NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Principles of Consolidation
The accompanying interim unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of March 31, 2022 and our results of operations and cash flows for the three months ended March 31, 2022 and 2021. The results reported in these interim unaudited, consolidated financial statements should not be regarded as indicative of results that may be expected for any other period or the entire year. The interim unaudited, consolidated financial statements should be read in conjunction with the audited, consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, accounts receivable, finance receivables and accounts payable approximate fair value as of March 31, 2022 and December 31, 2021. The fair values of our investment securities are disclosed in note 5, our recognized multiemployer pension withdrawal liabilities in note 7, our short- and long-term debt in note 9 and our derivative instruments in note 15. We apply a fair value hierarchy (Levels 1, 2 and 3) when measuring and reporting items at fair value. Fair values are based on listed market prices (Level 1), when such prices are available. To the extent that listed market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations (Level 2). If listed market prices or other relevant factors are not available, 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 (Level 3). We utilized Level 1 inputs in the fair value hierarchy to determine the fair value of our cash and cash equivalents, and Level 2 inputs to determine the fair value of our accounts receivable, finance receivables and accounts payable.
Use of Estimates
The preparation of the accompanying interim unaudited, consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of these financial statements, as well as the reported amounts of revenues and expenses during the reporting period.
Although our estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. As a result, our accounting estimates and assumptions may change significantly over time.
For interim unaudited, consolidated financial statement purposes, we provide for accruals under our various company-sponsored employee benefit plans for each three month period based on one quarter of the estimated annual expense.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
Accounting pronouncements adopted during the periods covered by the unaudited, consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows. For accounting standards adopted in the period ended March 31, 2021, refer to note 1 to our audited, consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
Accounting Standards Issued But Not Yet Effective
Accounting pronouncements issued before, but not effective until after, March 31, 2022, 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. 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”) domestically or internationally. These services may be carried out by or arranged by us, and generally occur 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 | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2022 | | 2021 |
| Revenue: | | | | | | | |
| Next Day Air | | | | | $ | 2,594 | | | $ | 2,331 | |
| Deferred | | | | | 1,420 | | | 1,260 | |
| Ground | | | | | 11,110 | | | 10,419 | |
| U.S. Domestic Package | | | | | 15,124 | | | 14,010 | |
| | | | | | | |
| Domestic | | | | | 851 | | | 928 | |
| Export | | | | | 3,778 | | | 3,493 | |
| Cargo & Other | | | | | 247 | | | 186 | |
| International Package | | | | | 4,876 | | | 4,607 | |
| | | | | | | |
| Forwarding | | | | | 2,589 | | | 2,072 | |
| Logistics | | | | | 1,251 | | | 1,104 | |
| Freight | | | | | — | | | 767 | |
| Other | | | | | 538 | | | 348 | |
| Supply Chain Solutions | | | | | 4,378 | | | 4,291 | |
| | | | | | | |
| Consolidated revenue | | | | | $ | 24,378 | | | $ | 22,908 | |
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 UNAUDITED 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 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 UNAUDITED 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, forward 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.
Our allowance for credit losses as of March 31, 2022 and December 31, 2021 was $136 and $128 million, respectively. Amounts for credit losses charged to expense, before recoveries, during the three months ended March 31, 2022 and 2021 were $54 and $41 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 $336 and $304 million as of March 31, 2022 and December 31, 2021, respectively, net of deferred revenue related to in-transit packages of $359 and $314 million as of March 31, 2022 and December 31, 2021, 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 $10 and $27 million as of March 31, 2022 and December 31, 2021, 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 and $25 million as of March 31, 2022 and December 31, 2021, respectively. Long-term contract liabilities are included within Other Non-Current Liabilities in the consolidated balance sheets.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. STOCK-BASED COMPENSATION
We issue share-based awards under various incentive compensation plans, including non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units ("RSUs") and restricted performance shares and performance units ("RPUs", collectively with RSUs, "Restricted Units"). Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Dividends accrued on Restricted Units are reinvested in additional Restricted Units at each dividend payable date and are subject to the same vesting and forfeiture conditions as the underlying Restricted Units upon which they are earned.
Our primary equity compensation programs are the UPS Management Incentive Award program (the "MIP"), the UPS Long-Term Incentive Performance Award program (the "LTIP") and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Our matching contributions to our primary employee defined contribution savings plan are made in shares of UPS class A common stock.
Management Incentive Award Program ("MIP")
RPUs issued under the MIP vest one year following the grant date based on continued employment with the Company (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).
Based on the date of Compensation Committee approval of the 2021 MIP award, we determined the award measurement dates to be February 9, 2022 (for U.S.-based employees and executive management) and March 21, 2022 (for international employees). The RPUs issued under the MIP were valued for stock compensation expense purposes using the closing New York Stock Exchange ("NYSE") prices of $225.07 and $218.56 on those dates.
Long-Term Incentive Performance Award Program ("LTIP")
RPUs issued under the LTIP vest at the end of a three-year performance period, assuming continued employment with the Company (except in the case of death, disability or retirement, in which case immediate vesting occurs on a prorated basis). The actual number of RPUs earned is based on achievement of the performance targets established on the grant date.
The performance targets are equally weighted between adjusted earnings per share and adjusted cumulative free cash flow. The actual number of RPUs earned is subject to adjustment based on total shareholder return relative to the Standard & Poors 500 Index ("S&P 500"). We determine the grant date fair value of the RPUs 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.
Based on the date of Compensation Committee approval of the 2022 LTIP award performance targets, we determined March 23, 2022 to be the award measurement date and the target RPUs awarded were valued at $230.67.
The weighted-average assumptions used and the weighted-average fair values of the LTIP awards granted in 2022 and 2021 are as follows: | | | | | | | | | | | | |
| 2022 | | 2021 | |
| Risk-free interest rate | 2.29 | % | | 0.19 | % | |
| Expected volatility | 31.90 | % | | 30.70 | % | |
| Weighted-average fair value of RPUs granted | $ | 230.67 | | | $ | 168.05 | | |
| Share payout | 107.50 | % | | 102.39 | % | |
There is no expected dividend yield as units earn dividend equivalents.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Non-Qualified Stock Options
We grant non-qualified stock options to a limited group of eligible senior management employees under the UPS Stock Option program. Stock option awards 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 option grants expire 10 years after the date of the grant. In the first quarter of 2022, we granted 0.1 million stock options at an exercise price of $214.58, which was the NYSE closing price on the date of grant.
