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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

FOR THE QUARTERLY PERIOD ENDED August 31, 2020

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 1-15829

 

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

62-1721435

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

942 South Shady Grove Road, Memphis, Tennessee

38120

(Address of principal executive offices)

(ZIP Code)

 

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

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

 

 

 

 

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.10 per share

 

FDX

 

New York Stock Exchange

0.700% Notes due 2022

 

FDX 22B

 

New York Stock Exchange

1.000% Notes due 2023

 

FDX 23A

 

New York Stock Exchange

0.450% Notes due 2025

 

FDX 25A

 

New York Stock Exchange

1.625% Notes due 2027

 

FDX 27

 

New York Stock Exchange

1.300% Notes due 2031

 

FDX 31

 

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No    

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

 

Large accelerated filer

Accelerated filer             

Non-accelerated filer

Smaller reporting company 

Emerging growth company 

 

 

 

 

 

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

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

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

 

Common Stock

 

Outstanding Shares at September 11, 2020

Common Stock, par value $0.10 per share

 

262,591,998

 

 

 

 

 


 

FEDEX CORPORATION

INDEX

 

 

 

PAGE

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. Financial Statements

 

 

Condensed Consolidated Balance Sheets

August 31, 2020 and May 31, 2020

 

3

Condensed Consolidated Statements of Income
Three Months Ended August 31, 2020 and 2019

 

5

Condensed Consolidated Statements of Comprehensive Income
Three Months Ended August 31, 2020 and 2019

 

6

Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 2020 and 2019

 

7

Condensed Consolidated Statements of Changes In Common Stockholders’ Investment

Three Months Ended August 31, 2020 and 2019

 

8

Notes to Condensed Consolidated Financial Statements

 

9

Report of Independent Registered Public Accounting Firm

 

19

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

 

20

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

42

ITEM 4. Controls and Procedures

 

42

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

ITEM 1. Legal Proceedings

 

43

ITEM 1A. Risk Factors

 

43

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

 

45

ITEM 5. Other Information

 

45

ITEM 6. Exhibits

 

46

Signature

 

48

 

 

 

Exhibit 10.1

 

 

Exhibit 10.2

 

 

Exhibit 10.3

 

 

Exhibit 10.4

 

 

Exhibit 10.5

 

 

Exhibit 15.1

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

Exhibit 101.1 Interactive Data Files

Exhibit 104.1 Cover Page Interactive Data File

 

 

- 2 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

 

 

August 31,

2020

(Unaudited)

 

 

May 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,954

 

 

$

4,881

 

Receivables, less allowances of $485 and $390

 

 

10,508

 

 

 

10,102

 

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

 

 

593

 

 

 

572

 

Prepaid expenses and other

 

 

848

 

 

 

828

 

Total current assets

 

 

18,903

 

 

 

16,383

 

PROPERTY AND EQUIPMENT, AT COST

 

 

66,446

 

 

 

65,024

 

Less accumulated depreciation and amortization

 

 

32,184

 

 

 

31,416

 

Net property and equipment

 

 

34,262

 

 

 

33,608

 

OTHER LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Operating lease right-of-use assets, net

 

 

14,496

 

 

 

13,917

 

Goodwill

 

 

6,633

 

 

 

6,372

 

Other assets

 

 

3,354

 

 

 

3,257

 

Total other long-term assets

 

 

24,483

 

 

 

23,546

 

 

 

$

77,648

 

 

$

73,537

 

 

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

- 3 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

 

 

August 31,

2020

(Unaudited)

 

 

May 31,

2020

 

LIABILITIES AND COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

 

87

 

 

 

51

 

Accrued salaries and employee benefits

 

 

1,756

 

 

 

1,569

 

Accounts payable

 

 

3,339

 

 

 

3,269

 

Operating lease liabilities

 

 

2,024

 

 

 

1,923

 

Accrued expenses

 

 

3,989

 

 

 

3,532

 

Total current liabilities

 

 

11,195

 

 

 

10,344

 

LONG-TERM DEBT, LESS CURRENT PORTION

 

 

23,204

 

 

 

21,952

 

