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2017 UPS
20172017
2017201720172017 UPSUPS
2017201720172017 UPSUPSUPSUPS
UPSUPS
Annual Report
Annual Report
Annual Report
Annual Report
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Annual Report
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Transforming UPS...
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55 Glenlake Parkway, NE, Atlanta, GA 30328-3474
www.ups.com
© 2018 United Parcel Service of America, Inc. UPS, the UPS brandmark and the color brown
are trademarks of United Parcel Service of America, Inc. All rights reserved.
180069_L01_CVRS.indd 1
2/28/18 8:51 PM
YEAR FOUNDED
1907
27,850 UPS ACCESS
POINT LOCATIONS
Return on assets (adj.)*
12.1%
12.8%
13.3%
Return on assets (GAAP)
11.4%
8.7%
13.1%
KEY METRICS
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
10.5 MILLION
CUSTOMERS
FINANCIAL HIGHLIGHTS
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
Revenue
$65,872
$60,906
$58,363
Operating expenses
58,343
55,439
50,695
Net income
4,910
3,431
4,844
Adjusted net income*
5,259
5,104
4,923
Diluted earnings per
share
Adjusted diluted earnings
per share*
Dividends declared
per share
5.61
3.87
5.35
6.01
5.75
5.43
3.32
3.12
2.92
Assets
45,403
40,377
38,311
Long-term debt
20,278
12,394
11,316
Shareowners’ equity
1,030
429
2,491
Capital expenditures
5,227
2,965
2,379
Cash and marketable
securities
4,069
4,567
4,726
(in millions except for per-share amounts)
5.1 BILLION
2017 DELIVERY VOLUME
9,100
ALTERNATIVE
FUEL VEHICLES
Return on invested
capital (adj.)*
Return on invested
capital (GAAP)
26.8%
32.5%
32.4%
30.3%
27.4%
39.2%
Dividend yield
2.6%
2.7%
3.0%
2,500
WORLDWIDE
OPERATING
FACILITIES
454,000
EMPLOYEES
119,000 VEHICLES
IN DELIVERY FLEET
FREE CASH FLOW
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
Net cash from operations
$1,479
$6,473
$7,430
Capital expenditures
(5,227)
(2,965)
(2,379)
Proceeds from disposals
of PP&E
Net change in finance
receivables
Other investing activities
24
88
26
5
9
(59)
(30)
5
1
Free cash f low
(3,718)
3,546
5,052
Discretionary Pension
Contributions
7,291
2,461
1,030
Adjusted free cash f low
$3,573 $6,007 $6,082
(in millions of dollars)
MORE THAN 43
MILLION
UPS MY CHOICE®
MEMBERS
2,242 DAILY
FLIGHT SEGMENTS
143 MILLION
DAILY ONLINE TRACKING
*See reconciliation of Non-GAAP financial measures on page A1.
INVE STOR INFOR MATION
ANNUAL MEETING
Our annual meeting of shareowners will be held at 8 a.m.
on May 10, 2018, at the Hotel Du Pont, 11th and Market
Street, Wilmington, DE. Shareowners of record as of
March 12, 2018, are entitled to vote at the meeting.
INVESTOR RELATIONS
You can contact our Investor Relations Department at:
UPS
55 Glenlake Parkway, NE
Atlanta, GA 30328-3474
800.877.1503 or 404.828.6059
investors.ups.com
EXCHANGE LISTING
Our Class B common stock is listed on the New York
Stock Exchange under the symbol “UPS”.
TRANSFER AGENT AND REGISTRAR
Computershare
Computershare
Computershare
Send notices of address changes or questions
regarding account status, stock transfer, lost
certificates, or dividend payments to:
Regular Mail:
UPS
c/o Computershare
PO Box 505002
Louisville, KY 40233-5002
or:
Expedited Delivery:
UPS
c/o Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
FORM 10-K
Our Annual Report on Form 10-K for the year ended
December 31, 2017, forms part of the UPS 2017 Annual
Report. If you would like an additional copy of our Form
10-K, you can access it through the Investor Relations
website at www.investors.ups.com or at the Securities
and Exchange Commission website, sec.gov. The Form
10-K also is available free of charge by calling, contacting
via the website, or writing to the Investor Relations
Department.
UPS SHAREOWNER SERVICES
Convenient access 24 hours a day, seven days a week.
Class A Common Shareowners
Class A Common Shareowners
Class A Common Shareowners
Class A Common Shareowners
Class A Common Shareowners
www.computershare.com/ups
888.663.8325
Class B Common Shareowners
Class B Common Shareowners
Class B Common Shareowners
Class B Common Shareowners
Class B Common Shareowners
www.computershare.com/ups
800.758.4674
Calls from outside the United States: 201.680.6612
TDD for hearing impaired: 800.231.5469
TDD for non-U.S. shareowners: 201.680.6610
DIRECT STOCK PURCHASE PLAN
To make an initial purchase of UPS Class B Common
Stock online, visit www.computershare.com/Investor
and go to “Buy stock direct-search and enroll in available
plans”. Follow the instructions provided to search for
Investment Plans and access the Enrollment Wizard.
Current Class B shareowners can enroll in the
plan online by accessing their accounts through
www.computershare.com/ups or by calling 800.758.4674.
DIVIDEND REINVESTMENT PLAN
To reinvest dividends in the purchase of additional
UPS shares:
Class A and B Shareowners
Class A and B Shareowners
Class A and B Shareowners
Class A and B Shareowners
Class A and B Shareowners
www.computershare.com/ups
ONLINE ACCESS TO SHAREOWNER
ACCOUNT MATERIALS
Enroll in E-Communications, a self-service program
that provides electronic notification and secure access
to shareowner communications. To enroll, access
your account at www.computershare.com/ups. After
accessing your account select the “View Account” link
to manage your holdings. Then click on “My Profile,”
select “Update” under “Communications” and follow the
enrollment instructions.
UPS WEBSITES
Investor Relations - - - - - - - - - - - - - - - investors.ups.com
UPS Corporate - - - - - - - - - - - - - - - - - - - - - - - - - ups.com
Sustainability/
Corporate Responsibility - - - - - sustainability.ups.com
Services and Solutions - - - ups.com/businesssolutions
180069_L01_CVRS.indd 2
3/5/18 5:32 PM
Dear Fellow Shareowner,
From our humble roots as a bicycle
intelligence, machine learning, blockchain,
messenger service, UPS has a long and
robotics, and many other cutting-edge
proud legacy of innovation. Today, we
technologies to future-proof our network.
live in an era of great technological
While these investments represent a
changes that are redrawing the terms of
major financial commitment in the
engagement for companies across the
near term, the benefits to our customers
globe. So while UPS achieved all-time
and shareowners over the long run will
highs in both earnings per share* and
be substantial. By implementing new
revenues last year, our ambitions are even
technology and expanding capacity in our
greater. Our founder Jim Casey famously
facilities, we are making the industry’s
said that “our horizon is as distant as our
most-efficient network even more
mind’s eye wishes it to be,” and in that
effective. Our digital investments give
same spirit, late in 2017, we embarked on a
us – and our customers – more flexibility,
major transformation initiative to ensure
consistency and visibility in how packages
UPS thrives in the new global marketplace.
are routed and delivered.
The cornerstone of that plan are the
Combine all this with our comprehensive
investments we’re making to implement
product portfolio and the passion of our
the most sweeping transformation of our
454,000 employees, and we’re confident
network in decades. We are taking full
that our Smart Global Logistics Network
advantage of the advances in artificial
will remain the industry standard for
decades to come.
180069_L01_NARR.indd 1
3/8/18 8:28 PM
20.2%
17.9%
61.9%
REVENUE BY SEGMENT
REVENUE BY GEOGRAPHY
20.2%
20.220.2%%
20.220.220.220.220.220.2%%
20.220.2
17.9%
17.917.9%%
17.917.917.917.9%%
17.917.9
61.9%
61.961.9%%
61.961.961.961.9%%
61.961.9
U.S. Domestic Package
U.S. Domestic Package
U.S. Domestic Package
U.S. Domestic Package
U.S. Domestic Package
U.S. Domestic Package
U.S. Domestic Package
U.S. Domestic Package
U.S. Domestic Package
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
Supply Chain & Freight
International Package
International Package
International Package
International Package
International Package
International Package
International Package
International Package
International Package
International Package
International Package
21212121%%%%
21%
%%7979%%
79%
79797979
U.S.U.S.U.S.U.S.U.S.U.S.
U.S.
International
International
International
International
International
International
International
International
International
International
International
International
International
Transforming, Today…
UPS launched several key initiatives to transform how we go
to market. To keep pace with consumer expectations for fast,
21%
dependable and convenient deliveries, we expanded access
to UPS services with Saturday Operations in the U.S. for 4,700
cities and towns last year. UPS now provides pickup and
79%
delivery services six days a week to 50% of the U.S. population.
In 2018, we will expand to cover 60% of the population in more
than 5,800 cities and towns across the country.
Saturday service offers our business customers the ability
to tender shipments to UPS on Saturday for delivery the
following Monday. Favorable customer response and
am excited about the potential of this group to transform
our company even further to the benefit of our customers,
employees and our investors.
We executed several important transactions designed to
create new capabilities and relationships that are essential
to our international growth strategy. This includes our
joint venture with S.F. Express, a leading integrated express
logistics service provider in China. Together we are providing
more competitive international delivery services, initially
from China to the U.S., with plans to expand to other
destinations. The exclusive partnership is leveraging our
complementary networks, service portfolios, technologies
incremental volume tendered to UPS under this service has
and logistics expertise.
exceeded our expectations.
Beyond a leading portfolio, we are committed to exploring
and implementing the best technology solutions to keep UPS
on the cutting edge of innovation. We created the Advanced
Technology Group (ATG), comprised of leading technology
and engineering experts to oversee research, testing,
development and application of new technologies.
Our ATG leadership is also charged with collaborating with
technology companies and academic institutions to bring
the best solutions to UPS. We are advancing the use of the
latest digital, robotic and machine technologies, to improve
customer service, make operations more efficient and
reduce the physically stressful nature of certain UPS jobs. I
Further, we expanded the UPS portfolio of solutions and
presence in other key international markets with the
acquisition of Nightline Logistics, the top small-package
company in Ireland. Nightline is a leader in developing and
deploying innovative consumer-focused and business-to-
business services. This acquisition immediately positioned
UPS as one of the premier shippers in Ireland.
To expand our truckload brokerage presence in Europe,
we purchased Freightex, a U.K.-based asset-light provider
of truckload, less-than-truckload, specialized and refrigerated
over-the-road services. The acquisition was rebranded
as Coyote Logistics and establishes a growth platform
across Europe.
– 2 –
180069_L01_NARR.indd 2
3/6/18 5:03 PM
In addition, UPS acquired Sandler & Travis Trade Advisory
These enhancements are clearly driving our business forward
Services in 2017. This purchase builds on the leadership
in Europe. In fact, we achieved another year of double-digit
position UPS has in specialized global brokerage services.
gains in European cross-border shipments — and UPS’s total
UPS was also selected as the Official Logistics Partner for
World Expo 2020 Dubai. As a partner with the first World
Expo in the Middle East, Africa and South Asia, UPS will gain
exposure and new business opportunities in this emerging
economic region with more than 3.2 billion people. This
exclusive partnership will accelerate our Emerging Market
Strategy in the Middle East.
export growth rate in 2017 was the highest since 2010.
A Year In Review
Our 2017 results demonstrate that UPS is transforming
and adapting to the many changes in the global economy,
including double-digit growth in ecommerce. Here are the
highlights for the year:
• Even as we invest, we continue to generate strong results that
These announcements bring the number of partnerships
position UPS for profitable growth. For the full year, adjusted
and acquisitions we’ve entered to 15 over the last three years.
diluted earnings per share increased 4.5%, to $6.01*, which
Going forward, we’ll continue to look for creative ways to
marked a record high.
expand our capabilities, our market presence and the reach of
our network in ways that create value.
As we expand our portfolio, we are also improving our service
across numerous countries in Asia and Europe, including
China, France, Germany, Taiwan and the United Kingdom. We
are expanding our coverage while improving time-in-transit
across these important regions.
In fact, we cut a full day out of delivery times between more
than 9,000 shipping lanes across Europe. UPS improved transit
times for virtually the entire ground network that serves the
28 EU countries plus Switzerland and Norway.
• The demand for our services has never been greater. UPS
delivered on average more than 20 million packages per day.
This higher volume drove an 8.2% increase in consolidated
revenue, to nearly $66 billion.
• In the U.S., our small package business produced nearly $41
billion in revenue, up 6.4% over 2016 and the fastest growth
we’ve seen in several years.
UPS now provides pickup and
delivery services six days a week
to 50% of the U.S. population.}
REVENUE
(In Billions of Dollars)
2017 : 65.9
65.965.965.965.965.965.9
2016 : 60.9
60.960.960.960.960.960.9
2015 : 58.4
58.458.458.458.458.458.4
2014 : 58.2
58.258.258.258.258.258.2
2013 : 55.4
55.455.455.455.455.455.4
2012 : 54.1
54.154.154.154.154.154.1
– 3 –
*See reconciliation of Non-GAAP financial measures on page A1.
180069_L01_NARR.indd 3
3/6/18 7:28 PM
}}
}
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
UPS was voted No. 1 in the delivery
industry in Fortune magazine’s
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2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
2018 rankings of the “World’s
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
Most Admired Companies.”
180069_L01_NARR.indd 4
3/6/18 5:03 PM
• Supply Chain and Freight and International business
segments produced outstanding results throughout the
year. The Supply Chain and Freight segment generated
a more than 26%* increase in adjusted operating profit
growth. International increased operating profit to $2.5
billion on average daily shipment growth of 9.3%.
• Strong cash flow enabled UPS to advance our strategic
investment schedule, and reward shareowners. For the
year, we invested $5.2 billion in capital expenditures,
paid $2.9 billion in dividends, and repurchased shares for
$1.8 billion.
• UPS was voted No. 1 in the delivery industry in Fortune
magazine’s 2018 rankings of the “World’s Most Admired
Companies.” We were also recognized by Just Capital
as one of America’s 100 Most Just Companies and by
Ethisphere as one of the World’s Most Ethical Companies
for the 11th straight year. We were named to the Dow
Jones Sustainability World Index for the fifth straight
year, and our medical drone initiative in Rwanda won a
Corporate Citizenship Award from the U.S. Chamber of
Commerce Foundation. These rankings highlight both the
strength of our solutions portfolio and of the UPS brand.
U.S. Domestic
The strong U.S. Domestic segment revenue expansion
was driven by balanced growth across all products.
Revenue for Ground products was up 6.5%, Next Day Air
was 5.0% higher and Deferred Air products increased
8.3%. Adjusted operating profit for U.S. Domestic was $4.9
billion*, with an adjusted operating margin of 12.1%*.
International
The International business segment delivered
outstanding performance again in 2017. Revenue
increased 11%* on a currency-neutral basis. Export
shipments jumped more than 15% — the highest level
we’ve produced in nearly two decades.
Total adjusted operating profit increased to $2.5 billion*,
up more than 16%* on a currency-neutral basis. Operating
margin was 18.7%* and continues to lead the industry.
*See reconciliation of Non-GAAP financial measures on page A1.
– 5 –
180069_L01_NARR.indd 5
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NET INCOME
(In Billions of Dollars)
2017 :
2016 :
2015 :
2014 :
2013 :
2012 :
Adjusted
4.9
4.94.94.94.94.94.9
5.35.35.35.3
5.3
3.4
3.43.43.43.43.43.4
5.15.15.15.1
5.1
4.84.84.84.84.84.8
4.8
4.94.94.94.9
4.9
3.0
3.03.03.03.03.03.0
4.44.44.44.44.44.4
4.4
4.44.44.44.44.44.4
4.4
4.34.34.34.3
4.3
0.8
0.80.80.80.80.80.8
4.44.44.44.44.44.4
4.4
DILUTED EARNINGS PER SHARE
(In Dollars)
2017 :
2016 :
2015 :
2014 :
2013 :
2012 :
Adjusted
5.61
5.615.615.615.615.615.615.615.61
6.016.016.016.016.016.01
6.01
3.87
3.873.873.873.873.873.873.873.87
5.755.755.755.755.755.75
5.75
5.355.355.355.355.355.355.355.35
5.35
5.435.435.435.435.435.43
5.43
3.28
3.283.283.283.283.283.283.283.28
4.754.754.754.754.754.75
4.75
4.614.614.614.614.614.614.614.61
4.61
4.574.574.574.574.574.57
4.57
0.83
0.830.830.830.830.830.830.830.83
4.534.534.534.534.534.53
4.53
OPERATING MARGIN
(Percent)
DIVIDENDS DECLARED
(cid:399)(cid:13)n (cid:8)ollars per S(cid:43)are(cid:400)
2017 :
2016 :
2015 :
2014 :
2013 :
2012 :
Adjusted
11.4
11.411.411.411.411.411.411.411.411.411.4
12.612.612.612.612.612.6
12.6
9.0
9.0
9.0
9.0
9.0
9.0
9.0
13.313.313.313.313.313.3
13.3
13.1
13.113.113.113.113.113.113.113.1
13.313.313.313.313.313.3
13.3
8.5
8.5
8.5
8.5
8.5
8.5
8.5
12.212.212.212.212.212.212.212.2
12.2
12.7
12.712.712.712.712.712.712.712.7
12.812.812.812.812.812.8
12.8
2.5
2.5
2.5
2.5
2.5
2.5
2.5
13.113.113.113.113.113.1
13.1
2017 :
2016 :
2015 :
2014 :
2013 :
2012 :
3.32
3.323.323.323.323.323.323.323.32
6.4%6.4%6.4%6.4%
6.4%
3.12
3.123.123.123.123.123.12
6.8%6.8%6.8%6.8%6.8%6.8%
6.8%
2.92
2.922.922.922.922.922.922.922.92
9.0%9.0%9.0%9.0%9.0%9.0%
9.0%
2.68
2.682.682.682.682.682.682.682.68
8.1%8.1%8.1%8.1%
8.1%
2.48
2.482.482.482.482.482.48
8.8%8.8%8.8%8.8%8.8%8.8%
8.8%
2.28
2.282.282.282.282.282.282.282.28
9.6%9.6%9.6%9.6%9.6%9.6%
9.6%
YOY % Growth Rate
SHARE REPURCHASE EXPENDITURES
(In Billions of Dollars)
NUMBER SHARES REPURCHASED
(In Millions)
2017 : 1.8
1.81.81.81.8
2016 : 2.7
2.72.72.72.72.72.7
2015 : 2.7
2.72.72.72.72.72.7
2014 : 2.7
2.72.72.72.72.72.7
2013 : 3.8
3.83.83.83.8
2012 : 1.6
1.61.61.61.6
2017 : 16.1
16.116.116.116.116.116.1
2016 : 25.4
25.425.425.425.425.425.4
2015 : 26.8
26.826.826.826.826.826.8
2014 : 26.4
26.426.426.426.426.426.4
2013 : 43.2
43.243.243.243.243.243.2
2012 : 21.8
21.821.821.821.8
– 6 –
180069_L01_NARR.indd 6
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Supply Chain and Freight
The Supply Chain and Freight segment generated strong top
and bottom-line results in 2017. Revenue growth was strong
across all major business units and was led by Forwarding
and Logistics, where revenue was up nearly 18% and 10%
at UPS Freight. Business strategies and improved market
conditions drove tonnage increases across the Forwarding
and UPS Freight units.
The Supply Chain and Freight segment has undergone a
multi-year transformation that has improved profitability.
Continued progress on target industry strategy has led to
growth in key verticals like Healthcare and Aerospace. In
2017, all units contributed to a more than 26%* increase in
operating profit and margin expansion of 70 basis points*.
A Helping Hand
In 2017, many of the global communities we serve suffered
through significant natural disasters. UPS teams reacted
quickly to assist those in need with relief supplies and
financial support; and we worked quickly to reestablish
delivery operations to ensure critical medical and other
urgent supplies could be delivered.
To assist in the recovery efforts, the UPS Foundation
committed more than $3 million to support the relief
efforts throughout the U.S., the Caribbean and Mexico. I am
extremely proud of the UPS team and their great work in the
face of natural disasters and through many other corporate
citizenship programs in cities and towns across the globe.
Transforming, Tomorrow…
In 2018, we are further accelerating UPS’s transformation
and laying the foundation for additional progress in 2019
and beyond. With the benefits from the passage of the Tax
Cut and Jobs Act, we are funding additional infrastructure
investments and significantly increasing pension
contributions – moves that position UPS to provide more
value to shareowners.
Over the next three years, we’ll enhance our information
technology platforms to better manage the business;
construct and renovate our facilities; acquire additional
Boeing aircraft; all while creating innovative solutions for
customers. By year’s end, we will add nine new aircraft to our
fleet; expand Saturday Operations to another 900 cities and
towns; and open 18 new or retrofitted facilities including 3
new regional hubs. As these investments become operational,
benefits will be realized in the form of new revenue and
improved productivity.
Globally, UPS has nearly 200 modernization projects in the
works. These investments, along with our other network
optimization and digital connectivity initiatives, are part of a
broader strategy to use technology to improve our operating
performance and help our employees deliver the best service
for UPS customers. We’re also using technology to enhance
the customer experience at UPS and are excited about the
recent successful launch of our new ups.com website and the
streamlined marketing capabilities we’ve added.
We expect to provide our customers a more personalized
experience that fosters growth in incremental revenue.
Summary
While customers, markets, economies, environments and
society as a whole continues to evolve, UPS is adapting
and advancing our business. It’s not a new phenomenon;
in fact, it’s part of our DNA. For more than 110 years, we’ve
transformed our business model for the benefit of UPS
customers, employees and shareowners. From a messenger
company facing disruption by home telephones to a global
logistics provider adapting to ecommerce, we’ve reinvented
ourselves many times with great success.
As we move forward through another period of
transformation, we intend to harness the power of
disruptive technologies and business models to the benefit
of UPS — which will serve as catalysts to accelerate growth
opportunities.
Our network and organizational transformation efforts are
aligning our unique capabilities, considerable resources and
future vision to refine our business model. Our focus is on
ensuring a sustainable, profitable and enduring UPS. We look
forward to updating you on our substantial progress along
the way.
David Abney
David Abney
UPS Chairman and
Chief Executive Officer
*See reconciliation of Non-GAAP financial measures on page A1.
– 7 –
180069_L01_NARR.indd 7
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MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
MANAGEMENT COMMITTEE
UPS BOARD OF DIRECTORS
DAVID ABNEY
UPS Chairman and
Chief Executive Officer
JIM BARBER
Senior Vice President and
President, UPS International
NORMAN BROTHERS, JR.
Senior Vice President, General
Counsel and Corporate Secretary
ALAN GERSHENHORN
Senior Vice President and
Chief Commercial Officer
MYRON GRAY
Senior Vice President and
President, U.S. Operations
KATE GUTMANN
Senior Vice President,
Chief Sales and Solutions Officer
TERI PLUMMER MCCLURE
Senior Vice President and
Chief H.R. Officer, Labor Relations
RICHARD PERETZ
Senior Vice President, Chief
Financial Officer and Treasurer
DAVID ABNEY
UPS Chairman and Chief Executive Officer
Director since 2014
RODNEY C. ADKINS
Former Senior Vice-President, IBM
Director since 2013
MICHAEL J. BURNS
Former Chairman, Chief Executive
Officer & President, Dana Corporation
Director since 2005
WILLIAM R. JOHNSON
Former Chairman, President & Chief
Executive Officer, H.J. Heinz Company
Director since 2009
DR. CANDACE KENDLE
Co-founder and Former Chairman & Chief
Executive Officer of Kendle International, Inc.
Director since 2011
ANN M. LIVERMORE
Former Executive Vice President,
Hewlett-Packard Company
Director since 1997
RUDY H.P. MARKHAM
Former Financial Director, Unilever
Director since 2007
FRANCK MOISON
Vice Chairman, Colgate-Palmolive Company
Director since 2017
CLARK T. RANDT, JR.
Former U.S. Ambassador to the People’s Republic
of China, President of Randt & Co. LLC
Director since 2010
JOHN T. STANKEY
Senior Executive Vice President AT&T /
Time Warner Integration
Director since 2014
CAROL B. TOMÉ
Chief Financial Officer & Executive Vice
President, The Home Depot, Inc.
Director since 2003
JUAN PEREZ
Senior Vice President and
Chief Information Officer
SCOTT PRICE
Senior Vice President and
Chief Transformation Officer
KEVIN M. WARSH
Former Member of the Federal Reserve Board of
Governors, Fellow, Hoover Institution, Stanford
Director since 2012
– 8 –
180069_L01_NARR.indd 8
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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.
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
55 Glenlake Parkway, N.E. Atlanta, Georgia
(Address of Principal Executive Offices)
58-2480149
(I.R.S. Employer
Identification No.)
30328
(Zip Code)
(404) 828-6000
(Registrant’s telephone number, including area code)
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Class B common stock, par value $.01 per share
Floating-Rate Senior Notes due 2020
1.625% Senior Notes due 2025
1% Senior Notes due 2028
0.375% Senior Notes due 2023
1.500% Senior Notes due 2032
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
_________________________________
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, par value $.01 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No
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
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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 definition of “accelerated filer”,
“large accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the class B common stock held by non-affiliates of the registrant was $76,094,649,311 as of June 30, 2017. The registrant’s class A common stock is not
listed on a national securities exchange or traded in an organized over-the-counter market, but each share of the registrant’s class A common stock is convertible into one share of the
registrant’s class B common stock.
As of February 8, 2018, there were 173,362,905 outstanding shares of class A common stock and 688,251,874 outstanding shares of class B common stock.
Portions of the registrant’s definitive proxy statement for its annual meeting of shareowners scheduled for May 10, 2018 are incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
UNITED PARCEL SERVICE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Business
Overview
Strategy
Reporting Segments and Products & Services
Our People
Competition
Competitive Strengths
Government Regulation
Where You Can Find More Information
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Operating Facilities
Fleet
Item 3.
Item 4.
Legal Proceedings
Mine Safety Disclosures
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Shareowner Return Performance Graph
Item 6.
Item 7.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Items Affecting Comparability
U.S. Domestic Package Operations
International Package Operations
Supply Chain & Freight Operations
Operating Expenses
Investment Income and Interest Expense
Income Tax Expense
Liquidity and Capital Resources
Collective Bargaining Agreements
New Accounting Pronouncements
Critical Accounting Policies and Estimates
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Principal Accounting Fees and Services
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
1
1
1
2
5
5
6
6
8
9
16
16
16
17
17
17
18
19
20
21
21
22
25
30
34
38
42
43
46
52
52
53
59
61
126
126
128
129
130
130
130
130
131
131
Cautionary Statement About Forward-Looking Statements
PART I
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 to Shareholders and in our other filings with the
Securities and Exchange Commission (“SEC”) contain forward-looking statements regarding our intent, belief and current
expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking
statements in other materials we release as well as oral forward-looking statements. Such statements give our current
expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that
these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue
reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ
materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties are
described in Part I, “Item 1A. Risk Factors” and may also be described from time to time in our future reports filed with the
SEC. 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.
Item 1. Business
Overview
United Parcel Service, Inc. (“UPS”) was founded in 1907 as a private messenger and delivery service in Seattle,
Washington. Today, we are the world’s largest package delivery company, a leader in the U.S. less-than-truckload industry and
a premier provider of global supply chain management solutions. We deliver packages each business day for 1.5 million
shipping customers to 9.0 million receivers ("consignees") in over 220 countries and territories. In 2017, we delivered an
average of 20.0 million pieces per day, or a total of 5.1 billion packages. Total revenue in 2017 was $65.872 billion.
We serve the global market for logistics services, which includes transportation, distribution, contract logistics, ground
freight, ocean freight, air freight, customs brokerage, insurance and financing. We have three segments: U.S. Domestic
Package, International Package and Supply Chain & Freight, all of which are described below. For financial information
concerning our segments and geographic regions, refer to note 12 of our audited consolidated financial statements.
Strategy
Our market strategy is to provide customers with advanced logistics solutions made possible by a broad portfolio of
differentiated services and capabilities expertly assembled and integrated into our customers’ businesses. This approach,
supported by our efficient and globally balanced multimodal network, enables us to deliver value to our customers and thereby
build lasting partnerships with them.
Customers leverage our broad portfolio of logistics capabilities comprised of: our balanced global presence in North
America, Europe, Middle East, Africa, Asia Pacific and Latin America; reliability; industry-leading technologies and solutions
expertise for competitive advantage in markets where they choose to compete. We continue to invest to expand our integrated
global network and service portfolio. In 2017, we formed and received approval for a joint venture with SF Express, China’s
leading small package company, which will ultimately provide millions of potential customers in China with improved access
to buyers and sellers around the world. We acquired Freightex, Ltd. ("Freightex") to extend our platform-based freight
transportation capabilities into both the U.K. and European markets. The acquisition of Eirpost Group Unlimited Company
("Nightline") vaulted UPS to a leading market position in Ireland. We added shipping centers and healthcare and distribution
facilities in Mexico, Colombia and India. In 2017, we also acquired STTAS Global Holdings, Inc. ("Sandler & Travis Trade
Advisory Services" or "STTAS"), the world’s largest dedicated global trade compliance management company.
1
We are increasing our capital expenditures to meet increasing global demand. Within our facilities, we are expanding
automated capacity, driving greater efficiencies and providing additional network flexibilities. We also continue to invest in our
air network capacity through aircraft acquisitions. In 2017, we announced investments in four new regional facilities in the
Indianapolis, Phoenix, Salt Lake City and Dallas areas, with the previously announced regional facility in Atlanta, Georgia
continuing to move toward completion.
We have a long history of sound financial management and our consolidated balance sheet reflects financial strength.
Cash generation is a significant strength of UPS, giving us ample capacity to service our obligations and allowing for
distributions to shareowners, reinvestment in our business and the pursuit of growth opportunities.
Reporting segments and products & services
Global Small Package
Our global small package operations provide time-definite delivery services for express letters, documents, small
packages and palletized freight via air and ground services. We serve more than 220 countries and territories around the world
along with domestic delivery service in over 50 countries. We handle packages that weigh up to 150 pounds and are up to 165
inches in combined length and girth as well as palletized shipments weighing more than 150 pounds. All of our package
services are supported by numerous shipping, visibility and billing technologies.
We handle all levels of service (air, ground, domestic, international, commercial and residential) through one global
integrated pickup and delivery network. We combine all packages within our network, unless dictated by specific service
commitments. This enables one UPS driver to pick up customers’ shipments for any of our services at the same scheduled time
each day. Compared to companies with single service network designs, our integrated network uniquely provides operational
and capital efficiencies while being more environmentally friendly.
We offer same-day pickup of air and ground packages upon request. Customers can schedule pickups for one to five days
a week, based on their specific needs. Additionally, our wholly-owned and partnered global network offers more than 150,000
entry points where customers can tender a package to us at a location or time convenient to them. This combined network
includes UPS drivers who can accept packages provided to them, UPS drop boxes, UPS Access Point locations, The UPS Store
locations, authorized shipping outlets and commercial counters, alliance locations and customer centers attached to UPS
facilities. Some of these locations offer a full array of services, including pickup, delivery and packing options, while others are
drop-off locations only.
The continued growth of online and mobile shopping has increased our customers’ needs for efficient and reliable returns,
resulting in our development of a robust selection of returns services that are available in more than 145 countries. The
portfolio provides a range of cost-effective label options and a vast network of consumer drop points, as well as a selection of
return technologies that promote efficiency and a friction-free consumer experience. These options vary based on customer
need and country and include solutions such as UPS Returns®, as well as more-specialized services such as UPS Returns®
Exchange. Our technologies promote systems integration, client ease of use and visibility of inbound merchandise, which help
reduce costs and improve efficiency of our merchants' reverse logistics processes. The newly launched UPS Returns® Manager
is an excellent example of this value.
We operate one of the largest airlines in the world, with global operations centered at our Worldport hub in Louisville,
Kentucky. Worldport sort capacity has expanded over the years due to volume growth and centralization efforts. Our European
air hub is located in Cologne, Germany, and we maintain Asia Pacific air hubs in Shanghai, China; Shenzhen, China and Hong
Kong. Our regional air hub in Canada is located in Hamilton, Ontario and our regional air hub for Latin America and the
Caribbean is in Miami, Florida.
Our U.S. regional air hubs in Dallas, Texas; Ontario, California; Philadelphia, Pennsylvania and Rockford, Illinois
support Worldport. This network design creates cost-effective package processing in our most technology-enabled facilities,
which allows us to use fewer, larger and more fuel-efficient aircraft. Our U.S. ground fleet serves all business and residential
zip codes in the contiguous U.S.
2
U.S. Domestic Package reporting segment
We are a leader in time-definite, money-back guaranteed, small package delivery services in the U.S. We offer a full
spectrum of U.S. domestic guaranteed ground and air package transportation services.
• Customers can select from same day, next day, two day and three day delivery alternatives. UPS’s Air portfolio offers
options enabling customers to specify a time-of-day guarantee for their delivery (e.g., by 8:00 A.M., 10:30 A.M.,
noon, end of day, etc.).
• Customers can also leverage our extensive ground network to ship using our day-definite guaranteed ground service
that serves every U.S. business and residential address. We deliver more ground packages in the U.S. than any other
carrier, with average daily package volume of 14.1 million, most within one to three business days.
• We also offer UPS SurePost, an economy residential ground service for customers with non-urgent, lightweight
residential shipments. UPS SurePost is a contractual residential ground service that combines the consistency and
reliability of the UPS Ground network with final delivery often provided by the U.S. Postal Service. We utilize our
operational technology to identify multiple package delivery opportunities and redirect UPS SurePost packages for
final delivery, improving time in transit, customer service and operational efficiency.
International Package reporting segment
Our International Package reporting segment includes small package operations in Europe, Asia Pacific, Canada and
Latin America, and the Indian sub-continent, Middle East and Africa ("ISMEA"). We offer a wide selection of guaranteed day
and time-definite international shipping services. We offer more guaranteed time-definite express options (Express Plus,
Express and Express Saver) than any other carrier.
•
In 2017, we continued expansion of our Express time-definite portfolios:
We expanded UPS WorldWide Express to five new countries around the globe.
UPS Express now reaches 124 countries with guaranteed mid-day delivery and 56 countries with guaranteed
morning delivery with Express Plus.
Express Saver reaches 220 countries and territories with guaranteed end-of-day delivery.
Express Freight Midday is available from all 67 WorldWide Express Freight origin countries to 35 destination
countries.
•
•
For international package shipments that do not require Express services, UPS Worldwide Expedited offers a reliable,
deferred, guaranteed day-definite service option. The service is available from more than 80 origin countries to more
than 220 countries and territories.
For cross-border ground package delivery, we offer UPS Standard delivery services within Europe, between the U.S.
and Canada and between the U.S. and Mexico.
Europe, our largest region outside of the U.S., accounts for approximately half of international revenue and is one of the
primary drivers of our growth. To accommodate the strong potential for growth in small package exports, we made a series of
enhancements to both our ground and air networks that help reduce transit time by one to two days and will result in improved
exporting opportunities for customers in Europe. These expansions and enhancements are part of our commitment to invest
nearly $2 billion in our European infrastructure.
Asia Pacific remains a strategic market due to growth rates in intra-Asia trade and the expanding Chinese economy. To
capitalize on these opportunities, we are bringing faster time-in-transit to customers focused on intra-Asia trade and reducing
transit time from Asia to the U.S. and Europe. Through added flight frequencies, we provide our customers the ability to ship
next day to more places in the U.S. and Europe - guaranteed - than any other express carrier. We serve more than 40 Asia
Pacific countries and territories through more than two dozen alliances with local delivery companies that supplement
company-owned operations. Our new joint venture with SF Express combines SF’s extensive Chinese network with UPS’s
delivery capabilities in the U.S. and Europe to increase our market presence and help provide Chinese enterprises with greater
global access.
Additional international highlights include several air network enhancements, improving time in transit and better
addressing growing markets. A new direct flight from the U.S. to Dubai improves time in transit to key destinations in the
ISMEA region for shippers throughout the U.S., Canada and the Americas. Europe added flight segments in Lithuania, Poland
and Spain, while a dedicated chartered flight from Cologne to Casablanca continues our investment strategy in Morocco, an
emerging market.
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Supply Chain & Freight segment
The Supply Chain & Freight segment consists of our forwarding and logistics services, truckload freight brokerage,
dedicated contract carriage truckload services, less-than-truckload (“LTL”) services and our financial offerings through UPS
Capital. Supply chain complexity creates demand for a global service offering that incorporates transportation, distribution and
international trade and brokerage services, with complementary financial and information services. Outsourcing of non-core
logistics activity is a strategy more and more companies are pursuing. With increased competition and growth opportunities in
new markets, businesses require flexible and responsive supply chains to support their business strategies. We meet this
demand by offering a broad array of supply chain services in more than 200 countries and territories.
Freight Forwarding
We are one of the largest U.S. domestic air freight carriers and among the top international air freight forwarders globally.
We offer a portfolio of guaranteed and non-guaranteed global air freight services. Additionally, as one of the world’s leading
non-vessel operating common carriers, we provide ocean freight full-container load, less-than-container load and multimodal
transportation services between most major ports around the world.
Truckload Freight Brokerage
In 2015, we acquired Coyote Logistics Midco, Inc. ("Coyote"), a U.S.-based truckload freight brokerage company. We
successfully integrated this large-scale truckload freight brokerage and transportation management services operation into our
Supply Chain & Freight segment and have seen significant synergies in the areas of purchased transportation, backhaul
utilization, technology systems and industry best practices. Coyote's access to our UPS fleet, combined with its broad carrier
network, has created a customized capacity solution for all markets, customers and situations. Moreover, Coyote creates access
to UPS services (such as air freight, customs brokerage and global freight forwarding) for its customer base.
In January 2017, UPS acquired U.K.-based freight brokerage firm, Freightex. The acquisition of Freightex adds a full-
scale truckload brokerage and transportation management solution to UPS’s European portfolio, creating a one-stop shop for
shippers throughout Europe with freight ranging from parcel to full truckload. The combination of Coyote’s technology and
business model with Freightex’s market knowledge and established customer and carrier base complements UPS’s North
American truckload brokerage business, as many international shippers know and trust the Coyote truckload product.
Global Logistics and Distribution
We provide value-added logistics services to customers through our global network of company-owned and leased
distribution centers and field stocking locations. We leverage a global network of more than 900 facilities in more than 100
countries around the globe to ensure products and parts are in the right place, at the right time.
Our distribution centers are strategically located near UPS air and ground transportation hubs for rapid delivery to
consumer and business markets. In 2017, UPS began piloting a new integrated transportation-fulfillment solution for small
business e-commerce merchants, enabling them to rapidly expand and grow their offerings without additional capital
investment.
UPS Post Sales relies on central and field stocking sites to support installed and delivered equipment and devices. In
2017, we integrated UPS Access Point locations into our network, offering greater flexibility, more convenience and improved
service for our customers. We also began piloting GPS tracking capabilities and are converting our primary transportation
couriers across the U.S. and Canada, which will continue in 2018.
Since its acquisition in late 2016, Maze 1 Limited ("Marken") has served as the clinical trials logistics subsidiary of UPS.
Marken strengthened its position as the only patient-centric supply chain organization 100 percent dedicated to the
pharmaceutical and life sciences industries. Marken expanded into new facilities, acquiring Touchdown International Logistics
Co., Ltd. in Taiwan, and launching a new hybrid service that leverages the strength and reach of UPS’s global network. The
focus in 2017 was on accelerating revenue growth through new business wins and realizing cost synergies in areas such as IT
purchasing, air transportation and insurance premiums.
UPS Express Critical provides urgent, secure transportation for time-sensitive and high-value goods. The service
complements UPS's core parcel and air freight services. It includes same-day, next-flight-out and door-to-door ground services,
including specialized charter and hand-carry services for both lightweight and heavyweight shipments. In 2017, UPS focused
on serving fast-growing industries such as life sciences and aerospace and we will continue this focus in 2018.
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UPS Freight
UPS Freight offers regional, inter-regional and long-haul LTL services in all 50 states, Canada, Puerto Rico, Guam, the
U.S. Virgin Islands and Mexico. UPS Freight provides reliable LTL service backed by a day-definite, on-time guarantee at no
additional cost. UPS Freight also provides dedicated contract carriage truckload services to select clients. Additionally, user
friendly shipping, visibility and billing technology offerings, including UPS WorldShip®, Quantum View and UPS Billing
Center, allow freight customers to create electronic bills of lading, monitor shipment progress and reconcile shipping charges.
Customs Brokerage
We are among the world’s largest customs brokers by both the number of shipments processed annually and by the
number of dedicated brokerage employees worldwide. In addition to customs clearance services, we also provide trade
management and consulting services. In 2017, we acquired STTAS, the world’s largest dedicated global trade compliance
management company. STTAS will help us reach our vision of becoming the global broker of choice by expanding the depth of
services we provide, as well as our geographic coverage.
UPS Capital
UPS Capital provides financial, insurance and payment services to leverage cash and help protect companies from risk in
their supply chains. With services available in more than 21 countries, UPS Capital and its affiliates support all aspects of the
order-to-cash cycle, including financing inventory warehoused overseas, insuring shipments and providing payment solutions.
The UPS Capital suite of insurance services, trade finance and payment solutions helps customers protect their assets and keeps
their businesses running smoothly. With the acquisitions of Parcel Pro™ and the Insured Parcel Services business of G4S
International Logistics in 2015, UPS Capital now offers insured transportation of high value goods including loose stones,
finished jewelry and wristwatches.
Our People
The strength of our company is our people, working together with a common purpose. We had more than 454,000
employees (excluding temporary seasonal employees) as of December 31, 2017, of which 374,000 are in the U.S. and 80,000
are located internationally. Our global workforce includes approximately 81,000 management employees (40% of whom are
part-time) and 373,000 hourly employees (49% of whom are part-time).
As of December 31, 2017, we had approximately 280,000 employees employed under a national master agreement and
various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”).
During 2014, the Teamsters ratified a national master agreement with UPS that will expire on July 31, 2018.
We have approximately 2,700 pilots who are employed under a collective bargaining agreement with the Independent
Pilots Association ("IPA"), which runs through September 1, 2021. The economic provisions in the agreement included pay
increases, signing bonuses and enhanced pension benefits.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became
amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727. In addition, approximately 3,100 of
our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under
collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”) that will
expire on July 31, 2019.
Competition
UPS is a global leader in logistics. We offer a broad array of services in the package and freight delivery industry and
compete with many different local, regional, national and international logistics providers. Our competitors include worldwide
postal services, various motor carriers, express companies, freight forwarders, air couriers and others, including startups that
combine technology with crowdsourcing to focus on local market needs. Through our supply chain service offerings, we
compete with a number of providers in the supply chain, financial services and information technology industries.
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Competitive Strengths
Our competitive strengths include:
Global Network. We believe that our integrated global ground and air network is the most extensive in the industry. We
provide all types of package services (air, ground, domestic, international, commercial and residential) through a single pickup
and delivery service network. We also have extensive air freight, ocean freight, ground freight and logistics networks that
provide additional capabilities in the global transportation and logistics market. Our sophisticated engineering systems allow us
to optimize our network efficiency and asset utilization on a daily basis.
Global Presence. We serve more than 220 countries and territories around the world. We have a significant presence in
all of the world’s major economies.
Cutting-Edge Technology. We are a global leader in developing technology that helps our customers enhance their
shipping and logistics business processes to lower costs, improve service and increase efficiency.
Technology powers virtually every service we offer and every operation we perform. Customer need drives our
technology offerings. We offer a variety of online service options that enable our customers to integrate UPS functionality into
their own businesses not only to send, manage and track their shipments conveniently, but also to provide their customers with
better information services. We provide the infrastructure for an internet presence that extends to tens of thousands of
customers who have integrated UPS tools directly into their own websites.
