Document
Table of Contents

United States
Securities and Exchange Commission
Washington, D.C. 20549
_____________________________________ 
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
_____________________________________ 
g795027a09.jpg
United Parcel Service, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
58-2480149
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
55 Glenlake Parkway, NE Atlanta, Georgia
 
30328
(Address of Principal Executive Offices)
 
(Zip Code)
(404) 828-6000
(Registrant’s telephone number, including area code)
_____________________________________   
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer  þ Accelerated filer  ¨ Non-accelerated filer  ¨    (Do not check if a smaller reporting company) Smaller reporting company  ¨ Emerging growth company   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
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.  ¨
There were 166,955,793 Class A shares, and 693,388,926 Class B shares, with a par value of $0.01 per share, outstanding at July 25, 2018.

Table of Contents

TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II—OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.

Table of Contents

PART I. FINANCIAL INFORMATION

Cautionary Statement About Forward-Looking Statements
This report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in the future tense, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof and similar terms are intended to be forward-looking statements. We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Our disclosure and analysis in this report, in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our other filings with the Securities and Exchange Commission contain forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties include, but are not limited to: general economic conditions, both in the U.S. and internationally; significant competition on a local, regional, national, and international basis; changes in our relationships with our significant customers; the existing complex and stringent regulation in the U.S. and internationally (including tax laws and regulations), changes to which can impact our business; increased physical or data security requirements that may increase our costs of operations and reduce operating efficiencies; legal, regulatory or market responses to global climate change; negotiation and ratification of labor contracts; strikes, work stoppages and slowdowns by our employees; the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; changes in exchange rates or interest rates; our ability to maintain the image of our brand; breaches in data security; disruptions to the Internet or our technology infrastructure; interruption of our business from natural or man-made disasters including terrorism; our ability to accurately forecast our future capital investment needs; exposure to changing economic, political and social developments in international and emerging markets; changes in business strategy, government regulations, or economic or market conditions that may result in substantial impairment of our assets; increases in our expenses or funding obligations relating to employee health, retiree health and/or pension benefits; potential additional tax liabilities both in the U.S. and internationally; the potential for various claims and litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters; our ability to realize the anticipated benefits from acquisitions, joint ventures or strategic alliances; our ability to manage insurance and claims expenses; and other risks discussed in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2017 or described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements, except as required by law.


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Table of Contents

Item 1. Financial Statements
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2018 (unaudited) and December 31, 2017 (In millions)
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
4,214

 
$
3,320

Marketable securities
720

 
749

Accounts receivable, net
7,363

 
8,773

Current income taxes receivable
307

 
1,573

Other current assets
1,270

 
1,303

Total Current Assets
13,874

 
15,718

Property, Plant and Equipment, Net
23,901

 
22,118

Goodwill
3,837

 
3,872

Intangible Assets, Net
2,028

 
1,964

Non-Current Investments and Restricted Cash
306

 
483

Deferred Income Tax Assets
210

 
266

Other Non-Current Assets
1,067

 
1,153

Total Assets
$
45,223

 
$
45,574

LIABILITIES AND SHAREOWNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt and commercial paper
$
2,591

 
$
4,011

Accounts payable
3,785

 
3,934

Accrued wages and withholdings
2,549

 
2,608

Self-insurance reserves
737

 
705

Accrued group welfare and retirement plan contributions
655

 
677

Other current liabilities
1,171

 
951

Total Current Liabilities
11,488

 
12,886

Long-Term Debt
20,120

 
20,278

Pension and Postretirement Benefit Obligations
7,026

 
7,061

Deferred Income Tax Liabilities
975

 
756

Self-Insurance Reserves
1,665

 
1,765

Other Non-Current Liabilities
1,593

 
1,804

Shareowners’ Equity:
 
 
 
Class A common stock (168 and 173 shares issued in 2018 and 2017, respectively)
2

 
2

Class B common stock (693 and 687 shares issued in 2018 and 2017, respectively)
7

 
7

Additional paid-in capital
—

 
—

Retained earnings
7,665

 
5,852

Accumulated other comprehensive loss
(5,346
)
 
(4,867
)
Deferred compensation obligations
31

 
37

Less: Treasury stock (1 share in 2018 and 2017)
(31
)
 
(37
)
Total Equity for Controlling Interests
2,328

 
994

Noncontrolling Interests
28

 
30

Total Shareowners’ Equity
2,356

 
1,024

Total Liabilities and Shareowners’ Equity
$
45,223

 
$
45,574


See notes to unaudited consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share amounts)
(unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2018
 
