XNYS:FDX FedEx Corp Quarterly Report 10-Q Filing - 8/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

FOR THE QUARTERLY PERIOD ENDED August 31, 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 September 17, 2012

314,090,117

 

 

 


Table of Contents

FEDEX CORPORATION

INDEX

 

     PAGE  

PART I. FINANCIAL INFORMATION

  

ITEM 1. Financial Statements

  

Condensed Consolidated Balance Sheets
August 31, 2012 and May 31, 2012

     3   

Condensed Consolidated Statements of Income
Three Months Ended August 31, 2012 and 2011

     5   

Condensed Consolidated Statements of Comprehensive Income
Three Months Ended August  31, 2012 and 2011

     6   

Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 2012 and 2011

     7   

Notes to Condensed Consolidated Financial Statements

     8   

Report of Independent Registered Public Accounting Firm

     24   

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

     25   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     47   

ITEM 4. Controls and Procedures

     47   
PART II. OTHER INFORMATION   

ITEM 1. Legal Proceedings

     48   

ITEM 1A. Risk Factors

     48   

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

     48   

ITEM 5. Other Information

     48   

ITEM 6. Exhibits

     49   

Signature

     50   

Exhibit Index

     E-1   

Exhibit 10.1

  

Exhibit 10.2

  

Exhibit 12.1

  

Exhibit 15.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

Exhibit 99.1

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

EX-101 DEFINITION LINKBASE DOCUMENT

  

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

 

                                                 
       August 31,           
       2012        May 31,  
       (Unaudited)        2012  

ASSETS

         

CURRENT ASSETS

         

Cash and cash equivalents

     $ 2,743        $ 2,843  

Receivables, less allowances of $166 and $178

       4,780          4,704  

Spare parts, supplies and fuel, less allowances of $187 and $184

       465          440  

Deferred income taxes

       518          533  

Prepaid expenses and other

       371          536  
    

 

 

      

 

 

 

Total current assets

       8,877          9,056  

PROPERTY AND EQUIPMENT, AT COST

       36,962          36,164  

Less accumulated depreciation and amortization

       19,096          18,916  
    

 

 

      

 

 

 

Net property and equipment

       17,866          17,248  

OTHER LONG-TERM ASSETS

         

Goodwill

       2,734          2,387  

Other assets

       1,214          1,212  
    

 

 

      

 

 

 

Total other long-term assets

       3,948          3,599  
    

 

 

      

 

 

 
     $ 30,691        $ 29,903  
    

 

 

      

 

 

 

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

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

 

                                                 
       August 31,         
       2012      May 31,  
       (Unaudited)      2012  

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

       

CURRENT LIABILITIES

       

Current portion of long-term debt

     $ 117      $ 417  

Accrued salaries and employee benefits

       1,157        1,635  

Accounts payable

       1,643        1,613  

Accrued expenses

       1,892        1,709  
    

 

 

    

 

 

 

Total current liabilities

       4,809        5,374  

LONG-TERM DEBT, LESS CURRENT PORTION

       2,242        1,250  

OTHER LONG-TERM LIABILITIES

       

Deferred income taxes

       879        836  

Pension, postretirement healthcare and other benefit obligations

       5,519        5,582  

Self-insurance accruals

       987        963  

Deferred lease obligations

       839        784  

Deferred gains, principally related to aircraft transactions

       245        251  

Other liabilities

       147        136  
    

 

 

    

 

 

 

Total other long-term liabilities

       8,616        8,552  

COMMITMENTS AND CONTINGENCIES

       

COMMON STOCKHOLDERS’ INVESTMENT

       

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

       32        32  

Additional paid-in capital

       2,612        2,595  

Retained earnings

       17,505        17,134  

Accumulated other comprehensive loss

       (4,847      (4,953

Treasury stock, at cost

       (278      (81
    

 

 

    

 

 

 

Total common stockholders’ investment

       15,024        14,727  
    

 

 

    

 

 

 
     $ 30,691      $ 29,903  
    

 

 

    

 

 

 

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

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

                                                 
       Three Months Ended
August 31,
 
       2012      2011  

REVENUES

     $ 10,792      $ 10,521  

OPERATING EXPENSES:

       

Salaries and employee benefits

       4,103        4,004  

Purchased transportation

       1,680        1,518  

Rentals and landing fees

       618        620  

Depreciation and amortization

       573        509  

Fuel

       1,138        1,244  

Maintenance and repairs

       542        551  

Other

       1,396        1,338  
    

 

 

    

 

 

 
       10,050        9,784  
    

 

 

    

 

 

 

OPERATING INCOME

       742        737  

OTHER INCOME (EXPENSE):

       

Interest, net

       (10      (11

Other, net

       (5      (2
    

 

 

    

 

 

 
       (15      (13
    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       727        724  

PROVISION FOR INCOME TAXES

       268        260  
    

 

 

    

 

 

 

NET INCOME

     $ 459      $ 464  
    

 

 

    

 

 

 

EARNINGS PER COMMON SHARE:

       

Basic

     $ 1.46      $ 1.46  
    

 

 

    

 

 

 

Diluted

     $ 1.45      $ 1.46  
    

 

 

    

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

     $ 0.28      $ 0.26  
    

 

 

    

 

 

 

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

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(IN MILLIONS)

 

                                                 
       Three Months Ended
August  31,
 
       2012        2011  

NET INCOME

     $ 459        $ 464  

OTHER COMPREHENSIVE INCOME:

         

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

       43          19  

Amortization of unrealized pension actuarial gains/losses and other, net of tax of $37 in 2012 and $18 in 2011

       63          30  
    

 

 

      

 

 

 

COMPREHENSIVE INCOME

     $ 565        $ 513  
    

 

 

      

 

 

 

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

 

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FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

 

                                                 
       Three Months Ended
August 31,
 
       2012      2011  

Operating Activities:

       

Net income

     $ 459      $ 464  

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

       

Depreciation and amortization

       573        509  

Provision for uncollectible accounts

       47        43  

Stock-based compensation

       40        37  

Deferred income taxes and other noncash items

       122        131  

Changes in assets and liabilities:

       

Receivables

       3        (41

Other assets

       147        1  

Accounts payable and other liabilities

       (474      (263

Other, net

       (14      (21
    

 

 

    

 

 

 

Cash provided by operating activities

       903        860  

Investing Activities:

       

Capital expenditures

       (972      (1,110

Business acquisitions, net of cash acquired

       (483      (111

Proceeds from asset dispositions and other

       12        5  
    

 

 

    

 

 

 

Cash used in investing activities

       (1,443      (1,216

Financing Activities:

       

Principal payments on debt

       (301      (17

Proceeds from debt issuance

       991        —     

Proceeds from stock issuances

       30        28  

Excess tax benefit on the exercise of stock options

       4        4  

Dividends paid

       (44      (41

Purchase of treasury stock

       (246      —     

Other, net

       (9      —     
    

 

 

    

 

 

 

Cash provided by (used in) financing activities

       425        (26
    

 

 

    

 

 

 

Effect of exchange rate changes on cash

       15        13  
    

 

 

    

 

 

 

Net decrease in cash and cash equivalents

       (100      (369

Cash and cash equivalents at beginning of period

       2,843        2,328  
    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ 2,743      $ 1,959  
    

 

 

    

 

 

 

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

 

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FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2012 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of August 31, 2012, and the results of our operations and cash flows for the three-month periods ended August 31, 2012 and 2011. Operating results for the three-month period ended August 31, 2012 are not necessarily indicative of the results that may be expected for the year ending May 31, 2013.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2013 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

BUSINESS ACQUISITIONS. In the first quarter of 2013, we have continued to expand the international service offerings of FedEx Express by completing the following business acquisitions:

 

 

Rapidão Cometa Logística e Transporte S.A., a Brazilian transportation and logistics company, for $398 million in cash from operations on July 4, 2012

 

 

TATEX, a French express transportation company, for $55 million in cash from operations on July 3, 2012

 

 

Opek Sp. z o.o., a Polish domestic express package delivery company, for $54 million in cash from operations on June 13, 2012

These acquisitions give us more robust transportation networks within these countries and added capabilities in these important international markets.

