NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Basis of Financial Statements and Business Activities
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), and include the accounts of United Parcel Service, Inc., and all of its consolidated subsidiaries (collectively “UPS” or the “Company”). All intercompany balances and transactions have been eliminated.
We provide transportation services, primarily domestic and international letter and package delivery. Through our Supply Chain & Freight subsidiaries, we are also a global provider of transportation, logistics and financial services.
Use of Estimates
The preparation of our consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses and the disclosure of contingencies. Estimates have been prepared on the basis of the most current and best information, and actual results could differ materially from those estimates. In particular, a number of estimates have been and will continue to be affected by the ongoing COVID-19 pandemic. The severity, magnitude and duration of the pandemic, and the resulting economic consequences, remain uncertain, rapidly changing and difficult to predict. As a result, our accounting estimates and assumptions may change over time.
Revenue Recognition
U.S. Domestic and International Package Operations: Revenue is recognized over time as we perform the services in the contract.
Forwarding: Freight forwarding revenue and the expense related to the transportation of freight are recognized over time as we perform the services. Truckload brokerage revenue and related transportation costs are recognized over time as we perform the services. Customs brokerage revenue is recognized upon completing documents necessary for customs entry purposes.
Logistics & Distribution: In our Logistics & Distribution business we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount to which we have a right to invoice the customer.
UPS Freight: Revenue is recognized over time as we perform the services in the contract.
Financial Services: Income on loans and direct finance leases is recognized on the effective interest method. Accrual of interest income is suspended at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days delinquent. Income on operating leases is recognized on the straight-line method over the terms of the underlying leases.
Principal vs. Agent Considerations: We utilize independent contractors and third-party carriers in the performance of some transportation services. GAAP requires us to evaluate whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model. Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. Revenue and the associated purchased transportation costs are reported on a gross basis within our statements of consolidated income.
Refer to note 2 for further discussion of our revenue recognition policies.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments that are readily convertible into cash. We consider securities with maturities of three months or less, when purchased, to be cash equivalents. The carrying amount of these securities approximates fair value because of the short-term maturity of these instruments.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
Debt securities are either classified as trading or available-for-sale securities and are carried at fair value. Unrealized gains and losses on trading securities are reported as Investment income (expense) and other on the statements of consolidated income. Unrealized gains and losses on available-for-sale securities are reported as accumulated other comprehensive income (“AOCI”), a separate component of shareowners’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in Investment income (expense) and other, along with interest and dividends. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in Investment income (expense) and other.
We periodically review our available-for-sale investments for indications of other-than-temporary impairment considering many factors, including the extent and duration to which a security’s fair value has been less than its cost, overall economic and market conditions and the financial condition and specific prospects for the issuer. Impairment of available-for-sale securities results in a charge to income when a market decline below cost is other-than-temporary.
Inventories
Fuel and other materials and supplies inventories are recognized as inventory when purchased, and then charged to expense when used in our operations. Jet fuel, diesel and unleaded gasoline inventories are valued at the lower of average cost or net realizable value. Total inventories were $620 and $511 million as of December 31, 2020 and 2019, respectively, and are included in “Other current assets” in the consolidated balance sheets.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. We evaluate the useful lives of our property, plant and equipment based on our usage, maintenance and replacement policies, and taking into account physical and economic factors that may affect the useful lives of the assets.
Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the assets, which are as follows:
•Aircraft: 12 to 40 years
•Buildings: 10 to 40 years
•Leasehold Improvements: lesser of asset useful life or lease term
•Plant Equipment: 3 to 20 years
•Technology Equipment: 3 to 10 years
•Vehicles: 5 to 15 years
For substantially all of our aircraft, the costs of major airframe and engine overhauls, as well as routine maintenance and repairs, are charged to expense as incurred.
Interest incurred during the construction period of certain property, plant and equipment is capitalized until the underlying assets are placed in service, at which time amortization of the capitalized interest begins, straight-line, over the estimated useful lives of the related assets. Capitalized interest was $87 and $91 million in 2020 and 2019, respectively.
We review long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on its undiscounted future cash flows. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows or external appraisals, as appropriate. We review long-lived assets for impairment at the individual asset level or the asset group for which the lowest level of independent cash flows can be identified.
Leased Assets
For a discussion of our accounting policies related to leased assets, refer to note 11.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Intangible Assets
Costs of purchased businesses in excess of net identifiable assets acquired (goodwill), and indefinite-lived intangible assets are tested for impairment at least annually, unless changes in circumstances indicate an impairment may have occurred sooner. We are required to test goodwill on a reporting unit basis. A reporting unit is the operating segment unless, for businesses within that operating segment, discrete financial information is prepared and regularly reviewed by management, in which case such a component business is the reporting unit.
In assessing goodwill for impairment, we initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We consider several factors, including macroeconomic conditions, industry and market conditions, overall financial performance of the reporting unit, changes in management, strategy or customers and relevant reporting unit-specific events such as a change in the carrying amount of net assets, a more likely than not expectation of selling or disposing of all, or a portion of, a reporting unit, and the testing for recoverability of a significant asset group within a reporting unit. If this qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit.
If the qualitative assessment is not conclusive, we calculate the fair value of a reporting unit to test goodwill for impairment. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we record the excess amount as goodwill impairment, not to exceed the total amount of goodwill allocated to the reporting unit. We primarily determine the fair value of our reporting units using a discounted cash flow model and supplement this with observable valuation multiples for comparable companies, as appropriate.
A trade name with a carrying value of $200 million and licenses with a carrying value of $5 million as of December 31, 2020 are considered to be indefinite-lived intangibles, and therefore are not amortized. We determined that the income approach, specifically the relief from royalty method, is the most appropriate valuation method to estimate the fair value of the trade name. The estimated fair value of the trade name is compared to the carrying value of the asset. If the carrying value of the trade name exceeds its estimated fair value, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value.
Finite-lived intangible assets, including trademarks, licenses, patents, customer lists, non-compete agreements and franchise rights are amortized on a straight-line basis over the estimated useful lives of the assets, which range from 2 to 22 years. Capitalized software is generally amortized over 7 years.
Assets Held for Sale
We classify long-lived assets or disposal groups as held for sale in the period when all of the following conditions have been met:
•we have approved and committed to a plan to sell the assets or disposal group;
• the asset or disposal group is available for immediate sale in its present condition;
•an active program to locate a buyer and other actions required to complete the sale have been initiated;
•the sale of the asset or disposal group is probable and expected to be completed within one year;
•the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
•it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
We initially measure a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell and recognize any loss in the period in which the held for sale criteria are met. Gains are not recognized until the date of sale. We cease depreciation and amortization of a long-lived asset, or assets within a disposal group, upon their designation as held for sale and subsequently assess fair value less any costs to sell at each reporting period until the asset or disposal group is no longer classified as held for sale.
Self-Insurance Accruals
We self-insure costs associated with workers’ compensation claims, automobile liability, health and welfare and general business liabilities, up to certain limits. Insurance reserves are established for estimates of the loss that we will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet reported. The expected ultimate cost for claims incurred is estimated based upon historical loss experience and judgments about the present and expected levels of cost per claim. Trends in actual experience are a significant factor in the determination of our reserves.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Workers’ compensation, automobile liability and general liability insurance claims may take several years to completely settle. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to fully resolve a claim. A number of factors can affect the actual cost of a claim, including the length of time the claim remains open, trends in healthcare costs, the results of any related litigation and with respect to workers’ compensation claims, changes in legislation. Furthermore, claims may emerge in a future year for events that occurred in a prior year at a rate that differs from actuarial projections. All of these factors can result in revisions to actuarial projections and produce a material difference between estimated and actual operating results. Based on our historical experience, in 2019 we changed our self-insurance reserves from the central estimate to the low end of the actuarial range of losses. The principal result of this change was a decrease in expense of $94 million and an increase in net income of $72 million, or $0.08 per share on a basic and diluted basis. We believe our estimated reserves for such claims are adequate, but actual experience in claim frequency and/or severity could materially differ from our estimates and affect our results of operations.
We sponsor a number of health and welfare insurance plans for our employees. These liabilities and related expenses are based on estimates of the number of employees and eligible dependents covered under the plans, anticipated medical usage by participants and overall trends in medical costs and inflation.
Pension and Postretirement Benefits
We incur certain employment-related expenses associated with pension and postretirement medical benefits. These pension and postretirement medical benefit costs for company-sponsored defined benefit plans are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS. Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement of any of our plans.
We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of a corridor (defined as 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation) in Investment income (expense) and other annually at December 31st each year. The remaining components of pension expense, primarily service and interest costs and the expected return on plan assets, are recorded on a quarterly basis.
For eligible employees hired after July 1, 2016, UPS contributes annually to a defined contribution plan. We recognize expense for the required contribution quarterly, and we recognize a liability for any contributions due and unpaid within Other current liabilities.
We participate in a number of trustee-managed multiemployer pension and health and welfare plans for employees covered under collective bargaining agreements. Our contributions to these plans are determined in accordance with the respective collective bargaining agreements. We recognize expense for the contractually required contribution for each period, and we recognize a liability for any contributions due and unpaid within Other current liabilities.
Income Taxes
Income taxes are accounted for on an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than proposed changes in the tax law or rates. Valuation allowances are provided if it is more likely than not that a deferred tax asset will not be realized.
We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. Once it is determined that the position meets the recognition threshold, the second step requires us to estimate and measure the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement. The difference between the amount of recognizable tax benefit and the total amount of tax benefit from positions filed or to be filed with the tax authorities is recorded as a liability for uncertain tax benefits. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation and Remeasurement
We translate the results of operations of our foreign subsidiaries using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Balance sheet currency translation adjustments are recorded in AOCI. Pre-tax foreign currency transaction gains (losses) from remeasurement, net of hedging, included in Investment income (expense) and other were $9, $(6) and $(19) million in 2020, 2019 and 2018, respectively.
Stock-Based Compensation
All share-based awards to employees are measured based on their fair values and expensed over the period during which an employee is required to provide service in exchange for the award (the vesting period), less estimated forfeitures. We have issued employee share-based awards under the UPS Incentive Compensation Plan that are subject to specific vesting conditions, including service conditions, where the awards cliff vest or vest ratably over a one, three, or five year period (the "nominal vesting period”) or at the date the employee retires (as defined by the plan), if earlier. Compensation cost is generally recognized immediately for awards granted to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. We estimate forfeiture rates based on historical rates of forfeitures for awards with similar characteristics, historical rates of employee turnover and the nature and terms of the vesting conditions of the awards. We reevaluate our forfeiture rates on an annual basis.
Fair Value Measurements
Our financial assets and liabilities measured at fair value on a recurring basis have been categorized based upon a fair value hierarchy. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities, and inputs other than quoted prices that are observable, such as interest rates and yield curves. Level 3 inputs are developed from unobservable data reflecting our own assumptions, and include situations where there is little or no market activity for the asset or liability.
Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis, including property, plant, and equipment, goodwill and intangible assets. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of an impairment. A general description of the valuation methodologies used for assets and liabilities measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy, is included in each footnote with fair value measurements present.
For acquisitions, we allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Derivative Instruments
We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the derivative as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation based upon the exposure being hedged.
A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the period during which the hedged transaction affects earnings.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability that is attributable to a particular risk. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative instrument is recognized during the current period, as well as the offsetting gain or loss on the hedged item.
A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of net investments in foreign operations. For instruments that meet the hedge accounting requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the foreign currency translation adjustment within AOCI, and are recorded in the income statement when the hedged item affects earnings.
Adoption of New Accounting Standards
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease obligation on their balance sheet for all leases with terms beyond twelve months. The new standard also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. Effective January 1, 2019, we adopted the requirements of this ASU using the modified retrospective approach. We elected the transition package of practical expedients permitted within the standard. As a result, we did not reassess initial direct costs, lease classification, or whether our contracts contain or are leases. We also made an accounting policy election to not recognize right-of-use assets and liabilities for leases with an original lease term of twelve months or less, unless the leases include options to renew or purchase the underlying asset that are reasonably certain to be exercised.
The adoption on January 1, 2019 resulted in the recognition of right-of-use assets for operating leases of approximately $2.7 billion and operating lease liabilities of approximately $2.7 billion. The consolidated financial statements for the years ended December 31, 2020 and 2019 are presented under the new standard, while earlier periods presented have not been adjusted and continue to be reported in accordance with the previous standard. See note 11 for additional disclosures required by this ASU.
In June 2016, the FASB issued an ASU introducing an expected credit loss methodology for the measurement of financial assets not accounted for at fair value. The methodology replaced the probable, incurred loss model for those assets. We adopted this standard on January 1, 2020 by updating our process for calculating our allowance for credit losses to include reasonable and supportable forecasts that could affect expected collectability. In 2020, we increased our allowance for credit losses by $45 million based upon our current forecasts that reflect ongoing economic uncertainty resulting from the COVID-19 pandemic.
In January 2017, the FASB issued an ASU to simplify the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill using a hypothetical purchase price allocation. Under this ASU, goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We adopted this standard on January 1, 2020, applying the simplified approach to calculate the goodwill impairment charge of $494 million that we recorded in conjunction with the pending divestiture of UPS Freight.
In March 2017, the FASB issued an ASU requiring the premium on callable debt securities to be amortized to the earliest call date. We adopted this standard on January 1, 2019. It did not have a material impact on our consolidated financial position, results of operations or cash flows.
In August 2017, the FASB issued an ASU to enhance recognition of the economic results of hedging activities in the financial statements. In addition, the update made certain targeted improvements to simplify the application of hedge accounting guidance and increase transparency regarding the scope and results of hedging activities. We adopted this standard on January 1, 2019. It did not have a material impact on our consolidated financial position, results of operations or cash flows but did require additional disclosures. See note 17 for disclosures required by this ASU.
In February 2018, the FASB issued an ASU that allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act. Effective January 1, 2018, we early adopted this ASU and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. This resulted in a $735 million increase to retained earnings and a $735 million decrease to AOCI. Our current accounting policy for releasing income tax effects from other comprehensive income is based on a portfolio approach.
In December 2019, the FASB issued an ASU to simplify the accounting for income taxes. The update removes certain exceptions to the general income tax principles. Effective October 1, 2020, we early adopted this ASU. It did not have a material impact on our consolidated financial position, results of operations or cash flows.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), to temporarily ease the potential burden in accounting for reference rate reform. The standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The guidance was effective upon issuance and generally can be applied through December 31, 2022. We are evaluating the potential impacts of reference rate reform on our various contractual positions to determine whether we may apply any of the practical expedients set forth in this standard.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.
Accounting Standards Issued But Not Yet Effective
Accounting pronouncements issued, but not effective until after December 31, 2020, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REVENUE RECOGNITION
Revenue Recognition
Substantially all of our revenues are from contracts associated with the pickup, transportation and delivery of packages and freight (“transportation services”), whether carried out by or arranged by UPS, either domestically or internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services to customers, both domestically and internationally, through our global network of company-owned and leased distribution centers and field stocking locations.
Disaggregation of Revenue
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Year Ended December 31,
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2020
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2019
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2018
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Revenue:
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Next Day Air
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$
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8,522
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$
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8,479
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$
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7,618
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Deferred
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5,665
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5,180
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4,752
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Ground
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39,312
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32,834
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31,223
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U.S. Domestic Package
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$
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53,499
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$
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46,493
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$
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43,593
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Domestic
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$
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3,160
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$
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2,836
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$
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2,874
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Export
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12,159
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10,837
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10,973
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Cargo & Other
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626
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547
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595
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International Package
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$
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15,945
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$
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14,220
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$
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14,442
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Forwarding
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$
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6,975
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$
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5,867
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$
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6,580
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Logistics
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4,073
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3,435
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3,234
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Freight
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3,149
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3,265
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3,218
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Other
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987
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814
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794
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Supply Chain & Freight
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$
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15,184
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$
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13,381
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$
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13,826
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Consolidated revenue
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$
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84,628
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$
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74,094
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$
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71,861
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We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis of revenue recognition in accordance with GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as a single contract, and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Within most of our contracts, the customer contracts with us to provide distinct services, such as transportation services. The vast majority of our contracts with customers for transportation services include only one performance obligation; the transportation services themselves. However, if a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In certain business units, such as Logistics, we sell customized, customer-specific solutions in which we integrate a complex set of tasks and components into a single capability (even if that single capability results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. In these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.
Satisfaction of Performance Obligations
We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to another. Further, if we were unable to complete delivery to the final location, another entity would not need to reperform the transportation service already performed.
As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost measure of progress for our package delivery contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including ancillary or accessorial fees and reductions for estimated customer incentives, are recorded proportionally as costs are incurred. Costs to fulfill include labor and other direct costs and an allocation of indirect costs. For our freight and freight forwarding contracts, an output method of progress based on time-in-transit is utilized as the timing of costs incurred does not best depict the transfer of control to the customer. In our Logistics business we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such, we recognize revenue in the amount to which we have a right to invoice the customer.
Variable Consideration
It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the transaction price. These variable amounts are generally dependent upon achievement of certain incentive tiers or performance metrics. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts of revenue, which may be reduced by incentives or other contract provisions, in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of anticipated customer spending and all information (historical, current and forecasted) that is reasonably available to us.
Contract Modifications
Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct services. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Contract modifications that add additional distinct goods or services are treated as separate contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services. These contract modifications are accounted for prospectively as the remaining performance obligations are distinct.
Payment Terms
Under the typical payment terms of our customer contracts, the customer pays at periodic intervals, which are generally seven days within our U.S. Domestic Package business, for shipments included on invoices received. Invoices are generated each week on the week-ending day, which is Saturday for the majority of our U.S. Domestic Package business, but could be another day depending on the business unit or the specific agreement with the customer. It is not customary business practice to extend payment terms past 90 days, and as such, we do not have a practice of including a significant financing component within our contracts with customers.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principal vs. Agent Considerations
In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. GAAP requires us to evaluate, using a control model, whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent). Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. Revenue and the associated purchased transportation costs are both reported on a gross basis within our statements of consolidated income.
Accounts Receivable, Net
Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when reasonable and supportable forecasts affect the expected collectability. This requires us to make our best estimate of the current expected losses inherent in our accounts receivable at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, forwarding-looking indicators, trends in customer payment frequency, and judgments about the probable effects of relevant observable data, including present and future economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk.
We increased our allowance for expected credit losses by $45 million during 2020 based upon current forecasts that anticipate a slight decline in the economic outlook. Our allowance for credit losses as of December 31, 2020 and 2019 was $138 and $93 million, respectively. Amounts for credit losses charged to expense before recoveries during the twelve months ended December 31, 2020 and 2019 were $254 and $194 million, respectively.
Contract Assets and Liabilities
Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e. packages have been delivered), and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.
Contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance payments and billings in excess of revenue represent payments received from our customers that will be earned over the contract term. Deferred revenue represents the amount of consideration due from customers related to in-transit shipments that has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the advance payment will be earned. We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which typically occurs within a short window after period-end. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.
Contract assets related to in-transit packages were $279 and $272 million as of December 31, 2020 and 2019, respectively, net of deferred revenue related to in-transit packages of $279 and $264 million as of December 31, 2020 and 2019, respectively. Contract assets are included within "Other current assets" in the consolidated balance sheets. Short-term contract liabilities related to advance payments from customers were $21 and $7 million as of December 31, 2020 and 2019, respectively. Short-term contract liabilities are included within "Other current liabilities" in the consolidated balance sheets. Long-term contract liabilities related to advance payments from customers were $26 million as of both December 31, 2020 and 2019. Long-term contract liabilities are included within "Other Non-Current Liabilities" in the consolidated balance sheets.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as trading and available-for-sale as of December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
2020
|
|
|
|
|
|
|
|
Current trading marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Equity securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading marketable securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Current available-for-sale marketable securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
181
|
|
|
3
|
|
|
—
|
|
|
184
|
|
Mortgage and asset-backed debt securities
|
30
|
|
|
1
|
|
|
—
|
|
|
31
|
|
Corporate debt securities
|
174
|
|
|
4
|
|
|
—
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. government debt securities
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable securities
|
396
|
|
|
8
|
|
|
—
|
|
|
404
|
|
|
|
|
|
|
|
|
|
Total current marketable securities
|
$
|
398
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
406
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
2019
|
|
|
|
|
|
|
|
Current trading marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
Equity securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading marketable securities
|
114
|
|
|
—
|
|
|
—
|
|
|
114
|
|
|
|
|
|
|
|
|
|
Current available-for-sale marketable securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
191
|
|
|
2
|
|
|
—
|
|
|
193
|
|
Mortgage and asset-backed debt securities
|
46
|
|
|
1
|
|
|
—
|
|
|
47
|
|
Corporate debt securities
|
130
|
|
|
3
|
|
|
—
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. government debt securities
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale marketable securities
|
383
|
|
|
6
|
|
|
—
|
|
|
389
|
|
|
|
|
|
|
|
|
|
Total current marketable securities
|
$
|
497
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
503
|
|
Total current marketable securities that were pledged as collateral for our self-insurance requirements had an estimated fair value of $404 and $389 million as of December 31, 2020 and 2019, respectively.
