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FedEx 10-Q 2014
10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

FOR THE QUARTERLY PERIOD ENDED November 30, 2014

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 1-15829

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   62-1721435

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(901) 818-7500

(Registrant’s telephone number, including area code)

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

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

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

 

Large accelerated filer þ

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

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

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

 

Common Stock   Outstanding Shares at December 17, 2014

Common Stock, par value $0.10 per share

  283,312,620

 

 


Table of Contents

FEDEX CORPORATION

INDEX

 

     PAGE  
PART I. FINANCIAL INFORMATION   

ITEM 1. Financial Statements

  

Condensed Consolidated Balance Sheets
November 30, 2014 and May 31, 2014

     3   

Condensed Consolidated Statements of Income
Three and Six Months Ended November 30, 2014 and 2013

     5   

Condensed Consolidated Statements of Comprehensive Income
Three and Six Months Ended November  30, 2014 and 2013

     6   

Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 2014 and 2013

     7   

Notes to Condensed Consolidated Financial Statements

     8   

Report of Independent Registered Public Accounting Firm

     27   

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

     28   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     52   

ITEM 4. Controls and Procedures

     52   
PART II. OTHER INFORMATION   

ITEM 1. Legal Proceedings

     52   

ITEM 1A. Risk Factors

     52   

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

     53   

ITEM 6. Exhibits

     53   

Signature

     55   

Exhibit Index

     E-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 12.1

  

Exhibit 15.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

Exhibit 101.1

  

Ex-101 INSTANCE DOCUMENT

  

Ex-101 SCHEMA DOCUMENT

  

Ex-101 CALCULATION LINKBASE DOCUMENT

  

Ex-101 PRESENTATION LINKBASE DOCUMENT

  

Ex-101 DEFINITION LINKBASE DOCUMENT

  

 

- 2 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

     November 30,         
     2014      May 31,  
     (Unaudited)      2014  

ASSETS

     

CURRENT ASSETS

     

Cash and cash equivalents

   $ 2,266      $ 2,908  

Receivables, less allowances of $176 and $164

     5,592        5,460  

Spare parts, supplies and fuel, less allowances of $215 and $212

     476        463  

Deferred income taxes

     497        522  

Prepaid expenses and other

     381        330  
  

 

 

    

 

 

 

Total current assets

     9,212        9,683  

PROPERTY AND EQUIPMENT, AT COST

     41,616        40,691  

Less accumulated depreciation and amortization

     21,723        21,141  
  

 

 

    

 

 

 

Net property and equipment

     19,893        19,550  

OTHER LONG-TERM ASSETS

     

Goodwill

     2,734        2,790  

Other assets

     1,145        1,047  
  

 

 

    

 

 

 

Total other long-term assets

     3,879        3,837  
  

 

 

    

 

 

 
   $   32,984      $       33,070  
  

 

 

    

 

 

 

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

 

- 3 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

     November 30,        
     2014     May 31,  
     (Unaudited)     2014  

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

    

CURRENT LIABILITIES

    

Current portion of long-term debt

   $     $ 1  

Accrued salaries and employee benefits

     1,219       1,277  

Accounts payable

     1,968       1,971  

Accrued expenses

     1,986       2,063  
  

 

 

   

 

 

 

Total current liabilities

     5,173       5,312  

LONG-TERM DEBT, LESS CURRENT PORTION

     4,735       4,736  

OTHER LONG-TERM LIABILITIES

    

Deferred income taxes

     2,104       2,114  

Pension, postretirement healthcare and other benefit obligations

     3,136       3,484  

Self-insurance accruals

     1,072       1,038  

Deferred lease obligations

     832       758  

Deferred gains, principally related to aircraft transactions

     193       206  

Other liabilities

     176       145  
  

 

 

   

 

 

 

Total other long-term liabilities

     7,513       7,745  

COMMITMENTS AND CONTINGENCIES

    

COMMON STOCKHOLDERS’ INVESTMENT

    

Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of November 30, 2014 and May 31, 2014

     32       32  

Additional paid-in capital

     2,618       2,643  

Retained earnings

     21,480       20,429  

Accumulated other comprehensive loss

     (3,787     (3,694

Treasury stock, at cost

     (4,780     (4,133
  

 

 

   

 

 

 

Total common stockholders’ investment

     15,563       15,277  
  

 

 

   

 

 

 
   $   32,984     $       33,070  
  

 

 

   

 

 

 

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

 

- 4 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
     2014     2013     2014     2013  

REVENUES

   $   11,939     $   11,403     $   23,623     $   22,427  

OPERATING EXPENSES:

        

Salaries and employee benefits

     4,304       4,148       8,493       8,225  

Purchased transportation

     2,185       2,040       4,239       3,919  

Rentals and landing fees

     663       648       1,323       1,288  

Depreciation and amortization

     651       647       1,302       1,286  

Fuel

     1,052       1,136       2,172       2,240  

Maintenance and repairs

     543       479       1,099       959  

Other

     1,528       1,478       2,995       2,888  
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,926       10,576       21,623       20,805  
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     1,013       827       2,000       1,622  

OTHER INCOME (EXPENSE):

        

Interest, net

     (47     (30     (95     (57

Other, net

     5       (5     3       (7
  

 

 

   

 

 

   

 

 

   

 

 

 
     (42     (35     (92     (64
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     971       792       1,908       1,558  

PROVISION FOR INCOME TAXES

     355       292       686       569  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 616     $ 500     $ 1,222     $ 989  
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER COMMON SHARE:

        

Basic

   $ 2.17     $ 1.58     $ 4.30     $ 3.13  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 2.14     $ 1.57     $ 4.24     $ 3.10  
  

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.20     $ 0.15     $ 0.60     $ 0.45  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

- 5 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
     2014     2013      2014     2013  

NET INCOME

   $   616     $   500      $   1,222     $   989  

OTHER COMPREHENSIVE INCOME (LOSS):

         

Foreign currency translation adjustments, net of tax of $14, $6, $23 and $4

     (122     45        (153     (34

Amortization of unrealized pension actuarial gains/losses and other, net of tax of $17, $25, $35 and $50

     29       43        60       85  
  

 

 

   

 

 

    

 

 

   

 

 

 
     (93     88        (93     51  
  

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 523     $ 588      $ 1,129     $   1,040  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

- 6 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

 

     Six Months Ended
November 30,
 
     2014     2013  

Operating Activities:

    

Net income

   $ 1,222     $ 989  

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

    

Depreciation and amortization

     1,302       1,286  

Provision for uncollectible accounts

     78       65  

Stock-based compensation

     79       71  

Deferred income taxes and other noncash items

     57       201  

Changes in assets and liabilities:

    

Receivables

     (317     (385

Other assets

     (46     (126

Accounts payable and other liabilities

     (201     (476

Other, net

     (23     (16
  

 

 

   

 

 

 

Cash provided by operating activities

     2,151       1,609  

Investing Activities:

    

