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FEDEX CORP - Quarter Report: 2018 February (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED February 28, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 1-15829

 

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

62-1721435

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

942 South Shady Grove Road Memphis, Tennessee

38120

(Address of principal executive offices)

(ZIP Code)

 

(901) 818-7500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    ☒  No    ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    ☒  No    ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer             

Non-accelerated filer

Smaller reporting company 

Emerging growth company 

 

 

(Do not check if a smaller reporting company)

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ☐  No    ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock

 

Outstanding Shares at March 19, 2018

Common Stock, par value $0.10 per share

 

267,215,207

 

 

 

 

 


 

FEDEX CORPORATION

INDEX

 

 

 

PAGE

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. Financial Statements

 

 

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

 

3

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

 

5

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

 

6

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

 

7

Notes to Condensed Consolidated Financial Statements

 

8

Report of Independent Registered Public Accounting Firm

 

27

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

 

28

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

51

ITEM 4. Controls and Procedures

 

51

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

ITEM 1. Legal Proceedings

 

52

ITEM 1A. Risk Factors

 

52

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

 

54

ITEM 6. Exhibits

 

55

Signature

 

57

Exhibit Index

 

E-1

 

 

 

Exhibit 10.1

 

 

Exhibit 10.2

 

 

Exhibit 10.3

 

 

Exhibit 10.4

 

 

Exhibit 10.5

 

 

Exhibit 10.6

 

 

Exhibit 10.7

 

 

Exhibit 10.8

 

 

Exhibit 10.9

 

 

Exhibit 10.10

 

 

Exhibit 12.1

 

 

Exhibit 15.1

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

Exhibit 101.1 Interactive Data Files

 

 

- 2 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

 

 

February 28,

2018

(Unaudited)

 

 

May 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,789

 

 

$

3,969

 

Receivables, less allowances of $373 and $252

 

 

8,671

 

 

 

7,599

 

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

 

 

523

 

 

 

514

 

Prepaid expenses and other

 

 

1,592

 

 

 

546

 

Total current assets

 

 

13,575

 

 

 

12,628

 

PROPERTY AND EQUIPMENT, AT COST

 

 

54,377

 

 

 

50,626

 

Less accumulated depreciation and amortization

 

 

26,680

 

 

 

24,645

 

Net property and equipment

 

 

27,697

 

 

 

25,981

 

OTHER LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Goodwill

 

 

7,464

 

 

 

7,154

 

Other assets

 

 

3,115

 

 

 

2,789

 

Total other long-term assets

 

 

10,579

 

 

 

9,943

 

 

 

$

51,851

 

 

$

48,552

 

 

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

- 3 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

 

 

February 28,

2018

(Unaudited)

 

 

May 31,

2017

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

      Short-term borrowings

 

$

799

 

 

$

 

Current portion of long-term debt

 

 

764

 

 

 

22

 

Accrued salaries and employee benefits

 

 

1,945

 

 

 

1,914

 

Accounts payable

 

 

3,102

 

 

 

2,752

 

Accrued expenses

 

 

2,893

 

 

 

3,230

 

Total current liabilities

 

 

9,503

 

 

 

7,918

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

16,017

 

 

 

14,909

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

2,401

 

 

 

2,485

 

Pension, postretirement healthcare and other benefit obligations

 

 

2,181

 

 

 

4,487

 

Self-insurance accruals

 

 

1,715

 

 

 

1,494

 

Deferred lease obligations

 

 

532

 

 

 

531

 

Deferred gains, principally related to aircraft transactions

 

 

124

 

 

 

137

 

Other liabilities

 

 

484

 

 

 

518

 

Total other long-term liabilities

 

 

7,437

 

 

 

9,652

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

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

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

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

3,085

 

 

 

3,005

 

Retained earnings

 

 

23,710

 

 

 

20,833

 

Accumulated other comprehensive loss

 

 

(357

)

 

 

(415

)

Treasury stock, at cost

 

 

(7,576

)

 

 

(7,382

)

Total common stockholders’ investment

 

 

18,894

 

 

 

16,073

 

 

 

$

51,851

 

 

$

48,552

 

 

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

- 4 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUES

 

$

16,526

 

 

$

14,997

 

 

$

48,136

 

 

$

44,591

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,981

 

 

 

5,395

 

 

 

17,241

 

 

 

16,059

 

Purchased transportation

 

 

3,935

 

 

 

3,498

 

 

 

11,220

 

 

 

10,169

 

Rentals and landing fees

 

 

873

 

 

 

834

 

 

 

2,526

 

 

 

2,426

 

Depreciation and amortization

 

 

786

 

 

 

762

 

 

 

2,293

 

 

 

2,241

 

Fuel

 

 

914

 

 

 

735

 

 

 

2,435

 

 

 

2,043

 

Maintenance and repairs

 

 

628

 

 

 

588

 

 

 

1,968

 

 

 

1,765

 

Other

 

 

2,408

 

 

 

2,160

 

 

 

7,073

 

 

 

6,432

 

 

 

 

15,525

 

 

 

13,972

 

 

 

44,756

 

 

 

41,135

 

OPERATING INCOME

 

 

1,001

 

 

 

1,025

 

 

 

3,380

 

 

 

3,456

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(125

)

 

 

(122

)

 

 

(363

)

 

 

(354

)

Other, net

 

 

(2

)

 

 

(4

)

 

 

(22

)

 

 

17

 

 

 

 

(127

)

 

 

(126

)

 

 

(385

)

 

 

(337

)

INCOME BEFORE INCOME TAXES

 

 

874

 

 

 

899

 

 

 

2,995

 

 

 

3,119

 

PROVISION FOR INCOME TAXES

 

 

(1,200

)

 

 

337

 

 

 

(450

)

 

 

1,142

 

NET INCOME

 

$

2,074

 

 

$

562

 

 

$

3,445

 

 

$

1,977

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

7.74

 

 

$

2.11

 

 

$

12.85

 

 

$

7.43

 

Diluted

 

$

7.59

 

 

$

2.07

 

 

$

12.63

 

 

$

7.31

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.50

 

 

$

0.40

 

 

$

2.00

 

 

$

1.60

 

 

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

- 5 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

NET INCOME

 

$

2,074

 

 

$

562

 

 

$

3,445

 

 

$

1,977

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

100

 

 

 

110

 

 

 

119

 

 

 

(108

)

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

 

 

(23

)

 

 

(19

)

 

 

(61

)

 

 

(57

)

 

 

 

77

 

 

 

91

 

 

 

58

 

 

 

(165

)

COMPREHENSIVE INCOME

 

$

2,151

 

 

$

653

 

 

$

3,503

 

 

$

1,812

 

 

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

- 6 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

 

 

 

Nine Months Ended

 

 

 

February 28,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,445

 

 

$

1,977

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,293

 

 

 

2,241

 

Provision for uncollectible accounts

 

 

177

 

 

 

115

 

Stock-based compensation

 

 

135

 

 

 

123

 

Deferred income taxes and other noncash items

 

 

(914

)

 

 

474

 

Gain from sale of investment

 

 

 

 

 

(35

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(986

)

 

 

(340

)

Other assets

 

 

(151

)

 

 

(235

)

Accounts payable and other liabilities

 

 

(2,781

)

 

 

(1,642

)

Other, net

 

 

(56

)

 

 

(33

)

Cash provided by operating activities

 

 

1,162

 

 

 

2,645

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(3,994

)

 

 

(3,790

)

Business acquisitions, net of cash acquired

 

 

(44

)

 

 

 

Proceeds from asset dispositions and other

 

 

21

 

 

 

123

 

Cash used in investing activities

 

 

(4,017

)

 

 

(3,667

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings, net

 

 

797

 

 

 

 

Principal payments on debt

 

 

(31

)

 

 

(49

)

Proceeds from debt issuances

 

 

1,481

 

 

 

1,190

 

Proceeds from stock issuances

 

 

284

 

 

 

265

 

Dividends paid

 

 

(402

)

 

 

(319

)

Purchase of treasury stock

 

 

(558

)

 

 

(358

)

Other, net

 

 

6

 

 

 

2

 

Cash provided by financing activities

 

 

1,577

 

 

 

731

 

Effect of exchange rate changes on cash

 

 

98

 

 

 

(70

)

Net decrease in cash and cash equivalents

 

 

(1,180

)

 

 

(361

)

Cash and cash equivalents at beginning of period

 

 

3,969

 

 

 

3,534

 

Cash and cash equivalents at end of period

 

$

2,789

 

 

$

3,173

 

 

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

- 7 -


 

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2017 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of February 28, 2018, the results of our operations for the three- and nine-month periods ended February 28, 2018 and 2017, and cash flows for the nine-month periods ended February 28, 2018 and 2017. Operating results for the three- and nine-month periods ended February 28, 2018 are not necessarily indicative of the results that may be expected for the year ending May 31, 2018.

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

 

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

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of Federal Express Corporation (“FedEx Express”), who represent a small number of its total employees, are employed under a collective bargaining agreement that took effect on November 2, 2015. This collective bargaining agreement is scheduled to become amendable in November 2021, after a six-year term. In addition to our pilots at FedEx Express, FedEx Supply Chain Distribution System, Inc. (“FedEx Supply Chain”) has a small number of employees who are members of unions, and certain non-U.S. employees are unionized.

STOCK-BASED COMPENSATION. We have two types of equity-based compensation: stock options and restricted stock. The key terms of the stock option and restricted stock awards granted under our incentive stock plans and all financial disclosures about these programs are set forth in our Annual Report.

Our stock-based compensation expense was $32 million for the three-month period ended February 28, 2018 and $135 million for the nine-month period ended February 28, 2018. Our stock-based compensation expense was $31 million for the three-month period ended February 28, 2017 and $123 million for the nine-month period ended February 28, 2017. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

RECENT ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. We believe the following new accounting guidance is relevant to the readers of our financial statements.

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

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

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

- 8 -


 

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

In 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. This standard will be effective for us beginning June 1, 2018 (fiscal 2019). The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five-step approach for the recognition of revenue. We are finalizing the assessment of the impact this new standard will have on our consolidated financial statements and related disclosures, including ongoing contract reviews, which will be completed by the end of 2018. We do not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems.

In March 2017, the FASB issued an Accounting Standards Update that changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income statement. This new guidance requires entities to report the service cost component in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component outside of income from operations. This standard will impact our operating income but will have no impact on our net income or earnings per share. For example, adoption of this guidance would have reduced operating income by $143 million in the third quarter and $436 million in the nine months of 2018, and by $113 million in the third quarter and $337 million in the nine months of 2017, but would not have impacted our net income in these periods. This new guidance will be effective June 1, 2018 and will be applied retrospectively.

In 2016, the FASB issued a new lease accounting standard which requires lessees to put most leases on their balance sheets but recognize the expenses in their income statements in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expenses related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement. Based on our lease portfolio, we currently anticipate recognizing a lease liability and related right-of-use asset on our balance sheet in excess of $13 billion, with an immaterial impact on our income statement compared to the current lease accounting model. However, the ultimate impact of the standard will depend on the company’s lease portfolio as of the adoption date. We are currently in the process of evaluating our existing lease portfolio, including accumulating all of the necessary information required to properly account for the leases under the new standard. Additionally, we are implementing an enterprise-wide lease management system to assist in the accounting and are evaluating additional changes to our processes and internal controls to ensure we meet the standard’s reporting and disclosure requirements. These changes will be effective June 1, 2019 (fiscal 2020).

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

TREASURY SHARES. In January 2016, our Board of Directors authorized a share repurchase program of up to 25 million shares. Shares under the current repurchase program may be repurchased from time to time in the open market or in privately negotiated transactions. The timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of FedEx common stock and general market conditions. No time limit was set for the completion of the program, and the program may be suspended or discontinued at any time.

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

DIVIDENDS DECLARED PER COMMON SHARE. On February 16, 2018, our Board of Directors declared a quarterly dividend of $0.50 per share of common stock. The dividend will be paid on April 2, 2018 to stockholders of record as of the close of business on March 12, 2018. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

- 9 -


 

(2) Accumulated Other Comprehensive Income (Loss)

The following table provides changes in AOCI, net of tax, reported in our unaudited condensed consolidated financial statements for the periods ended February 28 (in millions; amounts in parentheses indicate debits to AOCI):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Foreign currency translation loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(666

)

 

$

(732

)

 

$

(685

)

 

$

(514

)

Translation adjustments

 

 

100

 

 

 

110

 

 

 

119

 

 

 

(108

)

Balance at end of period

 

 

(566

)

 

 

(622

)

 

 

(566

)

 

 

(622

)

Retirement plans adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

232

 

 

 

307

 

 

 

270

 

 

 

345

 

Reclassifications from AOCI

 

 

(23

)

 

 

(19

)

 

 

(61

)

 

 

(57

)

Balance at end of period

 

 

209

 

 

 

288

 

 

 

209

 

 

 

288

 

Accumulated other comprehensive (loss) at end of period

 

$

(357

)

 

$

(334

)

 

$

(357

)

 

$

(334

)

 

The following table presents details of the reclassifications from AOCI for the periods ended February 28 (in millions; amounts in parentheses indicate debits to earnings):

 

 

 

Amount Reclassified from

AOCI

 

 

Affected Line Item in the

Income Statement

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

Amortization of retirement plans

   prior service credits, before tax

 

$

30

 

 

$

31

 

 

$

90

 

 

$

91

 

 

Salaries and employee benefits

Income tax benefit

 

 

(7

)

 

 

(12

)

 

 

(29

)

 

 

(34

)

 

Provision for income taxes

AOCI reclassifications, net of tax

 

$

23

 

 

$

19

 

 

$

61

 

 

$

57

 

 

Net income

 

(3) Financing Arrangements

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

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

During the quarter, we amended our five-year revolving credit facility to increase the aggregate amount available under the facility from $1.75 billion to $2.0 billion. The facility, which expires in November 2020 and includes a $500 million letter of credit sublimit, is available to finance our operations and other cash flow needs. The agreement contains a financial covenant, which requires us to maintain a ratio of debt to consolidated earnings (excluding non-cash pension mark-to-market adjustments and non-cash asset impairment charges) before interest, taxes, depreciation and amortization (“adjusted EBITDA”) of not more than 3.5 to 1.0, calculated as of the end of the applicable quarter on a rolling four-quarters basis. The ratio of our debt to adjusted EBITDA was 2.2 to 1.0 at February 28, 2018. We believe this covenant is the only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with this financial covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs.

During the third quarter of 2018, we issued commercial paper which provided us with additional short-term liquidity. The maximum outstanding during the quarter was $800 million. Our commercial paper program is backed by unused commitments under the revolving credit facility and borrowings under the program reduce the amount available under the credit facility. As of February 28, 2018, $800 million of commercial paper and $54 million in letters of credit were outstanding, leaving $1.146 billion available under the revolving credit facility for future borrowings.

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

- 10 -


 

weighted-average interest rate on long-term debt was 3.6% at February 28, 2018. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.