The gross realized gains on sales of available-for-sale marketable securities totaled $5 and $8 million in 2020 and 2019, respectively. There were no gross realized gains on sales of available-for-sale marketable securities in 2018. The gross realized losses on sales of available-for-sale marketable securities totaled $0, $2 and $4 million in 2020, 2019 and 2018, respectively.
There were no material impairment losses recognized on marketable securities during 2020, 2019 or 2018.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Impairments
We have concluded that no material impairment losses existed as of December 31, 2020. In making this determination, we considered the financial condition and prospects of each issuer, the magnitude of the losses compared with the 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.
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, 2020 (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
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
Mortgage and asset-backed debt securities
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Corporate debt securities
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. government debt securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
—
|
|
The unrealized losses for the U.S. government and agency debt securities, mortgage and asset-backed debt securities, and corporate debt securities are primarily due to changes in market interest rates. We have both the intent and ability to hold these securities for the time necessary to recover the cost basis.
Maturity Information
The amortized cost and estimated fair value of marketable securities as of December 31, 2020, 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 with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Estimated
Fair Value
|
Due in one year or less
|
$
|
27
|
|
|
$
|
27
|
|
Due after one year through three years
|
323
|
|
|
327
|
|
Due after three years through five years
|
10
|
|
|
10
|
|
Due after five years
|
36
|
|
|
40
|
|
|
396
|
|
|
404
|
|
Equity securities
|
2
|
|
|
2
|
|
|
$
|
398
|
|
|
$
|
406
|
|
Non-Current Investments and Restricted Cash
We previously held various marketable securities and cash equivalents as collateral under an escrow agreement to guarantee our self-insurance obligations which were reflected in "Cash, Cash Equivalents and Restricted Cash" in the statements of consolidated cash flows. In 2019 we fully liquidated our investment balance associated with this agreement and pledged the required collateral with a surety bond. For additional information on surety bonds written as of December 31, 2020, see note 9.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We held a $23 and $21 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan as of December 31, 2020 and 2019, respectively. The change in investment fair value is recognized in "Investment income (expense) and other" in the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets of $2 and $3 million as of December 31, 2020 and 2019, respectively. These amounts are classified as “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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
Cash and cash equivalents
|
$
|
5,910
|
|
|
$
|
5,238
|
|
|
$
|
4,225
|
|
Restricted cash
|
—
|
|
|
—
|
|
|
142
|
|
Total cash, cash equivalents and restricted cash
|
$
|
5,910
|
|
|
$
|
5,238
|
|
|
$
|
4,367
|
|
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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about our investments measured at fair value on a recurring basis as of December 31, 2020 and 2019, 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)
|
|
Total
|
2020
|
|
|
|
|
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
184
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
184
|
|
Mortgage and asset-backed debt securities
|
—
|
|
|
31
|
|
|
—
|
|
|
31
|
|
Corporate debt securities
|
—
|
|
|
178
|
|
|
—
|
|
|
178
|
|
|
|
|
|
|
|
|
|
Equity securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
184
|
|
|
222
|
|
|
—
|
|
|
406
|
|
Other non-current investments
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Total
|
$
|
207
|
|
|
$
|
222
|
|
|
$
|
—
|
|
|
$
|
429
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
2019
|
|
|
|
|
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
U.S. government and agency debt securities
|
$
|
193
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
193
|
|
Mortgage and asset-backed debt securities
|
—
|
|
|
47
|
|
|
—
|
|
|
47
|
|
Corporate debt securities
|
—
|
|
|
245
|
|
|
—
|
|
|
245
|
|
|
|
|
|
|
|
|
|
Equity securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Non-U.S. government debt securities
|
—
|
|
|
16
|
|
|
—
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
193
|
|
|
310
|
|
|
—
|
|
|
503
|
|
Other non-current investments
|
21
|
|
|
—
|
|
|
1
|
|
|
22
|
|
Total
|
$
|
214
|
|
|
$
|
310
|
|
|
$
|
1
|
|
|
$
|
525
|
|
There were no transfers of investments between Level 1 and Level 2 during 2020 or 2019.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ASSETS HELD FOR SALE
On January 24, 2021, we entered into a definitive agreement to divest our UPS Freight business to TFI International Inc. for $800 million, subject to working capital and other adjustments. The following table summarizes the carrying values of the assets and liabilities classified as held for sale in our consolidated balance sheet as of December 31, 2020 (in millions):
|
|
|
|
|
|
|
2020
|
Assets:
|
|
Accounts receivable, net
|
$
|
263
|
|
Other current assets
|
62
|
|
Property, plant and equipment, net
|
940
|
|
Other non-current assets
|
124
|
|
Total assets
|
1,389
|
|
Valuation allowance
|
(192)
|
|
Total assets held for sale
|
$
|
1,197
|
|
|
|
Liabilities:
|
|
Accounts payable
|
$
|
50
|
|
Other current liabilities
|
112
|
|
Other non-current liabilities
|
185
|
|
Total liabilities to be disposed of
|
$
|
347
|
|
|
|
Net assets held for sale
|
$
|
850
|
|
Self-insurance reserves for the UPS Freight business and obligations for benefits earned within UPS-sponsored pension and postretirement medical benefit plans will be retained by us at closing and are not included in the amounts presented above.
Upon classification as held for sale, we recognized a total impairment charge of $686 million within Other expenses in the statements of consolidated income. This was comprised of a goodwill impairment charge of $494 million and a valuation allowance to adjust the carrying value of the disposal group to fair value less cost to sell of $192 million.
We expect the transaction, which is subject to customary closing conditions and regulatory approvals, to close during the second quarter of 2021.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including both owned assets as well as assets subject to finance leases, consists of the following as of December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Vehicles
|
$
|
9,786
|
|
|
$
|
10,613
|
|
Aircraft
|
20,549
|
|
|
19,045
|
|
Land
|
2,052
|
|
|
2,087
|
|
Buildings
|
5,425
|
|
|
5,046
|
|
Building and leasehold improvements
|
4,921
|
|
|
4,898
|
|
Plant equipment
|
14,684
|
|
|
13,849
|
|
Technology equipment
|
2,626
|
|
|
2,206
|
|
|
|
|
|
Construction-in-progress
|
2,048
|
|
|
1,983
|
|
|
62,091
|
|
|
59,727
|
|
Less: Accumulated depreciation and amortization
|
(29,837)
|
|
|
(29,245)
|
|
Property, Plant and Equipment, Net
|
$
|
32,254
|
|
|
$
|
30,482
|
|
Property, plant and equipment purchased on account was $319 and $372 million as of December 31, 2020 and 2019, respectively.
We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aviation fuel prices and other factors. Additionally, we monitor all other property, plant and equipment categories for any indicators that the carrying value of the assets may not be recoverable. There were no material impairment charges during the years ended December 31, 2020 or 2019.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS
We sponsor various retirement and pension plans, including defined benefit and defined contribution plans which cover our employees worldwide.
U.S. Pension Benefits
In the U.S. we maintain the following single-employer defined benefit pension plans: the UPS Retirement Plan, the UPS Pension Plan, the UPS/IBT Full-Time Employee Pension Plan and the UPS Excess Coordinating Benefit Plan, a non-qualified plan.
The UPS Retirement Plan is noncontributory and includes substantially all eligible employees of participating domestic subsidiaries hired prior to July 1, 2016 who are not members of a collective bargaining unit, as well as certain employees covered by a collective bargaining agreement. This plan generally provides for retirement benefits based on average compensation earned by employees prior to retirement. Benefits payable under this plan are subject to maximum compensation limits and the annual benefit limits for a tax-qualified defined benefit plan as prescribed by the Internal Revenue Service (“IRS”).
The UPS Pension Plan is noncontributory and includes certain eligible employees of participating domestic subsidiaries and members of collective bargaining units that elect to participate in the plan. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.
The UPS/IBT Full-Time Employee Pension Plan is noncontributory and includes employees that were previously members of the Central States Pension Fund ("CSPF"), a multiemployer pension plan, in addition to other eligible employees who are covered under certain collective bargaining agreements. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.
The UPS Excess Coordinating Benefit Plan is a non-qualified plan that provides benefits to certain participants in the UPS Retirement Plan, hired prior to July 1, 2016, for amounts that exceed the benefit limits described above.
In the year ended December 31, 2017, we amended the UPS Retirement Plan and the UPS Excess Coordinating Benefit Plan to cease accruals of additional benefits for future service and compensation for non-union participants effective January 1, 2023.
During the fourth quarter of 2019, certain former U.S. employees were offered the option to receive a one-time payment of their vested pension benefit. Approximately 18,800 former employees accepted this option, accelerating $820 million in benefit payments during 2019 while reducing the number of participants who are due future payments from U.S. pension plans. As the cost of these settlements did not exceed the plans' service cost and interest cost for the year, the impact of the settlement was not recognized in earnings.
On January 24, 2021, we entered into a definitive agreement to divest our UPS Freight business as discussed in note 4. Upon closing, our U.S. pension and postretirement plans may be subject to remeasurement of plan assets and pension benefit obligations.
International Pension Benefits
We also sponsor various defined benefit plans covering certain of our international employees. The majority of our international obligations are for defined benefit plans in Canada and the United Kingdom. In addition, many of our international employees are covered by government-sponsored retirement and pension plans. We are not directly responsible for providing benefits to participants of government-sponsored plans.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Postretirement Medical Benefits
We also sponsor postretirement medical plans in the U.S. that provide healthcare benefits to our non-union retirees, as well as select union retirees who meet certain eligibility requirements and who are not otherwise covered by multiemployer plans. Generally, this includes employees with at least 10 years of service who have reached age 55 and employees who are eligible for postretirement medical benefits from a Company-sponsored plan pursuant to collective bargaining agreements. We have the right to modify or terminate certain of these plans. These benefits have been provided to certain retirees on a noncontributory basis; however, in many cases, retirees are required to contribute all or a portion of the total cost of the coverage.
Defined Contribution Plans
We sponsor a defined contribution plan for employees not covered under collective bargaining agreements, and several smaller defined contribution plans for certain employees covered under collective bargaining agreements. We match, in shares of UPS common stock or cash, a portion of the participating employees’ contributions. Matching contributions charged to expense were $139, $130 and $127 million for 2020, 2019 and 2018, respectively.
In addition to current benefits under the UPS 401(k) Savings Plan, non-union employees hired after July 1, 2016, receive a retirement contribution. UPS contributes 3% to 8% of eligible pay to the UPS 401(k) Savings Plan based on years of vesting service and business unit. Contributions under this plan are subject to maximum compensation and contribution limits for a tax-qualified defined contribution plan as prescribed by the IRS. Contributions charged to expense were $84, $67 and $28 million for 2020, 2019 and 2018 respectively.
Effective June 23, 2017, the Company amended the UPS 401(k) Savings Plan so that non-union employees who currently participate in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, earn a retirement contribution beginning January 1, 2023. UPS will contribute 5% to 8% of eligible compensation to the UPS 401(k) Savings Plan based on years of vesting service. The amendment also provides for transition contributions for certain participants. There was no impact to the statements of consolidated income for 2020, 2019 and 2018 as a result of this change.
The UPS Restoration Savings Plan is a non-qualified plan that provides benefits to certain participants in the UPS 401(k) Savings Plan for amounts that exceed the benefit limits described above.
Contributions are also made to defined contribution money purchase plans under certain collective bargaining agreements. Amounts charged to expense were $107, $97 and $92 million for 2020, 2019 and 2018, respectively.
Net Periodic Benefit Cost
Information about net periodic benefit cost for the company-sponsored pension and postretirement defined benefit plans is as follows (in millions):
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
1,853
|
|
|
$
|
1,439
|
|
|
$
|
1,661
|
|
|
$
|
29
|
|
|
$
|
23
|
|
|
$
|
29
|
|
|
$
|
67
|
|
|
$
|
57
|
|
|
$
|
62
|
|
Interest cost
|
1,977
|
|
|
2,067
|
|
|
1,799
|
|
|
91
|
|
|
108
|
|
|
104
|
|
|
40
|
|
|
47
|
|
|
45
|
|
Expected return on plan assets
|
(3,549)
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|
|
(3,130)
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|
|
(3,201)
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|
|
(8)
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|
|
(8)
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|
|
(8)
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|
|
(86)
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|
|
(76)
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|
|
(77)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
218
|
|
|
218
|
|
|
193
|
|
|
7
|
|
|
7
|
|
|
7
|
|
|
2
|
|
|
2
|
|
|
1
|
|
Actuarial (gain) loss
|
6,211
|
|
|
2,296
|
|
|
1,603
|
|
|
246
|
|
|
37
|
|
|
—
|
|
|
27
|
|
|
54
|
|
|
24
|
|
Curtailment and settlement loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
$
|
6,710
|
|
|
$
|
2,890
|
|
|
$
|
2,055
|
|
|
$
|
365
|
|
|
$
|
167
|
|
|
$
|
132
|
|
|
$
|
50
|
|
|
$
|
84
|
|
|
$
|
55
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actuarial Assumptions
The table below provides the weighted-average actuarial assumptions used to determine the net periodic benefit cost:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Service cost discount rate
|
3.60
|
%
|
|
4.50
|
%
|
|
3.84
|
%
|
|
3.59
|
%
|
|
4.51
|
%
|
|
3.82
|
%
|
|
3.01
|
%
|
|
3.58
|
%
|
|
3.35
|
%
|
Interest cost discount rate
|
3.60
|
%
|
|
4.50
|
%
|
|
3.84
|
%
|
|
3.59
|
%
|
|
4.51
|
%
|
|
3.82
|
%
|
|
2.67
|
%
|
|
3.25
|
%
|
|
3.01
|
%
|
Rate of compensation increase
|
4.22
|
%
|
|
4.25
|
%
|
|
4.25
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
|
3.00
|
%
|
|
3.24
|
%
|
|
3.22
|
%
|
Expected return on plan assets
|
7.77
|
%
|
|
7.75
|
%
|
|
7.75
|
%
|
|
7.20
|
%
|
|
7.20
|
%
|
|
7.20
|
%
|
|
5.55
|
%
|
|
5.69
|
%
|
|
5.76
|
%
|
Cash balance interest credit rate
|
2.50
|
%
|
|
2.98
|
%
|
|
2.50
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
|
2.59
|
%
|
|
3.17
|
%
|
|
3.07
|
%
|
The table below provides the weighted-average actuarial assumptions used to determine the benefit obligations of our plans:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Discount rate
|
2.90
|
%
|
|
3.60
|
%
|
|
2.88
|
%
|
|
3.59
|
%
|
|
1.94
|
%
|
|
2.21
|
%
|
Rate of compensation increase
|
4.21
|
%
|
|
4.22
|
%
|
|
N/A
|
|
N/A
|
|
2.93
|
%
|
|
3.00
|
%
|
Cash balance interest credit rate
|
2.50
|
%
|
|
2.50
|
%
|
|
N/A
|
|
N/A
|
|
2.74
|
%
|
|
2.59
|
%
|
A discount rate is used to determine the present value of our future benefit obligations. To determine the discount rate for our U.S. pension and postretirement benefit plans, we use a bond matching approach to select specific bonds that would satisfy our projected benefit payments. We believe the bond matching approach reflects the process we would employ to settle our pension and postretirement benefit obligations. In 2019, we refined the bond matching approach used to determine the discount rate for our U.S. pension and postretirement plans. Following a routine, periodic review of their standard bond matching tool which we reference to support discount rates, our external consultants refined their model to reflect the increased availability of longer duration high-quality corporate bonds, changes in the content and sources of available data and improvements in computational capabilities. We believe these refinements enhance the simulation of bond portfolios that match the plans' expected cash flows and result in a better estimate of the plan discount rates. These refinements resulted in an increase of approximately 10 basis points in the discount rates used to measure our plans, decreasing the total projected benefit obligation in our consolidated balance sheet at the December 31, 2019 measurement date by approximately $900 million and the resulting pre-tax mark-to-market charge within Other income and (expense) in our statements of consolidated income by approximately $810 million, and increasing net income by $616 million, or $0.71 per share on a basic and diluted basis. For our international plans, the discount rate is determined by matching the expected cash flows of the plan, where available, or of a sample plan of similar duration, to a yield curve based on long-term, high quality fixed income debt instruments available as of the measurement date. These assumptions are updated each measurement date, which is typically annually.
As of December 31, 2020, the impact of each basis point change in the discount rate on the projected benefit obligation of our pension and postretirement medical benefit plans is as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in the Projected Benefit Obligation
|
|
Pension Benefits
|
|
Postretirement Medical Benefits
|
One basis point increase in discount rate
|
$
|
(110)
|
|
|
$
|
(2)
|
|
One basis point decrease in discount rate
|
118
|
|
|
3
|
|
The Society of Actuaries ("SOA") published mortality tables and improvement scales are used in developing the best estimate of mortality for our U.S. plans. In October 2020, the SOA published an updated improvement scale which reduced expected mortality improvements from previously published improvement scales. Based on our perspective of future longevity, we updated the mortality assumptions to incorporate the improvement scale for purposes of measuring pension and other postretirement benefit obligations.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assumptions for the expected return on plan assets are used to determine a component of net periodic benefit cost for the year. The assumption for our U.S. plans is developed using a long-term projection of returns for each asset class. Our asset allocation targets are reviewed and, if necessary, updated taking into consideration plan changes, funded status and actual performance. The expected return for each asset class is a function of passive, long-term capital market assumptions and excess returns generated from active management. The capital market assumptions used are provided by independent investment advisors, while excess return assumptions are supported by historical performance, fund mandates and investment expectations.
For plans outside the U.S., consideration is given to local market expectations of long-term returns. Strategic asset allocations are determined by plan, based on the nature of liabilities and considering the demographic composition of the plan participants.
Actuarial Assumptions - Central States Pension Fund
UPS was a contributing employer to the CSPF until 2007 when we withdrew from the CSPF and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF.
Under our withdrawal agreement with the CSPF, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with applicable law.
In 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”). This change in law for the first time permitted multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury (“Treasury”). In 2016, Treasury rejected the proposed plan submitted by the CSPF. In 2018, Congress established a Joint Select Committee to develop a recommendation to improve the solvency of multiemployer plans and the Pension Benefit Guaranty Corporation (“PBGC”) before a November 30, 2018 deadline. While the Committee’s efforts failed to meet its deadline, the Committee made significant progress towards finding solutions that would address the long term solvency of multiemployer pension plans. In 2019, the U.S. House of Representatives passed the Rehabilitation for Multiemployer Pensions Act of 2019 to provide assistance to critical and declining multiemployer pension plans. Additionally, in 2020, the U.S. House of Representatives passed two versions of the Health and Economic Recovery Omnibus Emergency Solutions Act ("HEROES Act"), which would provide financial support to those same plans. These bills remain with the U.S. Senate for consideration. UPS continues to work with all stakeholders, including legislators and regulators, to implement an acceptable solution.
The CSPF has said that it believes a legislative solution to its funded status is necessary or that it will become insolvent in 2025. We expect that the CSPF will continue to explore options to avoid insolvency. Numerous factors could affect the CSPF’s funded status and UPS’s potential obligation to pay coordinating benefits under the UPS/IBT Plan, including whether the CSPF submits a revised benefit reduction plan under MPRA and the terms thereof, or whether it otherwise seeks federal government assistance, as well as the terms of any applicable legislation, the extent to which benefits are paid by the PBGC and our ability to successfully defend legal positions we may take in the future under the MPRA, including the suspension ordering provisions, our withdrawal agreement and other applicable law.
We account for the potential obligation to pay coordinating benefits to the UPS Transfer Group under Accounting Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”), which requires us to provide a best estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely outcome to this matter and the broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities. As such, our best estimate in accordance with ASC 715 at the December 31, 2020 measurement date is that the CSPF can no longer submit and implement another benefit reduction plan under the MPRA.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We developed our best estimate using a deterministic cash flow projection that reflects updated estimated CSPF cash flows and investment earnings, the lack of legislative action, payment of guaranteed benefits by the PBGC and the absence of a benefit reduction plan under MPRA having been filed by the CSPF. As a result, at the December 31, 2020 measurement date, the best estimate of our projected benefit obligation for coordinating benefits that may be required to be directly provided by the UPS/IBT Plan to the UPS Transfer Group increased by $2.3 billion. Since 2018, we have recorded $4.9 billion for coordinating benefits that the UPS/IBT Plan may be required to pay. At the December 31, 2020 measurement date, discount rate changes increased this liability to $5.5 billion.
