10-Q 1 fdx-10q_20180831.htm 10-Q fdx-10q_20180831.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 August 31, 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 every Interactive Data File required to be submitted 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 such files). Yes    ☒  No    ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 

 

 

 

 

 

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 September 13, 2018

Common Stock, par value $0.10 per share

 

263,515,857

 

 

 

 

 


 

FEDEX CORPORATION

INDEX

 

 

 

PAGE

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. Financial Statements

 

 

Condensed Consolidated Balance Sheets
August 31, 2018 and May 31, 2018

 

3

Condensed Consolidated Statements of Income
Three Months Ended August 31, 2018 and 2017

 

5

Condensed Consolidated Statements of Comprehensive Income
Three Months Ended August 31, 2018 and 2017

 

6

Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 2018 and 2017

 

7

Notes to Condensed Consolidated Financial Statements

 

8

Report of Independent Registered Public Accounting Firm

 

25

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

 

26

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

48

ITEM 4. Controls and Procedures

 

48

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

ITEM 1. Legal Proceedings

 

49

ITEM 1A. Risk Factors

 

49

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

 

50

ITEM 6. Exhibits

 

51

Signature

 

52

 

 

 

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 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)

 

 

 

August 31,

2018

(Unaudited)

 

 

May 31,

2018

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,369

 

 

$

3,265

 

Receivables, less allowances of $296 and $401

 

 

8,716

 

 

 

8,481

 

Spare parts, supplies and fuel, less allowances of $271 and $268

 

 

523

 

 

 

525

 

Prepaid expenses and other

 

 

1,033

 

 

 

1,070

 

Total current assets

 

 

12,641

 

 

 

13,341

 

PROPERTY AND EQUIPMENT, AT COST

 

 

56,326

 

 

 

55,121

 

Less accumulated depreciation and amortization

 

 

27,547

 

 

 

26,967

 

Net property and equipment

 

 

28,779

 

 

 

28,154

 

OTHER LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Goodwill

 

 

6,869

 

 

 

6,973

 

Other assets

 

 

3,612

 

 

 

3,862

 

Total other long-term assets

 

 

10,481

 

 

 

10,835

 

 

 

$

51,901

 

 

$

52,330

 

 

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)

 

 

 

August 31,

2018

(Unaudited)

 

 

May 31,

2018

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

299

 

 

$

 

Current portion of long-term debt

 

 

1,404

 

 

 

1,342

 

Accrued salaries and employee benefits

 

 

1,686

 

 

 

2,177

 

Accounts payable

 

 

3,066

 

 

 

2,977

 

Accrued expenses

 

 

3,151

 

 

 

3,131

 

Total current liabilities

 

 

9,606

 

 

 

9,627

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

15,241

 

 

 

15,243

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

2,948

 

 

 

2,867

 

Pension, postretirement healthcare and other benefit obligations

 

 

1,963

 

 

 

2,187

 

Self-insurance accruals

 

 

1,809

 

 

 

1,784

 

Deferred lease obligations

 

 

557

 

 

 

551

 

Deferred gains, principally related to aircraft transactions

 

 

156

 

 

 

121

 

Other liabilities

 

 

448

 

 

 

534

 

Total other long-term liabilities

 

 

7,881

 

 

 

8,044

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

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

   issued as of August 31, 2018 and May 31, 2018

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

3,154

 

 

 

3,117

 

Retained earnings

 

 

25,315

 

 

 

24,823

 

Accumulated other comprehensive loss

 

 

(763

)

 

 

(578

)

Treasury stock, at cost

 

 

(8,565

)

 

 

(7,978

)

Total common stockholders’ investment

 

 

19,173

 

 

 

19,416

 

 

 

$

51,901

 

 

$

52,330

 

 

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

 

 

 

 

August 31,

 

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

As Adjusted

 

 

REVENUES

 

$

17,052

 

 

$

15,297

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,260

 

 

 

5,664

 

 

Purchased transportation

 

 

3,967

 

 

 

3,445

 

 

Rentals and landing fees

 

 

823

 

 

 

818

 

 

Depreciation and amortization

 

