10-Q 1 fdx-10q_20181130.htm 10-Q fdx-10q_20181130.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, 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 December 14, 2018

Common Stock, par value $0.10 per share

 

261,043,625

 

 

 

 

 


 

FEDEX CORPORATION

INDEX

 

 

 

PAGE

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. Financial Statements

 

 

Condensed Consolidated Balance Sheets
November 30, 2018 and May 31, 2018

 

3

Condensed Consolidated Statements of Income
Three and Six Months Ended November 30, 2018 and 2017

 

5

Condensed Consolidated Statements of Comprehensive Income
Three and Six Months Ended November 30, 2018 and 2017

 

6

Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 2018 and 2017

 

7

Notes to Condensed Consolidated Financial Statements

 

8

Report of Independent Registered Public Accounting Firm

 

28

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

 

29

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

53

ITEM 4. Controls and Procedures

 

53

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

ITEM 1. Legal Proceedings

 

54

ITEM 1A. Risk Factors

 

54

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

 

55

ITEM 6. Exhibits

 

56

Signature

 

58

 

 

 

Exhibit 4.1

Exhibit 4.2

Exhibit 4.3

Exhibit 4.4

Exhibit 10.1

 

 

Exhibit 10.2

 

 

Exhibit 10.3

 

 

Exhibit 10.4

 

 

Exhibit 10.5

 

 

Exhibit 10.6

 

 

Exhibit 10.7

Exhibit 10.8

 

 

Exhibit 10.9

Exhibit 10.10

Exhibit 10.11

Exhibit 10.12

Exhibit 10.13

 

 

Exhibit 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,

2018

(Unaudited)

 

 

May 31,

2018

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,123

 

 

$

3,265

 

Receivables, less allowances of $308 and $401

 

 

9,573

 

 

 

8,481

 

Spare parts, supplies and fuel, less allowances of $276 and $268

 

 

522

 

 

 

525

 

Prepaid expenses and other

 

 

1,220

 

 

 

1,070

 

Total current assets

 

 

13,438

 

 

 

13,341

 

PROPERTY AND EQUIPMENT, AT COST

 

 

57,501

 

 

 

55,121

 

Less accumulated depreciation and amortization

 

 

28,114

 

 

 

26,967

 

Net property and equipment

 

 

29,387

 

 

 

28,154

 

OTHER LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Goodwill

 

 

6,908

 

 

 

6,973

 

Other assets

 

 

3,556

 

 

 

3,862

 

Total other long-term assets

 

 

10,464

 

 

 

10,835

 

 

 

$

53,289

 

 

$

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)

 

 

 

November 30,

2018

(Unaudited)

 

 

May 31,

2018

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

250

 

 

$

 

Current portion of long-term debt

 

 

642

 

 

 

1,342

 

Accrued salaries and employee benefits

 

 

1,850

 

 

 

2,177

 

Accounts payable

 

 

3,400

 

 

 

2,977

 

Accrued expenses

 

 

3,354

 

 

 

3,131

 

Total current liabilities

 

 

9,496

 

 

 

9,627

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

16,399

 

 

 

15,243

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

3,253

 

 

 

2,867

 

Pension, postretirement healthcare and other benefit obligations

 

 

1,735

 

 

 

2,187

 

Self-insurance accruals

 

 

1,844

 

 

 

1,784

 

Deferred lease obligations

 

 

605

 

 

 

551

 

Deferred gains, principally related to aircraft transactions

 

 

137

 

 

 

121

 

Other liabilities

 

 

526

 

 

 

534

 

Total other long-term liabilities

 

 

8,100

 

 

 

8,044

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

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

   issued as of November 30, 2018 and May 31, 2018

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

3,185

 

 

 

3,117

 

Retained earnings

 

 

26,080

 

 

 

24,823

 

Accumulated other comprehensive loss

 

 

(817

)

 

 

(578

)

Treasury stock, at cost

 

 

(9,186

)

 

 

(7,978

)

Total common stockholders’ investment

 

 

19,294

 

 

 

19,416

 

 

 

$

53,289

 

 

$

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

 

 

Six Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

As Adjusted

 

 

 

 

 

 

As Adjusted

 

REVENUES

 

$

17,824

 

 

$

16,313

 

 

$

34,876

 

 

$

31,610

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,260

 

 

 

5,889

 

 

 

12,520

 

 

 

11,553

 

Purchased transportation

 

 

4,346

 

 

 

3,840

 

 

 

8,313

 

 

 

7,285

 

Rentals and landing fees

 

 