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used and the weighted-average fair values of options granted in 2022 and 2021 are as follows: | | | | | | | | | | | |
| 2022 | | 2021 |
| Expected dividend yield | 2.35 | % | | 3.31 | % |
| Risk-free interest rate | 2.39 | % | | 0.84 | % |
| Expected life (in years) | 7.5 | | 7.5 |
| Expected volatility | 25.04 | % | | 23.15 | % |
| Weighted-average fair value of options granted | $ | 48.45 | | | $ | 23.71 | |
Pre-tax compensation expense for share-based awards recognized in Compensation and benefits on the statements of consolidated income for the three months ended March 31, 2022 and 2021 was $386 and $315 million, respectively.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. CASH AND INVESTMENTS
The following is a summary of marketable securities classified as trading and available-for-sale as of March 31, 2022 and December 31, 2021 (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Cost | | Unrealized
Gains | | Unrealized
Losses | | Estimated
Fair Value |
| March 31, 2022: | | | | | | | |
| Current trading marketable securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Equity securities | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total trading marketable securities | 2 | | | — | | | — | | | 2 | |
| | | | | | | |
| Current available-for-sale securities: | | | | | | | |
| U.S. government and agency debt securities | 203 | | | — | | | (4) | | | 199 | |
| Mortgage and asset-backed debt securities | 6 | | | — | | | — | | | 6 | |
| Corporate debt securities | 125 | | | — | | | (3) | | | 122 | |
| U.S. state and local municipal debt securities | 5 | | | — | | | — | | | 5 | |
| | | | | | | |
| Non-U.S. government debt securities | 3 | | | — | | | — | | | 3 | |
| | | | | | | |
| | | | | | | |
| Total available-for-sale marketable securities | 342 | | | — | | | (7) | | | 335 | |
| | | | | | | |
| Total current marketable securities | $ | 344 | | | $ | — | | | $ | (7) | | | $ | 337 | |
| | | | | | | |
| | Cost | | Unrealized
Gains | | Unrealized
Losses | | Estimated
Fair Value |
| December 31, 2021: | | | | | | | |
| Current trading marketable securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Equity securities | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total trading marketable securities | 2 | | | — | | | — | | | 2 | |
| | | | | | | |
| Current available-for-sale securities: | | | | | | | |
| U.S. government and agency debt securities | 199 | | | 2 | | | (1) | | | 200 | |
| Mortgage and asset-backed debt securities | 7 | | | — | | | — | | | 7 | |
| Corporate debt securities | 121 | | | — | | | — | | | 121 | |
| U.S. state and local municipal debt securities | 5 | | | — | | | — | | | 5 | |
| | | | | | | |
| Non-U.S. government debt securities | 3 | | | — | | | — | | | 3 | |
| | | | | | | |
| | | | | | | |
| Total available-for-sale marketable securities | 335 | | | 2 | | | (1) | | | 336 | |
| | | | | | | |
| Total current marketable securities | $ | 337 | | | $ | 2 | | | $ | (1) | | | $ | 338 | |
|
Investment Impairments
We have concluded that no material impairment losses existed as of March 31, 2022. 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.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Maturity Information
The amortized cost and estimated fair value of marketable securities as of March 31, 2022 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 | $ | 34 | | | $ | 34 | |
| Due after one year through three years | 307 | | | 300 | |
| Due after three years through five years | 1 | | | 1 | |
| Due after five years | — | | | — | |
| 342 | | | 335 | |
| Equity securities | 2 | | | 2 | |
| $ | 344 | | | $ | 337 | |
Non-Current Investments and Restricted Cash
We hold an investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. The investment had a fair market value of $21 million and $23 million as of March 31, 2022 and December 31, 2021, respectively. Changes in fair value are recognized in Investment income and other in the statements of consolidated income. Additionally, we held cash in escrow related to the acquisition and disposition of certain assets of $1 million and $3 million as of March 31, 2022 and December 31, 2021, 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): | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
| Cash and cash equivalents | | $ | 12,208 | | | $ | 10,255 | | | $ | 7,731 | |
| Restricted cash | | — | | | — | | | — | |
| Total cash, cash equivalents and restricted cash | | $ | 12,208 | | | $ | 10,255 | | | 7,731 | |
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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about our investments measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Balance |
| March 31, 2022: | | | | | | | |
| Marketable Securities: | | | | | | | |
| U.S. government and agency debt securities | $ | 199 | | | $ | — | | | $ | — | | | $ | 199 | |
| Mortgage and asset-backed debt securities | — | | | 6 | | | — | | | 6 | |
| Corporate debt securities | — | | | 122 | | | — | | | 122 | |
| U.S. state and local municipal debt securities | — | | | 5 | | | — | | | 5 | |
| Equity securities | — | | | 2 | | | — | | | 2 | |
| Non-U.S. government debt securities | — | | | 3 | | | — | | | 3 | |
| | | | | | | |
| | | | | | | |
| Total marketable securities | 199 | | | 138 | | | — | | | 337 | |
| Other non-current investments | 21 | | | — | | | — | | | 21 | |
| Total | $ | 220 | | | $ | 138 | | | $ | — | | | $ | 358 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| December 31, 2021: | | | | | | | |
| Marketable Securities: | | | | | | | |
| U.S. government and agency debt securities | $ | 200 | | | $ | — | | | $ | — | | | $ | 200 | |
| Mortgage and asset-backed debt securities | — | | | 7 | | | — | | | 7 | |
| Corporate debt securities | — | | | 121 | | | — | | | 121 | |
| U.S. state and local municipal debt securities | — | | | 5 | | | — | | | 5 | |
| Equity securities | — | | | 2 | | | — | | | 2 | |
| | | | | | | |
| Non-U.S. government debt securities | — | | | 3 | | | — | | | 3 | |
| | | | | | | |
| Total marketable securities | 200 | | | 138 | | | — | | | 338 | |
| Other non-current investments | 23 | | | — | | | — | | | 23 | |
| Total | $ | 223 | | | $ | 138 | | | $ | — | | | $ | 361 | |
There were no transfers of investments between Level 1 and Level 2 during the three months ended March 31, 2022 or 2021.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of March 31, 2022 and December 31, 2021 consisted of the following (in millions): | | | | | | | | | | | |
| 2022 | | 2021 |
| Vehicles | $ | 10,083 | | | $ | 10,018 | |
| Aircraft | 22,286 | | | 21,973 | |
| Land | 2,135 | | | 2,140 | |
| Buildings | 5,865 | | | 5,802 | |
| Building and leasehold improvements | 5,004 | | | 5,010 | |
| Plant equipment | 15,715 | | | 15,650 | |
| Technology equipment | 2,848 | | | 2,798 | |
| Construction-in-progress | 1,474 | | | 1,418 | |
| 65,410 | | | 64,809 | |
| Less: Accumulated depreciation and amortization | (31,815) | | | (31,334) | |
| Property, Plant and Equipment, Net | $ | 33,595 | | | $ | 33,475 | |
Property, plant and equipment purchased on account was $511 and $248 million as of March 31, 2022 and December 31, 2021, 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 impairment charges during the three months ended March 31, 2022. We recorded impairment charges of $24 million during the three months ended March 31, 2021, due to the reevaluation of certain facility projects.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. EMPLOYEE BENEFIT PLANS
Company-Sponsored Benefit Plans
Information about the net periodic benefit (income) cost for our company-sponsored pension and postretirement benefit plans for the three months ended March 31, 2022 and 2021 is as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Benefits | | U.S. Postretirement
Medical Benefits | | International
Pension Benefits |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Three Months Ended March 31: | | | | | | | | | | | |
| Service cost | $ | 506 | | | $ | 553 | | | $ | 8 | | | $ | 7 | | | $ | 18 | | | $ | 19 | |
| Interest cost | 488 | | | 488 | | | 20 | | | 19 | | | 12 | | | 10 | |
| Expected return on assets | (820) | | | (846) | | | (1) | | | (2) | | | (20) | | | (17) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Amortization of prior service cost | 23 | | | 33 | | | — | | | 2 | | | — | | | — | |
| | | | | | | | | | | |
| Actuarial (gain) loss | — | | | (3,290) | | | — | | | — | | | — | | | — | |
| Settlement and curtailment (gain) loss | — | | | — | | | — | | | — | | | (33) | | | — | |
| Net periodic benefit (income) cost | $ | 197 | | | $ | (3,062) | | | $ | 27 | | | $ | 26 | | | $ | (23) | | | $ | 12 | |
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The components of net periodic benefit (income) cost other than current service cost are presented within Investment income and other in the statements of consolidated income.
