FEDEX ANNUAL REPORT 2016
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FEDEX CORPORATION
942 South Shady Grove Road
Memphis, Tennessee 38120
fedex.com
FedEx is flying higher.
FY16 once again
showcased the
successful strategy of
managing our portfolio
of services to achieve
outstanding growth.
$
50+
BILLION
FY16 REVENUE
In FY16 FedEx
Corporation revenue
exceeded $50 billion
for the first time.
$
1.6
BILLION PROFIT
IMPROVEMENT
PLAN
9%
INCREASE IN FEDEX
GROUND PACKAGE
VOLUME
FedEx Express
achieved its profit
improvement goal
outlined in FY13.
Average daily volume,
driven by growth in
e-commerce, grew
9 percent year over year.
ACQUISITIONS
FedEx acquired TNT
Express for €4.4 billion
on schedule, and the
integration processes
are well underway at
GENCO and FedEx
CrossBorder (formerly
Bongo International).
PRICING
LEADERSHIP
Strategic actions include
general rate increases,
higher pricing on larger
packages and fuel
surcharge adjustments.
PAY FOR
PERFORMANCE
Most team members
earned higher variable
incentive compensation
year over year.
On the cover: Boeing 767-300 Freighters are more fuel-efficient with lower emissions and lower unit operating costs than the aircraft they
are replacing. Modernizing the FedEx Express fleet with these new aircraft is improving margins and adding flexibility to our domestic
and international operations.
THE ROAD
AHEAD: PASSION
FOR SAFETY
The bright lights of Las Vegas don’t
distract FedEx Freight City Driver Rebecca
Parker. With an eight-year safe driving
record at FedEx Freight, she is focused
on the road — and a job she loves.
“Ten years ago I applied to FedEx and
couldn’t have asked for a better job.
It’s perfect for a single mom. I have
full benefits, can support my kids, and
I’m home at night and on holidays. I’m
always telling other moms that FedEx has
a free truck driving training program.
“I also use my FedEx Freight trailer to
help local nonprofits deliver everything
from back-to-school supplies to food
for the homeless when our location
participates in these drives. I love that the
company gives us the tools to make a real
impact in our communities.
“The one thing I believe in wholeheartedly
is safety. As a certified Road Test Observer
and Road Test Coach, I train new team
members to observe FedEx driver safety
guidelines and learn safe habits. I love
that FedEx puts safety first above all for
its drivers, its communities and through
the programs that it supports.”
— Rebecca Parker,
FedEx Freight City Driver
TO OUR SHAREOWNERS,
In FY16, FedEx reached new heights as one of the
world’s unique enterprises. Through disciplined strategy
and execution, our shareowners, team members and
customers benefited greatly from new solutions and
higher revenues and profits, despite an environment
of low economic growth.
> In FY13, we stated we would meet the FedEx
Express profit improvement goal ‑– to exit FY16 with
an annual run rate of $1.6 billion in additional operating
profit ‑– and we did it. Moreover, we believe FedEx
Express profitability and productivity will continue
to increase for years to come, assuming continued
modest growth in the U.S. and global economies.
> We announced we would acquire the Dutch delivery
company TNT Express in the first half of calendar
2016. We officially acquired the company on May 25.
> We committed to continue improving FedEx
Corporation’s margins, earnings per share, cash flows
and returns over the long term. We successfully
advanced each of these goals in FY16.
To achieve our stated mission to produce superior
financial returns for shareowners, we manage our
operating companies as a portfolio of solutions.
Customers as well as FedEx benefit: Ninety‑six percent
of U.S. revenue is generated by customers using two
or more of our transportation companies ‑– FedEx
Express, FedEx Ground and FedEx Freight. About
77 percent of U.S. revenue comes from customers
using all three transportation companies. Our customer
base is large and diverse by design. No single customer
represents more than 3 percent of our total revenue.
Our investments are paying off, and we expect
positive financial momentum to continue into FY17.
While we integrate our acquisitions, we’ll continue our
successful investments in FedEx Express aircraft fleet
modernization and expand the capacity of the highly
automated FedEx Ground network. We expect these
major programs will have high returns, which are
integral to expanding corporate margins. It is important
to stress that we manage our operating companies
MORE > fedex.com/AnnualReport2016 1
Frederick W. Smith
Chairman, President and CEO
MISSION
FedEx Corporation will
produce superior financial
returns for its shareowners
by providing high value-added
logistics, transportation and
related business services
through focused operating
companies. Customer
requirements will be met in
the highest quality manner
appropriate to each market
segment served. FedEx will
strive to develop mutually
rewarding relationships
with its employees, partners
and suppliers. Safety will
be the first consideration
in all operations. Corporate
activities will be conducted
to the highest ethical and
professional standards.
LETTER FROM THE CHAIRMAN
collaboratively to achieve overall results for FedEx Corporation.
This means we do not necessarily maximize the profitability
of each FedEx unit every year. And because our operating
companies compete collectively as a portfolio, we are often
funding initiatives that may incur costs for an operating
company in the near term for long‑term benefit to the
enterprise as a whole.
From FY14 through FY16, FedEx returned more than
$8.8 billion to shareowners through our repurchase of more
than 63 million shares and increased dividends by at least
25 percent annually. Our strong balance sheet, profit and cash
flow performance gave us the flexibility to sustain stock
repurchase programs while continuing to execute our strategic
growth initiatives.
TRANSFORMATIVE ACQUISITIONS
The TNT Express acquisition broadens our global portfolio and
gives FedEx a global competitive advantage that will deliver
long‑term shareowner value. As we integrate TNT Express, the
density of its powerful pan‑European surface transportation
network will make our operations more productive and efficient.
Combining TNT Express with our intra‑European and interconti‑
nental FedEx Express services lowers our costs to serve the
market and puts us front and center to profit from the growth
of European commerce.
After acquiring TNT Express, we were able to hit the ground
running thanks to our detailed integration planning process,
and we’re confident we’ll successfully integrate TNT Express
with FedEx Express. We expect TNT Express to be accretive to
earnings in FY18. Longer term, we anticipate this acquisition will
generate substantial improvements in revenue and earnings.
We are already reaping the rewards of our acquisitions in FY15
of GENCO, part of our FedEx Ground segment, and Bongo
International, recently rebranded as FedEx CrossBorder, a unit
of FedEx Trade Networks. Thanks to complementary FedEx
and GENCO transport management logistics services, we’re
successfully working with customers to cross‑sell our
capabilities, including GENCO’s unmatched expertise in returns.
Retailers highly value this service, because reverse logistics
costs for consumer goods average 8 percent of total sales.
2 MORE > fedex.com/AnnualReport2016
LETTER FROM THE CHAIRMAN TNT EXPRESS:
STRATEGIC
INTEGRATION
TNT Express is the largest acquisition
in FedEx history, and its benefits are
expected to be equally significant.
The addition will transform our global
portfolio of solutions, particularly in
Europe, substantially lower our cost
to serve our European markets by
increasing density in our pickup and
delivery operations and accelerate our
global growth.
To help us realize the value of the
transaction, we’re applying our
ACQUIRE process that we’ve refined
over many acquisitions. It’s a cross-
functional management system used
to complete a transaction, integrate
a new company and help us obtain
the financial results we intend. Today
more than 20 FedEx and TNT Express
functional and geographical teams
are working together to ensure a
smooth integration and long-term
strategic success.
€
6.9
BILLION: 2015 TNT EXPRESS
REVENUE
3
The TNT Express acquisition elevates FedEx in air export
market rankings.
FedEx
(with TNT Express)
UPS
DHL
United States
Canada
Europe
Asia Pacific
Latin America
1
1
2
2
2
2
2
3
3
3
3
3
1
1
1
Rankings based on CY2015 company-reported data. FedEx and UPS estimates reported
as shipper-based. DHL and TNT Express reported as payor-based. For U.S. air export,
shipper-based estimates were used. Regional estimates are made based on FedEx region
definitions.
Source: FedEx Market Development.
LETTER FROM THE CHAIRMAN FedEx CrossBorder is expanding services to
merchants in China and Japan this year, enabling
shoppers to purchase goods internationally through
a seamless checkout and delivery process that takes
the guesswork out of what the total landed cost
will be, including international duties and taxes.
OUTSTANDING TEAM MEMBERS
The 2015 peak holiday season was historic by many
measures, and our team members responded to the
challenge by delivering our Purple Promise, which
simply states: “I will make every FedEx experience
outstanding.” They handled record demand, delivering
more than 25 million packages per day on multiple
days, more than double our average daily volume.
Their stellar performance and close collaboration
with our customers helped us achieve holiday season
service levels that were among the highest ever,
despite higher‑than‑expected volumes and difficult
weather in some locations.
Thanks to our team members’ commitment to the
customers and communities we serve, we were
proud to be once again recognized by FORTUNE
magazine as one of the world’s 10 most‑admired
companies and No. 1 in the delivery industry.
SUPERIOR NETWORKS
Our unrivaled transportation networks provide
competitive advantages for our customers. FedEx
Express is the world’s largest express transportation
company, with an unmatched global flight system.
FedEx Ground continues to increase market
share and is faster to more U.S. locations than its
competitors. FedEx Freight is the less‑than‑truckload
(LTL) market leader with similar transit advantages in
its sector. FedEx Office provides unique digital print
and package services. Given these facts, we believe
reports warning of possible near‑term disruptions to
the package shipping industry by new local delivery
business models to be fantastical, devoid of in‑depth
knowledge of large logistics systems and the markets
FedEx serves.
Our dense, ubiquitous networks create fundamental
scale and scope advantages that aren’t easily
replicated. Nearly every business and person on
the planet can order an item online and have it
affordably transported and delivered door‑to‑door
by FedEx across borders within one or two business
days, customs cleared. For e‑commerce to continue
to grow rapidly, our efficient and reliable global
transportation solutions are vital.
FedEx Express. Profit improvement initiatives have
been successful, and we plan to continue increasing
margins. For example, every aircraft we replace with
a new Boeing 767‑300 Freighter adds millions of
dollars annually to profits because the new planes
use 30 percent less fuel, are more reliable and require
less maintenance expense than the older planes
they replace.
FedEx Ground. We’ve nearly tripled our ground
market share during the last two decades and
continue to widen our competitive advantage by
investing in highly automated facilities that can quickly
process growing volumes of packages. To gain even
more operational efficiencies and flexibility, we
combined our FedEx Ground and FedEx SmartPost
networks and are introducing new routing technolo‑
gies to make our deliveries more efficient, particularly
in residential areas.
FedEx Freight. We’re enthusiastic about our efforts
to extend our market‑leading position by reshaping
the LTL market, just like FedEx has done in both the
express and ground segments. We are connecting
customers with more convenient, parcel‑like shipping
solutions, such as zone‑based pricing and the recently
introduced FedEx Freight box, a simplified way to ship
LTL that increases security and shipment protection.
To more accurately cost and price LTL shipments, we
continue to expand our use of dimensional scanners.
FedEx Services. Yield management is a critical
component of our financial success. We continue
to sharpen our revenue management and pricing
4 MORE > fedex.com/AnnualReport2016
LETTER FROM THE CHAIRMAN E-COMMERCE:
INVESTING IN
GROWTH
The holiday season of 2015 made it
clear that e-commerce has enabled
a full-scale retail revolution.
The value proposition, however,
remains the same — the ability to order
a product online and have it reliably
delivered to the consumer. FedEx is one
of only three enterprises that together
deliver 95 percent of all e-commerce
orders in the United States. We are
at the center of e-commerce and one
of the most profitable e-commerce
companies in the world.
It’s imperative that we continue
investing for profitable growth by
expanding our network capacity
to match the predicted increase in
e-commerce shipments. FedEx Ground
invested $1.6 billion in FY16, including
automated hubs in Tracy, California,
and Ocala, Florida, and 19 additional
automated stations. This will bring the
number of automated hubs to 35 and
the number of automated stations to
68. These operations are designed to
sort packages at a high rate, minimize
handling and lower costs. Since
2005, network enhancements have
accelerated service by at least one day
to more than 70 percent of the U.S.
$
2.4TRILLION: ESTIMATED VALUE OF
E-COMMERCE SALES WORLDWIDE
BY 2018, A 26 PERCENT INCREASE
FROM 2016
5
LETTER FROM THE CHAIRMAN science. Our world‑class pricing group analyzes
revenue data to better balance volume growth and
yield improvements. We’re currently evaluating and
executing multiple pricing initiatives to increase
margins and profits.
We are just as focused on simplifying and modernizing
our information technology footprint, which lowers
costs. As we do so, we spend less on infrastructure
and upgrades. Equally important, these information
technology initiatives make FedEx more agile and flexible
in meeting customers’ needs.
FedEx Office is at the center of solutions designed to
handle large volumes of e‑commerce shipments while
making it easier for customers to pack, ship and pick
up packages. Across the country, we’re also piloting
neighborhood third‑party retail locations to supplement
our convenience network.
ACCOUNTABLE SUSTAINABILITY
Delivering is our business; doing it sustainably is our
responsibility. We committed to increasing FedEx
Express vehicle fuel economy by 30 percent by 2020
from a 2005 baseline, and we surpassed our goal ahead
of schedule. In FY15, FedEx nearly doubled the number
of alternative fuel vehicles in our global fleet, including
approximately 1,900 hybrids, electric, compressed
natural gas, propane auto gas and hydrogen vehicles.
Please take time to review our Global Citizenship Report
at csr.fedex.com. It outlines current goals and the
progress we’ve made, plus our pledge to invest
$200 million in 200 communities worldwide by 2020.
In November 2015, we welcomed John C. Inglis,
former Deputy Director of the National Security Agency,
to the FedEx Board of Directors. His cybersecurity
and information technology expertise and significant
leadership experience will be very valuable to
FedEx, particularly as a knowledgeable expert on
our Information Technology Oversight Committee.
FY16 was a year of significant accomplishments, and
we plan to build on this success for many years to
come. By creating new solutions for our customers,
we help them grow and prosper. We continue to
advocate trade and economic policies that create
opportunities for business while helping the communities
we serve flourish.
FedEx is committed to the highest standards of
regulatory and legal compliance, acting with integrity
in everything we do, everywhere we do business.
Ethical conduct supports the reputation FedEx has
earned as one of the most admired brands in
the world.
As we’ve demonstrated, we’ve done the things we
said we’d do. We predict a bright future for FedEx,
and based on our record, we hope our customers,
team members and shareowners have confidence
in our commitment to their success as well.
Frederick W. Smith
Chairman, President and CEO
6 MORE > fedex.com/AnnualReport2016
LETTER FROM THE CHAIRMAN TRADE:
REMOVING BARRIERS
Free trade increases the world’s prosperity by
opening markets, and it has been an American
policy objective since 1934, when disastrous
tariffs that shackled global commerce were
overturned. History shows that trade made
easy, affordable and fast begets more trade.
At least 95 percent of the world’s consumers
live outside the United States. More than
3 billion people are connected to the internet,
and the overall market for international
door-to-door express shipping continues to
increase, driven by e-commerce.
Today’s remarkable transport systems and
technologies will continue to improve and
facilitate an even larger global economy as
individual trade becomes almost frictionless.
With virtually all of the world’s products at
one’s fingertips, millions of items can be
quickly found, ordered with a few clicks and
delivered in one or two days to our doors
from any point on the globe to any other.
These factors and more have created a global
trade market that exceeds $15 trillion per year.
From less than $50 billion in trade 50 years
ago, the U.S. now imports and exports about
$4 trillion per year in goods and services.
FedEx actively supports the policies and
infrastructure that enable the global supply
chain to operate as seamlessly as possible and
works tirelessly to increase understanding of
the profound benefits of free trade. By working
together, we help businesses efficiently deliver
the new products and services desired by
consumers around the world and create jobs
that lift our communities to higher standards
of living.
$
15
TRILLION: GLOBAL
TRADE MARKET
7
LETTER FROM THE CHAIRMAN FUEL EFFICIENCY:
ACCELERATING RESULTS
Five years ahead of plan, FedEx Express
surpassed its goal to boost vehicle fuel
efficiency 30 percent by 2020 from a 2005
baseline. When we set the goal, we knew
that most of the technology we needed
didn’t exist at the time. But we got the job
done thanks to a well-defined strategy:
Reduce, Replace, Revolutionize.
> REDUCE overall mileage by optimizing
routes and assigning the right truck to
the right route so that our 50,000-strong
vehicle fleet travels the minimum miles
needed to serve our customers.
> REPLACE vehicles with more fuel-efficient
models and maximize fuel economy
by reprogramming vehicles to run at
optimal levels for their weight and load.
> REVOLUTIONIZE the fleet by adopting
new technologies such as electric
vehicles, fuel cells, natural gas and
hybrids. In major metropolitan areas,
we’re moving toward electric vehicles.
We’re also focusing on hydrogen fuel
cells, which can help expand the zero-
emission range for electric vehicles.
Since starting the Reduce, Replace,
Revolutionize program, we’ve saved more
than 137 million gallons of fuel and avoided
nearly 1.5 million metric tons of CO2e
emissions. Go to csr.fedex.com for more
about our sustainability goals and progress.
137
MILLION GALLONS OF
FUEL SAVED SINCE 2008
LETTER FROM THE CHAIRMAN FINANCIAL HIGHLIGHTS
(in millions, except earnings per share)
Operating Results
Revenues
Operating income
Operating margin
Net income
Diluted earnings per common share
Average common and common equivalent shares
Cash provided by operating activities
Capital expenditures
Financial Position
Cash and cash equivalents
Total assets
Long-term debt, including current portion
Common stockholders’ investment
Comparison of Five-Year Cumulative Total Return*
$200
$180
$160
$140
$120
$100
$80
5/11
5/12
5/13
5/14
5/15
5/16
FedEx Corporation
S&P 500
Dow Jones Transportation Average
* $100 invested on 5/31/11 in stock or index, including reinvestment of dividends. Fiscal year
ended May 31.
2016(1)(2)
2015(2)(3)
Percent
Change
$ 50,365
3,077
$ 47,453
1,867
6.1%
3.9%
1,820
6.51
279
5,708
4,818
$ 3,534
46,064
13,867
13,784
1,050
3.65
287
5,366
4,347
$
3,763
36,531
7,268
14,993
6
65
220bp
73
78
(3)
6
11
(6)
26
91
(8)
(1) Results for 2016 include provisions related to independent contractor
litigation matters at FedEx Ground for $256 million, net of recognized
immaterial insurance recovery ($158 million, net of tax, or $0.57 per diluted
share) and expenses related to the settlement of a U.S. Customs and Border
Protection notice of action in the amount of $69 million, net of recognized
immaterial insurance recovery ($43 million, net of tax, or $0.15 per diluted
share). Total transaction, financing and integration planning expenses related
to our TNT Express acquisition, as well as TNT Express’s immaterial financial
results from the time of acquisition, were $132 million ($125 million, net of
tax, or $0.45 per diluted share) during 2016. In addition, 2016 results include
a $76 million ($0.27 per diluted share) favorable tax impact from an internal
corporate restructuring to facilitate the integration of FedEx Express and
TNT Express.
(2) Results include mark-to-market losses of $1.5 billion ($946 million, net of
tax, or $3.39 per diluted share) in 2016 and $2.2 billion ($1.4 billion, net of
tax, or $4.81 per diluted share) in 2015.
(3) Results for 2015 include impairment and related charges of $276 million
($175 million, net of tax, or $0.61 per diluted share) resulting from the
decision to permanently retire and adjust the retirement schedule of certain
aircraft and related engines. Additionally, results for 2015 include a charge
of $197 million ($133 million, net of tax, or $0.46 per diluted share) in the
fourth quarter to increase the legal reserve associated with the settlement
of a legal matter at FedEx Ground to the amount of the settlement.
9
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW OF FINANCIAL SECTION
The financial section of the FedEx Corporation (“FedEx”) Annual
Report (“Annual Report”) consists of the following Management’s
Discussion and Analysis of Results of Operations and Financial
Condition (“MD&A”), the Consolidated Financial Statements and the
notes to the Consolidated Financial Statements, and Other Financial
Information, all of which include information about our significant
accounting policies and practices and the transactions that underlie
our financial results. The following MD&A describes the principal
factors affecting the results of operations, liquidity, capital
resources, contractual cash obligations and critical accounting
estimates of FedEx. The discussion in the financial section should
be read in conjunction with the other sections of this Annual Report,
particularly our detailed discussion of risk factors included in
this MD&A.
Organization of Information
Our MD&A is composed of three major sections: Results of Operations,
Financial Condition and Critical Accounting Estimates. These sections
include the following information:
> Results of operations includes an overview of our consolidated 2016
results compared to 2015 results, and 2015 results compared to 2014
results. This section also includes a discussion of key actions and
events that impacted our results, as well as our outlook for 2017.
> The overview is followed by a financial summary and analysis
(including a discussion of both historical operating results and
our outlook for 2017) for each of our transportation segments.
> Our financial condition is reviewed through an analysis of key
elements of our liquidity, capital resources and contractual cash
obligations, including a discussion of our cash flows and our
financial commitments.
> Critical accounting estimates discusses those financial statement
elements that we believe are most important to understanding the
material judgments and assumptions incorporated in our financial
results.
> We conclude with a discussion of risks and uncertainties that may
impact our financial condition and operating results.
Description of Business
We provide a broad portfolio of transportation, e-commerce and
business services through companies competing collectively, operating
independently and managed collaboratively, under the respected
FedEx brand. Our primary operating companies are Federal Express
Corporation (“FedEx Express”), the world’s largest express transportation
company; TNT Express B.V., formerly TNT Express N.V. (“TNT Express”),
an international express, small-package ground delivery and freight
transportation company that was acquired near the end of our 2016
fourth quarter; 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.
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 and size;
> 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.
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, legal reserves, professional fees and uniforms.
Except as otherwise specified, references to years indicate our fiscal
year ended May 31, 2016 or ended May 31 of the year referenced and
comparisons are to the prior year. References to our transportation
segments include, collectively, our FedEx Express group, including
the FedEx Express and TNT Express reportable segments, the FedEx
Ground segment and the FedEx Freight segment. Because TNT Express
was acquired so late in 2016, its financial results are immaterial and
are included in “Eliminations, corporate and other.” In 2017, TNT
Express’s results will be disclosed as a reportable segment and
combined with the FedEx Express reportable segment in a new
reporting structure referred to as the FedEx Express Group. This
reporting structure will continue throughout the integration of the
TNT Express and FedEx Express businesses. Once these businesses
are integrated, our segment reporting structure could change based
on how we are operating, managing and assessing the performance
of the integrated businesses.
10
11
RESULTS OF OPERATIONS
Consolidated Results
The following table compares summary operating results (dollars in millions, except per share amounts) for the years ended May 31.
Consolidated revenues
FedEx Express Segment operating income(1)
FedEx Ground Segment operating income
FedEx Freight Segment operating income
Eliminations, corporate and other(2) (3)
Consolidated operating income(3)
FedEx Express Segment operating margin(1)
FedEx Ground Segment operating margin
FedEx Freight Segment operating margin
Consolidated operating margin(2) (3)
Consolidated net income(3)
Diluted earnings per share
2016(4)
$ 50,365
2,519
2,276
426
(2,144)
3,077
9.5%
13.7%
6.9%
6.1%
2015
$ 47,453
1,584
2,172
484
(2,373)
1,867
5.8%
16.7%
7.8%
3.9%
2014
$ 45,567
1,428
2,021
351
15
3,815
5.3%
17.4%
6.1%
8.4%
$ 1,820
$ 6.51
$ 1,050
$ 3.65
$ 2,324
$ 7.48
Percent Change
2016/2015
6
59
5
(12)
10
65
370 bp
(300)bp
(90)bp
220 bp
73
78
2015/2014
4
11
7
38
NM
(51)
50 bp
(70)bp
170 bp
(450)bp
(55 )
(51 )
The following table shows changes in revenues and operating income by reportable segment for 2016 compared to 2015, and 2015 compared
to 2014 (in millions).
FedEx Express segment(1)
FedEx Ground segment
FedEx Freight segment
FedEx Services segment
Eliminations, corporate and other(2) (3)
Year-over-Year Changes
Revenues
Operating Income
2016/2015
$ (788 )
3,590
9
48
53
$ 2,912
2015/2014
$ 118
1,367
434
9
(42)
$ 1,886
2016/2015(4)
$ 935
104
(58 )
–
229
$ 1,210
2015/2014
$ 156
151
133
–
(2,388 )
$ (1,948 )
(1) FedEx Express segment 2015 expenses include impairment and related charges of $276 million resulting from the decision to permanently retire and adjust the retirement schedule of certain
aircraft and related engines.
(2) Operating income includes a loss of $1.5 billion in 2016, $2.2 billion in 2015 and $15 million in 2014 associated with our mark-to-market pension accounting further discussed in Note 13 of the
accompanying consolidated financial statements.
(3) Operating income in 2016 includes provisions related to independent contractor litigation matters at FedEx Ground for $256 million and expenses related to the settlement of a U.S. Customs and
Border Protection notice of action in the amount of $69 million, in each case net of recognized immaterial insurance recovery. 2015 operating income includes a $197 million charge in the fourth
quarter to increase the legal reserve associated with the settlement of a legal matter at FedEx Ground to the amount of the settlement, which is further discussed in Note 18 of the accompanying
consolidated financial statements.
(4) Includes transaction, financing and integration planning expenses related to our TNT Express acquisition, as well as immaterial financial results of TNT Express from the date of acquisition,
aggregating $132 million during 2016. These expenses are predominantly included in “Eliminations, corporate and other.”
Overview
Our results for 2016 include a $1.5 billion loss ($946 million, net of
tax, or $3.39 per diluted share) associated with our fourth quarter
mark-to-market (or MTM) benefit plans adjustment. Our 2016 results
also include provisions for the settlement of and expected losses
related to independent contractor litigation matters involving FedEx
Ground for $256 million, net of recognized insurance recovery
($158 million, net of tax, or $0.57 per diluted share) and expenses
related to the settlement of a U.S. Customs and Border Protection
(“CBP”) notice of action regarding uncollected duties and merchandising
processing fees in the amount of $69 million, net of recognized
insurance recovery ($43 million, net of tax, or $0.15 per diluted share).
These items are included in “Eliminations, corporate and other” and
are further described below in this MD&A.
We acquired TNT Express on May 25, 2016. We incurred transaction,
financing and integration planning expenses related to this acquisition
of $132 million ($125 million, net of tax, or $0.45 per diluted share)
in 2016, which includes the impact of certain costs not deductible for
tax purposes as a result of the acquisition. These expenses also include
TNT Express’s financial results from the time of acquisition, which are
immaterial, and are predominantly included in “Eliminations, corporate
and other” in 2016.
10
11
MANAGEMENT’S DISCUSSION AND ANALYSIS
During 2016, a favorable tax impact from an internal corporate
restructuring to facilitate the integration of FedEx Express and TNT
Express was recorded in the amount of $76 million (or $0.27 per
diluted share). See the “Income Taxes” section of this MD&A and
Note 12 of the accompanying consolidated financial statements for
more information.
Our 2016 results benefited from higher operating income at FedEx
Express as our profit improvement program that commenced in
2013 continued to constrain expense growth while improving revenue
quality, and the positive net impact of fuel. Two additional operating
days benefited all our transportation segments in 2016. These factors
were partially offset by lower than anticipated revenue at FedEx
Freight, and network expansion costs, higher self-insurance expenses
and increased purchased transportation rates at FedEx Ground. In
2,683
2,700
addition, higher incentive compensation accruals, which were not
impacted by the charges and credits described above, negatively
2,600
impacted our overall results.
FedEx Express U.S. Domestic
Average Daily Package Volume
2,713
2,543
2,571
In 2016, we repurchased an aggregate of $2.7 billion of our common
2,500
stock through open market purchases. See additional information
on the share repurchase program in Note 1 of the accompanying
consolidated financial statements.
2,400
2015
FedEx Express U.S. Domestic
Average Daily Package Volume
2013
2016
2014
2,683
2013
2016
2,713
6,280
2,543
7,526
2,571
2014
6,774
FedEx Ground
Average Daily Package Volume
Our results for 2015 include a $2.2 billion loss ($1.4 billion, net of
2,700
tax, or $4.81 per diluted share) associated with our fourth quarter
mark-to-market benefit plans adjustment. In addition, we recorded
2,600
impairment and related charges of $276 million ($175 million, net
of tax, or $0.61 per diluted share) associated with aircraft and
2,500
engine retirements at FedEx Express, and a $197 million ($133
million, net of tax, or $0.46 per diluted share) charge in the fourth
8,000
quarter to increase the legal reserve associated with the settlement
2,400
7,500
2015
6,911
of an independent contractor litigation matter at FedEx Ground.
7,000
While these charges significantly impacted our consolidated results,
6,500
each of our transportation segments had strong performance during
6,000
2015. All of our transportation segments experienced higher
5,500
5,000
volumes, coupled with improved yields at FedEx Ground and FedEx
4,500
Freight. In addition, our results benefited from our profit improvement
4,000
program commenced in 2013, the positive net impact of fuel, and a
8,000
lower year-over-year impact from severe winter weather. Our 2015
7,500
results include higher maintenance expense, primarily due to the
6,911
7,000
timing of aircraft maintenance events at FedEx Express, and higher
6,500
incentive compensation accruals, which were not affected by the
6,000
mark-to-market accounting adoption, the aircraft impairment or the
5,500
legal reserve adjustment described above.
5,000
FedEx Ground
Average Daily Package Volume
2013
FedEx Express and FedEx Ground
Total Average Daily Package Volume
4,500
In 2015, we repurchased an aggregate of $1.3 billion of our common
12,500
4,000
stock through open market purchases.
12,000
The following graphs for FedEx Express, FedEx Ground and FedEx
11,500
Freight show selected volume trends (in thousands) for the years
11,033
11,000
ended May 31:
10,500
2016
7,526
10,744
11,702
6,774
6,280
2016
2015
2014
2013
2015
2014
10,184
12
10,000
9,500
12,500
12,000
11,500
11,000
$19.00
10,500
$18.00
10,000
9,500
$17.00
$16.00
$15.00
$14.00
$19.00
$18.00
$17.00
$9.00
$16.00
$8.00
$15.00
$14.00
$7.00
$6.00
$5.00
$9.00
$8.00
$7.00
$250.00
$6.00
$240.00
$5.00
$230.00
$220.00
$250.00
$240.00
$230.00
$220.00
FedEx Express and FedEx Ground
Total Average Daily Package Volume
2013
2015
2014
2016
11,702
FedEx Express U.S. Domestic
Revenue per Package – Yield
11,033
10,744
10,184
$17.33
2013
$17.42
2014
$17.13
2015
$17.00
2016
FedEx Express U.S. Domestic
Revenue per Package – Yield
2013
2014
2015
2016
$17.33
FedEx Ground
$17.42
Revenue per Package – Yield
$17.13
$17.00
$7.80
2016
$7.80
$6.60
2013
$6.75
2014
$7.16
2015
FedEx Ground
Revenue per Package – Yield
2013
2014
2015
2016
FedEx Freight
LTL Revenue per Shipment
$7.16
$6.60
$6.75
2013
$231.52
$234.23
2014
2015
2016
$232.11
FedEx Freight
LTL Revenue per Shipment
2013
2014
2015
2016
$240.09
$240.09
$234.23
$231.52
$232.11
2013
2014
2015
2016
2,700
2,600
2,500
2,400
2,700
2,600
1,000
800
2,500
8,000
600
2,700
2,400
7,500
400
7,000
6,500
2,600
200
6,000
5,500
1,000
2,500
5,000
4,500
800
2,400
4,000
8,000
600
7,500
400
7,000
6,500
200
100.0
6,000
5,500
5,000
4,500
8,000
90.0
12,500
4,000
7,500
12,000
7,000
6,500
11,500
80.0
6,000
11,000
5,500
100.0
10,500
5,000
4,500
10,000
4,000
9,500
90.0
12,500
12,000
11,500
80.0
11,000
$19.00
10,500
$18.00
10,000
12,500
9,500
$17.00
12,000
11,500
$16.00
11,000
$15.00
10,500
$14.00
10,000
$19.00
9,500
$18.00
$70.00
$17.00
$60.00
$9.00
$16.00
$50.00
$8.00
$15.00
$40.00
$19.00
$30.00
$14.00
$7.00
$20.00
$18.00
$10.00
$6.00
$17.00
$–
$16.00
$70.00
$5.00
$60.00
$9.00
$15.00
$50.00
$14.00
$8.00
$40.00
$30.00
$7.00
$250.00
$20.00
$10.00
$6.00
$–
$240.00
$9.00
$5.00
$8.00
$230.00
$7.00
$220.00
$6.00
$250.00
$5.00
$240.00
$4.50
$230.00
$3.50
$250.00
$2.50
$220.00
$1.50
$240.00
$.50
$230.00
$4.50
$3.50
$220.00
$2.50
$1.50
$.50
FedEx Express U.S. Domestic
Average Daily Package Volume
2,683
2,713
2,543
2,571
FedEx Express U.S. Domestic
Average Daily Package Volume
2013
2015
2014
2016
FedEx Express International(1)
Average Daily Package Volume
2,713
2,683
2,543
2,571
819
FedEx Express U.S. Domestic
FedEx Ground
785
Average Daily Package Volume
Average Daily Package Volume
853
888
576
2013
580
2014
6,774
586
2,683
2015
6,911
575
7,526
2,713
2016
FedEx Express International(1)
6,280
Average Daily Package Volume
2,543
2013
2015
2016
2014
2,571
International export
International domestic
853
888
819
FedEx Ground
785
Average Daily Package Volume
2013
2013
576
2014
2014
580
2015
2015
586
2016
2016
575
7,526
FedEx Freight
Average Daily LTL Shipments
6,911
6,774
6,280
2014
2015
2013
FedEx Ground
International export
FedEx Express and FedEx Ground
Average Daily Package Volume
Total Average Daily Package Volume
International domestic
95.5
90.6
98.8
2016
2013
85.7
2014
6,774
2015
6,911
FedEx Freight
6,280
Average Daily LTL Shipments
2013
11,033
2015
2014
10,744
7,526
2016
11,702
2016
98.8
10,184
95.5
FedEx Express and FedEx Ground
Total Average Daily Package Volume
2013
2016
2013
2016
2014
90.6
2014
2015
2015
85.7
FedEx Express U.S. Domestic
2013
Revenue per Package – Yield
11,033
2015
2014
10,744
11,702
2016
10,184
FedEx Express and FedEx Ground
Total Average Daily Package Volume
$17.33
2013
$17.42
2014
10,744
$17.13
2015
11,033
10,184
FedEx Express U.S. Domestic
Revenue per Package – Yield
2013
2015
2014
$17.00
2016
11,702
2016
2016
$17.00
$54.16
FedEx Express International
2013
Revenue per Package – Yield
$17.33
FedEx Ground
Revenue per Package – Yield
2014
$17.42
$17.13
2015
our international intra-country operations.
