UPS-3.31.2013-10Q

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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, 2012 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, 2012 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.



	March 31, 2013			December 31, 2012
ASSETS
Current Assets:
Cash and cash equivalents	$	6,456		$	7,327
Marketable securities	876			597
Accounts receivable, net	5,617			6,111
Deferred income tax assets	582			583
Other current assets	950			973
Total Current Assets	14,481			15,591
Property, Plant and Equipment, Net	17,888			17,894
Goodwill	2,151			2,173
Intangible Assets, Net	654			603
Non-Current Investments and Restricted Cash	406			307
Derivative Assets	488			535
Deferred Income Tax Assets	874			684
Other Non-Current Assets	1,063			1,076
Total Assets	$	38,005		$	38,863
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper	$	1,615		$	1,781
Accounts payable	1,956			2,278
Accrued wages and withholdings	1,903			1,927
Self-insurance reserves	762			763
Income taxes payable	589			399
Other current liabilities	1,209			1,242
Total Current Liabilities	8,034			8,390
Long-Term Debt	11,051			11,089
Pension and Postretirement Benefit Obligations	11,243			11,068
Self-Insurance Reserves	1,962			1,980
Other Non-Current Liabilities	1,672			1,603
Shareowners’ Equity:
Class A common stock (221 and 225 shares issued in 2013 and 2012)	2			3
Class B common stock (725 and 729 shares issued in 2013 and 2012)	7			7
Additional paid-in capital	—			—
Retained earnings	7,614			7,997
Accumulated other comprehensive loss	(3,595		)	(3,354		)
Deferred compensation obligations	66			78
Less: Treasury stock (1 share in 2013 and 2012)	(66		)	(78		)
Total Equity for Controlling Interests	4,028			4,653
Total Equity for Non-Controlling Interests	15			80
Total Shareowners’ Equity	4,043			4,733
Total Liabilities and Shareowners’ Equity	$	38,005		$	38,863



	Three Months Ended March 31,
	2013			2012
Revenue	$	13,434		$	13,136
Operating Expenses:
Compensation and benefits	6,968			6,835
Repairs and maintenance	309			302
Depreciation and amortization	474			459
Purchased transportation	1,780			1,717
Fuel	1,006			1,025
Other occupancy	253			237
Other expenses	1,064			992
Total Operating Expenses	11,854			11,567
Operating Profit	1,580			1,569
Other Income and (Expense):
Investment income	5			6
Interest expense	(96		)	(94		)
Total Other Income and (Expense)	(91		)	(88		)
Income Before Income Taxes	1,489			1,481
Income Tax Expense	452			511
Net Income	$	1,037		$	970
Basic Earnings Per Share	$	1.09		$	1.01
Diluted Earnings Per Share	$	1.08		$	1.00



	Three Months Ended March 31,
	2013			2012
Net income	$	1,037		$	970
Change in foreign currency translation adjustment, net of tax	(303		)	91
Change in unrealized gain (loss) on marketable securities, net of tax	(2		)	(1		)
Change in unrealized gain (loss) on cash flow hedges, net of tax	38			(41		)
Change in unrecognized pension and postretirement benefit costs, net of tax	26			34
Comprehensive income	$	796		$	1,053



	Three Months Ended March 31,
	2013			2012
Cash Flows From Operating Activities:
Net income	$	1,037		$	970
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	474			459
Pension and postretirement benefit expense	283			238
Pension and postretirement benefit contributions	(57		)	(220		)
Self-insurance reserves	(19		)	11
Deferred taxes, credits and other	(181		)	(92		)
Stock compensation expense	157			162
Other (gains) losses	(207		)	80
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable	421			585
Other current assets	21			(34		)
Accounts payable	(281		)	(276		)
Accrued wages and withholdings	(4		)	43
Other current liabilities	139			377
Other operating activities	(25		)	(23		)
Net cash from operating activities	1,758			2,280
Cash Flows From Investing Activities:
Capital expenditures	(453		)	(428		)
Proceeds from disposals of property, plant and equipment	12			19
Purchases of marketable securities	(501		)	(1,160		)
Sales and maturities of marketable securities	101			1,462
Net decrease in finance receivables	10			24
Cash paid for business acquisitions	—			(100		)
Other investing activities	78			(76		)
Net cash used in investing activities	(753		)	(259		)
Cash Flows From Financing Activities:
Net change in short-term debt	1,472			885
Proceeds from long-term borrowings	101			4
Repayments of long-term borrowings	(1,751		)	—
Purchases of common stock	(1,025		)	(547		)
Issuances of common stock	181			131
Dividends	(572		)	(534		)
Other financing activities	(252		)	112
Net cash provided by (used in) financing activities	(1,846		)	51
Effect Of Exchange Rate Changes On Cash And Cash Equivalents	(30		)	27
Net Increase (Decrease) In Cash And Cash Equivalents	(871		)	2,099
Cash And Cash Equivalents:
Beginning of period	7,327			3,034
End of period	$	6,456		$	5,133