 

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The financial results of these acquired businesses are included in the FedEx Express segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented. The estimated fair values of the assets and liabilities related to these acquisitions have been included in the accompanying unaudited balance sheet based on a preliminary allocation of the purchase price (summarized in the table below in millions). These allocations will be finalized as soon as the information becomes available, which shall not exceed one year from the acquisition date.

 

                        

Cash and cash equivalents

     $ 24  

Receivables

       117  

Other current assets

       5  

Property and equipment

       88  

Goodwill

       333  

Intangible assets

       58  

Other non-current assets

       68  

Current liabilities

       (170

Long-term liabilities

       (16
    

 

 

 

Total purchase price

     $ 507  
    

 

 

 

The portion of the purchase price allocated to goodwill is not deductible for U.S. income tax purposes. The intangible assets acquired consist primarily of customer-related intangible assets, which will be amortized on an accelerated basis over their average estimated useful lives of nine years, with the majority of the amortization recognized during the first five years.

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 $40 million for the three-month period ended August 31, 2012 and $37 million for the three-month period ended August 31, 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.

On June 1, 2012, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on the presentation of comprehensive income. The new guidance requires companies to report components of comprehensive income by including comprehensive income on the face of the income statement or in a separate statement of comprehensive income. We adopted this guidance by including a separate statement of comprehensive income in the first quarter of 2013. In addition, we adopted the FASB’s amendments to the fair value measurements and disclosure requirements during the first quarter of 2013, which expands existing disclosure requirements regarding the fair value of our long-term debt.

We believe that no other new accounting guidance was adopted or issued during the first three months of 2013 that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

TREASURY SHARES. During the first quarter of 2013, we repurchased 2.7 million shares of FedEx common stock at an average price of $91 per share for a total of $246 million. As of August 31, 2012, 188,000 shares remained under existing share repurchase authorizations.

 

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DIVIDENDS DECLARED PER COMMON SHARE. On August 17, 2012, our Board of Directors declared a dividend of $0.14 per share of common stock. The dividend will be paid on October 1, 2012 to stockholders of record as of the close of business on September 10, 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) Financing Arrangements

In September 2012, we expect to file a new shelf registration statement with the SEC that will allow us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock.

During the first quarter of 2013, we repaid our $300 million 9.65% unsecured notes that matured on June 15, 2012 using cash from operations.

In July 2012, we issued $1 billion of senior unsecured debt under a then current shelf registration statement, comprised of $500 million of 2.625% fixed-rate notes due in August 2022 and $500 million of 3.875% fixed-rate notes due in August 2042. Interest on these notes is payable semi-annually. We are utilizing the net proceeds for working capital and general corporate purposes.

A $1 billion revolving credit facility is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial paper. The 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 53% at August 31, 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 August 31, 2012, no commercial paper was outstanding and the entire $1 billion under the revolving credit facility was available for future borrowings.

Long-term debt, exclusive of capital leases, had a carrying value of $2.2 billion compared with an estimated fair value of $2.6 billion at August 31, 2012 and $1.5 billion compared with an estimated fair value of $2.0 billion at May 31, 2012. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.

 

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(3) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the three-month periods ended August 31was as follows (in millions, except per share amounts):

 

                                                 
       2012        2011  

Basic earnings per common share:

         

Net earnings allocable to common shares(1)

     $ 458        $ 463  

Weighted-average common shares

       315          316  
    

 

 

      

 

 

 

Basic earnings per common share

     $ 1.46        $ 1.46  
    

 

 

      

 

 

 

Diluted earnings per common share:

         

Net earnings allocable to common shares(1)

     $ 458        $ 463  
    

 

 

      

 

 

 

Weighted-average common shares

       315          316  

Dilutive effect of share-based awards

       1          2  
    

 

 

      

 

 

 

Weighted-average diluted shares

       316          318  

Diluted earnings per common share

     $ 1.45        $ 1.46  
    

 

 

      

 

 

 

Anti-dilutive options excluded from diluted earnings per common share

       13.9          13.2  
    

 

 

      

 

 

 

 

(1) 

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

(4) Retirement Plans

We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the three-month periods ended August 31 were as follows (in millions):

 

                                                 
       2012        2011  

U.S. domestic and international pension plans

     $ 169        $ 132  

U.S. domestic and international defined contribution plans

       88          86  

Postretirement healthcare plans

       19          18  
    

 

 

      

 

 

 
     $ 276        $ 236  
    

 

 

      

 

 

 

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

 

                                                                                                   
       Pension Plans      Postretirement
Healthcare Plans
 
       2012      2011      2012        2011  

Service cost

     $ 173      $ 148      $ 10        $ 9  

Interest cost

       242        244        9          9  

Expected return on plan assets

       (346      (309      —             —     

Recognized actuarial losses (gains) and other

       100        49        —             —     
    

 

 

    

 

 

    

 

 

      

 

 

 
     $ 169      $ 132      $ 19        $ 18  
    

 

 

    

 

 

    

 

 

      

 

 

 

Required contributions to our tax qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the three-month periods ended August 31 were $140 million in 2012 and $99 million in 2011. In September 2012, we made an additional contribution of $140 million to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments.

 

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(5) Business Segment Information

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

Our reportable segments include the following businesses:

 

FedEx Express Segment

   FedEx Express (express transportation)
   FedEx Trade Networks (air and ocean freight forwarding and customs brokerage)
   FedEx SupplyChain Systems (logistics services)

FedEx Ground Segment

   FedEx Ground (small-package ground delivery)
   FedEx SmartPost (small-parcel consolidator)

FedEx Freight Segment

   FedEx Freight (LTL freight transportation)
   FedEx Custom Critical (time-critical transportation)

FedEx Services Segment

  

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

   FedEx TechConnect (customer service, technical support, billings and collections)
   FedEx Office (document and business services and package acceptance)

FedEx Services Segment

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis by FedEx Express and reported in the FedEx Express segment in expense line items outside of intercompany charges. The FedEx Services segment includes: FedEx Services, which provides sales, marketing, information technology, communications and back-office 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, which are an immaterial component of our allocations, 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.

 

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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.

