Document

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, 2018 or



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

For the transition period from to

Commission file number 001-15451

_____________________________________

United Parcel Service, Inc.

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

There were 164,014,289 Class A shares, and 695,211,879 Class B shares, with a par value of $0.01 per share, outstanding at October 24, 2018.

Table of Contents

TABLE OF CONTENTS



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 and Accounting Policies	5
	Note 2—Recent Accounting Pronouncements	6
	Note 3—Revenue Recognition	11
	Note 4—Stock-Based Compensation	14
	Note 5—Investments and Restricted Cash	16
	Note 6—Property, Plant and Equipment	19
	Note 7—Employee Benefit Plans	20
	Note 8—Goodwill and Intangible Assets	23
	Note 9—Debt and Financing Arrangements	24
	Note 10—Legal Proceedings and Contingencies	26
	Note 11—Shareowners’ Equity	28
	Note 12—Segment Information	32
	Note 13—Earnings Per Share	33
	Note 14—Derivative Instruments and Risk Management	34
	Note 15—Income Taxes	40
	Note 16— Transformation Strategy	41
	Note 17— Subsequent Events	42
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
	Overview	43
	Items Affecting Comparability	43
	Results of Operations - Segment Review	45
	U.S. Domestic Package Operations	46
	International Package Operations	49
	Supply Chain & Freight Operations	52
	Consolidated Operating Expenses	54
	Other Income and (Expense)	57
	Income Tax Expense	57
	Liquidity and Capital Resources	58
	Net Cash From Operating Activities	58
	Net Cash Used in Investing Activities	59
	Net Cash Used in Financing Activities	60
	Sources of Credit	62
	Contractual Commitments	62
	Guarantees and Other Off-Balance Sheet Arrangements	62
	Contingencies	62
	Collective Bargaining Agreements	62
	Recent Accounting Pronouncements	62
	Rate Adjustments	62
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63
Item 4.	Controls and Procedures	64
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 6.	Exhibits	66

Table of Contents

PART I. FINANCIAL INFORMATION

Cautionary Statement About Forward-Looking Statements

This report includes and refers to certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than those of current or historical fact, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof and similar terms are intended to be forward-looking statements. Forward-looking statements are made subject to safe harbor protections of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Our disclosure and analysis in this report, in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our other filings with the Securities and Exchange Commission contain forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties include, but are not limited to: general economic conditions, both in the U.S. and internationally; significant competition on a local, regional, national, and international basis; changes in our relationships with our significant customers; the existing complex and stringent regulation in the U.S. and internationally (including tax laws and regulations), changes to which can impact our business; increased physical or data security requirements that may increase our costs of operations and reduce operating efficiencies; legal, regulatory or market responses to global climate change; negotiation and ratification of labor contracts; strikes, work stoppages and slowdowns by our employees; the effects of changing prices of energy, including gasoline, diesel and jet fuel, and interruptions in supplies of these commodities; changes in exchange rates or interest rates; our ability to maintain the image of our brand; breaches in data security; disruptions to the Internet or our technology infrastructure; interruption of our business from natural or man-made disasters including terrorism; our ability to accurately forecast our future capital investment needs; exposure to changing economic, political and social developments in international and emerging markets; changes in business strategy, government regulations, or economic or market conditions that may result in substantial impairment of our assets; increases in our expenses or funding obligations relating to employee health, retiree health and/or pension benefits; potential additional tax liabilities both in the U.S. and internationally; the potential for various claims and litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters; our ability to realize the anticipated benefits from acquisitions, joint ventures or strategic alliances; our ability to manage insurance and claims expenses; and other risks discussed in our filings with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2017 and in subsequent reports filed with the Securities and Exchange Commission. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements, except as required by law.

Table of Contents

Item 1. Financial Statements

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2018 (unaudited) and December 31, 2017 (In millions)



	September 30, 2018			December 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents	$	4,097		$	3,320
Marketable securities	744			749
Accounts receivable, net	7,494			8,773
Current income taxes receivable	320			1,573
Other current assets	1,336			1,303
Total Current Assets	13,991			15,718
Property, Plant and Equipment, Net	25,379			22,118
Goodwill	3,825			3,872
Intangible Assets, Net	2,070			1,964
Non-Current Investments and Restricted Cash	307			483
Deferred Income Tax Assets	193			266
Other Non-Current Assets	924			1,153
Total Assets	$	46,689		$	45,574
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper	$	3,200		$	4,011
Accounts payable	3,689			3,934
Accrued wages and withholdings	2,748			2,608
Self-insurance reserves	697			705
Accrued group welfare and retirement plan contributions	679			677
Other current liabilities	1,209			951
Total Current Liabilities	12,222			12,886
Long-Term Debt	20,101			20,278
Pension and Postretirement Benefit Obligations	7,012			7,061
Deferred Income Tax Liabilities	1,069			756
Self-Insurance Reserves	1,644			1,765
Other Non-Current Liabilities	1,515			1,804
Shareowners’ Equity:
Class A common stock (165 and 173 shares issued in 2018 and 2017, respectively)	2			2
Class B common stock (695 and 687 shares issued in 2018 and 2017, respectively)	7			7
Additional paid-in capital	—			—
Retained earnings	8,377			5,852
Accumulated other comprehensive loss	(5,288		)	(4,867		)
Deferred compensation obligations	32			37
Less: Treasury stock (1 share in 2018 and 2017)	(32		)	(37		)
Total Equity for Controlling Interests	3,098			994
Noncontrolling interests	28			30
Total Shareowners’ Equity	3,126			1,024
Total Liabilities and Shareowners’ Equity	$	46,689		$	45,574