 

808

 

 

 

751

 

 

Fuel

 

 

986

 

 

 

703

 

 

Maintenance and repairs

 

 

735

 

 

 

675

 

 

Other

 

 

2,402

 

 

 

2,270

 

 

 

 

 

15,981

 

 

 

14,326

 

 

OPERATING INCOME

 

 

1,071

 

 

 

971

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(112

)

 

 

(114

)

 

Other retirement plans income

 

 

158

 

 

 

146

 

 

Other, net

 

 

(16

)

 

 

(21

)

 

 

 

 

30

 

 

 

11

 

 

INCOME BEFORE INCOME TAXES

 

 

1,101

 

 

 

982

 

 

PROVISION FOR INCOME TAXES

 

 

266

 

 

 

386

 

 

NET INCOME

 

$

835

 

 

$

596

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

3.15

 

 

$

2.22

 

 

Diluted

 

$

3.10

 

 

$

2.19

 

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

1.30

 

 

$

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

 

 

 

August 31,

 

 

 

2018

 

 

2017

 

NET INCOME

 

$

835

 

 

$

596

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax benefit of $24 in 2018 and tax expense of $25 in 2017

 

 

(162

)

 

 

109

 

Amortization of prior service credit, net of tax benefit of $7 in 2018 and $11 in 2017

 

 

(23

)

 

 

(19

)

 

 

 

(185

)

 

 

90

 

COMPREHENSIVE INCOME

 

$

650

 

 

$

686

 

 

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)

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

835

 

 

$

596

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

808

 

 

 

751

 

Provision for uncollectible accounts

 

 

82

 

 

 

60

 

Stock-based compensation

 

 

68

 

 

 

62

 

Deferred income taxes and other noncash items

 

 

23

 

 

 

97

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(380

)

 

 

(271

)

Other assets

 

 

(120

)

 

 

(142

)

Accounts payable and other liabilities

 

 

(584

)

 

 

(540

)

Other, net

 

 

(31

)

 

 

(23

)

Cash provided by operating activities

 

 

701

 

 

 

590

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,179

)

 

 

(1,044

)

Proceeds from asset dispositions and other

 

 

78

 

 

 

6

 

Cash used in investing activities

 

 

(1,101

)

 

 

(1,038

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

 

299

 

 

 

 

Principal payments on debt

 

 

(2

)

 

 

(12

)

Proceeds from stock issuances

 

 

25

 

 

 

150

 

Dividends paid

 

 

(173

)

 

 

(134

)

Purchase of treasury stock

 

 

(625

)

 

 

(86

)

Other, net

 

 

4

 

 

 

(6

)

Cash used in financing activities

 

 

(472

)

 

 

(88

)

Effect of exchange rate changes on cash

 

 

(24

)

 

 

70

 

Net decrease in cash and cash equivalents

 

 

(896

)

 

 

(466

)

Cash and cash equivalents at beginning of period

 

 

3,265

 

 

 

3,969

 

Cash and cash equivalents at end of period

 

$

2,369

 

 

$

3,503

 

 

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, 2018 (“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 August 31, 2018, and the results of our operations and cash flows for the three-month periods ended August 31, 2018 and 2017. Operating results for the three-month periods ended August 31, 2018 are not necessarily indicative of the results that may be expected for the year ending May 31, 2019.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2019 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

RECLASSIFICATIONS. Certain reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year presentation.

REVENUE RECOGNITION

Satisfaction of Performance Obligation

We recognize revenue upon delivery of shipments for our transportation businesses and upon completion of services for our business services, logistics and trade services businesses. Transportation services are provided with the use of employees and independent businesses that contract with FedEx. FedEx is the principal to the transaction for most of these services and revenue is recognized on a gross basis based on the transfer of control to the customer. Costs associated with independent businesses are recognized as incurred and included in the caption “Purchased transportation” in the accompanying unaudited condensed consolidated statements of income.

For shipments in transit, revenue is recorded based on the percentage of service completed at the balance sheet date which results in our recognizing revenue over time as we perform the services in the contract because of the continuous transfer of control to the customer. Our customers receive the benefit of our services as the goods are transported from one location to another. If we were unable to complete delivery to the final location, another entity would not need to reperform the transportation service already performed. As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.

