10-Q 1 d643060d10q.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

FOR THE QUARTERLY PERIOD ENDED November 30, 2013

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 1-15829

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   62-1721435
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
942 South Shady Grove Road Memphis, Tennessee   38120
(Address of principal executive offices)   (ZIP Code)

(901) 818-7500

(Registrant’s telephone number, including area code)

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

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

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

 

Large accelerated filer x

  Accelerated filer ¨   Non-accelerated filer ¨        Smaller reporting company ¨
  (Do not check if a smaller reporting company)

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

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

 

Common Stock   Outstanding Shares at December 18, 2013

Common Stock, par value $0.10 per share

 

312,228,182

 

 

 


Table of Contents

FEDEX CORPORATION

INDEX

 

 

     PAGE  
PART I. FINANCIAL INFORMATION   

ITEM 1. Financial Statements

  

Condensed Consolidated Balance Sheets
November 30, 2013 and May 31, 2013

     3   

Condensed Consolidated Statements of Income
Three and Six Months Ended November 30, 2013 and 2012

     5   

Condensed Consolidated Statements of Comprehensive Income
Three and Six Months Ended November  30, 2013 and 2012

     6   

Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 2013 and 2012

     7   

Notes to Condensed Consolidated Financial Statements

     8   

Report of Independent Registered Public Accounting Firm

     26   

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

     27   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     53   

ITEM 4. Controls and Procedures

     53   
PART II. OTHER INFORMATION   

ITEM 1. Legal Proceedings

     54   

ITEM 1A. Risk Factors

     54   

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

     54   

ITEM 5. Other Information

     54   

ITEM 6. Exhibits

     55   

Signature

     56   

Exhibit Index

     E-1   

Exhibit 10.1

  

Exhibit 10.2

  

Exhibit 10.3

  

Exhibit 10.4

  

Exhibit 10.5

  

Exhibit 12.1

  

Exhibit 15.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

Exhibit 99.1

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

EX-101 DEFINITION LINKBASE DOCUMENT

  

 

- 2 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

     November 30,         
     2013      May 31,  
     (Unaudited)      2013  

ASSETS

     

CURRENT ASSETS

     

Cash and cash equivalents

   $ 3,935      $ 4,917  

Receivables, less allowances of $162 and $176

     5,377        5,044  

Spare parts, supplies and fuel, less allowances of $202 and $205

     458        457  

Deferred income taxes

     655        533  

Prepaid expenses and other

     441        323  
  

 

 

    

 

 

 

Total current assets

     10,866        11,274  

PROPERTY AND EQUIPMENT, AT COST

     39,301        38,109  

Less accumulated depreciation and amortization

     20,181        19,625  
  

 

 

    

 

 

 

Net property and equipment

     19,120        18,484  

OTHER LONG-TERM ASSETS

     

Goodwill

     2,737        2,755  

Other assets

     819        1,054  
  

 

 

    

 

 

 

Total other long-term assets

     3,556        3,809  
  

 

 

    

 

 

 
   $   33,542      $       33,567  
  

 

 

    

 

 

 

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

 

- 3 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

     November 30,        
     2013     May 31,  
     (Unaudited)     2013  

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

    

CURRENT LIABILITIES

    

Current portion of long-term debt

   $ 251     $ 251  

Accrued salaries and employee benefits

     1,403       1,688  

Accounts payable

     1,868       1,879  

Accrued expenses

     1,884       1,932  
  

 

 

   

 

 

 

Total current liabilities

     5,406       5,750  

LONG-TERM DEBT, LESS CURRENT PORTION

     2,739       2,739  

OTHER LONG-TERM LIABILITIES

    

Deferred income taxes

     1,945       1,652  

Pension, postretirement healthcare and other benefit obligations

     3,704       3,916  

Self-insurance accruals

     1,009       987  

Deferred lease obligations

     882       778  

Deferred gains, principally related to aircraft transactions

     215       227  

Other liabilities

     109       120  
  

 

 

   

 

 

 

Total other long-term liabilities

     7,864       7,680  

COMMITMENTS AND CONTINGENCIES

    

COMMON STOCKHOLDERS’ INVESTMENT

    

Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of November 30, 2013 and May 31, 2013

     32       32  

Additional paid-in capital

     2,666       2,668  

Retained earnings

     19,366       18,519  

Accumulated other comprehensive loss

     (3,769     (3,820

Treasury stock, at cost

     (762     (1
  

 

 

   

 

 

 

Total common stockholders’ investment

     17,533       17,398  
  

 

 

   

 

 

 
   $   33,542     $       33,567  
  

 

 

   

 

 

 

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

 

- 4 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
     2013     2012     2013     2012  

REVENUES

   $   11,403     $   11,107     $   22,427     $   21,899  

OPERATING EXPENSES:

        

Salaries and employee benefits

     4,148       4,133       8,225       8,236  

Purchased transportation

     2,040       1,860       3,919       3,540  

Rentals and landing fees

     648       630       1,288       1,248  

Depreciation and amortization

     647       592       1,286       1,165  

Fuel

     1,136       1,235       2,240       2,373  

Maintenance and repairs

     479       511       959       1,053  

Other

     1,478       1,428       2,888       2,824  
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,576       10,389       20,805       20,439  
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     827       718       1,622       1,460  

OTHER INCOME (EXPENSE):

        

Interest, net

     (30     (18     (57     (28

Other, net

     (5     (8     (7     (13
  

 

 

   

 

 

   

 

 

   

 

 

 
     (35     (26     (64     (41
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     792       692       1,558       1,419  

PROVISION FOR INCOME TAXES

     292       254       569       522  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 500     $ 438     $ 989     $ 897  
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER COMMON SHARE:

        

Basic

   $ 1.58     $ 1.39     $ 3.13     $ 2.85  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.57     $ 1.39     $ 3.10     $ 2.84  
  

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.15     $ 0.14     $ 0.45     $ 0.42  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

- 5 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
     2013      2012      2013     2012  

NET INCOME

   $   500      $   438      $ 989     $ 897  

OTHER COMPREHENSIVE INCOME (LOSS):

          

Foreign currency translation adjustments, net of tax of $6, $2, $4 and $6

     45        14        (34     57  

Amortization of unrealized pension actuarial gains/losses and other, net of tax of $25, $38, $50 and $75

     43        63        85       126  
  

 

 

    

 

 

    

 

 

   

 

 

 
     88        77        51       183  
  

 

 

    

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 588      $ 515      $   1,040     $   1,080  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

 

 

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

 

- 6 -


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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

 

     Six Months Ended
November 30,
 
     2013     2012  

Operating Activities:

    

Net income

   $ 989     $ 897  

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

    

Depreciation and amortization

     1,286       1,165  

Provision for uncollectible accounts

     65       93  

Stock-based compensation

     71       64  

Deferred income taxes and other noncash items

     201       267  

Changes in assets and liabilities:

    

Receivables

     (385     (503

Other assets

     (126     94  

Accounts payable and other liabilities

     (476     (345

Other, net

     (16     (14
  

 

 

   

 

 

 

Cash provided by operating activities

     1,609       1,718  

Investing Activities:

    

Capital expenditures

     (1,690     (1,888

Business acquisitions, net of cash acquired

           (483

Proceeds from asset dispositions and other

     19       20  
  

 

 

   

 

 

 

Cash used in investing activities

     (1,671     (2,351

Financing Activities:

    

Principal payments on debt

     (3     (417

Proceeds from debt issuance

           991  

Proceeds from stock issuances

     380       53  

Excess tax benefit on the exercise of stock options

     20       6  

Dividends paid

     (95     (88

Purchase of treasury stock

     (1,219     (246

Other, net

           (9
  

 

 

   

 

 

 

Cash (used in) provided by financing activities

     (917     290  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (3     17  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (982     (326

Cash and cash equivalents at beginning of period

     4,917       2,843  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,935     $ 2,517  
  

 

 

   

 

 

 

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

 

- 7 -


Table of Contents

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, 2013 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of November 30, 2013, the results of our operations for the three- and six-month periods ended November 30, 2013 and 2012 and cash flows for the six-month periods ended November 30, 2013 and 2012. Operating results for the three- and six-month periods ended November 30, 2013 are not necessarily indicative of the results that may be expected for the year ending May 31, 2014.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2014 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

BUSINESS ACQUISITIONS. As discussed in our Annual Report, on June 20, 2013, we signed agreements to acquire the businesses operated by our current service provider Supaswift (Pty) Ltd. in five countries in Southern Africa. In addition, on September 2, 2013, we entered into an agreement to acquire Supaswift’s business in two additional countries. This acquisition will be funded with cash from operations and is expected to be completed in the second half of 2014, subject to customary closing conditions. The financial results of the acquired businesses will be included in the FedEx Express segment from the date of acquisition and will be immaterial to our 2014 results.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of FedEx Express, which represent a small number of FedEx Express’s total employees, are employed under a collective bargaining agreement. The contract became amendable in March 2013, and the parties are currently in negotiations. In addition to our pilots at FedEx Express, certain non-U.S. employees are unionized.

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

Our stock-based compensation expense was $26 million for the three-month period ended November 30, 2013 and $71 million for the six-month period ended November 30, 2013. Our stock-based compensation expense was $25 million for the three-month period ended November 30, 2012 and $64 million for the six-month period ended November 30, 2012. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

RECENT ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.

On June 1, 2013, we adopted the authoritative guidance issued by the Financial Accounting Standards Board requiring additional information about reclassification adjustments out of accumulated other comprehensive income, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. We have adopted this guidance by including expanded accumulated other comprehensive income disclosure requirements in Note 2 of our condensed consolidated financial statements.

 

- 8 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

While no other new accounting guidance was adopted or issued during the first half of 2014 that is relevant to the readers of our financial statements, there are numerous proposals under development which, if and when enacted, may have a significant impact on our financial reporting as described in our Annual Report.

STOCK REPURCHASE PROGRAM AND DIVIDENDS. In October 2013, our Board of Directors authorized a new share repurchase program of up to 32 million shares of common stock. These shares augmented the 7.4 million shares remaining on our previously authorized share repurchase program. The shares may be purchased from time to time in the open market or in privately negotiated transactions. Repurchases will be made at the company’s discretion, based on ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit was set for the completion of the repurchase program, and the program may be suspended or discontinued at any time.