(4) Computation of Earnings Per Share

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

2,071

 

 

$

561

 

 

$

3,441

 

 

$

1,974

 

Weighted-average common shares

 

 

268

 

 

 

266

 

 

 

268

 

 

 

266

 

Basic earnings per common share

 

$

7.74

 

 

$

2.11

 

 

$

12.85

 

 

$

7.43

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

2,071

 

 

$

561

 

 

$

3,441

 

 

$

1,974

 

Weighted-average common shares

 

 

268

 

 

 

266

 

 

 

268

 

 

 

266

 

Dilutive effect of share-based awards

 

 

5

 

 

 

5

 

 

 

4

 

 

 

4

 

Weighted-average diluted shares

 

 

273

 

 

 

271

 

 

 

272

 

 

 

270

 

Diluted earnings per common share

 

$

7.59

 

 

$

2.07

 

 

$

12.63

 

 

$

7.31

 

Anti-dilutive options excluded from diluted earnings per

   common share

 

 

1.9

 

 

 

4.0

 

 

 

2.6

 

 

 

4.7

 

 

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

- 11 -


 

(5) Income Taxes

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

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

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

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

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2018

 

2017 Effective Tax Rate

 

 

37.5

%

 

 

36.6

%

Remeasurement of net U.S. deferred tax liability

 

 

(131.5

)

 

 

(38.4

)

Effect of February 2018 pension contribution (a)

 

 

(23.3

)

 

 

(6.8

)

Lower statutory tax rate

 

 

(18.9

)

 

 

(5.5

)

Transition tax

 

 

(4.1

)

 

 

(1.2

)

Other (b)

 

 

3.0

 

 

 

0.3

 

2018 Effective Tax Rate

 

 

(137.3

)%

 

 

(15.0

)%

 

(a)

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

 

(b)

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

(6) Retirement Plans

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

Our retirement plans costs for the periods ended February 28 were as follows (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Defined benefit pension plans

 

$

39

 

 

$

57

 

 

$

113

 

 

$

173

 

Defined contribution plans

 

 

135

 

 

 

117

 

 

 

386

 

 

 

348

 

Postretirement healthcare plans

 

 

19

 

 

 

19

 

 

 

56

 

 

 

57

 

 

 

$

193

 

 

$

193

 

 

$

555

 

 

$

578

 

- 12 -


 

 

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

 

 

Three Months Ended

 

 

 

U.S. Pension Plans

 

 

International Pension Plans

 

 

Postretirement Healthcare Plans

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

 

$

169

 

 

$

160

 

 

$

23

 

 

$

20

 

 

$

9

 

 

$

9

 

Interest cost

 

 

279

 

 

 

282

 

 

 

12

 

 

 

11

 

 

 

10

 

 

 

10

 

Expected return on plan assets

 

 

(406

)

 

 

(375

)

 

 

(10

)

 

 

(9

)

 

 

 

 

 

 

Amortization of prior service credit and other

 

 

(29

)

 

 

(30

)

 

 

1

 

 

 

(2

)

 

 

 

 

 

 

 

 

$

13

 

 

$

37

 

 

$

26

 

 

$

20

 

 

$

19

 

 

$

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

U.S. Pension Plans

 

 

International Pension Plans

 

 

Postretirement Healthcare Plans

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

 

$

509

 

 

$

479

 

 

$

69

 

 

$

61

 

 

$

27

 

 

$

27

 

Interest cost

 

 

836

 

 

 

846

 

 

 

37

 

 

 

33

 

 

 

29

 

 

 

30

 

Expected return on plan assets

 

 

(1,218

)

 

 

(1,126

)

 

 

(32

)

 

 

(30

)

 

 

 

 

 

 

Amortization of prior service credit and other

 

 

(88

)

 

 

(89

)

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

$

39

 

 

$

110

 

 

$

74

 

 

$

63

 

 

$

56

 

 

$

57

 

 

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

 

 

2018

 

 

2017

 

Required

 

$

22

 

 

$

444

 

Voluntary

 

 

2,478

 

 

 

1,306

 

 

 

$

2,500

 

 

$

1,750

 

 

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

(7) Business Segment Information

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are FedEx Express, including TNT Express B.V. (“TNT Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Services, form the core of our reportable segments.

Our reportable segments include the following businesses:

 

 

 

 

 

FedEx Express Segment

FedEx Express (express transportation)

 

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

 

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

 

 

 

 

FedEx Ground Segment

FedEx Ground (small-package ground delivery)

 

FedEx Supply Chain (third-party logistics)

 

 

 

 

FedEx Freight Segment

FedEx Freight (LTL freight transportation)

 

FedEx Custom Critical (time-critical transportation)

 

 

 

 

FedEx Services Segment

FedEx Services (sales, marketing, information technology, communications, customer service, technical support, billing and collection services and back-office functions)

 

FedEx Office (document and business services and package acceptance)

 

- 13 -


 

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

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

FedEx Services Segment

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis and reported in their natural expense line items. The FedEx Services segment includes: FedEx Services, which provides sales, marketing, information technology, communications, customer service, technical support, billing and collection services for U.S. customers of our major business units and certain back-office support to our other companies; and FedEx Office and Print Services, Inc. (“FedEx Office”), which provides an array of document and business services and retail access to our customers for our package transportation businesses.

The FedEx Services segment provides direct and indirect support to our transportation businesses, and we allocate all of the net operating costs of the FedEx Services segment (including the net operating results of FedEx Office) to reflect the full cost of operating our transportation businesses in the results of those segments. Within the FedEx Services segment allocation, the net operating results of FedEx Office, which are an immaterial component of our allocations, are allocated to FedEx Express and FedEx Ground. We review and evaluate the performance of our transportation segments based on operating income (inclusive of FedEx Services segment allocations). For the FedEx Services segment, performance is evaluated based on the impact of its total allocated net operating costs on our transportation segments.

Operating expenses for each of our transportation segments include the allocations from the FedEx Services segment to the respective transportation segments. These allocations also include charges and credits for administrative services provided between operating companies. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of providing these functions. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.

Eliminations, Corporate and Other

Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues and expenses are eliminated in our consolidated results and are not separately identified in the following segment information because the amounts are not material.

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

- 14 -


 

The following table provides a reconciliation of reportable segment revenues and operating income to our unaudited condensed consolidated financial statement totals for the periods ended February 28 (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

9,370

 

 

$

8,569

 

 

$

27,376

 

 

$

25,671

 

FedEx Ground segment

 

 

5,222

 

 

 

4,688

 

 

 

14,790

 

 

 

13,397

 

FedEx Freight segment

 

 

1,694

 

 

 

1,492

 

 

 

5,208

 

 

 

4,747

 

FedEx Services segment

 

 

397

 

 

 

389

 

 

 

1,213

 

 

 

1,198

 

Eliminations and other

 

 

(157

)

 

 

(141

)

 

 

(451

)

 

 

(422

)

 

 

$

16,526

 

 

$

14,997

 

 

$

48,136

 

 

$

44,591

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

424

 

 

$

557

 

 

$

1,574

 

 

$

1,873

 

FedEx Ground segment

 

 

634

 

 

 

515

 

 

 

1,781

 

 

 

1,590

 

FedEx Freight segment

 

 

55

 

 

 

41

 

 

 

349

 

 

 

264

 

Eliminations, corporate and other

 

 

(112

)

 

 

(88

)

 

 

(324

)

 

 

(271

)

 

 

$

1,001

 

 

$

1,025

 

 

$

3,380

 

 

$

3,456

 

 

(8) Commitments

As of February 28, 2018, our purchase commitments under various contracts for the remainder of 2018 and annually thereafter were as follows (in millions):

 

 

 

Aircraft and

Aircraft-Related

 

 

Other(1)

 

 

Total

 

2018 (remainder)

 

$

516

 

 

$

254

 

 

$

770

 

2019

 

 

1,789

 

 

 

725

 

 

 

2,514

 

2020

 

 

1,931

 

 

 

621

 

 

 

2,552

 

2021

 

 

1,244

 

 

 

400

 

 

 

1,644

 

2022

 

 

1,364

 

 

 

251

 

 

 

1,615

 

Thereafter

 

 

3,314

 

 

 

508

 

 

 

3,822

 

Total

 

$

10,158

 

 

$

2,759

 

 

$

12,917

 

 

 

(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 February 28, 2018, our obligation to purchase four Boeing 767-300 Freighter (“B767F”) aircraft and three Boeing 777 Freighter (“B777F”) 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. 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 an agreement to accelerate the delivery of two B777F aircraft from 2021 to 2020, one B777F aircraft from 2021 to 2019, and one B777F aircraft from 2022 to 2020. 

- 15 -


 

We had $922 million in deposits and progress payments as of February 28, 2018 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our consolidated balance sheets. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of February 28, 2018 with the year of expected delivery:

 

 

 

Cessna SkyCourier 408

 

 

ATR 72-600F

 

 

B767F

 

 

B777F

 

 

Total

 

2018 (remainder)

 

 

-

 

 

 

-

 

 

 

4

 

 

 

1

 

 

 

5

 

2019

 

 

-

 

 

 

-

 

 

 

15

 

 

 

3

 

 

 

18

 

2020

 

 

-

 

 

 

-

 

 

 

16

 

 

 

6

 

 

 

22

 

2021

 

 

12

 

 

 

5

 

 

 

10

 

 

 

-

 

 

 

27

 

2022

 

 

12

 

 

 

6

 

 

 

10

 

 

 

3

 

 

 

31

 

Thereafter

 

 

26

 

 

 

19

 

 

 

6

 

 

 

-

 

 

 

51

 

Total

 

 

50

 

 

 

30

 

 

 

61

 

 

 

13

 

 

 

154

 

 

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at February 28, 2018 is as follows (in millions):

 

 

 

Aircraft

and Related

Equipment

 

 

Facilities

and Other

 

 

Total

Operating

Leases

 

2018 (remainder)

 

$

47

 

 

$

585

 

 

$

632

 

2019

 

 

343

 

 

 

2,065

 

 

 

2,408

 

2020

 

 

261

 

 

 

1,854

 

 

 

2,115

 

2021

 

 

203

 

 

 

1,675

 

 

 

1,878

 

2022

 

 

185

 

 

 

1,510

 

 

 

1,695

 

Thereafter

 

 

175

 

 

 

9,018

 

 

 

9,193

 

Total

 

$

1,214

 

 

$

16,707

 

 

$

17,921

 

 

Future minimum lease payments under capital leases were immaterial at February 28, 2018. While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

(9) Contingencies

Independent Contractor — Lawsuits and Administrative Proceedings. FedEx Ground is involved in lawsuits and administrative proceedings claiming that owner-operators engaged under a contractor model no longer in use should have been treated as employees of FedEx Ground, rather than independent contractors. In addition, we are defending joint-employer cases where it is alleged that FedEx Ground should be treated as an employer of the drivers employed by owner-operators engaged by FedEx Ground. These cases are in varying stages of litigation, and we are not currently able to estimate an amount or range of potential loss in all of these matters. However, we do not expect to incur, individually or in the aggregate, a material loss in these matters. Nevertheless, adverse determinations in matters related to owner-operators engaged by FedEx Ground could, among other things, entitle certain owner-operators to the reimbursement of certain expenses, and their drivers to the benefit of wage-and-hour laws, and result in employment and withholding tax and benefit liability for FedEx Ground. We believe that owner-operators engaged by FedEx Ground are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers employed by these owner-operators.

 

City and State of New York Cigarette Suit. The City of New York and the State of New York filed two related lawsuits against FedEx Ground in December 2013 and November 2014 arising from FedEx Ground’s alleged shipments of cigarettes to New York residents in contravention of several statutes, including the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and New York’s Public Health Law, as well as common law nuisance claims. In April 2016, the two lawsuits were consolidated and will now proceed as one lawsuit. The first-filed lawsuit alleges that FedEx Ground provided delivery services on behalf of four shippers, and the second-filed lawsuit alleges that FedEx Ground provided delivery services on behalf of six additional shippers; none of these shippers continue to ship in our network. Following motions to dismiss filed in both lawsuits, some of the claims were dismissed entirely or limited. In the first-filed lawsuit, the New York Public Health Law and common law nuisance claims were dismissed and the plaintiffs voluntarily dismissed another claim. In the second-filed lawsuit, the common law nuisance claim was dismissed entirely and the New York Public Health Law claim has been limited to claims arising after September 27, 2013, when an amendment to that law provided enforcement authority to the City of New York and State of New York. Other claims, including the RICO claims, remain in both

- 16 -


 

lawsuits. The likelihood of loss is reasonably possible, but the amount or range of loss, if any, cannot be estimated at this stage of the litigation. We expect the amount of any loss to be immaterial.

 

On July 10, 2017, the City of New York and the State of New York filed a third lawsuit against FedEx Ground and included FedEx Freight as a co-defendant. This additional case identifies no shippers or shipments, but generally alleges violations of the same laws that are the subject of the other two lawsuits. The amount or range of loss, if any, cannot be estimated at this stage of the lawsuit.

 

Environmental Matters. SEC regulations require disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that management reasonably believes could exceed $100,000.

 

On September 9, 2016, FedEx Supply Chain received a written offer from several District Attorneys’ Offices in California to settle a civil action that the District Attorneys intend to file against FedEx Supply Chain for alleged violations of the state’s hazardous waste regulations. Specifically, the District Attorneys’ Offices allege FedEx Supply Chain unlawfully disposed of hazardous waste at one of its California facilities and caused the illegal transportation and disposal of hazardous waste from the retail stores of a FedEx Supply Chain customer at this same facility. The District Attorneys allege these violations began in 2006 and continued until the facility closed in the spring of 2015. In March 2018, we settled this matter for an immaterial amount, and the settlement agreement has been approved by the court. We have been reimbursed by the sellers of GENCO for the amount of the settlement.

 

Other Matters. During the third quarter of 2017, FedEx Trade Networks informed U.S. Customs and Border Protection (“CBP”) that in connection with certain customs entries it may have made improper claims for (i) reduced-duty treatment and (ii) duty-free treatment. In the fourth quarter of 2017 we established accruals totaling $39.3 million for the then-current estimated probable loss for these matters. In the first quarter of 2018, FedEx Trade Networks tendered payments to CBP in these matters totaling $46.5 million, and an additional expense of $7.2 million was recognized. CBP acknowledged receipt of the amounts tendered in these matters, and we are awaiting a response indicating whether these matters are fully resolved.

 

FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of business, including certain lawsuits containing various class-action allegations of wage-and-hour violations in which plaintiffs claim, among other things, that they were forced to work “off the clock,” were not paid overtime or were not provided work breaks or other benefits. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not have a material adverse effect on our financial position, results of operations or cash flows.

(10) Supplemental Cash Flow Information

Cash paid for interest expense and income taxes for the nine-month periods ended February 28 was as follows (in millions):

 

 

 

2018

 

 

2017

 

Cash payments for:

 

 

 

 

 

 

 

 

Interest (net of capitalized interest)

 

$

430

 

 

$

400

 

Income taxes

 

$

707

 

 

$

294

 

Income tax refunds received

 

 

(59

)

 

 

(16

)

Cash tax payments, net

 

$

648

 

 

$

278

 

 

- 17 -


 

(11) Condensed Consolidating Financial Statements

We are required to present condensed consolidating financial information in order for the subsidiary guarantors of our public debt to continue to be exempt from reporting under the Securities Exchange Act of 1934, as amended.

The guarantor subsidiaries, which are 100% owned by FedEx, guarantee $16.6 billion of our long-term debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the “Guarantor Subsidiaries” and “Non-guarantor Subsidiaries” columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting.

- 18 -


 

Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

February 28, 2018

 

 

 

 

 

 

 

Guarantor

 

 

Non-guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

957

 

 

$

375

 

 

$

1,494

 

 

$

(37

)

 

$

2,789

 

Receivables, less allowances

 

 

1

 

 

 

5,308

 

 

 

3,462

 

 

 

(100

)

 

 

8,671

 

Spare parts, supplies, fuel, prepaid expenses and other,

   less allowances

 

 

920

 

 

 

928

 

 

 

267

 

 

 

 

 

 

2,115

 

Total current assets

 

 

1,878

 

 

 

6,611

 

 

 

5,223

 

 

 

(137

)

 

 

13,575

 

PROPERTY AND EQUIPMENT, AT COST

 

 

22

 

 

 

50,601

 

 

 

3,754

 

 

 

 

 

 

54,377

 

Less accumulated depreciation and amortization

 

 

18

 

 

 

24,999

 

 

 

1,663

 

 

 

 

 

 

26,680

 

Net property and equipment

 

 

4

 

 

 

25,602

 

 

 

2,091

 

 

 

 

 

 

27,697

 

INTERCOMPANY RECEIVABLE

 

 

1,401

 

 

 

2,508

 

 

 

130

 

 

 

(4,039

)

 

 

 

GOODWILL

 

 

 

 

 

1,571

 

 

 

5,893

 

 

 

 

 

 

7,464

 

INVESTMENT IN SUBSIDIARIES

 

 

31,295

 

 

 

2,928

 

 

 

 

 

 

(34,223

)

 

 

 

OTHER ASSETS

 

 

2,706

 

 

 

1,566

 

 

 

1,268

 

 

 

(2,425

)

 

 

3,115

 

 

 

$

37,284

 

 

$

40,786

 

 

$

14,605

 

 

$

(40,824

)

 

$

51,851

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

799

 

 

$

 

 

$

 

 

$

 

 

$

799

 

Current portion of long-term debt

 

 

750

 

 

 

6

 

 

 

8

 

 

 

 

 

 

764

 

Accrued salaries and employee benefits

 

 

69

 

 

 

1,362

 

 

 

514

 

 

 

 

 

 

1,945

 

Accounts payable

 

 

149

 

 

 

1,483

 

 

 

1,607

 

 

 

(137

)

 

 

3,102

 

Accrued expenses

 

 

379

 

 

 

1,605

 

 

 

909

 

 

 

 

 

 

2,893

 

Total current liabilities

 

 

2,146

 

 

 

4,456

 

 

 

3,038

 

 

 

(137

)

 

 

9,503

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

15,713

 

 

 

288

 

 

