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 March 31, 2012, or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-15451
_____________________________________ 
United Parcel Service, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
58-2480149
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
55 Glenlake Parkway, NE Atlanta, Georgia
 
30328
(Address of Principal Executive Offices)
 
(Zip Code)
(404) 828-6000
(Registrant’s telephone number, including area code)
_____________________________________   

Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer  þ Accelerated filer  ¨ Non-accelerated filer  ¨    (Do not check if a smaller reporting company) Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
There were 233,763,372 Class A shares, and 725,732,912 Class B shares, with a par value of $0.01 per share, outstanding at April 20, 2012.


Table of Contents

UNITED PARCEL SERVICE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012
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 3.
Item 5.
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, 2011 and in our other filings with the Securities and Exchange Commission contain some forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties are described in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011 and may also be 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.

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Item 1. Financial Statements
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2012 (unaudited) and December 31, 2011
(In millions)
 
 
March 31,
2012
 
December 31,
2011
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
5,133

 
$
3,034

Marketable securities
947

 
1,241

Accounts receivable, net
5,637

 
6,246

Deferred income tax assets
635

 
611

Other current assets
1,121

 
1,152

Total Current Assets
13,473

 
12,284

Property, Plant and Equipment, Net
17,614

 
17,621

Goodwill
2,177

 
2,101

Intangible Assets, Net
634

 
585

Non-Current Investments and Restricted Cash
304

 
303

Other Non-Current Assets
1,761

 
1,807

Total Assets
$
35,963

 
$
34,701

LIABILITIES AND SHAREOWNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt and commercial paper
$
919

 
$
33

Accounts payable
2,000

 
2,300

Accrued wages and withholdings
1,881

 
1,843

Self-insurance reserves
772

 
781

Income taxes payable
567

 
146

Other current liabilities
1,404

 
1,411

Total Current Liabilities
7,543

 
6,514

Long-Term Debt
11,079

 
11,095

Pension and Postretirement Benefit Obligations
5,465

 
5,505

Deferred Income Tax Liabilities
1,870

 
1,900

Self-Insurance Reserves
1,826

 
1,806

Other Non-Current Liabilities
681

 
773

Shareowners’ Equity:
 
 
 
Class A common stock (236 and 240 shares issued in 2012 and 2011)
3

 
3

Class B common stock (725 and 725 shares issued in 2012 and 2011)
7

 
7

Additional paid-in capital

 

Retained earnings
10,433

 
10,128

Accumulated other comprehensive loss
(3,020
)
 
(3,103
)
Deferred compensation obligations
76

 
88

Less: Treasury stock (2 shares in 2012 and 2011)
(76
)
 
(88
)
Total Equity for Controlling Interests
7,423

 
7,035

Total Equity for Non-Controlling Interests
76

 
73

Total Shareowners’ Equity
7,499

 
7,108

Total Liabilities and Shareowners’ Equity
$
35,963

 
$
34,701


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
March 31,
2012
 
2011
Revenue
$
13,136

 
$
12,582

Operating Expenses:
 
 
 
Compensation and benefits
6,835

 
6,562

Repairs and maintenance
302

 
315

Depreciation and amortization
459

 
441

Purchased transportation
1,717

 
1,648

Fuel
1,025

 
908

Other occupancy
237

 
261

Other expenses
992

 
975

Total Operating Expenses
11,567

 
11,110

Operating Profit
1,569

 
1,472

Other Income and (Expense):
 
 
 
Investment income
6

 
11

Interest expense
(94
)

(85
)
Total Other Income and (Expense)
(88
)
 
(74
)
Income Before Income Taxes
1,481

 
1,398

Income Tax Expense
511

 
483

Net Income
$
970

 
$
915

Basic Earnings Per Share
$
1.01

 
$
0.92

Diluted Earnings Per Share
$
1.00

 
$
0.91


STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
 
 
Three Months Ended
March 31,
 
2012
 
2011
Net income
$
970

 
$
915

Change in foreign currency translation adjustment, net of tax
91

 
125

Change in unrealized gain (loss) on marketable securities, net of tax
(1
)
 
(4
)
Change in unrealized gain (loss) on cash flow hedges, net of tax
(41
)
 
(63
)
Change in unrecognized pension and postretirement benefit costs, net of tax
34

 
55

Comprehensive income
$
1,053

 
$
1,028

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)
 
 
Three Months Ended
March 31,
 
2012
 
2011
Cash Flows From Operating Activities:
 
 
 
Net income
$
970

 
$
915

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
459

 
441

Pension and postretirement benefit expense
238

 
210

Pension and postretirement benefit contributions
(220
)
 
(1,252
)
Self-insurance reserves
11

 
(6
)
Deferred taxes, credits and other
(92
)
 
128

Stock compensation expense
162

 
120

Other (gains) losses
80

 
23

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

 
312

Other current assets
(34
)
 
137

Accounts payable
(276
)
 
(81
)
Accrued wages and withholdings
43

 
144

Other current liabilities
377

 
182

Other operating activities
(23
)
 
8

Net cash from operating activities
2,280

 
1,281

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(428
)
 
(402
)
Proceeds from disposals of property, plant and equipment
19

 
11

Purchases of marketable securities
(1,160
)
 
(1,042
)
Sales and maturities of marketable securities
1,462

 
1,141

Net decrease in finance receivables
24

 
26

Cash paid for business acquisitions
(100
)
 

Other investing activities
(76
)
 
(16
)
Net cash used in investing activities
(259
)
 
(282
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term debt
885

 
1,297

Proceeds from long-term borrowings
4

 
12

Repayments of long-term borrowings

 
(113
)
Purchases of common stock
(547
)
 
(505
)
Issuances of common stock
131

 
104

Dividends
(534
)
 
(503
)
Other financing activities
112

 
(45
)
Net cash provided by financing activities
51

 
247

Effect Of Exchange Rate Changes On Cash And Cash Equivalents
27

 
41

Net Increase In Cash And Cash Equivalents
2,099

 
1,287

Cash And Cash Equivalents:
 
 
 
Beginning of period
3,034

 
3,370

End of period
$
5,133

 
$
4,657

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
Principles of Consolidation
In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of March 31, 2012, our results of operations for the three months ended March 31, 2012 and 2011, and cash flows for the three months ended March 31, 2012 and 2011. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.
For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans and self-insurance reserves for each three month period based on one quarter of the estimated annual expense.
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on our financial position or results of operations.
Fair Value of Financial Instruments
The carrying amount of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of March 31, 2012. The fair value of our investment securities is disclosed in Note 4, our short and long-term debt in Note 8 and our derivative instruments in Note 13. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.
Accounting Estimates
The preparation of the accompanying interim, unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best information and actual results could differ materially from those estimates.
Change in Accounting Methodology
As described in our Annual Report on Form 10-K for the year ended December 31, 2011, we elected to change our accounting methodologies for recognizing expense for our company-sponsored U.S. and international pension and other postretirement benefit plans. The impact of these changes in our accounting methodologies was reported through retrospective application of the new policies to all periods presented. Accordingly, all relevant information as of, and for the quarter ended, March 31, 2011 has been adjusted to reflect the application of the new policies.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In May 2011, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update to disclosure requirements for fair value measurement. These amendments, which became effective for us in the first quarter of 2012, result in a common definition of fair value and common measurement and disclosure requirements between U.S. GAAP and IFRS. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance had an immaterial impact on our consolidated financial position and results of operations.

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



In June 2011, the FASB issued an Accounting Standards Update that increases the prominence of items reported in other comprehensive income in the financial statements. This update requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. This requirement became effective for us beginning with the first quarter of 2012, and we have included the required presentation in this Form 10-Q.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements had an immaterial impact on our consolidated financial position and results of operations.
Accounting Standards Issued But Not Yet Effective
Accounting pronouncements issued, but not effective until after March 31, 2012, are not expected to have a significant impact on our consolidated financial position or results of operations.
NOTE 3. STOCK-BASED COMPENSATION
We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, performance units and management incentive awards to eligible employees. 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 plan are made in shares of UPS class A common stock.
Compensation Program Changes
Effective January 1, 2011, we modified certain components of our management compensation programs for future award grants, as follows:
We eliminated our Long-Term Incentive program, and incorporated the value of the award into our Management Incentive Award program. The combined award is referred to as the “Management Incentive Award” program.
Previously, the restricted stock units granted under the Management Incentive Award program were granted in the fourth quarter of each year, while the restricted performance units granted under the Long-Term Incentive program were granted in the second quarter of each year (restricted stock units and restricted performance units are referred to as “Restricted Units”). Prospectively, Restricted Units granted under the modified Management Incentive Award will generally be granted in the first quarter of each year.
Management Incentive Award
During the first quarter of 2012, we granted Restricted Units under the Management Incentive Award program to eligible management employees. Restricted Units under the Management Incentive Award program will generally vest over a five year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis over the requisite service period. Based on the date that the eligible management population and performance targets were approved for the Management Incentive Award program, we determined the award measurement date to be February 6, 2012 and therefore the Restricted Units grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $76.92 on that date.

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



Long-Term Incentive Performance Award
During the first quarter of 2012, we also granted target Restricted Units under the UPS Long-Term Incentive Performance Award program to eligible management employees. Of the total 2012 target award, 90% of the target award will be divided into three substantially equal tranches, one for each calendar year in the three-year award cycle from 2012 to 2014, using performance criteria targets established each year. For 2012, those targets consist of consolidated operating return on invested capital and growth in consolidated revenue. The remaining 10% of the total 2012 target award will be based upon our achievement of adjusted earnings per share in 2014 compared to a target established at the grant date.
The number of Restricted Units earned each year will be the target number adjusted for the percentage achievement of performance criteria targets for the year. The percentage of achievement used to determine the Restricted Units earned may be a percentage less than or more than 100% of the target Restricted Units for each tranche. Based on the date that the eligible management population and performance targets were approved for the 2012 performance tranches, we determined the award measurement date to be March 1, 2012; therefore the target Restricted Units grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $76.89 on that date.
Nonqualified Stock Options
Historically, awards granted under the UPS Stock Option program were granted during the second quarter of each year to a limited group of eligible senior management employees. Stock option awards generally vest over a five year period with approximately 20% of the award vesting at each anniversary date of the grant (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The options granted will expire ten years after the date of the grant. In the first quarter of 2012, we granted 0.2 million stock options at a weighted average grant price of $76.94. The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was $14.88 for 2012, using the following assumptions:
 
2012
Expected life (in years)
7.5

Risk-free interest rate
1.63
%
Expected volatility
25.06
%
Expected dividend yield
2.77
%
Compensation expense for share-based awards recognized in net income for the three months ended March 31, 2012 and 2011 was $162 and $120 million pre-tax, respectively.
 

