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 September 30, 2016, 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
_____________________________________ 
g795027a02.jpg
United Parcel Service, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
58-2480149
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
55 Glenlake Parkway, NE Atlanta, Georgia
 
30328
(Address of Principal Executive Offices)
 
(Zip Code)
(404) 828-6000
(Registrant’s telephone number, including area code)
_____________________________________   
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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 183,295,098 Class A shares, and 689,360,373 Class B shares, with a par value of $0.01 per share, outstanding at October 24, 2016.

Table of Contents

UNITED PARCEL SERVICE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II—OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.

Table of Contents

PART I. FINANCIAL INFORMATION

Cautionary Statement About Forward-Looking Statements
This report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in the future tense, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof and similar terms are intended to be forward-looking statements. We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Our disclosure and analysis in this report, in our Annual Report on Form 10-K for the year ended December 31, 2015 and in our other filings with the Securities and Exchange Commission contain forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties include, but are not limited to: general economic conditions, both in the U.S. and internationally; significant competition on a local, regional, national, and international basis; changes in our relationships with our significant customers; the existing complex and stringent regulation in the U.S. and internationally, changes to which can impact our business; increased security requirements that may increase our costs of operations and reduce operating efficiencies; legal, regulatory or market responses to global climate change; negotiation and ratification of labor contracts; strikes, work stoppages and slowdowns by our employees; the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; changes in exchange rates or interest rates; our ability to maintain the image of our brand; breaches in data security; disruptions to the Internet or our technology infrastructure; our ability to accurately forecast our future capital investment needs; exposure to changing economic, political and social developments in international and emerging markets; changes in business strategy, government regulations, or economic or market conditions that may result in substantial impairment of our assets; increases in our expenses or funding obligations relating to employee health, retiree health and/or pension benefits; the potential for various claims and litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters; our ability to realize the anticipated benefits from acquisitions, joint ventures or strategic alliances; our ability to manage insurance and claims expenses; and other risks discussed in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2015 or our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, or described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements.


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Item 1. Financial Statements
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2016 (unaudited) and December 31, 2015
(In millions)
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
3,299

 
$
2,730

Marketable securities
2,059

 
1,996

Accounts receivable, net
6,272

 
7,134

Other current assets
1,223

 
1,348

Total Current Assets
12,853

 
13,208

Property, Plant and Equipment, Net
18,489

 
18,352

Goodwill
3,436

 
3,419

Intangible Assets, Net
1,537

 
1,549

Non-Current Investments and Restricted Cash
485

 
473

Deferred Income Tax Assets
456

 
255

Other Non-Current Assets
1,086

 
1,055

Total Assets
$
38,342

 
$
38,311

LIABILITIES AND SHAREOWNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt and commercial paper
$
3,820

 
$
3,018

Accounts payable
2,287

 
2,587

Accrued wages and withholdings
2,270

 
2,253

Hedge margin liabilities
487

 
717

Income taxes payable
164

 
147

Self-insurance reserves
655

 
657

Accrued group welfare and retirement plan contributions
591

 
525

Other current liabilities
615

 
792

Total Current Liabilities
10,889

 
10,696

Long-Term Debt
11,506

 
11,316

Pension and Postretirement Benefit Obligations
10,052

 
10,638

Deferred Income Tax Liabilities
72

 
115

Self-Insurance Reserves
1,794

 
1,831

Other Non-Current Liabilities
1,262

 
1,224

Shareowners’ Equity:
 
 
 
Class A common stock (185 and 194 shares issued in 2016 and 2015)
2

 
2

Class B common stock (689 and 693 shares issued in 2016 and 2015)
7

 
7

Additional paid-in capital
—

 
—

Retained earnings
6,385

 
6,001

Accumulated other comprehensive loss
(3,651
)
 
(3,540
)
Deferred compensation obligations
44

 
51

Less: Treasury stock (1 share in 2016 and 2015)
(44
)
 
(51
)
Total Equity for Controlling Interests
2,743

 
2,470

Noncontrolling Interests
24

 
21

Total Shareowners’ Equity
2,767

 
2,491

Total Liabilities and Shareowners’ Equity
$
38,342

 
$
38,311

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
September 30,
Nine Months Ended
September 30,
2016
 
2015
2016
 
2015
Revenue
$
14,928

 
$
14,237

$
43,975

 
$
42,309

Operating Expenses:
 
 
 
 
 
 
Compensation and benefits
7,857

 
7,458

23,448

 
22,524

Repairs and maintenance
386

 
362

1,150

 
1,069

Depreciation and amortization
554

 
527

1,661

 
1,543

Purchased transportation
2,212

 
1,926

6,306

 
5,557

Fuel
541

 
617

1,480

 
1,900

Other occupancy
248

 
241

762

 
765

Other expenses
1,096

 
1,122

3,273

 
3,334

Total Operating Expenses
12,894

 
12,253

38,080

 
36,692

Operating Profit
2,034

 
1,984

5,895

 
5,617

Other Income and (Expense):
 
 
 
 
 
 
Investment income and other
13

 
4

38

 
12

Interest expense
(94
)

(83
)
(281
)
 
(256
)
Total Other Income and (Expense)
(81
)
 
(79
)
(243
)
 
(244
)
Income Before Income Taxes
1,953

 
1,905

5,652

 
5,373

Income Tax Expense
683

 
648

1,982

 
1,860

Net Income
$
1,270

 
$
1,257

$
3,670

 
$
3,513

Basic Earnings Per Share
$
1.44

 
$
1.40

$
4.15

 
$
3.90

Diluted Earnings Per Share
$
1.44

 
$
1.39

$
4.13

 
$
3.87


STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2016
 
2015
2016
 
2015
Net Income
$
1,270

 
$
1,257

$
3,670

 
$
3,513

Change in foreign currency translation adjustment, net of tax
(7
)
 
