NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Basis of Financial Statements and Business Activities
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), and include the accounts of United Parcel Service, Inc., and all of its consolidated subsidiaries (collectively "UPS" or the "Company"). All intercompany balances and transactions have been eliminated.
We provide transportation services, primarily domestic and international letter and package delivery. Through our Supply Chain Solutions subsidiaries, we are also a global provider of transportation, logistics and related services.
Use of Estimates
The preparation of our consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses and the disclosure of contingencies. Estimates have been prepared on the basis of the most current and best information, and actual results could differ materially from those estimates. In particular, a number of estimates have been and will continue to be affected by the ongoing COVID-19 pandemic. The pandemic and its economic consequences remain uncertain, are changing and are difficult to predict. As a result, our accounting estimates and assumptions may change over time.
Revenue Recognition
United States ("U.S.") Domestic Package and International Package Operations: Revenue is recognized over time as we perform the services in the contract.
Forwarding: Freight forwarding revenue, including truckload brokerage revenue, and expenses related to the transportation of freight are recognized over time as we perform the services. Customs brokerage revenue is recognized upon completing documents necessary for customs entry purposes.
Logistics: 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.
UPS Freight: Prior to the divestiture in 2021, revenue was recognized over time as we performed the services in the contract.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments that are readily convertible into cash. We consider securities with maturities of three months or less and insignificant credit risk, when purchased, to be cash equivalents. The carrying amount of these securities approximates fair value because of the short-term maturity of these instruments. As of December 31, 2022 and 2021, we did not have any restricted cash balances.
Marketable Securities and Non-Current Investments
Debt securities are classified as either trading or available-for-sale securities and are carried at fair value. Unrealized gains and losses on trading securities are reported as Investment income (expense) and other on the statements of consolidated income. Unrealized gains and losses on available-for-sale securities are reported as other comprehensive income, a separate component of shareowners’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in Investment income (expense) and other, together with interest and dividends. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in Investment income (expense) and other.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We periodically review our available-for-sale investments for indications of other-than-temporary impairment considering many factors, including the extent and duration to which a security’s fair value has been less than its cost, overall economic and market conditions and the financial condition and specific prospects for the issuer. Impairment of available-for-sale securities results in a charge to income when a market decline below cost is other-than-temporary. We have both the intent and ability to hold these securities for the time necessary to recover the cost basis. If a decline in fair value is determined to be the result of a credit loss, then the decrease is recognized in income through an allowance for credit losses.
Investments in equity securities through which we exercise significant influence but do not have control over the investee are accounted for under the equity method. We record the investment at cost and subsequently increase or decrease the carrying amount of the investment by our proportionate share of the net earnings or losses and other comprehensive income of the investee. Gains and losses from equity method investments are reported in Investment income (expense) and other on the statements of consolidated income. We record dividends or other equity distributions as reductions of the carrying value of the investment. Equity method investments are included within Other Non-Current Assets on our consolidated balance sheets.
Inventories
Fuel and other materials and supplies inventories are recognized as inventory when purchased, and then charged to expense when used in our operations. Jet fuel, diesel and unleaded gasoline inventories are valued at the lower of average cost or net realizable value. Total inventories were $889 and $717 million as of December 31, 2022 and 2021, respectively, and are included in Other current assets in the consolidated balance sheets.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. We evaluate the useful lives of our property, plant and equipment based on our usage, maintenance and replacement policies, and taking into account physical and economic factors that may affect the useful lives of the assets.
Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the assets, which are as follows:
•Aircraft: 7 to 40 years, based on aircraft type and original aircraft manufacture date
•Buildings: 10 to 40 years
•Leasehold Improvements: lesser of asset useful life or lease term
•Plant Equipment: 3 to 20 years
•Technology Equipment: 3 to 10 years
•Vehicles: 5 to 15 years
Routine maintenance and repairs are generally charged to expense as incurred. For substantially all of our aircraft, the costs of major airframe and engine overhauls, as well as routine maintenance and repairs, are charged to expense as incurred.
Interest incurred during the construction of property, plant and equipment is capitalized until the underlying assets are placed in service, at which time amortization of the capitalized interest begins, straight-line, over the estimated useful lives of the related assets. Capitalized interest was $60 and $58 million for the years ended December 31, 2022 and 2021, respectively.
We monitor our property, plant and equipment for any indicators that the carrying value of the assets may not be recoverable, at which time we review long-lived assets for impairment based on undiscounted future cash flows. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows or external appraisals, as appropriate. We test long-lived assets for impairment at the asset group level, which is the lowest level at which independent cash flows can be identified. Refer to note 4 for a discussion of impairments of property, plant and equipment.
Leases
We recognize a right-of-use ("ROU") asset and lease obligation for all leases greater than twelve months, including reasonably certain renewal or purchase options. Some of our leases contain both lease and non-lease components, which we have elected to treat as a single lease component. Lease costs for short-term leases are recognized on a straight-line basis over the lease term.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain of our leases contain future payments that are dependent on an index or rate, such as the consumer price index. We initially measure the lease obligation and ROU asset using the index or rate at the commencement date. In subsequent periods, lease payments dependent on an index or rate are not remeasured. Rather, changes to payments due to a change in an index or rate are recognized in our statements of consolidated income in the period of the change.
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. For these leases, we use an estimate of our incremental borrowing rate to discount lease payments based on information available at lease commencement. The incremental borrowing rate is derived using multiple inputs including our credit rating, the impact of full collateralization, lease term and denominated currency.
Goodwill and Intangible Assets
Costs of purchased businesses in excess of net identifiable assets acquired (goodwill) and indefinite-lived intangible assets are tested for impairment at least annually, unless changes in circumstances indicate an impairment may have occurred sooner. We are required to test goodwill on a reporting unit basis and we complete our annual goodwill impairment evaluation as of July 1st.
In assessing goodwill for impairment, we initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We consider several factors, including macroeconomic conditions, industry and market conditions, overall financial performance of the reporting unit, changes in management, strategy or customers and relevant reporting unit-specific events such as a change in the carrying amount of net assets, a more likely than not expectation of selling or disposing of all, or a portion of, a reporting unit, and the testing for recoverability of a significant asset group within a reporting unit. If this qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit.
If the qualitative assessment is not conclusive, we quantitatively assess the fair value of a reporting unit to test goodwill for impairment. We assess the fair value of a reporting unit using a combination of discounted cash flow modeling and observable valuation multiples for comparable companies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we record the excess amount as goodwill impairment, not to exceed the total amount of goodwill allocated to the reporting unit.
When performing impairment tests of indefinite-lived intangible assets, the estimated fair value is compared to the carrying value of the asset. If the carrying value of the asset exceeds its estimated fair value, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value.
Finite-lived intangible assets, including trademarks, licenses, patents, customer lists, non-compete agreements and franchise rights are amortized on a straight-line basis over their estimated useful lives, which range from 2 to 21 years. Capitalized software is generally amortized over 7 years.
Assets Held for Sale
We classify long-lived assets or disposal groups as held for sale in the period when all of the following conditions have been met:
•we have approved and committed to a plan to sell the assets or disposal group;
•the asset or disposal group is available for immediate sale in its present condition;
•an active program to locate a buyer and other actions required to complete the sale have been initiated;
•the sale of the asset or disposal group is probable and expected to be completed within one year;
•the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
•it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We initially measure a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell and recognize any loss in the period in which the held for sale criteria are met. Gains are not recognized until the date of sale. We cease depreciation and amortization of a long-lived asset, or assets within a disposal group, upon their designation as held for sale and subsequently assess fair value less any costs to sell at each reporting period until the asset or disposal group is no longer classified as held for sale.
Self-Insurance Accruals
We self-insure costs associated with workers' compensation claims, automobile liability, health and welfare and general business liabilities, up to certain limits. Self-insurance reserves are established for estimates of the losses we will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet reported. The expected ultimate cost for claims incurred is estimated based upon historical loss experience and judgments about the present and expected levels of cost per claim. Trends in actual experience are a significant factor in the determination of our reserves.
In November 2022, we transferred a portion of our workers' compensation liability related to policy years 2007 through 2016 to a third-party insurer. We paid $341 million to transfer a portfolio of claims for which we carried reserves of $332 million, recognizing a pre-tax loss of $9 million that was recorded in Other expenses in the statement of consolidated income for the year ended December 31, 2022.
We also sponsor a number of health and welfare insurance plans for our employees. Liabilities and expenses related to these plans are based on estimates of the number of employees and eligible dependents covered under the plans, global health events, anticipated medical usage by participants and overall trends in medical costs and inflation.
Pension and Postretirement Benefits
We incur certain employment-related expenses associated with company-sponsored defined benefit pension and postretirement medical benefits. These expenses are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS. Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim measurement of any of our plans.
We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of a corridor (defined as 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation) in Investment income (expense) and other upon remeasurement of a plan. The remaining components of pension expense, primarily service and interest costs and the expected return on plan assets, are recorded ratably on a quarterly basis.
We recognize expense for required contributions to defined contribution plans quarterly, and we recognize a liability for any contributions due and unpaid within Accrued group welfare and retirement plan contributions.
We participate in a number of trustee-managed multiemployer pension and health and welfare plans for employees covered under collective bargaining agreements. Our contributions to these plans are determined in accordance with the respective collective bargaining agreements. We recognize expense for the contractually required contribution for each period, and we recognize a liability for any contributions due and unpaid within Accrued group welfare and retirement plan contributions.
Income Taxes
Income taxes are accounted for on an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than proposed changes in the tax law or rates. Valuation allowances are provided if it is more likely than not that a deferred tax asset will not be realized. Our current accounting policy for releasing income tax effects from other comprehensive income is based on a portfolio approach.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. Once it is determined that the position meets the recognition threshold, the second step requires us to estimate and measure the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement. The difference between the amount of recognizable tax benefit and the total amount of tax benefit from positions filed or to be filed with the tax authorities is recorded as a liability for uncertain tax benefits. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision.
Foreign Currency Translation and Remeasurement
We translate the results of operations of our foreign subsidiaries using average exchange rates for each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Balance sheet currency translation adjustments are recorded in other comprehensive income. Pre-tax foreign currency transaction gains (losses) from remeasurement, net of hedging, included in Investment income (expense) and other were $72, $(36) and $9 million in 2022, 2021 and 2020, respectively.
Stock-Based Compensation
Share-based awards to employees are measured based on their fair values and expensed over the period during which an employee is required to provide service in exchange for the award (the vesting period), less estimated forfeitures. We have issued employee share-based awards under various incentive compensation plans that contain vesting conditions, including service conditions, where the awards cliff vest after one or three years or vest ratably over periods up to five years (the "nominal vesting period") or at the date the employee retires (as defined by the plan), if earlier. Compensation cost is generally recognized immediately for awards granted to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. We estimate forfeiture rates based on historical rates of forfeitures for awards with similar characteristics, historical and projected rates of employee turnover and the nature and terms of the vesting conditions of the awards. We reevaluate our forfeiture rates on an annual basis.
Fair Value Measurements
Our financial assets and liabilities measured at fair value on a recurring basis have been categorized based upon a fair value hierarchy. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities, and inputs other than quoted prices that are observable, such as interest rates and yield curves. Level 3 inputs are developed from unobservable data reflecting our own assumptions, and include situations where there is little or no market activity for the asset or liability.
Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis, including property, plant, and equipment, goodwill and intangible assets. These assets are subject to fair value adjustments in certain circumstances, such as when there is an impairment.
For business acquisitions, we allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and identified intangible assets based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Following the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, we designate the derivative as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation based upon the exposure being hedged.
•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 other comprehensive income, and reclassified into earnings in the 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 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 earnings during the current period, together with the 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 net investments in foreign operations. For instruments 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 other comprehensive income, and are recorded in the income statement when the hedged item affects earnings.
Adoption of New Accounting Standards
In December 2019, the Financial Accounting Standards Board issued an Accounting Standards Update ("ASU") to simplify the accounting for income taxes. The update removes certain exceptions to the general income tax principles. Effective October 1, 2020, we early adopted this ASU. It did not have a material impact on our consolidated financial position, results of operations, cash flows or internal controls.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), and in December 2022 subsequently issued ASU 2022-06, to temporarily ease the potential burden in accounting for reference rate reform. The standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The guidance was effective upon issuance and at present can generally be applied through December 31, 2024. We are evaluating the potential impacts of reference rate reform on our various contractual positions to determine whether we may apply any of the practical expedients set forth in this standard; however, we do not expect reference rate reform to have a material impact on our consolidated financial position, results of operations, cash flows, or internal controls.
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, cash flows or internal controls.
Accounting Standards Issued But Not Yet Effective
In September 2022, the FASB issued an ASU to enhance the disclosure of supplier finance programs. The update will be effective for us in the first quarter of 2023. We are evaluating the 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, cash flows or internal controls.
Other accounting pronouncements issued, but not effective until after December 31, 2022, are not expected to have a material impact on our consolidated financial position, results of operations, cash flows or internal controls.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REVENUE RECOGNITION
Revenue Recognition
Substantially all of our revenues are from contracts associated with the pickup, transportation and delivery of packages and freight ("transportation services"). These services may be carried out by or arranged by us and generally occur 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.
Disaggregation of Revenue
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Revenue: | | | | | |
Next Day Air | $ | 10,699 | | | $ | 10,009 | | | $ | 8,522 | |
Deferred | 5,968 | | | 5,846 | | | 5,665 | |
Ground | 47,542 | | | 44,462 | | | 39,312 | |
U.S. Domestic Package | $ | 64,209 | | | $ | 60,317 | | | $ | 53,499 | |
| | | | | |
Domestic | $ | 3,346 | | | $ | 3,690 | | | $ | 3,160 | |
Export | 15,341 | | | 15,012 | | | 12,159 | |
Cargo & Other | 1,011 | | | 839 | | | 626 | |
International Package | $ | 19,698 | | | $ | 19,541 | | | $ | 15,945 | |
| | | | | |
Forwarding | $ | 8,943 | | | $ | 9,872 | | | $ | 6,975 | |
Logistics | 5,351 | | | 4,767 | | | 4,073 | |
Freight | — | | | 1,064 | | | 3,149 | |
Other | 2,137 | | | 1,726 | | | 987 | |
Supply Chain Solutions | $ | 16,431 | | | $ | 17,429 | | | $ | 15,184 | |
| | | | | |
Consolidated revenue | $ | 100,338 | | | $ | 97,287 | | | $ | 84,628 | |
We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties are identified, 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. The vast majority of our contracts with customers are for transportation services that include only one performance obligation; the transportation services themselves. If a contract contains more than one performance obligation, we allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the services underlying each performance obligation.
In certain business units, such as Logistics, we sell customized, customer-specific solutions in which we integrate a complex set of tasks and components into a single capability that is accounted for as one performance obligation.
Satisfaction of Performance Obligations
We generally recognize revenue over time as we perform services in the contract because our customers receive the benefit of our services as goods are transported from one location to another. Further, if we were unable to complete delivery to the final location, those services would not need to be re-performed.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognize revenue based on the extent of progress towards completion of our services. We use the cost-to-cost measure of progress for our package delivery contracts because it best depicts the benefit received by the customer, which occurs as we incur costs on our contracts. Under this measure, 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 service. 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 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 benefit 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; therefore we recognize revenue in the amount to which we have a right to invoice the customer.
Variable Consideration
Our contracts commonly contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the rates paid for services. These variable amounts are generally dependent upon achievement of certain incentive tiers or performance metrics. We record revenue, which may be reduced by incentives or other contract provisions, to the extent it is probable that a significant reversal of cumulative amounts recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of revenue 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 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, customers pay at periodic intervals, which are generally seven days within our U.S. Domestic Package business, 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 contracts with customers.
Principal vs. Agent Considerations
In our transportation businesses, we may utilize independent contractors and third-party carriers to perform transportation services. We have determined that all our major businesses act as principal rather than agent within their revenue arrangements. Consequently, revenue and the associated purchased transportation costs are 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 reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimate of the current expected losses inherent in our accounts receivable at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, forward-looking indicators, trends in customer payment frequency, and judgments about the probable effects of relevant observable data, including present and future 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We increased our allowance for expected credit losses by $18 million during 2022 based upon current forecasts that reflect changes in the economic outlook. Our allowance for credit losses as of December 31, 2022 and 2021 was $146 and $128 million, respectively. Amounts for credit losses charged to expense before recoveries during the twelve months ended December 31, 2022 and 2021 were $214 and $175 million, respectively.
Contract Assets and Liabilities
Contract assets include billed and unbilled amounts resulting from in-transit shipments, as we have an unconditional right to payment only when services have been completed (i.e., shipments have been delivered). Amounts do 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 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 amount will be earned. We classify deferred revenue as current 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 and liabilities as of December 31, 2022 and 2021 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Location | | 2022 | | 2021 |
Contract Assets: | | | | | | |
Revenue related to in-transit packages | | Other current assets | | $ | 308 | | | $ | 304 | |
| | | | | | |
Contract Liabilities: | | | | | | |
Short-term advance payments from customers | | Other current liabilities | | $ | 11 | | | $ | 27 | |
Long-term advance payments from customers | | Other non-current liabilities | | $ | 26 | | | $ | 25 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. MARKETABLE SECURITIES AND NON-CURRENT INVESTMENTS
The following is a summary of marketable securities classified as trading and available-for-sale as of December 31, 2022 and 2021 (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
2022 | | | | | | | |
Current trading marketable securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Corporate debt securities | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | |
Equity securities | 2 | | | — | | | — | | | 2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total trading marketable securities | 2 | | | — | | | — | | | 2 | |
| | | | | | | |
Current available-for-sale marketable securities: | | | | | | | |
U.S. government and agency debt securities | 355 | | | — | | | (8) | | | 347 | |
Mortgage and asset-backed debt securities | 9 | | | — | | | — | | | 9 | |
Corporate debt securities | 1,472 | | | — | | | (6) | | | 1,466 | |
U.S. state and local municipal debt securities | 4 | | | — | | | — | | | 4 | |
| | | | | | | |
Non-U.S. government debt securities | 165 | | | — | | | — | | | 165 | |
| | | | | | | |
| | | | | | | |
Total available-for-sale marketable securities | 2,005 | | | — | | | (14) | | | 1,991 | |
| | | | | | | |
Total current marketable securities | $ | 2,007 | | | $ | — | | | $ | (14) | | | $ | 1,993 | |
| | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
2021 | | | | | | | |
Current trading marketable securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Corporate debt securities | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | |
Equity securities | 2 | | | — | | | — | | | 2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total trading marketable securities | 2 | | | — | | | — | | | 2 | |
| | | | | | | |
Current available-for-sale marketable securities: | | | | | | | |
U.S. government and agency debt securities | 199 | | | 2 | | | (1) | | | 200 | |
Mortgage and asset-backed debt securities | 7 | | | — | | | — | | | 7 | |
Corporate debt securities | 121 | | | — | | | — | | | 121 | |
U.S. state and local municipal debt securities | 5 | | | — | | | — | | | 5 | |
| | | | | | | |
Non-U.S. government debt securities | 3 | | | — | | | — | | | 3 | |
| | | | | | | |
| | | | | | | |
Total available-for-sale marketable securities | 335 | | | 2 | | | (1) | | | 336 | |
| | | | | | | |
Total current marketable securities | $ | 337 | | | $ | 2 | | | $ | (1) | | | $ | 338 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total current marketable securities that were pledged as collateral for our self-insurance requirements had an estimated fair value of $333 and $336 million as of December 31, 2022 and 2021, respectively.