Capital expenditures

     (1,890     (1,690

Proceeds from asset dispositions and other

     7       19  
  

 

 

   

 

 

 

Cash used in investing activities

     (1,883     (1,671

Financing Activities:

    

Principal payments on debt

     (1     (3

Proceeds from stock issuances

     189       380  

Excess tax benefit on the exercise of stock options

     23       20  

Dividends paid

     (114     (95

Purchase of treasury stock

     (947     (1,219
  

 

 

   

 

 

 

Cash used in financing activities

     (850     (917
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (60     (3
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (642     (982

Cash and cash equivalents at beginning of period

     2,908       4,917  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $   2,266     $   3,935  
  

 

 

   

 

 

 

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

 

- 7 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2014 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of November 30, 2014, the results of our operations for the three- and six-month periods ended November 30, 2014 and 2013 and cash flows for the six-month periods ended November 30, 2014 and 2013. Operating results for the three- and six-month periods ended November 30, 2014 are not necessarily indicative of the results that may be expected for the year ending May 31, 2015.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2015 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

BUSINESS ACQUISITIONS. Subsequent to November 30, 2014, FedEx entered into agreements to acquire two businesses, expanding our portfolio in e-commerce and supply chain solutions. On December 15, 2014, we entered into an agreement to acquire GENCO Distribution Systems, Inc., one of the largest third-party logistics providers in North America. This acquisition is expected to be completed in early calendar year 2015, subject to customary closing conditions. The financial results of this business will be included in the FedEx Ground segment from the date of acquisition and are expected to be immaterial to our 2015 results.

In addition, on December 16, 2014, FedEx acquired Bongo International, LLC, a leader in cross border enablement technologies and solutions. The financial results of this acquired business will be included in the FedEx Express segment from the date of acquisition and are expected to be immaterial to our 2015 results.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of FedEx Express, which represent a small number of FedEx Express’s total employees, are employed under a collective bargaining agreement. The contract became amendable in March 2013, and the parties are currently in negotiations. In October 2014, FedEx Express formally requested assistance from the National Mediation Board (“NMB”) to mediate the negotiations. The NMB is the U.S. governmental agency that oversees labor agreements for entities covered by the Railway Labor Act of 1926, as amended (“Railway Labor Act”). The progression of negotiations into the mediation stage has no impact on our operations. In addition to our pilots at FedEx Express, certain non-U.S. employees are unionized.

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

Our stock-based compensation expense was $31 million for the three-month period ended November 30, 2014 and $79 million for the six-month period ended November 30, 2014. Our stock-based compensation expense was $26 million for the three-month period ended November 30, 2013 and $71 million for the six-month period ended November 30, 2013. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

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

We believe that no other new accounting guidance was adopted or issued during the first six months of 2015 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

TREASURY SHARES. In September 2014, our Board of Directors authorized the repurchase of up to 15 million shares of common stock. It is expected that the share authorization will primarily be utilized to offset equity compensation dilution over the next several years. During the second quarter of 2015, we repurchased 1.0 million shares of FedEx common stock at an average price of $156 per share for a total of $156 million. As of November 30, 2014, 14 million shares remained under the share repurchase authorization.

 

- 8 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

DIVIDENDS DECLARED PER COMMON SHARE. On November 21, 2014, our Board of Directors declared a quarterly dividend of $0.20 per share of common stock. The dividend will be paid on January 2, 2015 to stockholders of record as of the close of business on December 12, 2014. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

(2) Accumulated Other Comprehensive Income (Loss)

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

 

     Three Months Ended     Six Months Ended  
     2014     2013     2014     2013  

Foreign currency translation gain (loss):

        

Balance at beginning of period

   $ 46     $ 23      $ 77     $ 102   

Translation adjustments

     (122     45        (153     (34
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

     (76     68        (76     68   
  

 

 

   

 

 

   

 

 

   

 

 

 

Retirement plans adjustments:

        

Balance at beginning of period

     (3,740     (3,880     (3,771     (3,922

Reclassifications from AOCI

     29       43        60       85   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

     (3,711     (3,837     (3,711     (3,837
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive loss at end of period

   $ (3,787   $ (3,769   $ (3,787   $ (3,769
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Amount Reclassified from
AOCI
   

Affected Line Item in the Income

Statement

     Three Months Ended     Six Months Ended      
     2014     2013     2014     2013      

Retirement plans:

          

Amortization of actuarial losses and other

   $ (75   $ (97   $ (153   $ (192   Salaries and employee benefits

Amortization of prior service credits

             29               29               58               57      Salaries and employee benefits
  

 

 

   

 

 

   

 

 

   

 

 

   

Total before tax

     (46     (68     (95     (135  

Income tax benefit

     17       25       35       50      Provision for income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   

AOCI reclassifications, net of tax

   $ (29   $ (43   $ (60   $ (85   Net income
  

 

 

   

 

 

   

 

 

   

 

 

   

 

- 9 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(3) Financing Arrangements

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

A $1 billion revolving credit facility is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial paper. The agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt to capital that does not exceed 70%. Our leverage ratio of adjusted debt to capital was 57% at November 30, 2014. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. See our Annual Report for a description of the term and covenant details of our revolving credit facility.

Long-term debt, exclusive of capital leases, had a carrying value of $4.7 billion at November 30, 2014 and May 31, 2014, compared with an estimated fair value of $5.1 billion at November 30, 2014 and $5.0 billion at May 31, 2014. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.

(4) Computation of Earnings Per Share

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

 

     Three Months Ended      Six Months Ended  
     2014      2013      2014      2013  

Basic earnings per common share:

           

Net earnings allocable to common shares(1)

   $ 615      $ 499      $ 1,220      $ 988  

Weighted-average common shares

     283        315        284        316  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 2.17      $ 1.58      $ 4.30      $ 3.13  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share:

           

Net earnings allocable to common shares(1)

   $ 615      $ 499      $ 1,220      $ 988  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares

     283        315        284        316  

Dilutive effect of share-based awards

     4        4        4        3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average diluted shares

     287        319        288        319  

Diluted earnings per common share

   $       2.14      $       1.57      $       4.24      $       3.10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive options excluded from diluted earnings per common share

     2.2        2.5        2.2        6.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

- 10 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(5) Retirement Plans

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

 

     Three Months Ended      Six Months Ended  
     2014      2013      2014      2013  

U.S. domestic and international pension plans

   $ 65      $ 121      $ 133      $ 242  

U.S. domestic and international defined contribution plans

     94        88        188        177  

U.S. domestic and international postretirement healthcare plans

     20        19        40        39  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $       179      $       228      $       361      $       458  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended     Six Months Ended  
     2014     2013     2014     2013  

Pension Plans

        

Service cost

   $       164     $       164     $       328     $       328  

Interest cost

     275       263       550       526  

Expected return on plan assets

     (420     (374     (840     (747

Recognized actuarial losses and other

     46       68       95       135  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 65     $ 121     $ 133     $ 242  
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended     Six Months Ended  
     2014     2013     2014     2013  

Postretirement Healthcare Plans

        

Service cost

   $ 10     $ 9     $ 20     $ 19  

Interest cost

     10       10       20       20  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 20     $ 19     $ 40     $ 39  
  

 

 

   

 

 

   

 

 

   

 

 

 

Contributions to our tax qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the six-month periods ended November 30 were as follows:

 

               2014        2013  

Required

         $       247        $       315  

Voluntary

           83          15  
        

 

 

      

 

 

 
         $ 330        $ 330  
        

 

 

      

 

 

 

In December 2014, we made an additional contribution of $165 million to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments. Following this December 2014 payment, for the remainder of 2015, we have no required contributions to our U.S. Pension Plans; however, we expect to make approximately $160 million in voluntary contributions to our U.S. Pension Plans.

