10-Q 1 d237124d10q.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)

 

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

FOR THE QUARTERLY PERIOD ENDED August 31, 2016

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 1-15829

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   62-1721435

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

942 South Shady Grove Road Memphis, Tennessee   38120
(Address of principal executive offices)   (ZIP Code)

(901) 818-7500

(Registrant’s telephone number, including area code)

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

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

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

 

Large accelerated filer x

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

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

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

 

Common Stock   Outstanding Shares at September 20, 2016
Common Stock, par value $0.10 per share   265,759,372

 

 

 


Table of Contents

FEDEX CORPORATION

INDEX

 

     PAGE  
PART I. FINANCIAL INFORMATION   

ITEM 1. Financial Statements

  

       Condensed Consolidated Balance Sheets
August 31, 2016 and May 31, 2016

     3   

       Condensed Consolidated Statements of Income
Three Months Ended August 31, 2016 and 2015

     5   

       Condensed Consolidated Statements of Comprehensive Income
Three Months Ended August 31, 2016 and 2015

     6   

       Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 2016 and 2015

     7   

      Notes to Condensed Consolidated Financial Statements

     8   

      Report of Independent Registered Public Accounting Firm

     26   

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

     27   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     56   

ITEM 4. Controls and Procedures

     56   
PART II. OTHER INFORMATION   

ITEM 1. Legal Proceedings

     57   

ITEM 1A. Risk Factors

     57   

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

     57   

ITEM 6. Exhibits

     57   

Signature

     60   

Exhibit Index

     E-1   

Exhibit 10.1

  

Exhibit 10.2

  

Exhibit 10.3

  

Exhibit 10.4

  

Exhibit 10.5

  

Exhibit 10.6

  

Exhibit 10.7

  

Exhibit 10.8

  

Exhibit 10.9

  

Exhibit 10.10

  

Exhibit 10.11

  

Exhibit 10.12

  

Exhibit 10.13

  

Exhibit 10.14

  

Exhibit 12.1

  

Exhibit 15.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

Exhibit 101 - Instance Document

  

Exhibit 101 - Schema Document

  

Exhibit 101 - Calculation Linkbase Document

  

Exhibit 101 - Presentation Linkbase Document

  

Exhibit 101 - Definition Linkbase Document

  

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

     August 31,         
     2016      May 31,  
     (Unaudited)      2016  

ASSETS

     

CURRENT ASSETS

     

Cash and cash equivalents

   $ 2,989      $ 3,534  

Receivables, less allowances of $169 and $178

     7,233        7,252  

Spare parts, supplies and fuel, less allowances of $222 and $218

     512        496  

Prepaid expenses and other

     667        707  
  

 

 

    

 

 

 

Total current assets

     11,401        11,989  

PROPERTY AND EQUIPMENT, AT COST

     48,121        47,018  

Less accumulated depreciation and amortization

     23,317        22,734  
  

 

 

    

 

 

 

Net property and equipment

     24,804        24,284  

OTHER LONG-TERM ASSETS

     

Goodwill

     6,783        6,747  

Other assets

     2,587        2,939  
  

 

 

    

 

 

 

Total other long-term assets

     9,370        9,686  
  

 

 

    

 

 

 
   $   45,575      $   45,959  
  

 

 

    

 

 

 

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

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

     August 31,        
     2016     May 31,  
     (Unaudited)     2016  

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

    

CURRENT LIABILITIES

    

Current portion of long-term debt

   $ 47     $ 29  

Accrued salaries and employee benefits

     1,603       1,972  

Accounts payable

     2,851       2,944  

Accrued expenses

     2,973       3,063  
  

 

 

   

 

 

 

Total current liabilities

     7,474       8,008  

LONG-TERM DEBT, LESS CURRENT PORTION

     13,735       13,733  

OTHER LONG-TERM LIABILITIES

    

Deferred income taxes

     1,762       1,567  

Pension, postretirement healthcare and other benefit obligations

     6,063       6,227  

Self-insurance accruals

     1,338       1,314  

Deferred lease obligations

     457       400  

Deferred gains, principally related to aircraft transactions

     150       155  

Other liabilities

     454       771  
  

 

 

   

 

 

 

Total other long-term liabilities

     10,224       10,434  

COMMITMENTS AND CONTINGENCIES

    

COMMON STOCKHOLDERS’ INVESTMENT

    

Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of August 31, 2016 and May 31, 2016

     32       32  

Additional paid-in capital

     2,918       2,892  

Retained earnings

     18,862       18,371  

Accumulated other comprehensive loss

     (176     (169

Treasury stock, at cost

     (7,494     (7,342
  

 

 

   

 

 

 

Total common stockholders’ investment

     14,142       13,784  
  

 

 

   

 

 

 
   $   45,575     $   45,959  
  

 

 

   

 

 

 

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

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

     Three Months Ended
August 31,
 
     2016     2015  

REVENUES

   $   14,663     $   12,279  

OPERATING EXPENSES:

    

Salaries and employee benefits

     5,311       4,525  

Purchased transportation

     3,240       2,344  

Rentals and landing fees

     790       695  

Depreciation and amortization

     739       648  

Fuel

     650       712  

Maintenance and repairs

     598       548  

Other

     2,071       1,663  
  

 

 

   

 

 

 
     13,399       11,135  
  

 

 

   

 

 

 

OPERATING INCOME

     1,264       1,144  

OTHER INCOME (EXPENSE):

    

Interest, net

     (113     (63

Other, net

     (9     3  
  

 

 

   

 

 

 
     (122     (60
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     1,142       1,084  

PROVISION FOR INCOME TAXES

     427       392  
  

 

 

   

 

 

 

NET INCOME

   $ 715     $ 692  
  

 

 

   

 

 

 

EARNINGS PER COMMON SHARE:

    

Basic

   $ 2.69     $ 2.45  
  

 

 

   

 

 

 

Diluted

   $ 2.65     $ 2.42  
  

 

 

   

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.80     $ 0.50  
  

 

 

   

 

 

 

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

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)

 

     Three Months Ended
August 31,
 
     2016     2015  

NET INCOME

   $   715     $ 692  

OTHER COMPREHENSIVE LOSS:

    

Foreign currency translation adjustments, net of tax expense of $4 in 2016 and tax benefit of $13 in 2015

     12         (138

Amortization of prior service credit, net of tax benefit of $11 in 2016 and $7 in 2015

     (19     (24
  

 

 

   

 

 

 
     (7     (162
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 708     $ 530  
  

 

 

   

 

 

 

 

 

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

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

 

     Three Months Ended
August 31,
 
     2016     2015  

Operating Activities:

    

Net income

   $ 715     $ 692  

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

    

Depreciation and amortization

     739       648  

Provision for uncollectible accounts

     39       28  

Stock-based compensation

     57       53  

Deferred income taxes and other noncash items

     173       20  

Changes in assets and liabilities:

    

Receivables

     20       50  

Other assets

     (4     (89

Accounts payable and other liabilities

     (753     (151

Other, net

     (15     (10
  

 

 

   

 

 

 

Cash provided by operating activities

     971       1,241  

Investing Activities:

    

Capital expenditures

     (1,215     (1,209

Proceeds from asset dispositions and other

     9       10  
  

 

 

   

 

 

 

Cash used in investing activities

     (1,206     (1,199

Financing Activities:

    

Principal payments on debt

     (12     (15

Proceeds from stock issuances

     40       46  

Excess tax benefit on the exercise of stock options

     2       6  

Dividends paid

     (106     (71

Purchase of treasury stock

     (222     (190

Other, net

     (15     —    
  

 

 

   

 

 

 

Cash used in financing activities

     (313     (224
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     3       (38
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (545     (220

Cash and cash equivalents at beginning of period

     3,534       3,763  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 2,989     $ 3,543  
  

 

 

   

 

 

 

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

 

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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, 2016 (“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 August 31, 2016, and the results of our operations and cash flows for the three-month periods ended August 31, 2016 and 2015. Operating results for the three-month period ended August 31, 2016 are not necessarily indicative of the results that may be expected for the year ending May 31, 2017.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2017 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

RECLASSIFICATIONS. Reclassifications have been made to the May 31, 2016 condensed consolidated balance sheets to conform to the current year’s presentation of debt issuance costs. See recent accounting guidance below for additional information.

BUSINESS ACQUISITION. On May 25, 2016, we acquired TNT Express B.V. (“TNT Express”) for €4.4 billion (approximately $4.9 billion). Cash acquired in the acquisition was approximately €250 million ($280 million). As of August 31, 2016, $36 million of shares associated with the transaction remained untendered, a decrease of $251 million since May 31, 2016. The remaining untendered shares are included in the “Other liabilities” caption of our consolidated balance sheets. We funded the acquisition with proceeds from our April 2016 debt issuance and existing cash balances. The financial results of this business are included in the FedEx Express group and TNT Express segment from the date of acquisition.

TNT Express collects, transports and delivers documents, parcels and freight to over 200 countries. This strategic acquisition broadens our portfolio of international transportation solutions with the combined strength of TNT Express’s strong European road platform and our strength in other regions globally, including North America and Asia.

