Strong Today.
Creating Our Tomorrow.
2018 Annual Report
QUICK FACTS
YEAR FOUNDED
1907
2,320
DAILY FLIGHT
SEGMENTS
2,500
WORLDWIDE
OPERATING
FACILITIES
MORE THAN
10,000
ALTERNATIVE FUEL
VEHICLES
OVER
28,000
UPS ACCESS POINT
LOCATIONS
5.2
BILLION
2018 DELIVERY
VOLUME
123,000
VEHICLES
IN DELIVERY
FLEET
MORE THAN
56 MILLION
UPS MY CHOICE®
MEMBERS
180
MILLION
DAILY ONLINE
TRACKING
10.6
MILLION
CUSTOMERS
481,000
EMPLOYEES
FINANCIAL HIGHLIGHTS
KEY METRICS
2018
2017
2016
2018
2017
2016
Revenue
$71,861 $66,585 $61,610
Return on assets (GAAP)
10.0%
11.4%
8.7%
Operating expenses
64,837
59,056
53,922
Return on assets (Adjusted)* 13.1%
12.0%
12.7%
Net income
4,791
4,905
3,422
Dividend yield
3.7%
2.6%
2.7%
Adjusted net income*
6,301
5,254
5,095
Diluted earnings per share
5.51
Adjusted diluted earnings
per share*
7.24
5.61
6.00
3.86
5.74
FREE CASH FLOW
Net cash from operations $12,711
$1,479
$6,473
2018
2017
2016
Dividends declared
per share
3.64
3.32
3.12
Capital expenditures1
(6,283)
(5,227)
(2,965)
Assets
50,016
45,574
40,545
Proceeds from disposals
of PP&E
37
24
88
Long-term debt
19,931
20,278
12,394
Net change in finance receivables 4
Shareowners’ equity
3,037
1,024
430
Other investing activities
1
5
1
9
(59)
Capital expenditures1
6,283
5,227
2,965
Free cash flow2
$6,470
($3,718)
$3,546
Cash and marketable
securities
5,035
4,069
4,567
(in millions except for per-share amounts)
*See reconciliation of Non-GAAP financial measures on page A1.
$7,291
$2,461
$6,470
$3,573
$6,007
Discretionary pension
contributions
Adjusted free cash flow
excluding discretionary
pension contributions
(in millions of dollars)
1Adjusted capital expenditures including principal repayments of
capital lease obligations were $6.623 billion in 2018.
2Adjusted free cash flow including principal repayments of capital
lease obligations was $6.130 billion in 2018.
Strong Today.
CREATING Our Tomorrow.
Dear Fellow Shareowner,
UPS is more than a year into a sweeping
transformation that’s touching every part of
our business — from leadership and culture
to our operations, processes and the way
we go to market. We’ve identified key global
megatrends that are poised to create the
greatest impact on our business over the
next decade and have aligned our strategies
to capitalize on these market opportunities.
We are investing in advanced technology and
focusing on key sectors to stay at the forefront
of our industry and create long-term value for
customers and shareowners.
ways for UPS to grow. The investments we are
making in our network, people, technology
and products will improve leverage in our
global operations and are creating greater
differentiation for UPS in the markets we
serve. Our customers will benefit from more
flexibility, consistency and visibility in how
packages are moved through our network.
By enhancing the value we create for our
customers, we will generate higher revenue
per package, better balance between our
business- and residential-based volumes and a
higher level of earnings growth.
The path we are on expands our current
competitive advantages and provides new
In short, UPS is Strong Today, and we are
CREATING our Tomorrow.
1
We are implementing
technology that’s making our
network and our company
more efficient, more flexible,
more resilient, and more
anticipatory.
To generate
higher quality revenue
growth, we listened to our
customers and are taking
action to develop new
solutions to better serve
their needs and strengthen
their loyalty.
2018 REVENUE BY SEGMENT
2018 REVENUE BY GEOGRAPHY
percent
percent
20.1%
19.2%
60.7%
U.S. Domestic
Package
International
Package
Supply Chain
& Freight
21.9%
78.1%
U.S.
International
REVENUE
in billions of dollars
2018
2017
2016
71.9
66.6
61.6
59.2
2015
2014 58.2
59.2
.
Transformation and our Future
Embarking on transformation touches all
facets of our business and puts UPS on a
clear path to enhance performance, “future-
proofing” the company and taking advantage
of our most promising growth opportunities.
Our transformation is designed to achieve
three principal goals: generate high-quality
revenue growth; drive efficiencies and cost
reductions that will improve our margins; and
further develop our talent as we continue to
foster a culture of innovation.
There are several megatrends that are key to
driving our business over the long-term. We
are pursuing four central opportunities that
serve as our new strategic growth imperatives:
• First, we reaffirmed our commitment to
focus our portfolio, service offerings and
pricing to meet the needs of small and
medium-sized businesses.
• Second, we are increasing our range of
offerings to solidify UPS as the provider of
choice in both B2C and B2B e-commerce,
the next frontier of growth.
• Third, we are improving our reach
and capabilities in high-growth
international markets to continue to
expand market share.
• Finally, we are developing innovative
logistics solutions to improve patient
care across the healthcare and life
sciences ecosystem.
To generate higher quality revenue growth,
we listened to our customers and are taking
action to develop new solutions to better
serve their needs and strengthen their loyalty.
These include new initiatives to expand
our portfolio and enhance our customers’
experience when doing business with UPS. We
launched new international express offerings;
expanded our Saturday operations; and added
new e-commerce services, including our asset-
light Ware2Go warehousing solution. We have
simplified pricing for small and medium-sized
businesses and equipped our sales force with
the tools to provide customers with shipping
quotes more quickly, often on the spot.
We are gaining traction with all of these
initiatives, and these actions will continue to
enhance our growth and earnings trajectory
well into the future.
Strong Today…
We made substantial progress on the network
investment initiatives we first discussed in
early 2017. We are implementing technology
that’s making our network and our company
more efficient, more flexible, more resilient,
and more anticipatory. The result is a
network that enables us to attract additional
opportunities for high-quality revenue growth
and generate improved operating margins.
We are capturing opportunities through digital
technology and automation that are changing
the way people and companies connect and
communicate. We operate a highly efficient
and integrated network that enables us
to offer customers a broad portfolio of air,
ground, express and deferred offerings with
more visibility and control than ever before.
For example, we have further automated our
technology platforms to provide enhanced
tracking, as well as access to special services.
Through the use of new technology, improved
controls and state-of-the-art automation,
our customers have more control over all of
their shipments — inbound and outbound,
package and freight, local and international.
Additionally, our advanced methods of
optimizing the flows of freight and packages
with available capacity results in improved
transit times for our customers and better
asset utilization and network efficiency. To
3
build on those improvements and fulfill the
growing demand for our services, we are
significantly expanding capacity through
comprehensive investments across our
operations. In 2018, we opened 22 new,
highly automated facilities that added more
than 400,000 packages per hour of sortation
capacity. And the 18 highly automated
facilities that will come online in 2019 will
make us even more efficient.
These improvements have succeeded in
large part due to the innovative ideas and
commitment to service our people bring to
UPS every day. We will continue to shape
our culture so we can seize on the new
market opportunities of the 21st century.
We are doing this in part by realigning our
management structure, and recruiting more
outside talent who offer new experiences to
enrich our leadership team. During the past
year, we have appointed members of the
leadership team to new positions, including
three who joined us from outside of UPS. They
bring new perspectives and ideas to a team of
world-class leaders. The diversity of thought,
experience and perspective of the entire team
continues to position us for success.
Together, we are strengthening our business
processes and culture. We are shifting a
culture historically centered on “constructive
dissatisfaction” to a new mindset of
“continuous transformation.” We are making
our company stronger and more capable of
delivering attractive returns in both the near
and long terms.
Our Results
The progress we have made towards our
transformation strategies and investments
were reflected in our 2018 results. Here are
the highlights:
We realized the benefits of transformation with
both growth and efficiency improvements. We
successfully delivered on our financial targets
for full-year earnings growth. Adjusted diluted
earnings per share increased 21%, to $7.24*;
marking an all-time high.
We produced good volume and revenue gains
as well as improved the quality of our revenue.
UPS delivered about 21 million packages per
day. This higher volume drove a 7.9% increase
in consolidated revenue, to $72 billion.
In the U.S., our small package business revenue
grew 6.9% to more than $43 billion driven by
the best increase in revenue per package in
many years.
The International business segment turned
an adjusted operating profit of $2.6 billion*
with strong growth in Export shipments in a
changing environment.
The Supply Chain and Freight segment
generated another year of excellent results with
a 13%* increase in adjusted operating profit.
We generated outstanding cash flow, which
enabled UPS to continue investing in our
network and rewarding shareowners. For
the year, we made $6.6 billion* in adjusted
capital expenditures, distributed $3.2 billion in
dividends and bought back $1 billion in shares.
UPS was voted No. 1 in the delivery industry
in Fortune magazine’s 2018 rankings of the
“World’s Most Admired Companies.” Just
Capital recognized UPS as one of America’s
100 Most Just Companies for the third
straight year. We were named to the Dow
Jones Sustainability World Index for the sixth
straight year and achieved a prestigious spot
on the Carbon Disclosure Project’s climate
change “A” list for our efforts to cut emissions,
mitigate climate risks, and develop a low-
carbon economy. At UPS, global citizenship
is part of who we are, and the deep culture
of excellence that permeates the entire
*See reconciliation of Non-GAAP financial measures on page A1.
5
NET INCOME
in Billions of Dollars
4.8
6.3
2018
2017 4.9
5.3
2016
3.4
5.1
2015
4.8
4.9
2014 3.0
4.4
DILUTED EARNINGS PER SHARE
in Dollars
2018
5.51
7.24
2017
5.61
6.00
2016 3.86
5.74
2015
5.34
5.43
2014
3.28
4.75
Adjusted*
Adjusted*
OPERATING MARGIN
DIVIDENDS DECLARED
Percent
2018
9.8
10.3
2017
11.3
11.3
2016 12.5
12.5
2015
12.2
12.2
2014
11.4
11.4
Dollars per share
2018
3.64
2017
3.32
2016
3.12
2015
2.92
2014
2.68
Adjusted*
SHARE REPURCHASE EXPENDITURES
NUMBER SHARES REPURCHASED
in Billions of Dollars
in Millions of Dollars
2018
1.0
2017
1.8
2016 2.7
2015
2.7
2014
2.7
2018
8.9
2017
16.1
2016 25.5
2015
26.8
2014
26.4
*See reconciliation of Non-GAAP financial measures on page A1.
organization. In fact, UPS employees have
committed to volunteering 20 million hours
by the end of 2020. I am proud to see that our
accomplishments and capabilities are being
recognized around the world.
U.S. Domestic
The U.S. Domestic segment revenue growth
was driven by strong demand across all
products, especially Next Day Air, as well as
revenue- per-package gains from our higher
quality revenue initiatives. Revenue for Next
Day Air products was up 7.5%, Deferred Air was
7.5% higher, and Ground products increased
6.7%. Adjusted operating profit for U.S.
Domestic was $3.9 billion* as we successfully
opened new facilities and implemented new
technologies across the business.
International
The International business segment grew both
its top and bottom line in a changing economic
environment. Revenue increased 7.1%* on a
currency-neutral basis. Strong export shipment
growth of 6.2% drove our total International
volume to 3.2 million on average daily. Total
adjusted operating profit increased to $2.6
billion* and reached 35% of total UPS profits.
The business’s 18% operating margin continues
to lead the industry. These results demonstrate
our ability to grow and adapt while executing a
disciplined approach to cost control.
Supply Chain and Freight
The Supply Chain and Freight segment
produced another year of double–digit
adjusted operating profit* growth in 2018. All
major business units contributed excellent
revenue growth, which was led by Forwarding;
up 16%. The business units demonstrated
continued growth as the result of greater
alignment with small and medium-sized
customers. These efforts drove Supply Chain
and Freight adjusted operating profit up 13%
in 2018 to $901* million.
CREATING our Tomorrow…
We embarked on this transformation from a
position of strength with a commitment to
create our own future. UPS has a powerful
brand, an exceptional and essential global
network, and a broad product and solutions
portfolio that is designed to meet the current
and emerging needs of our customers. UPS
produces strong cash flow, the industry’s
highest margins, and a solid balance sheet.
We have an unmatched global network that
connects more than 2.5 million businesses
in more than 220 countries and territories, with
10.6 million consumers and business people
worldwide every day. And we continue to invest
in this powerful network to help our customers
succeed locally and around the world as we
grow a higher quality revenue base.
I am confident that through our
transformation we will solidify UPS as the
fastest, most technology-enabled and
most responsive company in the industry.
By offering new, differentiated services,
improving our efficiency and embracing
the megatrends that will create growth
opportunities, we are taking a business built
on trust, reliability and integrity to the next
level of performance.
We have a proud 111-year history at UPS. Our
more than 481,000 employees have diverse
backgrounds, experiences and perspectives
and are committed to delivering the best
service to every one of our customers.
In summary, we are building a new UPS that is
Strong Today, and Creating a BETTER Tomorrow.
David Abney
UPS Chairman and Chief Executive Officer
7
MANAGEMENT COMMITTEE
UPS BOARD OF DIRECTORS
DAVID ABNEY
UPS Chairman and
Chief Executive Officer
JIM BARBER
Chief Operating
Officer
NORMAN BROTHERS, JR.
Senior Vice President,
General Counsel
and Corporate Secretary
NANDO CESARONE
President, UPS International
PHILIPPE GILBERT
President, Supply
Chain Solutions
KATE GUTMANN
Chief Sales and
Solutions Officer;
SVP The UPS Store;
UPS Capital – UPS
TERI PLUMMER MCCLURE
Chief Human Resources Officer
and Senior Vice President, Labor
RICHARD PERETZ
Chief Financial
Officer
JUAN PEREZ
Chief Information and
Engineering Officer
SCOTT PRICE
Chief Strategy and
Transformation Officer
KEVIN WARREN
Chief Marketing Officer
GEORGE WILLIS
President, U.S. Operations
DAVID P. 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, President and
Chief Executive Officer, Dana Corporation
Director since 2005
WILLIAM R. JOHNSON
Former Chairman, President and
Chief Executive Officer, H.J. Heinz Company
Director since 2009
DR. CANDACE KENDLE
Co-founder and Former Chairman and
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
Former 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
CHRISTINA SMITH SHI
Former President, Direct-to-Consumer, Nike, Inc.
Director since 2018
JOHN T. STANKEY
Chief Executive Officer, WarnerMedia, LLC
Director since 2014
CAROL B. TOMÉ
Chief Financial Officer and Executive Vice President —
Corporate Services, The Home Depot, Inc.
Director since 2003
KEVIN M. WARSH
Former Member of the Board of Governors of the
Federal Reserve System, Distinguished Visiting
Fellow, Hoover Institution, Stanford University
Director since 2012
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, 2018
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 every Interactive Data File required to be submitted 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 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 or an emerging growth 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 $73,643,493,685 as of June 30, 2018. 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 6, 2019, there were 164,239,863 outstanding shares of class A common stock and 695,989,113 outstanding shares of class B common stock.
Portions of the registrant’s definitive proxy statement for its annual meeting of shareowners scheduled for May 9, 2019 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
Shareowner Return Performance Graph
Item 6.
Item 7.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Overview
Items Affecting Comparability
U.S. Domestic Package Operations
International Package Operations
Supply Chain & Freight Operations
Consolidated Operating Expenses
Other Income and (Expense)
Income Tax Expense
Liquidity and Capital Resources
Collective Bargaining Agreements
New Accounting Pronouncements
Rate Adjustments
Critical Accounting Policies and Estimates
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Item 8.
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
6
6
6
7
8
10
18
18
18
19
19
19
20
21
22
23
23
24
28
33
37
41
45
47
49
55
55
55
56
62
64
136
136
137
139
140
140
140
140
141
141
Cautionary Statement About Forward-Looking Statements
PART I
This report, our Annual Report to Shareowners and our other filings with the Securities and Exchange Commission
(“SEC”) contain 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. Forward-looking statements are made subject to the safe harbor protections 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.
From time to time, we also include written or oral forward-looking statements in other publicly disclosed materials. Such
statements relate to our intent, belief and current expectations about our strategic direction prospects and future results, and
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 operate one of the largest airlines in the world, as well as
the world’s largest fleet of alternative-powered vehicles. We deliver packages each business day for 1.5 million shipping
customers to 9.1 million receivers ("consignees") in over 220 countries and territories. In 2018, we delivered an average of 20.7
million pieces per day, or a total of 5.2 billion packages. Total revenue in 2018 was $71.861 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 reporting segments: U.S.
Domestic Package and International Package, which together we refer to as our global small package operations, and Supply
Chain & Freight, all of which are described below.
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 are able to 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; and industry-leading technologies
and solutions expertise for competitive advantage in markets where they choose to compete.
We continue to invest in the expansion of the UPS business to serve our existing and prospective customers with a full
range of advanced logistics products, services and capabilities across an ever-increasing geographical and industry footprint.
Achieving our objectives has required new methods and innovative approaches to logistics services, including the acquisition
and creation of platform-based businesses, specialized healthcare services such as Marken’s clinical trial capabilities, a full
range of brokerage and transportation insurance services, retail offerings such as UPS My Choice and more.
1
We have a long history of operating with joint venture and partnership arrangements to provide flexibility as we build
scale. We often reevaluate these arrangements to ensure they are optimally designed for our future aspirations. For example, in
2018, we acquired full ownership of our express services unit in India, signaling a new era of opportunity and operational
design in a high-growth international market. We closely monitor global trade and economic, geopolitical, regulatory and
environmental factors, as well as other areas of risk and change to ensure we quickly adjust to a fast-moving world.
We aim to be a disciplined and focused business that purposefully reinvests capital to achieve both long-term strategic
benefits and favorable returns. In September 2018, we communicated our commitment to continuous transformation to
modernize our business and operations through state-of-the art technology. We see transformation as an ongoing commitment to
enhance quality and efficiency as we deliver innovative capabilities and services. Our strategic investments are primarily
focused in areas we believe will drive growth and lasting profit potential:
Services and solutions for small and medium-sized businesses.
International growth markets.
•
•
• Global Business to Consumer (“B2C”) and Business to Business (“B2B”) e-commerce.
• Healthcare and life-sciences logistics.
• Operational advancements and efficiencies through our technology-enabled network.
In 2018, we added nearly 400,000 pieces per hour of automated sort capacity globally, along with numerous new
technologies to help control the network and ensure resources are in the right place at the right time.
We have a long history of sound financial management, and our consolidated balance sheet showcases financial
strength. Cash generation is a significant strength of UPS, giving us ample capacity to service our obligations and facilitate
distributions to shareowners, reinvest in our business and pursue 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 more than 50 countries. We handle packages up to 108 inches in length 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 up to six days a
week, based on their specific needs. Additionally, our wholly-owned and partnered global network offers roughly 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
returns 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. UPS Returns Manager is an excellent
example of this value.
2
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.
U.S. Domestic Package Reporting Segment
We are a leader in time-definite, money-back guaranteed, small package delivery services in the United States. 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 14.5 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.
We continue to invest in our smart global logistics network. 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 2018, we expanded Saturday operations and opened 22 new facilities, including
regional facilities in the Atlanta, Indianapolis, Phoenix, Salt Lake City and Dallas areas.
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 2018, we continued expansion of our Express time-definite portfolios:
We expanded UPS WorldWide Express to 14 new countries around the globe.
UPS Express now reaches 137 countries with guaranteed mid-day delivery and 57 countries with guaranteed
morning delivery with Express Plus.
Express Saver reaches 220 countries and territories with guaranteed end-of-day delivery.
We grew our Worldwide Express Freight Midday footprint by five times in 12 European countries by
expanding this service to 39,000 new postal codes.
Worldwide Express Freight is available from 71 origin countries to 67 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.
3
We are constantly striving to provide our customers with better service. In 2018, we provided our customers with greater
flexibility by offering later pick-up times in nearly 52,000 postal codes across Europe, creating production and fulfillment
benefits. We continue to make major European infrastructure investments, including a $146 million facility in Eindhoven, the
Netherlands, the opening of a $150 million hub in London and the construction of a $100 million hub in Paris. These
investments are part of ongoing efforts allowing customers using UPS Standard to reach more than 80 percent of Europe’s
population within two business days. These recent 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 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.
In 2018, we extended cut-off times by four hours for export shipment pickups, lengthening production windows. We
upsized four daily flights to our Shenzhen Intra-Asia hub and Hong Kong to our new Boeing 747-8s for greater capacity to
support customers with import needs through gateways in Shanghai, Shenzhen and Hong Kong.
High-growth markets are also a strategic imperative for UPS. 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. Markets like India
in the ISMEA region provide new opportunities for growth. In 2018, we made additional investments in India to acquire full
ownership of our express services unit, previously a joint venture. This follows the construction of a new facility in Hyderabad
and an integrated logistics facility in Ahmedabad. These enhancements allow customers in ISMEA to reach markets in the U.S.
and Europe within a 48-hour delivery window. In addition to these upgrades, we added Saturday delivery to seven countries in
the region. The additional operating day gives our customers greater flexibility with their operations and scheduling.
Supply Chain & Freight
Supply Chain & Freight consists of our forwarding, logistics, truckload brokerage, UPS Freight, UPS Capital and other
businesses. 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 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.
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 Brokerage
Coyote Logistics Midco, Inc. (“Coyote”), a U.S.-based third party logistics provider, was acquired in August 2015. We
successfully integrated this large-scale truckload 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.
Freightex, a U.K.- based freight brokerage firm, was acquired in January 2017. The acquisition of Freightex added a full-
scale truckload brokerage and transportation management solution to UPS’s European portfolio, creating a single-source
solution for shippers throughout Europe with freight ranging from parcel to full truckload. In 2018, Freightex was rebranded to
Coyote Logistics to further leverage the centralized technology and business models with the market knowledge, talent and
established customer and carrier bases already in Europe. The Coyote Logistics European division complements UPS’s North
American truckload brokerage business, as many international shippers know and trust the Coyote truckload product.
4
Logistics
We provide value-added fulfillment and transportation management 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
investments. In 2018, we expanded our network to support new business growth by adding more than 1.6 million square feet of
distribution capacity.
Also in 2018, we rolled out new cloud-based transportation and warehouse management software platforms to drive
higher operational efficiency and improve service to customers. The result has been better visibility, more rapid onboarding of
customers and improved flexibility and response times.
Building on a 2017 pilot program, in 2018 we expanded a new integrated transportation-fulfillment solution for small
business e-commerce merchants in the United States. The program enables small merchants to rapidly expand and grow their
online offerings by providing connectivity to multiple marketplaces.
UPS Post Sales, our service parts logistics solution, relies on a global network of central and field stocking sites to
provide critical spare parts when and where customers need them. In 2018, we implemented new technology to support our
Implantable Medical Device solution, which helps ensure surgical kits and devices arrive safely and on time at hospitals and
surgery centers. This integrated solution was built in collaboration with WebOps, a medical device logistics and analytics
technology provider, and Baxter Planning, an inventory planning and optimization solutions provider. We continue to expand
UPS Access Point locations into our network, offering greater flexibility, more convenience and improved service for our
customers.
UPS Express Critical provides urgent, secure transportation for time-sensitive and high-value goods. 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.
UPS Freight
UPS Freight offers regional, inter-regional and long-haul less-than-truckload ("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 product
classification, trade management, duty drawback and consulting services through STTAS, a UPS company. STTAS was
acquired in 2017 and is a major differentiator in our ability to become the global broker of choice in all markets important to
our customers. In 2017, we also added to our portfolio UPS Zone Solutions, a leader in Foreign Trade Zone administration
services in the United States.
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 22 countries and territories, 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. UPS Capital also offers insured transportation of high value goods including
loose gemstones, finished jewelry and wristwatches.
5
Our People
The strength of our company is our people, working together with a common purpose. We had more than 481,000
employees (excluding temporary seasonal employees) as of December 31, 2018, of which 399,000 are in the U.S. and 82,000
are located internationally. Our global workforce includes approximately 85,000 management employees (41% of whom are
part-time) and 396,000 hourly employees (50% of whom are part-time).
As of December 31, 2018, we had approximately 283,000 employees employed under a national master agreement and
various supplemental agreements with local unions affiliated with the Teamsters. These agreements expired on July 31, 2018.
On October 5, 2018, the Teamsters declared that the tentative national master agreement for the U.S. Domestic Package
business unit was considered ratified, and will be implemented as soon as five remaining local and supplemental agreements
are negotiated and ratified. We remain in the process of negotiating and ratifying four of these local and supplemental
agreements which, when ratified, will be retroactive to August 1, 2018. The UPS Freight business unit national master
agreement was ratified on November 11, 2018.
