Item 8. Financial Statements and Supplementary Data

266K characters. Original on sec.gov · Markdown

Item 8. Financial Statements and Supplementary Data

Table of Contents

Report of Independent Registered Public Accounting Firm62
Consolidated Balance Sheets63
Statements of Consolidated Income64
Statements of Consolidated Comprehensive Income64
Statements of Consolidated Cash Flows65
Notes to Consolidated Financial Statements66
Note 1—Summary of Accounting Policies66
Note 2—Cash and Investments73
Note 3—Property, Plant and Equipment78
Note 4—Company-Sponsored Employee Benefit Plans78
Note 5—Multiemployer Employee Benefit Plans89
Note 6—Goodwill and Intangible Assets93
Note 7—Business Acquisitions95
Note 8—Debt and Financing Arrangements96
Note 9—Legal Proceedings and Contingencies102
Note 10—Shareowners’ Equity104
Note 11—Stock-Based Compensation107
Note 12—Segment and Geographic Information111
Note 13—Income Taxes114
Note 14—Earnings Per Share119
Note 15—Derivative Instruments and Risk Management119
Note 16—Quarterly Information (Unaudited)125

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareowners

United Parcel Service, Inc.

Atlanta, Georgia

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of United Parcel Service, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

February 21, 2018

We have served as the Company's auditor since 1969.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions)

December 31,
20172016
ASSETS
Current Assets:
Cash and cash equivalents$3,320$3,476
Marketable securities7491,091
Accounts receivable, net8,7737,695
Current income taxes receivable1,573633
Other current assets1,133954
Total Current Assets15,54813,849
Property, Plant and Equipment, Net22,11818,800
Goodwill3,8723,757
Intangible Assets, Net1,9641,758
Investments and Restricted Cash483476
Deferred Income Tax Assets265591
Other Non-Current Assets1,1531,146
Total Assets$45,403$40,377
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper$4,011$3,681
Accounts payable3,8723,042
Accrued wages and withholdings2,5212,317
Hedge margin liabilities17575
Self-insurance reserves705670
Accrued group welfare and retirement plan contributions677598
Other current liabilities905847
Total Current Liabilities12,70811,730
Long-Term Debt20,27812,394
Pension and Postretirement Benefit Obligations7,06112,694
Deferred Income Tax Liabilities757112
Self-Insurance Reserves1,7651,794
Other Non-Current Liabilities1,8041,224
Shareowners’ Equity:
Class A common stock (173 and 180 shares issued in 2017 and 2016)22
Class B common stock (687 and 689 shares issued in 2017 and 2016)77
Additional paid-in capital——
Retained earnings5,8584,879
Accumulated other comprehensive loss(4,867)(4,483)
Deferred compensation obligations3745
Less: Treasury stock (1 share in 2017 and 2016)(37)(45)
Total Equity for Controlling Interests1,000405
Noncontrolling Interests3024
Total Shareowners’ Equity1,030429
Total Liabilities and Shareowners’ Equity$45,403$40,377

See notes to consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(In millions, except per share amounts)

Years Ended December 31,
201720162015
Revenue$65,872$60,906$58,363
Operating Expenses:
Compensation and benefits34,58834,77031,028
Repairs and maintenance1,6001,5381,400
Depreciation and amortization2,2822,2242,084
Purchased transportation10,9899,1298,043
Fuel2,6902,1182,482
Other occupancy1,1551,0371,022
Other expenses5,0394,6234,636
Total Operating Expenses58,34355,43950,695
Operating Profit7,5295,4677,668
Other Income and (Expense):
Investment income and other725015
Interest expense(453)(381)(341)
Total Other Income and (Expense)(381)(331)(326)
Income Before Income Taxes7,1485,1367,342
Income Tax Expense2,2381,7052,498
Net Income$4,910$3,431$4,844
Basic Earnings Per Share$5.64$3.89$5.38
Diluted Earnings Per Share$5.61$3.87$5.35

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(In millions)

Years Ended December 31,
201720162015
Net Income$4,910$3,431$4,844
Change in foreign currency translation adjustment, net of tax86(119)(440)
Change in unrealized gain (loss) on marketable securities, net of tax(1)—(1)
Change in unrealized gain (loss) on cash flow hedges, net of tax(321)(112)6
Change in unrecognized pension and postretirement benefit costs, net of tax(148)(712)489
Comprehensive Income (Loss)$4,526$2,488$4,898

See notes to consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

Years Ended December 31,
201720162015
Cash Flows From Operating Activities:
Net income$4,910$3,431$4,844
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization2,2822,2242,084
Pension and postretirement benefit expense1,6433,7251,189
Pension and postretirement benefit contributions(7,794)(2,668)(1,229)
Self-insurance reserves—(21)(80)
Deferred tax expense1,230123540
Stock compensation expense584591574
Other (gains) losses37(198)(185)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable(1,022)(704)(452)
Other assets(982)(14)414
Accounts payable592461(147)
Accrued wages and withholdings193109(63)
Other liabilities(241)(561)(6)
Other operating activities47(25)(53)
Net cash from operating activities1,4796,4737,430
Cash Flows From Investing Activities:
Capital expenditures(5,227)(2,965)(2,379)
Proceeds from disposals of property, plant and equipment248826
Purchases of marketable securities(1,634)(4,816)(7,415)
Sales and maturities of marketable securities1,9905,7246,388
Net decrease in finance receivables595
Cash paid for business acquisitions(134)(547)(1,904)
Other investing activities1(59)(30)
Net cash used in investing activities(4,975)(2,566)(5,309)
Cash Flows From Financing Activities:
Net change in short-term debt(250)(88)2,529
Proceeds from long-term borrowings12,0165,9273,783
Repayments of long-term borrowings(3,939)(3,805)(2,724)
Purchases of common stock(1,813)(2,678)(2,702)
Issuances of common stock247245249
Dividends(2,771)(2,643)(2,525)
Other financing activities(203)(98)(175)
Net cash from (used in) financing activities3,287(3,140)(1,565)
Effect Of Exchange Rate Changes On Cash And Cash Equivalents53(21)(117)
Net Increase (Decrease) In Cash And Cash Equivalents(156)746439
Cash And Cash Equivalents:
Beginning of period3,4762,7302,291
End of period$3,320$3,476$2,730
Cash Paid During The Period For:
Interest (net of amount capitalized)$428$373$345
Income taxes (net of refunds and overpayments)$1,559$2,064$1,913

See notes to consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF ACCOUNTING POLICIES

Basis of Financial Statements and Business Activities

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), and include the accounts of United Parcel Service, Inc., and all of its consolidated subsidiaries (collectively “UPS” or the “Company”). All intercompany balances and transactions have been eliminated.

UPS concentrates its operations in the field of transportation services, primarily domestic and international letter and package delivery. Through our Supply Chain & Freight subsidiaries, we are also a global provider of specialized transportation, logistics and financial services.

Use of Estimates

The preparation of our consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses and the disclosure of contingencies. Estimates have been prepared on the basis of the most current and best information, and actual results could differ materially from those estimates.

Revenue Recognition

U.S. Domestic and International Package Operations—Revenue is recognized upon delivery of a letter or package.

Forwarding and Logistics—Freight forwarding revenue and the expense related to the transportation of freight are recognized at the time the services are completed. Truckload freight brokerage revenue and related transportation costs are recognized upon delivery of the shipment by a third-party carrier. Logistics and distribution revenue is recognized upon performance of the service provided. Customs brokerage revenue is recognized upon completing documents necessary for customs entry purposes.

UPS Freight—Revenue is recognized upon delivery of a less-than-truckload (“LTL”) or truckload (“TL”) shipment.

In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. In situations where we act as principal party to the transaction, we recognize revenue on a gross basis; in circumstances where we act as an agent, we recognize revenue net of the cost of the purchased transportation.

Financial Services—Income on loans and direct finance leases is recognized on the effective interest method. Accrual of interest income is suspended at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days delinquent. Income on operating leases is recognized on the straight-line method over the terms of the underlying leases.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments that are readily convertible into cash. We consider securities with maturities of three months or less, when purchased, to be cash equivalents. The carrying amount of these securities approximates fair value because of the short-term maturity of these instruments.

Investments

Marketable securities are either classified as trading or available-for-sale securities and are carried at fair value. Unrealized gains and losses on trading securities are reported as investment income and other on the statements of consolidated income. Unrealized gains and losses on available-for-sale securities are reported as accumulated other comprehensive income (“AOCI”), a separate component of shareowners’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income and other, along with interest and dividends. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in investment income and other.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We periodically review our available-for-sale investments for indications of other-than-temporary impairment considering many factors, including the extent and duration to which a security’s fair value has been less than its cost, overall economic and market conditions and the financial condition and specific prospects for the issuer. Impairment of available-for-sale securities results in a charge to income when a market decline below cost is other-than-temporary.

Accounts Receivable

Losses on accounts receivable are recognized when they are incurred, which requires us to make our best estimate of the probable losses inherent in our customer receivables at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, trends in customer payment frequency and judgments about the probable effects of relevant observable data, including present 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 total allowance for doubtful accounts as of December 31, 2017 and 2016 was $104 and $102 million, respectively. Our total provision for doubtful accounts charged to expense during the years ended December 31, 2017, 2016 and 2015 was $133, $116 and $121 million, respectively.

Inventories

Fuel and other materials and supplies inventories are recognized as inventory when purchased, and then charged to expense when used in our operations. Jet fuel, diesel and unleaded gasoline inventories are valued at the lower of average cost or market. Total inventories were $404 and $342 million as of December 31, 2017 and 2016, respectively, and are included in “other current assets” on the consolidated balance sheets.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the assets, which are as follows: Vehicles—3 to 15 years; Aircraft—12 to 30 years; Buildings—20 to 40 years; Leasehold Improvements—lesser of asset useful life or lease term; Plant Equipment—3 to 20 years; Technology Equipment—3 to 5 years. The costs of major airframe and engine overhauls, as well as routine maintenance and repairs, are charged to expense as incurred.

Interest incurred during the construction period of certain property, plant and equipment is capitalized until the underlying assets are placed in service, at which time amortization of the capitalized interest begins, straight-line, over the estimated useful lives of the related assets. Capitalized interest was $49, $14 and $13 million for 2017, 2016, and 2015, respectively.

We review long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows, or external appraisals, as appropriate. We review long-lived assets for impairment at the individual asset or the asset group level for which the lowest level of independent cash flows can be identified.

Goodwill and Intangible Assets

Costs of purchased businesses in excess of net identifiable assets acquired (goodwill), and indefinite-lived intangible assets are tested for impairment at least annually, unless changes in circumstances indicate an impairment may have occurred sooner. We are required to test goodwill on a “reporting unit” basis. A reporting unit is the operating segment unless, for businesses within that operating segment, discrete financial information is prepared and regularly reviewed by management, in which case such a component business is the reporting unit.

During the third quarter of 2017, we changed the measurement date of our annual goodwill impairment test from October 1st to July 1st. This change better aligns the timing of the goodwill impairment test with our long-term business planning process. The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or avoidance of an impairment charge.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In assessing goodwill for impairment, we initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We consider several factors, including macroeconomic conditions, industry and market conditions, overall financial performance of the reporting unit, changes in management, strategy or customers and relevant reporting unit-specific events such as a change in the carrying amount of net assets, a more likely than not expectation of selling or disposing all, or a portion, of a reporting unit, and the testing for recoverability of a significant asset group within a reporting unit. If this qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit.

If the qualitative assessment is not conclusive and it is necessary to calculate the fair value of a reporting unit, then we utilize a two-step process to test goodwill for impairment. First, a comparison of the fair value of the applicable reporting unit with the aggregate carrying value, including goodwill, is performed. If the carrying amount of a reporting unit exceeds its calculated fair value, then the second step is performed, and an impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. We primarily determine the fair value of our reporting units using a discounted cash flow model and supplement this with observable valuation multiples for comparable companies, as appropriate.

A trade name with a carrying value of $200 million and licenses with a carrying value of $5 million as of December 31, 2017 are considered to be indefinite-lived intangibles, and therefore are not amortized. Indefinite-lived intangible assets are reviewed for impairment at least annually. We determined that the income approach, specifically the relief from royalty method, is the most appropriate valuation method to estimate the fair value of the trade name. The estimated fair value of the trade name is compared to the carrying value of the asset. If the carrying value of the trade name exceeds its estimated fair value, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value.

Finite-lived intangible assets, including trademarks, licenses, patents, customer lists, non-compete agreements and franchise rights are amortized on a straight-line basis over the estimated useful lives of the assets, which range from 2 to 22 years. Capitalized software is generally amortized over 7 years.

Self-Insurance Accruals

We self-insure costs associated with workers’ compensation claims, automotive liability, health and welfare and general business liabilities, up to certain limits. Insurance reserves are established for estimates of the loss that we will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet reported. Recorded balances are based on reserve levels, which incorporate historical loss experience and judgments about the present and expected levels of cost per claim. Trends in actual experience are a significant factor in the determination of such reserves.

Workers’ compensation, automobile liability and general liability insurance claims may take several years to completely settle. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to fully resolve the claims. A number of factors can affect the actual cost of a claim, including the length of time the claim remains open, trends in healthcare costs and the results of related litigation. Furthermore, claims may emerge in future years for events that occurred in a prior year at a rate that differs from previous actuarial projections. Changes in state legislation with respect to workers' compensation can affect the adequacy of our self-insurance accruals. All of these factors can result in revisions to prior actuarial projections and produce a material difference between estimated and actual operating results. Prior to 2017, outside actuarial studies were performed semi-annually and we used the studies to estimate the liability in intervening quarters. Beginning in 2017, outside actuarial studies are now performed quarterly as we believe this provides us with better quarterly estimates of our outstanding workers' compensation liability.

We sponsor a number of health and welfare insurance plans for our employees. These liabilities and related expenses are based on estimates of the number of employees and eligible dependents covered under the plans, anticipated medical usage by participants and overall trends in medical costs and inflation.

Pension and Postretirement Benefits

We incur certain employment-related expenses associated with pension and postretirement medical benefits. These pension and postretirement medical benefit costs for company-sponsored benefit plans are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS. Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement for any of our plans.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of a corridor (defined as 10% of the greater of the fair value of plan assets or the plans' projected benefit obligations) in pension expense annually at December 31st each year. The remaining components of pension expense, primarily service and interest costs and the expected return on plan assets, are recorded on a quarterly basis.

Effective July 1, 2016, the UPS Retirement Plan was closed to new non-union participants. For eligible employees hired after July 1, 2016, UPS contributes annually to a defined contribution plan. We recognize expense for the required contribution quarterly, and we recognize a liability for any contributions due and unpaid (included in “other current liabilities”).

During June 2017, we amended the UPS Retirement Plan and Excess Coordinating Plans to cease accrual of additional benefits for future service for non-union participants effective January 1, 2023. We remeasured plan assets and pension benefit obligations compensation for the affected pension plans as of June 30, 2017 to recognize the impact of this change.

We participate in a number of trustee-managed multiemployer pension and health and welfare plans for employees covered under collective bargaining agreements. Our contributions to these plans are determined in accordance with the respective collective bargaining agreements. We recognize expense for the contractually required contribution for each period, and we recognize a liability for any contributions due and unpaid (included in “other current liabilities”).

Income Taxes

Income taxes are accounted for on an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than proposed changes in the tax law or rates. Valuation allowances are provided if it is more likely than not that a deferred tax asset will not be realized.

We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. Once it is determined that the position meets the recognition threshold, the second step requires us to estimate and measure the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement. The difference between the amount of recognizable tax benefit and the total amount of tax benefit from positions filed or to be filed with the tax authorities is recorded as a liability for uncertain tax benefits. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit atctivity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Cuts and Jobs Act (the "Tax Act"). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period costs are both acceptable methods subject to an accounting policy election. We elect to treat any potential GILTI inclusions as period costs.

