10-Q 1 fdx-10q_20171130.htm 10-Q fdx-10q_20171130.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 November 30, 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer             

Non-accelerated filer

Smaller reporting company 

Emerging growth company 

 

 

(Do not check if a smaller reporting company)

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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 December 18, 2017

Common Stock, par value $0.10 per share

 

267,889,623

 

 

 

 

 


 

FEDEX CORPORATION

INDEX

 

 

 

PAGE

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. Financial Statements

 

 

Condensed Consolidated Balance Sheets
November 30, 2017 and May 31, 2017

 

3

Condensed Consolidated Statements of Income
Three and Six Months Ended November 30, 2017 and November 30, 2016

 

5

Condensed Consolidated Statements of Comprehensive Income
Three and Six Months Ended November 30, 2017 and November 30, 2016

 

6

Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 2017 and November 30, 2016

 

7

Notes to Condensed Consolidated Financial Statements

 

8

Report of Independent Registered Public Accounting Firm

 

26

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

 

27

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

49

ITEM 4. Controls and Procedures

 

49

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

ITEM 1. Legal Proceedings

 

50

ITEM 1A. Risk Factors

 

50

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

 

51

ITEM 6. Exhibits

 

52

Signature

 

53

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 12.1

 

 

Exhibit 15.1

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

Exhibit 101.1 Interactive Data Files

 

 

- 2 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

 

 

November 30,

2017

(Unaudited)

 

 

May 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,768

 

 

$

3,969

 

Receivables, less allowances of $353 and $252

 

 

8,655

 

 

 

7,599

 

Spare parts, supplies and fuel, less allowances of $248 and $237

 

 

533

 

 

 

514

 

Prepaid expenses and other

 

 

925

 

 

 

546

 

Total current assets

 

 

12,881

 

 

 

12,628

 

PROPERTY AND EQUIPMENT, AT COST

 

 

53,240

 

 

 

50,626

 

Less accumulated depreciation and amortization

 

 

25,950

 

 

 

24,645

 

Net property and equipment

 

 

27,290

 

 

 

25,981

 

OTHER LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Goodwill

 

 

7,325

 

 

 

7,154

 

Other assets

 

 

2,785

 

 

 

2,789

 

Total other long-term assets

 

 

10,110

 

 

 

9,943

 

 

 

$

50,281

 

 

$

48,552

 

 

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)

 

 

 

November 30,

2017

(Unaudited)

 

 

May 31,

2017

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

      Short-term borrowings

 

$

250

 

 

$

 

Current portion of long-term debt

 

 

11

 

 

 

22

 

Accrued salaries and employee benefits

 

 

1,912

 

 

 

1,914

 

Accounts payable

 

 

3,147

 

 

 

2,752

 

Accrued expenses

 

 

2,907

 

 

 

3,230

 

Total current liabilities

 

 

8,227

 

 

 

7,918

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

15,180

 

 

 

14,909

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

3,088

 

 

 

2,485

 

Pension, postretirement healthcare and other benefit obligations

 

 

3,868

 

 

 

4,487

 

Self-insurance accruals

 

 

1,651

 

 

 

1,494

 

Deferred lease obligations

 

 

633

 

 

 

531

 

Deferred gains, principally related to aircraft transactions

 

 

122

 

 

 

137

 

Other liabilities

 

 

457

 

 

 

518

 

Total other long-term liabilities

 

 

9,819

 

 

 

9,652

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

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

   issued as of November 30, 2017 and May 31, 2017

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

3,055

 

 

 

3,005

 

Retained earnings

 

 

21,785

 

 

 

20,833

 

Accumulated other comprehensive loss

 

 

(434

)

 

 

(415

)

Treasury stock, at cost

 

 

(7,383

)

 

 

(7,382

)

Total common stockholders’ investment

 

 

17,055

 

 

 

16,073

 

 

 

$

50,281

 

 

$

48,552

 

 

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

 

 

Six Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

REVENUES

 

$

16,313

 

 

$

14,931

 

 

$

31,610

 

 

$

29,594

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,742

 

 

 

5,353

 

 

 

11,260

 

 

 

10,664

 

Purchased transportation

 

 

3,840

 

 

 

3,431

 

 

 

7,285

 

 

 

6,671

 

Rentals and landing fees

 

 

835

 

 

 

802

 

 

 

1,653

 

 

 

1,592

 

Depreciation and amortization

 

 

756

 

 

 

740

 

 

 

1,507

 

 

 

1,479

 

Fuel

 

 

818

 

 

 

658

 

 

 

1,521

 

 

 

1,308

 

Maintenance and repairs

 

 

665

 

 

 

579

 

 

 

1,340

 

 

 

1,177

 

Other

 

 

2,395

 

 

 

2,201

 

 

 

4,665

 

 

 

4,272

 

 

 

 