We have approximately 2,800 pilots who are employed under a collective bargaining agreement with the Independent
Pilots Association ("IPA"), which becomes amendable on September 1, 2021.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727. On February 8,
2019, the airline mechanics who are covered by this agreement voted to ratify a new contract which will become amendable
November 1, 2023. In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under
agreements with the Teamsters are employed under collective bargaining agreements with the International Association of
Machinists and Aerospace Workers (“IAM”) 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.
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 more than 9.1 million delivery customers daily. Cross selling small package, supply chain and freight
services across our customer base is an important growth mechanism for UPS.
6
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.
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 aircraft for military use during a national defense emergency. The DOD is required to compensate us for the use of
aircraft under the CRAF program. In addition, participation in CRAF entitles UPS Airlines to bid for other U.S. Government
opportunities including small package and air freight.
7
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 in the U.S.,
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. Our international operations are subject to similar regulatory
structures in their respective jurisdictions.
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 and Data Protection
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. In addition, the Federal Communications
Commission regulates and licenses our activities pertaining to satellite communications. There has recently been increased
regulatory and enforcement focus on data protection in the U.S. (at both the state and federal level) and in other countries. For
example, the European Union (“E.U.”) General Data Protection Regulation (“GDPR”), which became effective in May 2018,
greatly increases the jurisdictional reach of E.U. law and increases the requirements related to personal data, including
individual notice and opt-out preferences and public disclosure of significant data breaches. Additionally, violations of the
GDPR can result in significant fines. Other governments have enacted or are enacting similar data protection laws, and are
considering data localization laws that would govern the use of data outside of their respective jurisdictions.
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 with or furnished to the SEC 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.
8
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.
9
Item 1A.
Risk Factors
Our business, financial condition and results are subject to numerous risks and uncertainties. In connection with any
investment decision, 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. In addition, there remains
substantial economic uncertainty arising from the United Kingdom’s 2016 vote to leave the European Union. In 2017 the U.K.
government initiated a process to leave the E.U., and the U.K. and the E.U. continue to negotiate the future relationship
between the U.K. and the E.U., which could take several years to finalize. The results of these negotiations could result in,
among other things, fewer goods being transported globally, volatility in currency exchange rates and further regulations
relating to, among other things, trade and aviation. Any of the foregoing could materially adversely affect our business,
financial position and results of operations.
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,
including start ups and other companies that combine technologies with crowdsourcing to focus on local market needs.
Competition may also come from other sources in the future, including as a result of the development of new technologies.
Some of our competitors may 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. Additionally, to remain competitive, we may have to raise costs to our
customers and our customers may not be willing to accept these higher costs. 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.
10
Our business is subject to complex and stringent regulation in the U.S. and internationally, which could increase our
operating costs.
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. Recently, trade discussions between the U.S. and
some of its trading partners have been fluid, and any trade agreements that may be entered into are subject to a number of
uncertainties, including the imposition of new tariffs or adjustments and changes to the products covered by existing tariffs.
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.
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 materially 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.
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.
11
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. We cannot predict the impact any future regulation would have on our cost structure or our operating results. It is
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.
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
materially 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, as well as 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 as a result of war, actions by
producers or other factors beyond our control, which could have a material adverse effect on our business.
Changes in exchange rates or interest rates may have a material 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.
12
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. Social media may accelerate and amplify the scope of negative publicity, and increase
the challenge of responding to negative claims. Damage to our reputation and loss of brand equity could reduce demand for our
services and thus have a material 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.
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, became 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.
13
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 us.
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.
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
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 a material 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.
14
Employee health and retiree health and pension benefit costs represent a significant expense to us; further cost increases
could materially and adversely affect 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. Our national master agreement with the Teamsters includes provisions 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 materially adversely affect our business, financial position, results of operations or liquidity.
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. However, 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 CSPF and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion
withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS
agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS
participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the
event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with
the CSPF. Under our withdrawal agreement with the CSPF, benefits to the UPS Transfer Group cannot be reduced without our
consent and can only be reduced in accordance with applicable law.
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”). This change in law for the first
time permitted multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute
and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S.
Department of the Treasury (“Treasury”). In May 2016, Treasury rejected the proposed plan submitted by the CSPF. In the first
quarter of 2018, Congress established a Joint Select Committee to develop a recommendation to improve the solvency of
multiemployer plans and the Pension Benefit Guaranty Corporation (“PBGC”) before a November 30, 2018 deadline. While
the Committee’s efforts failed to meet its deadline, the Committee made significant progress towards finding solutions that will
address the long term solvency of multiemployer pension plans. UPS will continue to work with all stakeholders, including
legislators and regulators, to implement an acceptable solution.
The CSPF has said that it believes a legislative solution to its funded status is necessary or that it will become insolvent in
2025, and we expect that the CSPF will continue to explore options to avoid insolvency. Numerous factors could affect the
CSPF’s funded status and UPS’s potential obligation to pay coordinating benefits under the UPS/IBT Plan. Any obligation to
pay coordinating benefits will be subject to a number of significant uncertainties, including whether the CSPF submits a revised
MPRA filing and the terms thereof, or whether it otherwise seeks federal government assistance, as well as the terms of any
applicable legislation, the extent to which benefits are paid by the PBGC and our ability to successfully defend legal positions
we may take in the future under the MPRA, including the suspension ordering provisions, our withdrawal agreement and other
applicable law.
We account for the potential obligation to pay coordinating benefits to the UPS Transfer Group under Accounting
Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”), which requires us to provide a best
estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit
obligation at the December 31st measurement date. While we currently believe the most likely outcome to this matter and the
broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not
permit anticipation of changes in law in making a best estimate of pension liabilities.
15
As such, our best estimate of the next most likely outcome at the measurement date is that the CSPF submits and
implements another benefit reduction plan under the MPRA during 2019. We believe any MPRA filing would be designed to
forestall insolvency by reducing benefits to participants other than the UPS Transfer Group to the maximum extent permitted,
and then reducing benefits to the UPS Transfer Group by a lesser amount.
We have evaluated this outcome using a deterministic cash flow projection, reflecting updated estimated CSPF cash flows
and investment earnings, the lack of legislative action and the absence of a MPRA filing by the CSPF in 2018. As a result, at
the December 31, 2018 measurement date, the best estimate of our projected benefit obligation increased by $1.6 billion for
coordinating benefits that may be required to be directly provided by the UPS/IBT Plan to the UPS Transfer Group.
The future value of this estimate will be influenced by the terms and timing of any MPRA filing, changes in our discount
rate, rate of return on assets and other actuarial assumptions, presumed solvency of the PBGC, as well as potential solutions
resulting from federal government intervention. Any such event may result in a decrease or an increase in the best estimate of
our projected benefit obligation. If the uncertainties are not resolved, it is reasonably possible that our projected benefit
obligation could increase by approximately $2.4 billion, resulting in a total obligation for coordinating benefits of
approximately $4.0 billion as previously disclosed. If a future change in law occurs, it may be a significant event requiring an
interim remeasurement of the UPS/IBT Plan at the date the law is enacted. We will continue to assess the impact of these
uncertainties on our projected benefit obligation in accordance with ASC 715.
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 Cuts and Jobs Act (the “Tax
Act”) may require the collection of information not regularly produced within our company and the exercise of significant
judgment in accounting for its provisions. Many aspects of the Tax Act remain unclear and may not be clarified for some time.
In addition, many state jurisdictions continue to issue guidance on the state treatment of certain aspects of the Tax Act. As
regulations and guidance evolve with respect to the Tax Act, our results may differ from previous estimates and may materially
affect our tax rates and 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 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 materially 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.
16
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.
17
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
in an office campus, 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.
We own or lease over 1,000 package operating facilities in the U.S., with approximately 73 million square feet of floor
space. The smaller of these facilities have vehicles and drivers stationed for the pick-up 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 22 million square feet of floor space.
In addition, we own or lease more than 500 facilities, with approximately 35 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.
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.
18
Fleet
Aircraft
The following table shows information about our aircraft fleet as of December 31, 2018:
Description
Boeing 757-200
Boeing 767-200
Boeing 767-300
Boeing 767-300BCF
Airbus A300-600
Boeing MD-11
Boeing 747-400F
Boeing 747-400BCF
Boeing 747-8F
Other
Total
Vehicles
Owned and
Capital
Leases
Short-term
Leased or
Chartered
From
Others
On
Order
Under
Option
75
—
59
3
52
37
11
2
9
—
248
—
2
—
—
—
5
—
—
—
309
316
—
9
—
—
—
—
—
19
—
28
—
—
—
—
—
—
—
—
—
—
We operate a global ground fleet of approximately 123,000 package cars, vans, tractors and motorcycles. Our ground
support fleet consists of 36,000 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 47,000 containers
used to transport cargo in our aircraft.
Item 3. Legal Proceedings
See note 5 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.
19
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. Our class B
common stock is listed on the New York Stock Exchange under the symbol “UPS”.
As of February 8, 2019, there were 155,651 and 19,151 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 15, 2019, our Board declared a dividend of $0.96 per share, which is payable on March 12, 2019 to
shareowners of record on February 26, 2019. This represents a 5.5% increase from the previous $0.91 per share quarterly
dividend paid in December 2018.
A summary of repurchases of our class A and class B common stock during the fourth quarter of 2018 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
0.8
0.7
0.8
2.3
$
0.8
0.7
0.8
2.3
$
$
116.96
110.33
101.13
109.41
3,495
3,416
3,339
(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 share repurchase authorization has no expiration date. As of December 31,
2018, we had $3.339 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. We anticipate repurchasing
approximately $1.0 billion of shares in 2019.
20
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 stock price plus reinvested dividends for each of the quarterly periods, assumes
that $100 was invested on December 31, 2013 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
12/31/2013
$ 100.00
$ 100.00
$ 100.00
12/31/2014
$ 108.67
$ 113.68
$ 125.07
12/31/2015
$ 101.61
$ 115.24
$ 104.11
12/31/2016
$ 124.68
$ 129.02
$ 126.87
12/31/2017
$ 133.59
$ 157.17
$ 151.00
12/31/2018
$ 112.91
$ 150.27
$ 132.38
For information regarding our equity compensation plans, see Item 12 of this report.
21
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, 2018 (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 (expense) and other
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,
2018
2017
2016
2015
2014
$ 43,593
14,442
13,826
71,861
$ 40,761
13,342
12,482
66,585
$ 38,284
12,346
10,980
61,610
$ 36,744
12,142
10,300
59,186
$ 35,851
13,032
10,295
59,178
37,235
27,602
64,837
34,577
24,479
59,056
3,643
2,529
852
7,024
(400)
(605)
6,019
1,228
4,791
5.53
5.51
3.64
866
870
$
$
$
$
4,303
2,429
797
7,529
61
(453)
7,137
2,232
4,905
5.63
5.61
3.32
871
875
$
$
$
$
32,534
21,388
53,922
4,628
2,417
643
7,688
(2,186)
(381)
5,121
1,699
3,422
3.88
3.86
3.12
883
887
$
$
$
$
31,448
20,495
51,943
4,427
2,123
693
7,243
435
(341)
7,337
2,497
4,840
5.37
5.34
2.92
901
906
$
$
$
$
30,247
22,161
52,408
4,244
1,884
642
6,770
(1,776)
(353)
4,641
1,607
3,034
3.31
3.28
2.68
916
924
2018
2017
2016
2015
2014
As of December 31,
5,035
50,016
19,931
3,037
$
4,069
45,574
20,278
1,024
$
4,567
40,545
12,394
430
$
4,726
38,497
11,316
2,501
$
3,283
35,634
9,856
2,173
$
$
$
$
$
This table reflects the impact of the adoption of new accounting standards in 2018. Refer to note 1 to the audited
consolidated financial statements.
22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
During 2018, we produced strong revenue growth across all three segments. We realized improvements in revenue per
piece as pricing and growth initiatives drove an increase in yields in all of our major products.
We achieved solid operating profit growth in both our International Package and Supply Chain & Freight segments.
Operating profit in our U.S. Domestic segment operation was negatively impacted primarily by planned costs related to our
transformation strategy, higher pension expenses, one less operating day and the impact of bringing new facility and technology
projects on-line. The benefits of our efficiency and growth initiatives in the U.S. will not be fully realized until future periods.
Consolidated revenue increased 7.9% to $71.861 billion, up from $66.585 billion in 2017. Operating profit for 2018
decreased 6.7% to $7.024 billion, which includes the impact of $360 million pre-tax transformation strategy costs.
Consolidated average daily package volume increased 3.2% in 2018. We reported 2018 net income of $4.791 billion and
diluted earnings per share of $5.51, compared to 2017 net income of $4.905 billion and diluted earnings per share of $5.61.
Adjusting for the after-tax impacts of transformation costs of $273 million and an increase in pension expense due to a mark-to-
market loss recognized outside of the 10% corridor of $1.237 billion ($1.627 billion before tax), net income was $6.301 billion.
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
2018
$ 71,861
64,837
7,024
$
9.8%
2017
$ 66,585
59,056
7,529
11.3%
$
2016
$ 61,610
53,922
7,688
12.5%
$
20,677
10.98
4,791
5.53
5.51
$
$
$
$
20,030
10.53
4,905
5.63
5.61
$
$
$
$
19,083
10.29
3,422
3.88
3.86
$
$
$
$
2018/ 2017
2017/ 2016
7.9 %
9.8 %
(6.7)%
3.2 %
4.3 %
(2.3)%
(1.8)%
(1.8)%
8.1 %
9.5 %
(2.1)%
5.0 %
2.3 %
43.3 %
45.1 %
45.3 %
23
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, as applicable, "adjusted" compensation and
benefits, operating expenses, operating profit, operating margin, other income (expense), pre-tax income, net income and
earnings per share. These adjustments reflect the non-comparable items discussed below. We believe that these adjusted
financial 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
operating results 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.
The year-over-year comparisons of our financial results are affected by the following items (in millions):
Non-GAAP Adjustments
Operating Expenses:
Transformation Strategy Costs
Total Adjustments to Operating Expenses
Other Income and (Expense):
Defined Benefit Plans Mark-to-Market Charges
Total Adjustments to Other Income and (Expense)
Year Ended December 31,
2018
2017
2016
$
360
360
$ 1,627
1,627
$
$
— $ —
—
—
—
800
800
—
$ 2,651
2,651
Total Adjustments to Income Before Income Taxes
1,987
800
2,651
Income Tax Benefit from the Mark-to-Market Charges
Income Tax Benefit from Transformation Strategy Costs
Income Tax Benefit from the Tax Cuts and Jobs Act and Other Non-U.S. Tax Law Changes
Total Adjustments to Income Tax Expense
Total Adjustments to Net Income
(390)
(87)
—
(477) $
(978)
(193)
—
—
(258)
—
(451) $ (978)
$
$ 1,510
$
349
$ 1,673
These items have been excluded from comparisons of "adjusted" Compensation and benefits, Operating Expenses,
Operating Profit, Operating Margin, Other Income and (Expense), Income Tax Expense and effective tax rate in the discussion
that follows. The income tax effects of the transformation strategy costs and 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 2018, 2017 and
2016 were 24.0%, 24.1% and 36.9%, respectively. We believe this adjusted information provides useful comparison of year-to-
year ongoing operating performance without considering the short-term impact of transformation strategy costs. We evaluate
the performance of our businesses on an adjusted basis.
24
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Impact of Changes in Foreign Currency Exchange Rates
We supplement the reporting of our revenue, revenue per piece, and operating profit, along with other income and
expense, 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.
Transformation Strategy Costs
Transformation strategy costs described in note 16 to the audited consolidated financial statements have been excluded
from comparisons of "adjusted" Compensation and benefits, Other Operating Expenses, Operating Profit, Operating Margin,
Income Tax Expense and effective tax rate. The pre-tax transformation strategy costs totaled $360 million ($273 million after-
tax) in 2018, and reflects costs and other benefits of $262 million included within Compensation and benefits on the statements
of consolidated income, and other costs of $98 million recorded to total other expenses. We believe this adjusted information
provides useful comparison of year-to-year ongoing operating performance without considering the short-term impact of
transformation strategy costs.
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.
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 other than service cost. We
supplement the presentation of our Other Income and (Expense) with "adjusted" measures that exclude the impact of the
portion of net periodic benefit cost other than service cost represented by the gains and losses recognized in excess of the 10%
corridor and the related income tax effects.
This adjusted net periodic benefit cost ($615 million in 2018, $843 million in 2017 and $1.074 billion in 2016) utilizes
the expected return on plan assets (7.68% in 2018 and 8.65% in 2017 and 2016). The non-adjusted net periodic benefit cost
reflects the actual return on plan assets (-2.38% in 2018, 14.25% in 2017 and 6.06% in 2016) and the discount rate used to
measure the projected benefit obligation at the December 31 measurement date (4.45% in 2018, 3.81% in 2017 and 4.34% in
2016). 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.
We recognized pre-tax mark-to-market losses in "Other Income and (Expense)" of $1.627 billion, $800 million and
$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, for 2018, 2017 and 2016, respectively.
25
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
Coordinating benefits attributable to the Central States Pension Fund
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,
2018
$
845
$
(1,057)
(22)
(1,393)
(1,627)
$
$
2017
(2,288)
1,525
(37)
—
(800)
2016
(1,953)
(732)
34
—
(2,651)
$
$
Year Ended December 31,
2018
2017
2016
7.68 %
(2.38)%
3.81 %
4.45 %
8.65%
14.25%
4.34%
3.81%
8.65%
6.06%
4.81%
4.34%
The $1.627 billion, $800 million and $2.651 billion pre-tax mark-to-market losses for the years ended December 31, 2018,
2017 and 2016, respectively, were comprised of the following components:
2018 - $1.627 billion pre-tax mark-to-market loss:
• Return on Assets ($1.057 billion pre-tax loss): In 2018, the actual (2.38)% rate of return on plan assets was lower
than our expected rate of return of 7.68%, primarily due to weak global equity markets.
• Coordinating benefits attributable to the Central States Pension Fund ($1.393 billion pre-tax loss): This
represents our current best estimate of potential coordinating benefits that may be required to be paid related to the
Central States Pension Fund.
• Discount Rates ($845 million pre-tax gain): The weighted-average discount rate for our pension and
postretirement medical plans increased from 3.81% at December 31, 2017 to 4.45% at December 31, 2018,
primarily due to both an increase in U.S. treasury yields and an increase in credit spreads on AA-rated corporate
bonds in 2018.
• Demographic and Assumption Changes ($22 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.
2017 - $800 million pre-tax mark-to-market loss:
• 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.
26
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
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 2018,
2017 or 2016.
27
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
Transformation Strategy Costs
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
2018
2017
2016
2018/ 2017
2017/ 2016
1,542
1,432
14,498
17,472
1,460
1,400
14,060
16,920
1,379
1,350
13,508
16,237
$ 19.53
$ 19.11
$ 19.20
13.12
12.44
11.85
$
8.51
9.86
253
$
8.19
9.48
254
$
7.97
9.25
255
$ 7,618
$ 7,088
$ 6,752
4,752
31,223
4,422
29,251
4,080
27,452
$ 43,593
$40,761
$38,284
5.6 %
2.3 %
3.1 %
3.3 %
2.2 %
5.5 %
3.9 %
4.0 %
7.5 %
7.5 %
6.7 %
6.9 %
5.9 %
3.7 %
4.1 %
4.2 %
(0.5)%
5.0 %
2.8 %
2.5 %
5.0 %
8.4 %
6.6 %
6.5 %
$ 39,950
(235)
$ 39,715
$36,458
$33,656
9.6 %
8.3 %
—
—
$36,458
$33,656
8.9 %
8.3 %
$ 3,643
$ 4,303
$ 4,628
$ 3,878
$ 4,303
$ 4,628
(15.3)%
(9.9)%
(7.0)%
(7.0)%
8.4%
8.9%
10.6%
10.6%
12.1%
12.1%
The change in overall revenue was impacted by the following factors for the years ended December 31, 2018 and 2017,
compared with the corresponding prior year periods:
Revenue Change Drivers:
2018/ 2017
2017/ 2016
Volume
Rates /
Product Mix
Fuel
Surcharge
Total
Revenue
Change
2.9%
3.8%
2.5%
1.8%
1.5%
0.9%
6.9%
6.5%
28
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Volume
2018 compared to 2017
Our overall volume increased across all products in 2018 despite one less operating day, largely due to continued growth
in overall retail sales, of which e-commerce continues to represent a larger percentage of the total growth. Growth was focused
within the retail, healthcare and manufacturing industries.
Business-to-consumer shipments, which represented more than 50% of total U.S. Domestic Package volume, grew 6.2%
for the year and drove overall increases in both air and ground shipments. While business-to-business shipments were relatively
flat in 2018 compared to 2017, volume grew 3% in the fourth quarter of 2018 compared to 2017.
Among our air products, volume increased in 2018 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 Second Day package products, as consumers continue to demand faster and more economical delivery
options. This growth was slightly offset by declines in residential Next Day Air letter, Next Day Air Saver letter and Second
Day letter volume.
The increase in ground volume in 2018 was driven by growth in residential ground and SurePost volume, which
benefited from continued e-commerce demand. Business-to-business ground shipments were relatively flat in 2018 compared
to 2017, however they grew approximately 3% in the fourth quarter of 2018 compared to 2017.
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
just over 50% of total U.S. Domestic Package volume, grew 9.4% 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.
Rates and Product Mix
2018 compared to 2017
Overall revenue per piece increased 4.0% in 2018, and was impacted by changes in base rates, the implementation of new
surcharges for oversized packages and other fees, 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 24, 2017.
UPS Ground rates and UPS Air services rates increased an average net 4.9%. Effective June 4, 2018, we increased the
surcharge for Over Maximum Limits, Oversize Pallet Handling, and added a shipping correction audit fee. Effective July 8,
2018, we implemented a U.S. Residential Large Package surcharge and an additional handling surcharge for packages
exceeding 70 pounds. Additionally peak surcharges were in effect from October 1, 2018 through December 22, 2018 for U.S.
Residential, Large Packages and packages Over Maximum Limits. The charge was designed to enable UPS to continue to offset
some of the additional expenses incurred during significant volume surges. Additionally on December 5, 2018, we announced
an average 4.9% base rate increase effective December 26, 2018 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
United States. As of December 31, 2018, Saturday service is available in approximately 6,100 cities and towns in the U.S.
covering approximately 60% of the population.
29
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue per piece for all products was positively impacted by higher fuel surcharge rates in 2018 due to escalating fuel
prices and increases in rates.
Revenue per piece for our Next Day Air services increased in 2018 compared with 2017. The increase in Next Day Air
revenue per piece was primarily due to an increase in base rates driven by pricing initiatives and an increase in average billable
weight per piece which more than offset an unfavorable shift in product mix.
Revenue per piece for our Deferred air services increased in 2018 compared with 2017 due to an increase in base rate
pricing driven by pricing initiatives and average billable weight per piece offset slightly by an unfavorable shift in product mix.
Ground revenue per piece increased in 2018 compared with 2017, primarily due to base rate increases driven by our
pricing initiatives. These factors were partially offset by changes in product mix, as we experienced faster volume growth in
our SurePost product.
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
United States. As of December 2017, Saturday service was 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.
Revenue per piece for all products was positively impacted by higher fuel surcharge rates for 2017.
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.
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.
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
2018
2017
2016
2018/ 2017
2017/ 2016
7.7%
7.0%
5.1%
5.6%
3.6%
4.9%
2.6%
1.4%
1.5%
0.7%
30
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 in order to more closely align fuel surcharge revenues with fuel expenses. In
June and October 2018, ground fuel surcharge rates were raised by 0.50% and 0.25%, respectively, for all thresholds. In
October 2018, Domestic air fuel surcharge rates were increased by 0.25% for all thresholds.
While fluctuations in fuel surcharge percentages can be significant from period to period, fuel surcharges represent one of
the many individual components of our pricing structure that impact our overall revenue and yield. Additional components
include the mix of services sold, the base price and extra service charges we obtain for these services and the level of pricing
discounts offered.
Total domestic fuel surcharge revenue increased by $632 million in 2018 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 which drove increased delivery
miles driven and aircraft block hours.
Operating Expenses
2018 compared to 2017
Operating expenses for the segment increased $3.492 billion in 2018 compared with 2017, which included $235 million
of transformation strategy costs. Excluding the impact of transformation strategy costs, operating expenses for the segment
increased $3.257 billion in 2018, primarily due to pickup and delivery costs (up $1.305 billion), the costs of operating our
domestic integrated air and ground network (up $1.649 billion) and the costs of package sorting (up $639 million), offset by a
reduction in indirect operating costs (down $336 million) for the year. These expenses were primarily due to higher volume,
increased employee compensation costs, higher pension expense, higher fuel prices, a 6.2% increase in average daily block
hours and expansion of our technology-enabled network.