During the first quarter of 2022, we amended the UPS Canada Ltd. Retirement Plan to cease future benefit accruals effective December 31, 2023. We remeasured plan assets and pension benefit obligations for this plan as of March 31, 2022, resulting in a curtailment gain of $33 million ($24 million after-tax). The gain is included in Investment income and other in the statements of consolidated income for the quarter ended March 31, 2022.
During the first three months of 2022, we contributed $31 and $14 million to our company-sponsored pension and U.S. postretirement medical benefit plans, respectively. We expect to contribute approximately $2.0 billion and $264 million over the remainder of the year to our pension and U.S. postretirement medical benefit plans, respectively.
Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under the terms of collective bargaining agreements that cover our union-represented employees. Our current collective bargaining agreements set forth the annual contribution increases allotted to the plans that we participate in, and we are in compliance with these contribution rates. These limitations on annual contribution rates will remain in effect throughout the terms of the existing collective bargaining agreements.
As of March 31, 2022 and December 31, 2021, we had $828 and $830 million, respectively, recorded in Other Non-Current Liabilities on our consolidated balance sheets and $8 million as of March 31, 2022 and December 31, 2021, recorded in Other current liabilities on our consolidated balance sheets associated with our previous withdrawal from the New England Teamsters and Trucking Industry Pension Fund. This liability is payable in equal monthly installments over a remaining term of approximately 41 years. Based on the borrowing rates currently available to us for long-term financing of a similar maturity, the fair value of this withdrawal liability as of March 31, 2022 and December 31, 2021 was $849 and $963 million, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.
UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 at which time UPS withdrew from the CSPF and paid a $6.1 billion withdrawal liability to satisfy our allocable share of unfunded vested benefits. 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 this withdrawal agreement, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with applicable law. The financial crisis of 2008 created extensive asset losses at the CSPF, contributing to the plan’s projected insolvency, at which time benefits would be reduced to the legally permitted Pension Benefit Guaranty Corporation ("PBGC") limits, triggering the coordination of benefits provision in the collective bargaining agreement.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 light of its financial difficulties, the CSPF had stated that it believed a legislative solution to its funded status would be necessary or that it would become insolvent in 2025, at which time benefits would be reduced to the applicable PBGC benefit levels.
We account for the potential obligation to pay coordinating benefits to the UPS Transfer Group under 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 and at interim periods when a significant event occurs. ASC 715 does not permit anticipation of changes in law when developing a best estimate.
At the December 31, 2020 measurement date, we developed our best estimate for the potential obligation to pay coordinating benefits to the UPS Transfer Group using a deterministic cash flow projection that reflected estimated CSPF cash flows and investment earnings, the lack of legislative action having been taken, the expectation of payment of guaranteed benefits by the PBGC and the lack of a benefit reduction plan under MPRA having been filed by the CSPF. As a result, our best estimate at that time of the obligation for coordinating benefits that may have been required to be directly provided by the UPS/IBT Plan to the UPS Transfer Group was $5.5 billion.
In March 2021, the American Rescue Plan Act (“ARPA”) was enacted into law. The ARPA contains provisions that allow for qualifying financially distressed multiemployer pension plans to apply for special financial assistance ("SFA") from the PBGC, which will be funded by Treasury. Following approval of an application, a qualifying multiemployer pension plan will receive a lump sum payment to enable it to continue paying unreduced benefits through 2051. The multiemployer plan is not obligated to repay the SFA. The ARPA is intended to prevent both the PBGC and certain financially distressed multiemployer pension plans, including the CSPF, from becoming insolvent through 2051. On July 9, 2021, the PBGC issued interim final regulations implementing the SFA program established under the ARPA. On April 28, 2022, the CSPF submitted an application to the PBGC for SFA. The PBGC has up to 120 days from the date of submission to review the application.
The passage of the ARPA and the expected receipt of SFA by the CSPF currently suspends our obligation to provide additional coordinating benefits to the UPS Transfer Group through 2051. These matters also triggered a plan remeasurement under ASC 715. Accordingly, we remeasured the plan assets and pension benefit obligation of the UPS/IBT Plan as of March 31, 2021 resulting in an actuarial gain of $6.4 billion, reflecting a reduction of the liability for coordinating benefits of $5.1 billion and a gain from other updated actuarial assumptions of $1.3 billion.
The future value of this estimate will continue to be influenced by a number of factors, including interpretations of the ARPA, future legislative actions, actuarial assumptions and the ability of the PBGC to sustain its commitments. Actual events may result in a change in our best estimate of the projected benefit obligation. We will continue to assess the impact of these uncertainties in accordance with ASC 715.
Collective Bargaining Agreements
We have approximately 327,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the IBT. These agreements run through July 31, 2023.
We have approximately 3,200 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 1,700 airline mechanics who are covered by a collective bargaining agreement with Teamsters Local 2727 which becomes amendable November 1, 2023. In addition, approximately 3,300 of our auto and maintenance mechanics who are not employed under agreements with the IBT 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill as of March 31, 2022 and December 31, 2021 (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Domestic
Package | | International
Package | | Supply Chain Solutions | | Consolidated |
| December 31, 2021: | $ | 847 | | | $ | 403 | | | $ | 2,442 | | | $ | 3,692 | |
| Acquired | — | | | — | | | — | | | — | |
Currency / Other | — | | | (7) | | | (17) | | | (24) | |
| March 31, 2022: | $ | 847 | | | $ | 396 | | | $ | 2,425 | | | $ | 3,668 | |
The change in goodwill for both International Package and Supply Chain Solutions was primarily due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.