836

 

 

 

835

 

 

 

1,659

 

 

 

1,653

 

Depreciation and amortization

 

 

828

 

 

 

756

 

 

 

1,636

 

 

 

1,507

 

Fuel

 

 

1,052

 

 

 

818

 

 

 

2,038

 

 

 

1,521

 

Maintenance and repairs

 

 

751

 

 

 

665

 

 

 

1,486

 

 

 

1,340

 

Other

 

 

2,583

 

 

 

2,395

 

 

 

4,985

 

 

 

4,665

 

 

 

 

16,656

 

 

 

15,198

 

 

 

32,637

 

 

 

29,524

 

OPERATING INCOME

 

 

1,168

 

 

 

1,115

 

 

 

2,239

 

 

 

2,086

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(129

)

 

 

(124

)

 

 

(241

)

 

 

(238

)

Other retirement plans income

 

 

158

 

 

 

147

 

 

 

316

 

 

 

293

 

Other, net

 

 

(20

)

 

 

1

 

 

 

(36

)

 

 

(20

)

 

 

 

9

 

 

 

24

 

 

 

39

 

 

 

35

 

INCOME BEFORE INCOME TAXES

 

 

1,177

 

 

 

1,139

 

 

 

2,278

 

 

 

2,121

 

PROVISION FOR INCOME TAXES

 

 

242

 

 

 

364

 

 

 

508

 

 

 

750

 

NET INCOME

 

$

935

 

 

$

775

 

 

$

1,770

 

 

$

1,371

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.56

 

 

$

2.89

 

 

$

6.71

 

 

$

5.12

 

Diluted

 

$

3.51

 

 

$

2.84

 

 

$

6.60

 

 

$

5.03

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.65

 

 

$

0.50

 

 

$

1.95

 

 

$

1.50

 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

NET INCOME

 

$

935

 

 

$

775

 

 

$

1,770

 

 

$

1,371

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax benefit of $7 and $31 in 2018 and tax benefit of $7 and tax expense of $18 in 2017

 

 

(31

)

 

 

(90

)

 

 

(193

)

 

 

19

 

Amortization of prior service credit, net of tax benefit of $7 and $14 in 2018 and tax benefit of $11 and $22 in 2017

 

 

(23

)

 

 

(19

)

 

 

(46

)

 

 

(38

)

 

 

 

(54

)

 

 

(109

)

 

 

(239

)

 

 

(19

)

COMPREHENSIVE INCOME

 

$

881

 

 

$

666

 

 

$

1,531

 

 

$

1,352

 

 

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,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

1,770

 

 

$

1,371

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,636

 

 

 

1,507

 

Provision for uncollectible accounts

 

 

160

 

 

 

116

 

Stock-based compensation

 

 

108

 

 

 

103

 

Deferred income taxes and other noncash items

 

 

236

 

 

 

327

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(1,343

)

 

 

(983

)

Other assets

 

 

(111

)

 

 

(338

)

Accounts payable and other liabilities

 

 

(227

)

 

 

(564

)

Other, net

 

 

(50

)

 

 

(41

)

Cash provided by operating activities

 

 

2,179

 

 

 

1,498

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,634

)

 

 

(2,621

)

Business acquisitions, net of cash acquired

 

 

 

 

 

(44

)

Proceeds from asset dispositions and other

 

 

53

 

 

 

12

 

Cash used in investing activities

 

 

(2,581

)

 

 

(2,653

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

 

248

 

 

 

250

 

Proceeds from debt issuances

 

 

1,233

 

 

 

 

Principal payments on debt

 

 

(785

)

 

 

(28

)

Proceeds from stock issuances

 

 

45

 

 

 

205

 

Dividends paid

 

 

(173

)

 

 

(268

)

Purchase of treasury stock

 

 

(1,271

)

 

 

(270

)

Other, net

 

 

1

 

 

 

3

 

Cash used in financing activities

 

 

(702

)

 

 

(108

)

Effect of exchange rate changes on cash

 

 

(38

)

 

 

62

 

Net decrease in cash and cash equivalents

 

 

(1,142

)

 

 

(1,201

)

Cash and cash equivalents at beginning of period

 

 

3,265

 

 

 

3,969

 

Cash and cash equivalents at end of period

 

$

2,123

 

 

$

2,768

 

 