The growth in pickup and delivery and network costs was impacted by several factors:
• We incurred higher employee compensation and benefit costs largely resulting from volume growth, which impacted
an increase in average daily union labor hours (up 5.2%), scheduled union pay rate and benefit increases and growth in
the overall size of the workforce due to facility expansions. Labor hour increases were also related to the continued
expansion in Saturday operations. In addition, pension expense increased due to lower year-end discount rates used to
measure the pension benefit obligation, driving higher service costs.
• We incurred higher fuel expense in 2018 primarily due to higher fuel prices and increased volume which resulted in
higher fuel usage (increase in aircraft block hours of 6.2% and package delivery miles driven of 4.4%), partially offset
by alternative fuel tax credits. The manner in which we purchase fuel also influences the net impact of fuel on our
results. The majority of our contracts for fuel purchases utilize index-based pricing formulas plus or minus a fixed
locational/supplier differential. While many of the indices are aligned, each index may fluctuate at a different pace,
driving variability in the prices paid for fuel. Because of this, our operating results may be affected should the market
price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our
fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term.
• 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.
•
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.
Total cost per piece increased 6.6% in 2018 compared with 2017, which includes transformation strategy costs of $235
million. The cost per piece increase was primarily impacted by the cost increases described previously. The increased expenses
in 2018 were also driven by costs related to the improvement of our smart global logistics network, including additional aircraft
leases to improve our air service reliability; costs related to the implementation of Saturday operations in additional markets,
depreciation costs due to new facilities placed in service and higher pension expense. Costs were also negatively impacted by
rising fuel prices offset by net changes in depreciation, primarily driven by changes in the useful lives of vehicles, plant
equipment and building improvements.
31
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2017 compared to 2016
Operating expenses for the period increased $2.802 billion in 2017, primarily due to pickup and delivery costs (up $1.312
billion), the cost of operating our domestic integrated air and ground network (up $810 million), the costs of package sorting
(up $746 million), offset by a reduction in indirect operating costs (down $66 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 increased 4.3% in 2017 compared to 2016 and was primarily impacted 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.
Operating Profit and Margin
2018 compared to 2017
Operating profit was negatively impacted primarily by planned costs related to our transformation strategy, higher
pension expenses, one less operating day and the impact of bringing new facility and technology projects on-line. Operating
profit decreased $660 million in 2018 compared with 2017 with operating margins decreasing 220 basis points to 8.4%.
Excluding the impact of transformation strategy costs, operating profit decreased $425 million in 2018 compared to 2017 with
operating margins decreasing 170 basis points. While benefits from fuel (fuel surcharge revenue increased at a faster pace than
expense) and lower net depreciation expense had a positive impact on operating profit, higher purchased transportation costs
due to volume growth, one less operating day and an increase in pension costs driven by lower discount rates weighed on
profits. Additionally, operating profit was negatively impacted by costs related to continued investments in our smart global
logistics network, including implementation of Saturday operations in additional markets. The benefits of these projects will
not be fully realized until future periods.
2017 compared to 2016
Operating profit decreased $325 million in 2017 compared with 2016. Operating margin decreased 150 basis points to
10.6%. 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 of 2017 and from fuel as expense increased at a faster pace than fuel surcharge
revenue.
32
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
Transformation Strategy Costs
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
2018
2017
2016
2018/ 2017
2017/ 2016
1,723
1,482
3,205
$ 6.59
29.27
$ 17.08
253
$ 2,874
10,973
595
$14,442
1,715
1,395
3,110
$ 6.07
28.70
$ 16.22
254
$ 2,646
10,170
526
$13,342
$11,913
(76)
$11,837
$10,913
—
$10,913
1,635
1,211
2,846
$ 5.85
30.34
$ 16.27
255
$ 2,441
9,369
536
$12,346
$ 9,929
—
$ 9,929
0.5%
6.2%
3.1%
8.6%
2.0%
5.3%
8.6%
7.9%
13.1%
8.2%
4.9 %
15.2 %
9.3 %
3.8 %
(5.4)%
(0.3)%
8.4 %
8.5 %
(1.9)%
8.1 %
9.2%
9.9 %
8.5%
9.9 %
$ 2,529
$ 2,605
$ 2,429
$ 2,429
$ 2,417
$ 2,417
4.1%
7.2%
0.5 %
0.5 %
17.5%
18.0%
18.2%
18.2%
19.6%
19.6%
$
$
147
(157)
(10)
$ (325)
(50)
$ (375)
*
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, 2018 and 2017,
compared with the corresponding prior year periods:
Revenue Change Drivers:
2018/ 2017
2017/ 2016
Volume
Rates /
Product Mix
Fuel
Surcharge
Currency
Total
Revenue
Change
2.6%
8.8%
1.8 %
(0.7)%
2.7%
2.6%
1.1 %
(2.6)%
8.2%
8.1%
33
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Volume
2018 compared to 2017
Our overall average daily volume increased in 2018 largely due to strong demand from several sectors including retail,
industrial manufacturing, high-tech and healthcare. Business-to-consumer shipments remained relatively flat for the year.
We continued to experience export volume growth in 2018. The growth was mainly driven by our European, U.S. and
Asian operations, which experienced increases in volume on almost all major trade lanes. European export volume showed
growth in the Europe-to-U.S. and intra-Europe trade lanes. Export volume into the U.S. grew in most major trade lanes, led by
Europe and the Americas. Asia export volume growth was the most significant in the Asia-to- Americas and intra-Asia trade
lanes. Export volume growth was strong across most major products, with a continued shift towards our premium express
products, such as Worldwide Express and Transborder Express services.
Domestic volume increased slightly, primarily due to growth in Mexico, Canada and Netherlands, while domestic
products in the Euro zone declined slightly.
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 volume in 2017 was primarily due to growth in Turkey, Germany, France, Italy and U.K.
Rates and Product Mix
2018 compared to 2017
Total average revenue per piece increased 5.3% in 2018, impacted by a 110 basis point increase from currency.
Additionally, total revenue per piece was impacted by an increase in fuel surcharge revenue, as well as a shift in product mix, as
the growth in higher yielding premium products continued to exceed overall growth.
On December 24, 2017, 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 market. On October 15, 2018, we implemented a 0.50% increase in International Air-Import fuel
surcharge. Additionally, on December 5, 2018, we announced an average 4.9% net increase in base and accessorial rates for
international shipping originating in the United States, which became effective on December 26, 2018.
Export revenue per piece increased 2.0% in 2018, impacted by a 60 basis point increase from currency, shift in product
mix and higher fuel surcharge revenue.
Domestic revenue per piece increased 8.6% in 2018, impacted by a 320 basis point increase from currency and higher
fuel surcharges.
2017 compared to 2016
Total average revenue per piece decreased 0.3% 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.
34
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 5.4% 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 3.8% in 2017, impacted by a 50 basis point increase from currency, increases in
base rates and higher fuel surcharges.
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 largely 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.
While fluctuations in fuel surcharge percentages can be significant from period to period, fuel surcharges represent one of
the many individual components of our pricing structure that impact our overall revenue and yield. Additional components
include the mix of services sold, the base price and extra service charges we obtain for these services and the level of pricing
discounts offered.
Total international fuel surcharge revenue increased by $382 million in 2018, primarily due to volume increases and
higher fuel prices. Total international fuel surcharge revenue increased by $325 million in 2017, primarily due to volume
increase, 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.
Operating Expenses
2018 compared to 2017
Overall operating expenses increased by $1.0 billion, which included a $76 million increase from transformation strategy
costs. Excluding the impact of the transformation strategy costs, adjusted operating expenses for the segment increased $924
million in 2018 primarily due to increased volumes, currency fluctuations and higher fuel costs driven by increased usage and
higher prices.
In addition to variability in usage and fuel prices, the manner in which we purchase fuel also influences the net impact of
fuel on our results. The majority of our contracts for fuel purchases utilize index-based pricing formulas plus or minus a fixed
locational/supplier differential. While many of the indices are aligned, each index may fluctuate at a different pace, driving
variability in the prices paid for fuel. Because of this, our operating results may be affected should the market price of fuel
suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which
can affect our earnings either positively or negatively in the short-term.
Operating expenses were impacted by changes in the cost of operating our international integrated air and ground
network, which increased $546 million, as well as pickup and delivery costs, which increased $287 million. The increase in
network costs was largely driven by volume growth in the majority of our products and higher fuel costs due to increased prices
and usage. Additionally, the increase in pickup and delivery costs is due to increased volume. Operating expenses were also
impacted by a $91 million increase in indirect overhead and package sorting costs and other costs.
35
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2017 compared to 2016
Overall operating expenses increased by $984 million, 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 $424 million, as well as pickup and delivery costs, which increased $287 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 $273 million increase in indirect overhead and package sorting costs and other costs.
Operating Profit and Margin
2018 compared to 2017
Operating profit increased $100 million (4.1%) in 2018 compared with 2017, including $76 million in transformation
strategy costs. Operating margin decreased 70 basis points to 17.5%. Adjusted operating profit without transformation strategy
costs increased by $176 million (7.2%) in 2018, while the adjusted operating margin decreased 20 basis points to 18.0%.
Included in adjusted operating profit is a $10 million decrease due to currency. Currency adjusted margin was 18.3% up from
18.2% in the prior year.
2017 compared to 2016
Operating profit increased $12 million in 2017 compared with 2016. Operating margin increased 140 basis points to
18.2%. 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.
36
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
Logistics
Freight
Other
Total Revenue
Operating Expenses (in millions):
Operating Expenses
Transformation Strategy Costs
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
2018
2017
2016
2018/ 2017
2017/ 2016
$ 2,706
$ 25.52
9,720
38.4
10,605
1,091
253
6,580
3,234
3,218
794
$ 13,826
$ 2,598
$ 24.08
10,210
40.5
10,788
1,057
252
5,674
3,017
3,000
791
$ 12,482
$ 2,385
$ 23.44
9,961
39.4
10,174
1,021
253
4,873
2,644
2,737
726
$ 10,980
4.2 %
6.0 %
(4.8)%
(5.2)%
(1.7)%
3.2 %
16.0 %
7.2 %
7.3 %
0.4 %
10.8 %
8.9%
2.7%
2.5%
2.8%
6.0%
3.5%
16.4%
14.1%
9.6%
9.0%
13.7%
$ 12,974
(49)
$ 12,925
$ 11,685
—
$ 11,685
$ 10,337
—
$ 10,337
11.0 %
13.0%
10.6 %
13.0%
$
$
$
$
852
901
6.2%
6.5%
$
$
797
797
6.4%
6.4%
643
643
5.9%
5.9%
6.9 %
13.0 %
24.0%
24.0%
Currency Translation Benefit / (Cost)—(in millions)*:
Revenue
Operating Expenses
Operating Profit
*
Amount represents the change compared to the prior year.
$
$
39
(44)
(5)
$
$
10
(12)
(2)
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 the
Logistics unit 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.
37
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue
2018 compared to 2017
Total revenue for the Supply Chain & Freight segment increased $1.344 billion in 2018 compared to 2017.
Forwarding revenue increased $906 million in 2018 compared with 2017, primarily due to increased truckload brokerage
volume as well as tonnage increases in our international air freight and ocean freight forwarding businesses. Sell price
improvements in our international air freight forwarding business also contributed to the increase in revenue. Revenue in our
truckload brokerage business was driven by robust demand and tight capacity.
Logistics revenue increased by $217 million in 2018 compared with 2017, as we experienced growth in the healthcare,
aerospace, retail and manufacturing sectors.
UPS Freight revenue increased $218 million in 2018 compared with 2017, despite fourth-quarter volume declines as a
result of the contract ratification process wherein we took actions to clear our LTL network. Revenue was driven by increases in
average weight per shipment from improved customer mix due to middle market growth. LTL revenue per hundredweight
increased 6.0% as LTL base rate increases for certain shipments in the U.S., Canada and Mexico, averaging 5.9%, took effect
March 26, 2018. Fuel surcharge revenue also increased $75 million due to changes in diesel fuel prices.
2017 compared to 2016
Total revenue for the Supply Chain & Freight segment increased $1.502 billion in 2017 compared to 2016.
Forwarding revenue increased $801 million in 2017 compared with 2016, primarily due to increased truckload brokerage
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.
Logistics revenue increased $373 million 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 $263 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 and UPS Customer Solutions, as well as service contracts with the U.S. Postal Service.
Operating Expenses
2018 compared to 2017
Total operating expenses for the Supply Chain & Freight segment increased $1.289 billion in 2018 compared to 2017,
which includes $49 million of costs related to our transformation strategy.
Forwarding operating expenses increased $845 million in 2018 compared with 2017, largely due to increased purchased
transportation expenses, transformation strategy costs, and a $20 million favorable legal settlement in 2017. Excluding $16
million in costs related to our transformation strategy, Forwarding operating expenses increased $829 million. Purchased
transportation expense increased $720 million compared to 2017 primarily due to increased truckload brokerage volume and
higher tonnage in our international air freight forwarding business as well as the resulting costs passed to us from outside
contract carriers.
Logistics operating expenses increased $205 million in 2018 compared with 2017. Excluding $22 million in costs related
to our transformation strategy, Logistics operating expenses increased $183 million. The increases were driven by costs
associated with retail facility expansions, increased rates for mail services and strategic information technology investments.
38
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UPS Freight operating expenses increased $258 million in 2018 compared with 2017. Excluding $6 million in costs
related to our transformation strategy, UPS Freight operating expenses increased $252 million. Total cost per LTL shipment
increased 11.4% in 2018 compared to 2017. The operating expenses increased largely due to costs associated with operating our
linehaul network ($85 million) and increases in pickup and delivery costs ($60 million). The linehaul network and pickup and
delivery costs were driven by higher fuel prices and expense for outside transportation carriers, including fuel surcharges passed
on to us by these outside carriers.
2017 compared to 2016
Total operating expenses for the Supply Chain & Freight segment increased $1.348 billion in 2017 compared to 2016.
Forwarding operating expenses increased $752 million, largely due to increased purchased transportation expenses. This
was offset by operating efficiencies and the receipt of a $20 million favorable legal settlement in the second quarter of 2017.
Purchased transportation expense increased by $770 million compared to 2016 due to increased truckload brokerage
movements 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, also
contributed to increased purchased transportation expenses.
Logistics operating expenses increased $308 million in 2017, primarily due to the acquisition of Marken in 2016 and
increased purchased transportation costs driven by increased volume and rates for mail services.
UPS Freight operating expenses increased $256 million in 2017 compared with 2016. The increase in operating expense
was largely due to costs associated with operating our linehaul network ($126 million) and increases in pickup and delivery
costs ($99 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 5.7% 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 $32 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.
Operating Profit and Margin
2018 compared to 2017
Total operating profit for the Supply Chain & Freight segment increased $55 million in 2018 compared to 2017, which
includes a $49 million impact related to transformation strategy costs. Excluding transformation strategy costs, operating profit
increased $104 million. Operating margin decreased 20 basis points to 6.2%, while the adjusted operating margin increased 10
basis points to 6.5%.
Operating profit for the Forwarding unit increased $61 million in 2018 compared with 2017. Excluding the $16 million
impact related to transformation strategy costs, operating profit increased $77 million. Operating profit and margins increased
mainly due to tonnage increases in our international air freight and ocean freight forwarding business as well as pricing
improvements. Additionally, our truckload brokerage business grew due to robust demand and tight capacity.
Operating profit for the Logistics unit increased $12 million in 2018 compared with 2017. Excluding the $22 million
impact related to transformation strategy costs, operating profit increased $34 million. Operating profit and margins increased
due to higher demand in the healthcare, aerospace, retail and manufacturing sectors.
UPS Freight operating profit decreased $40 million in 2018 compared with 2017. Excluding the $6 million impact related
to transformation strategy costs, operating profit decreased $34 million. Operating profit and margins decreased as volume
declined due to labor uncertainties around the Teamsters contract ratification, partially offsetting the increased LTL revenue per
hundredweight realized during the year. Actions to clear our LTL network as a result of the contract ratification process reduced
operating profit by approximately $60 million.
39
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The combined operating profit for all of our other businesses within Supply Chain & Freight increased $22 million in
2018, 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. Excluding the $5 million impact related to transformation strategy costs, operating profit
increased $27 million.
2017 compared to 2016
Total operating profit for the Supply Chain & Freight segment increased $154 million in 2017 compared with 2016.
Operating profit for the Forwarding unit increased $49 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 unit increased $65 million in 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 $7 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 $33 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.
40
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated Operating Expenses
Operating Expenses (in millions):
Compensation and Benefits:
Transformation Strategy Costs
Adjusted Compensation and Benefits
Repairs and Maintenance
Depreciation and Amortization
Purchased Transportation
Fuel
Other Occupancy
Other Expenses
Total Other Expenses
Other Transformation Strategy Costs
Adjusted Total Other Expenses
Year Ended December 31,
% Change
2018
2017
2016
2018/ 2017
2017/ 2016
$ 37,235
(262)
36,973
$ 34,577
$ 32,534
7.7 %
6.3%
—
—
34,577
32,534
6.9 %
6.3%
1,732
2,207
1,601
2,282
13,409
11,696
3,427
1,362
5,465
27,602
(98)
$ 27,504
2,690
1,155
5,055
24,479
—
1,542
2,224
9,848
2,118
1,037
4,619
21,388
—
8.2 %
(3.3)%
14.6 %
27.4 %
17.9 %
8.1 %
12.8 %
3.8%
2.6%
18.8%
27.0%
11.4%
9.4%
14.5%
$ 24,479
$ 21,388
12.4 %
14.5%
Total Operating Expenses
Adjusted Total Operating Expenses
$ 64,837
$ 59,056
$ 53,922
$ 64,477
$ 59,056
$ 53,922
9.8 %
9.2 %
9.5%
9.5%
Currency Translation Cost / (Benefit)*
$
201
$
62
*
Amount represents the change compared to the prior year.
Compensation and Benefits
2018 compared to 2017
Total compensation and benefits increased $2.658 billion in 2018 compared to 2017. Excluding the impact of
transformation strategy costs of $262 million discussed in note 16 to the audited consolidated financial statements, adjusted
compensation and benefits expense increased $2.396 billion in 2018.
Employee payroll costs increased $1.459 billion in 2018 compared with 2017, largely due to higher U.S. domestic hourly
and management compensation costs. Total compensation costs increased 6.9%, while consolidated average daily volume
growth was 3.2%. U.S. domestic compensation costs for hourly employees increased largely due to higher volume growth,
contractual union wage increases, headcount increases, wage rate adjustments for part time workers and a 5.2% 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.
41
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Benefits expense increased $1.199 billion in 2018 compared to 2017. Excluding the impact of transformation strategy
costs of $262 million, benefits costs increased $937 million in 2018 compared to 2017, primarily due to the following factors:
• Health and welfare costs increased $341 million in 2018 compared to 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.
•
Pension and retirement benefits expense increased $312 million in 2018 compared to 2017 primarily due to increased
expense in UPS sponsored pension plans due to lower discount rates and additional expenses related to multiemployer
plan contributions, which were impacted by contractual contribution rate increases and an overall increase in the size
of the workforce. These increases were partially offset by lower Pension Benefit Guaranty Corporation premiums due
to prior voluntary pension contributions, as well as the amendment of the UPS Retirement Plan in the prior year.
• Vacation, holiday, excused absence, payroll tax and other expenses increased $244 million in 2018 due to salary
increases and growth in the overall size of the workforce.
• Workers' compensation expense increased $40 million in 2018 compared to 2017 as we experienced less favorable
actuarial adjustments.
2017 compared to 2016
Total compensation and benefits increased $2.043 billion in 2017 compared to 2016.
Employee payroll costs increased $1.273 billion in 2017 compared with 2016, largely due to higher U.S. domestic hourly
and management compensation costs. Total compensation costs increased 6.4%, while consolidated average daily volume
growth was 5.0%. U.S. domestic compensation costs for hourly employees increased largely due to fourth quarter 2017
seasonal staffing increases resulting from 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 increased $770 million in 2017 compared to 2016, primarily due to the following factors:
•
Pension costs increased $342 million in 2017 compared to 2016, primarily due to increased expense in UPS sponsored
pension plans due to lower discount rates and additional expenses related to multiemployer plan contributions, which
were impacted by contractual contribution rate increases and an overall increase in the size of the workforce.
• Health and welfare costs increased $240 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 $251 million in 2017 due to salary
increases and growth in the overall size of the workforce.
• 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.
Repairs and Maintenance
2018 compared to 2017
The $131 million increase in repairs and maintenance expense in 2018 was primarily due to maintenance of our
transportation equipment and aircraft and routine repairs to buildings and facilities. Building expansions and additions
throughout 2018 also contributed to increases in expense.
42
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2017 compared to 2016
The $59 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.
Depreciation and Amortization
2018 compared to 2017
We evaluate the useful lives of all our property, plant and equipment based on our usage, maintenance and replacement
policies, and taking into account physical and economic factors that may affect the useful lives of the assets. Refer to note 1 in
our consolidated financial statements for further description of our policy.
Total depreciation and amortization expense decreased $75 million in 2018 compared with 2017. The principal
components of this change included:
• An increase in expense of $257 million arising from capital investments in several large facilities and other new
projects coming into service. This had the effect of decreasing net income by $205 million or $0.24 per share on a
basic and diluted basis in 2018; and
• A decrease in expense of $286 million resulting from prospective revisions to our estimates of useful lives for building
improvements, vehicles and plant equipment as part of our ongoing investment in transformation. This had the effect
of increasing net income by $228 million or $0.26 per share on a basic and diluted basis.
Combining the impact of the revisions to the estimated useful lives with the impact of the increased capital investments
noted above resulted in a net decrease of $29 million to depreciation expense and an increase to net income of $23 million or
$0.03 per share on both a basic and diluted basis in 2018.
The changes to the estimated useful lives described above are expected to decrease 2019 depreciation and amortization
expense by approximately $335 million as compared to 2018. However, this will be largely offset by approximately $330
million of additional depreciation expense related to the addition of numerous facility automation and capacity expansion
projects, which are part of our multi-year transformation strategy.
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.
Purchased Transportation
2018 compared to 2017
The $1.713 billion increase in purchased transportation expense charged to us by third-party air, rail, ocean and truck
carriers in 2018 compared with 2017 was primarily driven by the following factors:
• Expense for our Forwarding and Logistics business increased $824 million in 2018, primarily due to increased
truckload brokerage freight loads per day; increased tonnage in our international air freight forwarding business, and
increased volume and rates for mail services. Additionally, expenses increased due to additional fuel surcharges passed
onto us from outside contract carriers.
• U.S. Domestic Package expense increased $326 million in 2018, primarily due to increased volume, general rate
increases and higher fuel surcharges passed to us from outside contract carriers.
•
International Package expense increased $180 million in 2018, primarily due to the increased usage of third-party
carriers to handle higher transborder volume and an unfavorable impact from currency exchange rate movements.
43
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
• UPS Freight expense increased $153 million in 2018, due to an increase in our ground freight pricing product, LTL
tonnage and higher fuel surcharges passed to us from outside transportation providers, partially offset by declines in
our LTL shipments due to fourth quarter labor uncertainties around the Teamsters contract ratification.
• We incurred additional purchased transportation expense of $230 million in 2018 compared to 2017, which was
primarily due to leasing additional aircraft to handle increases in air volume and higher jet fuel surcharges associated
with aircraft charters.
2017 compared to 2016
The $1.848 billion increase in purchased transportation expense charged to us by third-party air, rail, ocean and truck
carriers in 2017 compared with 2016 was primarily driven by the following factors:
• Expense for our Forwarding and Logistics business increased $937 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.
Fuel
2018 compared to 2017
Fuel expense increased $737 million in 2018 as compared to 2017. The increase in fuel expense in 2018 was primarily
due to higher jet fuel, diesel and unleaded gasoline prices and higher consumption due to higher total aircraft block hours and
increased Domestic Package delivery miles driven as a result of overall higher volume. These increases were partially offset by
the benefit of alternative fuel costs.
The manner in which we purchase fuel also influences the net impact of fuel on our results. The majority of our contracts
for fuel purchases utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. While many of the
indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for fuel. Because of this,
our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by
amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively
or negatively in the short-term.
2017 compared to 2016
The $572 million increase in fuel expense in 2017 as compared to 2016 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.
Other Occupancy
2018 compared to 2017
The $207 million increase in other occupancy expense in 2018 compared to 2017 was largely due to higher facility rent
expense, property tax expense and utility expenses. These increases were primarily driven by an increase in the number of
operating facilities compared to 2017.
