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 November 30, 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 December 18, 2012 314,461,506

 

 

 

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FEDEX CORPORATION

INDEX

 

		PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets November 30, 2012 and May 31, 2012			3
Condensed Consolidated Statements of Income Three and Six Months Ended November 30, 2012 and 2011			5
Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended November  30, 2012 and 2011			6
Condensed Consolidated Statements of Cash Flows Six Months Ended November 30, 2012 and 2011			7
Notes to Condensed Consolidated Financial Statements			8
Report of Independent Registered Public Accounting Firm			27
ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition			28
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			53
ITEM 4. Controls and Procedures			53
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			54
ITEM 1A. Risk Factors			54
ITEM 6. Exhibits			54
Signature			55
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
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)

 

		November 30,
		2012				May 31,
		(Unaudited)				2012
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	2,517			$	2,843
Receivables, less allowances of $172 and $178			5,202				4,704
Spare parts, supplies and fuel, less allowances of $194 and $184			456				440
Deferred income taxes			510				533
Prepaid expenses and other			474				536
Total current assets			9,159				9,056
PROPERTY AND EQUIPMENT, AT COST			37,749				36,164
Less accumulated depreciation and amortization			19,400				18,916
Net property and equipment			18,349				17,248
OTHER LONG-TERM ASSETS
Goodwill			2,757				2,387
Other assets			1,047				1,212
Total other long-term assets			3,804				3,599
		$	31,312			$	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)

 

		November 30,
		2012				May 31,
		(Unaudited)				2012
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt		$	1			$	417
Accrued salaries and employee benefits			1,297				1,635
Accounts payable			1,730				1,613
Accrued expenses			1,800				1,709
Total current liabilities			4,828				5,374
LONG-TERM DEBT, LESS CURRENT PORTION			2,241				1,250
OTHER LONG-TERM LIABILITIES
Deferred income taxes			973				836
Pension, postretirement healthcare and other benefit obligations			5,447				5,582
Self-insurance accruals			985				963
Deferred lease obligations			910				784
Deferred gains, principally related to aircraft transactions			239				251
Other liabilities			146				136
Total other long-term liabilities			8,700				8,552
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS’ INVESTMENT
Common stock, $0.10 par value; 800 million shares authorized; 317 million shares issued as of November 30, 2012 and May 31, 2012			32				32
Additional paid-in capital			2,635				2,595
Retained earnings			17,899				17,134
Accumulated other comprehensive loss			(4,770	)			(4,953	)
Treasury stock, at cost			(253	)			(81	)
Total common stockholders’ investment			15,543				14,727
		$	31,312			$	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								Six Months Ended
		November 30,								November 30,
		2012				2011				2012				2011
REVENUES		$	11,107			$	10,587			$	21,899			$	21,108
OPERATING EXPENSES:
Salaries and employee benefits			4,133				3,982				8,236				7,986
Purchased transportation			1,860				1,576				3,540				3,094
Rentals and landing fees			630				623				1,248				1,243
Depreciation and amortization			592				518				1,165				1,027
Fuel			1,235				1,200				2,373				2,444
Maintenance and repairs			511				511				1,053				1,062
Other			1,428				1,397				2,824				2,735
			10,389				9,807				20,439				19,591
OPERATING INCOME			718				780				1,460				1,517
OTHER INCOME (EXPENSE):
Interest, net			(18	)			(7	)			(28	)			(18	)
Other, net			(8	)			4				(13	)			2
			(26	)			(3	)			(41	)			(16	)
INCOME BEFORE INCOME TAXES			692				777				1,419				1,501
PROVISION FOR INCOME TAXES			254				280				522				540
NET INCOME		$	438			$	497			$	897			$	961
EARNINGS PER COMMON SHARE:
Basic		$	1.39			$	1.57			$	2.85			$	3.04
Diluted		$	1.39			$	1.57			$	2.84			$	3.02
DIVIDENDS DECLARED PER COMMON SHARE		$	0.14			$	0.13			$	0.42			$	0.39

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								Six Months Ended
		November 30,								November 30,
		2012				2011				2012				2011
NET INCOME		$	438			$	497			$	897			$	961
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments, net of tax of $2, $26, $6 and $22			14				(110	)			57				(91	)
Amortization of unrealized pension actuarial gains/losses and other, net of tax of $38, $18, $75 and $36			63				30				126				60
COMPREHENSIVE INCOME		$	515			$	417			$	1,080			$	930

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)

 

