| DEBT AND FINANCING ARRANGEMENTS |
DEBT AND FINANCING ARRANGEMENTS
The following table sets forth the principal amount, maturity or range of maturities, as well as the carrying value of our debt obligations, as of December 31, 2017 and 2016 (in millions). The carrying value of these debt obligations can differ from the principal amount due to the impact of unamortized discounts or premiums and valuation adjustments resulting from interest rate swap hedging relationships.
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Principal |
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Carrying Value |
|
Amount |
|
Maturity |
|
2017 |
|
2016 |
Commercial paper |
$ |
3,203 |
|
|
2018 |
|
$ |
3,203 |
|
|
$ |
3,250 |
|
Fixed-rate senior notes: |
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|
|
|
|
|
|
1.125% senior notes |
375 |
|
|
2017 |
|
— |
|
|
374 |
|
5.500% senior notes |
750 |
|
|
2018 |
|
751 |
|
|
769 |
|
5.125% senior notes |
1,000 |
|
|
2019 |
|
1,019 |
|
|
1,043 |
|
3.125% senior notes |
1,500 |
|
|
2021 |
|
1,549 |
|
|
1,584 |
|
2.050% senior notes |
700 |
|
|
2021 |
|
696 |
|
|
— |
|
2.450% senior notes |
1,000 |
|
|
2022 |
|
979 |
|
|
986 |
|
2.350% senior notes |
600 |
|
|
2022 |
|
597 |
|
|
— |
|
2.500% senior notes |
1,000 |
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|
2023 |
|
992 |
|
|
— |
|
2.800% senior notes |
500 |
|
|
2024 |
|
495 |
|
|
— |
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2.400% senior notes |
500 |
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|
2026 |
|
497 |
|
|
497 |
|
3.050% senior notes |
1,000 |
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|
2027 |
|
990 |
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|
— |
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6.200% senior notes |
1,500 |
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|
2038 |
|
1,482 |
|
|
1,481 |
|
4.875% senior notes |
500 |
|
|
2040 |
|
489 |
|
|
489 |
|
3.625% senior notes |
375 |
|
|
2042 |
|
368 |
|
|
367 |
|
3.400% senior notes |
500 |
|
|
2046 |
|
491 |
|
|
491 |
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3.750% senior notes |
1,150 |
|
|
2047 |
|
1,135 |
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|
— |
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Floating-rate senior notes: |
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|
|
|
|
|
|
Floating-rate senior notes |
350 |
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|
2021 |
|
348 |
|
|
— |
|
Floating-rate senior notes |
400 |
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|
2022 |
|
398 |
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|
— |
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Floating-rate senior notes |
500 |
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2023 |
|
496 |
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|
— |
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Floating-rate senior notes |
1,043 |
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|
2049-2067 |
|
1,032 |
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|
824 |
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8.375% Debentures: |
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|
|
|
|
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8.375% debentures |
424 |
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2020 |
|
447 |
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|
461 |
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8.375% debentures |
276 |
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2030 |
|
282 |
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|
282 |
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Pound Sterling Notes: |
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5.500% notes |
90 |
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2031 |
|
84 |
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|
76 |
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5.125% notes |
614 |
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|
2050 |
|
586 |
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|
535 |
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Euro Senior Notes: |
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|
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0.375% senior notes |
839 |
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2023 |
|
832 |
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— |
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1.625% senior notes |
839 |
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2025 |
|
833 |
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|
732 |
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1.000% senior notes |
599 |
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|
2028 |
|
595 |
|
|
523 |
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1.500% senior notes |
599 |
|
|
2032 |
|
594 |
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|
— |
|
Floating-rate senior notes |
599 |
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2020 |
|
598 |
|
|
525 |
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Canadian senior notes: |
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|
|
|
|
|
|
2.125% senior notes |
597 |
|
|
2024 |
|
593 |
|
|
— |
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Capital lease obligations |
500 |
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2018– 3005 |
|
500 |
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|
447 |
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Facility notes and bonds |
320 |
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2029 – 2045 |
|
319 |
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|
319 |
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Other debt |
19 |
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2018 – 2022 |
|
19 |
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|
20 |
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Total debt |
$ |
24,761 |
|
|
|
|
24,289 |
|
|
16,075 |
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Less: current maturities |
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|
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(4,011 |
) |
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(3,681 |
) |
Long-term debt |
|
|
|
|
$ |
20,278 |
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|
$ |
12,394 |
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Debt Issuances
On May 16, 2017 we issued U.S. senior rate notes. These senior notes consist of two separate series, as follows:
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Two series of notes, in the principal amounts of $600 and $400 million, were issued. These notes bear interest at a 2.350% fixed rate and at three-month LIBOR plus 38 basis points, respectively, and mature May 2022. Interest on the fixed-rate senior notes is payable semi-annually, beginning November 2017. Interest on the floating-rate senior notes is payable quarterly beginning August 2017. The 2.350% notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points and accrued interest. The floating-rate senior notes are not callable.