 

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This acquisition is included in the accompanying balance sheets based on an allocation of the purchase price (summarized in the table below, in millions). Given the timing and complexity of the acquisition, the presentation of TNT Express in our financial statements, including the allocation of the purchase price, is preliminary and will likely change in future periods, perhaps significantly, as fair value estimates of the assets acquired and liabilities assumed are refined during the measurement period. We will complete our purchase price allocation no later than the fourth quarter of 2017.

 

Current assets(1)

   $ 1,905  

Property and equipment

     1,104  

Goodwill

     2,964  

Identifiable intangible assets

     920  

Other non-current assets

     289   

Current liabilities(2)

         (1,644

Long-term liabilities

     (644
  

 

 

 

Total purchase price

   $ 4,894  
  

 

 

 

 

(1) 

Primarily accounts receivable and cash.

(2) 

Primarily accounts payable and other accrued expenses.

As a result of this acquisition, we recognized a preliminary value of $3.0 billion of goodwill, which is primarily attributable to the TNT Express workforce and the expected benefits from synergies of the combination with existing businesses and growth opportunities. The majority of the purchase price allocated to goodwill is not deductible for income tax purposes.

The purchase price was preliminarily allocated to the identifiable intangible assets acquired as follows (in millions):

 

Intangible assets with finite lives

  

Customer relationships (15-year useful life)

   $ 685  

Technology (4-year useful life)

     90  

Trademarks (4-year useful life)

     145  
  

 

 

 

Total intangible assets

   $     920  
  

 

 

 

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

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

Our stock-based compensation expense was $57 million for the three-month period ended August 31, 2016 and $53 million for the three-month period ended August 31, 2015. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

 

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RECENT ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. These matters are described in our Annual Report.

During the quarter, we retrospectively adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) to simplify the presentation of debt issuance costs. This new guidance requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, rather than as an asset. This new guidance had a minimal impact on our accounting and financial reporting.

On May 28, 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States (and International Financial Reporting Standards) which has been subsequently updated to defer the effective date of the new revenue recognition standard by one year. This standard will be effective for us beginning in fiscal 2019. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five-step approach for the recognition of revenue. Based on our preliminary assessment, we do not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems.

On February 25, 2016, the FASB issued the new lease accounting standard which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expense related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement. We are currently evaluating the impact of this new standard on our financial reporting, but recognizing the lease liability and related right-of-use asset will significantly impact our balance sheet. These changes will be effective for our fiscal year beginning June 1, 2019 (fiscal 2020), with a modified retrospective adoption method to the beginning of 2018.

In March 2016, the FASB issued an Accounting Standards Update to simplify the accounting for share-based payment transactions. The new guidance requires companies to recognize the income tax effects of awards that vest or are settled as income tax expense or benefit in the income statement as opposed to additional paid-in capital as is current practice. The guidance also provides clarification of the presentation of certain components of share-based awards in the statement of cash flows. Additionally, the guidance allows companies to make a policy election to account for forfeitures either upon occurrence or by estimating forfeitures. This new standard will have minimal impact on our financial reporting. These changes will be effective for our fiscal year beginning June 1, 2017 (fiscal 2018).

We believe that no other new accounting guidance was adopted or issued during the first three months of 2017 that is relevant to the readers of our financial statements.

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

During the first quarter of 2017, we repurchased 1.4 million shares of FedEx common stock at an average price of $160.18 per share for a total of $222 million. As of August 31, 2016, 17.6 million shares remained under the share repurchase authorization.

 

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DIVIDENDS DECLARED PER COMMON SHARE. On August 19, 2016, our Board of Directors declared a quarterly dividend of $0.40 per share of common stock. The dividend will be paid on October 3, 2016 to stockholders of record as of the close of business on September 12, 2016. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

(2) Accumulated Other Comprehensive Income

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

 

         2016             2015      

Foreign currency translation loss:

    

Balance at beginning of period

   $ (514   $ (253

Translation adjustments

     12       (138
  

 

 

   

 

 

 

Balance at end of period

     (502     (391
  

 

 

   

 

 

 

Retirement plans adjustments:

    

Balance at beginning of period

     345       425  

Reclassifications from AOCI

     (19     (24
  

 

 

   

 

 

 

Balance at end of period

     326       401  
  

 

 

   

 

 

 

Accumulated other comprehensive (loss) income at end of period

   $ (176   $ 10  
  

 

 

   

 

 

 

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

 

      Amount Reclassified from
AOCI
   

Affected Line Item in the

Income Statement

     2016           2015            

Amortization of retirement plans prior service credits, before tax

   $ 30     $ 31     Salaries and employee benefits

Income tax benefit

     (11     (7   Provision for income taxes
  

 

 

   

 

 

   

AOCI reclassifications, net of tax

   $ 19     $ 24     Net income
  

 

 

   

 

 

   

(3) Financing Arrangements

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

We have a five-year $1.75 billion revolving credit facility that expires in November 2020. The facility, which includes a $500 million letter of credit sublimit, is available to finance our operations and other cash flow needs. The agreement contains a financial covenant, which requires us to maintain a ratio of debt to consolidated earnings (excluding non-cash pension mark-to-market adjustments and non-cash asset impairment charges) before interest, taxes, depreciation and amortization (“adjusted EBITDA”) of not more than 3.5 to 1.0, calculated as of the end of the applicable quarter on a rolling four quarters basis. The ratio of our debt to adjusted EBITDA

 

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was 1.9 to 1.0 at August 31, 2016. We believe this covenant is the only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the financial covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of August 31, 2016, no commercial paper was outstanding. However, we had a total of $311 million in letters of credit outstanding at August 31, 2016, with $189 million of the letter of credit sublimit unused under our revolving credit facility.

Long-term debt, exclusive of capital leases, had a carrying value of $13.7 billion at August 31, 2016 and May 31, 2016, compared with estimated fair values of $15.0 billion at August 31, 2016 and $14.3 billion at May 31, 2016. The annualized weighted average interest rate on long-term debt was 3.6% for the three months ended August 31, 2016. 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 three-month periods ended August 31 was as follows (in millions, except per share amounts):

 

     2016        2015  

Basic earnings per common share:

       

Net earnings allocable to common shares(1)

   $       714        $       691  

Weighted-average common shares

     265          282  
  

 

 

      

 

 

 

Basic earnings per common share

   $ 2.69        $ 2.45  
  

 

 

      

 

 

 

Diluted earnings per common share:

       

Net earnings allocable to common shares(1)

   $ 714        $ 691  
  

 

 

      

 

 

 

Weighted-average common shares

     265          282  

Dilutive effect of share-based awards

     4          4  
  

 

 

      

 

 

 

Weighted-average diluted shares

     269          286  

Diluted earnings per common share

   $ 2.65        $ 2.42  
  

 

 

      

 

 

 

Anti-dilutive options excluded from diluted earnings per common share

     5.1          3.5  
  

 

 

      

 

 

 

 

(1) 

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

 

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(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 three-month periods ended August 31 were as follows (in millions):

 

         2016              2015      

Defined benefit pension plans

   $ 58      $ 53  

Defined contribution plans

     119        102  

Postretirement healthcare plans

     19        21  
  

 

 

    

 

 

 
   $ 196      $ 176  
  

 

 

    

 

 

 

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

 

     Pension Plans     Postretirement
Healthcare Plans
 
         2016             2015             2016              2015      

Service cost

   $ 180     $ 166     $ 9      $ 10  

Interest cost

     293       295       10        11  

Expected return on plan assets

     (386     (377             

Amortization of prior service credit and other

     (29     (31             
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ 58     $ 53     $ 19      $ 21  
  

 

 

   

 

 

   

 

 

    

 

 

 

Contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the three-month periods ended August 31 were as follows (in millions):

 

         2016              2015      

Required

   $      $ 6  

Voluntary

     250        159  
  

 

 

    

 

 

 
   $ 250      $ 165  
  

 

 

    

 

 

 

In September 2016, we made a required contribution of $250 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; TNT Express, an international express, small-package ground delivery and freight transportation company that was acquired near the end of our 2016 fourth quarter; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments.

