XNYS:FDX FedEx Corp Quarterly Report 10-Q Filing - 2/29/2012

Effective Date 2/29/2012

XNYS:FDX (FedEx Corp): Fair Value Estimate
Premium
XNYS:FDX (FedEx Corp): Consider Buying
Premium
XNYS:FDX (FedEx Corp): Consider Selling
Premium
XNYS:FDX (FedEx Corp): Fair Value Uncertainty
Premium
XNYS:FDX (FedEx Corp): Economic Moat
Premium
XNYS:FDX (FedEx Corp): Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

FOR THE QUARTERLY PERIOD ENDED February 29, 2012

OR

 

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

FOR THE TRANSITION PERIOD FROM             TO             

Commission File Number: 1-15829

 

 

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   62-1721435

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

942 South Shady Grove Road

Memphis, Tennessee

  38120
(Address of principal executive offices)   (ZIP Code)

(901) 818-7500

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

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

 

Common Stock

Common Stock, par value $0.10 per share

 

Outstanding Shares at March 21, 2012

315,367,909

 

 

 


Table of Contents

FEDEX CORPORATION

INDEX

 

 

     PAGE  

PART I. FINANCIAL INFORMATION

  

ITEM 1. Financial Statements

  

Condensed Consolidated Balance Sheets
February 29, 2012 and May 31, 2011

     3   

Condensed Consolidated Statements of Income
Three and Nine Months Ended February  29, 2012 and February 28, 2011

     5   

Condensed Consolidated Statements of Cash Flows
Nine Months Ended February  29, 2012 and February 28, 2011

     6   

Notes to Condensed Consolidated Financial Statements

     7   

Report of Independent Registered Public Accounting Firm

     22   

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

     23   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     46   

ITEM 4. Controls and Procedures

     46   
PART II. OTHER INFORMATION   

ITEM 1. Legal Proceedings

     47   

ITEM 1A. Risk Factors

     47   

ITEM 6. Exhibits

     47   

Signature

     49   

Exhibit Index

     E-1   

Exhibit 10.1

  

Exhibit 10.2

  

Exhibit 10.3

  

Exhibit 10.4

  

Exhibit 12.1

  

Exhibit 15.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 LABELS LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

EX-101 DEFINITION LINKBASE DOCUMENT

  

 

- 2 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

September 30, September 30,
       February 29,           
       2012        May 31,  
       (Unaudited)        2011  

ASSETS

         

CURRENT ASSETS

         

Cash and cash equivalents

     $ 2,040        $ 2,328  

Receivables, less allowances of $180 and $182

       4,635          4,581  

Spare parts, supplies and fuel, less allowances of $181 and $169

       447          437  

Deferred income taxes

       617          610  

Prepaid expenses and other

       459          329  
    

 

 

      

 

 

 

Total current assets

       8,198          8,285  

PROPERTY AND EQUIPMENT, AT COST

       35,933          33,686  

Less accumulated depreciation and amortization

       19,090          18,143  
    

 

 

      

 

 

 

Net property and equipment

       16,843          15,543  

OTHER LONG-TERM ASSETS

         

Goodwill

       2,419          2,326  

Other assets

       1,292          1,231  
    

 

 

      

 

 

 

Total other long-term assets

       3,711          3,557  
    

 

 

      

 

 

 
     $ 28,752        $ 27,385  
    

 

 

      

 

 

 

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

 

- 3 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

September 30, September 30,
       February 29,         
       2012      May 31,  
       (Unaudited)      2011  

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

       

CURRENT LIABILITIES

       

Current portion of long-term debt

     $ 419      $ 18  

Accrued salaries and employee benefits

       1,444        1,268  

Accounts payable

       1,687        1,702  

Accrued expenses

       1,602        1,894  
    

 

 

    

 

 

 

Total current liabilities

       5,152        4,882  

LONG-TERM DEBT, LESS CURRENT PORTION

       1,251        1,667  

OTHER LONG-TERM LIABILITIES

       

Deferred income taxes

       2,030        1,336  

Pension, postretirement healthcare and other benefit obligations

       1,654        2,124  

Self-insurance accruals

       960        977  

Deferred lease obligations

       750        779  

Deferred gains, principally related to aircraft transactions

       244        246  

Other liabilities

       142        154  
    

 

 

    

 

 

 

Total other long-term liabilities

       5,780        5,616  

COMMITMENTS AND CONTINGENCIES

       

COMMON STOCKHOLDERS’ INVESTMENT

       

Common stock, $0.10 par value; 800 million shares authorized; 317 million shares issued as of February 29, 2012 and May 31, 2011

       32        32  

Additional paid-in capital

       2,574        2,484  

Retained earnings

       16,584        15,266  

Accumulated other comprehensive loss

       (2,483      (2,550

Treasury stock, at cost

       (138      (12
    

 

 

    

 

 

 

Total common stockholders’ investment

       16,569        15,220  
    

 

 

    

 

 

 
     $ 28,752      $ 27,385  
    

 

 

    

 

 

 

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

 

- 4 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

September 30, September 30, September 30, September 30,
       Three Months Ended      Nine Months Ended  
       February 29,      February 28,      February 29,      February 28,  
       2012      2011      2012      2011  

REVENUES

     $ 10,564      $ 9,663      $ 31,672      $ 28,752  

OPERATING EXPENSES:

             

Salaries and employee benefits

       4,021        3,828        12,007        11,410  

Purchased transportation

       1,619        1,446        4,713        4,163  

Rentals and landing fees

       628        621        1,871        1,850  

Depreciation and amortization

       543        493        1,570        1,474  

Fuel

       1,233        1,049        3,677        2,874  

Maintenance and repairs

       456        480        1,518        1,470  

Impairment and other charges

       —           21        —           88  

Other

       1,251        1,332        3,986        3,933  
    

 

 

    

 

 

    

 

 

    

 

 

 
       9,751        9,270        29,342        27,262  
    

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING INCOME

       813        393        2,330        1,490  

OTHER INCOME (EXPENSE):

             

Interest, net

       (12      (24      (30      (65

Other, net

       (9      (9      (7      (25
    

 

 

    

 

 

    

 

 

    

 

 

 
       (21      (33      (37      (90
    

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       792        360        2,293        1,400  

PROVISION FOR INCOME TAXES

       271        129        811        506  
    

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

     $ 521      $ 231      $ 1,482      $ 894  
    

 

 

    

 

 

    

 

 

    

 

 

 

EARNINGS PER COMMON SHARE:

             

Basic

     $ 1.66      $ 0.73      $ 4.69      $ 2.84  
    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     $ 1.65      $ 0.73      $ 4.67      $ 2.82  
    

 

 

    

 

 

    

 

 

    

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

     $ 0.13      $ 0.12      $ 0.52      $ 0.48  
    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

- 5 -


Table of Contents

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

 

September 30, September 30,
       Nine Months Ended  
       February 29,      February 28,  
       2012      2011  

Operating Activities:

       

Net income

     $ 1,482      $ 894  

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

       

Depreciation and amortization

       1,570        1,474  

Provision for uncollectible accounts

       123        108  

Stock-based compensation

       83        78  

Deferred income taxes and other noncash items

       694        476  

Changes in assets and liabilities:

       

Receivables

       (87      (284

Other assets

       (153      (212

Accounts payable and other liabilities

       (660      (60

Other, net

       (35      (17
    

 

