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United Parcel Service 10-Q 2014
UPS-6.30.2014-10Q
United States
Securities and Exchange Commission
Washington, D.C. 20549
_____________________________________ 
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014, or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-15451
_____________________________________ 
United Parcel Service, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
58-2480149
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
55 Glenlake Parkway, NE Atlanta, Georgia
 
30328
(Address of Principal Executive Offices)
 
(Zip Code)
(404) 828-6000
(Registrant’s telephone number, including area code)
_____________________________________   

Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer  þ Accelerated filer  ¨ Non-accelerated filer  ¨    (Do not check if a smaller reporting company) Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
There were 207,146,352 Class A shares, and 706,356,536 Class B shares, with a par value of $0.01 per share, outstanding at July 29, 2014.



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



PART I. FINANCIAL INFORMATION

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


1


Item 1. Financial Statements
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2014 (unaudited) and December 31, 2013
(In millions)
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
3,056

 
$
4,665

Marketable securities
1,543

 
580

Accounts receivable, net
5,845

 
6,502

Deferred income tax assets
638

 
684

Other current assets
1,259

 
956

Total Current Assets
12,341

 
13,387

Property, Plant and Equipment, Net
17,787

 
17,961

Goodwill
2,202

 
2,190

Intangible Assets, Net
830

 
775

Non-Current Investments and Restricted Cash
445

 
444

Derivative Assets
342

 
323

Other Non-Current Assets
914

 
1,132

Total Assets
$
34,861

 
$
36,212

LIABILITIES AND SHAREOWNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt and commercial paper
$
1,902

 
$
48

Accounts payable
2,106

 
2,478

Accrued wages and withholdings
2,060

 
2,325

Self-insurance reserves
660

 
719

Other current liabilities
1,609

 
1,561

Total Current Liabilities
8,337

 
7,131

Long-Term Debt
9,940

 
10,824

Pension and Postretirement Benefit Obligations
6,639

 
7,051

Deferred Income Tax Liabilities
933

 
1,244

Self-Insurance Reserves
2,041

 
2,059

Other Non-Current Liabilities
1,386

 
1,415

Shareowners’ Equity:
 
 
 
Class A common stock (208 and 212 shares issued in 2014 and 2013)
2

 
2

Class B common stock (707 and 712 shares issued in 2014 and 2013)
7

 
7

Additional paid-in capital

 

Retained earnings
6,155

 
6,925

Accumulated other comprehensive loss
(596
)
 
(460
)
Deferred compensation obligations
58

 
69

Less: Treasury stock (1 share in 2014 and 2013)
(58
)
 
(69
)
Total Equity for Controlling Interests
5,568

 
6,474

Total Equity for Non-Controlling Interests
17

 
14

Total Shareowners’ Equity
5,585

 
6,488

Total Liabilities and Shareowners’ Equity
$
34,861

 
$
36,212

See notes to unaudited consolidated financial statements.

2


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share amounts)
(unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2014
 
2013
 
2014
 
2013
Revenue
$
14,268

 
$
13,507

 
$
28,047

 
$
26,941

Operating Expenses:
 
 
 
 
 
 
 
Compensation and benefits
8,375

 
6,981

 
15,640

 
13,949

Repairs and maintenance
341

 
309

 
670

 
618

Depreciation and amortization
473

 
466

 
941

 
940

Purchased transportation
1,988

 
1,731

 
3,896

 
3,511

Fuel
980

 
992

 
1,952

 
1,998

Other occupancy
241

 
225

 
538

 
478

Other expenses
1,123

 
1,061

 
2,150

 
2,125

Total Operating Expenses
13,521

 
11,765

 
25,787

 
23,619

Operating Profit
747

 
1,742

 
2,260

 
3,322

Other Income and (Expense):
 
 
 
 
 
 
 
Investment income
25

 
3

 
25

 
8

Interest expense
(89
)

(98
)
 
(179
)
 
(194
)
Total Other Income and (Expense)
(64
)
 
(95
)
 
(154
)
 