The gross realized gains on sales of available-for-sale marketable securities totaled $0, $7 and $5 million in 2022, 2021 and 2020, respectively. The gross realized losses on sales of available-for-sale marketable securities totaled $3, $2 and $0 million in 2022, 2021 and 2020, respectively.
There were no material impairment losses recognized on marketable securities during 2022, 2021 or 2020.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unrealized Losses
The following table presents the age of gross unrealized losses and fair value by investment category for all securities in a loss position as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. government and agency debt securities | $ | 209 | | | $ | (4) | | | $ | 68 | | | $ | (4) | | | $ | 277 | | | $ | (8) | |
Mortgage and asset-backed debt securities | 7 | | | — | | | — | | | — | | | 7 | | | — | |
Corporate debt securities | 592 | | | (3) | | | 51 | | | (3) | | | 643 | | | (6) | |
U.S. state and local municipal debt securities | — | | | — | | | 4 | | | — | | | 4 | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total marketable securities | $ | 808 | | | $ | (7) | | | $ | 123 | | | $ | (7) | | | $ | 931 | | | $ | (14) | |
Maturity Information
The amortized cost and estimated fair value of marketable securities as of December 31, 2022 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 | $ | 1,187 | | | $ | 1,187 | |
Due after one year through three years | 791 | | | 777 | |
Due after three years through five years | 27 | | | 27 | |
Due after five years | — | | | — | |
| 2,005 | | | 1,991 | |
Equity securities | 2 | | | 2 | |
| $ | 2,007 | | | $ | 1,993 | |
Non-current investments
We hold non-current investments that are reported within Other Non-Current Assets on our consolidated balance sheets. Cash paid for these investments is included in Other investing activities in our statements of consolidated cash flows.
•Equity method investments: During the fourth quarter of 2022 we invested $252 million in the parent company of CommerceHub, Inc., a software provider connecting retailers and brands with marketplaces, drop ship solutions and delivery providers. We determined there is no amortizable basis difference between the purchase price for our investment and the underlying books and records of the investee. As of December 31, 2022 and 2021, equity securities accounted for under the equity method had a carrying value of $256 and $28 million, respectively.
•Other equity securities: Certain equity securities that do not have readily determinable fair values are reported in accordance with the measurement alternative in Accounting Standards Codification Topic 321 Investments – Equity Securities. As of December 31, 2022 and 2021, we had equity securities of $31 and $26 million, respectively, accounted for under the measurement alternative.
•Other investments: We hold an investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. The investment had a fair market value of $18 and $23 million as of December 31, 2022 and 2021, respectively.
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 CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about our investments measured at fair value on a recurring basis as of December 31, 2022 and 2021, 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) | | Total |
2022 | | | | | | | |
Marketable Securities: | | | | | | | |
U.S. government and agency debt securities | $ | 279 | | | $ | 68 | | | $ | — | | | $ | 347 | |
Mortgage and asset-backed debt securities | — | | | 9 | | | — | | | 9 | |
Corporate debt securities | — | | | 1,466 | | | — | | | 1,466 | |
U.S. state and local municipal debt securities | — | | | 4 | | | — | | | 4 | |
Equity securities | — | | | 2 | | | — | | | 2 | |
Non-U.S. government debt securities | — | | | 165 | | | — | | | 165 | |
| | | | | | | |
| | | | | | | |
Total marketable securities | 279 | | | 1,714 | | | — | | | 1,993 | |
Other non-current investments(1) | — | | | 18 | | | — | | | 18 | |
Total | $ | 279 | | | $ | 1,732 | | | $ | — | | | $ | 2,011 | |
(1) Represents a variable life insurance policy funding benefits for the UPS Excess Coordinating Benefit Plan. |
| | | | | | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
2021 | | | | | | | |
Marketable Securities: | | | | | | | |
U.S. government and agency debt securities | $ | 200 | | | $ | — | | | $ | — | | | $ | 200 | |
Mortgage and asset-backed debt securities | — | | | 7 | | | — | | | 7 | |
Corporate debt securities | — | | | 121 | | | — | | | 121 | |
U.S. state and local municipal debt securities | — | | | 5 | | | — | | | 5 | |
Equity securities | — | | | 2 | | | — | | | 2 | |
Non-U.S. government debt securities | — | | | 3 | | | — | | | 3 | |
| | | | | | | |
| | | | | | | |
Total marketable securities | 200 | | | 138 | | | — | | | 338 | |
Other non-current investments(1) | — | | | 23 | | | — | | | 23 | |
Total | $ | 200 | | | $ | 161 | | | $ | — | | | $ | 361 | |
(1) Represents a variable life insurance policy funding benefits for the UPS Excess Coordinating Benefit Plan. |
There were no transfers of investments into or out of Level 3 during 2022 or 2021.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including owned assets and assets subject to finance leases, consisted of the following as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
Vehicles | $ | 10,628 | | | $ | 10,018 | |
Aircraft | 22,598 | | | 21,973 | |
Land | 2,140 | | | 2,140 | |
Buildings | 6,032 | | | 5,802 | |
Building and leasehold improvements | 5,067 | | | 5,010 | |
Plant equipment | 16,145 | | | 15,650 | |
Technology equipment | 2,411 | | | 2,798 | |
| | | |
Construction-in-progress | 2,409 | | | 1,418 | |
| 67,430 | | | 64,809 | |
Less: Accumulated depreciation and amortization | (32,711) | | | (31,334) | |
Property, Plant and Equipment, Net | $ | 34,719 | | | $ | 33,475 | |
Property, plant and equipment purchased on account was $176 and $248 million as of December 31, 2022 and 2021, respectively.
There were no material impairment charges during the year ended December 31, 2022. We recognized impairment charges of $71 million during the year ended December 31, 2021, due to the reevaluation of certain facility projects.
During 2022, we reduced the estimated residual value of our MD-11 aircraft to zero, incurring a one-time charge on our fully-depreciated aircraft during the fourth quarter. This resulted in an increase in depreciation expense of $76 million, and a decrease in net income of $58 million, or $0.07 per share on a basic and diluted basis. The change in estimate for the remainder of our MD-11 fleet will be accounted for prospectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS
We sponsor various retirement and pension plans, including defined benefit and defined contribution plans which cover our employees worldwide.
U.S. Pension Benefits
In the U.S. we maintain the following single-employer defined benefit pension plans:
•The UPS Retirement Plan is noncontributory and includes substantially all eligible employees of participating domestic subsidiaries hired prior to July 1, 2016 who are not members of a collective bargaining unit, as well as certain employees covered by a collective bargaining agreement. This plan generally provides for retirement benefits based on average compensation earned by employees prior to retirement. Benefits payable under this plan are subject to maximum compensation limits and the annual benefit limits for a tax-qualified defined benefit plan as prescribed by the Internal Revenue Service (“IRS”).
•The UPS Pension Plan is noncontributory and includes certain eligible employees of participating domestic subsidiaries and members of collective bargaining units that elect to participate in the plan. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.
•The UPS/IBT Full-Time Employee Pension Plan is noncontributory and includes employees that were previously members of the Central States Pension Fund ("CSPF"), a multiemployer pension plan, in addition to other eligible employees who are covered under certain collective bargaining agreements. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.
•The UPS Excess Coordinating Benefit Plan is a non-qualified plan that provides benefits to certain participants in the UPS Retirement Plan, hired prior to July 1, 2016, for amounts that exceed the benefit limits described above.
The UPS Retirement Plan and the UPS Excess Coordinating Benefit Plan ceased accruals of additional benefits for future service and compensation for non-union participants effective January 1, 2023.
The divestiture of UPS Freight in 2021 triggered an interim remeasurement of the plan assets and benefit obligations of the UPS Pension Plan, UPS Retirement Plan and UPS Retired Employee Health Care Plan as of April 30, 2021. The interim remeasurement resulted in an actuarial gain of $2.1 billion, reflecting updated actuarial assumptions, and was recorded in other comprehensive income within the equity section of the consolidated balance sheet. An actuarial gain of $69 million ($52 million after tax) for a prior service credit related to the divested group and a $66 million loss ($50 million after tax) for certain plan amendments to the UPS Pension Plan were immediately recognized within Other expenses in the statement of consolidated income for the year ended December 31, 2021.
During 2021, we remeasured the UPS/IBT Full-Time Employee Pension Plan following the enactment into law of the American Rescue Plan Act, which is discussed below. The interim remeasurement resulted in a pre-tax mark-to-market gain of $3.3 billion ($2.5 billion after tax) during the year. The gain was included within Investment income (expense) and other in the statement of consolidated income for the year ended December 31, 2021.
International Pension Benefits
We also sponsor various defined benefit plans covering certain of our international employees. The majority of our international obligations are for defined benefit plans in Canada and the United Kingdom. In addition, many of our international employees are covered by government-sponsored retirement and pension plans. We are not directly responsible for providing benefits to participants of government-sponsored plans.
During 2022, we amended certain Canadian defined benefit pension plans to cease future benefit accruals effective December 31, 2023. We remeasured plan assets and benefit obligations for the plans, which resulted in curtailment gains of $34 million ($24 million after tax). These gains are included in Investment income (expense) and other in the statement of consolidated income.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Postretirement Medical Benefits
We also sponsor postretirement medical plans in the U.S. that provide healthcare benefits to our non-union retirees, as well as select union retirees who meet certain eligibility requirements and who are not otherwise covered by multiemployer plans. Generally, this includes employees with at least 10 years of service who have reached age 55 and employees who are eligible for postretirement medical benefits from a company-sponsored plan pursuant to collective bargaining agreements. We have the right to modify or terminate certain of these plans. These benefits have been provided to certain retirees on a noncontributory basis; however, in many cases, retirees are required to contribute all or a portion of the total cost of the coverage.
Defined Contribution Plans
We sponsor a defined contribution plan for employees not covered under collective bargaining agreements, and several smaller defined contribution plans for certain employees covered under collective bargaining agreements. We match, in shares of UPS common stock or cash, a portion of the participating employees’ contributions. Matching contributions charged to expense were $153, $153 and $139 million for 2022, 2021 and 2020, respectively.
In addition to current benefits under the UPS 401(k) Savings Plan, non-union employees hired after July 1, 2016, receive a retirement contribution. UPS contributes 3% to 8% of eligible pay to the UPS 401(k) Savings Plan based on years of vesting service and business unit. Contributions under this plan are subject to maximum compensation and contribution limits for a tax-qualified defined contribution plan as prescribed by the IRS. The UPS Restoration Savings Plan is a non-qualified plan that provides benefits to certain participants in the UPS 401(k) Savings Plan for amounts that exceed these benefit limits. Contributions charged to expense were $83, $107 and $84 million for 2022, 2021 and 2020 respectively.
On June 23, 2017, the Company amended the UPS 401(k) Savings Plan so that non-union employees who participated in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, earn a retirement contribution beginning January 1, 2023. UPS will contribute 5% to 8% of eligible compensation to the UPS 401(k) Savings Plan based on years of vesting service. The amendment also provides for transition contributions for certain participants. There was no impact to the statements of consolidated income for 2022, 2021 and 2020 as a result of this change.
Contributions are also made to defined contribution money purchase plans under certain collective bargaining agreements. Amounts charged to expense were $119, $112 and $107 million for 2022, 2021 and 2020, respectively.
Net Periodic Benefit Cost
Information about net periodic benefit cost for the company-sponsored pension and postretirement defined benefit plans is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Net Periodic Benefit Cost: | | | | | | | | | | | | | | | | | |
Service cost | $ | 2,024 | | | $ | 1,897 | | | $ | 1,853 | | | $ | 30 | | | $ | 28 | | | $ | 29 | | | $ | 68 | | | $ | 76 | | | $ | 67 | |
Interest cost | 1,950 | | | 1,948 | | | 1,977 | | | 83 | | | 81 | | | 91 | | | 45 | | | 38 | | | 40 | |
Expected return on plan assets | (3,280) | | | (3,327) | | | (3,549) | | | (4) | | | (5) | | | (8) | | | (78) | | | (68) | | | (86) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Amortization of prior service cost | 93 | | | 139 | | | 218 | | | — | | | 7 | | | 7 | | | 1 | | | 2 | | | 2 | |
Actuarial (gain) loss | (875) | | | (3,284) | | | 6,211 | | | — | | | 24 | | | 246 | | | (152) | | | (12) | | | 27 | |
Curtailment and settlement (gain) loss | — | | | — | | | — | | | — | | | — | | | — | | | (34) | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Net periodic benefit cost | $ | (88) | | | $ | (2,627) | | | $ | 6,710 | | | $ | 109 | | | $ | 135 | | | $ | 365 | | | $ | (150) | | | $ | 36 | | | $ | 50 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actuarial Assumptions
The table below provides the weighted-average actuarial assumptions used to determine the net periodic benefit cost:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Service cost discount rate | 3.13 | % | | 2.90 | % | | 3.60 | % | | 3.28 | % | | 2.88 | % | | 3.59 | % | | 2.78 | % | | 2.38 | % | | 3.01 | % |
Interest cost discount rate | 3.13 | % | | 2.90 | % | | 3.60 | % | | 3.28 | % | | 2.88 | % | | 3.59 | % | | 2.74 | % | | 2.22 | % | | 2.67 | % |
Rate of compensation increase | 4.29 | % | | 4.50 | % | | 4.22 | % | | N/A | | N/A | | N/A | | 3.17 | % | | 2.93 | % | | 3.00 | % |
Expected return on plan assets | 5.90 | % | | 6.50 | % | | 7.77 | % | | 4.77 | % | | 3.65 | % | | 7.20 | % | | 3.87 | % | | 3.68 | % | | 5.55 | % |
Cash balance interest credit rate | 2.50 | % | | 2.50 | % | | 2.50 | % | | N/A | | N/A | | N/A | | 2.94 | % | | 2.74 | % | | 2.59 | % |
The table below provides the weighted-average actuarial assumptions used to determine the benefit obligations of our plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Discount rate | 5.79 | % | | 3.13 | % | | 6.06 | % | | 3.28 | % | | 4.63 | % | | 2.33 | % |
Rate of compensation increase | 3.25 | % | | 4.29 | % | | N/A | | N/A | | 3.20 | % | | 3.17 | % |
Cash balance interest credit rate | 4.21 | % | | 2.50 | % | | N/A | | N/A | | 3.69 | % | | 2.94 | % |
A discount rate is used to determine the present value of our future benefit obligations. To determine the discount rate for our U.S. pension and postretirement benefit plans, we use a bond matching approach to select specific bonds that would satisfy our projected benefit payments. We believe the bond matching approach reflects the process we would employ to settle our pension and postretirement benefit obligations. For our international plans, the discount rate is determined by matching the expected cash flows of the plan, where available, or of a sample plan of similar duration, to a yield curve based on long-term, high quality fixed income debt instruments available as of the measurement date. These assumptions are updated each measurement date, which is typically annually.
As of December 31, 2022, the impact of each basis point change in the discount rate on the projected benefit obligation of our pension and postretirement medical benefit plans is as follows (in millions):
| | | | | | | | | | | |
| Increase (Decrease) in the Projected Benefit Obligation |
| Pension Benefits | | Postretirement Medical Benefits |
One basis point increase in discount rate | $ | (55) | | | $ | (1) | |
One basis point decrease in discount rate | $ | 59 | | | $ | 2 | |
The Society of Actuaries ("SOA") published mortality tables and improvement scales are used in developing the best estimate of mortality for our U.S. plans. In October 2022, the SOA elected to not release a new mortality improvement scale. Based on our perspective of future longevity, we elected to maintain the MP 2021 mortality scale assumption for purposes of measuring pension and other postretirement benefit obligations.
Assumptions for the expected return on plan assets are used to determine a component of net periodic benefit cost for the year. The assumption for our U.S. plans is developed using a long-term projection of returns for each asset class. Our asset allocation targets are reviewed annually and, if necessary, updated taking into consideration plan changes, funded status and actual performance. The expected return for each asset class is a function of passive, long-term capital market assumptions and excess returns generated from active management. The capital market assumptions used are provided by independent investment advisors, while excess return assumptions are supported by historical performance, fund mandates and investment expectations. As a result of our long-term U.S. capital market assumptions and investment objectives for pension assets, the weighted-average long-term expected rate of return on assets decreased from 6.50% during 2021 to 5.90% in 2022.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For plans outside the U.S., consideration is given to local market expectations of long-term returns. Strategic asset allocations are determined by plan, based on the nature of liabilities and considering the demographic composition of the plan participants.
Actuarial Assumptions - Central States Pension Fund
UPS was a contributing employer to the CSPF until 2007, at which time UPS withdrew from the CSPF. 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 reduced by the CSPF consistent with the terms of our withdrawal agreement with the CSPF. Under this agreement, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with law.
Subsequent to our withdrawal, the CSPF incurred extensive asset losses and indicated that it was projected to become insolvent. In such event, the CSPF benefits would be reduced to the legally permitted Pension Benefit Guaranty Corporation ("PBGC") limits, triggering the coordinating benefits provision in the collective bargaining agreement.
In March 2021, the American Rescue Plan Act (“ARPA”) was enacted into law. The ARPA contains provisions that allow for qualifying multiemployer pension plans to apply for special financial assistance ("SFA") from the PBGC, which will be funded by the U.S. government. Following SFA approval, a qualifying multiemployer pension plan will receive a lump sum payment to enable it to continue paying unreduced pension benefits through 2051. The multiemployer plan is not obligated to repay the SFA. The ARPA is intended to prevent both the PBGC and certain financially distressed multiemployer pension plans, including the CSPF, from becoming insolvent through 2051. The CSPF submitted an application for SFA that was approved in December 2022. In January 2023, $35.8 billion was paid to the CSPF by the PBGC.