Other Intersegment Transactions

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

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

 

                                                 
       2012      2011  

Revenues

       

FedEx Express segment

     $ 6,632      $ 6,592  

FedEx Ground segment

       2,462        2,278  

FedEx Freight segment

       1,399        1,328  

FedEx Services segment

       389        411  

Other and eliminations

       (90      (88
    

 

 

    

 

 

 
     $ 10,792      $ 10,521  
    

 

 

    

 

 

 

Operating Income

       

FedEx Express segment

     $ 207      $ 288  

FedEx Ground segment

       445        407  

FedEx Freight segment

       90        42  
    

 

 

    

 

 

 
     $ 742      $ 737  
    

 

 

    

 

 

 

 

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(6) Commitments

As of August 31, 2012, our purchase commitments under various contracts for the remainder of 2013 and annually thereafter were as follows (in millions):

 

                                                                          
       Aircraft and
Aircraft-Related
       Other(1)        Total  

2013 (remainder)

     $ 596        $ 640        $ 1,236  

2014

       577          204          781  

2015

       966          115          1,081  

2016

       978          78          1,056  

2017

       978          53          1,031  

Thereafter

       5,803          139          5,942  

 

(1) 

Primarily vehicles, facilities, advertising contracts, and for the remainder of 2013, a total of $420 million of 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. 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.

On June 29, 2012, FedEx Express entered into a supplemental agreement to purchase nine additional Boeing 767-300 Freighter (“B767F”) aircraft. Additionally, FedEx Express exercised ten B767F options acquired in December 2011 and purchased the right to 15 additional purchase options. Four of these 19 additional B767F aircraft purchases were 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”). These 19 additional B767F aircraft are expected to be delivered from fiscal 2015 to 2019 and will replace current MD10-10 and A310-200 aircraft to continue to modernize our aircraft fleet at FedEx Express.

In conjunction with the additional B767F aircraft purchases, four previously contracted Boeing 777 Freighter (“B777F”) aircraft deliveries that were subject to the RLA condition (two scheduled for delivery in fiscal 2016 and two scheduled for delivery in fiscal 2017) were converted to equivalent purchase value for B767F aircraft. Nine B777F purchase obligations remain subject to the RLA condition.

 

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We had $565 million in deposits and progress payments as of August 31, 2012 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the Boeing 757 (“B757”) 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 August 31, 2012, with the year of expected delivery:

 

                                                                                                   
       B757        B767F        B777F        Total  

2013 (remainder)

       8          —             2          10  

2014

       —             3          2          5  

2015

       —             9          2          11  

2016

       —             10          —             10  

2017

       —             10          —             10  

Thereafter

       —             14          16          30  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

       8          46          22          76  
    

 

 

      

 

 

      

 

 

      

 

 

 

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 August 31, 2012 is as follows (in millions):

 

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

2013 (remainder)

     $ 118        $ 431        $ 1,040        $ 1,471  

2014

       2          462          1,310          1,772  

2015

       2          448          1,178          1,626  

2016

       2          453          985          1,438  

2017

       1          391          1,085          1,476  

Thereafter

       11          1,150          5,007          6,157  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

       136        $ 3,335        $ 10,605        $ 13,940  
         

 

 

      

 

 

      

 

 

 

Less amount representing interest

       8                 
    

 

 

                

Present value of net minimum lease payments

     $ 128                 
    

 

 

                

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.

(7) 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.

 

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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 in January 2012 and, in July 2012, issued an opinion that did not make a determination with respect to the correctness of the district court’s decision and, instead, certified two questions to the Kansas Supreme Court related to the classification of the plaintiffs as independent contractors under the Kansas Wage Payment Act. The other 19 cases that are before the Seventh Circuit remain stayed pending a decision of the Kansas Supreme Court.

The multidistrict litigation court remanded the other eight certified class actions back to the district courts where they were originally filed because its summary judgment ruling did not completely dispose of all of the claims in those lawsuits. 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 May 2012, the Oregon district court dismissed the two Oregon cases, but in June 2012, the plaintiffs in both cases filed notices of appeal with the Ninth Circuit Court of Appeals. In June 2012, the Kentucky district court ruled in favor of FedEx Ground on certain of the plaintiffs’ claims, thereby reducing our potential exposure in the matter.

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 argument in February 2012. In July 2012, the Washington Supreme Court affirmed the Washington Court of Appeals’ reversal of the jury verdict and remanded the case to the trial court.

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. We settled this matter for an immaterial amount, subject to court approval, in June 2012.

 

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In August 2012, another one of the contractor-model lawsuits that was not part of the multidistrict litigation, Scovil v. FedEx Ground, was certified as a class action by the federal district court in Maine. The court certified two state law claims seeking overtime and alleged illegal deductions, and class notices will be sent out to 143 potential class members. The court also previously certified an opt-in class for the Fair Labor Standards Act claims, and 21 people opted into this class.

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 attorney general in New York filed a lawsuit against FedEx Ground challenging the validity of the contractor model.

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. In the third quarter of 2012, we reversed the $66 million accrual established in the second quarter of 2011. After the Seventh Circuit denied ATA Airlines’ request for the Seventh Circuit to rehear oral argument on appeal, ATA Airlines asked the U.S. Supreme Court to accept a discretionary appeal of the matter. We believe that it is unlikely that the U.S. Supreme Court will accept the discretionary appeal.

Other Matters. In August 2010, a third-party consultant who works with shipping customers to negotiate lower rates filed a lawsuit in federal district court in California against FedEx and UPS alleging violations of U.S. antitrust law. This matter was dismissed in May 2011, but the court granted the plaintiff permission to file an amended complaint, which FedEx received in June 2011. In November 2011, the court granted our motion to dismiss this complaint, but again allowed the plaintiff to file an amended complaint. The plaintiff filed a new complaint in December 2011, and the matter remains pending before the court. In February 2011, shortly after the initial lawsuit was filed, we received a demand for the production of information and documents in connection with a civil investigation by the U.S. Department of Justice (“DOJ”) into the policies and practices of FedEx and UPS for dealing with third-party consultants who work with shipping customers to negotiate lower rates. We are cooperating with the investigation, do not believe that we have engaged in any anti-competitive activities and will vigorously defend ourselves in any action that may result from the investigation. While the litigation proceedings and the DOJ investigation are in an early stage and the amount of loss, if any, is dependent on a number of factors that are not yet fully developed or resolved, we do not believe that a material loss is reasonably possible.

 

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We have received requests for information from the DOJ in the Northern District of California in connection with a criminal investigation relating to the transportation of packages for online pharmacies that may have shipped pharmaceuticals in violation of federal law. We responded to grand jury subpoenas issued in June 2008 and August 2009 and to additional requests for information pursuant to those subpoenas, and we continue to respond and cooperate with the investigation. We do not believe that we have engaged in any illegal activities and will vigorously defend ourselves in any action that may result from the investigation. We cannot estimate the amount or range of loss, if any, in this matter, as such analysis would depend on facts and law that are not yet fully developed or resolved.

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.