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


NOTE 4. CASH AND INVESTMENTS
The following is a summary of marketable securities classified as available-for-sale as of March 31, 2012 and December 31, 2011 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2012
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
216

 
$
1

 
$
(1
)
 
$
216

Mortgage and asset-backed debt securities
175

 
3

 

 
178

Corporate debt securities
382

 
4

 

 
386

U.S. state and local municipal debt securities
15

 

 

 
15

Other debt and equity securities
152

 

 

 
152

Total marketable securities
$
940

 
$
8

 
$
(1
)
 
$
947

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2011
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
184

 
$
3

 
$

 
$
187

Mortgage and asset-backed debt securities
188

 
4

 
(1
)
 
191

Corporate debt securities
835

 
4

 
(2
)
 
837

U.S. state and local municipal debt securities
15

 

 

 
15

Other debt and equity securities
10

 
1

 

 
11

Total marketable securities
$
1,232

 
$
12

 
$
(3
)
 
$
1,241

Auction Rate Securities
During the first quarter 2011, we sold all remaining investments in auction rate securities, which had been classified as non-current marketable securities. These sales did not have a material impact on our statement of consolidated income.
Investment Other-Than-Temporary Impairments
We have concluded that no other-than-temporary impairment losses existed as of March 31, 2012. In making this determination, we considered the financial condition and prospects of the issuers, the magnitude of the losses compared with the investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that we will be unable to collect all amounts due according to the contractual terms of the securities, the credit rating of the securities and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
Maturity Information
The amortized cost and estimated fair value of marketable securities at March 31, 2012, 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
$
385

 
$
385

Due after one year through three years
252

 
253

Due after three years through five years
44

 
45

Due after five years
256

 
261

 
937

 
944

Equity securities
3

 
3

 
$
940

 
$
947


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



Non-Current Investments and Restricted Cash
We had $286 million of restricted cash related to our self-insurance requirements, as of March 31, 2012 and December 31, 2011, which is reported in “Non-Current Investments and Restricted Cash” on the consolidated balance sheets.
At March 31, 2012 and December 31, 2011 we held an $18 and $17 million, respectively, investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. This investment is classified as “Non-Current Investments and Restricted Cash” in the consolidated balance sheets with the quarterly change in investment value recognized in the statements of consolidated income.
Fair Value Measurements
Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “other investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model based on each partnership’s financial statements and cash flow projections. The significant unobservable inputs used in the fair value measurement of the investment partnerships are state and federal tax credits provided by each partnership, tax benefits from investment losses and tax benefits on interest expense. Significant increases or decreases in any of these inputs in isolation would result in changes in the fair value measurement. Generally, a decrease in the assumption used for the state and federal tax credits is accompanied by a directionally similar change in value of the investment.
The following table presents information about our investments measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, 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 
March 31, 2012
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
216

 
$

 
$

 
$
216

Mortgage and asset-backed debt securities

 
178

 

 
178

Corporate debt securities

 
386

 

 
386

U.S. state and local municipal debt securities

 
15

 

 
15

Other debt and equity securities

 
152

 

 
152

Total marketable securities
216

 
731

 

 
947

Other investments
18

 

 
204

 
222

Total
$
234

 
$
731

 
$
204

 
$
1,169

 

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



 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance 
December 31, 2011
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
187

 
$

 
$

 
$
187

Mortgage and asset-backed debt securities

 
191

 

 
191

Corporate debt securities

 
837

 

 
837

U.S. state and local municipal debt securities

 
15

 

 
15

Other debt and equity securities

 
11

 

 
11

Total marketable securities
187

 
1,054

 

 
1,241

Other investments
17

 

 
217

 
234

Total
$
204

 
$
1,054

 
$
217

 
$
1,475

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended March 31, 2012 and 2011 (in millions):
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2012
$

 
$
217

 
$
217

Transfers into (out of) Level 3

 

 

Net realized and unrealized gains (losses):

 

 

Included in earnings (in investment income)

 
(13
)
 
(13
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on March 31, 2012
$

 
$
204

 
$
204

 
 
 
 
 
 
 
 
 
 
 
 
Balance on January 1, 2011
$
138

 
$
267

 
$
405

Transfers into (out of) Level 3

 

 

Net realized and unrealized gains (losses):

 

 

Included in earnings (in investment income)

 
(13
)
 
(13
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales
(138
)
 

 
(138
)
Balance on March 31, 2011
$

 
$
254

 
$
254

There were no transfers of investments between Level 1 and Level 2 during the three months ended March 31, 2012 and 2011.

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


NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of March 31, 2012 and December 31, 2011 consist of the following (in millions):
 
2012
 
2011
Vehicles
$
5,954

 
$
5,981

Aircraft (including aircraft under capitalized leases)
14,763

 
14,616

Land
1,110

 
1,114

Buildings
3,105

 
3,095

Building and leasehold improvements
2,985

 
2,943

Plant equipment
6,863

 
6,803

Technology equipment
1,642

 
1,593

Equipment under operating leases
89

 
93

Construction-in-progress
374

 
303

 
36,885

 
36,541

Less: Accumulated depreciation and amortization
(19,271
)
 
(18,920
)
 
$
17,614

 
$
17,621

 

NOTE 6. EMPLOYEE BENEFIT PLANS
Information about net periodic benefit cost for our company-sponsored pension and postretirement benefit plans is as follows for the three months ended March 31, 2012 and 2011 (in millions):
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Net Periodic Cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
249

 
$
218

 
$
22

 
$
22

 
$
15

 
$
9

Interest cost
353

 
327

 
52

 
52

 
11

 
10

Expected return on assets
(492
)
 
(489
)
 
(4
)
 
(4
)
 
(12
)
 
(11
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
43

 
43

 
1

 
2

 

 

Other net (gain) loss

 
30

 

 

 

 
1

Actuarial (gain) loss

 

 

 

 

 

Net periodic benefit cost
$
153

 
$
129

 
$
71

 
$
72

 
$
14

 
$
9

During the first three months of 2012, we contributed $192 million and $28 million to our company-sponsored pension and postretirement medical benefit plans, respectively. We also expect to contribute $232 and $443 million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively.
As of December 31, 2011, we had approximately 245,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). These agreements run through July 31, 2013. We have approximately 2,700 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association, which became amendable at the end of 2011. Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which runs through November 1, 2013. In addition, approximately 3,200 of our ground mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”). Our agreement with the IAM runs through July 31, 2014.

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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.
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of March 31, 2012 and December 31, 2011 (in millions):
 
U.S. Domestic
Package
 
International
Package
 
Supply Chain &
Freight
 
Consolidated
December 31, 2011 balance
$

 
$
361

 
$
1,740

 
$
2,101

Acquired

 
67

 

 
67

Currency / Other

 
4

 
5

 
9

March 31, 2012 balance

 
$
432

 
$
1,745

 
$
2,177

The increase in goodwill in the International Package segment was due to the acquisition of Kiala S.A., a firm based in Brussels that provides e-commerce retailers a platform to offer delivery options to consumers. The purchase price allocation was not complete as of March 31, 2012 and therefore adjustments to the recorded amount of goodwill may occur in 2012 prior to the one year anniversary of the acquisition. The remaining increase in goodwill for both the International and Supply Chain & Freight segments was due to the impact of the weakening U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
The following is a summary of intangible assets as of March 31, 2012 and December 31, 2011 (in millions):
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
March 31, 2012:
 
 
 
 
 
Trademarks, licenses, patents, and other
$
189

 
$
(65
)
 
$
124

Customer lists
132

 
(70
)
 
62

Franchise rights
111

 
(59
)
 
52

Capitalized software
2,062

 
(1,666
)
 
396

Total Intangible Assets, Net
$
2,494

 
$
(1,860
)
 
$
634

December 31, 2011:
 
 
 
 
 
Trademarks, licenses, patents, and other
$
146

 
$
(54
)
 
$
92

Customer lists
120

 
(66
)
 
54

Franchise rights
109

 
(58
)
 
51

Capitalized software
2,014

 
(1,626
)
 
388

Total Intangible Assets, Net
$
2,389

 
$
(1,804
)
 
$
585


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt as of March 31, 2012 and December 31, 2011 consists of the following (in millions):
 
Maturity
 
2012
 
2011
Commercial paper
2012
 
$
885

 
$

4.50% senior notes
2013
 
1,773

 
1,778

3.875% senior notes
2014
 
1,048

 
1,050

5.50% senior notes
2018
 
837

 
841

5.125% senior notes
2019
 
1,109

 
1,119

8.375% debentures
2020
 
498

 
504

3.125% senior notes
2021
 
1,629

 
1,641

8.375% debentures
2030
 
283

 
284

6.20% senior notes
2038
 
1,480

 
1,480

4.875% senior notes
2040
 
489

 
489

Floating rate senior notes
2049-2053
 
376

 
376

Facility notes and bonds
2015-2036
 
320

 
320

Pound Sterling notes
2031/2050
 
793

 
777

Capital lease obligations
2012-3004
 
476

 
469

Other debt
2022
 
2

 

Total Debt
 
 
11,998

 
11,128

Less: Current Maturities
 
 
(919
)
 
(33
)
Long-term Debt
 
 
$
11,079

 
$
11,095

Debt Classification
We have classified our 4.50% senior notes with a principal balance of $1.750 billion due in January 2013 as a long-term liability, based on our intent and ability to refinance the debt as of March 31, 2012.
Sources of Credit
We are authorized to borrow up to $10.0 billion under the U.S. commercial paper program we maintain. We had $885 million outstanding under this program as of March 31, 2012, with an average interest rate of 0.04%. As of March 31, 2012, we have classified the entire commercial paper balance as a current liability in our consolidated balance sheets. We also maintain a European commercial paper program under which we are authorized to borrow up to €1.0 billion in a variety of currencies, however there were no amounts outstanding under this program as of March 31, 2012.
We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on April 11, 2013. 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 Citibank’s publicly announced base rate, 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 base 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 March 31, 2012.

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The second agreement provides revolving credit facilities of $1.0 billion, and expires on April 12, 2017. 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 Citibank’s publicly announced base rate, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The applicable margin is subject to certain minimum rates and maximum rates based on our public debt ratings from Standard & Poor’s Rating Service and Moody’s Investors Service. The minimum applicable margin rates range from 0.100% to 0.375%, and the maximum applicable margin rates range from 0.750% to 1.250%. The applicable margin for advances bearing interest based on the base 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 March 31, 2012.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of March 31, 2012 and for all prior periods, 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 March 31, 2012, 10% of net tangible assets is equivalent to $2.561 billion, however we have no covered sale-leaseback transactions or secured indebtedness outstanding. Additionally, we are required to maintain a minimum net worth, as defined, of $5.0 billion on a quarterly basis. As of March 31, 2012, our net worth, as defined, was equivalent to $10.443 billion. 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 $12.970 and $12.035 billion as of March 31, 2012 and December 31, 2011, 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.