Broad Portfolio of Services. Our portfolio of services helps customers choose the delivery option that is most
appropriate for their requirements. Increasingly, our customers benefit from business solutions that integrate many UPS
services beyond package delivery. For example, our supply chain services – such as freight forwarding, truckload brokerage,
customs brokerage, order fulfillment and returns management – help improve the efficiency of the supply chain management
process.
Customer Relationships. We focus on building and maintaining long-term customer relationships. We serve 1.5 million
shipping customers and 9.0 million delivery customers daily. Cross selling small package, supply chain and freight services
across our customer base is an important growth mechanism for UPS.
Brand Equity. We have built a leading and trusted brand that stands for quality service, reliability and service
innovation. The distinctive appearance of our vehicles and the professional courtesy of our drivers are major contributors to our
brand equity.
Distinctive Culture. We believe that the dedication of our employees comes in large part from our distinctive
“employee-owner” concept. Our employee stock ownership tradition dates back to 1927, when our founders, who believed that
employee stock ownership was a vital foundation for successful business, first offered stock to employees. To encourage
employee stock ownership, we maintain several stock-based compensation programs.
Financial Strength. Our financial strength gives us the resources to achieve global scale; to invest in employee
development, technology, transportation equipment and facilities; to pursue strategic opportunities that facilitate our growth; to
service our obligations and to return value to our shareowners in the form of dividends, share repurchases and steady share
growth.
Government regulation
We are subject to numerous laws and regulations in connection with our package and non-package businesses in the
countries in which we operate. Certain of these laws and regulations are summarized below.
Air Operations
The U.S. Department of Transportation (“DOT”), the Federal Aviation Administration (“FAA”) and the U.S. Department
of Homeland Security, through the Transportation Security Administration (“TSA”), have regulatory authority over United
Parcel Service Co.’s (“UPS Airlines”) air transportation services. The Federal Aviation Act of 1958, as amended, is the statutory
basis for DOT and FAA authority and the Aviation and Transportation Security Act of 2001, as amended, is the basis for TSA
aviation security authority.
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The DOT’s authority primarily relates to economic aspects of air transportation, such as insurance requirements,
discriminatory pricing, non-competitive practices, interlocking relations and cooperative agreements. The DOT also regulates,
subject to the authority of the President of the United States, international routes, fares, rates and practices and is authorized to
investigate and take action against discriminatory treatment of U.S. air carriers abroad. International operating rights for U.S.
airlines are usually subject to bilateral agreements between the U.S. and foreign governments or, in the absence of such
agreements, by principles of reciprocity. We are also subject to current and potential aviation regulations imposed by foreign
governments in the countries in which we operate, including registration and license requirements and security regulations.
UPS Airlines has international route operating rights granted by the DOT and we may apply for additional authorities when
those operating rights are available and are required for the efficient operation of our international network. The efficiency and
flexibility of our international air transportation network is dependent on DOT and foreign government regulations and
operating restrictions.
The FAA’s authority primarily relates to safety aspects of air transportation, including aircraft operating procedures,
transportation of hazardous materials, record keeping standards and maintenance activities and personnel. In 1988, the FAA
granted us an operating certificate, which remains in effect so long as we meet the safety and operational requirements of the
applicable FAA regulations. In addition, we are subject to non-U.S. government regulation of aviation rights involving non-
U.S. jurisdictions and non-U.S. customs regulation.
UPS aircraft maintenance programs and procedures, including aircraft inspection and repair at periodic intervals, are
approved for all aircraft under FAA regulations. The future cost of repairs pursuant to these programs may fluctuate according
to aircraft condition, age and the enactment of additional FAA regulatory requirements.
The TSA regulates various security aspects of air cargo transportation in a manner consistent with the TSA mission
statement to “protect the Nation’s transportation systems to ensure freedom of movement for people and commerce.” UPS
Airlines, and specified airport and off-airport locations, are regulated under TSA regulations applicable to the transportation of
cargo in an air network. In addition, personnel, facilities and procedures involved in air cargo transportation must comply with
TSA regulations.
UPS Airlines, along with a number of other domestic airlines, participates in the Civil Reserve Air Fleet (“CRAF”)
program. Our participation in the CRAF program allows the U.S. Department of Defense (“DOD”) to requisition specified UPS
Airlines wide-body aircraft for military use during a national defense emergency. The DOD compensates us for the use of
aircraft under the CRAF program. In addition, participation in CRAF entitles UPS Airlines to bid for military cargo charter
operations.
Ground Operations
Our ground transportation of packages in the U.S. is subject to regulation by the DOT and its agency, the Federal Motor
Carrier Safety Administration (the “FMCSA”) and the states’ jurisdiction with respect to the regulation of operations, safety,
insurance and hazardous materials. We also must comply with the safety and fitness regulations promulgated by the FMCSA,
including those relating to drug and alcohol testing and hours of service for drivers. We are subject to similar regulation in
many non-U.S. jurisdictions.
The Postal Reorganization Act of 1970 created the U.S. Postal Service as an independent establishment of the executive
branch of the federal government, and created the Postal Rate Commission, an independent agency, to recommend postal rates.
The Postal Accountability and Enhancement Act of 2006 amended the 1970 Act to give the re-named Postal Regulatory
Commission revised oversight authority over many aspects of the Postal Service, including postal rates, product offerings and
service standards. We sometimes participate in the proceedings before the Postal Regulatory Commission in an attempt to
secure fair postal rates for competitive services.
Our ground operations are subject to compliance with various cargo-security and transportation regulations issued by the
U.S. Department of Homeland Security, including regulation by the TSA.
Customs
We are subject to the customs laws in the countries in which we operate, regarding the import and export of shipments,
including those related to the filing of documents on behalf of client importers and exporters. Our activities, including customs
brokerage and freight forwarding, are subject to regulation by the Bureau of Customs and Border Protection, the TSA, the U.S.
Federal Maritime Commission and the DOT.
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Environmental
We are subject to federal, state and local environmental laws and regulations across all of our business units. These laws
and regulations cover a variety of processes, including, but not limited to: proper storage, handling and disposal of waste
materials; appropriately managing wastewater and stormwater; monitoring and maintaining the integrity of underground
storage tanks; complying with laws regarding clean air, including those governing emissions; protecting against and
appropriately responding to spills and releases and communicating the presence of reportable quantities of hazardous materials
to local responders. We have established site- and activity-specific environmental compliance and pollution prevention
programs to address our environmental responsibilities and remain compliant. In addition, we have created numerous programs
which seek to minimize waste and prevent pollution within our operations.
Pursuant to the Federal Aviation Act, the FAA, with the assistance of the Environmental Protection Agency (“EPA”), is
authorized to establish standards governing aircraft noise. Our aircraft fleet is in compliance with current noise standards of the
federal aviation regulations. Our international operations are also subject to noise regulations in certain countries in which we
operate.
Communications
Because of our extensive use of radio and other communication facilities in our aircraft and ground transportation
operations, we are subject to the Federal Communications Act of 1934, as amended. Additionally, the Federal Communications
Commission regulates and licenses our activities pertaining to satellite communications.
Where You Can Find More Information
We maintain a website at www.ups.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934 are made available through our website www.investors.ups.com as soon as reasonably practical after we
electronically file or furnish the reports to the SEC. However, information on these websites is not incorporated by reference
into this report or any other report filed with or furnished to the SEC.
We have adopted a written Code of Business Conduct that applies to all of our directors, officers and employees,
including our principal executive officer and senior financial officers. It is available in the governance section of our investor
relations website, located at www.investors.ups.com. In the event that we make changes in, or provide waivers from, the
provisions of the Code of Business Conduct that the SEC requires us to disclose, we intend to disclose these events in the
governance section of our investor relations website.
Our Corporate Governance Guidelines and the Charters for our Audit Committee, Compensation Committee, Executive
Committee, Risk Committee and Nominating and Corporate Governance Committee are also available in the governance
section of our investor relations website.
Our sustainability report, which describes our activities that support our commitment to acting responsibly and
contributing to society, is available at www.sustainability.ups.com. We provide the addresses to our internet sites solely for the
information of investors. We do not intend for any addresses to be active links or to otherwise incorporate the contents of any
website into this report.
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Item 1A.
Risk Factors
You should carefully consider the following factors, which could materially affect our business, financial condition or
results of operations. You should read these Risk Factors in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7 and our Consolidated Financial Statements and related notes in
Item 8.
General economic conditions, both in the U.S. and internationally, may adversely affect our results of operations.
We conduct operations in over 220 countries and territories. Our U.S. and international operations are subject to normal
cycles affecting the economy in general, as well as the local economic environments in which we operate. The factors that
create cyclical changes to the economy and to our business are beyond our control, may adversely impact our credit rating and
it may be difficult for us to adjust our business model to mitigate the impact of these factors. In particular, our business is
affected by levels of industrial production, consumer spending and retail activity and our business, financial position and results
of operations could be materially affected by adverse developments in these aspects of the economy. The United Kingdom’s
vote to leave the European Union could result in economic uncertainty and instability, resulting in fewer goods being
transported globally.
We face significant competition which could adversely affect our business, financial position and results of operations.
We face significant competition on a local, regional, national and international basis. Our competitors include the postal
services of the U.S. and other nations, various motor carriers, express companies, freight forwarders, air couriers and others.
Competition may also come from other sources in the future. Some of our competitors have cost and organizational structures
that differ from ours and may offer services and pricing terms that we may not be willing or able to offer. If we are unable to
timely and appropriately respond to competitive pressures, our business, financial position and results of operations could be
adversely affected.
The transportation industry continues to consolidate and competition remains strong. As a result of consolidation, our
competitors may increase their market share and improve their financial capacity, and may strengthen their competitive
positions. Business combinations could also result in competitors providing a wider variety of services and products at
competitive prices, which could adversely affect our financial performance.
Changes in our relationships with our significant customers, including the loss or reduction in business from one or more
of them, could have an adverse impact on us.
No single customer accounts for 10% or more of our consolidated revenue. We do not believe the loss of any single
customer would materially impair our overall financial condition or results of operations; however, collectively, some of our
large customers might account for a relatively significant portion of the growth in revenue in a particular quarter or year. These
customers can drive the growth in revenue for particular services based on factors such as: new customer product launches;
trends in the e-commerce industry, such as the seasonality associated with the fourth quarter holiday season; business mergers
and acquisitions and the overall fast growth of a customer's underlying business. These customers could choose to divert all or
a portion of their business with us to one of our competitors, demand pricing concessions for our services, require us to provide
enhanced services that increase our costs, or develop their own shipping and distribution capabilities. If these factors drove
some of our large customers to cancel all or a portion of their business relationships with us, it could materially impact the
growth in our business and the ability to meet our current and long-term financial forecasts.
Our business is subject to complex and stringent regulation in the U.S. and internationally.
We are subject to complex and stringent aviation, transportation, environmental, security, labor, employment and other
governmental laws, regulations and policies, both in the U.S. and in the other countries in which we operate. In addition, our
business is impacted by laws, regulations and policies that affect global trade, including tariff and trade policies, export
requirements, taxes, monetary policies and other restrictions and charges. Changes in laws, regulations and policies and the
related interpretations may alter the landscape in which we do business and may affect our costs of doing business. The impact
of new laws, regulations and policies cannot be predicted. Compliance with new laws and regulations may increase our
operating costs or require significant capital expenditures. Any failure to comply with applicable laws or regulations in the U.S.
or in any of the countries in which we operate could result in substantial fines or possible revocation of our authority to conduct
our operations, which could adversely affect our financial performance.
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Increased security requirements could impose substantial costs on us and we could be the target of an attack or have a
security breach.
As a result of concerns about global terrorism and homeland security, governments around the world have adopted or may
adopt stricter security requirements that will result in increased operating costs for businesses in the transportation industry.
These requirements may change periodically as a result of regulatory and legislative requirements and in response to evolving
threats. We cannot determine the effect that these new requirements will have on our cost structure or our operating results, and
these rules or other future security requirements may increase our costs of operations and reduce operating efficiencies.
Regardless of our compliance with security requirements or the steps we take to secure our facilities or fleet, we could be the
target of an attack or security breaches could occur, which could adversely affect our operations or our reputation.
We are subject to increasingly stringent regulations related to climate change, and new regulations could materially
increase our operating costs.
Concern over climate change, including the impact of global warming, has led to significant legislative and regulatory
efforts, particularly internationally but also in the United States, to limit greenhouse gas (“GHG”) emissions. State and local
governments also are increasingly considering GHG regulation. The possibility of increased regulation of GHG emissions
potentially exposes our transportation and logistics businesses to significant new taxes, fees and other costs. Compliance with
such potential regulation or the associated potential costs is further complicated by the fact that various countries and regions
are following different approaches to the regulation of climate change.
We are subject to international regulation of GHG emissions. For example, in 2009 the European Commission approved
the extension to the airline industry of the European Union Emissions Trading Scheme (“ETS”) for GHG emissions. Under this
decision, all of our flights operating within the European Union are covered by the ETS requirements, and we are required
annually to purchase emission allowances in an amount exceeding the number of free allowances allocated to us under the
ETS. Similarly, in 2016, the International Civil Aviation Organization (“ICAO”) passed a resolution adopting the Carbon
Offsetting and Reduction Scheme for International Aviation (“CORSIA”), which is a global, market-based emissions offset
program to encourage carbon-neutral growth beyond 2020. A pilot phase is scheduled to begin in 2021 in which countries may
voluntarily participate, and full mandatory participation is scheduled to begin in 2027. ICAO continues to develop details
regarding implementation, but compliance with CORSIA will increase our operating costs.
In the U.S., Congress in the past several years has considered various bills that would regulate GHG emissions, but these
bills so far have not received sufficient Congressional support for enactment. Nevertheless, some form of federal climate
change legislation is possible in the future. Even in the absence of such legislation, the Environmental Protection Agency
(“EPA”), spurred by judicial interpretation of the Clean Air Act, could determine to regulate GHG emissions, especially aircraft
or diesel engine emissions, and this could impose substantial costs on us.
In August 2017, the U.S. announced its intention to withdraw from the Paris climate accord, an agreement among 196
countries to reduce GHG emissions, and the effect of that withdrawal on future U.S. policy regarding GHG emissions, on
CORSIA and on other GHG regulation is uncertain. Nevertheless, the extent to which other countries implement that agreement
could have an adverse direct or indirect effect on our business.
We may face additional regulations regarding GHG emissions internationally and in the United States. Potential costs to
us of increased regulation regarding GHG emissions, especially aircraft or diesel engine emissions, include an increase in the
cost of the fuel and other energy we purchase and capital costs associated with updating or replacing our aircraft or vehicles
prematurely. However, until the timing, scope and extent of any future regulation becomes known, we cannot predict its effect
on our cost structure or our operating results. It is reasonably possible that such regulation could significantly increase our
operating expenses if we are unable to pass such costs along to our customers. Moreover, even without such regulation,
increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the airline
and transportation industries could harm our reputation and reduce customer demand for our services, especially our air
services.
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Strikes, work stoppages and slowdowns by our employees could adversely affect our business, financial position and results
of operations.
A significant number of our employees are employed under a national master agreement and various supplemental
agreements with local unions affiliated with the Teamsters. In addition, our airline pilots, airline mechanics, ground mechanics
and certain other employees are employed under other collective bargaining agreements. Strikes, work stoppages and
slowdowns by our employees could adversely affect our ability to meet our customers' needs, and customers may do more
business with competitors if they believe that such actions or threatened actions may adversely affect our ability to provide
services. We may face a permanent loss of customers if we are unable to provide uninterrupted service, and this could adversely
affect our business, financial position and results of operations. The terms of future collective bargaining agreements also may
affect our competitive position and results of operations.
We are exposed to the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in
supplies of these commodities.
Changing fuel and energy costs may have a significant impact on our operations. We require significant quantities of fuel
for our aircraft and delivery vehicles and are exposed to the risk associated with variations in the market price for petroleum
products, including gasoline, diesel and jet fuel. We mitigate our exposure to changing fuel prices through our indexed fuel
surcharges and we may also enter into hedging transactions from time to time. If we are unable to maintain or increase our fuel
surcharges, higher fuel costs could adversely impact our operating results. Even if we are able to offset the cost of fuel with our
surcharges, high fuel surcharges may result in a mix shift from our higher-yielding air products to lower-yielding ground
products or an overall reduction in volume. There can be no assurance that our hedging transactions will be effective to protect
us from changes in fuel prices. Moreover, we could experience a disruption in energy supplies, including our supply of
gasoline, diesel and jet fuel, as a result of war, actions by producers or other factors beyond our control, which could have an
adverse effect on our business.
Changes in exchange rates or interest rates may have an adverse effect on our results.
We conduct business across the globe with a significant portion of our revenue derived from operations outside the United
States. Our operations in international markets are affected by changes in the exchange rates for local currencies, and in
particular the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar.
We are exposed to changes in interest rates, primarily on our short-term debt and that portion of our long-term debt that
carries floating interest rates. The impact of a 100-basis-point change in interest rates affecting our debt is discussed in the
“Quantitative and Qualitative Disclosures about Market Risk” section of this report. Additionally, changes in interest rates
impact the valuation of our pension and postretirement benefit obligations and the related benefit cost recognized in the income
statement. The impact of changes in interest rates on our pension and postretirement benefit obligations and costs is discussed
further in the "Critical Accounting Policies and Estimates" section of this report.
We monitor and manage our exposures to changes in currency exchange rates and interest rates, and make use of
derivative instruments to mitigate the impact of changes in these rates on our financial position and results of operations;
however, changes in exchange rates and interest rates cannot always be predicted or hedged.
If we are unable to maintain our brand image and corporate reputation, our business may suffer.
Our success depends in part on our ability to maintain the image of the UPS brand and our reputation for providing
excellent service to our customers. Service quality issues, actual or perceived, even when false or unfounded, could tarnish the
image of our brand and may cause customers to use other companies. Also, adverse publicity surrounding labor relations,
environmental concerns, security matters, political activities and the like, or attempts to connect our company to these sorts of
issues, either in the United States or other countries in which we operate, could negatively affect our overall reputation and
acceptance of our services by customers. Damage to our reputation and loss of brand equity could reduce demand for our
services and thus have an adverse effect on our business, financial position and results of operations, and could require
additional resources to rebuild our reputation and restore the value of our brand.
11
A significant data breach or IT system disruption could adversely affect our business, financial results, or reputation, and
we may be required to increase our spending on data and system security.
We rely heavily on information technology networks and systems, including the Internet, to manage or support a wide
variety of important business processes and activities throughout our operations. For example, we rely on information
technology to receive package level information in advance of physical receipt of packages, to track items that move through
our delivery systems, to efficiently plan deliveries, to execute billing processes, and to track and report financial and
operational data. Our franchised center locations and businesses we have acquired also are reliant on the use of information
technology systems to manage their business processes and activities.
In addition, the provision of service to our customers and the operation of our networks and systems involve the storage
and transmission of significant amounts of proprietary information and sensitive or confidential data, including personal
information of customers, employees and others. To conduct our operations, we regularly move data across national borders,
and consequently we are subject to a variety of continuously evolving and developing laws and regulations in the United States
and abroad regarding privacy, data protection and data security. The scope of the laws that may be applicable to us is often
uncertain and may be conflicting, particularly with respect to foreign laws. For example, the European Union’s General Data
Protection Regulation (“GDPR”), which greatly increases the jurisdictional reach of European Union law and adds a broad
array of requirements for handling personal data, including the public disclosure of significant data breaches, becomes effective
in May 2018. Other countries have enacted or are enacting data localization laws that require data to stay within their borders.
All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time.
Our information technology systems (as well as those of our franchisees and acquired businesses) may be susceptible to
damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or
components thereof, power outages, hardware failures, computer viruses, cyber-attacks, ransomware attacks, malware attacks,
malicious employees or other insiders, telecommunications failures, human errors or catastrophic events. Hackers, foreign
governments, cyber-terrorists and cyber-criminals, acting individually or in coordinated groups, may launch distributed denial
of service attacks or other coordinated attacks that may cause service outages, gain inappropriate or block legitimate access to
systems or information, or result in other interruptions in our business. In addition, breaches in security could expose us, our
customers and franchisees, or the individuals affected, to a risk of loss or misuse of proprietary information and sensitive or
confidential data, including personal information of customers, employees and others. The techniques used to obtain
unauthorized access, disable or degrade service or sabotage systems change frequently, may be difficult to detect for a long
time and often are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or
to implement adequate preventative measures.
We also depend on and interact with the information technology networks and systems of third-parties for many aspects
of our business operations, including our customers and franchisees and service providers such as cloud service providers and
third-party delivery services. These third parties may have access to information we maintain about our company, operations,
customers, employees and vendors, or operating systems that are critical to or can significantly impact our business operations.
Like us, these third-parties are subject to risks imposed by data breaches and cyber-attacks and other events or actions that
could damage, disrupt or close down their networks or systems. Security processes, protocols and standards that we have
implemented and contractual provisions requiring security measures that we may have sought to impose on such third-parties
may not be sufficient or effective at preventing such events, which could result in unauthorized access to, or disruptions or
denials of access to, or misuse of, information or systems that are important to our business, including proprietary information,
sensitive or confidential data, and other information about our operations, customers, employees and suppliers, including
personal information.
Any of these events that impact our information technology networks or systems, or those of acquired businesses,
franchisees, customers, service providers or other third-parties, could result in disruptions in our operations, the loss of existing
or potential customers, damage to our brand and reputation, regulatory scrutiny, and litigation and potential liability for the
company. Among other consequences, our customers’ confidence in our ability to protect data and systems and to provide
services consistent with their expectations could be impacted, further disrupting our operations. Similarly, an actual or alleged
failure to comply with applicable U.S. or foreign data protection regulations or other data protection standards may expose us
to litigation, fines, sanctions or other penalties.
12
We have invested and continue to invest in technology security initiatives, information technology risk management and
disaster recovery plans. The cost and operational consequences of implementing, maintaining and enhancing further data or
system protection measures could increase significantly to overcome increasingly intense, complex and sophisticated global
cyber threats. Despite our best efforts, we are not fully insulated from data breaches and system disruptions. For example, in
August 2014, a broad-based malware intrusion targeting retailers throughout the U.S. was discovered and subsequently
eradicated at approximately 1% of our franchisees’ locations. While the impact of this cyber-attack, including the costs
associated with investigation and remediation activities, was not material to our business and our financial results, there is no
assurance that such impacts will not be material in the future, and our efforts to deter, identify, mitigate and/or eliminate future
breaches may require significant additional effort and expense and may not be successful.
Severe weather or other natural or manmade disasters could adversely affect our business.
Severe weather conditions and other natural or manmade disasters, including storms, floods, fires or earthquakes,
epidemics or pandemics, conflicts or unrest, or terrorist attacks, may result in decreased revenues, as our customers reduce their
shipments, or increased costs to operate our business, which could have an adverse effect on our results of operations for a
quarter or year. Any such event affecting one of our major facilities could result in a significant interruption in or disruption of
our business.
We make significant capital investments in our business of which a significant portion is tied to projected volume levels.
We require significant capital investments in our business consisting of aircraft, vehicles, technology, facilities and sorting
and other types of equipment to support both our existing business and anticipated growth. Forecasting projected volume
involves many factors which are subject to uncertainty, such as general economic trends, changes in governmental regulation
and competition. If we do not accurately forecast our future capital investment needs, we could have excess capacity or
insufficient capacity, either of which would negatively affect our revenues and profitability. In addition to forecasting our
capital investment requirements, we adjust other elements of our operations and cost structure in response to adverse economic
conditions; however, these adjustments may not be sufficient to allow us to maintain our operating margins in a weak economy.
We derive a significant portion of our revenues from our international operations and are subject to the risks of doing
business in international markets.
We have significant international operations, and while the geographical diversity of our international operations helps
ensure that we are not overly reliant on a single region or country, we are continually exposed to changing economic, political
and social developments that are beyond our control. Emerging markets are typically more volatile than those in the developed
world, and any broad-based downturn in these markets could reduce our revenues and adversely affect our business, financial
position and results of operations. We are subject to many laws governing our international operations, including those that
prohibit improper payments to government officials and commercial customers, and restrict where we can do business, our
shipments to certain countries and the information that we can provide to non-U.S. governments.
We are subject to changes in markets and our business plans that have resulted, and may in the future result, in substantial
write-downs of the carrying value of our assets, thereby reducing our net income.
Our regular review of the carrying value of our assets has resulted, from time to time, in significant impairments, and we
may in the future be required to recognize additional impairment charges. Changes in business strategy, government
regulations, or economic or market conditions have resulted and may result in further substantial impairments of our intangible,
fixed or other assets at any time in the future. In addition, we have been and may be required in the future to recognize
increased depreciation and amortization charges if we determine that the useful lives of our fixed assets or intangible assets are
shorter than we originally estimated. Such changes could reduce our net income.
Employee health and retiree health and pension benefit costs represent a significant expense to us.
Our expenses relating to employee health and retiree health and pension benefits are significant. In recent years, we have
experienced significant increases in some of these costs, largely as a result of economic factors beyond our control, including,
in particular, ongoing increases in healthcare costs well in excess of the rate of inflation and historically low discount rates that
we use to value our benefit plan obligations. Continually increasing healthcare costs, volatility in investment returns and
discount rates, as well as changes in laws, regulations and assumptions used to calculate retiree health and pension benefit
expenses, may adversely affect our business, financial position, results of operations or require significant contributions to our
benefit plans. The national master agreement with the IBT includes changes that are designed to mitigate certain of these
healthcare expenses, but there can be no assurance that our efforts will be successful or that the failure or success of these
efforts will not adversely affect our business, financial position, results of operations or liquidity.
13
We participate in a number of trustee-managed multiemployer pension and health and welfare plans for employees
covered under collective bargaining agreements. As part of the overall collective bargaining process for wage and benefit
levels, we have agreed to contribute certain amounts to the multiemployer benefit plans during the contract period. The
multiemployer benefit plans set benefit levels and are responsible for benefit delivery to participants. Future contribution
amounts to multiemployer benefit plans will be 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 in the event that a plan enters critical status, and our contributions are not sufficient to satisfy
any rehabilitation plan funding schedule). In future collective bargaining negotiations, we could agree to make significantly
higher future contributions to improve the funded status of one or more of these plans. The funded status of these
multiemployer plans is impacted by various factors, including investment performance, healthcare inflation, changes in
demographics and changes in participant benefit levels. At this time, we are unable to determine the amount of additional future
contributions, if any, or whether any material adverse effect on our financial condition, results of operations or liquidity could
result from our participation in these plans.
In addition to our on-going multiemployer pension plan obligations, we may have additional exposure with respect to
benefits earned in the Central States Pension Fund (the "CSPF"). UPS was a contributing employer to the CSPF until 2007
when we withdrew from the plan and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion
withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS
agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS
participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the
event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with
the CSPF.
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever
allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and
government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S.
Department of the Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants,
including the UPS Transfer Group. We vigorously challenged the proposed benefit reduction plan because we believed that it
did not comply with the law and that the CSPF failed to comply with its contractual obligation to obtain our consent to reduce
benefits to the UPS Transfer Group under the terms of the withdrawal agreement with the CSPF. On May 6, 2016, the U.S.
Department of the Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of
requirements set forth in the MPRA.
The CSPF has asserted that it will become insolvent in 2025, which could lead to the reduction of retirement benefits.
Although there are numerous factors that could affect the CSPF’s funding status, if the CSPF were to become insolvent as they
have projected, UPS may be required to provide coordinating benefits, thereby increasing the current projected benefit
obligation for the UPS/IBT Plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its
funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.
The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of significant
uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether
the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to
which benefits are paid by the Pension Benefit Guaranty Corporation, our ability to successfully defend our legal positions as
well as the effect of discount rates, CSPF asset returns and various other actuarial assumptions.
We account for this potential obligation under Accounting Standards Codification Topic 715- Compensation- Retirement
Benefits (“ASC 715”). Under ASC 715 we are required to provide a best estimate of various actuarial assumptions, including
the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date.
While we currently believe the most likely solution to this matter and the broader systemic problems facing multiemployer
pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a
best estimate of pension liabilities. Our best estimate as of the measurement date of December 31, 2017 does not incorporate
this solution. However, if a future change in law resulted in an obligation to provide coordinating benefits under the UPS/IBT
Plan, it may be a significant event, and may require us to remeasure the plan assets and projected benefit obligation of the UPS/
IBT Plan at the date the law is enacted.
14
Our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will submit
another benefit suspension application under the MPRA to forestall insolvency without reducing benefits to the UPS Transfer
Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing, we would be in a strong legal
position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction,
without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate
as of the measurement date of December 31, 2017 is that there is no liability to be recognized for additional coordinating
benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as the uncertainties are
resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in
accordance with ASC 715.
We may have additional tax liabilities.
We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining
our worldwide provision for income taxes. In the course of our business, there are many transactions and calculations where the
ultimate tax determination is uncertain. For example, compliance with the 2017 United States Tax Cut and Jobs Act (the “Tax
Act”) may require the collection of information not regularly produced within our company, the use of provisional estimates in
our financial statements, and the exercise of significant judgment in accounting for its provisions. Many aspects of the Tax Act
are unclear and may not be clarified for some time. As regulations and guidance evolve with respect to the Tax Act, and as we
gather more information and perform more analysis, our results may differ from previous estimates and may materially affect
our financial position.
We regularly are under audit by tax authorities in different jurisdictions. Economic and political pressures to increase tax
revenue in various jurisdictions may make resolving tax disputes favorably more difficult. Although we believe our tax
estimates are reasonable, the final determination of tax audits and any related litigation in the jurisdictions where we are subject
to taxation could be materially different from our historical income tax provisions and accruals. In addition, changes in U.S.
federal and state or international tax laws applicable to corporate multinationals, other fundamental law changes currently being
considered by many countries, including in the U.S., and changes in taxing jurisdictions’ administrative interpretations,
decisions, policies and positions may materially adversely impact our tax expense and cash flows.
We may be subject to various claims and lawsuits that could result in significant expenditures.
The nature of our business exposes us to the potential for various claims and litigation related to labor and employment,
personal injury, property damage, business practices, environmental liability and other matters. Any material litigation or a
catastrophic accident or series of accidents could have a material adverse effect on our business, financial position and results
of operations.
We may not realize the anticipated benefits of acquisitions, joint ventures or strategic alliances.
As part of our business strategy, we may acquire businesses and form joint ventures or strategic alliances. Whether we
realize the anticipated benefits from these transactions depends, in part, upon the successful integration between the businesses
involved, the performance of the underlying operations, capabilities or technologies and the management of the acquired
operations. Accordingly, our financial results could be adversely affected by our failure to effectively integrate the acquired
operations, unanticipated performance issues, transaction-related charges or charges for impairment of long-term assets that we
acquire.
Insurance and claims expenses could have a material adverse effect on our business, financial condition and results of
operations.
We have a combination of both self-insurance and high-deductible insurance programs for the risks arising out of the
services we provide and the nature of our global operations, including claims exposure resulting from cargo loss, personal
injury, property damage, aircraft and related liabilities, business interruption and workers' compensation. Workers'
compensation, automobile and general liabilities are determined using actuarial estimates of the aggregate liability for claims
incurred and an estimate of incurred but not reported claims, on an undiscounted basis. Our accruals for insurance reserves
reflect certain actuarial assumptions and management judgments, which are subject to a high degree of variability. If the
number or severity of claims for which we are retaining risk increases, our financial condition and results of operations could
be adversely affected. If we lose our ability to self-insure these risks, our insurance costs could materially increase and we may
find it difficult to obtain adequate levels of insurance coverage.
15
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2. Properties
Operating Facilities
We own our headquarters, which is located in Atlanta, Georgia and consists of about 745,000 square feet of office space,
and our UPS Supply Chain Solutions group’s headquarters, which is located in Alpharetta, Georgia and consists of about
310,000 square feet of office space.
Our primary information technology operations are consolidated in a 444,000 square foot owned facility, the Ramapo
Ridge facility, in Mahwah, New Jersey. Our information technology headquarters is located in Parsippany, New Jersey,
consisting of about 200,000 square feet of office space. We also own a 175,000 square foot facility in Alpharetta, Georgia,
which serves as a backup to the main information technology operations facility in New Jersey. This facility provides
production functions and backup capacity in the event that a power outage or other disaster incapacitates the main data center.
It also helps to meet our internal communication needs.
We own or lease over 1,000 package operating facilities in the U.S., with approximately 68 million square feet of floor
space. The smaller of these facilities have vehicles and drivers stationed for the pickup and delivery of packages, and capacity
to sort and transfer packages. The larger of these facilities also service our vehicles and equipment, and employ specialized
mechanical installations for the sorting and handling of packages. We own or lease approximately 800 facilities that support our
international package operations, with approximately 20 million square feet of floor space.
In addition, we own or lease more than 500 facilities, with approximately 34 million square feet of floor space, that
support our freight forwarding and logistics operations. We own and operate a logistics campus consisting of approximately
4 million square feet in Louisville, Kentucky.
We own or lease approximately 200 UPS Freight service centers with approximately 6 million square feet of floor space.
The main offices of UPS Freight are located in Richmond, Virginia and consist of about 217,000 square feet of office space.
Our aircraft are operated in a hub and spoke pattern in the U.S., with our principal air hub, known as Worldport, located
in Louisville, Kentucky. The Worldport facility consists of over 5 million square feet and includes high speed conveyor and
computer control systems.
We also own or lease regional air hubs globally, with over 4 million square feet of floor space. Our U.S. regional air hubs
are located in Dallas, Texas; Ontario, California; Philadelphia, Pennsylvania and Rockford, Illinois. These hubs house facilities
for the sorting, transfer and delivery of packages. Our European air hub is located in Cologne, Germany, and we maintain Asia
Pacific air hubs in Shanghai, China; Shenzhen, China and Hong Kong. Our regional air hub in Canada is located in Hamilton,
Ontario, and our regional air hub for Latin America and the Caribbean is in Miami, Florida.
In 2017, we announced seven new buildings and one expansion that total more than 5 million square feet. We believe that
our facilities are adequate to support our current operations.
16
Fleet
Aircraft
The following table shows information about our aircraft fleet as of December 31, 2017:
Description
Boeing 757-200F
Boeing 767-300ERF
Boeing 767-300BCF
Airbus A300-600F
Boeing MD-11F
Boeing 747-400F
Boeing 747-400BCF
Boeing 747-8F
Other
Total
Owned and
Capital
Leases
Short-term
Leased or
Chartered
From
Others
On
Order
Under
Option
75
59
2
52
37
11
2
3
—
241
—
—
—
—
—
—
—
—
340
340
—
—
1
—
—
—
—
11
—
12
—
—
—
—
—
—
—
14
—
14
On February 1, 2018, we announced an order for 14 Boeing 747-8 freighters previously under option and four new
Boeing 767 aircraft to be delivered between 2019 and 2022.
Vehicles
We operate a global ground fleet of approximately 119,000 package cars, vans, tractors and motorcycles. Our ground
support fleet consists of 35,000 pieces of equipment designed specifically to support our aircraft fleet, ranging from non-
powered container dollies and racks to powered aircraft main deck loaders and cargo tractors. We also have 45,000 containers
used to transport cargo in our aircraft.
Item 3. Legal Proceedings
For a discussion of legal proceedings affecting us and our subsidiaries, please see note 4 to the audited consolidated
financial statements for a discussion of pension related matters and note 9 for a discussion of judicial proceedings and other
matters arising from the conduct of our business activities.
Item 4. Mine Safety Disclosures
Not applicable.
17
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our class A common stock is not listed on a national securities exchange or traded in an organized over-the-counter
market, but each share of our class A common stock is convertible into one share of our class B common stock.
The following is a summary of our class B common stock price activity and dividend information for 2017 and 2016. Our
class B common stock is listed on the New York Stock Exchange under the symbol “UPS”.
2017:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Close
Dividends
Declared
$ 118.19
$ 111.55
$ 120.42
$ 125.16
$ 103.23
$ 102.12
$ 106.98
$ 111.30
$ 107.30
$ 110.59
$ 120.09
$ 119.15
$ 106.10
$ 107.72
$ 111.50
$ 120.16
$ 88.70
$ 100.66
$ 106.86
$ 106.84
$ 105.47
$ 107.72
$ 109.36
$ 114.64
$
$
$
$
$
$
$
$
0.83
0.83
0.83
0.83
0.78
0.78
0.78
0.78
As of February 8, 2018, there were 154,033 and 18,863 shareowners of record of class A and class B common stock,
respectively.
Our practice has been to pay dividends on a quarterly basis. The declaration of dividends is subject to the discretion of
the Board of Directors and will depend on various factors, including our net income, financial condition, cash requirements,
future prospects and other relevant factors.
On February 8, 2018, our Board declared a dividend of $0.91 per share, which is payable on March 7, 2018 to
shareowners of record on February 20, 2018. This represents a 10% increase from the previous $0.83 quarterly dividend in
2017.
A summary of repurchases of our class A and class B common stock during the fourth quarter of 2017 is as follows (in
millions, except per share amounts):
Total Number
of Shares
Purchased(1)
Total Number
of Shares Purchased
as Part of Publicly
Announced Program
Average
Price Paid
Per Share
Approximate Dollar
Value of Shares that
May Yet be Purchased
Under the Program
(as of month-end)
October 1—October 31
November 1—November 30
December 1—December 31
Total October 1—December 31
1.3
1.2
1.3
3.8
$
1.3
1.2
1.3
3.8
$
$
119.28
123.47
119.50
120.71
4,644
4,490
4,339
(1)
Includes shares repurchased through our publicly announced share repurchase program and shares tendered to pay the exercise price and tax withholding
on employee stock options.
In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion, which replaced an
authorization previously announced in 2013. The new share repurchase authorization has no expiration date. We anticipate
repurchasing approximately $1.0 billion of shares in 2018.
18
Shareowner Return Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with
the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or
Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates such
information by reference into such filing.
The following graph shows a five-year comparison of cumulative total shareowners’ returns for our class B common
stock, the Standard & Poor’s 500 Index and the Dow Jones Transportation Average. The comparison of the total cumulative
return on investment, which is the change in the quarterly stock price plus reinvested dividends for each of the quarterly
periods, assumes that $100 was invested on December 31, 2012 in the Standard & Poor’s 500 Index, the Dow Jones
Transportation Average and our class B common stock.
United Parcel Service, Inc.
Standard & Poor’s 500 Index
Dow Jones Transportation Average
12/31/2012
$ 100.00
$ 100.00
$ 100.00
12/31/2013
$ 146.54
$ 132.38
$ 141.38
12/31/2014
$ 159.23
$ 150.49
$ 176.83
12/31/2015
$ 148.89
$ 152.55
$ 147.19
12/31/2016
$ 182.70
$ 170.79
$ 179.37
12/31/2017
$ 195.75
$ 208.06
$ 213.49
19
Item 6. Selected Financial Data
The following table sets forth selected financial data for each of the five years in the period ended December 31, 2017 (in
millions, except per share amounts). This financial data should be read together with our consolidated financial statements and
related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including the Items
Affecting Comparability section, and other financial data appearing elsewhere in this report.
Selected Income Statement Data
Revenue:
U.S. Domestic Package
International Package
Supply Chain & Freight
Total Revenue
Operating Expenses:
Compensation and benefits
Other
Total Operating Expenses
Operating Profit:
U.S. Domestic Package
International Package
Supply Chain and Freight
Total Operating Profit
Other Income and (Expense):
Investment income
Interest expense
Income Before Income Taxes
Income Tax Expense
Net Income
Per Share Amounts:
Basic Earnings Per Share
Diluted Earnings Per Share
Dividends Declared Per Share
Weighted Average Shares Outstanding:
Basic
Diluted
Selected Balance Sheet Data:
Cash and marketable securities
Total assets
Long-term debt
Shareowners’ equity
Years Ended December 31,
2017
2016
2015
2014
2013
$ 40,764
13,338
11,770
65,872
$ 38,301
12,350
10,255
60,906
$ 36,747
12,149
9,467
58,363
$ 35,851
12,988
9,393
58,232
$ 34,074
12,429
8,935
55,438
34,588
23,755
58,343
34,770
20,669
55,439
31,028
19,667
50,695
32,045
21,219
53,264
28,557
19,847
48,404
4,280
2,464
785
7,529
72
(453)
7,148
2,238
4,910
5.64
5.61
3.32
871
875
$
$
$
$
3,017
2,044
406
5,467
50
(381)
5,136
1,705
3,431
3.89
3.87
3.12
883
887
$
$
$
$
4,767
2,137
764
7,668
15
(341)
7,342
2,498
4,844
5.38
5.35
2.92
901
906
$
$
$
$
2,859
1,677
432
4,968
22
(353)
4,637
1,605
3,032
3.31
3.28
2.68
916
924
$
$
$
$
4,603
1,757
674
7,034
20
(380)
6,674
2,302
4,372
4.65
4.61
2.48
940
948
2017
2016
2015
2014
2013
As of December 31,
4,069
45,403
20,278
1,030
$
4,567
40,377
12,394
429
$
4,726
38,311
11,316
2,491
$
3,283
35,440
9,856
2,158
$
5,245
35,553
10,824
6,488
$
$
$
$
$
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We produced solid growth and operating results in 2017 across all operating segments. In 2017, consolidated revenue
increased 8.2% to $65.872 billion, up from $60.906 billion in 2016. Revenue for 2017 increased in all segments and major
product categories, due to shipment growth, yield expansion and benefits recognized from our network investments and
portfolio initiatives. While operating profits were positively impacted by these growth factors discussed above, they were
partially offset by impacts from natural disasters, capacity constraints due to volume surges in the fourth quarter of 2017,
operating costs associated with facility construction and the deployment of Saturday operations in our U.S. Domestic Package
segment.
Operating profit for 2017 was up 37.7% to $7.529 billion, driven by strong performance in all segments and a $1.851
billion reduction in the pension mark-to-market charges.
Average daily package volume increased 4.9% in 2017. We reported 2017 net income of $4.910 billion and diluted
earnings per share of $5.61, compared to 2016 net income of $3.431 billion and diluted earnings per share of $3.87.
Our consolidated results are presented in the table below:
Revenue (in millions)
Operating Expenses (in millions)
Operating Profit (in millions)
Operating Margin
Average Daily Package Volume (in thousands)
Average Revenue Per Piece
Net Income (in millions)
Basic Earnings Per Share
Diluted Earnings Per Share
Year Ended December 31,
% Change
2017
$ 65,872
58,343
7,529
11.4%
$
20,030
10.53
4,910
5.64
5.61
$
$
$
$
2016
$ 60,906
55,439
5,467
$
9.0%
19,090
10.30
3,431
3.89
3.87
$
$
$
$
2015
$ 58,363
50,695
7,668
13.1%
$
18,324
10.37
4,844
5.38
5.35
$
$
$
$
2017/ 2016
2016/ 2015
8.2%
5.2%
37.7%
4.9%
2.2%
43.1%
45.0%
45.0%
4.4 %
9.4 %
(28.7)%
4.2 %
(0.7)%
(29.2)%
(27.7)%
(27.7)%
21
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Items Affecting Comparability
The results and discussions that follow are reflective of how our executive management monitors the performance of our
reporting segments. We supplement the reporting of our financial information determined under generally accepted accounting
principles (“GAAP”) with certain non-GAAP financial measures, including "adjusted" compensation and benefits, operating
expenses, operating profit, operating margin, income tax expense and effective tax rate. These adjustments reflect the non-
comparable items discussed below. We believe that these adjusted measures provide meaningful information to assist investors
and analysts in understanding our financial results and assessing our prospects for future performance. We believe these
adjusted financial measures are important indicators of our recurring results of operations because they exclude items that may
not be indicative of, or are unrelated to, our underlying results of operations and provide a useful baseline for analyzing trends
in our underlying businesses. Additionally, these adjusted financial measures are used internally by management for the
determination of incentive compensation awards, business unit operating performance analysis and business unit resource
allocation.