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On May 18, 2017 we issued Canadian senior notes. These senior notes consist of a single series as follows:
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Notes in the principal amount of C$750 million ($547 million), which bear interest at a 2.125% fixed interest rate and mature May 2024. Interest on the notes is payable semi-annually beginning November 2017. The notes are callable at our option, in whole or in part at the Government of Canada yield plus 21.5 basis points, and on or after the par call date, at par value.
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On November 8, 2017, we issued Euro senior rate notes. These senior notes consist of two separate series, as follows:
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• |
Two series of notes, in the principal amount of €700 million ($815 million) and €500 million ($582 million) were issued. These notes bear interest at 0.375% and 1.500% fixed rates, respectively, and mature November 2023 and November 2032, respectively. Interest on these notes is payable annually, beginning in November 2018. The notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable government bond yield plus 10 and 20 basis points, respectively, and accrued interest.
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On November 9, 2017, we issued U.S. senior rate notes. These senior notes consist of seven separate series, as follows:
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Notes in the principal amount of $350 million, which bear interest at three-month LIBOR plus 15 basis points and mature April 2021. Interest on the notes is payable quarterly beginning April 2018. These notes are not callable.
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• |
Notes in the principal amount of $500 million, which bear interest at three-month LIBOR plus 45 basis points and mature April 2023. Interest on the notes is payable quarterly beginning April 2018. These notes are not callable.
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• |
Notes in the principal amount of $700 million, which bear interest at a 2.050% fixed rate and mature April 2021. Interest on the fixed-rate senior notes is payable semi-annually, beginning April 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points and accrued interest.
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• |
Notes in the principal amount of $1 billion, which bear interest at a 2.500% fixed interest rate and mature April 2023. Interest on the fixed-rate senior notes is payable semi-annually, beginning April 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points plus accrued interest. If called within the one month prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and unpaid interest, if any, to, but excluding the redemption date.
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Notes in the principal amount of $500 million, which bear interest at a 2.800% fixed interest rate and mature November 2024. Interest on the fixed-rate senior notes is payable semi-annually, beginning May 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points plus accrued interest. If called within the two months prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and unpaid interest, if any, to, but excluding the redemption date.
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• |
Notes in the principal amount of $1 billion, which bear interest at a 3.050% fixed interest rate and mature November 2027. Interest on the fixed-rate senior notes is payable semi-annually, beginning May 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 15 basis points plus accrued interest. If called within the three months prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and unpaid interest, if any, to, but excluding the redemption date.
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• |
Notes in the principal amount of $1.15 billion, which bear interest at a 3.750% fixed interest rate and mature November 2047. Interest on the fixed-rate senior notes is payable semi-annually, beginning May 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 15 basis points plus accrued interest. If called within the six months prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and unpaid interest, if any, to, but excluding the redemption date.
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Commercial Paper
We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as of December 31, 2017: $2.458 billion with an average interest rate of 1.350% and €622 million ($745 million) with an average interest rate of -0.41%. The amount of commercial paper outstanding under these programs in 2018 is expected to fluctuate.
Fixed-Rate Senior Notes
We have completed several offerings of fixed-rate senior notes. All of the notes pay interest semi-annually, and allow for redemption of the notes by UPS at any time by paying the greater of the principal amount or a “make-whole” amount, plus accrued interest. We subsequently entered into interest rate swaps on several of these notes, which effectively converted the fixed interest rates on the notes to variable LIBOR-based interest rates. The average interest rate payable on these notes, including the impact of the interest rate swaps, for 2017 and 2016, respectively, were as follows:
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Principal |
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Average Effective Interest Rate |
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Value |
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Maturity |
|
2017 |
|
2016 |
1.125% senior notes |
$ |
375 |
|
|
2017 |
|
1.51 |
% |
|
1.04 |
% |
5.50% senior notes |
$ |
750 |
|
|
2018 |
|
3.45 |
% |
|
2.94 |
% |
5.125% senior notes |
$ |
1,000 |
|
|
2019 |
|
2.98 |
% |
|
2.49 |
% |
3.125% senior notes |
$ |
1,500 |
|
|
2021 |
|
1.34 |
% |
|
1.40 |
% |
2.45% senior notes |
$ |
1,000 |
|
|
2022 |
|
1.78 |
% |
|
1.26 |
% |
On October 1, 2017, our $375 million 1.125% senior notes matured and were repaid in full.
