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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, 2019

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)

 

Registrant’s telephone number, including area code: (901) 818-7500

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.10 per share

 

FDX

 

New York Stock Exchange

0.700% Notes due 2022

 

FDX 22B

 

New York Stock Exchange

1.000% Notes due 2023

 

FDX 23A

 

New York Stock Exchange

0.450% Notes due 2025

 

FDX 25A

 

New York Stock Exchange

1.625% Notes due 2027

 

FDX 27

 

New York Stock Exchange

1.300% Notes due 2031

 

FDX 31

 

New York Stock Exchange

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, 2019

Common Stock, par value $0.10 per share

 

260,910,309

 

 

 

 

 


 

FEDEX CORPORATION

INDEX

 

 

 

PAGE

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. Financial Statements

 

 

Condensed Consolidated Balance Sheets

August 31, 2019 and May 31, 2019

 

3

Condensed Consolidated Statements of Income
Three Months Ended August 31, 2019 and 2018

 

5

Condensed Consolidated Statements of Comprehensive Income
Three Months Ended August 31, 2019 and 2018

 

6

Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 2019 and 2018

 

7

Condensed Consolidated Statements of Changes In Common Stockholders’ Investment

Three Months Ended August 31, 2019 and 2018

 

8

Notes to Condensed Consolidated Financial Statements

 

9

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

 

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

 

53

ITEM 6. Exhibits

 

54

Signature

 

56

 

 

 

Exhibit 10.1

 

 

Exhibit 10.2

 

 

Exhibit 10.3

 

 

Exhibit 10.4

 

 

Exhibit 10.5

 

 

Exhibit 10.6

 

 

Exhibit 10.7

 

 

Exhibit 15.1

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

Exhibit 101.1 Interactive Data Files

Exhibit 104.1 Cover Page Interactive Data File

 

 

- 2 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

 

 

August 31,

2019

(Unaudited)

 

 

May 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,389

 

 

$

2,319

 

Receivables, less allowances of $304 and $300

 

 

9,312

 

 

 

9,116

 

Spare parts, supplies and fuel, less allowances of $337 and $335

 

 

574

 

 

 

553

 

Prepaid expenses and other

 

 

742

 

 

 

1,098

 

Total current assets

 

 

13,017

 

 

 

13,086

 

PROPERTY AND EQUIPMENT, AT COST

 

 

61,436

 

 

 

59,511

 

Less accumulated depreciation and amortization

 

 

29,826

 

 

 

29,082

 

Net property and equipment

 

 

31,610

 

 

 

30,429

 

OTHER LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

13,819

 

 

 

 

Goodwill

 

 

6,821

 

 

 

6,884

 

Other assets

 

 

3,185

 

 

 

4,004

 

Total other long-term assets

 

 

23,825

 

 

 

10,888

 

 

 

$

68,452

 

 

$

54,403

 

 

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,

2019

(Unaudited)

 

 

May 31,

2019

 

LIABILITIES AND COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

35

 

 

$

964

 

Accrued salaries and employee benefits

 

 

1,522

 

 

 

1,741

 

Accounts payable

 

 

3,179

 

 

 

3,030

 

Operating lease liabilities

 

 

1,896

 

 

 

 

Accrued expenses

 

 

3,303

 

 

 

3,278

 

Total current liabilities

 

 

9,935

 

 

 

9,013

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

18,726

 

 

 

16,617

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

2,953

 

 

 

2,821

 

Pension, postretirement healthcare and other benefit obligations

 

 

4,132

 

 

 

5,095

 

Self-insurance accruals

 

 

1,924

 

 

 

1,899

 

Operating lease liabilities

 

 

12,137

 

 

 

 

Deferred lease obligations

 

 

 

 

 

531

 

Other liabilities

 

 

479

 

 

 

670

 

Total other long-term liabilities

 

 

21,625

 

 

 

11,016

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

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

   issued as of August 31, 2019 and May 31, 2019

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

3,257

 

 

 

3,231

 

Retained earnings

 

 

25,048

 

 

 

24,648

 

Accumulated other comprehensive loss

 

 

(918

)

 

 

(865

)

Treasury stock, at cost

 

 

(9,253

)

 

 

(9,289

)

Total common stockholders’ investment

 

 

18,166

 

 

 

17,757

 

 

 

$

68,452

 

 

$

54,403

 

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,

 

 

 

2019

 

 

2018

 

REVENUES

 

$

17,048

 

 

$

17,052

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,087

 

 

 

6,260

 

Purchased transportation

 

 

4,028

 