(186
)
Income Before Income Taxes
683

 
1,647

 
2,106

 
3,136

Income Tax Expense
229

 
576

 
741

 
1,028

Net Income
$
454

 
$
1,071

 
$
1,365

 
$
2,108

Basic Earnings Per Share
$
0.49

 
$
1.14

 
$
1.48

 
$
2.22

Diluted Earnings Per Share
$
0.49

 
$
1.13

 
$
1.47

 
$
2.21


STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
454

 
$
1,071

 
$
1,365

 
$
2,108

Change in foreign currency translation adjustment, net of tax
39

 
(24
)
 
3

 
(327
)
Change in unrealized gain (loss) on marketable securities, net of tax
2

 
(6
)
 
2

 
(8
)
Change in unrealized gain (loss) on cash flow hedges, net of tax
(21
)
 
20

 
(41
)
 
58

Change in unrecognized pension and postretirement benefit costs, net
     of tax
(127
)
 
28

 
(100
)
 
54

Comprehensive income
$
347

 
$
1,089

 
$
1,229

 
$
1,885

See notes to unaudited consolidated financial statements.

3


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
(unaudited)
 
Six Months Ended
June 30,
 
2014
 
2013
Cash Flows From Operating Activities:
 
 
 
Net income
$
1,365

 
$
2,108

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
941

 
940

Pension and postretirement benefit expense
1,523

 
562

Pension and postretirement benefit contributions
(115
)
 
(114
)
Settlement of postretirement benefit obligation
(1,995
)
 

Self-insurance reserves
(77
)
 
4

Deferred tax expense (benefit)
(192
)
 
(282
)
Stock compensation expense
306

 
288

Other (gains) losses
144

 
(98
)
Changes in assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable
585

 
542

Other current assets
(269
)
 
(15
)
Accounts payable
(357
)
 
(209
)
Accrued wages and withholdings
(241
)
 
(49
)
Other current liabilities
207

 
(147
)
Other operating activities
7

 
(99
)
Net cash from operating activities
1,832

 
3,431

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(813
)
 
(990
)
Proceeds from disposals of property, plant and equipment
10

 
24

Purchases of marketable securities
(1,813
)
 
(1,615
)
Sales and maturities of marketable securities
854

 
717

Net decrease in finance receivables
13

 
19

Cash paid for business acquisitions
(22
)
 

Other investing activities
(31
)
 
(8
)
Net cash used in investing activities
(1,802
)
 
(1,853
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term debt
1,096

 
1,045

Proceeds from long-term borrowings
764

 
100

Repayments of long-term borrowings
(1,020
)
 
(1,861
)
Purchases of common stock
(1,379
)
 
(1,867
)
Issuances of common stock
149

 
293

Dividends
(1,192
)
 
(1,140
)
Other financing activities
(50
)
 
(611
)
Net cash used in financing activities
(1,632
)
 
(4,041
)
Effect Of Exchange Rate Changes On Cash And Cash Equivalents
(7
)
 
(56
)
Net Increase (Decrease) In Cash And Cash Equivalents
(1,609
)
 
(2,519
)
Cash And Cash Equivalents:
 
 
 
Beginning of period
4,665

 
7,327

End of period
$
3,056

 
$
4,808

See notes to unaudited consolidated financial statements.

4


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Principles of Consolidation
In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of June 30, 2014, our results of operations for the three and six months ended June 30, 2014 and 2013, and cash flows for the six months ended June 30, 2014 and 2013. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.
For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans and self-insurance reserves for each three month period based on one quarter of the estimated annual expense.
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on our financial position or results of operations.
Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of June 30, 2014. The fair values of our investment securities are disclosed in note 4, recognized multiemployer pension withdrawal liabilities are disclosed in note 6, our short and long-term debt in note 8 and our derivative instruments in note 13. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.
Accounting Estimates
The preparation of the accompanying interim, unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best information and actual results could differ materially from those estimates.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In January 2014, the FASB issued an accounting standards update that adds new disclosure requirements for investments in qualified affordable housing projects through limited liability entities. If certain conditions are met, the cost of an entity's investment in proportion to the tax credits and other tax benefits it receives may be amortized and included as a component of income tax expense. In January 2008, we adopted the fair value option for our investments in certain investment partnerships that were previously accounted for under the equity method; therefore, this accounting standards update did not have any effect on our consolidated financial position or results of operations.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements had an immaterial impact on our consolidated financial position and results of operations.

