UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED November 30, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 1-15829
FEDEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 62-1721435 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
942 South Shady Grove Road Memphis, Tennessee | 38120 | |
(Address of principal executive offices) | (ZIP Code) |
(901) 818-7500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
Accelerated filer ¨ | Non-accelerated filer ¨ | 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 x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common Stock | Outstanding Shares at December 15, 2015 | |
Common Stock, par value $0.10 per share | 275,615,246 |
FEDEX CORPORATION
Exhibit 101Calculation Linkbase Document
Exhibit 101Presentation Linkbase Document
Exhibit 101Definition Linkbase Document
- 2 -
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
November 30, | ||||||||
2015 | May 31, | |||||||
(Unaudited) | 2015 | |||||||
ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
$ | 3,647 | $ | 3,763 | ||||
Receivables, less allowances of $178 and $185 |
5,865 | 5,719 | ||||||
Spare parts, supplies and fuel, less allowances of $214 and $207 |
493 | 498 | ||||||
Deferred income taxes |
687 | 606 | ||||||
Prepaid expenses and other |
460 | 355 | ||||||
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Total current assets |
11,152 | 10,941 | ||||||
PROPERTY AND EQUIPMENT, AT COST |
45,242 | 42,864 | ||||||
Less accumulated depreciation and amortization |
22,964 | 21,989 | ||||||
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Net property and equipment |
22,278 | 20,875 | ||||||
OTHER LONG-TERM ASSETS |
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Goodwill |
3,806 | 3,810 | ||||||
Other assets |
1,135 | 1,443 | ||||||
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Total other long-term assets |
4,941 | 5,253 | ||||||
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$ | 38,371 | $ | 37,069 | |||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 3 -
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
November 30, | ||||||||
2015 | May 31, | |||||||
(Unaudited) | 2015 | |||||||
LIABILITIES AND STOCKHOLDERS INVESTMENT |
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CURRENT LIABILITIES |
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Current portion of long-term debt |
$ | 14 | $ | 19 | ||||
Accrued salaries and employee benefits |
1,510 | 1,436 | ||||||
Accounts payable |
2,129 | 2,066 | ||||||
Accrued expenses |
2,298 | 2,436 | ||||||
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Total current liabilities |
5,951 | 5,957 | ||||||
LONG-TERM DEBT, LESS CURRENT PORTION |
8,481 | 7,249 | ||||||
OTHER LONG-TERM LIABILITIES |
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Deferred income taxes |
1,759 | 1,747 | ||||||
Pension, postretirement healthcare and other benefit obligations |
4,702 | 4,893 | ||||||
Self-insurance accruals |
1,265 | 1,120 | ||||||
Deferred lease obligations |
840 | 711 | ||||||
Deferred gains, principally related to aircraft transactions |
167 | 181 | ||||||
Other liabilities |
216 | 218 | ||||||
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Total other long-term liabilities |
8,949 | 8,870 | ||||||
COMMITMENTS AND CONTINGENCIES |
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COMMON STOCKHOLDERS INVESTMENT |
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Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued as of November 30, 2015 and May 31, 2015 |
32 | 32 | ||||||
Additional paid-in capital |
2,839 | 2,786 | ||||||
Retained earnings |
18,048 | 16,900 | ||||||
Accumulated other comprehensive income |
(41 | ) | 172 | |||||
Treasury stock, at cost |
(5,888 | ) | (4,897 | ) | ||||
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Total common stockholders investment |
14,990 | 14,993 | ||||||
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$ | 38,371 | $ | 37,069 | |||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 4 -
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended | Six Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
REVENUES |
$ | 12,453 | $ | 11,939 | $ | 24,732 | $ | 23,623 | ||||||||
OPERATING EXPENSES: |
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Salaries and employee benefits |
4,570 | 4,229 | 9,095 | 8,343 | ||||||||||||
Purchased transportation |
2,538 | 2,185 | 4,882 | 4,239 | ||||||||||||
Rentals and landing fees |
682 | 663 | 1,377 | 1,323 | ||||||||||||
Depreciation and amortization |
653 | 651 | 1,301 | 1,302 | ||||||||||||
Fuel |
615 | 1,052 | 1,327 | 2,172 | ||||||||||||
Maintenance and repairs |
529 | 543 | 1,077 | 1,099 | ||||||||||||
Other |
1,729 | 1,528 | 3,392 | 2,995 | ||||||||||||
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11,316 | 10,851 | 22,451 | 21,473 | |||||||||||||
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OPERATING INCOME |
1,137 | 1,088 | 2,281 | 2,150 | ||||||||||||
OTHER INCOME (EXPENSE): |
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Interest, net |
(74 | ) | (47 | ) | (137 | ) | (95 | ) | ||||||||
Other, net |
(8 | ) | 5 | (5 | ) | 3 | ||||||||||
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(82 | ) | (42 | ) | (142 | ) | (92 | ) | |||||||||
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INCOME BEFORE INCOME TAXES |
1,055 | 1,046 | 2,139 | 2,058 | ||||||||||||
PROVISION FOR INCOME TAXES |
364 | 383 | 756 | 742 | ||||||||||||
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NET INCOME |
$ | 691 | $ | 663 | $ | 1,383 | $ | 1,316 | ||||||||
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EARNINGS PER COMMON SHARE: |
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Basic |
$ | 2.47 | $ | 2.34 | $ | 4.92 | $ | 4.63 | ||||||||
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Diluted |
$ | 2.44 | $ | 2.31 | $ | 4.86 | $ | 4.57 | ||||||||
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DIVIDENDS DECLARED PER COMMON SHARE |
$ | 0.25 | $ | 0.20 | $ | 0.75 | $ | 0.60 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 5 -
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLIONS)
Three Months Ended | Six Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
NET INCOME |
$ | 691 | $ | 663 | $ | 1,383 | $ | 1,316 | ||||||||
OTHER COMPREHENSIVE INCOME (LOSS): |
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Foreign currency translation adjustments, net of tax of $4, $14, $17 and $23 |
(33 | ) | (122 | ) | (171 | ) | (153 | ) | ||||||||
Amortization of prior service credit, net of tax of $11, $11, $18 and $21 |
(18 | ) | (18 | ) | (42 | ) | (34 | ) | ||||||||
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(51 | ) | (140 | ) | (213 | ) | (187 | ) | |||||||||
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COMPREHENSIVE INCOME |
$ | 640 | $ | 523 | $ | 1,170 | $ | 1,129 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 6 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Six Months Ended | ||||||||
November 30, | ||||||||
2015 | 2014 | |||||||
Operating Activities: |
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Net income |
$ | 1,383 | $ | 1,316 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation and amortization |
1,301 | 1,302 | ||||||
Provision for uncollectible accounts |
57 | 78 | ||||||
Stock-based compensation |
86 | 79 | ||||||
Deferred income taxes and other noncash items |
(48 | ) | (37 | ) | ||||
Changes in assets and liabilities: |
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Receivables |
(263 | ) | (317 | ) | ||||
Other assets |
(113 | ) | (46 | ) | ||||
Accounts payable and other liabilities |
66 | (201 | ) | |||||
Other, net |
(15 | ) | (23 | ) | ||||
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Cash provided by operating activities |
2,454 | 2,151 | ||||||
Investing Activities: |
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Capital expenditures |
(2,562 | ) | (1,890 | ) | ||||
Proceeds from asset dispositions and other |
12 | 7 | ||||||
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Cash used in investing activities |
(2,550 | ) | (1,883 | ) | ||||
Financing Activities: |
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Principal payments on debt |
(17 | ) | (1 | ) | ||||
Proceeds from debt issuances |
1,238 | | ||||||
Proceeds from stock issuances |
62 | 189 | ||||||
Excess tax benefit on the exercise of stock options |
8 | 23 | ||||||
Dividends paid |
(141 | ) | (114 | ) | ||||
Purchase of treasury stock |
(1,101 | ) | (947 | ) | ||||
Other, net |
(16 | ) | | |||||
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Cash provided by (used in) financing activities |
33 | (850 | ) | |||||
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Effect of exchange rate changes on cash |
(53 | ) | (60 | ) | ||||
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Net decrease in cash and cash equivalents |
(116 | ) | (642 | ) | ||||
Cash and cash equivalents at beginning of period |
3,763 | 2,908 | ||||||
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Cash and cash equivalents at end of period |
$ | 3,647 | $ | 2,266 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 7 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. These interim financial statements of FedEx Corporation (FedEx) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (SEC) instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2015 (Annual Report). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of November 30, 2015, the results of our operations for the three- and six-month periods ended November 30, 2015 and 2014 and cash flows for the six-month periods ended November 30, 2015 and 2014. Operating results for the three- and six-month periods ended November 30, 2015 are not necessarily indicative of the results that may be expected for the year ending May 31, 2016.
Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2016 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.
REVENUE RECOGNITION. On June 1, 2015, we began recording revenues associated with the FedEx SmartPost service on a gross basis including postal fees in revenues and expenses, versus our previous net treatment, due to operational changes occurring in 2016 that result in us being the principal in all cases for the FedEx SmartPost service. This change has been recognized prospectively.
BUSINESS ACQUISITIONS. As discussed in our Annual Report, on April 6, 2015, we entered into a conditional agreement to acquire TNT Express N.V. (TNT Express) for 4.4 billion (currently, approximately $4.8 billion). This combination is expected to expand our global portfolio, particularly in Europe, lower our costs to serve our European markets by increasing density in our pickup-and-delivery operations and accelerate our global growth. This acquisition is expected to be completed in the first half of calendar year 2016. The closing of the acquisition is subject to customary conditions, including obtaining all necessary approvals and competition clearances. We expect to secure all relevant competition approvals.
We completed our acquisitions of GENCO Distribution System, Inc. (GENCO) and Bongo International, LLC (Bongo) in the third quarter of 2015 and have included the financial results and estimated fair values of the assets and liabilities related to these acquisitions in the FedEx Ground and FedEx Express segments, respectively. These acquisitions are included in the accompanying balance sheets based on an allocation of the purchase price (summarized in the table below, in millions) which reflects immaterial updates from the May 31, 2015 and August 31, 2015 estimates.