$58.72
$58.92
$57.50
(1) International domestic average daily package volume represents
FedEx Express U.S. Domestic
Revenue per Package – Yield
$7.80
$6.60
2013
$17.33
$6.99
$6.75
2014
$17.42
$6.95
$7.16
2015
$17.13
FedEx Express International
$6.49
Revenue per Package – Yield
FedEx Ground
2014
2015
2013
2016
Revenue per Package – Yield
International export composite
$58.92
2014
2013
$58.72
International domestic
2016
2015
$57.50
LTL Revenue per Shipment
2013
FedEx Freight
2014
$6.60
$6.75
FedEx Ground
$6.95
$6.99
Revenue per Package – Yield
2013
$231.52
2014
$234.23
International export composite
2014
2013
International domestic
2016
2015
2015
$7.16
$6.49
$240.09
2015
$7.16
$232.11
$6.60
FedEx Freight
$6.75
LTL Revenue per Shipment
2013
2014
2015
2016
Average Fuel Cost per Gallon
2013
2014
$240.09
2015
2016
$3.81
$231.52
$234.23
$3.76
FedEx Freight
LTL Revenue per Shipment
$3.22
$3.13
$3.13
$232.11
2013
2014
Average Fuel Cost per Gallon
$234.23
2013
$231.52
$3.81
2014
Vehicle
$3.76
2016
$17.00
$5.65
$54.16
$7.80
2016
$5.65
2016
$7.80
$2.24
2016
$1.52
2016
$232.11
2016
$2.24
$1.52
2016
$3.22
2013
2014
$3.13
2013
2014
Vehicle
$2.47
2015
$240.09
2015
Jet
$3.13
2015
$2.47
2015
Jet
FedEx Express International(1)
Average Daily Package Volume
888
575
2016
888
98.8
888
2016
575
FedEx Express International(1)
Average Daily Package Volume
2013
2014
1,000
International export
International domestic
586
575
FedEx Express International(1)
FedEx Freight
Average Daily Package Volume
Average Daily LTL Shipments
1,000
200
100.0
2013
785
International export
International domestic
FedEx Freight
Average Daily LTL Shipments
2013
2013
2014
2014
2015
2015
2016
2016
International export
International domestic
98.8
FedEx Freight
85.7
Average Daily LTL Shipments
2013
2014
98.8
2016
819
580
819
580
2014
819
90.6
580
90.6
90.6
785
576
785
576
576
85.7
85.7
2013
2014
2015
2016
FedEx Express International
Revenue per Package – Yield
$58.72
$58.92
$57.50
$54.16
$6.99
$6.95
FedEx Express International
$6.49
$5.65
Revenue per Package – Yield
2013
2014
2015
2016
International export composite
$58.92
$58.72
International domestic
$57.50
$54.16
FedEx Express International
Revenue per Package – Yield
$6.99
$58.72
2013
$6.95
$58.92
2014
$6.49
$57.50
2015
$5.65
$54.16
2016
International export composite
International domestic
$6.99
$6.95
2013
2014
$6.49
2015
$5.65
2016
Average Fuel Cost per Gallon
International export composite
International domestic
$2.24
$1.52
2016
$2.24
$1.52
2016
$2.24
$1.52
2016
Average Fuel Cost per Gallon
2013
$3.81
2014
Vehicle
$3.76
$3.22
$3.13
Average Fuel Cost per Gallon
$3.81
2013
$3.22
$3.76
2014
$3.13
Vehicle
2013
2014
Vehicle
$4.50
$3.81
$3.76
$3.22
$3.13
1,000
800
600
400
200
800
600
400
800
600
90.0
400
200
80.0
100.0
90.0
80.0
100.0
90.0
80.0
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$–
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$70.00
$–
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$–
$3.50
$2.50
$1.50
$.50
$4.50
$3.50
$2.50
$1.50
$4.50
$.50
$3.50
$2.50
$1.50
$.50
853
586
2015
853
2015
853
95.5
586
95.5
2015
95.5
$3.13
$2.47
2015
Jet
$3.13
$2.47
2015
Jet
$3.13
$2.47
2015
Jet
13
MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Express U.S. Domestic
Average Daily Package Volume
2,683
2,713
2,543
2,571
FedEx Express International(1)
Average Daily Package Volume
785
576
819
580
853
586
888
575
2013
2014
2015
2016
2013
2014
2015
2016
International export
International domestic
FedEx Express U.S. Domestic
FedEx Express U.S. Domestic
FedEx Express U.S. Domestic
Average Daily Package Volume
Average Daily Package Volume
Average Daily Package Volume
2,683
2,683
2,683
2,713
2,713
2,713
2,543
2,543
2,571
2,571
2,571
FedEx Express International(1)
FedEx Express International(1)
FedEx Express International(1)
Average Daily Package Volume
Average Daily Package Volume
Average Daily Package Volume
1,000
1,000
FedEx Ground
Average Daily Package Volume
819
819
819
853
888
853
853
888
888
785
785
576
576
580
6,774
580
580
586
6,911
7,526
586
586
575
575
575
FedEx Freight
Average Daily LTL Shipments
98.8
95.5
90.6
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
85.7
International export
International export
International export
International domestic
International domestic
International domestic
2013
2014
2015
2016
2013
2014
2015
2016
FedEx Ground
FedEx Ground
FedEx Ground
Average Daily Package Volume
Average Daily Package Volume
Average Daily Package Volume
7,526
7,526
7,526
6,774
6,911
6,774
6,774
6,911
6,911
6,280
6,280
FedEx Freight
FedEx Freight
FedEx Freight
Average Daily LTL Shipments
Average Daily LTL Shipments
Average Daily LTL Shipments
100.0
100.0
100.0
FedEx Express and FedEx Ground
Total Average Daily Package Volume
95.5
95.5
95.5
98.8
98.8
98.8
90.6
90.6
90.6
85.7
85.7
10,744
11,033
11,702
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
2,700
2,700
2,700
2,600
2,600
2,600
2,543
2,500
2,500
2,500
2,400
2,400
2,400
2013
8,000
7,500
7,000
6,500
6,000
5,500
5,000
4,500
4,000
8,000
8,000
7,500
7,500
7,000
7,000
6,280
6,500
6,500
6,000
6,000
5,500
5,500
5,000
5,000
4,500
4,500
4,000
4,000
2013
2,700
2,600
2,500
2,400
1,000
800
8,000
7,500
600
7,000
6,500
400
6,000
5,500
200
5,000
4,500
4,000
12,500
90.0
12,000
11,500
11,000
80.0
10,500
10,000
9,500
$19.00
$18.00
$17.00
$16.00
$15.00
785
800
800
576
600
600
6,280
400
400
200
200
2013
90.0
90.0
85.7
80.0
80.0
2013
10,184
2013
2014
2015
2016
FedEx Express U.S. Domestic
Revenue per Package – Yield
$17.33
$17.42
$17.13
$17.00
FedEx Express and FedEx Ground
FedEx Express and FedEx Ground
FedEx Express and FedEx Ground
Total Average Daily Package Volume
Total Average Daily Package Volume
Total Average Daily Package Volume
12,500
12,500
12,500
12,000
12,000
12,000
11,500
11,500
11,500
11,000
11,000
11,000
10,744
10,744
10,744
11,033
11,033
11,033
11,702
11,702
11,702
10,500
10,000
9,500
10,500
10,500
10,184
10,000
10,000
9,500
9,500
2013
10,184
10,184
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
2016
The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends for the years ended May 31:
2014
2015
2013
$14.00
1,000
800
600
400
200
100.0
90.0
80.0
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$–
FedEx Express International
Revenue per Package – Yield
$58.72
$58.92
$57.50
$54.16
$6.99
$6.95
2013
2014
$6.49
2015
$5.65
2016
International export composite
International domestic
FedEx Express U.S. Domestic
Revenue per Package – Yield
FedEx Express U.S. Domestic
FedEx Express U.S. Domestic
Revenue per Package – Yield
Revenue per Package – Yield
FedEx Ground
FedEx Express International
Revenue per Package – Yield
Revenue per Package – Yield
FedEx Express International
FedEx Express International
Revenue per Package – Yield
Revenue per Package – Yield
$19.00
$19.00
$19.00
$18.00
$17.00
$18.00
$18.00
$17.33
$17.00
$17.00
$16.00
$16.00
$16.00
$15.00
$15.00
$15.00
$14.00
$14.00
$14.00
2013
$17.42
$17.33
$17.33
$17.42
$17.42
$17.13
$17.13
$17.13
$17.00
$17.00
$17.00
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
FedEx Ground
FedEx Ground
FedEx Ground
Revenue per Package – Yield
Revenue per Package – Yield
Revenue per Package – Yield
$9.00
$9.00
$9.00
$8.00
$8.00
$8.00
$7.80
$7.80
$7.80
$7.16
$7.16
$7.16
$7.00
$7.00
$7.00
$6.60
$6.75
$6.60
$6.60
$6.75
$6.75
$6.00
$6.00
$6.00
$5.00
$5.00
$5.00
2013
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
$9.00
$70.00
$60.00
$8.00
$50.00
$40.00
$7.00
$30.00
$20.00
$6.00
$10.00
$5.00
$–
$250.00
$240.00
$230.00
$220.00
$70.00
$70.00
$58.72
$60.00
$60.00
$50.00
$50.00
$40.00
$40.00
$6.60
$30.00
$30.00
$20.00
$20.00
$6.99
$10.00
$10.00
$–
$–
2013
2013
$58.92
$58.72
$58.72
$58.92
$58.92
$57.50
$57.50
$57.50
$54.16
$7.80
$54.16
$54.16
$7.16
$6.75
$6.99
$6.99
$6.95
$6.95
$6.95
$6.49
$6.49
$6.49
$5.65
2014
2014
2013
2013
2015
2015
2014
2014
2016
2016
2015
2015
$5.65
$5.65
2016
2016
International export composite
International export composite
International export composite
International domestic
International domestic
International domestic
FedEx Freight
LTL Revenue per Shipment
$240.09
$234.23
$231.52
$232.11
2013
2014
2015
2016
Average Fuel Cost per Gallon
$4.50
$3.81
$3.76
$3.22
$3.13
$3.50
$2.50
$1.50
$.50
2013
2014
Vehicle
$3.13
$2.47
2015
Jet
$2.24
$1.52
2016
$234.23
$231.52
$234.23
$234.23
$250.00
$250.00
$240.00
$240.00
$240.09
$240.09
FedEx Freight
LTL Revenue per Shipment
FedEx Freight
FedEx Freight
LTL Revenue per Shipment
LTL Revenue per Shipment
Revenue
Revenues increased 6% in 2016 driven by the FedEx Ground segment
$250.00
due to volume growth in our residential services coupled with rate
increases, and the inclusion of GENCO Distribution System, Inc.
$240.09
$240.00
(“GENCO”) revenue for a full year. In addition, revenues increased
approximately $1.2 billion in 2016 as a result of recording FedEx
SmartPost service revenues on a gross basis, versus our previous
$230.00
net treatment, as further discussed in this MD&A and in Note 1 of
the accompanying consolidated financial statements. Lower fuel
$220.00
surcharges had a significant negative impact on revenues at all of
2015
our transportation segments in 2016. Unfavorable exchange rates
also negatively impacted revenues at FedEx Express in 2016. Two
additional operating days benefited revenues at all our transportation
segments in 2016.
$220.00
$220.00
2013
$231.52
$231.52
$232.11
$232.11
$230.00
$230.00
$232.11
2016
2016
2015
2015
2014
2014
2013
2013
2016
2014
Revenues increased 4% in 2015 due to improved performance at all
our transportation segments. At FedEx Ground, revenues increased
12% in 2015 due to higher volume from continued growth in both our
$4.50
$4.50
$4.50
$3.81
Average Fuel Cost per Gallon
Average Fuel Cost per Gallon
FedEx Home Delivery service and commercial business, the inclusion
Average Fuel Cost per Gallon
of GENCO results from the date of acquisition and increased yields.
At FedEx Freight, revenues increased 8% in 2015 primarily due to
higher average daily shipments and revenue per shipment. Revenues
at FedEx Express were flat during 2015, as U.S. domestic and
$3.13
international package volume growth was offset by lower fuel
$2.24
$2.24
$2.24
surcharges and the negative impact of exchange rates.
$3.22
$2.50
$2.50
$3.50
$3.50
$3.22
$3.22
$3.76
$3.76
$3.13
$3.13
$3.13
$3.13
$2.47
$2.47
$3.81
$3.81
$3.76
$3.13
$3.50
$2.47
$2.50
$1.50
$1.50
$1.50
$1.52
$1.52
$1.52
$.50
2015
2016
2014
2013
2013
2015
2015
2014
2014
2016
2016
Vehicle
Vehicle
Jet
Vehicle
$.50
$.50
2013
Retirement Plans MTM Adjustment
We incurred noncash pre-tax mark-to-market losses of $1.5 billion in
2016 ($946 million, net of tax, or $3.39 per diluted share), $2.2 billion in
2015 ($1.4 billion, net of tax, or $4.81 per diluted share) and $15 million
in 2014 ($9 million, net of tax, or $0.03 per diluted share) from actuarial
adjustments to pension and postretirement healthcare plans related to
the measurement of plan assets and liabilities. For more information
see further discussion in the “Critical Accounting Estimates” section of
this MD&A and Note 1 and Note 13 of the accompanying consolidated
financial statements.
Jet
Jet
12
13
MANAGEMENT’S DISCUSSION AND ANALYSIS Operating Expenses
The following tables compare operating expenses expressed as dollar
amounts (in millions) and as a percent of revenue for the years ended
May 31:
Operating expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Impairment and other charges
Retirement plans mark-to-market
adjustment
Other
Total operating expenses
Total operating income
2016
2015
2014
$ 18,581
9,966
2,854
2,631
2,399
2,108
–
$ 17,110 $ 16,171
8,011
2,622
2,587
4,557
1,862
–
8,483
2,682
2,611
3,720
2,099
276 (1)
1,498
7,251 (2)
$ 47,288
$ 3,077
2,190
6,415 (3)
15
5,927
$ 45,586 $ 41,752
$ 3,815
$ 1,867
Percent of Revenue
2015
2016
2014
36.9 %
19.8
5.7
5.2
4.7
4.2
–
36.1 %
17.9
5.7
5.5
7.8
4.4
0.6 (1)
Operating expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Impairment and other charges
Retirement plans mark-to-market
adjustment
Other
Total operating expenses
Operating margin
(1) Includes charges resulting from the decision to permanently retire and adjust the retirement
3.0
14.4 (2)
93.9
6.1 %
4.6
13.5 (3)
96.1
3.9 %
35.5 %
17.6
5.7
5.7
10.0
4.1
–
–
13.0
91.6
8.4 %
Our operating expenses for 2016 include a $1.5 billion loss
($946 million, net of tax) associated with our annual MTM adjustment
described above. In addition, we recorded corporate level provisions
for the settlement of and expected losses related to independent
contractor litigation matters involving FedEx Ground and the settlement
of the CBP matter and expenses related to our acquisition of TNT
Express as described above. Operating expenses also increased due
to higher salaries and employee benefits at FedEx Freight, and higher
purchased transportation expenses due to the recording of FedEx
SmartPost revenues on a gross basis, network expansion costs, higher
self-insurance expenses and increased purchased transportation rates
at FedEx Ground. In addition, higher incentive compensation accruals
impacted our overall operating expenses.
Our operating margin benefited from the reduced year-over-year loss
from our MTM adjustment, the strong performance of our FedEx
Express segment due to the continued execution of our profit
improvement program and the positive net impact of fuel (as further
described below). However, operating margin was negatively
impacted in 2016 by higher salaries and employee benefits at FedEx
Freight, and network expansion costs, higher self-insurance expenses
and the recording of FedEx SmartPost revenues on a gross basis at
FedEx Ground, transaction and integration planning expenses related
to our TNT Express acquisition, and higher incentive compensation
accruals.
Our operating expenses included an increase in purchased
transportation costs of 17% in 2016 due to the recording of
FedEx SmartPost service revenues on a gross basis (including postal
fees in revenues and expenses) and higher volumes and increased
rates at FedEx Ground. Salaries and employee benefits expense
increased 9% in 2016 due to the inclusion of GENCO results for a full
year, pay initiatives coupled with increased staffing at FedEx Freight,
higher healthcare costs and higher incentive compensation accruals.
Other expenses were 13% higher in 2016 due to the inclusion of
GENCO results for a full year, higher self-insurance costs at FedEx
Ground and the CBP matter described above. Rentals and landing fees
increased 6% in 2016 due to network expansion and the inclusion
of GENCO results for a full year at FedEx Ground. Retirement plans
mark-to-market adjustment expenses decreased 32% in 2016, as
favorable demographic assumption experience partially offset the
actuarial loss on pension plan asset returns in 2016.
schedule of certain aircraft and related engines at FedEx Express.
(2) Includes provisions for the settlement of and expected losses related to independent contractor
litigation matters involving FedEx Ground for $256 million, and $69 million in expenses related
to the settlement of a CBP notice of action, in each case net of recognized immaterial insurance
recovery.
(3) Includes a $197 million charge in the fourth quarter to increase the legal reserve associated
with the settlement of a legal matter at FedEx Ground to the amount of the settlement.
14
15
MANAGEMENT’S DISCUSSION AND ANALYSIS
FedEx Express U.S. Domestic
Average Daily Package Volume
2,683
2,713
2,543
2,571
FedEx Express International(1)
Average Daily Package Volume
785
576
819
580
853
586
888
575
2013
2014
2015
2016
2013
2014
2015
2016
International export
International domestic
FedEx Ground
Average Daily Package Volume
7,526
6,774
6,911
6,280
FedEx Freight
Average Daily LTL Shipments
98.8
95.5
90.6
85.7
2013
2014
2015
2016
2013
2014
2015
2016
2,700
2,600
2,500
2,400
8,000
7,500
7,000
6,500
6,000
5,500
5,000
4,500
4,000
12,500
12,000
11,500
11,000
10,500
10,000
9,500
$19.00
$18.00
$17.00
$16.00
$15.00
$14.00
$9.00
$8.00
FedEx Express and FedEx Ground
Total Average Daily Package Volume
11,702
11,033
10,744
10,184
2013
2014
2015
2016
FedEx Express U.S. Domestic
Revenue per Package – Yield
$17.33
$17.42
$17.13
$17.00
2013
2014
2015
2016
FedEx Ground
Revenue per Package – Yield
$7.80
$7.16
$7.00
$6.60
$6.75
$6.00
$5.00
$250.00
$240.00
$230.00
$220.00
2016
2015
2013
2014
FedEx Freight
LTL Revenue per Shipment
Our operating expenses for 2015 included a $2.2 billion loss
($1.4 billion, net of tax) associated with our mark-to-market pension
accounting as described above. In addition, we recorded charges
of $276 million ($175 million, net of tax) associated with the decision
to permanently retire and adjust the retirement schedule of certain
aircraft and related engines at FedEx Express, and a $197 million
($133 million, net of tax) charge in the fourth quarter to increase the
reserve associated with the settlement of an independent contractor
proceeding at FedEx Ground to the amount of the settlement. Our
2015 operating expenses also increased primarily due to volume-
related growth in salaries and employee benefits and purchased
transportation expenses, higher maintenance and repairs expense
$231.52
and higher incentive compensation accruals. However, operating
margin benefited from revenue growth, our profit improvement
program, which we commenced in 2013, the net impact of fuel
(as further described below) and a lower year-over-year impact
from severe winter weather.
$240.09
$232.11
$234.23
2014
2013
2015
2016
1,000
800
600
400
200
100.0
90.0
80.0
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$–
FedEx Express International
Revenue per Package – Yield
$58.72
$58.92
$57.50
$54.16
$6.99
$6.95
2013
2014
$6.49
2015
$5.65
2016
International export composite
International domestic
Fuel
The following graph for our transportation segments shows our
average cost of jet and vehicle fuel per gallon for the years ended
May 31:
Average Fuel Cost per Gallon
$4.50
$3.81
$3.76
$3.50
$2.50
$1.50
$.50
$3.22
$3.13
2013
2014
Vehicle
$3.13
$2.47
2015
Jet
$2.24
$1.52
2016
Operating expenses included an increase in salaries and employee
benefits expense of 6% in 2015 due to the timing of merit increases
for many of our employees at FedEx Express, additional staffing to
support volume growth and higher incentive compensation accruals.
These factors were partially offset by the positive impact of our
voluntary buyout program completed in 2014. Other expenses were
driven 8% higher in 2015 due to the legal reserve increase discussed
above and the inclusion of GENCO results. Purchased transportation
costs increased 6% in 2015 due to volume growth and higher service
provider rates at FedEx Ground and volume growth, higher utilization
and higher service provider rates at FedEx Freight. The timing of
aircraft maintenance events at FedEx Express primarily drove an
increase in maintenance and repairs expense of 13% in 2015.
Fuel expense decreased 36% during 2016 primarily 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 2016,
2015 and 2014 in the accompanying discussions of each of our
transportation segments.
14
15
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 May 2016 was set based on March 2016 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, we updated the tables used
to determine our fuel surcharges at FedEx Express, FedEx Ground
and FedEx Freight.
The net impact of fuel had a modest benefit to operating income in
2016. This was driven by decreased fuel prices during 2016 versus
the prior year, which was partially offset by the year-over-year
decrease in fuel surcharge revenue 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.
Fuel expense decreased 18% during 2015 primarily due to lower
aircraft fuel prices. The net impact of fuel had a significant benefit
to operating income in 2015. This was driven by decreased fuel
prices during 2015 versus the prior year, which was slightly offset
by the year-over-year decrease in fuel surcharge revenue during
these periods.
Interest Expense
Interest expense increased $101 million in 2016 primarily due to
increased interest expense from our 2016 and 2015 debt offerings
used to fund our share repurchase programs and business acquisitions.
Interest expense increased $75 million in 2015 primarily due to
increased interest expense from our January 2015 debt offering and
January 2014 debt offering.
Income Taxes
Our effective tax rate was 33.6% in 2016, 35.5% in 2015 and
36.5% in 2014. Due to its effect on income before income taxes, the
adjustment for MTM accounting reduced our 2016 effective tax rate
by 120 basis points and our 2015 effective tax rate by 80 basis points,
and increased our effective tax rate by 20 basis points in 2014. Our
2016 tax rate was favorably impacted by $76 million from an internal
corporate restructuring done in anticipation of the integration of the
foreign operations of FedEx Express and TNT Express. As part of this
restructuring, our Canadian subsidiary made distributions to our U.S.
operations which resulted in the recognition of U.S. foreign tax credits
in excess of the U.S. taxes incurred from the distributions. This
favorable impact was partially offset by a $40 million tax expense
attributable to non-deductible expenses incurred as part of the TNT
Express acquisition. Our permanent reinvestment strategy with
respect to unremitted earnings of our foreign subsidiaries provided a
benefit of approximately $48 million to our 2016 provision for income
taxes. Cumulative permanently reinvested foreign earnings were
$1.6 billion at the end of 2016 and $1.9 billion at the end of 2015.
The 2016 reduction in our permanently reinvested earnings was due
to the internal corporate restructuring discussed above.
Additional information on income taxes, including our effective tax
rate reconciliation, liabilities for uncertain tax positions and our global
tax profile can be found in Note 12 of the accompanying consolidated
financial statements.
16
17
MANAGEMENT’S DISCUSSION AND ANALYSIS Business Acquisitions
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 May 31, 2016,
$287 million of shares associated with the transaction remained
untendered, the majority of which were tendered subsequent to
May 31, 2016, and 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. TNT Express’s financial results are immaterial from the time
of acquisition and are included in “Eliminations, corporate and other.”
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 Express’s 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.
For more information and a presentation of unaudited pro forma
consolidated results, see Note 3 of the accompanying consolidated
financial statements. The accounting literature establishes guidelines
regarding the presentation of this unaudited pro forma information.
Therefore, this unaudited pro forma information is not intended to
represent, nor do we believe it is indicative of, the consolidated
results of operations of FedEx that would have been reported had the
acquisition been completed as of the beginning of 2015. Furthermore,
this unaudited pro forma information does not give effect to the
anticipated business and tax synergies of the acquisition and is not
representative or indicative of the anticipated future consolidated
results of operations of FedEx.
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, now FedEx CrossBorder, LLC (“FedEx CrossBorder”), 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.
In 2014, we expanded the international service offerings of FedEx
Express by acquiring businesses operated by our previous service
provider, Supaswift (Pty) Ltd. (“Supaswift”), in seven countries in
Southern Africa, for $36 million in cash from operations. The financial
results of these businesses are included in the FedEx Express segment
from their respective date of acquisition.
The financial results of the GENCO, FedEx CrossBorder and Supaswift
businesses were not material, individually or in the aggregate, to our
results of operations and therefore, pro forma financial information
has not been presented.
16
17
MANAGEMENT’S DISCUSSION AND ANALYSIS Profit Improvement Programs
During 2013, we announced profit improvement programs primarily
through initiatives at FedEx Express and FedEx Services targeting
annual profitability improvement of $1.6 billion at FedEx Express.
During 2014, we completed a program to offer voluntary cash buyouts
to eligible U.S.-based employees in certain staff functions. As a result
of this program, approximately 3,600 employees left the company.
Payments under this program, which were related primarily to
employee severance, were made at the time of departure and
totaled approximately $300 million in 2014.
In 2015, we continued to make progress in achieving our profit
improvement goals. FedEx Express improved operating income by
approximately 70% from 2013 with essentially flat revenue during
the three-year period. FedEx Services reduced its total expenses while
investing in major information technology transformation projects.
We exited 2016 having achieved our profit improvement goals with
a run rate of $1.6 billion of additional operating profit from the then
2013 base business. FedEx Express has improved operating income
by approximately 170% from 2013, despite lower fuel surcharges
and unfavorable exchange rates driving flat to declining revenue during
the four-year period. FedEx Services has reduced its total expenses
while investing in major information technology transformation projects.
In addition, our incentive compensation programs have been gradually
reinstated so that 2017 business plan objectives will represent more
fully funded compensation targets. While this program is completed,
assuming continued modest growth in the U.S. and global economies,
profitability and productivity are expected to continue to increase for
years to come as we further leverage the benefits of these initiatives
and fully integrate our recent business acquisitions.
Outlook
During 2017, we expect improvements in the performance of all
our transportation segments to drive revenue and earnings growth,
excluding any year-end MTM adjustment and TNT Express financial
results, integration expenses and financing costs. Although our profit
improvement programs noted above are completed, we expect these
programs to continue to constrain expense growth while improving
revenue quality during 2017. Segment level pension expense for 2017
is expected to be comparable to 2016 levels. Continued moderate
global economic growth is anticipated to drive volume and yield
improvements. Our expectations for earnings growth in 2017 are
dependent on key external factors, including fuel prices and global
economic conditions.
Due to our recent acquisition of TNT Express, 2017 will be a year of
intensive integration activities and investments. However, the timing
and amount of integration activities and costs will be subject to
change as information is validated and integration and operating
plans are refined. While integration planning teams have been
working for months to prepare for post-closing activities, up until
May 25, 2016, we were competitors with TNT Express and therefore,
access to key customer, financial and operational data was limited
under competition laws and regulations. Furthermore, TNT Express
is undergoing a large restructuring and turnaround program called
Outlook, which includes incurring certain restructuring charges in
2017. As a result, we anticipate TNT Express will not be accretive to
earnings until 2018. Longer term, we anticipate this transaction will
generate substantial improvements in revenue and earnings and
reduce our effective tax rate due to increased international earnings.
Our capital expenditures for 2017 are expected to approximate
$5.6 billion, largely for continued expansion of the FedEx Ground
network and additional aircraft deliveries in 2017 to support our fleet
modernization program at FedEx Express. This capital expenditure
forecast includes TNT Express. We will continue to evaluate our
investments in critical long-term strategic projects to ensure our
capital expenditures generate high returns on investments and are
balanced with our outlook for global economic conditions. For
additional details on key 2017 capital projects, refer to the “Capital
Resources” and “Liquidity Outlook” sections of this MD&A.
18
19
MANAGEMENT’S DISCUSSION AND ANALYSIS Our outlook is dependent upon a stable pricing environment for fuel,
as volatility in fuel prices impacts our fuel surcharge levels, fuel
expense and demand for our services. Volatility in fuel costs may
impact earnings because adjustments to our fuel surcharges lag
changes in actual fuel prices paid. Therefore, the trailing impact
of adjustments to our fuel surcharges can significantly affect our
earnings either positively or negatively in the short-term.
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 24 states are operating under, or transitioning to, the ISP model.
The transition to the ISP model in the remaining 26 states is expected
to be completed by 2020. The costs associated with these transitions
will be recognized in the quarter incurred and are not expected to
be material.
See “Risk Factors” for a discussion of these and other potential risks
and uncertainties that could materially affect our future performance.
Seasonality of Business
Our businesses are cyclical in nature, as seasonal fluctuations affect
volumes, revenues and earnings. Historically, the U.S. express package
business experiences an increase in volumes in late November and
December. International business, particularly in the Asia-to-U.S.
market, peaks in October and November in advance of the U.S.
holiday sales season. Our first and third fiscal quarters, because
they are summer vacation and post winter-holiday seasons, have
historically experienced lower volumes relative to other periods.
Normally, the fall is the busiest shipping period for FedEx Ground,
while late December, June and July are the slowest periods. For
FedEx Freight, the spring and fall are the busiest periods and the
latter part of December through February is the slowest period.
For FedEx Office, the summer months are normally the slowest
periods. Shipment levels, operating costs and earnings for each
of our companies can also be adversely affected by inclement
weather, particularly the impact of severe winter weather in our
third fiscal quarter.
Recent Accounting Guidance
New accounting rules and disclosure requirements can significantly
impact our reported results and the comparability of our financial
statements.
In the second quarter of 2016, 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. Adoption of this guidance had no impact on our financial
reporting. See the “Business Acquisitions” section above for further
discussion regarding our recent business acquisitions.
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 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
18
19
MANAGEMENT’S DISCUSSION AND ANALYSIS 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.
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 had minimal impact on our accounting and financial
reporting, and we chose to early adopt on a retrospective basis
in the fourth quarter of 2016.
In May 2015, the FASB issued an Accounting Standards Update
that removes the requirement to categorize within the fair value
hierarchy investments for which fair values are estimated using
the net asset value practical expedient provided by Accounting
Standards Codification 820, Fair Value Measurement. This new
guidance is effective for entities for fiscal years beginning after
December 15, 2016, with retrospective application to all periods
presented. We elected to early adopt this standard, which impacted
our fair value disclosures related to retirement benefit plan investments
in Note 13 of the accompanying consolidated financial statements
but did not otherwise impact our financial statements.
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. We are currently
evaluating the impact of this new standard 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 2016 that is relevant to the readers of our financial
statements.
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
TNT Express Segment
FedEx Ground Segment
FedEx Freight Segment
FedEx Services 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
(international express transportation,
small-package ground delivery and
freight transportation)
> FedEx Ground
(small-package ground delivery)
> GENCO
(third-party logistics)
> FedEx Freight
(LTL freight transportation)
> FedEx Custom Critical
(time-critical transportation)
> 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)
20
21
MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Services Segment
The operating expenses line item “Intercompany charges” on the
accompanying 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 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 decrease in these costs was driven by a lower
mark-to-market benefit plans adjustment. Also, 2015 includes benefits
of approximately $266 million as a result of our change in recognizing
expected return on plan assets (“EROA”) for our defined benefit
pension and postretirement healthcare plans at the segment level
described further below, which had no impact at the consolidated
level. In addition, transaction and integration planning expenses
related to our TNT Express acquisition and the settlement of the
CBP notice of action described above increased these costs in 2016.
In 2015, we changed our method of accounting for our defined benefit
pension and postretirement healthcare plans to immediately recognize
actuarial gains and losses resulting from the remeasurement of these
plans in earnings in the fourth quarter of each fiscal year through
our MTM accounting as described in Note 1 and Note 13 of the
accompanying consolidated financial statements. FedEx’s segment
operating results follow internal management reporting, which is
used for making operating decisions and assessing performance.
Historically, total net periodic benefit cost was allocated to each
segment. We continue to record service cost, interest cost and EROA
at the business segments as well as an allocation from FedEx Services
of their comparable costs. Annual recognition of actuarial gains and
losses are reflected in our segment results only at the corporate level.
Additionally, although the actual asset returns are recognized in each
fiscal year through a MTM adjustment, we continue to recognize an
EROA in the determination of net pension cost on an interim basis.
At the segment level, we set our EROA at 6.5% for all periods
presented, which equals our consolidated EROA assumption in 2016.
In fiscal years where the consolidated EROA is greater than 6.5%,
that difference is reflected as a credit in “Eliminations, corporate
and other.”
FedEx Express Group
On May 25, 2016, we acquired TNT Express. TNT Express collects,
transports and delivers documents, parcels and freight on a day-definite
or time-definite basis. Its services are primarily classified by the speed,
distance, weight and size of consignments. Whereas the majority of its
shipments are between businesses, TNT Express also offers business-
to-consumer services to select key customers. The impact of TNT
Express’s results are immaterial to the FedEx Express Group from the
time of acquisition and are included in “Eliminations, corporate and
other.”
In 2017, we will combine the results of the FedEx Express and TNT
Express segments to create a collective FedEx Express Group. During
the integration process, we anticipate these segments will each
continue to have discrete financial information that will be regularly
reviewed when evaluating performance and making resource allocation
decisions. However, they are being combined 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. In
2017, the full-year impact of the TNT Express acquisition is expected
to have a negative impact on operating margin due to integration costs
and the impact of intangible asset amortization.
20
21
MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Express Segment
FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority
services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which
provide time-definite delivery within five business days worldwide. The following tables compare revenues, operating expenses, operating
expenses as a percent of revenue, operating income and operating margin (dollars in millions) for the years ended May 31:
Percent of Revenue
2015
2016
2014
Operating expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Impairment and other charges(3)
Intercompany charges
Other
Total operating expenses
Operating margin
(1) International domestic revenues represent our international intra-country operations.
