10-Q 1 d693794d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

FOR THE QUARTERLY PERIOD ENDED February 28, 2014

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 þ 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 þ 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 þ

  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 þ

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

 

Common Stock   Outstanding Shares at March 19, 2014

Common Stock, par value $0.10 per share

  295,516,371

 

 


Table of Contents

FEDEX CORPORATION

INDEX

 

     PAGE  
PART I. FINANCIAL INFORMATION   

ITEM 1. Financial Statements

  

Condensed Consolidated Balance Sheets
February 28, 2014 and May 31, 2013

     2   

Condensed Consolidated Statements of Income
Three and Nine Months Ended February 28, 2014 and 2013

     4   

Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months Ended February  28, 2014 and 2013

     5   

Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 2014 and 2013

     6   

Notes to Condensed Consolidated Financial Statements

     7   

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

     55   

ITEM 4. Controls and Procedures

     55   
PART II. OTHER INFORMATION   

ITEM 1. Legal Proceedings

     56   

ITEM 1A. Risk Factors

     56   

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

     56   

ITEM 6. Exhibits

     57   

Signature

     59   

Exhibit Index

     E-1   

Exhibit 4.1

  

Exhibit 4.2

  

Exhibit 4.3

  

Exhibit 4.4

  

Exhibit 4.5

  

Exhibit 10.1

  

Exhibit 10.2

  

Exhibit 10.3

  

Exhibit 10.4

  

Exhibit 12.1

  

Exhibit 15.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

Ex-101 INSTANCE DOCUMENT

  

Ex-101 SCHEMA DOCUMENT

  

Ex-101 CALCULATION LINKBASE DOCUMENT

  

Ex-101 PRESENTATION LINKBASE DOCUMENT

  

Ex-101 DEFINITION LINKBASE DOCUMENT

  

 

- 1 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

     February 28,         
     2014      May 31,  
     (Unaudited)      2013  

ASSETS

     

CURRENT ASSETS

     

Cash and cash equivalents

   $ 3,042      $ 4,917  

Receivables, less allowances of $155 and $176

     5,197        5,044  

Spare parts, supplies and fuel, less allowances of $207 and $205

     462        457  

Deferred income taxes

     624        533  

Prepaid expenses and other

     456        323  
  

 

 

    

 

 

 

Total current assets

     9,781        11,274  

PROPERTY AND EQUIPMENT, AT COST

     40,019        38,109  

Less accumulated depreciation and amortization

     20,734        19,625  
  

 

 

    

 

 

 

Net property and equipment

     19,285        18,484  

OTHER LONG-TERM ASSETS

     

Goodwill

     2,739        2,755  

Other assets

     924        1,054  
  

 

 

    

 

 

 

Total other long-term assets

     3,663        3,809  
  

 

 

    

 

 

 
   $   32,729      $       33,567  
  

 

 

    

 

 

 

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

 

- 2 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

     February 28,        
     2014     May 31,  
     (Unaudited)     2013  

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

    

CURRENT LIABILITIES

    

Current portion of long-term debt

   $ 1     $ 251  

Accrued salaries and employee benefits

     1,284       1,688  

Accounts payable

     1,903       1,879  

Accrued expenses

     1,831       1,932  
  

 

 

   

 

 

 

Total current liabilities

     5,019       5,750  

LONG-TERM DEBT, LESS CURRENT PORTION

     4,735       2,739  

OTHER LONG-TERM LIABILITIES

    

Deferred income taxes

     2,083       1,652  

Pension, postretirement healthcare and other benefit obligations

     3,586       3,916  

Self-insurance accruals

     1,028       987  

Deferred lease obligations

     741       778  

Deferred gains, principally related to aircraft transactions

     208       227  

Other liabilities

     102       120  
  

 

 

   

 

 

 

Total other long-term liabilities

     7,748       7,680  

COMMITMENTS AND CONTINGENCIES

    

COMMON STOCKHOLDERS’ INVESTMENT

    

Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of February 28, 2014 and May 31, 2013

     32       32  

Additional paid-in capital

     2,259       2,668  

Retained earnings

     19,699       18,519  

Accumulated other comprehensive loss

     (3,754     (3,820

Treasury stock, at cost

     (3,009     (1
  

 

 

   

 

 

 

Total common stockholders’ investment

     15,227       17,398  
  

 

 

   

 

 

 
   $   32,729     $       33,567  
  

 

 

   

 

 

 

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

 

- 3 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

     Three Months Ended
February 28,
    Nine Months Ended
February 28,
 
     2014     2013     2014     2013  

REVENUES

   $   11,301     $   10,953     $   33,728     $   32,852  

OPERATING EXPENSES:

        

Salaries and employee benefits

     4,167       4,150       12,392       12,378  

Purchased transportation

     2,063       1,871       5,982       5,411  

Rentals and landing fees

     662       640       1,950       1,888  

Depreciation and amortization

     652       599       1,938       1,764  

Fuel

     1,163       1,215       3,403       3,588  

Maintenance and repairs

     438       424       1,397       1,477  

Business realignment costs

           47             64  

Other

     1,515       1,418       4,403       4,233  
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,660       10,364       31,465       30,803  
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     641       589       2,263       2,049  

OTHER INCOME (EXPENSE):

        

Interest, net

     (38     (9     (95     (37

Other, net

     (9     (16     (16     (29
  

 

 

   

 

 

   

 

 

   

 

 

 
     (47     (25     (111     (66
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     594       564       2,152       1,983  

PROVISION FOR INCOME TAXES

     216       203       785       725  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 378     $ 361     $ 1,367     $ 1,258  
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER COMMON SHARE:

        

Basic

   $ 1.24     $ 1.14     $ 4.38     $ 3.99  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.23     $ 1.13     $ 4.34     $ 3.97  
  

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.15     $ 0.14     $ 0.60     $ 0.56  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

- 4 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)

 

     Three Months Ended
February 28,
    Nine Months Ended
February 28,
 
     2014     2013     2014     2013  

NET INCOME

   $   378     $   361     $   1,367     $   1,258  

OTHER COMPREHENSIVE INCOME (LOSS):

        

Foreign currency translation adjustments, net of tax of $3, $0, $7 and $6

     (30     (3     (64     54  

Amortization of unrealized pension actuarial gains/losses and other, net of tax of $25, $37, $75 and $112

     45       63       130       189  
  

 

 

   

 

 

   

 

 

   

 

 

 
     15       60       66       243  
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 393     $ 421     $ 1,433     $ 1,501  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

- 5 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

 

     Nine Months Ended
February 28,
 
     2014     2013  

Operating Activities:

    

Net income

   $ 1,367     $ 1,258  

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

    

Depreciation and amortization

     1,938       1,764  

Provision for uncollectible accounts

     95       130  

Stock-based compensation

     94       87  

Deferred income taxes and other noncash items

     392       493  

Changes in assets and liabilities:

    

Receivables

     (242     (280

Other assets

     (150     113  

Accounts payable and other liabilities

     (893     (570

Other, net

     (23     (19
  

 

 

   

 

 

 

Cash provided by operating activities

     2,578       2,976  

Investing Activities:

    

Capital expenditures

     (2,554     (2,430

Business acquisitions, net of cash acquired

           (483

Proceeds from asset dispositions and other

     23       45  
  

 

 

   

 

 

 

Cash used in investing activities

     (2,531     (2,868

Financing Activities:

    

Principal payments on debt

     (254     (417

Proceeds from debt issuances

     1,997       991  

Proceeds from stock issuances

     462       221  

Excess tax benefit on the exercise of stock options

     27       9  

Dividends paid

     (142     (132

Purchase of treasury stock, including accelerated share repurchase agreements

     (3,984     (246

Other, net

     (18     (9
  

 

 

   

 

 

 

Cash (used in) provided by financing activities

     (1,912     417  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (10     4  
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (1,875     529  

Cash and cash equivalents at beginning of period

     4,917       2,843  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $   3,042     $   3,372  
  

 

 

   

 

 

 

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

 

- 6 -


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 February 28, 2014, the results of our operations for the three- and nine-month periods ended February 28, 2014 and 2013 and cash flows for the nine-month periods ended February 28, 2014 and 2013. Operating results for the three- and nine-month periods ended February 28, 2014 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 fourth quarter 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 $23 million for the three-month period ended February 28, 2014 and $94 million for the nine-month period ended February 28, 2014. Our stock-based compensation expense was $23 million for the three-month period ended February 28, 2013 and $87 million for the nine-month period ended February 28, 2013. 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.

