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FEDEX ANNUAL REPORT 2013
North. South. East. West
FORWARD

Table of contents

  • Page 1
    North. South. East. West FORWARD FEDEX ANNUAL REPORT 2013

  • Page 2
    ... we've experienced dynamic economic, social and technological changes few could have envisioned. Yet, we've stayed the course, guided by a steadfast commitment to our customers, team members and shareowners. Regardless of what's happening in the world, you can count on FedEx to approach our business...

  • Page 3
    .... Revenues increased due to higher yield and average daily shipments. At FedEx Express, acquisitions in Brazil, France, Poland, Mexico, and India are on course to deliver solid returns in these key markets. We also signed a new sevenyear contract with the United States Postal Service, a testament...

  • Page 4
    ... lift alternatives to move Economy traffic and making better use of capacity within the FedEx Express international network for our Priority services. Recent acquisitions in Brazil, France, Poland, Mexico, and India helped drive significant increases in international domestic revenues in FY13, and...

  • Page 5
    ...-truckload (LTL) shipping. About 80 percent of FedEx Freight customers use both our Priority and Economy services through a single unique pickup-anddelivery network. Our strategy was validated by a recent survey in Logistics Management magazine, which ranked FedEx Freight as best-in-class in both...

  • Page 6
    ... first FedEx Express e-commerce package, we've been systematically building a suite of services and tools that meet retailers' and shoppers' needs for cost and service options. In 2000 we launched FedEx Home Delivery, the online purchases come with free shipping. Last year, FedEx SmartPost revenue...

  • Page 7
    ... a time, date or location that suits their needs. Customers have responded well to the service. Large e-commerce shippers value the convenience, ï¬,exibility and options FedEx Delivery Manager provides. It helps them satisfy their customers and lower their customer service costs. Just as important...

  • Page 8
    .... It makes us even more competitive while saving millions of dollars for years to come. Retailers can now save local customers a trip across town by offering delivery within hours using FedEx SameDay City. It works the same way for business-to-business packages. Shippers receive confirmation...

  • Page 9
    ... of air and ground transportation carriers. FedEx SameDay City is changing customer expectations by offering priority pickup and delivery service in as little as three hours. The new service is ideal for businesses whose products must reach their local customers within the same day. The enhanced...

  • Page 10
    ...Average 2009 2010 2011 2012 2013 Stock Price (May 31 close) $55.43 $83.49 $93.64 $89.14 $96.34 *$100 invested on 5/31/08 in stock or index, including reinvestment of dividends. Fiscal year ending May 31. (1) Results for 2013 include $560 million ($353 million, net of tax or $1.11 per diluted share...

  • Page 11
    ...reportable segments. Our FedEx Services segment provides sales, marketing, information technology, communications and back-office support to our transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services...

  • Page 12
    ...in costs associated with the combination of our FedEx Freight and FedEx National LTL operations, effective January 30, 2011, and a $66 million legal reserve at FedEx Express. The following table shows changes in revenues and operating income by reportable segment for 2013 compared to 2012, and 2012...

  • Page 13
    ....3 85.7 2010 2011 2012 2013 FedEx Express and FedEx Ground Total Average Daily Package Volume 10,500 10,184 10,000 9,500 9,000 8,500 8,000 8,785 (1) International domestic average daily package volume includes our international intra-country express operations, including acquisitions in India...

  • Page 14
    ... LTL Revenue per Hundredweight - Yield $19.94 $19.57 $18.24 $17.07 2010 2011 FedEx Ground 2012 SmartPost 2013 $16.00 2010 2011 2012 2013 Revenue Revenues increased 4% in 2013 primarily driven by increases in international domestic revenue at FedEx Express and volume growth at FedEx Ground...

  • Page 15
    ... due to higher fuel surcharges and our yield management programs. Our results also significantly benefited in 2012 from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust. FedEx Ground segment operating income increased $439 million in...

  • Page 16
    ...-party transportation providers in international locations primarily due to business acquisitions at FedEx Express. Fuel expense increased 19% during 2012 primarily due to price increases. Based on a static analysis of the impact to operating income of year-over-year changes in fuel prices compared...