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, 2013, our results of operations for the three months ended March 31, 2013 and 2012, and cash flows for the three months ended March 31, 2013 and 2012. 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, 2012.

The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of March 31, 2013. The fair values of our investment securities are 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.

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.

In February 2013, the FASB issued an accounting standards update that adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. This update requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., the release due to cash flow hedges from interest rate contracts) and the income statement line items affected by the reclassification (e.g., interest income or interest expense). If a component is not required to be reclassified to net income in its entirety (e.g., the net periodic pension cost), companies would instead cross reference to the related footnote for additional information (e.g., the pension footnote). This update was effective for us beginning in the first quarter of 2013, and we have included the applicable disclosures in note 10.

We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units, to eligible employees (Restricted stock and stock units, and restricted performance shares and performance units are herein referred to as "Restricted Units"). The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution plan are made in shares of UPS class A common stock.

During the first quarter of 2013, we granted Restricted Units under the Management Incentive Award program to eligible U.S.-based 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 5, 2013; therefore, the Restricted Unit grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $80.80 on that date.

During the first quarter of 2013, we granted target Restricted Units under the UPS Long-Term Incentive Performance Award program to eligible management employees. Of the total 2013 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 2013 to 2015, using performance criteria targets established each year. For 2013, those targets consist of consolidated operating return on invested capital and growth in consolidated revenue. The remaining 10% of the total 2013 target award will be based upon our achievement of adjusted earnings per share in 2015 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 2013 performance tranches, we determined the award measurement date to be March 1, 2013; therefore the target Restricted Units grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $82.87 on that date.

During the first quarter of 2013, we granted nonqualified stock option awards to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards generally vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The options granted will expire ten years after the date of the grant. In the first quarter of 2013 and 2012, we granted 0.2 million stock options each year at a weighted average grant price of $82.93 and $76.94, respectively. The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was $15.50 and $14.88 for 2013 and 2012, respectively, using the following assumptions:



	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
March 31, 2013
Current marketable securities:
U.S. government and agency debt securities	$	240	$	1	$	—		$	241
Mortgage and asset-backed debt securities	141		2		—			143
Corporate debt securities	417		4		—			421
U.S. state and local municipal debt securities	15		—		—			15
Other debt and equity securities	56		1		(1		)	56
Total marketable securities	$	869	$	8	$	(1	)	$	876

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
December 31, 2012
Current marketable securities:
U.S. government and agency debt securities	$	236	$	2	$	—		$	238
Mortgage and asset-backed debt securities	171		3		—			174
Corporate debt securities	158		5		—			163
U.S. state and local municipal debt securities	15		—		—			15
Other debt and equity securities	7		—		—			7
Total marketable securities	$	587	$	10	$	—		$	597

We have concluded that no other-than-temporary impairment losses existed as of March 31, 2013. 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.

At March 31, 2013 and December 31, 2012, we held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. This investment is classified as “Non-Current Investments and Restricted Cash” in the consolidated balance sheets with the quarterly change in investment value recognized in the statements of consolidated income.

Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.

We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “other investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) the risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 8.08% and 7.75% as of March 31, 2013 and December 31, 2012, respectively. These inputs and the resulting fair values are updated on a quarterly basis.