(141
)
(12
)
 
(344
)
Change in unrealized gain (loss) on marketable securities, net of tax
(1
)
 
—

4

 
1

Change in unrealized gain (loss) on cash flow hedges, net of tax
(64
)
 
(11
)
(183
)
 
6

Change in unrecognized pension and postretirement benefit costs, net of tax
27

 
28

80

 
80

Comprehensive Income
$
1,225

 
$
1,133

$
3,559

 
$
3,256

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)
 
Nine Months Ended
September 30,
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
Net income
$
3,670

 
$
3,513

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
1,661

 
1,543

Pension and postretirement benefit expense
804

 
807

Pension and postretirement benefit contributions
(1,298
)
 
(147
)
Self-insurance provision
(38
)
 
(148
)
Deferred tax (benefit) expense
(150
)
 
(198
)
Stock compensation expense
471

 
452

Other (gains) losses
(165
)
 
(79
)
Changes in assets and liabilities, net of effects of business acquisitions:
 
 
 
Accounts receivable
782

 
738

Other current assets
370

 
521

Accounts payable
(276
)
 
(745
)
Accrued wages and withholdings
46

 
(5
)
Other current liabilities
(491
)
 
214

Other operating activities
(23
)
 
(51
)
Net cash from operating activities
5,363

 
6,415

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(1,837
)
 
(1,648
)
Proceeds from disposals of property, plant and equipment
76

 
14

Purchases of marketable securities
(4,250
)
 
(6,074
)
Sales and maturities of marketable securities
4,038

 
4,821

Net (increase) decrease in finance receivables
4

 
(11
)
Cash paid for business acquisitions, net of cash and cash equivalents acquired
(3
)
 
(1,925
)
Other investing activities
(55
)
 
(136
)
Net cash used in investing activities
(2,027
)
 
(4,959
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term debt
(689
)
 
3,546

Proceeds from borrowings
4,018

 
1,927

Repayments of borrowings
(2,323
)
 
(1,699
)
Purchases of common stock
(2,007
)
 
(2,028
)
Issuances of common stock
196

 
194

Dividends
(1,987
)
 
(1,899
)
Other financing activities
11

 
(201
)
Net cash used in financing activities
(2,781
)
 
(160
)
Effect Of Exchange Rate Changes On Cash And Cash Equivalents
14

 
(146
)
Net Increase (Decrease) In Cash And Cash Equivalents
569

 
1,150

Cash And Cash Equivalents:
 
 
 
Beginning of period
2,730

 
2,291

End of period
$
3,299

 
$
3,441

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 September 30, 2016, our results of operations for the three and nine months ended September 30, 2016 and 2015, and cash flows for the nine months ended September 30, 2016 and 2015. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any other period or the entire year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.
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 material impact on our financial position or results of operations.
Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of September 30, 2016. The fair values of our investment securities are disclosed in note 4, recognized multiemployer pension withdrawal liabilities in note 6, our short and long-term debt in note 9 and our derivative instruments in note 14. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.
Accounting Estimates
The preparation of the accompanying interim, unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best information and actual results could differ materially from those estimates.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards

In May 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that changes the disclosure requirement for reporting investments at fair value. This update removes the requirement to categorize investments for which fair value is measured using the net asset value (“NAV”) per share practical expedient within the fair value hierarchy. These disclosures are limited to investments for which the entity has elected to measure fair value using the practical expedient. Substantially all of our Level 3 pension and postretirement benefit plan assets were measured using NAV as a practical expedient. This guidance became effective for us in the first quarter of 2016 and did not have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2014, the FASB issued an accounting standards update for companies that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. This guidance became effective for us in the first quarter of 2015 and did not have a material impact on our consolidated financial position, results of operations or cash flows.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.


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


Accounting Standards Issued But Not Yet Effective

In August 2016, the FASB issued an accounting standards update that addresses the classification and presentation of specific cash flow issues that currently result in diverse practices. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will generally be applied retrospectively and becomes effective for us in the first quarter of 2018, but early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated cash flows, but do not expect this standard to have a material impact.
 
In March 2016, the FASB issued an accounting standards update that simplifies the income tax accounting and cash flow presentation related to share-based compensation by requiring the recognition of all excess tax benefits and deficiencies directly on the income statement and classification as cash flows from operating activities on the statement of cash flows. This update also makes several changes to the accounting for forfeitures and employee tax withholding on share-based compensation. This new guidance becomes effective for us in the first quarter of 2017, but early adoption is permitted. At this time, we do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2016, the FASB issued an accounting standards update that requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with terms beyond twelve months. Although the distinction between operating and finance leases will continue to exist under the new standard, the recognition and measurement of expenses and cash flows will not change significantly from the current treatment. This new guidance requires modified retrospective application and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption on our consolidated financial position, results of operations, cash flows and related disclosures. We expect material changes to our consolidated financial position.

