Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

 

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

For the fiscal year ended May 31, 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   38120
(Address of Principal Executive Offices)   (ZIP Code)

Registrant’s telephone number, including area code: (901) 818-7500

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.10 per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Rule 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ

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 þ No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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 þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 þ

  Accelerated filer ¨   Non-accelerated filer ¨      Smaller reporting company ¨
              (Do not check if a 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 þ

The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the closing price as of the last business day of the Registrant’s most recently completed second fiscal quarter, November 30, 2012, was approximately $26.3 billion. The Registrant has no non-voting stock.

As of July 12, 2013, 316,584,465 shares of the Registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement to be delivered to stockholders in connection with the 2013 annual meeting of stockholders to be held on September 23, 2013 are incorporated by reference in response to Part III of this Report.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  
PART I   

ITEM 1. Business

     3   

ITEM 1A. Risk Factors

     23   

ITEM 1B. Unresolved Staff Comments

     23   

ITEM 2. Properties

     23   

ITEM 3. Legal Proceedings

     28   

ITEM 4. Mine Safety Disclosures

     28   

Executive Officers of the Registrant

     28   
PART II   

ITEM  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     31   

ITEM 6. Selected Financial Data

     31   

ITEM 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition

     31   

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     31   

ITEM 8. Financial Statements and Supplementary Data

     31   

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     32   

ITEM 9A. Controls and Procedures

     32   

ITEM 9B. Other Information

     32   
PART III   

ITEM 10. Directors, Executive Officers and Corporate Governance

     33   

ITEM 11. Executive Compensation

     33   

ITEM  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     33   

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

     33   

ITEM 14. Principal Accountant Fees and Services

     33   
PART IV   

ITEM 15. Exhibits, Financial Statement Schedules

     34   
FINANCIAL SECTION   

Table of Contents

     37   

Management’s Discussion and Analysis

     39   

Consolidated Financial Statements

     82   

Other Financial Information

     132   
EXHIBITS   

Exhibit Index

     E-1   

Exhibit 10.52

  

Exhibit 10.53

  

Exhibit 10.73

  

Exhibit 12

  

Exhibit 21

  

Exhibit 23

  

Exhibit 24

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINK BASE DOCUMENT

  

EX-101 DEFINITIONS LINK BASE DOCUMENT

  

EX-101 LABELS LINK BASE DOCUMENT

  

EX-101 PRESENTATION LINK BASE DOCUMENT

  

 

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PART I

ITEM 1. BUSINESS

Overview

FedEx Corporation (“FedEx”) provides a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. These companies are included in four business segments:

 

 

FedEx Express: Federal Express Corporation (“FedEx Express”) is the world’s largest express transportation company, offering time-certain delivery to more than 220 countries and territories, connecting markets that comprise more than 90% of the world’s gross domestic product. The FedEx Express segment also includes FedEx Trade Networks, Inc., which provides international trade services, specializing in customs brokerage and global ocean and air freight forwarding, and FedEx SupplyChain Systems, Inc., which offers a range of supply chain solutions.

 

 

FedEx Ground: FedEx Ground Package System, Inc. (“FedEx Ground”) is a leading North American provider of small-package ground delivery services. FedEx Ground provides low-cost, day-certain service to every business address in the United States and Canada, as well as residential delivery to nearly 100% of U.S. residences through its FedEx Home Delivery service. The FedEx Ground segment also includes FedEx SmartPost, Inc., which specializes in the consolidation and delivery of high volumes of low-weight, less time-sensitive business-to-consumer packages using the U.S. Postal Service (“USPS”) for final delivery to any residential address or PO Box in the United States.

 

 

FedEx Freight: FedEx Freight, Inc. (“FedEx Freight”) is a leading North American provider of less-than-truckload (“LTL”) freight services across all lengths of haul, offering: FedEx Freight Priority, when speed is critical to meet supply chain needs; and FedEx Freight Economy, when time can be traded for cost savings. The FedEx Freight segment also offers freight delivery service to most points in Canada, Mexico, Puerto Rico and the U.S. Virgin Islands and includes FedEx Custom Critical, Inc., a leading North American provider of time-specific, critical shipment services.

 

 

FedEx Services: FedEx Corporate Services, Inc. (“FedEx Services”) provides our other companies with sales, marketing, information technology, communications and back-office support. The FedEx Services segment also includes FedEx TechConnect, Inc., which is responsible for customer service, billings and collections for our U.S. customers and offers technical support services, and FedEx Office and Print Services, Inc. (“FedEx Office”), which provides document and business services and retail access to our package transportation businesses.

For financial information concerning our reportable business segments, refer to the accompanying financial section, which includes management’s discussion and analysis of results of operations and financial condition and our consolidated financial statements.

Our Web site is located at fedex.com. Detailed information about our services, e-commerce tools and solutions, and citizenship efforts can be found on our Web site. In addition, we make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to such reports available, free of charge, through our Web site, as soon as reasonably practicable after they are filed with or furnished to the SEC. These and other SEC filings are available through the Investor Relations page of our Web site, http://investors.fedex.com. The information on our Web site, however, is not incorporated by reference in, and does not form part of, this Annual Report on Form 10-K.

 

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Except as otherwise specified, any reference to a year indicates our fiscal year ended May 31 of the year referenced.

Strategy

FedEx was incorporated in Delaware on October 2, 1997 to serve as the parent holding company and provide strategic direction to the FedEx portfolio of companies. We intend to continue leveraging and extending the FedEx brand and providing our customers with convenient, seamless access to our entire portfolio of integrated services.

We believe that sales and marketing activities, as well as the information systems that support the extensive automation of our delivery services, are functions that are best coordinated across operating companies. Through the use of advanced information systems that connect the FedEx companies, we make it convenient for customers to use the full range of FedEx services. We believe that seamless information integration is critical to obtain business synergies from multiple operating units. For example, our Web site,  fedex.com, provides a single point of contact for our customers to access FedEx Express, FedEx Ground and FedEx Freight shipping, pick-up, shipment tracking, customer service and invoicing information, as well as FedEx Office services. Similarly, by making one call to FedEx Expedited Freight Services, our customers can quickly and easily evaluate surface and air freight shipping options available from FedEx Express, FedEx Freight and FedEx Custom Critical in order to select the service best meeting their needs. Through this one point of contact, customers can select from a broad range of freight services, based on their pickup and delivery requirements, time sensitivity and the characteristics of the products being shipped. Also, we have integrated our LTL and parcel sales teams to enhance the effectiveness of our sales efforts and provide additional simplicity for our customers.

We manage our business as a portfolio — in the long-term best interest of the enterprise, not a particular operating company. As a result, we base decisions on capital investment, expansion of delivery, information technology and retail networks, and service additions or enhancements on achieving the highest overall long-term return on capital for our business as a whole. For each FedEx company, we focus on making appropriate investments in the technology and assets necessary to optimize our long-term earnings performance and cash flow. As an example of our commitment to managing collaboratively, all our management incentive compensation programs across the enterprise are tied to the performance of FedEx as a whole.

While we have increased our emphasis on competing collectively and managing collaboratively, we continue to believe that operating independent networks, each focused on its own respective markets, results in optimal service quality, reliability and profitability from each business unit. Each FedEx company focuses exclusively on the market sectors in which it has the most expertise and can be independently enhanced and managed to provide outstanding service to our customers. Each company’s operations, cost structure and culture are designed to serve the unique customer demands of a particular market segment and as a result, we are able to adapt our networks in response to changing needs.

Our “compete collectively, operate independently, manage collaboratively” strategy also provides flexibility in sizing our various operating companies to align with varying macro-economic conditions and customer demand for the market segments in which they operate, allowing us to leverage and manage change. Volatility and uncertainty have become the norms in the global transportation market, and we are able to use our flexibility to accommodate changing conditions in the global economy. For example, in response to sluggish economic growth, we recently retired from service 10 aircraft and related engines and shortened the depreciable lives of an additional 76 aircraft and related engines. In addition, we have decreased capacity between Asia and the United States.

 

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At the same time, we continue to expand network capacity at our growing and highly successful FedEx Ground segment. Strategic management of the FedEx Ground business resulted in higher yields and volumes boosted by e-commerce and market share gains from continued growth in our FedEx Home Delivery service in 2013.

The following four trends have driven world commerce and shaped the global marketplace, and we believe they will continue to do so over the long term:

 

 

Globalization: As the world’s economy has become more fully integrated, companies are sourcing and selling globally. With customers in more than 220 countries and territories, we facilitate this supply chain through our global reach, delivery services and information capabilities.

 

 

Supply Chain Acceleration: While the growth of global trade has slowed, companies of all sizes continue to depend on the delivery of just-in-time inventory to help them compete. We have taken advantage of the move toward more efficient supply chains by helping customers obtain more visibility into their supply chains and near real-time information to manage inventory in motion, thereby reducing overhead and obsolescence and speeding time-to-market.

 

 

Increase in High-Tech and High-Value-Added Businesses: High-tech and high-value-added goods have increased as a percentage of total economic output, and our various operating companies offer a unique menu of services to fit virtually all shipping needs of high-tech and high-value-added industries.

 

 

Growth of E-Commerce: E-commerce acts as a catalyst for the other three trends and is a vital growth engine for businesses, as the Internet is increasingly being used to purchase goods and services. Through our global transportation and technology networks, we contribute to and benefit from the growth of e-commerce.

These trends have produced an unprecedented expansion of customer access — to goods, services and information. Through our global transportation, information technology and retail networks, we help to make this access possible. We continue to position our companies to facilitate and capitalize on this access and move toward stronger long-term growth, productivity and profitability. To this end, we are investing in long-term strategic projects focused on expanding and modernizing our global networks to accommodate future volume growth and increase customer convenience, such as investments in B777F and B767F aircraft. We also continue to broaden and more effectively bundle our portfolio of services in response to the needs and desires of our customers. For example, since the beginning of 2013, we:

 

 

Continued to reduce transit times and provide a better pickup experience within FedEx Ground’s growing and highly profitable network.

 

 

Made strategic acquisitions in Poland, France and Brazil, and entered into agreements to acquire the businesses operated by our current service provider in five countries in Southern Africa, which are giving and will give us more robust transportation networks in these countries and added capabilities in these important international markets.

 

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Continued to execute our aggressive plan to expand the global freight forwarding presence of FedEx Trade Networks — by opening additional facilities (over 140 freight forwarding offices are now open), including in Glasgow, Scotland, Bangkok, Thailand, Rio de Janeiro, Brazil, Guadalajara and Monterrey, Mexico, and Dublin, Ireland, and establishing new alliances throughout the world.

 

 

Introduced enhancements to the FedEx Deep Frozen Shipping Solution that offer more options and broader access to the end-to-end service that helps customers move temperature-sensitive samples and specimens around the world using an innovative liquid nitrogen dry vapor technology that maintains a temperature below -150 degrees Celsius for up to 10 days.

 

 

Expanded the availability of our sensor-based SenseAware service, which provides customers with near real-time tracking of a package’s vital statistics within the in-transit supply chain or stationary inventory monitoring, to international markets in Canada, the United Kingdom, Australia and Singapore, all the while adding new capabilities to provide customers with greater flexibility and reach.

 

 

Continued to utilize FedEx Freight’s expertise in technology and operational excellence under the unified LTL network to provide a powerful value proposition to customers.

Business Realignment

During 2013, we saw a more challenging business environment — particularly for FedEx Express, as ongoing shifts from priority to deferred shipping services significantly impacted profitability. In response to these trends, in addition to the continued profit improvements in the base businesses at FedEx Ground and FedEx Freight, our profit improvement programs announced in 2013 are targeting annual profitability improvement of $1.6 billion at FedEx Express by the end of 2016 (from the full year 2013 base business). The plan identifies several things the company will do, including reducing our costs, modernizing our aircraft fleet as discussed above, adjusting our transportation networks to meet changing customer needs and remaining dedicated to our people and culture, which have made us what we are today. In the face of tepid global economic growth, shifting customer preferences and volatile fuel prices, we continue to adapt our networks, striking the right balance between volume and yield improvements.

More specifically, multiple initiatives primarily across FedEx Express and FedEx Services are reducing our overall cost structure. For example, we completed a voluntary program offering cash buyouts to eligible U.S.-based employees in certain staff functions, and approximately 3,600 employees either have left or will be leaving voluntarily by the end of 2014. We are also streamlining support functions and eliminating redundant systems and processes. At the same time, in addition to modernizing our air fleet, we are transforming our U.S. domestic express network by closing and realigning regional and district facilities, reorganizing pickup and delivery operations while maintaining our outstanding service levels, improving flight and crew scheduling, refining aircraft maintenance processes and improving fuel efficiency of our vehicle fleet. Internationally, we are working to improve the quality of our international revenue as customers continue to make more economical choices in a low-growth global economy by moving the line-haul of certain slower-moving shipments to third-party transportation providers and better leveraging capacity within the FedEx Express international network through, for example, the reduction of flights to and from Asia. The international acquisitions discussed above will also help drive significant increases in international domestic revenues. Lastly, we are improving revenue quality by adding value for our customers with innovative and market-leading solutions, expanding our small and medium-size customer base and adding services for vertical industries such as healthcare and aerospace. Our way forward is clear, as we continue to make FedEx an even leaner, more efficient business.

 

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Reputation and Responsibility

By competing collectively under the FedEx brand, our operating companies benefit from one of the world’s most recognized brands. FedEx is one of the most trusted and respected companies in the world, and the FedEx brand name is a powerful sales and marketing tool. Among the many reputation awards we received during 2013, FedEx ranked 10th in FORTUNE magazine’s “World’s Most Admired Companies” list — the 12th consecutive year we have been ranked in the top 20 on the list. Additionally, FedEx recently ranked 12th on the Reputation Institute’s “U.S Reputation Pulse” list, which measures the corporate reputations of the largest U.S. companies based on consumers’ trust, esteem, admiration and good feeling about a company. Lastly, in a 2012 survey of U.S. consumers conducted by the Reputation Institute and the Boston College Center for Corporate Citizenship, FedEx placed 7th on the Corporate Social Responsibility Index (CSRI) 50 — a list of the most socially responsible companies in the United States.

FedEx is well recognized as a leader, not only in the transportation industry and technological innovation, but also in global citizenship. We understand that a sustainable global business is tied to our global citizenship, and we are committed to connecting the world responsibly and resourcefully. Our latest published update to our global citizenship report is available at http://csr.fedex.com. These reports describe how we think about our responsibilities in the area of global citizenship and include important goals and metrics that demonstrate our commitment to fulfilling these responsibilities.

Our People

Along with a strong reputation among customers and the general public, FedEx is widely acknowledged as a great place to work. In 2012, FedEx Express was named as one of the top five global companies to work for by The Great Place to Work® Institute in its inaugural ranking of the World’s Best Multinational Workplaces. FedEx Express made this ranking’s top 10 list again in 2013. In order to even be considered for this honor, a company must appear on at least five national Great Place to Work lists and have at least 5,000 employees worldwide. Additionally, in 2013, we were listed among Black Enterprise magazine’s “40 Best Companies for Diversity,” a list that we have made for eight consecutive years. Most recently, FedEx was named among FORTUNE magazine’s 2013 “100 Best Companies to Work For” in the United States, a list we have made 11 of the past 14 years. It is our people — our greatest asset — that give us our strong reputation. In addition to superior physical and information networks, FedEx has an exemplary human network, with more than 300,000 team members who are “absolutely, positively” focused on safety, the highest ethical and professional standards, and the needs of their customers and communities. Through our internal Purple Promise and Humanitarian Award programs, we recognize and reward employees who enhance customer service and promote human welfare. For additional information on our people-first philosophy and workplace initiatives, see http://csr.fedex.com.

Our Community

FedEx is committed to actively supporting the communities we serve worldwide through the strategic investment of our people, resources and network. We provide financial contributions, in-kind charitable shipping services and volunteer efforts by our team members to help a variety of non-profit organizations achieve their goals and make a measurable impact on the world. We have three core focus areas: disaster preparedness, relief and recovery (American Red Cross, The Salvation Army, Direct Relief and Heart to Heart International); pedestrian and road safety (Safe Kids Worldwide and United Nations Decade of Action for Road Safety); and environmental sustainability (Arbour Day Foundation, EMBARQ, National Fish & Wildlife Foundation and The Nature Conservancy). We support minority access to higher education by funding scholarships, are a major sponsor of the National Civil Rights Museum and also support Teach for America, Junior Achievement and ORBIS International. Additionally, FedEx supports

 

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communities throughout the United States with an annual United Way employee giving campaign. In the aftermath of Superstorm Sandy, FedEx stepped in and assisted in delivering almost 4 million pounds of relief aid on behalf of agencies such as the American Red Cross, Heart to Heart International, Direct Relief and The Salvation Army. For additional information on our community involvement and disaster relief efforts, see http://csr.fedex.com.

The Environment

In furtherance of our commitment to protecting the environment, we recently updated one of our long-term goals to increase FedEx Express vehicle fuel efficiency to reflect the significant progress we have made over the last several years — we have already reached more than 22 percent cumulative improvement in fuel economy since 2005. Our goal is to now increase FedEx Express vehicle fuel efficiency by 30 percent by 2020. We continue with our goal to reduce aircraft emissions by 30 percent by 2020 on an emissions per available-ton-mile basis, a goal that we increased from 20 percent in 2012. We have also established a goal of obtaining 30 percent of our jet fuel from alternative fuels by the year 2030.

We will continue to expand on-site renewable energy generation where feasible. To meet our future operational needs, as discussed above, we are adding more fuel-efficient aircraft to our fleet. The use of newer and more fuel-efficient aircraft is reducing our greenhouse gas emissions and airport noise and increasing our jet fuel efficiency. Our electric delivery fleet has grown to 360 low-emission hybrid-electric vehicles and 165 zero-emission electric vehicles. Additionally, we recently purchased 1,900 lightweight, composite-body Reach vehicles from Utilimaster to join our 400 Reach vehicles already in service, making our FedEx Express lightweight, composite-body vehicle fleet the largest in the industry. The Reach van is 35% more fuel efficient than traditional vehicles in the FedEx Express fleet. Our solar power generation systems represent another step we are taking toward progressive environmental stewardship and resource sustainability. We operate nine solar facilities around the world, including the newest roof top solar-electric system at FedEx Express’s distribution hub in Newark, New Jersey, with 8,684 solar modules covering 3.5 acres across three buildings on the roof of the Newark hub. In addition, nine FedEx facilities in the United States, including our FedEx Express facility in Las Vegas, Nevada, our FedEx Express World Headquarters in Memphis and our enterprise data center in Colorado Springs, Colorado, have received certification by Leadership in Energy and Environmental Design (LEED®), the U.S. Green Building Council’s system for rating the environmental performance of buildings. FedEx Express has made LEED certification the standard for newly built U.S. facilities.

We also continue to evaluate the environmental impacts of our packaging and copy and print services, and minimize waste generation through efforts that include recycling, pollution prevention and the use of copy paper with recycled content, among other environmentally-responsible available choices. For additional information on the ways we are minimizing our impact on the environment, see http://csr.fedex.com. In April 2012, we launched our FedEx Carbon-Neutral Envelope shipping program to all FedEx envelope shipping options, making FedEx Express the first global express transportation company to offer carbon-neutral envelope shipping at no extra charge to the customer. Through this program, FedEx Express makes an investment in global projects that displace or sequester greenhouse gas emissions from the atmosphere, neutralizing the impacts of the carbon emissions emitted during the shipment of all FedEx envelopes around the world.

 

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Governance

FedEx has an independent Board of Directors committed to the highest quality corporate governance. During the past two years, we have added highly qualified, independent directors to the Board in R. Brad Martin, the former CEO of Saks Incorporated, and Joshua Cooper Ramo, Vice Chairman of Kissinger Associates, Inc. The Board has taken significant steps to enhance its accountability to stockholders in recent years. For example, in September 2011, stockholders approved our proposal to amend FedEx’s certificate of incorporation in order to allow holders of 20 percent or more of FedEx’s common stock the right to call special meetings of stockholders. Additionally, in June 2012, the Board adopted a lead independent director corporate governance structure.

Our Board of Directors periodically reviews all aspects of our governance policies and practices, including our Corporate Governance Guidelines and our Code of Business Conduct and Ethics, in light of best practices and makes whatever changes are necessary to further our longstanding commitment to the highest standards of corporate governance. The Guidelines and the Code, which applies to all of our directors, officers and employees, including our principal executive officer and senior financial officers, are available in the corporate governance section of the Investor Relations page of our Web site at http://investors.fedex.com. We will post in the Corporate Governance section of the Investor Relations page of our Web site information regarding any amendment to, or waiver from, the provisions of the Code to the extent such disclosure is required.

Business Segments

The following describes in more detail the operations of each of our reportable segments:

FedEx Express Segment

FedEx Express

Overview

FedEx Express invented express distribution 40 years ago in 1973 and remains the industry leader, providing rapid, reliable, time-definite delivery of packages and freight to more than 220 countries and territories through one integrated global network. FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of package and freight, connecting markets that generate more than 90% of the world’s gross domestic product through door-to-door, customs-cleared service, with a money-back guarantee. FedEx Express’s unmatched air route authorities and extensive transportation infrastructure, combined with leading-edge information technologies, make it the world’s largest express transportation company. FedEx Express employs approximately 160,700 employees and has approximately 52,400 drop-off locations (including FedEx Office centers), 647 aircraft and approximately 54,100 vehicles and trailers in its integrated global network.

Services

FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight. Overnight and deferred package services are backed by money-back guarantees and extend to nearly the entire U.S. population. FedEx Express offers three U.S. overnight package delivery services: FedEx First Overnight, FedEx Priority Overnight and FedEx Standard Overnight. FedEx SameDay service is available for urgent shipments up to 70 pounds to virtually any U.S. destination. FedEx Express also offers U.S. express overnight and deferred freight services backed by money-back guarantees to handle the needs of the time-definite freight market.

International express and deferred package delivery with a money-back guarantee is available to more than 220 countries and territories, with a variety of time-definite services to meet distinct customer needs. FedEx International Priority package services provide time-definite delivery within one, two or three business days worldwide. FedEx International Economy package services

 

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provide time-definite delivery within five business days worldwide. FedEx International First, which provides a time-definite, customs cleared, door-to-door express service with a pre-defined delivery commitment of as early as 8:00 a.m. in the United States, 9:00 a.m. in Europe, and 10:00 a.m. in Asia, Canada and Latin America, was expanded in 2013 and now covers 19 destination countries. FedEx Express also offers domestic pickup-and-delivery services within certain non-U.S. countries, including the United Kingdom, Canada, China, India, Mexico, Brazil, France and Poland. In addition, FedEx Express offers comprehensive international express and deferred freight services, backed by a money-back guarantee, real-time tracking and advanced customs clearance.

