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SEC Filings


10-Q
UNITED PARCEL SERVICE INC filed this Form 10-Q on 11/02/2012
Entire Document
 
UPS-9.30.2012-10Q
United States
Securities and Exchange Commission
Washington, D.C. 20549
_____________________________________ 
Form 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012, or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-15451
_____________________________________ 
United Parcel Service, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
58-2480149
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
55 Glenlake Parkway, NE Atlanta, Georgia
 
30328
(Address of Principal Executive Offices)
 
(Zip Code)
(404) 828-6000
(Registrant’s telephone number, including area code)
_____________________________________   

Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer  þ Accelerated filer  ¨ Non-accelerated filer  ¨    (Do not check if a smaller reporting company) Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
There were 230,434,603 Class A shares, and 723,576,134 Class B shares, with a par value of $0.01 per share, outstanding at October 25, 2012.



UNITED PARCEL SERVICE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2012
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
PART II—OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 5.
Item 6.



PART I. FINANCIAL INFORMATION

Cautionary Statement About Forward-Looking Statements
This report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in the future tense, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan,” and variations thereof and similar terms are intended to be forward-looking statements. We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Our disclosure and analysis in this report, in our Annual Report on Form 10-K for the year ended December 31, 2011 and in our other filings with the Securities and Exchange Commission contain some forward-looking statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results. From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties are described in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011 and may also be described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements.

1


Item 1. Financial Statements
UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2012 (unaudited) and December 31, 2011
(In millions)
 
 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
8,430

 
$
3,034

Marketable securities
586

 
1,241

Accounts receivable, net
5,545

 
6,246

Deferred income tax assets
569

 
611

Other current assets
1,214

 
1,152

Total Current Assets
16,344

 
12,284

Property, Plant and Equipment, Net
17,829

 
17,621

Goodwill
2,170

 
2,101

Intangible Assets, Net
614

 
585

Non-Current Investments and Restricted Cash
305

 
303

Other Non-Current Assets
1,802

 
1,807

Total Assets
$
39,064

 
$
34,701

LIABILITIES AND SHAREOWNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt and commercial paper
$
3,859

 
$
33

Accounts payable
1,863

 
2,300

Accrued wages and withholdings
1,839

 
1,843

Self-insurance reserves
857

 
781

Income taxes payable
391

 
146

Other current liabilities
1,480

 
1,411

Total Current Liabilities
10,289

 
6,514

Long-Term Debt
11,148

 
11,095

Pension and Postretirement Benefit Obligations
5,213

 
5,505

Deferred Income Tax Liabilities
1,332

 
1,900

Self-Insurance Reserves
1,871

 
1,806

Other Non-Current Liabilities
1,597

 
773

Shareowners’ Equity:
 
 
 
Class A common stock (231 and 240 shares issued in 2012 and 2011)
3

 
3

Class B common stock (723 and 725 shares issued in 2012 and 2011)
7

 
7

Additional paid-in capital

 

Retained earnings
10,448

 
10,128

Accumulated other comprehensive loss
(2,929
)
 
(3,103
)
Deferred compensation obligations
77

 
88

Less: Treasury stock (2 shares in 2012 and 2011)
(77
)
 
(88
)
Total Equity for Controlling Interests
7,529

 
7,035

Total Equity for Non-Controlling Interests
85

 
73

Total Shareowners’ Equity
7,614

 
7,108

Total Liabilities and Shareowners’ Equity
$
39,064

 
$
34,701


See notes to unaudited consolidated financial statements.

2


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In millions, except per share amounts)
(unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2012
 
2011
 
2012
 
2011
Revenue
$
13,071

 
$
13,166

 
$
39,556

 
$
38,939

Operating Expenses:
 
 
 
 
 
 
 
Compensation and benefits
7,577

 
6,647

 
21,159

 
19,845

Repairs and maintenance
306

 
324

 
911

 
956

Depreciation and amortization
464

 
447

 
1,382

 
1,331

Purchased transportation
1,743

 
1,796

 
5,193

 
5,206

Fuel
969

 
1,015

 
3,008

 
2,980

Other occupancy
220

 
229

 
670

 
715

Other expenses
1,026

 
1,042

 
3,108

 
3,023

Total Operating Expenses
12,305

 
11,500

 
35,431

 
34,056

Operating Profit
766

 
1,666

 
4,125

 
4,883

Other Income and (Expense):
 
 
 
 
 
 
 
Investment income
6

 
16

 
18

 
36

Interest expense
(98
)

(84
)
 
(284
)
 
(252
)
Total Other Income and (Expense)
(92
)
 
(68
)
 
(266
)
 
(216
)
Income Before Income Taxes
674

 
1,598

 
3,859

 
4,667

Income Tax Expense
205

 
526

 
1,304

 
1,588

Net Income
$
469

 
$
1,072

 
$
2,555

 
$
3,079

Basic Earnings Per Share
$
0.49

 
$
1.10

 
$
2.66

 
$
3.12

Diluted Earnings Per Share
$
0.48

 
$
1.09

 
$
2.63

 
$
3.09


STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions)
(unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
469

 
$
1,072

 
$
2,555

 
$
3,079

Change in foreign currency translation adjustment, net of tax
243

 
(179
)
 
176

 
(47
)
Change in unrealized gain (loss) on marketable securities, net of tax
1

 
2

 
2

 
(5
)
Change in unrealized gain (loss) on cash flow hedges, net of tax
(8
)
 
39

 
(92
)
 
(29
)
Change in unrecognized pension and postretirement benefit costs, net of tax
27

 
45

 
88

 
147

Comprehensive income
$
732

 
$
979

 
$
2,729

 
$
3,145

See notes to unaudited consolidated financial statements.