The future value of this estimate will be influenced by a number of factors, including the terms and timing of any benefit reduction plan under MPRA, changes in our discount rate, rate of return on assets and other actuarial assumptions, the ability of the PBGC to sustain its commitments, as well as potential solutions resulting from federal government intervention. Any such event may result in a decrease or an increase in the best estimate of our projected benefit obligation. If a future change in law occurs, it may be a significant event requiring an interim remeasurement of the UPS/IBT Plan at the date the law is enacted. We will continue to assess the impact of these uncertainties on our projected benefit obligation in accordance with ASC 715.
Other Actuarial Assumptions
Healthcare cost trends are used to project future postretirement medical benefits payable from our plans. For 2020 U.S. plan obligations, future postretirement medical benefit costs were forecasted assuming an initial annual rate of increase of 6.5%, decreasing to 4.5% by the year 2029 and with consistent annual increases at that ultimate level thereafter.
Funded Status
The following table discloses the funded status of our plans and the amounts recognized in our consolidated balance sheets as of December 31 (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Funded Status:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
$
|
52,997
|
|
|
$
|
46,172
|
|
|
$
|
49
|
|
|
$
|
37
|
|
|
$
|
1,835
|
|
|
$
|
1,558
|
|
Benefit obligation
|
(65,922)
|
|
|
(54,039)
|
|
|
(2,759)
|
|
|
(2,616)
|
|
|
(2,177)
|
|
|
(1,906)
|
|
Funded status
|
$
|
(12,925)
|
|
|
$
|
(7,867)
|
|
|
$
|
(2,710)
|
|
|
$
|
(2,579)
|
|
|
$
|
(342)
|
|
|
$
|
(348)
|
|
Funded Status Recognized in our Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51
|
|
|
$
|
34
|
|
Other current liabilities
|
(22)
|
|
|
(22)
|
|
|
(184)
|
|
|
(200)
|
|
|
(5)
|
|
|
(5)
|
|
Pension and postretirement benefit obligations
|
(12,903)
|
|
|
(7,845)
|
|
|
(2,526)
|
|
|
(2,379)
|
|
|
(388)
|
|
|
(377)
|
|
Net liability
|
$
|
(12,925)
|
|
|
$
|
(7,867)
|
|
|
$
|
(2,710)
|
|
|
$
|
(2,579)
|
|
|
$
|
(342)
|
|
|
$
|
(348)
|
|
Amounts Recognized in AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net prior service cost
|
$
|
(753)
|
|
|
$
|
(800)
|
|
|
$
|
(9)
|
|
|
$
|
(16)
|
|
|
$
|
(11)
|
|
|
$
|
(12)
|
|
Unrecognized net actuarial gain (loss)
|
(6,592)
|
|
|
(5,404)
|
|
|
(276)
|
|
|
(240)
|
|
|
(151)
|
|
|
(162)
|
|
Gross unrecognized cost
|
(7,345)
|
|
|
(6,204)
|
|
|
(285)
|
|
|
(256)
|
|
|
(162)
|
|
|
(174)
|
|
Deferred tax assets (liabilities)
|
1,770
|
|
|
1,497
|
|
|
69
|
|
|
62
|
|
|
38
|
|
|
40
|
|
Net unrecognized cost
|
$
|
(5,575)
|
|
|
$
|
(4,707)
|
|
|
$
|
(216)
|
|
|
$
|
(194)
|
|
|
$
|
(124)
|
|
|
$
|
(134)
|
|
The accumulated benefit obligation for our pension plans as of the measurement dates in 2020 and 2019 was $66.9 and $55.0 billion, respectively. The accumulated benefit obligation for our postretirement medical benefit plans as of the measurement dates in 2020 and 2019 was $2.8 and $2.6 billion, respectively.
Benefit payments under the pension plans include $26 and $27 million paid from employer assets in 2020 and 2019, respectively. Benefit payments (net of participant contributions) under the postretirement medical benefit plans include $77 and $82 million paid from employer assets in 2020 and 2019, respectively. Such benefit payments from employer assets are also categorized as employer contributions.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2020 and 2019, the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with benefit obligations in excess of plan assets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation
Exceeds the Fair Value of Plan Assets
|
|
Accumulated Benefit Obligation
Exceeds the Fair Value of Plan Assets
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
U.S. Pension Benefits:
|
|
|
|
|
|
|
|
Projected benefit obligation
|
$
|
65,922
|
|
|
$
|
54,039
|
|
|
$
|
65,922
|
|
|
$
|
54,039
|
|
Accumulated benefit obligation
|
64,937
|
|
|
53,194
|
|
|
64,937
|
|
|
53,194
|
|
Fair value of plan assets
|
52,997
|
|
|
46,172
|
|
|
52,997
|
|
|
46,172
|
|
International Pension Benefits:
|
|
|
|
|
|
|
|
Projected benefit obligation
|
$
|
845
|
|
|
$
|
1,319
|
|
|
$
|
845
|
|
|
$
|
1,319
|
|
Accumulated benefit obligation
|
728
|
|
|
1,210
|
|
|
728
|
|
|
1,210
|
|
Fair value of plan assets
|
452
|
|
|
948
|
|
|
452
|
|
|
948
|
|
The accumulated postretirement benefit obligation presented in the funded status table exceeds plan assets for all U.S. postretirement medical benefit plans.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Benefit Obligations and Fair Value of Plan Assets
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of plan assets as of the respective measurement dates in each year (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Benefit Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
$
|
54,039
|
|
|
$
|
45,333
|
|
|
$
|
2,616
|
|
|
$
|
2,510
|
|
|
$
|
1,906
|
|
|
$
|
1,552
|
|
Service cost
|
1,853
|
|
|
1,439
|
|
|
29
|
|
|
23
|
|
|
67
|
|
|
57
|
|
Interest cost
|
1,977
|
|
|
2,067
|
|
|
91
|
|
|
108
|
|
|
40
|
|
|
47
|
|
Gross benefits paid
|
(1,846)
|
|
|
(2,394)
|
|
|
(274)
|
|
|
(288)
|
|
|
(38)
|
|
|
(40)
|
|
Plan participants’ contributions
|
—
|
|
|
—
|
|
|
32
|
|
|
30
|
|
|
3
|
|
|
3
|
|
Plan amendments
|
171
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Actuarial (gain)/loss
|
9,728
|
|
|
7,594
|
|
|
265
|
|
|
233
|
|
|
123
|
|
|
213
|
|
Foreign currency exchange rate changes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80
|
|
|
47
|
|
Curtailments and settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6)
|
|
|
(2)
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
28
|
|
Projected benefit obligation at end of year
|
$
|
65,922
|
|
|
$
|
54,039
|
|
|
$
|
2,759
|
|
|
$
|
2,616
|
|
|
$
|
2,177
|
|
|
$
|
1,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International
Pension Benefits
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Fair Value of Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
46,172
|
|
|
$
|
39,554
|
|
|
$
|
37
|
|
|
$
|
26
|
|
|
$
|
1,558
|
|
|
$
|
1,284
|
|
Actual return on plan assets
|
5,878
|
|
|
6,991
|
|
|
(9)
|
|
|
(5)
|
|
|
184
|
|
|
171
|
|
Employer contributions
|
2,793
|
|
|
2,021
|
|
|
263
|
|
|
274
|
|
|
69
|
|
|
67
|
|
Plan participants’ contributions
|
—
|
|
|
—
|
|
|
32
|
|
|
30
|
|
|
3
|
|
|
3
|
|
Gross benefits paid
|
(1,846)
|
|
|
(2,394)
|
|
|
(274)
|
|
|
(288)
|
|
|
(38)
|
|
|
(40)
|
|
Foreign currency exchange rate changes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
62
|
|
|
49
|
|
Curtailments and settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
(2)
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Fair value of plan assets at end of year
|
$
|
52,997
|
|
|
$
|
46,172
|
|
|
$
|
49
|
|
|
$
|
37
|
|
|
$
|
1,835
|
|
|
$
|
1,558
|
|
2020 - $10.1 billion pre-tax actuarial loss related to benefit obligation:
•Discount Rates ($7.3 billion pre-tax loss): The weighted-average discount rate for our pension and postretirement medical plans decreased from 3.55% as of December 31, 2019 to 2.87% as of December 31, 2020, primarily due to a decline in U.S. treasury yields that was slightly offset by an increase in credit spreads on AA-rated corporate bonds.
•Coordinating benefits attributable to the Central States Pension Fund ($2.3 billion pre-tax loss): This represents our current best estimate of additional potential coordinating benefits that may be required to be paid related to the Central States Pension Fund before taking into account the impact of the change in discount rates.
•Demographic and Assumption Changes ($513 million pre-tax loss): This represents the difference between actual and estimated participant data and demographic factors, including items such as healthcare cost trends, compensation changes, rates of termination, retirement, mortality and other changes.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2019 - $8.0 billion pre-tax actuarial loss related to benefit obligation:
•Discount Rates ($7.5 billion pre-tax loss): The weighted-average discount rate for our pension and postretirement medical plans decreased from 4.45% as of December 31, 2018 to 3.55% as of December 31, 2019, primarily due to both a decline in U.S. treasury yields and a decrease in credit spreads on AA-rated corporate bonds. This was partially offset by a refinement to the bond matching approach used to determine the discount rate for our U.S. pension and postretirement plans discussed above.
•Coordinating benefits attributable to the Central States Pension Fund ($603 million pre-tax loss): This represents our current best estimate of additional potential coordinating benefits that may be required to be paid related to the Central States Pension Fund before taking into account the impact of the change in discount rates.
•Demographic and Assumption Changes ($40 million pre-tax gain): This represents the difference between actual and estimated participant data and demographic factors, including items such as healthcare cost trends, compensation changes, rates of termination, retirement, mortality and other changes.
Pension and Postretirement Plan Assets
Under the governance of plan trustees, the Investment Committee establishes investment guidelines and strategies and regularly monitors the performance of investments and investment managers. The investment guidelines address items such as establishing appropriate governance provisions; defining investment objectives; determining strategic asset allocation; monitoring and reporting the investments on a regular basis; appointing/dismissing investment managers, custodians, consultants and advisors; risk management; determining/defining the mandates for investment managers; rebalancing of assets and determining investment restrictions/prohibited investments.
Plan assets are invested in accordance with applicable laws and regulations. The primary long-term investment objective for pension assets is to provide for a reasonable amount of long-term growth of capital given prudent levels of risk exposure while minimizing permanent loss of capital. To meet this objective, investment managers are engaged to actively manage assets within the guidelines and strategies set forth by the Investment Committee. Active managers are monitored regularly and their performance is compared to applicable benchmarks.
Fair Value Measurements
Plan assets valued utilizing Level 1 inputs include equity investments, corporate debt instruments and U.S. government securities. Fair values were determined by closing prices for those securities traded on national stock exchanges, while securities traded in the over-the-counter market and listed securities for which no sale was reported on the valuation date are valued at the mean between the last reported bid and ask prices.
Level 2 assets include certain bonds that are valued based on yields currently available on comparable securities of other issues with similar credit ratings; mortgage-backed securities that are valued based on cash flow and yield models using acceptable modeling and pricing conventions; and certain investments that are pooled with other investments in a commingled fund. We value our investments in commingled funds by taking the percentage ownership of the underlying assets, each of which has a readily determinable fair value.
Fair value estimates for certain investments are based on unobservable inputs that are not corroborated by observable market data and are thus classified as Level 3.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments that do not have a readily determinable fair value, and which provide a net asset value ("NAV") or its equivalent developed consistent with FASB measurement principles, are valued using NAV as a practical expedient. These investments are not classified in Levels 1, 2, or 3 of the fair value hierarchy but instead included within the subtotals by asset category. Such investments include hedge funds, risk parity funds, real estate investments, private debt and private equity funds. Investments in hedge funds and risk parity funds are valued using the reported NAV as of December 31st. Real estate investments, private debt and private equity funds are valued at NAV per the most recent partnership audited financial reports, and adjusted, as appropriate, for investment activity between the date of the financial reports and December 31st. Due to the inherent limitations in obtaining a readily determinable fair value measurement for alternative investments, the fair values reported may differ from the values that would have been used had readily available market information for the alternative investments existed. These investments are described further below:
•Hedge Funds: Plan assets are invested in hedge funds that pursue multiple strategies to diversify risk and reduce volatility. Most of these hedge funds allow redemptions either quarterly or semi-annually after a two to three month notice period, while others allow for redemption after only a brief notification period with no restriction on redemption frequency. No unfunded commitments existed with respect to hedge funds as of December 31, 2020.
•Risk Parity Funds: Plan assets are invested in risk parity strategies in order to provide diversification and balance risk/return objectives. These strategies reflect a multi-asset class balanced risk approach generally consisting of equity, interest rates, credit and commodities. These funds allow for monthly redemptions with only a brief notification period. No unfunded commitments existed with respect to risk parity funds as of December 31, 2020.
•Real Estate, Private Debt and Private Equity Funds: Plan assets are invested in limited partnership interests in various private equity, private debt and real estate funds. Limited provision exists for the redemption of these interests by the limited partners that invest in these funds until the end of the term of the partnerships, typically ranging between 10 and 15 years from the date of inception. An active secondary market exists for similar partnership interests, although no particular value (discount or premium) can be guaranteed. As of December 31, 2020, unfunded commitments to such limited partnerships totaling approximately $3.3 billion are expected to be contributed over the remaining investment period, typically ranging between three and six years.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of U.S. and international pension and postretirement benefit plan assets by asset category as of December 31, 2020 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets(1)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Percentage of
Plan Assets
|
|
Target
Allocation
|
Asset Category (U.S. Plans):
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,593
|
|
|
$
|
1,510
|
|
|
$
|
83
|
|
|
$
|
—
|
|
|
3.0
|
%
|
|
1-5
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Large Cap
|
8,294
|
|
|
4,272
|
|
|
4,022
|
|
|
—
|
|
|
|
|
|
U.S. Small Cap
|
370
|
|
|
370
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Emerging Markets
|
2,106
|
|
|
1,503
|
|
|
603
|
|
|
—
|
|
|
|
|
|
Global Equity
|
3,940
|
|
|
3,624
|
|
|
316
|
|
|
—
|
|
|
|
|
|
International Equity
|
4,335
|
|
|
2,043
|
|
|
2,292
|
|
|
—
|
|
|
|
|
|
Total Equity Securities
|
19,045
|
|
|
11,812
|
|
|
7,233
|
|
|
—
|
|
|
35.9
|
|
|
25-55
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Securities
|
16,145
|
|
|
14,646
|
|
|
1,499
|
|
|
—
|
|
|
|
|
|
Corporate Bonds
|
6,146
|
|
|
—
|
|
|
6,143
|
|
|
3
|
|
|
|
|
|
Global Bonds
|
42
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
|
|
|
Municipal Bonds
|
27
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
|
|
|
Total Fixed Income Securities
|
22,360
|
|
|
14,646
|
|
|
7,711
|
|
|
3
|
|
|
42.2
|
|
|
35-55
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds
|
3,518
|
|
|
—
|
|
|
1,652
|
|
|
—
|
|
|
6.6
|
|
|
5-15
|
Private Equity
|
3,424
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.5
|
|
|
1-10
|
Private Debt
|
695
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
1-10
|
Real Estate
|
1,986
|
|
|
244
|
|
|
82
|
|
|
—
|
|
|
3.7
|
|
|
1-10
|
Structured Products(2)
|
161
|
|
|
—
|
|
|
161
|
|
|
—
|
|
|
0.3
|
|
|
1-5
|
Risk Parity Funds
|
264
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
1-10
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Plan Assets
|
$
|
53,046
|
|
|
$
|
28,212
|
|
|
$
|
16,922
|
|
|
$
|
3
|
|
|
100.0
|
%
|
|
|
Asset Category (International Plans):
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
84
|
|
|
$
|
45
|
|
|
$
|
39
|
|
|
—
|
|
|
4.6
|
|
|
1-10
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Local Markets Equity
|
214
|
|
|
—
|
|
|
214
|
|
|
—
|
|
|
|
|
|
U.S. Equity
|
59
|
|
|
—
|
|
|
59
|
|
|
—
|
|
|
|
|
|
Emerging Markets
|
55
|
|
|
41
|
|
|
14
|
|
|
—
|
|
|
|
|
|
International / Global Equity
|
534
|
|
|
210
|
|
|
324
|
|
|
—
|
|
|
|
|
|
Total Equity Securities
|
862
|
|
|
251
|
|
|
611
|
|
|
—
|
|
|
47.0
|
|
|
25-55
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Local Government Bonds
|
102
|
|
|
—
|
|
|
102
|
|
|
—
|
|
|
|
|
|
Corporate Bonds
|
215
|
|
|
22
|
|
|
193
|
|
|
—
|
|
|
|
|
|
Global Bonds
|
125
|
|
|
125
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Total Fixed Income Securities
|
442
|
|
|
147
|
|
|
295
|
|
|
—
|
|
|
24.1
|
|
|
20-40
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
154
|
|
|
—
|
|
|
80
|
|
|
21
|
|
|
8.3
|
|
|
5-10
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
293
|
|
|
—
|
|
|
236
|
|
|
41
|
|
|
16.0
|
|
|
1-20
|
Total International Plan Assets
|
$
|
1,835
|
|
|
$
|
443
|
|
|
$
|
1,261
|
|
|
$
|
62
|
|
|
100.0
|
%
|
|
|
Total Plan Assets
|
$
|
54,881
|
|
|
$
|
28,655
|
|
|
$
|
18,183
|
|
|
$
|
65
|
|
|
|
|
|
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the category totals.
(2) Represents mortgage and asset-backed securities.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of U.S. and international pension and postretirement benefit plan assets by asset category as of December 31, 2019 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets(1)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Percentage of
Plan Assets
|
|
Target
Allocation
|
Asset Category (U.S. Plans):
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
964
|
|
|
$
|
818
|
|
|
$
|
146
|
|
|
$
|
—
|
|
|
2.1
|
%
|
|
1-5
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Large Cap
|
6,607
|
|
|
2,889
|
|
|
3,718
|
|
|
—
|
|
|
|
|
|
U.S. Small Cap
|
505
|
|
|
376
|
|
|
129
|
|
|
—
|
|
|
|
|
|
Emerging Markets
|
2,039
|
|
|
1,523
|
|
|
516
|
|
|
—
|
|
|
|
|
|
Global Equity
|
2,892
|
|
|
2,553
|
|
|
339
|
|
|
—
|
|
|
|
|
|
International Equity
|
4,591
|
|
|
2,499
|
|
|
2,092
|
|
|
—
|
|
|
|
|
|
Total Equity Securities
|
16,634
|
|
|
9,840
|
|
|
6,794
|
|
|
—
|
|
|
36.0
|
|
|
25-55
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Securities
|
14,077
|
|
|
12,980
|
|
|
1,097
|
|
|
—
|
|
|
|
|
|
Corporate Bonds
|
5,051
|
|
|
—
|
|
|
5,051
|
|
|
—
|
|
|
|
|
|
Global Bonds
|
50
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
|
|
|
Municipal Bonds
|
24
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
|
|
|
Total Fixed Income Securities
|
19,202
|
|
|
12,980
|
|
|
6,222
|
|
|
—
|
|
|
41.5
|
|
|
35-55
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds
|
3,273
|
|
|
—
|
|
|
1,380
|
|
|
—
|
|
|
7.1
|
|
|
5-15
|
Private Equity
|
3,030
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.6
|
|
|
1-10
|
Private Debt
|
772
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
|
1-10
|
Real Estate
|
1,940
|
|
|
149
|
|
|
74
|
|
|
—
|
|
|
4.2
|
|
|
1-10
|
Structured Products(2)
|
153
|
|
|
—
|
|
|
153
|
|
|
—
|
|
|
0.3
|
|
|
1-5
|
Risk Parity Funds
|
241
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
1-10
|
Total U.S. Plan Assets
|
$
|
46,209
|
|
|
$
|
23,787
|
|
|
$
|
14,769
|
|
|
$
|
—
|
|
|
100.0
|
%
|
|
|
Asset Category (International Plans):
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
72
|
|
|
$
|
32
|
|
|
$
|
40
|
|
|
—
|
|
|
4.6
|
|
|
1-10
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Local Markets Equity
|
209
|
|
|
—
|
|
|
209
|
|
|
—
|
|
|
|
|
|
U.S. Equity
|
47
|
|
|
—
|
|
|
47
|
|
|
—
|
|
|
|
|
|
Emerging Markets
|
33
|
|
|
33
|
|
|
—
|
|
|
—
|
|
|
|
|
|
International / Global Equity
|
441
|
|
|
179
|
|
|
262
|
|
|
—
|
|
|
|
|
|
Total Equity Securities
|
730
|
|
|
212
|
|
|
518
|
|
|
—
|
|
|
46.8
|
|
|
30-60
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Local Government Bonds
|
94
|
|
|
—
|
|
|
94
|
|
|
—
|
|
|
|
|
|
Corporate Bonds
|
177
|
|
|
20
|
|
|
157
|
|
|
—
|
|
|
|
|
|
Global Bonds
|
110
|
|
|
110
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Total Fixed Income Securities
|
381
|
|
|
130
|
|
|
251
|
|
|
—
|
|
|
24.5
|
|
|
25-45
|
Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
128
|
|
|
—
|
|
|
80
|
|
|
—
|
|
|
8.2
|
|
|
5-10
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
247
|
|
|
—
|
|
|
218
|
|
|
12
|
|
|
15.9
|
|
|
1-20
|
Total International Plan Assets
|
$
|
1,558
|
|
|
$
|
374
|
|
|
$
|
1,107
|
|
|
$
|
12
|
|
|
100.0
|
%
|
|
|
Total Plan Assets
|
$
|
47,767
|
|
|
$
|
24,161
|
|
|
$
|
15,876
|
|
|
$
|
12
|
|
|
|
|
|
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the category totals.