Non-GAAP financial measures should be considered in addition to, and not as an alternative for, our reported results
prepared in accordance with GAAP. Our non-GAAP financial information does not represent a comprehensive basis of
accounting. Therefore, our non-GAAP financial information may not be comparable to similarly titled measures reported by
other companies.
We supplement the reporting of our revenue, revenue per piece and operating profit with similar non-GAAP measures
that exclude the period-over-period impact of foreign currency exchange rate changes and hedging activities. We believe
currency-neutral revenue, revenue per piece and operating profit information allows users of our financial statements to
understand growth trends in our products and results. We evaluate the performance of our International Package and Supply
Chain & Freight businesses on a currency-neutral basis.
Currency-neutral revenue, revenue per piece and operating profit are calculated by dividing current period reported U.S.
dollar revenue, revenue per piece and operating profit by the current period average exchange rates to derive current period
local currency revenue, revenue per piece and operating profit. The derived current period local currency revenue, revenue per
piece and operating profit are then multiplied by the average foreign exchange rates used to translate the comparable results for
each month in the prior year period (including the period over period impact of foreign currency revenue hedging activities).
The difference between the current period reported U.S. dollar revenue, revenue per piece and operating profit and the derived
current period U.S. dollar revenue, revenue per piece and operating profit is the period over period impact of currency
fluctuations.
The year-over-year comparisons of our financial results are affected by the following items (in millions):
Non-GAAP Adjustments
Operating Expenses:
Defined Benefit Plans Mark-to-Market Charges
Total Adjustments to Operating Expenses
Income Tax Benefit from the Mark-to-Market Charges
Income Tax Benefit from the Tax Cuts and Jobs Act and Other Non-U.S. Tax Law Changes
Total Adjustments to Net Income
Year Ended December 31,
2016
2017
2015
$
$
800
800
(193)
(258)
349
$ 2,651
2,651
(978)
—
$ 1,673
$
$
118
118
(39)
—
79
These items have been excluded from comparisons of "adjusted" compensation and benefits, operating expenses,
operating profit, operating margin, income tax expense and effective tax rate in the discussion that follows. The income tax
effects of the mark-to-market charges are calculated by multiplying the statutory tax rates applicable in each tax jurisdiction,
including the U.S. federal jurisdiction and various U.S. state and non-U.S. jurisdictions, by the adjustments. The blended
average of the applicable statutory tax rates in 2017, 2016 and 2015 were 24.1%, 36.9% and 33.1%, respectively.
22
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Defined Benefit Plans Mark-to-Market Charges
We recognize changes in the fair value of plan assets and net actuarial gains and losses in excess of a 10% corridor for our
pension and postretirement defined benefit plans immediately as part of net periodic benefit cost. We supplement the
presentation of our operating profit and operating margin with "adjusted" measures that exclude the impact of the portion of net
periodic benefit cost represented by the gains and losses recognized in excess of the 10% corridor and the related income tax
effects.
The adjustments made to exclude these mark-to-market adjustments utilize the expected return on plan assets ($2.956,
$2.580 and $2.567 billion for 2017, 2016 and 2015, respectively) and the discount rates used for determining net periodic
benefit cost. The non-adjusted net periodic benefit cost reflects the actual return on plan assets ($4.811 billion, $1.846 billion
and $110 million for 2017, 2016 and 2015, respectively) and the discount rates used for measuring the projected benefit
obligation as summarized in the table below. We believe excluding these mark-to-market charges from our adjusted results
provides important supplemental information that reflects the anticipated long-term cost of our defined benefit plans and
provides a benchmark for historical defined benefit cost trends that may provide a useful comparison of year-to-year financial
performance without considering the short-term impact of changes in market interest rates, equity prices and similar factors.
In 2017, we recognized pre-tax mark-to-market losses in compensation and benefits expense of $800 million on our
pension and postretirement defined benefit plans related to the remeasurement of plan assets and liabilities recognized outside
of a 10% corridor. These charges impacted our U.S. Domestic Package segment ($637 million), International Package segment
($35 million) and Supply Chain & Freight segment ($128 million).
In 2016, we recognized pre-tax mark-to-market losses in compensation and benefits expense of $2.651 billion on our
pension and postretirement defined benefit plans related to the remeasurement of plan assets and liabilities recognized outside
of a 10% corridor. These charges impacted our U.S. Domestic Package segment ($1.908 billion), International Package segment
($425 million) and Supply Chain & Freight segment ($318 million).
In 2015, we recognized pre-tax mark-to-market losses in compensation and benefits expense of $118 million on our
pension and postretirement defined benefit plans related to the remeasurement of plan assets and liabilities recognized outside
of a 10% corridor. These charges impacted our U.S. Domestic Package segment ($62 million), International Package segment
($44 million) and Supply Chain & Freight segment ($12 million).
The table below indicates the amounts associated with each component of the pre-tax mark-to-market losses, as well as
the weighted-average actuarial assumptions used to determine our net periodic benefit costs, for each year:
Components of mark-to-market gain (loss) (in millions):
Discount rates
Return on assets
Demographic and assumption changes
Reclassification of prior year unrecognized benefit cost
Total mark-to-market gain (loss)
Weighted-average actuarial assumptions used to determine net
periodic benefit cost:
Expected rate of return on plan assets
Actual rate of return on plan assets
Discount rate used for net periodic benefit cost
Discount rate at measurement date
Year Ended December 31,
2017
(2,288)
1,525
(37)
—
(800)
$
$
2016
(1,953)
(732)
34
—
(2,651)
2015
1,624
(1,550)
(133)
(59)
(118)
$
$
$
$
Year Ended December 31,
2017
2016
2015
8.65%
14.25%
4.34%
3.81%
8.65%
6.06%
4.81%
4.34%
8.66%
0.37%
4.36%
4.81%
The $800 million, $2.651 billion and $118 million pre-tax mark-to-market losses for the years ended December 31, 2017,
2016 and 2015, respectively, were comprised of the following components:
2017 - $800 million pre-tax mark-to-market loss:
23
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
• Discount Rates ($2.288 billion pre-tax loss): The weighted-average discount rate for our pension and
postretirement medical plans decreased from 4.34% at December 31, 2016 to 3.81% at December 31, 2017,
primarily due to both a decline in U.S. treasury yields and a decrease in credit spreads on AA-rated corporate
bonds in 2017.
• Return on Assets ($1.525 billion pre-tax gain): In 2017, the actual 14.25% rate of return on plan assets exceeded
our expected rate of return of 8.65%, primarily due to strong global equity and U.S. bond markets.
• Demographic and Assumption Changes ($37 million pre-tax loss): This represents the difference between actual
and estimated participant data and demographic factors, including items such as healthcare cost trends,
compensation rate increases and rates of termination, retirement and mortality.
2016 - $2.651 billion pre-tax mark-to-market loss:
• Discount Rates ($1.953 billion pre-tax loss): The weighted-average discount rate for our pension and
postretirement medical plans decreased from 4.81% at December 31, 2015 to 4.34% at December 31, 2016,
primarily due to a decrease in credit spreads on AA-rated corporate bonds in 2016.
• Return on Assets ($732 million pre-tax loss): In 2016, the actual 6.06% rate of return on plan assets fell short of
our expected rate of return of 8.65%, primarily due to weak bond markets.
• Demographic and Assumption Changes ($34 million pre-tax gain): This represents the difference between actual
and estimated participant data and demographic factors, including items such as healthcare cost trends,
compensation rate increases and rates of termination, retirement and mortality.
2015 - $118 million pre-tax mark-to-market loss:
• Discount Rates ($1.624 billion pre-tax gain): The weighted-average discount rate for our pension and
postretirement medical plans increased from 4.36% at December 31, 2014 to 4.81% at December 31, 2015,
primarily due to an increase in U.S. treasury yields and credit spreads on AA-rated corporate bonds in 2015.
• Return on Assets ($1.550 billion pre-tax loss): In 2015, the actual 0.37% rate of return on plan assets fell short of
our expected rate of return of 8.66%, primarily due to weak global equity markets.
• Demographic and Assumption Changes ($133 million pre-tax loss): This represents the difference between actual
and estimated participant data and demographic factors, including items such as healthcare cost trends,
compensation rate increases and rates of termination, retirement and mortality.
• Reclassification of Prior Year Unrecognized Benefit Cost ($59 million pre-tax loss): Our mark-to-market
accounting policy requires recognition of gains and losses in excess of a corridor equal to 10% of the plans'
projected benefit obligations (or fair value of the plans' assets, if greater). The decrease in certain plans' projected
benefit obligations resulted in a lower corridor, which required recognition of prior year unrecognized benefit
costs for some of our plans.
Income Tax Benefit from the Tax Cuts and Jobs Act
We supplement the presentation of our income tax expense and effective tax rate with "adjusted" measures that exclude
the impact of the income tax benefit from the Tax Cuts and Jobs Act (the "Tax Act") described in the "Income Tax Expense"
section of Management's Discussion and Analysis and note 13 to the audited consolidated financial statements. We believe
income tax expense and the effective tax rate excluding the tax benefit is useful in evaluating our ongoing operating
performance for the current period to that of other periods presented. The estimates are based on our initial analysis and
interpretations of the Tax Act.
Expense Allocations
Certain operating expenses are allocated between our reporting 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 will 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. There were no significant changes in our expense allocation methodologies during 2017,
2016 or 2015.
24
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
U.S. Domestic Package Operations
Average Daily Package Volume (in thousands):
Next Day Air
Deferred
Ground
Total Avg. Daily Package Volume
Average Revenue Per Piece:
Next Day Air
Deferred
Ground
Total Avg. Revenue Per Piece
Operating Days in Period
Revenue (in millions):
Next Day Air
Deferred
Ground
Total Revenue
Operating Expenses (in millions):
Operating Expenses
Defined Benefit Plans Mark-to-Market Charges
Adjusted Operating Expenses
Operating Profit (in millions) and Operating Margin:
Operating Profit
Adjusted Operating Profit
Operating Margin
Adjusted Operating Margin
Revenue
Year Ended December 31,
% Change
2017
2016
2015
2017/ 2016
2016/ 2015
1,460
1,400
14,061
16,921
1,379
1,351
13,515
16,245
1,316
1,313
12,969
15,598
$ 19.11
$ 19.20
$ 19.66
12.43
11.85
11.70
$
8.19
9.48
254
$
7.97
9.25
255
$
7.98
9.28
254
$ 7,088
$ 6,752
$ 6,570
4,421
29,255
4,082
27,467
3,903
26,274
$ 40,764
$38,301
$36,747
5.9 %
3.6 %
4.0 %
4.2 %
(0.5)%
4.9 %
2.8 %
2.5 %
5.0 %
8.3 %
6.5 %
6.4 %
4.8 %
2.9 %
4.2 %
4.1 %
(2.3)%
1.3 %
(0.1)%
(0.3)%
2.8 %
4.6 %
4.5 %
4.2 %
$ 36,484
(637)
$ 35,847
$35,284
(1,908)
$33,376
$31,980
(62)
$31,918
3.4 %
10.3 %
7.4 %
4.6 %
$ 4,280
$ 3,017
$ 4,767
$ 4,917
$ 4,925
$ 4,829
41.9 %
(0.2)%
(36.7)%
2.0 %
10.5%
12.1%
7.9%
12.9%
13.0%
13.1%
The change in overall revenue was impacted by the following factors for the years ended December 31, 2017 and 2016,
compared with the corresponding prior year periods:
Revenue Change Drivers:
2017/ 2016
2016/ 2015
Volume
Rates /
Product Mix
Fuel
Surcharge
Total
Revenue
Change
3.8%
4.6%
1.7%
0.2%
0.9 %
(0.6)%
6.4%
4.2%
25
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Volume
2017 compared to 2016
Our overall volume increased across all products in 2017, largely due to continued growth in overall retail sales, of which
e-commerce continues to represent a larger percentage of the total growth. Business-to-consumer shipments, which represented
more than 50% of total U.S. Domestic Package volume, grew 9.3% for the year, which drove increases in both air and ground
shipments. Business-to-business shipments decreased slightly in 2017 compared to 2016 largely due to declines in volume in
professional services, as a result of increased digitization, and high tech industries.
Among our air products, volume increased in 2017 for our Next Day Air and Deferred services. Solid air volume growth
continued for those products most aligned with business-to-consumer shipping, including our residential Next Day Air, Next
Day Air Saver and Three Day Select package products, as consumers continue to demand faster options. This growth was
slightly offset by a decline in Next Day Air letter volume, largely due to declines in the professional services industry as a
result of continued growth in digitization.
The increase in ground volume in 2017 was driven by growth in residential ground and SurePost volume, which
benefited from continued e-commerce demand. Business-to-business shipments decreased slightly due to adverse weather
conditions in third quarter 2017 however this decrease was partially offset by an increase in our return shipping services.
2016 compared to 2015
Our total volume increased across all products in 2016, largely due to continued growth in e-commerce and overall retail
sales and the impact of one additional operating day. Business-to-consumer shipments, which represented more than 48% of
total U.S. Domestic Package volume, grew nearly 9% for the year and 11.5% in the fourth quarter, which drove increases in
both air and ground shipments. Business-to-business volume remained flat in 2016 due to revenue management initiatives and
the overall slowing of the industrial manufacturing sector, offset by increased volume from the retail industry, including the use
of our solutions for omni-channel (including ship-from-store and ship-to-store models) and returns shipping.
Next Day Air volume increased 5.2% in 2016, due to strong growth in e-commerce. We also experienced increased
volume for our deferred air services in 2016, particularly for those products most aligned with business-to-consumer shipping,
such as our residential Second Day Air Package and Three Day Select products partially offset by decreases in our business-to-
business deferred air volume.
The increase in ground volume in 2016 was driven by growth in residential ground and SurePost volume while business-
to-business shipments remained flat. Accelerating growth in e-commerce drove demand for our SurePost service, with volume
increasing 19% in 2016.
Rates and Product Mix
2017 compared to 2016
Overall revenue per piece increased 2.5% in 2017, and was impacted by changes in base rates, customer and product mix
and fuel surcharge rates.
Revenue per piece for ground and air products was positively impacted by a base rate increase on December 26, 2016.
UPS Ground rates and UPS Air services rates increased an average net 4.9%. Effective January 8, 2017, we changed the
dimensional weight calculation for packages subject to UPS daily rates. On June 19, 2017, we announced a new peak charge
applicable during selected weeks in November and December 2017 for U.S. Residential, Large Packages and packages Over
Maximum Limits. The new charge is designed to enable UPS to continue to offset some of the additional expenses incurred
during significant volume surges. Additionally on October 25, 2017, we announced an average 4.9% base rate increase
effective December 24, 2017 for UPS Ground and UPS Air services.
In the first quarter of 2017, we began our expanded Saturday ground operations to several metropolitan areas in the U.S.
As of December 2017, Saturday service is available in approximately 4,700 cities and towns in the U.S. covering
approximately 50% of the population. A Saturday pickup stop charge went into effect on May 1, 2017 and varies depending on
the pickup service selected.
26
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue per piece for our Next Day Air services decreased in 2017 compared with 2016. The decrease in Next Day Air
revenue per piece was primarily driven by a shift in product mix, as our lower yielding products experienced much larger
volume growth than our higher yielding products. This shift was offset slightly by an increase in the average billable weight per
piece. Revenue per piece of our deferred air services increased in 2017 compared with 2016. Deferred revenue per piece
increased primarily due to an increase in average billable weight per piece, but was partially offset by an unfavorable shift in
product mix. All products were positively impacted by higher fuel surcharge rates for 2017.
Ground revenue per piece increased in 2017, primarily due to base rate increases, higher fuel surcharge rates and an
increase in average billable weight per piece. These factors were partially offset by changes in product mix, as we experienced
faster volume growth in our SurePost product.
2016 compared to 2015
Overall revenue per piece decreased 0.3% in 2016, and was impacted by changes in base rates, customer and product mix
and fuel surcharge rates.
Ground revenue per piece decreased in 2016, primarily due to customer and product mix changes, which adversely
impacted revenue per piece as a greater portion of volume in 2016, relative to 2015, came from residential customers and
lighter-weight shipments as SurePost volume surged. Additionally, lower fuel surcharge rates contributed to the decline. These
drivers more than offset the rate actions taken since the fourth quarter of 2015.
Revenue per piece for Next Day Air products declined in 2016, while our deferred air products increased. All products
were negatively impacted by lower fuel surcharge rates. The Next Day Air revenue per piece decline was caused by a shift in
customer and product mix as well as an increase in lighter-weight packages. We experienced relatively stronger growth in our
lighter-weight business-to-consumer shipments, particularly our Next Day Air Saver product, which have lower average yields
than our heavier-weight commercial shipments. Customer mix also adversely impacted Next Day Air revenue per piece, due to
faster volume growth among our larger customers, which have a lower average yield than our small and middle-market
customers. Deferred revenue per piece increased primarily due to heavier-weight packages partially offset by product mix.
Revenue per piece for ground and air products was positively impacted by a base rate increase on December 28, 2015.
UPS Ground rates and accessorial charges increased an average net 4.9%, while UPS Air services and accessorial charges
increased an average net 5.2%. The surcharge increased for Over Maximum Packages and the index tables for the Ground and
Air fuel surcharges were adjusted effective November 2, 2015. A charge for UPS’s Third-Party Billing Service was
implemented, effective January 4, 2016. Additionally, the dimensions of ground packages incurring the UPS Additional
Handling charge were changed effective June 6, 2016.
Fuel Surcharges
UPS applies a fuel surcharge on our domestic air and ground services. The air fuel surcharge is based on the U.S.
Department of Energy’s (“DOE”) Gulf Coast spot price for a gallon of kerosene-type jet fuel, while the ground fuel surcharge is
based on the DOE’s On-Highway Diesel Fuel Price. Based on published rates, the average fuel surcharge rates for domestic air
and ground products were as follows:
Next Day Air / Deferred
Ground
Year Ended December 31,
% Point Change
2017
2016
2015
2017/ 2016
2016/ 2015
5.2%
5.6%
3.6%
4.9%
4.8%
5.5%
1.6%
0.7%
(1.2)%
(0.6)%
Effective February 6, 2017, the U.S. fuel surcharge rates are reset weekly instead of monthly. In addition, the price indices
have moved from a two month to a two week lag.
Total domestic fuel surcharge revenue increased by $347 million in 2017 as a result of higher fuel surcharge rates caused
by an increase in jet and diesel fuel prices, as well as an overall increase in package volume. In addition to the factors above,
fuel surcharge revenue was positively impacted by changes to the fuel surcharge calculation, as rates and price indices are
updated more frequently to better align with prevailing market rates. In 2016, total fuel surcharge revenue decreased by $219
million as a result of lower fuel surcharge rates caused by declining jet and diesel fuel prices, partially offset by the overall
increase in package volume for the period.
27
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Expenses
2017 compared to 2016
Operating expenses for the period increased $1.2 billion, which included a $1.3 billion decrease in mark-to-market
pension charges. Excluding the impact of the defined benefit plan mark-to-market charges, adjusted operating expenses for the
segment increased $2.5 billion in 2017, primarily due to pickup and delivery costs (up $1.0 billion), the cost of operating our
domestic integrated air and ground network (up $922 million), the costs of package sorting (up $246 million) and accessorials
and indirect operating costs (up $279 million). These increases were driven primarily by overall volume growth in 2017.
Adjusted operating expenses were impacted by several factors:
• We incurred higher employee compensation, largely resulting from volume growth, an increase in average daily union
labor hours (up 6.5%), growth in the overall size of the workforce and an increase in wage rates.
• Employee benefit costs increased, largely due to increased employee healthcare, partially offset by a decrease in
pension expense and workers' compensation expense.
• We incurred higher fuel expense in 2017 primarily due to higher fuel prices and increased volume which resulted in
higher fuel usage (increase in aircraft block hours of 7.0% and package delivery miles driven of 4.1%).
• We incurred higher costs associated with outside contract carriers, primarily due to volume growth (including
SurePost), higher fuel surcharges passed to us by carriers and general rate increases.
Total cost per piece decreased 0.3% in 2017 compared to 2016 and was primarily impacted by a 380 basis point decrease due to
the defined benefit plan mark-to-market charge offset by the cost increases described previously. The increased expenses in
2017 were also driven by: capacity constraints due to volume surges in the fourth quarter of 2017, start-up costs of several
investments underway to further expand and modernize our air and ground networks, and the costs of implementing Saturday
operations. Costs were further impacted by rising fuel prices. In order to contain costs, we continually adjust our air and ground
networks to better match higher volume levels. In addition, we continue to deploy and utilize technology to increase package
sorting and delivery productivity.
2016 compared to 2015
Operating expenses for the period increased $3.3 billion, which included a $1.8 billion increase in mark-to-market
pension charges. Excluding the impact of the defined benefit plan mark-to-market charges, adjusted operating expenses for the
segment increased $1.5 billion in 2016, primarily due to pickup and delivery costs (up $814 million), the cost of operating our
domestic integrated air and ground transportation network (up $282 million), the costs of package sorting (up $181 million) and
accessorials and indirect operating costs (up $180 million). Adjusted operating expenses were impacted by several factors:
• We incurred higher employee compensation, largely resulting from an increase in average daily union labor hours (up
4.2%) and growth in the overall size of the workforce partially offset by lower wage rates.
• Employee benefit costs increased, largely due to increased employee healthcare, pension expense and workers'
compensation expense.
• We incurred lower fuel expense in 2016 primarily due to lower fuel prices and an increase in average miles per gallon.
This was partially offset by higher fuel usage (due to an increase in aircraft block hours and vehicle miles driven.)
• We incurred higher expenses for purchased transportation due to higher volume, partially offset by lower fuel
surcharge rates passed to us from third-party carriers.
Total cost per piece increased 5.5% in 2016 compared to 2015 and was primarily impacted by a 540 basis point increase due to
the defined benefit plan mark-to-market charge and the cost increases described previously. These increases were partially
offset by the continued deployment of ORION, which has contained the growth of average daily vehicle miles driven, and the
increased redirect of SurePost volume to optimize delivery density on UPS vehicles, which has reduced the delivery costs for
business-to-consumer shipments.
28
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Profit and Margin
2017 compared to 2016
Operating profit increased $1.3 billion in 2017 compared with 2016, primarily due to a $1.3 billion decrease in mark-to-
market pension charges to operating expense. Operating margin increased 260 basis points to 10.5%. Adjusted operating profit
decreased $8 million in 2017 compared with 2016, while the adjusted operating margin decreased 80 basis points to 12.1%.
Operating profit was negatively impacted by an increase in continued investments in new buildings and new strategic
investments including deployment of Saturday operations. There was an adverse impact from higher purchased transportation
costs due to volume surges in the fourth quarter 2017 and from fuel as expense increased at a faster pace than fuel surcharge
revenue.
2016 compared to 2015
Operating profit decreased $1.8 billion in 2016 compared with 2015, primarily due to a $1.8 billion increase in mark-to-
market pension charges to operating expense. Operating margin decreased 510 basis points to 7.9%. Adjusted operating profit
increased $96 million in 2016 compared with 2015, while the adjusted operating margin decreased 20 basis points to 12.9%.
Revenue growth from increased volume and enhanced productivity through the continued deployment of ORION technology
resulted in higher operating profit, but was offset by an unfavorable shift in customer and product mix, especially in the fourth
quarter. The net impact of fuel also negatively impacted operating profit as fuel surcharge revenue decreased faster than fuel
expense.
29
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
International Package Operations
Average Daily Package Volume (in thousands):
Domestic
Export
Total Avg. Daily Package Volume
Average Revenue Per Piece:
Domestic
Export
Total Avg. Revenue Per Piece
Operating Days in Period
Revenue (in millions):
Domestic
Export
Cargo & Other
Total Revenue
Operating Expenses (in millions):
Operating Expenses
Defined Benefit Plan Mark-to-Market Charges
Adjusted Operating Expenses
Operating Profit (in millions) and Operating Margin:
Operating Profit
Adjusted Operating Profit
Operating Margin
Adjusted Operating Margin
Currency Translation Benefit / (Cost)—(in millions)*:
Revenue
Operating Expenses
Operating Profit
Year Ended December 31,
% Change
2017
2016
2015
2017/ 2016
2016/ 2015
1,714
1,395
3,109
$ 6.08
28.69
$ 16.22
254
$ 2,645
10,167
526
$13,338
1,635
1,210
2,845
$ 5.85
30.38
$ 16.29
255
$ 2,441
9,374
535
$12,350
1,575
1,151
2,726
$ 6.06
31.10
$ 16.63
254
$ 2,425
9,092
632
$12,149
4.8 %
15.3 %
9.3 %
3.9 %
(5.6)%
(0.4)%
3.8 %
5.1 %
4.4 %
(3.5)%
(2.3)%
(2.0)%
8.4 %
8.5 %
(1.7)%
8.0 %
0.7 %
3.1 %
(15.3)%
1.7 %
$10,874
(35)
$10,839
$10,306
(425)
$ 9,881
$10,012
(44)
$ 9,968
5.5 %
2.9 %
9.7 %
(0.9)%
$ 2,464
$ 2,499
$ 2,044
$ 2,469
$ 2,137
$ 2,181
20.5 %
1.2 %
(4.4)%
13.2 %
18.5%
18.7%
16.6%
20.0%
17.6%
18.0%
$ (325)
(50)
$ (375)
$ (138)
146
8
$
*
Net of currency hedging; amount represents the change compared to the prior year.
Revenue
The change in overall revenue was impacted by the following factors for the years ended December 31, 2017 and 2016,
compared with the corresponding prior year periods:
Revenue Change Drivers:
2017/ 2016
2016/ 2015
Volume
Rates /
Product Mix
Fuel
Surcharge
Currency
Total
Revenue
Change
8.9%
4.8%
(0.9)%
(1.2)%
2.6 %
(0.8)%
(2.6)%
(1.1)%
8.0%
1.7%
30
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Volume
2017 compared to 2016
Our overall average daily volume increased in 2017, largely due to continued strength in business-to-consumer volume,
as well as strong demand from several sectors including retail, industrial manufacturing, high-tech and healthcare.
We continued to experience export volume growth in 2017. The growth was mainly driven by our European, Asian and
U.S. operations, which experienced increases in volume to major trade lanes of the world. European export volume increased in
2017, with growth in all trade lanes. Asia export volume also increased in 2017, with particular strength in Asia-to-U.S., Asia-
to-Americas and intra-Asia trade lanes. Export volume into the U.S. grew in all trade lanes, led by Europe and the Americas.
Export volume growth was strong across all major products, with a continued shift towards our premium express products, such
as Worldwide Express and Transborder Express services.
The increase in domestic growth in 2017 was primarily due to growth in Turkey, Germany, France, Italy and U.K.
2016 compared to 2015
Our overall average daily volume increased in 2016, largely due to continued strength in business-to-consumer volume,
as well as strong demand from several sectors including retail, industrial manufacturing, high-tech and healthcare.
We continued to experience export volume growth in 2016. The growth was mainly driven by our European and Asian
operations, which experienced increases in volume to all regions of the world. European export volume increased in 2016, with
particular strength in the Europe-to-U.S. and intra-Europe trade lanes. Asia export volume also increased in 2016, with growth
in all trade lanes. However, U.S. export volume declined largely due to the impact of the stronger U.S. Dollar. Export volume
growth was distributed across all products led by our Worldwide Express product.
The increase in domestic volume in 2016 was primarily due to growth in Italy, France, Turkey and Mexico.
Rates and Product Mix
2017 compared to 2016
Total average revenue per piece decreased 0.4% in 2017, impacted by a 250 basis point reduction from currency and a
shift in product mix. These factors were partially offset by an increase in fuel surcharge rates as well as an increase in base
rates.
On December 26, 2016, we implemented an average 4.9% net increase in base and accessorial rates for international
shipments originating in the United States. Rate changes for shipments originating outside the U.S. are made throughout the
year and vary by geographic markets. Effective September 17, 2017, a peak surcharge was applied to any shipment originating
from China or Hong Kong to the United States for certain service levels during the peak period. The surcharge was applied as a
rate per pound based upon the billable weight of the shipment. Additionally, on October 25, 2017, we announced an average
4.9% net increase in base and accessorial rates for international shipping originating in the United States; changes became
effective on December 24, 2017.
Export revenue per piece decreased 5.6% in 2017, impacted by a 320 basis point reduction from currency and product
mix. This was partially offset by an increase in fuel surcharges, an increase in base rates and strong volume growth in premium
products.
Domestic revenue per piece increased 3.9% in 2017, impacted by a 50 basis point increase from currency, increase in
base rates and higher fuel surcharges.
2016 compared to 2015
Total average revenue per piece decreased 2.0% in 2016, impacted by a 110 basis point reduction from currency as well
as lower fuel surcharge rates. These factors were partially offset by an increase in base rates, lower discounts and a shift in
product mix as the growth in premium products continued to exceed the growth in our standard products.
31
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On December 28, 2015, we implemented an average 5.2% net increase in base and accessorial rates for international
shipments originating in the United States (Worldwide Express, Worldwide Saver, UPS Worldwide Expedited and UPS
International Standard service). On November 2, 2015, the surcharge increased for Over Maximum Packages and the tables for
Ground, Air and International fuel surcharges were adjusted. Rate changes for shipments originating outside the U.S. are made
throughout the year and vary by geographic market.
Export revenue per piece decreased 2.3% in 2016, impacted by a 50 basis point reduction from currency as well as lower
fuel surcharge rates. These factors were partially offset by an increase in base rates, lower discounts and favorable package
weight and characteristics.
Domestic revenue per piece decreased 3.5% in 2016, impacted by a 380 basis point reduction from currency as well as
lower fuel surcharge rates. These factors were partially offset by an increase in base rates.
Fuel Surcharges
We maintain fuel surcharges on our international air and ground services. The fuel surcharges for international air
products originating inside or outside the United States are indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-
type jet fuel, while the fuel surcharges for ground products originating outside the United States are indexed to fuel prices in the
international region or country where the shipment takes place.
Total international fuel surcharge revenue increased by $325 million in 2017, primarily due to volume increases, higher
fuel prices and pricing changes made to base freight rates and to the fuel surcharge indices from a two month lag to a two week
lag. Total international fuel surcharge revenue decreased by $119 million in 2016, primarily due to price reductions in the fuel
surcharge indices; however, this was partially offset by an increase in volume and changes in mix.
Operating Expenses
2017 compared to 2016
Overall operating expenses increased by $568 million, which included a $390 million decrease in mark-to-market pension
charges. Excluding the impact of the defined benefit plan mark-to-market charges, adjusted operating expenses for the segment
increased $958 million in 2017 primarily due to increased volumes, higher fuel usage and currency fluctuations.
Operating expenses were impacted by changes in the cost of operating our international integrated air and ground
network, which increased $418 million, as well as pickup and delivery costs, which increased $280 million. The increase in
network costs was largely driven by volume growth in our Express products, which drove a 3.0% increase in aircraft block
hours and higher fuel usage. Additionally, the increase in pickup and delivery costs is due to increased volume. Operating
expenses were also impacted in 2017 by a $260 million increase in indirect overhead and package sorting costs and other costs.
2016 compared to 2015
Overall operating expenses increased by $294 million, which included a $381 million increase in mark-to-market pension
charges. Excluding the impact of the defined benefit plan mark-to-market charges, adjusted operating expenses for the segment
decreased $87 million in 2016 primarily due to currency exchange rate movements and lower fuel expense.
Operating expenses were impacted by changes in the cost of operating our international integrated air and ground
network, which decreased $40 million, as well as pickup and delivery costs, which decreased $143 million. The decreases in
network and pickup and delivery costs were largely due to the impact of currency exchange rate movements and lower fuel
expense. Network cost reductions were somewhat offset by an increase in aircraft block hours (up 1.2% in 2016), driven by a
5.1% increase in international export volume and continuing air product service enhancements.
Operating expenses were also impacted in 2016 by a $96 million increase in indirect overhead, package sorting costs and
other gains and losses. The total cost per piece for the segment decreased 1.8% in 2016.
32
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Profit and Margin
2017 compared to 2016
Operating profit increased $420 million in 2017 compared with 2016, which included a $390 million decrease in
operating expenses due to mark-to-market pension adjustments. Operating margin increased 190 basis points to 18.5%.
Adjusted operating profit increased by $30 million in 2017, while the adjusted operating margin decreased 130 basis points to
18.7%. Operating margin was affected by negative currency exchange movements due to volatility of both hedged and
unhedged currencies. Included in adjusted operating profit is a $375 million decrease due to currency.
2016 compared to 2015
Operating profit decreased $93 million in 2016 compared with 2015, which included a $381 million increase in operating
expenses due to mark-to-market pension adjustments. Operating margin decreased 100 basis points to 16.6%. Adjusted
operating profit increased by $288 million in 2016, while the adjusted operating margin increased 200 basis points to 20.0%.
Operating profit and margin were positively affected by several factors including base rate increases, modifications to the fuel
surcharge indices and currency exchange rate movements (including currency hedging gains).
33
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Supply Chain & Freight Operations
Freight LTL Statistics:
Revenue (in millions)
Revenue Per Hundredweight
Shipments (in thousands)
Shipments Per Day (in thousands)
Gross Weight Hauled (in millions of lbs)
Weight Per Shipment (in lbs)
Operating Days in Period
Revenue (in millions):
Forwarding and Logistics
Freight
Other
Total Revenue
Operating Expenses (in millions):
Operating Expenses
Defined Benefit Plans Mark-to-Market Charges
Adjusted Operating Expenses
Operating Profit (in millions) and Operating Margins:
Operating Profit
Adjusted Operating Profit
Operating Margin
Adjusted Operating Margin
Year Ended December 31,
% Change
2017
2016
2015
2017/ 2016
2016/ 2015
$ 2,596
$ 24.08
10,203
40.5
10,782
1,057
252
$ 7,981
2,998
791
$ 11,770
$ 2,384
$ 23.44
9,954
39.3
10,167
1,021
253
$ 6,793
2,736
726
$ 10,255
$ 2,479
$ 22.94
10,433
41.2
10,808
1,036
253
$ 5,900
2,881
686
$ 9,467
$ 10,985
(128)
$ 10,857
$ 9,849
(318)
$ 9,531
$ 8,703
(12)
$ 8,691
$
$
$
$
785
913
6.7%
7.8%
$
$
406
724
4.0%
7.1%
764
776
8.1%
8.2%
8.9%
2.7%
2.5%
3.1%
6.0%
3.5%
17.5%
9.6%
9.0%
14.8%
(3.8)%
2.2 %
(4.6)%
(4.6)%
(5.9)%
(1.4)%
15.1 %
(5.0)%
5.8 %
8.3 %
11.5%
13.2 %
13.9%
9.7 %
93.3%
26.1%
(46.9)%
(6.7)%
Currency Translation Benefit / (Cost)—(in millions)*:
Revenue
Operating Expenses
Operating Profit
*
Amount represents the change compared to the prior year.
$
$
10
(12)
(2)
$
$
(56)
59
3
In December 2016, we acquired Marken, a global provider of supply chain solutions to the life sciences industry and
leader in clinical trials, material storage and distribution. Marken's financial results are included in the above table within
Forwarding and Logistics from the date of the acquisition and have impacted the year-over-year comparability of revenue,
operating expenses and operating profit for the years ended December 31, 2017 and 2016.
In August 2015, we acquired Coyote, a truckload freight brokerage company. Coyote's financial results are included in
the above table within Forwarding and Logistics from the date of the acquisition, which has impacted the year-over-year
comparability of revenue, operating expenses and operating profit for the years ended December 31, 2016 and 2015.
34
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue
2017 compared to 2016
Total revenue for the Supply Chain & Freight segment increased $1.515 billion in 2017 compared to 2016.
Forwarding and Logistics revenue increased $1.188 billion in 2017 compared with 2016, primarily due to increased
truckload brokerage freight volume movement and tonnage increases in our international air freight and North American air
freight forwarding businesses. The volume and tonnage increases were driven by improving overall market demand. Revenue
for our logistics products increased in 2017 due to growth in mail services, healthcare, retail and aerospace solutions, offset by
declines among our high tech customers. Additionally, the Marken acquisition on December 21, 2016 contributed to the
increase in revenue. Revenue was positively impacted by currency exchange rate movements.
UPS Freight revenue increased $262 million in 2017 compared to 2016, driven by increases in shipments and weight per
shipment. These increases were impacted by an overall improvement in market demand and customer mix. LTL revenue per
hundredweight increased slightly as LTL base rate increases, averaging 4.9%, took effect September 19, 2016. Additionally,
effective June 26, 2017, LTL base rates increased by an additional 4.9% for certain shipments in the U.S., Canada and Mexico.
Fuel surcharge revenue also increased $70 million due to changes in overall LTL shipment volume and diesel fuel prices.
Revenue for the other businesses within Supply Chain & Freight increased $65 million in 2017 due to revenue growth at
UPS Capital Corporation and UPS Customer Solutions, as well as service contracts with the U.S. Postal Service.
2016 compared to 2015
Total revenue for the Supply Chain & Freight segment increased $788 million in 2016 compared to 2015.
Forwarding and Logistics revenue increased $893 million in 2016 compared with 2015, primarily due to the Coyote
acquisition midway through the third quarter of 2015, offset by a combination of volume and tonnage declines in our North
American air freight and international air freight businesses (impacted by management focus to reduce lower-yielding accounts
and softer market conditions). Additionally, revenue was adversely impacted by currency exchange rate movements and lower
fuel surcharge rates (due to declining fuel prices). Revenue for our logistics products increased in 2016 as there was growth in
our mail services and retail, aerospace, healthcare and automotive solutions.
UPS Freight revenue decreased $145 million in 2016 compared with 2015, driven by lower tonnage (down 5.9% from
2015) and a $73 million decrease in fuel surcharge revenue due to lower diesel fuel prices. The decline in shipments and the
reduction in the weight per shipment were impacted by revenue management initiatives, an overall decline in market demand
and customer mix. LTL revenue per hundredweight increased as LTL base rate increases averaging 4.9% took effect on October
26, 2015 and September 19, 2016.
Revenue for the other businesses within Supply Chain & Freight increased $40 million in 2016 due to revenue growth at
UPS Capital Corporation, UPS Customer Solutions and The UPS Store.
Operating Expenses
2017 compared to 2016
Supply Chain & Freight operating expenses for the period increased $1.136 billion, which includes a $190 million
decrease in mark-to-market pension charges.
Forwarding and Logistics operating expenses increased $927 million, largely due to increased purchased transportation
expenses and the acquisition of Marken in 2016. This was offset by operating efficiencies, a decrease in the mark-to-market
pension charges in 2017 compared to 2016 and the receipt of a $20 million favorable legal settlement in the second quarter of
2017. Purchased transportation expense increased by $949 million compared to 2016 due to increased truckload brokerage
freight movement, the acquisition of Marken in 2016, and the resulting increased fuel surcharges passed to us from outside
transportation providers. Increased tonnage and third-party air carrier procurement rates in our North American and
international air freight forwarding businesses, and increased volume and rates for mail services, also contributed to increased
purchased transportation expenses.
35
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UPS Freight operating expenses increased $196 million in 2017 compared with 2016. The increase in operating expense
was largely due to costs associated with operating our linehaul network ($120 million) and increases in pickup and delivery
costs ($79 million). The network costs and pickup and delivery expenses were driven by higher fuel cost and higher expense for
outside transportation carriers (largely due to LTL volume growth and fuel surcharges passed to us by outside carriers). Total
cost per LTL shipment increased 4.7% in 2017 compared to 2016. Operating expenses related to our casualty self-insurance
reserves also increased in 2017 compared with 2016.
Other expenses for the other businesses within Supply Chain & Freight increased $13 million in 2017 compared with
2016 primarily due to UPS Capital, UPS Customer Solutions and service contracts with the U.S. Postal Service, slightly offset
by decreases in The UPS Store.
2016 compared to 2015
Supply Chain & Freight operating expenses for the period increased $1.146 billion, which included a $306 million
increase in mark-to-market pension charges. Forwarding and Logistics operating expenses increased $910 million, largely due
to the acquisition of Coyote during the third quarter of 2015 and the increase in mark-to-market pension adjustment, partially
offset by the impact of currency exchange rate movements and lower fuel expense. Purchased transportation expense increased
by $862 million compared to 2015 largely due to the acquisition of Coyote. These increases were partially offset by a
combination of lower volume and tonnage in our North American air freight and international air freight forwarding businesses,
lower buy rates due to softer market conditions and the impact of currency exchange rates.
UPS Freight operating expenses decreased $103 million in 2016 compared with 2015, primarily as a result of decreases in
our network costs ($58 million) and pickup and delivery costs ($34 million), offset in part by the increased mark-to-market
pension charges. The declines in network costs and pickup and delivery expenses were driven by a reduction in fuel expense
and expense for outside transportation carriers (due to lower LTL volume and fuel surcharges passed to us by outside carriers).
Total cost per LTL shipment increased by 2.7% compared with 2015 due to operating expenses declining at a faster rate than the
reduction in tonnage and shipments.
Other expenses for the other businesses within Supply Chain & Freight increased $33 million in 2016 compared with
2015 primarily due to UPS Capital, UPS Customer Solutions and The UPS Store.
Operating Profit and Margin
2017 compared to 2016
Supply Chain & Freight operating profit increased $379 million in 2017 compared with 2016, which includes a $190
million decrease in the mark-to-market pension charges. Operating margin increased 270 basis points to 6.7%, while the
adjusted operating margin increased 70 basis points to 7.8%.
Operating profit for Forwarding and Logistics increased $261 million in 2017 compared with 2016. Operating profit and
margins for the North American air freight business increased in 2017 due to an increase in volume, slightly offset by higher
transportation expenses. Operating profit and margins in our international air freight forwarding business increased due to
volume increases and higher revenue per kilo, slightly offset by higher rates at which we procure capacity from third-party air
carriers. Operating profit for the logistics units improved from 2017 compared to 2016, due to strong performance in the U.S. as
well as within our mail services. Additionally, the Marken acquisition in 2016 contributed to the increase in operating profit.
UPS Freight operating profit increased $66 million in 2017 compared with 2016, as increased volume and prices were
partially offset by increased purchased transportation costs.
The combined operating profit for all of our other businesses in this segment increased $52 million in 2017, primarily due
to higher operating profit at UPS Capital, UPS Customer Solutions and The UPS Store, as well as service contracts with the
U.S. Postal Service.
36
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2016 compared to 2015
Supply Chain & Freight operating profit decreased $358 million in 2016 compared with 2015, which includes a $306
million increase in the mark-to-market pension adjustments. Operating margin decreased 410 basis points to 4.0%, while the
adjusted operating margin decreased 110 basis points to 7.1%.
Operating profit for Forwarding and Logistics, which includes Coyote, decreased $17 million in 2016 compared with
2015. Operating results for the North American air freight and international air freight forwarding businesses declined, as buy
and sell spreads for capacity decreased. Profitability in ocean freight slightly declined due to margin compression from soft
market conditions. Operating profit for the logistics unit increased slightly in 2016 compared to 2015.
Operating profit for the freight unit decreased $42 million in 2016 compared with 2015, as a decline in tonnage and
increase in pension costs more than offset the increased LTL revenue per hundredweight realized during the year.
The combined operating profit for all of our other businesses in this segment increased $7 million in 2016, primarily due
to higher operating profit at UPS Capital, UPS Customer Solutions and The UPS Store.
