Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

Table of Contents




Report of Independent Registered Public Accounting Firm	65
Consolidated Balance Sheets	66
Statements of Consolidated Income	67
Statements of Consolidated Comprehensive Income (Loss)	67
Statements of Consolidated Cash Flows	68
Notes to Consolidated Financial Statements	69
Note 1—Summary of Accounting Policies	69
Note 2—Revenue Recognition	81
Note 3—Cash and Investments	84
Note 4—Property, Plant and Equipment	88
Note 5—Company-Sponsored Employee Benefit Plans	88
Note 6—Multiemployer Employee Benefit Plans	100
Note 7—Goodwill and Intangible Assets	104
Note 8—Debt and Financing Arrangements	106
Note 9—Legal Proceedings and Contingencies	111
Note 10—Shareowners’ Equity	113
Note 11—Stock-Based Compensation	116
Note 12—Segment and Geographic Information	120
Note 13—Income Taxes	123
Note 14—Earnings Per Share	127
Note 15—Derivative Instruments and Risk Management	127
Note 16—Transformation Strategy	134
Note 17—Quarterly Information (Unaudited)	134

Report of Independent Registered Public Accounting Firm

To the Shareowners and Board of Directors of

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, 2018 and 2017, the related consolidated statements of income, comprehensive income, and cash flows, for each of the three years in the period ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Change in Accounting Principles

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers and the presentation of net periodic benefit costs due to the adoption of new accounting standards. These changes have been applied retrospectively to all periods presented.

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, 2019

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

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions)



	December 31,
	2018			2017
ASSETS
Current Assets:
Cash and cash equivalents	$	4,225		$	3,320
Marketable securities	810			749
Accounts receivable, net	8,958			8,773
Current income taxes receivable	940			1,573
Other current assets	1,277			1,303
Total Current Assets	16,210			15,718
Property, Plant and Equipment, Net	26,576			22,118
Goodwill	3,811			3,872
Intangible Assets, Net	2,075			1,964
Investments and Restricted Cash	170			483
Deferred Income Tax Assets	141			266
Other Non-Current Assets	1,033			1,153
Total Assets	$	50,016		$	45,574
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper	$	2,805		$	4,011
Accounts payable	5,188			3,934
Accrued wages and withholdings	3,047			2,608
Self-insurance reserves	810			705
Accrued group welfare and retirement plan contributions	715			677
Other current liabilities	1,522			951
Total Current Liabilities	14,087			12,886
Long-Term Debt	19,931			20,278
Pension and Postretirement Benefit Obligations	8,347			7,061
Deferred Income Tax Liabilities	1,619			756
Self-Insurance Reserves	1,571			1,765
Other Non-Current Liabilities	1,424			1,804
Shareowners’ Equity:
Class A common stock (163 and 173 shares issued in 2018 and 2017)	2			2
Class B common stock (696 and 687 shares issued in 2018 and 2017)	7			7
Additional paid-in capital	—			—
Retained earnings	8,006			5,852
Accumulated other comprehensive loss	(4,994		)	(4,867		)
Deferred compensation obligations	32			37
Less: Treasury stock (1 share in 2018 and 2017)	(32		)	(37		)
Total Equity for Controlling Interests	3,021			994
Noncontrolling Interests	16			30
Total Shareowners’ Equity	3,037			1,024
Total Liabilities and Shareowners’ Equity	$	50,016		$	45,574

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,
	2018			2017			2016
Revenue	$	71,861		$	66,585		$	61,610
Operating Expenses:
Compensation and benefits	37,235			34,577			32,534
Repairs and maintenance	1,732			1,601			1,542
Depreciation and amortization	2,207			2,282			2,224
Purchased transportation	13,409			11,696			9,848
Fuel	3,427			2,690			2,118
Other occupancy	1,362			1,155			1,037
Other expenses	5,465			5,055			4,619
Total Operating Expenses	64,837			59,056			53,922
Operating Profit	7,024			7,529			7,688
Other Income and (Expense):
Investment income (expense) and other	(400		)	61			(2,186		)
Interest expense	(605		)	(453		)	(381		)
Total Other Income and (Expense)	(1,005		)	(392		)	(2,567		)
Income Before Income Taxes	6,019			7,137			5,121
Income Tax Expense	1,228			2,232			1,699
Net Income	$	4,791		$	4,905		$	3,422
Basic Earnings Per Share	$	5.53		$	5.63		$	3.88
Diluted Earnings Per Share	$	5.51		$	5.61		$	3.86

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(In millions)



	Years Ended December 31,
	2018			2017			2016
Net Income	$	4,791		$	4,905		$	3,422
Change in foreign currency translation adjustment, net of tax	(149		)	86			(119		)
Change in unrealized gain (loss) on marketable securities, net of tax	—			(1		)	—
Change in unrealized gain (loss) on cash flow hedges, net of tax	485			(321		)	(112		)
Change in unrecognized pension and postretirement benefit costs, net of tax	272			(148		)	(712		)
Comprehensive Income (Loss)	$	5,399		$	4,521		$	2,479

See notes to consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)



	Years Ended December 31,
	2018			2017			2016
Cash Flows From Operating Activities:
Net income	$	4,791		$	4,905		$	3,422
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	2,207			2,282			2,224
Pension and postretirement benefit expense	2,242			1,643			3,725
Pension and postretirement benefit contributions	(186		)	(7,794		)	(2,668		)
Self-insurance reserves	(86		)	—			(21		)
Deferred tax (benefit) expense	758			1,224			117
Stock compensation expense	634			584			591
Other (gains) losses	293			37			(198		)
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	(421		)	(1,022		)	(704		)
Other assets	754			(984		)	5
Accounts payable	1,034			599			460
Accrued wages and withholdings	505			200			91
Other liabilities	170			(243		)	(546		)
Other operating activities	16			48			(25		)
Net cash from operating activities	12,711			1,479			6,473
Cash Flows From Investing Activities:
Capital expenditures	(6,283		)	(5,227		)	(2,965		)
Proceeds from disposals of property, plant and equipment	37			24			88
Purchases of marketable securities	(973		)	(1,630		)	(4,813		)
Sales and maturities of marketable securities	886			1,990			5,724
Net (increase) decrease in finance receivables	4			5			9
Cash paid for business acquisitions, net of cash and cash equivalents acquired	(2		)	(134		)	(547		)
Other investing activities	1			1			(59		)
Net cash used in investing activities	(6,330		)	(4,971		)	(2,563		)
Cash Flows From Financing Activities:
Net change in short-term debt	63			(250		)	(88		)
Proceeds from long-term borrowings	1,202			12,016			5,927
Repayments of long-term borrowings	(2,887		)	(3,939		)	(3,805		)
Purchases of common stock	(1,011		)	(1,813		)	(2,678		)
Issuances of common stock	240			247			245
Dividends	(3,011		)	(2,771		)	(2,643		)
Other financing activities	(288		)	(203		)	(98		)
Net cash used in financing activities	(5,692		)	3,287			(3,140		)
Effect Of Exchange Rate Changes On Cash, Cash Equivalents and Restricted Cash	(91		)	53			(21		)
Net Increase (Decrease) In Cash, Cash Equivalents and Restricted Cash	598			(152		)	749
Cash, Cash Equivalents and Restricted Cash:
Beginning of period	3,769			3,921			3,172
End of period	$	4,367		$	3,769		$	3,921
Cash Paid During The Period For:
Interest (net of amount capitalized)	$	595		$	428		$	373
Income taxes (net of refunds and overpayments)	$	2		$	1,559		$	2,064

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 over time as we perform the services in the contract.

Forwarding —Freight forwarding revenue and the expense related to the transportation of freight are recognized over time as we perform the services. Truckload brokerage revenue and related transportation costs are recognized over time as we perform the services. Customs brokerage revenue is recognized upon completing documents necessary for customs entry purposes.

Logistics —In our Logistics business we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount to which we have a right to invoice the customer.

UPS Freight—Revenue is recognized over time as we perform the services in the contract.

In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. U.S. GAAP requires us to evaluate whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model. Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. Revenue and the associated purchased transportation costs are reported on a gross basis within our statements of consolidated income.

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.

Refer to note 2 of our audited consolidated financial statements for further discussion of our revenue recognition policies.

Cash and Cash Equivalents

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

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investments

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

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

Accounts Receivable

Accounts receivable, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. Losses on accounts receivable are recognized when 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, 2018 and 2017 was $94 and $104 million, respectively. Our total provision for doubtful accounts charged to expense before recoveries during the years ended December 31, 2018, 2017 and 2016 was $118, $133 and $116 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 $421 and $404 million as of December 31, 2018 and 2017, 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. We evaluate the useful lives of our property, plant and equipment based on our usage, maintenance and replacement policies, and taking into account physical and economic factors that may affect the useful lives of the assets. As part of our ongoing investment in transformation in 2018, we revised our estimates of useful lives for building improvements, vehicles and plant equipment based on our current assessment of these factors. In general, the change in estimate had the effect of lengthening the useful lives of building improvements, vehicles and plant equipment.

Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the assets, which are as follows: Vehicles—6 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. For substantially all of our aircraft, the costs of major airframe and engine overhauls, as well as routine maintenance and repairs, are charged to expense as incurred.

Interest incurred during the construction period of certain property, plant and equipment is capitalized until the underlying assets are placed in service, at which time amortization of the capitalized interest begins, straight-line, over the estimated useful lives of the related assets. Capitalized interest was $97, $49 and $14 million for 2018, 2017, and 2016, 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Intangible Assets

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

In assessing goodwill for impairment, we initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We consider several factors, including macroeconomic conditions, industry and market conditions, overall financial performance of the reporting unit, changes in management, strategy or customers and relevant reporting unit-specific events such as a change in the carrying amount of net assets, a more likely than not expectation of selling or disposing 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, 2018 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, automobile liability, health and welfare and general business liabilities, up to certain limits. Insurance reserves are established for estimates of the loss that we will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet reported. 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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 Plan 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 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 activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision.

In January 2018, the Financial Accounting Standards Board ("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 U.S. tax on certain 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreign Currency Translation and Remeasurement

We translate the results of operations of our foreign subsidiaries using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Balance sheet currency translation adjustments are recorded in AOCI. Pre-tax foreign currency transaction gains (losses) from remeasurement, net of hedging, included in investment income (expense) and other were $(19), $3 and $5 million in 2018, 2017 and 2016, respectively.

Stock-Based Compensation

All share-based awards to employees are measured based on their fair values and expensed over the period during which an employee is required to provide service in exchange for the award (the vesting period), less estimated forfeitures. We 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.

For acquisitions, we allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Adoption of New Accounting Standards

In May 2014, the FASB issued an accounting standards update ("ASU") that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services ("Revenue from Contracts with Customers"). 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. Effective January 1, 2018, we adopted the requirements of this ASU using the full retrospective method. See note 2 for required disclosures pertaining to the new ASU.

In January 2016, the FASB issued an ASU 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 March 2016, the FASB issued an ASU 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 and statements of consolidated income presentation on a prospective basis. The impact to income tax expense in the statements of consolidated income was a benefit of $38 and $71 million in 2018 and 2017, respectively. Additionally, we have elected to continue estimating forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.

In August 2016, the FASB issued an ASU that addresses the classification and presentation of specific cash flow issues that resulted 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 was applied retrospectively. We adopted this standard on January 1, 2018. This standard did not have a material impact on our statements of consolidated cash flows.

In November 2016, the FASB issued an ASU 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 ("Restricted Cash"). Effective January 1, 2018, we adopted the requirements of this ASU retrospectively. As a result of this update, restricted cash is included within cash and cash equivalents on our statements of consolidated cash flows.

In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost ("Improving 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. Effective January 1, 2018, we adopted the requirements of this ASU retrospectively, as required. As a result of this update, the net amount of interest cost, prior service cost and expected return on plan assets is now presented as other income.

In May 2017, the FASB issued an ASU 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 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Effective January 1, 2018, we early adopted this ASU and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. This resulted in a $735 million increase to retained earnings and a $735 million decrease to AOCI. Our current accounting policy for releasing income tax effects from other comprehensive income is based on a portfolio approach.

