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FedEx 10-Q 2015
10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

FOR THE QUARTERLY PERIOD ENDED February 28, 2015

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

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

 

Large accelerated filer þ

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

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

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

 

Common Stock   Outstanding Shares at March 18, 2015

Common Stock, par value $0.10 per share

  283,756,646

 

 


Table of Contents

FEDEX CORPORATION

INDEX

PART I. FINANCIAL INFORMATION

 

     PAGE  

ITEM 1. Financial Statements

  

Condensed Consolidated Balance Sheets
February 28, 2015 and May 31, 2014

     3   

Condensed Consolidated Statements of Income
Three and Nine Months Ended February 28, 2015 and 2014

     5   

Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months Ended February  28, 2015 and 2014

     6   

Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 2015 and 2014

     7   

Notes to Condensed Consolidated Financial Statements

     8   

Report of Independent Registered Public Accounting Firm

     28   

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

     29   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     53   

ITEM 4. Controls and Procedures

     53   
PART II. OTHER INFORMATION   

ITEM 1. Legal Proceedings

     53   

ITEM 1A. Risk Factors

     53   

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

     54   

ITEM 6. Exhibits

     54   

Signature

     56   

Exhibit Index

     E-1   

Exhibit 10.1

  

Exhibit 10.2

  

Exhibit 10.3

  

Exhibit 10.4

  

Exhibit 10.5

  

Exhibit 12.1

  

Exhibit 15.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

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)

 

  February 28,      
  2015   May 31,  
  (Unaudited)   2014  

ASSETS

CURRENT ASSETS

Cash and cash equivalents

$ 3,478   $ 2,908  

Receivables, less allowances of $184 and $164

  5,584     5,460  

Spare parts, supplies and fuel, less allowances of $197 and $212

  488     463  

Deferred income taxes

  510     522  

Prepaid expenses and other

  422     330  
  

 

 

    

 

 

 

Total current assets

  10,482     9,683  

PROPERTY AND EQUIPMENT, AT COST

  42,652     40,691  

Less accumulated depreciation and amortization

  22,227     21,141  
  

 

 

    

 

 

 

Net property and equipment

  20,425     19,550  

OTHER LONG-TERM ASSETS

Goodwill

  3,805     2,790  

Other assets

  1,396     1,047  
  

 

 

    

 

 

 

Total other long-term assets

  5,201     3,837  
  

 

 

    

 

 

 
$   36,108   $       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)

 

  February 28,      
  2015   May 31,  
  (Unaudited)   2014  

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

CURRENT LIABILITIES

Current portion of long-term debt

$   $ 1  

Accrued salaries and employee benefits

  1,231     1,277  

Accounts payable

  2,050     1,971  

Accrued expenses

  1,962     2,063  
  

 

 

   

 

 

 

Total current liabilities

  5,243     5,312  

LONG-TERM DEBT, LESS CURRENT PORTION

  7,228     4,736  

OTHER LONG-TERM LIABILITIES

Deferred income taxes

  2,497     2,114  

Pension, postretirement healthcare and other benefit obligations

  2,962     3,484  

Self-insurance accruals

  1,092     1,038  

Deferred lease obligations

  694     758  

Deferred gains, principally related to aircraft transactions

  187     206  

Other liabilities

  193     145  
  

 

 

   

 

 

 

Total other long-term liabilities

  7,625     7,745  

COMMITMENTS AND CONTINGENCIES

COMMON STOCKHOLDERS’ INVESTMENT

Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of February 28, 2015 and May 31, 2014

  32     32  

Additional paid-in capital

  2,739     2,643  

Retained earnings

  21,880     20,429  

Accumulated other comprehensive loss

  (3,909   (3,694

Treasury stock, at cost

  (4,730   (4,133
  

 

 

   

 

 

 

Total common stockholders’ investment

  16,012     15,277  
  

 

 

   

 

 

 
$   36,108   $       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
February 28,
  Nine Months Ended
February 28,
 
  2015   2014   2015   2014  

REVENUES

$   11,716   $   11,301   $   35,339   $   33,728  

OPERATING EXPENSES:

Salaries and employee benefits

  4,411     4,167     12,904     12,392  

Purchased transportation

  2,165     2,063     6,404     5,982  

Rentals and landing fees

  686     662     2,009     1,950  

Depreciation and amortization

  652     652     1,954     1,938  

Fuel

  810     1,163     2,982     3,403  

Maintenance and repairs

  505     438     1,604     1,397  

Other

  1,525     1,515     4,520     4,403  
  

 

 

   

 

 

   

 

 

   

 

 

 
  10,754     10,660     32,377     31,465  
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

  962     641     2,962     2,263  

OTHER INCOME (EXPENSE):

Interest, net

  (58   (38   (153   (95

Other, net

  5     (9   8     (16
  

 

 

   

 

 

   

 

 

   

 

 

 
  (53   (47   (145   (111
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

  909     594     2,817     2,152  

PROVISION FOR INCOME TAXES

  329     216     1,015     785  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

$ 580   $ 378   $ 1,802   $ 1,367  
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER COMMON SHARE:

Basic

$ 2.05   $ 1.24   $ 6.34   $ 4.38  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

$ 2.01   $ 1.23   $ 6.25   $ 4.34  
  

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

$ 0.20   $ 0.15   $ 0.80   $ 0.60  
  

 

 

   

 

 

   

 

 

   

 

 

 

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
February 28,
  Nine Months Ended
February 28,
 
  2015   2014   2015   2014  

NET INCOME

$   580   $   378   $   1,802   $   1,367  

OTHER COMPREHENSIVE INCOME (LOSS):

Foreign currency translation adjustments, net of tax of $18, $3, $41 and $7

  (152   (30   (305   (64

Amortization of unrealized pension actuarial gains/losses and other, net of tax of $18, $25, $53 and $75

  30     45     90     130  
  

 

 

   

 

 

   

 

 

   

 

 

 
  (122   15     (215   66  
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

$ 458   $ 393   $ 1,587   $   1,433  
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

  Nine Months Ended
February 28,
 
  2015   2014  

Operating Activities:

Net income

$ 1,802   $ 1,367  

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

Depreciation and amortization

  1,954     1,938  

Provision for uncollectible accounts

  112     95  

Stock-based compensation

  106     94  

Deferred income taxes and other noncash items

  362     392  

Changes in assets and liabilities:

Receivables

  (200   (242

Other assets

  (38   (150

Accounts payable and other liabilities

  (599   (893

Other, net

  (26   (23
  

 

 

   

 

 

 

Cash provided by operating activities

  3,473     2,578  

Investing Activities:

Capital expenditures

  (2,969   (2,554

Business acquisitions, net of cash acquired

  (1,429    

Proceeds from asset dispositions and other

  16     23  
  

 

 

   

 

 

 

Cash used in investing activities

  (4,382   (2,531

Financing Activities:

Principal payments on debt

  (1   (254

Proceeds from debt issuances

  2,491     1,997  

Proceeds from stock issuances

  272     462  

Excess tax benefit on the exercise of stock options

  31     27  

Dividends paid

  (171   (142

Purchase of treasury stock, including accelerated share repurchase agreements

  (1,016   (3,984

Other, net

  (23   (18
  

 

 

   

 

 

 

Cash provided by (used in) financing activities

  1,583     (1,912
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

  (104   (10
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  570     (1,875

Cash and cash equivalents at beginning of period

  2,908     4,917  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

$   3,478   $   3,042  
  

 

 

   

 

 

 

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 February 28, 2015, the results of our operations for the three- and nine-month periods ended February 28, 2015 and 2014 and cash flows for the nine-month periods ended February 28, 2015 and 2014. Operating results for the three- and nine-month periods ended February 28, 2015 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. During the third quarter of 2015, we acquired two businesses, expanding our portfolio in e-commerce and supply chain solutions. On January 30, 2015, we acquired GENCO Distribution System, Inc. (“GENCO”), one of the largest third-party logistics providers in North America, for $1.4 billion, which was funded using a portion of the proceeds from our January 2015 debt issuance (see Note 3). The financial results of this business are included in the FedEx Ground segment from the date of acquisition.

In addition, on December 16, 2014, FedEx acquired Bongo International, LLC (“Bongo”), a leader in cross-border enablement technologies and solutions, for $42 million in cash from operations. The financial results of this acquired business are included in the FedEx Express segment from the date of acquisition.

These acquisitions will allow us to enter new markets, as well as strengthen our current service offerings to existing customers. We expect that the goodwill of $40 million associated with our Bongo acquisition will be entirely attributable to our FedEx Express reporting unit. We expect that the goodwill of approximately $1.1 billion associated with our GENCO acquisition will be primarily attributable to our FedEx Ground and FedEx Express reporting units.

The financial results of these acquired businesses from the date of acquisition were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.

 

- 8 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

The estimated fair values of the assets and liabilities related to these acquisitions have been recorded in the FedEx Ground and FedEx Express segments and are included in the accompanying unaudited balance sheets based on a preliminary allocation of the purchase price (summarized in the table below in millions). These allocations will be completed during our fourth quarter.

 

Current assets

$ 344  

Property and equipment

  96  

Goodwill

  1,112  

Intangible assets

  175  

Other non-current assets

  37  

Current liabilities

  (225

Long-term liabilities

  (84
  

 

 

 

Total purchase price

$ 1,455  
  

 

 

 

The goodwill recorded of approximately $1.1 billion is primarily attributable to expected benefits from synergies of the combinations with existing businesses and other acquired entities. The majority of the purchase price allocated to goodwill is not deductible for U.S. income tax purposes. The intangible assets acquired consist primarily of customer-related intangible assets, which will be amortized over an estimated useful life of ten years.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of Federal Express Corporation (“FedEx Express”), which represent a small number of FedEx Express’s total employees, are employed under a collective bargaining agreement. 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 $26 million for the three-month period ended February 28, 2015 and $106 million for the nine-month period ended February 28, 2015. Our stock-based compensation expense was $23 million for the three-month period ended February 28, 2014 and $94 million for the nine-month period ended February 28, 2014. 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 nine 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 third quarter of 2015, we repurchased 400,000 shares of FedEx common stock at an average price of $172 per share for a total of $69 million. As of February 28, 2015, 13.6 million shares remained under the share repurchase authorization.

 

- 9 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

DIVIDENDS DECLARED PER COMMON SHARE. On February 13, 2015, our Board of Directors declared a quarterly dividend of $0.20 per share of common stock. The dividend will be paid on April 1, 2015 to stockholders of record as of the close of business on March 11, 2015. 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 February 28 (in millions; amounts in parentheses indicate debits to AOCI):

 

  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

Foreign currency translation gain (loss):

Balance at beginning of period

$ (76 $ 68    $ 77   $ 102   

Translation adjustments

  (152   (30   (305   (64
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  (228   38      (228   38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Retirement plans adjustments:

Balance at beginning of period

  (3,711   (3,837   (3,771   (3,922

Reclassifications from AOCI

  30     45      90     130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  (3,681   (3,792   (3,681   (3,792
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive loss at end of period

$ (3,909 $ (3,754 $ (3,909 $ (3,754
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

  Amount Reclassified from
AOCI
 

Affected Line Item in the Income
Statement

  Three Months Ended   Nine Months Ended    
  2015   2014   2015   2014    

Retirement plans:

Amortization of actuarial losses and other

$ (76 $ (98 $ (229 $ (290 Salaries and employee benefits

Amortization of prior service credits

          28             28             86             85   Salaries and employee benefits
  

 

 

   

 

 

   

 

 

   

 

 

   

Total before tax

  (48   (70   (143   (205

Income tax benefit

  18     25     53     75   Provision for income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   

AOCI reclassifications, net of tax

$ (30 $ (45 $ (90 $ (130 Net income
  

 

 

   

 

 

   

 

 

   

 

 

   

(3) Financing Arrangements

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

 

- 10 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

During the quarter, we issued $2.5 billion of senior unsecured debt under our current shelf registration statement, comprised of $400 million of 2.30% fixed-rate notes due in February 2020, $700 million of 3.20% fixed-rate notes due in February 2025, $500 million of 3.90% fixed-rate notes due in February 2035, $650 million of 4.10% fixed-rate notes due in February 2045, and $250 million of 4.50% fixed-rate notes due in February 2065. Interest on these notes is paid semiannually. We utilized the net proceeds to fund our $1.4 billion acquisition of GENCO and the remaining proceeds for working capital and general corporate purposes.

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 59% at February 28, 2015. 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 additional covenant details of our revolving credit facility.

Long-term debt, exclusive of capital leases, had a carrying value of $7.2 billion compared with an estimated fair value of $7.8 billion at February 28, 2015 and a carrying value of $4.7 billion compared with an estimated fair value of $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 February 28 was as follows (in millions, except per share amounts):

 

  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

Basic earnings per common share:

Net earnings allocable to common shares(1)

$ 579   $ 377   $ 1,799   $ 1,365  

Weighted-average common shares

  283     303     284     312  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

$ 2.05   $ 1.24   $ 6.34   $ 4.38  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share:

Net earnings allocable to common shares(1)

$ 579   $ 377   $ 1,799   $ 1,365  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares

  283     303     284     312  

Dilutive effect of share-based awards

  4     4     4     3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average diluted shares

  287     307     288     315  

Diluted earnings per common share

$       2.01   $       1.23   $       6.25   $       4.34  
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive options excluded from diluted earnings per common share

  2.0     0.5     2.1     4.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

- 11 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(5) Retirement Plans

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the periods ended February 28 were as follows (in millions):

 

  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

U.S. domestic and international pension plans

$ 66   $ 124   $ 199   $ 366  

U.S. domestic and international defined contribution plans

  96     90     284     269  

U.S. domestic and international postretirement healthcare plans

  21     20     61     59  
  

 

 

    

 

 

    

 

 

    

 

 

 
$       183   $       234   $       544   $       694  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

Pension Plans

Service cost

$       165   $       164   $       493   $       492  

Interest cost

  274     264     824     790  

Expected return on plan assets

  (420   (374   (1,260   (1,121

Recognized actuarial losses and other

  47     70     142     205  
  

 

 

   

 

 

   

 

 

   

 

 

 
$ 66   $ 124   $ 199   $ 366  
  

 

 

   

 

 

   

 

 

   

 

 

 
  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

Postretirement Healthcare Plans

Service cost

$ 10   $ 10   $ 30   $ 29  

Interest cost

  11     10     31     30  
  

 

 

   

 

 

   

 

 

   

 

 

 
$ 21   $ 20   $ 61   $ 59  
  

 

 

   

 

 

   

 

 

   

 

 

 

Contributions to our tax qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the nine months ended February 28 were as follows:

 

      2015   2014  

Required

$       380   $       480  

Voluntary

  115     15  
        

 

 

    

 

 

 
$ 495   $ 495  
        

 

 

    

 

 

 

In March 2015, we made approximately $160 million in voluntary contributions to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments.

(6) Business Segment Information

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

 

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Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

Our reportable segments include the following businesses:

 

FedEx Express Segment

FedEx Express (express transportation)

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

FedEx SupplyChain Systems (logistics services)

Bongo (cross-border enablement technology and solutions)

FedEx Ground Segment

FedEx Ground (small-package ground delivery)

FedEx SmartPost (small-parcel consolidator)

GENCO (third-party logistics)

FedEx Freight Segment

FedEx Freight (LTL freight transportation)

FedEx Custom Critical (time-critical transportation)

FedEx Services Segment

FedEx Services (sales, marketing, information technology, communications 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.

 

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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 periods ended February 28 (in millions):

 

  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

Revenues

FedEx Express segment

$ 6,656   $ 6,674   $ 20,542   $ 20,123  

FedEx Ground segment

  3,393     3,031     9,416     8,610  

FedEx Freight segment

  1,428     1,347     4,622     4,205  

FedEx Services segment

  370     368     1,138     1,134  

Eliminations and other

  (131   (119   (379   (344
  

 

 

   

 

 

   

 

 

   

 

 

 
$   11,716   $   11,301   $   35,339   $   33,728  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income(1)

FedEx Express segment

$ 384   $ 168   $ 1,237   $ 798  

FedEx Ground segment

  558     490     1,568     1,412  

FedEx Freight segment

  68     35     348     217  

Corporate, eliminations and other

  (48   (52   (191   (164
  

 

 

   

 

 

   

 

 

   

 

 

 
$ 962   $ 641   $ 2,962   $ 2,263  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(7) Commitments

As of February 28, 2015, 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)

$ 415    $ 180    $ 595  

2016

  1,249      335      1,584  

2017

  1,013      186      1,199  

2018

  1,389      111      1,500  

2019

  1,033      68      1,101  

Thereafter

  4,429      111      4,540  
  

 

 

    

 

 

    

 

 

 

Total

$   9,528    $                    991    $               10,519  
  

 

 

    

 

 

    

 

 

 

 

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

 

- 14 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of February 28, 2015, 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.

We had $401 million in deposits and progress payments as of February 28, 2015 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our consolidated balance sheets. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of February 28, 2015 with the year of expected delivery:

 

  B767F   B777F   Total  

2015 (remainder)

  4         4   

2016

  11     2     13   

2017

  12         12   

2018

  11     2     13   

2019

  6     2     8   

Thereafter

      12     12   
  

 

 

    

 

 

    

 

 

 

Total

          44             18             62   
  

 

 

    

 

 

    

 

 

 

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at February 28, 2015 is as follows (in millions):

 

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

2015 (remainder)

$ 82   $ 411   $ 493  

2016

  461     1,628     2,089  

2017

  400     1,767     2,167  

2018

  329     1,335     1,664  

2019

  273     1,149     1,422  

Thereafter

  550     7,459     8,009  
  

 

 

    

 

 

    

 

 

 

Total

$     2,095   $     13,749   $     15,844  
  

 

 

    

 

 

    

 

 

 

Future minimum lease payments under capital leases were immaterial at February 28, 2015. 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.

 

- 15 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 25 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.

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 and have received court approval. One of the cases is on appeal with the Court of Appeals for the Eleventh Circuit and one is currently pending in the Eastern District of Arkansas. Two cases in Oregon and one in California were appealed to the Ninth Circuit Court of Appeals, where the court reversed the district court decisions and held that the plaintiffs in California and Oregon were employees as a matter of law and remanded the cases to their respective district courts for further proceedings.

During the first quarter of 2015, we established an accrual for the estimated probable losses in the Oregon and California cases that were required to be recognized pursuant to applicable accounting standards. These amounts were immaterial. Material exposure above the accrued amounts, however, is reasonably possible, and accordingly we have undertaken a process to attempt to estimate a range of reasonably possible losses based on currently available information relating to the 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. For a number of reasons, we are not currently able to estimate a range of reasonably possible losses in excess of the amounts 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 cases. Further, the range of potential losses 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 California and Oregon, 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.

 

- 16 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

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 California and Oregon 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 (“RICO”) 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. On March 9, the court ruled on our motion to dismiss, granting our motions to limit the applicable statute of limitations to four years and to dismiss a portion of the claims. The court, however, denied our motion to dismiss some of the claims, including the RICO claims. Loss in these lawsuits is reasonably possible, but the amount of any loss is expected to be immaterial.

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

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. The county and state authorities filed a motion to dismiss FedEx Ground’s declaratory judgment action, and their motion was granted on January 22, 2015. FedEx Ground filed a notice of appeal with the Ninth Circuit Court of Appeals on February 23, 2015. Loss in this matter is reasonably possible, however, the amount of any loss is expected to be immaterial.

 

- 17 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

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 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.

 

- 18 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

(9) Supplemental Cash Flow Information

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

 

      2015           2014      

Cash payments for:

Interest (net of capitalized interest)

$ 196   $ 121  
  

 

 

   

 

 

 

Income taxes

$ 859   $ 716  

Income tax refunds received

  (7   (50
  

 

 

   

 

 

 

Cash tax payments, net

$ 852   $ 666  
  

 

 

   

 

 

 

(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 $7.0 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.

 

- 19 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

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

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

February 28, 2015

 

  Parent   Guarantor
Subsidiaries
  Non-
guarantor
Subsidiaries
  Eliminations   Consolidated  

ASSETS

CURRENT ASSETS

Cash and cash equivalents

$ 2,142   $ 492   $ 886   $ (42 $ 3,478  

Receivables, less allowances

  1     4,355     1,277     (49   5,584  

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

  100     687     123          910  

Deferred income taxes

       476     34          510  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

  2,243     6,010     2,320     (91   10,482  

PROPERTY AND EQUIPMENT, AT COST

  28     40,264     2,360          42,652  

Less accumulated depreciation and amortization

  23     20,973     1,231          22,227  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net property and equipment

  5     19,291     1,129          20,425  

INTERCOMPANY RECEIVABLE

       1,406     1,578     (2,984     

GOODWILL

       1,552     2,253          3,805  

INVESTMENT IN SUBSIDIARIES

  23,736     3,753          (27,489     

OTHER ASSETS

  2,055     856     473     (1,988   1,396  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
$ 28,039   $ 32,868   $ 7,753   $ (32,552 $ 36,108  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

CURRENT LIABILITIES

Accrued salaries and employee benefits

$ 35   $ 1,053   $ 143   $    $ 1,231  

Accounts payable

  60     1,327     754     (91   2,050  

Accrued expenses

  314     1,410     238          1,962  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

  409     3,790     1,135     (91   5,243  

LONG-TERM DEBT, LESS CURRENT PORTION

  6,978     248     2          7,228  

INTERCOMPANY PAYABLE

  2,984               (2,984     

OTHER LONG-TERM LIABILITIES

Deferred income taxes

       4,294     191     (1,988   2,497  

Other liabilities

  1,656     3,229     243          5,128  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other long-term liabilities

  1,656     7,523     434     (1,988   7,625  

STOCKHOLDERS’ INVESTMENT

  16,012     21,307     6,182     (27,489   16,012  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
$   28,039   $ 32,868   $ 7,753   $ (32,552 $ 36,108  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

- 20 -


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  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

- 21 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended February 28, 2015

 

  Parent   Guarantor
Subsidiaries
  Non-
guarantor
Subsidiaries
  Eliminations   Consolidated  

REVENUES

$    $ 9,793   $ 2,024   $ (101 $ 11,716  

OPERATING EXPENSES:

Salaries and employee benefits

  25     3,784     602          4,411  

Purchased transportation

       1,527     695     (57   2,165  

Rentals and landing fees

  1     597     89     (1   686  

Depreciation and amortization

       593     59          652  

Fuel

       790     20          810  

Maintenance and repairs

       468     37          505  

Intercompany charges, net

  (48   (34   82            

Other

  22     1,231     315     (43   1,525  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       8,956     1,899     (101   10,754  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

       837     125          962  

OTHER INCOME (EXPENSE):

Equity in earnings of subsidiaries

  580     90          (670     

Interest, net

  (66   6     2          (58

Intercompany charges, net

  68     (74   6            

Other, net

  (2   (4   11          5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

  580     855     144     (670   909  

Provision for income taxes

       248     81          329  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

$ 580   $ 607   $ 63   $ (670 $ 580  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

$         607   $ 596   $ (75 $ (670 $ 458  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 22 -


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended February 28, 2014

 

  Parent   Guarantor
Subsidiaries
  Non-
guarantor
Subsidiaries
  Eliminations   Consolidated  

REVENUES

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

OPERATING EXPENSES:

Salaries and employee benefits

  24     3,615     528          4,167  

Purchased transportation

       1,426     680     (43   2,063  

Rentals and landing fees

  1     576     86     (1   662  

Depreciation and amortization

       601     51          652  

Fuel

       1,138     25          1,163  

Maintenance and repairs

  1     406     31          438  

Intercompany charges, net

  (52   (17   69            

Other

  26     1,234     295     (40   1,515  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
       8,979     1,765     (84   10,660  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

       530     111          641  

OTHER INCOME (EXPENSE):

Equity in earnings of subsidiaries

  378     80          (458     

Interest, net

  (45   4     3          (38

Intercompany charges, net

  46     (52   6            

Other, net

  (1   (9   1          (9
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

  378     553     121     (458   594  

Provision for income taxes

       165     51          216  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

$ 378   $ 388   $ 70   $ (458 $ 378  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

$         419   $ 388   $ 44   $ (458 $ 393  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

- 23 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Nine Months Ended February 28, 2015

 

  Parent   Guarantor
Subsidiaries
  Non-guarantor
Subsidiaries
  Eliminations   Consolidated  

REVENUES

$    $ 29,488   $ 6,136   $ (285 $ 35,339  

OPERATING EXPENSES:

Salaries and employee benefits

  78     11,119     1,707          12,904  

Purchased transportation

       4,381     2,170     (147   6,404  

Rentals and landing fees

  4     1,746     263     (4   2,009  

Depreciation and amortization

  1     1,783     170          1,954  

Fuel

       2,913     69          2,982  

Maintenance and repairs

       1,497     107          1,604  

Intercompany charges, net

  (191   (82   273            

Other

  108     3,635     911     (134   4,520  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
       26,992     5,670     (285   32,377  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

       2,496     466          2,962  

OTHER INCOME (EXPENSE):

Equity in earnings of subsidiaries

  1,802     291          (2,093     

Interest, net

  (172   15     4          (153

Intercompany charges, net

  176     (192   16            

Other, net

  (4   (5   17          8  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

  1,802     2,605     503     (2,093   2,817  

Provision for income taxes

       836     179          1,015  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

$ 1,802   $ 1,769   $ 324   $ (2,093 $ 1,802  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

$         1,883   $ 1,733   $ 64   $ (2,093 $ 1,587  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

- 24 -


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Nine Months Ended February 28, 2014

 

  Parent   Guarantor
Subsidiaries
  Non-
guarantor
Subsidiaries
  Eliminations   Consolidated  

REVENUES

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

OPERATING EXPENSES:

Salaries and employee benefits

  79     10,697     1,616          12,392  

Purchased transportation

       4,008     2,092     (118   5,982  

Rentals and landing fees

  4     1,697     253     (4   1,950  

Depreciation and amortization

  1     1,785     152          1,938  

Fuel

       3,330     73          3,403  

Maintenance and repairs

  1     1,302     94          1,397  

Intercompany charges, net

  (163   (47   210            

Other

  78     3,559     896     (130   4,403  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
       26,331     5,386     (252   31,465  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

       1,853     410          2,263  

OTHER INCOME (EXPENSE):

Equity in earnings of subsidiaries

  1,367     323          (1,690     

Interest, net

  (114   14     5          (95

Intercompany charges, net

  117     (134   17            

Other, net

  (3   (14   1          (16
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

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

Provision for income taxes

       648     137          785  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

- 25 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 28, 2015

 

  Parent   Guarantor
Subsidiaries
  Non-
guarantor
Subsidiaries
  Eliminations   Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

$ (460 $ 3,443   $ 382   $ 108   $ 3,473  

INVESTING ACTIVITIES

Capital expenditures

  (1   (2,849   (119        (2,969

Business acquisitions, net of cash acquired

  (1,429                  (1,429

Proceeds from asset dispositions and other

       35     (19        16  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

  (1,430   (2,814   (138        (4,382

FINANCING ACTIVITIES

Net transfers from (to) Parent

  692     (681   (11          

Payment on loan between subsidiaries

       202     (202          

Intercompany dividends

       38     (38          

Principal payments on debt

       (1             (1

Proceeds from debt issuance

  2,491                    2,491  

Proceeds from stock issuances

  272                    272  

Excess tax benefit on the exercise of stock options

  31                    31  

Dividends paid

  (171                  (171

Purchase of treasury stock

  (1,016                  (1,016

Other, net

  (23   (105   105          (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

  2,276     (547   (146        1,583  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

       (31   (73        (104
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

  386     51     25     108     570  

Cash and cash equivalents at beginning of period

  1,756     441     861     (150   2,908  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

$         2,142   $ 492   $ 886   $ (42 $ 3,478  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 26 -


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 28, 2014

 

  Parent   Guarantor
Subsidiaries
  Non-
guarantor
Subsidiaries
  Eliminations   Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

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

INVESTING ACTIVITIES

Capital expenditures

       (2,342   (212        (2,554

Proceeds from asset dispositions and other

       26     (3        23  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN INVESTING ACTIVITIES

       (2,316   (215        (2,531

FINANCING ACTIVITIES

Net transfers from (to) Parent

  136     (123   (13          

Payment on loan between subsidiaries

       5     (5          

Intercompany dividends

       36     (36          

Principal payments on debt

  (250   (4             (254

Proceeds from debt issuance

  1,997                    1,997  

Proceeds from stock issuances

  462                    462  

Excess tax benefit on the exercise of stock options

  27                    27  

Dividends paid

  (142                  (142

Purchase of treasury stock

  (3,984                  (3,984

Other, net

  (18                  (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH USED IN FINANCING ACTIVITIES

  (1,772   (86   (54        (1,912
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

       (9   (1        (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

  (1,876   (25   71     (45   (1,875

Cash and cash equivalents at beginning of period

  3,892     405     717     (97   4,917  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 27 -


Table of Contents

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of February 28, 2015, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended February 28, 2015 and 2014 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 2015 and 2014. 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 (except for Note 14, as to which the date is January 6, 2015), 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

March 19, 2015

 

- 28 -


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.

 

- 29 -


Table of Contents

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 February 28:

 

  Three Months Ended   Percent   Nine Months Ended   Percent  
  2015   2014   Change   2015   2014   Change  

Revenues

$ 11,716   $ 11,301     4    $ 35,339   $ 33,728     5   

Operating income

  962     641     50      2,962     2,263     31   

Operating margin

  8.2   5.7   250 bp    8.4   6.7   170 bp 

Net income

$ 580   $ 378     53    $ 1,802   $ 1,367     32   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

$ 2.01   $ 1.23     63    $ 6.25   $ 4.34     44   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows changes in revenues and operating income by reportable segment for the periods ended February 28, 2015 compared to February 28, 2014 (dollars in millions):

 

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

FedEx Express segment

$ (18 $ 419   $ 216   $ 439  

FedEx Ground segment

  362     806     68     156  

FedEx Freight segment

  81     417     33     131  

FedEx Services segment

  2     4          

Corporate, eliminations and other

  (12   (35   4     (27
  

 

 

   

 

 

   

 

 

    

 

 

 
$ 415   $ 1,611   $ 321   $ 699  
  

 

 

   

 

 

   

 

 

    

 

 

 

Overview

Our earnings for the third quarter and nine months of 2015 increased significantly due to the strong performance of each of our transportation segments. Higher volumes across all of our transportation segments and improved yields at FedEx Ground and FedEx Freight were key drivers of our results. In addition, earnings growth was driven by the positive net impact of fuel, benefits from our profit improvement program commenced in 2013, a lower year-over-year impact from severe winter weather and reduced pension expense. Our results for the third quarter of 2015 include higher incentive compensation accruals and in the nine months of 2015, higher maintenance expense primarily due to the timing of aircraft maintenance events at FedEx Express.

Treasury stock repurchases had a $0.11 year-over-year positive impact on the third quarter earnings per diluted share and a $0.42 impact on the nine months of 2015 earnings per diluted share.

 

- 30 -


Table of Contents

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

 

 

LOGO

 

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

 

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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 4% in the third quarter due to improved performance at our FedEx Ground and FedEx Freight segments and 5% in the nine months of 2015 due to improved performance at all our transportation segments. At FedEx Ground, revenues increased 12% in the third quarter and 9% in the nine months of 2015 due to higher volume from continued growth in both our commercial business and FedEx Home Delivery service, as well as increased yields. At FedEx Freight, revenues increased 6% in the third quarter and 10% in the nine months of 2015 primarily due to higher average daily shipments and revenue per shipment. Revenues at FedEx Express declined slightly in the third quarter due to the negative impact of lower fuel surcharges, which were partially offset by higher U.S. and international export volumes. FedEx Express revenues increased 2% during the nine months of 2015 due to U.S. and international export volume growth, which were partially offset by lower fuel surcharges.

 

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Operating Expenses

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

 

  Three Months Ended      Nine Months Ended     
  2015   2014   2015   2014  

Operating expenses:

Salaries and employee benefits

$ 4,411   $ 4,167   $ 12,904   $ 12,392  

Purchased transportation

  2,165     2,063     6,404     5,982  

Rentals and landing fees

  686     662     2,009     1,950  

Depreciation and amortization

  652     652     1,954     1,938  

Fuel

  810     1,163     2,982     3,403  

Maintenance and repairs

  505     438     1,604     1,397  

Other

  1,525     1,515     4,520     4,403  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

$ 10,754   $ 10,660   $ 32,377   $ 31,465  
  

 

 

   

 

 

   

 

 

   

 

 

 
  Percent of Revenue  
  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

Operating expenses:

Salaries and employee benefits

  37.6   36.9   36.5   36.7

Purchased transportation

  18.5     18.2     18.1     17.7  

Rentals and landing fees

  5.9     5.8     5.7     5.8  

Depreciation and amortization

  5.6     5.8     5.5     5.8  

Fuel

  6.9     10.3     8.4     10.1  

Maintenance and repairs

  4.3     3.9     4.6     4.1  

Other

  13.0     13.4     12.8     13.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  91.8     94.3     91.6     93.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

  8.2   5.7   8.4   6.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses grew during the third quarter and nine months of 2015 primarily due to volume-related growth in salaries and employee benefits and purchased transportation expenses, higher incentive compensation accruals and in the nine months of 2015, higher maintenance and repairs expense. However, operating margin expanded due to revenue growth, a significant benefit from the net impact of fuel (as further described below), benefits from our profit improvement program, which we commenced in 2013, a lower year-over-year impact from severe winter weather and reduced pension expense.

Operating expenses included an increase in salaries and employee benefits expense of 6% in the third quarter and 4% in the nine months of 2015 due to additional staffing to support volume growth and higher incentive compensation accruals, partially offset by the positive impact of our voluntary buyout program and lower pension expense. Purchased transportation costs increased 5% in the third quarter due to volume growth and higher service provider rates at FedEx Ground and 7% in the nine months of 2015 due to volume growth and higher service provider rates at FedEx Ground and FedEx Freight. The timing of aircraft maintenance events at FedEx Express primarily drove an increase in maintenance and repairs expense of 15% in the third quarter and nine months of 2015.

 

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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 30% in the third quarter and 12% in the nine months of 2015 due to lower aircraft fuel prices. However, fuel prices represent only one component of the two factors we primarily 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 third quarter and nine months 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 February 2015 was set based on December 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. On February 2, 2015, we updated the tables used to determine our fuel surcharges at FedEx Express, FedEx Ground and FedEx Freight.

 

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The net impact of fuel had a significant benefit in the third quarter and nine months of 2015 to operating income. This was driven by decreased fuel prices during the third quarter and nine months 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 36.2% for the third quarter of 2015 and 36.0% for the nine months of 2015, compared with 36.4% in the third quarter and 36.5% in the nine months 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 36.5%. 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 February 28, 2015, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2014.

Business Acquisitions

During the third quarter of 2015, we acquired two businesses, expanding our portfolio in e-commerce and supply chain solutions. On January 30, 2015, we acquired GENCO Distribution System, Inc. (“GENCO”), one of the largest third-party logistics providers in North America, for $1.4 billion, which was funded using a portion of the proceeds from our January 2015 debt issuance. The financial results of this business are included in the FedEx Ground segment from the date of acquisition.

In addition, on December 16, 2014, FedEx acquired Bongo International, LLC (“Bongo”), a leader in cross-border enablement technologies and solutions, for $42 million in cash from operations. The financial results of this acquired business are included in the FedEx Express segment from the date of acquisition.

These acquisitions will allow us to enter new markets, as well as strengthen our current service offerings to existing customers. The financial results of these acquired businesses were immaterial to our results for the third quarter of 2015. See Note 1 of the accompanying unaudited financial statements for further discussion of these acquisitions.

Outlook

We expect revenue and earnings growth to continue into the fourth quarter of 2015, driven by ongoing improvements in the results of all of our transportation segments. We expect continued moderate global economic growth to 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 fourth quarter of 2015 will also benefit from lower pension expense due to strong asset returns in 2014; however, results for 2015 will be constrained by higher accruals for our incentive compensation programs to the extent our financial performance exceeds our business plan objectives. Our expectations for earnings growth in the fourth quarter of 2015 are dependent on key external factors, including fuel prices and the pace of improvement in the global economy.

 

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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.

On March 16, 2015, we announced that our FedEx SmartPost business will be merged into FedEx Ground effective September 1, 2015. The FedEx SmartPost service remains an important component of our service offerings and this internal structural change will enhance our ability to leverage the strengths of both the FedEx Ground and FedEx SmartPost networks to maximize operational efficiencies and will provide greater flexibility to meeting the needs of our e-commerce customers. There will be no personnel reductions associated with this merger and the estimated cost of the merger activities is immaterial to our results.

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

RECENT ACCOUNTING GUIDANCE

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

We believe that no other new accounting guidance was adopted or issued during the nine 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, 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)

Bongo (cross-border enablement technology and solutions)
FedEx Ground Segment

FedEx Ground (small-package ground delivery)

FedEx SmartPost (small-parcel consolidator)
GENCO (third-party logistics)
FedEx Freight Segment

FedEx Freight (LTL freight transportation)

FedEx Custom Critical (time-critical transportation)
FedEx Services Segment

FedEx Services (sales, marketing, information technology, communications 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 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.

 

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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.

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 nine months 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.

See Note 6 of the accompanying unaudited condensed consolidated financial statements and our Annual Report for more information.

 

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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. On December 16, 2014, we acquired Bongo, a leader in cross-border enablement technologies. Bongo’s financial results are included in the following table from the date of acquisition. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the periods ended February 28:

 

  Three Months Ended   Percent   Nine Months Ended   Percent  
  2015   2014   Change   2015   2014   Change  

Revenues:

Package:

U.S. overnight box

$ 1,653   $ 1,643     1    $ 5,040   $ 4,852     4   

U.S. overnight envelope

  392     393          1,207     1,210       

U.S. deferred

  895     869     3      2,524     2,369     7   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total U.S. domestic package revenue

  2,940     2,905     1      8,771     8,431     4   
  

 

 

   

 

 

     

 

 

   

 

 

   

International priority

  1,463     1,542     (5   4,742     4,760       

International economy

  560     540     4      1,729     1,639     5   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total international export package revenue

  2,023     2,082     (3   6,471     6,399     1   
  

 

 

   

 

 

     

 

 

   

 

 

   

International domestic(1)

  328     347     (5   1,082     1,077       
  

 

 

   

 

 

     

 

 

   

 

 

   

Total package revenue

  5,291     5,334     (1   16,324     15,907     3   

Freight:

U.S.

  580     577     1      1,745     1,786     (2

International priority

  375     379     (1   1,182     1,184       

International airfreight

  45     48     (6   133     157     (15
  

 

 

   

 

 

     

 

 

   

 

 

   

Total freight revenue

  1,000     1,004          3,060     3,127     (2

Other(2)

  365     336     9      1,158     1,089     6   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

  6,656     6,674          20,542     20,123     2   

Operating expenses:

Salaries and employee benefits

  2,580     2,509     3      7,596     7,418     2   

Purchased transportation

  614     608     1      1,942     1,876     4   

Rentals and landing fees

  436     432     1      1,284     1,273     1   

Depreciation and amortization

  364     374     (3   1,106     1,116     (1

Fuel

  697     1,010     (31   2,573     2,952     (13

Maintenance and repairs

  324     273     19      1,060     888     19   

Intercompany charges(3)

  461     474     (3   1,363     1,413     (4

Other

  796     826     (4   2,381     2,389       
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses(3)

  6,272     6,506     (4   19,305     19,325       
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income(3)

$ 384   $ 168     129    $ 1,237   $ 798     55   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin(3)

  5.8   2.5   330 bp    6.0   4.0   200 bp 

 

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  Percent of Revenue  
  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

Operating expenses:

Salaries and employee benefits

  38.8   37.6   37.0   36.9

Purchased transportation

  9.2     9.1     9.5     9.3  

Rentals and landing fees

  6.5     6.5     6.2     6.3  

Depreciation and amortization

  5.5     5.6     5.4     5.5  

Fuel

  10.5     15.1     12.5     14.7  

Maintenance and repairs

  4.9     4.1     5.2     4.4  

Intercompany charges(3)

  6.9     7.1     6.6     7.0  

Other

  11.9     12.4     11.6     11.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses(3)

  94.2     97.5     94.0     96.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin(3)

  5.8   2.5   6.0   4.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  International domestic revenues represent our international intra-country express operations.
(2)  Includes FedEx Trade Networks, FedEx SupplyChain Systems and Bongo.
(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 February 28:

 

  Three Months Ended   Percent   Nine Months Ended   Percent  
  2015   2014   Change   2015   2014   Change  

Package Statistics(1)

Average daily package volume (ADV):

U.S. overnight box

  1,258     1,202     5     1,243     1,153     8  

U.S. overnight envelope

  516     515         521     538     (3

U.S. deferred

  1,024     984     4     928     871     7  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total U.S. domestic ADV

  2,798     2,701     4     2,692     2,562     5  
  

 

 

    

 

 

      

 

 

    

 

 

    

International priority

  398     399         410     409      

International economy

  175     168     4     175     168     4  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total international export ADV

  573     567     1     585     577     1  
  

 

 

    

 

 

      

 

 

    

 

 

    

International domestic(2)

  831     780     7     854     822     4  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total ADV

  4,202     4,048     4     4,131     3,961     4  
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue per package (yield):

U.S. overnight box

$ 20.85   $ 21.70     (4 $ 21.34   $ 22.15     (4

U.S. overnight envelope

  12.07     12.09         12.18     11.84     3  

U.S. deferred

  13.88     14.01     (1   14.32     14.31      

U.S. domestic composite

  16.68     17.07     (2   17.15     17.32     (1

International priority

  58.40     61.38     (5   60.79     61.30     (1

International economy

  50.60     51.01     (1   52.03     51.24     2  

International export composite

  56.01     58.30     (4   58.17     58.37      

International domestic(2)

  6.28     7.05     (11   6.67     6.90     (3

Composite package yield

  19.99     20.91     (4   20.80     21.14     (2

Freight Statistics(1)

Average daily freight pounds:

U.S.

  8,145     8,263     (1   7,831     7,850      

International priority

  2,823     2,823         2,866     2,917     (2

International airfreight

  718     757     (5   673     839     (20
  

 

 

    

 

 

      

 

 

    

 

 

    

Total average daily freight pounds

    11,686       11,843     (1     11,370       11,606     (2
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue per pound (yield):

U.S.

$ 1.13   $ 1.11     2   $ 1.17   $ 1.20     (3

International priority

  2.11     2.13     (1   2.17     2.14     1  

International airfreight

  1.00     1.00         1.04     0.98     6  

Composite freight yield

  1.36     1.35     1     1.42     1.42      

 

(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 revenues declined slightly in the third quarter due to the negative impact of lower fuel surcharges and unfavorable exchange rates. These negative impacts were partially offset by increases in U.S. and international export base yields and volumes. Revenues during the nine months of 2015 increased 2% due to U.S. and international export base yield and volume growth, which were partially offset by lower fuel surcharges and unfavorable exchange rates.

U.S. domestic yields decreased in the third quarter and nine months of 2015 due to the negative impact of lower fuel surcharges, which were partially offset by higher rates. The decrease in international export yields in the third quarter and nine months of 2015 was due to the negative impact of lower fuel surcharges and exchange rates and was partially offset by higher rates and weight per package. U.S. domestic volumes increased 4% in the third quarter and 5% in the nine months of 2015 driven by both our overnight and deferred service offerings.

 

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Our U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the periods ended February 28:

 

  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

U.S. Domestic and Outbound Fuel Surcharge:

Low

  3.50   9.00   3.50   8.00

High

  6.00     10.00     9.50     10.50  

Weighted-average

  4.80     9.49     7.62     9.34  

International Fuel Surcharges:

Low

  0.50     13.00     0.50     12.00  

High

  15.00     18.50     18.00     19.00  

Weighted-average

  11.57     16.31     14.49     16.16  

On February 2, 2015, FedEx Express updated the tables used to determine fuel surcharges. 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.

FedEx Express Segment Operating Income

FedEx Express operating income and operating margin increased in the third quarter and nine months of 2015, driven by U.S. domestic and international export base yield and volume growth, the positive net impact of fuel, benefits associated with our profit improvement program, a lower year-over-year impact from severe winter weather and reduced pension expense. These factors were partially offset by higher maintenance expense and higher incentive compensation accruals.

Within operating expenses, salaries and employee benefits increased 3% in the third quarter and 2% in the nine months of 2015 due to additional staffing to support volume growth and higher incentive compensation accruals, partially offset by the benefits from our voluntary employee severance program and lower pension expense. Maintenance and repairs expense increased 19% in the third quarter and nine months of 2015 primarily due to the timing of aircraft maintenance events. Higher utilization of third-party transportation providers and costs associated with the growth of our freight-forwarding business at FedEx Trade Networks drove an increase in purchased transportation costs of 1% in the third quarter and 4% in the nine months of 2015.

Fuel expense decreased 31% in the third quarter and 13% in the nine months of 2015 due to lower aircraft fuel prices. The net impact of fuel had a significant benefit in the third quarter and nine months of 2015 to operating income. See the “Fuel” section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results.

 

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FEDEX GROUND SEGMENT

FedEx Ground service offerings include day-certain service delivery to businesses in the United States and Canada and to nearly 100% of U.S. residences. FedEx SmartPost consolidates high-volume, low-weight, less time-sensitive business-to-consumer packages and utilizes the United States Postal Service (“USPS”) for final delivery. On January 30, 2015, we acquired GENCO, one of the largest third-party logistics providers in North America. GENCO’s financial results are included in the following table from the date of acquisition, which has impacted the year-over-year comparability of revenue and operating expenses. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the periods ended February 28:

 

  Three Months Ended   Percent   Nine Months Ended   Percent  
  2015   2014   Change   2015   2014   Change  

Revenues:

FedEx Ground

$ 3,021    $ 2,751      10    $ 8,569    $ 7,858      9   

FedEx SmartPost

  285      280      2      760      752      1   

GENCO

  87           NM      87           NM   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

  3,393      3,031      12      9,416      8,610      9   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating expenses:

Salaries and employee benefits

  565      460      23      1,498      1,319      14   

Purchased transportation

  1,348      1,253      8      3,765      3,476      8   

Rentals

  126      105      20      349      299      17   

Depreciation and amortization

  136      121      12      381      350      9   

Fuel

  3      7      (57   9      14      (36

Maintenance and repairs

  61      57      7      174      166      5   

Intercompany charges(1)

  281      274      3      834      821      2   

Other

  315      264      19      838      753      11   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses(1)

  2,835      2,541      12      7,848      7,198      9   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income(1)

$ 558    $ 490      14    $ 1,568    $ 1,412      11   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin(1)

  16.4   16.2   20 bp    16.7   16.4   30 bp 

Average daily package volume

FedEx Ground

  5,136      4,817      7      4,851      4,584      6   

FedEx SmartPost

  2,360      2,529      (7   2,117      2,276      (7

Revenue per package (yield)

FedEx Ground

$ 9.32    $ 9.04      3    $ 9.28    $ 9.00      3   

FedEx SmartPost

$ 1.97    $ 1.82      8    $ 1.91    $ 1.76      9   

 

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Table of Contents
  Percent of Revenue  
  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

Operating expenses:

Salaries and employee benefits

  16.7   15.2   15.9   15.3

Purchased transportation

  39.7      41.3      40.0      40.4   

Rentals

  3.7      3.5      3.7      3.5   

Depreciation and amortization

  4.0      4.0      4.0      4.1   

Fuel

  0.1      0.2      0.1      0.2   

Maintenance and repairs

  1.8      1.9      1.8      1.9   

Intercompany charges(1)

  8.3      9.0      8.9      9.5   

Other

  9.3      8.7      8.9      8.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses(1)

  83.6      83.8      83.3      83.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin(1)

  16.4   16.2   16.7   16.4
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 12% in the third quarter and 9% in the nine months of 2015 due to volume and yield growth at FedEx Ground and yield growth at FedEx SmartPost, partially offset by lower volumes at FedEx SmartPost.

Average daily volume at FedEx Ground increased 7% in the third quarter and 6% in the nine months of 2015 due to continued growth in our commercial business and FedEx Home Delivery service. Yield increased 3% in the third quarter and nine months of 2015 primarily due to rate increases and higher dimensional weight charges.

FedEx SmartPost average daily volume decreased 7% in the third quarter and nine months of 2015 due to the reduction in volume from a major customer. FedEx SmartPost yield increased 8% in the third quarter and 9% in the nine months of 2015 due to rate increases and improved customer mix, partially offset by higher postage costs. FedEx SmartPost yield represents the amount charged to customers net of postage paid to the USPS.

The FedEx Ground fuel surcharge is based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel, as published by the Department of Energy. Our fuel surcharge ranged as follows for the periods ended February 28:

 

  Three Months Ended   Nine Months Ended  
  2015   2014   2015   2014  

Low

  5.50   6.50   5.50   6.50

High

  6.00     6.50     7.00     7.00  

Weighted-average

  5.85     6.50     6.38     6.61  

On February 2, 2015, FedEx Ground updated the tables used to determine fuel surcharges. On September 16, 2014, FedEx Ground and FedEx Home Delivery announced a 4.9% increase in average list price effective January 5, 2015. In addition, as announced in May 2014, FedEx Ground began applying dimensional weight pricing to all shipments effective January 5, 2015. In January 2014, FedEx Ground and FedEx Home Delivery implemented a 4.9% increase in average list price. FedEx SmartPost rates also increased.

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 14% in the third quarter and 11% in the nine months of 2015 driven by higher revenue per package and volumes, the positive net impact of fuel, and a lower year-over-year impact from severe winter weather. The increase to operating income was partially offset by higher network expansion costs, as we continue to invest heavily in our FedEx Ground and FedEx SmartPost businesses.

 

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The inclusion of GENCO in the FedEx Ground segment results has impacted the year-over-year comparability of all operating expenses. Along with incremental costs from GENCO, purchased transportation expense increased 8% in the third quarter and nine months of 2015 due to volume growth and higher service provider rates. Additional staffing to support volume growth drove an increase in salaries and employee benefits expense of 23% in the third quarter and 14% in the nine months of 2015. Other expense increased 19% in the third quarter and 11% in the nine months of 2015 primarily due to self-insurance costs and real estate taxes. Network expansion caused rentals expense to increase 20% in the third quarter and 17% in the nine months of 2015. Depreciation and amortization expense increased 12% in the third quarter and 9% in the nine months of 2015 due to network expansion and trailer purchases.

Independent Contractor Model

FedEx Ground is involved in numerous lawsuits and other proceedings (such as state tax or other administrative challenges) where the classification of its independent contractors is at issue. We are vigorously defending ourselves in all of these proceedings and continue to believe that FedEx Ground’s owner-operators are properly classified as independent contractors and not employees of FedEx Ground. For a description of these proceedings, see Note 8 of the accompanying unaudited condensed consolidated financial statements.

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

 

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FEDEX FREIGHT SEGMENT

FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income (dollars in millions), operating margin and selected statistics for the periods ended February 28:

 

  Three Months Ended   Percent   Nine Months Ended   Percent  
  2015   2014   Change   2015   2014   Change  

Revenues

$ 1,428    $ 1,347      6    $ 4,622    $ 4,205      10   

Operating expenses:

Salaries and employee benefits

  663      598      11      2,005      1,807      11   

Purchased transportation

  235      231      2      792      715      11   

Rentals

  33      31      6      96      94      2   

Depreciation and amortization

  54      58      (7   170      172      (1

Fuel

  109      146      (25   399      436      (8

Maintenance and repairs

  49      42      17      148      134      10   

Intercompany charges(1)

  108      105      3      329      329        

Other

  109      101      8      335      301      11   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses(1)

  1,360      1,312      4      4,274      3,988      7   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating income (1)

$ 68    $ 35      94    $ 348    $ 217      60   
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin(1)

  4.8   2.6   220 bp    7.5   5.2   230 bp 

Average daily LTL shipments (in thousands)

Priority

  62.0      59.5      4      67.1      61.5      9   

Economy

  26.8      26.3      2      28.4      27.3      4   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total average daily LTL shipments

  88.8      85.8      3      95.5      88.8      8   
  

 

 

   

 

 

     

 

 

   

 

 

   

Weight per LTL shipment (lbs)

Priority

  1,287      1,280      1      1,262      1,255      1   

Economy

  1,007      1,002           1,010      995      2   

Composite weight per LTL shipment

  1,203      1,195      1      1,187      1,175      1   

LTL revenue per shipment

Priority

$ 231.92    $ 224.63      3    $ 229.43    $ 222.99      3   

Economy

  265.66      257.74      3      265.51      257.10      3   

Composite LTL revenue per shipment

$ 242.52    $ 235.14      3    $ 240.30    $ 233.61      3   

LTL yield (revenue per hundredweight)

Priority

$ 18.02    $ 17.54      3    $ 18.18    $ 17.77      2   

Economy

  26.38      25.71      3      26.29      25.83      2   

Composite LTL yield

$ 20.17    $ 19.67      3    $ 20.24    $ 19.88      2   

 

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  Percent of Revenue  
  Three Months Ended