 

 

3,967

 

Rentals and landing fees

 

 

920

 

 

 

823

 

Depreciation and amortization

 

 

879

 

 

 

808

 

Fuel

 

 

870

 

 

 

986

 

Maintenance and repairs

 

 

768

 

 

 

735

 

Other

 

 

2,519

 

 

 

2,402

 

 

 

 

16,071

 

 

 

15,981

 

OPERATING INCOME

 

 

977

 

 

 

1,071

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

Interest, net

 

 

(137

)

 

 

(127

)

Other retirement plans income

 

 

168

 

 

 

158

 

Other, net

 

 

(12

)

 

 

(1

)

 

 

 

19

 

 

 

30

 

INCOME BEFORE INCOME TAXES

 

 

996

 

 

 

1,101

 

PROVISION FOR INCOME TAXES

 

 

251

 

 

 

266

 

NET INCOME

 

$

745

 

 

$

835

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

2.86

 

 

$

3.15

 

Diluted

 

$

2.84

 

 

$

3.10

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

1.30

 

 

$

1.30

 

 

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,

 

 

 

2019

 

 

2018

 

NET INCOME

 

$

745

 

 

$

835

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax benefit of $3 in 2019 and $24 in 2018

 

 

(83

)

 

 

(162

)

Amortization of prior service credit, net of tax benefit of $6 in 2019 and $7 in 2018

 

 

(21

)

 

 

(23

)

 

 

 

(104

)

 

 

(185

)

COMPREHENSIVE INCOME

 

$

641

 

 

$

650

 

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,

 

 

 

2019

 

 

2018

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

745

 

 

$

835

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

879

 

 

 

808

 

Provision for uncollectible accounts

 

 

105

 

 

 

82

 

Stock-based compensation

 

 

67

 

 

 

68

 

Deferred income taxes and other noncash items

 

 

694

 

 

 

23

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(267

)

 

 

(380

)

Other assets

 

 

(118

)

 

 

(120

)

Accounts payable and other liabilities

 

 

(1,537

)

 

 

(584

)

Other, net

 

 

(3

)

 

 

(31

)

Cash provided by operating activities

 

 

565

 

 

 

701

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,418

)

 

 

(1,179

)

Proceeds from asset dispositions and other

 

 

(1

)

 

 

78

 

Cash used in investing activities

 

 

(1,419

)

 

 

(1,101

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings, net

 

 

 

 

 

299

 

Principal payments on debt

 

 

(985

)

 

 

(2

)

Proceeds from debt issuances

 

 

2,093

 

 

 

 

Proceeds from stock issuances

 

 

12

 

 

 

25

 

Dividends paid

 

 

(170

)

 

 

(173

)

Purchase of treasury stock

 

 

(3

)

 

 

(625

)

Other, net

 

 

(5

)

 

 

4

 

Cash provided by (used in) financing activities

 

 

942

 

 

 

(472

)

Effect of exchange rate changes on cash

 

 

(18

)

 

 

(24

)

Net increase (decrease) in cash and cash equivalents

 

 

70

 

 

 

(896

)

Cash and cash equivalents at beginning of period

 

 

2,319

 

 

 

3,265

 

Cash and cash equivalents at end of period

 

$

2,389

 

 

$

2,369

 

 

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

- 7 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ INVESTMENT

(UNAUDITED)

(IN MILLIONS, EXCEPT SHARE DATA)

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

 

2019

 

 

2018

 

Common Stock

 

 

 

 

 

 

 

 

Beginning Balance

 

$

32

 

 

$

32

 

Ending Balance

 

 

32

 

 

 

32

 

Additional Paid-in-Capital

 

 

 

 

 

 

 

 

Beginning Balance

 

 

3,231

 

 

 

3,117

 

Employee incentive plans and other

 

 

26

 

 

 

37

 

Ending Balance

 

 

3,257

 

 

 

3,154

 

Retained Earnings

 

 

 

 

 

 

 

 

Beginning Balance

 

 

24,648

 

 

 

24,823

 

Net Income

 

 

745

 

 

 

835

 

Cash dividends declared ($1.30 and $1.30 per share)

 

 

(339

)

 

 

(344

)

Employee incentive plans and other

 

 

(2

)

 

 

1

 

Adoption of new accounting standards on June 1, 2019(1)

 

 

(4

)

 

 

 

Ending Balance

 

 

25,048

 

 

 

25,315

 

Accumulated Other Comprehensive Income

 

 

 

 

 

 

 

 

Beginning Balance

 

 

(865

)

