UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED February 28, 2013
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 (Address of principal executive offices) |
38120 (ZIP Code) |
(901) 818-7500
(Registrants 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 issuers classes of common stock, as of the latest practicable date.
Common Stock | Outstanding Shares at March 19, 2013 | |
Common Stock, par value $0.10 per share |
316,868,914 |
INDEX
PAGE | ||||
PART I. FINANCIAL INFORMATION | ||||
ITEM 1. Financial Statements |
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Condensed Consolidated Balance Sheets |
3 | |||
5 | ||||
6 | ||||
7 | ||||
8 | ||||
28 | ||||
ITEM 2. Managements Discussion and Analysis of Results of Operations and Financial Condition |
29 | |||
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk |
56 | |||
ITEM 4. Controls and Procedures |
56 | |||
PART II. OTHER INFORMATION | ||||
ITEM 1. Legal Proceedings |
57 | |||
ITEM 1A. Risk Factors |
57 | |||
ITEM 6. Exhibits |
57 | |||
59 | ||||
E-1 | ||||
- 2 -
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
February 28, 2013 (Unaudited) |
May 31, 2012 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
$ | 3,372 | $ | 2,843 | ||||
Receivables, less allowances of $178 and $178 |
4,950 | 4,704 | ||||||
Spare parts, supplies and fuel, less allowances of $198 and $184 |
460 | 440 | ||||||
Deferred income taxes |
510 | 533 | ||||||
Prepaid expenses and other |
453 | 536 | ||||||
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Total current assets |
9,745 | 9,056 | ||||||
PROPERTY AND EQUIPMENT, AT COST |
38,114 | 36,164 | ||||||
Less accumulated depreciation and amortization |
19,786 | 18,916 | ||||||
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Net property and equipment |
18,328 | 17,248 | ||||||
OTHER LONG-TERM ASSETS |
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Goodwill |
2,765 | 2,387 | ||||||
Other assets |
992 | 1,212 | ||||||
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Total other long-term assets |
3,757 | 3,599 | ||||||
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$ | 31,830 | $ | 29,903 | |||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 3 -
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
February 28, 2013 (Unaudited) |
May 31, 2012 |
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LIABILITIES AND STOCKHOLDERS INVESTMENT |
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CURRENT LIABILITIES |
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Current portion of long-term debt |
$ | 251 | $ | 417 | ||||
Accrued salaries and employee benefits |
1,395 | 1,635 | ||||||
Accounts payable |
1,730 | 1,613 | ||||||
Accrued expenses |
1,723 | 1,709 | ||||||
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Total current liabilities |
5,099 | 5,374 | ||||||
LONG-TERM DEBT, LESS CURRENT PORTION |
1,991 | 1,250 | ||||||
OTHER LONG-TERM LIABILITIES |
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Deferred income taxes |
1,139 | 836 | ||||||
Pension, postretirement healthcare and other benefit obligations |
5,361 | 5,582 | ||||||
Self-insurance accruals |
989 | 963 | ||||||
Deferred lease obligations |
766 | 784 | ||||||
Deferred gains, principally related to aircraft transactions |
234 | 251 | ||||||
Other liabilities |
139 | 136 | ||||||
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Total other long-term liabilities |
8,628 | 8,552 | ||||||
COMMITMENTS AND CONTINGENCIES |
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COMMON STOCKHOLDERS INVESTMENT |
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Common stock, $0.10 par value; 800 million shares authorized; 317 million shares issued as of February 28, 2013 and May 31, 2012 |
32 | 32 | ||||||
Additional paid-in capital |
2,623 | 2,595 | ||||||
Retained earnings |
18,216 | 17,134 | ||||||
Accumulated other comprehensive loss |
(4,710 | ) | (4,953 | ) | ||||
Treasury stock, at cost |
(49 | ) | (81 | ) | ||||
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Total common stockholders investment |
16,112 | 14,727 | ||||||
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$ | 31,830 | $ | 29,903 | |||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 4 -
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended | Nine Months Ended | |||||||||||||||
February 28, 2013 |
February 29, 2012 |
February 28, 2013 |
February 29, 2012 |
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REVENUES |
$ | 10,953 | $ | 10,564 | $ | 32,852 | $ | 31,672 | ||||||||
OPERATING EXPENSES: |
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Salaries and employee benefits |
4,150 | 4,021 | 12,378 | 12,007 | ||||||||||||
Purchased transportation |
1,871 | 1,619 | 5,411 | 4,713 | ||||||||||||
Rentals and landing fees |
640 | 628 | 1,888 | 1,871 | ||||||||||||
Depreciation and amortization |
599 | 543 | 1,764 | 1,570 | ||||||||||||
Fuel |
1,215 | 1,233 | 3,588 | 3,677 | ||||||||||||
Maintenance and repairs |
424 | 456 | 1,477 | 1,518 | ||||||||||||
Business realignment costs |
47 | | 64 | | ||||||||||||
Other |
1,418 | 1,251 | 4,233 | 3,986 | ||||||||||||
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10,364 | 9,751 | 30,803 | 29,342 | |||||||||||||
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OPERATING INCOME |
589 | 813 | 2,049 | 2,330 | ||||||||||||
OTHER INCOME (EXPENSE): |
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Interest, net |
(9 | ) | (12 | ) | (37 | ) | (30 | ) | ||||||||
Other, net |
(16 | ) | (9 | ) | (29 | ) | (7 | ) | ||||||||
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(25 | ) | (21 | ) | (66 | ) | (37 | ) | |||||||||
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INCOME BEFORE INCOME TAXES |
564 | 792 | 1,983 | 2,293 | ||||||||||||
PROVISION FOR INCOME TAXES |
203 | 271 | 725 | 811 | ||||||||||||
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NET INCOME |
$ | 361 | $ | 521 | $ | 1,258 | $ | 1,482 | ||||||||
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EARNINGS PER COMMON SHARE: |
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Basic |
$ | 1.14 | $ | 1.66 | $ | 3.99 | $ | 4.69 | ||||||||
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Diluted |
$ | 1.13 | $ | 1.65 | $ | 3.97 | $ | 4.67 | ||||||||
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DIVIDENDS DECLARED PER COMMON SHARE |
$ | 0.14 | $ | 0.13 | $ | 0.56 | $ | 0.52 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 5 -
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLIONS)
Three Months Ended | Nine Months Ended | |||||||||||||||
February 28, 2013 |
February 29, 2012 |
February 28, 2013 |
February 29, 2012 |
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NET INCOME |
$ | 361 | $ | 521 | $ | 1,258 | $ | 1,482 | ||||||||
OTHER COMPREHENSIVE INCOME: |
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Foreign currency translation adjustments, net of tax of $0, $17, $6 and $5 |
(3 | ) | 65 | 54 | (27 | ) | ||||||||||
Amortization of unrealized pension actuarial gains/losses and other, net of tax of $37, $19, $112 and $55 |
63 | 33 | 189 | 94 | ||||||||||||
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COMPREHENSIVE INCOME |
$ | 421 | $ | 619 | $ | 1,501 | $ | 1,549 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 6 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Nine Months Ended | ||||||||
February 28, 2013 |
February 29, 2012 |
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Operating Activities: |
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Net income |
$ | 1,258 | $ | 1,482 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation and amortization |
1,764 | 1,570 | ||||||
Provision for uncollectible accounts |
130 | 123 | ||||||
Stock-based compensation |
87 | 83 | ||||||
Deferred income taxes and other noncash items |
493 | 694 | ||||||
Changes in assets and liabilities: |
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Receivables |
(280 | ) | (87 | ) | ||||
Other assets |
113 | (153 | ) | |||||
Accounts payable and other liabilities |
(570 | ) | (660 | ) | ||||
Other, net |
(19 | ) | (35 | ) | ||||
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Cash provided by operating activities |
2,976 | 3,017 | ||||||
Investing Activities: |
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Capital expenditures |