In August 2018, the FASB issued an ASU that modifies the disclosure requirements for employers that sponsor defined benefit pension and postretirement plans. The update eliminates the disclosures for amounts in AOCI expected to be recognized as components of net periodic cost over the next fiscal year and the effects of a one-percentage-point change in the assumed healthcare cost trend rate. The update adds disclosure requirements to include the weighted-average interest crediting rates for cash balance plans and a narrative description of the significant gains and losses related to changes in the benefit obligation for the period. We have early adopted this standard for the year ended 2018 with retrospective application. This accounting standards update did not have a material impact on our consolidated financial position, results of operations or cash flows.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We have recast our consolidated financial statements from amounts previously reported due to the adoption of new revenue recognition, pension and restricted cash standards. Impacted consolidated balance sheet line items, which reflect the adoption of the new ASUs, are as follows (in millions):



	December 31, 2017
	As previously reported		Adjustments (a)			Adjustments (b)		Adjustments (c)		As Recast
Assets:
Other current assets	$	1,133	$	170		$	—	$	—	$	1,303
Total current assets	15,548		170			—		—		15,718
Deferred income tax assets	265		1			—		—		266
Total Assets	$	45,403	$	171		$	—	$	—	$	45,574
Liabilities:
Accounts payable	$	3,872	$	62		$	—	$	—	$	3,934
Accrued wages and withholdings	2,521		87			—		—		2,608
Other current liabilities(1)	905		29			—		—		934
Total current liabilities	12,708		178			—		—		12,886
Deferred income tax liabilities	757		(1		)	—		—		756
Shareowners' Equity:
Retained earnings	5,858		(6		)	—		—		5,852
Total Shareowners' Equity	1,030		(6		)	—		—		1,024
Total Liabilities and Shareowners' Equity	$	45,403	$	171		$	—	$	—	$	45,574

(1) The caption "Other current liabilities" was presented separately from "Hedge margin liabilities" of $17 million in the Form 10-K at December 31, 2017. These captions have been collapsed in the consolidated balance sheets as of December 31, 2018 and December 31, 2017 included within this Form 10-K.

(a) Recast to reflect the adoption of Revenue from Contracts with Customers.

(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The unaudited consolidated statements of operations, which reflects the adoption of the new ASUs, are as follows (in millions):



	Twelve months ended December 31, 2016
	As Previously Reported			Adjustments (a)			Adjustments (b)			Adjustments (c)		As Recast
Revenue	$	60,906		$	704		$	—		$	—	$	61,610
Operating Expenses:
Compensation and benefits	34,770			—			(2,236		)	—		32,534
Repairs and maintenance	1,538			4			—			—		1,542
Depreciation and amortization	2,224			—			—			—		2,224
Purchased transportation	9,129			719			—			—		9,848
Fuel	2,118			—			—			—		2,118
Other occupancy	1,037			—			—			—		1,037
Other expenses	4,623			(4		)	—			—		4,619
Total Operating Expenses	55,439			719			(2,236		)	—		53,922
Operating Profit	5,467			(15		)	2,236			—		7,688
Other Income and (Expense):
Investment income (expense) and other	50			—			(2,236		)	—		(2,186		)
Interest expense	(381		)	—			—			—		(381		)
Total Other Income and (Expense)	(331		)	—			(2,236		)	—		(2,567		)
Income Before Income Taxes	5,136			(15		)	—			—		5,121
Income Tax Expense (Benefit)	1,705			(6		)	—			—		1,699
Net Income	$	3,431		$	(9	)	$	—		$	—	$	3,422
Basic Earnings Per Share	$	3.89		$	(0.01	)	$	—		$	—	$	3.88
Diluted Earnings Per Share	$	3.87		$	(0.01	)	$	—		$	—	$	3.86

(a) Recast to reflect the adoption of Revenue from Contracts with Customers.

(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	Twelve months ended December 31, 2017
	As Previously Reported			Adjustments (a)			Adjustments (b)			Adjustments (c)		As Recast
Revenue	$	65,872		$	713		$	—		$	—	$	66,585
Operating Expenses:
Compensation and benefits	34,588			—			(11		)	—		34,577
Repairs and maintenance	1,600			1			—			—		1,601
Depreciation and amortization	2,282			—			—			—		2,282
Purchased transportation	10,989			707			—			—		11,696
Fuel	2,690			—			—			—		2,690
Other occupancy	1,155			—			—			—		1,155
Other expenses	5,039			16			—			—		5,055
Total Operating Expenses	58,343			724			(11		)	—		59,056
Operating Profit	7,529			(11		)	11			—		7,529
Other Income and (Expense):
Investment income (expense) and other	72			—			(11		)	—		61
Interest expense	(453		)	—			—			—		(453		)
Total Other Income and (Expense)	(381		)	—			(11		)	—		(392		)
Income Before Income Taxes	7,148			(11		)	—			—		7,137
Income Tax Expense (Benefit)	2,238			(6		)	—			—		2,232
Net Income	$	4,910		$	(5	)	$	—		$	—	$	4,905
Basic Earnings Per Share	$	5.64		$	(0.01	)	$	—		$	—	$	5.63
Diluted Earnings Per Share	$	5.61		$	—		$	—		$	—	$	5.61

(a) Recast to reflect the adoption of Revenue from Contracts with Customers.

(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The unaudited impacted consolidated statement of cash flows line items, which reflect the adoption of the new ASUs, are as follows (in millions):



	Twelve Months Ended December 31, 2016
	As Previously Reported			Adjustments (a)			Adjustments (b)		Adjustments (c)		As Recast
Net Income	$	3,431		$	(9	)	$	—	$	—	$	3,422
Adjustments to reconcile net income to net cash from operating activities:
Deferred tax (benefit) expense	123			(6		)	—		—		117
Other assets	(14		)	19			—		—		5
Accounts payable	461			(1		)	—		—		460
Accrued wages and withholdings	109			(18		)	—		—		91
Other liabilities	(561		)	15			—		—		(546		)
Cash flows from operating activities	6,473			—			—		—		6,473
Purchase of marketable securities	(4,816		)	—			—		3		(4,813		)
Net cash used in investing activities	(2,566		)	—			—		3		(2,563		)
Net decrease in cash, cash equivalents and restricted cash	746			—			—		3		749
Cash, cash equivalents and restricted cash at the beginning of period	2,730			—			—		442		3,172
Cash, cash equivalents and restricted cash at the end of period	$	3,476		$	—		$	—	$	445	$	3,921

(a) Recast to reflect the adoption of Revenue from Contracts with Customers.

(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	Twelve Months Ended December 31, 2017
	As Previously Reported			Adjustments (a)			Adjustments (b)		Adjustments (c)		As Recast
Net Income	$	4,910		$	(5	)	$	—	$	—	$	4,905
Adjustments to reconcile net income to net cash from operating activities:
Deferred tax (benefit) expense	1,230			(6		)	—		—		1,224
Other assets	(982		)	(2		)	—		—		(984		)
Accounts payable	592			7			—		—		599
Accrued wages and withholdings	193			7			—		—		200
Other liabilities	(241		)	(2		)	—		—		(243		)
Other operating activities	47			1							48
Cash flows from operating activities	1,479			—			—		—		1,479
Purchase of marketable securities	(1,634		)	—			—		4		(1,630		)
Net cash used in investing activities	(4,975		)	—			—		4		(4,971		)
Net decrease in cash, cash equivalents and restricted cash	(156		)	—			—		4		(152		)
Cash, cash equivalents and restricted cash at the beginning of period	3,476			—			—		445		3,921
Cash, cash equivalents and restricted cash at the end of period	$	3,320		$	—		$	—	$	449	$	3,769

(a) Recast to reflect the adoption of Revenue from Contracts with Customers.

(b) Recast to reflect the adoption of Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

Accounting Standards Issued But Not Yet Effective

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 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 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond twelve months. The new standard also requires enhanced disclosures that will provided more transparency and information to financial statement users about our lease portfolio. 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 current treatment. For finance leases, lessees will continue to recognize interest expense on the lease liability using the effective yield method, while the right-of-use asset will be amortized on a straight-line basis. For operating leases, expense will be recognized on a straight-line basis, consistent with the previous standard.

We will adopt this ASU on January 1, 2019 using the modified retrospective approach and will not restate comparative periods. We are substantially complete with our implementation plan. We plan to elect the transition package of three practical expedients permitted within the standard. In accordance with the package of practical expedients, we will not reassess initial direct costs, lease classification, or whether our contracts contain or are leases. We also made an accounting policy election to not recognize right-of-use assets and liabilities for leases with a term of 12 months or less, unless the leases include options to renew or purchase the underlying asset that are reasonably certain to be exercised.

Based on our lease portfolio as of December 31, 2018, we plan to recognize an operating lease liability and related right-of-use asset on our balance sheet of approximately $2.6 billion, which represents the present value of our future minimum lease payments related to operating leases, primarily related to leases of real estate and aircraft. We do not anticipate material changes to our income statement or our statement of cash flows.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. REVENUE RECOGNITION

Revenue Recognition

Substantially all of our revenues are from contracts associated with the pick-up, transportation and delivery of packages and freight (referred to hereafter as “transportation services”), whether carried out by or arranged by UPS, both domestically and internationally, which generally occurs over a short period of time. Additionally, we provide value-added logistics services to customers through our global network of company-owned and leased distribution centers and field stocking locations, both domestically and internationally.

Disaggregation of Revenue



	Year Ended December 31,
	2018		2017		2016
Revenue:
Next Day Air	$	7,618	$	7,088	$	6,752
Deferred	4,752		4,422		4,080
Ground	31,223		29,251		27,452
U.S. Domestic Package	$	43,593	$	40,761	$	38,284

Domestic	$	2,874	$	2,646	$	2,441
Export	10,973		10,170		9,369
Cargo & Other	595		526		536
International Package	$	14,442	$	13,342	$	12,346

Forwarding	$	6,580	$	5,674	$	4,873
Logistics	3,234		3,017		2,644
Freight	3,218		3,000		2,737
Other	794		791		726
Supply Chain & Freight	$	13,826	$	12,482	$	10,980

Consolidated revenue	$	71,861	$	66,585	$	61,610

We account for a contract when both parties have approved the contract and are committed to perform their obligations, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. See note 1 for the adoption of new accounting standards.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the basis of revenue recognition in accordance with U.S. GAAP. To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires judgment, and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, the customer contracts with us to provide distinct services within a contract, such as transportation services. The vast majority of our contracts with customers for transportation services include only one performance obligation, the transportation services themselves. However, if a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable standalone sales prices. In these instances, the observable standalone sales are used to determine the standalone selling price.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In certain business units, such as Logistics, we sell customized, customer-specific solutions in which we provide a significant service of integrating a complex set of tasks and components into a single capability (even if that single capability results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. In these cases we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

Satisfaction of Performance Obligations

We generally recognize revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to another. Further, if we were unable to complete delivery to the final location, another entity would not need to reperform the transportation service already performed.

As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost measure of progress for our package delivery contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including ancillary or accessorial fees and reductions for estimated customer incentives, are recorded proportionally as costs are incurred. Costs to fulfill include labor and other direct costs and an allocation of indirect costs. For our freight and freight forwarding contracts, an output method of progress based on time-in-transit is utilized as the timing of costs incurred does not best depict the transfer of control to the customer. In our Logistics business we have a right to consideration from customers in an amount that corresponds directly with the value to the customers of our performance completed to date, and as such we recognize revenue in the amount to which we have a right to invoice the customer.

Variable Consideration

It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the transaction price. These variable amounts are generally awarded upon achievement of certain incentive tiers or performance metrics. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts of revenue, which may be reduced by incentives or other contract provisions, in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of anticipated customer spending and all information (historical, current and forecasted) that is reasonably available to us.

Contract Modifications

Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct services. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that add additional distinct goods or services are treated as separate contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services. These contract modifications will be accounted for prospectively as the remaining performance obligations are distinct.

Payment Terms

Under the typical payment terms of our customer contracts, the customer pays at periodic intervals (i.e., every 14 days, 30 days, 45 days, etc.) for shipments included on invoices received. Invoices are generated each week on the week-ending day, which is Saturday for the majority of our U.S. Domestic Package business, but could be another day depending on the business unit or the specific agreement with the customer. It is not customary business practice to extend payment terms past 90 days, and as such, we do not have a practice of including a significant financing component within our revenue contracts with customers.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Principal vs. Agent Considerations

In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. U.S. GAAP requires us to evaluate whether our businesses themselves promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model. Based on our evaluation of the control model, we determined that all of our major businesses act as the principal rather than the agent within their revenue arrangements. This required a change in reporting for certain of our Supply Chain & Freight businesses where previously revenue was reported net of associated purchased transportation costs. Revenue and the associated purchased transportation costs are now both reported on a gross basis within our statements of consolidated income.