The vast majority of our contracts include only one performance obligation, which is short in duration and spans only a few days. However, if a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative stand-alone selling prices of the promised goods or services underlying each performance obligation. We frequently sell standard transportation services with observable stand-alone sales prices. In these instances, the observable stand-alone sales are used to determine the stand-alone selling price.

We sell customized customer-specific solutions, such as logistics, through which we provide the service of integrating a complex set of tasks and components into a single capability (even if that single capability results in the delivery of multiple units). Therefore, the entire contract is accounted for as one performance obligation. In these cases we typically use the expected cost plus a margin approach to estimate the stand-alone selling price of each performance obligation.

Variable Consideration

It is common for our contracts to contain customer incentives, guaranteed service refunds or other provisions that can either increase or decrease the transaction price. These variable amounts are generally awarded based upon certain incentive achievements or performance metrics. We estimate variable consideration as the most likely amount to which we expect to be entitled. Estimates for adjustments to revenue and accounts receivable are recognized at the time of shipment for certain customer initiatives, money-back service guarantees and billing corrections based on our assessment of historical, current and forecasted information available. Delivery costs are accrued as incurred.

- 8 -


 

Contract Modification

Contracts are often modified to account for changes in the rates we charge our customers or to add additional distinct services. We consider contract modifications to exist when the modification either creates new enforceable rights and obligations or alters the existing arrangement. Contract modifications that add distinct goods or services are treated as separate contracts. Contract modifications that do not add distinct goods or services typically change the price of existing services. These contract modifications are accounted for prospectively as the remaining performance obligations are executed.

Contract Assets and Liabilities

Contract assets include billed and unbilled amounts resulting from in-transit packages, as we have an unconditional right to payment only once all performance obligations have been completed (e.g., packages have been delivered). Contract assets are generally classified as current and the full balance is converted each quarter based on the short-term nature of the transactions. Our contract liabilities consist of advance payments and billings in excess of revenue. The full balance of deferred revenue is converted each quarter based on the short-term nature of the transactions.

Gross contract assets related to in-transit packages totaled $513 million and $542 million at August 31, 2018 and May 31, 2018, respectively. Contract assets net of deferred unearned revenue were $351 million and $363 million at August 31, 2018 and May 31, 2018, respectively. Contract assets are included within other current assets in the accompanying unaudited condensed consolidated balance sheets. Contract liabilities related to advance payments from customers were $15 million and $13 million at August 31, 2018 and May 31, 2018, respectively. Contract liabilities are included within current liabilities in the accompanying unaudited condensed consolidated balance sheets.

Our contract logistics, global trade services and certain transportation businesses engage in some transactions wherein they act as agents. Revenue from these transactions is recorded on a net basis. Net revenue includes billings to customers less third-party charges, including transportation or handling costs, fees, commissions and taxes and duties.

Certain of our revenue-producing transactions are subject to taxes, such as sales tax, assessed by governmental authorities. We present these revenues net of tax. Under the typical payment terms of our customer contracts, the customer pays at periodic intervals (i.e., every 15 days, 30 days, 45 days, etc.) for shipments included on invoices received. It is not customary business practice to extend payment terms past 90 days, and as such, we do not have a practice of including a significant financing component within our revenue contracts with customers.

- 9 -


 

Disaggregation of Revenue

The following table provides revenue by service type (dollars in millions) for the periods ended August 31. This presentation is consistent with how we organize our segments internally for making operating decisions and measuring performance.