2017
 
2018
 
2017
Revenue
$
17,456

 
$
15,927

 
$
34,569

 
$
31,437

Operating Expenses:
 
 
 
 
 
 
 
Compensation and benefits
9,024

 
8,284

 
18,069

 
16,595

Repairs and maintenance
423

 
392

 
857

 
782

Depreciation and amortization
542

 
562

 
1,138

 
1,116

Purchased transportation
3,209

 
2,614

 
6,354

 
5,159

Fuel
852

 
616

 
1,602

 
1,237

Other occupancy
321

 
264

 
682

 
563

Other expenses
1,312

 
1,158

 
2,574

 
2,331

Total Operating Expenses
15,683

 
13,890

 
31,276

 
27,783

Operating Profit
1,773

 
2,037

 
3,293

 
3,654

Other Income and (Expense):
 
 
 
 
 
 
 
Investment income and other
302

 
193

 
596

 
388

Interest expense
(149
)

(111
)
 
(302
)
 
(213
)
Total Other Income and (Expense)
153

 
82

 
294

 
175

Income Before Income Taxes
1,926

 
2,119

 
3,587

 
3,829

Income Tax Expense
441

 
735

 
757

 
1,279

Net Income
$
1,485

 
$
1,384

 
$
2,830

 
$
2,550

Basic Earnings Per Share
$
1.71

 
$
1.59

 
$
3.27

 
$
2.92

Diluted Earnings Per Share
$
1.71

 
$
1.58

 
$
3.25

 
$
2.91


STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net Income
$
1,485

 
$
1,384

 
$
2,830

 
$
2,550

Change in foreign currency translation adjustment, net of tax
(78
)
 
24

 
(84
)
 
54

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

 
1

 
(3
)
 
1

Change in unrealized gain (loss) on cash flow hedges, net of tax
332

 
(151
)
 
266

 
(192
)
Change in unrecognized pension and postretirement benefit costs, net of tax
38

 
386

 
77

 
418

Comprehensive Income
$
1,777

 
$
1,644

 
$
3,086

 
$
2,831

                
See notes to unaudited consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)(unaudited)
 
Six Months Ended
June 30,
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
Net income
$
2,830

 
$
2,550

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
1,138

 
1,116

Pension and postretirement benefit expense
308

 
463

Pension and postretirement benefit contributions
(92
)
 
(2,530
)
Self-insurance reserves
(66
)
 
(17
)
Deferred tax (benefit) expense
142

 
180

Stock compensation expense
378

 
345

Other (gains) losses
180

 
(11
)
Changes in assets and liabilities, net of effects of business acquisitions:
 
 
 
Accounts receivable
1,270

 
1,138

Other assets
1,345

 
420

Accounts payable
(260
)
 
(530
)
Accrued wages and withholdings
(9
)
 
(13
)
Other liabilities
22

 
(458
)
Other operating activities
14

 
(32
)
Net cash from operating activities
7,200

 
2,621

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(2,849
)
 
(2,009
)
Proceeds from disposals of property, plant and equipment
35

 
14

Purchases of marketable securities
(446
)
 
(1,082
)
Sales and maturities of marketable securities
453

 
1,111

Net (increase) decrease in finance receivables
(4
)
 
(16
)
Cash paid for business acquisitions, net of cash and cash equivalents acquired
(2
)
 
(57
)
Other investing activities
(7
)
 
14

Net cash used in investing activities
(2,820
)
 
(2,025
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term debt
68

 
(810
)
Proceeds from long-term borrowings
513

 
3,815

Repayments of long-term borrowings
(2,014
)
 
(1,220
)
Purchases of common stock
(521
)
 
(898
)
Issuances of common stock
125

 
132

Dividends
(1,507
)
 
(1,389
)
Other financing activities
(271
)
 
(186
)
Net cash used in financing activities
(3,607
)
 
(556
)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash
(51
)
 
30

Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
722

 
70

Cash, Cash Equivalents and Restricted Cash:
 
 
 
Beginning of period
3,769

 
3,921

End of period
$
4,491

 
$
3,991

                
See notes to unaudited consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Principles of Consolidation
In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of June 30, 2018, our results of operations for the three and six months ended June 30, 2018 and 2017, and cash flows for the six months ended June 30, 2018 and 2017. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any other period or the entire year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.
For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans for each three month period based on one quarter of the estimated annual expense.
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no material impact on our financial position or results of operations.
Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of June 30, 2018. The fair values of our investment securities are disclosed in note 5, our recognized multiemployer pension withdrawal liabilities in note 7, our short and long-term debt in note 9 and our derivative instruments in note 14. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.
Accounting Estimates
The preparation of the accompanying interim, unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best information and actual results could differ materially from those estimates.