The following is a summary of intangible assets as of March 31, 2022 and December 31, 2021 (in millions): | | | | | | | | | | | | | | | | | |
| Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Value |
| March 31, 2022: | | | | | |
| Capitalized software | $ | 4,950 | | | $ | (3,315) | | | $ | 1,635 | |
| Licenses | 43 | | | (18) | | | 25 | |
| Franchise rights | 118 | | | (37) | | | 81 | |
| Customer relationships | 727 | | | (423) | | | 304 | |
| Trade name | 67 | | | (3) | | | 64 | |
| Trademarks, patents and other | 157 | | | (5) | | | 152 | |
| Amortizable intangible assets | $ | 6,062 | | | $ | (3,801) | | | $ | 2,261 | |
| Indefinite-lived intangible assets | 204 | | | — | | | 204 | |
| Total Intangible Assets, Net | $ | 6,266 | | | $ | (3,801) | | | $ | 2,465 | |
| December 31, 2021: | | | | | |
| Capitalized software | $ | 4,910 | | | $ | (3,275) | | | $ | 1,635 | |
| Licenses | 58 | | | (27) | | | 31 | |
| Franchise rights | 119 | | | (37) | | | 82 | |
| Customer relationships | 733 | | | (408) | | | 325 | |
| Trade name | 67 | | | (1) | | | 66 | |
| Trademarks, patents and other | 158 | | | (15) | | | 143 | |
| Amortizable intangible assets | $ | 6,045 | | | $ | (3,763) | | | $ | 2,282 | |
| Indefinite-lived intangible assets | 204 | | | — | | | 204 | |
| Total Intangible Assets, Net | $ | 6,249 | | | $ | (3,763) | | | $ | 2,486 | |
As of March 31, 2022, we had a trade name with a carrying value of $200 million and licenses with a current carrying value of $4 million, which are deemed to be indefinite-lived intangible assets and are included in the table above. Our annual impairment testing of these assets indicated that the fair value of the trade name, which is associated with our truckload brokerage business, remained greater than its carrying value as of our July 1 testing date, although this excess was less than 10 percent. There were no events or changes in circumstances during the first quarter of 2022 that would indicate the carrying amount of our indefinite-lived intangible assets may be impaired as of the date of this report.
Impairment tests for finite-lived intangible assets are performed when a triggering event occurs that may indicate that the carrying value of the intangible asset may not be recoverable. There were no impairment charges for finite-lived intangible assets during the three months ended March 31, 2022. We recorded $6 million in impairment charges for finite-lived intangible assets during the three months ended March 31, 2021.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt obligations as of March 31, 2022 and December 31, 2021 consists of the following (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal
Amount | | | | Carrying Value | | | | | | | | |
| | Maturity | | 2022 | | 2021 | | | | | | | | |
| Commercial paper | $ | — | | | | | $ | — | | | $ | — | | | | | | | | | |
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| Fixed-rate senior notes: | | | | | | | | | | | | | | | |
2.450% senior notes | 1,000 | | | 2022 | | 1,002 | | | 1,010 | | | | | | | | | |
2.350% senior notes | 600 | | | 2022 | | 600 | | | 600 | | | | | | | | | |
2.500% senior notes | 1,000 | | | 2023 | | 999 | | | 998 | | | | | | | | | |
2.800% senior notes | 500 | | | 2024 | | 498 | | | 498 | | | | | | | | | |
2.200% senior notes | 400 | | | 2024 | | 399 | | | 399 | | | | | | | | | |
3.900% senior notes | 1,000 | | | 2025 | | 996 | | | 996 | | | | | | | | | |
2.400% senior notes | 500 | | | 2026 | | 499 | | | 498 | | | | | | | | | |
3.050% senior notes | 1,000 | | | 2027 | | 994 | | | 994 | | | | | | | | | |
3.400% senior notes | 750 | | | 2029 | | 746 | | | 746 | | | | | | | | | |
2.500% senior notes | 400 | | | 2029 | | 397 | | | 397 | | | | | | | | | |
4.450% senior notes | 750 | | | 2030 | | 744 | | | 744 | | | | | | | | | |
6.200% senior notes | 1,500 | | | 2038 | | 1,484 | | | 1,484 | | | | | | | | | |
5.200% senior notes | 500 | | | 2040 | | 494 | | | 494 | | | | | | | | | |
4.875% senior notes | 500 | | | 2040 | | 491 | | | 491 | | | | | | | | | |
3.625% senior notes | 375 | | | 2042 | | 368 | | | 368 | | | | | | | | | |
3.400% senior notes | 500 | | | 2046 | | 492 | | | 492 | | | | | | | | | |
3.750% senior notes | 1,150 | | | 2047 | | 1,137 | | | 1,137 | | | | | | | | | |
4.250% senior notes | 750 | | | 2049 | | 743 | | | 743 | | | | | | | | | |
3.400% senior notes | 700 | | | 2049 | | 688 | | | 688 | | | | | | | | | |
5.300% senior notes | 1,250 | | | 2050 | | 1,231 | | | 1,231 | | | | | | | | | |
| Floating-rate senior notes: | | | | | | | | | | | | | | | |
| Floating-rate senior notes | 400 | | | 2022 | | 400 | | | 400 | | | | | | | | | |
| Floating-rate senior notes | 500 | | | 2023 | | 500 | | | 500 | | | | | | | | | |
| Floating-rate senior notes | 1,039 | | | 2049-2067 | | 1,027 | | | 1,027 | | | | | | | | | |
| Debentures: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
7.620% debentures | 276 | | | 2030 | | 280 | | | 280 | | | | | | | | | |
| Pound Sterling Notes: | | | | | | | | | | | | | | | |
5.500% notes | 87 | | | 2031 | | 86 | | | 89 | | | | | | | | | |
5.125% notes | 596 | | | 2050 | | 566 | | | 583 | | | | | | | | | |
| Euro Senior Notes: | | | | | | | | | | | | | | | |
0.375% senior notes | 776 | | | 2023 | | 774 | | | 791 | | | | | | | | | |
1.625% senior notes | 776 | | | 2025 | | 773 | | | 791 | | | | | | | | | |
1.000% senior notes | 554 | | | 2028 | | 551 | | | 564 | | | | | | | | | |
1.500% senior notes | 554 | | | 2032 | | 551 | | | 564 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Canadian senior notes: | | | | | | | | | | | | | | | |
2.125% senior notes | 601 | | | 2024 | | 600 | | | 585 | | | | | | | | | |
| Finance lease obligations | 448 | | | 2022-2062 | | 448 | | | 408 | | | | | | | | | |
| Facility notes and bonds | 320 | | | 2029-2045 | | 320 | | | 320 | | | | | | | | | |
| Other debt | 3 | | | 2022-2025 | | 3 | | | 5 | | | | | | | | | |
| Total debt | $ | 22,055 | | | | | 21,881 | | | 21,915 | | | | | | | | | |
| Less: current maturities | | | | | (2,141) | | | (2,131) | | | | | | | | | |
| Long-term debt | | | | | $ | 19,740 | | | $ | 19,784 | | | | | | | | | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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 March 31, 2022, we had no outstanding balances under our commercial paper programs.