 

16

 

 

 

 

 

 

16,017

 

INTERCOMPANY PAYABLE

 

 

 

 

 

 

 

 

4,039

 

 

 

(4,039

)

 

 

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

 

 

 

4,285

 

 

 

541

 

 

 

(2,425

)

 

 

2,401

 

Other liabilities

 

 

531

 

 

 

3,605

 

 

 

900

 

 

 

 

 

 

5,036

 

Total other long-term liabilities

 

 

531

 

 

 

7,890

 

 

 

1,441

 

 

 

(2,425

)

 

 

7,437

 

STOCKHOLDERS’ INVESTMENT

 

 

18,894

 

 

 

28,152

 

 

 

6,071

 

 

 

(34,223

)

 

 

18,894

 

 

 

$

37,284

 

 

$

40,786

 

 

$

14,605

 

 

$

(40,824

)

 

$

51,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 19 -


 

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2017

 

 

 

 

 

 

 

Guarantor

 

 

Non-guarantor

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,884

 

 

$

325

 

 

$

1,807

 

 

$

(47

)

 

$

3,969

 

Receivables, less allowances

 

 

3

 

 

 

4,729

 

 

 

2,928

 

 

 

(61

)

 

 

7,599

 

Spare parts, supplies, fuel, prepaid expenses and other,

   less allowances

 

 

25

 

 

 

787

 

 

 

248

 

 

 

 

 

 

1,060

 

Total current assets

 

 

1,912

 

 

 

5,841

 

 

 

4,983

 

 

 

(108

)

 

 

12,628

 

PROPERTY AND EQUIPMENT, AT COST

 

 

22

 

 

 

47,201

 

 

 

3,403

 

 

 

 

 

 

50,626

 

Less accumulated depreciation and amortization

 

 

18

 

 

 

23,211

 

 

 

1,416

 

 

 

 

 

 

24,645

 

Net property and equipment

 

 

4

 

 

 

23,990

 

 

 

1,987

 

 

 

 

 

 

25,981

 

INTERCOMPANY RECEIVABLE

 

 

1,521

 

 

 

2,607

 

 

 

 

 

 

(4,128

)

 

 

 

GOODWILL

 

 

 

 

 

1,571

 

 

 

5,583

 

 

 

 

 

 

7,154

 

INVESTMENT IN SUBSIDIARIES

 

 

27,712

 

 

 

2,636

 

 

 

 

 

 

(30,348

)

 

 

 

OTHER ASSETS

 

 

3,494

 

 

 

1,271

 

 

 

1,249

 

 

 

(3,225

)

 

 

2,789

 

 

 

$

34,643

 

 

$

37,916

 

 

$

13,802

 

 

$

(37,809

)

 

$

48,552

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

 

$

9

 

 

$

13

 

 

$

 

 

$

22

 

Accrued salaries and employee benefits

 

 

72

 

 

 

1,335

 

 

 

507

 

 

 

 

 

 

1,914

 

Accounts payable

 

 

10

 

 

 

1,411

 

 

 

1,439

 

 

 

(108

)

 

 

2,752

 

Accrued expenses

 

 

991

 

 

 

1,522

 

 

 

717

 

 

 

 

 

 

3,230

 

Total current liabilities

 

 

1,073

 

 

 

4,277

 

 

 

2,676

 

 

 

(108

)

 

 

7,918

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

14,641

 

 

 

244

 

 

 

24

 

 

 

 

 

 

14,909

 

INTERCOMPANY PAYABLE

 

 

 

 

 

 

 

 

4,128

 

 

 

(4,128

)

 

 

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

 

 

 

5,472

 

 

 

238

 

 

 

(3,225

)

 

 

2,485

 

Other liabilities

 

 

2,856

 

 

 

3,448

 

 

 

863

 

 

 

 

 

 

7,167

 

Total other long-term liabilities

 

 

2,856

 

 

 

8,920

 

 

 

1,101

 

 

 

(3,225

)

 

 

9,652

 

STOCKHOLDERS’ INVESTMENT

 

 

16,073

 

 

 

24,475

 

 

 

5,873

 

 

 

(30,348

)

 

 

16,073

 

 

 

$

34,643

 

 

$

37,916

 

 

$

13,802

 

 

$

(37,809

)

 

$

48,552

 

 

- 20 -


 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended February 28, 2018

 

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

REVENUES

 

$

 

 

$

12,433

 

 

$

4,229

 

 

$

(136

)

 

$

16,526

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

39

 

 

 

4,623

 

 

 

1,319

 

 

 

 

 

 

5,981

 

Purchased transportation

 

 

 

 

 

2,459

 

 

 

1,560

 

 

 

(84

)

 

 

3,935

 

Rentals and landing fees

 

 

2

 

 

 

684

 

 

 

189

 

 

 

(2

)

 

 

873

 

Depreciation and amortization

 

 

1

 

 

 

670

 

 

 

115

 

 

 

 

 

 

786

 

Fuel

 

 

 

 

 

837

 

 

 

77

 

 

 

 

 

 

914

 

Maintenance and repairs

 

 

1

 

 

 

543

 

 

 

84

 

 

 

 

 

 

628

 

Intercompany charges, net

 

 

(114

)

 

 

185

 

 

 

(71

)

 

 

 

 

 

 

Other

 

 

71

 

 

 

1,596

 

 

 

791

 

 

 

(50

)

 

 

2,408

 

 

 

 

 

 

 

11,597

 

 

 

4,064

 

 

 

(136

)

 

 

15,525

 

OPERATING INCOME

 

 

 

 

 

836

 

 

 

165

 

 

 

 

 

 

1,001

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

 

2,074

 

 

 

2

 

 

 

 

 

 

(2,076

)

 

 

 

Interest, net

 

 

(137

)

 

 

11

 

 

 

1

 

 

 

 

 

 

(125

)

Intercompany charges, net

 

 

140

 

 

 

(78

)

 

 

(62

)

 

 

 

 

 

 

Other, net

 

 

(3

)

 

 

104

 

 

 

(103

)

 

 

 

 

 

(2

)

INCOME BEFORE INCOME TAXES

 

 

2,074

 

 

 

875

 

 

 

1

 

 

 

(2,076

)

 

 

874

 

Provision for income taxes

 

 

 

 

 

(1,197

)

 

 

(3

)

 

 

 

 

 

(1,200

)

NET INCOME

 

$

2,074

 

 

$

2,072

 

 

$

4

 

 

$

(2,076

)

 

$

2,074

 

COMPREHENSIVE INCOME

 

$

2,051

 

 

$

2,069

 

 

$

107

 

 

$

(2,076

)

 

$

2,151

 

- 21 -


 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended February 28, 2017

 

 

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

REVENUES

 

$

 

 

$

11,275

 

 

$

3,794

 

 

$

(72

)

 

$

14,997

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

29

 

 

 

4,210

 

 

 

1,156

 

 

 

 

 

 

5,395

 

Purchased transportation

 

 

 

 

 

2,219

 

 

 

1,306

 

 

 

(27

)

 

 

3,498

 

Rentals and landing fees

 

 

1

 

 

 

657

 

 

 

177

 

 

 

(1

)

 

 

834

 

Depreciation and amortization

 

 

1

 

 

 

649

 

 

 

112

 

 

 

 

 

 

762

 

Fuel

 

 

 

 

 

657

 

 

 

78

 

 

 

 

 

 

735

 

Maintenance and repairs

 

 

1

 

 

 

514

 

 

 

73

 

 

 

 

 

 

588

 

Intercompany charges, net

 

 

(87

)

 

 

(33

)

 

 

120

 

 

 

 

 

 

 

Other

 

 

55

 

 

 

1,428

 

 

 

721

 

 

 

(44

)

 

 

2,160

 

 

 

 

 

 

 

10,301

 

 

 

3,743

 

 

 

(72

)

 

 

13,972

 

OPERATING INCOME

 

 

 

 

 

974

 

 

 

51

 

 

 

 

 

 

1,025

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

 

562

 

 

 

(41

)

 

 

 

 

 

(521

)

 

 

 

Interest, net

 

 

(129

)

 

 

6

 

 

 

1

 

 

 

 

 

 

(122

)

Intercompany charges, net

 

 

130

 

 

 

(79

)

 

 

(51

)

 

 

 

 

 

 

Other, net

 

 

(1

)

 

 

(118

)

 

 

115

 

 

 

 

 

 

(4

)

INCOME BEFORE INCOME TAXES

 

 

562

 

 

 

742

 

 

 

116

 

 

 

(521

)

 

 

899

 

Provision for income taxes

 

 

 

 

 

280

 

 

 

57

 

 

 

 

 

 

337

 

NET INCOME

 

$

562

 

 

$

462

 

 

$

59

 

 

$

(521

)

 

$

562

 

COMPREHENSIVE INCOME

 

$

543

 

 

$

444

 

 

$

187

 

 

$

(521

)

 

$

653

 

 


- 22 -


 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Nine Months Ended February 28, 2018

 

 

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

REVENUES

 

$

 

 

$

36,044

 

 

$

12,445

 

 

$

(353

)

 

$

48,136

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

112

 

 

 

13,289

 

 

 

3,840

 

 

 

 

 

 

17,241

 

Purchased transportation

 

 

 

 

 

6,836

 

 

 

4,600

 

 

 

(216

)

 

 

11,220

 

Rentals and landing fees

 

 

4

 

 

 

1,951

 

 

 

577

 

 

 

(6

)

 

 

2,526

 

Depreciation and amortization

 

 

1

 

 

 

1,958

 

 

 

334

 

 

 

 

 

 

2,293

 

Fuel

 

 

 

 

 

2,220

 

 

 

215

 

 

 

 

 

 

2,435

 

Maintenance and repairs

 

 

1

 

 

 

1,729

 

 

 

238

 

 

 

 

 

 

1,968

 

Intercompany charges, net

 

 

(325

)

 

 

298

 

 

 

27

 

 

 

 

 

 

 

Other

 

 

207

 

 

 

4,664

 

 

 

2,333

 

 

 

(131

)

 

 

7,073

 

 

 

 

 

 

 

32,945

 

 

 

12,164

 

 

 

(353

)

 

 

44,756

 

OPERATING INCOME

 

 

 

 

 

3,099

 

 

 

281

 

 

 

 

 

 

3,380

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

 

3,445

 

 

 

39

 

 

 

 

 

 

(3,484

)

 

 

 

Interest, net

 

 

(396

)

 

 

35

 

 

 

(2

)

 

 

 

 

 

(363

)

Intercompany charges, net

 

 

403

 

 

 

(220

)

 

 

(183

)

 

 

 

 

 

 

Other, net

 

 

(7

)

 

 

88

 

 

 

(103

)

 

 

 

 

 

(22

)

INCOME BEFORE INCOME TAXES

 

 

3,445

 

 

 

3,041

 

 

 

(7

)

 

 

(3,484

)

 

 

2,995

 

Provision for income taxes

 

 

 

 

 

(573

)

 

 

123

 

 

 

 

 

 

(450

)

NET INCOME

 

$

3,445

 

 

$

3,614

 

 

$

(130

)

 

$

(3,484

)

 

$

3,445

 

COMPREHENSIVE INCOME

 

$

3,385

 

 

$

3,605

 

 

$

(3

)

 

$

(3,484

)

 

$

3,503

 

 

 

- 23 -


 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Nine Months Ended February 28, 2017

 

 

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

REVENUES

 

$

 

 

$

33,175

 

 

$

11,628

 

 

$

(212

)

 

$

44,591

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

94

 

 

 

12,477

 

 

 

3,488

 

 

 

 

 

 

16,059

 

Purchased transportation

 

 

 

 

 

6,210

 

 

 

4,040

 

 

 

(81

)

 

 

10,169

 

Rentals and landing fees

 

 

4

 

 

 

1,902

 

 

 

524

 

 

 

(4

)

 

 

2,426

 

Depreciation and amortization

 

 

1

 

 

 

1,894

 

 

 

346

 

 

 

 

 

 

2,241

 

Fuel

 

 

 

 

 

1,819

 

 

 

224

 

 

 

 

 

 

2,043

 

Maintenance and repairs

 

 

1

 

 

 

1,544

 

 

 

220

 

 

 

 

 

 

1,765

 

Intercompany charges, net

 

 

(266

)

 

 

67

 

 

 

199

 

 

 

 

 

 

 

Other

 

 

166

 

 

 

4,230

 

 

 

2,163

 

 

 

(127

)

 

 

6,432

 

 

 

 

 

 

 

30,143

 

 

 

11,204

 

 

 

(212

)

 

 

41,135

 

OPERATING INCOME

 

 

 

 

 

3,032

 

 

 

424

 

 

 

 

 

 

3,456

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

 

1,977

 

 

 

69

 

 

 

 

 

 

(2,046

)

 

 

 

Interest, net

 

 

(374

)

 

 

19

 

 

 

1

 

 

 

 

 

 

(354

)

Intercompany charges, net

 

 

376

 

 

 

(224

)

 

 

(152

)

 

 

 

 

 

 

Other, net

 

 

(2

)

 

 

(128

)

 

 

147

 

 

 

 

 

 

17

 

INCOME BEFORE INCOME TAXES

 

 

1,977

 

 

 

2,768

 

 

 

420

 

 

 

(2,046

)

 

 

3,119

 

Provision for income taxes

 

 

 

 

 

951

 

 

 

191

 

 

 

 

 

 

1,142

 

NET INCOME

 

$

1,977

 

 

$

1,817

 

 

$

229

 

 

$

(2,046

)

 

$

1,977

 

COMPREHENSIVE INCOME

 

$

1,921

 

 

$

1,781

 

 

$

156

 

 

$

(2,046

)

 

$

1,812

 

 

- 24 -


 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 28, 2018

 

 

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

CASH PROVIDED BY (USED IN) OPERATING

   ACTIVITIES

 

$

(3,537

)

 

$

4,664

 

 

$

25

 

 

$

10

 

 

$

1,162

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

(3,746

)

 

 

(248

)

 

 

 

 

 

(3,994

)

Business acquisitions, net of cash acquired

 

 

 

 

 

(44

)

 

 

 

 

 

 

 

 

(44

)

Proceeds from asset dispositions and other

 

 

(5

)

 

 

23

 

 

 

3

 

 

 

 

 

 

21

 

CASH USED IN INVESTING

   ACTIVITIES

 

 

(5

)

 

 

(3,767

)

 

 

(245

)

 

 

 

 

 

(4,017

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings, net

 

 

797

 

 

 

 

 

 

 

 

 

 

 

 

797

 

Net transfers from (to) Parent

 

 

807

 

 

 

(895

)

 

 

88

 

 

 

 

 

 

 

Payment on loan between subsidiaries

 

 

210

 

 

 

 

 

 

(210

)

 

 

 

 

 

 

Proceeds from debt issuances

 

 

1,481

 

 

 

 

 

 

 

 

 

 

 

 

1,481

 

Principal payments on debt

 

 

 

 

 

(17

)

 

 

(14

)

 

 

 

 

 

(31

)

Proceeds from stock issuances

 

 

284

 

 

 

 

 

 

 

 

 

 

 

 

284

 

Dividends paid

 

 

(402

)

 

 

 

 

 

 

 

 

 

 

 

(402

)

Purchase of treasury stock

 

 

(558

)

 

 

 

 

 

 

 

 

 

 

 

(558

)

Other, net

 

 

2

 

 

 

4

 

 

 

 

 

 

 

 

 

6

 

CASH (USED IN) PROVIDED BY FINANCING

   ACTIVITIES

 

 

2,621

 

 

 

(908

)

 

 

(136

)

 

 

 

 

 

1,577

 

Effect of exchange rate changes on cash

 

 

(6

)

 

 

61

 

 

 

43

 

 

 

 

 

 

98

 

Net (decrease) increase in cash and cash equivalents

 

 

(927

)

 

 

50

 

 

 

(313

)

 

 

10

 

 

 

(1,180

)

Cash and cash equivalents at beginning of period

 

 

1,884

 

 

 

325

 

 

 

1,807

 

 

 

(47

)

 

 

3,969

 

Cash and cash equivalents at end of period

 

$

957

 

 

$

375

 

 

$

1,494

 

 

$

(37

)

 

$

2,789

 

- 25 -


 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 28, 2017

 

 

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-guarantor

Subsidiaries

 

 

Eliminations

 

 

Consolidated

 

CASH PROVIDED BY (USED IN) OPERATING

   ACTIVITIES

 

$

(1,497

)

 

$

3,615

 

 

$

529

 

 

$

(2

)

 

$

2,645

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

(3,456

)

 