 

- 7 -


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 nine months of 2014 that is relevant to the readers of our financial statements, there are numerous proposals under development (as discussed in our Annual Report) which, if and when enacted, may have a significant impact on our financial reporting.

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. Shares may be purchased from time to time in the open market or in privately negotiated transactions. Repurchases are 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.

In January 2014, we entered into accelerated share repurchase (“ASR”) agreements with two banks to repurchase an aggregate of $2.0 billion of our common stock. During the third quarter of 2014, 11.4 million shares were initially delivered to us based on then-current market prices. This does not represent the final number of shares to be delivered under the ASR agreements. The final number of shares to be purchased under each ASR agreement will be based on a discount to the volume-weighted average price of our stock during the term of the respective transaction. Purchases under the ASR agreements are expected to be completed prior to the end of 2014.

Each ASR agreement was accounted for as two separate transactions: as shares of reacquired common stock for the shares delivered to us at the onset of the ASR agreements and as a forward contract indexed to our own common stock for the undelivered shares. The initial delivery of shares are included in treasury stock at a cost of $1.6 billion and resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. The $400 million forward contract indexed to our own stock met the criteria for equity classification and this amount was recorded in additional paid-in capital.

During the nine months of 2014, in addition to the ASR transactions, we repurchased 15.6 million shares of FedEx common stock at an average price of $128 per share for a total of $2.0 billion. As of February 28, 2014, 15.2 million shares remained under our share repurchase authorization.

On February 14, 2014, our Board of Directors declared a dividend of $0.15 per share of common stock. The dividend will be paid on April 1, 2014 to stockholders of record as of the close of business on March 11, 2014. 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.

 

- 8 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(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 February 28 (in millions; amounts in parentheses indicate debits to AOCI):

 

     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Foreign currency translation gain (loss):

        

Balance at beginning of period

   $           68     $         118     $         102     $ 61  

Translation adjustments

     (30     (3     (64     54  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

     38       115       38               115  
  

 

 

   

 

 

   

 

 

   

 

 

 

Retirement plans adjustments:

        

Balance at beginning of period

     (3,837     (4,888     (3,922     (5,014

Reclassifications from AOCI

     45       63       130       189  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

     (3,792     (4,825     (3,792     (4,825
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive loss at end of period

   $ (3,754   $ (4,710   $ (3,754   $ (4,710
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Amount Reclassified from
AOCI
   

Affected Line Item in the Income

Statement

     Three Months Ended     Nine Months Ended      
     2014     2013     2014     2013      

Retirement plans:

          

Amortization of actuarial losses and other

   $ (98   $ (129   $ (290   $ (387   Salaries and employee benefits

Amortization of prior service credits

             28               29               85               86     Salaries and employee benefits
  

 

 

   

 

 

   

 

 

   

 

 

   

Total before tax

     (70     (100     (205     (301  

Income tax benefit

     25       37       75       112     Provision for income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   

AOCI reclassifications, net of tax

   $ (45   $ (63   $ (130   $ (189   Net income
  

 

 

   

 

 

   

 

 

   

 

 

   

(3) Financing Arrangements

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

During the third quarter of 2014, we repaid our $250 million 7.38% senior unsecured notes that matured on January 15, 2014. During the quarter, we issued $2 billion of senior unsecured debt under our current shelf registration statement, comprised of $750 million of 4.00% fixed-rate notes due in January 2024, $500 million of 4.90% fixed-rate notes due in January 2034 and $750 million of 5.10% fixed-rate notes due in January 2044. Interest on these notes is paid semiannually. We utilized the net proceeds to make payments under the ASR agreements discussed in Note 1.

 

- 9 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

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 57% at February 28, 2014. 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 February 28, 2014, 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 of $4.7 billion compared with an estimated fair value of $4.9 billion at February 28, 2014 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.

(4) Computation of Earnings Per Share

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

 

     Three Months Ended      Nine Months Ended  
     2014      2013      2014      2013  

Basic earnings per common share:

           

Net earnings allocable to common shares(1)

   $ 377      $ 360      $ 1,365      $ 1,255  

Weighted-average common shares

     303        315        312        314  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 1.24      $ 1.14      $ 4.38      $ 3.99  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share:

           

Net earnings allocable to common shares(1)

   $ 377      $ 360      $ 1,365      $ 1,255  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares

     303        315        312        314  

Dilutive effect of share-based awards

     4        2        3        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average diluted shares

     307        317        315        316  

Diluted earnings per common share

   $       1.23      $       1.13      $       4.34      $       3.97  
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive options excluded from diluted earnings per common share

     0.5        7.9        4.3        12.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

- 10 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(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 February 28 were as follows (in millions):

 

     Three Months Ended      Nine Months Ended  
     2014      2013      2014      2013  

U.S. domestic and international pension plans

   $ 124       $ 169       $ 366       $ 509   

U.S. domestic and international defined contribution plans

     90         87         269         262   

U.S. domestic and international postretirement healthcare plans

     20         19         59         58   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $       234       $       275       $       694       $       829   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Pension Plans

        

Service cost

   $       164      $       173      $       492      $       519   

Interest cost

     264        242        790        726   

Expected return on plan assets

     (374     (346     (1,121     (1,037

Recognized actuarial losses and other

     70        100        205        301   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 124      $ 169      $ 366      $ 509   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Postretirement Healthcare Plans

        

Service cost

   $ 10      $ 10      $ 29      $ 31   

Interest cost

     10        9        30        27   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 20      $ 19      $ 59      $ 58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Required contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the nine-month periods ended February 28 were $480 million in 2014 and $420 million in 2013. In March 2014, 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.

 

- 11 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

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. 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. 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 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.

 

- 12 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

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

 

     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Revenues

        

FedEx Express segment

   $ 6,674     $ 6,704     $ 20,123     $ 20,194  

FedEx Ground segment

     3,031       2,747       8,610       7,802  

FedEx Freight segment

     1,347       1,237       4,205       4,013  

FedEx Services segment

     368       380       1,134       1,174  

Other and eliminations

     (119     (115     (344     (331
  

 

 

   

 

 

   

 

 

   

 

 

 
   $   11,301     $   10,953     $   33,728     $   32,852  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

        

FedEx Express segment

   $ 135     $ 118     $ 697     $ 555  

FedEx Ground segment

     477       467       1,369       1,324  

FedEx Freight segment

     29       4       197       170  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 641     $ 589     $ 2,263     $ 2,049  
  

 

 

   

 

 

   

 

 

   

 

 

 

(7) Commitments

As of February 28, 2014, 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)

   $ 217      $ 282      $ 499  

2015

     1,155        263        1,418  

2016

     1,215        179        1,394  

2017

     955        112        1,067  

2018

     1,396        48        1,444  

Thereafter

     5,388        116        5,504  
  

 

 

    

 

 

    

 

 

 

Total

   $   10,326      $                 1,000      $               11,326  
  

 

 

    

 

 

    

 

 

 

 

(1) Primarily vehicles, facilities, advertising contracts, and for the remainder of 2014, a total of $165 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 February 28, 2014, 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.

