(1)(1) | Net earnings available to participating securities were immaterial in all periods presented. - 11 -
(5) Income Taxes On December 22, 2017, the United States government enacted comprehensive tax legislation through the TCJA. The TCJA significantly changes the U.S. corporate income tax system including, among other things, lowering the statutory federal income tax rate from 35% to 21%, eliminating or reducing certain income tax deductions, and implementing a modified territorial tax system that includes a one-time transition tax on previously deferred foreign earnings. Due to our May 31 fiscal year end, the lower rate will be phased in, resulting in a U.S. statutory federal rate of 29.2% for 2018 and a 21% statutory federal rate for subsequent years. In December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides for a measurement period of up to one year from the enactment date for companies to complete the accounting for the initial income tax effects of the TCJA. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting is complete and provide a provisional estimate (where determinable) of the income tax effects of the TCJA where the accounting is incomplete. The provisional estimate is required to be updated throughout the measurement period. As of February 28, 2018, we have not completed our initial accounting of the tax effects of the TCJA; however, where determinable, we have made an estimate of the effects on our existing deferred tax balances and the one-time transition tax. During the quarter, we recognized a provisional benefit of $1.15 billion related to the remeasurement of our net U.S. deferred tax liability and a provisional benefit of $36 million from foreign tax credits exceeding the one-time transition tax on previously deferred foreign earnings. In addition to the provisional amounts above, we recognized a one-time benefit of $204 million from a $1.5 billion contribution to our U.S. Pension Plans in February 2018 and a benefit of $165 million related to a lower statutory income tax rate on fiscal 2018 year-to-date earnings. The following table provides a reconciliation of the 2017 effective tax rates to the 2018 effective tax rates, including the impact of the TCJA, for the periods ended February 28: | | Three Months Ended | | | Nine Months Ended | | | | 2018 | | | 2018 | | 2017 Effective Tax Rate | | | 37.5 | % | | | 36.6 | % | Remeasurement of net U.S. deferred tax liability | | | (131.5 | ) | | | (38.4 | ) | Effect of February 2018 pension contribution (a) | | | (23.3 | ) | | | (6.8 | ) | Lower statutory tax rate | | | (18.9 | ) | | | (5.5 | ) | Transition tax | | | (4.1 | ) | | | (1.2 | ) | Other (b) | | | 3.0 | | | | 0.3 | | 2018 Effective Tax Rate | | | (137.3 | )% | | | (15.0 | )% |
| (a) | The benefit is from the pension contribution deducted on our 2017 tax return at a tax rate of 35%. |
| (b) | The 2018 tax rates were negatively impacted by the effect of the NotPetya cyberattack, changes in uncertain tax positions and tax rate impacts on changes in deferred tax items after the TCJA enactment and were favorably impacted from foreign tax credits associated with a second quarter dividend from foreign operations. |
(5)(6) Retirement Plans
We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit pension plans, defined contribution plans and postretirement healthcare plans. Key terms of our retirement plans are provided in our Annual Report. Our retirement plans costs for the periods ended February 28 2017 and February 29, 2016 were as follows (in millions): | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Defined benefit pension plans | | $ | 57 | | | $ | 53 | | | $ | 173 | | | $ | 160 | | | $ | 39 | | | $ | 57 | | | $ | 113 | | | $ | 173 | | Defined contribution plans | | | 117 | | | | 104 | | | | 348 | | | | 304 | | | | 135 | | | | 117 | | | | 386 | | | | 348 | | Postretirement healthcare plans | | | 19 | | | | 20 | | | | 57 | | | | 61 | | | | 19 | | | | 19 | | | | 56 | | | | 57 | | | | $ | 193 | | | $ | 177 | | | $ | 578 | | | $ | 525 | | | $ | 193 | | | $ | 193 | | | $ | 555 | | | $ | 578 | |
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Net periodic benefit cost of the pension and postretirement healthcare plans for the periods ended February 28 2017 and February 29, 2016 included the following components (in millions): | | Three Months Ended | | | Nine Months Ended | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Pension Plans | | | | | | | | | | | | | | | | | Service cost | | $ | 180 | | | $ | 166 | | | $ | 540 | | | $ | 497 | | Interest cost | | | 293 | | | | 295 | | | | 879 | | | | 885 | | Expected return on plan assets | | | (384 | ) | | | (377 | ) | | | (1,156 | ) | | | (1,131 | ) | Amortization of prior service credit and other | | | (32 | ) | | | (31 | ) | | | (90 | ) | | | (91 | ) | | | $ | 57 | | | $ | 53 | | | $ | 173 | | | $ | 160 | |
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | U.S. Pension Plans | | | International Pension Plans | | | Postretirement Healthcare Plans | | Postretirement Healthcare Plans | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Service cost | | $ | 9 | | | $ | 10 | | | $ | 27 | | | $ | 30 | | | $ | 169 | | | $ | 160 | | | $ | 23 | | | $ | 20 | | | $ | 9 | | | $ | 9 | | Interest cost | | | 10 | | | | 10 | | | | 30 | | | | 31 | | | | 279 | | | | 282 | | | | 12 | | | | 11 | | | | 10 | | | | 10 | | Expected return on plan assets | | | | (406 | ) | | | (375 | ) | | | (10 | ) | | | (9 | ) | | | — | | | | — | | Amortization of prior service credit and other | | | | (29 | ) | | | (30 | ) | | | 1 | | | | (2 | ) | | | — | | | | — | | | | $ | 19 | | | $ | 20 | | | $ | 57 | | | $ | 61 | | | $ | 13 | | | $ | 37 | | | $ | 26 | | | $ | 20 | | | $ | 19 | | | $ | 19 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | | | | | U.S. Pension Plans | | | International Pension Plans | | | Postretirement Healthcare Plans | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Service cost | | | $ | 509 | | | $ | 479 | | | $ | 69 | | | $ | 61 | | | $ | 27 | | | $ | 27 | | Interest cost | | | | 836 | | | | 846 | | | | 37 | | | | 33 | | | | 29 | | | | 30 | | Expected return on plan assets | | | | (1,218 | ) | | | (1,126 | ) | | | (32 | ) | | | (30 | ) | | | — | | | | — | | Amortization of prior service credit and other | | | | (88 | ) | | | (89 | ) | | | — | | | | (1 | ) | | | — | | | | — | | | | | $ | 39 | | | $ | 110 | | | $ | 74 | | | $ | 63 | | | $ | 56 | | | $ | 57 | |
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Contributions to our U.S. Pension Plans for the nine-month periods ended February 28 2017 and February 29, 2016 were as follows (in millions): | | 2017 | | | 2016 | | | 2018 | | | 2017 | | Required | | $ | 444 | | | $ | 8 | | | $ | 22 | | | $ | 444 | | Voluntary | | | 1,306 | | | | 487 | | | | 2,478 | | | | 1,306 | | | | $ | 1,750 | | | $ | 495 | | | $ | 2,500 | | | $ | 1,750 | |
In March 2017,During the third quarter of 2018, we made $250 million involuntary contributions to our U.S. Pension Plans of which $15 million was required. Our U.S. Pension Plans have ample funds to meet expected benefit payments. We anticipate our U.S. Pension Plans will make payments in the fourth quarter of 2017 aggregating in excess of $1 billion to former employees who elected to receive their benefits early under a voluntary program offered to qualifying participants during the third quarter of 2017.$1.75 billion.
(6)(7) Business Segment Information
We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies includeare FedEx Express, including TNT Express B.V. (“TNT Express”), the world’s largest express transportation company; 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 reportable segments include the following businesses: | | FedEx Express Group:
| | | | FedEx Express Segment | FedEx Express (express transportation) | | TNT Express (international express transportation, small-package ground delivery and freight transportation) | | FedEx Trade Networks (air and ocean freight forwarding, customs brokerage and cross-border enablement technology and solutions) | | FedEx SupplyChain Systems (logistics services)
| | | TNT Express Segment
| TNT Express (international express transportation, small-package ground delivery and freight transportation)
| | | FedEx Ground Segment | FedEx Ground (small-package ground delivery) | | FedEx Supply Chain (third-party logistics) (formerly GENCO) | | | | | FedEx Freight Segment | FedEx Freight (LTL freight transportation) | | FedEx Custom Critical (time-critical transportation) | | | | | FedEx Services Segment | FedEx Services (sales, marketing, information technology, communications, customer service, technical support, billing and collection services and back-office functions) | | FedEx Office (document and business services and package acceptance) |
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As discussed in our Annual Report, in the thirdfirst quarter of 2017,2018, we rebranded GENCObegan to report TNT Express as part of the FedEx Express segment. Prior year amounts have been revised to conform to the current year presentation. Effective March 1, 2018, we realigned our specialty logistics and e-commerce solutions in a new organizational structure under FedEx Trade Networks, Inc. in the FedEx Express segment. The realignment allows us to improve our ability to deliver the capabilities of our specialty companies to customers. The new structure includes FedEx Custom Critical, FedEx Cross Border, FedEx Supply Chain. Chain, FedEx Trade Networks Transport & Brokerage and, effective June 1, 2018, a new company called FedEx Forward Depots. Prior period segment results will be recast to conform to current year presentation beginning in the fourth quarter of 2018. FedEx Services Segment The FedEx Services segment operates combined sales, marketing, administrative and information technology functions that support our transportation businesses and allow us to obtain synergies from the combination of these functions. For the international regions of FedEx Express, and for TNT Express, some of these functions are performed on a regional basis and reported in the applicable 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 and Print Services, Inc. (“FedEx Office”), which provides an array of document and business services and retail access to our customers for our package transportation businesses. - 13 -
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. 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 businesses.business. These costs are not allocated to the business segments. - 14 -
The following table provides a reconciliation of reportable segment revenues and operating income to our unaudited condensed consolidated financial statement totals for the periods ended February 28 2017 and February 29, 2016 (in millions): | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Express segment | | $ | 6,779 | | | $ | 6,557 | | | $ | 20,178 | | | $ | 19,736 | | | $ | 9,370 | | | $ | 8,569 | | | $ | 27,376 | | | $ | 25,671 | | TNT Express segment | | | 1,790 | | | N/A | | | | 5,493 | | | N/A | | | FedEx Ground segment | | | 4,688 | | | | 4,408 | | | | 13,397 | | | | 12,288 | | | | 5,222 | | | | 4,688 | | | | 14,790 | | | | 13,397 | | FedEx Freight segment | | | 1,492 | | | | 1,447 | | | | 4,747 | | | | 4,595 | | | | 1,694 | | | | 1,492 | | | | 5,208 | | | | 4,747 | | FedEx Services segment | | | 389 | | | | 384 | | | | 1,198 | | | | 1,177 | | | | 397 | | | | 389 | | | | 1,213 | | | | 1,198 | | Eliminations and other | | | (141 | ) | | | (142 | ) | | | (422 | ) | | | (410 | ) | | | (157 | ) | | | (141 | ) | | | (451 | ) | | | (422 | ) | | | $ | 14,997 | | | $ | 12,654 | | | $ | 44,591 | | | $ | 37,386 | | | $ | 16,526 | | | $ | 14,997 | | | $ | 48,136 | | | $ | 44,591 | | Operating Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Express segment | | $ | 555 | | | $ | 595 | | | $ | 1,815 | | | $ | 1,762 | | | $ | 424 | | | $ | 557 | | | $ | 1,574 | | | $ | 1,873 | | TNT Express segment | | | 2 | | | N/A | | | | 58 | | | N/A | | | FedEx Ground segment | | | 515 | | | | 557 | | | | 1,590 | | | | 1,620 | | | | 634 | | | | 515 | | | | 1,781 | | | | 1,590 | | FedEx Freight segment | | | 41 | | | | 56 | | | | 264 | | | | 289 | | | | 55 | | | | 41 | | | | 349 | | | | 264 | | Eliminations, corporate and other | | | (88 | ) | | | (344 | ) | | | (271 | ) | | | (526 | ) | | | (112 | ) | | | (88 | ) | | | (324 | ) | | | (271 | ) | | | $ | 1,025 | | | $ | 864 | | | $ | 3,456 | | | $ | 3,145 | | | $ | 1,001 | | | $ | 1,025 | | | $ | 3,380 | | | $ | 3,456 | |
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(7) (8) Commitments
As of February 28, 2017,2018, our purchase commitments under various contracts for the remainder of 20172018 and annually thereafter were as follows (in millions): | | Aircraft and Aircraft-Related | | | Other(1) | | | Total | | | Aircraft and Aircraft-Related | | | Other(1) | | | Total | | 2017 (remainder) | | $ | 219 | | | $ | 218 | | | $ | 437 | | | 2018 | | | 1,970 | | | | 534 | | | | 2,504 | | | 2018 (remainder) | | | $ | 516 | | | $ | 254 | | | $ | 770 | | 2019 | | | 1,730 | | | | 375 | | | | 2,105 | | | | 1,789 | | | | 725 | | | | 2,514 | | 2020 | | | 1,926 | | | | 267 | | | | 2,193 | | | | 1,931 | | | | 621 | | | | 2,552 | | 2021 | | | 1,348 | | | | 183 | | | | 1,531 | | | | 1,244 | | | | 400 | | | | 1,644 | | 2022 | | | | 1,364 | | | | 251 | | | | 1,615 | | Thereafter | | | 4,199 | | | | 258 | | | | 4,457 | | | | 3,314 | | | | 508 | | | | 3,822 | | Total | | $ | 11,392 | | | $ | 1,835 | | | $ | 13,227 | | | $ | 10,158 | | | $ | 2,759 | | | $ | 12,917 | |
| (1) | Primarily equipment and advertising contracts. |
The amounts reflected in the table above for purchase commitments represent noncancelable agreements to purchase goods or services. As of February 28, 2017,2018, our obligation to purchase four Boeing 767-300 Freighter (“B767F”) aircraft and sixthree 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. During the quarter, FedEx Express entered into agreementsan agreement to accelerate the delivery of one B767F aircraft to 2017 from 2018 and two B777F aircraft from 2021 to 20182020, one B777F aircraft from 2023.2021 to 2019, and one B777F aircraft from 2022 to 2020. - 15 -
We had $488$922 million in deposits and progress payments as of February 28, 20172018 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 February 28, 20172018 with the year of expected delivery: | | B767F | | | B777F | | | Total | | | Cessna SkyCourier 408 | | | ATR 72-600F | | | B767F | | | B777F | | | Total | | 2017 (remainder) | | | 1 | | | | - | | | | 1 | | | 2018 | | | 15 | | | | 4 | | | | 19 | | | 2018 (remainder) | | | | - | | | | - | | | | 4 | | | | 1 | | | | 5 | | 2019 | | | 15 | | | | 2 | | | | 17 | | | | - | | | | - | | | | 15 | | | | 3 | | | | 18 | | 2020 | | | 16 | | | | 3 | | | | 19 | | | | - | | | | - | | | | 16 | | | | 6 | | | | 22 | | 2021 | | | 10 | | | | 3 | | | | 13 | | | | 12 | | | | 5 | | | | 10 | | | | - | | | | 27 | | 2022 | | | | 12 | | | | 6 | | | | 10 | | | | 3 | | | | 31 | | Thereafter | | | 16 | | | | 4 | | | | 20 | | | | 26 | | | | 19 | | | | 6 | | | | - | | | | 51 | | Total | | | 73 | | | | 16 | | | | 89 | | | | 50 | | | | 30 | | | | 61 | | | | 13 | | | | 154 | |
A summary of future minimum lease payments under noncancelable operating leases with an initial or remaining term in excess of one year at February 28, 20172018 is as follows (in millions): | | Operating Leases | | | Aircraft and Related Equipment | | | Facilities and Other | | | Total Operating Leases | | | | Aircraft and Related Equipment | | | Facilities and Other | | | Total Operating Leases | | | 2017 (remainder) | | $ | 70 | | | $ | 547 | | | $ | 617 | | | 2018 | | | 398 | | | | 1,992 | | | | 2,390 | | | 2018 (remainder) | | | $ | 47 | | | $ | 585 | | | $ | 632 | | 2019 | | | 343 | | | | 1,799 | | | | 2,142 | | | | 343 | | | | 2,065 | | | | 2,408 | | 2020 | | | 261 | | | | 1,595 | | | | 1,856 | | | | 261 | | | | 1,854 | | | | 2,115 | | 2021 | | | 203 | | | | 1,441 | | | | 1,644 | | | | 203 | | | | 1,675 | | | | 1,878 | | 2022 | | | | 185 | | | | 1,510 | | | | 1,695 | | Thereafter | | | 360 | | | | 8,780 | | | | 9,140 | | | | 175 | | | | 9,018 | | | | 9,193 | | Total | | $ | 1,635 | | | $ | 16,154 | | | $ | 17,789 | | | $ | 1,214 | | | $ | 16,707 | | | $ | 17,921 | |
Future minimum lease payments under capital leases were immaterial at February 28, 2017.2018. 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. - 15 -
(8) (9) Contingencies
Independent Contractor — Lawsuits and State Administrative Proceedings. FedEx Ground is involved in class-action lawsuits (including 21 that have been certified as class actions), individual lawsuits and state tax and other administrative proceedings claiming that claim that the company’s owner-operators engaged under a contractor model no longer in use should have been treated as employees of FedEx Ground, rather than independent contractors. Most of the class-action lawsuits were consolidated for administration of the pre-trial proceedings by a single federal court, the U.S. District Court for the Northern District of Indiana. The multidistrict litigation court granted class certification in 28 cases and denied it in 14 cases. On December 13, 2010, the court entered an opinion and order addressing all outstanding motions for summary judgment on the status of the owner-operators (i.e., independent contractor vs. employee). In sum, the court ruled on our summary judgment motions and entered judgment in favor of FedEx Ground on all claims in 20 of the 28 multidistrict litigation cases that had been certified as class actions, finding that the owner-operators in those cases were contractors as a matter of the law of 20 states. The plaintiffs filed notices of appeal in all of these 20 cases. The Seventh Circuit heard the appeal in the Kansas case in January 2012 and, in July 2012, issued an opinion that did not make a determination with respect to the correctness of the district 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 were 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 requires court approval.
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.
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 motions for preliminary approval between June 15 and June 30, 2016, and on August 3 and 4, 2016, the multidistrict litigation court issued orders indicating that it would grant preliminary approval if the Seventh Circuit would remand the cases on appeal for the purpose of entering approval orders. Upon the parties’ joint motion, the Seventh Circuit remanded the cases for this purpose on August 10, 2016, and the multidistrict litigation court entered orders preliminarily approving the settlements on August 17, 2016. Fairness hearings were previously scheduled for January 23 and 24, 2017, but were held on March 13 and 14, 2017. On March 15, 2017, the court issued orders indicating that it would grant final approval of each settlement if the Seventh Circuit remands the cases on appeal for the purpose of considering and granting final approval.
The multidistrict litigation court remanded the other eight certified class actions back to the district courts where they were originally filed because its summary judgment ruling did not completely dispose of all of the claims in those lawsuits. Seven of these matters settled for immaterial amounts and have received court approval.
The case in Arkansas settled in the second quarter of 2016, and we established an accrual for the amount of the settlement. The court held a final approval hearing on March 1, 2017, and granted final approval on March 6, 2017.
The case in California was appealed to the Ninth Circuit Court of Appeals, where the court reversed the district court decisions and held that the plaintiffs in California were employees as a matter of law and remanded the cases to the district court for further proceedings. In the first quarter of 2015, we recognized an accrual for the then-estimated probable loss in this case.
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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 entered final judgment on June 20, 2016, and two objectors to the settlement filed appeals with the Ninth Circuit. One objector has settled with plaintiffs’ counsel, and we expect the appeal by the second objector to be briefed by the end of the fourth quarter of 2017 and arguments to be scheduled thereafter. The settlement is not effective until all appeals have been resolved without affecting the court’s approval of the settlement.
In addition, we are defending contractor-modeljoint-employer cases where it is alleged that are not or are no longer partFedEx Ground should be treated as an employer of the multidistrict litigation.drivers employed by owner-operators engaged by FedEx Ground. 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 cases, we continue to evaluate what facts may arise in the course of discoverylitigation, and what legal rulings the courts may render and how these facts and rulings might impact the 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, thean amount or 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 consequencein all of these factors, as well as others that are specific to these cases,matters. However, we are not currently able to estimate a range of reasonably possible loss. We do not believe thatexpect to incur, individually or in the aggregate, a material loss is probable in these matters.
Adverse Nevertheless, adverse determinations in matters related to owner-operators engaged by FedEx Ground’s independent contractorsGround could, among other things, entitle certain owner-operators and their drivers to the reimbursement of certain expenses, and their drivers to the benefit of wage-and-hour laws, and result in employment and withholding tax and benefit liability for FedEx Ground. We believe that owner-operators engaged by FedEx Ground’s owner-operatorsGround are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers of the company’s independent contractors.employed by these owner-operators.