 

    

 

 

 

Cash provided by operating activities

       3,017        2,457  

Investing Activities:

       

Capital expenditures

       (2,946      (2,703

Business acquisitions, net of cash acquired

       (114      (96

Proceeds from asset dispositions and other

       20        15  
    

 

 

    

 

 

 

Cash used in investing activities

       (3,040      (2,784

Financing Activities:

       

Principal payments on debt

       (28      (262

Proceeds from stock issuances

       83        64  

Excess tax benefit on the exercise of stock options

       7        11  

Dividends paid

       (123      (113

Purchase of treasury stock

       (197      —     
    

 

 

    

 

 

 

Cash used in financing activities

       (258      (300
    

 

 

    

 

 

 

Effect of exchange rate changes on cash

       (7      34  
    

 

 

    

 

 

 

Net decrease in cash and cash equivalents

       (288      (593

Cash and cash equivalents at beginning of period

       2,328        1,952  
    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ 2,040      $ 1,359  
    

 

 

    

 

 

 

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

 

- 6 -


Table of Contents

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2011 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of February 29, 2012, the results of our operations for the three- and nine-month periods ended February 29, 2012 and February 28, 2011 and cash flows for the nine-month periods ended February 29, 2012 and February 28, 2011. Operating results for the three- and nine-month periods ended February 29, 2012 are not necessarily indicative of the results that may be expected for the year ending May 31, 2012.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2012 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

BUSINESS ACQUISITION. On July 25, 2011, we completed our acquisition of Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican domestic express package delivery company, for $128 million in cash from operations. The financial results of the acquired business are included in the Federal Express Corporation (“FedEx Express”) segment from the date of acquisition and were not material to our results of operations or financial condition. Substantially all of the purchase price was allocated to goodwill, which was entirely attributed to our FedEx Express reporting unit.

EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of FedEx Express, which represent a small number of FedEx Express’s total employees, are employed under a collective bargaining agreement. During the fourth quarter of 2011 the pilots ratified a new labor contract that includes safety initiatives, increases in hourly pay rates and travel per diem rates, and provisions for opening a European crew base. The new contract becomes amendable in March 2013 as the pilot’s union determined, during the third quarter of 2012, not to exercise its option to shorten the contract. In addition to our pilots at FedEx Express, certain of FedEx’s non-U.S. employees are unionized.

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

Our stock-based compensation expense was $22 million for the three-month period ended February 29, 2012 and $83 million for the nine-month period ended February 29, 2012. Our stock-based compensation expense was $21 million for the three-month period ended February 28, 2011 and $78 million for the nine-month period ended February 28, 2011. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.

NEW ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. See our Annual Report for a discussion of the impact of new accounting guidance issued but not yet effective as of May 31, 2011. We believe that no new accounting guidance was adopted or issued during the nine months of 2012 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

 

- 7 -


Table of Contents

TREASURY SHARES. During the second quarter of 2012, we repurchased 2.8 million FedEx common shares at an average price of $70 per share for a total of $197 million. As of February 29, 2012, 2.9 million shares remained under existing share repurchase authorizations.

DIVIDENDS DECLARED PER COMMON SHARE. On February 17, 2012, our Board of Directors declared a dividend of $0.13 per share of common stock. The dividend will be paid on April 2, 2012 to stockholders of record as of the close of business on March 12, 2012. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.

(2) Comprehensive Income

The following tables provide a reconciliation of net income reported in our financial statements to comprehensive income for the periods ended February 29, 2012 and February 28, 2011 (in millions):

 

September 30, September 30,
       Three Months Ended  
       2012        2011  

Net income

     $ 521        $ 231  

Other comprehensive income:

         

Foreign currency translation adjustments, net of tax of $17 in 2012 and $4 in 2011

       65          34  

Amortization of unrealized pension actuarial gains/losses and other, net of tax of

    $19 in 2012 and $16 in 2011

       33          26  
    

 

 

      

 

 

 

Comprehensive income

     $ 619        $ 291  
    

 

 

      

 

 

 

 

September 30, September 30,
       Nine Months Ended  
       2012      2011  

Net income

     $ 1,482      $ 894  

Other comprehensive income:

       

Foreign currency translation adjustments, net of tax of $5 in 2012 and $21 in 2011

       (27      106  

Amortization of unrealized pension actuarial gains/losses and other, net of tax of

    $55 in 2012 and $46 in 2011

       94        78  
    

 

 

    

 

 

 

Comprehensive income

     $ 1,549      $ 1,078  
    

 

 

    

 

 

 

(3) Financing Arrangements

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

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 April 2016. 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 50% at February 29, 2012. 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 29, 2012, no commercial paper was outstanding, and the entire $1 billion under the revolving credit facility was available for future borrowings.

 

 

- 8 -


Table of Contents

Long-term debt, exclusive of capital leases, had a carrying value of $1.5 billion compared with an estimated fair value of $1.9 billion at February 29, 2012 and May 31, 2011. The estimated fair values were determined based on quoted market prices or on the current rates offered for debt with similar terms and maturities.

(4) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the periods ended February 29, 2012 and February 28, 2011 was as follows (in millions, except per share amounts):

 

Septemr 30, Septemr 30, Septemr 30, Septemr 30,
     Three Months Ended      Nine Months Ended  
     2012      2011      2012      2011  

Basic earnings per common share:

           

Net earnings allocable to common shares(1)

   $ 521      $ 231      $ 1,479      $ 892  

Weighted-average common shares

     314        315        315        314  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 1.66      $ 0.73      $ 4.69      $ 2.84  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share:

           

Net earnings allocable to common shares(1)

   $ 521      $ 231      $ 1,479      $ 892  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares

     314        315        315        314  

Dilutive effect of share-based awards

     2        2        2        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average diluted shares

     316        317        317        316  

Diluted earnings per common share

   $ 1.65      $ 0.73      $ 4.67      $ 2.82  
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive options excluded from diluted earnings per common share

     12.7        7.3        13.4        10.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

(5) Retirement Plans

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the periods ended February 29, 2012 and February 28, 2011 were as follows (in millions):

 

September 30, September 30, September 30, September 30,
     Three Months Ended      Nine Months Ended  
     2012      2011      2012      2011  

U.S. domestic and international pension plans

   $ 133      $ 136      $ 397      $ 411  

U.S. domestic and international defined contribution plans

     82        68        249        173  

Postretirement healthcare plans

     17        15        52        45  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 232      $ 219      $ 698      $ 629  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 9 -


Table of Contents

The three- and nine-month periods ended February 29, 2012 reflect the full restoration on January 1, 2011 of company-matching contributions for our 401(k) plans.

Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended February 29, 2012 and February 28, 2011 included the following components (in millions):

 

September 30, September 30, September 30, September 30,
       Three Months Ended      Nine Months Ended  
       2012      2011      2012      2011  

Pension Plans

             

Service cost

     $ 148      $ 130      $ 445      $ 390  

Interest cost

       245        224        733        673  

Expected return on plan assets

       (311      (266      (929      (796

Recognized actuarial losses and other

       51        48        148        144  
    

 

 

    

 

 

    

 

 

    

 

 

 
     $ 133      $ 136      $ 397      $ 411  
    

 

 

    

 

 

    

 

 

    

 

 

 

 

September 30, September 30, September 30, September 30,
       Three Months Ended      Nine Months Ended  
       2012        2011      2012      2011  

Postretirement Healthcare Plans

               

Service cost

     $ 8        $ 8      $ 26      $ 23  

Interest cost

       9          8        27        25  

Recognized actuarial gains and other

       —             (1      (1      (3
    

 

 

      

 

 

    

 

 

    

 

 

 
     $ 17        $ 15      $ 52      $ 45  
    

 

 

      

 

 

    

 

 

    

 

 

 

Contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the nine-month periods ended February 29, 2012 and February 28, 2011 were as follows (in millions):

 

September 30, September 30,
       2012        2011  

Required

     $ 484        $ 259  

Voluntary

       226          121  
    

 

 

      

 

 

 
     $ 710        $ 380  
    

 

 

      

 

 

 

Our U.S. Pension Plans have ample funds to meet expected benefit payments.

 

- 10 -


Table of Contents

(6) Business Segment Information

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

Our reportable segments include the following businesses:

 

FedEx Express Segment

   FedEx Express (express transportation)
   FedEx Trade Networks (global trade services)
   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 and information technology 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 expense line items outside of intercompany charges. The FedEx Services segment includes: FedEx Services, which provides sales, marketing and information technology support to our other companies; FedEx TechConnect, which is responsible for customer service, technical support, billings and collections for U.S. customers of our major business units; and FedEx Office, which provides an array of document and business services and retail access to our customers for our package transportation businesses.

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

The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments in Management’s Discussion and Analysis of Results of Operations and Financial Condition reflects the allocations from the FedEx Services segment to the respective transportation segments. The “Intercompany charges” caption also includes charges and credits for administrative services provided between operating companies and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe these allocations approximate the net cost of providing these functions.

 

- 11 -


Table of Contents

Other Intersegment Transactions

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

The following table provides a reconciliation of reportable segment revenues and operating income (loss) to our unaudited condensed consolidated financial statement totals for the periods ended February 29, 2012 and February 28, 2011 (in millions):

 

September 30, September 30, September 30, September 30,
      Three Months Ended     Nine Months Ended  
     2012     2011     2012     2011  

Revenues

        

FedEx Express segment

   $ 6,543     $ 6,049     $ 19,718     $ 17,953  

FedEx Ground segment

     2,480       2,184       7,097       6,222  

FedEx Freight segment

     1,234       1,123       3,887       3,602  

FedEx Services segment

     401       397       1,239       1,246  

Other and eliminations

     (94     (90     (269     (271
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 10,564     $ 9,663     $ 31,672     $ 28,752  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

        

FedEx Express segment

   $ 349     $ 178     $ 979     $ 799  

FedEx Ground segment

     465       325       1,270       908  

FedEx Freight segment

     (1     (110     81       (217
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 813     $ 393     $ 2,330     $ 1,490  
  

 

 

   

 

 

   

 

 

   

 

 

 

(7) Commitments

As of February 29, 2012, our purchase commitments under various contracts for the remainder of 2012 and annually thereafter were as follows (in millions):

 

September 30, September 30, September 30,
       Aircraft and
Aircraft  Related
       Other(1)        Total  

2012 (remainder)

     $ 279          $ 80          $ 359  

2013

       743            169            912  

2014

       540            119            659  

2015

       734            74            808  

2016

       749            77            826  

Thereafter

       6,415            182            6,597  

 

(1) 

Primarily vehicles, facilities, advertising and promotions contracts, and for the remainder of 2012, a total of $12 million of required quarterly contributions to our U.S. Pension Plans.

The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. Our obligation to purchase 13 Boeing 777 Freighters (“B777F”) is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended (“RLA”). Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into noncancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.

 

- 12 -


Table of Contents

In December 2011, FedEx Express entered into an agreement to acquire 27 new Boeing 767-300 Freighter (“B767F”) aircraft, with the first three arriving in 2014 followed by six per year from 2015 to 2018. In conjunction with the execution of the B767F aircraft purchase agreement, FedEx Express also delayed the delivery of nine B777F aircraft, five of which were deferred from 2014 and one per year from 2015 to 2018, to better align air network capacity to demand. FedEx Express also removed the RLA condition from two of the 15 B777F aircraft (bringing the number of purchase obligations subject to the condition to 13) and exercised two B777F options for aircraft to be delivered at the end of the delivery schedule.

We had $734 million in deposits and progress payments as of February 29, 2012 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our condensed consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the Boeing 757 (“B757”) in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of February 29, 2012, with the year of expected delivery:

 

September 30, September 30, September 30, September 30,
        B777F        B767F        B757        Total  

2012 (remainder)

       2          —             5          7   

2013

       4          —             8          12   

2014

       2          3          —             5   

2015

       2          6          —             8   

2016

       2          6          —             8   

Thereafter

       18          12          —             30   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

       30          27          13          70   
    

 

 

      

 

 

      

 

 

      

 

 

 

A summary of future minimum lease payments under capital leases and noncancelable operating leases with an initial or remaining term in excess of one year at February 29, 2012 is as follows (in millions):

 

September 30, September 30, September 30, September 30,
                Operating Leases  
                Aircraft                 Total  
       Capital        and Related        Facilities        Operating  
       Leases        Equipment        and Other        Leases  

2012 (remainder)

     $ 3        $ 84        $ 346        $ 430  

2013

       120          486          1,341          1,827  

2014

       2          462          1,183          1,645  

2015

       2          448          1,049          1,497  

2016

       2          453          871          1,324  

Thereafter

       13          1,541          5,515          7,056  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

       142        $ 3,474        $ 10,305        $ 13,779  
         

 

 

      

 

 

      

 

 

 

Less amount representing interest

       11                 
    

 

 

                

Present value of net minimum lease payments

     $ 131                 
    

 

 

                

While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

 

- 13 -


Table of Contents

(8) Contingencies

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

In September 2009, in Taylor v. FedEx Freight, a California state court granted class certification, certifying a class of all current and former drivers employed by FedEx Freight in California who performed linehaul services since June 2003. The plaintiffs alleged, among other things, that they were forced to work “off the clock” and were not provided with required rest or meal breaks. We entered into a tentative settlement agreement with the plaintiffs in June 2011 for an immaterial amount. The order of preliminary approval of settlement was entered by the court in September 2011. Class notices were mailed in October 2011. The court granted final approval of the settlement in January 2012.

Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 30 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings that claim that the company’s owner-operators should be treated as employees, rather than independent contractors.

Most of the class-action lawsuits were consolidated for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Indiana. The multidistrict litigation court granted class certification in 28 cases and denied it in 14 cases. On December 13, 2010, the court entered an opinion and order addressing all outstanding motions for summary judgment on the status of the owner-operators (i.e., independent contractor vs. employee). In sum, the court has now ruled on our summary judgment motions and entered judgment in favor of FedEx Ground on all claims in 20 of the 28 multidistrict litigation cases that had been certified as class actions, finding that the owner-operators in those cases were contractors as a matter of the law of the following states: Alabama, Arizona, Georgia, Indiana, Kansas (the court previously dismissed without prejudice the nationwide class claim under the Employee Retirement Income Security Act of 1974 based on the plaintiffs’ failure to exhaust administrative remedies), Louisiana, Maryland, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, West Virginia and Wisconsin. The plaintiffs filed notices of appeal in all of these 20 cases. The Seventh Circuit heard the appeal in the Kansas case first in January 2012.