(8) Supplemental Cash Flow Information

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

 

                                                 
       2012      2011  

Cash payments for:

       

Interest (net of capitalized interest)

     $ 45      $ 43  
    

 

 

    

 

 

 

Income taxes

     $ 54      $ 65  

Income tax refunds received

       (184      —     
    

 

 

    

 

 

 

Cash tax (refunds) payments, net

     $ (130    $ 65  
    

 

 

    

 

 

 

(9) 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 $2.0 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):

 

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CONDENSED CONSOLIDATING BALANCE SHEETS

(UNAUDITED)

August 31, 2012

 

                                                                                                                            
                Guarantor        Non-guarantor                  
       Parent        Subsidiaries        Subsidiaries        Eliminations      Consolidated  

ASSETS

                      

CURRENT ASSETS

                      

Cash and cash equivalents

     $ 1,767        $ 442        $ 671        $ (137    $ 2,743  

Receivables, less allowances

       —             3,793          1,021          (34      4,780  

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

       45          742          49          —           836  

Deferred income taxes

       —             499          19          —           518  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total current assets

       1,812          5,476          1,760          (171      8,877  

PROPERTY AND EQUIPMENT, AT COST

       27          34,912          2,023          —           36,962  

Less accumulated depreciation and amortization

       20          17,995          1,081          —           19,096  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Net property and equipment

       7          16,917          942          —           17,866  

INTERCOMPANY RECEIVABLE

       —             —             1,061          (1,061      —     

GOODWILL

       —             1,554          1,180          —           2,734  

INVESTMENT IN SUBSIDIARIES

       17,612          3,138          —             (20,750      —     

OTHER ASSETS

       2,818          966          216          (2,786      1,214  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 
     $ 22,249        $ 28,051        $ 5,159        $ (24,768    $ 30,691  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’

     INVESTMENT

                      

CURRENT LIABILITIES

                      

Current portion of long-term debt

     $ —           $ 117        $ —           $ —         $ 117  

Accrued salaries and employee benefits

       55          932          170          —           1,157  

Accounts payable

       44          1,230          540          (171      1,643  

Accrued expenses

       313          1,390          189          —           1,892  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total current liabilities

       412          3,669          899          (171      4,809  

LONG-TERM DEBT, LESS CURRENT PORTION

       1,992          250          —             —           2,242  

INTERCOMPANY PAYABLE

       566          495          —             (1,061      —     

OTHER LONG-TERM LIABILITIES

                      

Deferred income taxes

       —             3,665          —             (2,786      879  

Other liabilities

       4,255          3,273          209          —           7,737  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total other long-term liabilities

       4,255          6,938          209          (2,786      8,616  

STOCKHOLDERS’ INVESTMENT

       15,024          16,699          4,051          (20,750      15,024  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 
     $ 22,249        $ 28,051        $ 5,159        $ (24,768    $ 30,691  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2012

 

                                                                                                                            
       Parent        Guarantor
Subsidiaries
       Non-guarantor
Subsidiaries
       Eliminations      Consolidated  

ASSETS

                      

CURRENT ASSETS

                      

Cash and cash equivalents

     $ 1,906        $ 417        $ 636        $ (116    $ 2,843  

Receivables, less allowances

       3          3,793          943          (35      4,704  

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

       261          671          44          —           976  

Deferred income taxes

       —             514          19          —           533  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total current assets

       2,170          5,395          1,642          (151      9,056  

PROPERTY AND EQUIPMENT, AT COST

       29          34,301          1,834          —           36,164  

Less accumulated depreciation and amortization

       20          17,822          1,074          —           18,916  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Net property and equipment

       9          16,479          760          —           17,248  

INTERCOMPANY RECEIVABLE

       —             323          1,524          (1,847      —     

GOODWILL

       —             1,553          834          —           2,387  

INVESTMENT IN SUBSIDIARIES

       17,163          2,978          —             (20,141      —     

OTHER ASSETS

       2,845          1,099          86          (2,818      1,212  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 
     $ 22,187        $ 27,827        $ 4,846        $ (24,957    $ 29,903  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

                      

CURRENT LIABILITIES

                      

Current portion of long-term debt

     $ —           $ 417        $ —           $ —         $ 417  

Accrued salaries and employee benefits

       83          1,365          187          —           1,635  

Accounts payable

       6          1,276          482          (151      1,613  

Accrued expenses

       184          1,406          119          —           1,709  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total current liabilities

       273          4,464          788          (151      5,374  

LONG-TERM DEBT, LESS CURRENT PORTION

       1,000          250          —             —           1,250  

INTERCOMPANY PAYABLE

       1,847          —             —             (1,847      —     

OTHER LONG-TERM LIABILITIES

                      

Deferred income taxes

       —             3,649          5          (2,818      836  

Other liabilities

       4,340          3,193          183          —           7,716  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total other long-term liabilities

       4,340          6,842          188          (2,818      8,552  

STOCKHOLDERS’ INVESTMENT

       14,727          16,271          3,870          (20,141      14,727  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 
     $ 22,187        $ 27,827        $ 4,846        $ (24,957    $ 29,903  
    

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended August 31, 2012

 

                                                                                                                            
       Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations      Consolidated  

REVENUES

     $ —         $ 9,094      $ 1,778      $ (80    $ 10,792  

OPERATING EXPENSES:

                

Salaries and employee benefits

       30        3,589        484        —           4,103  

Purchased transportation

       —           1,130        583        (33      1,680  

Rentals and landing fees

       1        544        75        (2      618  

Depreciation and amortization

       —           530        43        —           573  

Fuel

       —           1,116        22        —           1,138  

Maintenance and repairs

       —           515        27        —           542  

Intercompany charges, net

       (60      (112      172        —           —     

Other

       29        1,133        279        (45      1,396  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       —           8,445        1,685        (80      10,050  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING INCOME

       —           649        93        —           742  

OTHER INCOME (EXPENSE):

                

Equity in earnings of subsidiaries

       459        29        —           (488      —     

Interest, net

       (23      11        2        —           (10

Intercompany charges, net

       24        (29      5        —           —     

Other, net

       (1      (2      (2      —           (5
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       459        658         98         (488      727  

Provision for income taxes

       —           236        32        —           268  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

     $ 459      $ 422       $ 66       $ (488    $ 459  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

COMPREHENSIVE INCOME

     $ 518      $ 428       $ 107       $ (488    $ 565  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended August 31, 2011

 

                                                                                                                            
       Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
       Eliminations      Consolidated  

REVENUES

     $ —         $ 9,007      $ 1,584        $ (70    $ 10,521  

OPERATING EXPENSES:

                  

Salaries and employee benefits

       33        3,531        440          —           4,004  

Purchased transportation

       —           1,080        464          (26      1,518  

Rentals and landing fees

       1        555        65          (1      620  

Depreciation and amortization

       —           471        38          —           509  

Fuel

       —           1,224        20          —           1,244  

Maintenance and repairs

       —           528        23          —           551  

Intercompany charges, net

       (58      (90      148          —           —     

Other

       24        1,125        232          (43      1,338  
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 
       —           8,424        1,430          (70      9,784  
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

OPERATING INCOME

       —           583        154          —           737  

OTHER INCOME (EXPENSE):

                  

Equity in earnings of subsidiaries

       464        71        —             (535      —     

Interest, net

       (20      8        1          —           (11

Intercompany charges, net

       21        (28      7          —           —     

Other, net

       (1      (2      1          —           (2
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       464        632        163          (535      724  

Provision for income taxes

       —           215        45          —           260  
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

NET INCOME

     $ 464      $ 417      $ 118        $ (535    $ 464  
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

COMPREHENSIVE INCOME

     $ 492      $ 430      $ 126        $ (535    $ 513  
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Three Months Ended August 31, 2012

 

                                                                                                                            
       Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations      Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     $ 118      $ 710      $ 96      $ (21    $ 903  

INVESTING ACTIVITIES

                

Capital expenditures

       (3      (844      (125      —           (972

Business acquisitions, net of cash acquired

       —           —           (483      —           (483

Proceeds from asset dispositions and other

       —           15        (3      —           12  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CASH USED IN INVESTING ACTIVITIES

