United Parcel Service, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS AND RESTRICTED CASH

INVESTMENTS AND RESTRICTED CASH

9 Months Ended

Sep. 30, 2018

CASH AND INVESTMENTS

The following is a summary of marketable securities classified as trading and available-for-sale as of September 30, 2018 and December 31, 2017 (in millions):



	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
September 30, 2018:
Current trading marketable securities:
Corporate debt securities	$	75	$	—	$	—		$	75
Equity securities	2		—		—			2
Total trading marketable securities	77		—		—			77

Current available-for-sale securities:
U.S. government and agency debt securities	297		—		(5		)	292
Mortgage and asset-backed debt securities	85		—		(1		)	84
Corporate debt securities	277		—		(2		)	275
Non-U.S. government debt securities	16		—		—			16
Total available-for-sale marketable securities	675		—		(8		)	667

Total current marketable securities	$	752	$	—	$	(8	)	$	744

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
December 31, 2017:
Current trading marketable securities:
Corporate debt securities	$	75	$	—	$	—		$	75
Carbon credit investments ⁽¹⁾	77		16		—			93
Total trading marketable securities	152		16		—			168

Current available-for-sale securities:
U.S. government and agency debt securities	286		—		(3		)	283
Mortgage and asset-backed debt securities	86		—		—			86
Corporate debt securities	201		1		(1		)	201
Equity securities	2		—		—			2
Non-U.S. government debt securities	9		—		—			9
Total available-for-sale marketable securities	584		1		(4		)	581

Total current marketable securities	$	736	$	17	$	(4	)	$	749
⁽¹⁾ These investments are hedged with forward contracts that are not designated in hedging relationships. See Note 14 for offsetting statement of consolidated income impact.

Investment Other-Than-Temporary Impairments

We have concluded that no material other-than-temporary impairment losses existed as of September 30, 2018. 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.

Maturity Information

The amortized cost and estimated fair value of marketable securities at September 30, 2018, 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	$	230	$	228
Due after one year through three years	424		420
Due after three years through five years	21		21
Due after five years	75		73
	750		742
Equity securities	2		2
	$	752	$	744

Non-Current Investments and Restricted Cash

Non-current investments and restricted cash is primarily associated with our self-insurance programs. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in various marketable securities and cash equivalents. Collateral provided is reflected in "Cash, Cash Equivalents and Restricted Cash" in the statements of consolidated cash flows. At September 30, 2018 and December 31, 2017, we had $278 and $449 million in self-insurance investments and restricted cash, respectively.

We held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at September 30, 2018 and December 31, 2017. The quarterly change in investment fair value is recognized in "Investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets, primarily real estate, of $9 and $15 million as of September 30, 2018 and December 31, 2017, respectively.

The amounts described above are classified as “Non-Current Investments and Restricted Cash” in the consolidated balance sheets.

A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows is shown below (in millions):



	September 30, 2018		December 31, 2017		September 30, 2017
Cash and cash equivalents	$	4,097	$	3,320	$	3,418
Restricted cash	278		449		448
Total cash, cash equivalents and restricted cash	$	4,375	$	3,769	$	3,866

Fair Value Measurements

Marketable securities valued 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 valued utilizing Level 2 inputs include 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 maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “Other non-current 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 with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 8.14% and 7.56% as of September 30, 2018 and December 31, 2017, respectively. These inputs, and the resulting fair values, are updated on a quarterly basis. The level 3 instruments measured on a recurring basis totaled $2 and $6 million as of September 30, 2018 and December 31, 2017, respectively.

The following table presents information about our investments measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, 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
September 30, 2018:
Marketable Securities:
U.S. government and agency debt securities	$	292	$	—	$	—	$	292
Mortgage and asset-backed debt securities	—		84		—		84
Corporate debt securities	—		350		—		350
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		16		—		16
Total marketable securities	292		452		—		744
Other non-current investments	19		—		2		21
Total	$	311	$	452	$	2	$	765



December 31, 2017:
Marketable Securities:
U.S. government and agency debt securities	$	283	$	—	$	—	$	283
Mortgage and asset-backed debt securities			86		—		86
Corporate debt securities	—		276		—		276
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		9		—		9
Carbon credit investments	93		—		—		93
Total marketable securities	376		373		—		749
Other non-current investments	19		—		6		25
Total	$	395	$	373	$	6	$	774

There were no transfers of investments between Level 1 and Level 2 during the three or nine months ended September 30, 2018 or 2017.