During the third quarter of 2014, 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 also deferred 11 existing options to purchase B777F aircraft by two years.

 

- 13 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

We had $272 million in deposits and progress payments as of February 28, 2014 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 February 28, 2014, with the year of expected delivery:

 

     B757      B767F      B777F      Total  

2014 (remainder)

     6                      6  

2015

         11        12               23  

2016

            11        2        13  

2017

            11               11  

2018

            10        2        12  

Thereafter

            4        14        18  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     17                48                18                83  
  

 

 

    

 

 

    

 

 

    

 

 

 

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at February 28, 2014 is as follows (in millions):

 

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

2014 (remainder)

   $ 100      $ 391      $ 491  

2015

     448        1,558        2,006  

2016

     453        1,365        1,818  

2017

     391        1,462        1,853  

2018

     326        1,060        1,386  

Thereafter

     824        6,678        7,502  
  

 

 

    

 

 

    

 

 

 

Total

   $     2,542      $     12,514      $     15,056  
  

 

 

    

 

 

    

 

 

 

Future minimum lease payments under capital leases were immaterial at February 28, 2014. 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.

 

- 14 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

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.

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 and have received final 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.

Environmental Matter. SEC regulations require disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that management reasonably believes could exceed $100,000. In February 2014, FedEx Ground received oral communications from District Attorneys’ Offices (representing California’s county environmental authorities) and the California Attorney General’s Office (representing the California Division of Toxic Substances Control) that they were seeking civil penalties for alleged violations of the state’s hazardous waste regulations. Specifically, the California environmental authorities are alleging that FedEx Ground improperly generates and/or handles, stores and transports hazardous waste from its stations to its hubs in California. We are currently in negotiations with the District Attorneys’ Offices and the California Attorney General’s Office in an effort to reach a statewide settlement on this matter. Loss in this matter is possible, however, the amount of any loss is expected to be immaterial.

 

- 15 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

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.

(9) Supplemental Cash Flow Information

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

 

         2014             2013      

Cash payments for:

    

Interest (net of capitalized interest)

   $ 121     $ 87  
  

 

 

   

 

 

 

Income taxes

   $ 716     $ 613  

Income tax refunds received

     (50     (205
  

 

 

   

 

 

 

Cash tax payments, net

   $ 666     $ 408  
  

 

 

   

 

 

 

 

- 16 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(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 $4.5 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)

February 28, 2014

 

    Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

         

CURRENT ASSETS

         

Cash and cash equivalents

  $ 2,016     $ 380     $ 788     $ (142   $ 3,042  

Receivables, less allowances

          4,190       1,051       (44     5,197  

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

    146       718       54             918  

Deferred income taxes

          607       17             624  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    2,162       5,895       1,910       (186     9,781  

PROPERTY AND EQUIPMENT, AT COST

    27       37,736       2,256             40,019  

Less accumulated depreciation and amortization

    22       19,535       1,177             20,734  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net property and equipment

    5       18,201       1,079             19,285  

INTERCOMPANY RECEIVABLE

          659       1,279       (1,938      

GOODWILL

          1,552       1,187             2,739  

INVESTMENT IN SUBSIDIARIES

    20,031       3,595             (23,626      

OTHER ASSETS

    2,122       641       232       (2,071     924  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 24,320     $ 30,543     $ 5,687     $ (27,821   $ 32,729  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

CURRENT LIABILITIES

         

Current portion of long-term debt

  $     $ 1     $     $     $ 1  

Accrued salaries and employee benefits

    66       1,061       157             1,284  

Accounts payable

    45       1,447       597       (186     1,903  

Accrued expenses

    285       1,352       194             1,831  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    396       3,861       948       (186     5,019  

LONG-TERM DEBT, LESS CURRENT PORTION

    4,486       249                   4,735  

INTERCOMPANY PAYABLE

    1,938                   (1,938      

OTHER LONG-TERM LIABILITIES

         

Deferred income taxes

          4,074       80       (2,071     2,083  

Other liabilities

    2,273       3,148       244             5,665  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other long-term liabilities

    2,273       7,222       324       (2,071     7,748  

STOCKHOLDERS’ INVESTMENT

    15,227       19,211       4,415       (23,626     15,227  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $   24,320     $ 30,543     $ 5,687     $ (27,821   $ 32,729  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 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 February 28, 2014

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
     Eliminations     Consolidated  

REVENUES

   $     $ 9,509     $ 1,876      $ (84   $ 11,301  

OPERATING EXPENSES:

           

Salaries and employee benefits

     24       3,615       528              4,167  

Purchased transportation

           1,426       680        (43     2,063  

Rentals and landing fees

     1       576       86        (1     662  

Depreciation and amortization

           601       51              652  

Fuel

           1,138       25              1,163  

Maintenance and repairs

     1       406       31              438  

Intercompany charges, net

     (52     (17     69               

Other

     26       1,234       295        (40     1,515  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
           8,979       1,765        (84     10,660  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

           530       111              641  

OTHER INCOME (EXPENSE):

           

Equity in earnings of subsidiaries

     378       80              (458      

Interest, net

     (45     4       3              (38

Intercompany charges, net

     46       (52     6               

Other, net

     (1     (9     1              (9
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     378       553       121        (458     594  

Provision for income taxes

           165       51              216  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 378     $ 388     $ 70      $ (458   $ 378  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $         419     $ 388     $ 44      $ (458   $ 393  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

- 20 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended February 28, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUES

   $     $ 9,182     $ 1,851     $ (80   $ 10,953  

OPERATING EXPENSES:

          

Salaries and employee benefits

     26       3,594       530             4,150  

Purchased transportation

           1,261       649       (39     1,871  

Rentals and landing fees

     2       555       85       (2     640  

Depreciation and amortization

           551       48             599  

Fuel

           1,190       25             1,215  

Maintenance and repairs

           395       29             424  

Business realignment costs

     5       42                   47  

Intercompany charges, net

     (55     (71     126              

Other

     22       1,129       306       (39     1,418  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           8,646       1,798       (80     10,364  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

           536       53             589  

OTHER INCOME (EXPENSE):

          

Equity in earnings of subsidiaries

     361       53             (414      

Interest, net

     (27     16       2             (9

Intercompany charges, net

     29       (33     4              

Other, net

     (2     (13     (1           (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     361       559       58       (414     564  

Provision for income taxes

           155       48             203  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 361     $ 404     $ 10     $ (414   $ 361  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $         419     $ 401     $ 15     $ (414   $ 421  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 21 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Nine Months Ended February 28, 2014

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
     Eliminations     Consolidated  

REVENUES

   $      $ 28,184      $ 5,796       $ (252   $ 33,728   

OPERATING EXPENSES:

           

Salaries and employee benefits

     79        10,697        1,616                12,392   

Purchased transportation

            4,008        2,092         (118     5,982   

Rentals and landing fees

     4        1,697        253         (4     1,950   

Depreciation and amortization

     1        1,785        152                1,938   

Fuel

            3,330        73                3,403   

Maintenance and repairs

     1        1,302        94                1,397   

Intercompany charges, net

     (163     (47     210                  

Other

     78        3,559        896         (130     4,403   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
            26,331        5,386         (252     31,465   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