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

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board ("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 3 for required disclosures pertaining to the new ASU.
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"). As a result of this update, restricted cash is included within cash and cash equivalents on our statements of consolidated cash flows. Effective January 1, 2018, we adopted the requirements of this ASU retrospectively.
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. 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. Effective January 1, 2018, we adopted the requirements of this ASU retrospectively, as required.
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):
 
December 31, 2017
 
As previously reported
 
Adjustments (a)
 
Adjustments (b)
 
Adjustments (c)
 
As Recast
Assets:
 
 
 
 
 
 
 
 
 
Other current assets
$
1,133

 
$
170

 
$
—

 
$
—

 
$
1,303

Total current assets
15,548

 
170

 
—

 
—

 
15,718

Deferred income tax assets
265

 
1

 
—

 
—

 
266

Total Assets
$
45,403

 
$
171

 
$
—

 
$
—

 
$
45,574

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
3,872

 
$
62

 
$
—

 
$
—

 
$
3,934

Accrued wages and withholdings
2,521

 
87

 
—

 
—

 
2,608

Other current liabilities(1)
905

 
29

 
—

 
—

 
934

Total current liabilities
12,708

 
178

 
—

 
—

 
12,886

Deferred income tax liabilities
757

 
(1
)
 
—

 
—

 
756

Shareowners' Equity:
 
 
 
 
 
 
 
 
 
Retained earnings
5,858

 
(6
)
 
—

 
—

 
5,852

Total Shareowners' Equity
1,030

 
(6
)
 
—

 
—

 
1,024

Total Liabilities and Shareowners' Equity
$
45,403

 
$
171

 
$
—

 
$
—

 
$
45,574

(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. These captions have been collapsed in the consolidated balance sheets as of June 30, 2018 and December 31, 2017 included within this Form 10-Q.  
(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. 
 

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

The unaudited consolidated statement of operations, which reflects the adoption of the new ASUs, is as follows (in millions):
 
Three months ended June 30, 2017
 
As previously reported
 
Adjustments (a)
 
Adjustments (b)
 
Adjustments (c)
 
As Recast
Revenue
$
15,750

 
$
177

 
$
—

 
$
—

 
$
15,927

Operating Expenses:
 
 
 
 
 
 
 
 
 
Compensation and benefits
8,105

 
—

 
179

 
—

 
8,284

Repairs and maintenance
392

 
—

 
—

 
—

 
392

Depreciation and amortization
562

 
—

 
—

 
—

 
562

Purchased transportation
2,443

 
171

 
—

 
—

 
2,614

Fuel
616

 
—

 
—

 
—

 
616

Other occupancy
264

 
—

 
—

 
—

 
264

Other expenses
1,152

 
6

 
—

 
—

 
1,158

Total Operating Expenses
13,534

 
177

 
179

 
—

 
13,890

Operating Profit
2,216

 
—

 
(179
)
 
—

 
2,037

Other Income and (Expense):
 
 
 
 
 
 
 
 
 
Investment income and other
14

 
—

 
179

 
—

 
193

Interest expense
(111
)
 
—

 
—

 
—

 
(111
)
Total Other Income and (Expense)
(97
)
 
—

 
179

 
—

 
82

Income Before Income Taxes
2,119

 
—

 
—

 
—

 
2,119

Income Tax Expense
735

 
—

 
—

 
—

 
735

Net Income
$
1,384

 
$
—

 
$
—

 
$
—

 
$
1,384

Basic earnings per share
$
1.59

 
$
—

 
$
—

 
$
—

 
$
1.59

Diluted earnings per share
$
1.58

 
$
—

 
$
—

 
$
—

 
$
1.58

(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. 