In April 2013, we launched FedEx Delivery Manager, which allows our U.S. residential customers to customize home deliveries to fit their schedule by providing a range of options to schedule dates, locations and times of delivery. By signing up at www.fedex.com, customers can receive notification of FedEx Express packages en route to their homes, and can choose various delivery options.

For information regarding FedEx Express e-shipping tools and solutions, see “FedEx Services — Technology.”

International Expansion

We are focused on the long-term expansion of our international presence, especially in key markets such as China, India, Europe and Latin America. We recently made strategic moves in Europe and Latin America. In 2013, we acquired:

 

 

the Polish domestic express package delivery company Opek Sp. z o.o.;

 

 

the French express transportation company TATEX; and

 

 

the Brazilian transportation and logistics company Rapidão Cometa Logística e Transporte S.A.

These acquisitions, along with our 2012 acquisition of the Mexican domestic express package delivery company Servicios Nacionales Mupa, S.A. de C.V. (Multipack), give us more robust transportation networks within these countries and added capabilities in these important international markets, continue our strategic European and Latin American growth plans and are expected to provide important contributions to our long-term growth, productivity and profitability. Additionally, in 2013, we opened 48 new stations across Europe pursuant to our organic growth strategy. In June 2013, we signed agreements to acquire the businesses operated by our current service provider Supaswift (Pty) Ltd. in five countries in Southern Africa, including South Africa.

We began serving mainland China in 1984, have expanded our service to cover more than 400 cities across the country and, in 2009, we began operations at our new Asia-Pacific hub at the Guangzhou Baiyun International Airport in southern China. Our new North Pacific regional hub at the Kansai International Airport in Osaka, Japan, which will serve as a consolidation point for shipments from northern Asia to the United States, and will continue to operate as an international gateway for customers in western Japan, is scheduled to open in the spring of 2014. Additionally, in October 2012, we announced plans to establish a new International Express and Cargo Hub in Shanghai. This new facility, with designated onsite customs clearance, will be located at Shanghai’s Pudong International Airport and is slated for completion in early 2017. These hubs will allow us to continue to better serve our global customers doing business in the Asia-Pacific markets.

 

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To facilitate the use of our growing international network, we offer a full range of international trade consulting services and a variety of online tools that enable customers to more easily determine and comply with international shipping requirements.

U.S. Postal Service Agreement

Under an agreement with the USPS that runs through September 2013, FedEx Express provides domestic air transportation services to the USPS, including for its First-Class, Priority and Express Mail. In April 2013, FedEx Express entered into a new seven-year transportation agreement with the USPS for the provision of domestic air transportation services to the USPS for Priority and Express Mail. The new agreement begins on October 1, 2013 and runs through September 2020. FedEx Express also provides transportation and delivery for the USPS’s international delivery service called Global Express Guaranteed (GXG) under a separate agreement.

Pricing

FedEx Express periodically publishes list prices in its Service Guides for the majority of its services. In general, U.S. shipping rates are based on the service selected, destination zone, weight, size, any ancillary service charge and whether the customer charged the shipment to a FedEx account. International rates are based on the type of service provided and vary with size, weight, destination and, whenever applicable, whether the customer charged the shipment to a FedEx account. FedEx Express offers its customers discounts generally based on actual or potential average daily revenue produced.

FedEx Express has an indexed fuel surcharge for U.S. domestic and U.S. outbound shipments and for shipments originating internationally, where legally and contractually possible. The surcharge percentage is subject to monthly adjustment based on a rounded average of a certain spot price for jet fuel. For example, the fuel surcharge for June 2013 was based on the average spot price for jet fuel published for April 2013. Changes to the FedEx Express fuel surcharge, when calculated according to the average spot price for jet fuel and FedEx Express trigger points, are applied effective from the first Monday of the month. These trigger points may change from time to time, but information on the fuel surcharge for each month is available at fedex.com approximately two weeks before the surcharge is applicable. The weighted average U.S. domestic and U.S. outbound fuel surcharge as a percentage of the base rates for the past three years was: 2013 — 12%; 2012 — 14%; and 2011 — 10%. These percentages include certain fuel surcharge reductions that are associated with our annual base rate increases.

Operations

FedEx Express’s primary sorting facility, located in Memphis, serves as the center of the company’s multiple hub-and-spoke system. A second national hub facility is located in Indianapolis. In addition to these national hubs, FedEx Express operates regional hubs in Newark, Oakland, Fort Worth and Greensboro and major metropolitan sorting facilities in Los Angeles and Chicago.

Facilities in Anchorage, Paris, Guangzhou and Cologne/Bonn serve as sorting facilities for express package and freight traffic moving to and from Asia, Europe and North America. Additional major sorting and freight handling facilities are located at Narita Airport in Tokyo, Stansted Airport outside London, and Pearson Airport in Toronto. The facilities in Guangzhou, Paris and Cologne/Bonn are also designed to serve as regional hubs for their respective market areas. A facility in Miami — the Miami Gateway Hub — serves our South Florida, Latin American and Caribbean markets.

Throughout its worldwide network, FedEx Express operates city stations and employs a staff of customer service agents, cargo handlers and couriers who pick up and deliver shipments in the station’s service area. In some international areas, independent agents (Global Service Participants) have been selected to complete deliveries and to pick up packages. For more information about our sorting and handling facilities, see Part I, Item 2 of this Annual Report on Form 10-K under the caption “FedEx Express Segment.”

 

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FedEx Office offers retail access to FedEx Express shipping services at all of its U.S. and Canadian retail locations. FedEx Express also has alliances with certain other retailers to provide in-store drop-off sites. Our unmanned FedEx Drop Boxes provide customers the opportunity to drop off packages in office buildings, shopping centers, and corporate or industrial parks.

Fuel Supplies and Costs

During 2013, FedEx Express purchased jet fuel from various suppliers under contracts that vary in length and which provide for estimated amounts of fuel to be delivered. The fuel represented by these contracts is purchased at market prices. Because of our indexed fuel surcharge, we do not have any jet fuel hedging contracts. See “FedEx Express — Pricing.”

The following table sets forth FedEx Express’s costs for jet fuel and its percentage of consolidated revenues for the last five fiscal years:

 

Fiscal Year

   Total Jet
Fuel  Cost

(in millions)
     Percentage  of
Consolidated
Revenues
 

2013

   $ 3,683         8.3

2012

     3,867         9.1   

2011

     3,178         8.1   

2010

     2,342         6.7   

2009

     2,932         8.3   

Most of FedEx Express’s vehicle fuel needs are satisfied by retail purchases with various discounts.

Competition

As described in Item 1A of this Annual Report on Form 10-K (“Risk Factors”), the express package and freight markets are both highly competitive and sensitive to price and service, especially in periods of little or no macro-economic growth. The ability to compete effectively depends upon price, frequency, capacity and speed of scheduled service, ability to track packages, extent of geographic coverage, reliability and innovative service offerings.

Competitors within the United States include other package delivery concerns, principally United Parcel Service, Inc. (“UPS”), passenger airlines offering express package services, regional express delivery concerns, air freight forwarders and the USPS. FedEx Express’s principal international competitors are DHL, UPS, TNT, other foreign postal authorities, freight forwarders, passenger airlines and all-cargo airlines. Many of FedEx Express’s international competitors are government-owned, -controlled or -subsidized carriers, which may have greater resources, lower costs, less profit sensitivity and more favorable operating conditions than FedEx Express.

Employees

David J. Bronczek is the President and Chief Executive Officer of FedEx Express, which is headquartered in Memphis, Tennessee. As of May 31, 2013, FedEx Express employed approximately 112,000 permanent full-time and 48,700 permanent part-time employees, of which approximately 14% are employed in the Memphis area. FedEx Express’s international employees in the aggregate represent approximately 37% of all employees.

 

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The pilots of FedEx Express, who constitute a small percentage of our total employees, are represented by the Air Line Pilots Association, International (“ALPA”), and are employed under a collective bargaining agreement. This agreement became amendable in March 2013, and the parties are currently in negotiations.

Attempts by other labor organizations to organize certain other groups of employees occur from time to time. Although these organizing attempts have not resulted in any certification of a U.S. domestic collective bargaining representative (other than ALPA), we cannot predict the outcome of these labor activities or their effect, if any, on FedEx Express or its employees. Certain of FedEx Express’s non-U.S. employees are unionized. FedEx Express believes its employee relations are excellent.

FedEx Trade Networks

FedEx Trade Networks provides international trade services, specializing in customs brokerage and global ocean and air freight forwarding. Since the beginning of 2013, FedEx Trade Networks continued to execute an aggressive plan to expand its global freight forwarding presence — by opening additional facilities (over 140 freight forwarding offices are now open), including in Glasgow, Scotland, Bangkok, Thailand, Rio de Janeiro, Brazil, Guadalajara and Monterrey, Mexico, and Dublin, Ireland, and establishing new alliances throughout the world. FedEx Trade Networks provides customs clearance services for FedEx Express at its major U.S. hub facilities. Value-added services include Global Trade Data, an information tool that allows customers to track and manage imports. FedEx Trade Networks provides international trade advisory services, including assistance with the Customs-Trade Partnership Against Terrorism (C-TPAT) program, and through its WorldTariff subsidiary, FedEx Trade Networks publishes customs duty and tax information for approximately 180 customs areas worldwide. In 2013, FedEx Trade Networks completed its mission to enable ACE (Automated Commercial Environment) entry summary filing at all U.S. ports of entry — ACE is U.S. Customs and Border Protection’s new automation system, and by getting on board early, FedEx Trade Networks has developed its expertise and improved its system capabilities for the new regulatory environment. FedEx Trade Networks has approximately 4,570 employees and 146 offices in 123 service locations throughout North America and in Asia, Europe, the Middle East, Latin America and Africa. FedEx Trade Networks maintains a network of air and ocean freight-forwarding service providers and has entered into strategic alliances to provide services in certain countries in which it does not have owned offices.

FedEx SupplyChain Systems

FedEx SupplyChain is an integrated logistics provider offering a range of supply chain solutions that leverage FedEx information technology and transportation networks around the world. The company offers services that include critical inventory logistics, transportation management and temperature-controlled transportation through a network of owned and managed resources — all tightly integrated via advanced information technology systems. FedEx SupplyChain also now offers expanded visibility and control features, as well as new stocking locations to support worldwide FedEx Critical Inventory Logistics customers with high-value, critical orders.

 

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FedEx Ground Segment

FedEx Ground

Overview

By leveraging the FedEx brand, maintaining a low cost structure and efficiently using information technology and advanced automation systems, FedEx Ground continues to enhance its competitive position as a leading provider of business and residential money-back guaranteed ground package delivery services. FedEx Ground serves customers in the North American small-package market, focusing on business and residential delivery of packages weighing up to 150 pounds. Ground service is provided to 100% of the continental U.S. population and overnight service of up to 400 miles to nearly 100% of the continental U.S. population. Service is also provided to nearly 100% of the Canadian population. In addition, FedEx Ground offers service to Alaska and Hawaii through a ground and air network operation coordinated with other transportation providers.

FedEx Ground continues to improve the speed, reach and service capabilities of its network, by reducing transit time for many of its lanes and introducing or expanding overnight ground service in many metropolitan areas. For example, during the most recent two-year period, FedEx Ground has reduced the transit times of 4.4% of its lanes. FedEx Ground’s ongoing network expansion program is substantially increasing the company’s daily pickup capacity through the addition of new hubs featuring the latest automated sorting technology, the expansion of existing hubs, and the expansion or relocation of other existing facilities.

The company offers our FedEx Home Delivery service, which reaches nearly 100% of U.S. residences. FedEx Home Delivery is dedicated to meeting the delivery needs of residential customers and provides routine Saturday and evening delivery and premium options such as day-specific, appointment and signature delivery. FedEx Home Delivery brings unmatched services to residential shippers and their customers and is the first residential ground package delivery service to have offered a money-back guarantee.

In April 2013, we launched FedEx Delivery Manager, which allows our U.S. residential customers to customize home deliveries to fit their schedule by providing a range of options to schedule dates, locations and times of delivery. By signing up at www.fedex.com, customers can receive notification of FedEx Ground packages en route to their homes, and can choose various delivery options.

Pricing

FedEx Ground periodically publishes list prices for the majority of its services in its Service Guide. In general, U.S. shipping rates are based on the service selected, destination zone, weight, size, any ancillary service charge and whether the customer charged the shipment to a FedEx account.

FedEx Ground has an indexed fuel surcharge, which is subject to a monthly adjustment. The surcharge percentage is based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel as published monthly by the U.S. Department of Energy. For example, the fuel surcharge for June 2013 was based on the average diesel fuel price published for April 2013. Changes to the FedEx Ground fuel surcharge, when calculated according to the rounded index average and FedEx Ground trigger points, are applied effective from the first Monday of the month. These trigger points may change from time to time, but information on the fuel surcharge for each month is available at fedex.com approximately two weeks before the surcharge is applicable.

 

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Operations

FedEx Ground operates a multiple hub-and-spoke sorting and distribution system consisting of 528 facilities, including 33 hubs, in the United States and Canada. FedEx Ground conducts its operations primarily with approximately 35,640 owner-operated vehicles and approximately 38,100 company-owned trailers. To provide FedEx Home Delivery service, FedEx Ground leverages its existing pickup operation and hub and linehaul network. FedEx Home Delivery’s operations are often co-located with existing FedEx Ground facilities to achieve further cost efficiencies.

Advanced automated sorting technology is used to streamline the handling of millions of packages daily. Using overhead laser and six-sided camera-based bar code scan technology, hub conveyors electronically guide packages to their appropriate destination chute, where they are loaded for transport to their respective destination terminals for local delivery. Software systems and Internet-based applications are also deployed to offer customers new ways to connect internal package data with external delivery information. FedEx Ground provides shipment tracing and proof-of-delivery signature functionality through the FedEx Web site, fedex.com. For additional information regarding FedEx Ground e-shipping tools and solutions, see “FedEx Services — Technology.”

FedEx Office offers retail access to FedEx Ground shipping services at all of its U.S. and Canadian retail locations. FedEx Ground is also available as a service option at many FedEx Authorized ShipCenters in the United States.

As of May 31, 2013, FedEx Ground had approximately 53,300 employees. In addition, FedEx Ground relies on independent small businesses to conduct its linehaul and pickup-and-delivery operations, as the use of independent contractors is well suited to the needs of the ground delivery business and its customers. Henry J. Maier is the President and Chief Executive Officer of FedEx Ground. FedEx Ground is headquartered in Pittsburgh, Pennsylvania, and its primary competitors are UPS and the USPS.

Independent Contractor Model

Although FedEx Ground is involved in numerous lawsuits and other proceedings (such as state tax or other administrative challenges) where the classification of its independent contractors is at issue, a number of recent judicial decisions support the company’s classification, and the company believes its relationship with its contractors is generally excellent. For a description of these proceedings, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”) and Note 18 of the accompanying consolidated financial statements.

FedEx Ground has made changes to its relationships with the small businesses it contracts with that, among other things, provide incentives for improved service and enhanced regulatory and other compliance by the contractors. For example, FedEx Ground has implemented or is implementing its Independent Service Provider (“ISP”) model in a number of states. The ISP model requires pickup-and-delivery contractors based in those states to, among other things: (i) assume responsibility for the pickup-and-delivery operations of an entire geographic service area that includes multiple routes, and (ii) negotiate independent agreements with FedEx Ground, rather than agree to a standard contract. To date, FedEx Ground has transitioned to the ISP model in 17 states. Depending on a number of considerations, FedEx Ground may transition to it in other states as well.

In addition, because of state-specific legal and regulatory issues, FedEx Ground only contracts with businesses that (i) are organized as corporations registered and in good standing under applicable state law, and (ii) ensure that their personnel who provide services under an operating agreement with FedEx Ground are treated as their employees. FedEx Ground also has an ongoing nationwide program to incentivize owners who choose to grow their businesses by adding routes. During May 2013, approximately 87% of FedEx Ground’s package volume was delivered by business owners operating multiple routes.

 

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FedEx SmartPost

FedEx SmartPost (a subsidiary of FedEx Ground) is a leading national small-parcel consolidator, which specializes in the consolidation and delivery of high volumes of low-weight, less time-sensitive business-to-consumer packages, using the USPS for final delivery to residences. The company picks up shipments from customers (including e-tailers and catalog companies), provides sorting and linehaul services and then delivers the packages to a USPS facility for final delivery by a postal carrier. Through its network of 26 distribution hubs and approximately 7,430 employees, FedEx SmartPost provides delivery to all residential addresses in the United States, including PO Boxes and military destinations. For more information about our relationship with the USPS, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

FedEx Freight Segment

FedEx Freight

FedEx Freight is a leading North American provider of LTL freight services, offering choice, simplicity and reliability to meet the needs of LTL shippers — FedEx Freight Priority, when speed is critical to meet supply chain needs, and FedEx Freight Economy, when time can be traded for cost savings. Through one comprehensive network of service centers and advanced information systems, FedEx Freight provides service to virtually every U.S. ZIP code (including Alaska and Hawaii) with industry-leading transit times. FedEx Freight Priority, which has the fastest published transit times of any nationwide LTL service, offers a no-fee money-back guarantee on eligible shipments. Internationally, FedEx Freight Canada offers FedEx Freight Priority and FedEx Freight Economy, serving most points in Canada, as well as between Canada and the United States. In addition, FedEx Freight serves Mexico, Puerto Rico and the U.S. Virgin Islands via alliances and purchased transportation.

Through its many service offerings, FedEx Freight can match customers’ time-critical needs with industry leading transit times. With the expansion of FedEx electronic solutions, LTL shippers have the convenience of a single shipping and tracking solution for FedEx Freight, FedEx Express and FedEx Ground. These solutions make freight shipping easier and provide customers easy access to their account information. The FedEx Freight Advance Notice feature available on FedEx Freight Priority shipments uses the company’s innovative technology systems to proactively notify FedEx Freight customers via the Internet, e-mail or fax when a shipment may be delayed beyond its estimated delivery date, providing customers with greater visibility and control of their LTL freight shipments. Customers can also process cross-border LTL shipments to and from Canada and Mexico through FedEx Ship Manager Software, FedEx Ship Manager Server and FedEx Web Services. Additionally, FedEx Freight A.M. offers freight delivery by 10:30 a.m. within and between the United States and Canada, backed by a money-back guarantee. FedEx Freight has an indexed fuel surcharge, which is subject to weekly adjustment based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel.

As of May 31, 2013, FedEx Freight was operating approximately 59,000 vehicles and trailers from a network of 370 service centers, and the FedEx Freight segment had approximately 33,700 employees. William J. Logue is the President and Chief Executive Officer of FedEx Freight, which is based in Memphis, Tennessee. FedEx Freight’s primary competitors are YRC Worldwide Inc. (which includes YRC Regional Transportation and YRC Freight), Con-way Freight (a subsidiary of Con-way Inc.), UPS Freight, Old Dominion Freight Line, Inc. and ABF Freight System, Inc.

 

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FedEx Custom Critical

FedEx Custom Critical provides a range of expedited, time-specific freight-shipping services throughout the United States, Canada and Mexico. Among its services are Surface Expedite, for exclusive-use and network-based transport of critical shipments and expedited shipments; Air Expedite, which offers an array of air solutions to meet customers’ critical delivery times; and White Glove Services, for shipments that require extra care in handling, temperature control or specialized security. In addition, its subsidiary FedEx Truckload Brokerage provides freight brokerage solutions within the United States and into and out of Canada and Mexico. Service is available 24 hours a day, 365 days a year. FedEx Custom Critical continuously monitors shipments through an integrated proprietary shipment-control system, including two-way satellite communications on exclusive-use shipments. Through the company’s Shipping Toolkit, customers can quote, ship, track and map shipments; view and print out copies of a shipment’s bill of lading, proof of delivery and invoice; and manage their online accounts. In 2013, FedEx Custom Critical launched a new service called ShipmentWatch, an offering through which FedEx Custom Critical manages SenseAware® devices to track customers’ shipments — by programming the device to the customer’s requirements prior to the shipment, sending the device to the shipper and then proactively monitoring the shipment from pickup to delivery. FedEx Custom Critical utilizes approximately 1,350 vehicles, operated by independent contractors and their drivers, which are dispatched out of approximately 140 geographically-based staging areas.

FedEx Services Segment

FedEx Services

FedEx Services provides our other companies with sales, marketing, information technology, communications, customer service and certain other back-office support. Through FedEx Services and its subsidiary FedEx TechConnect, we provide a convenient single point of access for many customer support functions, enabling us to more effectively sell the entire portfolio of transportation services and to help ensure a consistent and outstanding experience for our customers.

T. Michael Glenn is the President and Chief Executive Officer of FedEx Services, which is based in Memphis, Tennessee. As of May 31, 2013, the FedEx Services segment had approximately 33,300 employees (including approximately 15,500 at FedEx Office).

Customer Technology

FedEx is a world leader in technology, and FedEx founder Frederick W. Smith’s vision that “the information about a package is as important as the delivery of the package itself” remains at the core of our comprehensive technology strategy. In fact, FedEx has been recognized by InformationWeek 500 as a top technology innovator in the United States for 17 consecutive years.

Our technology strategy is driven by our desire for customer satisfaction. We strive to build technology solutions that will solve our customers’ business problems with simplicity, convenience, speed and reliability. The focal point of our strategy is our award-winning Web site, together with our customer integrated solutions.

 

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The fedex.com Web site was launched nearly 20 years ago, and during that time, customers have shipped and tracked billions of packages at fedex.com. The fedex.com Web site is widely recognized for its speed, ease of use and customer-focused features. At  fedex.com, our customers ship packages, determine international documentation requirements, track package status, pay invoices and access FedEx Office services. The advanced tracking capability within FedEx Tracking provides customers with a consolidated view of inbound and outbound shipments.

FedEx Mobile is a suite of services available on most Web-enabled mobile devices, such as the BlackBerry® and Android™ smartphones, and includes enhanced support for Apple products, such as the iPhone®, iPod touch® and iPad® mobile digital devices. The FedEx Mobile website has expanded to more than 220 countries and territories and 25 languages. FedEx Mobile allows customers to track the status of packages, create shipping labels, get account-specific rate quotes and access drop-off location information. FedEx Office has its own iPhone® app that allows customers to print directly from their smartphones to any FedEx Office location in the United States or have the order delivered right to their door, while also allowing customers to get account-specific pricing, track print orders or packages, or find the nearest FedEx Office location. FedEx Office self-serve printers give customers even more flexibility by allowing direct USB access to print documents, as well as the ability to retrieve documents submitted via Google Cloud Print, HP ePrint, Breezy and Canon Forms & Print Services for Salesforce with a secure retrieval code. FedEx also uses wireless data collection devices to scan bar codes on shipments, thereby enhancing and accelerating the package information available to our customers.