8.375% Debentures
The 8.375% debentures consist of two separate tranches, as follows:
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$276 million of the debentures have a maturity of April 1, 2030. These debentures have an 8.375% interest rate until April 1, 2020, and, thereafter, the interest rate will be 7.62% for the final 10 years. These debentures are redeemable in whole or in part at our option at any time. The redemption price is equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption (at a benchmark treasury yield plus five basis points) plus accrued interest.
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• |
$424 million of the debentures have a maturity of April 1, 2020. These debentures are not subject to redemption prior to maturity.
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Interest is payable semi-annually in April and October for both tranches and neither tranche is subject to sinking fund requirements. We subsequently entered into interest rate swaps on the 2020 debentures, which effectively converted the fixed interest rates on the debentures to variable LIBOR-based interest rates. The average interest rate payable on the 2020 debentures, including the impact of the interest rate swaps, for 2017 and 2016 was 5.95% and 5.43%, respectively.
Floating-Rate Senior Notes
The floating-rate senior notes with principal amounts totaling $1.043 billion, bear interest at either one or three-month LIBOR, less a spread ranging from 30 to 45 basis points. The average interest rate for 2017 and 2016 was 0.74% and 0.21%, respectively. These notes are callable at various times after 30 years at a stated percentage of par value, and putable by the note holders at various times after one year at a stated percentage of par value. The notes have maturities ranging from 2049 through 2067. We classified the floating-rate senior notes that are putable by the note holder as a long-term liability, due to our intent and ability to refinance the debt if the put option is exercised by the note holder.
In March and November 2017, we issued floating-rate senior notes in the principal amounts of $147 and $64 million, respectively, which are included in the $1.043 billion floating-rate senior notes described above. These notes will bear interest at three-month LIBOR less 30 and 35 basis points, respectively and mature in 2067.
The remaining three floating-rate senior notes in the principal amounts of $350, $400 and $500 million, bear interest at three-month LIBOR, plus a spread ranging from 15 to 45 basis points. The average interest rate for 2017 and 2016 was 0.50% and 0.0%, respectively. These notes are not callable. The notes have maturities ranging from 2021 through 2023. We classified the floating-rate senior notes that are putable by the note holder as a long-term liability, due to our intent and ability to refinance the debt if the put option is exercised by the note holder.
Capital Lease Obligations
We have certain property, plant and equipment subject to capital leases. Some of the obligations associated with these capital leases have been legally defeased. The recorded value of our property, plant and equipment subject to capital leases is as follows as of December 31 (in millions):
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2017 |
|
2016 |
Vehicles |
$ |
70 |
|
|
$ |
68 |
|
Aircraft |
2,291 |
|
|
2,291 |
|
Buildings |
285 |
|
|
190 |
|
Accumulated amortization |
(990 |
) |
|
(896 |
) |
Property, plant and equipment subject to capital leases |
$ |
1,656 |
|
|
$ |
1,653 |
|
These capital lease obligations have principal payments due at various dates from 2018 through 3005.
Facility Notes and Bonds
We have entered into agreements with certain municipalities to finance the construction of, or improvements to, facilities that support our U.S. Domestic Package and Supply Chain & Freight operations in the United States. These facilities are located around airport properties in Louisville, Kentucky; Dallas, Texas; and Philadelphia, Pennsylvania. Under these arrangements, we enter into a lease or loan agreement that covers the debt service obligations on the bonds issued by the municipalities, as follows:
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• |
Bonds with a principal balance of $149 million issued by the Louisville Regional Airport Authority associated with our Worldport facility in Louisville, Kentucky. The bonds, which are due in January 2029, bear interest at a variable rate, and the average interest rates for 2017 and 2016 were 0.83% and 0.37%, respectively.
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• |
Bonds with a principal balance of $42 million and due in November 2036 issued by the Louisville Regional Airport Authority associated with our air freight facility in Louisville, Kentucky. The bonds bear interest at a variable rate, and the average interest rates for 2017 and 2016 were 0.80% and 0.36%, respectively.
