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, 2016 (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; TNT Express B.V. (TNT
Express), an international express, small-package ground delivery and freight 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, customer service, technical support, billing and collection services, and certain back-office functions that support 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). 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:
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|
the overall customer demand for our various services based on macro-economic factors and the global economy;
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|
the volumes of transportation services provided through our networks, primarily measured by our average daily volume and shipment weight and size;
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the mix of services purchased by our customers;
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|
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);
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our ability to manage our cost structure (capital expenditures and operating expenses) to match shifting volume levels; and
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the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges.
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Many 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 changes 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 volumes. 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, and uniforms.
- 27 -
Except as otherwise specified, references to years indicate our fiscal year ending May 31, 2017 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 group, which includes the FedEx Express and TNT Express
segments, the FedEx Ground segment and the FedEx Freight segment.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The
following tables compare summary operating results and changes in revenues and operating income (dollars in millions, except per share amounts) for the three-month periods ended August 31:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
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|
Percent
Change
|
|
Consolidated revenues
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|
$
|
14,663
|
|
|
$
|
12,279
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|
|
|
19
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|
Operating income:
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|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express Segment
|
|
|
624
|
|
|
|
545
|
|
|
|
14
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|
TNT Express Segment
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
FedEx Ground Segment
|
|
|
610
|
|
|
|
537
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|
|
|
14
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|
FedEx Freight Segment
|
|
|
135
|
|
|
|
132
|
|
|
|
2
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|
Eliminations, corporate and other
|
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|
(91
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)
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|
|
(70
|
)
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|
|
(30
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
|
1,264
|
|
|
|
1,144
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin:
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|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express Segment
|
|
|
9.4
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%
|
|
|
8.3
|
%
|
|
|
110
|
bp
|
TNT Express Segment
|
|
|
(0.8
|
%)
|
|
|
|
|
|
|
|
bp
|
FedEx Ground Segment
|
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|
14.2
|
%
|
|
|
14.0
|
%
|
|
|
20
|
bp
|
FedEx Freight Segment
|
|
|
8.1
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%
|
|
|
8.2
|
%
|
|
|
(10
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)bp
|
Consolidated operating margin
|
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|
8.6
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%
|
|
|
9.3
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%
|
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|
(70
|
)bp
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Consolidated net income
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$
|
715
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|
$
|
692
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|
|
3
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|
|
|
|
|
|
|
|
|
|
|
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|
Diluted earnings per share
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|
$
|
2.65
|
|
|
$
|
2.42
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|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Year-over-Year
Changes
|
|
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|
Revenues
|
|
|
Operating Income
|
|
FedEx Express segment
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|
$
|
65
|
|
|
$
|
79
|
|
TNT Express segment
|
|
|
1,804
|
|
|
|
(14
|
)
|
FedEx Ground segment
|
|
|
460
|
|
|
|
73
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|
FedEx Freight segment
|
|
|
57
|
|
|
|
3
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|
FedEx Services segment
|
|
|
5
|
|
|
|
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|
Eliminations, corporate and other
|
|
|
(7
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
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$
|
2,384
|
|
|
$
|
120
|
|
|
|
|
|
|
|
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|
- 28 -
Overview
Our results for the first quarter of 2017 improved due to higher operating income at FedEx Express, as we continue to improve base yields while constraining expense growth, and at FedEx Ground, driven by
volume and yield growth. These factors were partially offset by higher network expansion costs and purchased transportation rates at FedEx Ground and lower LTL revenue per shipment at FedEx Freight.
In the first quarter of 2017 we incurred an aggregate $68 million ($45 million, net of tax, or $0.17 per diluted share) of integration expenses for TNT
Express and charges associated with TNT Expresss restructuring program called Outlook. The integration expenses are predominantly incremental costs directly associated with the integration of TNT Express, including professional fees,
advertising expenses, legal expenses and travel. Internal salaries, wages, and benefits costs are included only to the extent the individuals are assigned full time to integration activities. These costs were incurred primarily at FedEx
Corporation and FedEx Express. The identification of these costs as integration-related expenditures is subject to our disclosure controls and procedures. In addition, we incurred $28 million ($21 million, net of tax, or $0.08 per diluted
share) of increased intangible asset amortization as a result of this acquisition.
- 29 -
The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in
thousands) over the five most recent quarters (TNT Express volume trends are not presented, as it was acquired on May 25, 2016):
(1)
|
International
domestic average daily package volume represents our international intra-country operations in the FedEx Express Segment.
|
- 30 -
The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends over the
five most recent quarters (TNT yield trends are not presented, as it was acquired on May 25, 2016):
Revenue
Revenues increased 19% during the first quarter of 2017 due to the inclusion of TNT Express and improved performance at our other transportation segments. At FedEx Ground, revenues increased 12% due to
volume growth in our residential services and commercial business. Revenues at FedEx Express increased 1% due to base yields, package volume and freight pounds growth. FedEx Freight increased revenues 4% due to higher average daily LTL shipments,
which was partially offset by lower revenue per LTL shipment. Lower fuel surcharges had a negative impact on revenues at all of our transportation segments and unfavorable exchange rates negatively impacted revenues at FedEx Express in the first
quarter of 2017.
- 31 -
Operating Expenses
The following table compares operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the three-month periods ended August 31:
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|
|
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Percent of Revenue
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|
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2016
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|
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2015
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|
2016
|
|
|
2015
|
|
Operating expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
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|
$
|
5,311
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|
$
|
4,525
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|
|
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36.2
|
%
|
|
|
36.9
|
%
|
Purchased transportation
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|
|
3,240
|
|
|
|
2,344
|
|
|
|
22.1
|
|
|
|
19.1
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|
Rentals and landing fees
|
|
|
790
|
|
|
|
695
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|
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|
5.4
|
|
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|
5.6
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|
Depreciation and amortization
|
|
|
739
|
|
|
|
648
|
|
|
|
5.1
|
|
|
|
5.3
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|
Fuel
|
|
|
650
|
|
|
|
712
|
|
|
|
4.4
|
|
|
|
5.8
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|
Maintenance and repairs
|
|
|
598
|
|
|
|
548
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|
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|
4.1
|
|
|
|
4.5
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|
Other
|
|
|
2,071
|
|
|
|
1,663
|
|
|
|
14.1
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
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|
$
|
13,399
|
|
|
$
|
11,135
|
|
|
|
91.4
|
|
|
|
90.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,264
|
|
|
$
|
1,144
|
|
|
|
8.6
|
%
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin declined during the first quarter of 2017 due to the inclusion of TNT Express, which was partially
offset by the continued benefits from cost management initiatives at FedEx Express.
The inclusion of the TNT Express segment in our results
has impacted the year-over-year comparability of all our operating expenses. Purchased transportation costs increased 38% in the first quarter of 2017 due to the inclusion of TNT Express and higher volumes and increased rates at FedEx Ground.