FedEx innovation continued in 2013 with the following enhancements:

 

 

FedEx Delivery Manager, which allows our U.S. residential customers to customize home deliveries to fit their schedule by providing a range of options to schedule dates, locations and times of delivery.

 

 

The FedEx Ship to Friends app that allows people who use Facebook® to prepare and pay for a U.S. domestic shipment without leaving Facebook®.

 

 

FSM@fedex.com Integration Manager, which is a web-based tool for business owners who manage multiple stores online, working seamlessly with e-commerce platforms such as eBay, Amazon, Etsy, Google Checkout and Yahoo to allow business owners to organize, review and process their shipments from multiple stores in one place.

We design our e-commerce tools and solutions to be easily integrated into our customers’ applications, as well as into third-party software developed by leading e-procurement, systems integration and enterprise resource planning companies. Our FedEx Ship Manager suite of solutions offers a wide range of options to help our customers manage their parcel and LTL shipping and associated processes.

Marketing

The FedEx brand name is symbolic of outstanding service, reliability and speed. Emphasis is placed on promoting and protecting the FedEx brand, one of our most important assets. As a result, FedEx is one of the most widely recognized brands in the world. In addition to television, print and digital advertising, we promote the FedEx brand through corporate sponsorships and special events. For example, FedEx sponsors:

 

 

The National Football League (NFL), as its “Official Delivery Service Sponsor”

 

 

FedExField, home of the NFL’s Washington Redskins

 

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The #11 Joe Gibbs Racing Toyota Camry driven by Denny Hamlin in the NASCAR Sprint Cup Series

 

 

PGA TOUR and the Champions Tour golf organizations, as the “Official Shipping Company,” and FedExCup, a season-long points competition for PGA TOUR players

 

 

The FedEx St. Jude Classic, a PGA TOUR event that raises millions of dollars for St. Jude Children’s Research Hospital

 

 

FedExForum, home of the NBA’s Memphis Grizzlies

 

 

ATP World Tour men’s professional tennis circuit and French Open tennis tournament

Information Security

FedEx Services has a team of highly qualified professionals dedicated to securing information about our customers’ shipments and protecting our customers’ privacy, and we strive to provide a safe, secure online environment for our customers. We are committed to compliance with applicable information security laws, regulations and industry standards — including, for example, the Payment Card Industry Data Security Standard, a set of comprehensive requirements for enhancing payment account data security developed by the Payment Card Industry Security Standards Council. For a description of risks related to information security, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

Global ISO 9001 Certification

FedEx Services provides our customers with a high level of service quality, as evidenced by our ISO 9001 certification for our global express and ground operations. ISO 9001 registration is required by thousands of customers around the world. FedEx’s global certification, encompassing the processes of FedEx Express, FedEx Ground and FedEx Services, enhances our single-point-of-access strategy and solidifies our reputation as the quality leader in the transportation industry. ISO 9001 is currently the most rigorous international standard for Quality Management and Assurance. ISO standards were developed by the International Organization for Standardization in Geneva, Switzerland to promote and facilitate international trade. More than 150 countries, including European Union members, the United States and Japan, recognize ISO standards.

FedEx Office

FedEx Office’s network of digitally-connected locations offers access to copying and digital printing through retail and Web-based platforms, signs and graphics, professional finishing, computer rentals, and the full range of FedEx day-definite ground shipping and time-definite global express shipping services. FedEx Office’s network of locations provides convenient access points to FedEx Express and FedEx Ground services for higher margin retail customers. Customers may also have their FedEx Express, FedEx Ground and FedEx Home Delivery packages delivered to any FedEx Office location nationwide by choosing the Hold at FedEx Location option when initiating a shipment — or even when a shipment is on its way — free of charge.

In addition, FedEx Office offers packing services, and packing supplies and boxes are included in its retail product assortment. By allowing customers to have items professionally packed by specially trained FedEx Office team members and then shipped using any of the full range of FedEx day-definite ground shipping and time-definite global express shipping services, FedEx Office provides a complete “pack-and-ship” solution.

 

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Almost all FedEx Office locations provide local pick-up and delivery service — an offering whereby a FedEx courier picks up a customer’s job at the customer’s location and then returns the finished product to the customer — with options and service areas varying by location. Additionally, through cloud printing with FedEx Office Print Online, customers can upload files from some of the most popular cloud Web sites including Box, Dropbox and Google Drive™ and then select from a variety of printing options, and can choose to pick up their completed order at FedEx Office locations nationwide or have the order delivered right to their door. Customers also have the ability to access these same cloud files through a USB drive or mobile device at self-serve copiers in FedEx Office locations, giving them seamless access to their files across our online and retail channels. Lastly, we now offer our FedEx SameDay City service in select U.S. ZIP codes, which allows customers to get their packages across town in the same day with local delivery by FedEx Office uniformed employees.

As of May 31, 2013, FedEx Office operated approximately 1,800 locations, including 30 locations in four foreign countries, as well as 20 closed production centers. FedEx Office is headquartered in Dallas, Texas.

Trademarks

The “FedEx” trademark, service mark and trade name is essential to our worldwide business. FedEx, FedEx Express, FedEx Ground, FedEx Freight, FedEx Office, FedEx Services, FedEx SupplyChain Systems, FedEx TechConnect, FedEx Trade Networks, FedEx SmartPost and FedEx Custom Critical, among others, are trademarks, service marks and trade names of Federal Express Corporation, or the respective companies, for which registrations, or applications for registration, are on file, as applicable. We have authorized, through licensing arrangements, the use of certain of our trademarks, service marks and trade names by our contractors and Global Service Participants to support our business. In addition, we license the use of certain of our trademarks, service marks and trade names on promotional items for the primary purpose of enhancing brand awareness.

Regulation

Air. Under the Federal Aviation Act of 1958, as amended, both the U.S. Department of Transportation (“DOT”) and the Federal Aviation Administration (“FAA”) exercise regulatory authority over FedEx Express.

The FAA’s regulatory authority relates primarily to operational aspects of air transportation, including aircraft standards and maintenance, as well as personnel and ground facilities, which may from time to time affect the ability of FedEx Express to operate its aircraft in the most efficient manner. FedEx Express holds an air carrier certificate granted by the FAA pursuant to Part 119 of the federal aviation regulations. This certificate is of unlimited duration and remains in effect so long as FedEx Express maintains its standards of safety and meets the operational requirements of the regulations.

In September 2010, the FAA proposed rules that would significantly reduce the maximum number of hours on duty and increase the minimum amount of rest time for our pilots, and thus require us to hire additional pilots and modify certain of our aircraft. When the FAA issued final regulations in December 2011, all-cargo carriers, including FedEx Express, were exempt from these new pilot fatigue requirements, and instead required to continue complying with previously enacted flight and duty time rules. In December 2012, the FAA reaffirmed the exclusion of us from the new rule. It is reasonably possible, however, that future security or flight safety requirements could impose material costs on us.

The DOT’s authority relates primarily to economic aspects of air transportation. The DOT’s jurisdiction extends to aviation route authority and to other regulatory matters, including the transfer of route authority between carriers. FedEx Express holds various certificates issued by the DOT, authorizing FedEx Express to engage in U.S. and international air transportation of property and mail on a worldwide basis.

 

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Under the Aviation and Transportation Security Act of 2001, as amended, the Transportation Security Administration (“TSA”), an agency within the Department of Homeland Security, has responsibility for aviation security. The TSA continues to require FedEx Express to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains evolving and strict security requirements. These requirements are not static, but change periodically as the result of regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our operations. It is reasonably possible that these rules or other future security requirements could impose material costs on us.

FedEx Express participates in the Civil Reserve Air Fleet (“CRAF”) program. Under this program, the U.S. Department of Defense may requisition for military use certain of FedEx Express’s wide-bodied aircraft in the event of a declared need, including a national emergency. FedEx Express is compensated for the operation of any aircraft requisitioned under the CRAF program at standard contract rates established each year in the normal course of awarding contracts. Through its participation in the CRAF program, FedEx Express is entitled to bid on peacetime military cargo charter business. FedEx Express, together with a consortium of other carriers, currently contracts with the U.S. Government for such charter flights.

Ground. The ground transportation performed by FedEx Express is integral to its air transportation services. The enactment of the Federal Aviation Administration Authorization Act of 1994 abrogated the authority of states to regulate the rates, routes or services of intermodal all-cargo air carriers and most motor carriers. States may now only exercise jurisdiction over safety and insurance. FedEx Express is registered in those states that require registration.

The operations of FedEx Ground, FedEx Freight and FedEx Custom Critical in interstate commerce are currently regulated by the DOT and the Federal Motor Carrier Safety Administration, which retain limited oversight authority over motor carriers. Federal legislation preempts regulation by the states of rates and service in intrastate freight transportation.

Like other interstate motor carriers, our operations, including those at FedEx Express, are subject to certain DOT safety requirements governing interstate operations. In addition, vehicle weight and dimensions remain subject to both federal and state regulations.

International. FedEx Express’s international authority permits it to carry cargo and mail from points in its U.S. route system to numerous points throughout the world. The DOT regulates international routes and practices and is authorized to investigate and take action against discriminatory treatment of United States air carriers abroad. The right of a United States carrier to serve foreign points is subject to the DOT’s approval and generally requires a bilateral agreement between the United States and the foreign government. In addition, the carrier must then be granted the permission of such foreign government to provide specific flights and services. The regulatory environment for global aviation rights may from time to time impair the ability of FedEx Express to operate its air network in the most efficient manner. Additionally, global air cargo carriers, such as FedEx Express, are subject to current and potential additional aviation security regulation by foreign governments.

Our operations outside of the United States, such as FedEx Express’s growing international domestic operations, are also subject to current and potential regulations, including certain postal regulations and licensing requirements, that restrict, make difficult and sometimes prohibit, the ability of foreign-owned companies such as FedEx Express to compete effectively in parts of the international domestic transportation and logistics market.

 

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Communication. Because of the extensive use of radio and other communication facilities in its aircraft and ground transportation operations, FedEx Express is subject to the Federal Communications Commission Act of 1934, as amended. Additionally, the Federal Communications Commission regulates and licenses FedEx Express’s activities pertaining to satellite communications.

Environmental. Pursuant to the Federal Aviation Act, the FAA, with the assistance of the U.S. Environmental Protection Agency, is authorized to establish standards governing aircraft noise. FedEx Express’s aircraft fleet is in compliance with current noise standards of the federal aviation regulations. In addition to federal regulation of aircraft noise, certain airport operators have local noise regulations, which limit aircraft operations by type of aircraft and time of day. These regulations have had a restrictive effect on FedEx Express’s aircraft operations in some of the localities where they apply but do not have a material effect on any of FedEx Express’s significant markets. Congress’s passage of the Airport Noise and Capacity Act of 1990 established a National Noise Policy, which enabled FedEx Express to plan for noise reduction and better respond to local noise constraints. FedEx Express’s international operations are also subject to noise regulations in certain of the countries in which it operates.

Concern over climate change, including the impact of global warming, has led to significant U.S. and international legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions, including our aircraft and diesel engine emissions. For example, during 2009, the European Commission approved the extension of the European Union Emissions Trading Scheme (“ETS”) for GHG emissions, to the airline industry. Under this decision, all FedEx Express flights to and from any airport in any member state of the European Union are now covered by the ETS requirements, and each year we are required to submit emission allowances in an amount equal to the carbon dioxide emissions from such flights. Because the European Union ETS is being contested by many countries on a number of fronts, and the effective date for parts of the ETS has been delayed until next year, the future impact on us is unclear. For a description of such efforts and their potential effect on our cost structure and operating results, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

We are subject to federal, state and local environmental laws and regulations relating to, among other things, the shipment of dangerous goods, contingency planning for spills of petroleum products, the disposal of waste oil and the disposal of toners and other products used in FedEx Office’s copy machines. Additionally, we are subject to numerous regulations dealing with underground fuel storage tanks, hazardous waste handling, vehicle and equipment emissions and noise and the discharge of effluents from our properties and equipment. We have environmental management programs to ensure compliance with these regulations.

Customs. Our activities, including customs brokerage and freight forwarding, are subject to regulation by the Bureau of Customs and Border Protection and the TSA within the Department of Homeland Security (customs brokerage and security issues), the U.S. Federal Maritime Commission (ocean freight forwarding) and the DOT (air freight forwarding). Our offshore operations are subject to similar regulation by the regulatory authorities of foreign jurisdictions.

Labor. All U.S. employees at FedEx Express are covered by the Railway Labor Act of 1926, as amended (the “RLA”), while labor relations within the United States at our other companies are governed by the National Labor Relations Act of 1935, as amended (the “NLRA”). Under the RLA, groups that wish to unionize must do so across nationwide classes of employees. The RLA also requires mandatory government-led mediation of contract disputes supervised by the National Mediation Board before a union can strike or an employer can replace employees or impose contract terms. This part of the RLA helps minimize the risk of strikes that would shut down large portions of the economy. Under the NLRA, employees can unionize in small localized groups, and government-led mediation is not a required step in the negotiation process.

 

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The RLA was originally passed to govern railroad and express carrier labor negotiations. As transportation systems evolved, the law expanded to cover airlines, which are the dominant national transportation systems of today. As an air express carrier with an integrated air/ground network, FedEx Express and its employees have been covered by the RLA since the founding of the company in 1971. The purpose of the RLA is to offer employees a process by which to unionize (if they choose) and engage in collective bargaining while also protecting global commerce from damaging work stoppages and delays. Specifically, the RLA ensures that an entire transportation system, such as at FedEx Express, cannot be shut down by the actions of a local segment of the network.

The U.S. Congress has, in the past, considered adopting changes in labor laws that would make it easier for unions to organize units of our employees. For example, there is always a possibility that Congress could remove most FedEx Express employees from the jurisdiction of the RLA, thereby exposing the FedEx Express network to sporadic labor disputes and the risk that small groups of employees could disrupt the entire air/ground network. In addition, federal and state governmental agencies have and may continue to take actions that could make it easier for our employees to organize under the RLA or NLRA. For a description of these potential labor law changes, see Item 1A of this Annual Report on Form 10-K (“Risk Factors”).

Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act. We have comprehensive export controls and economic sanctions programs designed to ensure compliance with United States and other applicable export laws, rules and regulations. As part of our ongoing efforts to monitor the effectiveness of our international trade compliance programs, we recently identified the shipments described below involving FedEx Express, which occurred during 2013.

During 2013, a Dubai-based package consolidator tendered approximately 32,000 shipments to FedEx Express for handling, including 16 separate shipments for delivery to branches of Mir Business Bank in Russia and branches of Bank Melli in Azerbaijan, Iraq and Germany. Both banks are identified on the list of Specially Designated Nationals maintained by the United States Treasury Department’s Office of Foreign Assets Control (“OFAC”). Each of these shipments contained only documents. The aggregate revenue for these shipments was $212. There was no profit associated with these shipments.

This consolidator also tendered six separate shipments to FedEx Express for delivery to Iranian embassies and a consulate in Germany, Malaysia, Australia, Thailand and Argentina. These shipments contained documents, books, magazines, CDs, toys, nuts and/or candy. The aggregate revenue for these shipments was $218. There was no profit associated with these shipments.

The tendering of these shipments to FedEx Express violated the terms of the written agreements between FedEx Express and this consolidator.

FedEx Express’s handling of these shipments was inadvertent and not in accordance with our internal policies and procedures. Promptly upon learning of these shipments, FedEx Express canceled its agreements with the consolidator described above and certain other Dubai-based package consolidators and discontinued certain services in Dubai. We have implemented enhanced controls, procedures and other measures in connection with our international trade compliance programs that are designed to prevent these activities from recurring.

Our investigation into past shipments tendered by Dubai-based consolidators is ongoing. We have made initial voluntary disclosures to OFAC and will supplement these disclosures as our investigation is completed. We intend to fully cooperate with OFAC regarding these matters.

ITEM 1A. RISK FACTORS

We present information about our risk factors on pages 76 through 81 of this Annual Report on Form 10-K.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

FedEx Express Segment

FedEx Express’s principal owned and leased properties include its aircraft, vehicles, national, regional and metropolitan sorting facilities, administration buildings, FedEx Drop Boxes and data processing and telecommunications equipment.

 

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Aircraft and Vehicles

As of May 31, 2013, FedEx Express’s aircraft fleet consisted of the following:

 

Description

    Owned         Leased         Total       Maximum Gross
Structural  Payload
(Pounds per Aircraft) (1)
 

Boeing B777F

    23        0        23        233,300   

Boeing MD11

    38        26        64        192,600   

Boeing MD10-30

    13        4        17        175,900   

Boeing MD10-10

    47        0        47        137,500   

Airbus A300-600

    35        36        71        106,600   

Airbus A310-200/300

    30        0        30        83,170   

Boeing B757-200

    89        0        89 (2)      63,000   

Boeing B727-200

    14        0        14        59,300   

ATR 72-202/212

    21        0        21        17,970   

ATR 42-300/320

    26        0        26        12,070   

Cessna 208B

    245        0        245        2,830   
 

 

 

   

 

 

   

 

 

   

Total

        581            66            647     
 

 

 

   

 

 

   

 

 

   

 

 

(1) 

Maximum gross structural payload includes revenue payload and container weight.

(2) 

Includes 16 aircraft not currently in operation and awaiting completion of modification.

 

 

The B777Fs are two-engine, wide-bodied cargo aircraft that have a longer range and larger capacity than any other aircraft we operate.

 

 

The MD11s are three-engine, wide-bodied aircraft that have a longer range and larger capacity than MD10s.

 

 

The MD10s are three-engine, wide-bodied aircraft that have received an Advanced Common Flightdeck (ACF) modification, which includes a conversion to a two-pilot cockpit, as well as upgrades of electrical and other systems.

 

 

The A300s and A310s are two-engine, wide-bodied aircraft that have a longer range and more capacity than B757s and B727s.

 

 

The B757s are two-engine, narrow-bodied aircraft configured for cargo service.

 

 

The B727s are three-engine, narrow-bodied aircraft configured for cargo service. The B727 fleet was retired in June 2013.

 

 

The ATR and Cessna 208 turbo-prop aircraft are leased to independent operators to support FedEx Express operations in areas where demand does not justify use of a larger aircraft.

An inventory of spare engines and parts is maintained for each aircraft type.

In addition, FedEx Express leases smaller aircraft to operators, and these operators use the aircraft to move FedEx packages to and from airports served by FedEx Express’s larger jet aircraft. The lease agreements generally call for the lessee to provide the flight crews, maintenance, fuel and other supplies required to operate the aircraft, and FedEx Express reimburses the lessee for these items. The lease agreements are for terms not exceeding one year and are generally cancelable upon 30 days’ notice.

At May 31, 2013, FedEx Express operated approximately 54,100 ground transport vehicles, including pickup and delivery vans, larger trucks called container transport vehicles and over-the-road tractors and trailers.

 

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Aircraft Purchase Commitments

The following table is a summary of the number and type of aircraft we were committed to purchase as of May 31, 2013, with the year of expected delivery:

 

      B757         B767F(1)         B777F(2)         Total    
       

2014

    13        4        2        19   

2015

           12               12   

2016

           10        2        12   

2017

           10               10   

2018

           10        2        12   

Thereafter

           4        14        18   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    13        50        20        83   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

As of May 31, 2013, our obligation to purchase four of these aircraft was conditioned upon there being no event that causes FedEx Express or its employees to not be covered by the RLA.

(2) 

As of May 31, 2013, our obligation to purchase nine of these aircraft was conditioned upon there being no event that causes FedEx Express or its employees to not be covered by the RLA.

As of May 31, 2013, deposits and progress payments of $414 million had been made toward aircraft purchases and other planned aircraft-related transactions. Also see Note 17 of the accompanying consolidated financial statements for more information about our purchase commitments.

 

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Sorting and Handling Facilities

At May 31, 2013, FedEx Express operated the following major sorting and handling facilities:

 

Location

     Acres        Square
Feet
     Sorting
Capacity
  (per hour) (1)  
    

Lessor

   Lease
     Expiration    
Year
 

National

              

Memphis, Tennessee

     784         3,514,000         475,000       Memphis-Shelby County
Airport Authority
     2036   

Indianapolis, Indiana

     316         2,509,000         214,000      

Indianapolis Airport

Authority

     2017/2028 (5) 

Regional

              

Fort Worth, Texas

     168         948,000         76,000       Fort Worth Alliance Airport
Authority
     2021   

Newark, New Jersey

     70         595,000         156,000       Port Authority of New York
and New Jersey
     2030   

Oakland, California

     75         320,000         54,000       City of Oakland      2031   

Greensboro, N. Carolina

     165         593,000         29,000       Piedmont Triad Airport
Authority
     2031   

Metropolitan

              

Chicago, Illinois

     66         597,000         23,000       City of Chicago      2018/2028 (6) 

Los Angeles, California

     34         305,300         57,000       City of Los Angeles      2021/2025 (7) 

International

              

Anchorage, Alaska (2)

     64         332,000         25,000       Alaska Department of
Transportation and Public
Facilities
     2023   

Paris, France (3)

     111         1,238,000         63,000       Aeroports de Paris      2029   

Cologne, Germany (3)

     7         325,000         20,000       Cologne Bonn Airport      2040   

Guangzhou, China (4)

     155         882,000         64,000       Guangdong Airport
Management Corp.
     2029   

 

 

(1) 

Documents and packages.

 

(2) 

Handles international express package and freight shipments to and from Asia, Europe and North America.

 

(3) 

Handles intra-Europe express package and freight shipments, as well as international express package and freight shipments to and from Europe.

 

(4) 

Handles intra-Asia express package and freight shipments, as well as international express package and freight shipments to and from Asia.

 

(5) 

Property is held under two separate leases — lease for original hub expires in 2017, and lease for additional buildings expires in 2028.

 

(6) 

Property is held under two separate leases — lease for original hub expires in 2018, and lease for new facility expires in 2028.

 

(7) 

Property is held under two separate leases — lease for sorting and handling facility expires in 2021, and lease for ramp expansion expires in 2025.

 

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FedEx Express’s primary sorting facility, which serves as the center of its multiple hub-and-spoke system, is located at the Memphis International Airport. FedEx Express’s facilities at the Memphis International Airport also include aircraft hangars, aircraft ramp areas, vehicle parking areas, flight training and fuel facilities, administrative offices and warehouse space. FedEx Express leases these facilities from the Memphis-Shelby County Airport Authority (the “Authority”). The lease obligates FedEx Express to maintain and insure the leased property and to pay all related taxes, assessments and other charges. The lease is subordinate to, and FedEx Express’s rights thereunder could be affected by, any future lease or agreement between the Authority and the U.S. Government.