 

(334

)

 

 

 

 

 

(3,790

)

Proceeds from asset dispositions and other

 

 

85

 

 

 

16

 

 

 

22

 

 

 

 

 

 

123

 

CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

 

 

85

 

 

 

(3,440

)

 

 

(312

)

 

 

 

 

 

(3,667

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net transfers from (to) Parent

 

 

117

 

 

 

(148

)

 

 

31

 

 

 

 

 

 

 

Payment on loan between subsidiaries

 

 

36

 

 

 

(15

)

 

 

(21

)

 

 

 

 

 

 

Intercompany dividends

 

 

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Principal payments on debt

 

 

 

 

 

(33

)

 

 

(16

)

 

 

 

 

 

(49

)

Proceeds from debt issuances

 

 

1,190

 

 

 

 

 

 

 

 

 

 

 

 

1,190

 

Proceeds from stock issuances

 

 

265

 

 

 

 

 

 

 

 

 

 

 

 

265

 

Dividends paid

 

 

(319

)

 

 

 

 

 

 

 

 

 

 

 

(319

)

Purchase of treasury stock

 

 

(358

)

 

 

 

 

 

 

 

 

 

 

 

(358

)

Other, net

 

 

(8

)

 

 

(12

)

 

 

22

 

 

 

 

 

 

2

 

CASH (USED IN) PROVIDED BY FINANCING

   ACTIVITIES

 

 

923

 

 

 

(207

)

 

 

15

 

 

 

 

 

 

731

 

Effect of exchange rate changes on cash

 

 

(10

)

 

 

7

 

 

 

(67

)

 

 

 

 

 

(70

)

Net (decrease) increase in cash and cash equivalents

 

 

(499

)

 

 

(25

)

 

 

165

 

 

 

(2

)

 

 

(361

)

Cash and cash equivalents at beginning of period

 

 

1,974

 

 

 

326

 

 

 

1,277

 

 

 

(43

)

 

 

3,534

 

Cash and cash equivalents at end of period

 

$

1,475

 

 

$

301

 

 

$

1,442

 

 

$

(45

)

 

$

3,173

 

 

- 26 -


 

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of February 28, 2018, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended February 28, 2018 and February 28, 2017 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 2018 and February 28, 2017. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2017, and the related consolidated statements of income, comprehensive income, changes in stockholders’ investment, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated July 17, 2017. In our opinion, the accompanying condensed consolidated balance sheet of FedEx Corporation as of May 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Memphis, Tennessee

March 21, 2018

- 27 -


 

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

GENERAL

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (“FedEx”). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2017 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.

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 Federal Express Corporation (“FedEx Express”), including TNT Express B.V. (“TNT Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments.

As noted in our Annual Report, beginning in the first quarter of 2018, we began to report TNT Express as part of the FedEx Express segment. Prior year amounts have been revised to conform to the current year presentation. See Note 7 of the accompanying unaudited condensed consolidated financial statements for further discussion.

Our FedEx Services segment provides sales, marketing, information technology, communications, customer service, technical support, billing and collection services and certain back-office support functions that support our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. (“FedEx Office”). See “Reportable Segments” for further discussion. Additional information on our businesses can also be found in our Annual Report.

The key indicators necessary to understand our operating results include:

the overall customer demand for our various services based on macro-economic factors and the global economy;

the volumes of transportation services provided through our networks, primarily measured by our average daily volume and shipment weight and size;

the mix of services purchased by our customers;

the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per shipment or hundredweight for LTL freight shipments);

our ability to manage our network capacity and cost structure (capital expenditures and operating expenses) to match shifting volume levels; and

the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges.

The majority of our operating expenses are directly impacted by revenue and volume levels. Accordingly, we expect these operating expenses to fluctuate on a year-over-year basis consistent with the change in revenues and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends impacting expenses other than changes in revenues and volume. The line item “Other operating expenses” predominantly includes costs associated with outside service contracts (such as facility services and cargo handling, temporary labor and security), insurance, professional fees, taxes and licenses and uniforms.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2018 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, the FedEx Express segment, the FedEx Ground segment and the FedEx Freight segment.

- 28 -


 

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following tables compare summary operating results and changes in revenue and operating income (dollars in millions, except per share amounts) for the periods ended February 28:

 

 

 

Three Months Ended

 

 

Percent

 

 

 

Nine Months Ended

 

 

Percent

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

2018

 

 

2017

 

 

Change

 

 

Revenues

 

$

16,526

 

 

$

14,997

 

 

 

10

 

 

 

$

48,136

 

 

$

44,591

 

 

 

8

 

 

Operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment

 

 

424

 

 

 

557

 

 

 

(24

)

 

 

 

1,574

 

 

 

1,873

 

 

 

(16

)

 

FedEx Ground segment

 

 

634

 

 

 

515

 

 

 

23

 

 

 

 

1,781

 

 

 

1,590

 

 

 

12

 

 

FedEx Freight segment

 

 

55

 

 

 

41

 

 

 

34

 

 

 

 

349

 

 

 

264

 

 

 

32

 

 

Eliminations, corporate and other

 

 

(112

)

 

 

(88

)

 

 

(27

)

 

 

 

(324

)

 

 

(271

)

 

 

(20

)

 

Consolidated operating income

 

 

1,001

 

 

 

1,025

 

 

 

(2

)

 

 

 

3,380

 

 

 

3,456

 

 

 

(2

)

 

Operating margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Express segment

 

 

4.5

%

 

 

6.5

%

 

 

(200

)

bp

 

 

5.7

%

 

 

7.3

%

 

 

(160

)

bp

FedEx Ground segment

 

 

12.1

%

 

 

11.0

%

 

 

110

 

bp

 

 

12.0

%

 

 

11.9

%

 

 

10

 

bp

FedEx Freight segment

 

 

3.2

%

 

 

2.7

%

 

 

50

 

bp

 

 

6.7

%

 

 

5.6

%

 

 

110

 

bp

Consolidated operating margin

 

 

6.1

%

 

 

6.8

%

 

 

(70

)

bp

 

 

7.0

%

 

 

7.8

%

 

 

(80

)

bp

Consolidated net income

 

$

2,074

 

 

$

562

 

 

 

269

 

 

 

$

3,445

 

 

$

1,977

 

 

 

74

 

 

Diluted earnings per share

 

$

7.59

 

 

$

2.07

 

 

 

267

 

 

 

$

12.63

 

 

$

7.31

 

 

 

73

 

 

 

 

 

Change in Revenue

 

 

Change in Operating Income

 

 

 

Three Months

Ended

 

 

Nine Months

Ended

 

 

Three Months

Ended

 

 

Nine Months

Ended

 

FedEx Express segment

 

$

801

 

 

$

1,705

 

 

$

(133

)

 

$

(299

)

FedEx Ground segment

 

 

534

 

 

 

1,393

 

 

 

119

 

 

 

191

 

FedEx Freight segment

 

 

202

 

 

 

461

 

 

 

14

 

 

 

85

 

FedEx Services segment

 

 

8

 

 

 

15

 

 

 

 

 

 

 

Eliminations, corporate and other

 

 

(16

)

 

 

(29

)

 

 

(24

)

 

 

(53

)

 

 

$

1,529

 

 

$

3,545

 

 

$

(24

)

 

$

(76

)

 

Overview

Our operating income declined slightly in the third quarter of 2018 primarily due to significantly higher incentive compensation accruals (described below), higher peak-related costs at FedEx Express, increased TNT Express integration expenses and the negative impacts of inclement winter weather at FedEx Express. These factors were partially offset by increased yields and the favorable net impact of fuel at all of our transportation segments and volume growth at FedEx Ground and FedEx Freight. The NotPetya cyberattack (described below) also drove lower results in the nine months of 2018.

Net income for the third quarter and nine months of 2018 was positively impacted by a provisional benefit of $1.15 billion ($4.21 per diluted share) attributable to the enactment of the Tax Cuts and Jobs Act (“TCJA”), specifically related to the remeasurement of our net U.S. deferred tax liability. In addition, we recognized a one-time benefit of $204 million ($0.75 per diluted share) from a $1.5 billion contribution to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) in February 2018 and a benefit of $165 million ($0.60 per diluted share) related to a lower statutory income tax rate on fiscal 2018 year- to-date earnings. See the “Income Taxes” section below for further information.  

During the third quarter of 2018 we announced more than $3.2 billion in wage increases, bonuses, pension funding and expanded U.S. capital investment following the passage of the TCJA. In connection with this, during the third quarter of 2018 we made a pension funding contribution (noted above) and funded increases in performance-based incentive compensation plans. The incentive compensation adjustments made in the third quarter of 2018 include the year-to-date impact of the announced changes. Expenses related to wage increases will start to be recognized during the fourth quarter of 2018.  

We incurred TNT Express integration expenses totaling an aggregate of $106 million ($92 million, net of tax, or $0.34 per diluted share) in the third quarter of 2018, a $28 million increase from the third quarter of 2017. TNT Express integration expenses were an aggregate $341 million ($265 million, net of tax, or $0.97 per diluted share) in the nine months of 2018, a $137 million increase from

- 29 -


 

the nine months of 2017. The integration expenses are incremental costs directly associated with the integration of TNT Express, including professional and legal fees, salaries and wages, advertising expenses and travel, and include any restructuring charges at TNT Express. Internal salaries and wages are included only to the extent the individuals are assigned full time to integration activities. These costs were incurred at FedEx Express and FedEx Corporation. The identification of these costs as integration-related expenditures is subject to our disclosure controls and procedures.

As previously announced, on June 27, 2017, the worldwide operations of TNT Express were significantly affected by the cyberattack known as NotPetya. Immediately following the attack, contingency plans were implemented to recover TNT Express operations and communications systems, and substantially all TNT Express services were fully restored during the first quarter of 2018. As of the second quarter of 2018, all of TNT Express’s critical operational systems were fully restored, critical business data was recovered and shipping services and solutions were back in place.

Our results for the first half of 2018 were negatively impacted by the NotPetya cyberattack by an estimated $400 million ($1.14 per diluted share for the nine months of 2018), primarily from loss of revenue due to decreased shipments in the TNT Express network, as well as incremental costs to restore information technology systems. In addition, we continued to experience lingering revenue impacts from the NotPetya cyberattack in the third quarter of 2018 in the form of lower volumes at TNT Express.

- 30 -


 

The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands) over the five most recent quarters:

 

(1)

International domestic average daily package volume represents our international intra-country operations.

- 31 -


 

The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends over the five most recent quarters:

 

(1)

International domestic revenue per package represents our international intra-country operations.

Revenue

Revenues increased 10% in the third quarter and 8% in the nine months of 2018 due to improved performance at all of our transportation segments. Revenues at FedEx Express increased 9% in the third quarter and 7% in the nine months of 2018 due to improved base yields and favorable exchange rates, despite impacts from the NotPetya cyberattack discussed above. At FedEx Ground, revenues increased 11% in the third quarter and 10% in the nine months of 2018 due to volume growth and increased yields. FedEx Freight revenues increased 14% in the third quarter and 10% in the nine months of 2018 due to higher LTL revenue per shipment and average daily LTL shipments. Higher fuel surcharges had a positive impact on revenues at all of our transportation segments in the third quarter and nine months of 2018.

- 32 -


 

Operating Expenses

The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended February 28:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

5,981

 

 

$

5,395

 

 

$

17,241

 

 

$

16,059

 

Purchased transportation

 

 

3,935

 

 

 

3,498

 

 

 

11,220

 

 

 

10,169

 

Rentals and landing fees

 

 

873

 

 

 

834

 

 

 

2,526

 

 

 

2,426

 

Depreciation and amortization

 

 

786

 

 

 

762

 

 

 

2,293

 

 

 

2,241

 

Fuel

 

 

914

 

 

 

735

 

 

 

2,435

 

 

 

2,043

 

Maintenance and repairs

 

 

628

 

 

 

588

 

 

 

1,968

 

 

 

1,765

 

Other

 

 

2,408

 

 

 

2,160

 

 

 

7,073

 

 

 

6,432

 

Total operating expenses

 

$

15,525

 

 

$

13,972

 

 

$

44,756

 

 

$

41,135

 

Operating income

 

$

1,001

 

 

$

1,025

 

 

$

3,380

 

 

$

3,456

 

 

 

 

Percent of Revenue

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

36.2

 

%

 

 

36.0

 

%

 

 

35.8

 

%

 

 

36.0

 

%

Purchased transportation

 

 

23.8

 

 

 

 

23.3

 

 

 

 

23.3

 

 

 

 

22.8

 

 

Rentals and landing fees

 

 

5.3

 

 

 

 

5.6

 

 

 

 

5.2

 

 

 

 

5.4

 

 

Depreciation and amortization

 

 

4.7

 

 

 

 

5.1

 

 

 

 

4.8

 

 

 

 

5.0

 

 

Fuel

 

 

5.5

 

 

 

 

4.9

 

 

 

 

5.1

 

 

 

 

4.6

 

 

Maintenance and repairs

 

 

3.8

 

 

 

 

3.9

 

 

 

 

4.1

 

 

 

 

4.0

 

 

Other

 

 

14.6

 

 

 

 

14.4

 

 

 

 

14.7

 

 

 

 

14.4

 

 

Total operating expenses

 

 

93.9

 

 

 

 

93.2

 

 

 

 

93.0

 

 

 

 

92.2

 

 

Operating margin

 

 

6.1

 

%

 

 

6.8

 

%

 

 

7.0

 

%

 

 

7.8

 

%

 

Operating margin declined in the third quarter of 2018 primarily as a result of significantly higher incentive compensation accruals, higher peak-related costs at FedEx Express, the negative impacts of inclement winter weather at FedEx Express and increased TNT Express integration expenses. The impacts of the NotPetya cyberattack discussed above also drove the operating margin decline in the nine months of 2018.

Salaries and employee benefits expense increased 11% in the third quarter and 7% in the nine months of 2018 primarily due to merit increases and significantly higher incentive compensation accruals at all of our transportation segments, unfavorable exchange rates at FedEx Express and higher staffing at FedEx Ground and FedEx Freight. Purchased transportation costs increased 12% in the third quarter and 10% in the nine months of 2018 primarily due to higher volumes at all of our transportation segments, unfavorable exchange rates at FedEx Express and increased rates and higher fuel expenses at FedEx Ground. Other expenses increased 11% in the third quarter of 2018 primarily due to unfavorable exchange rates, increased outside service contracts at FedEx Express and TNT Express integration expenses. Other expenses increased 10% in the nine months of 2018 due to these same factors as well as higher self-insurance reserves at FedEx Ground. Maintenance and repairs expense increased 12% in the nine months of 2018 primarily due to the timing of aircraft engine maintenance events at FedEx Express.

- 33 -


 

Fuel

The following graph for our transportation segments shows our average cost of jet and vehicle fuel per gallon for the five most recent quarters:

 

 

Fuel expense increased 24% in the third quarter and 19% in the nine months of 2018 primarily due to increased fuel prices. Fuel prices represent only one component of the two factors we consider meaningful in understanding the impact of fuel on our business. Consideration must also be given to the fuel surcharge revenue we collect. Accordingly, we believe discussion of the net impact of fuel on our results, which is a comparison of the year-over-year change in these two factors, is important to understand the impact of fuel on our business. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative weighted-average fuel surcharge percentages in effect for the third quarter of 2018 and 2017 in the accompanying discussions of each of our transportation segments.

Effective February 6, 2017, FedEx Express and FedEx Ground fuel surcharges are adjusted on a weekly basis. The fuel surcharge is based on a weekly fuel price from two weeks prior to the week in which it is assessed. The index used to determine the fuel surcharge percentage for our FedEx Freight business continues to adjust weekly. Some FedEx Express international fuel surcharges continue to incorporate a timing lag of approximately six to eight weeks.

Prior to February 6, 2017, our fuel surcharges for the FedEx Express and FedEx Ground businesses incorporated a timing lag of approximately six to eight weeks before they were adjusted for changes in fuel prices. For example, the fuel surcharge index in effect at FedEx Express in January 2017 was set based on November 2016 fuel prices.

Beyond these factors, the manner in which we purchase fuel also influences the net impact of fuel on our results. For example, our contracts for jet fuel purchases at FedEx Express are tied to various indices, including the U.S. Gulf Coast index. While many of these indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for jet fuel. Furthermore, under these contractual arrangements, approximately 70% of our jet fuel is purchased based on the index price for the preceding week, with the remainder of our purchases tied to the index price for the preceding month, rather than based on daily spot rates. These contractual provisions mitigate the impact of rapidly changing daily spot rates on our jet fuel purchases.