(2) Represents mortgage and asset-backed securities.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in the Level 3 instruments measured on a recurring basis for the years ended December 31, 2020 and 2019 (in millions):
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance on January 1, 2019
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Return on Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Held at End of Year
|
—
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Sold During the Year
|
(4)
|
|
|
—
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
4
|
|
|
7
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
(2)
|
|
|
—
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers Into (Out of) Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance on December 31, 2019
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Return on Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Held at End of Year
|
—
|
|
|
3
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Sold During the Year
|
(5)
|
|
|
—
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
10
|
|
|
51
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
(2)
|
|
|
(4)
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers Into (Out of) Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance on December 31, 2020
|
$
|
3
|
|
|
$
|
62
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no shares of UPS class A or B common stock directly held in plan assets as of December 31, 2020 or 2019.
Expected Cash Flows
Information about expected cash flows for the pension and postretirement medical benefit plans is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Pension Benefits
|
|
U.S. Postretirement
Medical Benefits
|
|
International Pension Benefits
|
Expected Employer Contributions:
|
|
|
|
|
|
2021 to plan trusts
|
$
|
—
|
|
|
$
|
186
|
|
|
$
|
66
|
|
2021 to plan participants
|
23
|
|
|
70
|
|
|
6
|
|
Expected Benefit Payments:
|
|
|
|
|
|
2021
|
$
|
1,758
|
|
|
$
|
236
|
|
|
$
|
37
|
|
2022
|
1,892
|
|
|
227
|
|
|
42
|
|
2023
|
2,022
|
|
|
216
|
|
|
47
|
|
2024
|
2,156
|
|
|
205
|
|
|
54
|
|
2025
|
2,395
|
|
|
195
|
|
|
60
|
|
2026 - 2030
|
14,745
|
|
|
831
|
|
|
406
|
|
Our funding policy for U.S. plans is to contribute amounts annually that are at least equal to the amounts required by applicable laws and regulations, or to directly fund payments to plan participants, as applicable. International plans will be funded in accordance with local regulations. Additional discretionary contributions may be made when deemed appropriate to meet the long-term obligations of the plans. Expected benefit payments for pensions will be primarily paid from plan trusts. Expected benefit payments for postretirement medical benefits will be paid from plan trusts and corporate assets.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. MULTIEMPLOYER EMPLOYEE BENEFIT PLANS
We contribute to a number of multiemployer defined benefit plans under the terms of collective bargaining agreements that cover our union-represented employees. These plans generally provide for retirement, death and/or termination benefits for eligible employees within the applicable collective bargaining units, based on specific eligibility/participation requirements, vesting periods and benefit formulas. The risks of participating in multiemployer plans are different from single-employer plans in the following respects:
•Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
•If we negotiate to cease participating in a multiemployer plan, we may be required to pay that plan an amount based on our allocable share of its underfunded status, referred to as a "withdrawal liability". However, cessation of participation in a multiemployer plan and subsequent payment of any withdrawal liability is subject to the collective bargaining process.
•If any of the multiemployer pension plans in which we participate enter critical status, and our contributions are not sufficient to satisfy any rehabilitation plan funding schedule, we could be required under the Pension Protection Act of 2006 to make additional surcharge contributions to the multiemployer pension plan in the amount of five to ten percent of the existing contributions required by our labor agreement. Such surcharges would cease upon the ratification of a new collective bargaining agreement, and could not recur unless a plan re-entered critical status at a later date.
The discussion that follows sets forth the financial impact on our results of operations and cash flows for 2020, 2019 and 2018, from our participation in multiemployer benefit plans. As part of the overall collective bargaining process for wage and benefit levels, we have agreed to contribute certain amounts to the multiemployer benefit plans during the contract period. The multiemployer benefit plans set benefit levels and are responsible for benefit delivery to participants. Future contribution amounts to multiemployer benefit plans are determined only through collective bargaining, and we have no additional legal or constructive obligation to increase contributions beyond the agreed-upon amounts (except potential surcharges under the Pension Protection Act of 2006 described above).
The number of employees covered by our multiemployer pension plans has increased with the growth in our business. There have been no other significant changes that affect the comparability of 2020, 2019 and 2018 contributions. We recognize expense for the contractually-required contribution for each period, and we recognize a liability for any contributions due and unpaid at the end of a reporting period.
Status of Collective Bargaining Agreements
As of December 31, 2020, we had approximately 327,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters, of which approximately 11,000 are employees of UPS Freight. These agreements run through July 31, 2023.
We have approximately 3,000 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"). This collective bargaining agreement becomes amendable September 1, 2023.
We have approximately 1,600 airline mechanics who are covered by a collective bargaining agreement with Teamsters Local 2727 which becomes amendable November 1, 2023. In addition, approximately 3,400 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers ("IAM"). The collective bargaining agreement with the IAM runs through July 31, 2024.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Multiemployer Pension Plans
The following table outlines our participation in multiemployer pension plans for 2020, 2019 and 2018, and sets forth our calendar year contributions and accruals for each plan. The “EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”) and the three-digit plan number. The most recent Pension Protection Act zone status available in 2020 and 2019 relates to the plans’ two most recent fiscal year ends. The zone status is based on information that we received from the plans’ administrators and is certified by each plan’s actuary. Plans certified in the red zone are generally less than 65% funded; plans certified in the orange zone are both less than 80% funded and have an accumulated funding deficiency, or are expected to have a deficiency in any of the next six plan years; plans certified in the yellow zone are less than 80% funded; and plans certified in the green zone are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicates whether a financial improvement plan (“FIP”) for yellow/orange zone plans, or a rehabilitation plan (“RP”) for red zone plans, is either pending or has been implemented. As of December 31, 2020, all plans that have either a FIP or RP requirement have had the respective plan implemented.
Our collectively-bargained contributions satisfy the requirements of all implemented FIPs and RPs and do not currently require the payment of any surcharges. In addition, minimum contributions outside of the agreed upon contractual rates are not required. For the plans detailed in the following table, the expiration date of the associated collective bargaining agreements is July 31, 2023, with the exception of the IAM National Pension Fund / National Pension Plan, which has a July 31, 2024 expiration date. For all plans detailed in the following table, we provided more than 5% of the total plan contributions from all employers for 2020, 2019 and 2018 (as disclosed in the annual filing with the Department of Labor for each respective plan).
Certain plans have been aggregated in the “All Other Multiemployer Pension Plans” line in the following table, as the contributions to each of these individual plans are not material.
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|
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|
EIN / Pension
Plan Number
|
|
Pension
Protection Act
Zone Status
|
|
FIP / RP Status
Pending / Implemented
|
|
(in millions)
UPS Contributions and Accruals
|
|
Surcharge Imposed
|
Pension Fund
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
2018
|
|
Central Pennsylvania Teamsters Defined Benefit Plan
|
23-6262789-001
|
|
Green
|
|
Green
|
|
No
|
NA
|
|
$
|
57
|
|
|
$
|
48
|
|
|
$
|
44
|
|
|
No
|
Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund
|
55-6021850-001
|
|
Red
|
|
Red
|
|
Yes
|
Implemented
|
|
16
|
|
14
|
|
13
|
|
No
|
Hagerstown Motor Carriers and Teamsters Pension Fund
|
52-6045424-001
|
|
Red
|
|
Red
|
|
Yes
|
Implemented
|
|
11
|
|
10
|
|
9
|
|
No
|
I.A.M. National Pension Fund / National Pension Plan
|
51-6031295-002
|
|
Red
|
|
Green
|
|
Yes
|
Implemented
|
|
44
|
|
|
41
|
|
|
38
|
|
|
No
|
International Brotherhood of Teamsters Union Local No. 710 Pension Fund
|
36-2377656-001
|
|
Green
|
|
Green
|
|
No
|
NA
|
|
161
|
|
|
142
|
|
|
129
|
|
|
No
|
Local 705, International Brotherhood of Teamsters Pension Plan
|
36-6492502-001
|
|
Yellow
|
|
Yellow
|
|
Yes
|
Implemented
|
|
120
|
|
|
113
|
|
|
104
|
|
|
No
|
Local 804 I.B.T. & Local 447 I.A.M.—UPS Multiemployer Retirement Plan
|
51-6117726-001
|
|
Yellow
|
|
Yellow
|
|
Yes
|
Implemented
|
|
124
|
|
|
112
|
|
|
116
|
|
|
No
|
Milwaukee Drivers Pension Trust Fund
|
39-6045229-001
|
|
Green
|
|
Green
|
|
No
|
NA
|
|
53
|
|
|
48
|
|
|
42
|
|
|
No
|
New England Teamsters & Trucking Industry Pension Fund
|
04-6372430-001
|
|
Red
|
|
Red
|
|
Yes
|
Implemented
|
|
140
|
|
|
120
|
|
|
121
|
|
|
No
|
New York State Teamsters Conference Pension and Retirement Fund
|
16-6063585-074
|
|
Red
|
|
Red
|
|
Yes
|
Implemented
|
|
135
|
|
|
119
|
|
|
108
|
|
|
No
|
Teamster Pension Fund of Philadelphia and Vicinity
|
23-1511735-001
|
|
Yellow
|
|
Yellow
|
|
Yes
|
Implemented
|
|
85
|
|
|
74
|
|
|
66
|
|
|
No
|
Teamsters Joint Council No. 83 of Virginia Pension Fund
|
54-6097996-001
|
|
Green
|
|
Green
|
|
No
|
NA
|
|
82
|
|
|
75
|
|
|
69
|
|
|
No
|
Teamsters Local 639—Employers Pension Trust
|
53-0237142-001
|
|
Green
|
|
Green
|
|
No
|
NA
|
|
74
|
|
|
68
|
|
|
61
|
|
|
No
|
Teamsters Negotiated Pension Plan
|
43-6196083-001
|
|
Green
|
|
Green
|
|
No
|
NA
|
|
40
|
|
|
37
|
|
|
34
|
|
|
No
|
Truck Drivers and Helpers Local Union No. 355 Retirement Pension Plan
|
52-6043608-001
|
|
Green
|
|
Green
|
|
No
|
NA
|
|
27
|
|
|
24
|
|
|
22
|
|
|
No
|
United Parcel Service, Inc.—Local 177, I.B.T. Multiemployer Retirement Plan
|
13-1426500-419
|
|
Red
|
|
Red
|
|
Yes
|
Implemented
|
|
107
|
|
|
100
|
|
|
95
|
|
|
No
|
Western Conference of Teamsters Pension Plan
|
91-6145047-001
|
|
Green
|
|
Green
|
|
No
|
NA
|
|
1,138
|
|
|
939
|
|
|
868
|
|
|
No
|
Western Pennsylvania Teamsters and Employers Pension Fund
|
25-6029946-001
|
|
Red
|
|
Red
|
|
Yes
|
Implemented
|
|
37
|
|
|
34
|
|
|
31
|
|
|
No
|
All Other Multiemployer Pension Plans
|
|
|
|
|
|
|
|
|
|
104
|
|
|
102
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
Total Contributions
|
|
$
|
2,555
|
|
|
$
|
2,220
|
|
|
$
|
2,042
|
|
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Agreement with the New England Teamsters and Trucking Industry Pension Fund
In 2012, we reached an agreement with the New England Teamsters and Trucking Industry Pension Fund ("NETTI Fund"), a multiemployer pension plan in which UPS is a participant, to restructure the pension liabilities for approximately 10,200 UPS employees represented by the Teamsters. As of December 31, 2020 and 2019, we had $837 and $845 million, respectively, recognized in "Other Non-Current Liabilities" as well as $7 million as of December 31, 2020 and 2019 recorded in "Other current liabilities" in our consolidated balance sheets, representing the remaining balance of the NETTI Fund withdrawal liability. This liability is payable in equal monthly installments over a remaining term of approximately 42 years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of the NETTI Fund withdrawal liability as of December 31, 2020 and 2019 was $1.0 billion and $929 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.
Multiemployer Health and Welfare Plans
We also contribute to a number of multiemployer health and welfare plans covering both active and retired employees. Healthcare benefits are provided to participants who meet certain eligibility requirements as covered under the applicable collective bargaining unit. The following table sets forth our calendar year plan contributions and accruals. Certain plans have been aggregated in the “All Other Multiemployer Health and Welfare Plans” line, as the contributions to each of these individual plans are not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
UPS Contributions and Accruals
|
Health and Welfare Fund
|
2020
|
|
2019
|
|
2018
|
Bay Area Delivery Drivers
|
$
|
39
|
|
|
$
|
37
|
|
|
$
|
40
|
|
Central Pennsylvania Teamsters Health & Pension Fund
|
35
|
|
|
31
|
|
|
29
|
|
Central States, South East & South West Areas Health and Welfare Fund
|
3,202
|
|
|
2,899
|
|
|
2,530
|
|
Delta Health Systems—East Bay Drayage Drivers
|
37
|
|
|
30
|
|
|
30
|
|
Joint Council #83 Health & Welfare Fund
|
50
|
|
|
45
|
|
|
40
|
|
Local 804 Welfare Trust Fund
|
110
|
|
|
101
|
|
|
90
|
|
Milwaukee Drivers Pension Trust Fund—Milwaukee Drivers Health and Welfare Trust Fund
|
53
|
|
|
48
|
|
|
43
|
|
New York State Teamsters Health & Hospital Fund
|
84
|
|
|
71
|
|
|
62
|
|
Northern California General Teamsters (DELTA)
|
188
|
|
|
157
|
|
|
153
|
|
Northern New England Benefit Trust
|
72
|
|
|
59
|
|
|
54
|
|
Oregon / Teamster Employers Trust
|
59
|
|
|
51
|
|
|
43
|
|
Teamsters 170 Health & Welfare Fund
|
22
|
|
|
19
|
|
|
18
|
|
Teamsters Benefit Trust
|
57
|
|
|
47
|
|
|
48
|
|
Teamsters Local 251 Health & Insurance Plan
|
23
|
|
|
18
|
|
|
17
|
|
Teamsters Local 638 Health Fund
|
60
|
|
|
53
|
|
|
48
|
|
Teamsters Local 639—Employers Health & Pension Trust Funds
|
39
|
|
|
32
|
|
|
29
|
|
Teamsters Local 671 Health Services & Insurance Plan
|
23
|
|
|
20
|
|
|
19
|
|
Teamsters Union 25 Health Services & Insurance Plan
|
69
|
|
|
59
|
|
|
56
|
|
Teamsters Western Region & Local 177 Health Care Plan
|
859
|
|
|
769
|
|
|
656
|
|
Truck Drivers and Helpers Local 355 Baltimore Area Health & Welfare Fund
|
22
|
|
|
19
|
|
|
18
|
|
Utah-Idaho Teamsters Security Fund
|
45
|
|
|
37
|
|
|
32
|
|
Washington Teamsters Welfare Trust
|
76
|
|
|
67
|
|
|
57
|
|
All Other Multiemployer Health and Welfare Plans
|
175
|
|
|
141
|
|
|
156
|
|
Total Contributions
|
$
|
5,399
|
|
|
$
|
4,810
|
|
|
$
|
4,268
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic
Package
|
|
International
Package
|
|
Supply Chain &
Freight
|
|
Consolidated
|
Balance on January 1, 2019
|
$
|
715
|
|
|
$
|
417
|
|
|
$
|
2,679
|
|
|
$
|
3,811
|
|
Acquired
|
—
|
|
|
2
|
|
|
3
|
|
|
5
|
|
Currency / Other
|
—
|
|
|
(3)
|
|
|
—
|
|
|
(3)
|
|
Balance on December 31, 2019
|
$
|
715
|
|
|
$
|
416
|
|
|
$
|
2,682
|
|
|
$
|
3,813
|
|
Acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Impairments
|
—
|
|
|
—
|
|
|
(494)
|
|
|
(494)
|
|
Currency / Other
|
—
|
|
|
6
|
|
|
42
|
|
|
48
|
|
Balance on December 31, 2020
|
$
|
715
|
|
|
$
|
422
|
|
|
$
|
2,230
|
|
|
$
|
3,367
|
|
2020 Goodwill Activity
As of December 31, 2020 we classified our UPS Freight reporting unit as held for sale, which resulted in a goodwill impairment charge of $494 million for the Supply Chain & Freight segment.
The remaining change in goodwill for both the Supply Chain & Freight and International Package segments was due to immaterial purchase accounting adjustments and the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
2019 Goodwill Activity
The change in goodwill acquired for the International Package segment was due to our January 2019 acquisition of Transmodal Services Private Limited in India. The goodwill acquired in the Supply Chain & Freight segment was primarily due to our July 2019 acquisitions by Marken in Europe.
The remaining change in goodwill for the International Package segment was due to immaterial purchase accounting adjustments and the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
Goodwill Impairment
We completed our annual goodwill impairment evaluation as of July 1st on a reporting unit basis. Except as discussed below, no triggering events were identified for the periods presented that required an interim impairment test.
U.S. Domestic Package is our largest reporting segment and reporting unit. In our International Package reporting segment, we have the following reporting units: Europe, Asia, Americas and ISMEA. In our Supply Chain & Freight reporting segment we have the following reporting units: Forwarding, Logistics, UPS Mail Innovations, UPS Freight, The UPS Store, UPS Capital, Marken and Coyote.
In assessing goodwill for impairment, we initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive, we calculate the fair value of a reporting unit to test goodwill for impairment. We primarily determine the fair value of our reporting units using a discounted cash flow model, and supplement this with observable valuation multiples for comparable companies, as applicable. A comparison of the fair value of the reporting unit with its aggregate carrying value, including goodwill, is performed. If the carrying amount of a reporting unit exceeds its fair value, we record the excess amount as goodwill impairment, not to exceed the total amount of goodwill allocated to the reporting unit.
In 2020, we utilized a qualitative assessment to determine that it was more likely than not that the reporting unit fair value exceeded the carrying value for U.S. Domestic Package, Europe Package, Asia Package, Americas Package, ISMEA Package, The UPS Store and UPS Capital. For the remaining reporting units owned at the annual goodwill impairment testing date, we utilized the quantitative process to test goodwill for impairment.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the fourth quarter of 2020, we determined that our UPS Freight reporting unit should be classified as held for sale. Accordingly, we tested goodwill for impairment as of December 31, 2020, and determined that the fair value of the reporting unit had decreased. A goodwill impairment charge of $494 million, representing the remaining goodwill balance for UPS Freight, is included within Other expenses in the statements of consolidated income. We did not record any goodwill impairment charges in 2019 or 2018. Cumulatively, our Supply Chain & Freight segment has recorded $1.1 billion of goodwill impairment charges, while our International and U.S. Domestic Package segments have not recorded any goodwill impairment charges. For additional information on the pending divestiture of UPS Freight, see note 4.
Intangible Assets
The following is a summary of intangible assets as of December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Weighted-Average
Amortization
Period
(in years)
|
December 31, 2020
|
|
|
|
|
|
|
|
Capitalized software
|
$
|
4,531
|
|
|
$
|
(2,962)
|
|
|
$
|
1,569
|
|
|
6.9
|
Licenses
|
100
|
|
|
(37)
|
|
|
63
|
|
|
3.8
|
Franchise rights
|
165
|
|
|
(113)
|
|
|
52
|
|
|
20.0
|
Customer relationships
|
729
|
|
|
(344)
|
|
|
385
|
|
|
10.6
|
Trade name
|
200
|
|
|
—
|
|
|
200
|
|
|
N/M
|
Trademarks, patents and other
|
18
|
|
|
(13)
|
|
|
5
|
|
|
12.0
|
Total Intangible Assets
|
$
|
5,743
|
|
|
$
|
(3,469)
|
|
|
$
|
2,274
|
|
|
7.7
|
December 31, 2019
|
|
|
|
|
|
|
|
Capitalized software
|
$
|
4,125
|
|
|
$
|
(2,704)
|
|
|
$
|
1,421
|
|
|
|
Licenses
|
117
|
|
|
(64)
|
|
|
53
|
|
|
|
Franchise rights
|
146
|
|
|
(109)
|
|
|
37
|
|
|
|
Customer relationships
|
730
|
|
|
(282)
|
|
|
448
|
|
|
|
Trade name
|
200
|
|
|
—
|
|
|
200
|
|
|
|
Trademarks, patents and other
|
29
|
|
|
(21)
|
|
|
8
|
|
|
|
Total Intangible Assets
|
$
|
5,347
|
|
|
$
|
(3,180)
|
|
|
$
|
2,167
|
|
|
|
A trade name and licenses with carrying values of $200 and $5 million, respectively, as of December 31, 2020 are deemed to be indefinite-lived intangible assets, and therefore are not amortized. Impairment tests for indefinite-lived intangible assets are performed on an annual basis. All of our other recorded intangible assets are deemed to be finite-lived intangibles, and are amortized over their estimated useful lives. Impairment tests for these intangible assets are only performed when a triggering event occurs that may indicate that the carrying value of the intangible may not be recoverable. Impairments of finite-lived intangible assets were $13 and $2 million in 2020 and 2019, respectively.