(2,430 | ) | (2,946 | ) | ||||
Business acquisitions, net of cash acquired |
(483 | ) | (114 | ) | ||||
Proceeds from asset dispositions and other |
45 | 20 | ||||||
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Cash used in investing activities |
(2,868 | ) | (3,040 | ) | ||||
Financing Activities: |
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Principal payments on debt |
(417 | ) | (28 | ) | ||||
Proceeds from debt issuance |
991 | | ||||||
Proceeds from stock issuances |
221 | 83 | ||||||
Excess tax benefit on the exercise of stock options |
9 | 7 | ||||||
Dividends paid |
(132 | ) | (123 | ) | ||||
Purchase of treasury stock |
(246 | ) | (197 | ) | ||||
Other, net |
(9 | ) | | |||||
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Cash provided by (used in) financing activities |
417 | (258 | ) | |||||
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Effect of exchange rate changes on cash |
4 | (7 | ) | |||||
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Net increase (decrease) in cash and cash equivalents |
529 | (288 | ) | |||||
Cash and cash equivalents at beginning of period |
2,843 | 2,328 | ||||||
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Cash and cash equivalents at end of period |
$ | 3,372 | $ | 2,040 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 7 -
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 February 28, 2013, the results of our operations for the three- and nine-month periods ended February 28, 2013 and February 29, 2012 and cash flows for the nine-month periods ended February 28, 2013 and February 29, 2012. Operating results for the three- and nine-month periods ended February 28, 2013 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.
RECLASSIFICATIONS. Certain prior period amounts have been reclassified to conform to the current period presentation.
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.
- 8 -
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 |
$ | 145 | ||
Property and equipment |
87 | |||
Goodwill |
349 | |||
Intangible assets |
60 | |||
Other non-current assets |
67 | |||
Current liabilities |
(169 | ) | ||
Long-term liabilities |
(32 | ) | ||
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Total purchase price |
$ | 507 | ||
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The goodwill of $349 million is primarily attributable to expected benefits from synergies of the combinations with existing businesses and other 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.
EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of FedEx Express, which represent a small number of FedEx Expresss total employees, are employed under a collective bargaining agreement. The contract became amendable in March 2013, and the parties are currently in negotiations. In addition to our pilots at FedEx Express, certain FedEx non-U.S. employees are unionized.
STOCK-BASED COMPENSATION. We have two types of equity-based compensation: stock options and restricted stock. The key terms of the stock option and restricted stock awards granted under our incentive stock plans and all financial disclosures about these programs are set forth in our Annual Report.
Our stock-based compensation expense was $23 million for the three-month period ended February 28, 2013 and $87 million for the nine-month period ended February 28, 2013. Our stock-based compensation expense was $22 million for the three-month period ended February 29, 2012 and $83 million for the nine-month period ended February 29, 2012. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.
BUSINESS REALIGNMENT COSTS. During the second quarter of 2013, we announced profit improvement programs including reducing our selling, general and administrative cost functions through a voluntary employee separation program.
During the third quarter of 2013, we commenced a program to offer voluntary cash buyouts to eligible U.S.-based employees in certain staff functions. The voluntary buyout program includes voluntary severance payments and funding to healthcare reimbursement accounts, with the voluntary severance 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. Eligible employees will be scheduled to vacate positions in four 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, and we expect all employees who accept the buyout to vacate their positions by the end of fiscal year 2014. Costs of the benefits provided under the voluntary program will be recognized as special termination benefits in the period that eligible employees accept their offers, predominantly in the fourth quarter of 2013.
- 9 -
We incurred costs of $47 million ($30 million, net of tax, or $0.09 per diluted share) during the third quarter and $64 million ($40 million, net of tax, or $0.13 per diluted share) during the nine months of 2013, associated with our business realignment activities. These costs related predominantly to voluntary severance for officers and managing directors who accepted voluntary buyouts in the third quarter of 2013 to adjust our leadership team to our new organizational structure. We expect the pretax cost of the voluntary buyout program to range from approximately $450 million to $550 million in cash expenditures in 2013, but actual costs will depend on employee acceptance rates. Payments will be made at the time of departure, and no material payments of these costs were made in the third quarter of 2013. The cost of the buyout program is included in the caption Business realignment costs in our unaudited condensed consolidated statements of income. Also included in that caption are immaterial involuntary severance costs and other external costs directly attributable to our business realignment activities, such as professional fees. Additional costs will be incurred beyond 2013, primarily related to facility optimization and professional fees.
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 nine-month periods ended February 28, 2013 and February 29, 2012. In addition, on June 1, 2012, we adopted the FASBs amendments to the fair value measurements and disclosure requirements, which expanded existing disclosure requirements regarding the fair value of our long-term debt.
In February 2013, the FASB issued new guidance requiring additional information about reclassification adjustments out of comprehensive income, including changes in comprehensive income balances by component and significant items reclassified out of comprehensive income. This new standard is effective for our fiscal year ending May 31, 2014 and will have no impact on our financial condition or results of operations.
We believe that no other new accounting guidance was adopted or issued during the nine 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 February 28, 2013, 188,000 shares remained under existing share repurchase authorizations.
In March 2013, our board of directors authorized the repurchase of up to 10 million shares of common stock. These shares augment the remaining 188,000 shares authorized for purchase under existing share repurchase programs. It is expected that the additional share authorization will primarily be utilized to offset equity compensation dilution over the next several years.
DIVIDENDS DECLARED PER COMMON SHARE. On February 15, 2013, our Board of Directors declared a dividend of $0.14 per share of common stock. The dividend will be paid on April 1, 2013 to stockholders of record as of the close of business on March 11, 2013. 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.
- 10 -
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 utilized 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. On March 1, 2013, we entered into an amendment to our credit agreement to, among other things, extend its maturity date from April 26, 2016 to March 1, 2018. The agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times our last four fiscal quarters rentals and landing fees) to capital (adjusted debt plus total common stockholders investment) that does not exceed 70%. Our leverage ratio of adjusted debt to capital was 52% at February 28, 2013. We believe the leverage ratio covenant is our only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of February 28, 2013, 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 February 28, 2013 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.