  • Page 17
    ...four weeks of gross base salary for every year of FedEx service up to a maximum payment of two years of pay. This program was completed in the fourth quarter and approximately 3,600 employees have left or will be voluntarily leaving the company by the end of 2014. Eligible employees are scheduled to...

  • Page 18
    ... are involved in a number of lawsuits and other proceedings that challenge the status of FedEx Ground's owner-operators as independent contractors. FedEx Ground anticipates continuing changes to its relationships with its owner-operators. The nature, timing and amount of any changes are dependent on...

  • Page 19
    ...> FedEx SupplyChain Systems (logistics services) > FedEx Ground (small-package ground delivery) > FedEx SmartPost (small-parcel consolidator) > FedEx Freight (LTL freight transportation) > FedEx Custom Critical (time-critical transportation) > FedEx Services (sales, marketing, information technology...

  • Page 20
    ... (July 2012). (2) Includes FedEx Trade Networks and FedEx SupplyChain Systems. (3) 2013 includes $143 million of predominantly severance costs associated with our voluntary buyout program and a $100 million impairment charge resulting from the decision to retire 10 aircraft and related engines. 2012...

  • Page 21
    ...premium services. 6 Our fuel surcharges are indexed to the spot price for jet fuel. Using 8 this index, the U.S. domestic and outbound fuel surcharge and the (9) international fuel surcharges ranged as follows for the years ended 6 May 31: 2013 2012 2011 U.S. Domestic and Outbound Fuel Surcharge...

  • Page 22
    ...rates charged for FedEx Express services. FedEx Express segment operating income increased 3% in 2012 primarily due to the benefit from the timing lag that exists between when fuel prices change and when indexed fuel surcharges automatically adjust and U.S. domestic and international export package...

  • Page 23
    ...FedEx Ground and FedEx SmartPost. FedEx Ground yields increased 7% during 2012 primarily due to rate increases, higher fuel surcharges and higher extra service revenue. Average daily package volume increased 4% at FedEx Ground in 2012 due to market share gains from continued growth in our FedEx Home...

  • Page 24
    ...operating income are expected to continue to grow in 2014, led by volume growth across all our major services due to market share gains. We also anticipate yield growth in 2014 through yield management programs. We will continue to make investments to grow our highly profitable FedEx Ground network...

  • Page 25
    ... Department of Energy. The indexed LTL fuel surcharge ranged as follows for the years ended May 31: 2013 Low High Weighted-average 21.80% 24.40 23.38 2012 24.30 22.90 2011 20.70 17.00 19.80% 15.10% 1.8 8.7 8.0 103.6 (3.6)% FedEx Freight Segment Operating Income (1) 2013 includes severance costs...

  • Page 26
    ... to use investments in technology, focused on network and equipment planning and customer automation, to further enhance customer service levels throughout 2014. Capital expenditures in 2014 are expected to be comparable to 2013, with the majority of our spending for replacement of vehicles and...

  • Page 27
    ... toward future aircraft deliveries at FedEx Express. For 2014, we anticipate making required contributions totaling approxLiquidity Outlook imately $650 million to our U.S. Pension Plans. Our U.S. Pension Plans We believe that our cash and cash equivalents, which totaled have ample funds to meet...

  • Page 28
    ...Contributions to our U.S. Pension Plans Investing activities: Aircraft and aircraft-related capital commitments Other capital purchase obligations Financing activities: Debt Total 2014 $ 1,936 285 157 650 968 249 250 $ 4,495 Payments Due by Fiscal Year (Undiscounted) 2015 2016 2017 2018 Thereafter...

  • Page 29
    ... pension formula (based on average earnings and years of service). Benefits under this formula were capped on May 31, 2008 for most employees. Total retirement plans cost increased $179 million in 2013 driven by lower discount rates used to measure our benefit obligations at our May 31, 2012...

  • Page 30
    ... rate increases pension expense. The discount rate affects the PBO and pension expense based on the measurement dates, as described below. part of our strategy to manage pension costs and funded status volatility, we have transitioned to a liability-driven investment strategy to better align plan...

  • Page 31
    ...requirements in future years. Our current credit balance exceeds $2 billion at May 31, 2013. For 2014, we anticipate making required contributions to our U.S. Pension Plans totaling approximately $650 million. See Note 13 of the accompanying consolidated financial statements for further information...