OTHER LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

3,171

 

 

 

3,162

 

Pension, postretirement healthcare and other benefit obligations

 

 

5,036

 

 

 

5,019

 

Self-insurance accruals

 

 

2,147

 

 

 

2,104

 

Operating lease liabilities

 

 

12,714

 

 

 

12,195

 

Other liabilities

 

 

719

 

 

 

466

 

Total other long-term liabilities

 

 

23,787

 

 

 

22,946

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

COMMON STOCKHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

 

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

   issued as of August 31, 2020 and May 31, 2020

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

3,375

 

 

 

3,356

 

Retained earnings

 

 

26,108

 

 

 

25,216

 

Accumulated other comprehensive loss

 

 

(1,020

)

 

 

(1,147

)

Treasury stock, at cost

 

 

(9,033

)

 

 

(9,162

)

Total common stockholders’ investment

 

 

19,462

 

 

 

18,295

 

 

 

$

77,648

 

 

$

73,537

 

 

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

- 4 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

 

 

Three Months Ended

August 31,

 

 

 

2020

 

 

2019

 

REVENUE

 

$

19,321

 

 

$

17,048

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,852

 

 

 

6,087

 

Purchased transportation

 

 

4,977

 

 

 

4,028

 

Rentals and landing fees

 

 

936

 

 

 

920

 

Depreciation and amortization

 

 

926

 

 

 

879

 

Fuel

 

 

565

 

 

 

870

 

Maintenance and repairs

 

 

806

 

 

 

768

 

Other

 

 

2,669

 

 

 

2,519

 

 

 

 

17,731

 

 

 

16,071

 

OPERATING INCOME

 

 

1,590

 

 

 

977

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

Interest, net

 

 

(184

)

 

 

(137

)

Other retirement plans income

 

 

201

 

 

 

168

 

Other, net

 

 

(1

)

 

 

(12

)

 

 

 

16

 

 

 

19

 

INCOME BEFORE INCOME TAXES

 

 

1,606

 

 

 

996

 

PROVISION FOR INCOME TAXES

 

 

361

 

 

 

251

 

NET INCOME

 

$

1,245

 

 

$

745

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

4.75

 

 

$

2.86

 

Diluted

 

$

4.72

 

 

$

2.84

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

1.30

 

 

$

1.30

 

 

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

- 5 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

 

2020

 

 

2019

 

NET INCOME

 

$

1,245

 

 

$

745

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax benefit of $2 in 2020 and $3 in 2019

 

 

129

 

 

 

(83

)

Amortization of prior service credit, net of tax benefit of $1 in 2020 and $6 in 2019

 

 

(2

)

 

 

(21

)

 

 

 

127

 

 

 

(104

)

COMPREHENSIVE INCOME

 

$

1,372

 

 

$

641

 

 

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

- 6 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

 

 

 

Three Months Ended

August 31,

 

 

 

2020

 

 

2019

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

1,245

 

 

$

745

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

926

 

 

 

879

 

Provision for uncollectible accounts

 

 

143

 

 

 

105

 

Stock-based compensation

 

 

75

 

 

 

67

 

Other noncash items and deferred income taxes

 

 

531

 

 

 

694

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(387

)

 

 

(267

)

Other assets

 

 

(30

)

 

 

(118

)

Accounts payable and other liabilities

 

 

198

 

 

 

(1,537

)

Other, net

 

 

(50

)

 

 

(3

)

Cash provided by operating activities

 

 

2,651

 

 

 

565

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,424

)

 

 

(1,418

)

Proceeds from asset dispositions and other

 

 

6

 

 

 

(1

)

Cash used in investing activities

 

 

(1,418

)

 

 

(1,419

)

Financing Activities:

 

 

 

 

 

 

 

 

Principal payments on debt

 

 

(45

)

 

 

(985

)

Proceeds from debt issuances

 

 

959

 

 

 

2,093

 

Proceeds from stock issuances

 

 

82

 

 

 

12

 

Dividends paid

 

 

(170

)

 

 

(170

)

Purchase of treasury stock

 

 

 

 

 

(3

)

Other, net

 