(2) Includes FedEx Trade Networks and FedEx SupplyChain Systems.
(3) 2015 includes $276 million of impairment and related charges resulting from the decision
to permanently retire and adjust the retirement schedule of certain aircraft and related
engines.
38.7 %
8.7
6.4
5.2
7.7
4.9
–
7.0
11.9
90.5
9.5 %
37.1 %
9.3
6.2
5.4
11.7
5.0
1.0
6.8
11.7
94.2
5.8 %
36.1 %
9.3
6.3
5.5
14.5
4.4
–
6.9
11.7
94.7
5.3 %
Percent
Change
2016
2015
/
/ 2015
2014
2016
2015
2014
$ 6,763 $ 6,704 $ 6,555
1,636
1,629
3,188
3,342
1
2
1
1
(9)
(1 )
(7)
(9)
(3 )
8
(13 )
(30)
(2)
(9 )
(3 )
1
(10 )
–
(5)
(37)
(5 )
2
–
5
3
(3)
3
(1)
(3)
1
(2)
–
(12)
(2)
5
–
3
1
(1)
(2)
(19)
15
11,675
6,251
2,301
11,379
6,451
2,229
8,552
1,406
21,633
8,680
1,446
21,505
2,355
1,594
205
4,154
1,462
27,121
9,797
2,511
1,705
1,488
3,943
1,182
2,300
1,588
180
4,068
1,538
27,239
10,104
2,544
1,693
1,460
3,199
1,357
276
1,842
3,180
– NM NM
(2)
–
–
(1)
1,888
3,179
23,932
25,693
25,655
$ 2,519 $ 1,584 $ 1,428
(7 )
59
9.5%
5.8%
5.3% 370bp
–
11
50bp
11,804
5,697
2,282
Revenues:
Package:
U.S. overnight box
U.S. overnight envelope 1,662
U.S. deferred
3,379
Total U.S. domestic
package revenue
International priority
International economy
Total international
export package
7,979
revenue
International domestic(1)
1,285
Total package revenue 21,068
Freight:
U.S.
International priority
International airfreight
Total freight revenue
Other(2)
Total revenues
Operating expenses:
Salaries and employee
10,240
benefits
Purchased transportation 2,301
Rentals and landing fees 1,688
Depreciation and
amortization
Fuel
Maintenance and repairs
Impairment and other
charges(3)
Intercompany charges
Other
Total operating
expenses
Operating income
Operating margin
2,481
1,384
126
3,991
1,392
26,451
–
1,846
3,155
1,385
2,023
1,294
22
23
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table compares selected statistics (in thousands, except
yield amounts) for the years ended May 31:
Percent
Change
2016
2015
/
/ 2015
2014
2016
2015
2014
Package Statistics(1)
Average daily package
volume (ADV):
U.S. overnight box
U.S. overnight envelope
U.S. deferred
Total U.S. domestic ADV
International priority
International economy
Total international export
ADV
International domestic(2)
Total ADV
Revenue per package (yield):
U.S. overnight box
U.S. overnight envelope
U.S. deferred
U.S. domestic composite
International priority
International economy
International export
composite
International domestic(2)
Composite package yield
Freight Statistics(1)
Average daily freight pounds:
U.S.
International priority
International airfreight
541
901
1,271 1,240
527
916
2,713 2,683
410
176
394
181
575
888
586
853
4,176 4,122
1,164
538
869
2,571
410
170
580
819
3,970
$ 20.79 $ 21.29 $ 22.18
11.97
12.15
14.44
14.36
17.42
17.13
61.88
60.05
51.75
51.54
11.99
14.66
17.00
56.47
49.15
3
3
(2)
1
(4)
3
(2)
4
1
(2)
(1)
2
(1)
(6)
(5)
54.16
5.65
19.71
57.50
6.49
20.66
58.92
6.95
21.32
(6)
(13)
(5)
7
(2)
5
4
–
4
1
4
4
(4)
2
(1)
(2)
(3)
–
(2)
(7)
(3)
8,178
2,510
623
7,833
2,887
684
7,854
2,922
798
4
(13)
(9)
–
(1)
(14)
(1)
11,311 11,404 11,574
Total average daily
freight pounds
Revenue per pound (yield):
U.S.
$ 1.19 $ 1.16 $ 1.18
International priority
2.15
International airfreight
1.01
Composite freight yield
1.41
(1) Package and freight statistics include only the operations of FedEx Express.
(2) International domestic statistics represent our international intra-country operations.
3
(1)
(24)
(1)
2.15
0.79
1.38
2.17
1.04
1.40
(1)
(2)
1
3
(1)
FedEx Express Segment Revenues
FedEx Express segment revenues decreased 3% in 2016 primarily
due to lower fuel surcharges and unfavorable exchange rates, which
were partially offset by improved U.S. domestic and international
export yield management and U.S. domestic volume and pounds
growth. Two additional operating days also benefited revenues
in 2016.
During 2016, lower fuel surcharges resulted in decreased package
and freight yields. Unfavorable exchange rates also contributed
to the decrease in international package and freight yields. Higher
base rates partially offset the yield decrease for our U.S. domestic
package, international export and freight services. U.S. domestic
volumes increased 1% in 2016 driven by our overnight service
offerings. International domestic revenues declined 9% in 2016
due to the negative impact of unfavorable exchange rates, which
were partially offset by increased volumes.
FedEx Express total revenues were flat in 2015 as U.S. and
international package volume and base yield growth were offset
by lower fuel surcharges and unfavorable exchange rates.
U.S. domestic volumes increased 4% in 2015 driven by both our
overnight box and deferred service offerings. U.S. domestic yields
decreased 2% in 2015 due to the negative impact of lower fuel
surcharges, which were partially offset by higher rates. International
export volumes grew 1%, driven by a 4% growth in our international
economy service offering. The 2% decrease in international export
yields in 2015 was due to the negative impact of lower fuel surcharges
and unfavorable exchange rates, which were partially offset by higher
rates and weight per package. International domestic revenues declined
3% in 2015 due to the negative impact of unfavorable exchange rates,
which were partially offset by a 4% volume increase.
Our U.S. domestic and outbound fuel surcharge and the international
fuel surcharges ranged as follows for the years ended May 31:
U.S. Domestic and Outbound Fuel Surcharge:
Low
High
Weighted-average
International Fuel Surcharges:
Low
High
Weighted-average
2016
2015
2014
– % 1.50 % 8.00 %
4.00
1.84
9.50
6.34
10.50
9.47
–
12.00
6.09
0.50
18.00
12.80
12.00
19.00
16.26
On January 4, 2016 and January 5, 2015, 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
and February 2, 2015, FedEx Express updated certain tables used to
determine fuel surcharges.
22
23
MANAGEMENT’S DISCUSSION AND ANALYSIS
FedEx Express Segment Operating Income
FedEx Express operating income and operating margin increased
despite lower revenues in 2016. This increase was primarily driven
by profit improvement program initiatives, which continued to
constrain expense growth while improving revenue quality, the
positive net impact of fuel and lower international expenses due
to currency exchange rates. Also, operating income benefited from
two additional operating days in 2016. Results for 2015 were
negatively impacted by $276 million ($175 million, net of tax) of
impairment and related charges, of which $246 million was noncash,
resulting from the decision to permanently retire and adjust the
retirement schedule of certain aircraft and related engines.
Salaries and employee benefits increased 1% in 2016 due to merit
increases and higher incentive compensation accruals, which were
partially offset by a favorable exchange rate impact. Purchased
transportation decreased 10% in 2016 driven primarily by a favorable
exchange rate impact. Accelerated aircraft retirements during 2015
caused depreciation and amortization expense to decrease 5% in
2016. Maintenance and repairs expense decreased 5% in 2016
primarily due to the timing of aircraft maintenance events.
Fuel expense decreased 37% in 2016 due to lower aircraft fuel prices.
The net impact of fuel had a significant benefit to operating income in
2016. See the “Fuel” section of this MD&A for a description and
additional discussion of the net impact of fuel on our operating results.
Despite flat revenues, FedEx Express operating income and operating
margin increased in 2015, driven by U.S. domestic and international
package base yield and volume growth, benefits associated with our
profit improvement program, the positive net impact of fuel, reduced
pension expense, lower international expenses due to currency
exchange rates, lower depreciation expense and a lower year-over-
year impact from severe winter weather. These factors were
partially offset by higher maintenance expense and higher incentive
compensation accruals.
Within operating expenses, salaries and employee benefits increased
3% in 2015 due to the timing of annual merit increases for many of our
employees and higher incentive compensation accruals. These factors
were partially offset by the benefits from our voluntary employee
severance program and lower pension expense. Maintenance and
repairs expense increased 15% in 2015 primarily due to the timing of
aircraft maintenance events. Costs associated with the growth of our
freight-forwarding business at FedEx Trade Networks drove an increase
in purchased transportation costs of 1% in 2015. Depreciation and
amortization expense decreased 2% in 2015 driven by the expiration
of accelerated depreciation for certain aircraft that were retired from
service during the year.
Fuel expense decreased 19% in 2015 due to lower aircraft fuel prices.
The net impact of fuel had a significant benefit in 2015 to operating
income. See the “Fuel” section of this MD&A for a description and
additional discussion of the net impact of fuel on our operating results.
FedEx Express Group Outlook
Revenues and earnings are expected to increase at FedEx Express
during 2017. We expect revenues to increase primarily due to
improved international export and U.S. domestic volume and package
yields during 2017, as we continue to focus on revenue quality
while managing costs. Although our profit improvement programs
announced in 2013 are completed, we expect operating income to
improve through our continued execution of these programs, including
managing network capacity to match customer demand, reducing
structural costs, modernizing our fleet and driving productivity
increases throughout our U.S. and international operations. These
benefits will be partially offset in 2017 by higher maintenance
expense due to the timing of aircraft maintenance events.
Capital expenditures at FedEx Express are expected to be essentially
flat in 2017, excluding TNT Express expenditures, which are further
discussed below, but will continue to be driven by our aircraft fleet
modernization programs, as we add new aircraft that are more
reliable, fuel-efficient and technologically advanced and retire older,
less-efficient aircraft.
We plan to complete our purchase price allocation for TNT Express
no later than the fourth quarter of 2017. Given the timing and
complexity of this 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.
We will also begin operational integration activities focused on
combining TNT Express’s strong European capabilities and FedEx
Express’s strength in other regions globally, including North America
and Asia. Prior to our acquisition, TNT Express announced their
Outlook strategy aimed at doubling their adjusted operating income
and margin percentage by calendar 2018. This program includes
various initiatives focused on yield management, improved
operational efficiency and productivity and improved customer service.
We plan to continue these initiatives in 2017, although integration
activities may affect the execution of some of these initiatives.
We expect TNT Express earnings in 2017 to be negatively impacted
by integration expenses and intangible asset amortization, which
will more than offset the benefits of the Outlook programs.
Capital expenditures at TNT Express are expected to be approximately
$400 million during 2017 as we continue the Outlook program and
invest in projects related to the modernization of IT systems and
optimization of hubs and networks. Capital expenditures for 2017
will also include integration-related investments.
24
25
MANAGEMENT’S DISCUSSION AND ANALYSIS 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.
On August 31, 2015, our FedEx SmartPost business was merged into
FedEx Ground. The FedEx SmartPost service remains an important
component of our FedEx Ground service offerings; however, for
presentation purposes, FedEx SmartPost service revenues and operating
statistics have been combined with our FedEx Ground service
offerings. Also, on June 1, 2015, we prospectively began recording
revenues associated with the FedEx SmartPost service on a gross
basis and including postal fees in revenues and expenses, versus
our previous net treatment, due to operational changes that occurred
in 2016, which resulted in us being the principal in all cases for the
FedEx SmartPost service. On January 30, 2015, we acquired GENCO,
a leading North American third-party logistics provider. GENCO’s
financial results are included in the following table from the date
of acquisition, which has impacted the year-over-year comparability
of revenue and operating expenses. The following tables compare
revenues, operating expenses, operating expenses as a percent of
revenue, operating income and operating margin (dollars in millions)
and selected package statistics (in thousands, except yield amounts)
for the years ended May 31:
Percent
Change
2016
2015
/
/ 2015
2014
2016
2015
2014
Revenues:
FedEx Ground
GENCO
Total revenues
Operating expenses:
Salaries and employee
benefits
Purchased transportation
Rentals
Depreciation and
amortization
Fuel
Maintenance and repairs
Intercompany charges
Other
Total operating
expenses
Operating income
Operating margin
Average daily package
volume:
FedEx Ground
Revenue per package
(yield):
FedEx Ground
$ 15,050 $12,568 $11,617
1,524
16,574
416
12,984
8
20
– NM NM
12
28
11,617
2,834
6,817
639
608
10
288
1,230
1,872
2,146
5,021
485
530
12
244
1,123
1,251
1,749
4,635
402
468
17
222
1,095
1,008
14,298
9,596
10,812
$ 2,276 $ 2,172 $ 2,021
32
36
32
15
(17)
18
10
50
32
5
23
8
21
13
(29)
10
3
24
13
7
13.7 % 16.7% 17.4 % (300 )bp (70 )bp
7,526
6,911
6,774
$ 7.80 $ 7.16 $ 6.75
9
9
2
6
Percent of Revenue
2015
2016
2014
Operating expenses:
Salaries and employee benefits
Purchased transportation
Rentals
Depreciation and amortization
Fuel
Maintenance and repairs
Intercompany charges
Other
Total operating expenses
Operating margin
17.1 %
41.1
3.9
3.7
0.1
1.7
7.4
11.3
86.3
13.7 %
16.5 %
38.7
3.7
4.1
0.1
1.9
8.7
9.6
83.3
16.7 %
15.0 %
39.9
3.5
4.0
0.2
1.9
9.4
8.7
82.6
17.4 %
FedEx Ground Segment Revenues
FedEx Ground segment revenues increased 28% in 2016 due to
volume and yield growth at FedEx Ground and the inclusion of
GENCO revenue for a full year, which were partially offset by lower
fuel surcharges. Revenues increased approximately $1.2 billion in
2016 as a result of recording FedEx SmartPost revenues on a gross
basis, versus our previous net treatment. In addition, revenues
benefited from two additional operating days in 2016.
Average daily volume at FedEx Ground increased 9% in 2016 primarily
due to continued growth in our residential services driven by
e-commerce. FedEx Ground yield increased 9% in 2016 primarily due
to the recording of FedEx SmartPost revenues on a gross basis, versus
our previous net treatment, and increased base rates, which include
additional dimensional weight charges. These factors were partially
offset by lower fuel surcharges.
FedEx Ground segment revenues increased 12% in 2015 due to FedEx
Ground volume and yield growth, the inclusion of GENCO results and
FedEx SmartPost yield growth. These factors were partially offset by
lower FedEx SmartPost volumes.
Average daily volume at FedEx Ground increased 2% in 2015 due to
continued growth in our FedEx Home Delivery service and commercial
business, which was partially offset by a reduction in FedEx SmartPost
volumes from a major customer. Yield increased 6% in 2015 primarily
due to higher dimensional weight charges and rate increases, which
were partially offset by higher postage costs for FedEx SmartPost
services. During 2015, FedEx SmartPost service yield represented the
amount charged to customers net of postage paid to the United States
Postal Service (“USPS”). As stated above, on June 1, 2015, we
prospectively began recording revenues associated with the FedEx
SmartPost service on a gross basis and including postal fees in
revenues and expenses.
24
25
MANAGEMENT’S DISCUSSION AND ANALYSIS
FedEx Ground segment operating income increased 7% in 2015
driven by higher revenue per package and volumes, the positive net
impact of fuel, and a lower year-over-year impact from severe winter
weather. The increase to operating income was partially offset by
higher network expansion costs, as we continued to invest heavily
in our FedEx Ground and FedEx SmartPost businesses. The decline
in operating margin for 2015 is primarily attributable to network
expansion costs and the inclusion of GENCO results.
Including the incremental costs from GENCO, salaries and employee
benefits increased 23% driven by additional staffing to support volume
growth. Volume growth and higher service provider rates drove
purchased transportation expense to increase 8% in 2015. Other
expense increased 24% in 2015 primarily due to the addition of
GENCO results and higher self-insurance costs. Network expansion
caused rentals expense to increase 21% in 2015. Depreciation and
amortization expense increased 13% in 2015 due to network
expansion and trailer purchases.
FedEx Ground Segment Outlook
We expect FedEx Ground segment revenues and operating income
to increase in 2017, driven by e-commerce volume growth and market
share gains. We also anticipate continued yield growth in 2017 due
to yield management programs. Continued growth in e-commerce
has led to higher volumes of larger shipments that cannot be
processed in our automated sortation systems. Therefore, we are
making investments to adjust our network to efficiently handle
the larger packages, and we are adjusting our pricing to reflect the
higher cost of handling these packages. However, we anticipate
FedEx Ground operating margin will be negatively impacted by
higher operating costs in 2017 due to network expansion and other
operational costs resulting from higher residential service volumes
driven by continued growth in e-commerce.
Capital expenditures at FedEx Ground are expected to increase in
2017 as we continue to make investments to grow our highly
profitable FedEx Ground network through facility expansions and
equipment purchases. The impact of these investments on our cost
structure will continue to partially offset earnings growth in 2017.
The FedEx Ground fuel surcharge is based on a rounded average of the
national U.S. on-highway average price for a gallon of diesel fuel, as
published by the Department of Energy. Our fuel surcharge ranged as
follows for the years ended May 31:
Low
High
Weighted-average
2014
2015
2016
2.75 % 4.50 % 6.50 %
7.00
4.50
5.90
3.82
7.00
6.66
On January 4, 2016 and January 5, 2015, 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. On February 2, 2015,
FedEx Ground updated the tables used to determine fuel surcharges.
On January 5, 2015, FedEx Ground began applying dimensional weight
pricing to all shipments.
FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 5% in 2016 due
to higher volumes and increased yield, as well as the benefit from
two additional operating days. These factors were partially offset by
network expansion costs, higher self-insurance expenses and increased
purchased transportation rates.
Operating margin decreased in 2016 primarily due to the recording of
FedEx SmartPost revenues on a gross basis (including postal fees in
revenues and expenses), the inclusion of GENCO results for a full year,
and higher self-insurance expenses. The change in FedEx SmartPost
revenue recognition and the inclusion of GENCO collectively
decreased operating margin by 190 basis points in 2016.
The inclusion of GENCO in the FedEx Ground segment results for a full
year has impacted the year-over-year comparability of all operating
expenses. Along with incremental costs from GENCO, purchased
transportation expense increased 36% in 2016 due to the recording
of FedEx SmartPost revenues on a gross basis, as further discussed
in this MD&A, and higher volumes and increased rates. Salaries
and employee benefits expense increased 32% in 2016 due to the
inclusion of GENCO results, additional staffing to support volume
growth and higher healthcare costs. Other expenses increased
50% in 2016 primarily due to the addition of GENCO results and
higher self-insurance costs. Rentals expense increased 32% in
2016 due to network expansion and the inclusion of GENCO results.
Depreciation and amortization expense increased 15% in 2016 due
to network expansion and the inclusion of GENCO results.
26
27
MANAGEMENT’S DISCUSSION AND ANALYSIS FedEx Freight Segment
FedEx Freight service offerings include priority LTL 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 years ended May 31:
2016
2014
$ 6,200 $ 6,191 $ 5,757
2015
Percent
Change
2016
2015
–
/
/ 2015
2014
8
2,925
962
142
2,698
1,045
129
2,442
981
131
248
363
206
456
472
230
508
201
444
452
231
595
179
431
416
8
(8)
10
8
(29)
2
3
4
10
7
(2)
–
(15)
12
3
9
$
5,774
426 $
6.9 %
5,707
484 $
7.8 %
1
5,406
351
(12)
6.1% (90)bp 170bp
6
38
67.7
31.1
66.9
28.6
62.9
27.7
98.8
95.5
90.6
1
9
3
1,191
1,145
1,272
1,003
1,262
1,000
(6)
14
1,177
1,191
1,182
(1)
$ 218.50 $ 229.57 $ 223.61
258.05
264.34
261.27
(5)
(1)
$ 232.11 $ 240.09 $
234.23
(3)
$ 18.35 $ 18.05 $ 17.73
25.80
26.34
22.81
$ 19.73 $ 20.15 $ 19.82
2
(13)
(2)
6
3
5
1
–
1
3
2
3
2
2
2
Revenues
Operating expenses:
Salaries and employee
benefits
Purchased transportation
Rentals
Depreciation and
amortization
Fuel
Maintenance and repairs
Intercompany charges
Other
Total operating
expenses
Operating income
Operating margin
Average daily LTL
shipments (in thousands)
Priority
Economy
Total average daily LTL
shipments
Weight per LTL shipment
Priority
Economy
Composite weight per
LTL shipment
LTL revenue per shipment
Priority
Economy
Composite LTL
revenue per
shipment
LTL revenue per
hundredweight
Priority
Economy
Composite LTL
revenue per
hundredweight
Percent of Revenue
2015
2016
2014
Operating expenses:
Salaries and employee benefits
Purchased transportation
Rentals
Depreciation and amortization
Fuel
Maintenance and repairs
Intercompany charges
Other
Total operating expenses
Operating margin
47.2 %
15.5
2.3
4.0
5.8
3.3
7.4
7.6
93.1
6.9%
43.6 %
16.9
2.1
3.7
8.2
3.2
7.2
7.3
92.2
7.8%
42.4 %
17.1
2.3
4.0
10.3
3.1
7.5
7.2
93.9
6.1%
FedEx Freight Segment Revenues
FedEx Freight segment revenues were flat in 2016 as higher average
daily shipments were offset by lower revenue per shipment. Average
daily LTL shipments increased 3% in 2016 due to increased volume
primarily related to small and mid-sized customers. LTL revenue per
shipment decreased 3% in 2016 due to lower fuel surcharges and
lower weight per shipment.
FedEx Freight segment revenues increased 8% in 2015 due to higher
average daily shipments and revenue per shipment. Average daily
LTL shipments increased 5% in 2015 due to higher demand for our
FedEx Freight Priority and FedEx Freight Economy service offerings.
LTL revenue per shipment increased 3% in 2015 due to higher rates
and higher weight per LTL shipment.
The weekly indexed LTL fuel surcharge is based on the average of the
U.S. on-highway prices for a gallon of diesel fuel, as published by the
Department of Energy. The indexed LTL fuel surcharge ranged as
follows for the years ended May 31:
Low
High
Weighted-average
2016
2015
2014
18.50 % 20.90 % 22.70 %
23.10
20.60
26.20
24.30
23.70
23.20
On January 4, 2016, FedEx Freight implemented zone-based pricing
on U.S. and other LTL shipping rates. Also, on January 4, 2016 and
January 5, 2015, FedEx Freight implemented a 4.9% average increase
in certain U.S. and other shipping rates. On February 2, 2015, FedEx
Freight updated the tables used to determine fuel surcharges.
26
27
MANAGEMENT’S DISCUSSION AND ANALYSIS
FedEx Freight Segment Operating Income
FedEx Freight segment operating income and operating margin
decreased in 2016 primarily due to salaries and employee benefits
expense outpacing revenue growth, which was driven by weaker than
anticipated industrial production. Within operating expenses, salaries
and employee benefits increased 8% in 2016 due to pay initiatives and
increased staffing levels for higher shipment volumes. Other expenses
increased 4% in 2016 primarily due to higher insurance claims, a legal
reserve, and higher operating supplies. Depreciation and amortization
increased 8% in 2016 due to investments in transportation equipment.
Rentals increased 10% in 2016 driven primarily by a charge related
to a facility closure. Purchased transportation expense decreased
8% in 2016 due to lower rates and increased usage of lower cost rail
transportation. Fuel expense decreased 29% in 2016 due to lower
average price per gallon of diesel fuel. See the “Fuel” section of this
MD&A for a description and additional discussion of the net impact
of fuel on our operating results.
FedEx Freight segment operating income and operating margin
increased in 2015 due to higher LTL revenue per shipment and higher
average daily LTL shipments. These factors were partially offset by a
10% increase in salaries and employee benefits expense, due to higher
staffing to support volume growth and higher incentive compensation
accruals. Volume growth, higher utilization and higher service provider
rates drove an increase to purchased transportation expense of 7%
in 2015. Other expense increased 9% in 2015 partially due to higher
cargo claims.
FedEx Freight Segment Outlook
During 2017 we expect revenue, operating income and operating
margin improvement driven by effective yield management as well
as modest volume growth from small and mid-sized customers.
FedEx Freight earnings are also expected to be positively impacted
by improvement in productivity and further investments in technology.
Capital expenditures at FedEx Freight are expected to increase slightly
in 2017 primarily due to investments in vehicles.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $3.5 billion at May 31, 2016,
compared to $3.8 billion at May 31, 2015. The following table
provides a summary of our cash flows for the years ended May 31
(in millions):
2016
2015
2014
Operating activities:
Net income
Impairment and other charges
Retirement plans mark-to-market
adjustment
Other noncash charges and credits
Changes in assets and liabilities
Cash provided by operating activities
Investing activities:
Capital expenditures
Business acquisitions, net of
cash acquired
Proceeds from asset dispositions
and other
Cash used in investing activities
Financing activities:
Purchase of treasury stock
Principal payments on debt
Proceeds from debt issuances
Dividends paid
Other
Cash provided by (used in)
financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and
cash equivalents
Cash and cash equivalents at end
of period
$ 1,820 $ 1,050 $ 2,324
–
246
–
1,498
2,927
(537)
5,708
2,190
2,317
(437)
5,366
15
3,173
(1,248)
4,264
(4,818)
(4,347)
(3,533)
(4,618)
(1,429)
(36)
(10)
(9,446)
24
(5,752)
18
(3,551)
(2,722)
(41)
6,519
(277)
132
(1,254)
(5)
2,491
(227)
344
(4,857)
(254)
1,997
(187)
582
3,611
(102)
1,349
(108)
(2,719)
(3)
$
(229) $
855 $ (2,009)
$ 3,534 $ 3,763 $ 2,908
28
29
MANAGEMENT’S DISCUSSION AND ANALYSIS CASH PROVIDED BY OPERATING ACTIVITIES. Cash flows from
operating activities increased $342 million in 2016 primarily due to
higher segment operating income at FedEx Express and lower tax
payments due to bonus depreciation on aircraft purchases and other
qualifying assets. During the fourth quarter of 2016, we defeased the
underlying debt of certain leveraged operating leases, which was
accounted for as a prepayment of the lease obligations that reduced
our operating cash flows by $501 million.
Cash flows from operating activities increased $1.1 billion in 2015
primarily due to higher segment operating income, the inclusion in the
prior year of payments associated with our voluntary employee buyout
program and lower incentive compensation payments. We made
contributions of $660 million to our tax-qualified U.S. domestic
pension plans (“U.S. Pension Plans”) in 2016, 2015 and 2014.
CASH USED IN INVESTING ACTIVITIES. Capital expenditures were
11% higher in 2016 largely due to increased spending for sort facility
expansion at FedEx Ground, and were 23% higher in 2015 than in
2014 due to increased spending for aircraft at FedEx Express and sort
facility expansion at FedEx Ground. See “Capital Resources” for a
more detailed discussion of capital expenditures during 2016 and 2015.
FINANCING ACTIVITIES. We had various senior unsecured debt
issuances in 2016, 2015 and 2014. See Note 6 of the accompanying
consolidated financial statements for more information on these
issuances. Interest on our fixed-rate notes is paid semi-annually.
Interest on our Euro fixed-rate notes is paid annually. Our floating-rate
Euro senior notes bear interest at three-month EURIBOR plus a spread
of 55 basis points and resets quarterly. We utilized the net proceeds
of our 2016 debt issuances for working capital and general corporate
purposes, our acquisition of TNT Express, share repurchases and the
redemption and the prepayment and defeasance of the underlying
debt of certain leveraged operating leases. We utilized $1.4 billion of
the net proceeds of the 2015 debt issuance to fund our acquisition of
GENCO and the remaining proceeds for working capital and general
corporate purposes. See Note 3 of the accompanying consolidated
financial statements for further discussion of business acquisitions.
During 2014, we repaid our $250 million 7.38% senior unsecured
notes that matured on January 15, 2014.
The effect of exchange rate changes on cash during 2016 and 2015
was impacted by the overall strengthening of the U.S. dollar primarily
against the Brazilian real, the British pound, the Japanese yen, the
Canadian dollar and the Mexican peso.
The following table provides a summary of our common stock share repurchases for the periods ended May 31 (dollars in millions, except per
share amounts):
Total Number
of Shares
Purchased
18,225,000
2016
Average
Price Paid
per Share
$ 149.35
Total
Purchase
Price
$ 2,722
Total Number
of Shares
Purchased
8,142,410
2015
Average
Price Paid
per Share
$ 154.03
Total
Purchase
Price
$ 1,254
Common stock purchases
28
29
MANAGEMENT’S DISCUSSION AND ANALYSIS
In January 2016, the stock repurchase authorization announced in
2015 for 15 million shares was completed. On January 26, 2016, our
Board of Directors approved a new share repurchase program of up to
25 million shares. 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.
From 2014 through 2016, we repurchased 63.2 million shares of FedEx
common stock at an average price of $139.73 per share for a total of
$8.8 billion. As of May 31, 2016, 19.0 million shares remained under
the current share repurchase authorization.
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.
The following table compares capital expenditures by asset category
and reportable segment for the years ended May 31 (in millions):
Percent
Change
2016
2015
(9)
38
21
/
/ 2015
2014
41
49
(23)
2016
2014
Aircraft and related equipment $ 1,697 $ 1,866 $ 1,327
819
Facilities and sort equipment
784
1,691
730
1,224
601
2015
Vehicles
Information and technology
investments
Other equipment
Total capital expenditures
FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Services segment
Other
Total capital expenditures
396
304
348
308
403
200
$ 4,818 $ 4,347 $ 3,533
$ 2,356 $ 2,380 $ 1,994
850
1,248
325
337
381
363
1
1,597
433
432
–
(14)
14
54
(1)
23
11
19
(1)
47
28
4
28
5
13
1 NM NM
23
11
$ 4,818 $ 4,347 $ 3,533
Capital expenditures during 2016 were higher than the prior-year
period primarily due to increased spending for sort facility expansion
at FedEx Ground. Aircraft and related equipment purchases at FedEx
Express during 2016 included the delivery of 11 Boeing 767-300
Freighter (“B767F”) aircraft and two Boeing 777 Freighter (“B777F”)
aircraft, as well as the modification of certain aircraft before being
placed into service. Capital expenditures during 2015 were higher
than the prior year primarily due to increased spending for aircraft
at FedEx Express and increased spending for sort facility expansion
30
at FedEx Ground. Aircraft and related equipment purchases at FedEx
Express during 2015 included the delivery of 14 B767F aircraft and
13 Boeing 757 aircraft, as well as the modification of certain aircraft
before being placed into service.
Liquidity Outlook
We believe that our cash and cash equivalents, which totaled
$3.5 billion at May 31, 2016, cash flow from operations and available
financing sources will be adequate to meet our liquidity needs,
including working capital, capital expenditure requirements, debt
payment obligations and TNT Express integration expenses. Our cash
and cash equivalents balance at May 31, 2016 includes $522 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 U.S. domestic debt or working capital obligations.
Our capital expenditures are expected to be approximately $5.6 billion
in 2017. We anticipate that our cash flow from operations will be
sufficient to fund our increased capital expenditures in 2017, which
will include spending for network expansion at FedEx Ground and
aircraft modernization and re-fleeting at FedEx Express. This capital
expenditure forecast includes TNT Express. We expect approximately
50% of capital expenditures in 2016 to be designated for growth
initiatives, predominantly at FedEx Ground. Our expected capital
expenditures for 2017 include $1.6 billion in investments for delivery
of aircraft and progress payments toward future aircraft deliveries at
FedEx Express.
We have several aircraft modernization programs underway that are
supported by the purchase of B777F and B767F aircraft. These aircraft
are significantly more fuel-efficient per unit than the aircraft types
previously utilized, and these expenditures are necessary to achieve
significant long-term operating savings and to replace older aircraft.
Our ability to delay the timing of these aircraft-related expenditures
is limited without incurring significant costs to modify existing
purchase agreements.
In July 2015, FedEx Express entered into a supplemental agreement
to purchase 50 additional B767F aircraft from Boeing. Four of the 50
additional B767F aircraft purchases are conditioned upon there being
no event that causes FedEx Express or its employees not to be covered
by the Railway Labor Act of 1926, as amended (“RLA”). The 50
additional B767F aircraft are expected to be delivered from fiscal
2018 through fiscal 2023 and will enable FedEx Express to continue to
improve the efficiency and reliability of its aircraft fleet. In September
2014, FedEx Express entered into an agreement to purchase four
additional B767F aircraft, the delivery of which will begin in 2017 and
continue through 2019.
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.
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
31
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 (“adjusted 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 adjusted EBITDA
was 1.9 to 1.0 at May 31, 2016. We believe this covenant is the 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 financial 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. If we failed to comply with the financial
covenant or any other covenants of our revolving credit agreement,
our access to financing could become limited. We do not expect to
be at risk of noncompliance with the financial covenant or any other
covenants of our revolving credit agreement. As of May 31, 2016,
no commercial paper was outstanding. However, we had a total of
$318 million in letters of credit outstanding at May 31, 2016, with
$182 million of the letter of credit sublimit unused under our
revolving credit facility.
For 2017, we anticipate making contributions totaling $1.0 billion
(approximately $615 million of which are required) to our U.S. Pension
Plans. Contributions to our U.S. Pension Plans are increasing in 2017
to cover increasing retiree benefit payments and to improve the
funded status of our U.S. Pension Plans. Our U.S. Pension Plans have
ample funds to meet expected benefit payments.
In December 2015, The Protecting Americans from Tax Hikes Act
of 2015 (PATH Act) was passed into law. As a result, our current
federal income taxes will be reduced due to the accelerated
depreciation provisions on qualifying capital investments through
December 31, 2019.
On June 6, 2016, our Board of Directors declared a quarterly dividend
of $0.40 per share of common stock, an increase of $0.15 per common
share from the prior quarter’s dividend. The dividend was paid on
July 1, 2016 to stockholders of record as of the close of business on
June 16, 2016. 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.