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
March 31, 2013
Marketable Securities:
U.S. government and agency debt securities	$	240	$	1	$	—	$	241
Mortgage and asset-backed debt securities	—		143		—		143
Corporate debt securities	—		421		—		421
U.S. state and local municipal debt securities	—		15		—		15
Other debt and equity securities	—		56		—		56
Total marketable securities	240		636		—		876
Other investments	19		—		150		169
Total	$	259	$	636	$	150	$	1,045



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
December 31, 2012
Marketable Securities:
U.S. government and agency debt securities	$	237	$	1	$	—	$	238
Mortgage and asset-backed debt securities	—		174		—		174
Corporate debt securities	—		163		—		163
U.S. state and local municipal debt securities	—		15		—		15
Other debt and equity securities	—		7		—		7
Total marketable securities	237		360		—		597
Other investments	19		—		163		182
Total	$	256	$	360	$	163	$	779



	Marketable Securities		Other Investments			Total
Balance on January 1, 2013	$	—	$	163		$	163
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—		(13		)	(13		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on March 31, 2013	$	—	$	150		$	150

	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



	2013			2012
Vehicles	$	6,335		$	6,344
Aircraft	15,305			15,164
Land	1,121			1,122
Buildings	3,206			3,138
Building and leasehold improvements	3,060			3,049
Plant equipment	7,073			7,010
Technology equipment	1,693			1,675
Equipment under operating leases	62			69
Construction-in-progress	452			470
	38,307			38,041
Less: Accumulated depreciation and amortization	(20,419		)	(20,147		)
	$	17,888		$	17,894

We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor our other property, plant and equipment categories for any indicators that the carrying value of the assets exceeds the fair value. There were no indicators of impairment in our property, plant and equipment, and no impairment charges were recorded, during the three months ended March 31, 2013 and 2012.



	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2013			2012			2013			2012			2013			2012
Three Months Ended March 31:
Service cost	$	338		$	249		$	26		$	22		$	15		$	15
Interest cost	362			353			46			52			11			11
Expected return on assets	(537		)	(492		)	(8		)	(4		)	(14		)	(12		)
Amortization of:
Transition obligation	—			—			—			—			—			—
Prior service cost	43			43			1			1			—			—
Other net (gain) loss	—			—			—			—			—			—
Actuarial (gain) loss	—			—			—			—			—			—
Net periodic benefit cost	$	206		$	153		$	65		$	71		$	12		$	14

As of December 31, 2012, we had approximately 249,000 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. On April 25, 2013, we reached a tentative agreement with the Teamsters on two, new five-year contracts in the U.S. Domestic Package and UPS Freight business units. Subject to ratification by the UPS Teamster-represented employees, the new agreements would take effect on August 1, 2013. We have approximately 2,600 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 3,100 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.



	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
March 31, 2013:
Trademarks, licenses, patents, and other	$	211	$	(89	)	$	122
Customer lists	129		(81		)	48
Franchise rights	117		(66		)	51
Capitalized software	2,259		(1,826		)	433
Total Intangible Assets, Net	$	2,716	$	(2,062	)	$	654
December 31, 2012:
Trademarks, licenses, patents, and other	$	163	$	(80	)	$	83
Customer lists	131		(79		)	52
Franchise rights	117		(64		)	53
Capitalized software	2,197		(1,782		)	415
Total Intangible Assets, Net	$	2,608	$	(2,005	)	$	603



	Principal			Carrying Value
	Amount		Maturity	2013			2012
Commercial paper	$	1,572		$	1,572		$	—
Fixed-rate senior notes:
4.50% senior notes	—		2013	—			1,751
3.875% senior notes	1,000		2014	1,027			1,033
1.125% senior notes	375		2017	372			373
5.50% senior notes	750		2018	844			851
5.125% senior notes	1,000		2019	1,130			1,140
3.125% senior notes	1,500		2021	1,645			1,655
2.45% senior notes	1,000		2022	988			996
6.20% senior notes	1,500		2038	1,481			1,480
4.875% senior notes	500		2040	489			489
3.625% senior notes	375		2042	367			367
8.375% Debentures:
8.375% debentures	424		2020	506			512
8.375% debentures	276		2030	284			284
Pound Sterling notes:
5.50% notes	101		2031	96			103
5.13% notes	688		2050	656			699
Floating rate senior notes	377		2049-2053	373			374
Capital lease obligations	513		2013-3004	513			440
Facility notes and bonds	320		2015-2036	320			320
Other debt	3		2013-2022	3			3
Total Debt	$	12,274		12,666			12,870
Less: Current Maturities				(1,615		)	(1,781		)
Long-term Debt				$	11,051		$	11,089