 

(1

)

 

 

(5

)

Cash provided by financing activities

 

 

825

 

 

 

942

 

Effect of exchange rate changes on cash

 

 

15

 

 

 

(18

)

Net increase in cash and cash equivalents

 

 

2,073

 

 

 

70

 

Cash and cash equivalents at beginning of period

 

 

4,881

 

 

 

2,319

 

Cash and cash equivalents at end of period

 

$

6,954

 

 

$

2,389

 

 

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

- 7 -


 

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ INVESTMENT

(UNAUDITED)

(IN MILLIONS, EXCEPT SHARE DATA)

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

 

2020

 

 

2019

 

Common Stock

 

 

 

 

 

 

 

 

Beginning Balance

 

$

32

 

 

$

32

 

Ending Balance

 

 

32

 

 

 

32

 

Additional Paid-in Capital

 

 

 

 

 

 

 

 

Beginning Balance

 

 

3,356

 

 

 

3,231

 

Employee incentive plans and other

 

 

19

 

 

 

26

 

Ending Balance

 

 

3,375

 

 

 

3,257

 

Retained Earnings

 

 

 

 

 

 

 

 

Beginning Balance

 

 

25,216

 

 

 

24,648

 

Net Income

 

 

1,245

 

 

 

745

 

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

 

 

(341

)

 

 

(339

)

Employee incentive plans and other

 

 

(12

)

 

 

(2

)

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

 

 

 

 

 

(4

)

Ending Balance

 

 

26,108

 

 

 

25,048

 

Accumulated Other Comprehensive Income

 

 

 

 

 

 

 

 

Beginning Balance

 

 

(1,147

)

 

 

(865

)

Other comprehensive income, net of tax benefit of $3 and $9

 

 

127

 

 

 

(104

)

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

 

 

 

 

 

51

 

Ending Balance

 

 

(1,020

)

 

 

(918

)

Treasury Stock

 

 

 

 

 

 

 

 

Beginning Balance

 

 

(9,162

)

 

 

(9,289

)

Purchase of treasury stock (0.0 and 0.02 million shares)

 

 

 

 

 

(3

)

Employee incentive plans and other (1.0 and 0.3 million shares)

 

 

129

 

 

 

39

 

Ending Balance

 

 

(9,033

)

 

 

(9,253

)

Total Common Stockholders' Investment Balance

 

$

19,462

 

 

$

18,166

 

 

(1)

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

 

(2)

Relates to the adoption of ASU 2018-02.

 

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

 

 

- 8 -


FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2020 (“Annual Report”). Significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of August 31, 2020, and the results of our operations for the three-month periods ended August 31, 2020 and 2019, cash flows for the three-month periods ended August 31, 2020 and 2019, and changes in common stockholders’ investment for the three-month periods ended August 31, 2020 and 2019. Operating results for the three-month period ended August 31, 2020 are not necessarily indicative of the results that may be expected for the year ending May 31, 2021.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2021 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

REVENUE RECOGNITION

Contract Assets and Liabilities

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

Gross contract assets related to in-transit shipments totaled $620 million and $563 million at August 31, 2020 and May 31, 2020, respectively. Contract assets net of deferred unearned revenue were $450 million and $456 million at August 31, 2020 and May 31, 2020, respectively. Contract assets are included within current assets in the accompanying unaudited condensed consolidated balance sheets. Contract liabilities related to advance payments from customers were $9 million and $10 million at August 31, 2020 and May 31, 2020, respectively. Contract liabilities are included within current liabilities in the accompanying unaudited condensed consolidated balance sheets.

- 9 -


 

Disaggregation of Revenue

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

 

 

Three Months Ended

 

 

 

2020

 

 

2019

 

REVENUE BY SERVICE TYPE

 

 

 

 

 

 

 

 

FedEx Express segment:

 

 

 

 

 

 

 

 

Package:

 

 

 

 

 

 

 

 

U.S. overnight box

 

$

1,861

 

 

$

1,866

 

U.S. overnight envelope

 

 

426

 

 

 

479

 

U.S. deferred

 

 

1,096

 

 

 

956

 

Total U.S. domestic package revenue

 

 

3,383

 

 

 

3,301

 

International priority

 

 

2,317

 

 

 

1,817

 

International economy

 

 

616

 

 

 

855

 

Total international export package revenue

 

 

2,933

 

 

 

2,672

 

International domestic(1)

 

 

1,088

 

 

 

1,076

 

Total package revenue

 

 

7,404

 

 

 

7,049

 

Freight:

 

 

 

 

 

 

 

 

U.S.

