
899
|
|
|
54
|
|
|
52
|
|
|
23
|
|
|
23
|
|
Expected return on assets
|
(1,565
|
)
|
|
(1,601
|
)
|
|
(4
|
)
|
|
(4
|
)
|
|
(38
|
)
|
|
(39
|
)
|
Amortization of prior service cost
|
109
|
|
|
97
|
|
|
3
|
|
|
4
|
|
|
1
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
297
|
|
|
$
|
226
|
|
|
$
|
65
|
|
|
$
|
66
|
|
|
$
|
14
|
|
|
$
|
16
|
|
During the first
six
months of
2019
, we contributed $
874
and
$234
million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We currently expect to contribute approximately
$1.2
billion and
$10 million
over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively. Subject to market conditions, we continually evaluate opportunities for additional discretionary pension contributions.
The components of net periodic benefit cost other than current service cost are presented within “Investment income and other” in the statements of consolidated income.
Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under the terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.
As of
June 30, 2019
and
December 31, 2018
we had $
849
and
$852 million
, respectively, recorded in "Other Non-Current Liabilities" as well as
$7 million
as of
June 30, 2019
and
December 31, 2018
, recorded in "Other 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
43
years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of this withdrawal liability as of
June 30, 2019
and
December 31, 2018
was $
889
and $
832 million
, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the CSPF and fully funded our allocable share of unfunded vested benefits by paying a
$6.1 billion
withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF. Under our withdrawal agreement with the CSPF, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with applicable law.
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”). This change in law for the first time permitted multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury (“Treasury”). In May 2016, Treasury rejected the proposed plan submitted by the CSPF. In the first quarter of 2018, Congress established a Joint Select Committee to develop a recommendation to improve the solvency of multiemployer plans and the Pension Benefit Guaranty Corporation (“PBGC”) before a November 30, 2018 deadline. While the Committee’s efforts failed to meet its deadline, the Committee made significant progress towards finding solutions that will address the long term solvency of multiemployer pension plans. UPS will continue to work with all stakeholders, including legislators and regulators, to implement an acceptable solution.
The CSPF has said that it believes a legislative solution to its funded status is necessary or that it will become insolvent in 2025, and we expect that the CSPF will continue to explore options to avoid insolvency. Numerous factors could affect the CSPF’s funded status and UPS’s potential obligation to pay coordinating benefits under the UPS/IBT Plan. Any obligation to pay coordinating benefits will be subject to a number of significant uncertainties, including whether the CSPF submits a revised MPRA filing and the terms thereof, or whether it otherwise seeks federal government assistance, as well as the terms of any applicable legislation, the extent to which benefits are paid by the PBGC and our ability to successfully defend legal positions we may take in the future under the MPRA, including the suspension ordering provisions, our withdrawal agreement and other applicable law.
We account for the potential obligation to pay coordinating benefits to the UPS Transfer Group under Accounting Standards Codification Topic 715-
Compensation- Retirement Benefits
(“ASC 715”), which requires us to provide a best estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely outcome to this matter and the broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities.
As such, our best estimate of the next most likely outcome at the December 31, 2018 measurement date was that the CSPF would submit and implement another benefit reduction plan under the MPRA during 2019. We believe any MPRA filing would be designed to forestall insolvency by reducing benefits to participants other than the UPS Transfer Group to the maximum extent permitted, and then reducing benefits to the UPS Transfer Group by a lesser amount.
We evaluated this outcome using a deterministic cash flow projection, reflecting updated estimated CSPF cash flows and investment earnings, the lack of legislative action and the absence of a MPRA filing by the CSPF. As a result, at the December 31, 2018 measurement date, the best estimate of our projected benefit obligation increased by
$1.6 billion
for coordinating benefits that may be required to be directly provided by the UPS/IBT Plan to the UPS Transfer Group.
The future value of this estimate will be influenced by the terms and timing of any MPRA filing, changes in our discount rate, rate of return on assets and other actuarial assumptions, presumed solvency of the PBGC, as well as potential solutions resulting from federal government intervention. Any such event may result in a decrease or an increase in the best estimate of our projected benefit obligation. If the uncertainties are not resolved, it is reasonably possible that our projected benefit obligation could increase by approximately
$2.4 billion
, resulting in a total obligation for coordinating benefits of approximately
$4.0 billion
as previously disclosed. If a future change in law occurs, it may be a significant event requiring an interim remeasurement of the UPS/IBT Plan at the date the law is enacted. We will continue to assess the impact of these uncertainties on our projected benefit obligation in accordance with ASC 715.
Collective Bargaining Agreements
As of December 31, 2018, we had approximately
283,000
employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. The current National Master Agreement ("NMA") was ratified on April 28, 2019, and will expire on July 31, 2023. Most of the economic provisions of the NMA are retroactive to August 1, 2018, which is the effective date of the NMA. The UPS Freight business unit national master agreement was ratified on November 11, 2018.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We have approximately
2,800
pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which becomes amendable on September 1, 2021.
We have approximately
1,400
airline mechanics who are covered by a collective bargaining agreement with Teamsters Local 2727 which becomes amendable November 1, 2023. 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”). On May 2, 2019, the IAM ratified a new collective bargaining agreement that will expire on July 31, 2024.
NOTE
8
.
GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of
June 30, 2019
and
December 31, 2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic
Package
|
|
International
Package
|
|
Supply Chain &
Freight
|
|
Consolidated
|
December 31, 2018:
|
$
|
715
|
|
|
$
|
417
|
|
|
$
|
2,679
|
|
|
$
|
3,811
|
|
Acquired
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Currency / Other
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
June 30, 2019:
|
$
|
715
|
|
|
$
|
418
|
|
|
$
|
2,678
|
|
|
$
|
3,811
|
|
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
June 30, 2019
and
December 31, 2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
June 30, 2019:
|
|
|
|
|
|
Capitalized software
|
$
|
3,898
|
|
|
$
|
(2,579
|
)
|
|
$
|
1,319
|
|
Licenses
|
117
|
|
|
(50
|
)
|
|
67
|
|
Franchise rights
|
146
|
|
|
(108
|
)
|
|
38
|
|
Customer relationships
|
735
|
|
|
(253
|
)
|
|
482
|
|
Trade name
|
200
|
|
|
—
|
|
|
200
|
|
Trademarks, patents and other
|
55
|
|
|
(40
|
)
|
|
15
|
|
Total Intangible Assets, Net
|
$
|
5,151
|
|
|
$
|
(3,030
|
)
|
|
$
|
2,121
|
|
December 31, 2018:
|
|
|
|
|
|
Capitalized software
|
$
|
3,693
|
|
|
$
|
(2,478
|
)
|
|
$
|
1,215
|
|
Licenses
|
117
|
|
|
(36
|
)
|
|
81
|
|
Franchise rights
|
145
|
|
|
(105
|
)
|
|
40
|
|
Customer relationships
|
736
|
|
|
(217
|
)
|
|
519
|
|
Trade name
|
200
|
|
|
—
|
|
|
200
|
|
Trademarks, patents and other
|
52
|
|
|
(31
|
)
|
|
20
|
|
Total Intangible Assets, Net
|
$
|
4,943
|
|
|
$
|
(2,867
|
)
|
|
$
|
2,075
|
|
As of
June 30, 2019
, we had a trade name with a carrying value of $
200
million and licenses with a carrying value of $
4
million, which are deemed to be indefinite-lived intangible assets and are included in the table above.