            1,853        410                2,263   

OTHER INCOME (EXPENSE):

           

Equity in earnings of subsidiaries

     1,367        323                (1,690       

Interest, net

     (114     14        5                (95

Intercompany charges, net

     117        (134     17                  

Other, net

     (3     (14     1                (16
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     1,367        2,042        433         (1,690     2,152   

Provision for income taxes

            648        137                785   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 1,367      $ 1,394      $ 296       $ (1,690   $ 1,367   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $     1,487      $ 1,401      $ 235       $ (1,690   $ 1,433   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

- 22 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Nine Months Ended February 28, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUES

   $      $ 27,501      $ 5,594      $ (243   $ 32,852   

OPERATING EXPENSES:

          

Salaries and employee benefits

     79        10,752        1,547               12,378   

Purchased transportation

            3,613        1,905        (107     5,411   

Rentals and landing fees

     4        1,648        241        (5     1,888   

Depreciation and amortization

     1        1,626        137               1,764   

Fuel

            3,516        72               3,588   

Maintenance and repairs

     1        1,391        85               1,477   

Business realignment costs

     15        49                      64   

Intercompany charges, net

     (169     (276     445                 

Other

     69        3,403        892        (131     4,233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            25,722        5,324        (243     30,803   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

            1,779        270               2,049   

OTHER INCOME (EXPENSE):

          

Equity in earnings of subsidiaries

     1,258        152               (1,410       

Interest, net

     (77     35        5               (37

Intercompany charges, net

     82        (95     13                 

Other, net

     (5     (18     (6            (29
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     1,258        1,853        282        (1,410     1,983   

Provision for income taxes

            581        144               725   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 1,258      $ 1,272      $ 138      $ (1,410   $ 1,258   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $     1,434      $ 1,284      $ 193      $ (1,410   $ 1,501   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 23 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 28, 2014

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ (104   $ 2,386      $ 341      $ (45   $ 2,578   

INVESTING ACTIVITIES

          

Capital expenditures

            (2,342     (212            (2,554

Proceeds from asset dispositions and other

            26        (3            23   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

            (2,316     (215            (2,531

FINANCING ACTIVITIES

          

Net transfers from (to) Parent

     136        (123     (13              

Payment on loan between subsidiaries

            5        (5              

Intercompany dividends

            36        (36              

Principal payments on debt

     (250     (4                   (254

Proceeds from debt issuance

     1,997                             1,997   

Proceeds from stock issuances

     462                             462   

Excess tax benefit on the exercise of stock options

     27                             27   

Dividends paid

     (142                          (142

Purchase of treasury stock

     (3,984                          (3,984

Other, net

     (18                          (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN FINANCING ACTIVITIES

     (1,772     (86     (54            (1,912
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

            (9     (1            (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (1,876     (25     71        (45     (1,875

Cash and cash equivalents at beginning of period

     3,892        405        717        (97     4,917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $         2,016      $ 380      $ 788      $ (142   $ 3,042   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 24 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 28, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ 78      $ 2,556      $ 347      $ (5   $ 2,976   

INVESTING ACTIVITIES

          

Capital expenditures

     (3     (2,201     (226            (2,430

Business acquisitions, net of cash acquired

                   (483            (483

Proceeds from asset dispositions and other

            39        6               45   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

     (3     (2,162     (703            (2,868

FINANCING ACTIVITIES

          

Net transfers from (to) Parent

     (453     517        (64              

Payment on loan between subsidiaries

            (407     407                 

Intercompany dividends

            12        (12              

Principal payments on debt

            (417                   (417

Proceeds from debt issuance

     991                             991   

Proceeds from stock issuances

     221                             221   

Excess tax benefit on the exercise of stock options

     9                             9   

Dividends paid

     (132                          (132

Purchase of treasury stock

     (246                          (246

Other, net

     (9     (93     93               (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     381        (388     424               417   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

            (4     8               4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     456        2        76        (5     529   

Cash and cash equivalents at beginning of period

     1,906        417        636        (116     2,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $         2,362      $ 419      $ 712      $ (121   $ 3,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 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 February 28, 2014, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended February 28, 2014 and 2013 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 2014 and 2013. 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

March 20, 2014

 

- 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 certain 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.

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following table compares summary operating results (dollars in millions, except per share amounts) for the periods ended February 28:

 

     Three Months Ended     Percent
Change
    Nine Months Ended     Percent
Change
 
     2014     2013       2014     2013    

Revenues

   $   11,301     $   10,953       3     $   33,728     $   32,852       3  

Operating income

     641       589       9       2,263       2,049       10  

Operating margin

     5.7     5.4     30 bp      6.7     6.2     50 bp 

Net income

   $ 378     $ 361       5     $ 1,367     $ 1,258       9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 1.23     $ 1.13       9     $ 4.34     $ 3.97       9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows changes in revenues and operating income by reportable segment for the periods ended February 28, 2014 compared to February 28, 2013 (dollars in millions):

 

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

FedEx Express segment

   $ (30   $ (71               $ 17      $ 142        14        26  

FedEx Ground segment

     284       808       10       10       10        45        2        3  

FedEx Freight segment

     110       192       9       5       25        27        NM        16  

FedEx Services segment

     (12     (40     (3     (3                           

Other and eliminations

     (4     (13     NM       NM                             
  

 

 

   

 

 

       

 

 

    

 

 

       
   $ 348     $ 876       3       3     $ 52      $ 214        9        10  
  

 

 

   

 

 

       

 

 

    

 

 

       

Overview

While our revenues and earnings increased in the third quarter of 2014, our results include a significant negative impact from severe winter weather across all of our transportation segments. Winter weather often impacts our third quarter results, but the impact of multiple severe storms during the third quarter of 2014 was more pronounced, reducing earnings by an estimated $125 million year over year. Our results for the third quarter also reflect a negative net impact of fuel (described further below). These headwinds were partially offset by the benefit across all of our transportation segments of one additional operating day. Our results for the third quarter also include benefits from reduced variable incentive compensation, lower pension expense and benefits from the voluntary employee severance program we announced in 2013. In addition, our operating results comparisons to prior year were positively impacted by $47 million of business realignment costs in the prior year.

 

- 28 -


Table of Contents

For the nine months of 2014, our revenues and earnings increased due to improved performance of all our transportation segments despite the significant negative net impact of fuel and severe winter weather. Our nine months earnings benefited from lower pension expense and lower maintenance expense due to our profit improvement initiatives, including our fleet modernization programs. Additionally, our nine months results reflect benefits from the voluntary employee severance program and reduced variable incentive compensation.

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. In the third quarter of 2014, we entered into accelerated share repurchase (“ASR”) agreements with two banks to repurchase an aggregate of $2.0 billion of our common stock and made additional open market purchases of our common stock totaling $765 million. Share repurchases through the end of the third quarter had a minimal positive impact on earnings per diluted share. See additional information on the share repurchase program in Note 1 of the accompanying unaudited condensed consolidated financial statements.

 

- 29 -


Table of Contents

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

 

LOGO

 

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

 

- 30 -


Table of Contents

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

 

LOGO

Revenue

Revenues increased 3% in the third quarter and nine months of 2014, primarily due to higher volumes at FedEx Ground and FedEx Freight and yield increases at FedEx Ground. At our FedEx Ground segment, revenues increased 10% in the third quarter and nine months of 2014 due to higher volume from market share gains and increased yields as a result of rate increases. Revenues at FedEx Freight increased 9% during the third quarter and 5% during the nine months of 2014 primarily due to higher average daily LTL shipments and weight per LTL shipment. At FedEx Express, revenues were flat in the third quarter of 2014 due to lower freight revenues and lower fuel surcharges, partially offset by revenue growth from stronger base U.S. and international export package business. For the nine months of 2014, FedEx Express revenues were flat as lower fuel surcharges and lower freight revenue were offset by revenue growth due to stronger base U.S. and international export package business and our freight-forwarding business at FedEx Trade Networks. Revenues at all of our transportation segments in the third quarter and nine months of 2014 were negatively impacted by unusually severe winter weather while revenues for the third quarter benefited from one additional operating day.