Current assets |
$ | 344 | ||
Property and equipment |
113 | |||
Goodwill |
1,194 | |||
Intangible assets |
69 | |||
Other non-current assets |
25 | |||
Current liabilities |
(244 | ) | ||
Long-term liabilities |
(56 | ) | ||
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Total purchase price |
$ | 1,445 | ||
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- 8 -
The goodwill recorded is primarily attributable to expected benefits from synergies of the combinations with existing businesses and other acquired entities and the work force in place at GENCO. The majority of the purchase price allocated to goodwill is not deductible for U.S. income tax purposes. The intangible assets acquired consist primarily of customer-related intangible assets, which are amortized on an accelerated basis over an estimated life of 15 years.
EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS. The pilots of Federal Express Corporation (FedEx Express), which represent a small number of FedEx Expresss total employees, are employed under a newly ratified collective bargaining agreement (CBA). The new CBA was ratified by FedEx Express pilots in a vote concluded on October 20, 2015, and is the product of 32 months of bargaining under the Railway Labor Act of 1926, as amended (RLA), the last 10 months of which were mediated by the National Mediation Board (the U.S. governmental agency that oversees labor agreements for entities covered by the RLA). The new CBA took effect November 2, 2015, and is scheduled to become amendable in November 2021, after a six-year term. In addition to our pilots at FedEx Express, GENCO has a small number of employees who are members of unions, and certain non-U.S. employees are unionized.
STOCK-BASED COMPENSATION. We have two types of equity-based compensation: stock options and restricted stock. The key terms of the stock option and restricted stock awards granted under our incentive stock plans and all financial disclosures about these programs are set forth in our Annual Report.
Our stock-based compensation expense was $33 million for the three-month period ended November 30, 2015 and $86 million for the six-month period ended November 30, 2015. Our stock-based compensation expense was $31 million for the three-month period ended November 30, 2014 and $79 million for the six-month period ended November 30, 2014. Due to its immateriality, additional disclosures related to stock-based compensation have been excluded from this quarterly report.
RECENT ACCOUNTING GUIDANCE. New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. These matters are described in our Annual Report.
During the quarter, we chose to early adopt the authoritative guidance issued by the Financial Accounting Standards Board (FASB) requiring acquirers in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period that the adjustment amounts are determined and eliminates the requirement to retrospectively account for these adjustments. It also requires additional disclosure about the effects of the adjustments on prior periods. See the Business Acquisitions section above for further discussion regarding our recent business acquisitions.
On November 11, 2015, the FASB voted to proceed with the new lease accounting standard that will require companies to include a right-of-use asset and a liability to make lease payments on the balance sheet for all leases (except short-term leases). This new standard will have a significant impact on our accounting and financial reporting and will be effective for our fiscal year ending May 31, 2020.
On November 20, 2015, the FASB issued an Accounting Standards Update that will require companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This new guidance will have minimal impact on our accounting and financial reporting and will be effective for our fiscal year ending May 31, 2018.
We believe that no other new accounting guidance was adopted or issued during the first half of 2016 that is relevant to the readers of our financial statements.
TREASURY SHARES. In September 2014, our Board of Directors authorized the repurchase of up to 15 million shares of common stock. During the second quarter of 2016, we repurchased 6.0 million shares of FedEx common stock at an average price of $151.76 per share for a total of $911 million. As of November 30, 2015, 5.1 million shares remained under the share repurchase authorization. The timing and volume of repurchases are at the discretion of management, based on market conditions and other factors. We expect to repurchase all the remaining authorized shares by the end of 2016.
- 9 -
DIVIDENDS DECLARED PER COMMON SHARE. On November 2, 2015, our Board of Directors declared a quarterly dividend of $0.25 per share of common stock. The dividend will be paid on January 4, 2016 to stockholders of record as of the close of business on December 14, 2015. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.
(2) Accumulated Other Comprehensive Income (Loss)
The following table provides changes in accumulated other comprehensive income (loss) (AOCI), net of tax, reported in our condensed consolidated financial statements for the periods ended November 30 (in millions; amounts in parentheses indicate debits to AOCI):
Three Months Ended | Six Months Ended | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Foreign currency translation gain (loss): |
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Balance at beginning of period |
$ | (391 | ) | $ | 50 | $ | (253 | ) | $ | 81 | ||||||
Translation adjustments |
(33 | ) | (122 | ) | (171 | ) | (153 | ) | ||||||||
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Balance at end of period |
(424 | ) | (72 | ) | (424 | ) | (72 | ) | ||||||||
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Retirement plans adjustments: |
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Balance at beginning of period |
401 | 409 | 425 | 425 | ||||||||||||
Reclassifications from AOCI |
(18 | ) | (18 | ) | (42 | ) | (34 | ) | ||||||||
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Balance at end of period |
383 | 391 | 383 | 391 | ||||||||||||
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Accumulated other comprehensive (loss) income at end of period |
$ (41 | ) | $ | 319 | $ | (41 | ) | $ | 319 | |||||||
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The following table presents details of the reclassifications from AOCI for the periods ended November 30 (in millions; amounts in parentheses indicate debits to earnings):
Amount Reclassified from AOCI |
Affected Line Item in the Income Statement | |||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||
Amortization of retirement plans prior service credits, before tax |
$ | 29 | $ | 29 | $ | 60 | $ | 55 | Salaries and employee benefits | |||||||||
Income tax benefit |
(11 | ) | (11 | ) | (18 | ) | (21 | ) | Provision for income taxes | |||||||||
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AOCI reclassifications, net of tax |
$ | 18 | $ | 18 | $ | 42 | $ | 34 | Net income | |||||||||
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(3) Financing Arrangements
We have a shelf registration statement with the SEC that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock.
During the quarter, we issued $1.25 billion of senior unsecured 4.75% fixed-rate notes due in November 2045 under our current shelf registration statement. Interest on the notes is paid semiannually. We utilized the net proceeds for working capital and general corporate purposes, including share repurchases made pursuant to our current share repurchase authorization.
- 10 -
On November 13, 2015, we replaced our revolving and letter of credit facilities with a new, single five-year $1.75 billion revolving credit facility that expires in November 2020. The facility, which includes a $500 million letter of credit sublimit, is available to finance our operations and other cash flow needs. The agreement contains a financial covenant, which requires us to maintain a ratio of debt to consolidated earnings (excluding non-cash pension mark-to-market adjustments and non-cash asset impairment charges) before interest, taxes, depreciation and amortization (EBITDA) of not more than 3.5 to 1.0, calculated as of the end of the applicable quarter on a rolling four quarters basis. The ratio of our debt to EBITDA was 1.2 to 1.0 at November 30, 2015. We believe the leverage ratio covenant is our only significant restrictive covenant in our revolving credit agreement. Our revolving credit agreement contains other customary covenants that do not, individually or in the aggregate, materially restrict the conduct of our business. We are in compliance with the leverage ratio covenant and all other covenants of our revolving credit agreement and do not expect the covenants to affect our operations, including our liquidity or expected funding needs. As of November 30, 2015, no commercial paper was outstanding. However, we had a total of $318 million in letters of credit outstanding at November 30, 2015, with $182 million of the letter of credit sublimit unused under our revolving credit facility.
Long-term debt, exclusive of capital leases, had carrying values of $8.5 billion at November 30, 2015 and $7.2 billion at May 31, 2015, compared with estimated fair values of $8.5 billion at November 30, 2015 and $7.4 billion at May 31, 2015. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of our long-term debt is classified as Level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.
(4) Computation of Earnings Per Share
The calculation of basic and diluted earnings per common share for the periods ended November 30 was as follows (in millions, except per share amounts):
Three Months Ended | Six Months Ended | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Basic earnings per common share: |
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Net earnings allocable to common shares(1) |
$ | 690 | $ | 662 | $ | 1,382 | $ | 1,315 | ||||||||
Weighted-average common shares |
279 | 283 | 281 | 284 | ||||||||||||
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Basic earnings per common share |
$ | 2.47 | $ | 2.34 | $ | 4.92 | $ | 4.63 | ||||||||
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Diluted earnings per common share: |
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Net earnings allocable to common shares(1) |
$ | 690 | $ | 662 | $ | 1,382 | $ | 1,315 | ||||||||
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Weighted-average common shares |
279 | 283 | 281 | 284 | ||||||||||||
Dilutive effect of share-based awards |
4 | 4 | 3 | 4 | ||||||||||||
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Weighted-average diluted shares |
283 | 287 | 284 | 288 | ||||||||||||
Diluted earnings per common share |
$ | 2.44 | $ | 2.31 | $ | 4.86 | $ | 4.57 | ||||||||
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Anti-dilutive options excluded from diluted earnings per common share |
3.7 | 2.2 | 3.6 | 2.2 | ||||||||||||
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(1) | Net earnings available to participating securities were immaterial in all periods presented. |
- 11 -
(5) Retirement Plans
We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the periods ended November 30 were as follows (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Defined benefit pension plans |
$ | 54 | $ | (10 | ) | $ | 107 | $ | (17 | ) | ||||||
Defined contribution plans |
103 | 94 | 205 | 188 | ||||||||||||
Postretirement healthcare plans |
20 | 20 | 41 | 40 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 177 | $ | 104 | $ | 353 | $ | 211 | |||||||||
|
|
|
|
|
|
|
|
Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended November 30 included the following components (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Pension Plans |
||||||||||||||||
Service cost |
$ | 165 | $ | 164 | $ | 331 | $ | 328 | ||||||||
Interest cost |
295 | 275 | 590 | 550 | ||||||||||||
Expected return on plan assets |
(377 | ) | (420 | ) | (754 | ) | (840 | ) | ||||||||
Amortization of prior service credit |
(29 | ) | (29 | ) | (60 | ) | (55 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 54 | $ | (10 | ) | $ | 107 | $ | (17 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Postretirement Healthcare Plans |
||||||||||||||||
Service cost |
$ | 10 | $ | 10 | $ | 20 | $ | 20 | ||||||||
Interest cost |
10 | 10 | 21 | 20 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 20 | $ | 20 | $ | 41 | $ | 40 | |||||||||
|
|
|
|
|
|
|
|
Contributions to our tax qualified U.S. domestic pension plans (U.S. Pension Plans) for the six-month periods ended November 30 were as follows (in millions):
2015 | 2014 | |||||||
Required |
$ | 8 | $ | 247 | ||||
Voluntary |
322 | 83 | ||||||
|
|
|
|
|||||
$ | 330 | $ | 330 | |||||
|
|
|
|
In December 2015, we made an additional voluntary contribution of $165 million to our U.S. Pension Plans. Our U.S. Pension Plans have ample funds to meet expected benefit payments.