Debt Classification
We have classified certain floating-rate senior notes that are redeemable at the option of the note holder as long-term liabilities on our consolidated balance sheets, due to our intent and ability to refinance the debt if the put option is exercised.
Reference Rate Reform
Our floating-rate senior notes with maturities ranging from 2049 through 2067 bear interest at rates that reference the London Interbank Offer Rate ("LIBOR") for U.S. Dollars. As part of a broader program of reference rate reform, it is expected that U.S. Dollar LIBOR rates will cease to be published after June 2023. We are currently working to transition these notes to an alternative reference rate, and we anticipate that the Secured Overnight Financing Rate ("SOFR") will be adopted in accordance with recommendations of the Alternative Reference Rates Committee.
Sources of Credit
We maintain two credit agreements with a consortium of banks. The first of these agreements provides revolving credit facilities of $1.0 billion, and expires on December 6, 2022. Amounts outstanding under this agreement bear interest at a periodic fixed rate equal to the term SOFR rate, plus0.10% per annum and an applicable margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of March 31, 2022 was 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) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%, may be used at our discretion.
The second agreement provides revolving credit facilities of $2.0 billion, and expires on December 7, 2026. Amounts outstanding under this facility bear interest at a periodic fixed rate equal to the term SOFR rate plus 0.10% per annum and an applicable margin based on our then-current credit rating. The applicable margin from the credit pricing grid as of March 31, 2022 was 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) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%, plus an applicable margin, may be used at our discretion.
If the credit ratings established by Standard & Poors and Moody's differ, the higher rating will be used, except in cases where the lower rating is two or more levels lower. In these circumstances, the rating one step below the higher rating will be used. 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 March 31, 2022.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of March 31, 2022, 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 March 31, 2022, 10% of net tangible assets was equivalent to $4.7 billion and we had 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, was approximately $23.3 and $25.1 billion as of March 31, 2022 and December 31, 2021, 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. 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.
We recognize a right-of-use ("ROU") asset and lease obligation for all leases greater than twelve months. 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.
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 138 years.
Aircraft
In addition to the aircraft that we own, we have leases for 317 aircraft. Of these leased aircraft, 21 are classified as finance leases, 18 are classified as operating leases and the remaining 278 are classified as short-term leases. A majority of the obligations associated with the aircraft classified as finance leases have been legally defeased. A majority 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 UNAUDITED 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 three months ended March 31, 2022 and 2021 were as follows (in millions): | | | | | | | | | | | | | | | | | |
| | | | | 2022 | | 2021 |
| Operating lease costs | | | | | $ | 183 | | | $ | 175 | |
| Finance lease costs: | | | | | | | |
| Amortization of assets | | | | | 28 | | | 23 | |
| Interest on lease liabilities | | | | | 4 | | | 4 | |
| Total finance lease costs | | | | | 32 | | | 27 | |
| Variable lease costs | | | | | 68 | | | 65 | |
| Short-term lease costs | | | | | 302 | | | 279 | |
| Total lease costs | | | | | $ | 585 | | | $ | 546 | |
In addition to the lease costs disclosed in the table above, we monitor all lease categories for any indicators that the carrying value of the assets may not be recoverable. There were no impairments recognized during the three months ended March 31, 2022 and 2021.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental information related to leases and location within our consolidated balance sheets are as follows (in millions, except lease term and discount rate): | | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| Operating Leases: | | | |
| Operating lease right-of-use assets | $ | 3,481 | | | $ | 3,562 | |
| | | |
| Current maturities of operating leases | $ | 579 | | | $ | 580 | |
| Non-current operating leases | 2,970 | | | 3,033 | |
| Total operating lease obligations | $ | 3,549 | | | $ | 3,613 | |
| | | |
| Finance Leases: | | | |
| Property, plant and equipment, net | $ | 1,134 | | | $ | 1,225 | |
| | | |
| Current maturities of long-term debt, commercial paper and finance leases | $ | 140 | | | $ | 129 | |
| Long-term debt and finance leases | 308 | | | 279 | |
| Total finance lease obligations | $ | 448 | | | $ | 408 | |
| | | |
| Weighted average remaining lease term (in years): | | | |
| Operating leases | 11.5 | | 11.7 |
| Finance leases | 7.6 | | 8.0 |
| | | |
| Weighted average discount rate: | | | |
| Operating leases | 1.95 | % | | 1.94 | % |
| Finance leases | 2.71 | % | | 2.79 | % |
Supplemental cash flow information related to leases is as follows (in millions): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Cash paid for amounts included in measurement of obligations: | | | |
| Operating cash flows from operating leases | $ | 176 | | | $ | 171 | |
| Operating cash flows from finance leases | 1 | | | 1 | |
| Financing cash flows from finance leases | 18 | | | 13 | |
| | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | |
| Operating leases | $ | 119 | | | $ | 174 | |
| Finance leases | 59 | | | 23 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease obligations as of March 31, 2022 are as follows (in millions): | | | | | | | | | | | |
| Finance Leases | | Operating Leases |
| 2022 | $ | 137 | | | $ | 478 | |
| 2023 | 76 | | | 595 | |
| 2024 | 52 | | | 497 | |
| 2025 | 39 | | | 441 | |
| 2026 | 33 | | | 395 | |
| Thereafter | 197 | | | 1,663 | |
| Total lease payments | 534 | | | 4,069 | |
| Less: Imputed interest | (86) | | | (520) | |
| Total lease obligations | 448 | | | 3,549 | |
| Less: Current obligations | (140) | | | (579) | |
| Long-term lease obligations | $ | 308 | | | $ | 2,970 | |
As of March 31, 2022, we had $347 million of additional leases which had not commenced. These leases will commence between 2022 and 2023 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. 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 assurances 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' appeal of this decision was denied; however, in the second quarter of 2022 the plaintiffs were granted discretionary review of these claims by the Kentucky Supreme Court.
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 International Commercial Air contracts. We cooperated with the DOJ in connection with its inquiry and, in the first quarter of 2022, resolved this matter for an immaterial amount.
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, we received a Statement of Objections issued by the CNMC. In July 2017, we 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. We 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 November 2021, the Environmental Protection Agency (the "EPA") sent us an information request related to hazardous waste regulatory compliance at certain of our facilities. The EPA has indicated that it is investigating potential recordkeeping violations of the Resource Conservation and Recovery Act at those facilities. We are cooperating with the EPA. 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 the EPA as a result of this request.