 

- 31 -


Table of Contents

Operating Income

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

 

     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Operating expenses:

        

Salaries and employee benefits

   $ 4,167     $ 4,150     $ 12,392     $ 12,378  

Purchased transportation

     2,063       1,871       5,982       5,411  

Rentals and landing fees

     662       640       1,950       1,888  

Depreciation and amortization

     652       599       1,938       1,764  

Fuel

     1,163       1,215       3,403       3,588  

Maintenance and repairs

     438       424       1,397       1,477  

Business realignment costs(1)

            47              64  

Other

     1,515       1,418       4,403       4,233  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ 10,660     $ 10,364     $ 31,465     $ 30,803  
  

 

 

   

 

 

   

 

 

   

 

 

 
     Percent of Revenue  
     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Operating expenses:

        

Salaries and employee benefits

     36.9     37.9     36.7     37.7

Purchased transportation

     18.2       17.1       17.7       16.5  

Rentals and landing fees

     5.8       5.8       5.8       5.7  

Depreciation and amortization

     5.8       5.5       5.8       5.4  

Fuel

     10.3       11.1       10.1       10.9  

Maintenance and repairs

     3.9       3.9       4.1       4.5  

Business realignment costs(1)

            0.4              0.2  

Other

     13.4       12.9       13.1       12.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     94.3       94.6       93.3       93.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     5.7     5.4     6.7     6.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Includes predominantly severance costs associated with our voluntary employee buyout program.

Operating income increased in the third quarter of 2014 as a result of improved performance at all our transportation segments. Operating income increased for the nine months 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. Operating income in the third quarter and nine months of 2014 included a significant negative impact of both unusually severe winter weather and the net impact of fuel. Our results for all our transportation segments in the third quarter of 2014 compared to 2013 were positively impacted by one additional operating day and $47 million of business realignment costs incurred in the third quarter of 2013.

Purchased transportation costs increased 10% in the third quarter and 11% in the nine months of 2014 due to volume growth at FedEx Ground, higher utilization of third-party transportation providers at FedEx Freight and FedEx Express and, for the nine months of 2014, costs associated with prior year international acquisitions at FedEx Express and the expansion of our freight-forwarding business at FedEx Trade Networks. Depreciation and amortization expense increased 9% in the third quarter and 10% in the nine months of 2014 primarily due to accelerated depreciation on certain aircraft scheduled for retirement, and aircraft recently placed in service at FedEx Express. Salaries and employee benefits expense in the third quarter and in the nine months of 2014 increased only

 

- 32 -


Table of Contents

slightly due to the benefits from lower pension expense, benefits from our voluntary employee buyout program, the delayed timing or absence of merit increases for many of our employees and reduced variable incentive compensation. Maintenance and repairs expense increased 3% in the third quarter but decreased 5% in the nine months of 2014 due to the positive impact of continued modernization of our aircraft fleet, offset by the impact of certain maintenance events during the third quarter.

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 4% in the third quarter and 5% in the nine months of 2014 due to lower average price per gallon of jet fuel and lower aircraft fuel usage. Our results are impacted by the timing lag which exists between when fuel prices change and when indexed fuel surcharges automatically adjust, which we describe in the discussion of our results as the net impact of 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 had a significant negative impact on operating income in the third quarter and nine months 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 third quarter and the nine months of 2014 and 2013 in the accompanying discussions of each of our transportation segments.

Income Taxes

Our effective tax rate was 36.4% for the third quarter and 36.5% for the nine months of 2014, compared with 36.0% for the third quarter and 36.6% for the nine months 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

 

- 33 -


Table of Contents

material to our consolidated financial statements. As of February 28, 2014, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2013.

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 fourth quarter 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 earnings growth to continue in the fourth quarter of 2014, driven by ongoing improvements in the results of all of our transportation segments. However, our expected results for the fourth quarter of 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.

As of February 28, 2014, approximately 75% of the 3,600 employees accepting voluntary cash buyouts vacated their positions. The remaining 25% will depart by May 31, 2014. Our third quarter results include a benefit from the voluntary severance program and additional benefits realized from our voluntary severance program will continue as the fiscal year progresses and the remaining scheduled employee departures occur.

During the nine months 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.

 

- 34 -


Table of Contents

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.

While no other new accounting guidance was adopted or issued during the nine months 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. 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.

 

- 35 -


Table of Contents

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. 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 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.

 

- 36 -


Table of Contents

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 February 28:

 

     Three Months Ended     Percent     Nine Months Ended     Percent  
     2014     2013     Change     2014     2013     Change  

Revenues:

            

Package:

            

U.S. overnight box

   $ 1,643      $ 1,609        2      $ 4,852      $ 4,822        1   

U.S. overnight envelope

     393        413        (5     1,210        1,252        (3

U.S. deferred

     869        812        7        2,369        2,246        5   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total U.S. domestic package revenue

     2,905        2,834        3        8,431        8,320        1   
  

 

 

   

 

 

     

 

 

   

 

 

   

International priority

     1,542        1,567        (2     4,760        4,906        (3

International economy

     540        491        10        1,639        1,492        10   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total international export package revenue

     2,082        2,058        1        6,399        6,398          
  

 

 

   

 

 

     

 

 

   

 

 

   

International domestic(1)

     347        342        1        1,077        1,035        4   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total package revenue

     5,334        5,234        2        15,907        15,753        1   

Freight:

            

U.S.

     577        668        (14     1,786        1,923        (7

International priority

     379        384        (1     1,184        1,269        (7

International airfreight

     48        64        (25     157        215        (27
  

 

 

   

 

 

     

 

 

   

 

 

   

Total freight revenue

     1,004        1,116        (10     3,127        3,407        (8

Other(2)

     336        354        (5     1,089        1,034        5   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

     6,674        6,704               20,123        20,194          

Operating expenses:

            

Salaries and employee benefits

     2,509        2,539        (1     7,418        7,500        (1

Purchased transportation

     608        583        4        1,876        1,728        9   

Rentals and landing fees

     432        429        1        1,273        1,262        1   

Depreciation and amortization

     374        334        12        1,116        993        12   

Fuel

     1,010        1,066        (5     2,952        3,126        (6

Maintenance and repairs

     273        262        4        888        983        (10

Business realignment costs(3)

            13        NM               14        NM   

Intercompany charges(4)

     507        548        (7     1,514        1,620        (7

Other(5)

     826        812        2        2,389        2,413        (1
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses

     6,539        6,586        (1     19,426        19,639        (1
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income

   $ 135      $ 118        14      $ 697      $ 555        26   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin

     2.0     1.8     20 bp      3.5     2.7     80 bp 

 

- 37 -


Table of Contents
     Percent of Revenue  
     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Operating expenses:

        

Salaries and employee benefits

     37.6     37.8     36.9     37.1

Purchased transportation

     9.1        8.7        9.3        8.6   

Rentals and landing fees

     6.5        6.4        6.3        6.2   

Depreciation and amortization

     5.6        5.0        5.5        4.9   

Fuel

     15.1        15.9        14.7        15.5   

Maintenance and repairs

     4.1        3.9        4.4        4.9   

Business realignment costs(3)

            0.2               0.1   

Intercompany charges(4)

     7.6        8.2        7.5        8.0   

Other(5)

     12.4        12.1        11.9        12.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     98.0        98.2        96.5        97.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     2.0     1.8     3.5     2.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 severance costs associated with our voluntary employee buyout program.
(4) Includes allocations of $21 million in the third quarter and $31 million in the nine months of 2013 for business realignment costs.
(5) Includes predominantly costs associated with outside service contracts (such as security, facility services and cargo handling), professional fees, uniforms, insurance and advertising.