- 12 -
(6) Business Segment Information
We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively under the respected FedEx brand. Our primary operating companies include FedEx Express, the worlds largest express transportation company; FedEx Ground Package System, Inc. (FedEx Ground), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (FedEx Freight), a leading U.S. provider of less-than-truckload (LTL) freight services.
Our reportable segments include the following businesses:
FedEx Express Segment | FedEx Express (express transportation) | |
FedEx Trade Networks (air and ocean freight forwarding and customs brokerage) | ||
FedEx SupplyChain Systems (logistics services) | ||
Bongo (cross-border enablement technology and solutions) | ||
FedEx Ground Segment | FedEx Ground (small-package ground delivery) | |
GENCO (third-party logistics) | ||
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 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. 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.
Operating expenses for each of our transportation segments include the allocations from the FedEx Services segment to the respective transportation segments. These allocations also include charges and credits for administrative services provided between operating companies. 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. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.
- 13 -
Eliminations, Corporate and Other
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.
Corporate and other includes corporate headquarters costs for executive officers, certain other legal and financial functions, as well as certain other costs and credits not attributed to our core business. These costs are not allocated to the business segments.
The following table provides a reconciliation of reportable segment revenues and operating income to our unaudited condensed consolidated financial statement totals for the periods ended November 30 (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenues |
||||||||||||||||
FedEx Express segment |
$ | 6,588 | $ | 7,024 | $ | 13,179 | $ | 13,886 | ||||||||
FedEx Ground segment |
4,050 | 3,063 | 7,880 | 6,023 | ||||||||||||
FedEx Freight segment |
1,547 | 1,585 | 3,148 | 3,194 | ||||||||||||
FedEx Services segment |
403 | 394 | 793 | 768 | ||||||||||||
Eliminations and other |
(135 | ) | (127 | ) | (268 | ) | (248 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 12,453 | $ | 11,939 | $ | 24,732 | $ | 23,623 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating Income |
||||||||||||||||
FedEx Express segment |
$ | 622 | $ | 492 | $ | 1,167 | $ | 869 | ||||||||
FedEx Ground segment |
526 | 465 | 1,063 | 1,010 | ||||||||||||
FedEx Freight segment |
101 | 112 | 233 | 280 | ||||||||||||
Eliminations, corporate and other |
(112 | ) | 19 | (182 | ) | (9 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,137 | $ | 1,088 | $ | 2,281 | $ | 2,150 | |||||||||
|
|
|
|
|
|
|
|
(7) Commitments
As of November 30, 2015, our purchase commitments under various contracts for the remainder of 2016 and annually thereafter were as follows (in millions):
Aircraft and Aircraft-Related |
Other(1) | Total | ||||||||||
2016 (remainder) |
$ | 228 | $ | 258 | $ | 486 | ||||||
2017 |
1,286 | 271 | 1,557 | |||||||||
2018 |
1,755 | 157 | 1,912 | |||||||||
2019 |
1,575 | 72 | 1,647 | |||||||||
2020 |
1,646 | 24 | 1,670 | |||||||||
Thereafter |
5,867 | 98 | 5,965 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 12,357 | $ | 880 | $ | 13,237 | ||||||
|
|
|
|
|
|
(1) | Primarily equipment and advertising contracts. |
- 14 -
The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of November 30, 2015, our obligation to purchase six Boeing 767-300 Freighter (B767F) aircraft and nine Boeing 777 Freighter (B777F) aircraft is conditioned upon there being no event that causes FedEx Express or its employees not to be covered by the RLA. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above.
We had $326 million in deposits and progress payments as of November 30, 2015 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the Other assets caption of our consolidated balance sheets. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of the key aircraft we are committed to purchase as of November 30, 2015 with the year of expected delivery:
B767F | B777F | Total | ||||||||||
2016 (remainder) |
2 | | 2 | |||||||||
2017 |
12 | | 12 | |||||||||
2018 |
16 | 2 | 18 | |||||||||
2019 |
13 | 2 | 15 | |||||||||
2020 |
12 | 3 | 15 | |||||||||
Thereafter |
26 | 9 | 35 | |||||||||
|
|
|
|
|
|
|||||||
Total |
81 | 16 | 97 | |||||||||
|
|
|
|
|
|
A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at November 30, 2015 is as follows (in millions):
Operating Leases | ||||||||||||
Aircraft and Related Equipment |
Facilities and Other |
Total Operating Leases |
||||||||||
2016 (remainder) |
$ | 393 | $ | 868 | $ | 1,261 | ||||||
2017 |
403 | 1,954 | 2,357 | |||||||||
2018 |
332 | 1,544 | 1,876 | |||||||||
2019 |
274 | 1,356 | 1,630 | |||||||||
2020 |
190 | 1,192 | 1,382 | |||||||||
Thereafter |
360 | 7,668 | 8,028 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 1,952 | $ | 14,582 | $ | 16,534 | ||||||
|
|
|
|
|
|
Future minimum lease payments under capital leases were immaterial at November 30, 2015. While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.
(8) Contingencies
Wage-and-Hour. We are a defendant in a number of lawsuits containing various class-action allegations of wage-and-hour violations. The plaintiffs in these lawsuits allege, among other things, that they were forced to work off the clock, were not paid overtime or were not provided work breaks or other benefits. The complaints generally seek unspecified monetary damages, injunctive relief, or both. We do not believe that a material loss is reasonably possible with respect to any of these matters.
- 15 -
Independent Contractor Lawsuits and State Administrative Proceedings. FedEx Ground is involved in numerous class-action lawsuits (including 25 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings that claim that the companys owner-operators should be treated as employees, rather than independent contractors.
Most of the class-action lawsuits were consolidated for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Indiana. The multidistrict litigation court granted class certification in 28 cases and denied it in 14 cases. On December 13, 2010, the court entered an opinion and order addressing all outstanding motions for summary judgment on the status of the owner-operators (i.e., independent contractor vs. employee). In sum, the court ruled on our summary judgment motions and entered judgment in favor of FedEx Ground on all claims in 20 of the 28 multidistrict litigation cases that had been certified as class actions, finding that the owner-operators in those cases were contractors as a matter of the law of 20 states. The plaintiffs filed notices of appeal in all of these 20 cases. The Seventh Circuit heard the appeal in the Kansas case in January 2012 and, in July 2012, issued an opinion that did not make a determination with respect to the correctness of the district courts decision and, instead, certified two questions to the Kansas Supreme Court related to the classification of the plaintiffs as independent contractors under the Kansas Wage Payment Act. The other 19 cases that are before the Seventh Circuit were stayed.
On October 3, 2014, the Kansas Supreme Court determined that a 20 factor right to control test applies to claims under the Kansas Wage Payment Act and concluded that under that test, the class members were employees, not independent contractors. The case was subsequently transferred back to the Seventh Circuit, where both parties made filings requesting the action necessary to complete the resolution of the appeals. The parties also made recommendations to the court regarding next steps for the other 19 cases that are before the Seventh Circuit. FedEx Ground requested that each of those cases be separately briefed given the potential differences in the applicable state law from that in Kansas. On July 8, 2015, the Seventh Circuit issued an order and opinion confirming the decision of the Kansas Supreme Court, concluding that the class members are employees, not independent contractors. Additionally, the Seventh Circuit referred the other 19 cases to a representative of the court for purposes of setting a case management conference to address briefing and argument for those cases.
During the second quarter of 2015, we established an accrual for the estimated probable loss in the Kansas case. In the second quarter of 2016 the Kansas case settled, and we increased the accrual to the amount of the settlement. The settlement will require court approval.
The multidistrict litigation court remanded the other eight certified class actions back to the district courts where they were originally filed because its summary judgment ruling did not completely dispose of all of the claims in those lawsuits. Three of these matters settled for immaterial amounts and have received court approval. The cases in Arkansas and Florida settled in the second quarter of 2016, and we established an accrual in each of these cases for the amount of the settlement. The settlements are subject to court approval.
Two cases in Oregon and one in California were appealed to the Ninth Circuit Court of Appeals, where the court reversed the district court decisions and held that the plaintiffs in California and Oregon were employees as a matter of law and remanded the cases to their respective district courts for further proceedings. In the first quarter of 2015, we recognized an accrual for the then-estimated probable loss in those cases.
In June 2015, the parties in the California case engaged in mediation and reached an agreement to settle the matter for $228 million, and in the fourth quarter of 2015 we increased the accrual to that amount. The settlement agreement is pending court approval.
The two cases in Oregon have been consolidated with a non-MDL independent contractor case in Oregon. The three cases collectively settled in the second quarter of 2016, and we increased the accrual in these cases to the amount of the settlement. The settlement is subject to court approval.
- 16 -
The aggregate amount of independent contractor case settlements during the second quarter of 2016 was $47 million, and the related aggregate accrual increase was $41 million during the quarter.