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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SHAREOWNERS' EQUITY
Capital Stock, Additional Paid-In Capital, Retained Earnings and Non-Controlling Minority Interests
We are authorized to issue two classes of common stock, which are distinguished from each other primarily 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 NYSE under the symbol “UPS”. Class A and B shares both have a $0.01 par value, and as of March 31, 2022, 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 March 31, 2022, 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 three months ended March 31, 2022 and 2021 (in millions, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| | Shares | | Dollars | | Shares | | Dollars |
| Class A Common Stock: | | | | | | | |
| Balance at beginning of period | 138 | | | $ | 2 | | | 147 | | | $ | 2 | |
| Common stock purchases | — | | | | | — | | | — | |
| Stock award plans | 4 | | | | | 4 | | | — | |
| Common stock issuances | 1 | | | | | 1 | | | — | |
| Conversions of class A to class B common stock | (3) | | | | | (4) | | | — | |
| Class A shares outstanding at end of period | 140 | | | $ | 2 | | | 148 | | | $ | 2 | |
| Class B Common Stock: | | | | | | | |
| Balance at beginning of period | 732 | | | $ | 7 | | | 718 | | | $ | 7 | |
| Common stock purchases | (1) | | | | | — | | | — | |
| Conversions of class A to class B common stock | 3 | | | | | 4 | | | — | |
| Class B shares outstanding at end of period | 734 | | | $ | 7 | | | 722 | | | $ | 7 | |
| Additional Paid-In Capital: | | | | | | | |
| Balance at beginning of period | | | $ | 1,343 | | | | | $ | 865 | |
| Common stock purchases | | | (260) | | | | | — | |
| Stock award plans | | | (35) | | | | | 30 | |
| Common stock issuances | | | 183 | | | | | 154 | |
| | | | | | | |
| | | | | | |
| Balance at end of period | | | $ | 1,231 | | | | | $ | 1,049 | |
| Retained Earnings: | | | | | | | |
| Balance at beginning of period | | | $ | 16,179 | | | | | $ | 6,896 | |
| Net income attributable to controlling interests | | | 2,662 | | | | | 4,792 | |
Dividends ($1.52 and $1.02 per share) (1) | | | (1,406) | | | | | (938) | |
| | | | | | | |
| | | | | | | |
| Other | | | (2) | | | | | (2) | |
| Balance at end of period | | | $ | 17,433 | | | | | $ | 10,748 | |
| Non-Controlling Interests: | | | | | | | |
| Balance at beginning of period | | | $ | 16 | | | | | $ | 12 | |
| Change in non-controlling interest | | | 2 | | | | | — | |
| Balance at end of period | | | $ | 18 | | | | | $ | 12 | |
(1) The dividend per share amount is the same for both class A and class B common stock. Dividends include $122 and $80 million as of March 31, 2022 and 2021, respectively, that were settled in shares of class A common stock. |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In August 2021, the Board of Directors approved a share repurchase authorization for $5.0 billion of class A and class B common stock. During the first quarter of 2022, we repurchased 1.2 million shares of class B common stock for $260 million under this program ($254 million in repurchases is reported on the statement of consolidated cash flows due to the timing of settlements). As of March 31, 2022, we had $4.2 billion of our share repurchase authorization available. We anticipate our share repurchases will be approximately $2.0 billion for all of 2022.
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 of Directors, this program will expire when we have purchased all shares authorized for repurchase under the program.
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.
Accumulated Other Comprehensive Income (Loss)
We recognize activity in other comprehensive income 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 accumulated other comprehensive income for the three months ended March 31, 2022 and 2021 was as follows (in millions):
| | | | | | | | | | | |
| Three Months Ended March 31: | 2022 | | 2021 |
| Foreign currency translation gain (loss), net of tax: | | | |
| Balance at beginning of period | $ | (1,162) | | | $ | (981) | |
| | | |
Translation adjustment (net of tax effect of $0 and $30) | (40) | | | (82) | |
| | | |
| Balance at end of period | (1,202) | | | (1,063) | |
| Unrealized gain (loss) on marketable securities, net of tax: | | | |
| Balance at beginning of period | (1) | | | 6 | |
Current period changes in fair value (net of tax effect of $(2) and $0) | (6) | | | (1) | |
| | | |
Reclassification to earnings (net of tax effect of $0 and $0) | — | | | (3) | |
| Balance at end of period | (7) | | | 2 | |
| Unrealized gain (loss) on cash flow hedges, net of tax: | | | |
| Balance at beginning of period | (17) | | | (223) | |
Current period changes in fair value (net of tax effect of $23 and $39) | 72 | | | 124 | |
| | | |
Reclassification to earnings (net of tax effect of $(9) and $(3)) | (29) | | | (10) | |
| Balance at end of period | 26 | | | (109) | |
| Unrecognized pension and postretirement benefit costs, net of tax: | | | |
| Balance at beginning of period | (2,098) | | | (5,915) | |
Net actuarial gain (loss) resulting from remeasurements of plan assets and liabilities (net of tax effect of $11 and $1,544) | 31 | | | 4,901 | |
Reclassification to earnings (net of tax effect of $(3) and $(780)) | (7) | | | (2,475) | |
| | | |
| Balance at end of period | (2,074) | | | (3,489) | |
| Accumulated other comprehensive income (loss) at end of period | $ | (3,257) | | | $ | (4,659) | |
| | | |
|
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the three months ended March 31, 2022 and 2021 is as follows (in millions): | | | | | | | | | | | | | | | | | |
| Amount Reclassified from AOCI | | Affected Line Item in the Income Statement |
| Three Months Ended March 31: | 2022 | | 2021 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Unrealized gain (loss) on marketable securities: | | | | | |
| Realized gain (loss) on sale of securities | $ | — | | | $ | 3 | | | Investment income and other |
| Income tax (expense) benefit | — | | | — | | | Income tax expense |
| Impact on net income | — | | | 3 | | | Net income |
| Unrealized gain (loss) on cash flow hedges: | | | | | |
| Interest rate contracts | (3) | | | (2) | | | Interest expense |
| Foreign currency exchange contracts | 41 | | | 15 | | | Revenue |
| | | | | |
| | | | | |
| Income tax (expense) benefit | (9) | | | (3) | | | Income tax expense |
| Impact on net income | 29 | | | 10 | | | Net income |
| Unrecognized pension and postretirement benefit costs: | | | | | |
| Prior service costs | (23) | | | (35) | | | Investment income and other |
| | | | | |
| | | | | |
| Remeasurement of benefit obligation | — | | | 3,290 | | | Investment income and other |
| Curtailment of benefit obligation | 33 | | | — | | | Investment income and other |
| Income tax (expense) benefit | (3) | | | (780) | | | Income tax expense |
| Impact on net income | 7 | | | 2,475 | | | Net income |
| | | | | |
| Total amount reclassified for the period | $ | 36 | | | $ | 2,488 | | | 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 three months ended March 31, 2022 and 2021 was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| 2022 | | 2021 |
| Three Months Ended March 31: | Shares | | Dollars | | Shares | | Dollars |
| Deferred Compensation Obligations: | | | | | | | |
| Balance at beginning of period | | | $ | 16 | | | | | $ | 20 | |
| Reinvested dividends | | | — | | | | | — | |
| Benefit payments | | | (4) | | | | | (5) | |
| Balance at end of period | | | $ | 12 | | | | | $ | 15 | |
| Treasury Stock: | | | | | | | |
| Balance at beginning of period | — | | | $ | (16) | | | — | | | $ | (20) | |
| Reinvested dividends | — | | | — | | | — | | | — | |
| Benefit payments | — | | | 4 | | | — | | | 5 | |
| Balance at end of period | — | | | $ | (12) | | | — | | | $ | (15) | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SEGMENT INFORMATION
We have two reportable segments: U.S. Domestic Package and International Package, which are together referred to as our global small package operations. Our remaining businesses are reported as Supply Chain Solutions. Global small 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. Supply Chain Solutions comprises the results of non-reportable operating segments that do not meet the quantitative and qualitative criteria of a reportable segment as defined under ASC Topic 280 – Segment Reporting.