  • Page 32
    ... retire 24 aircraft and 43 related engines to better align the U.S. domestic air network capacity of FedEx Express to match current and anticipated shipment volumes. The majority of these aircraft were temporarily idled and not in revenue service. LEASES. We utilize operating leases to finance...

  • Page 33
    ...because payment of cash is not anticipated within one year of the balance sheet date. These noncurrent income tax liabilities are recorded in the caption "Other liabilities" in the accompanying consolidated balance sheets. We account for operating taxes based on multi-state, local and foreign taxing...

  • Page 34
    ... the funded status of our pension plans and potentially increase our requirement to make contributions to the plans. Substantial investment losses on plan assets will also increase pension and postretirement benefit expense in the years following the losses. FOREIGN CURRENCY. While we are a global...

  • Page 35
    ... vehicles, and the price and availability of fuel can be unpredictable and beyond our control. To date, we have been mostly successful in mitigating over time the expense impact of higher fuel costs through our indexed fuel surcharges, as the amount of the surcharges is closely linked to the market...

  • Page 36
    ...to organize under the RLA or NLRA. Finally, changes to federal or state laws governing employee classification could impact the status of FedEx Ground's owner-operators as independent contractors. FedEx Ground relies on owner-operators to conduct its linehaul and pickup-and-delivery operations, and...

  • Page 37
    ... the U.S. domestic operations and international profit improvements at FedEx Express, and improved efficiencies and lower costs of information technology at FedEx Services. To this end, during 2013, we conducted a program to offer voluntary cash buyouts to eligible U.S.-based employees in certain...

  • Page 38
    ... the transportation industry or us in particular, and what effects these events will have on our costs or the demand for our services; > any impacts on our businesses resulting from new domestic or international government laws and regulation; > changes in foreign currency exchange rates, especially...

  • Page 39
    ... over financial reporting as of May 31, 2013, has been audited by Ernst & Young LLP, the independent registered public accounting firm who also audited the Company's consolidated financial statements included in this Annual Report. Ernst & Young LLP's report on the Company's internal control over...

  • Page 40
    ...balance sheets of FedEx Corporation as of May 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders' investment, and cash ï¬,ows for each of the three years in the period ended May 31, 2013 of FedEx Corporation and our report dated...

  • Page 41
    FEDEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share amounts) Revenues Operating Expenses: Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and amortization Fuel Maintenance and repairs Business realignment, impairment and...

  • Page 42
    FEDEX CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in millions) Net Income Other Comprehensive Income (Loss): Foreign currency translation adjustments, net of tax benefit of $12 and $26 in 2013 and 2012 and tax expense of $27 in 2011 Amortization of unrealized pension ...

  • Page 43
    ... CONSOLIDATED BALANCE SHEETS May 31, (in millions, except share data) 2013 2012 Assets Current Assets Cash and cash equivalents Receivables, less allowances of $176 and $178 Spare parts, supplies and fuel, less allowances of $205 and $184 Deferred income taxes Prepaid expenses and other Total...

  • Page 44
    ... income taxes and other noncash items Business realignment, impairment and other charges Stock-based compensation Changes in assets and liabilities: Receivables Other current assets Pension assets and liabilities, net Accounts payable and other liabilities Other, net Cash provided by operating...

  • Page 45
    ... Net income Other comprehensive gain, net of tax of $665 Purchase of treasury stock Cash dividends declared ($0.56 per share) Employee incentive plans and other (4,172,976 shares issued) Balance at May 31, 2013 The accompanying notes are an integral part of these consolidated financial statements...

  • Page 46
    ... caption "Purchased transportation" in the accompanying consolidated statements of income. For shipments in transit, revenue is recorded based on the percentage of service completed at the balance sheet date. Estimates for future billing adjustments to revenue and accounts receivable are recognized...

  • Page 47
    ...in revenue service, better aligns the U.S. domestic air network capacity of FedEx Express to match current and anticipated shipment volumes. The combination of our FedEx Freight and FedEx National LTL operations was completed on January 30, 2011. These actions resulted in total program costs of $133...

  • Page 48
    ... using actuarial techniques that reï¬,ect management's assumptions for discount rate, expected long-term investment returns on plan assets, salary increases, expected retirement, mortality, employee turnover and future increases in healthcare costs. We determine the discount rate (which is required...