 

 

(578

)

Other comprehensive income, net of tax benefit of $9 and $31

 

 

(104

)

 

 

(185

)

Reclassification to retained earnings due to the adoption of a new accounting standard on June 1, 2019(2)

 

 

51

 

 

 

 

Ending Balance

 

 

(918

)

 

 

(763

)

Treasury Stock

 

 

 

 

 

 

 

 

Beginning Balance

 

 

(9,289

)

 

 

(7,978

)

Purchase of treasury stock (0.02 and 2.6 million shares)

 

 

(3

)

 

 

(625

)

Employee incentive plans and other (0.3 and 0.3 million shares)

 

 

39

 

 

 

38

 

Ending Balance

 

 

(9,253

)

 

 

(8,565

)

Total Common Stockholders' Investment Balance

 

$

18,166

 

 

$

19,173

 

 

(1)

Relates to the adoption of Accounting Standards Update (“ASU”) 2016-02 and ASU 2018-02.

 

(2)

Relates to the adoption of ASU 2018-02.

 

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

 

 

- 8 -


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, 2019 (“Annual Report”). 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, 2019, and the results of our operations for the three-month periods ended August 31, 2019 and 2018, cash flows for the three-month periods ended August 31, 2019 and 2018, and changes in common stockholders’ investment for the three-month periods ended August 31, 2019 and 2018. Operating results for the three-month period ended August 31, 2019 are not necessarily indicative of the results that may be expected for the year ending May 31, 2020.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2020 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

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 $466 million and $533 million at August 31, 2019 and May 31, 2019, respectively. Contract assets net of deferred unearned revenue were $338 million and $364 million at August 31, 2019 and May 31, 2019, 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 $10 million and $11 million at August 31, 2019 and May 31, 2019, respectively. Contract liabilities are included within current liabilities in the accompanying unaudited condensed consolidated balance sheets.

- 9 -


FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

 

 

 

2019

 

 

2018

 

REVENUE BY SERVICE TYPE

 

 

 

 

 

 

 

 

FedEx Express segment:

 

 

 

 

 

 

 

 

Package:

 

 

 

 

 

 

 

 

U.S. overnight box

 

$

1,866

 

 

$

1,886

 

U.S. overnight envelope

 

 

479

 

 

 

468

 

U.S. deferred

 

 

956

 

 

 

952

 

Total U.S. domestic package revenue

 

 

3,301

 

 

 

3,306

 

International priority

 

 

1,817

 

 

 

1,874

 

International economy

 

 

855

 

 

 

850

 

Total international export package revenue

 

 

2,672

 

 

 

2,724

 

International domestic(1)

 

 

1,076

 

 

 

1,131

 

Total package revenue

 

 

7,049

 

 

 

7,161

 

Freight:

 

 

 

 

 

 

 

 

U.S.

 

 

695

 

 

 

730

 

International priority

 

 

464

 

 

 

533

 

International economy

 

 

516

 

 

 

519

 

International airfreight

 

 

66

 

 

 

85

 

Total freight revenue

 

 

1,741

 

 

 

1,867

 

Other

 

 

155

 

 

 

194

 

Total FedEx Express segment

 

 

8,945

 

 

 

9,222

 

FedEx Ground segment

 

 

5,179

 

 

 

4,799

 

FedEx Freight segment

 

 

1,905

 

 

 

1,959

 

FedEx Services segment

 

 

4

 

 

 

9

 

Other and eliminations(2)

 

 

1,015

 

 

 

1,063

 

 

 

$

17,048

 

 

$

17,052

 

 

(1)

International domestic revenues relate to our international intra-country operations.

 

(2)

Includes the FedEx Logistics, Inc. (“FedEx Logistics”) and FedEx Office and Print Services, Inc. (“FedEx Office”) operating segments.

LEASES. We lease certain facilities, aircraft, equipment and vehicles under operating and finance leases that expire at various dates through 2059. A determination of whether a contract contains a lease is made at the inception of the arrangement. Our leased facilities include national, regional and metropolitan sorting facilities, retail facilities and administrative buildings. We leased 6% of our total aircraft fleet as of August 31, 2019 and May 31, 2019.

Our leases generally contain options to extend or terminate the lease. We reevaluate our leases on a regular basis to consider the economic and strategic incentives of exercising the renewal options, and how they align with our operating strategy. Therefore, substantially all the renewal option periods are not included within the lease term and the associated payments are not included in the measurement of the right-of-use asset and lease liability as the options to extend are not reasonably certain at lease commencement.