3


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions)
(unaudited)
 
 
Nine Months Ended
September 30,
 
2012
 
2011
Cash Flows From Operating Activities:
 
 
 
Net income
$
2,555

 
$
3,079

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
1,382

 
1,331

Pension and postretirement benefit expense
709

 
628

Pension and postretirement benefit contributions
(864
)
 
(1,397
)
Self-insurance reserves
141

 
44

Deferred taxes, credits and other
330

 
387

Stock compensation expense
421

 
402

Other (gains) losses
162

 
160

Changes in assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable
468

 
177

Other current assets
(47
)
 
185

Accounts payable
(279
)
 
(67
)
Accrued wages and withholdings
13

 
367

Other current liabilities
196

 
88

Other operating activities
(84
)
 
(22
)
Net cash from operating activities
5,103

 
5,362

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(1,603
)
 
(1,557
)
Proceeds from disposals of property, plant and equipment
61

 
29

Purchases of marketable securities
(2,256
)
 
(3,830
)
Sales and maturities of marketable securities
2,901

 
3,357

Net decrease in finance receivables
56

 
128

Cash paid for business acquisitions
(100
)
 

Other investing activities
34

 
(243
)
Net cash used in investing activities
(907
)
 
(2,116
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term debt
2,075

 
1,110

Proceeds from long-term borrowings
1,741

 
277

Repayments of long-term borrowings
(8
)
 
(180
)
Purchases of common stock
(1,402
)
 
(2,173
)
Issuances of common stock
253

 
220

Dividends
(1,600
)
 
(1,500
)
Other financing activities
8

 
(238
)
Net cash provided by (used in) financing activities
1,067

 
(2,484
)
Effect Of Exchange Rate Changes On Cash And Cash Equivalents
133

 
1

Net Increase In Cash And Cash Equivalents
5,396

 
763

Cash And Cash Equivalents:
 
 
 
Beginning of period
3,034

 
3,370

End of period
$
8,430

 
$
4,133

See notes to unaudited consolidated financial statements.

4


UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Principles of Consolidation
In our opinion, the accompanying interim, unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our financial position as of September 30, 2012, our results of operations for the three and nine months ended September 30, 2012 and 2011, and cash flows for the nine months ended September 30, 2012 and 2011. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The interim 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, 2011.
For interim consolidated financial statement purposes, we provide for accruals under our various employee benefit plans and self-insurance reserves for each three month period based on one quarter of the estimated annual expense.
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on our financial position or results of operations.
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 September 30, 2012. The fair values of our investment securities are disclosed in Note 4, our short and long-term debt in Note 8 and our derivative instruments in Note 13. We utilized Level 1 inputs in the fair value hierarchy of valuation techniques 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.
Accounting 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 the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best information and actual results could differ materially from those estimates.
Change in Accounting Methodology
As described in our Annual Report on Form 10-K for the year ended December 31, 2011, we elected to change our accounting methodologies for recognizing expense for our company-sponsored U.S. and international pension and other postretirement benefit plans. The impact of these changes in our accounting methodologies was reported through retrospective application of the new policies to all periods presented. Accordingly, all relevant information as of, and for the quarter and year-to-date periods ended, September 30, 2011 has been adjusted to reflect the application of the new policies.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In May 2011, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update to disclosure requirements for fair value measurement. These amendments, which became effective for us in the first quarter of 2012, result in a common definition of fair value and common measurement and disclosure requirements between U.S. GAAP and IFRS. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance had an immaterial impact on our consolidated financial position and results of operations.

5

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



In June 2011, the FASB issued an Accounting Standards Update that increases the prominence of items reported in other comprehensive income in the financial statements. This update requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. This requirement became effective for us beginning with the first quarter of 2012, and we have included the required presentation in all applicable filings since that date.
In July 2012, the FASB issued an Accounting Standards Update that added an optional qualitative assessment for determining whether an indefinite-lived intangible asset is impaired. The objective of this update is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by allowing an entity the option to make a qualitative evaluation about the likelihood of an intangible impairment to determine whether it should calculate the fair value of the asset. This accounting standards update also amends existing guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount. We adopted this accounting standard update and applied its provisions to certain of our intangible assets for our annual impairment testing as of October 1, 2012.
Other accounting pronouncements adopted during the periods covered by the consolidated financial statements had an immaterial impact on our consolidated financial position and results of operations.
Accounting Standards Issued But Not Yet Effective
Accounting pronouncements issued, but not effective until after September 30, 2012, are not expected to have a significant impact on our consolidated financial position or results of operations.
NOTE 3. STOCK-BASED COMPENSATION
We issue employee share-based awards under the UPS Incentive Compensation Plan, which permits the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, performance units and management incentive awards to eligible employees. The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. We also maintain an employee stock purchase plan which allows eligible employees to purchase shares of UPS class A common stock at a discount. Additionally, our matching contributions to the primary employee defined contribution plan are made in shares of UPS class A common stock.
Compensation Program Changes
Effective January 1, 2011, we modified certain components of our management compensation programs for future award grants, as follows:
We eliminated our Long-Term Incentive program, and incorporated the value of the award into our Management Incentive Award program. The combined award is referred to as the Management Incentive Award program.
Previously, the restricted stock units granted under the Management Incentive Award program were granted in the fourth quarter of each year, while the restricted performance units granted under the Long-Term Incentive program were granted in the second quarter of each year (restricted stock units and restricted performance units are referred to as “Restricted Units”). Prospectively, Restricted Units granted under the modified Management Incentive Award will generally be granted in the first quarter of each year.
Management Incentive Award
During 2012, we granted Restricted Units under the Management Incentive Award program to eligible management employees. Restricted Units under the Management Incentive Award program will generally vest over a five-year period with approximately 20% of the award vesting on January 15th of each of the years following the grant date (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis over the requisite service period. Based on the dates that the eligible management population and performance targets were approved for the Management Incentive Award program, we determined the award measurement dates to be February 6, 2012 (for U.S.-based employees) and April 2, 2012 (for internationally-based employees); therefore, the Restricted Unit grants were valued for stock compensation expense purposes using the closing New York Stock Exchange price of $76.92 and $80.67 on those dates, respectively.


