10-Q 1 fdx-10q_20170228.htm 10-Q fdx-10q_20170228.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED February 28, 2017

OR

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 1-15829

 

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

62-1721435

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

942 South Shady Grove Road Memphis, Tennessee

38120

(Address of principal executive offices)

(ZIP Code)

 

(901) 818-7500

(Registrant’s telephone number, including area code)

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    ☒  No    ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    ☒  No    ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company 

 

(Do not check if a 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    ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock

 

Outstanding Shares at March 20, 2017

Common Stock, par value $0.10 per share

 

267,374,954

 

 

 

 

 


 

FEDEX CORPORATION

INDEX

 

 

 

PAGE

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. Financial Statements

 

 

Condensed Consolidated Balance Sheets
February 28, 2017 and May 31,
2016

 

3

Condensed Consolidated Statements of Income
Three and Nine Months Ended February 28, 2017 and February 29, 2016

 

5

Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months Ended February 28, 2017 and February 29, 2016

 

6

Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 2017 and February 29, 2016

 

7

Notes to Condensed Consolidated Financial Statements

 

8

Report of Independent Registered Public Accounting Firm

 

27

ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

28

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

54

ITEM 4. Controls and Procedures

 

54

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

ITEM 1. Legal Proceedings

 

55

ITEM 1A. Risk Factors

 

55

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

55

ITEM 6. Exhibits

 

56

Signature

 

58

Exhibit Index

 

E-1

 

 

 

Exhibit 10.1

 

 

Exhibit 10.2

 

 

Exhibit 10.3

 

 

Exhibit 10.4

 

 

Exhibit 10.5

 

 

Exhibit 10.6

 

 

Exhibit 10.7

 

 

Exhibit 10.8

 

 

Exhibit 10.9

 

 

Exhibit 10.10

 

 

Exhibit 10.11

 

 

Exhibit 10.12

 

 

Exhibit 10.13

 

 

Exhibit 10.14

 

 

Exhibit 12.1

 

 

Exhibit 15.1

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

Exhibit 101 - Instance Document

 

 

Exhibit 101 - Schema Document

 

 

Exhibit 101 - Calculation Linkbase Document

 

 

Exhibit 101 - Definitions Linkbase Document

 

 

Exhibit 101 - Labels Linkbase Document

 

 

Exhibit 101 - Presentation Linkbase Document

 

 

 

- 2 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

 

 

February 28,

2017

(Unaudited)

 

 

May 31,

2016

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,173

 

 

$

3,534

 

Receivables, less allowances of $222 and $178

 

 

7,418

 

 

 

7,252

 

Spare parts, supplies and fuel, less allowances of $231 and $218

 

 

527

 

 

 

496

 

Prepaid expenses and other

 

 

820

 

 

 

707

 

Total current assets

 

 

11,938

 

 

 

11,989

 

PROPERTY AND EQUIPMENT, AT COST

 

 

49,752

 

 

 

47,018

 

Less accumulated depreciation and amortization

 

 

24,139

 

 

 

22,734

 

Net property and equipment

 

 

25,613

 

 

 

24,284

 

OTHER LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Goodwill

 

 

7,000

 

 

 

6,747

 

Other assets

 

 

2,230

 

 

 

2,939

 

Total other long-term assets

 

 

9,230

 

 

 

9,686

 

 

 

$

46,781

 

 

$

45,959

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 3 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

 

 

February 28,

2017

(Unaudited)

 

 

May 31,

2016

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

45

 

 

$

29

 

Accrued salaries and employee benefits

 

 

1,690

 

 

 

1,972

 

Accounts payable

 

 

2,707

 

 

 

2,944

 

Accrued expenses

 

 

3,008

 

 

 

3,063

 

Total current liabilities

 

 

7,450

 

 

 

8,008

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

14,713

 

 

 

13,733

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

2,299

 

 

 

1,567

 

Pension, postretirement healthcare and other benefit obligations

 

 

4,670

 

 

 

6,227

 