Foreign Currency Translation and Remeasurement

We translate the results of operations of our foreign subsidiaries using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Balance sheet currency translation adjustments are recorded in AOCI. Pre-tax foreign currency transaction gains from remeasurement, net of hedging, included in other operating expenses, investment income and interest expense were $3, $5 and $7 million in 2017, 2016 and 2015, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

All share-based awards to employees are measured based on their fair values and expensed over the period during which an employee is required to provide service in exchange for the award (the vesting period), less estimated forfeitures. We issue employee share-based awards under the UPS Incentive Compensation Plan that are subject to specific vesting conditions; including service conditions, where the awards cliff vest or vest ratably over a three or five year period (the "nominal vesting period”) or at the date the employee retires (as defined by the plan), if earlier. Compensation cost is generally recognized immediately for awards granted to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. We estimate forfeiture rates based on historical rates of forfeitures for awards with similar characteristics, historical rates of employee turnover and the nature and terms of the vesting conditions of the awards. We reevaluate our forfeiture rates on an annual basis.

Fair Value Measurements

Our financial assets and liabilities measured at fair value on a recurring basis have been categorized based upon a fair value hierarchy. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities, and inputs other than quoted prices that are observable, such as interest rates and yield curves. Level 3 inputs are developed from unobservable data reflecting our own assumptions, and include situations where there is little or no market activity for the asset or liability.

Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis, including property, plant, and equipment, goodwill and intangible assets. These assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of an impairment. A general description of the valuation methodologies used for assets and liabilities measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy, is included in each footnote with fair value measurements present.

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology and trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Derivative Instruments

All financial derivative instruments are recorded on our consolidated balance sheets at fair value. Derivatives not designated as hedges must be adjusted to fair value through income. If a derivative is designated as a hedge, changes in its fair value that are considered to be effective, as defined, either (depending on the nature of the hedge) offset the change in fair value of the hedged assets, liabilities or firm commitments through income, or are recorded in AOCI until the hedged item is recorded in income. Any portion of a change in a hedge’s fair value that is considered to be ineffective, or is excluded from the measurement of effectiveness, is recorded immediately in income.

Adoption of New Accounting Standards

In March 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that simplifies the income tax accounting and cash flow presentation related to share-based compensation by requiring the recognition of all excess tax benefits and deficiencies directly on the income statement and classification as cash flows from operating activities on the statement of cash flows. This new guidance became effective for us in the first quarter of 2017 and we adopted the statements of consolidated cash flows presentation on a prospective basis. The impact to income tax expense in 2017 in the statements of consolidated income was a benefit of $71 million. Additionally, we have elected to continue estimating forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In September 2015, the FASB issued an accounting standards update that simplifies the accounting for measurement-period adjustments related to business combinations. This update removes the requirement to retrospectively apply adjustments made to estimated amounts recognized in a business combination. This update permits the purchaser to adjust the estimated amounts in the reporting period in which the adjustment amounts are determined. This new guidance would have become effective for us in the first quarter of 2016; however, we elected to early adopt this standard in the third quarter of 2015. This accounting standards update did not have a material impact on our consolidated financial position or results of operations.

Accounting Standards Issued But Not Yet Effective

In February 2018, the FASB issued an accounting standards update that allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act. The guidance will generally be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The update becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption.

In August 2017, the FASB issued an accounting standards update to enhance recognition of the economic results of hedging activities in the financial statements. In addition, this update makes certain targeted improvements to simplify the application of the hedge accounting guidance and increase transparency regarding the scope and results of hedging activities. The guidance will generally be applied prospectively and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.

In May 2017, the FASB issued an accounting standards update to provide clarity and reduce complexity on when to apply modification accounting to existing share-based payment awards. The guidance will be applied prospectively. We adopted this standard on January 1, 2018. This accounting standards update does not have a material impact on our consolidated financial position, results of operations or cash flows.

In March 2017, the FASB issued an accounting standards update to require the premium on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount would not be impacted by the proposed update. Under current GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. Only in cases when an entity has a large number of similar securities is it allowed to consider estimates of principal prepayments. Amortization of the premium over the contractual life of the instrument can result in losses being recorded for the unamortized premium if the issuer exercises the call feature prior to maturity. The standard will be effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.

In March 2017, the FASB issued an accounting standards update to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The update requires employers to report the current service cost component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented separately from service cost and outside of income from operations. In accordance with the update, only the service cost component will be eligible for capitalization. The guidance in this update will be applied retrospectively for the presentation of service cost and other components of net benefit cost, and prospectively for the capitalization of the service cost component in assets. We adopted this standard on January 1, 2018. As a result of this update, the net amount of interest cost, prior service cost, expected return on plan assets and the actuarial gain (loss) in excess of the 10% corridor will be presented as other income (expense). For the years ended December 31, 2017, 2016 and 2015, non-service cost components amounted to an $11 million expense, a $2.236 billion expense, and a $420 million benefit, respectively, which were recognized in "Compensation and benefits" on the statements of consolidated income. After adoption, the non-service cost components will be recognized in "Other Income and (Expense)" on the statements of consolidated income.

In January 2017, the FASB issued an accounting standards update to simplify the accounting for goodwill impairment. The update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard will be effective for us in the first quarter of 2020, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption but do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In November 2016, the FASB issued an accounting standards update that is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. The guidance in this update will be applied retrospectively. We adopted this standard on January 1, 2018. As a result of this update, restricted cash will be included within cash and cash equivalents on our statements of consolidated cash flows. As of December 31, 2017 and 2016, we had $449 and $445 million, respectively, in investments and restricted cash primarily associated with our self-insurance requirements.

In August 2016, the FASB issued an accounting standards update that addresses the classification and presentation of specific cash flow issues that currently result in diverse practices. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be applied retrospectively. We adopted this standard on January 1, 2018. We have evaluated the impact of this standard on our statements of consolidated cash flows, and have determined that this standard does not have a material impact.

In February 2016, the FASB issued an accounting standards update that requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with terms beyond twelve months. Although the distinction between operating and finance leases will continue to exist under the new standard, the recognition and measurement of expenses and cash flows will not change significantly from the current treatment. This new guidance requires modified retrospective application and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this update to determine the full impact of its adoption on our consolidated financial position, results of operations, cash flows and related disclosures, as well as the impact of adoption on policies, practices and systems. As of December 31, 2017, we have $1.637 billion of future minimum operating lease commitments that are not currently recognized on our consolidated balance sheet (see note 8). Therefore, we expect material changes to our consolidated balance sheets.

In January 2016, the FASB issued an accounting standards update which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. We adopted this standard on January 1, 2018. This accounting standards update does not have a material impact on our consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued an accounting standards update that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services. The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner depicting the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued a number of updates to this standard. We adopted the standard on January 1, 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this standard. We adopted the standard using a full retrospective approach.

We have determined that revenue recognition will be accelerated for the transportation businesses as the standard requires revenue to be recognized as control is transferred to the customer over time rather than upon delivery. We have determined that the impact of this change to the statements of consolidated income is not material.

The standard also requires us to evaluate whether our businesses promise to transfer services to the customer itself (as a principal) or to arrange for services to be provided by another party (as an agent). To make that determination, the standard uses a control model rather than the risks-and-rewards model in current GAAP. Based on our evaluation of the control model, we determined that certain Supply Chain & Freight businesses act as the principal rather than the agent within their revenue arrangements. This change will require the affected businesses to report transportation revenue gross of associated purchased transportation costs rather than net of such amounts within the statements of consolidated income. This change will result in reclassifications of approximately $709 and $720 million from contra-revenue to operating expenses on the statements of consolidated income for the periods ended December 31, 2017 and 2016, respectively.

In addition to completing our review of contracts and quantifying the impacts on the consolidated financial statements, we have analyzed our internal control over financial reporting framework and determined that there will be new controls added around contract inception and contract modifications, as well as periodic reviews of material contracts. In addition, we have reviewed the impacts of this standard on our footnote disclosures for periods subsequent to January 1, 2018. We have determined that the adoption of this standard will result in several additional disclosures, including but not limited to additional information around our performance obligations, the timing of revenue recognition, remaining performance obligations at period end, contract assets and liabilities and significant judgments made that impact the amount and timing of revenue from our contracts with customers.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. CASH AND INVESTMENTS

The following is a summary of marketable securities classified as trading and available-for-sale at December 31, 2017 and 2016 (in millions):

CostUnrealized GainsUnrealized LossesEstimated Fair Value
2017
Current trading marketable securities:
Corporate debt securities$75$—$—$75
Carbon credit investments(1)7716—93
Total trading marketable securities15216—168
Current available-for-sale marketable securities:
U.S. government and agency debt securities286—(3)283
Mortgage and asset-backed debt securities86——86
Corporate debt securities2011(1)201
Equity securities2——2
Non-U.S. government debt securities9——9
Total available-for-sale marketable securities5841(4)581
Total current marketable securities$736$17$(4)$749
CostUnrealized GainsUnrealized LossesEstimated Fair Value
2016
Current trading marketable securities:
Corporate debt securities$427$—$—$427
Carbon credit investments(1)8010—90
Total trading marketable securities50710—517
Current available-for-sale marketable securities:
U.S. government and agency debt securities314—(2)312
Mortgage and asset-backed debt securities901—91
Corporate debt securities167—(1)166
Equity securities2——2
Non-U.S. government debt securities3——3
Total available-for-sale marketable securities5761(3)574
Total current marketable securities$1,083$11$(3)$1,091
(1) These investments are hedged with forward contracts that are not designated in hedging relationships. See note 15 for offsetting statement of consolidated income impact.

Total current marketable securities that were pledged as collateral for our self-insurance requirements had an estimated fair value of $579 and $572 million at December 31, 2017 and 2016, respectively.

The gross realized gains on sales of available-for-sale securities totaled $0, $1 and $1 million in 2017, 2016, and 2015, respectively. The gross realized losses on sales of available-for-sale securities totaled $2, $1 and $1 million in 2017, 2016, and 2015, respectively.

There were no material impairment losses recognized on marketable securities during 2017, 2016 or 2015.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investment Other-Than-Temporary Impairments

We have concluded that no material other-than-temporary impairment losses existed as of December 31, 2017. In making this determination, we considered the financial condition and prospects of the issuer, the magnitude of the losses compared with the investments’ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

Unrealized Losses

The following table presents the age of gross unrealized losses and fair value by investment category for all securities in a loss position as of December 31, 2017 (in millions):

Less Than 12 Months12 Months or MoreTotal
Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. government and agency debt securities$183$(2)$90$(1)$273$(3)
Mortgage and asset-backed debt securities36—25—61—
Corporate debt securities101(1)70—171(1)
Non-U.S. government debt securities8———8—
Total marketable securities$328$(3)$185$(1)$513$(4)

The unrealized losses for the corporate debt securities and U.S. government and agency debt securities are primarily due to changes in market interest rates. We have both the intent and ability to hold the securities contained in the previous table for a time necessary to recover the cost basis.

Maturity Information

The amortized cost and estimated fair value of marketable securities at December 31, 2017, 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.

CostEstimated Fair Value
Due in one year or less$112$112
Due after one year through three years453449
Due after three years through five years2121
Due after five years7374
659656
Equity and carbon credit investment securities7793
$736$749

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-Current Investments and Restricted Cash

Investments and Restricted Cash are primarily associated with our self-insurance requirements. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in money market funds and corporate and municipal bonds. Collateral provided is reflected in "other investing activities" in the statements of consolidated cash flows. At December 31, 2017 and 2016, we had $449 and $445 million in self-insurance investments and restricted cash, respectively.

We held a $19 and $18 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at December 31, 2017 and 2016, respectively. The quarterly change in investment fair value is recognized in "investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets, primarily real estate, of $15 and $13 million at December 31, 2017 and 2016, respectively.

The amounts described above are classified as “investments and restricted cash” in the consolidated balance sheets.

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 non-current 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 with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 7.56% and 8.06% as of December 31, 2017 and 2016, respectively. These inputs and the resulting fair values are updated on a quarterly basis.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information about our investments measured at fair value on a recurring basis as of December 31, 2017 and 2016, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):

Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Total
2017
Marketable securities:
U.S. government and agency debt securities$283$—$—$283
Mortgage and asset-backed debt securities—86—86
Corporate debt securities—276—276
Equity securities—2—2
Non-U.S. government debt securities—9—9
Carbon credit investments93——93
Total marketable securities376373—749
Other non-current investments19—625
Total$395$373$6$774
Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Total
2016
Marketable securities:
U.S. government and agency debt securities$312$—$—$312
Mortgage and asset-backed debt securities—91—91
Corporate debt securities—593—593
Equity securities—2—2
Non-U.S. government debt securities—3—3
Carbon credit investments90——90
Total marketable securities402689—1,091
Other non-current investments18—1331
Total$420$689$13$1,122

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the years ended December 31, 2017 and 2016 (in millions).

Marketable SecuritiesOther InvestmentsTotal
Balance on January 1, 2016$—$32$32
Transfers into (out of) Level 3———
Net realized and unrealized gains (losses):
Included in earnings (in investment income)—(19)(19)
Included in accumulated other comprehensive income (pre-tax)———
Purchases———
Settlements———
Balance on December 31, 2016$—$13$13
Transfers into (out of) Level 3———
Net realized and unrealized gains (losses):
Included in earnings (in investment income)—(7)(7)
Included in accumulated other comprehensive income (pre-tax)———
Purchases———
Settlements———
Balance on December 31, 2017$—$6$6

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including both owned assets as well as assets subject to capital leases, consists of the following as of December 31, 2017 and 2016 (in millions):

20172016
Vehicles$9,365$8,638
Aircraft16,24815,653
Land1,5821,397
Buildings4,0353,439
Building and leasehold improvements3,9343,612
Plant equipment9,3878,430
Technology equipment1,9071,741
Equipment under operating leases2929
Construction-in-progress2,239735
48,72643,674
Less: Accumulated depreciation and amortization(26,608)(24,874)
$22,118$18,800

We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor our other property, plant and equipment categories for any indicators that the carrying value of the assets may not be recoverable. No impairment charges on property, plant and equipment were recorded in 2017, 2016 or 2015.

NOTE 4. COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS

We sponsor various retirement and pension plans, including defined benefit and defined contribution plans which cover our employees worldwide.

U.S. Pension Benefits

In the U.S. we maintain the following single-employer defined benefit pension plans: the UPS Retirement Plan, the UPS Pension Plan, the UPS/IBT Full-Time Employee Pension Plan and the UPS Excess Coordinating Benefit Plan, a non-qualified plan.

The UPS Retirement Plan is noncontributory and includes substantially all eligible employees of participating domestic subsidiaries who are not members of a collective bargaining unit, as well as certain employees covered by a collective bargaining agreement. This plan generally provides for retirement benefits based on average compensation levels earned by employees prior to retirement. Benefits payable under this plan are subject to maximum compensation limits and the annual benefit limits for a tax-qualified defined benefit plan as prescribed by the Internal Revenue Service (“IRS”).

The UPS Pension Plan is noncontributory and includes certain eligible employees of participating domestic subsidiaries and members of collective bargaining units that elect to participate in the plan. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.

The UPS/IBT Full-Time Employee Pension Plan is noncontributory and includes employees that were previously members of the Central States Pension Fund, a multiemployer pension plan, in addition to other eligible employees who are covered under certain collective bargaining agreements. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.