 

 

833

 

 

 

695

 

International priority

 

 

653

 

 

 

464

 

International economy

 

 

371

 

 

 

516

 

International airfreight

 

 

75

 

 

 

66

 

Total freight revenue

 

 

1,932

 

 

 

1,741

 

Other

 

 

311

 

 

 

155

 

Total FedEx Express segment

 

 

9,647

 

 

 

8,945

 

FedEx Ground segment

 

 

7,040

 

 

 

5,179

 

FedEx Freight segment

 

 

1,826

 

 

 

1,905

 

FedEx Services segment

 

 

8

 

 

 

4

 

Other and eliminations(2)

 

 

800

 

 

 

1,015

 

 

 

$

19,321

 

 

$

17,048

 

 

(1)

International domestic revenue relates to our international intra-country operations.

 

(2)

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

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of Federal Express Corporation (“FedEx Express”), who are a small number of its total employees, are employed under a collective bargaining agreement that took effect on November 2, 2015. The collective bargaining agreement is scheduled to become amendable in November 2021. Other than the pilots at FedEx Express, a small number of our employees are members of unions.

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 outstanding incentive stock plans and all financial disclosures about these programs are set forth in our Annual Report.

Our stock-based compensation expense was $75 million for the three-month period ended August 31, 2020 and $67 million for the three-month period ended August 31, 2019. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

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

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

- 10 -


 

If a derivative is designated as a cash flow hedge, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in other comprehensive income. For net investment hedges, the entire change in the fair value is recorded in other comprehensive income. Any portion of a change in the fair value of a derivative that is considered to be ineffective, along with the change in fair value of any derivatives not designated in a hedging relationship, is immediately recognized in the income statement. We do not have any derivatives designated as a cash flow hedge for any period presented. As of August 31, 2020, we had €640 million of debt designated as a net investment hedge to reduce the volatility of the U.S. dollar value of a portion of our net investment in a euro-denominated consolidated subsidiary. As of August 31, 2020, the hedge remains effective.

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

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 that amends the impairment model for most financial assets and certain other instruments that are not measured at fair value through net income, including trade receivables, to utilize an expected loss methodology in place of the incurred loss methodology. We adopted this standard effective June 1, 2020 (fiscal 2021). We updated our process for estimating the expected credit loss to include a review of forecasted information that may impact expected collectability over the lifetime of the asset. See Note 2 for additional information. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15 that reduces the complexity of accounting for costs of implementing a cloud computing service arrangement and aligns the accounting for capitalizing implementation costs of hosting arrangements, regardless of whether they convey a license to the hosted software. We adopted this standard effective June 1, 2020 (fiscal 2021) and applied these changes prospectively. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This standard is effective June 1, 2021 (fiscal 2022). We adopted this standard effective June 1, 2020 (fiscal 2021). The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

New Accounting Standards and Accounting Standards Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06 that changes how entities account for convertible instruments and contracts in an entity’s own equity. These changes will be effective June 1, 2022 (fiscal 2023). We are assessing the impact of this new standard on our consolidated financial statements and related disclosures.

TREASURY SHARES. In January 2016, our Board of Directors approved a stock repurchase program of up to 25 million shares. We did not repurchase any shares of FedEx common stock during the first quarter of 2021. As of August 31, 2020, 5.1 million shares remained under the stock 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.

During 2020, we amended our amended and restated $2.0 billion five-year credit agreement (the “Five-Year Credit Agreement”) and our $1.5 billion 364-day credit agreement (the “364-Day Credit Agreement” and together with the Five-Year Credit Agreement, the “Credit Agreements”). The amendments to the Credit Agreements, among other things, temporarily restrict us from repurchasing any shares of our common stock between May 27, 2020 and May 31, 2021.