The court remanded the other eight certified class actions back to the district courts where they were originally filed because its summary judgment ruling did not completely dispose of all of the claims in those lawsuits. Specifically, in the five cases in Arkansas, California, Florida, and Oregon (two certified cases), the court’s ruling granted summary judgment in FedEx Ground’s favor on all of the certified claims but did not decide the uncertified claims. In the three cases filed in Kentucky, Nevada and New Hampshire, the court ruled in favor of FedEx Ground on some of the claims and against FedEx Ground on at least one claim. In January 2011, we asked the court to issue final judgments in these eight cases, and the court denied our motion. In July 2011, we filed a petition to the Seventh Circuit asking the appeals court to require these cases to be returned to the multidistrict litigation court for issuance of a final judgment so that all appeals of the December 2010 summary judgment rulings would be heard by the Seventh Circuit, and in November 2011, the Seventh Circuit denied our petition.

In January 2008, one of the contractor-model lawsuits that is not part of the multidistrict litigation, Anfinson v. FedEx Ground, was certified as a class action by a Washington state court. The plaintiffs in Anfinson represent a class of single-route, pickup-and-delivery owner-operators in Washington from December 21, 2001 through December 31, 2005 and allege that the class members should be reimbursed as employees for their uniform expenses and should receive overtime pay. In March 2009, a jury trial in the Anfinson case was held, and the jury returned a verdict in favor of FedEx Ground, finding that all 320 class members were independent contractors, not employees. The plaintiffs appealed the verdict. In December 2010, the Washington Court of Appeals reversed and remanded for further proceedings, including a new trial. We filed a motion to reconsider, and this motion was denied. In March 2011, we filed a discretionary appeal with the Washington Supreme Court, and in August 2011, that petition was granted. The Washington Supreme Court heard oral arguments in February 2012.

 

- 14 -


Table of Contents

In August 2010, another one of the contractor-model lawsuits that is not part of the multidistrict litigation, Rascon v. FedEx Ground, was certified as a class action by a Colorado state court. The plaintiff in Rascon represents a class of single-route, pickup-and-delivery owner-operators in Colorado who drove vehicles weighing less than 10,001 pounds at any time from August 27, 2005 through the present. The lawsuit seeks unpaid overtime compensation, and related penalties and attorneys’ fees and costs, under Colorado law. Our applications for appeal challenging this class certification decision have been rejected.

Other contractor-model cases that are not or are no longer part of the multidistrict litigation are in varying stages of litigation.

With respect to the state administrative proceedings relating to the classification of FedEx Ground’s owner-operators as independent contractors, during the second quarter of 2011, the attorneys general in New York and Kentucky each filed lawsuits against FedEx Ground challenging the validity of the contractor model. In January 2012, FedEx Ground settled the lawsuit filed by the Kentucky Attorney General for an immaterial amount.

While the granting of summary judgment in favor of FedEx Ground by the multidistrict litigation court in 20 of the 28 cases that had been certified as class actions remains subject to appeal, we believe that it significantly improves the likelihood that our independent contractor model will be upheld. Adverse determinations in matters related to FedEx Ground’s independent contractors, however, could, among other things, entitle certain of our contractors and their drivers to the reimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax and benefit liability for FedEx Ground, and could result in changes to the independent contractor status of FedEx Ground’s owner-operators in certain jurisdictions. We believe that FedEx Ground’s owner-operators are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers of the company’s independent contractors. While it is reasonably possible that potential loss in some of these lawsuits or such changes to the independent contractor status of FedEx Ground’s owner-operators could be material, we cannot yet determine the amount or reasonable range of potential loss. A number of factors contribute to this. The number of plaintiffs in these lawsuits continues to change, with some being dismissed and others being added and, as to new plaintiffs, discovery is still ongoing. In addition, the parties have not yet conducted any discovery into damages, which could vary considerably from plaintiff to plaintiff. Further, the range of potential loss could be impacted considerably by future rulings on the merits of certain claims and FedEx Ground’s various defenses, and on evidentiary issues. In any event, we do not believe that a material loss is probable in these matters.

ATA Airlines. In October 2010, a jury returned a verdict in favor of ATA Airlines in its breach of contract lawsuit against FedEx Express and awarded damages of $66 million, and in January 2011, the court awarded ATA pre-judgment interest of $5 million. In December 2011, the Seventh Circuit overturned the entire judgment entered against FedEx Express. ATA Airlines requested the Seventh Circuit to rehear oral argument on appeal, and in February 2012, the Seventh Circuit denied the request. The time for filing further appeal has passed. We have reversed the $66 million accrual established in the second quarter of 2011.

California Paystub Class Action. A federal court in California ruled in April 2011 that paystubs for certain FedEx Express employees in California did not meet that state’s requirements to reflect pay period begin date, total overtime hours worked and the correct overtime wage rate. The ruling came in a class action lawsuit filed by a former courier seeking damages on behalf of herself and all other FedEx Express employees in California that allegedly received noncompliant paystubs. The court certified the class in June 2011. The court has ruled that FedEx Express is liable to the State of California, and there will be a ruling as to whether FedEx Express is liable to class members who can prove they were injured by the paystub deficiencies. The judge has not yet decided on the amount, if any, of liability to the State of California or to the class, but has wide discretion. Prior to any decision on the amount of liability, we reached an agreement to settle this matter for an immaterial amount in October 2011, subject to approval by the court. The court preliminarily approved the proposed settlement in January 2012. Class notices were mailed in March 2012.

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

 

- 15 -


Table of Contents

(9) Supplemental Cash Flow Information

Cash paid for interest expense and income taxes for the nine-month periods ended February 29, 2012 and February 28, 2011 was as follows (in millions):

 

September 30, September 30,
     2012     2011  

Cash payments for:

    

Interest (net of capitalized interest)

   $ 73     $ 106  
  

 

 

   

 

 

 

Income taxes

   $ 342     $ 417  

Income tax refunds received

     (46     (16
  

 

 

   

 

 

 

Cash tax payments, net

   $ 296     $ 401  
  

 

 

   

 

 

 

(10) Condensed Consolidating Financial Statements

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

The guarantor subsidiaries, which are wholly owned by FedEx, guarantee $1.0 billion of our debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the “Guarantor Subsidiaries” and “Non-guarantor Subsidiaries” columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):

 

- 16 -


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

February 29, 2012

 

September 30, September 30, September 30, September 30, September 30,
       Parent        Guarantor
Subsidiaries
       Non-guarantor
Subsidiaries
       Eliminations      Consolidated  

ASSETS

                      

CURRENT ASSETS

                      

Cash and cash equivalents

     $ 1,033        $ 423        $ 707        $ (123    $ 2,040  

Receivables, less allowances

       97          3,638          919          (19      4,635  

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

       143          713          50          —           906  

Deferred income taxes

       —             599          18          —           617  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total current assets

       1,273          5,373          1,694          (142      8,198  

PROPERTY AND EQUIPMENT, AT COST

       26          34,117          1,790          —           35,933  

Less accumulated depreciation and amortization

       19          17,965          1,106          —           19,090  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Net property and equipment