In January 2016, the FASB issued an accounting standards update which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The amendment will be effective for us beginning the first quarter of 2018. At this time, we do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued an accounting standards update that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services. This amended guidance requires revenue to be recognized in an amount that reflects the consideration to which the company expects to be entitled for those goods and services when the performance obligation has been satisfied. This amended guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. In August 2015, the FASB issued an accounting standards update that defers the effective date of the new revenue recognition guidance for one year, to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for periods beginning after December 15, 2016. In March 2016, the FASB issued an accounting standards update that further clarifies the May 2014 accounting standards update with respect to principle versus agent considerations in revenue from contracts with customers. In the second quarter of 2016, the FASB issued two accounting standard updates that provide additional guidance when identifying performance obligations and licenses as well as allowing for certain narrow scope improvements and practical expedients. These accounting standard updates have the same effective date as the original standard. The Company is planning to adopt the standard on January 1, 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this standard. Management is currently evaluating this standard and the related updates, including which transition approach to use, to determine the full impact of adoption.
Other accounting pronouncements issued, but not effective until after September 30, 2016, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.


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


NOTE 3. STOCK-BASED COMPENSATION
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, restricted performance shares and performance units are herein referred to as "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date, and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
During the first quarter of 2016, we granted Restricted Units under MIP to certain eligible management employees. Restricted Units granted under MIP generally vest over a five-year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis (less estimated forfeitures) ratably over the requisite service period. Based on the date that the eligible management population and performance targets were approved for MIP, we determined the award measurement date to be February 4, 2016 (for U.S.-based employees), March 2, 2016 (for management committee employees) and March 21, 2016 (for international-based employees); therefore, the Restricted Units awarded were valued for stock compensation expense purposes using the closing New York Stock Exchange price of $96.25, $98.77 and $105.15 on those dates, respectively.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under LTIP to certain eligible management employees. The performance targets are equally-weighted among adjusted consolidated operating return on invested capital, growth in adjusted consolidated revenue and total shareowner return relative to a peer group of companies.  These Restricted Units generally vest at the end of a three-year period (except in the case of death, disability, or retirement, in which case immediate vesting occurs on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets established on the grant date. 
For the two-thirds of the award related to consolidated operating return on invested capital and growth in consolidated revenue, we recognize the grant-date fair value of these Restricted Units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned.  Based on the date that the eligible management population and performance targets were approved for the 2016 LTIP Award, we determined the award measurement date to be March 24, 2016; therefore, the target Restricted Units awarded for this portion of the award were valued for stock compensation expense using the closing New York Stock Exchange price of $105.43 on that date.
The remaining one-third of the award related to total shareowner return relative to a peer group is valued using a Monte Carlo model. The model utilized the following assumptions: expected volatility of 16.45% based on historical stock volatility, a risk-free rate of return of 1.01% and no expected dividend yield because the units earn dividend equivalents.  This portion of the award was valued with a grant date fair value of $135.57 per unit and is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period. 
During the third quarter of 2016, the UPS Compensation Committee approved changes to the compensation arrangements of certain executive officers. These changes include a one-time grant of additional Restricted Units that will vest over the same period as the 2016 LTIP award. Based on the date that the Compensation Committee approved this additional compensation, we determined the award measurement date to be September 16, 2016; therefore, the target Restricted Units awarded for the portion of the award related to consolidated operating return on invested capital and growth in consolidated revenue, were valued for stock compensation expense using the closing New York Stock Exchange price of $106.86 on that date.

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


The remaining one-third of the award related to total shareowner return relative to a peer group is valued using a Monte Carlo model. The model utilized the following assumptions: expected volatility of 16.61% based on historical stock volatility, a risk-free rate of return of 0.81% and no expected dividend yield because the units earn dividend equivalents.  This portion of the award was valued with a grant date fair value of $147.90 per unit and is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period. 
Nonqualified Stock Options
During the first quarter of 2016, 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 2016 and 2015, we granted 0.2 million stock options, respectively, at a grant price of $98.77 and $101.93, respectively. The grant price was based on the closing New York Stock Exchange price of March 2, 2016 and March 2, 2015, respectively.
During the third quarter of 2016, the UPS Compensation Committee approved changes to the compensation arrangements of certain executive officers. These changes include a one-time grant of 0.1 million nonqualified stock options at a grant price of $106.86 pursuant to the terms and conditions of the UPS Stock Option program. The grant price was based on the closing New York Stock Exchange price of September 16, 2016. These stock options will vest ratably over five years 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.
The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was $14.09 for the third quarter 2016 award, $17.32 for the first quarter 2016 award and $18.07 for the 2015 award using the following assumptions:
 
Q3 2016
 
Q1 2016
 
2015
Expected life (in years)
7.5

 
7.5

 
7.5

Risk-free interest rate
1.50
%
 
1.66
%
 
2.07
%
Expected volatility
19.10
%
 
23.60
%
 
20.61
%
Expected dividend yield
2.97
%
 
2.94
%
 
2.63
%

Compensation expense for share-based awards recognized in net income for the three months ended September 30, 2016 and 2015 was $125 and $124 million pre-tax, respectively. Compensation expense for share-based awards recognized in net income for the nine months ended September 30, 2016 and 2015 was $471 and $452 million pre-tax, respectively.

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


NOTE 4. INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2016 and December 31, 2015 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
September 30, 2016:
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
1,156

 
$
—

 
$
—

 
$
1,156

Carbon credit investments (1)
433

 
—

 
(150
)
 
283

Total trading marketable securities
$
1,589

 
$
—

 
$
(150
)
 
$
1,439

 
 
 
 
 
 
 
 
Current available-for-sale securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
321

 
$
2

 
$
—

 
$
323

Mortgage and asset-backed debt securities
86

 
1

 
—

 
87

Corporate debt securities
203

 
2

 
—

 
205

Equity Securities
2

 
—

 
—

 
2

Non-U.S. government debt securities
3

 
—

 
—

 
3

Total available-for-sale marketable securities
$
615

 
$
5

 
$
—

 
$
620

 
 
 
 
 
 
 
 
Total current marketable securities
$
2,204

 
$
5

 
$
(150
)
 