15,051

 

 

 

13,764

 

 

 

29,231

 

 

 

27,163

 

OPERATING INCOME

 

 

1,262

 

 

 

1,167

 

 

 

2,379

 

 

 

2,431

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(124

)

 

 

(119

)

 

 

(238

)

 

 

(232

)

Other, net

 

 

1

 

 

 

30

 

 

 

(20

)

 

 

21

 

 

 

 

(123

)

 

 

(89

)

 

 

(258

)

 

 

(211

)

INCOME BEFORE INCOME TAXES

 

 

1,139

 

 

 

1,078

 

 

 

2,121

 

 

 

2,220

 

PROVISION FOR INCOME TAXES

 

 

364

 

 

 

378

 

 

 

750

 

 

 

805

 

NET INCOME

 

$

775

 

 

$

700

 

 

$

1,371

 

 

$

1,415

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.89

 

 

$

2.63

 

 

$

5.12

 

 

$

5.32

 

Diluted

 

$

2.84

 

 

$

2.59

 

 

$

5.03

 

 

$

5.24

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.50

 

 

$

0.40

 

 

$

1.50

 

 

$

1.20

 

 

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

 

 

Six Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

NET INCOME

 

$

775

 

 

$

700

 

 

$

1,371

 

 

$

1,415

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax of $7, $21, $18, and $16

 

 

(90

)

 

 

(230

)

 

 

19

 

 

 

(218

)

Amortization of prior service credit, net of tax of $11, $11, $22, and $22

 

 

(19

)

 

 

(19

)

 

 

(38

)

 

 

(38

)

 

 

 

(109

)

 

 

(249

)

 

 

(19

)

 

 

(256

)

COMPREHENSIVE INCOME

 

$

666

 

 

$

451

 

 

$

1,352

 

 

$

1,159

 

 

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)

 

 

 

Six Months Ended

 

 

 

November 30,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

1,371

 

 

$

1,415

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,507

 

 

 

1,479

 

Provision for uncollectible accounts

 

 

116

 

 

 

76

 

Stock-based compensation

 

 

103

 

 

 

93

 

Deferred income taxes and other noncash items

 

 

327

 

 

 

320

 

Gain from sale of investment

 

 

 

 

 

(35

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(983

)

 

 

(513

)

Other assets

 

 

(338

)

 

 

(250

)

Accounts payable and other liabilities

 

 

(564

)

 

 

67

 

Other, net

 

 

(41

)

 

 

(17

)

Cash provided by operating activities

 

 

1,498

 

 

 

2,635

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,621

)

 

 

(2,681

)

Business acquisitions, net of cash acquired

 

 

(44

)

 

 

 

Proceeds from asset dispositions and other

 

 

12

 

 

 

100

 

Cash used in investing activities

 

 

(2,653

)

 

 

(2,581

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

 

250

 

 

 

 

Principal payments on debt

 

 

(28

)

 

 

(43

)

Proceeds from stock issuances

 

 

205

 

 

 

164

 

Dividends paid

 

 

(268

)

 

 

(213

)

Purchase of treasury stock

 

 

(270

)

 

 

(334

)

Other, net

 

 

3

 

 

 

(5

)

Cash used in financing activities

 

 

(108

)

 

 

(431

)

Effect of exchange rate changes on cash

 

 

62

 

 

 

(98

)

Net decrease in cash and cash equivalents

 

 

(1,201

)

 

 

(475

)

Cash and cash equivalents at beginning of period

 

 

3,969

 

 

 

3,534

 

Cash and cash equivalents at end of period

 

$

2,768

 

 

$

3,059

 

 

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, 2017  (“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 November 30, 2017, the results of our operations for the three- and six-month periods ended November 30, 2017 and 2016, and cash flows for the six-month periods ended November 30, 2017 and 2016. Operating results for the three- and six-month periods ended November 30, 2017 are not necessarily indicative of the results that may be expected for the year ending May 31, 2018.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2018 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

 

BUSINESS ACQUISITION. On October 13, 2017, FedEx acquired Northwest Research, Inc., a leader in inventory research and management, for $50 million in cash from operations. The majority of the purchase price was allocated to property, plant and equipment. The financial results of this acquired business are included in the FedEx Corporate Services, Inc. (“FedEx Services”) segment from the date of acquisition and were not material to our results of operations. Therefore, pro forma financial information has not been provided.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of Federal Express Corporation (“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”) 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 $41 million for the three-month period ended November 30, 2017 and $103 million for the six-month period ended November 30, 2017. Our stock-based compensation expense was $36 million for the three-month period ended November 30, 2016 and $93 million for the six-month period ended November 30, 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. We believe the following new accounting guidance is relevant to the readers of our financial statements.