       7          16,152          684          —           16,843  

INTERCOMPANY RECEIVABLE

       —             —             1,350          (1,350      —     

GOODWILL

       —             1,564          855          —           2,419  

INVESTMENT IN SUBSIDIARIES

       16,857          2,938          —             (19,795      —     

OTHER ASSETS

       1,496          1,162          104          (1,470      1,292  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 
     $ 19,633        $ 27,189        $ 4,687        $ (22,757    $ 28,752  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

                      

CURRENT LIABILITIES

                      

Current portion of long-term debt

     $ —           $ 419        $ —           $ —         $ 419  

Accrued salaries and employee benefits

       73          1,232          139          —           1,444  

Accounts payable

       40          1,318          471          (142      1,687  

Accrued expenses

       154          1,330          118          —           1,602  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total current liabilities

       267          4,299          728          (142      5,152  

LONG-TERM DEBT, LESS CURRENT PORTION

       1,000          251          —             —           1,251  

INTERCOMPANY PAYABLE

       1,126          224          —             (1,350      —     

OTHER LONG-TERM LIABILITIES

                      

Deferred income taxes

       —             3,485          15          (1,470      2,030  

Other liabilities

       671          2,922          157          —           3,750  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total other long-term liabilities

       671          6,407          172          (1,470      5,780  

STOCKHOLDERS’ INVESTMENT

       16,569          16,008          3,787          (19,795      16,569  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 
     $ 19,633        $ 27,189        $ 4,687        $ (22,757    $ 28,752  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

 

- 17 -


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2011

 

September 30, September 30, September 30, September 30, September 30,
       Parent        Guarantor
Subsidiaries
       Non-guarantor
Subsidiaries
       Eliminations      Consolidated  

ASSETS

                      

CURRENT ASSETS

                      

Cash and cash equivalents

     $ 1,589        $ 279        $ 546        $ (86    $ 2,328  

Receivables, less allowances

       —             3,696          912          (27      4,581  

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

       77          645          44          —           766  

Deferred income taxes

       —             598          12          —           610  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total current assets

       1,666          5,218          1,514          (113      8,285  

PROPERTY AND EQUIPMENT, AT COST

       24          31,916          1,746          —           33,686  

Less accumulated depreciation and amortization

       18          17,071          1,054          —           18,143  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Net property and equipment

       6          14,845          692          —           15,543  

INTERCOMPANY RECEIVABLE

       —             —             1,317          (1,317      —     

GOODWILL

       —             1,564          762          —           2,326  

INVESTMENT IN SUBSIDIARIES

       15,404          2,705          —             (18,109      —     

OTHER ASSETS

       1,652          1,039          63          (1,523      1,231  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 
     $ 18,728        $ 25,371        $ 4,348        $ (21,062    $ 27,385  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

                      

CURRENT LIABILITIES

                      

Current portion of long-term debt

     $ —           $ 18        $ —           $ —         $ 18  

Accrued salaries and employee benefits

       50          1,071          147          —           1,268  

Accounts payable

       —             1,385          430          (113      1,702  

Accrued expenses

       198          1,563          133          —           1,894  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total current liabilities

       248          4,037          710          (113      4,882  

LONG-TERM DEBT, LESS CURRENT PORTION

       1,000          667          —             —           1,667  

INTERCOMPANY PAYABLE

       1,095          222          —             (1,317      —     

OTHER LONG-TERM LIABILITIES

                      

Deferred income taxes

       —             2,842          17          (1,523      1,336  

Other liabilities

       1,165          3,001          114          —           4,280  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total other long-term liabilities

       1,165          5,843          131          (1,523      5,616  

STOCKHOLDERS’ INVESTMENT

       15,220          14,602          3,507          (18,109      15,220  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 
     $ 18,728        $ 25,371        $ 4,348        $ (21,062    $ 27,385  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

 

- 18 -


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(UNAUDITED)

Three Months Ended February 29, 2012

 

September 30, September 30, September 30, September 30, September 30,
       Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations      Consolidated  

REVENUES

     $ —         $ 9,031      $ 1,607      $ (74    $ 10,564  

OPERATING EXPENSES:

                

Salaries and employee benefits

       28        3,528        465        —           4,021  

Purchased transportation

       —           1,169        481        (31      1,619  

Rentals and landing fees

       1        560        68        (1      628  

Depreciation and amortization

       —           504        39        —           543  

Fuel

       —           1,213        20        —           1,233  

Maintenance and repairs

       1        432        23        —           456  

Intercompany charges, net

       (51      (66      117        —           —     

Other

       21        1,018        254        (42      1,251  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       —           8,358        1,467        (74      9,751  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING INCOME

       —           673        140        —           813  

OTHER INCOME (EXPENSE):

                

Equity in earnings of subsidiaries

       521        101        —           (622      —     

Interest, net

       (19      6        1        —           (12

Intercompany charges, net

       20        (25      5        —           —     

Other, net

       (1      (4      (4      —           (9
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       521        751        142        (622      792  

Provision for income taxes

       —           219        52        —           271  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

     $ 521      $ 532      $ 90      $ (622    $ 521  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(UNAUDITED)

Three Months Ended February 28, 2011

 

September 30, September 30, September 30, September 30, September 30,
       Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations      Consolidated  

REVENUES

     $ —         $ 8,188      $ 1,555      $ (80    $ 9,663  

OPERATING EXPENSES:

                

Salaries and employee benefits

       23        3,319        486        —           3,828  

Purchased transportation

       —           1,051        423        (28      1,446  

Rentals and landing fees

       1        558        63        (1      621  

Depreciation and amortization

       1        448        44        —           493  

Fuel

       —           1,012        37        —           1,049  

Maintenance and repairs

       1        452        27        —           480  

Impairment and other charges

       —           10        11        —           21  

Intercompany charges, net

       (48      (117      165        —           —     

Other

       22        1,095        266        (51      1,332  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       —           7,828        1,522        (80      9,270  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING INCOME

       —           360        33        —           393  

OTHER INCOME (EXPENSE):

                

Equity in earnings of subsidiaries

       231        12        —           (243      —     

Interest, net

       (23      —           (1      —           (24

Intercompany charges, net

       27        (34      7        —           —     

Other, net

       (4      (4      (1      —           (9
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       231        334        38        (243      360  

Provision for income taxes

       —           105        24        —           129  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

     $ 231      $ 229      $ 14      $ (243    $ 231  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 19 -


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(UNAUDITED)

Nine Months Ended February 29, 2012

 

September 30, September 30, September 30, September 30, September 30,
       Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
       Eliminations      Consolidated  

REVENUES

     $ —         $ 27,039      $ 4,851        $ (218    $ 31,672  

OPERATING EXPENSES:

                  

Salaries and employee benefits

       89        10,565        1,353          —           12,007  

Purchased transportation

       —           3,371        1,427          (85      4,713  

Rentals and landing fees

       3        1,672        200          (4      1,871  

Depreciation and amortization

       1        1,455        114          —           1,570  

Fuel

       —           3,618        59          —           3,677  

Maintenance and repairs

       1        1,446        71          —           1,518  

Intercompany charges, net

       (162      (291      453          —           —     

Other

       68        3,299        748          (129      3,986  
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 
       —           25,135        4,425          (218      29,342  
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

OPERATING INCOME

       —           1,904        426          —           2,330  

OTHER INCOME (EXPENSE):