5

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


Accounting Standards Issued But Not Yet Effective
In May 2014, the FASB issued an accounting standards update that provides a single comprehensive model for entities in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The underlying principle within the update is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The update requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. The update is effective for us beginning in the first quarter of 2017 and early adoption is not permitted. The Company is currently evaluating the update to determine the impact of its adoption on our consolidated financial position and results of operations.
Other accounting pronouncements issued, but not effective until after June 30, 2014, are not expected to have a significant impact on our consolidated financial position or results of operations.
NOTE 3. STOCK-BASED COMPENSATION
We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units, to eligible employees (restricted stock and stock units, and restricted performance shares and performance units are herein referred to as "Restricted Units"). The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
During the first quarter of 2014, we granted Restricted Units under MIP to eligible management employees. Restricted Units granted under MIP will generally vest over a five-year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis over the requisite service period. Based on the date that the eligible management population and performance targets were approved for MIP, we determined the award measurement date to be February 4, 2014 (for U.S.-based employees) and March 17, 2014 (for international-based employees); therefore, the Restricted Unit grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $93.89 and $96.99 on those dates, respectively.

6

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


Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under LTIP to certain eligible management employees. For grants prior to 2014, 90% of the target award was divided into three substantially equal tranches, one for each calendar year in the three-year award cycle, using performance criteria targets established each year.  The targets consisted of consolidated operating return on invested capital and growth in consolidated revenue.  The remaining 10% of the total award was based upon our achievement of adjusted earnings per share compared to a target established at the grant date.  The performance targets for these historical awards will continue to be determined each year, and the awards will continue to vest through 2016.
Beginning with the LTIP grant in the first quarter of 2014, the performance targets are equally-weighted among consolidated operating return on invested capital, growth in consolidated revenue, and total shareowner return relative to a peer group of companies.  These Restricted Units generally vest at the end of a three-year period (except in the case of death, disability, or retirement, in which case immediate vesting occurs on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets set forth on the grant date.  The range of percentage achievement can vary from 0% to 200% of the target award. 
For the two-thirds of the award related to consolidated operating return on invested capital and growth in consolidated revenue, we recognize the grant-date fair value of these Restricted Units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned.  The remaining one-third of the award related to total shareowner return relative to a peer group is valued using a Monte Carlo model.  This portion of the award was valued at a share payout of 109.84% of the target grant, and is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period.  Based on the date that the eligible management population and performance targets were approved for the 2014 LTIP Award, we determined the award measurement date to be March 4, 2014; therefore the target Restricted Units grant was valued for stock compensation expense using the closing New York Stock Exchange price of $96.98 on that date.
Nonqualified Stock Options
During the first quarter of 2014, we granted nonqualified stock option awards to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards generally vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The options granted will expire ten years after the date of the grant. In the first quarter of 2014 and 2013, we granted 0.1 and 0.2 million stock options, respectively, at a weighted average grant price of $96.98 and $82.93, respectively. The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was $20.48 and $15.50 for 2014 and 2013, respectively, using the following assumptions:
 
2014
 
2013
Expected life (in years)
7.5

 
7.5

Risk-free interest rate
2.40
%
 
1.38
%
Expected volatility
24.26
%
 
24.85
%
Expected dividend yield
2.56
%
 
2.75
%
Compensation expense for share-based awards recognized in net income for the three months ended June 30, 2014 and 2013 was $142 and $131 million pre-tax, respectively. Compensation expense for share-based awards recognized in net income for the six months ended June 30, 2014 and 2013 was $306 and $288 million pre-tax, respectively.


7

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


NOTE 4. INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as available-for-sale as of June 30, 2014 and December 31, 2013 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
June 30, 2014
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
332

 
$
1

 
$
(1
)
 
$
332

Mortgage and asset-backed debt securities
92

 
1

 
(1
)
 
92

Corporate debt securities
1,045

 
1

 

 
1,046

Other debt and equity securities
73

 

 

 
73

Total marketable securities
$
1,542

 
$
3

 
$
(2
)
 
$
1,543

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2013
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
355

 
$

 
$
(1
)
 
$
354

Mortgage and asset-backed debt securities
76

 
1

 
(2
)
 
75

Corporate debt securities
146

 
1

 
(1
)
 
146

Other debt and equity securities
5

 

 

 
5

Total marketable securities
$
582

 
$
2

 
$
(4
)
 
$
580

Investment Other-Than-Temporary Impairments
We have concluded that no other-than-temporary impairment losses existed as of June 30, 2014. In making this determination, we considered the financial condition and prospects of the issuers, the magnitude of the losses compared with the investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that we will be unable to collect all amounts due according to the contractual terms of the securities, the credit rating of the securities and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
Maturity Information
The amortized cost and estimated fair value of marketable securities at June 30, 2014, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
 
Cost
 
Estimated
Fair Value
Due in one year or less
$
990

 
$
990

Due after one year through three years
445

 
445

Due after three years through five years
15

 
15

Due after five years
90

 
91

 
1,540

 
1,541

Equity securities
2

 
2

 
$
1,542

 
$
1,543

Non-Current Investments and Restricted Cash
We had $426 and $425 million of restricted cash related to our self-insurance requirements as of June 30, 2014 and December 31, 2013, respectively, which is reported in “Non-Current Investments and Restricted Cash” on the consolidated balance sheets. This restricted cash is invested in money market funds and similar cash-equivalent type assets.

8

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


At June 30, 2014 and December 31, 2013, we held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. This investment is classified as “Non-Current Investments and Restricted Cash” in the consolidated balance sheets with the quarterly change in investment value recognized in the statements of consolidated income.
Fair Value Measurements
Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “Other investments” in the tables below and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership and (2) the risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 8.20% and 8.65% as of June 30, 2014 and December 31, 2013, respectively. These inputs and the resulting fair values are updated on a quarterly basis.
The following table presents information about our investments measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance 
June 30, 2014
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
332

 
$

 
$

 
$
332

Mortgage and asset-backed debt securities

 
92

 

 
92

Corporate debt securities

 
1,046

 

 
1,046

Other debt and equity securities

 
73

 

 
73

Total marketable securities
332

 
1,211

 

 
1,543

Other investments
19

 

 
95

 
114

Total
$
351

 
$
1,211

 
$
95

 
$
1,657

 

 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance 
December 31, 2013
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
353

 
$
1

 
$

 
$
354

Mortgage and asset-backed debt securities

 
75

 

 
75

Corporate debt securities

 
146

 

 
146

Other debt and equity securities

 
5

 

 
5

Total marketable securities
353

 
227

 

 
580

Other investments
19

 

 
110

 
129

Total
$
372

 
$
227

 
$
110

 
$
709


9

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


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

 
$
99

 
$
99

Transfers into (out of) Level 3

 

 

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

 
(4
)
 
(4
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2014
$

 
$
95

 
$
95

 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on April 1, 2013
$

 
$
150

 
$
150

Transfers into (out of) Level 3

 

 

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

 
(14
)
 
(14
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2013
$

 
$
136

 
$
136


10

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


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

 
110

 
110

Transfers into (out of) Level 3

 

 

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

 
(15
)
 
(15
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2014
$

 
$
95

 
$
95

 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2013
$

 
163

 
163

Transfers into (out of) Level 3

 

 

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

 
(27
)
 
(27
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2013
$

 
$
136


$
136

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

NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 2014 and December 31, 2013 consist of the following (in millions):
 
2014
 
2013
Vehicles
$
7,036

 
$
6,762

Aircraft
15,785

 
15,772

Land
1,164

 
1,163

Buildings
3,310

 
3,260

Building and leasehold improvements
3,150

 
3,116

Plant equipment
7,367

 
7,221

Technology equipment
1,600

 
1,569

Equipment under operating leases
41

 
44

Construction-in-progress
209

 
244

 
39,662

 
39,151

Less: Accumulated depreciation and amortization
(21,875
)
 
(21,190
)
 
$
17,787

 
$
17,961

 
We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor our other property, plant and equipment categories for any indicators that the carrying value of the assets exceeds the fair value. There were no indicators of impairment in our property, plant and equipment, and no impairment charges were recorded, during the three and six months ended June 30, 2014 and 2013.