6

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


As discussed in the Compensation Program Changes, we eliminated our Long-Term Incentive program and incorporated the value of the award into our Management Incentive Award program, beginning with the 2012 awards. Accordingly, no award was granted under the Long-Term Incentive program during 2012. During the second quarter of 2011, we granted 1.6 million Restricted Units at a grant price of $74.25 related to eligible management employees under the former UPS Long-Term Incentive program.
Long-Term Incentive Performance Award
During the first quarter of 2012, we also granted target Restricted Units under the UPS Long-Term Incentive Performance Award program to eligible management employees. Of the total 2012 target award, 90% of the target award will be divided into three substantially equal tranches, one for each calendar year in the three-year award cycle from 2012 to 2014, using performance criteria targets established each year. For 2012, those targets consist of consolidated operating return on invested capital and growth in consolidated revenue. The remaining 10% of the total 2012 target award will be based upon our achievement of adjusted earnings per share in 2014 compared to a target established at the grant date.
The number of Restricted Units earned each year will be the target number adjusted for the percentage achievement of performance criteria targets for the year. The percentage of achievement used to determine the Restricted Units earned may be a percentage less than or more than 100% of the target Restricted Units for each tranche. Based on the date that the eligible management population and performance targets were approved for the 2012 performance tranches, we determined the award measurement date to be March 1, 2012; therefore the target Restricted Units grant was valued for stock compensation expense purposes using the closing New York Stock Exchange price of $76.89 on that date.
Nonqualified Stock Options
Historically, awards granted under the UPS Stock Option program were granted during the second quarter of each year to a limited group of eligible senior management employees. Stock option awards generally vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant (except in the case of death, disability, or retirement, in which case immediate vesting occurs). The options granted will expire ten years after the date of the grant. In the first quarter of 2012, we granted 0.2 million stock options at a weighted average grant price of $76.94. In the second quarter of 2011, we granted 0.2 million stock options at a grant price of $74.25. The weighted average fair value of our employee stock options granted, as determined by the Black-Scholes valuation model, was $14.88 and $15.92 for 2012 and 2011 respectively, using the following assumptions:
 
2012
 
2011
Expected life (in years)
7.5

 
7.5

Risk-free interest rate
1.63
%
 
2.90
%
Expected volatility
25.06
%
 
24.26
%
Expected dividend yield
2.77
%
 
2.77
%
Compensation expense for share-based awards recognized in net income for the three months ended September 30, 2012 and 2011 was $126 and $130 million pre-tax, respectively. Compensation expense for share-based awards recognized in net income for the nine months ended September 30, 2012 and 2011 was $421 and $402 million pre-tax, respectively.
 

7

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4. INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as available-for-sale as of September 30, 2012 and December 31, 2011 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
September 30, 2012
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
242

 
$
3

 
$

 
$
245

Mortgage and asset-backed debt securities
152

 
4

 

 
156

Corporate debt securities
157

 
6

 

 
163

U.S. state and local municipal debt securities
15

 

 

 
15

Other debt and equity securities
7

 

 

 
7

Total marketable securities
$
573

 
$
13

 
$

 
$
586

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2011
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
184

 
$
3

 
$

 
$
187

Mortgage and asset-backed debt securities
188

 
4

 
(1
)
 
191

Corporate debt securities
835

 
4

 
(2
)
 
837

U.S. state and local municipal debt securities
15

 

 

 
15

Other debt and equity securities
10

 
1

 

 
11

Total marketable securities
$
1,232

 
$
12

 
$
(3
)
 
$
1,241

Auction Rate Securities
During the first quarter 2011, we sold all remaining investments in auction rate securities, which had been classified as non-current marketable securities. These sales did not have a material impact on our statement of consolidated income.
Investment Other-Than-Temporary Impairments
We have concluded that no other-than-temporary impairment losses existed as of September 30, 2012. In making this determination, we considered the financial condition and prospects of the issuers, the magnitude of the losses compared with the investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that we will be unable to collect all amounts due according to the contractual terms of the securities, the credit rating of the securities and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
Maturity Information
The amortized cost and estimated fair value of marketable securities at September 30, 2012, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
 
Cost
 
Estimated
Fair Value
Due in one year or less
$
43

 
$
43

Due after one year through three years
242

 
244

Due after three years through five years
52

 
53

Due after five years
234

 
244

 
571

 
584

Equity securities
2

 
2

 
$
573

 
$
586


8

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Non-Current Investments and Restricted Cash
We had $286 million of restricted cash related to our self-insurance requirements as of September 30, 2012 and December 31, 2011, which is reported in “Non-Current Investments and Restricted Cash” on the consolidated balance sheets.
At September 30, 2012 and December 31, 2011 we held a $19 and $17 million, respectively, investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. This investment is classified as “Non-Current Investments and Restricted Cash” in the consolidated balance sheets with the quarterly change in investment value recognized in the statements of consolidated income.
Fair Value Measurements
Marketable securities 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 utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “other investments” in the tables below, and as “Other Non-Current Assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model based on each partnership’s financial statements and cash flow projections. The significant unobservable inputs used in the fair value measurement of the investment partnerships are state and federal tax credits provided by each partnership, tax benefits from investment losses and tax benefits on interest expense. Significant increases or decreases in any of these inputs in isolation would result in changes in the fair value measurement.
The following table presents information about our investments measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance 
September 30, 2012
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
245

 
$

 
$

 
$
245

Mortgage and asset-backed debt securities

 
156

 

 
156

Corporate debt securities

 
163

 

 
163

U.S. state and local municipal debt securities

 
15

 

 
15

Other debt and equity securities

 
7

 

 
7

Total marketable securities
245

 
341

 

 
586

Other investments
19

 

 
177

 
196

Total
$
264

 
$
341

 
$
177

 
$
782

 

9

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance 
December 31, 2011
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
187

 
$

 
$

 
$
187

Mortgage and asset-backed debt securities

 
191

 

 
191

Corporate debt securities

 
837

 

 
837

U.S. state and local municipal debt securities

 
15

 

 
15

Other debt and equity securities

 
11

 

 
11

Total marketable securities
187

 
1,054

 

 
1,241

Other investments
17

 