		Six Months Ended
		November 30,
		2012				2011
Operating Activities:
Net income		$	897			$	961
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			1,165				1,027
Provision for uncollectible accounts			93				84
Stock-based compensation			64				60
Deferred income taxes and other noncash items			267				278
Changes in assets and liabilities:
Receivables			(503	)			(291	)
Other assets			94				(44	)
Accounts payable and other liabilities			(345	)			119
Other, net			(14	)			(26	)
Cash provided by operating activities			1,718				2,168
Investing Activities:
Capital expenditures			(1,888	)			(2,217	)
Business acquisitions, net of cash acquired			(483	)			(114	)
Proceeds from asset dispositions and other			20				15
Cash used in investing activities			(2,351	)			(2,316	)
Financing Activities:
Principal payments on debt			(417	)			(18	)
Proceeds from debt issuance			991				—
Proceeds from stock issuances			53				32
Excess tax benefit on the exercise of stock options			6				5
Dividends paid			(88	)			(82	)
Purchase of treasury stock			(246	)			(197	)
Other, net			(9	)			—
Cash provided by (used in) financing activities			290				(260	)
Effect of exchange rate changes on cash			17				(24	)
Net decrease in cash and cash equivalents			(326	)			(432	)
Cash and cash equivalents at beginning of period			2,843				2,328
Cash and cash equivalents at end of period		$	2,517			$	1,896

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 November 30, 2012, the results of our operations for the three- and six-month periods ended November 30, 2012 and 2011 and cash flows for the six-month periods ended November 30, 2012 and 2011. Operating results for the three- and six-month periods ended November 30, 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 expanded 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 and therefore, pro forma financial information has not been presented.

 

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The estimated fair values of the assets and liabilities related to these acquisitions have been recorded in the FedEx Express segment and are 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 and working capital adjustments are completed, which will not exceed one year from the acquisition date.

 

Current assets		$	143
Property and equipment			88
Goodwill			348
Intangible assets			60
Other non-current assets			68
Current liabilities			(166	)
Long-term liabilities			(34	)
Total purchase price		$	507

The goodwill of $348 million is primarily attributable to expected benefits from synergies of the combinations with existing businesses and acquired entities. 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 $25 million for the three-month period ended November 30, 2012 and $64 million for the six-month period ended November 30, 2012. Our stock-based compensation expense was $23 million for the three-month period ended November 30, 2011 and $60 million for the six-month period ended November 30, 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 have adopted this guidance by including a separate statement of comprehensive income for the three-month and six-month periods ended November 30, 2012 and 2011. In addition, on June 1, 2012, we adopted the FASB’s amendments to the fair value measurements and disclosure requirements, 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 half 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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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 November 30, 2012, 188,000 shares remained under existing share repurchase authorizations.

DIVIDENDS DECLARED PER COMMON SHARE. On November 2, 2012, our Board of Directors declared a dividend of $0.14 per share of common stock. The dividend was paid on December 17, 2012 to stockholders of record as of the close of business on November 21, 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 filed a shelf registration statement with the SEC that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock.

During the second quarter of 2013, we made principal payments of $116 million related to capital lease obligations. 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 November 30, 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 November 30, 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 November 30, 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 periods ended November 30 was as follows (in millions, except per share amounts):

 

		Three Months Ended								Six Months Ended
		2012				2011				2012				2011
Basic earnings per common share:
Net earnings allocable to common shares(1)		$	437			$	495			$	895			$	959
Weighted-average common shares			314				315				314				316
Basic earnings per common share		$	1.39			$	1.57			$	2.85			$	3.04
Diluted earnings per common share:
Net earnings allocable to common shares(1)		$	437			$	495			$	895			$	959
Weighted-average common shares			314				315				314				316
Dilutive effect of share-based awards			1				1				2				1
Weighted-average diluted shares			315				316				316				317
Diluted earnings per common share		$	1.39			$	1.57			$	2.84			$	3.02
Anti-dilutive options excluded from diluted earnings per common share			14.3				14.2				14.1				13.7

 

(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 periods ended November 30 were as follows (in millions):

 

		Three Months Ended								Six Months Ended
		2012				2011				2012				2011
U.S. domestic and international pension plans		$	171			$	132			$	340			$	264
U.S. domestic and international defined contribution plans			87				81				175				167
Postretirement healthcare plans			20				17				39				35
		$	278			$	230			$	554			$	466

 

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

 

		Three Months Ended								Six Months Ended
		2012				2011				2012				2011
Pension Plans
Service cost		$	173			$	149			$	346			$	297
Interest cost			242				244				484				488
Expected return on plan assets			(345	)			(309	)			(691	)			(618	)
Recognized actuarial losses and other			101				48				201				97
		$	171			$	132			$	340			$	264
		Three Months Ended								Six Months Ended
		2012				2011				2012				2011
Postretirement Healthcare Plans
Service cost		$	11			$	9			$	21			$	18
Interest cost			9				9				18				18
Recognized actuarial gains and other			—				(1	)			—				(1	)
		$	20			$	17			$	39			$	35

Required contributions to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) for the six-month periods ended November 30 were $280 million in 2012 and $226 million in 2011. In December 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.

