Quarterly report pursuant to Section 13 or 15(d)

SHAREOWNERS' EQUITY

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SHAREOWNERS' EQUITY
 3 Months Ended
Mar. 31, 2014
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 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 March 31, 2014, 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 March 31, 2014, 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 three months ended March 31, 2014 and 2013 (in millions, except per share amounts):
 
2014
 
2013
 
Shares
 
Dollars
 
Shares
 
Dollars
Class A Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
212

 
$
2

 
225

 
$
3

Common stock purchases
(1
)
 
—

 
(2
)
 
(1
)
Stock award plans
2

 
—

 
3

 
—

Common stock issuances
1

 
—

 
1

 
—

Conversions of class A to class B common stock
(3
)
 
—

 
(6
)
 
—

Class A shares issued at end of period
211

 
$
2

 
221

 
$
2

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
712

 
$
7

 
729

 
$
7

Common stock purchases
(6
)
 
—

 
(10
)
 
—

Conversions of class A to class B common stock
3

 
—

 
6

 
—

Class B shares issued at end of period
709

 
$
7

 
725

 
$
7

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

 
 
 
$
—

Stock award plans
 
 
97

 
 
 
216

Common stock purchases
 
 
(176
)
 
 
 
(186
)
Common stock issuances
 
 
78

 
 
 
70

Option premiums received (paid)
 
 
1

 
 
 
(100
)
Balance at end of period
 
 
$
—

 
 
 
$
—

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
6,925

 
 
 
$
7,997

Net income attributable to common shareowners
 
 
911

 
 
 
1,037

Dividends ($0.67 and $0.62 per share)
 
 
(626
)
 
 
 
(594
)
Common stock purchases
 
 
(483
)
 
 
 
(826
)
Balance at end of period
 
 
$
6,727

 
 
 
$
7,614


In total, we repurchased 6.8 million shares of class A and class B common stock for $659 million during the three months ended March 31, 2014, and 12.2 million shares for $1.013 billion during the three months ended March 31, 2013. On February 14, 2013, the Board of Directors approved a new share repurchase authorization of $10.0 billion, which has no expiration date. Share repurchases may take the form of accelerated share repurchases, open market purchases, or other such methods as we deem appropriate. The timing of our share repurchases will depend upon market conditions. Unless terminated earlier by the resolution of our Board, the program will expire when we have purchased all shares authorized for repurchase under the program. As of March 31, 2014, we had $6.155 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 first quarter of 2014, we entered into an accelerated share repurchase program, which allowed us to repurchase 3.1 million shares for $300 million. The program was completed in March 2014.
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 $1 and ($100) million during the first three months of 2014 and 2013 related to entering into and settling capped call options. As of March 31, 2014, we had outstanding options for the purchase of 1.1 million shares, with a weighted average strike price of $89.03 per share, that will settle in the second quarter of 2014.
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 three months ended March 31, 2014 and 2013 is as follows (in millions):
 
2014
 
2013
Foreign currency translation gain (loss):
 
 
 
Balance at beginning of period
$
(126
)
 
$
134

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

 
(161
)
Translation adjustment (net of tax effect of $2 and $6)
(36
)
 
(142
)
Balance at end of period
(162
)
 
(169
)
Unrealized gain (loss) on marketable securities, net of tax:
 
 
 
Balance at beginning of period
(1
)
 
6

Current period changes in fair value (net of tax effect of $0 and $(1))
—

 
(2
)
Reclassification to earnings (no tax impact in either period)
—

 
—

Balance at end of period
(1
)
 
4

Unrealized gain (loss) on cash flow hedges, net of tax:
 
 
 
Balance at beginning of period
(219
)
 
(286
)
Current period changes in fair value (net of tax effect of $(15) and $(7))
(24
)
 
(11
)
Reclassification to earnings (net of tax effect of $3 and $30)
4

 
49

Balance at end of period
(239
)
 
(248
)
Unrecognized pension and postretirement benefit costs, net of tax:
 
 
 
Balance at beginning of period
(114
)
 
(3,208
)
Reclassification to earnings (net of tax effect of $16 and $18)
27

 
26

Balance at end of period
(87
)
 
(3,182
)
Accumulated other comprehensive income (loss) at end of period
$
(489
)
 
$
(3,595
)




Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three months ended March 31, 2014 and 2013 is as follows (in millions):
 
Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
 
2014
 
2013
 
Foreign currency translation gain (loss):
 
 
 
 
 
Liquidation of foreign subsidiary
$
—

 
$
161

 
Other expenses
Income tax (expense) benefit
—

 
—

 
Income tax expense
Impact on net income
—

 
161

 
Net income
Unrealized gain (loss) on marketable securities:
 
 
 
 
 
Realized gain (loss) on sale of securities
—

 
—

 
Investment income
Income tax (expense) benefit
—

 
—

 
Income tax expense
Impact on net income
—

 
—

 
Net income
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
(6
)
 
(5
)
 
Interest expense
Foreign exchange contracts
8

 
(50
)
 
Interest expense
Foreign exchange contracts
(9
)
 
(14
)
 
Revenue
Commodity contracts
—

 
(10
)
 
Fuel expense
Income tax (expense) benefit
3

 
30

 
Income tax expense
Impact on net income
(4
)
 
(49
)
 
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
$
(31
)
 
$
86

 
Net income
 
 
 
 
 
 

 
 
 
 
 
 
Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the three months ended March 31, 2014 and 2013 is as follows (in millions):
 
2014
 
2013
Shares
 
Dollars
 
Shares
 
Dollars
Deferred Compensation Obligations:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
69

 
 
 
$
78

Reinvested dividends
 
 
1

 
 
 
1

Benefit payments
 
 
(12
)
 
 
 
(13
)
Balance at end of period
 
 
$
58

 
 
 
$
66

Treasury Stock:
 
 
 
 
 
 
 
Balance at beginning of period
(1
)
 
$
(69
)
 
(1
)
 
$
(78
)
Reinvested dividends
—

 
(1
)
 
—

 
(1
)
Benefit payments
—

 
12

 
—

 
13

Balance at end of period
(1
)
 
$
(58
)
 
(1
)
 
$
(66
)

Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. The activity related to our noncontrolling interests is presented below for the three months ended March 31, 2014 and 2013 (in millions):
 
2014
 
2013
Noncontrolling Interests:
 
 
 
Balance at beginning of period
$
14

 
$
80

Acquired noncontrolling interests
1

 
(65
)
Dividends attributable to noncontrolling interests
—

 
—

Net income attributable to noncontrolling interests
—

 
—

Balance at end of period
$
15

 
$
15



The reduction in our noncontrolling interests in 2013 primarily relates to our purchase of the remaining noncontrolling interest in a joint venture that operates in the Middle East, Turkey and portions of the Central Asia region for $70 million. After this transaction, we own 100% of this entity.