NOTE 9. LEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business activities.
Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious defense and will deny, liability in all litigation pending against us, including the matters described below, and we intend to defend vigorously each case. We have accrued for legal claims when, and to the extent that, amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.
For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible loss or range of loss.
Judicial Proceedings
We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with these matters, would have a material adverse effect on our financial condition, results of operations or liquidity.
UPS and our subsidiary Mail Boxes Etc., Inc. are defendants in two lawsuits about the rebranding or purchase of The UPS Store franchises-Morgate and Samica. We prevailed at the trial court level in both cases, and plaintiffs appealed.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Morgate was filed in March 2003. The plaintiffs are 125 individual franchisees who did not rebrand and a certified class of all franchisees who did rebrand to The UPS Store. A bellwether trial for three individual plaintiffs was set for early 2010, but the trial court entered judgment against one of the three plaintiffs prior to trial, which was affirmed in January 2012.  Plaintiffs have filed a petition for review with the California Supreme Court. The trial court also granted our motion for summary judgment against the members of the certified class, which was reversed in January 2012.  
Samica was filed in March 2006. The plaintiffs are 250 individual The UPS Store franchisees who either elected to rebrand or purchased new The UPS Store franchises. Summary judgment was granted in UPS's favor and affirmed on appeal in December 2011. Plaintiffs have indicated that they intend to file a petition for certiorari with the United States Supreme Court.
There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) three separate components of these cases were being appealed to federal and state courts following decisions favorable to UPS; and (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present if any aspects of these cases proceed forward. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. The Antitrust Division of the U.S. Department of Justice (“DOJ”) has informed us that it has opened a civil investigation of our policies and practices for dealing with third party negotiators. We are cooperating with this investigation. We deny any liability with respect to these matters and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) we believe that we have a number of meritorious defenses; (2) discovery is ongoing; and (3) the DOJ investigation is ongoing. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In Canada, three purported class-action cases were filed against us in British Columbia (2006); Ontario (2007) and Québec (2006). The cases each allege inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. The British Columbia class-action was declared inappropriate for certification and dismissed by the trial judge. That decision was upheld by the British Columbia Court of Appeal in March 2010, which ended the case in our favor. The Ontario class action was certified in September 2011. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court. The complaint under the Criminal Code was dismissed. No appeal is being taken from that decision. The allegations of inadequate disclosure were granted and we are appealing that decision. The request to certify the case in Québec was heard in February 2012. We have denied all liability and are vigorously defending the two outstanding cases. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters, including (1) 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 these matters. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operation or liquidity.
Other Matters
In May and December 2007 and August 2008 we received and responded to grand jury subpoenas from the DOJ in the Northern District of California in connection with an investigation by the Drug Enforcement Administration. We also have responded to informal requests for information in connection with this investigation, which relates to transportation of packages on behalf of on-line pharmacies that may have operated illegally. We are cooperating with this investigation and intend to continue to vigorously defend ourselves. 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 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.

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We received a grand jury subpoena from the Antitrust Division of the DOJ regarding the DOJ's investigation into certain pricing practices in the freight forwarding industry in December 2007.
In August 2010, competition authorities in Brazil opened an administrative proceeding to investigate alleged anticompetitive behavior in the freight forwarding industry. Approximately 45 freight forwarding companies and individuals are named in the proceeding, including UPS, UPS SCS Transportes (Brasil) S.A., and a former employee in Brazil. UPS will have an opportunity to respond to these allegations.
We are cooperating with each of these investigations, and intend to continue to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including (1) we are vigorously defending each matter and believe that we have a number of meritorious legal defenses; (2) there are unresolved questions of law that could be of importance to the ultimate resolutions of these matters, including the calculation of any potential fine; and (3) there is uncertainty about the time period that is the subject of the investigations. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
On March 28, 2012, the European Commission ("Commission") announced a decision finding that 14 freight forwarders, including UPS, had infringed EU competition law. The Commission assessed a fine on UPS in the amount of €10 million. We are currently evaluating the decision and a potential appeal.
In January 2008, a class action complaint was filed in the United States District Court for the Eastern District of New York alleging price-fixing activities relating to the provision of freight forwarding services. UPS was not named in this case. In July 2009, the plaintiffs filed a first amended complaint naming numerous global freight forwarders as defendants. UPS and UPS Supply Chain Solutions are among the 60 defendants named in the amended complaint. We 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 these matters including: (1) the magistrate judge recommended that the district court grant our motion to dismiss, with leave to amend, and the scope of the plaintiffs' claims is therefore unclear; (2) the scope and size of the proposed class is ill-defined; (3) there are significant legal questions about the adequacy and standing of the putative class representatives; and (4) we believe that we have a number of meritorious legal defenses. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
We are a defendant in various other lawsuits that arose in the normal course of business. We do not believe that the eventual resolution of these other lawsuits (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material adverse effect on our financial condition, results of operations or liquidity.
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 primarily by their respective voting rights. Class A shares 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, 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 under the symbol “UPS.” Class A and B shares both have a $0.01 par value, and as of March 31, 2012, 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, with a $0.01 par value, authorized to be issued; as of March 31, 2012, no preferred shares had been issued.
 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



The following is a rollforward of our common stock, additional paid-in capital and retained earnings accounts for the three months ended March 31, 2012 and 2011 (in millions, except per share amounts):
 
2012
 
2011
 
Shares
 
Dollars
 
Shares
 
Dollars
Class A Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
240

 
$
3

 
258

 
$
3

Common stock purchases
(2
)
 

 
(2
)
 

Stock award plans
2

 

 
1

 

Common stock issuances
1

 

 
1

 

Conversions of class A to class B common stock
(5
)
 

 
(6
)
 

Class A shares issued at end of period
236

 
$
3

 
252

 
$
3

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
725

 
$
7

 
735

 
$
7

Common stock purchases
(5
)
 

 
(5
)
 

Conversions of class A to class B common stock
5

 

 
6

 

Class B shares issued at end of period
725

 
$
7

 
736

 
$
7

Additional Paid-In Capital
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$

 
 
 
$

Stock award plans
 
 
210

 
 
 
143

Common stock purchases
 
 
(428
)
 
 
 
(176
)
Common stock issuances
 
 
63

 
 
 
58

Option premiums received (paid)
 
 
155

 
 
 
(25
)
Balance at end of period
 
 
$

 
 
 
$

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
10,128

 
 
 
$
10,604

Net income
 
 
970

 
 
 
915

Dividends ($0.57 and $0.52 per share)
 
 
(551
)
 
 
 
(518
)
Common stock purchases
 
 
(114
)
 
 
 
(325
)
Balance at end of period
 
 
$
10,433

 
 
 
$
10,676

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 first quarter of 2012, we entered into an accelerated share repurchase program, which allowed us to repurchase $350 million of shares (4.6 million shares). The program was completed in March 2012.
In total, we repurchased a total of 7.1 million shares of class A and class B common stock for $542 million during the three months ended March 31, 2012, and 6.8 million shares for $501 million for the three months ended March 31, 2011. On May 3, 2012, the Board of Directors approved a new share repurchase authorization of $5.0 billion, which replaces an authorization previously announced in 2008. The new share repurchase authorization has no expiration date.
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. During the three months ended March 31, 2012, we did not pay premiums on options for the purchase of shares. However, we received $155 million in premiums for options that were entered into during 2011 that expired during this quarter. During the three months ended March 31, 2011, we paid $25 million in premiums on options for the purchase of shares, and had not received any premiums in excess of our initial investment.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Accumulated Other Comprehensive Income (Loss)
We experience activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in AOCI for the three months ended March 31, 2012 and 2011 is as follows (in millions):
 
2012
 
2011
Foreign currency translation gain (loss):
 
 
 
Balance at beginning of period
$
(160
)
 
$
(68
)
Aggregate adjustment for the period (net of tax effect of $(11) and $(9))
91

 
125

Balance at end of period
(69
)
 
57

Unrealized gain (loss) on marketable securities, net of tax:
 
 
 
Balance at beginning of period
6

 
12

Current period changes in fair value (net of tax effect of $0, and $2)
1

 
4

Reclassification to earnings (net of tax effect of $(1) and $(4))
(2
)
 
(8
)
Balance at end of period
5

 
8

Unrealized gain (loss) on cash flow hedges, net of tax:
 
 
 
Balance at beginning of period
(204
)
 
(239
)
Current period changes in fair value (net of tax effect of $(25) and $(32))
(42
)
 
(53
)
Reclassification to earnings (net of tax effect of $0 and $(6))
1

 
(10
)
Balance at end of period
(245
)
 
(302
)
Unrecognized pension and postretirement benefit costs, net of tax:
 
 
 
Balance at beginning of period
(2,745
)
 
(2,340
)
Reclassification to earnings (net of tax effect of $16 and $29)
28

 
47

Adjustment for Early Retirement Reinsurance Program (net of tax effect of $4 and $4)
6

 
8

Balance at end of period
(2,711
)
 
(2,285
)
Accumulated other comprehensive income (loss) at end of period
$
(3,020
)
 
$
(2,522
)
Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the three months ended March 31, 2012 and 2011 is as follows (in millions):
 
2012
 
2011
Shares
 
Dollars
 
Shares
 
Dollars
Deferred Compensation Obligations:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
88

 
 
 
$
103

Reinvested dividends
 
 
1

 
 
 
1

Benefit payments
 
 
(13
)
 
 
 
(19
)
Balance at end of period
 
 
$
76

 
 
 
$
85

Treasury Stock:
 
 
 
 
 
 
 
Balance at beginning of period
(2
)
 
$
(88
)
 
(2
)
 
$
(103
)
Reinvested dividends

 
(1
)
 

 
(1
)
Benefit payments

 
13

 

 
19

Balance at end of period
(2
)
 
$
(76
)
 
(2
)
 
$
(85
)

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. The noncontrolling interests on our consolidated balance sheets primarily relate to a joint venture in Dubai that operates in the Middle East, Turkey and portions of the Central Asia region. The activity related to our noncontrolling interests is presented below for the three months ended March 31, 2012 and 2011 (in millions):
 
2012
 
2011
Noncontrolling Interests:
 
 
 
Balance at beginning of period
$
73

 
$
68

Acquired noncontrolling interests
3

 
2

Dividends attributable to noncontrolling interests

 

Net income attributable to noncontrolling interests

 

Balance at end of period
$
76

 
$
70

NOTE 11. SEGMENT 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 operations 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 distribution outside the United States. Our International Package reporting segment includes the operations of our Europe, Asia and Americas operating segments.
Supply Chain & Freight
Supply Chain & Freight includes our forwarding operations, logistics operations, UPS Freight and other aggregated business units. Our forwarding and logistics business provides services in more than 195 countries and territories worldwide, and includes supply chain design and management, freight distribution, customs brokerage, mail and consulting services. UPS Freight offers a variety of less-than-truckload (“LTL”) and truckload (“TL”) services to customers in North America. Other aggregated business units within this segment include Mail Boxes Etc., Inc. (the franchisor of Mail Boxes Etc. and 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, interest expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011, with certain expenses allocated between the segments using activity-based costing methods. Unallocated assets are comprised primarily of cash, marketable securities and investments in limited partnerships.

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



Segment information for the three months ended March 31, 2012 and 2011 is as follows (in millions):
 
Three Months Ended
March 31,
 
2012
 
2011
Revenue:
 
 
 
U.S. Domestic Package
$
8,004

 
$
7,543

International Package
2,966

 
2,900

Supply Chain & Freight
2,166

 
2,139

Consolidated
$
13,136

 
$
12,582

Operating Profit:
 
 
 
U.S. Domestic Package
$
995

 
$
880

International Package
408

 
453

Supply Chain & Freight
166

 
139

Consolidated
$
1,569

 
$
1,472


 
NOTE 12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2012 and 2011 (in millions, except per share amounts):
 
Three Months Ended
March 31,
2012
 
2011
Numerator:
 
 
 
Net income attributable to common shareowners
$
970

 
$
915

Denominator:
 
 
 
Weighted average shares
959

 
988

Deferred compensation obligations
2

 
2

Vested portion of restricted shares
1

 
2

Denominator for basic earnings per share
962

 
992

Effect of dilutive securities:
 
 
 
Restricted performance units
4

 
3

Restricted stock units
5

 
6

Stock option plans
1

 
1

Denominator for diluted earnings per share
972

 
1,002

Basic earnings per share
$
1.01

 
$
0.92

Diluted earnings per share
$
1.00

 
$
0.91

Diluted earnings per share for the three months ended March 31, 2012 and 2011 exclude the effect of 2.6 and 5.0 million shares of common stock, respectively, that may be issued upon the exercise of employee stock options, because such effect would be antidilutive.

