10-Q 1 fdx-10q_20180228.htm 10-Q fdx-10q_20180228.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, 2018

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 March 19, 2018

Common Stock, par value $0.10 per share

 

267,215,207

 

 

 

 

 


 

FEDEX CORPORATION

INDEX

 

 

 

PAGE

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. Financial Statements

 

 

Condensed Consolidated Balance Sheets
February 28, 2018 and May 31, 2017

 

3

Condensed Consolidated Statements of Income
Three and Nine Months Ended February 28, 2018 and 2017

 

5

Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months Ended February 28, 2018 and 2017

 

6

Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 2018 and 2017

 

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

 

51

ITEM 4. Controls and Procedures

 

51

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

ITEM 1. Legal Proceedings

 

52

ITEM 1A. Risk Factors

 

52

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

 

54

ITEM 6. Exhibits

 

55

Signature

 

57

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 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)

 

 

 

February 28,

2018

(Unaudited)

 

 

May 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,789

 

 

$

3,969

 

Receivables, less allowances of $373 and $252

 

 

8,671

 

 

 

7,599

 

Spare parts, supplies and fuel, less allowances of $258 and $237

 

 

523

 

 

 

514

 

Prepaid expenses and other

 

 

1,592

 

 

 

546

 

Total current assets

 

 

13,575

 

 

 

12,628

 

PROPERTY AND EQUIPMENT, AT COST

 

 

54,377

 

 

 

50,626

 

Less accumulated depreciation and amortization

 

 

26,680

 

 

 

24,645

 

Net property and equipment

 

 

27,697

 

 

 

25,981

 

OTHER LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Goodwill

 

 

7,464

 

 

 

7,154

 

Other assets

 

 

3,115

 

 

 

2,789

 

Total other long-term assets

 

 

10,579

 

 

 

9,943

 

 

 

$

51,851

 

 

$

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)

 

 

 

February 28,

2018

(Unaudited)

 

 

May 31,

2017

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

      Short-term borrowings

 

$

799

 

 

$

 

Current portion of long-term debt

 

 

764

 

 

 

22

 

Accrued salaries and employee benefits

 

 

1,945

 

 

 

1,914

 

Accounts payable

 

 

3,102

 

 

 

2,752

 

Accrued expenses

 

 

2,893

 

 

 

3,230

 

Total current liabilities

 

 

9,503

 

 

 

7,918

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

16,017

 

 

 

14,909

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

2,401

 

 

 

2,485

 

Pension, postretirement healthcare and other benefit obligations

 

 

2,181

 

 

 

4,487

 

Self-insurance accruals

 

 

1,715

 

 

 

1,494

 

Deferred lease obligations

 

 

532

 

 

 

531

 

Deferred gains, principally related to aircraft transactions

 

 

124

 

 

 

137

 

Other liabilities

 

 

484

 

 

 

518

 

Total other long-term liabilities

 

 

7,437

 

 

 

9,652

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

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

   issued as of February 28, 2018 and May 31, 2017

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

3,085

 

 

 

3,005

 

Retained earnings

 

 

23,710

 

 

 

20,833

 

Accumulated other comprehensive loss

 

 

(357

)

 

 

(415

)

Treasury stock, at cost

 

 

(7,576

)

 

 

(7,382

)

Total common stockholders’ investment

 

 

18,894

 

 

 

16,073

 

 

 

$

51,851

 

 

$

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

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUES

 

$

16,526

 

 

$

14,997

 

 

$

48,136

 

 

$

44,591

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,981

 

 

 

5,395

 

 

 

17,241

 

 

 

16,059

 

Purchased transportation

 

 

3,935

 

 

 

3,498

 

 

 

11,220

 

 

 

10,169

 

Rentals and landing fees

 

 

873

 

 

 

834

 

 

 

2,526

 

 

 

2,426

 

Depreciation and amortization

 

 

786

 

 

 

762

 

 

 

2,293

 

 

 

2,241

 

Fuel

 

 

914

 

 

 

735

 

