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Cover and table of contents
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, 2022
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 | ||
| 0.450% Notes due 2025 | FDX 25A | New York Stock Exchange | ||
| 1.625% Notes due 2027 | FDX 27 | New York Stock Exchange | ||
| 0.450% Notes due 2029 | FDX 29A | New York Stock Exchange | ||
| 1.300% Notes due 2031 | FDX 31 | New York Stock Exchange | ||
| 0.950% Notes due 2033 | FDX 33 | 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 March 15, 2022 | |
| Common Stock, par value $0.10 per share | 259,178,229 |
FEDEX CORPORATION
INDEX
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FEDEX CORPORATION
CONDENSED CONSOLIDA****TED BALANCE SHEETS
(IN MILLIONS)
| February 28, 2022 (Unaudited) | May 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 6,065 | $ | 7,087 | ||||
| Receivables, less allowances of $793 and $742 | 11,668 | 12,069 | ||||||
| Spare parts, supplies, and fuel, less allowances of $356 and $349 | 611 | 587 | ||||||
| Prepaid expenses and other | 1,122 | 837 | ||||||
| Total current assets | 19,466 | 20,580 | ||||||
| PROPERTY AND EQUIPMENT, AT COST | 74,146 | 70,077 | ||||||
| Less accumulated depreciation and amortization | 36,770 | 34,325 | ||||||
| Net property and equipment | 37,376 | 35,752 | ||||||
| OTHER LONG-TERM ASSETS | ||||||||
| Operating lease right-of-use assets, net | 16,605 | 15,383 | ||||||
| Goodwill | 6,755 | 6,992 | ||||||
| Other assets | 3,906 | 4,070 | ||||||
| Total other long-term assets | 27,266 | 26,445 | ||||||
| $ | 84,108 | $ | 82,777 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
| February 28, 2022 (Unaudited) | May 31, 2021 | |||||||
| LIABILITIES AND COMMON STOCKHOLDERS’ INVESTMENT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Current portion of long-term debt | $ | 116 | $ | 146 | ||||
| Accrued salaries and employee benefits | 2,489 | 2,903 | ||||||
| Accounts payable | 4,187 | 3,841 | ||||||
| Operating lease liabilities | 2,395 | 2,208 | ||||||
| Accrued expenses | 4,803 | 4,562 | ||||||
| Total current liabilities | 13,990 | 13,660 | ||||||
| LONG-TERM DEBT, LESS CURRENT PORTION | 20,393 | 20,733 | ||||||
| OTHER LONG-TERM LIABILITIES | ||||||||
| Deferred income taxes | 4,331 | 3,927 | ||||||
| Pension, postretirement healthcare, and other benefit obligations | 3,100 | 3,501 | ||||||
| Self-insurance accruals | 2,597 | 2,430 | ||||||
| Operating lease liabilities | 14,450 | 13,375 | ||||||
| Other liabilities | 721 | 983 | ||||||
| Total other long-term liabilities | 25,199 | 24,216 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| COMMON STOCKHOLDERS’ INVESTMENT | ||||||||
| Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of February 28, 2022 and May 31, 2021 | 32 | 32 | ||||||
| Additional paid-in capital | 3,686 | 3,481 | ||||||
| Retained earnings | 32,225 | 29,817 | ||||||
| Accumulated other comprehensive loss | (887 | ) | (732 | ) | ||||
| Treasury stock, at cost | (10,530 | ) | (8,430 | ) | ||||
| Total common stockholders’ investment | 24,526 | 24,168 | ||||||
| $ | 84,108 | $ | 82,777 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
| Three Months Ended February 28, | Nine Months Ended February 28, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUE | $ | 23,641 | $ | 21,510 | $ | 69,118 | $ | 61,394 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Salaries and employee benefits | 8,244 | 8,010 | 24,155 | 22,305 | ||||||||||||
| Purchased transportation | 6,272 | 5,660 | 18,172 | 16,044 | ||||||||||||
| Rentals and landing fees | 1,225 | 1,131 | 3,535 | 3,073 | ||||||||||||
| Depreciation and amortization | 986 | 956 | 2,952 | 2,818 | ||||||||||||
| Fuel | 1,201 | 756 | 3,355 | 1,946 | ||||||||||||
| Maintenance and repairs | 822 | 822 | 2,530 | 2,443 | ||||||||||||
| Business realignment costs | 107 | 10 | 218 | 10 | ||||||||||||
| Other | 3,458 | 3,160 | 9,880 | 8,695 | ||||||||||||
| 22,315 | 20,505 | 64,797 | 57,334 | |||||||||||||
| OPERATING INCOME | 1,326 | 1,005 | 4,321 | 4,060 | ||||||||||||
| OTHER (EXPENSE) INCOME: | ||||||||||||||||
| Interest, net | (163 | ) | (187 | ) | (478 | ) | (555 | ) | ||||||||
| Other retirement plans income | 211 | 202 | 380 | 553 | ||||||||||||
| Other, net | 1 | 29 | (11 | ) | 3 | |||||||||||
| 49 | 44 | (109 | ) | 1 | ||||||||||||
