Quarterly report pursuant to Section 13 or 15(d)

SHAREOWNERS' EQUITY

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SHAREOWNERS' EQUITY
 9 Months Ended
Sep. 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 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.
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
)




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


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.