 

 

2,435

 

 

 

2,043

 

Maintenance and repairs

 

 

628

 

 

 

588

 

 

 

1,968

 

 

 

1,765

 

Other

 

 

2,408

 

 

 

2,160

 

 

 

7,073

 

 

 

6,432

 

 

 

 

15,525

 

 

 

13,972

 

 

 

44,756

 

 

 

41,135

 

OPERATING INCOME

 

 

1,001

 

 

 

1,025

 

 

 

3,380

 

 

 

3,456

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(125

)

 

 

(122

)

 

 

(363

)

 

 

(354

)

Other, net

 

 

(2

)

 

 

(4

)

 

 

(22

)

 

 

17

 

 

 

 

(127

)

 

 

(126

)

 

 

(385

)

 

 

(337

)

INCOME BEFORE INCOME TAXES

 

 

874

 

 

 

899

 

 

 

2,995

 

 

 

3,119

 

PROVISION FOR INCOME TAXES

 

 

(1,200

)

 

 

337

 

 

 

(450

)

 

 

1,142

 

NET INCOME

 

$

2,074

 

 

$

562

 

 

$

3,445

 

 

$

1,977

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

7.74

 

 

$

2.11

 

 

$

12.85

 

 

$

7.43

 

Diluted

 

$

7.59

 

 

$

2.07

 

 

$

12.63

 

 

$

7.31

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.50

 

 

$

0.40

 

 

$

2.00

 

 

$

1.60

 

 

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 28,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

NET INCOME

 

$

2,074

 

 

$

562

 

 

$

3,445

 

 

$

1,977

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax of $9, $3, $26, and $19

 

 

100

 

 

 

110

 

 

 

119

 

 

 

(108

)

Amortization of prior service credit, net of tax of $7, $12, $29, and $34

 

 

(23

)

 

 

(19

)

 

 

(61

)

 

 

(57

)

 

 

 

77

 

 

 

91

 

 

 

58

 

 

 

(165

)

COMPREHENSIVE INCOME

 

$

2,151

 

 

$

653

 

 

$

3,503

 

 

$

1,812

 

 

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,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,445

 

 

$

1,977

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,293

 

 

 

2,241

 

Provision for uncollectible accounts

 

 

177

 

 

 

115

 

Stock-based compensation

 

 

135

 

 

 

123

 

Deferred income taxes and other noncash items

 

 

(914

)

 

 

474

 

Gain from sale of investment

 

 

 

 

 

(35

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(986

)

 

 

(340

)

Other assets

 

 

(151

)

 

 

(235

)

Accounts payable and other liabilities

 

 

(2,781

)

 

 

(1,642

)

Other, net

 

 

(56

)

 

 

(33

)

Cash provided by operating activities

 

 

1,162

 

 

 

2,645

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(3,994

)

 

 

(3,790

)

Business acquisitions, net of cash acquired

 

 

(44

)

 

 

 

Proceeds from asset dispositions and other

 

 

21

 

 

 

123

 

Cash used in investing activities

 

 

(4,017

)

 

 

(3,667

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings, net

 

 

797

 

 

 

 

Principal payments on debt

 

 

(31

)

 

 

(49

)

Proceeds from debt issuances

 

 

1,481

 

 

 

1,190

 

Proceeds from stock issuances

 

 

284

 

 

 

265

 

Dividends paid

 

 

(402

)

 

 

(319

)

Purchase of treasury stock

 

 

(558

)

 

 

(358

)

Other, net

 

 

6

 

 

 

2

 

Cash provided by financing activities

 

 

1,577

 

 

 

731

 

Effect of exchange rate changes on cash

 

 

98

 

 

 

(70

)

Net decrease in cash and cash equivalents

 

 

(1,180

)

 

 

(361

)

Cash and cash equivalents at beginning of period

 

 

3,969

 

 

 

3,534

 

Cash and cash equivalents at end of period

 

$

2,789

 

 

$

3,173

 

 

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 February 28, 2018, the results of our operations for the three- and nine-month periods ended February 28, 2018 and 2017, and cash flows for the nine-month periods ended February 28, 2018 and 2017. Operating results for the three- and nine-month periods ended February 28, 2018 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 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 $32 million for the three-month period ended February 28, 2018 and $135 million for the nine-month period ended February 28, 2018. 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. 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.