- 11 -
(3) Computation of Earnings Per Share
The calculation of basic and diluted earnings per common share for the periods ended February 28, 2013 and February 29, 2012 was as follows (in millions, except per share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Basic earnings per common share: |
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Net earnings allocable to common shares(1) |
$ | 360 | $ | 521 | $ | 1,255 | $ | 1,479 | ||||||||
Weighted-average common shares |
315 | 314 | 314 | 315 | ||||||||||||
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Basic earnings per common share |
$ | 1.14 | $ | 1.66 | $ | 3.99 | $ | 4.69 | ||||||||
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Diluted earnings per common share: |
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Net earnings allocable to common shares(1) |
$ | 360 | $ | 521 | $ | 1,255 | $ | 1,479 | ||||||||
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Weighted-average common shares |
315 | 314 | 314 | 315 | ||||||||||||
Dilutive effect of share-based awards |
2 | 2 | 2 | 2 | ||||||||||||
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Weighted-average diluted shares |
317 | 316 | 316 | 317 | ||||||||||||
Diluted earnings per common share |
$ | 1.13 | $ | 1.65 | $ | 3.97 | $ | 4.67 | ||||||||
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Anti-dilutive options excluded from diluted earnings per common share |
7.9 | 12.7 | 12.1 | 13.4 | ||||||||||||
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(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 February 28, 2013 and February 29, 2012 were as follows (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
U.S. domestic and international pension plans |
$ | 169 | $ | 133 | $ | 509 | $ | 397 | ||||||||
U.S. domestic and international defined contribution plans |
87 | 82 | 262 | 249 | ||||||||||||
Postretirement healthcare plans |
19 | 17 | 58 | 52 | ||||||||||||
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$ | 275 | $ | 232 | $ | 829 | $ | 698 | |||||||||
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- 12 -
Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended February 28, 2013 and February 29, 2012 included the following components (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Pension Plans |
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Service cost |
$ | 173 | $ | 148 | $ | 519 | $ | 445 | ||||||||
Interest cost |
242 | 245 | 726 | 733 | ||||||||||||
Expected return on plan assets |
(346 | ) | (311 | ) | (1,037 | ) | (929 | ) | ||||||||
Recognized actuarial losses and other |
100 | 51 | 301 | 148 | ||||||||||||
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$ | 169 | $ | 133 | $ | 509 | $ | 397 | |||||||||
|
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|
|
|
|
|
|
|||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Postretirement Healthcare Plans |
||||||||||||||||
Service cost |
$ | 10 | $ | 8 | $ | 31 | $ | 26 | ||||||||
Interest cost |
9 | 9 | 27 | 27 | ||||||||||||
Recognized actuarial gains and other |
| | | (1 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 19 | $ | 17 | $ | 58 | $ | 52 | |||||||||
|
|
|
|
|
|
|
|
Required contributions to our tax-qualified U.S. domestic pension plans (U.S. Pension Plans) were $420 million for the nine-month period ended February 28, 2013 and $484 million for the nine-month period ended February 29, 2012. We also made voluntary contributions of $226 million for the nine-month period ended February 29, 2012. In March 2013, 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 worlds largest express transportation company; FedEx Ground Package System, Inc. (FedEx Ground), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (FedEx Freight), a leading North American provider of less-than-truckload (LTL) freight services.
- 13 -
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 in Managements 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.
- 14 -
The following table provides a reconciliation of reportable segment revenues and operating income (loss) to our unaudited condensed consolidated financial statement totals for the periods ended February 28, 2013 and February 29, 2012 (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenues |
||||||||||||||||
FedEx Express segment |
$ | 6,704 | $ | 6,543 | $ | 20,194 | $ | 19,718 | ||||||||
FedEx Ground segment |
2,747 | 2,480 | 7,802 | 7,097 | ||||||||||||
FedEx Freight segment |
1,237 | 1,234 | 4,013 | 3,887 | ||||||||||||
FedEx Services segment |
380 | 401 | 1,174 | 1,239 | ||||||||||||
Other and eliminations |
(115 | ) | (94 | ) | (331 | ) | (269 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 10,953 | $ | 10,564 | $ | 32,852 | $ | 31,672 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating Income (Loss) |
||||||||||||||||
FedEx Express segment |
$ | 118 | $ | 349 | $ | 555 | $ | 979 | ||||||||
FedEx Ground segment |
467 | 465 | 1,324 | 1,270 | ||||||||||||
FedEx Freight segment |
4 | (1 | ) | 170 | 81 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 589 | $ | 813 | $ | 2,049 | $ | 2,330 | |||||||||
|
|
|
|
|
|
|
|
(6) Commitments
As of February 28, 2013, 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) |
$ | 250 | $ | 231 | $ | 481 | ||||||
2014 |
716 | 252 | 968 | |||||||||
2015 |
1,051 | 150 | 1,201 | |||||||||
2016 |
1,140 | 81 | 1,221 | |||||||||
2017 |
955 | 58 | 1,013 | |||||||||
Thereafter |
5,813 | 142 | 5,955 |
(1) | Primarily vehicles, facilities, advertising contracts, and for the remainder of 2013, a total of $140 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.
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 also deferred the delivery of two firm B777F aircraft orders from 2015 to 2016.
- 15 -
We had $380 million in deposits and progress payments as of February 28, 2013 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the Other assets caption of our condensed consolidated balance sheets. In addition to our commitment to purchase B777Fs and B767Fs, our aircraft purchase commitments include the Boeing 757 (B757) in passenger configuration, which will require additional costs to modify for cargo transport. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of February 28, 2013, with the year of expected delivery:
B757 | B767F | B777F | Total | |||||||||||||
2013 (remainder) |
4 | | | 4 | ||||||||||||
2014 |
| 4 | 2 | 6 | ||||||||||||
2015 |
| 12 | | 12 | ||||||||||||
2016 |
| 10 | 2 | 12 | ||||||||||||
2017 |
| 10 | | 10 | ||||||||||||
Thereafter |
| 14 | 16 | 30 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
4 | 50 | 20 | 74 | ||||||||||||
|
|
|
|
|
|
|
|
On March 8, 2013, FedEx Express entered into an agreement with United Airlines to purchase 14 B757 aircraft, the delivery of which will occur in 2013 through 2015. After delivery, these passenger aircraft will be modified for cargo transport. The agreement also provides for FedEx Express to purchase up to 16 additional B757 aircraft, subject to the satisfaction of certain conditions. This aircraft transaction is not included in the table above, as it occurred subsequent to the end of the third 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 February 28, 2013 is as follows (in millions):
Operating Leases | ||||||||||||
Aircraft and Related Equipment |
Facilities and Other |
Total Operating Leases |
||||||||||
2013 (remainder) |
$ | 105 | $ | 361 | $ | 466 | ||||||
2014 |
462 | 1,425 | 1,887 | |||||||||
2015 |
448 | 1,323 | 1,771 | |||||||||
2016 |
453 | 1,125 | 1,578 | |||||||||
2017 |
391 | 1,245 | 1,636 | |||||||||
Thereafter |
1,150 | 6,425 | 7,575 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 3,009 | $ | 11,904 | $ | 14,913 | ||||||
|
|
|
|
|
|
Future minimum lease payments under capital leases were immaterial at February 28, 2013, 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.
- 16 -
Independent Contractor Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 31 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings that claim that the companys 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 courts 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 courts ruling granted summary judgment in FedEx Grounds favor on all of the certified claims but did not decide the uncertified claims. In the cases filed in Kentucky 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.
- 17 -
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 Grounds 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 Grounds 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 Grounds owner-operators in certain jurisdictions. We believe that FedEx Grounds owner-operators are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers of the companys 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 Grounds 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 Grounds various defenses, and on evidentiary issues. In any event, we do not believe that a material loss is probable in these matters.
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 move forward, 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.
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.
- 18 -
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 nine-month periods ended February 28, 2013 and February 29, 2012 was as follows (in millions):
2013 | 2012 | |||||||
Cash payments for: |
||||||||
Interest (net of capitalized interest) |
$ | 87 | $ | 73 | ||||
|
|
|
|
|||||
Income taxes |
$ | 613 | $ | 342 | ||||
Income tax refunds received |
(205 | ) | (46 | ) | ||||
|
|
|
|
|||||
Cash tax payments, net |
$ | 408 | $ | 296 | ||||
|
|
|
|
(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):
- 19 -
CONDENSED CONSOLIDATING BALANCE SHEETS
(UNAUDITED)
February 28, 2013
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
CURRENT ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 2,362 | $ | 419 | $ | 712 | $ | (121 | ) | $ | 3,372 | |||||||||
Receivables, less allowances |
2 | 3,951 | 1,031 | (34 | ) | 4,950 | ||||||||||||||
Spare parts, supplies, fuel, prepaid expenses and other, less allowances |
144 | 719 | 50 | | 913 | |||||||||||||||
Deferred income taxes |
| 491 | 19 | | 510 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
2,508 | 5,580 | 1,812 | (155 | ) | 9,745 | ||||||||||||||
PROPERTY AND EQUIPMENT, AT COST |
26 | 36,003 | 2,085 | | 38,114 | |||||||||||||||
Less accumulated depreciation and amortization |
21 | 18,646 | 1,119 | | 19,786 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net property and equipment |
5 | 17,357 | 966 | | 18,328 | |||||||||||||||
INTERCOMPANY RECEIVABLE |
| 66 | 1,137 | (1,203 | ) | | ||||||||||||||
GOODWILL |
| 1,552 | 1,213 | | 2,765 | |||||||||||||||
INVESTMENT IN SUBSIDIARIES |
18,431 | 3,255 | | (21,686 | ) | | ||||||||||||||
OTHER ASSETS |
2,741 | 761 | 198 | (2,708 | ) | 992 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 23,685 | $ | 28,571 | $ | 5,326 | $ | (25,752 | ) | $ | 31,830 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND STOCKHOLDERS INVESTMENT |
||||||||||||||||||||
CURRENT LIABILITIES |
||||||||||||||||||||
Current portion of long-term debt |
$ | 250 | $ | 1 | $ | | $ | | $ | 251 | ||||||||||
Accrued salaries and employee benefits |
65 | 1,150 | 180 | | 1,395 | |||||||||||||||
Accounts payable |
47 | 1,277 | 561 | (155 | ) | 1,730 | ||||||||||||||
Accrued expenses |
178 | 1,341 | 204 | | 1,723 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
540 | 3,769 | 945 | (155 | ) | 5,099 | ||||||||||||||
LONG-TERM DEBT, LESS CURRENT PORTION |
1,741 | 250 | | | 1,991 | |||||||||||||||
INTERCOMPANY PAYABLE |
1,203 | | | (1,203 | ) | | ||||||||||||||
OTHER LONG-TERM LIABILITIES |
||||||||||||||||||||
Deferred income taxes |
| 3,831 | 16 | (2,708 | ) | 1,139 | ||||||||||||||
Other liabilities |
4,089 | 3,187 | 213 | | 7,489 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other long-term liabilities |
4,089 | 7,018 | 229 | (2,708 | ) | 8,628 | ||||||||||||||
STOCKHOLDERS INVESTMENT |
16,112 | 17,534 | 4,152 | (21,686 | ) | 16,112 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 23,685 | $ | 28,571 | $ | 5,326 | $ | (25,752 | ) | $ | 31,830 | ||||||||||
|
|
|
|
|
|
|
|
|
|
- 20 -
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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
- 21 -
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended February 28, 2013
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 9,182 | $ | 1,851 | $ | (80 | ) | $ | 10,953 | |||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Salaries and employee benefits |
26 | 3,594 | 530 | | 4,150 | |||||||||||||||
Purchased transportation |
| 1,261 | 649 | (39 | ) | 1,871 | ||||||||||||||
Rentals and landing fees |
2 | 555 | 85 | (2 | ) | 640 | ||||||||||||||
Depreciation and amortization |
| 551 | 48 | | 599 | |||||||||||||||
Fuel |
| 1,190 | 25 | | 1,215 | |||||||||||||||
Maintenance and repairs |
| 395 | 29 | | 424 | |||||||||||||||
Business realignment costs |
5 | 42 | | | 47 | |||||||||||||||
Intercompany charges, net |
(55 | ) | (71 | ) | 126 | | | |||||||||||||
Other |
22 | 1,129 | 306 | (39 | ) | 1,418 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 8,646 | 1,798 | (80 | ) | 10,364 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
OPERATING INCOME |
| 536 | 53 | | 589 | |||||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||||
Equity in earnings of subsidiaries |
361 | 53 | | (414 | ) | | ||||||||||||||
Interest, net |
(27 | ) | 16 | 2 | | (9 | ) | |||||||||||||
Intercompany charges, net |
29 | (33 | ) | 4 | | | ||||||||||||||
Other, net |
(2 | ) | (13 | ) | (1 | ) | | (16 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
INCOME BEFORE INCOME TAXES |
361 | 559 | 58 | (414 | ) | 564 | ||||||||||||||
Provision for income taxes |
| 155 | 48 | | 203 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME |
$ | 361 | $ | 404 | $ | 10 | $ | (414 | ) | $ | 361 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME |
$ | 419 | $ | 401 | $ | 15 | $ | (414 | ) | $ | 421 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 22 -
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended February 29, 2012
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 9,031 | $ | 1,607 | $ | (74 | ) | $ | 10,564 | |||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Salaries and employee benefits |
28 | 3,528 | 465 | | 4,021 | |||||||||||||||
Purchased transportation |
| 1,169 | 481 | (31 | ) | 1,619 | ||||||||||||||
Rentals and landing fees |
1 | 560 | 68 | (1 | ) | 628 | ||||||||||||||
Depreciation and amortization |
| 504 | 39 | | 543 | |||||||||||||||
Fuel |
| 1,213 | 20 | | 1,233 | |||||||||||||||
Maintenance and repairs |
1 | 432 | 23 | | 456 | |||||||||||||||
Intercompany charges, net |
(51 | ) | (66 | ) | 117 | | | |||||||||||||
Other |
21 | 1,018 | 254 | (42 | ) | 1,251 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 8,358 | 1,467 | (74 | ) | 9,751 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