We are authorized to borrow up to $10.0 billion under the U.S. commercial paper program we maintain. We had $1.514 billion outstanding under this program as of March 31, 2013, with an average interest rate of 0.08%. 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. As of March 31, 2013, there was €45 million ($58 million) outstanding under this program, with an average interest rate of 0.02%. As of March 31, 2013, we have classified the entire commercial paper balance as a current liability in our consolidated balance sheets.

We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on March 28, 2014. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of March 31, 2013.

The second agreement provides revolving credit facilities of $1.0 billion, and expires on March 29, 2018. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 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%, per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of March 31, 2013.

Our existing debt instruments and credit facilities subject us to certain financial covenants. As of March 31, 2013 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, 2013, 10% of net tangible assets was equivalent to $2.717 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.

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, was approximately $14.156 and $14.658 billion as of March 31, 2013 and December 31, 2012, 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.

Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious defense and will deny, liability in all litigation pending against us, including (except as otherwise noted herein) the matters described below, and we intend to defend vigorously each case. We have accrued for legal claims when, and to the extent that, amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.

For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible loss or range of loss.

UPS and our subsidiary Mail Boxes Etc., Inc. are defendants in a lawsuit in California Superior Court about the rebranding of The UPS Store franchises. In the Morgate case, the plaintiffs are 125 individual franchisees who did not rebrand to The UPS Store and a certified class of all franchisees who did rebrand. The trial court entered judgment against a bellwether individual plaintiff, which was affirmed in January 2012. The trial court granted our motion for summary judgment against the certified class, which was reversed in January 2012. In March 2013, we reached a settlement in principle with the remaining individual plaintiffs. We believe the ultimate settlement of this matter will not have a material adverse effect on our financial condition, results of operations or liquidity.

There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from whatever remaining aspects of this case proceeds, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; and (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. The case is scheduled to go to trial in February 2014. The Antitrust Division of the U.S. Department of Justice (“DOJ”) has an ongoing 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) briefing of dispositive motions 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, four purported class-action cases were filed against us in British Columbia (2006); Ontario (2007) and Québec (2006 and 2013). 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 motion to authorize the 2006 Québec litigation as a class action was dismissed by the motions judge in October 2012; there was no appeal, which ended that case in our favor. The 2013 Québec litigation also has been dismissed. We deny all liability and are vigorously defending the one outstanding case in Ontario. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operation or liquidity.

On March 29, 2013, we entered into a Non-Prosecution Agreement (“NPA”) with the United States Attorney's Office in the Northern District of California in connection with an investigation by the Drug Enforcement Administration of shipments by illicit online pharmacies. Under the NPA, we forfeited $40 million to the government, admitted to a Statement of Facts describing the conduct leading to the agreement, and agreed to implement an online pharmacy compliance program. The term of the NPA is two years, although we can petition the government to shorten that term in its discretion to one year. The NPA did not have a material impact on our results of operations for the first quarter of 2013.

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. In November 2012, we also received a request for information related to similar matters from authorities in Singapore.

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.

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. The plaintiffs filed a Second Amended Complaint in October 2010, which we moved to dismiss. In August 2012, the Court granted our motion to dismiss all claims relevant to UPS in the Second Amended Complaint, with leave to amend. The plaintiffs filed a Third Amended Complaint in November 2012. We have filed another motion to dismiss, and will otherwise 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 court has dismissed the complaint once but has not considered the adequacy of the amended complaint; (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.

In June 2011, we received an IRS Revenue Agent Report ("RAR") covering excise taxes for tax years 2003 through 2007, in addition to the income tax matters described in note 14. The excise tax RAR proposed two alternate theories for asserting additional excise tax on transportation of property by air. We disagreed with these proposed excise tax theories and related adjustments. We filed protests and, in the third quarter of 2011, the IRS responded to our protests and forwarded the case to IRS Appeals.