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

 
Six months ended June 30, 2017
 
As previously reported
 
Adjustments (a)
 
Adjustments (b)
 
Adjustments (c)
 
As Recast
Revenue
$
31,065

 
$
372

 
$
—

 
$
—

 
$
31,437

Operating Expenses:
 
 
 
 
 
 
 
 
 
Compensation and benefits
16,236

 
—

 
359

 
—

 
16,595

Repairs and maintenance
782

 
—

 
—

 
—

 
782

Depreciation and amortization
1,116

 
—

 
—

 
—

 
1,116

Purchased transportation
4,809

 
350

 
—

 
—

 
5,159

Fuel
1,237

 
—

 
—

 
—

 
1,237

Other occupancy
563

 
—

 
—

 
—

 
563

Other expenses
2,322

 
9

 
—

 
—

 
2,331

Total Operating Expenses
27,065

 
359

 
359

 
—

 
27,783

Operating Profit
4,000

 
13

 
(359
)
 
—

 
3,654

Other Income and (Expense):
 
 
 
 
 
 
 
 
 
Investment income and other
29

 
—

 
359

 
—

 
388

Interest expense
(213
)
 
—

 
—

 
—

 
(213
)
Total Other Income and (Expense)
(184
)
 
—

 
359

 
—

 
175

Income Before Income Taxes
3,816

 
13

 
—

 
—

 
3,829

Income Tax Expense
1,274

 
5

 
—

 
—

 
1,279

Net Income
$
2,542

 
$
8

 
$
—

 
$
—

 
$
2,550

Basic earnings per share
$
2.91

 
$
0.01

 
$
—

 
$
—

 
$
2.92

Diluted earnings per share
$
2.90

 
$
0.01

 
$
—

 
$
—

 
$
2.91

 
 
 
 
 
 
 
 
 
 
(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. 


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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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):
 
Six months ended June 30, 2017
 
As previously reported
 
Adjustments (a)
 
Adjustments (b)
 
Adjustments (c)
 
As Recast
Net Income
$
2,542

 
$
8

 
$
—

 
$
—

 
$
2,550

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
 
 
 
 
 
Deferred tax (benefit) expense
175

 
5

 
—

 
—

 
180

Other assets
440

 
(20
)
 
—

 
—

 
420

Accounts payable
(534
)
 
4

 
—

 
—

 
(530
)
Accrued wages and withholdings
(18
)
 
5

 
—

 
—

 
(13
)
Other liabilities
(456
)
 
(2
)
 
—

 
—

 
(458
)
Cash flows from operating activities
2,621

 
—

 
—

 
—

 
2,621

Purchase of marketable securities
(1,084
)
 
—

 
—

 
2

 
(1,082
)
Net cash used in investing activities
(2,027
)
 
—

 
—

 
2

 
(2,025
)
Net decrease in cash, cash equivalents and restricted cash
68

 
—

 
—

 
2

 
70

Cash, cash equivalents and restricted cash at the beginning of period
3,476

 
—

 
—

 
445

 
3,921

Cash, cash equivalents and restricted cash at the end of period
$
3,544

 
$
—

 
$
—

 
$
447

 
$
3,991

(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. 
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.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.
Accounting Standards Issued But Not Yet Effective
In August 2017, the FASB issued an ASU to enhance recognition of the economic results of hedging activities in the financial statements. In addition, this update makes certain targeted improvements to simplify the application of 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 ASU to have a material impact on our consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued an ASU 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 U.S. 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 ASU to have a material impact on our consolidated financial position, results of operations or cash flows.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In January 2017, the FASB issued an ASU to simplify the accounting for goodwill impairment. The update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. 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 ASU to have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued an ASU that requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond twelve months. Although the distinction between operating and finance leases will continue to exist under the new standard, the recognition and measurement of expenses and cash flows will not change significantly from the current treatment. This new guidance requires modified retrospective application and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update and subsequent amendments to the original update to determine the full impact of its adoption on our consolidated financial position, results of operations, cash flows and related disclosures, as well as the impact of adoption on policies, practices and systems. We have reviewed and selected a new lease accounting system and are currently accumulating and processing lease data into the system. In addition, we are currently analyzing our internal control framework to determine if controls should be added or modified as a result of adopting this standard. Based on the preliminary evaluation of our lease portfolio, we believe the largest impact will be accounting for leases for real estate, as we have a large portfolio of leased properties that are currently accounted for as operating leases. As of December 31, 2017, we had $1.637 billion of future minimum operating lease commitments that are not currently recognized on our consolidated balance sheets. We expect material changes to our consolidated balance sheets as a result of the new standard.
Other accounting pronouncements issued, but not effective until after June 30, 2018, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

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

NOTE 3. REVENUE RECOGNITION
Revenue Recognition
Substantially all of our revenues are from contracts associated with the pick-up, transportation and delivery of packages and freight (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
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
 
Next Day Air
 
$
1,830

 
$
1,752

 
$
3,614

 
$
3,417

Deferred
 
1,080

 
1,020

 
2,149

 
1,990

Ground
 
7,444

 
6,969

 
14,818

 
13,870

U.S. Domestic Package
 
10,354

 
9,741

 
20,581

 
19,277

 
 
