Quarterly report pursuant to Section 13 or 15(d)

SHAREOWNERS' EQUITY

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SHAREOWNERS' EQUITY
 9 Months Ended
Sep. 30, 2013
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 September 30, 2013, 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, 2013, 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, 2013 and 2012 (in millions, except per share amounts):
 
2013
 
2012
 
Shares
 
Dollars
 
Shares
 
Dollars
Class A Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
225

 
$
3

 
240

 
$
3

Common stock purchases
(6
)
 
(1
)
 
(6
)
 
—

Stock award plans
6

 
—

 
5

 
—

Common stock issuances
3

 
—

 
3

 
—

Conversions of class A to class B common stock
(14
)
 
—

 
(11
)
 
—

Class A shares issued at end of period
214

 
$
2

 
231

 
$
3

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
729

 
$
7

 
725

 
$
7

Common stock purchases
(27
)
 
—

 
(13
)
 
—

Conversions of class A to class B common stock
14

 
—

 
11

 
—

Class B shares issued at end of period
716

 
$
7

 
723

 
$
7

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

 
 
 
$
—

Stock award plans
 
 
493

 
 
 
414

Common stock purchases
 
 
(513
)
 
 
 
(827
)
Common stock issuances
 
 
216

 
 
 
207

Option premiums received (paid)
 
 
(196
)
 
 
 
206

Balance at end of period
 
 
$
—

 
 
 
$
—

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
7,997

 
 
 
$
10,128

Net income attributable to common shareowners
 
 
3,205

 
 
 
2,555

Dividends ($1.86 and $1.71 per share)
 
 
(1,770
)
 
 
 
(1,670
)
Common stock purchases
 
 
(2,330
)
 
 
 
(565
)
Balance at end of period
 
 
$
7,102

 
 
 
$
10,448


In total, we repurchased 33.3 million shares of class A and class B common stock for $2.844 billion during the nine months ended September 30, 2013, and 18.5 million shares for $1.392 billion during the nine months ended September 30, 2012. On February 14, 2013, the Board of Directors approved a new share repurchase authorization of $10.0 billion, which replaced an authorization previously announced in 2012. The new share repurchase authorization 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.
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 2013, we entered into an accelerated share repurchase program, which allowed us to repurchase $750 million of shares (8.6 million shares). The program was completed in September 2013.
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. As of September 30, 2013, we paid net premiums of $200 million on options for the purchase of 2.6 million shares that will settle in the fourth quarter of 2013. During the nine months ended September 30, 2013, we settled options that resulted in the receipt of $4 million in premiums (in excess of our initial investment). During the nine months ended September 30, 2012, we received $206 million in net premiums for options that were entered into during 2011 that expired in 2012, including $6 million in premiums in excess of our initial investment.

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 nine months ended September 30, 2013 and 2012 is as follows (in millions):
 
2013
 
2012
Foreign currency translation gain (loss):
 
 
 
Balance at beginning of period
$
134

 
$
(160
)
Reclassification to earnings (no tax impact in either period)
(161
)
 
—

Translation adjustment (net of tax effect of $(2) and $(6))
(99
)
 
176

Balance at end of period
(126
)
 
16

Unrealized gain (loss) on marketable securities, net of tax:
 
 
 
Balance at beginning of period
6

 
6

Current period changes in fair value (net of tax effect of $(5) and $5)
(7
)
 
7

Reclassification to earnings (net of tax effect of $0 and $(3))
—

 
(5
)
Balance at end of period
(1
)
 
8

Unrealized gain (loss) on cash flow hedges, net of tax:
 
 
 
Balance at beginning of period
(286
)
 
(204
)
Current period changes in fair value (net of tax effect of $3 and $(38))
6

 
(64
)
Reclassification to earnings (net of tax effect of $39 and $(16))
64

 
(28
)
Balance at end of period
(216
)
 
(296
)
Unrecognized pension and postretirement benefit costs, net of tax:
 
 
 
Balance at beginning of period
(3,208
)
 