The UPS Excess Coordinating Benefit Plan is a non-qualified plan that provides benefits to certain participants in the UPS Retirement Plan for amounts that exceed the benefit limits described above.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the year ended December 31, 2017, we amended the UPS Retirement Plan and the UPS Excess Coordinating Benefit Plan to cease accruals of additional benefits for future service and compensation for non-union participants effective January 1, 2023. We remeasured plan assets and pension benefit obligations for the affected pension plans as of June 30, 2017, resulting in a net actuarial gain of $569 million. This reflected a curtailment gain of $1.525 billion resulting from the benefit plan changes that was partially offset by net actuarial losses of $956 million, driven by a reduction of approximately 32 basis points in the discount rate compared to December 31, 2016, offset by actual asset returns approximately 275 basis points above our expected return as of the remeasurement date. The net curtailment gain reduced the actuarial loss recorded in "Accumulated other comprehensive loss" in the equity section of the consolidated balance sheet. As actuarial losses were within the corridor (defined as 10% of the greater of the fair value of plan assets and the plan's projected benefit obligation), there was no impact to the statement of consolidated income as a result of this remeasurement.

The UPS Retirement Plan was closed to new non-union participants effective July 1, 2016. The Company amended the UPS 401(k) Savings Plan so that employees who previously would have been eligible for participation in the UPS Retirement Plan receive, in addition to current benefits under the UPS 401(k) Savings Plan, a UPS Retirement Contribution. For employees eligible to receive the Retirement Contribution, UPS will contribute 3% to 8% of eligible pay to the UPS 401(k) Savings Plan based on years of vesting service and business unit. Contributions will be made annually in cash to the accounts of participants who are employed on December 31st of each calendar year.

During the fourth quarter of 2016, certain former U.S. employees were offered the option to receive a one-time payment of their vested pension benefit. Approximately 22,000 participants accepted this option, accelerating $685 million in benefit payments during 2016 while reducing the number of participants who are due future payments from U.S. pension plans. As the cost of these settlements did not exceed the plans' service cost and interest cost for the year, the impact of the settlement was not recognized in earnings.

International Pension Benefits

We also sponsor various defined benefit plans covering certain of our international employees. The majority of our international obligations are for defined benefit plans in Canada and the United Kingdom. In addition, many of our international employees are covered by government-sponsored retirement and pension plans. We are not directly responsible for providing benefits to participants of government-sponsored plans.

U.S. Postretirement Medical Benefits

We also sponsor postretirement medical plans in the U.S. that provide healthcare benefits to our retirees who meet certain eligibility requirements and who are not otherwise covered by multiemployer plans. Generally, this includes employees with at least 10 years of service who have reached age 55 and employees who are eligible for postretirement medical benefits from a Company-sponsored plan pursuant to collective bargaining agreements. We have the right to modify or terminate certain of these plans. These benefits have been provided to certain retirees on a noncontributory basis; however, in many cases, retirees are required to contribute all or a portion of the total cost of the coverage.

Defined Contribution Plans

We also sponsor several defined contribution plans for all employees not covered under collective bargaining agreements, and for certain employees covered under collective bargaining agreements. The Company matches, in shares of UPS common stock or cash, a portion of the participating employees’ contributions. Matching contributions charged to expense were $119, $111 and $104 million for 2017, 2016 and 2015, respectively.

Effective June 23, 2017, the Company amended the UPS 401(k) Savings Plan so that non-union employees who currently participate in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, earn a UPS Retirement Contribution beginning January 1, 2023. UPS will contribute 5% to 8% of eligible compensation to the UPS 401(k) Savings Plan based on years of vesting service. The amendment also provides for transition contributions for certain participants. There was no impact to the statement of consolidated income for the year ended December 31, 2017 as a result of this change.

As noted above, effective July 1, 2016, the UPS 401(k) Savings Plan was amended so that newly hired employees who previously would have been eligible for participation in the UPS Retirement Plan began receiving a UPS Retirement Contribution. Contributions associated with this amendment charged to expense were $23 and $4 million for 2017 and 2016 respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Contributions are also made to defined contribution money purchase plans under certain collective bargaining agreements. Amounts charged to expense were $91, $82 and $83 million for 2017, 2016 and 2015, respectively.

Net Periodic Benefit Cost

Information about net periodic benefit cost for the company-sponsored pension and postretirement defined benefit plans is as follows (in millions):

U.S. Pension BenefitsU.S. Postretirement Medical BenefitsInternational Pension Benefits
201720162015201720162015201720162015
Net Periodic Benefit Cost:
Service cost$1,543$1,412$1,527$29$28$34$60$49$48
Interest cost1,8131,8281,694112124117404144
Expected return on assets(2,883)(2,516)(2,489)(7)(6)(17)(66)(58)(61)
Amortization of prior service cost192166168755111
Actuarial (gain) loss7292,520705317171811431
Curtailment and settlement loss——————2——
Net periodic benefit cost$1,394$3,410$970$194$168$156$55$147$63

Actuarial Assumptions

The table below provides the weighted-average actuarial assumptions used to determine the net periodic benefit cost.

U.S. Pension BenefitsU.S. Postretirement Medical BenefitsInternational Pension Benefits
201720162015201720162015201720162015
Discount rate4.41%4.86%4.40%4.23%4.79%4.18%2.75%3.51%3.56%
Rate of compensation increase4.27%4.29%4.29%N/AN/AN/A3.17%3.04%3.08%
Expected return on assets8.75%8.75%8.75%8.75%8.75%8.75%5.65%5.73%6.03%

The table below provides the weighted-average actuarial assumptions used to determine the benefit obligations of our plans.

U.S. Pension BenefitsU.S. Postretirement Medical BenefitsInternational Pension Benefits
201720162017201620172016
Discount rate3.84%4.41%3.82%4.23%2.78%2.75%
Rate of compensation increase4.25%4.27%N/AN/A3.23%3.17%

A discount rate is used to determine the present value of our future benefit obligations. To determine the discount rate for our U.S. pension and postretirement benefit plans, we use a bond matching approach to select specific bonds that would satisfy our projected benefit payments. We believe the bond matching approach reflects the process we would employ to settle our pension and postretirement benefit obligations. For our international plans, the discount rate is determined by matching the expected cash flows of a sample plan of similar duration to a yield curve based on long-term, high quality fixed income debt instruments available as of the measurement date. These assumptions are updated each measurement date, which is typically annually.

As of December 31, 2017, the impact of each basis point change in the discount rate on the projected benefit obligation of the pension and postretirement medical benefit plans is as follows (in millions):

Increase (Decrease) in the Projected Benefit Obligation
Pension BenefitsPostretirement Medical Benefits
One basis point increase in discount rate$(75)$(2)
One basis point decrease in discount rate$80$3

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Society of Actuaries ("SOA") published mortality tables and improvement scales are used in developing the best estimate of mortality for U.S. plans. In October 2016, the SOA published an updated improvement scale which reduced expected mortality improvements from previously published scales. Based on our perspective of future longevity, we updated the mortality assumptions to incorporate this updated scale for purposes of measuring pension and other postretirement benefit obligations.

Assumptions for the expected return on plan assets are used to determine a component of net periodic benefit cost for the fiscal year. The assumption for our U.S. plans is developed using a long-term projection of returns for each asset class. Our asset allocation targets are reviewed and, if necessary, updated taking into consideration plan changes, funded status and actual performance. The expected return for each asset class is a function of passive, long-term capital market assumptions and excess returns generated from active management. The capital market assumptions used are provided by independent investment advisors, while excess return assumptions are supported by historical performance, fund mandates and investment expectations.

For plans outside the U.S., consideration is given to local market expectations of long-term returns. Strategic asset allocations are determined by plan based on the nature of liabilities and considering the demographic composition of the plan participants.

Actuarial Assumptions - Central States Pension Fund

UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the plan and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full-Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF.

In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants, including the UPS Transfer Group. We vigorously challenged the proposed benefit reduction plan because we believed that it did not comply with the law and that the CSPF failed to comply with its contractual obligation to obtain our consent to reduce benefits to the UPS Transfer Group under the terms of the withdrawal agreement with the CSPF. On May 6, 2016, the U.S. Department of the Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of requirements set forth in the MPRA.

The CSPF has asserted that it will become insolvent in 2025, which could lead to the reduction of retirement benefits. Although there are numerous factors that could affect the CSPF’s funding status, if the CSPF were to become insolvent as they have projected, UPS may be required to provide coordinating benefits, thereby increasing the current projected benefit obligation for the UPS/IBT Plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.

The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of significant uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to which benefits are paid by the Pension Benefit Guaranty Corporation, our ability to successfully defend our legal positions as well as the effect of discount rates, CSPF asset returns and various other actuarial assumptions.

We account for this potential obligation under Accounting Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”). Under ASC 715 we are required to provide a best estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely solution to this matter and the broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities. Our best estimate as of the measurement date of December 31, 2017, does not incorporate this solution. However, if a future change in law resulted in an obligation to provide coordinating benefits under the UPS/IBT Plan, it may be a significant event, and may require us to remeasure the plan assets and projected benefit obligation of the UPS/IBT Plan at the date the law is enacted.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will submit another benefit suspension application under the MPRA to forestall insolvency without reducing benefits to the UPS Transfer Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing, we would be in a strong legal position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction, without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate as of the measurement date of December 31, 2017, is that there is no liability to be recognized for additional coordinating benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as the uncertainties are resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in accordance with ASC 715.

Other Actuarial Assumptions

Healthcare cost trends are used to project future postretirement medical benefits payable from our plans. For year-end 2017 U.S. plan obligations, future postretirement medical benefit costs were forecasted assuming an initial annual rate of increase of 6.5%, decreasing to 4.5% by the year 2022 and with consistent annual increases at that ultimate level thereafter.

Assumed healthcare cost trends can have a significant effect on the amounts reported for our postretirement medical plans. A one percent change in assumed healthcare cost trend rates would have had the following effects on 2017 results (in millions):

1% Increase1% Decrease
Effect on total of service cost and interest cost$3$(3)
Effect on postretirement benefit obligation$65$(71)

Funded Status

The following table discloses the funded status of our plans and the amounts recognized in our consolidated balance sheets as of December 31st (in millions):

U.S. Pension BenefitsU.S. Postretirement Medical BenefitsInternational Pension Benefits
201720162017201620172016
Funded Status:
Fair value of plan assets$41,932$31,215$183$15$1,333$1,092
Benefit obligation(45,847)(41,069)(2,792)(2,730)(1,651)(1,425)
Funded status recognized at December 31$(3,915)$(9,854)$(2,609)$(2,715)$(318)$(333)
Funded Status Recognized in our Balance Sheet:
Other non-current assets$284$—$—$—$35$28
Other current liabilities(18)(17)(77)(216)(5)(3)
Pension and postretirement benefit obligations(4,181)(9,837)(2,532)(2,499)(348)(358)
Net liability at December 31$(3,915)$(9,854)$(2,609)$(2,715)$(318)$(333)
Amounts Recognized in AOCI:
Unrecognized net prior service cost$(880)$(1,074)$(29)$(36)$(2)$(3)
Unrecognized net actuarial gain (loss)(4,277)(4,107)(195)(80)(126)(150)
Gross unrecognized cost at December 31(5,157)(5,181)(224)(116)(128)(153)
Deferred tax assets (liabilities) at December 311,8401,94869443137
Net unrecognized cost at December 31$(3,317)$(3,233)$(155)$(72)$(97)$(116)

The accumulated benefit obligation for our pension plans as of the measurement dates in 2017 and 2016 was $45.776 and $39.488 billion, respectively.

Benefit payments under the pension plans include $22 million paid from employer assets in 2017 and in 2016. Benefit payments (net of participant contributions) under the postretirement medical benefit plans include $93 and $98 million paid from employer assets in 2017 and 2016, respectively. Such benefit payments from employer assets are also categorized as employer contributions.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2017 and 2016, the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with benefit obligations in excess of plan assets were as follows (in millions):

Projected Benefit Obligation Exceeds the Fair Value of Plan AssetsAccumulated Benefit Obligation Exceeds the Fair Value of Plan Assets
2017201620172016
U.S. Pension Benefits:
Projected benefit obligation$37,113$41,069$37,113$41,069
Accumulated benefit obligation35,53838,19435,53838,194
Fair value of plan assets32,91431,21532,91431,215
International Pension Benefits:
Projected benefit obligation$1,138$1,370$647$1,365
Accumulated benefit obligation9921,2385491,234
Fair value of plan assets7981,0203421,016

The accumulated postretirement benefit obligation exceeds plan assets for all of our U.S. postretirement medical benefit plans.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Benefit Obligations and Fair Value of Plan Assets

The following table provides a reconciliation of the changes in the plans’ benefit obligations and fair value of plan assets as of the respective measurement dates in each year (in millions).

U.S. Pension BenefitsU.S. Postretirement Medical BenefitsInternational Pension Benefits
201720162017201620172016
Benefit Obligations:
Projected benefit obligation at beginning of year$41,069$36,846$2,730$2,673$1,425$1,219
Service cost1,5431,41229286049
Interest cost1,8131,8281121244041
Gross benefits paid(1,309)(1,885)(264)(264)(32)(28)
Plan participants’ contributions——262733
Plan amendments(1)—285—15——
Actuarial (gain)/loss4,2562,58315912626208
Foreign currency exchange rate changes————129(67)
Curtailments and settlements(1,525)———(3)(3)
Other———133
Projected benefit obligation at end of year$45,847$41,069$2,792$2,730$1,651$1,425
(1) Resulting from a new labor contract with the Independent Pilots Association.
U.S. Pension BenefitsU.S. Postretirement Medical BenefitsInternational Pension Benefits
201720162017201620172016
Fair Value of Plan Assets:
Fair value of plan assets at beginning of year$31,215$28,887$15$130$1,092$1,014
Actual return on plan assets4,7171,735(2)396108
Employer contributions7,3092,4784081197771
Plan participants’ contributions——262733
Gross benefits paid(1,309)(1,885)(264)(264)(32)(28)
Foreign currency exchange rate changes————100(73)
Curtailments and settlements————(3)(3)
Fair value of plan assets at end of year$41,932$31,215$183$15$1,333$1,092

Pension and Postretirement Plan Assets

Under the governance of plan trustees, the investment committee establishes investment guidelines and strategies and regularly monitors the performance of investments and investment managers. The investment guidelines address items such as establishing appropriate governance provisions; defining investment objectives; determining strategic asset allocation; monitoring and reporting the investments on a regular basis; appointing/dismissing investment managers, custodians, consultants and advisors; risk management; determining/defining the mandates for investment managers; rebalancing of assets and determining investment restrictions/prohibited investments.

Pension assets are invested in accordance with applicable laws and regulations. The primary long-term investment objectives for pension assets are to: (1) provide for a reasonable amount of long-term growth of capital given prudent levels of risk exposure while minimizing permanent loss of capital; (2) generate investment results that meet or exceed the long-term rate of return assumption for the plans and (3) match the duration of the liabilities and assets of the plans to reduce the need for large employer contributions in the future. In furtherance of these objectives, investment managers are engaged to actively manage assets within the guidelines and strategies set forth by the Investment Committee. Active managers are monitored regularly and their performance is compared to applicable benchmarks.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

Pension assets utilizing Level 1 inputs include equity investments, corporate debt instruments and U.S. government securities. Fair values were determined by closing prices for those securities traded on national stock exchanges, while securities traded in the over-the-counter market and listed securities for which no sale was reported on the valuation date are valued at the mean between the last reported bid and asked prices.

Level 2 assets include certain bonds that are valued based on yields currently available on comparable securities of other issues with similar credit ratings; mortgage-backed securities that are valued based on cash flow and yield models using acceptable modeling and pricing conventions; and certain investments that are pooled with other investments in a commingled fund. We value our investments in commingled funds by taking the percentage ownership of the underlying assets, each of which has a readily determinable fair value.

Fair value estimates for certain investments are based on unobservable inputs that are not corroborated by observable market data and are thus classified as Level 3.