During the first half of 2014, we repurchased 10 million shares of FedEx common stock at an average price of $122 per share for a total of $1.2 billion. As of November 30, 2013, 32.2 million shares remained under existing share repurchase authorizations.

On November 15, 2013, our Board of Directors declared a dividend of $0.15 per share of common stock. The dividend will be paid on January 2, 2014 to stockholders of record as of the close of business on December 12, 2013. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

(2) Accumulated Other Comprehensive Income (Loss)

The following table provides changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax, reported in our condensed consolidated financial statements for the periods ended November 30 (in millions; amounts in parentheses indicate debits to AOCI):

 

     Three Months Ended     Six Months Ended  
     2013     2012     2013     2012  

Foreign currency translation gain (loss):

        

Balance at beginning of period

   $           23     $         104     $         102     $           61  

Translation adjustments

     45       14       (34     57  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

     68       118       68       118  
  

 

 

   

 

 

   

 

 

   

 

 

 

Retirement plans adjustments:

        

Balance at beginning of period

     (3,880     (4,951     (3,922     (5,014

Reclassifications from AOCI

     43       63       85       126  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

     (3,837     (4,888     (3,837     (4,888
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive loss at end of period

   $ (3,769   $ (4,770   $ (3,769   $ (4,770
  

 

 

   

 

 

   

 

 

   

 

 

 

 

- 9 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

The following table presents details of the reclassifications from AOCI for the periods ended November 30 (in millions; amounts in parentheses indicate debits to earnings):

 

     Amount Reclassified from
AOCI
   

Affected Line Item in the Income
Statement

     Three Months Ended     Six Months Ended      
     2013     2012     2013     2012      

Retirement plans:

          

Amortization of actuarial losses and other

   $ (97   $ (129   $ (192   $ (258   Salaries and employee benefits

Amortization of prior service credits

             29               28               57               57     Salaries and employee benefits
  

 

 

   

 

 

   

 

 

   

 

 

   

Total before tax

     (68     (101     (135     (201  

Income tax benefit

     25       38       50       75     Provision for income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   

AOCI reclassifications, net of tax

   $ (43   $ (63   $ (85   $ (126   Net income
  

 

 

   

 

 

   

 

 

   

 

 

   

(3) Financing Arrangements

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

A $1 billion revolving credit facility is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial paper. The revolving credit agreement expires in March 2018. The agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times our last four fiscal quarters’ rentals and landing fees) to capital (adjusted debt plus total common stockholders’ investment) that does not exceed 70%. Our leverage ratio of adjusted debt to capital was 51% at November 30, 2013. We believe the leverage ratio covenant is our only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of November 30, 2013, no commercial paper was outstanding, and the entire $1 billion under the revolving credit facility was available for future borrowings.

Long-term debt, exclusive of capital leases, had a carrying value and estimated fair value of $3.0 billion at November 30, 2013 and a carrying value of $3.0 billion compared with an estimated fair value of $3.2 billion at May 31, 2013. 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.

 

- 10 -


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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(4) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the periods ended November 30 was as follows (in millions, except per share amounts):

 

     Three Months Ended      Six Months Ended  
     2013      2012      2013      2012  

Basic earnings per common share:

           

Net earnings allocable to common shares(1)

   $ 499      $ 437      $ 988      $ 895  

Weighted-average common shares

     315        314        316        314  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 1.58      $ 1.39      $ 3.13      $ 2.85  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share:

           

Net earnings allocable to common shares(1)

   $ 499      $ 437      $ 988      $ 895  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares

     315        314        316        314  

Dilutive effect of share-based awards

     4        1        3        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average diluted shares

     319        315        319        316  

Diluted earnings per common share

   $       1.57      $       1.39      $       3.10      $       2.84  
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive options excluded from diluted earnings per common share

     2.5        14.3        6.2        14.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

(5) Retirement Plans

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the periods ended November 30 were as follows (in millions):

 

     Three Months Ended      Six Months Ended  
     2013      2012      2013      2012  

U.S. domestic and international pension plans

   $       121      $       171      $       242      $       340  

U.S. domestic and international defined contribution plans

     88        87        177        175  

U.S. domestic and international postretirement healthcare plans

     19        20        39        39  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 228      $ 278      $ 458      $ 554  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended November 30 included the following components (in millions):

 

     Three Months Ended     Six Months Ended  
     2013     2012     2013     2012  

Pension Plans

        

Service cost

   $ 164     $ 173     $ 328     $ 346  

Interest cost

             263               242               526               484  

Expected return on plan assets

     (374     (345     (747     (691

Recognized actuarial losses and other

     68       101       135       201  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 121     $ 171     $ 242     $ 340  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

     Three Months Ended      Six Months Ended  
     2013      2012      2013      2012  

Postretirement Healthcare Plans

           

Service cost

   $ 9      $ 11      $ 19      $ 21  

Interest cost

     10        9        20        18  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $           19      $           20      $           39      $           39  
  

 

 

    

 

 

    

 

 

    

 

 

 

Required contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the six-month periods ended November 30, were $315 million in 2013 and $280 million in 2012. In December 2013, we made an additional contribution of $165 million to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments.

(6) 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 include 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, Inc. (“FedEx Freight”), a leading North American provider of less-than-truckload (“LTL”) freight services.

Our reportable segments include the following businesses:

 

FedEx Express Segment      FedEx Express (express transportation)
    

FedEx Trade Networks (air and ocean freight forwarding and customs brokerage)

    

FedEx SupplyChain Systems (logistics services)

FedEx Ground Segment     

FedEx Ground (small-package ground delivery)

    

FedEx SmartPost (small-parcel consolidator)

FedEx Freight Segment     

FedEx Freight (LTL freight transportation)

    

FedEx Custom Critical (time-critical transportation)

FedEx Services Segment     

FedEx Services (sales, marketing, information technology, communications and back-office functions)

    

FedEx TechConnect (customer service, technical support, billings and collections)

    

FedEx Office (document and business services and package acceptance)

FedEx Services Segment

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis by FedEx Express and reported in the FedEx Express segment in their natural expense line items. The FedEx Services segment is discussed further in our Annual Report.

The FedEx Services segment provides direct and indirect support to our transportation businesses, and we allocate all of the net operating costs of the FedEx Services segment (including the net operating results of FedEx Office) to reflect the full cost of operating our transportation businesses in the results of those segments. Within the FedEx Services segment allocation, the net operating results of FedEx Office, which are an immaterial component of our allocations, are allocated to FedEx Express and FedEx Ground. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided.

 

- 12 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

We believe these allocations approximate the net cost of providing these functions. We review and evaluate the performance of our transportation segments based on operating income (inclusive of FedEx Services segment allocations). For the FedEx Services segment, performance is evaluated based on the impact of its total allocated net operating costs on our transportation segments.

The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments in Management’s Discussion and Analysis of Results of Operations and Financial Condition reflects the allocations from the FedEx Services segment to the respective transportation segments. The “Intercompany charges” caption also includes charges and credits for administrative services provided between operating companies and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe these allocations approximate the net cost of providing these functions and our allocation methodologies are refined as necessary to reflect changes in our businesses.

Other Intersegment Transactions

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

The following table provides a reconciliation of reportable segment revenues and operating income to our unaudited condensed consolidated financial statement totals for the periods ended November 30 (in millions):

 

     Three Months Ended     Six Months Ended  
     2013     2012     2013     2012  

Revenues

        

FedEx Express segment

   $ 6,844     $ 6,858     $ 13,449     $ 13,490  

FedEx Ground segment

     2,849       2,593       5,579       5,055  

FedEx Freight segment

     1,434       1,377       2,858       2,776  

FedEx Services segment

     391       405       766       794  

Other and eliminations

     (115     (126     (225     (216
  

 

 

   

 

 

   

 

 

   

 

 

 
   $   11,403     $   11,107     $   22,427     $   21,899  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

        

FedEx Express segment

   $ 326     $ 230     $ 562     $ 437  

FedEx Ground segment

     424       412       892       857  

FedEx Freight segment

     77       76       168       166  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 827     $ 718     $ 1,622     $ 1,460  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

- 13 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(7) Commitments

As of November 30, 2013, our purchase commitments under various contracts for the remainder of 2014 and annually thereafter were as follows (in millions):

 

     Aircraft and
Aircraft-Related
     Other(1)      Total  

2014 (remainder)

   $ 395      $ 539      $ 934  

2015

     1,142        222        1,364  

2016

     1,127        145        1,272  

2017

     903        101        1,004  

2018

     1,447        45        1,492  

Thereafter

     5,294        113        5,407  
  

 

 

    

 

 

    

 

 

 

Total

   $   10,308      $                 1,165      $               11,473  
  

 

 

    

 

 

    

 

 

 

 

(1) Primarily vehicles, facilities, advertising contracts, and for the remainder of 2014, a total of $330 million of quarterly contributions to our U.S. Pension Plans.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of November 30, 2013, our obligation to purchase four Boeing 767-300 Freighter (“B767F”) aircraft and nine Boeing 777 Freighter (“B777F”) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into noncancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

We had $237 million in deposits and progress payments as of November 30, 2013 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our condensed consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the Boeing 757 (“B757”) aircraft in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of November 30, 2013, with the year of expected delivery:

 

       B757        B767F        B777F        Total  

2014 (remainder)

       11          1                   12  

2015

       11          12                   23  

2016

                10          2          12  

2017

                10                   10  

2018

                10          2          12  

Thereafter

                4          14          18  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

           22                  47                  18              87  
    

 

 

      

 

 

      

 

 

      

 

 

 

On December 10, 2013, FedEx Express entered into an agreement with The Boeing Company for the purchase of two B767F aircraft, the delivery of which will occur in 2016 and 2017. FedEx Express is also deferring 11 existing options to purchase B777F aircraft by two years. This aircraft transaction is not included in the table above, as it occurred subsequent to the end of the second quarter of 2014.