 
217

 
234

Total
$
204

 
$
1,054

 
$
217

 
$
1,475

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended September 30, 2012 and 2011 (in millions):
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on July 1, 2012
$

 
$
190

 
$
190

Transfers into (out of) Level 3

 

 

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income)

 
(13
)
 
(13
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on September 30, 2012
$

 
$
177

 
$
177

 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on July 1, 2011
$

 
$
240

 
$
240

Transfers into (out of) Level 3

 

 

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income)

 
(12
)
 
(12
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on September 30, 2011
$

 
$
228

 
$
228



10

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the nine months ended September 30, 2012 and 2011 (in millions):
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2012
$

 
$
217

 
$
217

Transfers into (out of) Level 3

 

 

Net realized and unrealized gains (losses):

 

 

Included in earnings (in investment income)

 
(40
)
 
(40
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on September 30, 2012
$

 
$
177

 
$
177

 
 
 
 
 
 
 
Marketable
Securities

 
Other
Investments

 
Total
Balance on January 1, 2011
$
138

 
$
267

 
$
405

Transfers into (out of) Level 3

 

 

Net realized and unrealized gains (losses):

 

 

Included in earnings (in investment income)

 
(39
)
 
(39
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales
(138
)
 

 
(138
)
Balance on September 30, 2011
$

 
$
228

 
$
228

There were no transfers of investments between Level 1 and Level 2 during the three and nine months ended September 30, 2012 and 2011.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of September 30, 2012 and December 31, 2011 consist of the following (in millions):
 
2012
 
2011
Vehicles
$
6,095

 
$
5,981

Aircraft
15,144

 
14,616

Land
1,119

 
1,114

Buildings
3,131

 
3,095

Building and leasehold improvements
3,016

 
2,943

Plant equipment
6,933

 
6,803

Technology equipment
1,674

 
1,593

Equipment under operating leases
78

 
93

Construction-in-progress
498

 
303

 
37,688

 
36,541

Less: Accumulated depreciation and amortization
(19,859
)
 
(18,920
)
 
$
17,829

 
$
17,621

 


11

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6. EMPLOYEE BENEFIT PLANS
Information about net periodic benefit cost for our company-sponsored pension and postretirement benefit plans is as follows for the three and nine months ended September 30, 2012 and 2011 (in millions):
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Three Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
249

 
$
218

 
$
23

 
$
22

 
$
12

 
$
9

Interest cost
353

 
327

 
52

 
52

 
10

 
10

Expected return on assets
(493
)
 
(489
)
 
(4
)
 
(4
)
 
(11
)
 
(11
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
43

 
43

 
1

 
2

 
1

 

Other net (gain) loss

 
29

 

 

 

 
1

Actuarial (gain) loss

 

 

 

 

 

Net periodic benefit cost
$
152

 
$
128

 
$
72

 
$
72

 
$
12

 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Pension Benefits
 
U.S. Postretirement
Medical Benefits
 
International
Pension Benefits
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Nine Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
748

 
$
654

 
$
67

 
$
66

 
$
41

 
$
27

Interest cost
1,058

 
981

 
156

 
156

 
31

 
30

Expected return on assets
(1,478
)
 
(1,467
)
 
(13
)
 
(12
)
 
(35
)
 
(33
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Transition obligation

 

 

 

 

 

Prior service cost
130

 
129

 
3

 
6

 
1

 

Other net (gain) loss

 
88

 

 

 

 
3

Actuarial (gain) loss

 

 

 

 

 

Net periodic benefit cost
$
458

 
$
385

 
$
213

 
$
216

 
$
38

 
$
27

During the first nine months of 2012, we contributed $418 million and $446 million to our company-sponsored pension and postretirement medical benefit plans, respectively. We also expect to contribute $6 and $25 million over the remainder of the year to the pension and U.S. postretirement medical benefit plans, respectively.
As of December 31, 2011, we had approximately 245,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the International Brotherhood of Teamsters (“Teamsters”). These agreements run through July 31, 2013. We have approximately 2,700 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association, which became amendable at the end of 2011. Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which runs through November 1, 2013. In addition, approximately 3,200 of our ground mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”). Our agreement with the IAM runs through July 31, 2014.

12

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Multiemployer Benefit Plans
We contribute to a number of multiemployer defined benefit and health and welfare plans under 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 will remain in effect throughout the terms of the existing collective bargaining agreements.
In the third quarter of 2012, we reached an agreement with the New England Teamsters and Trucking Industry Pension Fund ("NETTI Fund"), a multiemployer pension plan in which UPS is a participant, to restructure the pension liabilities for approximately 10,200 UPS employees represented by the Teamsters. The agreement reflects a decision by the NETTI Fund's trustees to restructure the NETTI Fund through plan amendments to utilize a "two pool approach", which effectively subdivides the plan assets and liabilities between two groups of beneficiaries. As part of this agreement, UPS agreed to withdraw from the original pool of the NETTI Fund of which it had historically been a participant, and reenter the NETTI Fund's newly-established pool as a new employer.
Upon ratification of the agreement by the Teamsters in September 2012, we withdrew from the original pool of the NETTI Fund and incurred an undiscounted withdrawal liability of $2.162 billion to be paid in equal monthly installments over 50 years. The undiscounted withdrawal liability was calculated by independent actuaries employed by the NETTI Fund, in accordance with the governing plan documents and the applicable requirements of the Employee Retirement Income Security Act of 1974. In the third quarter of 2012, we recorded a charge to expense to establish an $896 million withdrawal liability on our consolidated balance sheet, which represents the present value of the $2.162 billion future payment obligation discounted at a 4.25% interest rate. This discount rate represents the estimated credit-adjusted market rate of interest at which we could obtain financing of a similar maturity and seniority.
The $896 million charge to expense recorded in the third quarter of 2012 is included in "compensation and benefits" expense in the statements of consolidated income, while the corresponding withdrawal liability is included in "other non-current liabilities" on the consolidated balance sheet. We will impute interest on the withdrawal liability using the 4.25% discount rate, while the monthly payments made to the NETTI Fund will reduce the remaining balance of the withdrawal liability.
Our status in the newly-established pool of the NETTI Fund is accounted for as the participation in a new multiemployer pension plan, and therefore we will recognize expense based on the contractually-required contribution for each period, and we will recognize a liability for any contributions due and unpaid at the end of a reporting period.
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
The following table indicates the allocation of goodwill by reportable segment as of September 30, 2012 and December 31, 2011 (in millions):
 