Amortization of intangible assets was $416, $377 and $339 million during 2020, 2019 and 2018, respectively. Expected amortization of finite-lived intangible assets recorded as of December 31, 2020 for the next five years is as follows (in millions): 2021—$512; 2022—$437; 2023—$372; 2024—$297; 2025—$222. Amortization expense in future periods will be affected by business acquisitions and divestitures, software development, licensing agreements, franchise rights purchased and other factors.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt obligations, as of December 31, 2020 and 2019 consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
Carrying Value
|
|
Amount
|
|
Maturity
|
|
2020
|
|
2019
|
Commercial paper
|
$
|
15
|
|
|
2021
|
|
$
|
15
|
|
|
$
|
3,234
|
|
Fixed-rate senior notes:
|
|
|
|
|
|
|
|
3.125% senior notes
|
1,500
|
|
|
2021
|
|
1,507
|
|
|
1,524
|
|
2.050% senior notes
|
700
|
|
|
2021
|
|
700
|
|
|
699
|
|
2.450% senior notes
|
1,000
|
|
|
2022
|
|
1,028
|
|
|
1,003
|
|
2.350% senior notes
|
600
|
|
|
2022
|
|
599
|
|
|
598
|
|
2.500% senior notes
|
1,000
|
|
|
2023
|
|
997
|
|
|
995
|
|
2.800% senior notes
|
500
|
|
|
2024
|
|
498
|
|
|
497
|
|
2.200% senior notes
|
400
|
|
|
2024
|
|
398
|
|
|
398
|
|
3.900% senior notes
|
1,000
|
|
|
2025
|
|
995
|
|
|
—
|
|
2.400% senior notes
|
500
|
|
|
2026
|
|
498
|
|
|
498
|
|
3.050% senior notes
|
1,000
|
|
|
2027
|
|
993
|
|
|
992
|
|
3.400% senior notes
|
750
|
|
|
2029
|
|
746
|
|
|
745
|
|
2.500% senior notes
|
400
|
|
|
2029
|
|
397
|
|
|
397
|
|
4.450% senior notes
|
750
|
|
|
2030
|
|
743
|
|
|
—
|
|
6.200% senior notes
|
1,500
|
|
|
2038
|
|
1,483
|
|
|
1,483
|
|
5.200% senior notes
|
500
|
|
|
2040
|
|
493
|
|
|
—
|
|
4.875% senior notes
|
500
|
|
|
2040
|
|
490
|
|
|
490
|
|
3.625% senior notes
|
375
|
|
|
2042
|
|
368
|
|
|
368
|
|
3.400% senior notes
|
500
|
|
|
2046
|
|
491
|
|
|
491
|
|
3.750% senior notes
|
1,150
|
|
|
2047
|
|
1,137
|
|
|
1,136
|
|
4.250% senior notes
|
750
|
|
|
2049
|
|
742
|
|
|
742
|
|
3.400% senior notes
|
700
|
|
|
2049
|
|
688
|
|
|
688
|
|
5.300% senior notes
|
1,250
|
|
|
2050
|
|
1,231
|
|
|
—
|
|
Floating-rate senior notes:
|
|
|
|
|
|
|
|
Floating-rate senior notes
|
350
|
|
|
2021
|
|
350
|
|
|
349
|
|
Floating-rate senior notes
|
400
|
|
|
2022
|
|
399
|
|
|
399
|
|
Floating-rate senior notes
|
500
|
|
|
2023
|
|
499
|
|
|
499
|
|
Floating-rate senior notes
|
1,039
|
|
|
2049-2067
|
|
1,027
|
|
|
1,028
|
|
8.375% Debentures:
|
|
|
|
|
|
|
|
8.375% debentures
|
—
|
|
|
2020
|
|
—
|
|
|
426
|
|
8.375% debentures
|
276
|
|
|
2030
|
|
281
|
|
|
281
|
|
Pound Sterling Notes:
|
|
|
|
|
|
|
|
5.500% notes
|
90
|
|
|
2031
|
|
90
|
|
|
86
|
|
5.125% notes
|
618
|
|
|
2050
|
|
586
|
|
|
566
|
|
Euro Senior Notes:
|
|
|
|
|
|
|
|
0.375% senior notes
|
860
|
|
|
2023
|
|
857
|
|
|
779
|
|
1.625% senior notes
|
860
|
|
|
2025
|
|
856
|
|
|
779
|
|
1.000% senior notes
|
614
|
|
|
2028
|
|
611
|
|
|
556
|
|
1.500% senior notes
|
614
|
|
|
2032
|
|
611
|
|
|
556
|
|
Floating-rate senior notes
|
—
|
|
|
2020
|
|
—
|
|
|
559
|
|
Canadian senior notes:
|
|
|
|
|
|
|
|
2.125% senior notes
|
585
|
|
|
2024
|
|
583
|
|
|
571
|
|
Finance lease obligations
|
342
|
|
|
2021 – 2159
|
|
342
|
|
|
498
|
|
Facility notes and bonds
|
320
|
|
|
2029 – 2045
|
|
320
|
|
|
320
|
|
Other debt
|
6
|
|
|
2021 – 2025
|
|
5
|
|
|
8
|
|
Total debt
|
$
|
24,814
|
|
|
|
|
24,654
|
|
|
25,238
|
|
Less: current maturities
|
|
|
|
|
(2,623)
|
|
|
(3,420)
|
|
Long-term debt
|
|
|
|
|
$
|
22,031
|
|
|
$
|
21,818
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Paper
We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. As of December 31, 2020 we had U.S. commercial paper outstanding of $15 million with an average interest rate of 0.17% and we had no outstanding balances under our European commercial paper program. As of December 31, 2020, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheets. The amount of commercial paper outstanding under these programs in 2021 is expected to fluctuate.
Debt Repayments
On July 15, 2020 our Euro floating-rate senior notes with a principal balance of €500 million ($566 million) matured and were repaid in full. On April 1, 2020, our 8.375% senior notes with a principal balance of $424 million matured and were repaid in full.
Debt Issuances
On March 24, 2020 we issued four series of notes, in the following principal amounts: $1.0 billion, $750 million, $500 million and $1.25 billion. These notes bear interest at 3.90%, 4.45%, 5.20% and 5.30%, respectively, and will mature on April 1, 2025, April 1, 2030, April 1, 2040 and April 1, 2050, respectively. Interest on the notes is payable semi-annually, beginning October 2020. Each series of notes is callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of scheduled payments of principal and interest, plus accrued and unpaid interest.
In such event, the present values of scheduled principal and interest payments are discounted to the redemption date on a semi-annual basis at the discount rate of the Treasury Rate plus 50 basis points, and are determined as follows:
•On the 3.90% notes, payments from the redemption date until one month prior to maturity
•On the 4.45% notes, payments from the redemption date until three months prior to maturity
•On the 5.20% and 5.30% notes, payments from the redemption date until six months prior to maturity
Fixed-Rate Senior Notes
All of our fixed-rate notes pay interest semi-annually, and allow for redemption by UPS at any time by paying the greater of the principal amount or a “make-whole” amount, plus accrued interest. We subsequently entered into interest rate swaps on several of these notes, which effectively converted the fixed interest rates on the notes to variable LIBOR-based interest rates. The average interest rate payable on the notes where fixed interest rates were swapped to variable-based interest rates, including the impact of the interest rate swaps, for 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
Average Effective Interest Rate
|
|
Value
|
|
Maturity
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
5.125% senior notes
|
$
|
1,000
|
|
|
2019
|
|
—
|
%
|
|
4.48
|
%
|
3.125% senior notes
|
1,500
|
|
|
2021
|
|
1.60
|
%
|
|
2.59
|
%
|
2.450% senior notes
|
1,000
|
|
|
2022
|
|
1.55
|
%
|
|
3.03
|
%
|
8.375% Debentures
The 8.375% debentures consist of two separate tranches, as follows:
•$276 million of the debentures have a maturity of April 1, 2030. These debentures have an 8.375% interest rate until April 1, 2020, and, thereafter, the interest rate will be 7.62% for the final 10 years. These debentures are redeemable in whole or in part at our option at any time. The redemption price is equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption (at a benchmark treasury yield plus five basis points) plus accrued interest.
•$424 million of the debentures matured and were paid in full on April 1, 2020. These debentures were not subject to redemption prior to maturity.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest is payable semi-annually in April and October for both tranches and neither tranche is subject to sinking fund requirements. We subsequently entered into interest rate swaps on the 2020 debentures, which effectively converted the fixed interest rates on the debentures to variable LIBOR-based interest rates. The average interest rate payable on the 2020 debentures, including the impact of the interest rate swaps, for 2020 and 2019 was 6.66% and 7.20%, respectively.
Floating-Rate Senior Notes
The floating-rate senior notes, with principal amounts totaling $1.0 billion, bear interest at either one or three-month LIBOR, less a spread ranging from 30 to 45 basis points. The average interest rate for 2020 and 2019 was 0.40% and 2.05%, respectively. These notes are callable at various times after 30 years at a stated percentage of par value, and putable by the note holders at various times after one year at a stated percentage of par value. The notes have maturities ranging from 2049 through 2067. We classified the floating-rate senior notes that are putable by the note holder as long-term liabilities in our consolidated balance sheets, due to our intent and ability to refinance the debt if the put option is exercised by the note holder.
The remaining three floating-rate senior notes in the principal amounts of $350, $400 and $500 million, bear interest at three-month LIBOR, plus a spread ranging from 15 to 45 basis points. The average interest rate for 2020 and 2019 was 1.29% and 2.82%, respectively. These notes are not callable. The notes have maturities ranging from 2021 through 2023.
Finance Lease Obligations
We have certain property, plant and equipment subject to finance leases. For additional information on finance lease obligations, see note 11.
Facility Notes and Bonds
We have entered into agreements with certain municipalities or related entities to finance the construction of, or improvements to, facilities that support our operations in the United States. These facilities are located around airport properties in Louisville, Kentucky; Dallas, Texas; and Philadelphia, Pennsylvania. Under these arrangements, we enter into a lease or loan agreement that covers the debt service obligations on the bonds issued by these entities, as follows:
•Bonds with a principal balance of $149 million issued by the Louisville Regional Airport Authority associated with our Worldport facility in Louisville, Kentucky. The bonds, which are due in January 2029, bear interest at a variable rate, and the average interest rates for 2020 and 2019 were 0.50% and 1.49%, respectively.
•Bonds with a principal balance of $42 million and due in November 2036 issued by the Louisville Regional Airport Authority associated with our air freight facility in Louisville, Kentucky. The bonds bear interest at a variable rate, and the average interest rates for 2020 and 2019 were 0.56% and 1.49%, respectively.
•Bonds with a principal balance of $29 million issued by the Dallas / Fort Worth International Airport Facility Improvement Corporation associated with our Dallas, Texas airport facilities. The bonds are due in May 2032 and bear interest at a variable rate, however the variable cash flows on the obligation have been swapped to a fixed 5.11%.
•Bonds with a principal balance of $100 million issued by the Delaware County, Pennsylvania Industrial Development Authority associated with our Philadelphia, Pennsylvania airport facilities. These bonds, which are due September 2045, bear interest at a variable rate. The average interest rate for 2020 and 2019 was 0.62% and 1.48%, respectively.
Pound Sterling Notes
The Pound Sterling notes consist of two separate tranches, as follows:
•Notes with a principal amount of £66 million accrue interest at a 5.50% fixed rate, and are due in February 2031. These notes are not callable.
•Notes with a principal amount of £455 million accrue interest at a 5.125% fixed rate, and are due in February 2050. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount plus accrued interest, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark U.K. government bond yield plus 15 basis points, plus accrued interest.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Canadian Dollar Senior Notes
The Canadian Dollar notes consist of a single series, as follows:
•Notes in the principal amount of C$750 million, which bear interest at a 2.125% fixed interest rate and mature in May 2024. Interest on the notes is payable semi-annually. The notes are callable at our option, in whole or in part, at the Government of Canada yield plus 21.5 basis points and on or after the par call date, at par value.
Euro Senior Notes
The Euro notes consist of three separate issuances, as follows:
•Notes in the principal amount of €500 million accrue interest at a 1.00% fixed rate and are due in November 2028. Interest is payable annually on the notes. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable German government bond yield plus 15 basis points, plus accrued interest.
•Notes with a principal amount of €700 million accrue interest at a 1.625% fixed rate and are due in November 2025. Interest is payable annually on the notes. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark German government bond yield plus 20 basis points, plus accrued interest.
•Notes with principal amounts of €700 million and €500 million accrue interest at 0.375% and 1.50% fixed rates, respectively, and are due in November 2023 and November 2032, respectively. Interest on these notes is payable annually. The notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable government bond yield plus 10 and 20 basis points, respectively, plus accrued interest.
Contractual Commitments
The following table sets forth the aggregate annual principal payments due under our long-term debt and the aggregate amounts expected to be spent for purchase commitments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
Debt Principal
|
|
Purchase
Commitments
|
2021
|
$
|
2,568
|
|
|
$
|
2,730
|
|
2022
|
2,001
|
|
|
1,415
|
|
2023
|
2,360
|
|
|
404
|
|
2024
|
1,485
|
|
|
201
|
|
2025
|
1,860
|
|
|
60
|
|
After 2025
|
14,198
|
|
|
1
|
|
Total
|
$
|
24,472
|
|
|
$
|
4,811
|
|
As of December 31, 2020, we had outstanding letters of credit totaling approximately $1.4 billion issued in connection with our self-insurance reserves and other routine business requirements. We also issue surety bonds as an alternative to letters of credit in certain instances, and as of December 31, 2020, we had $1.3 billion of surety bonds written.
Sources of Credit
We maintain two credit agreements with a consortium of banks. The first of these agreements provides revolving credit facilities of $2.0 billion, and expires on December 7, 2021. Amounts outstanding under this agreement bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus a margin of 0.875%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; or (3) LIBOR for a one-month interest period plus 1.0%, may be used at our discretion.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The second agreement provides revolving credit facilities of $2.5 billion, and expires on December 11, 2023. Amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion.
The applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our one-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75% per annum. The rate is interpolated for a period of time from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of the facility then in effect (but not less than a period of one year).
The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0%). We are also able to request advances under these facilities based on competitive bids for the applicable interest rate. There were no amounts outstanding under these facilities as of December 31, 2020.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2020 and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of December 31, 2020, 10% of net tangible assets is equivalent to $4.0 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.
Fair Value of Debt
Based on the borrowing rates currently available to us for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, is approximately $28.3 and $26.9 billion as of December 31, 2020 and 2019, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. LEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business.
Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have meritorious defenses and will deny, liability in all pending matters, including (except as otherwise noted herein) the matters described below, and we intend to vigorously defend each matter. We accrue amounts associated with legal proceedings when and to the extent a loss becomes probable and can be reasonably estimated. The actual costs of resolving legal proceedings may be substantially higher or lower than the amounts accrued on those claims.
For matters as to which we are not able to estimate a possible loss or range of losses, we are not able to determine whether any such loss will have a material impact on our operations or financial condition. For these matters, we have described the reasons that we are unable to estimate a possible loss or range of losses.
Judicial Proceedings
We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with any such matter will have a material impact on our operations or financial condition. One of these matters, Hughes v. UPS Supply Chain Solutions, Inc. and United Parcel Service, Inc. had previously been certified as a class action in Kentucky state court. In the second quarter of 2019, the court granted our motion for judgment on the pleadings related to the wage-and-hour claims. The plaintiffs have appealed this decision.
Other Matters
In October 2015, the Department of Justice ("DOJ") informed us of an industry-wide inquiry into the transportation of mail under the United States Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a Civil Investigative Demand seeking certain information relating to our contracts. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating with the DOJ. An immaterial accrual with respect to this matter is included in our consolidated balance sheets. We do not believe that any loss from this matter would have a material impact on our operations or financial condition, although we are unable to predict what action, if any, might be taken in the future by any government authorities as a result of their investigation.
In August 2016, Spain’s National Markets and Competition Commission (“CNMC”) announced an investigation into 10 companies in the commercial delivery and parcel industry, including UPS, related to alleged nonaggression agreements to allocate customers. In May 2017, UPS received a Statement of Objections issued by the CNMC. In July 2017, UPS received a Proposed Decision from the CNMC. On March 8, 2018, the CNMC adopted a final decision, finding an infringement and imposing an immaterial fine on UPS. UPS appealed the decision and in September 2018, obtained a suspension of the implementation of the decision (including payment of the fine). The appeal is pending. We do not believe that any loss from this matter would have a material impact on our operations or financial condition. We are vigorously defending ourselves and believe that we have a number of meritorious legal defenses. There are also unresolved questions of law and fact that could be important to the ultimate resolution of this matter.
In May 2020, the Environmental Protection Agency (“EPA”) sent us an information request related to hazardous waste regulatory compliance at certain of our facilities. The EPA indicated that it was investigating potential recordkeeping violations of the Resource Conservation and Recovery Act at those facilities. We have settled this matter with the payment of an immaterial amount.
We are a party in various other matters that arose in the normal course of business. We do not believe that the eventual resolution of these other matters (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material impact on our operations or financial condition.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. LEASES
We recognize a right-of-use ("ROU") asset and lease obligation for all leases. Some of our leases contain both lease and non-lease components, which we have elected to treat as a single lease component. We have also elected not to recognize leases that have an original lease term, including reasonably certain renewal or purchase options, of twelve months or less in our consolidated balance sheets for all classes of underlying assets. Lease costs for short-term leases are recognized on a straight-line basis over the lease term. We elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are, or contain, leases, lease classification and determination of initial direct costs.
We lease property and equipment under finance and operating leases. We have finance and operating leases for package centers, airport facilities, warehouses, office space, aircraft, aircraft engines, information technology equipment (primarily mainframes, servers and copiers), vehicles and various other equipment used in operating our business. Certain leases for real estate and aircraft contain options to purchase, extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease obligation for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain and whether the optional period and payments should be included in the calculation of the associated ROU asset and lease obligation. In making this determination, we consider all relevant economic factors that would compel us to exercise or not exercise an option.
When our leases contain future payments that are dependent on an index or rate, such as the consumer price index, we initially measure the lease obligation and ROU asset using the index or rate at the commencement date. In subsequent periods, lease payments dependent on an index or rate are not remeasured. Rather, changes to payments due to a change in an index or rate are recognized in our statements of consolidated income in the period of the change.
When available, we use the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of our leases. For these leases, we use an estimate of our incremental borrowing rate to discount lease payments based on information available at lease commencement. The incremental borrowing rate is derived using multiple inputs including our credit rating, the impact of full collateralization, lease term and denominated currency. The remaining lease terms vary from 1 month to 140 years.
Aircraft
In addition to the aircraft that we own, we have leases for 338 aircraft. Of these leased aircraft, 27 are classified as finance leases, 17 are classified as operating leases and the remaining 294 are classified as short-term leases. A majority of the obligations associated with the aircraft classified as finance leases have been legally defeased. Most of our long-term aircraft operating leases are operated by a third party to handle package and cargo volume in geographic regions where, due to government regulations, we are restricted from operating an airline.
In order to meet customers' needs, we charter aircraft to handle package and cargo volume on certain international trade lanes and domestic routes. Due to the nature of these agreements, primarily being that either party can cancel the agreement with short notice, we have classified these as short-term leases. Additionally, the lease payments associated with these charter agreements are variable in nature based on the number of hours flown.
Real Estate
We have operating and finance leases for package centers, airport facilities, warehouses, office space and expansion facilities utilized during peak shipping periods. Many of our leases contain charges for common area maintenance or other expenses that are updated based on landlord estimates. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the ROU asset and associated lease obligation.
Some of our real estate leases contain options to renew or extend the lease or terminate the lease before the expiration date. These options are factored into the determination of the lease term and lease payments when their exercise is considered to be reasonably certain.
We also enter into real estate leases that contain lease incentives, such as tenant improvement allowances or move-in allowances, that are received or receivable at lease commencement. These incentives reduce lease payments for classification purposes and reduce the initial ROU asset. When lease incentives are receivable at lease commencement, they also reduce the initial lease obligation.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From time to time, we enter into leases with the intention of purchasing the property, either through purchase options with a fixed price or a purchase agreement negotiated contemporaneously with the lease agreement. We classify these leases as finance leases and include the purchase date and purchase price in the determination of the lease term and lease payments, respectively, when the option to exercise or purchase is reasonably certain.