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 November 30, 2018, and the results of our operations for the three- and six-month periods ended November 30, 2018 and 2017 and cash flows for the six-month periods ended November 30, 2018 and 2017. Operating results for the three- and six-month periods ended November 30, 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 $600 million and $542 million at November 30, 2018 and May 31, 2018, respectively. Contract assets net of deferred unearned revenue were $423 million and $363 million at November 30, 2018 and May 31, 2018, respectively. Contract assets are included within current assets in the accompanying unaudited condensed consolidated balance sheets. Contract liabilities related to advance payments from customers were $9 million and $13 million at November 30, 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 (e.g., 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 November 30. This presentation is consistent with how we organize our segments internally for making operating decisions and measuring performance.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUE BY SERVICE TYPE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Package:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. overnight box

 

$

1,948

 

 

$

1,787

 

 

$

3,834

 

 

$

3,537

 

U.S. overnight envelope

 

 

444

 

 

 

432

 

 

 

912

 

 

 

882

 

U.S. deferred

 

 

1,060

 

 

 

922

 

 

 

2,012

 

 

 

1,800

 

Total U.S. domestic package revenue

 

 

3,452

 

 

 

3,141

 

 

 

6,758

 

 

 

6,219

 

International priority

 

 

1,896

 

 

 

1,865

 

 

 

3,770

 

 

 

3,628

 

International economy

 

 

885

 

 

 

815

 

 

 

1,735

 

 

 

1,585

 

Total international export package revenue

 

 

2,781

 

 

 

2,680

 

 

 

5,505

 

 

 

5,213

 

International domestic(1)

 

 

1,203

 

 

 

1,228

 

 

 

2,334

 

 

 

2,284

 

Total package revenue

 

 

7,436

 

 

 

7,049

 

 

 

14,597

 

 

 

13,716

 

Freight:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

792

 

 

 

688

 

 

 

1,522

 

 

 

1,301

 

International priority

 

 

564

 

 

 

541

 

 

 

1,097

 

 

 

995

 

International economy

 

 

554

 

 

 

481

 

 

 

1,073

 

 

 

862

 

International airfreight

 

 

83

 

 

 

100

 

 

 

168

 

 

 

183

 

Total freight revenue

 

 

1,993

 

 

 

1,810

 

 

 

3,860

 

 

 

3,341

 

Other

 

 

175

 

 

 

217

 

 

 

369

 

 

 

419

 

Total FedEx Express segment

 

 

9,604

 

 

 

9,076

 

 

 

18,826

 

 

 

17,476

 

FedEx Ground segment

 

 

5,142

 

 

 

4,525

 

 

 

9,941

 

 

 

8,770

 

FedEx Freight segment

 

 

1,918

 

 

 

1,673

 

 

 

3,877

 

 

 

3,337

 

FedEx Services segment

 

 

429

 

 

 

416

 

 

 

846

 

 

 

816

 

FedEx Trade Networks operating segment

 

 

966

 

 

 

834

 

 

 

1,850

 

 

 

1,633

 

Eliminations

 

 

(235

)

 

 

(211

)

 

 

(464

)

 

 

(422

)

 

 

$

17,824

 

 

$

16,313

 

 

$

34,876

 

 

$

31,610

 

 

 

(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 who 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 $40 million for the three-month period ended November 30, 2018 and $108 million for the six-month period ended November 30, 2018. 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. 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.

During the second quarter of 2019, we revised the provisional benefit associated with the remeasurement of our net U.S. deferred tax liability due to the corporate tax rate reduction under the TCJA. As a result, we recognized $4 million of tax expense resulting in a decrease to the $1.15 billion provisional benefit recorded in 2018. No other change to the provisional amounts recorded at May 31, 2018 has been recorded. We will continue to adjust provisional amounts for the impacts of the TCJA as more information and further guidance becomes available during the measurement period, which ends December 22, 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 November 30, 2017

 

 

Six Months Ended November 30, 2017

 

 

 

Reported

 

 

Effect of Adoption of ASU 2017-07

 

 

As Adjusted

 

 

Reported

 

 

Effect of Adoption of ASU 2017-07

 

 

As Adjusted

 

Revenue

 

$

16,313

 

 

$

 

 

$

16,313

 

 

$

31,610

 

 

$

 

 

$

31,610

 

Operating Income

 

 

1,262

 

 

 

(147

)

 

 

1,115

 

 

 

2,379

 

 

 

(293

)

 

 

2,086

 

Other Income (Expense), net

 

 

(123

)

 

 

147

 

 

 

24

 

 

 

(258

)

 

 

293

 

 

 

35

 

Net Income

 

 

775

 

 

 

 

 

 

775

 

 

 

1,371

 

 

 

 

 

 

1,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 of approximately $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).