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
June 30, 2019
and
December 31, 2018
consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Amount
|
|
|
|
Carrying Value
|
|
|
Maturity
|
|
2019
|
|
2018
|
Commercial paper
|
$
|
2,871
|
|
|
2019-2020
|
|
$
|
2,871
|
|
|
$
|
2,662
|
|
|
|
|
|
|
|
|
|
Fixed-rate senior notes:
|
|
|
|
|
|
|
|
5.125% senior notes
|
1,000
|
|
|
2019
|
|
—
|
|
|
998
|
|
3.125% senior notes
|
1,500
|
|
|
2021
|
|
1,531
|
|
|
1,492
|
|
2.050% senior notes
|
700
|
|
|
2021
|
|
698
|
|
|
698
|
|
2.450% senior notes
|
1,000
|
|
|
2022
|
|
1,001
|
|
|
1,023
|
|
2.350% senior notes
|
600
|
|
|
2022
|
|
598
|
|
|
597
|
|
2.500% senior notes
|
1,000
|
|
|
2023
|
|
995
|
|
|
994
|
|
2.800% senior notes
|
500
|
|
|
2024
|
|
497
|
|
|
496
|
|
2.400% senior notes
|
500
|
|
|
2026
|
|
498
|
|
|
498
|
|
3.050% senior notes
|
1,000
|
|
|
2027
|
|
992
|
|
|
991
|
|
3.400% senior notes
|
750
|
|
|
2029
|
|
745
|
|
|
—
|
|
6.200% senior notes
|
1,500
|
|
|
2038
|
|
1,483
|
|
|
1,482
|
|
4.875% senior notes
|
500
|
|
|
2040
|
|
490
|
|
|
490
|
|
3.625% senior notes
|
375
|
|
|
2042
|
|
368
|
|
|
368
|
|
3.400% senior notes
|
500
|
|
|
2046
|
|
491
|
|
|
491
|
|
3.750% senior notes
|
1,150
|
|
|
2047
|
|
1,136
|
|
|
1,136
|
|
4.250% senior notes
|
750
|
|
|
2049
|
|
742
|
|
|
—
|
|
Floating-rate senior notes:
|
|
|
|
|
|
|
|
|
|
|
Floating-rate senior notes
|
350
|
|
|
2021
|
|
349
|
|
|
349
|
|
Floating-rate senior notes
|
400
|
|
|
2022
|
|
399
|
|
|
399
|
|
Floating-rate senior notes
|
500
|
|
|
2023
|
|
499
|
|
|
499
|
|
Floating-rate senior notes
|
1,041
|
|
|
2049-2067
|
|
1,028
|
|
|
1,029
|
|
8.375% Debentures:
|
|
|
|
|
|
|
|
8.375% debentures
|
424
|
|
|
2020
|
|
431
|
|
|
419
|
|
8.375% debentures
|
276
|
|
|
2030
|
|
281
|
|
|
274
|
|
Pound Sterling notes:
|
|
|
|
|
|
|
|
5.500% notes
|
84
|
|
|
2031
|
|
84
|
|
|
84
|
|
5.125% notes
|
578
|
|
|
2050
|
|
547
|
|
|
546
|
|
Euro senior notes:
|
|
|
|
|
|
|
|
0.375% notes
|
797
|
|
|
2023
|
|
792
|
|
|
797
|
|
1.625% notes
|
797
|
|
|
2025
|
|
792
|
|
|
798
|
|
1.000% notes
|
569
|
|
|
2028
|
|
566
|
|
|
570
|
|
1.500% notes
|
569
|
|
|
2032
|
|
565
|
|
|
569
|
|
Floating-rate senior notes
|
569
|
|
|
2020
|
|
568
|
|
|
572
|
|
Canadian senior notes:
|
|
|
|
|
|
|
|
2.125% notes
|
573
|
|
|
2024
|
|
570
|
|
|
548
|
|
Finance lease obligations
|
445
|
|
|
2019-3005
|
|
445
|
|
|
534
|
|
Facility notes and bonds
|
320
|
|
|
2029-2045
|
|
319
|
|
|
320
|
|
Other debt
|
8
|
|
|
2019-2022
|
|
8
|
|
|
13
|
|
Total debt
|
$
|
24,496
|
|
|
|
|
23,379
|
|
|
22,736
|
|
Less: Current maturities
|
|
|
|
|
(2,952
|
)
|
|
(2,805
|
)
|
Long-term debt
|
|
|
|
|
$
|
20,427
|
|
|
$
|
19,931
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Commercial Paper
We are authorized to borrow up to $
10.0
billion under a U.S. commercial paper program and €
5.0
billion (in a variety of currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as of
June 30, 2019
: $
1.917
billion with an average interest rate of
2.44%
and €
838
million ($
954
million) with an average interest rate of -
0.36%
. As of
June 30, 2019
, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheets.
Debt Classification
We have classified our
8.375%
debentures due April 2020 with a principal balance of $
424
million as long-term debt based on our intent and ability to refinance the debt as of June 30, 2019. We have classified certain floating-rate senior notes that are putable by the note holders as long-term debt, due to our intent and ability to refinance the debt if the put option is exercised by the note holders.
Debt Issuance
On March 13, 2019 we issued two series of notes, both in the principal amounts of $
750 million
. These fixed rate notes bear interest at the rates of
3.40%
and
4.25%
and will mature on March 15, 2029 and March 15, 2049, respectively. Interest on the fixed-rate senior notes is payable semi-annually, beginning September 2019. The
3.40%
fixed-rate senior notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of remaining scheduled payments of principal and interest thereon discounted to the redemption date (three months prior to maturity) on a semi-annual basis at the discount rate of the Treasury Rate plus 15 basis points and accrued and unpaid interest. The
4.25%
fixed-rate senior notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of remaining scheduled payments of principal and interest thereon discounted to the redemption date (six months prior to maturity) on a semi-annual basis at the discount rate of the Treasury Rate plus 20 basis points and accrued and unpaid interest.
Sources of Credit
We maintain
two
credit agreements with a consortium of banks. One of these agreements provides a revolving credit facility of
$1.5
billion and expires on
December 10, 2019
. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus
0.50%
; and (3) LIBOR for a one month interest period plus
1.00%
, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 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
June 30, 2019
.
The second agreement provides a revolving credit facility of $
3.0
billion, and expires on
December 11, 2023
. 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
June 30, 2019
.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of
June 30, 2019
and for all periods presented, we were in compliance with all applicable 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
June 30, 2019
, 10% of net tangible assets was equivalent to $
3.322
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 us for debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately $
24.709
and $
23.293
billion as of
June 30, 2019
and
December 31, 2018
, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10
.