In December 2017, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118 to provide guidance to registrants in accounting for income taxes under the Tax Cuts and Jobs Act (“TCJA”). See Note 5 for further discussion related to applying this guidance.

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 an immaterial impact on our accounting and financial reporting for the third quarter and nine months of 2018.

In January 2017, the FASB issued an Accounting Standards Update that simplifies the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Under this new guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an

- 8 -


 

impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance will be applied prospectively and will be effective for us beginning June 1, 2020 (fiscal 2021). Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We expect to early adopt the guidance during the fourth quarter of 2018.

In 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 finalizing the assessment of the impact this new standard will have on our consolidated financial statements and related disclosures, including ongoing contract reviews, which will be completed by the end of 2018. We do not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems.

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 $143 million in the third quarter and $436 million in the nine months of 2018, and by $113 million in the third quarter and $337 million in the nine months of 2017, but would not have impacted our net income in these periods. This new guidance will be effective June 1, 2018 and will be applied retrospectively.

In 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 our 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 portfolio, 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 June 1, 2019 (fiscal 2020).

In February 2018, the FASB issued an Accounting Standards Update that will permit companies to reclassify the income tax effect of the TCJA on items within accumulated other comprehensive income (loss) (“AOCI”) to retained earnings. These changes will be effective June 1, 2019 (fiscal 2020).

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 2018, we repurchased 1.2 million shares of FedEx common stock at an average price of $248.73 per share for a total of $288 million. During the nine months of 2018, we repurchased 2.4 million shares of FedEx common stock at an average price of $232.00 per share for a total of $558 million. As of February 28, 2018, 13.6 million shares remained under the current share repurchase authorization.

DIVIDENDS DECLARED PER COMMON SHARE. On February 16, 2018, our Board of Directors declared a quarterly dividend of $0.50 per share of common stock. The dividend will be paid on April 2, 2018 to stockholders of record as of the close of business on March 12, 2018. 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 AOCI, net of tax, reported in our unaudited condensed consolidated financial statements for the periods ended February 28 (in millions; amounts in parentheses indicate debits to AOCI):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Foreign currency translation loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(666

)

 

$

(732

)

 

$

(685

)

 

$

(514

)

Translation adjustments

 

 

100

 

 

 

110

 

 

 

119

 

 

 

(108

)

Balance at end of period

 

 

(566

)

 

 

(622

)

 

 

(566

)

 

 

(622

)

Retirement plans adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

232

 

 

 

307

 

 

 

270

 

 

 

345

 

Reclassifications from AOCI

 

 

(23

)

 

 

(19

)

 

 

(61

)

 

 

(57

)

Balance at end of period

 

 

209

 

 

 

288

 

 

 

209

 

 

 

288

 

Accumulated other comprehensive (loss) at end of period

 

$

(357

)

 

$

(334

)

 

$

(357

)

 

$

(334

)

 

The following table presents details of the reclassifications from AOCI for the periods ended February 28 (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

 

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

Amortization of retirement plans

   prior service credits, before tax

 

$

30

 

 

$

31

 

 

$

90

 

 

$

91

 

 

Salaries and employee benefits

Income tax benefit

 

 

(7

)

 

 

(12

)

 

 

(29

)

 

 

(34

)

 

Provision for income taxes

AOCI reclassifications, net of tax

 

$

23

 

 

$

19

 

 

$

61

 

 

$

57

 

 

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 third quarter of 2018, we issued $1.5 billion of senior unsecured debt under our current shelf registration statement, comprised of $500 million of 3.40% fixed-rate notes due in February 2028, and $1 billion of 4.05% fixed-rate notes due in February 2048. Interest on these notes is paid semi-annually. We used the net proceeds for a voluntary incremental contribution in February 2018 to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”).