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 toFollowing motions to dismiss filed in both lawsuits, some of the claims have beenwere 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 common law nuisance claim has beenwas dismissed entirely and the New York Public Health Law claim has been limited to claims arising after September 27, 2013, when an amendment to that law provided enforcement authority to the City of New York and State of New York. Other claims, including the RICO claims, remain in both - 16 -
lawsuits. The likelihood of loss is reasonably possible, but the amount or range of loss, if any, cannot be estimated at this stage of the litigation and welitigation. We expect the amount of any loss to be immaterial. On July 10, 2017, the City of New York and the State of New York filed a third lawsuit against FedEx Ground and included FedEx Freight as a co-defendant. This additional case identifies no shippers or shipments, but generally alleges violations of the same laws that are the subject of the other two lawsuits. The amount or range of loss, if any, cannot be estimated at this stage of the lawsuit. 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. On September 9, 2016, FedEx Supply Chain received a written offer from several District Attorneys’ Offices in California to settle a civil action that the District Attorneys intend to file against FedEx Supply Chain for alleged violations of the state’s hazardous waste regulations. Specifically, the District Attorneys’ Offices allege FedEx Supply Chain unlawfully disposed of hazardous waste at one of its California facilities and caused the illegal transportation and disposal of hazardous waste from the retail stores of a FedEx Supply Chain customer at this same facility. The District Attorneys allege these violations began in 2006 and continued until the facility closed in the spring of 2015. We believeIn March 2018, we settled this matter for an immaterial loss in this matter is probable. The District Attorneys are also investigating FedEx Supply Chain’s hazardous waste activities at eight additional facilities within California.amount, and the settlement agreement has been approved by the court. We will pursue all available remedies againsthave been reimbursed by the sellers of GENCO to recover any losses in these matters.for the amount of the settlement. Other Matter.Matters. During the third quarter of 2017, FedEx Trade Networks informed U.S. Customs and Border Protection (“CBP”) that in connection with certain customs entries it may have made improper claims for (i) reduced-duty treatment and (ii) duty-free treatment. In the fourth quarter of 2017 we established accruals totaling $39.3 million for the then-current estimated probable loss for these matters. In the first quarter of 2018, FedEx Trade Networks is continuingtendered payments to review these matters. LossCBP in these matters is probable, but giventotaling $46.5 million, and an additional expense of $7.2 million was recognized. CBP acknowledged receipt of the early stage ofamounts tendered in these matters, and we cannot yet determine the amount or range of potential loss, butare awaiting a material loss is reasonably possibleresponse indicating whether these matters are fully resolved.. - 17 -
FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of business, including certain lawsuits containing various class-action allegations of wage-and-hour violations in which plaintiffs claim, 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. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not have a material adverse effect on our financial position, results of operations or cash flows. (9)(10) Supplemental Cash Flow Information
Cash paid for interest expense and income taxes for the nine-month periods ended February 28 2017 and February 29, 2016 was as follows (in millions): | | 2017 | | | 2016 | | | 2018 | | | 2017 | | Cash payments for: | | | | | | | | | | | | | | | | | Interest (net of capitalized interest) | | $ | 400 | | | $ | 284 | | | $ | 430 | | | $ | 400 | | Income taxes | | $ | 294 | | | $ | 919 | | | $ | 707 | | | $ | 294 | | Income tax refunds received | | | (16 | ) | | | (3 | ) | | | (59 | ) | | | (16 | ) | Cash tax payments, net | | $ | 278 | | | $ | 916 | | | $ | 648 | | | $ | 278 | |
(10) - 17 -
(11) 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 100% owned by FedEx, guarantee $14.6$16.6 billion of our long-term 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. - 18 -
Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions): CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED) February 28, 20172018 | | | | | | Guarantor | | | Non-guarantor | | | | | | | | | | | | | | | Guarantor | | | Non-guarantor | | | | | | | | | | | | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | | | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | | ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CURRENT ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 1,475 | | | $ | 301 | | | $ | 1,442 | | | $ | (45 | ) | | $ | 3,173 | | | $ | 957 | | | $ | 375 | | | $ | 1,494 | | | $ | (37 | ) | | $ | 2,789 | | Receivables, less allowances | | | 1 | | | | 4,636 | | | | 2,824 | | | | (43 | ) | | | 7,418 | | | | 1 | | | | 5,308 | | | | 3,462 | | | | (100 | ) | | | 8,671 | | Spare parts, supplies, fuel, prepaid expenses and other, less allowances | | | 292 | | | | 819 | | | | 236 | | | | — | | | | 1,347 | | | | 920 | | | | 928 | | | | 267 | | | | — | | | | 2,115 | | Total current assets | | | 1,768 | | | | 5,756 | | | | 4,502 | | | | (88 | ) | | | 11,938 | | | | 1,878 | | | | 6,611 | | | | 5,223 | | | | (137 | ) | | | 13,575 | | PROPERTY AND EQUIPMENT, AT COST | | | 22 | | | | 46,448 | | | | 3,282 | | | | — | | | | 49,752 | | | | 22 | | | | 50,601 | | | | 3,754 | | | | — | | | | 54,377 | | Less accumulated depreciation and amortization | | | 18 | | | | 22,810 | | | | 1,311 | | | | — | | | | 24,139 | | | | 18 | | | | 24,999 | | | | 1,663 | | | | — | | | | 26,680 | | Net property and equipment | | | 4 | | | | 23,638 | | | | 1,971 | | | | — | | | | 25,613 | | | | 4 | | | | 25,602 | | | | 2,091 | | | | — | | | | 27,697 | | INTERCOMPANY RECEIVABLE | | | 2,216 | | | | 1,442 | | | | — | | | | (3,658 | ) | | | — | | | | 1,401 | | | | 2,508 | | | | 130 | | | | (4,039 | ) | | | — | | GOODWILL | | | — | | | | 1,571 | | | | 5,429 | | | | — | | | | 7,000 | | | | — | | | | 1,571 | | | | 5,893 | | | | — | | | | 7,464 | | INVESTMENT IN SUBSIDIARIES | | | 26,637 | | | | 2,744 | | | | — | | | | (29,381 | ) | | | — | | | | 31,295 | | | | 2,928 | | | | — | | | | (34,223 | ) | | | — | | OTHER ASSETS | | | 3,043 | | | | 1,031 | | | | 1,052 | | | | (2,896 | ) | | | 2,230 | | | | 2,706 | | | | 1,566 | | | | 1,268 | | | | (2,425 | ) | | | 3,115 | | | | $ | 33,668 | | | $ | 36,182 | | | $ | 12,954 | | | $ | (36,023 | ) | | $ | 46,781 | | | $ | 37,284 | | | $ | 40,786 | | | $ | 14,605 | | | $ | (40,824 | ) | | $ | 51,851 | | LIABILITIES AND STOCKHOLDERS’ INVESTMENT | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CURRENT LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Short-term borrowings | | | $ | 799 | | | $ | — | | | $ | — | | | $ | — | | | $ | 799 | | Current portion of long-term debt | | $ | — | | | $ | 31 | | | $ | 14 | | | $ | — | | | $ | 45 | | | | 750 | | | | 6 | | | | 8 | | | | — | | | | 764 | | Accrued salaries and employee benefits | | | 52 | | | | 1,184 | | | | 454 | | | | — | | | | 1,690 | | | | 69 | | | | 1,362 | | | | 514 | | | | — | | | | 1,945 | | Accounts payable | | | 124 | | | | 1,354 | | | | 1,317 | | | | (88 | ) | | | 2,707 | | | | 149 | | | | 1,483 | | | | 1,607 | | | | (137 | ) | | | 3,102 | | Accrued expenses | | | 811 | | | | 1,419 | | | | 778 | | | | — | | | | 3,008 | | | | 379 | | | | 1,605 | | | | 909 | | | | — | | | | 2,893 | | Total current liabilities | | | 987 | | | | 3,988 | | | | 2,563 | | | | (88 | ) | | | 7,450 | | | | 2,146 | | | | 4,456 | | | | 3,038 | | | | (137 | ) | | | 9,503 | | LONG-TERM DEBT, LESS CURRENT PORTION | | | 14,443 | | | | 244 | | | | 26 | | | | — | | | | 14,713 | | | | 15,713 | | | | 288 | | | | 16 | | | | — | | | | 16,017 | | INTERCOMPANY PAYABLE | | | — | | | | — | | | | 3,658 | | | | (3,658 | ) | | | — | | | | — | | | | — | | | | 4,039 | | | | (4,039 | ) | | | — | | OTHER LONG-TERM LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred income taxes | | | — | | | | 4,978 | | | | 217 | | | | (2,896 | ) | | | 2,299 | | | | — | | | | 4,285 | | | | 541 | | | | (2,425 | ) | | | 2,401 | | Other liabilities | | | 3,054 | | | | 3,345 | | | | 736 | | | | — | | | | 7,135 | | | | 531 | | | | 3,605 | | | | 900 | | | | — | | | | 5,036 | | Total other long-term liabilities | | | 3,054 | | | | 8,323 | | | | 953 | | | | (2,896 | ) | | | 9,434 | | | | 531 | | | | 7,890 | | | | 1,441 | | | | (2,425 | ) | | | 7,437 | | STOCKHOLDERS’ INVESTMENT | | | 15,184 | | | | 23,627 | | | | 5,754 | | | | (29,381 | ) | | | 15,184 | | | | 18,894 | | | | 28,152 | | | | 6,071 | | | | (34,223 | ) | | | 18,894 | | | | $ | 33,668 | | | $ | 36,182 | | | $ | 12,954 | | | $ | (36,023 | ) | | $ | 46,781 | | | $ | 37,284 | | | $ | 40,786 | | | $ | 14,605 | | | $ | (40,824 | ) | | $ | 51,851 | | | | | | | | | | | | | | | | | | | | | | | |
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CONDENSED CONSOLIDATING BALANCE SHEETS May 31, 20162017 | | | | | | Guarantor | | | Non-guarantor | | | | | | | | | | | | | | | Guarantor | | | Non-guarantor | | | | | | | | | | | | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | | | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | | ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CURRENT ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 1,974 | | | $ | 326 | | | $ | 1,277 | | | $ | (43 | ) | | $ | 3,534 | | | $ | 1,884 | | | $ | 325 | | | $ | 1,807 | | | $ | (47 | ) | | $ | 3,969 | | Receivables, less allowances | | | 1 | | | | 4,461 | | | | 2,831 | | | | (41 | ) | | | 7,252 | | | | 3 | | | | 4,729 | | | | 2,928 | | | | (61 | ) | | | 7,599 | | Spare parts, supplies, fuel, prepaid expenses and other, less allowances | | | 233 | | | | 724 | | | | 246 | | | | — | | | | 1,203 | | | | 25 | | | | 787 | | | | 248 | | | | — | | | | 1,060 | | Total current assets | | | 2,208 | | | | 5,511 | | | | 4,354 | | | | (84 | ) | | | 11,989 | | | | 1,912 | | | | 5,841 | | | | 4,983 | | | | (108 | ) | | | 12,628 | | PROPERTY AND EQUIPMENT, AT COST | | | 22 | | | | 43,760 | | | | 3,236 | | | | — | | | | 47,018 | | | | 22 | | | | 47,201 | | | | 3,403 | | | | — | | | | 50,626 | | Less accumulated depreciation and amortization | | | 17 | | | | 21,566 | | | | 1,151 | | | | — | | | | 22,734 | | | | 18 | | | | 23,211 | | | | 1,416 | | | | — | | | | 24,645 | | Net property and equipment | | | 5 | | | | 22,194 | | | | 2,085 | | | | — | | | | 24,284 | | | | 4 | | | | 23,990 | | | | 1,987 | | | | — | | | | 25,981 | | INTERCOMPANY RECEIVABLE | | | 2,437 | | | | 1,284 | | | | — | | | | (3,721 | ) | | | — | | | | 1,521 | | | | 2,607 | | | | — | | | | (4,128 | ) | | | — | | GOODWILL | | | — | | | | 1,571 | | | | 5,176 | | | | — | | | | 6,747 | | | | — | | | | 1,571 | | | | 5,583 | | | | — | | | | 7,154 | | INVESTMENT IN SUBSIDIARIES | | | 24,766 | | | | 3,697 | | | | — | | | | (28,463 | ) | | | — | | | | 27,712 | | | | 2,636 | | | | — | | | | (30,348 | ) | | | — | | OTHER ASSETS | | | 3,359 | | | | 967 | | | | 1,851 | | | | (3,238 | ) | | | 2,939 | | | | 3,494 | | | | 1,271 | | | | 1,249 | | | | (3,225 | ) | | | 2,789 | | | | $ | 32,775 | | | $ | 35,224 | | | $ | 13,466 | | | $ | (35,506 | ) | | $ | 45,959 | | | $ | 34,643 | | | $ | 37,916 | | | $ | 13,802 | | | $ | (37,809 | ) | | $ | 48,552 | | LIABILITIES AND STOCKHOLDERS’ INVESTMENT | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CURRENT LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current portion of long-term debt | | $ | — | | | $ | 13 | | | $ | 16 | | | $ | — | | | $ | 29 | | | $ | — | | | $ | 9 | | | $ | 13 | | | $ | — | | | $ | 22 | | Accrued salaries and employee benefits | | | 54 | | | | 1,377 | | | | 541 | | | | — | | | | 1,972 | | | | 72 | | | | 1,335 | | | | 507 | | | | — | | | | 1,914 | | Accounts payable | | | 8 | | | | 1,501 | | | | 1,519 | | | | (84 | ) | | | 2,944 | | | | 10 | | | | 1,411 | | | | 1,439 | | | | (108 | ) | | | 2,752 | | Accrued expenses | | | 883 | | | | 1,411 | | | | 769 | | | | — | | | | 3,063 | | | | 991 | | | | 1,522 | | | | 717 | | | | — | | | | 3,230 | | Total current liabilities | | | 945 | | | | 4,302 | | | | 2,845 | | | | (84 | ) | | | 8,008 | | | | 1,073 | | | | 4,277 | | | | 2,676 | | | | (108 | ) | | | 7,918 | | LONG-TERM DEBT, LESS CURRENT PORTION | | | 13,451 | | | | 245 | | | | 37 | | | | — | | | | 13,733 | | | | 14,641 | | | | 244 | | | | 24 | | | | — | | | | 14,909 | | INTERCOMPANY PAYABLE | | | — | | | | — | | | | 3,721 | | | | (3,721 | ) | | | — | | | | — | | | | — | | | | 4,128 | | | | (4,128 | ) | | | — | | OTHER LONG-TERM LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred income taxes | | | — | | | | 4,436 | | | | 369 | | | | (3,238 | ) | | | 1,567 | | | | — | | | | 5,472 | | | | 238 | | | | (3,225 | ) | | | 2,485 | | Other liabilities | | | 4,595 | | | | 3,375 | | | | 897 | | | | — | | | | 8,867 | | | | 2,856 | | | | 3,448 | | | | 863 | | | | — | | | | 7,167 | | Total other long-term liabilities | | | 4,595 | | | | 7,811 | | | | 1,266 | | | | (3,238 | ) | | | 10,434 | | | | 2,856 | | | | 8,920 | | | | 1,101 | | | | (3,225 | ) | | | 9,652 | | STOCKHOLDERS’ INVESTMENT | | | 13,784 | | | | 22,866 | | | | 5,597 | | | | (28,463 | ) | | | 13,784 | | | | 16,073 | | | | 24,475 | | | | 5,873 | | | | (30,348 | ) | | | 16,073 | | | | $ | 32,775 | | | $ | 35,224 | | | $ | 13,466 | | | $ | (35,506 | ) | | $ | 45,959 | | | $ | 34,643 | | | $ | 37,916 | | | $ | 13,802 | | | $ | (37,809 | ) | | $ | 48,552 | |
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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended February 28, 2017 2018 | | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | REVENUES | | $ | — | | | $ | 11,275 | | | $ | 3,794 | | | $ | (72 | ) | | $ | 14,997 | | | $ | — | | | $ | 12,433 | | | $ | 4,229 | | | $ | (136 | ) | | $ | 16,526 | | OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 29 | | | | 4,210 | | | | 1,156 | | | | — | | | | 5,395 | | | | 39 | | | | 4,623 | | | | 1,319 | | | | — | | | | 5,981 | | Purchased transportation | | | — | | | | 2,219 | | | | 1,306 | | | | (27 | ) | | | 3,498 | | | | — | | | | 2,459 | | | | 1,560 | | | | (84 | ) | | | 3,935 | | Rentals and landing fees | | | 1 | | | | 657 | | | | 177 | | | | (1 | ) | | | 834 | | | | 2 | | | | 684 | | | | 189 | | | | (2 | ) | | | 873 | | Depreciation and amortization | | | 1 | | | | 649 | | | | 112 | | | | — | | | | 762 | | | | 1 | | | | 670 | | | | 115 | | | | — | | | | 786 | | Fuel | | | — | | | | 657 | | | | 78 | | | | — | | | | 735 | | | | — | | | | 837 | | | | 77 | | | | — | | | | 914 | | Maintenance and repairs | | | 1 | | | | 514 | | | | 73 | | | | — | | | | 588 | | | | 1 | | | | 543 | | | | 84 | | | | — | | | | 628 | | Intercompany charges, net | | | (87 | ) | | | (33 | ) | | | 120 | | | | — | | | | — | | | | (114 | ) | | | 185 | | | | (71 | ) | | | — | | | | — | | Other | | | 55 | | | | 1,428 | | | | 721 | | | | (44 | ) | | | 2,160 | | | | 71 | | | | 1,596 | | | | 791 | | | | (50 | ) | | | 2,408 | | | | | — | | | | 10,301 | | | | 3,743 | | | | (72 | ) | | | 13,972 | | | | — | | | | 11,597 | | | | 4,064 | | | | (136 | ) | | | 15,525 | | OPERATING INCOME | | | — | | | | 974 | | | | 51 | | | | — | | | | 1,025 | | | | — | | | | 836 | | | | 165 | | | | — | | | | 1,001 | | OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity in earnings of subsidiaries | | | 562 | | | | (41 | ) | | | — | | | | (521 | ) | | | — | | | | 2,074 | | | | 2 | | | | — | | | | (2,076 | ) | | | — | | Interest, net | | | (129 | ) | | | 6 | | | | 1 | | | | — | | | | (122 | ) | | | (137 | ) | | | 11 | | | | 1 | | | | — | | | | (125 | ) | Intercompany charges, net | | | 130 | | | | (79 | ) | | | (51 | ) | | | — | | | | — | | | | 140 | | | | (78 | ) | | | (62 | ) | | | — | | | | — | | Other, net | | | (1 | ) | | | (118 | ) | | | 115 | | | | — | | | | (4 | ) | | | (3 | ) | | | 104 | | | | (103 | ) | | | — | | | | (2 | ) | INCOME BEFORE INCOME TAXES | | | 562 | | | | 742 | | | | 116 | | | | (521 | ) | | | 899 | | | | 2,074 | | | | 875 | | | | 1 | | | | (2,076 | ) | | | 874 | | Provision for income taxes | | | — | | | | 280 | | | | 57 | | | | — | | | | 337 | | | | — | | | | (1,197 | ) | | | (3 | ) | | | — | | | | (1,200 | ) | NET INCOME | | $ | 562 | | | $ | 462 | | | $ | 59 | | | $ | (521 | ) | | $ | 562 | | | $ | 2,074 | | | $ | 2,072 | | | $ | 4 | | | $ | (2,076 | ) | | $ | 2,074 | | COMPREHENSIVE INCOME | | $ | 543 | | | $ | 444 | | | $ | 187 | | | $ | (521 | ) | | $ | 653 | | | $ | 2,051 | | | $ | 2,069 | | | $ | 107 | | | $ | (2,076 | ) | | $ | 2,151 | |
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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended February 29, 201628, 2017 | | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | REVENUES | | $ | — | | | $ | 10,838 | | | $ | 1,892 | | | $ | (76 | ) | | $ | 12,654 | | | $ | — | | | $ | 11,275 | | | $ | 3,794 | | | $ | (72 | ) | | $ | 14,997 | | OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 32 | | | | 4,072 | | | | 608 | | | | — | | | | 4,712 | | | | 29 | | | | 4,210 | | | | 1,156 | | | | — | | | | 5,395 | | Purchased transportation | | | — | | | | 2,106 | | | | 545 | | | | (28 | ) | | | 2,623 | | | | — | | | | 2,219 | | | | 1,306 | | | | (27 | ) | | | 3,498 | | Rentals and landing fees | | | 1 | | | | 660 | | | | 84 | | | | (1 | ) | | | 744 | | | | 1 | | | | 657 | | | | 177 | | | | (1 | ) | | | 834 | | Depreciation and amortization | | | — | | | | 608 | | | | 55 | | | | — | | | | 663 | | | | 1 | | | | 649 | | | | 112 | | | | — | | | | 762 | | Fuel | | | — | | | | 520 | | | | 17 | | | | — | | | | 537 | | | | — | | | | 657 | | | | 78 | | | | — | | | | 735 | | Maintenance and repairs | | | — | | | | 471 | | | | 33 | | | | — | | | | 504 | | | | 1 | | | | 514 | | | | 73 | | | | — | | | | 588 | | Intercompany charges, net | | | (344 | ) | | | 294 | | | | 50 | | | | — | | | | — | | | | (87 | ) | | | (33 | ) | | | 120 | | | | — | | | | — | | Other | | | 311 | | | | 1,344 | | | | 399 | | | | (47 | ) | | | 2,007 | | | | 55 | | | | 1,428 | | | | 721 | | | | (44 | ) | | | 2,160 | | | | | — | | | | 10,075 | | | | 1,791 | | | | (76 | ) | | | 11,790 | | | | — | | | | 10,301 | | | | 3,743 | | | | (72 | ) | | | 13,972 | | OPERATING INCOME | | | — | | | | 763 | | | | 101 | | | | — | | | | 864 | | | | — | | | | 974 | | | | 51 | | | | — | | | | 1,025 | | OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity in earnings of subsidiaries | | | 507 | | | | 86 | | | | — | | | | (593 | ) | | | — | | | | 562 | | | | (41 | ) | | | — | | | | (521 | ) | | | — | | Interest, net | | | (90 | ) | | | 6 | | | | 3 | | | | — | | | | (81 | ) | | | (129 | ) | | | 6 | | | | 1 | | | | — | | | | (122 | ) | Intercompany charges, net | | | 95 | | | | (105 | ) | | | 10 | | | | — | | | | — | | | | 130 | | | | (79 | ) | | | (51 | ) | | | — | | | | — | | Other, net | | | (5 | ) | | | (1 | ) | | | 5 | | | | — | | | | (1 | ) | | | (1 | ) | | | (118 | ) | | | 115 | | | | — | | | | (4 | ) | INCOME BEFORE INCOME TAXES | | | 507 | | | | 749 | | | | 119 | | | | (593 | ) | | | 782 | | | | 562 | | | | 742 | | | | 116 | | | | (521 | ) | | | 899 | | Provision for income taxes | | | — | | | | 249 | | | | 26 | | | | — | | | | 275 | | | | — | | | | 280 | | | | 57 | | | | — | | | | 337 | | NET INCOME | | $ | 507 | | | $ | 500 | | | $ | 93 | | | $ | (593 | ) | | $ | 507 | | | $ | 562 | | | $ | 462 | | | $ | 59 | | | $ | (521 | ) | | $ | 562 | | COMPREHENSIVE INCOME | | $ | 488 | | | $ | 487 | | | $ | 7 | | | $ | (593 | ) | | $ | 389 | | | $ | 543 | | | $ | 444 | | | $ | 187 | | | $ | (521 | ) | | $ | 653 | |
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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Nine Months Ended February 28, 2018 | | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | REVENUES | | $ | — | | | $ | 36,044 | | | $ | 12,445 | | | $ | (353 | ) | | $ | 48,136 | | OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 112 | | | | 13,289 | | | | 3,840 | | | | — | | | | 17,241 | | Purchased transportation | | | — | | | | 6,836 | | | | 4,600 | | | | (216 | ) | | | 11,220 | | Rentals and landing fees | | | 4 | | | | 1,951 | | | | 577 | | | | (6 | ) | | | 2,526 | | Depreciation and amortization | | | 1 | | | | 1,958 | | | | 334 | | | | — | | | | 2,293 | | Fuel | | | — | | | | 2,220 | | | | 215 | | | | — | | | | 2,435 | | Maintenance and repairs | | | 1 | | | | 1,729 | | | | 238 | | | | — | | | | 1,968 | | Intercompany charges, net | | | (325 | ) | | | 298 | | | | 27 | | | | — | | | | — | | Other | | | 207 | | | | 4,664 | | | | 2,333 | | | | (131 | ) | | | 7,073 | | | | | — | | | | 32,945 | | | | 12,164 | | | | (353 | ) | | | 44,756 | | OPERATING INCOME | | | — | | | | 3,099 | | | | 281 | | | | — | | | | 3,380 | | OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | | Equity in earnings of subsidiaries | | | 3,445 | | | | 39 | | | | — | | | | (3,484 | ) | | | — | | Interest, net | | | (396 | ) | | | 35 | | | | (2 | ) | | | — | | | | (363 | ) | Intercompany charges, net | | | 403 | | | | (220 | ) | | | (183 | ) | | | — | | | | — | | Other, net | | | (7 | ) | | | 88 | | | | (103 | ) | | | — | | | | (22 | ) | INCOME BEFORE INCOME TAXES | | | 3,445 | | | | 3,041 | | | | (7 | ) | | | (3,484 | ) | | | 2,995 | | Provision for income taxes | | | — | | | | (573 | ) | | | 123 | | | | — | | | | (450 | ) | NET INCOME | | $ | 3,445 | | | $ | 3,614 | | | $ | (130 | ) | | $ | (3,484 | ) | | $ | 3,445 | | COMPREHENSIVE INCOME | | $ | 3,385 | | | $ | 3,605 | | | $ | (3 | ) | | $ | (3,484 | ) | | $ | 3,503 | |
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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Nine Months Ended February 28, 2017 | | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | REVENUES | | $ | — | | | $ | 33,175 | | | $ | 11,628 | | | $ | (212 | ) | | $ | 44,591 | | OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 94 | | | | 12,477 | | | | 3,488 | | | | — | | | | 16,059 | | Purchased transportation | | | — | | | | 6,210 | | | | 4,040 | | | | (81 | ) | | | 10,169 | | Rentals and landing fees | | | 4 | | | | 1,902 | | | | 524 | | | | (4 | ) | | | 2,426 | | Depreciation and amortization | | | 1 | | | | 1,894 | | | | 346 | | | | — | | | | 2,241 | | Fuel | | | — | | | | 1,819 | | | | 224 | | | | — | | | | 2,043 | | Maintenance and repairs | | | 1 | | | | 1,544 | | | | 220 | | | | — | | | | 1,765 | | Intercompany charges, net | | | (266 | ) | | | 67 | | | | 199 | | | | — | | | | — | | Other | | | 166 | | | | 4,230 | | | | 2,163 | | | | (127 | ) | | | 6,432 | | | | | — | | | | 30,143 | | | | 11,204 | | | | (212 | ) | | | 41,135 | | OPERATING INCOME | | | — | | | | 3,032 | | | | 424 | | | | — | | | | 3,456 | | OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | | Equity in earnings of subsidiaries | | | 1,977 | | | | 69 | | | | — | | | | (2,046 | ) | | | — | | Interest, net | | | (374 | ) | | | 19 | | | | 1 | | | | — | | | | (354 | ) | Intercompany charges, net | | | 376 | | | | (224 | ) | | | (152 | ) | | | — | | | | — | | Other, net | | | (2 | ) | | | (128 | ) | | | 147 | | | | — | | | | 17 | | INCOME BEFORE INCOME TAXES | | | 1,977 | | | | 2,768 | | | | 420 | | | | (2,046 | ) | | | 3,119 | | Provision for income taxes | | | — | | | | 951 | | | | 191 | | | | — | | | | 1,142 | | NET INCOME | | $ | 1,977 | | | $ | 1,817 | | | $ | 229 | | | $ | (2,046 | ) | | $ | 1,977 | | COMPREHENSIVE INCOME | | $ | 1,921 | | | $ | 1,781 | | | $ | 156 | | | $ | (2,046 | ) | | $ | 1,812 | |