LEASES
We adopted ASU 2016-02,
Leases (Topic 842)
, on January 1, 2019. The standard requires lessees to recognize a right-of-use ("ROU") asset and lease liability for all leases. Some of our leases contain both lease and non-lease components, which we have elected to treat as a single lease component. We have also elected not to recognize leases that have an original lease term, including reasonably certain renewal or purchase options, of twelve months or less in our consolidated balance sheets for all classes of underlying assets. Lease costs for short-term leases are recognized on a straight-line basis over the lease term. We elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are or contain leases, lease classification and determination of initial direct costs.
We lease property and equipment under finance and operating leases. We have finance and operating leases for package centers, airport facilities, warehouses, corporate office space, aircraft, aircraft engines, information technology equipment (primarily mainframes, servers and copiers), vehicles and various other equipment used in operating our business. Certain leases for real estate and aircraft contain options to purchase, extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the optional period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, we consider all relevant economic factors that would compel us to exercise or not exercise an option.
When available, we use the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of our leases. In such cases, we use an estimate of our incremental borrowing rate to discount lease payments based on information available at lease commencement.
Aircraft
In addition to the aircraft that we own, we have leases for
335
aircraft. Of these leased aircraft,
34
are classified as finance leases,
12
are classified as operating leases and the remaining
289
are classified as short-term leases. A majority of the obligations associated with the aircraft classified as finance leases have been legally defeased. The long-term aircraft operating leases are operated by a third party to handle package and cargo volume in geographic regions where, due to government regulations, we are restricted from operating an airline.
In order to meet customers' needs, we charter aircraft to handle package and cargo volume on certain international trade lanes and domestic routes. Due to the nature of these agreements, primarily being that either party can cancel the agreement with short notice, we have classified these as short-term leases. Additionally, all of the lease payments associated with these charter agreements are variable in nature based on the number of hours flown.
Real Estate
We have operating and finance leases for package centers, airport facilities, warehouses, corporate office space and expansion facilities utilized during peak shipping periods. Many of our leases contain charges for common area maintenance or other miscellaneous expenses that are updated based on landlord estimates. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the ROU asset and associated lease liability.
Some of our real estate leases contain options to renew or extend the lease or terminate the lease before the expiration date. These options are factored into the determination of the lease term and lease payments when their exercise is considered to be reasonably certain.
From time to time, we enter into leases with the intention of purchasing the property, either through purchase options with a fixed price or a purchase agreement negotiated contemporaneously with the lease agreement. We classify these leases as finance leases and include the purchase date and purchase price in the lease term and lease payments, respectively, when the option to exercise or purchase is reasonably certain.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Transportation equipment and other equipment
We enter into both long-term and short-term leases for transportation equipment to supplement our capacity or meet contractual demands. Some of these assets are leased on a month-to-month basis and the leases can be terminated without penalty. The lease term for these types of leases is determined by the length of the underlying customer contract or based on the judgment of the business unit. We also enter into multi-year leases for trailers to increase capacity during periods of high demand, which are typically only used for 90-120 days during the year. These leases are treated as short-term as the cumulative right-of-use is less than 12 months over the term of the contract.
The remainder of our leases are primarily related to equipment used in our air operations, vehicles required to meet capacity needs during periods of higher demand for our shipping services, technology equipment and office equipment used in our facilities.
Some of our transportation and technology equipment leases require us to make additional lease payments based on the underlying usage of the assets. Due to the variable nature of these costs, these are expensed as incurred and are not included in the ROU asset and lease liability.
The components of lease expense for the
three and six
months ended
June 30, 2019
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2019
|
Operating lease costs
|
$
|
166
|
|
|
$
|
323
|
|
Finance lease costs:
|
|
|
|
Amortization of assets
|
18
|
|
|
$
|
37
|
|
Interest on lease liabilities
|
4
|
|
|
9
|
|
Total finance lease costs
|
22
|
|
|
46
|
|
Variable and short-term lease costs
|
240
|
|
|
518
|
|
Total lease costs
|
$
|
428
|
|
|
$
|
887
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental information and balance sheet location related to leases is as follows (in millions, except lease term and discount rate):
|
|
|
|
|
|
|
|
June 30, 2019
|
Operating Leases:
|
|
Operating lease right-of-use assets
|
$
|
2,477
|
|
|
|
Current maturities of operating leases
|
$
|
487
|
|
Non-current operating leases
|
2,026
|
|
Total operating lease liabilities
|
$
|
2,513
|
|
|
|
Finance Leases:
|
|
Property, plant and equipment, at cost
|
$
|
2,513
|
|
Accumulated amortization
|
961
|
|
Property, plant and equipment, net
|
$
|
1,552
|
|
|
|
Current maturities of long-term debt, commercial paper and finance leases
|
$
|
77
|
|
Long-term debt and finance leases
|
368
|
|
Total finance lease liabilities
|
$
|
445
|
|
|
|
Weighted average remaining lease term (in years):
|
|
Operating leases
|
9.2
|
|
Finance leases
|
10.6
|
|
|
|
Weighted average discount rate:
|
|
Operating leases
|
2.70
|
%
|
Finance leases
|
4.37
|
%
|
Supplemental cash flow information related to leases is as follows (in millions):
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2019
|
Cash paid for amounts included in measurement of liabilities:
|
|
Operating cash flows from operating leases
|
$
|
311
|
|
Operating cash flows from finance leases
|
9
|
|
Financing cash flows from finance leases
|
85
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
Operating leases
|
$
|
56
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease liabilities as of
June 30, 2019
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
Operating Leases
|
2019
|
$
|
62
|
|
|
$
|
293
|
|
2020
|
94
|
|
|
522
|
|
2021
|
42
|
|
|
441
|
|
2022
|
38
|
|
|
366
|
|
2023
|
37
|
|
|
292
|
|
Thereafter
|
293
|
|
|
1,077
|
|
Total lease payments
|
566
|
|
|
2,991
|
|
Less: Imputed interest
|
(121
|
)
|
|
(478
|
)
|
Total lease obligations
|
445
|
|
|
2,513
|
|
Less: Current obligations
|
(77
|
)
|
|
(487
|
)
|
Long-term lease obligations
|
$
|
368
|
|
|
$
|
2,026
|
|
As of
June 30, 2019
, we have additional leases which have not commenced. These leases will commence when we are granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained. These leases will commence in 2019 and 2020.
Disclosures related to periods prior to adoption of the new lease standard
The following table sets forth the aggregate minimum lease payments under capital and operating leases (in millions) as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
Capital Leases
|
|
Operating Leases
|
2019
|
$
|
158
|
|
|
$
|
578
|
|
2020
|
95
|
|
|
477
|
|
2021
|
42
|
|
|
399
|
|
2022
|
39
|
|
|
325
|
|
2023
|
36
|
|
|
262
|
|
After 2023
|
293
|
|
|
926
|
|
Total lease payments
|
663
|
|
|
2,967
|
|
Less: Imputed interest
|
(129
|
)
|
|
|
Total lease obligations
|
534
|
|
|
|
Less: Current obligations
|
(140
|
)
|
|
|
Long-term lease obligations
|
$
|
394
|
|
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11
.