U.S. Domestic
Package
 
International
Package
 
Supply Chain &
Freight
 
Consolidated
December 31, 2011:
$

 
$
361

 
$
1,740

 
$
2,101

Acquired

 
67

 

 
67

Currency / Other

 
5

 
(3
)
 
2

September 30, 2012:

 
$
433

 
$
1,737

 
$
2,170

The increase in goodwill in the International Package segment was due to the February 2012 acquisition of Kiala S.A., a firm based in Brussels that provides e-commerce retailers a platform to offer delivery options to consumers. The purchase price allocation was not complete as of September 30, 2012 and therefore adjustments to the recorded amount of goodwill may occur prior to the one year anniversary of the acquisition. The remaining change in goodwill for both the International Package and Supply Chain & Freight segments was due to the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.

13

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


The following is a summary of intangible assets as of September 30, 2012 and December 31, 2011 (in millions):
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
September 30, 2012:
 
 
 
 
 
Trademarks, licenses, patents, and other
$
186

 
$
(89
)
 
$
97

Customer lists
130

 
(75
)
 
55

Franchise rights
111

 
(62
)
 
49

Capitalized software
2,160

 
(1,747
)
 
413

Total Intangible Assets, Net
$
2,587

 
$
(1,973
)
 
$
614

December 31, 2011:
 
 
 
 
 
Trademarks, licenses, patents, and other
$
146

 
$
(54
)
 
$
92

Customer lists
120

 
(66
)
 
54

Franchise rights
109

 
(58
)
 
51

Capitalized software
2,014

 
(1,626
)
 
388

Total Intangible Assets, Net
$
2,389

 
$
(1,804
)
 
$
585

NOTE 8. DEBT AND FINANCING ARRANGEMENTS
The carrying value of our outstanding debt as of September 30, 2012 and December 31, 2011 consists of the following (in millions):
 
Maturity
 
2012
 
2011
Commercial paper
2012
 
$
2,075

 
$

4.50% senior notes
2013
 
1,759

 
1,778

3.875% senior notes
2014
 
1,040

 
1,050

5.50% senior notes
2018
 
856

 
841

5.125% senior notes
2019
 
1,147

 
1,119

8.375% debentures
2020
 
515

 
504

3.125% senior notes
2021
 
1,663

 
1,641

8.375% debentures
2030
 
284

 
284

6.20% senior notes
2038
 
1,480

 
1,480

4.875% senior notes
2040
 
489

 
489

1.125% senior notes
2017
 
373

 

2.45% senior notes
2022
 
994

 

3.625% senior notes
2042
 
367

 

Floating rate senior notes
2049-2053
 
376

 
376

Facility notes and bonds
2015-2036
 
320

 
320

Pound Sterling notes
2031/2050
 
804

 
777

Capital lease obligations
2012-3004
 
462

 
469

Other debt
2022
 
3

 

Total Debt
 
 
15,007

 
11,128

Less: Current Maturities
 
 
(3,859
)
 
(33
)
Long-term Debt
 
 
$
11,148

 
$
11,095



14

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Debt Issuances
In September 2012, we completed an offering of $1.75 billion in senior notes, consisting of $375 million of 1.125% notes due October 2017, $1.0 billion of 2.45% notes due October 2022, and $375 million of 3.625% notes due October 2042. These notes pay interest semiannually. We may redeem all or any portions of the notes at any time by paying the greater of the principal amount plus accrued interest, or the sum of the present values of remaining scheduled payments of principal and interest discounted to the redemption date on a semiannual basis at an applicable Treasury rate plus 10 basis points for the 1.125% notes and plus 15 basis points for the 2.45% and 3.625% notes (plus in each case, accrued interest to the date of redemption). After pricing and underwriting discounts, we received a total of $1.734 billion in cash proceeds from the offering. The proceeds from this offering will be used for the principal repayment of the $1.75 billion 4.5% senior notes due January 15, 2013.
Sources of Credit
We are authorized to borrow up to $10.0 billion under the U.S. commercial paper program we maintain. We had $2.075 billion outstanding under this program as of September 30, 2012, with an average interest rate of 0.08%. We also maintain a European commercial paper program under which we are authorized to borrow up to €1.0 billion in a variety of currencies. As of September 30, 2012, there were no amounts outstanding under this program. As of September 30, 2012, we have classified the entire commercial paper balance as a current liability in our consolidated balance sheets.
We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on April 11, 2013. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to Citibank’s publicly announced base rate, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the base rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of September 30, 2012.
The second agreement provides revolving credit facilities of $1.0 billion, and expires on April 12, 2017. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to Citibank’s publicly announced base rate, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The applicable margin is subject to certain minimum rates and maximum rates based on our public debt ratings from Standard & Poor’s Rating Service and Moody’s Investors Service. The minimum applicable margin rates range from 0.100% to 0.375%, and the maximum applicable margin rates range from 0.750% to 1.250%. The applicable margin for advances bearing interest based on the base rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of September 30, 2012.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of September 30, 2012 and for all prior periods, 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 September 30, 2012, 10% of net tangible assets was equivalent to $2.599 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. Additionally, we are required to maintain a minimum net worth, as defined, of $5.0 billion on a quarterly basis. As of September 30, 2012, our net worth, as defined, was equivalent to $10.458 billion. 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 the Company for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, was approximately $17.078 and $12.035 billion as of September 30, 2012 and December 31, 2011, 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.