See Note 4 for more information on the amendments to the Credit Agreements.

DIVIDENDS DECLARED PER COMMON SHARE. On August 14, 2020, our Board of Directors declared a quarterly dividend of $0.65 per share of common stock. The dividend will be paid on October 1, 2020 to stockholders of record as of the close of business on September 4, 2020. 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. The amendments to the Credit Agreements discussed above under “Treasury Shares” temporarily restrict us from increasing the amount of our quarterly dividend payable per share of common stock from $0.65 per share between May 27, 2020 and May 31, 2021. There are no other material restrictions on our ability to declare dividends, nor are there any material restrictions on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances.

- 11 -


 

(2) Credit Losses

We are exposed to credit losses primarily through our trade receivables. We assess ability to pay for certain customers by conducting a credit review, which considers the customer’s established credit rating and our assessment of creditworthiness. We determine the allowance for credit losses on accounts receivable using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are determined using loss rates based on historical write-offs by geography and recent forecasted information, including underlying economic expectations. We update our estimate of credit loss reserves quarterly, considering recent write-offs and collections information and underlying economic expectations.

Our allowance for credit losses was $175 million at May 31, 2020. Credit losses charged to expense for the quarters ended August 31, 2020 and 2019, were $143 million and $105 million, respectively. Our allowance for credit losses as of August 31, 2020 is $222 million.

(3) Accumulated Other Comprehensive Loss

The following table provides changes in accumulated other comprehensive income (“AOCI”), net of tax, reported in our unaudited condensed consolidated financial statements for the three-month periods ended August 31 (in millions; amounts in parentheses indicate debits to AOCI):

 

 

 

2020

 

 

2019

 

Foreign currency translation loss:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(1,207

)

 

$

(954

)

Translation adjustments

 

 

129

 

 

 

(83

)

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

 

 

 

 

 

1

 

Balance at end of period

 

 

(1,078

)

 

 

(1,036

)

Retirement plans adjustments:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

60

 

 

 

89

 

Reclassifications from AOCI

 

 

(2

)

 

 

(21

)

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

 

 

 

 

 

50

 

Balance at end of period

 

 

58

 

 

 

118

 

Accumulated other comprehensive (loss) at end of period

 

$

(1,020

)

 

$

(918

)

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

 

 

 

Amount Reclassified from

AOCI

 

 

Affected Line Item in the

Income Statement

 

 

2020

 

 

2019

 

 

 

Amortization of retirement plans

   prior service credits, before tax

 

$

3

 

 

$

27

 

 

Other retirement plans (expense) income

Income tax benefit

 

 

(1

)

 

 

(6

)

 

Provision for income taxes

AOCI reclassifications, net of tax

 

$

2

 

 

$

21

 

 

Net income

 

(4) Financing Arrangements

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

During August 2020, FedEx Express issued $970 million of Pass Through Certificates, Series 2020-1AA (the “Certificates”) with a fixed interest rate of 1.875% due in February 2034 utilizing pass through trusts (the “Trusts”). The Certificates are secured by 19 Boeing aircraft with a net book value of $1.9 billion at August 31, 2020. The payment obligations of FedEx Express in respect of the Certificates are fully and unconditionally guaranteed by FedEx. FedEx Express is using the proceeds from the issuance for general corporate purposes.

Each Trust meets the definition of a variable interest entity, or VIE, as defined in the Consolidations topic of the Codification (ASC 810), and must be considered for consolidation in our financial statements. Our assessment of the Trusts considers both quantitative and qualitative factors, including the purpose for which the Trust was established and the nature of the risks related to the Trusts. Neither FedEx nor FedEx Express invests in or possesses a financial interest in the Trusts. Rather, FedEx Express has an obligation to

- 12 -


 

make interest and principal payments, which are fully and unconditionally guaranteed by FedEx, and is not the primary beneficiary of the Trusts. Based on this analysis, we determined that we are not required to consolidate the Trusts.