(2,745
)
Reclassification to earnings (net of tax effect of $51 and $50)
82

 
84

Adjustment for Early Retirement Reinsurance Program (net of tax effect of $0 and $2)
—

 
4

Balance at end of period
(3,126
)
 
(2,657
)
Accumulated other comprehensive income (loss) at end of period
$
(3,469
)
 
$
(2,929
)




Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three and nine months ended September 30, 2013 and 2012 is as follows (in millions):
Three Months Ended September 30:
 
 
 
 
 
 
2013 Amount Reclassified from AOCI
 
2012 Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
Foreign currency translation gain (loss):
 
 
 
 
 
Liquidation of foreign subsidiary
$
—

 
$
—

 
Other expenses
Income tax (expense) benefit
—

 
—

 
Income tax expense
Impact on net income
—

 
—

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

 
4

 
Investment income
Income tax (expense) benefit
—

 
(2
)
 
Income tax expense
Impact on net income
—

 
2

 
Net income
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
(6
)
 
(6
)
 
Interest expense
Foreign exchange contracts
44

 
30

 
Interest expense
Foreign exchange contracts
(13
)
 
36

 
Revenue
Commodity contracts
—

 
—

 
Fuel expense
Income tax (expense) benefit
(9
)
 
(22
)
 
Income tax expense
Impact on net income
16

 
38

 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(45
)
 
(45
)
 
Compensation and benefits
Income tax (expense) benefit
17

 
16

 
Income tax expense
Impact on net income
(28
)
 
(29
)
 
Net income
 
 
 
 
 
 
Total amount reclassified for the period
$
(12
)
 
$
11

 
Net income
 
 
 
 
 
 


Nine Months Ended September 30:
 
 
 
 
 
 
2013 Amount Reclassified from AOCI
 
2012 Amount Reclassified from AOCI
 
Affected Line Item in the Income Statement
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
—

 
8

 
Investment income
Income tax (expense) benefit
—

 
(3
)
 
Income tax expense
Impact on net income
—

 
5

 
Net income
Unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
Interest rate contracts
(16
)
 
(16
)
 
Interest expense
Foreign exchange contracts
—

 
27

 
Interest expense
Foreign exchange contracts
(39
)
 
33

 
Revenue
Commodity contracts
(48
)
 
—

 
Fuel expense
Income tax (expense) benefit
39

 
(16
)
 
Income tax expense
Impact on net income
(64
)
 
28

 
Net income
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
Prior service costs
(133
)
 
(134
)
 
Compensation and benefits
Income tax (expense) benefit
51

 
50

 
Income tax expense
Impact on net income
(82
)
 
(84
)
 
Net income
 
 
 
 
 
 
Total amount reclassified for the period
$
15

 
$
(51
)
 
Net income


Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the nine months ended September 30, 2013 and 2012 is as follows (in millions):
 
2013
 
2012
Shares
 
Dollars
 
Shares
 
Dollars
Deferred Compensation Obligations:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
78

 
 
 
$
88

Reinvested dividends
 
 
3

 
 
 
3

Benefit payments
 
 
(13
)
 
 
 
(14
)
Balance at end of period
 
 
$
68

 
 
 
$
77

Treasury Stock:
 
 
 
 
 
 
 
Balance at beginning of period
(1
)
 
$
(78
)
 
(2
)
 
$
(88
)
Reinvested dividends
—

 
(3
)
 
—

 
(3
)
Benefit payments
—

 
13

 
—

 
14

Balance at end of period
(1
)
 
$
(68
)
 
(2
)
 
$
(77
)

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 nine months ended September 30, 2013 and 2012 (in millions):
 
2013
 
2012
Noncontrolling Interests:
 
 
 
Balance at beginning of period
$
80

 
$
73

Acquired noncontrolling interests
(67
)
 
12

Dividends attributable to noncontrolling interests
—

 
—

Net income attributable to noncontrolling interests
—

 
—

Balance at end of period
$
13

 
$
85



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.