 

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Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(6) Business Segment Information

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively under the respected FedEx brand. Our primary operating companies include FedEx Express, the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services.

Our reportable segments include the following businesses:

 

FedEx Express Segment   

FedEx Express (express transportation)

  

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

  

FedEx SupplyChain Systems (logistics services)

FedEx Ground Segment   

FedEx Ground (small-package ground delivery)

  

FedEx SmartPost (small-parcel consolidator)

FedEx Freight Segment   

FedEx Freight (LTL freight transportation)

  

FedEx Custom Critical (time-critical transportation)

FedEx Services Segment   

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

  

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

  

FedEx Office (document and business services and package acceptance)

FedEx Services Segment

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

The FedEx Services segment 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 and our allocation methodologies are refined as necessary to reflect changes in our businesses.

During the first quarter of 2015, we ceased allocating to our transportation segments the costs associated with our corporate headquarters division. These costs included services related to general oversight functions, including executive officers and certain legal and finance functions. This change allows for additional transparency and improved management of our corporate oversight costs. These costs are included in “Corporate, eliminations and other” in our segment reporting and reconciliations. Prior year amounts have been revised to conform to the current year segment presentation. This change did not impact our condensed consolidated financial statements included in Note 10.

 

- 12 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

Other Intersegment Transactions

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

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

 

     Three Months Ended     Six Months Ended  
     2014     2013     2014     2013  

Revenues

        

FedEx Express segment

   $ 7,024     $ 6,844     $ 13,886     $ 13,449  

FedEx Ground segment

     3,063       2,849       6,023       5,579  

FedEx Freight segment

     1,585       1,434       3,194       2,858  

FedEx Services segment

     394       391       768       766  

Eliminations and other

     (127     (115     (248     (225
  

 

 

   

 

 

   

 

 

   

 

 

 
   $   11,939     $   11,403     $   23,623     $   22,427  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

        

FedEx Express segment(1)

   $ 484     $ 357     $ 853     $ 630  

FedEx Ground segment(1)

     465       439       1,010       922  

FedEx Freight segment(1)

     112       83       280       182  

Corporate, eliminations and other(1)

     (48     (52     (143     (112
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,013     $ 827     $ 2,000     $ 1,622  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Prior year amounts have been revised to conform to the current year segment presentation regarding the allocation of corporate headquarters costs.

 

- 13 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(7) Commitments

As of November 30, 2014, our purchase commitments under various contracts for the remainder of 2015 and annually thereafter were as follows (in millions):

 

     Aircraft and
Aircraft-Related
     Other(1)      Total  
        

2015 (remainder)

   $ 709       $ 452       $ 1,161  

2016

     1,230         329         1,559  

2017

     1,033         175         1,208  

2018

     1,402         101         1,503  

2019

     1,022         58         1,080  

Thereafter

     4,472         101         4,573   
  

 

 

    

 

 

    

 

 

 

Total

   $   9,868       $                 1,216       $               11,084  
  

 

 

    

 

 

    

 

 

 

 

(1) Primarily equipment, advertising contracts and contributions to our U.S. Pension Plans, which are further described in Note 5.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of November 30, 2014, our obligation to purchase four Boeing 767-300 Freighter (“B767F”) aircraft and nine Boeing 777 Freighter (“B777F”) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into noncancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

During September 2014, FedEx Express entered into an agreement to purchase four additional B767F aircraft, the delivery of which will begin in 2017 and continue through 2019.

We had $500 million in deposits and progress payments as of November 30, 2014 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the Boeing 757 (“B757”) aircraft in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of November 30, 2014 with the year of expected delivery:

 

     B757      B767F      B777F      Total  

2015 (remainder)

     1        8               9   

2016

            11        2        13   

2017

            12               12   

2018

            11        2        13   

2019

         —        6        2        8   

Thereafter

                   12        12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1                48                18                67   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 14 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at November 30, 2014 is as follows (in millions):

 

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

2015 (remainder)

   $ 391      $ 791      $ 1,182  

2016

     461        1,561        2,022  

2017

     399        1,684        2,083  

2018

     329        1,264        1,593  

2019

     273        1,091        1,364  

Thereafter

     551        7,097        7,648  
  

 

 

    

 

 

    

 

 

 

Total

   $     2,404      $     13,488      $     15,892  
  

 

 

    

 

 

    

 

 

 

Future minimum lease payments under capital leases were immaterial at November 30, 2014. While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

(8) Contingencies

Wage-and-Hour. We are a defendant in a number of lawsuits containing various class-action allegations of wage-and-hour violations. The plaintiffs in these lawsuits allege, among other things, that they were forced to work “off the clock,” were not paid overtime or were not provided work breaks or other benefits. The complaints generally seek unspecified monetary damages, injunctive relief, or both. We do not believe that a material loss is reasonably possible with respect to any of these matters.

Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 26 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings that claim that the company’s owner-operators should be treated as employees, rather than independent contractors.

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

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 has requested that each of those cases be separately briefed given the potential differences in the applicable state law from that in Kansas. During the second quarter of 2015, we established an accrual for the estimated probable loss in the Kansas case that was required to be recognized pursuant to applicable accounting standards. This amount was immaterial.

 

- 15 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

The multidistrict litigation court remanded the other eight certified class actions back to the district courts where they were originally filed because its summary judgment ruling did not completely dispose of all of the claims in those lawsuits. Three of these matters settled for immaterial amounts. The courts have granted final approval of two of the three settlements, while the other settlement remains subject to court approval. One of the cases is on appeal with the Court of Appeals for the Eleventh Circuit and three cases, which had been decided in our favor by the respective district courts in Oregon and California, were appealed to the Ninth Circuit Court of Appeals. The last case is currently pending in the Eastern District of Arkansas.

On August 27, 2014, the Ninth Circuit reversed the district court decisions and held that the plaintiffs in California and Oregon were employees as a matter of law. In each case, we asked the court to reconsider and petitioned for en banc review by the full Ninth Circuit Court of Appeals, which was denied. On October 30, 2014, the cases were remanded to their respective district courts for further proceedings.