Salaries and employee benefits expense increased 17% in the first quarter of 2017 due to the inclusion of TNT Express, volume growth and staffing to support network expansion at FedEx Ground and increased staffing at FedEx Freight. Other expenses
were 25% higher in the first quarter of 2017 primarily due to the inclusion of TNT Express results driven by outside service contracts.
- 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 9% in the first quarter of 2017 due to lower 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 first quarter of 2017 and 2016 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,
TNT 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 August 2016 was set
based on June 2016 fuel prices. In addition, the structure of the table that is used to determine our fuel surcharge at FedEx Express, TNT 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. As announced on September 19, 2016, FedEx Express and FedEx Ground fuel
surcharges will be adjusted on a weekly basis compared to the current monthly adjustment, effective February 6, 2017. On November 2, 2015, we updated the tables used to determine our fuel surcharges at FedEx Express, FedEx Ground and FedEx
Freight.
- 33 -
The net impact of fuel had a minimal impact to consolidated operating income in the first quarter of 2017,
as the year-over-year decrease in fuel prices were offset by decreased fuel surcharge revenue during the first quarter of 2017 versus the prior year.
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.
Other Income and Expense
Interest expense increased $50 million in the first
quarter of 2017 primarily due to our U.S. and European debt issuances in fiscal 2016. The annualized weighted average interest rate on long-term debt was 3.6% for the three months ended August 31, 2016, reflecting the favorable interest rates
obtained in recent debt offerings.
Income Taxes
Our effective tax rate was 37.4% for the first quarter of 2017 and 36.2% for the first quarter of 2016. The tax rate in the first quarter of 2017 increased due to the impact of local country losses
in some entities within TNT Express, for which no tax benefit could be recognized due to the uncertainty as to the utilization of these losses. Longer term, as the synergies from the TNT Express acquisition result in greater international profits,
we expect our effective tax rate to be lower than the rate in recent years.
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 2014 and 2015 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next
12 months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements. As of August 31, 2016, there were no material changes to our
liabilities for unrecognized tax benefits from May 31, 2016.
Business Acquisition
On May 25, 2016, we acquired TNT Express for 4.4 billion (approximately $4.9 billion). Cash acquired in the acquisition was approximately 250
million ($280 million). As of August 31, 2016, $36 million of shares associated with the transaction remained untendered, a decrease of $251 million since May 31, 2016. The remaining untendered shares are included in the Other
liabilities caption of our consolidated balance sheets. We funded the acquisition with proceeds from our April 2016 debt issuance and existing cash balances. The financial results of this business are included in the FedEx Express group and
TNT Express segment from the date of acquisition.
TNT Express collects, transports and delivers documents, parcels and freight to over 200
countries. This strategic acquisition broadens our portfolio of international transportation solutions with the combined strength of TNT Expresss strong European road platform and our strength in other regions globally, including North America
and Asia.
Given the timing and complexity of the acquisition, the presentation of TNT Express in our financial statements, including the
allocation of the purchase price, is preliminary and will likely change in future periods, perhaps significantly, as fair value estimates of the assets acquired and liabilities assumed are refined during the measurement period. We will complete our
purchase price allocation no later than the fourth quarter of 2017.
See Note 1 of the accompanying unaudited condensed consolidated financial
statements for further discussion of this acquisition.
- 34 -
Outlook
We expect revenue and earnings growth in 2017 prior to any mark-to-market (MTM) benefit plans adjustment. Our results in 2017 will continue to be negatively impacted by our TNT Express integration and
restructuring activities. Our expectations for earnings growth in the second quarter and the remainder of 2017 are dependent on key external factors, including fuel prices and the pace of improvement in the global economy.
Due to our TNT Express acquisition, 2017 will be a year of intensive integration activities and investments. We have owned TNT Express for approximately
120 days, and our integration activities are well underway. The integration process is complex as it spans over 200 countries and involves combining our pickup and delivery operations at a local level, our global and regional air and ground
networks, and our extensive operations, clearance, sales and back-office IT systems, and is expected to take four years to complete. In addition, as discussed in our Annual Report, TNT Express is undergoing a large restructuring program called
Outlook, which includes incurring certain restructuring costs. We estimate incurring costs of approximately $275 million in 2017 as a result of the TNT Express integration and Outlook restructuring programs. We currently expect the aggregate
integration program expense over the four years to be in the range of $700 million to $800 million. The timing and amount of integration-related expenses in any future period is subject to change as we implement our plans. Therefore, we
cannot currently predict if TNT Express will be accretive under accounting principles generally accepted in the United States in 2018.
We
believe that this acquisition presents significant opportunities for material synergies in pickup and delivery costs, air and ground network optimization, selling, general and administrative expenses, as well as revenue growth, and the benefit of a
lower tax rate. We are currently anticipating annual pre-tax synergies following the completion of the integration program in fiscal 2020 of $750 million. Given that the integration is complex and spans several years, how we achieve our target
may evolve over time as market conditions and other factors change.
Other Outlook Matters
. For details on key 2017 capital projects,
refer to the Liquidity Outlook section of this 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. For a description of these proceedings, see Note 8 of the accompanying unaudited condensed consolidated financial statements and the Independent Contractor
Model section of our FedEx Ground segment MD&A.
In the third quarter of 2016, FedEx Ground announced plans to implement the
Independent Service Provider (ISP) model throughout its entire U.S. pickup and delivery network. To date, service providers in 32 states are operating under, or transitioning to, the ISP model. The transition to the ISP model in the
remaining 18 states is expected to be completed by the end of 2020. The costs associated with these transitions will be recognized in the periods incurred and are not expected to be material to any future quarter.
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 retrospectively adopted the authoritative guidance issued by the Financial Accounting Standards Board
(FASB) to simplify the presentation of debt issuance costs. This new guidance requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt
liability, rather than as an asset. This new guidance had a minimal impact on our accounting and financial reporting.
On May 28, 2014,
the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States (and International
Financial Reporting Standards) which has been subsequently updated to defer the effective date of the new revenue recognition standard by one year. This standard will be effective for us beginning in fiscal 2019. The fundamental principles of the
new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to
- 35 -
customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five-step approach
for the recognition of revenue. Based on our preliminary assessment, we do not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems.
On February 25, 2016, the FASB issued the new lease accounting standard which requires lessees to put most leases on their balance sheets but recognize
the expenses on their income statements in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the
underlying asset for the lease term. Expense related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile
in which interest and amortization are presented separately in the income statement. We are currently evaluating the impact of this new standard on our financial reporting, but recognizing the lease liability and related right-of-use asset will
significantly impact our balance sheet. These changes will be effective for our fiscal year beginning June 1, 2019 (fiscal 2020), with a modified retrospective adoption method to the beginning of 2018.