Contract Assets and Liabilities

Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (i.e., packages have been delivered), and our right to payment is not solely based on the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions.

Contract liabilities consist of advance payments and billings in excess of revenue as well as deferred revenue. Advance payments and billings in excess of revenue represent payments received from our customers that will be earned over the contract term. Deferred revenue represents the amount of consideration due from customers related to in-transit shipments that has not yet been recognized as revenue based on our selected measure of progress. We classify advance payments and billings in excess of revenue as either current or long-term, depending on the period over which the advance payment will be earned. We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which typically occurs within a short window after period-end. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that deferred revenue balance.

Contract assets related to in-transit packages were $234 and $170 million at December 31, 2018 and 2017, respectively, net of deferred revenue related to in-transit packages of $236 and $174 million at December 31, 2018 and 2017, respectively. Contract assets are included within "Other current assets" in the consolidated balance sheets. Short-term contract liabilities related to advanced payments from customers were $5 and $31 million at December 31, 2018 and 2017, respectively. Short-term contract liabilities are included within "Other current liabilities" in the consolidated balance sheets. Long-term contract liabilities related to advanced payments from customers were $26 million at December 31, 2018 and $0 at December 31, 2017, respectively. Long-term contract liabilities are included within "Other Non-Current liabilities" in the consolidated balance sheets.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. INVESTMENTS AND RESTRICTED CASH

The following is a summary of marketable securities classified as trading and available-for-sale at December 31, 2018 and 2017 (in millions):



	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
2018
Current trading marketable securities:
Corporate debt securities	$	137	$	—	$	—		$	137
Equity securities	2		—		—			2
Total trading marketable securities	139		—		—			139

Current available-for-sale marketable securities:
U.S. government and agency debt securities	297		1		(1		)	297
Mortgage and asset-backed debt securities	82		—		(1		)	81
Corporate debt securities	275		—		(2		)	273
Non-U.S. government debt securities	20		—		—			20
Total available-for-sale marketable securities	674		1		(4		)	671

Total current marketable securities	$	813	$	1	$	(4	)	$	810

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
2017
Current trading marketable securities:
Corporate debt securities	$	75	$	—	$	—		$	75
Carbon credit investments(1)	77		16		—			93
Total trading marketable securities	152		16		—			168

Current available-for-sale marketable securities:
U.S. government and agency debt securities	286		—		(3		)	283
Mortgage and asset-backed debt securities	86		—		—			86
Corporate debt securities	201		1		(1		)	201
Equity securities	2		—		—			2
Non-U.S. government debt securities	9		—		—			9
Total available-for-sale marketable securities	584		1		(4		)	581

Total current marketable securities	$	736	$	17	$	(4	)	$	749

(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 $587 and $579 million at December 31, 2018 and 2017, respectively.

There were no gross realized gains on sales of available-for-sale securities in 2018 or 2017. Gross realized gains on sales of available-for-sale securities totaled $1 million in 2016. The gross realized losses on sales of available-for-sale securities totaled $4, $2 and $1 million in 2018, 2017, and 2016, respectively.

There were no material impairment losses recognized on marketable securities during 2018, 2017 or 2016.

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, 2018. 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, 2018 (in millions):



	Less Than 12 Months				12 Months or More					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government and agency debt securities	$	54	$	—	$	111	$	(2	)	$	165	$	(2	)
Mortgage and asset-backed debt securities	24		—		36		(1		)	60		(1		)
Corporate debt securities	99		—		81		(2		)	180		(2		)
Non-U.S. government debt securities	—		—		5		—			5		—
Total marketable securities	$	177	$	—	$	233	$	(5	)	$	410	$	(5	)

The unrealized losses for the corporate debt securities, mortgage and asset-backed 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, 2018, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.



	Cost		Estimated Fair Value
Due in one year or less	$	268	$	267
Due after one year through three years	448		447
Due after three years through five years	22		22
Due after five years	73		72
	811		808
Equity securities	2		2
	$	813	$	810

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 "Cash, Cash Equivalents and Restricted Cash" in the statements of consolidated cash flows. At December 31, 2018 and 2017, we had $142 and $449 million in self-insurance investments and restricted cash, respectively.

We held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at December 31, 2018 and 2017, respectively. The quarterly change in investment fair value is recognized in "Investment income (expense) 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 $9 and $15 million at December 31, 2018 and 2017, respectively.

The amounts described above are classified as “Non-current Investments and Restricted Cash” in the consolidated balance sheets.

A reconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the statements of consolidated cash flows in shown below (in millions):



	December 31, 2018		December 31, 2017		December 31, 2016
Cash and cash equivalents	$	4,225	$	3,320	$	3,476
Restricted cash	$	142	$	449	$	445
Total cash, cash equivalents and restricted cash	$	4,367	$	3,769	$	3,921

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 8.16% and 7.56% as of December 31, 2018 and 2017, 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, 2018 and 2017, 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
2018
Marketable securities:
U.S. government and agency debt securities	$	297	$	—	$	—	$	297
Mortgage and asset-backed debt securities	—		81		—		81
Corporate debt securities	—		410		—		410
Equity securities	—		2		—		2
Non-U.S. government debt securities	—		20		—		20
Total marketable securities	297		513		—		810
Other non-current investments	19		—		2		21
Total	$	316	$	513	$	2	$	831

	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 investments	93		—		—		93
Total marketable securities	376		373		—		749
Other non-current investments	19		—		6		25
Total	$	395	$	373	$	6	$	774

There were no transfers of investments between Level 1 and Level 2 during the years ended December 31, 2018 and 2017.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. 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, 2018 and 2017 (in millions):



	2018			2017
Vehicles	$	9,820		$	9,365
Aircraft	17,499			16,248
Land	2,000			1,582
Buildings	4,808			4,035
Building and leasehold improvements	4,323			3,934
Plant equipment	11,833			9,387
Technology equipment	2,093			1,907
Equipment under operating leases	—			29
Construction-in-progress	2,112			2,239
	54,488			48,726
Less: Accumulated depreciation and amortization	(27,912		)	(26,608		)
	$	26,576		$	22,118

As part of our ongoing investment in transformation, in 2018 we made prospective revisions to our estimates of useful lives for building improvements, vehicles and plant equipment which in general had the effect of lengthening the useful lives of these categories. This resulted in a decrease in depreciation expense and an increase in operating income of $286 million and an increase to net income of $228 million or $0.26 per share on a basic and diluted basis. Separately, capital investments in additional property, plant and equipment, net of disposals and fully-depreciated assets, resulted in an increase in depreciation expense of $257 million and a decrease to net income of $205 million or $0.24 per share on a basic and diluted basis in 2018. Combining both impacts resulted in a net decrease of $29 million to depreciation expense, and an increase to net income of $23 million or $0.03 per share on both a basic and diluted basis in 2018.

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 2018, 2017 or 2016.

NOTE 5. 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

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 $127, $119 and $111 million for 2018, 2017 and 2016, 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 2018 and 2017 as a result of this change.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $28, $23 and $4 million for 2018, 2017 and 2016 respectively.

Contributions are also made to defined contribution money purchase plans under certain collective bargaining agreements. Amounts charged to expense were $92, $91 and $82 million for 2018, 2017 and 2016, 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 Benefits									U.S. Postretirement Medical Benefits									International Pension Benefits
	2018			2017			2016			2018			2017			2016			2018			2017			2016
Net Periodic Benefit Cost:
Service cost	$	1,661		$	1,543		$	1,412		$	29		$	29		$	28		$	62		$	60		$	49
Interest cost	1,799			1,813			1,828			104			112			124			45			40			41
Expected return on assets	(3,201		)	(2,883		)	(2,516		)	(8		)	(7		)	(6		)	(77		)	(66		)	(58		)
Amortization of prior service cost	193			192			166			7			7			5			1			1			1
Actuarial (gain) loss	1,603			729			2,520			—			53			17			24			18			114
Curtailment and settlement loss	—			—			—			—			—			—			—			2			—
Net periodic benefit cost	$	2,055		$	1,394		$	3,410		$	132		$	194		$	168		$	55		$	55		$	147

Actuarial Assumptions

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



	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2018		2017		2016		2018		2017		2016		2018		2017		2016
Discount rate	3.84	%	4.41	%	4.86	%	3.82	%	4.23	%	4.79	%	2.78	%	2.75	%	3.51	%
Rate of compensation increase	4.25	%	4.27	%	4.29	%	N/A		N/A		N/A		3.22	%	3.17	%	3.04	%
Expected return on assets	7.75	%	8.75	%	8.75	%	7.20	%	8.75	%	8.75	%	5.76	%	5.65	%	5.73	%
Cash balance interest credit rate	2.50	%	2.91	%	3.36	%	N/A		N/A		N/A		3.07	%	2.65	%	3.00	%

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



	U.S. Pension Benefits				U.S. Postretirement Medical Benefits				International Pension Benefits
	2018		2017		2018		2017		2018		2017
Discount rate	4.50	%	3.84	%	4.51	%	3.82	%	2.94	%	2.78	%
Rate of compensation increase	4.25	%	4.25	%	N/A		N/A		3.24	%	3.23	%
Cash balance interest credit rate	2.98	%	2.50	%	N/A		N/A		3.17	%	3.07	%

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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2018, 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 Benefits			Postretirement Medical Benefits
One basis point increase in discount rate	$	(69	)	$	(2	)
One basis point decrease in discount rate	73			2

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 2018, 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 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 CSPF and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF. Under our withdrawal agreement with the CSPF, benefits to the UPS Transfer Group cannot be reduced without our consent and can only be reduced in accordance with applicable law.

In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”). This change in law for the first time permitted multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury (“Treasury”). In May 2016, Treasury rejected the proposed plan submitted by the CSPF. In the first quarter of 2018, Congress established a Joint Select Committee to develop a recommendation to improve the solvency of multiemployer plans and the Pension Benefit Guaranty Corporation (“PBGC”) before a November 30, 2018 deadline. While the Committee’s efforts failed to meet its deadline, the Committee made significant progress towards finding solutions that will address the long term solvency of multiemployer pension plans. UPS will continue to work with all stakeholders, including legislators and regulators, to implement an acceptable solution.

The CSPF has said that it believes a legislative solution to its funded status is necessary or that it will become insolvent in 2025, and we expect that the CSPF will continue to explore options to avoid insolvency. Numerous factors could affect the CSPF’s funded status and UPS’s potential obligation to pay coordinating benefits under the UPS/IBT Plan. Any obligation to pay coordinating benefits will be subject to a number of significant uncertainties, including whether the CSPF submits a revised MPRA filing and the terms thereof, or whether it otherwise seeks federal government assistance, as well as the terms of any applicable legislation, the extent to which benefits are paid by the PBGC and our ability to successfully defend legal positions we may take in the future under the MPRA, including the suspension ordering provisions, our withdrawal agreement and other applicable law.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We account for the potential obligation to pay coordinating benefits to the UPS Transfer Group under Accounting Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”), which requires us to provide a best estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely outcome to this matter and the broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities.

As such, our best estimate of the next most likely outcome at the measurement date is that the CSPF submits and implements another benefit reduction plan under the MPRA during 2019. We believe any MPRA filing would be designed to forestall insolvency by reducing benefits to participants other than the UPS Transfer Group to the maximum extent permitted, and then reducing benefits to the UPS Transfer Group by a lesser amount.

We have evaluated this outcome using a deterministic cash flow projection, reflecting updated estimated CSPF cash flows and investment earnings, the lack of legislative action and the absence of a MPRA filing by the CSPF in 2018. As a result, at the December 31, 2018 measurement date, the best estimate of our projected benefit obligation increased by $1.6 billion for coordinating benefits that may be required to be directly provided by the UPS/IBT Plan to the UPS Transfer Group.

The future value of this estimate will be influenced by the terms and timing of any MPRA filing, changes in our discount rate, rate of return on assets and other actuarial assumptions, presumed solvency of the PBGC, as well as potential solutions resulting from federal government intervention. Any such event may result in a decrease or an increase in the best estimate of our projected benefit obligation. If the uncertainties are not resolved, it is reasonably possible that our projected benefit obligation could increase by approximately $2.4 billion, resulting in a total obligation for coordinating benefits of approximately $4.0 billion as previously disclosed. If a future change in law occurs, it may be a significant event requiring an interim remeasurement of the UPS/IBT Plan at the date the law is enacted. We will continue to assess the impact of these uncertainties on our projected benefit obligation in accordance with ASC 715.