 

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Our reportable segments include the following businesses:

 

FedEx Express Group:   

FedEx Express Segment

  

FedEx Express (express transportation)

  

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

   FedEx SupplyChain Systems (logistics services)

TNT Express Segment

  

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

FedEx Ground Segment    FedEx Ground (small-package ground delivery)
   GENCO (third-party logistics)
FedEx Freight Segment    FedEx Freight (LTL freight transportation)
   FedEx Custom Critical (time-critical transportation)
FedEx Services Segment   

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

  

FedEx Office (document and business services and package acceptance)

FedEx Services Segment

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

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

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

 

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Eliminations, Corporate and Other

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

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

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

 

          2016             2015      

Revenues

    

FedEx Express segment

   $ 6,656     $ 6,591  

TNT Express segment

     1,804       N/A  

FedEx Ground segment

     4,290       3,830  

FedEx Freight segment

     1,658       1,601  

FedEx Services segment

     395       390  

Eliminations and other

     (140     (133
  

 

 

   

 

 

 
   $ 14,663     $ 12,279  
  

 

 

   

 

 

 

Operating Income

    

FedEx Express segment

   $ 624     $ 545  

TNT Express segment

     (14     N/A  

FedEx Ground segment

     610       537  

FedEx Freight segment

     135       132  

Eliminations, corporate and other

     (91     (70
  

 

 

   

 

 

 
   $ 1,264     $ 1,144  
  

 

 

   

 

 

 

 

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(7) Commitments

As of August 31, 2016, our purchase commitments under various contracts for the remainder of 2017 and annually thereafter were as follows (in millions):

 

      Aircraft and
Aircraft-Related
       Other(1)           Total     

2017 (remainder)

   $ 719      $ 1,112      $ 1,831  

2018

     1,767        463        2,230  

2019

     1,717        316        2,033  

2020

     1,925        222        2,147  

2021

     1,480        135        1,615  

Thereafter

     4,191        112        4,303  
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,799      $ 2,360      $ 14,159  
  

 

 

    

 

 

    

 

 

 

 

(1)

Primarily equipment, advertising contracts and, for the remainder of 2017, $616 million of estimated required 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 August 31, 2016, our obligation to purchase four Boeing 767-300 Freighter (“B767F”) aircraft and seven Boeing 777 Freighter (“B777F”) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

On June 10, 2016, FedEx Express exercised options to acquire six additional B767F aircraft for delivery in 2019 and 2020.

We had $392 million in deposits and progress payments as of August 31, 2016 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our consolidated balance sheets. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of August 31, 2016 with the year of expected delivery:

 

        B767F          B777F          Total    

2017 (remainder)

     6               6  

2018

     16        2        18  

2019

     15        2        17  

2020

     16        3        19  

2021

     10        3        13  

Thereafter

     16        6        22  
  

 

 

    

 

 

    

 

 

 

Total

     79        16        95  
  

 

 

    

 

 

    

 

 

 

 

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A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at August 31, 2016 is as follows (in millions):

 

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

2017 (remainder)

   $ 398      $ 1,529      $ 1,927  

2018

     403        1,899        2,302  

2019

     345        1,673        2,018  

2020

     262        1,474        1,736  

2021

     204        1,329        1,533  

Thereafter

     364        8,123        8,487  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,976      $ 16,027      $ 18,003  
  

 

 

    

 

 

    

 

 

 

Future minimum lease payments under capital leases were immaterial at August 31, 2016. 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

Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 24 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings that claim that the company’s owner-operators under a contractor model no longer in use should have been treated as employees, rather than independent contractors.

Most of the class-action lawsuits were consolidated for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Indiana. The multidistrict litigation court granted class certification in 28 cases and denied it in 14 cases. On December 13, 2010, the court entered an opinion and order addressing all outstanding motions for summary judgment on the status of the owner-operators (i.e., independent contractor vs. employee). In sum, the court 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 other 19 cases that are before the Seventh Circuit were stayed.

On October 3, 2014, the Kansas Supreme Court determined that a 20 factor right to control test applies to claims under the Kansas Wage Payment Act and concluded that under that test, the class members were employees, not independent contractors. The case was subsequently transferred back to the Seventh Circuit, where both parties made filings requesting the action necessary to complete the resolution of the appeals. The parties also made recommendations to the court regarding next steps for the other 19 cases that are before the Seventh Circuit. FedEx Ground requested that each of those cases be separately briefed given the potential differences in the applicable state law from that in Kansas. On July 8, 2015, the Seventh Circuit issued an order and opinion confirming the decision of the Kansas Supreme Court, concluding that the class members are employees, not independent contractors. Additionally, the Seventh Circuit referred the other 19 cases to a representative of the court for purposes of setting a case management conference to address briefing and argument for those cases. During the second quarter of 2015, we established an accrual for the estimated probable loss in the Kansas case. In the second quarter of 2016 the Kansas case settled, and we increased the accrual to the amount of the settlement. The settlement requires court approval.

 

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During the third quarter of 2016, we reached agreements in principle to settle all of the 19 cases on appeal in the multidistrict independent contractor litigation. All of these settlements require court approval. We recognized a liability for the expected loss (net of recognized insurance recovery) related to these cases and certain other pending independent-contractor-related proceedings of $204 million.

The Kansas case was remanded to the multidistrict litigation court, and the other 19 cases remain at the Seventh Circuit; however, approval proceedings will be conducted primarily by the multidistrict litigation court. Plaintiffs filed motions for preliminary approval between June 15 and June 30, 2016, and on August 3 and 4, 2016, the multidistrict litigation court issued orders indicating that it would grant preliminary approval if the Seventh Circuit would remand the cases on appeal for the purpose of entering approval orders. Upon the parties’ joint motion, the Seventh Circuit remanded the cases for this purpose on August 10, 2016, and the multidistrict litigation court entered orders preliminarily approving the settlements on August 17, 2016. Fairness hearings are scheduled for January 23 and 24, 2017.

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. Four of these matters settled for immaterial amounts and have received court approval. The case in Arkansas settled in the second quarter of 2016, and we established an accrual for the amount of the settlement. The court granted preliminary approval on September 15, 2016, and scheduled a final approval hearing for March 1, 2017.

Two cases in Oregon and one in California were appealed to the Ninth Circuit Court of Appeals, where the court reversed the district court decisions and held that the plaintiffs in California and Oregon were employees as a matter of law and remanded the cases to their respective district courts for further proceedings. In the first quarter of 2015, we recognized an accrual for the then-estimated probable loss in those cases.

In June 2015, the parties in the California case reached an agreement to settle the matter for $228 million, and in the fourth quarter of 2015 we increased the accrual to that amount. The court entered final judgment on June 20, 2016, and two objectors to the settlement filed appeals with the Ninth Circuit. We expect the appeals to be briefed by the end of the third quarter of 2017 and arguments to be scheduled thereafter. The settlement is not effective until all appeals have been resolved without affecting the court’s approval of the settlement.

The two cases in Oregon were consolidated with a non-multidistrict litigation independent contractor case in Oregon. The three cases collectively settled in the second quarter of 2016, and we increased the accrual in these cases to the amount of the settlement. The settlement was preliminarily approved on April 20, 2016 and the court set a fairness hearing for October 20, 2016.

In addition, we are defending contractor-model cases that are not or are no longer part of the multidistrict litigation. These cases are in varying stages of litigation. We do not expect to incur a material loss in these matters; however, it is reasonably possible that potential loss in some of these lawsuits or changes to the independent contractor status of FedEx Ground’s owner-operators could be material. In these cases, we continue to evaluate what facts may arise in the course of discovery and what legal rulings the courts may render and how these facts and rulings might impact FedEx Ground’s loss. For a number of reasons, we are not currently able to estimate a range of reasonably possible loss in these cases. The number and identities of plaintiffs in these lawsuits are uncertain, as they are dependent on how the class of drivers is defined and how many individuals will qualify based on whatever criteria may be established. In addition, the parties have conducted only very limited discovery into damages in certain of these cases, which could vary considerably from plaintiff to plaintiff and be dependent on evidence pertaining to individual plaintiffs, which has yet to be produced in the cases. Further, the range of potential loss could be impacted substantially by future rulings by the court, including on the merits of the claims, on FedEx Ground’s defenses, and on evidentiary issues. As a consequence of these factors, as well as others that are specific to these cases, we are not currently able to estimate a range of reasonably possible loss. We do not believe that a material loss is probable in these matters.

 

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Adverse determinations in matters related to FedEx Ground’s independent contractors, could, among other things, entitle certain 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. 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.

City and State of New York Cigarette Suit. The City of New York and the State of New York filed two related lawsuits against FedEx Ground in December 2013 and November 2014 arising from FedEx Ground’s alleged shipments of cigarettes to New York residents in contravention of several statutes, including the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and New York’s Public Health Law, as well as common law nuisance claims. In April 2016, the two lawsuits were consolidated and will now proceed as one lawsuit. The first-filed lawsuit alleges that FedEx Ground provided delivery services on behalf of four shippers, and the second-filed lawsuit alleges that FedEx Ground provided delivery services on behalf of six additional shippers; none of these shippers continue to ship in our network. Pursuant to motions to dismiss filed in both lawsuits, some of the claims have been dismissed entirely or limited. In the first-filed lawsuit, the New York Public Health Law and common law nuisance claims were dismissed and the plaintiffs voluntarily dismissed another claim. In the second-filed lawsuit, the court dismissed, without prejudice to plaintiffs’ right to refile the claim at a later date, the New York Public Health Law claim. The plaintiffs have refiled the New York Public Health Law claim, and FedEx Ground has filed a motion to dismiss that claim that is pending with the court. Other claims, including the RICO claims, remain in both lawsuits. The likelihood of loss is reasonably possible, but the amount of loss cannot be estimated at this stage of the litigation and we expect the amount of any loss to be immaterial.