In March 2016, the FASB issued an Accounting Standards Update to simplify the accounting for share-based payment transactions. The new guidance requires
companies to recognize the income tax effects of awards that vest or are settled as income tax expense or benefit in the income statement as opposed to additional paid-in capital as is current practice. The guidance also provides clarification of
the presentation of certain components of share-based awards in the statement of cash flows. Additionally, the guidance allows companies to make a policy election to account for forfeitures either upon occurrence or by estimating forfeitures. This
new standard will have minimal impact on our financial reporting. These changes will be effective for our fiscal year beginning June 1, 2017 (fiscal 2018).
We believe that no other new accounting guidance was adopted or issued during the first three months of 2017 that is relevant to the readers of our financial statements.
- 36 -
REPORTABLE SEGMENTS
FedEx Express, TNT 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 Group:
|
|
|
|
|
FedEx Express Segment
|
|
FedEx Express (express transportation)
|
|
|
FedEx Trade Networks (air and ocean freight forwarding, customs brokerage and cross-border enablement technology and
solutions)
|
|
|
FedEx SupplyChain Systems (logistics services)
|
|
|
TNT Express Segment
|
|
TNT Express (international express transportation, small-package ground delivery and freight
transportation)
|
|
|
FedEx Ground Segment
|
|
FedEx Ground (small-package ground delivery)
|
|
|
GENCO Distribution System, Inc. (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, customer service, technical support, billing and
collection services and back-office functions)
|
|
|
FedEx Office (document and business services and package acceptance)
|
FEDEX SERVICES SEGMENT
The 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.
- 37 -
Corporate and other includes corporate headquarters costs for executive officers and certain 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 TNT Express integration expenses
discussed above.
- 38 -
FEDEX EXPRESS GROUP
The FedEx Express Group consists of the combined results of the FedEx Express and TNT Express segments. As discussed in our Annual Report, we have combined these segments for financial reporting
discussion purposes into a collective business as a result of their management reporting structure. Furthermore, over time their operations will be integrated, therefore presenting a group view provides a basis for future year-over-year
comparison purposes. We acquired TNT Express in the fourth quarter of 2016, which has impacted the year-over-year comparability of revenue and operating income. The following table compares selected performance measures (dollars in millions)
for the three-month periods ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Percent
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express Segment
|
|
$
|
6,656
|
|
|
$
|
6,591
|
|
|
|
1
|
|
TNT Express Segment
|
|
|
1,804
|
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express Group
|
|
|
8,460
|
|
|
|
6,591
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express Segment
|
|
|
624
|
|
|
|
545
|
|
|
|
14
|
|
TNT Express Segment
|
|
|
(14
|
)
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express Group
|
|
$
|
610
|
|
|
$
|
545
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express Segment
|
|
|
9.4
|
%
|
|
|
8.3
|
%
|
|
|
110
|
bp
|
TNT Express Segment
|
|
|
(0.8
|
%)
|
|
|
|
|
|
|
NM
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express Group
|
|
|
7.2
|
%
|
|
|
8.3
|
%
|
|
|
(110
|
)bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express Group Results
In the first quarter of 2017, the FedEx Express Group delivered combined revenue of $8.5 billion, which represents an increase of 28% over the first quarter of 2016. This increase was due to the inclusion
of our recently acquired TNT Express segment, as well as improved base yields and package volume and freight pounds growth at our FedEx Express segment, which were partially offset by the negative impact of lower fuel surcharges and slightly
unfavorable exchange rates.
Operating income increased in the first quarter of 2017 within the FedEx Express group reflecting the continued
success of our FedEx Express segment, which was slightly offset by the TNT Express segment. The TNT Express segment reported an operating loss due to the continued execution of the Outlook restructuring program and amortization of intangible assets.
Operating margin of the group declined due to the inclusion of the TNT Express segment which was partially offset by the increase in the FedEx Express segment operating margin.
- 39 -
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 table compares revenues, operating expenses, operating expenses as a percent of revenue,
operating income and operating margin (dollars in millions) for the three-month periods ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Percent
Change
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Package:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box
|
|
$
|
1,722
|
|
|
$
|
1,658
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
U.S. overnight envelope
|
|
|
443
|
|
|
|
422
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
U.S. deferred
|
|
|
810
|
|
|
|
816
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. domestic package revenue
|
|
|
2,975
|
|
|
|
2,896
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International priority
|
|
|
1,434
|
|
|
|
1,464
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
International economy
|
|
|
584
|
|
|
|
574
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international export package revenue
|
|
|
2,018
|
|
|
|
2,038
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International domestic
(1)
|
|
|
320
|
|
|
|
327
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total package revenue
|
|
|
5,313
|
|
|
|
5,261
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Freight:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
616
|
|
|
|
573
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
International priority
|
|
|
360
|
|
|
|
350
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
International airfreight
|
|
|
27
|
|
|
|
36
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenue
|
|
|
1,003
|
|
|
|
959
|
|
|
|
5
|
|
|
|
Percent of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(2)
|
|
|
340
|
|
|
|
371
|
|
|
|
(8
|
)
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
6,656
|
|
|
|
6,591
|
|
|
|
1
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,588
|
|
|
|
2,523
|
|
|
|
3
|
|
|
|
38.9
|
|
|
|
38.3
|
|
Purchased transportation
|
|
|
557
|
|
|
|
601
|
|
|
|
(7
|
)
|
|
|
8.4
|
|
|
|
9.1
|
|
Rentals and landing fees
|
|
|
401
|
|
|
|
410
|
|
|
|
(2
|
)
|
|
|
6.0
|
|
|
|
6.2
|
|
Depreciation and amortization
|
|
|
348
|
|
|
|
347
|
|
|
|
|
|
|
|
5.2
|
|
|
|
5.3
|
|
Fuel
|
|
|
501
|
|
|
|
607
|
|
|
|
(17
|
)
|
|
|
7.5
|
|
|
|
9.2
|
|
Maintenance and repairs
|
|
|
357
|
|
|
|
345
|
|
|
|
3
|
|
|
|
5.4
|
|
|
|
5.2
|
|
Intercompany charges
|
|
|
462
|
|
|
|
445
|
|
|
|
4
|
|
|
|
6.9
|
|
|
|
6.7
|
|
Other
|
|
|
818
|
|
|
|
768
|
|
|
|
7
|
|
|
|
12.3
|
|
|
|
11.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,032
|
|
|
|
6,046
|
|
|
|
|
|
|
|
90.6
|
%
|
|
|
91.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
624
|
|
|
$
|
545
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
9.4
|
%
|
|
|
8.3
|
%
|
|
|
110
|
bp
|
|
|
|
|
|
|
|
|
(1)
|
International
domestic revenues represent our international intra-country operations.
|
(2)
|
Includes FedEx
Trade Networks and FedEx SupplyChain Systems.