During the first quarter of 2015, we established an accrual for the estimated probable loss in this case that was required to be recognized pursuant to applicable accounting standards. This amount was immaterial. Material exposure above the accrued amount, however, is reasonably possible, and accordingly we have undertaken a process to attempt to estimate a range of reasonably possible loss based on currently available information relating to the case. This process has included attempting 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 excess of the amount accrued. The number and identities of plaintiffs in these lawsuits are uncertain, as they are dependent on how the class of full-time 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, 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 case. Further, the range of potential loss could be impacted substantially by future rulings by the courts, including on the merits of the claims, on FedEx Ground’s defenses, and on evidentiary issues.

With respect to the matters that are pending outside of the Ninth Circuit, 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. We have undertaken a process to attempt to estimate a range of reasonably possible loss based on currently available information relating to these cases. Similar to our analysis of loss contingency in the Ninth Circuit cases, this process has included attempting 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. As a consequence of many of the same factors described above, 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.

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, and we do not expect to incur a material loss in any of these matters.

Adverse determinations in matters related to FedEx Ground’s independent contractors, could, among other things, entitle certain of our owner-operators and their drivers to the reimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax and benefit liability for FedEx Ground, and could result in changes to the independent contractor status of FedEx Ground’s owner-operators in certain jurisdictions. We believe that FedEx Ground’s owner-operators are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers of the company’s independent contractors.

City and State of New York Cigarette Suit. On December 30, 2013, the City of New York filed suit against FedEx Express and FedEx Ground arising from our alleged shipments of cigarettes to New York City residents. The claims against FedEx Express were subsequently dismissed. On March 30, 2014, the complaint was amended adding the State of New York as a plaintiff. Beyond the addition of the State as a plaintiff, the amended complaint contains several amplifications of the previous claims. First, the claims now relate to four shippers, none of which continues to ship in our network. Second, the amended complaint contains a count for violation of the Assurance of Compliance (“AOC”) we had previously entered into with the State of New York, claiming that since 2006, FedEx has made shipments of cigarettes to residences in New York in violation of the AOC. Lastly, the amendment contains new theories of Racketeer Influenced and Corrupt Organizations Act violations. In May 2014, we filed a motion to dismiss almost all of the claims. On November 12, 2014 the City and State of New York filed a separate but almost identical lawsuit that includes two additional shippers. Loss in these lawsuits is reasonably possible, but the amount of any loss is expected to be immaterial.

 

- 16 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

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.

In February 2014, FedEx Ground received oral communications from District Attorneys’ Offices (representing California’s county environmental authorities) and the California Attorney General’s Office (representing the California Division of Toxic Substances Control) that they were seeking civil penalties for alleged violations of the state’s hazardous waste regulations. Specifically, the California environmental authorities alleged that FedEx Ground improperly generates and/or handles, stores and transports hazardous waste from its stations to its hubs in California. In April 2014, FedEx Ground filed a declaratory judgment action in the United States District Court for the Eastern District of California against the Director of the California Division of Toxic Substances Control and the county District Attorneys with whom we have been negotiating. In June 2014, the California Attorney General filed a complaint against FedEx Ground in Sacramento County Superior Court alleging violations of FedEx Ground as described above. The County District Attorneys filed a similar complaint in Sacramento County Superior Court in July 2014. Loss in this matter is reasonably possible, however, the amount of any loss is expected to be immaterial.

On January 14, 2014, the U.S. Department of Justice (“DOJ”) issued a Grand Jury Subpoena to FedEx Express relating to an asbestos matter previously investigated by the U.S. Environmental Protection Agency. On May 1, 2014, the DOJ informed us that it had determined to continue to pursue the matter as a criminal case, citing seven asbestos-related regulatory violations associated with removal of roof materials from a hangar in Puerto Rico during cleaning and repair activity, as well as violation of waste disposal requirements. Loss is reasonably possible; however, the amount of any loss is expected to be immaterial.

Department of Justice Indictment — Internet Pharmacy Shipments. In the past, we received requests for information from the DOJ in the Northern District of California in connection with a criminal investigation relating to the transportation of packages for online pharmacies that may have shipped pharmaceuticals in violation of federal law. In July 2014, the DOJ filed a criminal indictment in the United States District Court for the Northern District of California in connection with the matter. A superseding indictment was filed in August 2014. The indictment alleges that FedEx Corporation, FedEx Express and FedEx Services, together with certain pharmacies, conspired to unlawfully distribute controlled substances, unlawfully distributed controlled substances and conspired to unlawfully distribute misbranded drugs. The superseding indictment adds conspiracy to launder money counts related to services provided to and payments from online pharmacies. We continue to believe that our employees have acted in good faith at all times and that we have not engaged in any illegal activities.

Accordingly, we will vigorously defend ourselves in this matter. If we are convicted, remedies could include fines, penalties, forfeiture and compliance conditions. Given the early stage of this proceeding, we cannot estimate the amount or range of loss, if any; however, it is reasonably possible that it could be material if we are convicted.

Other Matters. In August 2010, a third-party consultant who works with shipping customers to negotiate lower rates filed a lawsuit in federal district court in California against FedEx and United Parcel Service, Inc. (“UPS”) alleging violations of U.S. antitrust law. This matter was dismissed in May 2011, but the court granted the plaintiff permission to file an amended complaint, which FedEx received in June 2011. In November 2011, the court granted our motion to dismiss this complaint, but again allowed the plaintiff to file an amended complaint. The plaintiff filed a new complaint in December 2011, and the matter remains pending before the court. In

 

- 17 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

February 2011, shortly after the initial lawsuit was filed, we received a demand for the production of information and documents in connection with a civil investigation by the DOJ into the policies and practices of FedEx and UPS for dealing with third-party consultants who work with shipping customers to negotiate lower rates. In November 2012, the DOJ served a civil investigative demand on the third-party consultant seeking all pleadings, depositions and documents produced in the lawsuit. We are cooperating with the investigation, do not believe that we have engaged in any anti-competitive activities and will vigorously defend ourselves in any action that may result from the investigation. While the litigation proceedings and the DOJ investigation move forward, and the amount of loss, if any, is dependent on a number of factors that are not yet fully developed or resolved, the amount of any loss is expected to be immaterial.

On June 30, 2014, we received a Statement of Objections from the French Competition Authority (“FCA”) addressed to FedEx Express France, formerly known as TATEX, regarding an investigation by the FCA into anticompetitive behavior that is alleged to have occurred primarily in the framework of trade association meetings that included the former general managers of TATEX prior to our acquisition of that company in July 2012. In September 2014, FedEx Express France submitted its observations in response to the Statement of Objections to the FCA. Given the early stage of this matter, we cannot yet determine the amount or range of potential loss; however, it is reasonably possible that it could be material.

FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of their business. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not have a material adverse effect on our financial position, results of operations or cash flows.