Other Actuarial Assumptions

Healthcare cost trends are used to project future postretirement medical benefits payable from our plans. For year-end 2018 U.S. plan obligations, future postretirement medical benefit costs were forecasted assuming an initial annual rate of increase of 6.0%, decreasing to 4.5% by the year 2022 and with consistent annual increases at that ultimate level thereafter.

Funded Status

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



	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2018			2017			2018			2017			2018			2017
Funded Status:
Fair value of plan assets	$	39,554		$	41,932		$	26		$	183		$	1,284		$	1,333
Benefit obligation	(45,333		)	(45,847		)	(2,510		)	(2,792		)	(1,552		)	(1,651		)
Funded status recognized at December 31	$	(5,779	)	$	(3,915	)	$	(2,484	)	$	(2,609	)	$	(268	)	$	(318	)
Funded Status Recognized in our Balance Sheet:
Other non-current assets	$	—		$	284		$	—		$	—		$	35		$	35
Other current liabilities	(20		)	(18		)	(195		)	(77		)	(4		)	(5		)
Pension and postretirement benefit obligations	(5,759		)	(4,181		)	(2,289		)	(2,532		)	(299		)	(348		)
Net liability at December 31	$	(5,779	)	$	(3,915	)	$	(2,484	)	$	(2,609	)	$	(268	)	$	(318	)
Amounts Recognized in AOCI:
Unrecognized net prior service cost	$	(1,018	)	$	(880	)	$	(21	)	$	(29	)	$	(14	)	$	(2	)
Unrecognized net actuarial gain (loss)	(3,967		)	(4,277		)	(32		)	(195		)	(100		)	(126		)
Gross unrecognized cost at December 31	(4,985		)	(5,157		)	(53		)	(224		)	(114		)	(128		)
Deferred tax assets (liabilities) at December 31	1,205			1,840			13			69			28			31
Net unrecognized cost at December 31	$	(3,780	)	$	(3,317	)	$	(40	)	$	(155	)	$	(86	)	$	(97	)

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accumulated benefit obligation for our pension plans as of the measurement dates in 2018 and 2017 was $45.704 and $45.776 billion, respectively.

Benefit payments under the pension plans include $23 and $22 million paid from employer assets in 2018 and in 2017, respectively. Benefit payments (net of participant contributions) under the postretirement medical benefit plans include $87 and $93 million paid from employer assets in 2018 and 2017, respectively. Such benefit payments from employer assets are also categorized as employer contributions.

At December 31, 2018 and 2017, the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with benefit obligations in excess of plan assets were as follows (in millions):



	Projected Benefit Obligation Exceeds the Fair Value of Plan Assets						Accumulated Benefit Obligation Exceeds the Fair Value of Plan Assets
2018			2017			2018			2017
U.S. Pension Benefits:
Projected benefit obligation	$	45,333		$	37,113		$	45,333		$	37,113
Accumulated benefit obligation	44,284			35,538			44,284			35,538
Fair value of plan assets	39,554			32,914			39,554			32,914
International Pension Benefits:
Projected benefit obligation	$	630		$	1,138		$	630		$	647
Accumulated benefit obligation	539			992			539			549
Fair value of plan assets	339			798			339			342

The accumulated postretirement benefit obligation presented in the funded status table exceeds plan assets for all U.S. postretirement medical benefit plans.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Benefit Obligations and Fair Value of Plan Assets

The following 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 Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2018			2017			2018			2017			2018			2017
Benefit Obligations:
Projected benefit obligation at beginning of year	$	45,847		$	41,069		$	2,792		$	2,730		$	1,651		$	1,425
Service cost	1,661			1,543			29			29			62			60
Interest cost	1,799			1,813			104			112			45			40
Gross benefits paid	(1,390		)	(1,309		)	(263		)	(264		)	(33		)	(32		)
Plan participants’ contributions	—			—			26			26			3			3
Plan amendments(1)	331			—			—			—			13			—
Actuarial (gain)/loss	(2,915		)	4,256			(178		)	159			(81		)	26
Foreign currency exchange rate changes	—			—			—			—			(110		)	129
Curtailments and settlements	—			(1,525		)	—			—			(1		)	(3		)
Other	—			—			—			—			3			3
Projected benefit obligation at end of year	$	45,333		$	45,847		$	2,510		$	2,792		$	1,552		$	1,651

(1) Resulting from a new Teamster national master agreement.

	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2018			2017			2018			2017			2018			2017
Fair Value of Plan Assets:
Fair value of plan assets at beginning of year	$	41,932		$	31,215		$	183		$	15		$	1,333		$	1,092
Actual return on plan assets	(1,007		)	4,717			(7		)	(2		)	(6		)	96
Employer contributions	19			7,309			87			408			80			77
Plan participants’ contributions	—			—			26			26			3			3
Gross benefits paid	(1,390		)	(1,309		)	(263		)	(264		)	(33		)	(32		)
Foreign currency exchange rate changes	—			—			—			—			(92		)	100
Curtailments and settlements	—			—			—			—			(1		)	(3		)
Fair value of plan assets at end of year	$	39,554		$	41,932		$	26		$	183		$	1,284		$	1,333

2018 - $3.174 billion pre-tax actuarial gain related to benefit obligation:


•	Discount Rates ($4.829 billion pre-tax gain): The weighted-average discount rate for our pension and postretirement medical plans increased from 3.81% at December 31, 2017 to 4.45% at December 31, 2018, primarily due to both an increase in U.S. treasury yields and an increase in credit spreads on AA-rated corporate bonds in 2018.


•	Coordinating benefits attributable to the Central States Pension Fund ($1.550 billion pre-tax loss): This represents our current best estimate of potential coordinating benefits that may be required to be paid related to the Central States Pension Fund.


•	Demographic and Assumption Changes ($105 million pre-tax loss): This represents the difference between actual and estimated participant data and demographic factors, including items such as healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2017 - $4.441 billion pre-tax actuarial loss related to benefit obligation:


•	Discount Rates ($4.124 billion pre-tax loss): The weighted-average discount rate for our pension and postretirement medical plans decreased from 4.34% at December 31, 2016 to 3.81% at December 31, 2017, primarily due to both a decline in U.S. treasury yields and a decrease in credit spreads on AA-rated corporate bonds in 2017.


•	Demographic and Assumption Changes ($317 million pre-tax loss): This represents the difference between actual and estimated participant data and demographic factors, including items such as healthcare cost trends, compensation rate increases and rates of termination, retirement and mortality.

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.

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 instead included in the subtotals within the tables shown below. Such investments include hedge funds, risk parity funds, real estate investments, private debt and private equity funds. Investments in hedge funds are valued using the reported NAV as of December 31st. Real estate investments, private debt and private equity funds are valued using fair values per the most recent partnership audited financial reports, and adjusted, as appropriate, for any lag between the date of the financial reports and December 31st. Due to the inherent limitations in obtaining a readily determinable fair value measurement for alternative investments, the fair values reported may differ from the values that would have been used had a ready market for the alternative investments existed. These investments are described further below:


•	Hedge Funds: Plan assets are invested in hedge funds that pursue multiple strategies to diversify risk and reduce volatility. Most of these hedge funds allow redemptions either quarterly or semi-annually after a two to three month notice period, while others allow for redemption after only a brief notification period with no restriction on redemption frequency. No unfunded commitments existed with respect to hedge funds as of December 31, 2018.

•

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, 2018.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


•	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, 2018.

•

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, 2018.


•	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, 2018, unfunded commitments to such limited partnerships totaling approximately $2.090 billion are expected to be contributed over the remaining investment period, typically ranging between three and six years.

•

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, 2018, unfunded commitments to such limited partnerships totaling approximately $2.090 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, 2018 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations.



	Total Assets(1)		Level 1		Level 2		Level 3		Percentage of Plan Assets		Target Allocation
Asset Category (U.S. Plans):
Cash and cash equivalents	$	157	$	108	$	49	$	—	0.4	%	1-5
Equity Securities:
U.S. Large Cap	5,276		2,155		3,121		—
U.S. Small Cap	542		386		156		—
Emerging Markets	1,859		1,436		423		—
Global Equity	2,320		2,056		264		—
International Equity	3,670		2,189		1,481		—
Total Equity Securities	13,667		8,222		5,445		—		34.5		25-55
Fixed Income Securities:
U.S. Government Securities	12,295		11,922		373		—
Corporate Bonds	4,303		—		4,301		2
Global Bonds	55		—		55		—
Municipal Bonds	16		—		16		—
Total Fixed Income Securities	16,669		11,922		4,745		2		42.1		35-55
Other Investments:
Hedge Funds	3,154		—		1,185		—		8.0		5-15
Private Equity	2,763		—		—		—		7.0		1-10
Private Debt	836		—		178		—		2.1		1-10
Real Estate	1,989		152		53		—		5.0		1-10
Structured Products(2)	138		—		138		—		0.4		1-5
Risk Parity Funds	207		—		—		—		0.5		1-10
Total U.S. Plan Assets	$	39,580	$	20,404	$	11,793	$	2	100.0	%
Asset Category (International Plans):
Cash and cash equivalents	$	45	$	4	$	41	—		3.5		1-10
Equity Securities:
Local Markets Equity	171		—		171		—
U.S. Equity	34		—		34		—
Emerging Markets	33		33		—		—
International / Global Equity	348		150		198		—
Total Equity Securities	586		183		403		—		45.6		30-60
Fixed Income Securities:
Local Government Bonds	102		24		78		—
Corporate Bonds	195		54		141		—
Global Bonds	27		27				—
Total Fixed Income Securities	324		105		219		—		25.2		25-45
Other Investments:
Real Estate	121		—		76		—		9.4		5-10
Other	208		—		191		4		16.3		1-20
Total International Plan Assets	$	1,284	$	292	$	930	$	4	100.0	%
Total Plan Assets	$	40,864	$	20,696	$	12,723	$	6

(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) Represent 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, 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 1		Level 2		Level 3		Percentage of Plan Assets		Target 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 Cap	5,924		3,121		2,803		—
U.S. Small Cap	591		421		170		—
Emerging Markets	2,101		1,669		432		—
Global Equity	2,817		2,400		417		—
International Equity	4,791		2,950		1,841		—
Total Equity Securities	16,224		10,561		5,663		—		38.5		35-55
Fixed Income Securities:
U.S. Government Securities	7,695		7,323		372		—
Corporate Bonds	3,865		—		3,857		8
Global Bonds	53		—		53		—
Municipal Bonds	21		—		21		—
Total Fixed Income Securities	11,634		7,323		4,303		8		27.6		25-35
Other Investments:
Hedge Funds	2,910		—		1,031		—		6.9		5-15
Private Equity	2,107		—		—		—		5.0		1-10
Private Debt	953		—		237		—		2.3		1-10
Real Estate	2,031		157		139		—		4.8		1-10
Structured Products(3)	172		—		172		—		0.4		0-5
Risk Parity Funds	359		—		—		—		0.9		1-10
Total U.S. Plan Assets	$	42,115	$	23,333	$	11,978	$	8	100.0	%
Asset Category (International Plans):
Cash and cash equivalents	$	78	$	43	$	35	—		5.8		0-10
Equity Securities:
Local Markets Equity	213		—		213		—
U.S. Equity	30		—		30		—
Emerging Markets	38		38		—		—
International / Global Equity	356		166		190		—
Total Equity Securities	637		204		433		—		47.7		30-60
Fixed Income Securities:
Local Government Bonds	103		25		78		—
Corporate Bonds	198		59		139		—
Total Fixed Income Securities	301		84		217		—		22.6		25-50
Other Investments:
Real Estate	124		—		79		—		9.3		5-10
Other	193		—		184		—		14.6		0-20
Total International Plan Assets	$	1,333	$	331	$	948	$	—	100.0	%
Total Plan Assets	$	43,448	$	23,664	$	12,926	$	8

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

(3) 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, 2018 and 2017 (in millions).



	Corporate Bonds			Other			Total
Balance on January 1, 2017	$	—		$	—		$	—
Actual Return on Assets:
Assets Held at End of Year	—			—			—
Assets Sold During the Year	—			—			—
Purchases	9			—			9
Sales	(1		)	—			(1		)
Transfers Into (Out of) Level 3	—			—			—
Balance on December 31, 2017	$	8		$	—		$	8
Actual Return on Assets:
Assets Held at End of Year	—			—			—
Assets Sold During the Year	(7		)	—			(7		)
Purchases	11			9			20
Sales	(10		)	(5		)	(15		)
Transfers Into (Out of) Level 3	—			—			—
Balance on December 31, 2018	$	2		$	4		$	6

There were no UPS class A or B shares of common stock directly held in plan assets as of December 31, 2018 or December 31, 2017.

Expected Cash Flows

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



	U.S. Pension Benefits		U.S. Postretirement Medical Benefits		International Pension Benefits
Expected Employer Contributions:
2019 to plan trusts	$	2,000	$	192	$	63
2019 to plan participants	20		74		5
Expected Benefit Payments:
2019	$	1,505	$	227	$	29
2020	1,652		233		32
2021	1,788		227		36
2022	1,930		218		41
2023	2,075		209		46
2024 - 2028	12,550		912		319

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

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. 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.

•

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, 2018, 2017 and 2016, 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 2018, 2017 and 2016 contributions. We recognize expense for the contractually-required contribution for each period, and we recognize a liability for any contributions due and unpaid at the end of a reporting period.

Status of Collective Bargaining Agreements

As of December 31, 2018, we had approximately 283,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. These agreements expired on July 31, 2018. On October 5, 2018, the Teamsters declared that the tentative national master agreement for the U.S. Domestic Package business unit was considered ratified, and will be implemented as soon as five remaining local and supplemental agreements are negotiated and ratified. We remain in the process of negotiating and ratifying four of these local and supplemental agreements which, when ratified, will be retroactive to August 1, 2018. The UPS Freight business unit national master agreement was ratified on November 11, 2018.

We have approximately 2,800 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which becomes amendable on September 1, 2021.

Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727. On February 8, 2019, the airline mechanics who are covered by this agreement voted to ratify a new contract which will become amendable November 1, 2023. 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Multiemployer Pension Plans

The following table outlines our participation in multiemployer pension plans for the periods ended December 31, 2018, 2017 and 2016, 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 2018 and 2017 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, 2018, 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 was 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 those plans covered by the collective bargaining agreement that expired on July 31, 2018, we have accrued a liability for the estimated contributions (which are included in the following table) under our new collective bargaining agreement that has been approved, but not yet implemented. For all plans detailed in the following table, we provided more than 5% of the total plan contributions from all employers for 2018, 2017 and 2016 (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 Plan	Pension Protection Act Zone Status		FIP / RP Status Pending /	(in millions) UPS Contributions and Accruals						Surcharge
Pension Fund	Number	2018	2017	Implemented	2018		2017		2016		Imposed
Alaska Teamster-Employer Pension Plan	92-6003463-024	Red	Red	Yes/Implemented	$	5	$	5	$	5	No
Automotive Industries Pension Plan	94-1133245-001	Red	Red	Yes/Implemented	5		5		4		No
Central Pennsylvania Teamsters Defined Benefit Plan	23-6262789-001	Green	Green	No	44		40		38		No
Eastern Shore Teamsters Pension Fund	52-0904953-001	Green	Green	No	6		5		5		No
Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund	55-6021850-001	Red	Red	Yes/Implemented	13		12		11		No
Hagerstown Motor Carriers and Teamsters Pension Fund	52-6045424-001	Red	Red	Yes/Implemented	9		8		7		No
I.A.M. National Pension Fund / National Pension Plan	51-6031295-002	Green	Green	No	38		35		31		No
International Brotherhood of Teamsters Union Local No. 710 Pension Fund	36-2377656-001	Green	Green	No	129		118		107		No
Local 705, International Brotherhood of Teamsters Pension Plan	36-6492502-001	Yellow	Yellow	Yes/Implemented	104		93		88		No
Local 804 I.B.T. & Local 447 I.A.M.—UPS Multiemployer Retirement Plan	51-6117726-001	Yellow	Yellow	Yes/Implemented	116		110		103		No
Milwaukee Drivers Pension Trust Fund	39-6045229-001	Green	Green	No	42		38		36		No
New England Teamsters & Trucking Industry Pension Fund	04-6372430-001	Red	Red	Yes/Implemented	121		114		114		No
New York State Teamsters Conference Pension and Retirement Fund	16-6063585-074	Red	Red	Yes/Implemented	108		100		91		No
Teamster Pension Fund of Philadelphia and Vicinity	23-1511735-001	Yellow	Yellow	Yes/Implemented	66		60		56		No
Teamsters Joint Council No. 83 of Virginia Pension Fund	54-6097996-001	Green	Green	No	69		64		61		No
Teamsters Local 639—Employers Pension Trust	53-0237142-001	Green	Green	No	61		55		51		No
Teamsters Negotiated Pension Plan	43-6196083-001	Green	Green	No	34		32		31		No
Truck Drivers and Helpers Local Union No. 355 Retirement Pension Plan	52-6043608-001	Green	Green	No	22		20		19		No
United Parcel Service, Inc.—Local 177, I.B.T. Multiemployer Retirement Plan	13-1426500-419	Red	Red	Yes/Implemented	95		88		83		No
Western Conference of Teamsters Pension Plan	91-6145047-001	Green	Green	No	868		772		694		No
Western Pennsylvania Teamsters and Employers Pension Fund	25-6029946-001	Red	Red	Yes/Implemented	31		30		28		No
All Other Multiemployer Pension Plans					56		66		56
				Total Contributions	$	2,042	$	1,870	$	1,719

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, 2018 and 2017, we had $852 and $859 million, respectively, recognized in "Other non-current liabilities" as well as $7 million as of December 31, 2018 and 2017 recorded in "other current liabilities" on our consolidated balance sheets representing the remaining balance of the NETTI Fund withdrawal liability. This liability is payable in equal monthly installments over a remaining term of approximately 44 years. 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, 2018 and 2017 was $832 and $921 million, respectively. 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. For those plans covered by the collective bargaining agreement that expired on July 31, 2018, we have accrued a liability for the estimated contributions (which are included in the following table) under our new collective bargaining agreement that has been approved, but not yet implemented. 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 Fund	2018		2017		2016
Central States, South East & South West Areas Health and Welfare Fund	$	2,530	$	2,366	$	2,268
Teamsters Western Region & Local 177 Health Care Plan	656		605		571
Health & Welfare Insurance Fund Teamsters Local 653	8		7		6
Bay Area Delivery Drivers	40		37		35
Central Pennsylvania Teamsters Health & Pension Fund	29		27		25
Delta Health Systems—East Bay Drayage Drivers	30		29		27
Employer—Teamster Local Nos. 175 & 505	12		11		11
General Teamsters Local 493 Health Services & Insurance Plan	6		5		5
Joint Council #83 Health & Welfare Fund	40		37		33
Local 191 Teamsters Health Fund	13		13		12
Local 401 Teamsters Health & Welfare Fund	10		9		8
Local 443 Transportation Health Services & Insurance Plan	6		5		5
Local 804 Welfare Trust Fund	90		84		79
Milwaukee Drivers Pension Trust Fund—Milwaukee Drivers Health and Welfare Trust Fund	43		38		36
Montana Teamster Employers Trust	9		8		8
New York State Teamsters Health & Hospital Fund	62		59		56
North Coast Benefit Trust	12		11		8
Northern California General Teamsters (DELTA)	153		132		116
Northern New England Benefit Trust	54		50		47
Oregon / Teamster Employers Trust	43		38		34
Teamsters 170 Health & Welfare Fund	18		17		16
Teamsters Benefit Trust	48		46		43
Teamsters Local 251 Health & Insurance Plan	17		15		14
Teamsters Local 404 Health & Insurance Plan	8		8		7
Teamsters Local 638 Health Fund	48		43		40
Teamsters Local 639—Employers Health & Pension Trust Funds	29		27		27
Teamsters Local 671 Health Services & Insurance Plan	19		17		17
Teamsters Union 25 Health Services & Insurance Plan	56		52		50
Teamsters Union Local 677 Health Services & Insurance Plan	12		11		10
Truck Drivers and Helpers Local 355 Baltimore Area Health & Welfare Fund	18		16		16
Utah-Idaho Teamsters Security Fund	32		29		26
Washington Teamsters Welfare Trust	57		52		47
All Other Multiemployer Health and Welfare Plans	60		68		58
Total Contributions	$	4,268	$	3,972	$	3,761

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. GOODWILL AND INTANGIBLE ASSETS

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



	U.S. Domestic Package		International Package			Supply Chain & Freight			Consolidated
Balance on January 1, 2017	$	715	$	407		$	2,635		$	3,757
Acquired	—		18			54			72
Currency / Other	—		10			33			43
Balance on December 31, 2017	$	715	$	435		$	2,722		$	3,872
Acquired	—		—			—			—
Currency / Other	—		(18		)	(43		)	(61		)
Balance on December 31, 2018	$	715	$	417		$	2,679		$	3,811

2018 Goodwill Activity

The 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.

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.

Goodwill Impairment

We completed our annual goodwill impairment valuation, as of July 1st, on a reporting unit basis. 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.

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 2018, 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, Logistics, 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 2018, 2017 or 2016. 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets

The following is a summary of intangible assets at December 31, 2018 and 2017 (in millions):



	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Weighted- Average Amortization Period (in years)
December 31, 2018
Capitalized software	$	3,693	$	(2,478	)	$	1,215	6.9
Licenses	117		(36		)	81		3.9
Franchise rights	145		(105		)	40		20.0
Customer relationships	736		(217		)	519		10.5
Trade name	200		—			200		N/A
Trademarks, patents and other	52		(31		)	20		5.8
Total Intangible Assets	$	4,943	$	(2,867	)	$	2,075	7.7
December 31, 2017
Capitalized software	$	3,273	$	(2,310	)	$	963
Licenses	114		(10		)	104
Franchise rights	144		(97		)	47
Customer relationships	776		(160		)	616
Trade name	200		—			200
Trademarks, patents and other	71		(37		)	34
Total Intangible Assets	$	4,578	$	(2,614	)	$	1,964

A trade name and licenses with a carrying value of $200 and $5 million, respectively, as of December 31, 2018 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 $12 and $7 million impairment of finite-lived intangible assets in 2018 and 2017, respectively.

Amortization of intangible assets was $339, $287 and $321 million during 2018, 2017 and 2016, respectively. Expected amortization of finite-lived intangible assets recorded as of December 31, 2018 for the next five years is as follows (in millions): 2019—$432; 2020—$380; 2021—$312; 2022—$249; 2023—$199. 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 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, 2018 and 2017 (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.



	Principal			Carrying Value
	Amount		Maturity	2018			2017
Commercial paper	$	2,662	2019	$	2,662		$	3,203
Fixed-rate senior notes:
5.500% senior notes	750		2018	—			751
5.125% senior notes	1,000		2019	998			1,019
3.125% senior notes	1,500		2021	1,492			1,549
2.050% senior notes	700		2021	698			696
2.450% senior notes	1,000		2022	1,023			979
2.350% senior notes	600		2022	597			597
2.500% senior notes	1,000		2023	994			992
2.800% senior notes	500		2024	496			495
2.400% senior notes	500		2026	498			497
3.050% senior notes	1,000		2027	991			990
6.200% senior notes	1,500		2038	1,482			1,482
4.875% senior notes	500		2040	490			489
3.625% senior notes	375		2042	368			368
3.400% senior notes	500		2046	491			491
3.750% senior notes	1,150		2047	1,136			1,135
Floating-rate senior notes:
Floating-rate senior notes	350		2021	349			348
Floating-rate senior notes	400		2022	399			398
Floating-rate senior notes	500		2023	499			496
Floating-rate senior notes	1,042		2049-2067	1,029			1,032
8.375% Debentures:
8.375% debentures	424		2020	419			447
8.375% debentures	276		2030	274			282
Pound Sterling Notes:
5.500% notes	84		2031	84			84
5.125% notes	577		2050	546			586
Euro Senior Notes:
0.375% senior notes	803		2023	797			832
1.625% senior notes	803		2025	798			833
1.000% senior notes	573		2028	570			595
1.500% senior notes	573		2032	569			594
Floating-rate senior notes	573		2020	572			598
Canadian senior notes:
2.125% senior notes	551		2024	548			593
Capital lease obligations	534		2019 – 3005	534			500
Facility notes and bonds	320		2029 – 2045	320			319
Other debt	13		2019 – 2022	13			19
Total debt	$	23,633		22,736			24,289
Less: current maturities				(2,805		)	(4,011		)
Long-term debt				$	19,931		$	20,278

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commercial Paper

We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as of December 31, 2018: $1.968 billion with an average interest rate of 2.34% and €606 million ($694 million) with an average interest rate of -0.37%. The amount of commercial paper outstanding under these programs in 2019 is expected to fluctuate.

Debt Classification

We have classified our 5.125% senior notes due April 2019 with a principal balance of $1.0 billion as long term based on our intent and ability to refinance the debt as of December 31, 2018. We have classified certain floating-rate senior notes that are putable by the note holders as long-term debt, due to our intent and ability to refinance the debt if the put option is exercised by the note holders.

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 2018 and 2017, respectively, were as follows:



	Principal			Average Effective Interest Rate
	Value		Maturity	2018		2017
1.125% senior notes	$	375	2017	—	%	1.51	%
5.50% senior notes	750		2018	3.63	%	3.45	%
5.125% senior notes	1,000		2019	3.99	%	2.98	%
3.125% senior notes	1,500		2021	2.32	%	1.34	%
2.45% senior notes	1,000		2022	2.77	%	1.78	%

On January 15, 2018, our $750 million 5.500% 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.

•

$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 2018 and 2017 was 6.93% and 5.95%, respectively.

Floating-Rate Senior Notes

The floating-rate senior notes with principal amounts totaling $1.042 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 2018 and 2017 was 1.76% and 0.74%, 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 2018 and 2017 was 2.50% and 0.5%, 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):



	2018			2017
Aircraft	$	2,291		$	2,291
Buildings	265			285
Vehicles, plant equipment, technology equipment and other	22			70
Accumulated amortization	(924		)	(990		)
Property, plant and equipment subject to capital leases	$	1,654		$	1,656

These capital lease obligations have principal payments due at various dates from 2019 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 2018 and 2017 were 1.43% and 0.83%, 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 2018 and 2017 were 1.39% and 0.80%, respectively.


•	Bonds with a principal balance of $29 million issued by the Dallas / Fort Worth International Airport Facility Improvement Corporation associated with our Dallas, Texas airport facilities. The bonds are due in May 2032 and bear interest at a variable rate, however the variable cash flows on the obligation have been swapped to a fixed 5.11%.


•	Bonds with a principal balance of $100 million issued by the Delaware County, Pennsylvania Industrial Development Authority associated with our Philadelphia, Pennsylvania airport facilities. These bonds, which are due September 2045, bear interest at a variable rate. The average interest rate for 2018 and 2017 was 1.35% and 0.78%, respectively.

Pound Sterling Notes

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


•	Notes with a principal amount of £66 million accrue interest at a 5.50% fixed rate, and are due in February 2031. These notes are not callable.

•

Notes with a principal amount of £455 million accrue interest at a 5.125% fixed rate, and are due in February 2050. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Canadian Dollar Senior Notes

The Canadian Dollar senior notes consist of a single series a follows:


•	Notes in the principal amount of C$750 million, which bear interest at a 2.125% fixed interest rate and mature in May 2024. Interest on the notes is payable semi-annually 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.

Euro Senior Notes

The Euro senior notes consist of four 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 scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable German government bond yield plus 15 basis points 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 2018 and 2017 were 0.11% and 0.10%, 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.

•

Notes with principal amounts of €700 million and €500 million accrue interest at a 0.375% and 1.500% fixed rates, respectively, and are due in 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.

Contractual Commitments

We lease certain aircraft, facilities, land, equipment and vehicles under operating leases, which expire at various dates through 2066. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our operating leases was $959, $804 and $686 million for 2018, 2017 and 2016, 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).



Year	Capital Leases			Operating Leases		Debt Principal		Purchase Commitments
2019	$	158		$	578	$	3,667	$	3,686
2020	95			477		998		1,732
2021	42			399		2,551		1,150
2022	39			325		2,000		383
2023	36			262		2,303		22
After 2023	293			926		10,830		8
Total	$	663		$	2,967	$	22,349	$	6,981
Less: imputed interest	(129		)
Present value of minimum capitalized lease payments	534
Less: current portion	(140		)
Long-term capitalized lease obligations	$	394

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2018, we had outstanding letters of credit totaling approximately $1.256 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, 2018, we had $1.031 billion of surety bonds written.

Sources of Credit

We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $3.0 billion, and expires on December 10, 2019. 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, 2018.

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, 2018.

Debt Covenants

Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2018 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, 2018, 10% of net tangible assets is equivalent to $3.004 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 $23.293 and $25.206 billion as of December 31, 2018 and 2017, 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 pending matters, including (except as otherwise noted herein) the matters described below, and we intend to defend vigorously each matter. We accrue 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

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 sheets at December 31, 2018. 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. The briefing is now complete and oral argument has been scheduled for the first quarter of 2019.

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. Except as described below, we do not believe that any loss associated with any matter would have a material adverse effect on our financial condition, results of operations or liquidity. Hughes v. UPS Supply Chain Solutions, Inc., and United Parcel Service, Inc. has been certified as a class action in Kentucky state court. In this action, Plaintiffs allege that they were not properly compensated for time entering and exiting security checkpoints and getting to their work areas at UPS’s facilities. Plaintiffs seek compensatory damages, liquidated damages, attorneys’ fees, and interest. We have denied any liability and intend to vigorously defend ourselves in this case. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from 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.

Other Matters

In October 2015, the Department of Justice ("DOJ") informed us of an industry-wide inquiry into the transportation of mail under the United States Postal Service ("USPS") International Commercial Air contracts. In October 2017, we received a Civil Investigative Demand seeking certain information relating to our contracts. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating with the DOJ. We are unable to predict what action, if any, might be taken in the future by any government authorities as a result of their investigation. 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In August 2016, Spain’s National Markets and Competition Commission (“CNMC”) announced an investigation into 10 companies in the commercial delivery and parcel industry, including UPS, related to alleged nonaggression agreements to allocate customers. In May 2017, UPS received a Statement of Objections issued by the CNMC. In July 2017, UPS received a Proposed Decision from the CNMC. On March 8, 2018 the CNMC adopted a final decision, finding an infringement and imposing a fine on UPS of €19.2 million. UPS has appealed the decision and in September 2018, obtained a suspension of the implementation of the decision (including payment of the fine). The appeal is pending. 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.

In February 2018, the Turkish Competition Authority ("Authority") opened an investigation into nine companies (including UPS) in the small package industry related to alleged customer allocations in violation of Turkish competition law. In April 2018, the Authority consolidated this investigation with two other investigations involving similar allegations. The consolidated investigation involves over 30 companies. The investigation is in its early stages. There are multiple factors that prevented 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 operation or liquidity.

We are a party in various other matters that arose in the normal course of business. We do not believe that the eventual resolution of these other matters (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material 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, 2018, 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, 2018, 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):



	2018					2017					2016
	Shares		Dollars			Shares		Dollars			Shares		Dollars
Class A Common Stock:
Balance at beginning of year	173		$	2		180		$	2		194		$	2
Common stock purchases	(3	)	—			(4	)	—			(4	)	—
Stock award plans	3		—			4		—			5		—
Common stock issuances	4		—			3		—			2		—
Conversions of class A to class B common stock	(14	)	—			(10	)	—			(17	)	—
Class A shares issued at end of year	163		$	2		173		$	2		180		$	2
Class B Common Stock:
Balance at beginning of year	687		$	7		689		$	7		693		$	7
Common stock purchases	(5	)	—			(12	)	—			(21	)	—
Conversions of class A to class B common stock	14		—			10		—			17		—
Class B shares issued at end of year	696		$	7		687		$	7		689		$	7
Additional Paid-In Capital:
Balance at beginning of year			$	—				$	—				$	—
Stock award plans			419					396					541
Common stock purchases			(859		)			(813		)			(898		)
Common stock issuances			406					363					303
Option premiums received (paid)			34					54					54
Balance at end of year			$	—				$	—				$	—
Retained Earnings:
Balance at beginning of year			$	5,852				$	4,880				$	6,011
Net income attributable to controlling interests			4,791					4,905					3,422
Dividends ($3.64, $3.32, and $3.12 per share)			(3,189		)			(2,928		)			(2,771		)
Common stock purchases			(141		)			(1,003		)			(1,782		)
Reclassification from AOCI pursuant to the early adoption of ASU 2018-02			735					—					—
Other			$	(42	)			$	(2	)			$	—
Balance at end of year			$	8,006				$	5,852				$	4,880

For the years ended December 31, 2018, 2017 and 2016, we repurchased a total of 8.9, 16.1 and 25.2 million shares of class A and class B common stock for $1.000, $1.816 and $2.680 billion, respectively ($1.011, $1.813 and $2.678 billion in repurchases for 2018, 2017 and 2016, respectively, are reported on the cash flow statement due to the timing of settlements). 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, 2018, we had $3.339 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 $34 million during 2018 and $54 million during both 2017 and 2016, related to entering into and settling capped call options for the purchase of class B shares. As of December 31, 2018, we had outstanding options for the purchase of 0.2 million shares with an average strike price of $95.60 per share that will settle in the first quarter of 2019.

Accumulated Other Comprehensive Income (Loss)

We recognize 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. Additionally, effective January 1, 2018, we early adopted an ASU that allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act (see note 1 for further information). The activity in AOCI is as follows (in millions):



	2018			2017			2016
Foreign Currency Translation Gain (Loss), Net of Tax:
Balance at beginning of year	$	(930	)	$	(1,016	)	$	(897	)
Translation adjustment (net of tax effect of $37, $(161) and $32)	(149		)	86			(119		)
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02	(47		)	—			—
Balance at end of year	(1,126		)	(930		)	(1,016		)
Unrealized Gain (Loss) on Marketable Securities, Net of Tax:
Balance at beginning of year	(2		)	(1		)	(1		)
Current period changes in fair value (net of tax effect of $(1), $(1) and $0)	(3		)	(2		)	—
Reclassification to earnings (net of tax effect of $1, $1 and $0)	3			1			—
Balance at end of year	(2		)	(2		)	(1		)
Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax:
Balance at beginning of year	(366		)	(45		)	67
Current period changes in fair value (net of tax effect of $135, $(190) and $75)	429			(316		)	124
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02	(79		)	—			—
Reclassification to earnings (net of tax effect of $18, $(3) and $(142))	56			(5		)	(236		)
Balance at end of year	40			(366		)	(45		)
Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:
Balance at beginning of year	$	(3,569	)	$	(3,421	)	$	(2,709	)
Reclassification to earnings (net of tax effect of $439, $269 and $1,040)	1,389			731			1,783
Reclassification to retained earnings pursuant to the early adoption of ASU 2018-02	(609		)	—			—
Net actuarial gain (loss) and prior service cost resulting from remeasurements of plan assets and liabilities (net of tax effect of $(355), $(180) and $(1,460))	(1,117		)	(879		)	(2,495		)
Balance at end of year	(3,906		)	(3,569		)	(3,421		)
Accumulated other comprehensive income (loss) at end of year	(4,994		)	(4,867		)	(4,483		)

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, 2018, 2017 and 2016 is as follows (in millions):



Twelve Months Ended December 31:	2018 Amount Reclassified from AOCI			2017 Amount Reclassified from AOCI			2016 Amount Reclassified from AOCI			Affected Line Item in the Income Statement
Unrealized Gain (Loss) on Marketable Securities:
Realized gain (loss) on sale of securities	(4		)	(2		)	—			Investment income (expense) and other
Income tax (expense) benefit	1			1			—			Income tax expense
Impact on net income	(3		)	(1		)	—			Net income
Unrealized Gain (Loss) on Cash Flow Hedges:
Interest rate contracts	(24		)	(27		)	(26		)	Interest expense
Foreign exchange contracts	(50		)	35			404			Revenue
Income tax (expense) benefit	18			(3		)	(142		)	Income tax expense
Impact on net income	(56		)	5			236			Net income
Unrecognized Pension and Postretirement Benefit Costs:
Prior service costs	(201		)	(200		)	(172		)	Investment income (expense) and other
Remeasurement of benefit obligation	(1,627		)	(800		)	(2,651		)	Investment income (expense) and other
Income tax (expense) benefit	439			269			1,040			Income tax expense
Impact on net income	(1,389		)	(731		)	(1,783		)	Net income

Total amount reclassified for the period	$	(1,448	)	$	(727	)	$	(1,547	)	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, 2018, 2017 and 2016 is as follows (in millions):



	2018					2017					2016
	Shares		Dollars			Shares		Dollars			Shares		Dollars
Deferred Compensation Obligations:
Balance at beginning of year			$	37				$	45				$	51
Reinvested dividends			2					2					3
Benefit payments			(7		)			(10		)			(9		)
Balance at end of year			$	32				$	37				$	45
Treasury Stock:
Balance at beginning of year	(1	)	$	(37	)	(1	)	$	(45	)	(1	)	$	(51	)
Reinvested dividends	—		(2		)	—		(2		)	—		(3		)
Benefit payments	—		7			—		10			—		9
Balance at end of year	(1	)	$	(32	)	(1	)	$	(37	)	(1	)	$	(45	)

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 decreased $14 million and increased $6 million for the years ended December 31, 2018 and 2017, 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. Shares authorized for issuance under the Incentive Compensation Plan were 26 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 20 million shares available to be issued under the Incentive Compensation Plan as of December 31, 2018.

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 $634, $584 and $591 million during 2018, 2017 and 2016, respectively. The associated income tax benefit recognized in our statements of consolidated income was $186, $227 and $219 million during 2018, 2017 and 2016, respectively. The cash income tax benefit received from the exercise of stock options and the lapsing of Restricted Units was $175, $276 and $207 million during 2018, 2017 and 2016, 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 early 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 brokerage company. During the third quarter of 2015, we granted Restricted Units to eligible Coyote management employees. The vesting of Restricted Units granted under this award varies 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 or disability, in which case immediate expensing occurs).

As of December 31, 2018, 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 Value		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Nonvested at January 1, 2018	10,471		$	99.16
Vested	(5,197	)	97.33
Granted	4,734		110.95
Reinvested Dividends	352		N/A
Forfeited / Expired	(221	)	104.74
Nonvested at December 31, 2018	10,139		$	104.47	1.41	$	989
Restricted Units Expected to Vest	10,029		$	104.52	1.40	$	978

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2018, 2017 and 2016 was $110.95, $105.62 and $97.04, respectively. The total fair value of Restricted Units vested was $596, $534 and $445 million in 2018, 2017 and 2016, respectively. As of December 31, 2018, there was $495 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 two months.

Long-Term Incentive Performance Award Program

We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible employees. 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:



	2018			2017			2016
Risk-free interest rate	2.61		%	1.46		%	1.00		%
Expected volatility	16.51		%	16.59		%	16.46		%
Weighted-average fair value of units granted	$	137.57		$	119.29		$	136.18
Share payout	123.47		%	113.55		%	129.08		%

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

As of December 31, 2018, 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 Value		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Nonvested at January 1, 2018	1,787		$	105.58
Vested	(912	)	105.60
Granted	957		111.42
Reinvested Dividends	79		N/A
Forfeited / Expired	(210	)	107.98
Nonvested at December 31, 2018	1,701		$	108.63	1.49	$	166
Restricted Units Expected to Vest	1,631		$	108.64	1.50	$	159

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 2018, 2017 and 2016 was $111.42, $105.65 and $105.50, respectively. The total fair value of Restricted Units vested was $97, $71 and $13 million in 2018, 2017 and 2016, respectively. As of December 31, 2018, there was $102 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2018	1,291		$	91.58
Exercised	(178	)	84.79
Granted	279		106.38
Forfeited / Expired	(8	)	104.87
Outstanding at December 31, 2018	1,384		$	95.36	6.28	$	9
Options Vested and Expected to Vest	1,384		$	95.36	6.28	$	9
Exercisable at December 31, 2018	857		$	89.36	5.05	$	9

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:



	2018			2017			2016
Expected dividend yield	2.93		%	2.89		%	2.95		%
Risk-free interest rate	2.84		%	2.15		%	1.62		%
Expected life in years	7.5			7.5			7.5
Expected volatility	16.72		%	17.81		%	22.40		%
Weighted-average fair value of options granted	$	15.23		$	14.70		$	16.46

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 $12, $41 and $72 million during 2018, 2017 and 2016, respectively, from option holders resulting from the exercise of stock options. The total intrinsic value of options exercised during 2018, 2017 and 2016 was $6, $22 and $24 million, respectively. As of December 31, 2018, there was $2 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about stock options outstanding and exercisable at December 31, 2018:



	Options Outstanding				Options Exercisable
Exercise Price Range	Shares (in thousands)	Weighted-Average Remaining Contractual Term (in years)	Weighted-Average Exercise Price		Shares (in thousands)	Weighted-Average Exercise Price
$55.01 - $70.00	116	0.88	$	61.94	116	$	61.94
$70.01 - $80.00	168	2.81	75.79		168	75.79
$80.01 - $90.00	104	4.17	82.89		104	82.89
$90.01 - $110.00	996	7.72	103.88		469	102.49
	1,384	6.28	$	95.36	857	$	89.36

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 million shares at average prices of $105.53, $108.98 and $99.27 per share during 2018, 2017 and 2016, 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 (expense) 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. In 2018, we changed the segment allocation methodology for certain shared assets. All prior periods have been recast to reflect this change in methodology.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment information for the years ended December 31, 2018, 2017 and 2016 is as follows (in millions):



	2018		2017		2016
Revenue:
U.S. Domestic Package	$	43,593	$	40,761	$	38,284
International Package	14,442		13,342		12,346
Supply Chain & Freight	13,826		12,482		10,980
Consolidated	$	71,861	$	66,585	$	61,610
Operating Profit:
U.S. Domestic Package	$	3,643	$	4,303	$	4,628
International Package	2,529		2,429		2,417
Supply Chain & Freight	852		797		643
Consolidated	$	7,024	$	7,529	$	7,688
Assets:
U.S. Domestic Package	$	28,216	$	25,449	$	22,299
International Package	12,070		10,361		9,219
Supply Chain & Freight	8,411		8,267		7,841
Unallocated	1,319		1,497		1,186
Consolidated	$	50,016	$	45,574	$	40,545
Depreciation and Amortization Expense:
U.S. Domestic Package	$	1,375	$	1,479	$	1,482
International Package	526		509		488
Supply Chain & Freight	306		294		254
Consolidated	$	2,207	$	2,282	$	2,224

Revenue by product type for the years ended December 31, 2018, 2017 and 2016 is as follows (in millions):



	2018		2017		2016
U.S. Domestic Package:
Next Day Air	$	7,618	$	7,088	$	6,752
Deferred	4,752		4,422		4,080
Ground	31,223		29,251		27,452
Total U.S. Domestic Package	43,593		40,761		38,284
International Package:
Domestic	2,874		2,646		2,441
Export	10,973		10,170		9,369
Cargo	595		526		536
Total International Package	14,442		13,342		12,346
Supply Chain & Freight:
Forwarding	6,580		5,674		4,873
Logistics	3,234		3,017		2,644
Freight	3,218		3,000		2,737
Other	794		791		726
Total Supply Chain & Freight	13,826		12,482		10,980
Consolidated	$	71,861	$	66,585	$	61,610

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Geographic information for the years ended December 31, 2018, 2017 and 2016 is as follows (in millions):



	2018		2017		2016
United States:
Revenue	$	56,115	$	52,080	$	48,434
Long-lived assets	$	24,918	$	21,141	$	18,761
International:
Revenue	$	15,746	$	14,505	$	13,176
Long-lived assets	$	8,577	$	7,966	$	6,700
Consolidated:
Revenue	$	71,861	$	66,585	$	61,610
Long-lived assets	$	33,495	$	29,107	$	25,461

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, 2018, 2017 or 2016.

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, 2018, 2017 and 2016 consists of the following (in millions):



	2018		2017			2016
Current:
U.S. Federal	$	89	$	671		$	1,338
U.S. State and Local	7		49			67
Non-U.S.	374		288			177
Total Current	470		1,008			1,582
Deferred:
U.S. Federal	668		1,115			98
U.S. State and Local	75		118			30
Non-U.S.	15		(9		)	(11		)
Total Deferred	758		1,224			117
Total Income Tax Expense	$	1,228	$	2,232		$	1,699

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



	2018		2017		2016
United States	$	4,307	$	5,987	$	4,307
Non-U.S.	1,712		1,150		814
Total Income Before Income Taxes:	$	6,019	$	7,137	$	5,121

A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2018, 2017 and 2016 consists of the following:



	2018		2017		2016
Statutory U.S. federal income tax rate	21.0	%	35.0	%	35.0	%
U.S. state and local income taxes (net of federal benefit)	1.4		1.5		1.5
Non-U.S. tax rate differential	0.2		(2.0	)	(2.4	)
U.S. federal tax credits	(1.1	)	(1.8	)	(1.2	)
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		—
Other	(1.1	)	0.7		0.3
Effective income tax rate	20.4	%	31.3	%	33.2	%

(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 in which we operate and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year.

Our effective tax rate decreased to 20.4% in 2018, compared with 31.3% in 2017 and 33.2% in 2016, 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 made 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 includes provisions that affected 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 Staff Accounting Bulletin ("SAB") 118, which provided 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. We recorded a $272 million provisional benefit inclusive of our Transition Tax liability, the change in our indefinite reinvestment assertion for certain foreign subsidiaries and the remeasurement of our U.S. net deferred tax liabilities for the year ended December 31, 2017. During the fourth quarter of 2018, we completed our accounting for the Tax Act based on the current regulatory guidance available at the end of the SAB 118 measurement period and recorded no material net adjustments to our provisional estimate.

The Tax Act also enacted provisions that took effect in 2018 including but not limited to: (1) a provision that imposes U.S. tax on certain foreign subsidiary income known as GILTI, (2) a new deduction for Foreign-Derived Intangible Income ("FDII"), (3) additional limitations on tax deductions for expenses such as interest and executive compensation, and (4) a new minimum tax based on certain payments from a U.S. company to foreign related parties known as the Base Erosion and Anti-Abuse Tax ("BEAT").

We included the impact of each of the newly effective Tax Act provisions in our computation of the 2018 income tax expense. Throughout 2018, the U.S. Department of the Treasury and Internal Revenue Service issued preliminary regulatory guidance clarifying certain provisions of the Tax Act, and we anticipate additional regulatory guidance and technical clarifications during 2019. When additional guidance is issued, we will recognize the related tax impact in the quarter of enactment.

2018 Discrete Items

The decrease in our effective tax rate was primarily due to the impact of the Tax Act which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.

In the fourth quarter of 2018, we recognized an income tax benefit of $390 million related to pre-tax mark-to-market losses of $1.627 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average tax rate than the 2018 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes.

We recorded pre-tax transformation strategy costs of $360 million during the year ended December 31, 2018. As a result, we recorded an additional income tax benefit of $87 million. This income tax benefit was generated at a higher average tax rate than the 2018 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes.

The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $38 million and reduced our effective tax rate by 0.6% during the year ended December 31, 2018.

Other factors that impacted our 2018 effective tax rate include favorable resolutions of uncertain tax positions, favorable U.S. state and local tax law changes, favorable tax provisions enacted in the Bipartisan Budget Act of 2018 and discrete tax credits associated with the filing of our 2017 U.S. federal income tax return.

2017 Discrete Items

In addition to the impact of the Tax Act described above, the following discrete items were recorded during the year ended December 31, 2017.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 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.

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 tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.

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 $27 million ($0.03 per share), $24 million ($0.03 per share) and $21 million ($0.02 per share) for 2018, 2017, and 2016, respectively.

Deferred income tax assets and liabilities are comprised of the following at December 31, 2018 and 2017 (in millions):



	2018			2017
Fixed assets and capitalized software	$	(4,010	)	$	(3,288	)
Other	(493		)	(532		)
Deferred tax liabilities	(4,503		)	(3,820		)

Pension and postretirement benefits	1,743			1,877
Loss and credit carryforwards	298			323
Insurance reserves	437			449
Stock compensation	189			182
Accrued employee compensation	274			266
Other	196			359
Deferred tax assets	3,137			3,456
Deferred tax assets valuation allowance	(112		)	(126		)
Deferred tax asset (net of valuation allowance)	3,025			3,330

Net deferred tax asset (liability)	$	(1,478	)	$	(490	)

Amounts recognized in the consolidated balance sheets:
Deferred tax assets	$	141		$	266
Deferred tax liabilities	(1,619		)	(756		)
Net deferred tax asset (liability)	$	(1,478	)	$	(490	)

The valuation allowance changed by $(14), $(33) and $(38) million during the years ended December 31, 2018, 2017 and 2016, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We have a U.S. federal capital loss carryforward of $31 million as of December 31, 2018, $30 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):



	2018		2017
U.S. state and local operating loss carryforwards	$	1,014	$	1,215
U.S. state and local credit carryforwards	$	80	$	83

The U.S. state and local operating loss carryforwards and credits can be carried forward for periods ranging from one year to indefinitely. We also have non-U.S. loss carryforwards of $706 million as of December 31, 2018, 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.