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

On September 9, 2016, GENCO received a written offer from several District Attorneys’ Offices in California to settle a civil action that the District Attorneys intend to file against GENCO for alleged violations of the state’s hazardous waste regulations. Specifically, the District Attorneys’ Offices allege GENCO unlawfully disposed of hazardous waste at one of its California facilities and caused the illegal transportation and disposal of hazardous waste from the retail stores of a GENCO customer at this same facility. The District Attorneys allege these violations began in 2006 and continued until the facility closed in the spring of 2015. We believe an immaterial loss in this matter is probable. The District Attorneys are also investigating GENCO’s hazardous waste activities at eight additional facilities within California. We will pursue all available remedies against the sellers of GENCO to recover any losses in these matters.

FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of business, including certain lawsuits containing various class-action allegations of wage-and-hour violations in which plaintiffs claim, among other things, that they were forced to work “off the clock,” were not paid overtime or were not provided work breaks or other benefits. 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.

 

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(9) Supplemental Cash Flow Information

Cash paid for interest expense and income taxes for the three-month periods ended August 31 was as follows (in millions):

 

         2016             2015      

Cash payments for:

    

Interest (net of capitalized interest)

   $ 143     $ 139  
  

 

 

   

 

 

 

Income taxes

   $ 80     $ 115  

Income tax refunds received

     (8     (2
  

 

 

   

 

 

 

Cash tax payments, net

   $ 72     $ 113  
  

 

 

   

 

 

 

(10) Condensed Consolidating Financial Statements

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

The guarantor subsidiaries, which are wholly owned by FedEx, guarantee $13.6 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.

 

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

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

August 31, 2016

 

        Parent         Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

CURRENT ASSETS

             

Cash and cash equivalents

   $ 1,308       $ 327       $ 1,391       $ (37   $ 2,989   

Receivables, less allowances

     1         4,517         2,760         (45     7,233   

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

     74         839         266                1,179   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     1,383         5,683         4,417         (82     11,401   

PROPERTY AND EQUIPMENT, AT COST

     22         44,777         3,322                48,121   

Less accumulated depreciation and amortization

     17         22,061         1,239                23,317   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net property and equipment

     5         22,716         2,083                24,804   

INTERCOMPANY RECEIVABLE

     2,747         1,177                 (3,924       

GOODWILL

             1,571         5,212                6,783   

INVESTMENT IN SUBSIDIARIES

     25,493         3,758                 (29,251       

OTHER ASSETS

     3,398         858         1,580         (3,249     2,587   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 33,026       $ 35,763       $ 13,292       $ (36,506   $ 45,575   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

             

CURRENT LIABILITIES

             

Current portion of long-term debt

   $       $ 29       $ 18       $      $ 47   

Accrued salaries and employee benefits

     38         1,115         450                1,603   

Accounts payable

     111         1,334         1,488         (82     2,851   

Accrued expenses

     877         1,368         728                2,973   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,026         3,846         2,684         (82     7,474   

LONG-TERM DEBT, LESS CURRENT PORTION

     13,458         245         32                13,735   

INTERCOMPANY PAYABLE

                     3,924         (3,924       

OTHER LONG-TERM LIABILITIES

             

Deferred income taxes

             4,645         366         (3,249     1,762   

Other liabilities

     4,400         3,420         642                8,462   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other long-term liabilities

     4,400         8,065         1,008         (3,249     10,224   

STOCKHOLDERS’ INVESTMENT

     14,142         23,607         5,644         (29,251     14,142   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 33,026       $ 35,763       $ 13,292       $ (36,506   $ 45,575   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2016

 

     Parent      Guarantor
Subsidiaries
     Non-
guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

CURRENT ASSETS

             

Cash and cash equivalents

   $ 1,974      $ 326      $ 1,277      $ (43   $ 3,534  

Receivables, less allowances

     1        4,461        2,831        (41     7,252  

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

     233        724        246               1,203  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     2,208        5,511        4,354        (84     11,989  

PROPERTY AND EQUIPMENT, AT COST

     22        43,760        3,236               47,018  

Less accumulated depreciation and amortization

     17        21,566        1,151               22,734  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net property and equipment

     5        22,194        2,085               24,284  

INTERCOMPANY RECEIVABLE

     2,437        1,284                (3,721       

GOODWILL

             1,571        5,176               6,747  

INVESTMENT IN SUBSIDIARIES

     24,766        3,697                (28,463       

OTHER ASSETS

     3,359        967        1,851        (3,238     2,939  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $   32,775      $ 35,224      $ 13,466      $ (35,506   $ 45,959  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

             

CURRENT LIABILITIES

             

Current portion of long-term debt

   $       $ 13      $ 16      $      $ 29  

Accrued salaries and employee benefits

     54        1,377        541               1,972  

Accounts payable

     8        1,501        1,519        (84     2,944  

Accrued expenses

     883        1,411        769               3,063  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     945        4,302        2,845        (84     8,008  

LONG-TERM DEBT, LESS CURRENT PORTION

     13,451        245        37               13,733  

INTERCOMPANY PAYABLE

                     3,721        (3,721       

OTHER LONG-TERM LIABILITIES

             

Deferred income taxes

             4,436        369        (3,238     1,567  

Other liabilities

     4,595        3,375        897               8,867  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other long-term liabilities

     4,595        7,811        1,266        (3,238     10,434  

STOCKHOLDERS’ INVESTMENT

     13,784        22,866        5,597        (28,463     13,784  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 32,775      $ 35,224      $ 13,466      $ (35,506   $ 45,959  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended August 31, 2016

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUES

   $      $ 10,903      $ 3,830      $ (70   $ 14,663   

OPERATING EXPENSES:

          

Salaries and employee benefits

     36        4,106        1,169               5,311   

Purchased transportation

            1,917        1,351        (28     3,240   

Rentals and landing fees

     1        620        170        (1     790   

Depreciation and amortization

            611        128               739   

Fuel

            578        72               650   

Maintenance and repairs

            526        72               598   

Intercompany charges, net

     (90     62        28                 

Other

     53        1,373        686        (41     2,071   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            9,793        3,676        (70     13,399   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

            1,110        154               1,264   

OTHER INCOME (EXPENSE):

          

Equity in earnings of subsidiaries

     715        56               (771       

Interest, net

     (122     9                      (113

Intercompany charges, net

     122        (81     (41              

Other, net

            (5     (4            (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     715        1,089        109        (771     1,142   

Provision for income taxes

            380        47               427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 715      $ 709      $ 62      $ (771   $ 715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 696      $ 702      $ 81      $ (771   $ 708   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended August 31, 2015

 

  

  

  

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUES

   $     $ 9,873     $ 2,509     $ (103   $ 12,279  

OPERATING EXPENSES:

          

Salaries and employee benefits

     34       3,813       678             4,525  

Purchased transportation

           1,434       965       (55     2,344  

Rentals and landing fees

     1       587       108       (1     695  

Depreciation and amortization

           583       65             648  

Fuel

           691       21             712  

Maintenance and repairs

           508       40             548  

Intercompany charges, net

     (69     (40     109              

Other

     34       1,264       412       (47     1,663  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           8,840       2,398       (103     11,135  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

           1,033       111             1,144  

OTHER INCOME (EXPENSE):

          

Equity in earnings of subsidiaries

     692       61             (753      

Interest, net

     (75     8       4             (63

Intercompany charges, net

     78       (76     (2            

Other, net

     (3     (3     9             3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     692       1,023       122       (753     1,084  

Provision for income taxes

           357       35             392  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 692     $ 666     $ 87     $ (753   $ 692  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $         674     $ 651     $ (42   $ (753   $ 530  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Three Months Ended August 31, 2016

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ (342   $ 1,119     $ 188     $ 6     $ 971  

INVESTING ACTIVITIES

          

Capital expenditures

           (1,111     (104           (1,215

Proceeds from asset dispositions and other

           9                   9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

           (1,102     (104           (1,206

FINANCING ACTIVITIES

          

Net transfers from (to) Parent

     (35     (2     37              

Payment on loan between subsidiaries

     (2     (14     16               

Principal payments on debt

           (7     (5            (12

Proceeds from stock issuances

     40                         40  

Excess tax benefit on the exercise of stock options

     2                         2  

Dividends paid

     (106                       (106

Purchase of treasury stock

     (222                       (222

Other, net

     (1     (1     (13            (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (324     (24     35              (313
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

           8       (5           3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (666     1       114       6       (545

Cash and cash equivalents at beginning of period

     1,974       326       1,277       (43     3,534  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $         1,308     $ 327     $ 1,391     $ (37   $ 2,989  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Three Months Ended August 31, 2015

 

  

  

  

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ (397   $ 1,533     $ 71     $ 34     $ 1,241  

INVESTING ACTIVITIES

          

Capital expenditures

           (1,170     (39           (1,209

Proceeds from asset dispositions and other

     (5     15                   10  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

     (5     (1,155     (39           (1,199

FINANCING ACTIVITIES

          

Net transfers from (to) Parent

     452       (479     27              

Payment on loan between subsidiaries

           98       (98            

Intercompany dividends

           4       (4            

Principal payments on debt

           (2     (13           (15

Proceeds from stock issuances

     46                         46  

Excess tax benefit on the exercise of stock options

     6                         6  

Dividends paid

     (71                       (71

Purchase of treasury stock

     (190                       (190

Other, net

           (25     25              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     243       (404     (63           (224
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

           (15     (23           (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (159     (41     (54     34       (220

Cash and cash equivalents at beginning of period

     2,383       487       971       (78     3,763  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $         2,224     $ 446     $ 917     $ (44   $ 3,543  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 August 31, 2016, and the related condensed consolidated statements of income, comprehensive income and cash flows for the three-month periods ended August 31, 2016 and 2015. These financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ investment, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated July 18, 2016. In our opinion, the accompanying condensed consolidated balance sheet of FedEx Corporation as of May 31, 2016, 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

September 21, 2016

 

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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, 2016 (“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; TNT Express B.V. (“TNT Express”), an international express, small-package ground delivery and freight transportation company, FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments.