| INCOME BEFORE INCOME TAXES | 1,375 | 1,049 | 4,212 | 4,061 | ||||||||||||
| PROVISION FOR INCOME TAXES | 263 | 157 | 944 | 698 | ||||||||||||
| NET INCOME | $ | 1,112 | $ | 892 | $ | 3,268 | $ | 3,363 | ||||||||
| EARNINGS PER COMMON SHARE: | ||||||||||||||||
| Basic | $ | 4.26 | $ | 3.36 | $ | 12.36 | $ | 12.75 | ||||||||
| Diluted | $ | 4.20 | $ | 3.30 | $ | 12.17 | $ | 12.55 | ||||||||
| DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.75 | $ | 0.65 | $ | 3.00 | $ | 2.60 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEM****ENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLIONS)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| February 28, | February 28, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| NET INCOME | $ | 1,112 | $ | 892 | $ | 3,268 | $ | 3,363 | ||||||||
| OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||
| Foreign currency translation adjustments, net of tax expense of $3 and tax benefit of $1 in 2022 and tax expense of $1 and $5 in 2021 | 91 | 136 | (150 | ) | 389 | |||||||||||
| Amortization of prior service credit, net of tax benefit of $1 and $2 in 2022 and $0 and $1 in 2021 | (1 | ) | (2 | ) | (5 | ) | (6 | ) | ||||||||
| 90 | 134 | (155 | ) | 383 | ||||||||||||
| COMPREHENSIVE INCOME | $ | 1,202 | $ | 1,026 | $ | 3,113 | $ | 3,746 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FEDEX CORPORATION
CONDENSED CONSOLIDATED S****TATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
| Nine Months Ended February 28, | ||||||||
| 2022 | 2021 | |||||||
| Operating Activities: | ||||||||
| Net income | $ | 3,268 | $ | 3,363 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,952 | 2,818 | ||||||
| Provision for uncollectible accounts | 327 | 428 | ||||||
| Stock-based compensation | 151 | 161 | ||||||
| Retirement plans mark-to-market adjustments | 260 | 52 | ||||||
| Other noncash items including leases and deferred income taxes | 2,498 | 2,020 | ||||||
| Business realignment costs | 128 | — | ||||||
| Changes in assets and liabilities: | ||||||||
| Receivables | (66 | ) | (1,187 | ) | ||||
| Other assets | (235 | ) | (165 | ) | ||||
| Accounts payable and other liabilities | (2,892 | ) | 63 | |||||
| Other, net | (61 | ) | (161 | ) | ||||
| Cash provided by operating activities | 6,330 | 7,392 | ||||||
| Investing Activities: | ||||||||
| Capital expenditures | (4,379 | ) | (4,202 | ) | ||||
| Business acquisitions, net of cash acquired | — | (225 | ) | |||||
| Purchase of investments | (145 | ) | — | |||||
| Proceeds from asset dispositions and other | 71 | 88 | ||||||
| Cash used in investing activities | (4,453 | ) | (4,339 | ) | ||||
| Financing Activities: | ||||||||
| Principal payments on debt | (113 | ) | (105 | ) | ||||
| Proceeds from debt issuances | — | 970 | ||||||
| Proceeds from stock issuances | 151 | 482 | ||||||
| Dividends paid | (598 | ) | (513 | ) | ||||
| Purchase of treasury stock | (2,248 | ) | — | |||||
| Other, net | — | (13 | ) | |||||
| Cash (used in) provided by financing activities | (2,808 | ) | 821 | |||||
| Effect of exchange rate changes on cash | (91 | ) | 101 | |||||
| Net (decrease) increase in cash and cash equivalents | (1,022 | ) | 3,975 | |||||
| Cash and cash equivalents at beginning of period | 7,087 | 4,881 | ||||||
| Cash and cash equivalents at end of period | $ | 6,065 | $ | 8,856 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHA****NGES IN COMMON STOCKHOLDERS’ INVESTMENT
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| February 28, | February 28, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Common Stock | ||||||||||||||||
| Beginning Balance | $ | 32 | $ | 32 | $ | 32 | $ | 32 | ||||||||
| Ending Balance | 32 | 32 | 32 | 32 | ||||||||||||
| Additional Paid-in Capital | ||||||||||||||||
| Beginning Balance | 3,653 | 3,400 | 3,481 | 3,356 | ||||||||||||
| Employee incentive plans and other | 42 | 45 | 214 | 89 | ||||||||||||
| Purchase of treasury stock | (9 | ) | — | (9 | ) | — | ||||||||||
| Ending Balance | 3,686 | 3,445 | 3,686 | 3,445 | ||||||||||||
| Retained Earnings | ||||||||||||||||
| Beginning Balance | 31,307 | 27,208 | 29,817 | 25,216 | ||||||||||||
| Net Income | 1,112 | 892 | 3,268 | 3,363 | ||||||||||||
| Cash dividends declared ($0.75, $0.65, $3.00, and $2.60 per share) | (194 | ) | (173 | ) | (792 | ) | (686 | ) | ||||||||