 

- 38 -


Table of Contents

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

 

     Three Months Ended      Percent     Nine Months Ended      Percent  
     2014      2013      Change     2014      2013      Change  

Package Statistics(1)

                

Average daily package volume (ADV):

                

U.S. overnight box

     1,202         1,176         2        1,153         1,135         2   

U.S. overnight envelope

     515         569         (9     538         570         (6

U.S. deferred

     984         944         4        871         843         3   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total U.S. domestic ADV

     2,701         2,689                2,562         2,548         1   
  

 

 

    

 

 

      

 

 

    

 

 

    

International priority

     399         420         (5     409         424         (4

International economy

     168         155         8        168         152         11   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total international export ADV

     567         575         (1     577         576           
  

 

 

    

 

 

      

 

 

    

 

 

    

International domestic(2)

     780         781                822         781         5   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total ADV

     4,048         4,045                3,961         3,905         1   
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue per package (yield):

                

U.S. overnight box

   $ 21.70       $ 22.08         (2   $ 22.15       $ 22.35         (1

U.S. overnight envelope

     12.09         11.69         3        11.84         11.57         2   

U.S. deferred

     14.01         13.87         1        14.31         14.02         2   

U.S. domestic composite

     17.07         17.00                17.32         17.18         1   

International priority

     61.38         60.25         2        61.30         60.93         1   

International economy

     51.01         51.03                51.24         51.72         (1

International export composite

     58.30         57.76         1        58.37         58.50           

International domestic(2)

     7.05         7.06                6.90         6.98         (1

Composite package yield

     20.91         20.87                21.14         21.23           

Freight Statistics(1)

                

Average daily freight pounds:

                

U.S.

     8,263         8,324         (1     7,850         7,697         2   

International priority

     2,823         2,894         (2     2,917         3,098         (6

International airfreight

     757         1,035         (27     839         1,102         (24
  

 

 

    

 

 

      

 

 

    

 

 

    

Total average daily freight pounds

       11,843           12,253         (3       11,606           11,897         (2
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue per pound (yield):

                

U.S.

   $ 1.11       $ 1.30         (15   $ 1.20       $ 1.31         (8

International priority

     2.13         2.14                2.14         2.15           

International airfreight

     1.00         0.99         1        0.98         1.03         (5

Composite freight yield

     1.35         1.47         (8     1.42         1.51         (6

 

(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 were flat in the third quarter of 2014 due to the negative impact of lower freight revenue, lower fuel surcharges and unusually severe winter weather, offset by stronger base U.S. and international export package business and one additional operating day. Revenue in the nine months of 2014 was flat due to the negative impact of lower fuel surcharges, lower freight revenue and unusually severe winter weather, offset by stronger base U.S. and international export package business and the growth of our freight-forwarding business at FedEx Trade Networks. The demand shift from our priority international services to our economy international services continued to negatively impact our results.

Freight yields decreased 8% in the third quarter and 6% in the nine months of 2014 due to lower fuel surcharges and lower rates. Freight average daily pounds decreased by 3% in the third quarter and 2% in the nine months of 2014 due to weakness in global economic conditions and capacity reductions. U.S. domestic yields remained flat for the third quarter and increased 1% for the nine months of 2014 primarily due to higher rates and weight per package, partially offset by lower fuel surcharges. International export package revenues increased 1% in the third quarter and remained flat in the nine months of 2014 as base business growth was offset

 

- 39 -


Table of Contents

by lower fuel surcharges, unfavorable exchange rate impact, and the demand shift to our lower-yielding economy services. International priority yields increased 2% in the third quarter of 2014, while international priority volumes declined 5%. Within this category, volumes for lower-yielding distribution services declined, while international priority volumes, excluding these distribution services, were flat. International domestic average daily volumes remained flat in the third quarter and increased 5% in the nine months 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 February 28:

 

     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

U.S. Domestic and Outbound Fuel Surcharge:

        

Low

     9.00     10.00     8.00     10.00

High

     10.00        13.50        10.50        14.50   

Weighted-average

     9.49        11.29        9.34        12.14   

International Fuel Surcharges:

        

Low

     13.00        14.00        12.00        12.00   

High

     18.50        19.00        19.00        20.50   

Weighted-average

     16.31        16.96        16.16        16.78   

In January 2014, we implemented a 3.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S. import services. In January 2013, we implemented a 5.9% average list price increase 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 third quarter of 2014 due to stronger U.S. and international export package business and lower pension expense, partially offset by lower freight revenues, an estimated $70 million year over year negative impact of severe winter weather and higher depreciation expense. In addition, operating income in the third quarter of 2014 benefited from one additional operating day and from the inclusion of costs associated with our business realignment program in the prior year results. Operating income in the third quarter of 2014 also reflects a significant negative net impact of fuel. Operating income in the nine months of 2014 improved due to stronger base U.S. and international export package business, lower pension expense and lower maintenance expense, offset by higher depreciation expense, the significant negative net impact of fuel and severe winter weather.

In the third quarter and nine months of 2014, salaries and employee benefits included lower pension expense, the delayed timing or absence of annual merit increases for many of our employees and benefits from our voluntary employee severance program. Intercompany charges decreased 7% in the third quarter and nine months of 2014 due to lower allocated sales and information technology costs, as well as the inclusion in the prior year results of costs associated with the business realignment program at FedEx Services. Depreciation and amortization expense increased 12% during the third quarter and nine months of 2014 as a result of accelerated depreciation due to the shortened life of certain aircraft scheduled for retirement, and aircraft recently placed into service. Purchased transportation costs increased 4% in the third quarter of 2014 due to higher utilization of third-party transportation providers and increased 9% in the nine months of 2014 due to higher utilization of third-party transportation providers, prior year international acquisitions and costs associated with the expansion of our freight-forwarding business at FedEx Trade Networks.

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

 

- 40 -


Table of Contents

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 increased 4% in the third quarter but decreased 10% in the nine months of 2014, as the benefits from the fourth quarter of 2013 retirement of 10 aircraft and related engines due to elimination of maintenance events for certain of these engines were offset by the impact of certain maintenance events during the third quarter.

Fuel costs decreased 5% in the third quarter and 6% in the nine months of 2014 due to lower average price per gallon of jet fuel and lower aircraft fuel usage. 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 had a significant negative impact on operating income in the third quarter and nine months of 2014. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express services.