The lease liabilities are measured at the lease commencement date and determined using the present value of the minimum lease payments not yet paid and our incremental borrowing rate, which approximates the rate at which we would borrow, on a collateralized basis, over the term of a lease in the applicable currency environment. The interest rate implicit in the lease is generally not determinable in transactions where we are the lessee.

- 10 -


FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

For real estate leases, we account for lease components and non-lease components (such as common area maintenance) as a single lease component. Certain real estate leases require additional payments based on sales volume and index based rate increases, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs. Certain leases contain fixed lease payments for items such as real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use assets and lease liabilities.

See Note 7 for additional information.

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. in 2015, which already had a small number of employees who are members of unions). Additionally, certain FedEx Express non-U.S. employees are unionized, and a union has been certified to represent owner-drivers at a FedEx Freight Canada, Corp. facility.

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 $67 million for the three-month period ended August 31, 2019 and $68 million for the three-month period ended August 31, 2018. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

DERIVATIVE FINANCIAL INSTRUMENTS. Our risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign currency exchange exposure on operating results and cash flows. In accordance with our risk management policies, we do not hold or issue derivative instruments for trading or speculative purposes. All derivative instruments are recognized in the financial statements at fair value, regardless of the purpose or intent for holding them.

When we become a party to a derivative instrument and intend to apply hedge accounting, we formally document the hedge relationship and the risk management objective for undertaking the hedge, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge or a net investment hedge.

If a derivative is designated as a cash flow hedge, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in other comprehensive income. For net investment hedges, the entire change in the fair value is recorded in the currency translation adjustment section of other comprehensive income. Any portion of a change in the fair value of a derivative that is considered to be ineffective, along with the change in fair value of any derivatives not designated in a hedging relationship, is immediately recognized in the income statement. We do not have any derivatives designated as a cash flow hedge for any period presented. Accordingly, additional disclosures about cash flow hedges are excluded from this report. On August 13, 2019, we designated €294 million of debt as a net investment hedge to reduce the volatility of the U.S. dollar value of a portion of our euro-denominated net investment. As of August 31, 2019, the designated net investment’s net equity balance exceeds the balance outstanding on the euro-denominated debt and all other critical terms of the hedging instrument and hedged net investment continue to match. Therefore, the hedging relationship is considered effective.

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.

Recently Adopted Accounting Standards

In 2016, the Financial Accounting Standards Board (“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. Lessees are required to 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 are recognized on a straight-line basis, while those determined to be finance leases are recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement.  

- 11 -


FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We adopted this new standard on June 1, 2019 using a modified retrospective transition method. Using the modified retrospective transition method of adoption, we did not adjust the balance sheet for comparative periods but recorded a cumulative effect adjustment to retained earnings on June 1, 2019. We have elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We also elected the practical expedient to not separate lease and non-lease components for the majority of our classes of assets. For leases in which the lease and non-lease components have been combined, the lease expense includes expenses such as common area maintenance. We have made an accounting policy election not to recognize leases with an initial term of 12 months or less on the consolidated balance sheet.  

The adoption of the new lease accounting standard resulted in the recognition of an operating lease liability of $14.2 billion and an operating right-of-use asset of $14.1 billion, with an immaterial impact on our income statement compared to the previous lease accounting model. Existing prepaid asset and net deferred rent liability balances of $154 million and $309 million, respectively, were recorded to the right-of-use asset. The cumulative effect of the adoption to retained earnings was an increase of $57 million ($47 million, net of tax), primarily related to the reclassification of deferred gains related to sale-leasebacks of aircraft. Substantially all of our lease arrangements are operating leases under the new standard. The new standard had a material impact on our balance sheet, but did not materially impact consolidated operating results and had no impact on operating cash flows.

See “Leases” and Note 7 for additional information.

In February 2018, the FASB issued ASU 2018-02 that permits companies to reclassify the income tax effect of the Tax Cuts and Jobs Act on items within Accumulated Other Comprehensive Income (“AOCI”) to retained earnings. We adopted this new standard on June 1, 2019.

New Accounting Standards and Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13 that changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. 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.

In August 2018, the FASB issued ASU 2018-15 that reduces the complexity of 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. 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 stock 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 2020, we repurchased 0.02 million shares of FedEx common stock at an average price of $156.90 per share for a total of $3 million. As of August 31, 2019, 5.1 million shares remained under the stock repurchase authorization.

DIVIDENDS DECLARED PER COMMON SHARE. On August 16, 2019, our Board of Directors declared a quarterly dividend of $0.65 per share of common stock. The dividend will be paid on October 1, 2019 to stockholders of record as of the close of business on September 9, 2019. 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.