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

The key indicators necessary to understand our operating results include:

 

 

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

 

 

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

 

 

the mix of services purchased by our customers;

 

 

the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per hundredweight and shipment 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.

Many 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 changes 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 volumes. The line item “Other operating expenses” predominantly includes costs associated with outside service contracts (such as security, facility services and cargo handling), insurance, professional fees, and uniforms.

 

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Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2017 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 group, which includes the FedEx Express and TNT Express segments, the FedEx Ground segment and the FedEx Freight segment.

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following tables compare summary operating results and changes in revenues and operating income (dollars in millions, except per share amounts) for the three-month periods ended August 31:

 

     2016     2015     Percent
Change
 

Consolidated revenues

   $   14,663     $   12,279       19   

Operating income:

      

FedEx Express Segment

     624       545       14   

TNT Express Segment

     (14             

FedEx Ground Segment

     610       537       14   

FedEx Freight Segment

     135       132       2   

Eliminations, corporate and other

     (91     (70     (30
  

 

 

   

 

 

   

 

 

 

Consolidated operating income

     1,264       1,144       10   
  

 

 

   

 

 

   

 

 

 

Operating margin:

      

FedEx Express Segment

     9.4     8.3     110  bp

TNT Express Segment

     (0.8 %)             bp

FedEx Ground Segment

     14.2     14.0     20  bp

FedEx Freight Segment

     8.1     8.2     (10 )bp

Consolidated operating margin

     8.6     9.3     (70 )bp

Consolidated net income

   $ 715     $ 692       3   
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 2.65     $ 2.42       10   
  

 

 

   

 

 

   

 

 

 

 

     Year-over-Year  Changes  
     Revenues     Operating Income  

FedEx Express segment

   $ 65     $ 79  

TNT Express segment

     1,804       (14

FedEx Ground segment

     460       73  

FedEx Freight segment

     57       3  

FedEx Services segment

     5        

Eliminations, corporate and other

     (7     (21
  

 

 

   

 

 

 
   $ 2,384     $ 120  
  

 

 

   

 

 

 

 

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Overview

Our results for the first quarter of 2017 improved due to higher operating income at FedEx Express, as we continue to improve base yields while constraining expense growth, and at FedEx Ground, driven by volume and yield growth. These factors were partially offset by higher network expansion costs and purchased transportation rates at FedEx Ground and lower LTL revenue per shipment at FedEx Freight.

In the first quarter of 2017 we incurred an aggregate $68 million ($45 million, net of tax, or $0.17 per diluted share) of integration expenses for TNT Express and charges associated with TNT Express’s restructuring program called Outlook. The integration expenses are predominantly incremental costs directly associated with the integration of TNT Express, including professional fees, advertising expenses, legal expenses and travel. Internal salaries, wages, and benefits costs are included only to the extent the individuals are assigned full time to integration activities. These costs were incurred primarily at FedEx Corporation and FedEx Express. The identification of these costs as integration-related expenditures is subject to our disclosure controls and procedures. In addition, we incurred $28 million ($21 million, net of tax, or $0.08 per diluted share) of increased intangible asset amortization as a result of this acquisition.

 

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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands) over the five most recent quarters (TNT Express volume trends are not presented, as it was acquired on May 25, 2016):

 

LOGO

 

(1)

International domestic average daily package volume represents our international intra-country operations in the FedEx Express Segment.

 

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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends over the five most recent quarters (TNT yield trends are not presented, as it was acquired on May 25, 2016):

 

LOGO

Revenue

Revenues increased 19% during the first quarter of 2017 due to the inclusion of TNT Express and improved performance at our other transportation segments. At FedEx Ground, revenues increased 12% due to volume growth in our residential services and commercial business. Revenues at FedEx Express increased 1% due to base yields, package volume and freight pounds growth. FedEx Freight increased revenues 4% due to higher average daily LTL shipments, which was partially offset by lower revenue per LTL shipment. Lower fuel surcharges had a negative impact on revenues at all of our transportation segments and unfavorable exchange rates negatively impacted revenues at FedEx Express in the first quarter of 2017.

 

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Operating Expenses

The following table compares operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the three-month periods ended August 31:

 

                                                                   
                   Percent of Revenue  
     2016      2015      2016     2015  

Operating expenses:

          

Salaries and employee benefits

   $ 5,311      $ 4,525        36.2     36.9

Purchased transportation

     3,240        2,344        22.1        19.1  

Rentals and landing fees

     790        695        5.4        5.6  

Depreciation and amortization

     739        648        5.1        5.3  

Fuel

     650        712        4.4        5.8  

Maintenance and repairs

     598        548        4.1        4.5  

Other

     2,071        1,663        14.1        13.5  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

   $ 13,399      $ 11,135        91.4        90.7  
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 1,264      $ 1,144        8.6     9.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating margin declined during the first quarter of 2017 due to the inclusion of TNT Express, which was partially offset by the continued benefits from cost management initiatives at FedEx Express.

The inclusion of the TNT Express segment in our results has impacted the year-over-year comparability of all our operating expenses. Purchased transportation costs increased 38% in the first quarter of 2017 due to the inclusion of TNT Express and higher volumes and increased rates at FedEx Ground. Salaries and employee benefits expense increased 17% in the first quarter of 2017 due to the inclusion of TNT Express, volume growth and staffing to support network expansion at FedEx Ground and increased staffing at FedEx Freight. Other expenses were 25% higher in the first quarter of 2017 primarily due to the inclusion of TNT Express results driven by outside service contracts.

 

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Fuel

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

 

LOGO

Fuel expense decreased 9% in the first quarter of 2017 due to lower fuel prices. However, fuel prices represent only one component of the two factors we consider meaningful in understanding the impact of fuel on our business. Consideration must also be given to the fuel surcharge revenue we collect. Accordingly, we believe discussion of the net impact of fuel on our results, which is a comparison of the year-over-year change in these two factors, is important to understand the impact of fuel on our business. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative weighted-average fuel surcharge percentages in effect for the first quarter of 2017 and 2016 in the accompanying discussions of each of our transportation segments.

The index used to determine the fuel surcharge percentage for our FedEx Freight business adjusts weekly, while our fuel surcharges for the FedEx Express, TNT Express and FedEx Ground businesses incorporate a timing lag of approximately six to eight weeks before they are adjusted for changes in fuel prices. For example, the fuel surcharge index in effect at FedEx Express in August 2016 was set based on June 2016 fuel prices. In addition, the structure of the table that is used to determine our fuel surcharge at FedEx Express, TNT Express and FedEx Ground does not adjust immediately for changes in fuel price, but allows for the fuel surcharge revenue charged to our customers to remain unchanged as long as fuel prices remain within certain ranges.

Beyond these factors, the manner in which we purchase fuel also influences the net impact of fuel on our results. For example, our contracts for jet fuel purchases at FedEx Express are tied to various indices, including the U.S. Gulf Coast index. While many of these indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for jet fuel. Furthermore, under these contractual arrangements, approximately 75% of our jet fuel is purchased based on the index price for the preceding week, with the remainder of our purchases tied to the index price for the preceding month, rather than based on daily spot rates. These contractual provisions mitigate the impact of rapidly changing daily spot rates on our jet fuel purchases.

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

We routinely review our fuel surcharges and our fuel surcharge methodology. As announced on September 19, 2016, FedEx Express and FedEx Ground fuel surcharges will be adjusted on a weekly basis compared to the current monthly adjustment, effective February 6, 2017. On November 2, 2015, we updated the tables used to determine our fuel surcharges at FedEx Express, FedEx Ground and FedEx Freight.

 

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The net impact of fuel had a minimal impact to consolidated operating income in the first quarter of 2017, as the year-over-year decrease in fuel prices were offset by decreased fuel surcharge revenue during the first quarter of 2017 versus the prior year.

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

Other Income and Expense

Interest expense increased $50 million in the first quarter of 2017 primarily due to our U.S. and European debt issuances in fiscal 2016. The annualized weighted average interest rate on long-term debt was 3.6% for the three months ended August 31, 2016, reflecting the favorable interest rates obtained in recent debt offerings.

Income Taxes

Our effective tax rate was 37.4% for the first quarter of 2017 and 36.2% for the first quarter of 2016. The tax rate in the first quarter of 2017 increased due to the impact of local country losses in some entities within TNT Express, for which no tax benefit could be recognized due to the uncertainty as to the utilization of these losses. Longer term, as the synergies from the TNT Express acquisition result in greater international profits, we expect our effective tax rate to be lower than the rate in recent years.