$
2,059

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2015:
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
715

 
$
—

 
$
—

 
$
715

Non-U.S. government debt securities (1)
363

 
—

 
—

 
363

Carbon credit investments (1)
347

 
9

 
(5
)
 
351

Total trading marketable securities
$
1,425

 
$
9

 
$
(5
)
 
$
1,429

 
 
 
 
 
 
 
 
Current available-for-sale securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
341

 
$
—

 
$
(1
)
 
$
340

Mortgage and asset-backed debt securities
74

 
1

 
(1
)
 
74

Corporate debt securities
147

 
—

 
(1
)
 
146

U.S. state and local municipal debt securities
2

 
—

 
—

 
2

Equity securities
2

 
—

 
—

 
2

Non-U.S. government debt securities
3

 
—

 
—

 
3

Total available-for-sale marketable securities
$
569

 
$
1

 
$
(3
)
 
$
567

 
 
 
 
 
 
 
 
Total current marketable securities
$
1,994

 
$
10

 
$
(8
)
 
$
1,996

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



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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Investment Other-Than-Temporary Impairments
We have concluded that no material other-than-temporary impairment losses existed as of September 30, 2016. 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 September 30, 2016, 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
$
1,227

 
$
1,228

Due after one year through three years
453

 
454

Due after three years through five years
17

 
17

Due after five years
72

 
75

 
1,769

 
1,774

Equity and carbon credit investments
435

 
285

 
$
2,204

 
$
2,059

Non-Current Investments and Restricted Cash
We had $444 and $442 million of restricted cash related to our self-insurance requirements as of September 30, 2016 and December 31, 2015 which is reported in non-current investments and restricted cash on the consolidated balance sheets. This restricted cash is primarily invested in money market funds.
At September 30, 2016 and December 31, 2015, we held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets of $22 and $12 million as of September 30, 2016 and December 31, 2015, respectively. The amounts described above are classified as non-current investments and restricted cash on the consolidated balance sheets, while the quarterly change in investment fair value is recognized in investment income and other on the statements of consolidated income.
Fair Value Measurements
Marketable securities utilizing Level 1 inputs include active exchange-traded carbon credit investments and certain U.S. Government debt securities, as these securities have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed and equity securities and corporate, government, and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as other non-current investments in the tables below and as other non-current assets in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership and (2) 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 7.49% and 8.22% as of September 30, 2016 and December 31, 2015, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



The following table presents information about our investments measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, 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 
September 30, 2016:
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
323

 
$
—

 
$
—

 
$
323

Mortgage and asset-backed debt securities
—

 
87

 
—

 
87

Corporate debt securities
—

 
1,361

 
—

 
1,361

Equity securities
—

 
2

 
—

 
2

Non-U.S. government debt securities
—

 
3

 
—

 
3

Carbon credit investments
283

 
—

 
—

 
283

Total marketable securities
606

 
1,453

 
—

 
2,059

Other non-current investments
19

 
—

 
18

 
37

Total
$
625

 
$
1,453

 
$
18

 
$
2,096

December 31, 2015:
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
340

 
$
—

 
$
—

 
$
340

Mortgage and asset-backed debt securities
—

 
74

 
—

 
74

Corporate debt securities
—

 
861

 
—

 
861

U.S. state and local municipal debt securities
—

 
2

 
—

 
2

Equity securities
—

 
2

 
—

 
2

Non-U.S. government debt securities
—

 
366

 
—

 
366

Carbon credit investments
351

 
—

 
—

 
351

Total marketable securities
691

 
1,305

 
—

 
1,996

Other non-current investments
19

 
—

 
32

 
51

Total
$
710

 
$
1,305

 
$
32

 
$
2,047



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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended September 30, 2016 and 2015 (in millions):    
 
Marketable
Securities
 
Other
Non-Current
Investments
 
Total
Balance on July 1, 2016
$
—

 
$
22

 
$
22

Transfers into (out of) Level 3
—

 
—

 
—

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income and other)
—

 
(4
)
 
(4
)
Included in accumulated other comprehensive income (pre-tax)
—

 
—

 
—

Purchases
—

 
—

 
—

Sales
—

 
—

 
—

Balance on September 30, 2016
$
—

 
$
18

 
$
18

 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable
Securities
 
Other
Non-Current
Investments
 
Total
Balance on July 1, 2015
$
—

 
$
48

 
$
48

Transfers into (out of) Level 3
—

 
—

 
—

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income and other)
—

 
(8
)
 
(8
)
Included in accumulated other comprehensive income (pre-tax)
—

 
—

 
—

Purchases
—

 
—

 
—

Sales
—

 
—

 
—

Balance on September 30, 2015
$
—

 
$
40

 
$
40



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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the nine months ended September 30, 2016 and 2015 (in millions):
 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2016
$
—

 
32

 
32

Transfers into (out of) Level 3
—

 
—

 
—

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income and other)
—

 
(14
)
 
(14
)
Included in accumulated other comprehensive income (pre-tax)
—

 
—

 
—

Purchases
—

 
—

 
—

Sales
—

 
—

 
—

Balance on September 30, 2016
$
—

 
$
18

 
$
18

 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2015
$
—

 
64

 
64

Transfers into (out of) Level 3
—

 
—

 
—

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income and other)
—

 
(24
)
 
(24
)
Included in accumulated other comprehensive income (pre-tax)
—

 
—

 
—

Purchases
—

 
—

 
—

Sales
—

 
—

 
—

Balance on September 30, 2015
$
—

 
$
40


$
40

There were no transfers of investments between Level 1 and Level 2 during the three and nine months ended September 30, 2016 and 2015.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of September 30, 2016 and December 31, 2015 consist of the following (in millions):
 
2016
 
2015
Vehicles
$
8,448

 
$
8,111

Aircraft
15,742

 
15,815

Land
1,392

 
1,263

Buildings
3,432

 
3,280

Building and leasehold improvements
3,559

 
3,450

Plant equipment
8,257

 
8,026

Technology equipment
1,730

 
1,670

Equipment under operating leases
29

 
30

Construction-in-progress
596

 
273

 
43,185

 
41,918

Less: Accumulated depreciation and amortization
(24,696
)
 
(23,566
)
 
$
18,489

 
$
18,352

 
We monitor all property, plant and equipment for any indicators of potential impairment. No impairment charges on property, plant and equipment were recorded during the three and nine months ended September 30, 2016 and 2015.