                  

Equity in earnings of subsidiaries

       1,482        252        —             (1,734      —     

Interest, net

       (58      25        3          —           (30

Intercompany charges, net

       62        (80      18          —           —     

Other, net

       (4      (7      4          —           (7
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       1,482        2,094        451          (1,734      2,293  

Provision for income taxes

       —           636        175          —           811  
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

NET INCOME

     $ 1,482      $ 1,458      $ 276        $ (1,734    $ 1,482  
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(UNAUDITED)

Nine Months Ended February 28, 2011

 

September 30, September 30, September 30, September 30, September 30,
       Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations      Consolidated  

REVENUES

     $ —         $ 24,083      $ 4,919      $ (250    $ 28,752  

OPERATING EXPENSES:

                

Salaries and employee benefits

       87        9,784        1,539        —           11,410  

Purchased transportation

       —           2,941        1,302        (80      4,163  

Rentals and landing fees

       3        1,659        191        (3      1,850  

Depreciation and amortization

       1        1,323        150        —           1,474  

Fuel

       —           2,744        130        —           2,874  

Maintenance and repairs

       1        1,375        94        —           1,470  

Impairment and other charges

       —           27        61        —           88  

Intercompany charges, net

       (177      (289      466        —           —     

Other

       85        3,218        797        (167      3,933  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       —           22,782        4,730        (250      27,262  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING INCOME

       —           1,301        189        —           1,490  

OTHER INCOME (EXPENSE):

                

Equity in earnings of subsidiaries

       894        61        —           (955      —     

Interest, net

       (70      9        (4      —           (65

Intercompany charges, net

       82        (103      21        —           —     

Other, net

       (12      (11      (2      —           (25
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       894        1,257        204        (955      1,400  

Provision for income taxes

       —           439        67        —           506  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

     $ 894      $ 818      $ 137      $ (955    $ 894  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 20 -


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 29, 2012

 

       Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations      Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     $ (61    $ 2,664      $ 451      $ (37    $ 3,017  

INVESTING ACTIVITIES

                

Capital expenditures

       (2      (2,856      (88      —           (2,946

Business acquisition, net of cash acquired

       —           —           (114      —           (114

Proceeds from asset dispositions and other

       —           20        —           —           20  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CASH USED IN INVESTING ACTIVITIES

       (2      (2,836      (202      —           (3,040

FINANCING ACTIVITIES

                

Net transfers from (to) Parent

       (263      320        (57      —           —     

Intercompany dividends

       —           46        (46      —           —     

Principal payments on debt

       —           (28      —           —           (28

Proceeds from stock issuances

       83        —           —           —           83  

Excess tax benefit on the exercise of stock options

       7        —           —           —           7  

Dividends paid

       (123      —           —           —           (123

Purchase of treasury stock

       (197      —           —           —           (197

Other, net

       —           (16      16        —           —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

       (493      322        (87      —           (258
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Effect of exchange rate changes on cash

       —           (6      (1      —           (7
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

       (556      144        161        (37      (288

Cash and cash equivalents at beginning of period

       1,589        279        546        (86      2,328  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $     1,033      $ 423      $ 707      $ (123    $ 2,040  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended February 28, 2011

 

           Parent          Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations      Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     $ (152    $ 2,758      $ (142    $ (7    $ 2,457  

INVESTING ACTIVITIES

                

Capital expenditures

       (1      (2,581      (121      —           (2,703

Business acquisition, net of cash acquired

       —           (96      —           —           (96

Proceeds from asset dispositions and other

       —           15        —           —           15  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CASH USED IN INVESTING ACTIVITIES

       (1      (2,662      (121      —           (2,784

FINANCING ACTIVITIES

                

Net transfers from (to) Parent

       (237      (239      476        —           —     

Payment on loan between subsidiaries

       —           147        (147      —           —     

Intercompany dividends

       —           19        (19      —           —     

Principal payments on debt

       (250      (12      —           —           (262

Proceeds from stock issuances

       64        —           —           —           64  

Excess tax benefit on the exercise of stock options

       11        —           —           —           11  

Dividends paid

       (113      —           —           —           (113

Other, net

       —           (1      1        —           —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

       (525      (86      311        —           (300
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Effect of exchange rate changes on cash

       —           11        23        —           34  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

       (678      21        71        (7      (593

Cash and cash equivalents at beginning of period

       1,310        258        443        (59      1,952  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ 632      $ 279      $ 514      $ (66    $ 1,359  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 21 -


Table of Contents

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of February 29, 2012, and the related condensed consolidated statements of income for the three-month and nine-month periods ended February 29, 2012 and February 28, 2011 and the condensed consolidated statements of cash flows for the nine-month periods ended February 29, 2012 and February 28, 2011. These financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2011, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income, and cash flows for the year then ended not presented herein, and in our report dated July 12, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Memphis, Tennessee

March 23, 2012

 

- 22 -


Table of Contents

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

GENERAL

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (“FedEx”). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2011 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments. Our FedEx Services segment provides sales, marketing and information technology 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.

The key indicators necessary to understand our operating results include:

 

 

the overall customer demand for our various services;

 

 

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

 

 

the mix of services purchased by our customers;

 

 

the prices we obtain for our services, primarily measured by yield (revenue per package or pound or revenue per hundredweight for LTL freight shipments);

 

 

our ability to manage our cost structure (capital expenditures and operating expenses) to match shifting volume levels; and

 

 

the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges.

The majority of our operating expenses are directly impacted by revenue and volume levels. Accordingly, we expect these operating expenses to fluctuate on a year-over-year basis consistent with the change in revenues and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends impacting expenses other than changes in revenues and volume.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2012 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.

 

- 23 -


Table of Contents

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following table compares summary operating results (dollars in millions, except per share amounts) for the periods ended February 29, 2012 and February 28, 2011:

 

     Three Months Ended     Percent     Nine Months Ended     Percent  
     2012     2011     Change     2012     2011     Change  

Revenues

   $ 10,564     $ 9,663       9      $ 31,672     $ 28,752       10   

Operating income

     813       393       107        2,330       1,490       56   

Operating margin

     7.7     4.1     360  bp      7.4     5.2     220  bp 

Net income

   $ 521     $ 231       126      $ 1,482     $ 894       66   

Diluted earnings per share

   $ 1.65     $ 0.73       126      $ 4.67     $ 2.82       66   

The following table shows changes in revenues and operating income by reportable segment for the periods ended February 29, 2012 compared to February 28, 2011 (dollars in millions):

 

     Change in
Revenues
    Percent Change in
Revenue
    Change in Operating
Income (Loss)
     Percent Change in
Operating Income
(Loss)
 
     Three
Months
Ended
    Nine
Months
Ended
    Three
Months
Ended
     Nine
Months
Ended
    Three
Months
Ended
     Nine
Months
Ended
     Three
Months
Ended
     Nine
Months
Ended
 

FedEx Express segment

   $ 494     $ 1,765       8        10     $ 171      $ 180        96        23  

FedEx Ground segment

     296       875       14        14       140        362        43        40  

FedEx Freight segment

     111       285       10        8       109        298        99        137  

FedEx Services segment

     4       (7     1        (1     —           —           —           —     

Other and eliminations

     (4     2       NM         NM        —           —           —           —     
  

 

 

   

 

 

        

 

 

    

 

 

       
   $ 901     $ 2,920       9        10     $ 420      $ 840        107        56  
  

 

 

   

 

 

        

 

 

    

 

 

       

Overview

Strong earnings growth at the FedEx Ground segment and ongoing yield management programs at all of our transportation segments resulted in improved results in the third quarter and nine months of 2012, despite continued slow economic growth. Our year-over-year comparisons for the third quarter and nine months of 2012 were impacted by certain one-time items, which are described below.

