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United States
Securities and Exchange Commission
Washington, D.C. 20549
_____________________________________
Form 10-Q
(Mark One)
|
| |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019 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.
____________________
Securities registered pursuant to Section 12(b) of the Act: |
| | | | |
Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
Class B common stock, par value $0.01 per share | | UPS | | New York Stock Exchange |
Floating-Rate Senior Notes due 2020 | | UPS20A | | New York Stock Exchange |
1.625% Senior Notes due 2025 | | UPS25 | | New York Stock Exchange |
1% Senior Notes due 2028 | | UPS28 | | New York Stock Exchange |
0.375% Senior Notes due 2023 | | UPS23A | | New York Stock Exchange |
1.500% Senior Notes due 2032 | | UPS32 | | New York Stock Exchange |
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 163,228,691 Class A shares, and 697,526,933 Class B shares, with a par value of $0.01 per share, outstanding at April 17, 2019.
TABLE OF CONTENTS |
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PART I—FINANCIAL INFORMATION |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
Item 4. | | |
PART II—OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
PART I. FINANCIAL INFORMATION
Cautionary Statement About Forward-Looking Statements
This report, our Annual Report on Form 10-K for the year ended December 31, 2018 and our other filings with the Securities and Exchange Commission contain “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.
From time to time, we also include forward-looking statements in other publicly disclosed materials. Such statements may relate to our intent, belief and current expectations about our strategic direction prospects and future results, and 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: changes in general economic conditions, in the U.S. or internationally; significant competition on a local, regional, national, and international basis; changes in our relationships with our significant customers; change in the complex and stringent regulation in the U.S. and internationally (including tax laws and regulations); 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; results from the negotiation and ratification of labor contracts; strikes, work stoppages or 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; interruptions in 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 in the U.S. or 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, 2018 and subsequently filed reports. 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.
Item 1. Financial Statements
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2019 (unaudited) and December 31, 2018 (In millions)
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 4,399 |
| | $ | 4,225 |
|
Marketable securities | 712 |
| | 810 |
|
Accounts receivable, net | 7,613 |
| | 8,958 |
|
Current income taxes receivable | 847 |
| | 940 |
|
Other current assets | 1,333 |
| | 1,277 |
|
Total Current Assets | 14,904 |
| | 16,210 |
|
Property, Plant and Equipment, Net | 27,247 |
| | 26,576 |
|
Operating Lease Right-Of-Use Assets | 2,543 |
| | — |
|
Goodwill | 3,813 |
| | 3,811 |
|
Intangible Assets, Net | 2,093 |
| | 2,075 |
|
Investments and Restricted Cash | 169 |
| | 170 |
|
Deferred Income Tax Assets | 153 |
| | 141 |
|
Other Non-Current Assets | 1,139 |
| | 1,033 |
|
Total Assets | $ | 52,061 |
| | $ | 50,016 |
|
LIABILITIES AND SHAREOWNERS’ EQUITY | | | |
Current Liabilities: | | | |
Current maturities of long-term debt, commercial paper and finance leases | $ | 2,789 |
| | $ | 2,805 |
|
Current maturities of operating leases | 492 |
| | — |
|
Accounts payable | 3,907 |
| | 5,188 |
|
Accrued wages and withholdings | 2,913 |
| | 3,047 |
|
Self-insurance reserves | 783 |
| | 810 |
|
Accrued group welfare and retirement plan contributions | 665 |
| | 715 |
|
Other current liabilities | 1,660 |
| | 1,522 |
|
Total Current Liabilities | 13,209 |
| | 14,087 |
|
Long-Term Debt and Finance Leases | 20,377 |
| | 19,931 |
|
Non-Current Operating Leases | 2,093 |
| | — |
|
Pension and Postretirement Benefit Obligations | 8,270 |
| | 8,347 |
|
Deferred Income Tax Liabilities | 1,758 |
| | 1,619 |
|
Self-Insurance Reserves | 1,523 |
| | 1,571 |
|
Other Non-Current Liabilities | 1,346 |
| | 1,424 |
|
Shareowners’ Equity: | | | |
Class A common stock (164 and 163 shares issued in 2019 and 2018, respectively) | 2 |
| | 2 |
|
Class B common stock (697 and 696 shares issued in 2019 and 2018, respectively) | 7 |
| | 7 |
|