 
 
 
 
 
 
 
Domestic
 
700

 
623

 
1,416

 
1,236

Export
 
2,747

 
2,426

 
5,419

 
4,763

Cargo & Other
 
155

 
122

 
300

 
246

International Package
 
3,602

 
3,171

 
7,135

 
6,245

 
 
 
 
 
 
 
 
 
Forwarding
 
1,659

 
1,347

 
3,264

 
2,613

Logistics
 
784

 
718

 
1,566

 
1,458

Freight
 
853

 
755

 
1,630

 
1,462

Other
 
204

 
195

 
393

 
382

Supply Chain & Freight
 
3,500

 
3,015

 
6,853

 
5,915

 
 
 
 
 
 
 
 
 
Consolidated revenue
 
$
17,456


$
15,927

 
$
34,569

 
$
31,437

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 2 for the adoption of new accounting standards.

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

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 of their goods. 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.
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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.
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 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.
Accounts Receivable, Net
Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when they are incurred, which requires us to make our best estimate of the probable losses inherent in our customer receivables at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, trends in customer payment frequency, and judgments about the probable effects of relevant observable data, including present economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk. Our total provision for doubtful accounts charged to expense before recoveries during the quarters ended June 30, 2018 and 2017 was $29 and $24 million, respectively and $41 and $63 million during six months ended June 30, 2018 and 2017, respectively.
Contract Assets and Liabilities
Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e., packages have been delivered), and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.
Our 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 $248 and $170 million at June 30, 2018 and December 31, 2017, respectively, net of deferred revenue related to in-transit packages of $231 and $174 million at June 30, 2018 and December 31, 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 $8 and $31 million at June 30, 2018 and December 31, 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 June 30, 2018 and $0 at December 31, 2017, respectively. Long-term contract liabilities are included within "Other Non-Current liabilities" in the consolidated balance sheets.


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

NOTE 4. STOCK-BASED COMPENSATION
We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units to eligible employees (restricted stock and stock units, restricted performance shares and performance units are herein referred to as "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date, and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
During the first quarter of 2018, we granted Restricted Units under MIP to certain eligible management employees. Restricted Units granted under MIP generally vest over a five-year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death or disability, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis (less estimated forfeitures) ratably over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs).
Based on the date that the eligible management population and performance targets were approved for MIP, we determined the award measurement date to be February 7, 2018 (for U.S.-based employees), March 1, 2018 (for management committee employees) and March 26, 2018 (for international-based employees); therefore, the Restricted Units awarded were valued for stock compensation expense purposes using the closing New York Stock Exchange price of $111.91, $106.43 and $103.70 on those dates, respectively.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under LTIP to certain eligible management employees. The performance targets are equally-weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareowner return ("RTSR") relative to a peer group of companies. These Restricted Units generally vest at the end of a three-year period (except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets established on the grant date. 
For the two-thirds of the award related to ROIC and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these Restricted Units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. We recognize the grant date fair value of this portion of the award as compensation expense (less estimated forfeitures) ratably over the vesting period. 
Based on the date that the eligible management population and performance targets were approved for the 2018 LTIP Award, we determined the award measurement date to be May 9, 2018; therefore, the target Restricted Units awarded for the ROIC and growth in currency-constant consolidated revenue portions of the award were valued for stock compensation expense using the closing New York Stock Exchange price of $111.40 on that date.
The weighted-average assumptions used and the calculated weighted-average fair values of the RTSR portion of the LTIP awards granted in 2018 and 2017 are as follows:
 
2018
 
2017
Risk-free interest rate
2.61
%
 
1.46
%
Expected volatility
16.51
%
 
16.59
%
Weighted-average fair value of units granted
$
137.53

 
$
119.29

Share payout
123.46
%
 
113.55
%
There is no expected dividend yield as units earn dividend equivalents.