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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS (UNAUDITED) Nine Months Ended February 29, 201628, 2018 | | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | REVENUES | | $ | — | | | $ | 31,190 | | | $ | 6,449 | | | $ | (253 | ) | | $ | 37,386 | | OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 92 | | | | 11,811 | | | | 1,904 | | | | — | | | | 13,807 | | Purchased transportation | | | — | | | | 5,481 | | | | 2,132 | | | | (108 | ) | | | 7,505 | | Rentals and landing fees | | | 4 | | | | 1,843 | | | | 278 | | | | (4 | ) | | | 2,121 | | Depreciation and amortization | | | 1 | | | | 1,792 | | | | 171 | | | | — | | | | 1,964 | | Fuel | | | — | | | | 1,808 | | | | 56 | | | | — | | | | 1,864 | | Maintenance and repairs | | | — | | | | 1,476 | | | | 105 | | | | — | | | | 1,581 | | Intercompany charges, net | | | (525 | ) | | | 338 | | | | 187 | | | | — | | | | — | | Other | | | 428 | | | | 3,901 | | | | 1,211 | | | | (141 | ) | | | 5,399 | | | | | — | | | | 28,450 | | | | 6,044 | | | | (253 | ) | | | 34,241 | | OPERATING INCOME | | | — | | | | 2,740 | | | | 405 | | | | — | | | | 3,145 | | OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | | Equity in earnings of subsidiaries | | | 1,890 | | | | 220 | | | | — | | | | (2,110 | ) | | | — | | Interest, net | | | (246 | ) | | | 20 | | | | 8 | | | | — | | | | (218 | ) | Intercompany charges, net | | | 257 | | | | (264 | ) | | | 7 | | | | — | | | | — | | Other, net | | | (11 | ) | | | (10 | ) | | | 15 | | | | — | | | | (6 | ) | INCOME BEFORE INCOME TAXES | | | 1,890 | | | | 2,706 | | | | 435 | | | | (2,110 | ) | | | 2,921 | | Provision for income taxes | | | — | | | | 915 | | | | 116 | | | | — | | | | 1,031 | | NET INCOME | | $ | 1,890 | | | $ | 1,791 | | | $ | 319 | | | $ | (2,110 | ) | | $ | 1,890 | | COMPREHENSIVE INCOME | | $ | 1,834 | | | $ | 1,758 | | | $ | 77 | | | $ | (2,110 | ) | | $ | 1,559 | |
| | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | $ | (3,537 | ) | | $ | 4,664 | | | $ | 25 | | | $ | 10 | | | $ | 1,162 | | INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | Capital expenditures | | | — | | | | (3,746 | ) | | | (248 | ) | | | — | | | | (3,994 | ) | Business acquisitions, net of cash acquired | | | — | | | | (44 | ) | | | — | | | | — | | | | (44 | ) | Proceeds from asset dispositions and other | | | (5 | ) | | | 23 | | | | 3 | | | | — | | | | 21 | | CASH USED IN INVESTING ACTIVITIES | | | (5 | ) | | | (3,767 | ) | | | (245 | ) | | | — | | | | (4,017 | ) | FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | Proceeds from short-term borrowings, net | | | 797 | | | | — | | | | — | | | | — | | | | 797 | | Net transfers from (to) Parent | | | 807 | | | | (895 | ) | | | 88 | | | | — | | | | — | | Payment on loan between subsidiaries | | | 210 | | | | — | | | | (210 | ) | | | — | | | | — | | Proceeds from debt issuances | | | 1,481 | | | | — | | | | — | | | | — | | | | 1,481 | | Principal payments on debt | | | — | | | | (17 | ) | | | (14 | ) | | | — | | | | (31 | ) | Proceeds from stock issuances | | | 284 | | | | — | | | | — | | | | — | | | | 284 | | Dividends paid | | | (402 | ) | | | — | | | | — | | | | — | | | | (402 | ) | Purchase of treasury stock | | | (558 | ) | | | — | | | | — | | | | — | | | | (558 | ) | Other, net | | | 2 | | | | 4 | | | | — | | | | — | | | | 6 | | CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | | | 2,621 | | | | (908 | ) | | | (136 | ) | | | — | | | | 1,577 | | Effect of exchange rate changes on cash | | | (6 | ) | | | 61 | | | | 43 | | | | — | | | | 98 | | Net (decrease) increase in cash and cash equivalents | | | (927 | ) | | | 50 | | | | (313 | ) | | | 10 | | | | (1,180 | ) | Cash and cash equivalents at beginning of period | | | 1,884 | | | | 325 | | | | 1,807 | | | | (47 | ) | | | 3,969 | | Cash and cash equivalents at end of period | | $ | 957 | | | $ | 375 | | | $ | 1,494 | | | $ | (37 | ) | | $ | 2,789 | |
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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended February 28, 2017 | | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | $ | (1,497 | ) | | $ | 3,615 | | | $ | 529 | | | $ | (2 | ) | | $ | 2,645 | | INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | Capital expenditures | | | — | | | | (3,456 | ) | | | (334 | ) | | | — | | | | (3,790 | ) | Proceeds from asset dispositions and other | | | 85 | | | | 16 | | | | 22 | | | | — | | | | 123 | | CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | | | 85 | | | | (3,440 | ) | | | (312 | ) | | | — | | | | (3,667 | ) | FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | Net transfers from (to) Parent | | | 117 | | | | (148 | ) | | | 31 | | | | — | | | | — | | Payment on loan between subsidiaries | | | 36 | | | | (15 | ) | | | (21 | ) | | | — | | | | — | | Intercompany dividends | | | — | | | | 1 | | | | (1 | ) | | | — | | | | — | | Principal payments on debt | | | — | | | | (33 | ) | | | (16 | ) | | | — | | | | (49 | ) | Proceeds from debt issuance | | | 1,190 | | | | — | | | | — | | | | — | | | | 1,190 | | Proceeds from stock issuances | | | 265 | | | | — | | | | — | | | | — | | | | 265 | | Dividends paid | | | (319 | ) | | | — | | | | — | | | | — | | | | (319 | ) | Purchase of treasury stock | | | (358 | ) | | | — | | | | — | | | | — | | | | (358 | ) | Other, net | | | (8 | ) | | | (12 | ) | | | 22 | | | | — | | | | 2 | | CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | 923 | | | | (207 | ) | | | 15 | | | | — | | | | 731 | | Effect of exchange rate changes on cash | | | (10 | ) | | | 7 | | | | (67 | ) | | | — | | | | (70 | ) | Net (decrease) increase in cash and cash equivalents | | | (499 | ) | | | (25 | ) | | | 165 | | | | (2 | ) | | | (361 | ) | Cash and cash equivalents at beginning of period | | | 1,974 | | | | 326 | | | | 1,277 | | | | (43 | ) | | | 3,534 | | Cash and cash equivalents at end of period | | $ | 1,475 | | | $ | 301 | | | $ | 1,442 | | | $ | (45 | ) | | $ | 3,173 | |
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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended February 29, 2016
| | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | | Parent | | | Guarantor Subsidiaries | | | Non-guarantor Subsidiaries | | | Eliminations | | | Consolidated | | CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | $ | (833 | ) | | $ | 4,213 | | | $ | 370 | | | $ | 46 | | | $ | 3,796 | | | $ | (1,497 | ) | | $ | 3,615 | | | $ | 529 | | | $ | (2 | ) | | $ | 2,645 | | INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditures | | | — | | | | (3,434 | ) | | | (128 | ) | | | — | | | | (3,562 | ) | | | — | | | | (3,456 | ) | | | (334 | ) | | | — | | | | (3,790 | ) | Proceeds from asset dispositions and other | | | (55 | ) | | | 26 | | | | 12 | | | | — | | | | (17 | ) | | | 85 | | | | 16 | | | | 22 | | | | — | | | | 123 | | CASH USED IN INVESTING ACTIVITIES | | | (55 | ) | | | (3,408 | ) | | | (116 | ) | | | — | | | | (3,579 | ) | | CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | | | | 85 | | | | (3,440 | ) | | | (312 | ) | | | — | | | | (3,667 | ) | FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net transfers from (to) Parent | | | 1,036 | | | | (1,039 | ) | | | 3 | | | | — | | | | — | | | | 117 | | | | (148 | ) | | | 31 | | | | — | | | | — | | Payment on loan between subsidiaries | | | — | | | | 109 | | | | (109 | ) | | | — | | | | — | | | | 36 | | | | (15 | ) | | | (21 | ) | | | — | | | | — | | Intercompany dividends | | | — | | | | 20 | | | | (20 | ) | | | — | | | | — | | | | — | | | | 1 | | | | (1 | ) | | | — | | | | — | | Principal payments on debt | | | — | | | | (7 | ) | | | (21 | ) | | | — | | | | (28 | ) | | | — | | | | (33 | ) | | | (16 | ) | | | — | | | | (49 | ) | Proceeds from debt issuance | | | 1,238 | | | | — | | | | — | | | | — | | | | 1,238 | | | Proceeds from debt issuances | | | | 1,190 | | | | — | | | | — | | | | — | | | | 1,190 | | Proceeds from stock issuances | | | 79 | | | | — | | | | — | | | | — | | | | 79 | | | | 265 | | | | — | | | | — | | | | — | | | | 265 | | Dividends paid | | | (210 | ) | | | — | | | | — | | | | — | | | | (210 | ) | | | (319 | ) | | | — | | | | — | | | | — | | | | (319 | ) | Purchase of treasury stock | | | (2,133 | ) | | | — | | | | — | | | | — | | | | (2,133 | ) | | | (358 | ) | | | — | | | | — | | | | — | | | | (358 | ) | Other, net | | | (7 | ) | | | (27 | ) | | | 27 | | | | — | | | | (7 | ) | | | (8 | ) | | | (12 | ) | | | 22 | | | | — | | | | 2 | | CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | | | 3 | | | | (944 | ) | | | (120 | ) | | | — | | | | (1,061 | ) | | | 923 | | | | (207 | ) | | | 15 | | | | — | | | | 731 | | Effect of exchange rate changes on cash | | | — | | | | (17 | ) | | | (61 | ) | | | — | | | | (78 | ) | | | (10 | ) | | | 7 | | | | (67 | ) | | | — | | | | (70 | ) | Net (decrease) increase in cash and cash equivalents | | | (885 | ) | | | (156 | ) | | | 73 | | | | 46 | | | | (922 | ) | | | (499 | ) | | | (25 | ) | | | 165 | | | | (2 | ) | | | (361 | ) | Cash and cash equivalents at beginning of period | | | 2,383 | | | | 487 | | | | 971 | | | | (78 | ) | | | 3,763 | | | | 1,974 | | | | 326 | | | | 1,277 | | | | (43 | ) | | | 3,534 | | Cash and cash equivalents at end of period | | $ | 1,498 | | | $ | 331 | | | $ | 1,044 | | | $ | (32 | ) | | $ | 2,841 | | | $ | 1,475 | | | $ | 301 | | | $ | 1,442 | | | $ | (45 | ) | | $ | 3,173 | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders FedEx Corporation We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of February 28, 2017,2018, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended February 28, 20172018 and February 29, 201628, 2017 and the condensed consolidated statements of cash flows for the nine-month periods ended February 28, 20172018 and February 29, 2016.28, 2017. These financial statements are the responsibility of the Company’s management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, 2016,2017, and the related consolidated statements of income, comprehensive income, changes in stockholders’ investment, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated July 18, 2016.17, 2017. In our opinion, the accompanying condensed consolidated balance sheet of FedEx Corporation as of May 31, 2016,2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP Memphis, Tennessee March 22, 201721, 2018 - 27 -
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition GENERAL The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) describes the principal factors affecting the results of operations, liquidity, capital resources, contractual cash obligations and critical accounting estimates of FedEx Corporation (“FedEx”). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended May 31, 20162017 (“Annual Report”). Our Annual Report includes additional information about our significant accounting policies, practices and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties associated with our financial condition and operating results. We provide a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. Our primary operating companies are Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company;including TNT Express B.V. (“TNT Express”), an internationalthe world’s largest express small-package ground delivery and freight transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading North American provider of small-package ground delivery services; and FedEx Freight, Inc. (“FedEx Freight”), a leading U.S. provider of less-than-truckload (“LTL”) freight services. These companies represent our major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments. As noted in our Annual Report, beginning in the first quarter of 2018, we began to report TNT Express as part of the FedEx Express segment. Prior year amounts have been revised to conform to the current year presentation. See Note 7 of the accompanying unaudited condensed consolidated financial statements for further discussion. Our FedEx Services segment provides sales, marketing, information technology, communications, customer service, technical support, billing and collection services and certain back-office support functions that support our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. (“FedEx Office”). See “Reportable Segments” for further discussion. Additional information on our businesses can also be found in our Annual Report. The key indicators necessary to understand our operating results include: 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 shipment or hundredweight for LTL freight shipments); our ability to manage our network capacity and cost structure (capital expenditures and operating expenses) to match shifting volume levels; and the timing and amount of fluctuations in fuel prices and our ability to recover incremental fuel costs through our fuel surcharges. The majority of our operating expenses are directly impacted by revenue and volume levels. Accordingly, we expect these operating expenses to fluctuate on a year-over-year basis consistent with the change in revenues and volumes. Therefore, the discussion of operating expense captions focuses on the key drivers and trends impacting expenses other than changes in revenues and volume. The line item “Other operating expenses” predominantly includes costs associated with outside service contracts (such as security, facility services and cargo handling)handling, temporary labor and security), insurance, professional fees, taxes and licenses and uniforms. Except as otherwise specified, references to years indicate our fiscal year ending May 31, 20172018 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments include, collectively, our FedEx Express group, which includes the FedEx Express and TNT Express segments,segment, the FedEx Ground segment and the FedEx Freight segment. - 28 -
RESULTS OF OPERATIONS CONSOLIDATED RESULTS The following tables compare summary operating results and changes in revenue and operating income (dollars in millions, except per share amounts) for the periods ended February 28, 2017 and February 29, 2016:28: | | Three Months Ended | | | Percent | | | | Nine Months Ended | | | Percent | | | | Three Months Ended | | | Percent | | | | Nine Months Ended | | | Percent | | | | | 2017 | | | 2016 | | | Change | | | | 2017 | | | 2016 | | | Change | | | | 2018 | | | 2017 | | | Change | | | | 2018 | | | 2017 | | | Change | | | Revenues | | $ | 14,997 | | | $ | 12,654 | | | | 19 | | | | $ | 44,591 | | | $ | 37,386 | | | | 19 | | | | $ | 16,526 | | | $ | 14,997 | | | | 10 | | | | $ | 48,136 | | | $ | 44,591 | | | | 8 | | | Operating income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Express segment | | | 555 | | | | 595 | | | | (7 | ) | | | | 1,815 | | | | 1,762 | | | | 3 | | | | | 424 | | | | 557 | | | | (24 | ) | | | | 1,574 | | | | 1,873 | | | | (16 | ) | | TNT Express segment | | | 2 | | | | — | | | NM | | | | | 58 | | | | — | | | NM | | | | FedEx Ground segment | | | 515 | | | | 557 | | | | (8 | ) | | | | 1,590 | | | | 1,620 | | | | (2 | ) | | | | 634 | | | | 515 | | | | 23 | | | | | 1,781 | | | | 1,590 | | | | 12 | | | FedEx Freight segment | | | 41 | | | | 56 | | | | (27 | ) | | | | 264 | | | | 289 | | | | (9 | ) | | | | 55 | | | | 41 | | | | 34 | | | | | 349 | | | | 264 | | | | 32 | | | Eliminations, corporate and other | | | (88 | ) | | | (344 | ) | | | 74 | | | | | (271 | ) | | | (526 | ) | | | 48 | | | | | (112 | ) | | | (88 | ) | | | (27 | ) | | | | (324 | ) | | | (271 | ) | | | (20 | ) | | Consolidated operating income | | | 1,025 | | | | 864 | | | | 19 | | | | | 3,456 | | | | 3,145 | | | | 10 | | | | | 1,001 | | | | 1,025 | | | | (2 | ) | | | | 3,380 | | | | 3,456 | | | | (2 | ) | | Operating margin: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Express segment | | | 8.2 | % | | | 9.1 | % | | | (90 | ) | bp | | | 9.0 | % | | | 8.9 | % | | | 10 | | bp | | | 4.5 | % | | | 6.5 | % | | | (200 | ) | bp | | | 5.7 | % | | | 7.3 | % | | | (160 | ) | bp | TNT Express segment | | | 0.1 | % | | | — | | | NM | | | | | 1.1 | % | | | — | | | NM | | | | FedEx Ground segment | | | 11.0 | % | | | 12.6 | % | | | (160 | ) | bp | | | 11.9 | % | | | 13.2 | % | | | (130 | ) | bp | | | 12.1 | % | | | 11.0 | % | | | 110 | | bp | | | 12.0 | % | | | 11.9 | % | | | 10 | | bp | FedEx Freight segment | | | 2.7 | % | | | 3.9 | % | | | (120 | ) | bp | | | 5.6 | % | | | 6.3 | % | | | (70 | ) | bp | | | 3.2 | % | | | 2.7 | % | | | 50 | | bp | | | 6.7 | % | | | 5.6 | % | | | 110 | | bp | Consolidated operating margin | | | 6.8 | % | | | 6.8 | % | | | — | | bp | | | 7.8 | % | | | 8.4 | % | | | (60 | ) | bp | | | 6.1 | % | | | 6.8 | % | | | (70 | ) | bp | | | 7.0 | % | | | 7.8 | % | | | (80 | ) | bp | Consolidated net income | | $ | 562 | | | $ | 507 | | | | 11 | | | | $ | 1,977 | | | $ | 1,890 | | | | 5 | | | | $ | 2,074 | | | $ | 562 | | | | 269 | | | | $ | 3,445 | | | $ | 1,977 | | | | 74 | | | Diluted earnings per share | | $ | 2.07 | | | $ | 1.84 | | | | 13 | | | | $ | 7.31 | | | $ | 6.71 | | | | 9 | | | | $ | 7.59 | | | $ | 2.07 | | | | 267 | | | | $ | 12.63 | | | $ | 7.31 | | | | 73 | | |
| | Change in Revenue | | | Change in Operating Income | | | Change in Revenue | | | Change in Operating Income | | | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | | FedEx Express segment | | $ | 222 | | | $ | 442 | | | $ | (40 | ) | | $ | 53 | | | $ | 801 | | | $ | 1,705 | | | $ | (133 | ) | | $ | (299 | ) | TNT Express segment | | | 1,790 | | | | 5,493 | | | | 2 | | | | 58 | | | FedEx Ground segment | | | 280 | | | | 1,109 | | | | (42 | ) | | | (30 | ) | | | 534 | | | | 1,393 | | | | 119 | | | | 191 | | FedEx Freight segment | | | 45 | | | | 152 | | | | (15 | ) | | | (25 | ) | | | 202 | | | | 461 | | | | 14 | | | | 85 | | FedEx Services segment | | | 5 | | | | 21 | | | | — | | | | — | | | | 8 | | | | 15 | | | | — | | | | — | | Eliminations, corporate and other | | | 1 | | | | (12 | ) | | | 256 | | | | 255 | | | | (16 | ) | | | (29 | ) | | | (24 | ) | | | (53 | ) | | | $ | 2,343 | | | $ | 7,205 | | | $ | 161 | | | $ | 311 | | | $ | 1,529 | | | $ | 3,545 | | | $ | (24 | ) | | $ | (76 | ) |
Overview Our segment resultsoperating income declined slightly in the third quarter of 2017 as a result of the unfavorable net impact of fuel and one fewer operating day2018 primarily due to significantly higher incentive compensation accruals (described below), higher peak-related costs at FedEx Express, increased TNT Express integration expenses and FedEx Ground, increased rent, depreciation and staffing as a resultthe negative impacts of network expansioninclement winter weather at FedEx Ground and lower operating income at FedEx Freight.Express. These factors were partially offset by yield growthincreased yields and the favorable net impact of fuel at all of our transportation segments. Our segmentsegments and volume growth at FedEx Ground and FedEx Freight. The NotPetya cyberattack (described below) also drove lower results increased in the nine months of 2017 due2018. Net income for the third quarter and nine months of 2018 was positively impacted by a provisional benefit of $1.15 billion ($4.21 per diluted share) attributable to yieldthe enactment of the Tax Cuts and volume growthJobs Act (“TCJA”), specifically related to the remeasurement of our net U.S. deferred tax liability. In addition, we recognized a one-time benefit of $204 million ($0.75 per diluted share) from a $1.5 billion contribution to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) in February 2018 and continued cost management at our FedEx Express segment, which was partially offset bya benefit of $165 million ($0.60 per diluted share) related to a lower statutory income tax rate on fiscal 2018 year- to-date earnings. See the factors noted above.“Income Taxes” section below for further information. During the third quarter of 2018 we announced more than $3.2 billion in wage increases, bonuses, pension funding and expanded U.S. capital investment following the passage of the TCJA. In connection with this, during the third quarter of 2018 we made a pension funding contribution (noted above) and funded increases in performance-based incentive compensation plans. The incentive compensation adjustments made in the third quarter of 2018 include the year-to-date impact of the announced changes. Expenses related to wage increases will start to be recognized during the fourth quarter of 2018. We incurred TNT Express integration expenses totaling an aggregate $78of $106 million ($6392 million, net of tax, or $0.23$0.34 per diluted share) in the third quarter and $204of 2018, a $28 million increase from the third quarter of 2017. TNT Express integration expenses were an aggregate $341 million ($158265 million, net of tax, or $0.58$0.97 per diluted share) in the nine months of 20172018, a $137 million increase from - 29 -
the nine months of integration expenses, including restructuring charges for TNT Express.2017. The integration expenses are predominantly incremental costs directly associated with the integration of TNT Express, including professional and legal fees, salaries and wages, advertising expenses and travel.travel, and include any restructuring charges at TNT Express. Internal salaries and wages are included only to the extent the individuals are assigned full time to integration activities. These costs were incurred primarily at FedEx CorporationExpress and FedEx Express.Corporation. The identification of these costs as integration-related expenditures is subject to our disclosure controls and procedures. In addition, we incurred $16 As previously announced, on June 27, 2017, the worldwide operations of TNT Express were significantly affected by the cyberattack known as NotPetya. Immediately following the attack, contingency plans were implemented to recover TNT Express operations and communications systems, and substantially all TNT Express services were fully restored during the first quarter of 2018. As of the second quarter of 2018, all of TNT Express’s critical operational systems were fully restored, critical business data was recovered and shipping services and solutions were back in place. Our results for the first half of 2018 were negatively impacted by the NotPetya cyberattack by an estimated $400 million ($13 million, net of tax, or $0.051.14 per diluted share) in the third quarter and $54 million ($41 million, net of tax, or $0.15 per diluted share) inshare for the nine months of 20172018), primarily from loss of increased intangible asset amortization as a result ofrevenue due to decreased shipments in the TNT Express acquisition. - 29 -
We incurred expenses associated withnetwork, as well as incremental costs to restore information technology systems. In addition, we continued to experience lingering revenue impacts from the TNT Express acquisition of $25 million ($15 million, net of tax, or $0.06 per diluted share)NotPetya cyberattack in the third quarter of 2016 and $53 million ($33 million, net of tax, or $0.12 per diluted share)2018 in the nine monthsform of 2016.