Additional paid-in capital | 27 |
| | — |
|
Retained earnings | 8,249 |
| | 8,006 |
|
Accumulated other comprehensive loss | (4,818 | ) | | (4,994 | ) |
Deferred compensation obligations | 25 |
| | 32 |
|
Less: Treasury stock (1 share in 2019 and 2018) | (25 | ) | | (32 | ) |
Total Equity for Controlling Interests | 3,467 |
| | 3,021 |
|
Noncontrolling interests | 18 |
| | 16 |
|
Total Shareowners’ Equity | 3,485 |
| | 3,037 |
|
Total Liabilities and Shareowners’ Equity | $ | 52,061 |
| | $ | 50,016 |
|
See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share amounts)
(unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
2019 | | 2018 |
Revenue | $ | 17,160 |
| | $ | 17,113 |
|
Operating Expenses: | | | |
Compensation and benefits | 9,317 |
| | 9,045 |
|
Repairs and maintenance | 434 |
| | 434 |
|
Depreciation and amortization | 568 |
| | 596 |
|
Purchased transportation | 2,966 |
| | 3,145 |
|
Fuel | 770 |
| | 750 |
|
Other occupancy | 371 |
| | 361 |
|
Other expenses | 1,340 |
| | 1,262 |
|
Total Operating Expenses | 15,766 |
| | 15,593 |
|
Operating Profit | 1,394 |
| | 1,520 |
|
Other Income and (Expense): | | | |
Investment income and other | 215 |
| | 294 |
|
Interest expense | (169 | ) |
| (153 | ) |
Total Other Income and (Expense) | 46 |
| | 141 |
|
Income Before Income Taxes | 1,440 |
| | 1,661 |
|
Income Tax Expense | 329 |
| | 316 |
|
Net Income | $ | 1,111 |
| | $ | 1,345 |
|
Basic Earnings Per Share | $ | 1.28 |
| | $ | 1.55 |
|
Diluted Earnings Per Share | $ | 1.28 |
| | $ | 1.55 |
|
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In millions)
(unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Net Income | $ | 1,111 |
| | $ | 1,345 |
|
Change in foreign currency translation adjustment, net of tax | 53 |
| | (6 | ) |
Change in unrealized gain (loss) on marketable securities, net of tax | 4 |
| | (3 | ) |
Change in unrealized gain (loss) on cash flow hedges, net of tax | 76 |
| | (66 | ) |
Change in unrecognized pension and postretirement benefit costs, net of tax | 43 |
| | 39 |
|
Comprehensive Income | $ | 1,287 |
| | $ | 1,309 |
|
See notes to unaudited consolidated financial statements.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
(unaudited) |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Cash Flows From Operating Activities: | | | |
Net income | $ | 1,111 |
| | $ | 1,345 |
|
Adjustments to reconcile net income to net cash from operating activities: | | | |
Depreciation and amortization | 568 |
| | 596 |
|
Pension and postretirement benefit expense | 188 |
| | 154 |
|
Pension and postretirement benefit contributions | (214 | ) | | (44 | ) |
Self-insurance reserves | (74 | ) | | (11 | ) |
Deferred tax (benefit) expense | 78 |
| | 106 |
|
Stock compensation expense | 308 |
| | 239 |
|
Other (gains) losses | 40 |
| | 71 |
|
Changes in assets and liabilities, net of effects of business acquisitions: | | | |
Accounts receivable | 1,301 |
| | 1,201 |
|
Other assets | 128 |
| | 1,100 |
|
Accounts payable | (1,143 | ) | | (601 | ) |
Accrued wages and withholdings | (94 | ) | | (67 | ) |
Other liabilities | 87 |
| | (24 | ) |
Other operating activities | (7 | ) | | 2 |
|
Net cash from operating activities | 2,277 |
| | 4,067 |
|
Cash Flows From Investing Activities: | | | |
Capital expenditures | (1,514 | ) | | (1,537 | ) |
Proceeds from disposals of property, plant and equipment | 4 |
| | 20 |
|
Purchases of marketable securities | (248 | ) | | (177 | ) |
Sales and maturities of marketable securities | 349 |
| | 246 |
|
Net (increase) decrease in finance receivables | 10 |
| | — |
|
Cash paid for business acquisitions, net of cash and cash equivalents acquired | (1 | ) | | — |
|
Other investing activities | (16 | ) | | 2 |
|
Net cash used in investing activities | (1,416 | ) | | (1,446 | ) |
Cash Flows From Financing Activities: | | | |
Net change in short-term debt | (1,217 | ) | | 165 |
|
Proceeds from long-term borrowings | 2,141 |
| | 159 |
|
Repayments of long-term borrowings | (439 | ) | | (1,656 | ) |
Purchases of common stock | (246 | ) | | (261 | ) |
Issuances of common stock | 47 |
| | 77 |
|
Dividends | (799 | ) | | (754 | ) |
Other financing activities | (182 | ) | | (280 | ) |
Net cash used in financing activities | (695 | ) | | (2,550 | ) |
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | 9 |
| | (14 | ) |
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | 175 |
| | 57 |
|
Cash, Cash Equivalents and Restricted Cash: | | | |
Beginning of period | 4,367 |
| | 3,769 |
|
End of period | $ | 4,542 |
| | $ | 3,826 |
|
See notes to unaudited consolidated financial statements.