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 Indian Sub-Continent, Middle East and Africa.
Supply Chain Solutions
Supply Chain Solutions includes our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations and other businesses. 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. 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 businesses within this segment include The UPS Store, UPS Capital and Roadie. UPS Freight was included within this segment until its divestiture in the second quarter of 2021.
In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income and other, interest expense and income tax expense. Certain expenses are allocated between the segments using activity-based costing methods that require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates would directly impact the expense allocated to each segment, and therefore the operating profit of each reporting segment. We periodically refine our allocation methodologies to reflect changes in our business.
Results of operations for the three months ended March 31, 2022 and 2021 are as follows (in millions):
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2022 | | 2021 |
| Revenue: | | | | | | | |
| U.S. Domestic Package | | | | | $ | 15,124 | | | $ | 14,010 | |
| International Package | | | | | 4,876 | | | 4,607 | |
| Supply Chain Solutions | | | | | 4,378 | | | 4,291 | |
| Consolidated revenue | | | | | $ | 24,378 | | | $ | 22,908 | |
| Operating Profit: | | | | | | | |
| U.S. Domestic Package | | | | | $ | 1,662 | | | $ | 1,359 | |
| International Package | | | | | 1,116 | | | 1,085 | |
| Supply Chain Solutions | | | | | 473 | | | 321 | |
| Consolidated operating profit | | | | | $ | 3,251 | | | $ | 2,765 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. 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 for the three months ended March 31, 2022 and 2021 (in millions, except per share amounts): | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | 2022 | | 2021 |
| Numerator: | | | | | | | |
| Net income attributable to common shareowners | | | | | $ | 2,662 | | $ | 4,792 |
| Denominator: | | | | | | | |
| Weighted average shares | | | | | 871 | | 867 |
| | | | | | | |
| Vested portion of restricted units | | | | | 3 | | 5 |
| Denominator for basic earnings per share | | | | | 874 | | 872 |
| Effect of dilutive securities: | | | | | | | |
| Restricted units | | | | | 4 | | 3 |
| Stock options | | | | | 1 | | 1 |
| Denominator for diluted earnings per share | | | | | 879 | | 876 |
| Basic earnings per share | | | | | $ | 3.05 | | $ | 5.50 |
| Diluted earnings per share | | | | | $ | 3.03 | | $ | 5.47 |
Diluted earnings per share for the three months ended March 31, 2022 and 2021 excluded the effect of 0.1 and 0.2 million shares of common stock, respectively, that may be issued upon the exercise of employee stock options because such effect would have been antidilutive.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. 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.
As of March 31, 2022 and December 31, 2021, we had agreements with all of our active counterparties (covering all of our derivative positions) which contained 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 March 31, 2022 and December 31, 2021, we held cash collateral of $253 and $260 million, respectively, under these agreements. This collateral is included in Cash and cash equivalents in the consolidated balance sheets and our use of it is not restricted. As of March 31, 2022, we were required to post $2 million of cash collateral with our counterparties. As of December 31, 2021, 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.
Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply to our domestic and international package 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 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 and other when the underlying transactions are subject to currency remeasurement.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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 other comprehensive income to offset the translation risk from those investments. Balances in the foreign currency 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 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 other comprehensive income.
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
As of March 31, 2022 and December 31, 2021, the notional amounts of our outstanding derivative positions were as follows (in millions): | | | | | | | | | | | | | | |
| | | March 31, 2022 | | December 31, 2021 |
| Currency hedges: | | | | |
| Euro | EUR | 4,215 | | | 4,257 | |
| British Pound Sterling | GBP | 1,394 | | | 1,402 | |
| Canadian Dollar | CAD | 1,672 | | | 1,633 | |
| Hong Kong Dollar | HKD | 4,286 | | | 4,033 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Interest rate hedges: | | | | |
| Fixed to Floating Interest Rate Swaps | USD | 1,000 | | | 1,000 | |
| Floating to Fixed Interest Rate Swaps | USD | 28 | | | 28 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
As of March 31, 2022 and December 31, 2021, we had no outstanding commodity hedge positions.
Our fixed to floating interest rate swaps are designated as a fair value hedge of our 2.450% fixed rate notes that mature in October 2022. These instruments utilize LIBOR as the reference rate to determine the floating interest rate to be paid. As these instruments will settle before the applicable U.S. Dollar LIBOR rate ceases to be published in June 2023, we have not evaluated the application of ASC Topic 848 to these instruments.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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 March 31, 2022 and December 31, 2021 (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 | | | March 31,
2022 | | December 31,
2021 | | March 31,
2022 | | December 31,
2021 |
| Derivatives designated as hedges: | | | | | | | | | | | | |
| Foreign currency exchange contracts | | Other current assets | | Level 2 | | $ | 128 | | | $ | 100 | | | $ | 109 | | | $ | 82 | |
| Interest rate contracts | | Other current assets | | Level 2 | | 3 | | | 11 | | | 3 | | | 11 | |
| | | | | | | | | | | | |
| Foreign currency exchange contracts | | Other non-current assets | | Level 2 | | 148 | | | 123 | | | 114 | | | 90 | |
| | | | | | | | | | | | |
| Derivatives not designated as hedges: | | | | | | | | | | | | |
| Foreign currency exchange contracts | | Other current assets | | Level 2 | | 1 | | | 2 | | | 1 | | | 2 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total Asset Derivatives | | | | | | $ | 280 | | | $ | 236 | | | $ | 227 | | | $ | 185 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | | | March 31,
2022 | | December 31,
2021 | | March 31,
2022 | | December 31,
2021 |
| Derivatives designated as hedges: | | | | | | | | | | | | |
| Foreign currency exchange contracts | | Other current liabilities | | Level 2 | | $ | 19 | | | $ | 19 | | | $ | — | | | $ | 1 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Foreign currency exchange contracts | | Other non-current liabilities | | Level 2 | | 34 | | | 33 | | | — | | | — | |
| Interest rate contracts | | Other non-current liabilities | | Level 2 | | 8 | | | 10 | | | 8 | | | 10 | |
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| Total Liability Derivatives | | | | | | $ | 61 | | | $ | 62 | | | $ | 8 | | | $ | 11 | |
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 March 31, 2022 and December 31, 2021 we did not have any derivatives that were classified as Level 1 or Level 3 within the fair value hierarchy.