OPERATING INCOME |
| 673 | 140 | | 813 | |||||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||||
Equity in earnings of subsidiaries |
521 | 101 | | (622 | ) | | ||||||||||||||
Interest, net |
(19 | ) | 6 | 1 | | (12 | ) | |||||||||||||
Intercompany charges, net |
20 | (25 | ) | 5 | | | ||||||||||||||
Other, net |
(1 | ) | (4 | ) | (4 | ) | | (9 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
INCOME BEFORE INCOME TAXES |
521 | 751 | 142 | (622 | ) | 792 | ||||||||||||||
Provision for income taxes |
| 219 | 52 | | 271 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME |
$ | 521 | $ | 532 | $ | 90 | $ | (622 | ) | $ | 521 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME |
$ | 549 | $ | 548 | $ | 144 | $ | (622 | ) | $ | 619 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 23 -
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Nine Months Ended February 28, 2013
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 27,501 | $ | 5,594 | $ | (243 | ) | $ | 32,852 | |||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Salaries and employee benefits |
79 | 10,752 | 1,547 | | 12,378 | |||||||||||||||
Purchased transportation |
| 3,613 | 1,905 | (107 | ) | 5,411 | ||||||||||||||
Rentals and landing fees |
4 | 1,648 | 241 | (5 | ) | 1,888 | ||||||||||||||
Depreciation and amortization |
1 | 1,626 | 137 | | 1,764 | |||||||||||||||
Fuel |
| 3,516 | 72 | | 3,588 | |||||||||||||||
Maintenance and repairs |
1 | 1,391 | 85 | | 1,477 | |||||||||||||||
Business realignment costs |
15 | 49 | | | 64 | |||||||||||||||
Intercompany charges, net |
(169 | ) | (276 | ) | 445 | | | |||||||||||||
Other |
69 | 3,403 | 892 | (131 | ) | 4,233 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 25,722 | 5,324 | (243 | ) | 30,803 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
OPERATING INCOME |
| 1,779 | 270 | | 2,049 | |||||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||||
Equity in earnings of subsidiaries |
1,258 | 152 | | (1,410 | ) | | ||||||||||||||
Interest, net |
(77 | ) | 35 | 5 | | (37 | ) | |||||||||||||
Intercompany charges, net |
82 | (95 | ) | 13 | | | ||||||||||||||
Other, net |
(5 | ) | (18 | ) | (6 | ) | | (29 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
INCOME BEFORE INCOME TAXES |
1,258 | 1,853 | 282 | (1,410 | ) | 1,983 | ||||||||||||||
Provision for income taxes |
| 581 | 144 | | 725 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME |
$ | 1,258 | $ | 1,272 | $ | 138 | $ | (1,410 | ) | $ | 1,258 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME |
$ | 1,434 | $ | 1,284 | $ | 193 | $ | (1,410 | ) | $ | 1,501 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 24 -
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Nine Months Ended February 29, 2012
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 27,039 | $ | 4,851 | $ | (218 | ) | $ | 31,672 | |||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Salaries and employee benefits |
89 | 10,565 | 1,353 | | 12,007 | |||||||||||||||
Purchased transportation |
| 3,371 | 1,427 | (85 | ) | 4,713 | ||||||||||||||
Rentals and landing fees |
3 | 1,672 | 200 | (4 | ) | 1,871 | ||||||||||||||
Depreciation and amortization |
1 | 1,455 | 114 | | 1,570 | |||||||||||||||
Fuel |
| 3,618 | 59 | | 3,677 | |||||||||||||||
Maintenance and repairs |
1 | 1,446 | 71 | | 1,518 | |||||||||||||||
Intercompany charges, net |
(162 | ) | (291 | ) | 453 | | | |||||||||||||
Other |
68 | 3,299 | 748 | (129 | ) | 3,986 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 25,135 | 4,425 | (218 | ) | 29,342 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
OPERATING INCOME |
| 1,904 | 426 | | 2,330 | |||||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||||
Equity in earnings of subsidiaries |
1,482 | 252 | | (1,734 | ) | | ||||||||||||||
Interest, net |
(58 | ) | 25 | 3 | | (30 | ) | |||||||||||||
Intercompany charges, net |
62 | (80 | ) | 18 | | | ||||||||||||||
Other, net |
(4 | ) | (7 | ) | 4 | | (7 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
INCOME BEFORE INCOME TAXES |
1,482 | 2,094 | 451 | (1,734 | ) | 2,293 | ||||||||||||||
Provision for income taxes |
| 636 | 175 | | 811 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME |
$ | 1,482 | $ | 1,458 | $ | 276 | $ | (1,734 | ) | $ | 1,482 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME |
$ | 1,566 | $ | 1,458 | $ | 259 | $ | (1,734 | ) | $ | 1,549 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 25 -
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended February 28, 2013
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
$ | 78 | $ | 2,556 | $ | 347 | $ | (5 | ) | $ | 2,976 | |||||||||
INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
(3 | ) | (2,201 | ) | (226 | ) | |
|
|
(2,430 | ) | |||||||||
Business acquisitions, net of cash acquired |
| | (483 | ) | | (483 | ) | |||||||||||||
Proceeds from asset dispositions and other |
| 39 | 6 | | 45 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH USED IN INVESTING ACTIVITIES |
(3 | ) | (2,162 | ) | (703 | ) | | (2,868 | ) | |||||||||||
FINANCING ACTIVITIES |
||||||||||||||||||||
Net transfers from (to) Parent |
(453 | ) | 517 | (64 | ) | | | |||||||||||||
Payment on loan between subsidiaries |
| (407 | ) | 407 | | | ||||||||||||||
Intercompany dividends |
| 12 | (12 | ) | | | ||||||||||||||
Principal payments on debt |
| (417 | ) | | | (417 | ) | |||||||||||||
Proceeds from debt issuance |
991 | | | | 991 | |||||||||||||||
Proceeds from stock issuances |
221 | | | | 221 | |||||||||||||||
Excess tax benefit on the exercise of stock options |
9 | | | | 9 | |||||||||||||||
Dividends paid |
(132 | ) | | | | (132 | ) | |||||||||||||
Purchase of treasury stock |
(246 | ) | | | (246 | ) | ||||||||||||||
Other, net |
(9 | ) | (93 | ) | 93 | | (9 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
381 | (388 | ) | 424 | | 417 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Effect of exchange rate changes on cash |
| (4 | ) | 8 | | 4 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) in cash and cash equivalents |
456 | 2 | 76 | (5 | ) | 529 | ||||||||||||||
Cash and cash equivalents at beginning of period |
1,906 | 417 | 636 | (116 | ) | 2,843 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents at end of period |
$ | 2,362 | $ | 419 | $ | 712 | $ | (121 | ) | $ | 3,372 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 26 -
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended February 29, 2012
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
$ | (61 | ) | $ | 2,664 | $ | 451 | $ | (37 | ) | $ | 3,017 | ||||||||
INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
(2 | ) | (2,856 | ) | (88 | ) | | (2,946 | ) | |||||||||||
Business acquisition, net of cash acquired |
| | (114 | ) | | (114 | ) | |||||||||||||
Proceeds from asset dispositions and other |
| 20 | | | 20 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH USED IN INVESTING ACTIVITIES |
(2 | ) | (2,836 | ) | (202 | ) | | (3,040 | ) | |||||||||||
FINANCING ACTIVITIES |
||||||||||||||||||||
Net transfers from (to) Parent |
(263 | ) | 320 | (57 | ) | | | |||||||||||||
Intercompany dividends |
| 46 | (46 | ) | | | ||||||||||||||
Principal payments on debt |
| (28 | ) | | | (28 | ) | |||||||||||||
Proceeds from stock issuances |
83 | | | | 83 | |||||||||||||||
Excess tax benefit on the exercise of stock options |
7 | | | | 7 | |||||||||||||||
Dividends paid |
(123 | ) | | | | (123 | ) | |||||||||||||
Purchase of treasury stock |
(197 | ) | | | | (197 | ) | |||||||||||||
Other, net |
| (16 | ) | 16 | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
(493 | ) | 322 | (87 | ) | | (258 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Effect of exchange rate changes on cash |
| (6 | ) | (1 | ) | | (7 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (decrease) increase in cash and cash equivalents |
(556 | ) | 144 | 161 | (37 | ) | (288 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
1,589 | 279 | 546 | (86 | ) | 2,328 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents at end of period |
$ | 1,033 | $ | 423 | $ | 707 | $ | (123 | ) | $ | 2,040 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 27 -
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of February 28, 2013, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended February 28, 2013 and February 29, 2012 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 2013 and February 29, 2012. These financial statements are the responsibility of the Companys 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
March 21, 2013
- 28 -
Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
GENERAL
The following Managements Discussion and Analysis of Results of Operations and Financial Condition (MD&A) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (FedEx). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 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 worlds largest express transportation company; FedEx Ground Package System, Inc. (FedEx Ground), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (FedEx Freight), a leading North American provider of less-than-truckload (LTL) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (FedEx Services), form the core of our reportable segments. Our FedEx Services segment provides sales, marketing, information technology, 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.
- 29 -
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 February 28, 2013 and February 29, 2012:
Three Months Ended | Percent |
Nine Months Ended | Percent | |||||||||||||||||||||
2013 | 2012 | Change | 2013 | 2012 | Change | |||||||||||||||||||
Revenues |
$ | 10,953 | $ | 10,564 | 4 | $ | 32,852 | $ | 31,672 | 4 | ||||||||||||||
Operating income |
589 | 813 | (28 | ) | 2,049 | 2,330 | (12 | ) | ||||||||||||||||
Operating margin |
5.4 | % | 7.7 | % | (230 | )bp | 6.2 | % | 7.4 | % | (120 | )bp | ||||||||||||
Net income |
$ | 361 | $ | 521 | (31 | ) | $ | 1,258 | $ | 1,482 | (15 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Diluted earnings per share |
$ | 1.13 | $ | 1.65 | (32 | ) | $ | 3.97 | $ | 4.67 | (15 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows changes in revenues and operating income by reportable segment for the periods ended February 28, 2013 compared to February 29, 2012 (dollars in millions):
Change in Revenues |
Percent Change in Revenue |
Change in Operating Income |
Percent Change in Operating Income |
|||||||||||||||||||||||||||||
Three Months Ended |
Nine Months Ended |
Three Months Ended |
Nine Months Ended |
Three Months Ended |
Nine Months Ended |
Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||||
FedEx Express segment |
$ | 161 | $ | 476 | 2 | 2 | $ | (231 | ) | $ | (424 | ) | (66 | ) | (43 | ) | ||||||||||||||||
FedEx Ground segment |
267 | 705 | 11 | 10 | 2 | 54 | | 4 | ||||||||||||||||||||||||
FedEx Freight segment |
3 | 126 | | 3 | 5 | 89 | NM | 110 | ||||||||||||||||||||||||
FedEx Services segment |
(21 | ) | (65 | ) | (5 | ) | (5 | ) | | | | | ||||||||||||||||||||
Other and eliminations |
(21 | ) | (62 | ) | NM | NM | | | | | ||||||||||||||||||||||
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$ | 389 | $ | 1,180 | 4 | 4 | $ | (224 | ) | $ | (281 | ) | (28 | ) | (12 | ) | |||||||||||||||||
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Overview
Our results for the third quarter reflect a significant decline in profitability at FedEx Express resulting from ongoing shifts in demand from priority international services to economy international services and lower international export yields. Reduced profitability at FedEx Express more than offset the strong performance of FedEx Ground and continuing profit improvement at FedEx Freight. Our results were also negatively impacted by business realignment costs of $47 million in the third quarter of 2013 primarily related to our voluntary cash buyout program for eligible U.S. officers and managing directors (see Business Realignment Costs for additional information). Additionally, operating result comparisons were negatively impacted by the reversal of a $66 million legal accrual in the third quarter of 2012. Results for the nine months reflect the net year-over-year negative impact from the timing lag that exists between when fuel prices change and indexed fuel surcharges automatically adjust. All our transportation segments experienced the negative impact of fewer operating days in the third quarter and nine months of 2013.
- 30 -
The following graphs for FedEx Express, FedEx Ground (including FedEx SmartPost) and FedEx Freight show selected volume trends (in thousands) over the five most recent quarters:
(1) | International domestic average daily package volume includes our international intra-country express operations, including recent acquisitions in Mexico (July 2011), Poland (June 2012), France (July 2012) and Brazil (July 2012). |
- 31 -
The following graphs for FedEx Express, FedEx Ground (including FedEx SmartPost) and FedEx Freight show selected yield trends over the five most recent quarters:
Revenue
Revenues increased 4% in both the third quarter and nine months of 2013, primarily driven by increases in international domestic revenue at FedEx Express and volume growth at FedEx Ground. At FedEx Express, revenues increased 2% in both the third quarter and nine months of 2013 primarily driven by increases in international domestic revenues due to recent acquisitions and growth in our freight-forwarding business at FedEx Trade Networks. While overall revenue increased, shifts in demand from our priority international services to our economy international services and lower rates resulted in declines in package yields at FedEx Express in the third quarter and nine months of 2013. At FedEx Ground, revenues increased 11% in the third quarter and 10% in the nine months of 2013 primarily due to volume growth from e-commerce and market share gains. At FedEx Freight, revenues were flat in the third quarter, and in the nine months of 2013 increased 3% as a result of higher yield and average daily LTL shipments.
- 32 -
Operating Income
The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended February 28, 2013 and February 29, 2012:
Three Months Ended | Nine Months Ended | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Operating expenses: |
||||||||||||||||
Salaries and employee benefits |
$ | 4,150 | $ | 4,021 | $ | 12,378 | $ | 12,007 | ||||||||
Purchased transportation |
1,871 | 1,619 | 5,411 | 4,713 | ||||||||||||
Rentals and landing fees |
640 | 628 | 1,888 | 1,871 | ||||||||||||
Depreciation and amortization |
599 | 543 | 1,764 | 1,570 | ||||||||||||
Fuel |
1,215 | 1,233 | 3,588 | 3,677 | ||||||||||||
Maintenance and repairs |
424 | 456 | 1,477 | 1,518 | ||||||||||||
Business realignment costs(1) |
47 | | 64 | | ||||||||||||
Other(2) |
1,418 | 1,251 | 4,233 | 3,986 | ||||||||||||
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Total operating expenses |
$ | 10,364 | $ | 9,751 | $ | 30,803 | $ | 29,342 | ||||||||
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(1) | Includes predominantly severance costs associated with our voluntary buyout program. |
(2) | The third quarter of 2012 includes the reversal of a $66 million legal reserve. |
Percent of Revenue | Percent of Revenue | |||||||||||||||
Three Months Ended |
Three Months Ended |
Nine Months Ended |
Nine Months Ended |
|||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Operating expenses: |
||||||||||||||||
Salaries and employee benefits |
37.9 | % | 38.1 | % | 37.7 | % | 37.9 | % | ||||||||
Purchased transportation |
17.1 | 15.3 | 16.5 | 14.9 | ||||||||||||
Rentals and landing fees |
5.8 | 6.0 | 5.7 | 5.9 | ||||||||||||
Depreciation and amortization |
5.5 | 5.1 | 5.4 | 4.9 | ||||||||||||
Fuel |
11.1 | 11.7 | 10.9 | 11.6 | ||||||||||||
Maintenance and repairs |
3.9 | 4.3 | 4.5 | 4.8 | ||||||||||||
Business realignment costs(1) |
0.4 | | 0.2 | | ||||||||||||
Other(2) |
12.9 | 11.8 | 12.9 | 12.6 | ||||||||||||
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Total operating expenses |
94.6 | 92.3 | 93.8 | 92.6 | ||||||||||||
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Operating margin |
5.4 | % | 7.7 | % | 6.2 | % | 7.4 | % | ||||||||
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(1) | Includes predominantly severance costs associated with our voluntary buyout program. |
(2) | The third quarter of 2012 includes the reversal of a $66 million legal reserve. |
Operating income and operating margin decreased in both the third quarter and nine months of 2013 as a result of significant reductions in profitability at FedEx Express. The reversal of a legal reserve in the third quarter of 2012 also negatively impacted our operating result comparisons. Additionally, we incurred business realignment costs in the third quarter of 2013 primarily due to our voluntary buyout program. Our operating income was positively impacted in the third quarter and nine months of 2013 by higher volumes and increased yields at our FedEx Ground segment and by increased yields and higher volumes at our FedEx Freight segment. All our transportation segments experienced the negative impact of fewer operating days in the third quarter and nine months of 2013, including one fewer day at FedEx Express and FedEx Ground and two fewer days at FedEx Freight.
- 33 -
Purchased transportation costs increased 16% in the third quarter and 15% in the nine months 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 3% in both the third quarter and nine months of 2013 primarily due to increases in pension and group health insurance costs, partially offset by lower incentive compensation accruals. Other expenses increased 13% in the third quarter and 6% in the nine months of 2013 primarily due to the reversal in 2012 of a legal reserve and current year costs associated with business acquisitions. Depreciation and amortization expense increased 10% in the third quarter and 12% in the nine months of 2013 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:
Fuel expense decreased 1% in the third quarter of 2013 due to lower aircraft fuel usage and decreased 2% in the nine months 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 minimal impact on operating income in the third quarter but had a negative impact for the nine months 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 third quarter and nine months of 2013 and 2012 in the accompanying discussions of each of our transportation segments.
Income Taxes
Our effective tax rate was 36.0% for the third quarter and 36.6% for the nine months of 2013, compared with 34.1% for the third quarter and 35.4% for the nine months of 2012. Our tax rates for both periods in 2012 were favorably impacted by the conclusion of the Internal Revenue Service (IRS) audit of our 2007-2009 consolidated income tax returns. For 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 February 28, 2013, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2012.
- 34 -
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 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 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.
Business Realignment Costs
During the second quarter of 2013, we announced profit improvement programs primarily through initiatives at FedEx Express and FedEx Services that include 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 |
During the third quarter of 2013, we commenced a program to offer voluntary cash buyouts to eligible U.S.-based employees in certain staff functions. The voluntary buyout program includes voluntary severance payments and funding to healthcare reimbursement accounts, with the voluntary severance 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. Eligible employees will be scheduled to vacate positions in four 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, and we expect all employees who accept the buyout to vacate their positions by the end of fiscal year 2014. Costs of the benefits provided under the voluntary program will be recognized as special termination benefits in the period that eligible employees accept their offers, predominantly in the fourth quarter of 2013.
- 35 -
We incurred costs of $47 million ($30 million, net of tax, or $0.09 per diluted share) during the third quarter and $64 million ($40 million, net of tax or $0.13 per diluted share) during the nine months of 2013, associated with our business realignment activities. These costs related predominantly to voluntary severance for officers and managing directors who accepted voluntary buyouts in the third quarter of 2013 to adjust our leadership team to our new organizational structure. We expect the pretax cost of the voluntary buyout program to range from approximately $450 million to $550 million in cash expenditures in 2013, but actual costs will depend on employee acceptance rates. Our current range for the 2013 cost of the voluntary buyout program is approximately $100 million lower than our previous forecast due to facility closures we originally expected to occur in late 2013 that will now happen in 2014 and deferred hiring of open positions which reduced our need to offer voluntary buyouts in some cases. Payments will be made at the time of departure, and no material payments of these costs were made in the third quarter of 2013. The cost of the buyout program is included in the caption Business realignment costs in our unaudited condensed consolidated statements of income. Also included in that caption are immaterial involuntary severance costs and other external costs directly attributable to our business realignment activities, such as professional fees. Additional costs will be incurred beyond 2013, primarily related to facility optimization and professional fees.
In addition to continued profit improvements in the base businesses at FedEx Ground and FedEx Freight, our profit improvement programs are targeting annual profitability improvement of $1.6 billion at FedEx Express by the end of 2016 (from the full year 2013 base business). Collectively, these initiatives, are expected to increase margins, improve cash flows and increase our competitiveness. The ultimate costs and savings from our profit improvement initiatives will depend, among 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 a portion of the benefits of these programs in 2014; however, the majority of the benefits, including those from our voluntary severance program, will not occur until 2015 and 2016.
Outlook
While we expect revenues to increase for 2013, we expect earnings to decrease due to business realignment costs and the demand shift from our priority international services to our economy international services at FedEx Express. However, we expect solid financial performance at FedEx Ground and FedEx Freight to partially offset the negative impact of these factors on our results for the remainder of 2013.
Base yields on priority international services at FedEx Express continue to weaken based on our customers accelerating preference for our lower-yielding services. Given the persistence of this trend, we are evaluating further actions to adjust our FedEx Express network capacity. Some of these actions may involve temporarily or permanently grounding aircraft, which could result in asset impairment or other charges in future periods. We operate integrated transportation networks and, accordingly, cash flows for most of our operating assets are assessed at a network level, not at an individual asset level for our analysis of impairment. In the normal management of our aircraft fleet, we routinely idle aircraft and engines temporarily due to maintenance cycles and adjustments of our network capacity to match seasonality and overall customer demand levels. Temporarily idled assets are classified as available-for-use, and we continue to record depreciation expense associated with these assets. These temporarily idled assets are assessed for impairment on a quarterly basis. Factors which could cause impairment include, but are not limited to, adverse changes in our global economic outlook and the impact of our outlook on our current and projected volume levels, including lower capacity needs during our peak shipping seasons; the introduction of new fleet types or decisions to permanently retire an aircraft fleet from operations; or the elimination of planned service expansion activities.
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.
- 36 -
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 Grounds 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 have adopted this guidance by including a separate statement of comprehensive income for the three-month and nine-month periods ended February 28, 2013 and February 29, 2012. In addition, on June 1, 2012, we adopted the FASBs amendments to the fair value measurements and disclosure requirements, which expanded existing disclosure requirements regarding the fair value of our long-term debt.
In February 2013, the FASB issued new guidance requiring additional information about reclassification adjustments out of comprehensive income, including changes in comprehensive income balances by component and significant items reclassified out of comprehensive income. This new standard is effective for our fiscal year ending May 31, 2014 and will have no impact on our financial condition or results of operations.
We believe that no other new accounting guidance was adopted or issued during the nine 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.
- 37 -
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.
- 38 -
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.
- 39 -
FEDEX EXPRESS SEGMENT
The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the periods ended February 28, 2013 and February 29, 2012:
Three Months Ended | Percent | Nine Months Ended | Percent | |||||||||||||||||||||
2013 | 2012 | Change | 2013 | 2012 | Change | |||||||||||||||||||
Revenues: |
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Package: |
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U.S. overnight box |
$ | 1,609 | $ | 1,619 | (1 | ) | $ | 4,822 | $ | 4,882 | (1 | ) | ||||||||||||
U.S. overnight envelope |
413 | 426 | (3 | ) | 1,252 | 1,298 | (4 | ) | ||||||||||||||||
U.S. deferred |
812 | 792 | 3 | 2,246 | 2,254 | | ||||||||||||||||||
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Total U.S. domestic package revenue |
2,834 | 2,837 | | 8,320 | 8,434 | (1 | ) | |||||||||||||||||
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International priority(1) |
1,567 | 1,625 | (4 | ) | 4,906 | 5,093 | (4 | ) | ||||||||||||||||
International economy(2) |
491 | 454 | 8 | 1,492 | 1,355 | 10 | ||||||||||||||||||
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Total international export package revenue |
2,058 | 2,079 | (1 | ) | 6,398 | 6,448 | (1 | ) | ||||||||||||||||
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International domestic(3) |
342 | 210 | 63 | 1,035 | 634 | 63 | ||||||||||||||||||
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Total package revenue |
5,234 | 5,126 | 2 | 15,753 | 15,516 | 2 | ||||||||||||||||||
Freight: |
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U.S. |
668 | 647 | 3 | 1,923 | 1,866 | 3 | ||||||||||||||||||
International priority(4) |
384 | 443 | (13 | ) | 1,269 | 1,362 | (7 | ) | ||||||||||||||||
International airfreight |
64 | 77 | (17 | ) | 215 | 228 | (6 | ) | ||||||||||||||||
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Total freight revenue |
1,116 | 1,167 | (4 | ) | 3,407 | 3,456 | (1 | ) | ||||||||||||||||
Other(5) |
354 | 250 | 42 | 1,034 | 746 | 39 | ||||||||||||||||||
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Total revenues |
6,704 | 6,543 | 2 | 20,194 | 19,718 | 2 | ||||||||||||||||||
Operating expenses: |
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Salaries and employee benefits |
2,539 | 2,410 | 5 | 7,500 | 7,200 | 4 | ||||||||||||||||||
Purchased transportation |
583 | 449 | 30 | 1,728 | 1,346 | 28 | ||||||||||||||||||
Rentals and landing fees |
429 | 425 | 1 | 1,262 | 1,269 | (1 | ) | |||||||||||||||||
Depreciation and amortization |
334 | 299 | 12 | 993 | 869 | 14 | ||||||||||||||||||
Fuel |
1,066 | 1,078 | (1 | ) | 3,126 | 3,194 | (2 | ) | ||||||||||||||||
Maintenance and repairs |
262 | 303 | (14 | ) | 983 | 1,037 | (5 | ) | ||||||||||||||||
Business realignment costs(6) |
13 | | NM | 14 | | NM | ||||||||||||||||||
Intercompany charges(7) |
548 | 547 | | 1,620 | 1,643 | (1 | ) | |||||||||||||||||
Other(8) |
812 | 683 | 19 | 2,413 | 2,181 | 11 | ||||||||||||||||||
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Total operating expenses |
6,586 | 6,194 | 6 | 19,639 | 18,739 | 5 | ||||||||||||||||||
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Operating income |
$ | 118 | $ | 349 | (66 | ) | $ | 555 | $ | 979 | (43 | ) | ||||||||||||
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Operating margin |
1.8 | % | 5.3 | % | (350 | )bp | 2.7 | % | 5.0 | % | (230 | )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. |
(6) | Includes predominantly severance costs associated with our voluntary buyout program. |
(7) | Includes allocations of $21 million in the third quarter and $31 million in the nine months of 2013 for business realignment costs. |
(8) | The third quarter of 2012 includes the reversal of a $66 million legal reserve. |
- 40 -
Percent of Revenue | Percent of Revenue | |||||||||||||||
Three Months Ended 2013 |
Three Months Ended 2012 |
Nine Months Ended 2013 |
Nine Months Ended 2012 |
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Operating expenses: |
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Salaries and employee benefits |
37.8 | % | 36.8 | % | 37.1 | % | 36.5 | % | ||||||||
Purchased transportation |
8.7 | 6.9 | 8.6 | 6.8 | ||||||||||||
Rentals and landing fees |
6.4 | 6.5 | 6.2 | 6.4 | ||||||||||||
Depreciation and amortization |
5.0 | 4.6 | 4.9 | 4.4 | ||||||||||||
Fuel |
15.9 | 16.5 | 15.5 | 16.2 | ||||||||||||
Maintenance and repairs |
3.9 | 4.6 | 4.9 | 5.3 | ||||||||||||
Business realignment costs(1) |
0.2 | | 0.1 | | ||||||||||||
Intercompany charges(2) |
8.2 | 8.4 | 8.0 | 8.3 | ||||||||||||