37
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Expenses
Operating Expenses (in millions):
Compensation and Benefits:
Defined Benefit Plans Mark-to-Market Charges
Adjusted Compensation and Benefits
Repairs and Maintenance
Depreciation and Amortization
Purchased Transportation
Fuel
Other Occupancy
Other Expenses
Year Ended December 31,
% Change
2017
2016
2015
2017/ 2016
2016/ 2015
$ 34,588
(800)
33,788
$ 34,770
(2,651)
32,119
$ 31,028
(118)
30,910
1,600
2,282
10,989
2,690
1,155
1,538
2,224
9,129
2,118
1,037
1,400
2,084
8,043
2,482
1,022
(0.5)%
12.1 %
5.2 %
3.9 %
4.0 %
2.6 %
20.4 %
27.0 %
11.4 %
9.9 %
6.7 %
13.5 %
(14.7)%
1.5 %
5,039
4,623
4,636
9.0 %
(0.3)%
Total Operating Expenses
Adjusted Total Operating Expenses
$ 58,343
$ 55,439
$ 50,695
$ 57,543
$ 52,788
$ 50,577
5.2 %
9.0 %
9.4 %
4.4 %
Currency Translation Cost / (Benefit)*
$
62
$
(205)
*
Amount represents the change compared to the prior year.
Compensation and Benefits
2017 compared to 2016
Total compensation and benefits decreased $182 million in 2017 compared to 2016. Excluding the impact of the defined
benefit plans mark-to-market charges, adjusted compensation and benefits expense increased $1.669 billion in 2017.
Employee payroll costs increased $1.295 billion in 2017 compared with 2016, largely due to higher U.S. domestic
hourly and management compensation costs. Total compensation costs increased 6.5%, while consolidated average daily
volume growth was 4.9%. U.S. domestic compensation costs for hourly employees increased largely due to fourth quarter 2017
seasonal staffing increases resulting from a 5.4% volume growth, contractual union wage increases, headcount increases, wage
rate adjustments for part time workers and a 6.5% increase in average daily union labor hours. Compensation costs for
management employees increased primarily due to merit salary increases and growth in the overall size of the workforce.
Benefits expense decreased $1.477 billion in 2017 compared to 2016, primarily due to the following factors:
•
Pension costs decreased $1.869 billion in 2017 compared to 2016, primarily due to a $1.851 billion decrease in defined
benefit plans mark-to-market charges. Additionally, expenses decreased due to higher asset returns in company
sponsored plans as a result of discretionary contributions. This decrease was offset by additional expense for
multiemployer pension plans, which were impacted by contractual contribution rate increases and an overall increase
in size of workforce.
• Health and welfare costs increased $229 million in 2017, largely due to increased contributions to multiemployer plans
resulting from contractual contribution rate increases and an overall increase in the size of the workforce.
• Vacation, holiday, excused absence, payroll tax and other expenses increased $226 million in 2017 due to salary
increases and growth in the overall size of the workforce.
38
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
• Workers' compensation expense decreased $63 million in 2017 as we experienced more favorable actuarial
adjustments. This decrease was partially offset by increases in work hours, medical trends and wage increases.
Insurance reserves are established for estimates of the loss that we will ultimately incur on reported workers'
compensation claims, as well as estimates of claims that have been incurred but not reported, and take into account a
number of factors, including our history of claim losses, payroll growth and the impact of safety improvement
initiatives.
2016 compared to 2015
Total compensation and benefits increased $3.742 billion in 2016 compared to 2015. Excluding the impact of the defined
benefit plans mark-to-market charges, adjusted compensation and benefits expense increased $1.209 billion in 2016.
Employee payroll costs increased $609 million in 2016 compared with 2015, largely due to higher U.S. domestic hourly
and management compensation costs and the acquisition of Coyote during the third quarter of 2015. Total compensation costs
increased 3.2%, while consolidated average daily volume growth was 4.2%. U.S. domestic compensation costs for hourly
employees increased largely due to increased headcount, contractual union wage increases and a 4.2% increase in average daily
union labor hours. Compensation costs for management employees increased primarily due to merit salary increases and growth
in the overall size of the workforce, partially offset by lower incentive compensation.
Benefits expense increased $3.133 billion in 2016 compared to 2015, primarily due to increased pension costs, health and
welfare costs, workers' compensation expenses, vacation, holiday and excused absence expenses and payroll taxes. These
factors are discussed further as follows:
•
Pension costs increased $2.634 billion in 2016 compared to 2015, primarily due to $2.533 billion in defined benefit
plans mark-to-market charges. Additionally, expenses increased for multiemployer pension plans due to increased
contribution rates and headcount.
• Health and welfare costs increased $277 million in 2016, largely due to increased contributions to multiemployer plans
resulting from contractual contribution rate increases and an overall increase in the size of the workforce.
• Vacation, holiday, excused absence and payroll tax expense increased $125 million in 2016, due to salary increases and
growth in the overall size of the workforce.
• Workers' compensation expense increased $96 million in 2016. Insurance reserves are established for estimates of the
loss that we will ultimately incur on reported workers' compensation claims, as well as estimates of claims that have
been incurred but not reported, and take into account a number of factors, including our history of claim losses, payroll
growth and the impact of safety improvement initiatives. In 2015, we experienced more favorable actuarial
adjustments, resulting in increased expense in 2016.
Repairs and Maintenance
2017 compared to 2016
The $62 million increase in repairs and maintenance expense in 2017 was primarily due to repairs and maintenance of our
transportation equipment resulting from growth in the size of our vehicle fleet and routine repairs to buildings and facilities.
2016 compared to 2015
The $138 million increase in repairs and maintenance expense in 2016 was primarily due to an increase in airframe and
aircraft engine maintenance resulting from increased air volume and increased vehicle maintenance costs in our global package
and freight operations, primarily due to the growth in the size of our vehicle fleet.
39
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Depreciation and Amortization
2017 compared to 2016
Depreciation and amortization expense increased $58 million in 2017 compared with 2016, primarily due to the following
factors: (1) depreciation expense on vehicles increased due to an overall increase in the size of our vehicle fleet in our U.S.
Domestic Package and UPS Freight operations, (2) depreciation expense for buildings and facilities increased due to the
opening of new facilities and facility automation and capacity expansion projects and (3) amortization expense of intangible
assets increased in conjunction with the Marken acquisition. These factors were largely offset by a decrease in amortization
expense related to longer lived internally developed capitalized software.
2016 compared to 2015
Depreciation and amortization expense increased $140 million in 2016 compared with 2015, primarily due to the
following factors: (1) depreciation expense for buildings and facilities increased due to leasehold improvements and purchases
of new equipment; (2) increase in amortization expense largely due to new internally developed capitalized software, as well as
intangible assets resulting from business acquisitions and (3) depreciation expense on vehicles increased due to the replacement
of older, fully-depreciated vehicles, technology upgrades on new vehicles and an overall increase in the size of our vehicle fleet
in our U.S. Domestic Package and UPS Freight operations.
Purchased Transportation
2017 compared to 2016
The $1.860 billion increase in purchased transportation expense charged to us by third-party air, rail, ocean and truck
carriers in 2017 was primarily driven by the following factors:
• Expense for our forwarding and logistics business increased $949 million in 2017, primarily due to increased truckload
brokerage freight loads per day and the resulting increased fuel surcharges passed to us from outside transportation
providers; increased volume and rates for mail services and increased tonnage in our North American and international
air freight forwarding businesses. Additionally, purchased transportation expense increased due to the acquisition of
Marken in December 2016.
• U.S. Domestic Package expense increased $421 million in 2017, primarily due to increased volume (including
SurePost), higher rates and higher fuel surcharges passed to us from outside contract carriers.
•
International Package expense increased $270 million in 2017, primarily due to the increased usage of third-party
carriers (due to higher volume); higher fuel surcharges passed to us from outside transportation providers and an
unfavorable impact of currency exchange rate movements.
• UPS Freight expense increased $163 million in 2017, due to an increase in LTL shipments and higher fuel surcharges
passed to us from outside transportation providers.
2016 compared to 2015
The $1.086 billion increase in purchased transportation expense charged to us by third-party air, ocean and truck carriers
in 2016 was driven by several factors:
• Expense for our forwarding and logistics business increased $840 million in 2016, primarily due to the acquisition of
Coyote and increased volume and rates for mail services; these items were partially offset by a combination of
decreased volume and tonnage in our North American air freight and international air freight forwarding business,
lower buy rates in international air freight due to softer market conditions and the impact of foreign currency exchange
rates.
• U.S. Domestic Package expense increased $130 million in 2016, primarily due to increased volume and rates, partially
offset by lower fuel surcharges passed to us from rail carriers and outside contract carriers.
•
International Package expense increased $112 million in 2016, primarily due to increased usage of third-party carriers;
this was partially offset by the impact of currency exchange rate movements as well as lower fuel surcharges passed to
us from outside transportation providers.
• UPS Freight expense decreased $18 million in 2016, largely due to decreased LTL shipments and the resulting
decreased use of, and lower fuel surcharges passed to us from, outside transportation carriers.
40
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Fuel
2017 compared to 2016
The $572 million increase in fuel expense in 2017 was primarily due to higher jet fuel, diesel and unleaded gasoline
prices, which increased fuel expense by $419 million. Additionally, increased alternative fuel costs and fuel consumption
increased expense by $170 million primarily due to volume increases, which resulted in higher total aircraft block hours and
Domestic Package delivery miles driven. These increases were partially offset by increased fuel efficiency.
2016 compared to 2015
The $364 million decrease in fuel expense in 2016 was primarily due to lower jet fuel, diesel and unleaded gasoline
prices, which decreased fuel expense by $461 million. The lower fuel prices were partially offset by increased fuel
consumption, primarily due to increases in total aircraft block hours and Domestic Package delivery stops (due to higher
volume), which increased expense by $97 million and lower alternative fuel and tax credits.
Other Occupancy
2017 compared to 2016
The $118 million increase in other occupancy expense in 2017 was largely due to higher facility rent expense driven by
new facilities, higher utilities and property taxes at our operating facilities.
2016 compared to 2015
The $15 million increase in other occupancy expense in 2016 was largely due to higher facility rent expense, partially
offset by lower utilities and snow removal costs at our operating facilities.
Other Expenses
2017 compared to 2016
The $416 million increase in other expenses in 2017 was caused by a number of factors:
•
Auto liability insurance expense increased $75 million due to increased miles driven, medical trend rates and severity
experience trends.
• Transportation equipment rental increased $60 million driven by growth in package volume.
The remaining $280 million increase is comprised of increases in several other expense categories, including outside
professional services, merchandise protection, computer and plant supplies and air cargo handling, partially offset by a decrease
in advertising expense.
2016 compared to 2015
The $13 million decrease in other expenses in 2016 was largely due to a decrease in overall auto liability insurance, offset
by an increase in outside professional services.
41
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Investment Income and Interest Expense
The following table sets forth investment income and interest expense for the years ended December 31, 2017, 2016 and
2015 (in millions):
Investment Income and Other
Interest Expense
Investment Income and Other
2017 compared to 2016
Year Ended December 31,
% Change
2017
2016
2015
2017/ 2016
2016/ 2015
$
$
$
72
(453) $
$
50
(381) $
15
(341)
44.0%
18.9%
NA
11.7%
The growth in investment income and other in 2017 as compared to 2016 was primarily due to higher interest income
from invested assets and the continued decrease in losses from fair value adjustments on real estate partnerships partially offset
by foreign currency exchange rate movements.
2016 compared to 2015
The growth in investment income and other in 2016 as compared to 2015 was primarily due to a decrease in losses from
fair value adjustments on real estate partnerships, higher interest income and unrealized gains on investments and a benefit
from foreign currency exchange rate movements.
Interest Expense
2017 compared to 2016
Interest expense increased in 2017 as compared to 2016 primarily due to the issuance of long-term CAD Senior Notes,
Euro Senior Notes and USD Senior Notes and higher effective interest rates on senior notes.
2016 compared to 2015
Interest expense increased in 2016 as compared to 2015 primarily due to an increase in average outstanding commercial
paper balances, an increase in long-term debt and higher effective interest rates on senior notes.
42
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Tax Expense
The following table sets forth income tax expense and our effective tax rate for the years ended December 31, 2017, 2016
and 2015 (in millions):
Income Tax Expense:
Income Tax Impact of:
Year Ended December 31,
% Change
2017
$ 2,238
2016
$ 1,705
2015
$ 2,498
2017/ 2016
31.3%
2016/ 2015
(31.7)%
Defined Benefit Plans Mark-to-Market Charge
Income Tax Benefit from the Tax Cuts and Jobs Act and
Other Non-U.S. Tax Law Changes
Adjusted Income Tax Expense
Effective Tax Rate
Adjusted Effective Tax Rate
193
978
39
258
$ 2,689
—
$ 2,683
—
$ 2,537
31.3%
33.8%
33.2%
34.5%
34.0%
34.0%
0.2%
5.8 %
Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions we operate in 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 decreased to 31.3% in 2017, compared with 33.2% in 2016 and 34.0% in 2015, primarily due to the
effects of the following discrete tax items and recurring factors:
Tax Cuts and Jobs Act
On December 22, 2017, the United States enacted into law the Tax Act. The Tax Act makes broad and complex changes
to the U.S. tax code, including a permanent corporate rate reduction to 21% and a transition to a territorial international system
effective in 2018. Going forward, we expect a lower future effective tax rate than we have reported in recent years. Applying
the lower corporate tax rate will lower our overall income tax expense, which will impact net income and cash flows. Benefits
from the lower tax rate will allow us to fund strategic initiatives for our customers, employees and shareowners. The Tax Act
also includes provisions that affect 2017, including: (1) requiring a one-time transition tax on certain unrepatriated earnings of
foreign subsidiaries (“Transition Tax”) that is payable over eight years; (2) requiring a remeasurement of all U.S. deferred tax
assets and liabilities to the newly enacted corporate tax rate of 21% and (3) providing for additional first-year depreciation that
allows full expensing of qualified property placed into service after September 27, 2017.
In late December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the
Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for
companies to complete the related accounting under U.S. GAAP. If a company’s accounting for certain income tax effects of the
Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial
statements. Accordingly, we have recorded provisional estimates related to our Transition Tax liability, our change in indefinite
reinvestment assertion for certain foreign subsidiaries and the remeasurement of our U.S. net deferred tax liabilities.
To calculate the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986
earnings and profits (“E&P”) of the foreign subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings.
We are able to make a reasonable estimate of the Transition Tax and recorded a provisional liability of $310 million; however,
there are certain factors that could impact our provisional estimate.
First, several of our foreign subsidiaries have a fiscal year-end, and E&P for these subsidiaries cannot be precisely
calculated until their fiscal years conclude during 2018. Second, we continue to gather additional information needed to
precisely estimate the impact of the Transition Tax on our U.S. state and local tax liabilities given the complexity of the relevant
state laws. Finally, we expect additional regulatory guidance and technical clarifications from the U.S. Department of the
Treasury and Internal Revenue Service within the next 12 months that could change our provisional estimate of the Transition
Tax.
43
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As the U.S. has moved to a territorial system, we have also changed our indefinite reinvestment assertion with respect to
the earnings of certain foreign subsidiaries. As a result, we have recorded a provisional deferred tax liability and corresponding
increase to deferred tax expense of $24 million. There are certain factors, discussed above with regard to the Transition Tax,
which could also impact our provisional estimate for the change in indefinite reinvestment assertion. For all other foreign
subsidiaries, we continue to assert that these earnings are indefinitely reinvested. We will continue to evaluate our indefinite
reinvestment assertion for all foreign subsidiaries in light of the Tax Act, and our provisional estimate is subject to change.
For our net U.S. deferred tax liabilities, we have recorded a provisional decrease of $606 million with a corresponding
reduction to deferred tax expense of $606 million for the year ended December 31, 2017. While we are able to make a
reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the Tax
Act, including, but not limited to, completing the analysis of our 2017 capital expenditures that qualify for full expensing and
the state tax effect of adjustments made to federal temporary differences.
Other 2017 Discrete Items
In the fourth quarter of 2017, we recognized an income tax benefit of $193 million related to pre-tax mark-to-market
losses of $800 million on our pension and postretirement defined benefit plans. This income tax benefit was generated at a
lower average statutory tax rate than the 2017 U.S. federal statutory tax rate due to future tax rate changes enacted by the Tax
Act and differences between U.S. and foreign statutory rates, which was partially offset by the effect of U.S. state and local
taxes.
In the fourth quarter of 2017, tax law changes were enacted in certain non-U.S. jurisdictions in which we operate. As a
result, we have recorded a decrease to our foreign net deferred tax assets of $14 million with a corresponding net increase to
deferred tax expense of $14 million for the year ended December 31, 2017.
In the first quarter of 2017, we adopted a new accounting standard that requires the recognition of excess tax benefits
related to share-based compensation in income tax expense, which resulted in tax benefits for the year ended December 31,
2017 of $71 million and reduced our effective tax rate by 1.0%.
2016 Discrete Items
In the fourth quarter of 2016, we recognized an income tax benefit of $978 million related to pre-tax mark-to-market
losses of $2,651,000,000.000 billion on our pension and postretirement defined benefit plans. This income tax benefit was
generated at a higher average statutory tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state
and local taxes.
2015 Discrete Items
During the third quarter of 2015 and after the filing of our annual federal tax returns, we reconciled our deferred tax
balances and identified adjustments to be made with respect to prior years’ deferred tax balances. The adjustments resulted in a
reduction of income tax expense of $66 million.
In connection with our acquisition of Coyote Logistics in 2015, we distributed $500 million of cash held by a Canadian
subsidiary to its U.S. parent during the fourth quarter of 2015. As a result of the distribution, we recorded additional net income
tax expense of $28 million.
In the fourth quarter of 2015, we recognized an income tax benefit of $39 million related to pre-tax mark-to-market losses
of $118 million on our pension and postretirement defined benefit plans. This income tax benefit was generated at a lower
average statutory tax rate than our U.S. federal statutory tax rate because it was due, in part, to non-U.S. benefit plans.
Other favorable rate impacting items in 2015 include: resolution of several U.S. state and local tax matters; the extension
of favorable U.S. federal tax provisions associated with the Protecting Americans from Tax Hikes Act of 2015 related to
research and development tax credits and work opportunity tax credits; and the execution of two bilateral advance pricing
agreements. These agreements established intercompany transfer pricing arrangements between the U.S. and certain non-U.S.
jurisdictions related to our small package operations for tax years 2010 through 2019.
44
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As described in the Items Affecting Comparability section, certain items have been excluded from comparisons of
"adjusted" income taxes in the discussion that follows.
Our adjusted effective tax rate decreased to 33.8% in 2017 from 34.5% in 2016 primarily due to favorable discrete tax
adjustments related to recognition of excess tax benefits related to share-based compensation in income tax expense.
Our adjusted effective tax rate increased to 34.5% in 2016 from 34.0% in 2015 primarily due to a decrease in favorable
discrete tax adjustments relative to 2015 partially offset by favorable changes in the proportion of our taxable income in certain
U.S. and non-U.S. jurisdictions relative to total pre-tax income.
45
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of December 31, 2017, we had $4.069 billion in cash, cash equivalents and marketable securities. We believe that our
current cash position, access to the long-term debt capital markets and cash flow generated from operations should be adequate
not only for operating requirements but also to enable us to complete our capital expenditure programs and to fund dividend
payments, share repurchases and long-term debt payments through the next several years. In addition, we have funds available
from our commercial paper program and the ability to obtain alternative sources of financing. We regularly evaluate
opportunities to optimize our capital structure, including through issuances of debt to refinance existing debt and to fund
ongoing cash needs.
Cash Flows From Operating Activities
The following is a summary of the significant sources (uses) of cash from operating activities (amounts in millions):
Net Income
Non-cash operating activities(1)
Pension and postretirement plan contributions (UPS-sponsored plans)
Hedge margin receivables and payables
Income tax receivables and payables
Changes in working capital and other non-current assets and liabilities
Other operating activities
Net cash from operating activities
2017
4,910
5,776
(7,794)
(732)
(550)
(178)
47
1,479
$
$
2016
3,431
6,444
(2,668)
(142)
(505)
(62)
(25)
6,473
$
$
2015
$ 4,844
4,122
(1,229)
170
(6)
(418)
(53)
$ 7,430
(1) Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, provisions for uncollectible
accounts, pension and postretirement benefit expense, stock compensation expense and other non-cash items.
Cash from operating activities remained strong throughout 2015 to 2017. Most of the variability in operating cash flows
during the 2015 to 2017 time period relates to the funding of our company-sponsored pension and postretirement benefit plans
(and related cash tax deductions). Except for discretionary or accelerated fundings of our plans, contributions to our company-
sponsored pension plans have largely varied based on whether any minimum funding requirements are present for individual
pension plans.
• We made discretionary contributions to our three primary company-sponsored U.S. pension plans totaling $7.291,
$2.461 and $1.030 billion in 2017, 2016 and 2015, respectively.
• The remaining contributions from 2015 to 2017 were largely due to contributions to our international pension plans
and U.S. postretirement medical benefit plans.
Apart from the transactions described above, operating cash flow was impacted by changes in our working capital
position, payments for income taxes and changes in hedge margin payables and receivables. Cash payments for income taxes
were $1.559, $2.064 and $1.913 billion for 2017, 2016 and 2015, respectively, and were primarily impacted by the timing of
current tax deductions. The net hedge margin collateral (paid)/received from derivative counterparties was $(732), $(142) and
$170 million during 2017, 2016 and 2015, respectively, due to settlements and changes in the fair value of the derivative
contracts used in our currency and interest rate hedging programs.
As of December 31, 2017, the total of our worldwide holdings of cash, cash equivalents and marketable securities were
$4.069 billion, of which approximately $1.800 billion was held by foreign subsidiaries. The amount of cash, cash equivalents
and marketable securities held by our U.S. and foreign subsidiaries fluctuates throughout the year due to a variety of factors,
including the timing of cash receipts and disbursements in the normal course of business. Cash provided by operating activities
in the U.S. continues to be our primary source of funds to finance domestic operating needs, capital expenditures, share
repurchases and dividend payments to shareowners. As a result of the Tax Act, all cash, cash equivalents and marketable
securities held by foreign subsidiaries are generally available for distribution to the U.S. without any U.S. federal income taxes.
Any such distributions may be subject to foreign withholding and U.S. state taxes. When amounts earned by foreign
subsidiaries are expected to be indefinitely reinvested, no accrual for taxes is provided.
46
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cash Flows From Investing Activities
Our primary sources (uses) of cash for investing activities were as follows (amounts in millions):
Net cash used in investing activities
Capital Expenditures:
Buildings, facilities and plant equipment
Aircraft and parts
Vehicles
Information technology
Total Capital Expenditures:
Capital Expenditures as a % of Revenue
Other Investing Activities:
Proceeds from disposals of property, plant and equipment
Net decrease in finance receivables
Net (purchases), sales of marketable securities
Cash paid for business acquisitions
Other investing activities
2017
(4,975)
(2,954)
(789)
(924)
(560)
(5,227)
7.9%
24
5
356
(134)
1
$
$
$
$
$
$
$
$
2016
(2,566)
(1,316)
(350)
(864)
(435)
(2,965)
4.9%
88
9
908
(547)
(59)
$
$
$
$
$
$
$
$
2015
(5,309)
(996)
(27)
(936)
(420)
(2,379)
4.1%
26
5
(1,027)
(1,904)
(30)
$
$
$
$
$
$
$
$
We have commitments for the purchase of aircraft, vehicles, equipment and real estate to provide for the replacement of
existing capacity and anticipated future growth. We generally fund our capital expenditures with our cash from operations.
Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic
and industry conditions. We anticipate that our capital expenditures for 2018 will be approximately $6.5 to $7.0 billion.
Capital expenditures on buildings, facilities and plant equipment increased in 2017 compared to the 2015 to 2016 periods
in our U.S. and international package businesses, largely due to several facility automation and capacity expansion projects.
Capital spending on aircraft increased in 2017 compared to the 2015 to 2016 periods due to contract deposits on open aircraft
orders and final payments for new Boeing 747-8F cargo aircraft and previously owned Boeing 767-300 cargo aircraft. Capital
spending on vehicles increased in 2017 in our U.S. and international package businesses, largely due to growth in our business
and the timing of vehicle replacements. Capital spending on information technology increased in 2017 compared to the 2015 to
2016 periods due to further development of our smart logistics network, technology enhancements and capitalized software
projects.
The proceeds from the disposal of property, plant and equipment in the 2015 to 2017 periods were largely due to vehicle
retirements in 2017, insurance recoveries in 2016 and real estate sales in 2015. The net decline in finance receivables in 2017
was primarily due to growth in our cargo finance products, partially offset by loan principal paydowns in our business credit
portfolio. The net change in finance receivables in the 2016 and 2015 periods was primarily due to customer paydowns and
loan sales activity, primarily in our commercial lending, asset-based lending and leasing portfolios. The purchases and sales of
marketable securities are largely determined by liquidity needs and the periodic rebalancing of investment types and will
fluctuate from period to period.
Cash paid for business acquisitions in the 2015 to 2017 periods was primarily related to the acquisitions of Poltraf Sp.
z.o.o., Parcel Pro, Inc. and Coyote in 2015; Marken in 2016 and Freightex, Nightline and STTAS in 2017.
Other investing activities are impacted by changes in our non-current investments and restricted cash balances, capital
contributions into certain investment partnerships and various other items. In 2017, 2016 and 2015, we increased the non-
current investments and restricted cash balance associated with our self-insurance requirements by $4, $3 and $0 million,
respectively.
47
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cash Flows From Financing Activities
Our primary sources (uses) of cash for financing activities were as follows (amounts in millions, except per share data):
Net cash used in financing activities
Share Repurchases:
Cash expended for shares repurchased
Number of shares repurchased
Shares outstanding at year-end
Percent reduction in shares outstanding
Dividends:
Dividends declared per share
Cash expended for dividend payments
Borrowings:
Net borrowings (repayments) of debt principal
Other Financing Activities:
Cash received for common stock issuances
Other financing activities
Capitalization:
Total debt outstanding at year-end
Total shareowners’ equity at year-end
Total capitalization
2017
3,287
(1,813)
(16.1)
859
(1.0)%
3.32
(2,771)
7,827
247
(203)
$
$
$
$
$
$
$
2016
(3,140)
(2,678)
(25.4)
868
(2.0)%
3.12
(2,643)
2,034
245
(98)
$
$
$
$
$
$
$
2015
(1,565)
(2,702)
(26.8)
886
(2.1)%
2.92
(2,525)
3,588
249
(175)
$
$
$
$
$
$
$
$ 24,289
1,030
$ 25,319
$ 16,075
429
$ 16,504
$ 14,334
2,491
$ 16,825
For the years ended December 31, 2017, 2016 and 2015, we repurchased a total of 16.1, 25.2 and 26.8 million shares of
class A and class B common stock for $1.816, $2.680 and $2.711 billion, respectively ($1.813, $2.678 and $2.702 billion in
repurchases for 2017, 2016 and 2015, respectively, are reported on the cash flow statement due to the timing of settlements).
During the first quarter of 2016, we also exercised a capped call option that we entered in 2015 for which we received 0.2
million UPS class B shares. The $25 million premium payment for this capped call option reduced shareowners' equity in 2015.
In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion, which replaced an
authorization previously announced in 2013. The share repurchase authorization has no expiration date. As of December 31,
2017, we had $4.339 billion of this share repurchase authorization remaining.
Share repurchases may take the form of accelerated share repurchases, open market purchases, or other such methods as
we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the
resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the
program. We anticipate repurchasing approximately $1.0 billion of shares in 2018.
The declaration of dividends is subject to the discretion of the Board of Directors and will depend on various factors,
including our net income, financial condition, cash requirements, future prospects and other relevant factors. We expect to
continue the practice of paying regular cash dividends. In February 2018, we increased our quarterly dividend payment from
$0.83 to $0.91 per share, a 10% increase.
48
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a summary of debt issuances as of December 31, 2017, 2016 and 2015 (in millions):
Principal Amount in USD
2017
Fixed-rate senior notes:
2.050% senior notes
2.350% senior notes
2.500% senior notes
2.800% senior notes
3.050% senior notes
3.750% senior notes
Floating-rate senior notes (multiple issuances)
Euro senior notes:
0.375% senior notes (€700)
1.500% senior notes (€500)
Canadian senior notes:
2.125% senior notes (C$750)
Total
2016
Fixed-rate senior notes:
2.400% senior notes
3.400% senior notes
Floating-rate senior notes (multiple issuances)
Euro senior notes:
1.000% senior notes (€500)
Total
2015
Facility notes and bonds
Floating-rate senior notes (multiple issuances)
Euro senior notes:
1.625% senior notes (€700)
Floating-rate senior notes (€500)
Total
$
$
$
$
$
$
700
600
1,000
500
1,000
1,150
1,461
815
582
547
8,355
500
500
226
549
1,775
100
144
765
547
1,556
Principal Amount in USD
Principal Amount in USD
The remaining debt issuances for the 2015 to 2017 periods consisted primarily of commercial paper.
Repayment of debt in 2017 consisted primarily of the maturity of our $375 million fixed-rate senior notes that matured on
October 1, 2017. In 2016, there were no repayments of fixed-rate senior notes or floating-rate senior notes. Repayments of debt
in 2015 consisted primarily of the maturity of our $100 million facility bonds associated with our Philadelphia, Pennsylvania
airport facilities. The remaining repayments of debt during the 2015 through 2017 time period included paydowns of
commercial paper and scheduled principal payments on our capitalized lease obligations. We consider the overall fixed and
floating interest rate mix of our portfolio and the related overall cost of borrowing when planning for future issuances and non-
scheduled repayments of debt.
49
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. The following
is a summary of our commercial paper program (amount in millions):
Functional currency
outstanding balance
at year-end
Outstanding balance
at year-end ($)
Average balance
outstanding
Average balance
outstanding ($)
Average interest rate
$
€
2,458
622
$
$
$
2,458
745
$
€
3,203
2,163
941
$
$
2,163
1,062
0.88 %
(0.39)%
Functional currency
outstanding balance
at year-end
Outstanding balance
at year-end ($)
Average balance
outstanding
Average balance
outstanding ($)
Average interest rate
$
€
£
2,406
801
$
$
— $
2,406
844
$
€
— £
1,838
776
94
$
$
$
1,838
817
116
0.44 %
(0.28)%
0.50 %
$
3,250
Functional currency
outstanding balance
at year-end
Outstanding balance
at year-end ($)
Average balance
outstanding
Average balance
outstanding ($)
Average interest rate
$
€
£
2,279
310
234
$
$
$
$
$
€
£
2,279
339
347
2,965
2,159
10
241
$
$
$
2,159
11
368
0.13 %
(0.09)%
0.50 %
2017
USD
EUR
Total
2016
USD
EUR
GBP
Total
2015
USD
EUR
GBP
Total
The variation in cash received from common stock issuances was primarily due to the level of stock option exercises by
employees in the 2015 through 2017 period.
The cash outflows in other financing activities were impacted by several factors, primarily the repurchase of shares to
satisfy tax withholding obligations on vested employee stock awards of $247, $167 and $217 million for 2017, 2016 and 2015,
respectively. Net cash inflows (outflows) from the premium payments and settlements of capped call options for the purchase of
UPS class B shares were $54 million in both 2017 and 2016, and $(17) million for 2015.
Sources of Credit
See note 8 to the audited consolidated financial statements for a discussion of our available credit and debt covenants.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, which
we believe could have a material impact on financial condition or liquidity.
50
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Contractual Commitments
We have contractual obligations and commitments in the form of capital leases, operating leases, debt obligations,
purchase commitments and certain other liabilities. We intend to satisfy these obligations through the use of cash flow from
operations. The following table summarizes the expected cash outflow to satisfy our contractual obligations and commitments
as of December 31, 2017 (in millions):
$
$
$
$
2019
2022
2021
2018
2020
Commitment Type
Capital Leases
Operating Leases
Debt Principal
Debt Interest
Purchase Commitments (1)
Tax Act Repatriation Liability
Pension Funding
Other Liabilities
Total
(1) Purchase commitments include our announcement on February 1, 2018 for 14 new Boeing 747-8 freighters and four new Boeing 767 aircraft.
After 2022
500
$
371
13,342
5,604
13
187
—
—
$ 20,017
45
138
2,000
433
323
25
—
—
$ 2,964
49
186
2,551
475
1,926
25
—
—
$ 5,212
69
239
1,024
510
2,428
25
—
—
$ 4,295
79
305
1,009
544
2,462
25
—
—
$ 4,424
81
398
3,960
578
3,789
23
—
5
$ 8,834
$
Total
$
823
1,637
23,886
8,144
10,941
310
—
5
$ 45,746
Our capital lease obligations relate primarily to leases on aircraft. Capital leases, operating leases and purchase
commitments, as well as our debt principal obligations, are discussed further in note 8 to our consolidated financial statements.
The amount of interest on our debt was calculated as the contractual interest payments due on our fixed-rate debt, in addition to
interest on variable rate debt that was calculated based on interest rates as of December 31, 2017. The calculations of debt
interest take into account the effect of interest rate swap agreements. For debt denominated in a foreign currency, the
U.S. Dollar equivalent principal amount of the debt at the end of the year was used as the basis to calculate future interest
payments.
Purchase commitments represent contractual agreements to purchase assets, goods or services that are legally binding,
including contracts for aircraft, construction of new or expanded facilities and orders for technology equipment and vehicles. As
of December 31, 2017, we had firm commitments to purchase 14 new Boeing 747-8F cargo aircraft. The 14 aircraft are to be
delivered between 2017 and 2020. On February 1, 2018, we announced an order for 14 additional Boeing 747-8 freighters
previously under option and four new Boeing 767 aircraft to be delivered between 2019 and 2022.
On December 22, 2017, the United States enacted into law the Tax Act requiring a one-time transition tax on certain
unrepatriated earnings of foreign subsidiaries. Companies may elect to pay the tax over eight years based on an installment
schedule outlined in the Tax Act. We intend to make this election and have reflected our estimated transition tax due by year as
a contractual obligation.
There are no anticipated required minimum cash contributions to our qualified U.S. pension plans (these plans are
discussed further in note 4 to the audited consolidated financial statements). The amount of any minimum funding requirement,
as applicable, for these plans could change significantly in future periods, depending on many factors, including future plan
asset returns, discount rates and changes to pension plan funding regulations. A decline in discount rates or a sustained
significant decline in the world equity or bond markets could result in our domestic pension plans being subject to significantly
higher minimum funding requirements. Actual contributions made in future years could materially differ and consequently
required minimum contributions beyond 2020 cannot be reasonably estimated.
As discussed in note 5 to the audited consolidated financial statements, we are not currently subject to any minimum
contributions or surcharges with respect to the multiemployer pension and health and welfare plans in which we participate.
Contribution rates to these multiemployer pension and health and welfare plans are established through the collective
bargaining process. As we are not subject to any minimum contribution levels, we have not included any amounts in the
contractual commitments table with respect to these multiemployer plans.
51
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The contractual payments due for “other liabilities” primarily include commitment payments related to our investment in
certain partnerships.
The table above does not include approximately $212 million of liabilities for uncertain tax positions because we are
uncertain if or when such amounts will ultimately be settled in cash. Uncertain tax positions are further discussed in note 13 to
the consolidated financial statements.
As of December 31, 2017, we had outstanding letters of credit totaling approximately $1.084 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, 2017, we had $932 million of surety bonds written. As of December 31,
2017, we had unfunded loan commitments totaling $137 million associated with UPS Capital.
We believe that funds from operations and borrowing programs will provide adequate sources of liquidity and capital
resources to meet our expected long-term needs for the operation of our business, including anticipated capital expenditures, for
the foreseeable future.
Contingencies
See note 4 to the audited consolidated financial statements for a discussion of pension related matters and note 9 for a
discussion of judicial proceedings and other matters arising from the conduct of our business activities.
Collective Bargaining Agreements
Status of Collective Bargaining Agreements
As of December 31, 2017, we had approximately 280,000 employees employed under a national master agreement and
various supplemental agreements with local unions affiliated with the Teamsters. These agreements run through July 31, 2018.
We have approximately 2,700 pilots who are employed under a collective bargaining agreement with the Independent
Pilots Association ("IPA"), which runs through September 1, 2021.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became
amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727. In addition, approximately 3,100 of
our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under
collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”) that will
expire on July 31, 2019.
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 will remain in effect throughout the terms of the existing collective bargaining agreements.
New Accounting Pronouncements
Recently Adopted Accounting Standards
See note 1 to the audited consolidated financial statements for a discussion of recently adopted accounting standards.
Accounting Standards Issued But Not Yet Effective
See note 1 to the audited consolidated financial statements for a discussion of accounting standards issued, but not yet
effective.
52
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial
statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. As
indicated in note 1 to our consolidated financial statements, the amounts of assets, liabilities, revenue and expenses reported in
our financial statements are affected by estimates and judgments that are necessary to comply with generally accepted
accounting principles. We base our estimates on prior experience and other assumptions that we consider reasonable to our
circumstances. Actual results could differ from our estimates, which would affect the related amounts reported in our
consolidated financial statements. While estimates and judgments are applied in arriving at many reported amounts, we believe
that the following matters may involve a higher degree of judgment and complexity.
Contingencies
As discussed in note 9 to our consolidated financial statements, we are involved in various legal proceedings and
contingencies. The events that may impact our contingent liabilities are often unique and generally are not predictable. At the
time a contingency is identified, we consider all relevant facts as part of our evaluation. We record a liability for a loss when the
loss is probable of occurring and reasonably estimable. Events may arise that were not anticipated and the outcome of a
contingency may result in a loss to us that differs from our previously estimated liability. These factors could result in a material
difference between estimated and actual operating results. Contingent losses that are probable and estimable, excluding those
related to income taxes and self-insurance which are discussed further below, were not material to our financial position or
results of operations as of, and for the year ended, December 31, 2017. In addition, we have certain contingent liabilities that
have not been recognized as of December 31, 2017, because a loss is not reasonably estimable.
Goodwill and Intangible Impairment
We perform impairment testing of goodwill for each of our reporting units on an annual basis. In our U.S. Domestic
Package and International Package reporting segments, we have the following reporting units: Europe, Asia, Americas and
ISMEA (Indian Subcontinent, Middle East and Africa). In our Supply Chain & Freight segment we have the following
reporting units: Forwarding, Logistics, UPS Mail Innovations, UPS Freight, The UPS Store, UPS Capital, Marken and Coyote
Logistics. During the third quarter of 2017, we changed the measurement date of our annual goodwill impairment testing from
October 1st to July 1st. This change better aligns the timing of the goodwill impairment test with our long-term business
planning process. The change was not material to our consolidated financial statements as it did not result in the delay,
acceleration or avoidance of an impairment charge. Our annual goodwill impairment testing date is July 1st for each reporting
unit owned at the testing date. 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. If the qualitative assessment is not
conclusive and it is necessary to calculate the fair value of a reporting unit, then we utilize a two-step process to test goodwill
for impairment. First, a comparison of the fair value of the applicable reporting unit with the aggregate carrying value,
including goodwill, is performed. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform
the second step of the goodwill impairment test to determine the amount of impairment loss. The second step includes
comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.
We primarily determine the fair value of our reporting units using a discounted cash flow model (“DCF model”) and
supplement this with observable valuation multiples for comparable companies, as appropriate. The completion of the DCF
model requires that we make a number of significant assumptions to produce an estimate of future cash flows. These
assumptions include projections of future revenue, costs, capital expenditures and working capital changes. In addition, we
make assumptions about the estimated cost of capital and other relevant variables, as required, in estimating the fair value of
our reporting units. The projections that we use in our DCF model are updated annually and will change over time based on the
historical performance and changing business conditions for each of our reporting units. The determination of whether goodwill
is impaired involves a significant level of judgment in these assumptions, and changes in our business strategy, government
regulations, or economic or market conditions could significantly impact these judgments. We routinely monitor market
conditions and other factors to determine if interim impairment tests are necessary. If impairment indicators are present in
future periods, the resulting impairment charges could have a material impact on our results of operations.
53
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
None of the reporting units incurred any goodwill impairment charges in 2017, 2016 or 2015. Changes in our forecasts
could cause carrying values of our reporting units to exceed their fair values in future periods, potentially resulting in a
goodwill impairment charge. During the year, management monitored the actual performance of the business relative to the fair
value assumptions used during our annual goodwill impairment test. For the periods presented, no triggering events were
identified that required an interim impairment test. Based on most recent tests, the fair value of all our reporting units
substantially exceed their carrying value.
A trade name with a carrying value of $200 million and licenses with a carrying value of $5 million as of December 31,
2017 are considered to be indefinite-lived intangibles, and therefore are not amortized. Impairment tests for indefinite-lived
intangibles are performed on an annual basis. We determined that the income approach, specifically the relief from royalty
method, is the most appropriate valuation method for the trade name. The estimated fair value of the trade name is compared to
the carrying value of the asset. If the carrying value of the trade name 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. This valuation approach requires
that we make a number of assumptions to estimate fair value. These assumptions include projections of future revenues, market
royalty rates, tax rates, discount rates and other relevant variables. The projections we use in the model are updated annually
and will change over time based on the historical performance and changing business conditions.
All of our remaining recorded intangible assets are deemed to be finite-lived intangibles, and are thus amortized over their
estimated useful lives. Impairment tests for these intangible assets are only performed when a triggering event occurs that
indicates that the carrying value of the intangible may not be recoverable based on the undiscounted future cash flows of the
intangible. If the carrying amount of the intangible is determined not to be recoverable, a write-down to fair value is recorded.
Fair values are determined based on a DCF model. If impairment indicators are present in future periods, the resulting
impairment charges could have a material impact on our results of operations. There were no impairments of any indefinite-
lived or finite-lived intangible assets in 2017, 2016 or 2015.
Self-Insurance Accruals
We self-insure costs associated with workers’ compensation claims, automotive liability, health and welfare and general
business liabilities, up to certain limits. Insurance reserves are established for estimates of the loss that we will ultimately incur
on reported claims, as well as estimates of claims that have been incurred but not yet reported. Recorded balances are based on
reserve levels, which incorporate 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 such reserves. We believe our estimated
reserves for such claims are adequate, but actual experience in claim frequency and/or severity could materially differ from our
estimates and affect our results of operations.
Workers’ compensation, automobile liability and general liability insurance claims may take several years to completely
settle. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to fully resolve the claims.
A number of factors can affect the actual cost of a claim, including the length of time the claim remains open, trends in
healthcare costs and the results of related litigation. Furthermore, claims may emerge in future years for events that occurred in
a prior year at a rate that differs from previous actuarial projections. Changes in state legislation with respect to workers'
compensation can affect the adequacy of our self-insurance accruals. All of these factors can result in revisions to prior actuarial
projections and produce a material difference between estimated and actual operating results. Prior to 2017, outside actuarial
studies were performed semi-annually and we used the studies to estimate the liability in intervening quarters. Beginning in
2017, outside actuarial studies are now performed quarterly as we believe this provides us with better quarterly estimates of our
outstanding workers' compensation liability.
We sponsor a number of health and welfare insurance plans for our employees. These liabilities and related expenses are
based on estimates of the number of employees and eligible dependents covered under the plans, anticipated medical usage by
participants and overall trends in medical costs and inflation. Actual experience may differ from these estimates and, therefore,
produce a material difference between estimated and actual operating results.
54
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pension and Postretirement Medical Benefits
Our pension and other postretirement benefit costs are calculated using various actuarial assumptions and methodologies.
These assumptions include discount rates, healthcare cost trend rates, inflation, compensation increase rates, expected returns
on plan assets, mortality rates and other factors. The assumptions utilized in recording the obligations under our plans represent
our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance as
well as other factors that might cause future expectations to differ from past trends.
Differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations
and future expense. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate
used to value pension and postretirement benefit obligations as of the measurement date, (2) differences between the expected
and the actual return on plan assets, (3) changes in demographic assumptions including mortality, (4) participant experience
different from demographic assumptions and (5) changes in coordinating benefits with plans not sponsored by UPS.