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


NOTE 13. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
We are exposed to market risk, primarily related to foreign exchange rates, commodity prices and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, we enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates, commodity prices and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value for those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Credit Risk Management
The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines, and monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.
 We have agreements with substantially all of our active counterparties containing early termination rights and/or bilateral collateral provisions whereby cash is required whenever the net fair value of derivatives associated with those counterparties exceed specific thresholds. Events such as a credit rating downgrade (depending on the ultimate rating level) would typically require an increase in the amount of collateral required of the counterparty and/or allow us to take additional protective measures such as early termination of trades. At March 31, 2012, we held cash collateral of $56 million under these agreements.
In connection with the agreements described above, we could also be required to provide additional collateral or terminate transactions with certain counterparties in the event of a downgrade of our debt rating. The amount of additional collateral is a fixed incremental amount. At March 31, 2012, the aggregate fair value of the instruments covered by these contractual features that were in a net liability position was $11 million. The Company has never been required to post any collateral as a result of these contractual features.
We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
Accounting Policy for Derivative Instruments
We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.
A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statements of consolidated income during the current period.
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.

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



A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within other 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. We periodically enter into option contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We have designated and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.
Foreign Currency Risk Management
To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, the British Pound Sterling and the Canadian Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with option contracts. We have designated and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur.
We also hedge portions of our anticipated cash settlements of intercompany transactions subject to foreign currency remeasurement using foreign currency forward contracts. We have designated and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions, and therefore the resulting gains and losses from these hedges are recognized as a component of other operating expense when the underlying transactions are subject to currency remeasurement.
We have foreign currency denominated debt obligations and capital lease obligations associated with our aircraft. For some of these debt obligations and leases, we hedge the foreign currency denominated contractual payments using cross-currency interest rate swaps, which effectively convert the foreign currency denominated contractual payments into U.S. Dollar denominated payments. We have designated and account for these swaps as cash flow hedges of the forecasted contractual payments and, therefore, the resulting gains and losses from these hedges are recognized in the statements of consolidated income when the currency remeasurement gains and losses on the underlying debt obligations and leases are incurred.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments, including interest rate swaps and cross-currency 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 date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within our capital structure.
We have designated and account for the majority of our interest rate swaps that convert fixed rate interest payments into floating rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We have designated and account for interest rate swaps that convert floating rate interest payments into fixed rate interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from fair value adjustments to the interest rate swaps are recorded to AOCI.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings, using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.

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



Outstanding Positions
As of March 31, 2012 and December 31, 2011, the notional amounts of our outstanding derivative positions were as follows (in millions):
 
March 31, 2012
 
December 31, 2011
Currency hedges:
 
 
 
 
 
Euro
2,337

 
1,685

British Pound Sterling
£
876

 
£
870

Canadian Dollar
C$
474

 
C$
318

 
 
 
 
 
 
Interest rate hedges:
 
 
 
 
 
Fixed to Floating Interest Rate Swaps
$
6,424

 
$
6,424

Floating to Fixed Interest Rate Swaps
$
789

 
$
791

Interest Rate Basis Swaps
$
2,500

 
$

Forward Starting Swaps
$
500

 
$

As of March 31, 2012, we had no outstanding commodity hedge positions. The maximum term over which we are hedging exposures to the variability of cash flow is 39 years.
Balance Sheet Recognition and Fair Value Measurements
The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives (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.
Asset Derivatives
Balance Sheet Location
 
Fair Value
Hierarchy Level
 
March 31, 2012
 
December 31, 2011
Derivatives designated as hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
Level 2
 
$
85

 
$
164

Foreign exchange contracts
Other non-current assets
 
Level 2
 
23

 

Interest rate contracts
Other non-current assets
 
Level 2
 
365

 
401

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
Other current assets
 
Level 2
 

 
2

Interest rate contracts
Other non-current assets
 
Level 2
 
70

 
82

Total Asset Derivatives
 
 
 
 
$
543

 
$
649

 
 
 
 
 
 
 
 
Liability Derivatives
Balance Sheet Location
 
Fair Value
Hierarchy Level
 
March 31, 2012

 
December 31, 2011

Derivatives designated as hedges:
 
 
 
 
 
 
 
Interest rate contracts
Other current liabilities
 
Level 2
 
$
9

 
$

Foreign exchange contracts
Other non-current liabilities
 
Level 2
 
143

 
185

Interest rate contracts
Other non-current liabilities
 
Level 2
 
12

 
13

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Interest rate contracts
Other non-current liabilities
 
Level 2
 
2

 
10

Total Liability Derivatives
 
 
 
 
$
166

 
$
208

 

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



Our foreign currency, interest rate and energy 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.
Income Statement Recognition
The following table indicates the amount and location in the statements of consolidated income for the three months ended March 31, 2012 and 2011 in which derivative gains and losses, as well as the related amounts reclassified from AOCI, have been recognized for those derivatives designated as cash flow hedges (in millions):
 
2012
 
2011
 
 
 
2012
 
2011
Derivative Instruments in Cash Flow
Hedging Relationships
Amount of
Gain (Loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
 
Amount of
Gain (Loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
 
Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective
Portion)
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective
Portion)
Interest rate contracts
$
(8
)
 
$

 
Interest Expense
 
$
(5
)
 
$
(5
)
Foreign exchange contracts
41

 
18

 
Interest Expense
 
16

 
34

Foreign exchange contracts
(5
)
 

 
Other Operating
Expense
 

 

Foreign exchange contracts
(95
)
 
(103
)
 
Revenue
 
(12
)
 
(13
)
Total
$
(67
)
 
$
(85
)
 
 
 
$
(1
)
 
$
16

As of March 31, 2012, $5 million of pre-tax losses related to cash flow hedges that are currently deferred in AOCI are expected to be reclassified to income over the 12 month period ended March 31, 2013. 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 amount of ineffectiveness recognized in income on derivative instruments designated in cash flow hedging relationships was immaterial for the three months ended March 31, 2012 and 2011.
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 three months ended March 31, 2012 and 2011 (in millions):
 
 
 
2012
 
2011
 
 
 
 
 
2012
 
2011
Derivative Instruments in Fair Value
Hedging Relationships
Location of
Gain (Loss)
Recognized in
Income
 
Amount of
Gain (Loss)
Recognized
in Income
 
Amount of
Gain (Loss)
Recognized
in Income
 
Hedged Items in
Fair Value
Hedging
Relationships
 
Location of 
Gain (Loss)
Recognized In
 Income
 
Amount of
Gain (Loss)
Recognized
in Income
 
Amount of
Gain (Loss)
Recognized
in Income
Interest rate contracts
Interest
Expense
 
$
(36
)
 
$
(27
)
 
Fixed-Rate
Debt and
Capital Leases
 
Interest
Expense
 
$
36

 
$
27

Additionally, we maintain some interest rate swap and foreign exchange forward contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic hedge of a portfolio of interest bearing receivables. These foreign exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement risks for certain assets and liabilities in our consolidated balance sheets.
We also periodically terminate interest rate swaps and foreign currency options by entering into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original swap and foreign currency contracts. These transactions provide an economic offset that effectively eliminates the effects of changes in market valuation.
We have entered into several interest rate basis swaps, which effectively convert cash flows based on variable LIBOR-based interest rates to cash flows based on the prevailing federal funds interest rate. These swaps are not designated as hedges, and all amounts related to fair value changes and settlements are recorded to interest expense in the statements of consolidated income.

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



The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these interest rate swaps and foreign currency forward contracts not designated as hedges (in millions):
 
 
 
2012
 
2011
Derivative Instruments in Fair Value
Hedging Relationships
Location of Gain (Loss)
Recognized in Income
 
Amount of
Gain (Loss)
Recognized
in Income
 
Amount of
Gain (Loss)
Recognized
in Income
Interest Rate Swap Contract
Interest Expense
 
$
(3
)
 
$

Foreign Exchange Contracts
Other Operating Expenses
 
$
(8
)
 
$
(10
)
NOTE 14. INCOME TAXES
Our effective tax rate remained at 34.5% in the first quarter of 2012, the same rate as in the first quarter of 2011.
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 2005. During the fourth quarter of 2010, we received a refund of $139 million as a result of the resolution of tax years 2003 through 2004 with the IRS Appeals Office. We have filed all required U.S. state and local returns reporting the result of the resolution of the U.S. federal income tax audit of the tax years 2003 and 2004. A limited number of U.S. state and local matters are the subject of ongoing audits, administrative appeals or litigation.
A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. Items that may cause changes to unrecognized tax benefits include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statute of limitations or other unforeseen circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.
In June 2011, we received IRS reports covering income taxes and excise taxes for tax years 2005 through 2007 and 2003 through 2007, respectively. The reports propose assessments related to amounts paid for software, research credit expenditures and deductibility of financing and post-acquisition integration costs as well as taxes on amounts paid for air transportation. Receipt of the reports represents only the conclusion of the examination process. We disagree with the proposed assessments related to these matters. Therefore, we have filed protests and protective tax refund claims. During the third quarter of 2011, the IRS responded to our protests and forwarded the cases to IRS Appeals. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) we are vigorously defending these matters and believe that we have a number of meritorious legal defenses; (2) we have filed refund claims in excess of the proposed assessments; (3) there are unresolved questions of law and fact that could be of importance to the ultimate resolutions of these matters, including the calculation of any additional taxes and/or tax refunds; and (4) these matters are at the initial stage of a multi-level administrative appeals process that may ultimately be resolved by litigation. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

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


NOTE 15. BUSINESS ACQUISITIONS
In February 2012, we acquired Kiala S.A. (“Kiala”), a Belgium-based developer of a platform that enables e-commerce retailers to offer their shoppers the option of having goods delivered to a convenient retail location. Kiala currently operates in Belgium, France, Luxembourg, the Netherlands and Spain. The acquisition will broaden our service portfolio for business-to-consumer deliveries. Kiala is not material to our consolidated financial position or results of operations.
On March 19, 2012 we announced an agreement to purchase TNT Express N.V. ("TNT Express") for €9.50 per ordinary share. The offer values the issued and outstanding share capital of TNT Express at €5.16 billion ($6.77 billion). We anticipate the acquisition will close during the third quarter of 2012 and intend to finance the offer by utilizing a combination of approximately $5.0 billion of available cash and approximately $1.8 billion in new debt. The transaction will create a global leader in the logistics industry and an enhanced, integrated global network. The combination will expand our express capabilities and logistics solutions in Europe, while deepening our existing position in fast-growing regions such as Asia-Pacific and Latin America.