 

- 14 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at November 30, 2013 is as follows (in millions):

 

       Operating Leases  
       Aircraft
and Related
Equipment
       Facilities
and Other
       Total
Operating
Leases
 

2014 (remainder)

     $ 395        $ 764        $ 1,159  

2015

       448          1,496          1,944  

2016

       453          1,294          1,747  

2017

       391          1,395          1,786  

2018

       326          995          1,321  

Thereafter

       824          6,238          7,062  
    

 

 

      

 

 

      

 

 

 

Total

     $       2,837        $     12,182        $     15,019  
    

 

 

      

 

 

      

 

 

 

Future minimum lease payments under capital leases were immaterial at November 30, 2013. 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.

(8) Contingencies

Wage-and-Hour. We are a defendant in a number of lawsuits containing various class-action allegations of wage-and-hour violations. The plaintiffs in these lawsuits allege, 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. The complaints generally seek unspecified monetary damages, injunctive relief, or both. We do not believe that a material loss is reasonably possible with respect to any of these matters.

Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 30 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings that claim that the company’s owner-operators should be treated as employees, rather than independent contractors.

Most of the class-action lawsuits were consolidated for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Indiana. The multidistrict litigation court granted class certification in 28 cases and denied it in 14 cases. On December 13, 2010, the court entered an opinion and order addressing all outstanding motions for summary judgment on the status of the owner-operators (i.e., independent contractor vs. employee). In sum, the court has now ruled on our summary judgment motions and entered judgment in favor of FedEx Ground on all claims in 20 of the 28 multidistrict litigation cases that had been certified as class actions, finding that the owner-operators in those cases were contractors as a matter of the law of 20 states. The plaintiffs filed notices of appeal in all of these 20 cases. The Seventh Circuit heard the appeal in the Kansas case in January 2012 and, in July 2012, issued an opinion that did not make a determination with respect to the correctness of the district court’s decision and, instead, certified two questions to the Kansas Supreme Court related to the classification of the plaintiffs as independent contractors under the Kansas Wage Payment Act. The Kansas Supreme Court heard oral argument on November 5, 2013. The other 19 cases that are before the Seventh Circuit remain stayed pending a decision of the Kansas Supreme Court.

The multidistrict litigation court remanded the other eight certified class actions back to the district courts where they were originally filed because its summary judgment ruling did not completely dispose of all of the claims in those lawsuits. Three of those cases are now on appeal with the Court of Appeals for the Ninth Circuit, and one is on appeal with the Court of Appeals for the Eleventh Circuit. The other four remain pending in their respective district courts, but two of these four matters have been settled for immaterial amounts. The court granted final approval of one of the two settlements during the second quarter of 2014, while the other settlement remains subject to court approval.

 

- 15 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

While the granting of summary judgment in favor of FedEx Ground by the multidistrict litigation court in 20 of the 28 cases that had been certified as class actions remains subject to appeal, we believe that it significantly improves the likelihood that our independent contractor model will be upheld. Adverse determinations in matters related to FedEx Ground’s independent contractors, however, could, among other things, entitle certain of our owner-operators and their drivers to the reimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax and benefit liability for FedEx Ground, and could result in changes to the independent contractor status of FedEx Ground’s owner-operators in certain jurisdictions. We believe that FedEx Ground’s owner-operators are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers of the company’s independent contractors. While it is reasonably possible that potential loss in some of these lawsuits or such changes to the independent contractor status of FedEx Ground’s owner-operators could be material, we cannot yet determine the amount or reasonable range of potential loss. A number of factors contribute to this. The number of plaintiffs in these lawsuits continues to change, with some being dismissed and others being added and, as to new plaintiffs, discovery is still ongoing. In addition, the parties have conducted only very limited discovery into damages, which could vary considerably from plaintiff to plaintiff. Further, the range of potential loss could be impacted considerably by future rulings on the merits of certain claims and FedEx Ground’s various defenses, and on evidentiary issues. In any event, we do not believe that a material loss is probable in these matters.

In addition, we are defending contractor-model cases that are not or are no longer part of the multidistrict litigation, two of which have been certified as class actions. These certified class actions were settled for immaterial amounts in the first quarter of 2014. The court granted final approval of one of the two settlements during the second quarter of 2014, while the other settlement remains subject to court approval. The other cases are in varying stages of litigation, and we do not expect to incur a material loss in any of these matters.

Other Matters. In August 2010, a third-party consultant who works with shipping customers to negotiate lower rates filed a lawsuit in federal district court in California against FedEx and United Parcel Service, Inc. (“UPS”) alleging violations of U.S. antitrust law. This matter was dismissed in May 2011, but the court granted the plaintiff permission to file an amended complaint, which FedEx received in June 2011. In November 2011, the court granted our motion to dismiss this complaint, but again allowed the plaintiff to file an amended complaint. The plaintiff filed a new complaint in December 2011, and the matter remains pending before the court. In February 2011, shortly after the initial lawsuit was filed, we received a demand for the production of information and documents in connection with a civil investigation by the U.S. Department of Justice (“DOJ”) into the policies and practices of FedEx and UPS for dealing with third-party consultants who work with shipping customers to negotiate lower rates. In November 2012, the DOJ served a civil investigative demand on the third-party consultant seeking all pleadings, depositions and documents produced in the lawsuit. We are cooperating with the investigation, do not believe that we have engaged in any anti-competitive activities and will vigorously defend ourselves in any action that may result from the investigation. While the litigation proceedings and the DOJ investigation move forward, and the amount of loss, if any, is dependent on a number of factors that are not yet fully developed or resolved, we do not believe that a material loss is reasonably possible.

We have received requests for information from the DOJ in the Northern District of California in connection with a criminal investigation relating to the transportation of packages for online pharmacies that may have shipped pharmaceuticals in violation of federal law. We responded to grand jury subpoenas issued in June 2008 and August 2009 and to additional requests for information pursuant to those subpoenas, and we continue to respond and cooperate with the investigation. We believe that our employees have acted in good faith at all times. We do not believe that we have engaged in any illegal activities and will vigorously defend ourselves in any action that may result from the investigation. The DOJ may pursue a criminal indictment and, if we are convicted, remedies could include fines, penalties, financial forfeiture and compliance conditions. We cannot estimate the amount or range of loss, if any, as such analysis would depend on facts and law that are not yet fully developed or resolved.

FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of their business. 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.

 

- 16 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(9) Supplemental Cash Flow Information

Cash paid for interest expense and income taxes for the six-month periods ended November 30 was as follows (in millions):

 

         2013             2012      

Cash payments for:

    

Interest (net of capitalized interest)

   $ 64     $ 36  
  

 

 

   

 

 

 

Income taxes

   $ 626     $ 543  

Income tax refunds received

     (36     (191
  

 

 

   

 

 

 

Cash tax payments, net

   $ 590     $ 352  
  

 

 

   

 

 

 

(10) Condensed Consolidating Financial Statements

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

The guarantor subsidiaries, which are wholly owned by FedEx, guarantee $2.75 billion of our debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the “Guarantor Subsidiaries” and “Non-guarantor Subsidiaries” columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):

 

- 17 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

November 30, 2013

 

    Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

         

CURRENT ASSETS

         

Cash and cash equivalents

  $ 2,808     $ 492     $ 775     $ (140   $ 3,935  

Receivables, less allowances

    3       4,270       1,141       (37     5,377  

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

    127       715       57              899  

Deferred income taxes

           638       17              655  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    2,938       6,115       1,990       (177     10,866  

PROPERTY AND EQUIPMENT, AT COST

    27       37,025       2,249              39,301  

Less accumulated depreciation and amortization

    21       19,003       1,157              20,181  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net property and equipment

    6       18,022       1,092              19,120  

INTERCOMPANY RECEIVABLE

           364       1,288       (1,652       

GOODWILL

           1,552       1,185              2,737  

INVESTMENT IN SUBSIDIARIES

    19,679       3,562              (23,241       

OTHER ASSETS

    2,130       551       235       (2,097     819  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 24,753     $ 30,166     $ 5,790     $ (27,167   $ 33,542  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

CURRENT LIABILITIES

         

Current portion of long-term debt

  $ 250     $ 1     $  —      $  —      $ 251  

Accrued salaries and employee benefits

    61       1,125       217              1,403  

Accounts payable

    46       1,344       655       (177     1,868  

Accrued expenses

    312       1,365       207              1,884  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    669       3,835       1,079       (177     5,406  

LONG-TERM DEBT, LESS CURRENT PORTION

    2,490       249                     2,739  

INTERCOMPANY PAYABLE

    1,652                     (1,652       

OTHER LONG-TERM LIABILITIES

         

Deferred income taxes

           3,963       79       (2,097     1,945  

Other liabilities

    2,409       3,263       247              5,919  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other long-term liabilities

    2,409       7,226       326       (2,097     7,864  

STOCKHOLDERS’ INVESTMENT

    17,533       18,856       4,385       (23,241     17,533  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $   24,753     $ 30,166     $ 5,790     $ (27,167   $ 33,542  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 18 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2013

 

    Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

         

CURRENT ASSETS

         

Cash and cash equivalents

  $ 3,892     $ 405     $ 717     $ (97   $ 4,917  

Receivables, less allowances

           3,989       1,084       (29     5,044  

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

    45       681       54              780  

Deferred income taxes

           518       15              533  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    3,937       5,593       1,870       (126     11,274  

PROPERTY AND EQUIPMENT, AT COST

    27       35,915       2,167              38,109  

Less accumulated depreciation and amortization

    21       18,469       1,135              19,625  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net property and equipment

    6       17,446       1,032              18,484  

INTERCOMPANY RECEIVABLE

           439       1,203       (1,642       

GOODWILL

           1,552       1,203              2,755  

INVESTMENT IN SUBSIDIARIES

    18,739       3,347              (22,086       

OTHER ASSETS

    2,187       822       191       (2,146     1,054  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 24,869     $ 29,199     $ 5,499     $ (26,000   $ 33,567  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

CURRENT LIABILITIES

         

Current portion of long-term debt

  $ 250     $ 1     $  —      $  —      $ 251  

Accrued salaries and employee benefits

    82       1,402       204              1,688  

Accounts payable

    4       1,392       609       (126     1,879  

Accrued expenses

    355       1,366       211              1,932  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    691       4,161       1,024       (126     5,750  

LONG-TERM DEBT, LESS CURRENT PORTION

    2,489       250                     2,739  

INTERCOMPANY PAYABLE

    1,642                     (1,642       

OTHER LONG-TERM LIABILITIES

         