FedEx Express has additional international sorting-and-handling facilities located at Narita Airport in Tokyo, Stansted Airport outside London, and Pearson Airport in Toronto. FedEx Express also has a substantial presence at airports in Hong Kong, Taiwan, Dubai and Miami.

Administrative and Other Properties and Facilities

The World Headquarters of FedEx Express is located in southeastern Shelby County, Tennessee. FedEx Express owns its headquarters campus, which comprises nine separate buildings with approximately 1.3 million square feet of space. FedEx Express also leases 39 facilities in the Memphis area for administrative offices and warehouses.

FedEx Express owns or leases 645 facilities for city station operations in the United States. In addition, 560 city stations are owned or leased throughout FedEx Express’s international network. The majority of these leases are for terms of five to ten years. City stations serve as a sorting and distribution center for a particular city or region. We believe that suitable alternative facilities are available in each locale on satisfactory terms, if necessary.

As of May 31, 2013, FedEx Express had approximately 38,500 Drop Boxes. FedEx Express also has approximately 12,900 FedEx Authorized ShipCenters and other types of staffed drop-off locations, such as FedEx Office centers. Internationally, FedEx Express had approximately 4,850 drop-off locations.

FedEx Ground Segment

FedEx Ground’s corporate offices are located in the Pittsburgh, Pennsylvania, area in an approximately 500,000 square-foot building owned by FedEx Ground. As of May 31, 2013, FedEx Ground had approximately 38,100 company-owned trailers and owned or leased 528 facilities, including 33 hubs. In addition, approximately 35,640 owner-operated vehicles support FedEx Ground’s business. Of the 331 facilities that support FedEx Home Delivery, 243 are co-located with existing FedEx Ground facilities. Leased facilities generally have terms of five years or less. The 33 hub facilities are strategically located to cover the geographic area served by FedEx Ground. The hub facilities average 357,000 square feet and range in size from 54,000 to 715,000 square feet.

FedEx Freight Segment

FedEx Freight’s corporate headquarters are located in Memphis, Tennessee, with some administrative offices for the FedEx Freight business in Harrison, Arkansas. As of May 31, 2013, FedEx Freight operated approximately 59,000 vehicles and trailers and 370 service centers, which are strategically located to provide service throughout North America. These facilities range in size from 850 to 220,000 square feet of office and dock space. FedEx Custom Critical’s headquarters are located in Green, Ohio.

 

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FedEx Services Segment

FedEx Services’ corporate headquarters are located in Memphis, Tennessee. FedEx Services and FedEx Express lease state-of-the-art technology centers in Collierville, Tennessee, Irving, Texas, Colorado Springs, Colorado, and Orlando, Florida. These facilities house personnel responsible for strategic software development and other functions that support FedEx’s technology and e-commerce solutions. FedEx Office’s corporate headquarters are located in Dallas, Texas in leased facilities. As of May 31, 2013, FedEx Office operated approximately 1,800 locations, including 30 locations in four foreign countries, as well as 20 closed production centers. Substantially all FedEx Office centers are leased, generally for terms of five to ten years with varying renewal options. FedEx Office centers are generally located in strip malls, office buildings or stand-alone structures and average approximately 4,000 square feet in size. We have a multi-year agreement with OfficeMax to offer U.S. domestic FedEx Express and FedEx Ground shipping services at all U.S. OfficeMax retail locations (more than 940 locations).

ITEM 3. LEGAL PROCEEDINGS

FedEx and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of their business. For a description of material pending legal proceedings, see Note 18 of the accompanying consolidated financial statements.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding executive officers of FedEx is as follows (included herein pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K):

 

Name and Office

  

 Age 

  

Positions and Offices Held and Business Experience

Frederick W. Smith

Chairman, President and Chief Executive Officer

   68    Chairman, President and Chief Executive Officer of FedEx since January 1998; Chairman of FedEx Express since 1975; Chairman, President and Chief Executive Officer of FedEx Express from April 1983 to January 1998; Chief Executive Officer of FedEx Express from 1977 to January 1998; and President of FedEx Express from June 1971 to February 1975.

David J. Bronczek

President and Chief Executive Officer, FedEx Express

   59    President and Chief Executive Officer of FedEx Express since January 2000; Executive Vice President and Chief Operating Officer of FedEx Express from January 1998 to January 2000; Senior Vice President — Europe, Middle East and Africa of FedEx Express from June 1995 to January 1998; Senior Vice President — Europe, Africa and Mediterranean of FedEx Express from June 1993 to June 1995; Vice President — Canadian Operations of FedEx Express from February 1987 to March 1993; and several sales and operations managerial positions at FedEx Express from 1976 to 1987. Mr. Bronczek serves as a director of International Paper Company, an uncoated paper and packaging company.

 

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Name and Office

  

 Age 

  

Positions and Offices Held and Business Experience

Robert B. Carter

Executive Vice President — FedEx Information Services and Chief Information Officer

   54    Executive Vice President — FedEx Information Services and Chief Information Officer of FedEx since January 2007; Executive Vice President and Chief Information Officer of FedEx from June 2000 to January 2007; Corporate Vice President and Chief Technology Officer of FedEx from February 1998 to June 2000; Vice President — Corporate Systems Development of FedEx Express from September 1993 to February 1998; Managing Director — Systems Development of FedEx Express from April 1993 to September 1993. Mr. Carter serves as a director of Saks Incorporated, a retailer operating luxury, specialty and traditional department stores, and as a director of First Horizon National Corporation, a financial services holding company.

T. Michael Glenn

Executive Vice President — Market Development and Corporate Communications

   57    Executive Vice President — Market Development and Corporate Communications of FedEx since January 1998; Senior Vice President — Marketing, Customer Service and Corporate Communications of FedEx Express from June 1994 to January 1998; Senior Vice President — Marketing and Corporate Communications of FedEx Express from December 1993 to June 1994; Senior Vice President — Worldwide Marketing Catalog Services and Corporate Communications of FedEx Express from June 1993 to December 1993; Senior Vice President — Catalog and Remail Services of FedEx Express from September 1992 to June 1993; Vice President — Marketing of FedEx Express from August 1985 to September 1992; and various management positions in sales and marketing and senior sales specialist of FedEx Express from 1981 to 1985. Mr. Glenn serves as a director of Pentair, Inc., a diversified industrial manufacturing company operating in water and technical products business segments, and as a director of Level 3 Communications, Inc., a global communications services company.

Alan B. Graf, Jr.

Executive Vice President and Chief Financial Officer

   59    Executive Vice President and Chief Financial Officer of FedEx since January 1998; Executive Vice President and Chief Financial Officer of FedEx Express from February 1996 to January 1998; Senior Vice President and Chief Financial Officer of FedEx Express from December 1991 to February 1996; Vice President and Treasurer of FedEx Express from August 1987 to December 1991; and various management positions in finance and a senior financial analyst of FedEx Express from 1980 to 1987. Mr. Graf serves as a director of Mid-America Apartment Communities Inc., a real estate investment trust that focuses on acquiring, constructing, developing, owning and operating apartment communities, and as a director of NIKE, Inc., a designer and marketer of athletic footwear, apparel, equipment and accessories for sports and fitness activities.

 

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Name and Office

  

 Age 

  

Positions and Offices Held and Business Experience

William J. Logue

President and Chief Executive Officer, FedEx Freight Corporation

   55    President and Chief Executive Officer of FedEx Freight Corporation (parent of FedEx Freight) since March 2010; President of FedEx Freight Corporation from December 2009 to February 2010; Executive Vice President and Chief Operating Officer — U.S. of FedEx Express from March 2008 to November 2009; Executive Vice President — U.S. Operations and System Support of FedEx Express from September 2006 to March 2008; Senior Vice President — U.S. Operations of FedEx Express from August 2004 to September 2006; Senior Vice President — Air-Ground and Freight Services of FedEx Express from 1999 to August 2004; Vice President — National Hub Operations, Memphis Hub of FedEx Express from 1995 to 1999; and various operations management positions with FedEx Express from 1989 to 1995.

Henry J. Maier

President and Chief Executive Officer, FedEx Ground

   59    President and Chief Executive Officer of FedEx Ground since June 2013; Executive Vice President — Strategic Planning and Communications of FedEx Ground from September 2009 to June 2013; Senior Vice President — Strategic Planning and Communications of FedEx Ground from December 2006 to September 2009; Vice President — Marketing of FedEx Services from March 2000 to December 2006; Vice President — Marketing and Communications of FedEx Ground from June 1999 to March 2000; and various management positions in logistics, sales, marketing and communications with RPS, Inc. and Caliber Logistics, Inc. from 1986 to 1999.

Christine P. Richards

Executive Vice President, General Counsel and Secretary

   58    Executive Vice President, General Counsel and Secretary of FedEx since June 2005; Corporate Vice President — Customer and Business Transactions of FedEx from March 2001 to June 2005; Senior Vice President and General Counsel of FedEx Services from March 2000 to June 2005; Staff Vice President — Customer and Business Transactions of FedEx from November 1999 to March 2001; Vice President — Customer and Business Transactions of FedEx Express from 1998 to November 1999; and various legal positions with FedEx Express from 1984 to 1998.

Executive officers are elected by, and serve at the discretion of, the Board of Directors. There is no arrangement or understanding between any executive officer and any person, other than a director or executive officer of FedEx or of any of its subsidiaries acting in his or her official capacity, pursuant to which any executive officer was selected. There are no family relationships between any executive officer and any other executive officer or director of FedEx or of any of its subsidiaries.

 

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

FedEx’s common stock is listed on the New York Stock Exchange under the symbol “FDX.” As of July 12, 2013, there were 13,151 holders of record of our common stock. The following table sets forth, for the periods indicated, the high and low sale prices, as reported on the NYSE, and the cash dividends paid per share of common stock.

 

     Sale Prices      Dividend  
     High      Low     

Fiscal Year Ended May 31, 2013

        

Fourth Quarter

   $ 109.66       $ 90.61       $ 0.14   

Third Quarter

     107.50         87.99         0.14   

Second Quarter

     94.26         83.92         0.14   

First Quarter

     93.17         83.80         0.14   

Fiscal Year Ended May 31, 2012

        

Fourth Quarter

   $ 96.89       $ 84.86       $ 0.13   

Third Quarter

     97.19         76.95         0.13   

Second Quarter

     85.75         64.07         0.13   

First Quarter

     98.66         72.16         0.13   

FedEx also paid a cash dividend on July 1, 2013 ($0.15 per share). We expect to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by our Board of Directors. We evaluate the dividend payment amount on an annual basis at the end of each fiscal year. There are no material restrictions on our ability to declare dividends, nor are there any material restrictions on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances. FedEx did not repurchase any of its common stock during the fourth quarter of 2013.

ITEM 6. SELECTED FINANCIAL DATA

Selected financial data as of and for the five years ended May 31, 2013 is presented on page 133 of this Annual Report on Form 10-K.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Management’s discussion and analysis of results of operations and financial condition is presented on pages 39 through 81 of this Annual Report on Form 10-K.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative information about market risk is presented on page 132 of this Annual Report on Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FedEx’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 15, 2013 thereon, are presented on pages 84 through 131 of this Annual Report on Form 10-K.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to FedEx management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of May 31, 2013 (the end of the period covered by this Annual Report on Form 10-K).

Assessment of Internal Control Over Financial Reporting

Management’s report on our internal control over financial reporting is presented on page 82 of this Annual Report on Form 10-K. The report of Ernst & Young LLP with respect to our internal control over financial reporting is presented on page 83 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

During our fiscal quarter ended May 31, 2013, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

 

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information regarding members of the Board of Directors, compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, FedEx’s Code of Business Conduct and Ethics and certain other aspects of FedEx’s corporate governance (such as the procedures by which FedEx’s stockholders may recommend nominees to the Board of Directors and information about the Audit Committee, including its members and our “audit committee financial expert”) will be presented in FedEx’s definitive proxy statement for its 2013 annual meeting of stockholders, which will be held on September 23, 2013, and is incorporated herein by reference. Information regarding executive officers of FedEx is included above in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant” pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K. Information regarding FedEx’s Code of Business Conduct and Ethics is included above in Part I, Item 1 of this Annual Report on Form 10-K under the caption “Reputation and Responsibility — Governance.”

ITEM 11. EXECUTIVE COMPENSATION

Information regarding director and executive compensation will be presented in FedEx’s definitive proxy statement for its 2013 annual meeting of stockholders, which will be held on September  23, 2013, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and management and related stockholder matters, as well as equity compensation plan information, will be presented in FedEx’s definitive proxy statement for its 2013 annual meeting of stockholders, which will be held on September 23, 2013, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information regarding certain relationships and transactions with related persons (including FedEx’s policies and procedures for the review and preapproval of related person transactions) and director independence will be presented in FedEx’s definitive proxy statement for its 2013 annual meeting of stockholders, which will be held on September 23, 2013, and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding the fees for services provided by Ernst & Young LLP during 2013 and 2012 and the Audit Committee’s administration of the engagement of Ernst & Young LLP, including the Committee’s preapproval policies and procedures (such as FedEx’s Policy on Engagement of Independent Auditor), will be presented in FedEx’s definitive proxy statement for its 2013 annual meeting of stockholders, which will be held on September 23, 2013, and is incorporated herein by reference.

 

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) and (2) Financial Statements; Financial Statement Schedules

FedEx’s consolidated financial statements, together with the notes thereto and the report of Ernst & Young LLP dated July 15, 2013 thereon, are listed on pages 37 through 38 and presented on pages 84 through 131 of this Annual Report on Form 10-K. FedEx’s “Schedule II — Valuation and Qualifying Accounts,” together with the report of Ernst & Young LLP dated July 15, 2013 thereon, is presented on pages 134 through 135 of this Annual Report on Form 10-K. All other financial statement schedules have been omitted because they are not applicable or the required information is included in FedEx’s consolidated financial statements or the notes thereto.

(a)(3) Exhibits

See the Exhibit Index on pages E-1 through E-10 for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  FEDEX CORPORATION  
Dated: July 15, 2013   By:  

/s/ FREDERICK W. SMITH

 
    Frederick W. Smith  
    Chairman, President and  
    Chief Executive Officer  

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

Signature

 

Capacity

 

Date

/s/ FREDERICK W. SMITH

 

Chairman, President and Chief Executive Officer and Director

(Principal Executive Officer)

  July 15, 2013

Frederick W. Smith

   

/s/ ALAN B. GRAF, JR.

 

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

  July 15, 2013

Alan B. Graf, Jr.

   

/s/ JOHN L. MERINO

 

Corporate Vice President and Principal Accounting Officer

(Principal Accounting Officer)

  July 15, 2013

John L. Merino

   

/s/ JAMES L. BARKSDALE *

 

Director

  July 15, 2013

James L. Barksdale

   

/s/ JOHN A. EDWARDSON *

 

Director

  July 15, 2013

John A. Edwardson

   

/s/ SHIRLEY ANN JACKSON *

 

Director

  July 15, 2013

Shirley Ann Jackson

   

/s/ STEVEN R. LORANGER *

 

Director

  July 15, 2013

Steven R. Loranger

   

 

35


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Signature

 

Capacity

 

Date

/s/ GARY W. LOVEMAN *

 

Director

  July 15, 2013

Gary W. Loveman

   

/s/ R. BRAD MARTIN *

 

Director

  July 15, 2013

R. Brad Martin

   

/s/ JOSHUA COOPER RAMO *

 

Director

  July 15, 2013

Joshua Cooper Ramo

   

/s/ SUSAN C. SCHWAB *

 

Director

  July 15, 2013

Susan C. Schwab

   

/s/ JOSHUA I. SMITH *

 

Director

  July 15, 2013

Joshua I. Smith

   

/s/ DAVID P. STEINER *

 

Director

  July 15, 2013

David P. Steiner

   

/s/ PAUL S. WALSH *

 

Director

  July 15, 2013

Paul S. Walsh

   

*By: /s/ JOHN L. MERINO

John L. Merino

Attorney-in-Fact

    July 15, 2013

 

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FINANCIAL SECTION TABLE OF CONTENTS

 

      PAGE   

Management’s Discussion and Analysis of Results of Operations and Financial Condition

  

Overview of Financial Section

     39   

Results of Operations

     41   

Recent Accounting Guidance

     50   

Reportable Segments

     51   

FedEx Services Segment

     51   

FedEx Express Segment

     53   

FedEx Ground Segment

     58   

FedEx Freight Segment

     61   

Financial Condition

     64   

Liquidity

     64   

Capital Resources

     65   

Liquidity Outlook

     65   

Contractual Cash Obligations and Off-Balance Sheet Arrangements

     67   

Critical Accounting Estimates

     68   

Retirement Plans

     68   

Self-Insurance Accruals

     71   

Long-Lived Assets

     72   

Contingencies

     74   

Risk Factors

     76   

Forward-Looking Statements

     80   

Consolidated Financial Statements

  

Management’s Report on Internal Control over Financial Reporting

     82   

Reports of Independent Registered Public Accounting Firm

     83   

Consolidated Balance Sheets
May 31, 2013 and 2012

     85   

 

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Consolidated Statements of Income
Years Ended May 31, 2013, 2012 and 2011

     87   

Consolidated Statements of Comprehensive Income (Loss)
Years Ended May 31, 2013, 2012 and 2011

     88   

Consolidated Statements of Cash Flows
Years Ended May 31, 2013, 2012 and 2011

     89   

Consolidated Statements of Changes in Stockholders’ Investment
Years Ended May  31, 2013, 2012 and 2011

     90   

Notes to Consolidated Financial Statements

     91   

Other Financial Information

  

Quantitative and Qualitative Disclosures about Market Risk

     132   

Selected Financial Data

     133   

Report of Independent Registered Public Accounting Firm

     134   

Schedule II — Valuation and Qualifying Accounts

     135   

Computation of Ratio of Earnings to Fixed Charges

     136   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND

FINANCIAL CONDITION

OVERVIEW OF FINANCIAL SECTION

The financial section of the FedEx Corporation (“FedEx”) Annual Report on Form 10-K (“Annual Report”) consists of the following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”), the Consolidated Financial Statements and the notes to the Consolidated Financial Statements, and Other Financial Information, all of which include information about our significant accounting policies, practices and the transactions that underlie our financial results. The following MD&A describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and the critical accounting estimates of FedEx. The discussion in the financial section should be read in conjunction with the other sections of this Annual Report, particularly “Item 1: Business” and our detailed discussion of risk factors included in this MD&A.

ORGANIZATION OF INFORMATION

Our MD&A is composed of three major sections: Results of Operations, Financial Condition and Critical Accounting Estimates. These sections include the following information:

 

 

Results of operations includes an overview of our consolidated 2013 results compared to 2012, and 2012 results compared to 2011. This section also includes a discussion of key actions and events that impacted our results, as well as our outlook for 2014.

 

 

The overview is followed by a financial summary and analysis (including a discussion of both historical operating results and our outlook for 2014) for each of our reportable transportation segments.

 

 

Our financial condition is reviewed through an analysis of key elements of our liquidity, capital resources and contractual cash obligations, including a discussion of our cash flows and our financial commitments.

 

 

Critical accounting estimates discusses those financial statement elements that we believe are important to understanding certain of the material judgments and assumptions incorporated in our financial results.

 

 

We conclude with a discussion of risks and uncertainties that may impact our financial and operating results.

DESCRIPTION OF BUSINESS

We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading North American provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments. Our FedEx Services segment provides sales, marketing, information technology, communications 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 and refer to “Item 1: Business” for a more detailed description of each of our operating companies.

 

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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.

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

 

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RESULTS OF OPERATIONS

CONSOLIDATED RESULTS

The following table compares summary operating results (dollars in millions, except per share amounts) for the years ended May 31:

 

                                                                
                       Percent Change  
     2013(1)     2012(2)     2011(3)       2013/2012         2012/2011    

Revenues

   $       44,287     $       42,680     $       39,304       4       9  

Operating income

     2,551        3,186        2,378       (20     34  

Operating margin

     5.8     7.5     6.1     (17 0)bp      14 0bp 

Net income

   $ 1,561     $ 2,032     $ 1,452       (23     40  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 4.91     $ 6.41     $ 4.57       (23     40  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Operating expenses include $560 million for business realignment costs and a $100 million impairment charge resulting from the decision to retire ten aircraft and related engines at FedEx Express.

 

(2) 

Operating expenses include an impairment charge of $134 million resulting from the decision to retire 24 aircraft and related engines at FedEx Express and the reversal of a $66 million legal reserve which was initially recorded in 2011 at FedEx Express.

 

(3) 

Operating expenses include $133 million in costs associated with the combination of our FedEx Freight and FedEx National LTL operations, effective January 30, 2011, and a $66 million legal reserve at FedEx Express.

The following table shows changes in revenues and operating income by reportable segment for 2013 compared to 2012, and 2012 compared to 2011 (dollars in millions):

 

     Revenues     Operating Income  
     Dollar Change     Percent Change     Dollar Change      Percent Change  
     2013/
2012
    2012/
2011
    2013/
2012
    2012/
2011
    2013/
2012
    2012/
2011
     2013/
2012
    2012/
2011
 

FedEx Express segment(1)

   $ 656     $ 1,934       2       8     $ (705   $ 32        (56     3  

FedEx Ground segment(2)

     1,005       1,088       10       13       24       439        1       33  

FedEx Freight segment(3)

     119       371       2       8       46       337        28       193  

FedEx Services segment

     (91     (13     (5     (1                         

Other and eliminations

     (82     (4     NM        NM                            
  

 

 

   

 

 

       

 

 

   

 

 

      
   $     1,607     $     3,376       4       9     $     (635   $     808        (20     34  
  

 

 

   

 

 

       

 

 

   

 

 

      

 

(1) 

FedEx Express segment 2013 operating expenses include $405 million of direct and allocated business realignment costs and an impairment charge of $100 million resulting from the decision to retire 10 aircraft and related engines. Additionally, FedEx Express segment 2012 operating expenses include an impairment charge of $134 million resulting from the decision to retire 24 aircraft and related engines and the reversal of a $66 million legal reserve that was initially recorded in 2011.

 

(2) 

FedEx Ground segment 2013 operating expenses include $105 million of allocated business realignment costs.

 

(3) 

FedEx Freight segment 2013 operating expenses include $50 million of direct and allocated business realignment costs. Additionally, FedEx Freight segment 2011 operating expenses include $133 million in costs associated with the combination of our FedEx Freight and FedEx National LTL operations, effective January 30, 2011.