Operating income in the third quarter and nine months of 2017 benefited from the inclusion of prior-year expenses in “Eliminations, corporate and other,” consisting of provisions for the settlement of (and certain expected losses related to) independent contractor litigation matters involving FedEx Ground for $204 million ($126 million, net of tax, or $0.46 per diluted share) in the third quarter and $245 ($152 million, net of tax, or $0.54 per diluted share) million in the nine months of 2016. In addition, in the third quarter and nine months of 2016, expenses included 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 ($43 million, net of tax, or $0.15 per diluted share). Both of these provisions were net of recognized insurance recoveries.
lower volumes at TNT Express.
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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected volume trends (in thousands) over the five most recent quarters (TNT Express volume trends are not presented, as it was acquired on May 25, 2016):quarters: (1) | International domestic average daily package volume represents our international intra-country operations in the FedEx Express segment.operations. |
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The following graphs for FedEx Express, FedEx Ground and FedEx Freight show selected yield trends over the five most recent quarters (TNT Express yield trends are not presented, as it was acquired on May 25, 2016):quarters: | | (1)
|
|
| International domestic revenue per package represents our international intra-country operations.
|
Revenue Revenues increased 19%10% in the third quarter and 8% in the nine months of 2018 due to improved performance at all of our transportation segments. Revenues at FedEx Express increased 9% in the third quarter and 7% in the nine months of 2018 due to improved base yields and favorable exchange rates, despite impacts from the NotPetya cyberattack discussed above. At FedEx Ground, revenues increased 11% in the third quarter and 10% in the nine months of 2018 due to volume growth and increased yields. FedEx Freight revenues increased 14% in the third quarter and 10% in the nine months of 2018 due to higher LTL revenue per shipment and average daily LTL shipments. Higher fuel surcharges had a positive impact on revenues at all of our transportation segments in the third quarter and nine months of 2017 due to the inclusion of TNT Express and improvements at our other transportation segments. At FedEx Ground, revenues increased 6% in the third quarter due to yield and volume growth in our commercial business and 9% in the nine months of 2017 due to volume and yield growth in our commercial business and residential services. Revenues at FedEx Express increased 3% in the third quarter due to yield and package volume growth and 2% in the nine months of 2017 due to the same factors, which were partially offset by unfavorable exchange rates. Revenues in the third quarter and the nine months of 2017 were negatively impacted by one fewer operating day at FedEx Express and FedEx Ground. FedEx Freight revenues increased 3% in the third quarter due to higher LTL revenue per shipment and higher fuel surcharges and 3% in the nine months of 2017 due to higher average daily LTL shipments. Lower fuel surcharges negatively impacted revenues at all our transportation segments in the nine months of 2017.2018. - 32 -
Operating Expenses The following tables compare operating expenses expressed as dollar amounts (in millions) and as a percent of revenue for the periods ended February 28, 2017 and February 29, 2016:28: | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | $ | 5,395 | | | $ | 4,712 | | | $ | 16,059 | | | $ | 13,807 | | | $ | 5,981 | | | $ | 5,395 | | | $ | 17,241 | | | $ | 16,059 | | Purchased transportation | | | 3,498 | | | | 2,623 | | | | 10,169 | | | | 7,505 | | | | 3,935 | | | | 3,498 | | | | 11,220 | | | | 10,169 | | Rentals and landing fees | | | 834 | | | | 744 | | | | 2,426 | | | | 2,121 | | | | 873 | | | | 834 | | | | 2,526 | | | | 2,426 | | Depreciation and amortization | | | 762 | | | | 663 | | | | 2,241 | | | | 1,964 | | | | 786 | | | | 762 | | | | 2,293 | | | | 2,241 | | Fuel | | | 735 | | | | 537 | | | | 2,043 | | | | 1,864 | | | | 914 | | | | 735 | | | | 2,435 | | | | 2,043 | | Maintenance and repairs | | | 588 | | | | 504 | | | | 1,765 | | | | 1,581 | | | | 628 | | | | 588 | | | | 1,968 | | | | 1,765 | | Other | | | 2,160 | | | | 2,007 | | | | 6,432 | | | | 5,399 | | | | 2,408 | | | | 2,160 | | | | 7,073 | | | | 6,432 | | Total operating expenses | | $ | 13,972 | | | $ | 11,790 | | | $ | 41,135 | | | $ | 34,241 | | | $ | 15,525 | | | $ | 13,972 | | | $ | 44,756 | | | $ | 41,135 | | Operating income | | $ | 1,025 | | | $ | 864 | | | $ | 3,456 | | | $ | 3,145 | | | $ | 1,001 | | | $ | 1,025 | | | $ | 3,380 | | | $ | 3,456 | |
| | Percent of Revenue | | | | Percent of Revenue | | | | | Three Months Ended | | | | Nine Months Ended | | | | Three Months Ended | | | | Nine Months Ended | | | | | 2017 | | | 2016 | | | | 2017 | | | 2016 | | | | 2018 | | | 2017 | | | | 2018 | | | 2017 | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 36.0 | | % | | | 37.2 | | % | | | 36.0 | | % | | | 36.9 | | % | | | 36.2 | | % | | | 36.0 | | % | | | 35.8 | | % | | | 36.0 | | % | Purchased transportation | | | 23.3 | | | | 20.7 | | | | 22.8 | | | | 20.1 | | | | | 23.8 | | | | 23.3 | | | | 23.3 | | | | 22.8 | | | Rentals and landing fees | | | 5.6 | | | | 5.9 | | | | 5.4 | | | | 5.7 | | | | | 5.3 | | | | 5.6 | | | | 5.2 | | | | 5.4 | | | Depreciation and amortization | | | 5.1 | | | | 5.2 | | | | 5.0 | | | | 5.3 | | | | | 4.7 | | | | 5.1 | | | | 4.8 | | | | 5.0 | | | Fuel | | | 4.9 | | | | 4.3 | | | | 4.6 | | | | 5.0 | | | | | 5.5 | | | | 4.9 | | | | 5.1 | | | | 4.6 | | | Maintenance and repairs | | | 3.9 | | | | 4.0 | | | | 4.0 | | | | 4.2 | | | | | 3.8 | | | | 3.9 | | | | 4.1 | | | | 4.0 | | | Other | | | 14.4 | | | | 15.9 | | | | 14.4 | | | | 14.4 | | | | | 14.6 | | | | 14.4 | | | | 14.7 | | | | 14.4 | | | Total operating expenses | | | 93.2 | | | | 93.2 | | | | 92.2 | | | | 91.6 | | | | | 93.9 | | | | 93.2 | | | | 93.0 | | | | 92.2 | | | Operating margin | | | 6.8 | | % | | | 6.8 | | % | | | 7.8 | | % | | | 8.4 | | % | | | 6.1 | | % | | | 6.8 | | % | | | 7.0 | | % | | | 7.8 | | % |
Operating margin remained flat in the third quarter of 2017 as prior-year provisions for independent contractor litigation matters involving FedEx Ground and the CBP matter noted above were offset by the inclusion of TNT Express and the unfavorable net impact of fuel and one fewer operating day at FedEx Express and FedEx Ground.
Operating margin declined in the nine monthsthird quarter of 20172018 primarily due to the inclusion of TNT Express, increased depreciation, rent and staffing as a result of network expansionsignificantly higher incentive compensation accruals, higher peak-related costs at FedEx Express, the negative impacts of inclement winter weather at FedEx Express and increased purchased transportation rates at FedEx Ground and lower operating income at FedEx Freight. These impacts were partially offset by the prior-year independent contractor litigation expenses and CBP matter. Purchased transportation costs increased 33% in the third quarter due to the inclusion of TNT Express and higher volumes at FedEx Ground and 35%integration expenses. The impacts of the NotPetya cyberattack discussed above also drove the operating margin decline in the nine months of 2017 due to the inclusion of TNT Express and higher volumes, as well as increased service provider and U.S. Postal Service rates at FedEx Ground. 2018.
Salaries and employee benefits expense increased 14%11% in the third quarter and 16%7% in the nine months of 20172018 primarily due to the inclusionmerit increases and significantly higher incentive compensation accruals at all of TNTour transportation segments, unfavorable exchange rates at FedEx Express volume growth and higher staffing to support network expansion at FedEx Ground and merit increases at FedEx Express and FedEx Freight. Other expensesPurchased transportation costs increased 19%12% in the third quarter and 10% in the nine months of 20172018 primarily due to higher volumes at all of our transportation segments, unfavorable exchange rates at FedEx Express and increased rates and higher fuel expenses at FedEx Ground. Other expenses increased 11% in the third quarter of 2018 primarily due to unfavorable exchange rates, increased outside service contracts at FedEx Express and TNT Express integration expenses. Other expenses increased 10% in the nine months of 2018 due to these same factors as well as higher self-insurance reserves at FedEx Ground. Maintenance and repairs expense increased 12% in the nine months of 2018 primarily due to the inclusiontiming of TNT Express driven by outside service contracts, which were partially offset by the inclusion of independent contractor litigation expenses and the CBP matter in the prior year.aircraft engine maintenance events at FedEx Express. - 33 -
Fuel The following graph for our transportation segments shows our average cost of jet and vehicle fuel per gallon for the five most recent quarters:
Fuel expense increased 37%24% in the third quarter of 2017 due to higher fuel prices and the inclusion of TNT Express and 10%19% in the nine months of 20172018 primarily due to the inclusion of TNT Express.increased fuel prices. Fuel prices represent only one component of the two factors we consider meaningful in understanding the impact of fuel on our business. Consideration must also be given to the fuel surcharge revenue we collect. Accordingly, we believe discussion of the net impact of fuel on our results, which is a comparison of the year-over-year change in these two factors, is important to understand the impact of fuel on our business. In order to provide information about the impact of fuel surcharges on the trend in revenue and yield growth, we have included the comparative weighted-average fuel surcharge percentages in effect for the third quarter of 2018 and nine months of 2017 and 2016 in the accompanying discussions of each of our transportation segments. Effective February 6, 2017, FedEx Express and FedEx Ground fuel surcharges are adjusted on a weekly basis. The fuel surcharge is based on a weekly fuel price from two weeks prior to the week in which it is assessed. The index used to determine the fuel surcharge percentage for our FedEx Freight business continues to adjust weekly. TNT Express’sSome FedEx Express international fuel surcharges continue to incorporate a six-timing lag of approximately six to eight-week timing lag.eight weeks. Prior to February 6, 2017, our fuel surcharges for the FedEx Express and FedEx Ground businesses incorporated a timing lag of approximately six to eight weeks before they were adjusted for changes in fuel prices. For example, the fuel surcharge index in effect at FedEx Express in January 2017 was set based on November 2016 fuel prices. In addition, on November 2, 2015, we updated the tables used to determine our fuel surcharges at FedEx Express, FedEx Ground and FedEx Freight. 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 76%70% 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. The net impact of fuel had a significant negative impactbenefit to operating income in the third quarter and nine months of 2017. This was driven by a year-over-year weighted average increase of 30% in jet2018 as higher fuel prices and 27% in vehiclesurcharges more than offset increased fuel prices during the third quarter of 2017.prices. - 34 -
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. - 34 -
Income Taxes Other IncomeOn December 22, 2017, the United States government enacted comprehensive tax legislation through the TCJA. The TCJA significantly changes the U.S. corporate income tax system including, among other things, lowering the statutory federal income tax rate from 35% to 21%, eliminating or reducing certain income tax deductions, and Expenseimplementing a modified territorial tax system that includes a one-time transition tax on previously deferred foreign earnings. Due to our May 31 fiscal year end, the lower rate will be phased in, resulting in a U.S. statutory federal rate of 29.2% for 2018 and a 21% statutory federal rate for subsequent years.
Interest expense increased $41In December 2017, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides for a measurement period of up to one year from the enactment date for companies to complete the accounting for the initial income tax effects of the TCJA. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting is complete and provide a provisional estimate (where determinable) of the income tax effects of the TCJA where the accounting is incomplete. The provisional estimate is required to be updated throughout the measurement period.
As of February 28, 2018, we have not completed our initial accounting of the tax effects of the TCJA; however, where determinable, we have made an estimate of the effects on our existing deferred tax balances and the one-time transition tax. During the quarter, we recognized a provisional benefit of $1.15 billion related to the remeasurement of our net U.S. deferred tax liability and a provisional benefit of $36 million infrom foreign tax credits exceeding the third quarter and $136one-time transition tax on previously deferred foreign earnings. In addition to the provisional amounts above, we recognized a one-time benefit of $204 million in the nine months of 2017 primarily duefrom a $1.5 billion contribution to our U.S. Pension Plans in February 2018 and Euro debt issuances in fiscal 2016. The interest expense increase in the nine monthsa benefit of 2017 was partially offset by$165 million related to a gain of $35 million from the sale of an investment during the second quarter of 2017. The annualized weighted average interestlower statutory income tax rate on our long-term debt was 3.6% for the nine months ended February 28, 2017, reflecting the favorable interest rates obtained in recent debt offerings.fiscal 2018 year-to-date earnings. Income Taxes
Our effective tax rate was 37.5% for the third quarter and 36.6% for the nine months of 2017, compared with 35.2% in the third quarter and 35.3% in the nine months of 2016. The tax rates in 2017 have been negatively impacted by non-deductible costs incurred in connection with the integration of TNT Express as well as local country losses in some entities within TNT, for which no tax benefit was recognized due to uncertainty as to the utilization of these losses. This negative impact has been partially offset by the continuing benefit from the Accounting Standards Update for share-based payments that we adopted in the second quarter of 2017. For additional details on the Accounting Standards Update for share-based payments, refer to Note 1following table provides a reconciliation of the accompanying unaudited condensed consolidated financial statements.
We expect our effective tax rate to be lower in the fourth quarter and our 2017 effective tax raterates to be approximately 35% prior to any year-end mark-to-market (“MTM”) benefit plans adjustment. Longer term, as more synergies from the TNT Express acquisition result in greater international profits, we expect our pre-MTM benefit plans adjustment2018 effective tax rate to be lower than our historical average rate.rates, including the impact of the TCJA, for the periods ended February 28:
| | Three Months Ended | | | Nine Months Ended | | | | 2018 | | | 2018 | | 2017 Effective Tax Rate | | | 37.5 | % | | | 36.6 | % | Remeasurement of net U.S. deferred tax liability | | | (131.5 | ) | | | (38.4 | ) | Effect of February 2018 pension contribution (a) | | | (23.3 | ) | | | (6.8 | ) | Lower statutory tax rate | | | (18.9 | ) | | | (5.5 | ) | Transition tax | | | (4.1 | ) | | | (1.2 | ) | Other (b) | | | 3.0 | | | | 0.3 | | 2018 Effective Tax Rate | | | (137.3 | )% | | | (15.0 | )% |
| (a) | The benefit is from the pension contribution deducted on our 2017 tax return at a tax rate of 35%. |
| (b) | The 2018 tax rates were negatively impacted by the effect of the NotPetya cyberattack, changes in uncertain tax positions and tax rate impacts on changes in deferred tax items after the TCJA enactment and were favorably impacted from foreign tax credits associated with a second quarter dividend from foreign operations. |
We are subject to taxation in the United States and various U.S. state, local and foreign jurisdictions. We are currently under examination by the Internal Revenue Service (“IRS”) for the 2014 and 2015 tax years. It is reasonably possible that certain income tax return proceedings will be completed during the next twelve months and could result in a change in our balance of unrecognized tax benefits. The expected impact of any changes would not be material to our consolidated financial statements. As of February 28, 2017,2018, there were no material changes to our liabilities for unrecognized tax benefits fromsubsequent to May 31, 2016 other than liabilities added as a result2017. See Note 5 of the ongoing TNT Express purchase price allocation.accompanying unaudited condensed consolidated financial statements for further discussion related to income taxes. Business Acquisition On May 25, 2016, weOctober 13, 2017, FedEx acquired TNT ExpressNorthwest Research, Inc., a leader in inventory research and management, for €4.4 billion (approximately $4.9 billion). Cash acquired$50 million in cash from operations. The majority of the acquisitionpurchase price was approximately €250 million ($280 million). All shares associated with the transaction were tendered or transferred as of February 28, 2017. We funded the acquisition with proceeds from an April 2016 debt issuanceallocated to property and existing cash balances.equipment. The financial results of this acquired business are included in the FedEx Express groupServices segment from the date of acquisition and TNT Express segment. TNT Express collects, transports and delivers documents, parcels and freightwere not material to over 200 countries. This strategic acquisition broadens our portfolioresults of international transportation solutions by combining TNT Express’s strong European road platform with FedEx Express’s strength in other regions globally.
Given the timing and complexity of the acquisition, the presentation of TNT Express in our financial statements, including the allocation of the purchase price, continues to be preliminary and will likely change in the fourth quarter of 2017, perhaps significantly, as additional information concerning the fair value estimates of the assets acquired and liabilities assumed as of the acquisition date is obtained during the remainder of the fiscal year. We will complete our purchase price allocation during the fourth quarter of 2017.
See Note 1 of the accompanying unaudited condensed consolidated financial statements for further discussion of this acquisition.operations.
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Outlook We expect volumeyield and yieldvolume growth at FedEx Expressall of our transportation segments to support revenue and FedEx Ground and the inclusion of TNT Express to drive earnings growth in the fourth quarter and full year of 20172018, prior to any MTMmark-to-market benefit plans adjustment. AtWe expect to continue implementing various cost management plans at FedEx Ground we are focused on balancing capacity and volume growth with yield management. These actions contributed tofor the third quarter volume results and are expected to impact fourth quarter volumes.remainder of 2018. Our fourth quarter and full-year 2018 results for 2017 will continue to be negatively impactedaffected by our TNT Express integration activities as well as increased compensation for certain of our hourly team members and restructuring activities.higher incentive compensation for our salaried personnel. Our expectations for earnings growth in the fourth quarter and the remainder of 2017 are dependent on key external factors, including fuel prices and the pace of improvement in the global economy.2018 assumes moderate economic growth. During the remainder of 2017,2018, we will continue to execute our TNT Express integration plans. We expect the aggregate integration program expense, including restructuring charges at TNT Express, over the four years to be approximately $1.4 billion and expect to incur approximately $450 million of these costs during 2018. The timing and amount of integration expenses and capital investments in any future period may change as we implement our plans. The integration process is complex as it spans over 200 countries and involves combining our pickup and delivery operations at a local level, our global and regional air and ground networks, and our extensive operations, customs clearance, sales and back-office IT systems, andinformation technology systems. In addition, a portion of our integration expenses relate to the ongoing establishment of our new international corporate structure which will leverage synergies to maximize our international profitability, ultimately benefiting our effective tax rate. The integration is expected to take four years tobe substantially complete fromby the acquisition date. We now estimate incurring costsend of approximately $300 million in 2017 as a result of the TNT Express integration, including restructuring charges. We expect the aggregate integration program expense over the four years to be approximately $800 million. The timing and amount of integration-related expenses in any future period is subject to change as we implement our plans. The integration process is proceeding in a manner such that we expect to have one integrated FedEx Express reportable segment (formerly the FedEx Express group) commencing in 2018 when the financial information for the FedEx Express and TNT Express segments will begin to merge and only the results of the FedEx Express group will be regularly reviewed when evaluating performance and making resource allocation decisions.2020. We are targeting operating income improvement at the FedEx Express groupsegment of $1.2 billion to $1.5 billion in 2020 from 2017 assuming moderate economic growth and current accounting rules and tax rules.laws. This target includes TNT Express synergies as well as base business and other operational improvements across the global FedEx Express network. Although we are targeting to complete our integration program by the end of 2020, we are investing in opportunities to improve the capabilities of the integrated business for future profitability, including periods beyond 2020.
As noted above, we recorded a provisional reduction to our net U.S. deferred tax liability during the third quarter of 2018 in connection with the recently enacted TCJA. The final impact of the TCJA on our reported results for fiscal year 2018 and beyond may differ from the estimates recorded, possibly materially, due to changes in interpretations and assumptions we have made, future guidance that may be issued, and other changes that may occur as we complete our analysis of the TCJA. Other Outlook Matters. For details on key 20172018 capital projects, refer to the “Liquidity Outlook” section of this MD&A. We are involved in a number of lawsuits and other proceedings that challenge the status of FedEx Ground’s owner-operators as independent contractors. For a description of these proceedings, see Note 8 of the accompanying unaudited condensed consolidated financial statements and the “Independent Contractor Model” section of our FedEx Ground segment MD&A.
FedEx Ground previously announced plans to implement the Independent Service Provider (“ISP”) model throughout its entire U.S. pickup and delivery network, including the 29 states that had not yet begun transitioning to the ISP model.network. The transition to the ISP model in these 29 states is being accomplished on a district-by-district basis and is expected to be completed byin the endsecond half of calendar 2020. As of February 28, 2017, 42%2018, 64% of FedEx Ground volume was being delivered by small businesses operating under the ISP model. The costs associated with these transitions will be recognized in the periods incurred and are not expected to be material to any future quarter. See “Forward-Looking Statements” and Part II, Item 1A “Risk Factors” for a discussion of these and other potential risks and uncertainties that could materially affect our future performance. RECENT ACCOUNTING GUIDANCE New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. These matters are described in our Annual Report.
During the first quarter of 2017, we retrospectively adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) to simplify the presentation of debt issuance costs. This new guidance requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, rather than as an asset. This new guidance had a minimal impact on our accounting and financial reporting.
On May 28, 2014, the FASB and International Accounting Standards Board issued a new accounting standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. This standard will be effective for us beginning in fiscal 2019. The fundamental principlesSee Note 1 of the new guidance are that companies should recognize revenue inaccompanying unaudited condensed consolidated financial statements for a manner that reflects the timingdiscussion 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 current assessment, we do not anticipate that the new guidance will have a material impact on our revenue recognition policies, practices or systems.recent accounting guidance.
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On February 25, 2016, the FASB issued a 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.REPORTABLE SEGMENTS
During the second quarter of 2017, we adopted the Accounting Standards Update issued by the FASB in March 2016 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. 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 have elected to continue estimating forfeitures expected to occur in order to determine the amount of compensation cost to be recognized each period and to apply the cash flow classification guidance prospectively. Excess tax benefits are now classified as an operating activity rather than a financing activity. The adoption of the new standard had a benefit of $21 million to net income ($0.07 per diluted share) for the third quarter and a benefit of $42 million to net income ($0.14 per diluted share) for the nine months of 2017.
In March 2017, the FASB issued an Accounting Standards Update that changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income statement. This new guidance requires entities to report the service cost component in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component outside of income from operations. This standard will impact our operating income but will have no material impact on our net income or earnings per share. This new guidance will be effective for our fiscal year beginning June 1, 2018 (fiscal 2019) and will be applied retrospectively.