LEGAL PROCEEDINGS
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 pending matters, including (except as otherwise noted herein) the matters described below, and we intend to vigorously defend each matter. We accrue 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
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 asserted claims under various federal and state laws. The complaint also included a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. On March 24, 2017, the District Court issued an opinion and order finding liability against UPS on each of the plaintiffs’ causes of action. On May 25, 2017, the District Court issued a corrected opinion and order on liability and an order awarding the plaintiffs damages of $
9.4
million and penalties of $
237.6
million. An accrual of $
9.4
million with respect to the damages awarded by the court is included on our consolidated balance sheets at
June 30, 2019
. We estimate that the amount of losses could be up to $
247
million, plus interest; however, the amount of penalties ultimately payable, if any, is subject to a variety of complex factors and potential outcomes that remain to be determined in future legal proceedings. Consequently, we are unable to reasonably estimate a likely amount of loss within that range. We strongly disagree with the District Court's analysis and conclusions, and have appealed to the United States Court of Appeals for the Second Circuit. The briefing and oral argument are now complete. We await a ruling by the Court of Appeals.
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 any matter would have a material adverse effect on our financial condition, results of operations or liquidity. Hughes v. UPS Supply Chain Solutions, Inc. and United Parcel Service, Inc. had previously been certified as a class action in Kentucky state court. In this action, plaintiffs alleged that they were not properly compensated for time entering and exiting security checkpoints and getting to their work areas at UPS’s facilities. Plaintiffs were seeking compensatory damages, liquidated damages, attorneys’ fees, and interest. In the second quarter of 2019, the court granted our motion for judgment on the pleadings.
Other Matters
In October 2015, the Department of Justice ("DOJ") informed us of an industry-wide inquiry into the transportation of mail under the United States Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a Civil Investigative Demand seeking certain information relating to our contracts. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating with the DOJ. We are unable to predict what action, if any, might be taken in the future by any government authorities as a result of their investigation. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, Spain’s National Markets and Competition Commission (“CNMC”) announced an investigation into
10
companies in the commercial delivery and parcel industry, including UPS, related to alleged nonaggression agreements to allocate customers. In May 2017, UPS received a Statement of Objections issued by the CNMC. In July 2017, UPS received a Proposed Decision from the CNMC. On March 8, 2018, the CNMC adopted a final decision, finding an infringement and imposing a fine on UPS of €
19.2
million. UPS has appealed the decision and in September 2018, obtained a suspension of the implementation of the decision (including payment of the fine). The appeal is pending. 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.
In February 2018, the Turkish Competition Authority (“Authority”) opened an investigation into nine companies, including UPS, in the small package industry related to alleged customer allocations in violation of Turkish competition law. In April 2018, the Authority consolidated this investigation with two other investigations involving similar allegations. The consolidated investigation involves over
30
companies. 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.
We are a party in various other matters that arose in the normal course of business. We do not believe that the eventual resolution of these other matters (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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12
.
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 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
June 30, 2019
, 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
June 30, 2019
,
no
preferred shares had been issued.
The following is a rollforward of our common stock, additional paid-in capital, retained earnings and non-controlling minority interest accounts for the three and
six
months ended
June 30, 2019
and
2018
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30:
|
2019
|
|
2018
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Class A Common Stock
|
|
|
|
|
|
|
|
Balance at beginning of period
|
164
|
|
|
$
|
2
|
|
|
174
|
|
|
$
|
2
|
|
Common stock purchases
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Stock award plans
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issuances
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Conversions of class A to class B common stock
|
(2
|
)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
Class A shares issued at end of period
|
161
|
|
|
$
|
2
|
|
|
168
|
|
|
$
|
2
|
|
Class B Common Stock
|
|
|
|
|
|
|
|
Balance at beginning of period
|
697
|
|
|
$
|
7
|
|
|
689
|
|
|
$
|
7
|
|
Common stock purchases
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Conversions of class A to class B common stock
|
2
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Class B shares issued at end of period
|
698
|
|
|
7
|
|
|
693
|
|
|
7
|
|
Additional Paid-In Capital
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
27
|
|
|
|
|
$
|
—
|
|
Stock award plans
|
|
|
213
|
|
|
|
|
150
|
|
Common stock purchases
|
|
|
(251
|
)
|
|
|
|
(247
|
)
|
Common stock issuances
|
|
|
107
|
|
|
|
|
77
|
|
Option premiums received (paid)
|
|
|
6
|
|
|
|
|
20
|
|
Unsettled portion of accelerated stock repurchase program
|
|
—
|
|
|
|
|
—
|
|
Balance at end of period
|
|
|
$
|
102
|
|
|
|
|
$
|
—
|
|
Retained Earnings
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
8,249
|
|
|
|
|
6,973
|
|
Net income attributable to common shareowners
|
|
|
1,685
|
|
|
|
|
1,485
|
|
Dividends ($0.96 and $0.91 per share)
(1)
|
|
|
(826
|
)
|
|
|
|
(784
|
)
|
Common stock purchases
|
|
|
—
|
|
|
|
|
(9
|
)
|
Other
|
|
|
1
|
|
|
|
|
—
|
|
Balance at end of period
|
|
|
$
|
9,109
|
|
|
|
|
$
|
7,665
|
|
Non-Controlling Minority Interest
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
18
|
|
|
|
|
$
|
31
|
|
Change in non-controlling minority interest
|
|
|
—
|
|
|
|
|
(3
|
)
|
Balance at end of period
|
|
|
$
|
18
|
|
|
|
|
$
|
28
|
|
(1)
The dividend per share amount is the same for both class A and class B common stock
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30:
|
2019
|
|
2018
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Class A Common Stock
|
|
|
|
|
|
|
|
Balance at beginning of period
|
163
|
|
|
$
|
2
|
|
|
173
|
|
|
$
|
2
|
|
Common stock purchases
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Stock award plans
|
4
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Common stock issuances
|
1
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Conversions of class A to class B common stock
|
(5
|
)
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
Class A shares issued at end of period
|
161
|
|
|
$
|
2
|
|
|
168
|
|
|
$
|
2
|
|
Class B Common Stock
|
|
|
|
|
|
|
|
Balance at beginning of period
|
696
|
|
|
$
|
7
|
|
|
687
|
|
|
$
|
7
|
|
Common stock purchases
|
(3
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Conversions of class A to class B common stock
|
5
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Class B shares issued at end of period
|
698
|
|
|
7
|
|
|
693
|
|
|
7
|
|
Additional Paid-In Capital
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Stock award plans
|
|
|
382
|
|
|
|
|
170
|
|
Common stock purchases
|
|
|
(502
|
)
|
|
|
|
(383
|
)
|
Common stock issuances
|
|
|
221
|
|
|
|
|
232
|
|
Option premiums received (paid)
|
|
|
1
|
|
|
|
|
(19
|
)
|
Balance at end of period
|
|
|
$
|
102
|
|
|
|
|
$
|
—
|
|
Retained Earnings
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
8,006
|
|
|
|
|
$
|
5,852
|
|
Net income attributable to common shareowners
|
|
|
2,796
|
|
|
|
|
2,830
|
|
Dividends ($1.92 and $1.82 per share)
(1)
|
|
|
(1,693
|
)
|
|
|
|
(1,624
|
)
|
Common stock purchases
|
|
|
—
|
|
|
|
|
(128
|
)
|
Reclassification from AOCI pursuant to the early adoption of ASU 2018-02
|
|
|
—
|
|
|
|
|
735
|
|
Balance at end of period
|
|
|
$
|
9,109
|
|
|
|
|
$
|
7,665
|
|
Non-Controlling Minority Interest
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
16
|
|
|
|
|
$
|
30
|
|
Change in non-controlling minority interest
|
|
|
2
|
|
|
|
|
(2
|
)
|
Balance at end of period
|
|
|
$
|
18
|
|
|
|
|
$
|
28
|
|
(1)
The dividend per share amount is the same for both class A and class B common stock
|
We repurchased
2.4
and
2.2
million shares of class A and class B common stock for $
251
and $
256
million during the three months ended June 30, 2019 and 2018, respectively. We repurchased
4.8
and
4.4
million shares of class A and class B common stock for
$502
and $
511
million during the
six
months ended
June 30, 2019
and 2018. In May 2016, the Board of Directors ("the Board") approved a share repurchase authorization of
$8.0
billion for shares of class A and class B common stock, which has no expiration date. As of
June 30, 2019
, we had
$2.837 billion
of this share repurchase authorization available.