Investments that do not have a readily determinable fair value, and which provide a net asset value ("NAV" or its equivalent) developed consistent with FASB measurement principles, are valued using NAV as a practical expedient. These investments are not classified in Levels 1, 2, or 3 of the fair value hierarchy, but are included in the totals in the tables shown below. These investments include hedge funds, risk parity funds, real estate investments, private debt and private equity funds. Investments in hedge funds are valued using reported NAVs as of December 31st. These assets are primarily invested in a portfolio of diversified, direct investments and funds of hedge funds. Real estate investments, private debt and private equity funds are valued using fair values per the most recent partnership audited financial reports, adjusted, as appropriate, for any lag between the date of the financial reports and December 31st. The fair values may, due to the inherent uncertainty of valuation for those alternative investments, differ significantly from the values that would have been used had a ready market for the alternative investments existed, and any differences could be material. These investments are described further below:

•Hedge Funds: Plan assets are invested in hedge funds that pursue multiple strategies to diversify risk and reduce volatility. Most of these hedge funds allow redemptions either quarterly or semi-annually after a two to three month notice period, while others allow for redemption after only a brief notification period with no restriction on redemption frequency. No unfunded commitments existed with respect to hedge funds as of December 31, 2017.
•Risk Parity Funds: Plan assets are invested in risk parity strategies in order to provide diversification and balance risk/return objectives. These strategies reflect a multi-asset class balanced risk approach generally consisting of equity, interest rates, credit and commodities. These funds allow for monthly redemptions with only a brief notification period. No unfunded commitments existed with respect to risk parity funds as of December 31, 2017.
•Real Estate, Private Debt and Private Equity Funds: Plan assets are invested in limited partnership interests in various private equity, private debt and real estate funds. Limited provision exists for the redemption of these interests by the limited partners that invest in these funds until the end of the term of the partnerships, typically ranging between 10 and 15 years from the date of inception. An active secondary market exists for similar partnership interests, although no particular value (discount or premium) can be guaranteed. At December 31, 2017, unfunded commitments to such limited partnerships totaling approximately $2.546 billion are expected to be contributed over the remaining investment period, typically ranging between three and six years.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair values of U.S. and international pension and postretirement benefit plan assets by asset category as of December 31, 2017 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations.

Total Assets(1)Level 1Level 2Level 3Percentage of Plan AssetsTarget Allocation
Asset Category (U.S. Plans):
Cash and cash equivalents(2)$5,725$5,292$433$—13.6%0-5
Equity Securities:
U.S. Large Cap5,9243,1212,803—
U.S. Small Cap591421170—
Emerging Markets2,1011,669432—
Global Equity2,8172,400417—
International Equity4,7912,9501,841—
Total Equity Securities16,22410,5615,663—38.535-55
Fixed Income Securities:
U.S. Government Securities7,6957,323372—
Corporate Bonds3,865—3,8578
Global Bonds53—53—
Municipal Bonds21—21—
Total Fixed Income Securities11,6347,3234,303827.625-35
Other Investments:
Hedge Funds2,910—1,031—6.95-15
Private Equity2,107———5.01-10
Private Debt953—237—2.31-10
Real Estate2,031157139—4.81-10
Structured Products(3)172—172—0.40-5
Risk Parity Funds359——0.91-10
Total U.S. Plan Assets$42,115$23,333$11,978$8100.0%
Asset Category (International Plans):
Cash and cash equivalents$78$43$355.80-10
Equity Securities:
Local Markets Equity213—213
U.S. Equity30—30
Emerging Markets3838—
International / Global Equity356166190
Total Equity Securities637204433—47.730-60
Fixed Income Securities:
Local Government Bonds1032578
Corporate Bonds19859139
Total Fixed Income Securities30184217—22.625-50
Other Investments:
Real Estate124—799.35-10
Other193—18414.60-20
Total International Plan Assets$1,333$331$948$—100.0%
Total Plan Assets$43,448$23,664$12,926$8

(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the category totals.

(2) Includes $5 billion in contributions made in December 2017 that had not yet been invested according to the targeted allocation.

(3) Represents mortgage and asset-backed securities.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair values of U.S. and international pension and postretirement benefit plan assets by asset category as of December 31, 2016 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations.

Total Assets(1)Level 1Level 2Level 3Percentage of Plan AssetsTarget Allocation
Asset Category (U.S. Plans):
Cash and cash equivalents$304$102$202$—1.0%0-5
Equity Securities:
U.S. Large Cap4,8832,3272,556—
U.S. Small Cap542393149—
Emerging Markets1,3961,236160—
Global Equity2,6032,55548—
International Equity3,0262,197829—
Total Equity Securities12,4508,7083,742—39.935-55
Fixed Income Securities:
U.S. Government Securities6,1735,821352—
Corporate Bonds4,492—4,492—
Global Bonds161—59—
Municipal Bonds24—24—
Total Fixed Income Securities10,8505,8214,927—34.625-35
Other Investments:
Hedge Funds2,867—763—9.25-15
Private Equity1,716———5.51-10
Private Debt496———1.61-10
Real Estate1,734122144—5.61-10
Structured Products(2)492—492—1.60-5
Risk Parity Funds321———1.01-10
Total U.S. Plan Assets$31,230$14,753$10,270$—100.0%
Asset Category (International Plans):
Cash and cash equivalents$54$37$17—4.90-15
Equity Securities:
Local Markets Equity188—188—
U.S. Equity20—20—
Emerging Markets2626——
International / Global Equity288141147—
Total Equity Securities522167355—47.750-65
Fixed Income Securities:
Local Government Bonds842262—
Corporate Bonds15851107—
Total Fixed Income Securities24273169—22.215-35
Other Investments:
Real Estate93—57—8.50-17
Other181—175—16.70-20
Total International Plan Assets$1,092$277$773$—100.0%
Total Plan Assets$32,322$15,030$11,043$—

(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the category totals.

(2) Represents mortgage and asset-backed securities.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the changes in the Level 3 instruments measured on a recurring basis for the years ended December 31, 2017 and 2016 (in millions).

Corporate BondsOtherTotal
Balance on January 1, 2016$6$49$55
Actual Return on Assets:
Assets Held at End of Year———
Assets Sold During the Year—(49)(49)
Purchases———
Sales(6)—(6)
Transfers Into (Out of) Level 3———
Balance on December 31, 2016$—$—$—
Actual Return on Assets:
Assets Held at End of Year———
Assets Sold During the Year———
Purchases9—9
Sales(1)—(1)
Transfers Into (Out of) Level 3———
Balance on December 31, 2017$8$—$8

There were no UPS class A or B shares of common stock directly held in plan assets as of December 31, 2017 or December 31, 2016.

Accumulated Other Comprehensive Income

The estimated amounts of prior service cost in AOCI expected to be amortized and recognized as a component of net periodic benefit cost in 2018 are as follows (in millions):

U.S. Pension BenefitsU.S. Postretirement Medical BenefitsInternational Pension Benefits
Prior service cost$193$7$1

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Expected Cash Flows

Information about expected cash flows for the pension and postretirement benefit plans is as follows (in millions):

U.S. Pension BenefitsU.S. Postretirement Medical BenefitsInternational Pension Benefits
Expected Employer Contributions:
2018 to plan trusts$—$—$75
2018 to plan participants19785
Expected Benefit Payments:
2018$1,294$237$24
20191,41823927
20201,55123730
20211,69123136
20221,83622241
2023 - 202711,358967286

Our funding policy for U.S. plans is to contribute amounts annually that are at least equal to the amounts required by applicable laws and regulations, or to directly fund payments to plan participants, as applicable. International plans will be funded in accordance with local regulations. Additional discretionary contributions may be made when deemed appropriate to meet the long-term obligations of the plans. Expected benefit payments for pensions will be primarily paid from plan trusts. Expected benefit payments for postretirement medical benefits will be paid from plan trusts and corporate assets.

NOTE 5. MULTIEMPLOYER EMPLOYEE BENEFIT PLANS

We contribute to a number of multiemployer defined benefit plans under the terms of collective bargaining agreements that cover our union-represented employees. These plans generally provide for retirement, death and/or termination benefits for eligible employees within the applicable collective bargaining units, based on specific eligibility/participation requirements, vesting periods and benefit formulas. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:

•Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
•If we negotiate to cease participating in a multiemployer plan, we may be required to pay that plan an amount based on our allocable share of its underfunded status, referred to as a "withdrawal liability". However, cessation of participation in a multiemployer plan and subsequent payment of any withdrawal liability is subject to the collective bargaining process.
•If any of the multiemployer pension plans in which we participate enter critical status, and our contributions are not sufficient to satisfy any rehabilitation plan funding schedule, we could be required under the Pension Protection Act of 2006 to make additional surcharge contributions to the multiemployer pension plan in the amount of five to ten percent of the existing contributions required by our labor agreement. Such surcharges would cease upon the ratification of a new collective bargaining agreement, and could not recur unless a plan re-entered critical status at a later date.

The discussion that follows sets forth the financial impact on our results of operations and cash flows for the years ended December 31, 2017, 2016 and 2015, from our participation in multiemployer benefit plans. As part of the overall collective bargaining process for wage and benefit levels, we have agreed to contribute certain amounts to the multiemployer benefit plans during the contract period. The multiemployer benefit plans set benefit levels and are responsible for benefit delivery to participants. Future contribution amounts to multiemployer benefit plans are determined only through collective bargaining, and we have no additional legal or constructive obligation to increase contributions beyond the agreed-upon amounts (except potential surcharges under the Pension Protection Act of 2006 as described above).

The number of employees covered by our multiemployer pension plans has remained consistent over the past three years, and there have been no significant changes that affect the comparability of 2017, 2016 and 2015 contributions. We recognize expense for the contractually-required contribution for each period, and we recognize a liability for any contributions due and unpaid at the end of a reporting period.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Status of Collective Bargaining Agreements

As of December 31, 2017, we had approximately 280,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. These agreements run through July 31, 2018. We have approximately 2,700 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which runs through September 1, 2021. Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727. In addition, approximately 3,100 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”) that will expire on July 31, 2019.

Multiemployer Pension Plans

The following table outlines our participation in multiemployer pension plans for the periods ended December 31, 2017, 2016 and 2015, and sets forth our calendar year contributions and accruals for each plan. The “EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”) and the three-digit plan number. The most recent Pension Protection Act zone status available in 2017 and 2016 relates to the plans’ two most recent fiscal year-ends. The zone status is based on information that we received from the plans’ administrators and is certified by each plan’s actuary. Plans certified in the red zone are generally less than 65% funded, plans certified in the orange zone are both less than 80% funded and have an accumulated funding deficiency or are expected to have a deficiency in any of the next six plan years, plans certified in the yellow zone are less than 80% funded, and plans certified in the green zone are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicates whether a financial improvement plan (“FIP”) for yellow/orange zone plans, or a rehabilitation plan (“RP”) for red zone plans, is either pending or has been implemented. As of December 31, 2017, all plans that have either a FIP or RP requirement have had the respective plan implemented.

Our collectively-bargained contributions satisfy the requirements of all implemented FIPs and RPs and do not currently require the payment of any surcharges. In addition, minimum contributions outside of the agreed upon contractual rates are not required. For the plans detailed in the following table, the expiration date of the associated collective bargaining agreements is July 31, 2018, with the exception of the Automotive Industries Pension Plan and the IAM National Pension Fund / National Pension Plan which both have a July 31, 2019 expiration date. For all plans detailed in the following table, we provided more than 5% of the total plan contributions from all employers for 2017, 2016 and 2015 (as disclosed in the annual filing with the Department of Labor for each respective plan).

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain plans have been aggregated in the “all other multiemployer pension plans” line in the following table, as the contributions to each of these individual plans are not material.

EIN / Pension PlanPension Protection Act Zone StatusFIP / RP Status Pending /(in millions) UPS Contributions and AccrualsSurcharge
Pension FundNumber20172016Implemented201720162015Imposed
Alaska Teamster-Employer Pension Plan92-6003463-024RedRedYes/Implemented$5$5$5No
Automotive Industries Pension Plan94-1133245-001RedRedYes/Implemented544No
Central Pennsylvania Teamsters Defined Benefit Plan23-6262789-001GreenGreenNo403836No
Eastern Shore Teamsters Pension Fund52-0904953-001GreenGreenNo554No
Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund55-6021850-001RedRedYes/Implemented121111No
Hagerstown Motor Carriers and Teamsters Pension Fund52-6045424-001RedRedYes/Implemented877No
I.A.M. National Pension Fund / National Pension Plan51-6031295-002GreenGreenNo353129No
International Brotherhood of Teamsters Union Local No. 710 Pension Fund36-2377656-001GreenGreenNo118107106No
Local 705, International Brotherhood of Teamsters Pension Plan36-6492502-001YellowRedYes/Implemented938891No
Local 804 I.B.T. & Local 447 I.A.M.—UPS Multiemployer Retirement Plan51-6117726-001YellowRedYes/Implemented11010397No
Milwaukee Drivers Pension Trust Fund39-6045229-001GreenGreenNo383635No
New England Teamsters & Trucking Industry Pension Fund04-6372430-001RedRedYes/Implemented114114110No
New York State Teamsters Conference Pension and Retirement Fund16-6063585-074RedRedYes/Implemented1009186No
Teamster Pension Fund of Philadelphia and Vicinity23-1511735-001YellowYellowYes/Implemented605653No
Teamsters Joint Council No. 83 of Virginia Pension Fund54-6097996-001GreenYellowNo646157No
Teamsters Local 639—Employers Pension Trust53-0237142-001GreenGreenNo555148No
Teamsters Negotiated Pension Plan43-6196083-001GreenGreenNo323130No
Truck Drivers and Helpers Local Union No. 355 Retirement Pension Plan52-6043608-001GreenYellowNo201917No
United Parcel Service, Inc.—Local 177, I.B.T. Multiemployer Retirement Plan13-1426500-419RedRedYes/Implemented888383No
Western Conference of Teamsters Pension Plan91-6145047-001GreenGreenNo772694646No
Western Pennsylvania Teamsters and Employers Pension Fund25-6029946-001RedRedYes/Implemented302826No
All Other Multiemployer Pension Plans665642
Total Contributions$1,870$1,719$1,623

Agreement with the New England Teamsters and Trucking Industry Pension Fund

In 2012, we reached an agreement with the New England Teamsters and Trucking Industry Pension Fund ("NETTI Fund"), a multiemployer pension plan in which UPS is a participant, to restructure the pension liabilities for approximately 10,200 UPS employees represented by the Teamsters. As of December 31, 2017 and 2016, we had $859 and $866 million, respectively, recognized in "other non-current liabilities" on our consolidated balance sheets representing the remaining balance of the NETTI Fund withdrawal liability. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value of the NETTI Fund withdrawal liability as of December 31, 2017 and 2016 was $921 and $861 million. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Multiemployer Health and Welfare Plans

We also contribute to several multiemployer health and welfare plans that cover both active and retired employees. Healthcare benefits are provided to participants who meet certain eligibility requirements as covered under the applicable collective bargaining unit. The following table sets forth our calendar year plan contributions and accruals. Certain plans have been aggregated in the “all other multiemployer health and welfare plans” line in the table, as the contributions to each of these individual plans are not material.