During the quarter, we amended our five-year revolving credit facility to increase the aggregate amount available under the facility from $1.75 billion to $2.0 billion. The facility, which expires in November 2020 and 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 2.2 to 1.0 at February 28, 2018. 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 this 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 third quarter of 2018, we issued commercial paper which provided us with additional short-term liquidity. The maximum outstanding during the quarter was $800 million. 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 February 28, 2018, $800 million of commercial paper and $54 million in letters of credit were outstanding, leaving $1.146 billion available under the revolving credit facility for future borrowings.

Long-term debt, exclusive of capital leases, had carrying values of $16.7 billion at February 28, 2018 and $14.9 billion at May 31, 2017, compared with estimated fair values of $17.0 billion at February 28, 2018 and $15.5 billion at May 31, 2017. The annualized

- 10 -


 

weighted-average interest rate on long-term debt was 3.6% at February 28, 2018. 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.

(4) Computation of Earnings Per Share

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

2,071

 

 

$

561

 

 

$

3,441

 

 

$

1,974

 

Weighted-average common shares

 

 

268

 

 

 

266

 

 

 

268

 

 

 

266

 

Basic earnings per common share

 

$

7.74

 

 

$

2.11

 

 

$

12.85

 

 

$

7.43

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

2,071

 

 

$

561

 

 

$

3,441

 

 

$

1,974

 

Weighted-average common shares

 

 

268

 

 

 

266

 

 

 

268

 

 

 

266

 

Dilutive effect of share-based awards

 

 

5

 

 

 

5

 

 

 

4

 

 

 

4

 

Weighted-average diluted shares

 

 

273

 

 

 

271

 

 

 

272

 

 

 

270

 

Diluted earnings per common share

 

$

7.59

 

 

$

2.07

 

 

$

12.63

 

 

$

7.31

 

Anti-dilutive options excluded from diluted earnings per

   common share

 

 

1.9

 

 

 

4.0

 

 

 

2.6

 

 

 

4.7

 

 

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

- 11 -


 

(5) Income Taxes

On December 22, 2017, the United States government enacted comprehensive tax legislation through the TCJA. The TCJA significantly changes the U.S. corporate income tax system including, among other things, lowering the statutory federal income tax rate from 35% to 21%, eliminating or reducing certain income tax deductions, and implementing a modified territorial tax system that includes a one-time transition tax on previously deferred foreign earnings. Due to our May 31 fiscal year end, the lower rate will be phased in, resulting in a U.S. statutory federal rate of 29.2% for 2018 and a 21% statutory federal rate for subsequent years.

In December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides for a measurement period of up to one year from the enactment date for companies to complete the accounting for the initial income tax effects of the TCJA. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting is complete and provide a provisional estimate (where determinable) of the income tax effects of the TCJA where the accounting is incomplete. The provisional estimate is required to be updated throughout the measurement period.

As of February 28, 2018, we have not completed our initial accounting of the tax effects of the TCJA; however, where determinable, we have made an estimate of the effects on our existing deferred tax balances and the one-time transition tax. During the quarter, we recognized a provisional benefit of $1.15 billion related to the remeasurement of our net U.S. deferred tax liability and a provisional benefit of $36 million from foreign tax credits exceeding the one-time transition tax on previously deferred foreign earnings.    

In addition to the provisional amounts above, we recognized a one-time benefit of $204 million from a $1.5 billion contribution to our U.S. Pension Plans in February 2018 and a benefit of $165 million related to a lower statutory income tax rate on fiscal 2018 year-to-date earnings.  