Our third quarter of 2012 results include the reversal of a $66 million reserve associated with the ATA Airlines lawsuit at FedEx Express. This reserve was initially recorded in the second quarter of 2011 when a loss was deemed probable as a result of an adverse decision in the lawsuit. We reversed this reserve during the third quarter of 2012 when FedEx Express won the appeal of this case and the court overturned the prior ruling. In addition, the third quarter and nine months of 2011 include one-time costs associated with the combination of our FedEx Freight and FedEx National LTL operations of $43 million in the third quarter of 2011 and $130 million in the nine months of 2011. Collectively, these items favorably impacted our year-over-year results by an estimated $0.18 per diluted share in the third quarter of 2012 and $0.45 per diluted share in the nine months of 2012, after considering the effect of variable incentive compensation accruals.

 

- 24 -


Table of Contents

During the third quarter and nine months of 2012 our results benefited from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust. Our year-over-year results for the third quarter and nine months of 2012 also benefited from milder winter weather, as our third quarter 2011 results were negatively impacted by unusually severe winter weather.

At our FedEx Ground segment, revenues and operating income increased in the third quarter and nine months of 2012 due to increased yields and strong demand for FedEx Home Delivery and FedEx SmartPost services. In addition to the benefits from the fuel surcharge timing lag, milder winter weather and the reversal of the ATA Airlines matter (described above), FedEx Express revenues and operating income benefited from higher U.S. domestic package and International Priority (“IP”) package yields in the third quarter and nine months of 2012. Slow global economic growth driven by constrained consumer demand resulted in package volume declines in U.S. domestic and IP services during the third quarter and nine months of 2012 at FedEx Express, while international domestic volumes increased due to acquisitions in India and Mexico. Despite a slight operating loss during the third quarter of 2012, the operating results at our FedEx Freight segment improved significantly for the third quarter and nine months of 2012 due to higher fuel surcharges, base yield growth and improved operational efficiencies.

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

 

LOGO

 

(1)

Includes international domestic operations of acquisitions in India (February 2011) and Mexico (July 2011).

(2)

Package statistics do not include the operations of FedEx SmartPost.

 

- 25 -


Table of Contents

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

 

LOGO

 

(1)

Includes international domestic operations of acquisitions in India (February 2011) and Mexico (July 2011).

(2)

Package statistics do not include the operations of FedEx SmartPost.

Revenue

Revenues increased 9% in the third quarter and 10% in the nine months of 2012 due to yield increases across all of our transportation segments. Revenues at FedEx Express increased 8% during the third quarter and 10% in the nine months of 2012 primarily due to an increase in yield, partially offset by decreases in U.S. domestic and IP volumes. At the FedEx Ground segment, revenues increased 14% in both the third quarter and nine months of 2012 due to yield and volume growth at both FedEx Ground and FedEx SmartPost. Revenues at FedEx Freight increased 10% during the third quarter of 2012 and 8% in the nine months of 2012 due to higher fuel surcharges and yield management actions, despite a decrease in volume for the nine months of 2012.

 

- 26 -


Table of Contents

Operating Income

The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended February 29, 2012 and February 28, 2011:

 

September 30, September 30, September 30, September 30,
        Three Months Ended        Nine Months Ended  
       2012        2011        2012        2011  

Operating expenses:

                   

Salaries and employee benefits

     $ 4,021        $ 3,828        $ 12,007        $ 11,410  

Purchased transportation

       1,619          1,446          4,713          4,163  

Rentals and landing fees

       628          621          1,871          1,850  

Depreciation and amortization

       543          493          1,570          1,474  

Fuel

       1,233          1,049          3,677          2,874  

Maintenance and repairs

       456          480          1,518          1,470  

Impairment and other charges(1)

       —             21          —             88  

Other(2)

       1,251          1,332          3,986          3,933  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total operating expenses

     $ 9,751        $ 9,270        $ 29,342        $ 27,262  
    

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) 

Represents charges associated with the combination of FedEx Freight and FedEx National LTL operations, effective January 30, 2011.

(2) 

The third quarter of 2012 includes the reversal of a $66 million legal reserve associated with the ATA Airlines lawsuit. The reserve was initially recorded in the second quarter of 2011 (See Note 8 of the accompanying unaudited condensed consolidated financial statements).

 

September 30, September 30, September 30, September 30,
       Percent of Revenue     Percent of Revenue  
       Three
Months
Ended
    Three
Months
Ended
    Nine
Months
Ended
    Nine
Months
Ended
 
       2012      2011      2012      2011   

Operating expenses:

          

Salaries and employee benefits

       38.1      39.6      37.9      39.7 

Purchased transportation

       15.3         15.0         14.9         14.5    

Rentals and landing fees

       6.0         6.4         5.9         6.4    

Depreciation and amortization

       5.1         5.1         4.9         5.1    

Fuel

       11.7         10.8         11.6         10.0    

Maintenance and repairs

       4.3         5.0         4.8         5.1    

Impairment and other charges(1)

       —          0.2         —          0.3    

Other(2)

       11.8         13.8         12.6         13.7    
    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

       92.3         95.9         92.6         94.8    
    

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

       7.7      4.1      7.4      5.2 
    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Represents charges associated with the combination of FedEx Freight and FedEx National LTL operations, effective January 30, 2011.

(2) 

The third quarter of 2012 includes the reversal of a $66 million legal reserve associated with the ATA Airlines lawsuit. The reserve was initially recorded in the second quarter of 2011 (see Note 8 of the accompanying unaudited condensed consolidated financial statements).

Operating income and operating margin increased in both the third quarter and nine months of 2012 as a result of increased yields due to higher fuel surcharges and our yield management programs. In addition, our year-over-year comparisons were favorably impacted in the third quarter and nine months of 2012 by the one-time items described in the “Overview” section above. Our third quarter of 2012 results also benefited from milder winter weather, as our third quarter 2011 results were negatively impacted by unusually severe winter weather.

 

- 27 -


Table of Contents

Salaries and employee benefits increased 5% in both the third quarter and the nine months of 2012 primarily due to higher incentive compensation and the full reinstatement of 401(k) company-matching contributions effective January 1, 2011. Purchased transportation costs increased 12% in the third quarter and 13% in the nine months of 2012 due to higher fuel costs and volume growth at FedEx Ground, costs associated with the expansion of our freight forwarding business at FedEx Trade Networks and higher utilization of third-party transportation providers in international locations primarily due to business acquisitions at FedEx Express.

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

 

LOGO

Fuel expense increased 18% during the third quarter of 2012 and 28% for the nine months of 2012 due to increases in the average price per gallon of fuel. Our fuel surcharges, which are more fully described in the “Quantitative and Qualitative Disclosures About Market Risk” section of this MD&A, have a timing lag and are designed to pass through the price of fuel not included in our base shipping rates to our customers. Based on a static analysis of the impact to operating income of year-over-year changes in fuel prices compared to changes in fuel surcharges, fuel surcharges more than offset incremental fuel costs for the third quarter and nine months of 2012.