(in millions) UPS Contributions and Accruals
Health and Welfare Fund201720162015
Central States, South East & South West Areas Health and Welfare Fund$2,366$2,268$2,081
Teamsters Western Region & Local 177 Health Care Plan605571515
Health & Welfare Insurance Fund Teamsters Local 653766
Bay Area Delivery Drivers373534
Central Pennsylvania Teamsters Health & Pension Fund272523
Delta Health Systems—East Bay Drayage Drivers292727
Employer—Teamster Local Nos. 175 & 505111110
Joint Council #83 Health & Welfare Fund373328
Local 191 Teamsters Health Fund131211
Local 401 Teamsters Health & Welfare Fund987
Local 804 Welfare Trust Fund847975
Milwaukee Drivers Pension Trust Fund—Milwaukee Drivers Health and Welfare Trust Fund383634
Montana Teamster Employers Trust887
New York State Teamsters Health & Hospital Fund595653
North Coast Benefit Trust1188
Northern California General Teamsters (DELTA)132116108
Northern New England Benefit Trust504742
Oregon / Teamster Employers Trust383431
Teamsters 170 Health & Welfare Fund171615
Teamsters Benefit Trust464336
Teamsters Local 251 Health & Insurance Plan151413
Teamsters Local 404 Health & Insurance Plan877
Teamsters Local 638 Health Fund434039
Teamsters Local 639—Employers Health & Pension Trust Funds272726
Teamsters Local 671 Health Services & Insurance Plan171715
Teamsters Union 25 Health Services & Insurance Plan525046
Teamsters Union Local 677 Health Services & Insurance Plan111010
Truck Drivers and Helpers Local 355 Baltimore Area Health & Welfare Fund161615
Utah-Idaho Teamsters Security Fund292625
Washington Teamsters Welfare Trust524744
All Other Multiemployer Health and Welfare Plans786895
Total Contributions$3,972$3,761$3,486

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

The following table indicates the allocation of goodwill by segment (in millions):

U.S. Domestic PackageInternational PackageSupply Chain & FreightConsolidated
Balance on January 1, 2016$715$425$2,279$3,419
Acquired——359359
Currency / Other—(18)(3)(21)
Balance on December 31, 2016$715$407$2,635$3,757
Acquired—185472
Currency / Other—103343
Balance on December 31, 2017$715$435$2,722$3,872

2017 Goodwill Activity

The goodwill acquired in the Supply Chain & Freight segment is primarily related to our January 2017 acquisition of Freightex Ltd. ("Freightex") and our November 2017 acquisition of STTAS Global Holdings, Inc ("Sandler & Travis Trade Advisory Services" or "STTAS"). The remaining goodwill acquired in the Supply Chain & Freight segment was related to other, smaller acquisitions immaterial to our consolidated financial position or results of operations.

The goodwill acquired in the International Package segment is related to our June 2017 acquisition of Eirpost Group Unlimited Company ("Nightline").

The remaining change in goodwill for both the Supply Chain & Freight and the International Package segments was due to immaterial purchase accounting adjustments and the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.

2016 Goodwill Activity

The goodwill acquired in the Supply Chain & Freight segment was related to our December 2016 acquisition of Maze 1 Limited ("Marken").

The remaining change in goodwill for both the Supply Chain & Freight and the International Package segments was due to immaterial purchase accounting adjustments and the impact of changes in the value of the U.S. Dollar on the translation of non-U.S. Dollar goodwill balances.

The estimates of the fair value of assets acquired and liabilities assumed are subject to change based on the completion of purchase accounting. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition. See note 7 for further discussion of these acquisitions.

Goodwill Impairment and Annual Assessment Date Change

During the third quarter of 2017, we changed the measurement date of our annual goodwill impairment test from October 1st to July 1st. This change better aligns the timing of the goodwill impairment test with our long-term business planning process. The change was not material to our consolidated financial statements as it did not result in the delay, acceleration or avoidance of an impairment charge.

We completed our annual goodwill impairment valuation, as of July 1st, on a reporting unit basis which we own at the testing date. For the periods presented, no triggering events were identified that required an interim impairment test.

U.S. Domestic Package is our largest reporting segment. In our International Package reporting segment, we have the following reporting units: Europe, Asia, Americas and ISMEA (Indian Subcontinent, Middle East and Africa). In our Supply Chain & Freight segment we have the following reporting units: Forwarding, Logistics, UPS Mail Innovations, UPS Freight, The UPS Store, UPS Capital, Marken and Coyote Logistics.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In assessing our goodwill for impairment, we initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive and it is necessary to calculate the fair value of a reporting unit, then we utilize a two-step process to test goodwill for impairment. First, a comparison of the fair value of the applicable reporting unit with the aggregate carrying value, including goodwill, is performed. We primarily determine the fair value of our reporting units using a discounted cash flow model, and supplement this with observable valuation multiples for comparable companies, as applicable. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step includes comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.

In 2017, we utilized a qualitative assessment to determine that it was more likely than not that the reporting unit fair value exceeded the carrying value for our U.S. Domestic Package, Europe Package, Asia Package, Americas Package, ISMEA Package, Forwarding, UPS Mail Innovations, The UPS Store and UPS Capital reporting units. For the remaining reporting units owned at the annual goodwill impairment testing date, we utilized the two-step process to test goodwill for impairment. We did not have any goodwill impairment charges in 2017, 2016 or 2015. Cumulatively, our Supply Chain & Freight segment has recorded $622 million of goodwill impairment charges, while our International and U.S. Domestic Package segments have not recorded any goodwill impairment charges.

Intangible Assets

The following is a summary of intangible assets at December 31, 2017 and 2016 (in millions):

Gross Carrying AmountAccumulated AmortizationNet Carrying ValueWeighted- Average Amortization Period (in years)
December 31, 2017
Capitalized software$3,273$(2,310)$9636.9
Licenses114(10)1043.9
Franchise rights144(97)4720.0
Customer relationships776(160)61610.8
Trade name200—200NA
Trademarks, patents and other71(37)345.4
Total Intangible Assets$4,578$(2,614)$1,9647.9
December 31, 2016
Capitalized software$2,933$(2,157)$776
Licenses131(70)61
Franchise rights128(90)38
Customer relationships724(85)639
Trade name200—200
Trademarks, patents and other67(23)44
Total Intangible Assets$4,183$(2,425)$1,758

A trade name and licenses with a carrying value of $200 and $5 million, respectively, as of December 31, 2017 are deemed to be indefinite-lived intangible assets, and therefore are not amortized. Impairment tests for indefinite-lived intangible assets are performed on an annual basis. All of our other recorded intangible assets are deemed to be finite-lived intangibles, and are thus amortized over their estimated useful lives. Impairment tests for these intangible assets are only performed when a triggering event occurs that may indicate that the carrying value of the intangible may not be recoverable. There was a $7 million impairment of a finite-lived intangible asset and no impairment of finite-lived and indefinite-lived intangible assets in 2017 and 2016, respectively.

Amortization of intangible assets was $287, $321 and $261 million during 2017, 2016 and 2015, respectively. Expected amortization of finite-lived intangible assets recorded as of December 31, 2017 for the next five years is as follows (in millions): 2018—$367; 2019—$328; 2020—$287; 2021—$232; 2022—$180. Amortization expense in future periods will be affected by business acquisitions, software development, licensing agreements, franchise rights purchases and other factors.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. BUSINESS ACQUISITIONS

In January 2017, we acquired Freightex Ltd. ("Freightex"), a U.K.-based asset-light provider of truckload, less-than-truckload and specialized over-the-road services, which was added to our Supply Chain & Freight segment. In June 2017, we acquired Eirpost Group Unlimited Company ("Nightline"), an Ireland-based express delivery and logistics company, which was added to our International Package reporting segment. In November 2017, we acquired STTAS, a global trade compliance management company, which was added to our Supply Chain & Freight segment. These acquisitions were funded with cash from operations and were not material to our consolidated financial position or results of operations.

In December 2016, we acquired Marken, a global provider of supply chain solutions to the life sciences industry and leader in clinical trials, material storage and distribution, for approximately $570 million. The purchase price allocation was completed in the fourth quarter of 2017 and there were no material changes to our estimated fair values of assets acquired and liabilities assumed. The financial results of Marken are included in the Supply Chain & Freight segment from the date of acquisition.

The following table summarizes the fair values of the Marken assets acquired and liabilities assumed at the acquisition date (in millions):

Marken Assets Acquired and (Liabilities) Assumed
Cash and cash equivalents$26
Accounts receivable34
Other current assets6
Deferred tax assets35
Property, plant, and equipment7
Goodwill319
Intangible assets238
Accounts payable and other current liabilities(29)
Deferred tax liabilities(66)
Total purchase price$570

The goodwill recognized of approximately $319 million is attributable to synergies anticipated from future growth of Marken. None of the goodwill is deductible for income tax purposes.

The intangible assets acquired of approximately $238 million primarily consist of $219 million of customer relationships (amortized over 12 years), $10 million of trade name (amortized over 3 years), $8 million of capitalized software (amortized over 3-5 years) and a $1 million agent network (amortized over 4 years). The carrying value of working capital approximates fair value.

We recognized approximately $8 million of acquisition related costs that were expensed in 2016. These costs are included in "other expenses" within the statements of consolidated income.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. DEBT AND FINANCING ARRANGEMENTS

The following table sets forth the principal amount, maturity or range of maturities, as well as the carrying value of our debt obligations, as of December 31, 2017 and 2016 (in millions). The carrying value of these debt obligations can differ from the principal amount due to the impact of unamortized discounts or premiums and valuation adjustments resulting from interest rate swap hedging relationships.

PrincipalCarrying Value
AmountMaturity20172016
Commercial paper$3,2032018$3,203$3,250
Fixed-rate senior notes:
1.125% senior notes3752017—374
5.500% senior notes7502018751769
5.125% senior notes1,00020191,0191,043
3.125% senior notes1,50020211,5491,584
2.050% senior notes7002021696—
2.450% senior notes1,0002022979986
2.350% senior notes6002022597—
2.500% senior notes1,0002023992—
2.800% senior notes5002024495—
2.400% senior notes5002026497497
3.050% senior notes1,0002027990—
6.200% senior notes1,50020381,4821,481
4.875% senior notes5002040489489
3.625% senior notes3752042368367
3.400% senior notes5002046491491
3.750% senior notes1,15020471,135—
Floating-rate senior notes:
Floating-rate senior notes3502021348—
Floating-rate senior notes4002022398—
Floating-rate senior notes5002023496—
Floating-rate senior notes1,0432049-20671,032824
8.375% Debentures:
8.375% debentures4242020447461
8.375% debentures2762030282282
Pound Sterling Notes:
5.500% notes9020318476
5.125% notes6142050586535
Euro Senior Notes:
0.375% senior notes8392023832—
1.625% senior notes8392025833732
1.000% senior notes5992028595523
1.500% senior notes5992032594—
Floating-rate senior notes5992020598525
Canadian senior notes:
2.125% senior notes5972024593—
Capital lease obligations5002018– 3005500447
Facility notes and bonds3202029 – 2045319319
Other debt192018 – 20221920
Total debt$24,76124,28916,075
Less: current maturities(4,011)(3,681)
Long-term debt$20,278$12,394

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Issuances

On May 16, 2017 we issued U.S. senior rate notes. These senior notes consist of two separate series, as follows:

•Two series of notes, in the principal amounts of $600 and $400 million, were issued. These notes bear interest at a 2.350% fixed rate and at three-month LIBOR plus 38 basis points, respectively, and mature May 2022. Interest on the fixed-rate senior notes is payable semi-annually, beginning November 2017. Interest on the floating-rate senior notes is payable quarterly beginning August 2017. The 2.350% notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points and accrued interest. The floating-rate senior notes are not callable.

On May 18, 2017 we issued Canadian senior notes. These senior notes consist of a single series as follows:

•Notes in the principal amount of C$750 million ($547 million), which bear interest at a 2.125% fixed interest rate and mature May 2024. Interest on the notes is payable semi-annually beginning November 2017. The notes are callable at our option, in whole or in part at the Government of Canada yield plus 21.5 basis points, and on or after the par call date, at par value.

On November 8, 2017, we issued Euro senior rate notes. These senior notes consist of two separate series, as follows:

•Two series of notes, in the principal amount of €700 million ($815 million) and €500 million ($582 million) were issued. These notes bear interest at 0.375% and 1.500% fixed rates, respectively, and mature November 2023 and November 2032, respectively. Interest on these notes is payable annually, beginning in November 2018. The notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable government bond yield plus 10 and 20 basis points, respectively, and accrued interest.

On November 9, 2017, we issued U.S. senior rate notes. These senior notes consist of seven separate series, as follows:

•Notes in the principal amount of $350 million, which bear interest at three-month LIBOR plus 15 basis points and mature April 2021. Interest on the notes is payable quarterly beginning April 2018. These notes are not callable.
•Notes in the principal amount of $500 million, which bear interest at three-month LIBOR plus 45 basis points and mature April 2023. Interest on the notes is payable quarterly beginning April 2018. These notes are not callable.
•Notes in the principal amount of $700 million, which bear interest at a 2.050% fixed rate and mature April 2021. Interest on the fixed-rate senior notes is payable semi-annually, beginning April 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points and accrued interest.
•Notes in the principal amount of $1 billion, which bear interest at a 2.500% fixed interest rate and mature April 2023. Interest on the fixed-rate senior notes is payable semi-annually, beginning April 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points plus accrued interest. If called within the one month prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and unpaid interest, if any, to, but excluding the redemption date.
•Notes in the principal amount of $500 million, which bear interest at a 2.800% fixed interest rate and mature November 2024. Interest on the fixed-rate senior notes is payable semi-annually, beginning May 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 10 basis points plus accrued interest. If called within the two months prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and unpaid interest, if any, to, but excluding the redemption date.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

•Notes in the principal amount of $1 billion, which bear interest at a 3.050% fixed interest rate and mature November 2027. Interest on the fixed-rate senior notes is payable semi-annually, beginning May 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 15 basis points plus accrued interest. If called within the three months prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and unpaid interest, if any, to, but excluding the redemption date.
•Notes in the principal amount of $1.15 billion, which bear interest at a 3.750% fixed interest rate and mature November 2047. Interest on the fixed-rate senior notes is payable semi-annually, beginning May 2018. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the discount rate of the treasury rate plus 15 basis points plus accrued interest. If called within the six months prior to maturity, the redemption price is equal to 100% of the principal amount plus accrued and unpaid interest, if any, to, but excluding the redemption date.

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. We had the following amounts outstanding under these programs as of December 31, 2017: $2.458 billion with an average interest rate of 1.350% and €622 million ($745 million) with an average interest rate of -0.41%. The amount of commercial paper outstanding under these programs in 2018 is expected to fluctuate.

Fixed-Rate Senior Notes

We have completed several offerings of fixed-rate senior notes. All of the notes pay interest semi-annually, and allow for redemption of the notes by UPS at any time by paying the greater of the principal amount or a “make-whole” amount, plus accrued interest. We subsequently entered into interest rate swaps on several of these notes, which effectively converted the fixed interest rates on the notes to variable LIBOR-based interest rates. The average interest rate payable on these notes, including the impact of the interest rate swaps, for 2017 and 2016, respectively, were as follows:

PrincipalAverage Effective Interest Rate
ValueMaturity20172016
1.125% senior notes$37520171.51%1.04%
5.50% senior notes$75020183.45%2.94%
5.125% senior notes$1,00020192.98%2.49%
3.125% senior notes$1,50020211.34%1.40%
2.45% senior notes$1,00020221.78%1.26%

On October 1, 2017, our $375 million 1.125% senior notes matured and were repaid in full.

8.375% Debentures

The 8.375% debentures consist of two separate tranches, as follows:

•$276 million of the debentures have a maturity of April 1, 2030. These debentures have an 8.375% interest rate until April 1, 2020, and, thereafter, the interest rate will be 7.62% for the final 10 years. These debentures are redeemable in whole or in part at our option at any time. The redemption price is equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption (at a benchmark treasury yield plus five basis points) plus accrued interest.
•$424 million of the debentures have a maturity of April 1, 2020. These debentures are not subject to redemption prior to maturity.

Interest is payable semi-annually in April and October for both tranches and neither tranche is subject to sinking fund requirements. We subsequently entered into interest rate swaps on the 2020 debentures, which effectively converted the fixed interest rates on the debentures to variable LIBOR-based interest rates. The average interest rate payable on the 2020 debentures, including the impact of the interest rate swaps, for 2017 and 2016 was 5.95% and 5.43%, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Floating-Rate Senior Notes

The floating-rate senior notes with principal amounts totaling $1.043 billion, bear interest at either one or three-month LIBOR, less a spread ranging from 30 to 45 basis points. The average interest rate for 2017 and 2016 was 0.74% and 0.21%, respectively. These notes are callable at various times after 30 years at a stated percentage of par value, and putable by the note holders at various times after one year at a stated percentage of par value. The notes have maturities ranging from 2049 through 2067. We classified the floating-rate senior notes that are putable by the note holder as a long-term liability, due to our intent and ability to refinance the debt if the put option is exercised by the note holder.