The passage of the ARPA triggered a remeasurement of the UPS/IBT Plan under ASC 715. Accordingly, we remeasured the plan assets and pension benefit obligation as of March 31, 2021, which resulted in an actuarial gain of $6.4 billion, reflecting a reduction of the liability for coordinating benefits of $5.1 billion and a gain from other updated actuarial assumptions of $1.3 billion.
We account for the potential obligation to pay coordinating benefits under ASC 715, which requires us to provide a best estimate of various actuarial assumptions in measuring our pension benefit obligation at the December 31st measurement date. As of December 31, 2022, our best estimate of coordinating benefits that may be required to be paid by the UPS/IBT Plan after SFA funds have been exhausted was immaterial.
The value of our estimate for future coordinating benefits will continue to be influenced by a number of factors, including interpretations of the ARPA, future legislative actions, actuarial assumptions and the ability of the CSPF to sustain its long-term commitments. Actual events may result in a change in our best estimate of the projected benefit obligation. We will continue to assess the impact of these uncertainties in accordance with ASC 715.
Other Actuarial Assumptions
Healthcare cost trends are used to project future postretirement medical benefits payable from our plans. For purposes of measuring our U.S. plan obligations as of December 31, 2022, a 7.50% annual rate of increase in postretirement medical benefit costs was assumed; the rate was assumed to decrease gradually to 4.5% by 2035 and to remain at that level thereafter.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Funded Status
The following table discloses the funded status of our plans and the amounts recognized in our consolidated balance sheets as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Funded Status: | | | | | | | | | | | |
Fair value of plan assets | $ | 42,058 | | | $ | 55,954 | | | $ | 215 | | | $ | 115 | | | $ | 1,643 | | | $ | 2,106 | |
Benefit obligation | (43,504) | | | (61,378) | | | (2,016) | | | (2,592) | | | (1,416) | | | (2,106) | |
Funded status | $ | (1,446) | | | $ | (5,424) | | | $ | (1,801) | | | $ | (2,477) | | | $ | 227 | | | $ | — | |
Funded Status Recognized in our Balance Sheet: | | | | | | | | | | | |
Other non-current assets | $ | 1,408 | | | $ | — | | | $ | — | | | $ | — | | | $ | 416 | | | $ | 295 | |
Other current liabilities | (24) | | | (24) | | | (7) | | | (118) | | | (6) | | | (7) | |
Pension and postretirement benefit obligations | (2,830) | | | (5,400) | | | (1,794) | | | (2,359) | | | (183) | | | (288) | |
Net asset (liability) | $ | (1,446) | | | $ | (5,424) | | | $ | (1,801) | | | $ | (2,477) | | | $ | 227 | | | $ | — | |
Amounts Recognized in AOCI(1): | | | | | | | | | | | |
Unrecognized net prior service cost | $ | (734) | | | $ | (682) | | | $ | (3) | | | $ | (3) | | | $ | (8) | | | $ | (9) | |
Unrecognized net actuarial gain (loss) | 80 | | | (1,949) | | | 201 | | | (232) | | | 115 | | | 107 | |
Gross unrecognized cost | (654) | | | (2,631) | | | 198 | | | (235) | | | 107 | | | 98 | |
Deferred tax assets (liabilities) | 168 | | | 642 | | | (48) | | | 55 | | | (30) | | | (27) | |
Net unrecognized cost | $ | (486) | | | $ | (1,989) | | | $ | 150 | | | $ | (180) | | | $ | 77 | | | $ | 71 | |
(1) Accumulated Other Comprehensive IncomeThe accumulated benefit obligation for our pension plans as of December 31, 2022 and 2021 was $44.8 and $62.7 billion, respectively. The accumulated benefit obligation for our postretirement medical benefit plans as of December 31, 2022 and 2021 was $2.0 and $2.6 billion, respectively.
Benefit payments under the pension plans include $31 and $29 million paid from employer assets for the years ended December 31, 2022 and 2021, respectively. Benefit payments (net of participant contributions) under the postretirement medical benefit plans include $174 and $63 million paid from employer assets for the years ended December 31, 2022 and 2021, respectively. Such benefit payments from employer assets are also categorized as employer contributions.
As of December 31, 2022 and 2021, the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with benefit obligations in excess of plan assets were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Projected Benefit Obligation Exceeds the Fair Value of Plan Assets | | Accumulated Benefit Obligation Exceeds the Fair Value of Plan Assets |
| 2022 | | 2021 | | 2022 | | 2021 |
U.S. Pension Benefits: | | | | | | | |
Projected benefit obligation | $ | 24,452 | | | $ | 61,378 | | | $ | 24,452 | | | $ | 61,378 | |
Accumulated benefit obligation | 24,414 | | | 60,769 | | | 24,414 | | | 60,769 | |
Fair value of plan assets | 21,598 | | | 55,954 | | | 21,598 | | | 55,954 | |
International Pension Benefits: | | | | | | | |
Projected benefit obligation | $ | 311 | | | $ | 798 | | | $ | 274 | | | $ | 408 | |
Accumulated benefit obligation | 278 | | | 696 | | | 246 | | | 357 | |
Fair value of plan assets | 121 | | | 503 | | | 86 | | | 132 | |
The accumulated postretirement benefit obligation presented in the funded status table exceeds plan assets for all U.S. postretirement medical benefit plans.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Benefit Obligations and Fair Value of Plan Assets
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of plan assets as of the respective measurement dates in each year (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Benefit Obligations: | | | | | | | | | | | |
Projected benefit obligation at beginning of year | $ | 61,378 | | | $ | 65,922 | | | $ | 2,592 | | | $ | 2,759 | | | $ | 2,106 | | | $ | 2,177 | |
Service cost | 2,024 | | | 1,897 | | | 30 | | | 28 | | | 68 | | | 76 | |
Interest cost | 1,950 | | | 1,948 | | | 83 | | | 81 | | | 45 | | | 38 | |
Gross benefits paid | (2,151) | | | (1,906) | | | (268) | | | (278) | | | (45) | | | (46) | |
Plan participants’ contributions | — | | | — | | | 31 | | | 35 | | | 3 | | | 3 | |
Plan amendments | 145 | | | 66 | | | — | | | — | | | — | | | — | |
Actuarial (gain)/loss | (19,842) | | | (6,390) | | | (452) | | | (26) | | | (575) | | | (111) | |
Foreign currency exchange rate changes | — | | | — | | | — | | | — | | | (150) | | | (32) | |
Curtailments and settlements | — | | | (159) | | | — | | | (7) | | | (40) | | | (3) | |
Other | — | | | — | | | — | | | — | | | 4 | | | 4 | |
Projected benefit obligation at end of year | $ | 43,504 | | | $ | 61,378 | | | $ | 2,016 | | | $ | 2,592 | | | $ | 1,416 | | | $ | 2,106 | |
| | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Fair Value of Plan Assets: | | | | | | | | | | | |
Fair value of plan assets at beginning of year | $ | 55,954 | | | $ | 52,997 | | | $ | 115 | | | $ | 49 | | | $ | 2,106 | | | $ | 1,835 | |
Actual return on plan assets | (13,657) | | | 4,706 | | | (15) | | | (8) | | | (349) | | | 230 | |
Employer contributions | 1,912 | | | 157 | | | 352 | | | 317 | | | 78 | | | 102 | |
Plan participants’ contributions | — | | | — | | | 31 | | | 35 | | | 3 | | | 3 | |
Gross benefits paid | (2,151) | | | (1,906) | | | (268) | | | (278) | | | (45) | | | (46) | |
Foreign currency exchange rate changes | — | | | — | | | — | | | — | | | (144) | | | (15) | |
Curtailments and settlements | — | | | — | | | — | | | — | | | (6) | | | (3) | |
Other | — | | | — | | | — | | | — | | | — | | | — | |
Fair value of plan assets at end of year | $ | 42,058 | | | $ | 55,954 | | | $ | 215 | | | $ | 115 | | | $ | 1,643 | | | $ | 2,106 | |
2022 - $20.9 billion pre-tax actuarial gain related to benefit obligation:
•Discount Rates ($21.1 billion pre-tax gain): The weighted-average discount rate for our pension and postretirement medical plans increased from 3.11% as of December 31, 2021 to 5.77% as of December 31, 2022, primarily due to an increase in U.S. treasury yields, as well as an increase in credit spreads on AA-rated corporate bonds.
•Demographic and Assumption Changes ($0.2 billion pre-tax loss): This represents the difference between actual and estimated participant data and demographic factors, including healthcare cost trends, compensation changes, rates of termination, retirement, mortality and other changes.
2021 - $6.5 billion pre-tax actuarial gain related to benefit obligation:
•Discount Rates ($2.4 billion pre-tax gain): The weighted-average discount rate for our pension and postretirement medical plans increased from 2.87% as of December 31, 2020 to 3.11% as of December 31, 2021, primarily due to an increase in U.S. treasury yields, slightly offset by a decrease in credit spreads on AA-rated corporate bonds.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Coordinating benefits attributable to the Central States Pension Fund ($5.1 billion pre-tax gain): This represents the reduction in our best estimate of potential coordinating benefits that may be required to be paid related to the CSPF before taking into account the impact of the change in discount rates.
•Demographic and Assumption Changes ($1.0 billion pre-tax loss): This represents the difference between actual and estimated participant data and demographic factors, including healthcare cost trends, compensation changes, rates of termination, retirement, mortality and other changes.
Pension and Postretirement Plan Assets
Pension assets are invested in accordance with applicable laws and regulations, as well as investment guidelines established by plan trustees. The strategic asset mixes are specifically tailored for each plan given distinct factors, including liability and liquidity needs. Equities, alternative investments, and other higher-yielding assets are utilized to generate returns and promote growth. Derivatives, repurchase/reverse repurchase agreements and fixed income securities are utilized as tools for duration management, mitigating interest rate risk, and minimizing funded status volatility.
The primary long-term investment objectives for pension assets are to provide for a reasonable amount of long-term capital growth to meet future obligations while minimizing risk exposures and reducing funded status volatility. To meet these objectives, investment managers are engaged to actively manage assets within the guidelines and strategies set forth by our investment committee. Active managers are monitored regularly and their performance is compared to applicable benchmarks.
Fair Value Measurements
Plan assets valued utilizing Level 1 inputs include equity investments, corporate debt instruments and U.S. government securities. Fair values were determined by closing prices for those securities traded on national stock exchanges, while securities traded in the over-the-counter market and listed securities for which no sale was reported on the valuation date are valued at the mean between the last reported bid and ask prices.
Level 2 assets include fixed income securities that are valued based on yields currently available on comparable securities of other issues with similar credit ratings; mortgage-backed securities that are valued based on cash flow and yield models using acceptable modeling and pricing conventions; and certain investments that are pooled with other investments in a commingled fund. We value our investments in commingled funds by taking the percentage ownership of the underlying assets, each of which has a readily determinable fair value.
Fair value estimates for certain investments are based on unobservable inputs that are not corroborated by observable market data and are thus classified as Level 3.
Investments that do not have a readily determinable fair value, and which provide a net asset value ("NAV") or its equivalent developed consistent with FASB measurement principles, are valued using NAV as a practical expedient. These investments are not classified in Levels 1, 2, or 3 of the fair value hierarchy but instead included within the subtotals by asset category. Such investments include hedge funds, risk parity funds, real estate investments, private debt and private equity funds. Investments in hedge funds and risk parity funds are valued using the reported NAV as of December 31st. Real estate investments, private debt and private equity funds are valued at NAV per the most recent partnership audited financial reports, and adjusted, as appropriate, for investment activity between the date of the financial reports and December 31st. Due to the inherent limitations in obtaining a readily determinable fair value measurement for alternative investments, the fair values reported may differ from the values that would have been used had readily available market information for the alternative investments existed. These investments are described further below:
•Hedge Funds: Plan assets are invested in hedge funds that pursue multiple strategies to diversify risk and reduce volatility. Most of these hedge funds allow redemptions either quarterly or semi-annually after a two- to three-month notice period, while others allow for redemption after only a brief notification period with no restriction on redemption frequency. No unfunded commitments existed with respect to hedge funds as of December 31, 2022.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Risk Parity Funds: Plan assets are invested in risk parity strategies in order to provide diversification and balance risk/return objectives. These strategies reflect a multi-asset class balanced risk approach generally consisting of equity, interest rates, credit and commodities. These funds allow for monthly redemptions with only a brief notification period. No unfunded commitments existed with respect to risk parity funds as of December 31, 2022.
•Real Estate, Private Debt and Private Equity Funds: Plan assets are invested in limited partnership interests in various private equity, private debt and real estate funds. Limited provision exists for the redemption of these interests by the limited partners that invest in these funds until the end of the term of the partnerships, typically ranging between 10 and 15 years from the date of inception. An active secondary market exists for similar partnership interests, although no particular value (discount or premium) can be guaranteed. As of December 31, 2022, unfunded commitments to such limited partnerships totaling approximately $3.3 billion are expected to be contributed over the remaining investment period, typically ranging between three and six years.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of U.S. and international pension and postretirement benefit plan assets by asset category, including derivative assets and liabilities, as of December 31, 2022 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Assets(1) | | Level 1 | | Level 2 | | Level 3 | | Percentage of Plan Assets | | Target Allocation |
Asset Category (U.S. Plans): | | | | | | | | | | | |
Cash and cash equivalents | $ | 1,230 | | | $ | 870 | | | $ | 360 | | | $ | — | | | 2.9 | % | | 1-7 |
Equity Securities: | | | | | | | | | | | |
U.S. Large Cap | 6,513 | | | 2,511 | | | 4,002 | | | — | | | | | |
U.S. Small Cap | 698 | | | 698 | | | — | | | — | | | | | |
Emerging Markets | 1,542 | | | 1,171 | | | 371 | | | — | | | | | |
Global Equity | 1,168 | | | 1,168 | | | — | | | — | | | | | |
International Equity | 3,610 | | | 1,663 | | | 1,947 | | | — | | | | | |
Total Equity Securities | 13,531 | | | 7,211 | | | 6,320 | | | — | | | 32.0 | | | 20-45 |
Fixed Income Securities: | | | | | | | | | | | |
U.S. Government Securities(2) | 7,865 | | | 14,628 | | | (6,763) | | | — | | | | | |
Corporate Bonds | 6,145 | | | 7 | | | 6,138 | | | — | | | | | |
Global Bonds | 702 | | | — | | | 702 | | | — | | | | | |
Municipal Bonds | 6 | | | — | | | 6 | | | — | | | | | |
Total Fixed Income Securities | 14,718 | | | 14,635 | | | 83 | | | — | | | 34.8 | | | 30-70 |
Other Investments: | | | | | | | | | | | |
Hedge Funds | 4,368 | | | — | | | 2,717 | | | — | | | 10.3 | | | 3-13 |
Private Equity | 5,012 | | | — | | | — | | | — | | | 11.9 | | | 3-15 |
Private Debt | 829 | | | — | | | — | | | — | | | 2.0 | | | 1-15 |
Real Estate | 2,415 | | | 267 | | | 69 | | | — | | | 5.7 | | | 3-15 |
Structured Products(3) | 170 | | | — | | | 170 | | | — | | | 0.4 | | | 0-5 |
Total U.S. Plan Assets | $ | 42,273 | | | $ | 22,983 | | | $ | 9,719 | | | $ | — | | | 100.0 | % | | |
Asset Category (International Plans): | | | | | | | | | | | |
Cash and cash equivalents | $ | 147 | | | $ | 70 | | | $ | 77 | | | $ | — | | | 8.9 | % | | 1-10 |
Equity Securities: | | | | | | | | | | | |
Local Markets Equity | 138 | | | — | | | 138 | | | — | | | | | |
U.S. Equity | (3) | | | — | | | (3) | | | — | | | | | |
Emerging Markets | — | | | — | | | — | | | — | | | | | |
International / Global Equity | 298 | | | 36 | | | 262 | | | — | | | | | |
Total Equity Securities | 433 | | | 36 | | | 397 | | | — | | | 26.4 | | | 20-50 |
Fixed Income Securities: | | | | | | | | | | | |
Local Government Bonds | 91 | | | 59 | | | 32 | | | — | | | | | |
Corporate Bonds | 494 | | | — | | | 494 | | | — | | | | | |
Global Bonds | 119 | | | 98 | | | 21 | | | — | | | | | |
Total Fixed Income Securities | 704 | | | 157 | | | 547 | | | — | | | 42.8 | | | 35-55 |
Other Investments: | | | | | | | | | | | |
Real Estate | 95 | | | — | | | 48 | | | 25 | | | 5.8 | | | 1-10 |
Other | 264 | | | — | | | 190 | | | 52 | | | 16.1 | | | 1-30 |
Total International Plan Assets | $ | 1,643 | | | $ | 263 | | | $ | 1,259 | | | $ | 77 | | | 100.0 | % | | |
Total Plan Assets | $ | 43,916 | | | $ | 23,246 | | | $ | 10,978 | | | $ | 77 | | | | | |
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the category totals.
(2) Level 2 U.S. Government Securities includes repurchase and reverse repurchase agreements.