(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)

 

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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 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.

 

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

 

		Three Months Ended								Six Months Ended
		2012				2011				2012				2011
Revenues
FedEx Express segment		$	6,858			$	6,583			$	13,490			$	13,175
FedEx Ground segment			2,593				2,339				5,055				4,617
FedEx Freight segment			1,377				1,325				2,776				2,653
FedEx Services segment			405				427				794				838
Other and eliminations			(126	)			(87	)			(216	)			(175	)
		$	11,107			$	10,587			$	21,899			$	21,108
Operating Income
FedEx Express segment		$	230			$	342			$	437			$	630
FedEx Ground segment			412				398				857				805
FedEx Freight segment			76				40				166				82
		$	718			$	780			$	1,460			$	1,517

(6) Commitments

As of November 30, 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)		$	350			$	404			$	754
2014			659				215				874
2015			888				117				1,005
2016			958				75				1,033
2017			952				54				1,006
Thereafter			5,912				139				6,051

 

(1)	Primarily vehicles, facilities, advertising contracts, and for the remainder of 2013, a total of $280 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. Our obligation to purchase four Boeing 767-300 Freighter (“B767F”) aircraft and nine Boeing 777 Freighter (“B777F”) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the Railway Labor Act of 1926, as amended. 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.

 

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We had $408 million in deposits and progress payments as of November 30, 2012 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the “Other assets” caption of our condensed consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the Boeing 757 (“B757”) in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of November 30, 2012, with the year of expected delivery:

 

		B757				B767F				B777F				Total
2013 (remainder)			5				—				—				5
2014			—				4				2				6
2015			—				8				2				10
2016			—				10				—				10
2017			—				10				—				10
Thereafter			—				14				16				30
Total			5				46				20				71

On December 11, 2012, FedEx Express entered into an agreement with The Boeing Company for the purchase of four incremental B767F aircraft, the delivery of which will occur in 2015. FedEx Express is also deferring the delivery of two firm B777F aircraft orders from 2015 to 2016. These aircraft transactions are not reflected in the tables above, as they occurred subsequent to the end of the second quarter of 2013.

A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at November 30, 2012 is as follows (in millions):

 

		Operating Leases
		Aircraft and Related Equipment				Facilities and Other				Total Operating Leases
2013 (remainder)		$	392			$	714			$	1,106
2014			462				1,383				1,845
2015			448				1,264				1,712
2016			453				1,065				1,518
2017			391				1,183				1,574
Thereafter			1,150				6,003				7,153
Total		$	3,296			$	11,612			$	14,908

Future minimum lease payments under capital leases were immaterial at November 30, 2012 and therefore are excluded from the table above. 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. We settled the individual claims in the California case for an immaterial amount, and in November 2012, the plaintiffs filed notices of appeal as to the certified claims to 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; class notices were sent out to 143 potential class members; and three individuals opted out. 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. In October 2012, the U.S. Supreme Court denied ATA Airlines’ request.

Other Matters. In August 2010, a third-party consultant who works with shipping customers to negotiate lower rates filed a lawsuit in federal district court in California against FedEx and United Parcel Service, Inc. (“UPS”) alleging violations of U.S. antitrust law. This matter was dismissed in May 2011, but the court granted the plaintiff permission to file an amended complaint, which FedEx received in June 2011. In November 2011, the court granted our motion to dismiss this complaint, but again allowed the plaintiff to file an amended complaint. The plaintiff filed a new complaint in December 2011, and the matter remains pending before the court. In February 2011, shortly after the initial lawsuit was filed, we received a demand for the production of information and documents in connection with a civil investigation by the 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. In November 2012, the DOJ served a civil investigative demand on the third-party consultant seeking all pleadings, depositions and documents produced in the lawsuit. We are cooperating with the investigation, do not believe that we have engaged in any anti-competitive activities and will vigorously defend ourselves in any action that may result from the investigation. While the litigation proceedings and the DOJ investigation 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 believe that our employees have acted in good faith at all times. 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. The DOJ may pursue a criminal indictment and, if we are convicted, remedies could include fines, penalties, financial forfeiture and compliance conditions. We cannot estimate the amount or range of loss, if any, 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 six-month periods ended November 30 was as follows (in millions):

 