|
- 40 -
The following table compares selected statistics (in thousands, except yield amounts) for the three-month
periods ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Percent
Change
|
|
Package Statistics
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily package volume (ADV):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box
|
|
|
1,255
|
|
|
|
1,210
|
|
|
|
4
|
|
U.S. overnight envelope
|
|
|
570
|
|
|
|
541
|
|
|
|
5
|
|
U.S. deferred
|
|
|
824
|
|
|
|
865
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. domestic ADV
|
|
|
2,649
|
|
|
|
2,616
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International priority
|
|
|
385
|
|
|
|
389
|
|
|
|
(1
|
)
|
International economy
|
|
|
178
|
|
|
|
176
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international export ADV
|
|
|
563
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International domestic
(2)
|
|
|
875
|
|
|
|
855
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ADV
|
|
|
4,087
|
|
|
|
4,036
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per package (yield):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. overnight box
|
|
$
|
21.11
|
|
|
$
|
21.08
|
|
|
|
|
|
U.S. overnight envelope
|
|
|
11.96
|
|
|
|
11.99
|
|
|
|
|
|
U.S. deferred
|
|
|
15.12
|
|
|
|
14.52
|
|
|
|
4
|
|
U.S. domestic composite
|
|
|
17.28
|
|
|
|
17.03
|
|
|
|
1
|
|
International priority
|
|
|
57.30
|
|
|
|
57.86
|
|
|
|
(1
|
)
|
International economy
|
|
|
50.48
|
|
|
|
50.18
|
|
|
|
1
|
|
International export composite
|
|
|
55.15
|
|
|
|
55.47
|
|
|
|
(1
|
)
|
International domestic
(2)
|
|
|
5.62
|
|
|
|
5.88
|
|
|
|
(4
|
)
|
Composite package yield
|
|
|
20.00
|
|
|
|
20.05
|
|
|
|
|
|
Freight Statistics
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily freight pounds:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
8,067
|
|
|
|
7,278
|
|
|
|
11
|
|
International priority
|
|
|
2,534
|
|
|
|
2,491
|
|
|
|
2
|
|
International airfreight
|
|
|
585
|
|
|
|
609
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average daily freight pounds
|
|
|
11,186
|
|
|
|
10,378
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per pound (yield):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1.18
|
|
|
$
|
1.21
|
|
|
|
(2
|
)
|
International priority
|
|
|
2.19
|
|
|
|
2.16
|
|
|
|
1
|
|
International airfreight
|
|
|
0.70
|
|
|
|
0.92
|
|
|
|
(24
|
)
|
Composite freight yield
|
|
|
1.38
|
|
|
|
1.42
|
|
|
|
(3
|
)
|
(1)
|
Package and
freight statistics include only the operations of FedEx Express.
|
(2)
|
International
domestic statistics represent our international intra-country operations.
|
FedEx Express Segment Revenues
FedEx Express segment revenues increased 1% in the first quarter of 2017 due to improved base yields and package volume and freight
pounds growth, which was largely offset by lower fuel surcharges and slightly unfavorable exchange rates. U.S. domestic average daily volumes increased 1% in the first quarter of 2017 driven by our overnight service offerings. U.S. domestic yields
increased 1% in the first quarter of 2017 due to higher base rates partially offset by lower fuel surcharges. Freight average daily pounds increased 8% in the first quarter of 2017 due to higher U.S. Postal Service volume. International export
yields decreased 1% in the first quarter of 2017 due to the negative impact of lower fuel surcharges and unfavorable exchange rates and were partially offset by higher base rates.
- 41 -
Our fuel surcharges are indexed to the spot price for jet fuel. Using this index, the U.S. domestic and
outbound fuel surcharge percentages and the international fuel surcharge percentages ranged as follows for the three-month periods ended August 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
U.S. Domestic and Outbound Fuel Surcharge:
|
|
|
|
|
|
|
|
|
Low
|
|
|
1.00
|
%
|
|
|
3.00
|
%
|
High
|
|
|
2.50
|
|
|
|
4.00
|
|
Weighted-average
|
|
|
1.83
|
|
|
|
3.34
|
|
|
|
|
International Fuel Surcharges:
|
|
|
|
|
|
|
|
|
Low
|
|
|
1.00
|
|
|
|
3.00
|
|
High
|
|
|
9.50
|
|
|
|
12.00
|
|
Weighted-average
|
|
|
5.69
|
|
|
|
8.82
|
|
On September 19, 2016, FedEx Express announced a 3.9% average list price increase for U.S. domestic, U.S. export and U.S.
import services and a change to the U.S. domestic dimensional weight divisor effective January 2, 2017. In addition, FedEx Express fuel surcharges will be adjusted on a weekly basis compared to the current monthly adjustment, effective February 6,
2017. On January 4, 2016, FedEx Express implemented a 4.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S. import services. In addition, effective November 2, 2015, FedEx Express updated certain tables used to
determine fuel surcharges.
FedEx Express Segment Operating Income
FedEx Express continued to increase operating income, which was up 14%, and grew operating margin 110 basis points in the first quarter of 2017 due to base yield improvement, volume growth and the
continued benefits of cost management initiatives. In addition, results in the first quarter of 2017 include approximately $22 million of TNT Express integration expenses. FedEx Express continues to manage network capacity to match customer demand,
reduce structural costs, modernize our fleet and drive productivity increases throughout its operations.
Salaries and employee benefits
increased 3% in the first quarter of 2017 due to merit increases and staffing to support volume growth. Other expenses increased 7% in the first quarter of 2017 primarily due to TNT Express integration expenses of approximately $15 million.
Purchased transportation expenses decreased 7% in the first quarter of 2017 driven by lower exchange rates.
Fuel expense decreased 17% during
the first quarter of 2017 due to lower fuel prices. See the Fuel section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results.