(9) Supplemental Cash Flow Information

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

 

         2014             2013      

Cash payments for:

    

Interest (net of capitalized interest)

   $ 103     $ 64  
  

 

 

   

 

 

 

Income taxes

   $ 760     $ 626  

Income tax refunds received

     (5     (36
  

 

 

   

 

 

 

Cash tax payments, net

   $ 755     $ 590  
  

 

 

   

 

 

 

(10) Condensed Consolidating Financial Statements

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

The guarantor subsidiaries, which are 100% owned by FedEx, guarantee $4.5 billion of our debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the “Guarantor Subsidiaries” and “Non-guarantor Subsidiaries” columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting.

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

 

- 18 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

November 30, 2014

 

    Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

         

CURRENT ASSETS

         

Cash and cash equivalents

  $ 1,048     $ 482     $ 869     $ (133   $ 2,266  

Receivables, less allowances

    1       4,453       1,189       (51     5,592  

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

    76       719       62             857  

Deferred income taxes

          474       23             497  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,125       6,128       2,143       (184     9,212  

PROPERTY AND EQUIPMENT, AT COST

    28       39,258       2,330             41,616  

Less accumulated depreciation and amortization

    22       20,458       1,243             21,723  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net property and equipment

    6       18,800       1,087             19,893  

INTERCOMPANY RECEIVABLE

          1,172       1,526       (2,698      

GOODWILL

          1,552       1,182             2,734  

INVESTMENT IN SUBSIDIARIES

    21,850       3,747             (25,597      

OTHER ASSETS

    2,051       862       237       (2,005     1,145  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 25,032     $ 32,261     $ 6,175     $ (30,484   $ 32,984  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

CURRENT LIABILITIES

         

Accrued salaries and employee benefits

  $ 33     $ 1,011     $ 175     $     $ 1,219  

Accounts payable

    60       1,403       689       (184     1,968  

Accrued expenses

    374       1,404       208             1,986  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    467       3,818       1,072       (184     5,173  

LONG-TERM DEBT, LESS CURRENT PORTION

    4,487       248                   4,735  

INTERCOMPANY PAYABLE

    2,698                   (2,698      

OTHER LONG-TERM LIABILITIES

         

Deferred income taxes

          4,021       88       (2,005     2,104  

Other liabilities

    1,817       3,344       248             5,409  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other long-term liabilities

    1,817       7,365       336       (2,005     7,513  

STOCKHOLDERS’ INVESTMENT

    15,563       20,830       4,767       (25,597     15,563  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $   25,032     $ 32,261     $ 6,175     $ (30,484   $ 32,984  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 19 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2014

 

    Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

         

CURRENT ASSETS

         

Cash and cash equivalents

  $ 1,756     $ 441     $ 861     $ (150   $ 2,908  

Receivables, less allowances

    2       4,338       1,151       (31     5,460  

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

    59       674       60             793  

Deferred income taxes

          501       21             522  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,817       5,954       2,093       (181     9,683  

PROPERTY AND EQUIPMENT, AT COST

    28       38,303       2,360             40,691  

Less accumulated depreciation and amortization

    22       19,899       1,220             21,141  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net property and equipment

    6       18,404       1,140             19,550  

INTERCOMPANY RECEIVABLE

          1,058       1,265       (2,323      

GOODWILL

          1,552       1,238             2,790  

INVESTMENT IN SUBSIDIARIES

    20,785       3,754             (24,539      

OTHER ASSETS

    2,088       747       250       (2,038     1,047  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 24,696     $ 31,469     $ 5,986     $ (29,081   $ 33,070  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

CURRENT LIABILITIES

         

Current portion of long-term debt

  $     $ 1     $     $     $ 1  

Accrued salaries and employee benefits

    55       1,042       180             1,277  

Accounts payable

    2       1,530       620       (181     1,971  

Accrued expenses

    405       1,444       214             2,063  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    462       4,017       1,014       (181     5,312  

LONG-TERM DEBT, LESS CURRENT PORTION

    4,487       249                   4,736  

INTERCOMPANY PAYABLE

    2,323                   (2,323      

OTHER LONG-TERM LIABILITIES

         

Deferred income taxes

          4,059       93       (2,038     2,114  

Other liabilities

    2,147       3,230       254             5,631  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other long-term liabilities

    2,147       7,289       347       (2,038     7,745  

STOCKHOLDERS’ INVESTMENT

    15,277       19,914       4,625       (24,539     15,277  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $   24,696     $ 31,469     $ 5,986     $ (29,081   $ 33,070  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 20 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended November 30, 2014

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
     Eliminations     Consolidated  

REVENUES

   $     $ 9,926     $ 2,108      $ (95   $ 11,939  

OPERATING EXPENSES:

           

Salaries and employee benefits

     23       3,729       552              4,304  

Purchased transportation

           1,468       764        (47     2,185  

Rentals and landing fees

     2       577       86        (2     663  

Depreciation and amortization

     1       595       55              651  

Fuel

           1,028       24              1,052  

Maintenance and repairs

           507       36              543  

Intercompany charges, net

     (48     (50     98               

Other

     22       1,239       313        (46     1,528  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
           9,093       1,928        (95     10,926  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

           833       180              1,013  

OTHER INCOME (EXPENSE):

           

Equity in earnings of subsidiaries

     616       103              (719      

Interest, net

     (53     5       1              (47

Intercompany charges, net

     54       (59     5               

Other, net

     (1     2       4              5  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     616       884       190        (719     971  

Provision for income taxes

           319       36              355  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 616     $ 565     $ 154      $ (719   $ 616  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $         642     $ 543     $ 57      $ (719   $ 523  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

- 21 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended November 30, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUES

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

OPERATING EXPENSES:

          

Salaries and employee benefits

     24       3,568       556             4,148  

Purchased transportation

           1,340       739       (39     2,040  

Rentals and landing fees

     2       563       85       (2     648  

Depreciation and amortization

     1       595       51             647  

Fuel

           1,111       25             1,136  

Maintenance and repairs

           447       32             479  

Intercompany charges, net

     (50     (24     74              

Other

     23       1,192       308       (45     1,478  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           8,792       1,870       (86     10,576  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

           655       172             827  

OTHER INCOME (EXPENSE):

          

Equity in earnings of subsidiaries

     500       133             (633      

Interest, net

     (35     5                   (30

Intercompany charges, net

     36       (41     5              

Other, net

     (1     (3     (1           (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     500       749       176       (633     792  

Provision for income taxes

           251       41             292  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 500     $ 498     $ 135     $ (633   $ 500  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $         540     $ 506     $ 175     $ (633   $ 588  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 22 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Six Months Ended November 30, 2014

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
     Eliminations     Consolidated  

REVENUES

   $     $ 19,695     $ 4,112      $ (184   $ 23,623  

OPERATING EXPENSES:

           