We believe that no other new accounting guidance was adopted or issued during the nine months of 2017 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:Segment | FedEx Express (express transportation) | | | FedExTNT Express Segment
| FedEx Express (express(international express transportation, small-package ground delivery and freight transportation)
| | FedEx Trade Networks (air and ocean freight forwarding, customs brokerage and cross-border enablement technology and solutions) | | FedEx SupplyChain Systems (logistics services)
| | | TNT Express Segment
| TNT Express (international express transportation, small-package ground delivery and freight transportation)
| | | FedEx Ground Segment | FedEx Ground (small-package ground delivery) | | FedEx Supply Chain (third-party logistics) (formerly GENCO) | | | FedEx Freight Segment | FedEx Freight (LTL freight transportation) | | FedEx Custom Critical (time-critical transportation) | | | FedEx Services Segment | FedEx Services (sales, marketing, information technology, communications, customer service, technical support, billing and collection services and back-office functions) | | FedEx Office (document and business services and package acceptance) |
DuringEffective March 1, 2018, we realigned our specialty logistics and e-commerce solutions in a new organizational structure under FedEx Trade Networks, Inc. in the thirdFedEx Express segment. The realignment allows us to improve our ability to deliver the capabilities of our specialty companies to customers. The new structure includes FedEx Custom Critical, FedEx Cross Border, FedEx Supply Chain, FedEx Trade Networks Transport & Brokerage and, effective June 1, 2018, a new company called FedEx Forward Depots. Prior period segment results will be recast to conform to current year presentation beginning in the fourth quarter of 2017, we rebranded GENCO to FedEx Supply Chain.
2018. FEDEX SERVICES SEGMENT The line item “Intercompany charges” on the accompanying unaudited condensed consolidated financial statements of our transportation segments reflects the allocations from the FedEx Services segment to the respective transportation segments. The allocations of net operating costs are based on metrics such as relative revenues or estimated services provided. - 37 -
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 businesses.business. These costs are not allocated to the business segments. The year-over-year decrease in these costs in the third quarter and nine months of 2017 was driven by a prior-year expense related to independent contractor litigation matters involving FedEx Ground, the prior-year settlement of a U.S. Customs and Border Protection notice of action regarding uncollected duties and merchandising processing and the prior-year TNT Express acquisition expenses partially offset by TNT Express integration expenses incurred in the three and nine months of 2017 discussed above. - 38 -
FEDEX EXPRESS GROUP
The FedEx Express group consists of the combined results of the FedEx Express and TNT Express segments. As discussed in our Annual Report, we have combined these segments for financial reporting discussion purposes into a collective business as a result of their management reporting structure. Furthermore, over time their operations will be integrated, therefore presenting a group view provides a basis for future year-over-year comparison purposes. We acquired TNT Express in the fourth quarter of 2016, which has impacted the year-over-year comparability of revenue and operating income. The following table compares selected performance measures (dollars in millions) for the periods ended February 28, 2017 and February 29, 2016:
| | Three Months Ended | | | Percent | | | | Nine Months Ended | | | Percent | | | | | 2017 | | | 2016 | | | Change | | | | 2017 | | | 2016 | | | Change | | | Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Express segment | | $ | 6,779 | | | $ | 6,557 | | | | 3 | | | | $ | 20,178 | | | $ | 19,736 | | | | 2 | | | TNT Express segment | | | 1,790 | | | | — | | | NM | | | | | 5,493 | | | | — | | | NM | | | FedEx Express group | | | 8,569 | | | | 6,557 | | | | 31 | | | | | 25,671 | | | | 19,736 | | | | 30 | | | Operating income: | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Express segment | | | 555 | | | | 595 | | | | (7 | ) | | | | 1,815 | | | | 1,762 | | | | 3 | | | TNT Express segment | | | 2 | | | �� | — | | | NM | | | | | 58 | | | | — | | | NM | | | FedEx Express group | | $ | 557 | | | $ | 595 | | | | (6 | ) | | | $ | 1,873 | | | $ | 1,762 | | | | 6 | | | Operating margin: | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Express segment | | | 8.2 | % | | | 9.1 | % | | | (90 | ) | bp | | | 9.0 | % | | | 8.9 | % | | | 10 | | bp | TNT Express segment | | | 0.1 | % | | | — | | | NM | | bp | | | 1.1 | % | | | — | | | NM | | bp | FedEx Express group | | | 6.5 | % | | | 9.1 | % | | | (260 | ) | bp | | | 7.3 | % | | | 8.9 | % | | | (160 | ) | bp |
FedEx Express Group Results
FedEx Express group revenues increased 31% in the third quarter and 30% in the nine months of 2017. This increase was due to the inclusion of the TNT Express segment, as well as improved yield and package volume at our FedEx Express segment.
Operating income decreased 6% in the third quarter driven by one fewer operating day and the negative net impact of fuel at FedEx Express. The TNT Express segment reported a small operating profit in the third quarter, which was negatively impacted by integration expenses, including restructuring charges and amortization of intangible assets. Operating income increased 6% in the nine months of 2017 driven by our FedEx Express segment and the inclusion of the TNT Express segment. Operating margin decreased in the third quarter due to the inclusion of the TNT Express segment, the unfavorable net impact of fuel and one fewer operating day and in the nine months of 2017 due to the inclusion of the TNT Express segment.
FedEx Express group results included $53 million in the third quarter and $122 million in the nine months of 2017 of TNT Express integration expenses. In addition, expenses included intangible asset amortization of $16 million in the third quarter and $54 million in the nine months of 2017.
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FEDEX EXPRESS SEGMENT FedEx Express offers a wide range of U.S. domestic and international shipping services for delivery of packages and freight including priority, services, which provide time-definite delivery within one, two or three business days worldwide, and deferred or economy services, which provide delivery on a time-definite delivery within five business days worldwide.or day-definite basis. As discussed in our Annual Report, we are reporting TNT Express as part of the FedEx Express segment. Prior year amounts have been revised to conform to the current year presentation, including revised statistical information. The following tables compare revenues, operating expenses, operating income (dollars in millions), operating margin and operating expenses as a percent of revenue operating income (dollars in millions) and operating margin for the periods ended February 28, 2017 and February 29, 2016:28: | | Three Months Ended | | | Percent | | | | Nine Months Ended | | | Percent | | | | Three Months Ended | | | Percent | | | | Nine Months Ended | | | Percent | | | | | 2017 | | | 2016 | | | Change | | | | 2017 | | | 2016 | | | Change | | | | 2018 | | | 2017 | | | Change | | | | 2018 | | | 2017 | | | Change | | | Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Package: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. overnight box | | $ | 1,742 | | | $ | 1,704 | | | | 2 | | | | $ | 5,173 | | | $ | 5,044 | | | | 3 | | | | $ | 1,836 | | | $ | 1,742 | | | | 5 | | | | $ | 5,373 | | | $ | 5,173 | | | | 4 | | | U.S. overnight envelope | | | 422 | | | | 408 | | | | 3 | | | | | 1,287 | | | | 1,227 | | | | 5 | | | | | 435 | | | | 422 | | | | 3 | | | | | 1,317 | | | | 1,287 | | | | 2 | | | U.S. deferred | | | 954 | | | | 926 | | | | 3 | | | | | 2,598 | | | | 2,568 | | | | 1 | | | | | 996 | | | | 954 | | | | 4 | | | | | 2,796 | | | | 2,598 | | | | 8 | | | Total U.S. domestic package revenue | | | 3,118 | | | | 3,038 | | | | 3 | | | | | 9,058 | | | | 8,839 | | | | 2 | | | | | 3,267 | | | | 3,118 | | | | 5 | | | | | 9,486 | | | | 9,058 | | | | 5 | | | International priority | | | 1,398 | | | | 1,346 | | | | 4 | | | | | 4,275 | | | | 4,243 | | | | 1 | | | | | 1,813 | | | | 1,667 | | | | 9 | | | | | 5,393 | | | | 5,144 | | | | 5 | | | International economy | | | 570 | | | | 546 | | | | 4 | | | | | 1,759 | | | | 1,688 | | | | 4 | | | | | 793 | | | | 692 | | | | 15 | | | | | 2,378 | | | | 2,101 | | | | 13 | | | Total international export package revenue | | | 1,968 | | | | 1,892 | | | | 4 | | | | | 6,034 | | | | 5,931 | | | | 2 | | | | | 2,606 | | | | 2,359 | | | | 10 | | | | | 7,771 | | | | 7,245 | | | | 7 | | | International domestic(1) | | | 312 | | | | 303 | | | | 3 | | | | | 964 | | | | 966 | | | | — | | | | | 1,128 | | | | 1,033 | | | | 9 | | | | | 3,386 | | | | 3,136 | | | | 8 | | | Total package revenue | | | 5,398 | | | | 5,233 | | | | 3 | | | | | 16,056 | | | | 15,736 | | | | 2 | | | | | 7,001 | | | | 6,510 | | | | 8 | | | | | 20,643 | | | | 19,439 | | | | 6 | | | Freight: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | | 667 | | | | 647 | | | | 3 | | | | | 1,895 | | | | 1,798 | | | | 5 | | | | | 739 | | | | 667 | | | | 11 | | | | | 2,040 | | | | 1,895 | | | | 8 | | | International priority | | | 355 | | | | 325 | | | | 9 | | | | | 1,093 | | | | 1,029 | | | | 6 | | | | | 551 | | | | 471 | | | | 17 | | | | | 1,581 | | | | 1,396 | | | | 13 | | | International economy | | | | 492 | | | | 437 | | | | 13 | | | | | 1,354 | | | | 1,265 | | | | 7 | | | International airfreight | | | 28 | | | | 30 | | | | (7 | ) | | | | 82 | | | | 98 | | | | (16 | ) | | | | 86 | | | | 84 | | | | 2 | | | | | 259 | | | | 270 | | | | (4 | ) | | Total freight revenue | | | 1,050 | | | | 1,002 | | | | 5 | | | | | 3,070 | | | | 2,925 | | | | 5 | | | | | 1,868 | | | | 1,659 | | | | 13 | | | | | 5,234 | | | | 4,826 | | | | 8 | | | Other(2) | | | 331 | | | | 322 | | | | 3 | | | | | 1,052 | | | | 1,075 | | | | (2 | ) | | | | 501 | | | | 400 | | | | 25 | | | | | 1,499 | | | | 1,406 | | | | 7 | | | Total revenues | | | 6,779 | | | | 6,557 | | | | 3 | | | | | 20,178 | | | | 19,736 | | | | 2 | | | | | 9,370 | | | | 8,569 | | | | 9 | | | | | 27,376 | | | | 25,671 | | | | 7 | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 2,662 | | | | 2,602 | | | | 2 | | | | | 7,854 | | | | 7,638 | | | | 3 | | | | | 3,484 | | | | 3,170 | | | | 10 | | | | | 10,001 | | | | 9,393 | | | | 6 | | | Purchased transportation | | | 562 | | | | 545 | | | | 3 | | | | | 1,722 | | | | 1,762 | | | | (2 | ) | | | | 1,478 | | | | 1,286 | | | | 15 | | | | | 4,346 | | | | 3,963 | | | | 10 | | | Rentals and landing fees | | | 431 | | | | 452 | | | | (5 | ) | | | | 1,230 | | | | 1,261 | | | | (2 | ) | | | | 532 | | | | 511 | | | | 4 | | | | | 1,520 | | | | 1,483 | | | | 2 | | | Depreciation and amortization | | | 360 | | | | 342 | | | | 5 | | | | | 1,068 | | | | 1,038 | | | | 3 | | | | | 425 | | | | 420 | | | | 1 | | | | | 1,254 | | | | 1,252 | | | | — | | | Fuel | | | 572 | | | | 455 | | | | 26 | | | | | 1,582 | | | | 1,579 | | | | — | | | | | 782 | | | | 633 | | | | 24 | | | | | 2,088 | | | | 1,753 | | | | 19 | | | Maintenance and repairs | | | 348 | | | | 306 | | | | 14 | | | | | 1,044 | | | | 981 | | | | 6 | | | | | 420 | | | | 386 | | | | 9 | | | | | 1,327 | | | | 1,158 | | | | 15 | | | Intercompany charges | | | 467 | | | | 464 | | | | 1 | | | | | 1,392 | | | | 1,371 | | | | 2 | | | | | 528 | | | | 473 | | | | 12 | | | | | 1,521 | | | | 1,403 | | | | 8 | | | Other | | | 822 | | | | 796 | | | | 3 | | | | | 2,471 | | | | 2,344 | | | | 5 | | | | | 1,297 | | | | 1,133 | | | | 14 | | | | | 3,745 | | | | 3,393 | | | | 10 | | | Total operating expenses | | | 6,224 | | | | 5,962 | | | | 4 | | | | | 18,363 | | | | 17,974 | | | | 2 | | | | | 8,946 | | | | 8,012 | | | | 12 | | | | | 25,802 | | | | 23,798 | | | | 8 | | | Operating income | | $ | 555 | | | $ | 595 | | | | (7 | ) | | | $ | 1,815 | | | $ | 1,762 | | | | 3 | | | | $ | 424 | | | $ | 557 | | | | (24 | ) | | | $ | 1,574 | | | $ | 1,873 | | | | (16 | ) | | Operating margin | | | 8.2 | % | | | 9.1 | % | | | (90 | ) | bp | | | 9.0 | % | | | 8.9 | % | | | 10 | | bp | | | 4.5 | % | | | 6.5 | % | | | (200 | ) | bp | | | 5.7 | % | | | 7.3 | % | | | (160 | ) | bp |
(1) | International domestic revenues represent our international intra-country operations. |
(2) | Includes FedEx Trade Networks and FedEx SupplyChain Systems.Networks. |
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| | Percent of Revenue | | | | Percent of Revenue | | | | | Three Months Ended | | | Nine Months Ended | | | | Three Months Ended | | | Nine Months Ended | | | | | 2017 | | | 2016 | | | | 2017 | | | 2016 | | | | 2018 | | | 2017 | | | | 2018 | | | 2017 | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 39.3 | | % | | | 39.7 | | % | | | 38.9 | | % | | | 38.7 | | % | | | 37.2 | | % | | | 37.0 | | % | | | 36.5 | | % | | | 36.6 | | % | Purchased transportation | | | 8.3 | | | | 8.3 | | | | 8.5 | | | | 8.9 | | | | | 15.8 | | | | 15.0 | | | | 15.9 | | | | 15.4 | | | Rentals and landing fees | | | 6.4 | | | | 6.9 | | | | 6.1 | | | | 6.4 | | | | | 5.7 | | | | 6.0 | | | | 5.6 | | | | 5.8 | | | Depreciation and amortization | | | 5.3 | | | | 5.2 | | | | 5.3 | | | | 5.3 | | | | | 4.5 | | | | 4.9 | | | | 4.6 | | | | 4.9 | | | Fuel | | | 8.4 | | | | 6.9 | | | | 7.8 | | | | 8.0 | | | | | 8.4 | | | | 7.4 | | | | 7.6 | | | | 6.8 | | | Maintenance and repairs | | | 5.1 | | | | 4.7 | | | | 5.2 | | | | 5.0 | | | | | 4.5 | | | | 4.5 | | | | 4.8 | | | | 4.5 | | | Intercompany charges | | | 6.9 | | | | 7.1 | | | | 6.9 | | | | 6.9 | | | | | 5.6 | | | | 5.5 | | | | 5.6 | | | | 5.5 | | | Other | | | 12.1 | | | | 12.1 | | | | 12.3 | | | | 11.9 | | | | | 13.8 | | | | 13.2 | | | | 13.7 | | | | 13.2 | | | Total operating expenses | | | 91.8 | | | | 90.9 | | | | 91.0 | | | | 91.1 | | | | | 95.5 | | | | 93.5 | | | | 94.3 | | | | 92.7 | | | Operating margin | | | 8.2 | | % | | | 9.1 | | % | | | 9.0 | | % | | | 8.9 | | % | | | 4.5 | | % | | | 6.5 | | % | | | 5.7 | | % | | | 7.3 | | % |
The following table compares selected statistics (in thousands, except yield amounts) for the periods ended February 28, 2017 and February 29, 2016:28: | | Three Months Ended | | | Percent | | | Nine Months Ended | | | Percent | | | Three Months Ended | | | Percent | | | Nine Months Ended | | | Percent | | | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | | 2018 | | | 2017 | | | Change | | | 2018 | | | 2017 | | | Change | | Package Statistics(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average daily package volume (ADV): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. overnight box | | | 1,322 | | | | 1,316 | | | | — | | | | 1,286 | | | | 1,271 | | | | 1 | | | | 1,315 | | | | 1,322 | | | | (1 | ) | | | 1,249 | | | | 1,286 | | | | (3 | ) | U.S. overnight envelope | | | 549 | | | | 535 | | | | 3 | | | | 559 | | | | 536 | | | | 4 | | | | 541 | | | | 549 | | | | (1 | ) | | | 548 | | | | 559 | | | | (2 | ) | U.S. deferred | | | 1,025 | | | | 1,015 | | | | 1 | | | | 904 | | | | 926 | | | | (2 | ) | | | 1,026 | | | | 1,025 | | | | — | | | | 946 | | | | 904 | | | | 5 | | Total U.S. domestic ADV | | | 2,896 | | | | 2,866 | | | | 1 | | | | 2,749 | | | | 2,733 | | | | 1 | | | | 2,882 | | | | 2,896 | | | | — | | | | 2,743 | | | | 2,749 | | | | — | | International priority | | | 407 | | | | 386 | | | | 5 | | | | 400 | | | | 393 | | | | 2 | | | | 529 | | | | 535 | | | | (1 | ) | | | 525 | | | | 522 | | | | 1 | | International economy | | | 182 | | | | 179 | | | | 2 | | | | 183 | | | | 180 | | | | 2 | | | | 266 | | | | 253 | | | | 5 | | | | 265 | | | | 250 | | | | 6 | | Total international export ADV | | | 589 | | | | 565 | | | | 4 | | | | 583 | | | | 573 | | | | 2 | | | | 795 | | | | 788 | | | | 1 | | | | 790 | | | | 772 | | | | 2 | | International domestic(2) | | | 943 | | | | 878 | | | | 7 | | | | 933 | | | | 895 | | | | 4 | | | | 2,445 | | | | 2,471 | | | | (1 | ) | | | 2,447 | | | | 2,391 | | | | 2 | | Total ADV | | | 4,428 | | | | 4,309 | | | | 3 | | | | 4,265 | | | | 4,201 | | | | 2 | | | | 6,122 | | | | 6,155 | | | | (1 | ) | | | 5,980 | | | | 5,912 | | | | 1 | | Revenue per package (yield): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. overnight box | | $ | 21.24 | | | $ | 20.56 | | | | 3 | | | $ | 21.17 | | | $ | 20.77 | | | | 2 | | | $ | 22.53 | | | $ | 21.24 | | | | 6 | | | $ | 22.64 | | | $ | 21.17 | | | | 7 | | U.S. overnight envelope | | | 12.41 | | | | 12.11 | | | | 2 | | | | 12.12 | | | | 11.99 | | | | 1 | | | | 12.97 | | | | 12.41 | | | | 5 | | | | 12.64 | | | | 12.12 | | | | 4 | | U.S. deferred | | | 15.00 | | | | 14.48 | | | | 4 | | | | 15.13 | | | | 14.52 | | | | 4 | | | | 15.66 | | | | 15.00 | | | | 4 | | | | 15.56 | | | | 15.13 | | | | 3 | | U.S. domestic composite | | | 17.36 | | | | 16.83 | | | | 3 | | | | 17.34 | | | | 16.93 | | | | 2 | | | | 18.29 | | | | 17.36 | | | | 5 | | | | 18.20 | | | | 17.34 | | | | 5 | | International priority | | | 55.42 | | | | 55.35 | | | | — | | | | 56.25 | | | | 56.59 | | | | (1 | ) | | | 55.26 | | | | 50.28 | | | | 10 | | | | 54.06 | | | | 51.82 | | | | 4 | | International economy | | | 50.56 | | | | 48.36 | | | | 5 | | | | 50.60 | | | | 49.02 | | | | 3 | | | | 48.01 | | | | 44.05 | | | | 9 | | | | 47.24 | | | | 44.24 | | | | 7 | | International export composite | | | 53.92 | | | | 53.14 | | | | 1 | | | | 54.48 | | | | 54.21 | | | | — | | | | 52.83 | | | | 48.27 | | | | 9 | | | | 51.77 | | | | 49.37 | | | | 5 | | International domestic(2) | | | 5.34 | | | | 5.47 | | | | (2 | ) | | | 5.44 | | | | 5.65 | | | | (4 | ) | | | 7.44 | | | | 6.74 | | | | 10 | | | | 7.29 | | | | 6.90 | | | | 6 | | Composite package yield | | | 19.66 | | | | 19.27 | | | | 2 | | | | 19.82 | | | | 19.61 | | | | 1 | | | | 18.45 | | | | 17.06 | | | | 8 | | | | 18.17 | | | | 17.31 | | | | 5 | | Freight Statistics(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average daily freight pounds: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | | 8,458 | | | | 8,340 | | | | 1 | | | | 8,231 | | | | 7,937 | | | | 4 | | | | 8,757 | | | | 8,458 | | | | 4 | | | | 8,311 | | | | 8,231 | | | | 1 | | International priority | | | 2,592 | | | | 2,414 | | | | 7 | | | | 2,622 | | | | 2,503 | | | | 5 | | | | 5,430 | | | | 5,238 | | | | 4 | | | | 5,342 | | | | 5,145 | | | | 4 | | International economy | | | | 13,209 | | | | 12,578 | | | | 5 | | | | 12,215 | | | | 12,095 | | | | 1 | | International airfreight | | | 645 | | | | 622 | | | | 4 | | | | 610 | | | | 636 | | | | (4 | ) | | | 1,757 | | | | 1,995 | | | | (12 | ) | | | 1,850 | | | | 1,941 | | | | (5 | ) | Total average daily freight pounds | | | 11,695 | | | | 11,376 | | | | 3 | | | | 11,463 | | | | 11,076 | | | | 3 | | | | 29,153 | | | | 28,269 | | | | 3 | | | | 27,718 | | | | 27,412 | | | | 1 | | Revenue per pound (yield): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | $ | 1.27 | | | $ | 1.23 | | | | 3 | | | $ | 1.21 | | | $ | 1.19 | | | | 2 | | | $ | 1.36 | | | $ | 1.27 | | | | 7 | | | $ | 1.29 | | | $ | 1.21 | | | | 7 | | International priority | | | 2.21 | | | | 2.14 | | | | 3 | | | | 2.19 | | | | 2.15 | | | | 2 | | | | 1.64 | | | | 1.45 | | | | 13 | | | | 1.56 | | | | 1.43 | | | | 9 | | International economy | | | | 0.60 | | | | 0.56 | | | | 7 | | | | 0.58 | | | | 0.55 | | | | 5 | | International airfreight | | | 0.71 | | | | 0.76 | | | | (7 | ) | | | 0.71 | | | | 0.81 | | | | (12 | ) | | | 0.78 | | | | 0.68 | | | | 15 | | | | 0.74 | | | | 0.73 | | | | 1 | | Composite freight yield | | | 1.45 | | | | 1.40 | | | | 4 | | | | 1.41 | | | | 1.38 | | | | 2 | | | | 1.02 | | | | 0.95 | | | | 7 | | | | 0.99 | | | | 0.93 | | | | 6 | |
(1) | Package and freight statistics include only the operations of FedEx Express and TNT Express. |
(2) | International domestic statistics represent our international intra-country operations. |
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FedEx Express Segment Revenues FedEx Express segment revenues increased 3%9% in the third quarter and 7% in the nine months of 2018 primarily due to improved base yields, favorable exchange rates and higher fuel surcharges, despite impacts from the NotPetya cyberattack discussed above. International export package yields increased 9% in the third quarter of 2017 primarily2018 due to improved base yield and package volume and higher fuel surcharges, which were partially offset by one fewer operating day. FedEx Express segment revenuesfavorable exchange rates and higher base rates. International export package yields increased 2%5% in the nine months of 2017 primarily2018 due to improved yieldhigher fuel surcharges and package volume partially offset by one fewer operating day, unfavorablefavorable exchange rates, and lower fuel surcharges. U.S. domestic package yieldsrates. International export average daily volumes increased 3%1% in the third quarter and 2% in the nine months of 20172018 primarily due to higher base rates and package weights.increased international economy shipments. This benefit was partially offset by the decrease in volume due to the NotPetya cyberattack. U.S. domestic average daily volumepackage yields increased 1%5% in the third quarter and nine months of 2017 driven by our overnight service offerings.2018 primarily due to higher base rates and fuel surcharges. Freight yields increased 4%7% in the third quarter primarily due to the impact of higher fuel surcharges and 2%6% in the nine months of 20172018 primarily due to higher base rates. Freight averagerates, favorable exchange rates and higher fuel surcharges. Average daily freight pounds increased 3% in the third quarter and nine months of 20172018 primarily due to higher international priority freight volume. In addition, higher U.S. Postal Service volume contributed to the increase in the nine months of 2017. International export average daily volumes increased 4% in the third quarter and 2% in the nine months of 2017 due to increased international priority box shipments and growth in international export from Asia and Europe. International export package yields increased 1% in the third quarter due to favorable service mix partially offset by unfavorable exchange rates and remained flat in the nine months of 2017 as favorable service mix was offset by unfavorable exchange rates and lower fuel surcharges.U.S. freight services.