44
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2017 compared to 2016
The $118 million increase in other occupancy expense in 2017 compared to 2016 was largely due to higher facility rent
expense driven by new facilities, as well as higher utilities and property taxes at our operating facilities.
Other Expenses
2018 compared to 2017
The $410 million increase in other expenses in 2018 compared to 2017 was primarily attributable to increases in
transportation equipment rental, outside professional service costs, security protection, non-income based state and local taxes,
and data processing costs. Additionally, costs of $86 million related to our transformation strategy contributed to the increase in
2018 when compared to 2017.
2017 compared to 2016
The $436 million increase in other expenses in 2017 compared to 2016 was caused by (1) an auto liability insurance
expense increase of $75 million due to miles driven, medical trend rates and severity experience trends and (2) transportation
equipment rental increase of $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, security protection, computer and plant supplies and air cargo handling, partially offset by a decrease in
advertising expense.
Other Income and (Expense)
The following table sets forth investment income (expense) and other and interest expense for the years ended
December 31, 2018, 2017 and 2016 (in millions):
Investment Income (Expense) and Other
Defined Benefit Plans Mark-to-Market Charges
Adjusted Investment Income (Expense) and Other
Interest Expense
Total Other Income and (Expense)
Adjusted Other Income and (Expense)
Investment Income (Expense) and Other
2018 compared to 2017
Year Ended December 31,
% Change
2018
2017
$
(400)
1,627
1,227
61
800
861
2016
(2,186)
2,651
465
(605)
$ (1,005) $
$
622
$
(381)
(453)
(392) $ (2,567)
84
$
408
2018/ 2017
2017/ 2016
NA
103.4%
42.5%
33.6%
156.4%
52.5%
(102.8)%
(69.8)%
85.2 %
18.9 %
(84.7)%
NA
Investment income (expense) and other for the period decreased $461 million, which included a $827 million increase in
mark-to-market pension charges. Excluding the impact of the defined benefit plan mark-to-market charges, adjusted investment
income (expense) and other for the period increased $366 million, which was comprised of expected investment returns on
pension assets, net of interest cost on projected benefit obligations and prior service cost. Expected returns on plan assets
increased as a result of both higher discretionary contributions and higher actual returns on plan assets in 2017. Interest cost on
projected benefit obligations decreased as a result of lower discount rates. Investment income increased as a result of higher
yields on invested assets, partially offset by foreign currency exchange rate movements.
45
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2017 compared to 2016
Investment income (expense) and other for the period increased $2.247 billion, which included a $1.851 billion decrease
in mark-to-market pension charges. Excluding the impact of the defined benefit plan mark-to-market charges, adjusted
investment income (expense) and other for the period increased $396 million, which was comprised of expected investment
returns on pension assets, net of interest cost on projected benefit obligations and prior service cost. Expected returns on plan
assets increased as a result of higher discretionary contributions in 2017 and 2016. Investment income also increased as a result
of higher invested assets and the ongoing reduction in losses from fair value adjustments on real estate partnerships, partially
offset by foreign currency exchange rate movements.
Interest Expense
2018 compared to 2017
Interest expense increased in 2018 as compared to 2017, primarily due to higher average outstanding debt balances and
higher effective interest rates, partially offset by higher capitalized interest related to several large construction projects.
2017 compared to 2016
Interest expense increased in 2017 as compared to 2016, primarily due to the issuance of long-term Canadian Dollar
Senior Notes, Euro Senior Notes and U.S. Dollar Senior Notes and higher effective interest rates on senior notes.
46
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, 2018, 2017
and 2016 (in millions):
Income Tax Expense:
Income Tax Impact of:
Year Ended December 31,
% Change
2018
$ 1,228
2017
$ 2,232
2016
$ 1,699
2018/ 2017
(45.0)%
2017/ 2016
31.4%
Defined Benefit Plans Mark-to-Market Charge
Transformation Strategy Costs
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
390
87
193
—
978
—
—
$ 1,705
258
$ 2,683
—
$ 2,677
20.4%
21.3%
31.3%
33.8%
33.2%
34.4%
(36.5)%
0.2%
Our effective tax rate is affected by recurring factors such as statutory tax rates in the jurisdictions in which we operate
and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in
any given year but may not be consistent from year to year.
Our effective tax rate decreased to 20.4% in 2018, compared with 31.3% in 2017 and 33.2% in 2016, primarily due to the
effects of the aforementioned recurring factors and the following discrete tax items.
Tax Cuts and Jobs Act
On December 22, 2017, the United States enacted into law the Tax Act. The Tax Act made 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 includes provisions that affected 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 Staff Accounting Bulletin ("SAB") 118, which provided 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. We recorded a $272
million provisional benefit inclusive of our Transition Tax liability, the change in our indefinite reinvestment assertion for
certain foreign subsidiaries and the remeasurement of our U.S. net deferred tax liabilities for the year ended December 31,
2017. During the fourth quarter of 2018, we completed our accounting for the Tax Act based on the current regulatory guidance
available at the end of the SAB 118 measurement period and recorded no net adjustment to our provisional estimate.
The Tax Act also enacted provisions that took effect in 2018 including but not limited to: (1) a provision that imposes
U.S. tax on certain foreign subsidiary income known as Global Intangible Low-Taxed Income ("GILTI"); (2) a new deduction
for Foreign-Derived Intangible Income ("FDII"); (3) additional limitations on tax deductions for expenses such as interest and
executive compensation, and (4) a new minimum tax based on certain payments from a U.S. company to foreign related parties
known as the Base Erosion and Anti-Abuse Tax ("BEAT").
We included the impact of each of the newly effective Tax Act provisions in our computation of the 2018 income tax
expense. Throughout 2018, the U.S. Department of the Treasury and Internal Revenue Service issued preliminary regulatory
guidance clarifying certain provisions of the Tax Act. We anticipate additional regulatory guidance and technical clarifications
that could change our future income tax expense. When additional guidance is issued, we will recognize the related tax impact
in the quarter of enactment.
47
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2018 Discrete Items
The decrease in our effective tax rate was primarily due to the impact of the Tax Act which reduced the U.S. federal
corporate income tax rate from 35% to 21% effective January 1, 2018.
In the fourth quarter of 2018, we recognized an income tax benefit of $390 million related to pre-tax mark-to-market
losses of $1.627 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a
higher average tax rate than the 2018 U.S. federal statutory tax rate because it included the effect of U.S. state and local and
foreign taxes.
We recorded pre-tax transformation strategy costs of $360 million during the year ended December 31, 2018. As a result,
we recorded an additional income tax benefit of $87 million. This income tax benefit was generated at a higher average tax rate
than the 2018 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense
resulted in a net tax benefit of $38 million and reduced our effective tax rate by 0.6% during the year ended December 31,
2018.
Other factors that impacted our 2018 effective tax rate include favorable resolutions of uncertain tax positions, favorable
U.S. state and local tax law changes, favorable tax provisions enacted in the Bipartisan Budget Act of 2018 and discrete tax
credits associated with the filing of our 2017 U.S. federal income tax return.
2017 Discrete Items
In addition to the impact of the Tax Act described above, the following discrete items were recorded during the year
ended December 31, 2017.
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 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 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 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a
higher average tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
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 21.3% in 2018 from 33.8% in 2017 primarily due to the impact of the Tax Act
which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.
Our adjusted effective tax rate decreased to 33.8% in 2017 from 34.4% 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.
48
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, 2018, we had $5.035 billion in cash, cash equivalents and marketable securities. We believe that our
current cash position, access to the commercial paper programs and 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, transformation strategy and to fund dividend payments, share repurchases and long-term debt payments
through the next several years. 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
(1) Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, provisions for
$
$
2018
4,791
6,048
(186)
482
469
1,091
16
$ 12,711
$
2017
4,905
5,770
(7,794)
(732)
(550)
(168)
48
1,479
2016
$ 3,422
6,438
(2,668)
(142)
(505)
(47)
(25)
$ 6,473
uncollectible accounts, pension and postretirement benefit expense, stock compensation expense and other non-cash items.
Cash from operating activities remained strong throughout 2016 to 2018. Most of the variability in operating cash flows
during the 2016 to 2018 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 no discretionary contributions to our three primary company-sponsored U.S. pension plans in 2018,
however we made contributions of $7.291 and $2.461 billion in 2017 and 2016, respectively. The remaining contributions from
2016 to 2018 were 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 hedge margin
receivables and payables, timing of income tax receipts and payments and improvements in our working capital position. The
net hedge margin collateral received (paid) from our derivative counterparties was $482, $(732) and $(142) million during
2018, 2017 and 2016, respectively, due to settlements and changes in the fair value of the derivative contracts used in our
currency and interest rate hedging programs. Cash payments for income taxes were $2 million, $1.559 billion and $2.064
billion for 2018, 2017 and 2016, respectively, primarily impacted by the timing of a $5.0 billion pension contribution made in
December 2017 which resulted in a tax refund in 2018, and the timing of current tax deductions.
As of December 31, 2018, the total of our worldwide holdings of cash, cash equivalents and marketable securities were
$5.035 billion, of which approximately $2.853 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. 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.
49
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 :(1)
Capital Expenditures as a % of Revenue
2018
(6,330)
(3,147)
(1,496)
(931)
(709)
(6,283)
$
$
$
2017
(4,971)
(2,954)
(789)
(924)
(560)
(5,227)
$
$
$
2016
(2,563)
(1,316)
(350)
(864)
(435)
(2,965)
$
$
$
8.7%
7.9%
4.9%
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
(1) In addition to capital expenditures of $6.283 billion in 2018, there were capital expenditures relating to the principal
repayments of capital lease obligations of $340 million. These are included in cash flows from financing activities.
24
5
360
(134)
1
37
4
(87)
(2)
1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
88
9
911
(547)
(59)
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. In 2017 we began a multi-year investment program in our smart logistics network which impacts all
asset categories, with the largest investments in buildings, facilities and plant equipment. This investment program will
continue in 2019, whereby we anticipate that our capital expenditures will be approximately $7.0 billion.
As such, capital expenditures on buildings, facilities and plant equipment increased in 2018 compared to prior periods in
our U.S. and international package businesses, largely due to several facility automation and capacity expansion projects.
Capital spending on aircraft also increased in 2018 compared to prior periods due to increased contract deposits on open aircraft
orders and final payments associated with the delivery of aircraft. Capital spending on information technology increased in
2018 compared to the prior periods due to further development of technology enabled enhancements and capitalized software
projects.
The proceeds from the disposal of property, plant and equipment were largely due to the disposal of equipment in 2018,
vehicle retirements in 2017 and insurance recoveries in 2016. 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 was related to our acquisition of area franchise rights for The UPS Store in 2018,
Freightex, Nightline and STTAS in 2017 and Marken in 2016.
Other investing activities are impacted by changes in our non-current investments, capital contributions into certain
investment partnerships and various other items.
50
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
2018
(5,692)
(1,011)
(8.9)
858
(0.1)%
3.64
(3,011)
(1,622)
240
(288)
$
$
$
$
$
$
$
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)
$
$
$
$
$
$
$
$ 22,736
3,037
$ 25,773
$ 24,289
1,024
$ 25,313
$ 16,075
430
$ 16,505
For the years ended December 31, 2018, 2017 and 2016, we repurchased a total of 8.9, 16.1 and 25.2 million shares of
class A and class B common stock for $1.000, $1.816 and $2.680 billion, respectively ($1.011, $1.813 and $2.678 billion in
repurchases for 2018, 2017 and 2016, respectively, are reported on the cash flow statement due to the timing of settlements).
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,
2018, we had $3.339 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. We anticipate repurchasing
approximately $1.0 billion of shares in 2019.
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 2019, we increased our quarterly dividend payment from
$0.91 to $0.96 per share, a 5.5% increase.
51
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Issuances of debt in 2018 consisted primarily of commercial paper. In 2017 and 2016 we completed senior rate note
offerings of $8.355 and $1.775 billion, respectively. The following is a summary of debt issuances in 2017 and 2016 (in
millions):
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)
Principal Amount in
USD
$
$
700
600
1,000
500
1,000
1,150
1,461
815
582
547
8,355
Principal Amount in
USD
$
$
500
500
226
549
1,775
The remaining debt issuances for 2017 and 2016 consisted primarily of commercial paper.
Repayment of debt in 2018 and 2017 consisted primarily of the maturity of our $750 million 5.50% fixed-rate senior
notes that matured in January 2018 and $375 million 1.125% fixed-rate senior notes that matured in October 2017. In 2016,
there were no repayments of fixed-rate senior notes or floating-rate senior notes. The remaining repayments of debt during the
2016 through 2018 time period included paydowns of commercial paper and scheduled principal payments on our capitalized
lease obligations. We consider the overall fixed and floating interest rate mix of our portfolio and the related overall cost of
borrowing when planning for future issuances and non-scheduled repayments of debt.
52
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The amount of commercial paper outstanding fluctuates throughout the year based on daily liquidity needs. The
following is a summary of our commercial paper program (amount in millions):
Functional currency
outstanding balance
at year-end
Outstanding balance
at year-end ($)
Average balance
outstanding
Average balance
outstanding ($)
Average interest rate
$
1,968
606
$
$
$
1,968
$
694
2,662
2,137
360
$
$
2,137
425
1.81 %
(0.38)%
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
— £
3,250
1,838
776
94
$
$
$
1,838
817
116
0.44 %
(0.28)%
0.50 %
2018
USD
EUR
Total
2017
USD
EUR
Total
2016
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 2016 through 2018 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 $259, $247 and $167 million for 2018, 2017 and 2016,
respectively. Net cash inflows from premium received on capped call options for the purchase of UPS class B shares were $34
million in 2018, and $54 million in both 2017 and 2016.
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.
53
€
€
€
€
€
€
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, 2018 (in millions):
$
$
2019
2020
Commitment Type
Capital Leases
Operating Leases
Debt Principal
Debt Interest
Purchase Commitments (1)
Tax Act Repatriation Liability
Pension Funding
Total
(1) Purchase commitments include aircraft leases that we entered into in 2019.
158
578
3,667
624
3,686
—
2,192
$ 10,905
95
477
998
582
1,732
—
—
$ 3,884
$
42
399
2,551
525
1,150
—
—
$ 4,667
2021
2022
2023
$
39
325
2,000
461
383
—
—
$ 3,208
$
36
262
2,303
389
22
—
—
$ 3,012
After 2023
293
$
926
10,830
5,626
8
96
—
$ 17,779
Total
$
663
2,967
22,349
8,207
6,981
96
2,192
$ 43,455
Our capital lease obligations relate primarily to leases on aircraft and real estate. 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, 2018. 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, 2018, we had firm commitments to purchase 19 new Boeing 747-8F cargo aircraft to be delivered between
2019 and 2022 and nine Boeing 767 aircraft to be delivered between 2019 and 2020.
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 but are required under current IRS guidance to offset certain overpayments of tax against the
liability. We intend to make this election and have reflected our remaining transition tax due by year as a contractual obligation.
There are no anticipated required minimum cash contributions to our qualified U.S. pension plans in 2019 (these plans are
discussed further in note 5 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 2019 cannot be reasonably estimated.
As discussed in note 6 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.
The table above does not include approximately $216 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.
54
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As of December 31, 2018, we had outstanding letters of credit totaling approximately $1.256 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, 2018, we had $1.031 million of surety bonds written. As of December 31,
2018, we had unfunded loan commitments totaling $164 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 5 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, 2018, we had approximately 283,000 employees employed under a national master agreement and
various supplemental agreements with local unions affiliated with the Teamsters. These agreements expired on July 31, 2018.
On October 5, 2018, the Teamsters declared that the tentative national master agreement for the U.S. Domestic Package
business unit was considered ratified, and will be implemented as soon as five remaining local and supplemental agreements are
negotiated and ratified. We remain in the process of negotiating and ratifying four of these local and supplemental agreements
which, when ratified, will be retroactive to August 1, 2018. The UPS Freight business unit national master agreement was
ratified on November 11, 2018.
We have approximately 2,800 pilots who are employed under a collective bargaining agreement with the Independent
Pilots Association ("IPA"), which becomes amendable on September 1, 2021.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727. On February 8, 2019,
the airline mechanics who are covered by this agreement voted to ratify a new contract which will become amendable
November 1, 2023. In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under
agreements with the Teamsters are employed under collective bargaining agreements with the International Association of
Machinists and Aerospace Workers (“IAM”) 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.
Rate Adjustments
Effective February 18, 2019, general UPS Freight rates will increase by 5.9%. This rate adjustment applies to non-
contractual less-than-truckload (LTL) shipments. The impact of this general rate increase may vary by specific lane or shipment
characteristics such as weight or class.
55
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 the audited 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, 2018. In addition, we have certain contingent liabilities that
have not been recognized as of December 31, 2018, 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. 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.
None of the reporting units incurred any goodwill impairment charges in 2018, 2017 or 2016. 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.
56
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A trade name with a carrying value of $200 million and licenses with a carrying value of $5 million as of December 31,
2018 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 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 was a $12 and $7 impairment of finite-
lived intangible assets in 2018 and 2017, respectively and no impairment of finite-lived intangible assets in 2016. There was no
impairment of indefinite-lived intangible assets in 2018, 2017 or 2016.
Self-Insurance Accruals
We self-insure costs associated with workers’ compensation claims, automobile liability, health and welfare and general
business liabilities, up to certain limits. 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.
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.
57
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 and return on
assets 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, 2018 (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
$
(48) $
(360)
(1,717)
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.
(106)
(24)
3
(10)
(53)
1
9
15
50
1,065
1,823
106
24
(3)
11
62
(1)
(9)
(16)
Pension Backstop
UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the
CSPF and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a
collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating
benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was
UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced
by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF. Under our withdrawal
agreement with the CSPF, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced
in accordance with applicable law.
58
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”). This change in law for the first
time permitted multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute
and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S.
Department of the Treasury (“Treasury”). In May 2016, Treasury rejected the proposed plan submitted by the CSPF. In the first
quarter of 2018, Congress established a Joint Select Committee to develop a recommendation to improve the solvency of
multiemployer plans and the Pension Benefit Guaranty Corporation (“PBGC”) before a November 30, 2018 deadline. While the
Committee’s efforts failed to meet its deadline, the Committee made significant progress towards finding solutions that will
address the long term solvency of multiemployer pension plans. UPS will continue to work with all stakeholders, including
legislators and regulators, to implement an acceptable solution.
The CSPF has said that it believes a legislative solution to its funded status is necessary or that it will become insolvent in
2025, and we expect that the CSPF will continue to explore options to avoid insolvency. Numerous factors could affect the
CSPF’s funded status and UPS’s potential obligation to pay coordinating benefits under the UPS/IBT Plan. Any obligation to
pay coordinating benefits will be subject to a number of significant uncertainties, including whether the CSPF submits a revised
MPRA filing and the terms thereof, or whether it otherwise seeks federal government assistance, as well as the terms of any
applicable legislation, the extent to which benefits are paid by the PBGC and our ability to successfully defend legal positions
we may take in the future under the MPRA, including the suspension ordering provisions, our withdrawal agreement and other
applicable law.
We account for the potential obligation to pay coordinating benefits to the UPS Transfer Group under Accounting
Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”), which requires us to provide a best
estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit
obligation at the December 31st measurement date. While we currently believe the most likely outcome to this matter and the
broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not
permit anticipation of changes in law in making a best estimate of pension liabilities.
As such, our best estimate of the next most likely outcome at the measurement date is that the CSPF submits and
implements another benefit reduction plan under the MPRA during 2019. We believe any MPRA filing would be designed to
forestall insolvency by reducing benefits to participants other than the UPS Transfer Group to the maximum extent permitted,
and then reducing benefits to the UPS Transfer Group by a lesser amount.
We have evaluated this outcome using a deterministic cash flow projection, reflecting updated estimated CSPF cash flows
and investment earnings, the lack of legislative action and the absence of a MPRA filing by the CSPF in 2018. As a result, at the
December 31, 2018 measurement date, the best estimate of our projected benefit obligation increased by $1.6 billion for
coordinating benefits that may be required to be directly provided by the UPS/IBT Plan to the UPS Transfer Group.
The future value of this estimate will be influenced by the terms and timing of any MPRA filing, changes in our discount
rate, rate of return on assets and other actuarial assumptions, presumed solvency of the PBGC, as well as potential solutions
resulting from federal government intervention. Any such event may result in a decrease or an increase in the best estimate of
our projected benefit obligation. If the uncertainties are not resolved, it is reasonably possible that our projected benefit
obligation could increase by approximately $2.4 billion, resulting in a total obligation for coordinating benefits of
approximately $4.0 billion as previously disclosed. If a future change in law occurs, it may be a significant event requiring an
interim remeasurement of the UPS/IBT Plan at the date the law is enacted. We will continue to assess the impact of these
uncertainties on our projected benefit obligation in accordance with ASC 715.
59
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, 2018, we had $26.576 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.
We evaluate the useful lives of our property, plant and equipment based on our usage, maintenance and replacement
policies, and taking into account physical and economic factors that may affect the useful lives of the assets. As part of our
ongoing investment in transformation in 2018, we revised our estimates of useful lives for building improvements, vehicles and
plant equipment based on our current assessment of these factors. In general, these changes in estimate had the effect of
lengthening the useful lives of vehicles, building improvements and plant equipment. The change in estimates for building
improvements, vehicles and plant equipment was applied prospectively beginning in 2018 through depreciation expense. See
"Consolidated Operating Expense" of Item 7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the discussion of the impacts to "Depreciation and amortization." See note 1 to the audited consolidated
financial statements for a discussion of our accounting policies. See note 4 to the audited consolidated financial statements for
a discussion of the change in estimated useful lives.
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 2018, 2017 and 2016.
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. If listed
market prices and other relevant facts are not available, 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 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.
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.
60
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
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.
61
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 and other alternative fuels. 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. The majority of our contracts for fuel purchases utilize index-based pricing
formulas plus or minus a fixed locational/supplier differential. While many of the indices are aligned, each index may fluctuate
at a different pace, driving variability in the prices paid for fuel. Because of this, our operating results may be affected should
the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in
our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term. 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, 2018 and 2017, 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.
62
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,
2018
2017
$
$
$
$
(426) $
(447)
58
47
1
$
$
$
51
55
2
(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, 2018 and 2017.
63
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 (Loss)
Statements of Consolidated Cash Flows
Notes to Consolidated Financial Statements
Note 1—Summary of Accounting Policies
Note 2—Revenue Recognition
Note 3—Cash and Investments
Note 4—Property, Plant and Equipment
Note 5—Company-Sponsored Employee Benefit Plans
Note 6—Multiemployer Employee Benefit Plans
Note 7—Goodwill and Intangible Assets
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—Transformation Strategy
Note 17—Quarterly Information (Unaudited)
65
66
67
67
68
69
69
81
84
88
88
100
104
106
111
113
116
120
123
127
127
134
134
64
Report of Independent Registered Public Accounting Firm
To the Shareowners and Board of Directors of
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, 2018 and 2017, the related consolidated statements of income, comprehensive income, and
cash flows, for each of the three years in the period ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018, 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, 2018, 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, 2019, expressed an unqualified opinion on the Company’s internal
control over financial reporting.
Change in Accounting Principles
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue from
contracts with customers and the presentation of net periodic benefit costs due to the adoption of new accounting standards.
These changes have been applied retrospectively to all periods presented.
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, 2019
We have served as the Company's auditor since 1969.
65
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
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 (163 and 173 shares issued in 2018 and 2017)
Class B common stock (696 and 687 shares issued in 2018 and 2017)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Deferred compensation obligations
Less: Treasury stock (1 share in 2018 and 2017)
Total Equity for Controlling Interests
Noncontrolling Interests
Total Shareowners’ Equity
Total Liabilities and Shareowners’ Equity
See notes to consolidated financial statements.