In March and November 2017, we issued floating-rate senior notes in the principal amounts of $147 and $64 million, respectively, which are included in the $1.043 billion floating-rate senior notes described above. These notes will bear interest at three-month LIBOR less 30 and 35 basis points, respectively and mature in 2067.

The remaining three floating-rate senior notes in the principal amounts of $350, $400 and $500 million, bear interest at three-month LIBOR, plus a spread ranging from 15 to 45 basis points. The average interest rate for 2017 and 2016 was 0.50% and 0.0%, respectively. These notes are not callable. The notes have maturities ranging from 2021 through 2023. We classified the floating-rate senior notes that are putable by the note holder as a long-term liability, due to our intent and ability to refinance the debt if the put option is exercised by the note holder.

Capital Lease Obligations

We have certain property, plant and equipment subject to capital leases. Some of the obligations associated with these capital leases have been legally defeased. The recorded value of our property, plant and equipment subject to capital leases is as follows as of December 31 (in millions):

20172016
Vehicles$70$68
Aircraft2,2912,291
Buildings285190
Accumulated amortization(990)(896)
Property, plant and equipment subject to capital leases$1,656$1,653

These capital lease obligations have principal payments due at various dates from 2018 through 3005.

Facility Notes and Bonds

We have entered into agreements with certain municipalities to finance the construction of, or improvements to, facilities that support our U.S. Domestic Package and Supply Chain & Freight operations in the United States. These facilities are located around airport properties in Louisville, Kentucky; Dallas, Texas; and Philadelphia, Pennsylvania. Under these arrangements, we enter into a lease or loan agreement that covers the debt service obligations on the bonds issued by the municipalities, as follows:

•Bonds with a principal balance of $149 million issued by the Louisville Regional Airport Authority associated with our Worldport facility in Louisville, Kentucky. The bonds, which are due in January 2029, bear interest at a variable rate, and the average interest rates for 2017 and 2016 were 0.83% and 0.37%, respectively.
•Bonds with a principal balance of $42 million and due in November 2036 issued by the Louisville Regional Airport Authority associated with our air freight facility in Louisville, Kentucky. The bonds bear interest at a variable rate, and the average interest rates for 2017 and 2016 were 0.80% and 0.36%, respectively.
•Bonds with a principal balance of $29 million issued by the Dallas / Fort Worth International Airport Facility Improvement Corporation associated with our Dallas, Texas airport facilities. The bonds are due in May 2032 and bear interest at a variable rate, however the variable cash flows on the obligation have been swapped to a fixed 5.11%.
•In September 2015, we entered into an agreement with the Delaware County, Pennsylvania Industrial Development Authority, associated with our Philadelphia, Pennsylvania airport facilities, for bonds issued with a principal balance of $100 million. These bonds, which are due September 2045, bear interest at a variable rate. The average interest rate for 2017 and 2016 was 0.78% and 0.40%, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pound Sterling Notes

The Pound Sterling notes consist of two separate tranches, as follows:

•Notes with a principal amount of £66 million accrue interest at a 5.50% fixed rate, and are due in February 2031. These notes are not callable.
•Notes with a principal amount of £455 million accrue interest at a 5.125% fixed rate, and are due in February 2050. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption at a benchmark U.K. government bond yield plus 15 basis points and accrued interest.

Euro Senior Notes

The remaining euro senior notes consist of three separate issuances, as follows:

•Notes in the principal amount of €500 million accrue interest at a 1% fixed rate and are due in November 2028. Interest is payable annually on the notes, commencing in November 2017. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amounts, or the sum of the present values of the remaining schedule payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable German government bond yield plus 15 basis points and accrued interest.
•Notes with a principal amount of €500 million accrue interest at a variable rate equal to three-month EURIBOR plus 43 basis points and are due in July 2020. Interest is payable quarterly on the notes, commencing in April 2016. These notes are not callable. The senior notes bear interest at a variable rate, and the average interest rates for 2017 and 2016 were 0.10% and 0.19%, respectively.
•Notes with a principal amount of €700 million accrue interest at a 1.625% fixed rate and are due in November 2025. Interest is payable annually on the notes, commencing in November 2016. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption at a benchmark German government bond yield plus 20 basis points and accrued interest.

Contractual Commitments

We lease certain aircraft, facilities, land, equipment and vehicles under operating leases, which expire at various dates through 2040. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our operating leases was $804, $686 and $669 million for 2017, 2016 and 2015, respectively.

The following table sets forth the aggregate minimum lease payments under capital and operating leases, the aggregate annual principal payments due under our long-term debt and the aggregate amounts expected to be spent for purchase commitments (in millions).

YearCapital LeasesOperating LeasesDebt PrincipalPurchase Commitments (1)
2018$81$398$3,960$3,789
2019793051,0092,462
2020692391,0242,428
2021491862,5511,926
2022451382,000323
After 202250037113,34213
Total823$1,637$23,886$10,941
Less: imputed interest(323)
Present value of minimum capitalized lease payments500
Less: current portion(51)
Long-term capitalized lease obligations$449

(1) Purchase commitments include our announcement on February 1, 2018 for 14 new Boeing 747-8 freighters and four new Boeing 767 aircraft.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2017, we had outstanding letters of credit totaling approximately $1.084 billion issued in connection with our self-insurance reserves and other routine business requirements. We also issue surety bonds as an alternative to letters of credit in certain instances, and as of December 31, 2017, we had $932 million of surety bonds written.

Available Credit

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 March 23, 2018. 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 the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. 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 prime 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 December 31, 2017.

The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 24, 2022. 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 the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. 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, 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 minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The applicable margin for advances bearing interest based on the prime 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 December 31, 2017.

Debt Covenants

Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2017 and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of December 31, 2017, 10% of net tangible assets is equivalent to $2.686 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.

Fair Value of Debt

Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, is approximately $25.206 and $17.134 billion as of December 31, 2017 and 2016, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 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 The UPS Store, Inc. are defendants in Morgate v. The UPS Store, Inc. et al., an action in the Los Angeles Superior Court brought on behalf of a certified class of all franchisees who chose to rebrand their Mail Boxes Etc. franchises to The UPS Store in March 2003. Plaintiff alleges that UPS and The UPS Store, Inc. misrepresented and omitted facts to the class about the market tests that were conducted before offering the class the choice of whether to rebrand to The UPS Store. Defendants’ motion to decertify the class was granted in August 2017. The plaintiff has filed a notice of appeal, and further proceedings in the trial court are stayed pending resolution by the California Court of Appeal. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from the remaining aspects of this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present; and (3) plaintiff’s notice of appeal is pending. 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 Court granted summary judgment motions filed by UPS and FedEx, entered judgment in favor of UPS and FedEx, and dismissed the case. Plaintiff appealed to the Court of Appeals for the Ninth Circuit. In August 2017, the Ninth Circuit affirmed the District Court's order dismissing the case. AFMS filed a petition for rehearing in September 2017, which was denied. AFMS filed a Petition for Writ of Certiorari in the Supreme Court in January 29, 2018. The Antitrust Division of the U.S. Department of Justice (“DOJ”) opened a civil investigation of our policies and practices for dealing with third-party negotiators. We have cooperated with this investigation, although the DOJ has not communicated with us for over five years. We deny any liability with respect to these matters and intend to vigorously defend ourselves in the event that any of these proceedings were to continue. 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 DOJ investigation may be pending and (2) AFMS filed a petition for discretionary review by the U.S. Supreme Court. 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 Ryan Wright and Julia Zislin v. United Parcel Service Canada Ltd., an action brought on behalf of a certified class of customers in the Superior Court of Justice in Ontario, Canada. Plaintiffs filed suit in February 2007, alleging 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. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court in August 2011, when it dismissed plaintiffs' complaint under the Criminal Code and granted plaintiffs' complaint of inadequate disclosure. We appealed the Court's decision pertaining to inadequate disclosure in September 2011. In October 2017, we reached an agreement in principle to resolve the case for an immaterial amount. Final resolution of this matter is subject to the negotiation, execution and delivery of a settlement agreement and court approval.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern District of New York, arising from alleged shipments of cigarettes to New York State and City residents. The complaint asserted claims under various federal and state laws. The complaint also included a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. On March 24, 2017, the District Court issued an opinion and order finding liability against UPS on each of the plaintiffs’ causes of action. On May 25, 2017, the District Court issued a corrected opinion and order on liability and an order awarding the plaintiffs damages of $9.4 million and penalties of $237.6 million. An accrual of $9.4 million with respect to the damages awarded by the court is included on our consolidated balance sheet at December 31, 2017. We estimate that the amount of losses could be up to $247 million, plus interest; however, the amount of penalties ultimately payable, if any, is subject to a variety of complex factors and potential outcomes that remain to be determined in future legal proceedings. Consequently, we are unable to reasonably estimate a likely amount of loss within that range. We strongly disagree with the District Court’s analysis and conclusions, and have appealed to the United States Court of Appeals for the Second Circuit. UPS filed its opening brief with the Appellate Court in October 2017.

Other Matters

In October 2015, the DOJ informed us of an industry-wide inquiry into the transportation of mail under the United States Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a Civil Investigative Demand seeking certain information relating to our contracts. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating with the DOJ. The Company is unable to predict what action, if any, might be taken in the future by any government authorities as a result of their investigation. 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 August 2016, Spain’s National Markets and Competition Commission (“CNMC”) opened an investigation into 10 companies in the commercial delivery and parcel industry, including UPS, related to alleged nonaggression agreements to allocate customers. In May 2017, UPS received a Statement of Objections issued by the CNMC. In July 2017, UPS received a Decision Proposal from the CNMC. These documents do not prejudge the final decision (which is subject to appeal) as to facts or law. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter, 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 this matter. 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.

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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO 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 by their respective voting rights. Class A shares of UPS are entitled to 10 votes per share, whereas class B shares are entitled to one vote per share. Class A shares are primarily held by UPS employees and retirees, as well as trusts and descendants of the Company’s founders, and these shares are fully convertible into class B shares at any time. Class B shares are publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “UPS”. Class A and B shares both have a $0.01 par value, and as of December 31, 2017, there were 4.6 billion class A shares and 5.6 billion class B shares authorized to be issued. Additionally, there are 200 million preferred shares authorized to be issued, with a par value of $0.01 per share; as of December 31, 2017, no preferred shares had been issued.

The following is a rollforward of our common stock, additional paid-in capital and retained earnings accounts (in millions, except per share amounts):

201720162015
SharesDollarsSharesDollarsSharesDollars
Class A Common Stock:
Balance at beginning of year180$2194$2201$2
Common stock purchases(4)—(4)—(4)—
Stock award plans4—5—5—
Common stock issuances3—2—3—
Conversions of class A to class B common stock(10)—(17)—(11)—
Class A shares issued at end of year173$2180$2194$2
Class B Common Stock:
Balance at beginning of year689$7693$7705$7
Common stock purchases(12)—(21)—(23)—
Conversions of class A to class B common stock10—17—11—
Class B shares issued at end of year687$7689$7693$7
Additional Paid-In Capital:
Balance at beginning of year$—$—$—
Stock award plans396541492
Common stock purchases(813)(898)(791)
Common stock issuances363303316
Option premiums received (paid)5454(17)
Balance at end of year$—$—$—
Retained Earnings:
Balance at beginning of year$4,879$6,001$5,726
Net income attributable to controlling interests4,9103,4314,844
Dividends ($3.32, $3.12, and $2.92 per share)(2,928)(2,771)(2,649)
Common stock purchases(1,003)(1,782)(1,920)
Balance at end of year$5,858$4,879$6,001

For the years ended December 31, 2017, 2016 and 2015, we repurchased a total of 16.1, 25.2 and 26.8 million shares of class A and class B common stock for $1.816, $2.680 and $2.711 billion, respectively ($1.813, $2.678 and $2.702 billion in repurchases for 2017, 2016 and 2015, respectively, are reported on the cash flow statement due to the timing of settlements). During the first quarter of 2016, we also exercised a capped call option that we entered in 2015 for which we received 0.2 million UPS class B shares. The $25 million premium payment for this capped call option reduced shareowners' equity in 2015. In total, shares repurchased and received the twelve months ended December 31, 2016 were 25.4 million shares for $2.705 billion. In May 2016, the Board of Directors approved a new share repurchase authorization of $8.0 billion, which replaced an authorization previously announced in 2013. This new share repurchase authorization has no expiration date. As of December 31, 2017, we had $4.339 billion of this share repurchase authorization remaining.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

From time to time, we enter into share repurchase programs with large financial institutions to assist in our buyback of company stock. These programs allow us to repurchase our shares at a price below the weighted average UPS share price for a given period. During the fourth quarter of 2016, we entered into an accelerated share repurchase program, which allowed us to repurchase $300 million of shares (2.6 million shares). The program was completed in December 2016.

In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We received net premiums of $54 and $54 million during 2017 and 2016, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of December 31, 2017, we had outstanding options for the purchase of 0.5 million shares with an average strike price of $101.91 per share that will settle in the first quarter of 2018.

Accumulated Other Comprehensive Income (Loss)

We incur 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 is as follows (in millions):

201720162015
Foreign Currency Translation Gain (Loss), Net of Tax:
Balance at beginning of year$(1,016)$(897)$(457)
Translation adjustment (net of tax effect of $(161), $32 and $0)86(119)(440)
Balance at end of year(930)(1,016)(897)
Unrealized Gain (Loss) on Marketable Securities, Net of Tax:
Balance at beginning of year(1)(1)—
Current period changes in fair value (net of tax effect of $(1), $0 and $(1))(2)—(1)
Reclassification to earnings (net of tax effect of $1, $0 and $0)1——
Balance at end of year(2)(1)(1)
Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax:
Balance at beginning of year(45)6761
Current period changes in fair value (net of tax effect of $(190), $75 and $103)(316)124171
Reclassification to earnings (net of tax effect of $(3), $(142) and $(99))(5)(236)(165)
Balance at end of year(366)(45)67
Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:
Balance at beginning of year(3,421)(2,709)(3,198)
Reclassification to earnings (net of tax effect of $269, $1,040 and $97)7311,783195
Net actuarial gain (loss) and prior service cost resulting from remeasurements of plan assets and liabilities (net of tax effect of $(180), $(1,460) and $197)(879)(2,495)294
Balance at end of year(3,569)(3,421)(2,709)
Accumulated other comprehensive income (loss) at end of year$(4,867)$(4,483)$(3,540)

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):

2017 Amount Reclassified from AOCI2016 Amount Reclassified from AOCI2015 Amount Reclassified from AOCIAffected Line Item in the Income Statement
Unrealized Gain (Loss) on Marketable Securities:
Realized gain (loss) on sale of securities(2)——Investment income
Income tax (expense) benefit1——Income tax expense
Impact on net income(1)——Net income
Unrealized Gain (Loss) on Cash Flow Hedges:
Interest rate contracts(27)(26)(24)Interest expense
Foreign exchange contracts——(25)Interest expense
Foreign exchange contracts35404313Revenue
Income tax (expense) benefit(3)(142)(99)Income tax expense
Impact on net income5236165Net income
Unrecognized Pension and Postretirement Benefit Costs:
Prior service costs(200)(172)(174)Compensation and benefits
Remeasurement of benefit obligation(800)(2,651)(118)Compensation and benefits
Income tax (expense) benefit2691,04097Income tax expense
Impact on net income(731)(1,783)(195)Net income
Total amount reclassified for the period$(727)$(1,547)$(30)Net income

Deferred Compensation Obligations and Treasury Stock

We maintain a deferred compensation plan whereby certain employees were previously able to elect to defer the gains on stock option exercises by deferring the shares received upon exercise into a rabbi trust. The shares held in this trust are classified as treasury stock, and the liability to participating employees is classified as “deferred compensation obligations” in the shareowners’ equity section of the consolidated balance sheets. The number of shares needed to settle the liability for deferred compensation obligations is included in the denominator in both the basic and diluted earnings per share calculations. Employees are generally no longer able to defer the gains from stock options exercised subsequent to December 31, 2004.