- 11 -


 

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.

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.

In August 2018, the FASB issued an Accounting Standards Update (ASU 2018-15) that reduces the complexity for accounting for costs of implementing a cloud computing service arrangement and aligns the accounting for capitalizing implementation costs of hosting arrangements, regardless of whether they convey a license to the hosted software. These changes will be effective June 1, 2020 (fiscal 2021). We are assessing the impact of this new standard on our consolidated financial statements and related disclosures.

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 2019, we repurchased 2.8 million shares of FedEx common stock at an average price of $228.35 per share for a total of $646 million. During the first half of 2019, we purchased 5.4 million shares of FedEx common stock at an average price of $233.44 per share for a total of $1.3 billion. As of November 30, 2018, 6.3 million shares remained under the current share repurchase authorization.

DIVIDENDS DECLARED PER COMMON SHARE. On November 16, 2018, our Board of Directors declared a quarterly dividend of $0.65 per share of common stock. The dividend will be paid on January 2, 2019 to stockholders of record as of the close of business on December 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.

(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 November 30 (in millions; amounts in parentheses indicate debits to AOCI):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Foreign currency translation loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(921

)

 

$

(576

)

 

$

(759

)

 

$

(685

)

Translation adjustments

 

 

(31

)

 

 

(90

)

 

 

(193

)

 

 

19

 

Balance at end of period

 

 

(952

)

 

 

(666

)

 

 

(952

)

 

 

(666

)

Retirement plans adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

158

 

 

 

251

 

 

 

181

 

 

 

270

 

Reclassifications from AOCI

 

 

(23

)

 

 

(19

)

 

 

(46

)

 

 

(38

)

Balance at end of period

 

 

135

 

 

 

232

 

 

 

135

 

 

 

232

 

Accumulated other comprehensive (loss) at end of period

 

$

(817

)

 

$

(434

)

 

$

(817

)

 

$

(434

)

 

- 12 -


 

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

 

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

Amortization of retirement plans

   prior service credits, before tax

 

$

30

 

 

$

30

 

 

$

60

 

 

$

60

 

 

Salaries and employee benefits

Income tax benefit

 

 

(7

)

 

 

(11

)

 

 

(14

)

 

 

(22

)

 

Provision for income taxes

AOCI reclassifications, net of tax

 

$

23

 

 

$

19

 

 

$

46

 

 

$

38

 

 

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.

During the second quarter of 2019, we issued $1.25 billion of senior unsecured debt under our current shelf registration statement, comprised of $400 million of 4.20% fixed-rate notes due in October 2028, and $850 million of 4.95% fixed-rate notes due in October 2048. Interest on these notes is paid semi-annually. We used the net proceeds to redeem the $750 million aggregate principal amount of 8.00% notes due January 15, 2019, and for general corporate purposes.

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 2.1 to 1.0 at November 30, 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 second quarter of 2019, we issued commercial paper to provide us with additional short-term liquidity. The maximum amount outstanding during the quarter was $600 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 November 30, 2018, $250 million of commercial paper and $54 million in letters of credit were outstanding, leaving $1.696 billion available under the revolving credit facility for future borrowings.

Long-term debt, exclusive of capital leases, had carrying values of $16.9 billion at November 30, 2018 and $16.5 billion at May 31, 2018, compared with estimated fair values of $16.2 billion at November 30, 2018 and $16.6 billion at May 31, 2018. The annualized weighted-average interest rate on long-term debt was 3.5% at November 30, 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.

- 13 -


 

(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

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

933

 

 

$

774

 

 

$

1,768

 

 

$

1,369

 

Weighted-average common shares

 

 

262

 

 

 

268

 

 

 

263

 

 

 

268

 

Basic earnings per common share

 

$

3.56

 

 

$

2.89

 

 

$

6.71

 

 

$

5.12

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

933

 

 

$

774

 

 

$

1,768

 

 

$

1,369

 

Weighted-average common shares

 

 

262

 

 

 

268

 

 

 

263

 

 

 

268

 

Dilutive effect of share-based awards

 

 

4

 

 

 

4

 

 

 

5

 

 

 

4

 

Weighted-average diluted shares

 

 

266

 

 

 

272

 

 

 

268

 

 

 

272

 

Diluted earnings per common share

 

$

3.51

 

 

$

2.84

 

 

$

6.60

 

 

$

5.03

 

Anti-dilutive options excluded from diluted earnings per

   common share

 

 

4.0

 

 

 

2.9

 

 

 

3.8

 

 

 

3.0