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NOTE 6. EMPLOYEE BENEFIT PLANS
Company-Sponsored Benefit Plans
Information about net periodic benefit cost for our company-sponsored pension and postretirement benefit plans is as follows for the three and nine months ended September 30, 2016 and 2015 (in millions):
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Three Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
353

 
$
382

 
$
7

 
$
8

 
$
12

 
$
12

Interest cost
457

 
423

 
32

 
30

 
10

 
11

Expected return on assets
(629
)
 
(622
)
 
(2
)
 
(5
)
 
(15
)
 
(15
)
Amortization of prior service cost
41

 
42

 
1

 
2

 
—

 
—

Net periodic benefit cost
$
222

 
$
225

 
$
38

 
$
35

 
$
7

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Nine Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
1,059

 
$
1,145

 
$
21

 
$
25

 
$
37

 
$
37

Interest cost
1,371

 
1,270

 
92

 
91

 
31

 
33

Expected return on assets
(1,887
)
 
(1,866
)
 
(4
)
 
(13
)
 
(44
)
 
(46
)
Amortization of prior service cost
125

 
126

 
3

 
4

 
—

 
1

Net periodic benefit cost
$
668

 
$
675

 
$
112

 
$
107

 
$
24

 
$
25

During the first nine months of 2016, we contributed $1.227 billion and $71 million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We also expect to contribute $9 and $30 million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively.
The UPS Retirement Plan (a single-employer defined benefit pension plan sponsored by UPS) was closed to new non-union participants effective July 1, 2016. The Company amended the UPS 401(k) Savings Plan so that employees who previously would have been eligible for participation in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, begin receiving a UPS Retirement Contribution. For employees eligible to receive the Retirement Contribution, UPS will contribute 3% to 8% of eligible pay to the UPS 401(k) Savings Plan based on years of vesting service and business unit. Contributions will be made annually in cash to the accounts of participants who are employed on December 31 of each calendar year and become vested after the employee reaches three complete years of service.
Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.
As of September 30, 2016 and December 31, 2015 we had $867 and $872 million, respectively, recognized in "other non-current liabilities" on our consolidated balance sheets associated with our previous withdrawal from a multiemployer pension plan. This liability is payable in equal monthly installments over a remaining term of approximately 46 years. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value of this withdrawal liability as of September 30, 2016 and December 31, 2015 was $941 and $841 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the plan and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters, UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants retiring on or after January 1, 2008 in the event that benefits are lawfully reduced by the CSPF in the future.

In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government oversight. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants, including UPS participants retiring on or after January 1, 2008. We vigorously challenged the proposed benefit reduction plan because we believed that it did not comply with the law and that certain actions by the CSPF were invalid. On May 6, 2016, the U.S. Department of the Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of requirements set forth in the MPRA.
The CSPF has asserted that it will become insolvent in 2025 which could lead to the reduction of retirement benefits. Although there are numerous factors that could affect the CSPF’s status, if the CSPF were to become insolvent as they have projected , UPS may be required to provide coordinating benefits, thereby increasing the current projected benefit obligation for the UPS/IBT Plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.
The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to which benefits are paid by the Pension Benefit Guaranty Corporation, as well as the effect of discount rates and various other actuarial assumptions. The numerous uncertainties that exist regarding the ultimate resolution of the CSPF situation prevent us from making reliable estimates of the timing and amount, if any, of CSPF benefit reductions that could result in additional benefit obligations for the UPS/IBT Plan. Therefore, we have not recognized any liability for additional coordinating benefits of the UPS/IBT Plan, but the current projected benefit obligation could materially increase as these uncertainties are resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in accordance with Accounting Standards Codification Topic 715 - Compensation - Retirement Benefits.
Collective Bargaining Agreements
As of December 31, 2015, we had approximately 266,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. In addition, our airline pilots, airline mechanics, ground mechanics and certain other employees are employed under other collective bargaining agreements. In 2014, the Teamsters ratified a new national master agreement (“NMA”) with UPS that will expire on July 31, 2018. The economic provisions in the NMA included wage rate increases, as well as increased contribution rates for healthcare and pension benefits. Most of these economic provisions were retroactive to August 1, 2013, which was the effective date of the NMA. During the first quarter of 2015, we remitted $53 million for these retroactive economic benefits.
We have approximately 2,600 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which became amendable at the end of 2011. On June 30, 2016, the IPA and the Company announced a tentative agreement on a new five-year labor contract. On August 31, 2016, the IPA members voted to ratify the agreement. Terms of the agreement became effective September 1, 2016 and run through September 1, 2021. The economic provisions in the agreement included pay increases, a signing bonus and enhanced pension benefits.
Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727 for a new agreement. In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”) that will expire on July 31, 2019.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of September 30, 2016 and December 31, 2015 (in millions):
 