 

 

 

Three Months Ended August 31,

 

 

 

2018

 

 

2017

 

REVENUE BY SERVICE TYPE

 

 

 

 

 

 

 

 

FedEx Express segment:

 

 

 

 

 

 

 

 

Package:

 

 

 

 

 

 

 

 

U.S. overnight box

 

$

1,886

 

 

$

1,750

 

U.S. overnight envelope

 

 

468

 

 

 

450

 

U.S. deferred

 

 

952

 

 

 

878

 

Total U.S. domestic package revenue

 

 

3,306

 

 

 

3,078

 

International priority

 

 

1,848

 

 

 

1,741

 

International economy

 

 

850

 

 

 

770

 

Total international export package revenue

 

 

2,698

 

 

 

2,511

 

International domestic(1)

 

 

1,127

 

 

 

1,044

 

Total package revenue

 

 

7,131

 

 

 

6,633

 

Freight:

 

 

 

 

 

 

 

 

U.S.

 

 

730

 

 

 

613

 

International priority

 

 

551

 

 

 

470

 

International economy

 

 

519

 

 

 

381

 

International airfreight

 

 

85

 

 

 

83

 

Total freight revenue

 

 

1,885

 

 

 

1,547

 

Other

 

 

206

 

 

 

220

 

Total FedEx Express segment

 

 

9,222

 

 

 

8,400

 

FedEx Ground segment

 

 

4,799

 

 

 

4,245

 

FedEx Freight segment

 

 

1,959

 

 

 

1,664

 

FedEx Services segment

 

 

417

 

 

 

400

 

FedEx Trade Networks segment

 

 

884

 

 

 

799

 

Eliminations

 

 

(229

)

 

 

(211

)

 

 

$

17,052

 

 

$

15,297

 

 

(1)

International domestic revenues relate to our intra-country operations.

 

 

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of Federal Express Corporation (“FedEx Express”), who are a small number of its total employees, are employed under a collective bargaining agreement that took effect on November 2, 2015. The collective bargaining agreement is scheduled to become amendable in November 2021. Other than the pilots at FedEx Express and drivers at one FedEx Freight, Inc. facility, our U.S. employees have thus far chosen not to unionize (we acquired FedEx Supply Chain Distribution System, Inc. (“FedEx Supply Chain,” formerly GENCO Distribution System, Inc.) in 2015, which already had a small number of employees that are members of unions). Additionally, certain of FedEx Express’s 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 $68 million for the three-month period ended August 31, 2018 and $62 million for the three-month period ended August 31, 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.

- 10 -


 

Recently Adopted Accounting Standards

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”). SAB 118 was issued to address the application of U.S. generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to finalize the calculations for certain income tax effects of the TCJA. In accordance with SAB 118, we made reasonable estimates and recorded provisional amounts for the TCJA during 2018. Under the transitional provisions of SAB 118, we have a one-year measurement period to complete the accounting for the initial tax effects of the TCJA. We are still in the process of completing that accounting. As of August 31, 2018, there were no changes to the provisional amounts recorded at May 31, 2018.

In 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board issued a new accounting standard that supersedes virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. 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 adopted this standard as of June 1, 2018 (fiscal 2019) using the modified retrospective method of adoption as permitted by the standard. The new guidance did not have an impact on our revenue recognition policies, practices or systems; therefore, there was no cumulative-effect adjustment to retained earnings as of June 1, 2018.

In March 2017, the FASB issued an Accounting Standards Update (ASU 2017-07) 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 impacts our operating income but has no impact on our net income or earnings per share. We adopted this standard effective June 1, 2018 (fiscal 2019) and applied these changes retrospectively. As such, prior year financial results are recast to conform to these new rules upon adoption.

The following table presents our results under our historical method of accounting and as adjusted to reflect our adoption of ASU 2017-07 (in millions):

 

 

Three Months Ended August 31, 2017

 

 

 

Reported

 

 

Effect of Adoption of ASU 2017-07

 

 

As Adjusted

 

Revenue

 

$

15,297

 

 

$

 

 

$

15,297

 

Operating Income

 

 

1,117

 

 

 

(146

)

 

 

971

 

Other Income (Expense), net

 

 

(135

)

 

 

146

 

 

 

11

 

Net Income

 

 

596

 

 

 

 

 

 

596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New Accounting Standards and Accounting Standards Not Yet Adopted

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 our lease portfolio as of the adoption date. We are currently 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). We are continuing to assess the impact of this new standard on our consolidated financial statements and related disclosures.