See notes to unaudited consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(In millions, except per share amounts)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenue	$	17,444		$	16,173		$	52,013		$	47,610
Operating Expenses:
Compensation and benefits	9,015			8,437			27,084			25,032
Repairs and maintenance	437			399			1,294			1,181
Depreciation and amortization	524			572			1,662			1,688
Purchased transportation	3,216			2,832			9,570			7,991
Fuel	867			636			2,469			1,873
Other occupancy	321			282			1,003			845
Other expenses	1,337			1,203			3,911			3,534
Total Operating Expenses	15,717			14,361			46,993			42,144
Operating Profit	1,727			1,812			5,020			5,466
Other Income and (Expense):
Investment income and other	317			236			913			624
Interest expense	(155		)	(111		)	(457		)	(324		)
Total Other Income and (Expense)	162			125			456			300
Income Before Income Taxes	1,889			1,937			5,476			5,766
Income Tax Expense	381			678			1,138			1,957
Net Income	$	1,508		$	1,259		$	4,338		$	3,809
Basic Earnings Per Share	$	1.74		$	1.45		$	5.01		$	4.37
Diluted Earnings Per Share	$	1.73		$	1.44		$	4.99		$	4.35

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(In millions)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net Income	$	1,508		$	1,259		$	4,338		$	3,809
Change in foreign currency translation adjustment, net of tax	(28		)	32			(112		)	86
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	49			(86		)	315			(278		)
Change in unrecognized pension and postretirement benefit costs, net of tax	38			32			115			450
Comprehensive Income	$	1,566		$	1,237		$	4,652		$	4,068

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,
	2018			2017
Cash Flows From Operating Activities:
Net income	$	4,338		$	3,809
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	1,662			1,688
Pension and postretirement benefit expense	461			651
Pension and postretirement benefit contributions	(137		)	(2,585		)
Self-insurance reserves	(127		)	(17		)
Deferred tax (benefit) expense	218			298
Stock compensation expense	507			463
Other (gains) losses	243			(21		)
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	1,096			818
Other assets	1,299			151
Accounts payable	(391		)	(398		)
Accrued wages and withholdings	200			134
Other liabilities	35			(582		)
Other operating activities	18			9
Net cash from operating activities	9,422			4,418
Cash Flows From Investing Activities:
Capital expenditures	(4,490		)	(3,708		)
Proceeds from disposals of property, plant and equipment	45			18
Purchases of marketable securities	(634		)	(1,465		)
Sales and maturities of marketable securities	612			1,582
Net (increase) decrease in finance receivables	(7		)	(1		)
Cash paid for business acquisitions, net of cash and cash equivalents acquired	(2		)	(61		)
Other investing activities	(23		)	20
Net cash used in investing activities	(4,499		)	(3,615		)
Cash Flows From Financing Activities:
Net change in short-term debt	(77		)	(354		)
Proceeds from long-term borrowings	1,052			5,328
Repayments of long-term borrowings	(2,122		)	(2,450		)
Purchases of common stock	(770		)	(1,346		)
Issuances of common stock	176			177
Dividends	(2,260		)	(2,085		)
Other financing activities	(259		)	(184		)
Net cash used in financing activities	(4,260		)	(914		)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(57		)	56
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	606			(55		)
Cash, Cash Equivalents and Restricted Cash:
Beginning of period	3,769			3,921
End of period	$	4,375		$	3,866

See notes to unaudited consolidated financial statements.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Principles of Consolidation

In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2018, our results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any other period or the entire year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans for each three month period based on one quarter of the estimated annual expense.

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no material impact on our financial position or results of operations.

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of September 30, 2018. The fair values of our investment securities are disclosed in note 5, our recognized multiemployer pension withdrawal liabilities in note 7, our short and long-term debt in note 9 and our derivative instruments in note 14. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. We evaluate the useful lives of our property, plant and equipment based on our usage, maintenance and replacement policies, and taking into account physical and economic factors that may affect the useful lives of the assets. As part of our ongoing investment in transformation, beginning in the third quarter of 2018, we revised our estimates of useful lives for building improvements and vehicles based on our current assessment of these factors. In general, the change in estimate had the effect of lengthening the useful lives of vehicles and building improvements. Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the assets, which are as follows: Vehicles-6 to 15 years; Aircraft-12 to 30 years; Buildings-20 to 40 years; Leasehold Improvements-lesser of asset useful life or lease term; Plant Equipment-3 to 20 years; Technology Equipment-3 to 5 years. The costs of major airframe and engine overhauls, as well as routine maintenance and repairs, are charged to expense as incurred.