66
December 31,
2018
2017
$
4,225
810
8,958
940
1,277
16,210
26,576
3,811
2,075
170
141
1,033
$ 50,016
$
3,320
749
8,773
1,573
1,303
15,718
22,118
3,872
1,964
483
266
1,153
$ 45,574
$
2,805
5,188
3,047
810
715
1,522
14,087
19,931
8,347
1,619
1,571
1,424
$
4,011
3,934
2,608
705
677
951
12,886
20,278
7,061
756
1,765
1,804
2
7
—
8,006
(4,994)
32
(32)
3,021
16
3,037
$ 50,016
2
7
—
5,852
(4,867)
37
(37)
994
30
1,024
$ 45,574
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 (expense) 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,
2018
$ 71,861
2017
$ 66,585
2016
$ 61,610
37,235
1,732
2,207
13,409
3,427
1,362
5,465
64,837
7,024
34,577
1,601
2,282
11,696
2,690
1,155
5,055
59,056
7,529
32,534
1,542
2,224
9,848
2,118
1,037
4,619
53,922
7,688
(400)
(605)
(1,005)
6,019
1,228
4,791
5.53
5.51
$
$
$
$
$
$
61
(453)
(392)
7,137
2,232
4,905
5.63
5.61
$
$
$
(2,186)
(381)
(2,567)
5,121
1,699
3,422
3.88
3.86
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,
2018
2017
2016
$
$
4,791
(149)
—
485
272
5,399
$
$
4,905
86
(1)
(321)
(148)
4,521
$
$
3,422
(119)
—
(112)
(712)
2,479
67
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
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 (benefit) expense
Stock compensation expense
Other (gains) losses
Changes in assets and liabilities, net of effects of business 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 (increase) decrease in finance receivables
Cash paid for business acquisitions, net of cash and cash equivalents acquired
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 used in financing activities
Effect Of Exchange Rate Changes On Cash, Cash Equivalents and Restricted Cash
Net Increase (Decrease) In Cash, Cash Equivalents and Restricted Cash
Cash, Cash Equivalents and Restricted Cash:
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.
Years Ended December 31,
2018
2017
2016
$
4,791
$
4,905
$
3,422
2,207
2,242
(186)
(86)
758
634
293
(421)
754
1,034
505
170
16
12,711
(6,283)
37
(973)
886
4
(2)
1
(6,330)
63
1,202
(2,887)
(1,011)
240
(3,011)
(288)
(5,692)
(91)
598
2,282
1,643
(7,794)
—
1,224
584
37
(1,022)
(984)
599
200
(243)
48
1,479
(5,227)
24
(1,630)
1,990
5
(134)
1
(4,971)
(250)
12,016
(3,939)
(1,813)
247
(2,771)
(203)
3,287
53
(152)
2,224
3,725
(2,668)
(21)
117
591
(198)
(704)
5
460
91
(546)
(25)
6,473
(2,965)
88
(4,813)
5,724
9
(547)
(59)
(2,563)
(88)
5,927
(3,805)
(2,678)
245
(2,643)
(98)
(3,140)
(21)
749
3,769
4,367
595
2
$
$
$
3,921
3,769
428
1,559
$
$
$
3,172
3,921
373
2,064
$
$
$
68
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 over time as we perform the services in
the contract.
Forwarding —Freight forwarding revenue and the expense related to the transportation of freight are recognized over
time as we perform the services. Truckload brokerage revenue and related transportation costs are recognized over time as we
perform the services. Customs brokerage revenue is recognized upon completing documents necessary for customs entry
purposes.
Logistics —In our Logistics business we have a right to consideration from customers in an amount that corresponds
directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount
to which we have a right to invoice the customer.
UPS Freight—Revenue is recognized over time as we perform the services in the contract.
In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some
transportation services. U.S. GAAP requires us to evaluate whether our businesses themselves promise to transfer services to
the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model.
Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the
agent within their revenue arrangements. Revenue and the associated purchased transportation costs are reported on a gross
basis within our statements of consolidated income.
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.
Refer to note 2 of our audited consolidated financial statements for further discussion of our revenue recognition policies.
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.
69
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (expense) 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 (expense) 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 (expense) and
other.
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
Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their
net estimated realizable value. Losses on accounts receivable are recognized when they are incurred, which requires us to make
our best estimate of the probable losses inherent in our customer receivables at each balance sheet date. These estimates require
consideration of historical loss experience, adjusted for current conditions, trends in customer payment frequency and
judgments about the probable effects of relevant observable data, including present economic conditions and the financial
health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing
major account exposures and concentrations of risk.
Our total allowance for doubtful accounts as of December 31, 2018 and 2017 was $94 and $104 million, respectively.
Our total provision for doubtful accounts charged to expense before recoveries during the years ended December 31, 2018,
2017 and 2016 was $118, $133 and $116 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 $421 and $404 million as of December 31, 2018 and 2017, 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. We evaluate the useful lives of our property, plant and equipment based
on our usage, maintenance and replacement policies, and taking into account physical and economic factors that may affect the
useful lives of the assets. As part of our ongoing investment in transformation in 2018, we revised our estimates of useful lives
for building improvements, vehicles and plant equipment based on our current assessment of these factors. In general, the
change in estimate had the effect of lengthening the useful lives of building improvements, vehicles and plant equipment.
Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the assets,
which are as follows: Vehicles—6 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. For
substantially all of our aircraft, the costs of major airframe and engine overhauls, as well as routine maintenance and repairs,
are charged to expense as incurred.
Interest incurred during the construction 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 $97, $49 and $14 million for 2018, 2017, and 2016, 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.
70
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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,
2018 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, automobile 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.
71
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 Plan 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 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 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.
In January 2018, the Financial Accounting Standards Board ("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 U.S. tax on certain 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.
72
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (losses) from remeasurement, net of hedging,
included in investment income (expense) and other were $(19), $3 and $5 million in 2018, 2017 and 2016, respectively.
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.
For acquisitions, 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.
73
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adoption of New Accounting Standards
In May 2014, the FASB issued an accounting standards update ("ASU") that changes the revenue recognition for
companies that enter into contracts with customers to transfer goods or services ("Revenue from Contracts with Customers").
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. Effective January 1, 2018, we
adopted the requirements of this ASU using the full retrospective method. See note 2 for required disclosures pertaining to the
new ASU.
In January 2016, the FASB issued an ASU 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 March 2016, the FASB issued an ASU 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 and statements of
consolidated income presentation on a prospective basis. The impact to income tax expense in the statements of consolidated
income was a benefit of $38 and $71 million in 2018 and 2017, respectively. Additionally, we have elected to continue
estimating forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.
In August 2016, the FASB issued an ASU that addresses the classification and presentation of specific cash flow issues
that resulted 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 was applied retrospectively. We
adopted this standard on January 1, 2018. This standard did not have a material impact on our statements of consolidated cash
flows.
In November 2016, the FASB issued an ASU 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 ("Restricted Cash").
Effective January 1, 2018, we adopted the requirements of this ASU retrospectively. As a result of this update, restricted cash is
included within cash and cash equivalents on our statements of consolidated cash flows.
In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic
postretirement benefit cost ("Improving 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. Effective January 1, 2018, we adopted the
requirements of this ASU retrospectively, as required. As a result of this update, the net amount of interest cost, prior service
cost and expected return on plan assets is now presented as other income.
In May 2017, the FASB issued an ASU 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 did not have a material impact on our consolidated financial position, results
of operations or cash flows.
In February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income
("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Effective
January 1, 2018, we early adopted this ASU and elected to reclassify the income tax effects of the Tax Act from AOCI to
retained earnings. This resulted in a $735 million increase to retained earnings and a $735 million decrease to AOCI. Our
current accounting policy for releasing income tax effects from other comprehensive income is based on a portfolio approach.
In August 2018, the FASB issued an ASU that modifies the disclosure requirements for employers that sponsor defined
benefit pension and postretirement plans. The update eliminates the disclosures for amounts in AOCI expected to be recognized
as components of net periodic cost over the next fiscal year and the effects of a one-percentage-point change in the assumed
healthcare cost trend rate. The update adds disclosure requirements to include the weighted-average interest crediting rates for
cash balance plans and a narrative description of the significant gains and losses related to changes in the benefit obligation for
the period. We have early adopted this standard for the year ended 2018 with retrospective application. This accounting
standards update did not have a material impact on our consolidated financial position, results of operations or cash flows.
74
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have recast our consolidated financial statements from amounts previously reported due to the adoption of new
revenue recognition, pension and restricted cash standards. Impacted consolidated balance sheet line items, which reflect the
adoption of the new ASUs, are as follows (in millions):
As previously
reported
Adjustments
(a)
December 31, 2017
Adjustments
(b)
Adjustments
(c)
As Recast
Assets:
Other current assets
Total current assets
Deferred income tax assets
Total Assets
Liabilities:
Accounts payable
Accrued wages and withholdings
Other current liabilities(1)
Total current liabilities
Deferred income tax liabilities
Shareowners' Equity:
Retained earnings
Total Shareowners' Equity
$
$
$
1,133
$
$
$
15,548
265
45,403
3,872
2,521
905
12,708
757
5,858
1,030
$
$
$
170
170
1
171
62
87
29
178
(1)
(6)
(6)
171
— $
— $
—
—
—
—
1,303
15,718
266
— $
— $
45,574
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
3,934
2,608
934
12,886
756
5,852
1,024
Total Liabilities and Shareowners' Equity $
(1) The caption "Other current liabilities" was presented separately from "Hedge margin liabilities" of $17 million in the Form 10-K at December 31, 2017.
45,574
45,403
— $
— $
$
$
These captions have been collapsed in the consolidated balance sheets as of December 31, 2018 and December 31, 2017 included within this Form 10-K.
(a) Recast to reflect the adoption of Revenue from Contracts with Customers.
(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
(c) Recast to reflect the adoption of Restricted Cash.
75
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated statements of operations, which reflects the adoption of the new ASUs, are as follows (in
millions):
As Previously
Reported
Twelve months ended December 31, 2016
Adjustments
(b)
Adjustments
(a)
Adjustments
(c)
As Recast
$
60,906
$
704
$
— $
— $
61,610
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 (expense)
and other
Interest expense
34,770
1,538
2,224
9,129
2,118
1,037
4,623
55,439
5,467
50
(381)
Total Other Income and (Expense)
Income Before Income Taxes
Income Tax Expense (Benefit)
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
(a) Recast to reflect the adoption of Revenue from Contracts with Customers.
(331)
5,136
1,705
3,431
3.89
3.87
$
$
$
$
$
$
—
4
—
719
—
—
(4)
719
(15)
—
—
—
(15)
(6)
(9) $
(0.01) $
(0.01) $
(2,236)
—
—
—
—
—
—
(2,236)
2,236
(2,236)
—
(2,236)
—
—
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
32,534
1,542
2,224
9,848
2,118
1,037
4,619
53,922
7,688
(2,186)
(381)
(2,567)
5,121
1,699
3,422
3.88
3.86
(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
(c) Recast to reflect the adoption of Restricted Cash.
76
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As Previously
Reported
Twelve months ended December 31, 2017
Adjustments
(b)
Adjustments
(a)
Adjustments
(c)
As Recast
$
65,872
$
713
$
— $
— $
66,585
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 (expense)
and other
Interest expense
34,588
1,600
2,282
10,989
2,690
1,155
5,039
58,343
7,529
72
(453)
Total Other Income and (Expense)
Income Before Income Taxes
Income Tax Expense (Benefit)
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
(a) Recast to reflect the adoption of Revenue from Contracts with Customers.
(381)
7,148
2,238
4,910
5.64
5.61
$
$
$
$
$
$
—
1
—
707
—
—
16
724
(11)
—
—
—
(11)
(6)
(5) $
(0.01) $
— $
(11)
—
—
—
—
—
—
(11)
11
(11)
—
(11)
—
—
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
34,577
1,601
2,282
11,696
2,690
1,155
5,055
59,056
7,529
61
(453)
(392)
7,137
2,232
4,905
5.63
5.61
(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
(c) Recast to reflect the adoption of Restricted Cash.
77
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited impacted consolidated statement of cash flows line items, which reflect the adoption of the new ASUs, are
as follows (in millions):
As Previously
Reported
Twelve Months Ended December 31, 2016
Adjustments
(b)
Adjustments
(c)
Adjustments
(a)
As Recast
Net Income
$
3,431
$
(9) $
— $
— $
3,422
Adjustments to reconcile net income to
net cash from operating activities:
Deferred tax (benefit) expense
Other assets
Accounts payable
Accrued wages and withholdings
Other liabilities
Cash flows from operating activities
Purchase of marketable securities
Net cash used in investing activities
Net decrease in cash, cash equivalents
and restricted cash
Cash, cash equivalents and restricted
cash at the beginning of period
123
(14)
461
109
(561)
6,473
(4,816)
(2,566)
746
2,730
(6)
19
(1)
(18)
15
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
3
3
442
117
5
460
91
(546)
6,473
(4,813)
(2,563)
749
3,172
Cash, cash equivalents and restricted
$
cash at the end of period
(a) Recast to reflect the adoption of Revenue from Contracts with Customers.
3,476
$
— $
— $
445
$
3,921
(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
(c) Recast to reflect the adoption of Restricted Cash.
78
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income
$
4,910
$
(5) $
— $
— $
4,905
As Previously
Reported
Twelve Months Ended December 31, 2017
Adjustments
(b)
Adjustments
(c)
Adjustments
(a)
As Recast
Adjustments to reconcile net income to
net cash from operating activities:
Deferred tax (benefit) expense
Other assets
Accounts payable
Accrued wages and withholdings
Other liabilities
Other operating activities
Cash flows from operating activities
Purchase of marketable securities
Net cash used in investing activities
Net decrease in cash, cash equivalents
and restricted cash
Cash, cash equivalents and restricted
cash at the beginning of period
1,230
(982)
592
193
(241)
47
1,479
(1,634)
(4,975)
(156)
3,476
Cash, cash equivalents and restricted
$
cash at the end of period
(a) Recast to reflect the adoption of Revenue from Contracts with Customers.
3,320
$
(6)
(2)
7
7
(2)
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4
4
4
1,224
(984)
599
200
(243)
48
1,479
(1,630)
(4,971)
(152)
445
3,921
— $
— $
449
$
3,769
(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
(c) Recast to reflect the adoption of Restricted Cash.
Accounting Standards Issued But Not Yet Effective
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 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 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.
79
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use
asset and lease liability on their balance sheet for all leases with terms beyond twelve months. The new standard also requires
enhanced disclosures that will provided more transparency and information to financial statement users about our lease
portfolio. Although the distinction between operating and finance leases will continue to exist under the new standard, the
recognition and measurement of expenses and cash flows will not change significantly from current treatment. For finance
leases, lessees will continue to recognize interest expense on the lease liability using the effective yield method, while the right-
of-use asset will be amortized on a straight-line basis. For operating leases, expense will be recognized on a straight-line basis,
consistent with the previous standard.
We will adopt this ASU on January 1, 2019 using the modified retrospective approach and will not restate comparative
periods. We are substantially complete with our implementation plan. We plan to elect the transition package of three practical
expedients permitted within the standard. In accordance with the package of practical expedients, we will not reassess initial
direct costs, lease classification, or whether our contracts contain or are leases. We also made an accounting policy election to
not recognize right-of-use assets and liabilities for leases with a term of 12 months or less, unless the leases include options to
renew or purchase the underlying asset that are reasonably certain to be exercised.
Based on our lease portfolio as of December 31, 2018, we plan to recognize an operating lease liability and related right-
of-use asset on our balance sheet of approximately $2.6 billion, which represents the present value of our future minimum lease
payments related to operating leases, primarily related to leases of real estate and aircraft. We do not anticipate material changes
to our income statement or our statement of cash flows.
80
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REVENUE RECOGNITION
Revenue Recognition
Substantially all of our revenues are from contracts associated with the pick-up, transportation and delivery of packages
and freight (referred to hereafter as “transportation services”), whether carried out by or arranged by UPS, both domestically
and internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services
to customers through our global network of company-owned and leased distribution centers and field stocking locations, both
domestically and internationally.
Disaggregation of Revenue
Revenue:
Next Day Air
Deferred
Ground
U.S. Domestic Package
Domestic
Export
Cargo & Other
International Package
Forwarding
Logistics
Freight
Other
Supply Chain & Freight
Consolidated revenue
Year Ended
December 31,
2018
2017
2016
$
$
$
$
$
$
$
7,618
$
7,088
$
4,752
31,223
43,593
2,874
10,973
595
14,442
6,580
3,234
3,218
794
13,826
71,861
$
$
$
$
$
$
4,422
29,251
40,761
2,646
10,170
526
13,342
5,674
3,017
3,000
791
12,482
66,585
$
$
$
$
$
$
6,752
4,080
27,452
38,284
2,441
9,369
536
12,346
4,873
2,644
2,737
726
10,980
61,610
We account for a contract when both parties have approved the contract and are committed to perform their obligations,
the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of
consideration is probable. See note 1 for the adoption of new accounting standards.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis
of revenue recognition in accordance with U.S. GAAP. To determine the proper revenue recognition method for contracts, we
evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the
combined or single contract should be accounted for as more than one performance obligation. This evaluation requires
judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple
performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts,
the customer contracts with us to provide distinct services within a contract, such as transportation services. The vast majority
of our contracts with customers for transportation services include only one performance obligation, the transportation services
themselves. However, if a contract is separated into more than one performance obligation, we allocate the total transaction
price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised
goods or services underlying each performance obligation. We frequently sell standard transportation services with observable
standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.
81
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain business units, such as Logistics, we sell customized, customer-specific solutions in which we provide a
significant service of integrating a complex set of tasks and components into a single capability (even if that single capability
results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. In these
cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance
obligation.
Satisfaction of Performance Obligations
We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of
control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to
another. Further, if we were unable to complete delivery to the final location, another entity would not need to reperform the
transportation service already performed.
As control transfers over time, revenue is recognized based on the extent of progress towards completion of the
performance obligation. The selection of the method to measure progress towards completion requires judgment and is based
on the nature of the products or services to be provided. We use the cost-to-cost measure of progress for our package delivery
contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under
the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred
to date to the total estimated costs at completion of the performance obligation. Revenues, including ancillary or accessorial
fees and reductions for estimated customer incentives, are recorded proportionally as costs are incurred. Costs to fulfill include
labor and other direct costs and an allocation of indirect costs. For our freight and freight forwarding contracts, an output
method of progress based on time-in-transit is utilized as the timing of costs incurred does not best depict the transfer of control
to the customer. In our Logistics business we have a right to consideration from customers in an amount that corresponds
directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount
to which we have a right to invoice the customer.
Variable Consideration
It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can
either increase or decrease the transaction price. These variable amounts are generally awarded upon achievement of certain
incentive tiers or performance metrics. We estimate variable consideration at the most likely amount to which we expect to be
entitled. We include estimated amounts of revenue, which may be reduced by incentives or other contract provisions, in the
transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of
whether to include estimated amounts in the transaction price are based on an assessment of anticipated customer spending and
all information (historical, current and forecasted) that is reasonably available to us.
Contract Modifications
Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct
services. We consider contract modifications to exist when the modification either creates new or changes the existing
enforceable rights and obligations. Contract modifications that add additional distinct goods or services are treated as separate
contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services.
These contract modifications will be accounted for prospectively as the remaining performance obligations are distinct.
Payment Terms
Under the typical payment terms of our customer contracts, the customer pays at periodic intervals (i.e., every 14 days, 30
days, 45 days, etc.) for shipments included on invoices received. Invoices are generated each week on the week-ending day,
which is Saturday for the majority of our U.S. Domestic Package business, but could be another day depending on the business
unit or the specific agreement with the customer. It is not customary business practice to extend payment terms past 90 days,
and as such, we do not have a practice of including a significant financing component within our revenue contracts with
customers.
82
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principal vs. Agent Considerations
In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some
transportation services. U.S. GAAP requires us to evaluate whether our businesses themselves promise to transfer services to
the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model.
Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the
agent within their revenue arrangements. This required a change in reporting for certain of our Supply Chain & Freight
businesses where previously revenue was reported net of associated purchased transportation costs. Revenue and the associated
purchased transportation costs are now both reported on a gross basis within our statements of consolidated income.
Contract Assets and Liabilities
Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right
to payment only once all performance obligations have been completed (i.e., packages have been delivered), and our right to
payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are
generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.
Contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance
payments and billings in excess of revenue represent payments received from our customers that will be earned over the
contract term. Deferred revenue represents the amount of consideration due from customers related to in-transit shipments that
has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings
in excess of revenue as either current or long-term, depending on the period over which the advance payment will be earned.
We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which typically occurs
within a short window after period-end. The full balance of deferred revenue is converted each quarter based on the short-term
nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the
end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate
revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that
deferred revenue balance.
Contract assets related to in-transit packages were $234 and $170 million at December 31, 2018 and 2017, respectively,
net of deferred revenue related to in-transit packages of $236 and $174 million at December 31, 2018 and 2017, respectively.
Contract assets are included within "Other current assets" in the consolidated balance sheets. Short-term contract liabilities
related to advanced payments from customers were $5 and $31 million at December 31, 2018 and 2017, respectively. Short-
term contract liabilities are included within "Other current liabilities" in the consolidated balance sheets. Long-term contract
liabilities related to advanced payments from customers were $26 million at December 31, 2018 and $0 at December 31, 2017,
respectively. Long-term contract liabilities are included within "Other Non-Current liabilities" in the consolidated balance
sheets.
83
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as trading and available-for-sale at December 31, 2018
and 2017 (in millions):
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
2018
Current trading marketable securities:
Corporate debt securities
Equity securities
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
Non-U.S. government debt securities
Total available-for-sale marketable securities
$
137
2
139
297
82
275
20
674
$
— $
—
—
— $
—
—
1
—
—
—
1
(1)
(1)
(2)
—
(4)
Total current marketable securities
$
813
$
1
$
(4) $
137
2
139
297
81
273
20
671
810
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
(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 $587 and $579 million at December 31, 2018 and 2017, respectively.
There were no gross realized gains on sales of available-for-sale securities in 2018 or 2017. Gross realized gains on sales
of available-for-sale securities totaled $1 million in 2016. The gross realized losses on sales of available-for-sale securities
totaled $4, $2 and $1 million in 2018, 2017, and 2016, respectively.
There were no material impairment losses recognized on marketable securities during 2018, 2017 or 2016.
84
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, 2018. 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, 2018 (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
54
$
24
99
—
Unrealized
Losses
$
Fair Value
111
36
— $
—
—
—
81
5
Total marketable securities
$
177
$
— $
233
$
Unrealized
Losses
$
Fair Value
165
60
180
5
410
(2) $
(1)
(2)
—
(5) $
Unrealized
Losses
$
$
(2)
(1)
(2)
—
(5)
The unrealized losses for the corporate debt securities, mortgage and asset-backed 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, 2018, 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 securities
Cost
Estimated
Fair Value
$
$
268
448
22
73
811
2
813
$
$
267
447
22
72
808
2
810
85
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 "Cash, Cash Equivalents and Restricted Cash" in the statements of consolidated cash flows. At December 31, 2018
and 2017, we had $142 and $449 million in self-insurance investments and restricted cash, respectively.
We held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating
Benefit Plan at December 31, 2018 and 2017, respectively. The quarterly change in investment fair value is recognized in
"Investment income (expense) 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 $9 and $15 million at December 31, 2018 and
2017, respectively.
The amounts described above are classified as “Non-current Investments and Restricted Cash” in the consolidated
balance sheets.
A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of
consolidated cash flows in shown below (in millions):
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
December 31, 2018
December 31, 2017
December 31, 2016
$
$
$
4,225
142
4,367
$
$
$
3,320
449
3,769
$
$
$
3,476
445
3,921
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 8.16% and 7.56% as of
December 31, 2018 and 2017, respectively. These inputs and the resulting fair values are updated on a quarterly basis.
86
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, 2018 and 2017, 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
2018
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 marketable securities
Other non-current investments
Total
$
$
297
—
—
—
—
297
19
316
$
$
— $
81
410
2
20
513
—
513
$
— $
—
—
—
—
—
2
2
$
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
$
297
81
410
2
20
810
21
831
283
86
276
2
9
93
749
25
774
There were no transfers of investments between Level 1 and Level 2 during the years ended December 31, 2018 and
2017.
87
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. 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, 2018 and 2017 (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
$
2018
2017
$
9,820
17,499
2,000
4,808
4,323
11,833
2,093
—
2,112
54,488
9,365
16,248
1,582
4,035
3,934
9,387
1,907
29
2,239
48,726
(27,912)
26,576
$
(26,608)
22,118
$
As part of our ongoing investment in transformation, in 2018 we made prospective revisions to our estimates of useful
lives for building improvements, vehicles and plant equipment which in general had the effect of lengthening the useful lives of
these categories. This resulted in a decrease in depreciation expense and an increase in operating income of $286 million and an
increase to net income of $228 million or $0.26 per share on a basic and diluted basis. Separately, capital investments in
additional property, plant and equipment, net of disposals and fully-depreciated assets, resulted in an increase in depreciation
expense of $257 million and a decrease to net income of $205 million or $0.24 per share on a basic and diluted basis in
2018. Combining both impacts resulted in a net decrease of $29 million to depreciation expense, and an increase to net income
of $23 million or $0.03 per share on both a basic and diluted basis in 2018.