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 March 31, 2019, our results of operations for the three months ended March 31, 2019 and 2018, and cash flows for the three months ended March 31, 2019 and 2018. 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, unaudited, 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, 2018.
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 March 31, 2019 and December 31, 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 15. 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.
Use of 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.
For interim, unaudited, 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond twelve months. The new standard also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. Effective January 1, 2019, we adopted the requirements of this ASU using the modified retrospective approach. The adoption on January 1, 2019 resulted in the recognition of right-of-use assets for operating leases of approximately $2.65 billion and operating lease liabilities of approximately $2.70 billion. The consolidated financial statements for the period ended March 31, 2019 are presented under the new standard, while comparative periods presented have not been adjusted and continue to be reported in accordance with the previous standard.
We elected the transition package of practical expedients permitted within the standard. In accordance with the package of practical expedients, we did not reassess initial direct costs, lease classification, or whether our contracts contain or are leases. We also made an accounting policy election to not recognize right-of-use assets and liabilities for leases with an original lease term of twelve months or less, unless the leases include options to renew or purchase the underlying asset that are reasonably certain to be exercised. See note 10 for additional disclosures required by this ASU.
In March 2017, the FASB issued an ASU requiring the premium on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount is not impacted by the update. We adopted this standard on January 1, 2019. This standard did not have a material impact on our consolidated financial position, results of operations or cash flows.
In August 2017, the FASB issued an ASU to enhance recognition of the economic results of hedging activities in the financial statements. In addition, this update makes certain targeted improvements to simplify the application of hedge accounting guidance and increase transparency regarding the scope and results of hedging activities. We adopted this standard on January 1, 2019. This standard did not have a material impact on our consolidated financial position, results of operations or cash flows but did require additional disclosures. See note 15 for required disclosures pertaining to this ASU.
For accounting standards adopted in the period ended March 31, 2018, refer to note 1 to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.
Accounting Standards Issued But Not Yet Effective
In January 2017, the FASB issued an ASU to simplify the accounting for goodwill impairment. The update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under this ASU, a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard will be effective for us in the first quarter of 2020, but early adoption is permitted. We continue to evaluate this update to determine the full impact of its adoption but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.
Other accounting pronouncements issued, but not effective until after March 31, 2019, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. REVENUE RECOGNITION
Revenue Recognition
Substantially all of our revenues are from contracts associated with the pick-up, transportation and delivery of packages and freight (referred to hereafter as “transportation services”), whether carried out by or arranged by UPS, both domestically and internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services to customers through our global network of company-owned and leased distribution centers and field stocking locations, both domestically and internationally.
Disaggregation of Revenue
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2019 | | 2018 |
Revenue: | | | | |
Next Day Air | | $ | 1,841 |
| | $ | 1,784 |
|
Deferred | | 1,089 |
| | 1,069 |
|
Ground | | 7,550 |
| | 7,374 |
|
U.S. Domestic Package | | 10,480 |
| | 10,227 |
|
| | | | |
Domestic | | 690 |
| | 716 |
|
Export | | 2,631 |
| | 2,672 |
|
Cargo & Other | | 138 |
| | 145 |
|
International Package | | 3,459 |
| | 3,533 |
|
| | | | |
Forwarding | | 1,416 |
| | 1,605 |
|
Logistics | | 832 |
| | 782 |
|
Freight | | 773 |
| | 777 |
|
Other | | 200 |
| | 189 |
|
Supply Chain & Freight | | 3,221 |
| | 3,353 |
|
| | | | |
Consolidated revenue | | $ | 17,160 |
|
| $ | 17,113 |
|
We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis of revenue recognition in accordance with U.S. GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, the customer contracts with us to provide distinct services within a contract, such as transportation services. The vast majority of our contracts with customers for transportation services include only one performance obligation, the transportation services themselves. However, if a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In certain business units, such as Logistics, we sell customized, customer-specific solutions in which we provide a significant service of integrating a complex set of tasks and components into a single capability (even if that single capability results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. In these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.
Satisfaction of Performance Obligations
We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to another. Further, if we were unable to complete delivery to the final location, another entity would not need to reperform the transportation service already performed.
As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost measure of progress for our package delivery contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including ancillary or accessorial fees and reductions for estimated customer incentives, are recorded proportionally as costs are incurred. Costs to fulfill include labor and other direct costs and an allocation of indirect costs. For our freight and freight forwarding contracts, an output method of progress based on time-in-transit is utilized as the timing of costs incurred does not best depict the transfer of control to the customer. In our Logistics business we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount of which we have a right to invoice the customer.
Variable Consideration
It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the transaction price. These variable amounts are generally dependent upon achievement of certain incentive tiers or performance metrics. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts of revenue, which may be reduced by incentives or other contract provisions, in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of anticipated customer spending and all information (historical, current and forecasted) that is reasonably available to us.
Contract Modifications
Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct services. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that add additional distinct goods or services are treated as separate contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services. These contract modifications are accounted for prospectively as the remaining performance obligations are distinct.
Payment Terms
Under the typical payment terms of our customer contracts, the customer pays at periodic intervals (i.e., every 14 days, 30 days, 45 days, etc.) for shipments included on invoices received. Invoices are generated each week on the week-ending day, which is Saturday for the majority of our U.S. Domestic Package business, but could be another day depending on the business unit or the specific agreement with the customer. It is not customary business practice to extend payment terms past 90 days, and as such, we do not have a practice of including a significant financing component within our revenue contracts with customers.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principal vs. Agent Considerations
In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. U.S. GAAP requires us to evaluate whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model. Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. Revenue and the associated purchased transportation costs are both reported on a gross basis within our statements of consolidated income.
Accounts Receivable, Net
Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when they are incurred, which requires us to make our best estimate of the probable losses inherent in our customer receivables at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, trends in customer payment frequency, and judgments about the probable effects of relevant observable data, including present economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk. Our total provision for doubtful accounts charged to expense before recoveries during the quarters ended March 31, 2019 and 2018 was $37 and $12 million, respectively.
Contract Assets and Liabilities
Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e., packages have been delivered), and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.
Contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance payments and billings in excess of revenue represent payments received from our customers that will be earned over the contract term. Deferred revenue represents the amount of consideration due from customers related to in-transit shipments that has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the advance payment will be earned. We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which typically occurs within a short window after period-end. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.
Contract assets related to in-transit packages were $170 and $234 million at March 31, 2019 and December 31, 2018, respectively, net of deferred revenue related to in-transit packages of $229 and $236 million at March 31, 2019 and December 31, 2018, respectively. Contract assets are included within "Other current assets" in the consolidated balance sheets. Short-term contract liabilities related to advanced payments from customers were $5 million at March 31, 2019 and December 31, 2018, respectively. Short-term contract liabilities are included within "Other current liabilities" in the consolidated balance sheets. Long-term contract liabilities related to advanced payments from customers were $26 million at March 31, 2019 and December 31, 2018, respectively. Long-term contract liabilities are included within "Other Non-Current liabilities" in the consolidated balance sheets.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. STOCK-BASED COMPENSATION
We issue employee share-based awards under various incentive compensation plans, which permit the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and performance units to eligible employees (restricted stock and stock units, restricted performance shares and performance units are herein referred to as "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date, and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
We award Restricted Units under MIP to certain eligible management employees. For Restricted Units granted under MIP prior to 2019, vesting generally occurs over a five-year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death or disability, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis (less estimated forfeitures) ratably over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs). These historical awards will continue to vest through 2023.
Beginning with the MIP grant in the first quarter of 2019, Restricted Units vest one year following the grant date (except in the case of death or disability, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis (less estimated forfeitures) ratably over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs).
Based on the date that the eligible management population and performance targets were approved for MIP, we determined the award measurement dates to be February 6, 2019 (for U.S.-based employees other than management committee employees), February 14, 2019 (for management committee employees) and March 25, 2019 (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 $108.82, $111.80 and $106.90 on those dates, respectively.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under LTIP to certain eligible management employees. 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. The performance targets are equally-weighted among consolidated operating return on invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareowner return ("RTSR") relative to a peer group of companies.