U.S. Domestic
Package
 
International
Package
 
Supply Chain &
Freight
 
Consolidated
December 31, 2015:
$
715

 
$
425

 
$
2,279

 
$
3,419

Acquired
—

 
—

 
—

 
—

Currency / Other
$
—

 
$
—

 
$
17

 
$
17

September 30, 2016:
$
715

 
$
425

 
$
2,296

 
$
3,436

The change in goodwill for the Supply Chain & Freight segment was primarily due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
The following is a summary of intangible assets as of September 30, 2016 and December 31, 2015 (in millions):
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
September 30, 2016:
 
 
 
 
 
Capitalized software
$
2,858

 
$
(2,103
)
 
$
755

Licenses
130

 
(63
)
 
67

Franchise rights
128

 
(88
)
 
40

Customer relationships
511

 
(73
)
 
438

Trade name
200

 
—

 
200

Trademarks, patents and other
58

 
(21
)
 
37

Total Intangible Assets, Net
$
3,885


$
(2,348
)
 
$
1,537

December 31, 2015:
 
 
 
 
 
Capitalized software
$
2,739

 
$
(2,026
)
 
$
713

Licenses
189

 
(116
)
 
73

Franchise rights
125

 
(83
)
 
42

Customer relationships
511

 
(35
)
 
476

Trade name
200

 
—

 
200

Trademarks, patents and other
61

 
(16
)
 
45

Total Intangible Assets, Net
$
3,825

 
$
(2,276
)
 
$
1,549


As of September 30, 2016, we had a trade name with a carrying value of $200 million and licenses with a carrying value of $4 million, which are deemed to be indefinite-lived intangible assets and are included in the table above.


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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8. BUSINESS COMBINATIONS
In 2016 and 2015, we acquired several businesses that were not material, individually or in the aggregate, to our consolidated financial position or results of operations. These acquisitions were funded with cash from operations. In March 2015, we acquired Poltraf Sp z.o.o. ("Poltraf"), a Polish-based pharmaceutical logistics company recognized for its temperature-sensitive warehousing and transportation solutions. In May 2015 and June 2015, we acquired Parcel Pro, Inc. ("Parcel Pro") and the Insured Parcel Services division of G4S International Logistics ("IPS"), respectively. These businesses provide services and insurance coverage for the transport of high value luxury goods.
In August 2015, we acquired Coyote Logistics Midco, Inc. ("Coyote"), a U.S.-based truckload freight brokerage company, for $1.829 billion. This acquisition allows us to expand our existing portfolio by adding large scale truckload freight brokerage and transportation management services to our Supply Chain & Freight reporting segment. In addition, we will continue to benefit from synergies in purchased transportation, backhaul utilization, cross-selling to customers, as well as technology systems and industry best practices. The acquisition was funded using cash from operations and issuances of commercial paper. The final purchase price allocation was completed in the third quarter of 2016 and there were no material adjustments recorded.
The financial results of these acquired businesses are included in the Supply Chain & Freight segment from the date of acquisition and were not material to our results of operations.




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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt as of September 30, 2016 and December 31, 2015 consists of the following (in millions):
 
Principal
Amount
 
 
 
Carrying Value
 
 
Maturity
 
2016
 
2015
Commercial paper
$
3,759

 
2016 -2017
 
$
3,759

 
$
2,965

Fixed-rate senior notes:
 
 
 
 
 
 
 
1.125% senior notes
375

 
2017
 
374

 
372

5.50% senior notes
750

 
2018
 
776

 
787

5.125% senior notes
1,000

 
2019
 
1,060

 
1,064

3.125% senior notes
1,500

 
2021
 
1,634

 
1,613

2.45% senior notes
1,000

 
2022
 
1,031

 
991

6.20% senior notes
1,500

 
2038
 
1,481

 
1,481

4.875% senior notes
500

 
2040
 
489

 
489

3.625% senior notes
375

 
2042
 
367

 
367

8.375% Debentures:
 
 
 
 
 
 
 
8.375% debentures
424

 
2020
 
474

 
474

8.375% debentures
276

 
2030
 
282

 
282

Pound Sterling notes:
 
 
 
 
 
 
 
5.50% notes
86

 
2031
 
80

 
92

5.125% notes
589

 
2050
 
563

 
638

Euro senior notes:
 
 
 
 
 
 
 
1.625% notes
781

 
2025
 
775

 
759

Floating rate senior notes
558

 
2020
 
556

 
544

Floating rate senior notes
833

 
2049-2066
 
824

 
600

Capital lease obligations
453

 
2016-3005
 
453

 
475

Facility notes and bonds
319

 
2016-2045
 
319

 
319

Other debt
29

 
2016-2022
 
29

 
22

Total debt
15,107

 
 
 
15,326

 
14,334

Less: Current maturities
 
 
 
 
(3,820
)
 
(3,018
)
Long-term debt
 
 
 
 
$
11,506

 
$
11,316

Debt Issuances
In March, June and August 2016, we issued floating rate senior notes in principal amounts of $118, $74 and $35 million, respectively. These notes bear interest at three-month LIBOR less 30 basis points and mature in 2066. These notes are callable at various times after 30 years at a stated percentage of par value, and putable by the note holders at various times after one year at a stated percentage of par value.
On October 19, 2016, we issued U.S. and Euro senior rate notes in two separate transactions. These senior notes consist of three separate series, as follows:
•
Two series of notes, each in the principal amount of $500 million, were issued. These notes bear interest at 2.4% and 3.4% fixed rates and are due November 2026 and November 2046, respectively. Interest on these notes is payable semi-annually, in each case beginning May 15, 2017. Each note is callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date at a benchmark treasury yield plus 10 and 15 basis points, respectively, and accrued interest.