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 March 31, 2022 and December 31, 2021 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| March 31, 2022 | | March 31, 2022 | | December 31, 2021 | | December 31, 2021 |
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| Long-term debt and finance leases | | $ | 1,282 | | | $ | 8 | | | $ | 1,290 | | | $ | 16 | |
The cumulative amount of fair value hedging losses remaining for any hedged assets and liabilities for which hedge accounting has been discontinued as of March 31, 2022 is $5 million. These amounts will be recognized over the next 8 years.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 three months ended March 31, 2022 and 2021 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| 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 | | | $ | — | | | $ | — | | | $ | 6 | | | $ | — | |
| Derivatives designated as hedging instruments | | — | | | (8) | | | — | | | — | | | (6) | | | — | |
| Gain or (loss) on cash flow hedging relationships: | | | | | | | | | | | | |
| Interest Contracts: | | | | | | | | | | | | |
| Amount of gain or (loss) reclassified from accumulated other comprehensive income | | — | | | (3) | | | — | | | — | | | (2) | | | — | |
| Foreign Currency Exchange Contracts: | | | | | | | | | | | | |
| Amount of gain or (loss) reclassified from accumulated other comprehensive income | | 41 | | | — | | | — | | | 15 | | | — | | | — | |
| 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 | | $ | 41 | | | $ | (3) | | | $ | — | | | $ | 15 | | | $ | (2) | | | $ | — | |
The following table indicates the amount of gains and (losses) that have been recognized in AOCI for the three months ended March 31, 2022 and 2021 for those derivatives designated as cash flow hedges (in millions):
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| Three Months Ended March 31: | | | | | | | | | | |
| Derivative Instruments in Cash Flow Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Derivatives | | | | | | |
| 2022 | | 2021 | | | | | | |
| Interest rate contracts | | $ | 3 | | | $ | 3 | | | | | | | |
| Foreign currency exchange contracts | | 92 | | | 160 | | | | | | | |
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| Total | | $ | 95 | | | $ | 163 | | | | | | | |
As of March 31, 2022, there were $99 million of unrealized 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 March 31, 2023. 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 10 years.
The following table indicates the amount of gains and (losses) that have been recognized in AOCI within foreign currency translation adjustment for the three months ended March 31, 2022 and 2021 for those instruments designated as net investment hedges (in millions):
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| Three Months Ended March 31: | | | | |
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| Non-derivative Instruments in Net Investment Hedging Relationships | | Amount of Gain (Loss) Recognized in AOCI on Debt |
| 2022 | | 2021 |
| Foreign denominated debt | | $ | 46 | | | $ | 124 | |
| Total | | $ | 46 | | | $ | 124 | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Additionally, we maintain foreign currency exchange forward contracts that are not designated as hedges. 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.
We also periodically terminate foreign currency exchange forward contracts by entering into offsetting foreign currency exchange positions with different counterparties. As part of this process, we de-designate our original 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 foreign currency exchange forward contracts not designated as hedges for the three months ended March 31, 2022 and 2021 (in millions):
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| Three Months Ended March 31: | | | | | | |
Derivative Instruments Not Designated in
Hedging Relationships | | Location of Gain (Loss)
Recognized in Income | | Amount of Gain (Loss) Recognized in Income |
| | 2022 | | 2021 |
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| Foreign currency exchange contracts | | Investment income and other | | $ | (28) | | | $ | (6) | |
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| Total | | | | $ | (28) | | | $ | (6) | |
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. INCOME TAXES
Our effective tax rate for the three months ended March 31, 2022 was approximately 21.5% compared with 22.8% in the same period of 2021. The recognition in income tax of excess tax benefits related to share-based compensation reduced our effective rate by 2.4% for the quarter compared to 1.1% in the same period of 2021. Other items that impacted our effective tax rate in the first quarter of 2022 compared to 2021 included unfavorable changes in uncertain tax positions and favorable changes in our jurisdictional earnings mix.
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, we have recognized liabilities for uncertain tax positions and we reevaluate these uncertain tax positions on a quarterly basis. 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 amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months, however, an estimate of the range of reasonably possible outcomes cannot be made. Items that may cause changes to unrecognized tax benefits 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 statutes of limitations or other unforeseen circumstances.
In the first quarter of 2022, we recognized an immaterial income tax expense related to a pre-tax curtailment gain of $33 million on the UPS Canada Ltd. Retirement Plan. This income tax expense was generated at a higher average tax rate than the U.S. federal statutory tax rate because it included the effect of foreign taxes.
In the first quarter of 2021, we recognized an income tax expense of $788 million related to a pre-tax mark-to-market gain of $3.3 billion on the UPS/IBT Full-Time Employee Pension Plan. This income tax expense was generated at a higher average tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.
As discussed in note 17, we recognized pre-tax transformation strategy costs of $55 million in the first quarter of 2022 compared to $118 million in the same period of 2021. As a result, we recorded an income tax benefit of $12 million in the first quarter compared to $28 million in the same period of 2021. The income tax benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate primarily due to the effect of U.S. state and local taxes and foreign taxes. The 2021 benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate primarily due to the effect of U.S. state and local taxes and foreign taxes.
We recorded a pre-tax valuation allowance against assets held for sale of $66 million during the first quarter of 2021, resulting in an additional income tax benefit of $16 million. This income tax benefit was generated at a higher average tax rate than the U.S. federal statutory tax rate due to the effect of U.S. state and local taxes.
Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which was effective through December 31, 2021. During the first quarter of 2022, the tax incentive was renegotiated and extended. The tax incentive is conditioned upon our meeting specific employment and investment thresholds, which we expect to meet. The impact of the tax incentive did not significantly change our effective tax rate for the first quarter of 2022 compared to the first quarter of 2021.
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. TRANSFORMATION STRATEGY COSTS
In 2018, we launched a multi-year, enterprise-wide transformation strategy impacting our organization. The program includes investments, as well as changes in processes and technology, that impact global direct and indirect operating costs.
The table below presents transformation strategy costs for the three months ended March 31, 2022 and 2021 (in millions): | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2022 | | 2021 | | | | |
| Transformation Strategy Costs: | | | | | | | |
| Compensation and benefits | $ | 33 | | | $ | 76 | | | | | |
| Total other expenses | 22 | | | 42 | | | | | |
| Total Transformation Strategy Costs | $ | 55 | | | $ | 118 | | | | | |
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| Income Tax Benefit from Transformation Strategy Costs | (12) | | | (28) | | | | | |
| After Tax Transformation Strategy Costs | $ | 43 | | | $ | 90 | | | | | |
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.