Activity in the deferred compensation program for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):

201720162015
SharesDollarsSharesDollarsSharesDollars
Deferred Compensation Obligations:
Balance at beginning of year$45$51$59
Reinvested dividends233
Benefit payments(10)(9)(11)
Balance at end of year$37$45$51
Treasury Stock:
Balance at beginning of year(1)$(45)(1)$(51)(1)$(59)
Reinvested dividends—(2)—(3)—(3)
Benefit payments—10—9—11
Balance at end of year(1)$(37)(1)$(45)(1)$(51)

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Noncontrolling Interests

We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests increased $6 and $3 million for the years ended December 31, 2017 and 2016, respectively.

NOTE 11. STOCK-BASED COMPENSATION

The UPS Incentive Compensation Plan permits the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and units to eligible employees. The number of shares reserved for issuance under the Incentive Compensation Plan is 27 million. Each share issued pursuant to restricted stock units and restricted performance units (collectively referred to as "Restricted Units"), stock options and other permitted awards will reduce the share reserve by one share. We had 12 million shares available to be issued under the Incentive Compensation Plan as of December 31, 2017.

The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the Coyote Restricted Stock Award, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. These awards are discussed in the following paragraphs. The total expense recognized in our income statement under all stock compensation award programs was $584, $591 and $574 million during 2017, 2016 and 2015, respectively. The associated income tax benefit recognized in our income statement was $227, $219 and $215 million during 2017, 2016 and 2015, respectively. The cash income tax benefit received from the exercise of stock options and the lapsing of Restricted Units was $276, $207 and $252 million during 2017, 2016 and 2015, respectively.

Management Incentive Award Program ("MIP")

Non-executive management earning the right to receive the Management Incentive Award are determined annually by the Salary Committee, which is comprised of executive officers of UPS. Awards granted to executive officers are determined annually by the Compensation Committee of the UPS Board of Directors. Our Management Incentive Award program provides, with certain exceptions, that one-half to two-thirds of the annual Management Incentive Award will be made in Restricted Units (depending upon the level of management involved). The other one-third to one-half of the award is electable in the form of cash or unrestricted shares of class A common stock, and is fully vested at the time of grant.

Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Except in the case of death, Restricted Units granted for our Management Incentive Award vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant. The entire grant (less estimated forfeitures) is expensed on a straight-line basis over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs). All Restricted Units granted are subject to earlier cancellation or vesting under certain conditions. Dividends earned on Restricted Units are reinvested in additional Restricted Units at each dividend payable date.

Coyote Restricted Stock Award

In August 2015 we acquired Coyote, a U.S.-based truckload freight brokerage company. During the third quarter of 2015, we granted Restricted Units to certain eligible Coyote management employees. The vesting of Restricted Units granted under this award will vary between one and four years with an equal number of restricted units vesting at each anniversary date (except in the case of death, in which case immediate vesting occurs). The entire grant is expensed on a straight-line basis over the requisite service period (except in the case of death, disability or retirement, in which case immediate expensing occurs).

Long-Term Incentive Performance Award granted prior to 2014

We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible employees. The Restricted Units ultimately granted under the Long-Term Incentive Performance Award program were based upon the achievement of certain performance measures, including growth in consolidated revenue and operating return on invested capital during the performance award cycle, and other measures, including the achievement of an adjusted earnings per share target over the entire three-year performance award cycle. The last award granted under this program fully vested in the first quarter of 2016.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2017, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our Management Incentive Award program and the Coyote Restricted Stock Award:

Shares (in thousands)Weighted-Average Grant Date Fair ValueWeighted-Average Remaining Contractual Term (in years)Aggregate Intrinsic Value (in millions)
Nonvested at January 1, 201711,475$94.32
Vested(5,100)90.71
Granted3,927105.62
Reinvested Dividends332N/A
Forfeited / Expired(163)99.70
Nonvested at December 31, 201710,471$99.161.38$1,248
Restricted Units Expected to Vest10,325$99.201.38$1,230

The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2017, 2016 and 2015 was $105.62, $97.04 and $100.63, respectively. The total fair value of Restricted Units vested was $534, $445 and $564 million in 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $475 million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted-average period of three years and one month.

Long-Term Incentive Performance Award Program granted after 2013

We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible employees. Beginning with the Long-Term Incentive Performance grant in 2014, the performance targets are equally-weighted among consolidated operating return on invested capital, growth in currency-constant consolidated revenue and total shareowner return relative ("RTSR") to a peer group of companies. The Restricted Units granted under this award vest at the end of a three-year period (except in the case of death, in which case immediate vesting occurs on a prorated basis. In the case of disability and retirement, vesting occurs at the end of the three-year period on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets set forth on the grant date. The range of percentage achievement can vary from 0% to 200% of the target award.

For the two-thirds of the award related to consolidated operating return on invested capital and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. This portion of the award is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period.

The weighted-average assumptions used, by year, and the calculated weighted-average fair values of the RTSR portion of the grants, are as follows:

201720162015
Risk-free interest rate1.46%1.00%0.89%
Expected volatility16.59%16.46%15.53%
Weighted-average fair value of units granted$119.29$136.18$63.64
Share payout113.55%129.08%65.86%

There is no expected dividend yield as units earn dividend equivalents.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2017, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our Long-Term Incentive Performance Award program:

Shares (in thousands)Weighted-Average Grant Date Fair ValueWeighted-Average Remaining Contractual Term (in years)Aggregate Intrinsic Value (in millions)
Nonvested at January 1, 20171,683$101.36
Vested(839)97.11
Granted958105.65
Reinvested Dividends73N/A
Forfeited / Expired(88)103.87
Nonvested at December 31, 20171,787$105.581.53$213
Performance Units Expected to Vest1,699$105.721.54$202

The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2017, 2016 and 2015 was $105.65, $105.50 and $96.64, respectively. The total fair value of Restricted Units vested was $71, $13 and $5 million in 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $100 million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted-average period of one year and nine months.

Non-qualified Stock Options

We maintain fixed stock option plans, under which options are granted to purchase shares of UPS class A common stock. Stock options granted in connection with the UPS Incentive Compensation Plan must have an exercise price at least equal to the NYSE closing price of UPS class B common stock on the date the option is granted.

Executive officers and certain senior managers receive a non-qualified stock option grant annually, in which the value granted is determined as a percentage of salary. Options granted generally vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant. All options granted are subject to earlier cancellation or vesting under certain conditions. The options granted will expire ten years after the date of the grant. Option holders may exercise their options via the tender of cash or class A common stock and new class A shares are issued upon exercise.

The following is an analysis of options to purchase shares of class A common stock issued and outstanding:

Shares (in thousands)Weighted-Average Exercise PriceWeighted-Average Remaining Contractual Term (in years)Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 20171,828$80.45
Exercised(802)71.57
Granted272106.87
Forfeited / Expired(7)70.90
Outstanding at December 31, 20171,291$91.586.30$36
Options Vested and Expected to Vest1,291$91.586.30$36
Exercisable at December 31, 2017757$83.284.80$27

The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used, by year, and the calculated weighted-average fair values of options, are as follows:

201720162015
Expected dividend yield2.89%2.95%2.63%
Risk-free interest rate2.15%1.62%2.07%
Expected life in years7.57.57.5
Expected volatility17.81%22.40%20.61%
Weighted-average fair value of options granted$14.70$16.46$18.07

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Expected volatilities are based on the historical returns on our stock and the implied volatility of our publicly-traded options. The expected dividend yield is based on the recent historical dividend yields for our stock, taking into account changes in dividend policy. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant. The expected life represents an estimate of the period of time options are expected to remain outstanding, and we have relied upon a combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the grants and an index of peer companies with similar grant characteristics in estimating this variable.

We received cash of $41, $72 and $56 million during 2017, 2016 and 2015, respectively, from option holders resulting from the exercise of stock options. The total intrinsic value of options exercised during 2017, 2016 and 2015 was $22, $24 and $31 million, respectively. As of December 31, 2017, there was $1 million of total unrecognized compensation cost related to nonvested options. That cost is expected to be recognized over a weighted-average period of three years and six months.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2017:

Options OutstandingOptions Exercisable
Exercise Price RangeShares (in thousands)Weighted-Average Remaining Contractual Term (in years)Weighted-Average Exercise PriceShares (in thousands)Weighted-Average Exercise Price
$55.01 - $70.001311.89$61.97131$61.97
$70.01 - $80.002233.3075.1222375.12
$80.01 - $90.001415.1782.8812782.87
$90.01 - $110.007968.07102.59276100.11
1,2916.30$91.58757$83.28

Discounted Employee Stock Purchase Plan

We maintain an employee stock purchase plan for all eligible employees. Under this plan, shares of UPS class A common stock may be purchased at quarterly intervals at 95% of the NYSE closing price of UPS class B common stock on the last day of each quarterly period. Employees purchased 0.9, 0.9 and 0.9 million shares at average prices of $108.98, $99.27 and $95.41 per share during 2017, 2016 and 2015, respectively. This plan is not considered to be compensatory, and therefore no compensation cost is measured for the employees’ purchase rights.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12. SEGMENT AND GEOGRAPHIC 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 products 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 destination outside the United States. Our International Package reporting segment includes the operations of our Europe, Asia, Americas and ISMEA operating segments.

Supply Chain & Freight

Supply Chain & Freight includes our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units. Our Forwarding, Logistics and UPS Mail Innovations units provide services in more than 200 countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, distribution and post-sales services, mail and consulting services. UPS Freight offers a variety of LTL and TL services to customers in North America. Coyote offers truckload brokerage services primarily in the United States. Marken is a global provider of supply chain solutions to the life sciences industry. Other aggregated business units within this segment include The UPS Store and UPS Capital.

In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income and other, interest expense and income taxes. The accounting policies of the segments are the same as those described in the "Items Affecting Comparability" section of Management's Discussion and Analysis, with certain expenses allocated between the segments using activity-based costing methods. Unallocated assets are comprised primarily of cash, marketable securities and certain investment partnerships.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment information for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):

201720162015
Revenue:
U.S. Domestic Package$40,764$38,301$36,747
International Package13,33812,35012,149
Supply Chain & Freight11,77010,2559,467
Consolidated$65,872$60,906$58,363
Operating Profit:
U.S. Domestic Package$4,280$3,017$4,767
International Package2,4642,0442,137
Supply Chain & Freight785406764
Consolidated$7,529$5,467$7,668
Assets:
U.S. Domestic Package$27,121$23,191$21,701
International Package8,5448,1937,858
Supply Chain & Freight8,2417,8067,728
Unallocated1,4971,1871,024
Consolidated$45,403$40,377$38,311
Depreciation and Amortization Expense:
U.S. Domestic Package$1,479$1,479$1,408
International Package509491475
Supply Chain & Freight294254201
Consolidated$2,282$2,224$2,084

Revenue by product type for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):

201720162015
U.S. Domestic Package:
Next Day Air$7,088$6,752$6,570
Deferred4,4214,0823,903
Ground29,25527,46726,274
Total U.S. Domestic Package40,76438,30136,747
International Package:
Domestic2,6452,4412,425
Export10,1679,3749,092
Cargo526535632
Total International Package13,33812,35012,149
Supply Chain & Freight:
Forwarding and Logistics7,9816,7935,900
Freight2,9982,7362,881
Other791726686
Total Supply Chain & Freight11,77010,2559,467
Consolidated$65,872$60,906$58,363

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Geographic information for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):

201720162015
United States:
Revenue$51,936$48,013$45,309
Long-lived assets$22,638$19,253$18,196
International:
Revenue$13,936$12,893$13,054
Long-lived assets$6,382$5,898$5,828
Consolidated:
Revenue$65,872$60,906$58,363
Long-lived assets$29,020$25,151$24,024

Long-lived assets include property, plant and equipment, pension and postretirement benefit assets, long-term investments, goodwill and intangible assets.

No countries outside of the United States, nor any individual customers, provided 10% or more of consolidated revenue for the years ended December 31, 2017, 2016 or 2015.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. INCOME TAXES

The income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 consists of the following (in millions):

201720162015
Current:
U.S. Federal$671$1,338$1,634
U.S. State and Local496788
Non-U.S.288177236
Total Current1,0081,5821,958
Deferred:
U.S. Federal1,121103469
U.S. State and Local1183165
Non-U.S.(9)(11)6
Total Deferred1,230123540
Total Income Tax Expense$2,238$1,705$2,498

Income before income taxes includes the following components (in millions):

201720162015
United States$5,998$4,322$6,348
Non-U.S.1,150814994
Total Income Before Income Taxes:$7,148$5,136$7,342

A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2017, 2016 and 2015 consists of the following:

201720162015
Statutory U.S. federal income tax rate35.0%35.0%35.0%
U.S. state and local income taxes (net of federal benefit)1.51.51.7
Non-U.S. tax rate differential(2.0)(2.4)(1.2)
Nondeductible/nontaxable items(0.1)0.80.2
U.S. federal tax credits(1.8)(1.2)(1.3)
Income tax benefit from the Tax Cuts and Jobs Act and other non-U.S. tax law changes(3.6)——
Defined benefit plans mark-to-market charge tax rate differential (1)1.5——
Other0.8(0.5)(0.4)
Effective income tax rate31.3%33.2%34.0%

(1) Impact of applying Tax Act corporate rate enacted of 21% versus 35%

Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions we operate in and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year.

Our effective tax rate decreased to 31.3% in 2017, compared with 33.2% in 2016 and 34.0% in 2015, primarily due to the effects of the aforementioned recurring factors and the following discrete tax items:

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tax Cuts and Jobs Act

On December 22, 2017, the United States enacted into law the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including a permanent corporate rate reduction to 21% and a transition to a territorial international system effective in 2018. The Tax Act also includes provisions that affect 2017, including: (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”) that is payable over eight years; (2) requiring a remeasurement of all U.S. deferred tax assets and liabilities to the newly enacted corporate tax rate of 21%; and (3) providing for additional first-year depreciation that allows full expensing of qualified property placed into service after September 27, 2017.

In late December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under U.S. GAAP. If a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. Accordingly, we have recorded provisional estimates related to our Transition Tax liability, our change in indefinite reinvestment assertion for certain foreign subsidiaries and the remeasurement of our U.S. net deferred tax liabilities.

To calculate the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 earnings and profits (“E&P”) of the foreign subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate of the Transition Tax and recorded a provisional liability of $310 million; however, there are certain factors that could impact our provisional estimate.

First, several of our foreign subsidiaries have a fiscal year-end, and E&P for these subsidiaries cannot be precisely calculated until their fiscal years conclude during 2018. Second, we continue to gather additional information needed to precisely estimate the impact of the Transition Tax on our U.S. state and local tax liabilities given the complexity of the relevant state laws. Finally, we expect additional regulatory guidance and technical clarifications from the U.S. Department of the Treasury and Internal Revenue Service within the next 12 months that could change our provisional estimate of the Transition Tax.

Undistributed E&P of our foreign subsidiaries amounted to $5.002 billion at December 31, 2017. As the U.S. has moved to a territorial system, we have changed our indefinite reinvestment assertion with respect to the earnings of certain foreign subsidiaries. As a result, we have recorded a provisional deferred tax liability and corresponding increase to deferred tax expense of $24 million. There are certain factors, discussed above with regard to the Transition Tax, which could also impact our provisional estimate for the change in indefinite reinvestment assertion. For all other foreign subsidiaries, we continue to assert that these earnings are indefinitely reinvested. $1.335 billion of the undistributed E&P of our foreign subsidiaries is considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. state and local taxes and withholding taxes payable in various jurisdictions. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation. We will continue to evaluate our indefinite reinvestment assertion for all foreign subsidiaries in light of the Tax Act, and our provisional estimate is subject to change.

