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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, 2018, 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, 2018, 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, 2018 and 2017 (in millions, except per share amounts):
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2018 |
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2017 |
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Shares |
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Dollars |
|
Shares |
|
Dollars |
Class A Common Stock |
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|
|
|
|
|
|
Balance at beginning of period |
173 |
|
|
$ |
2 |
|
|
180 |
|
|
$ |
2 |
|
Common stock purchases |
(3 |
) |
|
— |
|
|
(3 |
) |
|
— |
|
Stock award plans |
4 |
|
|
— |
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|
4 |
|
|
— |
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Common stock issuances |
3 |
|
|
— |
|
|
2 |
|
|
— |
|
Conversions of class A to class B common stock |
(12 |
) |
|
— |
|
|
(7 |
) |
|
— |
|
Class A shares issued at end of period |
165 |
|
|
$ |
2 |
|
|
176 |
|
|
$ |
2 |
|
Class B Common Stock |
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|
|
|
|
|
Balance at beginning of period |
687 |
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|
$ |
7 |
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|
689 |
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|
$ |
7 |
|
Common stock purchases |
(4 |
) |
|
— |
|
|
(9 |
) |
|
— |
|
Conversions of class A to class B common stock |
12 |
|
|
— |
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|
7 |
|
|
— |
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Class B shares issued at end of period |
695 |
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|
$ |
7 |
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|
687 |
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$ |
7 |
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Additional Paid-In Capital |
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Balance at beginning of period |
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$ |
— |
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|
|
$ |
— |
|
Stock award plans |
|
|
307 |
|
|
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|
283 |
|
Common stock purchases |
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|
(632 |
) |
|
|
|
(604 |
) |
Common stock issuances |
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|
312 |
|
|
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|
268 |
|
Option premiums received (paid) |
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13 |
|
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|
53 |
|
Balance at end of period |
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$ |
— |
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$ |
— |
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Retained Earnings |
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Balance at beginning of period |
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$ |
5,852 |
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$ |
4,880 |
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Net income attributable to common shareowners |
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|
4,338 |
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|
3,809 |
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Dividends ($2.73 and $2.49 per share) |
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|
(2,408 |
) |
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|
|
(2,213 |
) |
Common stock purchases |
|
|
(124 |
) |
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|
|
(748 |
) |
Reclassification from AOCI pursuant to the early adoption of ASU 2018-02 |
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|
735 |
|
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|
|
— |
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Other |
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|
(16 |
) |
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|
|
— |
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Balance at end of period |
|
|
$ |
8,377 |
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|
|
$ |
5,728 |
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We repurchased 6.6 million shares of class A and class B common stock for $756 million during the nine months ended September 30, 2018, and 12.3 million shares for $1.352 billion during the nine months ended September 30, 2017. 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, 2018, we had $3.583 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 2018, we did not enter into any accelerated share repurchase transactions.
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 net premiums of $13 million during the first nine months of 2018 and $53 million during the first nine months of 2017, related to entering into and settling capped call options for the purchase of class B shares. As of September 30, 2018, we had outstanding options for the purchase of 0.4 million shares with a weighted average strike price of $98.16 per share that will settle during 2018.
Accumulated Other Comprehensive Income (Loss)
We recognize 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. Additionally, effective January 1, 2018, we early adopted an ASU that allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act (see note 2 for further information). The activity in AOCI for the nine months ended September 30, 2018 and 2017 is as follows (in millions):
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2018 |
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2017 |
Foreign currency translation gain (loss), net of tax: |
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Balance at beginning of period |
$ |
(930 |
) |
|
$ |
(1,016 |
) |
Translation adjustment (net of tax effect of $26 and $(146)) |
(112 |
) |
|
86 |
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02 |
(47 |
) |
|
— |
|
Balance at end of period |
(1,089 |
) |
|
(930 |
) |
Unrealized gain (loss) on marketable securities, net of tax: |
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|
Balance at beginning of period |
(2 |
) |
|
(1 |
) |
Current period changes in fair value (net of tax effect of $(2) and $1) |
(6 |
) |
|
2 |
|
Reclassification to earnings (net of tax effect of $1 and $0) |
2 |
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|
(1 |
) |
Balance at end of period |
(6 |
) |
|
— |
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Unrealized gain (loss) on cash flow hedges, net of tax: |
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|
Balance at beginning of period |
(366 |
) |
|
(45 |
) |
Current period changes in fair value (net of tax effect of $81 and $(162)) |
254 |
|
|
(269 |
) |
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02 |
(79 |
) |
|
— |
|
Reclassification to earnings (net of tax effect of $19 and $(6)) |
61 |
|
|
(9 |
) |
Balance at end of period |
(130 |
) |
|
(323 |
) |
Unrecognized pension and postretirement benefit costs, net of tax: |
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Balance at beginning of period |
(3,569 |
) |
|
(3,421 |
) |
Remeasurement of plan assets and liabilities (net of tax effect of $0 and $214) (1)
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— |
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|
356 |
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02 |
(609 |
) |
|
— |
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Reclassification to earnings (net of tax effect of $36 and $56) |
115 |
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|
94 |
|
Balance at end of period |
(4,063 |
) |
|
(2,971 |
) |
Accumulated other comprehensive income (loss) at end of period |
$ |
(5,288 |
) |
|
$ |
(4,224 |
) |
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(1) See note 7 for further information about plan curtailments resulting in remeasurement of plan assets and liabilities.