Deferred income taxes

           3,798              (2,146     1,652  

Other liabilities

    2,649       3,133       246              6,028  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other long-term liabilities

    2,649       6,931       246       (2,146     7,680  

STOCKHOLDERS’ INVESTMENT

    17,398       17,857       4,229       (22,086     17,398  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $   24,869     $ 29,199     $ 5,499     $ (26,000   $ 33,567  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 19 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended November 30, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUES

   $  —      $ 9,447     $ 2,042     $ (86   $ 11,403  

OPERATING EXPENSES:

          

Salaries and employee benefits

     24       3,568       556              4,148  

Purchased transportation

            1,340       739       (39     2,040  

Rentals and landing fees

     2       563       85       (2     648  

Depreciation and amortization

     1       595       51              647  

Fuel

            1,111       25              1,136  

Maintenance and repairs

            447       32              479  

Intercompany charges, net

     (50     (24     74                

Other

     23       1,192       308       (45     1,478  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            8,792       1,870       (86     10,576  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

            655       172              827  

OTHER INCOME (EXPENSE):

          

Equity in earnings of subsidiaries

     500       133              (633       

Interest, net

     (35     5                     (30

Intercompany charges, net

     36       (41     5                

Other, net

     (1     (3     (1            (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     500       749       176       (633     792  

Provision for income taxes

            251       41              292  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 500     $ 498     $ 135     $ (633   $ 500  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $         540     $ 506     $ 175     $ (633   $ 588  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 20 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended November 30, 2012

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUES

   $  —      $ 9,225     $ 1,965     $ (83   $ 11,107  

OPERATING EXPENSES:

          

Salaries and employee benefits

     31       3,569       533              4,133  

Purchased transportation

            1,222       673       (35     1,860  

Rentals and landing fees

     1       549       81       (1     630  

Depreciation and amortization

     1       545       46              592  

Fuel

            1,210       25              1,235  

Maintenance and repairs

     1       481       29              511  

Intercompany charges, net

     (59     (88     147                

Other

     25       1,143       307       (47     1,428  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            8,631       1,841       (83     10,389  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

            594       124              718  

OTHER INCOME (EXPENSE):

          

Equity in earnings of subsidiaries

     438       70              (508       

Interest, net

     (27     8       1              (18

Intercompany charges, net

     29       (33     4                

Other, net

     (2     (3     (3            (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     438       636       126       (508     692  

Provision for income taxes

            190       64              254  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 438     $ 446     $ 62     $ (508   $ 438  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $         497     $ 455     $ 71     $ (508   $ 515  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 21 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Six Months Ended November 30, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
     Eliminations     Consolidated  

REVENUES

   $  —      $ 18,675     $ 3,920      $ (168   $ 22,427  

OPERATING EXPENSES:

           

Salaries and employee benefits

     55       7,082       1,088               8,225  

Purchased transportation

            2,582       1,412        (75     3,919  

Rentals and landing fees

     3       1,121       167        (3     1,288  

Depreciation and amortization

     1       1,184       101               1,286  

Fuel

            2,192       48               2,240  

Maintenance and repairs

            896       63               959  

Intercompany charges, net

     (111     (30     141                 

Other

     52       2,325       601        (90     2,888  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
            17,352       3,621        (168     20,805  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

            1,323       299               1,622  

OTHER INCOME (EXPENSE):

           

Equity in earnings of subsidiaries

     989       243               (1,232       

Interest, net

     (69     10       2               (57

Intercompany charges, net

     71       (82     11                 

Other, net

     (2     (5                    (7
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     989       1,489       312        (1,232     1,558  

Provision for income taxes

            483       86               569  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 989     $ 1,006     $ 226      $ (1,232   $ 989  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $     1,068     $ 1,013     $ 191      $ (1,232   $ 1,040  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

- 22 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Six Months Ended November 30, 2012

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUES

   $  —      $ 18,319     $ 3,743     $ (163   $ 21,899  

OPERATING EXPENSES:

          

Salaries and employee benefits

     61       7,158       1,017              8,236  

Purchased transportation

            2,352       1,256       (68     3,540  

Rentals and landing fees

     2       1,093       156       (3     1,248  

Depreciation and amortization

     1       1,075       89              1,165  

Fuel

            2,326       47              2,373  

Maintenance and repairs

     1       996       56              1,053  

Intercompany charges, net

     (119     (200     319                

Other

     54       2,276       586       (92     2,824  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            17,076       3,526       (163     20,439  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

            1,243       217              1,460  

OTHER INCOME (EXPENSE):

          

Equity in earnings of subsidiaries

     897       99              (996       

Interest, net

     (50     19       3              (28

Intercompany charges, net

     53       (62     9                

Other, net

     (3     (5     (5            (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     897       1,294       224       (996     1,419  

Provision for income taxes

            426       96              522  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 897     $ 868     $ 128     $ (996   $ 897  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $     1,015     $ 883     $ 178     $ (996   $ 1,080  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 23 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended November 30, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ (139   $ 1,545     $ 246     $ (43   $ 1,609  

INVESTING ACTIVITIES

          

Capital expenditures

            (1,521     (169            (1,690

Proceeds from asset dispositions and other

            19                     19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

            (1,502     (169            (1,671

FINANCING ACTIVITIES

          

Net transfers from (to) Parent

     (31     64       (33              

Payment on loan between subsidiaries

            (33     33                

Intercompany dividends

            22       (22              

Principal payments on debt

            (3                   (3

Proceeds from stock issuances

     380                            380  

Excess tax benefit on the exercise of stock options

     20                            20  

Dividends paid

     (95                          (95

Purchase of treasury stock

     (1,219                          (1,219
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (945     50       (22            (917
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

            (6     3              (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (1,084     87       58       (43     (982

Cash and cash equivalents at beginning of period

     3,892       405       717       (97     4,917  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $         2,808     $ 492     $ 775     $ (140   $ 3,935  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 24 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended November 30, 2012

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ (32   $ 1,652     $ 167     $ (69   $ 1,718  

INVESTING ACTIVITIES

          

Capital expenditures

     (3     (1,716     (169            (1,888

Business acquisitions, net of cash acquired

                   (483            (483

Proceeds from asset dispositions and other

            22       (2            20  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

     (3     (1,694     (654            (2,351

FINANCING ACTIVITIES

          

Net transfers from (to) Parent

     (863     891       (28              

Payment on loan between subsidiaries

            (430     430                

Intercompany dividends

            1       (1              

Principal payments on debt

            (417                   (417

Proceeds from debt issuance

     991                            991  

Proceeds from stock issuances

     53                            53  

Excess tax benefit on the exercise of stock options

     6                            6  

Dividends paid

     (88                          (88

Purchase of treasury stock

     (246                          (246

Other, net

     (9     (93     93              (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (156     (48     494              290  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

            1       16              17  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (191     (89     23       (69     (326

Cash and cash equivalents at beginning of period

     1,906       417       636       (116     2,843  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $         1,715     $ 328     $ 659     $ (185   $ 2,517  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 25 -


Table of Contents

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of November 30, 2013, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended November 30, 2013 and 2012 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2013 and 2012. These financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ investment, and cash flows for the year then ended not presented herein, and in our report dated July 15, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2013, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Memphis, Tennessee

December 19, 2013

 

- 26 -


Table of Contents

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

GENERAL

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (“FedEx”). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2013 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.

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

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

The key indicators necessary to understand our operating results include:

 

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

 

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

 

  the mix of services purchased by our customers;

 

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

 

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

 

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

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

 

- 27 -


Table of Contents

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2014 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.

 

- 28 -


Table of Contents

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following table compares summary operating results (dollars in millions, except per share amounts) for the periods ended November 30:

 

     Three Months Ended     Percent
Change
    Six Months Ended     Percent
Change
 
     2013     2012       2013     2012    

Revenues

   $   11,403     $   11,107       3      $   22,427     $   21,899       2   

Operating income

     827       718       15        1,622       1,460       11   

Operating margin

     7.3     6.5     80 bp      7.2     6.7     50 bp 

Net income

   $ 500     $ 438       14      $ 989     $ 897       10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 1.57     $ 1.39       13      $ 3.10     $ 2.84       9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows changes in revenues and operating income by reportable segment for the periods ended November 30, 2013 compared to November 30, 2012 (dollars in millions):

 

     Change in
Revenues
    Percent Change in
Revenue
    Change in
Operating Income
     Percent Change in
Operating Income
 
     Three
Months
Ended
    Six
Months
Ended
    Three
Months
Ended
    Six
Months
Ended
    Three
Months
Ended
     Six
Months
Ended
     Three
Months
Ended
     Six
Months
Ended
 

FedEx Express segment

   $ (14   $ (41               $ 96      $ 125        42        29  

FedEx Ground segment

     256       524       10       10       12        35        3        4  

FedEx Freight segment

     57       82       4       3       1        2        1        1  

FedEx Services segment

     (14     (28     (3     (4                           

Other and eliminations

     11       (9     NM       NM                             
  

 

 

   

 

 

       

 

 

    

 

 

       
   $ 296     $ 528       3       2     $ 109      $ 162        15        11  
  

 

 

   

 

 

       

 

 

    

 

 

       

Overview

Our revenues and earnings increased in the second quarter of 2014 driven by improved profitability at FedEx Express and continued solid performance of our FedEx Ground segment. In the second quarter of 2014, earnings improved at FedEx Express, despite a slight decrease in revenues, due to our profit improvement initiatives, including the benefits from our fleet modernization programs, which have resulted in lower aircraft maintenance expenses. Included in our 2013 results was an $0.11 per diluted share negative impact of Superstorm Sandy. Our results for the second quarter and first half of 2014 also reflect lower pension expense and a modest benefit from the voluntary employee severance program we announced in 2013. Our results for the first half of 2014 include significant headwinds from the net negative impact of fuel (described further below) and one fewer operating day.

In the second quarter of 2014, we announced the authorization of a new share repurchase program of up to 32 million shares of common stock, which augmented the 7.4 million shares remaining on our previously authorized repurchase program. During the second quarter, the company repurchased 7.2 million shares of FedEx common stock, increasing the fiscal 2014 year-to-date purchase total to 10 million shares. The second quarter share repurchases had no effect on the quarter’s earnings per share.