Self-insurance accruals

 

 

1,376

 

 

 

1,314

 

Deferred lease obligations

 

 

456

 

 

 

400

 

Deferred gains, principally related to aircraft transactions

 

 

142

 

 

 

155

 

Other liabilities

 

 

491

 

 

 

771

 

Total other long-term liabilities

 

 

9,434

 

 

 

10,434

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

Common stock, $0.10 par value; 800 million shares authorized; 318 million shares

   issued as of February 28, 2017 and May 31, 2016

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

2,976

 

 

 

2,892

 

Retained earnings

 

 

19,830

 

 

 

18,371

 

Accumulated other comprehensive loss

 

 

(334

)

 

 

(169

)

Treasury stock, at cost

 

 

(7,320

)

 

 

(7,342

)

Total common stockholders’ investment

 

 

15,184

 

 

 

13,784

 

 

 

$

46,781

 

 

$

45,959

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 4 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

REVENUES

 

$

14,997

 

 

$

12,654

 

 

$

44,591

 

 

$

37,386

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,395

 

 

 

4,712

 

 

 

16,059

 

 

 

13,807

 

Purchased transportation

 

 

3,498

 

 

 

2,623

 

 

 

10,169

 

 

 

7,505

 

Rentals and landing fees

 

 

834

 

 

 

744

 

 

 

2,426

 

 

 

2,121

 

Depreciation and amortization

 

 

762

 

 

 

663

 

 

 

2,241

 

 

 

1,964

 

Fuel

 

 

735

 

 

 

537

 

 

 

2,043

 

 

 

1,864

 

Maintenance and repairs

 

 

588

 

 

 

504

 

 

 

1,765

 

 

 

1,581

 

Other

 

 

2,160

 

 

 

2,007

 

 

 

6,432

 

 

 

5,399

 

 

 

 

13,972

 

 

 

11,790

 

 

 

41,135

 

 

 

34,241

 

OPERATING INCOME

 

 

1,025

 

 

 

864

 

 

 

3,456

 

 

 

3,145

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(122

)

 

 

(81

)

 

 

(354

)

 

 

(218

)

Other, net

 

 

(4

)

 

 

(1

)

 

 

17

 

 

 

(6

)

 

 

 

(126

)

 

 

(82

)

 

 

(337

)

 

 

(224

)

INCOME BEFORE INCOME TAXES

 

 

899

 

 

 

782

 

 

 

3,119

 

 

 

2,921

 

PROVISION FOR INCOME TAXES

 

 

337

 

 

 

275

 

 

 

1,142

 

 

 

1,031

 

NET INCOME

 

$

562

 

 

$

507

 

 

$

1,977

 

 

$

1,890

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.11

 

 

$

1.86

 

 

$

7.43

 

 

$

6.79

 

Diluted

 

$

2.07

 

 

$

1.84

 

 

$

7.31

 

 

$

6.71

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.40

 

 

$

0.25

 

 

$

1.60

 

 

$

1.00

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 5 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

NET INCOME

 

$

562

 

 

$

507

 

 

$

1,977

 

 

$

1,890

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax of $3, $11,

   $19 and $28

 

 

110

 

 

 

(99

)

 

 

(108

)

 

 

(270

)

Amortization of prior service credit, net of tax of $12, $12, $34

   and $30

 

 

(19

)

 

 

(19

)

 

 

(57

)

 

 

(61

)

 

 

 

91

 

 

 

(118

)

 

 

(165

)

 

 

(331

)

COMPREHENSIVE INCOME

 

$

653

 

 

$

389

 

 

$

1,812

 

 

$

1,559

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 6 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

 

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 29,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

1,977

 

 

$

1,890

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,241

 

 

 

1,964

 

Provision for uncollectible accounts

 

 

115

 

 

 

90

 

Stock-based compensation

 

 

123

 

 

 

115

 

Deferred income taxes and other noncash items

 

 

474

 

 

 

288

 

Gain from sale of investment

 