For the two-thirds of the award related to ROIC and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these Restricted Units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. We recognize the grant date fair value of this portion of the award (less estimated forfeitures) as compensation expense ratably over the vesting period.
Based on the date that the eligible management population and performance targets were approved for the 2019 LTIP Award, we determined the award measurement date to be March 22, 2019; therefore, the target Restricted Units awarded for the ROIC and growth in currency-constant consolidated revenue portions of the award were valued for stock compensation expense using the closing New York Stock Exchange price of $107.35 on that date.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average assumptions used and the calculated weighted-average fair values of the RTSR portion of the LTIP awards granted in 2019 and 2018 are as follows: |
| | | | | | | |
| 2019 | | 2018 |
Risk-free interest rate | 2.24 | % | | 2.61 | % |
Expected volatility | 19.61 | % | | 16.51 | % |
Weighted-average fair value of units granted | $ | 123.40 |
| | $ | 137.57 |
|
Share payout | 114.95 | % | | 123.47 | % |
There is no expected dividend yield as units earn dividend equivalents.
Non-Qualified Stock Options
During the first quarter of 2019, we granted non-qualified stock option awards to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards generally vest over a five-year period with approximately 20% of the award vesting at each anniversary of the grant date (except in the case of death or disability, in which case immediate vesting occurs). The options granted expire 10 years after the date of the grant. In the first quarter of 2019, we granted 0.3 million stock options at a grant price of $111.80, which is based on the closing New York Stock Exchange price on February 14, 2019. In the first quarter of 2018, we granted 0.3 million and 0.01 million stock options at a grant price of $106.43 and $104.45, which is based on the closing New York Stock Exchange price on March 1, 2018 and March 22, 2018, respectively.
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the calculated weighted-average fair values of options granted in 2019 and 2018 are as follows:
|
| | | | | | | |
| 2019 | | 2018 |
Expected dividend yield | 2.93 | % | | 2.93 | % |
Risk-free interest rate | 2.60 | % | | 2.84 | % |
Expected life (in years) | 7.5 |
| | 7.5 |
|
Expected volatility | 17.79 | % | | 16.72 | % |
Weighted-average fair value of options granted | $ | 16.39 |
| | $ | 15.23 |
|
Compensation expense for share-based awards recognized in "Compensation and benefits" on the statements of consolidated income for the three months ended March 31, 2019 and 2018 was $308 and $239 million, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. CASH AND INVESTMENTS
The following is a summary of marketable securities classified as trading and available-for-sale as of March 31, 2019 and December 31, 2018 (in millions): |
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
March 31, 2019: | | | | | | | |
Current trading marketable securities: | | | | | | | |
Corporate debt securities | $ | 113 |
| | $ | — |
| | $ | — |
| | $ | 113 |
|
Equity securities | 2 |
| | — |
| | — |
| | 2 |
|
Total trading marketable securities | 115 |
| | — |
| | — |
| | 115 |
|
| | | | | | | |
Current available-for-sale securities: | | | | | | | |
U.S. government and agency debt securities | 293 |
| | 1 |
| | (1 | ) | | 293 |
|
Mortgage and asset-backed debt securities | 73 |
| | 1 |
| | — |
| | 74 |
|
Corporate debt securities | 210 |
| | 1 |
| | (1 | ) | | 210 |
|
Non-U.S. government debt securities | 20 |
| | — |
| | — |
| | 20 |
|
Total available-for-sale marketable securities | 596 |
| | 3 |
| | (2 | ) | | 597 |
|
| | | | | | | |
Total current marketable securities | $ | 711 |
| | $ | 3 |
| | $ | (2 | ) | | $ | 712 |
|
| | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
December 31, 2018: | | | | | | | |
Current trading marketable securities: | | | | | | | |
Corporate debt securities | $ | 137 |
| | $ | — |
| | $ | — |
| | $ | 137 |
|
Equity securities | 2 |
| | — |
| | — |
| | 2 |
|
Total trading marketable securities | 139 |
| | — |
| | — |
| | 139 |
|
| | | | | | | |
Current available-for-sale securities: | | | | | | | |
U.S. government and agency debt securities | 297 |
| | 1 |
| | (1 | ) | | 297 |
|
Mortgage and asset-backed debt securities | 82 |
| | — |
| | (1 | ) | | 81 |
|
Corporate debt securities | 275 |
| | — |
| | (2 | ) | | 273 |
|
Non-U.S. government debt securities | 20 |
| | — |
| | — |
| | 20 |
|
Total available-for-sale marketable securities | 674 |
| | 1 |
| | (4 | ) | | 671 |
|
| | | | | | | |
Total current marketable securities | $ | 813 |
| | $ | 1 |
| | $ | (4 | ) | | $ | 810 |
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
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 March 31, 2019. In making this determination, we considered the financial condition and prospects of the issuer, the magnitude of the losses compared with the investments’ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
Maturity Information
The amortized cost and estimated fair value of marketable securities at March 31, 2019, 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 | $ | 33 |
| | $ | 33 |
|
Due after one year through three years | 578 |
| | 578 |
|
Due after three years through five years | 23 |
| | 23 |
|
Due after five years | 75 |
| | 76 |
|
| 709 |
| | 710 |
|
Equity securities | 2 |
| | 2 |
|
| $ | 711 |
| | $ | 712 |
|
Non-Current Investments and Restricted Cash
Non-current investments and restricted cash is primarily associated with our self-insurance programs. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in various marketable securities and cash equivalents. Collateral provided is reflected in "Cash, Cash Equivalents and Restricted Cash" in the statements of consolidated cash flows. At March 31, 2019 and December 31, 2018, we had $143 and $142 million in self-insurance investments and restricted cash, respectively.