In addition, we are defending contractor-model cases that are not or are no longer part of the multidistrict litigation. These cases are in varying stages of litigation. For these cases, as well as the remaining 19 cases before the Seventh Circuit, we do not expect to incur a material loss in these matters; however, it is reasonably possible that potential loss in some of these lawsuits or changes to the independent contractor status of FedEx Grounds owner-operators could be material. In these cases, we continue to evaluate what facts may arise in the course of discovery and what legal rulings the courts may render and how these facts and rulings might impact FedEx Grounds loss. For a number of reasons, we are not currently able to estimate a range of reasonably possible loss in these cases. The number and identities of plaintiffs in these lawsuits are uncertain, as they are dependent on how the class of full-time drivers is defined and how many individuals will qualify based on whatever criteria may be established. In addition, the parties have conducted only very limited discovery into damages in certain of these cases, which could vary considerably from plaintiff to plaintiff and be dependent on evidence pertaining to individual plaintiffs, which has yet to be produced in the cases. Further, the range of potential loss could be impacted substantially by future rulings by the court, including on the merits of the claims, on FedEx Grounds defenses, and on evidentiary issues. As a consequence of these factors, as well as others that are specific to these cases, we are not currently able to estimate a range of reasonably possible loss. We do not believe that a material loss is probable in these matters.
Adverse determinations in matters related to FedEx Grounds independent contractors, 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 Grounds owner-operators in certain jurisdictions. We believe that FedEx Grounds owner-operators are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers of the companys independent contractors.
City and State of New York Cigarette Suit. On December 30, 2013, the City of New York filed suit against FedEx Express and FedEx Ground arising from our alleged shipments of cigarettes to New York City residents. The claims against FedEx Express were subsequently dismissed. On March 30, 2014, the complaint was amended adding the State of New York as a plaintiff. Beyond the addition of the State as a plaintiff, the amended complaint contains several amplifications of the previous claims. First, the claims now relate to four shippers, none of which continues to ship in our network. Second, the amended complaint contains a count for violation of the Assurance of Compliance (AOC) we had previously entered into with the State of New York, claiming that since 2006, FedEx has made shipments of cigarettes to residences in New York in violation of the AOC. Lastly, the amendment contains new theories of Racketeer Influenced and Corrupt Organizations Act (RICO) violations. In May 2014, we filed a motion to dismiss almost all of the claims. On November 12, 2014, the City and State of New York filed a separate but almost identical lawsuit that includes two additional shippers. This complaint was amended in May 2015 to include additional shippers. On March 9, 2015, the court ruled on our motion to dismiss in the first case, granting our motions to limit the applicable statute of limitations to four years and to dismiss a portion of the claims. The court, however, denied our motion to dismiss some of the claims, including the RICO claims. Loss in these lawsuits is reasonably possible, but the amount of any loss is expected to be immaterial.
Environmental Matters. SEC regulations require disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that management reasonably believes could exceed $100,000.
In February 2014, FedEx Ground received oral communications from District Attorneys Offices (representing Californias county environmental authorities) and the California Attorney Generals Office (representing the California Division of Toxic Substances Control (DTSC)) that they were seeking civil penalties for alleged violations of the states hazardous waste regulations. Specifically, the California environmental authorities alleged that FedEx Ground improperly generates and/or handles, stores and transports hazardous waste from its stations to its hubs in California. In April 2014, FedEx Ground filed a declaratory judgment action in the United States District Court for the Eastern District of California against the Director of the California DTSC and the County District Attorneys with whom we have been negotiating. In June 2014, the California Attorney General filed a complaint
- 17 -
against FedEx Ground in Sacramento County Superior Court alleging violations by FedEx Ground as described above. The County District Attorneys filed a similar complaint in Sacramento County Superior Court in July 2014. The county and state authorities filed a motion to dismiss FedEx Grounds declaratory judgment action, and their motion was granted on January 22, 2015. FedEx Ground filed a notice of appeal with the Ninth Circuit Court of Appeals on February 23, 2015. FedEx Ground and the County District Attorneys reached an agreement to resolve all claims between them, and on August 10, 2015, they filed a negotiated final judgment in Sacramento County Superior Court that the court subsequently approved. In the fourth quarter of 2015, we established an accrual for the final judgment amount, which was immaterial. On November 19, 2015, FedEx Ground and the DTSC agreed to settle their dispute, subject to memorializing a consent judgment consistent with the terms FedEx Ground agreed upon with the District Attorneys. We established an accrual for the settlement amount in the second quarter of 2016. This amount was immaterial.
On January 14, 2014, the U.S. Department of Justice (DOJ) issued a Grand Jury Subpoena to FedEx Express relating to an asbestos matter previously investigated by the U.S. Environmental Protection Agency. On May 1, 2014, the DOJ informed us that it had determined to continue to pursue the matter as a criminal case, citing seven asbestos-related regulatory violations associated with removal of roof materials from a hangar in Puerto Rico during cleaning and repair activity, as well as violation of waste disposal requirements. Loss is reasonably possible; however, the amount of any loss is expected to be immaterial.
Department of Justice Indictment Internet Pharmacy Shipments. In the past, we received requests for information from the DOJ in the Northern District of California in connection with a criminal investigation relating to the transportation of packages for online pharmacies that may have shipped pharmaceuticals in violation of federal law. In July 2014, the DOJ filed a criminal indictment in the United States District Court for the Northern District of California in connection with the matter. A superseding indictment was filed in August 2014. The indictment alleges that FedEx Corporation, FedEx Express and FedEx Services, together with certain pharmacies, conspired to unlawfully distribute controlled substances, unlawfully distributed controlled substances and conspired to unlawfully distribute misbranded drugs. The superseding indictment adds conspiracy to launder money counts related to services provided to and payments from online pharmacies. We continue to believe that our employees have acted in good faith at all times and that we have not engaged in any illegal activities.
Accordingly, we will vigorously defend ourselves in this matter. If we are convicted, remedies could include fines, penalties, forfeiture and compliance conditions. Given the stage of this proceeding, we cannot estimate the amount or range of loss, if any; however, it is reasonably possible that it could be material if we are convicted.
Other Matters. On June 30, 2014, we received a Statement of Objections from the French Competition Authority (FCA) addressed to FedEx Express France, formerly known as TATEX, regarding an investigation by the FCA into anticompetitive behavior that is alleged to have occurred primarily in the framework of trade association meetings that included the former general managers of TATEX prior to our acquisition of that company in July 2012. In September 2014, FedEx Express France submitted its observations in response to the Statement of Objections to the FCA. In April 2015, the FCA issued a report responding to the observations submitted by all companies involved in the investigation. We submitted an answer to the FCAs report in early July. Loss in this matter is probable, and in the fourth quarter of 2015 we established an accrual for the estimated probable loss. This amount was immaterial.
A hearing in this matter before the Board of the FCA occurred on September 30, 2015. On December 15, 2015, the FCA announced its decision and related fines against all companies involved in the investigation. FedEx Express France was fined 17 million (currently, $19 million). We are analyzing the decision and are considering the possibility of an appeal. Based on the amount previously accrued and available indemnification, no adjustment to the accrued amount is necessary at this time.
The U.S. Customs & Border Protection (the CBP) previously notified FedEx Trade Networks that it would be reviewing certain customs entries made at U.S. ports from 2008 to December 2013. In November 2015, the CBP notified FedEx Trade Networks that it may be liable for $76 million to $210 million in estimated uncollected duties and fees. The CBP has given FedEx Trade Networks an opportunity to respond with an offer in compromise covering all periods. Loss in this matter is probable, but at this time it is not possible for us to estimate the range of loss as we are still evaluating the CBPs proposed range of liability, the amount we are willing to offer in compromise, if any, and the extent to which any loss would be covered by insurance.
- 18 -
FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of their business. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not have a material adverse effect on our financial position, results of operations or cash flows.
(9) Supplemental Cash Flow Information
Cash paid for interest expense and income taxes for the six-month periods ended November 30 was as follows (in millions):
2015 | 2014 | |||||||
Cash payments for: |
||||||||
Interest (net of capitalized interest) |
$ | 146 | $ | 103 | ||||
|
|
|
|
|||||
Income taxes |
$ | 831 | $ | 760 | ||||
Income tax refunds received |
(3 | ) | (5 | ) | ||||
|
|
|
|
|||||
Cash tax payments, net |
$ | 828 | $ | 755 | ||||
|
|
|
|
(10) Condensed Consolidating Financial Statements
We are required to present condensed consolidating financial information in order for the subsidiary guarantors of our public debt to continue to be exempt from reporting under the Securities Exchange Act of 1934, as amended. FedEx Express, however, currently files reports under such act.
The guarantor subsidiaries, which are 100% owned by FedEx, guarantee $8.25 billion of our debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the Guarantor Subsidiaries and Non-guarantor Subsidiaries columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. Prior year amounts have been recast to conform to the pension accounting changes as discussed in our Annual Report.