15

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9. LEGAL PROCEEDINGS AND CONTINGENCIES
We are involved in a number of judicial proceedings and other matters arising from the conduct of our business activities.
Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious defense and will deny, liability in all litigation pending against us, including (except as otherwise noted herein) the matters described below, and we intend to defend vigorously each case. We have accrued for legal claims when, and to the extent that, amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.
For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible loss or range of loss.
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 these matters, would have a material adverse effect on our financial condition, results of operations or liquidity.
UPS and our subsidiary Mail Boxes Etc., Inc. are defendants in a lawsuit in California Superior Court about the rebranding of The UPS Store franchises.  In Morgate, the plaintiffs are 125 individual franchisees who did not rebrand to The UPS Store and a certified class of all franchisees who did rebrand. The trial court entered judgment against a bellwether individual plaintiff, which was affirmed in January 2012. The trial court granted our motion for summary judgment against the certified class, which was reversed in January 2012.  
There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from whatever remaining aspects of this case proceeds including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; and (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. The Antitrust Division of the U.S. Department of Justice (“DOJ”) has informed us that it has opened a civil investigation of our policies and practices for dealing with third party negotiators. We are cooperating with this investigation. We deny any liability with respect to these matters and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) we believe that we have a number of meritorious defenses; (2) discovery is ongoing; and (3) the DOJ investigation is ongoing. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.


16

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


In Canada, three purported class-action cases were filed against us in British Columbia (2006); Ontario (2007) and Québec (2006). The cases each allege inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. The British Columbia class action was declared inappropriate for certification and dismissed by the trial judge. That decision was upheld by the British Columbia Court of Appeal in March 2010, which ended the case in our favor. The Ontario class action was certified in September 2011. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court. The complaint under the Criminal Code was dismissed. No appeal is being taken from that decision. The allegations of inadequate disclosure were granted and we are appealing that decision. The motion to authorize the Québec litigation as a class action was dismissed by the trial judge in October 2012; there may be an appeal. We have denied all liability and are vigorously defending the two outstanding cases. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of these matters. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operation or liquidity.
Other Matters
In May and December 2007 and August 2008 we received and responded to grand jury subpoenas from the DOJ in the Northern District of California in connection with an investigation by the Drug Enforcement Administration. We also have responded to informal requests for information in connection with this investigation, which relates to transportation of packages on behalf of on-line pharmacies that may have operated illegally. We have been cooperating with this investigation and are exploring the possibility of resolving this matter, which could include our undertaking further enhancements to our compliance program and/or a payment. Such a payment may exceed the amounts previously accrued with respect to this matter, but we do not expect that the amount of such additional loss would have a material adverse effect on our financial condition, results of operations or liquidity.
We received a grand jury subpoena from the Antitrust Division of the DOJ regarding the DOJ's investigation into certain pricing practices in the freight forwarding industry in December 2007.
In August 2010, competition authorities in Brazil opened an administrative proceeding to investigate alleged anticompetitive behavior in the freight forwarding industry. Approximately 45 freight forwarding companies and individuals are named in the proceeding, including UPS, UPS SCS Transportes (Brasil) S.A., and a former employee in Brazil. UPS will have an opportunity to respond to these allegations.
We are cooperating with each of these investigations, and intend to continue to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) we are vigorously defending each matter and believe that we have a number of meritorious legal defenses; (2) there are unresolved questions of law that could be of importance to the ultimate resolutions of these matters, including the calculation of any potential fine; and (3) there is uncertainty about the time period that is the subject of the investigations. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.


17

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


In January 2008, a class action complaint was filed in the United States District Court for the Eastern District of New York alleging price-fixing activities relating to the provision of freight forwarding services. UPS was not named in this case. In July 2009, the plaintiffs filed a first amended complaint naming numerous global freight forwarders as defendants. UPS and UPS Supply Chain Solutions are among the 60 defendants named in the amended complaint. We intend to vigorously defend ourselves in this case. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) the court has dismissed the complaint, with leave to amend, and the scope of the plaintiffs' claims is therefore unclear; (2) the scope and size of the proposed class is ill-defined; (3) there are significant legal questions about the adequacy and standing of the putative class representatives; and (4) we believe that we have a number of meritorious legal defenses. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
We are a defendant in various other lawsuits that arose in the normal course of business. We do not believe that the eventual resolution of these other lawsuits (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material adverse effect on our financial condition, results of operations or liquidity.
Tax Matters
In addition to the income tax matters described in Note 14, we received an IRS Revenue Agent Report (RAR) covering excise taxes for tax years 2003 through 2007 in June 2011. The excise tax RAR proposed two alternate theories for asserting additional excise tax on transportation of property by air. We disagree with these proposed excise tax theories and related adjustments.
We believe that these theories are not based on a reasonable interpretation of the applicable law, are inconsistent with our historical operating structure, and are in direct conflict with previously issued guidance to UPS from the IRS National Office. We filed protests and, in the third quarter of 2011, the IRS responded to our protests and forwarded the case to IRS Appeals.
We believe the likelihood that these theories will ultimately be sustained is remote.
Further, we have asserted that if the current excise tax theories are sustained, UPS will be entitled to correlative income tax refunds for the 1999 through 2007 tax years. Accordingly, we have filed protective income tax refund claims for amounts significantly greater than the proposed excise tax assessments. The IRS has not completed its audit or made any claims with respect to any tax year after 2007, nor have we filed protective income tax refund claims for those tax years. However, the income tax refund claims for those tax years would also be significantly greater than the amount of any excise tax assessment proposed under similar theories.
Because we believe there is only a remote likelihood that the excise tax RAR theories will ultimately be sustained, we have concluded that the uncertain income tax positions associated with the protective refund claims based on the same theories do not currently meet the applicable standard for recognition of an income tax benefit. Accordingly, we have not accrued any income tax benefit of such claims in our financial statements or in the disclosures in Note 14.
In the third quarter of 2012, following the Appeals Opening Conference in July 2012, we had settlement discussions which we expect will lead to a complete resolution of all excise tax matters and correlative income tax refund claims for the 2003 through 2007 tax years within the next twelve months. At this time, we do not believe the ultimate resolution of these matters will have a material effect on our financial condition, results of operations, or liquidity.