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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
The U.S. economic expansion continued at a moderate pace in the first quarter of 2012, which provided for growth in the overall U.S. small package delivery market. Additionally, continued growth in industrial production and retail sales, particularly online retail sales, have expanded the small package market in the U.S. These economic trends provided for a solid increase in our U.S. Domestic Package volume in the first quarter of 2012, and our products most aligned with business-to-consumer shipments showed the strongest growth.
Outside of the U.S., economic growth has slowed down due to volatility in world markets, particularly in Europe, although stronger growth has continued within Asia. This slower economic growth has created an environment where customers are more likely to trade-down from premium express products to standard delivery products. Additionally, the uneven nature of economic growth worldwide has led to shifting trade patterns in certain regions around the world. These circumstances have led us to adjust our air capacity and cost structure in our transportation network to the prevailing volume mix levels. Our broad portfolio of product offerings and the flexibilities inherent in our transportation network have helped us adapt to these changing trends, leading to solid overall performance for our international package business.
In 2012, we have continued to undertake initiatives to improve yield management, increase operational efficiency and contain costs across all segments. This has directly helped improve the operating margin and profit in our U.S. Domestic Package and Supply Chain & Freight segments. Continued deployment of technology improvements should lead to further gains in our operational efficiency, flexibility, and reliability, thus restraining costs and improving margins. In our International Package segment, we have continued to invest to support our growth initiatives. Throughout the world, we have adjusted our air network and utilized newly constructed or expanded operating facilities to improve time-in-transit for shipments in each region. We have also continued to optimize our aircraft network, to leverage the new route authority we have gained over the last several years and to take full advantage of faster growing trade lanes. Additionally, in the first quarter of 2012, we acquired Kiala S.A., which will expand our service offerings for business-to-consumer deliveries in Europe.
Volatile fuel prices have continued to impact both revenue and expense in all three of our segments. In the first quarter of 2012, rising fuel prices led to higher fuel surcharge rates and increased fuel and purchased transportation costs.
Our consolidated results are presented in the table below:
 
Three Months Ended
March 31,
 
Change
 
 
2012
 
2011
 
%
 
Revenue (in millions)
$
13,136

 
$
12,582

 
4.4
%
 
Operating Expenses (in millions)
11,567

 
11,110

 
4.1
%
 
Operating Profit (in millions)
$
1,569

 
$
1,472

 
6.6
%
 
Operating Margin
11.9
%
 
11.7
%
 
 
 
Average Daily Package Volume (in thousands)
15,592

 
14,957

 
4.3
%
 
Average Revenue Per Piece
$
10.86

 
$
10.76

 
0.9
%
 
Net Income (in millions)
$
970

 
$
915

 
6.0
%
 
Basic Earnings Per Share
$
1.01

 
$
0.92

 
9.8
%
 
Diluted Earnings Per Share
$
1.00

 
$
0.91

 
9.9
%
 


Results of Operations—Segment Review
The results and discussions that follow are reflective of how our executive management monitors the performance of our reporting segments. From time to time, we supplement the reporting of our financial information determined under generally accepted accounting principles (“GAAP”) with certain non-GAAP financial measures, including operating profit, operating margin, pre-tax income, effective tax rate, net income and earnings per share adjusted for the non-comparable items. We believe that these adjusted measures provide meaningful information to assist investors and analysts in understanding our financial results and assessing our prospects for future performance. We believe these adjusted financial measures are important indicators of our 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.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS



Certain operating expenses are allocated between our reporting segments based on 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. There were no significant changes in our expense allocation methodology during 2012 or 2011.
U.S. Domestic Package Operations
 
Three Months Ended
March 31,
 
Change
 
2012
 
2011
 
%
 
Average Daily Package Volume (in thousands):
 
 
 
 
 
 
Next Day Air
1,213

 
1,155

 
5.0
 %
 
Deferred
985

 
896

 
9.9
 %
 
Ground
11,042

 
10,618

 
4.0
 %
 
Total Avg. Daily Package Volume
13,240

 
12,669

 
4.5
 %
 
Average Revenue Per Piece:
 
 
 
 
 
 
Next Day Air
$
20.06

 
$
20.22

 
(0.8
)%
 
Deferred
13.01

 
13.13

 
(0.9
)%
 
Ground
7.96

 
7.79

 
2.2
 %
 
Total Avg. Revenue Per Piece
$
9.45

 
$
9.30

 
1.6
 %
 
Operating Days in Period
64

 
64

 
 
 
Revenue (in millions):
 
 
 
 
 
 
Next Day Air
$
1,557

 
$
1,495

 
4.1
 %
 
Deferred
820

 
753

 
8.9
 %
 
Ground
5,627

 
5,295

 
6.3
 %
 
Total Revenue
$
8,004

 
$
7,543

 
6.1
 %
 
Operating Expenses (in millions)
$
7,009

 
$
6,663

 
5.2
 %
 
Operating Profit (in millions)
$
995

 
$
880

 
13.1
 %
 
Operating Margin
12.4
%
 
11.7
%
 
 
 
Revenue
The change in overall revenue was impacted by the following factors for the first quarter of 2012 compared with the corresponding period of 2011:
 
Volume
 
Rates /
Product Mix
 
Fuel
Surcharge
 
Total
Revenue
Change
Net Revenue Change Drivers:
 
 
 
 
 
 
 
First quarter 2012 vs. 2011
4.5
%
 
(0.3
)%
 
1.9
%
 
6.1
%
Volume
Our overall volume increased in the first quarter of 2012 compared with the same period in 2011, largely due to improved U.S. economic conditions, continued solid growth in retail e-commerce, and strong customer demand for our lightweight products. Business-to-consumer shipments, which represent approximately 40% of total U.S. Domestic Package volume, experienced stronger growth than commercial volume.
Among our air products, Next Day Air package volume increased 5.6% with particular growth in our Next Day Air Saver product, while volume for our deferred air products increased 9.9%. This strong growth was driven by business-to-consumer shipments from e-commerce retailers. Next Day Air letter volume increased slightly, as strength in mortgage refinancing drove gains in our Next Day Air Saver letter product.

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The increase in ground volume was driven by our lightweight service offerings, including SurePost, which target low-cost, non-urgent residential deliveries. These lightweight products experienced volume growth over 30%, and accounted for approximately half of the total increase in ground shipments in the first quarter. Growth continues to be driven by business-to-consumer shipping activity from e-commerce retailers.
Rates and Product Mix
Overall revenue per piece increased in the first quarter of 2012 due to a combination of base price increases and fuel surcharge rate changes, which are discussed further below. The strong volume growth in Next Day Air Saver and our lightweight products negatively impacted overall yield growth, as these products accounted for a greater portion of our overall volume in the first quarter of 2012 than in 2011.
Revenue per piece for our ground and air products was also positively impacted by an increase in base rates that took effect on January 2, 2012. We increased the base rates 6.9% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day Select, and 5.9% on UPS Ground, while reducing our fuel surcharge indexes (discussed further below). Other pricing changes included an increase in the residential surcharge, and an increase in the delivery area surcharge on certain residential and commercial services. These rate changes are customary and occur on an annual basis.
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 for domestic air and ground products was as follows:
 
Three Months Ended
March 31,
 
Change
 
 
2012

2011
 
% Point
 
Next Day Air / Deferred
13.0
%
 
10.1
%
 
2.9
%
 
Ground
8.0
%
 
6.0
%
 
2.0
%
 
On January 2, 2012, in connection with our base rate increase, we modified the fuel surcharge on air and ground services by reducing the index used to determine the fuel surcharge by 2% and 1%, respectively. The 2012 increase in the air and ground fuel surcharges was due to the significant increase in jet and diesel fuel prices, but partially offset by the reduction in the index on the air and ground surcharges. Total domestic fuel surcharge revenue increased by $143 million in the first quarter of 2012, primarily due to the increase in volume and the higher fuel surcharge rates discussed above.
Operating Expenses
Overall operating expenses for the segment increased $346 million for the first quarter of 2012 compared with the same period of 2011, while the total cost per piece increased 0.6%. This increase was primarily due to an increase in pick-up and delivery costs of $198 million, primarily as a result of higher fuel prices and a 2.4% union contractual driver wage increase. Additionally, the cost of operating our domestic integrated air and ground network increased $138 million for the first quarter due largely to higher fuel costs, as well as higher rates charged by outside transportation carriers, primarily railroads.
Cost increases have been mitigated as we adjust our air and ground networks to better match higher volume levels and utilize technology to increase package sorting efficiency. Improved delivery densities, particularly for our residential products, have also contained increases in cost. These network efficiency improvements allowed us to process increased volume at a faster rate than the increase in direct labor hours (up 0.9%), aircraft block hours (up 0.3%) and miles driven (up 1.7%) in the first quarter of 2012 compared with the same period of 2011.
Operating Profit and Margin
The increase in revenue per piece in excess of the growth in cost per piece resulted in strong operating leverage, leading to a 70 basis point increase in the operating margin during the first quarter of 2012 compared with the same period of 2011. This margin improvement, combined with volume growth, resulted in a solid operating profit increase.
 

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RESULTS OF OPERATIONS


International Package Operations
 
Three Months Ended
March 31,
 
Change
 
 
2012
 
2011
 
%
 
Average Daily Package Volume (in thousands):
 
 
 
 
 
 
Domestic
1,409

 
1,393

 
1.1
 %
 
Export
943

 
895

 
5.4
 %
 
Total Avg. Daily Package Volume
2,352

 
2,288

 
2.8
 %
 
Average Revenue Per Piece:
 
 
 
 
 
 
Domestic
$
7.10

 
$
7.06

 
0.6
 %
 
Export
36.37

 
37.20

 
(2.2
)%
 
Total Avg. Revenue Per Piece
$
18.83

 
$
18.85

 
(0.1
)%
 
Operating Days in Period
64

 
64

 
 
 
Revenue (in millions):
 
 
 
 
 
 
Domestic
$
640

 
$
629

 
1.7
 %
 
Export
2,195

 
2,131

 
3.0
 %
 
Cargo
131

 
140

 
(6.4
)%
 
Total Revenue
$
2,966

 
$
2,900

 
2.3
 %
 
Operating Expenses (in millions)
$
2,558

 
$
2,447

 
4.5
 %
 
Operating Profit (in millions)
$
408

 
$
453

 
(9.9
)%
 
Operating Margin
13.8
%
 
15.6
%
 
 
 
Currency Translation Benefit / (Cost)—(in millions)*:
 
 
 
 
$
 
Revenue
 
 
 
 
$
(56
)
 
Operating Profit
 
 
 
 
$
(17
)
 
___________________
*
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 first quarter of 2012 compared with the corresponding period of 2011:
 
Volume
 
Rates /
Product Mix
 
Fuel
Surcharge
 
Currency
 
Total
Revenue
Change
Net Revenue Change Drivers:
 
 
 
 
 
 
 
 
 
First quarter 2012 vs. 2011
2.8
%
 
(0.7
)%
 
2.1
%
 
(1.9
)%
 
2.3
%
Volume
Export volume increased in the first quarter of 2012 compared to the same period in 2011, with our standard products growing at a faster rate than our premium express products. Our transborder products experienced solid growth, particularly in key countries within Europe. Our intra-Asia volume also increased, and was impacted by continued economic growth and increased trade among countries within Asia. Inter-regional volume increased at a slower pace, and was impacted by relatively lower volume growth in the key Asia-to-Americas trade lane. Additionally, inter-regional volume growth into Europe declined, largely due to the economic weakness within the European Union in the first quarter of 2012.
Domestic volume increases were driven by growth in key markets, including Canada, the U.K. and Poland, but somewhat offset by lower volume in Germany as a result of yield management initiatives.