- 19 -
Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):
CONDENSED CONSOLIDATING BALANCE SHEETS
(UNAUDITED)
November 30, 2015
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
CURRENT ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 2,229 | $ | 474 | $ | 988 | $ | (44 | ) | $ | 3,647 | |||||||||
Receivables, less allowances |
10 | 4,503 | 1,405 | (53 | ) | 5,865 | ||||||||||||||
Spare parts, supplies, fuel, prepaid expenses and other, less allowances |
85 | 739 | 129 | | 953 | |||||||||||||||
Deferred income taxes |
| 651 | 36 | | 687 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
2,324 | 6,367 | 2,558 | (97 | ) | 11,152 | ||||||||||||||
PROPERTY AND EQUIPMENT, AT COST |
29 | 43,125 | 2,088 | | 45,242 | |||||||||||||||
Less accumulated depreciation and amortization |
23 | 21,832 | 1,109 | | 22,964 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net property and equipment |
6 | 21,293 | 979 | | 22,278 | |||||||||||||||
INTERCOMPANY RECEIVABLE |
| 981 | 1,255 | (2,236 | ) | | ||||||||||||||
GOODWILL |
| 1,571 | 2,235 | | 3,806 | |||||||||||||||
INVESTMENT IN SUBSIDIARIES |
24,371 | 3,228 | | (27,599 | ) | | ||||||||||||||
OTHER ASSETS |
2,785 | 708 | 343 | (2,701 | ) | 1,135 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 29,486 | $ | 34,148 | $ | 7,370 | $ | (32,633 | ) | $ | 38,371 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND STOCKHOLDERS INVESTMENT |
||||||||||||||||||||
CURRENT LIABILITIES |
||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | 6 | $ | 8 | $ | | $ | 14 | ||||||||||
Accrued salaries and employee benefits |
49 | 1,251 | 210 | | 1,510 | |||||||||||||||
Accounts payable |
76 | 1,411 | 739 | (97 | ) | 2,129 | ||||||||||||||
Accrued expenses |
632 | 1,415 | 251 | | 2,298 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
757 | 4,083 | 1,208 | (97 | ) | 5,951 | ||||||||||||||
LONG-TERM DEBT, LESS CURRENT PORTION |
8,217 | 248 | 16 | | 8,481 | |||||||||||||||
INTERCOMPANY PAYABLE |
2,236 | | | (2,236 | ) | | ||||||||||||||
OTHER LONG-TERM LIABILITIES |
||||||||||||||||||||
Deferred income taxes |
| 4,263 | 197 | (2,701 | ) | 1,759 | ||||||||||||||
Other liabilities |
3,286 | 3,653 | 251 | | 7,190 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other long-term liabilities |
3,286 | 7,916 | 448 | (2,701 | ) | 8,949 | ||||||||||||||
STOCKHOLDERS INVESTMENT |
14,990 | 21,901 | 5,698 | (27,599 | ) | 14,990 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 29,486 | $ | 34,148 | $ | 7,370 | $ | (32,633 | ) | $ | 38,371 | ||||||||||
|
|
|
|
|
|
|
|
|
|
- 20 -
CONDENSED CONSOLIDATING BALANCE SHEETS
May 31, 2015
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
CURRENT ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 2,383 | $ | 487 | $ | 971 | $ | (78 | ) | $ | 3,763 | |||||||||
Receivables, less allowances |
3 | 4,383 | 1,385 | (52 | ) | 5,719 | ||||||||||||||
Spare parts, supplies, fuel, prepaid expenses and other, less allowances |
41 | 689 | 123 | | 853 | |||||||||||||||
Deferred income taxes |
| 571 | 35 | | 606 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
2,427 | 6,130 | 2,514 | (130 | ) | 10,941 | ||||||||||||||
PROPERTY AND EQUIPMENT, AT COST |
29 | 40,364 | 2,471 | | 42,864 | |||||||||||||||
Less accumulated depreciation and amortization |
23 | 20,685 | 1,281 | | 21,989 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net property and equipment |
6 | 19,679 | 1,190 | | 20,875 | |||||||||||||||
INTERCOMPANY RECEIVABLE |
| 686 | 1,563 | (2,249 | ) | | ||||||||||||||
GOODWILL |
| 1,552 | 2,258 | | 3,810 | |||||||||||||||
INVESTMENT IN SUBSIDIARIES |
23,173 | 3,800 | | (26,973 | ) | | ||||||||||||||
OTHER ASSETS |
2,752 | 898 | 477 | (2,684 | ) | 1,443 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 28,358 | $ | 32,745 | $ | 8,002 | $ | (32,036 | ) | $ | 37,069 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND STOCKHOLDERS INVESTMENT |
||||||||||||||||||||
CURRENT LIABILITIES |
||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | 7 | $ | 12 | $ | | $ | 19 | ||||||||||
Accrued salaries and employee benefits |
34 | 1,208 | 194 | | 1,436 | |||||||||||||||
Accounts payable |
5 | 1,433 | 758 | (130 | ) | 2,066 | ||||||||||||||
Accrued expenses |
604 | 1,557 | 275 | | 2,436 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
643 | 4,205 | 1,239 | (130 | ) | 5,957 | ||||||||||||||
LONG-TERM DEBT, LESS CURRENT PORTION |
6,978 | 248 | 23 | | 7,249 | |||||||||||||||
INTERCOMPANY PAYABLE |
2,249 | | | (2,249 | ) | | ||||||||||||||
OTHER LONG-TERM LIABILITIES |
||||||||||||||||||||
Deferred income taxes |
| 4,206 | 225 | (2,684 | ) | 1,747 | ||||||||||||||
Other liabilities |
3,495 | 3,367 | 261 | | 7,123 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other long-term liabilities |
3,495 | 7,573 | 486 | (2,684 | ) | 8,870 | ||||||||||||||
STOCKHOLDERS INVESTMENT |
14,993 | 20,719 | 6,254 | (26,973 | ) | 14,993 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 28,358 | $ | 32,745 | $ | 8,002 | $ | (32,036 | ) | $ | 37,069 | ||||||||||
|
|
|
|
|
|
|
|
|
|
- 21 -
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended November 30, 2015
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 10,479 | $ | 2,048 | $ | (74 | ) | $ | 12,453 | |||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Salaries and employee benefits |
26 | 3,926 | 618 | | 4,570 | |||||||||||||||
Purchased transportation |
| 1,941 | 622 | (25 | ) | 2,538 | ||||||||||||||
Rentals and landing fees |
2 | 596 | 86 | (2 | ) | 682 | ||||||||||||||
Depreciation and amortization |
1 | 601 | 51 | | 653 | |||||||||||||||
Fuel |
| 597 | 18 | | 615 | |||||||||||||||
Maintenance and repairs |
| 497 | 32 | | 529 | |||||||||||||||
Intercompany charges, net |
(112 | ) | 84 | 28 | | | ||||||||||||||
Other |
83 | 1,293 | 400 | (47 | ) | 1,729 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 9,535 | 1,855 | (74 | ) | 11,316 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
OPERATING INCOME |
| 944 | 193 | | 1,137 | |||||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||||
Equity in earnings of subsidiaries |
691 | 73 | | (764 | ) | | ||||||||||||||
Interest, net |
(81 | ) | 6 | 1 | | (74 | ) | |||||||||||||
Intercompany charges, net |
84 | (83 | ) | (1 | ) | | | |||||||||||||
Other, net |
(3 | ) | (6 | ) | 1 | | (8 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
INCOME BEFORE INCOME TAXES |
691 | 934 | 194 | (764 | ) | 1,055 | ||||||||||||||
Provision for income taxes |
| 309 | 55 | | 364 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME |
$ | 691 | $ | 625 | $ | 139 | $ | (764 | ) | $ | 691 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME |
$ | 672 | $ | 620 | $ | 112 | $ | (764 | ) | $ | 640 | |||||||||
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended November 30, 2014
(As Adjusted)
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 9,926 | $ | 2,108 | $ | (95 | ) | $ | 11,939 | |||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Salaries and employee benefits |
23 | 3,656 | 550 | | 4,229 | |||||||||||||||
Purchased transportation |
| 1,468 | 764 | (47 | ) | 2,185 | ||||||||||||||
Rentals and landing fees |
2 | 577 | 86 | (2 | ) | 663 | ||||||||||||||
Depreciation and amortization |
1 | 595 | 55 | | 651 | |||||||||||||||
Fuel |
| 1,028 | 24 | | 1,052 | |||||||||||||||
Maintenance and repairs |
| 507 | 36 | | 543 | |||||||||||||||
Intercompany charges, net |
(48 | ) | (50 | ) | 98 | | | |||||||||||||
Other |
22 | 1,239 | 313 | (46 | ) | 1,528 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 9,020 | 1,926 | (95 | ) | 10,851 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
OPERATING INCOME |
| 906 | 182 | | 1,088 | |||||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||||
Equity in earnings of subsidiaries |
663 | 103 | | (766 | ) | | ||||||||||||||
Interest, net |
(53 | ) | 5 | 1 | | (47 | ) | |||||||||||||
Intercompany charges, net |
54 | (59 | ) | 5 | | | ||||||||||||||
Other, net |
(1 | ) | 2 | 4 | | 5 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
INCOME BEFORE INCOME TAXES |
663 | 957 | 192 | (766 | ) | 1,046 | ||||||||||||||
Provision for income taxes |
| 346 | 37 | | 383 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME |
$ | 663 | $ | 611 | $ | 155 | $ | (766 | ) | $ | 663 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME |
$ | 644 | $ | 586 | $ | 59 | $ | (766 | ) | $ | 523 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 22 -
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Six Months Ended November 30, 2015
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 20,352 | $ | 4,557 | $ | (177 | ) | $ | 24,732 | |||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Salaries and employee benefits |
60 | 7,739 | 1,296 | | 9,095 | |||||||||||||||
Purchased transportation |
| 3,375 | 1,587 | (80 | ) | 4,882 | ||||||||||||||
Rentals and landing fees |
3 | 1,183 | 194 | (3 | ) | 1,377 | ||||||||||||||
Depreciation and amortization |
1 | 1,184 | 116 | | 1,301 | |||||||||||||||
Fuel |
| 1,288 | 39 | | 1,327 | |||||||||||||||
Maintenance and repairs |
| 1,005 | 72 | | 1,077 | |||||||||||||||
Intercompany charges, net |
(181 | ) | 44 | 137 | | | ||||||||||||||
Other |
117 | 2,557 | 812 | (94 | ) | 3,392 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 18,375 | 4,253 | (177 | ) | 22,451 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
OPERATING INCOME |
| 1,977 | 304 | | 2,281 | |||||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||||
Equity in earnings of subsidiaries |
1,383 | 134 | | (1,517 | ) | | ||||||||||||||
Interest, net |
(156 | ) | 14 | 5 | | (137 | ) | |||||||||||||
Intercompany charges, net |
162 | (159 | ) | (3 | ) | | | |||||||||||||
Other, net |
(6 | ) | (9 | ) | 10 | | (5 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
INCOME BEFORE INCOME TAXES |
1,383 | 1,957 | 316 | (1,517 | ) | 2,139 | ||||||||||||||
Provision for income taxes |
| 666 | 90 | | 756 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME |
$ | 1,383 | $ | 1,291 | $ | 226 | $ | (1,517 | ) | $ | 1,383 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME |
$ | 1,346 | $ | 1,271 | $ | 70 | $ | (1,517 | ) | $ | 1,170 | |||||||||
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Six Months Ended November 30, 2014
(As Adjusted)
Parent | Guarantor Subsidiaries |
Non-guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
REVENUES |
$ | | $ | 19,695 | $ | 4,112 | $ | (184 | ) | $ | 23,623 | |||||||||
OPERATING EXPENSES: |
||||||||||||||||||||
Salaries and employee benefits |
53 | 7,190 | 1,100 | | 8,343 | |||||||||||||||
Purchased transportation |
| 2,854 | 1,475 | (90 | ) | 4,239 | ||||||||||||||