Because of the factors described above, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term.

The net impact of fuel had a significant benefit to operating income in the third quarter and nine months of 2018 as higher fuel surcharges more than offset increased fuel prices.

The net impact of fuel on our operating results does not consider the effects that fuel surcharge levels may have on our business, including changes in demand and shifts in the mix of services purchased by our customers. While fluctuations in fuel surcharge percentages can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges we obtain for these services and the level of pricing discounts offered.

- 34 -


 

Income Taxes

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

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

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

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

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2018

 

2017 Effective Tax Rate

 

 

37.5

%

 

 

36.6

%

Remeasurement of net U.S. deferred tax liability

 

 

(131.5

)

 

 

(38.4

)

Effect of February 2018 pension contribution (a)

 

 

(23.3

)

 

 

(6.8

)

Lower statutory tax rate

 

 

(18.9

)

 

 

(5.5

)

Transition tax

 

 

(4.1

)

 

 

(1.2

)

Other (b)

 

 

3.0

 

 

 

0.3

 

2018 Effective Tax Rate

 

 

(137.3

)%

 

 

(15.0

)%

 

(a)

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

 

(b)

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

We are subject to taxation in the United States and various U.S. state, local and foreign jurisdictions. We are currently under examination by the Internal Revenue Service (“IRS”) for the 2014 and 2015 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next twelve months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements. As of February 28, 2018, there were no material changes to our liabilities for unrecognized tax benefits subsequent to May 31, 2017.

See Note 5 of the accompanying unaudited condensed consolidated financial statements for further discussion related to income taxes.

Business Acquisition

On October 13, 2017, FedEx acquired Northwest Research, Inc., a leader in inventory research and management, for $50 million in cash from operations. The majority of the purchase price was allocated to property and equipment. The financial results of this acquired business are included in the FedEx Services segment from the date of acquisition and were not material to our results of operations.

- 35 -


 

Outlook

We expect yield and volume growth at all of our transportation segments to support revenue and earnings growth in the fourth quarter and full year of 2018, prior to any mark-to-market benefit plans adjustment. We expect to continue implementing various cost management plans at FedEx Ground for the remainder of 2018. Our fourth quarter and full-year 2018 results will be negatively affected by our TNT Express integration activities as well as increased compensation for certain of our hourly team members and higher incentive compensation for our salaried personnel. Our expectations for earnings growth in 2018 assumes moderate economic growth.

During the remainder of 2018, we will continue to execute our TNT Express integration plans. We expect the aggregate integration program expense, including restructuring charges at TNT Express, over the four years to be approximately $1.4 billion and expect to incur approximately $450 million of these costs during 2018. The timing and amount of integration expenses and capital investments in any future period may change as we implement our plans.

The integration process is complex as it spans over 200 countries and involves combining our pickup and delivery operations at a local level, our global and regional air and ground networks, and our extensive operations, customs clearance, sales and back-office information technology systems. In addition, a portion of our integration expenses relate to the ongoing establishment of our new international corporate structure which will leverage synergies to maximize our international profitability, ultimately benefiting our effective tax rate. The integration is expected to be substantially complete by the end of 2020. We are targeting operating income improvement at the FedEx Express segment of $1.2 billion to $1.5 billion in 2020 from 2017 assuming moderate economic growth and current accounting rules and tax laws. This target includes TNT Express synergies as well as base business and other operational improvements across the global FedEx Express network. Although we are targeting to complete our integration program by the end of 2020, we are investing in opportunities to improve the capabilities of the integrated business for future profitability, including periods beyond 2020.

As noted above, we recorded a provisional reduction to our net U.S. deferred tax liability during the third quarter of 2018 in connection with the recently enacted TCJA. The final impact of the TCJA on our reported results for fiscal year 2018 and beyond may differ from the estimates recorded, possibly materially, due to changes in interpretations and assumptions we have made, future guidance that may be issued, and other changes that may occur as we complete our analysis of the TCJA.  

Other Outlook Matters. For details on key 2018 capital projects, refer to the “Liquidity Outlook” section of this MD&A.

FedEx Ground previously announced plans to implement the Independent Service Provider (“ISP”) model throughout its entire U.S. pickup and delivery network. The transition to the ISP model is being accomplished on a district-by-district basis and is expected to be completed in the second half of calendar 2020. As of February 28, 2018, 64% of FedEx Ground volume was being delivered by small businesses operating under the ISP model. The costs associated with these transitions will be recognized in the periods incurred and are not expected to be material to any future quarter.

See “Forward-Looking Statements” and  Part II, Item 1A “Risk Factors” for a discussion of these and other potential risks and uncertainties that could materially affect our future performance.

RECENT ACCOUNTING GUIDANCE

See Note 1 of the accompanying unaudited condensed consolidated financial statements for a discussion of recent accounting guidance.

 

- 36 -


 

REPORTABLE SEGMENTS

FedEx Express, FedEx Ground and FedEx Freight represent our major service lines and, along with FedEx Services, form the core of our reportable segments. Our reportable segments include the following businesses:

 

FedEx Express Segment

FedEx Express (express transportation)

 

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

 

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

 

 

FedEx Ground Segment

FedEx Ground (small-package ground delivery)

 

FedEx Supply Chain (third-party logistics)

 

 

FedEx Freight Segment

FedEx Freight (LTL freight transportation)

 

FedEx Custom Critical (time-critical transportation)

 

 

FedEx Services Segment

FedEx Services (sales, marketing, information technology, communications, customer service, technical support, billing and collection services and back-office functions)

 

FedEx Office (document and business services and package acceptance)

 

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

FEDEX SERVICES SEGMENT

The line item “Intercompany charges” on the accompanying unaudited condensed consolidated financial statements of our transportation segments reflects the allocations from the FedEx Services segment to the respective transportation segments. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided.

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. We believe these allocations approximate the net cost of providing these functions. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.

ELIMINATIONS, CORPORATE AND OTHER

Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues and expenses are eliminated in our consolidated results and are not separately identified in the following segment information because the amounts are not material.

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

 

- 37 -


 

FEDEX EXPRESS SEGMENT

FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority, deferred or economy services, which provide delivery on a time-definite or day-definite basis. As discussed in our Annual Report, we are reporting TNT Express as part of the FedEx Express segment. Prior year amounts have been revised to conform to the current year presentation, including revised statistical information. The following tables compare revenues, operating expenses, operating income (dollars in millions), operating margin and operating expenses as a percent of revenue for the periods ended February 28:

 

 

 

Three Months Ended

 

 

Percent

 

 

 

Nine Months Ended

 

 

Percent

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

2018

 

 

2017

 

 

Change

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Package:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. overnight box

 

$

1,836

 

 

$

1,742

 

 

 

5

 

 

 

$

5,373

 

 

$

5,173

 

 

 

4

 

 

U.S. overnight envelope

 

 

435

 

 

 

422

 

 

 

3

 

 

 

 

1,317

 

 

 

1,287

 

 

 

2

 

 

U.S. deferred

 

 

996

 

 

 

954

 

 

 

4

 

 

 

 

2,796

 

 

 

2,598

 

 

 

8

 

 

Total U.S. domestic package revenue

 

 

3,267

 

 

 

3,118

 

 

 

5

 

 

 

 

9,486

 

 

 

9,058

 

 

 

5

 

 

International priority

 

 

1,813

 

 

 

1,667

 

 

 

9

 

 

 

 

5,393

 

 

 

5,144

 

 

 

5

 

 

International economy

 

 

793

 

 

 

692

 

 

 

15

 

 

 

 

2,378

 

 

 

2,101

 

 

 

13

 

 

Total international export package revenue

 

 

2,606

 

 

 

2,359

 

 

 

10

 

 

 

 

7,771

 

 

 

7,245

 

 

 

7

 

 

International domestic(1)

 

 

1,128

 

 

 

1,033

 

 

 

9

 

 

 

 

3,386

 

 

 

3,136

 

 

 

8

 

 

Total package revenue

 

 

7,001

 

 

 

6,510

 

 

 

8

 

 

 

 

20,643

 

 

 

19,439

 

 

 

6

 

 

Freight:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

739

 

 

 

667

 

 

 

11

 

 

 

 

2,040

 

 

 

1,895

 

 

 

8

 

 

International priority

 

 

551

 

 

 

471

 

 

 

17

 

 

 

 

1,581

 

 

 

1,396

 

 

 

13

 

 

International economy

 

 

492

 

 

 

437

 

 

 

13

 

 

 

 

1,354

 

 

 

1,265

 

 

 

7

 

 

International airfreight

 

 

86

 

 

 

84

 

 

 

2

 

 

 

 

259

 

 

 

270

 

 

 

(4

)

 

Total freight revenue

 

 

1,868

 

 

 

1,659

 

 

 

13

 

 

 

 

5,234

 

 

 

4,826

 

 

 

8

 

 

Other(2)

 

 

501

 

 

 

400

 

 

 

25

 

 

 

 

1,499

 

 

 

1,406

 

 

 

7

 

 

Total revenues

 

 

9,370

 

 

 

8,569

 

 

 

9

 

 

 

 

27,376

 

 

 

25,671

 

 

 

7

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,484

 

 

 

3,170

 

 

 

10

 

 

 

 

10,001

 

 

 

9,393

 

 

 

6

 

 

Purchased transportation

 

 

1,478

 

 

 

1,286

 

 

 

15

 

 

 

 

4,346

 

 

 

3,963

 

 

 

10

 

 

Rentals and landing fees

 

 

532

 

 

 

511

 

 

 

4

 

 

 

 

1,520

 

 

 

1,483

 

 

 

2

 

 

Depreciation and amortization

 

 

425

 

 

 

420

 

 

 

1

 

 

 

 

1,254

 

 

 

1,252

 

 

 

 

 

Fuel

 

 

782

 

 

 

633

 

 

 

24

 

 

 

 

2,088

 

 

 

1,753

 

 

 

19

 

 

Maintenance and repairs

 

 

420

 

 

 

386

 

 

 

9

 

 

 

 

1,327

 

 

 

1,158

 

 

 

15

 

 

Intercompany charges

 

 

528

 

 

 

473

 

 

 

12

 

 

 

 

1,521

 

 

 

1,403

 

 

 

8

 

 

Other

 

 

1,297

 

 

 

1,133

 

 

 

14

 

 

 

 

3,745

 

 

 

3,393

 

 

 

10

 

 

Total operating expenses

 

 

8,946

 

 

 

8,012

 

 

 

12

 

 

 

 

25,802

 

 

 

23,798

 

 

 

8

 

 

Operating income

 

$

424

 

 

$

557

 

 

 

(24

)

 

 

$

1,574

 

 

$

1,873

 

 

 

(16

)

 

Operating margin

 

 

4.5

%

 

 

6.5

%

 

 

(200

)

bp

 

 

5.7

%

 

 

7.3

%

 

 

(160

)

bp

(1)

International domestic revenues represent our international intra-country operations.

(2)

Includes FedEx Trade Networks.

 

- 38 -


 

 

 

Percent of Revenue

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

37.2

 

%

 

 

37.0

 

%

 

 

36.5

 

%

 

 

36.6

 

%

Purchased transportation

 

 

15.8

 

 

 

 

15.0

 

 

 

 

15.9

 

 

 

 

15.4

 

 

Rentals and landing fees

 

 

5.7

 

 

 

 

6.0

 

 

 

 

5.6

 

 

 

 

5.8

 

 

Depreciation and amortization

 

 

4.5

 

 

 

 

4.9

 

 

 

 

4.6

 

 

 

 

4.9

 

 

Fuel

 

 

8.4

 

 

 

 

7.4

 

 

 

 

7.6

 

 

 

 

6.8

 

 

Maintenance and repairs

 

 

4.5

 

 

 

 

4.5

 

 

 

 

4.8

 

 

 

 

4.5

 

 

Intercompany charges

 

 

5.6

 

 

 

 

5.5

 

 

 

 

5.6

 

 

 

 

5.5

 

 

Other

 

 

13.8

 

 

 

 

13.2

 

 

 

 

13.7

 

 

 

 

13.2

 

 

Total operating expenses

 

 

95.5

 

 

 

 

93.5

 

 

 

 

94.3

 

 

 

 

92.7

 

 

Operating margin

 

 

4.5

 

%

 

 

6.5

 

%

 

 

5.7

 

%

 

 

7.3

 

%

The following table compares selected statistics (in thousands, except yield amounts) for the periods ended February 28:

 

 

 

Three Months Ended

 

 

Percent

 

 

Nine Months Ended

 

 

Percent

 

 

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

 

Change

 

Package Statistics(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average daily package volume (ADV):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. overnight box

 

 

1,315

 

 

 

1,322

 

 

 

(1

)

 

 

1,249

 

 

 

1,286

 

 

 

(3

)

U.S. overnight envelope

 

 

541

 

 

 

549

 

 

 

(1

)

 

 

548

 

 

 

559

 

 

 

(2

)

U.S. deferred

 

 

1,026

 

 

 

1,025

 

 

 

 

 

 

946

 

 

 

904

 

 

 

5

 

Total U.S. domestic ADV

 

 

2,882

 

 

 

2,896

 

 

 

 

 

 

2,743

 

 

 

2,749

 

 

 

 

International priority

 

 

529

 

 

 

535

 

 

 

(1

)

 

 

525

 

 

 

522

 

 

 

1

 

International economy

 

 

266

 

 

 

253

 

 

 

5

 

 

 

265

 

 

 

250

 

 

 

6

 

Total international export ADV

 

 

795

 

 

 

788

 

 

 

1

 

 

 

790

 

 

 

772

 

 

 

2

 

International domestic(2)

 

 

2,445

 

 

 

2,471

 

 

 

(1

)

 

 

2,447

 

 

 

2,391

 

 

 

2

 

Total ADV

 

 

6,122

 

 

 

6,155

 

 

 

(1

)

 

 

5,980

 

 

 

5,912

 

 

 

1

 

Revenue per package (yield):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. overnight box

 

$

22.53

 

 

$

21.24

 

 

 

6

 

 

$

22.64

 

 

$

21.17

 

 

 

7

 

U.S. overnight envelope

 

 

12.97

 

 

 

12.41

 

 

 

5

 

 

 

12.64

 

 

 

12.12

 

 

 

4

 

U.S. deferred

 

 

15.66

 

 

 

15.00

 

 

 

4

 

 

 

15.56

 

 

 

15.13

 

 

 

3

 

U.S. domestic composite

 

 

18.29

 

 

 

17.36

 

 

 

5

 

 

 

18.20

 

 

 

17.34

 

 

 

5

 

International priority

 

 

55.26

 

 

 

50.28

 

 

 

10

 

 

 

54.06

 

 

 

51.82

 

 

 

4

 

International economy

 

 

48.01

 

 

 

44.05

 

 

 

9

 

 

 

47.24

 

 

 

44.24

 

 

 

7

 

International export composite

 

 

52.83

 

 

 

48.27

 

 

 

9

 

 

 

51.77

 

 

 

49.37

 

 

 

5

 

International domestic(2)

 

 

7.44

 

 

 

6.74

 

 

 

10

 

 

 

7.29

 

 

 

6.90

 

 

 

6

 

Composite package yield

 

 

18.45

 

 

 

17.06

 

 

 

8

 

 

 

18.17

 

 

 

17.31

 

 

 

5

 

Freight Statistics(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average daily freight pounds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

8,757

 

 

 

8,458

 

 

 

4

 

 

 

8,311

 

 

 

8,231

 

 

 

1

 

International priority

 

 

5,430

 

 

 

5,238

 

 

 

4

 

 

 

5,342

 

 

 

5,145

 

 

 

4

 

International economy

 

 

13,209

 

 

 

12,578

 

 

 

5

 

 

 

12,215

 

 

 

12,095

 

 

 

1

 

International airfreight

 

 

1,757

 

 

 

1,995

 

 

 

(12

)

 

 

1,850

 

 

 

1,941

 

 

 

(5

)

Total average daily freight pounds

 

 

29,153

 

 

 

28,269

 

 

 

3

 

 

 

27,718

 

 

 

27,412

 

 

 

1

 

Revenue per pound (yield):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

1.36

 

 

$

1.27

 

 

 

7

 

 

$

1.29

 

 

$

1.21

 

 

 

7

 

International priority

 

 

1.64

 

 

 

1.45

 

 

 

13

 

 

 

1.56

 

 

 

1.43

 

 

 

9

 

International economy

 

 

0.60

 

 

 

0.56

 

 

 

7

 

 

 

0.58

 

 

 

0.55

 

 

 

5

 

International airfreight

 

 

0.78

 

 

 

0.68

 

 

 

15

 

 

 

0.74

 

 

 

0.73

 

 

 

1

 

Composite freight yield

 

 

1.02

 

 

 

0.95

 

 

 

7

 

 

 

0.99

 

 

 

0.93

 

 

 

6

 

 

(1)

Package and freight statistics include only the operations of FedEx Express and TNT Express.