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

Non-Qualified Stock Options
During the first quarter of 2018, we granted non-qualified stock option awards to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards generally vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant (except in the case of death or disability, in which case immediate vesting occurs). The options granted will expire ten years after the date of the grant. In the first quarter of 2018, we granted 0.3 and 0.01 million stock options at a grant price of $106.43 and $104.45, respectively, which is based on the closing New York Stock Exchange price on March 1, 2018 and March 22, 2018, respectively. In the first quarter of 2017, we granted 0.3 million stock options at a grant price of $106.87, which is based on the closing New York Stock Exchange price on March 1, 2017.
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the calculated weighted-average fair values of options granted in 2018 and 2017 are as follows:
 
2018
 
2017
Expected dividend yield
2.93
%
 
2.89
%
Risk-free interest rate
2.84
%
 
2.15
%
Expected life (in years)
7.5

 
7.5

Expected volatility
16.72
%
 
17.81
%
Weighted-average fair value of options granted
$
15.23

 
$
14.70


Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the three months ended June 30, 2018 and 2017 was $139 and $133 million, respectively. Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the six months ended June 30, 2018 and 2017 was $378 and $345 million pre-tax, respectively.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. CASH AND INVESTMENTS
The following is a summary of marketable securities classified as trading and available-for-sale as of June 30, 2018 and December 31, 2017 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
June 30, 2018:
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
75

 
$
—

 
$
—

 
$
75

Equity securities
2

 
—

 
—

 
2

Total trading marketable securities
77

 
—

 
—

 
77

 
 
 
 
 
 
 
 
Current available-for-sale securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
306

 
1

 
(4
)
 
303

Mortgage and asset-backed debt securities
86

 
—

 
(1
)
 
85

Corporate debt securities
243

 
—

 
(2
)
 
241

Non-U.S. government debt securities
14

 
—

 
—

 
14

Total available-for-sale marketable securities
649

 
1

 
(7
)
 
643

 
 
 
 
 
 
 
 
Total current marketable securities
$
726

 
$
1

 
$
(7
)
 
$
720

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2017:
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
75

 
$
—

 
$
—

 
$
75

Carbon credit investments (1)
77

 
16

 
—

 
93

Total trading marketable securities
152

 
16

 
—

 
168

 
 
 
 
 
 
 
 
Current available-for-sale securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
286

 
—

 
(3
)
 
283

Mortgage and asset-backed debt securities
86

 
—

 
—

 
86

Corporate debt securities
201

 
1

 
(1
)
 
201

Equity securities
2

 
—

 
—

 
2

Non-U.S. government debt securities
9

 
—

 
—

 
9

Total available-for-sale marketable securities
584

 
1

 
(4
)
 
581

 
 
 
 
 
 
 
 
Total current marketable securities
$
736

 
$
17

 
$
(4
)
 
$
749

(1) These investments are hedged with forward contracts that are not designated in hedging relationships. See Note 14 for offsetting statement of consolidated income impact.



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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Investment Other-Than-Temporary Impairments
We have concluded that no material other-than-temporary impairment losses existed as of June 30, 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.
Maturity Information
The amortized cost and estimated fair value of marketable securities at June 30, 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.
 
Cost
 
Estimated
Fair Value
Due in one year or less
$
193

 
$
193

Due after one year through three years
434

 
430

Due after three years through five years
24

 
23

Due after five years
73

 
72

 
724

 
718

Equity securities
2

 
2

 
$
726

 
$
720

Non-Current Investments and Restricted Cash
Non-current investments and restricted cash is 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 various marketable securities and cash equivalents. Collateral provided is reflected in "Cash, Cash Equivalents and Restricted Cash" in the statements of consolidated cash flows. At June 30, 2018 and December 31, 2017, we had $277 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 June 30, 2018 and December 31, 2017. The quarterly change in investment fair value is recognized in "Investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets, primarily real estate, of $10 and $15 million as of June 30, 2018 and December 31, 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 is shown below (in millions):
 
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Cash and cash equivalents
 
$
4,214

 
$
3,320

 
$
3,544

Restricted cash
 
277

 
449

 
447

Total cash, cash equivalents and restricted cash
 
$
4,491

 
$
3,769

 
$
3,991

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.




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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “Other non-current investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 8.11% and 7.56% as of June 30, 2018 and December 31, 2017, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis. The level 3 instruments measured on a recurring basis totaled $2 and $6 million as of June 30, 2018 and December 31, 2017, respectively.
The following table presents information about our investments measured at fair value on a recurring basis as of June 30, 2018 and December 31, 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)
 
Balance 
June 30, 2018:
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
303

 
$
—

 
$
—

 
$
303

Mortgage and asset-backed debt securities
—

 
85

 
—

 
85

Corporate debt securities
—

 
316

 
—

 
316

Equity securities
—

 
2

 
—

 
2

Non-U.S. government debt securities
—

 
14

 
—

 
14

Total marketable securities
303

 
417

 
—

 
720

Other non-current investments
19

 
—

 
2

 
21

Total
$
322

 
$
417

 
$
2

 
$
741

December 31, 2017:
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
283

 
$
—

 
$
—

 
$
283

Mortgage and asset-backed debt securities


 
86

 
—

 
86

Corporate debt securities
—

 
276

 
—

 
276

Equity securities
—

 
2

 
—

 
2

Non-U.S. government debt securities
—

 
9

 
—

 
9

Carbon credit investments
93

 
—

 
—

 
93

Total marketable securities
376

 
373

 
—

 
749

Other non-current investments
19

 
—

 
6

 
25

Total
$
395

 
$
373

 
$
6

 
$
774

There were no transfers of investments between Level 1 and Level 2 during the three and six months ended June 30, 2018 and 2017.
    