11

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


NOTE 6. EMPLOYEE BENEFIT PLANS
Company-Sponsored Benefit Plans
Information about net periodic benefit cost for our company-sponsored pension and postretirement benefit plans is as follows for the three and six months ended June 30, 2014 and 2013 (in millions):
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Three Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
285

 
$
337

 
$
18

 
$
26

 
$
15

 
$
11

Interest cost
401

 
363

 
34

 
47

 
14

 
11

Expected return on assets
(565
)
 
(537
)
 
(6
)
 
(9
)
 
(15
)
 
(14
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
43

 
43

 
(4
)
 
1

 
(3
)
 

Other net (gain) loss

 

 

 

 

 

Actuarial (gain) loss

 

 
746

 

 

 

Settlement and curtailment loss

 

 
320

 

 

 

Net periodic benefit cost
$
164

 
$
206

 
$
1,108

 
$
65

 
$
11

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
569

 
$
675

 
$
39

 
$
52

 
$
27

 
$
26

Interest cost
802

 
725

 
86

 
93

 
26

 
22

Expected return on assets
(1,129
)
 
(1,074
)
 
(12
)
 
(17
)
 
(30
)
 
(28
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
85

 
86

 
(3
)
 
2

 
(3
)
 

Other net (gain) loss

 

 

 

 

 

Actuarial (gain) loss

 

 
746

 

 

 

Settlement and curtailment loss

 

 
320

 

 

 

Net periodic benefit cost
$
327

 
$
412

 
$
1,176

 
$
130

 
$
20

 
$
20

During the first six months of 2014, we contributed $51 and $64 million to our company-sponsored pension and postretirement medical benefit plans, respectively. We also expect to contribute $49 and $36 million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively.
Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.

12

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


As of June 30, 2014 and December 31, 2013 we had $882 and $884 million, respectively, recognized in "Other Non-Current Liabilities" on our consolidated balance sheets associated with our previous withdrawal from a multiemployer pension plan. This liability is payable in equal monthly installments over a remaining term of approximately 48 years. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value of this withdrawal liability as of June 30, 2014 and December 31, 2013 was $782 and $783 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.
Status of Collective Bargaining Agreements
As of December 31, 2013, we had approximately 253,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). These agreements ran through July 31, 2013, but had been indefinitely extended pending the ratification of a new agreement with the Teamsters. On April 24, 2014, the Teamsters ratified a new national master agreement with UPS that will expire on July 31, 2018 (discussed further below).
We have approximately 2,600 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which became amendable at the end of 2011. In February 2014, UPS and the IPA requested mediation by the National Mediation Board for the ongoing contract negotiations.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”). Our previous agreements with the IAM ran through July 31, 2014; on July 28, 2014, the IAM ratified new collective bargaining agreements that will expire on July 31, 2019.
Ratification of New Collective Bargaining Agreements
On April 24, 2014, the Teamsters ratified a new national master agreement (“NMA”) with UPS that will expire on July 31, 2018. The UPS Freight business unit ratified its national master agreement in January 2014.
The economic provisions in the NMA include wage rate increases, as well as increased contribution rates for healthcare and pension benefits. Most of these economic provisions are retroactive to August 1, 2013, which is the effective date of the NMA. In the second quarter of 2014, we remitted $278 million for these retroactive economic benefits; this payment had an immaterial impact on net income, as these retroactive economic benefits had been accrued since the July 31, 2013 expiration of the prior agreement.
In addition to the retroactive economic provisions of the NMA, there are certain changes to the delivery of healthcare benefits that are effective at various dates. These changes impact approximately 36,000 full-time and 73,000 part-time active employees covered by the NMA and the UPS Freight collective bargaining agreement (collectively referred to as the “NMA Group”), as well as approximately 16,000 employees covered by other collective bargaining agreements (the “Non-NMA Group”). These provisions are discussed further below.
Changes to the Delivery of Active and Postretirement Healthcare Benefits
Prior to ratification, the NMA Group and Non-NMA Group employees received their healthcare benefits through UPS-sponsored active and postretirement health and welfare benefit plans. Effective June 1, 2014, we ceased providing healthcare benefits to active NMA Group employees through these UPS-sponsored benefit plans, and the responsibility for providing healthcare benefits for active employees was assumed by three separate multiemployer healthcare funds (the “Funds”). The responsibility for providing healthcare benefits for the active Non-NMA Group employees will also be assumed by the Funds on dates ranging from October 1, 2014 through January 1, 2015, depending on the ratification date of the applicable collective bargaining agreement. We will make contributions to the Funds based on negotiated fixed hourly or monthly contribution rates for the duration of the NMA and other applicable collective bargaining agreements.