(2)

International domestic statistics represent our international intra-country operations.

- 39 -


 

FedEx Express Segment Revenues

FedEx Express segment revenues increased 9% in the third quarter and 7% in the nine months of 2018 primarily due to improved base yields, favorable exchange rates and higher fuel surcharges, despite impacts from the NotPetya cyberattack discussed above.

International export package yields increased 9% in the third quarter of 2018 due to higher fuel surcharges, favorable exchange rates and higher base rates. International export package yields increased 5% in the nine months of 2018 due to higher fuel surcharges and favorable exchange rates. International export average daily volumes increased 1% in the third quarter and 2% in the nine months of 2018 primarily due to increased international economy shipments. This benefit was partially offset by the decrease in volume due to the NotPetya cyberattack. U.S. domestic package yields increased 5% in the third quarter and nine months of 2018 primarily due to higher base rates and fuel surcharges. Freight yields increased 7% in the third quarter and 6% in the nine months of 2018 primarily due to higher base rates, favorable exchange rates and higher fuel surcharges. Average daily freight pounds increased 3% in the third quarter of 2018 primarily due to higher volume in international and U.S. freight services.

Our U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the periods ended February 28:

 

  

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

U.S. Domestic and Outbound Fuel Surcharge:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Low

 

 

5.05

%

 

 

2.50

%

 

 

2.21

%

 

 

0.96

%

High

 

 

5.91

 

 

 

3.40

 

 

 

5.91

 

 

 

3.40

 

Weighted-average

 

 

5.56

 

 

 

2.97

 

 

 

4.31

 

 

 

2.30

 

International Fuel Surcharges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Low

 

 

6.25

 

 

 

2.60

 

 

 

3.38

 

 

 

1.16

 

High

 

 

15.87

 

 

 

11.25

 

 

 

15.87

 

 

 

11.25

 

Weighted-average

 

 

12.24

 

 

 

8.21

 

 

 

10.53

 

 

 

7.48

 

 

Effective January 1, 2018, FedEx Express implemented a 4.9% average list price increase for U.S. domestic, U.S. export and U.S. import services. Effective February 6, 2017, FedEx Express fuel surcharges are adjusted on a weekly basis compared to the previous monthly adjustment. On January 2, 2017, FedEx Express implemented a 3.9% average list price increase for U.S. domestic, U.S. export and U.S. import services and a change to the U.S. domestic dimensional weight divisor.

FedEx Express Segment Operating Income

FedEx Express operating income and margin decreased in the third quarter of 2018 due to higher incentive compensation accruals, higher peak-related costs, increased TNT Express integration expenses, the negative impacts of inclement winter weather and unfavorable exchange rates, partially offset by yield growth and positive net impact of fuel. The NotPetya cyberattack discussed above also drove declining results in the nine months of 2018.

The NotPetya cyberattack had an estimated $400 million negative impact for the first half of 2018 with lingering impacts in the third quarter of 2018. Results also included $86 million of TNT Express integration expenses in the third quarter and $270 million in the nine months of 2018, a $33 million increase from the third quarter and $148 million increase from the nine months of 2017.

Salaries and employee benefits increased 10% in the third quarter and 6% in the nine months of 2018 primarily due to merit increases, unfavorable exchange rates and higher incentive compensation accruals. Purchased transportation increased 15% in the third quarter and 10% in the nine months of 2018 due to unfavorable exchange rates and increased international volume. Other expenses increased 14% in the third quarter and 10% in the nine months of 2018 primarily due to unfavorable exchange rates, increased outside service contracts and TNT Express integration expenses. Intercompany charges increased 12% in the third quarter of 2018 primarily due to higher incentive compensation accruals. Maintenance and repairs increased 15% in the nine months of 2018 primarily due to the timing of aircraft engine maintenance events.

Fuel expense increased 24% in the third quarter and 19% in the nine months of 2018 due to increased fuel prices. However, the net impact of fuel had a moderate benefit to operating income in the third quarter of 2018 and a significant benefit to operating income in the nine months of 2018 as higher fuel surcharges more than offset increased fuel prices. See the “Fuel” section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results.

- 40 -


 

FEDEX GROUND SEGMENT

FedEx Ground service offerings include day-certain delivery to businesses in the U.S. and Canada and to 100% of U.S. residences. The following tables compare revenues, operating expenses, operating income (dollars in millions), operating margin, selected package statistics (in thousands, except yield amounts) and operating expenses as a percent of revenue for the periods ended February 28:

 

 

 

Three Months Ended

 

 

Percent

 

 

 

Nine Months Ended

 

 

Percent

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

2018

 

 

2017

 

 

Change

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Ground

 

$

4,824

 

 

$

4,296

 

 

 

12

 

 

 

$

13,586

 

 

$

12,202

 

 

 

11

 

 

FedEx Supply Chain

 

 

398

 

 

 

392

 

 

 

2

 

 

 

 

1,204

 

 

 

1,195

 

 

 

1

 

 

Total revenues

 

 

5,222

 

 

 

4,688

 

 

 

11

 

 

 

 

14,790

 

 

 

13,397

 

 

 

10

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

956

 

 

 

834

 

 

 

15

 

 

 

 

2,711

 

 

 

2,420

 

 

 

12

 

 

Purchased transportation

 

 

2,235

 

 

 

2,015

 

 

 

11

 

 

 

 

6,194

 

 

 

5,568

 

 

 

11

 

 

Rentals

 

 

209

 

 

 

197

 

 

 

6

 

 

 

 

617

 

 

 

567

 

 

 

9

 

 

Depreciation and amortization

 

 

187

 

 

 

177

 

 

 

6

 

 

 

 

537

 

 

 

508

 

 

 

6

 

 

Fuel

 

 

4

 

 

 

3

 

 

 

33

 

 

 

 

10

 

 

 

8

 

 

 

25

 

 

Maintenance and repairs

 

 

82

 

 

 

83

 

 

 

(1

)

 

 

 

249

 

 

 

237

 

 

 

5

 

 

Intercompany charges

 

 

371

 

 

 

330

 

 

 

12

 

 

 

 

1,087

 

 

 

983

 

 

 

11

 

 

Other

 

 

544

 

 

 

534

 

 

 

2

 

 

 

 

1,604

 

 

 

1,516

 

 

 

6

 

 

Total operating expenses

 

 

4,588

 

 

 

4,173

 

 

 

10

 

 

 

 

13,009

 

 

 

11,807

 

 

 

10

 

 

Operating income

 

$

634

 

 

$

515

 

 

 

23

 

 

 

$

1,781

 

 

$

1,590

 

 

 

12

 

 

Operating margin

 

 

12.1

%

 

 

11.0

%

 

 

110

 

bp

 

 

12.0

%

 

 

11.9

%

 

 

10

 

bp

Average daily package volume

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Ground

 

 

8,993

 

 

 

8,522

 

 

 

6

 

 

 

 

8,408

 

 

 

7,963

 

 

 

6

 

 

Revenue per package (yield)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FedEx Ground

 

$

8.64

 

 

$

8.12

 

 

 

6

 

 

 

$

8.49

 

 

$

8.05

 

 

 

5

 

 

 

 

 

Percent of Revenue

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

18.3

 

%

 

 

17.8

 

%

 

 

18.3

 

%

 

 

18.1

 

%

Purchased transportation

 

 

42.8

 

 

 

 

43.0

 

 

 

 

41.9

 

 

 

 

41.5

 

 

Rentals

 

 

4.0

 

 

 

 

4.2

 

 

 

 

4.2

 

 

 

 

4.2

 

 

Depreciation and amortization

 

 

3.6

 

 

 

 

3.7

 

 

 

 

3.6

 

 

 

 

3.8

 

 

Fuel

 

 

0.1

 

 

 

 

0.1

 

 

 

 

0.1

 

 

 

 

0.1

 

 

Maintenance and repairs

 

 

1.6

 

 

 

 

1.8

 

 

 

 

1.7

 

 

 

 

1.8

 

 

Intercompany charges

 

 

7.1

 

 

 

 

7.0

 

 

 

 

7.3

 

 

 

 

7.3

 

 

Other

 

 

10.4

 

 

 

 

11.4

 

 

 

 

10.9

 

 

 

 

11.3

 

 

Total operating expenses

 

 

87.9

 

 

 

 

89.0

 

 

 

 

88.0

 

 

 

 

88.1

 

 

Operating margin

 

 

12.1

 

%

 

 

11.0

 

%

 

 

12.0

 

%

 

 

11.9

 

%

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 11% in the third quarter and 10% in the nine months of 2018 due to volume growth and increased yields. Average daily volume at FedEx Ground increased 6% in the third quarter and nine months of 2018 primarily due to continued growth in our residential services. FedEx Ground yield increased 6% during the third quarter and 5% during the nine months of 2018 primarily driven by higher base rates and higher fuel surcharges.

- 41 -


 

The FedEx Ground fuel surcharge is based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel, as published by the Department of Energy. Our fuel surcharge ranged as follows for the periods ended February 28:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Low

 

 

5.30

%

 

 

4.00

%

 

 

4.00

%

 

 

3.30

%

High

 

 

5.80

 

 

 

4.50

 

 

 

5.80

 

 

 

4.50

 

Weighted-average

 

 

5.50

 

 

 

4.10

 

 

 

5.00

 

 

 

3.90

 

Effective January 1, 2018, FedEx Ground announced a 4.9% average list price increase. In addition, as announced on September 18, 2017, dimensional weight pricing applies to the majority of FedEx SmartPost shipments effective January 22, 2018. Effective February 6, 2017, FedEx Ground fuel surcharges are adjusted on a weekly basis compared to the previous monthly adjustment. On January 2, 2017, FedEx Ground implemented a 4.9% average list price increase and a change to the U.S. domestic dimensional weight divisor.

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 23% in the third quarter and 12% in the nine months of 2018 due to volume growth, increased yields and benefits associated with ongoing cost management. Higher purchased transportation, seasonal staffing and network expansion costs and higher incentive compensation accruals partially offset these benefits.

Purchased transportation expense increased 11% in the third quarter and nine months of 2018 primarily due to higher volumes, increased rates and higher fuel expenses. Salaries and employee benefits expense increased 15% in the third quarter and 12% in the nine months of 2018 due to additional staffing to support volume growth, higher incentive compensation accruals, network expansion and merit increases. Intercompany charges increased 12% in the third quarter and 11% in the nine months of 2018 primarily due to higher incentive compensation accruals. Other expenses increased 6% in the nine months of 2018 primarily due to higher self-insurance reserves. Rentals and depreciation and amortization expense increased 6% in the third quarter and 7% in the nine months of 2018 due to network expansion.

Independent Contractor Model

FedEx Ground is involved in lawsuits and administrative proceedings claiming that owner-operators engaged under a contractor model no longer in use should have been treated as employees of FedEx Ground, rather than independent contractors. In addition, we are defending joint-employer cases where it is alleged that FedEx Ground should be treated as an employer of the drivers employed by owner-operators engaged by FedEx Ground. These cases are in varying stages of litigation. We will continue to vigorously defend ourselves in these proceedings and continue to believe that owner-operators engaged by FedEx Ground are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers employed by these owner-operators.

 

For additional information on the FedEx Ground Independent Service Provider model, see “Other Outlook Matters” under Consolidated Results of this MD&A.

 

 

- 42 -


 

FEDEX FREIGHT SEGMENT

FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following tables compare revenues, operating expenses, operating income (dollars in millions), operating margin, selected statistics and operating expenses as a percent of revenue for the periods ended February 28:

 

 

 

Three Months Ended

 

 

Percent

 

 

 

Nine Months Ended

 

 

Percent

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

2018

 

 

2017

 

 

Change

 

 

Revenues

 

$

1,694

 

 

$

1,492

 

 

 

14

 

 

 

$

5,208

 

 

$

4,747

 

 

 

10

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

825

 

 

 

733

 

 

 

13

 

 

 

 

2,455

 

 

 

2,266

 

 

 

8

 

 

Purchased transportation

 

 

263

 

 

 

230

 

 

 

14

 

 

 

 

792

 

 

 

739

 

 

 

7

 

 

Rentals

 

 

41

 

 

 

36

 

 

 

14

 

 

 

 

114

 

 

 

101

 

 

 

13

 

 

Depreciation and amortization

 

 

77

 

 

 

69

 

 

 

12

 

 

 

 

219

 

 

 

199

 

 

 

10

 

 

Fuel

 

 

127

 

 

 

99

 

 

 

28

 

 

 

 

336

 

 

 

282

 

 

 

19

 

 

Maintenance and repairs

 

 

52

 

 

 

50

 

 

 

4

 

 

 

 

169

 

 

 

159

 

 

 

6

 

 

Intercompany charges

 

 

130

 

 

 

120

 

 

 

8

 

 

 

 

384

 

 

 

370

 

 

 

4

 

 

Other

 

 

124

 

 

 

114

 

 

 

9

 

 

 

 

390

 

 

 

367

 

 

 

6

 

 

Total operating expenses

 

 

1,639

 

 

 

1,451

 

 

 

13

 

 

 

 

4,859

 

 

 

4,483

 

 

 

8

 

 

Operating income

 

$

55

 

 

$

41

 

 

 

34

 

 

 

$

349

 

 

$

264

 

 

 

32

 

 

Operating margin

 

 

3.2

%

 

 

2.7

%

 

 

50

 

bp

 

 

6.7

%

 

 

5.6

%

 

 

110

 

bp

Average daily LTL shipments (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Priority

 

 

69.7

 

 

 

65.6

 

 

 

6

 

 

 

 

73.5

 

 

 

70.3

 

 

 

5

 

 

Economy

 

 

30.6

 

 

 

29.0

 

 

 

6

 

 

 

 

31.5

 

 

 

30.9

 

 

 

2

 

 

Total average daily LTL shipments

 

 

100.3

 

 

 

94.6

 

 

 

6

 

 

 

 

105.0

 

 

 

101.2

 

 

 

4

 

 

Weight per LTL shipment (lbs)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Priority

 

 

1,232

 

 

 

1,179

 

 

 

4

 

 

 

 

1,205

 

 

 

1,173

 

 

 

3

 

 

Economy

 

 

1,133

 

 

 

1,155

 

 

 

(2

)

 

 

 

1,144

 

 

 

1,121

 

 

 

2

 

 

Composite weight per LTL shipment

 

 

1,202

 

 

 

1,172

 

 

 

3

 

 

 

 

1,187

 

 

 

1,157

 

 

 

3

 

 

LTL revenue per shipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Priority

 

$

242.49

 

 

$

224.63

 

 

 

8

 

 

 

$

233.31

 

 

$

220.64

 

 

 

6

 

 

Economy

 

 

295.31

 

 

 

272.74

 

 

 

8

 

 

 

 

285.99

 

 

 

262.72

 

 

 

9

 

 

Composite LTL revenue per shipment

 

$

259.20

 

 

$

239.82

 

 

 

8

 

 

 

$

249.32

 

 

$

233.64

 

 

 

7

 

 

LTL yield (revenue per hundredweight)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Priority

 

$

19.67

 

 

$

19.06

 

 

 

3

 

 

 

$

19.37

 

 

$

18.81

 

 

 

3

 

 

Economy

 

 

26.07

 

 

 

23.61

 

 

 

10

 

 

 

 

24.99

 

 

 

23.44

 

 

 

7

 

 

Composite LTL yield

 

$

21.56

 

 

$

20.47

 

 

 

5

 

 

 

$

21.01

 

 

$

20.19

 

 

 

4

 

 

 

 

 

Percent of Revenue

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

48.7

 

%

 

 

49.1

 

%

 

 

47.1

 

%

 

 

47.7

 

%

Purchased transportation

 

 

15.5

 

 

 

 

15.4

 

 

 

 

15.2

 

 

 

 

15.6

 

 

Rentals

 

 

2.4

 

 

 

 

2.4

 

 

 

 

2.2

 

 

 

 

2.1

 

 

Depreciation and amortization

 

 

4.6

 

 

 

 

4.6

 

 

 

 

4.2

 

 

 

 

4.2

 

 

Fuel

 

 

7.5

 

 

 

 

6.6

 

 

 

 

6.5

 

 

 

 

5.9

 

 

Maintenance and repairs

 

 

3.1

 

 

 

 

3.4

 

 

 

 

3.2

 

 

 

 

3.4

 

 

Intercompany charges

 

 

7.7

 

 

 

 

8.1

 

 

 

 

7.4

 

 

 

 

7.8

 

 

Other

 

 

7.3

 

 

 

 

7.7

 

 

 

 

7.5

 

 

 

 

7.7

 

 

Total operating expenses

 

 

96.8

 

 

 

 

97.3

 

 

 

 

93.3

 

 

 

 

94.4

 

 

Operating margin

 

 

3.2

 

%

 

 

2.7

 

%

 

 

6.7

 

%

 

 

5.6

 

%

- 43 -


 

FedEx Freight Segment Revenues

FedEx Freight segment revenues increased 14% in the third quarter and 10% in the nine months of 2018 primarily due to higher LTL revenue per shipment and average daily LTL shipments. LTL revenue per shipment increased 8% in the third quarter and 7% in the nine months of 2018 primarily due to higher base rates driven by our ongoing yield management initiatives, higher fuel surcharges and higher weight per shipment. Average daily LTL shipments increased 6% in the third quarter and 4% in the nine months of 2018 due to higher demand for our LTL service offerings.