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RESULTS OF OPERATIONS



Rates and Product Mix
Total average revenue per piece increased 2.0% for the first quarter on a currency-adjusted basis. Currency-adjusted export revenue per piece decreased 0.7%, as the shift in product mix from our premium express products to our standard products more than offset the increases in base rates and fuel surcharge rates. Additionally, currency-adjusted export revenue per piece was adversely impacted by a shortening of average trade lanes, as we experienced greater volume growth among our Transborder and Trade Direct products relative to our inter-regional volume.
Currency-adjusted domestic revenue per piece increased 4.9% for first quarter, largely due to base rate increases and higher fuel surcharge rates.
On January 2, 2012, we increased the base rates 6.9% for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service), while reducing fuel surcharge indexes. Rate changes for shipments originating outside the U.S. are made throughout the year and vary by geographic market.
Fuel Surcharges
On January 2, 2012, in connection with our base rate increases, we modified the fuel surcharge on certain U.S.-related international air services by reducing the index used to determine the fuel surcharge by 2%. The fuel surcharges for air products originating outside the United States are indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-type jet fuel, while the fuel surcharges for ground products originating outside the United States are indexed to fuel prices in the international region or country where the shipment takes place. Total international fuel surcharge revenue increased by $60 million for the first quarter of 2012, due to higher fuel surcharge rates caused by increased fuel prices as well as an increase in international air volume.
Operating Expenses
Overall operating expenses for the segment increased $111 million for the first quarter of 2012 compared with the same period in 2011. The impact of foreign currency exchange rate changes resulted in a favorable impact on operating expense comparisons between the first quarter of 2012 and the same period of 2011 of $39 million.
Excluding the impact of currency exchange rate changes, the total cost per piece for the segment increased 3.3% for the first quarter. The largest component of this increase (excluding the impact of currency) relates to the cost of operating our international integrated air and ground network, which increased $54 million for the first quarter due largely to higher fuel costs and increased block hours. Pick-up and delivery costs increased $21 million for the first quarter, primarily as a result of higher fuel prices and increased package volume.
Operating Profit and Margin
The operating margin declined 180 basis points in the first quarter of 2012 compared with the same period of 2011, as revenue per piece was relatively flat while cost per piece increased. This decline in operating margin was primarily due to an unfavorable shift in product mix from our premium to our standard products, the impact of fuel prices and currency exchange rate movements. Fluctuations in foreign currency exchange rates resulted in an adverse impact on operating profit comparisons between the first quarter of 2012 and the same period of 2011 of $17 million. Additionally, fuel prices negatively impacted the operating profit comparison between the first quarter of 2012 and 2011, as fuel expense increased at a faster pace than fuel surcharge revenue. The adverse operating profit impacts of fuel, currency, and product mix changes were somewhat offset by the overall volume increase.

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RESULTS OF OPERATIONS


Supply Chain & Freight Operations
 
Three Months Ended
March 31,
 
Change
 
 
2012

2011
 
%
 
Freight LTL Statistics:
 
 
 
 
 
 
Revenue (in millions)
$
558

 
$
545

 
2.4
 %
 
Revenue Per Hundredweight
$
21.47

 
$
20.54

 
4.5
 %
 
Shipments (in thousands)
2,468

 
2,526

 
(2.3
)%
 
Shipments Per Day (in thousands)
38.6

 
39.5

 
(2.3
)%
 
Gross Weight Hauled (in millions of lbs)
2,597

 
2,656

 
(2.2
)%
 
Weight Per Shipment (in lbs)
1,052

 
1,051

 
0.1
 %
 
Operating Days in Period
64

 
64

 
 
 
Revenue (in millions):
 
 
 
 
 
 
Forwarding and Logistics
$
1,424

 
$
1,429

 
(0.3
)%
 
Freight
618

 
604

 
2.3
 %
 
Other
124

 
106

 
17.0
 %
 
Total Revenue
$
2,166

 
$
2,139

 
1.3
 %
 
Operating Expenses (in millions)
$
2,000

 
$
2,000

 
 %
 
Operating Profit (in millions)
$
166

 
$
139

 
19.4
 %
 
Operating Margin
7.7
%
 
6.5
%
 
 
 
Currency Translation Benefit / (Cost) – (in millions)*:
 
 
 
 
 
Revenue
 
 
 
 
$
(10
)
 
Operating Profit
 
 
 
 
$
(1
)
 
___________________
*
Net of currency hedging; amount represents the change compared to the prior year.
Revenue
Forwarding and Logistics revenue decreased $5 million in the first quarter of 2012 compared with the corresponding period in 2011. In our logistics products, revenue increased in the first quarter of 2012 as we experienced solid growth in our mail services and healthcare solutions. Forwarding revenue decreased primarily due to volume and tonnage declines in our air forwarding business; however, this was partially offset by improved rates and fuel and security surcharges. The tonnage decrease in our air forwarding business was largely impacted by an overall decline in demand in the air forwarding market in the first quarter of 2012 compared with 2011.
Freight revenue increased $14 million in the first quarter, primarily due to a base rate increase and increased fuel surcharge rates. The decline in average daily LTL shipments was impacted by increased competitiveness in the LTL market, while LTL revenue per hundredweight increased mainly due to our focus on yield management and profitable revenue growth. The increase in LTL revenue per hundredweight was impacted by a base rate increase that took effect during the latter half of 2011, as well as higher fuel surcharge rates, as total fuel surcharge revenue increased $11 million for the first quarter driven by higher diesel fuel prices. An increase in base prices took effect on August 1, 2011, as our freight unit increased minimum charge, LTL and TL rates an average of 6.9%, covering non-contractual shipments in the United States, Canada and Mexico.
The other businesses within Supply Chain & Freight experienced an increase in revenue, primarily due to growth at UPS Capital, the UPS Store, UPS Customer Solutions and our contract to provide domestic air transportation services for the U.S. Postal Service.

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Operating Expenses
Forwarding and logistics operating expenses decreased $29 million for the first quarter of 2012 compared with the same period of 2011, due to several factors. Compensation and benefits expense declined by $10 million, largely due to reduced payroll and lower pension costs. Operating expenses in 2012 were also reduced by a $9 million gain realized upon the sale of an operating facility. Additionally, expense reductions were realized across several other expense categories in our forwarding business, including hub and gateway costs, facility and occupancy expense, and the provision for doubtful accounts.
Freight operating expenses increased $15 million in the first quarter, with the total cost per LTL shipment increasing 5.0%. The largest component of this increase relates to the cost of operating our linehaul network, which increased $9 million for the quarter. Increased linehaul network costs were largely due to higher pension and healthcare costs, a 3.3% union contractual driver wage increase, as well as higher fuel costs operating our vehicle fleet and higher fuel surcharge rates passed to us from outside transportation carriers (due to higher diesel fuel prices). Non-operating costs increased $5 million for the quarter, largely due to management payroll increases, facility repairs and higher pension expense. These expense increases were somewhat offset by improved productivity measures, including pick-up and delivery stops per hour, dock bills per hour and linehaul network utilization.
Expenses for the other businesses within Supply Chain & Freight increased $14 million in the first quarter of 2012 compared with 2011.
Operating Profit and Margin
The forwarding and logistics unit increased operating profit by $24 million in the first quarter of 2012 compared to the same period in 2011, including a $9 million gain on the sale of an operating facility in 2012. In the forwarding business, operating margins expanded due to cost reductions and growth in our North American brokerage and transportation services businesses. Our logistics business had an increase in operating profit for the first quarter of 2012, largely due to strong growth in our higher-margin mail services, as well as the previously-mentioned gain on sale of a facility.
Operating profit for our freight unit remained flat in the first quarter of 2012 compared to the same period in 2011, as cost pressures were largely offset by productivity gains and volume declines were offset by improved yields.
The combined operating income for all of our other businesses in this segment increased $4 million during the quarter, largely due to growth from our contract to provide domestic air transportation services for the U.S. Postal Service.
Consolidated Operating Expenses
 
Three Months Ended
March 31,
 
Change
 
 
2012
 
2011
 
%
 
Operating Expenses (in millions):
 
 
 
 
 
 
Compensation and Benefits
$
6,835

 
$
6,562

 
4.2
 %
 
Repairs and Maintenance
302

 
315

 
(4.1
)%
 
Depreciation and Amortization
459

 
441

 
4.1
 %
 
Purchased Transportation
1,717

 
1,648

 
4.2
 %
 
Fuel
1,025

 
908

 
12.9
 %
 
Other Occupancy
237

 
261

 
(9.2
)%
 
Other Expenses
992

 
975

 
1.7
 %
 
Total Operating Expenses
$
11,567

 
$
11,110

 
4.1
 %
 
 
 
 
 
 
 
Currency Translation (Benefit) Cost
 
 
 
 
$
(48
)
 

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RESULTS OF OPERATIONS



Compensation and Benefits
Employee payroll costs increased $128 million for the first quarter of 2012 compared with the same period of 2011, largely due to contractual union wage rate increases that took effect under our collective bargaining agreement with the Teamsters, as well as a 0.6% increase in total union labor hours. Management payroll costs also increased, largely as a result of a change in the timing of our management incentive awards, as restricted units that were previously granted in the fourth quarter of each year were granted in the first quarter of 2012.
Benefits expense increased $145 million for the first quarter, primarily due to higher pension expense, payroll taxes, and the expense associated with our self-insurance for worker’s compensation claims, as follows:
Pension expense increased $63 million for the quarter, resulting from higher union contribution rates for multi-employer pension plans, combined with increased service and interest costs for company-sponsored plans. Increases in service and interest cost for company-sponsored plans was largely due to continued service accruals and lower discount rates.
Company accruals for employee payroll taxes increased by $32 million, largely due to the change in timing of our management incentive compensation awards.
The expense associated with our self-insurance programs for worker’s compensation claims increased by $55 million for the first quarter of 2012. 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 reported, and take into account a number of factors including our history of claim losses, payroll growth and the impact of safety improvement initiatives. In 2011, we experienced more favorable actuarial expense adjustments on previous years' claims compared with 2012, thus leading to the increase in expense.
Repairs and Maintenance
The decrease in repairs and maintenance expense was largely due to lower aircraft maintenance costs, which decreased $19 million for the first quarter of 2012 compared with 2011. This decrease resulted primarily from the conversion of an engine maintenance agreement with an outside vendor from a cost reimbursement approach to a fixed rate per flight hour. Additionally, aircraft maintenance expense declined due to a reduction in the number of scheduled maintenance checks for our Airbus A300, Boeing 757 and Boeing MD-11 aircraft, and a reduction of engine flight hours for some of our Boeing 757 aircraft.
Depreciation and Amortization
The increase in depreciation and amortization expense was primarily the result of a $17 million increase in depreciation expense on vehicles, as a result of an overall increase in the size of our vehicle fleet in our U.S. Domestic package operations.
Purchased Transportation
The increase in purchased transportation was impacted by a combination of higher volume, as well as increased fuel surcharges and base rates charged to us by third-party air, ocean and truck carriers across all segments. The combination of these factors increased expense by $56 million for the first quarter of 2012. Additionally, we incurred a $13 million increase in expense in the first quarter for the use of rail carriers, which was due primarily to higher rates and fuel surcharges.
Fuel
The increase in fuel expense was primarily caused by higher prices for jet-A fuel, diesel and unleaded gasoline, which increased expense by $111 million for the first quarter of 2012 compared with 2011. Higher usage of these products in our operations accounted for the remaining increase in expense of $6 million for the first quarter.
Other Occupancy
Other occupancy expense decreased primarily due to several weather-related factors. The relatively warm winter in the United States helped to reduce natural gas and heating costs in our facilities, as well as reduce snow-removal costs.