 

(35

)

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(340

)

 

 

(78

)

Other assets

 

 

(235

)

 

 

(322

)

Accounts payable and other liabilities

 

 

(1,642

)

 

 

(146

)

Other, net

 

 

(33

)

 

 

(5

)

Cash provided by operating activities

 

 

2,645

 

 

 

3,796

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(3,790

)

 

 

(3,562

)

Proceeds from asset dispositions and other

 

 

123

 

 

 

(17

)

Cash used in investing activities

 

 

(3,667

)

 

 

(3,579

)

Financing Activities:

 

 

 

 

 

 

 

 

Principal payments on debt

 

 

(49

)

 

 

(28

)

Proceeds from debt issuances

 

 

1,190

 

 

 

1,238

 

Proceeds from stock issuances

 

 

265

 

 

 

79

 

Dividends paid

 

 

(319

)

 

 

(210

)

Purchase of treasury stock

 

 

(358

)

 

 

(2,133

)

Other, net

 

 

2

 

 

 

(7

)

Cash provided by (used in) financing activities

 

 

731

 

 

 

(1,061

)

Effect of exchange rate changes on cash

 

 

(70

)

 

 

(78

)

Net decrease in cash and cash equivalents

 

 

(361

)

 

 

(922

)

Cash and cash equivalents at beginning of period

 

 

3,534

 

 

 

3,763

 

Cash and cash equivalents at end of period

 

$

3,173

 

 

$

2,841

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 7 -


 

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2016 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of February 28, 2017, the results of our operations for the three- and nine-month periods ended February 28, 2017 and February 29, 2016 and cash flows for the nine-month periods ended February 28, 2017 and February 29, 2016. Operating results for the three- and nine-month periods ended February 28, 2017 are not necessarily indicative of the results that may be expected for the year ending May 31, 2017.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2017 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

RECLASSIFICATIONS. Reclassifications have been made to the May 31, 2016 condensed consolidated balance sheets to conform to the current year’s presentation of debt issuance costs. See recent accounting guidance below for additional information.

BUSINESS ACQUISITION. On May 25, 2016, we acquired TNT Express B.V. (“TNT Express”) for €4.4 billion (approximately $4.9 billion). Cash acquired in the acquisition was approximately €250 million ($280 million). All shares associated with the transaction were tendered or transferred as of February 28, 2017. We funded the acquisition with proceeds from an April 2016 debt issuance and existing cash balances. The financial results of this business are included in the FedEx Express group and TNT Express segment.

TNT Express collects, transports and delivers documents, parcels and freight to over 200 countries. This strategic acquisition broadens our portfolio of international transportation solutions by combining TNT Express’s strong European road platform with Federal Express Corporation’s (“FedEx Express”) strength in other regions globally.

This acquisition is included in the accompanying balance sheets based on an allocation of the purchase price (summarized in the table below, in millions), which reflects updates to property and equipment and identifiable intangible assets from the May 31, 2016, August 31, 2016 and November 30, 2016 estimates, resulting in a net increase to goodwill of $417 million. These updates reflect the valuation work completed to date by third party experts and the receipt of additional information. Given the timing and complexity of the acquisition, the presentation of TNT Express in our financial statements, including the allocation of the purchase price, continues to be preliminary and will likely change in the fourth quarter of 2017, perhaps significantly, as additional information concerning the fair value estimates of the assets acquired and liabilities assumed as of the acquisition date is obtained during the remainder of the fiscal year. Due to the global scope of TNT Express’s operations and the decentralized nature of the accounting records, the measurement periods for fixed assets, customer intangibles and certain liabilities are longer than for the other categories noted below. We will complete our purchase price allocation during the fourth quarter of 2017.

 

Current assets(1)

 

$

1,917

 

Property and equipment

 

 

1,026

 

Goodwill

 

 

3,381

 

Identifiable intangible assets

 

 

505

 

Other non-current assets

 

 

307

 

Current liabilities(2)

 

 

(1,679

)

Long-term liabilities

 

 

(563

)

Total purchase price

 

$

4,894

 

 

(1)

Primarily accounts receivable and cash.