- 42 -
TNT EXPRESS SEGMENT
TNT Express collects, transports and delivers documents, parcels and freight on a day-definite or time-definite basis. Services are primarily classified by the speed, distance, weight and size of
shipments. Whereas the majority of shipments are between businesses, TNT Express also offers business-to-consumer services to select key customers. We acquired TNT Express in the fourth quarter of 2016. The following table presents revenues,
operating expenses, operating expenses as a percent of revenue, operating income, operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the three month period ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
Revenue
|
|
|
|
2016
|
|
|
2016
|
|
Revenues
|
|
$
|
1,804
|
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
521
|
|
|
|
28.9
|
|
Purchased transportation
|
|
|
768
|
|
|
|
42.5
|
|
Rentals and landing fees
|
|
|
86
|
|
|
|
4.8
|
|
Depreciation and amortization
|
|
|
72
|
|
|
|
4.0
|
|
Fuel
|
|
|
54
|
|
|
|
3.0
|
|
Maintenance and repairs
|
|
|
36
|
|
|
|
2.0
|
|
Other
|
|
|
281
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,818
|
|
|
|
100.8
|
%
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
Package:
|
|
|
|
|
|
|
|
|
|
|
|
Average daily packages
|
|
|
919
|
|
|
|
|
|
Revenue per package (yield)
|
|
$
|
25.97
|
|
|
|
|
|
|
|
|
Freight:
|
|
|
|
|
|
|
|
|
|
|
|
Average daily pounds
|
|
|
3,702
|
|
|
|
|
|
Revenue per pound (yield)
|
|
$
|
0.62
|
|
|
|
|
|
TNT Express fuel surcharges are indexed to the spot price for jet fuel. Using this index, the international fuel
surcharge percentages ranged as follows for the three-month periods ended August 31:
|
|
|
|
|
|
|
2016
|
|
International Fuel Surcharges:
|
|
|
|
|
Low
|
|
|
6.50
|
%
|
High
|
|
|
18.00
|
|
Weighted-average
|
|
|
12.70
|
|
- 43 -
TNT Express Segment Results
The TNT Express segment was formed in the fourth quarter of 2016, following the acquisition of TNT Express on May 25, 2016. Since the date of acquisition, TNT Express has focused on maintaining its
customer base while beginning integration activities with FedEx Express, as well as continuing to execute the Outlook program.
TNT Express
revenues were $1.8 billion for the first quarter of 2017. However, TNT Express reported an operating loss in the first quarter of 2017 due to intangible asset amortization of $28 million and $20 million of Outlook restructuring and integration
costs. Costs associated with the Outlook restructuring program are expected to continue through calendar year 2018 and integration costs are expected to continue through fiscal year 2020.
- 44 -
FEDEX GROUND SEGMENT
FedEx Ground service offerings include day-certain delivery to businesses in the U.S. and Canada and to 100% of U.S. residences. The following tables compare revenues, operating expenses, operating
expenses as a percent of revenue, operating income, operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the three-month periods ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Percent
Change
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Ground
|
|
$
|
3,891
|
|
|
$
|
3,460
|
|
|
|
12
|
|
|
|
Percent of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GENCO
|
|
|
399
|
|
|
|
370
|
|
|
|
8
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
4,290
|
|
|
|
3,830
|
|
|
|
12
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
766
|
|
|
|
653
|
|
|
|
17
|
|
|
|
17.9
|
|
|
|
17.0
|
|
Purchased transportation
|
|
|
1,692
|
|
|
|
1,527
|
|
|
|
11
|
|
|
|
39.4
|
|
|
|
39.9
|
|
Rentals
|
|
|
181
|
|
|
|
145
|
|
|
|
25
|
|
|
|
4.2
|
|
|
|
3.8
|
|
Depreciation and amortization
|
|
|
163
|
|
|
|
146
|
|
|
|
12
|
|
|
|
3.8
|
|
|
|
3.8
|
|
Fuel
|
|
|
2
|
|
|
|
3
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
0.1
|
|
Maintenance and repairs
|
|
|
76
|
|
|
|
69
|
|
|
|
10
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Intercompany charges
|
|
|
325
|
|
|
|
297
|
|
|
|
9
|
|
|
|
7.6
|
|
|
|
7.8
|
|
Other
|
|
|
475
|
|
|
|
453
|
|
|
|
5
|
|
|
|
11.1
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,680
|
|
|
|
3,293
|
|
|
|
12
|
|
|
|
85.8
|
%
|
|
|
86.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
610
|
|
|
$
|
537
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
14.2
|
%
|
|
|
14.0
|
%
|
|
|
20
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily package volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Ground
|
|
|
7,389
|
|
|
|
6,717
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per package (yield)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Ground
|
|
$
|
8.09
|
|
|
$
|
7.91
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
FedEx Ground Segment Revenues
FedEx Ground segment revenues increased 12% during the first quarter of 2017 due to volume and yield growth and were partially offset by lower fuel surcharges.
Average daily volume at FedEx Ground increased 10% during the first quarter of 2017 primarily due to continued growth in our residential services driven
by e-commerce, as well as our commercial business. FedEx Ground yield increased 2% during the first quarter of 2017 primarily due to higher base yields, which were partially offset by lower fuel surcharges.
The FedEx Ground fuel surcharge is based on a rounded average of the national U.S. on-highway average price for a gallon of diesel fuel, as published by
the Department of Energy. Our fuel surcharge percentages ranged as follows for the three-month periods ended August 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Low
|
|
|
3.30
|
%
|
|
|
4.00
|
%
|
High
|
|
|
4.00
|
|
|
|
4.50
|
|
Weighted-average
|
|
|
3.70
|
|
|
|
4.30
|
|
On September 19, 2016, FedEx Ground announced a 4.9% average list price increase and a change to the U.S. domestic
dimensional weight divisor effective January 2, 2017. In addition, FedEx Ground fuel surcharges will be adjusted on a weekly basis compared to the current monthly adjustment, effective February 6, 2017. On January 4, 2016, FedEx Ground implemented a
4.9% increase in average list price. In addition, on November 2, 2015, FedEx Ground increased surcharges for shipments that exceed the published maximum weight or dimensional limits and updated certain tables used to determine fuel surcharges.
- 45 -
FedEx Ground Segment Operating Income
FedEx Ground segment operating income and margin increased during the first quarter of 2017 due to volume and yield growth and lower self-insurance
costs. These factors were partially offset by higher operational costs due to continued network expansion and higher purchased transportation rates.
Purchased transportation expense increased 11% in the first quarter of 2017 due to higher volumes and increased rates. Salaries and employee benefits expense increased 17% during the first quarter of 2017
due to volume growth and additional staffing to support network expansion. Rentals expense increased 25% and depreciation and amortization expense increased 12% in the first quarter of 2017 due to network expansion.
Independent Contractor Model
FedEx Ground is involved in numerous lawsuits and other proceedings (such as state tax or other administrative challenges) where the classification of
its independent contractors is at issue. During the third quarter of 2016, we reached agreements in principle to settle all of the 19 cases on appeal in the multidistrict litigation. These cases involve a contractor model which FedEx Ground has not
operated since 2011. 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. We will continue to vigorously defend ourselves in these
proceedings and continue to 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. For a description
of these proceedings, see Note 8 of the accompanying unaudited condensed consolidated financial statements.
For additional information on the
FedEx Ground Independent Service Provider model, see Part 1, Item 1 of our Annual Report under the caption Independent Contractor Model and Other Outlook Matters under Consolidated Results of this MD&A.