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•
Notes in the principal amount of €500 million ($549 million) were issued. These notes bear interest at a 1.0% fixed rate and are due November 2028. Interest on these notes is payable annually, beginning November 15, 2017. The notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable German government bond yield plus 15 basis points and accrued interest.
Sources of Credit
We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as of September 30, 2016: $2.580 billion with an average interest rate of 0.45% and €1.056 billion ($1.179 billion) with an average interest rate of -0.35%. As of September 30, 2016, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheet.
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 24, 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 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 September 30, 2016.
The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 25, 2021. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of September 30, 2016.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of September 30, 2016 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 September 30, 2016, 10% of net tangible assets was equivalent to $2.248 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.
Fair Value of Debt
Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately $17.330 billion and $15.524 billion as of September 30, 2016 and December 31, 2015, 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.

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Contractual Commitments
We have contractual obligations and commitments for the purchase of aircraft, vehicles, technology equipment and building and leasehold improvements. On October 27, 2016, we placed an order for 14 Boeing 747-8 freighters to be delivered between 2017 and 2020. The agreement also includes an option to purchase an additional 14 747-8 freighters. In addition, we have new purchase commitments for aircraft engines, equipment and hub automation and expansion projects. These new purchase commitments will provide additional capacity for increased demand for our air and ground shipping services. Including these additional obligations, the expected cash outflow to satisfy our total purchase commitments is as follows (in millions): 2016 (remaining) - $466; 2017 - $1,020; 2018 - $1,010; 2019 - $611; 2020 - $347; and thereafter - $65.


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NOTE 10. LEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business activities.

Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious defense and will deny, liability in all litigation pending against us, including (except as otherwise noted herein) the matters described below, and we intend to defend vigorously each case. We have accrued for legal claims when, and to the extent that, amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.
For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible loss or range of loss.
Judicial Proceedings
We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with these matters would have a material adverse effect on our financial condition, results of operations or liquidity.
UPS and our subsidiary The UPS Store, Inc., are defendants in Morgate v. The UPS Store, Inc. et al., an action in the Los Angeles Superior Court brought on behalf of a certified class of all franchisees who chose to rebrand their Mail Boxes Etc. franchises to The UPS Store in March 2003. Plaintiff alleges that UPS and The UPS Store, Inc. misrepresented and omitted facts to the class about the market tests that were conducted before offering the class the choice of whether to rebrand to The UPS Store. Trial is scheduled for mid-2017.
There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from the remaining aspects of this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; 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 Court granted summary judgment motions filed by UPS and FedEx, entered judgment in favor of UPS and FedEx, and dismissed the case. Plaintiff appealed, and briefing is now complete before the Court of Appeals for the Ninth Circuit. The Antitrust Division of the U.S. Department of Justice (“DOJ”) opened a civil investigation of our policies and practices for dealing with third-party negotiators. We have cooperated with this investigation. 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) the DOJ investigation is pending; (2) the Court granted our motion for summary judgment; and (3) the appeal remains pending. 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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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 operations or liquidity.
In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern District of New York, arising from alleged shipments of cigarettes to New York State and City residents. The complaint asserts claims under various federal and state laws.  The complaint also includes a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. Trial was held in September, 2016, and closing arguments were held on November 2, 2016. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious factual and legal defenses; and (2) it remains uncertain how the Court will resolve the State and City’s various claims and our defenses. 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.
On May 2, 2016, a purported shareowner derivative suit was filed in the Delaware Court of Chancery naming certain of UPS’s current and former officers and directors as defendants, alleging that they breached their fiduciary duties by failing to monitor UPS’s compliance with the Assurance of Discontinuance and other federal and state laws relating to cigarette deliveries. The Company’s and individual defendants’ motion to dismiss was heard in October, 2016.
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.
Other Matters
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 submitted its written defenses to these allegations in April 2014. 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 the 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 this matter, including the calculation of any potential fine; and (3) there is uncertainty about the time period that is the subject of the investigation. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.


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NOTE 11. 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 on a one-to-one basis 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 September 30, 2016, 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 September 30, 2016, no preferred shares had been issued.
 
The following is a rollforward of our common stock, additional paid-in capital and retained earnings accounts for the nine months ended September 30, 2016 and 2015 (in millions, except per share amounts):
 
2016
 
2015
 
Shares
 
Dollars
 
Shares
 
Dollars
Class A Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
194

 
$
2

 
201

 
$
2

Common stock purchases
(4
)
 
—

 
(3
)
 
—

Stock award plans
5

 
—

 
4

 
—

Common stock issuances
2

 
—

 
2

 
—

Conversions of class A to class B common stock
(12
)
 
—

 
(8
)
 
—

Class A shares issued at end of period
185

 
$
2

 
196

 
$
2

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
693

 
$
7

 
705

 
$
7

Common stock purchases
(16
)
 
—

 
(17
)
 
—

Conversions of class A to class B common stock
12

 
—

 
8

 
—

Class B shares issued at end of period
689

 
$
7

 
696

 
$
7

Additional Paid-In Capital
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
—

 
 
 
$
—

Stock award plans
 
 
423

 
 
 
391

Common stock purchases
 
 
(811
)
 
 
 
(567
)
Common stock issuances
 
 
233

 
 
 
245

Option premiums received (paid)
 
 
155

 
 
 
(69
)
Balance at end of period
 
 
$
—

 
 
 
$
—

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
6,001

 
 
 
$
5,726

Net income attributable to common shareowners
 
 
3,670

 
 