 

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

 

LOGO   LOGO
LOGO   LOGO
LOGO

 

(1)  International domestic average daily package volume represents our international intra-country express operations.

 

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

 

LOGO

 

LOGO

Revenue

Revenues increased 3% in the second quarter and 2% in the first half of 2014, primarily due to higher volumes and yield increases at FedEx Ground and higher volumes at FedEx Freight. At our FedEx Ground segment, revenues increased 10% in the second quarter and in the first half of 2014 due to higher volume from market share gains and increased yields as a result of rate increases. Revenues at FedEx Freight increased 4% during the second quarter and 3% during the first half of 2014 primarily due to higher weight per shipment and average daily LTL shipments. At FedEx Express, revenues decreased slightly in the second quarter and the first half of 2014 as revenue growth from stronger base U.S. and international package business and our freight-forwarding business at FedEx Trade Networks was more than offset by lower freight revenue and the negative impact of lower fuel surcharges. Revenues at all of our transportation segments in the first half of 2014 were negatively impacted by one fewer operating day.

 

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Operating Income

The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended November 30:

 

     Three Months Ended      Six Months Ended  
     2013      2012      2013      2012  

Operating expenses:

           

Salaries and employee benefits

   $ 4,148      $ 4,133      $ 8,225      $ 8,236  

Purchased transportation

     2,040        1,860        3,919        3,540  

Rentals and landing fees

     648        630        1,288        1,248  

Depreciation and amortization

     647        592        1,286        1,165  

Fuel

     1,136        1,235        2,240        2,373  

Maintenance and repairs

     479        511        959        1,053  

Other

     1,478        1,428        2,888        2,824  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 10,576      $ 10,389      $ 20,805      $ 20,439  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Percent of Revenue     Percent of Revenue  
     Three
Months
Ended
    Three
Months
Ended
    Six
Months
Ended
    Six
Months
Ended
 
     2013     2012     2013     2012  

Operating expenses:

        

Salaries and employee benefits

     36.4     37.2     36.7     37.6

Purchased transportation

     17.9       16.7       17.5       16.2  

Rentals and landing fees

     5.7       5.7       5.7       5.7  

Depreciation and amortization

     5.7       5.3       5.7       5.3  

Fuel

     9.9       11.1       10.0       10.8  

Maintenance and repairs

     4.2       4.6       4.3       4.8  

Other

     12.9       12.9       12.9       12.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     92.7       93.5       92.8       93.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     7.3     6.5     7.2     6.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income increased in the second quarter and the first half of 2014 primarily as a result of improved profitability at FedEx Express, higher volumes and increased yields at FedEx Ground and improved performance at FedEx Freight. Our results in the second quarter of 2014 compared to 2013 benefited from the negative impact of Superstorm Sandy in the prior year. In addition, our results in the first half of 2014 include a significant negative impact of the timing lag which exists between when fuel prices change and when indexed fuel surcharges automatically adjust and one fewer operating day.

Purchased transportation costs increased 10% in the second quarter and 11% in the first half of 2014 due to volume growth at FedEx Ground, costs associated with the expansion of our freight-forwarding business at FedEx Trade Networks and higher utilization of third-party transportation providers at FedEx Express and FedEx Freight. Depreciation and amortization expense increased 9% in the second quarter and 10% in the first half of 2014 primarily due to accelerated depreciation on certain aircraft, and aircraft recently placed in service at FedEx Express. Salaries and employee benefits expense in the second quarter and in the first half of 2014 benefited from lower pension expense, lower headcount due to employees departing through our voluntary buyout program and the delayed timing or absence of merit increases for many of our employees. Maintenance and repairs expense decreased 6% in the second quarter and 9% in the first half of 2014 due to the continued modernization of our aircraft fleet, which impacted the timing of certain maintenance events.

 

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

 

LOGO

Fuel costs decreased 8% in the second quarter and 6% in the first half of 2014 due to lower average price per gallon of jet fuel. Based on a static analysis of the impact to operating income of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel did not impact operating income in the second quarter but had a significant negative impact on operating income in the first half of 2014.

Our analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express and FedEx Ground services. However, this analysis does not consider the negative effects that fuel surcharge levels may have on our business, including reduced demand and shifts by our customers to lower-yielding services. While fluctuations in fuel surcharge rates can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the base price and extra service charges we obtain for these services and the level of pricing discounts offered. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative fuel surcharge rates in effect for the second quarter and the first half of 2014 and 2013 in the accompanying discussions of each of our transportation segments.

Income Taxes

Our effective tax rate was 36.9% for the second quarter and 36.5% for the first half of 2014, compared with 36.8% for the second quarter and first half of 2013. For 2014, we expect an effective tax rate between 36.5% and 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

We are subject to taxation in the United States and various U.S. state, local and foreign jurisdictions. Substantially all U.S. federal income tax matters through fiscal year 2009 are concluded, and we are currently under examination by the Internal Revenue Service for the 2010 and 2011 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements. As of November 30, 2013, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2013.

 

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Business Acquisitions

As discussed in our Annual Report, on June 20, 2013, we signed agreements to acquire the businesses operated by our current service provider Supaswift (Pty) Ltd. in five countries in Southern Africa. In addition, on September 2, 2013, we entered into an agreement to acquire Supaswift’s business in two additional countries. This acquisition will be funded with cash from operations and is expected to be completed in the second half of 2014, subject to customary closing conditions. The financial results of the acquired businesses will be included in the FedEx Express segment from the date of acquisition and will be immaterial to our 2014 results.

Outlook

We expect revenue and earnings growth to continue into the third quarter and the remainder of 2014 driven by ongoing improvements in the results of all of our transportation segments. Our expected results for 2014 will continue to be constrained by moderate growth in the global economy and continued challenges from the demand shift trend from our priority international services to our economy international services at FedEx Express.

The second quarter share repurchases had no effect on the quarter’s earnings per share, but are expected to improve full year earnings by $0.04 per diluted share.

During the second quarter an additional 30% of the 3,600 employees accepting voluntary cash buyouts departed the company. As of November 30, 2013, approximately 75% of the total population of employees leaving the company had vacated their positions. The remaining 25% will depart by May 31, 2014. While the voluntary severance program provided a modest benefit to our second quarter results, the majority of the benefits realized from our voluntary severance program will ramp up as the fiscal year progresses and the remaining scheduled employee departures occur.

During the first half of 2014, we continued to execute on the profit improvement programs we announced in 2013. These activities are focused primarily at FedEx Express and FedEx Services. As previously noted, the majority of the benefits from our profit improvement programs will not occur until 2015 and 2016. Our ability to achieve the profit improvement target and other benefits from these programs is dependent upon a number of factors, including the health of the global economy and future customer demand, particularly for our priority services.

Other Outlook Matters. For details on key 2014 capital projects, refer to the “Liquidity Outlook” section of this MD&A.

Our outlook is dependent upon a stable pricing environment for fuel, as volatility in fuel prices impacts our fuel surcharge levels, fuel expense and demand for our services. Historically, our fuel surcharges have largely offset incremental fuel costs; however, volatility in fuel costs may impact earnings because adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, the trailing impact of adjustments to our fuel surcharges can significantly affect our earnings either positively or negatively in the short-term.

As described in Note 8 of the accompanying unaudited condensed consolidated financial statements and the “Independent Contractor Model” section of our FedEx Ground segment MD&A, we are involved in a number of lawsuits and other proceedings that challenge the status of FedEx Ground’s owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its relationships with its owner-operators. The nature, timing and amount of any changes are dependent on the outcome of numerous future events. We cannot reasonably estimate the potential impact of any such changes or a meaningful range of potential outcomes, although they could be material. However, we do not believe that any such changes will impair our ability to operate and profitably grow our FedEx Ground business.

See “Forward-Looking Statements” for a discussion of these and other potential risks and uncertainties that could materially affect our future performance.

RECENT ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.

On June 1, 2013, we adopted the authoritative guidance issued by the Financial Accounting Standards Board requiring additional information about reclassification adjustments out of accumulated other comprehensive income, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. We have adopted this guidance by including expanded accumulated other comprehensive income disclosure requirements in Note 2 of our condensed consolidated financial statements.

 

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While no other new accounting guidance was adopted or issued during the first half of 2014 that is relevant to the readers of our financial statements, there are numerous proposals under development which, if and when enacted, may have a significant impact on our financial reporting, as described in our Annual Report.

REPORTABLE SEGMENTS

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

 

FedEx Express Segment   

FedEx Express (express transportation)

FedEx Trade Networks (air and ocean freight forwarding and customs brokerage)

FedEx SupplyChain Systems (logistics services)

FedEx Ground Segment   

FedEx Ground (small-package ground delivery)

FedEx SmartPost (small-parcel consolidator)

FedEx Freight Segment   

FedEx Freight (LTL freight transportation)

FedEx Custom Critical (time-critical transportation)

FedEx Services Segment   

FedEx Services (sales, marketing, information technology, communications and back-office functions)

FedEx TechConnect (customer service, technical support, billings and collections)

FedEx Office (document and business services and package acceptance)

FEDEX SERVICES SEGMENT

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis by FedEx Express and reported in the FedEx Express segment in their natural expense line items. The FedEx Services segment is discussed further in our Annual Report.

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

The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments reflects the allocations from the FedEx Services segment to the respective transportation segments. The “Intercompany charges” caption also includes charges and credits for administrative services provided between operating companies and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe these allocations approximate the net cost of providing these functions and our allocation methodologies are refined as necessary to reflect changes in our businesses.

 

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OTHER INTERSEGMENT TRANSACTIONS

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

 

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FEDEX EXPRESS SEGMENT

FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide time-definite delivery within five business days worldwide. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the periods ended November 30:

 

     Three Months Ended     Percent
Change
    Six Months Ended     Percent
Change
 
         2013             2012               2013             2012        

Revenues:

            

Package:

            

U.S. overnight box

   $ 1,625     $ 1,609       1      $ 3,209     $ 3,213         

U.S. overnight envelope

     398       409       (3     817       839       (3

U.S. deferred

     771       732       5        1,500       1,434       5   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total U.S. domestic package revenue

     2,794       2,750       2        5,526       5,486       1   
  

 

 

   

 

 

     

 

 

   

 

 

   

International priority

     1,642       1,678       (2     3,218       3,339       (4

International economy

     567       514       10        1,099       1,001       10   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total international export package revenue

     2,209       2,192       1        4,317       4,340       (1
  

 

 

   

 

 

     

 

 

   

 

 

   

International domestic(1) 

     385       384              730       693       5   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total package revenue

     5,388       5,326       1        10,573       10,519       1   

Freight:

            

U.S.