Standard & Poor’s has assigned us a senior unsecured debt credit
rating of BBB and commercial paper rating of A-2 and a ratings
outlook of “stable.” On March 15, 2016, Moody’s Investors Service
lowered our unsecured debt credit rating of Baa1 to 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 May 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 May 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. Unless statutorily required, 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.
(in millions)
Operating activities:
Operating leases
Non-capital purchase obligations and other
Interest on long-term debt
Contributions to our U.S. Pension Plans
Investing activities:
Aircraft and aircraft-related capital commitments
Other capital purchase obligations
Financing activities:
Debt
Total
2017
$ 2,475
577
491
615
Payments Due by Fiscal Year (Undiscounted)
2020
2021
2019
Thereafter
2018
Total
$ 2,243
396
497
–
$ 1,953
260
496
–
$ 1,668
192
434
–
$ 1,451
119
422
–
$ 8,023
100
8,233
–
$ 17,813
1,644
10,573
615
1,212
44
1,770
5
1,563
4
1,620
1
1,476
1
4,240
8
11,881
63
3
$ 5,417
3
$ 4,914
1,311
$ 5,587
961
$ 4,876
–
$ 3,469
11,577
$ 32,181
13,855
$ 56,444
30
31
MANAGEMENT’S DISCUSSION AND ANALYSIS
Open purchase orders that are cancelable are not considered
unconditional purchase obligations for financial reporting purposes
and are not included in the table above. Such purchase orders often
represent authorizations to purchase rather than binding agreements.
See Note 17 of the accompanying consolidated financial statements
for more information on such purchase orders.
excluded from the table. See Note 12 of the accompanying
consolidated financial statements for further information.
We had $413 million in deposits and progress payments as of
May 31, 2016 on aircraft purchases and other planned aircraft-
related transactions.
Operating Activities
In accordance with accounting principles generally accepted in the
United States, future contractual payments under our operating leases
(totaling $17.8 billion on an undiscounted basis) are not recorded in
our balance sheet. Credit rating agencies routinely use information
concerning minimum lease payments required for our operating leases
to calculate our debt capacity. The amounts reflected in the table
above for operating leases represent undiscounted future minimum
lease payments under noncancelable operating leases (principally
aircraft and facilities) with an initial or remaining term in excess of
one year at May 31, 2016. Under the new lease accounting rules,
the majority of these leases will be required to be recognized at the
net present value on the balance sheet as a liability with an offsetting
right-to-use asset.
The amounts reflected for purchase obligations represent noncancelable
agreements to purchase goods or services that are not capital-related.
Such contracts include those for printing and advertising and
promotions contracts.
Included in the table above within the caption entitled “Non-capital
purchase obligations and other” is our estimate of the current portion
of the liability ($1 million) for uncertain tax positions. We cannot
reasonably estimate the timing of the long-term payments or the
amount by which the liability will increase or decrease over time;
therefore, the long-term portion of the liability ($48 million) is
Investing Activities
The amounts reflected in the table above for capital purchase
obligations represent noncancelable agreements to purchase
capital-related equipment. Such contracts include those for certain
purchases of aircraft, aircraft modifications, vehicles, facilities,
computers and other equipment. Commitments to purchase aircraft
in passenger configuration do not include the attendant costs to
modify these aircraft for cargo transport unless we have entered
into noncancelable commitments to modify such aircraft.
On June 10, 2016, FedEx Express exercised options to acquire six
additional B767F aircraft for delivery in 2019 and 2020.
Financing Activities
We have certain financial instruments representing potential
commitments, not reflected in the table above, that were incurred
in the normal course of business to support our operations, including
standby letters of credit and surety bonds. These instruments are
required under certain U.S. self-insurance programs and are also
used in the normal course of international operations. The underlying
liabilities insured by these instruments are reflected in our balance
sheets, where applicable. Therefore, no additional liability is reflected
for the letters of credit and surety bonds themselves.
The amounts reflected in the table above for long-term debt represent
future scheduled payments on our long-term debt.
32
33
MANAGEMENT’S DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management
to make significant judgments and estimates to develop amounts
reflected and disclosed in the financial statements. In many cases,
there are alternative policies or estimation techniques that could be
used. We maintain a thorough process to review the application of
our accounting policies and to evaluate the appropriateness of the
many estimates that are required to prepare the financial statements
of a complex, global corporation. However, even under optimal
circumstances, estimates routinely require adjustment based on
changing circumstances and new or better information.
The estimates discussed below include the financial statement
elements that are either the most judgmental or involve the selection
or application of alternative accounting policies and are material
to our financial statements. Management has discussed the
development and selection of these critical accounting estimates
with the Audit Committee of our Board of Directors and with our
independent registered public accounting firm.
Retirement Plans
OVERVIEW. We sponsor programs that provide retirement benefits
to most of our employees. These programs include defined benefit
pension plans, defined contribution plans and postretirement
healthcare plans and are described in Note 13 of the accompanying
consolidated financial statements. The rules for pension accounting
are complex and can produce tremendous volatility in our results,
financial condition and liquidity.
The TNT Express acquisition added a number of defined benefit pension
plans to our retirement plans portfolio. The net funded status of these
defined benefit pension plans is included in our disclosures as of
May 31, 2016. The completion of the purchase accounting process
to identify and value all of the defined benefit arrangements under
accounting principles generally accepted in the United States may
result in adjustment to the funded status of such plans during 2017.
We are required to record annual year-end adjustments to our financial
statements for the net funded status of our pension and postretirement
healthcare plans. The funded status of our plans also impacts our
liquidity; however, the cash funding rules operate under a completely
different set of assumptions and standards than those used for financial
reporting purposes. As a result, our actual cash funding requirements
can differ materially from our reported funded status.
The “Salaries and employee benefits” caption of our consolidated
income statements includes expense associated with service,
prior service and interest costs, the EROA and settlements and
curtailments. Our fourth quarter MTM adjustment is included in the
“Retirement plans mark-to-market adjustment” caption in our
consolidated income statements. A summary of our retirement plans
costs over the past three years is as follows (in millions):
Defined benefit pension plans:
Segment level
Eliminations, corporate and other
Total defined benefit pension plans
Defined contribution plans
Postretirement healthcare plans
Retirement plans mark-to-market
adjustment
2016
2015
2014
$ 209
5
$ 214
416
82
1,498
$ 2,210
$ 222
(263)
$ (41 )
385
81
$ 332
(233)
$ 99
363
78
2,190
$ 2,615
15
$ 555
The components of the pre-tax mark-to-market losses are as follows,
in millions:
Actual versus expected return
on assets
Discount rate changes
Demographic assumption experience
Total mark-to-market loss
2016
2015
2014
$ 1,285
1,129
(916 )
$ 1,498
$ (35 )
791
1,434
$ 2,190
$ (1,013)
705
323
$ 15
2016
The actual rate of return on our U.S. Pension Plan assets of 1.2% was
lower than our expected return of 6.50% primarily due to a challenging
environment for global equities and other risk-seeking asset classes.
The weighted average discount rate for all of our pension and
postretirement healthcare plans declined from 4.38% at May 31, 2015
to 4.04% at May 31, 2016. The demographic assumption experience
in 2016 reflects a change in disability rates and an increase in the
average retirement age for U.S. pension and other postemployment
benefit plans.
2015
The implementation of new U.S. mortality tables in 2015 resulted in
an increased participant life expectancy assumption, which increased
the overall projected benefit obligation by $1.2 billion. The weighted
average discount rate for all of our pension and postretirement
healthcare plans declined from 4.57% at May 31, 2014 to 4.38% at
May 31, 2015.
2014
The actual rate of return on our U.S. Pension Plan assets of 13.3%
exceeded our expected return of 7.75% primarily due to a favorable
investment environment for global equity markets. The weighted
average discount rate for all of our pension and postretirement
healthcare plans decreased from 4.76% at May 31, 2013 to 4.57%
at May 31, 2014.
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MANAGEMENT’S DISCUSSION AND ANALYSIS DISCOUNT RATE. This is the interest rate used to discount the
estimated future benefit payments that have been accrued to date
(the projected benefit obligation or “PBO”) to their net present value
and to determine the succeeding year’s ongoing pension expense
(prior to any year-end MTM adjustment). The discount rate is
determined each year at the plan measurement date. The discount
rate at each measurement date was as follows:
Measurement Date
Discount Rate
5/31/2016
5/31/2015
5/31/2014
5/31/2013
4.13 %
4.42
4.60
4.79
We determine the discount rate with the assistance of actuaries, who
calculate the yield on a theoretical portfolio of high-grade corporate
bonds (rated Aa or better). In developing this theoretical portfolio,
we select bonds that match cash flows to benefit payments, limit
our concentration by industry and issuer, and apply screening criteria
to ensure bonds with a call feature have a low probability of being
called. To the extent scheduled bond proceeds exceed the estimated
benefit payments in a given period, the calculation assumes those
excess proceeds are reinvested at one-year forward rates.
The discount rate assumption is highly sensitive. For our largest pension
plan, at our May 31, 2016 measurement date, a 50-basis-point
increase in the discount rate would have decreased our 2016 PBO
by approximately $1.8 billion and a 50-basis-point decrease in the
discount rate would have increased our 2016 PBO by approximately
$2.0 billion. With the adoption of MTM accounting, the impact of
changes in the discount rate on pension expense is predominantly
isolated to our fourth quarter mark-to-market adjustment. A
one-basis-point change in the discount rate for our largest pension
plan would have a $38 million effect on the fourth quarter mark-to-
market adjustment but only a net $200,000 impact on segment level
pension expense.
PLAN ASSETS. The expected average rate of return on plan assets
is a long-term, forward-looking assumption. It is required to be the
expected future long-term rate of earnings on plan assets. Our
pension plan assets are invested primarily in publicly tradable
securities, and our pension plans hold only a minimal investment in
FedEx common stock that is entirely at the discretion of third-party
pension fund investment managers. As part of our strategy to manage
pension costs and funded status volatility, we follow a liability-driven
investment strategy to better align plan assets with liabilities.
Establishing the expected future rate of investment return on our
pension assets is a judgmental matter, which we review on an annual
basis and revise as appropriate. Management considers the following
factors in determining this assumption:
> the duration of our pension plan liabilities, which drives the
investment strategy we can employ with our pension plan assets;
> the types of investment classes in which we invest our pension plan
assets and the expected compound geometric return we can
reasonably expect those investment classes to earn over time; and
> the investment returns we can reasonably expect our investment
management program to achieve in excess of the returns we could
expect if investments were made strictly in indexed funds.
For consolidated pension expense, we assumed a 6.5% expected
long-term rate of return on our U.S. Pension Plan assets in 2016 and
7.75% in 2015 and 2014. We lowered our EROA assumption in 2016 as
we continued to implement our asset and liability management strategy.
In lowering this assumption we considered our historical returns, our
current capital markets outlook and our investment strategy for our plan
assets, including the impact of the duration of our liabilities. Our actual
return in 2016 was less than the expected return. Our actual returns in
2015 and 2014, however, exceeded those long-term assumptions. Our
actual return on plan assets has contracted from 2015 due to lower than
expected returns on public equities.
At the segment level, we set our EROA at 6.5% for all periods
presented when we adopted MTM accounting in 2015. We record
service cost, interest cost and EROA at the segment level, but our
annual MTM adjustment and any difference between our consolidated
EROA and our segment EROA are reflected only at the corporate
level. This allows our segment operating results to follow internal
management reporting, which is used for making operating decisions
and assessing performance.
For our U.S. Pension Plans, a one basis-point change in our EROA
impacts our 2017 segment pension expense by $2.3 million. The actual
historical annual return on our U.S. Pension Plan assets, calculated
on a compound geometric basis, was 6.9%, net of investment manager
fees and administrative expenses, for the 15-year period ended
May 31, 2016.
FUNDED STATUS. The following is information concerning the funded
status of our pension plans as of May 31 (in millions):
Funded Status of Plans:
Projected benefit obligation (PBO)
Fair value of plan assets
Funded status of the plans
Cash Amounts:
Cash contributions during the year
Benefit payments during the year
2016
2015
$ 29,602
24,271
$ (5,331 )
$ 27,512
23,505
$ (4,007 )
$
$
726
912
$
$
746
815
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MANAGEMENT’S DISCUSSION AND ANALYSIS
FUNDING. The funding requirements for our U.S. Pension Plans are
governed by the Pension Protection Act of 2006, which has aggressive
funding requirements in order to avoid benefit payment restrictions
that become effective if the funded status determined under Internal
Revenue Service rules falls below 80% at the beginning of a plan
year. All of our U.S. Pension Plans have funded status levels in excess
of 80% and our plans remain adequately funded to provide benefits
to our employees as they come due. Additionally, current benefit
payments do not materially impact our total plan assets (benefit
payments for our U.S. Pension Plans for 2016 were approximately
$860 million or 3.7% of plan assets).
During 2016, required contributions to our U.S. Pension Plans were
not significant. Over the past several years, we have made voluntary
contributions to our U.S. Pension Plans in excess of the minimum
required contributions. Amounts contributed in excess of the minimum
required can result in a credit balance for funding purposes that can
be used to reduce minimum contribution requirements in future years.
Our current credit balance exceeds $2.9 billion at May 31, 2016.
For 2017, we anticipate making contributions to our U.S. Pension
Plans totaling $1.0 billion (approximately $615 million of which
are required).
See Note 13 of the accompanying consolidated financial statements
for further information about our retirement plans.
Self-Insurance Accruals
We are self-insured up to certain limits for costs associated with
workers’ compensation claims, vehicle accidents and general business
liabilities, and benefits paid under employee healthcare and disability
programs. Our reserves are established for estimates of loss on
reported claims, including incurred-but-not-reported claims. Self-
insurance accruals reflected in our balance sheet were $2.2 billion
at May 31, 2016 and $2.0 billion at May 31, 2015. Approximately
40% of these accruals were classified as current liabilities.
Our self-insurance accruals are primarily based on the actuarially
estimated cost of claims incurred as of the balance sheet date. These
estimates include consideration of factors such as severity of claims,
frequency and volume of claims, healthcare inflation, seasonality
and plan designs. Cost trends on material accruals are updated each
quarter. We self-insure up to certain limits that vary by type of risk.
Periodically, we evaluate the level of insurance coverage and adjust
insurance levels based on risk tolerance and premium expense.
We believe the use of actuarial methods to account for these
liabilities provides a consistent and effective way to measure these
highly judgmental accruals. However, the use of any estimation
technique in this area is inherently sensitive given the magnitude of
claims involved and the length of time until the ultimate cost is known.
We believe our recorded obligations for these expenses are consistently
measured on a conservative basis. Nevertheless, changes in healthcare
costs, accident frequency and severity, insurance retention levels and
other factors can materially affect the estimates for these liabilities.
Long-Lived Assets
USEFUL LIVES AND SALVAGE VALUES. Our business is capital
intensive, with approximately 53% of our total assets invested in
our transportation and information systems infrastructures.
The depreciation or amortization of our capital assets over their
estimated useful lives, and the determination of any salvage values,
requires management to make judgments about future events. Because
we utilize many of our capital assets over relatively long periods (the
majority of aircraft costs are depreciated over 15 to 30 years), we
periodically evaluate whether adjustments to our estimated service
lives or salvage values are necessary to ensure these estimates properly
match the economic use of the asset. This evaluation may result in
changes in the estimated lives and residual values used to depreciate
our aircraft and other equipment. For our aircraft, we typically assign
no residual value due to the utilization of these assets in cargo
configuration, which results in little to no value at the end of their
useful life. These estimates affect the amount of depreciation expense
recognized in a period and, ultimately, the gain or loss on the disposal
of the asset. Changes in the estimated lives of assets will result in an
increase or decrease in the amount of depreciation recognized in future
periods and could have a material impact on our results of operations
(as described below). Historically, gains and losses on disposals of
operating equipment have not been material. However, such amounts
may differ materially in the future due to changes in business levels,
technological obsolescence, accident frequency, regulatory changes
and other factors beyond our control.
In 2013, FedEx Express made the decision to accelerate the retirement
of 76 aircraft and related engines to aid in our fleet modernization and
improve our global network. In 2012, we shortened the depreciable
lives for 54 aircraft and related engines to accelerate the retirement
of these aircraft, resulting in a depreciation expense increase of
$69 million in 2013. As a result of these accelerated retirements,
we incurred an additional $74 million in year-over-year accelerated
depreciation expense in 2014.
IMPAIRMENT. As of May 31, 2016, the FedEx Express global air
and ground network includes a fleet of 643 aircraft (including
approximately 300 supplemental aircraft) that provide delivery
of packages and freight to more than 220 countries and territories
through a wide range of U.S. and international shipping services.
While certain aircraft are utilized in primary geographic areas (U.S.
versus international), we operate an integrated global network, and
utilize our aircraft and other modes of transportation to achieve the
lowest cost of delivery while maintaining our service commitments
to our customers. Because of the integrated nature of our global
network, our aircraft are interchangeable across routes and
geographies, giving us flexibility with our fleet planning to meet
changing global economic conditions and maintain and modify
aircraft as needed.
Because of the lengthy lead times for aircraft manufacture and
modifications, we must anticipate volume levels and plan our fleet
requirements years in advance, and make commitments for aircraft
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MANAGEMENT’S DISCUSSION AND ANALYSIS based on those projections. Furthermore, the timing and availability
of certain used aircraft types (particularly those with better fuel
efficiency) may create limited opportunities to acquire these aircraft
at favorable prices in advance of our capacity needs. These activities
create risks that asset capacity may exceed demand. Aircraft
purchases (primarily aircraft in passenger configuration) that have
not been placed in service totaled $22 million at May 31, 2016 and
$102 million at May 31, 2015. We plan to modify these assets in
the future and place them into operations.
The accounting test for whether an asset held for use is impaired
involves first comparing the carrying value of the asset with its
estimated future undiscounted cash flows. If the cash flows do not
exceed the carrying value, the asset must be adjusted to its current
fair value. We operate integrated transportation networks, and
accordingly, cash flows for most of our operating assets are assessed
at a network level, not at an individual asset level for our analysis
of impairment. Further, decisions about capital investments are
evaluated based on the impact to the overall network rather than
the return on an individual asset. We make decisions to remove
certain long-lived assets from service based on projections of reduced
capacity needs or lower operating costs of newer aircraft types, and
those decisions may result in an impairment charge. Assets held for
disposal must be adjusted to their estimated fair values less costs
to sell when the decision is made to dispose of the asset and certain
other criteria are met. The fair value determinations for such aircraft
may require management estimates, as there may not be active
markets for some of these aircraft. Such estimates are subject to
revision from period to period.
In the normal management of our aircraft fleet, we routinely idle
aircraft and engines temporarily due to maintenance cycles and
adjustments of our network capacity to match seasonality and overall
customer demand levels. Temporarily idled assets are classified as
available-for-use, and we continue to record depreciation expense
associated with these assets. These temporarily idled assets are
assessed for impairment on a quarterly basis. The criteria for
determining whether an asset has been permanently removed from
service (and, as a result, is potentially impaired) include, but are not
limited to, our global economic outlook and the impact of our outlook
on our current and projected volume levels, including capacity needs
during our peak shipping seasons; the introduction of new fleet types
or decisions to permanently retire an aircraft fleet from operations;
and changes to planned service expansion activities. At May 31, 2016,
we had four aircraft temporarily idled. These aircraft have been idled
for less than one year and are expected to return to revenue service.
In the fourth quarter of 2015, we retired from service seven Boeing
MD11 aircraft and 12 related engines, four Airbus A310-300 aircraft
and three related engines, three Airbus A300-600 aircraft and three
related engines and one Boeing MD10-10 aircraft and three related
engines, and related parts. We also adjusted the retirement schedule
of an additional 23 aircraft and 57 engines. As a consequence,
impairment and related charges of $276 million ($175 million, net of
tax, or $0.61 per diluted share), of which $246 million was noncash,
were recorded in the fourth quarter. The decision to permanently retire
these aircraft and engines aligns with FedEx Express’s plans to
rationalize capacity and modernize its aircraft fleet to more effectively
serve its customers. These combined retirement changes will not have
a material impact on our near-term depreciation expense.
LEASES. We utilize operating leases to finance certain of our aircraft,
facilities and equipment. Such arrangements typically shift the risk of
loss on the residual value of the assets at the end of the lease period
to the lessor. As disclosed in “Contractual Cash Obligations” and
Note 7 of the accompanying consolidated financial statements, at
May 31, 2016 we had approximately $17.8 billion (on an undiscounted
basis) of future commitments for payments under operating leases.
The weighted-average remaining lease term of all operating leases
outstanding at May 31, 2016 was approximately six years. The future
commitments for operating leases are not yet reflected as a liability in
our balance sheet until the new rules on lease accounting issued in
2016 become effective in our fiscal 2020 as described below.
The determination of whether a lease is accounted for as a capital
lease or an operating lease requires management to make estimates
primarily about the fair value of the asset and its estimated economic
useful life. In addition, our evaluation includes ensuring we properly
account for build-to-suit lease arrangements and making judgments
about whether various forms of lessee involvement during the
construction period make the lessee an agent for the owner-lessor or,
in substance, the owner of the asset during the construction period.
We believe we have well-defined and controlled processes for making
these evaluations, including obtaining third-party appraisals for
material transactions to assist us in making these evaluations.
On February 25, 2016, the FASB issued the new lease accounting
standard, which will require us to record an asset and a liability for
our outstanding operating leases similar to the current accounting
for capital leases. Notably, the new standard states that a lessee
will recognize a lease liability for the net present values of 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. Under the new rules, we believe that a majority of
our operating lease obligations reflected in the contractual cash
obligations table would be required to be reflected in our balance
sheet at their net present value. 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.
GOODWILL. As of May 31, 2016, we had $6.7 billion of recorded
goodwill from our business acquisitions, representing the excess
of the purchase price over the fair value of the net assets we have
acquired. During 2016, we recorded $3.0 billion in additional
goodwill associated with our TNT Express acquisition. During 2015,
we recorded $1.1 billion in additional goodwill associated with our
GENCO and FedEx CrossBorder acquisitions. Several factors give rise
to goodwill in our acquisitions, such as the expected benefit from
synergies of the combination and the existing workforce of the
acquired business.
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MANAGEMENT’S DISCUSSION AND ANALYSIS Goodwill is reviewed at least annually for impairment. In our evaluation
of goodwill impairment, we perform a qualitative assessment that
requires management judgment and the use of estimates to determine
if it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If the qualitative assessment is not
conclusive, we proceed to a two-step process to test goodwill for
impairment, including comparing the fair value of the reporting
unit to its carrying value (including attributable goodwill). Fair value
is estimated using standard valuation methodologies (principally
the income or market approach) incorporating market participant
considerations and management’s assumptions on revenue growth
rates, operating margins, discount rates and expected capital
expenditures. Estimates used by management can significantly affect
the outcome of the impairment test. Changes in forecasted operating
results and other assumptions could materially affect these estimates.
We perform our annual impairment tests in the fourth quarter unless
circumstances indicate the need to accelerate the timing of the tests.
Our reporting units with significant recorded goodwill include FedEx
Express, TNT Express, FedEx Ground, FedEx Freight, FedEx Office
(reported in the FedEx Services segment) and GENCO (reported in the
FedEx Ground segment). With the exception of TNT Express due to the
timing of the acquisition, we evaluated these reporting units during
the fourth quarters of 2016 and 2015. The estimated fair value of each
of these reporting units exceeded their carrying values in 2016 and
2015; therefore, we do not believe that any of these reporting units
were impaired as of the balance sheet dates.
Contingencies
We are subject to various loss contingencies, including tax proceedings
and litigation, in connection with our operations. Contingent liabilities
are difficult to measure, as their measurement is subject to multiple
factors that are not easily predicted or projected. Further, additional
complexity in measuring these liabilities arises due to the various
jurisdictions in which these matters occur, which makes our ability to
predict their outcome highly uncertain. Moreover, different accounting
rules must be employed to account for these items based on the nature
of the contingency. Accordingly, significant management judgment is
required to assess these matters and to make determinations about
the measurement of a liability, if any. Our material pending loss
contingencies are described in Note 18 of the accompanying
consolidated financial statements. In the opinion of management,
the aggregate liability, if any, of individual matters or groups of matters
not specifically described in Note 18 is not expected to be material
to our financial position, results of operations or cash flows. The
following describes our methods and associated processes for
evaluating these matters.
TAX CONTINGENCIES. We are subject to income and operating tax
rules of the U.S., its states and municipalities, and of the foreign
jurisdictions in which we operate. Significant judgment is required in
determining income tax provisions, as well as deferred tax asset and
liability balances and related deferred tax valuation allowances, if
necessary, due to the complexity of these rules and their interaction
with one another. We account for income taxes by recording both
current taxes payable and deferred tax assets and liabilities. Our
provision for income taxes is based on domestic and international
statutory income tax rates in the jurisdictions in which we operate,
applied to taxable income, reduced by applicable tax credits.
Tax contingencies arise from uncertainty in the application of tax
rules throughout the many jurisdictions in which we operate and are
impacted by several factors, including tax audits, appeals, litigation,
changes in tax laws and other rules and their interpretations, and
changes in our business. We regularly assess the potential impact
of these factors for the current and prior years to determine the
adequacy of our tax provisions. We continually evaluate the
likelihood and amount of potential adjustments and adjust our tax
positions, including the current and deferred tax liabilities, in the
period in which the facts that give rise to a revision become known.
In addition, management considers the advice of third parties in
making conclusions regarding tax consequences.
We recognize liabilities for uncertain income tax positions based
on a two-step process. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step requires us to estimate
and measure the tax benefit as the largest amount that is more than
50% likely to be realized upon ultimate settlement. It is inherently
difficult and subjective to estimate such amounts, as we must
determine the probability of various possible outcomes. We reevaluate
these uncertain tax positions on a quarterly basis or when new
information becomes available to management. These reevaluations
are based on factors including, but not limited to, changes in facts or
circumstances, changes in tax law, successfully settled issues under
audit and new audit activity. Such a change in recognition or
measurement could result in the recognition of a tax benefit or an
increase to the related provision.
We classify interest related to income tax liabilities as interest
expense, and if applicable, penalties are recognized as a component
of income tax expense. The income tax liabilities and accrued interest
and penalties that are due within one year of the balance sheet date
are presented as current liabilities. The remaining portion of our
income tax liabilities and accrued interest and penalties are presented
as noncurrent liabilities because payment of cash is not anticipated
within one year of the balance sheet date. These noncurrent income
tax liabilities are recorded in the caption “Other liabilities” in the
accompanying consolidated balance sheets.
We account for operating taxes based on multi-state, local and
foreign taxing jurisdiction rules in those areas in which we operate.
Provisions for operating taxes are estimated based upon these rules,
asset acquisitions and disposals, historical spend and other variables.
These provisions are consistently evaluated for reasonableness
against compliance and risk factors.
We measure and record operating tax contingency accruals in
accordance with accounting guidance for contingencies. As discussed
below, this guidance requires an accrual of estimated loss from a
contingency, such as a tax or other legal proceeding or claim, when it
is probable that a loss will be incurred and the amount of the loss can
be reasonably estimated.
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MANAGEMENT’S DISCUSSION AND ANALYSIS LEGAL AND OTHER CONTINGENCIES. Because of the complex
environment in which we operate, we are subject to other legal
proceedings and claims, including those relating to general commercial
matters, governmental enforcement actions, employment-related
claims and FedEx Ground’s owner-operators. Accounting guidance
for contingencies requires an accrual of estimated loss from a
contingency, such as a tax or other legal proceeding or claim, when
it is probable (i.e., the future event or events are likely to occur) that
a loss has been incurred and the amount of the loss can be reasonably
estimated. This guidance also requires disclosure of a loss contingency
matter when, in management’s judgment, a material loss is reasonably
possible or probable.
During the preparation of our financial statements, we evaluate
our contingencies to determine whether it is probable, reasonably
possible or remote that a liability has been incurred. A loss is
recognized for all contingencies deemed probable and estimable,
regardless of amount. For unresolved contingencies with potentially
material exposure that are deemed reasonably possible, we evaluate
whether a potential loss or range of loss can be reasonably estimated.
Our evaluation of these matters is the result of a comprehensive
process designed to ensure that accounting recognition of a loss or
disclosure of these contingencies is made in a timely manner and
involves our legal and accounting personnel, as well as external counsel
where applicable. The process includes regular communications during
each quarter and scheduled meetings shortly before the completion of
our financial statements to evaluate any new legal proceedings and
the status of existing matters.
In determining whether a loss should be accrued or a loss contingency
disclosed, we evaluate, among other factors:
> the current status of each matter within the scope and context of
the entire lawsuit or proceeding (e.g., the lengthy and complex
nature of class-action matters);
> the procedural status of each matter;
> any opportunities to dispose of a lawsuit on its merits before trial
(i.e., motion to dismiss or for summary judgment);
> the amount of time remaining before a trial date;
> the status of discovery;
> the status of settlement, arbitration or mediation proceedings; and
> our judgment regarding the likelihood of success prior to or at trial.
In reaching our conclusions with respect to accrual of a loss or loss
contingency disclosure, we take a holistic view of each matter based
on these factors and the information available prior to the issuance of
our financial statements. Uncertainty with respect to an individual
factor or combination of these factors may impact our decisions
related to accrual or disclosure of a loss contingency, including a
conclusion that we are unable to establish an estimate of possible loss
or a meaningful range of possible loss. We update our disclosures to
reflect our most current understanding of the contingencies at the
time we issue our financial statements. However, events may arise
that were not anticipated and the outcome of a contingency may
result in a loss to us that differs materially from our previously
estimated liability or range of possible loss.
Despite the inherent complexity in the accounting and disclosure of
contingencies, we believe that our processes are robust and thorough
and provide a consistent framework for management in evaluating the
potential outcome of contingencies for proper accounting recognition
and disclosure.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
INTEREST RATES. While we currently have market risk sensitive
instruments related to interest rates, we have no significant exposure
to changing interest rates on our fixed-rate, long-term debt or our
floating-rate debt. As disclosed in Note 6 to the accompanying
consolidated financial statements, we had outstanding fixed- and
floating-rate, long-term debt (exclusive of capital leases) with an
estimated fair value of $14.3 billion at May 31, 2016 and outstanding
fixed-rate, long-term debt (exclusive of capital leases) with an
estimated fair value of $7.4 billion at May 31, 2015. Market risk for
fixed- and floating-rate, long-term debt is estimated as the potential
decrease in fair value resulting from a hypothetical 10% increase in
interest rates and amounts to $312 million as of May 31, 2016 and
$208 million as of May 31, 2015. The underlying fair values of our
long-term debt were estimated based on quoted market prices or on
the current rates offered for debt with similar terms and maturities.
We have interest rate risk with respect to our pension and
postretirement benefit obligations. Changes in interest rates impact
our liabilities associated with these benefit plans, as well as the
amount of pension and postretirement benefit expense recognized.
Declines in the value of plan assets could diminish the funded
status of our pension plans and potentially increase our requirement
to make contributions to the plans. Substantial investment losses
on plan assets would also increase pension expense.
FOREIGN CURRENCY. While we are a global provider of transportation,
e-commerce and business services, the substantial majority of our
transactions during the periods presented in this Annual Report are
denominated in U.S. dollars. The principal foreign currency exchange
rate risks to which we are exposed are in the euro, Chinese yuan, British
pound, Brazilian real, Canadian dollar and Mexican peso. Historically,
our exposure to foreign currency fluctuations is more significant with
respect to our revenues than our expenses, as a significant portion of
our expenses are denominated in U.S. dollars, such as aircraft and fuel
expenses. Foreign currency fluctuations had a moderately positive
impact on operating income in 2016 and 2015. However, favorable
foreign currency fluctuations also may have had an offsetting impact
on the price we obtained or the demand for our services, which is
not quantifiable. At May 31, 2016, the result of a uniform 10%
strengthening in the value of the dollar relative to the currencies in
which our transactions are denominated would result in a decrease in
operating income of $68 million for 2017. This theoretical calculation
required under SEC guidelines assumes that each exchange rate would
change in the same direction relative to the U.S. dollar, which is not
consistent with our actual experience in foreign currency transactions.
In addition to the direct effects of changes in exchange rates,
fluctuations in exchange rates also affect the volume of sales or the
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MANAGEMENT’S DISCUSSION AND ANALYSIS foreign currency sales price as competitors’ services become more or
less attractive. The sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change
in sales levels or local currency prices.
Our recently acquired TNT Express segment impacts our exposure
to foreign currency exchange risk. TNT Express maintains derivative
financial instruments to manage foreign currency fluctuations related
to probable future transactions and cash flows denominated in
currencies other than the currency of the transacting entity. These
derivatives are not designated as hedges and are accounted for at
fair value with any profit or loss recorded in income during the period
since acquisition, which was immaterial for 2016.
COMMODITY. While we have market risk for changes in the price of
jet and vehicle fuel, this risk is largely mitigated by our indexed fuel
surcharges. For additional discussion of our indexed fuel surcharges,
see the “Fuel” section of “Management’s Discussion and Analysis of
Results of Operations and Financial Condition.”
RISK FACTORS
Our financial and operating results are subject to many risks and
uncertainties, as described below.
We are directly affected by the state of the economy. While
macro-economic risks apply to most companies, we are particularly
vulnerable. The transportation industry is highly cyclical and especially
susceptible to trends in economic activity. Our primary business is to
transport goods, so our business levels are directly tied to the purchase
and production of goods — key macro-economic measurements. When
individuals and companies purchase and produce fewer goods, we
transport fewer goods, and as companies expand the number of
distribution centers and move manufacturing closer to consumer
markets, we transport goods shorter distances. In addition, we have
a relatively high fixed-cost structure, which is difficult to quickly adjust
to match shifting volume levels. Moreover, as we continue to grow
our international business, we are increasingly affected by the health
of the global economy, the rate of growth of global trade and the
typically more volatile economies of emerging markets. Most recently,
the United Kingdom’s (“UK”) vote to leave the European Union (“EU”)
could result in economic uncertainty and instability, resulting in fewer
goods being transported globally. In 2016, we saw a continued
customer preference for slower, less costly shipping services.
Our businesses depend on our strong reputation and the value
of the FedEx brand. The FedEx brand name symbolizes high-quality
service, reliability and speed. FedEx is one of the most widely
recognized, trusted and respected brands in the world, and the FedEx
brand is one of our most important and valuable assets. In addition,
we have a strong reputation among customers and the general public
for high standards of social and environmental responsibility and
corporate governance and ethics. The FedEx brand name and our
corporate reputation are powerful sales and marketing tools, and
we devote significant resources to promoting and protecting them.