13

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


Additionally, the Funds assumed the obligation to provide postretirement healthcare benefits to the employees in the NMA Group who retire on or after January 1, 2014. The postretirement healthcare benefit obligation for the employees in the Non-NMA Group will be assumed by the Funds for employees retiring on or after January 1, 2014 or January 1, 2015, depending on the applicable collective bargaining agreement. In exchange for the assumption of the obligation to provide postretirement healthcare benefits to the NMA Group and Non-NMA Group, we transferred cash totaling $2.271 billion to the Funds in the second quarter of 2014. UPS-sponsored health and welfare benefit plans retained responsibility for providing postretirement healthcare coverage for employees in the NMA Group who retired from UPS prior to January 1, 2014, and for employees in the Non-NMA Group who retire from UPS prior to the January 1, 2014 or January 1, 2015 effective date in the applicable collective bargaining agreement.
Accounting Impact of Health and Welfare Plan Changes
Second Quarter 2014 - Income Statement Impact:
We recorded a pre-tax charge of $1.066 billion ($665 million after-tax) in the second quarter of 2014 for the health and welfare plan changes described above. The components of this charge, which was included in "Compensation and benefits" expense on the statement of consolidated income, are as follows:
Partial Plan Curtailment: We recorded a $112 million pre-tax curtailment loss due to the elimination of future service benefit accruals. This curtailment loss represents the accelerated recognition of unamortized prior service costs.
Remeasurement of Postretirement Obligation: We recorded a $746 million pre-tax loss due to the remeasurement of the postretirement benefit obligations of the affected UPS-sponsored health and welfare benefit plans.
Settlement: We recorded a $208 million pre-tax settlement loss, which represents the recognition of unamortized actuarial losses associated with the postretirement obligation for the NMA Group.
Second Quarter 2014 - Balance Sheet and Cash Flow Impact:
During the second quarter of 2014, we transferred cash totaling $2.271 billion to the Funds for the assumption of the postretirement healthcare benefit obligations. Of this cash transfer amount, $1.995 billion was accounted for as a settlement of our postretirement obligation for the NMA Group, while the remaining $276 million was accounted for as a prepaid deposit asset (recorded in "Other Current Assets" on the consolidated balance sheets) until the ratification of the collective bargaining agreements covering the Non-NMA Group. We have received approximately $375 million of cash tax benefits (through reduced U.S. Federal and state quarterly income tax payments) as of June 30, 2014, and we anticipate receiving the remaining cash tax benefits of approximately $479 million resulting from these payments over the remainder of 2014.
For NMA Group employees who retired prior to January 1, 2014 and remain with the UPS-sponsored health and welfare plans, the changes to the contributions, benefits and cost sharing provisions in these plans resulted in an increase in the postretirement benefit obligation, and a corresponding decrease in pre-tax accumulated other comprehensive income, of $13 million upon ratification.
After the remeasurement and settlement of the obligation for the NMA Group, the total postretirement medical benefit obligation was reduced by $858 million from $3.691 billion at December 31, 2013 to $2.833 billion at June 30, 2014.
Remainder of 2014:
Upon ratification of the collective bargaining agreements covering the Non-NMA Group, we plan to record a pre-tax charge of approximately $31 million for the remeasurement and settlement of the postretirement obligation associated with these employees. At the same time, the $276 million prepaid deposit asset, described previously, will be used to settle the postretirement benefit obligation for the Non-NMA Group. We anticipate the ratification of these agreements covering the Non-NMA Group will occur prior to December 31, 2014.
Based on the anticipated expense and contribution levels for the remainder of 2014, in addition to the remeasurement and settlement of the obligations, we expect that the total postretirement medical benefit obligation will be reduced by approximately $1.094 billion from $3.691 billion at December 31, 2013 to approximately $2.597 billion at December 31, 2014.
The accounting charges and other amounts described above are estimates based on actuarial valuation assumptions, and will be updated as necessary for any changes in discount rates, final collective bargaining agreement details and similar factors for the Non-NMA Group.