The indexed LTL fuel surcharge is based on the average of the national U.S. on-highway average prices for a gallon of diesel fuel, as published by the Department of Energy. The indexed LTL fuel surcharge ranged as follows for the periods ended February 28:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Low

 

 

23.10

%

 

 

21.00

%

 

 

20.90

%

 

 

20.20

%

High

 

 

24.00

 

 

 

21.60

 

 

 

24.00

 

 

 

21.60

 

Weighted-average

 

 

23.59

 

 

 

21.40

 

 

 

22.46

 

 

 

20.80

 

 

Effective January 1, 2018, FedEx Freight implemented a 4.9% average increase in certain U.S. and other shipping rates. On January 2, 2017, FedEx Freight implemented a 4.9% average increase in certain U.S. and other shipping rates.

FedEx Freight Segment Operating Income

FedEx Freight segment operating income increased 34% in the third quarter and 32% in the nine months of 2018 primarily driven by higher LTL revenue per shipment. Salaries and employee benefits increased 13% in the third quarter and 8% in the nine months of 2018 driven primarily by higher staffing levels to support volume growth, higher incentive compensation accruals and merit increases. Purchased transportation increased 14% in the third quarter and 7% in the nine months of 2018 due to higher volumes and increased rates.

Fuel expense increased 28% in the third quarter and 19% in the nine months of 2018 due to higher fuel prices. The net impact of fuel had a moderate benefit to operating income in the third quarter and nine months of 2018 as higher fuel surcharges more than offset increased fuel prices.

 

- 44 -


 

FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $2.8 billion at February 28, 2018, compared to $4.0 billion at May 31, 2017. The following table provides a summary of our cash flows for the nine-month periods ended February 28 (in millions):

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,445

 

 

$

1,977

 

Noncash charges and credits

 

 

1,691

 

 

 

2,953

 

Gain from sale of investment

 

 

 

 

 

(35

)

Changes in assets and liabilities

 

 

(3,974

)

 

 

(2,250

)

Cash provided by operating activities

 

 

1,162

 

 

 

2,645

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(3,994

)

 

 

(3,790

)

Business acquisitions, net of cash acquired

 

 

(44

)

 

 

 

Proceeds from asset dispositions and other

 

 

21

 

 

 

123

 

Cash used in investing activities

 

 

(4,017

)

 

 

(3,667

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings, net

 

 

797

 

 

 

 

Principal payments on debt

 

 

(31

)

 

 

(49

)

Proceeds from debt issuances

 

 

1,481

 

 

 

1,190

 

Proceeds from stock issuances

 

 

284

 

 

 

265

 

Dividends paid

 

 

(402

)

 

 

(319

)

Purchase of treasury stock

 

 

(558

)

 

 

(358

)

Other

 

 

6

 

 

 

2

 

Cash provided by financing activities

 

 

1,577

 

 

 

731

 

Effect of exchange rate changes on cash

 

 

98

 

 

 

(70

)

Net decrease in cash and cash equivalents

 

$

(1,180

)

 

$

(361

)

Cash and cash equivalents at the end of period

 

$

2,789

 

 

$

3,173

 

 

Cash flows from operating activities decreased $1.5 billion in the nine months of 2018 primarily due to voluntary pension contributions, the payment of a previously accrued legal settlement and the NotPetya cyberattack. Capital expenditures increased during the nine months of 2018 primarily due to aircraft and related equipment purchases at FedEx Express, increased spending on facilities and other at all of our transportation segments and increased vehicle purchases at FedEx Freight, partially offset by lower spending related to package handling and ground support equipment at FedEx Ground. See “Capital Resources” for a discussion of capital expenditures during 2018 and 2017.

During the third quarter of 2018, we issued $1.5 billion of senior unsecured debt under our current shelf registration statement. We used the net proceeds for a voluntary incremental contribution in February 2018 to our U.S. Pension Plans. See Note 3 of the accompanying unaudited condensed consolidated financial statements for further discussion of this debt issuance.

During the third quarter of 2018, we issued commercial paper which provided us with additional short-term liquidity. As of February 28, 2018, we have $800 million of commercial paper outstanding. See Note 3 of the accompanying unaudited condensed consolidated financial statements for further discussion.

In January 2016, our Board of Directors authorized a share repurchase program of up to 25 million shares. During the third quarter of 2018, we repurchased 1.2 million shares of FedEx common stock at an average price of $248.73 per share for a total of $288 million. During the nine months of 2018, we repurchased 2.4 million shares of FedEx common stock at an average price of $232.00 per share for a total of $558 million. As of February 28, 2018, 13.6 million shares remained under the current share repurchase authorization. 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.

- 45 -


 

CAPITAL RESOURCES

Our operations are capital intensive, characterized by significant investments in aircraft, vehicles, technology, facilities, and package handling and sort equipment. The amount and timing of capital additions depend on various factors, including pre-existing contractual commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, availability of satisfactory financing, tax laws and actions of regulatory authorities.

The following table compares capital expenditures by asset category and reportable segment for the periods ended February 28 (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018/2017

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months

 

 

Nine Months

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Ended

 

 

Ended

 

Aircraft and related equipment

 

$

591

 

 

$

284

 

 

$

1,631

 

 

$

1,319

 

 

 

108

 

 

 

24

 

Package handling and ground support equipment

 

 

207

 

 

 

295

 

 

 

621

 

 

 

819

 

 

 

(30

)

 

 

(24

)

Vehicles

 

 

237

 

 

 

219

 

 

 

748

 

 

 

737

 

 

 

8

 

 

 

1

 

Information technology

 

 

116

 

 

 

134

 

 

 

378

 

 

 

412

 

 

 

(13

)

 

 

(8

)

Facilities and other

 

 

221

 

 

 

177

 

 

 

616

 

 

 

503

 

 

 

25

 

 

 

22

 

Total capital expenditures

 

$

1,372

 

 

$

1,109

 

 

$

3,994

 

 

$

3,790

 

 

 

24

 

 

 

5

 

FedEx Express segment

 

$

860

 

 

$

479

 

 

$

2,316

 

 

$

2,034

 

 

 

80

 

 

 

14

 

FedEx Ground segment

 

 

227

 

 

 

387

 

 

 

974

 

 

 

1,127

 

 

 

(41

)

 

 

(14

)

FedEx Freight segment

 

 

198

 

 

 

152

 

 

 

397

 

 

 

360

 

 

 

30

 

 

 

10

 

FedEx Services segment

 

 

87

 

 

 

91

 

 

 

307

 

 

 

269

 

 

 

(4

)

 

 

14

 

Total capital expenditures

 

$

1,372

 

 

$

1,109

 

 

$

3,994

 

 

$

3,790

 

 

 

24

 

 

 

5

 

 

Capital expenditures increased during the nine months of 2018 primarily due to aircraft and related equipment purchases at FedEx Express, which included the delivery of ten Boeing 767-300 Freighter aircraft and three Boeing 777 Freighter (“B777F”) aircraft, increased spending on facilities and other at all of our transportation segments and increased vehicle purchases at FedEx Freight, partially offset by lower spending related to package handling and ground support equipment at FedEx Ground.

LIQUIDITY OUTLOOK

We believe that our cash and cash equivalents, cash flow from operations and available financing sources are adequate to meet our liquidity needs, including working capital, capital expenditure requirements and debt payment obligations. Our cash and cash equivalents balance at February 28, 2018 included $1.1 billion of cash in foreign jurisdictions associated with our permanent reinvestment strategy. We do not believe that the indefinite reinvestment of these funds impairs our ability to meet our domestic debt or working capital obligations. Although we expect higher capital expenditures in 2018, we anticipate that our cash flow from operations will be sufficient to fund these expenditures. Historically, we have been successful in obtaining unsecured financing, from both domestic and international sources, although the marketplace for such investment capital can become restricted depending on a variety of economic factors. We are currently re-evaluating our permanent reinvestment strategy as a result of the TCJA and, as of the date of this filing, any deferred tax liability associated with a change of assertion is not expected to be material.

Our capital expenditures are expected to be approximately $5.8 billion in 2018 and include spending for aircraft and aircraft-related equipment at FedEx Express, sort facility expansion, primarily at FedEx Ground, and new and replacement vehicles at all of our transportation segments. We expect to invest an additional $867 million for aircraft and aircraft-related equipment during the remainder of 2018. In addition, over multiple years, we will be investing over $1.5 billion to significantly expand the FedEx Express Indianapolis hub and over $1 billion to modernize and expand the Memphis SuperHub.

During the quarter, FedEx Express entered into an agreement to accelerate the delivery of two B777F aircraft from 2021 to 2020, one B777F aircraft from 2021 to 2019, and one B777F aircraft from 2022 to 2020.

Upon maturity of commercial paper during the fourth quarter of 2018, we will re-evaluate our short-term liquidity needs and assess whether to issue additional commercial paper in order to maintain this short-term liquidity.

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.

- 46 -


 

During the quarter, we amended our five-year revolving credit facility to increase the aggregate amount available under the facility from $1.75 billion to $2.0 billion. The facility expires in November 2020. See Note 3 of the accompanying unaudited condensed consolidated financial statements for a description of the terms and significant covenants of our revolving credit facility.

During the nine months of 2018, we have made contributions totaling $2.5 billion to our U.S. Pension Plans, of which $22 million were required. We do not expect to make any additional contributions to our U.S. Pension Plans during the fourth quarter of 2018. Our U.S. Pension Plans have ample funds to meet expected benefit payments.

Standard & Poor’s has assigned us a senior unsecured debt credit rating of BBB and commercial paper rating of A-2 and a ratings outlook of “stable.” Moody’s Investors Service has assigned our unsecured debt a credit rating of Baa2 and our commercial paper a rating of P-2 and a ratings outlook of “stable.” If our credit ratings drop, our interest expense may increase. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt credit ratings drop below investment grade, our access to financing may become limited.

CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The following table sets forth a summary of our contractual cash obligations as of February 28, 2018. Certain of these contractual obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. Except for the current portion of interest on long-term debt, this table does not include amounts already recorded in our balance sheet as current liabilities at February 28, 2018. We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the United States. These contingent liabilities are not included in the table below. We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, qualified and nonqualified pension and postretirement healthcare plan liabilities and other self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table below due to the absence of scheduled maturities. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.

 

 

 

Payments Due by Fiscal Year (Undiscounted)

(in millions)

 

 

 

2018 (1)

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

$

632

 

 

$

2,408

 

 

$

2,115

 

 

$

1,878

 

 

$

1,695

 

 

$

9,193

 

 

$

17,921

 

Non-capital purchase obligations and other

 

 

254

 

 

 

794

 

 

 

683

 

 

 

480

 

 

 

304

 

 

 

2,925

 

 

 

5,440

 

Interest on long-term debt

 

 

104

 

 

 

607

 

 

 

543

 

 

 

531

 

 

 

531

 

 

 

9,877

 

 

 

12,193

 

Quarterly contributions to our U.S. Pension

   Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aircraft and aircraft-related capital

   commitments

 

 

492

 

 

 

1,717

 

 

 

1,868

 

 

 

1,162

 

 

 

1,310

 

 

 

890

 

 

 

7,439

 

Other capital purchase obligations

 

 

73

 

 

 

3

 

 

 

1

 

 

 

2

 

 

 

1

 

 

 

7

 

 

 

87

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

 

3

 

 

 

1,367

 

 

 

1,015

 

 

 

 

 

 

 

 

 

14,500

 

 

 

16,885

 

Total

 

$

1,558

 

 

$

6,896

 

 

$

6,225

 

 

$

4,053

 

 

$

3,841

 

 

$

37,392

 

 

$

59,965

 

 

(1)

Cash obligations for the remainder of 2018.

Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent authorizations to purchase rather than binding agreements. See Note 8 of the accompanying unaudited condensed consolidated financial statements for more information.

Operating Activities

The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at February 28, 2018.

- 47 -


 

Included in the table above within the caption entitled “Non-capital purchase obligations and other” is our estimate of the current portion of the liability ($49 million) for uncertain tax positions and amounts for purchase obligations that represent noncancelable agreements to purchase goods or services that are not capital related. Such contracts include those for printing and advertising and promotions contracts. We cannot reasonably estimate the timing of the long-term payments or the amount by which the liability for uncertain tax positions will increase or decrease over time; therefore, the long-term portion of the liability for uncertain tax positions ($32 million) is excluded from the table.

The amounts reflected in the table above for interest on long-term debt represent future interest payments due on our long-term debt.

Investing Activities

The amounts reflected in the table above for capital purchase obligations represent noncancelable agreements to purchase capital-related equipment. Such contracts include those for certain purchases of aircraft, aircraft modifications, vehicles, facilities, computers and other equipment.

We had $922 million in deposits and progress payments as of February 28, 2018 on aircraft purchases and other planned aircraft-related transactions.

Financing Activities

The amounts reflected in the table above for long-term debt represent future scheduled principal payments on our long-term debt.

Additional information on amounts included within the operating, investing and financing activities captions in the table above can be found in our Annual Report.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a complex, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information.

GOODWILL. Goodwill is tested for impairment between annual tests whenever events or circumstances make it more likely than not that the fair value of a reporting unit has fallen below its carrying value. We do not believe there has been any other change of events or circumstances that would indicate that a reevaluation of the goodwill of our reporting units is required as of February 28, 2018, nor do we believe the goodwill of our reporting units is at risk of failing impairment testing. For additional details on goodwill impairment testing, refer to Note 1 to the financial statements included in our Annual Report.

Information regarding our critical accounting estimates can be found in our Annual Report, including Note 1 to the financial statements therein. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.