Undistributed earnings and profits ("E&P") of our foreign subsidiaries amounted to $6.583 billion at December 31, 2018. As a result of the Tax Act, during the year ended December 31, 2017, we changed our indefinite reinvestment assertion with respect to the earnings of certain foreign subsidiaries. For all other foreign subsidiaries, we continue to assert that these earnings are indefinitely reinvested. $1.458 billion of the undistributed E&P of our foreign subsidiaries is considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. state and local taxes and withholding taxes payable in various jurisdictions. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

The following table summarizes the activity related to our uncertain tax positions (in millions):



	Tax			Interest			Penalties
Balance at January 1, 2016	$	148		$	53		$	6
Additions for tax positions of the current year	17			—			—
Additions for tax positions of prior years	20			10			—
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, 2016	144			50			6
Additions for tax positions of the current year	16			—			—
Additions for tax positions of prior years	33			14			3
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
Additions for tax positions of the current year	47			—			1
Additions for tax positions of prior years	7			10			—
Reductions for tax positions of prior years for:
Changes based on facts and circumstances	(43		)	(8		)	(5		)
Settlements during the period	(1		)	(1		)	—
Lapses of applicable statute of limitations	(3		)	—			—
Balance at December 31, 2018	$	167		$	44		$	5

The total amount of gross uncertain tax positions as of December 31, 2018, 2017 and 2016 that, if recognized, would affect the effective tax rate was $165, $159 and $142 million, respectively. Our continuing policy is to recognize interest and penalties associated with income tax matters as a component of income tax expense.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 2015.

A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the liability for uncertain tax positions could significantly increase or decrease within the next twelve months. Items that may cause changes to uncertain tax positions include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statute of limitations, additional regulatory guidance on the Tax Act or other unforeseen circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.

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):



	2018		2017		2016
Numerator:
Net income attributable to common shareowners	$	4,791	$	4,905	$	3,422
Denominator:
Weighted-average shares	860		865		878
Deferred compensation obligations	1		1		1
Vested portion of restricted shares	5		5		4
Denominator for basic earnings per share	866		871		883
Effect of Dilutive Securities:
Restricted performance units	4		3		3
Stock options	—		1		1
Denominator for diluted earnings per share	870		875		887
Basic Earnings Per Share	$	5.53	$	5.63	$	3.88
Diluted Earnings Per Share	$	5.51	$	5.61	$	3.86

Diluted earnings per share for the years ended December 31, 2018, 2017 and 2016 exclude the effect of 0.2, 0.1 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

Changes in fuel prices, interest rates and foreign exchange rates impact our results of operations. These exposures are actively monitored by management. To manage the impact of these exposures, we enter into a variety of derivative financial instruments. Our objective is to manage, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Risk Management

The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements; however we seek to minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines and by monitoring 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.

At December 31, 2018 and 2017, we held cash collateral of $325 and $17 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. At December 31, 2018 and 2017, $0 and $174 million, respectively, of additional collateral was required to be posted with our counterparties.

Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. The amount of collateral required would be determined by the net fair value of the associated derivatives with each counterparty. We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default. At December 31, 2018, there were no instruments in a net liability position that were not covered by the zero threshold bilateral collateral provisions.

Accounting Policy for Derivative Instruments

We recognize all derivative instruments as assets or liabilities on 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 foreign currency 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 and, international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. In order to mitigate the impact of fuel surcharges imposed on us by outside carriers, we regularly adjust the rates we charge for our freight brokerage, inter-modal and truckload services. We periodically enter into derivative 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 normally designate 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.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 option and forward contracts. We normally designated and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur.

We also hedge portions of our anticipated cash settlements of intercompany transactions and interest payments on certain debt subject to foreign currency remeasurement using foreign currency forward contracts. We normally designate and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions; therefore the resulting gains and losses from these hedges are recognized as a component of investment income (expense) and other when the underlying transactions are subject to currency remeasurement.

We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of foreign denominated debt as the hedging instrument allows the debt to be remeasured to foreign currency translation adjustment within AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedging is recognized as a component of investment income (expense) and other. Balances in the cumulative translation adjustment accounts remain until the sale or complete 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 by, using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Outstanding Positions

The notional amounts of our outstanding derivative positions were as follows as of December 31, 2018 and 2017 (in millions):



		2018	2017
Currency Hedges:
Euro	EUR	4,924	4,942
British Pound Sterling	GBP	2,037	1,736
Canadian Dollar	CAD	1,443	1,259
Hong Kong Dollar	HKD	3,642	—
Mexican Peso	MXN	—	169
Singapore Dollar	SGD	20	11

Interest Rate Hedges:
Fixed to Floating Interest Rate Swaps	USD	4,674	5,424
Floating to Fixed Interest Rate Swaps	USD	778	778

Investment Market Price Hedges:
Marketable Securities	EUR	—	64

As of December 31, 2018, we had no outstanding commodity hedge positions.

Balance Sheet Recognition

The following table indicates the location on the consolidated balance sheets where our derivative assets and liabilities have been recognized, and the related fair values of those derivatives as of December 31, 2018 and 2017 (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 Sheets				Net Amounts if Right of Offset had been Applied
Asset Derivatives	Balance Sheet Location	2018		2017		2018		2017
Derivatives Designated As Hedges:
Foreign exchange contracts	Other current assets	$	90	$	2	$	83	$	—
Interest rate contracts	Other current assets	1		1		1		1
Foreign exchange contracts	Other non-current assets	230		1		215		—
Interest rate contracts	Other non-current assets	14		59		6		43
Derivatives Not Designated As Hedges:
Foreign exchange contracts	Other current assets	7		18		5		17
Foreign exchange contracts	Other non-current assets	1		—		1		—
Interest rate contracts	Other non-current assets	18		26		18		26
Total Asset Derivatives		$	361	$	107	$	329	$	87

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



		Gross Amounts Presented in Consolidated Balance Sheets				Net Amounts if Right of Offset had been Applied
Liability Derivatives	Balance Sheet Location	2018		2017		2018		2017
Derivatives Designated As Hedges:
Foreign exchange contracts	Other current liabilities	$	7	$	93	$	—	$	91
Interest rate contracts	Other current liabilities	—		—		—		—
Foreign exchange contracts	Other non-current liabilities	15		194		—		193
Interest rate contracts	Other non-current liabilities	41		28		33		12
Derivatives Not Designated As Hedges:
Foreign exchange contracts	Other current liabilities	3		1		1		—
Investment market price contracts	Other current liabilities	—		16		—		16
Foreign exchange contracts	Other non-current liabilities	1		—		1		—
Total Liability Derivatives		$	67	$	332	$	35	$	312

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, 2018 and 2017 for those derivatives designated as cash flow hedges (in millions):



Derivative Instruments in Cash Flow Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
	2018			2017
Interest rate contracts		$	1		$	—
Foreign exchange contracts		563			(506		)
Total		$	564		$	(506	)

As of December 31, 2018, $84 million of pre-tax gains 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, 2019. 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 14 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, 2018, 2017 and 2016.

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, 2018 and 2017 for those instruments designated as net investment hedges (in millions):



Non-derivative Instruments in Net Investment Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
	2018			2017
Foreign denominated debt		$	211		$	(428	)
Total		$	211		$	(428	)

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, 2018, 2017 and 2016.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2018 and 2017 (in millions):



Derivative Instruments in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income						Hedged Items in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income
	2018			2017				2018		2017
Interest rate contracts	Interest Expense	$	(57	)	$	(84	)	Fixed-Rate Debt and Capital Leases	Interest Expense	$	57	$	84

Additionally, we maintain some interest rate swaps, foreign exchange currency forwards and investment market price forward 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 and settlement 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 exchange 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 exchange currency contracts. These transactions provide an economic offset that effectively eliminates the effects of changes in market valuation.

The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these foreign currency forwards, interest rate swaps, investment market price and commodity contracts not designated as hedges for the years ended December 31, 2018 and 2017 (in millions):



Derivative Instruments Not Designated in Hedging Relationships	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income
	2018			2017
Foreign exchange contracts	Investment income (expense) and other	$	(102	)	$	60
Investment market price contracts	Investment income (expense) and other	16			(5		)
Interest rate contracts	Interest Expense	(9		)	(9		)
Total		$	(95	)	$	46

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2018 and 2017 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
2018
Assets:
Foreign Exchange Contracts	$	—	$	328	$	—	$	328
Interest Rate Contracts	—		33		—		33
Total	$	—	$	361	$	—	$	361
Liabilities:
Foreign Exchange Contracts	$	—	$	25	$	—	$	25
Investment Market Price Contracts	—		—		—		—
Interest Rate Contracts	—		42		—		42
Total	$	—	$	67	$	—	$	67

	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

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. TRANSFORMATION STRATEGY

In the first quarter of 2018, we launched the first phase of a multi-year, enterprise-wide transformation strategy to modernize our business and operations and enhance quality and efficiency. Over the next few years additional transformation phases will be implemented. The program includes investments impacting global direct and indirect operating costs, as well as changes in processes and technology.

During the year ended December 31, 2018 we recorded pre-tax charges of $360 million that reflect costs and other benefits of $262 million of primarily voluntary severance included within "Compensation and benefits" on the statements of consolidated income, and other costs of $98 million recorded to total other expenses. The after-tax transformation strategy costs totaled $273 million. The income tax effects of the transformation strategy costs are calculated by multiplying the amount of the adjustments by the statutory tax rates applicable in each tax jurisdiction. There were no comparable costs for the twelve months of 2017.

NOTE 17. QUARTERLY INFORMATION (UNAUDITED)

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



	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
	2018		2017		2018		2017		2018		2017		2018			2017
Revenue:
U.S. Domestic Package	$	10,227	$	9,536	$	10,354	$	9,741	$	10,437	$	9,651	$	12,575		$	11,833
International Package	3,533		3,074		3,602		3,171		3,478		3,376		3,829			3,721
Supply Chain & Freight	3,353		2,900		3,500		3,015		3,529		3,146		3,444			3,421
Total revenue	17,113		15,510		17,456		15,927		17,444		16,173		19,848			18,975
Operating Profit:
U.S. Domestic Package	756		950		939		1,255		949		1,011		999			1,087
International Package	594		518		618		570		536		606		781			735
Supply Chain & Freight	170		149		216		212		242		195		224			241
Total operating profit	1,520		1,617		1,773		2,037		1,727		1,812		2,004			2,063
Total Other Income and (Expense)	$	141	$	93	$	153	$	82	$	162	$	125	$	(1,461	)	$	(692	)

Net Income	$	1,345	$	1,166	$	1,485	$	1,384	$	1,508	$	1,259	$	453		$	1,096
Net Income Per Share:
Basic	$	1.55	$	1.33	$	1.71	$	1.59	$	1.74	$	1.45	$	0.52		$	1.26
Diluted	$	1.55	$	1.33	$	1.71	$	1.58	$	1.73	$	1.44	$	0.52		$	1.26

This table reflects the impact of the adoption of new accounting standards in 2018. Refer to note 1 to the audited consolidated financial statements.

Operating profit for the quarter ended June 30, 2018 was impacted by $263 million of transformation strategy costs, which includes voluntary retirement plan severance costs of $192 million and other costs of $71 million. These costs were allocated between the U.S. Domestic Package segment ($196 million), International Package segment ($36 million) and Supply Chain & Freight segment ($31 million). The transformation strategy costs reduced second quarter net income by $200 million, and basic and diluted earnings per share by $0.24 and $0.23, respectively.

Operating profit for the quarter ended September 30, 2018 was impacted by $97 million of transformation strategy costs. These costs were allocated between the U.S. Domestic Package segment ($39 million), International Package segment ($40 million) and Supply Chain & Freight segment ($18 million). The transformation strategy costs reduced third quarter net income by $73 million, and basic and diluted earnings per share by $0.09.

Other income and (expense) for the quarter ended December 31, 2018 was impacted by a mark-to-market loss of $1.627 billion on our pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor. This loss reduced net income by $1.237 billion and basic and diluted earnings per share by $1.43 and $1.42, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other income and (expense) 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. 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.

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