 

- 41 -


Table of Contents

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 February 28:

 

    Three Months Ended     Percent     Nine Months Ended     Percent  
        2014             2013             Change             2014             2013             Change      

Revenues:

           

FedEx Ground

  $ 2,751      $ 2,480        11      $ 7,858      $ 7,112        10   

FedEx SmartPost

    280        267        5        752        690        9   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

    3,031        2,747        10        8,610        7,802        10   
 

 

 

   

 

 

     

 

 

   

 

 

   

Operating expenses:

           

Salaries and employee benefits

    460        405        14        1,319        1,178        12   

Purchased transportation

    1,253        1,121        12        3,476        3,124        11   

Rentals

    105        86        22        299        245        22   

Depreciation and amortization

    121        111        9        350        324        8   

Fuel

    7        6        17        14        13        8   

Maintenance and repairs

    57        48        19        166        140        19   

Intercompany charges

    287        270        6        864        794        9   

Other(1)

    264        233        13        753        660        14   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses

    2,554        2,280        12        7,241        6,478        12   
 

 

 

   

 

 

     

 

 

   

 

 

   

Operating income

  $ 477      $ 467        2      $ 1,369      $ 1,324        3   
 

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin

    15.7     17.0     (130 )bp      15.9     17.0     (110 )bp 

Average daily package volume

           

FedEx Ground

    4,817        4,476        8        4,584        4,214        9   

FedEx SmartPost

    2,529        2,477        2        2,276        2,051        11   

Revenue per package (yield)

           

FedEx Ground

  $ 9.04      $ 8.92        1      $ 9.00      $ 8.86        2   

FedEx SmartPost

  $ 1.82      $ 1.77        3      $ 1.76      $ 1.78        (1

 

- 42 -


Table of Contents
     Percent of Revenue  
     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Operating expenses:

        

Salaries and employee benefits

     15.2     14.8     15.3     15.1

Purchased transportation

     41.3        40.8        40.4        40.0   

Rentals

     3.5        3.1        3.5        3.1   

Depreciation and amortization

     4.0        4.0        4.1        4.1   

Fuel

     0.2        0.2        0.2        0.2   

Maintenance and repairs

     1.9        1.8        1.9        1.8   

Intercompany charges

     9.5        9.8        10.0        10.2   

Other(1)

     8.7        8.5        8.7        8.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     84.3        83.0        84.1        83.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     15.7     17.0     15.9     17.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 10% in the third quarter and nine months of 2014 due to both volume and yield growth at FedEx Ground and volume growth at FedEx SmartPost. In addition, third quarter revenues were negatively impacted by unusually severe winter weather partially offset by one additional operating day.

Average daily volume at FedEx Ground increased 8% during the third quarter and 9% in the nine months of 2014 due to market share gains resulting from continued growth in our FedEx Home Delivery service and commercial business. FedEx Ground yield increased 1% during the third quarter and 2% during the nine months of 2014 primarily due to rate increases and higher residential surcharges, partially offset by lower fuel surcharge revenue.

FedEx SmartPost volumes grew 2% during the third quarter of 2014, primarily due to the delayed start of the holiday shipping season as Cyber Week occurred in December this year versus November last year, and 11% during the nine months of 2014, primarily due to growth in e-commerce. Yields at FedEx SmartPost increased 3% during the third quarter of 2014 primarily due to rate increases and changes in service mix, partially offset by higher postage rates and lower fuel surcharges. Yields decreased 1% during the nine months 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 February 28:

 

     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Low

     6.50     7.00     6.50     7.00

High

     6.50        8.50        7.00        8.50   

Weighted-average

     6.50        7.56        6.61        7.75   

 

- 43 -


Table of Contents

In January 2014, FedEx Ground and FedEx Home Delivery implemented a 4.9% increase in average list price. FedEx SmartPost rates also increased. In January 2013, FedEx Ground and FedEx Home Delivery implemented a 4.9% increase in average list price. 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 2% during the third quarter and 3% during the nine months of 2014 driven by higher volumes and yields. The FedEx Ground segment operating income for the third quarter of 2014 includes an estimated $40 million year over year negative impact of unusually severe winter weather. In addition, the increase to operating income for the third quarter and nine months of 2014 was partially offset by higher network expansion costs as we continue to invest heavily in the growing FedEx Ground and FedEx SmartPost businesses, the net negative impact of fuel and higher allocated fees. The FedEx Ground segment results for the third quarter of 2014 also benefited from the delayed start of the holiday shipping season this fiscal year and one additional operating day. The decline in operating margin for the third quarter and nine months of 2014 is primarily attributable to the negative impact of unusually severe winter weather and the negative net impact of fuel.

Salaries and employee benefits expense increased 14% during the third quarter and 12% during the nine months of 2014 primarily due to additional staffing to support volume growth. Rentals expense increased 22% in the third quarter and nine months of 2014 due to network expansion. Intercompany charges increased 6% in the third quarter and 9% in the nine months of 2014 primarily due to higher allocated marketing, information technology 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.”

 

- 44 -


Table of Contents

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 (dollars in millions), operating margin and selected statistics for the periods ended February 28:

 

     Three Months Ended     Percent     Nine Months Ended     Percent  
     2014     2013     Change     2014     2013     Change  

Revenues

   $ 1,347      $ 1,237        9      $ 4,205      $ 4,013        5   

Operating expenses:

            

Salaries and employee benefits

     598        562        6        1,807        1,750        3   

Purchased transportation

     231        197        17        715        647        11   

Rentals

     31        30        3        94        88        7   

Depreciation and amortization

     58        55        5        172        160        8   

Fuel

     146        142        3        436        447        (2

Maintenance and repairs

     42        45        (7     134        142        (6

Business realignment costs

            1        NM               1        NM   

Intercompany charges

     111        109        2        349        330        6   

Other(1)

     101        92        10        301        278        8   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses

     1,318        1,233        7        4,008        3,843        4   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income

   $ 29      $ 4        NM      $ 197      $ 170        16   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin

     2.2     0.3     190 bp      4.7     4.2     50 bp 

Average daily LTL shipments (in thousands)

            

Priority

     59.5        55.3        8        61.5        59.5        3   

Economy

     26.3        25.2        4        27.3        26.2        4   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total average daily LTL shipments

     85.8        80.5        7        88.8        85.7        4   
  

 

 

   

 

 

     

 

 

   

 

 

   

Weight per LTL shipment (lbs)

            

Priority

     1,280        1,250        2        1,255        1,226        2   

Economy

     1,002        989        1        995        993          

Composite weight per LTL shipment

     1,195        1,168        2        1,175        1,154        2   

LTL yield (revenue per hundredweight)

            

Priority

   $ 17.54      $ 17.87        (2   $ 17.77      $ 17.91        (1

Economy

     25.71        26.17        (2     25.83        25.92          

Composite LTL yield

   $ 19.67      $ 20.10        (2   $ 19.88      $ 20.03        (1

 

- 45 -


Table of Contents
     Percent of Revenue  
     Three Months Ended     Nine Months Ended  
     2014     2013     2014     2013  

Operating expenses:

        

Salaries and employee benefits

     44.4     45.4     43.0     43.6

Purchased transportation

     17.2        15.9        17.0        16.1   

Rentals

     2.3        2.4        2.2        2.2   

Depreciation and amortization

     4.3        4.5        4.1        4.0   

Fuel

     10.8        11.5        10.4        11.2   

Maintenance and repairs

     3.1        3.6        3.2        3.6   

Business realignment costs

            0.1                 

Intercompany charges

     8.2        8.8        8.3        8.2   

Other(1)

     7.5        7.5        7.1        6.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     97.8        99.7        95.3        95.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     2.2     0.3     4.7     4.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

FedEx Freight Segment Revenues

FedEx Freight segment revenues increased 9% during the third quarter and 5% during the nine months of 2014 due to higher average daily LTL shipments and weight per LTL shipment. In addition, the third quarter of 2014 was positively impacted by one more operating day, partially offset by the negative impact of unusually severe winter weather.

Average daily LTL shipments increased 7% in the third quarter and 4% in the nine months of 2014 due to higher demand for our FedEx Freight Priority and FedEx Freight Economy service offerings. LTL yield (revenue per hundredweight) decreased 2% during the third quarter and 1% during the nine months of 2014 due to changes in shipment characteristics and lower fuel surcharges.