		2012				2011
Cash payments for:
Interest (net of capitalized interest)		$	36			$	23
Income taxes		$	543			$	276
Income tax refunds received			(191	)			(6	)
Cash tax payments, net		$	352			$	270

(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)

November 30, 2012

 

		Parent				Guarantor Subsidiaries				Non-guarantor Subsidiaries				Eliminations				Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,715			$	328			$	659			$	(185	)		$	2,517
Receivables, less allowances			—				4,106				1,147				(51	)			5,202
Spare parts, supplies, fuel, prepaid expenses and other, less allowances			162				714				54				—				930
Deferred income taxes			—				491				19				—				510
Total current assets			1,877				5,639				1,879				(236	)			9,159
PROPERTY AND EQUIPMENT, AT COST			26				35,659				2,064				—				37,749
Less accumulated depreciation and amortization			20				18,264				1,116				—				19,400
Net property and equipment			6				17,395				948				—				18,349
INTERCOMPANY RECEIVABLE			—				—				1,115				(1,115	)			—
GOODWILL			—				1,554				1,203				—				2,757
INVESTMENT IN SUBSIDIARIES			18,069				3,238				—				(21,307	)			—
OTHER ASSETS			2,781				802				208				(2,744	)			1,047
		$	22,733			$	28,628			$	5,353			$	(25,402	)		$	31,312
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt		$	—			$	1			$	—			$	—			$	1
Accrued salaries and employee benefits			66				1,020				211				—				1,297
Accounts payable			46				1,347				573				(236	)			1,730
Accrued expenses			216				1,386				198				—				1,800
Total current liabilities			328				3,754				982				(236	)			4,828
LONG-TERM DEBT, LESS CURRENT PORTION			1,991				250				—				—				2,241
INTERCOMPANY PAYABLE			697				418				—				(1,115	)			—
OTHER LONG-TERM LIABILITIES
Deferred income taxes			—				3,704				13				(2,744	)			973
Other liabilities			4,174				3,343				210				—				7,727
Total other long-term liabilities			4,174				7,047				223				(2,744	)			8,700
STOCKHOLDERS’ INVESTMENT			15,543				17,159				4,148				(21,307	)			15,543
		$	22,733			$	28,628			$	5,353			$	(25,402	)		$	31,312

 

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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 November 30, 2012

 

		Parent				Guarantor Subsidiaries				Non-guarantor Subsidiaries				Eliminations				Consolidated
REVENUES		$	—			$	9,225			$	1,965			$	(83	)		$	11,107
OPERATING EXPENSES:
Salaries and employee benefits			31				3,569				533				—				4,133
Purchased transportation			—				1,222				673				(35	)			1,860
Rentals and landing fees			1				549				81				(1	)			630
Depreciation and amortization			1				545				46				—				592
Fuel			—				1,210				25				—				1,235
Maintenance and repairs			1				481				29				—				511
Intercompany charges, net			(59	)			(88	)			147				—				—
Other			25				1,143				307				(47	)			1,428
			—				8,631				1,841				(83	)			10,389
OPERATING INCOME			—				594				124				—				718
OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries			438				70				—				(508	)			—
Interest, net			(27	)			8				1				—				(18	)
Intercompany charges, net			29				(33	)			4				—				—
Other, net			(2	)			(3	)			(3	)			—				(8	)
INCOME BEFORE INCOME TAXES			438				636				126				(508	)			692
Provision for income taxes			—				190				64				—				254
NET INCOME		$	438			$	446			$	62			$	(508	)		$	438
COMPREHENSIVE INCOME		$	497			$	455			$	71			$	(508	)		$	515

 

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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended November 30, 2011

 

		Parent				Guarantor Subsidiaries				Non-guarantor Subsidiaries				Eliminations				Consolidated
REVENUES		$	—			$	9,001			$	1,660			$	(74	)		$	10,587
OPERATING EXPENSES:
Salaries and employee benefits			28				3,506				448				—				3,982
Purchased transportation			—				1,122				482				(28	)			1,576
Rentals and landing fees			1				557				67				(2	)			623
Depreciation and amortization			1				480				37				—				518
Fuel			—				1,181				19				—				1,200
Maintenance and repairs			—				486				25				—				511
Intercompany charges, net			(53	)			(135	)			188				—				—
Other			23				1,156				262				(44	)			1,397
			—				8,353				1,528				(74	)			9,807
OPERATING INCOME			—				648				132				—				780
OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries			497				80				—				(577	)			—
Interest, net			(19	)			11				1				—				(7	)
Intercompany charges, net			21				(27	)			6				—				—
Other, net			(2	)			(1	)			7				—				4
INCOME BEFORE INCOME TAXES			497				711				146				(577	)			777
Provision for income taxes			—				202				78				—				280
NET INCOME		$	497			$	509			$	68			$	(577	)		$	497
COMPREHENSIVE INCOME		$	525			$	480			$	(11	)		$	(577	)		$	417