     585       645       (9     1,209       1,255       (4

International priority

     417       446       (7     805       885       (9

International airfreight

     55       77       (29     109       151       (28
  

 

 

   

 

 

     

 

 

   

 

 

   

Total freight revenue

     1,057       1,168       (10     2,123       2,291       (7

Other(2) 

     399       364       10        753       680       11   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

     6,844       6,858              13,449       13,490         

Operating expenses:

            

Salaries and employee benefits

     2,469       2,488       (1     4,909       4,961       (1

Purchased transportation

     660       608       9        1,268       1,145       11   

Rentals and landing fees

     420       418              841       833       1   

Depreciation and amortization

     373       336       11        742       659       13   

Fuel

     986       1,074       (8     1,942       2,060       (6

Maintenance and repairs

     308       349       (12     615       721       (15

Intercompany charges

     512       535       (4     1,007       1,072       (6

Other(3) 

     790       820       (4     1,563       1,602       (2
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses

     6,518       6,628       (2     12,887       13,053       (1
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income

   $ 326     $ 230       42      $ 562     $ 437       29   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin

     4.8     3.4     140 bp      4.2     3.2     100 bp 

 

(1) International domestic revenues represent our international intra-country express operations, including acquisitions in Poland (June 2012), France (July 2012) and Brazil (July 2012).

 

(2) Includes FedEx Trade Networks and FedEx SupplyChain Systems.

 

(3) Includes predominantly costs associated with outside service contracts (such as security, facility services and cargo handling), professional fees, uniforms, insurance and advertising.

 

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     Percent of Revenue     Percent of Revenue  
     Three
Months
Ended
    Three
Months
Ended
    Six
Months
Ended
    Six
Months
Ended
 
     2013     2012     2013     2012  

Operating expenses:

        

Salaries and employee benefits

     36.1     36.3     36.5     36.8

Purchased transportation

     9.6       8.9       9.4       8.5  

Rentals and landing fees

     6.1       6.1       6.3       6.2  

Depreciation and amortization

     5.5       4.9       5.5       4.9  

Fuel

     14.4       15.6       14.4       15.3  

Maintenance and repairs

     4.5       5.1       4.6       5.3  

Intercompany charges

     7.5       7.8       7.5       7.9  

Other

     11.5       11.9       11.6       11.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     95.2       96.6       95.8       96.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     4.8     3.4     4.2     3.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table compares selected statistics (in thousands, except yield amounts) for the periods ended November 30:

 

     Three Months Ended      Percent
Change
    Six Months Ended      Percent
Change
 
         2013              2012                2013              2012         

Package Statistics(1)

                

Average daily package volume (ADV):

                

U.S. overnight box

     1,146        1,141              1,129        1,116        1  

U.S. overnight envelope

     535        564        (5     549        570        (4

U.S. deferred

     841        828        2       815        794        3  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total U.S. domestic ADV

     2,522        2,533              2,493        2,480        1  
  

 

 

    

 

 

      

 

 

    

 

 

    

International priority

     421        445        (5     414        426        (3

International economy

     172        157        10       168        150        12  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total international export ADV

     593        602        (1     582        576        1  
  

 

 

    

 

 

      

 

 

    

 

 

    

International domestic(2)

     896        884        1       842        781        8  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total ADV

     4,011        4,019              3,917        3,837        2  
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue per package (yield):

                

U.S. overnight box

   $ 22.50      $ 22.39            $ 22.39      $ 22.49         

U.S. overnight envelope

     11.84        11.51        3       11.72        11.51        2  

U.S. deferred

     14.55        14.04        4       14.49        14.10        3  

U.S. domestic composite

     17.59        17.24        2       17.45        17.28        1  

International priority

     61.87        59.91        3       61.27        61.26         

International economy

     52.27        51.97        1       51.35        52.07        (1

International export composite

     59.08        57.84        2       58.40        58.86        (1

International domestic(2)

     6.82        6.88        (1     6.83        6.93        (1

Composite package yield

     21.32        21.04        1       21.25        21.42        (1

Freight Statistics(1)

                

Average daily freight pounds:

                

U.S.

     7,872        7,719        2       7,646        7,393        3  

International priority

     3,068        3,212        (4     2,964        3,197        (7

International airfreight

     907        1,166        (22     878        1,135        (23
  

 

 

    

 

 

      

 

 

    

 

 

    

Total average daily freight pounds

     11,847        12,097        (2     11,488        11,725        (2
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue per pound (yield):

                

U.S.

   $ 1.18      $ 1.32        (11   $ 1.25      $ 1.33        (6

International priority

     2.16        2.21        (2     2.14        2.16        (1

International airfreight

     0.97        1.05        (8     0.98        1.04        (6

Composite freight yield

     1.42        1.53        (7     1.46        1.53        (5

 

(1) Package and freight statistics include only the operations of FedEx Express.

 

(2) International domestic statistics represent our international intra-country express operations, including acquisitions in Poland (June 2012), France (July 2012) and Brazil (July 2012).

FedEx Express Segment Revenues

FedEx Express segment revenues decreased slightly in both the second quarter and first half of 2014 as revenue growth from our stronger base U.S. and international export package business and our freight-forwarding business at FedEx Trade Networks was more than offset by lower freight revenue, the negative impact of lower fuel surcharges and continued shifts in demand from our priority international services to our economy international services. In addition, revenue in the first half of 2014 was negatively impacted by one fewer operating day.

Freight average daily pounds decreased by 2% in the second quarter and in the first half of 2014 due to weakness in global economic conditions and capacity reductions. Freight yields decreased 7% in the second quarter and 5% in the first half of 2014 due to lower fuel surcharges and lower rates. U.S. domestic yields increased 2% for the second quarter and 1% for the first half of 2014 primarily due to higher rates and weight per package, partially offset by lower fuel surcharges. International export revenues increased 1% in the second quarter of 2014 but decreased 1% in the first half of 2014 as base business growth was offset by lower fuel surcharges and the demand shift to our lower-yielding economy services. International priority yields increased 3% in the second quarter of 2014

 

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while international priority volumes declined 5%. Within this category, volumes for lower-yielding distribution services declined, while international priority volumes, excluding these distribution services, increased 1%. International domestic revenues remained flat in the second quarter of 2014 but increased 5% in the first half of 2014 due to international business acquisitions during the first quarter of 2013.

Our fuel surcharges are indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the periods ended November 30:

 

     Three Months Ended     Six Months Ended  
         2013             2012             2013             2012      

U.S. Domestic and Outbound Fuel Surcharge:

        

Low

     9.50     11.50     8.00     10.00

High

     10.50       14.00       10.50       14.50  

Weighted-average

     10.02       13.04       9.26       12.58  

International Fuel Surcharges:

        

Low

     13.50       13.50       12.00       12.00  

High

     19.00       20.00       19.00       20.50  

Weighted-average

     16.79       17.22       16.09       16.69  

On September 18, 2013, we announced a 3.9% average list price increase effective January 6, 2014, for FedEx Express U.S. domestic, U.S. export and U.S. import services. In September 2012, we announced a 5.9% average list price increase effective January 7, 2013 for FedEx Express U.S. domestic, U.S. export and U.S. import services, while we lowered our fuel surcharge index by two percentage points.

FedEx Express Segment Operating Income

FedEx Express operating income and operating margin increased in the second quarter and the first half of 2014 driven by stronger base U.S. and international business and lower aircraft maintenance and pension expense, partially offset by higher depreciation expense. In addition, operating income in the second quarter of 2014 compared to 2013 benefited from the negative impact of Superstorm Sandy in the prior year. In the first half of 2014, operating income reflects a significant negative impact of the timing lag which exists between when fuel prices change and when indexed fuel surcharges automatically adjust and one fewer operating day. The demand shift from our priority international services to our economy international services continued to impact our overall business.

In the second quarter and the first half of 2014, salaries and employee benefits included lower pension expense and the delayed timing or absence of annual merit increases for many of our employees. Intercompany charges decreased 4% in the second quarter and 6% in the first half of 2014 due to lower allocated sales and information technology costs. Purchased transportation costs increased 9% in the second quarter and 11% in the first half of 2014 due to costs associated with the expansion of our freight-forwarding business at FedEx Trade Networks and higher utilization of third-party transportation providers. Purchased transportation costs in the first half of 2014 were also negatively impacted by international acquisitions. Depreciation and amortization expense increased 11% during the second quarter and 13% during the first half of 2014 as a result of accelerated depreciation due to the shortened life of certain aircraft, and aircraft recently placed into service.

FedEx Express aircraft maintenance and repairs costs are largely driven by aircraft utilization and required periodic maintenance events. When newer aircraft are introduced into our operating fleet, less maintenance costs are incurred. As a part of our fleet modernization program, FedEx Express has retired older, less efficient aircraft prior to required periodic maintenance events and has introduced newly manufactured aircraft into the fleet. FedEx Express aircraft maintenance and repairs costs decreased 12% in the second quarter and 15% in the first half of 2014, due to the benefits from the fourth quarter of 2013 retirement of 10 aircraft and related engines as we eliminated maintenance events for certain of these engines, along with the timing of other major maintenance events.

 

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Fuel costs decreased 8% in the second quarter and 6% in the first half of 2014 due to lower average price per gallon of jet fuel. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel did not impact operating income in the second quarter but had a significant negative impact on operating income in the first half of 2014. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express services.