We are subject to taxation in the United States and various U.S. state, local and foreign jurisdictions. We are currently under examination by the Internal Revenue Service for the 2014 and 2015 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements. As of August 31, 2016, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2016.

Business Acquisition

On May 25, 2016, we acquired TNT Express for €4.4 billion (approximately $4.9 billion). Cash acquired in the acquisition was approximately €250 million ($280 million). As of August 31, 2016, $36 million of shares associated with the transaction remained untendered, a decrease of $251 million since May 31, 2016. The remaining untendered shares are included in the “Other liabilities” caption of our consolidated balance sheets. We funded the acquisition with proceeds from our April 2016 debt issuance and existing cash balances. The financial results of this business are included in the FedEx Express group and TNT Express segment from the date of acquisition.

TNT Express collects, transports and delivers documents, parcels and freight to over 200 countries. This strategic acquisition broadens our portfolio of international transportation solutions with the combined strength of TNT Express’s strong European road platform and our strength in other regions globally, including North America and Asia.

Given the timing and complexity of the acquisition, the presentation of TNT Express in our financial statements, including the allocation of the purchase price, is preliminary and will likely change in future periods, perhaps significantly, as fair value estimates of the assets acquired and liabilities assumed are refined during the measurement period. We will complete our purchase price allocation no later than the fourth quarter of 2017.

See Note 1 of the accompanying unaudited condensed consolidated financial statements for further discussion of this acquisition.

 

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Outlook

We expect revenue and earnings growth in 2017 prior to any mark-to-market (MTM) benefit plans adjustment. Our results in 2017 will continue to be negatively impacted by our TNT Express integration and restructuring activities. Our expectations for earnings growth in the second quarter and the remainder of 2017 are dependent on key external factors, including fuel prices and the pace of improvement in the global economy.

Due to our TNT Express acquisition, 2017 will be a year of intensive integration activities and investments. We have owned TNT Express for approximately 120 days, and our integration activities are well underway. The integration process is complex as it spans over 200 countries and involves combining our pickup and delivery operations at a local level, our global and regional air and ground networks, and our extensive operations, clearance, sales and back-office IT systems, and is expected to take four years to complete. In addition, as discussed in our Annual Report, TNT Express is undergoing a large restructuring program called Outlook, which includes incurring certain restructuring costs. We estimate incurring costs of approximately $275 million in 2017 as a result of the TNT Express integration and Outlook restructuring programs. We currently expect the aggregate integration program expense over the four years to be in the range of $700 million to $800 million. The timing and amount of integration-related expenses in any future period is subject to change as we implement our plans. Therefore, we cannot currently predict if TNT Express will be accretive under accounting principles generally accepted in the United States in 2018.

We believe that this acquisition presents significant opportunities for material synergies in pickup and delivery costs, air and ground network optimization, selling, general and administrative expenses, as well as revenue growth, and the benefit of a lower tax rate. We are currently anticipating annual pre-tax synergies following the completion of the integration program in fiscal 2020 of $750 million. Given that the integration is complex and spans several years, how we achieve our target may evolve over time as market conditions and other factors change.

Other Outlook Matters. For details on key 2017 capital projects, refer to the “Liquidity Outlook” section of this 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. For a description of these proceedings, see Note 8 of the accompanying unaudited condensed consolidated financial statements and the “Independent Contractor Model” section of our FedEx Ground segment MD&A.

In the third quarter of 2016, FedEx Ground announced plans to implement the Independent Service Provider (“ISP”) model throughout its entire U.S. pickup and delivery network. To date, service providers in 32 states are operating under, or transitioning to, the ISP model. The transition to the ISP model in the remaining 18 states is expected to be completed by the end of 2020. The costs associated with these transitions will be recognized in the periods incurred and are not expected to be material to any future quarter.

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

RECENT ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. These matters are described in our Annual Report.

During the quarter, we retrospectively adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) to simplify the presentation of debt issuance costs. This new guidance requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, rather than as an asset. This new guidance had a minimal impact on our accounting and financial reporting.

On May 28, 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States (and International Financial Reporting Standards) which has been subsequently updated to defer the effective date of the new revenue recognition standard by one year. This standard will be effective for us beginning in fiscal 2019. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to

 

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customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five-step approach for the recognition of revenue. Based on our preliminary assessment, we do not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems.

On February 25, 2016, the FASB issued the new lease accounting standard which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expense related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement. We are currently evaluating the impact of this new standard on our financial reporting, but recognizing the lease liability and related right-of-use asset will significantly impact our balance sheet. These changes will be effective for our fiscal year beginning June 1, 2019 (fiscal 2020), with a modified retrospective adoption method to the beginning of 2018.

In March 2016, the FASB issued an Accounting Standards Update to simplify the accounting for share-based payment transactions. The new guidance requires companies to recognize the income tax effects of awards that vest or are settled as income tax expense or benefit in the income statement as opposed to additional paid-in capital as is current practice. The guidance also provides clarification of the presentation of certain components of share-based awards in the statement of cash flows. Additionally, the guidance allows companies to make a policy election to account for forfeitures either upon occurrence or by estimating forfeitures. This new standard will have minimal impact on our financial reporting. These changes will be effective for our fiscal year beginning June 1, 2017 (fiscal 2018).

We believe that no other new accounting guidance was adopted or issued during the first three months of 2017 that is relevant to the readers of our financial statements.

 

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REPORTABLE SEGMENTS

FedEx Express, TNT 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 Group:

  

FedEx Express Segment

  

FedEx Express (express transportation)

  

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

  

FedEx SupplyChain Systems (logistics services)

TNT Express Segment

  

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

FedEx Ground Segment

  

FedEx Ground (small-package ground delivery)

  

GENCO Distribution System, Inc. (“GENCO”) (third-party logistics)

FedEx Freight Segment

  

FedEx Freight (LTL freight transportation)

  

FedEx Custom Critical (time-critical transportation)

FedEx Services Segment

  

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

  

FedEx Office (document and business services and package acceptance)

FEDEX SERVICES SEGMENT

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

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

ELIMINATIONS, CORPORATE AND OTHER

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

 

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Corporate and other includes corporate headquarters costs for executive officers and certain legal and financial functions, as well as certain other costs and credits not attributed to our core business. These costs are not allocated to the business segments. The year-over-year increase in these costs was driven by TNT Express integration expenses discussed above.

 

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FEDEX EXPRESS GROUP

The FedEx Express Group consists of the combined results of the FedEx Express and TNT Express segments. As discussed in our Annual Report, we have combined these segments for financial reporting discussion purposes into a collective business as a result of their management reporting structure. Furthermore, over time their operations will be integrated, therefore presenting a group view provides a basis for future year-over-year comparison purposes. We acquired TNT Express in the fourth quarter of 2016, which has impacted the year-over-year comparability of revenue and operating income. The following table compares selected performance measures (dollars in millions) for the three-month periods ended August 31:

 

       2016         2015       Percent
 Change 
 

Revenues:

      

FedEx Express Segment

   $   6,656     $   6,591       1   

TNT Express Segment

     1,804             NM   
  

 

 

   

 

 

   

FedEx Express Group

     8,460       6,591       28   
  

 

 

   

 

 

   

Operating income (loss):

      

FedEx Express Segment

     624       545       14   

TNT Express Segment

     (14           NM   
  

 

 

   

 

 

   

FedEx Express Group

   $ 610     $ 545       12   
  

 

 

   

 

 

   

Operating margin:

      

FedEx Express Segment

     9.4     8.3     110  bp 

TNT Express Segment

     (0.8 %)            NM  bp 
  

 

 

   

 

 

   

FedEx Express Group

     7.2     8.3     (110 )bp 
  

 

 

   

 

 

   

FedEx Express Group Results

In the first quarter of 2017, the FedEx Express Group delivered combined revenue of $8.5 billion, which represents an increase of 28% over the first quarter of 2016. This increase was due to the inclusion of our recently acquired TNT Express segment, as well as improved base yields and package volume and freight pounds growth at our FedEx Express segment, which were partially offset by the negative impact of lower fuel surcharges and slightly unfavorable exchange rates.

Operating income increased in the first quarter of 2017 within the FedEx Express group reflecting the continued success of our FedEx Express segment, which was slightly offset by the TNT Express segment. The TNT Express segment reported an operating loss due to the continued execution of the Outlook restructuring program and amortization of intangible assets. Operating margin of the group declined due to the inclusion of the TNT Express segment which was partially offset by the increase in the FedEx Express segment operating margin.