- 46 -
FEDEX FREIGHT SEGMENT
FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following table compares revenues, operating expenses,
operating expenses as a percent of revenue, operating income, operating margin (dollars in millions) and selected statistics for the three-month periods ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percent of Revenue
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
1,658
|
|
|
$
|
1,601
|
|
|
|
4
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
772
|
|
|
|
721
|
|
|
|
7
|
|
|
|
46.6
|
|
|
|
45.0
|
|
Purchased transportation
|
|
|
259
|
|
|
|
251
|
|
|
|
3
|
|
|
|
15.6
|
|
|
|
15.7
|
|
Rentals
|
|
|
30
|
|
|
|
43
|
|
|
|
(30
|
)
|
|
|
1.8
|
|
|
|
2.7
|
|
Depreciation and amortization
|
|
|
64
|
|
|
|
59
|
|
|
|
8
|
|
|
|
3.9
|
|
|
|
3.7
|
|
Fuel
|
|
|
91
|
|
|
|
102
|
|
|
|
(11
|
)
|
|
|
5.5
|
|
|
|
6.4
|
|
Maintenance and repairs
|
|
|
54
|
|
|
|
53
|
|
|
|
2
|
|
|
|
3.2
|
|
|
|
3.3
|
|
Intercompany charges
|
|
|
126
|
|
|
|
113
|
|
|
|
12
|
|
|
|
7.6
|
|
|
|
7.1
|
|
Other
|
|
|
127
|
|
|
|
127
|
|
|
|
|
|
|
|
7.7
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,523
|
|
|
|
1,469
|
|
|
|
4
|
|
|
|
91.9
|
%
|
|
|
91.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
135
|
|
|
$
|
132
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
8.1
|
%
|
|
|
8.2
|
%
|
|
|
(10
|
)bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily LTL shipments (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priority
|
|
|
72.5
|
|
|
|
66.5
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
Economy
|
|
|
32.3
|
|
|
|
30.7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average daily LTL shipments
|
|
|
104.8
|
|
|
|
97.2
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weight per LTL shipment (lbs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priority
|
|
|
1,176
|
|
|
|
1,198
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Economy
|
|
|
1,098
|
|
|
|
1,168
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Composite weight per LTL shipment
|
|
|
1,152
|
|
|
|
1,189
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTL revenue per shipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priority
|
|
$
|
217.50
|
|
|
$
|
223.26
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Economy
|
|
|
255.46
|
|
|
|
269.33
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Composite LTL revenue per shipment
|
|
$
|
229.20
|
|
|
$
|
237.81
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTL revenue per hundredweight
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priority
|
|
$
|
18.49
|
|
|
$
|
18.63
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Economy
|
|
|
23.26
|
|
|
|
23.06
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Composite LTL revenue per hundredweight
|
|
$
|
19.89
|
|
|
$
|
20.01
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
FedEx Freight Segment Revenues
FedEx Freight segment revenues increased 4% during the first quarter of 2017 due to higher average daily LTL shipments, which was partially offset by lower revenue per shipment. Average daily LTL
shipments increased 8% in the first quarter of 2017 primarily due to continued increased volumes from small and mid-sized customers. LTL revenue per shipment decreased 4% in the first quarter of 2017 due to lower fuel surcharges and lower weight per
shipment.
- 47 -
The indexed LTL fuel surcharge is based on the average of the national U.S. on-highway average price for a
gallon of diesel fuel, as published by the Department of Energy. The indexed LTL fuel surcharge percentages ranged as follows for the three-month periods ended August 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Low
|
|
|
20.20
|
%
|
|
|
21.40
|
%
|
High
|
|
|
20.80
|
|
|
|
23.10
|
|
Weighted-average
|
|
|
20.50
|
|
|
|
22.40
|
|
On September 19, 2016, FedEx Freight announced a 4.9% average increase in certain U.S. and other shipping rates effective
January 2, 2017. On January 4, 2016, FedEx Freight implemented zone-based pricing on U.S. and other LTL shipping rates. Also, on January 4, 2016, FedEx Freight implemented a 4.9% average increase in certain U.S. and other shipping rates.
FedEx Freight Segment Operating Income
FedEx Freight segment operating income increased 2% primarily due to higher volumes. This increase was partially offset by lower LTL revenue per shipment, which also drove a decline in operating margin.
Salaries and employee benefits increased 7% in the first quarter of 2017 due to higher staffing levels to support volume growth. Purchased transportation expense increased 3% in the first quarter of 2017 due to higher volumes. Rentals decreased 30%
in the first quarter of 2017 driven primarily by a charge related to a facility closure in the prior year and a credit related to the favorable sublease of the facility in the current year.
- 48 -
FINANCIAL CONDITION
LIQUIDITY
Cash and cash equivalents totaled $3.0 billion at August 31, 2016,
compared to $3.5 billion at May 31, 2016. The following table provides a summary of our cash flows for the three-month periods ended August 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
715
|
|
|
$
|
692
|
|
Noncash charges and credits
|
|
|
1,008
|
|
|
|
749
|
|
Changes in assets and liabilities
|
|
|
(752
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
971
|
|
|
|
1,241
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,215
|
)
|
|
|
(1,209
|
)
|
Proceeds from asset dispositions and other
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(1,206
|
)
|
|
|
(1,199
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(12
|
)
|
|
|
(15
|
)
|
Proceeds from stock issuances
|
|
|
40
|
|
|
|
46
|
|
Excess tax benefit on the exercise of stock options
|
|
|
2
|
|
|
|
6
|
|
Dividends paid
|
|
|
(106
|
)
|
|
|
(71
|
)
|
Purchase of treasury stock
|
|
|
(222
|
)
|
|
|
(190
|
)
|
Other, net
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(313
|
)
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
3
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(545
|
)
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
2,989
|
|
|
$
|
3,543
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities decreased $270 million in the first quarter of 2017 predominantly due to higher
variable compensation payouts and higher pension contributions. Capital expenditures during the first three months of 2017 were higher than capital expenditures in the first three months of 2016, primarily due to increased spending for sort facility
expansion at FedEx Ground. See Capital Resources for a discussion of capital expenditures during 2017 and 2016.
On January
26, 2016, our Board of Directors approved a share repurchase program of up to 25 million shares. During the first quarter of 2017, we repurchased 1.4 million shares of FedEx common stock at an average price of $160.18 per share for a total of $222
million. As of August 31, 2016, 17.6 million shares remained under the share repurchase authorization. Shares under the current repurchase program may be repurchased from time to time in the open market or in privately negotiated transactions. The
timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of FedEx common stock and general market conditions. No time limit was set for the completion of the program, and the
program may be suspended or discontinued at any time.
CAPITAL RESOURCES
Our operations are capital intensive, characterized by significant investments in aircraft, vehicles, technology, facilities, and package-handling and
sort equipment. The amount and timing of capital additions depend on various factors, including pre-existing contractual commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services,
geographical expansion of services, availability of satisfactory financing and actions of regulatory authorities.