FEDEX GROUND SEGMENT

FedEx Ground service offerings include day-certain service delivery to businesses in the United States and Canada and to nearly 100% of U.S. residences. FedEx SmartPost consolidates high-volume, low-weight, less time-sensitive business-to-consumer packages and utilizes the United States Postal Service (“USPS”) for final delivery. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the periods ended November 30:

 

     Three Months Ended     Percent
Change
    Six Months Ended     Percent
Change
 
         2013             2012               2013             2012        

Revenues:

            

FedEx Ground

   $ 2,601     $ 2,359       10      $ 5,107     $ 4,632       10   

FedEx SmartPost

     248       234       6        472       423       12   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

     2,849       2,593       10        5,579       5,055       10   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating expenses:

            

Salaries and employee benefits

     445       396       12        859       773       11   

Purchased transportation

     1,159       1,057       10        2,223       2,003       11   

Rentals

     102       85       20        194       159       22   

Depreciation and amortization

     118       110       7        229       213       8   

Fuel

     4       4              7       7         

Maintenance and repairs

     56       46       22        109       92       18   

Intercompany charges

     292       262       11        577       524       10   

Other(1)

     249       221       13        489       427       15   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses

     2,425       2,181       11        4,687       4,198       12   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income

   $ 424     $ 412       3      $ 892     $ 857       4   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin

     14.9     15.9     (100 )bp      16.0     17.0     (100 )bp 

Average daily package volume

            

FedEx Ground

     4,627       4,283       8        4,469       4,087       9   

FedEx SmartPost

     2,218       2,038       9        2,154       1,848       17   

Revenue per package (yield)

            

FedEx Ground

   $ 8.90     $ 8.72       2      $ 8.98     $ 8.83       2   

FedEx SmartPost

   $ 1.77     $ 1.82       (3   $ 1.72     $ 1.79       (4

 

(1)  Includes predominantly costs associated with outside service contracts (such as security and facility services), insurance and professional fees.

 

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Table of Contents
     Percent of Revenue     Percent of Revenue  
     Three
Months
Ended
    Three
Months
Ended
    Six
Months
Ended
    Six
Months
Ended
 
     2013     2012     2013     2012  

Operating expenses:

        

Salaries and employee benefits

     15.6     15.3     15.4     15.3

Purchased transportation

     40.7       40.8       39.8       39.6  

Rentals

     3.6       3.3       3.5       3.1  

Depreciation and amortization

     4.1       4.2       4.1       4.2  

Fuel

     0.1       0.1       0.1       0.1  

Maintenance and repairs

     2.0       1.8       2.0       1.8  

Intercompany charges

     10.3       10.1       10.3       10.4  

Other

     8.7       8.5       8.8       8.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     85.1       84.1       84.0       83.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     14.9     15.9     16.0     17.0
  

 

 

   

 

 

   

 

 

   

 

 

 

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 10% in the second quarter and first half of 2014 due to volume and yield growth at FedEx Ground and volume growth at FedEx SmartPost. Revenues in the first half of 2014 were negatively impacted by one fewer operating day.

Average daily volume at FedEx Ground increased 8% during the second quarter and 9% in the first half of 2014 due to market share gains resulting from continued growth in our commercial business and FedEx Home Delivery service. FedEx Ground yield increased 2% during the second quarter and the first half of 2014 primarily due to rate increases and higher residential surcharges, partially offset by lower fuel surcharge revenue.

FedEx SmartPost volumes grew 9% during the second quarter and 17% during the first half of 2014 as a result of the growth in e-commerce. Yields at FedEx SmartPost decreased 3% during the second quarter and 4% during the first half of 2014 primarily due to higher postage costs and lower fuel surcharges, partially offset by rate increases. FedEx SmartPost yield represents the amount charged to customers net of postage paid to the USPS.

The FedEx Ground fuel surcharge is based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel, as published by the Department of Energy. Our fuel surcharge ranged as follows for the periods ended November 30:

 

     Three Months Ended     Six Months Ended  
         2013             2012             2013             2012      

Low

     6.50     7.00     6.50     7.00

High

     7.00       8.50       7.00       8.50  

Weighted-average

     6.67       7.88       6.66       7.84  

On December 6, 2013, FedEx Ground and FedEx Home Delivery announced a 4.9% average list price increase effective January 6, 2014. FedEx SmartPost rates will also increase. In November 2012, FedEx Ground and FedEx Home Delivery announced a 4.9% average list price increase effective January 7, 2013. The full average rate increase of 5.9% was partially offset by adjusting the fuel price threshold at which the fuel surcharge begins, reducing the fuel surcharge by one percentage point. FedEx SmartPost rates also increased.

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 3% during the second quarter and 4% during the first half of 2014 driven by higher volumes and yields. The increase to operating income was partially offset by higher network expansion costs as we continue to invest heavily in the growing FedEx Ground and FedEx SmartPost businesses, and higher allocated fees. The FedEx Ground segment

 

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results for the first half of 2014 were also negatively impacted by one fewer operating day. The decline in operating margin for the second quarter of 2014 is primarily attributable to the delayed start of the holiday shipping season, as Cyber Week occurred in December this year versus November last year. The seasonal increases in volume, revenue and operating income related to Cyber Week will be realized in the third quarter for this fiscal year versus the second quarter in the prior year. The operating margin decrease in the first half of 2014 is primarily driven by the net negative impact of fuel.

Purchased transportation costs increased 10% during the second quarter and 11% during the first half of 2014 primarily as a result of volume growth. Salaries and employee benefits expense increased 12% during the second quarter and 11% during the first half of 2014 primarily due to additional staffing to support volume growth. Intercompany charges increased 11% in the second quarter and 10% in the first half of 2014 primarily due to higher allocated information technology, marketing and sales costs.

Independent Contractor Model

Although FedEx Ground is involved in numerous lawsuits and other proceedings (such as state tax audits or other administrative challenges) where the classification of its independent contractors is at issue, a number of recent judicial decisions support our classification, and we believe our relationship with the contractors is generally excellent. For a description of these proceedings, see “Risk Factors” and Note 8 of the accompanying unaudited condensed consolidated financial statements.

For additional information on the FedEx Ground Independent Service Provider model, see Part 1, Item 1 of our Annual Report under the caption “Independent Contractor Model.”

 

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FEDEX FREIGHT SEGMENT

FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected statistics for the periods ended November 30:

 

     Three Months Ended     Percent     Six Months Ended     Percent  
     2013     2012     Change     2013     2012     Change  

Revenues

   $ 1,434     $ 1,377       4      $ 2,858     $ 2,776       3   

Operating expenses:

            

Salaries and employee benefits

     611       589       4        1,209       1,188       2   

Purchased transportation

     250       224       12        484       450       8   

Rentals

     31       29       7        63       58       9   

Depreciation and amortization

     57       52       10        114       105       9   

Fuel

     145       157       (8     290       305       (5

Maintenance and repairs

     46       49       (6     92       97       (5

Intercompany charges

     117       110       6        238       221       8   

Other(1)

     100       91       10        200       186       8   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses

     1,357       1,301       4        2,690       2,610       3   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income

   $ 77     $ 76       1      $ 168     $ 166       1   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin

     5.4     5.5 %     (10 )bp      5.9     6.0     (10 )bp 

Average daily LTL shipments (in thousands)

            

Priority

     63.8       61.6       4        62.4       61.5       1   

Economy

     28.1       26.8       5        27.9       26.7       4   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total average daily LTL shipments

     91.9       88.4       4        90.3       88.2       2   
  

 

 

   

 

 

     

 

 

   

 

 

   

Weight per LTL shipment (lbs)

            

Priority

     1,241       1,215       2        1,243       1,215       2   

Economy

     992       989              992       994         

Composite weight per LTL shipment

     1,165       1,146       2        1,165       1,148       1   

LTL yield (revenue per hundredweight)

            

Priority

   $ 17.89     $ 18.15       (1   $ 17.88     $ 17.93         

Economy

     25.92       26.29       (1     25.88       25.80         

Composite LTL yield

   $ 19.98     $ 20.28       (1   $ 19.99     $ 19.99         

 

(1)  Includes predominantly costs associated with insurance, professional fees and outside service contracts (such as security and facility services).

 

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Table of Contents
     Percent of Revenue     Percent of Revenue  
     Three
Months
Ended
    Three
Months
Ended
    Six
Months
Ended
    Six
Months
Ended
 
       2013         2012         2013         2012    

Operating expenses:

        

Salaries and employee benefits

     42.6     42.8     42.3     42.8

Purchased transportation

     17.4       16.3       16.9       16.2  

Rentals

     2.2       2.1       2.2       2.1  

Depreciation and amortization

     4.0       3.8       4.0       3.8  

Fuel

     10.1       11.4       10.2       11.0  

Maintenance and repairs

     3.2       3.5       3.2       3.5  

Intercompany charges

     8.1       8.0       8.3       7.9  

Other

     7.0       6.6       7.0       6.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     94.6       94.5       94.1       94.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     5.4     5.5     5.9     6.0
  

 

 

   

 

 

   

 

 

   

 

 

 

FedEx Freight Segment Revenues

FedEx Freight segment revenues increased 4% during the second quarter and 3% during the first half of 2014 due to higher weight per LTL shipment and average daily LTL shipments. Although LTL yields decreased during the second quarter of 2014, they remained flat in the first half of 2014. In addition, the first half of 2014 was negatively impacted by one fewer operating day.

Weight per shipment increased 2% in the second quarter and 1% in the first half of 2014 due to FedEx Freight Priority service offerings. Average daily LTL shipments increased 4% in the second quarter due to FedEx Freight Economy and FedEx Freight Priority services and increased 2% in the first half of 2014 primarily due to FedEx Freight Economy services. LTL yield (revenue per hundredweight) decreased 1% during the second quarter of 2014 due to a decline in FedEx Freight Priority and FedEx Freight Economy yields resulting from lower fuel surcharges, higher weight per shipment and shorter length of haul.

Revenue per hundredweight is a commonly-used indicator of pricing trends, but this metric can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment, length of haul and the mix of freight. Generally, LTL freight is rated using a standard class system for the LTL industry and classes are assigned based on transportation characteristics including density, risk and handling. Under the class system, low-value freight that is easy to handle, unlikely to damage and dense will receive lower class ratings (and lower yields) than expensive, light, bulky freight which is highly susceptible to damage (and produces higher yields). As a result, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying base rates.