Transportation equipment and other equipment
We enter into both long-term and short-term leases for transportation equipment to supplement our capacity or meet contractual demands. Some of these assets are leased on a month-to-month basis and the leases can be terminated without penalty. The lease term for these types of leases is determined by the length of the underlying customer contract or based on the judgment of the business unit. We also enter into multi-year leases for trailers to increase capacity during periods of high demand, which are typically only used for 90-120 days during the year. These leases are treated as short-term as the cumulative right-of-use is less than 12 months over the term of the contract.
The remainder of our leases are primarily related to equipment used in our air operations, vehicles required to meet capacity needs during periods of higher demand for our shipping services, technology equipment and office equipment used in our facilities.
Some of our transportation and technology equipment leases require us to make additional lease payments based on the underlying usage of the assets. Due to the variable nature of these costs, these are expensed as incurred and are not included in the ROU asset and associated lease obligation.
The components of lease expense for the years ended December 31, 2020 and 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Operating lease costs
|
|
|
$
|
711
|
|
|
$
|
643
|
|
Finance lease costs:
|
|
|
|
|
|
Amortization of assets
|
|
|
$
|
79
|
|
|
$
|
73
|
|
Interest on lease liabilities
|
|
|
18
|
|
|
19
|
|
Total finance lease costs
|
|
|
97
|
|
|
92
|
|
Variable lease costs
|
|
|
247
|
|
|
206
|
|
Short-term lease costs
|
|
|
1,299
|
|
|
1,122
|
|
Total lease costs
|
|
|
$
|
2,354
|
|
|
$
|
2,063
|
|
We perform impairment assessments for our ROU assets when events or changes in circumstances indicate that their carrying values may not be recoverable. In addition to the lease costs disclosed in the table above, impairment charges for ROU assets were $17 million in 2020. We did not record any impairment charges in 2019 or 2018. Rent expense related to our operating leases was $959 million for 2018.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental information related to leases and location within our consolidated balance sheets as of December 31, 2020 and 2019 are as follows (in millions, except lease term and discount rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Operating Leases:
|
|
|
|
Operating lease right-of-use assets
|
$
|
3,073
|
|
|
$
|
2,856
|
|
|
|
|
|
Current maturities of operating leases
|
$
|
560
|
|
|
$
|
538
|
|
Non-current operating leases
|
2,540
|
|
|
2,391
|
|
Total operating lease obligations
|
$
|
3,100
|
|
|
$
|
2,929
|
|
|
|
|
|
Finance Leases:
|
|
|
|
Property, plant and equipment, net
|
$
|
1,225
|
|
|
$
|
1,502
|
|
|
|
|
|
Current maturities of long-term debt, commercial paper and finance leases
|
$
|
56
|
|
|
$
|
181
|
|
Long-term debt and finance leases
|
286
|
|
|
317
|
|
Total finance lease obligations
|
$
|
342
|
|
|
$
|
498
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
|
Operating leases
|
11.2
|
|
9.7
|
Finance leases
|
9.3
|
|
8.9
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
Operating leases
|
2.28
|
%
|
|
2.78
|
%
|
Finance leases
|
4.14
|
%
|
|
4.03
|
%
|
Supplemental cash flow information related to leases for the years ended December 31, 2020 and 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Cash paid for amounts included in measurement of obligations:
|
|
|
|
Operating cash flows from operating leases
|
$
|
686
|
|
|
$
|
620
|
|
Operating cash flows from finance leases
|
18
|
|
|
19
|
|
Financing cash flows from finance leases
|
192
|
|
|
140
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
Operating leases
|
$
|
787
|
|
|
$
|
810
|
|
Finance leases
|
$
|
66
|
|
|
$
|
110
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease obligations as of December 31, 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
Operating Leases
|
2021
|
$
|
69
|
|
|
$
|
631
|
|
2022
|
64
|
|
|
557
|
|
2023
|
50
|
|
|
458
|
|
2024
|
30
|
|
|
335
|
|
2025
|
27
|
|
|
259
|
|
Thereafter
|
188
|
|
|
1,468
|
|
Total lease payments
|
428
|
|
|
3,708
|
|
Less: Imputed interest
|
(86)
|
|
|
(608)
|
|
Total lease obligations
|
342
|
|
|
3,100
|
|
Less: Current obligations
|
(56)
|
|
|
(560)
|
|
Long-term lease obligations
|
$
|
286
|
|
|
$
|
2,540
|
|
As of December 31, 2020, we have additional leases which have not commenced of $184 million. These leases will commence in 2021 and 2022 when we are granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SHAREOWNERS' EQUITY
Capital Stock, Additional Paid-In Capital, Retained Earnings and Non-Controlling Minority Interests
We maintain two classes of common stock, which are distinguished from each other by their respective voting rights. Class A shares of UPS 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, as well as trusts and descendants of the Company's founders, 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 ("NYSE") under the symbol “UPS”. Class A and B shares both have a $0.01 par value, and as of December 31, 2020, 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 authorized to be issued, with a par value of $0.01 per share. As of December 31, 2020, no preferred shares had been issued.
The following is a rollforward of our common stock, additional paid-in capital, retained earnings and non-controlling minority interests accounts for the years ended December 31, 2020, 2019 and 2018 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Class A Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
156
|
|
|
$
|
2
|
|
|
163
|
|
|
$
|
2
|
|
|
173
|
|
|
$
|
2
|
|
Common stock purchases
|
—
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
Stock award plans
|
6
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Common stock issuances
|
4
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Conversions of class A to class B common stock
|
(19)
|
|
|
—
|
|
|
(12)
|
|
|
—
|
|
|
(14)
|
|
|
—
|
|
Class A shares issued at end of year
|
147
|
|
|
$
|
2
|
|
|
156
|
|
|
$
|
2
|
|
|
163
|
|
|
$
|
2
|
|
Class B Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
701
|
|
|
$
|
7
|
|
|
696
|
|
|
$
|
7
|
|
|
687
|
|
|
$
|
7
|
|
Common stock purchases
|
(2)
|
|
|
—
|
|
|
(7)
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
Conversions of class A to class B common stock
|
19
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
14
|
|
|
—
|
|
Class B shares issued at end of year
|
718
|
|
|
$
|
7
|
|
|
701
|
|
|
$
|
7
|
|
|
696
|
|
|
$
|
7
|
|
Additional Paid-In Capital:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
$
|
150
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Stock award plans
|
|
|
498
|
|
|
|
|
778
|
|
|
|
|
419
|
|
Common stock purchases
|
|
|
(217)
|
|
|
|
|
(1,005)
|
|
|
|
|
(859)
|
|
Common stock issuances
|
|
|
434
|
|
|
|
|
356
|
|
|
|
|
406
|
|
Option premiums received (paid)
|
|
|
—
|
|
|
|
|
21
|
|
|
|
|
34
|
|
Balance at end of year
|
|
|
$
|
865
|
|
|
|
|
$
|
150
|
|
|
|
|
$
|
—
|
|
Retained Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
$
|
9,105
|
|
|
|
|
$
|
8,006
|
|
|
|
|
$
|
5,852
|
|
Net income attributable to controlling interests
|
|
|
1,343
|
|
|
|
|
4,440
|
|
|
|
|
4,791
|
|
Dividends ($4.04, $3.84, and $3.64 per share) (1)
|
|
|
(3,552)
|
|
|
|
|
(3,341)
|
|
|
|
|
(3,189)
|
|
Common stock purchases
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(141)
|
|
Reclassification from AOCI pursuant to the early adoption of ASU 2018-02
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
735
|
|
Other
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(42)
|
|
Balance at end of year
|
|
|
$
|
6,896
|
|
|
|
|
$
|
9,105
|
|
|
|
|
$
|
8,006
|
|
Non-Controlling Interests:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
$
|
16
|
|
|
|
|
$
|
16
|
|
|
|
|
$
|
30
|
|
Change in non-controlling interests
|
|
|
(4)
|
|
|
|
|
—
|
|
|
|
|
(14)
|
|
Balance at end of year
|
|
|
$
|
12
|
|
|
|
|
$
|
16
|
|
|
|
|
$
|
16
|
|
(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $178, $147 and $178 million for 2020, 2019 and 2018, respectively, that were settled in shares of class A common stock.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2016, the Board of Directors approved a share repurchase authorization of $8.0 billion for shares of class A and class B common stock, which has no expiration date. As of December 31, 2020, we had $2.1 billion of this share repurchase authorization available.
Share repurchases may be in the form of accelerated share repurchase programs, open market purchases or other methods we deem appropriate. The timing of share repurchases will depend upon market conditions. Unless terminated earlier by the Board, the program will expire when we have purchased all shares authorized for repurchase under the program. On April 28, 2020, we announced our intention to suspend stock repurchases.
For the years ended December 31, 2020, 2019 and 2018, we repurchased a total of 2.1, 9.1 and 8.9 million shares of class A and class B common stock for $217 million, $1.0 and $1.0 billion, respectively ($224 million, $1.0 and $1.0 billion in repurchases for 2020, 2019 and 2018, respectively, are reported on the statements of consolidated cash flows due to the timing of settlements).
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 predetermined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the predetermined 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 $21 and $34 million during the years ended December 31, 2019 and 2018, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of December 31, 2020, we had no capped call options outstanding, nor did we enter into any of these structured repurchase agreements during the year.
Movements in additional paid-in capital in respect of stock award plans comprise accruals for unvested awards, offset by adjustments for awards that vest during the period. The movement year over year was driven by changes in the vesting schedule for certain of our awards.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income (Loss)
We recognize activity in AOCI for foreign currency translation adjustments, unrealized holding gains and losses on available-for-sale securities, 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 years ended December 31, 2020, 2019 and 2018 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Foreign Currency Translation Gain (Loss), Net of Tax:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(1,078)
|
|
|
$
|
(1,126)
|
|
|
$
|
(930)
|
|
Translation adjustment (net of tax effect of $(36), $10 and $37)
|
97
|
|
|
48
|
|
|
(149)
|
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
|
—
|
|
|
—
|
|
|
(47)
|
|
Balance at end of year
|
$
|
(981)
|
|
|
$
|
(1,078)
|
|
|
$
|
(1,126)
|
|
Unrealized Gain (Loss) on Marketable Securities, Net of Tax:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
4
|
|
|
$
|
(2)
|
|
|
$
|
(2)
|
|
Current period changes in fair value (net of tax effect of $1, $4 and $(1))
|
6
|
|
|
11
|
|
|
(3)
|
|
Reclassification to earnings (net of tax effect of $(1), $(1) and $1)
|
(4)
|
|
|
(5)
|
|
|
3
|
|
Balance at end of year
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
(2)
|
|
Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
112
|
|
|
$
|
40
|
|
|
$
|
(366)
|
|
Current period changes in fair value (net of tax effect of $(61), $61 and $135)
|
(192)
|
|
|
195
|
|
|
429
|
|
Reclassification to earnings (net of tax effect of $(45), $(39) and $18)
|
(143)
|
|
|
(123)
|
|
|
56
|
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
|
—
|
|
|
—
|
|
|
(79)
|
|
Balance at end of year
|
$
|
(223)
|
|
|
$
|
112
|
|
|
$
|
40
|
|
Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(5,035)
|
|
|
$
|
(3,906)
|
|
|
$
|
(3,569)
|
|
Net actuarial gain (loss) and prior service cost resulting from remeasurements of plan assets and liabilities (net of tax effect of $(1,885), $(979)and $(355))
|
(5,984)
|
|
|
(3,117)
|
|
|
(1,117)
|
|
Reclassification to earnings (net of tax effect of $1,607, $626 and $439)
|
5,104
|
|
|
1,988
|
|
|
1,389
|
|
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02
|
—
|
|
|
—
|
|
|
(609)
|
|
Balance at end of year
|
$
|
(5,915)
|
|
|
$
|
(5,035)
|
|
|
$
|
(3,906)
|
|
Accumulated other comprehensive income (loss) at end of year
|
$
|
(7,113)
|
|
|
$
|
(5,997)
|
|
|
$
|
(4,994)
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the years ended December 31, 2020, 2019 and 2018 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
Affected Line Item in the Income Statement
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) on Marketable Securities:
|
|
|
|
|
|
|
Realized gain (loss) on sale of securities
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
(4)
|
|
|
Investment income (expense) and other
|
Income tax (expense) benefit
|
(1)
|
|
|
(1)
|
|
|
1
|
|
|
Income tax expense
|
Impact on net income
|
4
|
|
|
5
|
|
|
(3)
|
|
|
Net income
|
Unrealized Gain (Loss) on Cash Flow Hedges:
|
|
|
|
|
|
|
|
Interest rate contracts
|
(8)
|
|
|
(15)
|
|
|
(24)
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
196
|
|
|
177
|
|
|
(50)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
(45)
|
|
|
(39)
|
|
|
18
|
|
|
Income tax expense
|
Impact on net income
|
143
|
|
|
123
|
|
|
(56)
|
|
|
Net income
|
Unrecognized Pension and Postretirement Benefit Costs:
|
|
|
|
|
|
|
Prior service costs
|
(227)
|
|
|
(227)
|
|
|
(201)
|
|
|
Investment income (expense) and other
|
|
|
|
|
|
|
|
|
Remeasurement of benefit obligation
|
(6,484)
|
|
|
(2,387)
|
|
|
(1,627)
|
|
|
Investment income (expense) and other
|
Income tax (expense) benefit
|
1,607
|
|
|
626
|
|
|
439
|
|
|
Income tax expense
|
Impact on net income
|
(5,104)
|
|
|
(1,988)
|
|
|
(1,389)
|
|
|
Net income
|
|
|
|
|
|
|
|
|
Total amount reclassified for the year
|
$
|
(4,957)
|
|
|
$
|
(1,860)
|
|
|
$
|
(1,448)
|
|
|
Net income
|
Deferred Compensation Obligations and Treasury Stock
We maintain a deferred compensation plan whereby certain employees were previously able to elect to defer the gains on stock option exercises by deferring the shares received upon exercise into a rabbi trust. The shares held in this trust are classified as treasury stock, and the liability to participating employees is classified as “Deferred compensation obligations” in the shareowners’ equity section of the consolidated balance sheets. The number of shares needed to settle the liability for deferred
compensation obligations is included in the denominator in both the basic and diluted earnings per share calculations. Employees
are generally no longer able to defer the gains from stock options exercised subsequent to December 31, 2004.
Activity in the deferred compensation program for the years ended December 31, 2020, 2019 and 2018 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Deferred Compensation Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
$
|
26
|
|
|
|
|
$
|
32
|
|
|
|
|
$
|
37
|
|
Reinvested dividends
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit payments
|
|
|
(7)
|
|
|
|
|
(8)
|
|
|
|
|
(7)
|
|
Balance at end of year
|
|
|
$
|
20
|
|
|
|
|
$
|
26
|
|
|
|
|
$
|
32
|
|
Treasury Stock:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
—
|
|
|
$
|
(26)
|
|
|
(1)
|
|
|
$
|
(32)
|
|
|
(1)
|
|
|
$
|
(37)
|
|
Reinvested dividends
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit payments
|
—
|
|
|
7
|
|
|
1
|
|
|
8
|
|
|
—
|
|
|
7
|
|
Balance at end of year
|
—
|
|
|
$
|
(20)
|
|
|
—
|
|
|
$
|
(26)
|
|
|
(1)
|
|
|
$
|
(32)
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. STOCK - BASED COMPENSATION
The UPS Incentive Compensation Plan permits the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and units to eligible employees. On May 14, 2018, our shareholders approved our 2018 Omnibus Incentive Compensation Plan under which we are authorized to issue an additional 26 million shares. Each share issued in the form of restricted stock units and restricted performance units (collectively referred to as "Restricted Units"), stock options and other permitted awards reduces the share reserve by one share. We had 7 million shares available to be issued under the UPS Incentive Compensation Plan as of December 31, 2020.
The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. These awards are discussed in the following paragraphs. We also match a portion of participating employees’ contributions to the UPS 401(k) Savings Plan in shares of UPS class A common stock. The total expense recognized in our statements of consolidated income under all stock compensation programs was $796, $915 and $634 million during 2020, 2019 and 2018, respectively. The associated income tax benefit recognized in our statements of consolidated income was $210, $216 and $186 million during 2020, 2019 and 2018, respectively. The cash income tax benefit received from the exercise of stock options and conversion of Restricted Units to class A shares was $272, $148 and $175 million during 2020, 2019 and 2018, respectively.
Management Incentive Award Program ("MIP")
Non-executive management earning the right to receive MIP awards is determined annually by the Salary Committee, which is comprised of executive officers of UPS. Awards granted to executive officers are determined annually by the Compensation Committee of the UPS Board of Directors. Our MIP provides, with certain exceptions, that one-half to two-thirds of the annual award will be made in Restricted Units, depending upon the level of management involved. The remaining one-third to one-half of the award is electable in the form of cash or unrestricted shares of class A common stock, and is fully vested at the time of grant. Upon conversion, Restricted Units result in the issuance of an equivalent number of UPS class A common shares after required tax withholdings.
Except in the case of death, Restricted Units granted under the MIP prior to 2019 previously vested over a five-year period with approximately 20% of the award vesting and converting to class A shares at the anniversary of each grant date. The grant value, less estimated forfeitures, was expensed on a straight-line basis over the requisite service period except in the case of death, disability or retirement, in which case immediate expensing occurred. On November 3, 2020, the Compensation Committee of the UPS Board of Directors approved an acceleration of the five-year vesting period for all outstanding Restricted Units granted to non-executive management under the MIP prior to 2019. These Restricted Units became fully vested as of December 31, 2020, however, conversion to class A shares will continue to occur over a five-year period. The elimination of the future service requirement for these awards resulted in the recognition of an additional $133 million of stock compensation expense for the year, of which approximately $104 million was recorded in U.S. Domestic Package.
Beginning with the MIP grant in the first quarter of 2019, Restricted Units vest one year following the grant date, except in the case of death, disability or retirement, in which case immediate vesting occurs. The grant value is expensed on a straight-line basis, less estimated forfeitures, over the requisite service period except in the case of death, disability or retirement, in which case immediate expensing occurs.
All Restricted Units granted are subject to early cancellation or vesting under certain conditions. Dividends earned on Restricted Units are reinvested in additional Restricted Units at each dividend payable date until they have fully vested. As of December 31, 2020, we had the following outstanding Restricted Units, including reinvested dividends, granted under the MIP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Units
(in thousands)
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Weighted-Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic
Value (in millions)
|
Non-vested as of January 1, 2020
|
10,739
|
|
|
$
|
106.94
|
|
|
|
|
|
Vested
|
(12,195)
|
|
|
106.60
|
|
|
|
|
|
Granted
|
3,638
|
|
|
102.54
|
|
|
|
|
|
Reinvested Dividends
|
276
|
|
|
N/A
|
|
|
|
|
Forfeited / Expired
|
(165)
|
|
|
101.80
|
|
|
|
|
|
Non-vested as of December 31, 2020
|
2,293
|
|
|
$
|
102.91
|
|
|
0.26
|
|
$
|
386
|
|
|
|
|
|
|
|
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2020, 2019 and 2018 was $102.54, $108.78 and $110.95, respectively. The total fair value of Restricted Units vested was $827, $457 and $596 million in 2020, 2019 and 2018, respectively. As of December 31, 2020, there was $37 million of total unrecognized compensation cost related to non-vested Restricted Units. That cost is expected to be recognized over a weighted-average period of eight months.
Long-Term Incentive Performance Award Program ("LTIP")
We award Restricted Units under the LTIP to certain eligible management employees. These Restricted Units generally vest at the end of a three-year performance period except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis. The number of Restricted Units earned is based on the achievement of the performance targets established on the grant date.
For awards granted prior to 2020, the performance targets are equally weighted among consolidated operating return on
invested capital ("ROIC"), growth in currency-constant consolidated revenue and total shareholder return ("RTSR") relative to a
peer group of companies. For the two-thirds of the award related to ROIC and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these Restricted Units, less estimated forfeitures, as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. We recognize the grant date fair value of this portion of the award, less estimated forfeitures, as compensation expense ratably over the vesting period.
Beginning with the LTIP grant in 2020, the performance targets are equally weighted between adjusted earnings per share and adjusted cumulative free cash flow. The final number of Restricted Units earned will then be subject to adjustment based on RTSR relative to the companies within the Standard & Poor's 500 Index. We determine the grant date fair value of the Restricted Units using a Monte Carlo model and recognize compensation expense, less estimated forfeitures, ratably over the vesting period based on the number of awards expected to be earned.
For the 2020 award, the LTIP will be subdivided into two measurement periods. The first measurement period will evaluate the achievement of performance targets for the year 2020. The second measurement period will evaluate the achievement of performance targets for the years 2021 through 2022. The performance targets for the second measurement period will be determined at a future date.