Beginning in the third quarter of 2012 and continuing through the first quarter of 2013, we had settlement discussions with the Appeals team. In the first quarter of 2013, we reached settlement terms for a complete resolution of all excise tax matters and correlative income tax refund claims for the 2003 through 2007 tax years. The final resolution of these matters did not materially impact our financial condition, results of operations or liquidity.

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, 2013, 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, 2013, no preferred shares had been issued.



	2013					2012
	Shares		Dollars			Shares		Dollars
Class A Common Stock
Balance at beginning of period	225		$	3		240		$	3
Common stock purchases	(2	)	(1		)	(2	)	—
Stock award plans	3		—			2		—
Common stock issuances	1		—			1		—
Conversions of class A to class B common stock	(6	)	—			(5	)	—
Class A shares issued at end of period	221		$	2		236		$	3
Class B Common Stock
Balance at beginning of period	729		$	7		725		$	7
Common stock purchases	(10	)	—			(5	)	—
Conversions of class A to class B common stock	6		—			5		—
Class B shares issued at end of period	725		$	7		725		$	7
Additional Paid-In Capital
Balance at beginning of period			$	—				$	—
Stock award plans			216					210
Common stock purchases			(186		)			(428		)
Common stock issuances			70					63
Option premiums received (paid)			(100		)			155
Balance at end of period			$	—				$	—
Retained Earnings
Balance at beginning of period			$	7,997				$	10,128
Net income attributable to common shareowners			1,037					970
Dividends ($0.62 and $0.57 per share)			(594		)			(551		)
Common stock purchases			(826		)			(114		)
Balance at end of period			$	7,614				$	10,433

In total, we repurchased a total of 12.2 million shares of class A and class B common stock for $1.013 billion during the three months ended March 31, 2013, and 7.1 million shares for $542 million during the three months ended March 31, 2012. On February 14, 2013, the Board of Directors approved a new share repurchase authorization of $10.0 billion, which replaced an authorization previously announced in 2012. 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.

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, 2013, we paid premiums of $100 million on options for the purchase of 1.4 million shares that will settle in the second quarter of 2013. During the three months ended March 31, 2012, we received $155 million in premiums for options that were entered into during 2011 that expired in 2012, including $5 million in premiums in excess of our initial investment.

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, 2013 and 2012 is as follows (in millions):



	2013			2012
Foreign currency translation gain (loss):
Balance at beginning of period	$	134		$	(160	)
Reclassification to earnings (no tax impact in either period)	(161		)	—
Translation adjustment (net of tax effect of $6 and $(11))	(142		)	91
Balance at end of period	(169		)	(69		)
Unrealized gain (loss) on marketable securities, net of tax:
Balance at beginning of period	6			6
Current period changes in fair value (net of tax effect of $(1) and $0)	(2		)	1
Reclassification to earnings (net of tax effect of $0 and $(1))	—			(2		)
Balance at end of period	4			5
Unrealized gain (loss) on cash flow hedges, net of tax:
Balance at beginning of period	(286		)	(204		)
Current period changes in fair value (net of tax effect of $(7) and $(25))	(11		)	(42		)
Reclassification to earnings (net of tax effect of $30 and $0)	49			1
Balance at end of period	(248		)	(245		)
Unrecognized pension and postretirement benefit costs, net of tax:
Balance at beginning of period	(3,208		)	(2,745		)
Reclassification to earnings (net of tax effect of $18 and $16)	26			28
Adjustment for Early Retirement Reinsurance Program (net of tax effect of $0 and $4)	—			6
Balance at end of period	(3,182		)	(2,711		)
Accumulated other comprehensive income (loss) at end of period	$	(3,595	)	$	(3,020	)