The following table provides a reconciliation of the 2017 effective tax rates to the 2018 effective tax rates, including the impact of the TCJA, for the periods ended February 28:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2018

 

2017 Effective Tax Rate

 

 

37.5

%

 

 

36.6

%

Remeasurement of net U.S. deferred tax liability

 

 

(131.5

)

 

 

(38.4

)

Effect of February 2018 pension contribution (a)

 

 

(23.3

)

 

 

(6.8

)

Lower statutory tax rate

 

 

(18.9

)

 

 

(5.5

)

Transition tax

 

 

(4.1

)

 

 

(1.2

)

Other (b)

 

 

3.0

 

 

 

0.3

 

2018 Effective Tax Rate

 

 

(137.3

)%

 

 

(15.0

)%

 

(a)

The benefit is from the pension contribution deducted on our 2017 tax return at a tax rate of 35%.

 

(b)

The 2018 tax rates were negatively impacted by the effect of the NotPetya cyberattack, changes in uncertain tax positions and tax rate impacts on changes in deferred tax items after the TCJA enactment and were favorably impacted from foreign tax credits associated with a second quarter dividend from foreign operations.

(6) 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 were as follows (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Defined benefit pension plans

 

$

39

 

 

$

57

 

 

$

113

 

 

$

173

 

Defined contribution plans

 

 

135

 

 

 

117

 

 

 

386

 

 

 

348

 

Postretirement healthcare plans

 

 

19

 

 

 

19

 

 

 

56

 

 

 

57

 

 

 

$

193

 

 

$

193

 

 

$

555

 

 

$

578

 

- 12 -


 

 

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

 

 

Three Months Ended

 

 

 

U.S. Pension Plans

 

 

International Pension Plans

 

 

Postretirement Healthcare Plans

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

 

$

169

 

 

$

160

 

 

$

23

 

 

$

20

 

 

$

9

 

 

$

9

 

Interest cost

 

 

279

 

 

 

282

 

 

 

12

 

 

 

11

 

 

 

10

 

 

 

10

 

Expected return on plan assets

 

 

(406

)

 

 

(375

)

 

 

(10

)

 

 

(9

)

 

 

 

 

 

 

Amortization of prior service credit and other

 

 

(29

)

 

 

(30

)

 

 

1

 

 

 

(2

)

 

 

 

 

 

 

 

 

$

13

 

 

$

37

 

 

$

26

 

 

$

20

 

 

$

19

 

 

$

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

U.S. Pension Plans

 

 

International Pension Plans

 

 

Postretirement Healthcare Plans

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

 

$

509

 

 

$

479

 

 

$

69

 

 

$

61

 

 

$

27

 

 

$

27

 

Interest cost

 

 

836

 

 

 

846

 

 

 

37

 

 

 

33

 

 

 

29

 

 

 

30

 

Expected return on plan assets

 

 

(1,218

)

 

 

(1,126

)

 

 

(32

)

 

 

(30

)

 

 

 

 

 

 

Amortization of prior service credit and other

 

 

(88

)

 

 

(89

)

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

$

39

 

 

$

110

 

 

$

74

 

 

$

63

 

 

$

56

 

 

$

57

 

 

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

 

 

2018

 

 

2017

 

Required

 

$

22

 

 

$

444

 

Voluntary

 

 

2,478

 

 

 

1,306

 

 

 

$

2,500

 

 

$

1,750

 

 

During the third quarter of 2018, we made voluntary contributions to our U.S. Pension Plans of $1.75 billion.

(7) 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.

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)

 

- 13 -


 

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.

Effective March 1, 2018, we realigned our specialty logistics and e-commerce solutions in a new organizational structure under FedEx Trade Networks, Inc. in the FedEx Express segment. The realignment allows us to improve our ability to deliver the capabilities of our specialty companies to customers. The new structure includes FedEx Custom Critical, FedEx Cross Border, FedEx Supply Chain, FedEx Trade Networks Transport & Brokerage and, effective June 1, 2018, a new company called FedEx Forward Depots. Prior period segment results will be recast to conform to current year presentation beginning in the fourth quarter of 2018.

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.

- 14 -


 

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 (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

9,370

 

 

$

8,569

 

 

$

27,376

 

 

$

25,671

 

FedEx Ground segment

 

 

5,222

 

 

 

4,688