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Other Expenses
The increase in other expenses in the first quarter of 2012 was largely due to increased advertising costs, equipment rentals, aircraft landing fees, and certain outside professional fees. These increases were partially offset by the gain on the sale of a distribution facility, and a reduction in aircraft deicing expense due to the relatively warm winter weather in the United States.
Investment Income and Interest Expense
 
Three Months Ended
March 31,
 
Change
 
 
2012
 
2011
 
%
 
(in millions)
 
 
 
 
 
 
Investment Income
$
6

 
$
11

 
(45.5
)%
 
Interest Expense
$
(94
)
 
$
(85
)
 
10.6
 %
 
Investment Income
The decrease in investment income for the first quarter of 2012 compared with the same period of 2011 was primarily caused by a decline in realized gains on sales of investments. During the first quarter of 2012, we realized $3 million in net gains on sales of securities, compared with $12 million in net gains on the sales of auction rate securities, preferred equity securities and an S&P 500 index fund in the first quarter of 2011. This decline in realized gains was partially offset by an increase in interest income in the first quarter of 2012 compared with 2011, largely due to having a higher average balance of interest-earning cash and investments in our portfolio in 2012.
Interest Expense
Interest expense increased in the first quarter of 2012 compared with the same period of 2011, largely due to a higher effective interest rate incurred on our debt, as well as a higher average balance outstanding, in 2012 compared with 2011. The higher effective interest rate incurred was largely due to having a greater proportion of fixed-rate debt outstanding relative to lower-yielding variable rate debt in the first quarter of 2012 compared with the same period of 2011. The higher average balance of debt outstanding in the first quarter of 2012 was largely due to aircraft capital lease obligations that were entered into during the last three quarters of 2011.
Income Tax Expense
 
Three Months Ended
March 31,
 
Change
 
 
2012
 
2011
 
%
 
(in millions)
 
 
 
 
 
 
Income Tax Expense
$
511

 
$
483

 
5.8
%
 
Effective Tax Rate
34.5
%
 
34.5
%
 
 
 
Income tax expense increased due to higher pre-tax income in the first quarter of 2012 compared with 2011. Our effective tax rate remained constant at 34.5% in both periods.

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Liquidity and Capital Resources
Net Cash From Operating Activities
The following is a summary of the significant sources (uses) of cash from operating activities (amounts in millions):
 
Three Months Ended
March 31,
 
2012
 
2011
Net income
$
970

 
$
915

Non-cash operating activities (a)
858

 
916

Pension and postretirement plan contributions (UPS-sponsored plans)
(220
)
 
(1,252
)
Income tax receivables and payables
437

 
393

Changes in working capital and other noncurrent assets and liabilities
258

 
301

Other sources (uses) of cash from operating activities
(23
)
 
8

Net cash from operating activities
$
2,280

 
$
1,281

___________________ 
(a)
Represents depreciation and amortization, gains and losses on derivative transactions and foreign exchange, deferred income taxes, provisions for uncollectible accounts, pension and postretirement benefit expense, stock compensation expense, impairment charges, and other non-cash items.
Contributions to our company-sponsored pension plans have varied based primarily on whether any minimum funding requirements are present for individual pension plans. In the first quarter of 2012, we contributed $220 million to our company-sponsored pension and postretirement medical benefit plans, which included a $176 million contribution to the UPS IBT Pension Plan. In the first quarter of 2011, we made a $1.2 billion contribution to the UPS IBT Pension Plan. As discussed in Note 6 to the unaudited consolidated financial statements, we expect to contribute $675 million to our company-sponsored pension and U.S. postretirement medical benefit plans over the remainder of 2012.
Operating cash flow was favorably impacted in both 2012 and 2011 by higher net income and seasonal changes in our working capital position. Cash flow also benefits in the first quarter of each year as a result of the lack of any required U.S. Federal estimated income tax payments. Other changes in working capital were largely a result of the timing of salary and wages payable and related tax withholdings, as well as improved collections of receivables during first quarter 2012 compared with the same period of 2011.

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RESULTS OF OPERATIONS


Net Cash Used In Investing Activities
Our primary sources (uses) of cash for investing activities were as follows (amounts in millions):
 
Three Months Ended
March 31,
 
2012
 
2011
Net cash used in investing activities
$
(259
)
 
$
(282
)
 
 
 
 
Capital Expenditures:
 
 
 
Buildings and facilities
$
(108
)
 
$
(73
)
Aircraft and parts
(172
)
 
(224
)
Vehicles
(33
)
 
(27
)
Information technology
(115
)
 
(78
)
 
$
(428
)
 
$
(402
)
 
 
 
 
Capital Expenditures as a % of Revenue
3.3
%
 
3.2
%
 
 
 
 
Other Investing Activities:
 
 
 
Proceeds from disposals of property, plant and equipment
$
19

 
$
11

Net decrease in finance receivables
$
24

 
$
26

Net sales of marketable securities
$
302

 
$
99

Cash paid for business acquisitions
$
(100
)
 
$

Other uses of cash for investing activities
$
(76
)
 
$
(16
)
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. Capital spending on aircraft primarily related to contract deposits on open aircraft orders, and final payments associated with the delivery of three Boeing 767-300s in 2012 and two Boeing 747-400s in 2011. Capital spending on buildings and facilities and information technology increased in 2012 compared with 2011, largely due to our Cologne hub expansion in Germany as well as various technology deployments. Future capital spending for anticipated growth and replacement assets will depend on a variety of factors, including economic and industry conditions.
The net change in finance receivables is primarily due to customer paydowns and new loan origination activity, primarily in our business credit and asset-based lending portfolios. The purchases and sales of marketable securities are largely determined by liquidity needs and the periodic rebalancing of investment types, and will therefore fluctuate from period to period. The cash paid for business acquisitions was related to our acquisition of Kiala S.A., which closed in the first quarter of 2012. Other investing activities include the cash settlement of derivative contracts used in our currency hedging programs and the timing of aircraft purchase contract deposits on our Boeing 767-300 aircraft order.
On March 19, 2012 we announced an agreement to purchase TNT Express N.V. ("TNT Express") for €9.50 per ordinary share. The offer values the issued and outstanding share capital of TNT Express at €5.16 billion ($6.77 billion). We anticipate the acquisition will close during third quarter 2012 and intend to finance the offer by utilizing a combination of approximately $5.0 billion of available cash and approximately $1.8 billion in new debt.

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Net Cash Provided by Financing Activities
Our primary sources (uses) of cash for financing activities are as follows (amounts in millions, except per share data):
 
Three Months Ended
March 31,
2012
 
2011
Net cash provided by (used in) financing activities
$
51

 
$
247

Share Repurchases:
 
 
 
Cash expended for shares repurchased
$
(547
)
 
$
(505
)
Number of shares repurchased
(7.1
)
 
(6.8
)
Shares outstanding at period end
959

 
986

Percent reduction in shares outstanding
(0.4
)%
 
(0.5
)%
Dividends:
 
 
 
Dividends declared per share
$
0.57

 
$
0.52

Cash expended for dividend payments
$
(534
)
 
$
(503
)
Borrowings:
 
 
 
Net borrowings (repayments) of debt principal
$
889

 
$
1,196

Other Financing Activities:
 
 
 
Cash received for common stock issuances
$
131

 
$
104

Other sources (uses) of cash for financing activities
$
112

 
$
(45
)
Capitalization (as of March 31 each year):
 
 
 
Total debt outstanding at period end
$
11,998

 
$
12,058

Total shareowners’ equity at period end
7,499

 
8,234

Total capitalization
$
19,497

 
$
20,292

Debt to Total Capitalization %
61.5
 %
 
59.4
 %
We repurchased a total of 7.1 million shares of class A and class B common stock for $542 million during the three months ended March 31, 2012, and 6.8 million shares for $501 million for the three months ended March 31, 2011 ($547 million and $505 million in repurchases for 2012 and 2011, respectively, are reported on the cash flow statement due to the timing of settlements). On May 3, 2012, the Board of Directors approved a new share repurchase authorization of $5.0 billion, which replaces an authorization previously announced in 2008. The new share repurchase authorization has no expiration date. For 2012 and 2013, we anticipate repurchasing approximately $1.5 billion in shares each year.
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 increased our quarterly cash dividend payment to $0.57 per share in 2012, compared with the previous $0.52 quarterly dividend rate in 2011. We expect to continue the practice of paying regular cash dividends.
Issuances of debt in 2012 and 2011 consisted primarily of commercial paper. Repayments of debt in 2012 and 2011 consisted primarily of paydowns of commercial paper and redemptions of certain floating rate notes. 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.
The cash outflows in other financing activities were primarily due to premiums paid and received on capped call options for the purchase of UPS class B shares, and tax withholdings on vested employee stock awards.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


Sources of Credit
We are authorized to borrow up to $10.0 billion under the U.S. commercial paper program we maintain. We had $885 million outstanding under this program as of March 31, 2012, with an average interest rate of 0.04%. We also maintain a European commercial paper program under which we are authorized to borrow up to €1.0 billion in a variety of currencies, however there were no amounts outstanding under this program as of March 31, 2012.
We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on April 11, 2013. 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 Citibank’s publicly announced base rate, 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 base 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 March 31, 2012.
The second agreement provides revolving credit facilities of $1.0 billion, and expires on April 12, 2017. 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 Citibank’s publicly announced base rate, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The applicable margin is subject to certain minimum rates and maximum rates based on our public debt ratings from Standard & Poor’s Rating Service and Moody’s Investors Service. The minimum applicable margin rates range from 0.100% to 0.375%, and the maximum applicable margin rates range from 0.750% to 1.250%. The applicable margin for advances bearing interest based on the base 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 March 31, 2012.
Our Moody’s and Standard & Poor’s short-term credit ratings are P-1 and A-1+, respectively. Our Moody’s and Standard & Poor’s long-term credit ratings are Aa3 and AA-, respectively. We currently have a negative outlook from both Moody’s and Standard & Poor’s.
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of March 31, 2012 and for all prior periods, 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 March 31, 2012, 10% of net tangible assets is equivalent to $2.561 billion, however we have no covered sale-leaseback transactions or secured indebtedness outstanding. Additionally, we are required to maintain a minimum net worth, as defined, of $5.0 billion on a quarterly basis. As of March 31, 2012, our net worth, as defined, was equivalent to $10.443 billion. We do not expect these covenants to have a material impact on our financial condition or liquidity.
Except as described in this quarterly report, the nature and amounts of our payment obligations under our debt, capital and operating lease agreements, purchase commitments, and other liabilities as of March 31, 2012 have not materially changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2011.
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, such as commitments for aircraft purchases, for the foreseeable future.
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 our financial condition or liquidity.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