 

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FEDEX EXPRESS SEGMENT

FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide time-definite delivery within five business days worldwide. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the three-month periods ended August 31:

 

       2016         2015       Percent
Change
             

Revenues:

          

Package:

          

U.S. overnight box

   $ 1,722     $ 1,658       4       

U.S. overnight envelope

     443       422       5       

U.S. deferred

     810       816       (1    
  

 

 

   

 

 

       

Total U.S. domestic package revenue

     2,975       2,896       3       
  

 

 

   

 

 

       

International priority

     1,434       1,464       (2    

International economy

     584       574       2       
  

 

 

   

 

 

       

Total international export package revenue

     2,018       2,038       (1    
  

 

 

   

 

 

       

International domestic(1)

     320       327       (2    
  

 

 

   

 

 

       

Total package revenue

     5,313       5,261       1       

Freight:

          

U.S.

     616       573       8       

International priority

     360       350       3       

International airfreight

     27       36       (25    
  

 

 

   

 

 

       

Total freight revenue

     1,003       959       5       Percent of Revenue   
        

 

 

 

Other(2)

     340       371       (8     2016       2015  
  

 

 

   

 

 

     

 

 

   

 

 

 

Total revenues

     6,656       6,591       1        100.0     100.0

Operating expenses:

          

Salaries and employee benefits

     2,588       2,523       3        38.9       38.3  

Purchased transportation

     557       601       (7     8.4       9.1  

Rentals and landing fees

     401       410       (2     6.0       6.2  

Depreciation and amortization

     348       347              5.2       5.3  

Fuel

     501       607       (17     7.5       9.2  

Maintenance and repairs

     357       345       3        5.4       5.2  

Intercompany charges

     462       445       4        6.9       6.7  

Other

     818       768       7        12.3       11.7  
  

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

     6,032       6,046              90.6     91.7
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

   $ 624     $ 545       14       
  

 

 

   

 

 

       

Operating margin

     9.4     8.3     110 bp     

 

(1)

International domestic revenues represent our international intra-country operations.

 

(2)

Includes FedEx Trade Networks and FedEx SupplyChain Systems.

 

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The following table compares selected statistics (in thousands, except yield amounts) for the three-month periods ended August 31:

 

       2016          2015        Percent
Change
 

Package Statistics(1)

        

Average daily package volume (ADV):

        

U.S. overnight box

     1,255        1,210        4  

U.S. overnight envelope

     570        541        5  

U.S. deferred

     824        865        (5
  

 

 

    

 

 

    

Total U.S. domestic ADV

     2,649        2,616        1  
  

 

 

    

 

 

    

International priority

     385        389        (1

International economy

     178        176        1  
  

 

 

    

 

 

    

Total international export ADV

     563        565         
  

 

 

    

 

 

    

International domestic(2)

     875        855        2  
  

 

 

    

 

 

    

Total ADV

     4,087        4,036        1  
  

 

 

    

 

 

    

Revenue per package (yield):

        

U.S. overnight box

   $ 21.11      $ 21.08         

U.S. overnight envelope

     11.96        11.99         

U.S. deferred

     15.12        14.52        4  

U.S. domestic composite

     17.28        17.03        1  

International priority

     57.30        57.86        (1

International economy

     50.48        50.18        1  

International export composite

     55.15        55.47        (1

International domestic(2)

     5.62        5.88        (4

Composite package yield

     20.00        20.05         

Freight Statistics(1)

        

Average daily freight pounds:

        

U.S.

     8,067        7,278        11  

International priority

     2,534        2,491        2  

International airfreight

     585        609        (4
  

 

 

    

 

 

    

Total average daily freight pounds

     11,186        10,378        8  
  

 

 

    

 

 

    

Revenue per pound (yield):

        

U.S.

   $ 1.18      $ 1.21        (2

International priority

     2.19        2.16        1  

International airfreight

     0.70        0.92        (24

Composite freight yield

     1.38        1.42        (3

 

(1)

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

 

(2)

International domestic statistics represent our international intra-country operations.

FedEx Express Segment Revenues

FedEx Express segment revenues increased 1% in the first quarter of 2017 due to improved base yields and package volume and freight pounds growth, which was largely offset by lower fuel surcharges and slightly unfavorable exchange rates. U.S. domestic average daily volumes increased 1% in the first quarter of 2017 driven by our overnight service offerings. U.S. domestic yields increased 1% in the first quarter of 2017 due to higher base rates partially offset by lower fuel surcharges. Freight average daily pounds increased 8% in the first quarter of 2017 due to higher U.S. Postal Service volume. International export yields decreased 1% in the first quarter of 2017 due to the negative impact of lower fuel surcharges and unfavorable exchange rates and were partially offset by higher base rates.

 

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Our fuel surcharges are indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge percentages and the international fuel surcharge percentages ranged as follows for the three-month periods ended August 31:

 

       2016         2015    

U.S. Domestic and Outbound Fuel Surcharge:

    

Low

     1.00     3.00

High

     2.50       4.00  

Weighted-average

     1.83       3.34  

International Fuel Surcharges:

    

Low

     1.00       3.00  

High

     9.50       12.00  

Weighted-average

     5.69       8.82  

On September 19, 2016, FedEx Express announced a 3.9% average list price increase for U.S. domestic, U.S. export and U.S. import services and a change to the U.S. domestic dimensional weight divisor effective January 2, 2017. In addition, FedEx Express fuel surcharges will be adjusted on a weekly basis compared to the current monthly adjustment, effective February 6, 2017. On January 4, 2016, FedEx Express implemented a 4.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S. import services. In addition, effective November 2, 2015, FedEx Express updated certain tables used to determine fuel surcharges.

FedEx Express Segment Operating Income

FedEx Express continued to increase operating income, which was up 14%, and grew operating margin 110 basis points in the first quarter of 2017 due to base yield improvement, volume growth and the continued benefits of cost management initiatives. In addition, results in the first quarter of 2017 include approximately $22 million of TNT Express integration expenses. FedEx Express continues to manage network capacity to match customer demand, reduce structural costs, modernize our fleet and drive productivity increases throughout its operations.

Salaries and employee benefits increased 3% in the first quarter of 2017 due to merit increases and staffing to support volume growth. Other expenses increased 7% in the first quarter of 2017 primarily due to TNT Express integration expenses of approximately $15 million. Purchased transportation expenses decreased 7% in the first quarter of 2017 driven by lower exchange rates.

Fuel expense decreased 17% during the first quarter of 2017 due to lower fuel prices. See the “Fuel” section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results.

 

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TNT EXPRESS SEGMENT

TNT Express collects, transports and delivers documents, parcels and freight on a day-definite or time-definite basis. Services are primarily classified by the speed, distance, weight and size of shipments. Whereas the majority of shipments are between businesses, TNT Express also offers business-to-consumer services to select key customers. We acquired TNT Express in the fourth quarter of 2016. The following table presents revenues, operating expenses, operating expenses as a percent of revenue, operating income, operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the three month period ended August 31:

 

           Percent of
Revenue
 
       2016       2016  

Revenues

   $   1,804       100.0 %

Operating expenses:

    

Salaries and employee benefits

     521       28.9  

Purchased transportation

     768       42.5  

Rentals and landing fees

     86       4.8  

Depreciation and amortization

     72       4.0  

Fuel

     54       3.0  

Maintenance and repairs

     36       2.0  

Other

     281       15.6  
  

 

 

   

 

 

 

Total operating expenses

     1,818       100.8 %
  

 

 

   

 

 

 

Operating loss

   $ (14  
  

 

 

   

Operating margin

     (0.8 )%   

Package:

    

Average daily packages

     919    

Revenue per package (yield)

   $   25.97    

Freight:

    

Average daily pounds

     3,702    

Revenue per pound (yield)

   $ 0.62     

TNT Express fuel surcharges are indexed to the spot price for jet fuel. Using this index, the international fuel surcharge percentages ranged as follows for the three-month periods ended August 31:

 

       2016    

International Fuel Surcharges:

  

Low

     6.50

High

     18.00  

Weighted-average

     12.70  

 

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TNT Express Segment Results

The TNT Express segment was formed in the fourth quarter of 2016, following the acquisition of TNT Express on May 25, 2016. Since the date of acquisition, TNT Express has focused on maintaining its customer base while beginning integration activities with FedEx Express, as well as continuing to execute the Outlook program.

TNT Express revenues were $1.8 billion for the first quarter of 2017. However, TNT Express reported an operating loss in the first quarter of 2017 due to intangible asset amortization of $28 million and $20 million of Outlook restructuring and integration costs. Costs associated with the Outlook restructuring program are expected to continue through calendar year 2018 and integration costs are expected to continue through fiscal year 2020.

 

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FEDEX GROUND SEGMENT

FedEx Ground service offerings include day-certain delivery to businesses in the U.S. and Canada and to 100% of U.S. residences. The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income, operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the three-month periods ended August 31:

 

       2016         2015       Percent
Change
       

Revenues:

          

FedEx Ground

   $ 3,891     $ 3,460       12        Percent of Revenue   
        

 

 

 

GENCO

     399       370       8        2016       2015  
  

 

 

   

 

 

     

 

 

   

 

 

 

Total revenues

     4,290       3,830       12        100.0     100.0
  

 

 

   

 

 

       

Operating expenses:

          

Salaries and employee benefits

     766       653       17        17.9       17.0  

Purchased transportation

     1,692       1,527       11        39.4       39.9  

Rentals

     181       145       25        4.2       3.8  

Depreciation and amortization

     163       146       12        3.8       3.8  

Fuel

     2       3       (33           0.1  

Maintenance and repairs

     76       69       10        1.8       1.8  

Intercompany charges

     325       297       9        7.6       7.8  

Other

     475       453       5        11.1       11.8  
  

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

     3,680       3,293       12        85.8     86.0
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

   $ 610     $ 537       14       
  

 

 

   

 

 

       

Operating margin

     14.2     14.0     20 bp     

Average daily package volume

          

FedEx Ground

     7,389       6,717       10       

Revenue per package (yield)

          

FedEx Ground

   $ 8.09     $ 7.91       2       

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 12% during the first quarter of 2017 due to volume and yield growth and were partially offset by lower fuel surcharges.