The weighted-average assumptions used in our Monte Carlo models for each award year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Risk-free interest rate
|
0.15
|
%
|
|
2.23
|
%
|
|
2.61
|
%
|
Expected volatility
|
27.53
|
%
|
|
19.64
|
%
|
|
16.51
|
%
|
Weighted-average fair value of units granted
|
$
|
92.77
|
|
|
$
|
123.44
|
|
|
$
|
137.57
|
|
Share payout
|
101.00
|
%
|
|
115.04
|
%
|
|
123.47
|
%
|
There is no expected dividend yield as units earn dividend equivalents.
As of December 31, 2020, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our LTIP program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Units
(in thousands)
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Weighted-Average Remaining
Contractual Term
(in years)
|
|
Aggregate Intrinsic
Value (in millions)
|
Non-vested as of January 1, 2020
|
1,691
|
|
|
$
|
109.18
|
|
|
|
|
|
Vested
|
(867)
|
|
|
110.79
|
|
|
|
|
|
Granted
|
230
|
|
|
92.76
|
|
|
|
|
|
Reinvested Dividends
|
64
|
|
|
N/A
|
|
|
|
|
Forfeited / Expired
|
(114)
|
|
|
107.34
|
|
|
|
|
|
Non-vested as of December 31, 2020
|
1,004
|
|
|
$
|
104.15
|
|
|
1.22
|
|
$
|
169
|
|
|
|
|
|
|
|
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2020, 2019 and 2018 was $92.76, $107.30 and $111.42, respectively. The total fair value of Restricted Units vested was $112, $71 and $97 million in 2020, 2019 and 2018, respectively. As of December 31, 2020, there was $31 million of total unrecognized compensation cost related to non-vested Restricted Units. That cost is expected to be recognized over a weighted-average period of one year.
Non-qualified Stock Options
We maintain stock option plans under which options are granted to purchase shares of UPS class A common stock. Stock options granted in connection with the UPS Incentive Compensation Plan must have an exercise price at least equal to the NYSE closing price of UPS class B common stock on the date the option is granted.
We grant non-qualified stock options to a limited group of eligible senior management employees annually, in which the value granted is determined as a percentage of salary. Options granted generally vest over a five-year period with approximately 20% of the award vesting at each anniversary of the grant date except in the case of death, disability or retirement, in which case immediate vesting occurs. The options granted expire 10 years after the date of the grant. Option holders may exercise their options via the payment of cash or class A common stock and new class A shares are issued upon exercise.
The following is an analysis of options to purchase shares of class A common stock issued and outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
(in thousands)
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average Remaining
Contractual Term
(in years)
|
|
Aggregate Intrinsic
Value (in millions)
|
Outstanding at January 1, 2020
|
1,498
|
|
|
$
|
100.74
|
|
|
|
|
|
Exercised
|
(375)
|
|
|
92.76
|
|
|
|
|
|
Granted
|
441
|
|
|
104.10
|
|
|
|
|
|
Forfeited / Expired
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2020
|
1,564
|
|
|
$
|
103.60
|
|
|
6.84
|
|
$
|
101
|
|
Options Vested and Expected to Vest
|
1,564
|
|
|
$
|
103.60
|
|
|
6.84
|
|
$
|
101
|
|
Exercisable at December 31, 2020
|
801
|
|
|
$
|
101.33
|
|
|
5.46
|
|
$
|
54
|
|
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used by year, and the calculated weighted-average fair values of options, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Expected dividend yield
|
3.51
|
%
|
|
2.94
|
%
|
|
2.93
|
%
|
Risk-free interest rate
|
1.26
|
%
|
|
2.60
|
%
|
|
2.84
|
%
|
Expected life in years
|
7.5
|
|
7.5
|
|
7.5
|
Expected volatility
|
19.25
|
%
|
|
17.79
|
%
|
|
16.72
|
%
|
Weighted-average fair value of options granted
|
$
|
11.74
|
|
|
$
|
16.34
|
|
|
$
|
15.23
|
|
The expected dividend yield is based on the recent historical dividend yields for our stock, taking into account changes in dividend policy. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant. The expected life represents an estimate of the period of time options are expected to remain outstanding, and we have relied upon a combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the grants and an index of peer companies with similar grant characteristics in estimating this variable. Expected volatilities are based on the historical returns on our stock and the implied volatility of our publicly-traded options.
We received cash of $28, $7 and $12 million during 2020, 2019 and 2018, respectively, from option holders resulting from the exercise of stock options. The total intrinsic value of options exercised during 2020, 2019 and 2018 was $17, $5 and $6 million, respectively. As of December 31, 2020, there was $3 million of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted-average period of three years and five months.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding and exercisable as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise Price Range
|
Options
(in thousands)
|
|
Weighted-Average
Remaining Contractual Term
(in years)
|
|
Weighted-Average
Exercise
Price
|
|
Options
(in thousands)
|
|
Weighted-Average
Exercise
Price
|
$65.01 - $80.00
|
67
|
|
|
0.90
|
|
$
|
76.02
|
|
|
67
|
|
|
$
|
76.02
|
|
$80.01 - $95.00
|
46
|
|
|
2.17
|
|
82.87
|
|
|
46
|
|
|
82.87
|
|
$95.01 - $110.00
|
1,208
|
|
|
7.09
|
|
104.28
|
|
|
587
|
|
|
103.87
|
|
$110.01 - $125.00
|
243
|
|
|
8.12
|
|
111.80
|
|
|
101
|
|
|
111.80
|
|
|
1,564
|
|
|
6.84
|
|
$
|
103.60
|
|
|
801
|
|
|
$
|
101.33
|
|
Discounted Employee Stock Purchase Plan
We maintain an employee stock purchase plan for all eligible employees. Under this plan, shares of UPS class A common stock may be purchased at quarterly intervals at 95% of the NYSE closing price of UPS class B common stock on the last day of each quarterly period. Employees purchased 0.9, 1.0 and 0.9 million shares at average prices of $110.92, $102.11 and $105.53 per share, during 2020, 2019 and 2018, respectively. This plan is not considered to be compensatory, and therefore no compensation cost is measured for the employees’ purchase rights.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION
We report our operations in three reporting segments: U.S. Domestic Package, International Package and Supply Chain & Freight. Package operations represent our most significant business and are broken down into regional operations around the world. Regional operations managers are responsible for both domestic and export products within their geographic area.
U.S. Domestic Package
U.S. Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the United States.
International Package
International Package operations include delivery to more than 220 countries and territories worldwide, including shipments wholly outside the United States, as well as shipments with either origin or destination outside the United States. Our International Package reporting segment includes our operations in Europe, Asia, Americas and ISMEA.
Supply Chain & Freight
Supply Chain & Freight includes our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units. Our Forwarding, Logistics and UPS Mail Innovations units provide services in more than 200 countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, distribution and post-sales services, mail and consulting services. UPS Freight offers a variety of less-than-truckload and truckload services to customers in North America. On January 24, 2021, we entered into a definitive agreement to sell our UPS Freight business as discussed in note 4. Coyote offers truckload brokerage services primarily in the United States. Marken is a global provider of supply chain solutions to the healthcare and life sciences industry, specializing in clinical trials logistics. Other aggregated business units within this segment include The UPS Store and UPS Capital.
In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income (expense) and other, interest expense and income tax expense. Certain expenses are allocated between the segments using activity-based costing methods as described in Part I, "Item 7. Supplemental Information - Items Affecting Comparability" section of Management's Discussion and Analysis. As we operate an integrated, global multimodal network, we evaluate many of our capital expenditure decisions at a network level. Accordingly, expenditures on property, plant and equipment by segment are not presented. Unallocated assets are comprised primarily of cash, marketable securities and certain investment partnerships. In 2018, we changed the segment allocation methodology for certain shared assets. All prior periods have been recast to reflect this change in methodology.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information for the years ended December 31, 2020, 2019 and 2018 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
53,499
|
|
|
$
|
46,493
|
|
|
$
|
43,593
|
|
International Package
|
15,945
|
|
|
14,220
|
|
|
14,442
|
|
Supply Chain & Freight
|
15,184
|
|
|
13,381
|
|
|
13,826
|
|
Consolidated revenue
|
$
|
84,628
|
|
|
$
|
74,094
|
|
|
$
|
71,861
|
|
Operating Profit:
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
3,891
|
|
|
$
|
4,164
|
|
|
$
|
3,643
|
|
International Package
|
3,436
|
|
|
2,657
|
|
|
2,529
|
|
Supply Chain & Freight
|
357
|
|
|
977
|
|
|
852
|
|
Consolidated operating profit
|
$
|
7,684
|
|
|
$
|
7,798
|
|
|
$
|
7,024
|
|
Assets:
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
35,067
|
|
|
$
|
32,795
|
|
|
$
|
28,216
|
|
International Package
|
15,717
|
|
|
14,044
|
|
|
12,070
|
|
Supply Chain & Freight(1)
|
9,041
|
|
|
9,045
|
|
|
8,411
|
|
Unallocated
|
2,583
|
|
|
1,973
|
|
|
1,319
|
|
Consolidated assets
|
$
|
62,408
|
|
|
$
|
57,857
|
|
|
$
|
50,016
|
|
Depreciation and Amortization Expense:
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
1,805
|
|
|
$
|
1,520
|
|
|
$
|
1,375
|
|
International Package
|
597
|
|
|
547
|
|
|
526
|
|
Supply Chain & Freight
|
296
|
|
|
293
|
|
|
306
|
|
Consolidated depreciation and amortization expense
|
$
|
2,698
|
|
|
$
|
2,360
|
|
|
$
|
2,207
|
|
(1) Includes $1.2 billion of assets held for sale related to the UPS Freight divestiture.
Revenue by product type for the years ended December 31, 2020, 2019 and 2018 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
U.S. Domestic Package:
|
|
|
|
|
|
Next Day Air
|
$
|
8,522
|
|
|
$
|
8,479
|
|
|
$
|
7,618
|
|
Deferred
|
5,665
|
|
|
5,180
|
|
|
4,752
|
|
Ground
|
39,312
|
|
|
32,834
|
|
|
31,223
|
|
Total U.S. Domestic Package
|
53,499
|
|
|
46,493
|
|
|
43,593
|
|
International Package:
|
|
|
|
|
|
Domestic
|
3,160
|
|
|
2,836
|
|
|
2,874
|
|
Export
|
12,159
|
|
|
10,837
|
|
|
10,973
|
|
Cargo
|
626
|
|
|
547
|
|
|
595
|
|
Total International Package
|
15,945
|
|
|
14,220
|
|
|
14,442
|
|
Supply Chain & Freight:
|
|
|
|
|
|
Forwarding
|
6,975
|
|
|
5,867
|
|
|
6,580
|
|
Logistics
|
4,073
|
|
|
3,435
|
|
|
3,234
|
|
Freight
|
3,149
|
|
|
3,265
|
|
|
3,218
|
|
Other
|
987
|
|
|
814
|
|
|
794
|
|
Total Supply Chain & Freight
|
15,184
|
|
|
13,381
|
|
|
13,826
|
|
Consolidated revenue
|
$
|
84,628
|
|
|
$
|
74,094
|
|
|
$
|
71,861
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic information for the years ended December 31, 2020, 2019 and 2018 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
United States:
|
|
|
|
|
|
Revenue
|
$
|
66,580
|
|
|
$
|
58,699
|
|
|
$
|
56,115
|
|
Long-lived assets
|
$
|
28,354
|
|
|
$
|
27,976
|
|
|
$
|
24,918
|
|
International:
|
|
|
|
|
|
Revenue
|
$
|
18,048
|
|
|
$
|
15,395
|
|
|
$
|
15,746
|
|
Long-lived assets
|
$
|
10,213
|
|
|
$
|
9,567
|
|
|
$
|
8,577
|
|
Consolidated:
|
|
|
|
|
|
Revenue
|
$
|
84,628
|
|
|
$
|
74,094
|
|
|
$
|
71,861
|
|
Long-lived assets
|
$
|
38,567
|
|
|
$
|
37,543
|
|
|
$
|
33,495
|
|
Long-lived assets include property, plant and equipment, pension and postretirement benefit assets, long-term investments, goodwill and intangible assets.
No countries outside of the United States provided 10% or more of consolidated revenue for the years ended December 31, 2020, 2019 or 2018. For the year ended December 31, 2020, Amazon.com, Inc. and its affiliates ("Amazon") represented 13.3% of our consolidated revenues. Substantially all of this revenue was attributed to U.S. Domestic Package. Amazon accounted for approximately 18.1% and 16.9% of accounts receivable, net, included within the consolidated balance sheets as of December 31, 2020 and 2019, respectively. No single customer represented 10% or more of our consolidated revenues for the year ended December 31, 2018.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. INCOME TAXES
The income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018 consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
U.S. Federal
|
$
|
839
|
|
|
$
|
570
|
|
|
$
|
89
|
|
U.S. State and Local
|
100
|
|
|
183
|
|
|
7
|
|
Non-U.S.
|
420
|
|
|
359
|
|
|
374
|
|
Total Current
|
1,359
|
|
|
1,112
|
|
|
470
|
|
Deferred:
|
|
|
|
|
|
U.S. Federal
|
(725)
|
|
|
255
|
|
|
668
|
|
U.S. State and Local
|
(159)
|
|
|
(93)
|
|
|
75
|
|
Non-U.S.
|
26
|
|
|
(62)
|
|
|
15
|
|
Total Deferred
|
(858)
|
|
|
100
|
|
|
758
|
|
Total Income Tax Expense
|
$
|
501
|
|
|
$
|
1,212
|
|
|
$
|
1,228
|
|
Income before income taxes includes the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
(39)
|
|
|
$
|
3,972
|
|
|
$
|
4,307
|
|
Non-U.S.
|
1,883
|
|
|
1,680
|
|
|
1,712
|
|
Total Income Before Income Taxes:
|
$
|
1,844
|
|
|
$
|
5,652
|
|
|
$
|
6,019
|
|
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2020, 2019 and 2018 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Statutory U.S. federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
U.S. state and local income taxes (net of federal benefit) (1)
|
(2.6)
|
|
|
1.4
|
|
|
1.4
|
|
Non-U.S. tax rate differential
|
1.6
|
|
|
0.3
|
|
|
0.2
|
|
U.S. federal tax credits
|
(3.6)
|
|
|
(1.4)
|
|
|
(1.1)
|
|
Goodwill and other asset impairments
|
5.1
|
|
|
—
|
|
|
—
|
|
Net uncertain tax positions
|
3.6
|
|
|
0.1
|
|
|
(0.6)
|
|
Non-U.S. valuation allowance release
|
—
|
|
|
(1.2)
|
|
|
—
|
|
Other
|
2.1
|
|
|
1.2
|
|
|
(0.5)
|
|
Effective income tax rate
|
27.2
|
%
|
|
21.4
|
%
|
|
20.4
|
%
|
(1)The 2020 state tax impact to the effective tax rate is negative due to the favorable proportion of state tax credits in comparison to pretax income.
Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions in which we operate and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year.
Our effective tax rate was 27.2% in 2020, compared with 21.4% in 2019 and 20.4% in 2018, primarily due to the effects of the aforementioned recurring factors and the following discrete tax items.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2020 Discrete Items
In the fourth quarter of 2020, we recognized an income tax benefit of $1.6 billion related to pre-tax mark-to-market losses of $6.5 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average tax rate than the 2020 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.
We recorded pre-tax transformation strategy costs of $348 million during the year ended December 31, 2020. As a result, we recorded an additional income tax benefit of $83 million. This income tax benefit was generated at a higher average tax rate than the 2020 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
We recorded goodwill and other asset impairment charges of $686 million during the year ended December 31, 2020. As a result, we recorded an additional income tax benefit of $57 million. This income tax benefit was generated at a lower average tax rate than the U.S. federal statutory tax rate due to the portion of the costs related to goodwill impairment, which is not deductible for tax purposes.
The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $28 million and reduced our effective tax rate by 1.5% during the year ended December 31, 2020.
Our 2020 effective tax rate was also unfavorably impacted by new uncertain tax positions.
2019 Discrete Items
In the fourth quarter of 2019, we recognized an income tax benefit of $571 million related to pre-tax mark-to-market losses of $2.4 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average tax rate than the 2019 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.
We recorded pre-tax transformation strategy costs of $255 million during the year ended December 31, 2019. As a result, we recorded an additional income tax benefit of $59 million. This income tax benefit was generated at a higher average tax rate than the 2019 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
Legal contingencies and expenses of $97 million were accrued during 2019 in respect of certain legal proceedings for which we recorded an additional income tax benefit of $6 million. This income tax benefit was generated at a lower average tax rate than the U.S. federal statutory tax rate due to the portion of the accrual related to penalties, which are not deductible for tax purposes.
As of December 31, 2018, we maintained a valuation allowance against certain deferred tax assets, primarily related to foreign net operating loss carryforwards. As of each reporting date, we consider new evidence, both positive and negative, that could affect the future realization of deferred tax assets. During 2019, we determined that there was sufficient positive evidence to conclude that it was more likely than not that the deferred tax assets related to certain foreign net operating loss carryforwards would be realized. This conclusion was primarily related to achieving cumulative three-year income and anticipated future earnings within the relevant jurisdiction. Accordingly, we reversed the related valuation allowance and recognized a discrete tax benefit of approximately $68 million.
Other factors that impacted our 2019 effective tax rate include favorable tax provisions enacted in the Taxpayer Certainty and Disaster Tax Relief Act of 2019.
2018 Discrete Items
In the fourth quarter of 2018, we recognized an income tax benefit of $390 million related to pre-tax mark-to-market losses of $1.6 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average tax rate than the 2018 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.
We recorded pre-tax transformation strategy costs of $360 million during the year ended December 31, 2018. As a result, we recorded an additional income tax benefit of $87 million. This income tax benefit was generated at a higher average tax rate than the 2018 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $38 million and reduced our effective tax rate by 0.6% during the year ended December 31, 2018.
Other factors that impacted our 2018 effective tax rate include favorable resolutions of uncertain tax positions, favorable U.S. state and local tax law changes, favorable tax provisions enacted in the Bipartisan Budget Act of 2018 and discrete tax credits associated with the filing of our 2017 U.S. federal income tax return.
Other Items
Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which is effective through December 31, 2021. The tax incentive is conditional upon our meeting specific employment and investment thresholds. The impact of this tax incentive decreased non-U.S. tax expense by $35, $27 and $27 million (increased diluted earnings per share by $0.04, $0.03 and $0.03) for 2020, 2019 and 2018, respectively.
Deferred income tax assets and liabilities are comprised of the following as of December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Fixed assets and capitalized software
|
$
|
(5,355)
|
|
|
$
|
(4,720)
|
|
|
|
|
|
Operating lease right-of-use assets
|
(730)
|
|
|
(685)
|
|
Other
|
(501)
|
|
|
(538)
|
|
Deferred tax liabilities
|
(6,586)
|
|
|
(5,943)
|
|
|
|
|
|
Pension and postretirement benefits
|
3,994
|
|
|
2,522
|
|
Loss and credit carryforwards
|
325
|
|
|
328
|
|
Insurance reserves
|
535
|
|
|
413
|
|
|
|
|
|
Stock compensation
|
183
|
|
|
249
|
|
Accrued employee compensation
|
583
|
|
|
287
|
|
Operating lease liabilities
|
736
|
|
|
691
|
|
Other
|
357
|
|
|
205
|
|
Deferred tax assets
|
6,713
|
|
|
4,695
|
|
Deferred tax assets valuation allowance
|
(88)
|
|
|
(54)
|
|
Deferred tax asset (net of valuation allowance)
|
6,625
|
|
|
4,641
|
|
|
|
|
|
Net deferred tax asset (liability)
|
$
|
39
|
|
|
$
|
(1,302)
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
$
|
527
|
|
|
$
|
330
|
|
Deferred tax liabilities
|
(488)
|
|
|
(1,632)
|
|
Net deferred tax asset (liability)
|
$
|
39
|
|
|
$
|
(1,302)
|
|
The valuation allowance changed by $34, $(58) and $(14) million during the years ended December 31, 2020, 2019 and 2018, respectively.
We have a U.S. federal capital loss carryforward of $38 million as of December 31, 2020, $15 million of which expires on December 31, 2021 and the remainder of which expires on December 31, 2025.
Further, we have U.S. state and local operating loss and credit carryforwards as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
U.S. state and local operating loss carryforwards
|
$
|
1,253
|
|
|
$
|
1,374
|
|
U.S. state and local credit carryforwards
|
$
|
108
|
|
|
$
|
110
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The U.S. state and local operating loss carryforwards and credits can be carried forward for periods ranging from one year to indefinitely. We also have non-U.S. loss carryforwards of $716 million as of December 31, 2020, the majority of which may be carried forward indefinitely. As indicated in the table above, we have established a valuation allowance for certain U.S. federal, state and non-U.S. carryforwards and outside basis differences due to the uncertainty resulting from a lack of previous taxable income within the applicable tax jurisdictions and other limitations.