	2013 Amount Reclassified from AOCI			2012 Amount Reclassified from AOCI			Affected Line Item in the Income Statement
Foreign currency translation gain (loss):
Liquidation of foreign subsidiary	$	161		$	—		Other expenses
Income tax (expense) benefit	—			—			Income tax expense
Impact on net income	161			—			Net income
Unrealized gain (loss) on marketable securities:
Realized gain (loss) on sale of securities	—			3			Investment income
Income tax (expense) benefit	—			(1		)	Income tax expense
Impact on net income	—			2			Net income
Unrealized gain (loss) on cash flow hedges:
Interest rate contracts	(5		)	(5		)	Interest expense
Foreign exchange contracts	(50		)	16			Interest expense
Foreign exchange contracts	(14		)	(12		)	Revenue
Commodity contracts	(10		)	—			Fuel expense
Income tax (expense) benefit	30			—			Income tax expense
Impact on net income	(49		)	(1		)	Net income
Unrecognized pension and postretirement benefit costs:
Prior service costs	(44		)	(44		)	Compensation and benefits
Income tax (expense) benefit	18			16			Income tax expense
Impact on net income	(26		)	(28		)	Net income

Total amount reclassified for the period	$	86		$	(27	)	Net income



	2013					2012
	Shares		Dollars			Shares		Dollars
Deferred Compensation Obligations:
Balance at beginning of period			$	78				$	88
Reinvested dividends			1					1
Benefit payments			(13		)			(13		)
Balance at end of period			$	66				$	76
Treasury Stock:
Balance at beginning of period	(1	)	$	(78	)	(2	)	$	(88	)
Reinvested dividends	—		(1		)	—		(1		)
Benefit payments	—		13			—		13
Balance at end of period	(1	)	$	(66	)	(2	)	$	(76	)

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.

Supply Chain & Freight includes the operations of our forwarding, logistics and freight units, as well as other aggregated businesses. 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 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, 2012, 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.



	Three Months Ended March 31,
	2013		2012
Numerator:
Net income attributable to common shareowners	$	1,037	$	970
Denominator:
Weighted average shares	949		959
Deferred compensation obligations	1		2
Vested portion of restricted shares	2		1
Denominator for basic earnings per share	952		962
Effect of dilutive securities:
Restricted shares	7		9
Stock options	1		1
Denominator for diluted earnings per share	960		972
Basic earnings per share	$	1.09	$	1.01
Diluted earnings per share	$	1.08	$	1.00

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.

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 counterparty 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, 2013, we held cash collateral of $48 million under these agreements.

In connection with the agreements described above, we could also be required to provide collateral or terminate transactions with certain counterparties in the event of a downgrade of our credit rating. The amount of collateral required would be determined by our credit rating and the net fair value of the associated derivatives with each counterparty. At March 31, 2013, the aggregate fair value of the instruments covered by these contractual features that were in a net liability position was $188 million; however, we were not required to post any collateral with our counterparties as of that date.

We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.

A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statements of consolidated income during the current period.

A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.

A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within other AOCI. The remainder of the change in value of such instruments is recorded in earnings.

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.

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, Canadian Dollar, Chinese Renminbi and Hong Kong 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; 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; 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.

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.



	March 31, 2013		December 31, 2012
Currency hedges:
Euro	EUR	1,890	EUR	1,783
British Pound Sterling	GBP	753	GBP	797
Canadian Dollar	CAD	296	CAD	341
United Arab Emirates Dirham	AED	—	AED	551
Mexican Peso	MXN	2,300	MXN	—
Malaysian Ringgit	MYR	600	MYR	500

Interest rate hedges:
Fixed to Floating Interest Rate Swaps	$	6,049	$	7,274
Floating to Fixed Interest Rate Swaps	$	781	$	781
Interest Rate Basis Swaps	$	2,500	$	2,500

Commodity hedges:
Heating Oil Swaps	Gal	100	Gal	—
Ultra Low Sulfur Diesel Swaps	Gal	98	Gal	—

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.

We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded on our consolidated balance sheets. The columns labeled "Net Amounts if Right of Offset had been Applied" indicate the potential net fair value positions by type of contract and location on the consolidated balance sheets had we elected to apply the right of offset.