We have a $2.0 billion Five-Year Credit Agreement and a $1.5 billion 364-Day Credit Agreement. The Five-Year Credit Agreement expires in March 2025 and includes a $250 million letter of credit sublimit. The 364-Day Credit Agreement expires in March 2021. The Credit Agreements are available to finance our operations and other cash flow needs. The Credit Agreements contain a financial covenant requiring us to maintain a ratio of debt to consolidated earnings (excluding noncash retirement plans mark-to-market adjustments, noncash pension service costs and noncash asset impairment charges) before interest, taxes, depreciation and amortization (“adjusted EBITDA”) of not more than 4.75 to 1.0, calculated as of August 31, 2020 on a rolling four-quarters basis. The ratio of our debt to adjusted EBITDA was 2.9 to 1.0 at August 31, 2020. The Credit Agreements also contain the temporary covenants discussed in Note 1. We believe these covenants are the only significant restrictive covenants in the Credit Agreements. The Credit Agreements contain other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the financial covenant and all other covenants in the Credit Agreements and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. If we failed to comply with the financial covenant or any other covenants in the Credit Agreements, our access to financing could become limited.

Information regarding changes to the ratio of debt to adjusted EBITDA required to be maintained under the Credit Agreements through the fourth quarter of 2021 is provided in our Annual Report.

As of August 31, 2020, no commercial paper was outstanding and $0.3 million in letters of credit were outstanding, leaving $3.5 billion available under the Credit Agreements for future borrowings. Outstanding commercial paper reduces the amount available to borrow under the Credit Agreements.

Long-term debt, including current maturities and exclusive of finance leases, had carrying values of $22.8 billion at August 31, 2020 and $21.5 billion at May 31, 2020, compared with estimated fair values of $26.0 billion at August 31, 2020 and $22.8 billion at May 31, 2020. The annualized weighted-average interest rate on long-term debt was 3.5% at August 31, 2020. 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.

(5) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the three-month periods ended August 31 was as follows (in millions, except per share amounts):

 

 

 

2020

 

 

2019

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

1,243

 

 

$

744

 

Weighted-average common shares

 

 

262

 

 

 

260

 

Basic earnings per common share

 

$

4.75

 

 

$

2.86

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

Net earnings allocable to common shares(1)

 

$

1,243

 

 

$

744

 

Weighted-average common shares

 

 

262

 

 

 

260

 

Dilutive effect of share-based awards

 

 

1

 

 

 

2

 

Weighted-average diluted shares

 

 

263

 

 

 

262

 

Diluted earnings per common share

 

$

4.72

 

 

$

2.84

 

Anti-dilutive options excluded from diluted earnings per

   common share

 

 

9.0

 

 

 

10.9

 

 

 

(1)

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

(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.

- 13 -


 

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

 

 

 

2020

 

 

2019

 

Defined benefit pension plans, net

 

$

25

 

 

$

37

 

Defined contribution plans

 

 

159

 

 

 

142

 

Postretirement healthcare plans

 

 

21

 

 

 

22

 

 

 

$

205

 

 

$

201

 

 

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

 

 

 

U.S. Pension Plans

 

 

International Pension Plans

 

 

Postretirement Healthcare Plans

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service cost

 

$

213

 

 

$

192

 

 

$

23

 

 

$

24

 

 

$

11

 

 

$

11

 

Other retirement plans (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Interest cost

 

 

240

 

 

 

250

 

 

 

10

 

 

 

11

 

 

 

10

 

 

 

11

 

    Expected return on plan assets

 

 

(446

)

 

 

(400

)

 

 

(12

)

 

 

(13

)

 

 

 

 

 

 

   Amortization of prior service credit and other

 

 

(2

)

 

 

(27

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

(208

)

 

 

(177

)

 

 

(3

)

 

 

(2

)

 

 

10

 

 

 

11

 

 

 

$

5

 

 

$

15

 

 

$

20

 

 

$

22

 

 

$

21

 

 

$

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For 2021, no pension contributions are required for our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) as they are fully funded under the Employee Retirement Income Security Act. We made voluntary contributions to our U.S. Pension Plans of $1.0 billion during the first quarter of 2020.