Rentals and landing fees |
3 | 1,149 | 174 | (3 | ) | 1,323 | ||||||||||||||
Depreciation and amortization |
1 | 1,190 | 111 | | 1,302 | |||||||||||||||
Fuel |
| 2,123 | 49 | | 2,172 | |||||||||||||||
Maintenance and repairs |
| 1,029 | 70 | | 1,099 | |||||||||||||||
Intercompany charges, net |
(143 | ) | (48 | ) | 191 | | | |||||||||||||
Other |
86 | 2,404 | 596 | (91 | ) | 2,995 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 17,891 | 3,766 | (184 | ) | 21,473 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
OPERATING INCOME |
| 1,804 | 346 | | 2,150 | |||||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||||
Equity in earnings of subsidiaries |
1,316 | 201 | | (1,517 | ) | | ||||||||||||||
Interest, net |
(106 | ) | 9 | 2 | | (95 | ) | |||||||||||||
Intercompany charges, net |
108 | (118 | ) | 10 | | | ||||||||||||||
Other, net |
(2 | ) | (1 | ) | 6 | | 3 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
INCOME BEFORE INCOME TAXES |
1,316 | 1,895 | 364 | (1,517 | ) | 2,058 | ||||||||||||||
Provision for income taxes |
| 642 | 100 | | 742 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME |
$ | 1,316 | $ | 1,253 | $ | 264 | $ | (1,517 | ) | $ | 1,316 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME |
$ | 1,280 | $ | 1,224 | $ | 142 | $ | (1,517 | ) | $ | 1,129 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 23 -
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended November 30, 2015
Parent | Guarantor Subsidiaries |
Non- guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
$ | (847 | ) | $ | 3,054 | $ | 213 | $ | 34 | $ | 2,454 | |||||||||
INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
| (2,482 | ) | (80 | ) | | (2,562 | ) | ||||||||||||
Proceeds from asset dispositions and other |
(5 | ) | 21 | (4 | ) | | 12 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH USED IN INVESTING ACTIVITIES |
(5 | ) | (2,461 | ) | (84 | ) | | (2,550 | ) | |||||||||||
FINANCING ACTIVITIES |
||||||||||||||||||||
Net transfers from (to) Parent |
648 | (691 | ) | 43 | | | ||||||||||||||
Payment on loan between subsidiaries |
| 106 | (106 | ) | | | ||||||||||||||
Intercompany dividends |
| 20 | (20 | ) | | | ||||||||||||||
Principal payments on debt |
| (2 | ) | (15 | ) | | (17 | ) | ||||||||||||
Proceeds from debt issuance |
1,238 | | | | 1,238 | |||||||||||||||
Proceeds from stock issuances |
62 | | | | 62 | |||||||||||||||
Excess tax benefit on the exercise of stock options |
8 | | | | 8 | |||||||||||||||
Dividends paid |
(141 | ) | | | | (141 | ) | |||||||||||||
Purchase of treasury stock |
(1,101 | ) | | | | (1,101 | ) | |||||||||||||
Other, net |
(16 | ) | (27 | ) | 27 | | (16 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
698 | (594 | ) | (71 | ) | | 33 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Effect of exchange rate changes on cash |
| (12 | ) | (41 | ) | | (53 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (decrease) increase in cash and cash equivalents |
(154 | ) | (13 | ) | 17 | 34 | (116 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
2,383 | 487 | 971 | (78 | ) | 3,763 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents at end of period |
$ | 2,229 | $ | 474 | $ | 988 | $ | (44 | ) | $ | 3,647 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 24 -
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended November 30, 2014
Parent | Guarantor Subsidiaries |
Non- guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
$ | (458 | ) | $ | 2,335 | $ | 257 | $ | 17 | $ | 2,151 | |||||||||
INVESTING ACTIVITIES |
||||||||||||||||||||
Capital expenditures |
(1 | ) | (1,809 | ) | (80 | ) | | (1,890 | ) | |||||||||||
Proceeds from asset dispositions and other |
(1 | ) | 17 | (9 | ) | | 7 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH USED IN INVESTING ACTIVITIES |
(2 | ) | (1,792 | ) | (89 | ) | | (1,883 | ) | |||||||||||
FINANCING ACTIVITIES |
||||||||||||||||||||
Net transfers from (to) Parent |
601 | (610 | ) | 9 | | | ||||||||||||||
Payment on loan between subsidiaries |
| 143 | (143 | ) | | | ||||||||||||||
Intercompany dividends |
| 22 | (22 | ) | | | ||||||||||||||
Principal payments on debt |
| (1 | ) | | | (1 | ) | |||||||||||||
Proceeds from stock issuances |
189 | | | | 189 | |||||||||||||||
Excess tax benefit on the exercise of stock options |
23 | | | | 23 | |||||||||||||||
Dividends paid |
(114 | ) | | | | (114 | ) | |||||||||||||
Purchase of treasury stock |
(947 | ) | | | | (947 | ) | |||||||||||||
Other, net |
| (39 | ) | 39 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH USED IN FINANCING ACTIVITIES |
(248 | ) | (485 | ) | (117 | ) | | (850 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Effect of exchange rate changes on cash |
| (17 | ) | (43 | ) | | (60 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (decrease) increase in cash and cash equivalents |
(708 | ) | 41 | 8 | 17 | (642 | ) | |||||||||||||
Cash and cash equivalents at beginning of period |
1,756 | 441 | 861 | (150 | ) | 2,908 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents at end of period |
$ | 1,048 | $ | 482 | $ | 869 | $ | (133 | ) | $ | 2,266 | |||||||||
|
|
|
|
|
|
|
|
|
|
- 25 -
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of November 30, 2015, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended November 30, 2015 and 2014 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2015 and 2014. These financial statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders investment, and cash flows for the year then ended, not presented herein, and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated July 14, 2015. In our opinion, the accompanying condensed consolidated balance sheet of FedEx Corporation as of May 31, 2015, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Memphis, Tennessee
December 17, 2015
- 26 -
Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
GENERAL
The following Managements Discussion and Analysis of Results of Operations and Financial Condition (MD&A) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (FedEx). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 2015 (Annual Report). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results.
We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are Federal Express Corporation (FedEx Express), the worlds largest express transportation company; FedEx Ground Package System, Inc. (FedEx Ground), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (FedEx Freight), a leading U.S. provider of less-than-truckload (LTL) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (FedEx Services), form the core of our reportable segments.
Our FedEx Services segment provides sales, marketing, information technology, communications and certain 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. Additional information on our businesses can also be found in our Annual Report.
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 and shipment 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. The line item Other operating expenses predominantly includes costs associated with outside service contracts (such as security, facility services and cargo handling), insurance, professional fees, uniforms and advertising.
- 27 -
Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2016 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following table compares summary operating results (dollars in millions, except per share amounts) for the periods ended November 30:
Three Months Ended | Percent Change |
Six Months Ended | Percent Change |
|||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||
Revenues |
$ | 12,453 | $ | 11,939 | 4 | $ | 24,732 | $ | 23,623 | 5 | ||||||||||||||
FedEx Express Segment operating income |
622 | 492 | 26 | 1,167 | 869 | 34 | ||||||||||||||||||
FedEx Ground Segment operating income |
526 | 465 | 13 | 1,063 | 1,010 | 5 | ||||||||||||||||||
FedEx Freight Segment operating income |
101 | 112 | (10 | ) | 233 | 280 | (17 | ) | ||||||||||||||||
Eliminations, corporate and other |
(112 | ) | 19 | NM | (182 | ) | (9 | ) | NM | |||||||||||||||
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Consolidated operating income |
1,137 | 1,088 | 5 | 2,281 | 2,150 | 6 | ||||||||||||||||||
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FedEx Express Segment operating margin |
9.4 | % | 7.0 | % | 240 | bp | 8.9 | % | 6.3 | % | 260 | bp | ||||||||||||
FedEx Ground Segment operating margin |
13.0 | % | 15.2 | % | (220 | )bp | 13.5 | % | 16.8 | % | (330 | )bp | ||||||||||||
FedEx Freight Segment operating margin |
6.5 | % | 7.1 | % | (60 | )bp | 7.4 | % | 8.8 | % | (140 | )bp | ||||||||||||
Consolidated operating margin |
9.1 | % | 9.1 | % | | bp | 9.2 | % | 9.1 | % | 10 | bp | ||||||||||||
Consolidated Net income |
$ | 691 | $ | 663 | 4 | $ | 1,383 | $ | 1,316 | 5 | ||||||||||||||
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Diluted earnings per share |
$ | 2.44 | $ | 2.31 | 6 | $ | 4.86 | $ | 4.57 | 6 | ||||||||||||||
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The following table shows changes in revenues and operating income by reportable segment for the periods ended November 30, 2015 compared to November 30, 2014 (dollars in millions):
Change in Revenue | Change in Operating Income | |||||||||||||||
Three Months Ended |
Six Months Ended |
Three Months Ended |
Six Months Ended |
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FedEx Express segment |
$ | (436 | ) | $ | (707 | ) | $ | 130 | $ | 298 | ||||||
FedEx Ground segment |
987 | 1,857 | 61 | 53 | ||||||||||||
FedEx Freight segment |
(38 | ) | (46 | ) | (11 | ) | (47 | ) | ||||||||
FedEx Services segment |
9 | 25 | | | ||||||||||||
Eliminations, corporate and other |
(8 | ) | (20 | ) | (131 | ) | (173 | ) | ||||||||
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$ | 514 | $ | 1,109 | $ | 49 | $ | 131 | |||||||||
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Overview
Our results for the second quarter and first half of 2016 improved due to higher operating income at FedEx Express and FedEx Ground and the continued positive impacts from our profit improvement program commenced in 2013. These factors were partially offset in the second quarter by lower than anticipated volume at FedEx Freight and the modest negative net impact of fuel. The first
- 28 -
half of 2016 benefited from one additional operating day at all our transportation segments and was partially offset by lower than anticipated volume at FedEx Freight, higher incentive compensation accruals, higher self-insurance costs at FedEx Ground and the modest negative net impact of fuel.