- 49 -
The following table compares capital expenditures by asset category and reportable segment for the
three-month periods ended August 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Change
|
|
Aircraft and related equipment
|
|
$
|
592
|
|
|
$
|
623
|
|
|
$
|
(31
|
)
|
|
|
(5
|
)
|
Package handling and ground support equipment
|
|
|
197
|
|
|
|
185
|
|
|
|
12
|
|
|
|
6
|
|
Vehicles
|
|
|
149
|
|
|
|
218
|
|
|
|
(69
|
)
|
|
|
(32
|
)
|
Information technology investments
|
|
|
159
|
|
|
|
74
|
|
|
|
85
|
|
|
|
115
|
|
Facilities and other
|
|
|
118
|
|
|
|
109
|
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
1,215
|
|
|
$
|
1,209
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedEx Express segment
|
|
|
775
|
|
|
|
834
|
|
|
|
(59
|
)
|
|
|
(7
|
)
|
TNT Express segment
|
|
|
56
|
|
|
|
|
|
|
|
56
|
|
|
|
NM
|
|
FedEx Ground segment
|
|
|
237
|
|
|
|
221
|
|
|
|
16
|
|
|
|
7
|
|
FedEx Freight segment
|
|
|
45
|
|
|
|
63
|
|
|
|
(18
|
)
|
|
|
(29
|
)
|
FedEx Services segment
|
|
|
102
|
|
|
|
91
|
|
|
|
11
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
1,215
|
|
|
$
|
1,209
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures during the first quarter of 2017 were higher than the prior-year period primarily due to increased
spending at FedEx Ground driven by sort facility expansion, which includes information technology investments. Aircraft and related equipment purchases at FedEx Express during the first quarter of 2017 included the delivery of six Boeing
767-300 Freighter (B767F) aircraft, as well as the modification of certain aircraft before being placed into service.
LIQUIDITY OUTLOOK
We believe
that our cash and cash equivalents, cash flow from operations and available financing sources are adequate to meet our liquidity needs, including working capital, capital expenditure requirements and debt payment obligations. Our cash and cash
equivalents balance at August 31, 2016 includes $728 million of cash in offshore jurisdictions associated with our permanent reinvestment strategy. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability
to meet our domestic debt or working capital obligations. Although we expect higher capital expenditures in 2017, we anticipate that our cash flow from operations will be sufficient to fund these expenditures. Historically, we have been
successful in obtaining unsecured financing, from both domestic and international sources, although the marketplace for such investment capital can become restricted depending on a variety of economic factors.
Our capital expenditures are expected to be approximately $5.6 billion in 2017 and include spending for sort facility expansion, primarily at FedEx
Ground, aircraft and aircraft-related equipment at FedEx Express, and vehicle replacement at all our transportation segments. This capital expenditure forecast includes TNT Express. We invested $592 million in aircraft and aircraft-related equipment
in the first quarter of 2017 and expect to invest an additional $1 billion for aircraft and aircraft-related equipment during the remainder of 2017.
We have a shelf registration statement filed with the Securities and Exchange Commission (SEC) that allows us to sell, in one or more future offerings, any combination of our unsecured debt
securities and common stock.
We have a five-year $1.75 billion revolving credit facility that expires in November 2020. See Note 3 of the
accompanying unaudited condensed consolidated financial statements for a description of the term and significant covenants of our revolving credit facility.
- 50 -
In September 2016, we made $250 million in required contributions to our tax-qualified U.S. domestic pension
plans (U.S. Pension Plans). Our U.S. Pension Plans have ample funds to meet expected benefit payments. For the remainder of 2017, we have $616 million in required contributions to our U.S. Pension Plans.
Standard & Poors has assigned us a senior unsecured debt credit rating of BBB and commercial paper rating of A-2 and a ratings outlook of
stable. Moodys Investors Service has assigned our unsecured debt a credit rating at Baa2 and affirmed our commercial paper rating of P-2 and a ratings outlook of stable. If our credit ratings drop, our interest
expense may increase. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt credit ratings drop below investment grade, our access to financing may
become limited.
CONTRACTUAL CASH OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following table sets forth a summary of our contractual cash obligations as of August 31, 2016. Certain of these contractual obligations are
reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. Except for the current portion of interest on long-term debt, this table does not include
amounts already recorded in our balance sheet as current liabilities at August 31, 2016. We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the United
States. These contingent liabilities are not included in the table below. We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, qualified and nonqualified pension and postretirement healthcare
plan liabilities and other self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table below due to the absence of scheduled maturities. Accordingly, this table is not meant to represent a
forecast of our total cash expenditures for any of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year (Undiscounted)
(in
millions)
|
|
|
|
2017
(1)
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
1,927
|
|
|
$
|
2,302
|
|
|
$
|
2,018
|
|
|
$
|
1,736
|
|
|
$
|
1,533
|
|
|
$
|
8,487
|
|
|
$
|
18,003
|
|
Non-capital purchase obligations and other
|
|
|
448
|
|
|
|
459
|
|
|
|
312
|
|
|
|
221
|
|
|
|
134
|
|
|
|
104
|
|
|
|
1,678
|
|
Interest on long-term debt
|
|
|
343
|
|
|
|
497
|
|
|
|
496
|
|
|
|
434
|
|
|
|
422
|
|
|
|
8,234
|
|
|
|
10,426
|
|
Quarterly contributions to our U.S. Pension Plans
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft and aircraft-related capital commitments
|
|
|
719
|
|
|
|
1,767
|
|
|
|
1,717
|
|
|
|
1,925
|
|
|
|
1,480
|
|
|
|
4,191
|
|
|
|
11,799
|
|
Other capital purchase obligations
|
|
|
49
|
|
|
|
4
|
|
|
|
4
|
|
|
|
1
|
|
|
|
1
|
|
|
|
8
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
8
|
|
|
|
3
|
|
|
|
1,313
|
|
|
|
961
|
|
|
|
|
|
|
|
11,580
|
|
|
|
13,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,110
|
|
|
$
|
5,032
|
|
|
$
|
5,860
|
|
|
$
|
5,278
|
|
|
$
|
3,570
|
|
|
$
|
32,604
|
|
|
$
|
56,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash obligations for the remainder of 2017.
|
Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often
represent authorizations to purchase rather than binding agreements. See Note 7 of the accompanying unaudited condensed consolidated financial statements for more information.
Operating Activities
The amounts reflected in the table above for operating leases
represent future minimum lease payments under noncancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at August 31, 2016.
- 51 -
Included in the table above within the caption entitled Non-capital purchase obligations and
other is our estimate of the current portion of the liability ($1 million) for uncertain tax positions and amounts for purchase obligations that represent noncancelable agreements to purchase goods or services that are not capital
related. Such contracts include those for printing and advertising and promotions contracts. We cannot reasonably estimate the timing of the long-term payments or the amount by which the liability for uncertain tax positions will increase
or decrease over time; therefore, the long-term portion of the liability for uncertain tax positions ($48 million) is excluded from the table.