In 2020, we announced the closing of our U.S.-based defined benefit pension plans to new non-union employees hired on or after January 1, 2020. We will introduce an all-401-(k) plan retirement benefit structure for eligible employees with a higher company match of up to 8% across all U.S.-based operating companies in 2022. During calendar 2021, current eligible employees under the Portable Pension Account (“PPA”) pension formula will be given a one-time option to continue to be eligible for pension compensation credits under the existing PPA formula and remain in the existing 401(k) plan with its match of up to 3.5%, or to cease receiving compensation credits under the pension plan and move to the new 401(k) plan with the higher match of up to 8%. Changes to the new 401(k) plan structure become effective beginning January 1, 2022. While this new program will provide employees greater flexibility and reduce our long-term pension costs, it will not have a material impact on current or near-term financial results.

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

- 14 -


 

Our reportable segments include the following businesses:

 

FedEx Express Segment

FedEx Express (express transportation)

 

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

   transportation)

FedEx Custom Critical, Inc. (time-critical transportation)

FedEx Cross Border Holdings, Inc. (“FedEx Cross Border”) (cross-border e-commerce technology and e-commerce transportation solutions)

 

 

 

FedEx Ground Segment

FedEx Ground (small-package ground delivery)

 

 

FedEx Freight Segment

FedEx Freight (LTL freight transportation)

 

 

FedEx Services Segment

FedEx Services (sales, marketing, information technology, communications, customer

   service, technical support, billing and collection services and back-office functions)

 

 

References to our transportation segments include, collectively, the FedEx Express segment, the FedEx Ground segment and the FedEx Freight segment.

Effective June 1, 2020, the results of FedEx Cross Border are included in the FedEx Express segment prospectively as the impact to prior periods was not material. This change was made to reflect our internal management reporting structure.

FedEx Services Segment

The FedEx Services segment operates combined sales, marketing, administrative and information-technology functions in shared services operations for U.S. customers of our major business units and certain back-office support to our operating segments which allows us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis and reported by FedEx Express in their natural expense line items.

The FedEx Services segment provides direct and indirect support to our operating segments, and we allocate all of the net operating costs of the FedEx Services segment to reflect the full cost of operating our businesses in the results of those segments. 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 operating 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 revenue or estimated services provided. We believe these allocations approximate the net cost of providing these functions. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.

Corporate, Other and Eliminations

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

Also included in corporate and other is the FedEx Office operating segment, which provides an array of document and business services and retail access to our customers for our package transportation businesses, and the FedEx Logistics operating segment, which provides integrated supply chain management solutions, specialty transportation, customs brokerage and global ocean and air freight forwarding.

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 revenue of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenue and expenses are eliminated in our consolidated results and are not separately identified in the following segment information because the amounts are not material.

- 15 -


 

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

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

9,647

 

 

$

8,945

 

FedEx Ground segment

 

 

7,040

 

 

 

5,179

 

FedEx Freight segment

 

 

1,826

 

 

 

1,905

 

FedEx Services segment

 

 

8

 

 

 

4

 

Other and eliminations

 

 

800

 

 

 

1,015

 

 

 

$

19,321

 

 

$

17,048

 

Operating income (loss):

 

 

 

 

 

 

 

 

FedEx Express segment

 

$

710

 

 

$

285

 

FedEx Ground segment

 

 

834

 

 

 

644

 

FedEx Freight segment

 

 

274

 

 

 

194

 

Corporate, other and eliminations

 

 

(228

)

 

 

(146

)

 

 

$

1,590

 

 

$

977

 

 

(8) Commitments

As of August 31, 2020, our purchase commitments under various contracts for the remainder of 2021 and annually thereafter were as follows (in millions):

 

 

 

Aircraft and Related

 

 

Other(1)

 

 

Total

 

2021 (remainder)

 

$

1,180

 

 

$

782

 

 

$

1,962

 

2022

 

 

2,166

 

 

 

670

 

 

 

2,836

 

2023

 

 

2,423

 

 

 

460

 

 

 

2,883

 

2024

 

 

1,015

 

 

 

302

 

 

&n