UPS 2012 Annual Report Download - page 54

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Cash received from common stock issuances to employees increased primarily due to additional stock option exercises in
2012 and 2011. The cash outflows in other financing activities are largely due to repurchases of shares from employees to
satisfy tax withholding obligations, as well as certain hedging activities on forecasted debt issuances and premiums paid on
capped call options for the purchase of UPS class B shares. In conjunction with the senior fixed rate debt offerings in 2012 and
2010, we settled several interest rate derivatives that were designated as hedges of these debt offerings, which resulted in cash
inflows (outflows) of $(70) and $7 million, respectively. During 2012, the expiration and settlement of several capped call
options for the purchase of UPS class B shares resulted in a cash inflow of $206 million in premiums, while the initial premium
payments for these options in 2011 resulted in a cash outflow of $200 million during that year.
Sources of Credit
We are authorized to borrow up to $10.0 billion under our U.S. commercial paper program. We also maintain a European
commercial paper program under which we are authorized to borrow up to €1.0 billion in a variety of currencies. 0 amounts
were outstanding under these programs as of December 31, 2012. The amount of commercial paper outstanding under these
programs in 2013 is expected to fluctuate.
We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit
facilities of $1.5 billion, and expires on April 11, 2013. Generally, amounts outstanding under this facility bear interest at a
periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin.
Alternatively, a fluctuating rate of interest equal to Citibank’s publicly announced base rate, plus an applicable margin, may be
used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage
determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of
0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the base rate is 1.00%
below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this
facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of
December 31, 2012.
The second agreement provides revolving credit facilities of $1.0 billion, and expires on April 12, 2017. Generally,
amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period
and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to Citibank’s publicly
announced base rate, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances
bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our credit default swap
spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new
interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The applicable
margin is subject to certain minimum rates and maximum rates based on our public debt ratings from Standard & Poor’s Rating
Service and Moody’s Investors Service. The minimum applicable margin rates range from 0.100% to 0.375%, and the
maximum applicable margin rates range from 0.750% to 1.250%. The applicable margin for advances bearing interest based on
the base rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request
advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of
December 31, 2012.
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2012 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, 2012, 10% of net tangible assets is equivalent to $2.770 billion; however, we have no covered sale-
leaseback transactions or secured indebtedness outstanding. Additionally, we are required to maintain a minimum net worth, as
defined, of $5.0 billion on a quarterly basis. As of December 31, 2012, our net worth, as defined, was equivalent to $8.007
billion. We do not expect these covenants to have a material impact on our financial condition or liquidity.
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.