       (3      (829      (611      —           (1,443

FINANCING ACTIVITIES

                

Net transfers from (to) Parent

       (980      963        17        —           —     

Payment on loan between subsidiaries

       —           (450      450        —           —     

Principal payments on debt

       —           (301      —           —           (301

Proceeds from debt issuance

       991        —           —           —           991  

Proceeds from stock issuances

       30        —           —           —           30  

Excess tax benefit on the exercise of stock options

       4        —           —           —           4  

Dividends paid

       (44      —           —           —           (44

Purchase of treasury stock

       (246      —           —           —           (246

Other, net

       (9      (69      69        —           (9
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

       (254      143        536        —           425  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Effect of exchange rate changes on cash

       —           1        14        —           15  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

       (139      25        35        (21      (100

Cash and cash equivalents at beginning of period

       1,906        417        636        (116      2,843  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ 1,767      $ 442      $ 671      $ (137    $ 2,743  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Three Months Ended August 31, 2011

 

                                                                                                                            
           Parent          Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations      Consolidated  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     $ 70      $ 743      $ 130      $ (83    $ 860  

INVESTING ACTIVITIES

                

Capital expenditures

       (1      (1,095      (14      —           (1,110

Business acquisition, net of cash acquired

       —           —           (111      —           (111

Proceeds from asset dispositions and other

       —           5        —           —           5  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CASH USED IN INVESTING ACTIVITIES

       (1      (1,090      (125      —           (1,216

FINANCING ACTIVITIES

                

Net transfers from (to) Parent

       (335      356        (21      —           —     

Principal payments on debt

       —           (17      —           —           (17

Proceeds from stock issuances

       28        —           —           —           28  

Excess tax benefit on the exercise of stock options

       4        —           —           —           4  

Dividends paid

       (41      —           —           —           (41

Other, net

       —           (15      15        —           —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

       (344      324        (6      —           (26
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Effect of exchange rate changes on cash

       —           5        8        —           13  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

       (275      (18      7        (83      (369

Cash and cash equivalents at beginning of period

       1,589        279        546        (86      2,328  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ 1,314      $ 261      $ 553      $ (169    $ 1,959  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of August 31, 2012, and the related condensed consolidated statements of income, comprehensive income and cash flows for the three-month periods ended August 31, 2012 and 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, 2012, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income (loss), and cash flows for the year then ended not presented herein, and in our report dated July 16, 2012, 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, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Memphis, Tennessee

September 19, 2012

 

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

GENERAL

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (“FedEx”). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2012 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading North American provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments. Our FedEx Services segment provides sales, marketing, information technology, communication and back-office support to our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. (“FedEx Office”) and provides customer service, technical support and billing and collection services through FedEx TechConnect, Inc. (“FedEx TechConnect”). See “Reportable Segments” for further discussion.

The key indicators necessary to understand our operating results include:

 

 

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

 

 

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

 

 

the mix of services purchased by our customers;

 

 

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

 

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Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2013 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following table compares summary operating results (dollars in millions, except per share amounts) for the three-month periods ended August 31:

 

           2012     2011     Percent
Change
 

Revenues

     $ 10,792     $ 10,521       3  

Operating income

       742       737       1  

Operating margin

       6.9     7.0     (10 ) bp 

Net income

     $ 459     $ 464       (1
    

 

 

   

 

 

   

 

 

 

Diluted earnings per share

     $ 1.45     $ 1.46       (1
    

 

 

   

 

 

   

 

 

 
The following table shows changes in revenues and operating income by reportable segment for the three-month periods ended August 31, 2012 compared to August 31, 2011 (dollars in millions):    
     Revenues     Operating Income  
     Dollar
Change
    Percent
Change
    Dollar
Change
    Percent
Change
 

FedEx Express segment

   $ 40       1     $ (81     (28

FedEx Ground segment

     184       8       38       9  

FedEx Freight segment

     71       5       48       114  

FedEx Services segment

     (22     (5     —          —     

Other and eliminations

     (2     NM        —          —     
  

 

 

     

 

 

   
   $ 271       3     $ 5       1  
  

 

 

     

 

 

   

Overview

Our revenues and operating income increased slightly in the first quarter of 2013 as continued improvement at FedEx Freight and the sustained strong performance of our FedEx Ground segment offset the impact of reduced demand for priority services at FedEx Express. Our results were impacted by weak global economic conditions, which are driving a shift by our customers to our economy services, as well as U.S. domestic and international priority package volume declines that outpaced our ability to reduce operating costs during the first quarter of 2013 to match demand levels at FedEx Express.

 

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

 

LOGO

 

(1) 

Excludes international domestic operations.

(2) 

Package statistics do not include the operations of FedEx SmartPost.

 

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

 

LOGO

 

(1) 

Excludes international domestic operations.

(2) 

Package statistics do not include the operations of FedEx SmartPost.

Revenue

Revenues increased 3% during the first quarter of 2013 primarily due to yield increases and higher volumes at our FedEx Ground and FedEx Freight segments. At FedEx Ground, revenues increased 8% in the first quarter of 2013 due to increased yields as a result of rate increases and higher volume from market share gains. Revenues increased 5% at FedEx Freight due to higher volumes and increased yields. At our FedEx Express segment, revenues increased 1% as growth in international domestic revenue due to recent business acquisitions, U.S. domestic package yields and our freight-forwarding operations at FedEx Trade Networks were substantially offset by decreases in U.S domestic package volumes.

 

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Operating Income

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

 

                                                                                                   
                         Percent of Revenue  
       2012        2011        2012     2011  

Operating expenses:

                

Salaries and employee benefits

     $ 4,103        $ 4,004          38.0      38.1 

Purchased transportation

       1,680          1,518          15.6       14.4  

Rentals and landing fees

       618          620          5.7       5.9  

Depreciation and amortization

       573          509          5.3       4.8  

Fuel

       1,138          1,244          10.6       11.8  

Maintenance and repairs

       542          551          5.0       5.3  

Other

       1,396          1,338          12.9       12.7  
    

 

 

      

 

 

      

 

 

   

 

 

 

Total operating expenses

     $ 10,050        $ 9,784          93.1       93.0  
    

 

 

      

 

 

      

 

 

   

 

 

 

Operating margin

                 6.9      7.0 
              

 

 

   

 

 

 

Operating income increased in the first quarter of 2013 as a result of continued profitability improvement at FedEx Freight due to increases in LTL shipments, higher yields and improved efficiencies in our LTL network. Additionally, operating income at FedEx Ground increased in the first quarter of 2013 due to increased yields and higher volume. Our results in the first quarter of 2013 were negatively impacted by reduced profitability at FedEx Express due to the impact of slower global economic growth on demand for our priority services, which outpaced our ability to adjust our operating costs to decreased demand levels within the first quarter.

Operating expenses in the first quarter of 2013 included an increase of 11% in purchased transportation costs due to volume growth at FedEx Ground, costs associated with the expansion of our freight forwarding business at FedEx Trade Networks, recent international business acquisitions and higher utilization of third-party transportation providers. Salaries and employee benefits expenses increased 2% in the first quarter of 2013 primarily due to increases in pension and group health insurance costs partially offset by lower incentive compensation accruals. Depreciation expense increased 13% in the first quarter of 2013 primarily due to aircraft recently placed in service and accelerated depreciation on certain aircraft 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

 

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Fuel costs decreased 9% in the first quarter of 2013 due to lower jet fuel costs and lower aircraft fuel usage. Based on a static analysis of year-over-year changes in fuel prices compared to changes in fuel surcharges, fuel had no impact on operating income in the first quarter of 2013.