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 the National Motor Freight Classification system which assigns classes 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 weekly indexed LTL fuel surcharge is based on the average of the U.S. on-highway average prices for a gallon of diesel fuel, as published by the Department of Energy. The indexed LTL fuel surcharge ranged as follows for the periods ended February 28:

 

     Three Months Ended     Nine Months Ended  
       2014         2013         2014         2013    

Low

     23.00     23.10     22.70     21.80

High

     23.70        24.40        23.70        24.40   

Weighted-average

     23.20        23.60        23.10        23.28   

On March 3, 2014, FedEx Freight announced it will increase certain U.S. and other shipping rates by an average of 3.9% effective on March 31, 2014. In July 2013, FedEx Freight increased certain U.S. and other shipping rates by an average of 4.5%. In July 2012, FedEx Freight increased certain U.S. and other shipping rates by an average of 6.9%.

 

- 46 -


Table of Contents

FedEx Freight Segment Operating Income

FedEx Freight segment operating income and operating margin increased in the third quarter and nine months of 2014 due to the positive impacts of higher average daily LTL shipments, higher LTL weight per shipment and greater utilization of rail in the FedEx Freight Economy service offering. FedEx Freight operating income in the third quarter of 2014 includes the year over year negative impact of unusually severe winter weather, partially offset by one additional operating day. In addition, operating income in the nine months of 2014 was negatively impacted by higher allocated intercompany costs.

Purchased transportation expense increased 17% in the third quarter and 11% in the nine months of 2014 due to increased use of rail and road third-party transportation providers and higher rates. Salaries and employee benefits increased 6% in the third quarter and 3% in the nine months of 2014 primarily due to a volume-related increase in labor hours. Other operating expenses increased 10% in the third quarter, primarily due to higher snow removal expense, and 8% in the nine months of 2014 due to higher bad debt expense and real estate taxes. Intercompany charges increased 2% in the third quarter and 6% in the nine months of 2014 primarily due to higher allocated sales costs.

Fuel costs increased 3% during the third quarter of 2014 due to higher average daily LTL shipments. Fuel costs decreased 2% during the nine months of 2014 due to increased use 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 had a minimal impact on operating income in the third quarter and the nine months of 2014.

 

- 47 -


Table of Contents

FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $3.0 billion at February 28, 2014, compared to $4.9 billion at May 31, 2013. The following table provides a summary of our cash flows for the nine-month periods ended February 28 (in millions):

 

     2014     2013  

Operating activities:

    

Net income

   $ 1,367      $ 1,258   

Noncash charges and credits

     2,519        2,474   

Changes in assets and liabilities

         (1,308     (756
  

 

 

   

 

 

 

Cash provided by operating activities

     2,578        2,976   
  

 

 

   

 

 

 

Investing activities:

    

Capital expenditures

     (2,554         (2,430

Business acquisitions, net of cash acquired

            (483

Proceeds from asset dispositions and other

     23        45   
  

 

 

   

 

 

 

Cash used in investing activities

     (2,531     (2,868
  

 

 

   

 

 

 

Financing activities:

    

Principal payments on debt

     (254     (417

Proceeds from debt issuances

     1,997        991   

Proceeds from stock issuances

     462        221   

Dividends paid

     (142     (132

Purchase of treasury stock, including accelerated share repurchase agreements

     (3,984     (246

Other

     9          
  

 

 

   

 

 

 

Cash (used in) provided by financing activities

     (1,912     417   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (10     4   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (1,875   $ 529   
  

 

 

   

 

 

 

Cash flows from operating activities decreased $398 million in the nine months of 2014 primarily due to an income tax refund received in the prior year, voluntary employee severance program payouts and higher income tax payments, partially offset by higher net income. We made contributions of $495 million to our tax qualified U.S. domestic pension plans (“U.S. Pension Plans”) during the nine months of 2014 and $420 million in contributions to our U.S. Pension Plans during the nine months of 2013. Capital expenditures during the nine months of 2014 were higher primarily due to increased spending for sort facility expansion at FedEx Ground and aircraft at FedEx Express. See “Capital Resources” for a discussion of capital expenditures during 2014 and 2013.

During the third quarter of 2014, we repaid our $250 million 7.38% senior unsecured notes that matured on January 15, 2014. During the quarter, we issued $2.0 billion of senior unsecured debt under our current shelf registration statement, comprised of $750 million of 4.00% fixed-rate notes due in January 2024, $500 million of 4.90% fixed-rate notes due in January 2034 and $750 million of 5.10% fixed-rate notes due in January 2044. Interest on these notes is paid semiannually. We utilized the net proceeds to finance the ASR agreements as discussed below.

In October 2013, our Board of Directors authorized a new share repurchase program of up to 32 million shares of common stock. Shares may be purchased from time to time in the open market or in privately negotiated transactions. Repurchases are 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.

 

- 48 -


Table of Contents

In January 2014, we entered into ASR agreements with two banks to repurchase an aggregate of $2.0 billion of our common stock. During the third quarter of 2014, 11.4 million shares were initially delivered to us based on then-current market prices. This does not represent the final number of shares to be delivered under the ASR agreements. The final number of shares to be purchased under each ASR agreement will be based on a discount to the volume-weighted average price of our stock during the term of the respective transaction. Purchases under the ASR agreements are expected to be completed prior to the end of 2014. See Note 1 of the accompanying unaudited condensed consolidated financial statements for additional information regarding the ASR agreements.

During the nine months of 2014, in addition to the ASR transactions, we repurchased 15.6 million shares of FedEx common stock at an average price of $128 per share for a total of $2.0 billion. As of February 28, 2014, 15.2 million shares remained under our share repurchase authorization.

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 February 28 (in millions):

 

                                 Percent Change
2014/2013
 
     Three Months Ended      Nine Months Ended      Three Months
Ended
    Nine Months
Ended
 
     2014      2013      2014      2013       

Aircraft and related equipment

   $ 308       $ 95       $ 1,001       $ 926         224        8   

Facilities and sort equipment

     215         169         545         454         27        20   

Vehicles

     210         106         634         610         98        4   

Information and technology investments

     91         100         253         272         (9     (7

Other equipment

     40         72         121         168         (44     (28
  

 

 

    

 

 

    

 

 

    

 

 

      

Total capital expenditures

   $ 864       $ 542       $ 2,554       $ 2,430         59        5   
  

 

 

    

 

 

    

 

 

    

 

 

      

FedEx Express segment

   $ 472       $ 260       $ 1,467       $ 1,526         82        (4

FedEx Ground segment

     199         102         609         365         95        67   

FedEx Freight segment

     110         80         250         263         38        (5

FedEx Services segment

     83         100         228         273         (17     (16

Other

                             3                NM   
  

 

 

    

 

 

    

 

 

    

 

 

      

Total capital expenditures

   $ 864       $ 542       $ 2,554       $ 2,430         59        5   
  

 

 

    

 

 

    

 

 

    

 

 

      

Capital expenditures during the nine months of 2014 were higher than the prior-year period primarily due to increased spending for sort facility expansion at FedEx Ground and aircraft at FedEx Express. Aircraft and related equipment expenditures at FedEx Express during the nine months of 2014 included 13 Boeing 757 (“B757”) aircraft, four 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.

 

- 49 -


Table of Contents

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 February 28, 2014 includes $450 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 $3.8 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 $1.0 billion in aircraft and aircraft-related equipment in the nine months of 2014 and expect to invest approximately $399 million for aircraft and aircraft-related equipment during the remainder of 2014.