Average daily volume at FedEx Ground increased 10% during the first quarter of 2017 primarily due to continued growth in our residential services driven by e-commerce, as well as our commercial business. FedEx Ground yield increased 2% during the first quarter of 2017 primarily due to higher base yields, which were partially offset by lower fuel surcharges.

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 percentages ranged as follows for the three-month periods ended August 31:

 

       2016         2015    

Low

     3.30     4.00

High

     4.00       4.50  

Weighted-average

     3.70       4.30  

On September 19, 2016, FedEx Ground announced a 4.9% average list price increase and a change to the U.S. domestic dimensional weight divisor effective January 2, 2017. In addition, FedEx Ground fuel surcharges will be adjusted on a weekly basis compared to the current monthly adjustment, effective February 6, 2017. On January 4, 2016, FedEx Ground implemented a 4.9% increase in average list price. In addition, on November 2, 2015, FedEx Ground increased surcharges for shipments that exceed the published maximum weight or dimensional limits and updated certain tables used to determine fuel surcharges.

 

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FedEx Ground Segment Operating Income

FedEx Ground segment operating income and margin increased during the first quarter of 2017 due to volume and yield growth and lower self-insurance costs. These factors were partially offset by higher operational costs due to continued network expansion and higher purchased transportation rates.

Purchased transportation expense increased 11% in the first quarter of 2017 due to higher volumes and increased rates. Salaries and employee benefits expense increased 17% during the first quarter of 2017 due to volume growth and additional staffing to support network expansion. Rentals expense increased 25% and depreciation and amortization expense increased 12% in the first quarter of 2017 due to network expansion.

Independent Contractor Model

FedEx Ground is involved in numerous lawsuits and other proceedings (such as state tax or other administrative challenges) where the classification of its independent contractors is at issue. During the third quarter of 2016, we reached agreements in principle to settle all of the 19 cases on appeal in the multidistrict litigation. These cases involve a contractor model which FedEx Ground has not operated since 2011. In addition, we are defending contractor-model cases that are not or are no longer part of the multidistrict litigation. These cases are in varying stages of litigation. We will continue to vigorously defend ourselves in these proceedings and continue to 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. For a description of these proceedings, see 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” and “Other Outlook Matters” under Consolidated Results of this MD&A.

 

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FEDEX FREIGHT SEGMENT

FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income, operating margin (dollars in millions) and selected statistics for the three-month periods ended August 31:

 

                 Percent     Percent of Revenue  
     2016     2015     Change     2016     2015  

Revenues

   $ 1,658     $ 1,601       4        100.0     100.0

Operating expenses:

          

Salaries and employee benefits

     772       721       7        46.6       45.0  

Purchased transportation

     259       251       3        15.6       15.7  

Rentals

     30       43       (30     1.8       2.7  

Depreciation and amortization

     64       59       8        3.9       3.7  

Fuel

     91       102       (11     5.5       6.4  

Maintenance and repairs

     54       53       2        3.2       3.3  

Intercompany charges

     126       113       12        7.6       7.1  

Other

     127       127              7.7       7.9  
  

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

     1,523       1,469       4        91.9     91.8
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

   $ 135     $ 132       2       
  

 

 

   

 

 

       

Operating margin

     8.1     8.2     (10 )bp     

Average daily LTL shipments (in thousands)

          

Priority

     72.5       66.5       9       

Economy

     32.3       30.7       5       
  

 

 

   

 

 

       

Total average daily LTL shipments

     104.8       97.2       8       
  

 

 

   

 

 

       

Weight per LTL shipment (lbs)

          

Priority

     1,176       1,198       (2    

Economy

     1,098       1,168       (6    

Composite weight per LTL shipment

     1,152       1,189       (3    

LTL revenue per shipment

          

Priority

   $ 217.50     $ 223.26       (3    

Economy

     255.46       269.33       (5    

Composite LTL revenue per shipment

   $  229.20     $  237.81       (4    

LTL revenue per hundredweight

          

Priority

   $ 18.49     $ 18.63       (1    

Economy

     23.26       23.06       1       

Composite LTL revenue per hundredweight

   $ 19.89     $ 20.01       (1    

FedEx Freight Segment Revenues

FedEx Freight segment revenues increased 4% during the first quarter of 2017 due to higher average daily LTL shipments, which was partially offset by lower revenue per shipment. Average daily LTL shipments increased 8% in the first quarter of 2017 primarily due to continued increased volumes from small and mid-sized customers. LTL revenue per shipment decreased 4% in the first quarter of 2017 due to lower fuel surcharges and lower weight per shipment.

 

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The indexed LTL fuel surcharge is based on the average of the national U.S. on-highway average price for a gallon of diesel fuel, as published by the Department of Energy. The indexed LTL fuel surcharge percentages ranged as follows for the three-month periods ended August 31:

 

       2016         2015    

Low

     20.20     21.40

High

     20.80       23.10  

Weighted-average

     20.50       22.40  

On September 19, 2016, FedEx Freight announced a 4.9% average increase in certain U.S. and other shipping rates effective January 2, 2017. On January 4, 2016, FedEx Freight implemented zone-based pricing on U.S. and other LTL shipping rates. Also, on January 4, 2016, FedEx Freight implemented a 4.9% average increase in certain U.S. and other shipping rates.

FedEx Freight Segment Operating Income

FedEx Freight segment operating income increased 2% primarily due to higher volumes. This increase was partially offset by lower LTL revenue per shipment, which also drove a decline in operating margin. Salaries and employee benefits increased 7% in the first quarter of 2017 due to higher staffing levels to support volume growth. Purchased transportation expense increased 3% in the first quarter of 2017 due to higher volumes. Rentals decreased 30% in the first quarter of 2017 driven primarily by a charge related to a facility closure in the prior year and a credit related to the favorable sublease of the facility in the current year.

 

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FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $3.0 billion at August 31, 2016, compared to $3.5 billion at May 31, 2016. The following table provides a summary of our cash flows for the three-month periods ended August 31 (in millions):

 

         2016             2015      

Operating activities:

    

Net income

   $ 715     $ 692  

Noncash charges and credits

     1,008       749  

Changes in assets and liabilities

     (752     (200
  

 

 

   

 

 

 

Cash provided by operating activities

     971       1,241  
  

 

 

   

 

 

 

Investing activities:

    

Capital expenditures

     (1,215     (1,209

Proceeds from asset dispositions and other

     9       10  
  

 

 

   

 

 

 

Cash used in investing activities

     (1,206     (1,199
  

 

 

   

 

 

 

Financing activities:

    

Principal payments on debt

     (12     (15

Proceeds from stock issuances

     40       46  

Excess tax benefit on the exercise of stock options

     2       6  

Dividends paid

     (106     (71

Purchase of treasury stock

     (222     (190

Other, net

     (15      
  

 

 

   

 

 

 

Cash used in financing activities

     (313     (224
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     3       (38
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (545     (220
  

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 2,989     $ 3,543  
  

 

 

   

 

 

 

Cash flows from operating activities decreased $270 million in the first quarter of 2017 predominantly due to higher variable compensation payouts and higher pension contributions. Capital expenditures during the first three months of 2017 were higher than capital expenditures in the first three months of 2016, primarily due to increased spending for sort facility expansion at FedEx Ground. See “Capital Resources” for a discussion of capital expenditures during 2017 and 2016.

On January 26, 2016, our Board of Directors approved a share repurchase program of up to 25 million shares. During the first quarter of 2017, we repurchased 1.4 million shares of FedEx common stock at an average price of $160.18 per share for a total of $222 million. As of August 31, 2016, 17.6 million shares remained under the share repurchase authorization. Shares under the current repurchase program may be repurchased from time to time in the open market or in privately negotiated transactions. The timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of FedEx common stock and general market conditions. No time limit was set for the completion of the program, and the program may be suspended or discontinued at any time.

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.

 

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The following table compares capital expenditures by asset category and reportable segment for the three-month periods ended August 31 (in millions):

 

                   Dollar     Percent  
       2016          2015        Change     Change  

Aircraft and related equipment

   $ 592      $ 623      $ (31     (5

Package handling and ground support equipment

     197        185        12       6  

Vehicles

     149        218        (69     (32

Information technology investments

     159        74        85       115  

Facilities and other

     118        109        9       8  
  

 

 

    

 

 

    

 

 

   

Total capital expenditures