| Employee incentive plans and other | — | (3 | ) | (68 | ) | 31 | ||||||||||
| Ending Balance | 32,225 | 27,924 | 32,225 | 27,924 | ||||||||||||
| Accumulated Other Comprehensive Loss | ||||||||||||||||
| Beginning Balance | (977 | ) | (898 | ) | (732 | ) | (1,147 | ) | ||||||||
| Other comprehensive income, net of tax (expense)/benefit of ($2), ($1), $3, and ($4) | 90 | 134 | (155 | ) | 383 | |||||||||||
| Ending Balance | (887 | ) | (764 | ) | (887 | ) | (764 | ) | ||||||||
| Treasury Stock | ||||||||||||||||
| Beginning Balance | (9,075 | ) | (8,703 | ) | (8,430 | ) | (9,162 | ) | ||||||||
| Purchase of treasury stock (6.1, 0.0, 8.9, and 0.0 million shares) | (1,491 | ) | — | (2,239 | ) | — | ||||||||||
| Employee incentive plans and other (0.3, 0.3, 1.1, and 3.7 million shares) | 36 | 47 | 139 | 506 | ||||||||||||
| Ending Balance | (10,530 | ) | (8,656 | ) | (10,530 | ) | (8,656 | ) | ||||||||
| Total Common Stockholders’ Investment Balance | $ | 24,526 | $ | 21,981 | $ | 24,526 | $ | 21,981 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FEDEX CORPORATION
NOTES TO CONDENSED CONSOLI****DATED 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, 2021 (“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 February 28, 2022, and the results of our operations for the three- and nine-month periods ended February 28, 2022 and 2021, cash flows for the nine-month periods ended February 28, 2022 and 2021, and changes in common stockholders’ investment for the three- and nine-month periods ended February 28, 2022 and 2021. Operating results for the three- and nine-month periods ended February 28, 2022 are not necessarily indicative of the results that may be expected for the year ending May 31, 2022.
Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2022 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 $819 million and $715 million at February 28, 2022 and May 31, 2021, respectively. Contract assets net of deferred unearned revenue were $591 million and $572 million at February 28, 2022 and May 31, 2021, 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 $8 million and $9 million at February 28, 2022 and May 31, 2021, respectively. Contract liabilities are included within current liabilities in the accompanying unaudited condensed consolidated balance sheets.
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Disaggregation of Revenue
The following table provides revenue by service type (in millions) for the periods ended February 28. This presentation is consistent with how we organize our segments internally for making operating decisions and measuring performance.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUE BY SERVICE TYPE | ||||||||||||||||
| FedEx Express segment: | ||||||||||||||||
| Package: | ||||||||||||||||
| U.S. overnight box | $ | 2,275 | $ | 2,078 | $ | 6,694 | $ | 5,951 | ||||||||
| U.S. overnight envelope | 479 | 444 | 1,435 | 1,305 | ||||||||||||
| U.S. deferred | 1,422 | 1,418 | 3,960 | 3,718 | ||||||||||||
| Total U.S. domestic package revenue | 4,176 | 3,940 | 12,089 | 10,974 | ||||||||||||
| International priority | 2,991 | 2,596 | 8,937 | 7,423 | ||||||||||||
| International economy | 697 | 653 | 2,072 | 1,927 | ||||||||||||
| Total international export package revenue | 3,688 | 3,249 | 11,009 | 9,350 | ||||||||||||
| International domestic(1) | 1,016 | 1,162 | 3,277 | 3,456 | ||||||||||||
| Total package revenue | 8,880 | 8,351 | 26,375 | 23,780 | ||||||||||||
| Freight: | ||||||||||||||||
| U.S. | 712 | 860 | 2,262 | 2,492 | ||||||||||||
| International priority | 948 | 775 | 2,815 | 2,165 | ||||||||||||
| International economy | 378 | 383 | 1,230 | 1,162 | ||||||||||||
| International airfreight | 40 | 56 | 134 | 196 | ||||||||||||
| Total freight revenue | 2,078 | 2,074 | 6,441 | 6,015 | ||||||||||||
| Other | 346 | 363 | 1,059 | 1,008 | ||||||||||||
| Total FedEx Express segment | 11,304 | 10,788 | 33,875 | 30,803 | ||||||||||||
| FedEx Ground segment | 8,800 | 7,980 | 24,741 | 22,364 | ||||||||||||
| FedEx Freight segment | 2,253 | 1,836 | 6,776 | 5,598 | ||||||||||||
| FedEx Services segment | 65 | 8 | 177 | 24 | ||||||||||||
| Other and eliminations(2) | 1,219 | 898 | 3,549 | 2,605 | ||||||||||||
| $ | 23,641 | $ | 21,510 | $ | 69,118 | $ | 61,394 |
(1)
International domestic revenue relates to our international intra-country operations.
