Quarterly report pursuant to Section 13 or 15(d)

SHAREOWNERS' EQUITY

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SHAREOWNERS' EQUITY
 6 Months Ended
Jun. 30, 2016
Stockholders' Equity Note [Abstract]  
SHAREOWNERS' EQUITY
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 June 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 June 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 six months ended June 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
(3
)
 
—

 
(2
)
 
—

Stock award plans
4

 
—

 
4

 
—

Common stock issuances
2

 
—

 
1

 
—

Conversions of class A to class B common stock
(8
)
 
—

 
(5
)
 
—

Class A shares issued at end of period
189

 
2

 
199

 
$
2

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
693

 
$
7

 
705

 
$
7

Common stock purchases
(10
)
 
—

 
(12
)
 
—

Conversions of class A to class B common stock
8

 
—

 
5

 
—

Class B shares issued at end of period
691

 
7

 
698

 
$
7

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

 
 
 
$
—

Stock award plans
 
 
289

 
 
 
265

Common stock purchases
 
 
(561
)
 
 
 
(392
)
Common stock issuances
 
 
168

 
 
 
173

Option premiums received (paid)
 
 
104

 
 
 
(46
)
Balance at end of period
 
 
$
—

 
 
 
$
—

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
6,001

 
 
 
$
5,726

Net income attributable to common shareowners
 
 
2,400

 
 
 
2,256

Dividends ($1.56 and $1.46 per share)
 
 
(1,409
)
 
 
 
(1,348
)
Common stock purchases
 
 
(769
)
 
 
 
(966
)
Balance at end of period
 
 
$
6,223

 
 
 
$
5,668


We repurchased 13.1 million shares of class A and class B common stock for $1.330 billion during the six months ended June 30, 2016, and 13.5 million shares for $1.358 billion during the six months ended June 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 six months ended June 30, 2016 were 13.3 million shares for $1.355 billion. In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion, which has no expiration date. As of June 30, 2016, we had $7.505 billion of this share repurchase authorization available.
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 second quarter of 2016, we entered into an accelerated share repurchase program which allowed us to repurchase 2.9 million shares for $300 million. The program was completed in June 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 $104 and $(46) million during the first six months of 2016 and 2015, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of June 30, 2016, we had outstanding options for the purchase of 0.5 million shares with a weighted average strike price of $92.98 per share that will settle in the third quarter of 2016.
Accumulated Other Comprehensive Income (Loss)
We experience activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in AOCI for the six months ended June 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 (no tax impact in either period)
(5
)
 
(203
)
Balance at end of period
(902
)
 
(660
)
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 $4 and $0)
5

 
1

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

 
—

Balance at end of period
4

 
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 $(5) and $56)
(7
)
 
91

Reclassification to earnings (net of tax effect of $(67) and $(45))
(112
)
 
(74
)
Balance at end of period
(52
)
 
78

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 $33 and $35)
53

 
52

Balance at end of period
(2,656
)
 
(3,146
)
Accumulated other comprehensive income (loss) at end of period
$
(3,606
)
 
$
(3,727
)




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

 
11

 
Interest expense
Foreign exchange contracts
85

 
77

 
Revenue
Income tax (expense) benefit
(29
)
 
(31
)
 
Income tax expense
Impact on net income
50

 
51

 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(43
)
 
(44
)
 
Compensation and benefits
Income tax (expense) benefit
16

 
18

 
Income tax expense
Impact on net income
(27
)
 
(26
)
 
Net income
Total amount reclassified for the period
$
23

 
$
25

 
Net income


Six Months Ended June 30:
 
 
 
 
 
 
Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
 
2016
 
2015
 
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
(12
)
 
(12
)
 
Interest expense
Foreign exchange contracts
—

 
(25
)
 
Interest expense
Foreign exchange contracts
191

 
156

 
Revenue
Income tax (expense) benefit
(67
)
 
(45
)
 
Income tax expense
Impact on net income
112

 
74

 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(86
)
 
(87
)
 
Compensation and benefits
Income tax (expense) benefit
33

 
35

 
Income tax expense
Impact on net income
(53
)
 
(52
)
 
Net income
Total amount reclassified for the period
$
59

 
$
22

 
Net income


Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the six months ended June 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
 
 
1

 
 
 
2

Benefit payments
 
 
(8
)
 
 
 
(11
)
Balance at end of period
 
 
$
44

 
 
 
$
50

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

 
(1
)
 
—

 
(2
)
Benefit payments
—

 
8

 
—

 
11

Balance at end of period
(1
)
 
$
(44
)
 
(1
)
 
$
(50
)


Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests increased $3 and $1 million for the six months ended June 30, 2016 and 2015, respectively.