Our U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the periods ended February 28, 2017 and February 29, 2016:28: | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | U.S. Domestic and Outbound Fuel Surcharge: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Low | | | 2.50 | % | | | 0.75 | % | | | 1.00 | % | | | 0.75 | % | | | 5.05 | % | | | 2.50 | % | | | 2.21 | % | | | 0.96 | % | High | | | 3.38 | | | | 2.75 | | | | 3.38 | | | | 4.00 | | | | 5.91 | | | | 3.40 | | | | 5.91 | | | | 3.40 | | Weighted-average | | | 2.96 | | | | 2.00 | | | | 2.30 | | | | 2.40 | | | | 5.56 | | | | 2.97 | | | | 4.31 | | | | 2.30 | | International Fuel Surcharges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Low | | | 2.50 | | | | 0.75 | | | | 1.00 | | | | 0.75 | | | | 6.25 | | | | 2.60 | | | | 3.38 | | | | 1.16 | | High | | | 10.50 | | | | 9.50 | | | | 10.50 | | | | 12.00 | | | | 15.87 | | | | 11.25 | | | | 15.87 | | | | 11.25 | | Weighted-average | | | 7.38 | | | | 5.83 | | | | 6.35 | | | | 7.08 | | | | 12.24 | | | | 8.21 | | | | 10.53 | | | | 7.48 | |
Effective January 1, 2018, FedEx Express implemented a 4.9% average list price increase for U.S. domestic, U.S. export and U.S. import services. Effective February 6, 2017, FedEx Express fuel surcharges are adjusted on a weekly basis compared to the previous monthly adjustment. On January 2, 2017, FedEx Express implemented a 3.9% average list price increase for U.S. domestic, U.S. export and U.S. import services and a change to the U.S. domestic dimensional weight divisor. On January 4, 2016, FedEx Express implemented a 4.9% average list price increase for FedEx Express U.S. domestic, U.S. export and U.S. import services. In addition, effective November 2, 2015, FedEx Express updated certain tables used to determine fuel surcharges. FedEx Express Segment Operating Income FedEx Express operating income and margin decreased in the third quarter of 2018 due to higher incentive compensation accruals, higher peak-related costs, increased TNT Express integration expenses, the negative impacts of inclement winter weather and unfavorable net impact of fuel, one fewer operating day and increased aircraft maintenance expenseexchange rates, partially offset by yield growth. Operating income increasedgrowth and positive net impact of fuel. The NotPetya cyberattack discussed above also drove declining results in the nine months of 2017 due to yield and volume growth and2018. The NotPetya cyberattack had an estimated $400 million negative impact for the continued benefitsfirst half of cost management initiatives partially offset by one fewer operating day and2018 with lingering impacts in the negative net impactthird quarter of fuel.2018. Results also included $31$86 million of TNT Express integration expenses in the third quarter and $70$270 million in the nine months of 20172018, a $33 million increase from the third quarter and $148 million increase from the nine months of TNT Express integration expenses. FedEx Express continues to focus on managing network capacity to match customer demand, reducing structural costs, modernizing its fleet and driving productivity increases throughout its operations.2017. Salaries and employee benefits increased 2% in the third quarter and 3% in the nine months of 2017 primarily due to merit increases. Maintenance and repairs increased 14%10% in the third quarter and 6% in the nine months of 20172018 primarily due to merit increases, unfavorable exchange rates and higher incentive compensation accruals. Purchased transportation increased 15% in the third quarter and 10% in the nine months of 2018 due to unfavorable exchange rates and increased international volume. Other expenses increased 14% in the third quarter and 10% in the nine months of 2018 primarily due to unfavorable exchange rates, increased outside service contracts and TNT Express integration expenses. Intercompany charges increased 12% in the third quarter of 2018 primarily due to higher incentive compensation accruals. Maintenance and repairs increased 15% in the nine months of 2018 primarily due to the timing of aircraft engine maintenance events. Purchased transportation expenses Fuel expense increased 3% in the third quarter due to increased volume. Rentals decreased 5%24% in the third quarter and 2%19% in the nine months of 2017 due to a reduction in aircraft leases. Fuel expense increased 26% in the third quarter2018 due to increased fuel prices and remained flat inprices. However, the nine months of 2017 due to lower fuel prices. The net impact of fuel had a significant negative impact onmoderate benefit to operating income in the third quarter of 2018 and a significant benefit to operating income in the nine months of 2017.2018 as higher fuel surcharges more than offset increased fuel prices. See the “Fuel” section of this MD&A for a description and additional discussion of the net impact of fuel on our operating results.
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TNT EXPRESS SEGMENT
TNT Express collects, transports and delivers documents, parcels and freight on a day-definite or time-definite basis. Services are primarily classified by the speed, distance, weight and size of shipments. While the majority of shipments are between businesses, TNT Express also offers business-to-consumer services to select key customers. We acquired TNT Express in the fourth quarter of 2016. The following tables present revenues, operating expenses, operating expenses as a percent of revenue, operating income, operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the periods ended February 28, 2017:
| | 2017 | | | | Three Months Ended | | | Nine Months Ended | | Revenues | | $ | 1,790 | | | $ | 5,493 | | Operating expenses: | | | | | | | | | Salaries and employee benefits | | | 508 | | | | 1,539 | | Purchased transportation | | | 724 | | | | 2,241 | | Rentals and landing fees | | | 80 | | | | 253 | | Depreciation and amortization | | | 60 | | | | 184 | | Fuel | | | 61 | | | | 171 | | Maintenance and repairs | | | 38 | | | | 114 | | Intercompany charges | | | 6 | | | | 11 | | Other | | | 311 | | | | 922 | | Total operating expenses | | | 1,788 | | | | 5,435 | | Operating income | | $ | 2 | | | $ | 58 | | Operating margin | | | 0.1 | % | | | 1.1 | % | Package: | | | | | | | | | Average daily packages | | | 1,034 | | | | 1,007 | | Revenue per package (yield) | | $ | 24.15 | | | $ | 24.96 | | Freight: | | | | | | | | | Average daily pounds | | | 3,169 | | | | 3,451 | | Revenue per pound (yield) | | $ | 0.54 | | | $ | 0.60 | |
| | Percent of Revenue | | | | | 2017 | | | | | Three Months Ended | | | | Nine Months Ended | | | Operating expenses: | | | | | | | | | | | Salaries and employee benefits | | | 28.4 | | % | | | 28.0 | | % | Purchased transportation | | | 40.4 | | | | | 40.8 | | | Rentals and landing fees | | | 4.5 | | | | | 4.6 | | | Depreciation and amortization | | | 3.4 | | | | | 3.3 | | | Fuel | | | 3.4 | | | | | 3.1 | | | Maintenance and repairs | | | 2.1 | | | | | 2.1 | | | Intercompany charges | | | 0.3 | | | | | 0.2 | | | Other | | | 17.4 | | | | | 16.8 | | | Total operating expenses | | | 99.9 | | | | | 98.9 | | | Operating margin | | | 0.1 | | % | | | 1.1 | | % |
TNT Express fuel surcharges are indexed to the spot price for jet fuel. Using this index, the international fuel surcharge percentages ranged as follows for the periods ended February 28, 2017:
| | Three Months Ended | | | Nine Months Ended | | | | 2017 | | | 2017 | | International Fuel Surcharges: | | | | | | | | | Low | | | 6.25 | % | | | 5.25 | % | High | | | 18.75 | | | | 18.75 | | Weighted-average | | | 12.94 | | | | 12.69 | |
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TNT Express Segment Results
The TNT Express segment was formed in the fourth quarter of 2016, following the acquisition of TNT Express on May 25, 2016. Since the date of acquisition, TNT Express has focused on maintaining its customer base while executing integration activities with FedEx Express.
TNT Express results included revenues of $1.8 billion for the third quarter and $5.5 billion for the nine months of 2017. TNT Express reported operating income of $2 million in the third quarter and $58 million in the nine months of 2017. These results included integration costs of $22 million in the third quarter and $52 million in the nine months of 2017. Costs associated with the integration, including restructuring charges, are expected to continue through fiscal year 2020. In addition, operating expenses included intangible asset amortization of $16 million in the third quarter and $54 million in the nine months of 2017.
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FEDEX GROUND SEGMENT FedEx Ground service offerings include day-certain delivery to businesses in the U.S. and Canada and to 100% of U.S. residences. The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income (dollars in millions), operating margin, and selected package statistics (in thousands, except yield amounts) and operating expenses as a percent of revenue for the periods ended February 28, 2017 and February 29, 2016:28: | | Three Months Ended | | | Percent | | | | Nine Months Ended | | | Percent | | | | Three Months Ended | | | Percent | | | | Nine Months Ended | | | Percent | | | | | 2017 | | | 2016 | | | Change | | | | 2017 | | | 2016 | | | Change | | | | 2018 | | | 2017 | | | Change | | | | 2018 | | | 2017 | | | Change | | | Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Ground | | $ | 4,296 | | | $ | 4,025 | | | | 7 | | | | $ | 12,202 | | | $ | 11,161 | | | | 9 | | | | $ | 4,824 | | | $ | 4,296 | | | | 12 | | | | $ | 13,586 | | | $ | 12,202 | | | | 11 | | | FedEx Supply Chain | | | 392 | | | | 383 | | | | 2 | | | | | 1,195 | | | | 1,127 | | | | 6 | | | | | 398 | | | | 392 | | | | 2 | | | | | 1,204 | | | | 1,195 | | | | 1 | | | Total revenues | | | 4,688 | | | | 4,408 | | | | 6 | | | | | 13,397 | | | | 12,288 | | | | 9 | | | | | 5,222 | | | | 4,688 | | | | 11 | | | | | 14,790 | | | | 13,397 | | | | 10 | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 834 | | | | 756 | | | | 10 | | | | | 2,420 | | | | 2,105 | | | | 15 | | | | | 956 | | | | 834 | | | | 15 | | | | | 2,711 | | | | 2,420 | | | | 12 | | | Purchased transportation | | | 2,015 | | | | 1,891 | | | | 7 | | | | | 5,568 | | | | 5,130 | | | | 9 | | | | | 2,235 | | | | 2,015 | | | | 11 | | | | | 6,194 | | | | 5,568 | | | | 11 | | | Rentals | | | 197 | | | | 166 | | | | 19 | | | | | 567 | | | | 466 | | | | 22 | | | | | 209 | | | | 197 | | | | 6 | | | | | 617 | | | | 567 | | | | 9 | | | Depreciation and amortization | | | 177 | | | | 159 | | | | 11 | | | | | 508 | | | | 451 | | | | 13 | | | | | 187 | | | | 177 | | | | 6 | | | | | 537 | | | | 508 | | | | 6 | | | Fuel | | | 3 | | | | 3 | | | | — | | | | | 8 | | | | 8 | | | | — | | | | | 4 | | | | 3 | | | | 33 | | | | | 10 | | | | 8 | | | | 25 | | | Maintenance and repairs | | | 83 | | | | 71 | | | | 17 | | | | | 237 | | | | 209 | | | | 13 | | | | | 82 | | | | 83 | | | | (1 | ) | | | | 249 | | | | 237 | | | | 5 | | | Intercompany charges | | | 330 | | | | 312 | | | | 6 | | | | | 983 | | | | 910 | | | | 8 | | | | | 371 | | | | 330 | | | | 12 | | | | | 1,087 | | | | 983 | | �� | | 11 | | | Other | | | 534 | | | | 493 | | | | 8 | | | | | 1,516 | | | | 1,389 | | | | 9 | | | | | 544 | | | | 534 | | | | 2 | | | | | 1,604 | | | | 1,516 | | | | 6 | | | Total operating expenses | | | 4,173 | | | | 3,851 | | | | 8 | | | | | 11,807 | | | | 10,668 | | | | 11 | | | | | 4,588 | | | | 4,173 | | | | 10 | | | | | 13,009 | | | | 11,807 | | | | 10 | | | Operating income | | $ | 515 | | | $ | 557 | | | | (8 | ) | | | $ | 1,590 | | | $ | 1,620 | | | | (2 | ) | | | $ | 634 | | | $ | 515 | | | | 23 | | | | $ | 1,781 | | | $ | 1,590 | | | | 12 | | | Operating margin | | | 11.0 | % | | | 12.6 | % | | | (160 | ) | bp | | | 11.9 | % | | | 13.2 | % | | | (130 | ) | bp | | | 12.1 | % | | | 11.0 | % | | | 110 | | bp | | | 12.0 | % | | | 11.9 | % | | | 10 | | bp | Average daily package volume | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Ground | | | 8,522 | | | | 8,339 | | | | 2 | | | | | 7,963 | | | | 7,551 | | | | 5 | | | | | 8,993 | | | | 8,522 | | | | 6 | | | | | 8,408 | | | | 7,963 | | | | 6 | | | Revenue per package (yield) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FedEx Ground | | $ | 8.12 | | | $ | 7.65 | | | | 6 | | | | $ | 8.05 | | | $ | 7.72 | | | | 4 | | | | $ | 8.64 | | | $ | 8.12 | | | | 6 | | | | $ | 8.49 | | | $ | 8.05 | | | | 5 | | |
| | Percent of Revenue | | | | Percent of Revenue | | | | | Three Months Ended | | | Nine Months Ended | | | | Three Months Ended | | | Nine Months Ended | | | | | 2017 | | | 2016 | | | | 2017 | | | 2016 | | | | 2018 | | | 2017 | | | | 2018 | | | 2017 | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 17.8 | | % | | | 17.1 | | % | | | 18.1 | | % | | | 17.1 | | % | | | 18.3 | | % | | | 17.8 | | % | | | 18.3 | | % | | | 18.1 | | % | Purchased transportation | | | 43.0 | | | | 42.9 | | | | 41.5 | | | | 41.7 | | | | | 42.8 | | | | 43.0 | | | | 41.9 | | | | 41.5 | | | Rentals | | | 4.2 | | | | 3.8 | | | | 4.2 | | | | 3.8 | | | | | 4.0 | | | | 4.2 | | | | 4.2 | | | | 4.2 | | | Depreciation and amortization | | | 3.7 | | | | 3.6 | | | | 3.8 | | | | 3.7 | | | | | 3.6 | | | | 3.7 | | | | 3.6 | | | | 3.8 | | | Fuel | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | Maintenance and repairs | | | 1.8 | | | | 1.6 | | | | 1.8 | | | | 1.7 | | | | | 1.6 | | | | 1.8 | | | | 1.7 | | | | 1.8 | | | Intercompany charges | | | 7.0 | | | | 7.1 | | | | 7.3 | | | | 7.4 | | | | | 7.1 | | | | 7.0 | | | | 7.3 | | | | 7.3 | | | Other | | | 11.4 | | | | 11.2 | | | | 11.3 | | | | 11.3 | | | | | 10.4 | | | | 11.4 | | | | 10.9 | | | | 11.3 | | | Total operating expenses | | | 89.0 | | | | 87.4 | | | | 88.1 | | | | 86.8 | | | | | 87.9 | | | | 89.0 | | | | 88.0 | | | | 88.1 | | | Operating margin | | | 11.0 | | % | | | 12.6 | | % | | | 11.9 | | % | | | 13.2 | | % | | | 12.1 | | % | | | 11.0 | | % | | | 12.0 | | % | | | 11.9 | | % |
FedEx Ground Segment Revenues FedEx Ground segment revenues increased 6%11% in the third quarter due to yield and volume growth in our commercial business partially offset by residential volume declines. FedEx Ground revenues increased 9%10% in the nine months of 20172018 due to volume growth and yield growth. Revenues in the third quarter and the nine months of 2017 were negatively impacted by one fewer operating day. increased yields. Average daily volume at FedEx Ground increased 2%6% in the third quarter primarily due to growth in our commercial business partially offset by lower residential volume due to yield management initiatives. Average daily volume at FedEx Ground increased 5% in theand nine months of 20172018 primarily due to continued growth in our commercial business and residential services. FedEx Ground yield increased 6% during the third quarter primarily driven by our commercial business and 4% in5% during the nine months of 2017 due to2018 primarily driven by higher base yields for our commercial businessrates and residential services.higher fuel surcharges. - 4541 -
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 periods ended February 28, 2017 and February 29, 2016:28: | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Low | | | 4.00 | % | | | 3.80 | % | | | 3.30 | % | | | 3.50 | % | | | 5.30 | % | | | 4.00 | % | | | 4.00 | % | | | 3.30 | % | High | | | 4.50 | | | | 4.30 | | | | 4.50 | | | | 4.50 | | | | 5.80 | | | | 4.50 | | | | 5.80 | | | | 4.50 | | Weighted-average | | | 4.10 | | | | 4.00 | | | | 3.90 | | | | 4.10 | | | | 5.50 | | | | 4.10 | | | | 5.00 | | | | 3.90 | |
Effective January 1, 2018, FedEx Ground announced a 4.9% average list price increase. In addition, as announced on September 18, 2017, dimensional weight pricing applies to the majority of FedEx SmartPost shipments effective January 22, 2018. Effective February 6, 2017, FedEx Ground fuel surcharges are adjusted on a weekly basis compared to the previous monthly adjustment. On January 2, 2017, FedEx Ground implemented a 4.9% average list price increase and a change to the U.S. domestic dimensional weight divisor. On January 4, 2016, FedEx Ground implemented a 4.9% increase in average list price. In addition, on November 2, 2015, FedEx Ground increased surcharges for shipments that exceed the published maximum weight or dimensional limits and updated certain tables used to determine fuel surcharges. FedEx Ground Segment Operating Income FedEx Ground segment operating income decreased 8%increased 23% in the third quarter and 2%12% in the nine months of 20172018 due to higher rent, depreciationvolume growth, increased yields and benefits associated with ongoing cost management. Higher purchased transportation, seasonal staffing as a result ofand network expansion the unfavorable net impact of fuelcosts and one fewer operating day,higher incentive compensation accruals partially offset by yield and volume growth. In addition, increased purchased transportation rates contributed to the operating income decline in the nine months of 2017.these benefits. Purchased transportation expense increased 7% primarily due to higher volumes and higher fuel expense in the third quarter and 9% in the nine months of 2017 due to higher volumes and increased service provider and U.S. Postal Service rates. Salaries and employee benefits expense increased 10% during the third quarter and 15% in the nine months of 2017 due to volume growth and additional staffing to support network expansion. Rent and depreciation and amortization expense increased11% in the third quarter and nine months of 20172018 primarily due to network expansion. Other expenseshigher volumes, increased 8%rates and higher fuel expenses. Salaries and employee benefits expense increased 15% in the third quarter and 9%12% in the nine months of 20172018 due to additional staffing to support volume growth, higher incentive compensation accruals, network expansion and merit increases. Intercompany charges increased 12% in the third quarter and 11% in the nine months of 2018 primarily due to higher incentive compensation accruals. Other expenses increased property taxes as a result6% in the nine months of 2018 primarily due to higher self-insurance reserves. Rentals and depreciation and amortization expense increased 6% in the third quarter and 7% in the nine months of 2018 due to network expansion. Independent Contractor Model FedEx Ground is involved in lawsuits and otheradministrative proceedings (such as state tax or other administrative challenges) where the classification of its independent contractors is at issue. During the third quarter of 2016, we reached agreements in principle to settle all of the 19 cases on appeal in the multidistrict litigation. These cases involveclaiming that owner-operators engaged under a contractor model whichno longer in use should have been treated as employees of FedEx Ground, has not operated since 2011.rather than independent contractors. In addition, we are defending contractor-modeljoint-employer cases where it is alleged that are not or are no longer partFedEx Ground should be treated as an employer of the multidistrict litigation.drivers employed by owner-operators engaged by FedEx Ground. These cases are in varying stages of litigation. We will continue to vigorously defend ourselves in these proceedings and continue to believe that owner-operators engaged by FedEx Ground’s owner-operatorsGround are properly classified as independent contractors and that FedEx Ground is not an employer of the drivers of the company’s independent contractors. For a description ofemployed by these proceedings, see Note 8 of the accompanying unaudited condensed consolidated financial statements.owner-operators. For additional information on the FedEx Ground Independent Service Provider model, see Part 1, Item 1 of our Annual Report under the caption “Independent Contractor Model” and “Other Outlook Matters” under Consolidated Results of this MD&A. - 4642 -