For our net U.S. deferred tax liabilities, we have recorded a provisional decrease of $606 million with a corresponding reduction to deferred tax expense of $606 million for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, completing the analysis of our 2017 capital expenditures that qualify for full expensing and the state tax effect of adjustments made to federal temporary differences.

Other 2017 Discrete Items

In the fourth quarter of 2017, we recognized an income tax benefit of $193 million related to pre-tax mark-to-market losses of $800 million on our pension and postretirement defined benefit plans.This income tax benefit was generated at a lower average statutory tax rate than the 2017 U.S. federal statutory tax rate due to future tax rate changes enacted by the Tax Act and differences between U.S. and foreign statutory rates, which was partially offset by the effect of U.S. state and local taxes.

In the fourth quarter of 2017, tax law changes were enacted in certain non-U.S. jurisdictions in which we operate. As a result, we have recorded a decrease to our foreign net deferred tax assets of $14 million with a corresponding net increase to deferred tax expense of $14 million for the year ended December 31, 2017.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the first quarter of 2017, we adopted a new accounting standard that requires the recognition of excess tax benefits related to share-based compensation in income tax expense, which resulted in tax benefits for the year ended December 31, 2017 of $71 million and reduced our effective tax rate by 1.0%.

2016 Discrete Items

In the fourth quarter of 2016, we recognized an income tax benefit of $978 million related to pre-tax mark-to-market losses of $2.651 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average statutory tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.

2015 Discrete Items

During the third quarter of 2015 and after the filing of our annual federal tax returns, we reconciled our deferred tax balances and identified adjustments to be made with respect to prior years’ deferred tax balances. The adjustments resulted in a reduction of income tax expense of $66 million.

In connection with our acquisition of Coyote Logistics in 2015, we distributed $500 million of cash held by a Canadian subsidiary to its U.S. parent during the fourth quarter of 2015. As a result of the distribution, we recorded additional net income tax expense of $28 million.

In the fourth quarter of 2015, we recognized an income tax benefit of $39 million related to pre-tax mark-to-market losses of $118 million on our pension and postretirement defined benefit plans. This income tax benefit was generated at a lower average statutory tax rate than our U.S. federal statutory tax rate because it was due, in part, to non-U.S. benefit plans.

Other favorable rate impacting items in 2015 include: resolution of several U.S. state and local tax matters; the extension of favorable U.S. federal tax provisions associated with the Protecting Americans from Tax Hikes Act of 2015 related to research and development tax credits and work opportunity tax credits; and the execution of two bilateral advance pricing agreements. These agreements established intercompany transfer pricing arrangements between the U.S. and certain non-U.S. jurisdictions related to our small package operations for tax years 2010 through 2019.

Other Items

Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which is effective through December 31, 2021. The tax incentive is conditional upon our meeting specific employment and investment thresholds. The impact of this tax incentive decreased non-U.S. tax expense by $24 million ($0.03 per share), $21 million ($0.02 per share) and $25 million ($0.03 per share) for 2017, 2016, and 2015, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred income tax assets and liabilities are comprised of the following at December 31, 2017 and 2016 (in millions):

20172016
Fixed assets and capitalized software$(3,288)$(4,782)
Other(535)(756)
Deferred tax liabilities(3,823)(5,538)
Pension and postretirement benefits1,8774,236
Loss and credit carryforwards323229
Insurance reserves449733
Stock compensation182297
Other626681
Deferred tax assets3,4576,176
Deferred tax assets valuation allowance(126)(159)
Deferred tax asset (net of valuation allowance)3,3316,017
Net deferred tax asset (liability)$(492)$479
Amounts recognized in the consolidated balance sheets:
Deferred tax assets$265$591
Deferred tax liabilities(757)(112)
Net deferred tax asset (liability)$(492)$479

The valuation allowance changed by $(33), $(38) and $(11) million during the years ended December 31, 2017, 2016 and 2015, respectively.

We have a U.S. federal capital loss carryforward of $34 million as of December 31, 2017, $32 million of which expires on December 31, 2021 and the remainder of which expires on December 31, 2022. In addition, we have U.S. state and local operating loss and credit carryforwards as follows (in millions):

20172016
U.S. state and local operating loss carryforwards$1,215$603
U.S. state and local credit carryforwards$83$70

The U.S. state and local operating loss carryforwards expire at varying dates through 2037. The U.S. state and local credits can be carried forward for periods ranging from one year to indefinitely. We also have non-U.S. loss carryforwards of $728 million as of December 31, 2017, the majority of which may be carried forward indefinitely. As indicated in the table above, we have established a valuation allowance for certain non-U.S. and state carryforwards, due to the uncertainty resulting from a lack of previous taxable income within the applicable tax jurisdictions.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the activity related to our unrecognized tax benefits (in millions):

TaxInterestPenalties
Balance at January 1, 2015$172$42$3
Additions for tax positions of the current year24——
Additions for tax positions of prior years45213
Reductions for tax positions of prior years for:
Changes based on facts and circumstances(85)(8)—
Settlements during the period(6)(2)—
Lapses of applicable statute of limitations(2)——
Balance at December 31, 2015148536
Additions for tax positions of the current year17——
Additions for tax positions of prior years2010—
Reductions for tax positions of prior years for:
Changes based on facts and circumstances(41)(13)—
Settlements during the period———
Lapses of applicable statute of limitations———
Balance at December 31, 2016144506
Additions for tax positions of the current year16——
Additions for tax positions of prior years33143
Reductions for tax positions of prior years for:
Changes based on facts and circumstances(24)(18)—
Settlements during the period(6)(3)—
Lapses of applicable statute of limitations(3)——
Balance at December 31, 2017$160$43$9

The total amount of gross unrecognized tax benefits as of December 31, 2017, 2016 and 2015 that, if recognized, would affect the effective tax rate were $159, $142 and $147 million, respectively. Our continuing policy is to recognize interest and penalties associated with income tax matters as a component of income tax expense.

We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. We have substantially resolved all U.S. federal income tax matters for tax years prior to 2014.

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. 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 the statute of limitations or other unforeseen circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 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 (in millions, except per share amounts):

201720162015
Numerator:
Net income attributable to common shareowners$4,910$3,431$4,844
Denominator:
Weighted-average shares865878896
Deferred compensation obligations111
Vested portion of restricted shares544
Denominator for basic earnings per share871883901
Effect of Dilutive Securities:
Restricted performance units334
Stock options111
Denominator for diluted earnings per share875887906
Basic Earnings Per Share$5.64$3.89$5.38
Diluted Earnings Per Share$5.61$3.87$5.35

Diluted earnings per share for the years ended December 31, 2017, 2016 and 2015 exclude the effect of 0.1, 0.2 and 0.2 million shares, respectively, of common stock that may be issued upon the exercise of employee stock options because such effect would be antidilutive.

NOTE 15. 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 by monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.

We have agreements with all of our active counterparties (covering the majority of our derivative positions) containing early termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of derivatives associated with those counterparties. 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. At December 31, 2017 and 2016, we held cash collateral of $17 and $575 million, respectively, under these agreements; this collateral is included in "cash and cash equivalents" on the consolidated balance sheets and its use by UPS is not restricted.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the agreements described above, we could also 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. At December 31, 2017 and 2016, $174 and $0 million, respectively, of additional collateral was required to be posted with our counterparties. In addition, the aggregate fair value of instruments not covered by the zero threshold bilateral collateral provisions that were in a net liability position was $16 million at December 31, 2017.

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 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, international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. In order to mitigate the impact of fuel surcharges imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services. We periodically enter into option and future 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, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with foreign currency option and forward 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, and 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.

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 cumulative translation adjustment within AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedges is recognized as a component of investment income and other. Balances in the cumulative translation adjustment account remain until the sale or liquidation of the foreign entity.

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. 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

The notional amounts of our outstanding derivative positions were as follows as of December 31, 2017 and 2016 (in millions):

20172016
Currency Hedges:
EuroEUR4,9423,702
British Pound SterlingGBP1,7361,380
Canadian DollarCAD1,2591,053
Indian RupeeINR—76
Mexican PesoMXN169—
Japanese YenJPY—3,972
Singapore DollarSGD1132
Interest Rate Hedges:
Fixed to Floating Interest Rate SwapsUSD5,4245,799
Floating to Fixed Interest Rate SwapsUSD778778
Investment Market Price Hedges:
Marketable SecuritiesEUR6476

As of December 31, 2017, we had no outstanding commodity hedge positions.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet Recognition

The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have been recognized, and the related fair values of those derivatives as of December 31, 2017 and 2016 (in millions). The table is segregated between those derivative instruments that qualify and are designated as hedging instruments and those that are not, as well as by type of contract and whether the derivative is in an asset or liability position.

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 the derivative contracts recorded on our 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 on the consolidated balance sheets had we elected to apply the right of offset.

Gross Amounts Presented in Consolidated Balance SheetsNet Amounts if Right of Offset had been Applied
Asset DerivativesBalance Sheet Location2017201620172016
Derivatives Designated As Hedges:
Foreign exchange contractsOther current assets$2$176$—$176
Interest rate contractsOther current assets1—1—
Foreign exchange contractsOther non-current assets1131—126
Interest rate contractsOther non-current assets5913743119
Derivatives Not Designated As Hedges:
Foreign exchange contractsOther current assets181171
Interest rate contractsOther non-current assets26422640
Total Asset Derivatives$107$487$87$462
Gross Amounts Presented in Consolidated Balance SheetsNet Amounts if Right of Offset had been Applied
Liability DerivativesBalance Sheet Location2017201620172016
Derivatives Designated As Hedges:
Foreign exchange contractsOther current liabilities$93$—$91$—
Interest rate contractsOther current liabilities—1—1
Foreign exchange contractsOther non-current liabilities19461931
Interest rate contractsOther non-current liabilities2821123
Derivatives Not Designated As Hedges:
Foreign exchange contractsOther current liabilities1———
Investment market price contractsOther current liabilities16101610
Interest rate contractsOther non-current liabilities—75
Total Liability Derivatives$332$45$312$20

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Statement and AOCI Recognition

The following table indicates the amount of gains and losses that have been recognized in AOCI within "unrealized gain (loss) on cash flow hedges" for the years ended December 31, 2017 and 2016 for those derivatives designated as cash flow hedges (in millions):

Derivative Instruments in Cash Flow Hedging RelationshipsAmount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
20172016
Interest rate contracts$—$1
Foreign exchange contracts(506)198
Total$(506)$199

As of December 31, 2017, $150 million of pre-tax losses related to cash flow hedges that are currently deferred in AOCI are expected to be reclassified to income over the 12 month period ended December 31, 2018. 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 flow is 15 years.

The amount of ineffectiveness recognized in income on derivative instruments designated in cash flow hedging relationships was immaterial for the years ended December 31, 2017, 2016 and 2015.

The following table indicates the amount of gains and losses that have been recognized in AOCI within "foreign currency translation gain (loss)" for the years ended December 31, 2017 and 2016 for those instruments designated as net investment hedges (in millions):

Non-derivative Instruments in Net Investment Hedging RelationshipsAmount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
20172016
Foreign denominated debt$(428)$119
Total$(428)$119

The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging relationships was immaterial for the years ended December 31, 2017, 2016 and 2015.

The following table indicates the amount and location in the statements of consolidated income in which derivative gains and losses, as well as the associated gains and losses on the underlying exposure, have been recognized for those derivatives designated as fair value hedges for the years ended December 31, 2017 and 2016 (in millions):

Derivative Instruments in Fair Value Hedging RelationshipsLocation of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in IncomeHedged Items in Fair Value Hedging RelationshipsLocation of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in Income
2017201620172016
Interest rate contractsInterest Expense$(84)$(71)Fixed-Rate Debt and Capital LeasesInterest Expense$84$71

Additionally, we maintain some interest rate swaps, foreign currency forwards, investment market price forwards and commodity contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic hedge of portions of our outstanding debt. These foreign exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement risks for certain assets and liabilities in our consolidated balance sheets. These investment market price forward contracts are intended to provide an economic offset to fair value fluctuations of certain investments in marketable securities.

We also periodically terminate interest rate swaps and foreign currency options by entering into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original swap and foreign currency contracts. These transactions provide an economic offset that effectively eliminates the impact of changes in market valuation.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 forwards, interest rate swaps, investment market price and commodity contracts not designated as hedges for the years ended December 31, 2017 and 2016 (in millions):

Derivative Instruments Not Designated in Hedging RelationshipsLocation of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in Income
20172016
Foreign exchange contractsInvestment income and other$60$(145)
Investment market price contractsInvestment income and other(5)(5)
Interest rate contractsInterest Expense(9)(8)
Total$46$(158)

Fair Value Measurements

Our foreign currency, 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 commodity forward prices, and therefore are classified as Level 2. The fair values of our derivative assets and liabilities as of December 31, 2017 and 2016 by hedge type are as follows (in millions):

Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Total
2017
Assets:
Foreign Exchange Contracts$—$21$—$21
Interest Rate Contracts—86—86
Total$—$107$—$107
Liabilities:
Foreign Exchange Contracts$—$288$—$288
Investment Market Price Contracts—16—16
Interest Rate Contracts—28—28
Total$—$332$—$332
Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Total
2016
Assets:
Foreign Exchange Contracts$—$308$—$308
Interest Rate Contracts—179—179
Total$—$487$—$487
Liabilities:
Foreign Exchange Contracts$—$6$—$6
Investment Market Price Contracts—10—10
Interest Rate Contracts—29—29
Total$—$45$—$45

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. QUARTERLY INFORMATION (UNAUDITED)

Our revenue, segment operating profit (loss), net income (loss), basic and diluted earnings per share on a quarterly basis are presented below (in millions, except per share amounts):

First QuarterSecond QuarterThird QuarterFourth Quarter
20172016201720162017201620172016
Revenue:
U.S. Domestic Package$9,535$9,084$9,745$9,015$9,649$9,289$11,835$10,913
International Package3,0582,9143,1633,0773,3643,0243,7533,335
Supply Chain & Freight2,7222,4202,8422,5372,9652,6153,2412,683
Total revenue15,31514,41815,75014,62915,97814,92818,82916,931
Operating Profit (Loss):
U.S. Domestic Package1,0761,1021,3951,2331,1821,252627(570)
International Package529574583613627576725281
Supply Chain & Freight179147238192226206142(139)
Total operating profit (loss)1,7841,8232,2162,0382,0352,0341,494(428)
Net Income (Loss)$1,158$1,131$1,384$1,269$1,264$1,270$1,104$(239)
Net Income (Loss) Per Share:
Basic$1.32$1.27$1.59$1.43$1.45$1.44$1.27$(0.27)
Diluted$1.32$1.27$1.58$1.43$1.45$1.44$1.27$(0.27)

Operating profit for the quarter ended December 31, 2017 was impacted by a mark-to-market loss of $800 million on our pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor (allocated as follows—U.S. Domestic Package $637 million, International Package $35 million, and Supply Chain & Freight $128 million). Net income for the quarter ended December 31, 2017 includes an income tax benefit of $258 million attributable to the 2017 Tax Act. These items reduced fourth quarter net income by $349 million and basic and diluted earnings per share by $0.41 and $0.40, respectively.

Operating profit for the quarter ended December 31, 2016 was impacted by a mark-to-market loss of $2.651 billion on our pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor (allocated as follows—U.S. Domestic Package $1.908 billion, International Package $425 million and Supply Chain & Freight $318 million). This loss reduced fourth quarter net income by $1.673 billion, and basic and diluted earnings per share by $1.91.

Previous: Item 7A. Quantitative and Qualitative Disclosures about Market Risk · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure