# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# FOR	ANNUAL	AND	TRANSITION	REPORTS

# PURSUANT	TO	SECTIONS	13	OR	15(d)	OF	THE

# SECURITIES	EXCHANGE	ACT	OF	1934

# (Mark	One)

x ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	December	31,	2016

¨ TRANSITION	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

# United	Parcel	Service,	Inc.

# (Exact	Name	of	Registrant	as	Specified	in	Its	Charter)

Delaware

(State	or	Other	Jurisdiction	of

Incorporation	or	Organization)

55	Glenlake	Parkway,	N.E.	Atlanta,	Georgia

(Address	of	Principal	Executive	Offices)

Title	of	Each	Class

Class	B	common	stock,	par	value	$.01	per	share

Floating	Rate	Senior	Notes	due	2020

(Zip	Code)

(Registrant's	telephone	number,	including	area	code)

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

# Name	of	Each	Exchange	on	Which	Registered

New	York	Stock	Exchange

1%	Senior	Notes	due	2028 New	York	Stock	Exchange

Securities	registered	pursuant	to	Section	12(g)	of	the	Act:

Class	A	common	stock,	par	value	$.01	per	share

(Title	of	Class)

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.				Yes		x				No		¨

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Exchange	Act.				Yes		¨				No		x

Indicate	by	check	mark	whether	the	registrant:	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the	preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past	90	days.				Yes		x				No		¨

Indicate	by	check	mark	whether	the	registrant	has	submitted	electronically	and	posted	on	its	corporate	Web	site,	if	any,	every	Interactive	Data	File	required	to	be	submitted	and	posted	pursuant	to	Rule	405	of	Regulation	S-T	during	the preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	submit	and	post	such	files).				Yes		x				No		¨

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	registrant's	knowledge,	in	definitive	proxy	or	information	statements incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.		x

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	a	non-accelerated	filer	or	a	smaller	reporting	company.	See	definition	of	"accelerated	filer",	"large	accelerated	filer"	and	"smaller	reporting company"	in	Rule	12b-2	of	the	Exchange	Act.	Check	one:

Large	accelerated	filer		x Accelerated	filer		¨ 	 Non-accelerated	filer		¨ Smaller	reporting	company		¨

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12b-2	of	the	Exchange	Act).				Yes		¨				No		x

The	aggregate	market	value	of	the	class	B	common	stock	held	by	non-affiliates	of	the	registrant	was	$74,441,628,766	as	of	June	30,	2016.	The	registrant's	class	A	common	stock	is	not	listed	on	a	national	securities	exchange	or	traded	in an	organized	over-the-counter	market,	but	each	share	of	the	registrant's	class	A	common	stock	is	convertible	into	one	share	of	the	registrant's	class	B	common	stock.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	the	registrant's	definitive	proxy	statement	for	its	annual	meeting	of	shareowners	scheduled	for	May	4,	2017	are	incorporated	by	reference	into	Part	III	of	this	report.

# ANNUAL	REPORT	ON	FORM	10-K

# TABLE	OF	CONTENTS

# PART	I

|  | PART	I |  |
| :--- | :--- | :--- |
| Item\t1. | Business | 1 |
|  | Overview | 1 |
|  | Business\tStrategy | 1 |
|  | Technology | 4 |
|  | Reporting\tSegments\tand\tProducts\t&\tServices | 5 |
|  | Sustainability | 8 |
|  | Community | 9 |
|  | Reputation | 9 |
|  | Employees | 9 |
|  | Safety | 10 |
|  | Competition | 10 |
|  | Competitive\tStrengths | 10 |
|  | Government\tRegulation | 11 |
|  | Where\tYou\tCan\tFind\tMore\tInformation | 12 |
| Item\t1A. | Risk\tFactors | 14 |
| Item\t1B. | Unresolved\tStaff\tComments | 19 |
| Item\t2. | Properties | 19 |
|  | Operating\tFacilities | 19 |
|  | Fleet | 20 |
| Item\t3. | Legal\tProceedings | 20 |
| Item\t4. | Mine\tSafety\tDisclosures | 20 |
|  | PART\tII |  |
| Item\t5. | Market\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 21 |
|  | Shareowner\tReturn\tPerformance\tGraph | 22 |
| Item\t6. | Selected\tFinancial\tData | 23 |
| Item\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 24 |
|  | Overview | 24 |
|  | Items\tAffecting\tComparability | 25 |
|  | U.S.\tDomestic\tPackage\tOperations | 28 |
|  | International\tPackage\tOperations | 33 |
|  | Supply\tChain\t&\tFreight\tOperations | 37 |
|  | Operating\tExpenses | 40 |
|  | Investment\tIncome\tand\tInterest\tExpense | 45 |
|  | Income\tTax\tExpense | 46 |
|  | Liquidity\tand\tCapital\tResources | 48 |
|  | Collective\tBargaining\tAgreements | 53 |
|  | New\tAccounting\tPronouncements | 56 |
|  | Critical\tAccounting\tPolicies\tand\tEstimates | 56 |
| Item\t7A. | Quantitative\tand\tQualitative\tDisclosures\tabout\tMarket\tRisk | 62 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 64 |
| Item\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 130 |
| Item\t9A. | Controls\tand\tProcedures | 130 |
| Item\t9B. | Other\tInformation | 132 |
|  | PART\tIII |  |
| Item\t10. | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 133 |
| Item\t11. | Executive\tCompensation | 134 |
| Item\t12. | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 134 |
| Item\t13. | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 134 |
| Item\t14. | Principal\tAccounting\tFees\tand\tServices | 134 |
|  | PART\tIV |  |
| Item\t15. | Exhibits\tand\tFinancial\tStatement\tSchedules | 135 |

# Cautionary	Statement	About	Forward-Looking	Statements

This	report	includes	certain	"forward-looking	statements"	within	the	meaning	of	the	Private	Securities	Litigation	Reform	Act	of	1995.	Statements	in	the	future tense,	and	all	statements	accompanied	by	terms	such	as	"believe,"	"project,"	"expect,"	"estimate,"	"assume,"	"intend,"	"anticipate,"	"target,"	"plan,"	and	variations thereof	and	similar	terms	are	intended	to	be	forward-looking	statements.	We	intend	that	all	forward-looking	statements	we	make	will	be	subject	to	safe	harbor	protection of	the	federal	securities	laws	pursuant	to	Section	27A	of	the	Securities	Act	of	1933	and	Section	21E	of	the	Securities	Exchange	Act	of	1934.

Our	disclosure	and	analysis	in	this	report,	in	our	Annual	Report	to	Shareholders	and	in	our	other	filings	with	the	Securities	and	Exchange	Commission	("SEC") contain	forward-looking	statements	regarding	our	intent,	belief	and	current	expectations	about	our	strategic	direction,	prospects	and	future	results.	From	time	to	time,	we also	provide	forward-looking	statements	in	other	materials	we	release	as	well	as	oral	forward-looking	statements.	Such	statements	give	our	current	expectations	or forecasts	of	future	events;	they	do	not	relate	strictly	to	historical	or	current	facts.	Management	believes	that	these	forward-looking	statements	are	reasonable	as	and	when made.	However,	caution	should	be	taken	not	to	place	undue	reliance	on	any	such	forward-looking	statements	because	such	statements	speak	only	as	of	the	date	when made.

Forward-looking	statements	are	subject	to	certain	risks	and	uncertainties	that	could	cause	actual	results	to	differ	materially	from	our	historical	experience	and	our present	expectations	or	anticipated	results.	These	risks	and	uncertainties	are	described	in	Part	I,	"Item	1A.	Risk	Factors"	and	may	also	be	described	from	time	to	time	in our	future	reports	filed	with	the	SEC.	You	should	consider	the	limitations	on,	and	risks	associated	with,	forward-looking	statements	and	not	unduly	rely	on	the	accuracy of	predictions	contained	in	such	forward-looking	statements.	We	do	not	undertake	any	obligation	to	update	forward-looking	statements	to	reflect	events,	circumstances, changes	in	expectations	or	the	occurrence	of	unanticipated	events	after	the	date	of	those	statements.

# Item	1. Business

# Overview

United	Parcel	Service,	Inc.	("UPS")	was	founded	in	1907	as	a	private	messenger	and	delivery	service	in	Seattle,	Washington.	Today,	we	are	the	world's	largest package	delivery	company,	a	leader	in	the	U.S.	less-than-truckload	industry	and	the	premier	provider	of	global	supply	chain	management	solutions.	We	deliver	packages each	business	day	for	1.6	million	shipping	customers	to	8.7	million	receivers	("consignees")	in	over	220	countries	and	territories.	In	2016,	we	delivered	an	average	of 19.1	million	pieces	per	day,	or	a	total	of	4.9	billion	packages.	Total	revenue	in	2016	was	$60.9	billion.

We	serve	the	global	market	for	logistics	services,	which	include	transportation,	distribution,	contract	logistics,	ground	freight,	ocean	freight,	air	freight,	customs brokerage,	insurance	and	financing.	We	have	three	reportable	segments:	U.S.	Domestic	Package,	International	Package	and	Supply	Chain	&	Freight,	all	of	which	are described	below.	For	financial	information	concerning	our	reportable	segments	and	geographic	regions,	refer	to	note	12	of	our	consolidated	financial	statements.

# Business	Strategy

Our	market	strategy	is	to	provide	customers	with	advanced	logistics	solutions	made	possible	by	a	broad	portfolio	of	differentiated	services	and	capabilities	expertly assembled	and	integrated	into	our	customers'	businesses.	This	approach,	supported	by	our	efficient	and	globally	balanced	multimodal	network,	enables	us	to	deliver value	to	our	customers	and	thereby	build	lasting	partnerships	with	them.

Customers	leverage	our	broad	portfolio	of	logistics	capabilities;	balanced	global	presence	in	North	America,	Europe,	Middle	East,	Africa,	Asia	Pacific	and	Latin America;	reliability;	industry-leading	technologies;	and	solutions	expertise	for	competitive	advantage	in	markets	where	they	choose	to	compete.	We	prudently	invest	to expand	our	integrated	global	network	and	service	portfolio.

Technology	investments	create	user-friendly	shipping,	e-commerce,	logistics	management	and	visibility	tools	for	our	customers,	while	supporting	our	ongoing effort	to	increase	operational	efficiencies.	We	actively	monitor	and	invest	to	gain	insights	into	emerging	technologies	such	as	additive	manufacturing	(3D	printing),	route and	network	optimization	tools,	autonomous	vehicles,	and	advanced	product	monitoring	and	tracking	functionality.	In	2016,	we	invested	in	Deliv,	a	same-day	retail delivery	startup,	and	Optoro,	a	reverse	logistics	firm.

In	order	to	meet	demand,	we	are	increasing	capital	expenditures	to	expand	network	capacity	and	increase	productivity	by	automating	existing	facilities.	We	are making	strategic	investments	in	our	top	30	processing	hubs	as	well	as	adding	new	facilities	to	our	network.	In	2016,	we	announced	investments	of	$400	million	to	build a	new	1.2	million	square	foot	regional	processing	facility	in	Atlanta,	Georgia,	$196	million	to	increase	the	processing	capacity	of	our	Jacksonville,	Florida	hub	by	33%, and	$175	million	to	double	the	processing	capacity	of	our	Columbus,	Ohio	hub.

Our	service	portfolio	and	investments	have	produced	among	the	best	return	on	invested	capital	and	operating	margins	in	the	industry.	We	have	a	long	history	of sound	financial	management	and	our	consolidated	balance	sheet	reflects	financial	strength	that	few	companies	can	match.	Cash	generation	is	a	significant	strength	of UPS,	giving	us	strong	capacity	to	service	our	obligations	and	allowing	for	distributions	to	shareowners,	reinvestment	in	our	business	and	the	pursuit	of	growth opportunities.

We	enable	and	are	the	beneficiaries	of	the	following	trends:

# Expansion	of	Global	Trade

We	continue	to	invest	to	expand	in	both	developed	and	emerging	international	markets.	In	Europe,	we	have	committed	to	nearly	$2	billion	of	capital	investment	to expand	our	infrastructure	to	meet	the	growing	demand	for	cross-border	commerce.	The	enhancements	to	our	European	ground	network	are	designed	to	ensure	that	we provide	fast,	reliable	service	to	customers	moving	goods	across	country	borders.

Emerging	market	opportunities	continue	to	expand.	Over	the	next	ten	years,	these	markets	are	expected	to	represent	the	majority	of	global	GDP	growth	and	an increasing	portion	of	global	trade.	Emerging	markets	are	a	focus	of	investment	and	growth	for	our	current	customers	and	will	be	a	source	of	our	next	generation	of customers.	To	take	advantage	of	these	opportunities,	we	continue	to	make	long-term	investments	in	markets	where	our	customers	are	growing.	Over	the	past	ten	years, we	have	established	a	strong	market	presence	in	three	developing	markets:	China,	Poland	and	Turkey.	India,	along	with	select	countries	in	the	Middle	East,	Latin America,	Africa	and	Eastern	Europe	are	also	becoming	increasingly	important	to	us.

Transcontinental	and	cross-border	trade	are	predicted	to	grow	faster	than	U.S.	and	global	gross	domestic	production	for	the	foreseeable	future.	As	a	result,	global economies	are	becoming	more	inter-connected	and	dependent	on	foreign	trade.	We	are	committed	to	continued	growth	in	both	international	logistics	and	express services.	We	are	expanding	our	aircraft	fleet	beginning	in	2017	to	include	an	additional	14	Boeing	747-8s.

UPS	plays	an	important	role	in	both	global	and	regional	trade	and	is	well	positioned	to	take	advantage	of	trade	growth,	wherever	it	occurs.	Our	global	presence	and productivity	enhancing	technologies	allow	customers	to	expand	into	new	markets.	We	advocate	for	the	expansion	of	free	trade,	including	the	passage	of	regional	trade pacts	and	the	removal	of	trade	barriers.

These	trends	underscore	why	we	believe	our	international	business	remains	a	catalyst	for	future	profitable	growth.

# e-Commerce	Growth	in	Retail	Sectors

E-commerce	continues	to	drive	significant	growth	in	package	delivery	volume.	Our	integrated	network	puts	us	in	an	ideal	position	to	capitalize	on	the	shift	towards residential	deliveries.	We	continue	to	create	new	services,	supported	by	our	technology,	that	complement	traditional	UPS	premium	home	delivery	services	and	address the	needs	of	e-commerce	shippers	and	consignees.	We	offer	cost-effective	solutions	such	as	UPS	SurePost,	for	U.S.	domestic	shipments,	and	UPS	i-parcel,	for	a	low- cost	deferred	cross	border	solution,	where	economy	takes	precedence	over	speed.	We	also	offer	feature-rich	solutions,	such	as	UPS	My	Choice,	a	service	that	provides more	than	30	million	members	with	visibility	and	control	of	their	inbound	shipments.	The	power	of	UPS	My	Choice	has	been	enhanced	over	the	past	year	with	the addition	of	UPS	Follow	My	Delivery	for	time-sensitive	shipments.	UPS	Follow	My	Delivery	offers	map-based	tracking	from	a	package's	delivery	departure	to	a	UPS My	Choice	member's	residence.

UPS	My	Choice	members	have	the	added	flexibility	to	direct	packages	to	UPS	Access	Point	locations	when	they	will	not	be	home	to	accept	a	delivery.	UPS Access	Point	locations	are	convenient	places	–	such	as	The	UPS	Store	and	other	local	businesses	–	that	offer	easy	package	drop-off	and	pick-up.	With	evening	and weekend	hours,	UPS	Access	Point	locations	better	fit	some	consumers'	schedules.	Merchants	in	50	origin	countries	and	territories	can	ship	directly	to	UPS	Access	Point locations	in	18	destination	countries,	giving	merchants	and	consumers	greater	control	over	package	deliveries.

# Industry-focused	Solutions	and	Offerings

We	offer	differentiated	value	propositions	in	several	segments,	including	aerospace,	automotive,	industrial	manufacturing,	retail,	professional	and	consumer services,	healthcare	and	high-tech.

Our	understanding	of	macro	and	industry	trends	in	each	market	allows	us	to	develop	commercial	insights	for	our	customers.	These	insights	are	incorporated	into our	sales	and	solutions	process	and	are	shared	with	customers	through	direct	engagement,	industry	forums	and	publications.	We	help	customers	achieve	their	business objectives	and	improve	their	performance	through	our	value-added	solutions.

The	combination	of	rising	global	demand	for	healthcare,	product	innovations	(many	of	which	are	time	and	temperature	sensitive),	increasing	regulatory	oversight and	downward	reimbursement	pressure	is	creating	opportunities	and	challenges	for	healthcare	and	life	sciences	firms.	In	2016,	we	expanded	our	healthcare	capabilities by	acquiring	Maze	1	Limited	("Marken"),	a	global	provider	of	supply	chain	solutions	to	the	life	sciences	industry,	primarily	serving	the	clinical	trials	logistics	space. Clinical	trials	are	subject	to	strict	regulatory	compliance,	require	temperature-controlled	logistics	services	and	are	typically	global	in	reach.	Marken	operates	a	global network	of	clinical	supply	chain	services	to	meet	this	need.	The	acquisition	of	Marken	follows	multiple	acquisitions	that	have	expanded	our	healthcare	logistics	services portfolio	in	recent	years.	With	over	seven	million	square	feet	of	healthcare	logistics	and	distribution	facilities	around	the	world	and	further	growth	planned	for	the	future, we	are	well-positioned	to	meet	our	customers'	increasingly	complex	requirements.

Rapid	technology	innovation	and	growing	worldwide	demand	for	electronics	are	driving	change	in	the	already-dynamic	high-tech	industry.	UPS's	global transportation	network	and	integrated	technology	solutions	enable	high-tech	customers	to	get	their	products	to	market	faster,	improve	customer	service	and	increase revenue.	We	offer	global	sourcing	and	a	significant	amount	of	repair	space	to	leverage	one	of	the	largest	networks	of	post-sales	facilities	in	the	world.	With	more	than 950	field	stocking	locations	in	over	110	countries,	we	help	high-tech	companies	identify	better	ways	to	manage	inventories	and	meet	their	crucial	logistics	needs.	Our experience	and	global	capabilities	make	us	a	strong	partner	in	the	high-tech	industry.

# Logistics	Outsourcing

Outsourcing	supply	chain	management	is	becoming	more	prevalent	as	customers	increasingly	view	professional	management	and	operation	of	their	supply	chains as	a	strategic	advantage.	This	trend	enables	companies	to	focus	on	what	they	do	best.	We	can	meet	our	customers'	needs	for	outsourced	logistics	with	our	global capabilities	in	customized	forwarding,	transportation,	warehousing,	distribution,	delivery	and	post-sales	services.

# Technology

Technology	powers	logistics,	forms	the	foundation	of	our	reliability	and	allows	us	to	enhance	the	customer	experience.	Recent	developments	that	improve	our operational	efficiency,	flexibility,	reliability	and	customer	experience	include:

•Completed	Phase	I	of	U.S.	deployment	of	our	On	Road	Integrated	Optimization	and	Navigation	system	("ORION").	ORION	employs	advanced	algorithms	to determine	the	optimal	route	for	each	delivery,	while	meeting	service	commitments.	Despite	continuing	growth	in	package	volume	and	delivery	stops,	ORION	is helping	bend	the	cost	curve	by	limiting	miles	driven,	which	results	in	fuel	and	productivity	savings.	For	instance,	average	daily	volume	and	delivery	stops increased	4.1%	and	4.4%,	respectively,	in	our	U.S.	domestic	package	operations	in	2016,	while	average	daily	package	miles	driven	only	increased	0.2%.

•Expanded	investment	in	new	automated	facilities.	We	are	also	automating	our	largest	hubs,	package	centers	and	small	sorts	globally.	This	effort	will	reduce package	handling	in	the	network	while	improving	network	flexibility	by	optimizing	network	flows	and	eliminating	the	need	for	complex	sort	knowledge.

•Continued	rollout	of	telematics	to	our	international	delivery	fleet.	Telematics	helps	UPS	determine	a	vehicles'	performance	and	condition	by	capturing	data	on more	than	200	operating	elements.	Together,	improved	data	and	driver	coaching	help	reduce	fuel	consumption,	emissions	and	maintenance	costs	while improving	driver	safety.	By	the	end	of	2016,	telematics	was	installed	in	more	than	86,000	vehicles.

We	bring	industry-leading	UPS	technology	to	our	customers	who,	in	turn,	realize	increased	productivity,	greater	control	of	their	supply	chains	and	improved customer	experience	when	they	integrate	with	our	systems.	Customers	benefit	through	offerings	such	as:

# Shipping

WorldShip™,	which	is	our	flagship	desktop	shipping	application,	provides	middle-market	and	large	customers	with	robust	shipping	capabilities.	Customers	can create	custom	labels,	set	up	shipment	alerts,	create	and	upload	customs	documentation,	track	and	export	shipments,	create	reports	and	integrate	with	their	enterprise resource	planning	and	accounting	systems	to	streamline	shipping	with	real-time	connectivity.

UPS	marketplace	shipping,	which	integrates	www.ups.com	with	eBay®	,	Amazon®,	Etsy®	and	BigCommerce®,	allows	marketplace	sellers	to	easily	ship	their orders	via	www.ups.com	or	WorldShip™.	UPS	marketplace	shipping	provides	simplified	shipment	processing,	multiple	payment	options	(including	PayPal™),	order and	shipment	history	and	automatic	tracking	updates.

# Tracking	and	Visibility

UPS	Quantum	View®	helps	customers	better	manage	shipments,	facilitate	tracking,	allow	for	inbound	volume	planning,	manage	third-party	shipping	costs	and automatically	notify	customers	of	incoming	shipments.	With	visibility	into	transit	times	and	delivery	confirmations,	customers	can	speed	up	their	revenue	cycle	and collect	accounts	receivable	more	quickly	while	improving	customer	service.

# International	Trade	Tools

UPS	Paperless™	solutions	allow	customers	to	self-enroll	in	UPS	Paperless™	Invoice	and	upload	shipping	documents.	These	solutions	enable	customers	to electronically	transmit	a	commercial	invoice,	packing	list	or	their	own	customs	documents	when	shipping	internationally.	This	eliminates	redundant	data	entry	and errors,	while	reducing	customs	delays	and	paper	waste.

UPS	TradeAbility®	tools	help	customers	effectively	and	confidently	manage	the	movement	of	goods	internationally	in	a	timely,	efficient	and	compliant	manner.

# Billing

The	UPS	Billing	Center,	a	secure	location	for	customers	to	view,	download,	manage	and	pay	their	UPS	invoices,	helps	customers	accelerate	billing	and	payment processes.	Customers	can	assign	privileges	with	administrative	controls,	manage	multiple	accounts	and	create	custom	reports	using	a	single	simple	interface.

# Integration

The	UPS	Developer	Kit,	which	is	comprised	of	multiple	Application	Programming	Interfaces	(APIs),	helps	customers	streamline	and	automate	their	internal business	processes.	The	UPS	Developer	Kit	APIs	allow	customers	to	integrate	a	wide	range	of	UPS	functionality	into	their	business	systems	and	websites	such	as address	validation,	shipment	scheduling,	selection	of	shipping	service	levels,	tracking	and	much	more.

# Business-to-Consumer

UPS	My	Choice®,	which	focuses	on	the	consignee,	has	transformed	the	residential	delivery	experience.	Receivers	can	direct	the	timing	and	delivery	instructions for	their	packages	using	their	computer,	mobile	devices	or	Facebook™	app.	This	innovative	service	is	powered	by	the	complex	integration	of	real-time	route optimization	and	other	technologies	within	our	delivery	network.

The	Global	Locator	on	www.ups.com	was	enhanced	to	give	customers	faster	and	simpler	access	to	UPS	drop-off	and	pick-up	locations,	including	new	UPS	Access Point	sites.	The	Global	Locator	has	a	new	search	field	with	updated	filters,	location	images	and	location-specific	promotions.	Customers	can	also	provide	online feedback,	e-mail	search	results,	save	favorite	locations	and	access	recent	searches.

# Mobile

UPS	Mobile,	which	includes	the	mobile	website,	m.ups.com,	and	apps	for	iPhone®,	iPad®	and	Android	devices,	is	readily	available	for	our	customers	in	over	80 countries.	Customers	can	track,	ship,	find	UPS	locations,	manage	UPS	My	Choice	shipments	and	receive	shipment	notifications	on	their	mobile	devices.	The	UPS Mobile	apps	and	website	were	enhanced	with	new	mobile	shipping	options	that	make	it	easier	to	create	or	print	a	label	from	a	mobile	device.	In	2016,	the	app	was deployed	in	an	additional	39	countries,	for	a	total	of	55	countries.

# Reporting	Segments	and	Products	&	Services

# Global	Small	Package

Our	global	small	package	operations	provide	time-definite	delivery	services	for	express	letters,	documents,	small	packages	and	palletized	freight	via	air	and ground	services.	We	serve	more	than	220	countries	and	territories	around	the	world	along	with	domestic	delivery	service	within	50	countries.	We	handle	packages	that weigh	up	to	150	pounds	and	are	up	to	165	inches	in	combined	length	and	girth	as	well	as	palletized	shipments	weighing	more	than	150	pounds.	All	of	our	package services	are	supported	by	numerous	shipping,	visibility	and	billing	technologies.

We	handle	all	levels	of	service	(air,	ground,	domestic,	international,	commercial,	residential)	through	one	global	integrated	pick-up	and	delivery	network.	All packages	are	commingled	within	our	network,	except	when	necessary	to	meet	their	specific	service	commitments.	This	enables	one	UPS	driver	to	pick	up	customers' shipments	for	any	of	our	services	at	the	same	scheduled	time	each	day.	Compared	to	companies	with	single	service	network	designs,	our	integrated	network	uniquely provides	operational	and	capital	efficiencies	while	being	more	environmentally-friendly.

We	offer	same-day	pick-up	of	air	and	ground	packages	upon	request.	Customers	can	schedule	pick-ups	for	one	to	five	days	a	week,	based	on	their	specific	needs. Additionally,	our	wholly-owned	and	partnered	global	network	offers	more	than	150,000	entry	points	where	customers	can	tender	a	package	to	us	at	a	location	or	time convenient	to	them.	This	combined	network	includes	UPS	drivers	who	can	accept	packages	provided	to	them,	UPS	drop	boxes,	UPS	Access	Point	locations,	The	UPS Store	locations,	authorized	shipping	outlets	and	commercial	counters,	alliance	locations	and	customer	centers	attached	to	UPS	facilities.	Some	of	these	locations	offer	a full	array	of	services	including	pick-up,	delivery	and	packing	options,	while	others	are	drop-off	locations	only.

The	growth	of	online	shopping	has	increased	our	customers'	needs	for	efficient	and	reliable	returns,	resulting	in	our	development	of	a	robust	selection	of	returns services	that	are	available	in	more	than	145	countries.	Options	vary	based	on	customer	needs	and	country,	and	range	from	cost-effective	solutions	such	as	UPS	Returns, to	more-specialized	services	such	as	UPS	Returns	Exchange.	UPS	Returns	enables	shippers	to	provide	their	customers	with	a	return	shipping	label,	while	UPS	Returns Exchange	simplifies	product	exchanges	by	delivering	a	replacement	item	and	picking	up	a	return	item	in	the	same	stop,	and	assisting	with	the	re-packaging	process.

We	operate	one	of	the	largest	airlines	in	the	world,	with	global	operations	centered	at	our	Worldport	hub	in	Louisville,	Kentucky.	Worldport	sort	capacity, currently	at	416,000	packages	per	hour,	has	expanded	over	the	years	due	to	volume	growth	and	a	centralization	effort.	Our	European	air	hub	is	located	in	Cologne, Germany,	and	we	maintain	Asia-Pacific	air	hubs	in	Shanghai,	China	and	Shenzhen,	China	and	Hong	Kong.	Our	regional	air	hub	in	Canada	is	located	in	Hamilton, Ontario,	and	our	regional	air	hub	for	Latin	America	and	the	Caribbean	is	in	Miami,	Florida.

In	the	U.S.,	Worldport	is	supported	by	our	regional	air	hubs	in	Columbia,	South	Carolina;	Dallas,	Texas;	Ontario,	California;	Philadelphia,	Pennsylvania;	and Rockford,	Illinois.	This	network	design	allows	for	cost-effective	package	processing	in	our	most	technology-enabled	facilities,	which	allow	us	to	use	fewer,	larger	and more	fuel-efficient	aircraft.	Our	U.S.	ground	fleet	serves	all	business	and	residential	zip	codes	in	the	contiguous	U.S.

# U.S.	Domestic	Package	Reporting	Segment

We	are	a	leader	in	time-definite,	money-back	guaranteed,	small	package	delivery	services	in	the	U.S.	We	offer	a	full	spectrum	of	U.S.	domestic	guaranteed	ground and	air	package	transportation	services.

•Customers	can	select	from	same	day,	next	day,	two	day	and	three	day	delivery	alternatives.	Many	of	these	services	offer	options	that	enable	customers	to specify	a	time-of-day	guarantee	for	their	delivery	(e.g.,	by	8:00	AM,	10:30	AM,	noon,	end	of	day,	etc.).

•We	expanded	UPS	Next	Day	Air	Early	(previously	known	as	"UPS	Next	Day	Air	Early	AM")	service	to	over	12,000	zip	codes	in	two	phases	where	previously only	an	end-of-day	guarantee	was	available.	This	enhancement	provides	shippers	and	their	customers	the	option	of	earlier	commitment	times	from	8:00	A.M.	to 2:00	P.M.	and	enlarges	our	early	delivery	coverage.

•Customers	can	also	leverage	our	extensive	ground	network	to	ship	using	our	day-definite	guaranteed	ground	service	that	serves	every	U.S.	business	and residential	address.	We	deliver	more	ground	packages	than	any	other	carrier,	with	average	daily	package	volume	of	13.5	million	in	the	U.S.,	most	within	one	to three	business	days.

•We	also	offer	UPS	SurePost,	an	economy	residential	ground	service	for	customers	with	non-urgent,	lightweight	residential	shipments.	UPS	SurePost	is	a contractual	residential	ground	service	that	combines	the	consistency	and	reliability	of	the	UPS	Ground	network	with	final	delivery	often	provided	by	the	U.S. Postal	Service.

# International	Package	Reporting	Segment

Our	International	Package	reporting	segment	includes	small	package	operations	in	Europe,	Asia-Pacific,	Canada	and	Latin	America,	the	Indian	sub-continent,	the Middle	East	and	Africa.	We	offer	a	wide	selection	of	guaranteed	day	and	time-definite	international	shipping	services.	We	offer	more	guaranteed	time-definite	express options	(Express	Plus,	Express	and	Express	Saver)	than	any	other	carrier.

•In	2016,	we	undertook	significant	country	expansions	of	Express	time-definite

portfolios:

◦We	expanded	our	UPS	Worldwide	Express	mid-day	service	to	52	new	countries	across	all	regions.	This	service	is	now	available	in	118 countries.

◦We	expanded	our	UPS	Worldwide	Express	Plus	morning	delivery	service	to	28	new	countries	and	expanded	our	footprint	in	25	existing	markets.	This service	is	now	available	in	56	countries.

•For	international	shipments	that	do	not	require	Express	services,	UPS	Worldwide	Expedited	offers	a	reliable,	deferred,	guaranteed	day-definite	service	option. The	service	is	available	from	more	than	80	origin	countries	to	more	than	220	countries	and	territories.

•For	cross-border	ground	package	delivery,	we	offer	UPS	Standard	delivery	services	within	Europe,	between	the	U.S.	and	Canada	and	between	the	U.S.	and Mexico.

•UPS	Worldwide	Express	Freight	provides	guaranteed,	day-definite	delivery	for	palletized	shipments	over	150	pounds.	In	2016,	we	expanded	services	to	nine new	emerging	market	countries.	UPS	Worldwide	Express	Freight	is	now	available	from	66	origin	countries	to	64	destination	countries.

Europe,	our	largest	region	outside	of	the	U.S.,	accounts	for	approximately	half	of	international	revenue	and	is	one	of	the	primary	drivers	of	our	growth.	To accommodate	the	strong	potential	for	growth	in	small	package	exports,	we	made	a	series	of	enhancements	to	our	ground	network	that	helps	reduce	transit	time	for	cross- border	shipments	by	one	to	two	days	and	will	result	in	improved	exporting	opportunities	for	customers	in	Europe.	These	expansions	and	enhancements	are	part	of	our commitment	to	invest	nearly	$2	billion	in	our	European	infrastructure	by	2019.

Asia-Pacific	remains	a	strategic	market	due	to	growth	rates	in	intra-Asia	trade	and	the	expanding	Chinese	economy.	To	capitalize	on	these	opportunities,	we	are bringing	faster	time-in-transit	to	customers	focused	on	intra-Asia	trade,	and	reducing	transit	days	from	Asia	to	the	U.S.	and	Europe.	Through	added	flight	frequencies,	we provide	our	customers	the	ability	to	ship	next	day	to	more	places	in	the	U.S.	and	Europe,	guaranteed,	than	any	other	express	carrier.	We	serve	more	than	40	Asia-Pacific countries	and	territories	through	more	than	two	dozen	alliances	with	local	delivery	companies	that	supplement	company-owned	operations.

The	investments	we	are	making	to	expand	our	network	and	improve	service	levels	have	already	created	a	strong	foundation,	contributing	to	30%	incremental	profit growth	over	the	last	two	years.	Excluding	any	impacts	from	foreign	currency,	we	expect	this	positive	momentum	in	our	core	International	business	model	to	continue going	forward.

# Supply	Chain	&	Freight	Reporting	Segment

The	Supply	Chain	&	Freight	reporting	segment	consists	of	our	forwarding	and	logistics	services,	truckload	freight	brokerage,	UPS	Freight	and	our	financial offerings	through	UPS	Capital.	Supply	chain	complexity	creates	demand	for	a	global	service	offering	that	incorporates	transportation,	distribution	and	international	trade and	brokerage	services,	with	complementary	financial	and	information	services.	Outsourcing	of	non-core	logistics	activity	is	a	strategy	more	and	more	companies	are pursuing.	With	increased	competition	and	growth	opportunities	in	new	markets,	businesses	require	flexible	and	responsive	supply	chains	to	support	their	business strategies.	We	meet	this	demand	by	offering	a	broad	array	of	supply	chain	services	in	over	195	countries	and	territories.

# Freight	Forwarding

We	are	one	of	the	largest	U.S.	domestic	air	freight	carriers	and	among	the	top	international	air	freight	forwarders	globally.	We	offer	a	portfolio	of	guaranteed	and non-guaranteed	global	air	freight	services.	Additionally,	as	one	of	the	world's	leading	non-vessel	operating	common	carriers,	we	provide	ocean	freight	full-container load,	less-than-container	load	and	multimodal	transportation	services	between	most	major	ports	around	the	world.

# Truckload	Freight	Brokerage	(Coyote)

In	2015,	we	acquired	Coyote	Logistics	Midco,	Inc	("Coyote"),	a	U.S.-based	truckload	freight	brokerage	company.	We	successfully	integrated	this	large-scale truckload	freight	brokerage	and	transportation	management	services	operation	into	our	Supply	Chain	&	Freight	reporting	segment,	and	have	seen	significant	synergies	in the	areas	of	purchased	transportation,	backhaul	utilization,	cross-selling	to	customers,	technology	systems	and	industry	best	practices.	Coyote's	access	to	our	UPS	fleet combined	with	its	broad	carrier	network	has	created	a	customized	capacity	solution	for	all	markets,	customers	and	situations.	Moreover,	Coyote	has	been	able	to	cross- sell	UPS	services	(such	as	air	freight,	customs	brokerage	and	global	freight	forwarding)	to	its	customer	base.

# Global	Logistics	and	Distribution

UPS	Logistics	offers	the	following	services:

•We	provide	value-added	distribution	services	to	customers	through	our	global	network	of	company-owned	and	leased	warehouse facilities.

•UPS	Post	Sales	enables	customers	and	end	users	to	support	equipment	and	devices	after	they	have	been	delivered	or	installed	in	the	field.	We	leverage	our global	network	of	over	950	field	stocking	locations	("FSL")	to	ensure	the	right	parts	are	in	the	right	place,	at	the	right	time.	Our	network	of	FSLs	span	more than	110	countries	around	the	globe.

•UPS	Mail	Innovations	offers	an	efficient,	cost-effective	method	for	sending	lightweight	parcels	and	flat	mail	to	global	addresses	from	the	U.S.	We	pick	up customers'	domestic	and	international	mail	and	then	sort,	post,	manifest	and	expedite	the	secured	mail	containers	to	the	destination	postal	service	for	last-mile delivery.

•UPS	Express	Critical	provides	urgent,	secure	transportation	for	time-sensitive	and	high-value	goods.	The	service	is	designed	to	complement	UPS's	core	parcel and	air	freight	services.	It	includes	same-day,	next-flight-out	and	door-to-door	ground	services,	including	specialized	charter	and	hand-carry	services	for	both light	and	heavyweight	shipments.

•In	2016,	we	expanded	our	healthcare	capabilities	by	acquiring	Marken,	a	global	provider	of	supply	chain	solutions	to	the	life	sciences	industry,	primarily serving	the	clinical	trials	logistics	space.	Clinical	trials	are	subject	to	strict	regulatory	compliance,	require	temperature-controlled	logistics	services	and	are typically	global	in	reach.	Marken	operates	a	global	network	of	clinical	supply	chain	services	to	meet	the	increasingly	complex	demands	of	its	clients.	The acquisition	of	Marken	follows	multiple	acquisitions	that	have	expanded	our	healthcare	logistics	services	portfolio.

# UPS	Freight

UPS	Freight	offers	regional,	inter-regional	and	long-haul	less-than-truckload	("LTL")	services,	as	well	as	full	truckload	services,	in	all	50	states,	Canada,	Puerto Rico,	Guam,	the	U.S.	Virgin	Islands	and	Mexico.	UPS	Freight	provides	reliable	LTL	service	backed	by	a	day-definite,	on-time	guarantee	at	no	additional	cost. Additionally,	user-friendly	shipping,	visibility	and	billing	technology	offerings	including	UPS	WorldShip®,	Quantum	View	and	UPS	Billing	Center,	allow	freight customers	to	create	electronic	bills	of	lading,	monitor	shipment	progress	and	reconcile	shipping	charges.

# Customs	Brokerage

We	are	among	the	world's	largest	customs	brokers	by	both	the	number	of	shipments	processed	annually	and	by	the	number	of	dedicated	brokerage	employees worldwide.	We	provide	our	customers	with	customs	clearance,	trade	management	and	international	trade	consulting	services.

# UPS	Capital

UPS	Capital	provides	financial,	insurance	and	payment	services	to	help	protect	companies	from	risk	and	leverage	cash	in	their	supply	chains.	With	services available	in	over	21	countries,	UPS	Capital	and	its	affiliates	support	all	aspects	of	the	order-to-cash	cycle,	including	financing	inventory	warehoused	overseas,	insuring shipments	and	providing	payment	solutions.	The	UPS	Capital	suite	of	cargo	and	credit	insurance,	trade	finance	and	payment	solutions	is	designed	to	help	customers protect	their	assets	and	keep	their	businesses	running	smoothly.	With	the	acquisitions	of	Parcel	Pro™	and	the	Insured	Parcel	Services	business	of	G4S	International Logistics	in	2015,	UPS	Capital	now	offers	insured	transportation	of	high-value	goods	including	loose	stones,	finished	jewelry	and	wristwatches.

# Sustainability

Our	business	and	corporate	responsibility	strategies	pursue	a	common	interest	to	increase	the	vitality	and	environmental	sustainability	of	the	global	economy	by aggregating	the	shipping	activity	of	millions	of	businesses	and	individuals	worldwide	into	a	single,	highly	efficient	logistics	network.	This	provides	benefits	to:

•UPS,	by	ensuring	strong	demand	for	our

services.

•The	economy,	by	enabling	global	commerce	and	making	global	supply	chains	more	efficient	and	less

expensive.

•The	environment,	by	enabling	our	global	customers	to	leverage	UPS's	network	efficiency	and	thereby	reduce	the	greenhouse	gas	emissions	intensity	of	their supply	chains.

•Communities,	by	connecting	individuals	to	global	markets	and	providing	the	economic	empowerment	that	can	help	facilitate	positive	social change.

We	pursue	sustainable	business	practices	worldwide	through	operational	efficiency,	fleet	and	fuel	advances,	facility	engineering	projects	and	conservation- enabling	technology	and	service	offerings.	We	help	our	customers	do	the	same.	We	consider	stakeholder	engagement	an	essential	aspect	of	corporate	governance	and regularly	collaborate	with	a	diverse	set	of	global	stakeholders	on	sustainability	issues.	Our	most	material	global	sustainability	issues	primarily	involve	our	energy	use, emissions	and	workplace	policies.	UPS	established	an	enterprise-wide	target	to	reduce	the	carbon	intensity	of	our	operations	by	20%	by	2020,	using	2007	as	a	baseline. As	of	2015,	we	achieved	a	14.5%	reduction	toward	this	goal	as	a	result	of	successfully	executing	greenhouse	gas	reduction	strategies	in	our	ground,	air	and	facility operations.

Sustainability	highlights	in	2016	include:

•One	of	Corporate	Responsibility's	"100	Best	Corporate	Citizens"	for	the	7th	consecutive

year.

•Recognized	by	Ethisphere	Institute	as	one	of	the	"World's	Most	Ethical	Companies"	for	the	10th	consecutive

•Recognized	as	a	constituent	of	the	Dow	Jones	Sustainability	North	America	Index	for	the	12th	consecutive	year;	in	addition,	we	were	included	on	the	Dow Jones	Sustainability	World	Index	for	the	4th	consecutive	year.

•Recognized	as	a	constituent	of	the	NASDAQ	OMX	Global	Sustainability	Index	for	the	7th	consecutive

•Recognized	at	the	Leadership	level	of	CDP's	climate	performance

review.

•Included	for	the	3rd	consecutive	time	on	Points	of	Light's	Civic	50,	which	recognizes	the	most	community-minded	companies	in	the

More	information	on	how	we	address	our	most	significant	sustainability	issues	is	available	in	the	UPS	Corporate	Sustainability	Report	and	on	the	UPS Sustainability	website	at	www.ups.com/sustainability.

# Community

We	believe	that	strong	communities	are	vital	to	the	success	of	our	company.	By	combining	our	philanthropy	with	the	volunteer	time	and	talents	of	our	employees, we	help	drive	positive	change	for	organizations	and	communities	in	need	across	the	globe.	The	highlights	of	our	corporate	citizenship	efforts	in	2016	include:

•Local	non-profits	around	the	world	received	nearly	2.7	million	hours	of	volunteer	service	from	our	employees	participating	in	our	Neighbor-to-Neighbor program.

•The	UPS	Foundation,	which	oversees	corporate	citizenship	efforts	for	the	company,	invested	nearly	$117	million	in	donations	of	both	cash	and	in-kind	services to	global	causes,	primarily	in	four	focus	areas—community	safety,	environmental	sustainability,	diversity	and	volunteerism.

•Our	employees,	both	active	and	retired,	contributed	approximately	$57	million	to	United	Way,	which	was	matched	by	a	corporate	contribution	of	nearly	$9 million.

•Through	The	UPS	Foundation	we	have	the	opportunity	to	support	our	global	communities	to	offset	carbon,	support	clean	water,	reduce	poverty	and	help individuals	sustain	their	lives	through	the	planting	of	trees.	The	UPS	Global	Forestry	Initiative,	which	began	in	2013,	is	the	signature	program	of	The	UPS Foundation's	Environmental	Focus	area.	By	the	end	of	2016,	we	have	supported	the	planting	of	seven	million	trees	worldwide.

•We	continued	to	aid	communities	impacted	by	disasters	through	our	UPS	Humanitarian	Relief	and	Resilience	program,	by	providing	our	logistics	expertise, skilled	volunteers,	capacity	building	support	and	in-kind	services.	In	2016,	we	coordinated	more	than	450	humanitarian	relief	shipments	across	53	countries and	provided	funding	and	logistics	support	to	strengthen	long-term	recovery	efforts	of	communities	impacted	by	over	20	world	disasters	including	the	Global Refugee	Crisis,	Hurricane	Matthew	and	the	Japan	Earthquake.

•Nearly	8,500	teenagers	and	novice	drivers	in	the	U.S.,	Canada,	the	U.K.,	Germany,	Mexico	and	China	participated	in	UPS	Road	Code.	This	safety	program	for new	drivers	features	our	employees	as	instructors	–	a	role	where	they	share	driving	knowledge	and	safety	tips	amassed	over	our	long	history	of	safe	driving.

# Reputation

Great	brands	require	connecting	with	customers,	investors	and	other	stakeholders	with	honesty	and	transparency.	In	working	to	develop	these	connections,	we regularly	receive	high	accolades	from	independent	brand	and	reputation	evaluations.

In	2016,	we	continued	to	be	ranked	highly	by	the	following:

•Forbes'	2016	ranking	of	"The	World's	Most	Valued	Brands",

•Interbrand's	"Best	Global	Brands,2016",

•2016	FORTUNE	Magazine's	list	of	"World's	Most	Admired	Companies",

•2016	Gartner	Magic	Quadrant	for	the	Third-Party	Logistics	Leader,	Worldwide,	and

•WPP's	BrandZ	"Top	100	Most	Valuable	Global	Brands"	2016	survey	by	Millward	Brown	Optimor.

# Employees

The	strength	of	our	company	is	our	people,	working	together	with	a	common	purpose.	We	had	more	than	434,000	employees	(excluding	temporary	seasonal employees)	as	of	December	31,	2016,	of	which	355,000	are	in	the	U.S.	and	79,000	are	located	internationally.	Our	global	workforce	includes	approximately	78,000 management	employees	(38%	of	whom	are	part-time)	and	356,000	hourly	employees	(47%	of	whom	are	part-time).

As	of	December	31,	2016,	we	had	approximately	268,000	employees	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with local	unions	affiliated	with	the	International	Brotherhood	of	Teamsters	("Teamsters").	During	2014,	the	Teamsters	ratified	a	new	national	master	agreement	with	UPS that	will	expire	on	July	31,	2018.

We	have	approximately	2,600	pilots	who	are	employed	under	a	collective	bargaining	agreement	with	the	Independent	Pilots	Association	("IPA"),	which	became amendable	at	the	end	of	2011.	On	August	31,	2016,	the	IPA	members	voted	to	ratify	a	new	five-year	labor	contract.	Terms	of	the	agreement	became	effective	September 1,	2016	and	run	through	September	1,	2021.	The	economic	provisions	in	the	agreement	included	pay	increases,	signing	bonuses	and	enhanced	pension	benefits.

Our	airline	mechanics	are	covered	by	a	collective	bargaining	agreement	with	Teamsters	Local	2727,	which	became	amendable	November	1,	2013.	We	are currently	in	negotiations	with	Teamsters	Local	2727.	In	addition,	approximately	3,000	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.

The	experience	of	our	management	team	continues	to	be	an	organizational	strength.	Nearly	34%	of	our	full-time	managers	have	more	than	20	years	of	service with	UPS.

We	believe	that	our	relations	with	our	employees	are	good.	We	periodically	survey	all	our	employees	to	determine	their	level	of	job	satisfaction.	Areas	of	concern receive	management	attention	as	we	strive	to	keep	UPS	the	employer-of-choice	among	our	employees.	We	consistently	receive	numerous	awards	and	wide	recognition as	an	employer-of-choice,	resulting	in	part	from	our	emphasis	on	diversity	and	corporate	citizenship.

# Safety

Health,	Wellness	and	Safety	are	core	values	at	UPS	and	an	enduring	belief	that	the	well-being	of	our	people,	business	partners	and	the	general	public	is	of	utmost importance.	We	train	our	people	to	recognize	hazards,	mitigate	risk	and	avoid	injury	to	themselves	and	others	in	all	aspects	of	their	work.	We	do	not	tolerate	unsafe	work practices.

We	recognize	employees	for	health,	wellness,	and	safety	accomplishments.	We	provide	education	programs	which	promote	the	health	and	wellness	of	employees, their	families	and	the	safety	of	our	global	operations.	We	are	committed	to	fostering	the	most	effective	safety	practices	in	our	work	environment.	By	maintaining	our high	safety	standards,	we	contribute	to	the	well-being	of	our	people,	the	company	and	the	communities	we	serve.

# Competition

UPS	is	a	global	leader	in	logistics.	We	offer	a	broad	array	of	services	in	the	package	and	freight	delivery	industry	and,	therefore,	compete	with	many	different local,	regional,	national	and	international	logistics	providers.	Our	competitors	include	worldwide	postal	services,	various	motor	carriers,	express	companies,	freight forwarders,	air	couriers	and	others,	including	startups	that	combine	technology	with	crowdsourcing	to	focus	on	local	market	needs.	Through	our	supply	chain	service offerings,	we	compete	with	a	number	of	providers	in	the	supply	chain,	financial	services	and	information	technology	industries.

# Competitive	Strengths

# Our	competitive	strengths	include:

Global	Network.				We	believe	that	our	integrated	global	ground	and	air	network	is	the	most	extensive	in	the	industry.	We	provide	all	types	of	package	service	(air, ground,	domestic,	international,	commercial	and	residential)	through	a	single	pick-up	and	delivery	service	network.	We	also	have	extensive	air	freight,	ocean	freight, ground	freight	and	logistics	networks	that	provide	additional	capabilities	in	the	global	transportation	and	logistics	market.

Our	sophisticated	engineering	systems	allow	us	to	optimize	our	network	efficiency	and	asset	utilization	on	a	daily	basis.	This	unique,	integrated	global	business model	creates	consistent	and	superior	returns.

Global	Presence.			We	serve	more	than	220	countries	and	territories	around	the	world.	We	have	a	significant	presence	in	all	of	the	world's	major	economies.

Leading-edge	Technology.				We	are	a	global	leader	in	developing	technology	that	helps	our	customers	optimize	their	shipping	and	logistics	business	processes	to lower	costs,	improve	service	and	increase	efficiency.

Technology	powers	virtually	every	service	we	offer	and	every	operation	we	perform.	Our	technology	offerings	are	driven	by	our	customers'	needs.	We	offer	a variety	of	online	service	options	that	enable	our	customers	to	integrate	UPS	functionality	into	their	own	businesses	not	only	to	send,	manage	and	track	their	shipments conveniently,	but	also	to	provide	their	customers	with	better	information	services.	We	provide	the	infrastructure	for	an	Internet	presence	that	extends	to	tens	of	thousands of	customers	who	have	integrated	UPS	tools	directly	into	their	own	websites.

Broad	Portfolio	of	Services.				Our	portfolio	of	services	enables	customers	to	choose	the	delivery	option	that	is	most	appropriate	for	their	requirements. Increasingly,	our	customers	benefit	from	business	solutions	that	integrate	many	UPS	services	in	addition	to	package	delivery.	For	example,	our	supply	chain	services— such	as	freight	forwarding,	customs	brokerage,	order	fulfillment	and	returns	management—help	improve	the	efficiency	of	the	supply	chain	management	process.

Customer	Relationships.				We	focus	on	building	and	maintaining	long-term	customer	relationships.	We	serve	1.6	million	pickup	customers	and	8.7	million delivery	customers	daily.	Cross-selling	small	package,	supply	chain	and	freight	services	across	our	customer	base	is	an	important	growth	mechanism	for	UPS.

Brand	Equity.				We	have	built	a	leading	and	trusted	brand	that	stands	for	quality	service,	reliability	and	service	innovation.	The	distinctive	appearance	of	our vehicles	and	the	professional	courtesy	of	our	drivers	are	major	contributors	to	our	brand	equity.

Distinctive	Culture.				We	believe	that	the	dedication	of	our	employees	results	in	large	part	from	our	distinctive	"employee-owner"	concept.	Our	employee	stock ownership	tradition	dates	from	1927,	when	our	founders,	who	believed	that	employee	stock	ownership	was	a	vital	foundation	for	successful	business,	first	offered	stock to	employees.	To	encourage	employee	stock	ownership,	we	maintain	several	stock-based	compensation	programs.

Our	long-standing	policy	of	"promotion	from	within"	complements	our	tradition	of	employee	ownership,	and	this	policy	reduces	the	need	for	us	to	hire	managers and	executive	officers	from	outside	UPS.	The	majority	of	our	management	team	began	their	careers	as	full-time	or	part-time	hourly	UPS	employees,	and	have	spent their	entire	careers	with	us.	Many	of	our	executive	officers	have	more	than	30	years	of	service	with	UPS	and	have	accumulated	a	meaningful	ownership	stake	in	our company.	Therefore,	our	executive	officers	have	a	strong	incentive	to	effectively	manage	UPS,	which	benefits	all	of	our	shareowners.

Financial	Strength.				Our	financial	strength	gives	us	the	resources	to	achieve	global	scale;	to	invest	in	employee	development,	technology,	transportation equipment	and	facilities;	to	pursue	strategic	opportunities	that	facilitate	our	growth;	to	service	our	obligations;	and	to	return	value	to	our	shareowners	in	the	form	of dividends,	share	repurchases	and	steady	share	growth.

# Government	Regulation

We	are	subject	to	numerous	laws	and	regulations	in	connection	with	our	package	and	non-package	businesses	in	the	countries	in	which	we	operate.	Certain	of these	laws	and	regulations	are	summarized	below.

# Air	Operations

The	U.S.	Department	of	Transportation	("DOT"),	the	Federal	Aviation	Administration	("FAA")	and	the	U.S.	Department	of	Homeland	Security,	through	the Transportation	Security	Administration	("TSA"),	have	regulatory	authority	over	United	Parcel	Service	Co.'s	("UPS	Airlines'")	air	transportation	services.	The	Federal Aviation	Act	of	1958,	as	amended,	is	the	statutory	basis	for	DOT	and	FAA	authority	and	the	Aviation	and	Transportation	Security	Act	of	2001,	as	amended,	is	the	basis for	TSA	aviation	security	authority.

The	DOT's	authority	primarily	relates	to	economic	aspects	of	air	transportation,	such	as	insurance	requirements,	discriminatory	pricing,	non-competitive	practices, interlocking	relations	and	cooperative	agreements.	The	DOT	also	regulates,	subject	to	the	authority	of	the	President	of	the	United	States,	international	routes,	fares,	rates and	practices,	and	is	authorized	to	investigate	and	take	action	against	discriminatory	treatment	of	U.S.	air	carriers	abroad.	International	operating	rights	for	U.S.	airlines are	usually	subject	to	bilateral	agreements	between	the	U.S.	and	foreign	governments	or,	in	the	absence	of	such	agreements,	by	principles	of	reciprocity.	We	are	also subject	to	current	and	potential	aviation	regulations	imposed	by	foreign	governments	in	the	countries	in	which	we	operate,	including	registration	and	license requirements	and	security	regulations.	UPS	Airlines	has	international	route	operating	rights	granted	by	the	DOT	and	we	may	apply	for	additional	authorities	when	those operating	rights	are	available	and	are	required	for	the	efficient	operation	of	our	international	network.	The	efficiency	and	flexibility	of	our	international	air	transportation network	is	dependent	on	DOT	and	foreign	government	regulations	and	operating	restrictions.

The	FAA's	authority	primarily	relates	to	safety	aspects	of	air	transportation,	including	aircraft	operating	procedures,	transportation	of	hazardous	materials,	record keeping	standards	and	maintenance	activities	and	personnel.	In	1988,	the	FAA	granted	us	an	operating	certificate,	which	remains	in	effect	so	long	as	we	meet	the	safety and	operational	requirements	of	the	applicable	FAA	regulations.	In	addition,	we	are	subject	to	non-U.S.	government	regulation	of	aviation	rights	involving	non-U.S. jurisdictions	and	non-U.S.	customs	regulation.

UPS	aircraft	maintenance	programs	and	procedures,	including	aircraft	inspection	and	repair	at	periodic	intervals,	are	approved	for	all	aircraft	under	FAA regulations.	The	future	cost	of	repairs	pursuant	to	these	programs	may	fluctuate	according	to	aircraft	condition,	age	and	the	enactment	of	additional	FAA	regulatory requirements.

The	TSA	regulates	various	security	aspects	of	air	cargo	transportation	in	a	manner	consistent	with	the	TSA	mission	statement	to	"protect	the	Nation's transportation	systems	to	ensure	freedom	of	movement	for	people	and	commerce."	UPS	Airlines,	and	specified	airport	and	off-airport	locations,	are	regulated	under	TSA regulations	applicable	to	the	transportation	of	cargo	in	an	air	network.	In	addition,	personnel,	facilities	and	procedures	involved	in	air	cargo	transportation	must	comply with	TSA	regulations.

UPS	Airlines,	along	with	a	number	of	other	domestic	airlines,	participates	in	the	Civil	Reserve	Air	Fleet	("CRAF")	program.	Our	participation	in	the	CRAF program	allows	the	U.S.	Department	of	Defense	("DOD")	to	requisition	specified	UPS	Airlines	wide-body	aircraft	for	military	use	during	a	national	defense	emergency. The	DOD	compensates	us	for	the	use	of	aircraft	under	the	CRAF	program.	In	addition,	participation	in	CRAF	entitles	UPS	Airlines	to	bid	for	military	cargo	charter operations.

# Ground	Operations

Our	ground	transportation	of	packages	in	the	U.S.	is	subject	to	regulation	by	the	DOT	and	its	agency,	the	Federal	Motor	Carrier	Safety	Administration	(the "FMCSA")	and	the	states'	jurisdiction	with	respect	to	the	regulation	of	operations,	safety,	insurance	and	hazardous	materials.	We	also	must	comply	with	the	safety	and fitness	regulations	promulgated	by	the	FMCSA,	including	those	relating	to	drug	and	alcohol	testing	and	hours	of	service	for	drivers.	We	are	subject	to	similar	regulation in	many	non-U.S.	jurisdictions.

The	Postal	Reorganization	Act	of	1970	created	the	U.S.	Postal	Service	as	an	independent	establishment	of	the	executive	branch	of	the	federal	government,	and created	the	Postal	Rate	Commission,	an	independent	agency,	to	recommend	postal	rates.	The	Postal	Accountability	and	Enhancement	Act	of	2006	amended	the	1970	Act to	give	the	re-named	Postal	Regulatory	Commission	revised	oversight	authority	over	many	aspects	of	the	Postal	Service,	including	postal	rates,	product	offerings	and service	standards.	We	sometimes	participate	in	the	proceedings	before	the	Postal	Regulatory	Commission	in	an	attempt	to	secure	fair	postal	rates	for	competitive services.

Our	ground	operations	are	subject	to	compliance	with	various	cargo-security	and	transportation	regulations	issued	by	the	U.S.	Department	of	Homeland	Security, including	regulation	by	the	TSA.

# Customs

We	are	subject	to	the	customs	laws	in	the	countries	in	which	we	operate,	regarding	the	import	and	export	of	shipments,	including	those	related	to	the	filing	of documents	on	behalf	of	client	importers	and	exporters.	Our	activities,	including	customs	brokerage	and	freight	forwarding,	are	subject	to	regulation	by	the	Bureau	of Customs	and	Border	Protection,	the	TSA,	the	U.S.	Federal	Maritime	Commission	and	the	DOT.

# Environmental

We	are	subject	to	federal,	state	and	local	environmental	laws	and	regulations	across	all	of	our	business	units.	These	laws	and	regulations	cover	a	variety	of processes,	including,	but	not	limited	to:	proper	storage,	handling	and	disposal	of	waste	materials;	appropriately	managing	wastewater	and	stormwater;	monitoring	and maintaining	the	integrity	of	underground	storage	tanks;	complying	with	laws	regarding	clean	air,	including	those	governing	emissions;	protecting	against	and appropriately	responding	to	spills	and	releases;	and	communicating	the	presence	of	reportable	quantities	of	hazardous	materials	to	local	responders.	We	have	established site-	and	activity-specific	environmental	compliance	and	pollution	prevention	programs	to	address	our	environmental	responsibilities	and	remain	compliant.	In	addition, we	have	created	numerous	programs	which	seek	to	minimize	waste	and	prevent	pollution	within	our	operations.

Pursuant	to	the	Federal	Aviation	Act,	the	FAA,	with	the	assistance	of	the	Environmental	Protection	Agency	("EPA"),	is	authorized	to	establish	standards	governing aircraft	noise.	Our	aircraft	fleet	is	in	compliance	with	current	noise	standards	of	the	federal	aviation	regulations.	Our	international	operations	are	also	subject	to	noise regulations	in	certain	countries	in	which	we	operate.

# Communications

Because	of	our	extensive	use	of	radio	and	other	communication	facilities	in	our	aircraft	and	ground	transportation	operations,	we	are	subject	to	the	Federal Communications	Act	of	1934,	as	amended.	Additionally,	the	Federal	Communications	Commission	regulates	and	licenses	our	activities	pertaining	to	satellite communications.

# Where	You	Can	Find	More	Information

We	maintain	a	website	at	www.ups.com.	Our	annual	report	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8-K	and	any	amendments	to those	reports	filed	or	furnished	pursuant	to	Section	13(a)	of	the	Securities	Exchange	Act	of	1934	are	made	available	through	our	website	www.investors.ups.com	as	soon as	reasonably	practical	after	we	electronically	file	or	furnish	the	reports	to	the	SEC.	However,	information	on	these	websites	is	not	incorporated	by	reference	into	this report	or	any	other	report	filed	with	or	furnished	to	the	SEC.

We	have	adopted	a	written	Code	of	Business	Conduct	that	applies	to	all	of	our	directors,	officers	and	employees,	including	our	principal	executive	officer	and senior	financial	officers.	It	is	available	in	the	governance	section	of	our	investor	relations	website,	located	at	www.investors.ups.com.	In	the	event	that	we	make	changes in,	or	provide	waivers	from,	the	provisions	of	the	Code	of	Business	Conduct	that	the	SEC	requires	us	to	disclose,	we	intend	to	disclose	these	events	in	the	governance section	of	our	investor	relations	website.

Our	Corporate	Governance	Guidelines	and	the	Charters	for	our	Audit	Committee,	Compensation	Committee,	Risk	Committee	and	Nominating	and	Corporate Governance	Committee	are	also	available	in	the	governance	section	of	our	investor	relations	website.

Our	sustainability	report,	which	describes	our	activities	that	support	our	commitment	to	acting	responsibly	and	contributing	to	society,	is	available	at www.sustainability.ups.com.	We	provide	the	addresses	to	our	Internet	sites	solely	for	the	information	of	investors.	We	do	not	intend	for	any	addresses	to	be	active	links or	to	otherwise	incorporate	the	contents	of	any	website	into	this	report.

# Item	1A. Risk	Factors

You	should	carefully	consider	the	following	factors,	which	could	materially	affect	our	business,	financial	condition	or	results	of	operations.	You	should	read	these Risk	Factors	in	conjunction	with	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations"	in	Item	7	and	our	Consolidated	Financial Statements	and	related	notes	in	Item	8.

# General	economic	conditions,	both	in	the	U.S.	and	internationally,	may	adversely	affect	our	results	of	operations.

We	conduct	operations	in	over	220	countries	and	territories.	Our	U.S.	and	international	operations	are	subject	to	normal	cycles	affecting	the	economy	in	general,	as well	as	the	local	economic	environments	in	which	we	operate.	The	factors	that	create	cyclical	changes	to	the	economy	and	to	our	business	are	beyond	our	control,	and	it may	be	difficult	for	us	to	adjust	our	business	model	to	mitigate	the	impact	of	these	factors.	In	particular,	our	business	is	affected	by	levels	of	industrial	production, consumer	spending	and	retail	activity	and	our	business,	financial	position	and	results	of	operations	could	be	materially	affected	by	adverse	developments	in	these	aspects of	the	economy.	The	United	Kingdom's	vote	to	leave	the	European	Union	could	result	in	economic	uncertainty	and	instability,	resulting	in	fewer	goods	being transported	globally.

# We	face	significant	competition	which	could	adversely	affect	our	business,	financial	position	and	results	of	operations.

We	face	significant	competition	on	a	local,	regional,	national	and	international	basis.	Our	competitors	include	the	postal	services	of	the	U.S.	and	other	nations, various	motor	carriers,	express	companies,	freight	forwarders,	air	couriers	and	others.	Competition	may	also	come	from	other	sources	in	the	future.	Some	of	our competitors	have	cost	and	organizational	structures	that	differ	from	ours	and	may	offer	services	and	pricing	terms	that	we	may	not	be	willing	or	able	to	offer.	If	we	are unable	to	timely	and	appropriately	respond	to	competitive	pressures,	our	business,	financial	position	and	results	of	operations	could	be	adversely	affected.

The	transportation	industry	continues	to	consolidate	and	competition	remains	strong.	As	a	result	of	consolidation,	our	competitors	may	increase	their	market	share and	improve	their	financial	capacity,	and	may	strengthen	their	competitive	positions.	Business	combinations	could	also	result	in	competitors	providing	a	wider	variety	of services	and	products	at	competitive	prices,	which	could	adversely	affect	our	financial	performance.

# Changes	in	our	relationships	with	our	significant	customers,	including	the	loss	or	reduction	in	business	from	one	or	more	of	them,	could	have	an	adverse	impact	on us.

No	single	customer	accounts	for	10%	or	more	of	our	consolidated	revenue.	We	do	not	believe	the	loss	of	any	single	customer	would	materially	impair	our	overall financial	condition	or	results	of	operations;	however,	collectively,	some	of	our	large	customers	might	account	for	a	relatively	significant	portion	of	the	growth	in	revenue in	a	particular	quarter	or	year.	These	customers	can	drive	the	growth	in	revenue	for	particular	services	based	on	factors	such	as:	new	customer	product	launches;	trends	in the	e-commerce	industry,	such	as	the	seasonality	associated	with	the	fourth	quarter	holiday	season;	business	mergers	and	acquisitions;	and	the	overall	fast	growth	of	a customer's	underlying	business.	These	customers	could	choose	to	divert	all	or	a	portion	of	their	business	with	us	to	one	of	our	competitors,	demand	pricing	concessions for	our	services,	require	us	to	provide	enhanced	services	that	increase	our	costs,	or	develop	their	own	shipping	and	distribution	capabilities.	If	these	factors	drove	some of	our	large	customers	to	cancel	all	or	a	portion	of	their	business	relationships	with	us,	it	could	materially	impact	the	growth	in	our	business	and	the	ability	to	meet	our current	and	long-term	financial	forecasts.

# Our	business	is	subject	to	complex	and	stringent	regulation	in	the	U.S.	and	internationally.

We	are	subject	to	complex	and	stringent	aviation,	transportation,	environmental,	security,	labor,	employment	and	other	governmental	laws,	regulations	and policies,	both	in	the	U.S.	and	in	the	other	countries	in	which	we	operate.	In	addition,	our	business	is	impacted	by	laws,	regulations	and	policies	that	affect	global	trade, including	tariff	and	trade	policies,	export	requirements,	taxes,	monetary	policies	and	other	restrictions	and	charges.	Changes	in	laws,	regulations	and	policies	and	the related	interpretations	may	alter	the	landscape	in	which	we	do	business	and	may	affect	our	costs	of	doing	business.	The	impact	of	new	laws,	regulations	and	policies cannot	be	predicted.	Compliance	with	new	laws	and	regulations	may	increase	our	operating	costs	or	require	significant	capital	expenditures.	Any	failure	to	comply	with applicable	laws	or	regulations	in	the	U.S.	or	in	any	of	the	countries	in	which	we	operate	could	result	in	substantial	fines	or	possible	revocation	of	our	authority	to	conduct our	operations,	which	could	adversely	affect	our	financial	performance.

# Increased	security	requirements	could	impose	substantial	costs	on	us	and	we	could	be	the	target	of	an	attack	or	have	a	security	breach.

As	a	result	of	concerns	about	global	terrorism	and	homeland	security,	governments	around	the	world	have	adopted	or	may	adopt	stricter	security	requirements	that will	result	in	increased	operating	costs	for	businesses	in	the	transportation	industry.	These	requirements	may	change	periodically	as	a	result	of	regulatory	and	legislative requirements	and	in	response	to	evolving	threats.	We	cannot	determine	the	effect	that	these	new	requirements	will	have	on	our	cost	structure	or	our	operating	results,	and these	rules	or	other	future	security	requirements	may	increase	our	costs	of	operations	and	reduce	operating	efficiencies.	Regardless	of	our	compliance	with	security requirements	or	the	steps	we	take	to	secure	our	facilities	or	fleet,	we	could	be	the	target	of	an	attack	or	security	breaches	could	occur,	which	could	adversely	affect	our operations	or	our	reputation.

# We	may	be	affected	by	global	climate	change	or	by	legal,	regulatory	or	market	responses	to	such	a	potential	change.

Concern	over	climate	change,	including	the	impact	of	global	warming,	has	led	to	significant	federal,	state	and	international	legislative	and	regulatory	efforts	to limit	greenhouse	gas	("GHG")	emissions.	For	example,	in	the	past	several	years,	the	U.S.	Congress	has	considered	various	bills	that	would	regulate	GHG	emissions. While	these	bills	have	not	yet	received	sufficient	Congressional	support	for	enactment,	some	form	of	federal	climate	change	legislation	is	possible	in	the	future.	Even	in the	absence	of	such	legislation,	the	Environmental	Protection	Agency,	spurred	by	judicial	interpretation	of	the	Clean	Air	Act,	may	regulate	GHG	emissions,	especially aircraft	or	diesel	engine	emissions,	and	this	could	impose	substantial	costs	on	us.	These	costs	include	an	increase	in	the	cost	of	the	fuel	and	other	energy	we	purchase	and capital	costs	associated	with	updating	or	replacing	our	aircraft	or	vehicles	prematurely.	Until	the	timing,	scope	and	extent	of	any	future	regulation	becomes	known,	we cannot	predict	its	effect	on	our	cost	structure	or	our	operating	results.	It	is	reasonably	possible	that	such	legislation	or	regulation	could	impose	material	costs	on	us. Moreover,	even	without	such	legislation	or	regulation,	increased	awareness	and	any	adverse	publicity	in	the	global	marketplace	about	the	GHGs	emitted	by	companies	in the	airline	and	transportation	industries	could	harm	our	reputation	and	reduce	customer	demand	for	our	services,	especially	our	air	services.

# Strikes,	work	stoppages	and	slowdowns	by	our	employees	could	adversely	affect	our	business,	financial	position	and	results	of	operations.

A	significant	number	of	our	employees	are	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with	local	unions	affiliated	with	the Teamsters.	In	addition,	our	airline	pilots,	airline	mechanics,	ground	mechanics	and	certain	other	employees	are	employed	under	other	collective	bargaining	agreements. Strikes,	work	stoppages	and	slowdowns	by	our	employees	could	adversely	affect	our	ability	to	meet	our	customers'	needs,	and	customers	may	do	more	business	with competitors	if	they	believe	that	such	actions	or	threatened	actions	may	adversely	affect	our	ability	to	provide	services.	We	may	face	a	permanent	loss	of	customers	if	we are	unable	to	provide	uninterrupted	service,	and	this	could	adversely	affect	our	business,	financial	position	and	results	of	operations.	The	terms	of	future	collective bargaining	agreements	also	may	affect	our	competitive	position	and	results	of	operations.

# We	are	exposed	to	the	effects	of	changing	prices	of	energy,	including	gasoline,	diesel	and	jet	fuel,	and	interruptions	in	supplies	of	these	commodities.

Changing	fuel	and	energy	costs	may	have	a	significant	impact	on	our	operations.	We	require	significant	quantities	of	fuel	for	our	aircraft	and	delivery	vehicles	and are	exposed	to	the	risk	associated	with	variations	in	the	market	price	for	petroleum	products,	including	gasoline,	diesel	and	jet	fuel.	We	mitigate	our	exposure	to changing	fuel	prices	through	our	indexed	fuel	surcharges	and	we	may	also	enter	into	hedging	transactions	from	time	to	time.	If	we	are	unable	to	maintain	or	increase	our fuel	surcharges,	higher	fuel	costs	could	adversely	impact	our	operating	results.	Even	if	we	are	able	to	offset	the	cost	of	fuel	with	our	surcharges,	high	fuel	surcharges	may result	in	a	mix	shift	from	our	higher-yielding	air	products	to	lower-yielding	ground	products	or	an	overall	reduction	in	volume.	There	can	be	no	assurance	that	our hedging	transactions	will	be	effective	to	protect	us	from	changes	in	fuel	prices.	Moreover,	we	could	experience	a	disruption	in	energy	supplies,	including	our	supply	of gasoline,	diesel	and	jet	fuel,	as	a	result	of	war,	actions	by	producers	or	other	factors	beyond	our	control,	which	could	have	an	adverse	effect	on	our	business.

# Changes	in	exchange	rates	or	interest	rates	may	have	an	adverse	effect	on	our	results.

We	conduct	business	across	the	globe	with	a	significant	portion	of	our	revenue	derived	from	operations	outside	the	United	States.	Our	operations	in	international markets	are	affected	by	changes	in	the	exchange	rates	for	local	currencies,	and	in	particular	the	Euro,	British	Pound	Sterling,	Canadian	Dollar,	Chinese	Renminbi	and Hong	Kong	Dollar.

We	are	exposed	to	changes	in	interest	rates,	primarily	on	our	short-term	debt	and	that	portion	of	our	long-term	debt	that	carries	floating	interest	rates.	The	impact of	a	100-basis-point	change	in	interest	rates	affecting	our	debt	is	discussed	in	the	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk"	section	of	this	report. Additionally,	changes	in	interest	rates	impact	the	valuation	of	our	pension	and	postretirement	benefit	obligations	and	the	related	benefit	cost	recognized	in	the	income statement.	The	impact	of	changes	in	interest	rates	on	our	pension	and	postretirement	benefit	obligations	and	costs	is	discussed	further	in	the	"Critical	Accounting	Policies and	Estimates"	section	of	this	report.

We	monitor	and	manage	our	exposures	to	changes	in	currency	exchange	rates	and	interest	rates,	and	make	use	of	derivative	instruments	to	mitigate	the	impact	of changes	in	these	rates	on	our	financial	position	and	results	of	operations;	however,	changes	in	exchange	rates	and	interest	rates	cannot	always	be	predicted	or	hedged.

# If	we	are	unable	to	maintain	our	brand	image	and	corporate	reputation,	our	business	may	suffer.

Our	success	depends	in	part	on	our	ability	to	maintain	the	image	of	the	UPS	brand	and	our	reputation	for	providing	excellent	service	to	our	customers.	Service quality	issues,	actual	or	perceived,	even	when	false	or	unfounded,	could	tarnish	the	image	of	our	brand	and	may	cause	customers	to	use	other	companies.	Also,	adverse publicity	surrounding	labor	relations,	environmental	concerns,	security	matters,	political	activities	and	the	like,	or	attempts	to	connect	our	company	to	these	sorts	of issues,	either	in	the	United	States	or	other	countries	in	which	we	operate,	could	negatively	affect	our	overall	reputation	and	acceptance	of	our	services	by	customers. Damage	to	our	reputation	and	loss	of	brand	equity	could	reduce	demand	for	our	services	and	thus	have	an	adverse	effect	on	our	business,	financial	position	and	results of	operations,	and	could	require	additional	resources	to	rebuild	our	reputation	and	restore	the	value	of	our	brand.

# A	significant	privacy	breach	or	IT	system	disruption	could	adversely	affect	our	business	and	we	may	be	required	to	increase	our	spending	on	data	and	system security.

We	rely	on	information	technology	networks	and	systems,	including	the	Internet,	to	process,	transmit	and	store	electronic	information,	and	to	manage	or	support	a variety	of	business	processes	and	activities.	In	addition,	the	provision	of	service	to	our	customers	and	the	operation	of	our	networks	and	systems	involve	the	storage	and transmission	of	proprietary	information	and	sensitive	or	confidential	data,	including	personal	information	of	customers,	employees	and	others.	Our	franchised	center locations	also	are	reliant	on	the	use	of	information	technology	systems	to	manage	their	business	processes	and	activities.		Our	information	technology	systems	(as	well	as those	of	our	franchisees),	some	of	which	are	managed	by	third-parties,	may	be	susceptible	to	damage,	disruptions	or	shutdowns	due	to	failures	during	the	process	of upgrading	or	replacing	software,	databases	or	components	thereof,	power	outages,	hardware	failures,	computer	viruses,	attacks	by	computer	hackers,	malicious	insiders, telecommunication	failures,	user	errors	or	catastrophic	events.	Hackers,	acting	individually	or	in	coordinated	groups,	may	also	launch	distributed	denial	of	service attacks	or	other	coordinated	attacks	that	may	cause	service	outages	or	other	interruptions	in	our	business.	In	addition,	breaches	in	security	could	expose	us,	our customers	and	franchisees,	or	the	individuals	affected,	to	a	risk	of	loss	or	misuse	of	proprietary	information	and	sensitive	or	confidential	data.	The	techniques	used	to obtain	unauthorized	access,	disable	or	degrade	service	or	sabotage	systems	change	frequently,	may	be	difficult	to	detect	for	a	long	time	and	often	are	not	recognized	until launched	against	a	target.	As	a	result,	we	may	be	unable	to	anticipate	these	techniques	or	to	implement	adequate	preventative	measures.

Any	of	these	occurrences	could	result	in	disruptions	in	our	operations,	the	loss	of	existing	or	potential	customers,	damage	to	our	brand	and	reputation,	and	litigation and	potential	liability	for	the	company.	In	addition,	the	cost	and	operational	consequences	of	implementing	further	data	or	system	protection	measures	could	be significant.	In	August	2014,	a	broad-based	malware	intrusion	targeting	retailers	throughout	the	U.S.	was	discovered	and	subsequently	eradicated	at	approximately	1%	of our	franchisees'	locations.	While	the	impact	of	this	cyber-attack,	including	the	costs	associated	with	investigation	and	remediation	activities,	was	not	material	to	our business	and	our	financial	results,	our	efforts	to	deter,	identify,	mitigate	and/or	eliminate	any	future	breaches	may	not	be	successful.

# Severe	weather	or	other	natural	or	manmade	disasters	could	adversely	affect	our	business.

Severe	weather	conditions	and	other	natural	or	manmade	disasters,	including	storms,	floods,	fires	or	earthquakes,	epidemics	or	pandemics,	conflicts	or	unrest,	or terrorist	attacks	may	result	in	decreased	revenues,	as	our	customers	reduce	their	shipments,	or	increased	costs	to	operate	our	business,	which	could	have	an	adverse effect	on	our	results	of	operations	for	a	quarter	or	year.	Any	such	event	affecting	one	of	our	major	facilities	could	result	in	a	significant	interruption	in	or	disruption	of our	business.

# We	make	significant	capital	investments	in	our	business	of	which	a	significant	portion	is	tied	to	projected	volume	levels.

We	require	significant	capital	investments	in	our	business	consisting	of	aircraft,	vehicles,	technology,	facilities	and	sorting	and	other	types	of	equipment	to	support both	our	existing	business	and	anticipated	growth.	Forecasting	projected	volume	involves	many	factors	which	are	subject	to	uncertainty,	such	as	general	economic trends,	changes	in	governmental	regulation	and	competition.	If	we	do	not	accurately	forecast	our	future	capital	investment	needs,	we	could	have	excess	capacity	or insufficient	capacity,	either	of	which	would	negatively	affect	our	revenues	and	profitability.	In	addition	to	forecasting	our	capital	investment	requirements,	we	adjust other	elements	of	our	operations	and	cost	structure	in	response	to	adverse	economic	conditions;	however,	these	adjustments	may	not	be	sufficient	to	allow	us	to	maintain our	operating	margins	in	a	weak	economy.

# We	derive	a	significant	portion	of	our	revenues	from	our	international	operations	and	are	subject	to	the	risks	of	doing	business	in	international	markets.

We	have	significant	international	operations	and	while	the	geographical	diversity	of	our	international	operations	helps	ensure	that	we	are	not	overly	reliant	on	a single	region	or	country,	we	are	continually	exposed	to	changing	economic,	political	and	social	developments	beyond	our	control.	Emerging	markets	are	typically	more volatile	than	those	in	the	developed	world,	and	any	broad-based	downturn	in	these	markets	could	reduce	our	revenues	and	adversely	affect	our	business,	financial position	and	results	of	operations.	We	are	subject	to	many	laws	governing	our	international	operations,	including	those	that	prohibit	improper	payments	to	government officials	and	commercial	customers,	and	restrict	where	we	can	do	business,	our	shipments	to	certain	countries	and	the	information	that	we	can	provide	to	non-U.S. governments.

# We	are	subject	to	changes	in	markets	and	our	business	plans	that	have	resulted,	and	may	in	the	future	result,	in	substantial	write-downs	of	the	carrying	value	of	our assets,	thereby	reducing	our	net	income.

Our	regular	review	of	the	carrying	value	of	our	assets	has	resulted,	from	time	to	time,	in	significant	impairments,	and	we	may	in	the	future	be	required	to	recognize additional	impairment	charges.	Changes	in	business	strategy,	government	regulations,	or	economic	or	market	conditions	have	resulted	and	may	result	in	further substantial	impairments	of	our	intangible,	fixed	or	other	assets	at	any	time	in	the	future.	In	addition,	we	have	been	and	may	be	required	in	the	future	to	recognize increased	depreciation	and	amortization	charges	if	we	determine	that	the	useful	lives	of	our	fixed	assets	or	intangible	assets	are	shorter	than	we	originally	estimated. Such	changes	could	reduce	our	net	income.

# Employee	health	and	retiree	health	and	pension	benefit	costs	represent	a	significant	expense	to	us.

Our	expenses	relating	to	employee	health	and	retiree	health	and	pension	benefits	are	significant.	In	recent	years,	we	have	experienced	significant	increases	in	some of	these	costs,	largely	as	a	result	of	economic	factors	beyond	our	control,	including,	in	particular,	ongoing	increases	in	health	care	costs	well	in	excess	of	the	rate	of inflation	and	historically	low	discount	rates	that	we	use	to	value	our	benefit	plan	obligations.	Continually	increasing	health	care	costs,	volatility	in	investment	returns	and discount	rates,	as	well	as	changes	in	laws,	regulations	and	assumptions	used	to	calculate	retiree	health	and	pension	benefit	expenses,	may	adversely	affect	our	business, financial	position,	results	of	operations	or	require	significant	contributions	to	our	benefit	plans.	The	new	national	master	agreement	with	the	IBT	includes	changes	that are	designed	to	mitigate	certain	of	these	health	care	expenses,	but	there	can	be	no	assurance	that	our	efforts	will	be	successful	or	that	the	failure	or	success	of	these efforts	will	not	adversely	affect	our	business,	financial	position,	results	of	operations	or	liquidity.

We	participate	in	a	number	of	trustee-managed	multiemployer	pension	and	health	and	welfare	plans	for	employees	covered	under	collective	bargaining agreements.	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	will	be	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	in	the	event	that	a	plan	enters	critical	status,	and our	contributions	are	not	sufficient	to	satisfy	any	rehabilitation	plan	funding	schedule).	In	future	collective	bargaining	negotiations,	we	could	agree	to	make	significantly higher	future	contributions	to	improve	the	funded	status	of	one	or	more	of	these	plans.	The	funded	status	of	these	multiemployer	plans	is	impacted	by	various	factors, including	investment	performance,	health	care	inflation,	changes	in	demographics	and	changes	in	participant	benefit	levels.	At	this	time,	we	are	unable	to	determine	the amount	of	additional	future	contributions,	if	any,	or	whether	any	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity	could	result	from our	participation	in	these	plans.

In	addition	to	our	on-going	multiemployer	pension	plan	obligations,	we	may	have	additional	exposure	with	respect	to	benefits	earned	in	the	Central	States	Pension Fund	(the	"CSPF").	UPS	was	a	contributing	employer	to	the	CSPF	until	2007	when	we	withdrew	from	the	plan	and	fully	funded	our	allocable	share	of	unfunded	vested benefits	by	paying	a	$6.1	billion	withdrawal	liability.	Under	a	collective	bargaining	agreement	with	the	International	Brotherhood	of	Teamsters,	UPS	agreed	to	provide coordinating	benefits	in	the	UPS/IBT	Full	Time	Employee	Pension	Plan	("UPS/IBT	Plan")	for	UPS	participants	retiring	on	or	after	January	1,	2008	in	the	event	that benefits	are	lawfully	reduced	by	the	CSPF	in	the	future.

In	December	2014,	Congress	passed	the	Multiemployer	Pension	Reform	Act	("MPRA"),	which	for	the	first	time	ever	allowed	multiemployer	pension	plans	to reduce	benefit	payments	to	retirees,	subject	to	specific	guidelines	in	the	statute	and	government	oversight.	In	September	2015,	the	CSPF	submitted	a	proposed	pension benefit	reduction	plan	to	the	U.S.	Department	of	the	Treasury	under	the	MPRA.	The	CSPF	plan	proposed	to	reduce	retirement	benefits	to	the	CSPF	participants, including	UPS	participants	retiring	on	or	after	January	1,	2008.	We	vigorously	challenged	the	proposed	benefit	reduction	plan	because	we	believed	that	it	did	not	comply with	the	law	and	that	certain	actions	by	the	CSPF	were	invalid.	On	May	6,	2016,	the	U.S.	Department	of	the	Treasury	rejected	the	proposed	plan	submitted	by	the	CSPF, stating	that	it	failed	to	satisfy	a	number	of	requirements	set	forth	in	the	MPRA.

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

The	potential	obligation	to	pay	coordinating	benefits	from	the	UPS/IBT	Plan	is	subject	to	a	number	of	uncertainties,	including	actions	that	may	be	taken	by	the CSPF,	the	federal	government	or	others.	These	actions	include	whether	the	CSPF	will	submit	a	revised	pension	benefit	reduction	plan	or	otherwise	seek	federal government	assistance,	the	extent	to	which	benefits	are	paid	by	the	Pension	Benefit	Guaranty	Corporation,	as	well	as	the	effect	of	discount	rates	and	various	other actuarial	assumptions.	Our	best	estimate,	as	of	the	measurement	date	of	December	31,	2016,	is	that	we	do	not	have	any	liability	for	additional	coordinating	benefits	of the	UPS/IBT	Plan.	However,	there	are	numerous	uncertainties	that	exist	regarding	the	ultimate	resolution	of	the	CSPF	situation	and	the	current	projected	benefit obligation	could	materially	increase	as	these	uncertainties	are	resolved.	We	will	continue	to	assess	the	impact	of	these	uncertainties	on	the	projected	benefit	obligation	of the	UPS/IBT	Plan	in	accordance	with	Accounting	Standards	Codification	Topic	715	-	Compensation	-	Retirement	Benefits.

# We	may	be	subject	to	various	claims	and	lawsuits	that	could	result	in	significant	expenditures.

The	nature	of	our	business	exposes	us	to	the	potential	for	various	claims	and	litigation	related	to	labor	and	employment,	personal	injury,	property	damage,	business practices,	environmental	liability	and	other	matters.	Any	material	litigation	or	a	catastrophic	accident	or	series	of	accidents	could	have	a	material	adverse	effect	on	our business,	financial	position	and	results	of	operations.

# We	may	not	realize	the	anticipated	benefits	of	acquisitions,	joint	ventures	or	strategic	alliances.

As	part	of	our	business	strategy,	we	may	acquire	businesses	and	form	joint	ventures	or	strategic	alliances.	Whether	we	realize	the	anticipated	benefits	from	these transactions	depends,	in	part,	upon	the	successful	integration	between	the	businesses	involved,	the	performance	of	the	underlying	operations,	capabilities	or	technologies and	the	management	of	the	acquired	operations.	Accordingly,	our	financial	results	could	be	adversely	affected	by	our	failure	to	effectively	integrate	the	acquired operations,	unanticipated	performance	issues,	transaction-related	charges	or	charges	for	impairment	of	long-term	assets	that	we	acquire.

# Insurance	and	claims	expenses	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

We	have	a	combination	of	both	self-insurance	and	high-deductible	insurance	programs	for	the	risks	arising	out	of	the	services	we	provide	and	the	nature	of	our global	operations,	including	claims	exposure	resulting	from	cargo	loss,	personal	injury,	property	damage,	aircraft	and	related	liabilities,	business	interruption	and workers'	compensation.	Workers'	compensation,	automobile	and	general	liabilities	are	determined	using	actuarial	estimates	of	the	aggregate	liability	for	claims	incurred and	an	estimate	of	incurred	but	not	reported	claims,	on	an	undiscounted	basis.	Our	accruals	for	insurance	reserves	reflect	certain	actuarial	assumptions	and	management judgments,	which	are	subject	to	a	high	degree	of	variability.	If	the	number	or	severity	of	claims	for	which	we	are	retaining	risk	increases,	our	financial	condition	and results	of	operations	could	be	adversely	affected.	If	we	lose	our	ability	to	self-insure	these	risks,	our	insurance	costs	could	materially	increase	and	we	may	find	it	difficult to	obtain	adequate	levels	of	insurance	coverage.

# Item	1B. Unresolved	Staff	Comments

Not	applicable.

# Item	2. Properties

# Operating	Facilities

We	own	our	headquarters,	which	is	located	in	Atlanta,	Georgia	and	consists	of	about	745,000	square	feet	of	office	space	in	an	office	campus,	and	our	UPS	Supply Chain	Solutions	group's	headquarters,	which	is	located	in	Alpharetta,	Georgia	and	consists	of	about	310,000	square	feet	of	office	space.

We	own	or	lease	33	principal	U.S.	package	operating	facilities,	which	have	floor	space	up	to	approximately	1.9	million	square	feet,	the	largest	being	our	operating facility	near	Chicago,	Illinois,	which	is	designed	to	streamline	shipments	between	East	Coast	and	West	Coast	destinations.	In	total,	we	own	or	lease	over	1,000 additional	package	operating	facilities	in	the	U.S.	The	smaller	of	these	facilities	have	vehicles	and	drivers	stationed	for	the	pick-up	and	delivery	of	packages,	and capacity	to	sort	and	transfer	packages.	The	larger	of	these	facilities	also	service	our	vehicles	and	equipment,	and	employ	specialized	mechanical	installations	for	the sorting	and	handling	of	packages.We	own	or	lease	more	than	800	facilities	that	support	our	international	package	operations.

In	addition,	we	own	or	lease	more	than	500	facilities,	with	approximately	33	million	square	feet	of	floor	space,	that	support	our	freight	forwarding	and	logistics operations.	We	own	and	operate	a	logistics	campus	consisting	of	approximately	3.7	million	square	feet	in	Louisville,	Kentucky.

We	own	or	lease	approximately	200	UPS	Freight	service	centers	with	approximately	6	million	square	feet	of	floor	space.	The	main	offices	of	UPS	Freight	are located	in	Richmond,	Virginia	and	consist	of	about	217,000	square	feet	of	office	space.

Our	aircraft	are	operated	in	a	hub	and	spoke	pattern	in	the	U.S.,	with	our	principal	air	hub,	known	as	Worldport,	located	in	Louisville,	Kentucky.	The	Worldport facility	consists	of	over	5	million	square	feet	and	the	site	includes	approximately	600	acres	with	a	sorting	capacity	of	approximately	416,000	packages	per	hour	and includes	high-speed	conveyor	and	computer	control	systems.

Our	U.S.	regional	air	hubs	are	located	in	Columbia,	South	Carolina;	Dallas,	Texas;	Ontario,	California;	Philadelphia,	Pennsylvania;	and	Rockford,	Illinois.	These hubs	house	facilities	for	the	sorting,	transfer	and	delivery	of	packages.	Our	European	air	hub	is	located	in	Cologne,	Germany,	and	we	maintain	Asia-Pacific	air	hubs	in Shanghai,	China;	Shenzhen,	China;	and	Hong	Kong.	Our	regional	air	hub	in	Canada	is	located	in	Hamilton,	Ontario,	and	our	regional	air	hub	for	Latin	America	and	the Caribbean	is	in	Miami,	Florida.

The	UPS	International	Air	Hub	at	Pudong	International	Airport	was	built	on	land	totaling	2.4	million	square	feet	with	a	sorting	capacity	of	17,000	packages	per hour.	This	hub	links	all	of	China	via	Shanghai	to	UPS's	international	network,	and	has	direct	service	to	the	Americas,	Europe	and	other	parts	of	Asia;	it	also	connects points	served	in	China	by	UPS	through	a	dedicated	service	provided	by	Yangtze	River	Express,	a	Chinese	all-cargo	airline.

We	also	have	an	intra-Asia	air	hub	at	Shenzhen	Bao'an	International	Airport	in	China.	The	Shenzhen	facility,	which	was	built	on	almost	one	million	square	feet	of land,	has	a	sorting	capacity	of	18,000	packages	per	hour	and	serves	as	our	primary	transit	hub	in	Asia.

Our	primary	information	technology	operations	are	consolidated	in	a	443,600	square	foot	owned	facility,	the	Ramapo	Ridge	facility,	which	is	located	on	a	39-acre site	in	Mahwah,	New	Jersey.	We	also	own	a	175,000	square	foot	facility	located	on	a	25-acre	site	in	Alpharetta,	Georgia,	which	serves	as	a	backup	to	the	main information	technology	operations	facility	in	New	Jersey.	This	facility	provides	production	functions	and	backup	capacity	in	the	event	that	a	power	outage	or	other disaster	incapacitates	the	main	data	center.	It	also	helps	to	meet	our	internal	communication	needs.

We	believe	that	our	facilities	are	adequate	to	support	our	current	operations.

# Fleet

# Aircraft

The	following	table	shows	information	about	our	aircraft	fleet	as	of	December	31,	2016:

| Description | Owned	and<br>Capital<br>Leases | Short-term<br>Leased	or<br>Chartered<br>From<br>Others | On<br>Order | Under<br>Option |
| :--- | :--- | :--- | :--- | :--- |
| Boeing\t757-200F | 75 | — | — | — |
| Boeing\t767-300ERF | 59 | — | — | — |
| Airbus\tA300-600F | 52 | — | — | — |
| Boeing\tMD-11F* | 38 | — | — | — |
| Boeing\t747-400F | 11 | — | — | — |
| Boeing\t747-400BCF | 2 | — | — | — |
| Boeing\t747-8F | — | — | 14 | 14 |
| Other | — | 420 | — | — |
| Total | 237 | 420 | 14 | 14 |

# *Includes	one	Boeing	MD-11F	not	in	operation	pending	disposal

We	maintain	an	inventory	of	spare	engines	and	parts	for	each	aircraft.

All	the	aircraft	we	own	meet	Stage	IV	federal	noise	regulations	and	can	operate	at	airports	that	have	aircraft	noise	restrictions.

We	currently	have	14	new	Boeing	747-8F	cargo	aircraft	on	order	to	meet	increased	demand	for	our	air	shipping	services.	The	14	aircraft	are	to	be	delivered between	2017	and	2020.	We	also	have	options	for	14	additional	747-8F	cargo	aircraft.

# Vehicles

We	operate	a	global	ground	fleet	of	approximately	114,000	package	cars,	vans,	tractors	and	motorcycles.	Our	ground	support	fleet	consists	of	34,000	pieces	of equipment	designed	specifically	to	support	our	aircraft	fleet,	ranging	from	non-powered	container	dollies	and	racks	to	powered	aircraft	main	deck	loaders	and	cargo tractors.	We	also	have	40,000	containers	used	to	transport	cargo	in	our	aircraft.

# Item	3. Legal	Proceedings

For	a	discussion	of	legal	proceedings	affecting	us	and	our	subsidiaries,	please	see	the	information	under	note	4	to	the	audited	consolidated	financial	statements	for a	discussion	of	pension	related	matters	and	note	9	for	a	discussion	of	judicial	proceedings	and	other	matters	arising	from	the	conduct	of	our	business	activities.

# Item	4. Mine	Safety	Disclosures

# PART	II

# Item	5. Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity

# Securities

Our	class	A	common	stock	is	not	listed	on	a	national	securities	exchange	or	traded	in	an	organized	over-the-counter	market,	but	each	share	of	our	class	A	common stock	is	convertible	into	one	share	of	our	class	B	common	stock.

The	following	is	a	summary	of	our	class	B	common	stock	price	activity	and	dividend	information	for	2016	and	2015.	Our	class	B	common	stock	is	listed	on	the New	York	Stock	Exchange	under	the	symbol	"UPS".

|  | High | Low | Close | Dividends<br>Declared |
| :--- | :--- | :--- | :--- | :--- |
| 2016: |  |  |  |  |
| First\tQuarter | $106.10 | $88.70 | $105.47 | $0.78 |
| Second\tQuarter | $107.72 | $100.66 | $107.72 | $0.78 |
| Third\tQuarter | $111.50 | $106.86 | $109.36 | $0.78 |
| Fourth\tQuarter | $120.16 | $106.84 | $114.64 | $0.78 |
| 2015: |  |  |  |  |
| First\tQuarter | $114.25 | $96.59 | $96.94 | $0.73 |
| Second\tQuarter | $102.13 | $95.38 | $96.91 | $0.73 |
| Third\tQuarter | $103.43 | $94.46 | $98.69 | $0.73 |
| Fourth\tQuarter | $106.80 | $96.23 | $96.23 | $0.73 |

Our	practice	has	been	to	pay	dividends	on	a	quarterly	basis.	The	declaration	of	dividends	is	subject	to	the	discretion	of	the	Board	of	Directors	and	will	depend	on various	factors,	including	our	net	income,	financial	condition,	cash	requirements,	future	prospects	and	other	relevant	factors.

On	February	8,	2017,	our	Board	declared	a	dividend	of	$0.83	per	share,	which	is	payable	on	March	8,	2017	to	shareowners	of	record	on	February	21,	2017.	This represents	a	6%	increase	from	the	previous	$0.78	quarterly	dividend	in	2016.

A	summary	of	repurchases	of	our	class	A	and	class	B	common	stock	during	the	fourth	quarter	of	2016	is	as	follows	(in	millions,	except	per	share	amounts):

|  | Total	Number<br>of	Shares<br>Purchased(1) | Total	Number<br>of	Shares	Purchased<br>as	Part	of	Publicly<br>Announced	Program | Average<br>Price	Paid<br>Per	Share | Approximate	Dollar<br>Value	of	Shares	that<br>May	Yet	be	Purchased<br>Under	the	Program<br>(as	of	month-end) |
| :--- | :--- | :--- | :--- | :--- |
| October\t1—October\t31 | 1.2 | 1.2 | $108.52 | $6,706 |
| November\t1—November\t30 | 3.5 | 3.5 | 114.35 | 6,306 |
| December\t1—December\t31 | 1.3 | 1.3 | 117.14 | 6,154 |
| Total\tOctober\t1—December\t31 | 6.0 | 6.0 | $113.83 |  |

(1) Includes	shares	repurchased	through	our	publicly	announced	share	repurchase	program	and	shares	tendered	to	pay	the	exercise	price	and	tax	withholding	on employee	stock	options.

In	May	2016,	the	Board	of	Directors	approved	a	share	repurchase	authorization	of	$8.0	billion,	which	replaced	an	authorization	previously	announced	in	2013.	The	new share	repurchase	authorization	has	no	expiration	date.	We	anticipate	repurchasing	approximately	$1.8	billion	of	shares	in	2017.

# Shareowner	Return	Performance	Graph

The	following	performance	graph	and	related	information	shall	not	be	deemed	"soliciting	material"	or	to	be	"filed"	with	the	SEC,	nor	shall	such	information	be incorporated	by	reference	into	any	future	filing	under	the	Securities	Act	of	1933	or	Securities	Exchange	Act	of	1934,	each	as	amended,	except	to	the	extent	that	the Company	specifically	incorporates	such	information	by	reference	into	such	filing.