We held a $20 and $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at March 31, 2019 and December 31, 2018 respectively. The quarterly change in investment fair value is recognized in "Investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets, primarily real estate, of $6 and $9 million as of March 31, 2019 and December 31, 2018, respectively.
The amounts described above are classified as “Investments and Restricted Cash” in the consolidated balance sheets.
A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows is shown below (in millions):
|
| | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 | | March 31, 2018 |
Cash and cash equivalents | | $ | 4,399 |
| | $ | 4,225 |
| | $ | 3,544 |
|
Restricted cash | | 143 |
| | 142 |
| | 282 |
|
Total cash, cash equivalents and restricted cash | | $ | 4,542 |
| | $ | 4,367 |
| | $ | 3,826 |
|
Fair Value Measurements
Marketable securities valued utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. government debt securities, as these securities all have quoted prices in active markets. Marketable securities valued utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “Other non-current investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 8.00% and 8.16% as of March 31, 2019 and December 31, 2018, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis. The level 3 instruments measured on a recurring basis totaled $2 million as of March 31, 2019 and December 31, 2018.
The following table presents information about our investments measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):
|
| | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance |
March 31, 2019: | | | | | | | |
Marketable Securities: | | | | | | | |
U.S. government and agency debt securities | $ | 293 |
| | $ | — |
| | $ | — |
| | $ | 293 |
|
Mortgage and asset-backed debt securities | — |
| | 74 |
| | — |
| | 74 |
|
Corporate debt securities | — |
| | 323 |
| | — |
| | 323 |
|
Equity securities | — |
| | 2 |
| | — |
| | 2 |
|
Non-U.S. government debt securities | — |
| | 20 |
| | — |
| | 20 |
|
Total marketable securities | 293 |
| | 419 |
| | — |
| | 712 |
|
Other non-current investments | 20 |
| | — |
| | 2 |
| | 22 |
|
Total | $ | 313 |
| | $ | 419 |
| | $ | 2 |
| | $ | 734 |
|
|
| | | | | | | | | | | | | | | |
December 31, 2018: | | | | | | | |
Marketable Securities: | | | | | | | |
U.S. government and agency debt securities | $ | 297 |
| | $ | — |
| | $ | — |
| | $ | 297 |
|
Mortgage and asset-backed debt securities |
|
| | 81 |
| | — |
| | 81 |
|
Corporate debt securities | — |
| | 410 |
| | — |
| | 410 |
|
Equity securities | — |
| | 2 |
| | — |
| | 2 |
|
Non-U.S. government debt securities | — |
| | 20 |
| | — |
| | 20 |
|
Total marketable securities | 297 |
| | 513 |
| | — |
| | 810 |
|
Other non-current investments | 19 |
| | — |
| | 2 |
| | 21 |
|
Total | $ | 316 |
| | $ | 513 |
| | $ | 2 |
| | $ | 831 |
|
There were no transfers of investments between Level 1 and Level 2 during the three months ended March 31, 2019 or 2018.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of March 31, 2019 and December 31, 2018 consists of the following (in millions):
|
| | | | | | | |
| 2019 | | 2018 |
Vehicles | $ | 9,936 |
| | $ | 9,820 |
|
Aircraft | 17,625 |
| |
|