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
second
quarter of 2019, we did not enter into any accelerated share repurchase transactions.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 net premiums of $
6
and
$20
million during the three months ended June 30, 2019 and 2018, respectively, related to entering into and settling capped call options for the purchase of class B shares. We received net premiums of
$1
million during the first
six
months of
2019
and paid
$19
million during the first
six
months of
2018
. As of
June 30, 2019
, we had outstanding options for the purchase of
0.2
million shares with a weighted average strike price of
$93.69
per share that will settle during 2019.
Accumulated Other Comprehensive Income (Loss)
We recognize 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. Additionally, effective January 1, 2018, we early adopted ASU 2018-02 that allowed a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act . The activity in AOCI for the three and
six
months ended
June 30, 2019
and
2018
is as follows (in millions):
|
|
|
|
|
|
|
|
|
Three Months Ended June 30:
|
2019
|
|
2018
|
Foreign currency translation gain (loss), net of tax:
|
|
|
|
Balance at beginning of period
|
$
|
(1,073
|
)
|
|
$
|
(983
|
)
|
Translation adjustment (net of tax effect of $(7) and $34)
|
(33
|
)
|
|
(78
|
)
|
Balance at end of period
|
(1,106
|
)
|
|
(1,061
|
)
|
Unrealized gain (loss) on marketable securities, net of tax:
|
|
|
|
Balance at beginning of period
|
2
|
|
|
(5
|
)
|
Current period changes in fair value (net of tax effect of $3 and $0)
|
5
|
|
|
—
|
|
Balance at end of period
|
7
|
|
|
(5
|
)
|
Unrealized gain (loss) on cash flow hedges, net of tax:
|
|
|
|
Balance at beginning of period
|
116
|
|
|
(511
|
)
|
Current period changes in fair value (net of tax effect of $5 and $100)
|
15
|
|
|
312
|
|
Reclassification to earnings (net of tax effect of $(9) and $6)
|
(27
|
)
|
|
20
|
|
Balance at end of period
|
104
|
|
|
(179
|
)
|
Unrecognized pension and postretirement benefit costs, net of tax:
|
|
|
|
Balance at beginning of period
|
(3,863
|
)
|
|
(4,139
|
)
|
Reclassification to earnings (net of tax effect of $14 and $12)
|
43
|
|
|
38
|
|
Balance at end of period
|
(3,820
|
)
|
|
(4,101
|
)
|
Accumulated other comprehensive income (loss) at end of period
|
$
|
(4,815
|
)
|
|
$
|
(5,346
|
)
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
Six Months Ended June 30:
|
2019
|
|
2018
|
Foreign currency translation gain (loss), net of tax:
|
|
|
|
Balance at beginning of period
|
$
|
(1,126
|
)
|
|
$
|
(930
|
)
|
Translation adjustment (net of tax effect of $2 and $25)
|
20
|
|
|
(84
|
)
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
|
—
|
|
|
(47
|
)
|
Balance at end of period
|
(1,106
|
)
|
|
(1,061
|
)
|
Unrealized gain (loss) on marketable securities, net of tax:
|
|
|
|
Balance at beginning of period
|
(2
|
)
|
|
(2
|
)
|
Current period changes in fair value (net of tax effect of $3 and $(1))
|
9
|
|
|
(4
|
)
|
Reclassification to earnings (net of tax effect of $0 and $1)
|
—
|
|
|
1
|
|
Balance at end of period
|
7
|
|
|
(5
|
)
|
Unrealized gain (loss) on cash flow hedges, net of tax:
|
|
|
|
Balance at beginning of period
|
40
|
|
|
(366
|
)
|
Current period changes in fair value (net of tax effect of $33 and $67)
|
104
|
|
|
210
|
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
|
—
|
|
|
(79
|
)
|
Reclassification to earnings (net of tax effect of $(13) and $18)
|
(40
|
)
|
|
56
|
|
Balance at end of period
|
104
|
|
|
(179
|
)
|
Unrecognized pension and postretirement benefit costs, net of tax:
|
|
|
|
Balance at beginning of period
|
(3,906
|
)
|
|
(3,569
|
)
|
Reclassification to earnings (net of tax effect of $27 and $24)
|
86
|
|
|
77
|
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
|
—
|
|
|
(609
|
)
|
Balance at end of period
|
(3,820
|
)
|
|
(4,101
|
)
|
Accumulated other comprehensive income (loss) at end of period
|
$
|
(4,815
|
)
|
|
$
|
(5,346
|
)
|
Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the
three and six
months ended
June 30, 2019
and
2018
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30:
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
Affected Line Item in the Income Statement
|
|
2019
|
|
2018
|
|
Unrealized gain (loss) on marketable securities:
|
|
|
|
|
|
Realized loss on sale of securities
|
$
|
—
|
|
|
$
|
—
|
|
|
Investment income and other
|
Income tax (expense) benefit
|
—
|
|
|
—
|
|
|
Income tax expense
|
Impact on net income
|
—
|
|
|
—
|
|
|
Net income
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
Interest rate contracts
|
(3
|
)
|
|
(6
|
)
|
|
Interest expense
|
Foreign exchange contracts
|
39
|
|
|
(20
|
)
|
|
Revenue
|
Income tax (expense) benefit
|
(9
|
)
|
|
6
|
|
|
Income tax expense
|
Impact on net income
|
27
|
|
|
(20
|
)
|
|
Net income
|
Unrecognized pension and postretirement benefit costs:
|
|
|
|
|
|
Prior service costs
|
(57
|
)
|
|
(50
|
)
|
|
Investment income and other
|
Income tax (expense) benefit
|
14
|
|
|
12
|
|
|
Income tax expense
|
Impact on net income
|
(43
|
)
|
|
(38
|
)
|
|
Net income
|
|
|
|
|
|
|
Total amount reclassified for the period
|
$
|
(16
|
)
|
|
$
|
(58
|
)
|
|
Net income
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30:
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
Affected Line Item in the Income Statement
|
|
2019
|
|
2018
|
|
Unrealized gain (loss) on marketable securities:
|
|
|
|
|
|
Realized loss on sale of securities
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
Investment income and other
|
Income tax (expense) benefit
|
—
|
|
|
1
|
|
|
Income tax expense
|
Impact on net income
|
—
|
|
|
(1
|
)
|
|
Net income
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
Interest rate contracts
|
(9
|
)
|
|
(12
|
)
|
|
Interest expense
|
Foreign exchange contracts
|
62
|
|
|
(62
|
)
|
|
Revenue
|
Income tax (expense) benefit
|
(13
|
)
|
|
18
|
|
|
Income tax expense
|
Impact on net income
|
40
|
|
|
(56
|
)
|
|
Net income
|
Unrecognized pension and postretirement benefit costs:
|
|
|
|
|
|
Prior service costs
|
(113
|
)
|
|
(101
|
)
|
|
Investment income and other
|
Income tax (expense) benefit