		Fair Value	Gross Amounts Presented in Consolidated Balance Sheets				Net Amounts if Right of Offset had been Applied
Asset Derivatives	Balance Sheet Location	Hierarchy Level	March 31, 2013		December 31, 2012		March 31, 2013		December 31, 2012
Derivatives designated as hedges:
Foreign exchange contracts	Other current assets	Level 2	$	67	$	27	$	67	$	27
Interest rate contracts	Other current assets	Level 2	—		1		—		1
Commodity contracts	Other current assets	Level 2	3		—		3		—
Foreign exchange contracts	Other non-current assets	Level 2	14		14		14		12
Interest rate contracts	Other non-current assets	Level 2	382		420		362		406
Derivatives not designated as hedges:
Foreign exchange contracts	Other current assets	Level 2	—		3		—		3
Interest rate contracts	Other non-current assets	Level 2	92		101		84		91
Total Asset Derivatives			$	558	$	566	$	530	$	540




		Fair Value	Gross Amounts Presented in Consolidated Balance Sheets				Net Amounts if Right of Offset had been Applied
Liability Derivatives	Balance Sheet Location	Hierarchy Level	March 31, 2013		December 31, 2012		March 31, 2013		December 31, 2012
Derivatives designated as hedges:
Commodity contracts	Other current liabilities	Level 2	$	12	$	—	$	12	$	—
Foreign exchange contracts	Other non-current liabilities	Level 2	134		103		134		101
Interest rate contracts	Other non-current liabilities	Level 2	20		14		—		—
Derivatives not designated as hedges:
Foreign exchange contracts	Other current liabilities	Level 2	3		1		3		1
Interest rate contracts	Other non-current liabilities	Level 2	32		41		24		31
Total Liability Derivatives			$	201	$	159	$	173	$	133



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)



PART I—FINANCIAL INFORMATION
	Cautionary Statement About Forward-Looking Statements	1
Item 1.	Financial Statements	2
	Consolidated Balance Sheets	2
	Statements of Consolidated Income	3
	Statements of Consolidated Comprehensive Income	3
	Statements of Consolidated Cash Flows	4
	Notes to Consolidated Financial Statements	5
	Note 1—Basis of Presentation	5
	Note 2—Recent Accounting Pronouncements	5
	Note 3—Stock-Based Compensation	6
	Note 4—Investments and Restricted Cash	7
	Note 5—Property, Plant and Equipment	10
	Note 6—Employee Benefit Plans	10
	Note 7—Goodwill and Intangible Assets	11
	Note 8—Debt and Financing Arrangements	12
	Note 9—Legal Proceedings and Contingencies	13
	Note 10—Shareowners’ Equity	16
	Note 11—Segment Information	19
	Note 12—Earnings Per Share	20
	Note 13—Derivative Instruments and Risk Management	21
	Note 14—Income Taxes	25
	Note 15—Termination of TNT Transaction	26
	Note 16—Subsequent Events	26
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Overview	27
	Items Affecting Comparability	28
	Results of Operations - Segment Review	28
	U.S. Domestic Package Operations	29
	International Package Operations	32
	Supply Chain & Freight Operations	35
	Consolidated Operating Expenses	37
	Investment Income and Interest Expense	39
	Income Tax Expense	39
	Liquidity and Capital Resources	40
	Net Cash from Operating Activities	40
	Net Cash used in Investing Activities	41
	Net Cash Provided by Financing Activities	42
	Sources of Credit	43
	Contingencies	44
	Recent Accounting Pronouncements	46
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 5.	Other Information	48
Item 6.	Exhibits	49



	2013		2012
Expected life (in years)	7.5		7.5
Risk-free interest rate	1.38	%	1.63	%
Expected volatility	24.85	%	25.06	%
Expected dividend yield	2.75	%	2.77	%



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	Cost		Estimated Fair Value
Due in one year or less	$	340	$	341
Due after one year through three years	247		248
Due after three years through five years	59		59
Due after five years	221		226
	867		874
Equity securities	2		2
	$	869	$	876



	U.S. Domestic Package		International Package			Supply Chain & Freight			Consolidated
December 31, 2012:	$	—	$	430		$	1,743		$	2,173
Acquired	—		—			—			—
Currency / Other	—		(12		)	(10		)	(22		)
March 31, 2013:	—		$	418		$	1,733		$	2,151



	2013			2012
Noncontrolling Interests:
Balance at beginning of period	$	80		$	73
Acquired noncontrolling interests	(65		)	3
Dividends attributable to noncontrolling interests	—			—
Net income attributable to noncontrolling interests	—			—
Balance at end of period	$	15		$	76