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 first quarter of 2013 and 2012 in the accompanying discussions of each of our transportation segments.

Income Taxes

Our effective tax rate was 36.8% for the first quarter of 2013 and 35.9% for the first quarter of 2012. Our effective tax rate in the first quarter of 2013 was higher than 2012 primarily due to a reduction in the benefits derived from permanently reinvested international earnings, which are generally taxed at lower rates than in the U.S. For 2013, we expect an effective tax rate between 37.0% and 38.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

As of August 31, 2012, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2012.

We are subject to taxation in the U.S. and various U.S. state, local and foreign jurisdictions. Substantially all U.S. federal income tax matters through fiscal year 2009 are concluded, and we are currently under examination by the Internal Revenue Service (IRS) for the 2010 and 2011 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next 12 months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements.

Business Acquisitions

In the first quarter of 2013, we have continued to expand the international service offerings of FedEx Express by completing the following business acquisitions:

 

 

Rapidão Cometa Logística e Transporte S.A., a Brazilian transportation and logistics company, for $398 million in cash from operations on July 4, 2012

 

 

TATEX, a French express transportation company, for $55 million in cash from operations on July 3, 2012

 

 

Opek Sp. z o.o., a Polish domestic express package delivery company, for $54 million in cash from operations on June 13, 2012

These acquisitions give us more robust transportation networks within these countries and added capabilities in these important international markets.

The financial results of these acquired businesses are included in the FedEx Express segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations. The estimated fair values of the assets and liabilities related to these acquisitions have been included in the accompanying unaudited balance sheet based on a preliminary allocation of the purchase price. See Note 1 of the accompanying unaudited financial statements for further discussion of these acquisitions.

 

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Outlook

Our results in the first quarter of 2013 reflect reduced demand for our priority services due to weak global economic conditions. We expect this weakness to persist in the second quarter of 2013 and continue to negatively impact our results. Furthermore, ongoing uncertainty in U.S. and global economic conditions may continue into the second half of 2013 and further constrain our ability to improve revenue and earnings. We are taking actions and evaluating opportunities to reduce costs, improve efficiencies and adjust our networks to match anticipated demand throughout 2013. These actions and opportunities include our recent announcement to develop a voluntary employee buyout plan, and build on actions taken in 2012, including the decisions to remove aircraft from operations and to focus on modernizing our aircraft fleet at FedEx Express. For details on key 2013 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 7 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.

On June 1, 2012, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on the presentation of comprehensive income. The new guidance requires companies to report components of comprehensive income by including comprehensive income on the face of the income statement or in a separate statement of comprehensive income. We adopted this guidance by including a separate statement of comprehensive income in the first quarter of 2013. In addition, we adopted the FASB’s amendments to the fair value measurements and disclosure requirements during the first quarter of 2013, which expands existing disclosure requirements regarding the fair value of our long-term debt.

We believe that no other new accounting guidance was adopted or issued during the first three months of 2013 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.

 

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REPORTABLE SEGMENTS

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

 

FedEx Express Segment    FedEx Express (express transportation)
   FedEx Trade Networks (air and ocean freight forwarding and customs brokerage)
   FedEx SupplyChain Systems (logistics services)
FedEx Ground Segment    FedEx Ground (small-package ground delivery)
   FedEx SmartPost (small-parcel consolidator)
FedEx Freight Segment    FedEx Freight (LTL freight transportation)
   FedEx Custom Critical (time-critical transportation)
FedEx Services Segment    FedEx Services (sales, marketing, information technology, communications and back-office
functions)
   FedEx TechConnect (customer service, technical support, billings and collections)
   FedEx Office (document and business services and package acceptance)

FEDEX SERVICES SEGMENT

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis by FedEx Express and reported in the FedEx Express segment in expense line items outside of intercompany charges. The FedEx Services segment includes: FedEx Services, which provides sales, marketing, information technology, communications and back-office 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, which are an immaterial component of our allocations, 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.

 

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OTHER INTERSEGMENT TRANSACTIONS

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

FEDEX EXPRESS SEGMENT

The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the three-month periods ended August 31:

 

                                                                                                                            
       2012     2011     Percent
Change
             

Revenues:

            

Package:

            

U.S. overnight box

     $ 1,604     $ 1,640       (2    

U.S. overnight envelope

       430       451       (5    

U.S. deferred

       702       731       (4    
    

 

 

   

 

 

       

Total U.S. domestic package revenue

       2,736       2,822       (3    
    

 

 

   

 

 

       

International priority(1)

       1,661       1,757       (5    

International economy(2)

       487       441       10      
    

 

 

   

 

 

       

Total international export package revenue

       2,148       2,198       (2    
    

 

 

   

 

 

       

International domestic(3)

       309       207       49      
    

 

 

   

 

 

       

Total package revenue

       5,193       5,227       (1    

Freight:

            

U.S.

       610       591       3      

International priority(4)

       439       449       (2    

International airfreight

       74       77       (4    
    

 

 

   

 

 

       

Total freight revenue

       1,123       1,117       1       Percent of Revenue   
          

 

 

 

Other(5)

       316       248       27       2012       2011  
    

 

 

   

 

 

     

 

 

   

 

 

 

Total revenues

       6,632       6,592       1       100.0      100.0 

Operating expenses:

            

Salaries and employee benefits

       2,473       2,413       2       37.3       36.6  

Purchased transportation

       537       449       20       8.1       6.8  

Rentals and landing fees

       415       423       (2     6.2       6.4  

Depreciation and amortization

       323       282       15       4.9       4.3  

Fuel

       986       1,077       (8     14.9       16.3  

Maintenance and repairs

       372       380       (2     5.6       5.8  

Intercompany charges

       537       548       (2     8.1       8.3  

Other

       782       732       7       11.8       11.1  
    

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

       6,425       6,304       2       96.9      95.6 
    

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

     $ 207     $ 288       (28    
    

 

 

   

 

 

       

Operating margin

       3.1     4.4     (130 ) bp     

 

(1) 

International priority package services provide time-definite delivery in one, two or three business days worldwide.

(2) 

International economy package services provide time-definite delivery within five business days worldwide.

(3) 

International domestic revenues include our international intra-country express operations including recent acquisitions in Mexico (July 2011), Poland (June 2012), France (July 2012) and Brazil (July 2012).

(4) 

Freight international priority includes our FedEx International Priority and FedEx International Economy freight services.

(5) 

Other revenues include FedEx Trade Networks and FedEx SupplyChain Systems.

