Annual report pursuant to Section 13 and 15(d)

CASH AND INVESTMENTS

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CASH AND INVESTMENTS
12 Months Ended
Dec. 31, 2011
CASH AND INVESTMENTS

NOTE 2. CASH AND INVESTMENTS

The following is a summary of marketable securities classified as available-for-sale at December 31, 2011 and 2010 (in millions):

 

     Cost      Unrealized
Gains
     Unrealized
Losses
    Estimated
Fair Value
 

2011

          

Current marketable securities:

          

U.S. government and agency debt securities

   $ 184       $ 3       $ —        $ 187   

Mortgage and asset-backed debt securities

     188         4         (1     191   

Corporate debt securities

     835         4         (2     837   

U.S. state and local municipal debt securities

     15         —           —          15   

Other debt and equity securities

     10         1         —          11   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable securities

   $ 1,232       $ 12       $ (3   $ 1,241   
  

 

 

    

 

 

    

 

 

   

 

 

 
     Cost      Unrealized
Gains
     Unrealized
Losses
    Estimated
Fair Value
 

2010

          

Current marketable securities:

          

U.S. government and agency debt securities

   $ 207       $ 1       $ (2   $ 206   

Mortgage and asset-backed debt securities

     220         3         (1     222   

Corporate debt securities

     179         5         (1     183   

U.S. state and local municipal debt securities

     33         —           —          33   

Other debt and equity securities

     62         5         —          67   
  

 

 

    

 

 

    

 

 

   

 

 

 

Current marketable securities

     701         14         (4     711   

Non-current marketable securities:

          

Mortgage and asset-backed debt securities

     79         2         (2     79   

U.S. state and local municipal debt securities

     49         2         (6     45   

Common equity securities

     20         14         —          34   

Preferred equity securities

     16         1         (3     14   
  

 

 

    

 

 

    

 

 

   

 

 

 

Non-current marketable securities

     164         19         (11     172   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable securities

   $ 865       $ 33       $ (15   $ 883   
  

 

 

    

 

 

    

 

 

   

 

 

 

The gross realized gains on sales of marketable securities totaled $49, $24 and $16 million in 2011, 2010, and 2009, respectively. The gross realized losses totaled $20, $18 and $12 million in 2011, 2010 and 2009, respectively. There were no impairment losses recognized on marketable securities during 2011, while impairment losses totaled $21 and $17 million during 2010 and 2009 (discussed further below), respectively.

Auction Rate Securities

During 2011, we sold all remaining investments in auction rate securities, which had been classified as non-current marketable securities as of December 31, 2010. These sales did not have a material impact on our statement of consolidated income.

Investment Other-Than-Temporary Impairments

We have concluded that no other-than-temporary impairment losses existed as of December 31, 2011. 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.

During the second quarter of 2010, we recorded impairment losses on certain asset-backed auction rate securities. The impairment charge resulted from provisions that allow the issuers of the securities to subordinate our holdings to newly issued debt or to tender for the securities at less than their par value. These securities, which had a cost basis of $128 million, were written down to their fair value of $107 million as of June 30, 2010, as an other-than-temporary impairment. The $21 million total impairment charge during the second quarter was recorded as a loss in investment income on the statement of consolidated income.

During the second quarter of 2009, we recorded impairment losses on certain perpetual preferred securities, and an auction rate security collateralized by preferred securities, issued by large financial institutions. The impairment charge resulted from conversion offers from the issuers of these securities at prices well below the stated redemption value of the preferred shares. These securities, which had a cost basis of $42 million, were written down to their fair value of $25 million as of June 30, 2009, as an other-than-temporary impairment. The $17 million total impairment charge during the second quarter was recorded as a loss in investment income on the statement of consolidated income.

Unrealized Losses

The following table presents the age of gross unrealized losses and fair value by investment category for all securities in a loss position as of December 31, 2011 (in millions):

 

     Less Than 12 Months     12 Months or More     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. government and agency debt securities

   $ 34       $ —        $ —         $ —        $ 34       $ —     

Mortgage and asset-backed debt securities

     10         —          11         (1     21         (1

Corporate debt securities

     621         (2     7         —          628         (2

U.S. state and local municipal debt securities

     —           —          —           —          —           —     

Other debt securities

     2         —          1         —          3         —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

     667         (2     19         (1     686         (3

Common equity securities

     —           —          —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 667       $ (2   $ 19       $ (1   $ 686       $ (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses for the U.S. government and agency debt securities, mortgage and asset-backed debt securities, corporate debt securities and other debt securities primarily relate to holdings of various fixed income securities, and are primarily due to changes in market interest rates. We have both the intent and ability to hold the securities contained in the previous table for a time necessary to recover the cost basis.