14

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


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

 
$
420

 
$
1,770

 
$
2,190

Acquired

 

 
11

 
11

Currency / Other

 
3

 
(2
)
 
1

June 30, 2014:
$

 
$
423

 
$
1,779

 
$
2,202

The goodwill acquired in the Supply Chain & Freight segment was related to our February 2014 acquisition of Polar Speed Distribution Limited ("Polar Speed"), a U.K.-based company that provides temperature-sensitive pharmaceutical supply chain solutions in the U.K. and continental Europe. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition. The acquisition of Polar Speed was not material to our consolidated financial position or results of operations.
The remaining change in goodwill for both the International Package and Supply Chain & Freight segments was due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
The following is a summary of intangible assets as of June 30, 2014 and December 31, 2013 (in millions):
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
June 30, 2014:
 
 
 
 
 
Capitalized software
$
2,547

 
$
(1,953
)
 
$
594

Licenses
225

 
(121
)
 
104

Franchise rights
117

 
(74
)
 
43

Customer lists
125

 
(61
)
 
64

Trademarks, patents, and other
37

 
(12
)
 
25

Total Intangible Assets, Net
$
3,051


$
(2,221
)
 
$
830

December 31, 2013:
 
 
 
 
 
Capitalized software
$
2,420

 
$
(1,897
)
 
$
523

Licenses
220

 
(97
)
 
123

Franchise rights
117

 
(70
)
 
47

Customer lists
118

 
(62
)
 
56

Trademarks, patents, and other
37

 
(11
)
 
26

Total Intangible Assets, Net
$
2,912

 
$
(2,137
)
 
$
775


15

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


NOTE 8. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt as of June 30, 2014 and December 31, 2013 consists of the following (in millions):
 
Principal
Amount
 
 
 
Carrying Value
 
 
Maturity
 
2014
 
2013
Commercial paper
$
1,860

 
2014
 
$
1,860

 
$

Fixed-rate senior notes:
 
 
 
 
 
 
 
3.875% senior notes

 
2014
 

 
1,007

1.125% senior notes
375

 
2017
 
370

 
367

5.50% senior notes
750

 
2018
 
817

 
821

5.125% senior notes
1,000

 
2019
 
1,085

 
1,079

3.125% senior notes
1,500

 
2021
 
1,613

 
1,579

2.45% senior notes
1,000

 
2022
 
955

 
913

6.20% senior notes
1,500

 
2038
 
1,481

 
1,481

4.875% senior notes
500

 
2040
 
489

 
489

3.625% senior notes
375

 
2042
 
367

 
367

8.375% Debentures:
 
 
 
 
 
 
 
8.375% debentures
424

 
2020
 
483

 
479

8.375% debentures
276

 
2030
 
283

 
283

Pound Sterling notes:
 
 
 
 
 
 
 
5.50% notes
113

 
2031
 
109

 
105

5.125% notes
775

 
2050
 
738

 
714

Floating rate senior notes
372

 
2049-2053
 
369

 
370

Capital lease obligations
486

 
2014-3004
 
486

 
473

Facility notes and bonds
320

 
2015-2036
 
320

 
320

Other debt
17

 
2014-2022
 
17

 
25

Total Debt
$
11,643

 
 
 
11,842

 
10,872

Less: Current Maturities
 
 
 
 
(1,902
)
 
(48
)
Long-term Debt
 
 
 
 
$
9,940

 
$
10,824

Debt Repayments
On April 1, 2014, our $1.0 billion 3.875% senior notes matured and were repaid in full. The principal balance of the senior notes was repaid from the proceeds of short-term commercial paper issuances.
Sources of Credit
We are authorized to borrow up to $10.0 billion under the U.S. commercial paper program we maintain. We had $1.860 billion outstanding under this program as of June 30, 2014, with an average interest rate of 0.10%. We also maintain a European commercial paper program under which we are authorized to borrow up to €5.0 billion in a variety of currencies. As of June 30, 2014, there were no amounts outstanding under this program. As of June 30, 2014, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheet.

16

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


We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on March 27, 2015. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of June 30, 2014.
The second agreement provides revolving credit facilities of $1.0 billion, and expires on March 28, 2019. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advan