 

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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Six Months Ended November 30, 2012

 

		Parent				Guarantor Subsidiaries				Non-guarantor Subsidiaries				Eliminations				Consolidated
REVENUES		$	—			$	18,319			$	3,743			$	(163	)		$	21,899
OPERATING EXPENSES:
Salaries and employee benefits			61				7,158				1,017				—				8,236
Purchased transportation			—				2,352				1,256				(68	)			3,540
Rentals and landing fees			2				1,093				156				(3	)			1,248
Depreciation and amortization			1				1,075				89				—				1,165
Fuel			—				2,326				47				—				2,373
Maintenance and repairs			1				996				56				—				1,053
Intercompany charges, net			(119	)			(200	)			319				—				—
Other			54				2,276				586				(92	)			2,824
			—				17,076				3,526				(163	)			20,439
OPERATING INCOME			—				1,243				217				—				1,460
OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries			897				99				—				(996	)			—
Interest, net			(50	)			19				3				—				(28	)
Intercompany charges, net			53				(62	)			9				—				—
Other, net			(3	)			(5	)			(5	)			—				(13	)
INCOME BEFORE INCOME TAXES			897				1,294				224				(996	)			1,419
Provision for income taxes			—				426				96				—				522
NET INCOME		$	897			$	868			$	128			$	(996	)		$	897
COMPREHENSIVE INCOME		$	1,015			$	883			$	178			$	(996	)		$	1,080

 

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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

Six Months Ended November 30, 2011

 

		Parent				Guarantor Subsidiaries				Non-guarantor Subsidiaries				Eliminations				Consolidated
REVENUES		$	—			$	18,008			$	3,244			$	(144	)		$	21,108
OPERATING EXPENSES:
Salaries and employee benefits			61				7,037				888				—				7,986
Purchased transportation			—				2,202				946				(54	)			3,094
Rentals and landing fees			2				1,112				132				(3	)			1,243
Depreciation and amortization			1				951				75				—				1,027
Fuel			—				2,405				39				—				2,444
Maintenance and repairs			—				1,014				48				—				1,062
Intercompany charges, net			(111	)			(225	)			336				—				—
Other			47				2,281				494				(87	)			2,735
			—				16,777				2,958				(144	)			19,591
OPERATING INCOME			—				1,231				286				—				1,517
OTHER INCOME (EXPENSE):
Equity in earnings of subsidiaries			961				151				—				(1,112	)			—
Interest, net			(39	)			19				2				—				(18	)
Intercompany charges, net			42				(55	)			13				—				—
Other, net			(3	)			(3	)			8				—				2
INCOME BEFORE INCOME TAXES			961				1,343				309				(1,112	)			1,501
Provision for income taxes			—				417				123				—				540
NET INCOME		$	961			$	926			$	186			$	(1,112	)		$	961
COMPREHENSIVE INCOME		$	1,017			$	910			$	115			$	(1,112	)		$	930

 

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended November 30, 2012

 

		Parent				Guarantor Subsidiaries				Non-guarantor Subsidiaries				Eliminations				Consolidated
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		$	(32	)		$	1,652			$	167			$	(69	)		$	1,718
INVESTING ACTIVITIES
Capital expenditures			(3	)			(1,716	)			(169	)			—				(1,888	)
Business acquisitions, net of cash acquired			—				—				(483	)			—				(483	)
Proceeds from asset dispositions and other			—				22				(2	)			—				20
CASH USED IN INVESTING ACTIVITIES			(3	)			(1,694	)			(654	)			—				(2,351	)
FINANCING ACTIVITIES
Net transfers from (to) Parent			(863	)			891				(28	)			—				—
Payment on loan between subsidiaries			—				(430	)			430				—				—
Intercompany dividends			—				1				(1	)			—				—
Principal payments on debt			—				(417	)			—				—				(417	)
Proceeds from debt issuance			991				—				—				—				991
Proceeds from stock issuances			53				—				—				—				53
Excess tax benefit on the exercise of stock options			6				—				—				—				6
Dividends paid			(88	)			—				—				—				(88	)
Purchase of treasury stock			(246	)			—				—				—				(246	)
Other, net			(9	)			(93	)			93				—				(9	)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			(156	)			(48	)			494				—				290
Effect of exchange rate changes on cash			—				1				16				—				17
Net (decrease) increase in cash and cash equivalents			(191	)			(89	)			23				(69	)			(326	)
Cash and cash equivalents at beginning of period			1,906				417				636				(116	)			2,843
Cash and cash equivalents at end of period		$	1,715			$	328			$	659			$	(185	)		$	2,517