18

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10. SHAREOWNERS' EQUITY
Capital Stock, Additional Paid-In Capital and Retained Earnings
We maintain two classes of common stock, which are distinguished from each other primarily by their respective voting rights. Class A shares are entitled to 10 votes per share, whereas class B shares are entitled to one vote per share. Class A shares are primarily held by UPS employees and retirees, and these shares are fully convertible into class B shares at any time. Class B shares are publicly traded on the New York Stock Exchange under the symbol “UPS.” Class A and B shares both have a $0.01 par value, and as of September 30, 2012, there were 4.6 billion class A shares and 5.6 billion class B shares authorized to be issued. Additionally, there are 200 million preferred shares, with a $0.01 par value, authorized to be issued; as of September 30, 2012, no preferred shares had been issued.
 
The following is a rollforward of our common stock, additional paid-in capital and retained earnings accounts for the nine months ended September 30, 2012 and 2011 (in millions, except per share amounts):
 
2012
 
2011
 
Shares
 
Dollars
 
Shares
 
Dollars
Class A Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
240

 
$
3

 
258

 
$
3

Common stock purchases
(6
)
 

 
(6
)
 

Stock award plans
5

 

 
4

 

Common stock issuances
3

 

 
3

 

Conversions of class A to class B common stock
(11
)
 

 
(15
)
 

Class A shares issued at end of period
231

 
$
3

 
244

 
$
3

Class B Common Stock
 
 
 
 
 
 
 
Balance at beginning of period
725

 
$
7

 
735

 
$
7

Common stock purchases
(13
)
 

 
(26
)
 

Conversions of class A to class B common stock
11

 

 
15

 

Class B shares issued at end of period
723

 
$
7

 
724

 
$
7

Additional Paid-In Capital
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$

 
 
 
$

Stock award plans
 
 
414

 
 
 
375

Common stock purchases
 
 
(827
)
 
 
 
(417
)
Common stock issuances
 
 
207

 
 
 
192

Option premiums received (paid)
 
 
206

 
 
 
(150
)
Unsettled portion of accelerated stock repurchase program
 

 
 
 

Balance at end of period
 
 
$

 
 
 
$

Retained Earnings
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
10,128

 
 
 
$
10,604

Net income attributable to common shareowners
 
 
2,555

 
 
 
3,079

Dividends ($1.71 and $1.56 per share)
 
 
(1,670
)
 
 
 
(1,553
)
Common stock purchases
 
 
(565
)
 
 
 
(1,773
)
Balance at end of period
 
 
$
10,448

 
 
 
$
10,357

In total, we repurchased a total of 18.5 million shares of class A and class B common stock for $1.392 billion during the nine months ended September 30, 2012, and 31.7 million shares for $2.190 billion during the nine months ended September 30, 2011. On May 3, 2012, the Board of Directors approved a new share repurchase authorization of $5.0 billion, which replaces an authorization previously announced in 2008. The new share repurchase authorization has no expiration date.

19

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. During the nine months ended September 30, 2012, we did not pay premiums on options for the purchase of shares; however, we received $206 million in premiums for options that were entered into during 2011 that expired during the nine months ended September 30, 2012. During the nine months ended September 30, 2011, we paid $150 million in premiums on options for the purchase of shares, and had not received any premiums in excess of our initial investment.

Accumulated Other Comprehensive Income (Loss)
We experience activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in AOCI for the nine months ended September 30, 2012 and 2011 is as follows (in millions):
 
2012
 
2011
Foreign currency translation gain (loss):
 
 
 
Balance at beginning of period
$
(160
)
 
$
(68
)
Aggregate adjustment for the period (net of tax effect of $(6) and $4)
176

 
(47
)
Balance at end of period
16

 
(115
)
Unrealized gain (loss) on marketable securities, net of tax:
 
 
 
Balance at beginning of period
6

 
12

Current period changes in fair value (net of tax effect of $5 and $10)
7

 
16

Reclassification to earnings (net of tax effect of $(3) and $(13))
(5
)
 
(21
)
Balance at end of period
8

 
7

Unrealized gain (loss) on cash flow hedges, net of tax:
 
 
 
Balance at beginning of period
(204
)
 
(239
)
Current period changes in fair value (net of tax effect of $(38) and $(47))
(64
)
 
(80
)
Reclassification to earnings (net of tax effect of $(16) and $30)
(28
)
 
51

Balance at end of period
(296
)
 
(268
)
Unrecognized pension and postretirement benefit costs, net of tax:
 
 
 
Balance at beginning of period
(2,745
)
 
(2,340
)
Reclassification to earnings (net of tax effect of $50 and $87)
84

 
139

Adjustment for Early Retirement Reinsurance Program (net of tax effect of $2 and $4)
4

 
8

Balance at end of period
(2,657
)
 
(2,193
)
Accumulated other comprehensive income (loss) at end of period
$
(2,929
)
 
$
(2,569
)

20

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Deferred Compensation Obligations and Treasury Stock
Activity in the deferred compensation program for the nine months ended September 30, 2012 and 2011 is as follows (in millions):
 
2012
 
2011
Shares
 
Dollars
 
Shares
 
Dollars
Deferred Compensation Obligations:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
88

 
 
 
$
103

Reinvested dividends
 
 
3

 
 
 
3

Benefit payments
 
 
(14
)
 
 
 
(19
)
Balance at end of period
 
 
$
77

 
 
 
$
87

Treasury Stock:
 
 
 
 
 
 
 
Balance at beginning of period
(2
)
 
$
(88
)
 
(2
)
 
$
(103
)
Reinvested dividends

 
(3
)
 

 
(3
)
Benefit payments

 
14

 

 
19

Balance at end of period
(2
)
 
$
(77
)
 
(2
)
 
$
(87
)

Noncontrolling Interests:
We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. The noncontrolling interests on our consolidated balance sheets primarily relate to a joint venture in Dubai that operates in the Middle East, Turkey and portions of the Central Asia region. The activity related to our noncontrolling interests is presented below for the nine months ended September 30, 2012 and 2011 (in millions):
 
2012
 
2011
Noncontrolling Interests:
 
 
 
Balance at beginning of period
$
73

 
$
68

Acquired noncontrolling interests
12

 
3

Dividends attributable to noncontrolling interests

 

Net income attributable to noncontrolling interests

 

Balance at end of period
$
85

 
$
71

NOTE 11. SEGMENT INFORMATION
We report our operations in three segments: U.S. Domestic Package operations, International Package operations and Supply Chain & Freight operations. 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 operations within their geographic area.
U.S. Domestic Package
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 distribution outside the United States. Our International Package reporting segment includes the operations of our Europe, Asia and Americas operating segments.