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 2018,
2017 or 2016.
NOTE 5. COMPANY - SPONSORED EMPLOYEE BENEFIT PLANS
We sponsor various retirement and pension plans, including defined benefit and defined contribution plans which cover
our employees worldwide.
U.S. Pension Benefits
In the U.S. we maintain the following single-employer defined benefit pension plans: the UPS Retirement Plan, 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.
88
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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 $127,
$119 and $111 million for 2018, 2017 and 2016, 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 2018 and 2017 as a result of this change.
89
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $28, $23 and $4 million for 2018, 2017
and 2016 respectively.
Contributions are also made to defined contribution money purchase plans under certain collective bargaining
agreements. Amounts charged to expense were $92, $91 and $82 million for 2018, 2017 and 2016, respectively.
Net Periodic Benefit Cost
Information about net periodic benefit cost for the company-sponsored pension and postretirement defined benefit plans
is as follows (in millions):
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
2018
2017
2016
2018
2017
2016
2018
2017
2016
$ 1,661
1,799
(3,201)
193
1,603
—
$ 2,055
$ 1,543
1,813
(2,883)
192
729
—
$ 1,394
$ 1,412
1,828
(2,516)
166
2,520
—
$ 3,410
$
29
104
(8)
7
—
—
$ 132
$
29
112
(7)
7
53
—
$ 194
$
28
124
(6)
5
17
—
$ 168
$
$
62
45
(77)
1
24
—
55
$
$
60
40
(66)
1
18
2
55
$
49
41
(58)
1
114
—
$ 147
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
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
2016
2018
2017
2018
3.84% 4.41% 4.86% 3.82% 4.23% 4.79% 2.78% 2.75% 3.51%
4.25% 4.27% 4.29%
3.22% 3.17% 3.04%
N/A
7.75% 8.75% 8.75% 7.20% 8.75% 8.75% 5.76% 5.65% 5.73%
N/A
N/A
2016
2018
2017
2016
2017
Cash balance interest credit rate
2.50% 2.91% 3.36%
N/A
N/A
N/A
3.07% 2.65% 3.00%
The table below provides the weighted-average actuarial assumptions used to determine the benefit obligations of our
plans.
Discount rate
Rate of compensation increase
Cash balance interest credit rate
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
2018
2017
2018
2017
2018
2017
4.50%
4.25%
2.98%
3.84%
4.25%
2.50%
4.51%
N/A
N/A
3.82%
N/A
N/A
2.94%
3.24%
3.17%
2.78%
3.23%
3.07%
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.
90
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2018, 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)
2
(69) $
73
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 2018, 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
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
CSPF and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a
collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating
benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was
UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced
by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF. Under our withdrawal
agreement with the CSPF, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced
in accordance with applicable law.
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”). This change in law for the first
time permitted multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute
and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S.
Department of the Treasury (“Treasury”). In May 2016, Treasury rejected the proposed plan submitted by the CSPF. In the first
quarter of 2018, Congress established a Joint Select Committee to develop a recommendation to improve the solvency of
multiemployer plans and the Pension Benefit Guaranty Corporation (“PBGC”) before a November 30, 2018 deadline. While the
Committee’s efforts failed to meet its deadline, the Committee made significant progress towards finding solutions that will
address the long term solvency of multiemployer pension plans. UPS will continue to work with all stakeholders, including
legislators and regulators, to implement an acceptable solution.
The CSPF has said that it believes a legislative solution to its funded status is necessary or that it will become insolvent in
2025, and we expect that the CSPF will continue to explore options to avoid insolvency. Numerous factors could affect the
CSPF’s funded status and UPS’s potential obligation to pay coordinating benefits under the UPS/IBT Plan. Any obligation to
pay coordinating benefits will be subject to a number of significant uncertainties, including whether the CSPF submits a revised
MPRA filing and the terms thereof, or whether it otherwise seeks federal government assistance, as well as the terms of any
applicable legislation, the extent to which benefits are paid by the PBGC and our ability to successfully defend legal positions
we may take in the future under the MPRA, including the suspension ordering provisions, our withdrawal agreement and other
applicable law.
91
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We account for the potential obligation to pay coordinating benefits to the UPS Transfer Group under Accounting
Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”), which requires us to provide a best
estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit
obligation at the December 31st measurement date. While we currently believe the most likely outcome to this matter and the
broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not
permit anticipation of changes in law in making a best estimate of pension liabilities.
As such, our best estimate of the next most likely outcome at the measurement date is that the CSPF submits and
implements another benefit reduction plan under the MPRA during 2019. We believe any MPRA filing would be designed to
forestall insolvency by reducing benefits to participants other than the UPS Transfer Group to the maximum extent permitted,
and then reducing benefits to the UPS Transfer Group by a lesser amount.
We have evaluated this outcome using a deterministic cash flow projection, reflecting updated estimated CSPF cash flows
and investment earnings, the lack of legislative action and the absence of a MPRA filing by the CSPF in 2018. As a result, at the
December 31, 2018 measurement date, the best estimate of our projected benefit obligation increased by $1.6 billion for
coordinating benefits that may be required to be directly provided by the UPS/IBT Plan to the UPS Transfer Group.
The future value of this estimate will be influenced by the terms and timing of any MPRA filing, changes in our discount
rate, rate of return on assets and other actuarial assumptions, presumed solvency of the PBGC, as well as potential solutions
resulting from federal government intervention. Any such event may result in a decrease or an increase in the best estimate of
our projected benefit obligation. If the uncertainties are not resolved, it is reasonably possible that our projected benefit
obligation could increase by approximately $2.4 billion, resulting in a total obligation for coordinating benefits of
approximately $4.0 billion as previously disclosed. If a future change in law occurs, it may be a significant event requiring an
interim remeasurement of the UPS/IBT Plan at the date the law is enacted. We will continue to assess the impact of these
uncertainties on our projected benefit obligation in accordance with ASC 715.
Other Actuarial Assumptions
Healthcare cost trends are used to project future postretirement medical benefits payable from our plans. For year-end
2018 U.S. plan obligations, future postretirement medical benefit costs were forecasted assuming an initial annual rate of
increase of 6.0%, decreasing to 4.5% by the year 2022 and with consistent annual increases at that ultimate level thereafter.
Funded Status
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
2018
2017
2018
2017
2018
2017
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
Unrecognized net actuarial gain (loss)
Gross unrecognized cost at December 31
Deferred tax assets (liabilities) at December 31
Net unrecognized cost at December 31
$ 39,554
(45,333)
$ 1,333
(1,651)
$ (5,779) $ (3,915) $ (2,484) $ (2,609) $ (268) $ (318)
$ 41,932
(45,847)
$ 1,284
(1,552)
183
(2,792)
26
(2,510)
$
$
$
$
— $
— $
(20)
(5,759)
35
(5)
(348)
$ (5,779) $ (3,915) $ (2,484) $ (2,609) $ (268) $ (318)
— $
(77)
(2,532)
284
(18)
(4,181)
35
(4)
(299)
(195)
(2,289)
$
$ (1,018) $
(3,967)
(4,985)
1,205
(880) $
(4,277)
(5,157)
1,840
$ (3,780) $ (3,317) $
(21) $
(32)
(53)
13
(40) $
(29) $
(195)
(224)
69
(155) $
(14) $
(100)
(114)
28
(86) $
(2)
(126)
(128)
31
(97)
92
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accumulated benefit obligation for our pension plans as of the measurement dates in 2018 and 2017 was $45.704 and
$45.776 billion, respectively.
Benefit payments under the pension plans include $23 and $22 million paid from employer assets in 2018 and in 2017,
respectively. Benefit payments (net of participant contributions) under the postretirement medical benefit plans include $87 and
$93 million paid from employer assets in 2018 and 2017, respectively. Such benefit payments from employer assets are also
categorized as employer contributions.
At December 31, 2018 and 2017, 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
2018
2017
2018
2017
$
$
$
$
45,333
44,284
39,554
630
539
339
$
$
37,113
35,538
32,914
1,138
992
798
$
$
45,333
44,284
39,554
630
539
339
37,113
35,538
32,914
647
549
342
The accumulated postretirement benefit obligation presented in the funded status table exceeds plan assets for all U.S.
postretirement medical benefit plans.
93
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
2018
2017
2018
2017
2018
2017
$ 45,847
1,661
1,799
(1,390)
—
331
(2,915)
—
—
—
$ 45,333
$ 41,069
1,543
1,813
(1,309)
—
—
4,256
—
(1,525)
—
$ 45,847
$
$
2,792
29
104
(263)
26
—
(178)
—
—
—
2,510
$
$
2,730
29
112
(264)
26
—
159
—
—
—
2,792
$
$
1,651
62
45
(33)
3
13
(81)
(110)
(1)
3
1,552
$
$
1,425
60
40
(32)
3
—
26
129
(3)
3
1,651
(1) Resulting from a new Teamster national master agreement.
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
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension
Benefits
2018
2017
2018
2017
2018
2017
$ 41,932
(1,007)
19
—
(1,390)
—
—
$ 39,554
$ 31,215
4,717
7,309
—
(1,309)
—
—
$ 41,932
$
$
183
(7)
87
26
(263)
—
—
26
$
$
15
(2)
408
26
(264)
—
—
183
$
$
1,333
(6)
80
3
(33)
(92)
(1)
1,284
$
$
1,092
96
77
3
(32)
100
(3)
1,333
2018 - $3.174 billion pre-tax actuarial gain related to benefit obligation:
• Discount Rates ($4.829 billion pre-tax gain): The weighted-average discount rate for our pension and postretirement
medical plans increased from 3.81% at December 31, 2017 to 4.45% at December 31, 2018, primarily due to both an
increase in U.S. treasury yields and an increase in credit spreads on AA-rated corporate bonds in 2018.
• Coordinating benefits attributable to the Central States Pension Fund ($1.550 billion pre-tax loss): This represents our
current best estimate of potential coordinating benefits that may be required to be paid related to the Central States
Pension Fund.
• Demographic and Assumption Changes ($105 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.
94
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017 - $4.441 billion pre-tax actuarial loss related to benefit obligation:
• Discount Rates ($4.124 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.
• Demographic and Assumption Changes ($317 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.
Pension and Postretirement Plan Assets
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.
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 instead included in the subtotals within the
tables shown below. Such investments include hedge funds, risk parity funds, real estate investments, private debt and private
equity funds. Investments in hedge funds are valued using the reported NAV as of December 31st. Real estate investments,
private debt and private equity funds are valued using fair values per the most recent partnership audited financial reports, and
adjusted, as appropriate, for any lag between the date of the financial reports and December 31st. Due to the inherent limitations
in obtaining a readily determinable fair value measurement for alternative investments, the fair values reported may differ from
the values that would have been used had a ready market for the alternative investments existed. These investments are
described further below:
• Hedge Funds: Plan assets are invested in hedge funds that pursue multiple strategies to diversify risk and reduce
volatility. Most of these hedge funds allow redemptions either quarterly or semi-annually after a two to three month
notice period, while others allow for redemption after only a brief notification period with no restriction on redemption
frequency. No unfunded commitments existed with respect to hedge funds as of December 31, 2018.
95
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• Risk Parity Funds: Plan assets are invested in risk parity strategies in order to provide diversification and balance risk/
return objectives. These strategies reflect a multi-asset class balanced risk approach generally consisting of equity,
interest rates, credit and commodities. These funds allow for monthly redemptions with only a brief notification
period. No unfunded commitments existed with respect to risk parity funds as of December 31, 2018.
• 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, 2018, unfunded commitments to such
limited partnerships totaling approximately $2.090 billion are expected to be contributed over the remaining
investment period, typically ranging between three and six years.
96
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, 2018 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
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
Global Bonds
Total Fixed Income Securities
Total
Assets(1)
Level 1
Level 2
Level 3
Percentage of
Plan Assets
Target
Allocation
$
157
$
108
$
49
$ —
0.4%
1-5
5,276
542
1,859
2,320
3,670
13,667
12,295
4,303
55
16
16,669
2,155
386
1,436
2,056
2,189
8,222
11,922
—
—
—
11,922
3,121
156
423
264
1,481
5,445
373
4,301
55
16
4,745
3,154
2,763
836
1,989
138
207
$ 39,580
—
—
—
152
—
—
$ 20,404
1,185
—
178
53
138
—
$ 11,793
$
$
45
$
4
$
41
171
34
33
348
586
102
195
27
324
—
—
33
150
183
24
54
27
105
171
34
—
198
403
78
141
219
—
—
—
—
—
—
—
2
—
—
2
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
34.5
25-55
42.1
35-55
8.0
7.0
2.1
5.0
0.4
0.5
100.0%
5-15
1-10
1-10
1-10
1-5
1-10
3.5
1-10
45.6
30-60
25.2
25-45
Other Investments:
Real Estate
Other
—
—
292
$
Total International Plan Assets
$ 20,696
Total Plan Assets
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified
76
191
930
$
$ 12,723
121
208
$ 1,284
$ 40,864
9.4
16.3
100.0%
—
4
4
6
5-10
1-20
$
$
in the fair value hierarchy but are included in the category totals.
(2) Represent mortgage and asset-backed securities.
97
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.
Total
Assets
(1)
Level 1
Level 2
Level 3
Percentage of
Plan Assets
Target
Allocation
Asset Category (U.S. Plans):
Cash and cash equivalents(2)
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
$ 5,725
$ 5,292
$
433
$
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
$
$
78
$
43
$
35
213
30
38
356
637
103
198
301
—
—
38
166
204
25
59
84
213
30
—
190
433
78
139
217
—
—
—
—
—
—
—
—
8
—
—
8
—
—
—
—
—
—
8
—
—
—
—
—
—
—
—
—
13.6%
0-5
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
5.8
0-10
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
Total International Plan Assets
Total Plan Assets
(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 allocations.
(3) Represents mortgage and asset-backed securities.
98
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, 2018 and 2017 (in millions).
Balance on January 1, 2017
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
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, 2018
Corporate
Bonds
— $
—
—
9
(1)
—
8
—
(7)
11
(10)
—
2
$
$
$
$
$
Other
Total
— $
—
—
—
—
—
— $
—
—
9
(5)
—
4
$
—
—
—
9
(1)
—
8
—
(7)
20
(15)
—
6
There were no UPS class A or B shares of common stock directly held in plan assets as of December 31, 2018 or
December 31, 2017.
Expected Cash Flows
Information about expected cash flows for the pension and postretirement benefit plans is as follows (in millions):
Expected Employer Contributions:
2019 to plan trusts
2019 to plan participants
Expected Benefit Payments:
2019
2020
2021
2022
2023
2024 - 2028
U.S.
Pension Benefits
U.S. Postretirement
Medical Benefits
International Pension
Benefits
$
$
$
$
2,000
20
1,505
1,652
1,788
1,930
2,075
12,550
$
$
192
74
227
233
227
218
209
912
63
5
29
32
36
41
46
319
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.
99
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. 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, 2018, 2017 and 2016, 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 2018, 2017 and 2016 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.
Status of Collective Bargaining Agreements
As of December 31, 2018, we had approximately 283,000 employees employed under a national master agreement and various
supplemental agreements with local unions affiliated with the Teamsters. These agreements expired on July 31, 2018. On October 5,
2018, the Teamsters declared that the tentative national master agreement for the U.S. Domestic Package business unit was considered
ratified, and will be implemented as soon as five remaining local and supplemental agreements are negotiated and ratified. We remain
in the process of negotiating and ratifying four of these local and supplemental agreements which, when ratified, will be retroactive to
August 1, 2018. The UPS Freight business unit national master agreement was ratified on November 11, 2018.
We have approximately 2,800 pilots who are employed under a collective bargaining agreement with the Independent Pilots
Association ("IPA"), which becomes amendable on September 1, 2021.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727. On February 8, 2019, the
airline mechanics who are covered by this agreement voted to ratify a new contract which will become amendable November 1, 2023.
In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters
are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers
(“IAM”) that will expire on July 31, 2019.
100
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Multiemployer Pension Plans
The following table outlines our participation in multiemployer pension plans for the periods ended December 31, 2018, 2017
and 2016, 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 2018 and 2017 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, 2018, 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 was 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 those plans covered by the collective bargaining agreement that expired on July 31, 2018, we
have accrued a liability for the estimated contributions (which are included in the following table) under our new collective bargaining
agreement that has been approved, but not yet implemented. For all plans detailed in the following table, we provided more than 5%
of the total plan contributions from all employers for 2018, 2017 and 2016 (as disclosed in the annual filing with the Department of
Labor for each respective plan).
101
Yes/Implemented
$
Yes/Implemented
No
No
Yes/Implemented
Yes/Implemented
No
No
5
5
44
6
13
9
38
$
5
5
40
5
12
8
35
$
5
4
38
5
11
7
31
129
118
107
104
116
42
93
88
110
38
103
36
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
2018
2017
Implemented
2018
2017
2016
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 Yellow
Yes/Implemented
51-6117726-001
Yellow Yellow
Yes/Implemented
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
04-6372430-001
Red
Red
Yes/Implemented
121
114
114
16-6063585-074
Red
Red
Yes/Implemented
108
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
Green
Green
Green
52-6043608-001
Green
Green
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
66
69
61
34
22
95
868
31
56
60
64
55
32
20
88
772
30
66
91
56
61
51
31
19
83
694
28
56
Total Contributions
$2,042
$1,870
$1,719
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, 2018 and 2017, we had $852 and $859 million, respectively, recognized
in "Other non-current liabilities" as well as $7 million as of December 31, 2018 and 2017 recorded in "other current liabilities" on our
consolidated balance sheets representing the remaining balance of the NETTI Fund withdrawal liability. This liability is payable in
equal monthly installments over a remaining term of approximately 44 years. 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,
2018 and 2017 was $832 and $921 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques
to determine the fair value of this liability.
102
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. For those plans covered by the collective
bargaining agreement that expired on July 31, 2018, we have accrued a liability for the estimated contributions (which are included in
the following table) under our new collective bargaining agreement that has been approved, but not yet implemented. 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
General Teamsters Local 493 Health Services & Insurance Plan
Joint Council #83 Health & Welfare Fund
Local 191 Teamsters Health Fund
Local 401 Teamsters Health & Welfare Fund
Local 443 Transportation Health Services & Insurance Plan
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
2018
$ 2,530
656
8
40
29
30
12
6
40
13
10
6
90
43
9
62
12
153
54
43
18
48
17
8
48
29
19
56
12
18
32
57
60
$ 4,268
2017
$ 2,366
605
7
37
27
29
11
5
37
13
9
5
84
38
8
59
11
132
50
38
17
46
15
8
43
27
17
52
11
16
29
52
68
$ 3,972
2016
$ 2,268
571
6
35
25
27
11
5
33
12
8
5
79
36
8
56
8
116
47
34
16
43
14
7
40
27
17
50
10
16
26
47
58
$ 3,761
103
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by segment (in millions):
Balance on January 1, 2017
Acquired
Currency / Other
Balance on December 31, 2017
Acquired
Currency / Other
Balance on December 31, 2018
2018 Goodwill Activity
U.S. Domestic
Package
International
Package
Supply Chain &
Freight
$
$
$
715
—
—
715
—
—
715
$
$
$
407
18
10
435
—
(18)
417
$
$
$
2,635
54
33
2,722
—
(43)
2,679
Consolidated
3,757
$
72
43
3,872
—
(61)
3,811
$
$
The 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.
2017 Goodwill Activity
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.
Goodwill Impairment
We completed our annual goodwill impairment valuation, as of July 1st, on a reporting unit basis. 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.
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 2018, 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, Logistics, 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 2018, 2017 or 2016. 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.
104
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
The following is a summary of intangible assets at December 31, 2018 and 2017 (in millions):
December 31, 2018
Capitalized software
Licenses
Franchise rights
Customer relationships
Trade name
Trademarks, patents and other
Total Intangible Assets
December 31, 2017
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
10.5
N/A
5.8
7.7
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Value
$
$
$
$
3,693
117
145
736
200
52
4,943
3,273
114
144
776
200
71
4,578
$
$
$
$
(2,478) $
(36)
(105)
(217)
—
(31)
(2,867) $
(2,310) $
(10)
(97)
(160)
—
(37)
(2,614) $
1,215
81
40
519
200
20
2,075
963
104
47
616
200
34
1,964
A trade name and licenses with a carrying value of $200 and $5 million, respectively, as of December 31, 2018 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 $12 and
$7 million impairment of finite-lived intangible assets in 2018 and 2017, respectively.
Amortization of intangible assets was $339, $287 and $321 million during 2018, 2017 and 2016, respectively. Expected
amortization of finite-lived intangible assets recorded as of December 31, 2018 for the next five years is as follows (in
millions): 2019—$432; 2020—$380; 2021—$312; 2022—$249; 2023—$199. Amortization expense in future periods will be
affected by business acquisitions, software development, licensing agreements, franchise rights purchases and other factors.
105
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, 2018 and 2017 (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:
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
$
2,662
Maturity
2019
Carrying Value
2018
2017
$
2,662
$
3,203
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
1,042
424
276
84
577
803
803
573
573
573
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
—
998
1,492
698
1,023
597
994
496
498
991
1,482
490
368
491
1,136
349
399
499
1,029
419
274
84
546
797
798
570
569
572
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
551
534
320
13
23,633
$
2024
2019 – 3005
2029 – 2045
2019 – 2022
548
534
320
13
22,736
(2,805)
19,931
$
593
500
319
19
24,289
(4,011)
20,278
$
106
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Paper
We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and € 5.0 billion (in a variety of
currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as
of December 31, 2018: $1.968 billion with an average interest rate of 2.34% and €606 million ($694 million) with an average
interest rate of -0.37%. The amount of commercial paper outstanding under these programs in 2019 is expected to fluctuate.
Debt Classification
We have classified our 5.125% senior notes due April 2019 with a principal balance of $1.0 billion as long term based on
our intent and ability to refinance the debt as of December 31, 2018. We have classified certain floating-rate senior notes that
are putable by the note holders as long-term debt, due to our intent and ability to refinance the debt if the put option is exercised
by the note holders.
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 2018 and 2017, 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
2018
—%
3.63%
3.99%
2.32%
2.77%
2017
1.51%
3.45%
2.98%
1.34%
1.78%
On January 15, 2018, our $750 million 5.500% 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 2018 and 2017 was 6.93% and 5.95%, respectively.
Floating-Rate Senior Notes
The floating-rate senior notes with principal amounts totaling $1.042 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 2018 and 2017 was 1.76% and 0.74%,
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.
107
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2018 and 2017 was 2.50%
and 0.5%, 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):
Aircraft
Buildings
Vehicles, plant equipment, technology equipment and other
Accumulated amortization
Property, plant and equipment subject to capital leases
2018
2017
$
$
2,291
265
22
(924)
1,654
$
$
2,291
285
70
(990)
1,656
These capital lease obligations have principal payments due at various dates from 2019 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 2018 and 2017 were 1.43% and 0.83%, 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 2018 and 2017 were 1.39% and 0.80%, 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%.
• Bonds with a principal balance of $100 million issued by the Delaware County, Pennsylvania Industrial Development
Authority associated with our Philadelphia, Pennsylvania airport facilities. These bonds, which are due September
2045, bear interest at a variable rate. The average interest rate for 2018 and 2017 was 1.35% and 0.78%, respectively.
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.
108
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Canadian Dollar Senior Notes
The Canadian Dollar senior notes consist of a single series a follows:
• Notes in the principal amount of C$750 million, which bear interest at a 2.125% fixed interest rate and mature in 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.
Euro Senior Notes
The Euro senior notes consist of four 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 scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark
comparable German government bond yield plus 15 basis points 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 2018 and 2017
were 0.11% and 0.10%, 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.
• Notes with principal amounts of €700 million and €500 million accrue interest at a 0.375% and 1.500% fixed rates,
respectively, and are due in 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.
Contractual Commitments
We lease certain aircraft, facilities, land, equipment and vehicles under operating leases, which expire at various dates
through 2066. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our
operating leases was $959, $804 and $686 million for 2018, 2017 and 2016, 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
2019
2020
2021
2022
2023
After 2023
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
578
477
399
325
262
926
2,967
$
$
3,667
998
2,551
2,000
2,303
10,830
22,349
$
$
3,686
1,732
1,150
383
22
8
6,981
$
$
158
95
42
39
36
293
663
(129)
534
(140)
394
$
$
$
109
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2018, we had outstanding letters of credit totaling approximately $1.256 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, 2018, we had $1.031 billion of surety bonds written.
Sources of Credit
We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit
facilities of $3.0 billion, and expires on December 10, 2019. Generally, amounts outstanding under this facility bear interest at a
periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin.
Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate;
(2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable
margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a
percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum
rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the prime rate is
1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances
under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this
facility as of December 31, 2018.
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, 2018.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2018 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, 2018, 10% of net tangible assets is equivalent to $3.004 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 $23.293 and $25.206 billion as of December 31,
2018 and 2017, 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.
110
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 pending matters, including (except as otherwise noted herein) the matters
described below, and we intend to defend vigorously each matter. We accrue for legal claims when, and to the extent that,
amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal
claims may be substantially higher or lower than the amounts accrued for those claims.
For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine
whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For
matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible
loss or range of loss.
Judicial Proceedings
In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern
District of New York, arising from alleged shipments of cigarettes to New York State and City residents. The complaint asserted
claims under various federal and state laws. The complaint also included a claim that UPS violated the Assurance of
Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. On March 24,
2017, the District Court issued an opinion and order finding liability against UPS on each of the plaintiffs’ causes of action. On
May 25, 2017, the District Court issued a corrected opinion and order on liability and an order awarding the plaintiffs damages
of $9.4 million and penalties of $237.6 million. An accrual of $9.4 million with respect to the damages awarded by the court is
included on our consolidated balance sheets at December 31, 2018. We estimate that the amount of losses could be up to $247
million, plus interest; however, the amount of penalties ultimately payable, if any, is subject to a variety of complex factors and
potential outcomes that remain to be determined in future legal proceedings. Consequently, we are unable to reasonably
estimate a likely amount of loss within that range. We strongly disagree with the District Court’s analysis and conclusions, and
have appealed to the United States Court of Appeals for the Second Circuit. The briefing is now complete and oral argument
has been scheduled for the first quarter of 2019.
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. Except as described below, we do not believe that any loss associated with any matter would
have a material adverse effect on our financial condition, results of operations or liquidity. Hughes v. UPS Supply Chain
Solutions, Inc., and United Parcel Service, Inc. has been certified as a class action in Kentucky state court. In this action,
Plaintiffs allege that they were not properly compensated for time entering and exiting security checkpoints and getting to their
work areas at UPS’s facilities. Plaintiffs seek compensatory damages, liquidated damages, attorneys’ fees, and interest. We
have denied any liability and intend to vigorously defend ourselves in this case. There are multiple factors that prevent us from
being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously defending
ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and
fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a
possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material
adverse effect on our financial condition, results of operations or liquidity.
Other Matters
In October 2015, the Department of Justice ("DOJ") informed us of an industry-wide inquiry into the transportation of
mail under the United States Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a
Civil Investigative Demand seeking certain information relating to our contracts. The DOJ has indicated it is investigating
potential violations of the False Claims Act or other statutes. We are cooperating with the DOJ. We are unable to predict what
action, if any, might be taken in the future by any government authorities as a result of their investigation. Accordingly, at this
time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such
loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
111
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, Spain’s National Markets and Competition Commission (“CNMC”) announced an investigation into 10
companies in the commercial delivery and parcel industry, including UPS, related to alleged nonaggression agreements to
allocate customers. In May 2017, UPS received a Statement of Objections issued by the CNMC. In July 2017, UPS received a
Proposed Decision from the CNMC. On March 8, 2018 the CNMC adopted a final decision, finding an infringement and
imposing a fine on UPS of €19.2 million . UPS has appealed the decision and in September 2018, obtained a suspension of the
implementation of the decision (including payment of the fine). The appeal is pending. There are multiple factors that prevent
us from being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously
defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of
law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to
estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a
material adverse effect on our financial condition, results of operations or liquidity.
In February 2018, the Turkish Competition Authority ("Authority") opened an investigation into nine companies (including
UPS) in the small package industry related to alleged customer allocations in violation of Turkish competition law. In April
2018, the Authority consolidated this investigation with two other investigations involving similar allegations. The consolidated
investigation involves over 30 companies. The investigation is in its early stages. There are multiple factors that prevented 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 operation or liquidity.
We are a party in various other matters that arose in the normal course of business. We do not believe that the eventual
resolution of these other matters (either individually or in the aggregate), including any reasonably possible losses in excess of
current accruals, will have a material adverse effect on our financial condition, results of operations or liquidity.
112
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, 2018, 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, 2018, 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):
2018
2017
2016
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
173
(3)
3
4
(14)
163
687
(5)
14
696
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 ($3.64, $3.32, and $3.12 per share)
Common stock purchases
Reclassification from AOCI pursuant to the
early adoption of ASU 2018-02
Other
Balance at end of year
$
$
$
$
$
$
$
$
$
2
—
—
—
—
2
7
—
—
7
—
419
(859)
406
34
—
5,852
4,791
(3,189)
(141)
735
(42)
8,006
180
(4)
4
3
(10)
173
689
(12)
10
687
$
$
$
$
$
$
$
$
$
2
—
—
—
—
2
7
—
—
7
—
396
(813)
363
54
—
4,880
4,905
(2,928)
(1,003)
—
(2)
5,852
194
(4)
5
2
(17)
180
693
(21)
17
689
$
$
$
$
$
$
$
$
$
2
—
—
—
—
2
7
—
—
7
—
541
(898)
303
54
—
6,011
3,422
(2,771)
(1,782)
—
—
4,880
For the years ended December 31, 2018, 2017 and 2016, we repurchased a total of 8.9, 16.1 and 25.2 million shares of
class A and class B common stock for $1.000, $1.816 and $2.680 billion, respectively ($1.011, $1.813 and $2.678 billion in
repurchases for 2018, 2017 and 2016, respectively, are reported on the cash flow statement due to the timing of settlements). 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, 2018, we had
$3.339 billion of this share repurchase authorization remaining.
113
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 $34 million during 2018 and $54 million during both 2017 and 2016, related to entering into and
settling capped call options for the purchase of class B shares. As of December 31, 2018, we had outstanding options for the
purchase of 0.2 million shares with an average strike price of $95.60 per share that will settle in the first quarter of 2019.
Accumulated Other Comprehensive Income (Loss)
We recognize activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency
translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized
pension and postretirement benefit costs. Additionally, effective January 1, 2018, we early adopted an ASU that allows a
reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act (see note 1 for further
information). 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 $37, $(161) and $32)
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
Balance at end of year
$
(930) $
(149)
(47)
(1,126)
(1,016) $
86
—
(930)
(897)
(119)
—
(1,016)
2018
2017
2016
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), $(1) and $0)
Reclassification to earnings (net of tax effect of $1, $1 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 $135, $(190) and $75)
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
Reclassification to earnings (net of tax effect of $18, $(3) and $(142))
Balance at end of year
Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:
(2)
(3)
3
(2)
(366)
429
(79)
56
40
(1)
(2)
1
(2)
(45)
(316)
—
(5)
(366)
Balance at beginning of year
Reclassification to earnings (net of tax effect of $439, $269 and $1,040)
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
$
(3,569) $
1,389
(609)
(3,421) $
731
—
Net actuarial gain (loss) and prior service cost resulting from remeasurements of plan
assets and liabilities (net of tax effect of $(355), $(180) and $(1,460))
Balance at end of year
Accumulated other comprehensive income (loss) at end of year
(1,117)
(3,906)
(4,994)
(879)
(3,569)
(4,867)
(1)
—
—
(1)
67
124
—
(236)
(45)
(2,709)
1,783
—
(2,495)
(3,421)
(4,483)
114
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, 2018, 2017 and 2016 is as follows (in millions):
Twelve Months Ended December 31:
2018 Amount
Reclassified
from AOCI
2017 Amount
Reclassified
from AOCI
2016 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
Income tax (expense) benefit
Impact on net income
Unrecognized Pension and Postretirement Benefit Costs:
(4)
1
(3)
(24)
(50)
18
(56)
(2)
1
(1)
(27)
35
(3)
5
—
—
—
(26)
404
(142)
236
Prior service costs
(201)
(200)
(172)
Remeasurement of benefit obligation
Income tax (expense) benefit
Impact on net income
(1,627)
439
(1,389)
(800)
269
(731)
(2,651)
1,040
(1,783)
Investment income
(expense) and other
Income tax expense
Net income
Interest expense
Revenue
Income tax expense
Net income
Investment income
(expense) and other
Investment income
(expense) and other
Income tax expense
Net income
Total amount reclassified for the period
$
(1,448) $
(727) $
(1,547)
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, 2018, 2017 and 2016 is as follows (in
millions):
2018
2017
2016
Shares
Dollars
Shares
Dollars
Shares
Dollars
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
37
2
(7)
32
(37)
(2)
7
(32)
$
$
(1) $
—
—
(1) $
45
2
(10)
37
(45)
(2)
10
(37)
$
$
(1) $
—
—
(1) $
51
3
(9)
45
(51)
(3)
9
(45)
$
$
(1) $
—
—
(1) $
115
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 decreased $14 million and increased $6 million for the years ended December 31,
2018 and 2017, 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. Shares authorized for
issuance under the Incentive Compensation Plan were 26 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 20 million shares available to be issued under the Incentive Compensation Plan
as of December 31, 2018.
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 $634, $584 and $591 million during 2018, 2017 and 2016,
respectively. The associated income tax benefit recognized in our statements of consolidated income was $186, $227 and $219
million during 2018, 2017 and 2016, respectively. The cash income tax benefit received from the exercise of stock options and
the lapsing of Restricted Units was $175, $276 and $207 million during 2018, 2017 and 2016, 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 early 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 brokerage company. During the third quarter of 2015, we
granted Restricted Units to eligible Coyote management employees. The vesting of Restricted Units granted under this award
varies 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 or disability, in which case immediate expensing occurs).
As of December 31, 2018, 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, 2018
Vested
Granted
Reinvested Dividends
Forfeited / Expired
Nonvested at December 31, 2018
Restricted Units Expected to Vest
Shares
(in thousands)
10,471
(5,197)
4,734
352
(221)
10,139
10,029
Weighted-Average
Grant Date
Fair Value
Weighted-Average Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
99.16
97.33
110.95
N/A
104.74
104.47
104.52
$
$
$
116
1.41
1.40
$
$
989
978
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2018, 2017 and 2016 was $110.95, $105.62 and
$97.04, respectively. The total fair value of Restricted Units vested was $596, $534 and $445 million in 2018, 2017 and 2016,
respectively. As of December 31, 2018, there was $495 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 two months.
Long-Term Incentive Performance Award Program
We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible
employees. 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
2018
2017
2016
2.61%
16.51%
137.57
123.47%
$
1.46%
16.59%
119.29
113.55%
$
1.00%
16.46%
136.18
129.08%
$
There is no expected dividend yield as units earn dividend equivalents.
As of December 31, 2018, 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, 2018
Vested
Granted
Reinvested Dividends
Forfeited / Expired
Nonvested at December 31, 2018
Restricted Units Expected to Vest
Shares
(in thousands)
1,787
(912)
957
79
(210)
1,701
1,631
Weighted-Average
Grant Date
Fair Value
Weighted-Average Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
$
$
$
105.58
105.60
111.42
N/A
107.98
108.63
108.64
1.49
1.50
$
$
166
159
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 2018, 2017 and 2016 was $111.42, $105.65 and
$105.50, respectively. The total fair value of Restricted Units vested was $97, $71 and $13 million in 2018, 2017 and 2016,
respectively. As of December 31, 2018, there was $102 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.
117
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2018
Exercised
Granted
Forfeited / Expired
Outstanding at December 31, 2018
Options Vested and Expected to Vest
Exercisable at December 31, 2018
1,291
(178)
279
(8)
1,384
1,384
857
$
$
$
$
91.58
84.79
106.38
104.87
95.36
95.36
89.36
6.28
6.28
5.05
$
$
$
9
9
9
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
2018
2017
2016
2.93%
2.84%
7.5
16.72%
15.23
$
2.89%
2.15%
7.5
17.81%
14.70
$
2.95%
1.62%
7.5
22.40%
16.46
$
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 $12, $41 and $72 million during 2018, 2017 and 2016, respectively, from option holders resulting
from the exercise of stock options. The total intrinsic value of options exercised during 2018, 2017 and 2016 was $6, $22 and
$24 million, respectively. As of December 31, 2018, there was $2 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.
118
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding and exercisable at December 31, 2018:
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
116
168
104
996
1,384
0.88
2.81
4.17
7.72
6.28
$
$
61.94
75.79
82.89
103.88
95.36
116
168
104
469
857
$
$
61.94
75.79
82.89
102.49
89.36
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 million shares at average prices of $105.53, $108.98 and $99.27 per share
during 2018, 2017 and 2016, respectively. This plan is not considered to be compensatory, and therefore no compensation cost
is measured for the employees’ purchase rights.
119
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 (expense) 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. In 2018, we changed the segment
allocation methodology for certain shared assets. All prior periods have been recast to reflect this change in methodology.
120
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information for the years ended December 31, 2018, 2017 and 2016 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
2018
2017
2016
$
$
$
$
$
$
$
$
43,593
14,442
13,826
71,861
3,643
2,529
852
7,024
28,216
12,070
8,411
1,319
50,016
1,375
526
306
2,207
$
$
$
$
$
$
$
$
40,761
13,342
12,482
66,585
4,303
2,429
797
7,529
25,449
10,361
8,267
1,497
45,574
1,479
509
294
2,282
$
$
$
$
$
$
$
$
38,284
12,346
10,980
61,610
4,628
2,417
643
7,688
22,299
9,219
7,841
1,186
40,545
1,482
488
254
2,224
Revenue by product type for the years ended December 31, 2018, 2017 and 2016 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
Logistics
Freight
Other
Total Supply Chain & Freight
Consolidated
2018
2017
2016
$
$
7,618
4,752
31,223
43,593
2,874
10,973
595
14,442
6,580
3,234
3,218
794
13,826
71,861
$
$
7,088
4,422
29,251
40,761
2,646
10,170
526
13,342
5,674
3,017
3,000
791
12,482
66,585
$
$
6,752
4,080
27,452
38,284
2,441
9,369
536
12,346
4,873
2,644
2,737
726
10,980
61,610
121
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic information for the years ended December 31, 2018, 2017 and 2016 is as follows (in millions):
United States:
Revenue
Long-lived assets
International:
Revenue
Long-lived assets
Consolidated:
Revenue
Long-lived assets
2018
2017
2016
$
$
$
$
$
$
56,115
24,918
15,746
8,577
71,861
33,495
$
$
$
$
$
$
52,080
21,141
14,505
7,966
66,585
29,107
$
$
$
$
$
$
48,434
18,761
13,176
6,700
61,610
25,461
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, 2018, 2017 or 2016.
122
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, 2018, 2017 and 2016 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:
2018
2017
2016
$
$
$
$
89
7
374
470
668
75
15
758
1,228
2018
4,307
1,712
6,019
$
$
$
$
671
49
288
1,008
1,115
118
(9)
1,224
2,232
2017
5,987
1,150
7,137
$
$
$
$
1,338
67
177
1,582
98
30
(11)
117
1,699
2016
4,307
814
5,121
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31,
2018, 2017 and 2016 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
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%
2018
2017
2016
21.0%
1.4
0.2
(1.1)
—
—
(1.1)
20.4%
35.0%
1.5
(2.0)
(1.8)
(3.6)
1.5
0.7
31.3%
35.0%
1.5
(2.4)
(1.2)
—
—
0.3
33.2%
Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions in which we operate
and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in
any given year, but may not be consistent from year to year.
Our effective tax rate decreased to 20.4% in 2018, compared with 31.3% in 2017 and 33.2% in 2016, primarily due to the
effects of the aforementioned recurring factors and the following discrete tax items.
123
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 made 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 includes provisions that affected 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 Staff Accounting Bulletin ("SAB") 118, which provided 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. We recorded a $272
million provisional benefit inclusive of our Transition Tax liability, the change in our indefinite reinvestment assertion for
certain foreign subsidiaries and the remeasurement of our U.S. net deferred tax liabilities for the year ended December 31,
2017. During the fourth quarter of 2018, we completed our accounting for the Tax Act based on the current regulatory guidance
available at the end of the SAB 118 measurement period and recorded no material net adjustments to our provisional estimate.
The Tax Act also enacted provisions that took effect in 2018 including but not limited to: (1) a provision that imposes
U.S. tax on certain foreign subsidiary income known as GILTI, (2) a new deduction for Foreign-Derived Intangible Income
("FDII"), (3) additional limitations on tax deductions for expenses such as interest and executive compensation, and (4) a new
minimum tax based on certain payments from a U.S. company to foreign related parties known as the Base Erosion and Anti-
Abuse Tax ("BEAT").
We included the impact of each of the newly effective Tax Act provisions in our computation of the 2018 income tax
expense. Throughout 2018, the U.S. Department of the Treasury and Internal Revenue Service issued preliminary regulatory
guidance clarifying certain provisions of the Tax Act, and we anticipate additional regulatory guidance and technical
clarifications during 2019. When additional guidance is issued, we will recognize the related tax impact in the quarter of
enactment.
2018 Discrete Items
The decrease in our effective tax rate was primarily due to the impact of the Tax Act which reduced the U.S. federal
corporate income tax rate from 35% to 21% effective January 1, 2018.
In the fourth quarter of 2018, we recognized an income tax benefit of $390 million related to pre-tax mark-to-market
losses of $1.627 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a
higher average tax rate than the 2018 U.S. federal statutory tax rate because it included the effect of U.S. state and local and
foreign taxes.
We recorded pre-tax transformation strategy costs of $360 million during the year ended December 31, 2018. As a result,
we recorded an additional income tax benefit of $87 million. This income tax benefit was generated at a higher average tax rate
than the 2018 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense
resulted in a net tax benefit of $38 million and reduced our effective tax rate by 0.6% during the year ended December 31,
2018.
Other factors that impacted our 2018 effective tax rate include favorable resolutions of uncertain tax positions, favorable
U.S. state and local tax law changes, favorable tax provisions enacted in the Bipartisan Budget Act of 2018 and discrete tax
credits associated with the filing of our 2017 U.S. federal income tax return.
2017 Discrete Items
In addition to the impact of the Tax Act described above, the following discrete items were recorded during the year
ended December 31, 2017.
124
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a
higher average tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
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 $27 million ($0.03 per share), $24 million ($0.03 per share) and
$21 million ($0.02 per share) for 2018, 2017, and 2016, respectively.
Deferred income tax assets and liabilities are comprised of the following at December 31, 2018 and 2017 (in millions):
Fixed assets and capitalized software
Other
Deferred tax liabilities
Pension and postretirement benefits
Loss and credit carryforwards
Insurance reserves
Stock compensation
Accrued employee compensation
Other
Deferred tax assets
Deferred tax assets valuation allowance
Deferred tax asset (net of valuation allowance)
$
2018
(4,010) $
(493)
(4,503)
2017
(3,288)
(532)
(3,820)
1,743
298
437
189
274
196
3,137
(112)
3,025
1,877
323
449
182
266
359
3,456
(126)
3,330
Net deferred tax asset (liability)
$
(1,478) $
(490)
Amounts recognized in the consolidated balance sheets:
Deferred tax assets
Deferred tax liabilities
Net deferred tax asset (liability)
$
$
$
141
(1,619)
(1,478) $
266
(756)
(490)
The valuation allowance changed by $(14), $(33) and $(38) million during the years ended December 31, 2018, 2017 and
2016, respectively.
125
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have a U.S. federal capital loss carryforward of $31 million as of December 31, 2018, $30 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
2018
2017
$
$
1,014
80
$
$
1,215
83
The U.S. state and local operating loss carryforwards and credits can be carried forward for periods ranging from one year
to indefinitely. We also have non-U.S. loss carryforwards of $706 million as of December 31, 2018, 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.
Undistributed earnings and profits ("E&P") of our foreign subsidiaries amounted to $6.583 billion at December 31, 2018.
As a result of the Tax Act, during the year ended December 31, 2017, we changed our indefinite reinvestment assertion with
respect to the earnings of certain foreign subsidiaries. For all other foreign subsidiaries, we continue to assert that these earnings
are indefinitely reinvested. $1.458 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.
The following table summarizes the activity related to our uncertain tax positions (in millions):
Tax
Interest
Penalties
Balance at January 1, 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, 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
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, 2018
$
$
148
17
20
(41)
—
—
144
16
33
(24)
(6)
(3)
160
47
7
(43)
(1)
(3)
167
$
$
53
—
10
(13)
—
—
50
—
14
(18)
(3)
—
43
—
10
(8)
(1)
—
44
$
$
6
—
—
—
—
—
6
—
3
—
—
—
9
1
—
(5)
—
—
5
The total amount of gross uncertain tax positions as of December 31, 2018, 2017 and 2016 that, if recognized, would
affect the effective tax rate was $165, $159 and $142 million, respectively. Our continuing policy is to recognize interest and
penalties associated with income tax matters as a component of income tax expense.
126
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2015.
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 liability for uncertain
tax positions could significantly increase or decrease within the next twelve months. Items that may cause changes to uncertain
tax positions 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, additional regulatory guidance on the Tax Act or other unforeseen circumstances. At this time, an
estimate of the range of the reasonably possible change cannot be made.
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:
2018
2017
2016
Net income attributable to common shareowners
$
4,791
$
4,905
$
3,422
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
860
1
5
866
4
—
870
5.53
5.51
$
$
865
1
5
871
3
1
875
5.63
5.61
$
$
878
1
4
883
3
1
887
3.88
3.86
$
$
Diluted earnings per share for the years ended December 31, 2018, 2017 and 2016 exclude the effect of 0.2, 0.1 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
Changes in fuel prices, interest rates and foreign exchange rates impact our results of operations. These exposures are actively
monitored by management. To manage the impact of these exposures, we enter into a variety of derivative financial instruments.
Our objective is to manage, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes
in foreign currency rates, commodity prices and interest rates. It is our policy and practice to use derivative financial instruments
only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing
and anticipated transactions, we expect that any loss in value 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.
127
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Risk Management
The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to
meet the terms of the agreements; however we seek to minimize such risk exposures for these instruments by limiting the
counterparties to banks and financial institutions that meet established credit guidelines and by monitoring 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.
At December 31, 2018 and 2017, we held cash collateral of $325 and $17 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. At
December 31, 2018 and 2017, $0 and $174 million, respectively, of additional collateral was required to be posted with our
counterparties.
Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take
additional protective measures such as the early termination of trades. The amount of collateral required would be determined by the
net fair value of the associated derivatives with each counterparty. We have not historically incurred, and do not expect to incur in
the future, any losses as a result of counterparty default. At December 31, 2018, there were no instruments in a net liability position
that were not covered by the zero threshold bilateral collateral provisions.
Accounting Policy for Derivative Instruments
We recognize all derivative instruments as assets or liabilities on the consolidated balance sheets at fair value. The accounting
for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging
relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as
hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair
value hedge or a hedge of a net investment in a foreign operation.
A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular
risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the
derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the
hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in
the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are
recognized in the statements of consolidated income during the current period.
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the
consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair
value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current
period, as well as the offsetting gain or loss on the hedged item.
A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to
hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or
losses attributable to changes in spot exchange rates are recorded in the foreign currency translation adjustment within AOCI. The
remainder of the change in value of such instruments is recorded in earnings.
Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply to our domestic and, international package and LTL services are the primary
means of reducing the risk of adverse fuel price changes on our business. In order to mitigate the impact of fuel surcharges imposed
on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services. We
periodically enter into derivative contracts on energy commodity products to manage the price risk associated with forecasted
transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the
variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We
normally designate and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these
fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or
revenue when the underlying transactions occur.
128
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Risk Management
To protect against the reduction in value of forecasted foreign currency cash flows from our international package business,
we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro,
British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue
denominated in foreign currencies with option and forward contracts. We normally 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.
We also hedge portions of our anticipated cash settlements of intercompany transactions and interest payments on certain debt
subject to foreign currency remeasurement using foreign currency forward contracts. We normally designate and account for these
contracts as cash flow hedges of forecasted foreign currency denominated transactions; therefore the resulting gains and losses from
these hedges are recognized as a component of investment income (expense) and other when the underlying transactions are subject
to currency remeasurement.
We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of
foreign denominated debt as the hedging instrument allows the debt to be remeasured to foreign currency translation adjustment
within AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedging is recognized
as a component of investment income (expense) and other. Balances in the cumulative translation adjustment accounts remain until
the sale or complete liquidation of the foreign entity.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative
instruments as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall
cost of borrowing. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt
being hedged. Interest rate swaps allow us to maintain a target range of floating-rate debt within our capital structure.
We have designated and account for the majority of our interest rate swaps that convert fixed-rate interest payments into
floating-rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses
resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are
recorded to interest expense in the period in which the gains and losses occur. We 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 by, using
forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our
interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby
mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the
issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.