FEDEX FREIGHT SEGMENT FedEx Freight service offerings include priority services when speed is critical and economy services when time can be traded for savings. The following tables compare revenues, operating expenses, operating expenses as a percent of revenue, operating income (dollars in millions), operating margin, and selected statistics and operating expenses as a percent of revenue for the periods ended February 28, 2017 and February 29, 2016:28: | | Three Months Ended | | | Percent | | | | Nine Months Ended | | | Percent | | | | Three Months Ended | | | Percent | | | | Nine Months Ended | | | Percent | | | | | 2017 | | | 2016 | | | Change | | | | 2017 | | | 2016 | | | Change | | | | 2018 | | | 2017 | | | Change | | | | 2018 | | | 2017 | | | Change | | | Revenues | | $ | 1,492 | | | $ | 1,447 | | | | 3 | | | | $ | 4,747 | | | $ | 4,595 | | | | 3 | | | | $ | 1,694 | | | $ | 1,492 | | | | 14 | | | | $ | 5,208 | | | $ | 4,747 | �� | | | 10 | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 733 | | | | 716 | | | | 2 | | | | | 2,266 | | | | 2,168 | | | | 5 | | | | | 825 | | | | 733 | | | | 13 | | | | | 2,455 | | | | 2,266 | | | | 8 | | | Purchased transportation | | | 230 | | | | 223 | | | | 3 | | | | | 739 | | | | 720 | | | | 3 | | | | | 263 | | | | 230 | | | | 14 | | | | | 792 | | | | 739 | | | | 7 | | | Rentals | | | 36 | | | | 33 | | | | 9 | | | | | 101 | | | | 109 | | | | (7 | ) | | | | 41 | | | | 36 | | | | 14 | | | | | 114 | | | | 101 | | | | 13 | | | Depreciation and amortization | | | 69 | | | | 65 | | | | 6 | | | | | 199 | | | | 185 | | | | 8 | | | | | 77 | | | | 69 | | | | 12 | | | | | 219 | | | | 199 | | | | 10 | | | Fuel | | | 99 | | | | 80 | | | | 24 | | | | | 282 | | | | 277 | | | | 2 | | | | | 127 | | | | 99 | | | | 28 | | | | | 336 | | | | 282 | | | | 19 | | | Maintenance and repairs | | | 50 | | | | 48 | | | | 4 | | | | | 159 | | | | 154 | | | | 3 | | | | | 52 | | | | 50 | | | | 4 | | | | | 169 | | | | 159 | | | | 6 | | | Intercompany charges | | | 120 | | | | 112 | | | | 7 | | | | | 370 | | | | 337 | | | | 10 | | | | | 130 | | | | 120 | | | | 8 | | | | | 384 | | | | 370 | | | | 4 | | | Other | | | 114 | | | | 114 | | | | — | | | | | 367 | | | | 356 | | | | 3 | | | | | 124 | | | | 114 | | | | 9 | | | | | 390 | | | | 367 | | | | 6 | | | Total operating expenses | | | 1,451 | | | | 1,391 | | | | 4 | | | | | 4,483 | | | | 4,306 | | | | 4 | | | | | 1,639 | | | | 1,451 | | | | 13 | | | | | 4,859 | | | | 4,483 | | | | 8 | | | Operating income | | $ | 41 | | | $ | 56 | | | | (27 | ) | | | $ | 264 | | | $ | 289 | | | | (9 | ) | | | $ | 55 | | | $ | 41 | | | | 34 | | | | $ | 349 | | | $ | 264 | | | | 32 | | | Operating margin | | | 2.7 | % | | | 3.9 | % | | | (120 | ) | bp | | | 5.6 | % | | | 6.3 | % | | | (70 | ) | bp | | | 3.2 | % | | | 2.7 | % | | | 50 | | bp | | | 6.7 | % | | | 5.6 | % | | | 110 | | bp | Average daily LTL shipments (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Priority | | | 65.6 | | | | 64.7 | | | | 1 | | | | | 70.3 | | | | 66.7 | | | | 5 | | | | | 69.7 | | | | 65.6 | | | | 6 | | | | | 73.5 | | | | 70.3 | | | | 5 | | | Economy | | | 29.0 | | | | 30.0 | | | | (3 | ) | | | | 30.9 | | | | 30.7 | | | | 1 | | | | | 30.6 | | | | 29.0 | | | | 6 | | | | | 31.5 | | | | 30.9 | | | | 2 | | | Total average daily LTL shipments | | | 94.6 | | | | 94.7 | | | | — | | | | | 101.2 | | | | 97.4 | | | | 4 | | | | | 100.3 | | | | 94.6 | | | | 6 | | | | | 105.0 | | | | 101.2 | | | | 4 | | | Weight per LTL shipment (lbs) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Priority | | | 1,179 | | | | 1,189 | | | | (1 | ) | | | | 1,173 | | | | 1,189 | | | | (1 | ) | | | | 1,232 | | | | 1,179 | | | | 4 | | | | | 1,205 | | | | 1,173 | | | | 3 | | | Economy | | | 1,155 | | | | 1,152 | | | | — | | | | | 1,121 | | | | 1,154 | | | | (3 | ) | | | | 1,133 | | | | 1,155 | | | | (2 | ) | | | | 1,144 | | | | 1,121 | | | | 2 | | | Composite weight per LTL shipment | | | 1,172 | | | | 1,177 | | | | — | | | | | 1,157 | | | | 1,178 | | | | (2 | ) | | | | 1,202 | | | | 1,172 | | | | 3 | | | | | 1,187 | | | | 1,157 | | | | 3 | | | LTL revenue per shipment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Priority | | $ | 224.63 | | | $ | 218.15 | | | | 3 | | | | $ | 220.64 | | | $ | 220.03 | | | | — | | | | $ | 242.49 | | | $ | 224.63 | | | | 8 | | | | $ | 233.31 | | | $ | 220.64 | | | | 6 | | | Economy | | | 272.74 | | | | 258.35 | | | | 6 | | | | | 262.72 | | | | 263.84 | | | | — | | | | | 295.31 | | | | 272.74 | | | | 8 | | | | | 285.99 | | | | 262.72 | | | | 9 | | | Composite LTL revenue per shipment | | $ | 239.82 | | | $ | 231.61 | | | | 4 | | | | $ | 233.64 | | | $ | 234.07 | | | | — | | | | $ | 259.20 | | | $ | 239.82 | | | | 8 | | | | $ | 249.32 | | | $ | 233.64 | | | | 7 | | | LTL yield (revenue per hundredweight) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Priority | | $ | 19.06 | | | $ | 18.35 | | | | 4 | | | | $ | 18.81 | | | $ | 18.51 | | | | 2 | | | | $ | 19.67 | | | $ | 19.06 | | | | 3 | | | | $ | 19.37 | | | $ | 18.81 | | | | 3 | | | Economy | | | 23.61 | | | | 22.42 | | | | 5 | | | | | 23.44 | | | | 22.86 | | | | 3 | | | | | 26.07 | | | | 23.61 | | | | 10 | | | | | 24.99 | | | | 23.44 | | | | 7 | | | Composite LTL yield | | $ | 20.47 | | | $ | 19.67 | | | | 4 | | | | $ | 20.19 | | | $ | 19.87 | | | | 2 | | | | $ | 21.56 | | | $ | 20.47 | | | | 5 | | | | $ | 21.01 | | | $ | 20.19 | | | | 4 | | |
| | Percent of Revenue | | | | Percent of Revenue | | | | | Three Months Ended | | | Nine Months Ended | | | | Three Months Ended | | | Nine Months Ended | | | | | 2017 | | | 2016 | | | | 2017 | | | 2016 | | | | 2018 | | | 2017 | | | | 2018 | | | 2017 | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 49.1 | | % | | | 49.5 | | % | | | 47.7 | | % | | | 47.2 | | % | | | 48.7 | | % | | | 49.1 | | % | | | 47.1 | | % | | | 47.7 | | % | Purchased transportation | | | 15.4 | | | | 15.4 | | | | 15.6 | | | | 15.7 | | | | | 15.5 | | | | 15.4 | | | | 15.2 | | | | 15.6 | | | Rentals | | | 2.4 | | | | 2.3 | | | | 2.1 | | | | 2.4 | | | | | 2.4 | | | | 2.4 | | | | 2.2 | | | | 2.1 | | | Depreciation and amortization | | | 4.6 | | | | 4.5 | | | | 4.2 | | | | 4.0 | | | | | 4.6 | | | | 4.6 | | | | 4.2 | | | | 4.2 | | | Fuel | | | 6.6 | | | | 5.5 | | | | 5.9 | | | | 6.0 | | | | | 7.5 | | | | 6.6 | | | | 6.5 | | | | 5.9 | | | Maintenance and repairs | | | 3.4 | | | | 3.3 | | | | 3.4 | | | | 3.4 | | | | | 3.1 | | | | 3.4 | | | | 3.2 | | | | 3.4 | | | Intercompany charges | | | 8.1 | | | | 7.7 | | | | 7.8 | | | | 7.3 | | | | | 7.7 | | | | 8.1 | | | | 7.4 | | | | 7.8 | | | Other | | | 7.7 | | | | 7.9 | | | | 7.7 | | | | 7.7 | | | | | 7.3 | | | | 7.7 | | | | 7.5 | | | | 7.7 | | | Total operating expenses | | | 97.3 | | | | 96.1 | | | | 94.4 | | | | 93.7 | | | | | 96.8 | | | | 97.3 | | | | 93.3 | | | | 94.4 | | | Operating margin | | | 2.7 | | % | | | 3.9 | | % | | | 5.6 | | % | | | 6.3 | | % | | | 3.2 | | % | | | 2.7 | | % | | | 6.7 | | % | | | 5.6 | | % |
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FedEx Freight Segment Revenues FedEx Freight segment revenues increased 3%14% in the third quarter and 10% in the nine months of 2018 primarily due to higher LTL revenue per shipment and higher fuel surcharges. FedEx Freight segment revenuesaverage daily LTL shipments. LTL revenue per shipment increased 3%8% in the third quarter and 7% in the nine months of 20172018 primarily due to higher average daily LTL shipments, which were partially offset by lower weight per shipment. LTL revenue per shipment increased 4% in the third quarter due to higher base rates as a result ofdriven by our ongoing yield management initiatives, and higher fuel surcharges and remained flat in the nine months of 2017 primarily due to lowerhigher weight per shipment. Average daily LTL shipments were flatincreased 6% in the third quarter due to yield management initiatives and a continued weak U.S. industrial environment and increased 4% in the nine months of 20172018 due to higher demand for our LTL service offerings. The indexed LTL fuel surcharge is based on the average of the national U.S. on-highway average prices for a gallon of diesel fuel, as published by the Department of Energy. The indexed LTL fuel surcharge ranged as follows for the periods ended February 28, 2017 and February 29, 2016:28: | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Low | | | 21.00 | % | | | 18.50 | % | | | 20.20 | % | | | 18.50 | % | | | 23.10 | % | | | 21.00 | % | | | 20.90 | % | | | 20.20 | % | High | | | 21.60 | | | | 20.70 | | | | 21.60 | | | | 23.10 | | | | 24.00 | | | | 21.60 | | | | 24.00 | | | | 21.60 | | Weighted-average | | | 21.40 | | | | 19.50 | | | | 20.80 | | | | 21.00 | | | | 23.59 | | | | 21.40 | | | | 22.46 | | | | 20.80 | |
OnEffective January 2, 2017,1, 2018, FedEx Freight implemented a 4.9% average increase in certain U.S. and other shipping rates. On January 4, 2016, FedEx Freight implemented zone-based pricing in certain U.S. and other LTL shipping rates. Also, on January 4, 2016,2, 2017, FedEx Freight implemented a 4.9% average increase in certain U.S. and other shipping rates.
FedEx Freight Segment Operating Income FedEx Freight segment operating income decreased 27%increased 34% in the third quarter as higher operating expenses more than offset base rate increases and 9%32% in the nine months of 2017 as2018 primarily driven by higher operating expenses more than offset volume growth. LTL revenue per shipment. Salaries and employee benefits increased 2%13% in the third quarter driven primarily by merit increases and 5%8% in the nine months of 2017 due to2018 driven primarily by higher staffing levels to support volume growth, higher incentive compensation accruals and merit increases. Intercompany chargesPurchased transportation increased 7%14% in the third quarter and 10% in the nine months of 2017 due to higher allocated information technology costs. Rentals decreased 7% in the nine months of 2017 primarily2018 due to a charge related to a facility closure in the prior yearhigher volumes and a credit related to the favorable sublease of the facility in the current year.increased rates. Fuel expense increased 24%28% in the third quarter and 19% in the nine months of 2018 due to higher fuel prices. The net impact of fuel did not havehad a material effect onmoderate benefit to operating income in the third quarter. See the “Fuel” sectionquarter and nine months of this MD&A for a description and additional discussion of the net impact on our operating results. 2018 as higher fuel surcharges more than offset increased fuel prices. - 4844 -
FINANCIAL CONDITION LIQUIDITY Cash and cash equivalents totaled $3.2$2.8 billion at February 28, 2017,2018, compared to $3.5$4.0 billion at May 31, 2016.2017. The following table provides a summary of our cash flows for the nine-month periods ended February 28 2017 and February 29, 2016 (in millions): | | 2017 | | | 2016 | | | 2018 | | | 2017 | | Operating activities: | | | | | | | | | | | | | | | | | Net income | | $ | 1,977 | | | $ | 1,890 | | | $ | 3,445 | | | $ | 1,977 | | Noncash charges and credits | | | 2,953 | | | | 2,457 | | | | 1,691 | | | | 2,953 | | Gain from sale of investment | | | (35 | ) | | | — | | | | — | | | | (35 | ) | Changes in assets and liabilities | | | (2,250 | ) | | | (551 | ) | | | (3,974 | ) | | | (2,250 | ) | Cash provided by operating activities | | | 2,645 | | | | 3,796 | | | | 1,162 | | | | 2,645 | | Investing activities: | | | | | | | | | | | | | | | | | Capital expenditures | | | (3,790 | ) | | | (3,562 | ) | | | (3,994 | ) | | | (3,790 | ) | Business acquisitions, net of cash acquired | | | | (44 | ) | | | — | | Proceeds from asset dispositions and other | | | 123 | | | | (17 | ) | | | 21 | | | | 123 | | Cash used in investing activities | | | (3,667 | ) | | | (3,579 | ) | | | (4,017 | ) | | | (3,667 | ) | Financing activities: | | | | | | | | | | | | | | | | | Proceeds from short-term borrowings, net | | | | 797 | | | | — | | Principal payments on debt | | | (49 | ) | | | (28 | ) | | | (31 | ) | | | (49 | ) | Proceeds from debt issuance | | | 1,190 | | | | 1,238 | | | Proceeds from debt issuances | | | | 1,481 | | | | 1,190 | | Proceeds from stock issuances | | | 265 | | | | 79 | | | | 284 | | | | 265 | | Dividends paid | | | (319 | ) | | | (210 | ) | | | (402 | ) | | | (319 | ) | Purchase of treasury stock | | | (358 | ) | | | (2,133 | ) | | | (558 | ) | | | (358 | ) | Other | | | 2 | | | | (7 | ) | | | 6 | | | | 2 | | Cash provided by (used in) financing activities | | | 731 | | | | (1,061 | ) | | Cash provided by financing activities | | | | 1,577 | | | | 731 | | Effect of exchange rate changes on cash | | | (70 | ) | | | (78 | ) | | | 98 | | | | (70 | ) | Net decrease in cash and cash equivalents | | $ | (361 | ) | | $ | (922 | ) | | $ | (1,180 | ) | | $ | (361 | ) | Cash and cash equivalents at the end of period | | $ | 3,173 | | | $ | 2,841 | | | $ | 2,789 | | | $ | 3,173 | |
Cash flows from operating activities decreased $1.2$1.5 billion in the nine months of 20172018 primarily due to highervoluntary pension contributions, higher variable compensation payoutsthe payment of a previously accrued legal settlement and higher interest payments partially offset by lower income tax payments.the NotPetya cyberattack. Capital expenditures increased during the nine months of 2017 were higher2018 primarily due to the inclusionaircraft and related equipment purchases at FedEx Express, increased spending on facilities and other at all of TNT Expressour transportation segments and increased spendingvehicle purchases at FedEx Ground drivenFreight, partially offset by sort facility expansion.lower spending related to package handling and ground support equipment at FedEx Ground. See “Capital Resources” for a discussion of capital expenditures during 20172018 and 2016. 2017. During the third quarter of 2018, we issued $1.2$1.5 billion of senior unsecured debt under our current shelf registration statement. We used the net proceeds for a voluntary incremental contribution in January 2017February 2018 to our tax-qualified U.S. domestic pension plans (“U.S. Pension Plans”) and for working capital and general corporate purposes.Plans. See Note 3 of the accompanying unaudited condensed consolidated financial statements for further discussion of this debt issuance. OnDuring the third quarter of 2018, we issued commercial paper which provided us with additional short-term liquidity. As of February 28, 2018, we have $800 million of commercial paper outstanding. See Note 3 of the accompanying unaudited condensed consolidated financial statements for further discussion.
In January 26, 2016, our Board of Directors approvedauthorized a share repurchase program of up to 25 million shares. During the third quarter of 2017,2018, we repurchased 0.131.2 million shares of FedEx common stock at an average price of $187.34$248.73 per share for a total of $24$288 million. During the nine months of 2017,2018, we repurchased 2.22.4 million shares of FedEx common stock at an average price of $165.44$232.00 per share for a total of $358$558 million. As of February 28, 2017, 16.82018, 13.6 million shares remained under the current 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. - 45 -
CAPITAL RESOURCES Our operations are capital intensive, characterized by significant investments in aircraft, vehicles, technology, facilities, and package-handlingpackage 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, tax laws and actions of regulatory authorities. - 49 -
The following table compares capital expenditures by asset category and reportable segment for the periods ended February 28 2017 and February 29, 2016 (in millions): | | | | | | | | | | | | | | | | | | Percent Change | | | | | | | | | | | | | | | | | | | Percent Change | | | | | | | | | | | | | | | | | | | | 2017/2016 | | | | | | | | | | | | | | | | | | | 2018/2017 | | | | Three Months Ended | | | Nine Months Ended | | | Three Months | | | Nine Months | | | Three Months Ended | | | Nine Months Ended | | | Three Months | | | Nine Months | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | Ended | | | Ended | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | Ended | | | Ended | | Aircraft and related equipment | | $ | 284 | | | $ | 231 | | | $ | 1,319 | | | $ | 1,388 | | | | 23 | | | | (5 | ) | | $ | 591 | | | $ | 284 | | | $ | 1,631 | | | $ | 1,319 | | | | 108 | | | | 24 | | Package handling and ground support equipment | | | 295 | | | | 356 | | | | 819 | | | | 842 | | | | (17 | ) | | | (3 | ) | | | 207 | | | | 295 | | | | 621 | | | | 819 | | | | (30 | ) | | | (24 | ) | Vehicles | | | 219 | | | | 176 | | | | 737 | | | | 651 | | | | 24 | | | | 13 | | | | 237 | | | | 219 | | | | 748 | | | | 737 | | | | 8 | | | | 1 | | Information technology investments | | | 134 | | | | 115 | | | | 412 | | | | 289 | | | | 17 | | | | 43 | | | Information technology | | | | 116 | | | | 134 | | | | 378 | | | | 412 | | | | (13 | ) | | | (8 | ) | Facilities and other | | | 177 | | | | 122 | | | | 503 | | | | 392 | | | | 45 | | | | 28 | | | | 221 | | | | 177 | | | | 616 | | | | 503 | | | | 25 | | | | 22 | | Total capital expenditures | | $ | 1,109 | | | $ | 1,000 | | | $ | 3,790 | | | $ | 3,562 | | | | 11 | | | | 6 | | | $ | 1,372 | | | $ | 1,109 | | | $ | 3,994 | | | $ | 3,790 | | | | 24 | | | | 5 | | FedEx Express segment | | $ | 420 | | | $ | 345 | | | $ | 1,860 | | | $ | 1,865 | | | | 22 | | | | — | | | $ | 860 | | | $ | 479 | | | $ | 2,316 | | | $ | 2,034 | | | | 80 | | | | 14 | | TNT Express segment | | | 59 | | | | — | | | | 174 | | | | — | | | NM | | | NM | | | FedEx Ground segment | | | 387 | | | | 387 | | | | 1,127 | | | | 1,033 | | | | — | | | | 9 | | | | 227 | | | | 387 | | | | 974 | | | | 1,127 | | | | (41 | ) | | | (14 | ) | FedEx Freight segment | | | 152 | | | | 161 | | | | 360 | | | | 367 | | | | (6 | ) | | | (2 | ) | | | 198 | | | | 152 | | | | 397 | | | | 360 | | | | 30 | | | | 10 | | FedEx Services segment | | | 91 | | | | 107 | | | | 269 | | | | 297 | | | | (15 | ) | | | (9 | ) | | | 87 | | | | 91 | | | | 307 | | | | 269 | | | | (4 | ) | | | 14 | | Total capital expenditures | | $ | 1,109 | | | $ | 1,000 | | | $ | 3,790 | | | $ | 3,562 | | | | 11 | | | | 6 | | | $ | 1,372 | | | $ | 1,109 | | | $ | 3,994 | | | $ | 3,790 | | | | 24 | | | | 5 | |
Capital expenditures increased during the nine months of 2017 were higher than the prior-year period2018 primarily due to the inclusion of TNT Express and increased spending at FedEx Ground driven by sort facility expansion. Aircraftaircraft and related equipment purchases at FedEx Express, during the nine months of 2017which included the delivery of 12ten Boeing 767-300 Freighter aircraft and three Boeing 777 Freighter (“B767F”B777F”) aircraft, as well as the modificationincreased spending on facilities and other at all of certain aircraft before being placed into service.our transportation segments and increased vehicle purchases at FedEx Freight, partially offset by lower spending related to package handling and ground support equipment at FedEx Ground. LIQUIDITY OUTLOOK We believe that our cash and cash equivalents, cash flow from operations and available financing sources are adequate to meet our liquidity needs, including working capital, capital expenditure requirements and debt payment obligations. Our cash and cash equivalents balance at February 28, 20172018 included $812 million$1.1 billion of cash in offshoreforeign jurisdictions associated with our permanent reinvestment strategy. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic debt or working capital obligations. Although we expect higher capital expenditures in 2017,2018, we anticipate that our cash flow from operations will be sufficient to fund these expenditures. Historically, we have been successful in obtaining unsecured financing, from both domestic and international sources, although the marketplace for such investment capital can become restricted depending on a variety of economic factors. We are currently re-evaluating our permanent reinvestment strategy as a result of the TCJA and, as of the date of this filing, any deferred tax liability associated with a change of assertion is not expected to be material. Our capital expenditures are expected to be approximately $5.3$5.8 billion in 20172018 and include spending for aircraft and aircraft-related equipment at FedEx Express, sort facility expansion, primarily at FedEx Ground, and new and replacement vehicles at all of our transportation segments. This capital expenditure forecast includes TNT Express. We invested $1.3 billion in aircraft and aircraft-related equipment in the nine months of 2017 and expect to invest an additional $318$867 million for aircraft and aircraft-related equipment during the remainder of 2017.2018. In addition, over multiple years, we will be investing over $1.5 billion to significantly expand the FedEx Express Indianapolis hub and over $1 billion to modernize and expand the Memphis SuperHub. During the quarter, FedEx Express entered into agreementsan agreement to accelerate the delivery of two B777F aircraft from 2021 to 2020, one B767FB777F aircraft from 2021 to 20172019, and one B777F aircraft from 2022 to 2020. Upon maturity of commercial paper during the fourth quarter of 2018, we will re-evaluate our short-term liquidity needs and two Boeing 777 Freighter aircraftassess whether to 2018 from 2023.issue additional commercial paper in order to maintain this short-term liquidity. We have a shelf registration statement filed with the Securities and Exchange Commission (“SEC”)SEC that allows us to sell, in one or more future offerings, any combination of our unsecured debt securities and common stock. We have a- 46 -
During the quarter, we amended our five-year $1.75 billion revolving credit facility thatto increase the aggregate amount available under the facility from $1.75 billion to $2.0 billion. The facility expires in November 2020. See Note 3 of the accompanying unaudited condensed consolidated financial statements for a description of the termterms and significant covenants of our revolving credit facility. ThroughDuring the datenine months of this filing,2018, we have made contributions totaling $2.0$2.5 billion ($459 million of which were required) to our U.S. Pension Plans.Plans, of which $22 million were required. We do not expect to make any additional contributions to our U.S. Pension Plans during the fourth quarter of 2017. We anticipate our U.S. Pension Plans will make payments in the fourth quarter of 2017 aggregating in excess of $1 billion to former employees who elected to receive their benefits early under a voluntary program offered to qualifying participants during the third quarter of 2017. This payout will allow us to reduce future liabilities and administrative costs associated with our U.S. Pension Plans.2018. Our U.S. Pension Plans have ample funds to meet expected benefit payments.