Salaries and employee benefits

     53       7,335       1,105              8,493  

Purchased transportation

           2,854       1,475        (90     4,239  

Rentals and landing fees

     3       1,149       174        (3     1,323  

Depreciation and amortization

     1       1,190       111              1,302  

Fuel

           2,123       49              2,172  

Maintenance and repairs

           1,029       70              1,099  

Intercompany charges, net

     (143     (48     191               

Other

     86       2,404       596        (91     2,995  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
           18,036       3,771        (184     21,623  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

           1,659       341              2,000  

OTHER INCOME (EXPENSE):

           

Equity in earnings of subsidiaries

     1,222       201              (1,423      

Interest, net

     (106     9       2              (95

Intercompany charges, net

     108       (118     10               

Other, net

     (2     (1     6              3  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     1,222       1,750       359        (1,423     1,908  

Provision for income taxes

           588       98              686  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 1,222     $ 1,162     $ 261      $ (1,423   $ 1,222  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $         1,276     $ 1,137     $ 139      $ (1,423   $ 1,129  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

- 23 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Six Months Ended November 30, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-
guarantor
Subsidiaries
     Eliminations     Consolidated  

REVENUES

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

OPERATING EXPENSES:

           

Salaries and employee benefits

     55       7,082       1,088              8,225  

Purchased transportation

           2,582       1,412        (75     3,919  

Rentals and landing fees

     3       1,121       167        (3     1,288  

Depreciation and amortization

     1       1,184       101              1,286  

Fuel

           2,192       48              2,240  

Maintenance and repairs

           896       63              959  

Intercompany charges, net

     (111     (30     141               

Other

     52       2,325       601        (90     2,888  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
           17,352       3,621        (168     20,805  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

           1,323       299              1,622  

OTHER INCOME (EXPENSE):

           

Equity in earnings of subsidiaries

     989       243              (1,232      

Interest, net

     (69     10       2              (57

Intercompany charges, net

     71       (82     11               

Other, net

     (2     (5                  (7
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

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

Provision for income taxes

           483       86              569  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

- 24 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended November 30, 2014

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ (458   $ 2,335     $ 257     $ 17     $ 2,151  

INVESTING ACTIVITIES

          

Capital expenditures

     (1     (1,809     (80           (1,890

Proceeds from asset dispositions and other

     (1     17       (9           7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

     (2     (1,792     (89           (1,883

FINANCING ACTIVITIES

          

Net transfers from (to) Parent

     601       (610     9              

Payment on loan between subsidiaries

           143       (143            

Intercompany dividends

           22       (22            

Principal payments on debt

           (1                 (1

Proceeds from stock issuances

     189                         189  

Excess tax benefit on the exercise of stock options

     23                         23  

Dividends paid

     (114                       (114

Purchase of treasury stock

     (947                       (947

Other, net

           (39     39              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN FINANCING ACTIVITIES

     (248     (485     (117           (850
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

           (17     (43           (60
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (708     41       8       17       (642

Cash and cash equivalents at beginning of period

     1,756       441       861       (150     2,908  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $         1,048     $ 482     $ 869     $ (133   $ 2,266  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 25 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended November 30, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

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

INVESTING ACTIVITIES

          

Capital expenditures

           (1,521     (169           (1,690

Proceeds from asset dispositions and other

           19                   19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

           (1,502     (169           (1,671

FINANCING ACTIVITIES

          

Net transfers from (to) Parent

     (31     64       (33            

Payment on loan between subsidiaries

           (33     33              

Intercompany dividends

           22       (22            

Principal payments on debt

           (3                 (3

Proceeds from stock issuances

     380                         380  

Excess tax benefit on the exercise of stock options

     20                         20  

Dividends paid

     (95                       (95

Purchase of treasury stock

     (1,219                       (1,219
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (945     50       (22           (917
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

           (6     3             (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (1,084     87       58       (43     (982

Cash and cash equivalents at beginning of period

     3,892       405       717       (97     4,917  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 26 -


Table of Contents

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of November 30, 2014, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended November 30, 2014 and 2013 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2014 and 2013. These financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders’ investment, and cash flows for the year then ended not presented herein, and in our report dated July 14, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Memphis, Tennessee

December 18, 2014

 

- 27 -


Table of Contents

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

GENERAL

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (“FedEx”). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2014 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading 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 and certain back-office support to our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. (“FedEx Office”) and provides customer service, technical support and billing and collection services through FedEx TechConnect, Inc. (“FedEx TechConnect”). See “Reportable Segments” for further discussion. Additional information on our businesses can also be found in our Annual Report.

The key indicators necessary to understand our operating results include:

 

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

 

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

 

  the mix of services purchased by our customers;

 

  the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per hundredweight 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 offset these fluctuations through our fuel surcharges.

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

 

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Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2015 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

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

 

     Three Months Ended     Percent
Change
    Six Months Ended     Percent
Change
 
     2014     2013       2014     2013    

Revenues

   $   11,939     $   11,403       5      $   23,623     $   22,427       5   

Operating income

     1,013       827       22        2,000       1,622       23   

Operating margin

     8.5     7.3     120 bp      8.5     7.2     130 bp 

Net income

   $ 616     $ 500       23      $ 1,222     $ 989       24   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 2.14     $ 1.57       36      $ 4.24     $ 3.10       37   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows changes in revenues and operating income by reportable segment for the periods ended November 30, 2014 compared to November 30, 2013 (dollars in millions):

 

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

FedEx Express segment

   $ 180     $ 437       3        3      $ 127      $ 223       36       35  

FedEx Ground segment

     214       444       8        8        26        88       6       10  

FedEx Freight segment

     151       336       11        12        29        98       35       54  

FedEx Services segment

     3       2       1                                   

Corporate, eliminations and other

     (12     (23     10        10        4        (31     (8     28  
  

 

 

   

 

 

         

 

 

    

 

 

     
   $ 536     $ 1,196       5        5      $ 186      $ 378       22       23  
  

 

 

   

 

 

         

 

 

    

 

 

     

Overview

Our earnings for the second quarter and first half of 2015 increased due to continued revenue growth in each of our transportation segments from higher volumes and yield. Our results for the second quarter and first half of 2015 were positively impacted by the benefits from the profit improvement programs commenced in 2013, lower pension expense and the net impact of fuel. These factors were partially offset by higher maintenance expense due to the timing of aircraft maintenance events.

Share repurchases had a $0.16 year-over-year positive impact on the second quarter earnings per diluted share and a $0.31 impact on the first half of 2015 earnings per diluted share.

 

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

 

LOGO

 

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

 

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

 

LOGO

Revenue

Revenues increased 5% in the second quarter and first half of 2015 due to improved performance at all our transportation segments. At FedEx Ground, revenues increased 8% in the second quarter and first half of 2015 due to higher volume from continued growth in both our commercial business and FedEx Home Delivery service, as well as increased yields primarily resulting from rate increases. At FedEx Express, revenues increased 3% in the second quarter and first half of 2015 due to U.S. volume growth and international export base revenue growth, partially offset by lower fuel surcharges and unfavorable exchange rates. Revenues at FedEx Freight increased 11% in the second quarter and 12% in the first half of 2015 primarily due to higher average daily shipments and revenue per shipment.