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• |
Bonds with a principal balance of $29 million issued by the Dallas / Fort Worth International Airport Facility Improvement Corporation associated with our Dallas, Texas airport facilities. The bonds are due in May 2032 and bear interest at a variable rate, however the variable cash flows on the obligation have been swapped to a fixed 5.11%.
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• |
In September 2015, we entered into an agreement with the Delaware County, Pennsylvania Industrial Development Authority, associated with our Philadelphia, Pennsylvania airport facilities, for bonds issued with a principal balance of $100 million. These bonds, which are due September 2045, bear interest at a variable rate. The average interest rate for 2017 and 2016 was 0.78% and 0.40%, respectively.
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Pound Sterling Notes
The Pound Sterling notes consist of two separate tranches, as follows:
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• |
Notes with a principal amount of £66 million accrue interest at a 5.50% fixed rate, and are due in February 2031. These notes are not callable.
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• |
Notes with a principal amount of £455 million accrue interest at a 5.125% fixed rate, and are due in February 2050. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption at a benchmark U.K. government bond yield plus 15 basis points and accrued interest.
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Euro Senior Notes
The remaining euro senior notes consist of three separate issuances, as follows:
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• |
Notes in the principal amount of €500 million accrue interest at a 1% fixed rate and are due in November 2028. Interest is payable annually on the notes, commencing in November 2017. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amounts, or the sum of the present values of the remaining schedule payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable German government bond yield plus 15 basis points and accrued interest.
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• |
Notes with a principal amount of €500 million accrue interest at a variable rate equal to three-month EURIBOR plus 43 basis points and are due in July 2020. Interest is payable quarterly on the notes, commencing in April 2016. These notes are not callable. The senior notes bear interest at a variable rate, and the average interest rates for 2017 and 2016 were 0.10% and 0.19%, respectively.
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• |
Notes with a principal amount of €700 million accrue interest at a 1.625% fixed rate and are due in November 2025. Interest is payable annually on the notes, commencing in November 2016. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption at a benchmark German government bond yield plus 20 basis points and accrued interest.
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Contractual Commitments
We lease certain aircraft, facilities, land, equipment and vehicles under operating leases, which expire at various dates through 2040. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our operating leases was $804, $686 and $669 million for 2017, 2016 and 2015, respectively.
The following table sets forth the aggregate minimum lease payments under capital and operating leases, the aggregate annual principal payments due under our long-term debt and the aggregate amounts expected to be spent for purchase commitments (in millions).
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Year |
Capital
Leases
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|
Operating
Leases
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|
Debt
Principal
|
|
Purchase
Commitments (1)
|
2018 |
$ |
81 |
|
|
$ |
398 |
|
|
$ |
3,960 |
|
|
$ |
3,789 |
|
2019 |
79 |
|
|
305 |
|
|
1,009 |
|
|
2,462 |
|
2020 |
69 |
|
|
239 |
|
|
1,024 |
|
|
2,428 |
|
2021 |
49 |
|
|
186 |
|
|
2,551 |
|
|
1,926 |
|
2022 |
45 |
|
|
138 |
|
|
2,000 |
|
|
323 |
|
After 2022 |
500 |
|
|
371 |
|
|
13,342 |
|
|
13 |
|
Total |
823 |
|
|
$ |
1,637 |
|
|
$ |
23,886 |
|
|
$ |
10,941 |
|
Less: imputed interest |
(323 |
) |
|
|
|
|
|
|
Present value of minimum capitalized lease payments |
500 |
|
|
|
|
|
|
|
Less: current portion |
(51 |
) |
|
|
|
|
|
|
Long-term capitalized lease obligations |
$ |
449 |
|
|
|
|
|
|
|
As of December 31, 2017, we had outstanding letters of credit totaling approximately $1.084 billion issued in connection with our self-insurance reserves and other routine business requirements. We also issue surety bonds as an alternative to letters of credit in certain instances, and as of December 31, 2017, we had $932 million of surety bonds written.
Available Credit
We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on March 23, 2018. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of December 31, 2017.
The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 24, 2022. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of December 31, 2017.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2017 and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of December 31, 2017, 10% of net tangible assets is equivalent to $2.686 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.
Fair Value of Debt
Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, is approximately $25.206 and $17.134 billion as of December 31, 2017 and 2016, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.
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