|
27
|
|
|
24
|
|
|
Income tax expense
|
Impact on net income
|
(86
|
)
|
|
(77
|
)
|
|
Net income
|
|
|
|
|
|
|
Total amount reclassified for the period
|
$
|
(46
|
)
|
|
$
|
(134
|
)
|
|
Net income
|
Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the
three and six
months ended
June 30, 2019
and
2018
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30:
|
2019
|
|
2018
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Deferred Compensation Obligations:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
25
|
|
|
|
|
$
|
31
|
|
Reinvested dividends
|
|
|
—
|
|
|
|
|
—
|
|
Benefit payments
|
|
|
—
|
|
|
|
|
—
|
|
Balance at end of period
|
|
|
$
|
25
|
|
|
|
|
$
|
31
|
|
Treasury Stock:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(1
|
)
|
|
$
|
(25
|
)
|
|
(1
|
)
|
|
$
|
(31
|
)
|
Reinvested dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefit payments
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
—
|
|
|
(25
|
)
|
|
(1
|
)
|
|
(31
|
)
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30:
|
2019
|
|
2018
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Deferred Compensation Obligations:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$
|
32
|
|
|
|
|
$
|
37
|
|
Reinvested dividends
|
|
|
1
|
|
|
|
|
1
|
|
Benefit payments
|
|
|
(8
|
)
|
|
|
|
(7
|
)
|
Balance at end of period
|
|
|
$
|
25
|
|
|
|
|
$
|
31
|
|
Treasury Stock:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(1
|
)
|
|
$
|
(32
|
)
|
|
(1
|
)
|
|
$
|
(37
|
)
|
Reinvested dividends
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Benefit payments
|
1
|
|
|
8
|
|
|
—
|
|
|
7
|
|
Balance at end of period
|
—
|
|
|
(25
|
)
|
|
(1
|
)
|
|
(31
|
)
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13
.
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 products 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 shipments with either origin or destination outside the United States. 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 our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units. Our Forwarding, Logistics and UPS Mail Innovations business units provide services in more than
200
countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, distribution and post-sales services, mail and consulting services. UPS Freight offers a variety of less-than-truckload ("LTL") and truckload ("TL") services to customers in North America. Coyote offers truckload brokerage services primarily in the United States. Marken is a global provider of supply chain solutions to the life sciences industry. 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, 2018
. Certain expenses are allocated between the segments using activity-based costing methods.
Segment information for the
three and six
months ended
June 30, 2019
and
2018
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
11,150
|
|
|
$
|
10,354
|
|
|
$
|
21,630
|
|
|
$
|
20,581
|
|
International Package
|
3,505
|
|
|
3,602
|
|
|
6,964
|
|
|
7,135
|
|
Supply Chain & Freight
|
3,393
|
|
|
3,500
|
|
|
6,614
|
|
|
6,853
|
|
Consolidated
|
$
|
18,048
|
|
|
$
|
17,456
|
|
|
$
|
35,208
|
|
|
$
|
34,569
|
|
Operating Profit:
|
|
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
1,208
|
|
|
$
|
939
|
|
|
$
|
1,874
|
|
|
$
|
1,695
|
|
International Package
|
663
|
|
|
618
|
|
|
1,191
|
|
|
1,212
|
|
Supply Chain & Freight
|
272
|
|
|
216
|
|
|
472
|
|
|
386
|
|
Consolidated
|
$
|
2,143
|
|
|
$
|
1,773
|
|
|
$
|
3,537
|
|
|
$
|
3,293
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14
.
EARNINGS PER SHARE
The earnings per share amounts are the same for class A and class B common shares as the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.
The following table sets forth the computation of basic and diluted earnings per share for the
three and six
months ended
June 30, 2019
and
2018
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to common shareowners
|
$
|
1,685
|
|
|
$
|
1,485
|
|
|
$
|
2,796
|
|
|
$
|
2,830
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares
|
860
|
|
|
861
|
|
|
860
|
|
|
861
|
|
Deferred compensation obligations
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Vested portion of restricted units
|
5
|
|
|
4
|
|
|
5
|
|
|
4
|
|
Denominator for basic earnings per share
|
865
|
|
|
866
|
|
|
866
|
|
|
866
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Restricted units
|
4
|
|
|
3
|
|
|
3
|
|
|
3
|
|
Stock options
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Denominator for diluted earnings per share
|
869
|
|
|
870
|
|
|
869
|
|
|
870
|
|
Basic earnings per share
|
$
|
1.95
|
|
|
$
|
1.71
|
|
|
$
|
3.23
|
|
|
$
|
3.27
|
|
Diluted earnings per share
|
$
|
1.94
|
|
|
$
|
1.71
|
|
|
$
|
3.22
|
|
|
$
|
3.25
|
|
Diluted earnings per share for the three months ended June 30, 2019 excluded the effect of
0.9
million shares of common stock that may be issued upon the exercise of employee stock options, because such effect would be antidilutive. There were no antidilutive shares for the three months ended June 30, 2018. Antidilutive shares for the six months ended
June 30, 2019
and
2018
were
0.9
and
0.1
million, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15
.
DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations. These exposures are actively monitored by management. To manage the impact of these exposures, we enter into a variety of derivative financial instruments. Our objective is to manage, 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 from those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Credit Risk Management
The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however, we seek to minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines, and by monitoring counterparties 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.
At
June 30, 2019
and
December 31, 2018
, we held cash collateral of $
448
and $
325
million, respectively, under these agreements; this collateral is included in "Cash and cash equivalents" in the consolidated balance sheets and its use by UPS is not restricted. At
June 30, 2019
and
December 31, 2018
, respectively,
$0 million
of additional collateral was required to be posted with our counterparties.
Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. Alternatively, we could be required to provide additional collateral or terminate transactions with certain counterparties in the event of a downgrade of our credit rating. The amount of collateral required would be determined by the net fair value of the associated derivatives with each counterparty. We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
At
June 30, 2019
and
December 31, 2018
there were no instruments in a net liability position that were not covered by the zero threshold bilateral collateral provisions.
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 cash flow hedges, 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.
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability in the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as fair value hedges, 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 hedge accounting requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the foreign currency translation adjustment within AOCI, and are recorded in the income statement when the hedged item affects earnings.
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. In order to mitigate the impact of fuel surcharges imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services. We periodically enter into derivative 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. Balances in the cumulative translation adjustment accounts remain until the sale or substantially complete liquidation of the foreign entity, upon which they are recognized as a component of investment income and other.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating-rate debt within our capital structure.
We have designated and account for the majority of our interest rate swaps that convert fixed-rate interest payments into floating-rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We have designated and account for interest rate swaps that convert floating-rate interest payments into fixed-rate interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from fair value adjustments to the interest rate swaps are recorded to AOCI.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings by using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.
Outstanding Positions
As of
June 30, 2019
and
December 31, 2018
, the notional amounts of our outstanding derivative positions were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Currency hedges:
|
|
|
|
|
|
Euro
|
EUR
|
4,793
|
|
|
EUR
|
4,924
|
|
British Pound Sterling
|
GBP
|
1,806
|
|
|
GBP
|
2,037
|
|
Canadian Dollar
|
CAD
|
1,444
|
|
|
CAD
|
1,443
|
|
Hong Kong Dollar
|
HKD
|
3,629
|
|
|
HKD
|
3,642
|
|
Singapore Dollar
|
SGD
|
—
|
|
|
SGD
|
20
|
|
|
|
|
|
|
|
Interest rate hedges:
|
|
|
|
|
|
Fixed to Floating Interest Rate Swaps
|
USD
|
3,674
|
|
|
USD
|
4,674
|
|
Floating to Fixed Interest Rate Swaps
|
USD
|
778
|
|
|
USD
|
778
|
|
As of
June 30, 2019
and
December 31, 2018
, we had no outstanding commodity hedge positions.
Balance Sheet Recognition and Fair Value Measurements
The following table indicates the location in the consolidated balance sheets where 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 in the consolidated balance sheets. The columns labeled "Net Amounts if Right of Offset had been Applied" indicate the potential net fair value positions by type of contract and location in 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
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2019
|
|
December 31,
2018
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
Level 2
|
|
$
|
119
|
|
|
$
|
90
|
|
|
$
|
114
|
|
|
$
|
83
|
|
Interest rate contracts
|
Other current assets
|
|
Level 2
|
|
4
|
|
|
1
|
|
|
4
|
|
|
1
|
|
Foreign exchange contracts
|
Other non-current assets
|
|
Level 2
|
|
264
|
|
|
230
|
|
|
254
|
|
|
215
|
|
Interest rate contracts
|
Other non-current assets
|
|
Level 2
|
|
25
|
|
|
14
|
|
|
24
|
|
|
6
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
Level 2
|
|
2
|
|
|
7
|
|
|
2
|
|
|
5
|
|
Foreign exchange contracts
|
Other non-current assets
|
|
Level 2
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Interest rate contracts
|
Other non-current assets
|
|
Level 2
|
|
17
|
|
|
18
|
|
|
16
|
|
|
18
|
|
Total Asset Derivatives
|
|
|
|
|
$
|
431
|
|
|
$
|
361
|
|
|
$
|
414
|
|
|
$
|
329
|
|
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
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2019
|
|
December 31,
2018
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current liabilities
|
|
Level 2
|
|
$
|
5
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange contracts
|
Other non-current liabilities
|
|
Level 2
|
|
10
|
|
|
15
|
|
|
—
|
|
|
—
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
Level 2
|
|
12
|
|
|
41
|
|
|
11
|
|
|
33
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current liabilities
|
|
Level 2
|
|
1
|
|
|
3
|
|
|
1
|
|
|
1
|
|
Foreign exchange contracts
|
Other non-current liabilities
|
|
Level 2
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
Level 2
|
|
2
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total Liability Derivatives
|
|
|
|
|
$
|
30
|
|
|
$
|
67
|
|
|
$
|
13
|
|
|
$
|
35
|
|
Our foreign exchange, interest rate and investment market price derivatives are largely comprised of over-the-counter derivatives, which are primarily valued using pricing models that rely on market observable inputs such as yield curves, currency exchange rates and investment forward prices; therefore, these derivatives are classified as Level 2.
Balance Sheet Location of Hedged Item in Fair Value Hedges
The following table indicates the amounts that were recorded in the consolidated balance sheets related to cumulative basis adjustments for fair value hedges as of
June 30, 2019
and
December 31, 2018
(in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount of Hedged Liabilities
|
|
Cumulative Amount of Fair Value Hedge Adjustments
|
|
Carrying Amount of Hedged Liabilities
|
|
Cumulative Amount of Fair Value Hedge Adjustments
|
Line Item in the Consolidated Balance Sheet in Which the Hedged Item is Included
|
|
June 30, 2019
|
|
June 30, 2019
|
|
December 31, 2018
|
|
December 31, 2018
|
Long-term debt and finance leases
|
|
3,246
|
|
|
54
|
|
|
4,207
|
|
|
16
|
|
The cumulative amount of fair value hedging losses remaining for any hedged assets and liabilities for which hedge accounting has been discontinued as of
June 30, 2019
is $
24
million. These amounts will be recognized over the next
11
years.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Income Statement and AOCI Recognition
The following table indicates the amount of gains and losses that have been recognized in the income statement for the fair value and cash flow hedges, as well as the associated gain or (loss) for the underlying hedged item for fair value hedges for the
three and six
months ended
June 30, 2019
and
2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Three Months Ended
June 30,
|
|
2019
|
|
2018
|
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|
Revenue
|
|
Interest Expense
|
|
Investment Income and Other
|
|
Revenue
|
|
Interest Expense
|
|
Investment Income and Other
|
Gain or (loss) on fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Interest Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
$
|
—
|
|
|
$
|
(30
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
—
|
|
Derivatives designated as hedging instruments
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
|
—
|
|
Gains or (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Interest Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
Foreign Exchange Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income
|
39
|
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
|
—
|
|
|
—
|
|
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded
|
$
|
39
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
(20
|
)
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|
Revenue
|
|
Interest Expense
|
|
Investment Income and Other
|
|
Revenue
|
|
Interest Expense
|
|
Investment Income and Other
|
Gain or (loss) on fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Interest Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
$
|
—
|
|
|
$
|
(45
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73
|
|
|
$
|
—
|
|
Derivatives designated as hedging instruments
|
—
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
(73
|
)
|
|
—
|
|
Gains or (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
Interest Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
Foreign Exchange Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income
|
62
|
|
|
—
|
|
|
—
|
|
|
(62
|
)
|
|
—
|
|
|
—
|
|
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded
|
$
|
62
|
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
$
|
(62
|
)
|
|
$
|
(12
|
)
|
|
$
|
—
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table indicates the amount of gains and (losses) that have been recognized in AOCI for the
three and six
months ended
June 30, 2019
and
2018
for those derivatives designated as cash flow hedges (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30:
|
|
|
|
|
Derivative Instruments in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivative
|
|
2019
|
|
2018
|
Interest rate contracts
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
Foreign exchange contracts
|
|
22
|
|
|
411
|
|
Total
|
|
$
|
20
|
|
|
$
|
412
|
|
|
|
|
|
|
Six Months Ended June 30:
|
|
|
|
|
Derivative Instruments in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
|
|
2019
|
|
2018
|
Interest rate contracts
|
|
$
|
11
|
|
|
$
|
2
|
|
Foreign exchange contracts
|
|
126
|
|
|
275
|
|
Total
|
|
$
|
137
|
|
|
$
|
277
|
|
As of
June 30, 2019
, there are $
133
million of pre-tax gains related to cash flow hedges that are currently deferred in AOCI that are expected to be reclassified to income over the 12 month period ending
June 30, 2020
. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions. The maximum term over which we are hedging exposures to the variability of cash flows is approximately
13
years.