- 12 -


FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(2) Accumulated Other Comprehensive 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):

 

 

 

2019

 

 

2018

 

Foreign currency translation loss:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(954

)

 

$

(759

)

Translation adjustments

 

 

(83

)

 

 

(162

)

Reclassification to retained earnings due to the adoption of ASU 2018-02

 

 

1

 

 

 

 

Balance at end of period

 

 

(1,036

)

 

 

(921

)

Retirement plans adjustments:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

89

 

 

 

181

 

Reclassifications from AOCI

 

 

(21

)

 

 

(23

)

Reclassification to retained earnings due to the adoption of ASU 2018-02

 

 

50

 

 

 

 

Balance at end of period

 

 

118

 

 

 

158

 

Accumulated other comprehensive (loss) at end of period

 

$

(918

)

 

$

(763

)

 

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

 

 

2019

 

 

2018

 

 

 

Amortization of retirement plans

   prior service credits, before tax

 

$

27

 

 

$

30

 

 

Salaries and employee benefits

Income tax benefit

 

 

(6

)

 

 

(7

)

 

Provision for income taxes

AOCI reclassifications, net of tax

 

$

21

 

 

$

23

 

 

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 first quarter of 2020, we issued $2.1 billion of senior unsecured debt under our current shelf registration statement, comprised of $1.0 billion of 3.10% fixed-rate notes due in August 2029, €500 million of 0.45% fixed-rate notes due in August 2025 and €500 million of 1.30% fixed-rate notes due in August 2031. We used the net proceeds to make voluntary contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) during the first quarter of 2020 and to redeem the $400 million aggregate principal amount of 2.30% notes due February 1, 2020 and the €500 million aggregate principal amount of 0.50% notes due April 9, 2020. The remaining net proceeds are being used for general corporate purposes.

We have a $2.0 billion five-year credit agreement (the “Five-Year Credit Agreement”) and a $1.5 billion 364-day credit agreement (the “364-Day Credit Agreement” and, together with the Five-Year Credit Agreement, the “Credit Agreements”). The Five-Year Credit Agreement expires in March 2024 and includes a $250 million letter of credit sublimit. The 364-Day Credit Agreement expires in March 2020. The Credit Agreements are available to finance our operations and other cash flow needs. The Credit Agreements contain a financial covenant requiring us to maintain a ratio of debt to consolidated earnings (excluding noncash retirement plans mark-to-market adjustments and noncash 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 2.41 to 1.0 at August 31, 2019. We believe this covenant is the only significant restrictive covenant in the Credit Agreements. The Credit Agreements contain other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the financial covenant and all other covenants in the Credit Agreements and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. If we failed to comply with the financial covenant or any other covenants in the Credit Agreements, our access to financing could become limited.

As of August 31, 2019, no commercial paper was outstanding. However, $53 million in letters of credit were outstanding, leaving $3.447 billion available under the Credit Agreements for future borrowings.

- 13 -


FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Long-term debt, including current maturities and exclusive of finance leases, had carrying values of $18.6 billion at August 31, 2019 and $17.5 billion at May 31, 2019, compared with estimated fair values of $20.1 billion at August 31, 2019 and $17.8 billion at May 31, 2019. The annualized weighted-average interest rate on long-term debt was 3.4% at August 31, 2019. 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):

 

 

 

2019

 

 

2018

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

744

 

 

$

834

 

Weighted-average common shares

 

 

260

 

 

 

265

 

Basic earnings per common share

 

$

2.86

 

 

$

3.15

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

744

 

 

$

834

 

Weighted-average common shares

 

 

260

 

 

 

265

 

Dilutive effect of share-based awards

 

 

2

 

 

 

4

 

Weighted-average diluted shares

 

 

262

 

 

 

269

 

Diluted earnings per common share

 

$

2.84

 

 

$

3.10

 

Anti-dilutive options excluded from diluted earnings per

   common share

 

 

10.9

 

 

 

3.7

 

 

 

(1)

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

(5) Retirement Plans

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report.

Our retirement plans costs for the three-month periods ended August 31 were as follows (in millions):

 

 

 

2019

 

 

2018

 

Defined benefit pension plans, net

 

$

37

 

 

$

28

 

Defined contribution plans

 

 

142

 

 

 

144

 

Postretirement healthcare plans

 

 

22

 

 

 

19

 

 

 

$

201

 

 

$

191

 

- 14 -


FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)