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 plans' projected benefit obligations) in pension expense annually at
December 31st each year. The remaining components of pension expense (herein referred to as "ongoing net periodic benefit
cost"), primarily service and interest costs and the expected return on plan assets, are reported on a quarterly basis.
The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate, return on
assets, and healthcare cost trend rate for our pension and postretirement benefit plans, and the resulting increase (decrease) on
our obligations and expense as of, and for the year ended, December 31, 2017 (in millions).
Pension Plans
Discount Rate:
25 Basis Point
Increase
25 Basis Point
Decrease
Effect on ongoing net periodic benefit cost
Effect on net periodic benefit cost for amounts recognized outside the 10% corridor
Effect on projected benefit obligation
$
(49) $
(616)
(1,883)
Return on Assets:
Effect on ongoing net periodic benefit cost(1)
Effect on net periodic benefit cost for amounts recognized outside the 10% corridor(2)
Postretirement Medical Plans
Discount Rate:
Effect on ongoing net periodic benefit cost
Effect on net periodic benefit cost for amounts recognized outside the 10% corridor
Effect on accumulated postretirement benefit obligation
Healthcare Cost Trend Rate:
Effect on ongoing net periodic benefit cost
Effect on net periodic benefit cost for amounts recognized outside the 10% corridor
Effect on accumulated postretirement benefit obligation
(1) Amount calculated based on 25 basis point increase / decrease in the expected return on assets.
(2) Amount calculated based on 25 basis point increase / decrease in the actual return on assets.
(84)
(37)
3
(11)
(62)
1
10
16
50
1,492
2,007
84
37
(3)
13
73
(1)
(10)
(17)
55
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pension Backstop
UPS was a contributing employer to the Central States Pension Fund ("CSPF") until 2007 when we withdrew from the
plan and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a
collective bargaining agreement with the International Brotherhood of Teamsters ("IBT"), UPS agreed to provide coordinating
benefits in the UPS/IBT Full Time Employee Pension Plan ("UPS/IBT Plan") for UPS participants whose last employer was
UPS and who had not retired as of January 1, 2008 ("the UPS Transfer Group") in the event that benefits are lawfully reduced
by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF.
In December 2014, Congress passed the Multiemployer Pension Reform Act ("MPRA") which for the first time ever
allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and
government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S.
Department of the Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants,
including the UPS Transfer Group. We vigorously challenged the proposed benefit reduction plan because we believed that it
did not comply with the law and the CSPF failed to comply with its contractual obligation to obtain our consent to reduce
benefits to the UPS Transfer Group under the terms of the withdrawal agreement with the CSPF. On May 6, 2016, the U.S.
Department of the Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of
requirements set forth in the MPRA.
The CSPF has asserted that it will become insolvent in 2025, which could lead to the reduction of retirement benefits.
Although there are numerous factors that could affect the CSPF's funding status, if the CSPF were to become insolvent as they
have projected, UPS may be required to provide coordinating benefits, thereby increasing the current projected benefit
obligation for the UPS/IBT Plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its
funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.
The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of significant
uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether
the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to
which benefits are paid by the Pension Benefit Guaranty Corporation, our ability to successfully defend our legal positions as
well as the effect of discount rates, CSPF asset returns and various other actuarial assumptions.
We account for this potential obligation under Accounting Standards Codification Topic 715- Compensation- Retirement
Benefits (“ASC 715”). Under ASC 715 we are required to provide a best estimate of various actuarial assumptions, including
the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While
we currently believe the most likely solution to this matter and the broader systemic problems facing multiemployer pension
plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best
estimate of pension liabilities. Our best estimate as of the measurement date of December 31, 2017, does not incorporate this
solution. However, if a future change in law resulted in an obligation to provide coordinating benefits under the UPS/IBT Plan,
it may be a significant event, and may require us to remeasure the plan assets and projected benefit obligation of the UPS/IBT
Plan at the date the law is enacted.
Our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will submit
another benefit suspension application under the MPRA to forestall insolvency without reducing benefits to the UPS Transfer
Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing, we would be in a strong legal
position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction,
without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate
as of the measurement date of December 31, 2017, is that there is no liability to be recognized for additional coordinating
benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as the uncertainties are
resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in
accordance with ASC 715.
56
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Depreciation, Residual Value and Impairment of Fixed Assets
As of December 31, 2017, we had $22.118 billion of net fixed assets, the most significant category of which is aircraft. In
accounting for fixed assets, we make estimates about the expected useful lives and the expected residual values of the assets,
and the potential for impairment based on the fair values of the assets and the cash flows generated by these assets.
In estimating the lives and expected residual values of aircraft, we have relied upon actual experience with the same or
similar aircraft types. Subsequent revisions to these estimates could be caused by changes to our maintenance program, changes
in the utilization of the aircraft, governmental regulations on aging aircraft and changing market prices of new and used aircraft
of the same or similar types. We periodically evaluate these estimates and assumptions, and adjust the estimates and
assumptions as necessary. Adjustments to the expected lives and residual values are accounted for on a prospective basis
through depreciation expense. In estimating cash flows, we project future volume levels for our different air express products in
all geographic regions in which we do business. Adverse changes in these volume forecasts, or a shortfall of our actual volume
compared with our projections, could result in our current aircraft capacity exceeding current or projected demand. This
situation could lead to an excess of a particular aircraft, resulting in an aircraft impairment charge or a reduction of the expected
life of an aircraft (thus resulting in increased depreciation expense).
We review long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be
recoverable based on the undiscounted future cash flows of the asset. 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 review long-lived assets for impairment at the individual asset or the asset
group level for which the lowest level of independent cash flows can be identified. The circumstances that would indicate
potential impairment may include, but are not limited to, a significant change in the extent to which an asset is utilized and
operating or cash flow losses associated with the use of the asset.
There were no impairment charges on our property, plant and equipment during 2017, 2016 and 2015.
Fair Value Measurements
In the normal course of business, we hold and issue financial instruments that contain elements of market risk, including
derivatives, marketable securities, finance receivables, pension assets, other investments and debt. Certain of these financial
instruments are required to be recorded at fair value, principally derivatives, marketable securities, pension assets and certain
other investments. Fair values are based on listed market prices, when such prices are available. To the extent that listed market
prices are not available, fair value is determined based on other relevant factors, including dealer price quotations. Certain
financial instruments, including over-the-counter derivative instruments, are valued using pricing models that consider, among
other factors, contractual and market prices, correlations, time value, credit spreads and yield curve volatility factors. Changes
in the fixed income, foreign exchange and commodity markets will impact our estimates of fair value in the future, potentially
affecting our results of operations. A quantitative sensitivity analysis of our exposure to changes in commodity prices, foreign
currency exchange rates and interest rates is presented in the “Quantitative and Qualitative Disclosures about Market Risk”
section of this report.
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible
assets acquired 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. Such valuations require management to make significant
estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets
include, but are not limited to, future expected cash flows from acquired customers, technology and trade names from a market
participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from
estimates. 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. Upon the conclusion of the measurement period,
any subsequent adjustments are recorded to earnings.
57
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of income by legal entity and jurisdiction, tax credits, benefits, and deductions,
and in the calculation of deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue
and expense for tax and financial statement purposes, as well as tax, interest and penalties related to uncertain tax positions.
Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
We assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase
our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be
recoverable. We believe that we will ultimately recover a substantial majority of the deferred tax assets recorded on our
consolidated balance sheets. However, should there be a change in our ability to recover our deferred tax assets, our tax
provision would increase in the period in which we determined that the recovery was not likely.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. 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.
See note 13 to the audited consolidated financial statements for a discussion of impacts of the Tax Act.
58
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates and interest
rates. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. In
order to manage the risk arising from these exposures, we utilize a variety of commodity, foreign exchange and interest rate
forward contracts, options and swaps. A discussion of our accounting policies for derivative instruments and further disclosures
are provided in note 15 to the consolidated financial statements.
Commodity Price Risk
We are exposed to changes in the prices of refined fuels, principally jet-A, diesel and unleaded gasoline, as well as
changes in the price of natural gas. Currently, the fuel surcharges that we apply to our domestic and international package and
LTL services are the primary means of reducing the risk of adverse fuel price changes. In order to mitigate the impact of fuel
surcharges imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and
truckload services. Additionally, we periodically use a combination of option, forward and futures contracts to provide partial
protection from changing fuel and energy prices. As of December 31, 2017 and 2016, however, we had no commodity contracts
outstanding.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue, operating expenses and financing transactions in currencies other
than the local currencies in which we operate. We are exposed to currency risk from the potential changes in functional
currency values of our foreign currency-denominated assets, liabilities and cash flows. Our most significant foreign currency
exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We use
forwards as well as a combination of purchased and written options to hedge forecasted cash flow currency exposures. These
derivative instruments generally cover forecasted foreign currency exposures for periods of 12 to 48 months. We also utilize
forward contracts to hedge portions of our anticipated cash settlements of intercompany transactions subject to foreign currency
remeasurement.
Interest Rate Risk
We have issued debt instruments, including debt associated with capital leases, that accrue expense at fixed and floating
rates of interest. We use a combination of interest rate swaps as part of our program to manage the fixed and floating interest
rate mix of our total debt portfolio and related overall cost of borrowing. The notional amount, interest payment and maturity
dates of the swaps match the terms of the associated debt. We also utilize forward starting swaps and similar instruments to lock
in all or a portion of the borrowing cost of anticipated debt issuances. Our floating-rate debt and interest rate swaps subject us to
risk resulting from changes in short-term (primarily LIBOR) interest rates.
We also are subject to interest rate risk with respect to our pension and postretirement benefit obligations, as changes in
interest rates will effectively increase or decrease our liabilities associated with these benefit plans, which also results in
changes to the amount of pension and postretirement benefit expense recognized in future periods.
We have investments in debt securities, as well as cash-equivalent instruments, some of which accrue income at variable
rates of interest. Additionally, we hold a portfolio of finance receivables that accrue income at fixed and floating rates of
interest.
Sensitivity Analysis
The following analysis provides quantitative information regarding our exposure to foreign currency exchange risk,
interest rate risk and equity price risk embedded in our existing financial instruments. We utilize valuation models to evaluate
the sensitivity of the fair value of financial instruments with exposure to market risk that assume instantaneous, parallel shifts in
exchange rates, interest rate yield curves and commodity and equity prices. For options and instruments with non-linear returns,
models appropriate to the instrument are utilized to determine the impact of market shifts.
59
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
There are certain limitations inherent in the sensitivity analyses presented, primarily due to the assumption that exchange
rates change in a parallel fashion and that interest rates change instantaneously. In addition, the analyses are unable to reflect
the complex market reactions that normally would arise from the market shifts modeled. While this is our best estimate of the
impact of the specified interest rate scenarios, these estimates should not be viewed as forecasts. We adjust the fixed and
floating interest rate mix of our interest rate sensitive assets and liabilities in response to changes in market conditions.
Additionally, changes in the fair value of foreign currency derivatives and commodity derivatives are offset by changes in the
cash flows of the underlying hedged foreign currency and commodity transactions.
(in millions)
Change in Fair Value:
Currency Derivatives(1)
Change in Annual Interest Expense:
Variable Rate Debt(2)
Interest Rate Derivatives(2)
Change in Annual Interest Income:
Marketable Securities(3)
Shock-Test Result
As of December 31,
2017
2016
$
$
$
$
(447) $
(437)
51
55
2
$
$
$
49
58
—
(1) The potential change in fair value from a hypothetical 10% weakening of the U.S. Dollar against local currency exchange rates across all maturities.
(2) The potential change in annual interest expense resulting from a hypothetical 100 basis point increase in short-term interest rates, applied to our variable
rate debt and swap instruments (excluding hedges of anticipated debt issuances).
(3) The potential change in interest income resulting from a hypothetical 100 basis point increase in short-term interest rates, applied to our variable rate
investment holdings.
The sensitivity of our pension and postretirement benefit obligations to changes in interest rates is quantified in “Critical
Accounting Policies and Estimates”. The sensitivity in the fair value and interest income of our finance receivables due to
changes in interest rates was not material as of December 31, 2017 and 2016.
60
Item 8. Financial Statements and Supplementary Data
Table of Contents
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Statements of Consolidated Income
Statements of Consolidated Comprehensive Income
Statements of Consolidated Cash Flows
Notes to Consolidated Financial Statements
Note 1—Summary of Accounting Policies
Note 2—Cash and Investments
Note 3—Property, Plant and Equipment
Note 4—Company-Sponsored Employee Benefit Plans
Note 5—Multiemployer Employee Benefit Plans
Note 6—Goodwill and Intangible Assets
Note 7—Business Acquisitions
Note 8—Debt and Financing Arrangements
Note 9—Legal Proceedings and Contingencies
Note 10—Shareowners’ Equity
Note 11—Stock-Based Compensation
Note 12—Segment and Geographic Information
Note 13—Income Taxes
Note 14—Earnings Per Share
Note 15—Derivative Instruments and Risk Management
Note 16—Quarterly Information (Unaudited)
62
63
64
64
65
66
66
73
78
78
89
93
95
96
102
104
107
111
114
119
119
125
61
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareowners
United Parcel Service, Inc.
Atlanta, Georgia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of United Parcel Service, Inc. and subsidiaries (the
“Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, and
cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as
the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States
of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 21, 2018, expressed an unqualified opinion on the Company’s internal
control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 21, 2018
We have served as the Company's auditor since 1969.
62
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions)
ASSETS
Current Assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Current income taxes receivable
Other current assets
Total Current Assets
Property, Plant and Equipment, Net
Goodwill
Intangible Assets, Net
Investments and Restricted Cash
Deferred Income Tax Assets
Other Non-Current Assets
Total Assets
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper
Accounts payable
Accrued wages and withholdings
Hedge margin liabilities
Self-insurance reserves
Accrued group welfare and retirement plan contributions
Other current liabilities
Total Current Liabilities
Long-Term Debt
Pension and Postretirement Benefit Obligations
Deferred Income Tax Liabilities
Self-Insurance Reserves
Other Non-Current Liabilities
Shareowners’ Equity:
Class A common stock (173 and 180 shares issued in 2017 and 2016)
Class B common stock (687 and 689 shares issued in 2017 and 2016)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Deferred compensation obligations
Less: Treasury stock (1 share in 2017 and 2016)
Total Equity for Controlling Interests
Noncontrolling Interests
Total Shareowners’ Equity
Total Liabilities and Shareowners’ Equity
See notes to consolidated financial statements.
63
December 31,
2017
2016
$
3,320
749
8,773
1,573
1,133
15,548
22,118
3,872
1,964
483
265
1,153
$ 45,403
$
3,476
1,091
7,695
633
954
13,849
18,800
3,757
1,758
476
591
1,146
$ 40,377
$
4,011
3,872
2,521
17
705
677
905
12,708
20,278
7,061
757
1,765
1,804
$
3,681
3,042
2,317
575
670
598
847
11,730
12,394
12,694
112
1,794
1,224
2
7
—
5,858
(4,867)
37
(37)
1,000
30
1,030
$ 45,403
2
7
—
4,879
(4,483)
45
(45)
405
24
429
$ 40,377
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share amounts)
Revenue
Operating Expenses:
Compensation and benefits
Repairs and maintenance
Depreciation and amortization
Purchased transportation
Fuel
Other occupancy
Other expenses
Total Operating Expenses
Operating Profit
Other Income and (Expense):
Investment income and other
Interest expense
Total Other Income and (Expense)
Income Before Income Taxes
Income Tax Expense
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
Years Ended December 31,
2017
$ 65,872
2016
$ 60,906
2015
$ 58,363
34,588
1,600
2,282
10,989
2,690
1,155
5,039
58,343
7,529
34,770
1,538
2,224
9,129
2,118
1,037
4,623
55,439
5,467
31,028
1,400
2,084
8,043
2,482
1,022
4,636
50,695
7,668
72
(453)
(381)
7,148
2,238
4,910
5.64
5.61
$
$
$
50
(381)
(331)
5,136
1,705
3,431
3.89
3.87
$
$
$
15
(341)
(326)
7,342
2,498
4,844
5.38
5.35
$
$
$
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In millions)
Net Income
Change in foreign currency translation adjustment, net of tax
Change in unrealized gain (loss) on marketable securities, net of tax
Change in unrealized gain (loss) on cash flow hedges, net of tax
Change in unrecognized pension and postretirement benefit costs, net of tax
Comprehensive Income (Loss)
See notes to consolidated financial statements.
Years Ended December 31,
2017
2016
2015
$
$
4,910
86
(1)
(321)
(148)
4,526
$
$
3,431
(119)
—
(112)
(712)
2,488
$
$
4,844
(440)
(1)
6
489
4,898
64
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
Years Ended December 31,
2017
2016
2015
$
4,910
$
3,431
$
4,844
2,282
1,643
(7,794)
—
1,230
584
37
(1,022)
(982)
592
193
(241)
47
1,479
(5,227)
24
(1,634)
1,990
5
(134)
1
(4,975)
(250)
12,016
(3,939)
(1,813)
247
(2,771)
(203)
3,287
53
(156)
2,224
3,725
(2,668)
(21)
123
591
(198)
(704)
(14)
461
109
(561)
(25)
6,473
(2,965)
88
(4,816)
5,724
9
(547)
(59)
(2,566)
(88)
5,927
(3,805)
(2,678)
245
(2,643)
(98)
(3,140)
(21)
746
2,084
1,189
(1,229)
(80)
540
574
(185)
(452)
414
(147)
(63)
(6)
(53)
7,430
(2,379)
26
(7,415)
6,388
5
(1,904)
(30)
(5,309)
2,529
3,783
(2,724)
(2,702)
249
(2,525)
(175)
(1,565)
(117)
439
3,476
3,320
428
1,559
2,730
3,476
373
2,064
2,291
2,730
345
1,913
$
$
$
$
$
$
$
$
$
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
Pension and postretirement benefit expense
Pension and postretirement benefit contributions
Self-insurance reserves
Deferred tax expense
Stock compensation expense
Other (gains) losses
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable
Other assets
Accounts payable
Accrued wages and withholdings
Other liabilities
Other operating activities
Net cash from operating activities
Cash Flows From Investing Activities:
Capital expenditures
Proceeds from disposals of property, plant and equipment
Purchases of marketable securities
Sales and maturities of marketable securities
Net decrease in finance receivables
Cash paid for business acquisitions
Other investing activities
Net cash used in investing activities
Cash Flows From Financing Activities:
Net change in short-term debt
Proceeds from long-term borrowings
Repayments of long-term borrowings
Purchases of common stock
Issuances of common stock
Dividends
Other financing activities
Net cash from (used in) financing activities
Effect Of Exchange Rate Changes On Cash And Cash Equivalents
Net Increase (Decrease) In Cash And Cash Equivalents
Cash And Cash Equivalents:
Beginning of period
End of period
Cash Paid During The Period For:
Interest (net of amount capitalized)
Income taxes (net of refunds and overpayments)
See notes to consolidated financial statements.
65
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
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.
UPS concentrates its operations in the field of transportation services, primarily domestic and international letter and
package delivery. Through our Supply Chain & Freight subsidiaries, we are also a global provider of specialized transportation,
logistics and financial 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.
Revenue Recognition
U.S. Domestic and International Package Operations—Revenue is recognized upon delivery of a letter or package.
Forwarding and Logistics—Freight forwarding revenue and the expense related to the transportation of freight are
recognized at the time the services are completed. Truckload freight brokerage revenue and related transportation costs are
recognized upon delivery of the shipment by a third-party carrier. Logistics and distribution revenue is recognized upon
performance of the service provided. Customs brokerage revenue is recognized upon completing documents necessary for
customs entry purposes.
UPS Freight—Revenue is recognized upon delivery of a less-than-truckload (“LTL”) or truckload (“TL”) shipment.
In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some
transportation services. In situations where we act as principal party to the transaction, we recognize revenue on a gross basis;
in circumstances where we act as an agent, we recognize revenue net of the cost of the purchased transportation.
Financial Services—Income on loans and direct finance leases is recognized on the effective interest method. Accrual of
interest income is suspended at the earlier of the time at which collection of an account becomes doubtful or the account
becomes 90 days delinquent. Income on operating leases is recognized on the straight-line method over the terms of the
underlying leases.
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, when purchased, to be cash equivalents. The carrying amount of these
securities approximates fair value because of the short-term maturity of these instruments.
Investments
Marketable securities are either classified as trading or available-for-sale securities and are carried at fair value.
Unrealized gains and losses on trading securities are reported as investment income and other on the statements of consolidated
income. Unrealized gains and losses on available-for-sale securities are reported as accumulated other comprehensive income
(“AOCI”), 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 and other,
along 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 and other.
66
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.
Accounts Receivable
Losses on accounts receivable are recognized when they are incurred, which requires us to make our best estimate of the
probable losses inherent in our customer receivables at each balance sheet date. These estimates require consideration of
historical loss experience, adjusted for current conditions, trends in customer payment frequency and judgments about the
probable effects of relevant observable data, including present economic conditions and the financial health of specific
customers and market sectors. Our risk management process includes standards and policies for reviewing major account
exposures and concentrations of risk.
Our total allowance for doubtful accounts as of December 31, 2017 and 2016 was $104 and $102 million, respectively.
Our total provision for doubtful accounts charged to expense during the years ended December 31, 2017, 2016 and 2015 was
$133, $116 and $121 million, respectively.
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 market. Total inventories were $404 and $342 million as of December 31, 2017 and 2016, respectively, and are included in
“other current assets” on the consolidated balance sheets.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and amortization are provided by the straight-line method
over the estimated useful lives of the assets, which are as follows: Vehicles—3 to 15 years; Aircraft—12 to 30 years; Buildings
—20 to 40 years; Leasehold Improvements—lesser of asset useful life or lease term; Plant Equipment—3 to 20 years;
Technology Equipment—3 to 5 years. 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 period of certain 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 $49, $14 and $13 million for 2017, 2016, and 2015, respectively.
We review long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be
recoverable based on the undiscounted future cash flows of the asset. 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 review long-lived assets for impairment at the individual asset or the asset
group level for which the lowest level of independent cash flows can be identified.
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. A reporting unit is the operating segment unless, for
businesses within that operating segment, discrete financial information is prepared and regularly reviewed by management, in
which case such a component business is the reporting unit.
During the third quarter of 2017, we changed the measurement date of our annual goodwill impairment test from October
1st to July 1st. This change better aligns the timing of the goodwill impairment test with our long-term business planning
process. The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or
avoidance of an impairment charge.
67
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 and it is necessary to calculate the fair value of a reporting unit, then we
utilize a two-step process to test goodwill for impairment. First, a comparison of the fair value of the applicable reporting unit
with the aggregate carrying value, including goodwill, is performed. If the carrying amount of a reporting unit exceeds its
calculated fair value, then the second step is performed, and an impairment charge is recognized for the amount, if any, by
which the carrying amount of goodwill exceeds its implied fair value. We primarily determine the fair value of our reporting
units using a discounted cash flow model and supplement this with observable valuation multiples for comparable companies,
as appropriate.
A trade name with a carrying value of $200 million and licenses with a carrying value of $5 million as of December 31,
2017 are considered to be indefinite-lived intangibles, and therefore are not amortized. Indefinite-lived intangible assets are
reviewed for impairment at least annually. We determined that the income approach, specifically the relief from royalty method,
is the most appropriate valuation method to estimate the fair value of the trade name. The estimated fair value of the trade name
is compared to the carrying value of the asset. If the carrying value of the trade name 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 the estimated useful lives of the assets, which range from 2 to 22
years. Capitalized software is generally amortized over 7 years.
Self-Insurance Accruals
We self-insure costs associated with workers’ compensation claims, automotive liability, health and welfare and general
business liabilities, up to certain limits. Insurance reserves are established for estimates of the loss that we will ultimately incur
on reported claims, as well as estimates of claims that have been incurred but not yet reported. Recorded balances are based on
reserve levels, which incorporate 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 such reserves.
Workers’ compensation, automobile liability and general liability insurance claims may take several years to completely
settle. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to fully resolve the claims.
A number of factors can affect the actual cost of a claim, including the length of time the claim remains open, trends in
healthcare costs and the results of related litigation. Furthermore, claims may emerge in future years for events that occurred in
a prior year at a rate that differs from previous actuarial projections. Changes in state legislation with respect to workers'
compensation can affect the adequacy of our self-insurance accruals. All of these factors can result in revisions to prior actuarial
projections and produce a material difference between estimated and actual operating results. Prior to 2017, outside actuarial
studies were performed semi-annually and we used the studies to estimate the liability in intervening quarters. Beginning in
2017, outside actuarial studies are now performed quarterly as we believe this provides us with better quarterly estimates of our
outstanding workers' compensation liability.
We sponsor a number of health and welfare insurance plans for our employees. These liabilities and related expenses are
based on estimates of the number of employees and eligible dependents covered under the plans, 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 pension and postretirement medical benefits. These
pension and postretirement medical benefit costs for company-sponsored benefit plans 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 remeasurement for any of our plans.
68
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 plans' projected benefit obligations) in pension expense annually at
December 31st each year. The remaining components of pension expense, primarily service and interest costs and the expected
return on plan assets, are recorded on a quarterly basis.
Effective July 1, 2016, the UPS Retirement Plan was closed to new non-union participants. For eligible employees hired
after July 1, 2016, UPS contributes annually to a defined contribution plan. We recognize expense for the required contribution
quarterly, and we recognize a liability for any contributions due and unpaid (included in “other current liabilities”).
During June 2017, we amended the UPS Retirement Plan and Excess Coordinating Plans to cease accrual of additional
benefits for future service for non-union participants effective January 1, 2023. We remeasured plan assets and pension benefit
obligations compensation for the affected pension plans as of June 30, 2017 to recognize the impact of this change.
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 (included in “other current liabilities”).
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.
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 atctivity. Such a change in recognition or measurement could result in the
recognition of a tax benefit or an additional charge to the tax provision.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income
("GILTI") provisions of the Tax Cuts and Jobs Act (the "Tax Act"). The GILTI provisions impose a tax on foreign income in
excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for
deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period costs are both acceptable
methods subject to an accounting policy election. We elect to treat any potential GILTI inclusions as period costs.
Foreign Currency Translation and Remeasurement
We translate the results of operations of our foreign subsidiaries using average exchange rates during 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 AOCI. Pre-tax foreign currency transaction gains from remeasurement, net of hedging, included in
other operating expenses, investment income and interest expense were $3, $5 and $7 million in 2017, 2016 and 2015,
respectively.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
All 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 issue
employee share-based awards under the UPS Incentive Compensation Plan that are subject to specific vesting conditions;
including service conditions, where the awards cliff vest or vest ratably over a three or five year period (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 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 not measured at fair value on a recurring basis; however, they
are subject to fair value adjustments in certain circumstances, such as when there is evidence of an impairment. A general
description of the valuation methodologies used for assets and liabilities measured at fair value, including the general
classification of such assets and liabilities pursuant to the valuation hierarchy, is included in each footnote with fair value
measurements present.
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible
assets acquired 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. Such valuations require management to make significant
estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets
include, but are not limited to, future expected cash flows from acquired customers, acquired technology and trade names from
a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates. 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. Upon the conclusion of the
measurement period, any subsequent adjustments are recorded to earnings.
Derivative Instruments
All financial derivative instruments are recorded on our consolidated balance sheets at fair value. Derivatives not
designated as hedges must be adjusted to fair value through income. If a derivative is designated as a hedge, changes in its fair
value that are considered to be effective, as defined, either (depending on the nature of the hedge) offset the change in fair value
of the hedged assets, liabilities or firm commitments through income, or are recorded in AOCI until the hedged item is recorded
in income. Any portion of a change in a hedge’s fair value that is considered to be ineffective, or is excluded from the
measurement of effectiveness, is recorded immediately in income.
Adoption of New Accounting Standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that
simplifies the income tax accounting and cash flow presentation related to share-based compensation by requiring the
recognition of all excess tax benefits and deficiencies directly on the income statement and classification as cash flows from
operating activities on the statement of cash flows. This new guidance became effective for us in the first quarter of 2017 and
we adopted the statements of consolidated cash flows presentation on a prospective basis. The impact to income tax expense in
2017 in the statements of consolidated income was a benefit of $71 million. Additionally, we have elected to continue
estimating forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2015, the FASB issued an accounting standards update that simplifies the accounting for measurement-
period adjustments related to business combinations. This update removes the requirement to retrospectively apply adjustments
made to estimated amounts recognized in a business combination. This update permits the purchaser to adjust the estimated
amounts in the reporting period in which the adjustment amounts are determined. This new guidance would have become
effective for us in the first quarter of 2016; however, we elected to early adopt this standard in the third quarter of 2015. This
accounting standards update did not have a material impact on our consolidated financial position or results of operations.
Accounting Standards Issued But Not Yet Effective
In February 2018, the FASB issued an accounting standards update that allows a reclassification from AOCI to retained
earnings for stranded tax effects resulting from the Tax Act. The guidance will generally be applied either in the period of
adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax
rate in the Tax Act is recognized. The update becomes effective for us in the first quarter of 2019, but early adoption is
permitted. We are currently evaluating this update to determine the full impact of its adoption.
In August 2017, the FASB issued an accounting standards update to enhance recognition of the economic results of
hedging activities in the financial statements. In addition, this update makes certain targeted improvements to simplify the
application of the hedge accounting guidance and increase transparency regarding the scope and results of hedging activities.
The guidance will generally be applied prospectively and becomes effective for us in the first quarter of 2019, but early
adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this
accounting standards update to have a material impact on our consolidated financial position, results of operations or cash
flows.
In May 2017, the FASB issued an accounting standards update to provide clarity and reduce complexity on when to apply
modification accounting to existing share-based payment awards. The guidance will be applied prospectively. We adopted this
standard on January 1, 2018. This accounting standards update does not have a material impact on our consolidated financial
position, results of operations or cash flows.
In March 2017, the FASB issued an accounting standards update to require the premium on callable debt securities to be
amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount would not be
impacted by the proposed update. Under current GAAP, premiums on callable debt securities are generally amortized over the
contractual life of the security. Only in cases when an entity has a large number of similar securities is it allowed to consider
estimates of principal prepayments. Amortization of the premium over the contractual life of the instrument can result in losses
being recorded for the unamortized premium if the issuer exercises the call feature prior to maturity. The standard will be
effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine
the full impact of its adoption but do not expect this accounting standards update to have a material impact on our consolidated
financial position, results of operations or cash flows.
In March 2017, the FASB issued an accounting standards update to improve the presentation of net periodic pension cost
and net periodic postretirement benefit cost. The update requires employers to report the current service cost component in the
same line item as other compensation costs arising from services rendered by employees during the period. The other
components of net benefit cost are required to be presented separately from service cost and outside of income from operations.
In accordance with the update, only the service cost component will be eligible for capitalization. The guidance in this update
will be applied retrospectively for the presentation of service cost and other components of net benefit cost, and prospectively
for the capitalization of the service cost component in assets. We adopted this standard on January 1, 2018. As a result of this
update, the net amount of interest cost, prior service cost, expected return on plan assets and the actuarial gain (loss) in excess
of the 10% corridor will be presented as other income (expense). For the years ended December 31, 2017, 2016 and 2015, non-
service cost components amounted to an $11 million expense, a $2.236 billion expense, and a $420 million benefit,
respectively, which were recognized in "Compensation and benefits" on the statements of consolidated income. After adoption,
the non-service cost components will be recognized in "Other Income and (Expense)" on the statements of consolidated
income.
In January 2017, the FASB issued an accounting standards update to simplify the accounting for goodwill impairment.
The update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill
impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. The standard will be effective for us in the first quarter of 2020, but early adoption is permitted. We are
currently evaluating this update to determine the full impact of its adoption but do not expect this accounting standards update
to have a material impact on our consolidated financial position, results of operations or cash flows.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2016, the FASB issued an accounting standards update that is intended to reduce diversity in practice by
adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows.
The guidance in this update will be applied retrospectively. We adopted this standard on January 1, 2018. As a result of this
update, restricted cash will be included within cash and cash equivalents on our statements of consolidated cash flows. As of
December 31, 2017 and 2016, we had $449 and $445 million, respectively, in investments and restricted cash primarily
associated with our self-insurance requirements.
In August 2016, the FASB issued an accounting standards update that addresses the classification and presentation of
specific cash flow issues that currently result in diverse practices. The guidance also clarifies how the predominance principle
should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will
be applied retrospectively. We adopted this standard on January 1, 2018. We have evaluated the impact of this standard on our
statements of consolidated cash flows, and have determined that this standard does not have a material impact.
In February 2016, the FASB issued an accounting standards update that requires lessees to recognize a right-of-use asset
and lease liability on the balance sheet for all leases with terms beyond twelve months. Although the distinction between
operating and finance leases will continue to exist under the new standard, the recognition and measurement of expenses and
cash flows will not change significantly from the current treatment. This new guidance requires modified retrospective
application and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently
evaluating this update to determine the full impact of its adoption on our consolidated financial position, results of operations,
cash flows and related disclosures, as well as the impact of adoption on policies, practices and systems. As of December 31,
2017, we have $1.637 billion of future minimum operating lease commitments that are not currently recognized on our
consolidated balance sheet (see note 8). Therefore, we expect material changes to our consolidated balance sheets.
In January 2016, the FASB issued an accounting standards update which addresses certain aspects of the recognition,
measurement, presentation and disclosure of financial instruments. We adopted this standard on January 1, 2018. This
accounting standards update does not have a material impact on our consolidated financial position, results of operations or
cash flows.
In May 2014, the FASB issued an accounting standards update that changes the revenue recognition for companies that
enter into contracts with customers to transfer goods or services. The standard is a comprehensive new revenue recognition
model that requires revenue to be recognized in a manner depicting the transfer of goods or services to a customer at an amount
that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued a
number of updates to this standard. We adopted the standard on January 1, 2018. Companies may use either a full retrospective
or a modified retrospective approach to adopt this standard. We adopted the standard using a full retrospective approach.
We have determined that revenue recognition will be accelerated for the transportation businesses as the standard requires
revenue to be recognized as control is transferred to the customer over time rather than upon delivery. We have determined that
the impact of this change to the statements of consolidated income is not material.
The standard also requires us to evaluate whether our businesses promise to transfer services to the customer itself (as a
principal) or to arrange for services to be provided by another party (as an agent). To make that determination, the standard uses
a control model rather than the risks-and-rewards model in current GAAP. Based on our evaluation of the control model, we
determined that certain Supply Chain & Freight businesses act as the principal rather than the agent within their revenue
arrangements. This change will require the affected businesses to report transportation revenue gross of associated purchased
transportation costs rather than net of such amounts within the statements of consolidated income. This change will result in
reclassifications of approximately $709 and $720 million from contra-revenue to operating expenses on the statements of
consolidated income for the periods ended December 31, 2017 and 2016, respectively.
In addition to completing our review of contracts and quantifying the impacts on the consolidated financial statements,
we have analyzed our internal control over financial reporting framework and determined that there will be new controls added
around contract inception and contract modifications, as well as periodic reviews of material contracts. In addition, we have
reviewed the impacts of this standard on our footnote disclosures for periods subsequent to January 1, 2018. We have
determined that the adoption of this standard will result in several additional disclosures, including but not limited to additional
information around our performance obligations, the timing of revenue recognition, remaining performance obligations at
period end, contract assets and liabilities and significant judgments made that impact the amount and timing of revenue from
our contracts with customers.
72
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. CASH AND INVESTMENTS
The following is a summary of marketable securities classified as trading and available-for-sale at December 31, 2017
and 2016 (in millions):
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
2017
Current trading marketable securities:
Corporate debt securities
Carbon credit investments(1)
Total trading marketable securities
Current available-for-sale marketable securities:
U.S. government and agency debt securities
Mortgage and asset-backed debt securities
Corporate debt securities
Equity securities
Non-U.S. government debt securities
Total available-for-sale marketable securities
$
75
$
— $
— $
77
152
286
86
201
2
9
584
16
16
—
—
1
—
—
1
—
—
(3)
—
(1)
—
—
(4)
Total current marketable securities
$
736
$
17
$
(4) $
75
93
168
283
86
201
2
9
581
749
2016
Current trading marketable securities:
Corporate debt securities
Carbon credit investments(1)
Total trading marketable securities
Current available-for-sale marketable securities:
U.S. government and agency debt securities
Mortgage and asset-backed debt securities
Corporate debt securities
Equity securities
Non-U.S. government debt securities
Total available-for-sale marketable securities
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
$
427
80
507
314
90
167
2
3
576
$
— $
10
10
— $
—
—
—
1
—
—
—
1
(2)
—
(1)
—
—
(3)
427
90
517
312
91
166
2
3
574
Total current marketable securities
$
1,083
$
11
$
(3) $
1,091
(1) These investments are hedged with forward contracts that are not designated in hedging relationships. See note 15 for offsetting statement of consolidated
income impact.
Total current marketable securities that were pledged as collateral for our self-insurance requirements had an estimated
fair value of $579 and $572 million at December 31, 2017 and 2016, respectively.
The gross realized gains on sales of available-for-sale securities totaled $0, $1 and $1 million in 2017, 2016, and 2015,
respectively. The gross realized losses on sales of available-for-sale securities totaled $2, $1 and $1 million in 2017, 2016, and
2015, respectively.
There were no material impairment losses recognized on marketable securities during 2017, 2016 or 2015.
73
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Other-Than-Temporary Impairments
We have concluded that no material other-than-temporary impairment losses existed as of December 31, 2017. In making
this determination, we considered the financial condition and prospects of the issuer, the magnitude of the losses compared with
the investments’ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the
security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in
market value occurs.
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, 2017 (in millions):
Less Than 12 Months
12 Months or More
Total
U.S. government and agency debt securities
Mortgage and asset-backed debt securities
Corporate debt securities
Non-U.S. government debt securities
Fair Value
183
$
36
101
8
Total marketable securities
$
328
$
(2) $
—
(1)
—
(3) $
Unrealized
Losses
$
Fair Value
90
25
Unrealized
Losses
$
Fair Value
273
61
(1) $
—
Unrealized
Losses
$
70
—
185
$
—
—
(1) $
171
8
513
$
(3)
—
(1)
—
(4)
The unrealized losses for the corporate debt securities and U.S. government and agency debt securities are primarily due
to changes in market interest rates. We have both the intent and ability to hold the securities contained in the previous table for a
time necessary to recover the cost basis.
Maturity Information
The amortized cost and estimated fair value of marketable securities at December 31, 2017, 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.
Due in one year or less
Due after one year through three years
Due after three years through five years
Due after five years
Equity and carbon credit investment securities
Cost
Estimated
Fair Value
$
$
112
453
21
73
659
77
736
$
$
112
449
21
74
656
93
749
74
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-Current Investments and Restricted Cash
Investments and Restricted Cash are primarily associated with our self-insurance requirements. We entered into an escrow
agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral
to the insurance carrier, which is invested in money market funds and corporate and municipal bonds. Collateral provided is
reflected in "other investing activities" in the statements of consolidated cash flows. At December 31, 2017 and 2016, we had
$449 and $445 million in self-insurance investments and restricted cash, respectively.
We held a $19 and $18 million investment in a variable life insurance policy to fund benefits for the UPS Excess
Coordinating Benefit Plan at December 31, 2017 and 2016, respectively. The quarterly change in investment fair value is
recognized in "investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash
related to the acquisition and disposition of certain assets, primarily real estate, of $15 and $13 million at December 31, 2017
and 2016, respectively.
The amounts described above are classified as “investments and restricted cash” in the consolidated balance sheets.
Fair Value Measurements
Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds,
and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities
utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using
market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified
as “other non-current investments” in the tables below, and as “other non-current assets” in the consolidated balance sheets).
These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data.
These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash
flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash
flows for each partnership. The weighted-average discount rates used to value these investments were 7.56% and 8.06% as of
December 31, 2017 and 2016, respectively. These inputs and the resulting fair values are updated on a quarterly basis.
75
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, 2017 and 2016, 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
2017
Marketable securities:
U.S. government and agency debt securities
Mortgage and asset-backed debt securities
Corporate debt securities
Equity securities
Non-U.S. government debt securities
Carbon credit investments
Total marketable securities
Other non-current investments
Total
$
$
283
—
—
—
—
93
376
19
395
$
$
— $
86
276
2
9
—
373
—
373
$
— $
—
—
—
—
—
—
6
6
$
283
86
276
2
9
93
749
25
774
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
2016
Marketable securities:
U.S. government and agency debt securities
Mortgage and asset-backed debt securities
Corporate debt securities
Equity securities
Non-U.S. government debt securities
Carbon credit investments
Total marketable securities
Other non-current investments
Total
$
$
312
—
—
—
—
90
402
18
420
$
$
— $
91
593
2
3
—
689
—
689
$
— $
—
—
—
—
—
—
13
13
$
312
91
593
2
3
90
1,091
31
1,122
76
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the years
ended December 31, 2017 and 2016 (in millions).
Balance on January 1, 2016
Transfers into (out of) Level 3
Net realized and unrealized gains (losses):
Included in earnings (in investment income)
Included in accumulated other comprehensive income (pre-tax)
Purchases
Settlements
Balance on December 31, 2016
Transfers into (out of) Level 3
Net realized and unrealized gains (losses):
Included in earnings (in investment income)
Included in accumulated other comprehensive income (pre-tax)
Purchases
Settlements
Balance on December 31, 2017
Marketable
Securities
Other
Investments
Total
$
$
$
— $
—
—
—
—
—
— $
—
—
—
—
—
— $
$
32
—
(19)
—
—
—
13
—
(7)
—
—
—
6
$
$
32
—
(19)
—
—
—
13
—
(7)
—
—
—
6
77
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including both owned assets as well as assets subject to capital leases, consists of the
following as of December 31, 2017 and 2016 (in millions):
Vehicles
Aircraft
Land
Buildings
Building and leasehold improvements
Plant equipment
Technology equipment
Equipment under operating leases
Construction-in-progress
Less: Accumulated depreciation and amortization
$
2017
2016
$
9,365
16,248
1,582
4,035
3,934
9,387
1,907
29
2,239
48,726
8,638
15,653
1,397
3,439
3,612
8,430
1,741
29
735
43,674
(26,608)
22,118
$
(24,874)
18,800
$
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 may not be recoverable. No impairment charges on property, plant and equipment were recorded in 2017,
2016 or 2015.
NOTE 4. 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, the UPS
Pension Plan, the UPS/IBT Full-Time Employee Pension Plan and the UPS Excess Coordinating Benefit Plan, a non-qualified
plan.
The UPS Retirement Plan is noncontributory and includes substantially all eligible employees of participating domestic
subsidiaries 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 levels 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, 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 for amounts that exceed the benefit limits described above.
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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the year ended December 31, 2017, we amended the UPS Retirement Plan and the UPS Excess Coordinating Benefit
Plan to cease accruals of additional benefits for future service and compensation for non-union participants effective January 1,
2023. We remeasured plan assets and pension benefit obligations for the affected pension plans as of June 30, 2017, resulting in
a net actuarial gain of $569 million. This reflected a curtailment gain of $1.525 billion resulting from the benefit plan changes
that was partially offset by net actuarial losses of $956 million, driven by a reduction of approximately 32 basis points in the
discount rate compared to December 31, 2016, offset by actual asset returns approximately 275 basis points above our expected
return as of the remeasurement date. The net curtailment gain reduced the actuarial loss recorded in "Accumulated other
comprehensive loss" in the equity section of the consolidated balance sheet. As actuarial losses were within the corridor
(defined as 10% of the greater of the fair value of plan assets and the plan's projected benefit obligation), there was no impact to
the statement of consolidated income as a result of this remeasurement.