- 11 -


 

In August 2018, the FASB issued an Accounting Standards Update (ASU 2018-14) that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. We expect this new guidance will have minimal impact on our financial reporting. These changes will be effective June 1, 2020 (fiscal 2021) and will be applied retrospectively. We plan to early adopt in the fourth quarter of fiscal 2019.

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 first quarter of 2019, we repurchased 2.6 million shares of FedEx common stock at an average price of $238.95 per share for a total of $625 million. As of August 31, 2018, 9.1 million shares remained under the current share repurchase authorization.

DIVIDENDS DECLARED PER COMMON SHARE. On August 17, 2018, our Board of Directors declared a quarterly dividend of $0.65 per share of common stock. The dividend will be paid on October 1, 2018 to stockholders of record as of the close of business on September 10, 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.

(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 three-month periods ended August 31 (in millions; amounts in parentheses indicate debits to AOCI):

 

 

 

2018

 

 

2017

 

Foreign currency translation loss:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(759

)

 

$

(685

)

Translation adjustments

 

 

(162

)

 

 

109

 

Balance at end of period

 

 

(921

)

 

 

(576

)

Retirement plans adjustments:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

181

 

 

 

270

 

Reclassifications from AOCI

 

 

(23

)

 

 

(19

)

Balance at end of period

 

 

158

 

 

 

251

 

Accumulated other comprehensive (loss) at end of period

 

$

(763

)

 

$

(325

)

 

The following table presents details of the reclassifications from AOCI for the three-month periods ended August 31 (in millions; amounts in parentheses indicate debits to earnings):

 

 

 

Amount Reclassified from

AOCI

 

 

Affected Line Item in the

Income Statement

 

 

2018

 

 

2017

 

 

 

Amortization of retirement plans

   prior service credits, before tax

 

$

30

 

 

$

30

 

 

Salaries and employee benefits

Income tax benefit

 

 

(7

)

 

 

(11

)

 

Provision for income taxes

AOCI reclassifications, net of tax

 

$

23

 

 

$

19

 

 

Net income

 

(3) Financing Arrangements

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

- 12 -


 

We have a five-year $2.0 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 retirement plans 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 2.0 to 1.0 at August 31, 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 first quarter of 2019, we issued commercial paper to provide us with additional short-term liquidity. The maximum amount outstanding during the quarter was $300 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 August 31, 2018, $300 million of commercial paper and $54 million in letters of credit were outstanding, leaving $1.646 billion available under the revolving credit facility for future borrowings.

Long-term debt, exclusive of capital leases, had carrying values of $16.5 billion at August 31, 2018 and May 31, 2018, compared with estimated fair values of $16.5 billion at August 31, 2018 and $16.6 billion at May 31, 2018. The annualized weighted-average interest rate on long-term debt was 3.6% at August 31, 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 three-month periods ended August 31 was as follows (in millions, except per share amounts):

 

 

 

Three Months Ended

 

 

 

2018

 

 

2017

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

834

 

 

$

595

 

Weighted-average common shares

 

 

265

 

 

 

268

 

Basic earnings per common share

 

$

3.15

 

 

$

2.22

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

834

 

 

$

595

 

Weighted-average common shares

 

 

265

 

 

 

268

 

Dilutive effect of share-based awards

 

 

4

 

 

 

4

 

Weighted-average diluted shares

 

 

269

 

 

 

272

 

Diluted earnings per common share

 

$

3.10

 

 

$

2.19

 

Anti-dilutive options excluded from diluted earnings per

   common share

 

 

3.7

 

 

 

3.2

 

 

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

(5) Income Taxes

Our effective tax rate was 24.2% for the first quarter of 2019, compared with 39.3% for the first quarter of 2018. The 2019 tax rate was favorably impacted by the TCJA, which resulted in an approximate $135 million benefit primarily from the lower statutory tax rate on first quarter 2019 earnings. The 2018 tax rate was negatively impacted by costs incurred in connection with the integration of the foreign operations of FedEx Express and TNT Express B.V. (“TNT Express”) and the effects of the NotPetya cyberattack on lower taxed foreign earnings, which were partially offset by tax benefits from share-based payments.