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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.” Moody’s Investors Service has assigned our unsecured debt a credit rating atof Baa2 and our commercial paper a 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 February 28, 2017.2018. 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 February 28, 2017.2018. We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the United States. These contingent liabilities are not included in the table below. We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, qualified and nonqualified pension and postretirement healthcare plan liabilities and other self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table below due to the absence of scheduled maturities. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented. | | Payments Due by Fiscal Year (Undiscounted) (in millions) | | | Payments Due by Fiscal Year (Undiscounted) (in millions) | | | | 2017 (1) | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Thereafter | | | Total | | | 2018 (1) | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Thereafter | | | Total | | Operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating leases | | $ | 617 | | | $ | 2,390 | | | $ | 2,142 | | | $ | 1,856 | | | $ | 1,644 | | | $ | 9,140 | | | $ | 17,789 | | | $ | 632 | | | $ | 2,408 | | | $ | 2,115 | | | $ | 1,878 | | | $ | 1,695 | | | $ | 9,193 | | | $ | 17,921 | | Non-capital purchase obligations and other | | | 177 | | | | 521 | | | | 371 | | | | 266 | | | | 182 | | | | 250 | | | | 1,767 | | | | 254 | | | | 794 | | | | 683 | | | | 480 | | | | 304 | | | | 2,925 | | | | 5,440 | | Interest on long-term debt | | | 87 | | | | 545 | | | | 542 | | | | 480 | | | | 468 | | | | 9,172 | | | | 11,294 | | | | 104 | | | | 607 | | | | 543 | | | | 531 | | | | 531 | | | | 9,877 | | | | 12,193 | | Quarterly contributions to our U.S. Pension Plans | | | 15 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 15 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Aircraft and aircraft-related capital commitments | | | 219 | | | | 1,970 | | | | 1,730 | | | | 1,926 | | | | 1,348 | | | | 4,199 | | | | 11,392 | | | | 492 | | | | 1,717 | | | | 1,868 | | | | 1,162 | | | | 1,310 | | | | 890 | | | | 7,439 | | Other capital purchase obligations | | | 31 | | | | 13 | | | | 4 | | | | 1 | | | | 1 | | | | 8 | | | | 58 | | | | 73 | | | | 3 | | | | 1 | | | | 2 | | | | 1 | | | | 7 | | | | 87 | | Financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt | | | 2 | | | | 3 | | | | 1,280 | | | | 929 | | | | — | | | | 12,647 | | | | 14,861 | | | | 3 | | | | 1,367 | | | | 1,015 | | | | — | | | | — | | | | 14,500 | | | | 16,885 | | Total | | $ | 1,148 | | | $ | 5,442 | | | $ | 6,069 | | | $ | 5,458 | | | $ | 3,643 | | | $ | 35,416 | | | $ | 57,176 | | | $ | 1,558 | | | $ | 6,896 | | | $ | 6,225 | | | $ | 4,053 | | | $ | 3,841 | | | $ | 37,392 | | | $ | 59,965 | |
(1) | Cash obligations for the remainder of 2017.2018. |
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 78 of the accompanying unaudited condensed consolidated financial statements for more information. Operating Activities The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at February 28, 2017.2018. - 47 -
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 ($549 million) for uncertain tax positions and amounts for purchase obligations that represent noncancelable agreements to purchase goods or services that are not capital related. Such contracts include those for printing and advertising and promotions contracts. We cannot reasonably estimate the timing of the long-term payments or the amount by which the liability for uncertain tax positions will increase or decrease over time; therefore, the long-term portion of the liability for uncertain tax positions ($5232 million) is excluded from the table. The amounts reflected in the table above for interest on long-term debt represent future interest payments due on our long-term debt. We had $488 million in deposits and progress payments as of February 28, 2017 on aircraft purchases and other planned aircraft-related transactions.
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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. We had $922 million in deposits and progress payments as of February 28, 2018 on aircraft purchases and other planned aircraft-related transactions. Financing Activities The amounts reflected in the table above for long-term debt represent future scheduled principal payments on our long-term debt. Additional information on amounts included within the operating, investing and financing activities captions in the table above can be found in our Annual Report. CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a complex, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information. GOODWILL. Goodwill is tested for impairment between annual tests whenever events or circumstances make it more likely than not that the fair value of a reporting unit has fallen below its carrying value. We do not believe there has been any other change of events or circumstances that would indicate that a reevaluation of the goodwill of our reporting units is required as of February 28, 2017,2018, nor do we believe the goodwill of our reporting units is at risk of failing impairment testing. For additional details on goodwill impairment testing, refer to Note 1 ofto the financial statements included in our Annual Report. Information regarding our critical accounting estimates can be found in our Annual Report, including Note 1 to the financial statements therein. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm. - 48 -
FORWARD-LOOKING STATEMENTS Certain statements in this report, including (but not limited to) those contained in “General,” “Income Taxes,” “Business Acquisition,” “Outlook,” “TNT Express Segment Results,” “Liquidity,” “Capital Resources,” “Liquidity Outlook,” “Contractual Cash Obligations and Off-Balance Sheet Arrangements” and “Critical Accounting Estimates,” and the “General,” “Financing Arrangements,” “Retirement Plans,” “Commitments” and “Contingencies” notes to the consolidated financial statements, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “will,” “believes,” “expects,” “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements because of, among other things, potential risks and uncertainties, such as: economic conditions in the global markets in which we operate; significant changes in the volumes of shipments transported through our networks, customer demand for our various services or the prices we obtain for our services; damagea significant data breach or other disruption to our technology infrastructure, which can adversely affect our reputation, business or lossresults of brand equity;operations;
the ongoing impact of the significant cyberattack that TNT Express experienced in the first quarter of fiscal 2018; our ability to successfully integrate the businesses and operations of FedEx Express and TNT Express in the expected time frame;frame or at the expected cost; damage to our reputation or loss of brand equity; the price and availability of jet and vehicle fuel; our ability to manage our network capacity and cost structure for capital expenditures and operating expenses, and match it to shifting and future customer volume levels; the price and availabilityimpact of jet and vehicle fuel;intense competition on our ability to maintain or increase our prices (including our fuel surcharges in response to fluctuating fuel prices) or to maintain or grow our market share; a significant data breach or other disruption to our technology infrastructure, which can adversely affect our reputation, business or results of operations;
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•
| the impact of intense competition on our ability to maintain or increase our prices (including our fuel surcharges in response to fluctuating fuel prices) or to maintain or grow our market share;
|
our ability to effectively operate, integrate, leverage and grow acquired businesses, and to continue to support the value we allocate to these acquired businesses, including their goodwill; our ability to achieve the FedEx Express profit improvement goal; our ability to maintain good relationships with our employees and preventavoid attempts by labor organizations to organize groups of our employees, which could significantly increase our operating costs and reduce our operational flexibility; the impact of costs related to (i) challenges to the status of owner-operators engaged by FedEx Ground’s owner-operatorsGround as independent contractors and direct employers of drivers providing services on their behalf, and (ii) any related changes to our relationship with these owner-operators and their drivers; the impact of the United Kingdom’s vote to leave the European Union; any impact on our business from disruptions or modifications in service by, or changes in the business or financial soundness of, the U.S. Postal Service, which is a significant customer and vendor of FedEx; the impact of any international conflicts or terrorist activities on the United States and global economies in general, the transportation industry or us in particular, and what effects these events will have on our costs or the demand for our services; any impacts on our businesses resulting from evolving or new domestic or international government laws and regulation, which could be unfavorable to our business, including regulatory actions affecting global aviation or other transportation rights, increased air cargo and other security or safety requirements, and tax, accounting, trade (such as protectionist measures or restrictions on free trade), labor (such as card-check legislation, joint employment standards or changes to the Railway Labor Act of 1926, as amended, affecting FedEx Express employees), environmental (such as global climate change legislation) or postal rules; future guidance and interpretations relating to the recently enacted TCJA and our ability to realize the benefits of certain provisions of the TCJA; adverse weather conditions or localized natural disasters in key geographic areas, such as earthquakes, volcanoes, wildfires, and hurricanes, which can disrupt our electrical service, damage our property, disrupt our operations, increase our fuel costs and adversely affect our shipment levels; - 49 -
increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare benefits;
• | increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare benefits; |
the increasing costs of compliance with federal, state and foreign governmental agency mandates (including the Foreign Corrupt Practices Act and the U.K. Bribery Act) and defending against inappropriate or unjustified enforcement or other actions by such agencies; changes in foreign currency exchange rates, especially in the euro, Chinese yuan, British pound, Brazilian real, Canadian dollar and Mexican peso, which can affect our sales levels and foreign currency sales prices; market acceptance of our new service and growth initiatives; any liability resulting from and the costs of defending against class-action litigation, such as wage-and-hour, joint employment, and discrimination and retaliation claims, and any other legal or governmental proceedings; our ability to achieve the benefits of any ongoing or future profit improvement initiatives;
the outcome of future negotiations to reach new collective bargaining agreements — including with the union that represents the pilots of FedEx Express (the current pilot agreement is scheduled to become amendable in November 2021) and with the unionsunion elected in 2015 to represent drivers at foura FedEx Freight facilities;facility; 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; availability of financing on terms acceptable to us and our ability to maintain our current credit ratings, especially given the capital intensity of our operations; and other risks and uncertainties you can find in our press releases and SEC filings, including the risk factors identified under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in our Annual Report, as updated by our quarterly reports on Form 10-Q. - 53 -
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. - 50 -
Item 3. Quantitative and QualitativeQualitative Disclosures About Market Risk As of February 28, 2017,2018, there had beenwere no material changes in our market risk sensitive instruments and positions since our disclosures in our Annual Report. 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. During the nine months of 2017,2018, the U.S. dollar strengthenedweakened relative to the currencies of the foreign countries in which we operate, as compared to May 31, 2016,2017, and this strengtheningweakening had a slightly negative impact on our results. 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.” Item 4. Controls and Procedures The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to FedEx management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of February 28, 20172018 (the end of the period covered by this Quarterly Report on Form 10-Q). On May 25, 2016, we acquired TNT Express. We have begun the TNT Express integration process including the integration of policies, processes, people, technology and operations, and we will continue to evaluate the impact of any related changes to internal control over financial reporting. During our fiscal quarter ended February 28, 2017,2018, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION Item 1. Legal Proceedings For a description of all material pending legal proceedings, see Note 89 of the accompanying unaudited condensed consolidated financial statements. Item 1A. Risk Factors There
Other than the risk factors set forth below, there have been no material changes from the risk factors disclosed in our Annual Report (under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition”) in response to Part I, Item 1A of Form 10-K. 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, to efficiently operate our businesses, 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, to protect our confidential business information and the information provided by our customers, and to maintain customer confidence in our ability to protect our systems and to provide services consistent with their expectations. We are subject to risks imposed by data breaches and operational disruptions, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists. Data breaches of companies and governments 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 and could result in unauthorized access to sensitive or confidential data regarding our operations, customers, employees, and suppliers, including personal information. We also use technology and systems from third-party service providers, including cloud service providers, for a variety of reasons and such providers may have access to information we maintain about our company, customers, employees and vendors or operate systems that are critical to our business operations and services. Like us, our third-party service providers are subject to risks imposed by data breaches and cyber-attacks. We have security processes, protocols and standards in place, including contractual provisions requiring such security measures, that are applicable to our service providers and are designed to protect information that is held by them, or to which they have access, as a result of their engagements with us. Nevertheless, a cyber-attack could defeat one or more of our third-party service providers’ security measures, allowing an attacker to obtain information about our company, customers, employees and vendors or disrupt our operations. Our third-party service providers may also experience operational disruptions or human error that could result in unauthorized access to sensitive or confidential data regarding our operations, customers, employees and suppliers, including personal information. Any disruption to our complex, global technology infrastructure, including those impacting our computer systems and websites, could result in the loss of confidential business or customer information, adversely impact our operations, 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, 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. For instance, in May 2017 FedEx was one of many companies attacked by the rapidly spreading ransomware described as WannaCry that exploited vulnerability in Microsoft Windows and infected computers using that program, encrypting files and holding them for ransom. Additionally, during the third quarter of 2018 we discovered an unsecured server hosted by one of our third-party cloud service providers, which exposed some archived account information related to a service discontinued after our 2015 acquisition of Bongo International, LLC. The server has been secured, and we have found no indication that any information has been misappropriated in connection with the incident. Neither incident caused a material disruption to our systems or resulted in any material costs to FedEx. In addition, in June 2017 TNT Express worldwide operations were significantly affected due to the infiltration of an information technology virus known as NotPetya, as further described in the following risk factor. While we have significant security processes and initiatives in place, we may be unable to detect or prevent a material breach or disruption in the future. - 52 -
TNT Express experienced a significant cyberattack in the first quarter of fiscal 2018 and the ongoing impact could negatively affect our results of operations and financial condition in the future, particularly if our continuing recovery efforts do not proceed as expected. On June 28, 2017, we announced that the worldwide operations of TNT Express were significantly affected by the cyberattack known as NotPetya, which involved the spread of an information technology virus that infiltrated TNT Express systems and encrypted its data. While TNT Express’s critical operational systems have been fully restored, critical business data has been recovered and shipping services and solutions are back in place, not all customers are shipping at pre-attack volume levels and we are continuing to engage in related recovery efforts. Our results of operations and financial condition could be negatively impacted in the future if our recovery efforts do not proceed as expected, particularly if lost revenues or incremental costs associated with the cyberattack exceed our expectations. The following consequences or potential consequences of the cyberattack could have an adverse impact on our results of operations and financial condition in the future: loss of revenue due to permanent customer loss or sustained lower volumes from pre-existing customers; additional costs due to claims for service failures; higher effective tax rate due to reduced international earnings; longer and more costly integration (due to increased expenses and capital spending requirements) of TNT Express and FedEx Express; investments in enhanced systems in order to prevent future attacks; cost of incentives offered to customers to restore confidence and maintain business relationships; reputational damage resulting in the failure to retain or attract customers; costs associated with potential litigation or governmental investigations; costs associated with any data breach or data loss to third parties that is discovered; and other consequences of which we are not currently aware but may subsequently discover. We could be subject to adverse changes in regulations and interpretations or challenges to our tax positions relating to the Tax Cuts and Jobs Act. We are subject to taxation in the U.S. and numerous foreign jurisdictions. From time to time, changes in tax laws or regulations may be proposed or enacted that could significantly affect our overall tax liability. For example, on December 22, 2017, the United States government enacted comprehensive tax legislation through the TCJA, which significantly changes the U.S. corporate income tax system. The TCJA requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments, estimates and calculations to be made in interpreting its provisions, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretation. In addition, further legislative action could be taken to address questions or issues caused by the TCJA. As we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may adversely impact our results of operations and financial condition. Additionally, state and foreign governments may enact tax laws in response to the TCJA or other global initiatives that could result in further changes to our taxation and adversely impact our results of operations and financial condition. - 53 -
Item 2. Unregistered Sales of EquityEquity Securities and Use of Proceeds The following table provides information on FedEx’s repurchases of our common stock during the third quarter of 2017:2018: ISSUER PURCHASES OF EQUITY SECURITIES Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Program | | | Maximum Number of Shares That May Yet Be Purchased Under the Program | | Dec. 1-31, 2016 | | | — | | | $ | — | | | | — | | | | 16,940,000 | | Jan. 1-31, 2017 | | | 60,000 | | | | 186.77 | | | | 60,000 | | | | 16,880,000 | | Feb. 1-28, 2017 | | | 70,000 | | | | 187.83 | | | | 70,000 | | | | 16,810,000 | | Total | | | 130,000 | | | $ | 187.34 | | | | 130,000 | | | | | |
Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Program | | | Maximum Number of Shares That May Yet Be Purchased Under the Program | | Dec. 1-31, 2017 | | | 195,000 | | | $ | 241.14 | | | | 195,000 | | | | 14,580,000 | | Jan. 1-31, 2018 | | | 272,800 | | | | 266.12 | | | | 272,800 | | | | 14,307,200 | | Feb. 1-28, 2018 | | | 690,000 | | | | 244.00 | | | | 690,000 | | | | 13,617,200 | | Total | | | 1,157,800 | | | $ | 248.73 | | | | 1,157,800 | | | | | |
The repurchases were made under the stock repurchase program approved by our Board of Directors and announced on January 26, 2016 and through which we are authorized to purchase, in the open market or in privately negotiated transactions, up to an aggregate of 25 million shares of our common stock. As of March 21, 2017, 16.820, 2018, 13.2 million shares remained authorized for purchase under the January 2016 stock repurchase program, which is the only such program that currently exists. The program does not have an expiration date. - 5554 -
Item 6. Exhibits Exhibit Number | | Description of Exhibit | | | | 4.1 | | Indenture, dated as of October 23, 2015, between FedEx, Corporation, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee. (Filed as Exhibit 4.1 to FedEx Corporation’sFedEx’s Current Report on Form 8-K dated and filed October 23, 2015, and incorporated herein by reference.) | | | | 4.2 | | Supplemental Indenture No. 4,5, dated as of January 6, 2017,31, 2018, between FedEx, Corporation, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee. (Filed as Exhibit 4.2 to FedEx Corporation’sFedEx’s Current Report on Form 8-K dated and filed January 6, 2017,31, 2018, and incorporated herein by reference.) | | | | 4.3 | | Form of 3.300%3.400% Note due 2027.2028. (Included in Exhibit 4.2 to FedEx Corporation’sFedEx’s Current Report on Form 8-K dated and filed January 6, 2017,31, 2018, and incorporated herein by reference.) | | | | 4.4 | | Form of 4.400%4.050% Note due 2047.2048. (Included in Exhibit 4.2 to FedEx Corporation’sFedEx’s Current Report on Form 8-K dated and filed January 6, 2017,31, 2018, and incorporated herein by reference.) | | | | 10.1 | | Amendment dated December 1, 20168, 2017 (but effective as of October 31, 2016)August 28, 2017), amending the Transportation Agreement dated April 23, 2013 between the United States Postal Service and FederalFedEx Express Corporation (the “USPS Transportation Agreement”). Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). | | | | 10.2 | | Amendment dated December 1, 20168, 2017 (but effective as of November 28, 2016)27, 2017), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.3 | | Amendment dated December 1, 20168, 2017 (but effective as of November 21, 2016)October 2, 2017), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.4 | | Amendment dated December 1, 2016January 8, 2018 (but effective as of November 21, 2016)January 1, 2018), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.5 | | Amendment dated December 1, 2016January 11, 2018 (but effective as of November 21, 2016)October 30, 2017), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.6 | | Amendment dated December 1, 2016January 26, 2018 (but effective as of November 28, 2016)27, 2017), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.7 | | Amendment dated December 1, 2016February 16, 2018 (but effective as of November 28, 2016)January 29, 2018), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.8 | | AmendmentSupplemental Agreement No. 28 (and related side letter) dated January 12, 2017 (but effective as of January 2, 2017)26, 2018, amending the USPS TransportationBoeing 777 Freighter Purchase Agreement dated as of November 7, 2006, between The Boeing Company and FedEx Express (the “Boeing 777 Freighter Purchase Agreement”). Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.
| | | | 10.9 | | Supplemental Agreement No. 29 (and related side letters) dated as of February 2, 2018, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.910.10
| | First Amendment dated January 12, 2017 (but effective as of October 31, 2016)January 26, 2018, between FedEx and JPMorgan Chase Bank, N.A., as administrative agent, amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercialFive-Year Credit Agreement dated as of November 13, 2015, among FedEx, JPMorgan Chase Bank, N.A., individually and financial information, pursuant to Rule 24b-2 under the Exchange Act.as administrative agent, and certain lenders. | | | | 10.1012.1
| | Amendment dated February 24, 2017 (but effective asComputation of January 30, 2017) amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuantRatio of Earnings to Rule 24b-2 under the Exchange Act.Fixed Charges.
| | | | 10.1115.1
| | Amendment dated February 22, 2017 (but effective as of February 27, 2017) amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.Letter re: Unaudited Interim Financial Statements.
| | | |
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Exhibit Number | | Description of Exhibit | | | | 10.1231.1
| | Supplemental Agreement No. 9 dated as of February 16, 2017, amending the Boeing 767-3S2 Freighter Purchase Agreement dated as of December 14, 2011, between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.
| | | | 10.13
| | Supplemental Agreement No. 26 (and related side letter) dated as of February 10, 2017, amending the Boeing 777 Freighter Purchase Agreement dated as of November 7, 2006, between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.
| | | | 10.14
| | Consulting Agreement, dated January 1, 2017, between FedEx Corporation and T. Michael Glenn.
| | | | 12.1
| | Computation of Ratio of Earnings to Fixed Charges.
| | | | 15.1
| | Letter re: Unaudited Interim Financial Statements.
| | | | 31.1
| | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | 31.2 | | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | 32.1 | | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 32.2 | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 101.1 | | Interactive Data Files. |
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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | FEDEX CORPORATION | | | | | Date: March 22, 201721, 2018 | | | /s/ JOHN L. MERINO | | | | JOHN L. MERINO | | | | CORPORATE VICE PRESIDENT AND | | | | PRINCIPAL ACCOUNTING OFFICER |
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EXHIBIT INDEX Exhibit Number | | Description of Exhibit | | | | 4.1 | | Indenture, dated as of October 23, 2015, between FedEx, Corporation, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee. (Filed as Exhibit 4.1 to FedEx Corporation’sFedEx’s Current Report on Form 8-K dated and filed October 23, 2015, and incorporated herein by reference.) | | | | 4.2 | | Supplemental Indenture No. 4,5, dated as of January 6, 2017,31, 2018, between FedEx, Corporation, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee. (Filed as Exhibit 4.2 to FedEx Corporation’sFedEx’s Current Report on Form 8-K dated and filed January 6, 2017,31, 2018, and incorporated herein by reference.) | | | | 4.3 | | Form of 3.300%3.400% Note due 2027.2028. (Included in Exhibit 4.2 to FedEx Corporation’sFedEx’s Current Report on Form 8-K dated and filed January 6, 2017,31, 2018, and incorporated herein by reference.) | | | | 4.4 | | Form of 4.400%4.050% Note due 2047.2048. (Included in Exhibit 4.2 to FedEx Corporation’sFedEx’s Current Report on Form 8-K dated and filed January 6, 2017,31, 2018, and incorporated herein by reference.) | | | | 10.1 | | Amendment dated December 1, 20168, 2017 (but effective as of October 31, 2016)August 28, 2017), amending the Transportation Agreement dated April 23, 2013 between the United States Postal Service and FederalFedEx Express Corporation (the “USPS Transportation Agreement”). Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). | | | | 10.2 | | Amendment dated December 1, 20168, 2017 (but effective as of November 28, 2016)27, 2017), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.3 | | Amendment dated December 1, 20168, 2017 (but effective as of November 21, 2016)October 2, 2017), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.4 | | Amendment dated December 1, 2016January 8, 2018 (but effective as of November 21, 2016)January 1, 2018), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.5 | | Amendment dated December 1, 2016January 11, 2018 (but effective as of November 21, 2016)October 30, 2017), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.6 | | Amendment dated December 1, 2016January 26, 2018 (but effective as of November 28, 2016)27, 2017), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.7 | | Amendment dated December 1, 2016February 16, 2018 (but effective as of November 28, 2016)January 29, 2018), amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.8 | | AmendmentSupplemental Agreement No. 28 (and related side letter) dated January 12, 2017 (but effective as of January 2, 2017)26, 2018, amending the USPS TransportationBoeing 777 Freighter Purchase Agreement dated as of November 7, 2006, between The Boeing Company and FedEx Express (the “Boeing 777 Freighter Purchase Agreement”). Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.
| | | | 10.9 | | Supplemental Agreement No. 29 (and related side letters) dated as of February 2, 2018, amending the Boeing 777 Freighter Purchase Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.9
| | Amendment dated January 12, 2017 (but effective as of October 31, 2016) amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.
| | | | 10.10 | | First Amendment dated February 24, 2017 (but effective as of January 30, 2017)26, 2018, between FedEx and JPMorgan Chase Bank, N.A., as administrative agent, amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act. | | | | 10.11
| | Amendment dated February 22, 2017 (but effective as of February 27, 2017) amending the USPS Transportation Agreement. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.
| | | |
Exhibit
Number
| | Description of Exhibit
| | | | 10.12
| | Supplemental Agreement No. 9 dated as of February 16, 2017, amending the Boeing 767-3S2 Freighter Purchase Agreement dated as of December 14, 2011, between The Boeing Company and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Exchange Act.
| | | | 10.13
| | Supplemental Agreement No. 26 (and related side letter) dated as of February 10, 2017, amending the Boeing 777 Freighter PurchaseFive-Year Credit Agreement dated as of November 7, 2006, between The Boeing Company13, 2015, among FedEx, JPMorgan Chase Bank, N.A., individually and Federal Express Corporation. Confidential treatment has been requested for confidential commercialas administrative agent, and financial information, pursuant to Rule 24b-2 under the Exchange Act.
| | | | 10.14
| | Consulting Agreement, dated January 1, 2017, between FedEx Corporation and T. Michael Glenn.certain lenders.
| | | | 12.1 | | Computation of Ratio of Earnings to Fixed Charges. | | | | 15.1 | | Letter re: Unaudited Interim Financial Statements. | | | | 31.1 | | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
E-2 |