The UPS Retirement Plan was closed to new non-union participants effective July 1, 2016. The Company amended the
UPS 401(k) Savings Plan so that employees who previously would have been eligible for participation in the UPS Retirement
Plan receive, in addition to current benefits under the UPS 401(k) Savings Plan, a UPS Retirement Contribution. For employees
eligible to receive the Retirement Contribution, UPS will contribute 3% to 8% of eligible pay to the UPS 401(k) Savings Plan
based on years of vesting service and business unit. Contributions will be made annually in cash to the accounts of participants
who are employed on December 31st of each calendar year.
During the fourth quarter of 2016, certain former U.S. employees were offered the option to receive a one-time payment
of their vested pension benefit. Approximately 22,000 participants accepted this option, accelerating $685 million in benefit
payments during 2016 while reducing the number of participants who are due future payments from U.S. pension plans. As the
cost of these settlements did not exceed the plans' service cost and interest cost for the year, the impact of the settlement was not
recognized in earnings.
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.
U.S. Postretirement Medical Benefits
We also sponsor postretirement medical plans in the U.S. that provide healthcare benefits to our 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 also sponsor several defined contribution plans for all employees not covered under collective bargaining agreements,
and for certain employees covered under collective bargaining agreements. The Company matches, in shares of UPS common
stock or cash, a portion of the participating employees’ contributions. Matching contributions charged to expense were $119,
$111 and $104 million for 2017, 2016 and 2015, respectively.
Effective June 23, 2017, the Company amended the UPS 401(k) Savings Plan so that non-union employees who currently
participate in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, earn a UPS
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 statement of consolidated income for the year ended December 31, 2017 as a result of
this change.
As noted above, effective July 1, 2016, the UPS 401(k) Savings Plan was amended so that newly hired employees who
previously would have been eligible for participation in the UPS Retirement Plan began receiving a UPS Retirement
Contribution. Contributions associated with this amendment charged to expense were $23 and $4 million for 2017 and 2016
respectively.
79
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contributions are also made to defined contribution money purchase plans under certain collective bargaining
agreements. Amounts charged to expense were $91, $82 and $83 million for 2017, 2016 and 2015, 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
2017
2016
2015
U.S. Postretirement
Medical Benefits
2016
2017
2015
International
Pension Benefits
2016
2017
2015
Net Periodic Benefit Cost:
Service cost
Interest cost
Expected return on assets
Amortization of prior service cost
Actuarial (gain) loss
Curtailment and settlement loss
Net periodic benefit cost
Actuarial Assumptions
$ 1,543
1,813
(2,883)
192
729
—
$ 1,394
$ 1,412
1,828
(2,516)
166
2,520
—
$ 3,410
$ 1,527
1,694
(2,489)
168
70
—
970
$
$
29
112
(7)
7
53
—
$ 194
$
28
124
(6)
5
17
—
$ 168
$
34
117
(17)
5
17
—
$ 156
$
$
60
40
(66)
1
18
2
55
$
49
41
(58)
1
114
—
$ 147
$
$
48
44
(61)
1
31
—
63
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
Discount rate
Rate of compensation increase
Expected return on assets
2017
4.41%
4.27%
8.75%
2016
4.86%
4.29%
8.75%
2015
4.40%
4.29%
8.75%
2017
4.23%
N/A
8.75%
2016
4.79%
N/A
8.75%
2015
4.18%
N/A
8.75%
2017
2.75%
3.17%
5.65%
2016
3.51%
3.04%
5.73%
2015
3.56%
3.08%
6.03%
The table below provides the weighted-average actuarial assumptions used to determine the benefit obligations of our
plans.
Discount rate
Rate of compensation increase
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
2017
2016
2017
2016
2017
2016
3.84%
4.25%
4.41%
4.27%
3.82%
N/A
4.23%
N/A
2.78%
3.23%
2.75%
3.17%
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 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, 2017, the impact of each basis point change in the discount rate on the projected benefit obligation of
the pension and postretirement medical benefit plans is as follows (in millions):
One basis point increase in discount rate
One basis point decrease in discount rate
Increase (Decrease) in the Projected Benefit Obligation
Pension Benefits
Postretirement Medical Benefits
(2)
3
(75) $
$
80
$
$
80
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Society of Actuaries ("SOA") published mortality tables and improvement scales are used in developing the best
estimate of mortality for U.S. plans. In October 2016, the SOA published an updated improvement scale which reduced
expected mortality improvements from previously published scales. Based on our perspective of future longevity, we updated
the mortality assumptions to incorporate this updated scale 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
fiscal 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 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.
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 Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the
plan and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a
collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating
benefits in the UPS/IBT Full-Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was
UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced
by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF.
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever
allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and
government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S.
Department of the Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants,
including the UPS Transfer Group. We vigorously challenged the proposed benefit reduction plan because we believed that it
did not comply with the law and that the CSPF failed to comply with its contractual obligation to obtain our consent to reduce
benefits to the UPS Transfer Group under the terms of the withdrawal agreement with the CSPF. On May 6, 2016, the U.S.
Department of the Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of
requirements set forth in the MPRA.
The CSPF has asserted that it will become insolvent in 2025, which could lead to the reduction of retirement benefits.
Although there are numerous factors that could affect the CSPF’s funding status, if the CSPF were to become insolvent as they
have projected, UPS may be required to provide coordinating benefits, thereby increasing the current projected benefit
obligation for the UPS/IBT Plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its
funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.
The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of significant
uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether
the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to
which benefits are paid by the Pension Benefit Guaranty Corporation, our ability to successfully defend our legal positions as
well as the effect of discount rates, CSPF asset returns and various other actuarial assumptions.
We account for this potential obligation under Accounting Standards Codification Topic 715- Compensation- Retirement
Benefits (“ASC 715”). Under ASC 715 we are required to provide a best estimate of various actuarial assumptions, including
the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While
we currently believe the most likely solution to this matter and the broader systemic problems facing multiemployer pension
plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best
estimate of pension liabilities. Our best estimate as of the measurement date of December 31, 2017, does not incorporate this
solution. However, if a future change in law resulted in an obligation to provide coordinating benefits under the UPS/IBT Plan,
it may be a significant event, and may require us to remeasure the plan assets and projected benefit obligation of the UPS/IBT
Plan at the date the law is enacted.
81
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will submit
another benefit suspension application under the MPRA to forestall insolvency without reducing benefits to the UPS Transfer
Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing, we would be in a strong legal
position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction,
without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate
as of the measurement date of December 31, 2017, is that there is no liability to be recognized for additional coordinating
benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as the uncertainties are
resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in
accordance with ASC 715.
Other Actuarial Assumptions
Healthcare cost trends are used to project future postretirement medical benefits payable from our plans. For year-end
2017 U.S. plan obligations, future postretirement medical benefit costs were forecasted assuming an initial annual rate of
increase of 6.5%, decreasing to 4.5% by the year 2022 and with consistent annual increases at that ultimate level thereafter.
Assumed healthcare cost trends can have a significant effect on the amounts reported for our postretirement medical
plans. A one percent change in assumed healthcare cost trend rates would have had the following effects on 2017 results (in
millions):
Effect on total of service cost and interest cost
Effect on postretirement benefit obligation
Funded Status
1% Increase
$
$
3
65
1% Decrease
$
$
(3)
(71)
The following table discloses the funded status of our plans and the amounts recognized in our consolidated balance
sheets as of December 31st (in millions):
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
2017
2016
2017
2016
2017
2016
Funded Status:
Fair value of plan assets
Benefit obligation
Funded status recognized at December 31
Funded Status Recognized in our Balance Sheet:
Other non-current assets
Other current liabilities
Pension and postretirement benefit obligations
Net liability at December 31
Amounts Recognized in AOCI:
Unrecognized net prior service cost
$ 41,932
(45,847)
$ 1,092
(1,425)
$ (3,915) $ (9,854) $ (2,609) $ (2,715) $ (318) $ (333)
$ 31,215
(41,069)
$ 1,333
(1,651)
183
(2,792)
15
(2,730)
$
$
$
$
284
(18)
(4,181)
28
(3)
(358)
$ (3,915) $ (9,854) $ (2,609) $ (2,715) $ (318) $ (333)
— $
(17)
(9,837)
— $
(77)
(2,532)
35
(5)
(348)
(216)
(2,499)
— $
$
Unrecognized net actuarial gain (loss)
Gross unrecognized cost at December 31
Deferred tax assets (liabilities) at December 31
(4,277)
(5,157)
1,840
(4,107)
(5,181)
1,948
Net unrecognized cost at December 31
$ (3,317) $ (3,233) $
(195)
(224)
69
(155) $
$
(880) $ (1,074) $
(29) $
(36) $
(80)
(116)
44
(72) $
(2) $
(3)
(150)
(126)
(153)
(128)
37
31
(97) $ (116)
The accumulated benefit obligation for our pension plans as of the measurement dates in 2017 and 2016 was $45.776 and
$39.488 billion, respectively.
Benefit payments under the pension plans include $22 million paid from employer assets in 2017 and in 2016. Benefit
payments (net of participant contributions) under the postretirement medical benefit plans include $93 and $98 million paid
from employer assets in 2017 and 2016, respectively. Such benefit payments from employer assets are also categorized as
employer contributions.
82
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2017 and 2016, 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):
U.S. Pension Benefits:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
International Pension Benefits:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Projected Benefit Obligation
Exceeds the Fair Value of Plan Assets
Accumulated Benefit Obligation
Exceeds the Fair Value of Plan Assets
2017
2016
2017
2016
$
$
$
$
37,113
35,538
32,914
1,138
992
798
$
$
41,069
38,194
31,215
1,370
1,238
1,020
$
$
37,113
35,538
32,914
647
549
342
41,069
38,194
31,215
1,365
1,234
1,016
The accumulated postretirement benefit obligation exceeds plan assets for all of our U.S. postretirement medical benefit
plans.
83
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Benefit Obligations and Fair Value of Plan Assets
The following table provides 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).
Benefit Obligations:
Projected benefit obligation at beginning of
year
Service cost
Interest cost
Gross benefits paid
Plan participants’ contributions
Plan amendments(1)
Actuarial (gain)/loss
Foreign currency exchange rate changes
Curtailments and settlements
Other
Projected benefit obligation at end of year
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension
Benefits
2017
2016
2017
2016
2017
2016
$ 41,069
1,543
1,813
(1,309)
—
—
4,256
—
(1,525)
—
$ 45,847
$ 36,846
1,412
1,828
(1,885)
—
285
2,583
—
—
—
$ 41,069
$
$
2,730
29
112
(264)
26
—
159
—
—
—
2,792
$
$
2,673
28
124
(264)
27
15
126
—
—
1
2,730
$
$
1,425
60
40
(32)
3
—
26
129
(3)
3
1,651
$
$
1,219
49
41
(28)
3
—
208
(67)
(3)
3
1,425
(1) Resulting from a new labor contract with the Independent Pilots Association.
Fair Value of Plan Assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Gross benefits paid
Foreign currency exchange rate changes
Curtailments and settlements
Fair value of plan assets at end of year
Pension and Postretirement Plan Assets
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension
Benefits
2017
2016
2017
2016
2017
2016
$ 31,215
4,717
7,309
—
(1,309)
—
—
$ 41,932
$ 28,887
1,735
2,478
—
(1,885)
—
—
$ 31,215
$
$
15
(2)
408
26
(264)
—
—
183
$
$
130
3
119
27
(264)
—
—
15
$
$
1,092
96
77
3
(32)
100
(3)
1,333
$
$
1,014
108
71
3
(28)
(73)
(3)
1,092
Under the governance of plan trustees, the investment committee establishes investment guidelines and strategies and
regularly monitors the performance of investments and investment managers. The investment guidelines address items such as
establishing appropriate governance provisions; defining investment objectives; determining strategic asset allocation;
monitoring and reporting the investments on a regular basis; appointing/dismissing investment managers, custodians,
consultants and advisors; risk management; determining/defining the mandates for investment managers; rebalancing of assets
and determining investment restrictions/prohibited investments.
Pension assets are invested in accordance with applicable laws and regulations. The primary long-term investment
objectives for pension assets are to: (1) provide for a reasonable amount of long-term growth of capital given prudent levels of
risk exposure while minimizing permanent loss of capital; (2) generate investment results that meet or exceed the long-term rate
of return assumption for the plans and (3) match the duration of the liabilities and assets of the plans to reduce the need for large
employer contributions in the future. In furtherance of these objectives, investment managers are engaged to actively manage
assets within the guidelines and strategies set forth by the Investment Committee. Active managers are monitored regularly and
their performance is compared to applicable benchmarks.
84
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
Pension assets 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 asked prices.
Level 2 assets include certain bonds 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 are included in the totals in the tables shown
below. These investments include hedge funds, risk parity funds, real estate investments, private debt and private equity funds.
Investments in hedge funds are valued using reported NAVs as of December 31st. These assets are primarily invested in a
portfolio of diversified, direct investments and funds of hedge funds. Real estate investments, private debt and private equity
funds are valued using fair values per the most recent partnership audited financial reports, adjusted, as appropriate, for any lag
between the date of the financial reports and December 31st. The fair values may, due to the inherent uncertainty of valuation
for those alternative investments, differ significantly from the values that would have been used had a ready market for the
alternative investments existed, and any differences could be material. 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, 2017.
• 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, 2017.
• 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. At December 31, 2017, unfunded commitments to such
limited partnerships totaling approximately $2.546 billion are expected to be contributed over the remaining
investment period, typically ranging between three and six years.
85
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 as of
December 31, 2017 are presented below (in millions), as well as the percentage that each category comprises of our total plan
assets and the respective target allocations.
Asset Category (U.S. Plans):
Cash and cash equivalents(2)
Equity Securities:
U.S. Large Cap
U.S. Small Cap
Emerging Markets
Global Equity
International Equity
Total Equity Securities
Fixed Income Securities:
U.S. Government Securities
Corporate Bonds
Global Bonds
Municipal Bonds
Total Fixed Income Securities
Other Investments:
Hedge Funds
Private Equity
Private Debt
Real Estate
Structured Products(3)
Risk Parity Funds
Total U.S. Plan Assets
Asset Category (International Plans):
Cash and cash equivalents
Equity Securities:
Local Markets Equity
U.S. Equity
Emerging Markets
International / Global Equity
Total Equity Securities
Fixed Income Securities:
Local Government Bonds
Corporate Bonds
Total Fixed Income Securities
Other Investments:
Real Estate
Other
Total International Plan Assets
Total Plan Assets
Total
Assets(1)
Level 1
Level 2
Level 3
Percentage of
Plan Assets
Target
Allocation
$ 5,725
$ 5,292
$
433
$ —
13.6%
0-5
5,924
591
2,101
2,817
4,791
16,224
7,695
3,865
53
21
11,634
3,121
421
1,669
2,400
2,950
10,561
7,323
—
—
—
7,323
2,803
170
432
417
1,841
5,663
372
3,857
53
21
4,303
2,910
2,107
953
2,031
172
359
$ 42,115
—
—
—
157
—
—
$ 23,333
1,031
—
237
139
172
—
$ 11,978
$
—
—
—
—
—
—
—
8
—
—
8
—
—
—
—
—
8
38.5
35-55
27.6
25-35
6.9
5.0
2.3
4.8
0.4
0.9
100.0%
5-15
1-10
1-10
1-10
0-5
1-10
$
78
$
43
$
35
5.8
0-10
213
30
38
356
637
103
198
301
—
—
38
166
204
25
59
84
213
30
—
190
433
78
139
217
—
47.7
30-60
—
22.6
25-50
124
193
$ 1,333
$ 43,448
—
—
331
$
$ 23,664
79
184
948
$
$ 12,926
$ —
8
$
9.3
14.6
100.0%
5-10
0-20
(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) Includes $5 billion in contributions made in December 2017 that had not yet been invested according to the targeted allocation.
(3) Represents mortgage and asset-backed securities.
86
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 as of
December 31, 2016 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
Equity Securities:
U.S. Large Cap
U.S. Small Cap
Emerging Markets
Global Equity
International Equity
Total Equity Securities
Fixed Income Securities:
U.S. Government Securities
Corporate Bonds
Global Bonds
Municipal Bonds
Total Fixed Income Securities
Other Investments:
Hedge Funds
Private Equity
Private Debt
Real Estate
Structured Products(2)
Risk Parity Funds
Total U.S. Plan Assets
Asset Category (International Plans):
Cash and cash equivalents
Equity Securities:
Local Markets Equity
U.S. Equity
Emerging Markets
International / Global Equity
Total Equity Securities
Fixed Income Securities:
Local Government Bonds
Corporate Bonds
Total Fixed Income Securities
Other Investments:
Real Estate
Other
Total International Plan Assets
Total Plan Assets
$
304
$
102
$
202
$
4,883
542
1,396
2,603
3,026
12,450
6,173
4,492
161
24
10,850
2,327
393
1,236
2,555
2,197
8,708
5,821
—
—
—
5,821
2,556
149
160
48
829
3,742
352
4,492
59
24
4,927
2,867
1,716
496
1,734
492
321
$ 31,230
—
—
—
122
—
—
$ 14,753
763
—
—
144
492
—
$ 10,270
$
$
54
$
37
$
17
188
20
26
288
522
84
158
242
—
—
26
141
167
22
51
73
188
20
—
147
355
62
107
169
93
181
$ 1,092
$ 32,322
—
—
277
$
$ 15,030
57
175
773
$
$ 11,043
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1.0%
0-5
39.9
35-55
34.6
25-35
9.2
5.5
1.6
5.6
1.6
1.0
100.0%
5-15
1-10
1-10
1-10
0-5
1-10
4.9
0-15
47.7
50-65
22.2
15-35
8.5
16.7
100.0%
0-17
0-20
(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) Represents mortgage and asset-backed securities.
87
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, 2017 and 2016 (in millions).
Corporate
Bonds
Other
Total
Balance on January 1, 2016
Actual Return on Assets:
Assets Held at End of Year
Assets Sold During the Year
Purchases
Sales
Transfers Into (Out of) Level 3
Balance on December 31, 2016
Actual Return on Assets:
Assets Held at End of Year
Assets Sold During the Year
Purchases
Sales
Transfers Into (Out of) Level 3
Balance on December 31, 2017
$
$
$
6
$
—
—
—
(6)
—
— $
—
—
9
(1)
—
8
$
49
$
—
(49)
—
—
—
— $
—
—
—
—
—
— $
55
—
(49)
—
(6)
—
—
—
—
9
(1)
—
8
There were no UPS class A or B shares of common stock directly held in plan assets as of December 31, 2017 or
December 31, 2016.
Accumulated Other Comprehensive Income
The estimated amounts of prior service cost in AOCI expected to be amortized and recognized as a component of net
periodic benefit cost in 2018 are as follows (in millions):
Prior service cost
U.S. Pension Benefits
$
193
$
U.S. Postretirement
Medical Benefits
International Pension
Benefits
7
$
1
88
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expected Cash Flows
Information about expected cash flows for the pension and postretirement benefit plans is as follows (in millions):
Expected Employer Contributions:
2018 to plan trusts
2018 to plan participants
Expected Benefit Payments:
2018
2019
2020
2021
2022
2023 - 2027
U.S.
Pension Benefits
U.S. Postretirement
Medical Benefits
International Pension
Benefits
$
$
— $
19
$
1,294
1,418
1,551
1,691
1,836
11,358
— $
78
$
237
239
237
231
222
967
75
5
24
27
30
36
41
286
Our funding policy for U.S. plans is to contribute amounts annually that are at least equal to the amounts required by
applicable laws and regulations, or to directly fund payments to plan participants, as applicable. 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 primarily paid from plan trusts.
Expected benefit payments for postretirement medical benefits will be paid from plan trusts and corporate assets.
NOTE 5. MULTIEMPLOYER EMPLOYEE BENEFIT PLANS
We contribute to a number of multiemployer defined benefit 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/participation requirements, vesting periods
and benefit formulas. The risks of participating in these multiemployer plans are different from single-employer plans in the following
aspects:
• 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 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 recur unless a plan re-entered critical status at a later date.
The discussion that follows sets forth the financial impact on our results of operations and cash flows for the years ended
December 31, 2017, 2016 and 2015, from our participation in multiemployer benefit plans. As part of the overall collective bargaining
process for wage and benefit levels, we have agreed to contribute certain amounts to the multiemployer benefit plans during the
contract period. The multiemployer benefit plans set benefit levels and are responsible for benefit delivery to participants. Future
contribution amounts to multiemployer benefit 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 as described above).
The number of employees covered by our multiemployer pension plans has remained consistent over the past three years, and
there have been no significant changes that affect the comparability of 2017, 2016 and 2015 contributions. We recognize expense for
the contractually-required contribution for each period, and we recognize a liability for any contributions due and unpaid at the end of
a reporting period.
89
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Status of Collective Bargaining Agreements
As of December 31, 2017, we had approximately 280,000 employees employed under a national master agreement and various
supplemental agreements with local unions affiliated with the Teamsters. These agreements run through July 31, 2018. We have
approximately 2,700 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association
("IPA"), which runs through September 1, 2021. Our airline mechanics are covered by a collective bargaining agreement with
Teamsters Local 2727, which became amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727. In
addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are
employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”)
that will expire on July 31, 2019.
Multiemployer Pension Plans
The following table outlines our participation in multiemployer pension plans for the periods ended December 31, 2017, 2016
and 2015, 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 2017 and 2016 relates to the plans’ 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. 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, 2017, 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, 2018, with
the exception of the Automotive Industries Pension Plan and the IAM National Pension Fund / National Pension Plan which both have
a July 31, 2019 expiration date. For all plans detailed in the following table, we provided more than 5% of the total plan contributions
from all employers for 2017, 2016 and 2015 (as disclosed in the annual filing with the Department of Labor for each respective plan).
90
Yes/Implemented
$
Yes/Implemented
No
No
Yes/Implemented
Yes/Implemented
No
No
5
5
40
5
12
8
35
$
5
4
38
5
11
7
31
$
5
4
36
4
11
7
29
118
107
106
110
38
103
36
91
97
35
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain plans have been aggregated in the “all other multiemployer pension plans” line in the following table, as the
contributions to each of these individual plans are not material.
EIN / Pension
Plan
Pension
Protection Act
Zone Status
FIP / RP Status
Pending /
(in millions)
UPS Contributions and
Accruals
Surcharge
Number
2017
2016
Implemented
2017
2016
2015
Imposed
Pension Fund
Alaska Teamster-Employer Pension Plan
Automotive Industries Pension Plan
Central Pennsylvania Teamsters Defined Benefit Plan
Eastern Shore Teamsters Pension Fund
Employer-Teamsters Local Nos. 175 & 505 Pension
Trust Fund
Hagerstown Motor Carriers and Teamsters Pension Fund
92-6003463-024
94-1133245-001
23-6262789-001
52-0904953-001
55-6021850-001
52-6045424-001
Red
Red
Green
Green
Red
Red
Red
Red
Green
Green
Red
Red
I.A.M. National Pension Fund / National Pension Plan
51-6031295-002
Green
Green
36-2377656-001
Green
Green
36-6492502-001
Yellow
Red
Yes/Implemented
93
88
International Brotherhood of Teamsters Union Local
No. 710 Pension Fund
Local 705, International Brotherhood of Teamsters
Pension Plan
Local 804 I.B.T. & Local 447 I.A.M.—UPS
Multiemployer Retirement Plan
New England Teamsters & Trucking Industry Pension
Fund
New York State Teamsters Conference Pension and
Retirement Fund
Milwaukee Drivers Pension Trust Fund
39-6045229-001
Green
Green
No
51-6117726-001
Yellow
Red
Yes/Implemented
04-6372430-001
Red
Red
Yes/Implemented
114
114
110
16-6063585-074
Red
Red
Yes/Implemented
100
Teamster Pension Fund of Philadelphia and Vicinity
23-1511735-001
Yellow Yellow
Yes/Implemented
Teamsters Joint Council No. 83 of Virginia Pension Fund
Teamsters Local 639—Employers Pension Trust
Teamsters Negotiated Pension Plan
Truck Drivers and Helpers Local Union No. 355
Retirement Pension Plan
United Parcel Service, Inc.—Local 177, I.B.T.
Multiemployer Retirement Plan
54-6097996-001
53-0237142-001
43-6196083-001
Green
Green
Green
Yellow
Green
Green
52-6043608-001
Green
Yellow
No
No
No
No
13-1426500-419
Red
Red
Yes/Implemented
Western Conference of Teamsters Pension Plan
91-6145047-001
Green
Green
No
Western Pennsylvania Teamsters and Employers Pension
Fund
All Other Multiemployer Pension Plans
25-6029946-001
Red
Red
Yes/Implemented
60
64
55
32
20
88
772
30
66
91
56
61
51
31
19
83
694
28
56
86
53
57
48
30
17
83
646
26
42
Total Contributions
$1,870
$1,719
$1,623
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, 2017 and 2016, we had $859 and $866 million, respectively, recognized
in "other non-current liabilities" on our consolidated balance sheets representing the remaining balance of the NETTI Fund withdrawal
liability. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value
of the NETTI Fund withdrawal liability as of December 31, 2017 and 2016 was $921 and $861 million. We utilized Level 2 inputs in
the fair value hierarchy of valuation techniques to determine the fair value of this liability.
91
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Multiemployer Health and Welfare Plans
We also contribute to several multiemployer health and welfare plans that cover 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 in the table, as the contributions to each of these individual plans are not material.
Health and Welfare Fund
Central States, South East & South West Areas Health and Welfare Fund
Teamsters Western Region & Local 177 Health Care Plan
Health & Welfare Insurance Fund Teamsters Local 653
Bay Area Delivery Drivers
Central Pennsylvania Teamsters Health & Pension Fund
Delta Health Systems—East Bay Drayage Drivers
Employer—Teamster Local Nos. 175 & 505
Joint Council #83 Health & Welfare Fund
Local 191 Teamsters Health Fund
Local 401 Teamsters Health & Welfare Fund
Local 804 Welfare Trust Fund
Milwaukee Drivers Pension Trust Fund—Milwaukee Drivers Health and Welfare Trust Fund
Montana Teamster Employers Trust
New York State Teamsters Health & Hospital Fund
North Coast Benefit Trust
Northern California General Teamsters (DELTA)
Northern New England Benefit Trust
Oregon / Teamster Employers Trust
Teamsters 170 Health & Welfare Fund
Teamsters Benefit Trust
Teamsters Local 251 Health & Insurance Plan
Teamsters Local 404 Health & Insurance Plan
Teamsters Local 638 Health Fund
Teamsters Local 639—Employers Health & Pension Trust Funds
Teamsters Local 671 Health Services & Insurance Plan
Teamsters Union 25 Health Services & Insurance Plan
Teamsters Union Local 677 Health Services & Insurance Plan
Truck Drivers and Helpers Local 355 Baltimore Area Health & Welfare Fund
Utah-Idaho Teamsters Security Fund
Washington Teamsters Welfare Trust
All Other Multiemployer Health and Welfare Plans
Total Contributions
(in millions)
UPS Contributions and Accruals
2017
$ 2,366
605
7
37
27
29
11
37
13
9
84
38
8
59
11
132
50
38
17
46
15
8
43
27
17
52
11
16
29
52
78
$ 3,972
2016
$ 2,268
571
6
35
25
27
11
33
12
8
79
36
8
56
8
116
47
34
16
43
14
7
40
27
17
50
10
16
26
47
68
$ 3,761
2015
$ 2,081
515
6
34
23
27
10
28
11
7
75
34
7
53
8
108
42
31
15
36
13
7
39
26
15
46
10
15
25
44
95
$ 3,486
92
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by segment (in millions):
Balance on January 1, 2016
Acquired
Currency / Other
Balance on December 31, 2016
Acquired
Currency / Other
Balance on December 31, 2017
2017 Goodwill Activity
U.S. Domestic
Package
International
Package
Supply Chain &
Freight
$
$
$
715
—
—
715
—
—
715
$
$
$
425
—
(18)
407
18
10
435
$
$
$
2,279
359
(3)
2,635
54
33
2,722
Consolidated
3,419
$
359
(21)
3,757
72
43
3,872
$
$
The goodwill acquired in the Supply Chain & Freight segment is primarily related to our January 2017 acquisition of
Freightex Ltd. ("Freightex") and our November 2017 acquisition of STTAS Global Holdings, Inc ("Sandler & Travis Trade
Advisory Services" or "STTAS"). The remaining goodwill acquired in the Supply Chain & Freight segment was related to
other, smaller acquisitions immaterial to our consolidated financial position or results of operations.
The goodwill acquired in the International Package segment is related to our June 2017 acquisition of Eirpost Group
Unlimited Company ("Nightline").
The remaining change in goodwill for both the Supply Chain & Freight and the International Package segments was due
to immaterial purchase accounting adjustments and the impact of changes in the value of the U.S. Dollar on the translation of
non-U.S. Dollar goodwill balances.
2016 Goodwill Activity
The goodwill acquired in the Supply Chain & Freight segment was related to our December 2016 acquisition of Maze 1
Limited ("Marken").
The remaining change in goodwill for both the Supply Chain & Freight and the International Package segments was due
to immaterial purchase accounting adjustments and the impact of changes in the value of the U.S. Dollar on the translation of
non-U.S. Dollar goodwill balances.
The estimates of the fair value of assets acquired and liabilities assumed are subject to change based on the completion of
purchase accounting. The purchase price allocation for acquired companies can be modified for up to one year from the date of
acquisition. See note 7 for further discussion of these acquisitions.
Goodwill Impairment and Annual Assessment Date Change
During the third quarter of 2017, we changed the measurement date of our annual goodwill impairment test from October
1st to July 1st. This change better aligns the timing of the goodwill impairment test with our long-term business planning
process. The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or
avoidance of an impairment charge.
We completed our annual goodwill impairment valuation, as of July 1st, on a reporting unit basis which we own at the
testing date. For the periods presented, no triggering events were identified that required an interim impairment test.
U.S. Domestic Package is our largest reporting segment. In our International Package reporting segment, we have the
following reporting units: Europe, Asia, Americas and ISMEA (Indian Subcontinent, Middle East and Africa). In our Supply
Chain & Freight segment we have the following reporting units: Forwarding, Logistics, UPS Mail Innovations, UPS Freight,
The UPS Store, UPS Capital, Marken and Coyote Logistics.
93
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In assessing our 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. If the qualitative assessment is not conclusive and it is
necessary to calculate the fair value of a reporting unit, then we utilize a two-step process to test goodwill for impairment. First,
a comparison of the fair value of the applicable reporting unit with the aggregate carrying value, including goodwill, is
performed. We primarily determine the fair value of our reporting units using a discounted cash flow model, and supplement
this with observable valuation multiples for comparable companies, as applicable. If the carrying amount of a reporting unit
exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of
impairment loss. The second step includes comparing the implied fair value of the affected reporting unit’s goodwill with the
carrying value of that goodwill.
In 2017, we utilized a qualitative assessment to determine that it was more likely than not that the reporting unit fair value
exceeded the carrying value for our U.S. Domestic Package, Europe Package, Asia Package, Americas Package, ISMEA
Package, Forwarding, UPS Mail Innovations, The UPS Store and UPS Capital reporting units. For the remaining reporting units
owned at the annual goodwill impairment testing date, we utilized the two-step process to test goodwill for impairment. We did
not have any goodwill impairment charges in 2017, 2016 or 2015. Cumulatively, our Supply Chain & Freight segment has
recorded $622 million of goodwill impairment charges, while our International and U.S. Domestic Package segments have not
recorded any goodwill impairment charges.
Intangible Assets
The following is a summary of intangible assets at December 31, 2017 and 2016 (in millions):
December 31, 2017
Capitalized software
Licenses
Franchise rights
Customer relationships
Trade name
Trademarks, patents and other
Total Intangible Assets
December 31, 2016
Capitalized software
Licenses
Franchise rights
Customer relationships
Trade name
Trademarks, patents and other
Total Intangible Assets
Weighted-
Average
Amortization
Period
(in years)
6.9
3.9
20.0
10.8
NA
5.4
7.9
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Value
$
$
$
$
3,273
114
144
776
200
71
4,578
2,933
131
128
724
200
67
4,183
$
$
$
$
(2,310) $
(10)
(97)
(160)
—
(37)
(2,614) $
(2,157) $
(70)
(90)
(85)
—
(23)
(2,425) $
963
104
47
616
200
34
1,964
776
61
38
639
200
44
1,758
A trade name and licenses with a carrying value of $200 and $5 million, respectively, as of December 31, 2017 are
deemed to be indefinite-lived intangible assets, and therefore are not amortized. Impairment tests for indefinite-lived intangible
assets are performed on an annual basis. All of our other recorded intangible assets are deemed to be finite-lived intangibles,
and are thus 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. There was a $7
million impairment of a finite-lived intangible asset and no impairment of finite-lived and indefinite-lived intangible assets in
2017 and 2016, respectively.
Amortization of intangible assets was $287, $321 and $261 million during 2017, 2016 and 2015, respectively. Expected
amortization of finite-lived intangible assets recorded as of December 31, 2017 for the next five years is as follows (in
millions): 2018—$367; 2019—$328; 2020—$287; 2021—$232; 2022—$180. Amortization expense in future periods will be
affected by business acquisitions, software development, licensing agreements, franchise rights purchases and other factors.
94
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. BUSINESS ACQUISITIONS
In January 2017, we acquired Freightex Ltd. ("Freightex"), a U.K.-based asset-light provider of truckload, less-than-
truckload and specialized over-the-road services, which was added to our Supply Chain & Freight segment. In June 2017, we
acquired Eirpost Group Unlimited Company ("Nightline"), an Ireland-based express delivery and logistics company, which was
added to our International Package reporting segment. In November 2017, we acquired STTAS, a global trade compliance
management company, which was added to our Supply Chain & Freight segment. These acquisitions were funded with cash
from operations and were not material to our consolidated financial position or results of operations.
In December 2016, we acquired Marken, a global provider of supply chain solutions to the life sciences industry and
leader in clinical trials, material storage and distribution, for approximately $570 million. The purchase price allocation was
completed in the fourth quarter of 2017 and there were no material changes to our estimated fair values of assets acquired and
liabilities assumed. The financial results of Marken are included in the Supply Chain & Freight segment from the date of
acquisition.
The following table summarizes the fair values of the Marken assets acquired and liabilities assumed at the acquisition
date (in millions):
Marken Assets Acquired and (Liabilities) Assumed
Cash and cash equivalents
Accounts receivable
Other current assets
Deferred tax assets
Property, plant, and equipment
Goodwill
Intangible assets
Accounts payable and other current liabilities
Deferred tax liabilities
Total purchase price
$
$
26
34
6
35
7
319
238
(29)
(66)
570
The goodwill recognized of approximately $319 million is attributable to synergies anticipated from future growth of
Marken. None of the goodwill is deductible for income tax purposes.
The intangible assets acquired of approximately $238 million primarily consist of $219 million of customer
relationships (amortized over 12 years), $10 million of trade name (amortized over 3 years), $8 million of capitalized software
(amortized over 3-5 years) and a $1 million agent network (amortized over 4 years). The carrying value of working capital
approximates fair value.
We recognized approximately $8 million of acquisition related costs that were expensed in 2016. These costs are
included in "other expenses" within the statements of consolidated income.
95
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. DEBT AND FINANCING ARRANGEMENTS
The following table sets forth the principal amount, maturity or range of maturities, as well as the carrying value of our
debt obligations, as of December 31, 2017 and 2016 (in millions). The carrying value of these debt obligations can differ from
the principal amount due to the impact of unamortized discounts or premiums and valuation adjustments resulting from interest
rate swap hedging relationships.
Commercial paper
Fixed-rate senior notes:
1.125% senior notes
5.500% senior notes
5.125% senior notes
3.125% senior notes
2.050% senior notes
2.450% senior notes
2.350% senior notes
2.500% senior notes
2.800% senior notes
2.400% senior notes
3.050% senior notes
6.200% senior notes
4.875% senior notes
3.625% senior notes
3.400% senior notes
3.750% senior notes
Floating-rate senior notes:
Floating-rate senior notes
Floating-rate senior notes
Floating-rate senior notes
Floating-rate senior notes
8.375% Debentures:
8.375% debentures
8.375% debentures
Pound Sterling Notes:
5.500% notes
5.125% notes
Euro Senior Notes:
0.375% senior notes
1.625% senior notes
1.000% senior notes
1.500% senior notes
Floating-rate senior notes
Canadian senior notes:
2.125% senior notes
Capital lease obligations
Facility notes and bonds
Other debt
Total debt
Less: current maturities
Long-term debt
Principal
Amount
$
3,203
Maturity
2018
Carrying Value
2017
2016
$
3,203
$
3,250
375
750
1,000
1,500
700
1,000
600
1,000
500
500
1,000
1,500
500
375
500
1,150
350
400
500
1,043
424
276
90
614
839
839
599
599
599
2017
2018
2019
2021
2021
2022
2022
2023
2024
2026
2027
2038
2040
2042
2046
2047
2021
2022
2023
2049-2067
2020
2030
2031
2050
2023
2025
2028
2032
2020
—
751
1,019
1,549
696
979
597
992
495
497
990
1,482
489
368
491
1,135
348
398
496
1,032
447
282
84
586
832
833
595
594
598
374
769
1,043
1,584
—
986
—
—
—
497
—
1,481
489
367
491
—
—
—
—
824
461
282
76
535
—
732
523
—
525
597
500
320
19
24,761
$
2024
2018– 3005
2029 – 2045
2018 – 2022
593
500
319
19
24,289
(4,011)
20,278
$
—
447
319
20
16,075
(3,681)
12,394
$
96
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Issuances
On May 16, 2017 we issued U.S. senior rate notes. These senior notes consist of two separate series, as follows:
• Two series of notes, in the principal amounts of $600 and $400 million, were issued. These notes bear interest at a
2.350% fixed rate and at three-month LIBOR plus 38 basis points, respectively, and mature May 2022. Interest on the
fixed-rate senior notes is payable semi-annually, beginning November 2017. Interest on the floating-rate senior notes
is payable quarterly beginning August 2017. The 2.350% notes are callable at our option at a redemption price equal
to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments
of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the
treasury rate plus 10 basis points and accrued interest. The floating-rate senior notes are not callable.
On May 18, 2017 we issued Canadian senior notes. These senior notes consist of a single series as follows:
• Notes in the principal amount of C$750 million ($547 million), which bear interest at a 2.125% fixed interest rate and
mature May 2024. Interest on the notes is payable semi-annually beginning November 2017. 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.
On November 8, 2017, we issued Euro senior rate notes. These senior notes consist of two separate series, as follows:
• Two series of notes, in the principal amount of €700 million ($815 million) and €500 million ($582 million) were
issued. These notes bear interest at 0.375% and 1.500% fixed rates, respectively, and mature November 2023 and
November 2032, respectively. Interest on these notes is payable annually, beginning in November 2018. The notes are
callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the
present values of 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, and accrued
interest.
On November 9, 2017, we issued U.S. senior rate notes. These senior notes consist of seven separate series, as follows:
• Notes in the principal amount of $350 million, which bear interest at three-month LIBOR plus 15 basis points and
mature April 2021. Interest on the notes is payable quarterly beginning April 2018. These notes are not callable.
• Notes in the principal amount of $500 million, which bear interest at three-month LIBOR plus 45 basis points and
mature April 2023. Interest on the notes is payable quarterly beginning April 2018. These notes are not callable.
• Notes in the principal amount of $700 million, which bear interest at a 2.050% fixed rate and mature April 2021.
Interest on the fixed-rate senior notes is payable semi-annually, beginning April 2018. These notes are callable at our
option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of
the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-
annual basis at the discount rate of the treasury rate plus 10 basis points and accrued interest.
• Notes in the principal amount of $1 billion, which bear interest at a 2.500% fixed interest rate and mature April 2023.
Interest on the fixed-rate senior notes is payable semi-annually, beginning April 2018. These notes are callable at our
option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of
the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-
annual basis at the discount rate of the treasury rate plus 10 basis points plus accrued interest. If called within the one
month prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and unpaid
interest, if any, to, but excluding the redemption date.
• Notes in the principal amount of $500 million, which bear interest at a 2.800% fixed interest rate and mature
November 2024. Interest on the fixed-rate senior notes is payable semi-annually, beginning May 2018. These notes
are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the
present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption
date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points plus accrued interest. If called
within the two months prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued
and unpaid interest, if any, to, but excluding the redemption date.
97
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• Notes in the principal amount of $1 billion, which bear interest at a 3.050% fixed interest rate and mature November
2027. Interest on the fixed-rate senior notes is payable semi-annually, beginning May 2018. These notes are callable
at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present
values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a
semi-annual basis at the discount rate of the treasury rate plus 15 basis points plus accrued interest. If called within
the three months prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and
unpaid interest, if any, to, but excluding the redemption date.
• Notes in the principal amount of $1.15 billion, which bear interest at a 3.750% fixed interest rate and mature
November 2047. Interest on the fixed-rate senior notes is payable semi-annually, beginning May 2018. These notes
are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the
present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption
date on a semi-annual basis at the discount rate of the treasury rate plus 15 basis points plus accrued interest. If called
within the six months prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued
and unpaid interest, if any, to, but excluding the redemption date.
Commercial Paper
We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of
currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as
of December 31, 2017: $2.458 billion with an average interest rate of 1.350% and €622 million ($745 million) with an average
interest rate of -0.41%. The amount of commercial paper outstanding under these programs in 2018 is expected to fluctuate.
Fixed-Rate Senior Notes
We have completed several offerings of fixed-rate senior notes. All of the notes pay interest semi-annually, and allow for
redemption of the notes 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 several of these notes, which effectively converted the
fixed interest rates on the notes to variable LIBOR-based interest rates. The average interest rate payable on these notes,
including the impact of the interest rate swaps, for 2017 and 2016, respectively, were as follows:
1.125% senior notes
5.50% senior notes
5.125% senior notes
3.125% senior notes
2.45% senior notes
Principal
Value
375
750
1,000
1,500
1,000
$
$
$
$
$
Maturity
2017
2018
2019
2021
2022
Average Effective
Interest Rate
2017
1.51%
3.45%
2.98%
1.34%
1.78%
2016
1.04%
2.94%
2.49%
1.40%
1.26%
On October 1, 2017, our $375 million 1.125% senior notes matured and were repaid in full.
8.375% Debentures
The 8.375% debentures consist of two separate tranches, as follows:
•
$276 million of the debentures have a maturity of April 1, 2030. These debentures have an 8.375% interest rate until
April 1, 2020, and, thereafter, the interest rate will be 7.62% for the final 10 years. These debentures are redeemable in
whole or in part at our option at any time. The redemption price is equal to the greater of 100% of the principal amount
and accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest
thereon discounted to the date of redemption (at a benchmark treasury yield plus five basis points) plus accrued
interest.
•
$424 million of the debentures have a maturity of April 1, 2020. These debentures are not subject to redemption prior
to maturity.
Interest is payable semi-annually in April and October for both tranches and neither tranche is subject to sinking fund
requirements. We subsequently entered into interest rate swaps on the 2020 debentures, which effectively converted the fixed
interest rates on the debentures to variable LIBOR-based interest rates. The average interest rate payable on the 2020
debentures, including the impact of the interest rate swaps, for 2017 and 2016 was 5.95% and 5.43%, respectively.
98
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Floating-Rate Senior Notes
The floating-rate senior notes with principal amounts totaling $1.043 billion, bear interest at either one or three-month
LIBOR, less a spread ranging from 30 to 45 basis points. The average interest rate for 2017 and 2016 was 0.74% and 0.21%,
respectively. These notes are callable at various times after 30 years at a stated percentage of par value, and putable by the note
holders at various times after one year at a stated percentage of par value. The notes have maturities ranging from 2049 through
2067. We classified the floating-rate senior notes that are putable by the note holder as a long-term liability, due to our intent
and ability to refinance the debt if the put option is exercised by the note holder.