During the first quarter of 2018, we early adopted the Accounting Standards Update issued by the Financial Accounting Standards Board (“FASB”) related to Intra-Entity Transfers of Assets Other Than Inventory. This update requires companies to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs, as opposed to when the assets are ultimately sold to an outside party. This new guidance had a minimal impact on our accounting and financial reporting for the second quarter and first half of 2018.

- 8 -


 

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 June 1, 2018 (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. We are continuing to complete the assessment of the impact this new standard will have on our consolidated financial statements and related disclosures, including ongoing contract reviews. 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 in 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. Expenses 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. Based on our lease portfolio, we currently anticipate recognizing a lease liability and related right-of-use asset on the balance sheet in excess of $13 billion with an immaterial impact on our income statement compared to the current lease accounting model. However, the ultimate impact of the standard will depend on the company’s lease portfolio as of the adoption date. We are currently in the process of evaluating our existing lease portfolios, including accumulating all of the necessary information required to properly account for the leases under the new standard. Additionally, we are implementing an enterprise-wide lease management system to assist in the accounting and are evaluating additional changes to our processes and internal controls to ensure we meet the standard’s reporting and disclosure requirements. 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.

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 impact on our net income or earnings per share. For example, adoption of this guidance would have reduced operating income by $146 million in the second quarter and $292 million in the first half of 2018, and by $112 million in the second quarter and $224 million in the first half of 2017, but would not have impacted our net income in these periods. This new guidance will be effective for our fiscal year beginning June 1, 2018 (fiscal 2019) and will be applied retrospectively.

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 second quarter of 2018, we repurchased 0.8 million shares of FedEx common stock at an average price of $220.67 per share for a total of $184 million. During the first half of 2018, we repurchased 1.2 million shares of FedEx common stock at an average price of $216.45 per share for a total of $270 million. As of November 30, 2017, 14.8 million shares remained under the share repurchase authorization.

DIVIDENDS DECLARED PER COMMON SHARE. On November 17, 2017, our Board of Directors declared a quarterly dividend of $0.50 per share of common stock. The dividend will be paid on January 2, 2018 to stockholders of record as of the close of business on December 11, 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.

- 9 -


 

(2) Accumulated Other Comprehensive Income (Loss)

The following table provides changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax, reported in our unaudited condensed consolidated financial statements for the periods ended November 30 (in millions; amounts in parentheses indicate debits to AOCI):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Foreign currency translation loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(576

)

 

$

(502

)

 

$

(685

)

 

$

(514

)

Translation adjustments

 

 

(90

)

 

 

(230

)

 

 

19

 

 

 

(218

)

Balance at end of period

 

 

(666

)

 

 

(732

)

 

 

(666

)

 

 

(732

)

Retirement plans adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

251

 

 

 

326

 

 

 

270

 

 

 

345

 

Reclassifications from AOCI

 

 

(19

)

 

 

(19

)

 

 

(38

)

 

 

(38

)

Balance at end of period

 

 

232

 

 

 

307

 

 

 

232

 

 

 

307

 

Accumulated other comprehensive (loss) at end of period

 

$

(434

)

 

$

(425

)

 

$

(434

)

 

$

(425

)

 

The following table presents details of the reclassifications from AOCI for the periods ended November 30 (in millions; amounts in parentheses indicate debits to earnings):

 

 

 

Amount Reclassified from

AOCI

 

 

Affected Line Item in the

Income Statement

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

Amortization of retirement plans

   prior service credits, before tax

 

$

30

 

 

$

30

 

 

$

60

 

 

$

60

 

 

Salaries and employee benefits

Income tax benefit

 

 

(11

)

 

 

(11

)

 

 

(22

)

 

 

(22

)

 

Provision for income taxes

AOCI reclassifications, net of tax

 

$

19

 

 

$

19

 

 

$

38

 

 

$

38

 

 

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.

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 November 30, 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.

During the second quarter of 2018, we issued $250 million of commercial paper, providing us with additional short-term liquidity flexibility. Our commercial paper program is backed by unused commitments under the revolving credit facility and borrowings under the program reduce the amount available under the credit facility. As of November 30, 2017, $250 million of commercial paper and $255 million in letters of credit were outstanding, leaving $1.245 billion available under the revolving credit facility for future borrowings.

Long-term debt, exclusive of capital leases, had carrying values of $15.1 billion at November 30, 2017 and $14.9 billion at May 31, 2017, compared with estimated fair values of $15.9 billion at November 30, 2017 and $15.5 billion at May 31, 2017. The annualized weighted average interest rate on long-term debt was 3.6% for the six-months ended November 30, 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.