(3) Represents mortgage and asset-backed securities.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of U.S. and international pension and postretirement benefit plan assets by asset category, including derivative assets and liabilities, as of December 31, 2021 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Assets(1) | | Level 1 | | Level 2 | | Level 3 | | Percentage of Plan Assets | | Target Allocation |
Asset Category (U.S. Plans): | | | | | | | | | | | |
Cash and cash equivalents | $ | 2,671 | | | $ | 2,564 | | | $ | 107 | | | $ | — | | | 4.8 | % | | 1-7 |
Equity Securities: | | | | | | | | | | | |
U.S. Large Cap | 12,840 | | | 8,948 | | | 3,892 | | | — | | | | | |
U.S. Small Cap | 484 | | | 484 | | | — | | | — | | | | | |
Emerging Markets | 2,077 | | | 1,483 | | | 594 | | | — | | | | | |
Global Equity | 3,054 | | | 2,901 | | | 153 | | | — | | | | | |
International Equity | 4,199 | | | 1,972 | | | 2,227 | | | — | | | | | |
Total Equity Securities | 22,654 | | | 15,788 | | | 6,866 | | | — | | | 40.4 | | | 20-45 |
Fixed Income Securities: | | | | | | | | | | | |
U.S. Government Securities(2) | 12,083 | | | 25,358 | | | (13,275) | | | — | | | | | |
Corporate Bonds | 6,156 | | | — | | | 6,142 | | | 14 | | | | | |
Global Bonds | 23 | | | — | | | 23 | | | — | | | | | |
Municipal Bonds | 19 | | | — | | | 19 | | | — | | | | | |
Total Fixed Income Securities | 18,281 | | | 25,358 | | | (7,091) | | | 14 | | | 32.6 | | | 30-70 |
Other Investments: | | | | | | | | | | | |
Hedge Funds | 4,121 | | | — | | | 2,303 | | | — | | | 7.3 | | | 5-10 |
Private Equity | 4,822 | | | — | | | — | | | — | | | 8.6 | | | 1-10 |
Private Debt | 763 | | | — | | | — | | | — | | | 1.4 | | | 1-10 |
Real Estate | 2,285 | | | 313 | | | 106 | | | — | | | 4.1 | | | 1-10 |
Structured Products(3) | 177 | | | — | | | 177 | | | — | | | 0.3 | | | 1-5 |
Risk Parity Funds | 295 | | | — | | | — | | | — | | | 0.5 | | | 1-10 |
Total U.S. Plan Assets | $ | 56,069 | | | $ | 44,023 | | | $ | 2,468 | | | $ | 14 | | | 100.0 | % | | |
Asset Category (International Plans): | | | | | | | | | | | |
Cash and cash equivalents | $ | 184 | | | $ | 135 | | | $ | 49 | | | $ | — | | | 8.7 | % | | 1-10 |
Equity Securities: | | | | | | | | | | | |
Local Markets Equity | 193 | | | — | | | 193 | | | — | | | | | |
U.S. Equity | 53 | | | 53 | | | — | | | — | | | | | |
Emerging Markets | 35 | | | 35 | | | — | | | — | | | | | |
International / Global Equity | 513 | | | 195 | | | 318 | | | — | | | | | |
Total Equity Securities | 794 | | | 283 | | | 511 | | | — | | | 37.7 | | | 20-50 |
Fixed Income Securities: | | | | | | | | | | | |
Local Government Bonds | 61 | | | — | | | 61 | | | — | | | | | |
Corporate Bonds | 438 | | | 21 | | | 417 | | | — | | | | | |
Global Bonds | 136 | | | 134 | | | 2 | | | — | | | | | |
Total Fixed Income Securities | 635 | | | 155 | | | 480 | | | — | | | 30.2 | | | 30-50 |
Other Investments: | | | | | | | | | | | |
Real Estate | 172 | | | — | | | 90 | | | 24 | | | 8.2 | | | 5-10 |
| | | | | | | | | | | |
Other | 321 | | | — | | | 247 | | | 50 | | | 15.2 | | | 1-20 |
Total International Plan Assets | $ | 2,106 | | | $ | 573 | | | $ | 1,377 | | | $ | 74 | | | 100.0 | % | | |
Total Plan Assets | $ | 58,175 | | | $ | 44,596 | | | $ | 3,845 | | | $ | 88 | | | | | |
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the category totals.
(2) Level 2 U.S. Government Securities includes repurchase and reverse repurchase agreements.
(3) Represents mortgage and asset-backed securities.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in the Level 3 instruments measured on a recurring basis for the years ended December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate Bonds | | Other | | Total | | | | | | | | | | | | |
Balance as of January 1, 2021 | $ | 3 | | | $ | 62 | | | $ | 65 | | | | | | | | | | | | | |
Actual Return on Assets: | | | | | | | | | | | | | | | | | |
Assets Held at End of Year | — | | | 5 | | | 5 | | | | | | | | | | | | | |
Assets Sold During the Year | (16) | | | — | | | (16) | | | | | | | | | | | | | |
Purchases | 33 | | | 10 | | | 43 | | | | | | | | | | | | | |
Sales | (6) | | | (3) | | | (9) | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Transfers Into (Out of) Level 3 | — | | | — | | | — | | | | | | | | | | | | | |
Balance as of December 31, 2021 | $ | 14 | | | $ | 74 | | | $ | 88 | | | | | | | | | | | | | |
Actual Return on Assets: | | | | | | | | | | | | | | | | | |
Assets Held at End of Year | — | | | (2) | | | (2) | | | | | | | | | | | | | |
Assets Sold During the Year | (35) | | | — | | | (35) | | | | | | | | | | | | | |
Purchases | 482 | | | 9 | | | 491 | | | | | | | | | | | | | |
Sales | (460) | | | (4) | | | (464) | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Transfers Into (Out of) Level 3 | (1) | | | — | | | (1) | | | | | | | | | | | | | |
Balance as of December 31, 2022 | $ | — | | | $ | 77 | | | $ | 77 | | | | | | | | | | | | | |
There were no shares of UPS class A or class B common stock directly held in plan assets as of December 31, 2022 or 2021.
Expected Cash Flows
Information about expected cash flows for our pension and postretirement medical benefit plans is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| U.S. Pension Benefits | | U.S. Postretirement Medical Benefits | | International Pension Benefits |
Expected Employer Contributions: | | | | | |
2023 to plan trust | $ | 1,180 | | | $ | 72 | | | $ | 69 | |
2023 to plan participants | 25 | | | 46 | | | 7 | |
Expected Benefit Payments: | | | | | |
2023 | $ | 2,062 | | | $ | 223 | | | $ | 45 | |
2024 | 2,193 | | | 212 | | | 50 | |
2025 | 2,328 | | | 203 | | | 56 | |
2026 | 2,464 | | | 194 | | | 62 | |
2027 | 2,599 | | | 186 | | | 69 | |
2028 - 2032 | 14,834 | | | 797 | | | 437 | |
Our current funding policy guideline for U.S. plans is to contribute amounts annually that are at least equal to the amounts required by applicable laws and regulations. International plans will be funded in accordance with local regulations. Additional discretionary contributions may be made when deemed appropriate to meet the long-term obligations of the plans. Expected benefit payments for pensions will be paid primarily from plan trusts. Expected benefit payments for postretirement medical benefits will be paid from plan trusts and corporate assets.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. MULTIEMPLOYER EMPLOYEE BENEFIT PLANS
We contribute to a number of multiemployer pension plans under the terms of collective bargaining agreements that cover our union-represented employees. These plans generally provide for retirement, death and/or termination benefits for eligible employees within the applicable collective bargaining units, based on specific eligibility and participation requirements, vesting periods and benefit formulas. The risks of participating in multiemployer plans are different from single-employer plans in the following respects:
•Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
•If we negotiate to cease participating in a multiemployer pension plan, we may be required to pay that plan an amount based on our allocable share of its underfunded status, referred to as a "withdrawal liability". However, cessation of participation in a multiemployer plan and subsequent payment of any withdrawal liability is subject to the collective bargaining process.
•If any of the multiemployer pension plans in which we participate enter critical status, and our contributions are not sufficient to satisfy any rehabilitation plan funding schedule, we could be required under the Pension Protection Act of 2006 to make additional surcharge contributions to the multiemployer pension plan in the amount of five to ten percent of the existing contributions required by our labor agreement. Such surcharges would cease upon the ratification of a new collective bargaining agreement and could not reoccur unless a plan re-entered critical status at a later date.
The discussion that follows sets forth the impact on our results of operations and cash flows for December 31, 2022, 2021 and 2020, from our participation in multiemployer pension plans. As part of the overall collective bargaining process for wage and benefit levels, we have agreed to contribute certain amounts to these plans during the contract period. The plans set benefit levels and are responsible for benefit delivery to participants. Future contributions to the plans are determined only through collective bargaining, and we have no additional legal or constructive obligation to increase contributions beyond the agreed-upon amounts (except potential surcharges under the Pension Protection Act of 2006 described above).
The number of employees covered by multiemployer pension plans remained relatively flat in 2022, having increased in 2021 due to business growth. Contributions increased in accordance with the terms of our collective bargaining agreements. There have been no other significant changes that affect the comparability of 2022, 2021 and 2020 contributions. We recognize expense for the contractually-required contributions for each period, and we recognize a liability for any contributions due and unpaid at the end of a reporting period.
Status of Collective Bargaining Agreements
We have approximately 330,000 employees in the U.S. employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. These agreements run through July 31, 2023. We have begun negotiating the various supplemental agreements with the Teamsters and expect that negotiations with respect to the national master agreement will commence in April 2023. We are negotiating in good faith in an effort to reach an agreement that is in the best interests of our employees, the Teamsters and UPS; however, no assurances of our ability to do so, or the timing or terms thereof, can be provided. Customers may reduce their business or stop doing business with us if they believe that such actions or threatened actions may adversely affect our ability to provide services. We may permanently lose customers if we are unable to provide uninterrupted service, and this could materially adversely affect us. The terms of future collective bargaining agreements also may affect our competitive position and results of operations. Furthermore, our actions or responses to any such negotiations, labor disputes, strikes or work stoppages could negatively impact how our brand is perceived and our corporate reputation and have adverse effects on our business, including our results of operations.
We have approximately 10,000 employees in Canada employed under a collective bargaining agreement with the Teamsters which runs through July 31, 2025.
We have approximately 3,500 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"). This collective bargaining agreement becomes amendable September 1, 2025.
We have approximately 1,800 airline mechanics who are covered by a collective bargaining agreement with Teamsters Local 2727 which becomes amendable November 1, 2026. 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"). The collective bargaining agreement with the IAM runs through July 31, 2024.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Multiemployer Pension Plans
The following table outlines our participation in multiemployer pension plans as of December 31, 2022, 2021 and 2020, and sets forth our calendar year contributions and accruals for each plan.
The EIN/Pension Plan Number column provides the Employer Identification Number ("EIN") and the three-digit plan number. The most recent Pension Protection Act zone status available in 2022 and 2021 relates to each plan's two most recent fiscal year ends. The zone status is based on information that we received from the plans’ administrators and is certified by each plan’s actuary. Plans certified in the red zone are generally less than 65% funded; plans certified in the orange zone are both less than 80% funded and have an accumulated funding deficiency, or are expected to have a deficiency in any of the next six plan years; plans certified in the yellow zone are less than 80% funded; and plans certified in the green zone are at least 80% funded. Certain plans have applied for special financial assistance ("SFA") from the PBGC. These plans' zone status may change if the funds are received and incorporated into the plan administrators' information.
The FIP / RP Status Pending / Implemented column indicates whether a financial improvement plan ("FIP") for yellow/orange zone plans, or a rehabilitation plan ("RP") for red zone plans, is either pending or has been implemented. As of December 31, 2022, all plans that have either a FIP or RP requirement have had the respective plan implemented. Our collectively-bargained contributions satisfy the requirements of all implemented FIPs and RPs and do not currently require the payment of any surcharges. In addition, minimum contributions outside of the agreed-upon contractual rates are not required.
For the plans detailed in the following table, the expiration date of the associated collective bargaining agreements is July 31, 2023, with the exception of the IAM National Pension Fund / National Pension Plan, which has a July 31, 2024 expiration date. For all plans detailed in the following table, we provided more than 5% of the total plan contributions from all employers for 2022, 2021 and 2020, as disclosed in the annual filing with the Department of Labor for each respective plan.
Certain plans have been aggregated in the All Other Multiemployer Pension Plans line in the following table, as contributions to each of these individual plans are not material.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| EIN / Pension Plan Number | | Pension Protection Act Zone Status | | FIP / RP Status Pending / Implemented | | (in millions) UPS Contributions and Accruals | | Surcharge Imposed |
Pension Fund | | 2022 | | 2021 | | | 2022 | | 2021 | | 2020 | |
Alaska Teamster-Employer Pension Plan | 92-6003463-024 | | Red | | Red | | Yes | Implemented | | 10 | | | 9 | | | 8 | | | No |
Central Pennsylvania Teamsters Defined Benefit Plan | 23-6262789-001 | | Green | | Green | | No | NA | | 75 | | 65 | | 57 | | No |
Eastern Shore Teamsters Pension Fund | 52-0904953-001 | | Green | | Green | | No | NA | | 10 | | | 8 | | | 7 | | | No |
Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund | 55-6021850-001 | | Red | | Red | | Yes | Implemented | | 21 | | 18 | | 16 | | No |
Hagerstown Motor Carriers and Teamsters Pension Fund | 52-6045424-001 | | Red | | Red | | Yes | Implemented | | 13 | | 12 | | 11 | | No |
I.A.M. National Pension Fund / National Pension Plan | 51-6031295-002 | | Red | | Red | | Yes | Implemented | | 48 | | | 48 | | | 44 | | | No |
International Brotherhood of Teamsters Union Local No. 710 Pension Fund | 36-2377656-001 | | Green | | Green | | No | NA | | 191 | | | 180 | | | 161 | | | No |
Local 705, International Brotherhood of Teamsters Pension Plan | 36-6492502-001 | | Green | | Yellow | | No | NA | | 136 | | | 131 | | | 120 | | | No |
Local 804 I.B.T. & Local 447 I.A.M.—UPS Multiemployer Retirement Plan | 51-6117726-001 | | Green | | Green | | No | NA | | 144 | | | 135 | | | 124 | | | No |
Milwaukee Drivers Pension Trust Fund | 39-6045229-001 | | Green | | Green | | No | NA | | 62 | | | 58 | | | 53 | | | No |
New England Teamsters & Trucking Industry Pension Fund | 04-6372430-001 | | Red | | Red | | Yes | Implemented | | 167 | | | 145 | | | 140 | | | No |
New York State Teamsters Conference Pension and Retirement Fund | 16-6063585-074 | | Red | | Red | | Yes | Implemented | | 149 | | | 147 | | | 135 | | | No |
Teamster Pension Fund of Philadelphia and Vicinity | 23-1511735-001 | | Green | | Yellow | | No | NA | | 100 | | | 94 | | | 85 | | | No |
Teamsters Joint Council No. 83 of Virginia Pension Fund | 54-6097996-001 | | Green | | Green | | No | NA | | 98 | | | 89 | | | 82 | | | No |
Teamsters Local 639—Employers Pension Trust | 53-0237142-001 | | Green | | Green | | No | NA | | 85 | | | 80 | | | 74 | | | No |
Teamsters Negotiated Pension Plan | 43-6196083-001 | | Green | | Green | | No | NA | | 49 | | | 45 | | | 40 | | | No |
Truck Drivers and Helpers Local Union No. 355 Retirement Pension Plan | 52-6043608-001 | | Green | | Green | | No | NA | | 30 | | | 29 | | | 27 | | | No |
United Parcel Service, Inc.—Local 177, I.B.T. Multiemployer Retirement Plan | 13-1426500-419 | | Green | | Yellow | | No | NA | | 124 | | | 116 | | | 107 | | | No |
Western Conference of Teamsters Pension Plan | 91-6145047-001 | | Green | | Green | | No | NA | | 1,310 | | | 1,260 | | | 1,138 | | | No |
Western Pennsylvania Teamsters and Employers Pension Fund | 25-6029946-001 | | Red | | Red | | Yes | Implemented | | 46 | | | 40 | | | 37 | | | No |
All Other Multiemployer Pension Plans | | | | | | | | | | 73 | | | 78 | | | 89 | | | |
| | | | | | | | Total Contributions | | $ | 2,941 | | | $ | 2,787 | | | $ | 2,555 | | | |
Agreement with the New England Teamsters and Trucking Industry Pension Fund
In 2012, we reached an agreement with the New England Teamsters and Trucking Industry Pension Fund ("NETTI Fund"), a multiemployer pension plan in which UPS is a participant, to restructure the pension liabilities for approximately 10,200 UPS employees represented by the Teamsters. As of December 31, 2022 and 2021, we had $821 and $830 million, respectively, recognized in Other Non-Current Liabilities and $8 million as of December 31, 2022 and 2021, recorded in Other current liabilities in our consolidated balance sheets, representing the remaining balance of the NETTI Fund withdrawal liability. This liability is payable in equal monthly installments over a remaining term of approximately 40 years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of the NETTI Fund withdrawal liability as of December 31, 2022 and 2021 was $686 and $963 million, respectively. We utilized Level 2 inputs in the fair value hierarchy to determine the fair value of this liability.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Multiemployer Health and Welfare Plans
We also contribute to a number of multiemployer health and welfare plans covering both active and retired employees. Healthcare benefits are provided to participants who meet certain eligibility requirements as covered under the applicable collective bargaining unit. The following table sets forth our calendar year plan contributions and accruals. Certain plans have been aggregated in the All Other Multiemployer Health and Welfare Plans line, as the contributions to each of these individual plans are not material.
| | | | | | | | | | | | | | | | | |
| (in millions) UPS Contributions and Accruals |
Health and Welfare Fund | 2022 | | 2021 | | 2020 |
Bay Area Delivery Drivers | $ | 40 | | | $ | 41 | | | $ | 39 | |
Central Pennsylvania Teamsters Health & Pension Fund | 42 | | | 39 | | | 35 | |
Central States, South East & South West Areas Health and Welfare Fund | 3,497 | | | 3,374 | | | 3,202 | |
Delta Health Systems—East Bay Drayage Drivers | 39 | | | 39 | | | 37 | |
Joint Council #83 Health & Welfare Fund | 62 | | | 56 | | | 50 | |
Local 401 Teamsters Health & Welfare Fund | 22 | | | 19 | | | 15 | |
Local 804 Welfare Trust Fund | 129 | | | 123 | | | 110 | |
Milwaukee Drivers Pension Trust Fund—Milwaukee Drivers Health and Welfare Trust Fund | 62 | | | 59 | | | 53 | |
New York State Teamsters Health & Hospital Fund | 89 | | | 91 | | | 84 | |
Northern California General Teamsters (DELTA) | 211 | | | 209 | | | 188 | |
Northern New England Benefit Trust | 87 | | | 81 | | | 72 | |
Oregon / Teamster Employers Trust | 70 | | | 66 | | | 59 | |
Teamsters 170 Health & Welfare Fund | 25 | | | 24 | | | 22 | |
Teamsters Benefit Trust | 58 | | | 60 | | | 57 | |
Teamsters Local 251 Health & Insurance Plan | 26 | | | 26 | | | 23 | |
Teamsters Local 638 Health Fund | 70 | | | 66 | | | 60 | |
Teamsters Local 639—Employers Health & Pension Trust Funds | 38 | | | 40 | | | 39 | |
Teamsters Local 671 Health Services & Insurance Plan | 25 | | | 24 | | | 23 | |
Teamsters Union 25 Health Services & Insurance Plan | 75 | | | 74 | | | 69 | |
Teamsters Western Region & Local 177 Health Care Plan | 1,035 | | | 980 | | | 859 | |
Truck Drivers and Helpers Local 355 Baltimore Area Health & Welfare Fund | 23 | | | 23 | | | 22 | |
Utah-Idaho Teamsters Security Fund | 54 | | | 52 | | | 45 | |
Washington Teamsters Welfare Trust | 88 | | | 83 | | | 76 | |
All Other Multiemployer Health and Welfare Plans | 166 | | | 164 | | | 160 | |
Total Contributions | $ | 6,033 | | | $ | 5,813 | | | $ | 5,399 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Domestic Package | | International Package | | Supply Chain Solutions | | Consolidated |
Balance as of January 1, 2021 | $ | 715 | | | $ | 422 | | | $ | 2,230 | | | $ | 3,367 | |
Acquired | 132 | | | — | | | 243 | | | 375 | |
| | | | | | | |
Currency / Other | — | | | (19) | | | (31) | | | (50) | |
Balance as of December 31, 2021 | $ | 847 | | | $ | 403 | | | $ | 2,442 | | | $ | 3,692 | |
Acquired | — | | | 105 | | | 491 | | | 596 | |
Currency / Other | — | | | (16) | | | (49) | | | (65) | |
Balance as of December 31, 2022 | $ | 847 | | | $ | 492 | | | $ | 2,884 | | | $ | 4,223 | |
2022 Goodwill Activity
The goodwill acquired during 2022 primarily relates to our acquisitions of Delivery Solutions in May 2022 and Bomi Group in November 2022. Goodwill associated with Delivery Solutions is reported in Supply Chain Solutions. Goodwill associated with Bomi Group is reported in International Package and Supply Chain Solutions. The purchase price allocation for acquired businesses may be modified for up to one year from the date of acquisition if additional facts or circumstances lead to changes in our preliminary purchase accounting estimates. See note 8 for further discussion of business acquisitions.