 

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended November 30, 2011

 

		Parent				Guarantor Subsidiaries				Non-guarantor Subsidiaries				Eliminations				Consolidated
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		$	135			$	1,814			$	248			$	(29	)		$	2,168
INVESTING ACTIVITIES
Capital expenditures			(1	)			(2,161	)			(55	)			—				(2,217	)
Business acquisition, net of cash acquired			—				—				(114	)			—				(114	)
Proceeds from asset dispositions and other			—				15				—				—				15
CASH USED IN INVESTING ACTIVITIES			(1	)			(2,146	)			(169	)			—				(2,316	)
FINANCING ACTIVITIES
Net transfers from (to) Parent			(481	)			484				(3	)			—				—
Intercompany dividends			—				21				(21	)			—				—
Principal payments on debt			—				(18	)			—				—				(18	)
Proceeds from stock issuances			32				—				—				—				32
Excess tax benefit on the exercise of stock options			5				—				—				—				5
Dividends paid			(82	)			—				—				—				(82	)
Purchase of treasury stock			(197	)			—				—				—				(197	)
Other, net			—				(16	)			16				—				—
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(723	)			471				(8	)			—				(260	)
Effect of exchange rate changes on cash			—				(6	)			(18	)			—				(24	)
Net (decrease) increase in cash and cash equivalents			(589	)			133				53				(29	)			(432	)
Cash and cash equivalents at beginning of period			1,589				279				546				(86	)			2,328
Cash and cash equivalents at end of period		$	1,000			$	412			$	599			$	(115	)		$	1,896

 

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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 November 30, 2012, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended November 30, 2012 and 2011 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 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

December 20, 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 periods ended November 30:

 

		Three Months Ended								Percent				Six Months Ended								Percent
		2012				2011				Change				2012				2011				Change
Revenues		$	11,107			$	10,587				5			$	21,899			$	21,108				4
Operating income			718				780				(8	)			1,460				1,517				(4	)
Operating margin			6.5	%			7.4	%			(90	)bp			6.7	%			7.2	%			(50	)bp
Net income		$	438			$	497				(12	)		$	897			$	961				(7	)
Diluted earnings per share		$	1.39			$	1.57				(11	)		$	2.84			$	3.02				(6	)

The following table shows changes in revenues and operating income by reportable segment for the periods ended November 30, 2012 compared to November 30, 2011 (dollars in millions):

 

		Change in Revenues								Percent Change in Revenue								Change in Operating Income								Percent Change in Operating Income
		Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
FedEx Express segment		$	275			$	315				4				2			$	(112	)		$	(193	)			(33	)			(31	)
FedEx Ground segment			254				438				11				9				14				52				4				6
FedEx Freight segment			52				123				4				5				36				84				90				102
FedEx Services segment			(22	)			(44	)			(5	)			(5	)			—				—				—				—
Other and eliminations			(39	)			(41	)			NM				NM				—				—				—				—
		$	520			$	791				5				4			$	(62	)		$	(57	)			(8	)			(4	)

Overview

Despite an increase in revenues in the second quarter and first half of 2013, operating income and operating margins decreased as the continued strong performance of FedEx Ground and improving results at FedEx Freight were offset by reduced profitability at FedEx Express from higher demand for our lower yielding international services. Our results for the second quarter include a $0.11 per diluted share negative impact of Superstorm Sandy, primarily at FedEx Express, which caused severe damage in portions of the Northeastern United States region, particularly in New York and New Jersey, where each of our business segments have significant operations. This storm negatively impacted our operations, resulting in reduced shipment volumes and incremental operating costs. The results for the second quarter of 2013 also reflect the net year-over-year negative impact, primarily at FedEx Express, from the timing lag that exists between when fuel prices change and indexed fuel surcharges automatically adjust.

 

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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:

 

 

 

(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:

 

 

 

(1)	Excludes international domestic operations.

(2)	Package statistics do not include the operations of FedEx SmartPost.

Revenue

Revenues increased 5% in the second quarter of 2013 and 4% in the first half of 2013, despite service interruptions and reduced shipments due to the impact of Superstorm Sandy. At FedEx Express, revenues increased 4% in the second quarter of 2013 and 2% in the first half of 2013 primarily driven by increases in international domestic revenues due to recent acquisitions, growth in our freight-forwarding business at FedEx Trade Networks and higher international export volume. Revenues were partially offset by lower U.S. domestic package revenue and the demand shift toward lower-yielding international services in the second quarter and first half of 2013. At FedEx Ground, revenues increased 11% in the second quarter and 9% in the first half of 2013 due to volume growth from market share gains and increased yields due to rate increases. Revenues increased 4% in the second quarter and 5% in the first half of 2013 at FedEx Freight as a result of higher average daily LTL shipments and yield.