- 10 -


 

(4) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the periods ended November 30 was as follows (in millions, except per share amounts):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

774

 

 

$

700

 

 

$

1,369

 

 

$

1,414

 

Weighted-average common shares

 

 

268

 

 

 

266

 

 

 

268

 

 

 

266

 

Basic earnings per common share

 

$

2.89

 

 

$

2.63

 

 

$

5.12

 

 

$

5.32

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

774

 

 

$

700

 

 

$

1,369

 

 

$

1,414

 

Weighted-average common shares

 

 

268

 

 

 

266

 

 

 

268

 

 

 

266

 

Dilutive effect of share-based awards

 

 

4

 

 

 

4

 

 

 

4

 

 

 

4

 

Weighted-average diluted shares

 

 

272

 

 

 

270

 

 

 

272

 

 

 

270

 

Diluted earnings per common share

 

$

2.84

 

 

$

2.59

 

 

$

5.03

 

 

$

5.24

 

Anti-dilutive options excluded from diluted earnings per

   common share

 

 

2.9

 

 

 

5.1

 

 

 

3.0

 

 

 

5.1

 

 

(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 November 30 were as follows (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Defined benefit pension plans

 

$

37

 

 

$

58

 

 

$

74

 

 

$

116

 

Defined contribution plans

 

 

124

 

 

 

112

 

 

 

251

 

 

 

231

 

Postretirement healthcare plans

 

 

18

 

 

 

19

 

 

 

37

 

 

 

38

 

 

 

$

179

 

 

$

189

 

 

$

362

 

 

$

385

 

 

- 11 -


 

Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended November 30 included the following components (in millions):

 

 

 

Three Months Ended

 

 

 

U.S. Pension Plans

 

 

International Pension Plans

 

 

Postretirement Healthcare Plans

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Service cost

 

$

170

 

 

$

160

 

 

$

23

 

 

$

20

 

 

$

9

 

 

$

9

 

Interest cost

 

 

278

 

 

 

282

 

 

 

13

 

 

 

11

 

 

 

9

 

 

 

10

 

Expected return on plan assets

 

 

(406

)

 

 

(375

)

 

 

(11

)

 

 

(11

)

 

 

 

 

 

 

Amortization of prior service credit and other

 

 

(29

)

 

 

(30

)

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

$

13

 

 

$

37

 

 

$

24

 

 

$

21

 

 

$

18

 

 

$

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

U.S. Pension Plans

 

 

International Pension Plans

 

 

Postretirement Healthcare Plans

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Service cost

 

$

340

 

 

$

319

 

 

$

46

 

 

$

41

 

 

$

18

 

 

$

18

 

Interest cost

 

 

557

 

 

 

564

 

 

 

25

 

 

 

22

 

 

 

19

 

 

 

20

 

Expected return on plan assets

 

 

(812

)

 

 

(751

)

 

 

(22

)

 

 

(21

)

 

 

 

 

 

 

Amortization of prior service credit and other

 

 

(59

)

 

 

(59

)

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

$

26

 

 

$

73

 

 

$

48

 

 

$

43

 

 

$

37

 

 

$

38

 

 

Contributions to our tax-qualified U.S. domestic pension plans for the six-month periods ended November 30 were as follows (in millions):

 

 

 

2017

 

 

2016

 

Required

 

$

268

 

 

$

250

 

Voluntary

 

 

482

 

 

 

250

 

 

 

$

750

 

 

$

500

 

 

(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 are FedEx Express, including TNT Express B.V. (“TNT Express”), the world’s largest express transportation company; 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 Services, form the core of our reportable segments.

- 12 -


 

Our reportable segments include the following businesses:

 

 

 

 

 

FedEx Express Segment

FedEx Express (express transportation)

 

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

 

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

 

 

 

 

FedEx Ground Segment

FedEx Ground (small-package ground delivery)

 

FedEx Supply Chain (third-party logistics)

 

 

 

 

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)

 

As discussed in our Annual Report, in the first quarter of 2018, we began to report TNT Express as part of the FedEx Express segment. Prior year amounts have been revised to conform to the current year presentation.

 

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, some of these functions are performed on a regional basis and reported 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 and Print Services, Inc. (“FedEx Office”), which provides an array of document and business services and retail access to our customers for our package transportation businesses.

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 business. These costs are not allocated to the business segments.

- 13 -


 

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 November 30 (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

9,354

 

 

$

8,642

 

 

$

18,006

 

 

$

17,102

 

FedEx Ground segment

 

 

4,929

 

 

 

4,419

 

 

 

9,568

 

 

 

8,709

 

FedEx Freight segment

 

 

1,762

 

 

 

1,597

 

 

 

3,514

 

 

 

3,255

 

FedEx Services segment

 

 

416

 

 

 

414

 

 

 

816

 

 

 

809

 

Eliminations and other

 

 

(148

)

 

 

(141

)

 

 

(294

)

 

 

(281

)

 

 

$

16,313

 

 

$

14,931

 

 

$

31,610

 

 

$

29,594

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

717

 

 

$

706

 

 

$

1,150

 

 

$

1,316