(2)
Includes the FedEx Office and Print Services, Inc. (“FedEx Office”), FedEx Logistics, Inc. (“FedEx Logistics”), and FedEx Dataworks (including ShopRunner, Inc.) (“FedEx Dataworks”) 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, and became amendable in November 2021. Bargaining for a successor agreement began in May 2021 and continues. A small number of our other employees are members of unions.
EQUITY INVESTMENT. On December 8, 2021, FedEx Express finalized its strategic alliance with Delhivery Limited (“Delhivery”). In connection with the strategic alliance, FedEx Express and Delhivery entered into equity and commercial agreements. As part of the collaboration, FedEx Express made a $100 million equity investment in Delhivery, FedEx Express sold certain assets pertaining to its domestic business in India to Delhivery, and the companies entered into a long-term commercial agreement. FedEx Express will focus on international export and import services to and from India, and Delhivery will, in addition to FedEx, sell FedEx Express international services in the India market and provide pickup-and-delivery services across India. This transaction was recorded in the third quarter of 2022 and was not material to our results of operations.
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 $39 million for the three-month period ended February 28, 2022 and $151 million for the nine-month period ended February 28, 2022. Our stock-based compensation expense was $40 million for the three-month period ended February 28, 2021 and $161 million for the nine-month period ended February 28, 2021. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.
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BUSINESS REALIGNMENT COSTS. In 2021, FedEx Express announced a workforce reduction plan in Europe as it nears the completion of the network integration of TNT Express. The plan will affect approximately 5,000 employees in Europe across operational teams and back-office functions. The execution of the plan is subject to a works council consultation process that will occur through 2023 in accordance with local country processes and regulations.
We incurred costs associated with our business realignment activities of $107 million ($82 million, net of tax, or $0.31 per diluted share) in the third quarter and $218 million ($168 million, net of tax, or $0.63 per diluted share) in the nine months of 2022. We recognized $116 million ($90 million, net of tax, or $0.33 per diluted share) of costs under this program in the second half of 2021. These costs are related to certain employee severance arrangements. Payments under this program totaled approximately $30 million in the third quarter and $86 million in the nine months of 2022. We expect the pre-tax cost of our business realignment activities to range from $380 million to $450 million through 2023. The actual amount and timing of business realignment costs and related cost savings resulting from the workforce reduction plan are dependent on local country consultation processes and regulations and negotiated social plans and may differ from our current expectation and estimates. For additional information about the business realignment costs, see the section titled “Business Realignment Costs” included in Item 2 of this Form 10-Q (“Management’s Discussion and Analysis of Results of Operations and Financial Condition”).
DERIVATIVE FINANCIAL INSTRUMENTS. Our risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign currency exchange exposure on operating results and cash flows. In accordance with our risk management policies, we do not hold or issue derivative instruments for trading or speculative purposes. All derivative instruments are recognized in the financial statements at fair value, regardless of the purpose or intent for holding them.
When we become a party to a derivative instrument and intend to apply hedge accounting, we formally document the hedge relationship and the risk management objective for undertaking the hedge, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge.
If a derivative is designated as a cash flow hedge, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in other comprehensive income. For net investment hedges, the entire change in the fair value is recorded in 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 February 28, 2022, we had €150 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 February 28, 2022, the hedge remains effective.
RECENT ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly affect 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.
New Accounting Standards and Accounting Standards Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for applying accounting principles generally accepted in the United States to existing contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate to be discontinued because of reference rate reform. The guidance was effective upon issuance and can generally be applied through December 31, 2022. While there has been no material effect to our financial condition, results of operations, or cash flows from reference rate reform as of February 28, 2022, we continue to monitor our contracts and transactions for potential application of this ASU. See Note 4 for information on the replacement of LIBOR with the Secured Overnight Financing Rate (“SOFR”) in our Credit Agreements (defined below) on March 15, 2022.
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which provides alternative accounting for sales-type and direct financing leases with variable lease payments. The guidance allows lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or rate as an operating lease if certain criteria are met. These changes will be effective June 1, 2022 (fiscal 2023). We do not have leases classified as sales-type or direct financing and will apply the guidance on a prospective basis to applicable leases that commence or are modified on or after June 1, 2022.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. These changes will be effective June 1, 2022 (fiscal 2023). We are assessing the effect of this new standard on our consolidated financial statements and related disclosures.
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TREASURY SHARES. In January 2016, our Board of Directors approved a stock repurchase program of up to 25 million shares (the “2016 repurchase program”). In December 2021, our Board of Directors authorized a new stock repurchase program of up to $5 billion of FedEx common stock (the “2022 repurchase program” and together with the 2016 repurchase program, the “repurchase programs”). As part of the repurchase programs, we entered into an accelerated share repurchase (“ASR”) agreement with a bank in December 2021 to repurchase an aggregate of $1.5 billion of our common stock.
During the third quarter of 2022, the ASR transaction was completed, and 6.1 million shares were delivered under the ASR agreement. The final number of shares delivered upon settlement of the ASR agreement was determined based on a discount to the volume-weighted average price of our stock during the term of the transaction. The repurchased shares were accounted for as a reduction to common stockholders’ investment in the accompanying consolidated balance sheet and resulted in a reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. The 6.1 million shares delivered under the ASR agreement were the only shares of FedEx common stock we repurchased during the third quarter of 2022.
During the nine months ended February 28, 2022, including the ASR transaction, we repurchased 8.9 million shares of FedEx common stock at an average price of $253.85 per share for a total of $2.2 billion. As of February 28, 2022, approximately $4.1 billion remained available to use for repurchases under the 2022 repurchase program. No shares remain available for repurchase under the 2016 repurchase program.
Shares under the 2022 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 limits were set for the completion of the program, and the program may be suspended or discontinued at any time.
DIVIDENDS DECLARED PER COMMON SHARE. On February 11, 2022, our Board of Directors declared a quarterly dividend of $0.75 per share of common stock. The dividend will be paid on April 1, 2022 to stockholders of record as of the close of business on March 7, 2022. 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. There are no 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.
(2) Credit Losses
We are exposed to credit losses primarily through our trade receivables. We assess ability for certain customers to pay 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.
Credit losses were $116 million for the three-month period ended February 28, 2022 and $327 million for the nine-month period ended February 28, 2022. Credit losses were $137 million for the three-month period ended February 28, 2021 and $428 million for the nine-month period ended February 28, 2021. Our allowance for credit losses was $390 million at February 28, 2022 and $358 million at May 31, 2021.
(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 periods ended February 28 (in millions; amounts in parentheses indicate debits to AOCI):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Foreign currency translation loss: | ||||||||||||||||
| Balance at beginning of period | $ | (1,026 | ) | $ | (954 | ) | $ | (785 | ) | $ | (1,207 | ) | ||||
| Translation adjustments | 91 | 136 | (150 | ) | 389 | |||||||||||
| Balance at end of period | (935 | ) | (818 | ) | (935 | ) | (818 | ) | ||||||||
| Retirement plans adjustments: | ||||||||||||||||
| Balance at beginning of period | 49 | 56 | 53 | 60 | ||||||||||||
| Reclassifications from AOCI | (1 | ) | (2 | ) | (5 | ) | (6 | ) | ||||||||
| Balance at end of period | 48 | 54 | 48 | 54 | ||||||||||||
| Accumulated other comprehensive (loss) at end of period | $ | (887 | ) | $ | (764 | ) | $ | (887 | ) | $ | (764 | ) |
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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 | |||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||
| Amortization of retirement plans prior service credits, before tax | $ | 2 | $ | 2 | $ | 7 | $ | 7 | Other retirement plans income | |||||||||
| Income tax benefit | (1 | ) | — | (2 | ) | (1 | ) | Provision for income taxes | ||||||||||
| AOCI reclassifications, net of tax | $ | 1 | $ | 2 | $ | 5 | $ | 6 | 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.
FedEx Express has 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 Certificates are secured by 19 Boeing aircraft with a net book value of $1.8 billion at February 28, 2022. 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.
On March 15, 2022, we further amended our second amended and restated $2.0 billion five-year credit agreement (the “Five-Year Credit Agreement”) and replaced our previously existing $1.5 billion 364-day credit agreement (the “Terminated Credit Agreement”) with a $1.5 billion three-year credit agreement (the “Three-Year Credit Agreement” and together with the Five-Year Credit Agreement, the “Credit Agreements”). The Five-Year Credit Agreement expires in March 2026 and includes a $250 million letter of credit sublimit. The Three-Year Credit Agreement expires in March 2025. The Credit Agreements are available to finance our operations and other cash flow needs. As of February 28, 2022, no commercial paper was outstanding, and we had $250 million of the letter of credit sublimit unused under the Five-Year Credit Agreement. Outstanding commercial paper reduces the amount available to borrow under the Credit Agreements.
As a result of the discontinuation of LIBOR from recent reference rate reform, effective March 15, 2022, all references to LIBOR in the Five-Year Credit Agreement have been replaced with references to SOFR, the recommended risk-free reference rate of the Federal Reserve Board and Alternative Reference Rates Committee, and the additional procedures for transition to a reference rate other than LIBOR have been removed from the Five-Year Credit Agreement. The Three-Year Credit Agreement includes identical provisions regarding SOFR. We do not expect the change in rate to have a material impact on our financial condition, results of operations, or cash flows.
Our Credit Agreements contain a financial covenant requiring us to maintain a ratio of debt to consolidated earnings (excluding noncash retirement plans mark-to-market (“MTM”) adjustments, noncash pension service costs, and noncash asset impairment charges) before interest, taxes, depreciation, and amortization (“adjusted EBITDA”) of not more than 3.5 to 1.0, calculated as of the last day of each fiscal quarter on a rolling four-quarters basis. The Terminated Credit Agreement also included this financial covenant. The ratio of our debt to adjusted EBITDA was 1.87 to 1.0 at February 28, 2022.
The financial covenant discussed above is the only significant restrictive covenant in the Credit Agreements. The Credit Agreements contain other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the financial covenant and all other covenants in the Credit Agreements and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. If we failed to comply with the financial covenant or any other covenants in the Credit Agreements, our access to financing could become limited.
Long-term debt, including current maturities and exclusive of finance leases, had carrying values of $20.0 billion at February 28, 2022 and $20.4 billion at May 31, 2021, compared with estimated fair values of $21.2 billion at February 28, 2022 and $23.1 billion at May 31, 2021. The annualized weighted-average interest rate on long-term debt was 3.5% at February 28, 2022. 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.
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(5) 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 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Basic earnings per common share: | ||||||||||||||||
| Net earnings allocable to common shares(1) | $ | 1,110 | $ | 889 | $ | 3,262 | $ | 3,356 | ||||||||
| Weighted-average common shares | 261 | 265 | 264 | 263 | ||||||||||||
| Basic earnings per common share | $ | 4.26 | $ | 3.36 | $ | 12.36 | $ | 12.75 | ||||||||
| Diluted earnings per common share: | ||||||||||||||||
| Net earnings allocable to common shares(1) | $ | 1,110 | $ | 889 | $ | 3,262 | $ | 3,356 | ||||||||
| Weighted-average common shares | 261 | 265 | 264 | 263 | ||||||||||||
| Dilutive effect of share-based awards | 4 | 5 | 4 | 4 | ||||||||||||
| Weighted-average diluted shares | 265 | 270 | 268 | 267 | ||||||||||||
| Diluted earnings per common share | $ | 4.20 | $ | 3.30 | $ | 12.17 | $ | 12.55 | ||||||||
| Anti-dilutive options excluded from diluted earnings per common share | 4.4 | 2.0 | 3.8 | 4.1 |
(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.
Our retirement plans costs for the periods ended February 28 were as follows (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Defined benefit pension plans, net | $ | 2 | $ | 20 | $ | (3 | ) | $ | 72 | |||||||
| Defined contribution plans | 226 | 182 | 577 | 493 | ||||||||||||
| Postretirement healthcare plans | 22 | 21 | 67 | 62 | ||||||||||||
| Retirement plans MTM net loss | — | — | 260 | 52 | ||||||||||||
| $ | 250 | $ | 223 | $ | 901 | $ | 679 |
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 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Service cost | $ | 209 | $ | 213 | $ | 14 | $ | 19 | $ | 12 | $ | 11 | ||||||||||||
| Other retirement plans expense (income): | ||||||||||||||||||||||||
| Interest cost | 254 | 240 | 8 | 10 | 10 | 10 | ||||||||||||||||||
| Expected return on plan assets | (478 | ) | (447 | ) | (3 | ) | (13 | ) | — | — | ||||||||||||||
| Amortization of prior service credit and other | (1 | ) | (2 | ) | (1 | ) | — | — | — | |||||||||||||||
| (225 | ) | (209 | ) | 4 | (3 | ) | 10 | 10 | ||||||||||||||||
| $ | (16 | ) | $ | 4 | $ | 18 | $ | 16 | $ | 22 | $ | 21 | ||||||||||||
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| Nine Months Ended | ||||||||||||||||||||||||
| U.S. Pension Plans | International Pension Plans | Postretirement Healthcare Plans | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Service cost | $ | 625 | $ | 638 | $ | 43 | $ | 68 | $ | 36 | $ | 33 | ||||||||||||
| Other retirement plans expense (income): | ||||||||||||||||||||||||
| Interest cost | 765 | 719 | 27 | 31 | 31 | 29 | ||||||||||||||||||
| Expected return on plan assets | (1,433 | ) | (1,339 | ) | (23 | ) | (38 | ) | — | — | ||||||||||||||
| Amortization of prior service credit and other | (5 | ) | (6 | ) | (2 | ) | (1 | ) | — | — | ||||||||||||||
| MTM net loss | 36 | — | 224 | 52 | — | — | ||||||||||||||||||
| (637 | ) | (626 | ) | 226 | 44 | 31 | 29 | |||||||||||||||||
| $ | (12 | ) | $ | 12 | $ | 269 | $ | 112 | $ | 67 | $ | 62 |
For 2022, 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 $500 million during the nine months of 2022.
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 introduced 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 were 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 PPA and move to the new 401(k) plan with the higher company match of up to 8%. Changes to the new 401(k) plan structure became effective 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.
In the second quarter of 2022, we incurred a pre-tax, noncash MTM net loss of $36 million related to the U.S. FedEx Freight Pension Plan. During the second quarter of 2022, 21% of FedEx Freight Corporation (“FedEx Freight”) employees elected to move from the current pension/401(k) benefit structure to the new 401(k)-only structure with a higher company match effective January 1, 2022. The $36 million net loss consisted of a $75 million MTM loss due to a lower discount rate, partially offset by a $39 million curtailment gain.
We incurred an additional pre-tax, noncash MTM net loss of $224 million in the second quarter of 2022 related to the termination of the TNT Express Netherlands Pension Plan. Effective October 1, 2021, the responsibility of all pension assets and liabilities of this plan was transferred to a separate, multi-employer pension plan.
In the second quarter of 2021, we incurred a pre-tax, noncash MTM net loss of $52 million related to amendments to the TNT Express Netherlands Pension Plan. Benefits for approximately 2,100 employees were frozen effective December 31, 2020. Effective January 1, 2021, these employees began earning pension benefits under a separate, multi-employer pension plan. This $52 million net loss consisted of a $106 million MTM loss due to a lower discount rate and a $54 million curtailment gain.
(7) Business Segment Information
We provide a broad portfolio of transportation, e-commerce, and business services through companies competing collectively, operating collaboratively, and innovating digitally under the respected FedEx brand. Our primary operating companies are FedEx 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, 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.
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Our reportable segments include the following businesses:
| FedEx Express Segment | FedEx Express (express transportation, small-package ground delivery, and freight transportation) |
| FedEx Custom Critical, Inc. (time-critical transportation) | |
| FedEx Ground Segment | FedEx Ground (small-package ground delivery) |
| FedEx Freight Segment | FedEx Freight (LTL freight transportation) |
| FedEx Services Segment | FedEx Services (sales, marketing, information technology, communications, customer service, technical support, billing and collection services, and back-office functions) |
During the third quarter of 2022, FedEx Cross Border Holdings, Inc. was merged into FedEx Express. References to our transportation segments include, collectively, the FedEx Express segment, the FedEx Ground segment, and the FedEx Freight segment.
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 effect 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, including certain other costs and credits not attributed to our core business, as well as certain costs associated with developing our innovate digitally strategic pillar through our FedEx Dataworks operating segment. FedEx Dataworks is focused on creating solutions to transform the digital and physical experiences of our customers and team members.
Also included in Corporate and other are 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.
The results of Corporate, other, and eliminations are not allocated to the other business segments.
Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment in order to optimize our resources. 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.
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The following table provides a reconciliation of reportable segment revenue and operating income (loss) to our unaudited condensed consolidated financial statement totals for the periods ended February 28 (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue: | ||||||||||||||||
| FedEx Express segment | $ | 11,304 | $ | 10,788 | $ | 33,875 | $ | 30,803 | ||||||||
| FedEx Ground segment | 8,800 | 7,980 | 24,741 | 22,364 | ||||||||||||
| FedEx Freight segment | 2,253 | 1,836 | 6,776 | 5,598 | ||||||||||||
| FedEx Services segment | 65 | 8 | 177 | 24 | ||||||||||||
| Other and eliminations | 1,219 | 898 | 3,549 | 2,605 | ||||||||||||
| $ | 23,641 | $ | 21,510 | $ | 69,118 | $ | 61,394 | |||||||||
| Operating income (loss): | ||||||||||||||||
| FedEx Express segment | $ | 520 | $ | 463 | $ | 2,036 | $ | 2,073 | ||||||||
| FedEx Ground segment | 641 | 702 | 1,793 | 2,088 | ||||||||||||
| FedEx Freight segment | 337 | 119 | 1,061 | 645 | ||||||||||||
| Corporate, other, and eliminations | (172 | ) | (279 | ) | (569 | ) | (746 | ) | ||||||||
| $ | 1,326 | $ | 1,005 | $ | 4,321 | $ | 4,060 |
(8) Commitments
As of February 28, 2022, our purchase commitments under various contracts for the remainder of 2022 and annually thereafter were as follows (in millions):
| Aircraft and Related | Other**(1)** | Total | ||||||||||
| 2022 (remainder) | $ | 242 | $ | 287 | $ | 529 | ||||||
| 2023 | 2,636 | 838 | 3,474 | |||||||||
| 2024 | 1,929 | 614 | 2,543 | |||||||||
| 2025 | 1,392 | 463 | 1,855 | |||||||||
| 2026 | 423 | 391 | 814 | |||||||||
| Thereafter | 2,271 | 268 | 2,539 | |||||||||
| Total | $ | 8,893 | $ | 2,861 | $ | 11,754 |
(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, 2022, our obligation to purchase two Boeing 777 Freighter (“B777F”) aircraft and two Boeing 767-300 Freighter (“B767F”) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended. 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 first quarter of 2022, FedEx Express exercised options to purchase an additional 20 B767F aircraft, ten of which will be delivered in 2024 and ten of which will be delivered in 2025.