129
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding Positions
The notional amounts of our outstanding derivative positions were as follows as of December 31, 2018 and 2017 (in millions):
Currency Hedges:
Euro
British Pound Sterling
Canadian Dollar
Hong Kong Dollar
Mexican Peso
Singapore Dollar
Interest Rate Hedges:
Fixed to Floating Interest Rate Swaps
Floating to Fixed Interest Rate Swaps
Investment Market Price Hedges:
Marketable Securities
2018
2017
4,924
2,037
1,443
3,642
—
20
4,674
778
4,942
1,736
1,259
—
169
11
5,424
778
—
64
EUR
GBP
CAD
HKD
MXN
SGD
USD
USD
EUR
As of December 31, 2018, we had no outstanding commodity hedge positions.
Balance Sheet Recognition
The following table indicates the location on the consolidated balance sheets where our derivative assets and liabilities have
been recognized, and the related fair values of those derivatives as of December 31, 2018 and 2017 (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.
Gross Amounts Presented in
Consolidated Balance Sheets
Net Amounts if Right of
Offset had been Applied
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
Foreign exchange contracts
Interest rate contracts
Total Asset Derivatives
Balance Sheet Location
2018
2017
2018
2017
Other current assets
$
90
$
Other current assets
Other non-current assets
Other non-current assets
Other current assets
Other non-current assets
Other non-current assets
1
230
14
7
1
18
2
1
1
59
18
—
26
$
83
$
1
215
6
5
1
18
$
361
$
107
$
329
$
—
1
—
43
17
—
26
87
130
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross Amounts Presented in
Consolidated Balance Sheets
Net Amounts if Right of
Offset had been Applied
Balance Sheet Location
2018
2017
2018
2017
Other current liabilities
$
Other current liabilities
Other non-current liabilities
Other non-current liabilities
Other current liabilities
Other current liabilities
Other non-current liabilities
$
7
—
15
41
3
—
1
67
$
93
—
194
28
1
16
—
$
332
$
$
— $
—
—
33
1
—
1
35
$
91
—
193
12
—
16
—
312
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
Foreign exchange contracts
Total Liability Derivatives
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, 2018 and 2017 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)
2018
2017
$
$
1
563
564
$
$
—
(506)
(506)
As of December 31, 2018, $84 million of pre-tax gains 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, 2019. 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 14 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, 2018, 2017 and 2016.
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, 2018 and 2017 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)
2018
2017
$
$
211
211
$
$
(428)
(428)
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, 2018, 2017 and 2016.
131
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2018 and 2017 (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
2018
2017
Interest Expense
$
(57) $
(84)
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
2018
2017
Interest Expense
$
57
$
84
Additionally, we maintain some interest rate swaps, foreign exchange currency forwards and investment market price forward
contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic hedge of portions
of our outstanding debt. These foreign exchange forward contracts are intended to provide an economic offset to foreign currency
remeasurement and settlement 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 exchange 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
exchange currency contracts. These transactions provide an economic offset that effectively eliminates the effects of changes in
market valuation.
The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes
and settlements of these foreign currency forwards, interest rate swaps, investment market price and commodity contracts not
designated as hedges for the years ended December 31, 2018 and 2017 (in millions):
Derivative Instruments Not Designated in
Hedging Relationships
Foreign exchange contracts
Investment market price contracts
Interest rate contracts
Total
Location of Gain
(Loss) Recognized
in Income
Investment income (expense) and other
Investment income (expense) and other
Interest Expense
Amount of Gain (Loss)
Recognized in Income
2018
2017
$
$
(102) $
16
(9)
(95) $
60
(5)
(9)
46
132
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
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, 2018 and 2017 by hedge type are as follows (in millions):
2018
Assets:
Foreign Exchange Contracts
Interest Rate Contracts
Total
Liabilities:
Foreign Exchange Contracts
Investment Market Price Contracts
Interest Rate Contracts
Total
2017
Assets:
Foreign Exchange Contracts
Interest Rate Contracts
Total
Liabilities:
Foreign Exchange Contracts
Investment Market Price Contracts
Interest Rate Contracts
Total
328
33
361
25
—
42
67
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
$
$
$
$
— $
—
— $
— $
—
—
— $
328
33
361
25
—
42
67
$
$
$
$
— $
—
— $
— $
—
—
— $
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
$
— $
$
$
$
$
133
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. TRANSFORMATION STRATEGY
In the first quarter of 2018, we launched the first phase of a multi-year, enterprise-wide transformation strategy to
modernize our business and operations and enhance quality and efficiency. Over the next few years additional transformation
phases will be implemented. The program includes investments impacting global direct and indirect operating costs, as well as
changes in processes and technology.
During the year ended December 31, 2018 we recorded pre-tax charges of $360 million that reflect costs and other
benefits of $262 million of primarily voluntary severance included within "Compensation and benefits" on the statements of
consolidated income, and other costs of $98 million recorded to total other expenses. The after-tax transformation strategy costs
totaled $273 million. The income tax effects of the transformation strategy costs are calculated by multiplying the amount of
the adjustments by the statutory tax rates applicable in each tax jurisdiction. There were no comparable costs for the twelve
months of 2017.
NOTE 17. QUARTERLY INFORMATION (UNAUDITED)
Our revenue, segment operating profit, net income, 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:
U.S. Domestic Package
International Package
Supply Chain & Freight
Total operating profit
Total Other Income and (Expense)
$
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
2017
2018
2017
2018
2017
2018
2017
$ 10,227
3,533
3,353
17,113
$ 9,536
3,074
2,900
15,510
$ 10,354
3,602
3,500
17,456
$ 9,741
3,171
3,015
15,927
$ 10,437
3,478
3,529
17,444
$ 9,651
3,376
3,146
16,173
$ 12,575
3,829
3,444
19,848
$ 11,833
3,721
3,421
18,975
756
594
170
1,520
141
950
518
149
1,617
93
939
618
216
1,773
153
1,255
570
212
2,037
82
949
536
242
1,727
162
1,011
606
195
1,812
125
999
781
224
2,004
$ (1,461) $
1,087
735
241
2,063
(692)
$
$
$
$
$
Net Income
Net Income Per Share:
Basic
Diluted
$ 1,345
$ 1,166
$ 1,485
$ 1,384
$ 1,508
$ 1,259
$
$
1.55
1.55
$
$
1.33
1.33
$
$
1.71
1.71
$
$
1.59
1.58
$
$
1.74
1.73
$
$
1.45
1.44
$
$
$
453
$ 1,096
0.52
0.52
$
$
1.26
1.26
This table reflects the impact of the adoption of new accounting standards in 2018. Refer to note 1 to the audited consolidated financial
statements.
Operating profit for the quarter ended June 30, 2018 was impacted by $263 million of transformation strategy costs,
which includes voluntary retirement plan severance costs of $192 million and other costs of $71 million. These costs were
allocated between the U.S. Domestic Package segment ($196 million), International Package segment ($36 million) and Supply
Chain & Freight segment ($31 million). The transformation strategy costs reduced second quarter net income by $200 million,
and basic and diluted earnings per share by $0.24 and $0.23, respectively.
Operating profit for the quarter ended September 30, 2018 was impacted by $97 million of transformation strategy
costs. These costs were allocated between the U.S. Domestic Package segment ($39 million), International Package segment
($40 million) and Supply Chain & Freight segment ($18 million). The transformation strategy costs reduced third quarter net
income by $73 million, and basic and diluted earnings per share by $0.09.
Other income and (expense) for the quarter ended December 31, 2018 was impacted by a mark-to-market loss of $1.627
billion on our pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized
outside of a 10% corridor. This loss reduced net income by $1.237 billion and basic and diluted earnings per share by $1.43 and
$1.42, respectively.
134
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other income and (expense) 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. 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.
135
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. 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 control over financial reporting during the quarter ended December 31,
2018 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 control 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, 2018. 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, 2018 and the related
statements of consolidated income, consolidated comprehensive income and consolidated cash flows for the year ended
December 31, 2018, has issued an attestation report on the Company’s internal control over financial reporting, which is
included herein.
136
Report of Independent Registered Public Accounting Firm
To the Shareowners and Board of Directors of
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, 2018, 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, 2018, 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, 2018 of the Company and
our report dated February 21, 2019, expressed an unqualified opinion on those financial statements and included an explanatory
paragraph regarding the Company’s adoption of new accounting standards.
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, 2019
137
Item 9B.
Other Information
None.
PART III
138
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, Chief Operating
Officer
Norman M. Brothers, Jr.
Senior Vice President, General Counsel and
Corporate Secretary
Nando Cesarone
Senior Vice President and President, UPS International
Philippe Gilbert
Senior Vice President and President, UPS Supply Chain
Solutions
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
Kevin Warren
Senior Vice President, Chief Marketing Officer
Principal Occupation
and Employment For
the Last Five Years
Age
63 Chief Executive Officer (2014 - present), Chairman
(2016 - present) Senior Vice President and Chief
Operating Officer (2007 - 2014).
58 Chief Operating Officer (2018 - present) President,
UPS International (2013 - 2018), Chief Operating
Officer, UPS Europe, Middle East and Africa (2010
- 2013).
51 Senior Vice President, General Counsel and
Corporate Secretary (2016 - present), Corporate
Legal Department Manager (2014 - 2016), Vice
President, Corporate Legal (2004 - 2014).
47 President, UPS International (2018 - present),
Europe Region Manager (2016 - 2018), Asia Pacific
Region Manager (2013 - 2016).
54 President, Supply Chain Solutions ( 2019 - present),
Regional CEO of the Americas, DB Schenker
Logistics ( 2015 - 2018), Regional CEO for West
Europe, DB Schenker Logistics (2013 - 2015).
50 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).
55 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).
57 Chief Financial Officer (2015 - present), Corporate
Controller and Treasurer (2014 - 2015), Corporate
Controller (2013 - 2015), Vice President of
Corporate Finance and Accounting (2008 - 2013).
52 Chief Information Officer and Engineering Officer
(2017 - present), Chief Information Officer (2016 -
2017), Vice President, Information Services (2011 -
2016).
56 Chief Strategy Transformation Officer (2017 -
present), Walmart International Executive Vice
President of Global Leverage - Walmart
International, Walmart Stores, Inc. (2017 - 2017),
Chief Administrative Officer and Executive Vice
President - Walmart International, Walmart Store
Inc. (2016 - 2017), Chief Executive Officer and
President of Walmart Asia Pte. Ltd (2014 - 2016).
56 Chief Marketing Officer (2018 - present),
Executive Vice-President and Chief Commercial
Officer, Xerox Corp (2017 - 2018), President,
Commercial Business Group, Xerox Corp. (2016 -
2017), President, Industrial, Retail and Hospitality
Business Group, Xerox Corp. (2015 - 2016),
President of Strategic Growth Initiatives, Xerox
Corp. (2014 - 2015).
George Willis
Senior Vice President and President, United States
Operations
54 President, U.S. Operations (2018 - present),
President, West Region (2015 - 2018), U.K., Ireland,
and Nordics District Manager (2013 - 2015).
139
Information about our directors is presented under the caption “Our Board of Directors" in our definitive proxy statement
for the Annual Meeting of Shareowners to be held on May 9, 2019 (the “Proxy Statement”) and is incorporated herein by
reference.
Information about our Audit Committee is presented under the caption “Our Board of Directors - Committees of the
Board of Directors” and "Audit Committee Matters" in our Proxy Statement 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 Proxy Statement and
is incorporated herein by reference.
Item 11. Executive Compensation
Information about our board and executive compensation is presented under the captions “Our Board of Directors -
Director Compensation" and "Executive Compensation" in our Proxy Statement 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 Proxy Statement and is incorporated herein by reference.
Information about our equity compensation plans is presented under the caption “Executive Compensation - Equity
Compensation Plans” in our Proxy Statement 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 Proxy Statement and is incorporated herein by reference.
Information about director independence is presented under the caption “Corporate Governance - Director Independence”
in our Proxy Statement 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 Proxy Statement and is incorporated herein by reference.
140
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
141
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
— Restated Certificate of Incorporation of United Parcel Service, Inc. (incorporated by reference to Exhibit 3.3 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 on December 7, 1989)(1).
— Indenture dated as of December 18, 1997 (incorporated by reference to Exhibit T-3C to Form T-3, filed on
December 18, 1997) (1).
— 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) (1).
— Form of First Supplemental Indenture to Indenture dated as of 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 as of 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).
— 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 6.20% Senior Notes due January 15, 2038 (incorporated by reference to Exhibit 4.3 to Form 8-K, filed on
January 15, 2008).
4.10
— Form of 5.125% Senior Notes due April 1, 2019 (incorporated by reference to Exhibit 4.2 to Form 8-K, filed on
March 24, 2009).
4.11
— Form of 3.125% Senior Notes due January 15, 2021 (incorporated by reference to Exhibit 4.1 to Form 8-K, filed on
November 12, 2010).
4.12
— Form of 4.875% Senior Notes due November 15, 2040 (incorporated by reference to Exhibit 4.2 to Form 8-K, filed
on November 12, 2010).
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
— Form of 2.450% Senior Notes due October 1, 2022 (incorporated by reference to Exhibit 4.2 to Form 8-K, filed on
September 27, 2012).
— Form of 3.625% Senior Notes due October 1, 2042 (incorporated by reference to Exhibit 4.3 to Form 8-K, filed on
September 27, 2012).
— Form of Floating Rate Senior Notes due December 15, 2064 (incorporated by reference to Exhibit 4.1 to Form 8-K,
filed on December 15, 2014).
— Form of 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 Floating Rate Senior Notes due July 15, 2020 (incorporated by reference to Exhibit 4.1 to Form 8-K, filed
on November 20, 2015).
— Form of 1.625% Senior Notes due November 15, 2025 (incorporated by reference to Exhibit 4.2 to Form 8-K, filed
on November 20, 2015).
— Form of Floating Rate Senior Notes due March 15, 2066 (incorporated by reference to Exhibit 4.1 to Form 8-K,
filed on April 1, 2016).
— Form of 2.40% Senior Notes Due November 2026 (incorporated by reference to Exhibit 4.2 to Form 8-K, filed on
October 25, 2016).
142
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
4.33
4.34
4.35
4.36
10.1
— Form of 3.40% Senior Notes Due November 2046 (incorporated by reference to Exhibit 4.3 to Form 8-K, filed on
October 25, 2016).
— Form of 1.00% Senior Notes Due November 2028 (incorporated by reference to Exhibit 4.1 to Form 8-K, filed on
October 25, 2016).
— Form of Floating Rate Senior Notes due March 15, 2067 (incorporated by reference to Exhibit 4.1 to Form 8-K,
filed on March 31, 2017).
— Form of Floating Rate Senior Notes due May 16, 2022 (incorporated by reference to Exhibit 4.1 to Form 8-K, filed
on May 16, 2017).
— Form of 2.350% Senior Notes due May 16, 2022 (incorporated by reference to Exhibit 4.2 to Form 8-K, filed on
May 16, 2017).
— Form of 2.125% Senior Notes due May 21, 2024 (incorporated by reference to Exhibit 4.2 to Form 8-K, filed on
May 18, 2017).
— Form of 0.375% Senior Notes due November 15, 2023 (incorporated by reference to Exhibit 4.1 to Form 8-K, filed
on November 13, 2017).
— Form of 1.500% Senior Notes due November 15, 2032 (incorporated by reference to Exhibit 4.2 to Form 8-K, filed
on November 13, 2017).
— Form of Floating Rate Senior Notes due April 1, 2021 (incorporated by reference to Exhibit 4.1 to Form 8-K, filed
on November 14, 2017).
— Form of Floating Rate Senior Notes due April 1, 2023 (incorporated by reference to Exhibit 4.2 to Form 8-K, filed
on November 14, 2017).
— Form of 2.050% Senior Notes due April 1, 2021 (incorporated by reference to Exhibit 4.3 to Form 8-K, filed on
November 14, 2017).
— Form of 2.500% Senior Notes due April 1, 2023 (incorporated by reference to Exhibit 4.4 to Form 8-K, filed on
November 14, 2017).
— Form of 2.800% Senior Notes due November 15, 2024 (incorporated by reference to Exhibit 4.5 to Form 8-K, filed
on November 14, 2017).
— Form of 3.050% Senior Notes due November 15, 2027 (incorporated by reference to Exhibit 4.6 to Form 8-K, filed
on November 14, 2017).
— Form of 3.750% Senior Notes due November 15, 2047 (incorporated by reference to Exhibit 4.7 to Form 8-K, filed
on November 14, 2017).
— Form of Floating Rate Senior Notes due November 15, 2067 (incorporated by reference to Exhibit 4.8 to Form 8-K,
filed on November 14, 2017).
— UPS Retirement Plan Amendment and Restatement Effective January 1 , 2014 (incorporated by reference to Exhibit
10.1 to From 10-K for the year ended December 31, 2014).*
10.1(a)
— 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(b)
— 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
—
UPS 401(k) Savings Plan, Amendment and Restatement effective as of January 1, 2017 (incorporated by reference
to Exhibit 10.1 to Form 8-K, filed on June 27, 2017).*
10.3
10.4
— UPS Restoration Savings Plan effective January 1, 2017 (incorporated by reference to Exhibit 10.3 to Form 8-K
filed on June 27, 2017).*
— Amendment One to the Amended and Restated 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).*
10.4(a)
— UPS Excess Coordinating Benefit Plan, as Amended and Restated, effective as of January 1, 2012 (incorporated by
reference to Exhibit 10.5 to the Form 10-K for the year ended December 31, 2012).*
143
10.5
— United Parcel Service, Inc. 2012 Omnibus Incentive Compensation Plan (incorporated by reference to Annex A to
the Definitive Proxy Statement, filed on March 12, 2012).*
10.5(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).*
10.5(b)
— Form of Non-Management Director Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).*
10.5(c)
— UPS Management Incentive Program Terms and Conditions effective as of January 1, 2011 (incorporated by
reference to Exhibit 10.10(3) to the Form 10-K) for the year ended December 31, 2010).*
10.5(d)
— UPS Stock Option Program Terms and Conditions effective as of January 1, 2012 (incorporated by reference to
Exhibit 10.7(4) to the Form 10-K for the year ended December 31, 2011).*
10.5(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 Form 10-K for the year ended December 31, 2011).*
10.6
— Form of UPS Deferred Compensation Plan as Amended and Restated effective January 1, 2012 .*
10.6(a)
— Amendment No. 1 to Amended and Restated UPS Deferred Compensation Plan (incorporated by reference to
Exhibit 10.7(1) to the Form 10-K for the year ended December 31, 2012).*
10.7
— 2015 Omnibus Incentive Compensation Plan (incorporated by reference to Annex A to the Definitive Proxy
Statement filed on March 24, 2015).*
10.8
— 2018 Omnibus Incentive Compensation Plan (incorporated by reference to Annex A to the Definitive Proxy
Statement filed on March 16, 2018).*
10.8(a)
— UPS Management Incentive Program Amended and Restated Terms and Conditions effective November 8, 2018.*
10.8(b)
— UPS Stock Option Program Amended and Restated Terms and Conditions effective November 8, 2018.*
10.8(c)
— UPS Long-Term Incentive Performance Program Amended and Restated Terms and Conditions effective as of
November 8, 2018.*
10.9
10.10
10.11
10.12
21
23
— Employment offer letter agreement between the Company and Scott Price, dated November 28, 2017.*
— Form of Protective Covenant Agreement between the Company and Scott Price.*
— Employment offer letter agreement between the Company and Kevin Warren, dated May 5, 2018.*
— Form of Protective Covenant Agreement between the Company and Kevin Warren.*
— Subsidiaries
— 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, 2018,
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 (Loss), (iv) the
Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
__________________________
(1)
*
Filed in paper format.
Management contract or compensatory plan or arrangement.
144
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, 2019
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
/S/ DAVID P. ABNEY
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
Title
Date
Chairman, Chief Executive Officer and Director
February 21, 2019
(Principal Executive Officer)
Director
Director
Director
Director
Director
Director
Director
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
/S/ RICHARD N. PERETZ
Senior Vice President, Chief Financial Officer and Treasurer
February 21, 2019
Richard N. Peretz
(Principal Financial and Accounting Officer)
/S/ CLARK T. RANDT, JR.
Clark T. Randt, Jr.
/S/ CHRISTIANA SMITH SHI
Christiana Smith Shi
/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
Director
145
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
Reconciliation of Non-GAAP Financial Measures
(amounts in millions, except per share amounts)
Reported / GAAP
Defined Benefit Plans Mark-to-Market Charge
Health & Welfare Plan Charges
Transformation Strategy
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
$
2018
4,791
1,627
-
360
(477)
$
2017
4,905
800
-
Net Income
2016
3,422
2,651
-
$
$
2015
4,840
118
-
$
2014
3,034
1,062
1,102
(193)
(978)
(39)
(807)
2018
$
5.51
1.87
-
0.41
(0.55)
Diluted Earnings Per Share
2015
2016
2017
$
5.61
0.90
-
-
(0.22)
$
3.86
2.98
-
-
(1.10)
$
5.34
0.13
-
-
(0.04)
2014
$
3.28
1.15
1.19
-
(0.87)
-
6,301
$
(258)
5,254
$
-
5,095
$
-
4,919
$
-
4,391
$
-
7.24
$
(0.29)
6.00
$
-
5.74
$
-
5.43
$
-
4.75
$
Reported / GAAP
Transformation Strategy
Health & Welfare Plan Charges
Adjusted
Reported / GAAP
Transformation Strategy
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)
Reported / GAAP
Principal Repayments of Capital Lease Obligations
Adjusted
$
2018
7,024
360
-
7,384
$
$
Operating Profit
2016
7,688
-
-
7,688
$
$
2015
7,243
-
-
7,243
$
$
2017
7,529
-
-
7,529
$
$
$
U.S. Domestic Package
2018
2017
4,303
3,643
-
235
4,303
3,878
-
-
4,303
3,878
$
$
$
$
$
Operating Profit
International Package
2018
2017
2,429
2,529
-
76
2,429
2,605
375
10
2,804
2,615
$
$
$
$
$
$
2014
6,770
-
1,102
7,872
$
$
Supply Chain & Freight
2018
2017
797
$
-
797
$
2
799
852
49
901
5
906
$
$
$
2018
9.8%
0.5%
0.0%
10.3%
Operating Margin
2016
12.5%
0.0%
0.0%
12.5%
2017
11.3%
0.0%
0.0%
11.3%
2015
12.2%
0.0%
0.0%
12.2%
2014
11.4%
0.0%
1.9%
13.3%
Operating Margin
U.S. Domestic Package
International Package
2018
8.4%
0.5%
8.9%
2017
10.6%
0.0%
10.6%
2018
17.5%
0.5%
18.0%
2017
18.2%
0.0%
18.2%
Supply Chain & Freight
2017
2018
6.2%
0.4%
6.5%
6.4%
0.0%
6.4%
Revenue
Currency Neutral Revenue
U.S. Domestic Package
International Package
Supply Chain & Freight
$
2018
43,593
-
$
43,593
2017
40,761
-
40,761
$
$
2018
14,442
(147)
14,295
$
$
2017
13,342
325
13,667
$
$
2018
13,826
(39)
13,787
$
$
2017
12,482
(10)
12,472
$
$
$
$
$
Return on Assets
2017
40,545
41,523
45,574
-
451
46,025
43,060
43,774
11.4%
12.0%
$
$
$
$
$
$
$
$
$
2016
38,497
38,536
40,545
-
978
41,523
39,521
40,030
8.7%
12.7%
2018
45,574
46,025
50,016
$
$
$
$
$
$
477
50,493
47,795
48,259
10.0%
13.1%
International Package
2018
Currency
Neutral
14,295
$
2017
As Reported % Change
$
7.1%
13,342
$
$
$
Adjusted Shareowners' Equity
2018
2016
2017
2,501
1,024
5,210
4,593
430
3,037
3,421
3,906
-
-
3,851
6,943
430
3,851
1,024
3,569
-
4,593
$
$
$
$
$
$
$
$
$
Adjusted Capital
Expenditures
2018
$
$
6,283
340
6,623
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, 2018, 2017, 2016, 2015, and 2014, as well as in the historical financial
schedules on our investor relations website.
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, capital expenditures and return on assets 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
INVESTOR INFORMATION
Our annual meeting of shareowners will be held at 8 a.m.
on May 9, 2019, at the Hotel DuPont, 11th and Market Street,
Wilmington, DE. Shareowners of record as of March 11, 2019,
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
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, 2018 forms a part of this UPS 2018 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
www.computershare.com/ups
888.663.8325
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
“Invest Now”. 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 additional UPS shares:
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
55 Glenlake Parkway, NE, Atlanta, GA 30328-3474
www.ups.com
© 2019 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.