On August 1, 2018, the U.S. Treasury Department released proposed regulations covering the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of the TCJA. Certain guidance included in these proposed regulations is inconsistent with our interpretation that led to the recognition of a $225 million ($0.94 per diluted share) benefit in 2018 (the “2018 Benefit”). This proposed guidance is not authoritative and is subject to change in the regulatory review process. However, if the proposed guidance is included in the final regulations as drafted, we may be required to reverse the 2018 Benefit in the quarter the regulations become final.

- 13 -


 

We are still completing our accounting for the income tax effects of the TCJA. As of August 31, 2018, there were no changes to the provisional amounts recorded at May 31, 2018.

(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 three-month periods ended August 31 were as follows (in millions):

 

 

 

2018

 

 

2017

 

Defined benefit pension plans, net

 

$

28

 

 

$

37

 

Defined contribution plans

 

 

144

 

 

 

127

 

Postretirement healthcare plans

 

 

19

 

 

 

19

 

 

 

$

191

 

 

$

183

 

 

Net periodic benefit cost of the pension and postretirement healthcare plans for the three-month periods ended August 31 included the following components (in millions):

 

 

U.S. Pension Plans

 

 

International Pension Plans

 

 

Postretirement Healthcare Plans

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

 

$

172

 

 

$

170

 

 

$

24

 

 

$

23

 

 

$

9

 

 

$

9

 

Other retirement plans (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Interest cost

 

 

238

 

 

 

279

 

 

 

13

 

 

 

12

 

 

 

10

 

 

 

10

 

    Expected return on plan assets

 

 

(377

)

 

 

(406

)

 

 

(12

)

 

 

(11

)

 

 

 

 

 

 

   Amortization of prior service credit and other

 

 

(29

)

 

 

(30

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

(168

)

 

 

(157

)

 

 

 

 

 

1

 

 

 

10

 

 

 

10

 

 

 

$

4

 

 

$

13

 

 

$

24

 

 

$

24

 

 

$

19

 

 

$

19

 

 

We made voluntary contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) of $250 million during the first quarters of 2019 and 2018. In September 2018, we made additional voluntary contributions to our U.S. Pension Plans of $250 million.

(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, 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 Corporation (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight transportation services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), constitute our reportable segments.

- 14 -


 

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 Ground Segment

FedEx Ground (small-package ground delivery)

 

 

 

 

 

 

FedEx Freight Segment

FedEx Freight (LTL freight 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)

FedEx Services Segment

The FedEx Services segment operates combined sales, marketing, administrative and information-technology functions in shared services operations 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 by FedEx Express 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.

Corporate, Other and Eliminations

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

Also included in corporate and other is the FedEx Trade Networks, Inc. (“FedEx Trade Networks”) operating segment, which provides customs brokerage and global ocean and air freight forwarding through FedEx Trade Networks Transport & Brokerage, Inc.; cross-border enablement and technology solutions and e-commerce transportation solutions through FedEx Cross Border Technologies, Inc.; integrated supply chain management solutions through FedEx Supply Chain; time-critical shipment services through FedEx Custom Critical, Inc.; and, effective September 1, 2018, critical inventory and service parts logistics, 3-D printing and technology repair through FedEx Forward Depots, Inc.

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.

- 15 -


 

The following table provides a reconciliation of reportable segment revenues and operating income (loss) to our unaudited condensed consolidated financial statement totals for the three-month periods ended August 31 (in millions):

 

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

9,222

 

 

$

8,400

 

FedEx Ground segment

 

 

4,799

 

 

 

4,245

 

FedEx Freight segment

 

 

1,959

 

 

 

1,664

 

FedEx Services segment

 

 

417

 

 

 

400

 

Other and eliminations

 

 

655

 

 

 

588

 

 

 

$

17,052

 

 

$

15,297

 

Operating income (loss):

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

367

 

 

$

320

 

FedEx Ground segment

 

 

667

 

 

 

606

 

FedEx Freight segment

 

 

176

 

 

 

165

 

Corporate, other and eliminations

 

 

(139

)

 

 