Adverse publicity (whether or not justified) relating to activities by our
employees, contractors or agents, such as customer service mishaps
or noncompliance with laws, could tarnish our reputation and reduce
the value of our brand. With the increase in the use of social media
outlets such as YouTube and Twitter, adverse publicity can be
disseminated quickly and broadly, making it increasingly difficult for
us to effectively respond. Damage to our reputation and loss of brand
equity could reduce demand for our services and thus have an adverse
effect on our financial condition, liquidity and results of operations, as
well as require additional resources to rebuild our reputation and
restore the value of our brand.
The failure to integrate successfully the businesses and
operations of FedEx Express and TNT Express in the expected
time frame may adversely affect our future results. Prior to FedEx’s
acquisition of TNT Express in May 2016, FedEx Express and TNT
Express operated as independent companies. There can be no
assurances that these businesses can be integrated successfully.
It is possible that the integration process could result in higher than
expected integration costs, the loss of customers, the disruption of
ongoing businesses, unexpected integration issues, or the loss of key
historical FedEx Express or TNT Express employees. It is also possible
that the overall post-acquisition integration process will take longer
than currently anticipated. Specifically, the following issues, among
others, must be addressed as we begin to integrate the operations
of FedEx Express and TNT Express in order to realize the anticipated
benefits of the transaction:
> combining the companies’ operations and corporate functions;
> combining the businesses of FedEx Express and TNT Express and
meeting the capital requirements of the combination in a manner
that permits us to achieve the operating and financial results we
anticipated from the acquisition, the failure of which could result
in the material anticipated benefits of the transaction not being
realized in the time frame currently anticipated, or at all;
> integrating and consolidating the companies’ administrative and
information technology infrastructure and computer systems;
> integrating workforces while continuing to provide consistent,
high-quality service to customers;
> integrating and unifying the offerings and services available to
historical FedEx Express and TNT Express customers;
> harmonizing the companies’ operating practices, employee
development and compensation programs, integrity and
compliance programs, internal controls and other policies,
procedures and processes;
> integrating the companies’ financial reporting and internal control
systems, including our ability to become compliant with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
as amended, and the rules promulgated thereunder by the SEC;
> maintaining existing agreements with customers and service
providers and avoiding delays in entering into new agreements
with prospective customers and service providers;
> addressing possible differences in business backgrounds, corporate
cultures and management philosophies;
> addressing employee social issues so as to maintain efficient and
effective labor and employee relations;
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MANAGEMENT’S DISCUSSION AND ANALYSIS > coordinating rebranding and marketing efforts;
> managing the movement of certain positions to different locations;
> managing potential unknown and unidentified liabilities, including
liabilities that are significantly larger than currently anticipated,
and unforeseen increased expenses or delays associated with the
integration process; and
> managing the expanded operations of a significantly larger, more
complex company.
All of these factors could dilute FedEx’s earnings per share, decrease
or delay the expected accretive effect of the acquisition and negatively
impact the price of FedEx’s common stock. In addition, at times the
attention of certain members of our management may be focused on
the integration of the businesses of FedEx Express and TNT Express
and diverted from day-to-day business operations, which may disrupt
our business.
A significant data breach or other disruption to our technology
infrastructure could disrupt our operations and result in the loss
of critical confidential information, adversely impacting our
reputation, business or results of operations. Our ability to attract
and retain customers and to compete effectively depends in part upon
the sophistication and reliability of our technology network, including
our ability to provide features of service that are important to our
customers and to protect our confidential business information and
the information provided by our customers. We are subject to risks
imposed by data breaches, particularly through cyber-attack or
cyber-intrusion, including by computer hackers, foreign governments
and cyber terrorists. Data breaches have increased in recent years as
the number, intensity and sophistication of attempted attacks and
intrusions from around the world have increased. Additionally, risks
such as code anomalies, “Acts of God,” transitional challenges in
migrating operating company functionality to our FedEx enterprise
automation platform, data leakage and human error pose a direct
threat to our products, services and data.
Any disruption to our complex, global technology infrastructure,
including those impacting our computer systems and fedex.com,
could result in the loss of confidential business or customer information,
adversely impact our customer service, volumes and revenues or
could lead to litigation or investigations, resulting in significant costs.
These types of adverse impacts could also occur in the event the
confidentiality, integrity or availability of company and customer
information was compromised due to a data loss by FedEx or a trusted
third party. Recently, there has also been heightened regulatory
and enforcement focus on data protection in the U.S. and abroad
(particularly in the EU), and failure to comply with applicable U.S. or
foreign data protection regulations or other data protection standards
may expose us to litigation, fines, sanctions or other penalties, which
could harm our reputation and adversely impact our business, results
of operations and financial condition.
We have invested and continue to invest in technology security
initiatives, information technology risk management and disaster
recovery plans. The development and maintenance of these measures
is costly and requires ongoing monitoring and updating as technologies
change and efforts to overcome security measures become
increasingly more sophisticated. Despite our efforts, we are not fully
insulated from data breaches, technology disruptions or data loss,
which could adversely impact our competitiveness and results of
operations. Although we have not experienced data breaches or other
disruptions to our technology infrastructure that are material either
individually or in the aggregate, we may be unable to detect or
prevent a material breach or disruption in the future.
Our transportation businesses are impacted by the price and
availability of fuel. We must purchase large quantities of fuel to
operate our aircraft and vehicles, and the price and availability of fuel
can be unpredictable and beyond our control. To date, we have been
mostly successful in mitigating over time the expense impact of higher
fuel costs through our indexed fuel surcharges, as the amount of the
surcharges is closely linked to the market prices for fuel. If we are
unable to maintain or increase our fuel surcharges because of
competitive pricing pressures or some other reason, fuel costs could
adversely impact our operating results. Additionally, if fuel prices rise
sharply, even if we increase our fuel surcharge, we could experience
a lag time in implementing the surcharge, which could adversely
affect our short-term operating results. Even if we are able to offset
the cost of fuel with our surcharges, high fuel surcharges could move
our customers away from our higher-yielding express services to our
lower-yielding deferred or ground services or even reduce customer
demand for our services altogether. In addition, disruptions in the
supply of fuel could have a negative impact on our ability to operate
our transportation networks.
Our businesses are capital intensive, and we must make capital
decisions based upon projected volume levels. We make
significant investments in aircraft, package handling facilities,
vehicles, technology, sort equipment, copy equipment and other
assets to support our transportation and business networks. We
also make significant investments to rebrand, integrate and grow
the companies that we acquire. The amount and timing of capital
investments depend on various factors, including our anticipated
volume growth. We must make commitments to purchase or modify
aircraft years before the aircraft are actually needed. We must predict
volume levels and fleet requirements and make commitments for
aircraft based on those projections. Missing our projections could
result in too much or too little capacity relative to our shipping
volumes. Overcapacity could lead to asset dispositions or write-downs
and undercapacity could negatively impact service levels.
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MANAGEMENT’S DISCUSSION AND ANALYSIS We face intense competition. The transportation and business
services markets are both highly competitive and sensitive to price
and service, especially in periods of little or no macro-economic
growth. Some of our competitors have more financial resources than
we do, or they are controlled or subsidized by foreign governments,
which enables them to raise capital more easily. We also compete
with regional transportation providers that operate smaller and less
capital-intensive transportation networks and startups that combine
technology with crowdsourcing to focus on local market needs. In
addition, some high volume package shippers, such as Amazon.com,
are developing in-house delivery capabilities, which could in turn
reduce our revenues and market share. We believe we compete
effectively with these companies — for example, by providing more
reliable service at compensatory prices. However, an irrational pricing
environment can limit our ability not only to maintain or increase our
prices (including our fuel surcharges in response to rising fuel costs),
but also to maintain or grow our market share. While we believe we
compete effectively through our current service offerings, if our current
competitors or potential future competitors offer a broader range of
services or more effectively bundle their services, it could impede our
ability to maintain or grow our market share. Moreover, if our current
customers, such as Amazon.com, become competitors, it will reduce
our revenue and could negatively impact our financial condition and
results of operations.
If we do not successfully execute or effectively operate,
integrate, leverage and grow acquired businesses, our financial
results and reputation may suffer. Our strategy for long-term growth,
productivity and profitability depends in part on our ability to make
prudent strategic acquisitions and to realize the benefits we expect
when we make those acquisitions. In furtherance of this strategy, in
addition to TNT Express, we have acquired businesses in Europe, Latin
America, Africa and the United States over the past several years.
While we expect our past and future acquisitions to enhance our value
proposition to customers and improve our long-term profitability, there
can be no assurance that we will realize our expectations within the
time frame we have established, if at all, or that we can continue to
support the value we allocate to these acquired businesses, including
their goodwill or other intangible assets.
Labor organizations attempt to organize groups of our employees
from time to time, and potential changes in labor laws could
make it easier for them to do so. If we are unable to continue to
maintain good relationships with our employees and prevent labor
organizations from organizing groups of our employees, our operating
costs could significantly increase and our operational flexibility could
be significantly reduced. Despite continual organizing attempts by
labor unions, other than the pilots of FedEx Express and drivers at four
FedEx Freight facilities, our U.S. employees have thus far chosen not
to unionize (we acquired GENCO in January 2015, which already had
a small number of employees that are members of unions).
The U.S. Congress has, in the past, considered adopting changes
in labor laws, however, that would make it easier for unions to
organize units of our employees. For example, there is always
a possibility that Congress could remove most FedEx Express
employees from the purview of the RLA. Such legislation could
expose our customers to the type of service disruptions that the RLA
was designed to prevent — local work stoppages in key areas that
interrupt the timely flow of shipments of time-sensitive, high-value
goods throughout our global network. Such disruptions could
threaten our ability to provide competitively priced shipping options
and ready access to global markets.
There is also the possibility that Congress could pass other labor
legislation that could adversely affect our companies, such as FedEx
Ground and FedEx Freight, whose employees are governed by the
National Labor Relations Act of 1935, as amended (“NLRA”). In
addition, federal and state governmental agencies, such as the
National Labor Relations Board, have and may continue to take
actions that could make it easier for our employees to organize under
the RLA or NLRA. Finally, changes to federal or state laws governing
employee classification could impact the status of FedEx Ground’s
owner-operators as independent employers of drivers. If FedEx
Ground is deemed to be a joint employer of independent contractors’
employees, labor organizations could more easily organize these
individuals, our operating costs could increase materially and we
could incur significant capital outlays.
FedEx Ground relies on owner-operators to conduct its linehaul
and pickup-and-delivery operations, and the status of these
owner-operators as independent contractors and direct
employers of drivers providing these services, is being
challenged. FedEx Ground’s use of independent contractors is
well suited to the needs of the ground delivery business and its
customers, as evidenced by the strong growth of this business
segment. We are involved in numerous lawsuits and state tax and
other administrative proceedings that claim that the company’s
owner-operators under a contractor model no longer in use should
have been treated as our employees rather than independent
contractors, or that drivers employed by independent contractors
should be treated as our employees. We incur certain costs, including
legal fees, in defending the status of FedEx Ground’s owner-operators
as independent contractors.
We believe that FedEx Ground’s owner-operators are properly classified
as independent contractors and that FedEx Ground is not an employer of
the drivers of the company’s independent contractors. However, adverse
determinations in these matters could, among other things, entitle
certain of our owner-operators and their drivers to the reimbursement of
certain expenses and to the benefit of wage-and-hour laws and result in
employment and withholding tax and benefit liability for FedEx Ground,
and could result in changes to the independent contractor status of
FedEx Ground’s owner-operators. Changes to state laws governing the
definition of independent contractors could also impact the status of
FedEx Ground’s owner-operators.
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MANAGEMENT’S DISCUSSION AND ANALYSIS The UK vote to leave the EU could adversely impact our business,
results of operations and financial condition. There is substantial
uncertainty surrounding the UK’s June 23, 2016 vote to leave the EU
(“Brexit”). Any impact of the Brexit vote depends on the terms of the
UK’s withdrawal from the EU, which still need to be determined and
could take several years to accomplish. The UK’s withdrawal from the
EU could result in a global economic downturn, which could depress
the demand for our services. The UK also could lose access to the
single EU market and to the global trade deals negotiated by the
EU on behalf of its members, depressing trade between the UK and
other countries, which would negatively impact our international
operations. Additionally, we may face new regulations regarding trade,
aviation, security and employees, among others in the UK. Compliance
with such regulations could be costly, negatively impacting our
business, results of operations and financial condition.
Disruptions or modifications in service by the USPS or changes
in its business could have an adverse effect on our operations
and financial results. The USPS is a significant customer and vendor
of FedEx. In particular, the USPS is the largest customer of FedEx
Express, which provides domestic air transportation services for the
USPS’s First Class, Priority and Express Mail and transportation and
delivery for the USPS’s international delivery service. Disruptions or
modifications in service by the USPS as a result of financial difficulties
or changes in its business, including any structural changes to its
operations, network, service offerings or pricing, could adversely affect
our operations, negatively impacting our revenue and financial results.
The transportation infrastructure continues to be a target of
terrorist activities. Because transportation assets continue to be
a target of terrorist activities, governments around the world are
adopting or are considering adopting stricter security requirements
that will increase operating costs and potentially slow service for
businesses, including those in the transportation industry. For
example, the U.S. Transportation Security Administration requires
FedEx Express to comply with a Full All-Cargo Aircraft Operator
Standard Security Plan, which contains evolving and strict security
requirements. These requirements are not static, but change
periodically as the result of regulatory and legislative requirements,
imposing additional security costs and creating a level of uncertainty
for our operations. Thus, it is reasonably possible that these rules
or other future security requirements could impose material costs
on us or slow our service to our customers. Moreover, a terrorist
attack directed at FedEx or other aspects of the transportation
infrastructure could disrupt our operations and adversely impact
demand for our services.
The regulatory environment for global aviation or other
transportation rights may impact our operations. Our extensive
air network is critical to our success. Our right to serve foreign points
is subject to the approval of the Department of Transportation and
generally requires a bilateral agreement between the United States
and foreign governments. In addition, we must obtain the permission
of foreign governments to provide specific flights and services. Our
operations outside of the United States, such as FedEx Express’s
growing international domestic operations, are also subject to current
and potential regulations, including certain postal regulations and
licensing requirements, that restrict, make difficult and sometimes
prohibit, the ability of foreign-owned companies such as FedEx
Express to compete effectively in parts of the international domestic
transportation and logistics market. Regulatory actions affecting
global aviation or transportation rights or a failure to obtain or maintain
aviation or other transportation rights in important international
markets could impair our ability to operate our networks.
We may be affected by global climate change or by legal,
regulatory or market responses to such change. Concern over
climate change, including the impact of global warming, has led to
significant U.S. and international legislative and regulatory efforts to
limit greenhouse gas (“GHG”) emissions, including our aircraft and
diesel engine emissions. For example, in 2015, the U.S. Environmental
Protection Agency (the “EPA”) issued a proposed finding on GHG
emissions from aircraft and its relationships to air pollution. The final
finding is a regulatory prerequisite to the EPA’s adoption of a new
certification standard for aircraft emissions. Additionally, in 2009, the
European Commission approved the extension of the European Union
Emissions Trading Scheme (“ETS”) for GHG emissions, to the airline
industry. Under this decision, all FedEx Express flights that are wholly
within the European Union are now covered by the ETS requirements,
and each year we are required to submit emission allowances in an
amount equal to the carbon dioxide emissions from such flights.
In addition, the U.S. Congress has, in the past, considered bills that
would regulate GHG emissions, and some form of federal climate
change legislation is possible in the future. Increased regulation
regarding GHG emissions, especially aircraft or diesel engine
emissions, could impose substantial costs on us, especially at FedEx
Express. These costs include an increase in the cost of the fuel and
other energy we purchase and capital costs associated with updating
or replacing our aircraft or vehicles prematurely. Until the timing,
scope and extent of such regulation becomes known, we cannot
predict its effect on our cost structure or our operating results. It is
reasonably possible, however, that it could impose material costs
on us.
Moreover, even without such regulation, increased awareness and
any adverse publicity in the global marketplace about the GHGs
emitted by companies in the airline and transportation industries
could harm our reputation and reduce customer demand for our
services, especially our air express services. Finally, given the broad
and global scope of our operations and our susceptibility to global
macro-economic trends, we are particularly vulnerable to the physical
risks of climate change that could affect all of humankind, such as
shifts in weather patterns and world ecosystems.
A localized disaster in a key geography could adversely impact
our business. While we operate several integrated networks with
assets distributed throughout the world, there are concentrations of
key assets within our networks that are exposed to adverse weather
conditions or localized risks from natural or manmade disasters such
as tornados, floods, earthquakes or terrorist attacks. The loss of a key
location such as our Memphis super hub or one of our information
technology centers could cause a significant disruption to our
operations and cause us to incur significant costs to reestablish or
relocate these functions. Moreover, resulting economic dislocations,
including supply chain and fuel disruptions, could adversely impact
demand for our services.
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MANAGEMENT’S DISCUSSION AND ANALYSIS FORWARD-LOOKING STATEMENTS
Certain statements in this report, including (but not limited to) those
contained in “Outlook” (including group and segment outlooks),
“Liquidity,” “Capital Resources,” “Liquidity Outlook,” “Contractual
Cash Obligations” and “Critical Accounting Estimates,” and the
“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, the risk factors
identified above and the other risks and uncertainties you can find in
our press releases and other SEC filings.
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.
.
We are also subject to other risks and uncertainties that affect
many other businesses, including:
> 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;
> the impact of any international conflicts 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;
> changes in foreign currency exchange rates, especially in the euro,
Chinese yuan, British pound, Brazilian real, Canadian dollar and the
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; and
> 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes,
among other things, defined policies and procedures for conducting and governing our business, sophisticated information systems for
processing transactions and a properly staffed, professional internal audit department. Mechanisms are in place to monitor the effectiveness
of our internal control over financial reporting and actions are taken to correct all identified deficiencies. Our procedures for financial reporting
include the active involvement of senior management, our Audit Committee and our staff of highly qualified financial and legal professionals.
Management, with the participation of our principal executive and financial officers, assessed our internal control over financial reporting
as of May 31, 2016, the end of our fiscal year. Management based its assessment on criteria established in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
Based on this assessment, management has concluded that our internal control over financial reporting was effective as of May 31, 2016.
On May 25, 2016, we acquired TNT Express. See Note 3 – Business Combinations of our consolidated financial statements for additional
information. Total assets of TNT Express represented approximately 16% of our consolidated total assets as of May 31, 2016. As permitted
by the Securities and Exchange Commission, management has elected to exclude TNT Express from its assessment of internal control over
financial reporting as of May 31, 2016.
The effectiveness of our internal control over financial reporting as of May 31, 2016, has been audited by Ernst & Young LLP, the independent
registered public accounting firm who also audited the Company’s consolidated financial statements included in this Annual Report.
Ernst & Young LLP’s report on the Company’s internal control over financial reporting is included in this Annual Report.
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FEDEX CORPORATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have audited FedEx Corporation’s internal control over financial reporting as of May 31, 2016, based on criteria established in Internal
Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the
COSO criteria). FedEx Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and
conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of TNT Express, which is included
in the consolidated financial statements of FedEx Corporation and constituted approximately 16% of consolidated total assets as of
May 31, 2016. Our audit of internal control over financial reporting of FedEx Corporation also did not include an evaluation of internal control
over financial reporting of TNT Express.
In our opinion, FedEx Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31, 2016,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of FedEx Corporation as of May 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income,
changes in stockholders’ investment, and cash flows for each of the three years in the period ended May 31, 2016 of FedEx Corporation and our
report dated July 18, 2016 expressed an unqualified opinion thereon.
Memphis, Tennessee
July 18, 2016
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CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
Revenues
Operating Expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Impairment and other charges
Retirement plans mark-to-market adjustment
Other
Operating Income
Other Income (Expense):
Interest expense
Interest income
Other, net
Income Before Income Taxes
Provision For Income Taxes
Net Income
Basic Earnings Per Common Share
Diluted Earnings Per Common Share
The accompanying notes are an integral part of these consolidated financial statements.
2016
$ 50,365
Years ended May 31,
2015
$ 47,453
2014
$ 45,567
18,581
9,966
2,854
2,631
2,399
2,108
–
1,498
7,251
47,288
3,077
(336)
21
(22)
(337)
2,740
920
$ 1,820
6.59
$
6.51
$
17,110
8,483
2,682
2,611
3,720
2,099
276
2,190
6,415
45,586
1,867
(235)
14
(19)
(240)
1,627
577
$ 1,050
3.70
$
3.65
$
16,171
8,011
2,622
2,587
4,557
1,862
–
15
5,927
41,752
3,815
(160)
18
(15)
(157)
3,658
1,334
$ 2,324
7.56
$
7.48
$
46
47
FEDEX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Net Income
Other Comprehensive Loss:
Foreign currency translation adjustments, net of tax benefit of $22, $45 and $1
Amortization of prior service credit and other, net of tax benefit of $45 in 2016,
tax expense of $1 in 2015 and tax benefit of $38 in 2014
Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
2016
$ 1,820
(261
)
(80 )
(341 )
$ 1,479
Years ended May 31,
2015
$ 1,050
(334)
–
(334 )
716
$
2014
$ 2,324
(25)
(76)
(101)
$ 2,223
46
47
FEDEX CORPORATION CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
Assets
Current Assets
Cash and cash equivalents
Receivables, less allowances of $178 and $185
Spare parts, supplies and fuel, less allowances of $218 and $207
Prepaid expenses and other
Total current assets
Property and Equipment, at Cost
Aircraft and related equipment
Package handling and ground support equipment
Computer and electronic equipment
Vehicles
Facilities and other
Less accumulated depreciation and amortization
Net property and equipment
Other Long-Term Assets
Goodwill
Other assets
Total other long-term assets
Liabilities and Stockholders’ Investment
Current Liabilities
Current portion of long-term debt
Accrued salaries and employee benefits
Accounts payable
Accrued expenses
Total current liabilities
Long-Term Debt, Less Current Portion
Other Long-Term Liabilities
Deferred income taxes
Pension, postretirement healthcare and other benefit obligations
Self-insurance accruals
Deferred lease obligations
Deferred gains, principally related to aircraft transactions
Other liabilities
Total other long-term liabilities
Commitments and Contingencies
Common Stockholders’ Investment
Common stock, $0.10 par value; 800 million shares authorized; 318 million shares issued
as of May 31, 2016 and 2015
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost
Total common stockholders’ investment
The accompanying notes are an integral part of these consolidated financial statements.
May 31,
2016
2015
$ 3,534
7,252
496
707
11,989
17,499
7,961
5,149
6,422
9,987
47,018
22,734
24,284
6,747
3,044
9,791
$ 46,064
$
29
1,972
2,944
3,063
8,008
13,838
1,567
6,227
1,314
400
155
771
10,434
32
2,892
18,371
(169)
(7,342)
13,784
$ 46,064
$ 3,763
5,719
498
355
10,335
16,186
6,725
5,208
5,816
8,929
42,864
21,989
20,875
3,810
1,511
5,321
$ 36,531
$
19
1,436
2,066
2,435
5,956
7,249
1,210
4,893
1,120
711
181
218
8,333
32
2,786
16,900
172
(4,897)
14,993
$ 36,531
48
49
FEDEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Operating Activities
Net Income
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
Provision for uncollectible accounts
Deferred income taxes and other noncash items
Impairment and other charges
Stock-based compensation
Retirement plans mark-to-market adjustment
Changes in assets and liabilities:
Receivables
Other current assets
Pension and postretirement healthcare assets and liabilities, net
Accounts payable and other liabilities
Other, net
Cash provided by operating activities
Investing Activities
Capital expenditures
Business acquisitions, net of cash acquired
Proceeds from asset dispositions and other
Cash used in investing activities
Financing Activities
Principal payments on debt
Proceeds from debt issuances
Proceeds from stock issuances
Excess tax benefit on the exercise of stock options
Dividends paid
Purchase of treasury stock
Other, net
Cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
The accompanying notes are an integral part of these consolidated financial statements.
Years ended May 31,
2015
2016
2014
$ 1,820
$ 1,050
$ 2,324
2,631
121
31
–
144
1,498
(199)
(234)
(346)
467
(225)
5,708
(4,818)
(4,618)
(10)
(9,446)
(41)
6,519
183
3
(277)
(2,722)
(54)
3,611
(102 )
(229)
3,763
$ 3,534
2,611
145
(572)
246
133
2,190
(392)
25
(692)
659
(37)
5,366
(4,347)
(1,429)
24
(5,752)
(5)
2,491
320
51
(227)
(1,254)
(27)
1,349
(108 )
855
2,908
$ 3,763
2,587
130
339
–
117
15
(516)
(22)
(453)
(235)
(22)
4,264
(3,533)
(36)
18
(3,551)
(254)
1,997
557
44
(187)
(4,857)
(19)
(2,719)
(3)
(2,009)
4,917
$ 2,908
48
49
FEDEX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
INVESTMENT
Common
Stock
$ 32
–
–
–
–
(in millions, except share data)
Balance at May 31, 2013
Net income
Other comprehensive loss, net of tax of $39
Purchase of treasury stock (36.8 million shares)
Cash dividends declared ($0.60 per share)
Employee incentive plans and other
(6.7 million shares issued)
Balance at May 31, 2014
Net income
Other comprehensive loss, net of tax of $44
Purchase of treasury stock (8.1 million shares)
Cash dividends declared ($0.80 per share)
Employee incentive plans and other
(3.7 million shares issued)
Balance at May 31, 2015
Net income
Other comprehensive loss, net of tax of $67
Purchase of treasury stock (18.2 million shares)
Cash dividends declared ($1.00 per share)
Employee incentive plans and other
(2.0 million shares issued)
Balance at May 31, 2016
The accompanying notes are an integral part of these consolidated financial statements.
–
32
–
–
–
–
–
32
–
–
–
–
–
$ 32
Additional
Paid-in
Capital
$ 2,668
–
–
–
–
(25 )
2,643
–
–
–
–
143
2,786
–
–
–
–
Accumulated
Other
Comprehensive
Income
$ 607
–
(101 )
–
–
–
506
–
(334)
–
–
–
172
–
(341)
–
–
Retained
Earnings
$ 14,092
2,324
–
–
(187 )
–
16,229
1,050
–
–
(227 )
(152 )
16,900
1,820
–
–
(277 )
Treasury
Stock
$ (1)
–
–
(4,857)
–
725
(4,133)
–
–
(1,254 )
–
490
(4,897)
–
–
(2,722 )
–
Total
$ 17,398
2,324
(101)
(4,857)
(187 )
700
15,277
1,050
(334)
(1,254 )
(227)
481
14,993
1,820
(341)
(2,722 )
(277)
106
$ 2,892
(72)
$ 18,371
–
$ (169)
277
$ (7,342)
311
$ 13,784
50
50
51
51
FEDEX CORPORATION NOTE 1: DESCRIPTION OF BUSINESS
AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. FedEx Corporation (“FedEx”) provides a
broad portfolio of transportation, e-commerce and business services
through companies competing collectively, operating independently
and managed collaboratively, under the respected FedEx brand.
Our primary operating companies are Federal Express Corporation
(“FedEx Express”), the world’s largest express transportation company;
TNT Express B.V., formerly TNT Express N.V. (“TNT Express”), an
international express, small-package ground delivery and freight
transportation company that was acquired near the end of our 2016
fourth quarter; 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”).
FISCAL YEARS. Except as otherwise specified, references to years
indicate our fiscal year ended May 31, 2016 or ended May 31 of the
year referenced.
RECLASSIFICATIONS. Certain reclassifications have been made to
the prior years’ consolidated financial statements to conform to the
current year’s presentation.
PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of FedEx and its subsidiaries,
substantially all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated
in consolidation. We are not the primary beneficiary of, nor do we
have a controlling financial interest in, any variable interest entity.
Accordingly, we have not consolidated any variable interest entity.
REVENUE RECOGNITION. We recognize revenue upon delivery of
shipments for our transportation businesses and upon completion
of services for our business services, logistics and trade services
businesses. Transportation services are provided with the use of
employees and independent contractors. FedEx is the principal to
the transaction for most of these services and revenue from these
transactions is recognized on a gross basis. Costs associated
with independent contractor settlements are recognized as incurred
and included in the caption “Purchased transportation” in the
accompanying consolidated statements of income. For shipments
in transit, revenue is recorded based on the percentage of service
completed at the balance sheet date. Estimates for future billing
adjustments to revenue and accounts receivable are recognized at
the time of shipment for money-back service guarantees and billing
corrections. Delivery costs are accrued as incurred.
Our contract logistics, global trade services and certain transportation
businesses engage in some transactions wherein they act as agents.
Revenue from these transactions is recorded on a net basis. Net
revenue includes billings to customers less third-party charges,
including transportation or handling costs, fees, commissions and
taxes and duties.
Certain of our revenue-producing transactions are subject to taxes,
such as sales tax, assessed by governmental authorities. We present
these revenues net of tax.
CREDIT RISK. We routinely grant credit to many of our customers for
transportation and business services without collateral. The risk of
credit loss in our trade receivables is substantially mitigated by our
credit evaluation process, short collection terms and sales to a large
number of customers, as well as the low revenue per transaction
for most of our services. Allowances for potential credit losses are
determined based on historical experience and the impact of current
economic factors on the composition of accounts receivable.
Historically, credit losses have been within management’s expectations.
ADVERTISING. Advertising and promotion costs are expensed as
incurred and are classified in other operating expenses. Advertising
and promotion expenses were $417 million in 2016, $403 million in
2015 and $407 million in 2014.
CASH EQUIVALENTS. Cash in excess of current operating requirements
is invested in short-term, interest-bearing instruments with maturities
of three months or less at the date of purchase and is stated at cost,
which approximates market value.
SPARE PARTS, SUPPLIES AND FUEL. Spare parts (principally aircraft-
related) are reported at weighted-average cost. Allowances for
obsolescence are provided for spare parts currently identified as
excess or obsolete as well as expected to be on hand at the date
the aircraft are retired from service. These allowances are provided
over the estimated useful life of the related aircraft and engines.
The majority of our supplies and our fuel are reported at weighted-
average cost.
PROPERTY AND EQUIPMENT. Expenditures for major additions,
improvements and flight equipment modifications are capitalized
when such costs are determined to extend the useful life of the asset
or are part of the cost of acquiring the asset. Expenditures for equipment
overhaul costs of engines or airframes prior to their operational use
are capitalized as part of the cost of such assets as they are costs
required to ready the asset for its intended use. Maintenance and
repairs costs are charged to expense as incurred, except for certain
aircraft engine maintenance costs incurred under third-party service
agreements. These agreements resulted in costs being expensed
based on cycles or hours flown and are subject to annual escalation.
These service contracts transfer risk to third party service providers
and generally fix the amount we pay for maintenance to the service
provider as a rate per cycle or flight hour, in exchange for maintenance
and repairs under a predefined maintenance program. We capitalize
certain direct internal and external costs associated with the
development of internal-use software. Gains and losses on sales of
property used in operations are classified within operating expenses
and historically have been nominal.
50
50
51
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For financial reporting purposes, we record depreciation and
amortization of property and equipment on a straight-line basis over
the asset’s service life or related lease term, if shorter. For income
tax purposes, depreciation is computed using accelerated methods
when applicable.
The depreciable lives and net book value of our property and
equipment are as follows (dollars in millions):
Net Book Value at
May 31,
2016
2015
Range
15 to 30 years
Wide-body aircraft and
related equipment
Narrow-body and feeder
aircraft and related equipment 5 to 18 years
Package handling and ground
support equipment
Vehicles
Computer and electronic
equipment
Facilities and other
2 to 10 years
2 to 40 years
3 to 30 years
3 to 15 years
$ 8,356
$ 7,548
3,180
2,943
3,249
3,084
1,051
5,364
2,410
2,717
866
4,391
The fair value of TNT Express property and equipment included in the
table above at May 31, 2016 was $1.1 billion. Given the timing of the
TNT Express acquisition, this value is preliminary and likely to change
during the purchase price allocation measurement period, which ends
no later than the fourth quarter of 2017.
Substantially all property and equipment have no material residual
values. The majority of aircraft costs are depreciated on a straight-line
basis over 15 to 30 years. We periodically evaluate the estimated
service lives and residual values used to depreciate our property
and equipment. In May 2015, we adjusted the depreciable lives of
23 aircraft and 57 engines. These changes will not have a material
impact on near-term depreciation expense. In May 2013, FedEx Express
made the decision to accelerate the retirement of 76 aircraft and
related engines to aid in our fleet modernization and improve our global
network. In 2012, we shortened the depreciable lives for 54 aircraft
and related engines to accelerate the retirement of these aircraft. As
a result of these accelerated retirements, we incurred an additional
$74 million in year-over-year accelerated depreciation expense in 2014.
Depreciation and amortization expense, excluding gains and losses on
sales of property and equipment used in operations, was $2.6 billion in
2016, 2015 and 2014. Depreciation and amortization expense includes
amortization of assets under capital lease.
CAPITALIZED INTEREST. Interest on funds used to finance the
acquisition and modification of aircraft, including purchase deposits,
construction of certain facilities, and development of certain software
up to the date the asset is ready for its intended use is capitalized
and included in the cost of the asset if the asset is actively under
construction. Capitalized interest was $42 million in 2016, $37 million
in 2015 and $29 million in 2014.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets are
reviewed for impairment when circumstances indicate the carrying
value of an asset may not be recoverable. For assets that are to be
held and used, an impairment is recognized when the estimated
undiscounted cash flows associated with the asset or group of assets
is less than their carrying value. If impairment exists, an adjustment is
made to write the asset down to its fair value, and a loss is recorded
as the difference between the carrying value and fair value. Fair
values are determined based on quoted market values, discounted
cash flows or internal and external appraisals, as applicable. Assets
to be disposed of are carried at the lower of carrying value or
estimated net realizable value.
We operate integrated transportation networks, and accordingly,
cash flows for most of our operating assets to be held and used are
assessed at a network level, not at an individual asset level, for our
analysis of impairment.