Undistributed earnings and profits ("E&P") of our foreign subsidiaries amounted to $5.6 billion as of December 31, 2020. Currently, $1.4 billion of the undistributed E&P of our foreign subsidiaries is considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. state and local taxes and withholding taxes payable in various jurisdictions. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
The following table summarizes the activity related to our uncertain tax positions (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
Interest
|
|
Penalties
|
Balance at January 1, 2018
|
$
|
160
|
|
|
$
|
43
|
|
|
$
|
9
|
|
Additions for tax positions of the current year
|
47
|
|
|
—
|
|
|
1
|
|
Additions for tax positions of prior years
|
7
|
|
|
10
|
|
|
—
|
|
Reductions for tax positions of prior years for:
|
|
|
|
|
|
Changes based on facts and circumstances
|
(43)
|
|
|
(8)
|
|
|
(5)
|
|
Settlements during the period
|
(1)
|
|
|
(1)
|
|
|
—
|
|
Lapses of applicable statute of limitations
|
(3)
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2018
|
167
|
|
|
44
|
|
|
5
|
|
Additions for tax positions of the current year
|
6
|
|
|
—
|
|
|
—
|
|
Additions for tax positions of prior years
|
51
|
|
|
13
|
|
|
—
|
|
Reductions for tax positions of prior years for:
|
|
|
|
|
|
Changes based on facts and circumstances
|
(45)
|
|
|
(4)
|
|
|
(1)
|
|
Settlements during the period
|
(3)
|
|
|
(1)
|
|
|
—
|
|
Lapses of applicable statute of limitations
|
(4)
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2019
|
172
|
|
|
52
|
|
|
4
|
|
Additions for tax positions of the current year
|
61
|
|
|
—
|
|
|
—
|
|
Additions for tax positions of prior years
|
154
|
|
|
34
|
|
|
2
|
|
Reductions for tax positions of prior years for:
|
|
|
|
|
|
Changes based on facts and circumstances
|
(54)
|
|
|
(24)
|
|
|
(2)
|
|
Settlements during the period
|
—
|
|
|
(1)
|
|
|
—
|
|
Lapses of applicable statute of limitations
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2020
|
$
|
333
|
|
|
$
|
61
|
|
|
$
|
4
|
|
The total amount of gross uncertain tax positions as of December 31, 2020, 2019 and 2018 that, if recognized, would affect the effective tax rate was $332, $171 and $165 million, respectively. Our continuing policy is to recognize interest and penalties associated with income tax matters as a component of income tax expense.
We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. We have substantially resolved all U.S. federal income tax matters for tax years prior to 2016.
A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the liability for uncertain tax positions could significantly increase or decrease within the next twelve months. Items that may cause changes to uncertain tax positions include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statute of limitations, or other unforeseen circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. EARNINGS PER SHARE
The earnings per share amounts are the same for class A and class B common shares as the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
Net income attributable to common shareowners
|
$
|
1,343
|
|
|
$
|
4,440
|
|
|
$
|
4,791
|
|
Denominator:
|
|
|
|
|
|
Weighted-average shares
|
862
|
|
|
859
|
|
|
860
|
|
Deferred compensation obligations
|
—
|
|
|
—
|
|
|
1
|
|
Vested portion of restricted shares
|
5
|
|
|
5
|
|
|
5
|
|
Denominator for basic earnings per share
|
867
|
|
|
864
|
|
|
866
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
Restricted performance units
|
4
|
|
|
5
|
|
|
4
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
871
|
|
|
869
|
|
|
870
|
|
Basic Earnings Per Share
|
$
|
1.55
|
|
|
$
|
5.14
|
|
|
$
|
5.53
|
|
Diluted Earnings Per Share
|
$
|
1.54
|
|
|
$
|
5.11
|
|
|
$
|
5.51
|
|
Diluted earnings per share for the years ended December 31, 2020, 2019 and 2018 exclude the effect of 0.6, 0.5 and 0.2 million shares, respectively, of common stock that may be issued upon the exercise of employee stock options because such effect would be antidilutive.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations and we actively monitor these exposures. To manage the impact of these exposures, we may enter into a variety of derivative financial instruments. Our objective is to manage, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates, commodity prices and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value from those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Credit Risk Management
The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however, we seek to minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines and by monitoring counterparties to prevent concentrations of credit risk with any single counterparty.
We have agreements with all of our active counterparties (covering the majority of our derivative positions) containing early termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of derivatives associated with those counterparties.
As of December 31, 2020 and 2019, we held cash collateral of $146 and $495 million, respectively, under these agreements. This collateral is included in Cash and cash equivalents in the consolidated balance sheets and its use by UPS is not restricted. As of December 31, 2020, $158 million of collateral was required to be posted with our counterparties. As of December 31, 2019, no collateral was required to be posted with our counterparties.
Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. Alternatively, we could be required to provide additional collateral or terminate transactions with certain counterparties in the event of a downgrade of our credit rating. The amount of collateral required would be determined by the net fair value of the associated derivatives with each counterparty. We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
As of December 31, 2020, there were no instruments in a net liability position that were not covered by the zero threshold bilateral collateral provisions.
Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. In order to mitigate the impact of fuel surcharges imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services.
Foreign Currency Risk Management
To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with forward contracts. We normally designate and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur.
We also hedge portions of our anticipated cash settlements of intercompany transactions and interest payments on certain debt subject to foreign currency remeasurement using foreign currency forward contracts. We normally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions; therefore, the resulting gains and losses from these hedges are recognized as a component of Investment income (expense) and other when the underlying transactions are subject to currency remeasurement.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of foreign denominated debt as the hedging instrument allows the debt to be remeasured to foreign currency translation adjustment within AOCI to offset the translation risk from those investments. Balances in the cumulative translation adjustment accounts remain until the sale or substantially complete liquidation of the foreign entity, upon which they are recognized as a component of Investment income (expense) and other.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. Interest rate swaps allow us to maintain a target range of floating-rate debt within our capital structure. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged.
We have designated and account for the majority of our interest rate swaps that convert fixed-rate interest payments into floating-rate interest payments as fair value hedges of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We have designated and account for interest rate swaps that convert floating-rate interest payments into fixed-rate interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from fair value adjustments to these interest rate swaps are recorded to AOCI.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings by using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.
Outstanding Positions
The notional amounts of our outstanding derivative positions were as follows as of December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Currency hedges:
|
|
|
|
|
|
Euro
|
EUR
|
|
4,197
|
|
|
4,571
|
|
British Pound Sterling
|
GBP
|
|
1,400
|
|
|
1,494
|
|
Canadian Dollar
|
CAD
|
|
1,576
|
|
|
1,402
|
|
Hong Kong Dollar
|
HKD
|
|
3,717
|
|
|
3,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate hedges:
|
|
|
|
|
|
Fixed to Floating Interest Rate Swaps
|
USD
|
|
3,250
|
|
|
3,674
|
|
Floating to Fixed Interest Rate Swaps
|
USD
|
|
778
|
|
|
778
|
|
|
|
|
|
|
|
As of December 31, 2020 and 2019, we had no outstanding commodity hedge positions.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet Recognition
The following table indicates the location in the consolidated balance sheets where our derivative assets and liabilities have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives.
We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded in the consolidated balance sheets. The columns labeled "Net Amounts if Right of Offset had been Applied" indicate the potential net fair value positions by type of contract and location in the consolidated balance sheets had we elected to apply the right of offset as of December 31, 2020 and December 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Gross Amounts Presented in Consolidated Balance Sheets
|
|
Net Amounts if Right of Offset had been Applied
|
Asset Derivatives
|
|
Balance Sheet Location
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current assets
|
|
|
|
Level 2
|
|
$
|
56
|
|
|
$
|
138
|
|
|
$
|
45
|
|
|
$
|
131
|
|
Interest rate contracts
|
|
Other current assets
|
|
|
|
Level 2
|
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
Foreign currency exchange contracts
|
|
Other non-current assets
|
|
|
|
Level 2
|
|
35
|
|
|
252
|
|
|
4
|
|
|
236
|
|
Interest rate contracts
|
|
Other non-current assets
|
|
|
|
Level 2
|
|
29
|
|
|
21
|
|
|
26
|
|
|
20
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current assets
|
|
|
|
Level 2
|
|
4
|
|
|
7
|
|
|
4
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Other non-current assets
|
|
|
|
Level 2
|
|
—
|
|
|
12
|
|
|
—
|
|
|
11
|
|
Total Asset Derivatives
|
|
|
|
|
|
|
|
$
|
126
|
|
|
$
|
432
|
|
|
$
|
81
|
|
|
$
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Gross Amounts Presented in Consolidated Balance Sheets
|
|
Net Amounts if Right of Offset had been Applied
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current liabilities
|
|
|
|
Level 2
|
|
$
|
34
|
|
|
$
|
7
|
|
|
$
|
23
|
|
|
$
|
—
|
|
Foreign currency exchange contracts
|
|
Other non-current liabilities
|
|
|
|
Level 2
|
|
142
|
|
|
16
|
|
|
111
|
|
|
—
|
|
Interest rate contracts
|
|
Other non-current liabilities
|
|
|
|
Level 2
|
|
13
|
|
|
11
|
|
|
10
|
|
|
10
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current liabilities
|
|
|
|
Level 2
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Interest rate contracts
|
|
Other current liabilities
|
|
|
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Other non-current liabilities
|
|
|
|
Level 2
|
|
—
|
|
|
3
|
|
|
—
|
|
|
2
|
|
Total Liability Derivatives
|
|
|
|
|
|
|
|
$
|
192
|
|
|
$
|
37
|
|
|
$
|
147
|
|
|
$
|
12
|
|
Our foreign currency exchange, interest rate and investment market price derivatives are largely comprised of over-the-counter derivatives, which are primarily valued using pricing models that rely on market observable inputs such as yield curves, currency exchange rates and investment forward prices; therefore, these derivatives are classified as Level 2. As of December 31, 2020 and 2019 we did not have any derivatives that were classified as Level 1 (valued using quoted prices in active markets for identical assets) or Level 3 (valued using significant unobservable inputs).
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet Location of Hedged Item in Fair Value Hedges
The following table indicates the amounts that were recorded in the consolidated balance sheets related to cumulative basis adjustments for fair value hedges as of December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included
|
|
Carrying Amount of Hedged Liabilities
|
|
Cumulative Amount of Fair Value Hedge Adjustments
|
|
Carrying Amount of Hedged Liabilities
|
|
Cumulative Amount of Fair Value Hedge Adjustments
|
Long-Term Debt and Finance Leases
|
|
$
|
2,816
|
|
|
$
|
42
|
|
|
$
|
3,234
|
|
|
$
|
40
|
|
The cumulative amount of fair value hedging losses remaining for any hedged assets and liabilities for which hedge accounting has been discontinued as of December 31, 2020 is $7 million. These amounts will be recognized over the next 10 years.
Income Statement and AOCI Recognition
The following table indicates the amount of gains and (losses) that have been recognized in the statements of consolidated income for fair value and cash flow hedges, as well as the associated gain or (loss) for the underlying hedged item for fair value hedges for the years ended December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|
|
Revenue
|
|
Interest Expense
|
|
Investment Income and Other
|
|
Revenue
|
|
Interest Expense
|
|
Investment Income and Other
|
Gain or (loss) on fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
|
$
|
—
|
|
|
$
|
(8)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(38)
|
|
|
$
|
—
|
|
Derivatives designated as hedging instruments
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
38
|
|
|
—
|
|
Gain or (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(8)
|
|
|
—
|
|
|
—
|
|
|
(15)
|
|
|
—
|
|
Foreign Currency Exchange Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from accumulated other comprehensive income
|
|
196
|
|
|
—
|
|
|
—
|
|
|
177
|
|
|
—
|
|
|
—
|
|
Total amounts of income and expense line items presented in the statement of income in which the effects of fair value or cash flow hedges are recorded
|
|
$
|
196
|
|
|
$
|
(8)
|
|
|
$
|
—
|
|
|
$
|
177
|
|
|
$
|
(15)
|
|
|
$
|
—
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table indicates the amount of gains and (losses) that have been recognized in AOCI for the years ended December 31, 2020 and 2019 for those derivatives designated as cash flow hedges (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivatives
|
|
|
2020
|
|
2019
|
|
Interest rate contracts
|
|
$
|
—
|
|
|
$
|
6
|
|
|
Foreign currency exchange contracts
|
|
(253)
|
|
|
250
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(253)
|
|
|
$
|
256
|
|
|
As of December 31, 2020, there were $11 million of pre-tax gains related to cash flow hedges deferred in AOCI that are expected to be reclassified to income over the 12 month period ending December 31, 2021. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions. The maximum term over which we are hedging exposures to the variability of cash flows is approximately 12 years.
The following table indicates the amount of gains and (losses) that have been recognized in AOCI within foreign currency translation adjustment for the years ended December 31, 2020 and 2019 for those instruments designated as net investment hedges (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-derivative Instruments in Net Investment Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in AOCI on Debt
|
|
|
2020
|
|
2019
|
|
Foreign denominated debt
|
|
$
|
(265)
|
|
|
$
|
75
|
|
|
Total
|
|
$
|
(265)
|
|
|
$
|
75
|
|
|
Additionally, we maintain interest rate swaps, foreign currency exchange forwards and investment market price forward contracts that are not designated as hedges. The interest rate swap contracts are intended to provide an economic hedge of portions of our outstanding debt. The foreign currency exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement and settlement risk for certain assets and liabilities in our consolidated balance sheets. The investment market price forward contracts are intended to provide an economic offset to fair value fluctuations of certain investments in marketable securities.
We also periodically terminate interest rate swaps and foreign currency exchange forward contracts by entering into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original swap and foreign currency exchange contracts. These transactions provide an economic offset that effectively eliminates the effects of changes in market valuation.
The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these interest rate swaps, foreign currency forward and investment market price forward contracts not designated as hedges for the years ended December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments Not Designated in
Hedging Relationships
|
|
Location of Gain
(Loss) Recognized
in Income
|
|
Amount of Gain (Loss) Recognized in Income
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Interest expense
|
|
$
|
(9)
|
|
|
$
|
(9)
|
|
Foreign currency exchange contracts
|
|
Investment income and other
|
|
27
|
|
|
(1)
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
18
|
|
|
$
|
(10)
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. TRANSFORMATION STRATEGY COSTS
In the first quarter of 2018, we launched the first phase of a multi-year, enterprise-wide transformation strategy impacting our organization. Over the next several years additional phases will be implemented. The program includes investments, as well as changes in processes and technology, that impact global direct and indirect operating costs.
The table below presents the transformation strategy costs for the years ended December 31, 2020, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation Strategy Costs
|
|
2020
|
|
2019
|
|
2018
|
Compensation and benefits
|
|
$
|
211
|
|
|
$
|
166
|
|
|
$
|
262
|
|
Total other expenses
|
|
137
|
|
|
89
|
|
|
98
|
|
Total Transformation Strategy Costs
|
|
$
|
348
|
|
|
$
|
255
|
|
|
$
|
360
|
|
|
|
|
|
|
|
|
Income Tax Benefit from Transformation Strategy Costs
|
|
(83)
|
|
|
(59)
|
|
|
(87)
|
|
After-Tax Transformation Strategy Costs
|
|
$
|
265
|
|
|
$
|
196
|
|
|
$
|
273
|
|
The income tax effects of transformation strategy costs are calculated by multiplying the amount of the adjustments by the statutory tax rates applicable in each tax jurisdiction.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. QUARTERLY INFORMATION (UNAUDITED)
Our segment revenue, segment operating profit, other income and (expense), net income (loss), basic and diluted earnings (loss) per share on a quarterly basis are presented below (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
11,456
|
|
|
$
|
10,480
|
|
|
$
|
13,074
|
|
|
$
|
11,150
|
|
|
$
|
13,225
|
|
|
$
|
11,455
|
|
|
$
|
15,744
|
|
|
$
|
13,408
|
|
International Package
|
3,383
|
|
|
3,459
|
|
|
3,705
|
|
|
3,505
|
|
|
4,087
|
|
|
3,494
|
|
|
4,770
|
|
|
3,762
|
|
Supply Chain & Freight
|
3,196
|
|
|
3,221
|
|
|
3,680
|
|
|
3,393
|
|
|
3,926
|
|
|
3,369
|
|
|
4,382
|
|
|
3,398
|
|
Total revenue
|
18,035
|
|
|
17,160
|
|
|
20,459
|
|
|
18,048
|
|
|
21,238
|
|
|
18,318
|
|
|
24,896
|
|
|
20,568
|
|
Operating Profit (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic Package
|
364
|
|
|
666
|
|
|
1,182
|
|
|
1,208
|
|
|
1,098
|
|
|
1,216
|
|
|
1,247
|
|
|
1,074
|
|
International Package
|
551
|
|
|
528
|
|
|
771
|
|
|
663
|
|
|
966
|
|
|
667
|
|
|
1,148
|
|
|
799
|
|
Supply Chain & Freight
|
157
|
|
|
200
|
|
|
259
|
|
|
272
|
|
|
299
|
|
|
245
|
|
|
(358)
|
|
|
260
|
|
Total operating profit
|
1,072
|
|
|
1,394
|
|
|
2,212
|
|
|
2,143
|
|
|
2,363
|
|
|
2,128
|
|
|
2,037
|
|
|
2,133
|
|
Total Other Income and (Expense)
|
$
|
178
|
|
|
$
|
46
|
|
|
$
|
145
|
|
|
$
|
61
|
|
|
$
|
162
|
|
|
$
|
78
|
|
|
$
|
(6,325)
|
|
|
$
|
(2,331)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
$
|
965
|
|
|
$
|
1,111
|
|
|
$
|
1,768
|
|
|
$
|
1,685
|
|
|
$
|
1,957
|
|
|
$
|
1,750
|
|
|
$
|
(3,347)
|
|
|
$
|
(106)
|
|
Net Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share
|
$
|
1.12
|
|
|
$
|
1.28
|
|
|
$
|
2.04
|
|
|
$
|
1.95
|
|
|
$
|
2.25
|
|
|
$
|
2.03
|
|
|
$
|
(3.84)
|
|
|
$
|
(0.12)
|
|
Diluted Earnings (Loss) Per Share
|
$
|
1.11
|
|
|
$
|
1.28
|
|
|
$
|
2.03
|
|
|
$
|
1.94
|
|
|
$
|
2.24
|
|
|
$
|
2.01
|
|
|
$
|
(3.84)
|
|
|
$
|
(0.12)
|
|
Our quarterly results were impacted by restructuring and other costs, legal contingencies and expenses and defined benefit plans mark-to-market charges. The table below presents the impact on operating profit and other income and (expense) for each period (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring & Other - Employee Benefits
|
$
|
12
|
|
|
$
|
106
|
|
|
$
|
81
|
|
|
$
|
2
|
|
|
$
|
18
|
|
|
$
|
41
|
|
|
$
|
100
|
|
|
$
|
17
|
|
Restructuring & Other - Other Costs
|
33
|
|
|
17
|
|
|
31
|
|
|
19
|
|
|
26
|
|
|
22
|
|
|
47
|
|
|
31
|
|
Restructuring & Other - Impairment Charges
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
686
|
|
|
—
|
|
Legal Contingencies and Expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of Matters Impacting Operating Profit to Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Domestic Package
|
$
|
37
|
|
|
$
|
28
|
|
|
$
|
33
|
|
|
$
|
18
|
|
|
$
|
35
|
|
|
$
|
26
|
|
|
$
|
132
|
|
|
$
|
133
|
|
International Package
|
7
|
|
|
84
|
|
|
71
|
|
|
2
|
|
|
6
|
|
|
26
|
|
|
12
|
|
|
10
|
|
Supply Chain & Freight
|
1
|
|
|
11
|
|
|
8
|
|
|
1
|
|
|
3
|
|
|
11
|
|
|
689
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to Other Income and (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans Mark-to-Market Charges
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,484
|
|
|
$
|
2,387
|
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. SUBSEQUENT EVENTS
On January 24, 2021, we entered into a definitive agreement to divest our UPS Freight business to TFI International Inc. for $800 million, subject to working capital and other adjustments. This agreement provides for the continuation of certain pension and postretirement benefits within UPS-sponsored plans that we estimate will require us to record an additional pre-tax expense when we close on the UPS Freight divestiture and amend the impacted plans. Upon closing, we also anticipate recording a pre-tax curtailment gain resulting from the acceleration of prior service credits. We currently anticipate that a favorable impact from reducing future benefit accruals for UPS Freight employees will be offset by net losses recorded in AOCI. The divestiture of UPS Freight may require an interim measurement of certain of our U.S. pension and postretirement benefit plans. We expect to record the impacts discussed herein by the second quarter of 2021.
As of December 31, 2020, UPS Freight was classified as held for sale in the consolidated balance sheet. For additional information, see note 4.