(2)

Primarily accounts payable and accrued expenses.

- 8 -


 

As a result of this acquisition, we recognized a preliminary value of $3.4 billion of goodwill, which is primarily attributable to the TNT Express workforce and the expected benefits from synergies of the combination with existing businesses and growth opportunities. The majority of the purchase price allocated to goodwill is not deductible for income tax purposes.

The purchase price was preliminarily allocated to the identifiable intangible assets acquired as follows (in millions):

 

Intangible assets with finite lives

 

 

 

 

Customer relationships (12-year life)

 

$

405

 

Technology (3-year life)

 

 

20

 

Trademarks (4-year life)

 

 

80

 

Total intangible assets

 

$

505

 

 

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of FedEx Express, who represent a small number of its total employees, are employed under a collective bargaining agreement that took effect on November 2, 2015. This collective bargaining agreement is scheduled to become amendable in November 2021, after a six-year term. In addition to our pilots at FedEx Express, FedEx Supply Chain Distribution System, Inc. (“FedEx Supply Chain”) (formerly GENCO Distribution System, Inc. (“GENCO”)) has a small number of employees who are members of unions, and certain non-U.S. employees are unionized.

STOCK-BASED COMPENSATION. We have two types of equity-based compensation: stock options and restricted stock. The key terms of the stock option and restricted stock awards granted under our incentive stock plans and all financial disclosures about these programs are set forth in our Annual Report.

Our stock-based compensation expense was $31 million for the three-month period ended February 28, 2017 and $123 million for the nine-month period ended February 28, 2017. Our stock-based compensation expense was $29 million for the three-month period ended February 29, 2016 and $115 million for the nine-month period ended February 29, 2016. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

RECENT ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. These matters are described in our Annual Report.

During the first quarter of 2017, we retrospectively adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) to simplify the presentation of debt issuance costs. This new guidance requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, rather than as an asset. This new guidance had a minimal impact on our accounting and financial reporting.

On May 28, 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. This standard will be effective for us beginning in fiscal 2019. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five-step approach for the recognition of revenue. Based on our current assessment, we do not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems.

On February 25, 2016, the FASB issued a new lease accounting standard which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expense related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement. We are currently evaluating the impact of this new standard on our financial reporting, but recognizing the lease liability and related right-of-use asset will significantly impact our balance sheet. These changes will be effective for our fiscal year beginning June 1, 2019 (fiscal 2020), with a modified retrospective adoption method to the beginning of 2018.

- 9 -


 

During the second quarter of 2017, we adopted the Accounting Standards Update issued by the FASB in March 2016 to simplify the accounting for share-based payment transactions. The new guidance requires companies to recognize the income tax effects of awards that vest or are settled as income tax expense or benefit in the income statement as opposed to additional paid-in capital. The guidance also provides clarification of the presentation of certain components of share-based awards in the statement of cash flows.  Additionally, the guidance allows companies to make a policy election to account for forfeitures either upon occurrence or by estimating forfeitures. We have elected to continue estimating forfeitures expected to occur in order to determine the amount of compensation cost to be recognized each period and to apply the cash flow classification guidance prospectively. Excess tax benefits are now classified as an operating activity rather than a financing activity. The adoption of the new standard had a benefit of $21 million to net income ($0.07 per diluted share) for the third quarter and a benefit of $42 million to net income ($0.14 per diluted share) for the nine months of 2017.

 

In March 2017, the FASB issued an Accounting Standards Update that changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income statement. This new guidance requires entities to report the service cost component in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component outside of income from operations. This standard will impact our operating income but will have no material impact on our net income or earnings per share. This new guidance will be effective for our fiscal year beginning June 1, 2018 (fiscal 2019) and will be applied retrospectively.

 

We believe that no other new accounting guidance was adopted or issued during the nine months of 2017 that is relevant to the readers of our financial statements.