The amounts reflected in the table above for interest on long-term debt represent future interest payments due on our long-term debt.
We had $392 million in deposits and progress payments as of August 31, 2016 on aircraft purchases and other planned aircraft-related transactions.
Investing Activities
The
amounts reflected in the table above for capital purchase obligations represent noncancelable agreements to purchase capital-related equipment. Such contracts include those for certain purchases of aircraft, aircraft modifications, vehicles,
facilities, computers and other equipment.
On June 10, 2016, FedEx Express exercised options to acquire six additional B767F aircraft for
delivery in 2019 and 2020.
Financing Activities
The amounts reflected in the table above for long-term debt represent future scheduled payments on our long-term debt. For the remainder of 2017, we have no scheduled principal debt payments.
Additional information on amounts included within the operating, investing and financing activities captions in the table above can be found
in our Annual Report.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make significant judgments and estimates to develop amounts
reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to
evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a complex, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing
circumstances and new or better information.
GOODWILL.
Goodwill is tested for impairment between annual tests whenever events or
circumstances make it more likely than not that the fair value of a reporting unit has fallen below its carrying value. We do not believe there has been any change of events or circumstances that would indicate that a reevaluation of the goodwill of
our reporting units is required as of August 31, 2016, nor do we believe the goodwill of our reporting units is at risk of failing impairment testing. For additional details on goodwill impairment testing, refer to Note 1 of our Annual Report.
Information regarding our critical accounting estimates can be found in our Annual Report, including Note 1 to the financial statements
therein. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm.
- 52 -
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including (but not limited to) those contained in Outlook, Liquidity, Capital Resources, Liquidity Outlook,
Contractual Cash Obligations and Critical Accounting Estimates, and the Financing Arrangements, General, Retirement Plans, and Contingencies notes to the consolidated financial
statements, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, objectives, future performance and
business. Forward-looking statements include those preceded by, followed by or that include the words may, could, would, should, will, believes, expects,
anticipates, plans, estimates, targets, projects, intends or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may
differ materially from those contemplated (expressed or implied) by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:
|
|
|
economic conditions in the global markets in which we operate;
|
|
|
|
significant changes in the volumes of shipments transported through our networks, customer demand for our various services or the prices we obtain for
our services;
|
|
|
|
damage to our reputation or loss of brand equity;
|
|
|
|
our ability to successfully integrate the businesses and operations of FedEx Express and TNT Express in the expected time frame;
|
|
|
|
a significant data breach or other disruption to our technology infrastructure, which can adversely affect our reputation, business or results of
operations;
|
|
|
|
the price and availability of jet and vehicle fuel;
|
|
|
|
our ability to manage our cost structure for capital expenditures and operating expenses, and match it to shifting and future customer volume levels;
|
|
|
|
the impact of intense competition on our ability to maintain or increase our prices (including our fuel surcharges in response to fluctuating fuel
prices) or to maintain or grow our market share;
|
|
|
|
our ability to effectively operate, integrate, leverage and grow acquired businesses, and to continue to support the value we allocate to these
acquired businesses, including their goodwill;
|
|
|
|
our ability to maintain good relationships with our employees and prevent attempts by labor organizations to organize groups of our employees, which
could significantly increase our operating costs and reduce our operational flexibility;
|
|
|
|
the impact of costs related to (i) challenges to the status of FedEx Grounds owner-operators as independent contractors and direct employers of
drivers providing services on their behalf, and (ii) any related changes to our relationship with these owner-operators and their drivers;
|
- 53 -
|
|
|
the impact of the United Kingdoms vote to leave the European Union;
|
|
|
|
any impact on our business from disruptions or modifications in service by, or changes in the business of, the U.S. Postal Service, which is a
significant customer and vendor of FedEx;
|
|
|
|
the impact of any international conflicts or terrorist activities on the United States and global economies in general, the transportation industry or
us in particular, and what effects these events will have on our costs or the demand for our services;
|
|
|
|
any impacts on our businesses resulting from new domestic or international government laws and regulation, including regulatory actions affecting
global aviation or other transportation rights, increased air cargo and other security or safety requirements, and tax, accounting, trade (such as protectionist measures enacted in response to weak economic conditions), labor (such as card-check
legislation, joint employment standards or changes to the Railway Labor Act affecting FedEx Express employees), environmental (such as global climate change legislation) or postal rules;
|
|
|
|
adverse weather conditions or localized natural disasters in key geographic areas, such as earthquakes, volcanoes, and hurricanes, which can disrupt
our electrical service, damage our property, disrupt our operations, increase our fuel costs and adversely affect our shipment levels;
|
|
|
|
increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare
benefits;
|
|
|
|
the increasing costs of compliance with federal, state and foreign governmental agency mandates (including the Foreign Corrupt Practices Act and the
U.K. Bribery Act) and defending against inappropriate or unjustified enforcement or other actions by such agencies;
|
|
|
|
changes in foreign currency exchange rates, especially in the euro, Chinese yuan, British pound, Brazilian real, Canadian dollar and Mexican peso,
which can affect our sales levels and foreign currency sales prices;
|
|
|
|
market acceptance of our new service and growth initiatives;
|
|
|
|
any liability resulting from and the costs of defending against class-action litigation, such as wage-and-hour, joint employment, and discrimination
and retaliation claims, and any other legal or governmental proceedings;
|
|
|
|
our ability to achieve the benefits of any ongoing or future profit improvement initiatives;
|
|
|
|
the outcome of future negotiations to reach new collective bargaining agreements including with the union that represents the pilots of FedEx
Express (the current pilot agreement is scheduled to become amendable in November 2021) and with the union that was elected in 2015 to represent drivers at four FedEx Freight facilities;
|
|
|
|
the impact of technology developments on our operations and on demand for our services, and our ability to continue to identify and eliminate
unnecessary information technology redundancy and complexity throughout the organization;
|
|
|
|
governmental underinvestment in transportation infrastructure, which could increase our costs and adversely impact our service levels due to traffic
congestion or sub-optimal routing of our vehicles and aircraft;
|
|
|
|
widespread outbreak of an illness or any other communicable disease, or any other public health crisis;
|
- 54 -
|
|
|
availability of financing on terms acceptable to us and our ability to maintain our current credit ratings, especially given the capital intensity of
our operations; and
|
|
|
|
other risks and uncertainties you can find in our press releases and SEC filings, including the risk factors identified under the heading Risk
Factors in Managements Discussion and Analysis of Results of Operations and Financial Condition in our Annual Report, as updated by our quarterly reports on Form 10-Q.
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As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking
statement is neither a prediction nor a guarantee of future events or circumstances and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date
of this report. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
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