In March and November 2017, we issued floating-rate senior notes in the principal amounts of $147 and $64 million,
respectively, which are included in the $1.043 billion floating-rate senior notes described above. These notes will bear interest
at three-month LIBOR less 30 and 35 basis points, respectively and mature in 2067.
The remaining three floating-rate senior notes in the principal amounts of $350, $400 and $500 million, bear interest at
three-month LIBOR, plus a spread ranging from 15 to 45 basis points. The average interest rate for 2017 and 2016 was 0.50%
and 0.0%, respectively. These notes are not callable. The notes have maturities ranging from 2021 through 2023. We classified
the floating-rate senior notes that are putable by the note holder as a long-term liability, due to our intent and ability to refinance
the debt if the put option is exercised by the note holder.
Capital Lease Obligations
We have certain property, plant and equipment subject to capital leases. Some of the obligations associated with these
capital leases have been legally defeased. The recorded value of our property, plant and equipment subject to capital leases is as
follows as of December 31 (in millions):
Vehicles
Aircraft
Buildings
Accumulated amortization
Property, plant and equipment subject to capital leases
2017
2016
70
2,291
285
(990)
1,656
$
$
68
2,291
190
(896)
1,653
$
$
These capital lease obligations have principal payments due at various dates from 2018 through 3005.
Facility Notes and Bonds
We have entered into agreements with certain municipalities to finance the construction of, or improvements to, facilities
that support our U.S. Domestic Package and Supply Chain & Freight 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 the
municipalities, 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, which are due in January 2029, bear interest at a variable rate,
and the average interest rates for 2017 and 2016 were 0.83% and 0.37%, respectively.
• Bonds with a principal balance of $42 million and due in November 2036 issued by the Louisville Regional Airport
Authority associated with our air freight facility in Louisville, Kentucky. The bonds bear interest at a variable rate, and
the average interest rates for 2017 and 2016 were 0.80% and 0.36%, 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, however the variable cash flows on the obligation have been swapped to a fixed 5.11%.
In September 2015, we entered into an agreement with the Delaware County, Pennsylvania Industrial Development
Authority, associated with our Philadelphia, Pennsylvania airport facilities, for bonds issued with a principal balance
of $100 million. These bonds, which are due September 2045, bear interest at a variable rate. The average interest rate
for 2017 and 2016 was 0.78% and 0.40%, respectively.
99
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 5.50% fixed rate, and are due in February 2031.
These notes are not callable.
• Notes with a principal amount of £455 million accrue interest at a 5.125% fixed rate, and are due in February 2050.
These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount and
accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest thereon
discounted to the date of redemption at a benchmark U.K. government bond yield plus 15 basis points and accrued
interest.
Euro Senior Notes
The remaining euro senior notes consist of three separate issuances, as follows:
• Notes in the principal amount of €500 million accrue interest at a 1% fixed rate and are due in November 2028.
Interest is payable annually on the notes, commencing in November 2017. These notes are callable at our option at a
redemption price equal to the greater of 100% of the principal amounts, or the sum of the present values of the
remaining schedule payments of principal and interest thereon discounted to the date of redemption at a benchmark
comparable German government bond yield plus 15 basis points and accrued interest.
• Notes with a principal amount of €500 million accrue interest at a variable rate equal to three-month EURIBOR plus
43 basis points and are due in July 2020. Interest is payable quarterly on the notes, commencing in April 2016. These
notes are not callable. The senior notes bear interest at a variable rate, and the average interest rates for 2017 and 2016
were 0.10% and 0.19%, respectively.
• Notes with a principal amount of €700 million accrue interest at a 1.625% fixed rate and are due in November 2025.
Interest is payable annually on the notes, commencing in November 2016. These notes are callable at our option at a
redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the
remaining scheduled payout of principal and interest thereon discounted to the date of redemption at a benchmark
German government bond yield plus 20 basis points and accrued interest.
Contractual Commitments
We lease certain aircraft, facilities, land, equipment and vehicles under operating leases, which expire at various dates
through 2040. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our
operating leases was $804, $686 and $669 million for 2017, 2016 and 2015, respectively.
The following table sets forth the aggregate minimum lease payments under capital and operating leases, the aggregate
annual principal payments due under our long-term debt and the aggregate amounts expected to be spent for purchase
commitments (in millions).
Year
2018
2019
2020
2021
2022
After 2022
Total
Less: imputed interest
Present value of minimum capitalized lease payments
Less: current portion
Long-term capitalized lease obligations
Capital
Leases
Operating
Leases
Debt
Principal
Purchase
Commitments (1)
398
305
239
186
138
371
1,637
$
$
3,960
1,009
1,024
2,551
2,000
13,342
23,886
$
$
3,789
2,462
2,428
1,926
323
13
10,941
$
$
$
$
81
79
69
49
45
500
823
(323)
500
(51)
449
(1) Purchase commitments include our announcement on February 1, 2018 for 14 new Boeing 747-8 freighters and four new Boeing 767 aircraft.
100
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2017, we had outstanding letters of credit totaling approximately $1.084 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, 2017, we had $932 million of surety bonds written.
Available Credit
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 23, 2018. 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 December 31, 2017.
The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 24, 2022. Generally,
amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period
and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1)
JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a
one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable
margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our
1-year credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in
connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one
year). The minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The
applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR
advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There
were no amounts outstanding under this facility as of December 31, 2017.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2017 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, 2017, 10% of net tangible assets is equivalent to $2.686 billion; however, we have no covered sale-
leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our
financial condition or liquidity.
Fair Value of Debt
Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the
fair value of long-term debt, including current maturities, is approximately $25.206 and $17.134 billion as of December 31,
2017 and 2016, 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.
101
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. LEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business activities.
Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a
meritorious defense and will deny, liability in all litigation pending against us, including (except as otherwise noted herein) the
matters described below, and we intend to defend vigorously each case. We have accrued for legal claims when, and to the
extent that, amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving
legal claims may be substantially higher or lower than the amounts accrued for those claims.
For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine
whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For
matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible
loss or range of loss.
Judicial Proceedings
We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations
under state wage-and-hour laws. At this time, we do not believe that any loss associated with these matters would have a
material adverse effect on our financial condition, results of operations or liquidity.
UPS and our subsidiary The UPS Store, Inc. are defendants in Morgate v. The UPS Store, Inc. et al., an action in the Los
Angeles Superior Court brought on behalf of a certified class of all franchisees who chose to rebrand their Mail Boxes Etc.
franchises to The UPS Store in March 2003. Plaintiff alleges that UPS and The UPS Store, Inc. misrepresented and omitted
facts to the class about the market tests that were conducted before offering the class the choice of whether to rebrand to The
UPS Store. Defendants’ motion to decertify the class was granted in August 2017. The plaintiff has filed a notice of appeal, and
further proceedings in the trial court are stayed pending resolution by the California Court of Appeal. There are multiple factors
that prevent us from being able to estimate the amount of loss, if any, that may result from the remaining aspects of this case,
including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; (2) it remains
uncertain what evidence of damages, if any, plaintiffs will be able to present; and (3) plaintiff’s notice of appeal is pending.
Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to
determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or
liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in
August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-
party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators.
The Court granted summary judgment motions filed by UPS and FedEx, entered judgment in favor of UPS and FedEx, and
dismissed the case. Plaintiff appealed to the Court of Appeals for the Ninth Circuit. In August 2017, the Ninth Circuit affirmed
the District Court's order dismissing the case. AFMS filed a petition for rehearing in September 2017, which was denied. AFMS
filed a Petition for Writ of Certiorari in the Supreme Court in January 29, 2018. The Antitrust Division of the U.S. Department
of Justice (“DOJ”) opened a civil investigation of our policies and practices for dealing with third-party negotiators. We have
cooperated with this investigation, although the DOJ has not communicated with us for over five years. We deny any liability
with respect to these matters and intend to vigorously defend ourselves in the event that any of these proceedings were to
continue. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from
these matters including: (1) the DOJ investigation may be pending and (2) AFMS filed a petition for discretionary review by the
U.S. Supreme Court. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from
these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results
of operations or liquidity.
We are a defendant in Ryan Wright and Julia Zislin v. United Parcel Service Canada Ltd., an action brought on behalf of a
certified class of customers in the Superior Court of Justice in Ontario, Canada. Plaintiffs filed suit in February 2007, alleging
inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial
consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. Partial
summary judgment was granted to us and the plaintiffs by the Ontario motions court in August 2011, when it dismissed
plaintiffs' complaint under the Criminal Code and granted plaintiffs' complaint of inadequate disclosure. We appealed the
Court's decision pertaining to inadequate disclosure in September 2011. In October 2017, we reached an agreement in principle
to resolve the case for an immaterial amount. Final resolution of this matter is subject to the negotiation, execution and delivery
of a settlement agreement and court approval.
102
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern
District of New York, arising from alleged shipments of cigarettes to New York State and City residents. The complaint asserted
claims under various federal and state laws. The complaint also included a claim that UPS violated the Assurance of
Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. On March 24,
2017, the District Court issued an opinion and order finding liability against UPS on each of the plaintiffs’ causes of action. On
May 25, 2017, the District Court issued a corrected opinion and order on liability and an order awarding the plaintiffs damages
of $9.4 million and penalties of $237.6 million. An accrual of $9.4 million with respect to the damages awarded by the court is
included on our consolidated balance sheet at December 31, 2017. We estimate that the amount of losses could be up to $247
million, plus interest; however, the amount of penalties ultimately payable, if any, is subject to a variety of complex factors and
potential outcomes that remain to be determined in future legal proceedings. Consequently, we are unable to reasonably
estimate a likely amount of loss within that range. We strongly disagree with the District Court’s analysis and conclusions, and
have appealed to the United States Court of Appeals for the Second Circuit. UPS filed its opening brief with the Appellate
Court in October 2017.
Other Matters
In October 2015, the DOJ informed us of an industry-wide inquiry into the transportation of mail under the United States
Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a Civil Investigative Demand
seeking certain information relating to our contracts. The DOJ has indicated it is investigating potential violations of the False
Claims Act or other statutes. We are cooperating with the DOJ. The Company is unable to predict what action, if any, might be
taken in the future by any government authorities as a result of their investigation. Accordingly, at this time, we are not able to
estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a
material adverse effect on our financial condition, results of operations or liquidity.
In August 2016, Spain’s National Markets and Competition Commission (“CNMC”) opened an investigation into 10
companies in the commercial delivery and parcel industry, including UPS, related to alleged nonaggression agreements to
allocate customers. In May 2017, UPS received a Statement of Objections issued by the CNMC. In July 2017, UPS received a
Decision Proposal from the CNMC. These documents do not prejudge the final decision (which is subject to appeal) as to facts
or law. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from
this matter, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal
defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter.
Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to
determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or
liquidity.
We are a defendant in various other lawsuits that arose in the normal course of business. We do not believe that the
eventual resolution of these other lawsuits (either individually or in the aggregate), including any reasonably possible losses in
excess of current accruals, will have a material adverse effect on our financial condition, results of operations or liquidity.
103
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SHAREOWNERS’ EQUITY
Capital Stock, Additional Paid-In Capital and Retained Earnings
We maintain two classes of common stock, which are distinguished from each other 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, 2017,
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, 2017, no preferred shares had
been issued.
The following is a rollforward of our common stock, additional paid-in capital and retained earnings accounts (in
millions, except per share amounts):
2017
2016
2015
Shares
Dollars
Shares
Dollars
Shares
Dollars
Class A Common Stock:
Balance at beginning of year
Common stock purchases
Stock award plans
Common stock issuances
Conversions of class A to class B common stock
Class A shares issued at end of year
Class B Common Stock:
Balance at beginning of year
Common stock purchases
Conversions of class A to class B common stock
Class B shares issued at end of year
180
(4)
4
3
(10)
173
689
(12)
10
687
Additional Paid-In Capital:
Balance at beginning of year
Stock award plans
Common stock purchases
Common stock issuances
Option premiums received (paid)
Balance at end of year
Retained Earnings:
Balance at beginning of year
Net income attributable to controlling interests
Dividends ($3.32, $3.12, and $2.92 per share)
Common stock purchases
Balance at end of year
$
$
$
$
$
$
$
$
2
—
—
—
—
2
7
—
—
7
—
396
(813)
363
54
—
4,879
4,910
(2,928)
(1,003)
5,858
194
(4)
5
2
(17)
180
693
(21)
17
689
$
$
$
$
$
$
$
$
2
—
—
—
—
2
7
—
—
7
—
541
(898)
303
54
—
6,001
3,431
(2,771)
(1,782)
4,879
201
(4)
5
3
(11)
194
705
(23)
11
693
$
$
$
$
$
$
$
$
2
—
—
—
—
2
7
—
—
7
—
492
(791)
316
(17)
—
5,726
4,844
(2,649)
(1,920)
6,001
For the years ended December 31, 2017, 2016 and 2015, we repurchased a total of 16.1, 25.2 and 26.8 million shares of
class A and class B common stock for $1.816, $2.680 and $2.711 billion, respectively ($1.813, $2.678 and $2.702 billion in
repurchases for 2017, 2016 and 2015, respectively, are reported on the cash flow statement due to the timing of settlements).
During the first quarter of 2016, we also exercised a capped call option that we entered in 2015 for which we received 0.2
million UPS class B shares. The $25 million premium payment for this capped call option reduced shareowners' equity in 2015.
In total, shares repurchased and received the twelve months ended December 31, 2016 were 25.4 million shares for $2.705
billion. In May 2016, the Board of Directors approved a new share repurchase authorization of $8.0 billion, which replaced an
authorization previously announced in 2013. This new share repurchase authorization has no expiration date. As of
December 31, 2017, we had $4.339 billion of this share repurchase authorization remaining.
104
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From time to time, we enter into share repurchase programs with large financial institutions to assist in our buyback of
company stock. These programs allow us to repurchase our shares at a price below the weighted average UPS share price for a
given period. During the fourth quarter of 2016, we entered into an accelerated share repurchase program, which allowed us to
repurchase $300 million of shares (2.6 million shares). The program was completed in December 2016.
In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into
structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a
fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash
or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined
price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing
market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the
agreement. We received net premiums of $54 and $54 million during 2017 and 2016, respectively, related to entering into and
settling capped call options for the purchase of class B shares. As of December 31, 2017, we had outstanding options for the
purchase of 0.5 million shares with an average strike price of $101.91 per share that will settle in the first quarter of 2018.
Accumulated Other Comprehensive Income (Loss)
We incur activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency
translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized
pension and postretirement benefit costs. The activity in AOCI is as follows (in millions):
Foreign Currency Translation Gain (Loss), Net of Tax:
Balance at beginning of year
Translation adjustment (net of tax effect of $(161), $32 and $0)
Balance at end of year
Unrealized Gain (Loss) on Marketable Securities, Net of Tax:
Balance at beginning of year
Current period changes in fair value (net of tax effect of $(1), $0 and $(1))
Reclassification to earnings (net of tax effect of $1, $0 and $0)
Balance at end of year
Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax:
Balance at beginning of year
Current period changes in fair value (net of tax effect of $(190), $75 and $103)
Reclassification to earnings (net of tax effect of $(3), $(142) and $(99))
Balance at end of year
Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:
Balance at beginning of year
Reclassification to earnings (net of tax effect of $269, $1,040 and $97)
Net actuarial gain (loss) and prior service cost resulting from remeasurements of
plan assets and liabilities (net of tax effect of $(180), $(1,460) and $197)
Balance at end of year
Accumulated other comprehensive income (loss) at end of year
2017
2016
2015
$
(1,016) $
86
(930)
(897) $
(119)
(1,016)
(457)
(440)
(897)
(1)
(2)
1
(2)
(45)
(316)
(5)
(366)
(1)
—
—
(1)
67
124
(236)
(45)
(3,421)
731
(2,709)
1,783
(879)
(3,569)
(4,867) $
(2,495)
(3,421)
(4,483) $
$
—
(1)
—
(1)
61
171
(165)
67
(3,198)
195
294
(2,709)
(3,540)
105
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, 2017, 2016 and 2015 is as follows (in millions):
2017 Amount
Reclassified
from AOCI
2016 Amount
Reclassified
from AOCI
2015 Amount
Reclassified
from AOCI
Affected Line Item in the Income
Statement
Unrealized Gain (Loss) on Marketable Securities:
Realized gain (loss) on sale of securities
Income tax (expense) benefit
Impact on net income
Unrealized Gain (Loss) on Cash Flow Hedges:
Interest rate contracts
Foreign exchange contracts
Foreign exchange contracts
Income tax (expense) benefit
Impact on net income
Unrecognized Pension and Postretirement Benefit Costs:
Prior service costs
Remeasurement of benefit obligation
Income tax (expense) benefit
Impact on net income
(2)
1
(1)
(27)
—
35
(3)
5
(200)
(800)
269
(731)
—
—
—
(26)
—
404
(142)
236
(172)
(2,651)
1,040
(1,783)
—
—
—
(24)
(25)
313
(99)
165
Investment income
Income tax expense
Net income
Interest expense
Interest expense
Revenue
Income tax expense
Net income
(174) Compensation and benefits
(118) Compensation and benefits
97
(195)
Income tax expense
Net income
Total amount reclassified for the period
$
(727) $
(1,547) $
(30)
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.
Activity in the deferred compensation program for the years ended December 31, 2017, 2016 and 2015 is as follows (in
millions):
Deferred Compensation Obligations:
Balance at beginning of year
Reinvested dividends
Benefit payments
Balance at end of year
Treasury Stock:
Balance at beginning of year
Reinvested dividends
Benefit payments
Balance at end of year
2017
2016
2015
Shares
Dollars
Shares
Dollars
Shares
Dollars
$
$
(1) $
—
—
(1) $
45
2
(10)
37
(45)
(2)
10
(37)
$
$
(1) $
—
—
(1) $
51
3
(9)
45
(51)
(3)
9
(45)
$
$
(1) $
—
—
(1) $
59
3
(11)
51
(59)
(3)
11
(51)
106
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Noncontrolling Interests
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain &
Freight segments. Noncontrolling interests increased $6 and $3 million for the years ended December 31, 2017 and 2016,
respectively.
NOTE 11. STOCK-BASED COMPENSATION
The UPS Incentive Compensation Plan permits the grant of non-qualified and incentive stock options, stock appreciation
rights, restricted stock and stock units, and restricted performance shares and units to eligible employees. The number of shares
reserved for issuance under the Incentive Compensation Plan is 27 million. Each share issued pursuant to restricted stock units
and restricted performance units (collectively referred to as "Restricted Units"), stock options and other permitted awards will
reduce the share reserve by one share. We had 12 million shares available to be issued under the Incentive Compensation Plan
as of December 31, 2017.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management
Incentive Award program, the Coyote Restricted Stock Award, the UPS Long-Term Incentive Performance Award program and
the UPS Stock Option program. These awards are discussed in the following paragraphs. The total expense recognized in our
income statement under all stock compensation award programs was $584, $591 and $574 million during 2017, 2016 and 2015,
respectively. The associated income tax benefit recognized in our income statement was $227, $219 and $215 million during
2017, 2016 and 2015, respectively. The cash income tax benefit received from the exercise of stock options and the lapsing of
Restricted Units was $276, $207 and $252 million during 2017, 2016 and 2015, respectively.
Management Incentive Award Program ("MIP")
Non-executive management earning the right to receive the Management Incentive Award are determined annually by the
Salary Committee, which is comprised of executive officers of UPS. Awards granted to executive officers are determined
annually by the Compensation Committee of the UPS Board of Directors. Our Management Incentive Award program provides,
with certain exceptions, that one-half to two-thirds of the annual Management Incentive Award will be made in Restricted Units
(depending upon the level of management involved). The other one-third to one-half of the award is electable in the form of
cash or unrestricted shares of class A common stock, and is fully vested at the time of grant.
Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after
required tax withholdings. Except in the case of death, Restricted Units granted for our Management Incentive Award vest over
a five-year period with approximately 20% of the award vesting at each anniversary date of the grant. The entire grant (less
estimated forfeitures) is expensed on a straight-line basis over the requisite service period (except in the case of death, disability
or retirement, in which case immediate expensing occurs). All Restricted Units granted are subject to earlier cancellation or
vesting under certain conditions. Dividends earned on Restricted Units are reinvested in additional Restricted Units at each
dividend payable date.
Coyote Restricted Stock Award
In August 2015 we acquired Coyote, a U.S.-based truckload freight brokerage company. During the third quarter of
2015, we granted Restricted Units to certain eligible Coyote management employees. The vesting of Restricted Units granted
under this award will vary between one and four years with an equal number of restricted units vesting at each anniversary date
(except in the case of death, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis over
the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs).
Long-Term Incentive Performance Award granted prior to 2014
We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible
employees. The Restricted Units ultimately granted under the Long-Term Incentive Performance Award program were based
upon the achievement of certain performance measures, including growth in consolidated revenue and operating return on
invested capital during the performance award cycle, and other measures, including the achievement of an adjusted earnings per
share target over the entire three-year performance award cycle. The last award granted under this program fully vested in the
first quarter of 2016.
107
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2017, we had the following Restricted Units outstanding, including reinvested dividends, that were
granted under our Management Incentive Award program and the Coyote Restricted Stock Award:
Nonvested at January 1, 2017
Vested
Granted
Reinvested Dividends
Forfeited / Expired
Nonvested at December 31, 2017
Restricted Units Expected to Vest
Shares
(in thousands)
11,475
(5,100)
3,927
332
(163)
10,471
10,325
Weighted-Average
Grant Date
Fair Value
Weighted-Average Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
$
$
$
94.32
90.71
105.62
N/A
99.70
99.16
99.20
1.38
1.38
$
$
1,248
1,230
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 2017, 2016 and 2015 was $105.62, $97.04 and
$100.63, respectively. The total fair value of Restricted Units vested was $534, $445 and $564 million in 2017, 2016 and 2015,
respectively. As of December 31, 2017, there was $475 million of total unrecognized compensation cost related to nonvested
Restricted Units. That cost is expected to be recognized over a weighted-average period of three years and one month.
Long-Term Incentive Performance Award Program granted after 2013
We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible
employees. Beginning with the Long-Term Incentive Performance grant in 2014, the performance targets are equally-weighted
among consolidated operating return on invested capital, growth in currency-constant consolidated revenue and total
shareowner return relative ("RTSR") to a peer group of companies. The Restricted Units granted under this award vest at the
end of a three-year period (except in the case of death, in which case immediate vesting occurs on a prorated basis. In the case
of disability and retirement, vesting occurs at the end of the three-year period 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 currency-
constant consolidated revenue, we recognize the grant date fair value of these units (less estimated forfeitures) as compensation
expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the
award related to RTSR is valued using a Monte Carlo model. This portion of the award is recognized as compensation expense
(less estimated forfeitures) ratably over the vesting period.
The weighted-average assumptions used, by year, and the calculated weighted-average fair values of the RTSR portion of
the grants, are as follows:
Risk-free interest rate
Expected volatility
Weighted-average fair value of units granted
Share payout
2017
2016
2015
$
1.46%
16.59%
119.29
113.55%
$
1.00%
16.46%
136.18
129.08%
$
0.89%
15.53%
63.64
65.86%
There is no expected dividend yield as units earn dividend equivalents.
108
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2017, we had the following Restricted Units outstanding, including reinvested dividends, that were
granted under our Long-Term Incentive Performance Award program:
Nonvested at January 1, 2017
Vested
Granted
Reinvested Dividends
Forfeited / Expired
Nonvested at December 31, 2017
Performance Units Expected to Vest
Shares
(in thousands)
1,683
(839)
958
73
(88)
1,787
1,699
Weighted-Average
Grant Date
Fair Value
Weighted-Average Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
$
$
$
101.36
97.11
105.65
N/A
103.87
105.58
105.72
1.53
1.54
$
$
213
202
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 2017, 2016 and 2015 was $105.65, $105.50 and
$96.64, respectively. The total fair value of Restricted Units vested was $71, $13 and $5 million in 2017, 2016 and 2015,
respectively. As of December 31, 2017, there was $100 million of total unrecognized compensation cost related to nonvested
Restricted Units. That cost is expected to be recognized over a weighted-average period of one year and nine months.
Non-qualified Stock Options
We maintain fixed 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.
Executive officers and certain senior managers receive a non-qualified stock option grant annually, in which the value
granted is determined as a percentage of salary. Options granted generally vest over a five-year period with approximately 20%
of the award vesting at each anniversary date of the grant. All options granted are subject to earlier cancellation or vesting under
certain conditions. The options granted will expire ten years after the date of the grant. Option holders may exercise their
options via the tender 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:
Shares
(in thousands)
Weighted-Average
Exercise
Price
Weighted-Average Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
Outstanding at January 1, 2017
Exercised
Granted
Forfeited / Expired
Outstanding at December 31, 2017
Options Vested and Expected to Vest
Exercisable at December 31, 2017
1,828
(802)
272
(7)
1,291
1,291
757
$
$
$
$
80.45
71.57
106.87
70.90
91.58
91.58
83.28
6.30
6.30
4.80
$
$
$
36
36
27
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:
Expected dividend yield
Risk-free interest rate
Expected life in years
Expected volatility
Weighted-average fair value of options granted
2017
2016
2015
2.89%
2.15%
7.5
17.81%
14.70
$
2.95%
1.62%
7.5
22.40%
16.46
$
2.63%
2.07%
7.5
20.61%
18.07
$
109
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expected volatilities are based on the historical returns on our stock and the implied volatility of our publicly-traded
options. 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, and we have relied upon a
combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the grants
and an index of peer companies with similar grant characteristics in estimating this variable.
We received cash of $41, $72 and $56 million during 2017, 2016 and 2015, respectively, from option holders resulting
from the exercise of stock options. The total intrinsic value of options exercised during 2017, 2016 and 2015 was $22, $24 and
$31 million, respectively. As of December 31, 2017, there was $1 million of total unrecognized compensation cost related to
nonvested options. That cost is expected to be recognized over a weighted-average period of three years and six months.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2017:
Exercise Price Range
$55.01 - $70.00
$70.01 - $80.00
$80.01 - $90.00
$90.01 - $110.00
Options Outstanding
Weighted-Average
Remaining
Contractual Term
(in years)
Shares
(in thousands)
Options Exercisable
Weighted-Average
Exercise
Price
Shares
(in thousands)
Weighted-Average
Exercise
Price
131
223
141
796
1,291
1.89
3.30
5.17
8.07
6.30
$
$
61.97
75.12
82.88
102.59
91.58
131
223
127
276
757
$
$
61.97
75.12
82.87
100.11
83.28
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 0.9, 0.9 and 0.9 million shares at average prices of $108.98, $99.27 and $95.41
per share during 2017, 2016 and 2015, respectively. This plan is not considered to be compensatory, and therefore no
compensation cost is measured for the employees’ purchase rights.
110
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
We report our operations in three segments: U.S. Domestic Package operations, International Package operations and
Supply Chain & Freight operations. Package operations represent our most significant business and are broken down into
regional operations around the world. Regional operations managers are responsible for both domestic and export products
within their geographic area.
U.S. Domestic Package
Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the United
States.
International Package
International Package operations include delivery to more than 220 countries and territories worldwide, including
shipments wholly outside the United States, as well as shipments with either origin or destination outside the United States. Our
International Package reporting segment includes the operations of our Europe, Asia, Americas and ISMEA operating segments.
Supply Chain & Freight
Supply Chain & Freight includes our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and
other aggregated business units. Our Forwarding, Logistics and UPS Mail Innovations units provide services in more than 200
countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, distribution
and post-sales services, mail and consulting services. UPS Freight offers a variety of LTL and TL services to customers in North
America. Coyote offers truckload brokerage services primarily in the United States. Marken is a global provider of supply chain
solutions to the life sciences industry. Other aggregated business units within this segment include The UPS Store and UPS
Capital.
In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating
profit is before investment income and other, interest expense and income taxes. The accounting policies of the segments are
the same as those described in the "Items Affecting Comparability" section of Management's Discussion and Analysis, with
certain expenses allocated between the segments using activity-based costing methods. Unallocated assets are comprised
primarily of cash, marketable securities and certain investment partnerships.
111
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):
Revenue:
U.S. Domestic Package
International Package
Supply Chain & Freight
Consolidated
Operating Profit:
U.S. Domestic Package
International Package
Supply Chain & Freight
Consolidated
Assets:
U.S. Domestic Package
International Package
Supply Chain & Freight
Unallocated
Consolidated
Depreciation and Amortization Expense:
U.S. Domestic Package
International Package
Supply Chain & Freight
Consolidated
2017
2016
2015
$
$
$
$
$
$
$
$
40,764
13,338
11,770
65,872
4,280
2,464
785
7,529
27,121
8,544
8,241
1,497
45,403
1,479
509
294
2,282
$
$
$
$
$
$
$
$
38,301
12,350
10,255
60,906
3,017
2,044
406
5,467
23,191
8,193
7,806
1,187
40,377
1,479
491
254
2,224
$
$
$
$
$
$
$
$
36,747
12,149
9,467
58,363
4,767
2,137
764
7,668
21,701
7,858
7,728
1,024
38,311
1,408
475
201
2,084
Revenue by product type for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):
U.S. Domestic Package:
Next Day Air
Deferred
Ground
Total U.S. Domestic Package
International Package:
Domestic
Export
Cargo
Total International Package
Supply Chain & Freight:
Forwarding and Logistics
Freight
Other
Total Supply Chain & Freight
Consolidated
2017
2016
2015
$
$
7,088
4,421
29,255
40,764
2,645
10,167
526
13,338
7,981
2,998
791
11,770
65,872
$
$
6,752
4,082
27,467
38,301
2,441
9,374
535
12,350
6,793
2,736
726
10,255
60,906
$
$
6,570
3,903
26,274
36,747
2,425
9,092
632
12,149
5,900
2,881
686
9,467
58,363
112
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic information for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):
United States:
Revenue
Long-lived assets
International:
Revenue
Long-lived assets
Consolidated:
Revenue
Long-lived assets
2017
2016
2015
$
$
$
$
$
$
51,936
22,638
13,936
6,382
65,872
29,020
$
$
$
$
$
$
48,013
19,253
12,893
5,898
60,906
25,151
$
$
$
$
$
$
45,309
18,196
13,054
5,828
58,363
24,024
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, nor any individual customers, provided 10% or more of consolidated revenue
for the years ended December 31, 2017, 2016 or 2015.
113
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. INCOME TAXES
The income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 consists of the following (in
millions):
Current:
U.S. Federal
U.S. State and Local
Non-U.S.
Total Current
Deferred:
U.S. Federal
U.S. State and Local
Non-U.S.
Total Deferred
Total Income Tax Expense
Income before income taxes includes the following components (in millions):
United States
Non-U.S.
Total Income Before Income Taxes:
2017
2016
2015
$
$
$
$
671
49
288
1,008
1,121
118
(9)
1,230
2,238
2017
5,998
1,150
7,148
$
$
$
$
1,338
67
177
1,582
103
31
(11)
123
1,705
2016
4,322
814
5,136
$
$
$
$
1,634
88
236
1,958
469
65
6
540
2,498
2015
6,348
994
7,342
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31,
2017, 2016 and 2015 consists of the following:
Statutory U.S. federal income tax rate
U.S. state and local income taxes (net of federal benefit)
Non-U.S. tax rate differential
Nondeductible/nontaxable items
U.S. federal tax credits
Income tax benefit from the Tax Cuts and Jobs Act and other non-U.S. tax law
changes
Defined benefit plans mark-to-market charge tax rate differential (1)
Other
Effective income tax rate
(1) Impact of applying Tax Act corporate rate enacted of 21% versus 35%
2017
2016
2015
35.0%
1.5
(2.0)
(0.1)
(1.8)
(3.6)
1.5
0.8
31.3%
35.0%
1.5
(2.4)
0.8
(1.2)
—
—
(0.5)
33.2%
35.0%
1.7
(1.2)
0.2
(1.3)
—
—
(0.4)
34.0%
Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions we operate in 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 decreased to 31.3% in 2017, compared with 33.2% in 2016 and 34.0% in 2015, primarily due to the
effects of the aforementioned recurring factors and the following discrete tax items:
114
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Cuts and Jobs Act
On December 22, 2017, the United States enacted into law the Tax Act. The Tax Act makes broad and complex changes
to the U.S. tax code, including a permanent corporate rate reduction to 21% and a transition to a territorial international system
effective in 2018. The Tax Act also includes provisions that affect 2017, including: (1) requiring a one-time transition tax on
certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”) that is payable over eight years; (2) requiring a
remeasurement of all U.S. deferred tax assets and liabilities to the newly enacted corporate tax rate of 21%; and (3) providing
for additional first-year depreciation that allows full expensing of qualified property placed into service after September 27,
2017.
In late December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the
Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for
companies to complete the related accounting under U.S. GAAP. If a company’s accounting for certain income tax effects of the
Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial
statements. Accordingly, we have recorded provisional estimates related to our Transition Tax liability, our change in indefinite
reinvestment assertion for certain foreign subsidiaries and the remeasurement of our U.S. net deferred tax liabilities.
To calculate the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986
earnings and profits (“E&P”) of the foreign subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings.
We are able to make a reasonable estimate of the Transition Tax and recorded a provisional liability of $310 million; however,
there are certain factors that could impact our provisional estimate.
First, several of our foreign subsidiaries have a fiscal year-end, and E&P for these subsidiaries cannot be precisely
calculated until their fiscal years conclude during 2018. Second, we continue to gather additional information needed to
precisely estimate the impact of the Transition Tax on our U.S. state and local tax liabilities given the complexity of the relevant
state laws. Finally, we expect additional regulatory guidance and technical clarifications from the U.S. Department of the
Treasury and Internal Revenue Service within the next 12 months that could change our provisional estimate of the Transition
Tax.
Undistributed E&P of our foreign subsidiaries amounted to $5.002 billion at December 31, 2017. As the U.S. has moved
to a territorial system, we have changed our indefinite reinvestment assertion with respect to the earnings of certain foreign
subsidiaries. As a result, we have recorded a provisional deferred tax liability and corresponding increase to deferred tax
expense of $24 million. There are certain factors, discussed above with regard to the Transition Tax, which could also impact
our provisional estimate for the change in indefinite reinvestment assertion. For all other foreign subsidiaries, we continue to
assert that these earnings are indefinitely reinvested. $1.335 billion 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. We will continue to evaluate our
indefinite reinvestment assertion for all foreign subsidiaries in light of the Tax Act, and our provisional estimate is subject to
change.
For our net U.S. deferred tax liabilities, we have recorded a provisional decrease of $606 million with a corresponding
reduction to deferred tax expense of $606 million for the year ended December 31, 2017. While we are able to make a
reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act,
including, but not limited to, completing the analysis of our 2017 capital expenditures that qualify for full expensing and the
state tax effect of adjustments made to federal temporary differences.
Other 2017 Discrete Items
In the fourth quarter of 2017, we recognized an income tax benefit of $193 million related to pre-tax mark-to-market
losses of $800 million on our pension and postretirement defined benefit plans.This income tax benefit was generated at a lower
average statutory tax rate than the 2017 U.S. federal statutory tax rate due to future tax rate changes enacted by the Tax Act and
differences between U.S. and foreign statutory rates, which was partially offset by the effect of U.S. state and local taxes.
In the fourth quarter of 2017, tax law changes were enacted in certain non-U.S. jurisdictions in which we operate. As a
result, we have recorded a decrease to our foreign net deferred tax assets of $14 million with a corresponding net increase to
deferred tax expense of $14 million for the year ended December 31, 2017.
115
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the first quarter of 2017, we adopted a new accounting standard that requires the recognition of excess tax benefits
related to share-based compensation in income tax expense, which resulted in tax benefits for the year ended December 31,
2017 of $71 million and reduced our effective tax rate by 1.0%.
2016 Discrete Items
In the fourth quarter of 2016, we recognized an income tax benefit of $978 million related to pre-tax mark-to-market
losses of $2.651 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a
higher average statutory tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local
taxes.
2015 Discrete Items
During the third quarter of 2015 and after the filing of our annual federal tax returns, we reconciled our deferred tax
balances and identified adjustments to be made with respect to prior years’ deferred tax balances. The adjustments resulted in a
reduction of income tax expense of $66 million.
In connection with our acquisition of Coyote Logistics in 2015, we distributed $500 million of cash held by a Canadian
subsidiary to its U.S. parent during the fourth quarter of 2015. As a result of the distribution, we recorded additional net income
tax expense of $28 million.
In the fourth quarter of 2015, we recognized an income tax benefit of $39 million related to pre-tax mark-to-market losses
of $118 million on our pension and postretirement defined benefit plans. This income tax benefit was generated at a lower
average statutory tax rate than our U.S. federal statutory tax rate because it was due, in part, to non-U.S. benefit plans.
Other favorable rate impacting items in 2015 include: resolution of several U.S. state and local tax matters; the extension
of favorable U.S. federal tax provisions associated with the Protecting Americans from Tax Hikes Act of 2015 related to
research and development tax credits and work opportunity tax credits; and the execution of two bilateral advance pricing
agreements. These agreements established intercompany transfer pricing arrangements between the U.S. and certain non-U.S.
jurisdictions related to our small package operations for tax years 2010 through 2019.
Other Items
Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which is effective through
December 31, 2021. 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 $24 million ($0.03 per share), $21 million ($0.02 per share) and
$25 million ($0.03 per share) for 2017, 2016, and 2015, respectively.
116
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income tax assets and liabilities are comprised of the following at December 31, 2017 and 2016 (in millions):
Fixed assets and capitalized software
Other
Deferred tax liabilities
Pension and postretirement benefits
Loss and credit carryforwards
Insurance reserves
Stock compensation
Other
Deferred tax assets
Deferred tax assets valuation allowance
Deferred tax asset (net of valuation allowance)
Net deferred tax asset (liability)
Amounts recognized in the consolidated balance sheets:
Deferred tax assets
Deferred tax liabilities
Net deferred tax asset (liability)
$
2017
(3,288) $
(535)
(3,823)
2016
(4,782)
(756)
(5,538)
1,877
323
449
182
626
3,457
(126)
3,331
4,236
229
733
297
681
6,176
(159)
6,017
$
$
$
(492) $
479
$
265
(757)
(492) $
591
(112)
479
The valuation allowance changed by $(33), $(38) and $(11) million during the years ended December 31, 2017, 2016 and
2015, respectively.
We have a U.S. federal capital loss carryforward of $34 million as of December 31, 2017, $32 million of which expires
on December 31, 2021 and the remainder of which expires on December 31, 2022. In addition, we have U.S. state and local
operating loss and credit carryforwards as follows (in millions):
U.S. state and local operating loss carryforwards
U.S. state and local credit carryforwards
2017
2016
$
$
1,215
83
$
$
603
70
The U.S. state and local operating loss carryforwards expire at varying dates through 2037. The U.S. state and local
credits can be carried forward for periods ranging from one year to indefinitely. We also have non-U.S. loss carryforwards of
$728 million as of December 31, 2017, the majority of which may be carried forward indefinitely. As indicated in the table
above, we have established a valuation allowance for certain non-U.S. and state carryforwards, due to the uncertainty resulting
from a lack of previous taxable income within the applicable tax jurisdictions.
117
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity related to our unrecognized tax benefits (in millions):
Tax
Interest
Penalties
Balance at January 1, 2015
Additions for tax positions of the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years for:
Changes based on facts and circumstances
Settlements during the period
Lapses of applicable statute of limitations
Balance at December 31, 2015
Additions for tax positions of the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years for:
Changes based on facts and circumstances
Settlements during the period
Lapses of applicable statute of limitations
Balance at December 31, 2016
Additions for tax positions of the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years for:
Changes based on facts and circumstances
Settlements during the period
Lapses of applicable statute of limitations
Balance at December 31, 2017
$
$
172
24
45
(85)
(6)
(2)
148
17
20
(41)
—
—
144
16
33
(24)
(6)
(3)
160
$
$
42
—
21
(8)
(2)
—
53
—
10
(13)
—
—
50
—
14
(18)
(3)
—
43
$
$
3
—
3
—
—
—
6
—
—
—
—
—
6
—
3
—
—
—
9
The total amount of gross unrecognized tax benefits as of December 31, 2017, 2016 and 2015 that, if recognized, would
affect the effective tax rate were $159, $142 and $147 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 2014.
A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the
ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of
unrecognized tax benefits could significantly increase or decrease within the next twelve months. Items that may cause changes
to unrecognized tax benefits include the timing of interest deductions and the allocation of income and expense between tax
jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the
expiration of the statute of limitations or other unforeseen circumstances. At this time, an estimate of the range of the
reasonably possible change cannot be made.
118
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EARNINGS PER SHARE
The earnings per share amounts are the same for class A and class B common shares as the holders of each class are
legally entitled to equal per share distributions whether through dividends or in liquidation.
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share
amounts):
Numerator:
2017
2016
2015
Net income attributable to common shareowners
$
4,910
$
3,431
$
4,844
Denominator:
Weighted-average shares
Deferred compensation obligations
Vested portion of restricted shares
Denominator for basic earnings per share
Effect of Dilutive Securities:
Restricted performance units
Stock options
Denominator for diluted earnings per share
Basic Earnings Per Share
Diluted Earnings Per Share
865
1
5
871
3
1
875
5.64
5.61
$
$
878
1
4
883
3
1
887
3.89
3.87
$
$
896
1
4
901
4
1
906
5.38
5.35
$
$
Diluted earnings per share for the years ended December 31, 2017, 2016 and 2015 exclude the effect of 0.1, 0.2 and
0.2 million shares, respectively, of common stock that may be issued upon the exercise of employee stock options because such
effect would be antidilutive.
NOTE 15. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
We are exposed to market risk, primarily related to foreign exchange rates, commodity prices and interest rates. These
exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, we enter into a
variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in
earnings and cash flows associated with changes in foreign currency rates, commodity prices and interest rates. It is our policy and
practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive
instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value for those
instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative
financial instruments for trading or speculative purposes.
Credit Risk Management
The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to
meet the terms of the agreements. However, we minimize such risk exposures for these instruments by limiting the counterparties to
banks and financial institutions that meet established credit guidelines and by monitoring counterparty credit risk to prevent
concentrations of credit risk with any single counterparty.
We have agreements with all of our active counterparties (covering the majority of our derivative positions) containing early
termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of
derivatives associated with those counterparties. Events such as a counterparty credit rating downgrade (depending on the ultimate
rating level) could also allow us to take additional protective measures such as the early termination of trades. At December 31,
2017 and 2016, we held cash collateral of $17 and $575 million, respectively, under these agreements; this collateral is included in
"cash and cash equivalents" on the consolidated balance sheets and its use by UPS is not restricted.
119
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the agreements described above, we could also be required to provide additional collateral or terminate
transactions with certain counterparties in the event of a downgrade of our credit rating. The amount of collateral required would be
determined by the net fair value of the associated derivatives with each counterparty. At December 31, 2017 and 2016, $174 and $0
million, respectively, of additional collateral was required to be posted with our counterparties. In addition, the aggregate fair value
of instruments not covered by the zero threshold bilateral collateral provisions that were in a net liability position was $16 million at
December 31, 2017.
We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
Accounting Policy for Derivative Instruments
We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting
for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging
relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as
hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair
value hedge or a hedge of a net investment in a foreign operation.
A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular
risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the
derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the
hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in
the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are
recognized in the statements of consolidated income during the current period.
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the
consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair
value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current
period, as well as the offsetting gain or loss on the hedged item.
A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to
hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or
losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within AOCI. The
remainder of the change in value of such instruments is recorded in earnings.
Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply to our domestic, international package and LTL services are the primary means of
reducing the risk of adverse fuel price changes on our business. In order to mitigate the impact of fuel surcharges imposed on us by
outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services. We
periodically enter into option and future contracts on energy commodity products to manage the price risk associated with
forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to
reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those
products. We have designated and account for these contracts as cash flow hedges of the underlying forecasted transactions
involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel
expense or revenue when the underlying transactions occur.
Foreign Currency Risk Management
To protect against the reduction in value of forecasted foreign currency cash flows from our international package business,
we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro,
British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue
denominated in foreign currencies with foreign currency option and forward contracts. We have designated and account for these
contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses
from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur.
120
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We also hedge portions of our anticipated cash settlements of intercompany transactions subject to foreign currency
remeasurement using foreign currency forward contracts. We have designated and account for these contracts as cash flow hedges of
forecasted foreign currency denominated transactions, and therefore the resulting gains and losses from these hedges are recognized
as a component of investment income and other when the underlying transactions are subject to currency remeasurement.
We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of
foreign denominated debt as the hedging instrument allows the debt to be remeasured to cumulative translation adjustment within
AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedges is recognized as a
component of investment income and other. Balances in the cumulative translation adjustment account remain until the sale or
liquidation of the foreign entity.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative
instruments as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall
cost of borrowing. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt
being hedged. Interest rate swaps allow us to maintain a target range of floating-rate debt within our capital structure.
We have designated and account for the majority of our interest rate swaps that convert fixed-rate interest payments into
floating-rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses
resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are
recorded to interest expense in the period in which the gains and losses occur. We have designated and account for interest rate
swaps that convert floating-rate interest payments into fixed-rate interest payments as cash flow hedges of the forecasted payment
obligations. The gains and losses resulting from fair value adjustments to the interest rate swaps are recorded to AOCI.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings, using forward
starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate
exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the
impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt,
and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.
Outstanding Positions
The notional amounts of our outstanding derivative positions were as follows as of December 31, 2017 and 2016 (in millions):
Currency Hedges:
Euro
British Pound Sterling
Canadian Dollar
Indian Rupee
Mexican Peso
Japanese Yen
Singapore Dollar
Interest Rate Hedges:
Fixed to Floating Interest Rate Swaps
Floating to Fixed Interest Rate Swaps
Investment Market Price Hedges:
Marketable Securities
As of December 31, 2017, we had no outstanding commodity hedge positions.
121
2017
2016
4,942
1,736
1,259
—
169
—
11
5,424
778
3,702
1,380
1,053
76
—
3,972
32
5,799
778
64
76
EUR
GBP
CAD
INR
MXN
JPY
SGD
USD
USD
EUR
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet Recognition
The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have
been recognized, and the related fair values of those derivatives as of December 31, 2017 and 2016 (in millions). The table is
segregated between those derivative instruments that qualify and are designated as hedging instruments and those that are not, as
well as by type of contract and whether the derivative is in an asset or liability position.
We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative
positions. However, we have not elected to offset the fair value positions of the derivative contracts recorded on our consolidated
balance sheets. The columns labeled "net amounts if right of offset had been applied" indicate the potential net fair value positions
by type of contract and location on the consolidated balance sheets had we elected to apply the right of offset.
Asset Derivatives
Derivatives Designated As Hedges:
Foreign exchange contracts
Interest rate contracts
Foreign exchange contracts
Interest rate contracts
Derivatives Not Designated As Hedges:
Foreign exchange contracts
Interest rate contracts
Total Asset Derivatives
Liability Derivatives
Derivatives Designated As Hedges:
Foreign exchange contracts
Interest rate contracts
Foreign exchange contracts
Interest rate contracts
Derivatives Not Designated As Hedges:
Foreign exchange contracts
Investment market price contracts
Interest rate contracts
Total Liability Derivatives
Gross Amounts Presented in
Consolidated Balance Sheets
Net Amounts if Right of
Offset had been Applied
Balance Sheet Location
2017
2016
2017
2016
$
176
$
— $
Other current assets
$
Other current assets
Other non-current assets
Other non-current assets
Other current assets
Other non-current assets
2
1
1
59
18
26
$
107
$
487
$
Gross Amounts Presented in
Consolidated Balance Sheets
Net Amounts if Right of
Offset had been Applied
Balance Sheet Location
2017
2016
2017
2016
$
— $
Other current liabilities
$
Other current liabilities
Other non-current liabilities
Other non-current liabilities
Other current liabilities
Other current liabilities
Other non-current liabilities
93
—
194
28
1
16
—
$
312
$
1
—
43
17
26
87
$
$
91
—
193
12
—
16
176
—
126
119
1
40
462
—
1
1
3
—
10
5
20
—
131
137
1
42
1
6
21
—
10
7
45
$
332
$
122
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Statement and AOCI Recognition
The following table indicates the amount of gains and losses that have been recognized in AOCI within "unrealized gain (loss)
on cash flow hedges" for the years ended December 31, 2017 and 2016 for those derivatives designated as cash flow hedges (in
millions):
Derivative Instruments in Cash Flow Hedging Relationships
Interest rate contracts
Foreign exchange contracts
Total
Amount of Gain (Loss) Recognized in AOCI on
Derivative (Effective Portion)
2017
2016
$
$
— $
(506)
(506) $
1
198
199
As of December 31, 2017, $150 million of pre-tax losses related to cash flow hedges that are currently deferred in AOCI are
expected to be reclassified to income over the 12 month period ended December 31, 2018. 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 flow is 15 years.
The amount of ineffectiveness recognized in income on derivative instruments designated in cash flow hedging relationships
was immaterial for the years ended December 31, 2017, 2016 and 2015.
The following table indicates the amount of gains and losses that have been recognized in AOCI within "foreign currency
translation gain (loss)" for the years ended December 31, 2017 and 2016 for those instruments designated as net investment hedges
(in millions):
Non-derivative Instruments in Net Investment Hedging Relationships
Foreign denominated debt
Total
Amount of Gain (Loss) Recognized in AOCI on
Debt (Effective Portion)
2017
2016
$
$
(428) $
(428) $
119
119
The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging
relationships was immaterial for the years ended December 31, 2017, 2016 and 2015.
The following table indicates the amount and location in the statements of consolidated income in which derivative gains and
losses, as well as the associated gains and losses on the underlying exposure, have been recognized for those derivatives designated
as fair value hedges for the years ended December 31, 2017 and 2016 (in millions):
Derivative Instruments
in Fair Value Hedging
Relationships
Interest rate
contracts
Location of
Gain (Loss)
Recognized in
Income
Amount of Gain (Loss)
Recognized in Income
2017
2016
Interest Expense
$
(84) $
(71)
Hedged Items in
Fair Value Hedging
Relationships
Fixed-Rate Debt
and Capital Leases
Location of
Gain (Loss)
Recognized in
Income
Amount of Gain (Loss)
Recognized in Income
2017
2016
Interest Expense
$
84
$
71
Additionally, we maintain some interest rate swaps, foreign currency forwards, investment market price forwards and
commodity contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic
hedge of portions of our outstanding debt. These foreign exchange forward contracts are intended to provide an economic offset to
foreign currency remeasurement risks for certain assets and liabilities in our consolidated balance sheets. These investment market
price forward contracts are intended to provide an economic offset to fair value fluctuations of certain investments in marketable
securities.
We also periodically terminate interest rate swaps and foreign currency options by entering into offsetting swap and foreign
currency positions with different counterparties. As part of this process, we de-designate our original swap and foreign currency
contracts. These transactions provide an economic offset that effectively eliminates the impact of changes in market valuation.
123
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes
and settlements of these foreign currency forwards, interest rate swaps, investment market price and commodity contracts not
designated as hedges for the years ended December 31, 2017 and 2016 (in millions):
Derivative Instruments Not Designated in
Hedging Relationships
Foreign exchange contracts
Investment market price contracts
Interest rate contracts
Total
Fair Value Measurements
Location of Gain
(Loss) Recognized
in Income
Investment income and other
Investment income and other
Interest Expense
Amount of Gain (Loss)
Recognized in Income
2017
2016
$
$
60
(5)
(9)
46
$
$
(145)
(5)
(8)
(158)
Our foreign currency, interest rate and investment market price derivatives are largely comprised of over-the-counter
derivatives, which are primarily valued using pricing models that rely on market observable inputs such as yield curves, currency
exchange rates and commodity forward prices, and therefore are classified as Level 2. The fair values of our derivative assets and
liabilities as of December 31, 2017 and 2016 by hedge type are as follows (in millions):
2017
Assets:
Foreign Exchange Contracts
Interest Rate Contracts
Total
Liabilities:
Foreign Exchange Contracts
Investment Market Price Contracts
Interest Rate Contracts
Total
2016
Assets:
Foreign Exchange Contracts
Interest Rate Contracts
Total
Liabilities:
Foreign Exchange Contracts
Investment Market Price Contracts
Interest Rate Contracts
Total
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
— $
—
— $
— $
—
—
$
$
$
21
86
107
288
16
28
— $
—
— $
— $
—
—
— $
332
$
— $
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
— $
—
— $
— $
—
—
— $
308
179
487
6
10
29
45
$
$
$
$
— $
—
— $
— $
—
—
— $
$
$
$
$
124
21
86
107
288
16
28
332
308
179
487
6
10
29
45
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. QUARTERLY INFORMATION (UNAUDITED)
Our revenue, segment operating profit (loss), net income (loss), basic and diluted earnings per share on a quarterly basis
are presented below (in millions, except per share amounts):
Revenue:
U.S. Domestic Package
International Package
Supply Chain & Freight
Total revenue
Operating Profit (Loss):
U.S. Domestic Package
International Package
Supply Chain & Freight
Total operating profit (loss)
Net Income (Loss)
Net Income (Loss) Per Share:
First Quarter
2017
2016
Second Quarter
2016
2017
Third Quarter
2017
2016
Fourth Quarter
2016
2017
$ 9,535
3,058
2,722
15,315
$ 9,084
2,914
2,420
14,418
$ 9,745
3,163
2,842
15,750
$ 9,015
3,077
2,537
14,629
$ 9,649
3,364
2,965
15,978
$ 9,289
3,024
2,615
14,928
$ 11,835
3,753
3,241
18,829
$ 10,913
3,335
2,683
16,931
1,076
529
179
1,784
$ 1,158
1,102
574
147
1,823
$ 1,131
1,395
583
238
2,216
$ 1,384
1,233
613
192
2,038
$ 1,269
1,182
627
226
2,035
$ 1,264
1,252
576
206
2,034
$ 1,270
627
725
142
1,494
$ 1,104
$
(570)
281
(139)
(428)
(239)
Basic
Diluted
$
$
1.32
1.32
$
$
1.27
1.27
$
$
1.59
1.58
$
$
1.43
1.43
$
$
1.45
1.45
$
$
1.44
1.44
$
$
1.27
1.27
$ (0.27)
$ (0.27)
Operating profit for the quarter ended December 31, 2017 was impacted by a mark-to-market loss of $800 million on our
pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10%
corridor (allocated as follows—U.S. Domestic Package $637 million, International Package $35 million, and Supply Chain &
Freight $128 million). Net income for the quarter ended December 31, 2017 includes an income tax benefit of $258 million
attributable to the 2017 Tax Act. These items reduced fourth quarter net income by $349 million and basic and diluted earnings
per share by $0.41 and $0.40, respectively.
Operating profit for the quarter ended December 31, 2016 was impacted by a mark-to-market loss of $2.651 billion on our
pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10%
corridor (allocated as follows—U.S. Domestic Package $1.908 billion, International Package $425 million and Supply Chain &
Freight $318 million). This loss reduced fourth quarter net income by $1.673 billion, and basic and diluted earnings per share
by $1.91.
125
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures:
As of the end of the period covered by this report, management, including our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures and internal
controls over financial reporting. Based upon, and as of the date of, the evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be
disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and
when required and is accumulated and communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control:
There were no changes in the Company’s internal controls over financial reporting during the quarter ended December 31,
2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Management’s Report on Internal Control Over Financial Reporting:
UPS management is responsible for establishing and maintaining adequate internal controls over financial reporting for
United Parcel Service, Inc. and its subsidiaries (the “Company”). Based on the criteria for effective internal control over
financial reporting established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, management has assessed the Company’s internal control over financial reporting
as effective as of December 31, 2017. The independent registered public accounting firm of Deloitte & Touche LLP, as auditors
of the consolidated balance sheets of United Parcel Service, Inc. and its subsidiaries as of December 31, 2017 and the related
statements of consolidated income, consolidated comprehensive income and consolidated cash flows for the year ended
December 31, 2017, has issued an attestation report on the Company’s internal control over financial reporting, which is
included herein.
126
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareowners
United Parcel Service, Inc.
Atlanta, Georgia
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of United Parcel Service, Inc. and subsidiaries (the
"Company") as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company
and our report dated February 21, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 21, 2018
127
Item 9B.
Other Information
None.
PART III
128
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers of the Registrant
Name and Office
David P. Abney
Chairman and Chief Executive Officer
James J. Barber, Jr.
Senior Vice President and President, UPS International
Norman M. Brothers, Jr.
Senior Vice President, General Counsel and
Corporate Secretary
Alan Gershenhorn
Senior Vice President, Chief Commercial Officer
Principal Occupation
and Employment For
the Last Five Years
Age
62 Chief Executive Officer (2014 - present), Chairman
(2016 - present) Senior Vice President and Chief
Operating Officer (2007 - 2014).
57 President, UPS International (2013 - present), Chief
Operating Officer, UPS Europe, Middle East and
Africa (2010 - 2013).
50 Senior Vice President, General Counsel and
Corporate Secretary (2016 - present), Corporate
Legal Department Manager (2014 - 2016), Vice
President, Corporate Legal (2004 - 2014).
59 Executive Vice President and Chief Commercial
Officer (2014 - present), Senior Vice President,
Worldwide Sales, Marketing and Strategy (2011 -
2014).
Myron A. Gray
Senior Vice President and President, United States
Operations
60 President, United States Operations (2014 -
present), Senior Vice President, United States
Operations (2009 - 2014).
Kate M. Gutmann
Senior Vice President, Chief Sales and Solutions Officer
Teri P. McClure
Senior Vice President, Chief Human Resources Officer,
Labor Relations
Richard N. Peretz
Senior Vice President, Chief Financial Officer and
Treasurer
Juan R. Perez
Senior Vice President, Chief Information Officer
Scott A. Price
Senior Vice President, Chief Transformation Officer
Mark R. Wallace
Senior Vice President, Global Engineering and
Sustainability
49 Chief Sales and Solutions Officer; Senior Vice
President The UPS Store and UPS Capital (2017 -
present), Senior Vice President, Worldwide Sales
and Solutions (2014 - 2017), President, Worldwide
Sales (2011 - 2014).
54 Chief Human Resources Officer and Senior Vice
President, Labor (2016 - present), Chief Legal,
Communications and Human Resources Officer
(2015 - 2016), Senior Vice President of Legal,
Compliance and Public Affairs, General Counsel
and Corporate Secretary (2006 -2014).
56 Chief Financial Officer (2015 - present), Corporate
Controller and Treasurer (2014-2015), Corporate
Controller (2013 - 2015), Vice President of
Corporate Finance and Accounting (2008 - 2013).
51 Chief Information Officer and Engineering Officer
(2017 - present), Chief Information Officer (2016 -
2017), Vice President, Information Services (2011 -
2016).
56 Chief Transformation Officer (2017 - present),
Walmart International Executive Vice President of
Global Leverage (2017), Walmart Asia President
and Chief Executive Officer (2009 - 2017).
55 Senior Vice President, Global Engineering and
Sustainability (2015 - present), President, Global
Logistics & Distribution (2013 - 2015), Corporate
U.S. Engineering Coordinator (2012 - 2013).
129
Information about our directors is presented under the caption “Your Board of Directors" in our definitive Proxy
Statement for the Annual Meeting of Shareowners to be held on May 10, 2018 and is incorporated herein by reference.
Information about our Audit Committee is presented under the caption “Your Board of Directors - Committees of the
Board of Directors” and "Audit Committee Matters" in our definitive Proxy Statement for the Annual Meeting of Shareowners
to be held on May 10, 2018 and is incorporated herein by reference.
Information about our Code of Business Conduct is presented under the caption “Where You Can Find More Information”
in Part I, Item 1 of this report.
Information about our compliance with Section 16 of the Exchange Act of 1934, as amended, is presented under the
caption “Ownership of Our Securities - Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy
Statement for the Annual Meeting of Shareowners to be held on May 10, 2018 and is incorporated herein by reference.
Item 11. Executive Compensation
Information about our board and executive compensation is presented under the captions “Your Board of Directors -
Director Compensation" and "Executive Compensation" in our definitive Proxy Statement for the Annual Meeting of
Shareowners to be held on May 10, 2018 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information about security ownership is presented under the caption “Ownership of Our Securities - Securities
Ownership of Certain Beneficial Owners and Management” in our definitive Proxy Statement for the Annual Meeting of
Shareowners to be held on May 10, 2018 and is incorporated herein by reference.
Information about our equity compensation plans is presented under the caption “Executive Compensation - Equity
Compensation Plans” in our definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 10, 2018
and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information about transactions with related persons is presented under the caption “Corporate Governance - Conflicts of
Interest and Related Person Transactions” in our definitive Proxy Statement for the Annual Meeting of Shareowners to be held
on May 10, 2018 and is incorporated herein by reference.
Information about director independence is presented under the caption “Corporate Governance - Director Independence”
in our definitive Proxy Statement for the Annual Meeting of Shareowners to be held on May 10, 2018 and is incorporated
herein by reference.
Item 14. Principal Accounting Fees and Services
Information about aggregate fees billed to us by our principal accountant is presented under the caption “Audit
Committee Matters - Principal Accounting Firm Fees” in our definitive Proxy Statement for the Annual Meetings of
Shareowners to be held on May 10, 2018 and is incorporated herein by reference.
130
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as a part of this report:
1. Financial Statements.
See Item 8 for the financial statements filed with this report.
2. Financial Statement Schedules.
None.
3. Exhibits.
See the Exhibit Index below for a list of the exhibits incorporated by reference into or filed with this report.
(b) Exhibits Required To Be Filed
See Item 15(a)1 above
(c) Financial Statement Schedules Required To Be Filed
See Item 15(a) 2 above
Item 16. Form 10-K Summary
None
Exhibit
No.
Description
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
— Form of Restated Certificate of Incorporation of United Parcel Service, Inc. (incorporated by reference to Exhibit 3.2
to Form 8-K filed on May 12, 2010).
— Amended and Restated Bylaws of United Parcel Service, Inc. as of November 17, 2017 (incorporated by reference to
Exhibit 3.1 to Form 8-K, filed on November 17, 2017).
— Indenture relating to 8 3/8% Debentures due April 1, 2020 (incorporated by reference to Exhibit 4(c) to Registration
Statement No. 33-32481, filed December 7, 1989)(1).
— Indenture dated as of December 18, 1997 (incorporated by reference to Exhibit T-3C to Form T-3 filed December 18,
1997).
— Indenture dated as of January 26, 1999 (incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 1
to Form S-3 (No. 333-08369), filed on January 26, 1999).
— Supplemental Indenture dated as of March 27, 2000 to Indenture dated January 26, 1999 (incorporated by reference
to Exhibit 4.2 to Post-Effective Amendment No. 1 to Form S-3 (No. 333-08369-01), filed on March 15, 2000).
— Second Supplemental Indenture dated as of September 21, 2001 to Indenture dated January 26, 1999 (incorporated by
reference to Exhibit 4 to Form 10-Q for the Quarter Ended September 30, 2001).
— Indenture dated as of August 26, 2003 (incorporated by reference to Exhibit 4.1 to Form S-3 (No. 333-108272), filed
on August 27, 2003).
— First Supplemental Indenture dated as of November 15, 2013 to Indenture dated as of August 26, 2003 (incorporated
by reference to Exhibit 4.2 to Form S-3ASR (No. 333-192369) filed on November 15, 2013).
— Form of Second Supplemental Indenture dated as of May 18, 2017 (incorporated by reference to Exhibit 4.1 to Form
8-K filed on May 18, 2017).
— Form of Note for 5.50% Senior Notes due January 15, 2018 (incorporated by reference to Exhibit 4.2 to Form 8-K
filed on January 15, 2008).
4.10
— Form of Note for 6.20% Senior Notes due January 15, 2038 (incorporated by reference to Exhibit 4.3 to Form 8-K
filed on January 15, 2008).
131
4.11
— Form of Note for 5.125% Senior Notes due April 1, 2019 (incorporated by reference to Exhibit 4.2 to Form 8-K filed
on March 24, 2009).
4.12
— Form of Note for 3.125% Senior Notes due January 15, 2021 (incorporated by reference to Exhibit 4.1 to Form 8-K
filed on November 12, 2010).
4.13
— Form of Note for 4.875% Senior Notes due November 15, 2040 (incorporated by reference to Exhibit 4.2 to Form 8-
K filed on November 12, 2010).
4.14
— Form of Note for 1.125% Senior Notes due October 1, 2017 (incorporated by reference to Exhibit 4.1 to Form 8-K
filed on September 27, 2012).
4.15
— Form of Note for 2.450% Senior Notes due October 1, 2022 (incorporated by reference to Exhibit 4.2 to Form 8-K
filed on September 27, 2012).
4.16
— Form of Note for 3.625% Senior Notes due October 1, 2042 (incorporated by reference to Exhibit 4.3 to Form 8-K
filed on September 27, 2012).
4.17
— Form of Note for Floating Rate Senior Notes due December 15, 2064 (incorporated by reference to Exhibit 4.3 to
Form 8-K filed on December 15, 2014).
4.18
4.19
4.20
4.21
4.22
— Form of Note for Floating Rate Senior Notes due September 15, 2065 (incorporated by reference to Exhibit 4.1 to
Form 8-K filed on September 17, 2015).
— Form of Note for Floating Rate Senior Notes due July 15, 2020 (incorporated by reference to Exhibit 4.1 and Exhibit
4.2 to Form 8-K filed on November 20, 2015).
— Form of Note for 1.625% Senior Notes due November 15, 2025 (incorporated by reference to Exhibit 4.1 and Exhibit
4.2 to Form 8-K filed on November 20, 2015).
— Form of Note for Floating Rate Senior Notes due September 15, 2065 (incorporated by reference to Exhibit 4.1 to
Form 8-K filed on December 15, 2015).
— Form of Note for Floating Rate Senior Notes due March 15, 2066 (incorporated by reference to Exhibit 4.1 to Form
8-K filed on April 1, 2016).
4.23
— Form of Note for Floating Rate Senior Notes due March 15, 2066 (incorporated by reference to Exhibit 4.1 to Form
8-K filed on June 15, 2016).
4.24
— Form of Note for Floating Rate Senior Notes due March 15, 2066 (incorporated by reference to Exhibit 4.1 to Form
8-K filed on August 24, 2016).
4.25
— Form of Note for 2.40% Senior Notes Due November 2026 (incorporated by reference to Exhibit 4.2 to Form 8-K
filed on October 24, 2016).
4.26
— Form of Note for 3.40% Senior Notes Due November 2046 (incorporated by reference to Exhibit 4.3 to Form 8-K
filed on October 24, 2016).
4.27
— Form of Note for 1.00% Senior Notes Due November 2028 (incorporated by reference to Exhibit 4.1 to Form 8-K
filed on October 24, 2016).
4.28
— Form of Note for Floating Rate Senior Notes due March 15, 2067 (incorporated by reference to Exhibit 4.1 to Form
8-K filed on March 31, 2017).
4.29
— Form of Note for Floating Rate Senior Notes due May 16, 2022 (incorporated by reference to Exhibit 4.1 to Form 8-
K filed on May 16, 2017).
4.30
— Form of Note 2.350% Senior Noted due May 16, 2022 (incorporated by reference to Exhibit 4.2 to Form 8-K filed on
May 16, 2017).
4.31
— Form of Note for 2.125% Senior Notes due May 21, 2024 (incorporated by reference to Exhibit 4.2 to Form 8-K filed
on May 18, 2017).
4.32
— Form of Note 0.375% Senior Notes due November 15, 2023 (incorporated by reference to Exhibit 4.1 to Form 8-K
filed on November 13, 2017).
4.33
— Form of Note 1.500% Senior Notes due November 15, 2032 (incorporated by reference to Exhibit 4.2 to Form 8-K
filed on November 13, 2017).
4.34
— Form of Note for Floating Rate Senior Notes due April 1, 2021 (incorporated by reference to Exhibit 4.1 to Form 8-K
filed on November 14, 2017).
132
4.35
— Form of Note for Floating Rate Senior Notes due April 1, 2023 (incorporated by reference to Exhibit 4.2 to Form 8-K
filed on November 14, 2017).
4.36
— Form of Note 2.050% Senior Notes due April 1, 2021 (incorporated by reference to Exhibit 4.3 to Form 8-K filed on
November 14, 2017).
4.37
— Form of Note 2.500% Senior Notes due April 1, 2023 (incorporated by reference to Exhibit 4.4 to Form 8-K filed on
November 14, 2017).
4.38
— Form of Note 2.800% Senior Notes due November 15, 2024 (incorporated by reference to Exhibit 4.5 to Form 8-K
filed on November 14, 2017).
4.39
— Form of Note 3.050% Senior Notes due November 15, 2027 (incorporated by reference to Exhibit 4.6 to Form 8-K
filed on November 14, 2017).
4.40
— Form of Note 3.750% Senior Notes due November 15, 2047 (incorporated by reference to Exhibit 4.7 to Form 8-K
filed on November 14, 2017).
4.41
— Form of Note for Floating Rate Senior Notes due November 15, 2067 (incorporated by reference to Exhibit 4.8 to
Form 8-K filed on November 14, 2017).
10.1
— Amendment No. 1 to UPS Retirement Plan, as Amended and Restated, effective as of June 30, 2016 (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the Quarter Ended June 30, 2016).
10.1(a) — Amendment Four to the Amended and Restated UPS Retirement Plan effective June 23, 2017 (incorporated by
reference to Exhibit 10.2 to Form 8-K filed on June 27, 2017).
10.2
—
10.2(a) —
UPS 401(k) Savings Plan, Amendment and Restatement effective as of July 1, 2016 (incorporated by reference to
Exhibit 10.2 to Form 10-Q for the Quarter Ended September 30, 2016).
Amended and Restated UPS 401(k) Savings Plan effective January 1, 2017 (incorporated by references to Exhibit
10.1 to 8-K filed on June 27, 2017).
10.3
— Amended and Restated UPS Restoration Savings Plan effective January 1, 2017 (incorporated by reference to Exhibit
10.3 to Form 8-K filed on June 27, 2017).
10.4
— Amendment One to the UPS Excess Coordinating Benefit Plan effective June 23, 2017 (incorporated by reference to
Exhibit 10.4 to Form 8-K filed on June 27, 2017).
10.5
— UPS Excess Coordinating Benefit Plan, as Amended and Restated, effective as of January 1, 2012 (incorporated by
reference to Exhibit 10.5 to the 2012 Annual Report on Form 10-K).
10.6
— United Parcel Service, Inc. 2012 Omnibus Incentive Compensation Plan (incorporated by reference to Annex II to the
Definitive Proxy Statement, filed on March 12, 2012).
10.6(a) — Form of Long-Term Incentive Performance Award Agreement (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).
10.6(b) — Form of Non-Management Director Restricted Stock Unit Award (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).
10.6(c) — UPS Management Incentive Program Terms and Conditions effective as of January 1, 2011 (incorporated by
reference to Exhibit 10.10(3) to the 2010 Annual Report on Form 10-K).
10.6(d) — UPS Stock Option Program Terms and Conditions effective as of January 1, 2012 (incorporated by reference to
Exhibit 10.7(4) to the 2011 Annual Report on Form 10-K).
10.6(e) — UPS Long-Term Incentive Performance Program Terms and Conditions effective as of January 1, 2012 (incorporated
by reference to Exhibit 10.7(5) to the 2011 Annual Report on Form 10-K).
10.7
— Form of UPS Deferred Compensation Plan (incorporated by reference to Exhibit 10.11 to the 2010 Annual Report on
Form 10-K).
10.7(a) — Amendment No. 1 to the UPS Deferred Compensation Plan (incorporated by reference to Exhibit 10.7(1) to the 2012
Annual Report on Form 10-K).
10.8
— United Parcel Service, Inc. Nonqualified Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to
the registration statement on Form S-8 (No. 333-34054), filed on April 5, 2000).
10.9
— Discounted Employee Stock Purchase Plan, as Amended and Restated, effective October 1, 2002.
133
10.9(a) — Amendment No. 1 to the Discounted Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.12(1)
to the 2005 Annual Report on Form 10-K).
— Amendment No. 2 to the Discounted Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.13(2)
10.9(b)
to the 2009 Annual Report on Form 10-K).
10.9(c)
10.10
11
†12
†21
†23
— Amendment No. 3 to the Discounted Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.9(3) to
the 2012 Annual Report on Form 10-K).
— 2015 Omnibus Incentive Compensation Plan (incorporated by reference to Annex A to the Definitive Proxy
Statement filed on March 24, 2015).
— Statement regarding Computation of per Share Earnings (incorporated by reference to note 14 to Part I, Item 8
“Financial Statements and Supplementary Data” of this Annual Report on Form 10-K).
— Ratio of Earnings to Fixed Charges.
— Subsidiaries of the Registrant.
— Consent of Deloitte & Touche LLP.
†31.1
— Certificate of the Chief Executive Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
†31.2
— Certificate of the Chief Financial Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
†32.1
— Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
†32.2
— Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
†101
— The following financial information from the Annual Report on Form 10-K for the year ended December 31, 2017,
formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the
Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
__________________________
†
(1)
Filed herewith.
Filed in paper format.
134
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, United Parcel Service, Inc. has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
UNITED PARCEL SERVICE, INC.
(REGISTRANT)
By:
/S/ DAVID P. ABNEY
David P. Abney
Chairman and Chief Executive Officer
Date: February 21, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ DAVID P. ABNEY
Chairman, Chief Executive Officer and Director (Principal Executive Officer) February 21, 2018
David P. Abney
/S/ RODNEY C. ADKINS
Rodney C. Adkins
/S/ MICHAEL J. BURNS
Michael J. Burns
/S/ WILLIAM R. JOHNSON
William R. Johnson
/S/ Dr. CANDACE KENDLE
Candace Kendle
/S/ ANN M. LIVERMORE
Ann M. Livermore
/S/ RUDY H.P. MARKHAM
Rudy H. P. Markham
/S/ FRANCK J. MOISON
Franck J. Moison
Director
Director
Director
Director
Director
Director
Director
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
/S/ RICHARD N. PERETZ
Senior Vice President, Chief Financial Officer and Treasurer
February 21, 2018
Richard N. Peretz
(Principal Financial and Accounting Officer)
/S/ CLARK T. RANDT, JR.
Clark T. Randt, Jr.
/S/ JOHN T. STANKEY
John T. Stankey
/S/ CAROL B. TOMÉ
Carol B. Tomé
/S/ KEVIN M. WARSH
Kevin M. Warsh
Director
Director
Director
Director
135
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
(This page intentionally left blank)
Reconciliation of Non-GAAP Financial Measures
(amounts in millions, except per share amounts)
Reported / GAAP
Defined Benefit Plans Mark-to-Market Charge
TNT Termination Fee and Related Expenses
Gain Upon Liquidation of Foreign Subsidiary
Multiemployer Pension Plan Withdrawal Charge
Health & Welfare Plan Charges
Income Tax Expense (Benefit) from the Items Above
Income Tax Benefit from the Tax Cuts and Jobs Act and other non-U.S. tax law
change
Adjusted
Net Income
Diluted Earnings Per Share
2017
2016
2015
2014
2013
$
4,910
800
-
-
-
-
(193)
$
3,431
2,651
-
-
-
-
(978)
$
4,844
118
-
-
-
-
(39)
$
3,032
1,062
-
-
-
1,102
(807)
$
4,372
-
284
(245)
-
-
(75)
$
2012
807
4,831
-
-
896
-
(2,145)
2017
2016
2015
2014
2013
2012
$
5.61
0.91
-
-
-
-
(0.22)
$
3.87
2.98
-
-
-
-
(1.10)
$
5.35
0.12
-
-
-
-
(0.04)
$
3.28
1.15
-
-
-
1.19
(0.87)
$
4.61
-
0.30
(0.26)
-
-
(0.08)
$
0.83
4.99
-
-
0.92
-
(2.21)
(258)
5,259
$
-
5,104
$
-
4,923
$
-
4,389
$
-
4,336
$
-
4,389
$
(0.29)
6.01
$
-
5.75
$
-
5.43
$
-
4.75
$
-
4.57
$
-
4.53
$
2017
2016
7,529
800
-
-
-
-
8,329
$
$
5,467
2,651
-
-
-
-
8,118
U.S. Domestic Package
2017
2016
4,280
637
4,917
-
4,917
$
$
3,017
1,908
4,925
$
4,925
U.S. Domestic Package
2017
2016
40,764
38,301
-
40,764
38,301
$
$
Reported / GAAP
Defined Benefit Plans Mark-to-Market Charge
TNT Termination Fee and Related Expenses
Gain Upon Liquidation of Foreign Subsidiary
Multiemployer Pension Plan Withdrawal Charge
Health & Welfare Plan Charges
Adjusted
Reported / GAAP
Defined Benefit Plans Mark-to-Market Charge
Adjusted
Currency Adjustment
Adjusted Currency Neutral
Reported / GAAP
Currency Adjustment
Currency Neutral
$
$
$
$
$
$
$
Beginning Balance (Reported / GAAP)
Beginning Balance (Adjusted)
Ending Balance (Reported / GAAP)
Unrecognized Pension and Postretirement Benefit Costs (Net of Tax)
Long-Term U.S. Deferred Tax Assets
Adjusted Ending Balance
Average Reported Balance ((Reported Beginning + Reported Ending) / 2)
Average Adjusted Balance ((Adjusted Beginning + Adjusted Ending) / 2)
Return on Reported Balance (Reported Net Income / Average Reported Balance)
Return on Adjusted Balance (Adjusted Net Income / Average Adjusted Balance)
$
$
$
$
$
$
$
$
$
$
$
$
$
Operating Profit
2015
2014
7,668
118
-
-
-
-
7,786
$
$
4,968
1,062
-
-
-
1,102
7,132
Operating Profit
International Package
2017
2016
2013
2012
2017
2016
$
$
7,034
-
284
(245)
-
-
7,073
$
$
1,343
4,831
-
-
896
-
7,070
11.4%
1.2%
0.0%
0.0%
0.0%
0.0%
12.6%
9.0%
4.3%
0.0%
0.0%
0.0%
0.0%
13.3%
Supply Chain & Freight
2017
2016
U.S. Domestic Package
2017
2016
2,464
35
2,499
375
2,874
$
$
2,044
425
2,469
$
2,469
$
$
$
785
128
913
2
915
$
$
$
406
318
724
724
10.5%
1.6%
12.1%
7.9%
5.0%
12.9%
Operating Margin
2015
2014
2013
2012
13.1%
0.2%
0.0%
0.0%
0.0%
0.0%
13.3%
8.5%
1.8%
0.0%
0.0%
0.0%
1.9%
12.2%
12.7%
0.0%
0.5%
-0.4%
0.0%
0.0%
12.8%
2.5%
8.9%
0.0%
0.0%
1.7%
0.0%
13.1%
Operating Margin
International Package
2017
2016
18.5%
0.2%
18.7%
16.6%
3.4%
20.0%
Supply Chain & Freight
2017
2016
6.7%
1.1%
7.8%
4.0%
3.1%
7.1%
Revenue
International Package
2017
2016
13,338
12,350
325
13,663
12,350
$
$
Supply Chain & Freight
2017
2016
11,770
10,255
(10)
11,760
10,255
$
$
$
$
$
$
$
Return on Assets
2016
38,311
38,350
40,377
-
978
41,355
39,344
39,853
8.7%
12.8%
$
$
$
2017
40,377
41,355
45,403
-
193
45,596
42,890
43,476
11.4%
12.1%
Adjusted Shareowners' Equity
2017
2015
2016
$
$
$
$
429
3,850
1,030
3,569
-
4,599
$
$
$
$
2,491
5,200
429
3,421
-
3,850
$
$
$
$
2,158
5,356
2,491
2,709
-
5,200
$
$
$
$
$
$
2015
35,440
35,744
38,311
-
39
38,350
36,876
37,047
13.1%
13.3%
Return on Invested Capital
Operating Profit
Less: Taxes
Beginning LT Debt
Ending LT Debt
Beginning Shareowners' Equity
Ending Shareowners' Equity
Average Invested Capital
Return on Invested Capital
2017
2016
2015
Reported
7,529
$
(2,357)
5,172
$
Adjusted
8,329
$
(2,815)
5,514
$
Reported
5,467
$
(1,815)
3,652
$
Adjusted
8,118
$
(2,801)
5,317
$
Reported
7,668
$
(2,607)
5,061
$
Adjusted
7,786
$
(2,647)
5,139
$
$
$
12,394
20,278
429
1,030
17,066
$
$
12,394
20,278
3,850
4,599
20,561
$
$
11,316
12,394
2,491
429
13,315
$
$
11,316
12,394
5,200
3,850
16,380
$
$
9,856
11,316
2,158
2,491
12,911
$
$
9,856
11,316
5,356
5,200
15,864
30.3%
26.8%
27.4%
32.5%
39.2%
32.4%
Note: The adjustments denoted in the tables above are further described in our annual reports on Form 10-K for the years ended December 31, 2017, 2016, 2015, 2014, 2013 and 2012, as well as in the historical financial
schedules on our investor relations website. The taxes deducted from operating profit in the return on invested capital calculation are based on the reported and adjusted effective tax rates noted
on page 43 of our 2017 annual report on Form 10-K.
Note: We supplement the reporting of our financial information determined under Generally Accepted Accounting Principles ("GAAP") with certain non-GAAP financial measures, including net income,
earnings per share, operating profit, operating margin, return on assets, and return on invested capital adjusted for the non-comparable items listed in the tables above. We
believe these adjusted measures provide meaningful information to assist investors and analysts in understanding our financial results and assessing our prospects for future performance. We
believe these adjusted financial measures are important indicators of our recurring results of operations because they exclude items that may not be indicative of, or are unrelated to, our core
operating results, and provide a better baseline for analyzing trends in our underlying businesses.
A1
(This page intentionally left blank)
YEAR FOUNDED
1907
27,850 UPS ACCESS
POINT LOCATIONS
Return on assets (adj.)*
12.1%
12.8%
13.3%
Return on assets (GAAP)
11.4%
8.7%
13.1%
KEY METRICS
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
10.5 MILLION
CUSTOMERS
FINANCIAL HIGHLIGHTS
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
Revenue
$65,872
$60,906
$58,363
Operating expenses
58,343
55,439
50,695
Net income
4,910
3,431
4,844
Adjusted net income*
5,259
5,104
4,923
Diluted earnings per
share
Adjusted diluted earnings
per share*
Dividends declared
per share
5.61
3.87
5.35
6.01
5.75
5.43
3.32
3.12
2.92
Assets
45,403
40,377
38,311
Long-term debt
20,278
12,394
11,316
Shareowners’ equity
1,030
429
2,491
Capital expenditures
5,227
2,965
2,379
Cash and marketable
securities
4,069
4,567
4,726
(in millions except for per-share amounts)
5.1 BILLION
2017 DELIVERY VOLUME
9,100
ALTERNATIVE
FUEL VEHICLES
Return on invested
capital (adj.)*
Return on invested
capital (GAAP)
26.8%
32.5%
32.4%
30.3%
27.4%
39.2%
Dividend yield
2.6%
2.7%
3.0%
2,500
WORLDWIDE
OPERATING
FACILITIES
454,000
EMPLOYEES
119,000 VEHICLES
IN DELIVERY FLEET
FREE CASH FLOW
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2017
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2016
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
Net cash from operations
$1,479
$6,473
$7,430
Capital expenditures
(5,227)
(2,965)
(2,379)
Proceeds from disposals
of PP&E
Net change in finance
receivables
Other investing activities
24
88
26
5
9
(59)
(30)
5
1
Free cash f low
(3,718)
3,546
5,052
Discretionary Pension
Contributions
7,291
2,461
1,030
Adjusted free cash f low
$3,573 $6,007 $6,082
(in millions of dollars)
MORE THAN 43
MILLION
UPS MY CHOICE®
MEMBERS
2,242 DAILY
FLIGHT SEGMENTS
143 MILLION
DAILY ONLINE TRACKING
*See reconciliation of Non-GAAP financial measures on page A1.
INVE STOR INFOR MATION
ANNUAL MEETING
Our annual meeting of shareowners will be held at 8 a.m.
on May 10, 2018, at the Hotel Du Pont, 11th and Market
Street, Wilmington, DE. Shareowners of record as of
March 12, 2018, are entitled to vote at the meeting.
INVESTOR RELATIONS
You can contact our Investor Relations Department at:
UPS
55 Glenlake Parkway, NE
Atlanta, GA 30328-3474
800.877.1503 or 404.828.6059
investors.ups.com
EXCHANGE LISTING
Our Class B common stock is listed on the New York
Stock Exchange under the symbol “UPS”.
TRANSFER AGENT AND REGISTRAR
Computershare
Computershare
Computershare
Send notices of address changes or questions
regarding account status, stock transfer, lost
certificates, or dividend payments to:
Regular Mail:
UPS
c/o Computershare
PO Box 505002
Louisville, KY 40233-5002
or:
Expedited Delivery:
UPS
c/o Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
FORM 10-K
Our Annual Report on Form 10-K for the year ended
December 31, 2017, forms part of the UPS 2017 Annual
Report. If you would like an additional copy of our Form
10-K, you can access it through the Investor Relations
website at www.investors.ups.com or at the Securities
and Exchange Commission website, sec.gov. The Form
10-K also is available free of charge by calling, contacting
via the website, or writing to the Investor Relations
Department.
UPS SHAREOWNER SERVICES
Convenient access 24 hours a day, seven days a week.
Class A Common Shareowners
Class A Common Shareowners
Class A Common Shareowners
Class A Common Shareowners
Class A Common Shareowners
www.computershare.com/ups
888.663.8325
Class B Common Shareowners
Class B Common Shareowners
Class B Common Shareowners
Class B Common Shareowners
Class B Common Shareowners
www.computershare.com/ups
800.758.4674
Calls from outside the United States: 201.680.6612
TDD for hearing impaired: 800.231.5469
TDD for non-U.S. shareowners: 201.680.6610
DIRECT STOCK PURCHASE PLAN
To make an initial purchase of UPS Class B Common
Stock online, visit www.computershare.com/Investor
and go to “Buy stock direct-search and enroll in available
plans”. Follow the instructions provided to search for
Investment Plans and access the Enrollment Wizard.
Current Class B shareowners can enroll in the
plan online by accessing their accounts through
www.computershare.com/ups or by calling 800.758.4674.
DIVIDEND REINVESTMENT PLAN
To reinvest dividends in the purchase of additional
UPS shares:
Class A and B Shareowners
Class A and B Shareowners
Class A and B Shareowners
Class A and B Shareowners
Class A and B Shareowners
www.computershare.com/ups
ONLINE ACCESS TO SHAREOWNER
ACCOUNT MATERIALS
Enroll in E-Communications, a self-service program
that provides electronic notification and secure access
to shareowner communications. To enroll, access
your account at www.computershare.com/ups. After
accessing your account select the “View Account” link
to manage your holdings. Then click on “My Profile,”
select “Update” under “Communications” and follow the
enrollment instructions.
UPS WEBSITES
Investor Relations - - - - - - - - - - - - - - - investors.ups.com
UPS Corporate - - - - - - - - - - - - - - - - - - - - - - - - - ups.com
Sustainability/
Corporate Responsibility - - - - - sustainability.ups.com
Services and Solutions - - - ups.com/businesssolutions
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