TREASURY SHARES. In January 2016, our Board of Directors authorized a share repurchase program of up to 25 million shares. Shares under the current repurchase program may be repurchased from time to time in the open market or in privately negotiated transactions. The timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of FedEx common stock and general market conditions. No time limit was set for the completion of the program, and the program may be suspended or discontinued at any time.

During the third quarter of 2017, we repurchased 0.13 million shares of FedEx common stock at an average price of $187.34 per share for a total of $24 million. During the nine months of 2017, we repurchased 2.2 million shares of FedEx common stock at an average price of $165.44 per share for a total of $358 million. As of February 28, 2017, 16.8 million shares remained under the share repurchase authorization.

DIVIDENDS DECLARED PER COMMON SHARE. On February 17, 2017, our Board of Directors declared a quarterly dividend of $0.40 per share of common stock. The dividend will be paid on April 3, 2017 to stockholders of record as of the close of business on March 13, 2017. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

(2) Accumulated Other Comprehensive Income (Loss)

The following table provides changes in accumulated other comprehensive loss (“AOCI”), net of tax, reported in our unaudited condensed consolidated financial statements for the periods ended February 28, 2017 and February 29, 2016 (in millions; amounts in parentheses indicate debits to AOCI):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Foreign currency translation loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(732

)

 

$

(424

)

 

$

(514

)

 

$

(253

)

Translation adjustments

 

 

110

 

 

 

(99

)

 

 

(108

)

 

 

(270

)

Balance at end of period

 

 

(622

)

 

 

(523

)

 

 

(622

)

 

 

(523

)

Retirement plans adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

307

 

 

 

383

 

 

 

345

 

 

 

425

 

Reclassifications from AOCI

 

 

(19

)

 

 

(19

)

 

 

(57

)

 

 

(61

)

Balance at end of period

 

 

288

 

 

 

364

 

 

 

288

 

 

 

364

 

Accumulated other comprehensive loss at end of period

 

$

(334

)

 

$

(159

)

 

$

(334

)

 

$

(159

)

 

- 10 -


 

The following table presents details of the reclassifications from AOCI for the periods ended February 28, 2017 and February 29, 2016 (in millions; amounts in parentheses indicate debits to earnings):

 

 

 

Amount Reclassified from

AOCI

 

 

Affected Line Item in the

Income Statement

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

Amortization of retirement plans

   prior service credits, before tax

 

$

31

 

 

$

31

 

 

$

91

 

 

$

91

 

 

Salaries and employee benefits

Income tax benefit

 

 

(12

)

 

 

(12

)

 

 

(34

)

 

 

(30

)

 

Provision for income taxes

AOCI reclassifications, net of tax

 

$

19

 

 

$

19

 

 

$

57

 

 

$

61

 

 

Net income

 

(3) Financing Arrangements

We have a shelf registration statement with the SEC that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock.

During the quarter, we issued $1.2 billion of senior unsecured debt under our current shelf registration statement, comprised of $450 million of 3.30% fixed-rate notes due in March 2027, and $750 million of 4.40% fixed-rate notes due in January 2047. Interest on these notes is paid semiannually. We used the net proceeds for a voluntary incremental contribution in January 2017 to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) and for working capital and general corporate purposes.

We have a five-year $1.75 billion revolving credit facility that expires in November 2020. The facility, which includes a $500 million letter of credit sublimit, is available to finance our operations and other cash flow needs. The agreement contains a financial covenant, which requires us to maintain a ratio of debt to consolidated earnings (excluding non-cash pension mark-to-market adjustments and non-cash asset impairment charges) before interest, taxes, depreciation and amortization (“adjusted EBITDA”) of not more than 3.5 to 1.0, calculated as of the end of the applicable quarter on a rolling four-quarters basis. The ratio of our debt to adjusted EBITDA was 1.9 to 1.0 at February 28, 2017. We believe this covenant is the only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the financial covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of February 28, 2017, no commercial paper was outstanding. However, we had a total of $317 million in letters of credit outstanding at February 28, 2017, with $183 million of the letter of credit sublimit unused under our revolving credit facility.