The remaining change in goodwill for both Supply Chain Solutions and International Package was attributable to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
2021 Goodwill Activity
The goodwill acquired in U.S. Domestic Package and Supply Chain Solutions relates to our October 2021 acquisition of Roadie. See note 8 for further discussion of business acquisitions.
The remaining change in goodwill for both Supply Chain Solutions and International Package was attributable to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
Goodwill Impairment
We complete our annual goodwill impairment evaluation as of July 1st on a reporting unit basis. Our annual impairment testing indicated that the fair value of goodwill associated with our Roadie reporting unit remained greater than its carrying value as of our July 1st testing date, although this excess was less than 10 percent. The goodwill associated with our Roadie reporting unit as of December 31, 2022 was $241 million. We did not identify any triggering events for the periods presented that required an interim impairment test.
We did not record any goodwill impairment charges for the years ended December 31, 2022 and 2021. During 2020, we recorded a goodwill impairment charge of $494 million in connection with designating our UPS Freight business as held for sale. Cumulatively, we have recorded $1.1 billion of goodwill impairment charges in Supply Chain Solutions, while our International and U.S. Domestic Package segments have not recorded any goodwill impairment charges.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
The following is a summary of intangible assets as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Weighted-Average Amortization Period (in years) |
December 31, 2022 | | | | | | | |
Capitalized software | $ | 5,186 | | | $ | (3,500) | | | $ | 1,686 | | | 6.9 |
Licenses | 55 | | | (30) | | | 25 | | | 3.3 |
Franchise rights | 226 | | | (37) | | | 189 | | | 20.0 |
Customer relationships | 872 | | | (453) | | | 419 | | | 10.2 |
Trade name | 125 | | | (8) | | | 117 | | | 7.2 |
Trademarks, patents and other | 183 | | | (27) | | | 156 | | | 8.0 |
Amortizable intangible assets | $ | 6,647 | | | $ | (4,055) | | | $ | 2,592 | | | 7.8 |
Indefinite-lived intangible assets | 204 | | | — | | | 204 | | | |
Total Intangible Assets | $ | 6,851 | | | $ | (4,055) | | | $ | 2,796 | | | |
December 31, 2021 | | | | | | | |
Capitalized software | $ | 4,910 | | | $ | (3,275) | | | $ | 1,635 | | | |
Licenses | 58 | | | (27) | | | 31 | | | |
Franchise rights | 119 | | | (37) | | | 82 | | | |
Customer relationships | 733 | | | (408) | | | 325 | | | |
Trade name | 67 | | | (1) | | | 66 | | | |
Trademarks, patents and other | 158 | | | (15) | | | 143 | | | |
Amortizable intangible assets | $ | 6,045 | | | $ | (3,763) | | | $ | 2,282 | | | |
Indefinite-lived intangible assets | 204 | | | — | | | 204 | | | |
Total Intangible Assets | $ | 6,249 | | | $ | (3,763) | | | $ | 2,486 | | | |
A trade name and licenses with carrying values of $200 and $4 million, respectively, as of December 31, 2022 are deemed to be indefinite-lived intangible assets, and therefore are not amortized. Impairment tests for indefinite-lived intangible assets are performed annually. There were no events or changes in circumstances that would indicate the carrying amount of our indefinite-lived intangible assets may have been impaired as of December 31, 2022.
All of our other recorded intangible assets are deemed to be finite-lived intangibles, and are amortized over their estimated useful lives. Impairment tests for these intangible assets are only performed when a triggering event occurs that may indicate that the carrying value of the intangible may not be recoverable. Impairments of finite-lived intangible assets were $17, $19 and $13 million in 2022, 2021, and 2020, respectively.
Amortization of intangible assets was $525, $475 and $416 million in each of 2022, 2021 and 2020, respectively. Expected amortization of finite-lived intangible assets recorded as of December 31, 2022 for the next five years is as follows (in millions): 2023—$595; 2024—$512; 2025—$432; 2026—$334; 2027—$257. Amortization expense in future periods will be affected by business acquisitions and divestitures, software development, licensing agreements, purchases of development areas or similar franchise rights and other factors.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. ACQUISITIONS
In May 2022, we acquired Delivery Solutions, a digital platform that optimizes customer deliveries across multiple networks and provides real-time customer tracking and notifications. In November 2022, we acquired Bomi Group to accelerate our growth in healthcare logistics by expanding our international presence and increasing our cold chain capabilities in major European and Latin American markets. Delivery Solutions and Bomi Group are both reported within Supply Chain Solutions.
During 2022, we also acquired development areas for The UPS Store, which are recorded as intangible assets within Supply Chain Solutions.
The aggregate purchase price of acquisitions in 2022 was approximately $755 million, net of cash acquired. Acquisitions were funded using cash from operations.
The estimated fair value of assets acquired and liabilities assumed are subject to change based on completion of our purchase accounting. Certain areas, including our estimates of tax positions for Bomi Group, are preliminary as of December 31, 2022. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in millions):
| | | | | |
| 2022 |
Cash and cash equivalents | $ | 29 | |
Accounts receivable | 90 | |
Other current assets | 17 | |
Property, Plant, and Equipment | 58 | |
Operating Lease Right-Of-Use Assets | 111 | |
Goodwill | 596 | |
Intangible Assets(1) | 385 | |
Accounts Payable and other current liabilities | (159) | |
Non-Current Operating Leases | (85) | |
Long-Term Debt and Finance Leases | (190) | |
Deferred Income Tax Liabilities | (68) | |
Total purchase price | $ | 784 | |
(1) Includes acquisitions of development areas for The UPS StoreGoodwill recognized of approximately $596 million is attributable to expected synergies from future growth, including synergies to other segments. We have allocated $105 and $491 million of the recognized goodwill to reporting units within International Package and Supply Chain Solutions, respectively. Deductible goodwill for income tax purposes is not expected to be material.
The intangible assets acquired of approximately $385 million primarily consist of $176 million of customer relationships (amortized over a weighted-average of 15 years), $113 million of franchise rights (amortized over 20 years), $72 million of trade names (amortized over a weighted-average of 5 years), $14 million of technology (amortized over a weighted-average of 6 years) and $10 million in other intangibles (amortized over a weighted-average of 5 years). The carrying value of accounts receivable approximates fair value.
Acquisition-related costs in 2022 were approximately $25 million. These were expensed as incurred and are included in Other expenses within the statements of consolidated income.
In October 2021, we acquired Roadie, a technology platform that provides local same-day delivery with operations throughout the United States. The Roadie technology platform is purpose-built to connect merchants and consumers with contract drivers to enable efficient and scalable same-day local delivery services for items that are not compatible with the UPS network. The acquisition was funded using cash from operations. We report Roadie within Supply Chain Solutions.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in millions). Subsequent measurement period adjustments during 2022 were not material.
| | | | | |
| 2021 |
Cash and cash equivalents | $ | 12 | |
Accounts receivable | 15 | |
Goodwill | 375 | |
Intangible assets | 231 | |
Deferred tax liability | (47) | |
Total purchase price | $ | 586 | |
Goodwill recognized of approximately $375 million was attributable to expected synergies from future growth, including synergies to our U.S. Domestic Package segment. We allocated $243 and $132 million of the recognized goodwill to Supply Chain Solutions and U.S. Domestic Package, respectively. None of the goodwill is expected to be deductible for income tax purposes.
The intangible assets acquired of approximately $231 million primarily consisted of $145 million of technology (amortized over 8 years), $67 million of trade name (amortized over 10 years), and $19 million in other intangibles (amortized over an average of 8 years). The carrying value of accounts receivable approximated fair value.
Acquisition-related costs were not material, and were expensed as incurred and included in Other expenses within the statements of consolidated income.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt obligations, as of December 31, 2022 and 2021 consists of the following (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Principal | | | | Carrying Value |
| Amount | | Maturity | | 2022 | | 2021 |
| | | | | | | |
Fixed-rate senior notes: | | | | | | | |
| | | | | | | |
| | | | | | | |
2.450% senior notes | $ | — | | | 2022 | | $ | — | | | $ | 1,010 | |
2.350% senior notes | — | | | 2022 | | — | | | 600 | |
2.500% senior notes | 1,000 | | | 2023 | | 999 | | | 998 | |
2.800% senior notes | 500 | | | 2024 | | 499 | | | 498 | |
2.200% senior notes | 400 | | | 2024 | | 399 | | | 399 | |
3.900% senior notes | 1,000 | | | 2025 | | 997 | | | 996 | |
2.400% senior notes | 500 | | | 2026 | | 499 | | | 498 | |
3.050% senior notes | 1,000 | | | 2027 | | 995 | | | 994 | |
3.400% senior notes | 750 | | | 2029 | | 747 | | | 746 | |
2.500% senior notes | 400 | | | 2029 | | 397 | | | 397 | |
4.450% senior notes | 750 | | | 2030 | | 744 | | | 744 | |
6.200% senior notes | 1,500 | | | 2038 | | 1,485 | | | 1,484 | |
5.200% senior notes | 500 | | | 2040 | | 494 | | | 494 | |
4.875% senior notes | 500 | | | 2040 | | 491 | | | 491 | |
3.625% senior notes | 375 | | | 2042 | | 369 | | | 368 | |
3.400% senior notes | 500 | | | 2046 | | 492 | | | 492 | |
3.750% senior notes | 1,150 | | | 2047 | | 1,137 | | | 1,137 | |
4.250% senior notes | 750 | | | 2049 | | 743 | | | 743 | |
3.400% senior notes | 700 | | | 2049 | | 688 | | | 688 | |
5.300% senior notes | 1,250 | | | 2050 | | 1,231 | | | 1,231 | |
Floating-rate senior notes: | | | | | | | |
| | | | | | | |
Floating-rate senior notes | — | | | 2022 | | — | | | 400 | |
Floating-rate senior notes | 500 | | | 2023 | | 500 | | | 500 | |
Floating-rate senior notes | 1,039 | | | 2049-2067 | | 1,027 | | | 1,027 | |
Debentures: | | | | | | | |
7.620% debentures | 276 | | | 2030 | | 280 | | | 280 | |
Pound Sterling Notes: | | | | | | | |
5.500% notes | 80 | | | 2031 | | 79 | | | 89 | |
5.125% notes | 548 | | | 2050 | | 521 | | | 583 | |
Euro Senior Notes: | | | | | | | |
0.375% senior notes | 746 | | | 2023 | | 745 | | | 791 | |
1.625% senior notes | 746 | | | 2025 | | 744 | | | 791 | |
1.000% senior notes | 533 | | | 2028 | | 531 | | | 564 | |
1.500% senior notes | 533 | | | 2032 | | 530 | | | 564 | |
Canadian senior notes: | | | | | | | |
2.125% senior notes | 554 | | | 2024 | | 553 | | | 585 | |
Finance lease obligations (see note 11) | 390 | | | 2023 – 2063 | | 390 | | | 408 | |
Facility notes and bonds | 320 | | | 2029 – 2045 | | 320 | | | 320 | |
Other debt | 36 | | | 2023 – 2026 | | 36 | | | 5 | |
Total debt | $ | 19,826 | | | | | 19,662 | | | 21,915 | |
Less: current maturities | | | | | (2,341) | | | (2,131) | |
Long-term debt | | | | | $ | 17,321 | | | $ | 19,784 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO 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. As of December 31, 2022 we had no outstanding balances under these commercial paper programs. The amount of commercial paper outstanding under these programs in 2023 is expected to fluctuate.
Debt Repayments
On May 15, 2022, our 2.350% senior notes with a principal balance of $600 million and our floating-rate senior notes with a principal balance of $400 million matured and were repaid in full. On October 1, 2022, our 2.450% senior notes with a principal balance of $1.0 billion matured and were repaid in full. Additionally, we repaid €142 million of debt assumed in the Bomi Group acquisition during the fourth quarter of 2022.
Fixed-Rate Senior Notes
All of our fixed-rate notes pay interest semi-annually, and allow for redemption by UPS at any time by paying the greater of the principal amount or a "make-whole" amount, plus accrued interest. We subsequently entered into interest rate swaps on certain of these notes, which effectively converted the fixed interest rates on the notes to variable interest rates. The average interest rates payable on the notes where fixed interest rates were swapped to variable interest rates, including the impact of the interest rate swaps, for the years ended December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Principal | | | | Average Effective Interest Rate |
| Value | | Maturity | | 2022 | | 2021 |
3.125% senior notes | $ | 1,500 | | | 2021 | | — | % | | 1.07 | % |
2.450% senior notes | 1,000 | | | 2022 | | 1.75 | % | | 0.76 | % |
Both the 3.125% and 2.450% senior notes matured and have been repaid in full.
Floating-Rate Senior Notes
Our floating-rate senior notes bear interest at rates that reference the London Interbank Offer Rate ("LIBOR") for U.S. Dollars. As part of a broader program of reference rate reform, it is expected that U.S. Dollar LIBOR rates will cease to be published after June 2023.
We have floating-rate senior notes in the principal amount of $500 million that bear interest at three-month LIBOR, plus a spread of 45 basis points. Interest is payable semi-annually. These notes are not callable and mature in 2023, prior to the expected discontinuance of U.S. Dollar LIBOR. The average interest rate for 2022 and 2021, including interest on our $400 million floating-rate senior notes that matured on May 1, 2022, was 1.93% and 0.58%, respectively.
The remaining floating-rate senior notes, with principal amounts totaling $1.0 billion, bear interest at either one or three-month LIBOR, less a spread ranging from 30 to 45 basis points. These notes have maturities ranging from 2049 through 2067. Interest is payable monthly for notes maturing through 2053 and quarterly for notes maturing from 2064 through 2067. These notes will be impacted by the expected discontinuance of U.S. Dollar LIBOR rates in June 2023. We are currently working to transition these notes to an alternative reference rate. We anticipate that the Secured Overnight Financing Rate ("SOFR") will be adopted in accordance with recommendations of the Alternative Reference Rates Committee.
The average interest rate on the remaining floating-rate senior notes for 2022 and 2021 was 1.44% and 0.00%, respectively. These notes are callable at various times after 30 years at a stated percentage of par value, and redeemable at the option of the note holders at various times after one year at a stated percentage of par value. We have classified these floating-rate senior notes as long-term liabilities in our consolidated balance sheets, due to our intent and ability to refinance the debt if the put option is exercised.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.620% Debentures
The $276 million debentures have a maturity of April 1, 2030. These debentures are redeemable in whole or in part at any time at our option. The redemption price is equal to the greater of the principal amount plus accrued interest, or the present value of remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark treasury yield plus five basis points, plus accrued interest. Interest is payable semi-annually in April and October, and the debentures are not subject to sinking fund requirements.
Pound Sterling Notes
The Pound Sterling notes consist of two separate tranches, as follows:
•Notes with a principal amount of £66 million accrue interest at a fixed rate of 5.50% and are due in February 2031. Interest is payable semi-annually and these notes are not callable.
•Notes with a principal amount of £455 million accrue interest at a fixed rate of 5.125% and are due in February 2050. Interest is payable semi-annually. These notes are callable at our option at a redemption price equal to the greater of the principal amount plus accrued interest, or the present value of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark U.K. government bond yield plus 15 basis points, plus accrued interest.
Euro Senior Notes
The Euro notes consist of three separate issuances, as follows:
•Notes with principal amounts of €700 million and €500 million accrue interest at fixed rates of 0.375% and 1.50%, respectively, and are due in November 2023 and November 2032, respectively. Interest is payable annually. The notes are callable at our option at a redemption price equal to the greater of the principal amount, or the present value of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable government bond yield plus 10 and 20 basis points, respectively, plus accrued interest.
•Notes with a principal amount of €700 million accrue interest at a fixed rate of 1.625% and are due in November 2025. Interest is payable annually. These notes are callable at our option at a redemption price equal to the greater of the principal amount, or the present value of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark German government bond yield plus 20 basis points, plus accrued interest.
•Notes in the principal amount of €500 million accrue interest at a fixed rate of 1.00% and are due in November 2028. Interest is payable annually. These notes are callable at our option at a redemption price equal to the greater of the principal amount, or the present value of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable German government bond yield plus 15 basis points, plus accrued interest.
Canadian Dollar Senior Notes
The Canadian Dollar notes consist of a single series, as follows:
•Notes in the principal amount of C$750 million, which bear interest at a fixed rate of 2.125% and mature in May 2024. Interest is payable semi-annually. The notes are callable at our option, in whole or in part, at the Government of Canada yield plus 21.5 basis points, and on or after the par call date at par value.