  • Page 49
    ...four weeks of gross base salary for every year of FedEx service up to a maximum payment of two years of pay. This program was completed in the fourth quarter and approximately 3,600 employees have left or will be voluntarily leaving the company by the end of 2014. Eligible employees are scheduled to...

  • Page 50
    ... impact on our financial reporting. The estimated fair values of the assets and liabilities related to these acquisitions have been recorded in the FedEx Express segment and are included in the accompanying consolidated balance sheet based on an allocation of the purchase prices (summarized in the...

  • Page 51
    ... on our fixed-rate notes is paid semi-annually. Long-term debt, exclusive of capital leases, had estimated fair values of $3.2 billion at May 31, 2013 and $2.0 billion at May 31, 2012. The estimated fair values were determined based on quoted market prices and the current rates offered for debt...

  • Page 52
    ... at May 31, 2013. The weighted-average remaining lease term of all operating leases outstanding at May 31, 2013 was approximately six years. While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of...

  • Page 53
    ...and the key weighted-average assumptions used in the valuation calculations for the options granted during the years ended May 31, and then a discussion of our methodology for developing each of the assumptions used in the valuation model: 2013 2012 2011 Weighted-average Black-Scholes value $ 29.20...

  • Page 54
    ...stock option vesting during the years ended May 31: Unvested at June 1, 2012 Granted Vested Forfeited Unvested at May 31, 2013 Shares 589,872 220,391 (253,423) (27,506) 529,334 Restricted Stock Weighted-Average Grant Date Fair Value $ 76.79 85.45 75.46 80.13 $ 80.86 2013 2012 2011 Stock Options...

  • Page 55
    ... our international or domestic results of operations. A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended May 31 was as follows: 2013 Basic earnings per common share: Net earnings allocable to common shares(1) Weighted-average common shares...

  • Page 56
    ... returns on plan assets; future salary increases; employee turnover; mortality; and retirement ages. These assumptions most significantly impact our U.S. Pension Plans. The accounting guidance related to postretirement benefits requires recognition in the balance sheet of the funded status of de...

  • Page 57
    ... CONSOLIDATED FINANCIAL STATEMENTS Total retirement plans costs in 2013 were higher than 2012 due to the negative impact of a significantly lower discount rate at our May 31, 2012 measurement date. Total retirement plans cost increased in 2012 primarily due to higher expenses for our 401(k) plans...

  • Page 58
    ... market value, as it did in 2013. For determining 2012 pension expense, we used the calculated value method which resulted in a portion of the asset gain in 2011 being deferred to future years because our actual returns on plan assets significantly exceeded our assumptions. The investment strategy...

  • Page 59
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair values of investments by level and asset category and the weighted-average asset allocations for our domestic pension plans at the measurement date are presented in the following table (in millions): Asset Class Cash and cash equivalents Equities...

  • Page 60
    ... Change in Plan Assets Fair value of plan assets at the beginning of year Actual return on plan assets Company contributions Benefits paid Other Fair value of plan assets at the end of year Funded Status of the Plans Amount Recognized in the Balance Sheet at May 31: Current pension, postretirement...

  • Page 61
    ... Fair Value of Plan Assets 2013 2012 Pension Benefits ABO(1) Fair value of plan assets PBO Net funded status (1) ABO not used in determination of funded status. $ (21,930) 19,404 (22,570) $ (3,166) $ (21,555) 17,333 (22,185) $ (4,852) Contributions to our U.S. Pension Plans for the years ended...

  • Page 62
    ... to be paid as follows for the years ending May 31 (in millions): These estimates are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates. Future medical benefit claims costs are estimated to increase at an annual rate of 7.7% during 2014...

  • Page 63
    ...> FedEx SupplyChain Systems (logistics services) > FedEx Ground (small-package ground delivery) > FedEx SmartPost (small-parcel consolidator) > FedEx Freight (LTL freight transportation) > FedEx Custom Critical (time-critical transportation) > FedEx Services (sales, marketing, information technology...

  • Page 64
    ... FedEx National LTL operations, effective January 30, 2011. (4) Segment assets include intercompany receivables. The following table provides a reconciliation of reportable segment capital expenditures to consolidated totals for the years ended May 31 (in millions): 2013 2012 2011 FedEx Express...