The following table indicates the amount of gains and losses that have been recognized in AOCI within foreign currency translation adjustment for the
three and six
months ended
June 30, 2019
and
2018
for those instruments designated as net investment hedges (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30:
|
|
|
|
|
Non-derivative Instruments in Net Investment Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Debt
|
|
2019
|
|
2018
|
Foreign denominated debt
|
|
$
|
(67
|
)
|
|
$
|
218
|
|
Total
|
|
$
|
(67
|
)
|
|
$
|
218
|
|
|
|
|
|
|
Six Months Ended June 30:
|
|
|
|
|
Non-derivative Instruments in Net Investment Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
|
|
2019
|
|
2018
|
Foreign denominated debt
|
|
$
|
6
|
|
|
138
|
|
Total
|
|
$
|
6
|
|
|
$
|
138
|
|
|
|
|
|
|
Additionally, we maintain some interest rate swaps, foreign exchange forwards and investment market price forward contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic hedge of portions of our outstanding debt. The foreign exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement and settlement risk for certain assets and liabilities on our consolidated balance sheets. These investment market price forward contracts are intended to provide an economic offset to fair value fluctuations of certain investments in marketable securities.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We also periodically terminate interest rate swaps and foreign exchange options by entering into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original swap and foreign exchange contracts. These transactions provide an economic offset that effectively eliminates the effects of changes in market valuation.
The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these interest rate swaps, foreign currency forward and investment market price forward contracts not designated as hedges for the
three and six
months ended
June 30, 2019
and
2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated in
Hedging Relationships
|
Location of Gain (Loss)
Recognized in Income
|
|
Amount of Gain (Loss)
Recognized in Income
|
|
2019
|
|
2018
|
Three Months Ended June 30:
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
Foreign exchange contracts
|
Investment income and other
|
|
(19
|
)
|
|
(67
|
)
|
Total
|
|
|
$
|
(21
|
)
|
|
$
|
(69
|
)
|
Six Months Ended June 30:
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
Foreign exchange contracts
|
Investment income and other
|
|
(20
|
)
|
|
$
|
(59
|
)
|
Investment market price contracts
|
Investment income and other
|
|
—
|
|
|
16
|
|
Total
|
|
|
$
|
(24
|
)
|
|
$
|
(47
|
)
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
16
.
INCOME TAXES
Our effective tax rate increased to
23.5%
in the second quarter of 2019 from
22.9%
in the same period of 2018 (
23.3%
year-to-date in 2019 compared to
21.1%
in the same period of 2018). The recognition in income tax of excess tax benefits related to share-based compensation reduced our effective rate by
0.2%
year-to-date in 2019 compared to
1.3%
in the same period of 2018 (there was not a significant impact in the second quarter of 2019 or 2018). Other favorable items that impacted our effective tax rate in 2018, but did not recur in 2019, included favorable resolutions of uncertain tax positions and favorable tax provisions enacted in the Bipartisan Budget Act of 2018.
As discussed in our Annual Report on Form 10-K for the year ended
December 31, 2018
, we have recognized liabilities for uncertain tax positions. We reevaluate these uncertain tax positions on a quarterly basis. A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. However, an estimate of the range of reasonably possible outcomes cannot be made. Items that may cause changes to unrecognized tax benefits include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statutes of limitations, additional regulatory guidance on the Tax Cuts and Jobs Act or other unforeseen circumstances.
As of June 30, 2019 and December 31, 2018, we maintained a valuation allowance against certain deferred tax assets primarily related to foreign net operating loss carryforwards. We intend to maintain a valuation allowance on these deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the allowance. Given our current and anticipated future foreign earnings, we believe there is a reasonable possibility that within the next 12 months sufficient positive evidence may become available to allow us to reach a conclusion that a portion of the valuation allowance will no longer be needed. Release of a portion of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period in which the release is recorded. The exact timing and amount of any valuation allowance release are subject to change depending on the level of profitability that we are able to achieve.
As discussed in note 17, we recognized pre-tax transformation strategy costs of $
21
million in the
second
quarter of 2019 ($
144
million year-to-date). As a result, we recorded an additional income tax benefit in the second quarter of $
4 million
($
34 million
year-to-date). This year-to-date benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate primarily due to the effect of U.S. state and local taxes and foreign taxes.
As discussed in note 17, we recognized pre-tax transformation strategy costs of $
263
million in the second quarter of 2018. As a result, we recorded an income tax benefit of $
63
million. This benefit was generated at a higher average tax rate than the U.S. federal statutory rate primarily due to the effect of U.S. state and local taxes.
NOTE
17
.
TRANSFORMATION STRATEGY
In the first quarter of 2018, we launched the first phase of a multi-year, enterprise-wide transformation strategy that is expected to impact our organization. Over the next few years additional phases will be implemented. The program includes investments, as well as changes in processes and technology, that impact global direct and indirect operating costs.
During the three months ended
June 30, 2019
and
2018
, we recorded pre-tax charges of $
21
and $
263
million ($
144
and
$263
million year-to-date). These charges reflect other employee benefits costs of $
2
and $
192
million in the second quarter of 2019 and 2018 respectively ($
108
and
$192
million year-to-date respectively), included within "Compensation and benefits" on the statements of consolidated income, and other costs of $
19
and $
71
million in the second quarter of 2019 and 2018, respectively ($
36
and $
71
million year-to-date respectively), included within "Other expenses" in the statements of consolidated income. The after-tax transformation strategy costs totaled $
17
and $
200
million in the
second
quarter of 2019 and 2018, respectively ($
110
and $
200
million year-to-date, respectively). The income tax effects of the transformation strategy costs are calculated by multiplying the amount of the adjustments by the statutory tax rates applicable in each tax jurisdiction.