We incurred expenses related to our pending acquisition of TNT Express N.V. (TNT Express) of $19 million ($12 million, net of tax, or $0.04 per diluted share) in the second quarter and $28 million ($18 million, net of tax, or $0.06 per diluted share) in the first half of 2016.
Eliminations, corporate and other included expenses related to the settlement of independent contractor litigation matters involving FedEx Ground for $41 million ($25 million, net of tax, or $0.09 per diluted share) in the second quarter of 2016. In addition, the first half of 2015 included a legal contingency reserve associated with an independent contractor litigation matter involving FedEx Ground.
- 29 -
The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands) over the five most recent quarters:
(1) | International domestic average daily package volume represents our international intra-country express operations. |
- 30 -
The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends over the five most recent quarters:
Revenue
Revenues increased 4% in the second quarter and 5% in the first half of 2016 driven by the FedEx Ground segment due to the inclusion of GENCO Distribution System, Inc. (GENCO) revenue, as well as volume growth in our residential services and rate increases. In addition, revenues increased approximately $300 million in the second quarter and $540 million in the first half of 2016 as a result of recording FedEx SmartPost service revenues on a gross basis, versus our previous net treatment, as further discussed in our Annual Report and in Note 1 of our unaudited condensed consolidated financial statements. Lower fuel surcharges had a significant negative impact on revenues at all of our transportation segments and had a modest negative impact on our earnings in the second quarter and first half of 2016. In addition, revenues at FedEx Express were negatively impacted by unfavorable exchange rates in the second quarter and first half of 2016. One additional operating day benefited revenues at all our transportation segments in the first half of 2016.
- 31 -
Operating Expenses
The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended November 30:
Three Months Ended | Six Months Ended | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Operating expenses: |
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Salaries and employee benefits |
$ | 4,570 | $ | 4,229 | $ | 9,095 | $ | 8,343 | ||||||||
Purchased transportation |
2,538 | 2,185 | 4,882 | 4,239 | ||||||||||||
Rentals and landing fees |
682 | 663 | 1,377 | 1,323 | ||||||||||||
Depreciation and amortization |
653 | 651 | 1,301 | 1,302 | ||||||||||||
Fuel |
615 | 1,052 | 1,327 | 2,172 | ||||||||||||
Maintenance and repairs |
529 | 543 | 1,077 | 1,099 | ||||||||||||
Other |
1,729 | 1,528 | 3,392 | 2,995 | ||||||||||||
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Total operating expenses |
$ | 11,316 | $ | 10,851 | $ | 22,451 | $ | 21,473 | ||||||||
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Percent of Revenue | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Operating expenses: |
||||||||||||||||
Salaries and employee benefits |
36.7 | % | 35.4 | % | 36.8 | % | 35.4 | % | ||||||||
Purchased transportation |
20.4 | 18.3 | 19.7 | 17.9 | ||||||||||||
Rentals and landing fees |
5.5 | 5.6 | 5.6 | 5.6 | ||||||||||||
Depreciation and amortization |
5.2 | 5.5 | 5.3 | 5.5 | ||||||||||||
Fuel |
4.9 | 8.8 | 5.4 | 9.2 | ||||||||||||
Maintenance and repairs |
4.3 | 4.5 | 4.3 | 4.6 | ||||||||||||
Other |
13.9 | 12.8 | 13.7 | 12.7 | ||||||||||||
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Total operating expenses |
90.9 | 90.9 | 90.8 | 90.9 | ||||||||||||
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Operating margin |
9.1 | % | 9.1 | % | 9.2 | % | 9.1 | % | ||||||||
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Exceptionally strong performance at FedEx Express benefited our operating margin during the second quarter and first half of 2016. Our operating margin for the second quarter of 2016 was negatively impacted by higher salaries and employee benefits at FedEx Freight, expenses related to the settlement of independent contractor litigation matters involving FedEx Ground for $41 million (described above), the recording of FedEx SmartPost service revenues on a gross basis, the inclusion of GENCO results and the negative net impact of fuel. During the first half of 2016, operating margin was negatively impacted by higher salaries and employee benefits at FedEx Freight, higher incentive compensation accruals, higher self-insurance costs at FedEx Ground, the recording of FedEx SmartPost service revenues on a gross basis and the inclusion of GENCO results.
Operating expenses included an increase in salaries and employee benefits expense of 8% in the second quarter and 9% in the first half of 2016 due to the inclusion of GENCO results, pay initiatives coupled with increased staffing at FedEx Freight and higher incentive compensation accruals at all our transportation segments. Purchased transportation costs increased 16% in the second quarter and 15% in the first half of 2016 due to the recording of FedEx SmartPost service revenues on a gross basis. Other expenses were driven 13% higher in the second quarter due to the inclusion of GENCO results and expenses related to the settlement of independent contractor litigation matters involving FedEx Ground further discussed in Note 8 of the accompanying unaudited condensed consolidated financial statements and in the first half of 2016 due to the inclusion of GENCO results, higher self-insurance insurance costs at FedEx Ground and expenses related to the settlement of independent contractor litigation matters involving FedEx Ground.
- 32 -
Fuel
The following graph for our transportation segments shows our average cost of jet and vehicle fuel per gallon for the five most recent quarters:
Fuel expense decreased 42% in the second quarter and 39% in the first half of 2016 due to lower aircraft fuel prices. However, fuel prices represent only one component of the two factors we consider meaningful in understanding the impact of fuel on our business. Consideration must also be given to the fuel surcharge revenue we collect. Accordingly, we believe discussion of the net impact of fuel on our results, which is a comparison of the year-over-year change in these two factors, is important to understand the impact of fuel on our business. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative weighted-average fuel surcharge percentages in effect for the second quarter and first half of 2016 and 2015 in the accompanying discussions of each of our transportation segments.
The index used to determine the fuel surcharge percentage for our FedEx Freight business adjusts weekly, while our fuel surcharges for the FedEx Express and FedEx Ground businesses incorporate a timing lag of approximately six to eight weeks before they are adjusted for changes in fuel prices. For example, the fuel surcharge index in effect at FedEx Express in November 2015 was set based on September 2015 fuel prices. In addition, the structure of the table that is used to determine our fuel surcharge at FedEx Express and FedEx Ground does not adjust immediately for changes in fuel price, but allows for the fuel surcharge revenue charged to our customers to remain unchanged as long as fuel prices remain within certain ranges.
Beyond these factors, the manner in which we purchase fuel also influences the net impact of fuel on our results. For example, our contracts for jet fuel purchases at FedEx Express are tied to various indices, including the U.S. Gulf Coast index. While many of these indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for jet fuel. Furthermore, under these contractual arrangements, approximately 75% of our jet fuel is purchased based on the index price for the preceding week, with the remainder of our purchases tied to the index price for the preceding month, rather than based on daily spot rates. These contractual provisions mitigate the impact of rapidly changing daily spot rates on our jet fuel purchases.
Because of the factors described above, our operating results may be affected should the market price of fuel suddenly change by a significant amount or change by amounts that do not result in an adjustment in our fuel surcharges, which can significantly affect our earnings either positively or negatively in the short-term.
We routinely review our fuel surcharges and our fuel surcharge methodology. On November 2, 2015, FedEx Express and FedEx Ground updated certain tables used to determine fuel surcharges.
- 33 -
The net impact of fuel had a modest negative impact in the second quarter and first half of 2016 to operating income. This was driven by the year-over-year decrease in fuel surcharge revenue during the second quarter and first half of 2016, which was partially offset by decreased fuel prices during these periods.
The net impact of fuel on our operating results does not consider the effects that fuel surcharge levels may have on our business, including changes in demand and shifts in the mix of services purchased by our customers. While fluctuations in fuel surcharge percentages 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.
Income Taxes
Our effective tax rate was 34.5% for the second quarter of 2016 and 35.3% for the first half of 2016, compared with 36.6% in the second quarter and 36.0% in the first half of 2015. The tax rates in 2016 have decreased primarily due to the resolution of a state income tax matter during the second quarter. For 2016, we expect an effective tax rate of approximately 36.0% prior to any year-end mark-to-market accounting adjustment for defined benefit pension and postretirement healthcare plans (MTM Adjustment). The actual rate, however, will depend on a number of factors, including the amount and source of operating income, the impact of the MTM Adjustment and when the proposed TNT Express acquisition is completed.
We are subject to taxation in the United States and various U.S. state, local and foreign jurisdictions. We are currently under examination by the Internal Revenue Service for the 2012 and 2013 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next twelve months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements. As of November 30, 2015, there were no material changes to our liabilities for unrecognized tax benefits from May 31, 2015.