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 2018 and December 31, 2017 consists of the following (in millions):
 
2018
 
2017
Vehicles
$
9,435

 
$
9,365

Aircraft
16,811

 
16,248

Land
1,777

 
1,582

Buildings
4,195

 
4,035

Building and leasehold improvements
4,114

 
3,934

Plant equipment
9,952

 
9,387

Technology equipment
2,001

 
1,907

Equipment under operating leases
—

 
29

Construction-in-progress
2,915

 
2,239

 
51,200

 
48,726

Less: Accumulated depreciation and amortization
(27,299
)
 
(26,608
)
 
$
23,901

 
$
22,118

 
We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor all other property, plant and equipment categories for any indicators that the carrying value of the assets may not be recoverable. No impairment charges on property, plant and equipment were recorded during the three and six months ended June 30, 2018 and 2017.





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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. EMPLOYEE BENEFIT PLANS
Company-Sponsored Benefit Plans
Information about net periodic benefit cost for our company-sponsored pension and postretirement benefit plans is as follows for the three and six months ended June 30, 2018 and 2017 (in millions):
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Three Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
415

 
$
389

 
$
7

 
$
7

 
$
16

 
$
14

Interest cost
450

 
462

 
26

 
28

 
11

 
10

Expected return on assets
(800
)
 
(712
)
 
(2
)
 
(1
)
 
(19
)
 
(16
)
Amortization of prior service cost
48

 
48

 
2

 
2

 
—

 
—

Net periodic benefit cost
$
113

 
$
187

 
$
33

 
$
36

 
$
8

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
831

 
$
779

 
$
14

 
$
14

 
$
32

 
$
29

Interest cost
899

 
924

 
52

 
56

 
23

 
20

Expected return on assets
(1,601
)
 
(1,424
)
 
(4
)
 
(3
)
 
(39
)
 
(32
)
Amortization of prior service cost
97

 
96

 
4

 
4

 
—

 
—

Net periodic benefit cost
$
226

 
$
375

 
$
66

 
$
71

 
$
16

 
$
17

During the first six months of 2018, we contributed $50 and $42 million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We currently expect to contribute $48 and $37 million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively. Subject to market conditions, we continually evaluate opportunities for additional discretionary pension contributions.
The components of net periodic benefit cost other than current service cost are presented within “Investment income and other” in the statements of consolidated income.
Plan Amendments and Curtailments
In the quarter ended June 30, 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 assets 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 sheets. 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 statements of consolidated income as a result of this remeasurement.
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 statements of consolidated income for the three and six months ended June 30, 2018 as a result of the above changes.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under the terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.
As of June 30, 2018 and December 31, 2017 we had $856 and $859 million, respectively, recorded in "Other non-current liabilities" as well as $8 million as of June 30, 2018 and December 31, 2017, recorded in "Other current liabilities" on our consolidated balance sheets associated with our previous withdrawal from a multiemployer pension plan. This liability is payable in equal monthly installments over a remaining term of approximately 44 years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of this withdrawal liability as of June 30, 2018 and December 31, 2017 was $841 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.
UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the plan and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF.
In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants, including the UPS Transfer Group. We vigorously challenged the proposed benefit reduction plan because we believed that it did not comply with the law and that the CSPF failed to comply with its contractual obligation to obtain our consent to reduce benefits to the UPS Transfer Group under the terms of the withdrawal agreement with the CSPF. On May 6, 2016, the U.S. Department of the Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of requirements set forth in the MPRA.
The CSPF has asserted that it will become insolvent in 2025 which could lead to the reduction of retirement benefits. Although there are numerous factors that could affect the CSPF’s funding status, if the CSPF were to become insolvent as they have projected, UPS may be required to provide coordinating benefits, thereby increasing the current projected benefit obligation for the UPS/IBT Plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.
The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of significant uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to which benefits are paid by the Pension Benefit Guaranty Corporation and our ability to successfully defend our legal positions, as well as the effect of discount rates and various other actuarial assumptions.
We account for this potential obligation under Accounting Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”). Under ASC 715 we are required to provide a best estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely solution to this matter and the broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities. Our best estimate as of the measurement date of December 31, 2017 did not incorporate this solution. However, if a future change in law resulted in an obligation to provide coordinating benefits under the UPS/IBT Plan, it may be a significant event, and may require us to remeasure the plan assets and projected benefit obligation of the UPS/IBT Plan at the date the law is enacted.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will submit another MPRA filing to forestall insolvency without reducing benefits to the UPS Transfer Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing, we would be in a strong legal position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction, without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate as of the measurement date of December 31, 2017, was that there is no liability to be recognized for additional coordinating benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as the uncertainties are resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in accordance with ASC 715.
Collective Bargaining Agreements
As of December 31, 2017, we had approximately 280,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. These agreements ran through July 31, 2018. We reached tentative agreements with the Teamsters on two new five-year contracts in the U.S. Domestic Package and UPS Freight business units on June 21, 2018 and on July 13, 2018, respectively, while several local U.S. Domestic Package supplemental agreements require additional negotiation and approval before ratification occurs. We are in the process of ratifying the new national master agreements and negotiating and ratifying the related supplemental agreements, all of which will be retroactively effective as of August 1, 2018. As of the date of this filing, there can be no assurance that our efforts will be successful or that the ultimate resolution of these matters will not adversely affect our business, financial position, results of operations or liquidity.
We have approximately 2,700 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which runs through September 1, 2021. Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727. In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”) that will expire on July 31, 2019.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of June 30, 2018 and December 31, 2017 (in millions):
 