 

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Overview

Our results for 2013 reflect a significant impact of certain charges (described below), which negatively impacted our earnings by $1.31 per diluted share. Beyond these factors, our results for 2013 benefited from the strong performance of FedEx Ground, which continued to grow market share, and ongoing profit improvement at FedEx Freight. However, a decline in profitability was experienced at our FedEx Express segment resulting from ongoing shifts in demand from our priority international services to economy international services which could not be fully offset by network cost and capacity reductions in 2013.

Our 2013 results include business realignment costs of $560 million, primarily related to our voluntary cash buyout program (see “Business Realignment, Impairment and Other Charges” for additional information). Furthermore, in May 2013, we made the decision to retire from service 10 aircraft and related engines, which resulted in a noncash asset impairment charge of $100 million.

In addition, actions in 2012 at FedEx Express related to fleet modernization resulted in the accelerated retirement of certain aircraft which negatively impacted our 2013 results by $69 million due to additional depreciation recorded for the shortened lives of the aircraft.

Our 2012 revenues, operating income and operating margins reflected the exceptional performance of our FedEx Ground segment, improved profitability at FedEx Freight and increased yields across all our operating segments. Our results significantly benefited in 2012 from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust. Our 2012 results included the reversal of a $66 million legal reserve initially recorded in 2011 and an aircraft impairment charge of $134 million at FedEx Express.

 

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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands) for the years ended May 31:

 

LOGO

 

(1) 

International domestic average daily package volume includes our international intra-country express operations, including acquisitions in India (February 2011), Mexico (July 2011), Poland (June 2012), France (July 2012) and Brazil (July 2012).

 

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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends for the years ended May 31:

 

LOGO

Revenue

Revenues increased 4% in 2013 primarily driven by increases in international domestic revenue at FedEx Express and volume growth at FedEx Ground. At FedEx Ground, revenues increased 10% in 2013 primarily due to volume growth from market share gains. At FedEx Express, revenues increased 2% due to increases in international domestic revenues from recent acquisitions and growth in our freight-forwarding business at FedEx Trade Networks. Base revenue growth at FedEx Express in 2013 was constrained by global economic conditions as shifts in demand from our priority international services to our economy international services and lower rates resulted in declines in international export package yields. At FedEx Freight, revenues increased 2% as a result of higher yield and average daily LTL shipments.

During 2012, revenues increased 9% due to yield growth across all our transportation segments. At FedEx Express, revenues increased 8% in 2012 led by higher U.S. domestic and international export package yields. However, U.S. domestic package and international export package volumes declined due to weakening global economic conditions. Revenues increased 13% during 2012 at our FedEx Ground segment due to higher yields and strong demand for all our major services. At FedEx Freight, revenues increased 8% during 2012 due to higher LTL yield as a result of higher fuel surcharges and yield management programs, despite a decrease in volume.

 

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Operating Income

The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the years ended May 31:

 

         2013             2012             2011      

Operating expenses:

      

Salaries and employee benefits

   $ 16,570     $ 16,099     $ 15,276  

Purchased transportation

     7,272       6,335       5,674  

Rentals and landing fees

     2,521       2,487       2,462  

Depreciation and amortization

     2,386       2,113       1,973  

Fuel

     4,746       4,956       4,151  

Maintenance and repairs

     1,909       1,980       1,979  

Business realignment, impairment and other charges

     660 (1)      134 (2)      89 (3) 

Other (4)

     5,672       5,390       5,322  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ 41,736     $ 39,494     $ 36,926  
  

 

 

   

 

 

   

 

 

 

 

     Percent of Revenue  
       2013         2012         2011    

Operating expenses:

      

Salaries and employee benefits

     37.4     37.7     38.9

Purchased transportation

     16.4       14.9       14.4  

Rentals and landing fees

     5.7       5.8       6.3  

Depreciation and amortization

     5.4       5.0       5.0  

Fuel

     10.7       11.6       10.6  

Maintenance and repairs

     4.3       4.6       5.0  

Business realignment, impairment and other charges

     1.5 (1)      0.3 (2)      0.2 (3) 

Other (4)

     12.8       12.6       13.5  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     94.2       92.5       93.9  
  

 

 

   

 

 

   

 

 

 

Operating margin

     5.8     7.5     6.1
  

 

 

   

 

 

   

 

 

 

 

(1) 

Includes predominantly severance costs associated with our voluntary buyout program and charges resulting from the decision to retire 10 aircraft and related engines at FedEx Express.

 

(2) 

Represents charges resulting from the decision to retire 24 aircraft and related engines at FedEx Express.

 

(3) 

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

 

(4) 

Includes the 2012 reversal of a $66 million legal reserve at FedEx Express that was initially recorded in 2011.

Our 2013 operating income and operating margin decreased primarily due to the impact of business realignment costs, aircraft impairment charges and accelerated aircraft depreciation (see “Overview” section above). Beyond these factors, operating income was positively impacted in 2013 by higher volumes and increased yields at our FedEx Ground segment and by increased yields and higher volumes at our FedEx Freight segment. However, the ongoing shifts in demand from priority international services to economy international services and lower rates resulted in a substantial decline in profitability at FedEx Express.

Purchased transportation increased 15% in 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 benefits increased 3% in 2013 primarily due to increases in pension and group health insurance costs, partially offset by lower incentive compensation accruals. Other expenses increased 5% in 2013 primarily due to the impact of business acquisitions and the reversal in 2012 of a legal reserve.

 

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The following graph for our transportation segments shows our average cost of jet and vehicle fuel per gallon for the years ended May 31:

 

LOGO

Fuel expense decreased 4% during 2013 primarily due to lower jet fuel prices and lower aircraft fuel usage. Our fuel surcharges, which are more fully described in the “Quantitative and Qualitative Disclosures About Market Risk” section of this MD&A, have a timing lag and are designed to pass through the price of fuel not included in our base shipping rates to our customers. Based on a static analysis of the impact to operating income of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a negative impact on operating income in 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 2013, 2012 and 2011 in the accompanying discussions of each of our transportation segments.

In 2012, operating income increased 34% and operating margin increased 140 basis points driven by higher yields across all our transportation segments due to higher fuel surcharges and our yield management programs. Our results also significantly benefited in 2012 from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust. FedEx Ground segment operating income increased $439 million in 2012 driven by higher yields and strong demand for all our major services. At our FedEx Freight segment, operating income increased $337 million due to higher LTL yield and efficiencies gained from the combination of our LTL operations in 2011.

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

Fuel expense increased 19% during 2012 primarily due to price increases. Based on a static analysis of the impact to operating income of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel surcharges significantly exceeded incremental fuel costs in 2012.

 

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Other Income and Expense

Interest expense increased $30 million in 2013 primarily due to a reduction in capitalized interest and increased interest expense from 2013 debt issuances. Other expense increased in 2013 driven by foreign currency translation due to global currency volatility. Interest expense decreased $34 million in 2012 due to debt maturities, an increase in capitalized interest related to the timing of progress payments on aircraft purchases and lower financing fees.

Income Taxes

Our effective tax rate was 36.4% in 2013, 35.3% in 2012 and 35.9% in 2011. Our 2012 rate was favorably impacted by the conclusion of the Internal Revenue Service (“IRS”) audit of our 2007-2009 consolidated income tax returns. Our permanent reinvestment strategy with respect to unremitted earnings of our foreign subsidiaries provided a 1.2% benefit to our 2013 effective tax rate. Our total permanently reinvested foreign earnings were $1.3 billion at the end of 2013 and $1.0 billion at the end of 2012.

Our current federal income tax expenses in 2013, 2012 and 2011 were significantly reduced by accelerated depreciation deductions we claimed under provisions of the American Taxpayer Relief Act of 2013 and the Tax Relief and the Small Business Jobs Acts of 2010. Those Acts, designed to stimulate new business investment in the U.S., accelerated our depreciation deductions for qualifying investments, such as our Boeing 777 Freighter (“B777F”) aircraft. These were timing benefits only, in that depreciation accelerated into an earlier year is foregone in later years. Our 2013 current provision for federal income taxes was, therefore, higher than in 2012 and 2011.

The components of the provision for federal income taxes for the years ended May 31 were as follows (in millions):

 

         2013              2012             2011      

Current

   $ 512      $ (120   $ 79  

Deferred

     175        947       485  
  

 

 

    

 

 

   

 

 

 

Total Federal Provision

   $ 687      $ 827     $ 564  
  

 

 

    

 

 

   

 

 

 

For 2014, we expect our effective tax rate to be between 36.5% and 37.0%. The actual rate, however, will depend on a number of factors, including the amount and source of operating income. We also expect our current federal income tax expense will increase in 2014 due to lower accelerated depreciation benefits than in prior years.

Additional information on income taxes, including our effective tax rate reconciliation, liabilities for uncertain tax positions and our global tax profile can be found in Note 12 of the accompanying consolidated financial statements.

 

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Business Acquisitions

During 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. See Note 3 of the accompanying consolidated financial statements for further discussion of these acquisitions.

In 2012, we completed our acquisition of Servicios Nacionales Mupa, S.A. de C.V. (MultiPack), a Mexican domestic express package delivery company, for $128 million in cash from operations on July 25, 2011. In 2011, we completed the acquisition of the Indian logistics, distribution and express businesses of AFL Pvt. Ltd. and its affiliate Unifreight India Pvt. Ltd. for $96 million in cash from operations on February 22, 2011.

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. Substantially all of the purchase price in each of these acquisitions was allocated to goodwill, which was entirely attributed to our FedEx Express reporting unit.

On June 20, 2013, we signed agreements to acquire the businesses operated by our current service provider Supaswift (Pty) Ltd. in five countries in Southern Africa. The acquisition will be funded with cash from operations and is expected to be completed in the second half of 2014, subject to customary closing conditions. The financial results of the acquired businesses will be included in the FedEx Express segment from the date of acquisition and will be immaterial to our 2014 results.

Business Realignment, Impairment and Other Charges

During 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 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 2013, we conducted 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. This program was completed in the fourth quarter and approximately 3,600 employees have left or will be voluntarily leaving the company by the end of 2014. Eligible employees are scheduled to vacate positions in phases to ensure a smooth transition in the impacted functions so that we maintain service levels to our customers. Of the total population leaving the

 

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company, approximately 40% of the employees vacated positions on May 31, 2013. An additional 35% will depart throughout 2014 and approximately 25% of this population will remain until May 31, 2014. Costs of the benefits provided under the voluntary program were recognized as special termination benefits in the period that eligible employees accepted their offers.

We incurred costs of $560 million ($353 million, net of tax, or $1.11 per diluted share) during 2013 associated with our business realignment activities. These costs related primarily to severance for employees who accepted voluntary buyouts in the third and fourth quarters of 2013. Payments will be made at the time of departure. Approximately $180 million was paid under this program during 2013. The cost of the buyout program is included in the caption “Business realignment, impairment and other charges” in our consolidated statements of income. Also included in that caption are other external costs directly attributable to our business realignment activities, such as professional fees.

In addition, actions in 2012 at FedEx Express related to fleet modernization resulted in accelerated depreciation of $69 million in 2013 included in the caption “Depreciation and amortization” in our consolidated statements of income as we shortened the lives of certain aircraft.

In May 2013, we made the decision to retire from service two Airbus A310-200 aircraft and four related engines, three Airbus A310-300 aircraft and two related engines, and five Boeing MD10-10 aircraft and 15 related engines. As a consequence of this decision, a noncash impairment charge of $100 million ($63 million, net of tax, or $0.20 per diluted share) was recorded in the fourth quarter. The decision to retire these aircraft, which were temporarily idled and not in revenue service, aligns with the plans of FedEx Express to modernize its aircraft fleet and improve its global network.

In May 2012, we retired from service 24 aircraft and related engines, the majority of which were temporarily idled and not in revenue service. As a consequence of this decision, a noncash impairment charge of $134 million ($84 million, net of tax, or $0.26 per diluted share) was recorded in the fourth quarter of 2012.

See the “Long-lived Assets” section of our “Critical Accounting Estimates” for a discussion of our accounting for aircraft retirement decisions.

Outlook

We anticipate revenue and earnings growth in 2014 driven by the continued strong performance of our FedEx Ground and FedEx Freight businesses and improving performance at FedEx Express. Our expected results for 2014 will be constrained by moderate growth in the global economy and continued challenges from the demand shift trend from our priority international services to our economy international services. In response to these trends, we will be evaluating additional capacity reductions and other actions in 2014. During 2014 we will incur incremental costs to transform our information technology operations at FedEx Services in connection with our profit improvement programs, which will increase the costs allocated to our transportation segments. In May 2013, in conjunction with the retirement of aircraft, FedEx Express shortened the depreciable lives of 76 aircraft and related engines. As a result of this decision and the 2012 decision to shorten the depreciable lives of 54 aircraft, we expect to incur additional year-over-year accelerated depreciation expense of $74 million in 2014. However, lower pension expense in 2014 will positively impact our operating results.

In addition to continued profit improvements in the base businesses at FedEx Ground and FedEx Freight, our profit improvement programs announced in 2013 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. However, the amount of benefit ultimately realized will vary depending upon future customer demand, particularly for priority international services. 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.

 

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Our capital expenditures for 2014 are expected to increase to approximately $4.0 billion for additional aircraft deliveries in 2014 to support our fleet modernization program and continued expansion of the FedEx Ground network. We will continue to evaluate our investments in critical long-term strategic projects to ensure our capital expenditures generate high returns on investments and are balanced with our outlook for global economic conditions. For additional details on key 2014 capital projects, refer to the “Capital Resources” and “Liquidity Outlook” sections of this MD&A.

Our outlook is dependent upon a stable pricing environment for fuel, as volatility in fuel prices impacts our fuel surcharge levels, fuel expense and demand for our services. Historically, our fuel surcharges have largely offset incremental fuel costs; however, volatility in fuel costs may impact earnings because adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, the trailing impact of adjustments to our fuel surcharges can significantly affect our earnings either positively or negatively in the short-term.

As described in Note 18 of the accompanying consolidated financial statements and the “Independent Contractor Model” section of our FedEx Ground segment MD&A, we are involved in a number of lawsuits and other proceedings that challenge the status of FedEx Ground’s owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its relationships with its owner-operators. The nature, timing and amount of any changes are dependent on the outcome of numerous future events. We cannot reasonably estimate the potential impact of any such changes or a meaningful range of potential outcomes, although they could be material. However, we do not believe that any such changes will impair our ability to operate and profitably grow our FedEx Ground business.

See “Risk Factors” for a discussion of these and other potential risks and uncertainties that could materially affect our future performance.

Seasonality of Business

Our businesses are cyclical in nature, as seasonal fluctuations affect volumes, revenues and earnings. Historically, the U.S. express package business experiences an increase in volumes in late November and December. International business, particularly in the Asia-to-U.S. market, peaks in October and November in advance of the U.S. holiday sales season. Our first and third fiscal quarters, because they are summer vacation and post winter-holiday seasons, have historically experienced lower volumes relative to other periods. Normally, the fall is the busiest shipping period for FedEx Ground, while late December, June and July are the slowest periods. For FedEx Freight, the spring and fall are the busiest periods and the latter part of December through February is the slowest period. For FedEx Office, the summer months are normally the slowest periods. Shipment levels, operating costs and earnings for each of our companies can also be adversely affected by inclement weather, particularly the impact of severe winter weather in our third fiscal quarter.

RECENT ACCOUNTING GUIDANCE

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements.

On June 1, 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 (loss) for the three years ending May 31, 2013 and by including expanded accumulated other comprehensive income disclosure requirements in the notes to our consolidated financial statements. In addition, on June 1, 2012, we adopted the FASB’s amendments to the fair value measurements and disclosure requirements, which expanded existing disclosure requirements regarding the fair value of our long-term debt.

 

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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.

In May 2013, the FASB issued a revised exposure draft outlining proposed changes to the accounting for leases. Under the revised exposure draft, the recognition, measurement and presentation of expenses and cash flows arising from a lease would depend primarily on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. A right-of-use asset and a liability to make lease payments will be recognized on the balance sheet for all leases (except short-term leases). The enactment of this proposal will have a significant impact on our accounting and financial reporting. The FASB has not yet proposed an effective date of this proposal.

We believe that no other new accounting guidance was adopted or issued during 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.

REPORTABLE SEGMENTS

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

 

FedEx Express Segment   

FedEx Express (express transportation)

FedEx Trade Networks (air and ocean freight forwarding and customs brokerage)

FedEx SupplyChain Systems (logistics services)

FedEx Ground Segment   

FedEx Ground (small-package ground delivery)

FedEx SmartPost (small-parcel consolidator)

FedEx Freight Segment   

FedEx Freight (LTL freight transportation)

FedEx Custom Critical (time-critical transportation)

FedEx Services Segment   

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

FedEx TechConnect (customer service, technical support, billings and collections)

FedEx Office (document and business services and package acceptance)

FEDEX SERVICES SEGMENT

The FedEx Services segment operates combined sales, marketing, administrative and information technology functions in shared services operations that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, some of these functions are performed on a regional basis by FedEx Express and reported in the FedEx Express segment in their natural expense line items. The FedEx Services segment 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.

 

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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.

OTHER INTERSEGMENT TRANSACTIONS

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

 

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FEDEX EXPRESS SEGMENT

FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide time-definite delivery within five business days worldwide. The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the years ended May 31:

 

                        Percent Change  
     2013     2012     2011     2013/2012     2012/2011  

Revenues:

          

Package:

          

U.S. overnight box

   $ 6,513     $ 6,546     $ 6,128       (1     7  

U.S. overnight envelope

     1,705       1,747        1,736       (2     1  

U.S. deferred

     3,020       3,001       2,805       1       7  
  

 

 

   

 

 

   

 

 

     

Total U.S. domestic package revenue

     11,238       11,294       10,669             6  

International priority

     6,586       6,849       6,760       (4     1  

International economy

     2,046       1,859       1,468       10       27  
  

 

 

   

 

 

   

 

 

     

Total international export package revenue

     8,632       8,708       8,228       (1     6  

International domestic (1)

     1,398       853       653       64       31  
  

 

 

   

 

 

   

 

 

     

Total package revenue

     21,268       20,855       19,550       2       7  

Freight:

          

U.S.

     2,562       2,498       2,188       3       14  

International priority

     1,678       1,827       1,722       (8     6  

International airfreight

     276       307       283       (10     8  
  

 

 

   

 

 

   

 

 

     

Total freight revenue

     4,516       4,632       4,193       (3     10  

Other  (2)

     1,387       1,028       838       35       23  
  

 

 

   

 

 

   

 

 

     

Total revenues

     27,171       26,515       24,581       2       8  

Operating expenses:

          

Salaries and employee benefits

     10,045       9,657       9,183       4       5  

Purchased transportation

     2,331       1,828       1,573       28       16  

Rentals and landing fees

     1,684       1,680       1,672              

Depreciation and amortization

     1,350       1,169       1,059       15       10  

Fuel

     4,130       4,304       3,553       (4     21  

Maintenance and repairs

     1,244       1,332       1,353       (7     (2

Business realignment, impairment and other charges (3)

     243       134             NM        NM   

Intercompany charges (4)

     2,379       2,193       2,043       8       7  

Other  (5)

     3,210       2,958       2,917       9       1  
  

 

 

   

 

 

   

 

 

     

Total operating expenses

     26,616       25,255       23,353       5       8  
  

 

 

   

 

 

   

 

 

     

Operating income

   $ 555     $ 1,260      $ 1,228       (56     3  
  

 

 

   

 

 

   

 

 

     
          

Operating margin (6)

     2.0     4.8 %       5.0     (280 )bp      (20 )bp 

 

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     Percent of Revenue  
       2013         2012         2011    

Operating expenses:

      

Salaries and employee benefits

     37.0     36.4     37.4

Purchased transportation

     8.6       6.9       6.4  

Rentals and landing fees

     6.2       6.3       6.8  

Depreciation and amortization

     5.0       4.4       4.3  

Fuel

     15.2       16.2       14.4  

Maintenance and repairs

     4.6       5.0       5.5  

Business realignment, impairment and other charges (3)

     0.9       0.5        

Intercompany charges (4)

     8.7       8.3       8.3  

Other  (5)

     11.8       11.2       11.9  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     98.0        95.2       95.0   
  

 

 

   

 

 

   

 

 

 

Operating margin (6)

     2.0     4.8     5.0
  

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

(2) 

Includes FedEx Trade Networks and FedEx SupplyChain Systems.

 

(3) 

2013 includes $143 million of predominantly severance costs associated with our voluntary buyout program and a $100 million impairment charge resulting from the decision to retire 10 aircraft and related engines. 2012 represents impairment charges resulting from the decision to retire 24 aircraft and related engines.

 

(4) 

Includes allocations of $262 million in 2013 for business realignment costs.

 

(5) 

Includes the 2012 reversal of a $66 million legal reserve that was initially recorded in 2011.

 

(6) 

The direct and indirect charges described in notes (3) and (4) above reduced 2013 operating margin by 190 basis points. The charges and credit described in notes (3) and (5) above reduced 2012 operating margin by 20 basis points.

 

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The following table compares selected statistics (in thousands, except yield amounts) for the years ended May 31:

 

                       Percent Change  
     2013     2012     2011     2013/2012     2012/2011  

Package Statistics (1)

         

Average daily package volume (ADV):

         

U.S. overnight box

    1,134       1,146       1,184       (1     (3

U.S. overnight envelope

    574       586       627       (2     (7

U.S. deferred

    835       845       873       (1     (3
 

 

 

   

 

 

   

 

 

     

Total U.S. domestic ADV

    2,543       2,577       2,684       (1     (4

International priority

    421       421       459             (8

International economy

    155       138       116       12       19  
 

 

 

   

 

 

   

 

 

     

Total international export ADV

    576       559       575       3       (3

International domestic (2)

    785       495       348       59       42  
 

 

 

   

 

 

   

 

 

     

Total ADV

    3,904       3,631       3,607       8       1  
 

 

 

   

 

 

   

 

 

     

Revenue per package (yield):

         

U.S. overnight box

  $ 22.52     $ 22.31     $ 20.29       1       10  

U.S. overnight envelope

    11.66       11.65       10.86             7  

U.S. deferred

    14.18       13.87       12.60       2       10  

U.S. domestic composite

    17.33       17.12       15.59       1       10  

International priority

    61.28       63.47       57.68       (3     10  

International economy

    51.77       52.77       49.76       (2     6  

International export composite

    58.72       60.83       56.08       (3     8  

International domestic (2)

    6.99       6.74       7.38       4       (9

Composite package yield

    21.36       22.44       21.25       (5     6  

Freight Statistics (1)

         

Average daily freight pounds:

         

U.S.

    7,612       7,487       7,340       2       2  

International priority

    3,048       3,303       3,184       (8     4  

International airfreight

    1,066       1,171       1,235       (9     (5
 

 

 

   

 

 

   

 

 

     

Total average daily freight pounds

    11,726       11,961       11,759       (2     2  
 

 

 

   

 

 

   

 

 

     

Revenue per pound (yield):

         

U.S.

  $ 1.32     $ 1.30     $ 1.17       2       11  

International priority

    2.16       2.16       2.12             2  

International airfreight

    1.01       1.02       0.90       (1     13  

Composite freight yield

    1.51       1.51       1.40             8  

 

(1) 

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

 

(2) 

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

FedEx Express Segment Revenues

FedEx Express segment revenues increased 2% in 2013 primarily due to the impact of new business acquisitions and growth in our freight-forwarding business at FedEx Trade Networks. Core revenue growth was constrained by global economic conditions as revenue growth from higher international export volume was offset by decreased yields due to shifts in demand from our priority international services to our economy international services, as well as lower rates. In 2013, international domestic revenues increased 64% due to recent acquisitions in Brazil, France and Poland. International export revenues were down in 2013 as revenue per package decreased 3% due to the demand shift to our lower-yielding economy services and lower rates, while volume increased 3% driven by our economy services. A decrease in U.S. domestic package volumes more than offset an increase in U.S. domestic package yield, resulting in slightly lower U.S. domestic package revenues in 2013. Total average daily freight pounds decreased 2% in 2013 due to weakness in economic global conditions.

 

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FedEx Express segment revenues increased 8% in 2012 primarily due to an increase in U.S. domestic and international export package yields, partially offset by decreases in U.S. domestic and international export package volumes. In 2012, U.S. domestic package yields increased 10% due to higher fuel surcharges and increased rate per pound. International export package yields increased 8% in 2012 due to higher fuel surcharges, increased package weights and increased rate per pound. Continued softness in the global economy resulted in decreased demand for our U.S. domestic and international export package services in 2012. International export revenue growth was negatively impacted by a lower-yielding mix of services, consisting of growth in deferred services and declines in premium services.

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

 

       2013         2012         2011    

U.S. Domestic and Outbound Fuel Surcharge:

      

Low

     10.00     11.50     7.00

High

     14.50       16.50       15.50  

Weighted-average

     11.84       14.23       9.77  

International Fuel Surcharges:

      

Low

     12.00       13.50       7.00  

High

     20.50       23.00       21.00  

Weighted-average

     17.02       17.45       12.36  

In both January 2013 and 2012, we implemented a 5.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S. import services, while we lowered our fuel surcharge index by two percentage points.

FedEx Express Segment Operating Income

FedEx Express segment operating results were negatively impacted by $405 million of costs associated with our business realignment program, both directly and through intercompany allocations. Additionally, results for 2013 were negatively impacted by a $100 million impairment charge as a result of the decision to retire 10 aircraft and related engines from service. FedEx Express incurred $69 million in year-over-year incremental depreciation costs in 2013 due to the decision in 2012 to accelerate the retirement of certain aircraft. Operating income and operating margin also decreased in 2013 due to the demand shift toward lower-yielding international services. Operating comparisons were also impacted by an aircraft impairment charge in 2012 and a legal reserve accrual reversal as discussed below.

Purchased transportation costs increased 28% in 2013 due to recent business acquisitions and costs associated with the expansion of our freight forwarding business at FedEx Trade Networks. Salaries and benefits increased 4% in 2013 due to recent acquisitions and higher pension costs, partially offset by lower incentive compensation accruals. Other operating expenses increased 9% due to the impact of recent business acquisitions and the negative year-over-year comparison of the legal reserve accrual reversal in 2012. Depreciation and amortization expense increased 15% in 2013 as a result of aircraft recently placed into service and accelerated depreciation due to the shortened life of certain aircraft.

FedEx Express aircraft maintenance and repairs costs are largely driven by aircraft utilization and required periodic maintenance events. When newer aircraft are introduced into our operating fleet, less maintenance costs are incurred. As a part of our fleet modernization program, FedEx Express has retired older, less efficient aircraft prior to required periodic maintenance events and has introduced newly manufactured aircraft into the fleet. As a result, a decrease in maintenance and repairs costs was experienced in 2013 and 2012.

Fuel costs decreased 4% in 2013 due to lower jet fuel prices and lower aircraft fuel usage. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a slightly positive impact in 2013. This analysis considers the estimated impact of the reduction in fuel surcharges included in the base rates charged for FedEx Express services.

 

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FedEx Express segment operating income increased 3% in 2012 primarily due to the benefit from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust and U.S. domestic and international export package yield improvements. Results of the FedEx Express segment reflect the impact of two one-time items in 2012. FedEx Express segment results for 2012 were negatively impacted by $134 million as a result of the decision to retire from service 18 Airbus A310-200 aircraft and 26 related engines as well as six Boeing MD10-10 aircraft and 17 related engines to better align the U.S. domestic air network capacity of FedEx Express to match current and anticipated shipment volumes. The 2012 operating results at the FedEx Express segment were favorably impacted by the reversal of a legal reserve of $66 million that was initially recorded in 2011. FedEx Express segment results also benefited from a milder winter compared to the negative impact of unusually severe winter weather in 2011.

Salaries and employee benefits increased 5% in 2012 due to higher incentive compensation accruals and the full reinstatement of 401(k) company-matching contributions effective January 1, 2011. Purchased transportation costs increased 16% in 2012 due to costs associated with the expansion of our freight forwarding business at FedEx Trade Networks, business acquisitions in India and Mexico and higher utilization of third-party transportation providers, primarily in Europe. Intercompany charges increased 7% in 2012 due to higher allocated variable incentive compensation expenses.

Fuel costs increased 21% in 2012 due to increases in the average price per gallon of fuel. Fuel usage in 2012 was down slightly.

FedEx Express Segment Outlook

We expect revenues and earnings to increase at FedEx Express during 2014 due to slight growth in our international package and international domestic services. In addition, we expect operating income to improve through ongoing execution of our profit improvement programs including improving yields, adjusting network capacity and reducing structural costs. However, the demand shift from our priority international services to our economy international services will continue to constrain earnings growth in 2014. 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 will continue evaluating further actions to adjust our FedEx Express network capacity and shift lower yielding services into lower cost delivery networks.

Capital expenditures at FedEx Express are expected to increase in 2014 driven by an increase in aircraft investment. We will continue to modernize our aircraft fleet at FedEx Express during 2014 by adding newer aircraft that are more reliable, fuel-efficient and technologically advanced, and retiring older, less-efficient aircraft. Due to the accelerated retirement of certain aircraft and related engines to aid in modernizing our fleet and improving our global network, we expect an additional $74 million in year-over-year depreciation expense in 2014.

In April 2013, FedEx Express was selected as the sole awardee of the recent U.S. Postal Service air cargo solicitation, representing the majority of the United States Postal Service’s (“USPS”) air linehaul traffic. This new seven year agreement begins on October 1, 2013. The agreement provides reduced rates for the USPS versus the prior FedEx Express agreement and offers the opportunity for incremental revenue.

 

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FEDEX GROUND SEGMENT

FedEx Ground service offerings include day-certain service delivery to businesses in the U.S. and Canada and to nearly 100% of U.S. residences. FedEx SmartPost consolidates high-volume, low-weight, less time-sensitive business-to-consumer packages and utilizes the USPS for final delivery. The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income and operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the years ended May 31:

 

                       Percent Change  
         2013             2012             2011         2013/2012     2012/2011  

Revenues:

          

FedEx Ground

   $ 9,652     $ 8,791     $ 7,855       10       12  

FedEx SmartPost

     926       782       630       18       24  
  

 

 

   

 

 

   

 

 

     

Total revenues

     10,578       9,573       8,485       10       13  

Operating expenses:

          

Salaries and employee benefits

     1,586       1,451       1,282       9       13  

Purchased transportation

     4,191       3,762       3,431       11       10  

Rentals

     331       284       263       17       8  

Depreciation and amortization

     434       389       337       12       15  

Fuel

     17       14       12       21       17  

Maintenance and repairs

     190       176       169       8       4  

Intercompany charges(1)

     1,148       978       897       17       9  

Other

     893       755       769       18       (2
  

 

 

   

 

 

   

 

 

     

Total operating expenses

     8,790       7,809       7,160       13       9  
  

 

 

   

 

 

   

 

 

     

Operating income

   $ 1,788     $ 1,764     $ 1,325       1       33  
  

 

 

   

 

 

   

 

 

     
          

Operating margin(1)

     16.9     18.4     15.6     (150 )bp      280 bp 

Average daily package volume:

          

FedEx Ground

     4,222       3,907       3,746       8       4  

FedEx SmartPost

     2,058       1,692       1,432       22       18  

Revenue per package (yield):

          

FedEx Ground

   $ 8.94     $ 8.77     $ 8.17       2       7  

FedEx SmartPost

   $ 1.77     $ 1.81     $ 1.72       (2     5  
     Percent of Revenue              
     2013     2012     2011              

Operating expenses:

          

Salaries and employee benefits

     15.0     15.2     15.1    

Purchased transportation

     39.6       39.3       40.4      

Rentals

     3.1       3.0       3.1      

Depreciation and amortization

     4.1       4.1       4.0      

Fuel

     0.2       0.1       0.1      

Maintenance and repairs

     1.8       1.8       2.0      

Intercompany charges(1)

     10.9       10.2       10.6      

Other

     8.4       7.9       9.1      
  

 

 

   

 

 

   

 

 

     

Total operating expenses

     83.1        81.6       84.4       
  

 

 

   

 

 

   

 

 

     

Operating margin(1)

     16.9     18.4     15.6    
  

 

 

   

 

 

   

 

 

     

 

(1) 

Includes allocations of $105 million in 2013 for business realignment costs which reduced operating margin by 100 basis points.

 

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FedEx Ground Segment Revenues

FedEx Ground segment revenues increased 10% during 2013 due to volume increases at both FedEx Ground and FedEx SmartPost, as well as yield growth at FedEx Ground.

FedEx Ground average daily package volume increased 8% during 2013 due to market share gains from continued growth in our FedEx Home Delivery service and increases in our commercial business. FedEx Ground yield increased 2% in 2013 primarily due to increased rates and higher residential surcharge revenue, partially offset by lower fuel surcharges and package weights.

FedEx SmartPost average daily volume grew 22% during 2013 primarily as a result of growth in e-commerce. Yields at FedEx SmartPost decreased 2% during 2013 primarily due to higher postage costs, partially offset by increased rates. FedEx SmartPost yield represents the amount charged to customers net of postage paid to the USPS.

During 2012, FedEx Ground segment revenues increased 13% due to yield and volume growth at both FedEx Ground and FedEx SmartPost.

FedEx Ground yields increased 7% during 2012 primarily due to rate increases, higher fuel surcharges and higher extra service revenue. Average daily package volume increased 4% at FedEx Ground in 2012 due to market share gains from continued growth in our FedEx Home Delivery service and an increase in our commercial business.

At FedEx SmartPost, yields increased 5% in 2012 primarily due to higher fuel surcharges and increased rates, partially offset by an unfavorable service mix. Average daily volume increased 18% at FedEx SmartPost in 2012 as a result of growth in e-commerce.

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

 

       2013         2012         2011    

Low

     6.50     7.50     5.50

High

     8.50       9.50       8.50  

Weighted-average

     7.60       8.46       6.20  

In January 2013 and 2012, FedEx Ground and FedEx Home Delivery implemented a 4.9% average list price increase. The full average rate increase of 5.9% was partially offset by adjusting the fuel price threshold at which the fuel surcharge begins, reducing the fuel surcharge by one percentage point. FedEx SmartPost rates also increased.

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 1% during 2013 primarily due to volume growth and higher yields. However, operating margin decreased as the benefit of higher volume and revenue per package was more than offset by intercompany charges of $105 million associated with the business realignment program and a favorable self-insurance true-up in the prior year. Purchased transportation costs increased 11% in 2013 primarily as a result of volume growth and higher rates paid to our independent contractors. Other operating expenses increased 18% primarily due to a favorable self-insurance true-up in the prior year and higher legal expenses in the current year. Salaries and employee benefits expense increased 9% in 2013 primarily due to increased staffing to support volume growth.

 

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FedEx Ground segment operating income increased 33% and operating margin increased 280 basis points during 2012 primarily due to higher yields and volume growth. FedEx Ground has continued to shorten transit times throughout 2012 by accelerating various lanes throughout the U.S. and Canada, while maintaining consistently high on-time service. Purchased transportation costs increased 10% in 2012 primarily as a result of volume growth and higher fuel surcharges. Salaries and employee benefits increased 13% primarily due to increased staffing to support volume growth and higher incentive compensation accruals. Intercompany charges increased 9% in 2012 primarily due to higher allocated information technology costs. Depreciation expense increased 15% in 2012 due to higher capital spending across the network, including technology and transportation equipment upgrades and an initiative to replace lighting fixtures throughout the network in order to reduce energy costs.

Independent Contractor Model

Although FedEx Ground is involved in numerous lawsuits and other proceedings (such as state tax or other administrative challenges) where the classification of its independent contractors is at issue, a number of recent judicial decisions support our classification, and we believe our relationship with the contractors is generally excellent. For a description of these proceedings, see “Risk Factors” and Note 18 of the accompanying consolidated financial statements.

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

FedEx Ground Segment Outlook

FedEx Ground segment revenues and operating income are expected to continue to grow in 2014, led by volume growth across all our major services due to market share gains. We also anticipate yield growth in 2014 through yield management programs. We will continue to make investments to grow our highly profitable FedEx Ground network through hub expansion and vehicle and equipment purchases. Earnings growth may be dampened slightly during periods of increased network expansion.

We will continue to vigorously defend various attacks against our independent contractor model and incur ongoing legal costs as a part of this process. While we believe that FedEx Ground’s owner-operators are properly classified as independent contractors, it is reasonably possible that we could incur a material loss in connection with one or more of these matters or be required to make material changes to our contractor model. However, we do not believe that any such changes will impair our ability to operate and profitably grow our FedEx Ground business.

 

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FEDEX FREIGHT SEGMENT

FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income (loss) and operating margin (dollars in millions) and selected statistics for the years ended May 31:

 

                       Percent Change  
         2013             2012             2011         2013/2012     2012/2011  

Revenues

   $ 5,401     $ 5,282     $ 4,911       2       8  

Operating expenses:

          

Salaries and employee benefits

     2,342       2,316       2,303       1       1  

Purchased transportation

     865       851       779       2       9  

Rentals

     118       114       122       4       (7

Depreciation and amortization

     217       185       205       17       (10

Fuel

     598       636       585       (6     9  

Maintenance and repairs

     191       192       182       (1     5  

Business realignment, impairment and other charges (1)

     3             89       NM        NM   

Intercompany charges (2)

     484       433       427       12       1  

Other

     375       393       394       (5      
  

 

 

   

 

 

   

 

 

     

Total operating expenses

     5,193       5,120       5,086       1       1  
  

 

 

   

 

 

   

 

 

     

Operating income (loss)

   $ 208     $ 162     $ (175     28       193  
  

 

 

   

 

 

   

 

 

     

Operating margin (3)

     3.9     3.1     (3.6 )%      80 bp      670 bp 

Average daily LTL shipments (in thousands) (4)

          

Priority

     59.3       60.4         (2  

Economy

     26.4       24.5         8    
  

 

 

   

 

 

       

Total average daily LTL shipments

     85.7       84.9       86.0       1       (1
  

 

 

   

 

 

       

Weight per LTL shipment (lbs) (4)

          

Priority

     1,237       1,202         3    

Economy

     990       1,045         (5  

Composite weight per LTL shipment

     1,161       1,156       1,144             1  

LTL yield (revenue per hundredweight) (4)

          

Priority

   $ 17.80     $ 18.02         (1  

Economy

     25.90       23.96         8    

Composite LTL yield

   $ 19.94     $ 19.57     $ 18.24       2       7  

 

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     Percent of Revenue  
       2013         2012         2011    

Operating expenses:

      

Salaries and employee benefits

     43.4     43.9     46.9

Purchased transportation

     16.0       16.1       15.9  

Rentals

     2.2       2.2       2.5  

Depreciation and amortization

     4.0       3.5       4.2  

Fuel

     11.1       12.0       11.9  

Maintenance and repairs

     3.5       3.6       3.7  

Business realignment, impairment and other charges (1)

                 1.8  

Intercompany charges (2)

     9.0       8.2       8.7  

Other

     6.9       7.4       8.0  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     96.1       96.9       103.6  
  

 

 

   

 

 

   

 

 

 

Operating margin (3)

     3.9     3.1     (3.6 )% 
  

 

 

   

 

 

   

 

 

 

 

(1) 

2013 includes severance costs associated with our voluntary buyout program. 2011 includes severance, impairment and other charges associated with the combination of our FedEx Freight and FedEx National LTL operations, effective January 30, 2011.

 

(2) 

Includes allocations of $47 million in 2013 for business realignment costs.

 

(3) 

The direct and indirect charges disclosed in notes (1) and (2) above reduced 2013 operating margin by 90 basis points.

 

(4) 

FedEx Freight introduced Priority and Economy services during the fourth quarter of 2011; therefore, full-year detail has not been presented for 2011.

FedEx Freight Segment Revenues

FedEx Freight segment revenues increased 2% in 2013 due to higher LTL yield and average daily LTL shipments. LTL yield increased 2% in 2013 due to improvements in FedEx Freight Economy yield resulting from higher rates and lower weight per LTL shipment. Average daily LTL shipments increased 1% in 2013 driven by our FedEx Freight Economy services offering, partially offset by transitional challenges encountered by some customers in the second half of 2013 while migrating FedEx Freight functionality to the FedEx enterprise automated platform.

Revenue per hundredweight is a commonly-used indicator of pricing trends, but this metric can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment, length of haul and the mix of freight. Generally, LTL freight is rated using a standard class system for the LTL industry and classes are assigned based on transportation characteristics including density, risk and handling. Under the class system, low-value freight that is easy to handle, unlikely to damage and dense will receive lower class ratings (and lower yields) than expensive, light, bulky freight which is highly susceptible to damage (and produces higher yields). As a result, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying base rates.

During 2012, FedEx Freight revenues increased 8% due to increased LTL yield and weight per LTL shipment, partially offset by lower average daily LTL shipments. LTL yield increased 7% during 2012 due to higher fuel surcharges and base yield improvement. Average daily LTL shipments decreased 1% in 2012; however, during the second half of 2012, LTL shipment year-over-year comparisons improved sequentially (2% in the third quarter and 4% in the fourth quarter) due to enhanced service levels, strong customer satisfaction from our service offerings and the impact of severe weather in the prior year.

 

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

 

       2013         2012         2011    

Low

     21.80     19.80     15.10

High

     24.40       24.30       20.70  

Weighted-average

     23.38       22.90       17.00  

On June 10, 2013, FedEx Freight announced it will increase U.S. and certain other shipping rates by an average of 4.5% effective on July 1, 2013. In July 2012, FedEx Freight implemented a rate increase of 6.9% for LTL shipments. In June 2011, FedEx Freight increased the fuel surcharge rate to a maximum of 3.6 percentage points above previous levels.

FedEx Freight Segment Operating Income

The FedEx Freight segment operating results for 2013 improved as a result of LTL yield growth and increased average daily LTL shipments, along with ongoing improvement in operational efficiencies in our integrated network. However, operating results for 2013 were negatively impacted by $50 million of costs associated with our business realignment program both directly and through intercompany allocations.

Depreciation and amortization expense increased 17% due to continued investment in replacement transportation equipment. Salaries and employee benefits increased 1% in 2013 primarily due to increases in volume and higher healthcare, workers’ compensation and pension costs, partially offset by operational efficiencies and lower incentive compensation. Purchased transportation costs increased 2% in 2013 due to increased utilization of rail and higher rates, partially offset by a lower cost per mile due to our ability to optimize mode of transportation.

Fuel costs decreased 6% in 2013 due to increased utilization of rail and fuel efficiency improvements. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a minimal impact on operating income in 2013.

In 2012, the FedEx Freight segment operating income increased significantly as a result of higher fuel surcharges, yield growth and ongoing improvements in operational efficiencies due to the combination of our FedEx Freight and FedEx National LTL operations in 2011. Additionally, the FedEx Freight segment’s 2012 results benefited from milder winter weather, while our 2011 results were negatively impacted by unusually severe winter weather.

Purchased transportation costs increased 9% in 2012 due to higher rates and the increased utilization of rail, partially offset by a lower cost per mile due to our ability to optimize mode of transportation while meeting service standards. Fuel costs increased 9% in 2012 due to a higher average price per gallon of diesel fuel, partially offset by the increased utilization of rail. Based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges, fuel had a positive impact to operating income in 2012. Depreciation and amortization expense decreased 10% in 2012 primarily due to accelerated depreciation in 2011 associated with the combination of our LTL operations.

FedEx Freight Segment Outlook

We expect modest revenue growth at the FedEx Freight segment in 2014 driven by yield and volume initiatives from our differentiated LTL services.

FedEx Freight operating income and operating margin are expected to increase in 2014 driven by improvements in yields and volume, as well as continued improvement in productivity and efficiency across our integrated network. We will continue to use investments in technology, focused on network and equipment planning and customer automation, to further enhance customer service levels throughout 2014.

 

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Capital expenditures in 2014 are expected to be comparable to 2013, with the majority of our spending for replacement of vehicles and freight handling equipment.

FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled $4.9 billion at May 31, 2013, compared to $2.8 billion at May 31, 2012. The following table provides a summary of our cash flows for the periods ended May 31 (in millions):

 

     2013     2012     2011  

Operating activities:

      

Net income

   $ 1,561     $ 2,032     $ 1,452  

Business realignment, impairment and other charges

     479       134       29  

Other noncash charges and credits

     3,183       3,504       2,892  

Changes in assets and liabilities

     (535     (835     (332
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     4,688       4,835       4,041  
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Capital expenditures

     (3,375     (4,007     (3,434

Business acquisitions, net of cash acquired

     (483     (116     (96

Proceeds from asset dispositions and other

     55       74       111  
  

 

 

   

 

 

   

 

 

 

Cash used in investing activities

     (3,803     (4,049     (3,419
  

 

 

   

 

 

   

 

 

 

Financing activities:

      

Purchase of treasury stock

     (246     (197      

Principal payments on debt

     (417     (29     (262

Proceeds from debt issuance

     1,739              

Dividends paid

     (177     (164     (151

Other

     285       146       126  
  

 

 

   

 

 

   

 

 

 

Cash provided by (used in) financing activities

     1,184       (244     (287

Effect of exchange rate changes on cash

     5       (27     41  
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 2,074     $ 515     $ 376  
  

 

 

   

 

 

   

 

 

 

Cash Provided by Operating Activities. Cash flows from operating activities decreased $147 million in 2013 primarily due to decreased earnings and higher tax, variable compensation and voluntary buyout payments, partially offset by a decrease in pension contributions. Cash flows from operating activities increased $794 million in 2012 primarily due to increased earnings, partially offset by higher pension contributions. We made contributions of $560 million to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) during 2013 and contributions of $722 million to our U.S. Pension Plans during 2012. We made contributions of $480 million to our U.S. Pension Plans during 2011.

Cash Used in Investing Activities. Capital expenditures were 16% lower in 2013 largely due to decreased spending at FedEx Express and 17% higher in 2012 primarily due to increased spending at FedEx Express and FedEx Freight. See “Capital Resources” for a discussion of capital expenditures during 2013 and 2012.

Financing Activities. In April 2013, we issued $750 million of senior unsecured debt under our current shelf registration statement, comprised of $250 million of 2.70% fixed-rate notes due in April 2023 and $500 million of 4.10% fixed rate notes due in April 2043. Interest on these notes is payable semi-annually. We utilized the net proceeds for working capital and general corporate purposes. 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.

 

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During 2013, we made principal payments of $116 million related to capital lease obligations and repaid our $300 million 9.65% unsecured notes that matured in June 2012 using cash from operations.

During 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. In March 2013, our Board of Directors authorized the repurchase of up to 10 million shares of common stock. It is expected that the additional share authorization will primarily be utilized to offset the effects of equity compensation dilution over the next several years. As of May 31, 2013, 10,188,000 shares remained under existing share repurchase authorizations. During 2012, we repurchased 2.8  million FedEx common shares at an average price of $70 per share for a total of $197 million.

CAPITAL RESOURCES

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

The following table compares capital expenditures by asset category and reportable segment for the years ended May 31 (in millions):

 

                          Percent Change  
     2013      2012      2011      2013/2012     2012/2011  

Aircraft and related equipment

   $ 1,190      $ 1,875      $ 1,988        (37     (6

Facilities and sort equipment

     727        638        555        14       15  

Vehicles

     734        723        282        2       156  

Information and technology investments

     452        541        455        (16     19  

Other equipment

     272        230        154        18       49  
  

 

 

    

 

 

    

 

 

      

Total capital expenditures

   $   3,375      $   4,007      $   3,434        (16     17  
  

 

 

    

 

 

    

 

 

      

FedEx Express segment

   $ 2,067      $ 2,689      $ 2,467        (23     9  

FedEx Ground segment

     555        536        426        4       26  

FedEx Freight segment

     326        340        153        (4     122  

FedEx Services segment

     424        437        387        (3     13  

Other

     3        5        1        NM        NM   
  

 

 

    

 

 

    

 

 

      

Total capital expenditures

   $ 3,375      $ 4,007      $ 3,434        (16     17  
  

 

 

    

 

 

    

 

 

      

Capital expenditures during 2013 were lower than the prior year primarily due to decreased spending for aircraft and related equipment at FedEx Express. Aircraft and aircraft-related equipment purchases at FedEx Express during 2013 included the delivery of 16 Boeing 757s (“B757”) to be modified for cargo transport and four B777Fs. Capital expenditures during 2012 were higher than the prior year primarily due to increased spending for vehicles at FedEx Express, FedEx Freight and FedEx Ground, although spending for aircraft and related equipment at FedEx Express decreased. Aircraft and aircraft-related equipment purchases at FedEx Express during 2012 included delivery of seven B777Fs and 15 B757s.

LIQUIDITY OUTLOOK

We believe that our cash and cash equivalents, which totaled $4.9 billion in 2013, cash flow from operations and available financing sources will be adequate to meet our liquidity needs, including working capital, capital expenditure requirements and debt payment obligations. Our cash and cash equivalents balance at May 31, 2013 includes $420 million of cash in offshore jurisdictions associated with our permanent reinvestment strategy. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic debt or working capital obligations.

 

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

A $1 billion revolving credit facility is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial paper. In March 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 51% at May 31, 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 May 31, 2013, no commercial paper was outstanding, and the entire $1 billion under the revolving credit facility was available for future borrowings.

Standard & Poor’s has assigned us a senior unsecured debt credit rating of BBB and a commercial paper rating of A-2 and a ratings outlook of “stable.” Moody’s Investors Service has assigned us a senior unsecured debt credit rating of Baa1 and a commercial paper rating of P-2 and a ratings outlook of “stable.” If our credit ratings drop, our interest expense may increase. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt credit ratings drop below investment grade, our access to financing may become limited.

Our capital expenditures are expected to be $4.0 billion in 2014. We anticipate that our cash flow from operations will be sufficient to fund our increased capital expenditures in 2014, which will include spending for aircraft and aircraft-related equipment at FedEx Express, sort facility expansion, primarily at FedEx Ground, and vehicle replacement at all our transportation segments. We expect approximately 50% of capital expenditures in 2014 will be designated for growth initiatives, predominantly at FedEx Ground and 50% dedicated to maintaining our existing operations. Our expected capital expenditures for 2014 include $1.4 billion in investments for delivery of aircraft, as well as progress payments toward future aircraft deliveries at FedEx Express. For 2014, we anticipate making required contributions totaling approximately $650 million to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments.

We have several aircraft modernization programs underway which are supported by the purchase of B777F, Boeing 767-300 Freighter (“B767F”) and B757 aircraft. These aircraft are significantly more fuel-efficient per unit than the aircraft types previously utilized, and these expenditures are necessary to achieve significant long-term operating savings and to replace older aircraft. Our ability to delay the timing of these aircraft-related expenditures is limited without incurring significant costs to modify existing purchase agreements. During 2013, FedEx Express entered into an agreement to purchase 14 additional B757 aircraft, the delivery of which began in 2013 and will continue through 2014. The agreement provides the option to purchase up to 16 additional B757 aircraft, subject to the satisfaction of certain conditions. In addition, FedEx Express entered into agreements to purchase an additional 23 B767F aircraft, the delivery of which will occur between 2014 and 2019. The delivery of two firm B777F aircraft orders were also deferred from 2015 to 2016.

Effective as of June 14, 2013, FedEx Express entered into a supplemental agreement to purchase 13 of the 16 B757 option aircraft noted above. Delivery of the aircraft will occur during 2014 and 2015.

 

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CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The following table sets forth a summary of our contractual cash obligations as of May 31, 2013. Certain of these contractual obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. Except for the current portion of long-term debt, this table does not include amounts already recorded in our balance sheet as current liabilities at May 31, 2013. We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the United States. These contingent liabilities are not included in the table below. We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, qualified and nonqualified pension and postretirement healthcare plan liabilities and other self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table below due to the absence of scheduled maturities. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.

 

     Payments Due by Fiscal Year (Undiscounted)
(in millions)
 
     2014      2015      2016      2017      2018      Thereafter      Total  

Operating activities:

                    

Operating leases

   $   1,936      $   1,834      $   1,636      $   1,689      $   1,230      $   6,650      $   14,975  

Non-capital purchase obligations and other

     285        183        123        101        44        109        845  

Interest on long-term debt

     157        138        138        138        138        2,582        3,291  

Contributions to our U.S. Pension Plans

     650                                           650  

Investing activities:

                    

Aircraft and aircraft-related capital commitments

     968        1,054        1,140        959        1,382        4,492        9,995  

Other capital purchase obligations

     249        1                                    250  

Financing activities:

                    

Debt

     250                                    2,740        2,990  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,495      $ 3,210      $ 3,037      $ 2,887      $ 2,794      $ 16,573      $ 32,996  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent authorizations to purchase rather than binding agreements. See Note 17 of the accompanying consolidated financial statements for more information.

Operating Activities

In accordance with accounting principles generally accepted in the United States, future contractual payments under our operating leases (totaling $15 billion on an undiscounted basis) are not recorded in our balance sheet. Credit rating agencies routinely use information concerning minimum lease payments required for our operating leases to calculate our debt capacity. The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at May 31, 2013. Under the proposed new lease accounting rules, the majority of these leases will be required to be recognized on the balance sheet as a liability with an offsetting right-to-use asset. In the past, we financed a significant portion of our aircraft needs (and certain other equipment needs) using operating leases (a type of “off-balance sheet financing”). At the time that the decision to lease was made, we determined that these operating leases would provide economic benefits favorable to ownership with respect to market values, liquidity or after-tax cash flows.

The amounts reflected for purchase obligations represent noncancelable agreements to purchase goods or services that are not capital-related. Such contracts include those for printing and advertising and promotions contracts.

 

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Included in the table above within the caption entitled “Non-capital purchase obligations and other” is our estimate of the current portion of the liability ($1 million) for uncertain tax positions. We cannot reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time; therefore, the long-term portion of the liability ($46 million) is excluded from the table. See Note 12 of the accompanying consolidated financial statements for further information.

The amounts reflected in the table above for interest on long-term debt represent future interest payments due on our long-term debt, all of which are fixed rate.

Investing Activities

The amounts reflected in the table above for capital purchase obligations represent noncancelable agreements to purchase capital-related equipment. Such contracts include those for certain purchases of aircraft, aircraft modifications, vehicles, facilities, computers and other equipment. 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.

Financing Activities

We have certain financial instruments representing potential commitments, not reflected in the table above, that were incurred in the normal course of business to support our operations, including standby letters of credit and surety bonds. These instruments are required under certain U.S. self-insurance programs and are also used in the normal course of international operations. The underlying liabilities insured by these instruments are reflected in our balance sheets, where applicable. Therefore, no additional liability is reflected for the letters of credit and surety bonds themselves.

The amounts reflected in the table above for long-term debt represent future scheduled payments on our long-term debt. In 2014, we have scheduled debt payments of $250 million.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a complex, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information.

The estimates discussed below include the financial statement elements that are either the most judgmental or involve the selection or application of alternative accounting policies and are material to our financial statements. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.

RETIREMENT PLANS

OVERVIEW. 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.

Pension benefits for most employees are accrued under a cash balance formula we call the Portable Pension Account. Under the Portable Pension Account, the retirement benefit is expressed as a dollar amount in a notional account that grows with annual credits based on pay, age and years of credited service, and interest on the notional account balance. The Portable Pension Account benefit is payable as a lump sum or an annuity at retirement at the election of the employee. The plan interest credit rate varies from year to year based on a U.S. Treasury index and corporate bond rates. Prior to 2009, certain employees earned benefits using a traditional pension formula (based on average earnings and years of service). Benefits under this formula were capped on May 31, 2008 for most employees.

 

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The current rules for pension accounting are complex and can produce tremendous volatility in our results, financial condition and liquidity. Our pension expense is primarily a function of the value of our plan assets and the discount rate used to measure our pension liabilities at a single point in time at the end of our fiscal year (the measurement date). Both of these factors are significantly influenced by the stock and bond markets, which in recent years have experienced substantial volatility.

In addition to expense volatility, we are required to record year-end adjustments to our balance sheet on an annual basis for the net funded status of our pension and postretirement healthcare plans. These adjustments have fluctuated significantly over the past several years and like our pension expense, are a result of the discount rate and value of our plan assets at the measurement date. The funded status of our plans also impacts our liquidity, as current funding laws require increasingly aggressive funding levels for our pension plans. However, the cash funding rules operate under a completely different set of assumptions and standards than those used for financial reporting purposes, so our actual cash funding requirements can differ materially from our reported funded status. Temporary funding relief was passed in July 2012 that will improve our funded status for those purposes over the next several years.

Our retirement plans cost is included in the “Salaries and Employee Benefits” caption in our consolidated income statements. A summary of our retirement plans costs over the past three years is as follows (in millions):

 

     2013               2012               2011  

U.S. domestic and international pension plans

   $ 679             $ 524             $ 543  

U.S. domestic and international defined contribution plans

     354               338               257  

U.S. domestic and international postretirement healthcare plans

     78               70               60  
  

 

 

           

 

 

           

 

 

 
   $   1,111             $       932             $       860  
  

 

 

           

 

 

           

 

 

 

Total retirement plans cost increased $179 million in 2013 driven by lower discount rates used to measure our benefit obligations at our May 31, 2012 measurement date. Total retirement plans cost increased $72 million in 2012 primarily due to higher expenses for our 401(k) plans due to the full restoration of company matching contributions on January 1, 2011.

Amounts recognized in our balance sheet reflect a snapshot of the state of our long-term pension liabilities at the plan measurement date and the effect of year-end accounting on plan assets. Cumulative unrecognized actuarial losses were $7.0 billion through May 31, 2013, compared to $8.9 billion through May 31, 2012. These unrecognized losses reflect changes in the discount rates and differences between expected and actual asset returns, which are being amortized over future periods. These unrecognized losses may be recovered in future periods through actuarial gains. However, unless they are below a corridor amount, these unrecognized actuarial losses are required to be amortized and recognized in future periods. Our pension expense includes amortization of these actuarial losses of $506 million in 2013, $302 million in 2012 and $276 million in 2011.

PENSION COST. The accounting for pension and postretirement healthcare plans includes numerous assumptions, including the discount rate and expected long-term investment returns on plan assets. These assumptions most significantly impact our U.S. Pension Plans.

 

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Following is a discussion of the key estimates we consider in determining our pension cost:

DISCOUNT RATE. This is the interest rate used to discount the estimated future benefit payments that have been accrued to date (the projected benefit obligation, or “PBO”) to their net present value and to determine the succeeding year’s pension expense. The discount rate is determined each year at the plan measurement date. A decrease in the discount rate increases pension expense. The discount rate affects the PBO and pension expense based on the measurement dates, as described below.

 

Measurement

Date

       Discount Rate      

Amounts Determined by Measurement Date and

Discount Rate

5/31/2013

      4.79%   2013 PBO and 2014 expense

5/31/2012

   4.44   2012 PBO and 2013 expense

5/31/2011

   5.76   2011 PBO and 2012 expense

5/31/2010

   6.37   2010 PBO and 2011 expense

We determine the discount rate with the assistance of actuaries, who calculate the yield on a theoretical portfolio of high-grade corporate bonds (rated Aa or better). In developing this theoretical portfolio, we select bonds that match cash flows to benefit payments, limit our concentration by industry and issuer, and apply screening criteria to ensure bonds with a call feature have a low probability of being called. To the extent scheduled bond proceeds exceed the estimated benefit payments in a given period, the calculation assumes those excess proceeds are reinvested at one-year forward rates.

The discount rate assumption is highly sensitive, as the following table illustrates for our largest pension plan:

 

     Sensitivity (in millions)  
     Effect on 2014
Pension
Expense
     Effect on 2013
Pension
Expense
 

One-basis-point change in discount rate

   $ 2.1      $ 2.3  

At our May 31, 2013 measurement date, a 50-basis-point increase in the discount rate would have decreased our 2013 PBO by approximately $1.4 billion and a 50-basis-point decrease in the discount rate would have increased our 2013 PBO by approximately $1.5 billion. From 2010 to 2013, the discount rate used to value our liabilities has declined by over 150 basis points, which increased the valuation of our liabilities by over $3.8 billion.

PLAN ASSETS. The estimated average rate of return on plan assets is a long-term, forward-looking assumption that also materially affects our pension cost. It is required to be the expected future long-term rate of earnings on plan assets. Our pension plan assets are invested primarily in publicly tradeable securities, and our pension plans hold only a minimal investment in FedEx common stock that is entirely at the discretion of third-party pension fund investment managers. As part of our strategy to manage pension costs and funded status volatility, we have transitioned to a liability-driven investment strategy to better align plan assets with liabilities.

Establishing the expected future rate of investment return on our pension assets is a judgmental matter, which we review on an annual basis and revise as appropriate. Management considers the following factors in determining this assumption:

 

 

the duration of our pension plan liabilities, which drives the investment strategy we can employ with our pension plan assets;

 

 

the types of investment classes in which we invest our pension plan assets and the expected compound geometric return we can reasonably expect those investment classes to earn over time; and

 

 

the investment returns we can reasonably expect our investment management program to achieve in excess of the returns we could expect if investments were made strictly in indexed funds.

We have assumed an 8.0% expected long-term rate of return on our U.S. Pension Plan assets for 2013, 2012 and 2011. The actual returns during each of the last three fiscal years have exceeded that long-term assumption. The actual historical return on our U.S. Pension Plan assets, calculated on a compound geometric basis, was 6.9%, net of investment manager fees, for the 15-year period ended May 31, 2013 and 7.4%, net of investment manager fees, for the 15-year period ended May 31, 2012. For 2014, we plan to lower our expected return on plan assets assumption for long-term returns on plan assets to 7.75% as we continue to refine our asset

 

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and liability management strategy. In lowering this assumption we considered our historical returns, our investment strategy for our plan assets, including the impacts of the long duration of our plan liability and the relatively low annual draw on plan assets on that investment strategy. A one-basis-point change in our expected return on plan assets impacts our pension expense by $1.9 million.

Pension expense is also affected by the accounting policy used to determine the value of plan assets at the measurement date. We use a calculated-value method to determine the value of plan assets, which helps mitigate short-term volatility in market performance (both increases and decreases) by amortizing certain actuarial gains or losses over a period no longer than four years. Another method used in practice applies the market value of plan assets at the measurement date. For purposes of valuing plan assets for determining 2014 pension expense, the calculated value method resulted in the same value as the market value.

FUNDED STATUS. Following is information concerning the funded status of our pension plans as of May 31 (in millions):

 

      2013     2012  

Funded Status of Plans:

    

Projected benefit obligation (PBO)

   $ 22,600     $ 22,187  

Fair value of plan assets

     19,433       17,334  
  

 

 

   

 

 

 

Funded status of the plans

   $ (3,167   $ (4,853
  

 

 

   

 

 

 

Cash Amounts:

    

Cash contributions during the year

   $ 615     $ 780  

Benefit payments during the year

   $ 589     $ 502  

Our retirement plans costs are expected to decrease approximately $190 million in 2014 due to significant increases in the value of our plan assets in 2013 and an increase in our discount rates at our May 31, 2013 measurement date.

FUNDING. The funding requirements for our U.S. Pension Plans are governed by the Pension Protection Act of 2006, which has aggressive funding requirements in order to avoid benefit payment restrictions that become effective if the funded status determined under IRS rules falls below 80% at the beginning of a plan year. All of our U.S. Pension Plans have funded status levels in excess of 80% and our plans remain adequately funded to provide benefits to our employees as they come due. Additionally, current benefit payments are nominal compared to our total plan assets (benefit payments for our U.S. Pension Plans for 2013 were approximately $572 million or 3% of plan assets).

During 2013, we made $560 million in required contributions to our U.S. Pension Plans. Over the past several years, we have made voluntary contributions to our U.S. Pension Plans in excess of the minimum required contributions. Amounts contributed in excess of the minimum required can result in a credit balance for funding purposes that can be used to reduce minimum contribution requirements in future years. Our current credit balance exceeds $2 billion at May 31, 2013. For 2014, we anticipate making required contributions to our U.S. Pension Plans totaling approximately $650 million.

See Note 13 of the accompanying consolidated financial statements for further information about our retirement plans.

SELF-INSURANCE ACCRUALS

We are self-insured up to certain limits for costs associated with workers’ compensation claims, vehicle accidents and general business liabilities, and benefits paid under employee healthcare and long-term disability programs. Our reserves are established for estimates of loss on reported claims, including incurred-but-not-reported claims.

 

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Self-insurance accruals reflected in our balance sheet were $1.7 billion at May 31, 2013, and $1.6 billion at May 31, 2012. Approximately 41% of these accruals were classified as current liabilities.

Our self-insurance accruals are primarily based on the actuarially estimated, undiscounted cost of claims incurred as of the balance sheet date. These estimates include consideration of factors such as severity of claims, frequency of claims and future healthcare costs. Cost trends on material accruals are updated each quarter. We self-insure up to certain limits that vary by operating company and type of risk. Periodically, we evaluate the level of insurance coverage and adjust insurance levels based on risk tolerance and premium expense. Historically, it has been infrequent that incurred claims exceeded our self-insured limits.

We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation technique in this area is inherently sensitive given the magnitude of claims involved and the length of time until the ultimate cost is known. We believe our recorded obligations for these expenses are consistently measured on a conservative basis. Nevertheless, changes in healthcare costs, accident frequency and severity, insurance retention levels and other factors can materially affect the estimates for these liabilities.

LONG-LIVED ASSETS

PROPERTY AND EQUIPMENT. Our key businesses are capital intensive, with approximately 55% of our total assets invested in our transportation and information systems infrastructures. We capitalize only those costs that meet the definition of capital assets under accounting standards. Accordingly, repair and maintenance costs that do not extend the useful life of an asset or are not part of the cost of acquiring the asset are expensed as incurred.

The depreciation or amortization of our capital assets over their estimated useful lives, and the determination of any salvage values, requires management to make judgments about future events. Because we utilize many of our capital assets over relatively long periods (the majority of aircraft costs are depreciated over 15 to 30 years), we periodically evaluate whether adjustments to our estimated service lives or salvage values are necessary to ensure these estimates properly match the economic use of the asset. This evaluation may result in changes in the estimated lives and residual values used to depreciate our aircraft and other equipment. For our aircraft, we typically assign no residual value due to the utilization of these assets in cargo configuration, which results in little to no value at the end of their useful life. These estimates affect the amount of depreciation expense recognized in a period and, ultimately, the gain or loss on the disposal of the asset. Changes in the estimated lives of assets will result in an increase or decrease in the amount of depreciation recognized in future periods and could have a material impact on our results of operations. Historically, gains and losses on disposals of operating equipment have not been material. However, such amounts may differ materially in the future due to changes in business levels, technological obsolescence, accident frequency, regulatory changes and other factors beyond our control.

In May 2013, FedEx Express made the decision to accelerate the retirement of 76 aircraft and related engines to aid in our fleet modernization and improve our global network. In May 2012, we shortened the depreciable lives for 54 aircraft and related engines to accelerate the retirement of these aircraft, resulting in a depreciation expense increase of $69 million in 2013. As a result of these accelerated retirements, we expect an additional $74 million in year-over-year accelerated depreciation expense in 2014.

Because of the lengthy lead times for aircraft manufacture and modifications, we must anticipate volume levels and plan our fleet requirements years in advance, and make commitments for aircraft based on those projections. Furthermore, the timing and availability of certain used aircraft types (particularly those with better fuel efficiency) may create limited opportunities to acquire these aircraft at favorable prices in advance of our capacity needs. These activities create risks that asset capacity may exceed demand and that an impairment of our assets may occur. Aircraft purchases (primarily aircraft in passenger configuration) that have not been placed in service totaled $129 million at May 31, 2013 and $127 million at May 31, 2012. We plan to modify these assets in the future and place them into operations.

 

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The accounting test for whether an asset held for use is impaired involves first comparing the carrying value of the asset with its estimated future undiscounted cash flows. If the cash flows do not exceed the carrying value, the asset must be adjusted to its current fair value. 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. Further, decisions about capital investments are evaluated based on the impact to the overall network rather than the return on an individual asset. We make decisions to remove certain long-lived assets from service based on projections of reduced capacity needs or lower operating costs of newer aircraft types, and those decisions may result in an impairment charge. Assets held for disposal must be adjusted to their estimated fair values less costs to sell when the decision is made to dispose of the asset and certain other criteria are met. The fair value determinations for such aircraft may require management estimates, as there may not be active markets for some of these aircraft. Such estimates are subject to revision from period to period.

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 changes to planned service expansion activities. We currently have one aircraft temporarily idled. This aircraft has been idled for 15 months and is expected to return to revenue service.

In May 2013, we made the decision to retire from service two Airbus A310-200 aircraft and four related engines, three Airbus A310-300 aircraft and two related engines and five Boeing MD10-10 aircraft and 15 related engines, to align with the plans of FedEx Express to modernize its aircraft fleet and improve its global network. As a consequence of this decision, a noncash impairment charge of $100 million ($63 million, net of tax, or $0.20 per diluted share) was recorded in the fourth quarter. All of these aircraft were temporarily idled and not in revenue service.

In 2012, we incurred a noncash impairment charge of $134 million ($84 million, net of tax, or $0.26 per diluted share). This charge related to our May 2012 decision to permanently retire 24 aircraft and 43 related engines to better align the U.S. domestic air network capacity of FedEx Express to match current and anticipated shipment volumes. The majority of these aircraft were temporarily idled and not in revenue service.

LEASES. We utilize operating leases to finance certain of our aircraft, facilities and equipment. Such arrangements typically shift the risk of loss on the residual value of the assets at the end of the lease period to the lessor. As disclosed in “Contractual Cash Obligations” and Note 7 of the accompanying consolidated financial statements, at May 31, 2013 we had approximately $15 billion (on an undiscounted basis) of future commitments for payments under operating leases. The weighted-average remaining lease term of all operating leases outstanding at May 31, 2013 was approximately six years. The future commitments for operating leases are not reflected as a liability in our balance sheet under current U.S. accounting rules.

The determination of whether a lease is accounted for as a capital lease or an operating lease requires management to make estimates primarily about the fair value of the asset and its estimated economic useful life. In addition, our evaluation includes ensuring we properly account for build-to-suit lease arrangements and making judgments about whether various forms of lessee involvement during the construction period make the lessee an agent for the owner-lessor or, in substance, the owner of the asset during the construction period. We believe we have well-defined and controlled processes for making these evaluations, including obtaining third-party appraisals for material transactions to assist us in making these evaluations.

Under a proposed revision to the accounting standards for leases, we would be required to record an asset and a liability for our outstanding operating leases similar to the current accounting for capital leases. Notably, the amount we record in the future would be the net present value of our future lease commitments at the date of adoption. This proposed guidance has not been issued and has been subjected to numerous revisions since the proposal was issued, most recently in May 2013. While we are not required to quantify the effects of the proposed rule changes until these rules are finalized, we believe that a majority of the operating lease

 

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obligations reflected in the contractual cash obligations table would be required to be reflected in our balance sheet were the proposed rules to be adopted. Furthermore, our existing financing agreements and the rating agencies that evaluate our creditworthiness already take our operating leases into account.

GOODWILL. As of May 31, 2013, we had $2.8 billion of recorded goodwill from our acquisitions, representing the excess of the purchase price over the fair value of the net assets we have acquired. Several factors give rise to goodwill in our acquisitions, such as the expected benefit from synergies of the combination and the existing workforce of the acquired entity.

In our evaluation of goodwill impairment, we perform a qualitative assessment which requires management judgment and the use of estimates to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive, we proceed to a two-step process to test goodwill for impairment, including comparing the fair value of each reporting unit with its carrying value (including attributable goodwill). Fair value is estimated using standard valuation methodologies (principally the income or market approach) incorporating market participant considerations and management’s assumptions on revenue growth rates, operating margins, discount rates and expected capital expenditures. Estimates used by management can significantly affect the outcome of the impairment test. Changes in forecasted operating results and other assumptions could materially affect these estimates. We perform our annual impairment tests in the fourth quarter unless circumstances indicate the need to accelerate the timing of the tests.

Our reporting units with significant recorded goodwill include our FedEx Express, FedEx Freight and FedEx Office (reported in the FedEx Services segment) reporting units. We evaluated these reporting units during the fourth quarters of 2013 and 2012. The estimated fair value of each of these reporting units exceeded their carrying values in 2013 and 2012, and we do not believe that any of these reporting units were at risk as of May 31, 2013.

CONTINGENCIES

We are subject to various loss contingencies, including tax proceedings and litigation, in connection with our operations. Contingent liabilities are difficult to measure, as their measurement is subject to multiple factors that are not easily predicted or projected. Further, additional complexity in measuring these liabilities arises due to the various jurisdictions in which these matters occur, which makes our ability to predict their outcome highly uncertain. Moreover, different accounting rules must be employed to account for these items based on the nature of the contingency. Accordingly, significant management judgment is required to assess these matters and to make determinations about the measurement of a liability, if any. Our material pending loss contingencies are described in Note 18 of the accompanying consolidated financial statements. In the opinion of management, the aggregate liability, if any, of individual matters or groups of matters not specifically described in Note 18 is not expected to be material to our financial position, results of operations or cash flows. The following describes our methods and associated processes for evaluating these matters.

TAX CONTINGENCIES. We are subject to income and operating tax rules of the U.S., its states and municipalities, and of the foreign jurisdictions in which we operate. Significant judgment is required in determining income tax provisions, as well as deferred tax asset and liability balances and related deferred tax valuation allowances, if necessary, due to the complexity of these rules and their interaction with one another. We account for income taxes by recording both current taxes payable and deferred tax assets and liabilities. Our provision for income taxes is based on domestic and international statutory income tax rates in the jurisdictions in which we operate, applied to taxable income, reduced by applicable tax credits.

Tax contingencies arise from uncertainty in the application of tax rules throughout the many jurisdictions in which we operate and are impacted by several factors, including tax audits, appeals, litigation, changes in tax laws and other rules and their interpretations, and changes in our business. We regularly assess the potential impact of these factors for the current and prior years to determine the adequacy of our tax provisions. We continually evaluate the likelihood and amount of potential adjustments and adjust our tax positions, including the current and deferred tax liabilities, in the period in which the facts that give rise to a revision become known. In addition, management considers the advice of third parties in making conclusions regarding tax consequences.

 

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We recognize liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the related provision.

We classify interest related to income tax liabilities as interest expense, and if applicable, penalties are recognized as a component of income tax expense. The income tax liabilities and accrued interest and penalties that are due within one year of the balance sheet date are presented as current liabilities. The remaining portion of our income tax liabilities and accrued interest and penalties are presented as noncurrent liabilities because payment of cash is not anticipated within one year of the balance sheet date. These noncurrent income tax liabilities are recorded in the caption “Other liabilities” in the accompanying consolidated balance sheets.

We account for operating taxes based on multi-state, local and foreign taxing jurisdiction rules in those areas in which we operate. Provisions for operating taxes are estimated based upon these rules, asset acquisitions and disposals, historical spend and other variables. These provisions are consistently evaluated for reasonableness against compliance and risk factors.

We measure and record operating tax contingency accruals in accordance with accounting guidance for contingencies. As discussed below, this guidance requires an accrual of estimated loss from a contingency, such as a tax or other legal proceeding or claim, when it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated.

OTHER CONTINGENCIES. Because of the complex environment in which we operate, we are subject to other legal proceedings and claims, including those relating to general commercial matters, employment-related claims and FedEx Ground’s owner-operators. Accounting guidance for contingencies requires an accrual of estimated loss from a contingency, such as a tax or other legal proceeding or claim, when it is probable (i.e., the future event or events are likely to occur) that a loss has been incurred and the amount of the loss can be reasonably estimated. This guidance also requires disclosure of a loss contingency matter when, in management’s judgment, a material loss is reasonably possible or probable.

During the preparation of our financial statements, we evaluate our contingencies to determine whether it is probable, reasonably possible or remote that a liability has been incurred. A loss is recognized for all contingencies deemed probable and estimable, regardless of amount. For unresolved contingencies with potentially material exposure that are deemed reasonably possible, we evaluate whether a potential loss or range of loss can be reasonably estimated.

Our evaluation of these matters is the result of a comprehensive process designed to ensure that accounting recognition of a loss or disclosure of these contingencies is made in a timely manner and involves our legal and accounting personnel, as well as external counsel where applicable. The process includes regular communications during each quarter and scheduled meetings shortly before the completion of our financial statements to evaluate any new legal proceedings and the status of any existing matters.

 

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In determining whether a loss should be accrued or a loss contingency disclosed, we evaluate, among other factors:

 

   

the current status of each matter within the scope and context of the entire lawsuit (i.e., the lengthy and complex nature of class-action matters);

 

   

the procedural status of each lawsuit;

 

   

any opportunities to dispose of the lawsuit on its merits before trial (i.e., motion to dismiss or for summary judgment);

 

   

the amount of time remaining before the trial date;

 

   

the status of discovery;

 

   

the status of settlement, arbitration or mediation proceedings, and;

 

   

our judgment regarding the likelihood of success prior to or at trial.

In reaching our conclusions with respect to accrual of a loss or loss contingency disclosure, we take a holistic view of each matter based on these factors and the information available prior to the issuance of our financial statements. Uncertainty with respect to an individual factor or combination of these factors may impact our decisions related to accrual or disclosure of a loss contingency, including a conclusion that we are unable to establish an estimate of possible loss or a meaningful range of possible loss. We update our disclosures to reflect our most current understanding of the contingencies at the time we issue our financial statements. However, events may arise that were not anticipated and the outcome of a contingency may result in a loss to us that differs materially from our previously estimated liability or range of possible loss.

Despite the inherent complexity in the accounting and disclosure of contingencies, we believe that our processes are robust and thorough and provide a consistent framework for management in evaluating the potential outcome of contingencies for proper accounting recognition and disclosure.

RISK FACTORS

Our financial and operating results are subject to many risks and uncertainties, as described below.

We are directly affected by the state of the economy. While macro-economic risks apply to most companies, we are particularly vulnerable. The transportation industry is highly cyclical and especially susceptible to trends in economic activity. Our primary business is to transport goods, so our business levels are directly tied to the purchase and production of goods — key macro-economic measurements. When individuals and companies purchase and produce fewer goods, we transport fewer goods, and as companies expand the number of distribution centers and move manufacturing closer to consumer markets, we transport goods shorter distances. In addition, we have a relatively high fixed-cost structure, which is difficult to quickly adjust to match shifting volume levels. Moreover, as we continue to grow our international business, we are increasingly affected by the health of the global economy and the typically more volatile economies of emerging markets. In 2013, slower than expected economic growth resulted in a continued customer preference for slower, less costly shipping services, which had a negative impact on our profitability.

Our businesses depend on our strong reputation and the value of the FedEx brand. The FedEx brand name symbolizes high-quality service, reliability and speed. FedEx is one of the most widely recognized, trusted and respected brands in the world, and the FedEx brand is one of our most important and valuable assets. In addition, we have a strong reputation among customers and the general public for high standards of social and environmental responsibility and corporate governance and ethics. The FedEx brand name and our corporate reputation are powerful sales and marketing tools, and we devote significant resources to promoting and protecting them. Adverse publicity (whether or not justified) relating to activities by our employees, contractors or agents, such as customer service mishaps or noncompliance with anti-corruption laws, could tarnish our reputation and reduce the value of our brand. With the increase in the use of social media outlets such as YouTube and Twitter, adverse publicity can be disseminated quickly and broadly, making it increasingly difficult for us to defend against. Damage to our reputation and loss of brand equity could reduce demand for our services and thus have an adverse effect on our financial condition, liquidity and results of operations, as well as require additional resources to rebuild our reputation and restore the value of our brand.

 

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We rely heavily on information and technology to operate our transportation and business networks, and any disruption to our technology infrastructure or the Internet could harm our operations and our reputation among customers. Our ability to attract and retain customers and to compete effectively depends in part upon the sophistication and reliability of our technology network, including our ability to provide features of service that are important to our customers. External and internal risks, such as malware, code anomalies, “Acts of God,” attempts to penetrate our networks, transitional challenges in migrating operating company functionality to our FedEx enterprise automation platform, data leakage and human error, pose a direct threat to our products, services and data. Any disruption to the Internet or our complex, global technology infrastructure, including those impacting our computer systems and customer Web sites, could adversely impact our customer service, volumes, and revenues and result in increased costs. These types of adverse impacts could also occur in the event the confidentiality, integrity, or availability of company and customer information was compromised due to a data loss by FedEx or a trusted third party. While we have invested and continue to invest in technology security initiatives, information technology risk management and disaster recovery plans, these measures cannot fully insulate us from technology disruptions or data loss and the resulting adverse effect on our operations and financial results.

Our transportation businesses are impacted by the price and availability of fuel. We must purchase large quantities of fuel to operate our aircraft and vehicles, and the price and availability of fuel can be unpredictable and beyond our control. To date, we have been mostly successful in mitigating over time the expense impact of higher fuel costs through our indexed fuel surcharges, as the amount of the surcharges is closely linked to the market prices for fuel. If we are unable to maintain or increase our fuel surcharges because of competitive pricing pressures or some other reason, fuel costs could adversely impact our operating results. Even if we are able to offset the cost of fuel with our surcharges, high fuel surcharges could move our customers away from our higher-yielding express services to our lower-yielding deferred or ground services or even reduce customer demand for our services altogether. In addition, disruptions in the supply of fuel could have a negative impact on our ability to operate our transportation networks.

Our businesses are capital intensive, and we must make capital decisions based upon projected volume levels. We make significant investments in aircraft, vehicles, technology, package handling facilities, sort equipment, copy equipment and other assets to support our transportation and business networks. We also make significant investments to rebrand, integrate and grow the companies that we acquire. The amount and timing of capital investments depend on various factors, including our anticipated volume growth. We must make commitments to purchase or modify aircraft years before the aircraft are actually needed. We must predict volume levels and fleet requirements and make commitments for aircraft based on those projections. Missing our projections could result in too much or too little capacity relative to our shipping volumes. Overcapacity could lead to asset dispositions or write-downs and undercapacity could negatively impact service levels. For example, in the fourth quarter of 2013, we made a decision to retire from service certain aircraft and excess aircraft engines and thus recorded a noncash impairment charge of $100 million.

We face intense competition. The transportation and business services markets are both highly competitive and sensitive to price and service, especially in periods of little or no macro-economic growth. Some of our competitors have more financial resources than we do, or they are controlled or subsidized by foreign governments, which enables them to raise capital more easily. We believe we compete effectively with these companies — for example, by providing more reliable service at compensatory prices. However, an irrational pricing environment can limit our ability not only to maintain or increase our prices (including our fuel surcharges in response to rising fuel costs), but also to maintain or grow our market share. In addition, high volume package shippers could develop in-house ground delivery capabilities, which would in turn reduce our revenues and market share. While we believe we compete effectively through our current service offerings, if our current competitors or potential future competitors offer a broader range of services or more effectively bundle their services or our current customers become competitors, it could impede our ability to maintain or grow our market share.

 

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If we do not effectively operate, integrate, leverage and grow acquired businesses, our financial results and reputation may suffer. Our strategy for long-term growth, productivity and profitability depends in part on our ability to make prudent strategic acquisitions and to realize the benefits we expect when we make those acquisitions. In furtherance of this strategy, in 2013, we made strategic acquisitions in Poland, France and Brazil. While we expect our past and future acquisitions to enhance our value proposition to customers and improve our long-term profitability, there can be no assurance that we will realize our expectations within the time frame we have established, if at all, or that we can continue to support the value we allocate to these acquired businesses, including their goodwill or other intangible assets.

Labor organizations attempt to organize groups of our employees from time to time, and potential changes in labor laws could make it easier for them to do so. If we are unable to continue to maintain good relationships with our employees and prevent labor organizations from organizing groups of our employees, our operating costs could significantly increase and our operational flexibility could be significantly reduced. Despite continual organizing attempts by labor unions, other than the pilots of FedEx Express, all of our U.S. employees have thus far chosen not to unionize. The U.S. Congress has, in the past, considered adopting changes in labor laws, however, that would make it easier for unions to organize units of our employees. For example, there is always a possibility that Congress could remove most FedEx Express employees from the purview of the Railway Labor Act of 1926, as amended (the “RLA”). For additional discussion of the RLA, see Part I, Item 1 of this Annual Report on Form 10-K under the caption “Regulation.” Such legislation could expose our customers to the type of service disruptions that the RLA was designed to prevent — local work stoppages in key areas that interrupt the timely flow of shipments of time-sensitive, high-value goods throughout our global network. Such disruptions could threaten our ability to provide competitively priced shipping options and ready access to global markets. There is also the possibility that Congress could pass other labor legislation that could adversely affect our companies, such as FedEx Ground and FedEx Freight, whose employees are governed by the National Labor Relations Act of 1935, as amended (the “NLRA”). In addition, federal and state governmental agencies, such as the National Labor Relations Board, have and may continue to take actions that could make it easier for our employees to organize under the RLA or NLRA. Finally, changes to federal or state laws governing employee classification could impact the status of FedEx Ground’s owner-operators as independent contractors.

FedEx Ground relies on owner-operators to conduct its linehaul and pickup-and-delivery operations, and the status of these owner-operators as independent contractors, rather than employees, is being challenged. FedEx Ground’s use of independent contractors is well suited to the needs of the ground delivery business and its customers, as evidenced by the strong growth of this business segment. We are involved in numerous lawsuits and state tax and other administrative proceedings that claim that the company’s owner-operators or their drivers should be treated as our employees, rather than independent contractors. We incur certain costs, including legal fees, in defending the status of FedEx Ground’s owner-operators as independent contractors. We believe that FedEx Ground’s owner-operators are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers of the company’s independent contractors. However, adverse determinations in these matters could, among other things, entitle certain of our owner-operators and their drivers to the reimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax and benefit liability for FedEx Ground, and could result in changes to the independent contractor status of FedEx Ground’s owner-operators. Changes to state laws governing the definition of independent contractors could impact the status of FedEx Ground’s owner-operators. If FedEx Ground is compelled to convert its independent contractors to employees, labor organizations could more easily organize these individuals, our operating costs could increase materially and we could incur significant capital outlays.

Failure to execute on our business realignment program will cause our future financial results to suffer. In 2013, we announced profit improvement programs primarily through initiatives at FedEx Express and FedEx Services that include cost reductions, modernization of our aircraft fleet, transformation of the U.S. domestic operations and international profit improvements at FedEx Express, and improved efficiencies and lower costs of information technology at FedEx Services. To this end, during 2013, we conducted a program to offer voluntary cash buyouts to eligible U.S.-based employees in certain staff functions. Additionally, we announced in May 2013 our decision to retire from service 10 aircraft and related engines, as well as to shorten the depreciable lives of an additional 76 aircraft and related engines, in an effort to modernize our aircraft fleet and improve our global network. We will continue to work towards the plan of annual profitability improvement of $1.6 billion by the end of 2016, but if we are not able to reach this goal in the face of challenging economic conditions, our future financial results may suffer.

 

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The transportation infrastructure continues to be a target of terrorist activities. Because transportation assets continue to be a target of terrorist activities, governments around the world are adopting or are considering adopting stricter security requirements that will increase operating costs and potentially slow service for businesses, including those in the transportation industry. For example, the U.S. Transportation Security Administration continues to require FedEx Express to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains evolving and strict security requirements. These requirements are not static, but change periodically as the result of regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our operations. Thus, it is reasonably possible that these rules or other future security requirements could impose material costs on us. Moreover, a terrorist attack directed at FedEx or other aspects of the transportation infrastructure could disrupt our operations and adversely impact demand for our services.

The regulatory environment for global aviation or other transportation rights may impact our operations. Our extensive air network is critical to our success. Our right to serve foreign points is subject to the approval of the Department of Transportation and generally requires a bilateral agreement between the United States and foreign governments. In addition, we must obtain the permission of foreign governments to provide specific flights and services. Our operations outside of the United States, such as FedEx Express’s growing international domestic operations, are also subject to current and potential regulations, including certain postal regulations and licensing requirements, that restrict, make difficult and sometimes prohibit, the ability of foreign-owned companies such as FedEx Express to compete effectively in parts of the international domestic transportation and logistics market. Regulatory actions affecting global aviation or transportation rights or a failure to obtain or maintain aviation or other transportation rights in important international markets could impair our ability to operate our networks.

We may be affected by global climate change or by legal, regulatory or market responses to such change. Concern over climate change, including the impact of global warming, has led to significant U.S. and international legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions, including our aircraft and diesel engine emissions. For example, during 2009, the European Commission approved the extension of the European Union Emissions Trading Scheme (“ETS”) for GHG emissions, to the airline industry. Under this decision, all FedEx Express flights to and from any airport in any member state of the European Union are now covered by the ETS requirements, and each year we are required to submit emission allowances in an amount equal to the carbon dioxide emissions from such flights. Because the European Union ETS is being contested by many countries on a number of fronts, and the effective date for parts of the ETS has been delayed until next year, the future impact on us is unclear. In addition, the U.S. Congress has, in the past, considered bills that would regulate GHG emissions, and some form of federal climate change legislation is possible in the future. Increased regulation regarding GHG emissions, especially aircraft or diesel engine emissions, could impose substantial costs on us, especially at FedEx Express. These costs include an increase in the cost of the fuel and other energy we purchase and capital costs associated with updating or replacing our aircraft or vehicles prematurely. Until the timing, scope and extent of such regulation becomes known, we cannot predict its effect on our cost structure or our operating results. It is reasonably possible, however, that it could impose material costs on us. Moreover, even without such regulation, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the airline and transportation industries could harm our reputation and reduce customer demand for our services, especially our air express services. Finally, given the broad and global scope of our operations and our susceptibility to global macro-economic trends, we are particularly vulnerable to the physical risks of climate change that could affect all of humankind, such as shifts in weather patterns and world ecosystems.

A localized disaster in a key geography could adversely impact our business. While we operate several integrated networks with assets distributed throughout the world, there are concentrations of key assets within our networks that are exposed to localized risks from natural or manmade disasters such as tornados, floods, earthquakes or terrorist attacks. The loss of a key location such as our Memphis super hub or one of our information technology centers could cause a significant disruption to our operations and cause us to incur significant c