Contingencies
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business activities.
Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious defense and will deny, liability in all litigation pending against us, including the matters described below, and we intend to defend vigorously each case. We have accrued for legal claims when, and to the extent that, amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.
For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible loss or range of loss.
Judicial Proceedings
We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with these matters, would have a material adverse effect on our financial condition, results of operations or liquidity.
UPS and our subsidiary Mail Boxes Etc., Inc. are defendants in two lawsuits about the rebranding or purchase of The UPS Store franchises-Morgate and Samica. We prevailed at the trial court level in both cases, and plaintiffs appealed.
Morgate was filed in March 2003. The plaintiffs are 125 individual franchisees who did not rebrand and a certified class of all franchisees who did rebrand to The UPS Store. A bellwether trial for three individual plaintiffs was set for early 2010, but the trial court entered judgment against one of the three plaintiffs prior to trial, which was affirmed in January 2012.  Plaintiffs have filed a petition for review with the California Supreme Court. The trial court also granted our motion for summary judgment against the members of the certified class, which was reversed in January 2012.  
Samica was filed in March 2006. The plaintiffs are 250 individual The UPS Store franchisees who either elected to rebrand or purchased new The UPS Store franchises. Summary judgment was granted in UPS's favor and affirmed on appeal in December 2011. Plaintiffs have indicated that they intend to file a petition for certiorari with the United States Supreme Court.
There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) three separate components of these cases were being appealed to federal and state courts following decisions favorable to UPS; and (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present if any aspects of these cases proceed forward. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. The Antitrust Division of the U.S. Department of Justice (“DOJ”) has informed us that it has opened a civil investigation of our policies and practices for dealing with third party negotiators. We are cooperating with this investigation. We deny any liability with respect to these matters and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) we believe that we have a number of meritorious defenses; (2) discovery is ongoing; and (3) the DOJ investigation is ongoing. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS



In Canada, three purported class-action cases were filed against us in British Columbia (2006); Ontario (2007) and Québec (2006). The cases each allege inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. The British Columbia class-action was declared inappropriate for certification and dismissed by the trial judge. That decision was upheld by the British Columbia Court of Appeal in March 2010, which ended the case in our favor. The Ontario class action was certified in September 2011. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court. The complaint under the Criminal Code was dismissed. No appeal is being taken from that decision. The allegations of inadequate disclosure were granted and we are appealing that decision. The request to certify the case in Québec was heard in February 2012. We have denied all liability and are vigorously defending the two outstanding cases. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters, including (1) 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 these matters. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operation or liquidity.
Other Matters
In May and December 2007 and August 2008 we received and responded to grand jury subpoenas from the DOJ in the Northern District of California in connection with an investigation by the Drug Enforcement Administration. We also have responded to informal requests for information in connection with this investigation, which relates to transportation of packages on behalf of on-line pharmacies that may have operated illegally. We are cooperating with this investigation and intend to continue to vigorously defend ourselves. 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 we have a number of meritorious legal defenses and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
We received a grand jury subpoena from the Antitrust Division of the DOJ regarding the DOJ's investigation into certain pricing practices in the freight forwarding industry in December 2007.
In August 2010, competition authorities in Brazil opened an administrative proceeding to investigate alleged anticompetitive behavior in the freight forwarding industry. Approximately 45 freight forwarding companies and individuals are named in the proceeding, including UPS, UPS SCS Transportes (Brasil) S.A., and a former employee in Brazil. UPS will have an opportunity to respond to these allegations.
We are cooperating with each of these investigations, and intend to continue to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including (1) we are vigorously defending each matter and believe that we have a number of meritorious legal defenses; (2) there are unresolved questions of law that could be of importance to the ultimate resolutions of these matters, including the calculation of any potential fine; and (3) there is uncertainty about the time period that is the subject of the investigations. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
On March 28, 2012, the European Commission ("Commission") announced a decision finding that 14 freight forwarders, including UPS, had infringed EU competition law. The Commission assessed a fine on UPS in the amount of €10 million. We are currently evaluating the decision and a potential appeal.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS



In January 2008, a class action complaint was filed in the United States District Court for the Eastern District of New York alleging price-fixing activities relating to the provision of freight forwarding services. UPS was not named in this case. In July 2009, the plaintiffs filed a first amended complaint naming numerous global freight forwarders as defendants. UPS and UPS Supply Chain Solutions are among the 60 defendants named in the amended complaint. We 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 these matters including: (1) the magistrate judge recommended that the district court grant our motion to dismiss, with leave to amend, and the scope of the plaintiffs' claims is therefore unclear; (2) the scope and size of the proposed class is ill-defined; (3) there are significant legal questions about the adequacy and standing of the putative class representatives; and (4) we believe that we have a number of meritorious legal defenses. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
We are a defendant in various other lawsuits that arose in the normal course of business. We do not believe that the eventual resolution of these other lawsuits (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material adverse effect on our financial condition, results of operations or liquidity.
In June 2011, we received IRS reports covering income taxes and excise taxes for tax years 2005 through 2007 and 2003 through 2007, respectively. The reports propose assessments related to amounts paid for software, research credit expenditures and deductibility of financing and post-acquisition integration costs as well as taxes on amounts paid for air transportation. Receipt of the reports represents only the conclusion of the examination process. We disagree with the proposed assessments related to these matters. Therefore, we have filed protests and protective tax refund claims. During the third quarter of 2011, the IRS responded to our protests and forwarded the cases to IRS Appeals. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) we are vigorously defending these matters and believe that we have a number of meritorious legal defenses; (2) we have filed refund claims in excess of the proposed assessments; (3) there are unresolved questions of law and fact that could be of importance to the ultimate resolutions of these matters, including the calculation of any additional taxes and/or tax refunds; and (4) these matters are at the initial stage of a multi-level administrative appeals process that may ultimately be resolved by litigation. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
Collective Bargaining Agreements
As of December 31, 2011, we had approximately 245,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). These agreements run through July 31, 2013. We have approximately 2,700 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association, which became amendable at the end of 2011. Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which runs through November 1, 2013. In addition, approximately 3,200 of our ground mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”). Our agreement with the IAM runs through July 31, 2014.
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.


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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


Recent Accounting Pronouncements
Adoption of New Accounting Standards
In May 2011, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update to disclosure requirements for fair value measurement. These amendments, which became effective for us in the first quarter of 2012, result in a common definition of fair value and common measurement and disclosure requirements between U.S. GAAP and IFRS. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance had an immaterial impact on our consolidated financial position and results of operations.
In June 2011, the FASB issued an Accounting Standards Update that increases the prominence of items reported in other comprehensive income in the financial statements. This update requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. This requirement became effective for us beginning with the first quarter of 2012, and we have included the required presentation in this Form 10-Q.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements had an immaterial impact on our consolidated financial position and results of operations.
Accounting Standards Issued But Not Yet Effective
Accounting pronouncements issued, but not effective until after March 31, 2012, are not expected to have a significant impact on our consolidated financial position or results of operations.

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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, interest rates, equity prices, and certain commodity prices. This market risk arises 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 foreign exchange, interest rate, equity and commodity forward contracts, options, and swaps.
The total fair value asset (liability) of our derivative financial instruments is summarized in the following table (in millions):
 
March 31,
2012
 
December 31,
2011
Currency Derivatives
$
(35
)
 
$
(19
)
Interest Rate Derivatives
412

 
460

 
$
377

 
$
441

Our market risks, hedging strategies and financial instrument positions at March 31, 2012 have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011. In 2012, we entered into several interest rate basis swaps, which effectively converted cash flows based on variable LIBOR-based interest rates to cash flows based on the prevailing federal funds interest rate. We also entered into new currency options on the Euro, British Pound Sterling and Canadian Dollar, as well as terminated positions that expired during the first three months of 2012. The remaining fair value changes between December 31, 2011 and March 31, 2012 in the table above are primarily due to interest rate and foreign currency exchange rate changes between those dates.
The forward contracts, swaps, and options previously discussed contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines.
We have agreements with substantially all of our active counterparties containing early termination rights and/or bilateral collateral provisions whereby cash is required whenever the net fair value of derivatives associated with those counterparties exceed specific thresholds. Events, such as a credit rating downgrade (depending on the ultimate rating level) would typically require an increase in the amount of collateral required of the counterparty and/or allow us to take additional protective measures such as early termination of trades. At March 31, 2012, we held cash collateral of $56 million under these agreements.
We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
The information concerning market risk under the caption “Quantitative and Qualitative Disclosures about Market Risk” on pages 56-58 of our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2011, is hereby incorporated by reference in this report.
Item 4.
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 (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)). Based upon that 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 reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management to allow their timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting:
There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.
Legal Proceedings
For a discussion of legal proceedings affecting us and our subsidiaries, please see the information under the sub-caption “Contingencies” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report.
Item 1A.
Risk Factors
There have been no material changes to the risk factors described in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of our class A and class B common stock during the first quarter of 2012 is as follows (in millions, except per share amounts):
 
Total Number
of Shares
Purchased(1)
 
Average
Price Paid
Per Share
 
Total Number
of Shares Purchased
as Part of Publicly
Announced Program
 
Approximate Dollar
Value of Shares that
May Yet be  Purchased
Under the Program
January 1 – January 31, 2012
5.3

 
$
75.68

 
5.0

 
$
2,150

February 1 – February 29, 2012
2.0

 
77.06

 
0.9

 
2,078

March 1 – March 31, 2012
1.7

 
80.68

 
1.2

 
1,983

Total January 1 – March 31, 2012
9.0

 
$
76.69

 
7.1

 
 
_________________ 
(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.
On May 3, 2012, the Board of Directors approved a new share repurchase authorization of $5.0 billion, which replaces an authorization previously announced in 2008. The new share repurchase authorization has no expiration date. Share repurchases may take the form of accelerated share repurchases, open market purchases, or other such methods as we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the program.
Item 3.
Defaults Upon Senior Securities
None.
Item 5.
Other Information
None.

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Item 6.
Exhibits
These exhibits are either incorporated by reference into this report or filed with this report as indicated below.
Index to Exhibits:
3.1

  
  
Form of Restated Certificate of Incorporation of United Parcel Service, Inc. (incorporated by reference to Exhibit 3.2 to Form 10-Q for the Quarter Ended September 30, 2002).
 
 
 
3.2

  
  
Form of Bylaws of United Parcel Service, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K, filed on November 12, 2008).
 
 
 
 
 
†10.1

 
 
Credit Agreement (364-Day Facility) dated April 12, 2012 among United Parcel Service, Inc., the initial lenders named therein, Citigroup Global Markets, Inc. and J.P. Morgan Securities LLC as joint lead arrangers and joint bookrunners, Barclays Capital and BNP Paribas Securities Corp. as co-lead arrangers, Barclays Bank PLC and BNP Paribas as co-documentation agents, Citibank, N.A. as administrative agent, and JPMorgan Chase Bank, N.A. as syndication agent.

 
 
 
 
 
†10.2

 
 
Credit Agreement (5 Year Facility) dated April 12, 2012 among United Parcel Service, Inc., the initial lenders named therein, Citigroup Global Markets, Inc. and J.P. Morgan Securities LLC as joint lead arrangers and joint bookrunners, Barclays Capital and BNP Paribas Securities Corp. as co-lead arrangers, Barclays Bank PLC and BNP Paribas as co-documentation agents, Citibank, N.A. as administrative agent, and JPMorgan Chase Bank, N.A. as syndication agent.

 
 
 
 
 
11

  
  
Statement regarding Computation of per Share Earnings (incorporated by reference to Note 12 to “Item 1. Financial Statements” of this quarterly report on Form 10-Q).
 
 
 
†12

  
  
Computation of Ratio of Earnings to Fixed Charges.
 
 
 
†31.1

  
  
Certification 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

  
  
Certification 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.
___________________
Filed herewith.
††
Furnished electronically herewith



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
UNITED PARCEL SERVICE, INC.
(Registrant)
 
 
 
Date:
May 7, 2012
By:
  
/S/    KURT P. KUEHN        
 
 
 
  
Kurt P. Kuehn
 
 
 
  
Senior Vice President and
 
 
 
  
Chief Financial Officer
 
 
 
  
(Duly Authorized Officer and
Principal Accounting Officer)



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