  • Page 65
    ... information for the years ended or as of May 31 (in millions): 2013 Revenue by Service Type FedEx Express segment: Package: $ 6,513 U.S. overnight box 1,705 U.S. overnight envelope 3,020 U.S. deferred Total U.S. domestic package revenue 11,238 6,586 International priority International economy...

  • Page 66
    ... B777F aircraft orders were also deferred from 2015 to 2016. We had $414 million in deposits and progress payments as of May 31, 2013 on aircraft purchases and other planned aircraft-related transactions. These deposits are classified in the "Other assets" caption of our consolidated balance sheets...

  • Page 67
    ...ed as independent contractors and that FedEx Ground is not an employer of the drivers of the company's independent contractors. While it is reasonably possible that potential loss in some of these lawsuits or such changes to the independent contractor status of FedEx Ground's owner-operators could...

  • Page 68
    ... differences in the weighted-average number of shares outstanding during the respective period. (3) The fourth quarter of 2012 includes an impairment charge of $134 million resulting from the decision to retire 24 aircraft and related engines at FedEx Express. The third quarter of 2012 includes the...

  • Page 69
    ... NOTE 21: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS We are required to present condensed consolidating financial information in order for the subsidiary guarantors (other than FedEx Express) of our public debt to continue to be exempt from reporting under the Securities Exchange Act of 1934...

  • Page 70
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Balance Sheets May 31, 2012 Guarantor Non-guarantor Subsidiaries Subsidiaries Eliminations Parent Consolidated Assets Current Assets Cash and cash equivalents Receivables, less allowances Spare parts, supplies, fuel, prepaid ...

  • Page 71
    ...2,032 $ (371) 69 Revenues Operating Expenses: Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and amortization Fuel Maintenance and repairs Impairment and other charges Intercompany charges, net Other Operating Income Other Income (Expense): Equity in...

  • Page 72
    ... $ 1,452 $ 1,342 Revenues Operating Expenses: Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and amortization Fuel Maintenance and repairs Impairment and other charges Intercompany charges, net Other Operating Income Other Income (Expense): Equity in...

  • Page 73
    ... dividends Principal payments on debt Proceeds from stock issuances Excess tax benefit on the exercise of stock options Dividends paid Purchase of treasury stock Other, net Cash (used in) provided by financing activities Effect of exchange rate changes on cash Net increase (decrease) in...

  • Page 74
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders FedEx Corporation We have audited the accompanying consolidated balance sheets of FedEx Corporation as of May 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income (...

  • Page 75
    ... income increase of $861 million, net of tax, for the funded status of our retirement plans at May 31, 2013. (2) Results for 2012 include a $134 million ($84 million, net of tax or $0.26 per diluted share) impairment charge resulting from the decision to retire 24 aircraft and related engines...

  • Page 76
    ... Cooper Ramo(3) Vice Chairman Kissinger Associates, Inc. Strategic advisory firm Chairman and President Barksdale Management Corporation Investment management company John A. Edwardson(1*) Former Chairman and Chief Executive Officer CDW Corporation Technology products and services company Susan...

  • Page 77
    ... Executive Vice President, Market Development and Corporate Communications Robert B. Carter Executive Vice President, FedEx Information Services and Chief Information Officer John L. Merino Corporate Vice President and Principal Accounting Officer FedEx Express Segment FedEx Ground Segment...

  • Page 78
    ... CUSTOMER SERVICE: Call 1-800-Go-FedEx or visit fedex.com. MEDIA INQUIRIES: Jess Bunn, Manager, Investor Relations, FedEx Corporation, 942 South Shady Grove Road, Memphis, Tennessee 38120, (901) 818-7463, e-mail: [email protected] SHAREOWNER ACCOUNT SERVICES: Computershare Investor Services...

  • Page 79
    Powering Possibilities When people connect with each other, anything is possible. Fair and open trade unleashes innovation - the power of technology, transportation, information and ideas to compound and multiply. By making it easier to bring new ideas to new markets, everyone benefits.

  • Page 80
    FEDEX CORPORATION 942 South Shady Grove Road Memphis, Tennessee 38120 fedex.com