This change in estimate was applied prospectively effective for the third quarter of 2018. See"Consolidated Operating Expenses" of Item 2 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for the discussion of the impact to "Depreciation and amortization."

Accounting Estimates

The preparation of the accompanying interim, unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best information and actual results could differ materially from those estimates.

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services ("Revenue from Contracts with Customers"). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner depicting the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued a number of updates to this standard. Effective January 1, 2018, we adopted the requirements of this ASU using the full retrospective method. See note 3 for required disclosures pertaining to the new ASU.

In November 2016, the FASB issued an ASU that is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows ("Restricted Cash"). Effective January 1, 2018, we adopted the requirements of this ASU retrospectively. As a result of this update, restricted cash is included within cash and cash equivalents on our statements of consolidated cash flows.

In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost ("Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost"). The update requires employers to report the current service cost component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented separately from service cost and outside of income from operations. Effective January 1, 2018, we adopted the requirements of this ASU retrospectively, as required. As a result of this update, the net amount of interest cost, prior service cost and expected return on plan assets is now presented as other income.

We have recast our consolidated financial statements from amounts previously reported due to the adoption of new revenue recognition, pension and restricted cash standards. Impacted consolidated balance sheet line items, which reflect the adoption of the new ASUs, are as follows (in millions):



	December 31, 2017
	As previously reported		Adjustments (a)			Adjustments (b)		Adjustments (c)		As Recast
Assets:
Other current assets	$	1,133	$	170		$	—	$	—	$	1,303
Total current assets	15,548		170			—		—		15,718
Deferred income tax assets	265		1			—		—		266
Total Assets	$	45,403	$	171		$	—	$	—	$	45,574
Liabilities:
Accounts payable	$	3,872	$	62		$	—	$	—	$	3,934
Accrued wages and withholdings	2,521		87			—		—		2,608
Other current liabilities⁽¹⁾	905		29			—		—		934
Total current liabilities	12,708		178			—		—		12,886
Deferred income tax liabilities	757		(1		)	—		—		756
Shareowners' Equity:
Retained earnings	5,858		(6		)	—		—		5,852
Total Shareowners' Equity	1,030		(6		)	—		—		1,024
Total Liabilities and Shareowners' Equity	$	45,403	$	171		$	—	$	—	$	45,574

^{(1) The caption "Other current liabilities" was presented separately from "Hedge margin liabilities" of}^{$17 million}^{in the Form 10-K at December 31, 2017. These captions have been collapsed in the consolidated balance sheets as of September 30, 2018 and December 31, 2017 included within this Form 10-Q.}

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited consolidated statement of operations, which reflects the adoption of the new ASUs, is as follows (in millions):



	Three months ended September 30, 2017
	As Previously Reported			Adjustments (a)			Adjustments (b)			Adjustments (c)		As Recast
Revenue	$	15,978		$	195		$	—		$	—	$	16,173
Operating Expenses:
Compensation and benefits	8,221			—			216			—		8,437
Repairs and maintenance	398			1			—			—		399
Depreciation and amortization	572			—			—			—		572
Purchased transportation	2,652			180			—			—		2,832
Fuel	636			—			—			—		636
Other occupancy	282			—			—			—		282
Other expenses	1,182			21			—			—		1,203
Total Operating Expenses	13,943			202			216			—		14,361
Operating Profit	2,035			(7		)	(216		)	—		1,812
Other Income and (Expense):
Investment income and other	20			—			216			—		236
Interest expense	(111		)	—			—			—		(111		)
Total Other Income and (Expense)	(91		)	—			216			—		125
Income Before Income Taxes	1,944			(7		)	—			—		1,937
Income Tax Expense (Benefit)	680			(2		)	—			—		678
Net Income	$	1,264		$	(5	)	$	—		$	—	$	1,259
Basic Earnings Per Share	$	1.45		$	—		$	—		$	—	$	1.45
Diluted Earnings Per Share	$	1.45		$	(0.01	)	$	—		$	—	$	1.44

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



	Nine months ended September 30, 2017
	As Previously Reported			Adjustments (a)		Adjustments (b)			Adjustments (c)		As Recast
Revenue	$	47,043		$	567	$	—		$	—	$	47,610
Operating Expenses:
Compensation and benefits	24,457			—		575			—		25,032
Repairs and maintenance	1,180			1		—			—		1,181
Depreciation and amortization	1,688			—		—			—		1,688
Purchased transportation	7,461			530		—			—		7,991
Fuel	1,873			—		—			—		1,873
Other occupancy	845			—		—			—		845
Other expenses	3,504			30		—			—		3,534
Total Operating Expenses	41,008			561		575			—		42,144
Operating Profit	6,035			6		(575		)	—		5,466
Other Income and (Expense):
Investment income and other	49			—		575			—		624
Interest expense	(324		)	—		—			—		(324		)
Total Other Income and (Expense)	(275		)	—		575			—		300
Income Before Income Taxes	5,760			6		—			—		5,766
Income Tax Expense (Benefit)	1,954			3		—			—		1,957
Net Income	$	3,806		$	3	$	—		$	—	$	3,809
Basic Earnings Per Share	$	4.36		$