Finance Lease Obligations
We have certain property, plant and equipment subject to finance leases. For additional information on finance lease obligations, see note 11.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Facility Notes and Bonds
We have entered into agreements with certain municipalities or related entities to finance the construction of, or improvements to, facilities that support our operations in the United States. These facilities are located around airport properties in Louisville, Kentucky; Dallas, Texas and Philadelphia, Pennsylvania. Under these arrangements, we enter into a lease or loan agreement that covers the debt service obligations on the bonds issued by these entities, as follows:
•Bonds with a principal balance of $149 million issued by the Louisville Regional Airport Authority associated with our Worldport facility in Louisville, Kentucky. The bonds are due in January 2029 and bear interest at a variable rate that is payable monthly. The average interest rates for 2022 and 2021 were 0.16% and 0.05%, respectively.
•Bonds with a principal balance of $42 million issued by the Louisville Regional Airport Authority associated with our airfreight facility in Louisville, Kentucky. The bonds are due in November 2036 and bear interest at a variable rate that is payable monthly. The average interest rates for 2022 and 2021 were 1.08% and 0.07%, respectively.
•Bonds with a principal balance of $29 million issued by the Dallas / Fort Worth International Airport Facility Improvement Corporation associated with our Dallas, Texas airport facilities. The bonds are due in May 2032 and bear interest at a variable rate that is payable quarterly. The variable cash flows on this obligation have been swapped to a fixed rate of 5.11%.
•Bonds with a principal balance of $100 million issued by the Delaware County, Pennsylvania Industrial Development Authority associated with our Philadelphia, Pennsylvania airport facilities. These bonds are due September 2045 and bear interest at a variable rate that is payable monthly. The average interest rate for 2022 and 2021 was 1.03% and 0.05%, respectively.
Contractual Commitments
The following table sets forth the aggregate annual principal payments on our long-term debt and our projected aggregate annual purchase commitments (in millions):
| | | | | | | | | | | |
Year | Debt Principal | | Purchase Commitments (1) |
2023 | $ | 2,259 | | | $ | 1,990 | |
2024 | 1,460 | | | 1,102 | |
2025 | 1,748 | | | 846 | |
2026 | 515 | | | 304 | |
2027 | 1,000 | | | — | |
After 2027 | 12,454 | | | — | |
Total | $ | 19,436 | | | $ | 4,242 | |
(1) Purchase commitments include estimates of future amounts yet to be recognized in our financial statements.
Purchase commitments represent contractual agreements for capital expenditures that are legally binding, including contracts for aircraft, construction of new or expanded facilities and vehicles.
Sources of Credit
Letters of Credit
As of December 31, 2022, we had outstanding letters of credit totaling approximately $1.7 billion issued in connection with our self-insurance reserves and other routine business requirements. We also issue surety bonds as an alternative to letters of credit in certain instances and, as of December 31, 2022, we had $1.5 billion of surety bonds written.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revolving Credit Facilities
We maintain two credit agreements with a consortium of banks. The first of these agreements provides revolving credit facilities of $1.0 billion and expires on December 5, 2023. Amounts outstanding under this agreement bear interest at a periodic fixed rate equal to the term SOFR rate, plus 0.10% per annum and an applicable margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of December 31, 2022 was 0.70%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; or (3) the Adjusted Term SOFR Rate for a one month interest period plus 1.00%, may be used at our discretion.
The second agreement provides revolving credit facilities of $2.0 billion and expires on December 7, 2026. Amounts outstanding under this facility bear interest at a periodic fixed rate equal to the term SOFR rate plus 0.10% per annum and an applicable margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of December 31, 2022 was 0.875%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; and (3) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%, plus an applicable margin, may be used at our discretion.
If the credit ratings established by Standard & Poor's and Moody’s differ, the higher rating will be used, except in cases where the lower rating is two or more levels lower. In these circumstances, the rating one step below the higher rating will be used. We are also able to request advances under these facilities based on competitive bids for the applicable interest rate. There were no amounts outstanding under our revolving credit facilities as of December 31, 2022.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2022 and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of December 31, 2022, 10% of net tangible assets is equivalent to $4.6 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 long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately $18.2 billion and $25.1 billion as of December 31, 2022 and 2021, 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 CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. LEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business.
Although there can be no assurances as to the ultimate outcome, we have generally denied, or believe we have meritorious defenses 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 amounts associated with legal proceedings when and to the extent a loss becomes probable and can be reasonably estimated. The actual costs of resolving legal proceedings may be substantially higher or lower than the amounts accrued on those claims.
For matters as to which we are not able to estimate a possible loss or range of losses, we are not able to determine whether any such loss will have a material impact on our operations or financial condition. For these matters, we have described the reasons that we are unable to estimate a possible loss or range of losses.
Judicial Proceedings
We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with any such matter will have a material impact on our operations or financial condition. One of these matters, 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 the second quarter of 2019, the court granted our motion for judgment on the pleadings related to the wage-and-hour claims. The plaintiffs' appeal of this decision was denied; however, in the second quarter of 2022 the plaintiffs were granted discretionary review of these claims by the Kentucky Supreme Court.
Other Matters
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, we received a Statement of Objections issued by the CNMC. In July 2017, we received a Proposed Decision from the CNMC. In March 2018, the CNMC adopted a final decision, finding an infringement and imposing an immaterial fine on UPS. We appealed the decision. In December 2022, the appeal was dismissed, although we intend to appeal this judgment before the Spanish Supreme Court. We do not believe that any loss from this matter would have a material impact on our operations or financial condition. We are vigorously defending ourselves and believe that we have a number of meritorious legal defenses. There are also unresolved questions of law and fact that could be important to the ultimate resolution of this matter.
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 impact on our operations or financial condition.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. LEASES
We have finance and operating leases for real estate (primarily package centers, airport facilities and warehouses), aircraft and engines, information technology equipment, 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.
Aircraft
In addition to the aircraft that we own, 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. A majority of our 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.
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. We also enter into equipment leases to increase capacity during periods of high demand. These leases are treated as short-term as the cumulative right of use is less than 12 months over the term of the contract.
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 right of use lease asset and associated lease obligation.
The components of lease expense for the years ended December 31, 2022, 2021 and 2020 were as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Operating lease costs | $ | 736 | | | $ | 729 | | | $ | 711 | |
Finance lease costs: | | | | | |
Amortization of assets | $ | 112 | | | $ | 97 | | | $ | 79 | |
Interest on lease liabilities | 14 | | | 14 | | | 18 | |
Total finance lease costs | 126 | | | 111 | | | 97 | |
Variable lease costs | 270 | | | 246 | | | 247 | |
Short-term lease costs | 1,499 | | | 1,510 | | | 1,299 | |
Total lease costs | $ | 2,631 | | | $ | 2,596 | | | $ | 2,354 | |
In addition to the lease costs disclosed in the table above, we monitor all lease categories for any indicators that the carrying value of the assets may not be recoverable. We recognized impairment charges of $17 million for the year ended December 31, 2020. There were no material impairments recognized for the years ended December 31, 2022 or 2021.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental information related to leases and location within our consolidated balance sheets as of December 31, 2022 and 2021 are as follows (in millions, except lease term and discount rate): | | | | | | | | | | | |
| 2022 | | 2021 |
Operating Leases: | | | |
Operating lease right-of-use assets | $ | 3,755 | | | $ | 3,562 | |
| | | |
Current maturities of operating leases | $ | 621 | | | $ | 580 | |
Non-current operating leases | 3,238 | | | 3,033 | |
Total operating lease obligations | $ | 3,859 | | | $ | 3,613 | |
| | | |
Finance Leases: | | | |
Property, plant and equipment, net | $ | 959 | | | $ | 1,125 | |
| | | |
Current maturities of long-term debt, commercial paper and finance leases | $ | 92 | | | $ | 129 | |
Long-term debt and finance leases | 298 | | | 279 | |
Total finance lease obligations | $ | 390 | | | $ | 408 | |
| | | |
Weighted average remaining lease term (in years): | | | |
Operating leases | 10.8 | | 11.7 |
Finance leases | 8.4 | | 8.0 |
| | | |
Weighted average discount rate: | | | |
Operating leases | 2.32 | % | | 1.94 | % |
Finance leases | 3.17 | % | | 2.79 | % |
Supplemental cash flow information related to leases for the years ended December 31, 2022 and 2021 is as follows (in millions): | | | | | | | | | | | |
| 2022 | | 2021 |
Cash paid for amounts included in measurement of obligations: | | | |
Operating cash flows from operating leases | $ | 705 | | | $ | 731 | |
Operating cash flows from finance leases | 14 | | | 4 | |
Financing cash flows from finance leases | 149 | | | 208 | |
| | | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 879 | | | $ | 1,247 | |
Finance leases | $ | 122 | | | $ | 280 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future payments for lease obligations as of December 31, 2022 are as follows (in millions): | | | | | | | | | | | |
| Finance Leases | | Operating Leases |
2023 | $ | 105 | | | $ | 703 | |
2024 | 56 | | | 631 | |
2025 | 42 | | | 565 | |
2026 | 35 | | | 497 | |
2027 | 34 | | | 429 | |
Thereafter | 193 | | | 1,608 | |
Total lease payments | 465 | | | 4,433 | |
Less: Imputed interest | (75) | | | (574) | |
Total lease obligations | 390 | | | 3,859 | |
Less: Current obligations | (92) | | | (621) | |
Long-term lease obligations | $ | 298 | | | $ | 3,238 | |
As of December 31, 2022, we have additional leases which have not commenced of $1.2 billion. These leases will commence between 2023 and 2024 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SHAREOWNERS' EQUITY
Capital Stock, Additional Paid-In Capital, Retained Earnings and Non-Controlling Minority Interests
We are authorized to issue two classes of common stock, which are distinguished from each other primarily by their respective voting rights. Class A shares of UPS 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, as well as trusts and descendants of the Company's founders, and these shares are fully convertible into class B shares at any time. Class B shares are publicly traded on the New York Stock Exchange ("NYSE") under the symbol "UPS". Class A and B shares both have a $0.01 par value, and as of December 31, 2022, 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 authorized to be issued, with a par value of $0.01 per share. As of December 31, 2022, 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 interests accounts for the years ended December 31, 2022, 2021 and 2020 (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Shares | | Dollars | | Shares | | Dollars | | Shares | | Dollars |
Class A Common Stock: | | | | | | | | | | | |
Balance at beginning of year | 138 | | | $ | 2 | | | 147 | | | $ | 2 | | | 156 | | | $ | 2 | |
| | | | | | | | | | | |
Stock award plans | 5 | | | — | | | 6 | | | — | | | 6 | | | — | |
Common stock issuances | 3 | | | — | | | 2 | | | — | | | 4 | | | — | |
Conversions of class A to class B common stock | (12) | | | — | | | (17) | | | — | | | (19) | | | — | |
Class A shares issued at end of year | 134 | | | $ | 2 | | | 138 | | | $ | 2 | | | 147 | | | $ | 2 | |
Class B Common Stock: | | | | | | | | | | | |
Balance at beginning of year | 732 | | | $ | 7 | | | 718 | | | $ | 7 | | | 701 | | | $ | 7 | |
Common stock purchases | (19) | | | — | | | (3) | | | — | | | (2) | | | — | |
Conversions of class A to class B common stock | 12 | | | — | | | 17 | | | — | | | 19 | | | — | |
Class B shares issued at end of year | 725 | | | $ | 7 | | | 732 | | | $ | 7 | | | 718 | | | $ | 7 | |
Additional Paid-In Capital: | | | | | | | | | | | |
Balance at beginning of year | | | $ | 1,343 | | | | | $ | 865 | | | | | $ | 150 | |
Stock award plans | | | 624 | | | | | 574 | | | | | 498 | |
Common stock purchases | | | (2,462) | | | | | (500) | | | | | (217) | |
Common stock issuances | | | 495 | | | | | 404 | | | | | 434 | |
| | | | | | | | | | | |
Balance at end of year | | | $ | — | | | | | $ | 1,343 | | | | | $ | 865 | |
Retained Earnings: | | | | | | | | | | | |
Balance at beginning of year | | | $ | 16,179 | | | | | $ | 6,896 | | | | | $ | 9,105 | |
Net income attributable to controlling interests | | | 11,548 | | | | | 12,890 | | | | | 1,343 | |
Dividends ($6.08, $4.08, and $4.04 per share) (1) | | | (5,363) | | | | | (3,604) | | | | | (3,552) | |
Common stock purchases | | | (1,038) | | | | | — | | | | | — | |
Other | | | — | | | | | (3) | | | | | — | |
Balance at end of year | | | $ | 21,326 | | | | | $ | 16,179 | | | | | $ | 6,896 | |
Non-Controlling Interests: | | | | | | | | | | | |
Balance at beginning of year | | | $ | 16 | | | | | $ | 12 | | | | | $ | 16 | |
Change in non-controlling interests | | | 1 | | | | | 4 | | | | | (4) | |
Balance at end of year | | | $ | 17 | | | | | $ | 16 | | | | | $ | 12 | |
(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $249, $167 and $178 million for 2022, 2021 and 2020, respectively, that were settled in shares of class A common stock.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion of class A and class B common stock. For the year ended December 31, 2020, we repurchased a total of 2.1 million shares of class A and class B common stock for $217 million under this program ($224 million is reported on the statements of consolidated cash flows due to the timing of settlements). We did not repurchase any shares under this program during 2021.
In August 2021, the Board of Directors terminated this authorization and approved a new share repurchase authorization (the "2021 Authorization") of $5.0 billion for class A and class B common stock. We repurchased 19.0 and 2.6 million shares of class B common stock for $3.5 billion and $500 million under this authorization during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had $1.0 billion of this share repurchase authorization available.
In January 2023, the Board of Directors terminated the 2021 Authorization and approved a new share repurchase authorization of $5.0 billion for class A and class B common stock.
Future share repurchases may be in the form of accelerated share repurchase programs, open market purchases or other methods we deem appropriate. The timing of share repurchases will depend upon market conditions. Unless terminated earlier by the Board of Directors, this program will expire when we have purchased all shares authorized for repurchase under the program.
Movements in additional paid-in capital in respect of stock award plans comprise accruals for unvested awards, offset by adjustments for awards that vest during the period.
Accumulated Other Comprehensive Income (Loss)
We recognize activity in other comprehensive income for foreign currency translation adjustments, unrealized holding gains and losses on available-for-sale securities, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in accumulated other comprehensive income for the years ended December 31, 2022, 2021 and 2020 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Foreign Currency Translation Gain (Loss), Net of Tax: | | | | | |
Balance at beginning of year | $ | (1,162) | | | $ | (981) | | | $ | (1,078) | |
Translation adjustment (net of tax effect of $(17), $42 and $(36)) | (315) | | | (181) | | | 97 | |
Reclassification to earnings (net of tax effect of $2, $0 and $0) | 31 | | | — | | | — | |
Balance at end of year | $ | (1,446) | | | $ | (1,162) | | | $ | (981) | |
Unrealized Gain (Loss) on Marketable Securities, Net of Tax: | | | | | |
Balance at beginning of year | $ | (1) | | | $ | 6 | | | $ | 4 | |
Current period changes in fair value (net of tax effect of $(3), $0 and $1) | (12) | | | (2) | | | 6 | |
Reclassification to earnings (net of tax effect of $1, $0 and $(1)) | 2 | | | (5) | | | (4) | |
Balance at end of year | $ | (11) | | | $ | (1) | | | $ | 6 | |
Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax: | | | | | |
Balance at beginning of year | $ | (17) | | | $ | (223) | | | $ | 112 | |
Current period changes in fair value (net of tax effect of $128, $82 and $(61)) | 407 | | | 261 | | | (192) | |
Reclassification to earnings (net of tax effect of $(70), $(17) and $(45)) | (223) | | | (55) | | | (143) | |
Balance at end of year | $ | 167 | | | $ | (17) | | | $ | (223) | |
Unrecognized Pension and Postretirement Benefit Costs, Net of Tax: | | | | | |
Balance at beginning of year | $ | (2,098) | | | $ | (5,915) | | | $ | (5,035) | |
Net actuarial gain (loss) and prior service cost resulting from remeasurements of plan assets and liabilities (net of tax effect of $810, $1,956 and $(1,885)) | 2,576 | | | 6,195 | | | (5,984) | |
Reclassification to earnings (net of tax effect of $(230), $(749) and $1,607) | (737) | | | (2,378) | | | 5,104 | |
Balance at end of year | $ | (259) | | | $ | (2,098) | | | $ | (5,915) | |
Accumulated other comprehensive income (loss) at end of year | $ | (1,549) | | | $ | (3,278) | | | $ | (7,113) | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the years ended December 31, 2022, 2021 and 2020 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amount Reclassified from AOCI | | Affected Line Item in the Income Statement |
| 2022 | | 2021 | | 2020 | |
Unrealized Gain (Loss) on Foreign Currency Translation: | | | | | | |
Realized gain (loss) on business wind-down | (33) | | | — | | | — | | | Other expenses |
Income tax (expense) benefit | 2 | | | — | | | — | | | Income tax expense |
Impact on net income | (31) | | | — | | | — | | | Net income |
Unrealized Gain (Loss) on Marketable Securities: | | | | | | | |
Realized gain (loss) on sale of securities | (3) | | | 5 | | | 5 | | | Investment income (expense) and other |
Income tax (expense) benefit | 1 | | | — | | | (1) | | | Income tax expense |
Impact on net income | (2) | | | 5 | | | 4 | | | Net income |
Unrealized Gain (Loss) on Cash Flow Hedges: | | | | | | | |
Interest rate contracts | (10) | | | (11) | | | (8) | | | Interest expense |
Foreign currency exchange contracts | 304 | | | 83 | | | 196 | | | Revenue |
Foreign currency exchange contracts | (1) | | | — | | | — | | | Investment income (expense) and other |
Income tax (expense) benefit | (70) | | | (17) | | | (45) | | | Income tax expense |
Impact on net income | 223 | | | 55 | | | 143 | | | Net income |
Unrecognized Pension and Postretirement Benefit Costs: | | | | | | |
Prior service costs | (94) | | | (148) | | | (227) | | | Investment income (expense) and other |
Prior service credit for divested business | — | | | 69 | | | — | | | Other expenses |
Plan amendments for divested business | — | | | (66) | | | — | | | Other expenses |
Remeasurement of benefit obligation | 1,027 | | | 3,272 | | | (6,484) | | | Investment income (expense) and other |
Curtailment of benefit obligation | 34 | | | — | | | — | | | Investment income (expense) and other |
Income tax (expense) benefit | (230) | | | (749) | | | 1,607 | | | Income tax expense |
Impact on net income | 737 | | | 2,378 | | | (5,104) | | | Net income |
Total amount reclassified for the year | $ | 927 | | | $ | 2,438 | | | $ | (4,957) | | | Net income |
Deferred Compensation Obligations and Treasury Stock
We maintain a deferred compensation plan whereby certain employees were previously able to elect to defer the gains on stock option exercises by deferring the shares received upon exercise into a rabbi trust. The shares held in this trust are classified as treasury stock, and the liability to participating employees is classified as Deferred compensation obligations in the Shareowners’ Equity section of the consolidated balance sheets. The number of shares needed to settle the liability for deferred compensation obligations is included in the denominator in both the basic and diluted earnings per share calculations. Employees are generally no longer able to defer the gains from stock options exercised subsequent to December 31, 2004.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the deferred compensation program for the years ended December 31, 2022, 2021 and 2020 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Shares | | Dollars | | Shares | | Dollars | | Shares | | Dollars |
Deferred Compensation Obligations: | | | | | | | | | | | |
Balance at beginning of year | | | $ | 16 | | | | | $ | 20 | | | | | $ | 26 | |
Reinvested dividends | | | 2 | | | | | 1 | | | | | 1 | |
Benefit payments | | | (5) | | | | | (5) | | | | | (7) | |
Balance at end of year | | | $ | 13 | | | | | $ | 16 | | | | | $ | 20 | |
Treasury Stock: | | | | | | | | | | | |
Balance at beginning of year | — | | | $ | (16) | | | — | | | $ | (20) | | | — | | | $ | (26) | |
Reinvested dividends | — | | | (2) | | | — | | | (1) | | | — | | | (1) | |
Benefit payments | — | | | 5 | | | — | | | 5 | | | — | | | 7 | |
Balance at end of year | — | | | $ | (13) | | | — | | | $ | (16) | | | — | | | $ | (20) | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. STOCK-BASED COMPENSATION
Our various incentive compensation plans permit the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units ("RSUs"), and restricted performance shares and performance units ("RPUs", collectively with RSUs, "Restricted Units"). On May 13, 2021, our shareholders approved our 2021 Omnibus Incentive Compensation Plan under which we are authorized to issue awards underlying 25 million shares. Each award issued in the form of Restricted Units, stock options and other permitted awards reduces the share reserve by one share. We had 14 million shares available to be issued under the UPS Incentive Compensation Plan as of December 31, 2022.