 

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Operating Income

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

 

     Three Months Ended        Six Months Ended     
     2014     2013     2014     2013  

Operating expenses:

        

Salaries and employee benefits

   $ 4,304     $ 4,148     $ 8,493     $ 8,225  

Purchased transportation

     2,185       2,040       4,239       3,919  

Rentals and landing fees

     663       648       1,323       1,288  

Depreciation and amortization

     651       647       1,302       1,286  

Fuel

     1,052       1,136       2,172       2,240  

Maintenance and repairs

     543       479       1,099       959  

Other

     1,528       1,478       2,995       2,888  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ 10,926     $ 10,576     $ 21,623     $ 20,805  
  

 

 

   

 

 

   

 

 

   

 

 

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

Operating expenses:

        

Salaries and employee benefits

     36.0     36.4     36.0     36.7

Purchased transportation

     18.3       17.9       17.9       17.5  

Rentals and landing fees

     5.6       5.7       5.6       5.7  

Depreciation and amortization

     5.5       5.7       5.5       5.7  

Fuel

     8.8       9.9       9.2       10.0  

Maintenance and repairs

     4.5       4.2       4.6       4.3  

Other

     12.8       12.9       12.7       12.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     91.5       92.7       91.5       92.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     8.5     7.3     8.5     7.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income increased in the second quarter and first half of 2015 primarily as a result of higher volumes at FedEx Express, improved revenue per shipment and volumes at FedEx Freight, and increased yields and higher volumes at FedEx Ground. Results in the second quarter and first half of 2015 include benefits from our profit improvement programs, which we commenced in 2013, lower pension expense and a benefit from the net impact of fuel (as further described below). These benefits were partially offset by higher maintenance expense due to the timing of aircraft maintenance events at FedEx Express.

Operating expenses included an increase in purchased transportation costs of 7% in the second quarter and 8% in the first half of 2015 due to volume growth and higher service provider rates at FedEx Ground and higher utilization of third-party transportation providers and higher service provider rates at FedEx Freight. Salaries and employee benefits expense increased 4% in the second quarter and 3% in the first half of 2015 due to additional staffing to support volume growth, partially offset by the positive impact of our voluntary buyout program and lower pension expense. Maintenance and repairs expense increased 13% in the second quarter and 15% in the first half of 2015 due to the timing of aircraft maintenance events at FedEx Express.

 

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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 7% in the second quarter and 3% in the first half of 2015 due to lower aircraft 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 second quarter and first half of 2015 and 2014 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 FedEx 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 November 2014 was set based on September 2014 fuel prices. In addition, the structure of the table that is used to determine our fuel surcharge at FedEx 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. Effective February 2, 2015, we will update 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 slight benefit in the second quarter and a modest benefit in the first half of 2015 to operating income. This was driven by decreased fuel prices during the second quarter and first half of 2015 versus prior year, which was partially offset by the year-over-year decrease in fuel surcharge revenue during these periods.

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.

Income Taxes

Our effective tax rate was 36.6% for the second quarter of 2015 and 36.0% for the first half of 2015, compared with 36.9% in the second quarter and 36.5% in the first half of 2014. The tax rates in 2015 have decreased primarily due to discrete tax benefits related to changes in valuation allowances required in certain entities and jurisdictions. For 2015, we expect an effective tax rate between 36.0% and 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

We are subject to taxation in the United States and various U.S. state, local and foreign jurisdictions. Substantially all U.S. federal income tax matters through fiscal year 2011 are concluded, and we are currently under examination by the Internal Revenue Service for the 2012 and 2013 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next twelve months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements. As of November 30, 2014, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2014.

Business Acquisitions

Subsequent to November 30, 2014, FedEx entered into agreements to acquire two businesses, expanding our portfolio in e-commerce and supply chain solutions. On December 15, 2014, we entered into an agreement to acquire GENCO Distribution Systems, Inc., one of the largest third-party logistics providers in North America. This acquisition is expected to be completed in early calendar year 2015, subject to customary closing conditions. The financial results of this business will be included in the FedEx Ground segment from the date of acquisition and are expected to be immaterial to our 2015 results.

In addition, on December 16, 2014, FedEx acquired Bongo International, LLC, a leader in cross border enablement technologies and solutions. The financial results of this acquired business will be included in the FedEx Express segment from the date of acquisition and are expected to be immaterial to our 2015 results.

Outlook

We expect revenue and earnings growth to continue into the third quarter and the remainder of 2015, driven by ongoing improvements in the results of all of our transportation segments as our expectations for continued moderate global economic growth drive volume and yield improvements. Our results in 2015 will continue to benefit from execution of the profit improvement programs announced in 2013 and which are further described in our Annual Report. Our results for the third quarter and the remainder of 2015 will also benefit from lower pension expense due to strong asset returns in 2014; however, results for 2015 could be constrained by the reinstatement of our incentive compensation programs to the extent our financial performance exceeds our business plan objectives. Our expectations for earnings growth in the third quarter and the remainder of 2015 are dependent on key external factors, including fuel prices and the pace of improvement in the global economy.

Other Outlook Matters. For details on key 2015 capital projects, refer to the “Liquidity Outlook” section of this MD&A.

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

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

 

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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.

We believe that no other new accounting guidance was adopted or issued during the first half of 2015 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting, as described in our Annual Report.

REPORTABLE SEGMENTS

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

 

FedEx Express Segment   

FedEx Express (express transportation)

  

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

  

FedEx SupplyChain Systems (logistics services)

FedEx Ground Segment   

FedEx Ground (small-package ground delivery)

  

FedEx SmartPost (small-parcel consolidator)

FedEx Freight Segment   

FedEx Freight (LTL freight transportation)

  

FedEx Custom Critical (time-critical transportation)

FedEx Services Segment   

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

  

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

  

FedEx Office (document and business services and package acceptance)

FEDEX SERVICES SEGMENT

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support our transportation businesses and allow us to obtain synergies from the combination of these functions.

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 believe these allocations approximate the net cost of providing these functions and our allocation methodologies are refined as necessary to reflect changes in our businesses.

The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments reflects the allocations from the FedEx Services segment to the respective transportation segments. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided. See Note 6 of the accompanying unaudited condensed consolidated financial statements and our Annual Report for more information.

During the first quarter of 2015, we ceased allocating to our transportation segments the costs associated with our corporate headquarters division. These costs included services related to general oversight functions, including executive officers and certain legal and finance functions. This change allows for additional transparency and improved management of our corporate oversight costs. These costs were previously included in the operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments. These costs are included in “Corporate, eliminations and other” in our segment reporting and reconciliations. Prior year amounts have been revised to conform to the current year segment presentation. The increase in these unallocated costs in the first half of 2015 from the prior year was driven by a legal contingency reserve recorded in the first quarter of 2015 associated with the multi-district litigation matters described in Note 8.

 

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OTHER INTERSEGMENT TRANSACTIONS

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

 

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FEDEX EXPRESS SEGMENT

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

 

     Three Months Ended     Percent     Six Months Ended     Percent  
     2014     2013     Change     2014     2013     Change  

Revenues:

            

Package:

            

U.S. overnight box

   $ 1,705     $ 1,625       5      $ 3,387     $ 3,209       6   

U.S. overnight envelope

     400       398       1        815       817         

U.S. deferred

     834       771       8        1,629       1,500       9   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total U.S. domestic package revenue

     2,939       2,794       5        5,831       5,526       6   
  

 

 

   

 

 

     

 

 

   

 

 

   

International priority

     1,649       1,642              3,279       3,218       2   

International economy

     598       567       5        1,169       1,099       6   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total international export package revenue

     2,247       2,209       2        4,448       4,317       3   
  

 

 

   

 

 

     

 

 

   

 

 

   

International domestic(1)

     383       385       (1     754       730       3   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total package revenue

     5,569       5,388       3        11,033       10,573       4   

Freight:

            

U.S.

     586       585              1,165       1,209       (4

International priority

     412       417       (1     807       805         

International airfreight

     42       55       (24     88       109       (19
  

 

 

   

 

 

     

 

 

   

 

 

   

Total freight revenue

     1,040       1,057       (2     2,060       2,123       (3

Other(2)

     415       399       4        793       753       5   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

     7,024       6,844       3        13,886       13,449       3   

Operating expenses:

            

Salaries and employee benefits

     2,531       2,469       3        5,016       4,909       2   

Purchased transportation

     681       660       3        1,328       1,268       5   

Rentals and landing fees

     422       420              848       841       1   

Depreciation and amortization

     368       373       (1     742       742         

Fuel

     906       986       (8     1,876       1,942       (3

Maintenance and repairs

     357       308       16        736       615       20   

Intercompany charges(3)

     453       481       (6     902       939       (4

Other

     822       790       4        1,585       1,563       1   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses(3)

     6,540       6,487       1        13,033       12,819       2   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income(3)

   $ 484     $ 357       36      $ 853     $ 630       35   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin(3)

     6.9     5.2     170 bp      6.1     4.7     140 bp 

 

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

Operating expenses:

        

Salaries and employee benefits

     36.0     36.1     36.1     36.5

Purchased transportation

     9.7       9.6       9.6       9.4  

Rentals and landing fees

     6.0       6.1       6.1       6.3  

Depreciation and amortization

     5.2       5.5       5.4       5.5  

Fuel

     12.9       14.4       13.5       14.4  

Maintenance and repairs

     5.1       4.5       5.3       4.6  

Intercompany charges(3)

     6.5       7.1       6.5       7.0  

Other

     11.7       11.5       11.4       11.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses(3)

     93.1       94.8       93.9       95.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin(3)

     6.9     5.2     6.1     4.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  International domestic revenues represent our international intra-country express operations.
(2)  Includes FedEx Trade Networks and FedEx SupplyChain Systems.
(3)  Prior year amounts have been revised to the current year segment presentation regarding the allocation of corporate headquarters costs.

 

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

 

     Three Months Ended      Percent     Six Months Ended      Percent  
     2014      2013      Change     2014      2013      Change  

Package Statistics(1)

                

Average daily package volume (ADV):

                

U.S. overnight box

     1,259        1,146        10       1,235        1,129        9  

U.S. overnight envelope

     521        535        (3     524        549        (5

U.S. deferred

     915        841        9       880        815        8  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total U.S. domestic ADV

     2,695        2,522        7       2,639        2,493        6  
  

 

 

    

 

 

      

 

 

    

 

 

    

International priority

     424        421        1       417        414        1  

International economy

     180        172        5       175        168        4  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total international export ADV

     604        593        2       592        582        2  
  

 

 

    

 

 

      

 

 

    

 

 

    

International domestic(2)

     917        896        2       866        842        3  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total ADV

     4,216        4,011        5       4,097        3,917        5  
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue per package (yield):

                

U.S. overnight box

   $ 21.50      $ 22.50        (4   $ 21.59      $ 22.39        (4

U.S. overnight envelope

     12.15        11.84        3       12.24        11.72        4  

U.S. deferred

     14.48        14.55              14.58        14.49        1  

U.S. domestic composite

     17.31        17.59        (2     17.40        17.45         

International priority

     61.64        61.87              61.92        61.27        1  

International economy

     52.88        52.27        1       52.75        51.35        3  

International export composite

     59.04        59.08              59.21        58.40        1  

International domestic(2)

     6.63        6.82        (3     6.85        6.83         

Composite package yield

     20.97        21.32        (2     21.21        21.25         

Freight Statistics(1)

                

Average daily freight pounds:

                

U.S.

     8,039        7,872        2       7,676        7,646         

International priority

     2,983        3,068        (3     2,887        2,964        (3

International airfreight

     630        907        (31     650        878        (26
  

 

 

    

 

 

      

 

 

    

 

 

    

Total average daily freight pounds

       11,652          11,847        (2       11,213          11,488        (2
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue per pound (yield):

                

U.S.

   $ 1.16      $ 1.18        (2   $ 1.20      $ 1.25        (4

International priority

     2.19        2.16        1       2.20        2.14        3  

International airfreight

     1.07        0.97        10       1.07        0.98        9  

Composite freight yield

     1.42        1.42              1.45        1.46        (1

 

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

 

(2) International domestic statistics represent our international intra-country express operations.

FedEx Express Segment Revenues

FedEx Express segment revenues increased 3% in the second quarter and first half of 2015 primarily due to higher U.S. domestic package volumes and international export package base revenues. These factors were partially offset by lower fuel surcharges and unfavorable exchange rates.

U.S. domestic volumes increased 7% in the second quarter and 6% in the first half of 2015 driven by both our overnight and deferred service offerings. International export yields increased in the first half of 2015, due to higher rates and weight per package, partially offset by unfavorable exchange rates. U.S. domestic and international export revenues were partially offset by lower fuel surcharges. International export volumes increased 2% in the second quarter and first half of 2015 driven by our international economy service offering.

 

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Table of Contents

Our U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the periods ended November 30:

 

     Three Months Ended     Six Months Ended  
     2014     2013     2014     2013  

U.S. Domestic and Outbound Fuel Surcharge:

        

Low

     8.00     9.50     8.00     8.00

High

     9.00       10.50       9.50       10.50  

Weighted-average

     8.69       10.02       9.09       9.26  

International Fuel Surcharges:

        

Low

     12.00       13.50       12.00       12.00  

High

     17.50       19.00       18.00       19.00  

Weighted-average

     15.59       16.79       15.92       16.09  

On September 16, 2014, FedEx Express announced a 4.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S. import services effective January 5, 2015. In January 2014, we implemented a 3.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S. import services.