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Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three and nine months ended September 30, 2018 and 2017 is as follows (in millions):
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Three Months Ended September 30: |
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Amount Reclassified from AOCI |
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Affected Line Item in the Income Statement |
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2018 |
|
2017 |
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Unrealized gain (loss) on marketable securities: |
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Realized loss on sale of securities |
$ |
(1 |
) |
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$ |
1 |
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Investment income and other |
Income tax (expense) benefit |
— |
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|
— |
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Income tax expense |
Impact on net income |
(1 |
) |
|
1 |
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Net income |
Unrealized gain (loss) on cash flow hedges: |
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Interest rate contracts |
(6 |
) |
|
(6 |
) |
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Interest expense |
Foreign exchange contracts |
— |
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|
3 |
|
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Revenue |
Income tax (expense) benefit |
1 |
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|
1 |
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Income tax expense |
Impact on net income |
(5 |
) |
|
(2 |
) |
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Net income |
Unrecognized pension and postretirement benefit costs: |
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Prior service costs |
(50 |
) |
|
(50 |
) |
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Investment income and other |
Income tax (expense) benefit |
12 |
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|
19 |
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Income tax expense |
Impact on net income |
(38 |
) |
|
(31 |
) |
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Net income |
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Total amount reclassified for the period |
$ |
(44 |
) |
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$ |
(32 |
) |
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Net income |
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Nine Months Ended September 30: |
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Amount Reclassified from AOCI |
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Affected Line Item in the Income Statement |
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2018 |
|
2017 |
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Unrealized gain (loss) on marketable securities: |
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|
Realized loss on sale of securities |
(3 |
) |
|
1 |
|
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Investment income and other |
Income tax (expense) benefit |
1 |
|
|
— |
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Income tax expense |
Impact on net income |
(2 |
) |
|
1 |
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Net income |
Unrealized gain (loss) on cash flow hedges: |
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Interest rate contracts |
(18 |
) |
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(20 |
) |
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Interest expense |
Foreign exchange contracts |
(62 |
) |
|
35 |
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Revenue |
Income tax (expense) benefit |
19 |
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|
(6 |
) |
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Income tax expense |
Impact on net income |
(61 |
) |
|
9 |
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Net income |
Unrecognized pension and postretirement benefit costs: |
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Prior service costs |
(151 |
) |
|
(150 |
) |
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Investment income and other |
Income tax (expense) benefit |
36 |
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|
56 |
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Income tax expense |
Impact on net income |
(115 |
) |
|
(94 |
) |
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Net income |
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Total amount reclassified for the period |
$ |
(178 |
) |
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$ |
(84 |
) |
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Net income |
Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the nine months ended September 30, 2018 and 2017 is as follows (in millions):
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2018 |
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2017 |
Shares |
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Dollars |
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Shares |
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Dollars |
Deferred Compensation Obligations: |
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Balance at beginning of period |
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$ |
37 |
|
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$ |
45 |
|
Reinvested dividends |
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|
2 |
|
|
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|
2 |
|
Benefit payments |
|
|
(7 |
) |
|
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|
(10 |
) |
Balance at end of period |
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$ |
32 |
|
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$ |
37 |
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Treasury Stock: |
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Balance at beginning of period |
(1 |
) |
|
$ |
(37 |
) |
|
(1 |
) |
|
$ |
(45 |
) |
Reinvested dividends |
— |
|
|
(2 |
) |
|
— |
|
|
(2 |
) |
Benefit payments |
— |
|
|
7 |
|
|
— |
|
|
10 |
|
Balance at end of period |
(1 |
) |
|
$ |
(32 |
) |
|
(1 |
) |
|
$ |
(37 |
) |
Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests decreased $2 million and increased $6 million for the nine months ended September 30, 2018 and 2017, respectively.
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