In the normal management of our aircraft fleet, we routinely idle
aircraft and engines temporarily due to maintenance cycles and
adjustments of our network capacity to match seasonality and overall
customer demand levels. Temporarily idled assets are classified as
available-for-use, and we continue to record depreciation expense
associated with these assets. These temporarily idled assets are
assessed for impairment on a quarterly basis. The criteria for
determining whether an asset has been permanently removed from
service (and, as a result, is potentially impaired) include, but are not
limited to, our global economic outlook and the impact of our outlook
on our current and projected volume levels, including capacity needs
during our peak shipping seasons; the introduction of new fleet types
or decisions to permanently retire an aircraft fleet from operations;
and changes to planned service expansion activities. At May 31, 2016,
we had four aircraft temporarily idled. These aircraft have been idled
for less than one year and are expected to return to revenue service.
In May 2015, we retired from service seven Boeing MD11 aircraft and
12 related engines, four Airbus A310-300 aircraft and three related
engines, three Airbus A300-600 aircraft and three related engines
and one Boeing MD10-10 aircraft and three related engines, and
related parts. As a consequence, impairment and related charges of
$276 million ($175 million, net of tax, or $0.61 per diluted share) were
recorded in the fourth quarter of 2015. Of this amount, $246 million
was non-cash. The decision to permanently retire these aircraft and
engines aligns with FedEx Express’s plans to rationalize capacity and
modernize its aircraft fleet to more effectively serve its customers.
GOODWILL. Goodwill is recognized for the excess of the purchase
price over the fair value of tangible and identifiable intangible net
assets of businesses acquired. Several factors give rise to goodwill
in our acquisitions, such as the expected benefit from synergies of
the combination and the existing workforce of the acquired business.
Goodwill is reviewed at least annually for impairment. In our evaluation
of goodwill impairment, we perform a qualitative assessment to
determine if it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If the qualitative assessment is
not conclusive, we proceed to a two-step process to test goodwill for
impairment, including comparing the fair value of the reporting unit to
its carrying value (including attributable goodwill). Fair value for our
reporting units is determined using an income or market approach
incorporating market participant considerations and management’s
assumptions on revenue growth rates, operating margins, discount
52
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS rates and expected capital expenditures. Fair value determinations
may include both internal and third-party valuations. Unless
circumstances otherwise dictate, we perform our annual impairment
testing in the fourth quarter.
INTANGIBLE ASSETS. Intangible assets primarily include customer
relationships, technology assets and trademarks acquired in business
combinations. Intangible assets are amortized over periods ranging from
3 to 15 years, either on a straight-line basis or on a basis consistent
with the pattern in which the economic benefits are realized.
PENSION AND POSTRETIREMENT HEALTHCARE PLANS. Our defined
benefit plans are measured using actuarial techniques that reflect
management’s assumptions for discount rate, investment returns on
plan assets, salary increases, expected retirement, mortality,
employee turnover and future increases in healthcare costs. We
determine the discount rate (which is required to be the rate at which
the projected benefit obligation could be effectively settled as of the
measurement date) with the assistance of actuaries, who calculate
the yield on a theoretical portfolio of high-grade corporate bonds
(rated Aa or better) with cash flows that are designed to match our
expected benefit payments in future years. We use the fair value of
plan assets to calculate the expected return on plan assets (“EROA”)
for interim and segment reporting purposes. Our EROA is a judgmental
matter which is reviewed on an annual basis and revised as
appropriate.
The accounting guidance related to employers’ accounting for defined
benefit pension and other postretirement plans requires recognition in
the balance sheet of the funded status of defined benefit pension and
other postretirement benefit plans. We use “mark-to-market” or MTM
accounting and immediately recognize changes in the fair value of
plan assets and actuarial gains or losses in our operating results
annually in the fourth quarter each year. The annual MTM adjustment
is recognized at the corporate level and does not impact segment
results. The remaining components of pension and postretirement
healthcare expense, primarily service and interest costs and the
EROA, are recorded on a quarterly basis.
INCOME TAXES. Deferred income taxes are provided for the tax effect
of temporary differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements. The liability
method is used to account for income taxes, which requires deferred
taxes to be recorded at the statutory rate expected to be in effect when
the taxes are paid.
We recognize liabilities for uncertain income tax positions based on
a two-step process. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates
that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes,
if any. The second step requires us to estimate and measure the tax
benefit as the largest amount that is more than 50% likely to be realized
upon ultimate settlement. It is inherently difficult and subjective to
estimate such amounts, as we must determine the probability of
various possible outcomes. We reevaluate these uncertain tax positions
on a quarterly basis or when new information becomes available to
management. These reevaluations are based on factors including, but
not limited to, changes in facts or circumstances, changes in tax law,
successfully settled issues under audit and new audit activity. Such a
change in recognition or measurement could result in the recognition
of a tax benefit or an increase to the related provision.
We classify interest related to income tax liabilities as interest
expense, and if applicable, penalties are recognized as a component
of income tax expense. The income tax liabilities and accrued interest
and penalties that are due within one year of the balance sheet date
are presented as current liabilities. The noncurrent portion of our
income tax liabilities and accrued interest and penalties are recorded
in the caption “Other liabilities” in the accompanying consolidated
balance sheets.
SELF-INSURANCE ACCRUALS. We are self-insured for costs associated
with workers’ compensation claims, vehicle accidents and general
business liabilities, and benefits paid under employee healthcare and
disability programs. Accruals are primarily based on the actuarially
estimated cost of claims, which includes incurred-but-not-reported
claims. Current workers’ compensation claims, vehicle and general
liability, employee healthcare claims and long-term disability are
included in accrued expenses. We self-insure up to certain limits
that vary by operating company and type of risk. Periodically, we
evaluate the level of insurance coverage and adjust insurance levels
based on risk tolerance and premium expense.
LEASES. We lease certain aircraft, facilities, equipment and vehicles
under capital and operating leases. The commencement date of all
leases is the earlier of the date we become legally obligated to make
rent payments or the date we may exercise control over the use of the
property. In addition to minimum rental payments, certain leases
provide for contingent rentals based on equipment usage, principally
related to aircraft leases at FedEx Express and copier usage at FedEx
Office. Rent expense associated with contingent rentals is recorded
as incurred. Certain of our leases contain fluctuating or escalating
payments and rent holiday periods. The related rent expense is
recorded on a straight-line basis over the lease term. The cumulative
excess of rent payments over rent expense is accounted for as
a deferred lease asset and recorded in “Other assets” in the
accompanying consolidated balance sheets. The cumulative excess
of rent expense over rent payments is accounted for as a deferred
lease obligation. Leasehold improvements associated with assets
utilized under capital or operating leases are amortized over the
shorter of the asset’s useful life or the lease term.
DEFERRED GAINS. Gains on the sale and leaseback of aircraft and
other property and equipment are deferred and amortized ratably over
the life of the lease as a reduction of rent expense. Substantially all of
these deferred gains are related to aircraft transactions.
DERIVATIVE FINANCIAL INSTRUMENTS. Our recently acquired TNT
Express segment maintains a risk management strategy that includes
the use of derivative instruments to reduce the effects of volatility in
foreign currency exchange exposure on operating results and cash
flows. In accordance with our risk management policies, we do not
hold or issue derivative instruments for trading or speculative
purposes. We account for derivative instruments under the provisions
of the accounting guidance related to derivatives and hedging, which
requires all derivative instruments to be recognized in the financial
statements and measured at fair value, regardless of the purpose or
intent for holding them.
52
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivatives are recognized in our consolidated balance sheets at their
fair values. When we become a party to a derivative instrument and
intend to apply hedge accounting, we formally document the hedge
relationship and the risk management objective for undertaking the
hedge, which includes designating the instrument for financial
reporting purposes as a fair value hedge, a cash flow hedge, or a net
investment hedge.
STOCK-BASED COMPENSATION. We recognize compensation
expense for stock-based awards under the provisions of the accounting
guidance related to share-based payments. This guidance requires
recognition of compensation expense for stock-based awards using a
fair value method. We issue new shares or repurchase shares on the
open market to cover employee stock option exercises and restricted
stock grants.
If a derivative is designated as a cash flow or net investment hedge,
changes in its fair value are considered to be effective and are
recorded in accumulated other comprehensive income until the
hedged item is recorded in income. Any portion of a change in the fair
value of a derivative that is considered to be ineffective, along with
the change in fair value of any derivatives not designated in a hedging
relationship, is immediately recorded in the income statement.
For derivative instruments designated as hedges, we assess, both
at hedge inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items. In addition,
when we determine that a derivative is not highly effective as a
hedge, hedge accounting is discontinued. When a hedging instrument
expires or is sold, or when the hedge no longer meets the criteria for
hedge accounting, any cumulative gains or losses existing in equity
at that time, remain in equity until the forecasted transaction is
ultimately recognized in the income statement. When a forecasted
transaction is no longer expected to occur, the cumulative gains or
losses that were reported in equity are immediately transferred to
the income statement. The financial statement impact of derivative
transactions were immaterial for the year ended May 31, 2016 and
as such, additional disclosures have been excluded from this report.
FOREIGN CURRENCY TRANSLATION. Translation gains and losses of
foreign operations that use local currencies as the functional currency
are accumulated and reported, net of applicable deferred income taxes,
as a component of accumulated other comprehensive income within
common stockholders’ investment. Transaction gains and losses that
arise from exchange rate fluctuations on transactions denominated in a
currency other than the local currency are included in the caption “Other,
net” in the accompanying consolidated statements of income and were
immaterial for each period presented.
EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS.
The pilots of FedEx Express, which represent a small number of
FedEx Express’s total employees, are employed under a collective
bargaining agreement that took effect on November 2, 2015. This
collective bargaining agreement is scheduled to become amendable
in November 2021, after a six-year term. In addition to our pilots at
FedEx Express, GENCO Distribution System, Inc. (“GENCO”) has a
small number of employees who are members of unions, and certain
non-U.S. employees are unionized.
TREASURY SHARES. In January 2016, the stock repurchase
authorization announced in September 2014 for 15 million shares
was completed. On January 26, 2016, our Board of Directors
approved a new share repurchase program of up to 25 million
shares. During 2016, we repurchased 18.2 million shares of FedEx
common stock at an average price of $149.35 per share for a total
of $2.7 billion. As of May 31, 2016, 19 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.
In 2015, we repurchased 8.1 million shares of FedEx common stock
at an average price of $154.03 per share for a total of $1.3 billion. In
2014, we repurchased 36.8 million shares of FedEx common stock at
an average price of $131.83 per share for a total of $4.9 billion.
DIVIDENDS DECLARED PER COMMON SHARE. On June 6, 2016, our
Board of Directors declared a quarterly dividend of $0.40 per share of
common stock. The dividend was paid on July 1, 2016 to stockholders
of record as of the close of business on June 16, 2016. 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.
USE OF ESTIMATES. The preparation of our consolidated financial
statements requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities, the reported
amounts of revenues and expenses and the disclosure of contingent
liabilities. Management makes its best estimate of the ultimate
outcome for these items based on historical trends and other
information available when the financial statements are prepared.
Changes in estimates are recognized in accordance with the
accounting rules for the estimate, which is typically in the period
when new information becomes available to management. Areas
where the nature of the estimate makes it reasonably possible
that actual results could materially differ from amounts estimated
include: self-insurance accruals; retirement plan obligations;
long-term incentive accruals; tax liabilities; loss contingencies;
litigation claims; impairment assessments on long-lived assets
(including goodwill); and purchase price allocations.
54
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: RECENT ACCOUNTING
GUIDANCE
New accounting rules and disclosure requirements can significantly
impact our reported results and the comparability of our financial
statements.
In the second quarter of 2016, 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. Adoption of this
guidance had no impact on our financial reporting. See Note 3 for
further discussion regarding our recent business acquisitions.
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 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.
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 had minimal impact on our accounting and financial
reporting, and we chose to early adopt on a retrospective basis in
the fourth quarter of 2016.
In May 2015, the FASB issued an Accounting Standards Update
that removes the requirement to categorize within the fair value
hierarchy investments for which fair values are estimated using
the net asset value practical expedient provided by Accounting
Standards Codification 820, Fair Value Measurement. This new
guidance is effective for entities for fiscal years beginning after
December 15, 2016, with retrospective application to all periods
presented. We elected to early adopt this standard, which impacted
our fair value disclosures related to retirement benefit plan
investments in Note 13 of the accompanying consolidated financial
statements but did not otherwise impact our financial statements.
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. We are currently evaluating
the impact of this new standard 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 2016 that is relevant to the readers of our financial
statements.
54
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: BUSINESS COMBINATIONS
The purchase price was preliminarily allocated to the identifiable
intangible assets acquired as follows (in millions):
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 May 31, 2016,
$287 million of shares associated with the transaction remained
untendered, the majority of which were tendered subsequent to
May 31, 2016, and 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. TNT Express’s financial results are immaterial from the time
of acquisition and are included in “Eliminations, corporate and other.”
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 Express’s strong European road platform and our
strength in other regions globally, including North America and Asia.
This acquisition is included in the accompanying balance sheets based
on an allocation of the purchase price (summarized in the table below,
in millions). 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.
Current assets(1)
Property and equipment
Goodwill
Identifiable intangible assets
Other non-current assets
Current liabilities(2)
Long-term liabilities
Total purchase price
(1) Primarily accounts receivable and cash.
(2) Primarily accounts payable and other accrued expenses.
$ 1,905
1,104
2,964
920
289
(1,644)
(644)
$ 4,894
As a result of this acquisition, we recognized a preliminary value of
$3.0 billion of goodwill, which is primarily attributable to the TNT
Express workforce and the expected benefits from synergies of the
combination with existing businesses and growth opportunities. The
majority of the purchase price allocated to goodwill is not deductible
for income tax purposes.
Intangible assets with finite lives
Customer relationships (15-year useful life)
Technology (4-year useful life)
Trademarks (4-year useful life)
Total intangible assets
$ 685
90
145
$ 920
See Note 4 for further discussion of our intangible assets.
The following unaudited pro forma consolidated financial information
presents the combined operations of FedEx and TNT Express as if the
acquisition had occurred at the beginning of 2015 (dollars in millions,
except per share amounts):
Consolidated revenues
Consolidated net income
Diluted earnings per share
(Unaudited)
2016
$ 57,899
1,566
5.60
$
2015
$ 55,862
595
2.07
$
The accounting literature establishes guidelines regarding the
presentation of this unaudited pro forma information. Therefore, this
unaudited pro forma information is not intended to represent, nor do
we believe it is indicative of, the consolidated results of operations
of FedEx that would have been reported had the acquisition been
completed as of the beginning of 2015. Furthermore, this unaudited
pro forma information does not give effect to the anticipated business
and tax synergies of the acquisition and is not representative or
indicative of the anticipated future consolidated results of operations
of FedEx.
The unaudited pro forma consolidated financial information reflects
our historical financial information and the historical results of TNT
Express, after conversion of TNT Express’s accounting methods from
International Financial Reporting Standards to U.S. generally accepted
accounting principles, adjusted to reflect the acquisition had it been
completed as of the beginning of 2015. The most significant pro forma
adjustments to the historical results of operations relate to the
application of purchase accounting and the financing for the acquisition.
The unaudited pro forma financial information includes various
assumptions, including those related to the preliminary purchase price
allocation that may be impacted upon the finalization of the purchase
price allocation. The tax impact of these adjustments was calculated
based on TNT Express’s statutory rate.
56
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Included in the unaudited pro forma net income (net of tax) are
nonrecurring acquisition-related costs incurred by TNT Express
associated with the sale of TNT Express’s airline operations, a
condition precedent to the acquisition, and transaction and integration
planning expenses of $115 million in 2016. In addition, the TNT
Express results include expenses for restructuring, impairments,
litigation matters and pension adjustments of approximately
$40 million in 2016 and $320 million in 2015.
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, now FedEx CrossBorder, LLC (“FedEx CrossBorder”), 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.
In 2014, we expanded the international service offerings of FedEx
Express by acquiring businesses operated by our previous service
provider, Supaswift (Pty) Ltd. (“Supaswift”), in seven countries in
Southern Africa, for $36 million in cash from operations. The financial
results of these businesses are included in the FedEx Express segment
from their respective date of acquisition.
The financial results of the GENCO, FedEx CrossBorder and Supaswift
businesses were not material, individually or in the aggregate, to our
results of operations and therefore, pro forma financial information
has not been presented.
NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL. The carrying amount of goodwill attributable to each reportable operating segment and changes therein are as follows (in millions):
Goodwill at May 31, 2014
Accumulated impairment charges
Balance as of May 31, 2014
Goodwill acquired(1)
Purchase adjustments and other(2)
Balance as of May 31, 2015
Goodwill acquired(1)
Purchase adjustments and other(2)
Balance as of May 31, 2016
Accumulated goodwill impairment
charges as of May 31, 2016
(1) Goodwill acquired relates to the acquisition of transportation companies in Southern Africa in 2014, the acquisition of e-commerce and supply chain solutions companies in 2015, and the
$ (1,177)
$ –
$ –
$ –
$ (133)
FedEx Freight
Segment
$ 735
(133)
602
38
–
640
–
(5)
$ 635
FedEx Services
Segment
$ 1,525
(1,177)
348
–
–
348
–
–
$ 348
FedEx Express
Segment
$ 1,750
–
1,750
40
(113)
1,677
–
(88 )
$ 1,589
FedEx Ground
Segment
$ 90
–
90
1,055
–
1,145
–
66
$ 1,211
TNT Express
Segment
$ –
–
–
–
–
–
2,964
–
$ 2,964
Total
$ 4,100
(1,310)
2,790
1,133
(113)
3,810
2,964
(27 )
$ 6,747
$ (1,310)
acquisition of TNT Express in 2016. See Note 3 for related disclosures.
(2) Primarily currency translation adjustments, acquired goodwill related to immaterial acquisitions, and purchase related adjustments.
56
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our reporting units with significant recorded goodwill include FedEx
Express, TNT Express, FedEx Ground, FedEx Freight, FedEx Office
(reported in the FedEx Services segment) and GENCO (reported in the
FedEx Ground segment). We evaluated reporting units for impairment
during the fourth quarter of 2016 and 2015. The estimated fair value
of each of these reporting units exceeded their carrying values in 2016
and 2015, and we do not believe that any of these reporting units were
impaired as of the balance sheet dates. The goodwill for our TNT
Express reporting unit will be tested beginning in 2017.
Given the timing and complexity of the TNT Express acquisition, the full
amount of acquired goodwill has been presented in the TNT Express
segment for 2016 as we continue to evaluate benefits from synergies
with our FedEx Express segment. Therefore, attribution of this goodwill
could change in future periods.
OTHER INTANGIBLE ASSETS. The summary of our intangible assets
and related accumulated amortization at May 31, 2016 and 2015 is as
follows (in millions):
Gross Carrying
Amount
$ 912
123
202
$1,237
2016
Accumulated
Amortization
$ (156)
(16)
(57)
$ (229)
Net Book
Value
$ 756
107
145
$ 1,008
Gross Carrying
Amount
$ 338
34
60
$ 432
2015
Accumulated
Amortization
$ (151)
(14)
(60)
$ (225)
Net Book
Value
$ 187
20
–
$ 207
Customer relationships
Technology
Trademarks and other
Total
Amortization expense for intangible assets was $14 million in 2016,
$21 million in 2015 and $23 million in 2014.
Expected amortization expense for the next five years is as follows
(in millions):
2017
2018
2019
2020
2021
$ 130
116
115
112
54
Given the timing and complexity of the TNT Express acquisition, the
amount and timing of expected amortization expense may change
once the purchase price allocation is complete.
NOTE 5: SELECTED CURRENT
LIABILITIES
The components of selected current liability captions at May 31 were
as follows (in millions):
Accrued Salaries and Employee Benefits
Salaries
Employee benefits, including
variable compensation
Compensated absences
Accrued Expenses
Self-insurance accruals
Taxes other than income taxes
Other
2016
2015
$
478
$
345
804
690
$ 1,972
$ 837
311
1,915
$ 3,063
507
584
$ 1,436
$ 865
328
1,242
$ 2,435
58
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: LONG-TERM DEBT
AND OTHER FINANCING
ARRANGEMENTS
The components of long-term debt (net of discounts), along with
maturity dates for the years subsequent to May 31, 2016, are as
follows (in millions):
Maturity
2019
2020
2023
2024
2025
2026
2034
2035
2043
2044
2045
2046
2065
2098
Maturity
2019
2020
2023
2027
Senior unsecured debt:
Interest Rate %
8.00
2.30
2.625–2.70
4.00
3.20
3.25
4.90
3.90
3.875–4.10
5.10
4.10
4.55–4.75
4.50
7.60
Euro senior unsecured debt:
Interest Rate %
floating rate
0.50
1.00
1.625
Total senior unsecured debt
Other debt
Capital lease obligations
Less current portion
May 31,
2016
2015
$
750
399
749
749
699
749
499
498
992
749
646
2,483
248
240
559
558
836
1,389
13,792
12
63
13,867
29
$ 13,838
$
750
399
749
749
699
–
499
498
992
749
646
–
248
239
–
–
–
–
7,217
–
51
7,268
19
$ 7,249
Interest on our U.S. dollar fixed-rate notes is paid semi-annually.
Interest on our Euro fixed-rate notes is paid annually. Our floating-rate
Euro senior notes bear interest at three-month EURIBOR plus a spread
of 55 basis points, and resets quarterly. Long-term debt, exclusive
of capital leases, had estimated fair values of $14.3 billion at
May 31, 2016 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.
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.
On April 11, 2016, we issued €3 billion of senior unsecured debt under
our current shelf registration statement, comprised of €500 million of
senior unsecured floating rate notes due in April 2019 with interest
payments quarterly, €500 million of senior unsecured 0.5% fixed-rate
notes due in April 2020, €750 million of senior unsecured 1.00%
fixed-rate notes due in January 2023, and €1.25 billion of senior
unsecured 1.625% fixed-rate notes due in January 2027. Interest
on the fixed-rate notes is paid annually. We utilized the net proceeds
for working capital and general corporate purposes, including our
acquisition of TNT Express.
On March 24, 2016, we issued $2 billion of senior unsecured
debt under our current shelf registration statement, comprised of
$750 million of senior unsecured 3.25% fixed-rate notes due in April
2026 and $1.25 billion of senior unsecured 4.55% fixed-rate notes due
in April 2046. Interest on the notes is paid semiannually. We utilized
the net proceeds for working capital and general corporate purposes,
including the redemption and the prepayment and defeasance of the
underlying debt of certain leveraged operating leases and share
repurchases.
On October 23, 2015, we issued under our current shelf registration
statement $1.25 billion of senior unsecured 4.75% fixed-rate notes
due in November 2045. Interest on the notes is paid semiannually.
We utilized the net proceeds for working capital and general
corporate purposes, including share repurchases.
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 (“adjusted 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 adjusted EBITDA
was 1.9 to 1.0 at May 31, 2016. We believe this covenant is the 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 financial covenant
and all other covenants of our revolving credit agreement and do not
expect the covenants to affect our operations, including our liquidity
or expected funding needs. As of May 31, 2016, no commercial paper
was outstanding. However, we had a total of $318 million in letters of
credit outstanding at May 31, 2016, with $182 million of the letter of
credit sublimit unused under our revolving credit facility.
58
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: LEASES
We utilize certain aircraft, land, facilities, retail locations and
equipment under capital and operating leases that expire at various
dates through 2046. We leased 10% of our total aircraft fleet under
operating leases as of May 31, 2016 and May 31, 2015. A portion
of our supplemental aircraft are leased by us under agreements that
provide for cancellation upon 30 days’ notice. Our leased facilities
include national, regional and metropolitan sorting facilities, retail
facilities and administrative buildings.
Rent expense under operating leases for the years ended May 31 was
as follows (in millions):
Minimum rentals
Contingent rentals(1)
2016
$ 2,394
214
$ 2,608
(1) Contingent rentals are based on equipment usage.
2015
$ 2,249
194
$ 2,443
2014
$ 2,154
197
$ 2,351
A summary of future minimum lease payments under noncancelable
operating leases with an initial or remaining term in excess of one
year at May 31, 2016 is as follows (in millions):
Aircraft and
Related
Equipment
$ 454
383
321
240
182
352
$ 1,932
Operating Leases
Facilities and
Other
$ 2,021
1,860
1,632
1,428
1,269
7,671
$ 15,881
Total Operating
Leases
$ 2,475
2,243
1,953
1,668
1,451
8,023
$ 17,813
2017
2018
2019
2020
2021
Thereafter
Total
Property and equipment recorded under capital leases and future
minimum lease payments under capital leases were immaterial at
May 31, 2016 and 2015. The weighted-average remaining lease
term of all operating leases outstanding at May 31, 2016 was
approximately six years. 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.
FedEx Express makes payments under certain leveraged operating
leases that are sufficient to pay principal and interest on certain
pass-through certificates. The pass-through certificates are not
direct obligations of, or guaranteed by, FedEx or FedEx Express.
We are the lessee in a series of operating leases covering a portion
of our leased aircraft. The lessors are trusts established specifically to
purchase, finance and lease aircraft to us. These leasing entities meet
the criteria for variable interest entities. We are not the primary
beneficiary of the leasing entities, as the lease terms are consistent
with market terms at the inception of the lease and do not include a
residual value guarantee, fixed-price purchase option or similar
feature that obligates us to absorb decreases in value or entitles us
to participate in increases in the value of the aircraft. As such, we are
not required to consolidate the entity as the primary beneficiary. Our
maximum exposure under these leases is included in the summary of
future minimum lease payments.
NOTE 8: PREFERRED STOCK
Our Certificate of Incorporation authorizes the Board of Directors, at
its discretion, to issue up to 4,000,000 shares of preferred stock. The
stock is issuable in series, which may vary as to certain rights and
preferences, and has no par value. As of May 31, 2016, none of these
shares had been issued.
60
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table provides changes in accumulated other comprehensive income (loss) (“AOCI”), net of tax, reported in the consolidated
financial statements for the years ended May 31 (in millions; amounts in parentheses indicate debits to AOCI):
Foreign currency translation gain (loss):
Balance at beginning of period
Translation adjustments
Balance at end of period
Retirement plans adjustments:
Balance at beginning of period
Prior service credit and other arising during period
Reclassifications from AOCI
Balance at end of period
Accumulated other comprehensive (loss) income at end of period
2016
2015
2014
$ (253)
(261)
(514)
425
(4)
(76)
345
$ (169 )
$
81
(334)
(253)
425
72
(72)
425
172
$
$
$
106
(25)
81
501
1
(77)
425
506
The following table presents details of the reclassifications from AOCI for the years ended May 31 (in millions; amounts in parentheses indicate
debits to earnings):
Amount Reclassified from AOCI
2015
2016
2014
Affected Line Item in the
Income Statement
Amortization of retirement plans prior
service credits, before tax
Income tax benefit
AOCI reclassifications, net of tax
$ 121
(45)
76
$
$ 115
(43)
72
$
$ 115
(38)
77
$
Salaries and employee benefits
Provision for income taxes
Net income
60
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: STOCK-BASED
COMPENSATION
Our total stock-based compensation expense for the years ended
May 31 was as follows (in millions):
Stock-based compensation expense
2016
$ 144
2015
$ 133
2014
$ 117
We have two types of equity-based compensation: stock options and
restricted stock.
STOCK OPTIONS. Under the provisions of our incentive stock plans,
key employees and non-employee directors may be granted options
to purchase shares of our common stock at a price not less than its
fair market value on the date of grant. Vesting requirements are
determined at the discretion of the Compensation Committee of our
Board of Directors (or our Board of Directors with respect to grants
to non-employee directors). Option-vesting periods range from one
to four years, with 82% of our options vesting ratably over four years.
Compensation expense associated with these awards is recognized
on a straight-line basis over the requisite service period of the award.
RESTRICTED STOCK. Under the terms of our incentive stock plans,
restricted shares of our common stock are awarded to key employees.
All restrictions on the shares expire ratably over a four-year period.
Shares are valued at the market price on the date of award. The terms
of our restricted stock provide for continued vesting subsequent to the
employee’s retirement. Compensation expense associated with these
awards is recognized on a straight-line basis over the shorter of the
remaining service or vesting period.
VALUATION AND ASSUMPTIONS. We use the Black-Scholes option
pricing model to calculate the fair value of stock options. The value
of restricted stock awards is based on the stock price of the award
on the grant date. We record stock-based compensation expense in
the “Salaries and employee benefits” caption in the accompanying
consolidated statements of income.
The key assumptions for the Black-Scholes valuation method include
the expected life of the option, stock price volatility, a risk-free
interest rate and dividend yield. The following is a table of the
weighted-average Black-Scholes value of our stock option grants,
the intrinsic value of options exercised (in millions) and the key
weighted-average assumptions used in the valuation calculations
for options granted during the years ended May 31, and then a
discussion of our methodology for developing each of the assumptions
used in the valuation model:
Weighted-average
Black-Scholes value
Intrinsic value of options exercised
Black-Scholes Assumptions:
Expected lives
Expected volatility
Risk-free interest rate
Dividend yield
2016
2015
2014
$ 52.40
$ 115
$ 53.33
$ 253
$ 35.79
$ 347
6.4 years
6.3 years
6.2 years
28 %
1.94%
0.519 %
34 %
2.02%
0.448 %
35 %
1.47%
0.561 %
The expected life represents an estimate of the period of time options
are expected to remain outstanding, and we examine actual stock
option exercises to determine the expected life of the options. Options
granted have a maximum term of 10 years. Expected volatilities are
based on the actual changes in the market value of our stock and are
calculated using daily market value changes from the date of grant
over a past period equal to the expected life of the options. The
risk-free interest rate is the U.S. Treasury Strip rate posted at the date
of grant having a term equal to the expected life of the option. The
expected dividend yield is the annual rate of dividends per share over
the exercise price of the option.
The following table summarizes information about stock option activity for the year ended May 31, 2016:
Stock Options
Outstanding at June 1, 2015
Granted
Exercised
Forfeited
Outstanding at May 31, 2016
Exercisable
Expected to vest
Available for future grants
(1) Only presented for options with market value at May 31, 2016 in excess of the exercise price of the option.
Shares
14,221,824
2,229,582
(1,822,547)
(187,428)
14,441,431
8,717,768
5,408,862
10,948,196
Weighted-Average
Exercise Price
$ 101.54
171.41
100.40
138.40
$ 111.99
$ 92.93
$ 141.03
Weighted-Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
(in millions)(1)
6.0 years
4.6 years
8.1 years
$ 795
$ 629
$ 156
62
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The options granted during the year ended May 31, 2016 are primarily
related to our principal annual stock option grant in June 2015.
The following table summarizes information about vested and
unvested restricted stock for the year ended May 31, 2016:
Restricted Stock
Shares
439,042
139,838
(185,933)
(3,795)
389,152
Weighted-Average
Grant Date Fair Value
$ 112.87
168.83
104.42
158.82
$ 136.57
Unvested at June 1, 2015
Granted
Vested
Forfeited
Unvested at May 31, 2016
During the year ended May 31, 2015, there were 154,115 shares
of restricted stock granted with a weighted-average fair value of
$148.89. During the year ended May 31, 2014, there were 191,964
shares of restricted stock granted with a weighted-average fair value
of $100.80.
The following table summarizes information about stock option
vesting during the years ended May 31:
2016
2015
2014
Stock Options
Vested during
the year
2,572,129
2,611,524
2,408,179
Fair value
(in millions)
$ 98
83
65
As of May 31, 2016, there was $188 million of total unrecognized
compensation cost, net of estimated forfeitures, related to unvested
share-based compensation arrangements. This compensation
expense is expected to be recognized on a straight-line basis over
the remaining weighted-average vesting period of approximately
two years.
Total shares outstanding or available for grant related to equity
compensation at May 31, 2016 represented 9% of the total outstanding
common and equity compensation shares and equity compensation
shares available for grant.
NOTE 11: COMPUTATION OF
EARNINGS PER SHARE
The calculation of basic and diluted earnings per common share for
the years ended May 31 was as follows (in millions, except per share
amounts):
2016
2015
2014
Basic earnings per common share:
Net earnings allocable to common shares(1) $ 1,818 $ 1,048
Weighted-average common shares
283
$ 6.59 $ 3.70
Basic earnings per common share
276
$ 2,320
307
$ 7.56
Diluted earnings per common share:
Net earnings allocable to common shares(1) $ 1,818 $ 1,048
283
Weighted-average common shares
4
Dilutive effect of share-based awards
Weighted-average diluted shares
287
$ 6.51 $ 3.65
Diluted earnings per common share
Anti-dilutive options excluded from
3.3
diluted earnings per common share
(1) Net earnings available to participating securities were immaterial in all periods presented..
$ 2,320
307
3
310
$ 7.48
276
3
279
2.1
3.9
NOTE 12: INCOME TAXES
The components of the provision for income taxes for the years ended
May 31 were as follows (in millions):
2016
2015
2014
Current provision
Domestic:
Federal
State and local
Foreign
Deferred provision (benefit)
Domestic:
Federal
State and local
Foreign
$ 513
72
200
785
155
(18)
(2)
135
$ 920
$ 795
102
214
1,111
(474)
(47)
(13)
(534)
$ 577
$ 624
56
194
874
360
82
18
460
$ 1,334
Pre-tax earnings of foreign operations for 2016, 2015 and 2014 were
$905 million, $773 million and $412 million, respectively. These
amounts represent only a portion of total results associated with
international shipments and do not represent our international results
of operations.
62
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of total income tax expense and the amount
computed by applying the statutory federal income tax rate (35%)
to income before taxes for the years ended May 31 is as follows
(in millions):
Taxes computed at federal
statutory rate
Increases (decreases) in income
tax from:
State and local income taxes,
net of federal benefit
Foreign operations
Internal restructuring
TNT Express acquisition costs
Other, net
Effective Tax Rate
2016
2015
2014
$ 959
$ 569
$ 1,280
33
(50)
(76)
40
14
$ 920
33.6 %
36
(43)
–
–
15
$ 577
35.5 %
90
(38)
–
–
2
$ 1,334
36.5 %
Our 2016 tax rate was favorably impacted by $76 million from an
internal corporate restructuring done in anticipation of the integration
of the foreign operations of FedEx Express and TNT Express. As part
of this restructuring, our Canadian subsidiary made distributions to
our U.S. operations which resulted in the recognition of U.S. foreign
tax credits in excess of the U.S. taxes incurred from the distributions.
This favorable impact was partially offset by a $40 million tax expense
attributable to non-deductible expenses incurred as part of the TNT
Express acquisition.