 
3,513

Dividends ($2.34 and $2.19 per share)
 
 
(2,093
)
 
 
 
(2,000
)
Common stock purchases
 
 
(1,193
)
 
 
 
(1,468
)
Balance at end of period
 
 
$
6,385

 
 
 
$
5,771

We repurchased 19.3 million shares of class A and class B common stock for $2.004 billion during the nine months ended September 30, 2016, and 20.2 million shares for $2.035 billion during the nine months ended September 30, 2015. During the first quarter of 2016, we also exercised a capped call option that we entered into in 2015 for which we received 0.2 million UPS class B shares. The $25 million premium payment for this capped call option reduced shareowners' equity in 2015. In total, shares repurchased and received in the nine months ended September 30, 2016 were 19.5 million shares for $2.029 billion. In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion, which has no expiration date. As of September 30, 2016, we had $6.831 billion of this share repurchase authorization available.

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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 third quarter of 2016, we entered into an accelerated share repurchase program which allowed us to repurchase 2.8 million shares for $300 million. The program was completed in September 2016.
In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We received (paid) net premiums of $155 and $(69) million during the first nine months of 2016 and 2015, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of September 30, 2016, we had no capped call options outstanding.
Accumulated Other Comprehensive Income (Loss)
We experience activity in Accumulated other comprehensive income (loss) ("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 nine months ended September 30, 2016 and 2015 is as follows (in millions):
 
2016
 
2015
Foreign currency translation gain (loss):
 
 
 
Balance at beginning of period
$
(897
)
 
$
(457
)
Translation adjustment (net tax of $24 and no tax impact)
(12
)
 
(344
)
Balance at end of period
(909
)
 
(801
)
Unrealized gain (loss) on marketable securities, net of tax:
 
 
 
Balance at beginning of period
(1
)
 
—

Current period changes in fair value (net of tax effect of $3 and $1)
4

 
1

Reclassification to earnings (no tax impact in either period)
—

 
—

Balance at end of period
3

 
1

Unrealized gain (loss) on cash flow hedges, net of tax:
 
 
 
Balance at beginning of period
67

 
61

Current period changes in fair value (net of tax effect of $(15) and $71)
(24
)
 
119

Reclassification to earnings (net of tax effect of $(96) and $(67))
(159
)
 
(113
)
Balance at end of period
(116
)
 
67

Unrecognized pension and postretirement benefit costs, net of tax:
 
 
 
Balance at beginning of period
(2,709
)
 
(3,198
)
Reclassification to earnings (net of tax effect of $48 and $51)
80

 
80

Balance at end of period
(2,629
)
 
(3,118
)
Accumulated other comprehensive income (loss) at end of period
$
(3,651
)
 
$
(3,851
)




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Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three and nine months ended September 30, 2016 and 2015 is as follows (in millions):
Three Months Ended September 30:
 
 
 
 
 
 
Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
 
2016
 
2015
 
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
$
(7
)
 
$
(6
)
 
Interest expense
Foreign exchange contracts
83

 
67

 
Revenue
Income tax (expense) benefit
(29
)
 
(22
)
 
Income tax expense
Impact on net income
47

 
39

 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(42
)
 
(44
)
 
Compensation and benefits
Income tax (expense) benefit
15

 
16

 
Income tax expense
Impact on net income
(27
)
 
(28
)
 
Net income
Total amount reclassified for the period
$
20

 
$
11

 
Net income

Nine Months Ended September 30:
 
 
 
 
 
 
Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
 
2016
 
2015
 
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
(19
)
 
(18
)
 
Interest expense
Foreign exchange contracts
—

 
(25
)
 
Interest expense
Foreign exchange contracts
274

 
223

 
Revenue
Income tax (expense) benefit
(96
)
 
(67
)
 
Income tax expense
Impact on net income
159

 
113

 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(128
)
 
(131
)
 
Compensation and benefits
Income tax (expense) benefit
48

 
51

 
Income tax expense
Impact on net income
(80
)
 
(80
)
 
Net income
Total amount reclassified for the period
$
79

 
$
33

 
Net income


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Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the nine months ended September 30, 2016 and 2015 is as follows (in millions):
 
2016
 
2015
Shares
 
Dollars
 
Shares
 
Dollars
Deferred Compensation Obligations:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
51

 
 
 
$
59

Reinvested dividends
 
 
2

 
 
 
3

Benefit payments
 
 
(9
)
 
 
 
(11
)
Balance at end of period
 
 
$
44

 
 
 
$
51

Treasury Stock:
 
 
 
 
 
 
 
Balance at beginning of period
(1
)
 
$
(51
)
 
(1
)
 
$
(59
)
Reinvested dividends
—

 
(2
)
 
—

 
(3
)
Benefit payments
—

 
9

 
—

 
11

Balance at end of period
(1
)
 
$
(44
)
 
(1
)
 
$
(51
)

Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests increased $3 and $2 million for the nine months ended September 30, 2016 and 2015, respectively.


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NOTE 12. 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 U.S. export and U.S. import shipments. Our International Package reporting segment includes the operations of our Europe, Asia, Americas and ISMEA (Indian Subcontinent, Middle East and Africa) operating segments.
Supply Chain & Freight
Supply Chain & Freight includes the operations of our forwarding, logistics, Coyote, UPS Freight and other aggregated business units. Our forwarding, logistics and Coyote units provide services in more than 195 countries and territories worldwide, and include North American and international air and ocean freight forwarding, customs brokerage, truckload freight brokerage, distribution and post-sales services and 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, 2015, with certain expenses allocated between the segments using activity-based costing methods.
Segment information for the three and nine months ended September 30, 2016 and 2015 is as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016