 

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Operating Income

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

 

		Three Months Ended								Six Months Ended
		2012				2011				2012				2011
Operating expenses:
Salaries and employee benefits		$	4,133			$	3,982			$	8,236			$	7,986
Purchased transportation			1,860				1,576				3,540				3,094
Rentals and landing fees			630				623				1,248				1,243
Depreciation and amortization			592				518				1,165				1,027
Fuel			1,235				1,200				2,373				2,444
Maintenance and repairs			511				511				1,053				1,062
Other			1,428				1,397				2,824				2,735
Total operating expenses		$	10,389			$	9,807			$	20,439			$	19,591

 

		Percent of Revenue								Percent of Revenue
		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
		2012				2011				2012				2011
Operating expenses:
Salaries and employee benefits			37.2	%			37.6	%			37.6	%			37.8	%
Purchased transportation			16.7				14.9				16.2				14.7
Rentals and landing fees			5.7				5.9				5.7				5.9
Depreciation and amortization			5.3				4.9				5.3				4.9
Fuel			11.1				11.3				10.8				11.6
Maintenance and repairs			4.6				4.8				4.8				5.0
Other			12.9				13.2				12.9				12.9
Total operating expenses			93.5				92.6				93.3				92.8
Operating margin			6.5	%			7.4	%			6.7	%			7.2	%

Operating income and operating margin decreased in both the second quarter and first half of 2013 as a result of lower profitability at FedEx Express. Reduced profitability at FedEx Express in the second quarter of 2013 was driven by the demand shift toward lower-yielding international services, the negative impact of year-over-year net fuel changes, higher depreciation expense, and the impact of Superstorm Sandy. In the first half of 2013, lower profitability at FedEx Express was primarily due to lower U.S. domestic package volume, the demand shift toward lower-yielding international services, and higher depreciation and pension expenses. Our operating income was positively impacted in the second quarter and first half of 2013 by increased yields and higher volumes at our FedEx Freight and FedEx Ground segments.

Purchased transportation costs increased 18% in the second quarter and 14% in the first half of 2013 due to volume growth at FedEx Ground, recent international business acquisitions and the expansion of our freight forwarding business at FedEx Trade Networks. Salaries and employee benefits increased 4% in the second quarter and 3% in the first half of 2013 primarily due to increases in pension and group health insurance costs, partially offset by lower incentive compensation accruals. Depreciation and amortization expense increased 14% in the second quarter and 13% in the first half of 2013 due to aircraft recently placed in service and accelerated depreciation on certain aircraft at FedEx Express.

 

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

 

Fuel expense increased 3% during the second quarter of 2013 due to increases in the average price per gallon of fuel. However, fuel expense decreased 3% in the first half 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 a negative impact on operating income in the first half 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 second quarter and first half 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 second quarter and first half of 2013, compared with 36.1% for the second quarter of 2012 and 36.0% for the first half of 2012. Our effective tax rate in 2013 was higher than in 2012 primarily due to lower benefits derived from permanently reinvested international earnings, which are generally taxed at lower rates than in the U.S. For the remainder of 2013, we expect our effective tax rate to be approximately 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income.

As of November 30, 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.

 

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Business Acquisitions

In the first quarter of 2013, we expanded 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.

Outlook

For the remainder of 2013, we expect weakness in global economic conditions, growing uncertainty in the U.S. on the outcome of tax and spending policy decisions and increased demand for our lower yielding international services to restrain earnings growth. However, weakness at FedEx Express will be partially offset by the sustained strong performance driven by yield and market share growth from our FedEx Ground and FedEx Freight segments.

Profit Improvement Programs. During the second quarter of 2013, we announced programs targeting annual profitability improvement of $1.7 billion during the next three years. The majority of the profitability improvement will come from initiatives at FedEx Express and FedEx Services and includes the following:

 

•

Cost reductions in selling, general and administrative functions, including information technology, through headcount reductions, streamlining of processes and elimination of less essential work, as well as deriving greater value from strategic sourcing

 

•

Modernization of our aircraft fleet, transformation of the U.S. domestic operations and international profit improvements at FedEx Express

 

•

Improved efficiencies and lower costs of information technology at FedEx Services

Our overall profit improvement plan includes offering voluntary cash buyouts to eligible U.S.-based employees, beginning in February 2013. The voluntary buyout program will include voluntary severance payments and funding to healthcare reimbursement accounts, with the voluntary severance to be calculated based on four weeks of gross base salary for every year of FedEx service up to a maximum payment of two years of pay.