The	following	graph	shows	a	five	year	comparison	of	cumulative	total	shareowners'	returns	for	our	class	B	common	stock,	the	Standard	&	Poor's	500	Index	and the	Dow	Jones	Transportation	Average.	The	comparison	of	the	total	cumulative	return	on	investment,	which	is	the	change	in	the	quarterly	stock	price	plus	reinvested dividends	for	each	of	the	quarterly	periods,	assumes	that	$100	was	invested	on	December	31,	2011	in	the	Standard	&	Poor's	500	Index,	the	Dow	Jones	Transportation Average	and	our	class	B	common	stock.

|  | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| United\tParcel\tService,\tInc. | $100.00 | $103.84 | $152.16 | $165.35 | $154.61 | $189.72 |
| Standard\t&amp;\tPoor's\t500\tIndex | $100.00 | $115.99 | $153.54 | $174.54 | $176.94 | $198.09 |
| Dow\tJones\tTransportation\tAverage | $100.00 | $107.49 | $151.97 | $190.07 | $158.22 | $192.80 |

# Item	6. Selected	Financial	Data

The	following	table	sets	forth	selected	financial	data	for	each	of	the	five	years	in	the	period	ended	December	31,	2016	(in	millions,	except	per	share	amounts). This	financial	data	should	be	read	together	with	our	consolidated	financial	statements	and	related	notes,	Management's	Discussion	and	Analysis	of	Financial	Condition and	Results	of	Operations,	including	the	Items	Affecting	Comparability	section,	and	other	financial	data	appearing	elsewhere	in	this	report.

|  | 2016 | 2015 | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Selected\tIncome\tStatement\tData |  |  |  |  |  |
| Revenue: |  |  |  |  |  |
| U.S.\tDomestic\tPackage | $38,301 | $36,747 | $35,851 | $34,074 | $32,856 |
| International\tPackage | 12,350 | 12,149 | 12,988 | 12,429 | 12,124 |
| Supply\tChain\t&amp;\tFreight | 10,255 | 9,467 | 9,393 | 8,935 | 9,147 |
| Total\tRevenue | 60,906 | 58,363 | 58,232 | 55,438 | 54,127 |
| Operating\tExpenses: |  |  |  |  |  |
| Compensation\tand\tbenefits | 34,770 | 31,028 | 32,045 | 28,557 | 33,102 |
| Other | 20,669 | 19,667 | 21,219 | 19,847 | 19,682 |
| Total\tOperating\tExpenses | 55,439 | 50,695 | 53,264 | 48,404 | 52,784 |
| Operating\tProfit: |  |  |  |  |  |
| U.S.\tDomestic\tPackage | 3,017 | 4,767 | 2,859 | 4,603 | 459 |
| International\tPackage | 2,044 | 2,137 | 1,677 | 1,757 | 869 |
| Supply\tChain\tand\tFreight | 406 | 764 | 432 | 674 | 15 |
| Total\tOperating\tProfit | 5,467 | 7,668 | 4,968 | 7,034 | 1,343 |
| Other\tIncome\tand\t(Expense): |  |  |  |  |  |
| Investment\tincome | 50 | 15 | 22 | 20 | 24 |
| Interest\texpense | (381) | (341) | (353) | (380) | (393) |
| Income\tBefore\tIncome\tTaxes | 5,136 | 7,342 | 4,637 | 6,674 | 974 |
| Income\tTax\tExpense | 1,705 | 2,498 | 1,605 | 2,302 | 167 |
| Net\tIncome | $3,431 | $4,844 | $3,032 | $4,372 | $807 |
| Per\tShare\tAmounts: |  |  |  |  |  |
| Basic\tEarnings\tPer\tShare | $3.89 | $5.38 | $3.31 | $4.65 | $0.84 |
| Diluted\tEarnings\tPer\tShare | $3.87 | $5.35 | $3.28 | $4.61 | $0.83 |
| Dividends\tDeclared\tPer\tShare | $3.12 | $2.92 | $2.68 | $2.48 | $2.28 |
| Weighted\tAverage\tShares\tOutstanding: |  |  |  |  |  |
| Basic | 883 | 901 | 916 | 940 | 960 |
| Diluted | 887 | 906 | 924 | 948 | 969 |

# Item	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of

# Operations

The	U.S.	economic	environment	was	mixed	in	2016	as	relatively	stable	consumer	conditions	were	somewhat	offset	by	continued	weakness	in	industrial	production and	soft	business	investment.	U.S.	manufacturing	has	shown	positive	signs	of	growth	in	recent	months,	reaching	a	two-year	high	in	the	fourth	quarter	of	2016,	and	we continue	to	see	modest	GDP	growth.	Consumer	confidence	reached	a	high	in	the	fourth	quarter	of	2016	and	there	were	lower	fuel	prices	coupled	with	the	continuation	of steady	job	growth	throughout	the	year.	Holiday	retail	sales	grew	4%	in	2016	as	compared	to	last	year,	mainly	driven	by	online	sales,	while	the	holiday	season	saw	many categories	of	traditional	brick	and	mortar	stores	struggle.	Continued	growth	in	e-commerce	and	omni-channel	retail	sales	has	driven	package	volume	demand	for residential	products.	Given	these	trends,	our	products	most	aligned	with	business-to-consumer	shipments	have	experienced	the	strongest	growth.

Outside	the	U.S.,	emerging	markets	have	stabilized	in	recent	months	and	most	developed	nations	have	seen	modest	growth.	The	impending	exit	of	the	United Kingdom	from	the	European	Union	creates	some	uncertainty	regarding	its	impact	on	global	GDP.	The	uneven	nature	of	economic	growth	worldwide	and	fluctuations	in currency	markets,	particularly	the	strengthening	of	the	U.S.	Dollar,	have	continued	shifting	trade	patterns	and	weakened	demand	in	certain	trade	lanes.	As	a	result	of these	circumstances,	we	continued	to	adjust	our	air	capacity	and	cost	structure	in	our	transportation	network	to	better	match	the	prevailing	volume	levels.	Our	broad portfolio	of	product	offerings	and	the	flexibilities	inherent	in	our	transportation	network	have	helped	us	adapt	to	these	changing	trends.

While	the	worldwide	economic	environment	remained	challenging	in	2016,	we	have	continued	to	undertake	several	initiatives	in	the	U.S.	and	internationally	to	(1) improve	the	flexibility	and	capacity	in	our	transportation	network;	(2)	improve	yield	management;	and	(3)	increase	operational	efficiency	and	contain	costs	across	all segments.	Most	notably,	the	continued	deployment	of	technology	improvements	(including	several	facility	automation	projects	and	the	accelerated	deployment	of	our On	Road	Integrated	Optimization	and	Navigation	system	-	"ORION")	should	continue	to	increase	our	network	capacity	and	improve	operational	efficiency,	flexibility and	reliability.	Additionally,	we	have	continued	to	utilize	newly	expanded	operating	facilities	to	improve	time-in-transit	for	shipments	in	each	region.

Our	consolidated	results	are	presented	in	the	table	below:

|  | Year	Ended	December	31, | Year	Ended	December	31, |  | %	Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | 2014 | 2016/\t2015 | 2015/\t2014 |
| Revenue\t(in\tmillions) | $60,906 | $58,363 | $58,232 | 4.4\t% | 0.2\t% |
| Operating\tExpenses\t(in\tmillions) | 55,439 | 50,695 | 53,264 | 9.4\t% | (4.8)% |
| Operating\tProfit\t(in\tmillions) | $5,467 | $7,668 | $4,968 | (28.7)% | 54.3\t% |
| Operating\tMargin | 9.0% | 13.1% | 8.5% |  |  |
| Average\tDaily\tPackage\tVolume\t(in\tthousands) | 19,090 | 18,324 | 18,016 | 4.2\t% | 1.7\t% |
| Average\tRevenue\tPer\tPiece | $10.30 | $10.37 | $10.58 | (0.7)% | (2.0)% |
| Net\tIncome\t(in\tmillions) | $3,431 | $4,844 | $3,032 | (29.2)% | 59.8\t% |
| Basic\tEarnings\tPer\tShare | $3.89 | $5.38 | $3.31 | (27.7)% | 62.5\t% |
| Diluted\tEarnings\tPer\tShare | $3.87 | $5.35 | $3.28 | (27.7)% | 63.1\t% |

# UNITED	PARCEL	SERVICE,	INC.	AND	SUBSIDIARIES

# MANAGEMENT'S	DISCUSSION	AND	ANALYSIS	OF	FINANCIAL	CONDITION	AND

# RESULTS	OF	OPERATIONS

# Items	Affecting	Comparability

The	results	and	discussions	that	follow	are	reflective	of	how	our	executive	management	monitors	the	performance	of	our	reporting	segments.	We	supplement	the reporting	of	our	financial	information	determined	under	generally	accepted	accounting	principles	("GAAP")	with	certain	non-GAAP	financial	measures,	including "adjusted"	compensation	and	benefits,	operating	expenses,	operating	profit,	operating	margin,	income	tax	expense	and	effective	tax	rate.	These	adjustments	reflect	the non-comparable	items	discussed	below.	We	believe	that	these	adjusted	measures	provide	meaningful	information	to	assist	investors	and	analysts	in	understanding	our financial	results	and	assessing	our	prospects	for	future	performance.	We	believe	these	adjusted	financial	measures	are	important	indicators	of	our	recurring	results	of operations	because	they	exclude	items	that	may	not	be	indicative	of,	or	are	unrelated	to,	our	underlying	operations	results,	and	provide	a	useful	baseline	for	analyzing trends	in	our	underlying	businesses.	Additionally,	these	adjusted	financial	measures	are	used	internally	by	management	for	the	determination	of	incentive	compensation awards,	business	unit	operating	performance	analysis	and	business	unit	resource	allocation.

The	year-over-year	comparisons	of	our	financial	results	are	affected	by	the	following	items	(in	millions):

| Non-GAAP	Adjustments | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Operating\tExpenses: |  |  |  |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharges | $2,651 | $118 | $1,062 |
| Health\t&amp;\tWelfare\tPlan\tCharges | — | — | 1,102 |
| Total\tAdjustments\tto\tOperating\tExpenses | 2,651 | 118 | 2,164 |
| Income\tTax\tExpense\t(Benefit)\tfrom\tthe\tItems\tAbove | (978) | (39) | (807) |
| Total\tAdjustments\tto\tNet\tIncome | $1,673 | $79 | $1,357 |

These	items	have	been	excluded	from	comparisons	of	"adjusted"	compensation	and	benefits,	operating	expenses,	operating	profit,	operating	margin,	income	tax expense	and	effective	tax	rate	in	the	discussion	that	follows.	The	income	tax	effects	of	these	adjustments	are	calculated	by	multiplying	the	statutory	tax	rates	applicable in	each	tax	jurisdiction,	including	the	U.S.	federal	jurisdiction	and	various	U.S.	state	and	non-U.S.	jurisdictions,	by	the	adjustments.	The	blended	average	of	the applicable	statutory	tax	rates	in	2016,	2015	and	2014	were	36.9%	,	33.1%	and	37.2%	respectively.

# Defined	Benefit	Plans	Mark-to-Market	Charges

We	recognize	changes	in	the	fair	value	of	plan	assets	and	net	actuarial	gains	and	losses	in	excess	of	a	10%	corridor	for	our	pension	and	postretirement	defined benefit	plans	immediately	as	part	of	net	periodic	benefit	cost.	We	supplement	the	presentation	of	our	operating	profit	and	operating	margin	with	"adjusted"	measures	that exclude	the	impact	of	the	portion	of	net	periodic	benefit	cost	represented	by	the	gains	and	losses	recognized	in	excess	of	the	10%	corridor	and	the	related	income	tax effects.

The	adjustments	made	to	exclude	these	mark-to-market	adjustments	utilize	the	expected	return	on	plan	assets	($2.580	billion,	$2.567	billion	and	$2.343	billion	for 2016,	2015	and	2014,	respectively)	and	the	discount	rates	used	for	determining	net	periodic	benefit	cost.	The	non-adjusted	net	periodic	benefit	cost	reflects	the	actual return	on	plan	assets	($1.846	billion,	$110	million	and	$2.600	billion	for	2016,	2015	and	2014,	respectively)	and	the	discount	rates	used	for	measuring	the	projected benefit	obligation	as	summarized	in	the	table	below.	We	believe	excluding	these	mark-to-market	charges	from	our	adjusted	results	provides	important	supplemental information	that	reflects	the	anticipated	long-term	cost	of	our	defined	benefit	plans	and	provides	a	benchmark	for	historical	defined	benefit	cost	trends	that	may	provide a	useful	comparison	of	year-to-year	financial	performance	without	considering	the	short-term	impact	of	changes	in	market	interest	rates,	equity	prices	and	similar factors.

In	2016,	we	recognized	pre-tax	mark-to-market	losses	in	compensation	and	benefits	expense	of	$2.651	billion	on	our	pension	and	postretirement	defined	benefit plans	related	to	the	remeasurement	of	plan	assets	and	liabilities	recognized	outside	of	a	10%	corridor.	These	charges	impacted	our	U.S.	Domestic	Package	segment ($1.908	billion),	International	Package	segment	($425	million)	and	Supply	Chain	&	Freight	segment	($318	million).

In	2015,	we	recognized	pre-tax	mark-to-market	losses	in	compensation	and	benefits	expense	of	$118	million	on	our	pension	and	postretirement	defined	benefit plans	related	to	the	remeasurement	of	plan	assets	and	liabilities	recognized	outside	of	a	10%	corridor.	These	charges	impacted	our	U.S.	Domestic	Package	segment	($62 million),	International	Package	segment	($44	million)	and	Supply	Chain	&	Freight	segment	($12	million).

In	2014,	we	recognized	pre-tax	mark-to-market	losses	in	compensation	and	benefits	expense	of	$1.062	billion	on	our	pension	and	postretirement	defined	benefit plans	related	to	the	remeasurement	of	plan	assets	and	liabilities	recognized	outside	of	a	10%	corridor.	These	charges	impacted	our	U.S.	Domestic	Package	segment ($660	million),	International	Package	segment	($200	million)	and	Supply	Chain	&	Freight	segment	($202	million).

The	table	below	indicates	the	amounts	associated	with	each	component	of	the	pre-tax	mark-to-market	loss,	as	well	as	the	weighted-average	actuarial	assumptions used	to	determine	our	net	periodic	benefit	costs,	for	each	year:

•Discount	Rates	($1.953	billion	pre-tax	loss):	The	weighted-average	discount	rate	for	our	pension	and	postretirement	medical	plans	decreased	from	4.81% at	December	31,	2015	to	4.34%	at	December	31,	2016,	primarily	due	to	a	decrease	in	credit	spreads	on	AA-rated	corporate	bonds	in	2016.

•Return	on	Assets	($732	million	pre-tax	loss):	In	2016,	the	actual	6.06%	rate	of	return	on	plan	assets	fell	short	of	our	expected	rate	of	return	of	8.65%, primarily	due	to	weak	bond	markets.

•Demographic	and	Assumption	Changes	($34	million	pre-tax	gain):	This	represents	the	difference	between	actual	and	estimated	participant	data	and demographic	factors,	including	items	such	as	health	care	cost	trends,	compensation	rate	increases	and	rates	of	termination,	retirement	and	mortality.

•Discount	Rates	($1.624	billion	pre-tax	gain):	The	weighted-average	discount	rate	for	our	pension	and	postretirement	medical	plans	increased	from	4.36% at	December	31,	2014	to	4.81%	at	December	31,	2015,	primarily	due	to	an	increase	in	U.S.	treasury	yields	and	credit	spreads	on	AA-rated	corporate	bonds in	2015.

•Return	on	Assets	($1.550	billion	pre-tax	loss):	In	2015,	the	actual	0.37%	rate	of	return	on	plan	assets	fell	short	of	our	expected	rate	of	return	of	8.66%, primarily	due	to	weak	global	equity	markets.

•Demographic	and	Assumption	Changes	($133	million	pre-tax	loss):	This	represents	the	difference	between	actual	and	estimated	participant	data	and demographic	factors,	including	items	such	as	health	care	cost	trends,	compensation	rate	increases,	and	rates	of	termination,	retirement	and	mortality.

•Reclassification	of	Prior	Year	Unrecognized	Benefit	Cost	($59	million	pre-tax	loss):	Our	mark-to-market	accounting	policy	requires	recognition	of	gains and	losses	in	excess	of	a	corridor	equal	to	10%	of	the	plans'	projected	benefit	obligations	(or	fair	value	of	the	plans'	assets,	if	greater).	The	decrease	in certain	plans'	projected	benefit	obligations	resulted	in	a	lower	corridor,	which	required	recognition	of	prior	year	unrecognized	benefit	costs	for	some	of	our plans.

•Discount	Rates	($954	million	pre-tax	loss):	The	weighted-average	discount	rate	for	our	pension	and	postretirement	medical	plans	declined	from	5.24%	at December	31,	2013	to	4.36%	at	December	31,	2014.	This	overall	decline	in	discount	rates	was	primarily	driven	by	a	122	basis	point	decline	in	the	30	year Treasury	bond	rate,	but	was	partially	offset	by	an	increase	in	credit	spreads	on	AA-rated	30	year	bonds.

•Return	on	Assets	($42	million	pre-tax	gain):	In	2014,	the	actual	rate	of	return	on	plan	assets	of	9.45%	exceeded	our	expected	rate	of	return	of	8.66%, primarily	due	to	gains	in	the	world	equity	markets.

•Demographic	and	Assumption	Changes	($150	million	pre-tax	loss):	The	implementation	of	new	U.S.	mortality	tables	in	2014	resulted	in	an	increased participant	life	expectancy	assumption,	which	increased	the	overall	projected	benefit	obligation	for	our	plans.

# Health	and	Welfare	Plan	Charges

In	connection	with	the	ratification	of	our	national	master	agreement	with	the	International	Brotherhood	of	Teamsters	("Teamsters")	in	2014,	we	incurred	pre-tax charges	totaling	$1.102	billion	associated	with	changes	in	the	delivery	of	healthcare	benefits	to	certain	active	and	retired	union	employees.	These	one-time	charges	are discussed	in	further	detail	in	the	"Collective	Bargaining	Agreements"	section	and	do	not	reflect	the	obligations	of	our	on-going	business.	We	believe	adjusting	for	these charges	provides	important	supplemental	information	that	is	reflective	of	long-term	trends	and	that	may	provide	useful	comparison	of	year-to-year	financial performance	without	considering	the	short-term	impact	of	one-time	health	and	welfare	plan	charges.

These	charges	impacted	our	U.S.	Domestic	Package	segment	($990	million),	International	Package	segment	($28	million)	and	Supply	Chain	&	Freight	segment ($84	million).

# Rate	Adjustments

Effective	February	6,	2017,	the	U.S.	fuel	surcharge	will	be	adjusted	weekly	and	the	U.S.	Import	fuel	surcharge	percentage	will	increase	and	be	assessed independently	of	the	U.S.	Air	and	Export	fuel	surcharge.

Effective	January	8,	2017,	the	Additional	Handling	charge	will	be	assessed	for	any	package	with	the	longest	side	exceeding	48	inches,	instead	of	60	inches.

Additionally,	we	will	change	the	dimensional	weight	calculation	for	U.S.	domestic	services	and	UPS	Standard	from	Canada	import	packages	subject	to	UPS	Daily	rates. Also,	transactional	requests	for	refunds	under	the	UPS	Service	Guarantee	will	not	be	paid	where	timely	upload	of	package-level	detail	is	not	provided,	as	set	forth	in	the UPS	Tariff/Terms	and	Conditions	of	Service.

Effective	December	26,	2016,	UPS	Ground	rates	and	accessorial	charges	increased	by	an	average	net	4.9%.	UPS	Air	and	International	services	and	accessorials, including	UPS	Air	Freight	rates	within	and	between	the	U.S.,	Canada	and	Puerto	Rico,	increased	an	average	net	4.9%.	UPS	Freight's	Density-Based	rate	tariff	will increase	an	average	net	of	4.9%.

These	rate	changes	are	customary	and	occur	on	an	annual	basis.	Rate	changes	for	shipments	originating	outside	the	U.S.	are	made	throughout	the	year	and	vary	by geographic	market.

# Expense	Allocations

Certain	operating	expenses	are	allocated	between	our	reporting	segments	based	on	activity-based	costing	methods.	These	activity-based	costing	methods	require us	to	make	estimates	that	impact	the	amount	of	each	expense	category	that	is	attributed	to	each	segment.	Changes	in	these	estimates	will	directly	impact	the	amount	of expense	allocated	to	each	segment,	and	therefore	the	operating	profit	of	each	reporting	segment.	There	were	no	significant	changes	in	our	expense	allocation methodology	during	2016,	2015	or	2014.

# U.S.	Domestic	Package	Operations

|  | 2016 | Year	Ended	December	31,<br>2015 | 2014 | %	Change<br>2016/	2015 | 2015/	2014 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Average\tDaily\tPackage\tVolume\t(in\tthousands): |  |  |  |  |  |
| Next\tDay\tAir | 1,379 | 1,316 | 1,274 | 4.8\t% | 3.3\t% |
| Deferred | 1,351 | 1,313 | 1,155 | 2.9\t% | 13.7\t% |
| Ground | 13,515 | 12,969 | 12,893 | 4.2\t% | 0.6\t% |
| Total\tAvg.\tDaily\tPackage\tVolume | 16,245 | 15,598 | 15,322 | 4.1\t% | 1.8\t% |
| Average\tRevenue\tPer\tPiece: |  |  |  |  |  |
| Next\tDay\tAir | $19.20 | $19.66 | $20.42 | (2.3)% | (3.7)% |
| Deferred | 11.85 | 11.70 | 12.57 | 1.3\t% | (6.9)% |
| Ground | 7.97 | 7.98 | 7.85 | (0.1)% | 1.7\t% |
| Total\tAvg.\tRevenue\tPer\tPiece | $9.25 | 9.28 | 9.25 | (0.3)% | 0.3\t% |
| Operating\tDays\tin\tPeriod | 255 | 254 | 253 |  |  |
| Revenue\t(in\tmillions): |  |  |  |  |  |
| Next\tDay\tAir | $6,752 | $6,570 | $6,581 | 2.8\t% | (0.2)% |
| Deferred | 4,082 | 3,903 | 3,672 | 4.6\t% | 6.3\t% |
| Ground | 27,467 | 26,274 | 25,598 | 4.5\t% | 2.6\t% |
| Total\tRevenue | $38,301 | $36,747 | $35,851 | 4.2\t% | 2.5\t% |
| Operating\tExpenses\t(in\tmillions): |  |  |  |  |  |
| Operating\tExpenses | $35,284 | $31,980 | $32,992 | 10.3\t% | (3.1)% |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharges | (1,908) | (62) | (660) |  |  |
| Health\t&amp;\tWelfare\tPlan\tCharges | — | — | (990) |  |  |
| Adjusted\tOperating\tExpenses | $33,376 | $31,918 | $31,342 | 4.6\t% | 1.8\t% |
| Operating\tProfit\t(in\tmillions)\tand\tOperating\tMargin: |  |  |  |  |  |
| Operating\tProfit | $3,017 | $4,767 | $2,859 | (36.7)% | 66.7\t% |
| Adjusted\tOperating\tProfit | $4,925 | $4,829 | $4,509 | 2.0\t% | 7.1\t% |
| Operating\tMargin | 7.9% | 13.0% | 8.0% |  |  |
| Adjusted\tOperating\tMargin | 12.9% | 13.1% | 12.6% |  |  |

# Revenue

The	change	in	overall	revenue	was	impacted	by	the	following	factors	for	the	years	ended	December	31,	2016	and	2015,	compared	with	the	corresponding	prior year	periods:

|  | Volume | Rates	/<br>Product	Mix | Fuel<br>Surcharge | Total<br>Revenue<br>Change |
| :--- | :--- | :--- | :--- | :--- |
| Revenue\tChange\tDrivers: |  |  |  |  |
| 2016/\t2015 | 4.6% | 0.2% | (0.6)% | 4.2% |
| 2015/\t2014 | 2.2% | 2.7% | (2.4)% | 2.5% |

# Volume

Our	total	volume	increased	across	all	products	in	2016,	largely	due	to	continued	growth	in	e-commerce	and	overall	retail	sales	and	the	impact	of	one	additional operating	day.	Business-to-consumer	shipments,	which	represented	more	than	48%	of	total	U.S.	Domestic	Package	volume,	grew	nearly	9%	for	the	year	and	11.5%	in the	fourth	quarter,	which	drove	increases	in	both	air	and	ground	shipments.	Business-to-business	volume	remained	flat	in	2016	due	to	revenue	management	initiatives and	the	overall	slowing	of	the	industrial	manufacturing	sector,	offset	by	increased	volume	from	the	retail	industry,	including	the	use	of	our	solutions	for	omni-channel (including	ship-from-store	and	ship-to-store	models)	and	returns	shipping.

Next	Day	Air	volume	increased	5.2%	in	2016,	due	to	strong	growth	in	e-commerce.	We	also	experienced	increased	volume	for	our	deferred	air	services	in	2016, particularly	for	those	products	most	aligned	with	business-to-consumer	shipping,	such	as	our	residential	Second	Day	Air	Package	and	Three	Day	Select	products partially	offset	by	decreases	in	our	business-to-business	deferred	air	volume.

The	increase	in	ground	volume	in	2016	was	driven	by	growth	in	residential	ground	and	SurePost	volume	while	business-to-business	shipments	remained	flat. Accelerating	growth	in	e-commerce	drove	demand	for	our	SurePost	service,	with	volume	increasing	19%	in	2016.

Our	total	volume	increased	in	2015,	largely	due	to	faster	growing	premium	air	products,	continued	growth	in	e-commerce	and	overall	retail	sales	and	the	impact	of one	additional	operating	day.	Business-to-consumer	shipments,	which	represented	more	than	45%	of	total	U.S.	Domestic	Package	volume,	grew	nearly	3%	for	the	year and	drove	increases	in	both	air	and	ground	shipments.	Business-to-business	volume	grew	1%	in	2015,	largely	due	to	increased	volume	from	the	retail	industry	including the	use	of	our	solutions	for	omni-channel	(including	ship-from-store	and	ship-to-store	models)	and	returns	shipping.

Among	our	air	products,	we	experienced	increased	volume	for	our	deferred	air	services	in	2015,	particularly	for	those	products	most	aligned	with	business-to- consumer	shipping,	such	as	our	residential	Second	Day	Air	Package	and	Three	Day	Select	products.	We	also	experienced	solid	growth	in	our	business-to-business deferred	air	volume,	largely	due	to	increases	in	the	retail	sector.	Next	Day	Air	volume	increased	3.3%	in	2015,	due	to	strong	growth	in	e-commerce.

The	increase	in	ground	volume	in	2015	was	driven	by	growth	in	residential	ground	and	SurePost	volume	and	business-to-business	shipping	activity.	The	continued growth	in	e-commerce	drove	demand	for	our	SurePost	service,	with	volume	increasing	3%	in	2015.	The	increase	in	business-to-business	ground	volume	was	largely	due to	growth	in	omni-channel	retail	volume,	the	increased	use	of	our	returns	service	offerings	and	the	growth	in	shipments	from	the	retail	sector.

# Rates	and	Product	Mix

Overall	revenue	per	piece	decreased	0.3%	in	2016,	and	was	impacted	by	changes	in	base	rates,	customer	and	product	mix	and	fuel	surcharge	rates.

Ground	revenue	per	piece	decreased	in	2016,	primarily	due	to	customer	and	product	mix	changes,	which	adversely	impacted	revenue	per	piece	as	a	greater	portion of	volume	in	2016,	relative	to	2015,	came	from	residential	customers	and	lighter-weight	shipments	as	Surepost	volume	surged.	Additionally,	lower	fuel	surcharge	rates contributed	to	the	decline.	These	drivers	more	than	offset	the	rate	actions	taken	since	the	fourth	quarter	of	2015.

Revenue	per	piece	for	Next	Day	Air	products	declined	in	2016,	while	our	deferred	air	products	increased.	All	products	were	negatively	impacted	by	lower	fuel surcharge	rates.	The	Next	Day	Air	revenue	per	piece	decline	was	caused	by	a	shift	in	customer	and	product	mix	as	well	as	an	increase	in	lighter-weight	packages.	We experienced	relatively	stronger	growth	in	our	lighter-weight	business-to-consumer	shipments,	particularly	our	Next	Day	Air	Saver	product,	which	have	lower	average yields	than	our	heavier-weight	commercial	shipments.	Customer	mix	also	adversely	impacted	Next	Day	Air	revenue	per	piece,	due	to	faster	volume	growth	among	our larger	customers,	which	have	a	lower	average	yield	than	our	small	and	middle-market	customers.	Deferred	revenue	per	piece	increased	primarily	due	to	heavier-weight packages	partially	offset	by	product	mix.

Revenue	per	piece	for	ground	and	air	products	was	positively	impacted	by	a	base	rate	increase	on	December	28,	2015.	UPS	Ground	rates	and	accessorial	charges increased	an	average	net	4.9%,	while	UPS	Air	services	and	accessorial	charges	increased	an	average	net	5.2%.	The	surcharge	increased	for	Over	Maximum	Packages and	the	index	tables	for	the	Ground	and	Air	fuel	surcharges	were	adjusted	effective	November	2,	2015.	A	charge	for	UPS's	Third-Party	Billing	Service	was implemented,	effective	January	4,	2016.	Additionally,	the	dimensions	of	ground	packages	incurring	the	UPS	Additional	Handling	charge	were	changed	effective	June	6, 2016.

Overall	revenue	per	piece	increased	0.3%	in	2015,	and	was	impacted	by	changes	in	base	rates,	customer	and	product	mix	and	fuel	surcharge	rates.

Revenue	per	piece	for	our	ground	and	air	products	was	positively	impacted	by	an	increase	in	base	rates	which	took	effect	on	December	29,	2014	and	an	increase in	surcharge	rates	that	took	effect	November	2,	2015.	We	implemented	an	average	4.9%	net	increase	in	base	and	accessorial	rates	on	UPS	Next	Day	Air,	UPS	2nd	Day Air,	UPS	3	Day	Select	and	UPS	Ground.	Additionally,	a	pricing	change	involving	the	application	of	dimensional	weight	pricing	to	all	UPS	Ground	services	took	effect on	December	29,	2014.	On	November	2,	2015,	the	surcharge	increased	for	Over	Maximum	Packages	and	the	indices	for	Ground,	Air	and	International	fuel	surcharges were	adjusted.

Revenue	per	piece	decreased	for	our	Next	Day	Air	and	deferred	air	products	in	2015,	as	lower	fuel	surcharge	rates	more	than	offset	the	positive	impact	of	the	base rate	increase.	Product	mix	adversely	impacted	Next	Day	Air	and	deferred	revenue	per	piece,	as	we	experienced	relatively	stronger	growth	in	our	lighter-weight	business- to-consumer	shipments,	which	have	lower	average	yields	than	our	heavier-weight	commercial	shipments.	Customer	mix	also	adversely	impacted	Next	Day	Air	and deferred	revenue	per	piece,	due	to	faster	volume	growth	among	our	larger	customers,	which	typically	have	a	lower	average	yield	than	our	small	and	middle-market customers.

Ground	revenue	per	piece	increased	in	2015,	primarily	due	to	the	base	rate	increase,	the	dimensional	weight	pricing	change	and	product	mix.	Additionally,	the revenue	per	piece	for	our	traditional	ground	residential	products	was	positively	impacted	by	our	decision	not	to	pursue	certain	lower-yielding	customer	contract renewals.	These	factors	were	partially	offset	by	declines	in	fuel	surcharge	rates	as	well	as	changes	in	customer	mix,	as	we	experienced	faster	volume	growth	among	our larger	customers.

# Fuel	Surcharges

UPS	applies	a	fuel	surcharge	on	our	domestic	air	and	ground	services.	The	air	fuel	surcharge	is	based	on	the	U.S.	Department	of	Energy's	("DOE")	Gulf	Coast spot	price	for	a	gallon	of	kerosene-type	jet	fuel,	while	the	ground	fuel	surcharge	is	based	on	the	DOE's	On-Highway	Diesel	Fuel	Price.	Based	on	published	rates,	the average	fuel	surcharge	rates	for	domestic	air	and	ground	products	were	as	follows:

|  | Year	Ended	December	31, | Year	Ended	December	31, |  | %	Point	Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | 2014 | 2016/\t2015 | 2015/\t2014 |
| Next\tDay\tAir\t/\tDeferred | 3.6% | 4.8% | 10.2% | (1.2)% | (5.4)% |
| Ground | 4.9% | 5.5% | 7.1% | (0.6)% | (1.6)% |

Total	domestic	fuel	surcharge	revenue	decreased	by	$219	million	in	2016	as	a	result	of	lower	fuel	surcharge	rates	caused	by	declining	jet	and	diesel	fuel	prices, partially	offset	by	the	overall	increase	in	package	volume	for	the	period.	In	2015,	total	fuel	surcharge	revenue	declined	by	$843	million	as	a	result	of	lower	fuel	surcharge rates	caused	by	declining	jet	and	diesel	fuel	prices;	however,	the	impact	of	lower	fuel	prices	was	partially	mitigated	by	changes	to	the	fuel	surcharge	indices,	as	well	as the	overall	increase	in	package	volume	for	the	period.

# Operating	Expenses

Operating	expenses	for	the	period	increased	$3.3	billion,	which	included	a	$1.8	billion	increase	increase	in	mark-to-market	pension	charges.	Excluding	the	impact of	the	defined	benefit	plan	mark-to-market	charges,	adjusted	operating	expenses	for	the	segment	increased	$1.5	billion	in	2016,	primarily	due	to	pick-up	and	delivery costs	(up	$814	million),	the	cost	of	operating	our	domestic	integrated	air	and	ground	transportation	network	(up	$282	million),	the	costs	of	package	sorting	(up	$181 million)	and	accessorials	and	indirect	operating	costs	(up	$180	million).	Adjusted	operating	expenses	were	impacted	by	several	factors:

•We	incurred	higher	employee	compensation,	largely	resulting	from	an	increase	in	average	daily	union	labor	hours	(up	4.2%)	and	growth	in	the	overall	size	of the	workforce	partially	offset	by	lower	wage	rates.

•Employee	benefit	costs	increased,	largely	due	to	increased	employee	healthcare,	pension	expense	and	workers'	compensation

expense.

•We	incurred	lower	fuel	expense	in	2016	primarily	due	to	lower	fuel	prices	and	an	increase	in	average	miles	per	gallon.	This	was	partially	offset	by	higher	fuel usage	(due	to	an	increase	in	aircraft	block	hours	and	vehicle	miles	driven.)

•We	incurred	higher	expenses	for	purchased	transportation	due	to	higher	volume,	partially	offset	by	lower	fuel	surcharge	rates	passed	to	us	from	third-party carriers.

Total	cost	per	piece	increased	5.5%	in	2016	compared	to	2015	and	was	primarily	impacted	by	a	540	basis	point	increase	due	to	the	defined	benefit	plan	mark-to-market charge	and	the	cost	increases	described	previously.	These	increases	were	partially	offset	by	the	continued	deployment	of	ORION,	which	has	contained	the	growth	of average	daily	vehicle	miles	driven,	and	the	increased	redirect	of	SurePost	volume	to	optimize	delivery	density	on	UPS	vehicles,	which	has	reduced	the	delivery	costs	for business-to-consumer	shipments.

Operating	expenses	decreased	$1	billion	in	2015,	primarily	due	to	$1.6	billion	of	health	and	welfare	plan	charges	in	2014	that	did	not	recur	in	2015	and significantly	less	pension	mark-to-market	charges	in	2015	compared	to	2014.	Excluding	the	impact	of	the	health	and	welfare	plan	charges	and	pension	mark-to-market charges,	adjusted	operating	expenses	for	the	segment	increased	$576	million	in	2015,	primarily	due	to	pick-up	and	delivery	costs	(up	$602	million),	the	costs	of	package sorting	(up	$172	million)	and	indirect	operating	costs	(up	$122	million).	The	cost	increases	were	partially	offset	by	a	reduction	in	the	cost	of	operating	our	domestic integrated	air	and	ground	transportation	network	(down	$319	million).	These	costs	were	impacted	by	several	factors:

•We	incurred	higher	employee	compensation,	largely	resulting	from	an	increase	in	average	daily	union	labor	hours	(up	0.8%),	union	contractual	wage	rate increases	and	growth	in	the	overall	size	of	the	workforce.

•We	incurred	lower	fuel	expense	in	2015	primarily	due	to	lower	fuel	prices.	This	was	partially	offset	by	higher	fuel	usage	(due	to	an	increase	in	aircraft	block hours	and	vehicle	miles	driven	offset	by	an	increase	in	average	miles	per	gallon).

•We	incurred	lower	expenses	associated	with	purchased	transportation,	primarily	due	to	the	decreased	use	of,	and	lower	fuel	surcharge	rates	passed	to	us	from rail	carriers	and	outside	contract	carriers.

Total	cost	per	piece	decreased	5.2%	in	2015	compared	to	2014	and	was	primarily	impacted	by	a	480	basis	point	decrease	due	to	the	defined	benefit	plan	mark-to-market charge	and	the	cost	increases	described	previously.	Productivity	improvements	have	continued	to	be	realized	through	adjusting	our	air	and	ground	networks	to	better match	volume	levels	and	utilizing	technology	to	increase	package	sorting	and	delivery	efficiency.	The	continued	deployment	of	ORION	has	contained	the	average	daily vehicle	miles	driven	(down	0.4%)	even	as	package	volume	increased	(up	1.8%).

# Operating	Profit	and	Margin

Operating	profit	decreased	$1.8	billion	in	2016	compared	with	2015,	primarily	due	to	a	$1.8	billion	increase	in	mark-to-market	pension	charges	to	operating expense.	Operating	margin	decreased	510	basis	points	to	7.9%.	Adjusted	operating	profit	increased	$96	million	in	2016	compared	with	2015,	while	the	adjusted operating	margin	decreased	20	basis	points	to	12.9%.	Revenue	growth	from	increased	volume	and	enhanced	productivity	through	the	continued	deployment	of	ORION technology	resulted	in	higher	operating	profit,	but	was	offset	by	an	unfavorable	shift	in	customer	and	product	mix,	especially	in	the	fourth	quarter.	The	net	impact	of	fuel also	negatively	impacted	operating	profit	as	fuel	surcharge	revenue	decreased	faster	than	fuel	expense.

Operating	profit	increased	$1.9	billion	in	2015	compared	with	2014,	primarily	due	to	$1.6	billion	of	health	and	welfare	plan	charges	and	pension	mark-to-market charges	that	were	significantly	less	in	2015.	Operating	margin	increased	500	basis	points	to	13.0%.	Adjusted	operating	profit	increased	$320	million	in	2015	compared with	2014,	while	the	adjusted	operating	margin	increased	50	basis	points	to	13.1%.	Overall	volume	growth	allowed	us	to	better	leverage	our	transportation	network, leading	to	improved	productivity	(resulting	in	a	lower	cost	per	piece)	discussed	previously.	This	was	slightly	offset	by	higher	pension	and	healthcare	costs,	contractual union	wage	increases	and	the	negative	impact	of	fuel	(fuel	surcharge	revenue	decreased	faster	than	fuel	expense).

# International	Package	Operations

|  | 2016 | Year	Ended	December	31,<br>2015 | 2014 | %	Change<br>2016/	2015 | 2015/	2014 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Average\tDaily\tPackage\tVolume\t(in\tthousands): |  |  |  |  |  |
| Domestic | 1,635 | 1,575 | 1,579 | 3.8\t% | (0.3)% |
| Export | 1,210 | 1,151 | 1,115 | 5.1\t% | 3.2\t% |
| Total\tAvg.\tDaily\tPackage\tVolume | 2,845 | 2,726 | 2,694 | 4.4\t% | 1.2\t% |
| Average\tRevenue\tPer\tPiece: |  |  |  |  |  |
| Domestic | $5.85 | $6.06 | $6.97 | (3.5)% | (13.1)% |
| Export | 30.38 | 31.10 | 33.98 | (2.3)% | (8.5)% |
| Total\tAvg.\tRevenue\tPer\tPiece | $16.29 | $16.63 | $18.15 | (2.0)% | (8.4)% |
| Operating\tDays\tin\tPeriod | 255 | 254 | 253 |  |  |
| Revenue\t(in\tmillions): |  |  |  |  |  |
| Domestic | $2,441 | $2,425 | $2,784 | 0.7\t% | (12.9)% |
| Export | 9,374 | 9,092 | 9,586 | 3.1\t% | (5.2)% |
| Cargo\t&amp;\tOther | 535 | 632 | 618 | (15.3)% | 2.3\t% |
| Total\tRevenue | $12,350 | $12,149 | $12,988 | 1.7\t% | (6.5)% |
| Operating\tExpenses\t(in\tmillions): |  |  |  |  |  |
| Operating\tExpenses | $10,306 | $10,012 | $11,311 | 2.9\t% | (11.5)% |
| Defined\tBenefit\tPlan\tMark-to-Market\tCharges | (425) | (44) | (200) |  |  |
| Health\t&amp;\tWelfare\tPlan\tCharges | — | — | (28) |  |  |
| Adjusted\tOperating\tExpenses | $9,881 | $9,968 | $11,083 | (0.9)% | (10.1)% |
| Operating\tProfit\t(in\tmillions)\tand\tOperating\tMargin: |  |  |  |  |  |
| Operating\tProfit | $2,044 | $2,137 | $1,677 | (4.4)% | 27.4\t% |
| Adjusted\tOperating\tProfit | $2,469 | $2,181 | $1,905 | 13.2\t% | 14.5\t% |
| Operating\tMargin | 16.6% | 17.6% | 12.9% |  |  |
| Adjusted\tOperating\tMargin | 20.0% | 18.0% | 14.7% |  |  |
| Currency\tTranslation\tBenefit\t/\t(Cost)—(in\tmillions)*: |  |  |  |  |  |
| Revenue |  |  |  | $(138) | $(880) |
| Operating\tExpenses |  |  |  | 146 | 858 |
| Operating\tProfit |  |  |  | $8 | $(22) |

* Net	of	currency	hedging;	amount	represents	the	change	compared	to	the	prior	year.

|  | Volume | Rates	/<br>Product	Mix | Fuel<br>Surcharge | Currency | Revenue<br>Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Revenue\tChange\tDrivers: |  |  |  |  |  |
| 2016/\t2015 | 4.8% | (1.2)% | (0.8)% | (1.1)% | 1.7\t% |
| 2015/\t2014 | 1.6% | 1.9\t% | (3.2)% | (6.8)% | (6.5)% |

Our	overall	average	daily	volume	increased	in	2016,	largely	due	to	continued	strength	in	business-to-consumer	volume,	as	well	as	strong	demand	from	several sectors	including	retail,	industrial,	high-tech	and	healthcare.

We	continued	to	experience	export	volume	growth	in	2016.	The	growth	was	mainly	driven	by	our	European	and	Asian	operations,	which	experienced	increases	in volume	to	all	regions	of	the	world.	European	export	volume	increased	in	2016,	with	particular	strength	in	the	Europe-to-U.S.	and	intra-Europe	trade	lanes.	Asia	export volume	also	increased	in	2016,	with	growth	in	all	trade	lanes.	However,	U.S.	export	volume	declined	largely	due	to	the	impact	of	the	stronger	U.S.	Dollar.	Export volume	growth	was	distributed	across	all	products	led	by	our	Worldwide	Express	product.

The	increase	in	domestic	volume	in	2016	was	primarily	due	to	growth	in	Italy,	France,	Turkey	and	Mexico.

Our	overall	average	daily	volume	increased	in	2015,	largely	due	to	continued	strength	in	business-to-consumer	volume,	as	well	as	strong	demand	from	several sectors	including	healthcare	and	diversified	vehicles	and	parts.

We	continued	to	experience	solid	export	volume	growth	in	2015.	The	growth	was	mainly	driven	by	our	European	and	Americas	operations,	which	experienced solid	increases	in	volume	to	most	regions	of	the	world.	European	export	volume	increased	in	2015,	with	particular	strength	in	the	Europe-to-U.S.,	intra-European	and Europe-to-Americas	trade	lanes.	Americas	export	volume	increased	in	2015,	with	solid	growth	in	the	Americas-to-Europe	and	Americas-to-U.S.	trade	lanes.	However, Asian	export	volume	declined	across	all	trade	lanes	due	to	the	economic	slowdown	throughout	the	region,	particularly	China,	while	U.S.	export	volume	declined	largely due	to	the	impact	of	the	stronger	U.S.	Dollar.	Export	volume	growth	was	led	by	our	Transborder	products,	such	as	Transborder	Standard	and	Transborder	Express.

Domestic	volume	in	2015	decreased	slightly	from	2014	driven	by	selective	revenue	management	initiatives	focused	on	disciplined	growth.	Additionally,	the	results were	impacted	by	slowing	overall	economic	conditions	in	Germany	and	Canada.

Total	average	revenue	per	piece	decreased	2.0%	in	2016	impacted	by	a	110	basis	point	reduction	from	currency	as	well	as	lower	fuel	surcharge	rates.	These	factors were	partially	offset	by	an	increase	in	base	rates,	lower	discounts	and	a	shift	in	product	mix	as	the	growth	in	premium	products	continued	to	exceed	the	growth	in	our standard	products.

On	December	28,	2015,	we	implemented	an	average	5.2%	net	increase	in	base	and	accessorial	rates	for	international	shipments	originating	in	the	United	States (Worldwide	Express,	Worldwide	Saver,	UPS	Worldwide	Expedited	and	UPS	International	Standard	service).	On	November	2,	2015,	the	surcharge	increased	for	Over Maximum	Packages	and	the	tables	for	Ground,	Air	and	International	fuel	surcharges	were	adjusted.	Rate	changes	for	shipments	originating	outside	the	U.S.	are	made throughout	the	year	and	vary	by	geographic	market.

Export	revenue	per	piece	decreased	2.3%	in	2016,	impacted	by	a	50	basis	point	reduction	from	currency	as	well	as	lower	fuel	surcharge	rates.	These	factors	were partially	offset	by	an	increase	in	base	rate,	lower	discounts	and	favorable	package	weight	and	characteristics.

Domestic	revenue	per	piece	decreased	3.5%	in	2016,	impacted	by	a	380	basis	point	reduction	from	currency	as	well	as	lower	fuel	surcharge	rates.	These	factors were	partially	offset	by	an	increase	in	base	rates.

Total	average	revenue	per	piece	decreased	8.4%	in	2015	impacted	by	a	700	basis	point	reduction	from	currency	as	well	as	lower	fuel	surcharge	revenues (discussed	in	detail	under	Fuel	Surcharges).	These	factors	were	partially	offset	by	the	increases	in	base	rates	and	revenue	management	activities.

On	December	29,	2014,	we	implemented	an	average	4.9%	net	increase	in	base	and	accessorial	rates	for	international	shipments	originating	in	the	United	States (Worldwide	Express,	Worldwide	Saver,	UPS	Worldwide	Expedited	and	UPS	International	Standard	service).	Rate	changes	for	shipments	originating	outside	the	U.S. are	made	throughout	the	year	and	vary	by	geographic	market.

Export	revenue	per	piece	decreased	8.5%	in	2015	impacted	by	a	480	basis	point	reduction	from	currency	as	well	as	lower	fuel	surcharge	revenues.	These	factors were	partially	offset	by	the	increases	in	base	rates	and	disciplined	yield	and	growth	initiatives	in	Europe.

Domestic	revenue	per	piece	decreased	13.1%	in	2015	impacted	by	a	1,490	basis	point	reduction	from	currency	as	well	as	lower	fuel	surcharge	revenues.	These factors	were	partially	offset	by	the	increases	to	base	rate	and	disciplined	yield	and	growth	initiatives	in	Europe	and	Canada.

We	maintain	fuel	surcharges	on	our	international	air	and	ground	services.	The	fuel	surcharges	for	international	air	products	originating	inside	or	outside	the	United States	are	indexed	to	the	DOE's	Gulf	Coast	spot	price	for	a	gallon	of	kerosene-type	jet	fuel,	while	the	fuel	surcharges	for	ground	products	originating	outside	the	United States	are	indexed	to	fuel	prices	in	the	international	region	or	country	where	the	shipment	takes	place.

Total	international	fuel	surcharge	revenue	decreased	by	$119	million	in	2016,	primarily	due	to	price	reductions	in	the	fuel	surcharge	indices;	however,	this	was partially	offset	by	an	increase	in	volume	and	changes	in	mix.	Total	international	fuel	surcharge	revenue	decreased	by	$516	million	in	2015,	primarily	due	to	lower	fuel prices;	however,	this	was	partially	offset	by	an	increase	in	volume	and	pricing	changes	made	to	the	fuel	surcharge	indices.

Overall	operating	expenses	increased	by	$294	million,	which	included	a	$381	million	increase	in	mark-to-market	pension	charges.	Excluding	the	impact	of	the defined	benefit	plan	mark-to-market	charges,	adjusted	operating	expenses	for	the	segment	decreased	$87	million	in	2016	primarily	due	to	currency	exchange	rate movements	and	lower	fuel	expense.

Operating	expenses	were	impacted	by	changes	in	the	cost	of	operating	our	international	integrated	air	and	ground	network,	which	decreased	$40	million,	as	well	as pick-up	and	delivery	costs,	which	decreased	$143	million.	The	decreases	in	network	and	pick-up	and	delivery	costs	were	largely	due	to	the	impact	of	currency	exchange rate	movements	and	lower	fuel	expense.	Network	cost	reductions	were	somewhat	offset	by	an	increase	in	aircraft	block	hours	(up	1.2%	in	2016),	driven	by	a	5.1% increase	in	international	export	volume	and	continuing	air	product	service	enhancements.

Operating	expenses	were	also	impacted	in	2016	by	a	$96	million	increase	in	indirect	overhead,	package	sorting	costs	and	other	gains	and	losses.The	total	cost	per piece	for	the	segment	decreased	1.8%	in	2016.

Overall	operating	expenses	decreased	$1.299	billion	in	2015,	which	included	$156	million	decrease	due	to	mark-to-market	pension	adjustments.	Overall	adjusted operating	expenses	for	the	segment	decreased	$1.115	billion	in	2015.	This	decrease	was	mostly	due	to	currency	exchange	rate	movements	($858	million)	and	lower	fuel expense.

The	decrease	in	operating	expenses	was	impacted	by	the	cost	of	operating	our	international	integrated	air	and	ground	network,	which	decreased	$617	million,	as well	as	pick-up	and	delivery	costs,	which	decreased	$332	million.	The	decreases	in	network	and	pick-up	and	delivery	costs	were	largely	due	to	the	impact	of	currency exchange	rate	movements,	lower	fuel	expense	and	a	reduction	in	expense	for	outside	transportation	carriers	(due	to	lower	fuel	surcharges	passed	to	us	from	the	carriers). Additionally,	network	costs	were	mitigated	by	restraining	the	growth	in	aircraft	block	hours	(down	1.1%	in	2015),	as	a	result	of	ongoing	modifications	to	our	air network;	this	was	achieved	with	a	3.2%	increase	in	international	export	volume	and	continuing	air	product	service	enhancements.

The	remaining	decrease	in	operating	expenses	in	2015	was	largely	due	to	reductions	of	indirect	operating	costs	and	the	cost	of	package	sorting.	Indirect	operating costs	decreased	$130	million	and	the	cost	of	package	sorting	decreased	by	$36	million.	Both	of	these	decreases	were	mainly	attributable	to	the	impact	of	currency.

The	total	cost	per	piece	for	the	segment	decreased	12.9%	in	2015	impacted	by	a	147	basis	point	reduction	in	currency.

Operating	profit	decreased	$93	million	in	2016	compared	with	2015,	which	included	a	$381	million	increase	in	operating	expenses	due	to	mark-to-market	pension adjustments.	Operating	margin	decreased	100	basis	points	to	16.6%.	Adjusted	operating	profit	increased	by	$288	million	in	2016,	while	the	adjusted	operating	margin increased	200	basis	points	to	20.0%.	Operating	profit	and	margin	were	positively	affected	by	several	factors	including	base	rate	increases,	modifications	to	the	fuel surcharge	indices	and	currency	exchange	rate	movements	(including	our	currency	hedging	gains).

Operating	profit	increased	$460	million	in	2015	compared	with	2014,	which	included	a	$156	million	decrease	in	operating	expenses	due	to	mark-to-market pension	adjustments.	Operating	margin	increased	470	basis	points	to	17.6%.	Adjusted	operating	profit	increased	by	$276	million	in	2015,	while	the	adjusted	operating margin	increased	330	basis	points	to	18.0%.	Operating	profit	and	margin	were	positively	affected	by	several	factors	including	base	rate	increases,	modifications	to	the fuel	surcharge	indices	and	the	net	impact	of	fuel	(fuel	expense	declined	at	a	faster	rate	than	fuel	surcharge	revenue).	These	items	were	partially	offset	by	the	net	impact of	currency	exchange	rate	movements	(including	our	currency	hedging	gains),	which	reduced	operating	profit	by	$22	million	when	comparing	2015	with	2014.

# Supply	Chain	&	Freight	Operations

|  | 2016 | Year	Ended	December	31,<br>2015 | 2014 | %	Change<br>2016/	2015 | 2015/	2014 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Freight\tLTL\tStatistics: |  |  |  |  |  |
| Revenue\t(in\tmillions) | $2,384 | $2,479 | $2,633 | (3.8)% | (5.8)% |
| Revenue\tPer\tHundredweight | $23.44 | $22.94 | $22.64 | 2.2\t% | 1.3\t% |
| Shipments\t(in\tthousands) | 9,954 | 10,433 | 10,762 | (4.6)% | (3.1)% |
| Shipments\tPer\tDay\t(in\tthousands) | 39.3 | 41.2 | 42.5 | (4.6)% | (3.1)% |
| Gross\tWeight\tHauled\t(in\tmillions\tof\tlbs) | 10,167 | 10,808 | 11,632 | (5.9)% | (7.1)% |
| Weight\tPer\tShipment\t(in\tlbs) | 1,021 | 1,036 | 1,081 | (1.4)% | (4.2)% |
| Operating\tDays\tin\tPeriod | 253 | 253 | 253 |  |  |
| Revenue\t(in\tmillions): |  |  |  |  |  |
| Forwarding\tand\tLogistics | $6,793 | $5,900 | $5,758 | 15.1\t% | 2.5\t% |
| Freight | 2,736 | 2,881 | 3,048 | (5.0)% | (5.5)% |
| Other | 726 | 686 | 587 | 5.8\t% | 16.9\t% |
| Total\tRevenue | $10,255 | $9,467 | $9,393 | 8.3\t% | 0.8\t% |
| Operating\tExpenses\t(in\tmillions): |  |  |  |  |  |
| Operating\tExpenses | $9,849 | $8,703 | $8,961 | 13.2\t% | (2.9)% |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharges | (318) | (12) | (202) |  |  |
| Health\t&amp;\tWelfare\tPlan\tCharges | — | — | (84) |  |  |
| Adjusted\tOperating\tExpenses | $9,531 | $8,691 | $8,675 | 9.7\t% | 0.2\t% |
| Operating\tProfit\t(in\tmillions)\tand\tOperating\tMargins: |  |  |  |  |  |
| Operating\tProfit | $406 | $764 | $432 | (46.9)% | 76.9\t% |
| Adjusted\tOperating\tProfit | $724 | $776 | $718 | (6.7)% | 8.1\t% |
| Operating\tMargin | 4.0% | 8.1% | 4.6% |  |  |
| Adjusted\tOperating\tMargin | 7.1% | 8.2% | 7.6% |  |  |
| Currency\tTranslation\tBenefit\t/\t(Cost)—(in\tmillions)*: |  |  |  |  |  |
| Revenue |  |  |  | $(56) | $(249) |
| Operating\tExpenses |  |  |  | 59 | 279 |
| Operating\tProfit |  |  |  | $3 | $30 |

* Amount	represents	the	change	compared	to	the	prior	year.

In	August	2015,	we	acquired	Coyote	Logistics	Midco,	Inc	("Coyote"),	a	truckload	freight	brokerage	company.	Coyote's	financial	results	are	included	in	the	above table	within	Forwarding	and	Logistics	from	the	date	of	the	acquisition,	which	has	impacted	the	year-over-year	comparability	of	revenue,	operating	expenses	and operating	profit.

In	December	2016,	we	acquired	Marken,	a	global	provider	of	supply	chain	solutions	to	the	life	sciences	industry	and	leader	in	clinical	trials	material	storage	and distribution.	Marken's	financial	results	are	included	in	the	above	table	within	Forwarding	and	Logistics	from	the	date	of	the	acquisition	and	were	not	material	to	our results	of	operations.

Total	revenue	for	the	Supply	Chain	&	Freight	segment	increased	$788	million	in	2016	compared	to	2015.	Forwarding	and	Logistics	revenue	increased	$893	million	in 2016	compared	with	2015,	primarily	due	to	the	Coyote	acquisition	midway	through	the	third	quarter	of	2015.	The	increase	was	driven	by	Coyote,	offset	by	a combination	of	volume	and	tonnage	declines	in	our	North	American	air	freight	and	international	air	freight	businesses	(impacted	by	management	focus	to	reduce	lower- yielding	accounts	and	softer	market	conditions).	Additionally,	revenue	was	adversely	impacted	by	currency	exchange	rate	movements	and	lower	fuel	surcharge	rates (due	to	declining	fuel	prices).	Revenue	for	our	logistics	products	increased	in	2016	as	there	was	growth	in	our	mail	services	and	retail,	aerospace,	healthcare	and automotive	solutions.

UPS	Freight	revenue	decreased	$145	million	in	2016,	driven	by	lower	tonnage	(down	5.9%	from	the	prior	year)	and	a	$73	million	decrease	in	fuel	surcharge revenue	due	to	lower	diesel	fuel	prices.	The	decline	in	shipments	and	the	reduction	in	the	weight	per	shipment	were	impacted	by	revenue	management	initiatives,	an overall	decline	in	market	demand	and	customer	mix.	LTL	revenue	per	hundredweight	increased	as	LTL	base	rate	increases	averaging	4.9%	took	effect	on	October	26, 2015	and	September	19,	2016.

Revenue	for	the	other	businesses	within	Supply	Chain	&	Freight	increased	$40	million	in	2016	due	to	revenue	growth	at	UPS	Capital	Corporation,	UPS	Customer Solutions	and	the	UPS	Store.

Total	revenue	for	the	Supply	Chain	&	Freight	segment	increased	$74	million	in	2015	compared	to	2014.	Forwarding	and	Logistics	revenue	increased	$142	million in	2015	compared	with	2014	primarily	due	to	the	Coyote	acquisition	midway	through	the	third	quarter	of	2015.	The	increase	driven	by	Coyote	was	partially	offset	by adverse	impact	of	currency	exchange	rate	movements,	lower	fuel	surcharge	rates	(due	to	declining	fuel	prices)	and	volume	and	tonnage	declines	in	our	North	American air	freight	and	international	air	freight	businesses	(impacted	by	management	focus	on	reducing	lower-yielding	accounts).	Revenue	for	our	logistics	products	increased	in 2015,	as	we	experienced	solid	growth	in	our	healthcare	and	aerospace	solutions.

UPS	Freight	revenue	decreased	$167	million	in	2015,	driven	by	lower	tonnage	of	7.1%	and	a	$157	million	decrease	in	fuel	surcharge	revenue	due	to	lower	diesel fuel	prices.	The	decline	in	average	daily	shipments	and	the	reduction	in	weight	per	shipment	was	impacted	by	revenue	management	initiatives,	customer	mix	and	an overall	decline	in	market	demand.	LTL	revenue	per	hundredweight	increased	slightly,	as	LTL	base	rate	increases	averaging	4.9%	took	effect	on	December	29,	2014, covering	non-contractual	shipments	in	the	United	States,	Canada	and	Mexico.

Revenue	for	the	other	businesses	within	Supply	Chain	&	Freight	increased	$99	million	in	2015	due	to	revenue	growth	from	our	service	contracts	with	the	U.S Postal	Service	and	at	The	UPS	Store,	UPS	Capital	and	UPS	Customer	Solutions.

Supply	Chain	&	Freight	operating	expenses	for	the	period	increased	$1.1	billion,	which	included	a	$306	million	increase	in	mark-to-market	pension	charges. Forwarding	and	Logistics	operating	expenses	increased	$910	million,	largely	due	to	the	acquisition	of	Coyote	during	the	third	quarter	of	2015	and	the	increase	in	mark- to-market	pension	adjustment,	partially	offset	by	the	impact	of	currency	exchange	rate	movements	and	lower	fuel	expense.	Purchased	transportation	expense	increased by	$862	million	compared	to	2015	largely	due	to	the	acquisition	of	Coyote.	These	increases	were	partially	offset	by	a	combination	of	lower	volume	and	tonnage	in	our North	American	air	freight	and	international	air	freight	forwarding	businesses,	lower	buy	rates	due	to	softer	market	conditions	and	the	impact	of	foreign	exchange	rates.

UPS	Freight	operating	expenses	decreased	$103	million	in	2016	compared	with	2015,	primarily	as	a	result	of	decreases	in	our	network	costs	($58	million)	and pick-up	and	delivery	costs	($34	million),	offset	in	part	by	the	increased	mark-to-market	pension	charges.	The	declines	in	network	costs	and	pick-up	and	delivery expenses	were	driven	by	a	reduction	in	fuel	expense	and	expense	for	outside	transportation	carriers	(due	to	lower	LTL	volume	and	fuel	surcharges	passed	to	us	by	outside carriers).	Total	cost	per	LTL	shipment	increased	by	2.7%	compared	with	2015	due	to	operating	expenses	declining	at	a	faster	rate	than	the	reduction	in	tonnage	and shipments.

Other	expenses	for	the	other	businesses	within	Supply	Chain	&	Freight	increased	$33	million	in	2016	compared	with	2015	primarily	due	to	UPS	Capital,	UPS Customer	Solutions	and	the	UPS	Store.

Supply	Chain	&	Freight	operating	expenses	for	the	period	decreased	$258	million,	which	included	a	$190	million	decrease	due	to	the	mark-to-market	pension adjustments.	Additionally,	there	were	no	health	and	welfare	plan	charges	for	2015.	Forwarding	and	Logistics	operating	expenses	increased	$91	million	in	2015	compared with	2014.	This	increase	was	largely	due	to	the	acquisition	of	Coyote	during	the	third	quarter	of	2015,	partially	offset	by	the	impact	of	currency	exchange	rate movements,	lower	fuel	expense	and	the	mark-to-market	adjustment.	Purchased	transportation	expense	increased	by	$37	million	in	2015	due	to	the	acquisition	of	Coyote offset	by	lower	tonnage,	fuel	expense	and	the	impact	of	foreign	currency	exchange	rates.	The	remaining	operating	expense	increase	was	related	to	several	other	expense categories,	including	payroll	and	benefits	expense.

UPS	Freight	operating	expenses	decreased	$151	million	in	2015	compared	with	2014.	Total	cost	per	LTL	shipment	decreased	1.9%,	which	was	partially	offset	by the	decrease	in	the	mark-to-market	pension	charges	and	health	and	welfare	changes.	The	decrease	in	operating	expense	was	also	due	to	the	cost	associated	with	operating our	linehaul	network	(which	decreased	$142	million)	and	decreases	in	pick-up	and	delivery	expenses.	The	decreases	in	network	costs	and	pick-up	and	delivery	expenses were	driven	by	a	reduction	in	fuel	expense	and	expense	for	outside	transportation	carriers	(largely	due	to	lower	LTL	volume	and	fuel	surcharges	passed	to	us	from	the carriers).

Operating	expenses	for	the	other	businesses	within	Supply	Chain	&	Freight	increased	$76	million	in	2015	compared	with	2014	primarily	due	to	UPS	Capital	and our	service	contracts	with	the	U.S.	Postal	Service.

Supply	Chain	&	Freight	operating	profit	decreased	$358	million	in	2016	compared	with	2015,	which	includes	a	$306	million	increase	in	the	mark-to-market pension	adjustments.	Operating	profit	for	Forwarding	and	Logistics,	which	includes	Coyote,	decreased	$17	million	in	2016	compared	with	2015.	Operating	results	for the	North	American	air	freight	and	international	air	freight	forwarding	businesses	declined,	as	buy	and	sell	spreads	for	capacity	decreased.	Profitability	in	ocean	freight slightly	declined	due	to	margin	compression	from	soft	market	conditions.	Operating	profit	for	the	logistics	unit	increased	slightly	from	2016	compared	to	2015.

Operating	profit	for	the	freight	unit	decreased	$42	million	in	2016	compared	with	2015,	as	a	decline	in	tonnage	and	increase	in	pension	cost	more	than	offset	the increased	LTL	revenue	per	hundredweight	realized	during	the	year.

The	combined	operating	profit	for	all	of	our	other	businesses	in	this	segment	increased	$7	million	in	2016,	primarily	due	to	higher	operating	profit	at	UPS	Capital, UPS	Customer	Solutions	and	the	UPS	Store.

Supply	Chain	&	Freight	operating	profit	increased	$332	million	in	2015	compared	with	2014,	which	includes	a	$190	million	decrease	in	the	mark-to-market pension	adjustments	and	a	$84	million	decrease	in	health	and	wealth	plan	change.	Operating	profit	for	the	Forwarding	and	Logistics	unit	increased	by	$51	million	in 2015	compared	with	2014,	primarily	due	to	improved	results	in	our	international	air	business,	partially	offset	by	the	impact	of	Coyote	acquisition	costs.	The	net	impact of	fuel	costs	and	revenue	management	initiatives	had	a	positive	impact	on	operating	profit.	Operating	results	for	the	international	air	forwarding	business	improved,	as the	rates	at	which	we	procure	capacity	from	third-party	air	carriers	decreased	faster	than	the	rates	we	charge	our	customers.	Profitability	in	our	ocean	freight	unit	grew largely	as	a	result	of	transportation	expense	decreasing	at	a	faster	rate	than	the	rates	we	charge	our	customers.	However,	operating	profit	for	the	logistics	unit	declined,	as investments	in	technology	and	infrastructure	continued	to	pressure	distribution	margins	during	2015.

Operating	profit	for	our	freight	unit	decreased	$16	million	in	2015	compared	with	2014,	as	declines	in	tonnage	and	increased	pension	costs	more	than	offset	the increased	LTL	revenue	per	hundredweight	realized	during	the	year.

The	combined	operating	profit	for	all	of	our	other	businesses	in	this	segment	increased	$23	million	in	2015,	primarily	due	to	higher	operating	profit	at	UPS	Capital and	our	service	contracts	with	the	U.S.	Postal	Service.

|  | 2016 | Year	Ended	December	31,<br>2015 | 2014 | %	Change<br>2016/	2015 | 2015/	2014 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Operating\tExpenses\t(in\tmillions): |  |  |  |  |  |
| Compensation\tand\tBenefits: | $34,770 | $31,028 | $32,045 | 12.1\t% | (3.2)% |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharges | (2,651) | (118) | (1,062) |  |  |
| Health\t&amp;\tWelfare\tPlan\tCharges | — | — | (1,102) |  |  |
| Adjusted\tCompensation\tand\tBenefits | 32,119 | 30,910 | 29,881 | 3.9\t% | 3.4\t% |
| Repairs\tand\tMaintenance | 1,538 | 1,400 | 1,371 | 9.9\t% | 2.1\t% |
| Depreciation\tand\tAmortization | 2,224 | 2,084 | 1,923 | 6.7\t% | 8.4\t% |
| Purchased\tTransportation | 9,129 | 8,043 | 8,460 | 13.5\t% | (4.9)% |
| Fuel | 2,118 | 2,482 | 3,883 | (14.7)% | (36.1)% |
| Other\tOccupancy | 1,037 | 1,022 | 1,044 | 1.5\t% | (2.1)% |
| Other\tExpenses | 4,623 | 4,636 | 4,538 | (0.3)% | 2.2\t% |
| Total\tOperating\tExpenses | $55,439 | $50,695 | $53,264 | 9.4\t% | (4.8)% |
| Adjusted\tTotal\tOperating\tExpenses | $52,788 | $50,577 | $51,100 | 4.4\t% | (1.0)% |
| Currency\tTranslation\tCost\t/\t(Benefit)* |  |  |  | $(205) | $(1,137) |

# Compensation	and	Benefits

Total	compensation	and	benefits	increased	$3.74	billion	in	2016	compared	to	2015.	Excluding	the	impact	of	the	defined	benefit	plans	mark-to-market	charges, adjusted	compensation	and	benefits	expense	increased	$1.21	billion	in	2016.

Employee	payroll	costs	increased	$609	million	in	2016	compared	with	2015,	largely	due	to	higher	U.S.	domestic	hourly	and	management	compensation	costs	and the	acquisition	of	Coyote	during	the	third	quarter	of	2015.	Total	compensation	costs	increased	3.2%,	while	consolidated	average	daily	volume	growth	was	4.2%.	U.S. domestic	compensation	costs	for	hourly	employees	increased	largely	due	to	increased	headcount,	contractual	union	wage	increases	and	a	4.2%	increase	in	average	daily union	labor	hours.	Compensation	costs	for	management	employees	increased	primarily	due	to	merit	salary	increases	and	growth	in	the	overall	size	of	the	workforce, partially	offset	by	lower	incentive	compensation.

Benefits	expense	increased	$3.13	billion	in	2016	compared	to	2015,	primarily	due	to	increased	pension	costs,	health	and	welfare	costs,	workers'	compensation expenses,	vacation,	holiday	and	excused	absence	expenses	and	payroll	taxes.	These	factors	are	discussed	further	as	follows:

•Pension	costs	increased	$2.63	billion	in	2016	compared	to	2015,	primarily	due	to	$2.53	billion	in	defined	benefit	plans	mark-to-market	charges.	Additionally, expenses	increased	for	multiemployer	pension	plans	due	to	increased	contribution	rates	and	headcount.

•Health	and	welfare	costs	increased	$277	million	in	2016,	largely	due	to	increased	contributions	to	multiemployer	plans	resulting	from	contractual	contribution rate	increases	and	an	overall	increase	in	the	size	of	the	workforce.

•Vacation,	holiday,	excused	absence	and	payroll	tax	expense	increased	$125	million	in	2016,	due	to	salary	increases	and	growth	in	the	overall	size	of	the workforce.

•Workers'	compensation	expense	increased	$96	million	in	2016.	Insurance	reserves	are	established	for	estimates	of	the	loss	that	we	will	ultimately	incur	on reported	workers'	compensation	claims,	as	well	as	estimates	of	claims	that	have	been	incurred	but	not	reported,	and	take	into	account	a	number	of	factors, including	our	history	of	claim	losses,	payroll	growth	and	the	impact	of	safety	improvement	initiatives.	In	2015,	we	experienced	more	favorable	actuarial adjustments,	resulting	in	increased	expense	in	2016.

Total	compensation	and	benefits	decreased	$1.02	billion	in	2015	compared	to	2014.	Excluding	the	impact	of	the	defined	benefit	plans	mark-to-market	charges	and the	health	and	welfare	plan	charges,	adjusted	compensation	and	benefits	expense	increased	$1.03	billion	in	2015.

Employee	payroll	costs	increased	$351	million	in	2015,	compared	with	2014,	largely	due	to	contractual	union	wage	rate	increases,	a	1.2%	increase	in	union	labor hours,	higher	incentive	compensation	and	a	merit	salary	increase	for	management	employees,	partially	offset	by	productivity	improvements	and	the	impact	of	currency exchange	rates.	The	increase	in	average	daily	union	labor	hours	was	impacted	by	volume	growth.	Additionally,	adverse	weather	conditions	in	the	early	part	of	2014 contributed	to	a	decrease	in	labor	hours	in	the	comparison	between	2015	and	2014.

Benefits	expense	decreased	$1.37	billion	in	2015	compared	to	2014,	primarily	due	to	increased	pension	costs,	health	and	welfare	costs,	workers'	compensation expenses,	vacation,	holiday	and	excused	absence	expenses	and	payroll	taxes.	These	factors	are	discussed	further	as	follows:

•Pension	cost	decreased	$605	million	in	2015	compared	to	2014,	primarily	due	to	a	decrease	of	$944	million	in	defined	benefit	plans	mark-to-market	charges. The	decrease	in	mark-to-market	charges	was	partially	offset	by	an	increase	in	expenses	in	company-sponsored	pension	plans	(largely	due	to	lower	discount rates	used	to	determine	ongoing	pension	cost	for	2015)	and	multiemployer	pension	plans	(due	to	both	increased	contribution	rates	and	higher	union	labor hours).

•Health	and	welfare	costs	decreased	$834	million	compared	to	2014,	largely	due	to	a	decrease	of	$1.10	billion	related	to	the	impact	of	the	2014	health	and welfare	plan	charges.	The	decrease	in	plan	charges	was	partially	offset	by	contractual	contribution	rate	increases	and	higher	union	labor	hours.

•Workers'	compensation	expense	increased	$36	million	in	2015.	Insurance	reserves	are	established	for	estimates	of	the	loss	that	we	will	ultimately	incur	on reported	workers'	compensation	claims,	as	well	as	estimates	of	claims	that	have	been	incurred	but	not	reported,	and	take	into	account	a	number	of	factors including	our	history	of	claim	losses,	payroll	growth	and	the	impact	of	safety	improvement	initiatives.	In	2015,	we	experienced	less	favorable	actuarial	expense adjustments	than	the	prior	year	as	well	as	increased	program	costs	and	taxes.

•Vacation,	holiday	and	excused	absence	expense	increased	$32	million	in	2015,	due	to	an	increase	in	the	overall	number	of	employees	and	increased	vacation entitlements	earned	based	on	employees'	years	of	service;	however,	these	factors	were	partially	offset	by	the	impact	of	currency	exchange	rates.

# Repairs	and	Maintenance

The	$138	million	increase	in	repairs	and	maintenance	expense	in	2016	was	primarily	due	to	an	increase	in	airframe	and	aircraft	engine	maintenance	resulting	from increased	air	volume	and	increased	vehicle	maintenance	costs	in	our	global	package	and	freight	operations,	primarily	due	to	the	growth	in	the	size	of	our	vehicle	fleet.

The	$29	million	increase	in	repairs	and	maintenance	expense	in	2015	was	primarily	due	to	an	increase	in	airframe	and	aircraft	engine	repair	and	component replacement	costs,	largely	in	our	Boeing	747	and	767	aircraft	fleets.	The	remaining	increase	was	largely	due	to	increased	vehicle	maintenance	costs	in	our	global package	and	freight	operations,	primarily	due	to	the	growth	in	the	size	of	our	vehicle	fleet.

# Depreciation	and	Amortization

Depreciation	and	amortization	expense	increased	$140	million	in	2016	compared	with	2015,	primarily	due	to	the	following	factors:	(1)	depreciation	expense	for buildings	and	facilities	increased	due	to	leasehold	improvements	and	purchases	of	new	equipment;	(2)	increase	in	amortization	expense	largely	due	to	new	internally developed	capitalized	software,	as	well	as	intangible	assets	resulting	from	business	acquisitions	and	(3)	depreciation	expense	on	vehicles	increased	due	to	the replacement	of	older,	fully-depreciated	vehicles,	technology	upgrades	on	new	vehicles	and	an	overall	increase	in	the	size	of	our	vehicle	fleet	in	our	U.S.	Domestic Package	and	UPS	Freight	operations.

Depreciation	and	amortization	expense	increased	$161	million	in	2015	compared	with	2014,	primarily	due	to	three	factors:	(1)	amortization	expense	increased largely	due	to	new	internally	developed	capitalized	software,	as	well	as	intangible	assets	resulting	from	business	acquisitions;	(2)	depreciation	expense	for	buildings	and facilities	increased	due	to	new	leasehold	improvements	and	purchases	of	new	equipment	and	(3)	depreciation	expense	on	vehicles	increased	due	to	the	replacement	of older,	fully-depreciated	vehicles,	technology	upgrades	on	new	vehicles	and	an	overall	increase	in	the	size	of	our	vehicle	fleet	in	our	U.S.	Domestic	Package	and	UPS Freight	operations.

# Purchased	Transportation

The	$1.086	billion	increase	in	purchased	transportation	expense	charged	to	us	by	third-party	air,	ocean	and	truck	carriers	in	2016	was	driven	by	several	factors:

•Expense	for	our	forwarding	and	logistics	business	increased	$840	million	in	2016,	primarily	due	to	the	acquisition	of	Coyote	and	increased	volume	and	rates for	mail	services;	these	items	were	partially	offset	by	a	combination	of	decreased	volume	and	tonnage	in	our	North	American	air	freight	and	international	air freight	forwarding	business,	lower	buy	rates	in	international	air	freight	due	to	softer	market	conditions	and	the	impact	of	foreign	currency	exchange	rates.

•U.S.	Domestic	Package	expense	increased	$130	million	in	2016,	primarily	due	to	increased	volume	and	rates,	partially	offset	by	lower	fuel	surcharges	passed	to us	from	rail	carriers	and	outside	contract	carriers.

•International	Package	expense	increased	$112	million	in	2016,	primarily	due	to	increased	usage	of	third-party	carriers;	this	was	partially	offset	by	the	impact	of currency	exchange	rate	movements	as	well	as	lower	fuel	surcharges	passed	to	us	from	outside	transportation	providers.

•UPS	Freight	expense	decreased	$18	million	in	2016,	largely	due	to	decreased	LTL	shipments	and	the	resulting	decreased	use	of,	and	lower	fuel	surcharges passed	to	us	from,	outside	transportation	carriers.

The	$417	million	decrease	in	purchased	transportation	expense	charged	to	us	by	third-party	air,	ocean	and	truck	carriers	in	2015	was	driven	by	several	factors:

•U.S.	Domestic	Package	expense	decreased	$322	million	in	2015,	primarily	due	to	the	decreased	use	of,	and	lower	fuel	surcharge	rates	passed	to	us	from	rail carriers	and	outside	contract	carriers.	Additionally,	adverse	weather	conditions	in	the	early	months	of	2014	resulted	in	the	additional	use	of	outside	contract carriers,	which	impacted	the	comparison	with	2015.

•International	Package	expense	decreased	$64	million	in	2015,	primarily	due	to	to	the	impact	of	currency	exchange	rate	movements	and	lower	fuel	surcharges passed	from	outside	transportation	providers.	These	factors	were	partially	offset	by	international	volume	growth.

•UPS	Freight	expense	decreased	$68	million	in	2015,	largely	due	to	decreased	LTL	shipments	and	fuel	efficiency,	and	the	resulting	decreased	use	of,	and	lower fuel	surcharges	passed	to	us	from,	outside	transportation	carriers.

•The	expense	for	Forwarding	and	Logistics	and	other	businesses	increased	$37	million	in	2015	primarily	due	to	the	acquisition	of	Coyote;	however,	this	was offset	by	the	impact	of	decreased	volume	and	tonnage	in	our	international	and	North	American	air	freight	businesses,	the	impact	of	currency	exchange movements	and	lower	fuel	surcharges	passed	to	us	from	outside	transportation	providers.

The	$364	million	decrease	in	fuel	expense	in	2016	was	primarily	due	to	lower	jet	fuel,	diesel	and	unleaded	gasoline	prices,	which	decreased	fuel	expense	by	$461 million.	The	lower	fuel	prices	were	partially	offset	by	increased	fuel	consumption,	primarily	due	to	increases	in	total	aircraft	block	hours	and	Domestic	Package	delivery stops	(due	to	higher	volume),	which	increased	expense	by	$97	million	and	lower	alternative	fuel	and	tax	credits.

The	$1.401	billion	decrease	in	fuel	expense	in	2015	was	primarily	due	to	lower	fuel	prices,	which	decreased	fuel	expense	by	$1.383	billion.	Increases	in	fuel efficiency,	fuel	hedging	activities,	alternative	fuel	credits	and	fewer	miles	driven	by	UPS	Freight	and	International	Package	decreased	expense	by	$99	million.	These decreases	were	partially	offset	by	an	increase	of	$82	million	related	to	increases	in	aircraft	block	hours	and	Domestic	Package	delivery	stops	and	miles	driven	due	to higher	volume.

# Other	Occupancy

The	$15	million	increase	in	other	occupancy	expense	in	2016	was	largely	due	to	higher	facility	rent	expense,	partially	offset	by	lower	utilities	and	snow	removal costs	at	our	operating	facilities.

The	$22	million	decrease	in	other	occupancy	expense	in	2015	was	largely	due	to	a	decrease	in	facility	rent	expense	and	utility	costs,	but	partially	offset	by	an increase	in	facility	maintenance	expense.

# Other	Expenses

The	$13	million	decrease	in	other	expenses	in	2016	was	largely	due	to	a	decrease	in	overall	auto	liability	insurance,	offset	by	an	increase	in	outside	professional services.

The	$98	million	increase	in	other	expenses	in	2015	was	caused	by	a	number	of	factors.	Automotive	liability	insurance expense	increased	$36	million	largely	due	to	established	estimates	of	the	loss	that	will	ultimately	be	incurred	on	reported	claims,	as	well	as	estimates	of	claims	that	have been	incurred	but	not	reported,	and	take	into	account	a	number	of	factors	including	our	history	of	claim	losses.	Outside	professional	service	fees	increased	$16	million primarily	due	to	transaction	costs	associated	with	Coyote.	Advertising	expense	increased	$15	million	mostly	driven	by	the	"United	Problem	Solver"	campaign.	We	also incurred	increases	in	several	other	expense	categories,	including	software	license	fees,	computer	supplies	and	employee	expense	reimbursement.	These	increases	were partially	offset	by	lower	bad	debt	expense	and	other	items.

# Investment	Income	and	Interest	Expense

The	following	table	sets	forth	investment	income	and	interest	expense	for	the	years	ended	December	31,	2016,	2015	and	2014	(in	millions):

|  |  | Year	Ended	December	31, |  | %	Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | 2014 | 2016/\t2015 | 2015/\t2014 |
| Investment\tIncome\tand\tOther | $50 | $15 | $22 | NA | (31.8)% |
| Interest\tExpense | $(381) | $(341) | $(353) | 11.7% | (3.4)% |

The	growth	in	investment	income	and	other	in	2016	as	compared	to	2015	was	primarily	due	to	a	decrease	in	losses	from	fair	value	adjustments	on	real	estate partnerships,	higher	interest	income	and	unrealized	gains	on	investments	and	a	benefit	from	foreign	currency	exchange	rate	movements.

The	decrease	in	investment	income	was	primarily	due	to	lower	realized	gains	on	the	sale	of	investments	in	2015	compared	with	2014,	and	a	decline	in	interest income.	This	was	partially	offset	by	a	decrease	in	losses	from	fair	value	adjustments	on	real	estate	partnerships.

# Interest	Expense

Interest	expense	increased	in	2016	as	compared	to	2015	primarily	due	to	an	increase	in	average	outstanding	commercial	paper	balances,	an	increase	in	long-term debt	and	higher	effective	interest	rates	on	senior	notes.

Interest	expense	decreased	in	2015	compared	with	2014	largely	due	to	a	decrease	in	effective	interest	rates	related	to	the	termination	of	our	British	Pound	Sterling cross-currency	interest	rate	swaps,	the	prior	year	repayment	of	senior	notes	at	maturity	and	the	impact	of	foreign	currency.	This	was	partially	offset	by	an	increase	in average	outstanding	commercial	paper	and	long-term	debt.

# Income	Tax	Expense

The	following	table	sets	forth	income	tax	expense	and	our	effective	tax	rate	for	the	years	ended	December	31,	2016,	2015	and	2014	(in	millions):

|  | Year	Ended	December	31, | Year	Ended	December	31, |  | %	Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | 2014 | 2016/\t2015 | 2015/\t2014 |
| Income\tTax\tExpense: | $1,705 | $2,498 | $1,605 | (31.7)% | 55.6% |
| Income\tTax\tImpact\tof: |  |  |  |  |  |
| Defined\tBenefit\tPlans\tMark-to-Market\tCharge | 978 | 39 | 392 |  |  |
| Health\t&amp;\tWelfare\tPlan\tCharges | — | — | 415 |  |  |
| Adjusted\tIncome\tTax\tExpense | $2,683 | $2,537 | $2,412 | 5.8\t% | 5.2% |
| Effective\tTax\tRate | 33.2% | 34.0% | 34.6% |  |  |
| Adjusted\tEffective\tTax\tRate | 34.5% | 34.0% | 35.5% |  |  |

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

Our	effective	tax	rate	decreased	to	33.2%	in	2016,	compared	with	34.0%	in	2015	and	34.6%	in	2014,	primarily	due	to	the	effects	of	the	following	discrete	tax items	and	recurring	factors:

# 2016	Discrete	Items

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

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

In	connection	with	our	acquisition	of	Coyote	Logistics	(see	note	7),	we	distributed	$500	million	of	cash	held	by	a	Canadian	subsidiary	to	its	U.S.	parent	during	the fourth	quarter	of	2015.	As	a	result	of	the	distribution,	we	recorded	additional	net	income	tax	expense	of	$28	million.

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

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

In	2014,	we	recorded	a	$415	million	tax	benefit	related	to	a	pre-tax	charge	of	$1.102	billion	for	certain	health	and	welfare	plan	changes	(see	note	5).	This	income tax	benefit	was	generated	at	a	higher	average	statutory	tax	rate	than	our	U.S.	federal	statutory	tax	rate	because	it	included	the	effect	of	U.S.	state	and	local	taxes.

In	the	fourth	quarter	of	2014,	we	recognized	an	income	tax	benefit	of	$392	million	related	to	pre-tax	mark-to-market	losses	of	$1.062	billion	on	our	pension	and postretirement	defined	benefit	plans.	This	income	tax	benefit	was	generated	at	a	higher	average	statutory	tax	rate	than	the	U.S.	federal	statutory	tax	rate	because	it included	the	effect	of	U.S.	state	and	local	taxes.

As	described	in	the	Items	Affecting	Comparability	section,	certain	items	have	been	excluded	from	comparisons	of	"adjusted"	income	taxes	in	the	discussion	that follows.

Our	adjusted	effective	tax	rate	increased	to	34.5%	in	2016	from	34.0%	in	2015	primarily	due	to	a	decrease	in	favorable	discrete	tax	adjustments	relative	to	2015 partially	offset	by	favorable	changes	in	the	proportion	of	our	taxable	income	in	certain	U.S.	and	non-U.S.	jurisdictions	relative	to	total	pre-tax	income.

Our	adjusted	effective	tax	rate	decreased	to	34.0%	in	2015	from	35.5%	in	2014	primarily	due	to	favorable	discrete	tax	adjustments	related	to:	(1)	prior	years' deferred	tax	balances;	(2)	execution	of	advance	pricing	agreements	with	certain	foreign	tax	jurisdictions;	(3)	resolution	of	several	U.S.	state	and	local	tax	matters;	and	(4) the	extension	of	several	previously	expired	U.S.	tax	provisions	in	2015.	These	benefits	were	partially	offset	by	the	additional	U.S.	tax	expense	associated	with	a	cash distribution	from	a	Canadian	subsidiary	to	its	U.S.	parent.

# Liquidity	and	Capital	Resources

# Cash	Flows	From	Operating	Activities

The	following	is	a	summary	of	the	significant	sources	(uses)	of	cash	from	operating	activities	(amounts	in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tIncome | $3,431 | $4,844 | $3,032 |
| Non-cash\toperating\tactivities(a) | 6,444 | 4,122 | 5,901 |
| Pension\tand\tpostretirement\tplan\tcontributions\t(UPS-sponsored\tplans) | (2,668) | (1,229) | (1,258) |
| Settlement\tof\tpostretirement\tbenefit\tobligation | — | — | (2,271) |
| Hedge\tmargin\treceivables\tand\tpayables | (142) | 170 | 421 |
| Income\ttax\treceivables\tand\tpayables | (505) | (6) | (224) |
| Changes\tin\tworking\tcapital\tand\tother\tnon-current\tassets\tand\tliabilities | (62) | (418) | 91 |
| Other\toperating\tactivities | (25) | (53) | 34 |
| Net\tcash\tfrom\toperating\tactivities | $6,473 | $7,430 | $5,726 |

(a) Represents	depreciation	and	amortization,	gains	and	losses	on	derivative	transactions	and	foreign	exchange,	deferred	income	taxes,	provisions	for	uncollectible	accounts,	pension	and postretirement	benefit	expense,	stock	compensation	expense	and	other	non-cash	items.

Cash	from	operating	activities	remained	strong	throughout	2014	to	2016.	Operating	cash	flow	was	adversely	impacted	by	$1.527	billion	in	2014	and	$33	million	in 2015	due	to	certain	transactions	resulting	from	the	ratification	of	our	collective	bargaining	agreement	with	the	Teamsters.	These	transactions	are	discussed	further	in	the "Collective	Bargaining	Agreements"	section:

•We	paid	$2.271	billion	in	2014	to	settle	postretirement	benefit	obligations	for	certain	union

•We	paid	$176	million	in	2014	for	retroactive	economic	benefits	under	the	collective	bargaining	agreement	that	were	related	to	the	period	between	August through	December	of	2013.

•During	2014,	we	received	cash	tax	benefits	of	$920	million	from	the	items	described	above	(through	reduced	U.S.	Federal	and	state	quarterly	income	tax payments).

•We	paid	$53	million	in	2015	for	additional	retroactive	economic	benefits	under	the	collective	bargaining	agreement	and	we	received	$20	million	of	cash	tax benefits	(through	reduced	U.S.	Federal	and	state	quarterly	income	tax	payments)	from	the	payment.

Most	of	the	remaining	variability	in	operating	cash	flows	during	the	2014	to	2016	time	period	relates	to	the	funding	of	our	company-sponsored	pension	and postretirement	benefit	plans	(and	related	cash	tax	deductions).	Except	for	discretionary	or	accelerated	fundings	of	our	plans,	contributions	to	our	company-sponsored pension	plans	have	largely	varied	based	on	whether	any	minimum	funding	requirements	are	present	for	individual	pension	plans.

•We	made	discretionary	contributions	to	our	three	primary	company-sponsored	U.S.	pension	plans	totaling	$2.461,	$1.030	and	1.042	billion	in	2016,	2015	and 2014,	respectively.

•The	remaining	contributions	from	2014	to	2016	were	largely	due	to	contributions	to	our	international	pension	plans	and	U.S.	postretirement	medical	benefit plans.

Apart	from	the	transactions	described	above,	operating	cash	flow	was	impacted	by	changes	in	our	working	capital	position,	payments	for	income	taxes	and changes	in	hedge	margin	payables	and	receivables.	Cash	payments	for	income	taxes	were	$2.064,	$1.913	and	$1.524	billion	for	2016,	2015	and	2014,	respectively,	and were	primarily	impacted	by	the	timing	of	current	tax	deductions.	The	net	hedge	margin	collateral	(paid)/received	from	derivative	counterparties	was	$(142),	$170	and $421	million	during	2016,	2015	and	2014,	respectively,	due	to	changes	in	the	fair	value	of	the	derivative	contracts	used	in	our	currency	and	interest	rate	hedging programs.

As	of	December	31,	2016,	the	total	of	our	worldwide	holdings	of	cash,	cash	equivalents	and	marketable	securities	were	$4.567	billion,	of	which	$2.192	billion	was held	by	foreign	subsidiaries.	The	amount	of	cash,	cash	equivalents	and	marketable	securities	held	by	our	U.S.	and	foreign	subsidiaries	fluctuates	throughout	the	year	due to	a	variety	of	factors,	including	the	timing	of	cash	receipts	and	disbursements	in	the	normal	course	of	business.	Cash	provided	by	operating	activities	in	the	United States	continues	to	be	our	primary	source	of	funds	to	finance	domestic	operating	needs,	capital	expenditures,	share	repurchases	and	dividend	payments	to	shareowners. To	the	extent	that	such	amounts	represent	previously	untaxed	earnings,	the	cash,	cash	equivalents	and	marketable	securities	held	by	foreign	subsidiaries	would	be subject	to	tax	if	such	amounts	were	repatriated	in	the	form	of	dividends;	however,	not	all	international	balances	would	have	to	be	repatriated	in	the	form	of	a	dividend	if returned	to	the	U.S.	When	amounts	earned	by	foreign	subsidiaries	are	expected	to	be	indefinitely	reinvested,	no	accrual	for	taxes	is	provided.

# Cash	Flows	From	Investing	Activities

Our	primary	sources	(uses)	of	cash	for	investing	activities	were	as	follows	(amounts	in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tcash\tused\tin\tinvesting\tactivities | $(2,566) | $(5,309) | $(2,801) |
| Capital\tExpenditures: |  |  |  |
| Buildings\tand\tfacilities | $(1,316) | $(996) | $(808) |
| Aircraft\tand\tparts | (350) | (27) | (44) |
| Vehicles | (864) | (936) | (1,061) |
| Information\ttechnology | (435) | (420) | (415) |
| Total\tCapital\tExpenditures: | $(2,965) | $(2,379) | $(2,328) |
| Capital\tExpenditures\tas\ta\t%\tof\tRevenue | 4.9% | 4.1% | 4.0% |
| Other\tInvesting\tActivities: |  |  |  |
| Proceeds\tfrom\tdisposals\tof\tproperty,\tplant\tand\tequipment | $88 | $26 | $53 |
| Net\tdecrease\tin\tfinance\treceivables | $9 | $5 | $44 |
| Net\t(purchases)\tsales\tof\tmarketable\tsecurities | $908 | $(1,027) | $(419) |
| Cash\tpaid\tfor\tbusiness\tacquisitions | $(547) | $(1,904) | $(88) |
| Other\tinvesting\tactivities | $(59) | $(30) | $(63) |

We	have	commitments	for	the	purchase	of	aircraft,	vehicles,	equipment	and	real	estate	to	provide	for	the	replacement	of	existing	capacity	and	anticipated	future growth.	We	generally	fund	our	capital	expenditures	with	our	cash	from	operations.	Future	capital	spending	for	anticipated	growth	and	replacement	assets	will	depend	on a	variety	of	factors,	including	economic	and	industry	conditions.	We	anticipate	that	our	capital	expenditures	for	2017	will	be	approximately	$4	billion.

Capital	spending	on	aircraft	increased	in	2016	compared	to	the	2014	to	2015	periods,	due	to	firm	commitments	to	purchase	14	new	Boeing	747-8F	cargo	aircraft. Capital	spending	on	vehicles	decreased	during	the	2014	to	2016	period	in	our	U.S.	and	international	package	businesses	and	our	freight	unit,	largely	due	to	the	timing	of vehicle	replacements.	Capital	expenditures	on	buildings	and	facilities	also	increased	in	the	2014	to	2016	period,	and	included	hub	automation	and	capacity	expansion projects	in	the	U.S.	during	2016,	as	well	as	expansion	and	new	construction	projects	at	facilities	in	Europe	and	Asia.

The	proceeds	from	the	disposal	of	property,	plant	and	equipment	were	largely	due	to	proceeds	from	insurance	recoveries	in	2014	to	2016.	The	net	decline	in finance	receivables	in	the	2014	to	2016	period	was	primarily	due	to	customer	paydowns	and	loan	sales	activity,	primarily	in	our	commercial	lending,	asset-based	lending and	leasing	portfolios.	The	purchases	and	sales	of	marketable	securities	are	largely	determined	by	liquidity	needs	and	the	periodic	rebalancing	of	investment	types	and will	fluctuate	from	period	to	period.

Cash	paid	for	business	acquisitions	in	the	2014	to	2016	period	was	largely	due	to	the	acquisitions	of	i-parcel	LLC	(2014),	Polar	Speed	Distribution	Limited	(2014), Poltraft	Sp.	z.o.o.	(2015),	Parcel	Pro,	Inc.	(2015),	Coyote	Logistics	Midco,	Inc.	(2015)	and	Marken	(2016),	as	well	as	other	smaller	acquisitions.

Other	investing	activities	are	impacted	by	changes	in	our	non-current	investments	and	restricted	cash	balances,	capital	contributions	into	certain	investment partnerships	and	various	other	items.	In	2016,	2015	and	2014,	we	increased	the	non-current	investments	and	restricted	cash	balance	associated	with	our	self-insurance requirements	by	$3,	$0	and	$17	million,	respectively.

# Cash	Flows	From	Financing	Activities

Our	primary	sources	(uses)	of	cash	for	financing	activities	were	as	follows	(amounts	in	millions,	except	per	share	data):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tcash\tused\tin\tfinancing\tactivities | $(3,140) | $(1,565) | $(5,161) |
| Share\tRepurchases: |  |  |  |
| Cash\texpended\tfor\tshares\trepurchased | $(2,678) | $(2,702) | $(2,695) |
| Number\tof\tshares\trepurchased | (25.4) | (26.8) | (26.4) |
| Shares\toutstanding\tat\tyear-end | 868 | 886 | 905 |
| Percent\treduction\tin\tshares\toutstanding | (2.0)% | (2.1)% | (2.0)% |
| Dividends: |  |  |  |
| Dividends\tdeclared\tper\tshare | $3.12 | $2.92 | $2.68 |
| Cash\texpended\tfor\tdividend\tpayments | $(2,643) | $(2,525) | $(2,366) |
| Borrowings: |  |  |  |
| Net\tborrowings\t(repayments)\tof\tdebt\tprincipal | $2,034 | $3,588 | $(169) |
| Other\tFinancing\tActivities: |  |  |  |
| Cash\treceived\tfor\tcommon\tstock\tissuances | $245 | $249 | $274 |
| Other\tfinancing\tactivities | $(98) | $(175) | $(205) |
| Capitalization: |  |  |  |
| Total\tdebt\toutstanding\tat\tyear-end | $16,075 | $14,334 | $10,779 |
| Total\tshareowners'\tequity\tat\tyear-end | 429 | 2,491 | 2,158 |
| Total\tcapitalization | $16,504 | $16,825 | $12,937 |

In	May	2016,	the	Board	of	Directors	approved	a	share	repurchase	authorization	of	$8.0	billion,	which	replaced	an	authorization	previously	announced	in	2013.The share	repurchase	authorization	has	no	expiration	date.	During	the	first	quarter	of	2016,	we	exercised	a	capped	call	option	that	we	entered	into	in	2015,	which	allowed	us to	repurchase	0.2	million	class	B	shares.	The	$25	million	premium	payment	for	this	capped	call	option	was	classified	as	other	financing	activities	in	2015.	As	of December	31,	2016,	we	had	$6.155	billion	of	this	share	repurchase	authorization	remaining.	Share	repurchases	may	take	the	form	of	accelerated	share	repurchases,	open market	purchases,	or	other	such	methods	as	we	deem	appropriate.	The	timing	of	our	share	repurchases	will	depend	upon	market	conditions.	Unless	terminated	earlier	by the	resolution	of	our	Board,	the	program	will	expire	when	we	have	purchased	all	shares	authorized	for	repurchase	under	the	program.	We	anticipate	repurchasing approximately	$1.8	billion	of	shares	in	2017.

The	declaration	of	dividends	is	subject	to	the	discretion	of	the	Board	of	Directors	and	will	depend	on	various	factors,	including	our	net	income,	financial condition,	cash	requirements,	future	prospects	and	other	relevant	factors.	We	expect	to	continue	the	practice	of	paying	regular	cash	dividends.	In	February	2017,	we increased	our	quarterly	dividend	payment	from	$0.78	to	$0.83	per	share,	a	6%	increase.

Issuances	of	debt	in	2016	consisted	of	floating	rate	senior	notes	totaling	$226	million,	two	series	of	fixed	rate	senior	notes	each	$500	million	and	euro denominated	fixed	rate	senior	note	totaling	€500	million	($549	million).	Issuances	of	debt	in	2015	consisted	of	floating	rate	senior	notes	totaling	$144	million,	euro denominated	floating	rate	senior	notes	totaling	€500	million	($547	million),	euro	denominated	fixed	rate	senior	notes	totaling	€700	million	($765	million)	and	facility bonds	associated	with	our	Philadelphia,	Pennsylvania	airport	facilities	totaling	$100	million.	The	remainder	consisted	primarily	of	commercial	paper.	Issuances	of	debt in	2014	consisted	primarily	of	commercial	paper.

In	2016,	there	were	no	repayments	of	fixed	rate	senior	notes	and	floating	rate	senior	notes.	Repayments	of	debt	in	2015	consisted	primarily	of	the	maturity	of	our $100	million	facility	bonds	associated	with	our	Philadelphia,	Pennsylvania	airport	facilities.	Repayments	of	debt	in	2014	consisted	primarily	of	the	maturity	of	our	$1.0 billion	senior	fixed	rate	notes	in	April	2014.	The	remaining	repayments	of	debt	during	the	2014	through	2016	time	period	included	paydowns	of	commercial	paper	and scheduled	principal	payments	on	our	capitalized	lease	obligations.	We	consider	the	overall	fixed	and	floating	interest	rate	mix	of	our	portfolio	and	the	related	overall	cost of	borrowing	when	planning	for	future	issuances	and	non-scheduled	repayments	of	debt.

The	amount	of	commercial	paper	outstanding	fluctuates	throughout	the	year	based	on	daily	liquidity	needs.	The	following	is	a	summary	of	our	commercial	paper program	(amount	in	millions):

|  | Outstanding	balance<br>at	year-end | Outstanding	balance<br>at	year-end | Outstanding	balance<br>at	year-end | Average	balance<br>outstanding | Average	balance<br>outstanding | Average	interest	rate |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| 2016 |  |  |  |  |  |  |
| USD | $2,406 | $2,406 | \t $2,406 | \t $1,838 | \t $1,838 | 0.44\t% |
| EUR | €801 | €801 | \t $844 | \t €776 | \t $817 | (0.28)% |
| GBP | £ | — \t $ | — \t £ | 94 | \t $116 | 0.5\t% |

The	variation	in	cash	received	from	common	stock	issuances	was	primarily	due	to	the	level	of	stock	option	exercises	by	employees	in	the	2014	through	2016 period.

The	cash	outflows	in	other	financing	activities	were	impacted	by	several	factors.	Net	cash	outflows	from	the	premium	payments	and	settlements	of	capped	call options	for	the	purchase	of	UPS	class	B	shares	were	$(54),	$(17)	and	$(47)	million	for	2016,	2015	and	2014,	respectively.	Cash	outflows	related	to	the	repurchase	of shares	to	satisfy	tax	withholding	obligations	on	vested	employee	stock	awards	were	$167,	$217,	and	$224	million	for	2016,	2015	and	2014,	respectively.

# Sources	of	Credit

See	note	8	to	the	audited	consolidated	financial	statements	for	a	discussion	of	our	available	credit	and	debt	covenants.

# Guarantees	and	Other	Off-Balance	Sheet	Arrangements

We	do	not	have	guarantees	or	other	off-balance	sheet	financing	arrangements,	including	variable	interest	entities,	which	we	believe	could	have	a	material	impact on	financial	condition	or	liquidity.

# Contractual	Commitments

We	have	contractual	obligations	and	commitments	in	the	form	of	capital	leases,	operating	leases,	debt	obligations,	purchase	commitments	and	certain	other liabilities.	We	intend	to	satisfy	these	obligations	through	the	use	of	cash	flow	from	operations.	The	following	table	summarizes	the	expected	cash	outflow	to	satisfy	our contractual	obligations	and	commitments	as	of	December	31,	2016	(in	millions):

| Commitment	Type | 2017 | 2018 | 2019 | 2020 | 2021 | After	2021 | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Capital\tLeases | $72 | $70 | $62 | $56 | $39 | $370 | $669 |
| Operating\tLeases | 368 | 302 | 221 | 168 | 111 | 300 | 1,470 |
| Debt\tPrincipal | 3,635 | 756 | 1,001 | 528 | 1,501 | 8,136 | 15,557 |
| Debt\tInterest | 362 | 345 | 315 | 286 | 273 | 4,302 | 5,883 |
| Purchase\tCommitments | 1,358 | 1,151 | 758 | 286 | 17 | 45 | 3,615 |
| Pension\tFundings | 2,291 | — | — | — | — | — | 2,291 |
| Other\tLiabilities | 10 | 5 | — | — | — | — | 15 |
| Total | $8,096 | $2,629 | $2,357 | $1,324 | $1,941 | $13,153 | $29,500 |

Our	capital	lease	obligations	relate	primarily	to	leases	on	aircraft.	Capital	leases,	operating	leases,	and	purchase	commitments,	as	well	as	our	debt	principal obligations,	are	discussed	further	in	note	8	to	our	consolidated	financial	statements.	The	amount	of	interest	on	our	debt	was	calculated	as	the	contractual	interest payments	due	on	our	fixed-rate	debt,	in	addition	to	interest	on	variable	rate	debt	that	was	calculated	based	on	interest	rates	as	of	December	31,	2016.	The	calculations	of debt	interest	take	into	account	the	effect	of	interest	rate	swap	agreements.	For	debt	denominated	in	a	foreign	currency,	the	U.S.	Dollar	equivalent	principal	amount	of	the debt	at	the	end	of	the	year	was	used	as	the	basis	to	calculate	future	interest	payments.

Purchase	commitments	represent	contractual	agreements	to	purchase	assets,	goods	or	services	that	are	legally	binding,	including	contracts	for	aircraft,	construction of	new	or	expanded	facilities	and	orders	for	technology	equipment	and	vehicles.	As	of	December	31,	2016,	we	have	firm	commitments	to	purchase	14	new	Boeing	747- 8F	cargo	aircraft.	The	14	aircraft	are	to	be	delivered	between	2017	and	2020.	Options	for	14	additional	747-8F	cargo	aircraft	are	also	included	in	the	contract,	but	are	not included	in	the	commitment	table	above.

Pension	fundings	represent	a	voluntary	contribution	for	2017.	There	are	no	anticipated	required	minimum	cash	contributions	to	our	qualified	U.S.	pension	plans (these	plans	are	discussed	further	in	note	4	to	the	consolidated	financial	statements).	The	amount	of	any	minimum	funding	requirement,	as	applicable,	for	these	plans could	change	significantly	in	future	periods,	depending	on	many	factors,	including	future	plan	asset	returns,	discount	rates	and	changes	to	pension	plan	funding regulations.	A	decline	in	discount	rates	or	a	sustained	significant	decline	in	the	world	equity	or	bond	markets	could	result	in	our	domestic	pension	plans	being	subject	to significantly	higher	minimum	funding	requirements.	Actual	contributions	made	in	future	years	could	materially	differ	from	the	amounts	shown	in	the	table	above,	and consequently	required	minimum	contributions	beyond	2019	cannot	be	reasonably	estimated.

As	discussed	in	note	5	to	our	consolidated	financial	statements,	we	are	not	currently	subject	to	any	minimum	contributions	or	surcharges	with	respect	to	the multiemployer	pension	and	health	and	welfare	plans	in	which	we	participate.	Contribution	rates	to	these	multiemployer	pension	and	health	and	welfare	plans	are established	through	the	collective	bargaining	process.	As	we	are	not	subject	to	any	minimum	contribution	levels,	we	have	not	included	any	amounts	in	the	contractual commitments	table	with	respect	to	these	multiemployer	plans.

The	contractual	payments	due	for	"other	liabilities"	primarily	include	commitment	payments	related	to	our	investment	in	certain	partnerships.	The	table	above does	not	include	approximately	$200	million	of	liabilities	for	uncertain	tax	positions	because	we	are	uncertain	if	or	when	such	amounts	will	ultimately	be	settled	in	cash. Uncertain	tax	positions	are	further	discussed	in	note	13	to	the	consolidated	financial	statements.

As	of	December	31,	2016,	we	had	outstanding	letters	of	credit	totaling	approximately	$1.89	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,	2016,	we	had	$730	million	of surety	bonds	written.	As	of	December	31,	2016,	we	had	unfunded	loan	commitments	totaling	$149	million	associated	with	UPS	Capital.

We	believe	that	funds	from	operations	and	borrowing	programs	will	provide	adequate	sources	of	liquidity	and	capital	resources	to	meet	our	expected	long-term needs	for	the	operation	of	our	business,	including	anticipated	capital	expenditures,	for	the	foreseeable	future.

# Contingencies

See	note	4	to	the	audited	consolidated	financial	statements	for	a	discussion	of	pension	related	matters	and	note	9	for	a	discussion	of	judicial	proceedings	and	other matters	arising	from	the	conduct	of	our	business	activities.

# Collective	Bargaining	Agreements

# Status	of	Collective	Bargaining	Agreements

As	of	December	31,	2016,	we	had	approximately	268,000	employees	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with local	unions	affiliated	with	the	Teamsters.	During	2014,	the	Teamsters	ratified	a	new	national	master	agreement	("NMA")	with	UPS	that	will	expire	on	July	31,	2018. The	economic	provisions	in	the	NMA	included	wage	rate	increases,	as	well	as	increased	contribution	rates	for	healthcare	and	pension	benefits.	Most	of	these	economic provisions	were	retroactive	to	August	1,	2013,	which	was	the	effective	date	of	the	NMA.	In	the	second	quarter	of	2014,	we	remitted	$278	million	for	these	retroactive economic	benefits;	this	payment	had	an	immaterial	impact	on	net	income,	as	these	retroactive	economic	benefits	had	been	accrued	since	the	July	31,	2013	expiration	of the	prior	agreement.

In	addition	to	the	retroactive	economic	provisions	of	the	NMA,	there	were	certain	changes	to	the	delivery	of	healthcare	benefits	that	were	effective	at	various dates.	These	changes	impact	approximately	36,000	full-time	and	73,000	part-time	active	employees	covered	by	the	NMA	and	the	UPS	Freight	collective	bargaining agreement	(collectively	referred	to	as	the	"NMA	Group"),	as	well	as	approximately	16,000	employees	covered	by	other	collective	bargaining	agreements	(the	"Non- NMA	Group").	These	provisions	are	discussed	further	below	in	the	"Changes	to	the	Delivery	of	Active	and	Postretirement	Healthcare	Benefits"	section.

We	have	approximately	2,600	pilots	who	are	employed	under	a	collective	bargaining	agreement	with	the	Independent	Pilots	Association	("IPA"),	which	became amendable	at	the	end	of	2011.	On	August	31,	2016,	the	IPA	members	voted	to	ratify	a	new	five-year	labor	contract.	Terms	of	the	agreement	became	effective	September 1,	2016	and	run	through	September	1,	2021.	The	economic	provisions	in	the	agreement	included	pay	increases,	a	signing	bonus	and	enhanced	pension	benefits.

# Multiemployer	Benefit	Plans

We	contribute	to	a	number	of	multiemployer	defined	benefit	and	health	and	welfare	plans	under	terms	of	collective	bargaining	agreements	that	cover	our	union represented	employees.	Our	current	collective	bargaining	agreements	set	forth	the	annual	contribution	increases	allotted	to	the	plans	that	we	participate	in,	and	we	are	in compliance	with	these	contribution	rates.	These	limitations	will	remain	in	effect	throughout	the	terms	of	the	existing	collective	bargaining	agreements.

# Changes	to	the	Delivery	of	Active	and	Postretirement	Healthcare	Benefits

Prior	to	ratification,	the	NMA	Group	and	Non-NMA	Group	employees	received	their	healthcare	benefits	through	UPS-sponsored	active	and	postretirement	health and	welfare	benefit	plans.	Effective	June	1,	2014,	we	ceased	providing	healthcare	benefits	to	active	NMA	Group	employees	through	these	UPS-sponsored	benefit	plans, and	the	responsibility	for	providing	healthcare	benefits	for	active	employees	was	assumed	by	three	separate	multiemployer	healthcare	funds	(the	"Funds").	The responsibility	for	providing	healthcare	benefits	for	the	active	Non-NMA	Group	employees	was	also	assumed	by	the	Funds	on	various	dates	up	to	January	1,	2015, depending	on	the	ratification	date	of	the	applicable	collective	bargaining	agreement.	We	will	make	contributions	to	the	Funds	based	on	negotiated	fixed	hourly	or monthly	contribution	rates	for	the	duration	of	the	NMA	and	other	applicable	collective	bargaining	agreements.

Additionally,	the	Funds	assumed	the	obligation	to	provide	postretirement	healthcare	benefits	to	the	employees	in	the	NMA	Group	who	retire	on	or	after	January	1, 2014.	The	postretirement	healthcare	benefit	obligation	for	the	employees	in	the	Non-NMA	Group	was	assumed	by	the	Funds	for	employees	retiring	on	or	after	January	1, 2014	or	January	1,	2015,	depending	on	the	applicable	collective	bargaining	agreement.	In	exchange	for	the	assumption	of	the	obligation	to	provide	postretirement healthcare	benefits	to	the	NMA	Group	and	Non-NMA	Group,	we	transferred	cash	totaling	$2.271	billion	to	the	Funds	in	the	second	quarter	of	2014.	UPS-sponsored health	and	welfare	benefit	plans	retained	responsibility	for	providing	postretirement	healthcare	coverage	for	employees	in	the	NMA	Group	who	retired	from	UPS	prior to	January	1,	2014,	and	for	employees	in	the	Non-NMA	Group	who	retire	from	UPS	prior	to	the	January	1,	2014	or	January	1,	2015	effective	date	in	the	applicable collective	bargaining	agreement.

# Accounting	Impact	of	Health	and	Welfare	Plan	Changes

# Income	Statement	Impact:

We	recorded	a	pre-tax	charge	of	$1.066	billion	($665	million	after-tax)	in	the	second	quarter	of	2014	for	the	health	and	welfare	plan	changes	described	above.	The components	of	this	charge,	which	was	included	in	"compensation	and	benefits"	expense	in	the	statement	of	consolidated	income,	are	as	follows:

•Partial	Plan	Curtailment:	We	recorded	a	$112	million	pre-tax	curtailment	loss	due	to	the	elimination	of	future	service	benefit	accruals.	This	curtailment	loss represents	the	accelerated	recognition	of	unamortized	prior	service	costs.

•Remeasurement	of	Postretirement	Obligation:	We	recorded	a	$746	million	pre-tax	loss	due	to	the	remeasurement	of	the	postretirement	benefit	obligations	of the	affected	UPS-sponsored	health	and	welfare	benefit	plans.

•Settlement:	We	recorded	a	$208	million	pre-tax	settlement	loss,	which	represents	the	recognition	of	unamortized	actuarial	losses	associated	with	the postretirement	obligation	for	the	NMA	Group.

We	recorded	an	additional	pre-tax	charge	of	$36	million	($22	million	after-tax)	in	the	fourth	quarter	of	2014	upon	ratification	of	the	collective	bargaining agreements	covering	the	Non-NMA	Group,	related	to	the	remeasurement	and	settlement	of	the	postretirement	benefit	obligation	associated	with	those	employees.

# Balance	Sheet	and	Cash	Flow	Impact:

During	2014,	as	part	of	the	health	and	welfare	plan	changes	described	previously,	we	transferred	cash	totaling	$2.271	billion	to	the	Funds,	which	was	accounted	for as	a	settlement	of	our	postretirement	benefit	obligations.	We	received	approximately	$854	million	of	cash	tax	benefits	(through	reduced	U.S.	Federal	and	state	quarterly income	tax	payments)	in	2014.

For	NMA	Group	employees	who	retired	prior	to	January	1,	2014	and	remained	with	the	UPS-sponsored	health	and	welfare	plans,	the	changes	to	the	contributions, benefits	and	cost	sharing	provisions	in	these	plans	resulted	in	an	increase	in	the	postretirement	benefit	obligation,	and	a	corresponding	decrease	in	pre-tax	accumulated other	comprehensive	income,	of	$13	million	upon	ratification.

# Anticipated	Benefits	of	Health	and	Welfare	Plan	Changes

We	believe	we	have	obtained	several	benefits	as	a	result	of	these	health	and	welfare	plan	changes,	including:

•Liability	Transfer:	We	have	removed	a	significant	liability	from	our	balance	sheet,	which	helps	to	reduce	uncertainty	around	potential	changes	to healthcare	laws	and	regulations,	control	the	volatility	of	healthcare	inflation,	and	removes	the	risk	associated	with	providing	future	retiree	healthcare.

•Negotiated	Healthcare	Costs:	Using	the	model	of	a	defined	contribution	plan	allows	us	to	negotiate	our	contributions	towards	healthcare	costs	going forward,	and	provides	more	certainty	of	costs	over	the	contract	period.

Minimize	Impact	of	Healthcare	Law	Changes:	Multiemployer	plans	have	several	advantages	under	the	Patient	Protection	and	Affordable	Care	Act	of 2010,	including	reduced	transitional	fees	and	the	ability	to	limit	the	impact	of	future	excise	taxes.

Mitigate	Demographic	Issues:	This	helps	reduce	the	potential	impact	of	increased	early	retirements	by	employees.

# New	Accounting	Pronouncements

# Recently	Adopted	Accounting	Standards

See	note	1	to	the	audited	consolidated	financial	statements	for	a	discussion	of	recently	adopted	accounting	standards.

# Accounting	Standards	Issued	But	Not	Yet	Effective

See	note	1	to	the	audited	consolidated	financial	statements	for	a	discussion	of	accounting	standards	issued,	but	not	yet	effective.

# Critical	Accounting	Policies	and	Estimates

Our	discussion	and	analysis	of	our	financial	condition	and	results	of	operations	are	based	on	our	consolidated	financial	statements,	which	are	prepared	in accordance	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	As	indicated	in	note	1	to	our	consolidated	financial	statements,	the	amounts	of assets,	liabilities,	revenue	and	expenses	reported	in	our	financial	statements	are	affected	by	estimates	and	judgments	that	are	necessary	to	comply	with	generally accepted	accounting	principles.	We	base	our	estimates	on	prior	experience	and	other	assumptions	that	we	consider	reasonable	to	our	circumstances.	Actual	results	could differ	from	our	estimates,	which	would	affect	the	related	amounts	reported	in	our	consolidated	financial	statements.	While	estimates	and	judgments	are	applied	in arriving	at	many	reported	amounts,	we	believe	that	the	following	matters	may	involve	a	higher	degree	of	judgment	and	complexity.

As	discussed	in	note	9	to	our	consolidated	financial	statements,	we	are	involved	in	various	legal	proceedings	and	contingencies.	The	events	that	may	impact	our contingent	liabilities	are	often	unique	and	generally	are	not	predictable.	At	the	time	a	contingency	is	identified,	we	consider	all	relevant	facts	as	part	of	our	evaluation. We	record	a	liability	for	a	loss	when	the	loss	is	probable	of	occurring	and	reasonably	estimable.	Events	may	arise	that	were	not	anticipated	and	the	outcome	of	a contingency	may	result	in	a	loss	to	us	that	differs	from	our	previously	estimated	liability.	These	factors	could	result	in	a	material	difference	between	estimated	and	actual operating	results.	Contingent	losses	that	are	probable	and	estimable,	excluding	those	related	to	income	taxes	and	self-insurance	which	are	discussed	further	below,	were not	material	to	our	financial	position	or	results	of	operations	as	of,	and	for	the	year	ended,	December	31,	2016.	In	addition,	we	have	certain	contingent	liabilities	that have	not	been	recognized	as	of	December	31,	2016,	because	a	loss	is	not	reasonably	estimable.

# Goodwill	and	Intangible	Impairment

We	perform	impairment	testing	of	goodwill	for	each	of	our	reporting	units	on	an	annual	basis.	Our	reporting	units	are	comprised	of	the	U.S.	Domestic	Package, Europe,	Asia,	Americas	and	ISMEA	(Indian	Subcontinent,	Middle	East	and	Africa)	reporting	units	in	the	International	Package	reporting	segment,	and	the	Forwarding, Logistics,	UPS	Mail	Innovations,	UPS	Freight,	The	UPS	Store,	UPS	Capital,	Marken	and	Coyote	Logistics	reporting	units	in	the	Supply	Chain	&	Freight	reporting segment.	Our	annual	goodwill	impairment	testing	date	is	October	1st	for	each	reporting	unit	owned	at	the	testing	date.	In	assessing	goodwill	for	impairment,	we	initially evaluate	qualitative	factors	to	determine	if	it	is	more	likely	than	not	that	the	fair	value	of	a	reporting	unit	is	less	than	its	carrying	amount.	If	the	qualitative	assessment	is not	conclusive	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	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.

We	primarily	determine	the	fair	value	of	our	reporting	units	using	a	discounted	cash	flow	model	("DCF	model")	and	supplement	this	with	observable	valuation multiples	for	comparable	companies,	as	appropriate.	The	completion	of	the	DCF	model	requires	that	we	make	a	number	of	significant	assumptions	to	produce	an estimate	of	future	cash	flows.	These	assumptions	include	projections	of	future	revenue,	costs,	capital	expenditures	and	working	capital	changes.	In	addition,	we	make assumptions	about	the	estimated	cost	of	capital	and	other	relevant	variables,	as	required,	in	estimating	the	fair	value	of	our	reporting	units.	The	projections	that	we	use	in our	DCF	model	are	updated	annually	and	will	change	over	time	based	on	the	historical	performance	and	changing	business	conditions	for	each	of	our	reporting	units. The	determination	of	whether	goodwill	is	impaired	involves	a	significant	level	of	judgment	in	these	assumptions,	and	changes	in	our	business	strategy,	government regulations,	or	economic	or	market	conditions	could	significantly	impact	these	judgments.	We	routinely	monitor	market	conditions	and	other	factors	to	determine	if interim	impairment	tests	are	necessary.	If	impairment	indicators	are	present	in	future	periods,	the	resulting	impairment	charges	could	have	a	material	impact	on	our results	of	operations.

None	of	the	reporting	units	incurred	any	goodwill	impairment	charges	in	2016,	2015	or	2014.	Changes	in	our	forecasts	could	cause	carrying	values	of	our reporting	units	to	exceed	their	fair	values	in	future	periods,	potentially	resulting	in	a	goodwill	impairment	charge.	A	10%	decrease	in	the	estimated	fair	value	for	any	of our	reporting	units	as	of	our	most	recent	goodwill	testing	date	(October	1,	2016)	would	not	result	in	a	goodwill	impairment	charge.

A	trade	name	with	a	carrying	value	of	$200	million	and	licenses	with	a	carrying	value	of	$4	million	as	of	December	31,	2016	are	considered	to	be	indefinite-lived intangibles,	and	therefore	are	not	amortized.	Impairment	tests	for	indefinite-lived	intangibles	are	performed	on	an	annual	basis.	We	determined	that	the	income	approach, specifically	the	relief	from	royalty	method,	is	the	most	appropriate	valuation	method	for	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.	This	valuation	approach	requires	that	we	make	a	number	of	assumptions	to	estimate	fair	value.	These	assumptions include	projections	of	future	revenues,	market	royalty	rates,	tax	rates,	discount	rates	and	other	relevant	variables.	The	projections	we	use	in	the	model	are	updated annually	and	will	change	over	time	based	on	the	historical	performance	and	changing	business	conditions.

All	of	our	remaining	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	indicates	that	the	carrying	value	of	the	intangible	may	not	be	recoverable	based	on	the undiscounted	future	cash	flows	of	the	intangible.	If	the	carrying	amount	of	the	intangible	is	determined	not	to	be	recoverable,	a	write-down	to	fair	value	is	recorded.	Fair values	are	determined	based	on	a	DCF	model.	There	were	no	impairments	of	any	indefinite-lived	or	finite-lived	intangible	assets	in	2016,	2015	or	2014.

# Self-Insurance	Accruals

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

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	health	care	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.

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.	Actual	results may	differ	from	these	estimates	and,	therefore,	produce	a	material	difference	between	estimated	and	actual	operating	results.

# Pension	and	Postretirement	Medical	Benefits

Our	pension	and	other	postretirement	benefit	costs	are	calculated	using	various	actuarial	assumptions	and	methodologies.	These	assumptions	include	discount rates,	health	care	cost	trend	rates,	inflation,	compensation	increase	rates,	expected	returns	on	plan	assets,	mortality	rates	and	other	factors.	The	assumptions	utilized	in recording	the	obligations	under	our	plans	represent	our	best	estimates,	and	we	believe	that	they	are	reasonable,	based	on	information	as	to	historical	experience	and performance	as	well	as	other	factors	that	might	cause	future	expectations	to	differ	from	past	trends.

Differences	in	actual	experience	or	changes	in	assumptions	may	affect	our	pension	and	other	postretirement	obligations	and	future	expense.	The	primary	factors contributing	to	actuarial	gains	and	losses	each	year	are	(1)	changes	in	the	discount	rate	used	to	value	pension	and	postretirement	benefit	obligations	as	of	the measurement	date,	(2)	differences	between	the	expected	and	the	actual	return	on	plan	assets,	(3)	changes	in	demographic	assumptions	including	mortality,	(4)	participant experience	different	from	demographic	assumptions	and	(5)	changes	in	coordinating	benefits	with	plans	not	sponsored	by	UPS.

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	(herein referred	to	as	"ongoing	net	periodic	benefit	cost"),	primarily	service	and	interest	costs	and	the	expected	return	on	plan	assets,	are	reported	on	a	quarterly	basis.

The	following	sensitivity	analysis	shows	the	impact	of	a	25	basis	point	change	in	the	assumed	discount	rate,	return	on	assets,	and	healthcare	cost	trend	rate	for	our pension	and	postretirement	benefit	plans,	and	the	resulting	increase	(decrease)	on	our	obligations	and	expense	as	of,	and	for	the	year	ended,	December	31,	2016	(in millions).

| Pension	Plans | 25	Basis	Point<br>Increase | 25	Basis	Point<br>Decrease |
| :--- | :--- | :--- |
| Discount\tRate: |  |  |
| Effect\ton\tongoing\tnet\tperiodic\tbenefit\tcost | $(51) | $59 |
| Effect\ton\tnet\tperiodic\tbenefit\tcost\tfor\tamounts\trecognized\toutside\tthe\t10%\tcorridor | (1,496) | 1,603 |
| Effect\ton\tprojected\tbenefit\tobligation | (1,674) | 1,782 |
| Return\ton\tAssets: |  |  |
| Effect\ton\tongoing\tnet\tperiodic\tbenefit\tcost(1) | (74) | 74 |
| Effect\ton\tnet\tperiodic\tbenefit\tcost\tfor\tamounts\trecognized\toutside\tthe\t10%\tcorridor(2) | (73) | 73 |
| Postretirement\tMedical\tPlans |  |  |
| Discount\tRate: |  |  |
| Effect\ton\tongoing\tnet\tperiodic\tbenefit\tcost | 3 | (2) |
| Effect\ton\tnet\tperiodic\tbenefit\tcost\tfor\tamounts\trecognized\toutside\tthe\t10%\tcorridor | (11) | 13 |
| Effect\ton\taccumulated\tpostretirement\tbenefit\tobligation | (59) | 70 |
| Health\tCare\tCost\tTrend\tRate: |  |  |
| Effect\ton\tongoing\tnet\tperiodic\tbenefit\tcost | 1 | (1) |
| Effect\ton\tnet\tperiodic\tbenefit\tcost\tfor\tamounts\trecognized\toutside\tthe\t10%\tcorridor | 11 | (10) |
| Effect\ton\taccumulated\tpostretirement\tbenefit\tobligation | 16 | (18) |

(2) Amount	calculated	based	on	25	basis	point	increase	/	decrease	in	the	actual	return	on	assets.

# Pension	Backstop

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

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

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

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

We	account	for	this	potential	obligation	under	Accounting	Standards	Codification	Topic	715	-	Compensation	-	Retirement	Benefits	("ASC	715").	Under	ASC	715 we	are	required	to	provide	a	best	estimate	of	various	actuarial	assumptions,	including	the	eventual	outcome	this	matter,	in	measuring	our	pension	benefit	obligation	at the	December	31st	measurement	date.	While	we	currently	believe	the	most	likely	solution	to	this	matter	and	the	broader	systemic	problems	facing	multi-employer pension	plans	is	intervention	by	the	federal	government,	ASC	715	does	not	permit	anticipation	of	changes	in	law	in	making	a	best	estimate	of	pension	liabilities.	Our best	estimate	as	of	the	measurement	date	of	December	31,	2016	does	not	incorporate	this	solution.	Rather,	our	best	estimate	of	the	next	most	likely	outcome	to	resolve the	CSPF's	solvency	concerns	is	that	the	CSPF	will	make	another	MPRA	filing	to	forestall	insolvency	without	reducing	benefits	to	the	UPS	Transfer	Group.	If	the	CSPF attempts	to	reduce	benefits	for	the	UPS	Transfer	Group	under	a	MPRA	filing	we	would	be	in	a	strong	legal	position	to	prevent	that	from	occurring	given	that	these benefits	cannot	be	reduced	without	our	consent	and	such	a	reduction,	without	first	exhausting	reductions	to	other	groups	in	the	CSPF,	would	be	contrary	to	the	statute. Accordingly,	our	best	estimate	as	of	the	measurement	date	of	December	31,	2016	is	that	there	is	no	liability	to	be	recognized	for	additional	coordinating	benefits	of	the UPS/IBT	Plan.	However,	the	projected	benefit	obligation	could	materially	increase	as	these	uncertainties	are	resolved.	We	will	continue	to	assess	the	impact	of	these uncertainties	on	the	projected	benefit	obligation	of	the	UPS/IBT	Plan	in	accordance	with	ASC	715.

# Depreciation,	Residual	Value	and	Impairment	of	Fixed	Assets

As	of	December	31,	2016,	we	had	$18.8	billion	of	net	fixed	assets,	the	most	significant	category	of	which	is	aircraft.	In	accounting	for	fixed	assets,	we	make estimates	about	the	expected	useful	lives	and	the	expected	residual	values	of	the	assets,	and	the	potential	for	impairment	based	on	the	fair	values	of	the	assets	and	the cash	flows	generated	by	these	assets.

In	estimating	the	lives	and	expected	residual	values	of	aircraft,	we	have	relied	upon	actual	experience	with	the	same	or	similar	aircraft	types.	Subsequent	revisions to	these	estimates	could	be	caused	by	changes	to	our	maintenance	program,	changes	in	the	utilization	of	the	aircraft,	governmental	regulations	on	aging	aircraft	and changing	market	prices	of	new	and	used	aircraft	of	the	same	or	similar	types.	We	periodically	evaluate	these	estimates	and	assumptions,	and	adjust	the	estimates	and assumptions	as	necessary.	Adjustments	to	the	expected	lives	and	residual	values	are	accounted	for	on	a	prospective	basis	through	depreciation	expense.

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.	The	circumstances	that	would	indicate	potential	impairment	may	include,	but	are	not limited	to,	a	significant	change	in	the	extent	to	which	an	asset	is	utilized	and	operating	or	cash	flow	losses	associated	with	the	use	of	the	asset.	In	estimating	cash	flows, we	project	future	volume	levels	for	our	different	air	express	products	in	all	geographic	regions	in	which	we	do	business.	Adverse	changes	in	these	volume	forecasts,	or	a shortfall	of	our	actual	volume	compared	with	our	projections,	could	result	in	our	current	aircraft	capacity	exceeding	current	or	projected	demand.	This	situation	could lead	to	an	excess	of	a	particular	aircraft	type,	resulting	in	an	aircraft	impairment	charge	or	a	reduction	of	the	expected	life	of	an	aircraft	type	(thus	resulting	in	increased depreciation	expense).

There	were	no	impairment	charges	on	our	property,	plant	and	equipment	during	2016,	2015	and	2014.

# Fair	Value	Measurements

In	the	normal	course	of	business,	we	hold	and	issue	financial	instruments	that	contain	elements	of	market	risk,	including	derivatives,	marketable	securities,	finance receivables,	pension	assets,	other	investments	and	debt.	Certain	of	these	financial	instruments	are	required	to	be	recorded	at	fair	value,	principally	derivatives, marketable	securities,	pension	assets	and	certain	other	investments.	Fair	values	are	based	on	listed	market	prices,	when	such	prices	are	available.	To	the	extent	that	listed market	prices	are	not	available,	fair	value	is	determined	based	on	other	relevant	factors,	including	dealer	price	quotations.	Certain	financial	instruments,	including	over- the-counter	derivative	instruments,	are	valued	using	pricing	models	that	consider,	among	other	factors,	contractual	and	market	prices,	correlations,	time	value,	credit spreads	and	yield	curve	volatility	factors.	Changes	in	the	fixed	income,	foreign	exchange	and	commodity	markets	will	impact	our	estimates	of	fair	value	in	the	future, potentially	affecting	our	results	of	operations.	A	quantitative	sensitivity	analysis	of	our	exposure	to	changes	in	commodity	prices,	foreign	currency	exchange	rates	and interest	rates	is	presented	in	the	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk"	section	of	this	report.

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,	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.

# Income	Taxes

We	make	certain	estimates	and	judgments	in	determining	income	tax	expense	for	financial	statement	purposes.	These	estimates	and	judgments	occur	in	the calculation	of	income	by	legal	entity	and	jurisdiction,	tax	credits,	benefits,	and	deductions,	and	in	the	calculation	of	deferred	tax	assets	and	liabilities,	which	arise	from differences	in	the	timing	of	recognition	of	revenue	and	expense	for	tax	and	financial	statement	purposes,	as	well	as	tax,	interest	and	penalties	related	to	uncertain	tax positions.	Significant	changes	to	these	estimates	may	result	in	an	increase	or	decrease	to	our	tax	provision	in	a	subsequent	period.

We	assess	the	likelihood	that	we	will	be	able	to	recover	our	deferred	tax	assets.	If	recovery	is	not	likely,	we	must	increase	our	provision	for	taxes	by	recording	a valuation	allowance	against	the	deferred	tax	assets	that	we	estimate	will	not	ultimately	be	recoverable.	We	believe	that	we	will	ultimately	recover	a	substantial	majority of	the	deferred	tax	assets	recorded	on	our	consolidated	balance	sheets.	However,	should	there	be	a	change	in	our	ability	to	recover	our	deferred	tax	assets,	our	tax provision	would	increase	in	the	period	in	which	we	determined	that	the	recovery	was	not	likely.

The	calculation	of	our	tax	liabilities	involves	dealing	with	uncertainties	in	the	application	of	complex	tax	regulations.	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	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.

# Allowance	for	Doubtful	Accounts

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.	Deterioration	in macroeconomic	variables	could	result	in	our	ultimate	loss	exposures	on	our	accounts	receivable	being	significantly	higher	than	what	we	have	currently	estimated	and reserved	for	in	our	allowance	for	doubtful	accounts.	Our	total	allowance	for	doubtful	accounts	as	of	December	31,	2016	and	2015	was	$102	and	$118	million, respectively.	Our	total	provision	for	doubtful	accounts	charged	to	expense	during	the	years	ended	December	31,	2016,	2015	and	2014	was	$116,	$121	and	$143	million, respectively.

# Item	7A. Quantitative	and	Qualitative	Disclosures	about	Market

We	are	exposed	to	market	risk	from	changes	in	certain	commodity	prices,	foreign	currency	exchange	rates	and	interest	rates.	All	of	these	market	risks	arise	in	the normal	course	of	business,	as	we	do	not	engage	in	speculative	trading	activities.	In	order	to	manage	the	risk	arising	from	these	exposures,	we	utilize	a	variety	of commodity,	foreign	exchange	and	interest	rate	forward	contracts,	options	and	swaps.	A	discussion	of	our	accounting	policies	for	derivative	instruments	and	further disclosures	are	provided	in	note	15	to	the	consolidated	financial	statements.

# Commodity	Price	Risk

We	are	exposed	to	changes	in	the	prices	of	refined	fuels,	principally	jet-A,	diesel	and	unleaded	gasoline,	as	well	as	changes	in	the	price	of	natural	gas.	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. Additionally,	we	periodically	use	a	combination	of	option,	forward	and	futures	contracts	to	provide	partial	protection	from	changing	fuel	and	energy	prices.	As	of December	31,	2016	and	2015,	however,	we	had	no	commodity	contracts	outstanding.

# Foreign	Currency	Exchange	Risk

We	have	foreign	currency	risks	related	to	our	revenue,	operating	expenses	and	financing	transactions	in	currencies	other	than	the	local	currencies	in	which	we operate.	We	are	exposed	to	currency	risk	from	the	potential	changes	in	functional	currency	values	of	our	foreign	currency-denominated	assets,	liabilities	and	cash	flows. Our	most	significant	foreign	currency	exposures	relate	to	the	Euro,	British	Pound	Sterling,	Canadian	Dollar,	Chinese	Renminbi	and	Hong	Kong	Dollar.	We	use	forwards as	well	as	a	combination	of	purchased	and	written	options	to	hedge	forecasted	cash	flow	currency	exposures.	These	derivative	instruments	generally	cover	forecasted foreign	currency	exposures	for	periods	of	12	to	48	months.	We	also	utilize	forward	contracts	to	hedge	portions	of	our	anticipated	cash	settlements	of	intercompany transactions	subject	to	foreign	currency	remeasurement.

# Interest	Rate	Risk

We	have	issued	debt	instruments,	including	debt	associated	with	capital	leases,	that	accrue	expense	at	fixed	and	floating	rates	of	interest.	We	use	a	combination	of interest	rate	swaps	as	part	of	our	program	to	manage	the	fixed	and	floating	interest	rate	mix	of	our	total	debt	portfolio	and	related	overall	cost	of	borrowing.	The	notional amount,	interest	payment	and	maturity	dates	of	the	swaps	match	the	terms	of	the	associated	debt.	We	also	utilize	forward	starting	swaps	and	similar	instruments	to	lock in	all	or	a	portion	of	the	borrowing	cost	of	anticipated	debt	issuances.	Our	floating	rate	debt	and	interest	rate	swaps	subject	us	to	risk	resulting	from	changes	in	short- term	(primarily	LIBOR)	interest	rates.

We	also	are	subject	to	interest	rate	risk	with	respect	to	our	pension	and	postretirement	benefit	obligations,	as	changes	in	interest	rates	will	effectively	increase	or decrease	our	liabilities	associated	with	these	benefit	plans,	which	also	results	in	changes	to	the	amount	of	pension	and	postretirement	benefit	expense	recognized	in future	periods.

We	have	investments	in	debt	securities,	as	well	as	cash-equivalent	instruments,	some	of	which	accrue	income	at	variable	rates	of	interest.	Additionally,	we	hold	a portfolio	of	finance	receivables	that	accrue	income	at	fixed	and	floating	rates	of	interest.

# Sensitivity	Analysis

The	following	analysis	provides	quantitative	information	regarding	our	exposure	to	foreign	currency	exchange	risk,	interest	rate	risk	and	equity	price	risk embedded	in	our	existing	financial	instruments.	We	utilize	valuation	models	to	evaluate	the	sensitivity	of	the	fair	value	of	financial	instruments	with	exposure	to	market risk	that	assume	instantaneous,	parallel	shifts	in	exchange	rates,	interest	rate	yield	curves	and	commodity	and	equity	prices.	For	options	and	instruments	with	non-linear returns,	models	appropriate	to	the	instrument	are	utilized	to	determine	the	impact	of	market	shifts.

There	are	certain	limitations	inherent	in	the	sensitivity	analyses	presented,	primarily	due	to	the	assumption	that	exchange	rates	change	in	a	parallel	fashion	and	that interest	rates	change	instantaneously.	In	addition,	the	analyses	are	unable	to	reflect	the	complex	market	reactions	that	normally	would	arise	from	the	market	shifts modeled.	While	this	is	our	best	estimate	of	the	impact	of	the	specified	interest	rate	scenarios,	these	estimates	should	not	be	viewed	as	forecasts.	We	adjust	the	fixed	and floating	interest	rate	mix	of	our	interest	rate	sensitive	assets	and	liabilities	in	response	to	changes	in	market	conditions.

Additionally,	changes	in	the	fair	value	of	foreign	currency	derivatives	and	commodity	derivatives	are	offset	by	changes	in	the	cash	flows	of	the	underlying	hedged foreign	currency	and	commodity	transactions.

| (in	millions) | 2016 | 2015 |
| :--- | :--- | :--- |
| Change\tin\tFair\tValue: |  |  |
| Currency\tDerivatives(1) | $(437) | $(435) |
| Change\tin\tAnnual\tInterest\tExpense: |  |  |
| Variable\tRate\tDebt(2) | $49 | $44 |
| Interest\tRate\tDerivatives(2) | $58 | $66 |

(1) The	potential	change	in	fair	value	from	a	hypothetical	10%	weakening	of	the	U.S.	Dollar	against	local	currency	exchange	rates	across	all	maturities.

(2) The	potential	change	in	annual	interest	expense	resulting	from	a	hypothetical	100	basis	point	increase	in	short-term	interest	rates,	applied	to	our	variable	rate	debt	and	swap	instruments (excluding	hedges	of	anticipated	debt	issuances).

The	sensitivity	of	our	pension	and	postretirement	benefit	obligations	to	changes	in	interest	rates	is	quantified	in	"Critical	Accounting	Policies	and	Estimates".	The sensitivity	in	the	fair	value	and	interest	income	of	our	marketable	securities	and	finance	receivables	due	to	changes	in	interest	rates	was	not	material	as	of	December	31, 2016	and	2015.

# Item	8. Financial	Statements	and	Supplementary

| Report	of	Independent	Registered	Public	Accounting	Firm | 65 |
| :--- | :--- |
| Consolidated\tBalance\tSheets | 66 |
| Statements\tof\tConsolidated\tIncome | 67 |
| Statements\tof\tConsolidated\tComprehensive\tIncome | 67 |
| Statements\tof\tConsolidated\tCash\tFlows | 68 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 69 |
| Note\t1—Summary\tof\tAccounting\tPolicies | 69 |
| Note\t2—Cash\tand\tInvestments | 75 |
| Note\t3—Property,\tPlant\tand\tEquipment | 80 |
| Note\t4—Company-Sponsored\tEmployee\tBenefit\tPlans | 80 |
| Note\t5—Multiemployer\tEmployee\tBenefit\tPlans | 91 |
| Note\t6—Goodwill\tand\tIntangible\tAssets | 96 |
| Note\t7—Business\tAcquisitions | 98 |
| Note\t8—Debt\tand\tFinancing\tArrangements | 100 |
| Note\t9—Legal\tProceedings\tand\tContingencies | 105 |
| Note\t10—Shareowners'\tEquity | 107 |
| Note\t11—Stock-Based\tCompensation | 111 |
| Note\t12—Segment\tand\tGeographic\tInformation | 115 |
| Note\t13—Income\tTaxes | 118 |
| Note\t14—Earnings\tPer\tShare | 122 |
| Note\t15—Derivative\tInstruments\tand\tRisk\tManagement | 122 |
| Note\t16—Quarterly\tInformation\t(Unaudited) | 129 |

# Report	of	Independent	Registered	Public	Accounting	Firm

# Board	of	Directors	and	Shareowners

# Atlanta,	Georgia

We	have	audited	the	accompanying	consolidated	balance	sheets	of	United	Parcel	Service,	Inc.	and	subsidiaries	(the	"Company")	as	of	December	31,	2016	and 2015,	and	the	related	statements	of	consolidated	income,	consolidated	comprehensive	income,	and	consolidated	cash	flows	for	each	of	the	three	years	in	the	period	ended December	31,	2016.	These	financial	statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on	these	financial statements	based	on	our	audits.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on	a test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and	significant estimates	made	by	management,	as	well	as	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

In	our	opinion,	such	consolidated	financial	statements	present	fairly,	in	all	material	respects,	the	financial	position	of	United	Parcel	Service,	Inc.	and	subsidiaries at	December	31,	2016	and	2015,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2016,	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),	the	Company's	internal	control	over financial	reporting	as	of	December	31,	2016,	based	on	the	criteria	established	in	Internal	Control—Integrated	Framework	(2013)	issued	by	the	Committee	of	Sponsoring Organizations	of	the	Treadway	Commission	and	our	report	dated	February	20,	2017	expressed	an	unqualified	opinion	on	the	Company's	internal	control	over	financial reporting.

/s/	Deloitte	&	Touche	LLP

# CONSOLIDATED	BALANCE	SHEETS

# (In	millions)

| ASSETS | 2016 | 2015 |
| :--- | :--- | :--- |
| Current\tAssets: |  |  |
| Cash\tand\tcash\tequivalents | $3,476 | $2,730 |
| Marketable\tsecurities | 1,091 | 1,996 |
| Accounts\treceivable,\tnet | 7,695 | 7,134 |
| Other\tcurrent\tassets | 1,587 | 1,348 |
| Total\tCurrent\tAssets | 13,849 | 13,208 |
| Property,\tPlant\tand\tEquipment,\tNet | 18,800 | 18,352 |
| Goodwill | 3,757 | 3,419 |
| Intangible\tAssets,\tNet | 1,758 | 1,549 |
| Investments\tand\tRestricted\tCash | 476 | 473 |
| Deferred\tIncome\tTax\tAssets | 591 | 255 |
| Other\tNon-Current\tAssets | 1,146 | 1,055 |
| Total\tAssets | $40,377 | $38,311 |
| LIABILITIES\tAND\tSHAREOWNERS'\tEQUITY |  |  |
| Current\tLiabilities: |  |  |
| Current\tmaturities\tof\tlong-term\tdebt\tand\tcommercial\tpaper | $3,681 | $3,018 |
| Accounts\tpayable | 3,042 | 2,587 |
| Accrued\twages\tand\twithholdings | 2,317 | 2,253 |
| Hedge\tmargin\tliabilities | 575 | 717 |
| Self-insurance\treserves | 670 | 657 |
| Accrued\tgroup\twelfare\tand\tretirement\tplan\tcontributions | 598 | 525 |
| Other\tcurrent\tliabilities | 847 | 939 |
| Total\tCurrent\tLiabilities | 11,730 | 10,696 |
| Long-Term\tDebt | 12,394 | 11,316 |
| Pension\tand\tPostretirement\tBenefit\tObligations | 12,694 | 10,638 |
| Deferred\tIncome\tTax\tLiabilities | 112 | 115 |
| Self-Insurance\tReserves | 1,794 | 1,831 |
| Other\tNon-Current\tLiabilities | 1,224 | 1,224 |
| Shareowners'\tEquity: |  |  |
| Class\tA\tcommon\tstock\t(180\tand\t194\tshares\tissued\tin\t2016\tand\t2015) | 2 | 2 |
| Class\tB\tcommon\tstock\t(689\tand\t693\tshares\tissued\tin\t2016\tand\t2015) | 7 | 7 |
| Additional\tpaid-in\tcapital | — | — |
| Retained\tearnings | 4,879 | 6,001 |
| Accumulated\tother\tcomprehensive\tloss | (4,483) | (3,540) |
| Deferred\tcompensation\tobligations | 45 | 51 |
| Less:\tTreasury\tstock\t(1\tshare\tin\t2016\tand\t2015) | (45) | (51) |
| Total\tEquity\tfor\tControlling\tInterests | 405 | 2,470 |
| Noncontrolling\tInterests | 24 | 21 |
| Total\tShareowners'\tEquity | 429 | 2,491 |
| Total\tLiabilities\tand\tShareowners'\tEquity | $40,377 | $38,311 |

# STATEMENTS	OF	CONSOLIDATED	INCOME

# (In	millions,	except	per	share	amounts)

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Revenue | $60,906 | $58,363 | $58,232 |
| Operating\tExpenses: |  |  |  |
| Compensation\tand\tbenefits | 34,770 | 31,028 | 32,045 |
| Repairs\tand\tmaintenance | 1,538 | 1,400 | 1,371 |
| Depreciation\tand\tamortization | 2,224 | 2,084 | 1,923 |
| Purchased\ttransportation | 9,129 | 8,043 | 8,460 |
| Fuel | 2,118 | 2,482 | 3,883 |
| Other\toccupancy | 1,037 | 1,022 | 1,044 |
| Other\texpenses | 4,623 | 4,636 | 4,538 |
| Total\tOperating\tExpenses | 55,439 | 50,695 | 53,264 |
| Operating\tProfit | 5,467 | 7,668 | 4,968 |
| Other\tIncome\tand\t(Expense): |  |  |  |
| Investment\tincome\tand\tother | 50 | 15 | 22 |
| Interest\texpense | (381) | (341) | (353) |
| Total\tOther\tIncome\tand\t(Expense) | (331) | (326) | (331) |
| Income\tBefore\tIncome\tTaxes | 5,136 | 7,342 | 4,637 |
| Income\tTax\tExpense | 1,705 | 2,498 | 1,605 |
| Net\tIncome | $3,431 | $4,844 | $3,032 |
| Basic\tEarnings\tPer\tShare | $3.89 | $5.38 | $3.31 |
| Diluted\tEarnings\tPer\tShare | $3.87 | $5.35 | $3.28 |

# STATEMENTS	OF	CONSOLIDATED	COMPREHENSIVE	INCOME	(LOSS)

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tIncome | $3,431 | $4,844 | $3,032 |
| Change\tin\tforeign\tcurrency\ttranslation\tadjustment,\tnet\tof\ttax | (119) | (440) | (331) |
| Change\tin\tunrealized\tgain\t(loss)\ton\tmarketable\tsecurities,\tnet\tof\ttax | — | (1) | 1 |
| Change\tin\tunrealized\tgain\t(loss)\ton\tcash\tflow\thedges,\tnet\tof\ttax | (112) | 6 | 280 |
| Change\tin\tunrecognized\tpension\tand\tpostretirement\tbenefit\tcosts,\tnet\tof\ttax | (712) | 489 | (3,084) |
| Comprehensive\tIncome\t(Loss) | $2,488 | $4,898 | $(102) |

See	notes	to	consolidated	financial	statements.

# STATEMENTS	OF	CONSOLIDATED	CASH	FLOWS

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Cash\tFlows\tFrom\tOperating\tActivities: |  |  |  |
| Net\tincome | $3,431 | $4,844 | $3,032 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tfrom\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 2,224 | 2,084 | 1,923 |
| Pension\tand\tpostretirement\tbenefit\texpense | 3,725 | 1,189 | 3,040 |
| Pension\tand\tpostretirement\tbenefit\tcontributions | (2,668) | (1,229) | (1,258) |
| Settlement\tof\tpostretirement\tbenefit\tobligation | — | — | (2,271) |
| Self-insurance\treserves | (21) | (80) | (201) |
| Deferred\ttax\texpense | 123 | 540 | 385 |
| Stock\tcompensation\texpense | 591 | 574 | 536 |
| Other\t(gains)\tlosses | (198) | (185) | 218 |
| Changes\tin\tassets\tand\tliabilities,\tnet\tof\teffect\tof\tacquisitions: |  |  |  |
| Accounts\treceivable | (704) | (452) | (523) |
| Other\tcurrent\tassets | (14) | 414 | 112 |
| Accounts\tpayable | 461 | (147) | 276 |
| Accrued\twages\tand\twithholdings | 109 | (63) | 106 |
| Other\tcurrent\tliabilities | (561) | (6) | 317 |
| Other\toperating\tactivities | (25) | (53) | 34 |
| Net\tcash\tfrom\toperating\tactivities | 6,473 | 7,430 | 5,726 |
| Cash\tFlows\tFrom\tInvesting\tActivities: |  |  |  |
| Capital\texpenditures | (2,965) | (2,379) | (2,328) |
| Proceeds\tfrom\tdisposals\tof\tproperty,\tplant\tand\tequipment | 88 | 26 | 53 |
| Purchases\tof\tmarketable\tsecurities | (4,816) | (7,415) | (3,525) |
| Sales\tand\tmaturities\tof\tmarketable\tsecurities | 5,724 | 6,388 | 3,106 |
| Net\tdecrease\tin\tfinance\treceivables | 9 | 5 | 44 |
| Cash\tpaid\tfor\tbusiness\tacquisitions | (547) | (1,904) | (88) |
| Other\tinvesting\tactivities | (59) | (30) | (63) |
| Net\tcash\tused\tin\tinvesting\tactivities | (2,566) | (5,309) | (2,801) |
| Cash\tFlows\tFrom\tFinancing\tActivities: |  |  |  |
| Net\tchange\tin\tshort-term\tdebt | (88) | 2,529 | — |
| Proceeds\tfrom\tlong-term\tborrowings | 5,927 | 3,783 | 1,525 |
| Repayments\tof\tlong-term\tborrowings | (3,805) | (2,724) | (1,694) |
| Purchases\tof\tcommon\tstock | (2,678) | (2,702) | (2,695) |
| Issuances\tof\tcommon\tstock | 245 | 249 | 274 |
| Dividends | (2,643) | (2,525) | (2,366) |
| Other\tfinancing\tactivities | (98) | (175) | (205) |
| Net\tcash\tused\tin\tfinancing\tactivities | (3,140) | (1,565) | (5,161) |
| Effect\tOf\tExchange\tRate\tChanges\tOn\tCash\tAnd\tCash\tEquivalents | (21) | (117) | (138) |
| Net\tIncrease\t(Decrease)\tIn\tCash\tAnd\tCash\tEquivalents | 746 | 439 | (2,374) |
| Cash\tAnd\tCash\tEquivalents: |  |  |  |
| Beginning\tof\tperiod | 2,730 | 2,291 | 4,665 |
| End\tof\tperiod | $3,476 | $2,730 | $2,291 |
| Cash\tPaid\tDuring\tThe\tPeriod\tFor: |  |  |  |
| Interest\t(net\tof\tamount\tcapitalized) | $373 | $345 | $366 |
| Income\ttaxes | $2,064 | $1,913 | $1,524 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# NOTE	1.	SUMMARY	OF	ACCOUNTING	POLICIES

# Basis	of	Financial	Statements	and	Business	Activities

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

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

# Use	of	Estimates

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

# Revenue	Recognition

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

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

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

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

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

# Cash	and	Cash	Equivalents

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

# Investments

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

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

# Accounts	Receivable

Losses	on	accounts	receivable	are	recognized	when	they	are	incurred,	which	requires	us	to	make	our	best	estimate	of	the	probable	losses	inherent	in	our	customer receivables	at	each	balance	sheet	date.	These	estimates	require	consideration	of	historical	loss	experience,	adjusted	for	current	conditions,	trends	in	customer	payment frequency,	and	judgments	about	the	probable	effects	of	relevant	observable	data,	including	present	economic	conditions	and	the	financial	health	of	specific	customers and	market	sectors.	Our	risk	management	process	includes	standards	and	policies	for	reviewing	major	account	exposures	and	concentrations	of	risk.

Our	total	allowance	for	doubtful	accounts	as	of	December	31,	2016	and	2015	was	$102	and	$118	million,	respectively.	Our	total	provision	for	doubtful	accounts charged	to	expense	during	the	years	ended	December	31,	2016,	2015	and	2014	was	$116,	$121	and	$143	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	$342	and	$308	million	as	of	December	31,	2016	and 2015,	respectively,	and	are	included	in	"other	current	assets"	on	the	consolidated	balance	sheets.

# Property,	Plant	and	Equipment

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

Interest	incurred	during	the	construction	period	of	certain	property,	plant	and	equipment	is	capitalized	until	the	underlying	assets	are	placed	in	service,	at	which time	amortization	of	the	capitalized	interest	begins,	straight-line,	over	the	estimated	useful	lives	of	the	related	assets.	Capitalized	interest	was	$14,	$13	and	$11	million for	2016,	2015,	and	2014,	respectively.

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

# Goodwill	and	Intangible	Assets

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

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	$4	million	as	of	December	31,	2016	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	Coyote	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	amortized	over	5	years.

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

# 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	date	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").

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	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	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.

# Foreign	Currency	Translation	and	Remeasurement

We	translate	the	results	of	operations	of	our	foreign	subsidiaries	using	average	exchange	rates	during	each	period,	whereas	balance	sheet	accounts	are	translated using	exchange	rates	at	the	end	of	each	period.	Balance	sheet	currency	translation	adjustments	are	recorded	in	AOCI.	Pre-tax	foreign	currency	transaction	gains	from remeasurement,	net	of	hedging,	included	in	other	operating	expenses,	investment	income	and	interest	expense	were	$5,	$7	and	$14	million	in	2016,	2015	and	2014, 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).	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.

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

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

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

# Derivative	Instruments

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

# Adoption	of	New	Accounting	Standards

In	November	2015,	the	Financial	Accounting	Standards	Board	("FASB")	issued	an	accounting	standards	update	that	simplifies	the	presentation	of	deferred	tax assets	and	liabilities.	The	update	removes	the	requirement	to	separate	deferred	tax	liabilities	and	assets	into	current	and	non-current	amounts	in	a	classified	statement	of financial	position.	The	update	permits	the	entity	to	present	deferred	tax	liabilities	and	assets	as	non-current	in	a	classified	statement	of	financial	position.	We	adopted	this standard	on	a	retrospective	basis	in	the	fourth	quarter	of	2015.	This	accounting	standards	update	did	not	have	a	material	impact	on	our	consolidated	financial	position	or results	of	operations.

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

In	April	2015,	the	FASB	issued	an	accounting	standards	update	to	simplify	the	presentation	of	debt	issuance	costs.	This	update	amends	existing	guidance	to require	the	presentation	of	debt	issuance	costs	in	the	consolidated	balance	sheets	as	a	direct	deduction	from	the	carrying	amount	of	the	associated	debt	liability	instead	of a	deferred	charge.	In	August	2015,	the	FASB	issued	updated	guidance	pertaining	to	the	presentation	of	debt	issuance	costs	related	to	line-of-credit	arrangements.	This update	allows	an	entity	to	defer	and	present	debt	issuance	costs	as	an	asset,	subsequently	amortizing	the	deferred	debt	issuance	costs	over	the	term	of	the	line-of-credit arrangement,	regardless	of	whether	there	are	any	outstanding	borrowings	on	the	line-of-credit	arrangement.	We	elected	to	early	adopt	this	standard	in	the	fourth	quarter of	2015	on	a	retrospective	basis.	This	accounting	standards	update	did	not	have	a	material	impact	on	our	consolidated	financial	position	or	results	of	operations.

In	May	2015,	the	FASB	issued	an	accounting	standards	update	that	changes	the	disclosure	requirement	for	reporting	investments	at	fair	value.	This	update removes	the	requirement	to	categorize	investments	for	which	fair	value	is	measured	using	the	net	asset	value	("NAV")	per	share	practical	expedient	within	the	fair	value hierarchy.	These	disclosures	are	limited	to	investments	for	which	the	entity	has	elected	to	measure	fair	value	using	the	practical	expedient.	Substantially	all	of	our	Level 3	pension	and	postretirement	benefit	plan	assets	were	measured	using	NAV	as	a	practical	expedient.	This	guidance	became	effective	for	us	in	the	first	quarter	of	2016 and	did	not	have	a	material	impact	on	our	consolidated	financial	position	or	results	of	operations.

In	June	2014,	the	FASB	issued	an	accounting	standards	update	for	companies	that	grant	their	employees	share-based	payments	in	which	the	terms	of	the	award provide	that	a	performance	target	that	affects	vesting	could	be	achieved	after	the	requisite	service	period.	This	guidance	became	effective	for	us	in	the	first	quarter	of 2015	and	did	not	have	a	material	impact	on	our	consolidated	financial	position,	results	of	operations	or	cash	flows.

In	November	2016,	the	FASB	issued	an	accounting	standards	update	that	is	intended	to	reduce	diversity	in	practice	by	adding	or	clarifying	guidance	on classification	and	presentation	of	changes	in	restricted	cash	on	the	statement	of	cash	flows.	The	guidance	in	this	update	should	be	applied	retrospectively	and	becomes effective	for	us	in	the	first	quarter	of	2018,	but	early	adoption	is	permitted.	As	a	result	of	this	update,	restricted	cash	will	be	included	within	cash	and	cash	equivalents	on our	statements	of	consolidated	cash	flows.	As	of	December	31,	2016	and	2015,	we	had	$445	and	$442	million	in	self-insurance	investments	and	restricted	cash, respectively.

In	August	2016,	the	FASB	issued	an	accounting	standards	update	that	addresses	the	classification	and	presentation	of	specific	cash	flow	issues	that	currently	result in	diverse	practices.	The	guidance	also	clarifies	how	the	predominance	principle	should	be	applied	when	cash	receipts	and	cash	payments	have	aspects	of	more	than	one class	of	cash	flows.	The	guidance	will	generally	be	applied	retrospectively	and	becomes	effective	for	us	in	the	first	quarter	of	2018,	but	early	adoption	is	permitted.	We are	currently	evaluating	the	impact	of	this	standard	on	our	statements	of	consolidated	cash	flows,	but	do	not	expect	this	standard	to	have	a	material	impact.

In	March	2016,	the	FASB	issued	an	accounting	standards	update	that	simplifies	the	income	tax	accounting	and	cash	flow	presentation	related	to	share-based compensation	by	requiring	the	recognition	of	all	excess	tax	benefits	and	deficiencies	directly	on	the	income	statement	and	classification	as	cash	flows	from	operating activities	on	the	statement	of	cash	flows.	This	new	guidance	becomes	effective	for	us	in	the	first	quarter	of	2017.	We	have	evaluated	adoption	of	this	update	and determined	that	the	impact	to	income	tax	expense	in	the	statements	of	consolidated	income,	for	the	first	quarter	of	2017,	will	be	a	benefit	of	approximately	$60	million, which	will	result	in	a	reclassification	of	approximately	$60	million	from	net	cash	from	financing	activities	to	net	cash	from	operating	activities	in	the	statements	of consolidated	cash	flows.

In	February	2016,	the	FASB	issued	an	accounting	standards	update	that	requires	lessees	to	recognize	a	right-of-use	asset	and	lease	liability	on	the	balance	sheet	for all	leases	with	terms	beyond	twelve	months.	Although	the	distinction	between	operating	and	finance	leases	will	continue	to	exist	under	the	new	standard,	the	recognition and	measurement	of	expenses	and	cash	flows	will	not	change	significantly	from	the	current	treatment.	This	new	guidance	requires	modified	retrospective	application	and becomes	effective	for	us	in	the	first	quarter	of	2019,	but	early	adoption	is	permitted.	We	are	currently	evaluating	this	update	to	determine	the	full	impact	of	its	adoption on	our	consolidated	financial	position,	results	of	operations,	cash	flows	and	related	disclosures,	as	well	as	the	impact	of	adoption	on	policies,	practices	and	systems.	As of	December	31,	2016,	we	have	$1.470	billion	of	future	minimum	operating	lease	commitments	that	are	not	currently	recognized	on	our	consolidated	balance	sheet	(see note	8).	Therefore,	we	expect	material	changes	to	our	consolidated	balance	sheets.

In	January	2016,	the	FASB	issued	an	accounting	standards	update	which	addresses	certain	aspects	of	the	recognition,	measurement,	presentation	and	disclosure	of financial	instruments.	The	amendment	will	be	effective	for	us	beginning	the	first	quarter	of	2018.	At	this	time,	we	do	not	expect	this	accounting	standards	update	to	have a	material	impact	on	our	consolidated	financial	position,	results	of	operations	or	cash	flows.

In	May	2014,	the	FASB	issued	an	accounting	standards	update	that	changes	the	revenue	recognition	for	companies	that	enter	into	contracts	with	customers	to transfer	goods	or	services.	The	standard	is	a	comprehensive	new	revenue	recognition	model	that	requires	revenue	to	be	recognized	in	a	manner	depicting	the	transfer	of goods	or	services	to	a	customer	at	an	amount	that	reflects	the	consideration	expected	to	be	received	in	exchange	for	those	goods	or	services.	The	FASB	has	also	issued	a number	of	updates	to	this	standard.	We	are	planning	to	adopt	the	standard	on	January	1,	2018.	Companies	may	use	either	a	full	retrospective	or	a	modified	retrospective approach	to	adopt	this	standard.	We	are	currently	evaluating	this	standard	and	the	related	updates,	including	which	transition	approach	to	use	as	well	as	the	impact	of adoption	on	policies,	practices	and	systems.

At	this	stage	in	the	evaluation,	we	expect	that	revenue	recognition	will	be	accelerated	for	the	transportation	businesses	as	the	standard	requires	revenue	to	be recognized	as	control	is	transferred	to	the	customer	over	time	rather	than	upon	delivery.	We	are	currently	quantifying	the	impact	of	this	change	to	the	statements	of consolidated	income.

The	standard	also	requires	us	to	evaluate	whether	our	businesses	promise	to	transfer	services	to	the	customer	itself	(as	a	principal)	or	to	arrange	for	services	to	be provided	by	another	party	(as	an	agent).	To	make	that	determination,	the	standard	uses	a	control	model	rather	than	the	risks-and-rewards	model	in	current	U.S.	GAAP. Based	on	our	evaluation	of	the	control	model,	we	determined	that	certain	Supply	Chain	&	Freight	businesses	act	as	the	principal	rather	than	the	agent	within	their revenue	arrangements.	This	change	will	require	the	affected	businesses	to	report	transportation	revenue	gross	of	associated	purchase	transportation	costs	rather	than	net of	such	amounts	within	the	statements	of	consolidated	income.	We	are	currently	quantifying	the	amount	of	revenue	impacted	by	this	change.	Additionally,	contract reviews	are	ongoing,	and	more	businesses	could	be	impacted	by	the	adoption	of	the	standard.

# 	Changes	in	Presentation

Certain	prior	year	amounts	have	been	reclassified	to	conform	to	the	current	year	presentation.	These	reclassifications	had	no	impact	on	our	financial	position	or results	of	operations.

# NOTE	2.	CASH	AND	INVESTMENTS

The	following	is	a	summary	of	marketable	securities	classified	as	trading	and	available-for-sale	at	December	31,	2016	and	2015	(in	millions):

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| 2016 |  |  |  |  |
| Current\ttrading\tmarketable\tsecurities: |  |  |  |  |
| Corporate\tdebt\tsecurities | $427 | $— | $— | $427 |
| Carbon\tcredit\tinvestments(1) | 80 | 10 | — | 90 |
| Total\ttrading\tmarketable\tsecurities | 507 | 10 | — | 517 |
| Current\tavailable-for-sale\tmarketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $314 | $— | $(2) | $312 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | 90 | 1 | — | 91 |
| Corporate\tdebt\tsecurities | 167 | — | (1) | 166 |
| Equity\tsecurities | 2 | — | — | 2 |
| Non-U.S.\tgovernment\tdebt\tsecurities | 3 | — | — | 3 |
| Total\tavailable-for-sale\tmarketable\tsecurities | 576 | 1 | (3) | 574 |
| Total\tcurrent\tmarketable\tsecurities | $1,083 | $11 | $(3) | $1,091 |

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| 2015 |  |  |  |  |
| Current\ttrading\tmarketable\tsecurities: |  |  |  |  |
| Corporate\tdebt\tsecurities | $715 | $— | $— | $715 |
| Non-U.S.\tgovernment\tdebt\tsecurities(1) | 363 | — | — | 363 |
| Carbon\tcredit\tinvestments(1) | 347 | 9 | (5) | 351 |
| Total\ttrading\tmarketable\tsecurities | 1,425 | 9 | (5) | 1,429 |
| Current\tavailable-for-sale\tmarketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $341 | $— | $(1) | $340 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | 74 | 1 | (1) | 74 |
| Corporate\tdebt\tsecurities | 147 | — | (1) | 146 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | 2 | — | — | 2 |
| Equity\tsecurities | 2 | — | — | 2 |
| Non-U.S.\tgovernment\tdebt\tsecurities | 3 | — | — | 3 |
| Total\tavailable-for-sale\tmarketable\tsecurities | 569 | 1 | (3) | 567 |
| Total\tcurrent\tmarketable\tsecurities | $1,994 | $10 | $(8) | $1,996 |

(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	$572	and	$564	million	at December	31,	2016	and	2015,	respectively.

The	gross	realized	gains	on	sales	of	available-for-sale	securities	totaled	$1,	$1	and	$1	million	in	2016,	2015,	and	2014,	respectively.	The	gross	realized	losses	on sales	of	available-for-sale	securities	totaled	$1,	$1	and	$0	million	in	2016,	2015,	and	2014,	respectively.

There	were	no	material	impairment	losses	recognized	on	marketable	securities	during	2016,	2015	or	2014.

# Investment	Other-Than-Temporary	Impairments

We	have	concluded	that	no	material	other-than-temporary	impairment	losses	existed	as	of	December	31,	2016.	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,	2016 (in	millions):

|  | Less	Than	12	Months |  | 12	Months	or	More |  |  | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fair\tValue | \t Unrealized\tLosses | Fair\tValue | \t Unrealized\tLosses | Fair\tValue | \t Unrealized\tLosses |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $206 | $(2) | $— | $— | $206 | $(2) |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | — | — | — | — | — | — |
| Corporate\tdebt\tsecurities | 68 | (1) | — | — | 68 | (1) |
| Equity\tsecurities | — | — | — | — | — | — |
| Non-U.S.\tgovernment\tdebt\tsecurities | — | — | — | — | — | — |
| Total\tmarketable\tsecurities | $274 | $(3) | $— | $— | $274 | $(3) |

The	unrealized	losses	for	the	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,	2016,	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 | Fair	Value |
| :--- | :--- | :--- |
| Due\tin\tone\tyear\tor\tless | $463 | $462 |
| Due\tafter\tone\tyear\tthrough\tthree\tyears | 450 | 449 |
| Due\tafter\tthree\tyears\tthrough\tfive\tyears | 16 | 16 |
| Due\tafter\tfive\tyears | 72 | 72 |
|  | 1,001 | 999 |
| Equity\tand\tcarbon\tcredit\tinvestment\tsecurities | 82 | 92 |
|  | $1,083 | $1,091 |

# Non-Current	Investments	and	Restricted	Cash

Investments	and	Restricted	Cash	is	primarily	associated	with	our	self-insurance	requirements.	We	entered	into	an	escrow	agreement	with	an	insurance	carrier	to guarantee	our	self-insurance	obligations.	This	agreement	requires	us	to	provide	collateral	to	the	insurance	carrier,	which	is	invested	in	money	market	funds	and	corporate and	municipal	bonds.	Collateral	provided	is	reflected	in	"other	investing	activities"	in	the	statements	of	consolidated	cash	flows.	At	December	31,	2016	and	2015,	we	had $445	and	$442	million	in	self-insurance	investments	and	restricted	cash,	respectively.

We	held	an	$18	and	$19	million	investment	in	a	variable	life	insurance	policy	to	fund	benefits	for	the	UPS	Excess	Coordinating	Benefit	Plan	at	December	31, 2016	and	2015,	respectively.	The	quarterly	change	in	investment	fair	value	is	recognized	in	"investment	income	and	other"	on	the	statements	of	consolidated	income. Additionally,	we	held	escrowed	cash	related	to	the	acquisition	and	disposition	of	certain	assets,	primarily	real	estate,	of	$13	and	$12	million	at	December	31,	2016	and 2015,	respectively.

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

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	8.06%	and	8.22%	as	of	December	31,	2016	and	2015,	respectively.	These	inputs	and	the	resulting fair	values	are	updated	on	a	quarterly	basis.

The	following	table	presents	information	about	our	investments	measured	at	fair	value	on	a	recurring	basis	as	of	December	31,	2016	and	2015,	and	indicates	the fair	value	hierarchy	of	the	valuation	techniques	utilized	to	determine	such	fair	value	(in	millions):

|  | Quoted	Prices	in<br>Active	Markets<br>for	Identical<br>Assets<br>(Level	1) | Significant<br>Other	Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Total |
| :--- | :--- | :--- | :--- | :--- |
| 2016 |  |  |  |  |
| Marketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $312 | $— | $— | $312 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | — | 91 | — | 91 |
| Corporate\tdebt\tsecurities | — | 593 | — | 593 |
| Equity\tsecurities | — | 2 | — | 2 |
| Non-U.S.\tgovernment\tdebt\tsecurities | — | 3 | — | 3 |
| Carbon\tcredit\tinvestments | 90 | — | — | 90 |
| Total\tmarketable\tsecurities | 402 | 689 | — | 1,091 |
| Other\tnon-current\tinvestments | 18 | — | 13 | 31 |
| Total | $420 | $689 | $13 | $1,122 |

|  | Active	Markets<br>for	Identical<br>Assets<br>(Level	1) | Significant	Other<br>Observable	Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Total |
| :--- | :--- | :--- | :--- | :--- |
| 2015 |  |  |  |  |
| Marketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $340 | $— | $— | $340 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | — | 74 | — | 74 |
| Corporate\tdebt\tsecurities | — | 861 | — | 861 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | — | 2 | — | 2 |
| Equity\tsecurities | — | 2 | — | 2 |
| Non-U.S.\tgovernment\tdebt\tsecurities | — | 366 | — | 366 |
| Carbon\tcredit\tinvestments | 351 | — | — | 351 |
| Total\tmarketable\tsecurities | 691 | 1,305 | — | 1,996 |
| Other\tnon-current\tinvestments | 19 | — | 32 | 51 |
| Total | $710 | $1,305 | $32 | $2,047 |

The	following	table	presents	the	changes	in	the	above	Level	3	instruments	measured	on	a	recurring	basis	for	the	years	ended	December	31,	2016	and	2015	(in millions).

|  | Marketable<br>Securities | Other<br>Investments | Total |
| :--- | :--- | :--- | :--- |
| Balance\ton\tJanuary\t1,\t2015 | $— | $64 | $64 |
| Transfers\tinto\t(out\tof)\tLevel\t3 | — | — | — |
| Net\trealized\tand\tunrealized\tgains\t(losses): |  |  |  |
| Included\tin\tearnings\t(in\tinvestment\tincome) | — | (32) | (32) |
| Included\tin\taccumulated\tother\tcomprehensive\tincome\t(pre-tax) | — | — | — |
| Purchases | — | — | — |
| Settlements | — | — | — |
| Balance\ton\tDecember\t31,\t2015 | $— | $32 | $32 |
| Transfers\tinto\t(out\tof)\tLevel\t3 | — | — | — |
| Net\trealized\tand\tunrealized\tgains\t(losses): |  |  |  |
| Included\tin\tearnings\t(in\tinvestment\tincome) | — | (19) | (19) |
| Included\tin\taccumulated\tother\tcomprehensive\tincome\t(pre-tax) | — | — | — |
| Purchases | — | — | — |
| Settlements | — | — | — |
| Balance\ton\tDecember\t31,\t2016 | $— | $13 | $13 |

# NOTE	3.	PROPERTY,	PLANT	AND	EQUIPMENT

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

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Vehicles | $8,638 | $8,111 |
| Aircraft | 15,653 | 15,815 |
| Land | 1,397 | 1,263 |
| Buildings | 3,439 | 3,280 |
| Building\tand\tleasehold\timprovements | 3,612 | 3,450 |
| Plant\tequipment | 8,430 | 8,026 |
| Technology\tequipment | 1,741 | 1,670 |
| Equipment\tunder\toperating\tleases | 29 | 30 |
| Construction-in-progress | 735 | 273 |
|  | 43,674 | 41,918 |
| Less:\tAccumulated\tdepreciation\tand\tamortization | (24,874) | (23,566) |
|  | $18,800 | $18,352 |

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	2016,	2015	or	2014.

# NOTE	4.	COMPANY-SPONSORED	EMPLOYEE	BENEFIT	PLANS

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

# U.S.	Pension	Benefits

In	the	U.S.	we	maintain	the	following	single-employer	defined	benefit	pension	plans:	The	UPS	Retirement	Plan,	the	UPS	Pension	Plan,	the	UPS	IBT	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	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	will,	in	addition	to	current	benefits	under	the	UPS	401(k)	Savings Plan,	begin	receiving	a	UPS	Retirement	Contribution.	For	employees	eligible	to	receive	the	Retirement	Contribution,	UPS	will	contribute	3%	to	8%	of	eligible	pay	to	the UPS	401(k)	Savings	Plan	based	on	years	of	vesting	service	and	business	unit.	Contributions	will	be	made	annually	in	cash	to	the	accounts	of	participants	who	are employed	on	December	31st	of	each	calendar	year.

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.

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

The	UPS	IBT	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.

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	$111,	$104	and	$95	million	for	2016,	2015	and	2014,	respectively.

Effective	July	1,	2016,	the	UPS	Retirement	Plan	was	closed	to	new	non-union	participants.	The	UPS	401(k)	Savings	Plan	was	amended	so	that	employees	who previously	would	have	been	eligible	for	participation	in	the	UPS	Retirement	Plan	will,	in	addition	to	current	benefits	under	the	UPS	401(k)	Savings	Plan,	begin	receiving a	UPS	Retirement	Contribution.	Contributions	associated	with	this	amendment	charged	to	expense	were	$4	million	for	2016.

Contributions	are	also	made	to	defined	contribution	money	purchase	plans	under	certain	collective	bargaining	agreements.	Amounts	charged	to	expense	were	$82, $83	and	$82	million	for	2016,	2015	and	2014,	respectively.

# Net	Periodic	Benefit	Cost

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

|  | 2016 | U.S.	Pension	Benefits<br>2015 | 2014 | 2016 | U.S.	Postretirement<br>Medical	Benefits<br>2015 | 2014 | 2016 | International<br>Pension	Benefits<br>2015 | 2014 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Net\tPeriodic\tBenefit\tCost: |  |  |  |  |  |  |  |  |  |
| Service\tcost | $1,412 | $1,527 | $1,137 | $28 | $34 | $62 | $49 | $48 | $43 |
| Interest\tcost | 1,828 | 1,694 | 1,604 | 124 | 117 | 152 | 41 | 44 | 49 |
| Expected\treturn\ton\tassets | (2,516) | (2,489) | (2,257) | (6) | (17) | (25) | (58) | (61) | (61) |
| Amortization\tof: |  |  |  |  |  |  |  |  |  |
| Transition\tobligation | — | — | — | — | — | — | — | — | — |
| Prior\tservice\tcost | 166 | 168 | 169 | 5 | 5 | — | 1 | 1 | 1 |
| Actuarial\t(gain)\tloss | 2,520 | 70 | 991 | 17 | 17 | 767 | 114 | 31 | 48 |
| Curtailment\tand\tsettlement\tloss | — | — | — | — | — | 356 | — | — | — |
| Other | — | — | — | — | — | — | — | — | 4 |
| Net\tperiodic\tbenefit\tcost | $3,410 | $970 | $1,644 | $168 | $156 | $1,312 | $147 | $63 | $84 |

The	curtailment	and	settlement	loss	in	2014	for	the	U.S.	postretirement	medical	benefit	plans	is	discussed	further	in	note	5	under	the	section	entitled	"Accounting Impact	of	Health	and	Welfare	Plan	Changes".

# Actuarial	Assumptions

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

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

As	of	December	31,	2016,	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):

|  | Pension	Benefits | Postretirement	Medical	Benefits |
| :--- | :--- | :--- |
| One\tbasis\tpoint\tincrease\tin\tdiscount\trate | $(67) | $(2) |
| One\tbasis\tpoint\tdecrease\tin\tdiscount\trate | $71 | $3 |

The	Society	of	Actuaries	("SOA")	published	mortality	tables	and	improvement	scales	are	used	in	developing	the	best	estimate	of	mortality	for	U.S.	plans.	In October	2016,	the	SOA	published	an	updated	improvement	scale	which	reduced	expected	mortality	improvements	from	previously	published	scales.	Based	on	our perspective	of	future	longevity,	we	updated	the	mortality	assumptions	to	incorporate	this	updated	scale	for	purposes	of	measuring	pension	and	other	postretirement benefit	obligations	at	December	31,	2016.

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

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

# Actuarial	Assumptions	-	Central	States	Pension	Fund

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

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

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

We	account	for	this	potential	obligation	under	Accounting	Standards	Codification	Topic	715-	Compensation-	Retirement	Benefits	("ASC	715").	Under	ASC	715 we	are	required	to	provide	a	best	estimate	of	various	actuarial	assumptions,	including	the	eventual	outcome	of	this	matter,	in	measuring	our	pension	benefit	obligation	at the	December	31st	measurement	date.	While	we	currently	believe	the	most	likely	solution	to	this	matter	and	the	broader	systemic	problems	facing	multi-employer pension	plans	is	intervention	by	the	federal	government,	ASC	715	does	not	permit	anticipation	of	changes	in	law	in	making	a	best	estimate	of	pension	liabilities.	Our best	estimate	as	of	the	measurement	date	of	December	31,	2016	does	not	incorporate	this	solution.	Rather,	our	best	estimate	of	the	next	most	likely	outcome	to	resolve the	CSPF's	solvency	concerns	is	that	the	CSPF	will	make	another	MPRA	filing	to	forestall	insolvency	without	reducing	benefits	to	the	UPS	Transfer	Group.	If	the	CSPF attempts	to	reduce	benefits	for	the	UPS	Transfer	Group	under	a	MPRA	filing	we	would	be	in	a	strong	legal	position	to	prevent	that	from	occurring	given	that	these benefits	cannot	be	reduced	without	our	consent	and	such	a	reduction,	without	first	exhausting	reductions	to	other	groups	in	the	CSPF,	would	be	contrary	to	the	statute. Accordingly,	our	best	estimate	as	of	the	measurement	date	of	December	31,	2016	is	that	there	is	no	liability	to	be	recognized	for	additional	coordinating	benefits	of	the UPS/IBT	Plan.	However,	the	projected	benefit	obligation	could	materially	increase	as	these	uncertainties	are	resolved.	We	will	continue	to	assess	the	impact	of	these uncertainties	on	the	projected	benefit	obligation	of	the	UPS/IBT	Plan	in	accordance	with	ASC	715.

# Other	Actuarial	Assumptions

Healthcare	cost	trends	are	used	to	project	future	postretirement	benefits	payable	from	our	plans.	For	year-end	2016	U.S.	plan	obligations,	future	postretirement medical	benefit	costs	were	forecasted	assuming	an	initial	annual	increase	of	7.0%,	decreasing	to	4.5%	by	the	year	2021	and	with	consistent	annual	increases	at	those ultimate	levels	thereafter.

Assumed	healthcare	cost	trends	can	have	a	significant	effect	on	the	amounts	reported	for	our	postretirement	medical	plans.	A	one	percent	change	in	assumed healthcare	cost	trend	rates	would	have	had	the	following	effects	on	2016	results	(in	millions):

# 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<br>2016 | 2015 | U.S.	Postretirement<br>Medical	Benefits<br>2016 | 2015 | International<br>Pension	Benefits<br>2016 | 2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Funded\tStatus: |  |  |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets | $31,215 | $28,887 | $15 | $130 | $1,092 | $1,014 |
| Benefit\tobligation | (41,069) | (36,846) | (2,730) | (2,673) | (1,425) | (1,219) |
| Funded\tstatus\trecognized\tat\tDecember\t31 | $(9,854) | $(7,959) | $(2,715) | $(2,543) | $(333) | $(205) |
| Funded\tStatus\tRecognized\tin\tour\tBalance\tSheet: |  |  |  |  |  |  |
| Other\tnon-current\tassets | $— | $— | $— | $— | $28 | $48 |
| Other\tcurrent\tliabilities | (17) | (16) | (216) | (98) | (3) | (3) |
| Pension\tand\tpostretirement\tbenefit\tobligations | (9,837) | (7,943) | (2,499) | (2,445) | (358) | (250) |
| Net\tliability\tat\tDecember\t31 | $(9,854) | $(7,959) | $(2,715) | $(2,543) | $(333) | $(205) |
| Amounts\tRecognized\tin\tAOCI: |  |  |  |  |  |  |
| Unrecognized\tnet\tprior\tservice\tcost | $(1,074) | $(954) | $(36) | $(26) | $(3) | $(4) |
| Unrecognized\tnet\tactuarial\tgain\t(loss) | (4,107) | (3,263) | (80) | 32 | (150) | (103) |
| Gross\tunrecognized\tcost\tat\tDecember\t31 | (5,181) | (4,217) | (116) | 6 | (153) | (107) |
| Deferred\ttax\tassets\t(liabilities)\tat\tDecember\t31 | 1,948 | 1,585 | 44 | (2) | 37 | 26 |
| Net\tunrecognized\tcost\tat\tDecember\t31 | $(3,233) | $(2,632) | $(72) | $4 | $(116) | $(81) |

The	accumulated	benefit	obligation	for	our	pension	plans	as	of	the	measurement	dates	in	2016	and	2015	was	$39.488	and	$35.320	billion,	respectively.

Benefit	payments	under	the	pension	plans	include	$22	million	paid	from	employer	assets	in	2016	and	in	2015.	Benefit	payments	(net	of	participant	contributions) under	the	postretirement	medical	benefit	plans	include	$98	and	$111	million	paid	from	employer	assets	in	2016	and	2015,	respectively.	Such	benefit	payments	from employer	assets	are	also	categorized	as	employer	contributions.

At	December	31,	2016	and	2015,	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<br>Exceeds	the	Fair	Value	of	Plan	Assets<br>2016 | 2015 | Accumulated	Benefit	Obligation<br>Exceeds	the	Fair	Value	of	Plan	Assets<br>2016 | 2015 |
| :--- | :--- | :--- | :--- | :--- |
| U.S.\tPension\tBenefits: |  |  |  |  |
| Projected\tbenefit\tobligation | $41,069 | $36,846 | $41,069 | $36,846 |
| Accumulated\tbenefit\tobligation | 38,194 | 34,210 | 38,194 | 34,210 |
| Fair\tvalue\tof\tplan\tassets | 31,215 | 28,887 | 31,215 | 28,887 |
| International\tPension\tBenefits: |  |  |  |  |
| Projected\tbenefit\tobligation | $1,370 | $493 | $1,365 | $477 |
| Accumulated\tbenefit\tobligation | 1,238 | 416 | 1,234 | 401 |
| Fair\tvalue\tof\tplan\tassets | 1,020 | 247 | 1,016 | 232 |

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

# 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<br>2016 | 2015 | U.S.	Postretirement<br>Medical	Benefits<br>2016 | 2015 | International<br>Pension<br>Benefits<br>2016 | 2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Benefit\tObligations: |  |  |  |  |  |  |
| Projected\tbenefit\tobligation\tat\tbeginning\tof\tyear | $36,846 | $37,521 | $2,673 | $2,883 | $1,219 | $1,274 |
| Service\tcost | 1,412 | 1,527 | 28 | 34 | 49 | 48 |
| Interest\tcost | 1,828 | 1,694 | 124 | 117 | 41 | 44 |
| Gross\tbenefits\tpaid | (1,885) | (1,056) | (264) | (261) | (28) | (30) |
| Plan\tparticipants'\tcontributions | — | — | 27 | 21 | 3 | 3 |
| Plan\tamendments(1) | 285 | — | 15 | — | — | (2) |
| Actuarial\t(gain)/loss | 2,583 | (2,840) | 126 | (120) | 208 | 13 |
| Foreign\tcurrency\texchange\trate\tchanges | — | — | — | — | (67) | (138) |
| Curtailments\tand\tsettlements | — | — | — | — | (3) | (3) |
| Other | — | — | 1 | (1) | 3 | 10 |
| Projected\tbenefit\tobligation\tat\tend\tof\tyear | $41,069 | $36,846 | $2,730 | $2,673 | $1,425 | $1,219 |

(1)	Resulting	from	a	new	labor	contract	with	the	Independent	Pilots	Association.	See	"Status	of	Collective	Bargaining	Agreements"	in	note	5.

|  | U.S.	Pension	Benefits<br>2016 | 2015 | U.S.	Postretirement<br>Medical	Benefits<br>2016 | 2015 | International<br>Pension<br>Benefits<br>2016 | 2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Fair\tValue\tof\tPlan\tAssets: |  |  |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tbeginning\tof\tyear | $28,887 | $28,828 | $130 | $259 | $1,014 | $1,042 |
| Actual\treturn\ton\tplan\tassets | 1,735 | 67 | 3 | — | 108 | 43 |
| Employer\tcontributions | 2,478 | 1,048 | 119 | 111 | 71 | 70 |
| Plan\tparticipants'\tcontributions | — | — | 27 | 21 | 3 | 3 |
| Gross\tbenefits\tpaid | (1,885) | (1,056) | (264) | (261) | (28) | (30) |
| Foreign\tcurrency\texchange\trate\tchanges | — | — | — | — | (73) | (113) |
| Curtailments\tand\tsettlements | — | — | — | — | (3) | (3) |
| Other | — | — | — | — | — | 2 |
| Fair\tvalue\tof\tplan\tassets\tat\tend\tof\tyear | $31,215 | $28,887 | $15 | $130 | $1,092 | $1,014 |

# 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, 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.

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

•Hedge	Funds:	Plan	assets	are	invested	in	hedge	funds	that	pursue	multiple	strategies	to	diversify	risk	and	reduce	volatility.	Most	of	these	hedge	funds	allow redemptions	either	quarterly	or	semi-annually	after	a	two	to	three	month	notice	period,	while	others	allow	for	redemption	after	only	a	brief	notification	period with	no	restriction	on	redemption	frequency.	At	December	31,	2016,	unfunded	commitments	to	hedge	funds	totaling	approximately	$5	million	are	expected	to be	contributed	over	the	remaining	investment	period,	typically	ranging	between	two	and	four	years.

•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,	2016.

•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,	2016,	unfunded	commitments	to	such	limited	partnerships	totaling approximately	$1.908	billion	are	expected	to	be	contributed	over	the	remaining	investment	period,	typically	ranging	between	three	and	six	years.

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

|  | Total<br>Assets(1) | Level	1 | Level	2 | Level	3 | Percentage	of<br>Plan	Assets	-<br>2016 | Target<br>Allocation<br>2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Asset\tCategory\t(U.S.\tPlans): |  |  |  |  |  |  |
| Cash\tand\tcash\tequivalents | $304 | $102 | $202 | $— | 1.0% | 0-5 |
| Equity\tSecurities: |  |  |  |  |  |  |
| U.S.\tLarge\tCap | 4,883 | 2,327 | 2,556 | — |  |  |
| U.S.\tSmall\tCap | 542 | 393 | 149 | — |  |  |
| Emerging\tMarkets | 1,396 | 1,236 | 160 | — |  |  |
| Global\tEquity | 2,603 | 2,555 | 48 | — |  |  |
| International\tEquity | 3,026 | 2,197 | 829 | — |  |  |
| Total\tEquity\tSecurities | 12,450 | 8,708 | 3,742 | — | 39.9 | 35-55 |
| Fixed\tIncome\tSecurities: |  |  |  |  |  |  |
| U.S.\tGovernment\tSecurities | 6,173 | 5,821 | 352 | — |  |  |
| Corporate\tBonds | 4,492 | — | 4,492 | — |  |  |
| Global\tBonds | 161 | — | 59 | — |  |  |
| Municipal\tBonds | 24 | — | 24 | — |  |  |
| Total\tFixed\tIncome\tSecurities | 10,850 | 5,821 | 4,927 | — | 34.6 | 25-35 |
| Other\tInvestments: |  |  |  |  |  |  |
| Hedge\tFunds | 2,867 | — | 763 | — | 9.2 | 5-15 |
| Private\tEquity | 1,716 | — | — | — | 5.5 | 1-10 |
| Private\tDebt | 496 | — | — | — | 1.6 | 1-10 |
| Real\tEstate | 1,734 | 122 | 144 | — | 5.6 | 1-10 |
| Structured\tProducts(2) | 492 | — | 492 | — | 1.6 | 0-5 |
| Risk\tParity\tFunds | 321 | — | — | — | 1.0 | 1-10 |
| Total\tU.S.\tPlan\tAssets | $31,230 | $14,753 | $10,270 | $— | 100.0% |  |
| Asset\tCategory\t(International\tPlans): |  |  |  |  |  |  |
| Cash\tand\tcash\tequivalents | $54 | $37 | $17 | — | 4.9 | 0-15 |
| Equity\tSecurities: |  |  |  |  |  |  |
| Local\tMarkets\tEquity | 188 | — | 188 | — |  |  |
| U.S.\tEquity | 20 | — | 20 | — |  |  |
| Emerging\tMarkets | 26 | 26 | — | — |  |  |
| International\t/\tGlobal\tEquity | 288 | 141 | 147 | — |  |  |
| Total\tEquity\tSecurities | 522 | 167 | 355 | — | 47.7 | 50-65 |
| Fixed\tIncome\tSecurities: |  |  |  |  |  |  |
| Local\tGovernment\tBonds | 84 | 22 | 62 | — |  |  |
| Corporate\tBonds | 158 | 51 | 107 | — |  |  |
| Total\tFixed\tIncome\tSecurities | 242 | 73 | 169 | — | 22.2 | 15-35 |
| Other\tInvestments: |  |  |  |  |  |  |
| Real\tEstate | 93 | — | 57 | — | 8.5 | 0-17 |
| Other | 181 | — | 175 | — | 16.7 | 0-20 |
| Total\tInternational\tPlan\tAssets | $1,092 | $277 | $773 | $— | 100.0% |  |
| Total\tPlan\tAssets | $32,322 | $15,030 | $11,043 | $— |  |  |

(1)	In	accordance	with	ASU	No.	2015-07,	certain	investments	that	are	measured	at	fair	value	using	the	NAV	per	share	(or	its	equivalent)	practical	expedient	have	not	been	classified	in	the	fair value	hierarchy	but	are	included	in	the	category	totals.

(2)	Represents	mortgage	and	asset-backed	securities.

|  | Total<br>Assets(1) | Level	1 | Level	2 | Level	3 | Percentage	of<br>Plan	Assets	-<br>2015 | Target<br>Allocation<br>2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Asset\tCategory\t(U.S.\tPlans): |  |  |  |  |  |  |
| Cash\tand\tcash\tequivalents | $811 | $716 | $95 | $— | 2.8% | 0-5 |
| Equity\tSecurities: |  |  |  |  |  |  |
| U.S.\tLarge\tCap | 4,246 | 2,542 | 1,704 | — |  |  |
| U.S.\tSmall\tCap | 352 | 310 | 42 | — |  |  |
| Emerging\tMarkets | 1,426 | 1,271 | 155 | — |  |  |
| Global\tEquity | 2,935 | 2,935 | — | — |  |  |
| International\tEquity | 3,089 | 2,308 | 781 | — |  |  |
| Total\tEquity\tSecurities | 12,048 | 9,366 | 2,682 | — | 41.5 | 35-55 |
| Fixed\tIncome\tSecurities: |  |  |  |  |  |  |
| U.S.\tGovernment\tSecurities | 3,469 | 3,257 | 212 | — |  |  |
| Corporate\tBonds | 3,961 | — | 3,682 | 6 |  |  |
| Global\tBonds | 733 | — | 147 | — |  |  |
| Municipal\tBonds | 36 | — | 36 | — |  |  |
| Total\tFixed\tIncome\tSecurities | 8,199 | 3,257 | 4,077 | 6 | 28.2 | 25-35 |
| Other\tInvestments: |  |  |  |  |  |  |
| Hedge\tFunds | 3,617 | — | — | — | 12.5 | 5-15 |
| Private\tEquity | 1,415 | — | — | — | 4.9 | 1-10 |
| Real\tEstate | 1,848 | 126 | 155 | — | 6.4 | 1-10 |
| Structured\tProducts(2) | 324 | — | 324 | — | 1.1 | 0-5 |
| Risk\tParity\tFunds | 755 | — | — | — | 2.6 | 1-10 |
| Total\tU.S.\tPlan\tAssets | $29,017 | $13,465 | $7,333 | $6 | 100.0% |  |
| Asset\tCategory\t(International\tPlans): |  |  |  |  |  |  |
| Cash\tand\tcash\tequivalents | $25 | $9 | $16 | — | 2.5 | 0-5 |
| Equity\tSecurities: |  |  |  |  |  |  |
| Local\tMarkets\tEquity | 240 | 133 | 107 | — |  |  |
| U.S.\tEquity | 16 | 16 | — | — |  |  |
| Emerging\tMarkets | 16 | 16 | — | — |  |  |
| International\t/\tGlobal\tEquity | 176 | 84 | 92 | — |  |  |
| Total\tEquity\tSecurities | 448 | 249 | 199 | — | 44.1 | 50-65 |
| Fixed\tIncome\tSecurities: |  |  |  |  |  |  |
| Local\tGovernment\tBonds | 72 | 72 | — | — |  |  |
| Corporate\tBonds | 149 | 56 | 93 | — |  |  |
| Total\tFixed\tIncome\tSecurities | 221 | 128 | 93 | — | 21.8 | 15-35 |
| Other\tInvestments: |  |  |  |  |  |  |
| Real\tEstate | 111 | — | 69 | — | 10.9 | 0-17 |
| Other | 209 | — | 160 | 49 | 20.7 | 0-20 |
| Total\tInternational\tPlan\tAssets | $1,014 | $386 | $537 | $49 | 100.0% |  |
| Total\tPlan\tAssets | $30,031 | $13,851 | $7,870 | $55 |  |  |

Investments	classified	in	prior	years	as	Level	2	and	Level	3	that	are	measured	at	fair	value	using	the	NAV	per	share	(or	its	equivalent)	practical	expedient	have been	removed	from	the	fair	value	hierarchy	in	accordance	with	retrospective	adoption	of	Accounting	Standards	Update	No.	2015-07.	As	a	result,	a	reclassification	has been	made	within	the	prior	year's	plan	asset	classification	table	to	conform	to	the	current	year's	presentation.

The	following	table	presents	the	changes	in	the	Level	3	instruments	measured	on	a	recurring	basis	for	the	years	ended	December	31,	2016	and	2015	(in	millions).

|  | Corporate<br>Bonds | Other | Total(1) |
| :--- | :--- | :--- | :--- |
| Balance\ton\tJanuary\t1,\t2015 | $8 | $53 | $61 |
| Actual\tReturn\ton\tAssets: |  |  |  |
| Assets\tHeld\tat\tEnd\tof\tYear | (1) | (4) | (5) |
| Assets\tSold\tDuring\tthe\tYear | — | — | — |
| Purchases | 3 | — | 3 |
| Sales | (4) | — | (4) |
| Transfers\tInto\t(Out\tof)\tLevel\t3 | — | — | — |
| Balance\ton\tDecember\t31,\t2015 | $6 | $49 | $55 |
| Actual\tReturn\ton\tAssets: |  |  |  |
| Assets\tHeld\tat\tEnd\tof\tYear | — | — | — |
| Assets\tSold\tDuring\tthe\tYear | — | (49) | (49) |
| Purchases | — | — | — |
| Sales | (6) | — | (6) |
| Transfers\tInto\t(Out\tof)\tLevel\t3 | — | — | — |
| Balance\ton\tDecember\t31,\t2016 | $— | $— | $— |

(1)	Investments	that	are	measured	at	fair	value	using	the	NAV	per	share	(or	its	equivalent)	practical	expedient	have	been	removed	from	the	fair	value	hierarchy	in	accordance	with	retrospective adoption	of	Accounting	Standards	Update	No.	2015-07.

There	were	no	UPS	class	A	or	B	shares	of	common	stock	directly	held	in	plan	assets	as	of	December	31,	2016	or	December	31,	2015.

# Accumulated	Other	Comprehensive	Income

The	estimated	amounts	of	prior	service	cost	in	AOCI	expected	to	be	amortized	and	recognized	as	a	component	of	net	periodic	benefit	cost	in	2017	are	as	follows (in	millions):

# Expected	Cash	Flows

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

|  | U.S.<br>Pension	Benefits | U.S.	Postretirement<br>Medical	Benefits | International	Pension<br>Benefits |
| :--- | :--- | :--- | :--- |
| Expected\tEmployer\tContributions: |  |  |  |
| 2017\tto\tplan\ttrusts | $2,291 | $154 | $66 |
| 2017\tto\tplan\tparticipants | 17 | 87 | 3 |
| Expected\tBenefit\tPayments: |  |  |  |
| 2017 | $1,180 | $239 | $23 |
| 2018 | 1,292 | 235 | 23 |
| 2019 | 1,412 | 236 | 26 |
| 2020 | 1,542 | 232 | 29 |
| 2021 | 1,680 | 225 | 34 |
| 2022-2026 | 10,627 | 986 | 235 |

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

# NOTE	5.	MULTIEMPLOYER	EMPLOYEE	BENEFIT	PLANS

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

•Assets	contributed	to	a	multiemployer	plan	by	one	employer	may	be	used	to	provide	benefits	to	employees	of	other	participating employers.

•If	we	negotiate	to	cease	participating	in	a	multiemployer	plan,	we	may	be	required	to	pay	that	plan	an	amount	based	on	our	allocable	share	of	its	underfunded status,	referred	to	as	a	"withdrawal	liability".	However,	cessation	of	participation	in	a	multiemployer	plan	and	subsequent	payment	of	any	withdrawal	liability is	subject	to	the	collective	bargaining	process.

•If	any	of	the	multiemployer	pension	plans	in	which	we	participate	enter	critical	status,	and	our	contributions	are	not	sufficient	to	satisfy	any	rehabilitation	plan funding	schedule,	we	could	be	required	under	the	Pension	Protection	Act	of	2006	to	make	additional	surcharge	contributions	to	the	multiemployer	pension	plan in	the	amount	of	five	to	ten	percent	of	the	existing	contributions	required	by	our	labor	agreement.	Such	surcharges	would	cease	upon	the	ratification	of	a	new collective	bargaining	agreement,	and	could	not	recur	unless	a	plan	re-entered	critical	status	at	a	later	date.

The	discussion	that	follows	sets	forth	the	financial	impact	on	our	results	of	operations	and	cash	flows	for	the	years	ended	December	31,	2016,	2015	and	2014	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	2016,	2015	and	2014	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.

As	of	December	31,	2016,	we	had	approximately	268,000	employees	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with local	unions	affiliated	with	the	Teamsters.	During	2014,	the	Teamsters	ratified	a	new	national	master	agreement	("NMA")	with	UPS	that	will	expire	on	July	31,	2018. The	economic	provisions	in	the	NMA	included	wage	rate	increases,	as	well	as	increased	contribution	rates	for	healthcare	and	pension	benefits.	Most	of	these	economic provisions	were	retroactive	to	August	1,	2013,	which	was	the	effective	date	of	the	NMA.	In	2014	and	2015,	we	remitted	$278	and	$53	million,	respectively,	for	these retroactive	economic	benefits;	this	payment	had	an	immaterial	impact	on	net	income,	as	these	retroactive	economic	benefits	had	been	accrued	since	the	July	31,	2013 expiration	of	the	prior	agreement.

# Multiemployer	Pension	Plans

The	following	table	outlines	our	participation	in	multiemployer	pension	plans	for	the	periods	ended	December	31,	2016,	2015	and	2014,	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	2016	and	2015	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.	Among	other	factors,	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,	2016,	all	plans	that	have	either	a	FIP	or	RP	requirement	have	had	the	respective	FIP or	RP	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	rate	are	not	required.	For	the	plans	detailed	in	the	following	table,	the	expiration	date	of	the associated	collective	bargaining	agreements	is	July	31,	2018,	with	the	exception	of	the	Automotive	Industries	Pension	Plan	and	the	IAM	National	Pension	Fund	/ National	Pension	Plan	which	both	have	a	July	31,	2019	expiration	date.	For	all	plans	detailed	in	the	following	table,	we	provided	more	than	5%	of	the	total	plan contributions	from	all	employers	for	2016,	2015	and	2014	(as	disclosed	in	the	Form	5500	for	each	respective	plan).

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

|  | EIN	/	Pension<br>Plan | Pension<br>Protection	Act<br>Zone	Status | Pension<br>Protection	Act<br>Zone	Status | FIP	/	RP	Status<br>Pending	/ | (in	millions)<br>UPS	Contributions	and<br>Accruals | (in	millions)<br>UPS	Contributions	and<br>Accruals | (in	millions)<br>UPS	Contributions	and<br>Accruals | Surcharge |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Pension\tFund | Number | 2016 | 2015 | Implemented | 2016 | 2015 | 2014 | Imposed |
| Alaska\tTeamster-Employer\tPension\tPlan | 92-6003463-024 | Red | Red | Yes/Implemented | $5 | $5 | $5 | No |
| Automotive\tIndustries\tPension\tPlan | 94-1133245-001 | Red | Red | Yes/Implemented | 4 | 4 | 5 | No |
| Central\tPennsylvania\tTeamsters\tDefined\tBenefit\tPlan | 23-6262789-001 | Green | Green | No | 38 | 36 | 33 | No |
| Eastern\tShore\tTeamsters\tPension\tFund | 52-0904953-001 | Green | Green | No | 5 | 4 | 4 | No |
| Employer-Teamsters\tLocal\tNos.\t175\t&amp;\t505\tPension\tTrust\tFund | 55-6021850-001 | Red | Red | Yes/Implemented | 11 | 11 | 10 | No |
| Hagerstown\tMotor\tCarriers\tand\tTeamsters\tPension\tFund | 52-6045424-001 | Red | Red | Yes/Implemented | 7 | 7 | 6 | No |
| I.A.M.\tNational\tPension\tFund\t/\tNational\tPension\tPlan | 51-6031295-002 | Green | Green | No | 31 | 29 | 27 | No |
| International\tBrotherhood\tof\tTeamsters\tUnion\tLocal\tNo.\t710 |  |  |  |  |  |  |  |  |
| Pension\tFund | 36-2377656-001 | Green | Green | No | 107 | 106 | 89 | No |
| Local\t705,\tInternational\tBrotherhood\tof\tTeamsters\tPension\tPlan | 36-6492502-001 | Red | Red | Yes/Implemented | 88 | 91 | 69 | No |
| Local\t804\tI.B.T.\t&amp;\tLocal\t447\tI.A.M.—UPS\tMultiemployer |  |  |  |  |  |  |  |  |
| Retirement\tPlan | 51-6117726-001 | Red | Red | Yes/Implemented | 103 | 97 | 92 | No |
| Milwaukee\tDrivers\tPension\tTrust\tFund | 39-6045229-001 | Green | Green | No | 36 | 35 | 32 | No |
| New\tEngland\tTeamsters\t&amp;\tTrucking\tIndustry\tPension\tFund | 04-6372430-001 | Red | Red | Yes/Implemented | 114 | 110 | 108 | No |
| New\tYork\tState\tTeamsters\tConference\tPension\tand\tRetirement\nFund | 16-6063585-074 | Red | Red | Yes/Implemented | 91 | 86 | 81 | No |
| Teamster\tPension\tFund\tof\tPhiladelphia\tand\tVicinity | 23-1511735-001 | Yellow | Yellow | Yes/Implemented | 56 | 53 | 50 | No |
| Teamsters\tJoint\tCouncil\tNo.\t83\tof\tVirginia\tPension\tFund | 54-6097996-001 | Yellow | Yellow | Yes/Implemented | 61 | 57 | 52 | No |
| Teamsters\tLocal\t639—Employers\tPension\tTrust | 53-0237142-001 | Green | Green | No | 51 | 48 | 45 | No |
| Teamsters\tNegotiated\tPension\tPlan | 43-6196083-001 | Green | Green | No | 31 | 30 | 27 | No |
| Truck\tDrivers\tand\tHelpers\tLocal\tUnion\tNo.\t355\tRetirement\nPension\tPlan | 52-6043608-001 | Yellow | Yellow | Yes/Implemented | 19 | 17 | 16 | No |
| United\tParcel\tService,\tInc.—Local\t177,\tI.B.T.\tMultiemployer\nRetirement\tPlan | 13-1426500-419 | Red | Red | Yes/Implemented | 83 | 83 | 85 | No |
| Western\tConference\tof\tTeamsters\tPension\tPlan | 91-6145047-001 | Green | Green | No | 694 | 646 | 604 | No |
| Western\tPennsylvania\tTeamsters\tand\tEmployers\tPension\tFund | 25-6029946-001 | Red | Red | Yes/Implemented | 28 | 26 | 24 | No |
| All\tOther\tMultiemployer\tPension\tPlans |  |  |  |  | 56 | 42 | 53 |  |
|  |  |  |  | Total\tContributions | $ 1,719 | $ 1,623 | $1,517 |  |

# 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,	2016	and	2015, we	had	$866	and	$872	million,	respectively,	recognized	in	"other	non-current	liabilities"	on	our	consolidated	balance	sheets	representing	the	remaining	balance	of	the NETTI	Fund	withdrawal	liability.	Based	on	the	borrowing	rates	currently	available	to	the	Company	for	long-term	financing	of	a	similar	maturity,	the	fair	value	of	the NETTI	Fund	withdrawal	liability	as	of	December	31,	2016	and	2015	was	$861	and	$841	million.	We	utilized	Level	2	inputs	in	the	fair	value	hierarchy	of	valuation techniques	to	determine	the	fair	value	of	this	liability.

# Multiemployer	Health	and	Welfare	Plans

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

| Health	and	Welfare	Fund | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Central\tStates,\tSouth\tEast\t&amp;\tSouth\tWest\tAreas\tHealth\tand\tWelfare\tFund | $2,268 | $2,081 | $1,306 |
| Teamsters\tWestern\tRegion\t&amp;\tLocal\t177\tHealth\tCare\tPlan | 571 | 515 | 239 |
| Health\t&amp;\tWelfare\tInsurance\tFund\tTeamsters\tLocal\t653 | 6 | 6 | 5 |
| Bay\tArea\tDelivery\tDrivers | 35 | 34 | 32 |
| Central\tPennsylvania\tTeamsters\tHealth\t&amp;\tPension\tFund | 25 | 23 | 21 |
| Delta\tHealth\tSystems—East\tBay\tDrayage\tDrivers | 27 | 27 | 24 |
| Employer—Teamster\tLocal\tNos.\t175\t&amp;\t505 | 11 | 10 | 9 |
| Joint\tCouncil\t#83\tHealth\t&amp;\tWelfare\tFund | 33 | 28 | 26 |
| Local\t191\tTeamsters\tHealth\tFund | 12 | 11 | 11 |
| Local\t401\tTeamsters\tHealth\t&amp;\tWelfare\tFund | 8 | 7 | 7 |
| Local\t804\tWelfare\tTrust\tFund | 79 | 75 | 70 |
| Milwaukee\tDrivers\tPension\tTrust\tFund—Milwaukee\tDrivers\tHealth\tand\tWelfare\tTrust\tFund | 36 | 34 | 32 |
| Montana\tTeamster\tEmployers\tTrust | 8 | 7 | 7 |
| New\tYork\tState\tTeamsters\tHealth\t&amp;\tHospital\tFund | 56 | 53 | 51 |
| North\tCoast\tBenefit\tTrust | 8 | 8 | 9 |
| Northern\tCalifornia\tGeneral\tTeamsters\t(DELTA) | 116 | 108 | 96 |
| Northern\tNew\tEngland\tBenefit\tTrust | 47 | 42 | 39 |
| Oregon\t/\tTeamster\tEmployers\tTrust | 34 | 31 | 29 |
| Teamsters\t170\tHealth\t&amp;\tWelfare\tFund | 16 | 15 | 15 |
| Teamsters\tBenefit\tTrust | 43 | 36 | 40 |
| Teamsters\tLocal\t251\tHealth\t&amp;\tInsurance\tPlan | 14 | 13 | 12 |
| Teamsters\tLocal\t404\tHealth\t&amp;\tInsurance\tPlan | 7 | 7 | 7 |
| Teamsters\tLocal\t638\tHealth\tFund | 40 | 39 | 35 |
| Teamsters\tLocal\t639—Employers\tHealth\t&amp;\tPension\tTrust\tFunds | 27 | 26 | 26 |
| Teamsters\tLocal\t671\tHealth\tServices\t&amp;\tInsurance\tPlan | 17 | 15 | 14 |
| Teamsters\tUnion\t25\tHealth\tServices\t&amp;\tInsurance\tPlan | 50 | 46 | 44 |
| Teamsters\tUnion\tLocal\t677\tHealth\tServices\t&amp;\tInsurance\tPlan | 10 | 10 | 9 |
| Truck\tDrivers\tand\tHelpers\tLocal\t355\tBaltimore\tArea\tHealth\t&amp;\tWelfare\tFund | 16 | 15 | 15 |
| Utah-Idaho\tTeamsters\tSecurity\tFund | 26 | 25 | 22 |
| Washington\tTeamsters\tWelfare\tTrust | 47 | 44 | 36 |
| All\tOther\tMultiemployer\tHealth\tand\tWelfare\tPlans | 68 | 95 | 64 |
| Total\tContributions | $3,761 | $3,486 | $2,352 |

The	increases	in	2015	contributions	to	the	Central	States,	South	East	&	South	West	Areas	Health	and	Welfare	Fund	and	to	the	Teamsters	Western	Region	&	Local 177	Health	Care	Plan	are	related	to	the	changes	to	the	delivery	of	active	and	postretirement	healthcare	benefits	described	below.

Additionally,	the	Funds	assumed	the	obligation	to	provide	postretirement	healthcare	benefits	to	the	employees	in	the	NMA	Group	who	retire	on	or	after	January	1, 2014.	The	postretirement	healthcare	benefit	obligation	for	the	employees	in	the	Non-NMA	Group	was	assumed	by	the	Funds	for	employees	retiring	on	or	after	January	1, 2014	or	January	1,	2015,	depending	on	the	applicable	collective	bargaining	agreement.	In	exchange	for	the	assumption	of	the	obligation	to	provide	postretirement healthcare	benefits	to	the	NMA	Group	and	Non-NMA	Group,	we	transferred	cash	totaling	$2.271	billion	to	the	Funds	in	the	second	quarter	of	2014.	UPS-sponsored health	and	welfare	benefit	plans	retained	responsibility	for	providing	postretirement	healthcare	coverage	for	employees	in	the	NMA	Group	who	retired	from	UPS	prior to	January	1,	2014,	and	for	employees	in	the	Non-NMA	Group	who	retired	from	UPS	prior	to	the	January	1,	2014	or	January	1,	2015	effective	date	in	the	applicable collective	bargaining	agreement.

For	NMA	Group	employees	who	retired	prior	to	January	1,	2014	and	remained	with	the	UPS-sponsored	health	and	welfare	plans,	the	changes	to	the	contributions, benefits	and	cost	sharing	provisions	in	these	plans	resulted	in	an	increase	in	the	postretirement	benefit	obligation	and	a	corresponding	decrease	in	pre-tax	AOCI	of	$13 million	upon	ratification.

# NOTE	6.	GOODWILL	AND	INTANGIBLE	ASSETS

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

|  | U.S.	Domestic<br>Package | International<br>Package | Supply	Chain	&amp;<br>Freight | Consolidated |
| :--- | :--- | :--- | :--- | :--- |
| Balance\ton\tJanuary\t1,\t2015 | $6 | $449 | $1,729 | $2,184 |
| Acquired | 709 | — | 585 | 1,294 |
| Currency\t/\tOther | — | (24) | (35) | (59) |
| Balance\ton\tDecember\t31,\t2015 | $715 | $425 | $2,279 | $3,419 |
| Acquired | — | — | 359 | 359 |
| Currency\t/\tOther | — | (18) | (3) | (21) |
| Balance\ton\tDecember\t31,\t2016 | $715 | $407 | $2,635 | $3,757 |

# 2016	Goodwill	Activity:

The	goodwill	acquired	in	the	Supply	Chain	&	Freight	segment	is	related	to	our	December	2016	acquisition	of	Maze	1	Limited	("Marken").	See	note	7	for	further discussion	of	this	acquisition.

The	purchase	price	allocation	for	acquired	companies	can	be	modified	for	up	to	one	year	from	the	date	of	acquisition.

The	goodwill	acquired	in	the	U.S.	Domestic	Package	segment	was	related	to	our	August	2015	acquisition	of	Coyote	Logistics	Midco,	Inc	("Coyote").	The	goodwill acquired	in	the	Supply	Chain	&	Freight	segment	was	related	to	our	March	2015	acquisition	of	Poltraf	Sp.	z.o.o.	("Poltraf"),	our	May	2015	acquisition	of	Parcel	Pro,	Inc. ("Parcel	Pro"),	our	June	2015	acquisition	of	the	Insured	Parcel	Services	division	of	G4S	International	Logistics	("IPS")	and	our	August	2015	acquisition	of	Coyote.

# Goodwill	Impairment

We	test	our	goodwill	for	impairment	annually,	as	of	October	1st,	on	a	reporting	unit	basis	which	we	own	at	the	testing	date.	Our	reporting	units	are	comprised	of the	U.S.	Domestic	Package	reporting	unit,	the	Europe,	Asia,	Americas	and	ISMEA	(Indian	Subcontinent,	Middle	East	and	Africa)	reporting	units	in	the	International Package	reporting	segment	and	the	Forwarding,	Logistics,	UPS	Mail	Innovations,	UPS	Freight,	The	UPS	Store,	UPS	Capital,	Coyote	Logistics	and	Marken	reporting units	in	the	Supply	Chain	&	Freight	reporting	segment.

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	2016,	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 Europe,	Asia,	Americas,	ISMEA,	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	2016,	2015	or	2014.	Cumulatively,	our Supply	Chain	&	Freight	reporting	segment	has	recorded	$622	million	of	goodwill	impairment	charges,	while	our	International	and	U.S.	Domestic	Package	segments have	not	recorded	any	goodwill	impairment	charges.

# Intangible	Assets

The	following	is	a	summary	of	intangible	assets	at	December	31,	2016	and	2015	(in	millions):

|  | Gross	Carrying<br>Amount | Accumulated<br>Amortization | Net	Carrying<br>Value | Weighted-<br>Average<br>Amortization<br>Period<br>(in	years) |
| :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2016 |  |  |  |  |
| Capitalized\tsoftware | $2,933 | $(2,157) | $776 | 5.0 |
| Licenses | 131 | (70) | 61 | 4.1 |
| Franchise\trights | 128 | (90) | 38 | 20.0 |
| Customer\trelationships | 724 | (85) | 639 | 10.8 |
| Trade\tname | 200 | — | 200 | NA |
| Trademarks,\tpatents\tand\tother | 67 | (23) | 44 | 6.9 |
| Total\tIntangible\tAssets,\tNet | $4,183 | $(2,425) | $1,758 | 6.5 |
| December\t31,\t2015 |  |  |  |  |
| Capitalized\tsoftware | $2,739 | $(2,026) | $713 |  |
| Licenses | 189 | (116) | 73 |  |
| Franchise\trights | 125 | (83) | 42 |  |
| Customer\trelationships | 511 | (35) | 476 |  |
| Trade\tname | 200 | — | 200 |  |
| Trademarks,\tpatents\tand\tother | 61 | (16) | 45 |  |
| Total\tIntangible\tAssets,\tNet | $3,825 | $(2,276) | $1,549 |  |

A	trade	name	and	licenses	with	a	carrying	value	of	$200	and	$4	million,	respectively,	as	of	December	31,	2016	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	were	no	impairments	of	any	finite-lived	or	indefinite- lived	intangible	assets	in	2016	or	2015.

Amortization	of	intangible	assets	was	$321,	$261	and	$195	million	during	2016,	2015	and	2014,	respectively.	Expected	amortization	of	finite-lived	intangible assets	recorded	as	of	December	31,	2016	for	the	next	five	years	is	as	follows	(in	millions):	2017—$378;	2018—$304;	2019—$249;	2020—$186;	2021—$126. Amortization	expense	in	future	periods	will	be	affected	by	business	acquisitions,	software	development,	licensing	agreements,	franchise	rights	purchases	and	other factors.

# NOTE	7.	BUSINESS	ACQUISITIONS

In	December	2016,	we	acquired	Marken,	a	global	provider	of	supply	chain	solutions	to	the	life	sciences	industry	and	leader	in	clinical	trials	material	storage	and distribution,	which	was	added	to	our	Supply	Chain	&	Freight	reporting	segment.	The	financial	results	of	the	acquired	business	were	not	material	to	our	results	of operations.

The	estimates	of	fair	value	of	assets	acquired	and	liabilities	assumed	are	subject	to	change	based	on	completion	of	our	purchase	accounting.	The	purchase	price allocation	for	acquired	companies	can	be	modified	for	up	to	one	year	from	the	date	of	acquisition.	The	acquisition	was	funded	using	cash	from	operations.

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

# Marken	Assets	Acquired	and	(Liabilities)	Assumed

| Marken	Assets	Acquired	and	(Liabilities)	Assumed |  |
| :--- | :--- |
| Cash\tand\tcash\tequivalents | $26 |
| Accounts\treceivable | 36 |
| Other\tcurrent\tassets | 3 |
| Deferred\ttax\tassets | 4 |
| Property,\tplant,\tand\tequipment | 7 |
| Goodwill | 359 |
| Intangible\tassets | 233 |
| Accounts\tpayable\tand\tother\tcurrent\tliabilities | (31) |
| Deferred\ttax\tliability | (67) |
| \t\t\t\tTotal\tpurchase\tprice | $570 |

The	goodwill	recognized	of	approximately	$359	million	is	attributable	to	expected	synergies	from	future	growth	of	Marken.	None	of	the	goodwill	is	deductible for	income	tax	purposes.

The	intangible	assets	acquired	of	approximately	$233	million	primarily	consist	of	$216	million	of	customer	relationships	(amortized	over	12	years),	$10 million	of	trade	name	(amortized	over	3	years),	$6	million	capitalized	software	(amortized	over	3-5	years)	and	$1	million	agent	network	(amortized	over	4	years).	The carrying	value	of	accounts	receivable	approximates	fair	value.

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

In	March	2015,	we	acquired	Poltraf,	a	Polish-based	pharmaceutical	logistics	company	recognized	for	its	temperature-sensitive	warehousing	and	transportation solutions.	In	May	2015	and	June	2015,	we	acquired	Parcel	Pro	and	IPS,	respectively.	These	businesses	provide	services	and	insurance	coverage	for	the	transport	of	high value	luxury	goods.	These	acquisitions	were	funded	with	cash	from	operations.	These	acquisitions	were	not	material	to	our	consolidated	balance	sheets.

In	August	2015,	we	acquired	Coyote,	a	U.S.-based	truckload	freight	brokerage	company	for	$1.829	billion.	This	acquisition	allows	us	to	expand	our	existing portfolio	by	adding	large	scale	truckload	freight	brokerage	and	transportation	management	services	to	our	Supply	Chain	&	Freight	reporting	segment.	In	addition,	we benefit	from	synergies	in	purchased	transportation,	backhaul	utilization,	cross-selling	to	customers,	as	well	as	technology	systems	and	industry	best	practices.	The acquisition	was	funded	using	cash	from	operations	and	issuances	of	commercial	paper.

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

# Coyote	Assets	Acquired	and	(Liabilities)	Assumed

| Coyote	Assets	Acquired	and	(Liabilities)	Assumed |  |
| :--- | :--- |
| Cash\tand\tcash\tequivalents | $18 |
| Accounts\treceivable | 249 |
| Other\tcurrent\tassets | 1 |
| Property,\tplant,\tand\tequipment | 17 |
| Goodwill | 1,241 |
| Intangible\tassets | 664 |
| Other\tnon-current\tassets | 2 |
| Accounts\tpayable\tand\tother\tcurrent\tliabilities | (132) |
| Other\tnon-current\tliabilities | (11) |
| Deferred\ttax\tliability | (212) |
| \t\t\t\tTotal\tpurchase\tprice | $1,837 |

The	goodwill	recognized	of	approximately	$1.241	billion	is	attributable	to	synergies	anticipated	from	more	efficient	usage	of	our	existing	transportation	networks and	the	assembled	workforce	of	Coyote.	We	have	allocated	$709	and	$532	million	of	the	recognized	goodwill	to	the	U.S.	Domestic	Package	and	Supply	Chain	& Freight	segments,	respectively.	None	of	the	goodwill	is	deductible	for	income	tax	purposes.

The	intangible	assets	acquired	of	approximately	$664	million	primarily	consist	of	$426	million	of	customer	relationships	(amortized	over	10	years),	$27	million	of non-compete	agreements	(amortized	over	4	years),	and	$200	million	of	trade	name,	which	has	an	indefinite	useful	life.	The	carrying	value	of	acquired	accounts receivable	approximated	fair	value.

# 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,	2016 and	2015	(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 | Carrying	Value |
| :--- | :--- | :--- | :--- | :--- |
|  | Amount | Maturity | 2016 | 2015 |
| Commercial\tpaper | $3,250 | 2017 | $3,250 | $2,965 |
| Fixed-rate\tsenior\tnotes: |  |  |  |  |
| 1.125%\tsenior\tnotes | 375 | 2017 | 374 | 372 |
| 5.50%\tsenior\tnotes | 750 | 2018 | 769 | 787 |
| 5.125%\tsenior\tnotes | 1,000 | 2019 | 1,043 | 1,064 |
| 3.125%\tsenior\tnotes | 1,500 | 2021 | 1,584 | 1,613 |
| 2.45%\tsenior\tnotes | 1,000 | 2022 | 986 | 991 |
| 2.40%\tsenior\tnotes | 500 | 2026 | 497 | — |
| 6.20%\tsenior\tnotes | 1,500 | 2038 | 1,481 | 1,481 |
| 4.875%\tsenior\tnotes | 500 | 2040 | 489 | 489 |
| 3.625%\tsenior\tnotes | 375 | 2042 | 367 | 367 |
| 3.40%\tsenior\tnotes | 500 | 2046 | 491 | — |
| 8.375%\tDebentures: |  |  |  |  |
| 8.375%\tdebentures | 424 | 2020 | 461 | 474 |
| 8.375%\tdebentures | 276 | 2030 | 282 | 282 |
| Pound\tSterling\tNotes: |  |  |  |  |
| \t\t\t\t\t5.50%\tnotes | 82 | 2031 | 76 | 92 |
| \t\t\t\t\t5.125%\tnotes | 560 | 2050 | 535 | 638 |
| Euro\tSenior\tNotes: |  |  |  |  |
| 1.625%\tnotes | 738 | 2025 | 732 | 759 |
| 1.000%\tnotes | 527 | 2028 | 523 | — |
| Floating\trate\tsenior\tnotes | 527 | 2020 | 525 | 544 |
| Floating\trate\tsenior\tnotes | 833 | 2049\t–\t2066 | 824 | 600 |
| Capital\tlease\tobligations | 447 | 2017–\t3005 | 447 | 475 |
| Facility\tnotes\tand\tbonds | 320 | 2029\t–\t2045 | 319 | 319 |
| Other\tdebt | 20 | 2017\t–\t2022 | 20 | 22 |
| Total\tdebt | $16,004 |  | 16,075 | 14,334 |
| Less:\tcurrent\tmaturities |  |  | (3,681) | (3,018) |
| Long-term\tdebt |  |  | $12,394 | $11,316 |

# Debt	Issuances

On	October	19,	2016,	we	issued	U.S.	and	Euro	senior	rate	notes	in	two	separate	transactions.	These	senior	notes	consist	of	three	separate	series,	as	follows:

•Two	series	of	notes,	each	in	the	principal	amount	of	$500	million,	were	issued.	These	notes	bear	interest	at	2.4%	and	3.4%	fixed	rates	and	are	due	November 2026	and	November	2046,	respectively.	Interest	on	these	notes	is	payable	semi-annually,	in	each	case	beginning	in	May	2017.	Each	note	is	callable	at	our option	at	a	redemption	price	equal	to	the	greater	of	100%	of	the	principal	amount,	or	the	sum	of	the	present	values	of	the	remaining	scheduled	payments	of principal	and	interest	thereon	discounted	to	the	redemption	date	at	a	benchmark	treasury	yield	plus	10	and	15	basis	points,	respectively,	and	accrued	interest.

•Notes	in	the	principal	amount	of	€500	million	($549	million)	were	issued.	These	notes	bear	interest	at	a	1.0%	fixed	rate	and	are	due	November	2028.	Interest on	these	notes	is	payable	annually,	beginning	in	November	2017.	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	German	government	bond	yield	plus	15	basis	points	and	accrued	interest.

# 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,	2016:	$2.406	billion	with	an	average	interest	rate	of	0.49%	and €801	million	($844	million)	with	an	average	interest	rate	of	-0.36%.	The	amount	of	commercial	paper	outstanding	under	these	programs	in	2017	is	expected	to	fluctuate.

# Fixed	Rate	Senior	Notes

We	have	completed	several	offerings	of	fixed	rate	senior	notes.	All	of	the	notes	pay	interest	semiannually,	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	2016	and	2015,	respectively,	were	as	follows:

|  | Principal |  | Average	Effective	Interest	Rate | Average	Effective	Interest	Rate |
| :--- | :--- | :--- | :--- | :--- |
|  | Value | Maturity | 2016 | 2015 |
| 1.125%\tsenior\tnotes | $375 | 2017 | 1.04% | 0.68% |
| 5.50%\tsenior\tnotes | $750 | 2018 | 2.94% | 2.54% |
| 5.125%\tsenior\tnotes | $1,000 | 2019 | 2.49% | 2.06% |
| 3.125%\tsenior\tnotes | $1,500 | 2021 | 1.40% | 1.04% |
| 2.45%\tsenior\tnotes | $1,000 | 2022 | 1.26% | 0.87% |

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

•$276	million	of	the	debentures	have	a	maturity	of	April	1,	2030.	These	debentures	have	an	8.375%	interest	rate	until	April	1,	2020,	and,	thereafter,	the	interest rate	will	be	7.62%	for	the	final	10	years.	These	debentures	are	redeemable	in	whole	or	in	part	at	our	option	at	any	time.	The	redemption	price	is	equal	to	the greater	of	100%	of	the	principal	amount	and	accrued	interest,	or	the	sum	of	the	present	values	of	the	remaining	scheduled	payout	of	principal	and	interest thereon	discounted	to	the	date	of	redemption	(at	a	benchmark	treasury	yield	plus	five	basis	points)	plus	accrued	interest.

•$424	million	of	the	debentures	have	a	maturity	of	April	1,	2020.	These	debentures	are	not	subject	to	redemption	prior	to

maturity.

Interest	is	payable	semiannually	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	2016	and	2015	was	5.43%	and	5.04%,	respectively.

# Floating	Rate	Senior	Notes

The	floating	rate	senior	notes	bear	interest	at	either	one	or	three-month	LIBOR,	less	a	spread	ranging	from	30	to	45	basis	points.	The	average	interest	rate	for	2016 and	2015	was	0.21%	and	0.01%,	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	10	years	at	a	stated	percentage	of	par	value.	The	notes	have	maturities	ranging	from	2049	through	2066.

In	March,	June	and	August	2016,	we	issued	floating	rate	senior	notes	in	principal	balances	of	$118,	$74	and	$35	million,	respectively.	These	notes	bear	interest	at three-month	LIBOR	less	30	basis	points	and	mature	in	2066.

# 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):

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Vehicles | $68 | $74 |
| Aircraft | 2,291 | 2,289 |
| Buildings | 190 | 207 |
| Accumulated\tamortization | (896) | (849) |
| Property,\tplant\tand\tequipment\tsubject\tto\tcapital\tleases | $1,653 | $1,721 |

These	capital	lease	obligations	have	principal	payments	due	at	various	dates	from	2017	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	2016	and	2015	were	0.37%	and	0.03%, 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	2016	and	2015	were	0.36%	and	0.02%,	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.	The	bonds,	which	were	due	in	December	2015,	had	a	variable	interest	rate,	and	the	average	interest	rates	for	2016 and	2015	were	0.00%	and	0.02%,	respectively.	As	of	December	2015,	these	$100	million	bonds	were	repaid	in	full.

•In	September	2015,	we	entered	into	an	agreement	with	the	Delaware	County,	Pennsylvania	Industrial	Development	Authority,	associated	with	our	Philadelphia, Pennsylvania	airport	facilities,	for	bonds	issued	with	a	principal	balance	of	$100	million.	These	bonds,	which	are	due	September	2045,	bear	interest	at	a variable	rate.	The	average	interest	rate	for	2016	and	2015	was	0.40%	and	0.00%,	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.

# Euro	Senior	Notes

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

•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	2016	and	2015	were	0.19%	and	0.34%,	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.

We	lease	certain	aircraft,	facilities,	land,	equipment	and	vehicles	under	operating	leases,	which	expire	at	various	dates	through	2038.	Certain	of	the	leases	contain escalation	clauses	and	renewal	or	purchase	options.	Rent	expense	related	to	our	operating	leases	was	$686,	$669	and	$676	million	for	2016,	2015	and	2014,	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<br>Leases | Operating<br>Leases | Debt<br>Principal | Purchase<br>Commitments |
| :--- | :--- | :--- | :--- | :--- |
| 2017 | $72 | $368 | $3,635 | $1,358 |
| 2018 | 70 | 302 | 756 | 1,151 |
| 2019 | 62 | 221 | 1,001 | 758 |
| 2020 | 56 | 168 | 528 | 286 |
| 2021 | 39 | 111 | 1,501 | 17 |
| After\t2021 | 370 | 300 | 8,136 | 45 |
| Total | 669 | $1,470 | $15,557 | $3,615 |
| Less:\timputed\tinterest | (222) |  |  |  |
| Present\tvalue\tof\tminimum\tcapitalized\tlease\tpayments | 447 |  |  |  |
| Less:\tcurrent\tportion | (46) |  |  |  |
| Long-term\tcapitalized\tlease\tobligations | $401 |  |  |  |

As	of	December	31,	2016,	we	had	outstanding	letters	of	credit	totaling	approximately	$1.890	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,	2016,	we	had	$730 million	of	surety	bonds	written.

# Available	Credit

We	maintain	two	credit	agreements	with	a	consortium	of	banks.	One	of	these	agreements	provides	revolving	credit	facilities	of	$1.5	billion,	and	expires	on March	24,	2017.	Generally,	amounts	outstanding	under	this	facility	bear	interest	at	a	periodic	fixed	rate	equal	to	LIBOR	for	the	applicable	interest	period	and	currency denomination,	plus	an	applicable	margin.	Alternatively,	a	fluctuating	rate	of	interest	equal	to	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,	2016.

The	second	agreement	provides	revolving	credit	facilities	of	$3.0	billion,	and	expires	on	March	21,	2021.	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,	2016.

# Debt	Covenants

Our	existing	debt	instruments	and	credit	facilities	subject	us	to	certain	financial	covenants.	As	of	December	31,	2016	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,	2016,	10%	of	net	tangible	assets	is	equivalent	to	$2.313	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	$17.134	and	$15.524	billion	as	of	December	31,	2016	and	2015,	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.

# NOTE	9.	LEGAL	PROCEEDINGS	AND	CONTINGENCIES

We	are	involved	in	a	number	of	judicial	proceedings	and	other	matters	arising	from	the	conduct	of	our	business	activities.

Although	there	can	be	no	assurance	as	to	the	ultimate	outcome,	we	have	generally	denied,	or	believe	we	have	a	meritorious	defense	and	will	deny,	liability	in	all litigation	pending	against	us,	including	(except	as	otherwise	noted	herein)	the	matters	described	below,	and	we	intend	to	defend	vigorously	each	case.	We	have	accrued for	legal	claims	when,	and	to	the	extent	that,	amounts	associated	with	the	claims	become	probable	and	can	be	reasonably	estimated.	The	actual	costs	of	resolving	legal claims	may	be	substantially	higher	or	lower	than	the	amounts	accrued	for	those	claims.

For	those	matters	as	to	which	we	are	not	able	to	estimate	a	possible	loss	or	range	of	loss,	we	are	not	able	to	determine	whether	the	loss	will	have	a	material	adverse effect	on	our	business,	financial	condition	or	results	of	operations	or	liquidity.	For	matters	in	this	category,	we	have	indicated	in	the	descriptions	that	follow	the	reasons that	we	are	unable	to	estimate	the	possible	loss	or	range	of	loss.

# Judicial	Proceedings

We	are	a	defendant	in	a	number	of	lawsuits	filed	in	state	and	federal	courts	containing	various	class	action	allegations	under	state	wage-and-hour	laws.	At	this time,	we	do	not	believe	that	any	loss	associated	with	these	matters	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity.

UPS	and	our	subsidiary	The	UPS	Store,	Inc.,	are	defendants	in	Morgate	v.	The	UPS	Store,	Inc.	et	al.,	an	action	in	the	Los	Angeles	Superior	Court	brought	on behalf	of	a	certified	class	of	all	franchisees	who	chose	to	rebrand	their	Mail	Boxes	Etc.	franchises	to	The	UPS	Store	in	March	2003.	Plaintiff	alleges	that	UPS	and	The UPS	Store,	Inc.	misrepresented	and	omitted	facts	to	the	class	about	the	market	tests	that	were	conducted	before	offering	the	class	the	choice	of	whether	to	rebrand	to	The UPS	Store.	Trial	is	scheduled	for	mid-2017.

There	are	multiple	factors	that	prevent	us	from	being	able	to	estimate	the	amount	of	loss,	if	any,	that	may	result	from	the	remaining	aspects	of	this	case,	including: (1)	we	are	vigorously	defending	ourselves	and	believe	we	have	a	number	of	meritorious	legal	defenses;	and	(2)	it	remains	uncertain	what	evidence	of	damages,	if	any, plaintiffs	will	be	able	to	present.	Accordingly,	at	this	time,	we	are	not	able	to	estimate	a	possible	loss	or	range	of	loss	that	may	result	from	this	matter	or	to	determine whether	such	loss,	if	any,	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity.

In	AFMS	LLC	v.	UPS	and	FedEx	Corporation,	a	lawsuit	filed	in	federal	court	in	the	Central	District	of	California	in	August	2010,	the	plaintiff	asserts	that	UPS	and FedEx	violated	U.S.	antitrust	law	by	conspiring	to	refuse	to	negotiate	with	third-party	negotiators	retained	by	shippers	and	by	individually	imposing	policies	that	prevent shippers	from	using	such	negotiators.	The	Court	granted	summary	judgment	motions	filed	by	UPS	and	FedEx,	entered	judgment	in	favor	of	UPS	and	FedEx,	and dismissed	the	case.	Plaintiff	appealed	to	the	Court	of	Appeals	for	the	Ninth	Circuit,	briefing	is	complete	and	oral	argument	has	been	scheduled	for	March	2017.	The Antitrust	Division	of	the	U.S.	Department	of	Justice	("DOJ")	opened	a	civil	investigation	of	our	policies	and	practices	for	dealing	with	third-party	negotiators.	We	have cooperated	with	this	investigation.	We	deny	any	liability	with	respect	to	these	matters	and	intend	to	vigorously	defend	ourselves.	There	are	multiple	factors	that	prevent us	from	being	able	to	estimate	the	amount	of	loss,	if	any,	that	may	result	from	these	matters	including:	(1)	the	DOJ	investigation	is	pending;	(2)	the	Court	granted	our motion	for	summary	judgment;	and	(3)	the	appeal	remains	pending.	Accordingly,	at	this	time,	we	are	not	able	to	estimate	a	possible	loss	or	range	of	loss	that	may	result from	these	matters	or	to	determine	whether	such	loss,	if	any,	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	or	liquidity.

We	are	a	defendant	in	Ryan	Wright	and	Julia	Zislin	v.	United	Parcel	Service	Canada	Ltd.,	an	action	brought	on	behalf	of	a	certified	class	of	customers	in	the Superior	Court	of	Justice	in	Ontario,	Canada.	Plaintiffs	filed	suit	in	February	2007,	alleging	inadequate	disclosure	concerning	the	existence	and	cost	of	brokerage services	provided	by	us	under	applicable	provincial	consumer	protection	legislation	and	infringement	of	interest	restriction	provisions	under	the	Criminal	Code	of Canada.	Partial	summary	judgment	was	granted	to	us	and	the	plaintiffs	by	the	Ontario	motions	court	in	August	2011,	when	it	dismissed	plaintiffs'	complaint	under	the Criminal	Code	and	granted	plaintiffs'	complaint	of	inadequate	disclosure.	We	appealed	the	Court's	decision	pertaining	to	inadequate	disclosure	in	September	2011	and continue	to	vigorously	defend	all	other	allegations.	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	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	asserts	claims	under	various	federal	and	state	laws.		The	complaint	also	includes	a	claim that	UPS	violated	the	Assurance	of	Discontinuance	it	entered	into	with	the	New	York	Attorney	General	in	2005	concerning	cigarette	deliveries.	Trial	was	held	in September	2016,	and	closing	arguments	were	held	in	November	2016.	There	are	multiple	factors	that	prevent	us	from	being	able	to	estimate	the	amount	of	loss,	if	any, that	may	result	from	this	case,	including:	(1)	we	are	vigorously	defending	ourselves	and	believe	we	have	a	number	of	meritorious	factual	and	legal	defenses;	and	(2)	it remains	uncertain	how	the	Court	will	resolve	the	State	and	City's	various	claims	and	our	defenses.	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	May	2016,	a	purported	shareowner	derivative	suit	was	filed	in	the	Delaware	Court	of	Chancery	naming	certain	of	UPS's	current	and	former	officers	and directors	as	defendants,	alleging	that	they	breached	their	fiduciary	duties	by	failing	to	monitor	UPS's	compliance	with	the	Assurance	of	Discontinuance	and	other	federal and	state	laws	relating	to	cigarette	deliveries.	The	Company's	and	individual	defendants'	motion	to	dismiss	was	heard	in	October	2016.	On	January	19,	2017,	the	Court of	Chancery	dismissed	the	plaintiffs'	suit	in	its	entirety.

We	are	a	defendant	in	various	other	lawsuits	that	arose	in	the	normal	course	of	business.	We	do	not	believe	that	the	eventual	resolution	of	these	other	lawsuits (either	individually	or	in	the	aggregate),	including	any	reasonably	possible	losses	in	excess	of	current	accruals,	will	have	a	material	adverse	effect	on	our	financial condition,	results	of	operations	or	liquidity.

# Other	Matters

In	August	2010,	competition	authorities	in	Brazil	opened	an	administrative	proceeding	to	investigate	alleged	anticompetitive	behavior	in	the	freight	forwarding industry.	Approximately	45	freight	forwarding	companies	and	individuals	are	named	in	the	proceeding,	including	UPS,	UPS	SCS	Transportes	(Brasil)	S.A.,	and	a former	employee	in	Brazil.	UPS	submitted	its	written	defenses	to	these	allegations	in	April	2014.	These	allegations	have	been	settled	for	an	immaterial	amount.

# 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,	2016,	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,	2016,	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):

|  | 2016<br>Shares | Dollars | 2015<br>Shares | Dollars | 2014<br>Shares | Dollars |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Class\tA\tCommon\tStock: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 194 | $2 | 201 | $2 | 212 | $2 |
| Common\tstock\tpurchases | (4) | — | (4) | — | (5) | — |
| Stock\taward\tplans | 5 | — | 5 | — | 5 | — |
| Common\tstock\tissuances | 2 | — | 3 | — | 3 | — |
| Conversions\tof\tclass\tA\tto\tclass\tB\tcommon\tstock | (17) | — | (11) | — | (14) | — |
| Class\tA\tshares\tissued\tat\tend\tof\tyear | 180 | $2 | 194 | $2 | 201 | $2 |
| Class\tB\tCommon\tStock: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 693 | $7 | 705 | $7 | 712 | $7 |
| Common\tstock\tpurchases | (21) | — | (23) | — | (21) | — |
| Conversions\tof\tclass\tA\tto\tclass\tB\tcommon\tstock | 17 | — | 11 | — | 14 | — |
| Class\tB\tshares\tissued\tat\tend\tof\tyear | 689 | $7 | 693 | $7 | 705 | $7 |
| Additional\tPaid-In\tCapital: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $— |  | $— |  | $— |
| Stock\taward\tplans | 541 | 541 |  | 492 | 656 | 656 |
| Common\tstock\tpurchases | (898) | (898) |  | (791) | (918) | (918) |
| Common\tstock\tissuances |  |  |  |  |  |  |
|  | 303 | 303 |  | 316 | 309 | 309 |
| Option\tpremiums\treceived\t(paid) |  | 54 |  | (17) |  | (47) |
| Balance\tat\tend\tof\tyear |  | $— |  | $— |  | $— |
| Retained\tEarnings: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $6,001 |  | $5,726 |  | $6,925 |
| Net\tincome\tattributable\tto\tcontrolling\tinterests |  | 3,431 |  | 4,844 |  | 3,032 |
| Dividends\t($3.12,\t$2.92\tand\t$2.68\tper\tshare) | (2,771) | (2,771) |  | (2,649) |  | (2,487) |
| Common\tstock\tpurchases |  | (1,782) |  | (1,920) |  | (1,744) |
| Balance\tat\tend\tof\tyear |  | $4,879 |  | $6,001 |  | $5,726 |

For	the	years	ended	December	31,	2016,	2015	and	2014,	we	repurchased	a	total	of	25.2,	26.8	and	26.4	million	shares	of	class	A	and	class	B	common	stock	for $2.680,	$2.711	and	$2.662	billion,	respectively	($2.678,	$2.702	and	$2.695	billion	in	repurchases	for	2016,	2015	and	2014,	respectively,	are	reported	on	the	cash	flow statement	due	to	the	timing	of	settlements).	During	the	first	quarter	of	2016,	we	also	exercised	a	capped	call	option	that	we	entered	in	2015	for	which	we	received	0.2 million	UPS	class	B	shares.	The	$25	million	premium	payment	for	this	capped	call	option	reduced	shareowners'	equity	in	2015.	In	total,	shares	repurchased	and	received the	twelve	months	ended	December	31,	2016	were	25.4	million	shares	for	$2.705	billion.	In	May	2016,	the	Board	of	Directors	approved	a	new	share	repurchase authorization	of	$8.0	billion,	which	replaced	an	authorization	previously	announced	in	2013.	This	new	share	repurchase	authorization	has	no	expiration	date.	As	of December	31,	2016,	we	had	$6.155	billion	of	this	share	repurchase	authorization	remaining.

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	(paid)	net	premiums	of	$54	and	$(17)	million during	2016	and	2015,	respectively,	related	to	entering	into	and	settling	capped	call	options	for	the	purchase	of	class	B	shares.	As	of	December	31,	2016,	we	had outstanding	options	for	the	purchase	of	1.0	million	shares	with	an	average	strike	price	of	$97.27	per	share	that	will	settle	in	the	first	quarter	of	2017.

# Accumulated	Other	Comprehensive	Income	(Loss)

We	incur	activity	in	AOCI	for	unrealized	holding	gains	and	losses	on	available-for-sale	securities,	foreign	currency	translation	adjustments,	unrealized	gains	and losses	from	derivatives	that	qualify	as	hedges	of	cash	flows	and	unrecognized	pension	and	postretirement	benefit	costs.	The	activity	in	AOCI	is	as	follows	(in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Foreign\tCurrency\tTranslation\tGain\t(Loss): |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $(897) | $(457) | $(126) |
| Translation\tadjustment\t(net\tof\ttax\teffect\tof\t$32,\t$0,\tand\t$105) | (119) | (440) | (331) |
| Balance\tat\tend\tof\tyear | (1,016) | (897) | (457) |
| Unrealized\tGain\t(Loss)\ton\tMarketable\tSecurities,\tNet\tof\tTax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (1) | — | (1) |
| Current\tperiod\tchanges\tin\tfair\tvalue\t(net\tof\ttax\teffect\tof\t$0,\t$(1),\tand\t$1) | — | (1) | 2 |
| Reclassification\tto\tearnings\t(no\ttax\timpact\tin\tany\tperiod) | — | — | (1) |
| Balance\tat\tend\tof\tyear | (1) | (1) | — |
| Unrealized\tGain\t(Loss)\ton\tCash\tFlow\tHedges,\tNet\tof\tTax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 67 | 61 | (219) |
| Current\tperiod\tchanges\tin\tfair\tvalue\t(net\tof\ttax\teffect\tof\t$75,\t$103,\tand\t$133) | 124 | 171 | 220 |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$(142),\t$(99),\tand\t$35) | (236) | (165) | 60 |
| Balance\tat\tend\tof\tyear | (45) | 67 | 61 |
| Unrecognized\tPension\tand\tPostretirement\tBenefit\tCosts,\tNet\tof\tTax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (2,709) | (3,198) | (114) |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$1,040,\t$97,\tand\t$870) | 1,783 | 195 | 1,462 |
| Net\tactuarial\tgain\t(loss)\tand\tprior\tservice\tcost\tresulting\tfrom\tremeasurements\tof\tplan\tassets\tand\tliabilities\n(net\tof\ttax\teffect\tof\t$(1,460),\t$197,\tand\t$(2,714)) | (2,495) | 294 | (4,546) |
| Balance\tat\tend\tof\tyear | (3,421) | (2,709) | (3,198) |
| Accumulated\tother\tcomprehensive\tincome\t(loss)\tat\tend\tof\tyear | $(4,483) | $(3,540) | $(3,594) |

Detail	of	the	gains	(losses)	reclassified	from	AOCI	to	the	statements	of	consolidated	income	for	the	years	ended	December	31,	2016,	2015	and	2014	is	as	follows (in	millions):

|  | 2016	Amount<br>Reclassified	from<br>AOCI | 2015	Amount<br>Reclassified	from<br>AOCI | 2014	Amount<br>Reclassified	from<br>AOCI | Affected	Line	Item	in	the	Income	Statement |
| :--- | :--- | :--- | :--- | :--- |
| Unrealized\tGain\t(Loss)\ton\tMarketable\tSecurities: |  |  |  |  |
| Realized\tgain\t(loss)\ton\tsale\tof\tsecurities | — | — | 1 | Investment\tincome |
| Income\ttax\t(expense)\tbenefit | — | — | — | Income\ttax\texpense |
| Impact\ton\tnet\tincome | — | — | 1 | Net\tincome |
| Unrealized\tGain\t(Loss)\ton\tCash\tFlow\tHedges: |  |  |  |  |
| Interest\trate\tcontracts | (26) | (24) | (23) | Interest\texpense |
| Foreign\texchange\tcontracts | — | (25) | (48) | Interest\texpense |
| Foreign\texchange\tcontracts | 404 | 313 | (24) | Revenue |
| Income\ttax\t(expense)\tbenefit | (142) | (99) | 35 | Income\ttax\texpense |
| Impact\ton\tnet\tincome | 236 | 165 | (60) | Net\tincome |
| Unrecognized\tPension\tand\tPostretirement\tBenefit\tCosts: |  |  |  |  |
| Prior\tservice\tcosts | (172) | (174) | (170) | Compensation\tand\tbenefits |
| Curtailment\tand\tsettlement\tloss | — | — | (356) | Compensation\tand\tbenefits |
| Remeasurement\tof\tbenefit\tobligation | (2,651) | (118) | (1,806) | Compensation\tand\tbenefits |
| Income\ttax\t(expense)\tbenefit | 1,040 | 97 | 870 | Income\ttax\texpense |
| Impact\ton\tnet\tincome | (1,783) | (195) | (1,462) | Net\tincome |
| Total\tamount\treclassified\tfor\tthe\tperiod | $(1,547) | $(30) | $(1,521) | Net\tincome |

# 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,	2016,	2015	and	2014	is	as	follows	(in	millions):

|  | 2016<br>Shares | Dollars | 2015<br>Shares | Dollars | 2014<br>Shares | Dollars |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Deferred\tCompensation\tObligations: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $51 |  | $59 |  | $69 |
| Reinvested\tdividends | 3 | 3 | 3 | 3 | 2 | 2 |
| Options\texercise\tdeferrals |  | — |  | — |  | — |
| Benefit\tpayments |  | (9) |  | (11) |  | (12) |
| Balance\tat\tend\tof\tyear |  | $45 |  | $51 |  | $59 |
| Treasury\tStock: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (1) | $(51) | (1) | $(59) | (1) | $(69) |
| Reinvested\tdividends | — | (3) | — | (3) | — | (2) |
| Options\texercise\tdeferrals | — | — | — | — | — | — |
| Benefit\tpayments | — | 9 | — | 11 | — | 12 |
| Balance\tat\tend\tof\tyear | (1) | $(45) | (1) | $(51) | (1) | $(59) |

# Noncontrolling	Interests

We	have	noncontrolling	interests	in	certain	consolidated	subsidiaries	in	our	International	Package	and	Supply	Chain	&	Freight	segments.	Noncontrolling	interests increased	$3	and	$4	million	for	the	years	ended	December	31,	2016	and	2015,	respectively.

# NOTE	11.	STOCK-BASED	COMPENSATION

The	UPS	Incentive	Compensation	Plan	permits	the	grant	of	non-qualified	and	incentive	stock	options,	stock	appreciation	rights,	restricted	stock	and	stock	units, and	restricted	performance	shares	and	units	to	eligible	employees.	The	number	of	shares	reserved	for	issuance	under	the	Incentive	Compensation	Plan	is	27	million. Each	share	issued	pursuant	to	restricted	stock	units	and	restricted	performance	units	(collectively	referred	to	as	"Restricted	Units"),	stock	options	and	other	permitted awards	will	reduce	the	share	reserve	by	one	share.	We	had	17	million	shares	available	to	be	issued	under	the	Incentive	Compensation	Plan	as	of	December	31,	2016.

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	$591,	$574	and	$536	million	during	2016,	2015 and	2014,	respectively.	The	associated	income	tax	benefit	recognized	in	our	income	statement	was	$219,	$215	and	$199	million	during	2016,	2015	and	2014,

respectively.	The	cash	income	tax	benefit	received	from	the	exercise	of	stock	options	and	the	lapsing	of	Restricted	Units	was	$207,	$252	and	$261	million	during	2016, 2015	and	2014,	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,	disability,	or	retirement,	Restricted	Units	granted	for	our	Management	Incentive	Award	generally	vest	over	a	five-year	period	with	approximately	20%	of	the award	vesting	at	each	anniversary	date	of	the	grant.	The	entire	grant	is	expensed	on	a	straight-line	basis	over	the	requisite	service	period.	All	Restricted	Units	granted	are subject	to	earlier	cancellation	or	vesting	under	certain	conditions.	Dividends	earned	on	Restricted	Units	are	reinvested	in	additional	Restricted	Units	at	each	dividend payable	date.

# Coyote	Restricted	Stock	Award

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

# Long-Term	Incentive	Performance	Award	granted	prior	to	2014

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

As	of	December	31,	2016,	we	had	the	following	Restricted	Units	outstanding,	including	reinvested	dividends,	that	were	granted	under	our	Management	Incentive Award	program,	Coyote	Restricted	Stock	Award	and	Long-Term	Incentive	Performance	Award	program	(granted	prior	to	2014):

|  | Shares<br>(in	thousands) | Weighted-Average<br>Grant	Date<br>Fair	Value | Weighted-Average	Remaining<br>Contractual	Term<br>(in	years) | Aggregate	Intrinsic<br>Value	(in	millions) |
| :--- | :--- | :--- | :--- | :--- |
| Nonvested\tat\tJanuary\t1,\t2016 | 11,012 | $90.71 |  |  |
| Vested | (5,180) | 87.79 |  |  |
| Granted | 5,446 | 97.04 |  |  |
| Reinvested\tDividends | 348 | N/A |  |  |
| Forfeited\t/\tExpired | (151) | 95.23 |  |  |
| Nonvested\tat\tDecember\t31,\t2016 | 11,475 | $94.32 | 1.42 | $1,315 |
| Restricted\tUnits\tExpected\tto\tVest | 11,129 | $94.33 | 1.41 | $1,276 |

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	2016,	2015	and	2014	was	$97.04,	$100.63	and	$92.35,	respectively.	The	total	fair	value	of	Restricted	Units	vested	was	$445,	$564	and $579	million	in	2016,	2015	and	2014,	respectively.	As	of	December	31,	2016,	there	was	$512	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	granted	after	2013

We	award	Restricted	Units	in	conjunction	with	our	Long-Term	Incentive	Performance	Award	program	to	certain	eligible	employees.	Beginning	with	the	Long- Term	Incentive	Performance	grant	in	2014,	the	performance	targets	are	equally-weighted	among	consolidated	operating	return	on	invested	capital,	growth	in	currency- constant	consolidated	revenue	and	total	shareowner	return	relative	("RTSR")	to	a	peer	group	of	companies.	The	Restricted	Units	granted	under	this	award	generally	vest at	the	end	of	a	three-year	period	(except	in	the	case	of	death	disability	or	retirement,	in	which	case	immediate	vesting	occurs	on	a	prorated	basis).	The	number	of Restricted	Units	earned	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:

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Risk-free\tinterest\trate | 1.00% | 0.89% | 0.65% |
| Expected\tvolatility | 16.46% | 15.53% | 17.02% |
| Weighted-average\tfair\tvalue\tof\tunits\tgranted | $136.18 | $63.64 | $106.52 |
| Share\tpayout | 129.08% | 65.86% | 109.84% |

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

As	of	December	31,	2016,	we	had	the	following	Restricted	Units	outstanding,	including	reinvested	dividends,	that	were	granted	under	our	Long-Term	Incentive Performance	Award	program	(granted	after	2013):

|  | Shares<br>(in	thousands) | Weighted-Average<br>Grant	Date<br>Fair	Value | Weighted-Average	Remaining<br>Contractual	Term<br>(in	years) | Aggregate	Intrinsic<br>Value	(in	millions) |
| :--- | :--- | :--- | :--- | :--- |
| Nonvested\tat\tJanuary\t1,\t2016 | 1,615 | $96.80 |  |  |
| Vested | (800) | 97.02 |  |  |
| Granted | 926 | 105.50 |  |  |
| Reinvested\tDividends | 70 | N/A |  |  |
| Forfeited\t/\tExpired | (128) | 99.70 |  |  |
| Nonvested\tat\tDecember\t31,\t2016 | 1,683 | $101.36 | 1.53 | $193 |
| Performance\tUnits\tExpected\tto\tVest | 1,590 | $101.44 | 1.56 | $182 |

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	2016,	2015	and	2014	was	$105.50,	$96.64	and	$96.98,	respectively.	The	total	fair	value	of	Restricted	Units	vested	was	$13	and	$5 million	in	2016	and	2015,	respectively.	As	of	December	31,	2016,	there	was	$92	million	of	total	unrecognized	compensation	cost	related	to	nonvested	Restricted	Units. That	cost	is	expected	to	be	recognized	over	a	weighted-average	period	of	one	year	and	nine	months.

# Non-qualified	Stock	Options

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

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

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

|  | Shares<br>(in	thousands) | Weighted-Average<br>Exercise<br>Price | Weighted-Average	Remaining<br>Contractual	Term<br>(in	years) | Aggregate	Intrinsic<br>Value	(in	millions) |
| :--- | :--- | :--- | :--- | :--- |
| Outstanding\tat\tJanuary\t1,\t2016 | 2,771 | $77.33 |  |  |
| Exercised | (1,186) | 77.63 |  |  |
| Granted | 259 | 100.92 |  |  |
| Forfeited\t/\tExpired | (16) | 80.88 |  |  |
| Outstanding\tat\tDecember\t31,\t2016 | 1,828 | $80.45 | 4.26 | $62 |
| Options\tVested\tand\tExpected\tto\tVest | 1,828 | $80.45 | 4.26 | $62 |
| Exercisable\tat\tDecember\t31,\t2016 | 1,410 | $75.07 | 3.01 | $56 |

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:

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Expected\tdividend\tyield | 2.95% | 2.63% | 2.56% |
| Risk-free\tinterest\trate | 1.62% | 2.07% | 2.40% |
| Expected\tlife\tin\tyears | 7.5 | 7.5 | 7.5 |
| Expected\tvolatility | 22.40% | 20.61% | 24.26% |
| Weighted-average\tfair\tvalue\tof\toptions\tgranted | $16.46 | $18.07 | $20.48 |

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	$72,	$56	and	$85	million	during	2016,	2015	and	2014,	respectively,	from	option	holders	resulting	from	the	exercise	of	stock	options.	The total	intrinsic	value	of	options	exercised	during	2016,	2015	and	2014	was	$24,	$31	and	$47	million,	respectively.	As	of	December	31,	2016,	there	was	$1	million	of	total unrecognized	compensation	cost	related	to	nonvested	options.	That	cost	is	expected	to	be	recognized	over	a	weighted-average	period	of	three	years	and	seven	months.

The	following	table	summarizes	information	about	stock	options	outstanding	and	exercisable	at	December	31,	2016:

|  |  | Options	Outstanding |  | Options	Exercisable | Options	Exercisable |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Exercise\tPrice\tRange | Shares\n(in\tthousands) | Average\tLife\n(in\tyears) | Weighted-Average\nExercise\nPrice | Shares\n(in\tthousands) | Weighted-Average\nExercise\nPrice |
| $55.01\t-\t$70.00 | 201 | 2.93 | $62.42 | 201 | $62.42 |
| $70.01\t-\t$80.00 | 937 | 1.79 | 72.42 | 921 | 72.34 |
| $80.01\t-\t$90.00 | 147 | 6.17 | 82.94 | 115 | 82.92 |
| $90.01\t-\t$110.00 | 543 | 8.49 | 100.31 | 173 | 99.14 |
|  | 1,828 | 4.26 | $80.45 | 1,410 | $75.07 |

# Discounted	Employee	Stock	Purchase	Plan

We	maintain	an	employee	stock	purchase	plan	for	all	eligible	employees.	Under	this	plan,	shares	of	UPS	class	A	common	stock	may	be	purchased	at	quarterly intervals	at	95%	of	the	NYSE	closing	price	of	UPS	class	B	common	stock	on	the	last	day	of	each	quarterly	period.	Employees	purchased	0.9,	0.9	and	0.9	million	shares at	average	prices	of	$99.27,	$95.41	and	$95.67	per	share	during	2016,	2015	and	2014,	respectively.	This	plan	is	not	considered	to	be	compensatory,	and	therefore	no compensation	cost	is	measured	for	the	employees'	purchase	rights.

# 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	(Indian	Subcontinent,	Middle	East	and	Africa)	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	Coyote	units	provide	services	in	more	than	195	countries	and	territories	worldwide	and	include	international	air	and	ocean	freight	forwarding, customs	brokerage,	truckload	freight	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.	Other	aggregated	business	units	within	this	segment	include	The	UPS	Store	and	UPS	Capital.

In	evaluating	financial	performance,	we	focus	on	operating	profit	as	a	segment's	measure	of	profit	or	loss.	Operating	profit	is	before	investment	income	and	other, interest	expense	and	income	taxes.	The	accounting	policies	of	the	reportable	segments	are	the	same	as	those	described	in	the	summary	of	accounting	policies	(see	note 1),	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.

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

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Revenue: |  |  |  |
| U.S.\tDomestic\tPackage | $38,301 | $36,747 | $35,851 |
| International\tPackage | 12,350 | 12,149 | 12,988 |
| Supply\tChain\t&amp;\tFreight | 10,255 | 9,467 | 9,393 |
| Consolidated | $60,906 | $58,363 | $58,232 |
| Operating\tProfit: |  |  |  |
| U.S.\tDomestic\tPackage | $3,017 | $4,767 | $2,859 |
| International\tPackage | 2,044 | 2,137 | 1,677 |
| Supply\tChain\t&amp;\tFreight | 406 | 764 | 432 |
| Consolidated | $5,467 | $7,668 | $4,968 |
| Assets: |  |  |  |
| U.S.\tDomestic\tPackage | $23,191 | $21,701 | $20,708 |
| International\tPackage | 8,193 | 7,858 | 7,850 |
| Supply\tChain\t&amp;\tFreight | 7,806 | 7,728 | 6,004 |
| Unallocated | 1,187 | 1,024 | 878 |
| Consolidated | $40,377 | $38,311 | $35,440 |
| Depreciation\tand\tAmortization\tExpense: |  |  |  |
| U.S.\tDomestic\tPackage | $1,479 | $1,408 | $1,276 |
| International\tPackage | 491 | 475 | 478 |
| Supply\tChain\t&amp;\tFreight | 254 | 201 | 169 |
| Consolidated | $2,224 | $2,084 | $1,923 |

Revenue	by	product	type	for	the	years	ended	December	31	is	as	follows	(in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| U.S.\tDomestic\tPackage: |  |  |  |
| Next\tDay\tAir | $6,752 | $6,570 | $6,581 |
| Deferred | 4,082 | 3,903 | 3,672 |
| Ground | 27,467 | 26,274 | 25,598 |
| Total\tU.S.\tDomestic\tPackage | 38,301 | 36,747 | 35,851 |
| International\tPackage: |  |  |  |
| Domestic | 2,441 | 2,425 | 2,784 |
| Export | 9,374 | 9,092 | 9,586 |
| Cargo | 535 | 632 | 618 |
| Total\tInternational\tPackage | 12,350 | 12,149 | 12,988 |
| Supply\tChain\t&amp;\tFreight: |  |  |  |
| Forwarding\tand\tLogistics | 6,793 | 5,900 | 5,758 |
| Freight | 2,736 | 2,881 | 3,048 |
| Other | 726 | 686 | 587 |
| Total\tSupply\tChain\t&amp;\tFreight | 10,255 | 9,467 | 9,393 |
| Consolidated | $60,906 | $58,363 | $58,232 |

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

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| United\tStates: |  |  |  |
| Revenue | $48,013 | $45,309 | $43,840 |
| Long-lived\tassets | $19,253 | $18,196 | $15,902 |
| International: |  |  |  |
| Revenue | $12,893 | $13,054 | $14,392 |
| Long-lived\tassets | $5,898 | $5,828 | $6,105 |
| Consolidated: |  |  |  |
| Revenue | $60,906 | $58,363 | $58,232 |
| Long-lived\tassets | $25,151 | $24,024 | $22,007 |

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,	2016, 2015	or	2014.

# NOTE	13.	INCOME	TAXES

The	income	tax	expense	(benefit)	for	the	years	ended	December	31	consists	of	the	following	(in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Current: |  |  |  |
| U.S.\tFederal | $1,338 | $1,634 | $932 |
| U.S.\tState\tand\tLocal | 67 | 88 | 103 |
| Non-U.S. | 177 | 236 | 185 |
| Total\tCurrent | 1,582 | 1,958 | 1,220 |
| Deferred: |  |  |  |
| U.S.\tFederal | 103 | 469 | 427 |
| U.S.\tState\tand\tLocal | 31 | 65 | (11) |
| Non-U.S. | (11) | 6 | (31) |
| Total\tDeferred | 123 | 540 | 385 |
| Total\tIncome\tTax\tExpense | $1,705 | $2,498 | $1,605 |

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

Our	effective	tax	rate	decreased	to	33.2%	in	2016,	compared	with	34.0%	in	2015	and	34.6%	in	2014,	primarily	due	to	the	effects	of	the	aforementioned	recurring factors	and	the	following	discrete	tax	items:

# 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,	2017	and	may	be	extended through	December	31,	2022	if	additional	requirements	are	satisfied.	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	$21,	$25	and	$21	million	for	2016,	2015,	and	2014,	respectively.

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

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Fixed\tassets\tand\tcapitalized\tsoftware | $(4,782) | $(4,776) |
| Other | (756) | (699) |
| Deferred\ttax\tliabilities | (5,538) | (5,475) |
| Pension\tand\tpostretirement\tbenefits | 4,236 | 3,915 |
| Loss\tand\tcredit\tcarryforwards | 229 | 261 |
| Insurance\treserves | 733 | 730 |
| Stock\tcompensation | 297 | 256 |
| Other | 681 | 650 |
| Deferred\ttax\tassets | 6,176 | 5,812 |
| Deferred\ttax\tassets\tvaluation\tallowance | (159) | (197) |
| Deferred\ttax\tasset\t(net\tof\tvaluation\tallowance) | 6,017 | 5,615 |
| Net\tdeferred\ttax\tasset | $479 | $140 |
| Amounts\trecognized\tin\tthe\tconsolidated\tbalance\tsheets: |  |  |
| Deferred\ttax\tassets | $591 | $255 |
| Deferred\ttax\tliabilities | (112) | (115) |
| Net\tdeferred\ttax\tasset | $479 | $140 |

We	have	a	U.S.	federal	capital	loss	carryforward	of	$33	million	as	of	December	31,	2016	which	expires	December	31,	2021.	In	addition,	we	have	U.S.	state	and local	operating	loss	and	credit	carryforwards	as	follows	(in	millions):

The	U.S.	state	and	local	operating	loss	carryforwards	expire	at	varying	dates	through	2036.	The	U.S.	state	and	local	credits	can	be	carried	forward	for	periods ranging	from	three	years	to	indefinitely.	We	also	have	non-U.S.	loss	carryforwards	of	$479	million	as	of	December	31,	2016,	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	of	foreign	subsidiaries	amounted	to	$5.504	billion	at	December	31,	2016.	Those	earnings	are	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 income	taxes	and	withholding	taxes	payable	in	various	jurisdictions,	which	could	potentially	be	offset	by	foreign	tax	credits.	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	unrecognized	tax	benefits	(in	millions):

|  | Tax | Interest | Penalties |
| :--- | :--- | :--- | :--- |
| Balance\tat\tJanuary\t1,\t2014 | $191 | $40 | $4 |
| Additions\tfor\ttax\tpositions\tof\tthe\tcurrent\tyear | 15 | — | — |
| Additions\tfor\ttax\tpositions\tof\tprior\tyears | 51 | 13 | — |
| Reductions\tfor\ttax\tpositions\tof\tprior\tyears\tfor: |  |  |  |
| Changes\tbased\ton\tfacts\tand\tcircumstances | (74) | (8) | — |
| Settlements\tduring\tthe\tperiod | (10) | (2) | — |
| Lapses\tof\tapplicable\tstatute\tof\tlimitations | (1) | (1) | (1) |
| Balance\tat\tDecember\t31,\t2014 | 172 | 42 | 3 |
| Additions\tfor\ttax\tpositions\tof\tthe\tcurrent\tyear | 24 | — | — |
| Additions\tfor\ttax\tpositions\tof\tprior\tyears | 45 | 21 | 3 |
| Reductions\tfor\ttax\tpositions\tof\tprior\tyears\tfor: |  |  |  |
| Changes\tbased\ton\tfacts\tand\tcircumstances | (85) | (8) | — |
| Settlements\tduring\tthe\tperiod | (6) | (2) | — |
| Lapses\tof\tapplicable\tstatute\tof\tlimitations | (2) | — | — |
| Balance\tat\tDecember\t31,\t2015 | 148 | 53 | 6 |
| Additions\tfor\ttax\tpositions\tof\tthe\tcurrent\tyear | 17 | — | — |
| Additions\tfor\ttax\tpositions\tof\tprior\tyears | 20 | 10 | — |
| Reductions\tfor\ttax\tpositions\tof\tprior\tyears\tfor: |  |  |  |
| Changes\tbased\ton\tfacts\tand\tcircumstances | (41) | (13) | — |
| Settlements\tduring\tthe\tperiod | — | — | — |
| Lapses\tof\tapplicable\tstatute\tof\tlimitations | — | — | — |
| Balance\tat\tDecember\t31,\t2016 | $144 | $50 | $6 |

The	total	amount	of	gross	unrecognized	tax	benefits	as	of	December	31,	2016,	2015	and	2014	that,	if	recognized,	would	affect	the	effective	tax	rate	were	$142, $147	and	$166	million,	respectively.	Our	continuing	policy	is	to	recognize	interest	and	penalties	associated	with	income	tax	matters	as	a	component	of	income	tax expense.

We	file	income	tax	returns	in	the	U.S.	federal	jurisdiction,	most	U.S.	state	and	local	jurisdictions,	and	many	non-U.S.	jurisdictions.	We	have	substantially	resolved all	U.S.	federal	income	tax	matters	for	tax	years	prior	to	2013.

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

# NOTE	14.	EARNINGS	PER	SHARE

The	following	table	sets	forth	the	computation	of	basic	and	diluted	earnings	per	share	(in	millions,	except	per	share	amounts):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Numerator: |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tshareowners | $3,431 | $4,844 | $3,032 |
| Denominator: |  |  |  |
| Weighted-average\tshares | 878 | 896 | 913 |
| Deferred\tcompensation\tobligations | 1 | 1 | 1 |
| Vested\tportion\tof\trestricted\tshares | 4 | 4 | 2 |
| Denominator\tfor\tbasic\tearnings\tper\tshare | 883 | 901 | 916 |
| Effect\tof\tDilutive\tSecurities: |  |  |  |
| Restricted\tperformance\tunits | 3 | 4 | 7 |
| Stock\toptions | 1 | 1 | 1 |
| Denominator\tfor\tdiluted\tearnings\tper\tshare | 887 | 906 | 924 |
| Basic\tEarnings\tPer\tShare | $3.89 | $5.38 | $3.31 |
| Diluted\tEarnings\tPer\tShare | $3.87 | $5.35 | $3.28 |

Diluted	earnings	per	share	for	the	years	ended	December	31,	2016,	2015	and	2014	exclude	the	effect	of	0.2,	0.2	and	0.1	million	shares,	respectively,	of	common stock	that	may	be	issued	upon	the	exercise	of	employee	stock	options	because	such	effect	would	be	antidilutive.

# NOTE	15.	DERIVATIVE	INSTRUMENTS	AND	RISK	MANAGEMENT

# Risk	Management	Policies

We	are	exposed	to	market	risk,	primarily	related	to	foreign	exchange	rates,	commodity	prices	and	interest	rates.	These	exposures	are	actively	monitored	by management.	To	manage	the	volatility	relating	to	certain	of	these	exposures,	we	enter	into	a	variety	of	derivative	financial	instruments.	Our	objective	is	to	reduce,	where it	is	deemed	appropriate	to	do	so,	fluctuations	in	earnings	and	cash	flows	associated	with	changes	in	foreign	currency	rates,	commodity	prices	and	interest	rates.	It	is	our policy	and	practice	to	use	derivative	financial	instruments	only	to	the	extent	necessary	to	manage	exposures.	As	we	use	price	sensitive	instruments	to	hedge	a	certain portion	of	our	existing	and	anticipated	transactions,	we	expect	that	any	loss	in	value	for	those	instruments	generally	would	be	offset	by	increases	in	the	value	of	those hedged	transactions.	We	do	not	hold	or	issue	derivative	financial	instruments	for	trading	or	speculative	purposes.

# Credit	Risk	Management

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

We	have	agreements	with	all	of	our	active	counterparties	(covering	the	majority	of	our	derivative	positions)	containing	early	termination	rights	and/or	zero threshold	bilateral	collateral	provisions	whereby	cash	is	required	based	on	the	net	fair	value	of	derivatives	associated	with	those	counterparties.	Events	such	as	a counterparty	credit	rating	downgrade	(depending	on	the	ultimate	rating	level)	could	also	allow	us	to	take	additional	protective	measures	such	as	the	early	termination	of trades.	At	December	31,	2016	and	2015,	we	held	cash	collateral	of	$575	and	$717	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.

In	connection	with	the	agreements	described	above,	we	could	also	be	required	to	provide	additional	collateral	or	terminate	transactions	with	certain	counterparties in	the	event	of	a	downgrade	of	our	credit	rating.	The	amount	of	collateral	required	would	be	determined	by	the	net	fair	value	of	the	associated	derivatives	with	each counterparty.	At	December	31,	2016	and	2015,	no	collateral	was	required	to	be	posted	with	any	of	our	counterparties;	however,	the	aggregate	fair	value	of	instruments not	covered	by	the	zero	threshold	bilateral	collateral	provisions	that	were	in	a	net	liability	position	was	$10	million	at	December	31,	2016.

We	have	not	historically	incurred,	and	do	not	expect	to	incur	in	the	future,	any	losses	as	a	result	of	counterparty	default.

# Accounting	Policy	for	Derivative	Instruments

We	recognize	all	derivative	instruments	as	assets	or	liabilities	in	the	consolidated	balance	sheets	at	fair	value.	The	accounting	for	changes	in	the	fair	value	of	a derivative	instrument	depends	on	whether	it	has	been	designated	and	qualifies	as	part	of	a	hedging	relationship	and,	further,	on	the	type	of	hedging	relationship.	For those	derivative	instruments	that	are	designated	and	qualify	as	hedging	instruments,	a	company	must	designate	the	derivative,	based	upon	the	exposure	being	hedged,	as a	cash	flow	hedge,	a	fair	value	hedge	or	a	hedge	of	a	net	investment	in	a	foreign	operation.

A	cash	flow	hedge	refers	to	hedging	the	exposure	to	variability	in	expected	future	cash	flows	that	is	attributable	to	a	particular	risk.	For	derivative	instruments	that are	designated	and	qualify	as	a	cash	flow	hedge,	the	effective	portion	of	the	gain	or	loss	on	the	derivative	instrument	is	reported	as	a	component	of	AOCI,	and reclassified	into	earnings	in	the	same	period	during	which	the	hedged	transaction	affects	earnings.	The	remaining	gain	or	loss	on	the	derivative	instrument	in	excess	of the	cumulative	change	in	the	present	value	of	future	cash	flows	of	the	hedged	item,	or	hedge	components	excluded	from	the	assessment	of	effectiveness,	are	recognized in	the	statements	of	consolidated	income	during	the	current	period.

A	fair	value	hedge	refers	to	hedging	the	exposure	to	changes	in	the	fair	value	of	an	existing	asset	or	liability	on	the	consolidated	balance	sheets	that	is	attributable to	a	particular	risk.	For	derivative	instruments	that	are	designated	and	qualify	as	a	fair	value	hedge,	the	gain	or	loss	on	the	derivative	instrument	is	recognized	in	the statements	of	consolidated	income	during	the	current	period,	as	well	as	the	offsetting	gain	or	loss	on	the	hedged	item.

A	net	investment	hedge	refers	to	the	use	of	cross	currency	swaps,	forward	contracts	or	foreign	currency	denominated	debt	to	hedge	portions	of	our	net	investments in	foreign	operations.	For	hedges	that	meet	the	effectiveness	requirements,	the	net	gains	or	losses	attributable	to	changes	in	spot	exchange	rates	are	recorded	in	the cumulative	translation	adjustment	within	AOCI.	The	remainder	of	the	change	in	value	of	such	instruments	is	recorded	in	earnings.

# Types	of	Hedges

# Commodity	Risk	Management

Currently,	the	fuel	surcharges	that	we	apply	to	our	domestic	and	international	package	and	LTL	services	are	the	primary	means	of	reducing	the	risk	of	adverse	fuel price	changes	on	our	business.	We	periodically	enter	into	option	and	future	contracts	on	energy	commodity	products	to	manage	the	price	risk	associated	with	forecasted transactions	involving	refined	fuels,	principally	jet-A,	diesel	and	unleaded	gasoline.	The	objective	of	the	hedges	is	to	reduce	the	variability	of	cash	flows,	due	to changing	fuel	prices,	associated	with	the	forecasted	transactions	involving	those	products.	We	have	designated	and	account	for	these	contracts	as	cash	flow	hedges	of	the underlying	forecasted	transactions	involving	these	fuel	products	and,	therefore,	the	resulting	gains	and	losses	from	these	hedges	are	recognized	as	a	component	of	fuel expense	or	revenue	when	the	underlying	transactions	occur.

# Foreign	Currency	Risk	Management

To	protect	against	the	reduction	in	value	of	forecasted	foreign	currency	cash	flows	from	our	international	package	business,	we	maintain	a	foreign	currency	cash flow	hedging	program.	Our	most	significant	foreign	currency	exposures	relate	to	the	Euro,	British	Pound	Sterling,	Canadian	Dollar,	Chinese	Renminbi	and	Hong	Kong Dollar.	We	hedge	portions	of	our	forecasted	revenue	denominated	in	foreign	currencies	with	foreign	currency	option	and	forward	contracts.	We	have	designated	and account	for	these	contracts	as	cash	flow	hedges	of	anticipated	foreign	currency	denominated	revenue	and,	therefore,	the	resulting	gains	and	losses	from	these	hedges	are recognized	as	a	component	of	international	package	revenue	when	the	underlying	sales	transactions	occur.

We	also	hedge	portions	of	our	anticipated	cash	settlements	of	intercompany	transactions	subject	to	foreign	currency	remeasurement	using	foreign	currency forward	contracts.	We	have	designated	and	account	for	these	contracts	as	cash	flow	hedges	of	forecasted	foreign	currency	denominated	transactions,	and	therefore	the resulting	gains	and	losses	from	these	hedges	are	recognized	as	a	component	of	investment	income	and	other	when	the	underlying	transactions	are	subject	to	currency remeasurement.

We	hedge	our	net	investment	in	certain	foreign	operations	with	foreign	currency	denominated	debt	instruments.	The	use	of	foreign	denominated	debt	as	the hedging	instrument	allows	the	debt	to	be	remeasured	to	cumulative	translation	adjustment	within	AOCI	to	offset	the	translation	risk	from	those	investments.	Any ineffective	portion	of	net	investment	hedging	is	recognized	as	a	component	of	investment	income	and	other.	Balances	in	the	cumulative	translation	adjustment	accounts remain	until	the	sale	or	liquidation	of	the	foreign	entity.

# Interest	Rate	Risk	Management

Our	indebtedness	under	our	various	financing	arrangements	creates	interest	rate	risk.	We	use	a	combination	of	derivative	instruments	as	part	of	our	program	to manage	the	fixed	and	floating	interest	rate	mix	of	our	total	debt	portfolio	and	related	overall	cost	of	borrowing.	The	notional	amount,	interest	payment	date	and	maturity date	of	the	swaps	match	the	terms	of	the	associated	debt	being	hedged.	Interest	rate	swaps	allow	us	to	maintain	a	target	range	of	floating	rate	debt	within	our	capital structure.

We	have	designated	and	account	for	the	majority	of	our	interest	rate	swaps	that	convert	fixed	rate	interest	payments	into	floating	rate	interest	payments	as	hedges of	the	fair	value	of	the	associated	debt	instruments.	Therefore,	the	gains	and	losses	resulting	from	fair	value	adjustments	to	the	interest	rate	swaps	and	fair	value adjustments	to	the	associated	debt	instruments	are	recorded	to	interest	expense	in	the	period	in	which	the	gains	and	losses	occur.	We	have	designated	and	account	for interest	rate	swaps	that	convert	floating	rate	interest	payments	into	fixed	rate	interest	payments	as	cash	flow	hedges	of	the	forecasted	payment	obligations.	The	gains	and losses	resulting	from	fair	value	adjustments	to	the	interest	rate	swaps	are	recorded	to	AOCI.

We	periodically	hedge	the	forecasted	fixed-coupon	interest	payments	associated	with	anticipated	debt	offerings,	using	forward	starting	interest	rate	swaps,	interest rate	locks	or	similar	derivatives.	These	agreements	effectively	lock	a	portion	of	our	interest	rate	exposure	between	the	time	the	agreement	is	entered	into	and	the	date when	the	debt	offering	is	completed,	thereby	mitigating	the	impact	of	interest	rate	changes	on	future	interest	expense.	These	derivatives	are	settled	commensurate	with the	issuance	of	the	debt,	and	any	gain	or	loss	upon	settlement	is	amortized	as	an	adjustment	to	the	effective	interest	yield	on	the	debt.

# Outstanding	Positions

The	notional	amounts	of	our	outstanding	derivative	positions	were	as	follows	as	of	December	31,	2016	and	2015	(in	millions):

|  |  | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Currency\tHedges: |  |  |  |
| Euro | EUR | 3,702 | 3,750 |
| British\tPound\tSterling | GBP | 1,380 | 1,140 |
| Canadian\tDollar | CAD | 1,053 | 177 |
| Indian\tRupee | INR | 76 | — |
| Mexican\tPeso | MXN | — | 3,863 |
| Japanese\tYen | JPY | 3,972 | 20,000 |
| Singapore\tDollar | SGD | 32 | — |
| Interest\tRate\tHedges: |  |  |  |
| Fixed\tto\tFloating\tInterest\tRate\tSwaps | USD | 5,799 | 5,799 |
| Floating\tto\tFixed\tInterest\tRate\tSwaps | USD | 778 | 778 |
| Investment\tMarket\tPrice\tHedges: |  |  |  |
| Marketable\tSecurities | EUR | 76 | 496 |

The	maximum	term	over	which	we	are	hedging	exposures	to	the	variability	of	cash	flow	is	16	years.

# Balance	Sheet	Recognition

The	following	table	indicates	the	location	on	the	consolidated	balance	sheets	in	which	our	derivative	assets	and	liabilities	have	been	recognized,	and	the	related fair	values	of	those	derivatives	as	of	December	31,	2016	and	2015	(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	our	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<br>Consolidated	Balance	Sheets | Gross	Amounts	Presented	in<br>Consolidated	Balance	Sheets | Net	Amounts	if	Right	of<br>Offset	had	been	Applied |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Asset\tDerivatives | Balance\tSheet\tLocation | 2016 | 2015 | 2016 | 2015 |
| Derivatives\tdesignated\tas\thedges: |  |  |  |  |  |
| Foreign\texchange\tcontracts | Other\tcurrent\tassets | $176 | $408 | $176 | $408 |
| Foreign\texchange\tcontracts | Other\tnon-current\tassets | 131 | 92 | 126 | 92 |
| Interest\trate\tcontracts | Other\tnon-current\tassets | 137 | 204 | 119 | 185 |
| Derivatives\tnot\tdesignated\tas\thedges: |  |  |  |  |  |
| Foreign\texchange\tcontracts | Other\tcurrent\tassets | 1 | 2 | 1 | — |
| Investment\tmarket\tprice\tcontracts | Other\tcurrent\tassets | — | 5 | — | — |
| Interest\trate\tcontracts | Other\tnon-current\tassets | 42 | 57 | 40 | 53 |
| Total\tAsset\tDerivatives |  | $487 | $768 | $462 | $738 |

|  |  | Gross	Amounts	Presented	in<br>Consolidated	Balance	Sheets |  | Net	Amounts	if	Right	of<br>Offset	had	been	Applied |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Liability\tDerivatives | Balance\tSheet\tLocation | 2016 | 2015 | 2016 | 2015 |
| Derivatives\tDesignated\tAs\tHedges: |  |  |  |  |  |
| Interest\trate\tcontracts | Other\tcurrent\tliabilities | 1 | — | 1 | — |
| Foreign\texchange\tcontracts | Other\tnon-current\tliabilities | 6 | — | 1 | — |
| Interest\trate\tcontracts | Other\tnon-current\tliabilities | 21 | 19 | 3 | — |
| Derivatives\tNot\tDesignated\tAs\tHedges: |  |  |  |  |  |
| Foreign\texchange\tcontracts | Other\tcurrent\tliabilities | — | 12 | — | 10 |
| Interest\trate\tcontracts | Other\tcurrent\tliabilities | — | — | — | — |
| Investment\tmarket\tprice\tcontracts | Other\tcurrent\tliabilities | 10 | 9 | 10 | 4 |
| Interest\trate\tcontracts | Other\tnon-current\tliabilities | 7 | 13 | 5 | 9 |
| Total\tLiability\tDerivatives |  | $45 | $53 | $20 | $23 |

# 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,	2016	and	2015	for	those	derivatives	designated	as	cash	flow	hedges	(in	millions):

| Derivative	Instruments	in	Cash	Flow	Hedging	Relationships | 2016 | 2015 |
| :--- | :--- | :--- |
| Interest\trate\tcontracts | $1 | $(1) |
| Foreign\texchange\tcontracts | 198 | 275 |
| Total | $199 | $274 |

As	of	December	31,	2016,	$92	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,	2017.	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	amount	of	ineffectiveness	recognized	in	income	on	derivative	instruments	designated	in	cash	flow	hedging	relationships	was	immaterial	for	the	years	ended December	31,	2016,	2015	and	2014.

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,	2016	and	2015	for	those	instruments	designated	as	net	investment	hedges	(in	millions):

| Non-derivative	Instruments	in	Net	Investment	Hedging	Relationships | 2016 | 2015 |
| :--- | :--- | :--- |
| Foreign\tdenominated\tdebt | $119 | $(33) |
| Total | $119 | $(33) |

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,	2016,	2015	and	2014.

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,	2016	and	2015 (in	millions):

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

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

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,	2016	and	2015	(in millions):

|  | Location	of	Gain | Amount	of	Gain	(Loss)	Recognized	in	Income | Amount	of	Gain	(Loss)	Recognized	in	Income |
| :--- | :--- | :--- | :--- |
| Derivative\tInstruments\tNot\tDesignated\tin\nHedging\tRelationships | (Loss)\tRecognized\nin\tIncome | 2016 | 2015 |
| Commodity\tcontracts | Fuel\tExpense | $— | $(2) |
| Foreign\texchange\tcontracts | Other\tOperating\tExpenses | — | 22 |
| Foreign\texchange\tcontracts | Investment\tincome\tand\tother | (145) | 43 |
| Investment\tmarket\tprice\tcontracts | Investment\tincome\tand\tother | (5) | (5) |
| Foreign\texchange\tcontracts | Interest\tExpense | — | (14) |
| Interest\trate\tcontracts | Interest\tExpense | (8) | (7) |
| Total |  | $(158) | $37 |

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,	2016	and	2015	by	hedge	type	are	as	follows	(in	millions):

|  | Quoted	Prices	in<br>Active	Markets	for<br>Identical	Assets<br>(Level	1) | Significant<br>Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Total |
| :--- | :--- | :--- | :--- | :--- |
| 2016 |  |  |  |  |
| Assets: |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $308 | $— | $308 |
| Interest\tRate\tContracts | — | 179 | — | 179 |
| Total | $— | $487 | $— | $487 |
| Liabilities: |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $6 | $— | $6 |
| Investment\tMarket\tPrice\tContracts | — | 10 | — | 10 |
| Interest\tRate\tContracts | — | 29 | — | 29 |
| Total | $— | $45 | $— | $45 |

|  | Quoted	Prices	in<br>Active	Markets	for<br>Identical	Assets<br>(Level	1) | Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Total |
| :--- | :--- | :--- | :--- | :--- |
| 2015 |  |  |  |  |
| Assets: |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $502 | $— | $502 |
| Investment\tMarket\tPrice\tContracts | — | 5 | — | 5 |
| Interest\tRate\tContracts | — | 261 | — | 261 |
| Total | $— | $768 | $— | $768 |
| Liabilities: |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $12 | $— | $12 |
| Investment\tMarket\tPrice\tContracts | — | 9 | — | 9 |
| Interest\tRate\tContracts | — | 32 | — | 32 |
| Total | $— | $53 | $— | $53 |

# NOTE	16.	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<br>2016 | 2015 | Second	Quarter<br>2016 | 2015 | Third	Quarter<br>2016 | 2015 | Fourth	Quarter<br>2016 | 2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Revenue: |  |  |  |  |  |  |  |  |
| U.S.\tDomestic\tPackage | $9,084 | $8,814 | $9,015 | $8,808 | $9,289 | $8,860 | $10,913 | $10,265 |
| International\tPackage | 2,914 | 2,970 | 3,077 | 3,045 | 3,024 | 2,959 | 3,335 | 3,175 |
| Supply\tChain\t&amp;\tFreight | 2,420 | 2,193 | 2,537 | 2,242 | 2,615 | 2,418 | 2,683 | 2,614 |
| Total\trevenue | 14,418 | 13,977 | 14,629 | 14,095 | 14,928 | 14,237 | 16,931 | 16,054 |
| Operating\tProfit\t(Loss): |  |  |  |  |  |  |  |  |
| U.S.\tDomestic\tPackage | 1,102 | 1,024 | 1,233 | 1,201 | 1,252 | 1,258 | (570) | 1,284 |
| International\tPackage | 574 | 498 | 613 | 552 | 576 | 507 | 281 | 580 |
| Supply\tChain\t&amp;\tFreight | 147 | 151 | 192 | 207 | 206 | 219 | (139) | 187 |
| Total\toperating\tprofit | 1,823 | 1,673 | 2,038 | 1,960 | 2,034 | 1,984 | (428) | 2,051 |
| Net\tIncome | $1,131 | $1,026 | $1,269 | $1,230 | $1,270 | $1,257 | $(239) | $1,331 |
| Net\tIncome\tPer\tShare: |  |  |  |  |  |  |  |  |
| Basic | $1.27 | $1.13 | $1.43 | $1.37 | $1.44 | $1.40 | $(0.27) | $1.49 |
| Diluted | $1.27 | $1.12 | $1.43 | $1.35 | $1.44 | $1.39 | $(0.27) | $1.48 |

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

Operating	profit	for	the	quarter	ended	December	31,	2015	was	impacted	by	a	mark-to-market	loss	of	$118	million	on	our	pension	and	postretirement	benefit	plans related	to	the	remeasurement	of	plan	assets	and	liabilities	recognized	outside	of	a	10%	corridor	(allocated	as	follows—U.S.	Domestic	Package	$62	million,	International Package	$44	million	and	Supply	Chain	&	Freight	$12	million).	This	loss	reduced	net	income	by	$79	million,	and	basic	and	diluted	earnings	per	share	by	$0.09.

# Item	9. Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial

# Disclosure

None.

# Item	9A.	Controls	and	Procedures

# Evaluation	of	Disclosure	Controls	and	Procedures:

As	of	the	end	of	the	period	covered	by	this	report,	management,	including	our	chief	executive	officer	and	chief	financial	officer,	evaluated	the	effectiveness	of	the design	and	operation	of	our	disclosure	controls	and	procedures	and	internal	controls	over	financial	reporting.	Based	upon,	and	as	of	the	date	of,	the	evaluation,	our	chief executive	officer	and	chief	financial	officer	concluded	that	the	disclosure	controls	and	procedures	were	effective	to	ensure	that	information	required	to	be	disclosed	in the	reports	we	file	and	submit	under	the	Exchange	Act	is	recorded,	processed,	summarized	and	reported	as	and	when	required	and	is	accumulated	and	communicated	to our	management,	including	the	Chief	Executive	Officer	and	Chief	Financial	Officer,	as	appropriate	to	allow	timely	decisions	regarding	required	disclosure.

# Changes	in	Internal	Control:

There	were	no	changes	in	the	Company's	internal	controls	over	financial	reporting	during	the	quarter	ended	December	31,	2016	that	have	materially	affected,	or are	reasonably	likely	to	materially	affect,	the	Company's	internal	control	over	financial	reporting.

# Management's	Report	on	Internal	Control	Over	Financial	Reporting:

UPS	management	is	responsible	for	establishing	and	maintaining	adequate	internal	controls	over	financial	reporting	for	United	Parcel	Service,	Inc.	and	its subsidiaries	(the	"Company").	Based	on	the	criteria	for	effective	internal	control	over	financial	reporting	established	in	Internal	Control-Integrated	Framework	(2013) issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission,	management	has	assessed	the	Company's	internal	control	over	financial	reporting as	effective	as	of	December	31,	2016.	The	independent	registered	public	accounting	firm	of	Deloitte	&	Touche	LLP,	as	auditors	of	the	consolidated	balance	sheets	of United	Parcel	Service,	Inc.	and	its	subsidiaries	as	of	December	31,	2016	and	the	related	statements	of	consolidated	income,	consolidated	comprehensive	income	and consolidated	cash	flows	for	the	year	ended	December	31,	2016,	has	issued	an	attestation	report	on	the	Company's	internal	control	over	financial	reporting,	which	is included	herein.

/s/	United	Parcel	Service,	Inc.

We	have	audited	the	internal	control	over	financial	reporting	of	United	Parcel	Service,	Inc.	and	subsidiaries	(the	"Company")	as	of	December	31,	2016,	based on	criteria	established	in	Internal	Control-Integrated	Framework	(2013)	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.	The Company's	management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control over	financial	reporting,	included	in	the	accompanying	Management's	Report	on	Internal	Control	over	Financial	Reporting.	Our	responsibility	is	to	express	an	opinion on	the	Company's	internal	control	over	financial	reporting	based	on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our audit	included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	testing	and	evaluating	the	design and	operating	effectiveness	of	internal	control	based	on	the	assessed	risk,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We believe	that	our	audit	provides	a	reasonable	basis	for	our	opinion.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	by,	or	under	the	supervision	of,	the	company's	principal	executive	and	principal financial	officers,	or	persons	performing	similar	functions,	and	effected	by	the	company's	board	of	directors,	management,	and	other	personnel	to	provide	reasonable assurance	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted accounting	principles.	A	company's	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the company	are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and	(3)	provide	reasonable	assurance	regarding prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	the	inherent	limitations	of	internal	control	over	financial	reporting,	including	the	possibility	of	collusion	or	improper	management	override	of controls,	material	misstatements	due	to	error	or	fraud	may	not	be	prevented	or	detected	on	a	timely	basis.	Also,	projections	of	any	evaluation	of	the	effectiveness	of	the internal	control	over	financial	reporting	to	future	periods	are	subject	to	the	risk	that	the	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the degree	of	compliance	with	the	policies	or	procedures	may	deteriorate.

In	our	opinion,	the	Company	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2016,	based	on	the criteria	established	in	Internal	Control	-	Integrated	Framework	(2013)	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	financial statements	as	of	and	for	the	year	ended	December	31,	2016	of	the	Company	and	our	report	dated	February	20,	2017	expressed	an	unqualified	opinion	on	those	financial statements.

# Item	9B. Other	Information

# PART	III

# Item	10.Directors,	Executive	Officers	and	Corporate

# Governance

# Executive	Officers	of	the	Registrant

| Name	and	Office | Age | the	Last	Five	Years |
| :--- | :--- | :--- |
| David\tP.\tAbney | 61 | Chief\tExecutive\tOfficer\t(2014\t-\tpresent),\tChairman\t(2016\t-\tpresent) |
| Chairman\tand\tChief\tExecutive\tOfficer |  | Senior\tVice\tPresident\tand\tChief\tOperating\tOfficer\t(2007\t-\t2014). |
| James\tJ.\tBarber,\tJr. | 56 | Senior\tVice\tPresident\tand\tPresident,\tUPS\tInternational\t(2013\t- |
| Senior\tVice\tPresident\tand\tPresident,\tUPS\tInternational |  | present),\tPresident\tand\tChief\tOperating\tOfficer,\tUPS\tEurope,\tMiddle |
|  |  | East,\tand\tAfrica\t(2010\t-\t2013). |
| Norman\tM.\tBrothers,\tJr. | 49 | Senior\tVice\tPresident,\tGeneral\tCounsel\tand\tCorporate\tSecretary\t(2016 |
| Senior\tVice\tPresident,\tGeneral\tCounsel\tand |  | -\tpresent) |
| Corporate\tSecretary |  |  |
| Teresa\tM.\tFinley | 56 | Senior\tVice\tPresident,\tChief\tMarketing\tand\tBusiness\tServices\tOfficer |
| \t\t\t\t\t\t\t\tSenior\tVice\tPresident,\tChief\tMarketing\tand |  | (2016\t-\tpresent),\tSenior\tVice\tPresident\tof\tGlobal\tMarketing\t(2015\t- |
| Business\tServices\tOfficer |  | 2016),\tCorporate\tController\tand\tTreasurer\t(2010\t-\t2015),\tInternational |
|  |  | Chief\tFinancial\tOfficer\t(2010). |
| Alan\tGershenhorn | 58 | Senior\tVice\tPresident\tand\tChief\tCommercial\tOfficer\t(2014\t-\tpresent), |
| Senior\tVice\tPresident,\tChief\tCommercial\tOfficer |  | Senior\tVice\tPresident,\tWorldwide\tSales,\tMarketing\tand\tStrategy |
|  |  | (2011\t-\t2014). |
| Myron\tA.\tGray | 59 | Senior\tVice\tPresident\tand\tPresident,\tUnited\tStates\tOperations\t(2014\t- |
| Senior\tVice\tPresident\tand\tPresident,\tUnited\tStates |  | present),\tSenior\tVice\tPresident,\tUnited\tStates\tOperations\t(2009\t- |
| Operations |  | 2014). |
| Kate\tM.\tGutmann | 48 | Senior\tVice\tPresident,\tChief\tSales\tand\tSolutions\tOfficer\t(2014\t- |
| Senior\tVice\tPresident,\tChief\tSales\tand\tSolutions\tOfficer |  | present),\tPresident,\tWorldwide\tSales\t(2011\t-\t2014). |
| Teri\tP.\tMcClure\tSenior\tVice\tPresident,\tChief\tHuman\tResources\tOfficer,\tLabor | 53 | Senior\tVice\tPresident,\tChief\tHuman\tResources\tOfficer,\tLabor |
| Relations |  | Relations\t(2016\t-\tpresent),\tSenior\tVice\tPresident\tand\tChief\tLegal, |
|  |  | Communications,\tand\tHuman\tResources\tOfficer\t(2015\t-\t2016),\tSenior |
|  |  | Vice\tPresident\tof\tLegal,\tCompliance\tand\tPublic\tAffairs,\tGeneral |
|  |  | Counsel\tand\tCorporate\tSecretary\t(2006\t-\t2014). |
| Richard\tN.\tPeretz | 55 | Senior\tVice\tPresident,\tChief\tFinancial\tOfficer\tand\tTreasurer\t(2015\t- |
| Senior\tVice\tPresident,\tChief\tFinancial\tOfficer\tand\tTreasurer |  | present),\tCorporate\tController\tand\tTreasurer\t(2014-2015),\tCorporate |
|  |  | Controller\t(2013\t-\t2015),\tVice\tPresident\tof\tCorporate\tFinance\tand |
|  |  | Accounting\t(2008\t-\t2013). |
| Juan\tR.\tPerez\tSenior\tVice\tPresident,\tChief\tInformation\tOfficer | 50 | Senior\tVice\tPresident,\tChief\tInformation\tOfficer\t(2016\t-\tpresent), |
|  |  | Vice\tPresident,\tInformation\tServices\t(2011\t-\t2016). |
| Mark\tR.\tWallace | 54 | Senior\tVice\tPresident,\tGlobal\tEngineering\tand\tSustainability\t(2015\t- |
| Senior\tVice\tPresident,\tGlobal\tEngineering\tand\tSustainability |  | present),\tPresident,\tGlobal\tLogistics\t&amp;\tDistribution\t(2013\t-\t2015), |

Information	about	our	directors	is	presented	under	the	caption	"Your	Board	of	Directors"	in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of Shareowners	to	be	held	on	May	4,	2017	and	is	incorporated	herein	by	reference.

Information	about	our	Audit	Committee	is	presented	under	the	caption	"Your	Board	of	Directors	-	Committees	of	the	Board	of	Directors"	and	"Audit	Committee Matters"	in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	4,	2017	and	is	incorporated	herein	by	reference.

Information	about	our	Code	of	Business	Conduct	is	presented	under	the	caption	"Where	You	Can	Find	More	Information"	in	Part	I,	Item	1	of	this	report.

Information	about	our	compliance	with	Section	16	of	the	Exchange	Act	of	1934,	as	amended,	is	presented	under	the	caption	"Ownership	of	Our	Securities	- Section	16(a)	Beneficial	Ownership	Reporting	Compliance"	in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	4,	2017	and	is incorporated	herein	by	reference.

# Item	11.Executive	Compensation

Information	about	our	board	and	executive	compensation	is	presented	under	the	captions	"Your	Board	of	Directors	-	Director	Compensation"	and	"Executive Compensation"	in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	4,	2017	and	is	incorporated	herein	by	reference.

# Item	12.Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder

# Matters

Information	about	security	ownership	is	presented	under	the	caption	"Ownership	of	Our	Securities	-	Securities	Ownership	of	Certain	Beneficial	Owners	and Management"	in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	4,	2017	and	is	incorporated	herein	by	reference.

Information	about	our	equity	compensation	plans	is	presented	under	the	caption	"Executive	Compensation	-	Equity	Compensation	Plans"	in	our	definitive	Proxy Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	4,	2017	and	is	incorporated	herein	by	reference.

# Item	13.Certain	Relationships	and	Related	Transactions,	and	Director

# Independence

Information	about	transactions	with	related	persons	is	presented	under	the	caption	"Corporate	Governance	-	Conflicts	of	Interest	and	Related	Person	Transactions" in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	4,	2017	and	is	incorporated	herein	by	reference.

Information	about	director	independence	is	presented	under	the	caption	"Corporate	Governance	-	Director	Independence"	in	our	definitive	Proxy	Statement	for	the Annual	Meeting	of	Shareowners	to	be	held	on	May	4,	2017	and	is	incorporated	herein	by	reference.

# Item	14.Principal	Accounting	Fees	and	Services

Information	about	aggregate	fees	billed	to	us	by	our	principal	accountant	is	presented	under	the	caption	"Audit	Committee	Matters	-	Principal	Accounting	Firm Fees"	in	our	definitive	Proxy	Statement	for	the	Annual	Meetings	of	Shareowners	to	be	held	on	May	4,	2017	and	is	incorporated	herein	by	reference.

# PART	IV

# Item	15.Exhibits	and	Financial	Statement

# Schedules

# (a)	1.	Financial	Statements.

See	Item	8	for	the	financial	statements	filed	with	this	report.

# 2.	Financial	Statement	Schedules.

# 3.	List	of	Exhibits.

See	the	Exhibit	Index	for	a	list	of	the	exhibits	incorporated	by	reference	into	or	filed	with	this	report.

(b)	Exhibits	required	by	Item	601	of	Regulation	S-K.

# (c)	Financial	Statement	Schedules.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	United	Parcel	Service,	Inc.	has	duly	caused	this	report	to	be	signed	on its	behalf	by	the	undersigned,	thereunto	duly	authorized.

(REGISTRANT)

David	P.	Abney

Chairman	and	Chief	Executive	Officer

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	Registrant	and	in the	capacities	and	on	the	dates	indicated.

Kevin	M.	Warsh

# EXHIBIT	INDEX

10.5 — UPS	Excess	Coordinating	Benefit	Plan,	as	amended	and	restated,	effective	as	of	January	1,	2012	(incorporated	by	reference	to	Exhibit	10.5	to	the	2012 Annual	Report	on	Form	10-K).

10.6 — United	Parcel	Service,	Inc.	2012	Omnibus	Incentive	Compensation	Plan	(incorporated	by	reference	to	Annex	II	to	the	Definitive	Proxy	Statement,	filed on	March	12,	2012).

(1)	Form	of	Long-Term	Incentive	Performance	Award	Agreement	(incorporated	by	reference	to	Exhibit	10.3	to	the	Quarterly	Report	on	Form	10-Q	for the	quarter	ended	March	31,	2011).

(2)	Form	of	Non-Management	Director	Restricted	Stock	Unit	Award	(incorporated	by	reference	to	Exhibit	10.2	to	the	Quarterly	Report	on	Form	10-Q for	the	quarter	ended	March	31,	2010).

(3)	UPS	Management	Incentive	Program	Terms	and	Conditions	effective	as	of	January	1,	2011	(incorporated	by	reference	to	Exhibit	10.10(3)	to	the 2010	Annual	Report	on	Form	10-K).

(4)	UPS	Stock	Option	Program	Terms	and	Conditions	effective	as	of	January	1,	2012	(incorporated	by	reference	to	Exhibit	10.7(4)	to	the	2011	Annual Report	on	Form	10-K).

(5)	UPS	Long-Term	Incentive	Performance	Program	Terms	and	Conditions	effective	as	of	January	1,	2012	(incorporated	by	reference	to	Exhibit	10.7(5) to	the	2011	Annual	Report	on	Form	10-K).

10.7 — Form	of	UPS	Deferred	Compensation	Plan	(incorporated	by	reference	to	Exhibit	10.11	to	the	2010	Annual	Report	on	Form	10-K).

(1)	Amendment	No.	1	to	the	UPS	Deferred	Compensation	Plan	(incorporated	by	reference	to	Exhibit	10.7(1)	to	the	2012	Annual	Report	on	Form	10-K).

10.8 — United	Parcel	Service,	Inc.	Nonqualified	Employee	Stock	Purchase	Plan	(incorporated	by	reference	to	Exhibit	99.1	to	the	registration	statement	on	Form S-8	(No.	333-34054),	filed	on	April	5,	2000).

10.9 — Discounted	Employee	Stock	Purchase	Plan,	as	amended	and	restated,	effective	October	1,	2002.

(1)	Amendment	No.	1	to	the	Discounted	Employee	Stock	Purchase	Plan	(incorporated	by	reference	to	Exhibit	10.12(1)	to	the	2005	Annual	Report	on Form	10-K).

(3)	Amendment	No.	3	to	the	Discounted	Employee	Stock	Purchase	Plan	(incorporated	by	reference	to	Exhibit	10.9(3)	to	the	2012	Annual	Report	on Form	10-K).

10.10 — 2015	Omnibus	Incentive	Compensation	Plan	(incorporated	by	reference	to	Annex	A	to	the	Definitive	Proxy	Statement	filed	on	March	24,	2015).

11 — Statement	regarding	Computation	of	per	Share	Earnings	(incorporated	by	reference	to	note	14	to	Part	I,	Item	8	"Financial	Statements	and	Supplementary Data"	of	this	Annual	Report	on	Form	10-K).

† Filed	herewith.


what was the change in millions of buildings from 2015 to 2016?
  building_increase = 190 - 207
 building_decrease = building_increase
 answer = building_decrease