- 48 -


 

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including (but not limited to) those contained in “Income Taxes,” “Outlook,” “Liquidity,” “Liquidity Outlook,” “Contractual Cash Obligations and Off-Balance Sheet Arrangements” and “Critical Accounting Estimates,” and the “General,” “Retirement Plans,” “Commitments” and “Contingencies” notes to the consolidated financial statements, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “will,” “believes,” “expects,” “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements because of, among other things, potential risks and uncertainties, such as:

economic conditions in the global markets in which we operate;

significant changes in the volumes of shipments transported through our networks, customer demand for our various services or the prices we obtain for our services;

a significant data breach or other disruption to our technology infrastructure, which can adversely affect our reputation, business or results of operations;

the ongoing impact of the significant cyberattack that TNT Express experienced in the first quarter of fiscal 2018;

our ability to successfully integrate the businesses and operations of FedEx Express and TNT Express in the expected time frame or at the expected cost;

damage to our reputation or loss of brand equity;

the price and availability of jet and vehicle fuel;

our ability to manage our network capacity and cost structure for capital expenditures and operating expenses, and match it to shifting and future customer volume levels;

the impact of intense competition on our ability to maintain or increase our prices (including our fuel surcharges in response to fluctuating fuel prices) or to maintain or grow our market share;

our ability to effectively operate, integrate, leverage and grow acquired businesses, and to continue to support the value we allocate to these acquired businesses, including their goodwill;

our ability to achieve the FedEx Express profit improvement goal;

our ability to maintain good relationships with our employees and avoid attempts by labor organizations to organize groups of our employees, which could significantly increase our operating costs and reduce our operational flexibility;

the impact of costs related to (i) challenges to the status of owner-operators engaged by FedEx Ground as independent contractors and direct employers of drivers providing services on their behalf, and (ii) any related changes to our relationship with these owner-operators and their drivers;

the impact of the United Kingdom’s vote to leave the European Union;

any impact on our business from disruptions or modifications in service by, or changes in the business or financial soundness of, the U.S. Postal Service, which is a significant customer and vendor of FedEx;

the impact of any international conflicts or terrorist activities on the United States and global economies in general, the transportation industry or us in particular, and what effects these events will have on our costs or the demand for our services;

any impacts on our businesses resulting from evolving or new domestic or international government laws and regulation, which could be unfavorable to our business, including regulatory actions affecting global aviation or other transportation rights, increased air cargo and other security or safety requirements, and tax, accounting, trade (such as protectionist measures or restrictions on free trade), labor (such as card-check legislation, joint employment standards or changes to the Railway Labor Act of 1926, as amended, affecting FedEx Express employees), environmental (such as global climate change legislation) or postal rules;

future guidance and interpretations relating to the recently enacted TCJA and our ability to realize the benefits of certain provisions of the TCJA;

adverse weather conditions or localized natural disasters in key geographic areas, such as earthquakes, volcanoes, wildfires, and hurricanes, which can disrupt our electrical service, damage our property, disrupt our operations, increase our fuel costs and adversely affect our shipment levels;

- 49 -


 

increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare benefits;

the increasing costs of compliance with federal, state and foreign governmental agency mandates (including the Foreign Corrupt Practices Act and the U.K. Bribery Act) and defending against inappropriate or unjustified enforcement or other actions by such agencies;

changes in foreign currency exchange rates, especially in the euro, Chinese yuan, British pound, Brazilian real, Canadian dollar and Mexican peso, which can affect our sales levels and foreign currency sales prices;

market acceptance of our new service and growth initiatives;

any liability resulting from and the costs of defending against class-action litigation, such as wage-and-hour, joint employment, and discrimination and retaliation claims, and any other legal or governmental proceedings;

the outcome of future negotiations to reach new collective bargaining agreements — including with the union that represents the pilots of FedEx Express (the current pilot agreement is scheduled to become amendable in November 2021) and with the union elected in 2015 to represent drivers at a FedEx Freight facility;

the impact of technology developments on our operations and on demand for our services, and our ability to continue to identify and eliminate unnecessary information technology redundancy and complexity throughout the organization;

governmental underinvestment in transportation infrastructure, which could increase our costs and adversely impact our service levels due to traffic congestion or sub-optimal routing of our vehicles and aircraft;

widespread outbreak of an illness or any other communicable disease, or any other public health crisis;

availability of financing on terms acceptable to us and our ability to maintain our current credit ratings, especially given the capital intensity of our operations; and

other risks and uncertainties you can find in our press releases and SEC filings, including the risk factors identified under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in our Annual Report, as updated by our quarterly reports on Form 10-Q.

As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of February 28, 2018, there were no material changes in our market risk sensitive instruments and positions since our disclosures in our Annual Report.

The principal foreign currency exchange rate risks to which we are exposed are in the euro, Chinese yuan, British pound, Brazilian real, Canadian dollar and Mexican peso. Historically, our exposure to foreign currency fluctuations is more significant with respect to our revenues than our expenses, as a significant portion of our expenses are denominated in U.S. dollars, such as aircraft and fuel expenses. During the nine months of 2018, the U.S. dollar weakened relative to the currencies of the foreign countries in which we operate, as compared to May 31, 2017, and this weakening had a slightly negative impact on our results.

While we have market risk for changes in the price of jet and vehicle fuel, this risk is largely mitigated by our indexed fuel surcharges. For additional discussion of our indexed fuel surcharges see the “Fuel” section of “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”

Item 4. Controls and Procedures

The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to FedEx management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of February 28, 2018 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended February 28, 2018, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of all material pending legal proceedings, see Note 9 of the accompanying unaudited condensed consolidated financial statements.

Item 1A. Risk Factors

 

Other than the risk factors set forth below, there have been no material changes from the risk factors disclosed in our Annual Report (under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition”) in response to Part I, Item 1A of Form 10-K.

A significant data breach or other disruption to our technology infrastructure could disrupt our operations and result in the loss of critical confidential information, adversely impacting our reputation, business or results of operations. Our ability to attract and retain customers, to efficiently operate our businesses, and to compete effectively depends in part upon the sophistication and reliability of our technology network, including our ability to provide features of service that are important to our customers, to protect our confidential business information and the information provided by our customers, and to maintain customer confidence in our ability to protect our systems and to provide services consistent with their expectations. We are subject to risks imposed by data breaches and operational disruptions, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists. Data breaches of companies and governments have increased in recent years as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Additionally, risks such as code anomalies, “Acts of God,” transitional challenges in migrating operating company functionality to our FedEx enterprise automation platform, data leakage and human error pose a direct threat to our products, services and data and could result in unauthorized access to sensitive or confidential data regarding our operations, customers, employees, and suppliers, including personal information.

We also use technology and systems from third-party service providers, including cloud service providers, for a variety of reasons and such providers may have access to information we maintain about our company, customers, employees and vendors or operate systems that are critical to our business operations and services. Like us, our third-party service providers are subject to risks imposed by data breaches and cyber-attacks. We have security processes, protocols and standards in place, including contractual provisions requiring such security measures, that are applicable to our service providers and are designed to protect information that is held by them, or to which they have access, as a result of their engagements with us. Nevertheless, a cyber-attack could defeat one or more of our third-party service providers’ security measures, allowing an attacker to obtain information about our company, customers, employees and vendors or disrupt our operations. Our third-party service providers may also experience operational disruptions or human error that could result in unauthorized access to sensitive or confidential data regarding our operations, customers, employees and suppliers, including personal information.

Any disruption to our complex, global technology infrastructure, including those impacting our computer systems and websites, could result in the loss of confidential business or customer information, adversely impact our operations, customer service, volumes and revenues, or could lead to litigation or investigations, resulting in significant costs. These types of adverse impacts could also occur in the event the confidentiality, integrity or availability of company and customer information was compromised due to a data loss by FedEx or a trusted third party. Recently, there has also been heightened regulatory and enforcement focus on data protection in the U.S. and abroad, and failure to comply with applicable U.S. or foreign data protection regulations or other data protection standards may expose us to litigation, fines, sanctions or other penalties, which could harm our reputation and adversely impact our business, results of operations and financial condition.

We have invested and continue to invest in technology security initiatives, information technology risk management and disaster recovery plans. The development and maintenance of these measures is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become increasingly more sophisticated. Despite our efforts, we are not fully insulated from data breaches, technology disruptions or data loss, which could adversely impact our competitiveness and results of operations. For instance, in May 2017 FedEx was one of many companies attacked by the rapidly spreading ransomware described as WannaCry that exploited vulnerability in Microsoft Windows and infected computers using that program, encrypting files and holding them for ransom. Additionally, during the third quarter of 2018 we discovered an unsecured server hosted by one of our third-party cloud service providers, which exposed some archived account information related to a service discontinued after our 2015 acquisition of Bongo International, LLC. The server has been secured, and we have found no indication that any information has been misappropriated in connection with the incident. Neither incident caused a material disruption to our systems or resulted in any material costs to FedEx. In addition, in June 2017 TNT Express worldwide operations were significantly affected due to the infiltration of an information technology virus known as NotPetya, as further described in the following risk factor.

While we have significant security processes and initiatives in place, we may be unable to detect or prevent a material breach or disruption in the future.

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TNT Express experienced a significant cyberattack in the first quarter of fiscal 2018 and the ongoing impact could negatively affect our results of operations and financial condition in the future, particularly if our continuing recovery efforts do not proceed as expected. On June 28, 2017, we announced that the worldwide operations of TNT Express were significantly affected by the cyberattack known as NotPetya, which involved the spread of an information technology virus that infiltrated TNT Express systems and encrypted its data. While TNT Express’s critical operational systems have been fully restored, critical business data has been recovered and shipping services and solutions are back in place, not all customers are shipping at pre-attack volume levels and we are continuing to engage in related recovery efforts. Our results of operations and financial condition could be negatively impacted in the future if our recovery efforts do not proceed as expected, particularly if lost revenues or incremental costs associated with the cyberattack exceed our expectations. The following consequences or potential consequences of the cyberattack could have an adverse impact on our results of operations and financial condition in the future:

 

 

loss of revenue due to permanent customer loss or sustained lower volumes from pre-existing customers;

 

additional costs due to claims for service failures;

 

higher effective tax rate due to reduced international earnings;

 

longer and more costly integration (due to increased expenses and capital spending requirements) of TNT Express and FedEx Express;

 

investments in enhanced systems in order to prevent future attacks;

 

cost of incentives offered to customers to restore confidence and maintain business relationships;

 

reputational damage resulting in the failure to retain or attract customers;

 

costs associated with potential litigation or governmental investigations;

 

costs associated with any data breach or data loss to third parties that is discovered; and

 

other consequences of which we are not currently aware but may subsequently discover.

 

We could be subject to adverse changes in regulations and interpretations or challenges to our tax positions relating to the Tax Cuts and Jobs Act. We are subject to taxation in the U.S. and numerous foreign jurisdictions. From time to time, changes in tax laws or regulations may be proposed or enacted that could significantly affect our overall tax liability. For example, on December 22, 2017, the United States government enacted comprehensive tax legislation through the TCJA, which significantly changes the U.S. corporate income tax system. The TCJA requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments, estimates and calculations to be made in interpreting its provisions, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretation. In addition, further legislative action could be taken to address questions or issues caused by the TCJA. As we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may adversely impact our results of operations and financial condition. Additionally, state and foreign governments may enact tax laws in response to the TCJA or other global initiatives that could result in further changes to our taxation and adversely impact our results of operations and financial condition.

 

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

The following table provides information on FedEx’s repurchases of our common stock during the third quarter of 2018:

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total Number of

Shares Purchased

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares  Purchased

as Part of

Publicly

Announced

Program

 

 

Maximum

Number of

Shares That May

Yet Be Purchased

Under the

Program

 

Dec. 1-31, 2017

 

 

195,000

 

 

$

241.14

 

 

 

195,000

 

 

 

14,580,000

 

Jan. 1-31, 2018

 

 

272,800

 

 

 

266.12

 

 

 

272,800

 

 

 

14,307,200

 

Feb. 1-28, 2018

 

 

690,000

 

 

 

244.00

 

 

 

690,000

 

 

 

13,617,200

 

Total

 

 

1,157,800

 

 

$

248.73

 

 

 

1,157,800

 

 

 

 

 

 

The repurchases were made under the stock repurchase program approved by our Board of Directors and announced on January 26, 2016 and through which we are authorized to purchase, in the open market or in privately negotiated transactions, up to an aggregate of 25 million shares of our common stock. As of March 20, 2018, 13.2 million shares remained authorized for purchase under the January 2016 stock repurchase program, which is the only such program that currently exists. The program does not have an expiration date.

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Item 6. Exhibits

 

Exhibit

Number

 

Description of Exhibit

 

 

 

4.1

 

Indenture, dated as of October 23, 2015, between FedEx, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee. (Filed as Exhibit 4.1 to FedEx’s Current Report on Form 8-K dated and filed October 23, 2015, and incorporated herein by reference.)

 

 

 

4.2

 

Supplemental Indenture No. 5, dated as of January 31, 2018, between FedEx, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee. (Filed as Exhibit 4.2 to FedEx’s Current Report on Form 8-K dated and filed January 31, 2018, and incorporated herein by reference.)

 

 

 

4.3

 

Form of 3.400% Note due 2028. (Included in Exhibit 4.2 to FedEx’s Current Report on Form 8-K dated and filed January 31, 2018, and incorporated herein by reference.)

 

 

 

4.4

 

Form of 4.050% Note due 2048. (Included in Exhibit 4.2 to FedEx’s Current Report on Form 8-K dated and filed January 31, 2018, and incorporated herein by reference.)

 

 

 

10.1

 

Amendment dated December 8, 2017 (but effective as of August 28, 2017), amending the Transportation Agreement dated April 23, 2013 between the United States Postal Service and FedEx Express (the “USPS Transportation Agreement”).  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

 

 

10.2

 

Amendment dated December 8, 2017 (but effective as of November 27, 2017), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.3

 

Amendment dated December 8, 2017 (but effective as of October 2, 2017), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.4

 

Amendment dated January 8, 2018 (but effective as of January 1, 2018), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.5

 

Amendment dated January 11, 2018 (but effective as of October 30, 2017), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.6

 

Amendment dated January 26, 2018 (but effective as of November 27, 2017), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.7

 

Amendment dated February 16, 2018 (but effective as of January 29, 2018), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.8

 

Supplemental Agreement No. 28 (and related side letter) dated as of January 26, 2018, amending the Boeing 777 Freighter Purchase Agreement dated as of November 7, 2006, between The Boeing Company and FedEx Express (the “Boeing 777 Freighter Purchase Agreement”). Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.9

 

Supplemental Agreement No. 29 (and related side letters) dated as of February 2, 2018, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.10

 

First Amendment dated as of January 26, 2018, between FedEx and JPMorgan Chase Bank, N.A., as administrative agent, amending the Five-Year Credit Agreement dated as of November 13, 2015, among FedEx, JPMorgan Chase Bank, N.A., individually and as administrative agent, and certain lenders.

 

 

 

12.1

 

Computation of Ratio of Earnings to Fixed Charges.

 

 

 

15.1

 

Letter re: Unaudited Interim Financial Statements.

 

 

 

- 55 -


 

Exhibit

Number

 

Description of Exhibit

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.1

 

Interactive Data Files.

 

- 56 -


 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

FEDEX CORPORATION

 

 

 

 

Date: March 21, 2018

 

 

/s/ JOHN L. MERINO

 

 

 

JOHN L. MERINO

 

 

 

CORPORATE VICE PRESIDENT AND

 

 

 

PRINCIPAL ACCOUNTING OFFICER

 

 

 

- 57 -


 

EXHIBIT INDEX

Exhibit

Number

 

Description of Exhibit

 

 

 

4.1

 

Indenture, dated as of October 23, 2015, between FedEx, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee. (Filed as Exhibit 4.1 to FedEx’s Current Report on Form 8-K dated and filed October 23, 2015, and incorporated herein by reference.)

 

 

 

4.2

 

Supplemental Indenture No. 5, dated as of January 31, 2018, between FedEx, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee. (Filed as Exhibit 4.2 to FedEx’s Current Report on Form 8-K dated and filed January 31, 2018, and incorporated herein by reference.)

 

 

 

4.3

 

Form of 3.400% Note due 2028. (Included in Exhibit 4.2 to FedEx’s Current Report on Form 8-K dated and filed January 31, 2018, and incorporated herein by reference.)

 

 

 

4.4

 

Form of 4.050% Note due 2048. (Included in Exhibit 4.2 to FedEx’s Current Report on Form 8-K dated and filed January 31, 2018, and incorporated herein by reference.)

 

 

 

10.1

 

Amendment dated December 8, 2017 (but effective as of August 28, 2017), amending the Transportation Agreement dated April 23, 2013 between the United States Postal Service and FedEx Express (the “USPS Transportation Agreement”).  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

 

 

10.2

 

Amendment dated December 8, 2017 (but effective as of November 27, 2017), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.3

 

Amendment dated December 8, 2017 (but effective as of October 2, 2017), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.4

 

Amendment dated January 8, 2018 (but effective as of January 1, 2018), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.5

 

Amendment dated January 11, 2018 (but effective as of October 30, 2017), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.6

 

Amendment dated January 26, 2018 (but effective as of November 27, 2017), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.7

 

Amendment dated February 16, 2018 (but effective as of January 29, 2018), amending the USPS Transportation Agreement.  Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.8

 

Supplemental Agreement No. 28 (and related side letter) dated as of January 26, 2018, amending the Boeing 777 Freighter Purchase Agreement dated as of November 7, 2006, between The Boeing Company and FedEx Express (the “Boeing 777 Freighter Purchase Agreement”). Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.9

 

Supplemental Agreement No. 29 (and related side letters) dated as of February 2, 2018, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.

 

 

 

10.10

 

First Amendment dated as of January 26, 2018, between FedEx and JPMorgan Chase Bank, N.A., as administrative agent, amending the Five-Year Credit Agreement dated as of November 13, 2015, among FedEx, JPMorgan Chase Bank, N.A., individually and as administrative agent, and certain lenders.

 

 

 

12.1

 

Computation of Ratio of Earnings to Fixed Charges.

 

 

 

15.1

 

Letter re: Unaudited Interim Financial Statements.

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

E-1


 

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.1

 

Interactive Data Files.

 

E-2