 

Maturity Information

The amortized cost and estimated fair value of marketable securities at December 31, 2011, 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

   $ 669       $ 668   

Due after one year through three years

     207         207   

Due after three years through five years

     51         51   

Due after five years

     303         313   
  

 

 

    

 

 

 
     1,230         1,239   

Equity securities

     2         2   
  

 

 

    

 

 

 
   $ 1,232       $ 1,241   
  

 

 

    

 

 

 

Non-Current Investments and Restricted Cash

Restricted cash and cash equivalents relate to our self-insurance requirements. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide cash collateral to the insurance carrier, which is reported in “Non-Current Investments and Restricted Cash” on our consolidated balance sheets. Additional cash collateral provided is reflected in other investing activities in the statements of consolidated cash flows. This restricted cash is invested in money market funds and similar cash equivalent type assets. As of December 31, 2011 and 2010, we had $286 million in restricted cash.

At December 31, 2011, we held a $17 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. This investment is classified as “Non-Current Investments and Restricted Cash” in the consolidated balance sheets with the quarterly change in investment value recognized in investment income on the statements of consolidated income.

Fair Value Measurements

Marketable securities 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 utilizing Level 2 inputs include non-auction rate 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.

We classified our previous holdings of auction rate securities as utilizing Level 3 inputs, as their valuation required substantial judgment and estimation of factors that were not observable in the market due to the lack of trading in the securities. These securities were valued as of December 31, 2010 considering several factors, including the credit quality of the securities, the rate of interest received since the failed auctions began, the yields of securities similar to the underlying auction rate securities and the input of broker-dealers in these securities.

We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “other 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 based on each partnership’s financial statements and cash flow projections.

 

The following table presents information about our investments measured at fair value on a recurring basis as of December 31, 2011 and 2010, 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 as of
December 31, 2011
 

2011

       

Marketable Securities:

       

U.S. Government and Agency Debt Securities

  $ 187      $ —        $ —        $ 187   

Mortgage and Asset-Backed Debt Securities

    —          191        —          191   

Corporate Debt Securities

    —          837        —          837   

U.S. State and Local Municipal Debt Securities

    —          15        —          15   

Other Debt and Equity Securities

    —          11        —          11   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Marketable Securities

    187        1,054        —          1,241   

Other investments

    17        —          217        234   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 204      $ 1,054      $ 217      $ 1,475   
 

 

 

   

 

 

   

 

 

   

 

 

 
    Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Balance as of
December 31, 2010
 

2010

       

Marketable Securities:

       

U.S. Government and Agency Debt Securities

  $ 206      $ —        $ —        $ 206   

Mortgage and Asset-Backed Debt Securities

    —          222        79        301   

Corporate Debt Securities

    —          183        —          183   

U.S. State and Local Municipal Debt Securities

    —          33        45        78   

Other Debt and Equity Securities

    41        60        14        115   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Marketable Securities

    247        498        138        883   

Other investments

    —          —          267        267   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 247      $ 498      $ 405      $ 1,150   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the years ended December 31, 2011 and 2010 (in millions).

 

     Marketable
Securities
    Other
Investments
    Total  

Balance on January 1, 2010

   $ 216      $ 301      $ 517   

Transfers into (out of) Level 3

     —          —          —     

Net realized and unrealized gains (losses):

      

Included in earnings (in investment income)

     (27     (34     (61

Included in accumulated other comprehensive income (pre-tax)

     59        —          59   

Purchases

     —          —          —     

Settlements

     (110     —          (110
  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2010

   $ 138      $ 267      $ 405   
  

 

 

   

 

 

   

 

 

 

Transfers into (out of) Level 3

     —          —          —     

Net realized and unrealized gains (losses):

      

Included in earnings (in investment income)

     —          (50     (50

Included in accumulated other comprehensive income (pre-tax)

     —          —          —     

Purchases

     —          —          —     

Settlements

     (138     —          (138
  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2011

   $ —        $ 217      $ 217