21

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Supply Chain & Freight
Supply Chain & Freight includes the operations of our forwarding, logistics and freight units, as well as other aggregated businesses. Our forwarding and logistics business provides services in more than 195 countries and territories worldwide, and includes supply chain design and management, freight distribution, customs brokerage, mail and consulting services. UPS Freight offers a variety of less-than-truckload (“LTL”) and truckload (“TL”) services to customers in North America. Other aggregated business units within this segment include Mail Boxes Etc., Inc. (the franchisor of Mail Boxes Etc. and The UPS Store) and UPS Capital.
In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income, interest expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011, with certain expenses allocated between the segments using activity-based costing methods. Unallocated assets are comprised primarily of cash, marketable securities and investments in limited partnerships.
Segment information for the three and nine months ended September 30, 2012 and 2011 is as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenue:
 
 
 
 
 
 
 
U.S. Domestic Package
$
7,861

 
$
7,767

 
$
23,923

 
$
23,047

International Package
2,943

 
3,057

 
8,923

 
9,096

Supply Chain & Freight
2,267

 
2,342

 
6,710

 
6,796

Consolidated
$
13,071

 
$
13,166

 
$
39,556

 
$
38,939

Operating Profit:
 
 
 
 
 
 
 
U.S. Domestic Package
$
129

 
$
1,046

 
$
2,258

 
$
2,923

International Package
449

 
417

 
1,311

 
1,375

Supply Chain & Freight
188

 
203

 
556

 
585

Consolidated
$
766

 
$
1,666

 
$
4,125

 
$
4,883


 

22

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011 (in millions, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
Net income attributable to common shareowners
$
469

 
$
1,072

 
$
2,555

 
$
3,079

Denominator:
 
 
 
 
 
 
 
Weighted average shares
958

 
974

 
959

 
982

Deferred compensation obligations
1

 
1

 
1

 
2

Vested portion of restricted shares
2

 
2

 
2

 
2

Denominator for basic earnings per share
961

 
977

 
962

 
986

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted performance units
3

 
2

 
3

 
3

Restricted stock units
5

 
7

 
5

 
6

Stock option plans
1

 
1

 
1

 
1

Denominator for diluted earnings per share
970

 
987

 
971

 
996

Basic earnings per share
$
0.49

 
$
1.10

 
$
2.66

 
$
3.12

Diluted earnings per share
$
0.48

 
$
1.09

 
$
2.63

 
$
3.09

Diluted earnings per share for the three months ended September 30, 2012 and 2011 exclude the effect of 2.6 and 9.8 million shares of common stock (2.6 and 6.6 million for the nine months ended September 30, 2012 and 2011), respectively, that may be issued upon the exercise of employee stock options, because such effect would be antidilutive.
NOTE 13. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management Policies
We are exposed to market risk, primarily related to foreign exchange rates, commodity prices and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, we enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency 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 for 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 minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines, and monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.
 We have agreements with substantially all of our active counterparties containing early termination rights and/or bilateral collateral provisions whereby cash is required whenever the net fair value of derivatives associated with those counterparties exceed specific thresholds. Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) would typically require an increase in the amount of collateral required of the counterparty and/or allow us to take additional protective measures such as early termination of trades. At September 30, 2012, we held cash collateral of $128 million under these agreements.

23

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


In connection with the agreements described above, we could also be required to provide 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 our credit rating and the net fair value of the associated derivatives with each counterparty. At September 30, 2012, the aggregate fair value of the instruments covered by these contractual features that were in a net liability position was $233 million; however, we were not required to post any collateral with our counterparties as of that date.
We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.
Accounting Policy for Derivative Instruments
We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.
A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statements of consolidated income during the current period.
A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.
A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within other AOCI. The remainder of the change in value of such instruments is recorded in earnings.
Types of Hedges
Commodity Risk Management
Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. We periodically enter into option contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We have designated and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.
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, the British Pound Sterling and the Canadian Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with option contracts. We have designated 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 subject to foreign currency remeasurement using foreign currency forward contracts. We have designated 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 other operating expense when the underlying transactions are subject to currency remeasurement.

24

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


We have foreign currency denominated debt obligations and capital lease obligations associated with our aircraft. For some of these debt obligations and leases, we hedge the foreign currency denominated contractual payments using cross-currency interest rate swaps, which effectively convert the foreign currency denominated contractual payments into U.S. Dollar denominated payments. We have designated and account for these swaps as cash flow hedges of the forecasted contractual payments; therefore, the resulting gains and losses from these hedges are recognized in the statements of consolidated income when the currency remeasurement gains and losses on the underlying debt obligations and leases are incurred.
Interest Rate Risk Management
Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments, including interest rate swaps and cross-currency interest rate swaps, 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. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within our capital structure.
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 hedges of the fair value 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 the interest rate swaps are recorded to AOCI.
We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings, 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 September 30, 2012 and December 31, 2011, the notional amounts of our outstanding derivative positions were as follows (in millions):
 
September 30, 2012
 
December 31, 2011
Currency hedges:
 
 
 
 
 
Euro
EUR
1,701

 
EUR
1,685

British Pound Sterling
GBP
832

 
GBP
870

Canadian Dollar
CAD
363

 
CAD
318

Mexican Peso
MXN
4,400

 
MXN

Malaysian Ringgit
MYR
100

 
MYR

 
 
 
 
 
 
Interest rate hedges:
 
 
 
 
 
Fixed to Floating Interest Rate Swaps
$