The indexed LTL fuel surcharge is based on the average of the national U.S. on-highway average prices for a gallon of diesel fuel, as published by the Department of Energy. The indexed LTL fuel surcharge ranged as follows for the periods ended November 30:

 

     Three Months Ended     Six Months Ended  
     2013     2012     2013     2012  

Low

     22.70     23.50     22.70     21.80 

High

     23.50       24.40       23.50       24.40  

Weighted-average

     23.10       24.00       23.00       23.30  

In July 2013, FedEx Freight implemented a rate increase of 4.5% for LTL shipments. In July 2012, FedEx Freight implemented a rate increase of 6.9% for LTL shipments.

 

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FedEx Freight Segment Operating Income

FedEx Freight segment operating income increased slightly in the second quarter and in the first half of 2014, as higher average daily LTL shipments and higher LTL weights were partially offset by higher purchased transportation. Operating margin decreased in the second quarter and the first half of 2014 primarily due to higher purchased transportation, allocated intercompany charges and other operating expenses.

Purchased transportation expense increased 12% in the second quarter of 2014 and 8% in the first half of 2014 due to increased utilization of road and rail third-party transportation providers and higher rates. Salaries and employee benefits increased 4% in the second quarter and 2% in the first half of 2014 primarily due to a volume-related increase in labor hours. Intercompany charges increased 6% in the second quarter and 8% in the first half of 2014 primarily due to higher allocated sales costs. Other operating expenses increased 10% in the second quarter and 8% in the first half of 2014 due to higher real estate taxes and bad debt expense.

Fuel costs decreased 8% during the second quarter and 5% during the first half of 2014 due to increased utilization of purchased transportation, lower average price per gallon of diesel fuel and fuel efficiency improvements. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel did not impact operating income in the second quarter and the first half of 2014.

FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $3.9 billion at November 30, 2013, compared to $4.9 billion at May 31, 2013. The following table provides a summary of our cash flows for the six-month periods ended November 30, 2013 and November 30, 2012 (in millions):

 

     2013     2012  

Operating activities:

    

Net income

   $ 989     $ 897  

Noncash charges and credits

     1,623       1,589  

Changes in assets and liabilities

     (1,003     (768
  

 

 

   

 

 

 

Cash provided by operating activities

     1,609       1,718  
  

 

 

   

 

 

 

Investing activities:

    

Capital expenditures

     (1,690     (1,888

Business acquisitions, net of cash acquired

           (483

Proceeds from asset dispositions and other

     19       20  
  

 

 

   

 

 

 

Cash used in investing activities

     (1,671     (2,351
  

 

 

   

 

 

 

Financing activities:

    

Principal payments on debt

     (3     (417

Proceeds from debt issuance

           991  

Proceeds from stock issuances

     380       53  

Dividends paid

     (95     (88

Purchase of treasury stock

     (1,219     (246

Other

     20       (3
  

 

 

   

 

 

 

Cash (used in) provided by financing activities

     (917     290  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (3     17  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

   $ (982   $ (326
  

 

 

   

 

 

 

 

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Cash flows from operating activities decreased $109 million in the first half of 2014 primarily due to an income tax refund received in the prior year, partially offset by higher net income. We made contributions of $330 million to our tax qualified U.S. domestic pension plans (“U.S. Pension Plans”) during the first half of 2014 and $280 million in contributions to our U.S. Pension Plans during the first half of 2013. Capital expenditures during the first half of 2014 were lower primarily due to decreased spending for aircraft and vehicle replacement at FedEx Express. See “Capital Resources” for a discussion of capital expenditures during 2014 and 2013.

In October 2013, our Board of Directors authorized a new share repurchase program of up to 32 million shares of common stock. These shares augmented the 7.4 million shares remaining on our previously authorized share repurchase program. The shares may be purchased from time to time in the open market or in privately negotiated transactions. Repurchases will be made at the company’s discretion, based on ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit was set for the completion of the repurchase program, and the program may be suspended or discontinued at any time.

During the first half of 2014, we repurchased 10 million shares of FedEx common stock at an average price of $122 per share for a total of $1.2 billion. As of November 30, 2013, 32.2 million shares remained under existing share repurchase authorizations.

CAPITAL RESOURCES

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

The following table compares capital expenditures by asset category and reportable segment for the periods ended November 30 (in millions):

 

                                 Percent Change 2013/2012  
     Three Months Ended      Six Months Ended      Three Months
Ended
    Six Months
Ended
 
     2013      2012      2013      2012       

Aircraft and related equipment

   $ 495      $ 357      $ 692      $ 831        39       (17

Facilities and sort equipment

     205        173        331        286        18       16  

Vehicles

     277        240        425        504        15       (16

Information and technology investments

     90        80        162        171        13       (5

Other equipment

     51        66        80        96        (23     (17
  

 

 

    

 

 

    

 

 

    

 

 

      

Total capital expenditures

   $ 1,118      $ 916      $ 1,690      $ 1,888        22       (10
  

 

 

    

 

 

    

 

 

    

 

 

      

FedEx Express segment

   $ 690      $ 517      $ 995      $ 1,266        33       (21

FedEx Ground segment

     249        177        410        263        41       56  

FedEx Freight segment

     100        139        140        183        (28     (23

FedEx Services segment

     79        83        145        173        (5     (16

Other

                          3              NM  
  

 

 

    

 

 

    

 

 

    

 

 

      

Total capital expenditures

   $ 1,118      $ 916      $ 1,690      $ 1,888        22       (10
  

 

 

    

 

 

    

 

 

    

 

 

      

Capital expenditures during the first half of 2014 were lower than the prior-year period primarily due to decreased spending for aircraft and vehicle replacement at FedEx Express. Aircraft and related equipment expenditures at FedEx Express during the first half of 2014 included the acceptance of seven Boeing 757 (“B757”) aircraft, three Boeing 767-300 Freighter (“B767F) aircraft and two Boeing 777 Freighter (“B777F”) aircraft, as well as the modification of certain aircraft before being placed into service.

 

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LIQUIDITY OUTLOOK

We believe that our existing cash and cash equivalents, cash flow from operations and available financing sources are adequate to meet our liquidity needs, including working capital, capital expenditure requirements and debt payment obligations. Our cash and cash equivalents balance at November 30, 2013 includes $467 million of cash in offshore jurisdictions associated with our permanent reinvestment strategy. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic debt or working capital obligations. Although we expect higher capital expenditures in 2014, we anticipate that our cash flow from operations will be sufficient to fund these expenditures. Historically, we have been successful in obtaining unsecured financing, from both domestic and international sources, although the marketplace for such investment capital can become restricted depending on a variety of economic factors.

Our capital expenditures are expected to be approximately $4.0 billion in 2014 and include spending for aircraft and related equipment at FedEx Express, facility projects at FedEx Express and FedEx Ground and vehicle replacement at all our transportation segments. We invested $692 million in aircraft and aircraft-related equipment in the first half of 2014 and expect to invest approximately $751 million for aircraft and aircraft-related equipment during the remainder of 2014.

The FedEx Express global air and ground network includes a fleet of over 640 aircraft (including approximately 300 supplemental aircraft) that provide delivery of packages and freight to more than 220 countries and territories through a wide range of U.S. and international shipping services. While certain aircraft are utilized in primary geographic areas (U.S. versus international), we operate an integrated global network, and utilize our aircraft and other modes of transportation to achieve the lowest cost of delivery while maintaining our service commitments to our customers. Because of the integrated nature of our global network, our aircraft are interchangeable across routes and geographies, giving us flexibility with our fleet planning to meet changing global economic conditions and maintain and modify aircraft as needed.

We have several aircraft modernization programs underway that are supported by the purchase of B777F, B767F and B757 aircraft. These aircraft are significantly more fuel-efficient per unit than the aircraft types previously utilized, and these expenditures are necessary to achieve significant long-term operating savings and to replace older aircraft. Our ability to delay the timing of these aircraft-related expenditures is limited without incurring significant costs to modify existing purchase agreements.

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

A $1 billion revolving credit facility is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial paper. The revolving credit agreement expires in March 2018. The agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times our last four fiscal quarters’ rentals and landing fees) to capital (adjusted debt plus total common stockholders’ investment) that does not exceed 70%. Our leverage ratio of adjusted debt to capital was 51% at November 30, 2013. We believe the leverage ratio covenant is our only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of November 30, 2013, no commercial paper was outstanding and the entire $1 billion under the revolving credit facility was available for future borrowings.

In December 2013, we made $165 million in required contributions to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments. For the remainder of 2014, we have $165 million in required contributions to our U.S. Pension Plans.

 

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Standard & Poor’s has assigned us a senior unsecured debt credit rating of BBB and commercial paper rating of A-2 and a ratings outlook of “stable.” Moody’s Investors Service has assigned us a senior unsecured debt credit rating of Baa1 and commercial paper rating of P-2 and a ratings outlook of “stable.” If our credit ratings drop, our interest expense may increase. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt credit ratings drop below investment grade, our access to financing may become limited.

On December 10, 2013, FedEx Express entered into an agreement with The Boeing Company for the purchase of two B767F aircraft, the delivery of which will occur in 2016 and 2017. FedEx Express is also deferring 11 existing options to purchase B777F aircraft by two years.

CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The following table sets forth a summary of our contractual cash obligations as of November 30, 2013. Certain of these contractual obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. Except for the current portion of long-term debt and capital lease obligations, this table does not include amounts already recorded in our balance sheet as current liabilities at November 30, 2013. We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the United States. These contingent liabilities are not included in the table below. We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, qualified and nonqualified pension and postretirement healthcare plan liabilities and other self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table below due to the absence of scheduled maturities. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.

 

     Payments Due by Fiscal Year (Undiscounted)
(in millions)
 
     2014(1)      2015      2016      2017      2018      Thereafter      Total  

Operating activities:

                    

Operating leases

   $  1,159      $  1,944      $  1,747      $  1,786      $  1,321      $  7,062      $  15,019  

Non-capital purchase obligations and other

     168        220        145        101        45        113        792  

Interest on long-term debt

     78        138        138        138        138        2,590        3,220  

Quarterly contributions to our U.S. Pension Plans

     330                                           330  

Investing activities:

                    

Aircraft and aircraft-related capital commitments

     395        1,142        1,127        903        1,447        5,294        10,308  

Other capital purchase obligations

     42