Long-term debt, exclusive of capital leases, had carrying values of $14.7 billion at February 28, 2017 and $13.7 billion at May 31, 2016, compared with estimated fair values of $15.2 billion at February 28, 2017 and $14.3 billion at May 31, 2016. The annualized weighted average interest rate on long-term debt was 3.6% for the nine months ended February 28, 2017. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.

- 11 -


 

(4) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the periods ended February 28, 2017 and February 29, 2016 was as follows (in millions, except per share amounts):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

561

 

 

$

506

 

 

$

1,974

 

 

$

1,888

 

Weighted-average common shares

 

 

266

 

 

 

272

 

 

 

266

 

 

 

278

 

Basic earnings per common share

 

$

2.11

 

 

$

1.86

 

 

$

7.43

 

 

$

6.79

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

561

 

 

$

506

 

 

$

1,974

 

 

$

1,888

 

Weighted-average common shares

 

 

266

 

 

 

272

 

 

 

266

 

 

 

278

 

Dilutive effect of share-based awards

 

 

5

 

 

 

3

 

 

 

4

 

 

 

3

 

Weighted-average diluted shares

 

 

271

 

 

 

275

 

 

 

270

 

 

 

281

 

Diluted earnings per common share

 

$

2.07

 

 

$

1.84

 

 

$

7.31

 

 

$

6.71

 

Anti-dilutive options excluded from diluted earnings per

   common share

 

 

4.0

 

 

 

4.8

 

 

 

4.7

 

 

 

4.0

 

 

(1)

Net earnings available to participating securities were immaterial in all periods presented.

(5) Retirement Plans

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the periods ended February 28, 2017 and February 29, 2016 were as follows (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Defined benefit pension plans

 

$

57

 

 

$

53

 

 

$

173

 

 

$

160

 

Defined contribution plans

 

 

117

 

 

 

104

 

 

 

348

 

 

 

304

 

Postretirement healthcare plans

 

 

19

 

 

 

20

 

 

 

57

 

 

 

61

 

 

 

$

193

 

 

$

177

 

 

$

578

 

 

$

525

 

 

Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended February 28, 2017 and February 29, 2016 included the following components (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Pension Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Service cost

 

$

180

 

 

$

166

 

 

$

540

 

 

$

497

 

    Interest cost

 

 

293

 

 

 

295

 

 

 

879

 

 

 

885

 

    Expected return on plan assets

 

 

(384

)

 

 

(377

)

 

 

(1,156

)

 

 

(1,131

)

    Amortization of prior service credit and other

 

 

(32

)

 

 

(31

)

 

 

(90

)

 

 

(91

)

 

 

$

57

 

 

$

53

 

 

$

173

 

 

$

160

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Postretirement Healthcare Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Service cost

 

$

9

 

 

$

10

 

 

$

27

 

 

$

30

 

    Interest cost

 

 

10

 

 

 

10

 

 

 

30

 

 

 

31

 

 

 

$

19

 

 

$

20

 

 

$

57

 

 

$

61

 

 

- 12 -


 

Contributions to our U.S. Pension Plans for the nine-month periods ended February 28, 2017 and February 29, 2016 were as follows (in millions):

 

 

 

2017

 

 

2016

 

Required

 

$

444

 

 

$

8

 

Voluntary

 

 

1,306

 

 

 

487

 

 

 

$

1,750

 

 

$

495

 

 

In March 2017, we made $250 million in contributions to our U.S. Pension Plans, of which $15 million was required. Our U.S. Pension Plans have ample funds to meet expected benefit payments. We anticipate our U.S. Pension Plans will make payments in the fourth quarter of 2017 aggregating in excess of $1 billion to former employees who elected to receive their benefits early under a voluntary program offered to qualifying participants during the third quarter of 2017.

(6) Business Segment Information

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies include FedEx Express, the world’s largest express transportation company; TNT Express, an international express, small-package ground delivery and freight transportation company that was acquired near the end of our 2016 fourth quarter; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments.

Our reportable segments include the following businesses:

 

FedEx Express Group:

 

 

 

FedEx Express Segment

FedEx Express (express transportation)

 

FedEx Trade Networks (air and ocean freight forwarding, customs brokerage and cross-border enablement technology and solutions)

 

FedEx SupplyChain Systems (logistics services)

 

 

TNT Express Segment

TNT Express (international express transportation, small-package ground delivery and freight transportation)

 

 

FedEx Ground Segment

FedEx Ground (small-package ground delivery)

 

FedEx Supply Chain (third-party logistics) (formerly GENCO)

 

 

FedEx Freight Segment

FedEx Freight (LTL freight transportation)

 

FedEx Custom Critical (time-critical transportation)

 

 

FedEx Services Segment

FedEx Services (sales, marketing, information technology, communications, customer service, technical support, billing and collection services and back-office functions)

 

FedEx Office (document and business services and package acceptance)

 

During the third quarter of 2017, we rebranded GENCO to FedEx Supply Chain.

 

FedEx Services Segment

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express and for TNT Express, some of these functions are performed on a regional basis and reported in the applicable segment in their natural expense line items. The FedEx Services segment includes: FedEx Services, which provides sales, marketing, information technology, communications, customer service, technical support, billing and collection services for U.S. customers of our major business units and certain back-office support to our other companies; and FedEx Office, which provides an array of document and business services and retail access to our customers for our package transportation businesses.

- 13 -


 

The FedEx Services segment provides direct and indirect support to our transportation businesses, and we allocate all of the net operating costs of the FedEx Services segment (including the net operating results of FedEx Office) to reflect the full cost of operating our transportation businesses in the results of those segments. Within the FedEx Services segment allocation, the net operating results of FedEx Office, which are an immaterial component of our allocations, are allocated to FedEx Express and FedEx Ground. We review and evaluate the performance of our transportation segments based on operating income (inclusive of FedEx Services segment allocations). For the FedEx Services segment, performance is evaluated based on the impact of its total allocated net operating costs on our transportation segments.

Operating expenses for each of our transportation segments include the allocations from the FedEx Services segment to the respective transportation segments. These allocations also include charges and credits for administrative services provided between operating companies. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of providing these functions. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.

Eliminations, Corporate and Other

Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues and expenses are eliminated in our consolidated results and are not separately identified in the following segment information, because the amounts are not material.

Corporate and other includes corporate headquarters costs for executive officers and certain legal and financial functions, as well as certain other costs and credits not attributed to our core businesses. These costs are not allocated to the business segments.

The following table provides a reconciliation of reportable segment revenues and operating income to our unaudited condensed consolidated financial statement totals for the periods ended February 28, 2017 and February 29, 2016 (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

6,779

 

 

$

6,557

 

 

$

20,178

 

 

$

19,736

 

TNT Express segment

 

 

1,790

 

 

N/A

 

 

 

5,493

 

 

N/A

 

FedEx Ground segment

 

 

4,688

 

 

 

4,408

 

 

 

13,397

 

 

 

12,288

 

FedEx Freight segment

 

 

1,492

 

 

 

1,447

 

 

 

4,747

 

 

 

4,595

 

FedEx Services segment

 

 

389

 

 

 

384

 

 

 

1,198

 

 

 

1,177

 

Eliminations and other

 

 

(141

)

 

 

(142

)

 

 

(422

)

 

 

(410

)

 

 

$

14,997

 

 

$

12,654

 

 

$

44,591

 

 

$

37,386

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

555

 

 

$

595

 

 

$

1,815

 

 

$

1,762

 

TNT Express segment

 

 

2

 

 

N/A

 

 

 

58

 

 

N/A

 

FedEx Ground segment

 

 

515