Our primary equity compensation programs are the UPS Management Incentive Award program (the "MIP"), the UPS Long-Term Incentive Performance Award program (the "LTIP") and the UPS Stock Option program. Our matching contributions to our primary employee defined contribution savings plan were also made in shares of UPS class A common stock through 2022. Beginning in 2023, these matching contributions will be made in cash. The total expense recognized in our statements of consolidated income under all stock compensation programs during 2022, 2021 and 2020 was $1,568, $878 and $796 million, respectively. The associated income tax benefit recognized in our statements of consolidated income during 2022, 2021 and 2020 was $451, $301 and $210 million, respectively. The cash income tax benefit received from the exercise of stock options and conversion of Restricted Units to class A shares during 2022, 2021 and 2020 was $352, $278 and $272 million, respectively.
Management Incentive Award Program ("MIP")
Non-executive management eligibility for MIP awards is determined annually by the executive officers of UPS. Awards granted to executive officers are determined annually by the Compensation and Human Capital Committee of the UPS Board of Directors (the "Compensation Committee"). For awards earned through 2022, our MIP provided, with certain exceptions, that one-half to two-thirds of the annual award would be made in RPUs, depending upon the level of management. The remaining one-third to one-half of the award was electable in the form of cash or unrestricted shares of class A common stock, and was fully vested at the time of grant. Upon conversion, RPUs resulted in the issuance of an equivalent number of UPS class A shares after required tax withholdings. On November 2, 2022, the Compensation Committee amended and restated the terms and conditions of the MIP effective January 1, 2023, such that awards earned will be fully electable in the form of cash or unrestricted shares of class A common stock.
Beginning with the MIP granted in 2019, RPUs vest one year following the grant date based on continued employment with the Company (except in the case of death, disability or retirement, in which case immediate vesting occurs). The grant value is expensed on a straight-line basis (less estimated forfeitures) over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs). RPUs granted under the MIP prior to 2019 vest over a five-year period with approximately 20% of the award vesting and converting to class A shares at the anniversary of each grant date. As of December 31, 2020, outstanding RPUs granted to non-executive management prior to 2019 became fully vested. The elimination of the future service requirement for these awards resulted in the recognition of an additional $133 million of stock compensation expense in 2020. Conversion to class A shares continues to occur over the remaining five-year period with the final conversion occurring in the first quarter of 2023.
On November 2, 2022, the Compensation Committee amended and restated the terms and conditions governing the 2022 MIP to fully vest RPUs to be issued in connection therewith as of December 31, 2022. The elimination of a future service requirement for this award resulted in the recognition of an additional $505 million of stock compensation expense in 2022, of which approximately $431 million was recorded in U.S. Domestic Package. Conversion to class A shares will occur one year from the grant date. As of December 31, 2022, this award was classified as a compensation obligation and recorded in Accrued wages and withholdings on the consolidated balance sheet.
All RPUs granted are subject to early cancellation or vesting under certain conditions. Dividends earned on RPUs are reinvested in additional RPUs at each dividend payable date until they have fully vested.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2022, we had the following outstanding, non-vested Restricted Units granted under the MIP:
| | | | | | | | | | | | | | | |
| Restricted Units (in thousands) | | Weighted-Average Grant Date Fair Value | | | | |
Non-vested as of January 1, 2022 | 3,467 | | | $ | 163.32 | | | | | |
Vested | (3,613) | | | 166.65 | | | | | |
Granted | 3,254 | | | 223.72 | | | | | |
Reinvested Dividends | 140 | | | N/A | | | | |
Forfeited / Expired | (142) | | | 199.66 | | | | | |
Non-vested as of December 31, 2022 | 3,106 | | | $ | 221.97 | | | | | |
The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2022, 2021 and 2020 was $223.72, $165.27 and $102.54, respectively. The total fair value of RPUs vested was $923, $716 and $827 million in 2022, 2021 and 2020, respectively. As of December 31, 2022, there was $93 million of total unrecognized compensation cost related to non-vested RPUs. That cost is expected to be recognized over a weighted-average period of three months.
Long-Term Incentive Performance Award Program ("LTIP")
RPUs issued under the LTIP vest at the end of a three-year performance period, assuming continued employment with the Company (except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis). The number of RPUs earned is based on achievement of the performance targets established on the grant date.
For LTIP awards with a performance period ended December 31, 2021, the performance targets were equally weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareholder 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 recognized the grant date fair value of these RPUs (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 was valued using a Monte Carlo model. We recognized the grant date fair value of this portion of the award (less estimated forfeitures) as compensation expense ratably over the vesting period.
For LTIP awards with a performance period ending in 2022 or later, the performance targets are equally weighted between adjusted earnings per share and adjusted cumulative free cash flow. The final number of RPUs earned will then be subject to adjustment based on RTSR relative to the Standard & Poor's 500 Index. We determine the grant date fair value of the RPUs using a Monte Carlo model and recognize compensation expense (less estimated forfeitures) ratably over the vesting period, based on the number of awards expected to be earned.
For the 2020 LTIP award, the performance period was divided into two measurement periods. The first measurement period evaluated the achievement of the performance targets for 2020. The second measurement period evaluated the achievement of the performance targets for 2021 and 2022.
The weighted-average assumptions used in our Monte Carlo models for each award year were as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Risk-free interest rate | 2.35 | % | | 0.19 | % | | 0.15 | % |
Expected volatility | 31.92 | % | | 30.70 | % | | 27.53 | % |
Weighted-average fair value of units granted | $ | 227.00 | | | $ | 168.05 | | | $ | 92.77 | |
Share payout | 107.37 | % | | 102.39 | % | | 101.00 | % |
There is no expected dividend yield as units earn dividend equivalents.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2022, we had the following outstanding, non-vested RPUs granted under our LTIP program: | | | | | | | | | | | | | | | |
| RPUs (in thousands) | | Weighted-Average Grant Date Fair Value | | | | |
Non-vested as of January 1, 2022 | 1,636 | | | $ | 159.34 | | | | | |
Vested | (973) | | | 153.13 | | | | | |
Granted | 613 | | | 227.00 | | | | | |
Reinvested Dividends | 68 | | | N/A | | | | |
Forfeited / Expired | (101) | | | 174.70 | | | | | |
Non-vested as of December 31, 2022 | 1,243 | | | $ | 197.17 | | | | | |
The fair value of each RPU is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of RPUs granted during 2022, 2021 and 2020 was $227.00, $168.10 and $92.76, respectively. The total fair value of RPUs vested was $239, $160 and $112 million in 2022, 2021 and 2020, respectively. As of December 31, 2022, there was $139 million of total unrecognized compensation cost related to non-vested RPUs. That cost is expected to be recognized over a weighted-average period of one year and nine months.
Non-qualified Stock Options
We maintain stock option plans under which options are granted to purchase shares of UPS class A common stock. Stock options granted in connection with the UPS Incentive Compensation Plan must have an exercise price at least equal to the NYSE closing price of UPS class B common stock on the date the option is granted.
We grant non-qualified stock options to a limited group of eligible senior management employees annually, in which the value granted is determined as a percentage of salary. Stock option awards 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, disability or retirement, in which case immediate vesting occurs). The option grants expire 10 years after the date of the grant. Option holders may exercise their options via the payment of cash or class A common stock and new class A shares are issued upon exercise.
The following is an analysis of options to purchase shares of class A common stock issued and outstanding: | | | | | | | | | | | | | | | | | | | | | | | |
| Options (in thousands) | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) |
Outstanding at January 1, 2022 | 1,599 | | | $ | 112.18 | | | | | |
Exercised | (192) | | | 98.45 | | | | | |
Granted | 109 | | | 214.58 | | | | | |
Forfeited / Expired | (50) | | | N/A | | | | |
Outstanding as of December 31, 2022 | 1,466 | | | $ | 120.51 | | | 5.96 | | $ | 82 | |
Options Vested and Expected to Vest | 1,466 | | | $ | 120.51 | | | 5.96 | | $ | 82 | |
Exercisable as of December 31, 2022 | 1,047 | | | $ | 108.81 | | | 5.19 | | $ | 68 | |
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used by year, and the calculated weighted-average fair values of options, are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Expected dividend yield | 2.35 | % | | 3.31 | % | | 3.51 | % |
Risk-free interest rate | 2.39 | % | | 0.84 | % | | 1.26 | % |
Expected life in years | 7.5 | | 7.5 | | 7.5 |
Expected volatility | 25.04 | % | | 23.15 | % | | 19.25 | % |
Weighted-average fair value of options granted | $ | 48.45 | | | $ | 23.71 | | | $ | 11.74 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected dividend yield is based on the recent historical dividend yields for our stock, taking into account changes in dividend policy. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant. The expected life represents an estimate of the period of time options are expected to remain outstanding. In determining this, we have relied upon a combination of the observed exercise behavior of our prior grants with similar characteristics and the contractual term of the grants. Expected volatilities are based on the historical returns on our stock and the implied volatility of our publicly-traded options.
We received cash of $14, $16 and $28 million during 2022, 2021 and 2020, respectively, from option holders resulting from the exercise of stock options. The total intrinsic value of options exercised during 2022, 2021 and 2020 was $20, $16 and $17 million, respectively. As of December 31, 2022, there was $4 million of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted-average period of three years and five months.
Discounted Employee Stock Purchase Plan
We maintain an employee stock purchase plan for all eligible employees. Under this plan, shares of UPS class A common stock may be purchased at quarterly intervals at 95% of the NYSE closing price of UPS class B common stock on the last day of each quarterly period. Employees purchased 0.6, 0.6 and 0.9 million shares at average prices of $180.80, $172.07 and $110.92 per share, during 2022, 2021 and 2020, respectively. This plan is not considered to be compensatory, and therefore no compensation cost is measured for the employees’ purchase rights.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION
We have two reportable segments: U.S. Domestic Package and International Package, which are together referred to as our global small package operations. Our remaining businesses are reported as Supply Chain Solutions. Global small 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. Supply Chain Solutions comprises the results of non-reportable operating segments that do not meet the quantitative and qualitative criteria of a reportable segment as defined under ASC Topic 280 – Segment Reporting.
U.S. Domestic Package
U.S. 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 our operations in Europe, Asia, the Indian sub-continent, the Middle East, Africa, Canada and Latin America.
Supply Chain Solutions
Supply Chain Solutions includes our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations and other businesses. Our Forwarding, Logistics and UPS Mail Innovations businesses 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. Coyote offers truckload brokerage services, primarily in the United States. Marken and Bomi Group provide supply chain solutions to the healthcare and life sciences industry. Other businesses within this segment include The UPS Store, UPS Capital, Roadie, and Delivery Solutions.
In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income (expense) and other, interest expense and income tax expense. Certain expenses are allocated between the segments using activity-based costing methods. These activity-based costing methods require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates directly impact the amount of expense allocated to each segment, and therefore the operating profit of each reporting segment. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses. In 2021, we updated our cost allocation methodology for aircraft engine maintenance expense to better align with aircraft utilization by segment, resulting in an immaterial reallocation of expense from our U.S. Domestic Package segment to our International Package segment.
As we operate an integrated, global multimodal network, we evaluate many of our capital expenditure decisions at a network level. Accordingly, expenditures on property, plant and equipment by segment are not presented. Unallocated assets are comprised primarily of cash and marketable securities.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information for the years ended December 31, 2022, 2021 and 2020 is as follows (in millions): | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Revenue: | | | | | |
U.S. Domestic Package | $ | 64,209 | | | $ | 60,317 | | | $ | 53,499 | |
International Package | 19,698 | | | 19,541 | | | 15,945 | |
Supply Chain Solutions | 16,431 | | | 17,429 | | | 15,184 | |
Consolidated revenue | $ | 100,338 | | | $ | 97,287 | | | $ | 84,628 | |
Operating Profit: | | | | | |
U.S. Domestic Package | $ | 6,997 | | | $ | 6,436 | | | $ | 3,891 | |
International Package | 4,326 | | | 4,646 | | | 3,436 | |
Supply Chain Solutions | 1,771 | | | 1,728 | | | 357 | |
Consolidated operating profit | $ | 13,094 | | | $ | 12,810 | | | $ | 7,684 | |
Assets: | | | | | |
U.S. Domestic Package | $ | 38,303 | | | $ | 35,746 | | | $ | 35,067 | |
International Package | 17,670 | | | 17,225 | | | 15,717 | |
Supply Chain Solutions | 10,407 | | | 9,556 | | | 9,041 | |
Unallocated | 4,744 | | | 6,878 | | | 2,583 | |
Consolidated assets | $ | 71,124 | | | $ | 69,405 | | | $ | 62,408 | |
Depreciation and Amortization Expense: | | | | | |
U.S. Domestic Package | $ | 2,173 | | | $ | 2,058 | | | $ | 1,805 | |
International Package | 761 | | | 685 | | | 597 | |
Supply Chain Solutions | 254 | | | 210 | | | 296 | |
Consolidated depreciation and amortization expense | $ | 3,188 | | | $ | 2,953 | | | $ | 2,698 | |
Revenue by product type for the years ended December 31, 2022, 2021 and 2020 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
U.S. Domestic Package: | | | | | |
Next Day Air | $ | 10,699 | | | $ | 10,009 | | | $ | 8,522 | |
Deferred | 5,968 | | | 5,846 | | | 5,665 | |
Ground | 47,542 | | | 44,462 | | | 39,312 | |
Total U.S. Domestic Package | 64,209 | | | 60,317 | | | 53,499 | |
International Package: | | | | | |
Domestic | 3,346 | | | 3,690 | | | 3,160 | |
Export | 15,341 | | | 15,012 | | | 12,159 | |
Cargo | 1,011 | | | 839 | | | 626 | |
Total International Package | 19,698 | | | 19,541 | | | 15,945 | |
Supply Chain Solutions: | | | | | |
Forwarding | 8,943 | | | 9,872 | | | 6,975 | |
Logistics | 5,351 | | | 4,767 | | | 4,073 | |
Freight | — | | | 1,064 | | | 3,149 | |
Other | 2,137 | | | 1,726 | | | 987 | |
Total Supply Chain Solutions | 16,431 | | | 17,429 | | | 15,184 | |
Consolidated revenue | $ | 100,338 | | | $ | 97,287 | | | $ | 84,628 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic information for the years ended December 31, 2022, 2021 and 2020 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
United States: | | | | | |
Revenue | $ | 78,110 | | | $ | 74,376 | | | $ | 66,580 | |
Long-lived assets | $ | 32,002 | | | $ | 29,609 | | | $ | 28,354 | |
International: | | | | | |
Revenue | $ | 22,228 | | | $ | 22,911 | | | $ | 18,048 | |
Long-lived assets | $ | 12,991 | | | $ | 11,098 | | | $ | 10,213 | |
Consolidated: | | | | | |
Revenue | $ | 100,338 | | | $ | 97,287 | | | $ | 84,628 | |
Long-lived assets | $ | 44,993 | | | $ | 40,707 | | | $ | 38,567 | |
Long-lived assets include property, plant and equipment, pension and postretirement benefit assets, long-term investments, goodwill and intangible assets.
No countries outside of the United States provided 10% or more of consolidated revenue for the years ended December 31, 2022, 2021 or 2020. For the years ended December 31, 2022, 2021 and 2020, Amazon.com, Inc. and its affiliates ("Amazon") represented 11.3%, 11.7% and 13.3% of our consolidated revenues, respectively. Substantially all of this revenue was attributed to U.S. Domestic Package. Amazon accounted for approximately 15.5%, 15.5% and 18.1% of accounts receivable, net, included within the consolidated balance sheets as of December 31, 2022, 2021 and 2020, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. INCOME TAXES
The income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020 consists of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Current: | | | | | |
U.S. Federal | $ | 2,006 | | | $ | 1,388 | | | $ | 839 | |
U.S. State and Local | 273 | | | 194 | | | 100 | |
Non-U.S. | 467 | | | 478 | | | 420 | |
Total Current | 2,746 | | | 2,060 | | | 1,359 | |
Deferred: | | | | | |
U.S. Federal | 296 | | | 1,311 | | | (725) | |
U.S. State and Local | 136 | | | 273 | | | (159) | |
Non-U.S. | 99 | | | 61 | | | 26 | |
Total Deferred | 531 | | | 1,645 | | | (858) | |
Total Income Tax Expense | $ | 3,277 | | | $ | 3,705 | | | $ | 501 | |
Income before income taxes includes the following components (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
United States | $ | 12,276 | | | $ | 14,220 | | | $ | (39) | |
Non-U.S. | 2,549 | | | 2,375 | | | 1,883 | |
Total Income Before Income Taxes: | $ | 14,825 | | | $ | 16,595 | | | $ | 1,844 | |
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2022, 2021 and 2020 consists of the following:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Statutory U.S. federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
U.S. state and local income taxes (net of federal benefit) (1) | 2.0 | | | 2.2 | | | (2.6) | |
Non-U.S. tax rate differential | 0.1 | | | — | | | 1.6 | |
U.S. federal tax credits | (0.5) | | | (0.4) | | | (3.6) | |
Goodwill and other asset impairments | — | | | — | | | 5.1 | |
Net uncertain tax positions | 0.4 | | | 0.6 | | | 3.6 | |
Other | (0.9) | | | (1.1) | | | 2.1 | |
Effective income tax rate | 22.1 | % | | 22.3 | % | | 27.2 | % |
(1)The 2020 state tax impact to the effective tax rate is negative due to the favorable proportion of state tax credits in comparison to pretax income.
Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions in which we operate and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year.
Our effective tax rate was 22.1% in 2022, compared with 22.3% in 2021 and 27.2% in 2020, primarily due to the effects of the aforementioned recurring factors and the following discrete tax items.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2022 Discrete Items
We recognized an income tax expense of $255 million related to pre-tax defined benefit pension and postretirement medical plan gains of $1.1 billion. This income tax expense was generated at a higher average tax rate than the 2022 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.
We recorded pre-tax transformation strategy costs of $178 million during the year ended December 31, 2022. As a result, we recorded an additional income tax benefit of $36 million. This income tax benefit was generated at a lower average tax rate than the 2022 U.S. federal statutory tax rate due to the effect of foreign taxes.
We recorded pre-tax expenses of $505 million in connection with incentive compensation program design changes during the year ended December 31, 2022. As a result, we recorded an additional income tax benefit of $121 million. This income tax benefit was generated at a higher average tax rate than the 2022 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
We recorded pre-tax expenses of $76 million as a result of a reduction in estimated residual value for certain aircraft during the year ended December 31, 2022. As a result, we recorded an additional income tax benefit of $18 million. This income tax benefit was generated at a higher average tax rate than the 2022 U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.
The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $95 million and reduced our effective tax rate by 0.6% during the year ended December 31, 2022.
2021 Discrete Items
We recognized an income tax expense of $784 million related to pre-tax defined benefit pension and postretirement medical plan gains of $3.3 billion. This income tax expense was generated at a higher average tax rate than the 2021 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.
We recorded pre-tax transformation strategy costs of $380 million during the year ended December 31, 2021. As a result, we recorded an additional income tax benefit of $95 million. This income tax benefit was generated at a higher average tax rate than the 2021 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
We recorded a pre-tax gain of $46 million during the year ended December 31, 2021 related to the divestiture of UPS Freight. As a result, we recorded an additional income tax expense of $11 million. This income tax expense was generated at a higher average tax rate than the 2021 U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.
The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $105 million and reduced our effective tax rate by 0.6% during the year ended December 31, 2021.
2020 Discrete Items
In the fourth quarter of 2020, we recognized an income tax benefit of $1.6 billion related to pre-tax defined benefit pension and postretirement medical plan losses of $6.5 billion. This income tax benefit was generated at a higher average tax rate than the 2020 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.
We recorded pre-tax transformation strategy costs of $348 million during the year ended December 31, 2020. As a result, we recorded an additional income tax benefit of $83 million. This income tax benefit was generated at a higher average tax rate than the 2020 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
We recorded goodwill and other asset impairment charges of $686 million during the year ended December 31, 2020. As a result, we recorded an additional income tax benefit of $57 million. This income tax benefit was generated at a lower average tax rate than the U.S. federal statutory tax rate due to the portion of the costs related to goodwill impairment, which is not deductible for tax purposes.
The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $28 million and reduced our effective tax rate by 1.5% during the year ended December 31, 2020.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our 2020 effective tax rate was also unfavorably impacted by new uncertain tax positions.
Other Items
Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which was effective through December 31, 2021. During 2022, the tax incentive was renegotiated and extended through December 31, 2026. The tax incentive is conditional upon our meeting specific employment and investment thresholds. The impact of this tax incentive decreased non-U.S. tax expense by $47, $61 and $35 million (increased diluted earnings per share by $0.05, $0.07 and $0.04) for 2022, 2021 and 2020, respectively.
Deferred income tax assets and liabilities are comprised of the following as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
Fixed assets and capitalized software | $ | (5,819) | | | $ | (5,808) | |
| | | |
Operating lease right-of-use assets | (893) | | | (839) | |
Other | (708) | | | (593) | |
Deferred tax liabilities | (7,420) | | | (7,240) | |
| | | |
Pension and postretirement benefits | 637 | | | 1,620 | |
Loss and credit carryforwards | 242 | | | 342 | |
Insurance reserves | 603 | | | 587 | |
| | | |
Stock compensation | 315 | | | 219 | |
Accrued employee compensation | 304 | | | 453 | |
Operating lease liabilities | 948 | | | 874 | |
Other | 331 | | | 318 | |
Deferred tax assets | 3,380 | | | 4,413 | |
Deferred tax assets valuation allowance | (123) | | | (122) | |
Deferred tax asset (net of valuation allowance) | 3,257 | | | 4,291 | |
| | | |
Net deferred tax asset (liability) | $ | (4,163) | | | $ | (2,949) | |
| | | |
Amounts recognized in the consolidated balance sheets: | | | |
| | | |
| | | |
Deferred tax assets | $ | 139 | | | $ | 176 | |
Deferred tax liabilities | (4,302) | | | (3,125) | |
Net deferred tax asset (liability) | $ | (4,163) | | | $ | (2,949) | |
The valuation allowance changed by $1, $34 and $34 million during the years ended December 31, 2022, 2021 and 2020, respectively.
We have a U.S. federal capital loss carryforward of $213 million as of December 31, 2022, $6 million of which expires on December 31, 2025, $156 million of which expires on December 31, 2026 and the remainder of which expires on December 31, 2027.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further, we have U.S. state and local operating loss and credit carryforwards as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
U.S. state and local operating loss carryforwards | $ | 653 | | | $ | 924 | |
U.S. state and local credit carryforwards | $ | 46 | | | $ | 90 | |
The U.S. state and local operating loss carryforwards and credits can be carried forward for periods ranging from one year to indefinitely. We also have non-U.S. loss carryforwards of $487 million as of December 31, 2022, the majority of which may be carried forward indefinitely. As indicated in the table above, we have established a valuation allowance for certain U.S. federal, state and non-U.S. carryforwards due to the uncertainty resulting from a lack of previous taxable income within the applicable tax jurisdictions and other limitations.
Undistributed earnings and profits ("E&P") of our foreign subsidiaries amounted to $5.6 billion as of December 31, 2022. Currently, $578 million of the undistributed E&P of our foreign subsidiaries is considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. state and local taxes and withholding taxes payable in various jurisdictions. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
In December 2017, the United States enacted into law the Tax Cuts and Jobs Act (the "Tax Act"), requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. We elected to pay the tax over eight years based on an installment schedule outlined in the Tax Act. The remaining liability of $123 million is reflected in current and non-current liabilities on the consolidated balance sheets based on the timing of payment. This balance will be paid between 2023 and 2025.
The following table summarizes the activity related to our uncertain tax positions (in millions):
| | | | | | | | | | | | | | | | | |
| Tax | | Interest | | Penalties |
Balance as of January 1, 2020 | $ | 172 | | | $ | 52 | | | $ | 4 | |
Additions for tax positions of the current year | 61 | | | — | | | — | |
Additions for tax positions of prior years | 154 | | | 34 | | | 2 | |
Reductions for tax positions of prior years for: | | | | | |
Changes based on facts and circumstances | (54) | | | (24) | | | (2) | |
Settlements during the period | — | | | (1) | | | — | |
Lapses of applicable statute of limitations | — | | | — | | | — | |
Balance as of December 31, 2020 | 333 | | | 61 | | | 4 | |
Additions for tax positions of the current year | 85 | | | — | | | — | |
Additions for tax positions of prior years | 107 | | | 23 | | | — | |
Reductions for tax positions of prior years for: | | | | | |
Changes based on facts and circumstances | (42) | | | (4) | | | (2) | |
Settlements during the period | (3) | | | (2) | | | — | |
Lapses of applicable statute of limitations | — | | | — | | | — | |
Balance as of December 31, 2021 | 480 | | | 78 | | | 2 | |
Additions for tax positions of the current year | 56 | | | — | | | — | |
Additions for tax positions of prior years | 25 | | | 30 | | | 2 | |
Reductions for tax positions of prior years for: | | | | | |
Changes based on facts and circumstances | (9) | | | (1) | | | — | |
Settlements during the period | (10) | | | (1) | | | — | |
Lapses of applicable statute of limitations | (9) | | | (2) | | | — | |
Balance as of December 31, 2022 | $ | 533 | | | $ | 104 | | | $ | 4 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total amount of gross uncertain tax positions as of December 31, 2022, 2021, and 2020 that, if recognized, would affect the effective tax rate was $533, $479, and $332 million, respectively. Our continuing policy is to recognize interest and penalties associated with income tax matters as a component of income tax expense.
We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. We have substantially resolved all U.S. federal income tax matters for tax years prior to 2016.
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. Items that may cause changes to unrecognized tax benefits include the allowance or disallowance of deductions, the timing of 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 statute of limitations, or other unforeseen circumstances. Over the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits may decrease by up to $175 million.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. 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 (in millions, except per share amounts): | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Numerator: | | | | | |
Net income attributable to common shareowners | $ | 11,548 | | | $ | 12,890 | | | $ | 1,343 | |
Denominator: | | | | | |
Weighted-average shares | 868 | | | 869 | | | 862 | |
Deferred compensation obligations | — | | | — | | | — | |
Vested portion of restricted shares | 3 | | | 5 | | | 5 | |
Denominator for basic earnings per share | 871 | | | 874 | | | 867 | |
Effect of Dilutive Securities: | | | | | |
Restricted performance units | 3 | | | 3 | | | 4 | |
Stock options | 1 | | | 1 | | | — | |
Denominator for diluted earnings per share | 875 | | | 878 | | | 871 | |
Basic Earnings Per Share | $ | 13.26 | | | $ | 14.75 | | | $ | 1.55 | |
Diluted Earnings Per Share | $ | 13.20 | | | $ | 14.68 | | | $ | 1.54 | |
Diluted earnings per share for the years ended December 31, 2022, 2021 and 2020 exclude the effect of 0.1, 0.1 and 0.6 million shares, respectively, of common stock that may be issued upon the exercise of employee stock options because such effect would be antidilutive.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations and we actively monitor these exposures. Where deemed appropriate, to manage the impact of these exposures on earnings and/or cash flows, we may enter into a variety of derivative financial instruments. 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. We may further manage credit risk through the use of zero threshold bilateral collateral provisions and/or early termination rights utilizing master netting arrangements, whereby cash is exchanged based on the net fair value of derivatives associated with each counterparty.
As of December 31, 2022 and 2021, we held cash collateral of $534 and $260 million, respectively, under these agreements. This collateral is included in Cash and cash equivalents in the consolidated balance sheets and is unrestricted. As of December 31, 2022 and 2021, no collateral was required to be posted with our counterparties.
Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply in our domestic and international package businesses 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 services.
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 generally designate and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue.
We also hedge portions of our anticipated cash settlements of principal and interest on certain foreign currency denominated debt. We generally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions.
We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments.
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.
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 fair value hedges of the associated debt instruments. 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.
We may 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding Positions
The notional amounts of our outstanding derivative positions as of December 31, 2022 and 2021 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 |
Currency hedges: | | | | | |
Euro | EUR | | 4,115 | | | 4,257 | |
British Pound Sterling | GBP | | 856 | | | 1,402 | |
Canadian Dollar | CAD | | 1,598 | | | 1,633 | |
Hong Kong Dollar | HKD | | 4,261 | | | 4,033 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Interest rate hedges: | | | | | |
Fixed to Floating Interest Rate Swaps | USD | | — | | | 1,000 | |
Floating to Fixed Interest Rate Swaps | USD | | 28 | | | 28 | |
| | | | | |
As of December 31, 2022 and 2021, we had no outstanding commodity hedge positions.
Balance Sheet Recognition
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.
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 as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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 | | | | | 2022 | | 2021 | | 2022 | | 2021 |
Derivatives designated as hedges: | | | | | | | | | | | | | | |
Foreign currency exchange contracts | | Other current assets | | | | Level 2 | | $ | 174 | | | $ | 100 | | | $ | 171 | | | $ | 82 | |
Interest rate contracts | | Other current assets | | | | Level 2 | | — | | | 11 | | | — | | | 11 | |
Foreign currency exchange contracts | | Other non-current assets | | | | Level 2 | | 250 | | | 123 | | | 226 | | | 90 | |
| | | | | | | | | | | | | | |
Derivatives not designated as hedges: | | | | | | | | | | | | | | |
Foreign currency exchange contracts | | Other current assets | | | | Level 2 | | 1 | | | 2 | | | 1 | | | 2 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total Asset Derivatives | | | | | | | | $ | 425 | | | $ | 236 | | | $ | 398 | | | $ | 185 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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 | | | | | 2022 | | 2021 | | 2022 | | 2021 |
Derivatives designated as hedges: | | | | | | | | | | | | | | |
Foreign currency exchange contracts | | Other current liabilities | | | | Level 2 | | $ | 3 | | | $ | 19 | | | $ | — | | | $ | 1 | |
Foreign currency exchange contracts | | Other non-current liabilities | | | | Level 2 | | 24 | | | 33 | | | — | | | — | |
Interest rate contracts | | Other non-current liabilities | | | | Level 2 | | 5 | | | 10 | | | 5 | | | 10 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total Liability Derivatives | | | | | | | | $ | 32 | | | $ | 62 | | | $ | 5 | | | $ | 11 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our foreign currency exchange rate, 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, foreign 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 December 31, 2022 and 2021 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included | | Carrying Amount of Hedged Liabilities | | Cumulative Amount of Fair Value Hedge Adjustments | | Carrying Amount of Hedged Liabilities | | Cumulative Amount of Fair Value Hedge Adjustments |
Long-Term Debt and Finance Leases | | $ | 280 | | | $ | 5 | | | $ | 1,290 | | | $ | 16 | |
Income Statement and AOCI Recognition of Designated Hedges
The following table indicates the amount of gains and (losses) that have been recognized in the statements of consolidated income for 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 years ended December 31, 2022 and 2021 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
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 | | $ | — | | | $ | 11 | | | $ | — | | | $ | — | | | $ | 20 | | | $ | — | |
Derivatives designated as hedging instruments | | — | | | (11) | | | — | | | — | | | (20) | | | — | |
Gain or (loss) on cash flow hedging relationships: | | | | | | | | | | | | |
Interest Contracts: | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income | | — | | | (10) | | | — | | | — | | | (11) | | | — | |
Foreign Currency Exchange Contracts: | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income | | 304 | | | — | | | (1) | | | 83 | | | — | | | — | |
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 | | $ | 304 | | | $ | (10) | | | $ | (1) | | | $ | 83 | | | $ | (11) | | | $ | — | |
The following table indicates the amount of gains and (losses) that have been recognized in AOCI for the years ended December 31, 2022 and 2021 for those derivatives designated as cash flow hedges (in millions):
| | | | | | | | | | | | | | | |
Derivative Instruments in Cash Flow Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Derivatives | |
| 2022 | | 2021 | |
Interest rate contracts | | $ | 6 | | | $ | 2 | | |
Foreign currency exchange contracts | | 529 | | | 341 | | |
| | | | | |
Total | | $ | 535 | | | $ | 343 | | |
As of December 31, 2022, there were $165 million of pre-tax gains related to cash flow hedges deferred in AOCI that are expected to be reclassified to income over the 12 month period ending December 31, 2023. 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 9 years.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table indicates the amount of gains and (losses) that have been recognized in AOCI within foreign currency translation adjustment for the years ended December 31, 2022 and 2021 for those instruments designated as net investment hedges (in millions): | | | | | | | | | | | | | | | |
Non-derivative Instruments in Net Investment Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Debt | |
| 2022 | | 2021 | |
Foreign denominated debt | | $ | 199 | | | $ | 225 | | |
Total | | $ | 199 | | | $ | 225 | | |
Income Statement Recognition of Non-Designated Derivative Instruments
Derivative instruments that are not designated as hedges are recorded at fair value with unrealized gains and losses reported in earnings each period. Cash flows from the settlement of derivative instruments appear in the statement of consolidated cash flows within the same categories as the cash flows of the hedged item.
We may periodically terminate interest rate swaps and foreign currency exchange forward contracts or enter into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original hedge relationship.
Amounts recorded in the statements of consolidated income related to fair value changes and settlements of interest rate swaps, foreign currency forward and investment market price forward contracts not designated as hedges for the years ended December 31, 2022 and 2021 (in millions) were as follows:
| | | | | | | | | | | | | | | | | | | | |
Derivative Instruments Not Designated in Hedging Relationships | | Location of Gain (Loss) Recognized in Income | | Amount of Gain (Loss) Recognized in Income |
| 2022 | | 2021 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Foreign currency exchange contracts | | Investment income and other | | $ | (69) | | | $ | (28) | |
| | | | | | |
Total | | | | $ | (69) | | | $ | (28) | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. TRANSFORMATION STRATEGY COSTS
Our strategy includes a multi-year, enterprise-wide transformation of our organization. The program includes initiatives, as well as changes in processes and technology, that impact global direct and indirect operating costs.
The table below presents the transformation strategy costs for the years ended December 31, 2022, 2021 and 2020 (in millions): | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Compensation and benefits | | $ | 46 | | | $ | 206 | | | $ | 211 | |
Total other expenses | | 132 | | | 174 | | | 137 | |
Total Transformation Strategy Costs | | $ | 178 | | | $ | 380 | | | $ | 348 | |
| | | | | | |
Income Tax Benefit from Transformation Strategy Costs | | (36) | | | (95) | | | (83) | |
After-Tax Transformation Strategy Costs | | $ | 142 | | | $ | 285 | | | $ | 265 | |
The income tax effects of transformation strategy costs are calculated by multiplying the amount of the adjustments by the statutory tax rates applicable in each tax jurisdiction.