Business Acquisitions
As discussed in our Annual Report, on April 6, 2015, we entered into a conditional agreement to acquire TNT Express for 4.4 billion (currently, approximately $4.8 billion). This combination is expected to expand our global portfolio, particularly in Europe, lower our costs to serve our European markets by increasing density in our pickup-and-delivery operations and accelerate our global growth. This acquisition is expected to be completed in the first half of calendar year 2016. The closing of the acquisition is subject to customary conditions, including obtaining all necessary approvals and competition clearances. We expect to secure all relevant competition approvals.
During 2015, we acquired two businesses, expanding our portfolio in e-commerce and supply chain solutions. On January 30, 2015, we acquired GENCO, a leading North American third-party logistics provider, for $1.4 billion, which was funded using a portion of the proceeds from our January 2015 debt issuance. The financial results of this business are included in the FedEx Ground segment from the date of acquisition.
In addition, on December 16, 2014, we acquired Bongo International, LLC (Bongo), a leader in cross-border enablement technologies and solutions, for $42 million in cash from operations. The financial results of this business are included in the FedEx Express segment from the date of acquisition.
These acquisitions will allow us to enter new markets, as well as strengthen our current service offerings to existing customers. See Note 1 of the accompanying unaudited condensed consolidated financial statements for further discussion of these acquisitions.
- 34 -
Outlook
We expect earnings growth in the full year of 2016 prior to any MTM Adjustment driven by ongoing improvements in the results of our FedEx Express and FedEx Ground segments due to volume and base yield growth, despite weaker than anticipated industrial production. Our results in 2016 will continue to benefit from execution of the profit improvement programs announced in 2013, which are further described in our Annual Report. Our expectations for earnings growth in the third quarter and the remainder of 2016 are dependent on key external factors, including fuel prices and moderate growth in the global economy. Our outlook for 2016 does not include any impact from our announced intent to acquire TNT Express, such as integration planning or transaction costs, the operating activities of TNT Express, or the related tax consequences if the transaction is consummated.
Other Outlook Matters. For details on key 2016 capital projects, refer to the Liquidity Outlook section of this MD&A.
As described in Note 8 of the accompanying unaudited condensed 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 Grounds 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 Forward-Looking Statements for a discussion of these and other potential risks and uncertainties that could materially affect our future performance.
RECENT ACCOUNTING GUIDANCE
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. These matters are described in our Annual Report.
During the quarter, we chose to early adopt the authoritative guidance issued by the Financial Accounting Standards Board (FASB) requiring acquirers in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period that the adjustment amounts are determined and eliminates the requirement to retrospectively account for these adjustments. It also requires additional disclosure about the effects of the adjustments on prior periods. See the Business Acquisitions section above for further discussion regarding our recent business acquisitions.
On November 11, 2015, the FASB voted to proceed with the new lease accounting standard that will require companies to include a right-of-use asset and a liability to make lease payments on the balance sheet for all leases (except short-term leases). This new standard will have a significant impact on our accounting and financial reporting and will be effective for our fiscal year ending May 31, 2020.
On November 20, 2015, the FASB issued an Accounting Standards Update that will require companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This new guidance will have minimal impact on our accounting and financial reporting and will be effective for our fiscal year ending May 31, 2018.
We believe that no other new accounting guidance was adopted or issued during the first half of 2016 that is relevant to the readers of our financial statements.
- 35 -
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) | ||
Bongo (cross-border enablement technology and solutions) | ||
FedEx Ground Segment |
FedEx Ground (small-package ground delivery) | |
GENCO (third-party logistics) | ||
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 operating expenses line item Intercompany charges on the accompanying unaudited condensed consolidated financial statements of our transportation segments reflects the allocations from the FedEx Services segment to the respective transportation segments. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided.
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. 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. We believe these allocations approximate the net cost of providing these functions. Our allocation methodologies are refined periodically, as necessary, to reflect changes in our businesses.
ELIMINATIONS, CORPORATE AND OTHER
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.
Corporate and other includes corporate headquarters costs for executive officers, certain other legal and financial functions, as well as certain other costs and credits not attributed to our core business. These costs are not allocated to the business segments. The year-over-year increase in these costs was driven by prior year benefits of $66 million in the second quarter and $133 million in the first half as a result of our change in recognizing expected return on plan assets for our defined benefit pension and postretirement healthcare plans at the segment level, which had no impact at the consolidated level.
- 36 -
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 (dollars in millions) and operating margin for the periods ended November 30:
Three Months Ended | Percent | Six Months Ended | Percent | |||||||||||||||||||||
2015 | 2014 | Change | 2015 | 2014 | Change | |||||||||||||||||||
Revenues: |
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Package: |
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U.S. overnight box |
$ | 1,682 | $ | 1,705 | (1 | ) | $ | 3,340 | $ | 3,387 | (1 | ) | ||||||||||||
U.S. overnight envelope |
397 | 400 | (1 | ) | 819 | 815 | | |||||||||||||||||
U.S. deferred |
826 | 834 | (1 | ) | 1,642 | 1,629 | 1 | |||||||||||||||||
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Total U.S. domestic package revenue |
2,905 | 2,939 | (1 | ) | 5,801 | 5,831 | (1 | ) | ||||||||||||||||
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International priority |
1,433 | 1,649 | (13 | ) | 2,897 | 3,279 | (12 | ) | ||||||||||||||||
International economy |
568 | 598 | (5 | ) | 1,142 | 1,169 | (2 | ) | ||||||||||||||||
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Total international export package revenue |
2,001 | 2,247 | (11 | ) | 4,039 | 4,448 | (9 | ) | ||||||||||||||||
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International domestic(1) |
336 | 383 | (12 | ) | 663 | 754 | (12 | ) | ||||||||||||||||
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Total package revenue |
5,242 | 5,569 | (6 | ) | 10,503 | 11,033 | (5 | ) | ||||||||||||||||
Freight: |
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U.S. |
578 | 586 | (1 | ) | 1,151 | 1,165 | (1 | ) | ||||||||||||||||
International priority |
354 | 412 | (14 | ) | 704 | 807 | (13 | ) | ||||||||||||||||
International airfreight |
32 | 42 | (24 | ) | 68 | 88 | (23 | ) | ||||||||||||||||
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Total freight revenue |
964 | 1,040 | (7 | ) | 1,923 | 2,060 | (7 | ) | ||||||||||||||||
Other(2) |
382 | 415 | (8 | ) | 753 | 793 | (5 | ) | ||||||||||||||||
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Total revenues |
6,588 | 7,024 | (6 | ) | 13,179 | 13,886 | (5 | ) | ||||||||||||||||
Operating expenses: |
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Salaries and employee benefits |
2,513 | 2,524 | | 5,036 | 5,002 | 1 | ||||||||||||||||||
Purchased transportation |
616 | 681 | (10 | ) | 1,217 | 1,328 | (8 | ) | ||||||||||||||||
Rentals and landing fees |
399 | 422 | (5 | ) | 809 | 848 | (5 | ) | ||||||||||||||||
Depreciation and amortization |
349 | 368 | (5 | ) | 696 | 742 | (6 | ) | ||||||||||||||||
Fuel |
517 | 906 | (43 | ) | 1,124 | 1,876 | (40 | ) | ||||||||||||||||
Maintenance and repairs |
330 | 357 | (8 | ) | 675 | 736 | (8 | ) | ||||||||||||||||
Intercompany charges |
462 | 452 | 2 | 907 | 900 | 1 | ||||||||||||||||||
Other |
780 | 822 | (5 | ) | 1,548 | 1,585 | (2 | ) | ||||||||||||||||
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Total operating expenses |
5,966 | 6,532 | (9 | ) | 12,012 | 13,017 | (8 | ) | ||||||||||||||||
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Operating income |
$ | 622 | $ | 492 | 26 | $ | 1,167 | $ | 869 | 34 | ||||||||||||||
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Operating margin |
9.4 | % | 7.0 | % | 240 | bp | 8.9 | % | 6.3 | % | 260 | bp |
(1) | International domestic revenues represent our international intra-country express operations. |
(2) | Includes FedEx Trade Networks, FedEx SupplyChain Systems and Bongo. |
- 37 -
Percent of Revenue | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Operating expenses: |
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Salaries and employee benefits |
38.1 | % | 35.9 | % | 38.2 | % | 36.0 | % | ||||||||
Purchased transportation |
9.4 | 9.7 | 9.2 | 9.6 | ||||||||||||
Rentals and landing fees |
6.1 | 6.0 | 6.1 | 6.1 | ||||||||||||
Depreciation and amortization |
5.3 | 5.2 | 5.3 | 5.4 | ||||||||||||
Fuel |
7.9 | 12.9 | 8.5 | 13.5 | ||||||||||||
Maintenance and repairs |
5.0 | 5.1 | 5.1 | 5.3 | ||||||||||||
Intercompany charges |
7.0 | 6.5 | 6.9 | 6.4 | ||||||||||||
Other |
11.8 | 11.7 | 11.8 | 11.4 | ||||||||||||
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Total operating expenses |
90.6 | 93.0 | 91.1 | 93.7 | ||||||||||||
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Operating margin |
9.4 | % | 7.0 | % | 8.9 | % | 6.3 | % | ||||||||
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The following table compares selected statistics (in thousands, except yield amounts) for the periods ended November 30:
Three Months Ended | Percent | Six Months Ended | Percent | |||||||||||||||||||||
2015 | 2014 | Change | 2015 | 2014 | Change | |||||||||||||||||||
Package Statistics(1) |
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Average daily package volume (ADV): |
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U.S. overnight box |
1,290 | 1,259 | 2 | 1,250 | 1,235 | 1 | ||||||||||||||||||
U.S. overnight envelope |
531 | 521 | 2 | 536 | 524 | 2 | ||||||||||||||||||
U.S. deferred |
900 | 915 | (2 | ) | 882 | 880 | | |||||||||||||||||
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Total U.S. domestic ADV |
2,721 | 2,695 | 1 | 2,668 | 2,639 | 1 | ||||||||||||||||||
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International priority |
402 | 424 | (5 | ) | 396 | 417 |