 

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Costs of the benefits provided under the voluntary programs will be recognized in the period that eligible employees accept their offers, predominantly in the fourth quarter of 2013. We expect the pretax cost of the voluntary buyout program to range from approximately $550 to $650 million, but actual costs will depend on employee acceptance rates. Other costs associated with the profit improvement initiatives will be recognized in the period incurred. Eligible employees will vacate positions in three phases to ensure a smooth transition in the impacted functions so that we maintain service levels to our customers. Employees in the first phase will vacate their positions on May 31, 2013.

These programs, combined with continued profit improvements at FedEx Ground and FedEx Freight, are expected to increase margins, improve cash flows and increase our competitiveness. The ultimate costs and savings from our profit improvement initiatives will depend, upon other things, on the number of employees that participate in the voluntary buyout program and the timing and execution of these programs. We expect to begin realizing the benefits of these programs in 2014, with a significant portion of the benefits to be achieved by the end of 2015.

Other Outlook Matters. For additional 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 for the three-month and six-month periods ended November 30, 2012 and 2011. In addition, on June 1, 2012, we adopted the FASB’s amendments to the fair value measurements and disclosure requirements, 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 half 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 tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the periods ended November 30:

 

		Three Months Ended								Percent				Six Months Ended								Percent
		2012				2011				Change				2012				2011				Change
Revenues:
Package:
U.S. overnight box		$	1,609			$	1,623				(1	)		$	3,213			$	3,263				(2	)
U.S. overnight envelope			409				421				(3	)			839				872				(4	)
U.S. deferred			732				731				—				1,434				1,462				(2	)
Total U.S. domestic package revenue			2,750				2,775				(1	)			5,486				5,597				(2	)
International priority(1)			1,678				1,711				(2	)			3,339				3,468				(4	)
International economy(2)			514				460				12				1,001				901				11
Total international export package revenue			2,192				2,171				1				4,340				4,369				(1	)
International domestic(3)			384				217				77				693				424				63
Total package revenue			5,326				5,163				3				10,519				10,390				1
Freight:
U.S.			645				628				3				1,255				1,219				3
International priority(4)			446				470				(5	)			885				919				(4	)
International airfreight			77				74				4				151				151				—
Total freight revenue			1,168				1,172				—				2,291				2,289				—
Other(5)			364				248				47				680				496				37
Total revenues			6,858				6,583				4				13,490				13,175				2
Operating expenses:
Salaries and employee benefits			2,488				2,377				5				4,961				4,790				4
Purchased transportation			608				448				36				1,145				897				28
Rentals and landing fees			418				421				(1	)			833				844				(1	)
Depreciation and amortization			336				288				17				659				570				16
Fuel			1,074				1,039				3				2,060				2,116				(3	)
Maintenance and repairs			349				354				(1	)			721				734				(2	)
Intercompany charges			535				548				(2	)			1,072				1,096				(2	)
Other			820				766				7				1,602				1,498				7
Total operating expenses			6,628				6,241				6				13,053				12,545				4
Operating income		$	230			$	342				(33	)		$	437			$	630				(31	)
Operating margin			3.4	%			5.2	%			(180	)bp			3.2	%			4.8	%			(160	)bp

 

(1)	International priority package services provide time-definite delivery within 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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		Percent of Revenue								Percent of Revenue
		Three Months Ended 2012				Three Months Ended 2011				Six Months Ended 2012				Six Months Ended 2011
Operating expenses:
Salaries and employee benefits			36.3	%			36.1	%			36.8	%			36.3	%
Purchased transportation			8.9				6.8				8.5				6.8
Rentals and landing fees			6.1				6.4				6.2				6.4
Depreciation and amortization			4.9				4.4				4.9				4.3
Fuel			15.6				15.8				15.3				16.1
Maintenance and repairs			5.1				5.4				5.3				5.6
Intercompany charges			7.8				8.3				7.9				8.3
Other			11.9				11.6				11.9				11.4
Total operating expenses			96.6				94.8				96.8				95.2
Operating margin			3.4	%			5.2	%			3.2	%			4.8	%

 

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

 

		Three Months Ended								Percent				Six Months Ended								Percent
		2012				2011				Change				2012				2011				Change
Package Statistics(1)
Average daily package volume (ADV):
U.S. overnight box			1,141				1,168				(2	)			1,116				1,151				(3	)
U.S. overnight envelope			564				582				(3	)			570				589				(3	)
U.S. deferred			828				838