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 nine months of 2012 and 2011 in the accompanying discussions of each of our transportation segments.

Income Taxes

Our effective tax rate was 34.1% for the third quarter of 2012 and 35.4% for the nine months of 2012, compared with 35.7% for the third quarter of 2011 and 36.1% for the nine months of 2011. Our tax rates for both periods in 2012 were favorably impacted by the conclusion of the Internal Revenue Service (“IRS”) audit of our 2007-2009 consolidated income tax returns noted below. For the remainder of 2012, we expect our effective tax rate to be between 36.0% and 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

 

- 28 -


Table of Contents

As of February 29, 2012, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2011. The IRS completed its audit of our 2007 through 2009 consolidated U.S. income tax returns, and the result of the audit did not have a material effect on our consolidated financial statements.

We file income tax returns in the U.S. and various U.S. states and foreign jurisdictions. It is reasonably possible that certain other U.S. federal, U.S. state and foreign jurisdiction income tax return proceedings could be completed during the next 12 months and result in a change in our balance of unrecognized tax benefits. An estimate of the range of the change cannot be made at this time; however, the expected impact of any changes would not be material to our consolidated financial statements.

Business Acquisition

On July 25, 2011, we completed our acquisition of Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican domestic express package delivery company, for $128 million in cash from operations. The financial results of the acquired business are included in the FedEx Express segment from the date of acquisition and were not material to our results of operations or financial condition. Substantially all of the purchase price was allocated to goodwill, which was entirely attributed to our FedEx Express reporting unit.

Outlook

We expect strong yields across all our transportation segments to support revenue and earnings growth in the fourth quarter of 2012. Our expectations for the fourth quarter of 2012 are based on current global economic conditions and a stable fuel price environment.

We are evaluating actions to adjust our FedEx Express U.S. domestic network capacity and improve efficiency. However, we remain committed to investing in critical long-term strategic projects focused on improving our cost structure and enhancing and broadening our service offerings to position us for stronger growth as global economic conditions improve. For additional details on key 2012 capital projects, refer to the “Liquidity Outlook” section of this MD&A.

All of our businesses operate in a competitive pricing environment, exacerbated by continuing volatile fuel prices, which impact our fuel surcharge levels. 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 “Evolution of Independent Contractor Model” section of our FedEx Ground segment MD&A, we are involved in a number of lawsuits and other proceedings that challenge the status of FedEx Ground’s owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its relationships with its contractors. 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.

NEW ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. See our Annual Report for a discussion of the impact of new accounting guidance issued but not yet effective as of May 31, 2011. We believe that no new accounting guidance was adopted or issued during the nine months of 2012 that is relevant to the readers of our financial statements.

 

- 29 -


Table of Contents

However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

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 (global trade services)
   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 and information technology 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 expense line items outside of intercompany charges. The FedEx Services segment includes: FedEx Services, which provides sales, marketing and information technology support to our other companies; FedEx TechConnect, which is responsible for customer service, technical support, billings and collections for U.S. customers of our major business units; and FedEx Office, which provides an array of document and business services and retail access to our customers for our package transportation businesses.

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

The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our transportation segments 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. We believe these allocations approximate the net cost of providing these functions.

 

- 30 -


Table of Contents

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.

FEDEX EXPRESS SEGMENT

The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the periods ended February 29, 2012 and February 28, 2011:

 

       Three Months Ended     Percent     Nine Months Ended     Percent  
       2012     2011     Change     2012     2011     Change  

Revenues:

              

Package:

              

U.S. overnight box

     $ 1,619      $ 1,514        7      $ 4,882      $ 4,494        9   

U.S. overnight envelope

       426        425        —          1,298        1,273        2   

U.S. deferred

       792        743        7        2,254        2,070        9   
    

 

 

   

 

 

     

 

 

   

 

 

   

Total U.S. domestic package revenue

       2,837        2,682        6        8,434        7,837        8   
    

 

 

   

 

 

     

 

 

   

 

 

   

International priority (1)

       2,079        1,974        5        6,448        5,957        8   

International domestic (2)

       210        158        33        634        471        35   
    

 

 

   

 

 

     

 

 

   

 

 

   

Total package revenue

       5,126        4,814        6        15,516        14,265        9   

Freight:

              

U.S.

       647        565        15        1,866        1,618        15   

International priority(3)

       443        412        8        1,362        1,253        9   

International airfreight

       77        68        13        228        207        10   
    

 

 

   

 

 

     

 

 

   

 

 

   

Total freight revenue

       1,167        1,045        12        3,456        3,078        12   

Other (4)

       250        190        32        746        610        22   
    

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

       6,543        6,049        8        19,718        17,953        10   

Operating expenses:

              

Salaries and employee benefits

       2,410        2,321        4        7,200        6,832        5   

Purchased transportation

       449        386        16        1,346        1,143        18   

Rentals and landing fees

       425        424        —          1,269        1,254        1   

Depreciation and amortization

       299        267        12        869        787        10   

Fuel

       1,078        898        20        3,194        2,454        30   

Maintenance and repairs

       303        330        (8     1,037        1,002        3   

Intercompany charges

       547        498        10        1,643        1,523        8   

Other(5)

       683        747        (9     2,181        2,159        1   
    

 

 

   

 

 

     

 

 

   

 

 

   

Total operating expenses

       6,194        5,871        6        18,739        17,154        9   
    

 

 

   

 

 

     

 

 

   

 

 

   

Operating income

     $ 349      $ 178        96      $ 979      $ 799        23   
    

 

 

   

 

 

     

 

 

   

 

 

   

Operating margin

       5.3     2.9     240 bp      5.0     4.5     50 bp 

 

(1) 

International priority package revenues include our international overnight package, international overnight letter and international economy services.

(2) 

International domestic revenues include our international intra-country express operations, including acquisitions in India (February 2011) and Mexico (July 2011).

(3) 

International priority freight revenues include our international priority freight and international economy freight services.

(4) 

Other revenues include FedEx Trade Networks and FedEx SupplyChain Systems.

(5) 

The third quarter of 2012 includes the reversal of a $66 million legal reserve associated with the ATA Airlines lawsuit. The reserve was initially recorded in the second quarter of 2011 (see Note 8 of the accompanying unaudited condensed consolidated financial statements).

 

- 31 -


Table of Contents
September 30, September 30, September 30, September 30,
        Percent of Revenue     Percent of Revenue  
       Three
Months
Ended
    Three
Months
Ended
    Nine
Months
Ended
    Nine
Months
Ended
 
       2012     2011     2012     2011  

Operating expenses:

          

Salaries and employee benefits

       36.8      38.4      36.5      38.0 

Purchased transportation

       6.9         6.4         6.8         6.3    

Rentals and landing fees

       6.5         7.0         6.4         7.0    

Depreciation and amortization

       4.6         4.4         4.4         4.4    

Fuel

       16.5         14.8         16.2         13.7    

Maintenance and repairs

       4.6         5.5         5.3         5.6    

Intercompany charges

       8.4         8.2         8.3         8.5    

Other(1)

       10.4         12.4         11.1         12.0    
    

 

 

   

 

 

   

 

 

&n