U.S. Domestic
Package
 
International
Package
 
Supply Chain &
Freight
 
Consolidated
December 31, 2017:
$
715

 
$
435

 
$
2,722

 
$
3,872

Acquired
—

 
—

 
—

 
—

Currency / Other
—

 
(11
)
 
(24
)
 
(35
)
June 30, 2018:
$
715

 
$
424

 
$
2,698

 
$
3,837


The change in goodwill for both the International Package and Supply Chain & Freight segments was primarily due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
The following is a summary of intangible assets as of June 30, 2018 and December 31, 2017 (in millions):
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
June 30, 2018:
 
 
 
 
 
Capitalized software
$
3,507

 
$
(2,404
)
 
$
1,103

Licenses
115

 
(23
)
 
92

Franchise rights
145

 
(101
)
 
44

Customer relationships
741

 
(182
)
 
559

Trade name
200

 
—

 
200

Trademarks, patents and other
55

 
(25
)
 
30

Total Intangible Assets, Net
$
4,763


$
(2,735
)
 
$
2,028

December 31, 2017:
 
 
 
 
 
Capitalized software
$
3,273

 
$
(2,310
)
 
$
963

Licenses
114

 
(10
)
 
104

Franchise rights
144

 
(97
)
 
47

Customer relationships
776

 
(160
)
 
616

Trade name
200

 
—

 
200

Trademarks, patents and other
71

 
(37
)
 
34

Total Intangible Assets, Net
$
4,578

 
$
(2,614
)
 
$
1,964


As of June 30, 2018, we had a trade name with a carrying value of $200 million and licenses with a carrying value of $5 million, which are deemed to be indefinite-lived intangible assets and are included in the table above. Impairment tests for the finite-lived 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 million impairment of a finite-lived asset in the second quarter of 2018.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt as of June 30, 2018 and December 31, 2017 consists of the following (in millions):
 
Principal
Amount
 
 
 
Carrying Value
 
 
Maturity
 
2018
 
2017
Commercial paper
$
2,530

 
2018 - 2019
 
$
2,530

 
$
3,203

Fixed-rate senior notes:
 
 
 
 
 
 
 
5.500% senior notes
750

 
2018
 
—

 
751

5.125% senior notes
1,000

 
2019
 
1,007

 
1,019

3.125% senior notes
1,500

 
2021
 
1,516

 
1,549

2.050% senior notes
700

 
2021
 
697

 
696

2.450% senior notes
1,000

 
2022
 
956

 
979

2.350% senior notes
600

 
2022
 
597

 
597

2.500% senior note
1,000

 
2023
 
993

 
992

2.800% senior note
500

 
2024
 
496

 
495

2.400% senior note
500

 
2026
 
497

 
497

3.050% senior note
1,000

 
2027
 
991

 
990

6.200% senior notes
1,500

 
2038
 
1,482