(120

)

 

 

$

1,071

 

 

$

971

 

 

(8) Commitments

As of August 31, 2018, our purchase commitments under various contracts for the remainder of 2018 and annually thereafter were as follows (in millions):

 

 

 

Aircraft and Related

 

 

Other(1)

 

 

Total

 

2019 (remainder)

 

$

1,341

 

 

$

664

 

 

$

2,005

 

2020

 

 

1,991

 

 

 

786

 

 

 

2,777

 

2021

 

 

2,315

 

 

 

500

 

 

 

2,815

 

2022

 

 

1,856

 

 

 

363

 

 

 

2,219

 

2023

 

 

1,561

 

 

 

263

 

 

 

1,824

 

Thereafter

 

 

2,986

 

 

 

532

 

 

 

3,518

 

Total

 

$

12,050

 

 

$

3,108

 

 

$

15,158

 

 

 

(1)

Primarily equipment and advertising contracts.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of August 31, 2018, our obligation to purchase six Boeing 777 Freighter (“B777F”) aircraft and five Boeing 767-300 Freighter (“B767F”) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended (“RLA”). Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

During the quarter, FedEx Express entered into agreements to purchase 12 incremental B777F aircraft and 12 incremental B767F aircraft. Six of the B777F and one of the B767F aircraft purchases are conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the RLA (the RLA condition was removed from three previously ordered B777F aircraft). The B777F aircraft are expected to be delivered between 2021 and 2025. The B767F aircraft are expected to be delivered between 2020 and 2022. As part of these agreements, one B777F and one B767F aircraft delivery were accelerated from 2020 to 2019.

One B777F aircraft and five B767F aircraft were delivered during the quarter. FedEx Express now has a total of 23 firm orders for B777F aircraft scheduled for delivery during the remainder of 2019 through 2025 and a total of 64 firm orders for B767F aircraft for delivery during the remainder of 2019 through 2023.

During the quarter, FedEx Express also acquired options to purchase an additional 14 B777F aircraft, and the delivery dates of 11 existing B777F option aircraft were rescheduled. As a result, FedEx Express now has options to purchase a total of 25 B777F aircraft for delivery through 2028. FedEx Express also acquired options to purchase an additional six B767F aircraft. As a result, FedEx Express now has options to purchase a total of 50 B767F aircraft for delivery through 2026. 

- 16 -


 

As of August 31, 2018, we had $992 million in deposits and progress payments on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our accompanying unaudited condensed consolidated balance sheets. Aircraft and related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of August 31, 2018, with the year of expected delivery:

 

 

 

Cessna SkyCourier 408

 

 

ATR 72-600F

 

 

B767F

 

 

B777F

 

 

Total

 

2019 (remainder)

 

 

-

 

 

 

-

 

 

 

11

 

 

 

3

 

 

 

14

 

2020

 

 

-

 

 

 

-

 

 

 

17

 

 

 

5

 

 

 

22

 

2021

 

 

12

 

 

 

5

 

 

 

18

 

 

 

2

 

 

 

37

 

2022

 

 

12

 

 

 

6

 

 

 

12

 

 

 

3

 

 

 

33

 

2023

 

 

12

 

 

 

6

 

 

 

6

 

 

 

4

 

 

 

28

 

Thereafter

 

 

14

 

 

 

13

 

 

 

-

 

 

 

6

 

 

 

33

 

Total

 

 

50

 

 

 

30

 

 

 

64

 

 

 

23

 

 

 

167

 

 

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at August 31, 2018 is as follows (in millions):

 

 

 

Aircraft

and Related

Equipment

 

 

Facilities

and Other

 

 

Total

Operating

Leases

 

2019 (remainder)

 

$

307

 

 

$

1,623

 

 

$

1,930

 

2020

 

 

261

 

 

 

1,961

 

 

 

2,222

 

2021

 

 

203

 

 

 

1,796

 

 

 

1,999

 

2022

 

 

185

 

 

 

1,615

 

 

 

1,800

 

2023

 

 

127

 

 

 

1,459

 

 

 

1,586

 

Thereafter

 

 

48