As of February 28, 2022, we had $677 million in deposits and progress payments on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our accompanying unaudited condensed consolidated balance sheets. Aircraft and related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of February 28, 2022 with the year of expected delivery:
| Cessna SkyCourier 408 | ATR 72-600F | B767F | B777F | Total | ||||||||||||||||
| 2022 (remainder) | 3 | 5 | 3 | — | 11 | |||||||||||||||
| 2023 | 12 | 6 | 13 | 2 | 33 | |||||||||||||||
| 2024 | 12 | 6 | 14 | 4 | 36 | |||||||||||||||
| 2025 | 12 | 6 | 10 | 2 | 30 | |||||||||||||||
| 2026 | 11 | 1 | — | — | 12 | |||||||||||||||
| Thereafter | — | — | — | — | — | |||||||||||||||
| Total | 50 | 24 | 40 | 8 | 122 |
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A summary of future minimum lease payments under noncancelable operating and finance leases with an initial or remaining term in excess of one year as of February 28, 2022 is as follows (in millions):
| Aircraft and Related Equipment | Facilities and Other | Total Operating Leases | Finance Leases | Total Leases | ||||||||||||||||
| 2022 (remainder) | $ | 33 | $ | 531 | $ | 564 | $ | 52 | $ | 616 | ||||||||||
| 2023 | 200 | 2,674 | 2,874 | 35 | 2,909 | |||||||||||||||
| 2024 | 111 | 2,343 | 2,454 | 31 | 2,485 | |||||||||||||||
| 2025 | 80 | 2,078 | 2,158 | 27 | 2,185 | |||||||||||||||
| 2026 | 73 | 1,826 | 1,899 | 22 | 1,921 | |||||||||||||||
| Thereafter | 223 | 9,139 | 9,362 | 691 | 10,053 | |||||||||||||||
| Total lease payments | 720 | 18,591 | 19,311 | 858 | 20,169 | |||||||||||||||
| Less imputed interest | (55 | ) | (2,411 | ) | (2,466 | ) | (357 | ) | (2,823 | ) | ||||||||||
| Present value of lease liability | $ | 665 | $ | 16,180 | $ | 16,845 | $ | 501 | $ | 17,346 |
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.
As of February 28, 2022, FedEx has entered into additional leases which have not yet commenced and are therefore not part of the right-of-use asset and liability. These leases are generally for build-to-suit facilities and have undiscounted future payments of approximately $2.6 billion that will commence when FedEx gains beneficial access to the leased asset. Commencement dates are expected to be from 2022 to 2023.
(9) Contingencies
Service Provider Lawsuits. FedEx Ground is defending lawsuits in which it is alleged that FedEx Ground should be treated as a joint employer of drivers employed by service providers 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 these matters could, among other things, entitle service providers’ drivers to certain wage payments from the service providers and FedEx Ground and result in employment and withholding tax and benefit liability for FedEx Ground. We continue to believe that FedEx Ground is not an employer or joint employer of the drivers of these independent businesses.
Derivative Lawsuit Related to New York Cigarette Litigation. On October 3, 2019, FedEx and certain present and former FedEx directors and officers were named as defendants in a stockholder derivative lawsuit filed in the Delaware Court of Chancery. The complaint alleged the defendants breached their fiduciary duties in connection with the activities alleged in lawsuits filed by the City of New York and the State of New York against FedEx Ground in December 2013 and November 2014 and against FedEx Ground and FedEx Freight in July 2017. The underlying lawsuits related to the alleged shipment of cigarettes to New York residents in contravention of several statutes, as well as common law nuisance claims, and were dismissed by the court in December 2018 following entry into a final settlement agreement for approximately $35 million. The settlement did not include any admission of liability by FedEx Ground or FedEx Freight. In addition to the settlement amount, we recognized approximately $10 million for certain attorney’s fees in connection with the underlying lawsuits. On June 28, 2021, the stockholder derivative lawsuit was dismissed with prejudice. The dismissal was appealed on July 28, 2021. On February 25, 2022, the Delaware Supreme Court affirmed the dismissal, and the matter is now concluded.
Other Matters. 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, as well as lawsuits containing allegations that FedEx and its subsidiaries are responsible for third-party losses related to vehicle accidents that could exceed our insurance coverage for such losses. 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.
Environmental Matters. SEC regulations require us to disclose certain information about proceedings arising under federal, state, or local environmental provisions if we reasonably believe that such proceedings may result in monetary sanctions above a stated threshold. Pursuant to the SEC regulations, FedEx uses a threshold of $1 million or more for purposes of determining whether disclosure of any such proceedings is required. Applying this threshold, there are no environmental matters required to be disclosed for this period.
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(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):
| 2022 | 2021 | |||||||
| Cash payments for: | ||||||||
| Interest (net of capitalized interest) | $ | 496 | $ | 593 | ||||
| Income taxes | $ | 628 | $ | 934 | ||||
| Income tax refunds received | (180 | ) | (42 | ) | ||||
| Cash tax payments, net | $ | 448 | $ | 892 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
FedEx Corporation
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of FedEx Corporation (the Company) as of February 28, 2022, the related condensed consolidated statements of income, comprehensive income, and changes in common stockholders’ investment for the three- and nine-month periods ended February 28, 2022 and 2021, the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 2022 and 2021, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements 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) (PCAOB), the consolidated balance sheet of the Company as of May 31, 2021, the related consolidated statements of income, comprehensive income, cash flows, and changes in common stockholders’ investment for the year then ended, and the related notes (not presented herein); and in our report dated July 19, 2021, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2021 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements 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 PCAOB, 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.
| /s/ Ernst & Young LLP |
Memphis, Tennessee
March 17, 2022
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Next: Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition