Item 2. Managements Discussion and Analysis of Results of Operations
and Financial Condition
GENERAL
The
following Managements Discussion and Analysis of Results of Operations and Financial Condition (MD&A) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash
obligations and critical accounting estimates of FedEx Corporation (FedEx). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form
10-K for the year ended May 31, 2013 (Annual Report). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a
detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.
We provide a broad
portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are Federal Express
Corporation (FedEx Express), the worlds largest express transportation company; FedEx Ground Package System, Inc. (FedEx Ground), a leading North American provider of small-package ground delivery services; and FedEx
Freight, Inc. (FedEx Freight), a leading North American provider of less-than-truckload (LTL) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (FedEx
Services), form the core of our reportable segments.
Our FedEx Services segment provides sales, marketing, information technology, communications
and certain back-office support to our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc.
(FedEx Office) and provides customer service, technical support and billing and collection services through FedEx TechConnect, Inc. (FedEx TechConnect). See Reportable Segments for further discussion. Additional
information on our businesses can also be found in our Annual Report.
The key indicators necessary to understand our operating results include:
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the overall customer demand for our various services based on macro-economic factors and the global economy;
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the volumes of transportation services provided through our networks, primarily measured by our average daily volume and shipment weight;
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the mix of services purchased by our customers;
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the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per hundredweight for LTL freight shipments);
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our ability to manage our cost structure (capital expenditures and operating expenses) to match shifting volume levels; and
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the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges.
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The majority of our operating expenses are directly impacted by revenue and volume levels. Accordingly, we expect these operating expenses to fluctuate on a
year-over-year basis consistent with the change in revenues and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends impacting expenses other than changes in revenues and volume. The line item
Other operating expenses predominantly includes costs associated with outside service contracts (such as security, facility services and cargo handling), insurance, uniforms, professional fees and advertising.
- 27 -
Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2014 or ended
May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following table compares summary operating results (dollars in millions, except per share amounts) for the periods ended February 28:
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Three Months Ended
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Percent
Change
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Nine Months Ended
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|
Percent
Change
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2014
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2013
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2014
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2013
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Revenues
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$
|
11,301
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|
$
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10,953
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|
|
3
|
|
|
$
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33,728
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|
$
|
32,852
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|
|
3
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|
|
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|
Operating income
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641
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|
589
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9
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2,263
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|
2,049
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|
10
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Operating margin
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|
5.7
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%
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|
5.4
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%
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|
|
30
|
bp
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|
|
6.7
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%
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|
6.2
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%
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|
|
50
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bp
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Net income
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$
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378
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$
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361
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5
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$
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1,367
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|
$
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1,258
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9
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Diluted earnings per share
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$
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1.23
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$
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1.13
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9
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$
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4.34
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$
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3.97
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9
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The following table shows changes in revenues and operating income by reportable segment for the periods ended
February 28, 2014 compared to February 28, 2013 (dollars in millions):
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Change in
Revenues
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Percent Change in
Revenue
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Change in
Operating Income
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Percent Change in
Operating Income
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Three
Months
Ended
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Nine
Months
Ended
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|
Three
Months
Ended
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|
|
Nine
Months
Ended
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|
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Three
Months
Ended
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Nine
Months
Ended
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Three
Months
Ended
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Nine
Months
Ended
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FedEx Express segment
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$
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(30
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)
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$
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(71
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)
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$
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17
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$
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142
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14
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26
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|
FedEx Ground segment
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284
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|
808
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|
10
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|
10
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|
10
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45
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2
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|
3
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FedEx Freight segment
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110
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192
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9
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5
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25
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27
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NM
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16
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FedEx Services segment
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(12
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)
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(40
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)
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(3
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)
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(3
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)
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Other and eliminations
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(4
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)
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(13
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)
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NM
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NM
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$
|
348
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$
|
876
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|
3
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|
3
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$
|
52
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$
|
214
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|
9
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|
10
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Overview
While
our revenues and earnings increased in the third quarter of 2014, our results include a significant negative impact from severe winter weather across all of our transportation segments. Winter weather often impacts our third quarter results, but the
impact of multiple severe storms during the third quarter of 2014 was more pronounced, reducing earnings by an estimated $125 million year over year. Our results for the third quarter also reflect a negative net impact of fuel (described further
below). These headwinds were partially offset by the benefit across all of our transportation segments of one additional operating day. Our results for the third quarter also include benefits from reduced variable incentive compensation, lower
pension expense and benefits from the voluntary employee severance program we announced in 2013. In addition, our operating results comparisons to prior year were positively impacted by $47 million of business realignment costs in the prior year.
- 28 -
For the nine months of 2014, our revenues and earnings increased due to improved performance of all our
transportation segments despite the significant negative net impact of fuel and severe winter weather. Our nine months earnings benefited from lower pension expense and lower maintenance expense due to our profit improvement initiatives, including
our fleet modernization programs. Additionally, our nine months results reflect benefits from the voluntary employee severance program and reduced variable incentive compensation.
In the second quarter of 2014, we announced the authorization of a new share repurchase program of up to 32 million shares of common stock. In the third
quarter of 2014, we entered into accelerated share repurchase (ASR) agreements with two banks to repurchase an aggregate of $2.0 billion of our common stock and made additional open market purchases of our common stock totaling $765
million. Share repurchases through the end of the third quarter had a minimal positive impact on earnings per diluted share. See additional information on the share repurchase program in Note 1 of the accompanying unaudited condensed consolidated
financial statements.
- 29 -
The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands)
over the five most recent quarters:
(1)
|
International domestic average daily package volume represents our international intra-country express operations.
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- 30 -
The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends over the five
most recent quarters:
Revenue
Revenues increased 3% in the third quarter and nine months of 2014, primarily due to higher volumes at FedEx Ground and FedEx Freight and yield increases at
FedEx Ground. At our FedEx Ground segment, revenues increased 10% in the third quarter and nine months of 2014 due to higher volume from market share gains and increased yields as a result of rate increases. Revenues at FedEx Freight increased 9%
during the third quarter and 5% during the nine months of 2014 primarily due to higher average daily LTL shipments and weight per LTL shipment. At FedEx Express, revenues were flat in the third quarter of 2014 due to lower freight revenues and lower
fuel surcharges, partially offset by revenue growth from stronger base U.S. and international export package business. For the nine months of 2014, FedEx Express revenues were flat as lower fuel surcharges and lower freight revenue were offset by
revenue growth due to stronger base U.S. and international export package business and our freight-forwarding business at FedEx Trade Networks. Revenues at all of our transportation segments in the third quarter and nine months of 2014 were
negatively impacted by unusually severe winter weather while revenues for the third quarter benefited from one additional operating day.
- 31 -
Operating Income
The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended February 28:
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Three Months Ended
|
|
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Nine Months Ended
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2014
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2013
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2014
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2013
|
|
Operating expenses:
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|
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Salaries and employee benefits
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|
$
|
4,167
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|
|
$
|
4,150
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|
|
$
|
12,392
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|
|
$
|
12,378
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|
Purchased transportation
|
|
|
2,063
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|
|
|
1,871
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|
|
|
5,982
|
|
|
|
5,411
|
|
Rentals and landing fees
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|
|
662
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|
|
|
640
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|
|
|
1,950
|
|
|
|
1,888
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|
Depreciation and amortization
|
|
|
652
|
|
|
|
599
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|
|
|
1,938
|
|
|
|
1,764
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|
Fuel
|
|
|
1,163
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|
|
|
1,215
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|
|
|
3,403
|
|
|
|
3,588
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|
Maintenance and repairs
|
|
|
438
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|
|
|
424
|
|
|
|
1,397
|
|
|
|
1,477
|
|
Business realignment costs
(1)
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
64
|
|
Other
|
|
|
1,515
|
|
|
|
1,418
|
|
|
|
4,403
|
|
|
|
4,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
10,660
|
|
|
$
|
10,364
|
|
|
$
|
31,465
|
|
|
$
|
30,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
36.9
|
%
|
|
|
37.9
|
%
|
|
|
36.7
|
%
|
|
|
37.7
|
%
|
Purchased transportation
|
|
|
18.2
|
|
|
|
17.1
|
|
|
|
17.7
|
|
|
|
16.5
|
|
Rentals and landing fees
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
5.7
|
|
Depreciation and amortization
|
|
|
5.8
|
|
|
|
5.5
|
|
|
|
5.8
|
|
|
|
5.4
|
|
Fuel
|
|
|
10.3
|
|
|
|
11.1
|
|
|
|
10.1
|
|
|
|
10.9
|
|
Maintenance and repairs
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
4.1
|
|
|
|
4.5
|
|
Business realignment costs
(1)
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
0.2
|
|
Other
|
|
|
13.4
|
|
|
|
12.9
|
|
|
|
13.1
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
94.3
|
|
|
|
94.6
|
|
|
|
93.3
|
|
|
|
93.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
5.7
|
%
|
|
|
5.4
|
%
|
|
|
6.7
|
%
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes predominantly severance costs associated with our voluntary employee buyout program.
|
Operating
income increased in the third quarter of 2014 as a result of improved performance at all our transportation segments. Operating income increased for the nine months of 2014 primarily as a result of improved profitability at FedEx Express, higher
volumes and increased yields at FedEx Ground and improved performance at FedEx Freight. Operating income in the third quarter and nine months of 2014 included a significant negative impact of both unusually severe winter weather and the net impact
of fuel. Our results for all our transportation segments in the third quarter of 2014 compared to 2013 were positively impacted by one additional operating day and $47 million of business realignment costs incurred in the third quarter of 2013.
Purchased transportation costs increased 10% in the third quarter and 11% in the nine months of 2014 due to volume growth at FedEx Ground, higher utilization
of third-party transportation providers at FedEx Freight and FedEx Express and, for the nine months of 2014, costs associated with prior year international acquisitions at FedEx Express and the expansion of our freight-forwarding business at FedEx
Trade Networks. Depreciation and amortization expense increased 9% in the third quarter and 10% in the nine months of 2014 primarily due to accelerated depreciation on certain aircraft scheduled for retirement, and aircraft recently placed in
service at FedEx Express. Salaries and employee benefits expense in the third quarter and in the nine months of 2014 increased only
- 32 -
slightly due to the benefits from lower pension expense, benefits from our voluntary employee buyout program, the delayed timing or absence of merit increases for many of our employees and
reduced variable incentive compensation. Maintenance and repairs expense increased 3% in the third quarter but decreased 5% in the nine months of 2014 due to the positive impact of continued modernization of our aircraft fleet, offset by the impact
of certain maintenance events during the third quarter.
The following graph for our transportation segments shows our average cost of jet and vehicle
fuel per gallon for the five most recent quarters:
Fuel costs decreased 4% in the third quarter and 5% in the nine months of 2014 due to lower average price per gallon of jet
fuel and lower aircraft fuel usage. Our results are impacted by the timing lag which exists between when fuel prices change and when indexed fuel surcharges automatically adjust, which we describe in the discussion of our results as the net impact
of fuel. Based on a static analysis of the impact to operating income of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a significant negative impact on operating income in the third quarter and
nine months of 2014.
Our analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express
and FedEx Ground services. However, this analysis does not consider the negative effects that fuel surcharge levels may have on our business, including reduced demand and shifts by our customers to lower-yielding services. While fluctuations in fuel
surcharge rates can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and yield. Additional components include the mix of services sold, the
base price and extra service charges we obtain for these services and the level of pricing discounts offered. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the
comparative fuel surcharge rates in effect for the third quarter and the nine months of 2014 and 2013 in the accompanying discussions of each of our transportation segments.
Income Taxes
Our effective tax rate was 36.4%
for the third quarter and 36.5% for the nine months of 2014, compared with 36.0% for the third quarter and 36.6% for the nine months of 2013. For 2014, we expect an effective tax rate between 36.5% and 37.0%. The actual rate, however, will
depend on a number of factors, including the amount and source of operating income.
We are subject to taxation in the United States and various U.S.
state, local and foreign jurisdictions. Substantially all U.S. federal income tax matters through fiscal year 2009 are concluded, and we are currently under examination by the Internal Revenue Service for the 2010 and 2011 tax years. It is
reasonably possible that certain income tax return proceedings will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be
- 33 -
material to our consolidated financial statements. As of February 28, 2014, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2013.
Business Acquisitions
As discussed in our Annual
Report, on June 20, 2013, we signed agreements to acquire the businesses operated by our current service provider Supaswift (Pty) Ltd. in five countries in Southern Africa. In addition, on September 2, 2013, we entered into an agreement to
acquire Supaswifts business in two additional countries. This acquisition will be funded with cash from operations and is expected to be completed in the fourth quarter of 2014, subject to customary closing conditions. The financial results of
the acquired businesses will be included in the FedEx Express segment from the date of acquisition and will be immaterial to our 2014 results.
Outlook
We expect earnings growth to continue in
the fourth quarter of 2014, driven by ongoing improvements in the results of all of our transportation segments. However, our expected results for the fourth quarter of 2014 will continue to be constrained by moderate growth in the global economy
and continued challenges from the demand shift trend from our priority international services to our economy international services at FedEx Express.
As
of February 28, 2014, approximately 75% of the 3,600 employees accepting voluntary cash buyouts vacated their positions. The remaining 25% will depart by May 31, 2014. Our third quarter results include a benefit from the voluntary
severance program and additional benefits realized from our voluntary severance program will continue as the fiscal year progresses and the remaining scheduled employee departures occur.
During the nine months of 2014, we continued to execute on the profit improvement programs we announced in 2013. These activities are focused primarily at
FedEx Express and FedEx Services. As previously noted, the majority of the benefits from our profit improvement programs will not occur until 2015 and 2016. Our ability to achieve the profit improvement target and other benefits from these programs
is dependent upon a number of factors, including the health of the global economy and future customer demand, particularly for our priority services.
Other Outlook Matters
. For details on key 2014 capital projects, refer to the Liquidity Outlook section of this MD&A.
Our outlook is dependent upon a stable pricing environment for fuel, as volatility in fuel prices impacts our fuel surcharge levels, fuel expense and demand
for our services. Historically, our fuel surcharges have largely offset incremental fuel costs; however, volatility in fuel costs may impact earnings because adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, the
trailing impact of adjustments to our fuel surcharges can significantly affect our earnings either positively or negatively in the short-term.
As
described in Note 8 of the accompanying unaudited condensed consolidated financial statements and the Independent Contractor Model section of our FedEx Ground segment MD&A, we are involved in a number of lawsuits and other
proceedings that challenge the status of FedEx Grounds owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its relationships with its owner-operators. The nature, timing and amount of any changes are
dependent on the outcome of numerous future events. We cannot reasonably estimate the potential impact of any such changes or a meaningful range of potential outcomes, although they could be material. However, we do not believe that any such changes
will impair our ability to operate and profitably grow our FedEx Ground business.
See Forward-Looking Statements for a discussion of these
and other potential risks and uncertainties that could materially affect our future performance.
- 34 -
RECENT ACCOUNTING GUIDANCE
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.
On June 1, 2013, we adopted the authoritative guidance issued by the Financial Accounting Standards Board requiring additional information about
reclassification adjustments out of accumulated other comprehensive income, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. We have
adopted this guidance by including expanded accumulated other comprehensive income disclosure requirements in Note 2 of our condensed consolidated financial statements.
While no other new accounting guidance was adopted or issued during the nine months of 2014 that is relevant to the readers of our financial statements, there
are numerous proposals under development which, if and when enacted, may have a significant impact on our financial reporting, as described in our Annual Report.
REPORTABLE SEGMENTS
FedEx Express, FedEx Ground
and FedEx Freight represent our major service lines and, along with FedEx Services, form the core of our reportable segments. Our reportable segments include the following businesses:
|
|
|
FedEx Express Segment
|
|
FedEx Express (express transportation)
|
|
|
FedEx Trade Networks (air and ocean freight forwarding and customs brokerage)
|
|
|
FedEx SupplyChain Systems (logistics services)
|
|
|
FedEx Ground Segment
|
|
FedEx Ground (small-package ground delivery)
|
|
|
FedEx SmartPost (small-parcel consolidator)
|
|
|
FedEx Freight Segment
|
|
FedEx Freight (LTL freight transportation)
|
|
|
FedEx Custom Critical (time-critical transportation)
|
|
|
FedEx Services Segment
|
|
FedEx Services (sales, marketing, information technology, communications and back-office functions)
|
|
|
FedEx TechConnect (customer service, technical support, billings and collections)
|
|
|
FedEx Office (document and business services and package acceptance)
|
FEDEX SERVICES SEGMENT
The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support
our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis by FedEx Express and reported in the
FedEx Express segment in their natural expense line items. The FedEx Services segment is discussed further in our Annual Report.
The FedEx Services
segment provides direct and indirect support to our transportation businesses, and we allocate all of the net operating costs of the FedEx Services segment (including the net operating results of FedEx Office) to reflect the full cost of operating
our transportation businesses in the results of those segments. Within the FedEx Services segment allocation, the net operating results of FedEx Office, which are an immaterial component of our allocations, are allocated to FedEx Express and FedEx
Ground. We review and evaluate the performance of our transportation segments based on operating income (inclusive of FedEx Services segment allocations). For the FedEx Services segment, performance is evaluated based on the impact of its total
allocated net operating costs on our transportation segments.
- 35 -
The operating expenses line item Intercompany charges on the accompanying unaudited financial
summaries of our transportation segments reflects the allocations from the FedEx Services segment to the respective transportation segments. The Intercompany charges caption also includes charges and credits for administrative services
provided between operating companies and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. The allocations of net
operating costs are based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the net cost of providing these functions and our allocation methodologies are refined as necessary to reflect
changes in our businesses.
OTHER INTERSEGMENT TRANSACTIONS
Certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such
services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues and expenses are
eliminated in our consolidated results and are not separately identified in the following segment information, because the amounts are not material.
- 36 -
FEDEX EXPRESS SEGMENT
FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority services, which
provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide time-definite delivery within five business days worldwide. The following table compares revenues, operating expenses,
operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the periods ended February 28:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Percent
|
|
|
Nine Months Ended
|
|
|
Percent
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Package:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box
|
|
$
|
1,643
|
|
|
$
|
1,609
|
|
|
|
2
|
|
|
$
|
4,852
|
|
|
$
|
4,822
|
|
|
|
1
|
|
U.S. overnight envelope
|
|
|
393
|
|
|
|
413
|
|
|
|
(5
|
)
|
|
|
1,210
|
|
|
|
1,252
|
|
|
|
(3
|
)
|
U.S. deferred
|
|
|
869
|
|
|
|
812
|
|
|
|
7
|
|
|
|
2,369
|
|
|
|
2,246
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. domestic package revenue
|
|
|
2,905
|
|
|
|
2,834
|
|
|
|
3
|
|
|
|
8,431
|
|
|
|
8,320
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International priority
|
|
|
1,542
|
|
|
|
1,567
|
|
|
|
(2
|
)
|
|
|
4,760
|
|
|
|
4,906
|
|
|
|
(3
|
)
|
International economy
|
|
|
540
|
|
|
|
491
|
|
|
|
10
|
|
|
|
1,639
|
|
|
|
1,492
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international export package revenue
|
|
|
2,082
|
|
|
|
2,058
|
|
|
|
1
|
|
|
|
6,399
|
|
|
|
6,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International domestic
(1)
|
|
|
347
|
|
|
|
342
|
|
|
|
1
|
|
|
|
1,077
|
|
|
|
1,035
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total package revenue
|
|
|
5,334
|
|
|
|
5,234
|
|
|
|
2
|
|
|
|
15,907
|
|
|
|
15,753
|
|
|
|
1
|
|
Freight:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
577
|
|
|
|
668
|
|
|
|
(14
|
)
|
|
|
1,786
|
|
|
|
1,923
|
|
|
|
(7
|
)
|
International priority
|
|
|
379
|
|
|
|
384
|
|
|
|
(1
|
)
|
|
|
1,184
|
|
|
|
1,269
|
|
|
|
(7
|
)
|
International airfreight
|
|
|
48
|
|
|
|
64
|
|
|
|
(25
|
)
|
|
|
157
|
|
|
|
215
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenue
|
|
|
1,004
|
|
|
|
1,116
|
|
|
|
(10
|
)
|
|
|
3,127
|
|
|
|
3,407
|
|
|
|
(8
|
)
|
Other
(2)
|
|
|
336
|
|
|
|
354
|
|
|
|
(5
|
)
|
|
|
1,089
|
|
|
|
1,034
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
6,674
|
|
|
|
6,704
|
|
|
|
|
|
|
|
20,123
|
|
|
|
20,194
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,509
|
|
|
|
2,539
|
|
|
|
(1
|
)
|
|
|
7,418
|
|
|
|
7,500
|
|
|
|
(1
|
)
|
Purchased transportation
|
|
|
608
|
|
|
|
583
|
|
|
|
4
|
|
|
|
1,876
|
|
|
|
1,728
|
|
|
|
9
|
|
Rentals and landing fees
|
|
|
432
|
|
|
|
429
|
|
|
|
1
|
|
|
|
1,273
|
|
|
|
1,262
|
|
|
|
1
|
|
Depreciation and amortization
|
|
|
374
|
|
|
|
334
|
|
|
|
12
|
|
|
|
1,116
|
|
|
|
993
|
|
|
|
12
|
|
Fuel
|
|
|
1,010
|
|
|
|
1,066
|
|
|
|
(5
|
)
|
|
|
2,952
|
|
|
|
3,126
|
|
|
|
(6
|
)
|
Maintenance and repairs
|
|
|
273
|
|
|
|
262
|
|
|
|
4
|
|
|
|
888
|
|
|
|
983
|
|
|
|
(10
|
)
|
Business realignment costs
(3)
|
|
|
|
|
|
|
13
|
|
|
|
NM
|
|
|
|
|
|
|
|
14
|
|
|
|
NM
|
|
Intercompany charges
(4)
|
|
|
507
|
|
|
|
548
|
|
|
|
(7
|
)
|
|
|
1,514
|
|
|
|
1,620
|
|
|
|
(7
|
)
|
Other
(5)
|
|
|
826
|
|
|
|
812
|
|
|
|
2
|
|
|
|
2,389
|
|
|
|
2,413
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,539
|
|
|
|
6,586
|
|
|
|
(1
|
)
|
|
|
19,426
|
|
|
|
19,639
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
135
|
|
|
$
|
118
|
|
|
|
14
|
|
|
$
|
697
|
|
|
$
|
555
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
2.0
|
%
|
|
|
1.8
|
%
|
|
|
20
|
bp
|
|
|
3.5
|
%
|
|
|
2.7
|
%
|
|
|
80
|
bp
|
- 37 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
37.6
|
%
|
|
|
37.8
|
%
|
|
|
36.9
|
%
|
|
|
37.1
|
%
|
Purchased transportation
|
|
|
9.1
|
|
|
|
8.7
|
|
|
|
9.3
|
|
|
|
8.6
|
|
Rentals and landing fees
|
|
|
6.5
|
|
|
|
6.4
|
|
|
|
6.3
|
|
|
|
6.2
|
|
Depreciation and amortization
|
|
|
5.6
|
|
|
|
5.0
|
|
|
|
5.5
|
|
|
|
4.9
|
|
Fuel
|
|
|
15.1
|
|
|
|
15.9
|
|
|
|
14.7
|
|
|
|
15.5
|
|
Maintenance and repairs
|
|
|
4.1
|
|
|
|
3.9
|
|
|
|
4.4
|
|
|
|
4.9
|
|
Business realignment costs
(3)
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.1
|
|
Intercompany charges
(4)
|
|
|
7.6
|
|
|
|
8.2
|
|
|
|
7.5
|
|
|
|
8.0
|
|
Other
(5)
|
|
|
12.4
|
|
|
|
12.1
|
|
|
|
11.9
|
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
98.0
|
|
|
|
98.2
|
|
|
|
96.5
|
|
|
|
97.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
2.0
|
%
|
|
|
1.8
|
%
|
|
|
3.5
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
International domestic revenues represent our international intra-country express operations, including acquisitions in Poland (June 2012), France (July 2012) and
Brazil (July 2012).
|
(2)
|
Includes FedEx Trade Networks and FedEx SupplyChain Systems.
|
(3)
|
Includes predominantly severance costs associated with our voluntary employee buyout program.
|
(4)
|
Includes allocations of $21 million in the third quarter and $31 million in the nine months of 2013 for business realignment costs.
|
(5)
|
Includes predominantly costs associated with outside service contracts (such as security, facility services and cargo handling), professional fees, uniforms,
insurance and advertising.
|
- 38 -
The following table compares selected statistics (in thousands, except yield amounts) for the periods ended
February 28:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Percent
|
|
|
Nine Months Ended
|
|
|
Percent
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Package Statistics
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily package volume (ADV):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box
|
|
|
1,202
|
|
|
|
1,176
|
|
|
|
2
|
|
|
|
1,153
|
|
|
|
1,135
|
|
|
|
2
|
|
U.S. overnight envelope
|
|
|
515
|
|
|
|
569
|
|
|
|
(9
|
)
|
|
|
538
|
|
|
|
570
|
|
|
|
(6
|
)
|
U.S. deferred
|
|
|
984
|
|
|
|
944
|
|
|
|
4
|
|
|
|
871
|
|
|
|
843
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. domestic ADV
|
|
|
2,701
|
|
|
|
2,689
|
|
|
|
|
|
|
|
2,562
|
|
|
|
2,548
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International priority
|
|
|
399
|
|
|
|
420
|
|
|
|
(5
|
)
|
|
|
409
|
|
|
|
424
|
|
|
|
(4
|
)
|
International economy
|
|
|
168
|
|
|
|
155
|
|
|
|
8
|
|
|
|
168
|
|
|
|
152
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international export ADV
|
|
|
567
|
|
|
|
575
|
|
|
|
(1
|
)
|
|
|
577
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International domestic
(2)
|
|
|
780
|
|
|
|
781
|
|
|
|
|
|
|
|
822
|
|
|
|
781
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ADV
|
|
|
4,048
|
|
|
|
4,045
|
|
|
|
|
|
|
|
3,961
|
|
|
|
3,905
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per package (yield):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box
|
|
$
|
21.70
|
|
|
$
|
22.08
|
|
|
|
(2
|
)
|
|
$
|
22.15
|
|
|
$
|
22.35
|
|
|
|
(1
|
)
|
U.S. overnight envelope
|
|
|
12.09
|
|
|
|
11.69
|
|
|
|
3
|
|
|
|
11.84
|
|
|
|
11.57
|
|
|
|
2
|
|
U.S. deferred
|
|
|
14.01
|
|
|
|
13.87
|
|
|
|
1
|
|
|
|
14.31
|
|
|
|
14.02
|
|
|
|
2
|
|
U.S. domestic composite
|
|
|
17.07
|
|
|
|
17.00
|
|
|
|
|
|
|
|
17.32
|
|
|
|
17.18
|
|
|
|
1
|
|
International priority
|
|
|
61.38
|
|
|
|
60.25
|
|
|
|
2
|
|
|
|
61.30
|
|
|
|
60.93
|
|
|
|
1
|
|
International economy
|
|
|
51.01
|
|
|
|
51.03
|
|
|
|
|
|
|
|
51.24
|
|
|
|
51.72
|
|
|
|
(1
|
)
|
International export composite
|
|
|
58.30
|
|
|
|
57.76
|
|
|
|
1
|
|
|
|
58.37
|
|
|
|
58.50
|
|
|
|
|
|
International domestic
(2)
|
|
|
7.05
|
|
|
|
7.06
|
|
|
|
|
|
|
|
6.90
|
|
|
|
6.98
|
|
|
|
(1
|
)
|
Composite package yield
|
|
|
20.91
|
|
|
|
20.87
|
|
|
|
|
|
|
|
21.14
|
|
|
|
21.23
|
|
|
|
|
|
Freight Statistics
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily freight pounds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
8,263
|
|
|
|
8,324
|
|
|
|
(1
|
)
|
|
|
7,850
|
|
|
|
7,697
|
|
|
|
2
|
|
International priority
|
|
|
2,823
|
|
|
|
2,894
|
|
|
|
(2
|
)
|
|
|
2,917
|
|
|
|
3,098
|
|
|
|
(6
|
)
|
International airfreight
|
|
|
757
|
|
|
|
1,035
|
|
|
|
(27
|
)
|
|
|
839
|
|
|
|
1,102
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average daily freight pounds
|
|
|
11,843
|
|
|
|
12,253
|
|
|
|
(3
|
)
|
|
|
11,606
|
|
|
|
11,897
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per pound (yield):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1.11
|
|
|
$
|
1.30
|
|
|
|
(15
|
)
|
|
$
|
1.20
|
|
|
$
|
1.31
|
|
|
|
(8
|
)
|
International priority
|
|
|
2.13
|
|
|
|
2.14
|
|
|
|
|
|
|
|
2.14
|
|
|
|
2.15
|
|
|
|
|
|
International airfreight
|
|
|
1.00
|
|
|
|
0.99
|
|
|
|
1
|
|
|
|
0.98
|
|
|
|
1.03
|
|
|
|
(5
|
)
|
Composite freight yield
|
|
|
1.35
|
|
|
|
1.47
|
|
|
|
(8
|
)
|
|
|
1.42
|
|
|
|
1.51
|
|
|
|
(6
|
)
|
(1)
|
Package and freight statistics include only the operations of FedEx Express.
|
(2)
|
International domestic statistics represent our international intra-country express operations, including acquisitions in Poland (June 2012), France (July 2012) and Brazil (July 2012).
|
FedEx Express Segment Revenues
FedEx Express
segment revenues were flat in the third quarter of 2014 due to the negative impact of lower freight revenue, lower fuel surcharges and unusually severe winter weather, offset by stronger base U.S. and international export package business and one
additional operating day. Revenue in the nine months of 2014 was flat due to the negative impact of lower fuel surcharges, lower freight revenue and unusually severe winter weather, offset by stronger base U.S. and international export package
business and the growth of our freight-forwarding business at FedEx Trade Networks. The demand shift from our priority international services to our economy international services continued to negatively impact our results.
Freight yields decreased 8% in the third quarter and 6% in the nine months of 2014 due to lower fuel surcharges and lower rates. Freight average daily pounds
decreased by 3% in the third quarter and 2% in the nine months of 2014 due to weakness in global economic conditions and capacity reductions. U.S. domestic yields remained flat for the third quarter and increased 1% for the nine months of 2014
primarily due to higher rates and weight per package, partially offset by lower fuel surcharges. International export package revenues increased 1% in the third quarter and remained flat in the nine months of 2014 as base business growth was offset
- 39 -
by lower fuel surcharges, unfavorable exchange rate impact, and the demand shift to our lower-yielding economy services. International priority yields increased 2% in the third quarter of 2014,
while international priority volumes declined 5%. Within this category, volumes for lower-yielding distribution services declined, while international priority volumes, excluding these distribution services, were flat. International domestic average
daily volumes remained flat in the third quarter and increased 5% in the nine months of 2014 due to international business acquisitions during the first quarter of 2013.
Our fuel surcharges are indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge and the international fuel
surcharges ranged as follows for the periods ended February 28:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
U.S. Domestic and Outbound Fuel Surcharge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
9.00
|
%
|
|
|
10.00
|
%
|
|
|
8.00
|
%
|
|
|
10.00
|
%
|
High
|
|
|
10.00
|
|
|
|
13.50
|
|
|
|
10.50
|
|
|
|
14.50
|
|
Weighted-average
|
|
|
9.49
|
|
|
|
11.29
|
|
|
|
9.34
|
|
|
|
12.14
|
|
|
|
|
|
|
International Fuel Surcharges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
13.00
|
|
|
|
14.00
|
|
|
|
12.00
|
|
|
|
12.00
|
|
High
|
|
|
18.50
|
|
|
|
19.00
|
|
|
|
19.00
|
|
|
|
20.50
|
|
Weighted-average
|
|
|
16.31
|
|
|
|
16.96
|
|
|
|
16.16
|
|
|
|
16.78
|
|
In January 2014, we implemented a 3.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S.
import services. In January 2013, we implemented a 5.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S. import services, while we lowered our fuel surcharge index by two percentage points.
FedEx Express Segment Operating Income
FedEx
Express operating income and operating margin increased in the third quarter of 2014 due to stronger U.S. and international export package business and lower pension expense, partially offset by lower freight revenues, an estimated $70 million year
over year negative impact of severe winter weather and higher depreciation expense. In addition, operating income in the third quarter of 2014 benefited from one additional operating day and from the inclusion of costs associated with our business
realignment program in the prior year results. Operating income in the third quarter of 2014 also reflects a significant negative net impact of fuel. Operating income in the nine months of 2014 improved due to stronger base U.S. and international
export package business, lower pension expense and lower maintenance expense, offset by higher depreciation expense, the significant negative net impact of fuel and severe winter weather.
In the third quarter and nine months of 2014, salaries and employee benefits included lower pension expense, the delayed timing or absence of annual merit
increases for many of our employees and benefits from our voluntary employee severance program. Intercompany charges decreased 7% in the third quarter and nine months of 2014 due to lower allocated sales and information technology costs, as well as
the inclusion in the prior year results of costs associated with the business realignment program at FedEx Services. Depreciation and amortization expense increased 12% during the third quarter and nine months of 2014 as a result of accelerated
depreciation due to the shortened life of certain aircraft scheduled for retirement, and aircraft recently placed into service. Purchased transportation costs increased 4% in the third quarter of 2014 due to higher utilization of third-party
transportation providers and increased 9% in the nine months of 2014 due to higher utilization of third-party transportation providers, prior year international acquisitions and costs associated with the expansion of our freight-forwarding business
at FedEx Trade Networks.
FedEx Express aircraft maintenance and repairs costs are largely driven by aircraft utilization and required periodic
maintenance events. When newer aircraft are introduced into our operating fleet, less maintenance costs are incurred. As a part of our fleet
- 40 -
modernization program, FedEx Express has retired older, less efficient aircraft prior to required periodic
maintenance events and has introduced newly manufactured aircraft into the fleet. FedEx Express aircraft maintenance and repairs costs increased 4% in the third quarter but decreased 10% in the nine months of 2014, as the benefits from the
fourth quarter of 2013 retirement of 10 aircraft and related engines due to elimination of maintenance events for certain of these engines were offset by the impact of certain maintenance events during the third quarter.
Fuel costs decreased 5% in the third quarter and 6% in the nine months of 2014 due to lower average price per gallon of jet fuel and lower aircraft fuel
usage. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a significant negative impact on operating income in the third quarter and nine months of
2014. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express services.
- 41 -
FEDEX GROUND SEGMENT
FedEx Ground service offerings include day-certain service delivery to businesses in the United States and Canada and to nearly 100% of U.S. residences. FedEx
SmartPost consolidates high-volume, low-weight, less time-sensitive business-to-consumer packages and utilizes the United States Postal Service (USPS) for final delivery. The following table compares revenues, operating expenses,
operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the periods ended February 28:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Percent
|
|
|
Nine Months Ended
|
|
|
Percent
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Ground
|
|
$
|
2,751
|
|
|
$
|
2,480
|
|
|
|
11
|
|
|
$
|
7,858
|
|
|
$
|
7,112
|
|
|
|
10
|
|
FedEx SmartPost
|
|
|
280
|
|
|
|
267
|
|
|
|
5
|
|
|
|
752
|
|
|
|
690
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,031
|
|
|
|
2,747
|
|
|
|
10
|
|
|
|
8,610
|
|
|
|
7,802
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
460
|
|
|
|
405
|
|
|
|
14
|
|
|
|
1,319
|
|
|
|
1,178
|
|
|
|
12
|
|
Purchased transportation
|
|
|
1,253
|
|
|
|
1,121
|
|
|
|
12
|
|
|
|
3,476
|
|
|
|
3,124
|
|
|
|
11
|
|
Rentals
|
|
|
105
|
|
|
|
86
|
|
|
|
22
|
|
|
|
299
|
|
|
|
245
|
|
|
|
22
|
|
Depreciation and amortization
|
|
|
121
|
|
|
|
111
|
|
|
|
9
|
|
|
|
350
|
|
|
|
324
|
|
|
|
8
|
|
Fuel
|
|
|
7
|
|
|
|
6
|
|
|
|
17
|
|
|
|
14
|
|
|
|
13
|
|
|
|
8
|
|
Maintenance and repairs
|
|
|
57
|
|
|
|
48
|
|
|
|
19
|
|
|
|
166
|
|
|
|
140
|
|
|
|
19
|
|
Intercompany charges
|
|
|
287
|
|
|
|
270
|
|
|
|
6
|
|
|
|
864
|
|
|
|
794
|
|
|
|
9
|
|
Other
(1)
|
|
|
264
|
|
|
|
233
|
|
|
|
13
|
|
|
|
753
|
|
|
|
660
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,554
|
|
|
|
2,280
|
|
|
|
12
|
|
|
|
7,241
|
|
|
|
6,478
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
477
|
|
|
$
|
467
|
|
|
|
2
|
|
|
$
|
1,369
|
|
|
$
|
1,324
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
15.7
|
%
|
|
|
17.0
|
%
|
|
|
(130
|
)bp
|
|
|
15.9
|
%
|
|
|
17.0
|
%
|
|
|
(110
|
)bp
|
|
|
|
|
|
|
|
Average daily package volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Ground
|
|
|
4,817
|
|
|
|
4,476
|
|
|
|
8
|
|
|
|
4,584
|
|
|
|
4,214
|
|
|
|
9
|
|
FedEx SmartPost
|
|
|
2,529
|
|
|
|
2,477
|
|
|
|
2
|
|
|
|
2,276
|
|
|
|
2,051
|
|
|
|
11
|
|
|
|
|
|
|
|
|
Revenue per package (yield)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Ground
|
|
$
|
9.04
|
|
|
$
|
8.92
|
|
|
|
1
|
|
|
$
|
9.00
|
|
|
$
|
8.86
|
|
|
|
2
|
|
FedEx SmartPost
|
|
$
|
1.82
|
|
|
$
|
1.77
|
|
|
|
3
|
|
|
$
|
1.76
|
|
|
$
|
1.78
|
|
|
|
(1
|
)
|
- 42 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
15.2
|
%
|
|
|
14.8
|
%
|
|
|
15.3
|
%
|
|
|
15.1
|
%
|
Purchased transportation
|
|
|
41.3
|
|
|
|
40.8
|
|
|
|
40.4
|
|
|
|
40.0
|
|
Rentals
|
|
|
3.5
|
|
|
|
3.1
|
|
|
|
3.5
|
|
|
|
3.1
|
|
Depreciation and amortization
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.1
|
|
|
|
4.1
|
|
Fuel
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Maintenance and repairs
|
|
|
1.9
|
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
1.8
|
|
Intercompany charges
|
|
|
9.5
|
|
|
|
9.8
|
|
|
|
10.0
|
|
|
|
10.2
|
|
Other
(1)
|
|
|
8.7
|
|
|
|
8.5
|
|
|
|
8.7
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
84.3
|
|
|
|
83.0
|
|
|
|
84.1
|
|
|
|
83.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
15.7
|
%
|
|
|
17.0
|
%
|
|
|
15.9
|
%
|
|
|
17.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes predominantly costs associated with outside service contracts (such as security and facility services), insurance and professional fees.
|
FedEx Ground Segment Revenues
FedEx Ground
segment revenues increased 10% in the third quarter and nine months of 2014 due to both volume and yield growth at FedEx Ground and volume growth at FedEx SmartPost. In addition, third quarter revenues were negatively impacted by unusually severe
winter weather partially offset by one additional operating day.
Average daily volume at FedEx Ground increased 8% during the third quarter and 9% in the
nine months of 2014 due to market share gains resulting from continued growth in our FedEx Home Delivery service and commercial business. FedEx Ground yield increased 1% during the third quarter and 2% during the nine months of 2014 primarily due to
rate increases and higher residential surcharges, partially offset by lower fuel surcharge revenue.
FedEx SmartPost volumes grew 2% during the third
quarter of 2014, primarily due to the delayed start of the holiday shipping season as Cyber Week occurred in December this year versus November last year, and 11% during the nine months of 2014, primarily due to growth in e-commerce. Yields at FedEx
SmartPost increased 3% during the third quarter of 2014 primarily due to rate increases and changes in service mix, partially offset by higher postage rates and lower fuel surcharges. Yields decreased 1% during the nine months of 2014 primarily due
to higher postage costs and lower fuel surcharges, partially offset by rate increases. FedEx SmartPost yield represents the amount charged to customers net of postage paid to the USPS.
The FedEx Ground fuel surcharge is based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel, as published by the
Department of Energy. Our fuel surcharge ranged as follows for the periods ended February 28:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Low
|
|
|
6.50
|
%
|
|
|
7.00
|
%
|
|
|
6.50
|
%
|
|
|
7.00
|
%
|
High
|
|
|
6.50
|
|
|
|
8.50
|
|
|
|
7.00
|
|
|
|
8.50
|
|
Weighted-average
|
|
|
6.50
|
|
|
|
7.56
|
|
|
|
6.61
|
|
|
|
7.75
|
|
- 43 -
In January 2014, FedEx Ground and FedEx Home Delivery implemented a 4.9% increase in average list price. FedEx
SmartPost rates also increased. In January 2013, FedEx Ground and FedEx Home Delivery implemented a 4.9% increase in average list price. The full average rate increase of 5.9% was partially offset by adjusting the fuel price threshold at which the
fuel surcharge begins, reducing the fuel surcharge by one percentage point. FedEx SmartPost rates also increased.
FedEx Ground Segment Operating
Income
FedEx Ground segment operating income increased 2% during the third quarter and 3% during the nine months of 2014 driven by higher volumes
and yields. The FedEx Ground segment operating income for the third quarter of 2014 includes an estimated $40 million year over year negative impact of unusually severe winter weather. In addition, the increase to operating income for the third
quarter and nine months of 2014 was partially offset by higher network expansion costs as we continue to invest heavily in the growing FedEx Ground and FedEx SmartPost businesses, the net negative impact of fuel and higher allocated fees. The FedEx
Ground segment results for the third quarter of 2014 also benefited from the delayed start of the holiday shipping season this fiscal year and one additional operating day. The decline in operating margin for the third quarter and nine months of
2014 is primarily attributable to the negative impact of unusually severe winter weather and the negative net impact of fuel.
Salaries and employee
benefits expense increased 14% during the third quarter and 12% during the nine months of 2014 primarily due to additional staffing to support volume growth. Rentals expense increased 22% in the third quarter and nine months of 2014 due to network
expansion. Intercompany charges increased 6% in the third quarter and 9% in the nine months of 2014 primarily due to higher allocated marketing, information technology and sales costs.
Independent Contractor Model
Although FedEx
Ground is involved in numerous lawsuits and other proceedings (such as state tax audits or other administrative challenges) where the classification of its independent contractors is at issue, a number of recent judicial decisions support our
classification, and we believe our relationship with the contractors is generally excellent. For a description of these proceedings, see Risk Factors and Note 8 of the accompanying unaudited condensed consolidated financial
statements.
For additional information on the FedEx Ground Independent Service Provider model, see Part 1, Item 1 of our Annual Report under the
caption Independent Contractor Model.
- 44 -
FEDEX FREIGHT SEGMENT
FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following table
compares revenues, operating expenses, operating expenses as a percent of revenue, operating income (dollars in millions), operating margin and selected statistics for the periods ended February 28:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Percent
|
|
|
Nine Months Ended
|
|
|
Percent
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Revenues
|
|
$
|
1,347
|
|
|
$
|
1,237
|
|
|
|
9
|
|
|
$
|
4,205
|
|
|
$
|
4,013
|
|
|
|
5
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
598
|
|
|
|
562
|
|
|
|
6
|
|
|
|
1,807
|
|
|
|
1,750
|
|
|
|
3
|
|
Purchased transportation
|
|
|
231
|
|
|
|
197
|
|
|
|
17
|
|
|
|
715
|
|
|
|
647
|
|
|
|
11
|
|
Rentals
|
|
|
31
|
|
|
|
30
|
|
|
|
3
|
|
|
|
94
|
|
|
|
88
|
|
|
|
7
|
|
Depreciation and amortization
|
|
|
58
|
|
|
|
55
|
|
|
|
5
|
|
|
|
172
|
|
|
|
160
|
|
|
|
8
|
|
Fuel
|
|
|
146
|
|
|
|
142
|
|
|
|
3
|
|
|
|
436
|
|
|
|
447
|
|
|
|
(2
|
)
|
Maintenance and repairs
|
|
|
42
|
|
|
|
45
|
|
|
|
(7
|
)
|
|
|
134
|
|
|
|
142
|
|
|
|
(6
|
)
|
Business realignment costs
|
|
|
|
|
|
|
1
|
|
|
|
NM
|
|
|
|
|
|
|
|
1
|
|
|
|
NM
|
|
Intercompany charges
|
|
|
111
|
|
|
|
109
|
|
|
|
2
|
|
|
|
349
|
|
|
|
330
|
|
|
|
6
|
|
Other
(1)
|
|
|
101
|
|
|
|
92
|
|
|
|
10
|
|
|
|
301
|
|
|
|
278
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,318
|
|
|
|
1,233
|
|
|
|
7
|
|
|
|
4,008
|
|
|
|
3,843
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
29
|
|
|
$
|
4
|
|
|
|
NM
|
|
|
$
|
197
|
|
|
$
|
170
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
2.2
|
%
|
|
|
0.3
|
%
|
|
|
190
|
bp
|
|
|
4.7
|
%
|
|
|
4.2
|
%
|
|
|
50
|
bp
|
|
|
|
|
|
|
|
Average daily LTL shipments (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priority
|
|
|
59.5
|
|
|
|
55.3
|
|
|
|
8
|
|
|
|
61.5
|
|
|
|
59.5
|
|
|
|
3
|
|
Economy
|
|
|
26.3
|
|
|
|
25.2
|
|
|
|
4
|
|
|
|
27.3
|
|
|
|
26.2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average daily LTL shipments
|
|
|
85.8
|
|
|
|
80.5
|
|
|
|
7
|
|
|
|
88.8
|
|
|
|
85.7
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weight per LTL shipment (lbs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priority
|
|
|
1,280
|
|
|
|
1,250
|
|
|
|
2
|
|
|
|
1,255
|
|
|
|
1,226
|
|
|
|
2
|
|
Economy
|
|
|
1,002
|
|
|
|
989
|
|
|
|
1
|
|
|
|
995
|
|
|
|
993
|
|
|
|
|
|
Composite weight per LTL shipment
|
|
|
1,195
|
|
|
|
1,168
|
|
|
|
2
|
|
|
|
1,175
|
|
|
|
1,154
|
|
|
|
2
|
|
|
|
|
|
|
|
|
LTL yield (revenue per hundredweight)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priority
|
|
$
|
17.54
|
|
|
$
|
17.87
|
|
|
|
(2
|
)
|
|
$
|
17.77
|
|
|
$
|
17.91
|
|
|
|
(1
|
)
|
Economy
|
|
|
25.71
|
|
|
|
26.17
|
|
|
|
(2
|
)
|
|
|
25.83
|
|
|
|
25.92
|
|
|
|
|
|
Composite LTL yield
|
|
$
|
19.67
|
|
|
$
|
20.10
|
|
|
|
(2
|
)
|
|
$
|
19.88
|
|
|
$
|
20.03
|
|
|
|
(1
|
)
|
- 45 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
44.4
|
%
|
|
|
45.4
|
%
|
|
|
43.0
|
%
|
|
|
43.6
|
%
|
Purchased transportation
|
|
|
17.2
|
|
|
|
15.9
|
|
|
|
17.0
|
|
|
|
16.1
|
|
Rentals
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
2.2
|
|
|
|
2.2
|
|
Depreciation and amortization
|
|
|
4.3
|
|
|
|
4.5
|
|
|
|
4.1
|
|
|
|
4.0
|
|
Fuel
|
|
|
10.8
|
|
|
|
11.5
|
|
|
|
10.4
|
|
|
|
11.2
|
|
Maintenance and repairs
|
|
|
3.1
|
|
|
|
3.6
|
|
|
|
3.2
|
|
|
|
3.6
|
|
Business realignment costs
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Intercompany charges
|
|
|
8.2
|
|
|
|
8.8
|
|
|
|
8.3
|
|
|
|
8.2
|
|
Other
(1)
|
|
|
7.5
|
|
|
|
7.5
|
|
|
|
7.1
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
97.8
|
|
|
|
99.7
|
|
|
|
95.3
|
|
|
|
95.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
2.2
|
%
|
|
|
0.3
|
%
|
|
|
4.7
|
%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes predominantly costs associated with insurance, professional fees and outside service contracts (such as security and facility services).
|
FedEx Freight Segment Revenues
FedEx Freight
segment revenues increased 9% during the third quarter and 5% during the nine months of 2014 due to higher average daily LTL shipments and weight per LTL shipment. In addition, the third quarter of 2014 was positively impacted by one more operating
day, partially offset by the negative impact of unusually severe winter weather.
Average daily LTL shipments increased 7% in the third quarter and 4% in
the nine months of 2014 due to higher demand for our FedEx Freight Priority and FedEx Freight Economy service offerings. LTL yield (revenue per hundredweight) decreased 2% during the third quarter and 1% during the nine months of 2014 due to changes
in shipment characteristics and lower fuel surcharges.
Revenue per hundredweight is a commonly-used indicator of pricing trends, but this metric can be
influenced by many other factors, such as changes in fuel surcharges, weight per shipment, length of haul and the mix of freight. Generally, LTL freight is rated using the National Motor Freight Classification system which assigns classes based on
transportation characteristics including density, risk and handling. Under the class system, low-value freight that is easy to handle, unlikely to damage and dense will receive lower class ratings (and lower yields) than expensive, light, bulky
freight which is highly susceptible to damage (and produces higher yields). As a result, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying base rates.
The weekly indexed LTL fuel surcharge is based on the average of the U.S. on-highway average prices for a gallon of diesel fuel, as published by the
Department of Energy. The indexed LTL fuel surcharge ranged as follows for the periods ended February 28:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Low
|
|
|
23.00
|
%
|
|
|
23.10
|
%
|
|
|
22.70
|
%
|
|
|
21.80
|
%
|
High
|
|
|
23.70
|
|
|
|
24.40
|
|
|
|
23.70
|
|
|
|
24.40
|
|
Weighted-average
|
|
|
23.20
|
|
|
|
23.60
|
|
|
|
23.10
|
|
|
|
23.28
|
|
On March 3, 2014, FedEx Freight announced it will increase certain U.S. and other shipping rates by an average of 3.9%
effective on March 31, 2014. In July 2013, FedEx Freight increased certain U.S. and other shipping rates by an average of 4.5%. In July 2012, FedEx Freight increased certain U.S. and other shipping rates by an average of 6.9%.
- 46 -
FedEx Freight Segment Operating Income
FedEx Freight segment operating income and operating margin increased in the third quarter and nine months of 2014 due to the positive impacts of higher
average daily LTL shipments, higher LTL weight per shipment and greater utilization of rail in the FedEx Freight Economy service offering. FedEx Freight operating income in the third quarter of 2014 includes the year over year negative impact of
unusually severe winter weather, partially offset by one additional operating day. In addition, operating income in the nine months of 2014 was negatively impacted by higher allocated intercompany costs.
Purchased transportation expense increased 17% in the third quarter and 11% in the nine months of 2014 due to increased use of rail and road third-party
transportation providers and higher rates. Salaries and employee benefits increased 6% in the third quarter and 3% in the nine months of 2014 primarily due to a volume-related increase in labor hours. Other operating expenses increased 10% in the
third quarter, primarily due to higher snow removal expense, and 8% in the nine months of 2014 due to higher bad debt expense and real estate taxes. Intercompany charges increased 2% in the third quarter and 6% in the nine months of 2014 primarily
due to higher allocated sales costs.
Fuel costs increased 3% during the third quarter of 2014 due to higher average daily LTL shipments. Fuel costs
decreased 2% during the nine months of 2014 due to increased use of purchased transportation, lower average price per gallon of diesel fuel and fuel efficiency improvements. Based on a static analysis of the net impact of year-over-year changes in
fuel prices compared to year-over-year changes in fuel surcharges, fuel had a minimal impact on operating income in the third quarter and the nine months of 2014.
- 47 -
FINANCIAL CONDITION
LIQUIDITY
Cash and cash equivalents totaled $3.0
billion at February 28, 2014, compared to $4.9 billion at May 31, 2013. The following table provides a summary of our cash flows for the nine-month periods ended February 28 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,367
|
|
|
$
|
1,258
|
|
Noncash charges and credits
|
|
|
2,519
|
|
|
|
2,474
|
|
Changes in assets and liabilities
|
|
|
(1,308
|
)
|
|
|
(756
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
2,578
|
|
|
|
2,976
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,554
|
)
|
|
|
(2,430
|
)
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(483
|
)
|
Proceeds from asset dispositions and other
|
|
|
23
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(2,531
|
)
|
|
|
(2,868
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(254
|
)
|
|
|
(417
|
)
|
Proceeds from debt issuances
|
|
|
1,997
|
|
|
|
991
|
|
Proceeds from stock issuances
|
|
|
462
|
|
|
|
221
|
|
Dividends paid
|
|
|
(142
|
)
|
|
|
(132
|
)
|
Purchase of treasury stock, including accelerated share repurchase agreements
|
|
|
(3,984
|
)
|
|
|
(246
|
)
|
Other
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(1,912
|
)
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(10
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(1,875
|
)
|
|
$
|
529
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities decreased $398 million in the nine months of 2014 primarily due to an income tax refund
received in the prior year, voluntary employee severance program payouts and higher income tax payments, partially offset by higher net income. We made contributions of $495 million to our tax qualified U.S. domestic pension plans (U.S.
Pension Plans) during the nine months of 2014 and $420 million in contributions to our U.S. Pension Plans during the nine months of 2013. Capital expenditures during the nine months of 2014 were higher primarily due to increased spending for
sort facility expansion at FedEx Ground and aircraft at FedEx Express. See Capital Resources for a discussion of capital expenditures during 2014 and 2013.
During the third quarter of 2014, we repaid our $250 million 7.38% senior unsecured notes that matured on January 15, 2014. During the quarter, we issued
$2.0 billion of senior unsecured debt under our current shelf registration statement, comprised of $750 million of 4.00% fixed-rate notes due in January 2024, $500 million of 4.90% fixed-rate notes due in January 2034 and $750 million of 5.10%
fixed-rate notes due in January 2044. Interest on these notes is paid semiannually. We utilized the net proceeds to finance the ASR agreements as discussed below.
In October 2013, our Board of Directors authorized a new share repurchase program of up to 32 million shares of common stock. Shares may be purchased
from time to time in the open market or in privately negotiated transactions. Repurchases are made at the companys discretion, based on ongoing assessments of the capital needs of the business, the market price of its common stock and general
market conditions. No time limit was set for the completion of the repurchase program, and the program may be suspended or discontinued at any time.
- 48 -
In January 2014, we entered into ASR agreements with two banks to repurchase an aggregate of $2.0 billion of our
common stock. During the third quarter of 2014, 11.4 million shares were initially delivered to us based on then-current market prices. This does not represent the final number of shares to be delivered under the ASR agreements. The final
number of shares to be purchased under each ASR agreement will be based on a discount to the volume-weighted average price of our stock during the term of the respective transaction. Purchases under the ASR agreements are expected to be completed
prior to the end of 2014. See Note 1 of the accompanying unaudited condensed consolidated financial statements for additional information regarding the ASR agreements.
During the nine months of 2014, in addition to the ASR transactions, we repurchased 15.6 million shares of FedEx common stock at an average price of $128
per share for a total of $2.0 billion. As of February 28, 2014, 15.2 million shares remained under our share repurchase authorization.
CAPITAL RESOURCES
Our operations are capital
intensive, characterized by significant investments in aircraft, vehicles, technology, facilities, and package-handling and sort equipment. The amount and timing of capital additions depend on various factors, including pre-existing contractual
commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, availability of satisfactory financing and actions of regulatory authorities.
The following table compares capital expenditures by asset category and reportable segment for the periods ended February 28 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
2014/2013
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
Aircraft and related equipment
|
|
$
|
308
|
|
|
$
|
95
|
|
|
$
|
1,001
|
|
|
$
|
926
|
|
|
|
224
|
|
|
|
8
|
|
Facilities and sort equipment
|
|
|
215
|
|
|
|
169
|
|
|
|
545
|
|
|
|
454
|
|
|
|
27
|
|
|
|
20
|
|
Vehicles
|
|
|
210
|
|
|
|
106
|
|
|
|
634
|
|
|
|
610
|
|
|
|
98
|
|
|
|
4
|
|
Information and technology investments
|
|
|
91
|
|
|
|
100
|
|
|
|
253
|
|
|
|
272
|
|
|
|
(9
|
)
|
|
|
(7
|
)
|
Other equipment
|
|
|
40
|
|
|
|
72
|
|
|
|
121
|
|
|
|
168
|
|
|
|
(44
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
864
|
|
|
$
|
542
|
|
|
$
|
2,554
|
|
|
$
|
2,430
|
|
|
|
59
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express segment
|
|
$
|
472
|
|
|
$
|
260
|
|
|
$
|
1,467
|
|
|
$
|
1,526
|
|
|
|
82
|
|
|
|
(4
|
)
|
FedEx Ground segment
|
|
|
199
|
|
|
|
102
|
|
|
|
609
|
|
|
|
365
|
|
|
|
95
|
|
|
|
67
|
|
FedEx Freight segment
|
|
|
110
|
|
|
|
80
|
|
|
|
250
|
|
|
|
263
|
|
|
|
38
|
|
|
|
(5
|
)
|
FedEx Services segment
|
|
|
83
|
|
|
|
100
|
|
|
|
228
|
|
|
|
273
|
|
|
|
(17
|
)
|
|
|
(16
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
864
|
|
|
$
|
542
|
|
|
$
|
2,554
|
|
|
$
|
2,430
|
|
|
|
59
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures during the nine months of 2014 were higher than the prior-year period primarily due to increased spending
for sort facility expansion at FedEx Ground and aircraft at FedEx Express. Aircraft and related equipment expenditures at FedEx Express during the nine months of 2014 included 13 Boeing 757 (B757) aircraft, four Boeing 767-300 Freighter
(B767F) aircraft and two Boeing 777 Freighter (B777F) aircraft, as well as the modification of certain aircraft before being placed into service.
- 49 -
LIQUIDITY OUTLOOK
We believe that our existing cash and cash equivalents, cash flow from operations and available financing sources are adequate to meet our liquidity needs,
including working capital, capital expenditure requirements and debt payment obligations. Our cash and cash equivalents balance at February 28, 2014 includes $450 million of cash in offshore jurisdictions associated with our permanent
reinvestment strategy. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic debt or working capital obligations. Although we expect higher capital expenditures in 2014, we anticipate
that our cash flow from operations will be sufficient to fund these expenditures. Historically, we have been successful in obtaining unsecured financing, from both domestic and international sources, although the marketplace for such investment
capital can become restricted depending on a variety of economic factors.
Our capital expenditures are expected to be approximately $3.8 billion in 2014
and include spending for aircraft and related equipment at FedEx Express, facility projects at FedEx Express and FedEx Ground and vehicle replacement at all our transportation segments. We invested $1.0 billion in aircraft and aircraft-related
equipment in the nine months of 2014 and expect to invest approximately $399 million for aircraft and aircraft-related equipment during the remainder of 2014.
The FedEx Express global air and ground network includes a fleet of over 640 aircraft (including approximately 300 supplemental aircraft) that provide
delivery of packages and freight to more than 220 countries and territories through a wide range of U.S. and international shipping services. While certain aircraft are utilized in primary geographic areas (U.S. versus international), we operate an
integrated global network, and utilize our aircraft and other modes of transportation to achieve the lowest cost of delivery while maintaining our service commitments to our customers. Because of the integrated nature of our global network, our
aircraft are interchangeable across routes and geographies, giving us flexibility with our fleet planning to meet changing global economic conditions and maintain and modify aircraft as needed.
We have several aircraft modernization programs underway that are supported by the purchase of B777F, B767F and B757 aircraft. These aircraft are
significantly more fuel-efficient per unit than the aircraft types previously utilized, and these expenditures are necessary to achieve significant long-term operating savings and to replace older aircraft. Our ability to delay the timing of these
aircraft-related expenditures is limited without incurring significant costs to modify existing purchase agreements.
We have a shelf registration
statement filed with the Securities and Exchange Commission (SEC) that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock.
A $1 billion revolving credit facility is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial
paper. The revolving credit agreement expires in March 2018. The agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times our
last four fiscal quarters rentals and landing fees) to capital (adjusted debt plus total common stockholders investment) that does not exceed 70%. Our leverage ratio of adjusted debt to capital was 57% at February 28, 2014. We
believe the leverage ratio covenant is our only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict
the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs.
As of February 28, 2014, no commercial paper was outstanding and the entire $1 billion under the revolving credit facility was available for future borrowings.
In March 2014, we made $165 million in required contributions to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit
payments. We have no additional required contributions to our U.S. Pension Plans for the remainder of 2014.
Standard & Poors has assigned
us a senior unsecured debt credit rating of BBB and commercial paper rating of A-2 and a ratings outlook of stable. Moodys Investors Service has assigned us a senior unsecured debt credit rating of Baa1 and commercial paper rating
of P-2 and a ratings outlook of stable. If our credit ratings drop, our interest expense may increase. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior
unsecured debt credit ratings drop below investment grade, our access to financing may become limited.
- 50 -
On December 10, 2013, FedEx Express entered into an agreement with The Boeing Company for the purchase of
two B767F aircraft, the delivery of which will occur in 2016 and 2017. FedEx Express also deferred 11 existing options to purchase B777F aircraft by two years.
CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following table sets forth a summary of our contractual cash obligations as of February 28, 2014. Certain of these contractual obligations are
reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. Except for the current portion of interest on long-term debt, this table does not include amounts
already recorded in our balance sheet as current liabilities at February 28, 2014. We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the United
States. These contingent liabilities are not included in the table below. We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, qualified and nonqualified pension and postretirement healthcare plan
liabilities and other self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table below due to the absence of scheduled maturities. Accordingly, this table is not meant to represent a forecast of
our total cash expenditures for any of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year (Undiscounted)
(in millions)
|
|
|
|
2014
(1)
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
Thereafter
|
|
|
Total
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
491
|
|
|
$
|
2,006
|
|
|
$
|
1,818
|
|
|
$
|
1,853
|
|
|
$
|
1,386
|
|
|
$
|
7,502
|
|
|
$
|
15,056
|
|
Non-capital purchase obligations and other
|
|
|
96
|
|
|
|
260
|
|
|
|
178
|
|
|
|
112
|
|
|
|
48
|
|
|
|
116
|
|
|
|
810
|
|
Interest on long-term debt
|
|
|
14
|
|
|
|
232
|
|
|
|
231
|
|
|
|
231
|
|
|
|
231
|
|
|
|
4,156
|
|
|
|
5,095
|
|
Quarterly contributions to our U.S. Pension Plans
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft and aircraft-related capital commitments
|
|
|
217
|
|
|
|
1,155
|
|
|
|
1,215
|
|
|
|
955
|
|
|
|
1,396
|
|
|
|
5,388
|
|
|
|
10,326
|
|
Other capital purchase obligations
|
|
|
22
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,740
|
|
|
|
4,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,005
|
|
|
$
|
3,656
|
|
|
$
|
3,443
|
|
|
$
|
3,151
|
|
|
$
|
3,061
|
|
|
$
|
21,902
|
|
|
$
|
36,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash obligations for the remainder of 2014.
|
Open purchase orders that are cancelable are not considered
unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent authorizations to purchase rather than binding agreements. See Note 7 of the accompanying unaudited
condensed consolidated financial statements for more information.
Operating Activities
The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancelable operating leases (principally
aircraft and facilities) with an initial or remaining term in excess of one year at February 28, 2014.
Included in the table above within the
caption entitled Non-capital purchase obligations and other is our estimate of the current portion of the liability ($1 million) for uncertain tax positions and amounts for purchase obligations that represent noncancelable agreements to
purchase goods or services that are not capital related. Such contracts include those for printing and advertising and
- 51 -
promotions contracts. We cannot reasonably estimate the timing of the long-term payments or the amount by which the liability for uncertain tax positions will increase or decrease over time;
therefore, the long-term portion of the liability for uncertain tax positions ($36 million) is excluded from the table.
The amounts reflected in the
table above for interest on long-term debt represent future interest payments due on our long-term debt, all of which are fixed rate.
We had $272 million
in deposits and progress payments as of February 28, 2014 on aircraft purchases and other planned aircraft-related transactions.
Investing
Activities
The amounts reflected in the table above for capital purchase obligations represent noncancelable agreements to purchase capital-related
equipment. Such contracts include those for certain purchases of aircraft, aircraft modifications, vehicles, facilities, computers and other equipment.
Financing Activities
The amounts reflected in the table
above for long-term debt represent future scheduled payments on our long-term debt. For the remainder of 2014, we have no scheduled principal debt payments.
Additional information on amounts included within the operating, investing and financing activities captions in the table above can be found in our Annual
Report.
CRITICAL ACCOUNTING ESTIMATES
The
preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make significant judgments and estimates to develop amounts reflected and disclosed in the financial
statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that
are required to prepare the financial statements of a complex, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information.
GOODWILL.
Goodwill is tested for impairment between annual tests whenever events or circumstances make it more likely than not that the fair value of a
reporting unit has fallen below its carrying value. We do not believe there has been any change of events or circumstances that would indicate that a reevaluation of the goodwill of our reporting units is required as of February 28, 2014, nor
do we believe the goodwill of our reporting units is at risk of failing impairment testing. For additional details on goodwill impairment testing, refer to Note 1 of our Annual Report.
Information regarding our critical accounting estimates can be found in our Annual Report, including Note 1 to the financial statements therein. Management
has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.
FORWARD-LOOKING STATEMENTS
Certain statements in this
report, including (but not limited to) those contained in Outlook, Liquidity, Capital Resources, Liquidity Outlook, Contractual Cash Obligations and Critical Accounting
Estimates, and the General, Retirement Plans, and Contingencies notes to the consolidated financial statements, are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows,
- 52 -
plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words may, could,
would, should, believes, expects, anticipates, plans, estimates, targets, projects, intends or similar expressions. These
forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements, because of, among other things, potential risks and uncertainties,
such as:
|
|
economic conditions in the global markets in which we operate;
|
|
|
significant changes in the volumes of shipments transported through our networks, customer demand for our various services or the prices we obtain for our services;
|
|
|
damage to our reputation or loss of brand equity;
|
|
|
disruptions to the Internet or our technology infrastructure, including those impacting our computer systems and Web site, which can adversely affect our operations and reputation among customers;
|
|
|
the price and availability of jet and vehicle fuel;
|
|
|
our ability to manage our cost structure for capital expenditures and operating expenses, and match it to shifting and future customer volume levels;
|
|
|
the impact of intense competition on our ability to maintain or increase our prices (including our fuel surcharges in response to rising fuel costs) or to maintain or grow our market share;
|
|
|
our ability to effectively operate, integrate, leverage and grow acquired businesses, and to continue to support the value we allocate to these acquired businesses, including their goodwill;
|
|
|
our ability to maintain good relationships with our employees and prevent attempts by labor organizations to organize groups of our employees, which could significantly increase our operating costs and reduce our
operational flexibility;
|
|
|
the impact of costs related to (i) challenges to the status of FedEx Grounds owner-operators as independent contractors, rather than employees, and (ii) any related changes to our relationship with these
owner-operators;
|
|
|
our ability to execute on our business realignment program;
|
|
|
the impact of any international conflicts or terrorist activities on the United States and global economies in general, the transportation industry or us in particular, and what effects these events will have on our
costs or the demand for our services;
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any impacts on our businesses resulting from new domestic or international government laws and regulation, including regulatory actions affecting global aviation or other transportation rights, increased air cargo and
other security or safety requirements, and tax, accounting, trade (such as protectionist measures enacted in response to weak economic conditions), labor (such as card-check legislation or changes to the Railway Labor Act affecting FedEx Express
employees), environmental (such as global climate change legislation) or postal rules;
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adverse weather conditions or localized natural disasters in key geographic areas, such as earthquakes, volcanoes, and hurricanes, which can disrupt our electrical service, damage our property, disrupt our operations,
increase our fuel costs and adversely affect our shipment levels;
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any impact on our business from disruptions or modifications in service by the USPS, which is a significant customer and vendor of FedEx, as a consequence of the USPSs current financial difficulties or any
resulting structural changes to its operations, network, service offerings or pricing;
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increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare benefits;
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the increasing costs of compliance with federal and state governmental agency mandates, including those related to healthcare benefits, and defending against inappropriate or unjustified enforcement of other actions by
such agencies;
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changes in foreign currency exchange rates, especially in the Chinese yuan, euro, Brazilian real, Canadian dollar and the British pound, which can affect our sales levels and foreign currency sales prices;
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market acceptance of our new service and growth initiatives;
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any liability resulting from and the costs of defending against class-action litigation, such as wage-and-hour and discrimination and retaliation claims, and any other legal or governmental proceedings;
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the outcome of future negotiations to reach new collective bargaining agreements including with the union that represents the pilots of FedEx Express (the current pilot contract became amendable in March 2013,
and the parties are currently in negotiations);
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the impact of technology developments on our operations and on demand for our services, and our ability to continue to identify and eliminate unnecessary information technology redundancy and complexity throughout the
organization;
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widespread outbreak of an illness or any other communicable disease, or any other public health crisis;
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availability of financing on terms acceptable to us and our ability to maintain our current credit ratings, especially given the capital intensity of our operations; and
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other risks and uncertainties you can find in our press releases and SEC filings, including the risk factors identified under the heading Risk Factors in Managements Discussion and Analysis of
Results of Operations and Financial Condition in our Annual Report, as updated by our quarterly reports on Form 10-Q.
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As a result of
these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or
circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or alter any forward-looking statements, whether as a result
of new information, future events or otherwise.
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