 

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

 

                                                                          
                         Percent  
       2012        2011        Change  

Package Statistics(1)

              

Average daily package volume (ADV):

              

U.S. overnight box

       1,092          1,134          (4

U.S. overnight envelope

       575          596          (4

U.S. deferred

       762          829          (8
    

 

 

      

 

 

      

Total U.S. domestic ADV

       2,429          2,559          (5
    

 

 

      

 

 

      

International priority(2)

       408          417          (2

International economy(3)

       143          126          13  
    

 

 

      

 

 

      

Total international export ADV

       551          543          1  
    

 

 

      

 

 

      

International domestic(4)

       681          445          53  
    

 

 

      

 

 

      

Total ADV

       3,661          3,547          3  
    

 

 

      

 

 

      

Revenue per package (yield):

              

U.S. overnight box

     $ 22.59        $ 22.24          2  

U.S. overnight envelope

       11.51          11.64          (1

U.S. deferred

       14.17          13.57          4  

U.S. domestic composite

       17.33          16.97          2  

International priority(2)

       62.68          64.82          (3

International economy(3)

       52.17          53.91          (3

International export composite

       59.94          62.30          (4

International domestic(4)

       7.00          7.16          (2

Composite package yield

       21.82          22.67          (4

Freight Statistics(1)

              

Average daily freight pounds:

              

U.S.

       7,077          6,969          2  

International priority(5)

       3,184          3,132          2  

International airfreight

       1,104          1,165          (5
    

 

 

      

 

 

      

Total average daily freight pounds

       11,365          11,266          1  
    

 

 

      

 

 

      

Revenue per pound (yield):

              

U.S.

     $ 1.33        $ 1.31          2  

International priority(5)

       2.12          2.21          (4

International airfreight

       1.03          1.02          1  

Composite freight yield

       1.52          1.53          (1

 

(1) 

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

(2) 

International priority package services provide time-definite delivery in one, two or three business days worldwide.

(3) 

International economy package services provide time-definite delivery within five business days worldwide.

(4) 

International domestic statistics include our international intra-country express operations, including recent acquisitions in Mexico (July 2011), Poland (June 2012), France (July 2012) and Brazil (July 2012).

(5) 

Freight international priority includes FedEx International Priority and FedEx International Economy freight services.

FedEx Express Segment Revenues

Despite lower U.S. domestic package volumes, an unfavorable exchange rate impact and lower fuel surcharge revenue, FedEx Express segment revenues increased 1% in the first quarter of 2013 due to the impact of new business acquisitions, U.S. domestic package yield growth, growth in our freight-forwarding business at FedEx Trade Networks and higher international export package volumes. U.S. domestic package volumes decreased 5% in the first quarter of 2013 due to weak global economic conditions resulting in reduced demand for our services. International export package volume increased 1% driven by increases in FedEx international economy from Europe and Asia. International domestic revenues increased 49% during the first quarter of 2013 due to recent international business acquisitions. International export package yields decreased 4% due to unfavorable exchange rates and lower fuel surcharges. U.S. domestic package yields increased 2% in the first quarter of 2013 primarily due to increased rate per pound partially offset by lower fuel surcharges.

 

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

 

                                                 
       2012     2011  

U.S. Domestic and Outbound Fuel Surcharge:

      

Low

       10.00      15.00 

High

       14.50       16.50  

Weighted-average

       12.12       15.52  

International Fuel Surcharges:

      

Low

       12.00       15.00  

High

       20.50       23.00  

Weighted-average

       16.13       17.80  

On September 18, 2012, we announced a 5.9% average list price increase effective January 7, 2013, for FedEx Express U.S. domestic, U.S. export and U.S. import services, while we lowered our fuel surcharge index by two percentage points.

FedEx Express Segment Operating Income

Although FedEx Express segment revenues increased in the first quarter of 2013, operating income and operating margin decreased due to declining U.S. domestic package volumes, the demand shift toward lower-yielding international services and increased depreciation and employee benefits expenses, which more than offset on-going cost-containment activities such as reductions in flight hours and labor hours. Recent business acquisitions and exchange rate fluctuations affected both revenue and expense but had little net impact on operating income for the first quarter of 2013.

In the first quarter of 2013, purchased transportation costs increased 20% due to costs associated with the expansion of our freight forwarding business at FedEx Trade Networks, recent international business acquisitions and higher utilization of third-party transportation providers, primarily in Latin America. Salaries and employee benefits costs increased 2% in the first quarter of 2013 due to higher pension and medical costs, partially offset by lower incentive compensation accruals. Other operating expenses increased 7% in the first quarter of 2013 primarily due to costs related to our recent business acquisitions. Depreciation and amortization expense increased 15% during the first quarter of 2013 as a result of aircraft recently placed into service and accelerated depreciation due to the shortened life of certain aircraft.

Fuel costs decreased 8% during the first quarter of 2013 due to decreases in the average price per gallon of jet fuel and lower aircraft fuel usage. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a minimal impact on operating income in the first quarter of 2013. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express services.

 

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FEDEX GROUND SEGMENT

The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the three-month periods ended August 31:

 

                                                                                                                            
                   Percent        
       2012     2011     Change              

Revenues:

            

FedEx Ground

     $ 2,273     $ 2,116       7       Percent of Revenue   

FedEx SmartPost

       189       162       17       2012       2011  
    

 

 

   

 

 

     

 

 

   

 

 

 

Total revenues

       2,462       2,278       8       100.0      100.0 
    

 

 

   

 

 

       

Operating expenses:

            

Salaries and employee benefits

       377       351       7       15.3       15.4  

Purchased transportation

       946       886       7       38.4       38.9  

Rentals

       74       66       12       3.0       2.9  

Depreciation and amortization

       103       93       11       4.2       4.1  

Fuel

       3       2       NM        0.1       0.1  

Maintenance and repairs

       46       44       5       1.9       1.9  

Intercompany charges

       262       241       9       10.6       10.6  

Other

       206       188       10       8.4       8.2  
    

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

       2,017       1,871       8       81.9      82.1 
    

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

     $ 445     $ 407       9      
    

 

 

   

 

 

       

Operating margin

       18.1     17.9     20  bp    

Average daily package volume

            

FedEx Ground

       3,898       3,722       5      

FedEx SmartPost

       1,664       1,415       18      

Revenue per package (yield)

            

FedEx Ground

     $ 8.94     $ 8.73       2      

FedEx SmartPost

     $ 1.75     $ 1.76       (1    

FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 8% during the first quarter of 2013 due to yield and volume growth at FedEx Ground and volume growth at FedEx SmartPost.

Average daily volume at FedEx Ground increased 5% during the first quarter of 2013 due to market share gains resulting from continued growth in our commercial business and our FedEx Home Delivery service. FedEx Ground yield increased 2% during the first quarter of 2013 primarily due to rate increases.

FedEx SmartPost volumes grew 18% during the first quarter of 2013 as a result of the growth in e-commerce. Yields at FedEx SmartPost decreased 1% during the first quarter of 2013 primarily due to higher postage costs partially offset by rate increases. FedEx SmartPost yield represents the amount charged to customers net of postage paid to the United States Postal Service (“USPS”).

 

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

 

                                                 
       2012     2011  

Low

       7.00      9.00 

High

       8.50       9.50  

Weighted-average

       7.80       9.32  

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 9% during the first quarter of 2013 due to yield and package volume growth. Purchased transportation costs increased 7% during the first quarter of 2013 primarily as a result of volume growth. Salaries and employee benefits expense increased 7% during the first quarter of 2013 primarily due to increased additional staffing to support volume growth. Intercompany charges increased 9% in the first quarter of 2013 primarily due to higher allocated information technology, sales and marketing costs.

Evolution of Independent Contractor Model

Although FedEx Ground is involved in numerous lawsuits and other proceedings (such as state tax audits or other administrative challenges) where the classification of its independent contractors is at issue, a number of recent judicial decisions support our classification, and we believe our relationship with the contractors is generally excellent. For a description of these proceedings, see “Risk Factors” and Note 7 of the accompanying unaudited condensed consolidated financial statements.

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

 

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FEDEX FREIGHT SEGMENT

The following table compares revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected statistics for the three-month periods ended August 31:

 

                                                                                                                            
                   Percent     Percent of Revenue  
       2012     2011     Change     2012     2011  

Revenues

     $ 1,399     $ 1,328       5       100.0      100.0 

Operating expenses:

            

Salaries and employee benefits

       599       578       4       42.8       43.5  

Purchased transportation

       226       207       9       16.2       15.6  

Rentals

       29       28       4       2.1       2.1  

Depreciation and amortization

       53       44       20       3.8       3.3  

Fuel

       148       165       (10     10.6       12.4  

Maintenance and repairs

       48       50       (4     3.4       3.8  

Intercompany charges

       111       109       2       7.9       8.2  

Other

       95       105       (10     6.8       7.9  
    

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

       1,309       1,286       2       93.6      96.8 
    

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

     $ 90     $ 42       114      
    

 

 

   

 

 

       

Operating margin

       6.4     3.2     320  bp    

Average daily LTL shipments (in thousands)

            

Priority

       61.4       61.3       —         

Economy

       26.6       23.7       12      
    

 

 

   

 

 

       

Total average daily LTL shipments

       88.0       85.0       4      
    

 

 

   

 

 

       

Weight per LTL shipment (lbs)

            

Priority

       1,215       1,186       2      

Economy

       999       1,082       (8    

Composite weight per LTL shipment

       1,150       1,157       (1    

LTL yield (revenue per hundredweight)

            

Priority

     $ 17.73     $ 17.94       (1    

Economy

       25.33       23.13       10      

Composite LTL yield

     $ 19.72     $ 19.29       2      

FedEx Freight Segment Revenues

FedEx Freight segment revenues increased 5% during the first quarter of 2013 as a result of higher average daily LTL shipments and yields. Average daily LTL shipments increased 4% during the first quarter of 2013 due to an increase in customer demand for our FedEx Freight Economy service offering. Additionally, we increased the number of customers using both FedEx Freight Priority and Economy service offerings in the first quarter of 2013.

Total LTL yield increased 2% during the first quarter of 2013 due to improvements in FedEx Freight Economy yield resulting from higher rates and lower weight per LTL shipment. FedEx Freight Priority yield declined slightly due to higher weight per LTL shipment and the negative impact of weakened economic conditions on pricing for priority services. Changes in weight per shipment generally have an inverse effect on LTL yields, as a decrease in weight per shipment will cause an increase in yield.

 

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

 

                                                 
       2012     2011  

Low

       21.80      19.80 

High

       24.00       23.40  

Weighted-average

       22.60       22.90  

In July 2012, FedEx Freight implemented a rate increase of 6.9% for LTL shipments. In June 2011, FedEx Freight increased the fuel surcharge rate to a maximum of 3.6 percentage points above previous levels.

FedEx Freight Segment Operating Income

Operating income increased 114% and operating margin increased 320 basis points at FedEx Freight in the first quarter of 2013 primarily due to increased average daily LTL shipments and LTL yield growth, particularly in our FedEx Freight Economy services, and ongoing improvements from efficiencies in our integrated network.

In the first quarter of 2013, salaries and employee benefits increased 4% primarily due to a volume-related increase in labor hours and higher medical and pension costs, partially offset by lower incentive compensation accruals. Purchased transportation costs increased 9% in the first quarter of 2013 due to increased utilization of rail and higher rates. Other operating expenses decreased 10% in the first quarter of 2013 due to higher legal settlements and bad debt expense in the prior year. Depreciation and amortization increased 20% due to continued investment in transportation equipment and technology.

Fuel costs decreased 10% during the first quarter of 2013 due to increased utilization of rail, fuel efficiency improvements and a lower average price per gallon of diesel fuel. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had minimal impact on operating income in the first quarter of 2013.

 

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FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $2.7 billion at August 31, 2012, compared to $2.8 billion at May 31, 2012. The following table provides a summary of our cash flows for the three-month periods ended August 31(in millions):

 

                                                 
       2012      2011  

Operating activities:

       

Net income

     $ 459      $ 464  

Noncash charges and credits

       782        720  

Changes in assets and liabilities

       (338      (324
    

 

 

    

 

 

 

Cash provided by operating activities

       903        860  
    

 

 

    

 

 

 

Investing activities:

       

Capital expenditures

       (972      (1,110

Business acquisitions, net of cash acquired

       (483      (111

Proceeds from asset dispositions and other

       12        5  
    

 

 

    

 

 

 

Cash used in investing activities

       (1,443      (1,216
    

 

 

    

 

 

 

Financing activities:

       

Principal payments on debt

       (301      (17

Proceeds for debt issuance

       991        —     

Proceeds from stock issuances

       30        28  

Excess tax benefit on the exercise of stock options

       4        4  

Dividends paid

       (44      (41

Purchase of treasury stock

       (246      —     

Other

       (9      —     
    

 

 

    

 

 

 

Cash provided by (used in) financing activities

       425        (26
    

 

 

    

 

 

 

Effect of exchange rate changes on cash

       15        13  
    

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     $ (100    $ (369
    

 

 

    

 

 

 

Cash flows from operating activities increased $43 million in the first quarter of 2013 primarily due to an income tax refund, partially offset by our pension contributions. We made contributions of $140 million to our tax qualified U.S. domestic pension plans (“U.S. Pension Plans”) during the first quarter of 2013 and $99 million in contributions to our U.S. Pension Plans during the first quarter of 2012. Capital expenditures during the first three months of 2013 were lower primarily due to decreased spending at FedEx Express for aircraft. See “Capital Resources” for a discussion of capital expenditures during 2013 and 2012.

During the first quarter of 2013, we repaid our $300 million 9.65% unsecured notes that matured on June 15, 2012 using cash from operations.

In July 2012, we issued $1 billion of senior unsecured debt under a then current shelf registration statement, comprised of $500 million of 2.625% fixed-rate notes due in August 2022 and $500 million of 3.875% fixed-rate notes due in August 2042. Interest on these notes is payable semi-annually. We are utilizing the net proceeds for working capital and general corporate purposes.

 

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During the first quarter of 2013, we repurchased 2.7 million shares of FedEx common stock at an average price of $91 per share for a total of $246 million. As of August 31, 2012, 188,000 shares remained under existing share repurchase authorizations.

CAPITAL RESOURCES

Our operations are capital intensive, characterized by significant investments in aircraft, vehicles, technology, facilities, and package-handling and sort equipment. The amount and timing of capital additions depend on various factors, including pre-existing contractual commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, availability of satisfactory financing and actions of regulatory authorities.

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

 

                                                                                                   
       2012        2011        Dollar
Change
     Percent
Change
 

Aircraft and related equipment

     $ 474        $ 700        $ (226      (32

Facilities and sort equipment

       113          95          18        19  

Vehicles

       264          174          90        52  

Information and technology investments

       91          128          (37      (29

Other equipment

       30          13          17        NM   
    

 

 

      

 

 

      

 

 

    

Total capital expenditures

     $ 972        $ 1,110        $ (138      (12
    

 

 

      

 

 

      

 

 

    

FedEx Express segment