The significant components of deferred tax assets and liabilities as of
May 31 were as follows (in millions):
2016
2015
Deferred
Tax
Assets
Deferred
Tax
Liabilities
Deferred
Tax
Assets
Deferred
Tax
Liabilities
Property, equipment,
leases and intangibles
Employee benefits
Self-insurance accruals
Other
Net operating loss/credit
carryforwards
Valuation allowances
$ 129
2,453
681
528
925
(738)
$ 3,978
$ 4,767
–
–
343
$ 93
2,029
607
477
–
–
$ 5,110
326
(224)
$ 3,308
$ 3,872
13
–
414
–
–
$ 4,299
The net deferred tax liabilities as of May 31 have been classified in
the balance sheets as follows (in millions):
Noncurrent deferred tax assets(1)
Noncurrent deferred tax liabilities
2016
$ 435
(1,567)
$ (1,132)
2015
$ 219
(1,210)
$ (991)
(1) Noncurrent deferred tax assets are included in the line item “Other Assets” in our
consolidated balance sheets.
The table above has been revised to reflect the new accounting
standard discussed in Note 2 which requires companies to classify all
deferred tax assets and liabilities as noncurrent on the balance sheet.
We have approximately $3.0 billion of net operating loss carryovers
in various foreign jurisdictions and $581 million of state operating loss
carryovers. The valuation allowances primarily represent amounts
reserved for operating loss and tax credit carryforwards, which expire
over varying periods starting in 2017. The change in the valuation
allowance is primarily due to the increase in net operating losses as
a result of the acquisition of TNT Express. As a result of this and other
factors, we believe that a substantial portion of these deferred tax
assets may not be realized. We establish valuation allowances if it is
more likely than not that deferred income tax assets will not be realized.
In making this determination, we consider all available positive and
negative evidence and make certain assumptions. We consider, among
other things, our future projections of sustained profitability, deferred
income tax liabilities, the overall business environment, our historical
financial results and potential current and future tax planning strategies.
If we were to identify and implement tax planning strategies to recover
these deferred tax assets or generate sufficient income of the
appropriate character in these jurisdictions in the future, it could lead
to the reversal of these valuation allowances and a reduction of income
tax expense. We believe that we will generate sufficient future taxable
income to realize the tax benefits related to the remaining net deferred
tax assets in our consolidated balance sheets.
Permanently reinvested earnings of our foreign subsidiaries
amounted to $1.6 billion at the end of 2016 and $1.9 billion at the
end of 2015. Our permanently reinvested earnings were reduced
in 2016 due to an internal corporate restructuring done to facilitate
the integration of FedEx Express and TNT Express. We have not
recognized deferred taxes for U.S. federal income tax purposes on
those earnings. In 2016, our permanent reinvestment strategy with
respect to unremitted earnings of our foreign subsidiaries provided
an approximate $48 million benefit to our provision for income taxes.
Were the earnings to be distributed, in the form of dividends or
otherwise, these earnings could be subject to U.S. federal income
tax and non-U.S. withholding taxes. Unrecognized foreign tax credits
potentially could be available to reduce a portion of any U.S. tax
liability. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable due to uncertainties
related to the timing and source of any potential distribution of
such funds, along with other important factors such as the amount
of associated foreign tax credits. Cash in offshore jurisdictions
associated with our permanent reinvestment strategy totaled
$522 million at the end of 2016 and $478 million at the end of 2015.
In 2016, approximately 80% of our total enterprise-wide income was
earned in U.S. companies of FedEx that are taxable in the United
States. As a U.S. airline, our FedEx Express unit is required by Federal
Aviation Administration and other rules to conduct its air operations,
domestic and international, through a U.S. company. However, we
serve more than 220 countries and territories around the world, and
are required to establish legal entities in many of them. Most of our
entities in those countries are operating entities, engaged in picking
64
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: 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. The
accounting for pension and postretirement healthcare plans includes
numerous assumptions, such as: discount rates; expected long-term
investment returns on plan assets; future salary increases; employee
turnover; mortality; and retirement ages.
The accounting guidance related to postretirement benefits requires
recognition in the balance sheet of the funded status of defined
benefit pension and other postretirement benefit plans, and the
recognition in either expense or AOCI of unrecognized gains or losses
and prior service costs or credits. During 2015, we adopted mark-to-
market accounting for the recognition of our actuarial gains and losses
related to our defined benefit pension and postretirement healthcare
plans as described in Note 1. The funded status is measured as the
difference between the fair value of the plan’s assets and the
projected benefit obligation (“PBO”) of the plan.
A summary of our retirement plans costs over the past three years is
as follows (in millions):
Defined benefit pension plans
Defined contribution plans
Postretirement healthcare plans
Retirement plans mark-to-market
adjustment
2016
$ 214
416
82
2015
$ (41)
385
81
1,498
$ 2,210
2,190
$ 2,615
2014
$ 99
363
78
15
$ 555
The components of the pre-tax mark-to-market losses are as follows,
in millions:
2016
2015
2014
Actual versus expected return on
assets
Discount rate changes
Demographic assumption experience
Total mark-to-market loss
$ 1,285
1,129
(916)
$ 1,498
$ (35)
791
1,434
$ 2,190
$ (1,013)
705
323
$ 15
up and delivering packages and performing other transportation
services. We are continually expanding our global network to meet
our customers’ needs, which requires increasing investment outside
the U.S. We typically use cash generated overseas to fund these
investments and have a foreign holding company which manages our
investments in several foreign operating companies.
We are subject to taxation in the U.S. and various U.S. state, local
and foreign jurisdictions. During 2016, the Internal Revenue Service
completed the audit of our 2012 and 2013 tax returns without any
significant adjustments. 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.
A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows (in millions):
Balance at beginning of year
Increases for tax positions taken in
the current year
Increases for tax positions taken in
prior years
Increase for business acquisition
Decreases for tax positions taken in
prior years
Settlements
Decreases from lapse of statute
of limitations
Changes due to currency translation
Balance at end of year
2016
$ 36
2015
$ 38
2014
$ 47
3
3
25
(5)
(4)
(7)
(2)
$ 49
1
6
–
(2)
(2)
–
(5)
$ 36
1
3
–
(3)
(6)
(3)
(1)
$ 38
Our liabilities recorded for uncertain tax positions include $45 million
at May 31, 2016 and $31 million at May 31, 2015 associated with
positions that if favorably resolved would provide a benefit to our
effective tax rate. We classify interest related to income tax
liabilities as interest expense and, if applicable, penalties are
recognized as a component of income tax expense. The balance
of accrued interest and penalties was $11 million on May 31, 2016
and $19 million on May 31, 2015. Total interest and penalties
included in our consolidated statements of income are immaterial.
It is difficult to predict the ultimate outcome or the timing of resolution
for tax positions. Changes may result from the conclusion of ongoing
audits, appeals or litigation in state, local, federal and foreign tax
jurisdictions, or from the resolution of various proceedings between
U.S. and foreign tax authorities. Our liability for uncertain tax
positions includes no matters that are individually or collectively
material to us. It is reasonably possible that the amount of the benefit
with respect to certain of our unrecognized tax positions will increase
or decrease within the next 12 months, but an estimate of the range
of the reasonably possible changes cannot be made. However, we do
not expect that the resolution of any of our uncertain tax positions will
have a material effect on us.
64
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2016
The actual rate of return on our tax-qualified U.S. domestic pension
plans (“U.S. Pension Plans”) assets of 1.2% was lower than our
expected return of 6.50% primarily due to a challenging environment
for global equities and other risk-seeking asset classes. The weighted
average discount rate for all of our pension and postretirement
healthcare plans declined from 4.38% at May 31, 2015 to 4.04% at
May 31, 2016. The demographic assumption experience in 2016 reflects
a change in disability rates and an increase in the average retirement
age for U.S. pension and other postemployment benefit plans.
2015
The implementation of new U.S. mortality tables in 2015 resulted in
an increased participant life expectancy assumption, which increased
the overall projected benefit obligation by $1.2 billion. The weighted
average discount rate for all of our pension and postretirement
healthcare plans declined from 4.57% at May 31, 2014 to 4.38%
at May 31, 2015.
2014
The actual rate of return on our U.S. Pension Plan assets of 13.3%
exceeded our expected return of 7.75% primarily due to a favorable
investment environment for global equity markets. The weighted
average discount rate for all of our pension and postretirement
healthcare plans decreased from 4.76% at May 31, 2013 to 4.57%
at May 31, 2014.
PENSION PLANS. Our largest pension plan covers certain U.S.
employees age 21 and over, with at least one year of service. Pension
benefits for most employees are accrued under a cash balance formula
we call the Portable Pension Account. Under the Portable Pension
Account, the retirement benefit is expressed as a dollar amount in a
notional account that grows with annual credits based on pay, age and
years of credited service, and interest on the notional account balance.
The Portable Pension Account benefit is payable as a lump sum or an
annuity at retirement at the election of the employee. The plan interest
credit rate varies from year to year based on a U.S. Treasury index. Prior
to 2009, certain employees earned benefits using a traditional pension
formula (based on average earnings and years of service). Benefits
under this formula were capped on May 31, 2008 for most employees.
We also sponsor or participate in nonqualified benefit plans covering
certain of our U.S. employee groups and other pension plans covering
certain of our international employees. The international defined
benefit pension plans provide benefits primarily based on earnings
and years of service and are funded in compliance with local laws and
practices. The majority of our international obligations are for defined
benefit pension plans in the Netherlands and the United Kingdom.
The TNT Express acquisition added a number of defined benefit
pension plans, the most significant of which are in the Netherlands,
Germany, Italy and Belgium. At May 31, 2016, the total projected
benefit obligation for all of these defined benefit plans is $907 million
and the total fair value of assets is $761 million. The assets of the
largest acquired plan are primarily invested in fixed income managed
funds. At May 31, 2016, the weighted average discount rate for all of
these defined benefit plans is 2.25% and the expected return on
assets used to calculate 2017 expense is 3.29%. Our international
pension PBO at May 31, 2016, is approximately 6% of the total
pension obligation, and therefore, disaggregated disclosures have
not been provided.
POSTRETIREMENT HEALTHCARE PLANS. Certain of our subsidiaries
offer medical, dental and vision coverage to eligible U.S. retirees and
their eligible dependents. U.S. employees covered by the principal
plan become eligible for these benefits at age 55 and older, if they have
permanent, continuous service of at least 10 years after attainment
of age 45 if hired prior to January 1, 1988, or at least 20 years after
attainment of age 35 if hired on or after January 1, 1988. Postretirement
healthcare benefits are capped at 150% of the 1993 per capita
projected employer cost, which has been reached and, therefore,
these benefits are not subject to additional future inflation.
PENSION PLAN ASSUMPTIONS. We use a measurement date
of May 31 for our pension and postretirement healthcare plans.
Management reviews the assumptions used to measure pension
costs on an annual basis. Economic and market conditions at the
measurement date impact these assumptions from year to year.
Actuarial gains or losses are generated for changes in assumptions
and to the extent that actual results differ from those assumed.
These actuarial gains and losses are immediately recognized and
expensed in the fourth quarter mark-to-market adjustment.
Weighted-average actuarial assumptions for our primary U.S. retirement plans, which represent substantially all of our PBO and accumulated
postretirement benefit obligation (“APBO”), are as follows:
Discount rate used to determine benefit obligation
Discount rate used to determine net periodic
benefit cost
Rate of increase in future compensation levels
used to determine benefit obligation
Rate of increase in future compensation levels
used to determine net periodic benefit cost
Expected long-term rate of return on assets — Consolidated
Expected long-term rate of return on assets — Segment Reporting
66
Pension Plans
2015
4.42 %
2016
4.13 %
2014
4.60 %
Postretirement Healthcare Plans
2014
2015
2016
4.70%
4.60%
4.41%
4.42
4.60
4.79
4.60
4.70
4.91
4.46
4.62
6.50
6.50
4.62
4.56
7.75
6.50
4.56
4.54
7.75
6.50
–
–
–
–
–
–
–
–
–
–
–
–
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The expected average rate of return on plan assets is a long-term,
forward-looking assumption. It is required to be the expected future
long-term rate of earnings on plan assets. Our pension plan assets
are invested primarily in publicly tradable securities, and our pension
plans hold only a minimal investment in FedEx common stock that
is entirely at the discretion of third-party pension fund investment
managers. As part of our strategy to manage pension costs and
funded status volatility, we follow a liability-driven investment
strategy to better align plan assets with liabilities.
Establishing the expected future rate of investment return on our
pension assets is a judgmental matter, which we review on an annual
basis and revise as appropriate. Management considers the following
factors in determining this assumption:
> the duration of our pension plan liabilities, which drives the
investment strategy we can employ with our pension plan assets;
concentrations of risk. Active management strategies are utilized
within the plan in an effort to realize investment returns in excess of
market indices. Our investment strategy also includes the limited use
of derivative financial instruments on a discretionary basis to improve
investment returns and manage exposure to market risk. In all cases,
our investment managers are prohibited from using derivatives for
speculative purposes and are not permitted to use derivatives to
leverage a portfolio.
The following is a description of the valuation methodologies used for
investments measured at fair value:
> Cash and cash equivalents. These Level 1 investments include
cash, cash equivalents and foreign currency valued using exchange
rates. These Level 2 investments include short-term investment
funds which are collective funds priced at a constant value by the
administrator of the funds.
> the types of investment classes in which we invest our pension
> Domestic, international and global equities. These Level 1
plan assets and the expected compound geometric return we can
reasonably expect those investment classes to earn over time; and
> the investment returns we can reasonably expect our investment
management program to achieve in excess of the returns we could
expect if investments were made strictly in indexed funds.
For consolidated pension expense, we assumed a 6.5% expected
long-term rate of return on our U.S. Pension Plan assets in 2016 and
7.75% in 2015 and 2014. We lowered our EROA assumption in 2016 as
we continued to implement our asset and liability management strategy.
In lowering this assumption we considered our historical returns, our
current capital markets outlook and our investment strategy for our plan
assets, including the impact of the duration of our liabilities. Our actual
return in 2016 was less than the expected return. Our actual returns in
2015 and 2014, however, exceeded those long-term assumptions. Our
actual return on plan assets has contracted from 2015 due to lower
than expected returns on public equities. For the 15-year period ended
May 31, 2016, our actual returns were 6.9%.
The investment strategy for pension plan assets is to utilize a
diversified mix of global public and private equity portfolios, together
with fixed-income portfolios, to earn a long-term investment return
that meets our pension plan obligations. Our largest asset classes
are Corporate Fixed Income Securities and Government Fixed Income
Securities (which are largely benchmarked against the Barclays Long
Government/Long Corporate Index), and U.S. and International Large
Cap Equities (which are mainly indexed to the S&P 500 Index and
other global indices). Accordingly, we do not have any significant
investments are valued at the closing price or last trade reported
on the major market on which the individual securities are traded.
These Level 2 investments include mutual funds.
> Fixed income. We determine the fair value of these Level 2
corporate bonds, U.S. and non-U.S. government securities and other
fixed income securities by using bid evaluation pricing models or
quoted prices of securities with similar characteristics.
> Alternative Investments. The valuation of these Level 3
investments requires significant judgment due to the absence
of quoted market prices, the inherent lack of liquidity and the
long-term nature of such assets. Investments in private equity, debt,
real estate and other private investments are valued at estimated
fair value based on quarterly financial information received from the
investment advisor and/or general partner. These estimates
incorporate factors such as contributions and distributions, market
transactions, market comparables and performance multiples.
In accordance with recently updated accounting standards, certain
investments in 2016 and 2015 that are measured at fair value using
the net asset value per share (or its equivalent) practical expedient
have not been classified as Level 1, 2 or 3 in the below fair value
hierarchy but are included in the total. As a result, a reclassification
has been made to the prior year’s plan asset classification table to
conform to the current year’s presentation, which also resulted in the
removal of the prior year Level 3 asset roll-forward. See Note 2 for
additional information.
66
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair values of investments by level and asset category and the weighted-average asset allocations for our U.S. Pension Plans at the
measurement date are presented in the following table (in millions):
Asset Class
Cash and cash equivalents
Equities
U.S. large cap equity(1)
International equities(1)
Global equities(1)
U.S. SMID cap equity
Fixed income securities
Corporate
Government
Mortgage backed and other(1)
Alternative investments(1)
Other
Fair Value
$ 568
Actual %
2 %
3,257
3,381
2,794
913
14
15
12
4
6,608
5,148
347
322
(321)
$ 23,017
29
22
2
1
(1)
100 %
Plan Assets at Measurement Date
2016
Target
Range%
0-5%
35-55
45-65
0-5
Quoted Prices in
Active Markets
Level 1
$ 76
Other Observable
Inputs
Level 2
$ 492
Unobservable
Inputs
Level 3
750
2,685
913
121
6,608
5,148
146
$ 48
$ 48
(1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included
(305)
$ 4,119
(16)
$ 12,499
in the total.
Asset Class
Cash and cash equivalents
Equities
U.S. large cap equity(1)
International equities(1)
Global equities(1)
U.S. SMID cap equity
Fixed income securities
Corporate
Government
Mortgage backed and other(1)
Alternative investments(1)
Other
Fair Value
$ 738
Actual %
3 %
4,291
3,064
2,579
979
6,455
4,645
213
226
(184)
$ 23,006
19
14
11
4
28
20
1
1
(1)
100 %
Target
Range %
0-5 %
35-55
45-65
0-5
2015
Quoted Prices in
Active Markets
Level 1
$ 36
Other Observable
Inputs
Level 2
$ 702
302
2,429
979
(181)
$ 3,565
1
6,455
4,645
153
(3)
$ 11,953
(1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included
in the total.
The change in fair value of Level 3 assets that use significant unobservable inputs is shown in the table below (in millions):
2016
$ –
Balance at beginning of year(1)
Actual return on plan assets:
Assets held during current year
Assets sold during the year
Purchases, sales and settlements
Balance at end of year
(1) Investments classified in prior years as Level 3 that are measured at fair value
2
–
46
$ 48
using the net asset value per share (or its equivalent) practical expedient have been
removed from the fair value hierarchy in accordance with retrospective adoption
of recently updated accounting standards. See Note 2 for additional information.
68
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of the changes in the pension and postretirement healthcare plans’ benefit obligations and fair
value of assets over the two-year period ended May 31, 2016 and a statement of the funded status as of May 31, 2016 and 2015 (in millions):
Accumulated Benefit Obligation ("ABO")
Changes in Projected Benefit Obligation (“PBO”) and
Accumulated Postretirement Benefit Obligation (“APBO”)
PBO/APBO at the beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid
Business acquisition
Other
PBO/APBO at the end of year
Change in Plan Assets
Fair value of plan assets at the beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Business acquisition
Other
Fair value of plan assets at the end of year
Funded Status of the Plans
Amount Recognized in the Balance Sheet at May 31:
Noncurrent asset
Current pension, postretirement healthcare and other
benefit obligations
Noncurrent pension, postretirement healthcare and other
benefit obligations
Net amount recognized
Amounts Recognized in AOCI and not yet reflected in
Net Periodic Benefit Cost:
Prior service credit and other
Amounts Recognized in AOCI and not yet reflected in
Net Periodic Benefit Cost expected to be amortized in
next year’s Net Periodic Benefit Cost:
Prior service credit and other
Pension Plans
2016
$ 28,845
2015
$ 26,793
Postretirement
Healthcare Plans
2016
2015
$ 27,512
662
1,180
277
(912)
907
(24)
$ 29,602
$ 23,505
223
726
(912)
761
(32)
$ 24,271
$ (5,331)
$ 24,578
653
1,096
2,231
(815)
–
(231)
$ 27,512
$ 21,907
1,718
746
(815)
–
(51)
$ 23,505
$ (4,007)
$
53
$
26
(31)
(34)
(5,353)
$ (5,331)
(3,999)
$ (4,007)
$ (546)
$ (668)
$
(121)
$
(121)
$
$
$
$
$
$
$
$
$
929
40
42
(64)
(78)
–
36
905
–
–
42
(78)
–
36
–
(905 )
–
(40)
(865)
(905)
–
–
$ 883
40
41
6
(73)
–
32
$ 929
$
–
–
37
(73)
–
36
$
–
$ (929)
$
–
(42)
(887)
$ (929)
$
–
$
–
69
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our pension plans included the following components at May 31 (in millions):
2016
Qualified
Nonqualified
International Plans
Total
2015
Qualified
Nonqualified
International Plans
Total
PBO
$ 27,543
261
1,798
$ 29,602
$ 26,365
271
876
$ 27,512
Fair Value of
Plan Assets
$ 23,017
–
1,254
$ 24,271
$ 23,006
–
499
$ 23,505
Funded
Status
$ (4,526)
(261)
(544)
$ (5,331)
$ (3,359)
(271)
(377)
$ (4,007)
The table above provides the PBO, fair value of plan assets and funded status of our pension plans on an aggregated basis. The following table
presents our plans on a disaggregated basis to show those plans (as a group) whose assets did not exceed their liabilities. The fair value of plan
assets for pension plans with a PBO or ABO in excess of plan assets at May 31 were as follows (in millions):
Pension Benefits
Fair value of plan assets
PBO
Net funded status
Pension Benefits
ABO(1)
Fair value of plan assets
PBO
Net funded status
(1) ABO not used in determination of funded status.
Contributions to our U.S. Pension Plans for the years ended May 31 were as follows (in millions):
Required
Voluntary
PBO Exceeds the Fair Value
of Plan Assets
2016
2015
$ 23,867
(29,251)
$ (5,384)
$ 23,099
(27,132)
$ (4,033)
ABO Exceeds the Fair Value
of Plan Assets
2016
2015
$ (28,493)
23,865
(29,249)
$ (5,384)
2016
$ 8
652
$ 660
$ (26,413)
23,099
(27,132)
$ (4,033)
2015
$ 388
272
$ 660
For 2017, we anticipate making contributions to our U.S. Pension Plans totaling $1.0 billion (approximately $615 million of which are required).
70
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit cost for the three years ended May 31 were as follows (in millions):
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit
Actuarial losses (gains) and other
Net periodic benefit cost
$
2016
662
1,180
(1,508)
(121)
1,562
$ 1,775
$
Pension Plans
2015
653
1,096
(1,678)
(115)
2,190
$ 2,146
2014
657
1,055
(1,495)
(115)
7
109
$
$
2016
$ 40
42
–
–
(64)
$ 18
Postretirement
Healthcare Plans
2015
$ 40
41
–
–
6
$ 87
2014
$ 38
40
–
–
5
$ 83
Amounts recognized in other comprehensive income (“OCI”) for all plans for the years ended May 31 were as follows (in millions):
2016
2015
Pension Plans
Gross
Amount
$ –
Net of Tax
Amount
$ –
Postretirement
Healthcare Plans
Gross
Amount
$ –
Net of Tax
Amount
$ –
Pension Plans
Gross
Amount
$ (113)
Net of Tax
Amount
$ (72 )
Postretirement
Healthcare Plans
Gross
Amount
$ (1 )
Net of Tax
Amount
$ –
121
$ 121
76
$ 76
–
$ –
–
$ –
115
$ 2
72
$ –
–
$ (1 )
–
$ –
Prior service cost arising during period
Amortizations:
Prior services credit
Total recognized in OCI
Benefit payments, which reflect expected future service, are expected
to be paid as follows for the years ending May 31 (millions):
These estimates are based on assumptions about future events.
Actual benefit payments may vary significantly from these estimates.
2017
2018
2019
2020
2021
2022–2026
Pension Plans
$ 982
1,010
1,091
1,201
1,287
8,424
Postretirement
Healthcare Plans
$ 40
41
43
42
43
240
Future medical benefit claims costs are estimated to increase at an
annual rate of 8.3% during 2017, decreasing to an annual growth
rate of 4.50% in 2037 and thereafter. A 1% change in these annual
trend rates would not have a significant impact on the APBO at
May 31, 2016 or 2016 benefit expense because the level of these
benefits is capped.
70
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: BUSINESS SEGMENT
INFORMATION
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
TNT Express Segment
FedEx Ground Segment
FedEx Freight Segment
FedEx Services 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
(international express transportation,
small-package ground delivery and
freight transportation)
> FedEx Ground
(small-package ground delivery)
> GENCO
(third-party logistics)
> FedEx Freight
(LTL freight transportation)
> FedEx Custom Critical
(time-critical transportation)
> 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 FedEx Services segment operates combined sales, marketing,
administrative and information technology functions in shared services
operations that support our transportation businesses and allow us
to obtain synergies from the combination of these functions. For the
international regions of FedEx Express, some of these functions are
performed on a regional basis by FedEx Express and reported in the
FedEx Express segment in their natural expense line items. The FedEx
Services segment includes: FedEx Services, which provides sales,
marketing, information technology, communications, customer service,
technical support, billing and collection services for U.S. customers of
our major business units and certain back-office support to our other
companies; and FedEx Office, which provides an array of document and
business services and retail access to our customers for our package
transportation businesses.
The FedEx Services segment provides direct and indirect support to our
transportation businesses, and we allocate all of the net operating costs
of the FedEx Services segment (including the net operating results of
FedEx Office) to reflect the full cost of operating our transportation
businesses in the results of those segments. Within the FedEx Services
segment allocation, the net operating results of FedEx Office, which are
an immaterial component of our allocations, are allocated to FedEx
Express and FedEx Ground. 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.
72
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Intersegment Transactions
Certain FedEx operating companies provide transportation and related
services for other FedEx companies outside their reportable segment.
Billings for such services are based on negotiated rates, which we
believe approximate fair value, and are reflected as revenues of the
billing segment. These rates are adjusted from time to time based
on market conditions. Such intersegment revenues and expenses
are eliminated in our consolidated results and are not separately
identified in the following segment information, because the amounts
are not material.
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.
In 2016, these costs include our annual mark-to-market benefit plans
adjustment, transaction and integration planning expenses related
to our TNT Express acquisition, provisions for the settlement of and
expected losses related to independent contractor litigation matters
at FedEx Ground and the settlement of a U.S. Customs and Border
Protection (“CBP”) notice of action (both legal matters are net of
recognized immaterial insurance recovery).
The following table provides a reconciliation of reportable segment revenues, depreciation and amortization, operating income and segment assets to
consolidated financial statement totals (in millions) for the years ended or as of May 31:
FedEx Express
Segment(1)
FedEx Ground
Segment
FedEx Freight
Segment
FedEx Services
Segment
Eliminations,
corporate
and other(2)(3)
Consolidated
Total
$ 6,200
6,191
5,757
$ 1,593
1,545
1,536
$ (453)
(506)
(464)
$ 1,385
1,460
1,488
$ 26,451
27,239
27,121
$ 16,574
12,984
11,617
Revenues
2016
2015
2014
Depreciation and amortization
2016
2015
2014
Operating income
2016
2015
2014
Segment assets(4)
2016
2015
2014
(1) FedEx Express segment 2015 operating income includes $276 million of impairment and related charges resulting from the decision to permanently retire and adjust the retirement schedule
$ 13,098
11,691
8,466
$ 2,276
2,172
2,021
$ 21,207
20,382
19,901
$ 2,519
1,584
1,428
$ 608
530
468
$ (2,144)
(2,373)
15
$ 2,620
(4,369)
(3,699)
$ 6
1
1
$ 5,390
5,356
5,186
$ 3,749
3,471
3,216
$ 384
390
399
$ 248
230
231
$ –
–
–
$ 426
484
351
$ 2,631
2,611
2,587
$ 3,077
1,867
3,815
$ 50,365
47,453
45,567
$ 46,064
36,531
33,070
of certain aircraft and related engines.
(2) Operating income includes a loss of $1.5 billion in 2016, $2.2 billion in 2015 and $15 million in 2014 associated with our mark-to-market pension accounting. Operating income in 2016 includes
provisions for the settlement of and expected losses related to independent contractor litigation matters at FedEx Ground for $256 million and expenses related to the settlement of a CBP notice
of action in the amount of $69 million, in each case net of recognized immaterial insurance recovery. 2015 also includes a $197 million charge in the fourth quarter to increase the legal reserve
associated with the settlement of a legal matter at FedEx Ground to the amount of the settlement.
(3) Includes TNT Express’s assets and immaterial financial results from the time of acquisition (May 25, 2016).
(4) Segment assets include intercompany receivables.
The following table provides a reconciliation of reportable segment capital expenditures to consolidated totals for the years ended May 31
(in millions):
2016
2015
2014
FedEx Express
Segment
$ 2,356
2,380
1,994
FedEx Ground
Segment
$ 1,597
1,248
850
FedEx Freight
Segment
$ 433
337
325
FedEx Services
Segment
$ 432
381
363
Other
$ –
1
1
Consolidated
Total
$ 4,818
4,347
3,533
72
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenue by service type and geographic
information for the years ended or as of May 31 (in millions):
2016
2015
2014
NOTE 15: SUPPLEMENTAL CASH
FLOW INFORMATION
Revenue by Service Type
FedEx Express segment:
Package:
U.S. overnight box
U.S. overnight envelope
U.S. deferred
Total U.S. domestic package revenue
International priority
International economy
Total international export
package revenue
International domestic(1)
Total package revenue
Freight:
U.S.
International priority
International airfreight
Total freight revenue
Other(2)
Total FedEx Express segment
FedEx Ground segment:
FedEx Ground
GENCO
Total FedEx Ground segment
FedEx Freight segment
FedEx Services segment
Other and eliminations(3)
Geographical Information(4)
Revenues:
U.S.
International:
FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Services segment
Other(3)
Total international revenue
Noncurrent assets:
U.S.
International
Cash paid for interest expense and income taxes for the years ended
May 31 was as follows (in millions):
Cash payments for:
Interest (net of capitalized interest)
Income taxes
Income tax refunds received
Cash tax payments, net
2016
2015
2014
$ 321
$ 996
(5)
$ 991
$ 201
$ 1,122
(9)
$ 1,113
$ 131
$ 820
(54)
$ 766
NOTE 16: GUARANTEES AND
INDEMNIFICATIONS
In conjunction with certain transactions, primarily the lease, sale or
purchase of operating assets or services in the ordinary course of
business and in connection with business acquisitions, we may provide
routine guarantees or indemnifications (e.g., environmental, fuel, tax
and software infringement), the terms of which range in duration, and
often they are not limited and have no specified maximum obligation.
As a result of the TNT Express acquisition, we have assumed a
guarantee related to the demerger of TNT Express and PostNL Holding
B.V., which occurred in 2011 for pension benefits earned prior to the
date of the demerger. The risk of making payments associated with
this guarantee is remote. The overall maximum potential amount of
the obligation under such guarantees and indemnifications cannot be
reasonably estimated. Historically, we have not been required to make
significant payments under our guarantee or indemnification obligations
and no material amounts have been recognized in our financial
statements for the underlying fair value of these obligations.
$ 6,763 $ 6,704 $ 6,555
1,636
3,188
11,379
6,451
2,229
1,629
3,342
11,675
6,251
2,301
1,662
3,379
11,804
5,697
2,282
7,979
1,285
21,068
8,552
1,406
21,633
8,680
1,446
21,505
2,481
1,384
126
3,991
1,392
26,451
2,300
1,588
180
4,068
1,538
27,239
2,355
1,594
205
4,154
1,462
27,121
15,050
1,524
16,574
6,200
1,593
(453 )
11,617
–
11,617
5,757
1,536
(464)
$ 50,365 $ 47,453 $ 45,567
12,568
416
12,984
6,191
1,545
(506)
$ 38,070 $ 34,216 $ 32,259
11,672
383
137
10
93
12,295
12,916
12,772
248
311
130
142
14
12
–
–
13,308
13,237
$ 50,365 $ 47,453 $ 45,567
$ 26,047 $ 23,582 $ 20,658
2,729
$ 34,075 $ 26,196 $ 23,387
2,614
8,028
(1) International domestic revenues represent our intra-country operations.
(2) Includes FedEx Trade Networks and FedEx SupplyChain Systems.
(3) Includes TNT Express’s revenue from the time of acquisition (May 25, 2016).
(4) International revenue includes shipments that either originate in or are destined to locations
outside the United States, which could include U.S. payors. Noncurrent assets include property
and equipment, goodwill and other long-term assets. Our flight equipment is registered in the
U.S. and is included as U.S. assets; however, many of our aircraft operate internationally.
74
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17: COMMITMENTS
Annual purchase commitments under various contracts as of May 31,
2016 were as follows (in millions):
Aircraft and
Aircraft Related
$ 1,212
2017
1,770
2018
1,563
2019
1,620
2020
1,476
2021
4,240
Thereafter
$ 11,881
Total
(1) Primarily equipment, advertising contracts and, in 2017, approximately $615 million of
Other(1)
$ 1,235
401
264
193
120
108
$ 2,321
Total
$ 2,447
2,171
1,827
1,813
1,596
4,348
$ 14,202
estimated required quarterly contributions to our U.S. Pension Plans.
The amounts reflected in the table above for purchase commitments
represent noncancelable agreements to purchase goods or services.
As of May 31, 2016, our obligation to purchase four Boeing 767-300
Freighter (“B767F”) aircraft and seven Boeing 777 Freighter (“B777F”)
aircraft is conditioned upon there being no event that causes FedEx
Express or its employees not to be covered by the Railway Labor Act
of 1926, as amended. 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 have several aircraft modernization programs underway that are
supported by the purchase of B777F and B767F aircraft. These aircraft
are significantly more fuel-efficient per unit than the aircraft types
previously utilized, and these expenditures are necessary to achieve
significant long-term operating savings and to replace older aircraft.
Our ability to delay the timing of these aircraft-related expenditures is
limited without incurring significant costs to modify existing purchase
agreements.
During July 2015, FedEx Express entered into a supplemental
agreement to purchase 50 additional B767F aircraft from Boeing. The
50 additional B767F aircraft are expected to be delivered from fiscal
2018 through fiscal 2023 and will enable FedEx Express to continue
to improve the efficiency and reliability of its aircraft fleet.
On June 10, 2016, FedEx Express exercised options to acquire six
additional B767F aircraft for delivery in 2019 and 2020.
We had $413 million in deposits and progress payments as of
May 31, 2016 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
May 31, 2016, with the year of expected delivery:
2017
2018
2019
2020
2021
Thereafter
Total
B767F
12
16
13
12
10
16
79
B777F
–
2
2
3
3
6
16
Total
12
18
15
15
13
22
95
NOTE 18: CONTINGENCIES
WAGE-AND-HOUR. We are a defendant in several 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.
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 company’s
owner-operators under a contractor model no longer in use
should have been treated as employees, rather than independent
contractors.
74
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 court’s decision and, instead, certified
two questions to the Kansas Supreme Court related to the classification
of the plaintiffs as independent contractors under the Kansas Wage
Payment Act. The other 19 cases that are before the Seventh Circuit
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 Kansas case was remanded to the multidistrict litigation court,
and the other 19 cases remain at the Seventh Circuit; however,
approval proceedings will be conducted primarily by the multidistrict
litigation court. Plaintiffs filed preliminary approval motions in all
20 cases on June 15 and 29, 2016. The multidistrict litigation court
set a fairness hearing for January 23 and 24, 2017.
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. On January
13, 2016, the court preliminarily approved the settlement of the Florida
case and granted final approval at a fairness hearing on July 15, 2016.
On January 29, 2016, the plaintiffs filed their motion for preliminary
approval of the settlement in the Arkansas case.
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 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 court granted final
approval of the settlement on June 15, 2016. However, on June 30,
2016, an objector to the class settlement filed an appeal of the court’s
approval of the settlement. We anticipate that the appeal will be
argued in the spring of 2017. The settlement is not effective until all
appeals have been resolved without affecting the court’s approval of
the settlement.
The two cases in Oregon were consolidated with a non-multidistrict
litigation 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 was preliminarily approved on April 20, 2016 and the court
set a fairness hearing for October 18, 2016.
During the third quarter of 2016, we reached agreements in principle
to settle all of the 19 cases on appeal in the multidistrict independent
contractor litigation. All of these settlements require court approval.
We recognized a liability for the expected loss (net of recognized
insurance recovery) related to these cases and certain other pending
independent-contractor-related proceedings of $204 million.
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 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 Ground’s owner-operators could be material. In these
76
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Ground’s 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 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 Ground’s 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 Ground’s
independent contractors, could, among other things, entitle certain
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.
We believe that FedEx Ground’s owner-operators are properly
classified as independent contractors and that FedEx Ground is not
an employer of the drivers of the company’s independent contractors.
CITY AND STATE OF NEW YORK CIGARETTE SUIT. The City of New
York and the State of New York filed two related lawsuits against
FedEx Ground in December 2013 and November 2014 arising from
FedEx Ground’s alleged shipments of cigarettes to New York residents
in contravention of several statutes, including the Racketeer
Influenced and Corrupt Organizations Act (“RICO”) and New York’s
Public Health Law, as well as common law nuisance claims. In April
2016, the two lawsuits were consolidated and will now proceed as
one lawsuit. The first-filed lawsuit alleges that FedEx Ground provided
delivery services on behalf of four shippers, and the second-filed
lawsuit alleges that FedEx Ground provided delivery services on
behalf of six additional shippers; none of these shippers continue
to ship in our network. Pursuant to motions to dismiss filed in both
lawsuits, some of the claims have been dismissed entirely or limited.
In the first-filed lawsuit, the New York Public Health Law and common
law nuisance claims were dismissed and the plaintiffs voluntarily
dismissed another claim. In the second-filed lawsuit, the court
dismissed, without prejudice to plaintiffs’ right to refile the claim
at a later date, the New York Public Health Law claim. Other claims,
including the RICO claims, remain in both lawsuits. The likelihood
of loss is reasonably possible, but the amount of loss cannot be
estimated at this stage of the litigation and we expect the amount
of any loss 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 California’s county
environmental authorities) and the California Attorney General’s
Office (representing the California Division of Toxic Substances
Control (“DTSC”)) that they were seeking civil penalties for alleged
violations of the state’s 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 had been negotiating. In June 2014, the
California Attorney General filed a complaint 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
Ground’s 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, and on
June 2, 2016, filed a negotiated final judgment in Sacramento
County Superior Court, consistent with the terms FedEx Ground
agreed upon with the County 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.
76
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
In March 2016, the Court denied our motions to dismiss the money
laundering charges and granted our motion to dismiss FedEx
Corporation and FedEx Services from certain counts. Trial in this
matter commenced on June 13, 2016, and on June 17, 2016, the
DOJ dismissed all remaining criminal charges against FedEx and
its subsidiaries.
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.
NOTE 19: RELATED PARTY
TRANSACTIONS
Our Chairman, President and Chief Executive Officer, Frederick W.
Smith, currently holds an approximate 10% ownership interest in the
National Football League Washington Redskins professional football
team and is a member of its board of directors. FedEx has a multi-year
naming rights agreement with Washington Football, Inc. granting
us certain marketing rights, including the right to name the stadium
where the team plays and other events are held “FedExField.”
NOTE 20: SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)
(in millions, except per share amounts)
2016(1)
Revenues
Operating income (loss)
Net income (loss)
Basic earnings (loss) per common share(3)
Diluted earnings (loss) per common share(3)
First
Quarter
$ 12,279
1,144
692
2.45
2.42
Second
Quarter
$ 12,453
1,137
691
2.47
2.44
Third
Quarter
$ 12,654
864
507
1.86
1.84
Fourth
Quarter
$ 12,979
(68)
(70)
(0.26)
(0.26)
2015(2)
$ 12,114
$ 11,684
Revenues
(1,321)
1,062
Operating income (loss)
(895)
653
Net income (loss)
Basic earnings (loss) per common share(3)
(3.16)
2.29
Diluted earnings (loss) per common share(3)
(3.16)
2.26
(1) The fourth quarter of 2016 includes a $1.5 billion retirement plans mark-to-market loss and TNT Express transaction, financing and integration planning expenses and immaterial financial results
$ 11,939
1,088
663
2.34
2.31
$ 11,716
1,038
628
2.21
2.18
from the time of acquisition totaling $79 million. In addition, the fourth quarter of 2016 includes a $76 million favorable tax impact from an internal corporate restructuring to facilitate the
integration of FedEx Express and TNT Express and $11 million of expenses related to independent contractor litigation matters at FedEx Ground. The third quarter of 2016 includes provisions
related to independent contractor litigation matters at FedEx Ground for $204 million and expenses related to the settlement of a U.S. Customs and Border Protection notice of action in the
amount of $69 million, as well as TNT Express transaction, financing and integration planning expenses of $25 million. The second quarter of 2016 includes provisions related to independent
contractor litigation matters at FedEx Ground for $41 million and $19 million of TNT Express transaction, financing and integration planning expenses.
(2) The fourth quarter of 2015 includes a $2.2 billion retirement plans mark-to-market loss, $276 million of impairment and related charges resulting from the decision to permanently retire
and adjust the retirement schedule of certain aircraft and related engines at FedEx Express and a $197 million reserve increase due to the settlement of a legal matter at FedEx Ground.
(3) The sum of the quarterly earnings per share may not equal annual amounts due to differences in the weighted-average number of shares outstanding during the respective periods.
78
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21: 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.
The guarantor subsidiaries, which are wholly owned by FedEx, guarantee $13.6 billion of our debt. The guarantees are full and unconditional
and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result,
the “Guarantor Subsidiaries” and “Non-guarantor Subsidiaries” columns each include portions of our domestic and international operations.
Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose
other than to comply with the specific requirements for subsidiary guarantor reporting.
Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following
tables (in millions):
Condensed Consolidating Balance Sheets
Parent
Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Eliminations
Consolidated
May 31, 2016
Assets
Current Assets
Cash and cash equivalents
Receivables, less allowances
Spare parts, supplies, fuel, prepaid expenses
and other, less allowances
Total current assets
Property and Equipment, at Cost
Less accumulated depreciation and amortization
Net property and equipment
Intercompany Receivable
Goodwill
Investment in Subsidiaries
Other Assets
Liabilities and Stockholders’ Investment
Current Liabilities
Current portion of long-term debt
Accrued salaries and employee benefits
Accounts payable
Accrued expenses
Total current liabilities
Long-Term Debt, Less Current Portion
Intercompany Payable
Other Long-Term Liabilities
Deferred income taxes
Other liabilities
Total other long-term liabilities
Stockholders’ Investment
$ 1,974
1
233
2,208
22
17
5
2,437
–
24,766
3,461
$ 32,877
$ –
54
8
883
945
13,553
–
–
4,595
4,595
13,784
$ 32,877
$ 326
4,461
724
5,511
43,760
21,566
22,194
1,284
1,571
3,697
970
$ 35,227
$ 13
1,377
1,501
1,411
4,302
248
–
4,436
3,375
7,811
22,866
$ 35,227
$ 1,277
2,831
246
4,354
3,236
1,151
2,085
–
5,176
–
1,851
$ 13,466
$ 16
541
1,519
769
2,845
37
3,721
369
897
1,266
5,597
$ 13,466
$ (43)
(41)
–
(84)
–
–
–
(3,721)
–
(28,463)
(3,238)
$ (35,506)
$ –
–
(84)
–
(84)
–
(3,721)
(3,238)
–
(3,238)
(28,463)
$ (35,506)
$ 3,534
7,252
1,203
11,989
47,018
22,734
24,284
–
6,747
–
3,044
$ 46,064
$ 29
1,972
2,944
3,063
8,008
13,838
–
1,567
8,867
10,434
13,784
$ 46,064
79
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheets
Assets
Current Assets
Cash and cash equivalents
Receivables, less allowances
Spare parts, supplies, fuel, prepaid expenses
and other, less allowances
Total current assets
Property and Equipment, at Cost
Less accumulated depreciation and amortization
Net property and equipment
Intercompany Receivable
Goodwill
Investment in Subsidiaries
Other Assets
Liabilities and Stockholders’ Investment
Current Liabilities
Current portion of long-term debt
Accrued salaries and employee benefits
Accounts payable
Accrued expenses
Total current liabilities
Long-Term Debt, Less Current Portion
Intercompany Payable
Other Long-Term Liabilities
Deferred income taxes
Other liabilities
Total other long-term liabilities
Stockholders’ Investment
Parent
Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Eliminations
Consolidated
May 31, 2015
$ 2,383
3
41
2,427
29
23
6
–
–
23,173
2,770
$ 28,376
$ –
34
5
604
643
6,978
2,267
–
3,495
3,495
14,993
$ 28,376
$ 487
4,383
689
5,559
40,364
20,685
19,679
713
1,552
3,800
898
$ 32,201
$ 7
1,208
1,433
1,557
4,205
248
–
3,662
3,367
7,029
20,719
$ 32,201
$ 971
1,385
123
2,479
2,471
1,281
1,190
1,554
2,258
–
480
$ 7,961
$ 12
194
758
274
1,238
23
–
185
261
446
6,254
$ 7,961
$ (78)
(52)
–
(130)
–
–
–
(2,267 )
–
(26,973)
(2,637)
$ (32,007)
$ –
–
(130)
–
(130)
–
(2,267 )
(2,637)
–
(2,637)
(26,973)
$ (32,007)
$ 3,763
5,719
853
10,335
42,864
21,989
20,875
–
3,810
–
1,511
$ 36,531
$ 19
1,436
2,066
2,435
5,956
7,249
–
1,210
7,123
8,333
14,993
$ 36,531
80
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Comprehensive Income
Revenues
Operating Expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Retirement plans mark-to-market adjustment
Intercompany charges, net
Other
Operating Income
Other Income (Expense):
Equity in earnings of subsidiaries
Interest, net
Intercompany charges, net
Other, net
Income Before Income Taxes
Provision for income taxes
Net Income
Comprehensive Income
Year Ended May 31, 2016
Parent
$ –
Guarantor
Subsidiaries
$ 42,143
Non-guarantor
Subsidiaries
$ 8,547
Eliminations
$ (325)
Consolidated
$ 50,365
119
–
5
1
–
1
–
(645)
519
–
–
1,820
(355)
369
(14)
1,820
–
$ 1,820
$ 1,746
15,880
7,380
2,484
2,399
2,324
1,954
1,414
425
5,274
39,534
2,609
279
27
(354)
(14)
2,547
818
$ 1,729
$ 1,704
2,582
2,720
371
231
75
153
84
220
1,643
8,079
468
–
13
(15)
6
472
102
$ 370
$ 128
–
(134)
(6)
–
–
–
–
–
(185)
(325)
–
(2,099)
–
–
–
(2,099)
–
$ (2,099)
$ (2,099)
18,581
9,966
2,854
2,631
2,399
2,108
1,498
–
7,251
47,288
3,077
–
(315)
–
(22)
2,740
920
$ 1,820
$ 1,479
Condensed Consolidating Statements of Comprehensive Income
Revenues
Operating Expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Impairment and other charges
Retirement plans mark-to-market adjustment
Intercompany charges, net
Other
Operating Income
Other Income (Expense):
Equity in earnings of subsidiaries
Interest, net
Intercompany charges, net
Other, net
Income Before Income Taxes
Provision for income taxes
Net Income
Comprehensive Income
Year Ended May 31, 2015
Parent
$ –
Guarantor
Subsidiaries
$ 39,420
Non-guarantor
Subsidiaries
$ 8,414
Eliminations
$ (381)
Consolidated
$ 47,453
106
–
5
1
–
1
–
–
(450)
337
–
–
1,050
(247)
253
(6)
1,050
–
$ 1,050
$ 1,053
14,626
5,802
2,322
2,370
3,632
1,949
276
2,075
117
4,946
38,115
1,305
337
23
(265)
(32)
1,368
390
$ 978
$ 929
2,378
2,878
360
240
88
149
–
115
333
1,311
7,852
562
–
3
12
19
596
187
$ 409
$ 121
–
(197)
(5)
–
–
–
–
–
–
(179)
(381)
–
(1,387)
–
–
–
(1,387)
–
$ (1,387)
$ (1,387)
17,110
8,483
2,682
2,611
3,720
2,099
276
2,190
–
6,415
45,586
1,867
–
(221)
–
(19)
1,627
577
$ 1,050
$ 716
81
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statements of Comprehensive Income
Revenues
Operating Expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Retirement plans mark-to-market adjustment
Intercompany charges, net
Other
Operating Income
Other Income (Expense):
Equity in earnings of subsidiaries
Interest, net
Intercompany charges, net
Other, net
Income Before Income Taxes
Provision for income taxes
Net Income
Comprehensive Income
Year Ended May 31, 2014
Parent
$ –
Guarantor
Subsidiaries
$ 38,088
Non-guarantor
Subsidiaries
$ 7,820
Eliminations
$ (341)
Consolidated
$ 45,567
99
–
5
1
–
1
–
(209 )
103
–
–
2,324
(167)
172
(5)
2,324
–
$ 2,324
$ 2,248
13,936
5,374
2,282
2,379
4,460
1,734
13
(125)
4,823
34,876
3,212
412
16
(194)
(14)
3,432
1,141
$ 2,291
$ 2,294
2,136
2,796
340
207
97
127
2
334
1,178
7,217
603
–
9
22
4
638
193
$ 445
$ 417
–
(159)
(5)
–
–
–
–
–
(177)
(341)
–
(2,736)
–
–
–
(2,736)
–
$ (2,736)
$ (2,736)
16,171
8,011
2,622
2,587
4,557
1,862
15
–
5,927
41,752
3,815
–
(142)
–
(15)
3,658
1,334
$ 2,324
$ 2,223
Condensed Consolidating Statements of Cash Flows
Cash provided by (used in) operating activities
Investing activities
Capital expenditures
Business acquisitions, net of cash acquired
Proceeds from asset dispositions and other
Cash used in investing activities
Financing activities
Net transfers from (to) Parent
Payment on loan between subsidiaries
Intercompany dividends
Principal payments on debt
Proceeds from debt issuance
Proceeds from stock issuances
Excess tax benefit on the exercise of stock options
Dividends paid
Purchase of treasury stock
Other, net
Cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
82
Year Ended May 31, 2016
Parent
$ (831 )
Guarantor
Subsidiaries
$ 5,932
Non-guarantor
Subsidiaries
$ 572
Eliminations
$ 35
Consolidated
$ 5,708
–
–
(55)
(55)
1,629
(4,805)
–
–
6,519
183
3
(277)
(2,722)
(54)
476
1
(409)
2,383
$ 1,974
(4,617)
–
33
(4,584)
(1,549)
109
20
(19)
–
–
–
–
–
(48)
(1,487)
(22)
(161)
487
$ 326
(201)
(4,618)
12
(4,807)
(80)
4,696
(20)
(22)
–
–
–
–
–
48
4,622
(81 )
306
971
$ 1,277
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
35
(78)
$ (43)
(4,818)
(4,618)
(10)
(9,446)
–
–
–
(41)
6,519
183
3
(277)
(2,722)
(54)
3,611
(102)
(229)
3,763
$ 3,534
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Cash Flows
Cash provided by (used in) operating activities
Investing activities
Capital expenditures
Business acquisitions, net of cash acquired
Proceeds from asset dispositions and other
Cash used in investing activities
Financing activities
Net transfers from (to) Parent
Payment on loan between subsidiaries
Intercompany dividends
Principal payments on debt
Proceeds from debt issuance
Proceeds from stock issuances
Excess tax benefit on the exercise of stock options
Dividends paid
Purchase of treasury stock
Other, net
Cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Parent
$ (727 )
(1)
(1,429 )
–
(1,430)
1,431
–
–
–
2,491
320
51
(227)
(1,254)
(27)
2,785
(1 )
627
1,756
$ 2,383
Year Ended May 31, 2015
Guarantor
Subsidiaries
$ 5,446
Non-guarantor
Subsidiaries
$ 575
Eliminations
$ 72
Consolidated
$ 5,366
(4,139)
–
42
(4,097)
(1,502)
267
68
(1)
–
–
–
–
–
(105)
(1,273)
(30)
46
441
$ 487
(207)
–
(18 )
(225)
71
(267)
(68)
(4)
–
–
–
–
–
105
(163)
(77 )
110
861
$ 971
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
72
(150)
$ (78)
(4,347)
(1,429)
24
(5,752)
–
–
–
(5)
2,491
320
51
(227)
(1,254)
(27)
1,349
(108)
855
2,908
$ 3,763
Condensed Consolidating Statements of Cash Flows
Cash provided by (used in) operating activities
Investing activities
Capital expenditures
Business acquisitions, net of cash acquired
Proceeds from asset dispositions and other
Cash used in investing activities
Financing activities
Net transfers from (to) Parent
Payment on loan between subsidiaries
Intercompany dividends
Principal payments on debt
Proceeds from debt issuance
Proceeds from stock issuances
Excess tax benefit on the exercise of stock options
Dividends paid
Purchase of treasury stock
Other, net
Cash used in financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended May 31, 2014
Parent
$ (8 )
Guarantor
Subsidiaries
$ 3,790
Non-guarantor
Subsidiaries
$ 535
Eliminations
$ (53)
Consolidated
$ 4,264
(1)
–
–
(1)
588
–
–
(250)
1,997
557
44
(187)
(4,857)
(19)
(2,127 )
–
(2,136 )
3,892
$ 1,756
(3,230)
(36)
37
(3,229)
(546)
(4)
54
(4)
–
–
–
–
–
(16)
(516)
(9)
36
405
$ 441
(302)
–
(19 )
(321)
(42 )
4
(54)
–
–
–
–
–
–
16
(76)
6
144
717
$ 861
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(53)
(97)
$ (150)
(3,533)
(36)
18
(3,551)
–
–
–
(254)
1,997
557
44
(187)
(4,857)
(19)
(2,719)
(3)
(2,009 )
4,917
$ 2,908
83
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx Corporation
We have audited the accompanying consolidated balance sheets of FedEx Corporation as of May 31, 2016 and 2015, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ investment and cash flows for each of the three years in the period ended
May 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FedEx
Corporation at May 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period
ended May 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FedEx Corporation’s
internal control over financial reporting as of May 31, 2016, based on criteria established in Internal Control–Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated July 18, 2016 expressed an
unqualified opinion thereon.
Memphis, Tennessee
July 18, 2016
84
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85
SELECTED FINANCIAL DATA
The following table sets forth (in millions, except per share amounts and other operating data) certain selected consolidated financial and
operating data for FedEx as of and for the five years ended May 31, 2016. This information should be read in conjunction with the Consolidated
Financial Statements, MD&A and other financial data appearing elsewhere in this Annual Report.
Operating Results
Revenues
Operating income (loss)
Income (loss) before income taxes
Net income (loss)
Per Share Data
Earnings (loss) per share:
Basic
Diluted
Average shares of common stock outstanding
Average common and common equivalent shares outstanding
Cash dividends declared
Financial Position
Property and equipment, net
Total assets
Long-term debt, less current portion
Common stockholders’ investment
2016(1) (2)
2015(2) (3)
2014(2)
2013(2) (4)
2012(2) (5)
$ 50,365
3,077
2,740
1,820
$ 6.59
$ 6.51
276
279
$ 1.00
$ 24,284
46,064
13,838
13,784
$ 47,453
1,867
1,627
1,050
$ 3.70
$ 3.65
283
287
$ 0.80
$ 20,875
36,531
7,249
14,993
$ 45,567
3,815
3,658
2,324
$ 7.56
$ 7.48
307
310
$ 0.60
$ 19,550
33,070
4,736
15,277
$ 44,287
4,434
4,338
2,716
$ 8.61
$ 8.55
315
317
$ 0.56
$ 18,484
33,567
2,739
17,398
$ 42,680
(399)
(444)
(220)
$ (0.70)
$ (0.70)
315
317
$ 0.52
$ 17,248
29,903
1,250
14,727
Other Operating Data
FedEx Express aircraft fleet
(1) Results for 2016 include provisions related to independent contractor litigation matters at FedEx Ground for $256 million, net of recognized insurance recovery ($158 million, net of tax, or
650
643
647
647
660
$0.57 per diluted share), and expenses related to the settlement of a U.S. Customs and Border Protection notice of action in the amount of $69 million, net of recognized insurance recovery
($43 million, net of tax, or $0.15 per diluted share). Total transaction, financing and integration planning expenses related to our TNT Express acquisition, as well as TNT Express’s immaterial
financial results from the time of acquisition, were $132 million ($125 million, net of tax, or $0.45 per diluted share) during 2016. In addition, 2016 results include a $76 million ($0.27 per diluted
share) favorable tax impact from an internal corporate restructuring to facilitate the integration of FedEx Express and TNT Express.
(2) Results include mark-to-market losses of $1.5 billion ($946 million, net of tax, or $3.39 per diluted share) in 2016, losses of $2.2 billion ($1.4 billion, net of tax, or $4.81 per diluted share) in
2015 and $15 million ($9 million, net of tax, or $0.03 per diluted share) in 2014, a gain of $1.4 billion ($835 million, net of tax, or $2.63 per diluted share) in 2013 and losses of $3.9 billion
($2.5 billion, net of tax, or $7.76 per diluted share) in 2012. See Note 1 and Note 13 of the accompanying consolidated financial statements.
(3) Results for 2015 include impairment and related charges of $276 million ($175 million, net of tax, or $0.61 per diluted share) resulting from the decision to permanently retire and adjust the
retirement schedule of certain aircraft and related engines. See Note 1 to the accompanying consolidated financial statements. Additionally, results for 2015 include a charge of $197 million
($133 million, net of tax, or $0.46 per diluted share) in the fourth quarter to increase the legal reserve associated with the settlement of a legal matter at FedEx Ground to the amount of the
settlement. See Note 18 to the accompanying consolidated financial statements.
(4) Results for 2013 include $560 million ($353 million, net of tax, or $1.11 per diluted share) of business realignment costs and a $100 million ($63 million, net of tax, or $0.20 per diluted share)
impairment charge resulting from the decision to retire 10 aircraft and related engines at FedEx Express.
(5) Results for 2012 include a $134 million ($84 million, net of tax, or $0.26 per diluted share) impairment charge resulting from the decision to retire 24 aircraft and related engines at FedEx
Express and the reversal of a $66 million legal reserve initially recorded in 2011.
84
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FEDEX CORPORATION R. Brad Martin(1) (3)
Chairman
RBM Venture Company
Private investment company
Joshua Cooper Ramo(1) (3)
Vice Chairman, Co-Chief Executive Officer
Kissinger Associates, Inc.
Strategic advisory firm
Susan C. Schwab(2) (3)
Professor
University of Maryland
School of Public Policy
Frederick W. Smith
Chairman, President and Chief Executive Officer
FedEx Corporation
David P. Steiner(4*) (5)
Chief Executive Officer
Waste Management, Inc.
Integrated waste management services company
Paul S. Walsh(2*)
Chairman
Compass Group PLC
Food service and support services company
BOARD OF DIRECTORS
James L. Barksdale(3*) (4)
Chairman and President
Barksdale Management Corporation
Investment management company
John A. Edwardson(1*)
Former Chairman and Chief Executive Officer
CDW Corporation
Technology products and services company
Marvin R. Ellison(2) (4)
Chairman and Chief Executive Officer
J. C. Penney Company, Inc.
Apparel and home furnishings retailer
John C. (“Chris”) Inglis(3) (4)
Professor
U.S. Naval Academy
Kimberly A. Jabal(1) (3)
Chief Financial Officer
Weebly, Inc.
Small business software company
Shirley Ann Jackson(2) (4)
President
Rensselaer Polytechnic Institute
Technological research university
Gary W. Loveman(1) (4)
Executive Vice President
Aetna Inc.
Diversified healthcare benefits company
(1) Audit Committee
(2) Compensation Committee
(3) Information Technology Oversight Committee
(4) Nominating & Governance Committee
(5) Lead Independent Director
* Committee Chair
86
87
FEDEX CORPORATION EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
FedEx Corporation
Frederick W. Smith
Chairman, President and Chief Executive Officer
Alan B. Graf, Jr.
Executive Vice President and Chief Financial Officer
Robert B. Carter
Executive Vice President,
FedEx Information Services and Chief Information Officer
FedEx Express Group
David J. Bronczek
President and Chief Executive Officer
FedEx Express
David L. Cunningham, Jr.
Executive Vice President and Chief Operating Officer
FedEx Express
Elise L. Jordan
Executive Vice President and Chief Financial Officer
FedEx Express
James R. Parker
Executive Vice President, Air Operations
FedEx Express
David Binks
Regional President, Europe and
Chief Executive Officer, TNT Express
FedEx Express
James R. Muhs, Sr.
President and Chief Executive Officer
FedEx Trade Networks
Craig M. Simon
President and Chief Executive Officer
FedEx SupplyChain Systems
FedEx Freight Segment
Michael L. Ducker
President and Chief Executive Officer
FedEx Freight
Donald C. Brown
Executive Vice President, Finance and Administration
and Chief Financial Officer
FedEx Freight
Virginia C. Albanese
President and Chief Executive Officer
FedEx Custom Critical
Christine P. Richards
Executive Vice President, General Counsel and Secretary
T. Michael Glenn
Executive Vice President,
Market Development and Corporate Communications
John L. Merino
Corporate Vice President and Principal Accounting Officer
FedEx Ground Segment
Henry J. Maier
President and Chief Executive Officer
FedEx Ground
Ward B. Strang
Executive Vice President and Chief Operating Officer
FedEx Ground
Arthur F. Smuck III
President and Chief Executive Officer
GENCO
FedEx Services Segment
Donald F. Colleran
Executive Vice President, Global Sales
FedEx Services
Rajesh Subramaniam
Executive Vice President, Global Marketing
FedEx Services
Brian D. Philips
President and Chief Executive Officer
FedEx Office
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FEDEX CORPORATION CORPORATE INFORMATION
FEDEX CORPORATION: 942 South Shady Grove Road, Memphis,
Tennessee 38120, (901) 818-7500, fedex.com
ANNUAL MEETING OF SHAREOWNERS: Monday, September 26, 2016,
8:00 a.m. local time, FedEx Express World Headquarters, 3670 Hacks
Cross Road, Building G, Memphis, Tennessee 38125.
STOCK LISTING: FedEx Corporation’s common stock is listed on the
New York Stock Exchange under the ticker symbol FDX.
SHAREOWNERS: As of July 14, 2016, there were 12,453
shareowners of record.
MARKET INFORMATION: Following are high and low sale prices and
cash dividends paid, by quarter, for FedEx Corporation’s common stock
in 2016 and 2015:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
FY2016
High
Low
Dividend
FY2015
High
Low
Dividend
$ 185.19
130.13
0.25
$ 155.31
138.30
0.20
$ 164.94
140.01
0.25
$ 179.79
148.37
0.20
$ 160.67
119.71
0.25
$ 183.51
163.57
0.20
$ 169.30
137.30
0.25
$ 178.79
163.60
0.20
FINANCIAL INFORMATION: Copies of FedEx Corporation’s Annual
Report on Form 10-K, other documents filed with or furnished to the
Securities and Exchange Commission (SEC) and other financial and
statistical information are available through the Investor Relations
page of our website at http://investors.fedex.com. The information we
post on our Investor Relations website could be deemed to be material
information. We encourage investors, the media and others interested
in FedEx to visit this website from time to time, as information is
updated and new information is posted. Company documents filed
with or furnished to the SEC can also be found at the SEC’s website
at www.sec.gov. You will be mailed a copy of the Form 10-K upon
request to: FedEx Corporation Investor Relations, 942 South Shady
Grove Road, Memphis, Tennessee 38120, (901) 818-7200,
e-mail: ir@fedex.com.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
Ernst & Young LLP, Memphis, Tennessee
CUSTOMER SERVICE: Call 1-800-Go-FedEx or visit fedex.com.
MEDIA INQUIRIES: Jess Bunn, Manager, Investor Relations, FedEx
Corporation, 942 South Shady Grove Road, Memphis, Tennessee 38120,
(901) 818-7463, e-mail: mediarelations@fedex.com
SHAREOWNER ACCOUNT SERVICES: Computershare Investor Services,
211 Quality Circle, Suite 210, College Station, Texas 77845,
(800) 446-2617, www.computershare.com
DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT: For
information on the direct stock purchase and dividend reinvestment
plan for FedEx Corporation common stock, call Computershare at
(800) 446-2617 or visit their direct stock purchase plan website at
www.computershare.com. This plan provides an alternative to
traditional retail brokerage methods of purchasing, holding and
selling FedEx common stock. This plan also permits shareowners to
automatically reinvest their dividends to purchase additional shares
of FedEx common stock.
INVESTOR RELATIONS: Mickey Foster, Vice President, Investor
Relations, FedEx Corporation, 942 South Shady Grove Road, Memphis,
Tennessee 38120, (901) 818-7200, e-mail: ir@fedex.com
EQUAL EMPLOYMENT OPPORTUNITY: Our greatest asset is our
people. We are committed to providing a workplace where our
employees and contractors feel respected, satisfied and appreciated.
Our policies are designed to promote fairness and respect for
everyone. We hire, evaluate and promote employees, and engage
contractors, based on their skills and performance. With this in mind,
we will not tolerate certain behaviors. These include harassment,
retaliation, violence, intimidation and discrimination of any kind
involving race, color, religion, national origin, gender, sexual
orientation, gender identity, gender expression, age, disability,
veteran status or any other characteristic protected by federal,
state or local law.
For more detail on the information in this report,
visit http://investors.fedex.com.
Our latest Global Citizenship Report is available
at http://csr.fedex.com.
In line with FedEx’s commitment to sustainability, our Annual Report was produced using
environmentally and socially responsible procurement and manufacturing practices to ensure
a minimized environmental impact. This report was printed at EarthColor on FSC® certified
paper containing 10% recycled PCW fiber. Printing plant utilized 100% renewable wind power
(RECs) and lean manufacturing principles, including green chemistry principles, the recycling of
residual materials as well as the use of low VOC inks and coatings. In addition, carbon and VOC
reduction strategies were employed to destroy residual VOCs via bio-oxidation. Carbon offsets
were purchased where carbon could not be eliminated rendering this report carbon-balanced.
88
> 125 trees preserved for the future
> 56 million BTUs of energy conserved
> 5,760 kWh of electricity offset
> 10,739 pounds of greenhouse gas reduced
> 58,242 gallons of water waste eliminated
> 3,899 pounds of solid waste eliminated
Sources: Environmental impact estimates were made using the Environmental Paper Network
Paper Calculator and the U.S. EPA ‘s power profiler.
.
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FEDEX CORPORATION
FedEx is flying higher.
FY16 once again
showcased the
successful strategy of
managing our portfolio
of services to achieve
outstanding growth.
$
50+
BILLION
FY16 REVENUE
In FY16 FedEx
Corporation revenue
exceeded $50 billion
for the first time.
$
1.6
BILLION PROFIT
IMPROVEMENT
PLAN
9%
INCREASE IN FEDEX
GROUND PACKAGE
VOLUME
FedEx Express
achieved its profit
improvement goal
outlined in FY13.
Average daily volume,
driven by growth in
e-commerce, grew
9 percent year over year.
ACQUISITIONS
FedEx acquired TNT
Express for €4.4 billion
on schedule, and the
integration processes
are well underway at
GENCO and FedEx
CrossBorder (formerly
Bongo International).
PRICING
LEADERSHIP
Strategic actions include
general rate increases,
higher pricing on larger
packages and fuel
surcharge adjustments.
PAY FOR
PERFORMANCE
Most team members
earned higher variable
incentive compensation
year over year.
On the cover: Boeing 767-300 Freighters are more fuel-efficient with lower emissions and lower unit operating costs than the aircraft they
are replacing. Modernizing the FedEx Express fleet with these new aircraft is improving margins and adding flexibility to our domestic
and international operations.
THE ROAD
AHEAD: PASSION
FOR SAFETY
The bright lights of Las Vegas don’t
distract FedEx Freight City Driver Rebecca
Parker. With an eight-year safe driving
record at FedEx Freight, she is focused
on the road — and a job she loves.
“Ten years ago I applied to FedEx and
couldn’t have asked for a better job.
It’s perfect for a single mom. I have
full benefits, can support my kids, and
I’m home at night and on holidays. I’m
always telling other moms that FedEx has
a free truck driving training program.
“I also use my FedEx Freight trailer to
help local nonprofits deliver everything
from back-to-school supplies to food
for the homeless when our location
participates in these drives. I love that the
company gives us the tools to make a real
impact in our communities.
“The one thing I believe in wholeheartedly
is safety. As a certified Road Test Observer
and Road Test Coach, I train new team
members to observe FedEx driver safety
guidelines and learn safe habits. I love
that FedEx puts safety first above all for
its drivers, its communities and through
the programs that it supports.”
— Rebecca Parker,
FedEx Freight City Driver
FEDEX ANNUAL REPORT 2016
F
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2
0
1
6
latitude.
longitude.
altitude.
FEDEX CORPORATION
942 South Shady Grove Road
Memphis, Tennessee 38120
fedex.com